Alfa Laval : 2020 Q3 Transcript.pdf

ALFA LAVAL AB Moderator: Tom Erixon 22-10-20/9:00 a.m. GMT Confirmation # 2183237 Page 1

ALFA LAVAL AB

Moderator: Tom Erixon

22 October 2020

9:00 a.m. GMT

OPERATOR:	This is Conference #: 2183237.
Operator:	Ladies and gentlemen, thank you for standing by, and welcome to the Alfa
	Laval Q3 Earnings Call.
	(Operator Instructions)
	I must advise you the conference is being recorded today on Thursday, the
	22nd of October 2020.
	I will now hand the conference over to your speaker today, Tom Erixon.
	Please, go ahead.
Tom Erixon:	Good morning. Welcome to our third quarter earnings call. Let me start as
	always, with a couple of overall comments to the report, and then we'll go
	through the presentation.
	First, regarding demand in Q3, it remained sequentially stable and on a
	somewhat of a slow level compared to last year. The parts of the oil and gas
	market and parts of the Marine markets were specifically weak, whereas the
	transition to a more carbon-free economy at large is driving increased demand
	in other parts of the portfolio, especially related to energy efficiency solutions.
	The margin was unchanged compared to a strong third quarter last year at
	above 17 percent. And although we did have a volume decline in sales, it was

ALFA LAVAL AB Moderator: Tom Erixon 22-10-20/9:00 a.m. GMT Confirmation # 2183237 Page 2

compensated by cost reductions and productivity improvements across the value chain in the company.

The forward-looking statement, we will come back to later. But in general, we expect somewhat of a slow global recovery from the current level. And we expect that, this will continue into the next year. And as a consequence, we will see a relative slow demand in parts of our portfolio also going forward.

In that context, after 6 months of short-term flexible cost savings that we implemented starting Q2 with good effects in Q2 and Q3, with the ambition to keep our sales teams and R&D teams together we will gradually now return into somewhat of a more normal operational mode moving into 2021. And instead of the flexible cost reduction programs, we will, in Q4, go through with the restructuring program in order to adjust some of the portfolio imbalances we have as a result of specific declines in part of our portfolio. We will come back with the details on that program latest in connection with the Q4 report.

With that, let me go to key figures. In fixed currency, order intake declined with 9 percent, in line with our guidance compared to Q3 last year. The year- to-date numbers are reasonably stable, given the global turbulence since February, with around 5 percent decline in order intake in sales, respectively and a flat margin, as I said, after a relatively strong 2019. All in all, for the first 9 months, perhaps a little bit better than what we had reason to believe when the pandemic started back in late first quarter.

Let me go to the divisional reviews. And this time, start with the Food & Water Division. We are pleased that the Food & Water Division can shine in this quarter with a strong margin development. Normally, as you know, from you and in our Q&A session, Food & Water Division is not getting a lot of attention. I think it deserves it at this point in time. As expected, the order intake and market situation for the division has been stable in the quarter. And in fact, we have an organic growth, currency adjusted of about positive 2 percent compared to last year.

ALFA LAVAL AB Moderator: Tom Erixon 22-10-20/9:00 a.m. GMT Confirmation # 2183237 Page 3

This is despite the fact that we do have longer lead time for large projects across our company, but also including the Food & Water Division, where decisions on large CapEx projects are taking a longer time to materialize also in this division. I would say at this point that we have a good momentum in the division. We have, as you know, for a number of years, worked with our manufacturing footprint, we have worked with the improvement of our product portfolio, and we have worked with specializing in product oriented, a very competent sales organization globally at this point in time.

And for the Food & Water, built on strong channel partnerships across the geographies. So I think there is a little bit of a reflection of progress in the numbers that you see in the Food & Water. As a result of all of that, the margin improvement was considerable compared to normal levels. We have, when we started a few years ago, been at below 15 percent corporate target at the time. And since then, we've seen a clear trend line to above 15 percent.

With that said, the 19 percent in the quarter was perhaps a little bit exceptional. It was a quarter when everything went right. We were low in cost. We were low in quality costs again, and we had a little bit of one-off tailwinds in the quarter. So while we do appreciate the significant improvement in the quarter, it may overstate the underlying profitability somewhat compared to a normalized level in the division.

With that, let me go to the Energy Division. Overall, we had a weak demand situation. Large projects also in the Energy Division being slower when it comes to decision-making and the upstream oil and gas market remains slow, including impact on our Service business in the quarter due to idling units and idling assets in the area. All in all, it led to a 12 percent organic decline year- on-year.

Still, the demand related to the ongoing energy transition continues to grow, and we see every quarter how we gradually change the mix from fossil-driven business to renewable and energy efficiency like applications. We have for years invested to be a technology provider, enabling the ongoing change in the global energy market, and we are starting to see good results from that.

ALFA LAVAL AB Moderator: Tom Erixon 22-10-20/9:00 a.m. GMT Confirmation # 2183237 Page 4

I'd like to add at this point that Alfa Laval decided to sign on to the carbon- neutral 2030 agenda some time ago in this year. And fundamentally, we are trying to address our own carbon footprint given that we are, in terms of our product solution, certainly addressing the ones of our customers.

The resulting mix changes in the Energy Division from fossil to renewables is supporting the positive margin development that you see in the quarter. Margin compared to last year despite significant volume declines are up almost 1 percent.

Let's go to the Marine Division from here. Demand remained weak in certain areas due to low contracting and a slow retrofit and Service business impacted by the pandemic conditions. Both margins and market shares were stable in the third quarter in most product areas compared to last year. However, the lower margin came mainly as a mix effect in our environmental product portfolio and, to a degree, from lower volumes compared to last year that were not fully compensated for in terms of cost reductions.

We expect that we are somewhere at the bottom of the cycle in the Marine side, expecting a slow recovery from here, supported by important technology trends related to LNG and multifuel and increased carbon awareness among large ship owners.

Let's move on to the Service side. As always, and as you know, in weaker markets, Service has a tendency to grow as a percentage of sales, providing a degree of a natural margin hedge. This is true, as you can see from the numbers, also this time. However, this time, we do see a bit more of a negative volume effects than we see in normal downturns and that is related primarily to difficulty to execute on-site repair and conditioning work.

And in addition to that, we see a little bit more of idling assets during this downturn, certainly in the Marine sector and in oil and gas sector. It is suffice to say that the global cruise fleet is basically completely idle, and that in and of itself, impacts the Marine service business at the moment.