Alfa Laval : 2022 Q1 Transcript

ALFA LAVAL AB Moderator: Tom Erixon 26-04-22/2:00 p.m. CET Confirmation # 8959035

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ALFA LAVAL AB

Moderator: Tom Erixon

26 April 2022 2:00 p.m. CET

OPERATOR:This is Conference #: 8959035

Operator:

Good day, and thank you for standing by. Welcome to the Alfa Laval Q1 Earnings Call. (Operator Instructions) Please be advised today's call is being recorded. I'll now hand the call over to your speaker today, Tom Erixon. Please go ahead.

Tom Erixon:

Thank you, and welcome to the Q1 earnings call. As always, I'll start with a couple of introductory comments before moving into the presentation.

First, order intake was very strong at SEK 13.3 billion, a new all-time high. Demand was good all over the place. But of course, it was especially firm in the Food & Water division with an exceptional organic growth rate of 40 percent in the quarter.

Margins were overall stable on a group level at just above 17 percent despite some variations between divisions. As indicated in previous quarters, the operating environment is complex and some quarterly volatility is to be expected. And indeed, we had some of that polarity on the divisional level in Q1.

Finally, as you know, we signed an agreement to acquire Desmet, an engineering firm complementing Alfa Laval in important growth areas of vegetable oil and biofuels. We expect to close the transaction mid-2022 and add approximately SEK 4 billion at around the double-digit market starting from there.

Classified by Alfa Laval as: Business

ALFA LAVAL AB Moderator: Tom Erixon 26-04-22/2:00 p.m. CET Confirmation # 8959035

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So with that, let's go to the key figures. As you've seen, our organic growth was strong and solid in Q1 at a rate of 20 percent. You should be aware that, of course, we have a slightly higher share of price growth in the numbers than we traditionally have had. So we would estimate that the price effect in the quarter is maybe in the area of around 5 percent. And the volume component, somewhere in the neighborhood of 15 percent for your reference.

Sales is going slower than orders related to the disturbances in the supply chain worsening to a degree. Before, in earlier quarters, we've indicated to you that we were lagging in deliveries approximately around SEK 150 million.

Now, in this quarter, we estimate that lag to be in the order of SEK 600 million. And consequently, with some effects on sales cost ratio and also in terms of the gross profit from the operations. With that said, profit grew in line with invoicing for the quarter.

Then going on divisional level, starting with the Food & Water division. As I already indicated, we had an exceptional quarter in the division with a total order intake at SEK 5.7 billion with clearly strong demand across all of the end markets of the division, partly the exceptional order intake was driven by large SEK 700 million brewery order that was booked in the quarter. But even without the large order, we would have been way over 20 percent in the organic growth rate and at SEK 5 billion, it would still have been the all-time high for the division by far.

Sales increased, but the supply chain challenges affected invoicing negatively with an increase of the backlog, the late deliveries. In fact, the supply chain challenges are somewhat bigger in Food & Water and to a degree, Marine, compared to the Energy division as a whole.

The margin was stable in the quarter. We had positive volume effects and negative mix effects. And those two pretty much balanced out in the quarter.

Now in this context, a few extra comments on the Desmet acquisition. We were excited to announce the acquisition a few weeks ago. The strategic rationale for us is to take a further step in building our (Palomares) position in

Classified by Alfa Laval as: Business

ALFA LAVAL AB Moderator: Tom Erixon 26-04-22/2:00 p.m. CET Confirmation # 8959035

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the energy transition and biofuels is one of several tools that are important for us in our offer towards a decarbonized planet.

Combined with Alfa Laval's know-how, we have a complete engineering know-how and product coverage, feedstock to final product. So we will become a very strong company in this area. Our intention is to continue to operate the Desmet brand within the Alfa Laval portfolio of offering. And with that, we believe that we are well positioned for a dynamic and growing sector going forward.

The running rate of Desmet, we estimate to be in terms of invoicing in the order of magnitude of around SEK 4 billion per year. And we expect that the margin, leaving out then the synergies or other improvement areas that we may do, currently would be at approximately 10 percent, which mirrors fairly where Alfa Laval is currently in our engineering business in food systems.

Then on to the Energy division. We had a positive demand trend that continued related to the energy transition as a whole. Energy efficiency solutions are the main driver in the growth but we also had some early signs and bookings within the hydrogen market. And we also see a recovery in the gas sector related to LNG, whereas the traditional oil upstream, downstream remain on a fairly depressed level.

The supply chain is relatively stable in the Energy division with invoicing growing pretty much as expected and pretty much in line with the order intake growth.

The margin improved significantly in the quarter, supported by volume and also some revaluation effects on the inventory. Going forward, pricing effects should partly compensate for the future absence of further revaluations.

As I have indicated to you throughout the quarters, there are many moving components in the results of the group and on the division and here, you have some of those ingredients.

Then moving on to the Marine division. Despite cancellations of part of the Russian order book amounting to around SEK 500 million, the net orders in

Classified by Alfa Laval as: Business

ALFA LAVAL AB Moderator: Tom Erixon 26-04-22/2:00 p.m. CET Confirmation # 8959035

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the quarter were still on a stable level with a small growth which indicates an underlying sound market demand.

Sales were stable, but supply chain challenges affected the shipments in the quarter, not least in relation to our Chinese supply chain, where we have substantial industrial activities, we are being challenged by lockdowns, and this will likely continue in Q2.

The margin dropped in the Marine division with several headwinds as a result.

The mix was negative partly driven by the ballast water joint venture and the increasing share of invoicing. We also had deliveries of an old backlog priced at the old conditions. And we have earlier indicated to you that the group margins may be affected by approximately minus 0.5 percent as a whole. And this quarter, that was mainly affecting the Marine part of the business. In all, we are addressing the situation in the Marine division, but it will take a few quarters to sort out.

Then moving on to Service. We had a very strong service quarter with a new all-time high and a 16 percent organic growth rate. All three divisions had good development but it was unusually strong in the Marine division.

Note, when you look at the Marine numbers where, for the first time, the share of Service was 42 percent that, that mix was a little bit affected by the order calculation related to Russian orders. Consequently, the more normalized level would have been around 35 percent or so, which is slightly closer to, let's say, the historic average numbers. All in all, a good quarter for the Service business.

Returning to the overall or the intake situation. As I indicated, a new all-time high, supported by large orders, but certainly, the underlying demand trends was very positive. In fact, the large orders are a bit more than normal, but not dramatically. So if you want to get a feel for the pace, you could say that the one-off large brewery order that amounted to around SEK 700 million in the quarter was pretty much balanced out by the write-off of SEK 600 million of Russian-related orders. Those two taken out of the equation leads you to approximately the same level of orders that we actually accounted for in this

Classified by Alfa Laval as: Business

ALFA LAVAL AB Moderator: Tom Erixon 26-04-22/2:00 p.m. CET Confirmation # 8959035

Page 5

quarter, SEK 13.3 billion. If you add the Russian parts of it and just look at the gross order for the quarter, we were in fact close to SEK 14 billion.

The regional picture, of course, when you have this type of growth, the whole world grows very synchronized. We had a stable situation in China and a much stronger growth path in Southeast Asia than previous quarter. So all in all, Asia was positive. We had a very strong quarter in North America, especially in the U.S. with unusually high growth rates across the board.

Europe was good. Latin America was good. And in fact, even in Eastern Europe, with the big cancellations in Russia and the pausing of all new Russian orders, we are still ahead when it comes to the order intake in Eastern Europe as a whole, net-net.

So that is the situation in the market. Let me then in this context, give you some final comments on the Russia, Ukraine situation. We have earlier communicated that we are pausing new orders in Russia due to the complex situation and the sanctions. That decision remains in place for now. We canceled approximately SEK 600 million from the existing order books in Q1 due to the existing sanctions. We have also canceled SEK 200 million in signed but not booked orders in the quarter. So all in all, SEK 800 million, approximately corresponding to normal business year in Russia.

We made provisions of around SEK 330 million to cover for possible costs related to our contractual obligations in Russia. The net assets in Russia amount to only SEK 30 million. So impairment is a minor issue for us going forward. However, we do have 240 employees in Russia, and although we have started a personnel reduction in that process, we may have some restructuring costs related to the personnel situation in Russia, either in Q2 or as we find appropriate depending on when decisions are being made.

So with that, I'd like to hand over to Jan for some further financial comments.

Jan Allde:

Thank you, Tom. And as usual, we'll jump into the sales picture first. So we expect that invoicing in Q1 to be higher than the same quarter last year. We realized sales of SEK 10.6 billion, which is 18 percent higher than last year.

Classified by Alfa Laval as: Business