Alfa Laval : 2020 Q4 Transcript.pdf

ALFA LAVAL AB

Moderator: TOM ERIXON

03-02-21/9:00 a.m. GMT

Confirmation # 8775435

Page 1

ALFA LAVAL AB

Moderator: TOM ERIXON

3 February 2021

9:00 a.m. GMT

OPERATOR:	This is Conference #: 8775435.
Operator:	Ladies and gentlemen, thank you for standing by, and welcome to the Alfa
	Laval Q4 earnings call. (Operator Instructions) I do have to advise you that
	the call is being recorded today on Wednesday, 3rd of February 2021.
	And your speaker for today is Tom Erixon, President and CEO. Please go
	ahead, sir.
Tom Erixon:	Good morning. Welcome to Alfa Laval's Earnings Call for full year 2020 and
	the fourth quarter.
	As always, let me start with a few introductory comments. Financially, the
	year was relatively stable with an order intake of organic minus 6 percent,
	with a clear margin uptick during the year and especially during the fourth
	quarter, and overall, a strong cash flow.
	Operationally, we had a good year with almost all operating indicators
	improving further during the year. Safety was improved. The cost of quality
	was reduced. The delivery position was kept high during a problematic year
	and the project execution improved. All in all, we had a meaningful
	contribution to the positive margin development through the operational
	improvements during the year.
	Strategically, we accelerated the portfolio mix change towards the
	environmental solutions, and we increased investments into areas like thermal

ALFA LAVAL AB

Moderator: TOM ERIXON

03-02-21/9:00 a.m. GMT

Confirmation # 8775435

Page 2

energy storage and hydrogen to just name a few examples. In parallel, we announced the restructuring program, addressing some structural demand changes in our portfolio primarily related to the hydrocarbon chain. I think you all can see the emerging of the new direction we are heading in for Alfa Laval in this context.

Finally, based on a stable market outlook and a strong balance sheet, we intend to resume dividend payments for 2020, and we also intend to initiate a share buyback program starting from the AGM in 2021. The program is estimated to be of a level of approximately SEK 2 billion per year over the next 3-year period in size. I'm sure we're coming back to that later during the call.

With that, let me go to the presentation and start with the key figures. Financially, as I said, a relatively stable year and a modestly higher profit margin all in all through the year. The volume decline in sales has been mitigated by good cost control and a good performance on operational parameters. The Q4 specifically was sequentially better but fell short in comparison in terms of order intake with the all-time high level of Q4 2019.

Turning to the Food & Water Division. We had a very strong quarter and a strong year with solid sequential growth and clearly positive year-on-year order intake, excluding the currency effects. Most end markets saw demand growth, including important areas like protein and biotech. Even the brewery end market was relatively stable despite challenging end market conditions in the brewery sector.

The pipeline of large projects were slow in 2020, and it was compensated by a mix of smaller projects in terms of the order intake. To a degree, the smaller projects and the change of mix is reflected in a better margin for the full year and for the Q4, specifically in the Food & Water Division.

The Energy Division is in transition towards energy efficiency solutions, and that continued in Q4 with good demand growth in the HVAC sector and other end markets related to environmental solutions. The distribution channel

ALFA LAVAL AB

Moderator: TOM ERIXON

03-02-21/9:00 a.m. GMT

Confirmation # 8775435

Page 3

continued to grow, reflecting a clear strength in our product offering and our channel partners in the Energy Division, and in fact, in the group as a whole.

Large projects continued on a low level in Q4 also in the Energy Division, mainly related to limited CapEx into the refinery and petrochemicals end segments.

Finally, as expected, the oil and gas sector bottomed out probably around mid- 2020. The CapEx spending in the sector has started to grow from a low level, reflecting a small increase in the orders sequentially for the Energy Division.

Then turning to the Marine Division. Overall, ship contracting market was very modest in 2020. Most likely, we will end up below about 1,000 ships when the final count is in, in a month's time or so.

There is no major change anticipated for the first half of 2021, although I would like to point out that there are certain ship classes, like container ships and LNG carriers, where there may be a somewhat more positive outlook when it comes to the medium term. And those are ship classes that typically are important for Alfa Laval and our order intake in the Marine Division.

Consequently for the quarter, order intake remained sequentially low. The existing environmental applications were flattish in Q4. But I'd also like to note that investments into new environmental solutions increased during 2020 with a number of product launches with the ambition to provide shipowners with a stronger toolbox to combat the environmental impact of the global merchant fleet.

Financially, Q4 was strong with a solid margin of 21 percent despite lower volumes. There were many contributing factors to the margin improvement, altogether perhaps somewhat overstating the underlying profitability of the division in the quarter.

Turning to Service. Sequentially, we were back to growth in Service in Q4, although still behind the 2019 numbers. Food & Water again had a very strong year, including in Service, in Q4 despite a weak start of the year in the service order intake.

ALFA LAVAL AB

Moderator: TOM ERIXON

03-02-21/9:00 a.m. GMT

Confirmation # 8775435

Page 4

The Marine Division is growing service in new applications from a low level, but it doesn't fully compensate the decline from idling ships and difficulties to perform onboard services and reconditioning work.

The Energy Division had a mixed portfolio with steady growth in many end markets but a larger decline in some idling customer plants and processes, especially related to the upstream oil and gas.

The digital transition in Service accelerated in 2020 with significant growth in remote services, connectivity solutions and long-term service agreements. The increased investment over the last years into our digital service offering is having a meaningful impact on Service sales overall towards the end of 2020.

Then finally, some reflections on the order intake trends. We had about, as expected, a 4 percent organic growth sequentially as we guided you during the last earnings call. We had that growth despite a very low level of large orders.

And as you can see on the graph, typically, we tend to be higher especially in Q4 on large orders. And as I indicated earlier, the large orders are there in the pipeline, but they are taking a longer time to convert. I will come back to the outlook overall, but in general, we believe the market demand will be stable in the short term.

In terms of regions, the largest regions, as always for us, is Asia with approximately 40 percent of the orders coming from there. Apart from some very specific weaknesses, we have a good underlying growth trend in most of the Asian markets, and that includes China.

North America, after a weaker period in our books, saw a good quarter, especially in the Food & Water Division. Latin America had a very strong quarter across the board, across the businesses and in most of the regions of Latin America.

Northern Europe and Southern Europe was trending a bit down both in the quarter and full year. But overall, we saw a quite stable business situation there during the second half. Finally, Eastern Europe, we had a long period of