Alfa Laval Thursday, April 27, :30 Hrs UK time Chaired by Lars Renstrom

Transcription

1 Alfa Laval Thursday, April 27, :30 Hrs UK time Chaired by Lars Renstrom Operator Good morning ladies and gentlemen and welcome to the Alfa Laval Q1 Report Conference Call. At this time, all participants are in listen only mode until we conduct a question and answer session and instructions will be given at that time. If anyone should require assistance during the conference, press * then 0 on your telephone. Just to remind you, this conference call is being recorded. I would now like to hand over to the chairperson, Lars Renstrom. Please begin your meeting and I will be standing by. Lars Renstrom Thank you very much. Good afternoon and most welcome to the presentation of the First Quarter Report. I will start by giving you my three highlights. First of all, order intake increased by 27% to SEK 6.5 billion, with all business segments and regions contributing to the growth. My second highlight concerns marine and diesel that had a good development, based on the order intake to the shipyards in Also in process industry, investments picked up since some of the customers had to go beyond the deep bottlenecking to increase capacity. And finally, Alfa Laval continues to deliver a strong operating margin, 19.2%, despite adverse currency effects and higher raw material prices. Let s take a look at the key figures. Order intake rose 27% to SEK 6.5 billion and net sales increased 10% to SEK 5.9 billion. Adjusted EBITA was up 12% to SEK 1.1 billion. The EBITA margin reached a solid 19.2%. Moving to the next slide we see that orders received on a rolling twelve months rose to SEK The increase in Order intake was 38% year on year at constant exchange rates. On the next slide you see from the order analysis that acquisitions contributed with 4.4% and that we had 11% negative currency effects and we had a very strong increase in organic growth of 34%. Moving to the next slide we see that we in the quarter reached an operating margin of 19.2% and the operating result was SEK 1.1 billion. Let s take a look at the highlights in the quarter. In India we received at order of SEK 50 million for a vegetable oil process line. In Saudi Arabia we received an order of SEK 75 million for Packinox heat exchangers for a refinery. From MAN in Germany we received an order of SEK 60 million for oil treatment modules to a land-based diesel power plant. When it comes to the acquisition of Aalborg Industries, we have obtained clearance from four out of five authorities; the decision from the Chinese authorities is still pending.

2 2 Considering that, there are no product overlaps; we see no obstacles to completing the deal, but the administrative process takes time. Let s take a look at the development per segment. In the Process Technology Division, demand from Oil & Gas exploration was boosted by capacity investments and we saw a recovery in demand for waste-water applications. Further, in Process Industry we saw a pick up in investments in most end markets. Moving over to the next slide with the Equipment Division, there we find that Industrial Equipment was up on strong demand from refrigeration applications and Sanitary enjoyed continued increased demand from food and pharma industries and in Marine & Diesel we had good order intake supported by last years contracting at the yards. On the next slide we see orders received for the first three months and for the first time in several years all segments delivered growth and I will give some forward looking comments. We expect the high activity level in oil and gas exploration to continue. Further, we expect the continued good demand from food and pharma markets, benefiting sanitary and food segments. And finally, we expect a continued improvement of the activity level in process industry. And now we move over to the geographical developments and there we see that all regions delivered at least 20% growth year on year, with Asia and Latin America standing out with 50% growth and we are very pleased to report that Western Europe recovered strongly with 35% growth. Let s look at the regions more in detail. We start with the Americas and in North America we had good contribution from the base business and we saw particularly good development for segments in the process technology division. In Latin America we had strong development for base business and large orders alike and we had particularly good sales growth in Brazil, Mexico and Chile. Moving over to Europe, in Western Europe, including the Nordic countries, we had substantial growth in base business which confirms an improved business climate and the best development was seen in Process Industry, Food Technology and Marine & Diesel. In Central and Eastern Europe we had a strong quarter, particularly for Sanitary and Food and Russia and the Czech Republic performed well. Moving over to Asia, we find that in Asia we had a very strong development in China and Korea and Marine and Process Industry performed the best. The Japanese earthquake has had insignificant effect on the operations. And by that I hand over to Thomas for the financials. Thomas Thuresson Good afternoon all of you. Time for some more numbers. If we start off with a few comments on the sales development, as you have noted already, SEK 5.9 billion in sales. That is to say on a like for like basis, we had an increase in sales of almost 15%, acquisitions contributed with about 4.5% and particularly the weaker US dollar had a big effect, so we had a negative FX effect in sales of 9.5%. I would also like to mention at

3 3 this point that we have not seen any effects worth mentioning on deliveries from the increased pressure on our supply chain; that is our internal supply chain as well as that of suppliers. Let s move on to the gross profit margin. We ended, as you see from the graph on 40.4% gross profit margin in the quarter, a decline of some 2.3% year on year. Let s look at why on the next slide. With a starting point of 42.7%, as you ve noted already, we had adverse FX effects representing 0.5%, that is the transaction part of the FX. In addition, we had an adverse mix effect, to a very large extent coming from the increase in capital sales, the relative increase in capital sales of some 3%, that was giving an adverse mix effect of 1.7%, giving a subtotal of 40.5%. The remaining parameters, the remaining main parameters ended net at almost zero, giving the 40.4%. Going forward, to give you a sense of what is to be expected, you will have to expect gradually increasing adverse FX effects. Given that we will have a continued level of demand similar to the last few quarters, you will also have to anticipate a continued negative mix effect, again, to a very large extent following the relative increase in capital sales of the total. For the rest, going forward, price and leverage continues to be the tools to compensate for more expensive metals and lower margins in contract-based sales. Moving on, further down the P&L, R&D increased with 11.4% like for like. This is a reflection of the fact that we did increase the project activity in R&D mid 2010, given that we saw the recovery during the spring of last year. With regard to sales and admin, we realized an increase like for like of 8.4%, that is a result of of course the increased activity level in most if not all markets, a selective addition of resources and finally, substantial salary inflation in primarily the large emerging markets. As you have seen, EBITA margin of 19.2%, that is above last year and in our view a very good level. Looking at profit before tax, a SEK 1,007 billion, which is then including a negative FX effect predominantly unrealized effects of a negative SEK 23 million and that is to be compared with the positive of SEK 32 million in the first quarter of 2010 and of course, this is largely coming again from the devaluation of he US dollar in relation to most currencies. Moving on to EPS, as you see from the slide, EPS came out stronger both including as well as excluding step-up, an increase of 18% and 13% respectively. I think this is a development which clearly very well supports the proposed increase in dividends for the upcoming AGM later this afternoon. Moving on to cash flows, cash flow from operations SEK 438 million, quite a substantial reduction from the SEK 1,007 billion of last year, but I will get back to that in just a short while. Return on capital and employed and return on equity both reporting an increase of 6.5% and 2.5% respectively, which is, as we see it, going from a good level to an even better level. Getting to the cash flow statement on the next slide, cash flows from operating activities of SEK 438, the reduction then, compared to last year, is coming from an increase in working capital of some SEK 350 million, instead of as last year a reduction of SEK 150 million. This is a reflection of mainly two elements. To some extent the increased activity level, but mainly because of the more expensive metals that we re using in our production. Another factor was an increase in taxes paid, which is more to do with

4 4 phasing than anything else. We think that the free cash flow generation was strong considering the increase in activity level, as well as the metal prices and we ended with SEK 528 million, as specified on the slide. A bit of a forward looking statement or adjustment to a statement we made before, when it comes to capital expenditure; given the increased scope of manufacturing in emerging economies, as well as the general activity level, we expect to further increase our capex from the earlier guided of about SEK 600 million to a capex of somewhere between SEK 650 and SEK 700 million for 2011, so an increasing capex for this year compared to earlier guidance. Moving on FX, again, the weakening in the US dollar will further increase the adverse FX effects and if we assume today s levels for the rest of the year, we expect adverse FX totalling SEK 425 million, which is an increase of SEK 115 million compared to our guidance of SEK 310 with the full year report. Moving on to the status of our order backlog, you find on the slide the status as per March 31 and the last three years. As you can see, the total has come down, very much due to the reduction in backlog in marine and diesel. Let me point out that for delivery in the current year, we have SEK 8.9 billion in the bag at this point, which is an increase of some SEK 300+ million, compared to last year. With this as a basis, let s take a look at a sales bridge from 2011 over Starting with a SEK 24.7 billion of sales of last year, we are now, with current exchange rates, anticipating translation FX of a negative SEK 1.9 billion, that is an increase of SEK 800 million compared to what we showed you with the full year report, again, having to do with dollar and dollar related currencies. That gives you a subtotal of SEK 22.8 billion. With the acquisitions already landed and with the assumption that we will be able to close Aalborg round about the very beginning of May, we can add some SEK 2.4 billion to sales for 2011 and then of course, what remains is price and volume effects on in-for-out orders. Let me at this point point out that in-for-out orders in 2010, recalculated at current exchange rates, amounted to SEK 14 billion, so in-for-out orders of SEK 14 billion in If we then make an example, just an example, given an increase in in-for-out orders of 15% from January 1 until December 31 of 2011, that would mean an addition of another SEK 2.1 billion, so that added together will give you SEK 27.3 billion 22.8 plus 2.4 from acquisitions and 2.1 with a 15% increase in in-for-out orders, giving Of course it s up to you to make your assumption whether it s 10, 15 or some other percentage increase in 2011 over 2010, but I think this is very important to have in mind when forecasts are made. And with that, I hand back to Lars for the outlook. Lars Renstrom And the outlook for the second quarter is as follows. We expect demand during the second quarter 2011 to be somewhat higher than in the second quarter of 2010 and possibly even somewhat higher than the first quarter of And by that, we have finished our presentation and now I hand over to the operator for the Q&A session.

5 5 Questions and Answers First question Yes, good afternoon and good morning. My first question relates to the mix in the order book. You mentioned today that it s mostly on capital sales versus the total that gives you the negative mix, does that imply that the... call it the sort of the weaker profitable orders that were taken in after the recession, are they now invoiced and also the very, very strong profitable orders that were taken on the marine side before its collapse, are they also sort of already taken, so we have now a more normal mix in terms of the profitability in the orders, we should only look at the mix on after market versus capital sales? That s my first question. My second question is very much related to the marine side, maybe you can explain what happened sequentially on the marine order side and what you said more in detail here? Well to start off with, mix shifts. You know, if you look at orders received, we had 25% parts and service of the total the first quarter this year, we had almost 32 last year. But that is of course orders. If we look at net invoicing, we had 25.5 this year of parts and service invoicing against 28.2 last year, which is almost 3% less. That is the main element of the negative mix effect, the 1.2. Then when it comes to the order backlog, we will continue to have somewhat of an adverse effect from the margin we have in the backlog. We were, as we were quite open about, selectively aggressive in contract-based sales during the trough and there is still a number of orders that remains to be shipped, so we will... again, I repeat... continue to have somewhat of an adverse effect of pressure on the gross profit margin from these contracts that we still have in the backlog. But I guess that s insignificant when compared to the other mix effect that you described as 1.7%. Well, I did not put a number on it, but of course it s significant enough in order that it s worth to be mentioned. Okay, thank you. And then when we come to the marine, there we... first some words about the order intake to the shipyards. In the first half of 2010 there were booked 1,200 ships were contracted and in the second half of last year 1,000+ were contracted, and with a lag of six to nine months, orders are placed with Alfa Laval and we could see... we saw a pick up in the order intake already in the fourth quarter last year for marine and diesel and it escalated now in the first quarter and we saw a good amount, both for marine, especially from China, and we also saw a good demand for land-based diesel power stations. But how should we think of this Lars, I mean given the sort of sequentially weaker contracting in the second half of last year, is it fair to assume that the order for you with the time lag is sort of levelling out at this level or is it coming down or are we still seeing some possible momentum for you in the lag here? It s... we... there was a lower intake in the second half of the year, but for us it s impossible to know to what extent the different shipyards have already placed the orders with their suppliers or not.

6 6 Is this one of the elements that might mean that the sequential demand also could be better and after only the year on year is marine one of those, call it uncertainties that leads to this type of guidance? I would rather say that we saw an increased activity level in process industry during the first quarter. We saw in several end markets a pick up in demand, refinery was quite active and a number of other end markets, so it s more the process industry side and we saw that some of our customers, they have now gone beyond the de-bottlenecking and have to make more significant investments to increase capacity. Second question on the call First, you mentioned that activity among customers are picking up, could you give some indication about larger orders and tender activity, if you should expect that to pick up as well or is this more like mid-sized to smaller orders that are sort of expected to come? Yes, okay. The increased activity is mainly in the mid-size order range. We can say between one to five million euro, there we see a good pick up in activity level and also in order intake. When it comes to the big ones, above five million euro, they come in a bit lumpy, but the main message is the mid-size, there is an increased activity level that we can confirm and that we saw now in the first quarter. Price increases I guess, have they sort of had an impact on customer behaviour, I guess in a pre-buying or something like that, which explains the good order figure? No, I mean we made one adjustment at the back end of last year and following the metal price increases. We are now well into implementing a further adjustment, but we have no reason to believe that there s anything to do with price... with pre-buying in relations to that price adjustment. Remember, we re into investment goods for capacity increases to a very large extent in capital sales, so it s nothing that you do to sort of put on the shelf. You also mentioned that the supply chain seemed to be in order and I guess is there anything more to say about... I mean you supply a lot of... or sources in Japan, is there something to say about that? No, I think that again, let s look at what s happening to working capital. You know, we had an increase of 350 million, but as I commented before, that s basically to do with the increase in prices for metals and for the rest, you know, there are only slight movements in the other elements of working capital and I think that s evidence that the supply chain inside of the company remains solid. We ve had very... none or very limited implications from, you know, hiccups with suppliers. If we look at Japan, we have gotten confirmation from our main suppliers of titanium that they expect to be able to meet their delivery obligations and then when it comes to electronics specifically, you know, we are directly a very, very small user/buyer of electronics, so we ve not seen any direct effects, indirect effects well that remains to be seen of course. And finally, just one about Aalborg here, are you at all concerned about the missing approval from the Chinese?

7 7 No, we ve stayed in continuous dialogue with our advisors, our lawyers, as well as with the Ministry of Commerce on this matter and you know, it is, as Lars stated before, a question of getting the administrative process completed inside of the authority. There are no questions pending between the Minister of Commerce and Alfa Laval on the acquisition. Have you got any indication about when we... the timing of the approval? The authority is very well aware that we are eager to close the acquisition and they have promised to do their utmost to complete the process, that is as far as of course they are prepared to commit. Third question Okay, a question on price. I mean price is still a question mark in your sales bridge Thomas, but more to that, how do you see it on pricing now? Lars you commented before that you are a price leader, but you also want to sort of protect the volumes in the business and I guess that you have a quite good possibility here to increase prices due to the input of material. How should we think about the pricing for Alfa Laval? Will you go out rather aggressively as you did in the past or are you waiting others more this time around, or how should we look at the price element? We stick to our approach when it comes to price adjustments coming from metal cost increases. We try to work the same way as we did four years ago and then when it comes to sort of aggressivity and specific orders, you know, we talked about selective aggressivity and contract-based sales in the trough, you know, the demand situation is quite different at this point and of course that we expect and we see as well in certain areas will have an effect on the price levels on contract-based sales. On the organic leverage, if you look at, if you try to take out the FX both in the translation and transaction, are you pleased with that organic leverage on additional volumes? That s the first question. The second is really on your guidance, whey are you changing it from a quarter on quarter guidance to a year on year guidance? Is there any reason for that? Well I can start with the guidance. Historically we have always had a guidance year on year. We abandoned it when we came into the financial crisis in 2008 when there was a free fall in demand, then it didn t make sense to refer to something a year ago. Now we are returning to our normal way of giving the outlook, comparing year on year instead. Yes, that s very logical, yes. When it comes to the leverage, well I think the outcome in the first quarter speaks for itself and I think it s evidence that we have improved productivity quite significantly. That is to say we ve gotten more out the door with less resources in quarter one and of course the measures taken during the trough, they ve been every important in order to achieve this productivity improvement, so yes, we re quite happy with the leverage effect.

8 8 Fourth question Firstly Thomas, just on the working capital build, would you expect to get that back in the second half of the year as you deliver the finished goods with higher raw material content, or do you think we should expect more of a kind of more general working capital outflow this year just because of the higher volumes. I guess in short, what do you think your working capital to sales ratios will do over the course of this year? That s the first question. And then secondly, just in terms of you say that you ve secured your supply of titanium going forward, you know, some of your smaller competitors may not have done, do you think that gives you kind of extra pricing leverage versus some of your competitors and maybe the scope to get your gross margins up to the levels you saw in the last cycle? Thank you. If we look at working capital, you know, the bulk of the effect of the increase, that is to say, in the first quarter, has to do with metal price increases. Assuming that we will continue to see a strong demand, I think, you know, in order to retain high level supply accuracy towards our customers, good delivery performance, you know, I do not expect that we will be able to reduce working capital going forward. Again, given demand stays on a good level, we will have to build some working capital in order to retain good delivery performance. Okay, thanks. And when it comes to titanium, there is a good balance... the market supply and demand is well in balance in the titanium market, so we don t foresee any shortage of titanium and we ve had confirmation from the Japanese suppliers that they do not have any interruptions due to the catastrophe over there, so therefore, it s a normal market when it comes to titanium products, so we don t foresee at all the same effect as we had in the previous boom. Great, thank you. And maybe just a follow up on marine, just so we can get it in context. Can you just say how much of your order intake for the quarter came from the marine segment and maybe, as you ve done in previous quarters, what the book to bill was within that segment. Thank you. Well if you look at the pie on page 7 of the report, you will find that we were about a dozen percent of orders coming from marine and diesel and we had orders being on about level with sales in the quarter. Fifth question Just a question regarding maybe profitability mix going forward. Obviously FX gets somewhat worse, still you re going to have or are going to face negative metal pricing, but then if I just read well what you ve just been saying, the mix is probably getting better from a product invoicing standpoint, but then also you are escalating volumes and then you are increasing prices as well, is that sort of almost saying that from here on we re going to see more of let s say margin accretion towards the second half of 2011? Well when it comes to the first element that mix would become better, I was saying before quite the opposite. We have to expect that mix will give a negative effect because the

9 9 capital sales element will increase given current demand levels. When it comes to volume and price, what I said before was that those are the two factors we have in order to compensate for what we see today, that is, more expensive metals and lower margins in the backlog still for some time. But when it comes to let s say the mix in the invoicing of your capital equipment, well actually the services, which yes, I mean they re going to be that service is to cover a legitimate period, but within capital you also see mix improving there, right? No, I didn t say that. I just said that because of contracts with lower margins still to be recognized as revenue in the coming quarters, we will have an adverse effect within capital sales as well. Okay thank you. And then last, sequentially, how much do you expect parts and services growing into sort of second quarter? We re not providing a specific growth percentage for any of the segments and that goes for parts and services as well. And how much did it grow in this quarter, sorry? I think it s specified in the report on page 2 at 14.3%. So is it accelerating? I think I remember that Q4 was sort of 8% sequentially, is that also sequential growth? No, this is year on year. Year on year. We appear to have no more questions at this time. I hand the conference back to you. Closing Comments Thank you very much for your attention and wishing you continued good day. Thank you from all of us. Bye-bye. Thank you guys. Bye. Operator Ladies and gentlemen thank you for your participation. This concludes today s conference, you may now disconnect your lines. Thank you.