Earnings Call: Q2 2021

Jul 20, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Alfa Laval Q2 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. If you wish to ask a question, please press star one on your telephone keypad. For your information, the conference is being recorded. Now I would like to hand the conference over to your speaker today. Please go ahead, sir. Good morning. Welcome to the earnings call. I will start with a few intro comments before we move on to the presentation, as always. First, let me say that end markets across the board remain positive in the quarter across all our regions and across all our divisions. We are in a clear global recovery, and Alfa Laval is now passing the low point on this business cycle as we are rebuilding the order book going forward. The operating margin improved somewhat despite the noticeable inflationary pressure and the somewhat low invoicing. Strong operational performance and the implementation of the early announced restructuring program compensated well for the cost escalations across the board. The sustainability platform continues to grow organically at a good pace, as you notice. On top of that, we have added a number of important business development initiatives in the quarter, specifically to the Marine Division, and I will come back to that later on, obviously. Let me say that end markets are expected to remain firm in the near future, but for Q3, we also expect perhaps some seasonal variation effects that we normally have for a weaker Q3, and there may have been some pre-ordering taking place in Q2 ahead of anticipated price increases and others. While end markets in nature remain firm and strong, we may see some effect on the order intake, specifically in Q3, and we'll return to that in the forward-looking statement. With that, let me go to the key figures. Being a long cyclical company, invoicing lags order intake, as always, and as expected. Despite the lag, the operating margin improved a bit in Q2 year-over-year and sequentially. The weaker Marine invoicing, an increased cost for managing inflation and bottlenecks in supply chain was compensated by good operational performance and also to a degree, with a positive mix in product and mix in service versus capital sales. Remember that when the invoicing decreases, the share of large projects tends to decrease, and the share of service tends to increase. We have a natural hedge reducing the margin cyclicality, and remember that hedge goes in both directions, both when we are heading south and when we are heading north. With that, let's go to the divisional reviews. For Food & Water, it was obviously a very strong Q2 in terms of margin and in terms of order intake. We saw a clear return of large projects in the quarter, especially in sustainability-related application like biofuels. In addition, the demand was very strong with our channel partners, driving volumes to record levels for our transactional business. Let me here point out an important fact regarding the structure of our order intake. The biofuel business, to a large extent, is booked in the Food & Water Division. Due to the technology platform, we have an engineering solution for vegetable oils. As we transit from fossil to biofuels, which is part of the energy transition, we are somewhat consequently understating the order intake in the Energy Division and somewhat overstating the order intake in the Food & Water Division from an end market perspective. Strictly looking at end markets in Q2, if we adjust for this, you would find that both the Energy Division and the Food & Water Division was just above the 30% growth mark, both of them. I hope you follow me in terms of the allocation of the order intake and how it's being booked for technology reasons. End market-wise, we saw equal strength between those two divisions. Let me move on to Energy Division as such. We had, even in the posted numbers in the Energy Division, strong growth in sustainability application, and it was more than compensating for the weak market sentiment that remained in the upstream oil and gas market and to a degree downstream as well. From a supply chain point of view, we are in a challenging situation with bottlenecks becoming a limiting factor with extended lead times and some additional cost already present in the Q2 result. At the same time, we have under-absorption in some units with primary focus on the oil and gas application. This is to a reasonable degree addressed in the ongoing restructuring program, supporting a stable margin in the quarter. Service demand was high and grew also in the upstream oil and gas market, which tend to be a leading indicator when it comes to market development for the quarters ahead. Regarding the Marine Division, the second quarter continued a clear improvement in yard contracting following a strong Q1, and it's now on a contracting pace at around the historic average level of 1,500 to 2,000 ships per year. We expect when the final count for ship contracts is in for the first six months, we will be in the region of 800 to 900 ships. For first half 2021, with reasonable expectations for a good contracting market looking into the second half as well. Contracting included a good number of product tankers with immediate effect on the order intake for pumping systems specifically. They had a very solid order intake in Q2, affecting the overall order intake for the Marine Division positively. Demand developed somewhat positive also across most of the product groups, but especially in sustainability-related applications. Despite the expected lower invoicing margins, were relatively stable on the back of a quick implementation of capacity adjustments end last year, beginning this year, and a good operational performance overall. You know, we have been working on the Marine sustainability platform for many years, starting with the PureBallast project over 10 years ago. Global environmental regulations will continue to drive innovation and investment into this area over the next 10 years as decarbonization becomes critical for the shipping industry. In Q2, we added three important initiatives to the decarbonization toolbox available for the shipping industry. First, we announced the acquisition of StormGeo. StormGeo has multiple purposes in our portfolio, one important aspect is the providing of a route advisory service to save fuel on the navigational arena. Apart from that, StormGeo also has other aspects, as we discussed in an earlier call, supporting the digitalization and development of digital service business in the rest of Alfa Laval's portfolio. The second announcement we did in the quarter was the investment into a joint venture called Alfa Laval Oceanbird, which will develop a highly efficient wind propulsion system with significant fuel savings opportunities for a number of ship classes. Third, we took a minority stake in a company called Marine Performance Systems, which will commercialize a system to distribute air bubbles under the hull in order to reduce friction and save fuel. Together with the existing portfolio of environmental applications, we're in a strong position to support the shipping industry to cut emissions by 50% going forward. We have positioned our portfolio in the Marine Division to become fuel independent in the time span of 2025, 2030 range. Let me make some remarks on service specifically. Service has returned to growth in all divisions and end markets at this point in time. Although we do still see some limiting effects from travel restrictions in a number of geographical areas, not least for the Marine Division. The implementation of digital service tools and investment into modern technology to industrialize high-volume service items, will continue and have a positive effect in building Alfa Laval as a service company and building the service culture in the group. I think we're on good track, and the current order intake growth is signaling that as well. A couple of geographical comments to round off before I hand over to Jan. The global recovery is clearly noticeable in our order intake numbers for Q2, and we see growth in all regions with perhaps small exceptions of the Nordics. In all regions, we see good, stable, and in fact, rather high growth numbers at the moment. If you remember, just a few years back, China was first out in entering the growth phase, and after that came North America. What we saw this quarter was the rest follow. It has been quite a few years since we have seen a synchronized business upturn across all important regions in the world. That's where we are right now, and that is clearly supporting the order intake growth we've seen in the quarter. With that, I'd like to hand over to Jan for the financial details. Thank you, Tom. I'm going to start with looking at sales as usual. We expected invoicing in Q2 to be lower than the same quarter last year. We realized sales of SEK 10 billion, which is 5% lower than last year. Please note that we had a large negative FX translation impact on sales in Q2. Excluding this, sales were up 2% versus last year, pretty much as expected. With regards to sales in Q3, my outlook is as follows. I expect invoicing in Q3 to be somewhat higher than the same quarter last year, primarily driven by higher invoicing in the Food & Water and Energy Division, despite the continued expected negative FX translation impact versus last year. Looking at our gross profit margin. The margin came in at 38.2% in Q2 compared to 35.4% last year. We had a positive capital sales service mix due to the relative strong service invoicing in the quarter. We had a good load and capacity utilization in most of our factories during Q2. This benefit could more than compensate for the very low cost situation of last year when the short-term working programs were in full effect. Secondly, we also had a positive impact from the ongoing restructuring program in the quarter, primarily impacting the Marine Division. As expected, the PPV metals impact was slightly negative in the quarter due to increased material and freight costs, which mainly impacted the Energy Division. Finally, we did see a positive FX impact on gross profit margin in the quarter. Now over to my outlook for Q3. The starting point is 36.1% margin reported Q3 last year. We do expect a continued positive capital sales service mix. We expect a neutral load volume effect, but a continued negative PPV metals impact due to the increased material and freight costs. We expect this to be partly offset by price increases and material price hedges already in place. Finally, we do expect a positive FX impact on the gross profit margin also to continue into Q3. Looking at our S&A expenses. On a comparable basis, the S&A expenses were up 15% in Q2 and 4% year-to-date. This reflects that we are returning to a more normal activity level in the company and that we are comparing with a period, again, where the short-term working programs of last year were in full effect. With regards to the restructuring program announced in December last year, the program is progressing as planned, and we have reduced approximately 375 employees so far, which represents about 60% of the total planned employee reduction. We've booked the remaining part of the restructuring cost, amounting to SEK 204 million in Q2, which brings the total cost of the program to SEK 945 million. Please note that this program is primarily reducing cost of goods sold and was set up to offset the lower invoicing volumes in the Marine Division and the upstream oil and gas-related part of the Energy Division. When it comes to our EBITDA margin, as you have seen, it came in at 17.4%, slightly up versus last year, despite a lower invoicing volume and higher overhead costs. This was possible due to a positive mix impact, both in terms of a high proportion of service, but also a higher proportion of transactional business volumes, but also the ongoing restructuring program and the strong operational performance that Tom commented on earlier. Looking at some of the rest of the key figures. Again, excluding FX effect, S&A were up 15% and R&D expenses were up 16%. This reflects that we are returning to a more normal activity level in the company and that most of our end markets are recovering and business activity is strong. Excluding the restructuring cost of SEK 204 million that was booked in Q2, as commented earlier, other cost and income was SEK 186 million, which is slightly lower than last year. Financial net, excluding FX impact, was minus SEK 22 million, and the FX gain losses in Q2 were minus SEK 91 million, giving a total finance net of SEK 113 million versus SEK 166 million last year. The main reason for the FX impact in 2021 and also last year are due to revaluation of cash positions in local currencies. The tax rate came in at 20% in the quarter and 23% year to date. The reason for the lower tax rate is due to tax incentives and tax refunds in various jurisdictions. The lower EPS in Q2, of course, is primarily due to the restructuring cost that was booked in the quarter. Now looking at the cash flow statement, cash flow from operating activities were SEK 1.4 billion in the quarter. While the EBITDA was on about the same level as the last year, we did see a slight increase in working capital, primarily driven by the strong growth in orders received. Investing activities include the CapEx investment of SEK 172 million and, of course, the acquisition of StormGeo at SEK 3.6 billion. Financial net paid, excluding FX impact, was minus SEK 10. Realized FX gains losses in the quarter amounted to a positive SEK 7 million, giving a total finance net paid of minus SEK 3. This means that our total cash flow came in at negative SEK 2.3 billion, primarily due, of course, through the acquisition of StormGeo. Please note that we have bought back approximately 1.2 million of shares in the company during Q2, representing 0.3% of total number of outstanding shares at a value of SEK 330 million. When it comes to the FX impact on EBITDA in the quarter, the transaction impact was a positive SEK 30 and the translation impact was a negative SEK 60, giving a total net negative FX impact on EBITDA of SEK 30 million in the quarter. Looking at the projection for the full year 2021, we expect a slight net negative FX impact of SEK 50 million, driven by a negative FX translation impact caused primarily by the stronger Swedish krona. When it comes to the order backlog, at the end of June, it totally amounts to SEK 21.5 billion, which is 7% higher than same time last year, but 19% higher than compared to the end of 2020 on a comparable basis. This large increase in order backlog is, of course, due to the high book-and-bill rate of 1.22 in the quarter. The order backlog now represents 6.6 months of LTM sales, and for shipment in the remaining part of 2021 amounts to SEK 12 billion, which is about the same level at the same time last year. That brings me to the sales bridge for 2021. Starting, of course, with the sales achieved during the first half, which is SEK 18.9 billion. As stated in the previous slide, the backlog for shipment in the remaining part of 2021 is SEK 12 billion, which adds up to a subtotal of SEK 30.9 billion. On top of that, you will need to make your estimate on change in in-for-out orders, FX translation impact, and acquisitions. For your reference, the total of in-for-out orders during Q3, Q4 2020 was SEK 8.3 billion. Regards to acquisition, StormGeo had sales of approximately SEK 700 million in 2020, and as the deal was closed on June 1st, we will have seven months of sales attributable to Alfa Laval during this year. The expected FX impact, of course, very uncertain. However, using the closing rate at the end of June, the estimated FX impact is a negative SEK 1.5 billion for the full year. By that, I hand back to Tom. Thank you. Let me repeat some comments on the outlook statement. As indicated, we believe that end markets will remain on the current high level in Q3. We also expect some seasonality effect, which are normal, and some pre-ordering perhaps that took place in Q2 will possibly affect the order intake in Q3 somewhat. All in all, we expect a somewhat lower demand for the group, and we expect a somewhat lower demand across all 3 of the divisions. With that, we open for questions. Thank you. As a reminder, if you wish to ask a question, please press star 1 and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, star 1 if you wish to ask a question. We are taking the first question from the line of Klas Bergelind at Citi Research. Yes, thank you. Hi, Tom and Jan. Klas at Citi. The first one is on mix. It's already quite good, but I'm trying to understand the product mix ahead looking at the orders now coming in linked to the green agenda. We still have weak oil and gas orders, I think, moving through the backlog, and now we have the strong growth in the newer verticals looking at orders. Does this mean that the mix out of the backlog from a product point of view should start to turn more positive into the second half, or is that more for 2022? I.e., is net pricing better on these newer, greener products? That's my first question. Well, it's difficult to describe it in terms of net pricing for various reasons. I think that it's a bit more complicated than that. We have a lot of welded products that go into the oil and gas side, and the demand is relatively low there still, and the utilization in those units is relatively low. Whereas what we sell into a lot of the other areas are products where we are in high capacity utilization, but also perhaps in some areas starting to reach, let's say, some bottleneck challenges. It's not that we are shifting sales from product A from one area to the other. It certainly happens to a degree, but there's also is a different mix. With that said, I would not predict that we have a negative mix effect from fossil to renewable, if you like. Okay. No, that's fine. My second one is on Marine. We know that product tankers are important for you, and you get orders through very quickly after contracting increases. Early in the year, contracting was more driven by containers, LNG, LPG, and so forth, and that typically is a 9 to 12-month lag until you get an order in these segments. Now we have bottlenecks out there. Do you think, Tom, that orders will take longer to come through outside of the tanker segments, i.e., those that are geared to more conventional containers and so forth? I think what's driving that in this cycle is that at least initially, I think we may have somewhat shorter times than normally just because the order books are relatively short at the yards and the delivery times for the first book ships, I think will be relatively quick. We may have a somewhat accelerated order book build in Marine compared to a normal cyclical upturn. As we've said before, we don't expect any major impact this year, certainly not when it comes to invoicing. I think if anything, outside of pumping system may be a bit gradual during the year. Okay. My very final one is for you, Jan, on the cost savings. Great execution driven by both good load and the mix, but you had temporary savings reversing, and then we had some structural cost savings. Can you please zoom in on those? How much did the temporary savings from last year, the SEK 300 million, reverse? Did you get any structural savings already this quarter? I thought that that was more for the third quarter onwards, so I understand the moving parts there a little bit better. I would say the following. A lot of the savings we saw last year came through the short-term working programs and such. Of course, those go away. You also have some other elements related to traveling and such, which will more gradually, of course, come back. I think if you do the math, you probably have about two-thirds of, let's say, the costs that are coming back on that program, or maybe even a little bit more. On the restructuring programs, as I've said before, we expected to have that program fully up and running in 2022. We did see some of those savings come through, absolutely. They're coming through in a different line on the P&L. It's coming through primarily on the COGS side rather than on the S&A side. It's a bit of a different, let's say, hitting the P&L from a little bit different points in the P&L. You had savings at the COGS line from the structured program this quarter already? Yes. Okay, cool. Thank you. Thank you. We are now taking our next question from the line of Max Yates at Credit Suisse. Thank you. Just my first question is about how you're thinking about this marine recovery. I guess if I look back to the last time we had a very good year in marine, it was 2018. You were doing around SEK 5 billion of orders that were directly related to pure shipbuilding. I just wanted to understand, as we think about this recovery going in through this year, and then in your own orders into 2022, should we think about a similar sort of level of order intake for your pure shipbuilding business? Is there anything additional that you're doing, content per ship, additional products that mean actually for a similar amount of ships and mix, we may actually see a higher revenue, a higher order number for your own business in the pure shipbuilding component? Your question implies that the sky's the limit, but I think the reality is a bit more complex than that. The 2018 number, remember, was an enormous pumped-up demand short term for scrubber. That invoicing has been going on up until, let's say, beginning of this year when that part of the order book was more or less invoiced out. A main reason for the deviation in invoicing this quarter compared to last year is the decrease on the scrubber invoicing volume. It's not the only factor, but it's an important factor. The 2018 number was not really so supported by contracting market conditions as opposed to retrofit conditions. If I would guide you on that, remember that at any given point over the last years, our order intake from new shipbuilding tends to be approximately a quarter of the marine order intake. About a quarter is related to the service area, and about a quarter is related to offshore and to a degree, environmental products that tend to go as much on a retrofit as a new build. If you're going to look at an escalation of order intake from marine, you can't start from the full base of order intake. You have to take the third of it and do some math on that further. The service will have its own dynamics. The sustainability products will have their own dynamics as well. You rightly point out that there are new components and elements. What I talked about earlier when it comes to StormGeo, obviously, is joining us on a monthly basis, a quarterly basis from now on, with an annual revenue of about 700 million SEK. First month of operation within our book has been stable and according to plan. We are on good pace with that. Others like Oceanbird and Marine Performance Systems, it will take years before we see any effect on invoicing. There's been another of other announced projects over the last year related to methane slip and other things where we certainly see opportunities for additional revenue going forward. I'm just trying to describe the components for you a bit, and from there on, you have to think through the numbers. Okay. Maybe just a very quick follow-up question on that. I think if I go back to 2018, the scrubbers business was about SEK 4.3 billion. We know that's come down considerably, but I just wondered if you could give us a feel of, obviously the scrubber, but the ballast water business is bigger since then. Just maybe any feel on where the current ballast water business on a sort of annualized basis may sit? Just to try and get a feel relative to that, where the scrubbers were previously. Yeah. We are on a good level in ballast water. As you know, we are starting to approach the final years of the retrofit programs. We will have a decrease eventually, but right at this moment and in this year, the PureBallast business is strong and firm. Approximately, it's somewhat higher than 2018. It's not a huge factor, but it's a plus factor compared to 2018. As you rightly point out, the scrubber side is significantly lower, and we don't expect that it will come back anywhere close to where we were in 2018. From almost a collapse in that market last year, now we see a more normal and what we think is maybe a somewhat of a sustainable order level. It's a contributing factor for us. In the quarter, it's somewhat positive compared to last year for sure, and it is also sequentially growing in the quarter. Okay, great. Thank you very much. We're now taking our next question from the line of Mattias Holmberg at DNB. Thank you all. First, any particular area where you've seen these pre-orders that you mentioned earlier in the presentation? Just to be safe, I'm pretty sure you've said earlier that you also require down payments to book orders, but would you say that there is any risk of order cancellations because of this pre-buying that you've seen? No, I don't think so at all. Let me divide it up for you a little bit. What we've seen structurally in the quarter is a return on larger projects. They were not released during 2020 and the beginning of this year. They'd been in the pipeline for a long period of time. As expected, when the pandemic effects are starting to wither, then we see the release on some of those projects. I don't think that is not a pre-ordering or any quick fixes. Those have been work where we've been doing a lot of engineering work already, sometimes invoiced, and then eventually converted. Those projects are firm. Well, they're as firm as they've been any time in history. We don't have any order cancellation situations of any meaningful substance in Q2, and we don't expect it going forward. The area of pre-ordering when we granulate the order intake is possibly in the area where we have strong channel partners. We built a very strong channel partner network, not least in the Food & Water Division, but to some degree in other areas as well. They performed exceptionally well in the quarter. I think that's where we may have some pre-ordering or early posting of orders in anticipation of price increases or anticipation on the fact that we may see some bottleneck and lead time extension in certain areas. From that point of view, I don't think it's a massive challenge. I don't think there's a risk that we have products returned, but it may affect the pace of order intaking in Q3. That's how we see it. That's very clear. One more question from me is, if you look at your organization today, you're doing some headcount reduction in marine oil and gas, as you mentioned. Is there any part of the business where you see the need to adjust either up or down in order to be able to have a right-sized organization going forward? Let me start with sizing up. I think we are on all-time high order intake in quite a few areas, which are high value-add production areas. We will need to take decisions when it comes to CapEx and manning gradually in a number of areas going forward. We are cautious not to move too quickly because the future is always uncertain. We are clearly in a zone right now in a number of areas that if we continue on this level or higher, it will not be efficient for us to operate in the current size of the cost structure that we have. We are going up in shift, we're going up in temps, we're going up in a lot of ways to cope with the supply situation. I think we are standing in front of a number of areas where we may come back to do additional investments, additional manning. As of now, I have to say our productivity numbers look very, very good. They've been doing that during 2020, and they've been doing that during 2021. We are cautious and considerate in making sure that, as you know, the footprint investments and CapEx levels for automation, I think, has been higher the last few years than before. What we're seeing now, I think is some positive effects and outputs from those CapEx projects as well. Before we add a lot of manning in operations, we will look carefully on optimization levels. That's part of your question. The other part of your question is the possibility for downsizing. Well, with order intake at pace this quarter of SEK 48, 49 billion, of course, there's not a lot of areas where we are looking for restructuring. I still have to say that we believe that the actions we took to adjust capacities in oil and gas-related applications is what we see is needed right now. We are still a little bit in that program. I've communicated a number of times that we have foreseen that we probably have another cycle to go in the CapEx programs, upstream, downstream oil and gas. Expecting that, I think we will be relatively stable as to where we are. If that is a miscalculation or there is a different scenario going forward, then obviously we may have some portfolio reshuffling to do in the years to come. It's nothing that I see as particularly urgent right now. We are in a reasonable position. We've taken a lot of actions to address the situation. As long as we believe that we will see another cycle of investments, and that's where we are right now, then I think we are well-equipped to handle the uptick. I remind you guys that when we were a year, a year and a half back and looking at the very uncertain situation, the actions we took were very much set in an order for us to be able to scale up afterwards. The scale-up is being done right now and is working, and we're going to do the same with oil and gas. We will remain with our full capabilities to follow the next cycle should it come. Sorry, long answer. No, that's great. Thank you. We are now taking our next question from the line of Andrew Wilson at J.P. Morgan. Hi. Good morning, everyone. Thanks for taking my questions. If I can start with just, I guess it's a broader question. The Q2 Marine orders were significantly better than I think we talked about with the Q1 results. I guess better than obviously consensus was expecting as well. Interested in what I guess happened that surprised you in the quarter. Was it just a case that it was a relatively cautious guide? I know you alluded in the Q1 to some potentially customers taking options up early or making sure that they could take options up. Therefore maybe it felt a little less sustainable. You obviously, again, talked positively today on the outlook. Is it just that you just feel the whole underlying market, you just have more confidence that this is a sustainable level? Appreciate that's quite a long question, but maybe just to get- Yeah a little bit more of the thought process how it's changed. No, it's good, Andrew. I follow you. Let's see if I can wrap up a reasonable response. You're right. When we looked at the Q1, we thought it was a bit of a container-driven uptick. We thought it was rather options conversion related. We didn't necessarily feel confident in looking at it as a cyclical upturn. We saw structural reasons for orders coming in. I think after Q2, we see this as a little bit more broad-based when it comes to ship classes. We see it a bit more broad-based when it comes to the shipping industry's optimism going forward. It's supported by a return to growth in global trade and the underlying, and to some degree, capacity needed to manage bottlenecks in ports of the global trade system. I think we are a little bit more comfortable with where the contracting volumes are at the moment compared to Q1. That's one aspect. Structurally, for us, when it comes to the order intake in Marine, I think the big difference compared to our guidance at the time and what we didn't necessarily nail to the decimal was the fact that the pumping system orders came ahead of our expectations. I think we've been mentioning this a couple of times, that tends to be the most short cyclical order book business compared to contracting. Sometimes and often we see pumping system orders before the ships are registered in the statistics at Clarksons. Those came to a large degree in June and later part of June. It was a little bit in advance of our expectation. It doesn't change perhaps too much our outlook for longer, 3, 4 quarters. A lot of it came in Q2, I think that moved the numbers significantly in the 2nd quarter. You can call it a bit of a one-off. If there is something that is less of a one-off, I think the fact that the shipping industry is gradually moving to a multi-fuel solution type of situation. On top of that, we see an increase in pricing delta for low sulfur, high sulfur fuels. I think in generally speaking, the demand situation with more ship contracting, more multi-fuel, higher price deltas, sort of the underlying situation was somewhat positively affected already in the Q2, and that is not a one-off. I think that may be certainly in Q3, a trend that extends. That's helpful. Maybe if I can just follow up quickly on that. I think in previous quarters, appreciate things have sort of moved quite quickly on the marine side, I think you talked about customers having been hesitant to place orders given obviously the uncertainty around the direction of fuel and fuel types. It sounds as if that is beginning to free up a little bit, you'd kind of expect that to continue too. I think we were coming to a point where decisions needed to be made. I think the decision-making process among a lot of the ship owners have been to not bet everything on one card. We still see extension of the life cycle of older ships that may not be that efficient. There's still a hesitation in the market, even at the current contracting level. We see trade of secondhand ships being relatively active and high priced, despite the fact that perhaps the time to put an order in for new would make sense. The fuel story and the fuel challenge is still out there. I think the underlying trend has been that this uncertainty will not disappear. We will get, as a consequence, more complex fuel solutions in the engine room, and we see that already in the mix of the ordered ships, and we see it to a degree in the water intake for a number of the Alfa Laval systems that go into the engine room. That's great. If I can just ask one, I guess, unrelated, but just to cover it off. Interested in any comments you can or are prepared to make regarding the situation with Neles. I don't have a lot to add. We've obviously noticed the emerging proposal. I thought it would have been good if that came around when the actual bidding was on the table. It didn't. Now it's there. We haven't made a final decision yet, but obviously we feel comfortable in the situation that we are well into the money. Thanks, Tom. Appreciate the answers. We're now taking our next question from the line of Madhavendra Singh at Bank of America. Yes. Hi. Thanks for taking my question. The first one is a quick follow-up on your comments on temporary savings. I think you said more than 2/3 of the temp savings are coming back. I just wanted to understand whether you meant it for second quarter or you were expecting it for third quarter. Then I'll have a second question afterwards. Yeah. Yeah. What I said that a large part of the cost savings program of last year was related to short-term working programs. Of course, that cost automatically comes back here during 2021 and was visible in the quarter. I also said is that part of that program were related to lower level of traveling and a lower activity level in general in the company. Of course, now, yes, the activity level is coming back in the company, but we haven't yet seen the full effect of a higher, let's say, a more normalized traveling aspect. Some elements has certainly come back and some of the activity level, particularly related to traveling, is still low. On the other hand, as I said, yes, the restructuring program is progressing well. Majority of that is COGS of sales, but certainly there is an element of S&A savings also there. Okay. Just trying to understand your views on the oil and gas market. Because for Energy Division, you said that orders are mostly driven by the energy efficiency products, while trends in the both upstream and downstream are still not great. At the same time, in the Marine Division, your product tankers are seeing a very good demand and take-up, and hence, you're seeing the good pumping system orders. Just want to square up these comments with regard to two divisions where we are seeing different trends. Well, I don't think I'm able to connect the dots between the Marine market and the oil and gas market. It is what it is. I think you've got to figure out the links. I'm just trying to sell products. What I was trying to understand was that when you say that oil upstream and downstream both are weak, do you mean on year-on-year basis, or you haven't seen any sequential improvement either within oil and gas upstream and downstream side? I think it's fair to say that it's fairly low. It can vary by individual projects and things like that, but there is not a clear release of funds into the refinery sector other than the biofuel side. As I commented on, that's what you see to a degree then mainly booked in the Food & Water business that amounts to about SEK 600 million. I made this comment too, I think, at last quarter that we booked about SEK 600 million on biofuels. Our upstream oil and gas business is about SEK 1 billion. We are almost doubling the Energy Division from a biofuel point of view, and that is becoming a more and more important part of the portfolio. Okay, great. Thank you very much. We're taking our next question from the line of Johan Eliason at Kepler Cheuvreux. Hello. Thank you for taking my questions. I was just wondering a little bit, going back to the BWTS and the ballast water. We had the regulations put in force in 2019, implying sort of a 5-year cycle where these installations needed to be done on the existing fleet. Has the pandemic changed this in any way, the regulations or the availability for the ship owners to actually get access to shipyards and then do the upgrades? Is it still until 2024, we should be expecting this cycle to continue and then drop off? Thank you. Yes. I have an answer and a comment. To my memory, I think we had a one-year extension compared to the original implementation plan due to the difficulty of visiting a repair yard. That is my understanding. The other comment is you guys are surprising. If we are throwing a 45% organic growth on the Food & Water Division and you're burying yourself in marine and oil and gas, I get a little bit puzzled as to the investor strategy here. Okay, that was a bit of a noisy comment, but I had to make it. I apologize. No, I understand. I think part of it is it's more difficult to find good numbers about. I know where you're coming from. the edible oil business, basically. That's why we are relating to this area which we know better. Thank you anyhow. We are now taking our next question from the line of Robert Davies at Morgan Stanley. Hello. Thank you for taking my questions. My first one was actually on Food & Water. Oh, very good. Just in time. My first one is on Food & Water. I guess some of just the larger project activity, and it's always difficult to get a sense quarter-on-quarter of when these sort of larger projects and where the investment cycles are. I guess sort of stepping back on a sort of 3 or 5-year view, where are we? Do you have any sense of whether there's been any sort of catch-up or acceleration or build-out as COVID kind of impacted the types of investment cycles some of these Food & Water sort of businesses have made across those divisions? I guess my question is really trying to sort of figure out, are we expecting more, less, or a similar amount of sort of large orders over the next 1 to 2 years, for example? Thank you. That was my first question. Yeah. I can understand that it's a bit of a struggle for you and, in all honesty, it becomes a bit sometimes a struggle for us as well when it comes to predicting the short-term order intake, given that whether you book or not book a SEK 400 million project in one division certainly affects the overall number. I would say in general, to a degree before the pandemic and certainly during the pandemic, we were in the Food & Water side a bit low on the larger projects. We got low in ethanol and part of the biofuel side because of the regulatory changes, not least in the U.S. and, I think to a degree, an over-investment in capacity over a period of time. It's been very slow for many years, and we see signs of recovery specifically in that sector right now. The veg oil side, sometimes we call it edible oil, and sometimes we call it vegetable, but let's call it veg oil, was also over a period a bit over-invested, not least in Southeast Asia, and we see a good return on it now, not only for consumables but also as feedstock for biofuel. I think those are two areas where typically the projects are relatively large and visible to you guys. On a slightly smaller scale, of course, there are very healthy project pipeline driven by the growth in biotech, including the vaccine growth that we see at the moment. In protein, it's quite okay. It may not be mega projects, but the project pipeline is good. I would say it's pretty healthy. That is, of course, a comment that is also affecting our outlook in Q3. As you can understand with the large projects announced, to compensate for that, to get anywhere close, we need to continue to book a bit on the large order side. That's our best guess short term, but the pipeline looks okay. Great. Thank you. My only other question was, I guess I'll kind of joining up the dots across marine transport logistics. We're hearing various stories of all these transport logistic headwinds and issues. Is that at all affecting the amount of service business in your marine business? Are you seeing people kind of holding off through 2Q from doing service because they're making better money on higher freight rates or whatever it is, and there could be some sort of catch-up into 3Q? I know you had a sort of positive number on your slide for marine service growth. Just wondered, I guess, was there any option or potential for that to accelerate into 3Q, or is that not a meaningful impact quarter-on-quarter? Well, I think there are 2 parts of the service side in Marine that remains weak. 1 is, of course, in cruise, where we still have an idling fleet. With that said, both in cruise and in upstream oil and gas, we see some small growth from a very low level. It's moving in a slow way in the right direction. The other part is services on board, which require flying in personnel, sometimes in 1 port and flying them out from another port. That logistics exercise is still very difficult to do in large parts of the Asian harbors, not least. There is still a couple of factors that is holding us back. With that said, from what we see on the transactional side, I think we see a fair reflection of the underlying market right now. I don't think there's a lot of headwinds left when it comes to optimizing ships. There may even be a little bit of pent-up ordering demand for spare parts that is happening right now. I don't think we are overstating or understating the growth right now. We may be fairly balanced in where it is when it comes to the Marine. That's great. Thank you very much. We're taking our next question from the line of Sebastian Kuenne, RBC. Hi, gentlemen. A couple of questions. First on Food & Water, very briefly. You have mentioned ethanol and vegetable oil business coming back. What do you see for the milk or for the dairy business overall? Because I saw that the U.S. is producing a significantly high amount of milk at the moment. Secondly, for Marine, I still don't quite understand the market positions for your new acquisitions. Where is StormGeo positioned, Oceanbird, Marine Performance, where are they compared to competitors or competitor technology? That would be the second question. Thirdly, again, on Marine, sorry to be insistent there. We see the big boom of container vessels, of course, maybe growing 5-fold this year. We noticed that a lot of these ships now have dual fuel engines, so they need a lot of LNG technology. If you were to look at the modern ship ordered now and a ship ordered, let's say, three years ago, how much more content, or how does the content change for Alfa Laval if you go from a bunker fuel engine to a dual fuel engine with all the technology needed? Thank you very much. Thank you. That was a broad question. Sorry. The first question was easier. I'll take that one first. If we look at the Q2 order intake for the Food & Water Division, 2 applications areas that were stable rather than growing was brewery and dairy. I think the outlook is reasonable as you indicate, actually, in both of those orders. We've been somewhat surprised that the brewery, despite the shutdown of pubs and restaurant, has stayed as healthy as it has during the pandemic. Nevertheless, it has, and we may see some signs of further strengthening in that area. Dairy has, for us, stayed flattish over a period of time. I think the expectations are that specifically there, looking into Q3, we may see some signs of recovery. I'm not making those comments to accelerate the growth path of the Food Division above and beyond what it was in Q2. We have many moving elements, but those two specifically, as your question indicate, have been flattish and may be a reasonable outlook. When it comes to StormGeo, I would just highlight there were the two reasons why we acquire it. If you want to go to fundamentals, we are all clear about the impact of digitalization on industrial companies, and we are also clear that building organically some of those capabilities is difficult. It's difficult to retain people, it's difficult to develop the culture and the context for where some of these data scientists and big data analytics and AI competence sits. Therefore, we felt convinced that acquiring a platform from which we can continue to build our digital services in a broader way was an important place to start, as opposed to fiddle around in our mechanical engineering world and try to make us digital. It was a very long-term strategic option for us to use. One of the key tasks in the coming 12 months is to explore and evaluate opportunities to drive digital acceleration in the Alfa Laval portfolio above and beyond what StormGeo does today. There is one fundament. The other question is around StormGeo's market position and what they do. They clearly are doing more than route advisory. Although I would say on route advisory, our perception is that it is the market leader. The best way to optimize fleet, optimize performance, or optimize navigation, is by using data and know-how from StormGeo, which is not only weather data, mind you. It is actually a significant database of performance from thousands of journeys being done historically, where the effects on fuel consumption can be clearly noted and learnings and lessons to be learned are there. I think it is an important knowledge base that we acquire. Of course, they do a lot of other things too, when it comes to providing safety data to the offshore as well as onshore industries. That weather insight and very localized knowledge is a big part of the business portfolio going forward. StormGeo, as it is today, we will continue to support the development, the know-how in AI, potentially further acquisitions to expand the portfolio. Clearly, the position within the marine industry indicates the tight link we see between something like StormGeo and of course, the possibilities down the road of Oceanbird, when we start to use wind as propulsion system, weather insights will become massively more important. Consequently, we think we are in a good position to build a very relevant platform for 2025 onwards, when sometimes we expect to start to see the initial installation going on ships. Do you see Oceanbird and Marine Performance as being also the leader in the market in terms of technology on wind propulsion. Well, air lubrication in that respect? Yeah, I understand your question, I will remain a little bit humble. This is early investments into projects we believe a lot in. What I really like with Oceanbird is the fact that we are doing a joint venture with Wallenius. One of the aspects, apart from the prototype technology development that already has been done, we also have ships ready to be equipped with sails. As long as we can develop the supply and technological challenges in the right way up until 2025, we have the pilot ships. I shouldn't use pilot in this context because it means something else. The initial installation already secured, and we have a very environmental-conscious partner, who will work with us side by side in making this penetrate into the ocean side. I think today it's difficult to judge the various initiatives in terms of the quality of where they are. I think our route to success in this is putting the best people at work, working with one of the most environmental conscious ship owners in the world, and to drive this very fast forward to proof of concept. That's where the value is. I don't think the drawing board of Alfa Laval is significantly better than any other smart company figuring out a way to design the sail solution. Momentum, speed and capabilities are key. I think the air bubble side is a different story. We believe that the patented solution that we are buying into is a very good platform to build on. Obviously, that is a much more straightforward industrial development to do. It's not technologically a very difficult challenge for us. It's more of a question of finding a market acceptance for the technology. We're obviously very hopeful that this will play a role. Mm-hmm. On old versus new two-stroke engines and large container vessels, the content that you have? Sorry, can you repeat that one? Yeah. Sorry, my third question I had was container vessels ordered three years ago compared to new container vessels booked, especially in the first half of the year, with most of them running on dual fuel, two-stroke engines. How does the content for Alfa Laval change on those? Yeah. You're right in your assumption. We add complexity in these situations. We have been guiding many years that depending on ship classes, we see total order intake potential varying between a few million EUR to some EUR 12 million-EUR 14 million, depending on ship class and equipment. That was before we started to discuss multi-fuel solutions. You could potentially add a couple of million EUR into the theoretical potential of exhausting all of the equipment opportunities on board. It's not a game changer, but it is an add-on possibility for any given ship, yes. Okay. Very quick final question. In Energy, you have any orders relating to hydrogen yet? Heat exchangers for hydrogen production? I am not sure I'm answering your question absolutely correct, but my feeling is that we are in a very early stage still when it comes to actual orders. I don't know, Johan, do you have a different perception on? There are some, but it's not sizable. Yeah. Understood. Perfect. Thank you so much for your help. There are no further questions on the line. Please continue. Well, with that, thank you very much. If nothing dramatic happens, we will all meet up again after the third quarter. Thank you. That concludes our call for today. Thank you for participating. You may all disconnect.