Welcome to the Arpella Royal Q2 Earnings Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today on Thursday 17th July 2014. I would now like to hand the conference over to your speaker today, Lars Rellstrom.
Please go ahead.
Thank you very much. Good morning and most welcome to our presentation. I will start by highlighting 3 matters. Firstly, order intake was excellent and we reached a record order level in the quarter both with and without Frank Moon. Order intake rose 19% year on year to SEK 9,000,000,000 and we are pleased to state that we expect demand in the Q3 to remain on about the same high level.
Secondly, in the quarter, the demand from the marine industry exceeded our expectations with a particularly strong demand for all boilers. The consolidation of Frank Moon, which added roughly SEK 600,000,000 to both orders and sales developed very well and in line with our expectations. Finally, some words on profitability. The operating margin declined year on year, partly due to a negative pricemix. Also the market has not taken off the way we had expected when selectively investing for growth during the past 18 months.
Consequently, costs have been rising faster than revenues. Hence, we have initiated a review of the costs and our structure to rectify that. However, it should be noted that earnings per share rose 24% and that profit before tax rose 20% compared to the Q2 last year. And now we move on to the key figures for the quarter. Orders received rose 19% to €9,000,000,000 Net sales grew 12% to €8,400,000,000 euros Adjusted EBITA increased 9% to 1,350,000,000 dollars and adjusted EBITA margin reached 16% versus 16.5% a year ago.
For the 1st 6 months, orders received rose 12% to 16,400,000,000 dollars Net sales increased 7% to $15,000,000,000 and adjusted EBITA advanced 5% to $2,400,000,000 and adjusted EBITA margin reached 16%. Now we move on to orders received and margins. There you see orders received on rolling 12 months reached EUR 32,100,000,000 and the increase year on year at fixed currency was 18%. We move on to the next slide. There you see from the order analysis that year on year acquisitions contributed with 9.3 percentage units and organic growth was up 9.1%.
Positive currency effects was 0.8%, giving a total of 19.2%. Sequentially, acquisitions contributed with 10%, organic growth 8.1% and positive currency effects with 1.9% giving a total of 20%. Next slide. The EBITA margin reached 16%. The operating result was €1,350,000,000 which was the 2nd best quarter in 2.5 years.
Now we move on to highlights. In Process Technology, we booked an order in the U. S. For a natural gas liquids export terminal. This is an example of investments driven by the shale gas boom.
The order from China reflects the Chinese government's high priority to convert coal into liquids in order to reduce CO2 emissions. From the Netherlands, we received an order for our largest caustic soda installation to date. And from Russia and U. K, we received orders for oil and gas production. In marine and diesel, we booked orders for in total 10 exhaust gas cleaning systems and accumulated we have booked 50 commercial systems.
And we received 2 significant orders, 1 from fill lines and one from a German ship owner. We also closed the acquisition of Frank Moon in May. Now we move over to the development per segment. We had 9% organic growth year on year in the quarter and you see that 7 segments grew, 2 were unchanged and 2 declined. And we are very pleased that organic growth for service is up 11% with all the 3 service segments contributing.
Let's take a look at the development per division and now all comments are sequential. Equipment reached an all time high order level driven by seasonality in industrial equipment as well as good demand in the food sector. Sanitary saw an increase in demand for products going into personal care, dairy and food. Especially U. S.
And China had a positive development. Next slide. In Marine and Diesel, equipment saw overall higher order intake following ship contracting growth. Marine and Offshore Systems saw very strong demand for boilers. Arena and Offshore Pumping Systems previously Frank Moon saw high order intake reflecting contracting of chemical and product tankers late 2013 early 2014.
Next slide. Process Technology had a very strong base business with added support from larger orders. Segment Energy and Process saw higher demand, while Food and Life Science was affected by non repeats. Water and waste grew mainly due to larger orders. Finally, we are very pleased that service had a strong development.
Next slide. For the 1st 6 months, 5 segments have been growing, 3 were unchanged and 3 have declined. Now we move over to the geographical development. You see that year on year Asia has been growing by 39%, boosted by the recovery in the marine industry. Then follows North America with a solid 24%.
Both Western Europe and Central and Eastern Europe had good growth, while Latin America and Nordic declined.
Let's take a look at
the development per region. And now all comments are sequential. The strong development in Asia was supported by growth in both base and project business. Marine and Diesel division did very well as it continued to benefit from an earlier surge in yard contracting as well as an increased demand for crude oil and LNG carriers. China enjoyed a broad and positive development following growth for all three divisions.
Next slide. In Western Europe including Nordic, we had a good development across most countries where both base business and large orders grew. In Central and Eastern Europe, we had a significant increase following a positive development for the base business and large orders alike. We are very pleased that Russia recovered to normal levels after a very weak Q1. Moving over to Americas.
Growth in North America came from both the base business and large orders and the growth was broad based. Service also performed well. In Latin America, we had a slight decline due to fewer large orders. We are very pleased that service developed very well across the region. Next slide.
Here you see orders year on year for the 1st 6 months with Asia and North America having double digit growth. It's interesting to note this that Asia and total Europe are equal in size. Now we move over to the next slide, top 10 markets. The green bar represents whole year 2013 and the yellow rolling 12 months. The U.
S. Has continued to grow following a broad based demand and 1 acquisition in May last year. China has been boosted by the marine industry and the same applies for South Korea, where Frank Moon makes a significant contribution. The growth in mid Europe reflects the strength of the German economy. Russia is still impacted by the very weak first quarter.
In Brazil, we see fewer large orders. And finally, the growth in Benelux is impressive and it's driven by domestic customers as well as local contractors working on the global markets. And now I hand over to Thomas for the financials.
Okay. Good morning all of you. Let's move in to take a look at sales as Lars has covered orders in-depth already. In the quarter, we realized sales of €8,400,000,000 an increase of 12.1 percent year on year, of which the organic element was 3.9 percent. After quarter 1, you may recall, we commented that we had a shortfall of some €200,000,000 to €300,000,000 of sales.
With the level of revenues in quarter 2, this shortfall has been recovered. In comparison with quarter 1 of this year, sales was up just over 26% with an organic increase of 17.5%, quite an increase I must say. This was partly a regular seasonal variation and as mentioned just before partly recovery of the shortfall in quarter 1. As you may have noted from the report, Frank Mon, the acquisition has added SEK552 1,000,000 to sales in this quarter. Then looking at service, the service activities represented 27.2% of total revenues in the quarter against 27.5% a year ago, of course, giving a slight adverse mix effect.
In the quarter, year on year then and more substantially a mix effect sequentially. So a more substantial mix effect sequentially than that year on year. Now let me give the first forward looking statement. I guess it goes without saying, but based on having Frank Mone in the group for the full coming quarter, it is of course reasonable to expect an increase in sales also in quarter 3. With that, let's move on to talk a bit about gross profit margins.
Gross profit margin for the quarter was 36.3%. This represents a decline of 1.6 percent year on year and a decline of 3.1% sequentially. With the quarter one report, I said, in the near term, we do not expect product mix to be as favorable in quarter as in quarter 1. We expect very limited positive price effects, no material change to factory results and transaction effects are expected to continue to be slightly negative. The actual Q4 2 came out, I have to say, slightly worse than anticipated.
This is mainly due to a worse pricemix variation within capital sales. In addition, gross margins are lower in francmoen than in already established Alfa Laval businesses. That brings me to the 2nd forward looking statement. In the near term, we do not foresee any material change compared to the outcome in quarter 2 with regard to gross profit margins. Let's then move on and take a look at the overheads and the rest of the P and L account.
R and D ended with EUR 201,000,000 in the quarter, which is an increase year on year like for like of 8.1%. The explanation as in quarter 1 is being certain increases in resources as well as other costs related to individual projects individual R and D projects. S and A amounted to almost 1 €400,000,000 in the quarter representing an increase like for like of 5.9%
year on year.
Salary inflation, selective increases of resources locally to improve presence as well as and this is of course, a further addition, additional resources for central application and product support for local sales. These are the main reasons for the increase. Let me also comment that we had adverse limited adverse FX effects, a negative €10,000,000 this quarter to EBITA. All in all, we reached, as you have seen from the report, an EBITA margin for the quarter of 16%. Profit before tax was almost €1,160,000,000 in the quarter, an increase of 20% over last year.
This includes a difference in financial net due to exchange differences being €1 €117,000,000 better than last year. Before leaving the P and L, let me point out that taxes ended with a charge of €363,000,000 somewhat above our guidance for taxes in percentage terms. However, we maintain 28% of profit before tax as our guidance. EPS €189,000,000 in the quarter €2.24,000,000 excluding amortization on step up, an increase of 24% compared to last year as far as EPS is concerned. The increase, of course, explained by FX differences in financial net, increased operating profit, where, of course, Trammel contributed.
With regard to return on capital, we ended at 22.9%. Of course, return on capital was adversely impacted by the acquisition of Fromno adding substantial goodwill amounts. As for return on equity, we reached 19.4%. Let's then move on to take a short look at divisional performance. Equipment came out below quarter 2, 2013 as well as quarter 1 of this year, mainly due to a negative pricemix effect, but also increased R and D efforts and small increases in sales and admin.
Increased sales volume had a limited positive impact on operating profit. Moving on to Process Technology. Process Technology was suffering from a negative pricemix as well as increased fairly substantial increases in sales and admin costs more so year on year than sequentially. And then finally, Marine was adversely impacted year on year by increased sales and admin due to the high level of activity generating a buildup in order backlog. The development of gross profit margin was also negatively due to an adverse price mix effect.
And of course, Frank Mown had a positive effect on operating margin. Sequentially, Marine was adversely impacted by pricemix compensated in its entirety by franc mode. As you can see from the slide, we've experienced a decline in operating margin for all 3 selling divisions year on year. Development has, as Lars has already mentioned, led us to initiating a review of cost and structure in the cost of goods as well as in the overhead areas. And I would like to remind you that in connection with the quarter one report, we said an increase in overheads higher than the increase in revenues is not sustainable.
So this is the measures that we have initiated a review. Conclusions from this review can be expected to be communicated earliest with the 3rd quarter report. Let's then move on to the cash flow statement. In summary, cash flow from operations amounted to 1.17 €1,000,000,000 and well above quarter 2 of last year, the reason being both increased earnings as well as reduced working capital. Free cash flow was almost €1,100,000,000 compared to just €100,900,000 in Q2 of last year.
The reason for the improvement in addition to the just commented is a better net from the financial elements of the cash flow. And of course, Frankfurt did contribute to the generation of cash flow. Then we're coming to FX. As mentioned before, FX effects in EBITA were negative €10,000,000 so not substantial at all. We have, as we always do, updated our forecast for 20 14 with the assumed exchange rates as specified on the slide for open exposures and applying the closing rates as per end of June for calculation of translation effects, we expect a net FX effect for the full year of 0 nothing.
A change for the better compared to our forecast communicated with the quarter one report. The explanation is of course the weakening of the Swedish krona against most currencies. As you can always see on the slide, we expect the transaction effect in 2015, given of course stability in exchange rate has changed for the better again due to the weaker Swedish krona, a positive of €55,000,000 Then we're getting to the order backlog. We had a total order backlog as per end of June of almost €21,700,000,000 If we look at the backlog excluding francmoan and LTM sales excluding francmoan, this represents 6.3 months of sales. Including Frank Mone, the backlog we estimate represents approximately 7.5 months of sales.
On a like for like basis, the order backlog to be shipped in the current year is about $100,000,000 above the end of June 2013. In monetary terms and then including acquisitions that you can see from the slide, the backlog for shipment in 2014 is almost €2,600,000,000 above the level end of June last year. Having said that, let's move on to the bridge for full year sales 20132014. I'm sure you noted already last time the change in full year sales 2013 due to changes in IFRS. So it's about €100,000,000 Like for like the backlog as per January 1 was €200,000,000 smaller than the beginning of 2013, so an adverse impact with €200,000,000 Based on the closing exchange rates as per end of June, we expect a positive translation effect of approximately SEK 500,000,000 This is an adjustment compared to last report of a positive €600,000,000 Then finally, the acquisition in 2013 of Niagara Blowers and the acquisition of Frank Mon in May, we estimate will give additional sales of $3,000,000,000 in 2014.
This gives you a subtotal for the known, if you like, parameters of $33,100,000,000 And as always, it's up to you to form an opinion about demand and shipment of infra out orders as well as price effects 2014 over 2013. With that, I give the word back to Lars for the outlook and the closing remarks.
Yes. The outlook is as follows. We expect that demand during the Q3 will be on about the same level as in the second quarter. And bear in mind that we are comparing with a record quarter. For each division, our demand expectations for the Q3 is as follows: Process Technology, unchanged with continued high tendering activity Marine and diesel, unchanged based on earlier contracting at the yards And finally, equipment unchanged since the high season in HVAC applications still prevails.
And that completes our presentation. And now we hand over to the operator for the Q and A session.
Thank you. And your first question comes from the line from Ben Mayslin. Please ask your question.
Thank you. Yes, morning. A few questions please. Firstly, just on Frang Moon. I mean, can you give us any sense as to what the EBIT margin was for this business during the quarter?
And if you can't, then is there any seasonal pattern as to how that margin develops through the year that we should be aware of? That's the first question. Thank you.
Hi, Bjorn. Well, we have, of course, discussed disclosure with the sellers and with management of Frang Moen. And we are not prepared to provide any further detail as far as EBIT margin is concerned. Looking at the seasonal pattern of earnings for Fromo, you have to accept that we are still early it's still early days for us. So we are in a learning mode still when it comes to the business.
If we look at history, there has been a stronger earnings in the second half and even more so in the last quarter for Frank Moen. But of course, historically, the company has not applied, for instance, percentage of completion for revenue recognition. So at this point, I would say normally not any large seasonality, but we're still learning. So we have to come back when we know even more about the company.
Got it. And then just I remember when you bought Alborg, you did change the accounting and there were some volatile quarters around percentage of completion and so forth. I mean, would you the learning curve you're going through, would you expect Framo to be fairly volatile? Or you're not making big accounting changes?
There will certainly be accounting changes. It's been a privately owned company, very profitable, where I would say that owners and management have been watching more of the bank balances than sort of getting into too many details of accounting. So there will be changes absolutely. And it is impossible to predict now what the implications will be. We've had substantial resources to dig into the accounting over these 1st 6 weeks.
And I think they've done a great job, but I'm sure we will have to see some changes.
Thank you. The second one is on the comments suggest that through all the businesses price mix is negative or is putting pressure on the margin. Any way you can give us a comment as to whether that is all mix large projects less service? Or are you seeing some areas where pricing is tougher, competition is more difficult and it is actually that that is pulling down the gross margin?
Well, if we look at it, this is really mostly to do with contract based sales.
Right.
And I'm sure you Right. And I'm sure you appreciate from earlier that depending on the scope of supply that we have in different businesses, there are large variations in gross profit margin. And then of course there is a price effect. It is not material, but yes there is a price effect. And just to take an example, if we look at ballast water treatment systems, we're now in a situation where the retrofit market has not opened up.
There is a large amount of competition. We believe that Antfana Vale is almost the last European supplier, substantial supplier. And in these systems, there is a price pressure, a significant price pressure. But we are fortunate in that we had a new version of the product launched not too long ago. But that's an example I can give.
For the rest nothing material.
Great. And the final one if I can. Just on the cost review you're talking about, can you give us any sense as to the breadth of it? Are you just talking about pulling back some of the SG and A that you put in there to drive growth? Or is this broader thinking about kind of factory footprint more kind of structural?
Well, I said that you have to wait for conclusions until early as quarter 3 report. What we both said in our comments was that we are looking at structure as well as cost or spending both in the supply chain area as well as in the overhead area. So I think there you have the response.
Got it. Thanks, Thomas. Thanks, Lars.
And your next question comes from the line from Sven Weier. Please ask your question.
Yes. Good morning. Three questions from my side please. The first one just housekeeping on Framo. If you had the full order and sales numbers for the Q2 so that we get a sense about that.
2nd question regarding your margin in Process Technology. If I follow your gross margin guidance for Q3, the kind of more negative mix you had in Process Technology relative to Q1 seems to be more sustainable. And then the last question just on the shipyard orders, which have been more weakening recently, going where you're usually late, that's probably then something for Q4? Yes, that's it. Thank you.
Hi, Sjoern. Looking at the Framo and the third quarter too, of course, we know the very details of what happened from January 1 until May 2022, But we do not have a sense of what was actually happening in January, March and what happened between April 1 May 21. So I'm sorry, we cannot provide that kind of detail. But of course, we will have 12 weeks rather than 6 weeks in quarter 3. So hopefully, there will be something coming out of that.
Looking at gross profit margins and PTD in particular, I said as an overall forward looking statement that we do not foresee any material change in quarter 3 to what happened in quarter 2. I think that is as far as I'm prepared to go when it comes to gross profit margin. Of course, there are movements depending on what we are actually shipping, what we are actually recognizing of revenues and the scope of supply in launch. So I'm not prepared to go beyond that general statement.
And when it comes to ship contracting, 2013 was a peak in the order intake to the yards. And we have already earlier said that 2,000 will be lower, but it is still a good level as we see it. And when it comes to the actual numbers, there is always a lag in the reporting. So therefore, we wait for the full year's figures. That's all we have on ship contracting.
Okay. Thank you.
And your next question comes from the line from Max Yates. Please ask your question.
Hi, good morning. Just one question for me. Just on the francmoan business, given that we've seen some new ship orders slightly weaker in the last couple of months and last quarters. And I think from conversations before the lag between francmohan products and new ship orders is a lot shorter. So is it still strong marine orders coming through that's supporting francmohan orders?
Or is it also the other areas of the business, the offshore and servicing that's supporting all the levels where we are now? Or is it still you're seeing strong activity for Frank Moon from new ship orders? Thank you.
In the Q3, we expect good order intake from both Frank Moon and our traditional Alfa Laval marine products. So the Q3 looks good.
Okay. And just perhaps one follow-up. On the gross margin year on year change, are you able to try and quantify or give us a sense of how much of that was as a result of franc mode being consolidated the year on year decline in gross margins?
We are talking about the number of tens of percent.
A number of tens of percent. Okay. Thank you very much.
Your next question comes from the line from Glen Liddy. Please ask your question.
On Frank Moon, can you give us an idea if the gross margin relative to your margin historically has been relatively the difference has been relatively stable? And on pure dry, can you give us a sense of how you're progressing with orders and sales?
When it comes to historical gross margins in Frankfurt, again I'm terribly sorry, but the kind of accounting that we've seen in francmohan From that, it is very hard to give any sense if we look at shorter periods than full year. And even so, the principles that have been implied makes it very difficult to compare even year on year to Alfa Laval. But as a general statement, gross profit margins are lower than those of Alfa Laval. But then with a small organization, lower smaller overheads, so a substantially higher operating margin.
And when it comes to Pure Drive, just to remind you last year, we had an order intake of around 100 systems and that is the rate that is prevailing right now. However, we see that there are set quite a number of ship owners that are evaluating the system. So you can say it is at a plateau right now. But going forward, of course, our expectations are higher than this. Once they evaluate it and if they decide to go for a full to put it in a whole fleet.
Okay. Thank you.
And your last question comes from the line from Daniela Costa. Please ask your question.
Hi, good morning. It's Daniela Costa from Goldman Sachs. I just wanted to clarify a little bit on your guidance on why do you guide for the same level of IMEEN in Q3 versus Q2 given you saw a positive sequential evolution in Q2 versus Q1? Is it just that Q1 was structurally was lower by the shortfall that you mentioned and Q2 was simply the compensation for that, the improvement? Or are there really underlying sequential improvements in your end markets?
Thank you.
You can take if you take the 3 divisions, we could see that equipment was up if you we talk sequentially now. It was up 10% plus and that is due to seasonality, seasonality between Q1 and Q2. BTD Process Technology was up 3%. So there we had a slight growth. And when it comes to marine and diesel, it was up 19%.
And that was and there we could see that we had a surge in order intake for some of our products. And to summarize it, it was marine and diesel that exceeded our expectations for the quarter. And we believe that we will remain on that level also in the Q3. So that's I hope that satisfies you the question.
Yes. I was wondering why don't you expect it to continue that rate of improvement and just remain at the same level?
Yes. Well, I think it's quite optimistic to say that we have the order intake took Alfa Laval to a new level and now we are pleased to state that we see that this level will prevail also in the Q3.
And you have to realize as well that when it comes to contract based sales, it's also a matter of when customers are actually making their final decisions, when they're actually signing the purchase orders and when we're getting the advanced payments in our account. So there is a number of criteria that have to be fulfilled before we're actually booking orders. And that can play quite a big role when it comes to the outcome from 1 quarter to the other.
Okay. Thank you very much.
Thank you.
There are no more questions at this time. Please continue.
[SPEAKER SEBASTIEN DE MONTESSUS:] Okay. Thank you very much. Then I want to thank everybody for attending and wishing you all a nice summer wherever you are in the world. Thank you and goodbye.
Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.