Welcome to the Alfa Laval Q1 Earnings Call Conference Call. 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 Monday 28th, 8,040,014. And now like to hand the conference over to your speaker today, Lars Vandenhorn.
Please go ahead, sir, and thank you.
Thank you very much. Good afternoon and most welcome to the presentation. I will start by giving you my 3 highlights. Marine and diesel grew significantly year on year and increased somewhat from the high level established in the Q4. And the number of exhaust gas cleaning systems booked were at a record level.
The second highlight is that Asia grew slightly as a positive development for the base business compensated for fewer large orders. Also in China, the positive trend for base business continued. And finally, on the 7th April, we communicated that Alfa Laval had signed an agreement to acquire the Norwegian company Frank Moon AS, a leader in pumping systems for marine and offshore. We expect to close the transaction during May after approval from competition authorities. And now we move over to the figures.
Orders received rose 5% to €7,500,000,000 Net sales increased 1% to €6,600,000,000 Adjusted EBITA unchanged at €1,100,000,000 and adjusted EBITA margin at 16.1% versus 16.4% a year ago. Now we move over to orders received and margins. Orders received on rolling 12 months reached SEK 30,600,000,000 The increase year on year was 5%. Sequential orders declined mainly due to an exceptional order intake of launch orders in the 4th quarter. Next slide.
From the order analysis, you find that year on year acquisitions contributed with 1.2 percentage units and organic growth was up 3 0.8%. Negative currency effects was 0.2% giving a total of 4 point 8%. Sequentially, organic growth was minus 8.1%, mainly due to non repeat large orders. 16.1% and the operating result was SEK 1,100,000,000 which is the same as 1 year ago. Now we move over to highlights in the quarter.
Process Technology booked large orders for EUR 280,000,000 the largest being for an offshore platform in the North Sea. The rest were for refineries of crude oil and vegetable oil. Marine and Diesel booked 17 open loop exhaust gas cleaning systems from both existing and new customers, giving a total of 40 systems since the product was commercially launched. The open
open
developments. On the 7th April, we communicated that we had signed an agreement to acquire a Frenchman AS. We expect to close the transaction during May after approval from competition authorities. And on the next slide, we take a closer look at the company. The Marine Pumping Systems made up 50% of sales in 2013.
Frantmon AS is the global market leader for cargo pumping systems for product and chemical tankers. The company also supplies cargo heaters and coolers. Oil and Gas Offshore Pumping contributed with 23 Frank Mune also has an Frank Mone also has an interesting environmental business supplying oil recovery systems. It is both equipment ships. And finally, 21% came from service where Frank Moon has 50% of the installed base covered by service contracts.
And now we move over to the development per segment. We had 4% organic growth year on year in the quarter and you see that 7 segments grew, 2 were unchanged and 2 declined. Let's take a look at the development per division and now all comments are sequential. In equipment, sanitary declined due to non repeat larger orders despite that pharma performed well. Industrial equipment was affected by non repeats, a cold winter in the U.
S. And political uncertainty in Russia. OEM as well as service was unchanged. Next slide. In Marine and Diesel, equipment saw overall higher demand following the ship contracting growth in 2013.
Marine and Offshore Systems declined somewhat from a very strong Q4. Demand for exhaust gas cleaning systems was very good. Service grew favored by improved freight rates that increased demand for parts and repair work. Next slide. In Process Technology division, base business was stable, while large orders declined from extraordinary levels.
Food Technology was down due to non repeats, while market unit food solutions and vegetable oil had strong growth. Process industry was virtually unchanged with substantial growth in refinery, while life science and petrochemicals declined. It is also worth mentioning that oil and gas remains on a high level even if there were fewer geographical development. And there you see that year on year Asia has grown 17%, boosted by the recovery in the marine industry. Then follows Latin America with 11%.
And we see a positive trend in Western Europe and Nordic and a modest decline in North America. The decline of 21% in Central and Eastern Europe is caused by Russia and Turkey that have been affected by political uncertainty. Let's take a look at the regions and now all comments are sequential. In Asia, base business to develop well, while the project business was more mixed reflecting a cautious approach from some customers. The
The
Refinery, petrochemical and vegetable oil also did well. In China, base business had a continued good development, while non repeats made total China decline. Now we move over to Europe. And when we combine Western Europe and Nordic, both total and base business was unchanged. In Central and Eastern Europe, we had
a
business declined as Russia and Turkey were affected by political uncertainty. Moving over to Americas. In North America, we declined as we had fewer large orders. Positive was that base business remained unchanged. Energy and Environment and OEM did particularly well, while others declined due to less of larger orders.
In Latin America, fewer large orders in Brazil caused the region to decline. However, we are very pleased that we had a broad based growth in service. Moving on to the next slide, you see our top 10 markets and the green bar is full year 2013 and the yellow bar is last 12 months. And you can see that most countries are virtually unchanged. Changes of significance are China, driven by the marine industry and that also applies for South Korea, where also offshore industry contributes.
Russia has had a very slow start due to political uncertainty triggered by Ukraine. And now I hand over to Thomas for the financials.
Thank you, Lars. Good afternoon all of you. So let's move on to the slide on highlights. And let me jump right into sales as losses covered orders received in quite some depth. In the quarter, we realized sales of 6,600,000,000 an increase of 1.4% year on year, of which the organic element was 1.1%.
Even if we report growth in sales, the number was some €200,000,000 to €300,000,000 below our own expectations. However, given that we have the orders expected to have been shipped in our order backlog, we expect to recover the shortfall in the coming couple of quarters. In comparison with quarter 4 of 2013, sales was down quite a bit. This was a regular seasonal difference as I'm sure you recognize and totally in accordance with our prediction from February. Let me also point out that service represented 29.2% of total revenues in the quarter compared with 28.1 percent in quarter 1 of 2013.
Let me then give you the first forward looking statement. Not surprising, we expect sales to come in higher in quarter 2 than what was achieved in quarter 1. Let's then move on to gross profit margin. Gross profit margin margin. Gross profit margin ended 39.4% in the quarter, an increase of 1 point 2% year on year and 3% sequentially.
Let me remind you that with quarter 4 report I said, in the near term, we expect a positive mix effect mainly from a reduction in capital sales. FX transaction effects are expected to be negative. The actual for quarter 1 came out slightly better than anticipated. This is mainly thanks to a better mix within capital sales, but also factory results and mix between aftermarket and capital equipment contributed. With that, let me then give you the second forward looking statement.
In the near term, we do not expect product mix to be as favorable as in quarter 1. We expect very limited positive price effects, no material change to factory results and FX transaction effects are expected
to
Looking at the overhead costs, we can report the following. R and D ended at $188,000,000 in the quarter, which is an increase year on year like for like of 11.4 percent. The explanation being phasing of project related individual cost items and also a certain increase in resources. Moving on to sales and admin. They amounted to EUR 1,270,000,000 in the quarter, representing a like for like year on year increase of 5.6%.
Explanations are salary inflation, combined with selective increases of resources to improve presence and also increased activity to catch the contracting oil in Marine and Diesel. Then other costs and income. Please let me point out that this nonrecurring charge of $60,000,000 in other costs. [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] EBITA margin, 16.1%, as Lars pointed out before. Moving on down the P and L, profit before tax was $794,000,000 in the quarter, a reduction of 14% over last year.
And this includes a difference in financial net due to exchange differences being some $43,000,000 worse than last year. Before leaving, the P and L taxes ended with a charge of $230,000,000 slightly above our guidance of 28% of profit before tax. As far as EPS is concerned, the quarter ended EUR134,000,000 EUR157,000,000 excluding amortization on step up. This a decline compared to quarter 1 of 2013 with approximately 20%. Let me then point out again that this decline is almost in its entirety explained by acquisition related nonrecurring costs and the FX differences in financial net.
Return on capital employed and return on equity ended exactly on the same level as per year end. That is 26.4% 20.4% respectively. Let's then let me then give you a few comments on decisional performance on the next slide. Equipment came out above quarter 1, mainly thanks to increased sales volume and a better mix and part of factory results. These improvements were somewhat reduced through increased R and D efforts, but all in all an increase in operating profit and an improvement in operating margin.
Process Technology division was benefiting from a positive mix effect year on year. Sales and admin increased some what giving a slight adverse impact, but still the net was a positive impact on operating margin with 0.4%. Marine was adversely impacted by increased sales and admin costs and that is entirely explained by the high level of activity giving a buildup in order backlog. The increased contracting to the yards, of course, is an opportunity that is captured through increased activity in the sales area. The development in gross profit margin, I should mention for Marie, was slightly positive, thanks to mix though.
If we then move on to cash flow, I think we can summarize the cash flow statement for the quarter as follows. Cash flow from operations amounted to just under €600,000,000 and then some €370,000,000,000, €80,000,000 below quarter 1 of 2013. The main reasons being an increase in inventories on the back of the increased backlog and some of our receivables due to among other volume. The free cash flow ended €567,000,000 compared to EUR 933,000,000 a year ago. The main reason, of course, for this deviation is the working capital, as I just commented.
And let me point out then, this variation in working capital is not to be considered anything but ordinary fluctuations in working capital due to volume. Moving on to FX. We had an adverse effect in the quarter of $10,000,000 And of course, we've updated our full year forecast. And we've concluded on the back of the rates on the slide as well as applying closing rates as per end of March for calculating the expected translation effect, we believe will come in a negative €50,000,000 for the full year. And as you see from the slide as well, a very small positive in 2015 if everything remains the same.
Moving on to the backlog then. We had a total order backlog as per end of March of just over EUR 15,300,000,000 that represents just over 6 months of LTM sales. On a like for like basis, the order backlog to be shipped in 2014 is some EUR 700,000,000 above the end of
we
typically we typically do, let's look at the known and the unknown parameters. Let me, to begin with, point out that full year sales 2014 is about €100,000,000 lower than what was reported in the P and L for 2013. And that is of course to do with the changes due to changes in IFRS 18 on accounting for joint ventures. Order backlog like for like, some 200 $1,000,000 lower at the beginning of the year. Closing exchange rates as per end of March as end of December an adverse effect of €100,000,000 Acquisitions that is Niagara Blowers assumed to give a boost to sales of about €100,000,000 additionally in 2014.
That gives a subtotal of the known parameters of 29.6 1,000,000,000 Of course, it's up to you to form an opinion about demand in 2014. As for prices, let me just point out that we made some small adjustments to prices for standard products at the beginning of the year and that is expected to give only limited effects to the total of sales. With that, I hand back to Lars for the outlook and closing remarks. Thank you. The outlook is
as follows. We expect that demand during the Q2 will be on about the same level as in the Q1. And for each division, our demand expectations for the Q2 are as follows. Process Technology unchanged with continued high tendering activity Marine and diesel unchanged Equipment division somewhat higher due to seasonality. And that completes our presentation.
And now I hand over to the operator for the Q and A session.
Thank you. Your first question today comes from the line of Peter Frohnen from Panfil Bank. Please ask your question.
Yes. Good morning and thanks for taking my questions. Now it seems like we are closing in on the consolidation of Frank Moon. Is it it possible to share some light on the deliveries this year on a full year basis? That's my first question.
My second question relates to the scrubber orders. Could you please remind us on the deliveries here 2013, 2014 and beyond that of the in total 40 systems? I stand back there and wait in line. [SPEAKER JEAN
FRANCOIS VAN BOXMEER:] Well, when it comes to Pramble and its impact on deliveries, I. E, sales in 20 2014, please we would like to come back only once we've closed. And with the Q2 report, we will certainly do our best to give you a very good sense of what the implications of the Frankfurt, but we are not prepared to provide any detail at this juncture.
And when it comes to the deliveries of the exhaust gas cleaning systems, it's in 2014, but most of them will be delivered in 2015.
Okay. That's very clear. Thank you.
Thank you. Your next question comes from the line of Nick Wilson from Respirato. Please ask your question.
Good afternoon. It's Nick from Respirato. Just two related sales questions, if I may. I think or we've seen you've been quoted saying that sales in Q1 were perhaps SEK 200,000,000 to
SEK 300,000,000
below expectation. And just you were talking about a recovery in the next couple of quarters. I mean, I presume that's more likely to be in Process Technology and Marine as some of these larger orders that were booked in Q4 start to be delivered. So I'm just checking which divisions have the catch up. And then also given your guidance Q2 on Q1 that you think Process Tech and Marine are fairly unchanged.
I'm just trying to work that out given the sales catch that you've implied from that comment.
Well, Nick, to begin with, yes, the relating to the demand I. E. Orders as far as we're concerned and not related to sales.
Okay. That's a lot clearer. Thank
you very much.
Thank you very much. Your next question comes from the line of Colin Gibson from HSBC. Please ask your question.
Thanks very much indeed. Good afternoon, everyone. A couple of questions, please. First of all, you mentioned the slowdown in equipment orders at least in part due to the weather in North America. If that's the case, can you then confirm that you saw a pickup in orders in March compared to January February?
I think most companies that experienced weather disruption in North America saw a better March than January February. So I'm just wondering whether you also saw that. And then secondly, I have to ask, since we last spoke, GEA's HX division has been, as expected, sold to a PE buyer. What reaction do you see in the marketplace from that? And do you anticipate any impact on your business?
Thank you.
Well, first of all, when it comes to the U. S. And order intake, we do not comment individual months when it comes to order intake Alfa Laval. And the second one, it's too early to tell what the let's say what the impact will be from the acquisition of GEA's CC Changer division. But from Alfa Laval's perspective, we do not expect any material impact from the sale of that division.
Thanks.
Thank you. Your next question comes from the line of Ben Nelson from Bank of America. Please ask your
Just firstly on the gross margin, even with the comments you make, it seems like a fairly big sequential step up, especially given currency didn't move too much. Can you give us any more color on the different favorable mix effects that you saw in the quarter either by region or product line? Are there new products coming in that are helping it? Just so perhaps we can understand the sustainability of that. And then secondly, I guess against it you mentioned higher costs in the quarter for SG and A and R and D.
Are there any one off effects in there when you look at it year on year? Or is this a sustainable step up in the rate of spending that we should see for the rest of 2014? Thank you.
Okay. Ben, if we start with gross margin, I think it's important to stress then what I said before on the outcome quarter 1, the mix within capital sales was better. And a good part of that has to do with the mix within Process Technology where with a lower revenue recognition, I. E. With less of larger wider scope contracts with revenue recognition, you get a positive impact on gross profit margin.
So this was more an impact in the quarter. And as I stated in the second forward looking statement, in the near term, we do not expect product mix to be as favorable as in quarter one. I think that is quite explicit. It is relating to the lower than expected sales figures. Then moving on to the overheads.
In SG and A, no doubt Marine and Diesel had higher sales and admin costs, partly due to the increased level of activity towards yards and ship owners on the back of the uptick in contracting. Underneath, of course, there is the salary inflation, but particularly in Marine and Diesel, you have an impact of the higher activity level in the market. For R and D, 11.4% certainly is not what we are looking for the full year. This is due to individual cost items. For instance, in specific projects, we're buying the first set of tools for testing the new product.
That is something that in Alfa Laval terms is an and D spend and that is expensed immediately. And they kick into quarters randomly. So that is not an ongoing level.
Got it. Thank you. So to summarize then, the improvement in the gross margin is more process technology driven and the step up in SG and A is more marine and diesel driven. Is that a fair assumption?
That's a fair conclusion. But all of the 3 divisions had a better had improvement in gross profit margin, but it was particularly strong in Process Technology for the reason I mentioned. Yes.
Thank you. And if you have a very brief follow-up. In terms of the more cautious comments you made around Russia and Turkey, I mean, just how do you expect those markets to develop in the Q2? And then your flat guidance, what have you assumed that those markets deteriorate further or they're fairly flat or maybe orders missed in Q1 come back a bit? Thank you.
We believe that we will see a recovery in Turkey since the elections have been completed and Mr. Erdogan has been a clear winner. So we then people know who is in charge. And when it comes to Russia, we do not see any significant change to what we saw in the first you can say, what we saw in the Q1 we believe will continue in the Q2 as well since this is linked to the situation in Ukraine.
Got it. Thank you.
Thank you very much. Your next question comes from the line of Max Yates from Credit Suisse London. Please ask your question.
Hi, good afternoon. If you could just firstly on the overall marine and diesel market trends, if you could just give us an idea whether there's any updates on what you're seeing relative to the pre closed call that you did? And I think second question on the exhaust gas cleaning orders that you've received this quarter. Have those mostly been retrofits? Or I assume most of those have been on new ship orders?
Thank you.
Well, when it comes to the marine and diesel and the demand situation, we maintain our view that for the full year, we will see a slight decline in order intake compared to a very strong sorry, when it comes to what I'm talking about is contracting at the yards. And we believe that we will see a slightly lower contracting at the yards 2014 compared to a very strong 2013. And when it comes to the exhaust gas cleaning equipment, it is mostly retrofit. And we had orders both from existing and new customers.
Thank you. And maybe just a very quick follow-up. On Process Technology, obviously, we mentioned the lack of large orders this quarter and it was exceptionally strong in the Q4 of last year. Are there any orders that have been pushed out from this quarter that maybe signed next quarter? Or would you say just we've seen most of the large orders in Q4 and we haven't seen them in this quarter, but there hasn't been any push out?
Well, we saw in the Q4 that there were some customers that postponed their decisions. And whether that will materialize in the Q2 or not that remains to be seen.
Okay.
And please remember that we commented with the full year report that we had some of the large contracts pushed forward into quarter 4. So there was an element of things reported already before year end that sort of impacted quarter 1 as well. I think it's important last qualification to demand that we see a high level of tendering and quotation in PTD still.
Okay. Thank you.
Operator, can you increase the level from your end? We have difficulties to hear the questions.
No, sir. I can't increase the volume levels from our side.
Then we ask the persons that ask the questions. Please speak up a little bit.
Your next comes from the line of Daniel Schmidt from SEB.com. Please ask your question.
Yes. Hello. Do you hear me better?
No, very clear.
Okay. Good. Can I just ask you two questions? And firstly on exhaust gas system orders, the value per order has that been coming down compared to what you delivered order, has that been coming down compared to what you delivered last year in terms of order per value? And secondly, what should we expect in terms of the impacts on margin from partly SOX being executed and also service orders picking up?
And what's going to be the net out of that going forward for the Marina Diesel Division?
Okay. If we start with the value on the orders landed in the quarter, they were open loop systems, but still prepared for closed loop. But being open loop systems that means without separation equipment, so a lower value in average. It is clearly lower than the average €2,000,000 we mentioned for closed loop. They are more like €1,000,000 each on the scrubbers.
And then when it comes to the capital equipment in marine. So no impact as far as the capital equipment in Marine. So no impact as far as say the capital equipment is concerned. And then yes, we've seen an uptick in service. And of course, that is beneficial for gross margin.
But then enjoying an uptick in orders will eventually mean an uptick in sales. So then you will have an adverse mix with more capital equipment eventually. Great. Thank you.
And your next question comes from the line of Anders Seibold from ABG.
Hi, there. Yes, most of my questions have been answered. I was just if you look at the energy and environment piece, I mean, it came down sequentially quite a bit and still say it's on a high level. What do you see specifically on the oil and gas side there in terms of entering activity?
Yes. Well, we see that we have good tendering backlog and we see still good activity in the North Sea. And it's the only thing that differs compared to a couple of quarters ago that there are less of the very large orders. And we continue to believe that going forward there will also be a good activity level. And we should remember the absolute level is quite good.
Yes. And then perhaps just a few small items. The €60,000,000 charge that you're taking this quarter for the pharma acquisition, is that all of extraordinary is that the total of extraordinary cost that you will book? And then I would also ask you just the extraordinary cost that you will book?
And then I would also ask
you just the tax rate a little bit higher this quarter than last quarter. I mean what should we expect for the year there? [SPEAKER KARL HENRIK SUNDSTROM:] As
[SPEAKER JEAN FRANCOIS VAN BOXMEER:] As far as the EUR 60,000,000 are concerned that relates to the cost of for the acquisition for actually making the due diligence, set up the SPA and get to closing. And as far as any costs for integration are concerned, that is work in progress. And to the extent we see any material cost for integration, we will come back on that subject. Then as far as the tax rate is concerned, nothing else than the overall guidance of 28% of profit before tax.
Got it. Thanks.
Thank you. There are no further questions at this time. Please continue.
Okay. Then we complete our presentation. And thank you everybody that participated. Thank you and goodbye.
One final question has just come through.
All right. We are happy to answer that.
Okay. The question comes from the line of Pero Tholmann from Handelsbanken. Please ask your question.
Okay, gentlemen. Sorry for that. Okay. Yes, but to ask Lars, order activities so far, I mean, we heard your guidance. Do in particular, are the parts and service order activities so far in the quarters continue to increase sequentially?
And could you please tell us a bit about the tendering on large orders? I mean, we have seen the press releases or the lack of rate releases, but could you share some words regarding the activity?
Yes. The tendering activity is still on a high level. Whether they will materialize into orders in the Q2 that remains to be seen. And you can see the Q1 we had the lowest in 9 quarters €280,000,000 So it is hard to predict the behavior. And then when it comes to service, we continue to believe that we will grow our service business at a steady pace.
And more specific than that I cannot be. Thanks.
Thanks for that. And yes, that's it for me.
Yes. Thank you very much, Peter. And thank you all the rest of you. Thank you and goodbye.
Ladies and gentlemen, that does conclude our conference call today. Thank you all for your participation. You may now disconnect.