Welcome to the Alfa Laval Q2 Earnings 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 this conference is being recorded today, Thursday, 18th July, 2013. I would now like to hand the conference over to your speaker today, Lars Brindstrom.
Please go ahead.
Thank you, sir. Good morning and most welcome to the presentation. I will start by giving you my 3 highlights. The order intake improved sequentially and was up 5% organically and we came in somewhat higher than we anticipated. And we expect the Q3 to be on about the same level, which means somewhat higher than the corresponding quarter a year ago.
The second highlight is that order intake for the Marine and Diesel division grew 11% sequentially, mainly due to large orders for exhaust gas cleaning. And this means that the first half of twenty thirteen is up 21% compared to the second half of twenty twelve. And official statistics show that the increased contracting to the shipyards that started in the Q1 continued in the second, triggered by low yard prices and increased fuel efficiency of modern ships. And finally, after a series of stable quarters in China, we achieved a broad based double digit growth sequentially since the wait and see mode seemed to ease somewhat. Let's take a look at the key figures now.
Orders received declined 4% to €7,600,000,000 and net sales dropped 3% to €7,500,000,000 dollars Adjusted EBITA declined 4 percent to 1,200,000,000 adjusted EBITA margin reached 16.4% versus 16.5% a year ago. For the 1st 6 months, orders received declined 7% to 14,700,000,000 dollars Net sales dropped 4% to $14,100,000,000 and adjusted EBITA declined 5% to 2,300,000,000. And the adjusted EBITA margin reached 16.4 percent versus 16.5 percent a year ago. Now we move over to orders received and margins. There you see that the orders received on rolling 12 months reached €29,300,000,000 and the increase was 1% year on year at constant exchange rates.
After 3 consecutive quarters with You see from the order analysis that year on year acquisitions contributed with 2.2 percentage units and organic growth was minus 1.4%. We had negative currency effects of 5.2%, giving a total of minus 4%. Sequentially, acquisitions contributed with 0.1% and the organic growth was 4.6%. The positive currency effect was 0.9% and it gives a total of +5.6%. Moving over to the next slide.
The EBITA margin reached 16.4% and the operating result was €1,200,000,000 And we can see that we have now had 6 consecutive quarters around 16.5%. Moving over to highlights in the quarter. Process Technology booked a large order for heat exchangers to petrochemical plants in the Middle East. And in the U. S.-based Niagarablower company was acquired.
The company adds about SEK 400,000,000 in annualized sales with the profitability well above group average. The company supplies air cooled heater changers especially suited for the oil and gas processing industries. The Marine and Diesel division booked 2 large orders for exhaust gas cleaning. One for 2 new cruise ships with a value of €55,000,000 and the other for retrofit installation worth 170,000,000. We expect more orders for exhaust gas cleaning during the second half of twenty thirteen.
Now we move over to the development per segment. We see that year on year in the quarter 6 segments grew over unchanged whereas
5 declined. Let's take
a closer look at the divisions. And please note that all comments are sequential. We start with the Equipment division where order intake was up 10%. Sanitary saw wood demand from beverage and dairy applications and both industrial equipment and OEM had significant growth due to seasonal demand. Also successful introduction of new products contributed to the growth of OEM.
Moving over to the Process Technology division. We see that food reported growth for base business and large contracts alike. Energy and Environment was down due to non repeats. Bartley has a very high activity level in the oil and gas resulted in lack of industry resources leading to projects being postponed. For Process Industries segment, base business supported growth.
Moving over to the Marine and Diesel division, which grew 13% on top of the 20% growth in the Q1. Marine and Diesel Equipment saw base business growth reflecting an increase in yard contracting. Marine and Offshore Systems was lifted by a strong base business as well as large exhaust gas cleaning contracts. Demand for parts and service declined as large repair orders were not repeated. On the next slide, we see that for the half year that Marine and Offshore Systems is the only segment up supported by exhaust gas cleaning.
Process Industry and Energy Environment are down due to non repeat large orders. We however maintain our positive view on demand from refinery and oil and gas industry as the activity level is
high.
Now we move over to the geographical developments. We see that order intake in the quarter that's order intake in the quarter year on year North America grew 11%, followed by Latin America with 10% and Nordic at 7%. Central and Eastern Europe declined 12% due to non repeat large orders. Let's take a closer look at Asia. And now all comments are sequential.
The region grew 5% and base business was strong in all three divisions. As a whole, Marine and Diesel and Equipment division grew, while Process Technology declined somewhat due to non repeats. Marine saw a positive impact from new ship contracting in general and for oil and gas transportation vessels in particular. After a series of stable quarters in China, we reported broad based double digit growth for base business and large orders alike as the wait and see mode seem to ease somewhat. Next slide.
Western Europe and Nordic increased 4% respectively. There was a positive development for both base business and large orders. The large exhaust gas cleaning order boosted the growth in Nordic and we saw growth in most countries and sales regions. The 10% growth in Central and Eastern Europe was explained by a very good base business development. Russia was unchanged as the decline in large orders was compensated by growth in base business.
Next slide, we see that North America declined 10% due to non repeat large contracts as base business and parts and service was unchanged. We see that in oil and gas customers are delaying projects due to lack of resources. Latin America grew 10% since we received large orders in the food and oil and gas sectors. The base business also reported growth. On the next slide, we see that for the 1st 6 months, Latin America delivered 5% growth year on year, while North America and Western Europe including Nordic were unchanged.
Central and Eastern Europe and Asia declined due to non repeat large orders. Moving over to the next slide. Here we have the top 10 ranking in 2012 and the yellow bars show the LTM development after the second quarter. The U. S.
Continued to strengthen SKU's number one position. All other markets declined except mid Europe and Adriatic since we had a very strong 1st 6 months last year. And by that, we move over to the financials. And Thomas? Thank you,
Lars. Good morning all of you. So let's then take a look a bit more into the details of the financials. Let's move on to the next slide. Lars has covered the orders in a good amount of data.
So let's move on to sales. In the quarter, we realized sales of €7,550,000,000 Let me confirm that this was in line with our own expectations including that the delays commented after quarter 1 were largely recovered. Sales was down 2% organically compared to last year. Acquisitions added 3.7% in the quarter. Please note that we had as much as 5.1% adverse translation effect.
However, given that the weakening of the Swedish krona remains, we expect translation effects to be less significant in relative terms a whole year basis. In absolute terms, sales was down 3.4% year on year. Sequentially, we enjoyed a like for like increase in sales of 14.3%, mainly explained by a combination of seasonality and delays from quarter 1. Looking at parts and service, it represented 27.4% of total revenues in the quarter against 26% in quarter 2 of 2012. Parts and service represented 27.7% during the 1st 6 months, an increase from 26.8% last year.
With that, let's move on to gross profit margin. Gross profit margin for the quarter was 37.9%. This represents an increase of 0.9% year on year and a reduction of 0.3% sequentially. Remember with the Q1 report, I said in the near term we expect a negative mix effect as capital sales is expected to increase and FX transaction effects will be turning to the negative. I also said, we do not foresee any material changes to load or any material effects from gross margin in the backlog compared to the just reported.
The slight positive price effect is expected to continue year on year. I would argue that the actual Q4 2 was just reported came out as we predicted 3 months ago. Sequentially, we were benefiting from better factory results, which is then mainly a combination of load and lower metal prices. But we were then suffering from worse mix, FX and still some accounting adjustments to Alfa Laval standards at Oldroy. Year on year, we were mainly enjoying a better mix, factory results and a limited positive price effect, partly reduced by a slight negative FX effect.
Let's then come to the first forward looking statement. In the near term, we expect a slight negative mix effect. FX transaction effects are expected to be limited, but negative. We do not foresee any material changes to load or factory results as a whole. And finally, gross margin in the backlog is not expected to present any material change to the just reported.
With that, let's move on to look at overhead costs and other items in the P and L. D ended at €191,000,000 in the quarter, which is an increase year on year like for like of 6.4%. R and D spend looking at the 1st 6 months represented 2.6% of sales and that is of course in line with our guidance for R and D in relation to sales. Moving on to sales and admin. Sales and admin amounted to €1,270,000,000 in the quarter, representing an increased like for like of 0.9% year on year.
This effectively means continued effects from the savings program initiated late 2011, taking salary inflation and selective revenue investments in presence into consideration. We had, as I'm sure you've noted, adverse FX effects, totally impacting EBITA of €63,000,000 in the quarter then giving us an EBITA margin of 16.4% and in absolute terms €1,240,000,000 euros Moving on to profit before tax. We ended with a profit before tax of €969,000,000 in the quarter, a decline of 12% over last year. This included exchange differences in the financial net of €103,000,000 and total FX effect including the effects in EBITA of €166,000,000 So actually profit before 10 lakhs was some $28,000,000 higher excluding FX in a year on year comparison. Of course, this has a lot to do with the weakening of the Swedish krona as far as the exchange effects in the financial net is concerned.
Before leaving the P and L, taxes ended with a charge of $325,000,000 the higher than guidance tax charge is coming from a few non deductible items. Our long term guidance remains 28% tax is based on profit before tax. EPS for the quarter $1.53 $1.81 excluding amortization on step up. This is a slight decline compared to quarter 2 of 2012, again broadly explained by FX effects. With regard to return on capital employed, we reached just over 26%, an increase sequentially of 1% and a decline of just over 2.5% year on year.
Return on equity 22%, again 22.9% last year, but then an increase of 0.6% from quarter 1.
Let's then move on to look at the cash flow statement.
We can summarize the cash flow statement in the following way. We enjoyed
We enjoyed a
substantial increase in cash flow from operation. This was reported thanks to a reduction in working capital to compare with a fairly substantial increase in the Q2 of 2012. This reduction is to quite some extent coming from an increase in customer advances in our Process Technology contract business. Acquisitions of 441,000,000 dollars is largely coming from the acquisition that Lars commented just before of Niagara Blowers in the U. S.
Free cash flow reached $876,000,000 This is to be compared with $450,000,000 a year ago. I think it's fair to say that we had another really good quarter in terms of cash generation. So let's then take a look at FX. As mentioned earlier, FX effects and EBITA were €63,000,000 negative coming from a translation of 56,000,000 negative and a 7,000,000 transaction negative. We have of course updated our forecast for the full year on the back of among other the weaker Swedish krona.
With the assumed rates as specified on the same slide, we expect a net FX effect of a negative 125,000,000 in EBITA for the full year, mainly coming from translation as specified. This is an improvement of €70,000,000 compared to the projection as presented with the quarter one report. Then applying the same rates into 2014, we estimate an adverse transaction effect of a mere €15,000,000 to be compared with a negative €100,000,000 3 months ago. Let's then move on and look at a bit at the order backlog. We had a total order backlog as per end of June of almost $14,900,000,000 representing approximately 6 months of LTM sales.
Looking at the backlog by division, you find an increase in new process technology and equipment and reduction in Marine and Diesel year on year. However, it's worthy to note that sequentially, marine and diesel backlog grew for the first time in a very long while in quarter 2. Looking at the order backlog to be shipped during 2013, this amounted to 9,790,000,000 dollars Having said that, let's move on to the bridge of whole year sales 2012 to 20 13. Looking at the known and the unknown parameters for full year sales. We had a like for like backlog as per January 1 that will cause reduced sales with €100,000,000 for 20.13.
Based on the closing exchange rates as per June 30, we expect negative translation effect to sales of some €900,000,000 a reduction of this effect with some €300,000,000 compared to the last report on the back of again this weaker effect. The acquisitions in 20 122013, we estimate will give additional sales of €700,000,000 in 20.13. This might be lower than you expected. The reason being that acquisitions exposed to oil and gas are also expected to be influenced by the delays among customers commented earlier by laws. This gives us a subtotal for the known parameters of €29,500,000,000 an increase from the situation after Q1 of €300,000,000 due to less of translation effects.
As far as the unknowns are concerned, it's always up to you to form an opinion about demand. Please consider our outlook and the order trends over 20 12 Q2 of 2030. To provide you with a reference point, infraut orders amounted to €5,100,000,000 dollars in the second half of twenty twelve at current exchange rates. With regard to prices, we made small adjustments to prices for standard products at the beginning of the year giving limited effects to the total. Then metal prices are expected to have somewhat of an adverse effect on particularly the OEM segment.
And with that, I give the word back to Lars for the outlook and closing remarks.
And the outlook is as follows. We expect that demand during the 3rd quarter will be on about the same level as in the Q2, which means that it's somewhat higher than the same quarter the previous year. For each division, our demand expectations for the Q3 is as follows: Marine and diesel somewhat lower since the large exhaust gas cleaning orders are not likely to repeat in the 3rd quarter. Equipment on about the same level since the positive seasonal effect remains. And finally, process industry somewhat higher due to large orders expected.
And that completes our presentation. And now we hand it over to the operator for the Q and A session.
Thank you. Your first question comes from Ben Maslin from Merrill London. Please ask your question.
Thank you. Good morning, Lars. Good morning, Thomas. I wonder if maybe you could just give us a little bit more color on your comments on the oil and gas markets in the U. S.
You obviously say there are some delays there. Just is that in kind of upstream or downstream segments onshoreoffshore? Just a bit of color there. Have you seen cancellations? And then maybe how long do you think it will take the industry to work through this capacity issue I guess that they have?
Thank you.
Well, you can see it's among end customers and also among contractors. It is a shortage of human resources competence. And that means that they delay some of the investments. And it's hard for us to judge how long it will take. But it is but the activity level is high, but we can see that the large contracts there are delays.
And we cannot give an assessment how long it will take.
Okay. But from your perspective, it's more that you stay at a high at an elevated level as opposed to these markets come down in terms of your business?
Absolutely. We stay on an elevated level. It's the large contracts that we see are being delayed.
Great. Thank you. And then a follow-up question on the exhaust gas systems. Can you say, I mean, how many scrubbers you sold in the quarter? And just give us an update on tendering whether there's any change in your expectations for that market now relative to earlier in the year?
Thank you.
We see well, we are in discussions with several ship owners and we made a couple of 100 quotations. And quite a few of the quotations are the customers that are getting close to making a decision. And the number of scrubbers
I'm sorry, Bernard. We can't give you the exact number at this juncture. But obviously, the 2 large orders that we landed in the quarter represent several individual systems. But I'm sorry we can't provide the exact number at this juncture.
Got it. Okay. Thanks a lot. Thanks Thomas.
Your next question comes from Peter Froelen from Handelbanken Kapital. Please ask your question.
Yes. Good morning to both of you. Firstly, on the you mentioned in a lot of places about the seasonality helping, especially equipment and maintaining that high season seasonal activity into Q3. On sort of a broad alfalfaol basis, are we normally seeing a weaker season in Q3? And also, is it normal to see the service being slightly lower in the Q2 over the first on seasonality reasons?
That's my first question.
[SPEAKER STEPHEN ROBERT BINNIE:] When it comes to seasonality, what this refers to is really that during quarters 2 and 3 typically you have an exchange of systems for heating as well as air conditioning in the Northern Hemisphere. So it's really relating to the equipment division business. As far as service is concerned, this has nothing to do with seasonality. It's merely a question of when customers actually place orders for as last stated major overhaul contract service contracts for power plants or other installations.
That's very clear. Thank you. On to follow-up on Ben's questions on ballast water systems, maybe you could try to accumulate number of systems in the backlog and also about the activity there? And finally, on the gross margin, 37.9%, to me a rather strong figure despite the negative mix sequentially. You mentioned that it was in line with your expectations on a net basis so to speak.
But could you please quantify the positive effect of load and raw material more in detail? Or on the other side, I guess, the negative on mix, which I think you will hold for yourself? [SPEAKER
STEPHEN ROBERT
BINNIE:] Well, if we start with balanced water treatment, we see a good activity level. And for the 1st 6 months this year compared to last year, we are up more than 90%. So we are having an order intake around SEK 200,000,000 for the 1st 6 months. So good activity level.
Thank you.
As far as gross margin development is concerned, I have to make you disappointed that you will not get the details in terms of percentage units when it comes to a bridge between last year or sequentially. But what I can say is that there's a fairly substantial mix effect year on year. And we were enjoying not only a good load, a somewhat better load than we anticipated also sequentially. But of course, we were also enjoying some positive effects from the lower metal prices. So that's really the bulk.
And then sequentially, of course, we did have, as we predicted, a somewhat of a negative mix effect.
Yes. That's very clear. Thank you.
Your next question comes from Andre Kukhnin from CIREG London. Please ask your question.
Good morning. It's Andre from Credit Suisse. Thanks for taking my questions. Firstly, on China, on your commentary, could you tell us whether you believe you're taking share in China? Or is this the broader market development that you're seeing, the improvement?
For a number of quarters, order intake was moving sideways in China. And we saw now that we had a double digit uptake in order intake and it was broad based for Alfa Laval. And the wait and see mode that has been prevailing for quite a while seemed to ease somewhat. And to draw any further conclusions from that, we don't want to do. I mean, we see the same we read the same newspapers as you do
and about the macro statistics in China. Maybe just to add to your comment Lars, when it comes to the breadth of the uptick in China, one conclusion that I think we can draw is that the investments that we have made during the last 12, 15 months in going west and further increasing our presence is paying off because it's not really coming from the very large contracts. We have it across pretty much all segments and then also local component business.
Great. Thank you. And just another question on the acquisitions pipeline. How is it looking right now? Could we expect another sort of few deals like you've announced within Niagara?
Well, our target is to add 3% to 4% annual sales growth from and bolt on acquisitions. And we continue to believe that we will deliver that and we have a number of discussions ongoing.
Okay. Thank you.
Then if I may add to come back to Ben's question about EGC or Exos gas cleaning orders, I can provide the following detail. Including the order that we announced in December, we have landed systems 18 systems, 1 8 systems for 13 ships. And that is a combination of new ships as well as retrofit orders. So 13 ships, 18 systems.
Your next question comes from Sven Weier from UBS Frankfurt. Please ask your question.
Good morning. Couple of questions from my side please. First one is on the shipyard order recovery. It seems that this has already arrived at your order book. So does that mean that the kind of 6 to 9 months period has now shortened a bit?
I guess Wartsila was also just making that comment that they're now seeing this period shortened. Second question would be just on the project pipeline. I guess in the pre closed conference call Thomas you said that the pipeline for big tickets was a bit smaller going into Q2, but the mid sized projects below the radar screen of the €5,000,000 was actually developing quite fine. So I was just wondering if you could give us an updated picture on that. And then just finally on the raw materials you already mentioned the options you had a small positive impact.
When I look at the raw material development we've already had quite a significant decline. So is it that you have to pass on most of the benefit to your clients?
Thank you.
So the marine orders, yes, we see that the lead time has decreased. So the orders are coming in faster than historically. So we saw base business picking up in the second quarter. And when it comes to the pipeline of medium small, medium and large contracts. You can see you could see that in the second quarter, we had a good order intake of small and medium size since we delivered growth despite fairly few large contracts.
And when it comes to the pipeline going forward with large contracts, we have commented that we see some large contracts coming in, in the Process Technology division and that will generate growth for them in the Q3.
Then finally, Sverao and raw materials. If we look at the alloys, we and also the copper and the aluminum prices, Let me start off by saying that this most recent reduction in prices only started say 8 weeks ago or so 8 to 10 weeks ago. And of course, there is a bit of a lag before this has an effect without any hedging. Then on top of that, of course, we have some of our next 12 month exposure hedged, which means that we are pushing the effects forward and are getting less bulk to customer. It's merely a matter of the hedging and the fact that there is a bit of a lag before it really kicks in.
As I commented for the sales bridge, of course, we will see some adverse impact particularly in the OEM segment where we do have raw materials clauses pretty much in all of the OEM contracts.
Can I just ask you one follow-up question on the Marine business? Obviously, we've seen quite a strong development in the environment area and new equipment orders. So how should we think about profitability of the Marine division going forward? So I guess especially on ballast water you share the profit with what Valenius scrubber is a relatively new product. So should we assume that to have somewhat of a depressing effect on margins?
Or what's your guidance there?
Well, Sven, I appreciate that you're trying to get a forecast for profit in the Marine division. But we are not as you know providing any forecast on the profit line. But to give you a bit of a sense, we do not see any drama in either direction. I think you should recall as well if we go back, I think it's now almost 2 years, we have seen what we then call a normalization of price levels in the marine area. So the situation that we were used to before booms say going back to 2,000 and 3, 2004.
But of course that has kicked into our P and L as well at this juncture.
Thank you.
Thank you. Your next question comes from Colin Gibson from HSBC London. Please ask your question.
Hi, good morning gentlemen. A couple of questions please. First of all, I just wanted to go back to your discussion of the food business within PTD. Just wondering generally how sustainable you see the growth that you saw there in Q2, whether we should expect more good momentum for the rest of the year and just generally how you feel about that business? 2nd question, I wanted to ask you how you feel about GEA's slightly surprising decision to put the whole of their heat exchanges division for sale.
What I'm thinking particularly is the risk to Alfa Laval in terms of a new owner of that business either adopting different pricing strategies or depending on who it might be being able to bundle products in a way that you can't bundle products. How should we feel about either of those risks when we think about GEA's exit from heat exchanges? Thank you.
So first of all, when it comes to the Food segment, we have generally a positive view on the Food segment. And we have the product we have applications like vegetable oil and so on. However, between the quarters, the business comes it's often fairly big contracts and they come in a little bit lumpy. So therefore, between the quarters, it's hard to tell how it will develop. But overall, we have a positive view on the Food segment.
And then we have when it comes to gear and the risk of a new owner, Well, let's say short term it of course opens opportunities for Alfa Laval since uncertainty within among customers and among GEA's organization will for sure open opportunities for us. And then in the longer perspective, a new owner, Well, we have great respect for GEA as a company and they have been a very tough competitor. So we are prepared whoever is will be the new owner at the end. We are prepared to take them on. And when it comes to bundling, I would say that GEA has had good opportunities to bundle.
So we don't see any threat there.
Okay. Thank you very much.
Thank you.
Your next question comes from Peter Reilly from Deutsche Bank London.
Good morning. I just wanted to come back to the Marine Exhaust Gas Scrubber business. If I understood it right, you said that you aren't expecting any large orders in the Q3, but you are expecting more orders in the second half of the year. So does that mean you're expecting a strong Q4? Is it are you changing your outlook on the market?
Or is it just the timing of some of the larger orders coming through?
It's timing of large orders. So it's you have a correct conclusion.
Okay. And secondly, just on the larger feature. You've obviously had several years now of the 2 years of the margin coming down on a year on year basis. As you said it seems to have stabilized in around about 16.5%. Is that now you think a sustainable level going forward?
Or is it really dependent on volume developments? Can you get the margin back up to where it used to be if you have a more positive volume environment?
[SPEAKER JEAN PIERRE ANDRE DE
CHALENDAR:] Well, to begin with, I don't think we've commented on the margin as such. But of course, a fair conclusion that we've reported half a dozen quarters consecutively on about the same level. Going forward, the only thing I can say is that I have to remind you of our target of being above 15% operating margin as often as ever possible. We will do our best to overshoot our target as often as possible.
Thank you.
There are no first questions. Please continue. Apologies. There's a question from Peter Froelen from Hanzl Banking Capital. Please ask your question.
Yes. Thank you. Sorry for that. Coming back to the outlook Lars and Thomas, I totally hear what you're saying about year on year and also sequentially. But given this sort of higher activity in, call it, investment willingness, it seems that a slight growth year on year with the FX that we are flattening out on translation at least in orders feels a bit cautious.
Is there something I have missed here? Is it something else that is expected to maybe come down a bit or that you are more uncertain about the direction than what's
we we have commented on each of the division and we say that as we do not expect a repeat in the very short term of large contracts in Marine, we expect Marine to be somewhat down. We expect equipment to be on about the same level, high level due to seasonality. And finally, Process Technology, as we believe we will land some large contracts, we'll be up somewhat. One down, one flat and one up, I think the average of those is pretty much the same and that's really what we're seeing.
Yes. And for you about the same level as sort of plusminus3 percent of the cap. That's in your mindset, right?
Well, Peter, again, we are dependent on customers individual customers' decisions for contracts and also component orders. So we're in the hands of our customers to that extent. We cannot predict whether they take the decisions on September 30 or October 2.
Yes. That's true. We won't
do any better than this.
Thank you.
All right. Thank you, Peter.
No further questions.
So that completes the Q and A session. So thank you all of you that have attended and we are wishing you a nice warm and relaxing summer wherever you are.
Thank you and goodbye. Bye guys. Bye.
That does conclude our conference for today. Thank you for participating. You may disconnect.