Welcome to the Alfa Laval Q1 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 that this conference is being recorded today on Tuesday, April 23, 2013.
I'd now like
to hand the conference over to your speaker today, Mr. Lars Ramstrom. Please go ahead, sir.
Thank you very much. Good afternoon and most welcome to our presentation. I will start by giving you my three highlights. The order intake came in as expected on the same level as in the previous quarter. Further, we expect the Q2 to be on about the same level.
The second highlight is that order intake for the Marine and Diesel division grew 20% sequentially, driven by stronger base business and large orders within Environment and Offshore. Official statistics for the Q1 is showing an increase in contracting to the shipyards. It's too early to say if this is a trend. But if it continues, it could represent opportunities for Alfa Laval towards the end of the year. And finally, we continue to deliver on the savings program and sales and admin cost was down year on year like for like.
Let's take a look at the key figures. Orders received declined 9% to €7,200,000,000 Net sales dropped 4 percent to SEK 6,500,000,000 and adjusted EBITA declined 5% to SEK 1,100,000,000 and adjusted EBITA margin reached 16.3% versus 16.5% a year ago. Moving over to orders received. Orders received on rolling 12 months reached 20 €600,000,000 The decline was 5% year on year at constant exchange rates. And we have now had 3 consecutive quarters with the same order intake.
Next slide. From the order analysis, you find that year on year acquisitions contributed with 3.2 percentage units and organic growth was minus 8%. We had negative currency effects of 4.5% giving a total of minus 9%. Sequentially, acquisitions contributed with 1 0.7% and organic growth was minus 0.7%. Negative currency effects of 2.3% gives a total of minus 1.3%.
On the next slide, we see the adjusted margin that reached 16.3% and the operating result was €1,100,000,000 Moving over to highlights in the quarter. There we see that the Process Technologies division booked 3 large orders built in oil and gas processing and one order for heavy fuel oil treatment in the power plant. The Marine and Diesel division booked an order for heaters to an FPSO vessel and an order for ballast water treatment systems. Also a minor acquisition of a gas combustion activity was made. Let's move over to the development Per segment.
We see that year on year in the quarter, we had growth in the sanitary segment and marine and diesel parts and service, whereas 5 segments declined and 4 were unchanged. 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 down somewhat. Sensitive was negative, was affected by non repeat of larger projects.
Industrial equipment was somewhat lower as rising demand for refrigeration did not compensate for slow development in district heating. OEM was unchanged as the long winter led to lower demand for air conditioning units, while demand for boilers grew. Parts and service had an overall good development. Next slide. In Process Technologies division, order intake was down somewhat.
Despite strong growth for vegetable oil, food declined as it was affected by Brewery and Beverage and Viscous Food. Energy and Environment was boosted by large orders, primarily in oil and gas exploration. Power also contributed to the positive development. Process Industry declined due to fewer large contracts. The base business had a stable development, reflecting the underlying good activity level in the end markets.
And and service had a stable development. Next slide. The marine and diesel grew with 20%. Segment Marine and Diesel Equipment reported growth for the traditional marine portfolio as well as diesel power plants and in particular, environmental solutions. Marine and Offshore Systems was boosted by a large offshore order in Korea.
The base business was stable. Parts and service rose mainly due to good offshore repair activity. On the next slide. Then our commitment and belief in the marine market is evidenced by our decision to build a new test and training center in Old Boy. The center will primarily focus on testing of scrubbers, waste heat recovery boilers and ballast water systems.
In this center, we will be able to evaluate and test integrated systems and also provide training. Now we move over to the geographical development. Order intake in the quarter shows that year on year Western Europe grew 9%. Latin America was almost unchanged and all other regions declined since we are comparing with a very strong quarter. Let's take a closer look at Asia.
And now all comments are sequential. The region declined 1%. Marine and Diesel Division performed the best. Parts and service was unchanged, while Process Technologies division declined due to fewer large projects. China declined somewhat affected by a continued wait and see mode among customers.
South Korea, Malaysia and Japan were among the best performers. Next slide. Western Europe and Nordic declined 5% 8% respectively due to fewer large contracts. It's interesting to note that both parts and service and base business had a positive development. Central and Eastern Europe grew 33%, driven by oil and gas and refinery in Russia.
The base business was stable and parts and service saw a very good development. In North America, we grew 11% following large contracts in the U. S. And Canada. The base business grew also.
Energy and Environment did particularly well. Latin America grew 4% due to project orders in the Process Technology Division. Orders for capital equipment declined in equipment and Marine and Diesel division. Parts and service saw an overall good development. Moving over to the next slide.
Here we have the top 10 ranking in 2012. And the yellow bars show the LTM development in the Q1. The U. S. Continued to strengthen the number one position.
All other markets declined except mid Europe and Adriatic since we had a very strong quarter in 2012. And now we move over to Thomas and the financials.
Okay. Good afternoon all of you. Let's get into the details of the financials then. We take the first slide. Loss, of course, covered orders, so let's talk a bit more about sales.
In the quarter, we realized sales of $6,500,000,000 and let me already now confirm that this was somewhat below our own expectations. To be more precise, the outcome was a shortfall of approximately $300,000,000 to our expectations. There are two main reasons for this shortfall. Deliveries of equipment to certain shipyards were pushed back by the yards. They delayed the delivery of equipment, so to say.
We also had a slightly lower than expected level of revenue recognition in certain Process Technology projects. We are however confident that most of this shortfall will be recovered during the course of quarter 2. The backlog is there to be shipped as you know. Sales was organically some 3.2% down compared to Q1 last year. Acquisitions then added 3.5 percent to sales.
But please note that the strengthening primarily the Swedish krona gave an adverse translation effect of more than 4.5%. This will give a very substantial number on a whole year basis if the set stays on this level. In absolute terms, sales were, as you have noticed, 4.3% down year on year. A sequential comparison is not really relevant considering that we have quite some seasonality to the benefit of sales in quarter 4 every year. Parts and Service finally represented 28% of total revenues in the quarter against 27.7 percent a year ago.
Let's then move on to gross profit margin. Gross profit margin ended 38.2% in the quarter, representing a decline of 0.3% year on year and an increase of 1.2% sequentially. Let me remind you that with the quarter 4 report I said, in the near term, we expect a relative reduction of capital sales to have somewhat of a positive effect on gross profit margin. We do not foresee any price effects. And as far as load is concerned, we do not envisage any major effects.
I'm happy to be able to say now that for quarter 1, we came out very much as predicted. Sequentially, we were benefiting from a limited adverse mix effect as well as the cost accounting adjustments in Old Boy that you are familiar with since the latter part of last year. Factory load and price gave limited positive effects. Let me then move on to a forward looking statement concerning is expected to increase and also negative as FX transaction effects are expected to be turning to the negative. We do not foresee any material changes to load or any material effects from the gross margin in the backlog compared to what we've just reported.
A slight positive price effect is expected to continue year on year. If we continue to other parts of the P and L, R and D ended at EUR 170,000,000 in the quarter, which is a year on year like for like increase of almost 11%. R and D spend represented 2.6 percent of sales in the quarter, which is in line with the guidance we've given since long. Moving on to sales and admin. They amounted to almost $1,200,000,000 in the quarter, representing a like for like reduction of 2.5%.
The savings program launched at the end of 2011 is clearly generating the effects that we promised. The outcome in quarter 1 effectively means a saving of between $50,000,000 $60,000,000 over last year, if you allow me to exclude targeted revenue investments in sales and service resources. We came out with an EBITA margin for the quarter of 16.5%, almost level with last year, despite the shortfall in invoicing. Profit before tax was falling from about $927,000,000 which is a decline of 9% over last year, largely again explained by the lower sales volume. And to some extent also, we are due to more of step up on amortization coming out of recent acquisitions.
Before leaving the P and L, let me just point out that taxes ended with a charge of $224,000,000 representing 24% is coming partly from deferred tax assets on pension insurances in Sweden, but our long term guidance remains 28% based on profit before tax. However, on the back of these benefits, these deferred tax benefits, we may come out a bit lower for 2013. EPS for the quarter, dollars 1.67 and $1.94 excluding amortization on step up. A slight reduction as per P and L, but a slight increase adjusted for step up. Return on capital employed, almost 26%, return on equity, 21.5%.
If we then move on to the cash flow statement, we have a reduction in cash flow from operations. This was this is, of course, reported due to lower profits and higher tax payments compared to last year, but then partly compensated by a bigger reduction in working capital compared to quarter 1 of 2012. Acquisition on acquisitions, we spent almost $70,000,000 in the quarter coming out of the delisting in India where we continue to buy shares from minority shareholders and then also the acquisition of the gas combustion activity as Lars commented on before. Finally, a free cash flow of €935,000,000 just above what we generated in Q1 of last year. So I think it's fair to say again another good quarter in terms of cash generation.
Moving on, I'm sure you're all aware that there is a change in accounting standards when it comes to employee benefits known as IAS 19. In brief, the changes means or meant for Alfa Laval that we made a restatement of the closing balance sheet as per end of December 2011. This caused a reduction in equity for the Alfa Laval Group of EUR 791,000,000. Dollars The changes to this standard means that any unrecognized actuarial gains or losses from January 1, 2012 are to be charged to the P and L account as other comprehensive income. That is below net income and as a consequence obviously influence equity.
The impact under this restatement effort was a negative €164,000,000 for 2012, which totally means a reduction of equity because of this accounting change of totally €9 $55,000,000 in the opening balance sheet for 2013. Let me move on to FX. We had a negative effect in the quarter of EUR 37,000,000 Obviously, we've updated our forecast for the full year on the back of, among others, the strengthening of the Swedish krona With the rates specified on the slide, we expect for the full year a negative effect of 195,000,000 mainly coming from translation. This is of course a deterioration from the €140,000,000 we predicted 2014, we calculate an adverse transaction effect to the tune of EUR 100,000,000 EUR 100,000,000 Let's then look at our order backlog. As for the end of March, we had a total backlog of 14 point $7,000,000,000 representing about 6 months of LTM sales.
Looking at the backlog by division, we've had an increase in Process Technology and Equipment and a reduction in Marine and Diesel. Looking at the part of the backlog to be shipped during 2013, it was just over $10,900,000,000 Excluding acquisitions, so like for like, this means a slight increase as per end of March. Having said that, let's move on to the bridge of whole year sales 2012 to 20.13. Starting last year's sales of €29,800,000,000 Let's look at the knowns and the unknowns. The order backlog for January 1 was about $100,000,000 lower on a like for like basis.
Applying the exchange rates as for end of March, the translation effect has obviously grown. So we're estimating on the back of these exchange rates an adverse translation of EUR 1,200,000,000. As for the acquisitions completed during 2012 and to date 2013, we estimated additional sales of €700,000,000 So a subtotal for known parameters of €29,200,000,000 some €600,000,000 lower than the number that we showed you with the full year report. Of course, all coming from the FX translation. But of course, there are 2 unknowns.
The demand going forward and the demand translated into invoicing in 2013 in for out orders. Please consider the order pattern over 2012, the Q1 2013 and our outlook when you assess the in frout orders. And then finally, price, of course. We have adjusted prices on Standard Products going into this year, but still on a very limited scale. So that of course plays a role.
With that, I hand back to Lars for the outlook and closing remarks. [SPEAKER LARS
FRUERGAARD THOMAS:] The outlook is as follows. We expect that demand during the second quarter will be on about the same level as in the Q1. For each division, our demand expectation for the Q2 is as follows. Both Marine and Diesel and Process technology will be on about the same level, whereas equipment will be somewhat higher due to seasonality. And that completes our presentation.
And now we hand over to the operator for the Q and A session.
Thank Your first question comes from the line of Peter Frohnen from Handelsbanken Capital. Please ask your question.
Yes. Good afternoon. Can you hear me?
Yes. Good afternoon.
Hi, gentlemen. Okay. Just to begin, Lars, on your outlook. Any day effect in your outlook? Or is that in addition?
You normally talk about sort of daily activity in the order intake, right?
[SPEAKER JEAN FRANCOIS LABADIE:] What do
you mean day We had a tough quarter working day wise in the Q1. Is that taking into account in your outlook? Or should that be added if we make that a little bit
more days?
[SPEAKER JEAN FRANCOIS VAN BOXMEER:] No, that is taken into account. Let's say, you shouldn't adjust for any invoicing days or any working days.
Okay. And a detailed a detailed question on the order released today on the scrubber orders. Are those sort of retrofits? Or are new 2 new cruise ships.
Yes. New 2 new cruise ships.
Yes. Could I as a follow-up, just to ask you there, have you put out any sort of do your solution works well for the retrofit market for the cruise ships do you think? Or do you offer your products to those?
[SPEAKER STEPHEN ROBERT BINNIE:] Absolutely. The order that we communicated in the end of December that was pure retrofit. And we are in close discussions on a number of retrofits. So it's perfectly suitable for both retrofits and newbuilds.
Okay. Thank you. I will get back in line with further questions. Thank you.
Thank you. Your next question comes from the line of Sven Ovaia from UBS. Frankfurt. Please ask your question.
Yes. Good afternoon, gentlemen.
A couple of questions from
my side. First one also on the scrubbers. I was just wondering, from my side. First one also on the scrubbers. I was just wondering if you could give us a number of scrubbers that you sold in Q1.
I guess Wartsila said 10. So I was just wondering if your number was any higher or lower than that. My second question is you also mentioned the impact of the cold weather on the equipment and air conditioning business. Can you kind of quantify the impact on the orders? Or is it rather relatively meaningless in your view?
And then just finally on the Marine, here also Wartsila has been stating a bit of an uptick in the merchant market, which they refer to some ship owners cherry picking low prices rather than a genuine recovery. I was just wondering if your sense of that uptick was. Do you agree that it is a phenomenon of the low pricing? Or any other color that you would have? Thank you.
Okay. So we were nowhere than Wartsila in the Q1. And it does not make sense for us to quantify the impact of the cold weather. And finally, when it comes to the official numbers stating the higher activity level or the higher order intake at the yards. It's of course, it is an opportunity for ship owners since prices are favorable right now and we are following the situation closely.
And if this is a trend, it represents an opportunity. We just have to watch what is happening in the Q2.
Can I just also ask you a final question on you talked about slight price increases while lately the metal prices have obviously come off? So what would you see that having quite a net positive impact, I would guess, on for yourself? Thank you.
[SPEAKER JEAN FRANCOIS XAVIER BOUVIGNIES:] Well, again, we have adjusted list price based type of product with the beginning of the year. You are, of course, correct that metals has gone down and that will, of course, have an impact on the alloy surcharges for stainless mainly. And the effects of that I think is too early to comment on. With OEM, of course, we have clauses that will have an influence on the price out as we have a benefit on the pricing. But for the rest, the outlook in the short term space, as I mentioned before, a slight positive price effect year on year.
Thank you.
Thank you. Your next question comes from Kenneth Torjohans from Carnegie Stockholm. Please go ahead.
Yes. Hello. It's a small detailed question. On if you add up the other operating income and other operating costs, it was quite low in this quarter minus €75,000,000 versus the minus €118,000,000 for Q1 2012. Are there any specific explanations why that those costs were quite low in this quarter?
No. I think if you look at our history, there are swings in the other cost and income. There are no particular items that represents extraordinarily high or extraordinarily low in this or last year's quarter. I think if you look at as an average, we tend to be in the neighborhood of EUR 100,000,000 plusminus.
Okay. Thank you.
Thank you. Your next question comes from Martin Przyzewski from Bernstein in London. Please go ahead.
Good afternoon, everybody. Two questions, please. First on Marine and Diesel. I was surprised to see kind of the service orders moving up for parts and service because of the slower steaming we're still seeing in marine. Is this more because of other end markets maybe offshore that's doing well?
That's the reason that's going up? And then the second question, on the mix comments that you made, I mean, it seems a lot of that's linked to large order share within the revenues in the quarter. Can you give us more longer term a sense of where you see the large order mix heading? I mean, it stepped up a few like a year or so ago to a kind of a newer level. Is this kind of what we should expect if you average it out because I understand there's volatility quarter on quarter.
But what is your expectation for kind of large order mix over a more medium term?
[SPEAKER STEPHEN ROBERT BINNIE:] If I start with parts and service in marine and diesel, The main reason for the very good developments in the quarter was that we saw a high repair activity offshore. It's offshore for customers like Petrobras for instance. And so it's offshore vessels.
Okay.
Then moving on to the mix and the larger order impact longer term. If we look at Alfa Lavalin over say the last 10 years or 10 plus years, no doubt we've seen the average order value and even more so the relative part of orders with a value above €500,000 that has clearly gone up. We have acquisitions like for instance, Taki Nox having a definite impact on this. Another one would be Ashbrook Simon Hartley recently and also ACE. So yes, if we look at the mix, we have a larger portion of our business represented by orders above €500,000 in value.
At the same instance, we have maintained or rather increased the portion of after sales of the total. So a bit more of larger contracts, but also an increase of parts and service.
And do you see that remaining more
or less stable that these two effects offset each other?
We do not see any material changes between capital sales and aftermarket sales. You have, of course, swings between quarters in a year. You have a seasonality where you tend to have a lot more of capital sales relative to the total in quarter 4 and you have quite a bit more of aftermarket to the total in quarter 1.
Great. Thank you.
Thank There appear to be no further questions at this time. Please continue.
So that completes the Q and A session. So thank you very much for your attention and your interest. Thank you and goodbye.