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. At which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today on Tuesday the 23rd of April, 2013. I will now turn the conference over to your speaker today, Mr. Lars Renström. Please go ahead, sir.
Thank you very much. Good afternoon. 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 second quarter to be on about the same level. The second highlight is that order intake for the Marine & Diesel division grew 20% sequentially, driven by stronger base business and large orders within environment and offshore. Official statistics for the first quarter is showing an increase in contracting to the shipyards. It is 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. 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 SEK 7.2 billion. Net sales dropped 4% to SEK 6.5 billion, and adjusted EBITA declined 5% to SEK 1.1 billion, 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 SEK 29.6 billion. The decline was 5% year-on-year at constant exchange rates, and we have now had three 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 1.7%, 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 SEK 1.1 billion.
Moving over to highlights in the quarter. There we see that the Process Technology division booked three large orders within oil and gas processing, and one order for heavy fuel oil treatment in a power plant. The Marine & Diesel division booked an order for heaters to an FPSO vessel and an order for ballast water treatment systems. 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 have growth in the Sanitary segment and Marine & Diesel Parts and Service, whereas five segments declined and four were unchanged. Let's take a closer look at the divisions. Please note that all comments are sequential. We start with the Equipment division, where order intake was down somewhat. Sanitary 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. In Process Technology 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. 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 Parts and Service had a stable development. The Marine & Diesel grew with 20%.
Segment Marine & 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. Our commitment and belief in the marine market is evidenced by our decision to build a new test and training center in Aalborg. 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. 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, all other regions declined, since we are comparing with a very strong quarter. Let's take a closer look at Asia. All comments are sequential. The region declined 1%. Marine & Diesel division performed the best. Parts and Service was unchanged, while Process Technology 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. Western Europe and Nordic declined 5% and 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 & Diesel division. Parts and Service saw an overall good development. Here we have a top 10 ranking in 2012, the yellow bars show the LTM development in the first quarter. The U.S. continued to strengthen the number 1 position. All other markets declined except Mid Europe and Adriatic, since we had a very strong quarter in 2012. We move over to Thomas and the financials.
Good afternoon, all of you. Let's get into the details of the financials. We take the first slide. Lars, of course, covered orders. Let's talk a bit more about sales. In the quarter, we realized sales of SEK 6.5 billion. Let me already now confirm that this was somewhat below our own expectations. To be more precise, the outcome was a shortfall of approximately SEK 300 million 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 two. The backlog is there to be shipped, as you know.
Sales was organically some 3.2% down compared to first quarter last year. Acquisitions added 3.5% to sales. Please note that the strengthening of 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 four every year. Parts and service, finally, represented 28% of total revenues in the quarter against 27.7% a year ago. Let's move on to gross profit margin. Gross profit margin ended 38.2% in the quarter, representing a decline of 0.3% year-on-year. An increase of 1.2% sequentially.
Let me remind you that with the quarter four 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. 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 one, we came out very much as predicted. Sequentially, we were benefiting from better mix. Added to that, a slight price effect. Year-on-year, we were suffering from a limited adverse mix effect, as well as the cost accounting adjustments in Aalborg that you are familiar with since the latter part of last year. Factory load and price gave limited positive effects. Let me move on to a forward-looking statement concerning gross profit margin.
In the near term, we expect a negative mix effect as capital sales is expected to increase. 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&L, R&D ended at SEK 170 million in the quarter, which is a year-on-year like-for-like increase of almost 11%. R&D spend represented 2.6% 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 SEK 1.2 billion 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've promised. The outcome in quarter one effectively means a saving of between SEK 50 million and SEK 60 million 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 16.3%, almost level with last year, despite the shortfall in invoicing. Profit before tax was falling from about SEK 927 million, which is a decline of 9% over last year, largely again explained by the lower sales volume, and to some extent also due to more of step-up on amortization coming out of recent acquisitions. Before leaving the P&L, let me just point out that taxes ended with a charge of SEK 224 million, representing 24% of profit before tax.
This lower than guided tax charge 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 deferred tax benefits, we may come out a bit lower for 2013. EPS for the quarter, SEK 167 and SEK 194, excluding amortization on step-up. A slight reduction as per P&L Adjusted for step-up. Return on capital employed, almost 26%. Return on equity, 21.5%. If we then move on to the cash flow statements, we have a reduction in cash flow from operations. 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 Q1 of 2012.
On acquisitions, we spent almost SEK 70 million in the quarter, coming out of the delisting in India, where we continued 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 SEK 935 million, just above what we generated in Q1 of last year. 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 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 SEK 791 million.
The changes to this standard means that any unrecognized actuarial gains or losses from January 1 of 2012 are to be charged to the P&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 SEK 164 million for 2012, which totally means a reduction of equity, because of this accounting change, of totally SEK 955 million in the opening balance sheet for 2013. Let's move on to FX. We had a negative effect in the quarter of SEK 32 million. Obviously, we've updated our forecast for the full year on the back of, among other, the strengthening of the Swedish krona. With the rates as specified on the slide, we expect for the full year, a negative effect of SEK 195 million, mainly coming from translation.
This is, of course, a deterioration from the SEK 140 we predicted with the full year report. Applying the same rates into 2014, we calculate an adverse transaction effect to the tune of SEK 100 million. Let's look at our order backlog. As for the end of March, we had a total backlog of SEK 14.7 billion, representing about six 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 & Diesel. Looking at the part of the backlog to be shipped during 2013, it was just over SEK 10.9 billion. Excluding acquisitions, so like for like, this means a slight increase as for end of March. Having said that, let's move on to the bridge of whole year sales 2012 to 2013. Starting from last year's sales of SEK 29.8 billion, let's look at the knowns and the unknowns.
The order backlog for January 1 was about SEK 100 million lower on a like-for-like basis. Applying the exchange rates as for end of March, the translation effect has obviously grown, we're estimating on the back of these exchange rates, an adverse translation of SEK 1.2 billion. As for the acquisitions completed during 2012 and to date 2013, we estimated additional sales of SEK 700 million. A subtotal for known parameters of SEK 29.2 billion, some SEK 600 million lower than the number that we showed you with the full year report. Of course, all coming from the FX translation. Of course, there are two 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 first quarter 2013, and our outlook when you assess the in-for-out orders. Finally, price, of course.
We have adjusted prices on standard products going into this year, but still on a very limited scale. That, of course, plays a role. With that, I hand back to Lars for the outlook and closing remarks.
The outlook is as follows. We expect that demand during the second quarter will be on about the same level as in the first quarter. For each division, our demand expectation for the second quarter is as follows. Both Marine & Diesel and Process Technology will be on about the same level, whereas Equipment will be somewhat higher due to seasonality. That completes our presentation, now we hand over to the operator for the Q&A session.
Thank you. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Your first question comes to the line of [Peder Froment] from Handelsbanken in Copenhagen. Please ask your question.
Yes, good afternoon. Can you hear me?
Yes, we hear you.
Hi, gentlemen. Okay, just to begin, Lars, on your outlook. Any day affecting your outlook or is that in addition? You normally talk about daily activity in the order intake, right?
What do you mean day-
We had a tough quarter working day-wise in the-
Okay
first quarter. Is that taken into account in your outlook, or should that be added if we mentioned that it was more days?
That is taken into account. Let's say you shouldn't adjust for any invoicing days or any working days.
Okay. A detailed question on the order released today, on the scrubber orders. Are those retrofits or are the two new ships, the SOx?
These are for two new cruise ships.
Yeah. Could I, as a follow-up, just ask you there, do your solution works well for the retrofit market for the cruise ships, do you think, or do you offer your products to those?
Absolutely. The order that we communicated in the end of December, that was pure retrofit. We are in close discussions on a number of retrofits. It's perfectly suitable for both retrofits and new builds.
Okay. Thank you. I will get back in line with further questions. Thank you.
Thank you. Your next question comes on the line of Sven Weier from UBS in Frankfurt. Please ask your question.
Good afternoon, gentlemen. Couple of questions from my side. First one also on the scrubbers. Was just wondering if you could give us a number of scrubbers that you sold in Q1? I guess Wärtsilä said 10, 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 quantify the impact on the orders, or is it rather relatively meaningless in your view? Then just finally on the marine, here also Wärtsilä 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 what 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. We were lower than Wärtsilä in the first quarter. It does not make sense for us to quantify the impact of the cold weather. Finally, when it comes to the official numbers stating the higher activity level or the higher order intake at the yards, 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 second quarter.
Can I just also ask you a final question. You talked about slight price increases, while lately the metal prices have obviously come off. What would you see that having quite a net positive impact, I would guess, for yourself. Thank you.
Well, again, we have adjusted list price base 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. The effects of that, I think it's too early to comment on. With OEM, of course, we have clauses that will have an influence on the price out. We have a benefit on the price end, but for the rest, the outlook in the short term stays, as I mentioned before, a slight positive price effect year-on-year.
Thank you.
Thank you. Your next question comes from Kenneth Toll Johansson from Carnegie Stockholm. Please go ahead.
Yeah, hello. A small detailed question. If you add up the other operating income and other operating costs, it was quite low in this quarter, minus SEK 75 versus the minus SEK 118 for Q1 2012. Are there any specific explanations why those costs were quite low in this quarter?
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 as an average, we tend to be in the neighborhood of SEK 100 million plus or minus.
Okay, thank you.
Thank you. Your next question comes from Martin Atkin from Bernstein in London. Please go ahead.
Good afternoon, everybody. Two questions, please. First on Marine & Diesel, I was surprised to see the service orders moving up, the 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? The second question, on the mixed comments that you made, 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 sense of where you see the large order mix heading? It stepped up a year or so ago to a newer level. Is this what we should expect if you average it out? Because I understand there's volatility quarter-on-quarter, but what is your expectation for large order mix over more medium-term?
If I start with Parts and Service in Marine & Diesel, the main reason for the very good development in the quarter was that we saw a high repair activity offshore. It's offshore for customers like Petrobras, for instance, it's offshore vessels.
Okay.
Moving on to the mix and the larger order impact longer term. If we look at Alfa Laval over, say, the last 10 years or 10+ years, no doubt we've seen the average order value, and even more so, the relative part of orders with a value above EUR 500,000. That has clearly gone up. We have acquisitions like, for instance, Packinox having a definite impact on this. Another one would be Ashbrook Simon-Hartley recently, and also ACE. Yes, if we look at the mix, we have a larger portion of our business represented by orders above half a million euro in value. At the same instance, we have maintained or rather increased the portion of after sales of the total. A bit more of larger contracts, but also an increase of Parts and Service.
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 four, and you have quite a bit more of aftermarket to the total in quarter one.
Great. Thank you.
Thank you once again. If you wish to ask a question, please press star followed by one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. There appear to be no further questions at this time. Please continue.
That completes the Q&A session. Thank you very much for your attention and your interest. Thank you and goodbye.