Welcome to the Alfa Laval Q2 Earnings Call. At this time, all participants are in a listen only mode until we come back to the question and answer session. And instructions will be given at that time. And just to remind you, this conference call is being recorded. I would now like to hand over to the chairperson, Mr.
Lars Hinstem. Please begin your meeting, sir, and I would be standing by.
Thank you very much. Good morning and most welcome to the presentation of the Q2 report. I will start by giving you my three highlights. Demand remained on the same high level as in the Q1 and order intake increased year on year by 6% to SEK 7,900,000,000 Contributors to the growth year on year were the Process Industries segment and the Marine and Diesel division through the acquisition of Olbar Industries. And all regions in Europe grew compared to 2011, thanks to several large orders.
My second highlight is that the operating margin year on year was negatively affected by lower capacity utilization in some factories, lower margins in marine capital sales and product mix. Sequentially, the operating margin was unchanged. And finally, we expect demand in the 3rd quarter to be on about the same level as in the second quarter. Now we move over to the key figures. There you see that orders received rose 6% to €7,900,000,000 and net sales increased 11% to SEK 7,800,000,000 Adjusted EBITA declined 3% to SEK 1,300,000,000 and adjusted EBITA margin reached 16.5% compared to 19% 1 year ago.
For the 1st 6 months, orders received rose 14% to €15,800,000,000 and net sales increased 13% to SEK 14,600,000,000 Adjusted EBITA declined 2% to SEK 2,400,000,000 and adjusted EBITA margin reached 16.5% compared to 19.1% a year ago. And now we move over to orders received and margins. Orders received on rolling 12 months rose to 30,600,000,000 and the increase in order intake was 3% year on year at constant exchange rates. And we are pleased to note that excluding large orders, order intake grew sequentially with 5%. Next slide gives order analysis.
And there you find that year on year acquisitions contributed with 4 percentage units and organic growth was minus 1.2%. We have positive currency effects of 3.6%. Sequentially, the organic growth was minus 1.2% and we had 1.2% positive currency effect resulting in unchanged order intake. Next slide. The EBITA margin declined to 16.5% and the operating result was SEK 1 point 3,000,000,000.
And now we move over to the development per segment. And here you see for the 1st 6 months that most of the segments were unchanged or declined. And we can see that the process industry industry stands out and they had a positive development and the same goes for parts and service in equipment division and the marine and diesel division. And now we move over to take a look we take it we move over, take a closer look into the divisions. And here you should note that here all comments are sequential.
And we start with the equipment division. Thus, we see that Sanity was up driven by food and beverage as well as Pharma and Personal Care. Industrial equipment was significantly higher boosted by seasonal demand for HVAC. OEM and parts and service was unchanged. Now we move over to the Marine and Diesel division.
And there we enjoyed substantially higher demand for diesel power and continued growth for environmental and we also enjoyed continued growth for environmental solutions. Demand for marine equipment, the traditional Anfalaval products was unchanged. Marine and Offshore Systems was down significantly due to non repeat large order. More upgrading and repair works listed parts and service. Next slide.
In the Process Technology division, food technology grew supported by beverage and viscous Food Markets. Energy and Environment declined due to non repeat large orders. And process industry showed strong growth driven by refinery in Asia and Middle East. And parts and service declined due to non repeat launch orders. You've heard non repeats a few times in the sequential comparison, but remember that Q1 was all time high in launch orders.
And now we move over to the next slide, the 1st 6 months. And there you see that year on year and like for like, the aftermarket for all divisions was stable or growing, whereas most capital sales segments declined. Now we proceed with the geographical developments. There you see that in the quarter all European regions had growth year on year and the other regions showed modest decline. Let's take a closer look at this interesting fact by going deeper into the regions starting with Asia.
And please note that all comments are sequential. The decline of 7% in Asia was caused by non repeat large marine order. It's positive that both Equipment and Process Technologies division reported growth. The best segments were process industry, food and sanitary. Korea and India did well and China had good sequential development if we exclude marine.
Moving over to Europe. We see that in all European regions, we had double digit growth. In Western Europe, including Nordic, orders rose boosted by large projects. It's positive to note that despite negative macroeconomic news, both base business and parts and service were unchanged. In Central and Eastern Europe, both equipment and process technology division contributed to the growth.
Russia is the best performing big country in 2012 and base business continued to grow. Now we move over to the Americas. And there you see in North America, we declined 25% due to non repeat launch orders. We are pleased that base business, particularly in the U. S, showed a continued good development.
Industrial Equipment, Food and Process Industries did the best, while Energy and Environment declined due to non repeats. In Latin America, we had a good development for the base business, while large orders declined. Argentina and Chile reported good growth and Brazil's base business grew, but the overall intake declined. On the next slide, you see that the 1st 6 months, all regions delivered growth with Central and Eastern Europe standing out. Here, Russia has been the main contributor.
On the next slide, this is the top ten ranking. The green bars are whole year 2011 and yellow bars are last 12 months. And we see that the U. S. Has had a positive development and strengthened the number one position.
China has declined due to slowdown in marine. And Nordic has grown and is challenging China for the number one position. South Korea has grown substantially, thanks to all of our industries and the success of Korean EPC contractors. Mid Europe consisting of Germany, Switzerland and Austria has declined and is now challenged by Southeast Asia where Indonesia and Singapore have grown significantly. Adiatic has declined modestly and now they are over and they are now overtaken by Russia where we have had a broad based growth.
Brazil has grown mainly due to Petrobras. And India's decline reflects the state of the Indian economy. And now I hand over to Thomas for the financials.
Thank you, Lars. Good morning, all of you. So let's then take a bit of a look into the details of the financials. As I think Lasse has covered orders in some depth, let's move on to sales. Sales was up organically 3.7% over quarter 2 of 2011.
If we then include acquisitions adding a further 3.5% and positive FX effects adding 3.9%, we had an increase in absolute terms just over 11%. Also sequentially, sales was up to the tune of 13% on a like for like basis. This is explained mainly by the sizable backlog from 2011 and seasonality as we tend to have less of revenue recognition on contract based sales in quarter 1 every year compared to the other quarters during the year. Let's move on to gross profit margin. We ended the quarter at 37% flat compared to 41.1% quarter2 of 201138.5% in quarter1 of 2012.
With the Q1 report, I gave the following forecast for gross profit margin. In the near term, we do not see conditions being different than those that prevailed in Q1. However, with the order levels of Q1 load is likely to improve somewhat and mix deteriorates with a relative increase of capital sales revenues. So let's look at the deviations and the actuals for Q2. Of course, we can see that the actual came out slightly below this forecast.
As projected, mix gave a negative effect sequentially as well as year on year, so in line with the projection after the Q1 report. Currency was negative year on year also as predicted. Impact from load was negative year on year and sequentially. And of course, sequentially, that is a deviation to the forecast I gave 3 months ago. The reason the main reason is that order inflow was lower in the beginning of the quarter than anticipated.
And please remember, Lars' comments about sanitary and industrial equipment in the quarter, we saw a stronger inflow, a much stronger inflow in these two segments during the latter part of the quarter. And the effect of that was obviously, we did not have the anticipated load throughout the quarter. Then let's get to the first forward looking statement. In the near term, we expect conditions to be largely similar to those that prevailed in quarter 2. However, order levels of quarter 1 and quarter 2 can support load tumblers, while gross profit margin is expected to be adversely affected by mix within capital sales.
And with that, let's move on to overhead costs and the rest of the P and L. Starting with R and D. R and D ended at SEK 180,000,000 second in the quarter, which is an increase with 7.9% by ferrite. This is, of course, proof of continued investments in future products and entirely in line with the established plans for product development. In terms of relation to sales, R and D represented 2.3% in the quarter.
Sales and admin then amounted to €1,260,000,000 in the quarter and that meant a reduction like for like of 2.7% year on year. So a trend shift compared to quarter 1 where you remember we still had an increase in sales and admin year on year. This is of course evidence that the measures initiated at the back end of last year are having an impact in the organization. EBITA margin for the quarter ended 16.5%, as Lars commented, which is on the same level as Q1. And in summary of above comments is explained by lower gross profit margins compensated by higher sales volume and lower overheads.
Again, let me repeat, the implementation of the savings program launched at the end of 2011 is progressing and effects are realized. Looking at profit before tax. This P and L line was influenced by negative exchange differences in the quarter to an amount of EUR 36,000,000 That is to be compared with a positive SEK 58,000,000 in Q2 of 2011. Profit before tax following above just exceeded $1,100,000,000 a reduction of some 6% over last year. EPS then for the 1st 6 months is down about 5%.
And if I exclude the amortization on step up, EPS is down just 2% for the 1st 6 months that is. Before leaving the P and L, let me also comment on taxes. Taxes ended with a charge of $386,000,000 in the quarter. This relatively high number is explained by negative results in a few countries in this particular quarter as well as some nonrecurring items relating to Allboy Industries activities. Our guidance, however, remains 30% based on profit before tax.
Then moving on to cash flow and cash flow from operations. This amounted to EUR 640,000,000 compared to EUR 669,000,000 last year, slight reduction, mainly explained by an increase in taxes paid and somewhat lower tax profits generated, also an influence of course from working capital. With regard to returns, return on capital employed almost 28%, slightly lower than Q1. Of course, the capital coming from the acquisition of Allboy is having an impact on returns in comparison with last year. Return on equity, almost 22% close to last year's level.
Coming back to cash flows and looking a bit more into the details of the cash flow statement for the 1st 6 months, the following can be concluded. We are reporting an increase in cash flow from operations of 51%, and that is despite an increase in working capital of almost $300,000,000 Acquisitions represented a cash out of €1,250,000,000 and is a result of the delisting in India. That is now involving a cash out of almost SEK 800,000,000. And then in addition, cash out of SEK 460,000,000 relating to the acquisition of Autec Systems as well as delayed payments on some other earlier acquisitions. Free cash flow that is exclusive of acquisitions, divestments and dividends.
Free cash flow reached almost €1,400,000,000 for the 1st 6 months, which is about EUR 200,000,000 above what was generated same period last year. So I think it's fair to say that it's been another good quarter and 1st 6 months in terms of cash flow generation despite an increase in sales volume and the following increase in working capital. Moving on to FX effects. In the quarter, we had for a change, a positive effect with some $12,000,000 coming from positive translation and negative transaction. For 2012 and then assuming exchange rates of Eurosek 8.75 dollars €1.26 we anticipate a net of negative €40,000,000 for the full year.
And that of course includes a negative transaction effect of some €130,000,000 and then an improvement in our estimation for translation effect, giving an improvement in the net total effect for the full year of some €65,000,000 So £40,000,000 negative for the full year. And then for 2013, given current hedges and the exchange rates mentioned before, we anticipated positive 50 for 2013 as far as transaction effects are concerned. Let's then look a bit at the backlog as per end of June. Our total backlog amounted to $15,100,000,000 again representing about 6 months of LTM sales. If we look at the backlog development by division, you find an increase in Process Technology, a reduction in Marine and Diesel and basically the same level of backlog for the Equipment division compared to end of June last year.
Looking at the backlog to be shipped during the rest of this year, it amounted to €9,800,000,000 end of June. This also means an increase compared to end of June 2011 with about SEK 500,000,000. Euros Please have that in mind. And then let's take a look at the next slide. And that is to take a look at a summary of what I call the known and the unknown parameters for projecting full year sales for 2012.
Again, as we just concluded, like for like the backlog will give increased sales of $500,000,000 during the last two quarters of 2012. As we had Old Boy Industries only for 8 months in 2011, we must add these final 4 months of sales from Oldboy. The actual addition, January April from Oldboy was 900,000,000 euros So that comes on top. And then based on our current exchange rate assumptions and the rate supply at the end of Q2, we expect a positive translation effect of some 100,000,000 This gives a subtotal for the knowns of €30,200,000,000 an increase that is from the last reporting after Q1 with some €700,000,000 euros As always, it's of course up to you to form an opinion about demand for the full year 2012, which would give you a basis for estimating in for out orders for the rest of 2012. Remember, when you think about in for out orders and demand for the latter part of 2012 that 2011 was a year with a very strong demand situation for the 1st 9 months.
And we reported an all time high in quarter 3 with regard to orders received. Commenting on prices, let me just repeat what I've commented already before. Prices for metals have been going down compared to 2011. That is to be noted. We've adjusted prices as we typically do as per the end as per the beginning of the year.
These adjustments have been very limited for Standard Products. This is, of course, to be kept in mind when you make your projection for sales for full year 2012. And with that, I give the word back to Lars for the outlook and closing remarks.
The outlook for the Q3 is as follows. We expect that demand during the Q3 2012 will be on about the same level as in the Q2. I have 2 forward looking comments. The first is that we expect the lower level of capital sales to the shipyards to continue given the contracting at the yards in 2011 2012. This affects about 10% of Alfa Laval's total sales.
And the other comment is that we expect the high activity level in the Process Technology division to continue, especially within the Process Industries segment. And by that, we have completed our presentation. And now I hand over to the operator for the Q and A session.
Thank you.
It's Ben Maslin from Merrill Lynch. Just a couple of questions, please. Firstly, the weaker part of the explanation you gave for the weaker margin was lower capacity utilization in some factories. Can you just say which divisions that utilization is lower? And should we read from your comments on loading going forward that you think the gross margin can stabilize at this level?
That's the first question. And then secondly on Marine, the margin is down quite
a bit year on year.
Can you just give us a
bit more color on what the main driver of that is? Is it mix? Is it more outboard, less existing business, lower overhead recovery, etcetera? And then when I look at last year, the Q3 Marine margin went up to almost 30%. Would you expect a similar seasonal kind of spike in margins in Marine and Diesel this year?
Thank you.
Okay. That was quite a few questions Ben and we'll do our best to deal with them all. Weaker gross margin. As I mentioned, we did have the projected negative mix effect. And of course, sequentially, the increase in revenue recognition in capital sales plays a big role.
And that is all in line with what we expected and in the right direction as far as you should expect as well. When it comes to load, we did have a weaker load in quarter 2 than we anticipated as I commented before. It has to do with how orders came in for the fast moving businesses in sanitary and industrial equipment. So of course that is having an impact on equipment, but it does also affect standard products sold in the Process Technology division as well as in Marine. So for instance, smaller standard size standard type heat exchangers.
Okay. Thank
you. Then Marine down year on year. Well, yes, we did mention that we had a price mix effect negative year on year as well. And of course, looking at the EBIT margins reported for Marine, quite a bit of that came out of the Marine division and that has to do with 2 things mainly. Firstly, if we look at the old boy product range, we have we tend to have a longer cycle order cycle than for the Alfa Laval product.
And what we see is say a normalization of the price level for the all boy range, something that we have commented upon for the Alfa Laval range post the peak and the adjustments in metal prices. And secondly, we have an adjustment of the costing methods in Old Boy, meaning that we are increasing the overhead charges included in cost of goods in all boy sort of going on to alpha Laval standards for product costing. So that's the second one. Then you were asking about a projection for marine for the Q3. And of course, I'm sorry Ben, we are not providing any divisional projections as far as margin is concerned.
You have to remember what I said before about gross margin that we expect possibly a bit support from load and a continued negative year on year on mix as far as we go.
Okay. Thanks.
I mean, if
I can just follow-up
on that. I was more trying to just understand whether there is any seasonality in this business because we haven't looked at all booked for very long. And it did a 30% margin in Q3 last year and then it's fallen back to 2017 Marine and Diesel. How much of that is a reflection of the exceptional pricing that you just talked about coming out of the backlog? And how much is it mix and seasonality and things that maybe
I think my comment to that is we have spent a big effort in bringing Al Falaval or Oldboy onto the standards that we apply in Al Falaval and the recorded profits of the Marine and Diesel division as they are reported. Now they well represent the standards and the way we account in Alfa Laval.
Okay. Got it. Thank you, Thomas.
Our next question comes from the line of Ben Weier. Please announce your company name and go ahead with your question.
Yes. Good morning, gentlemen. Also a couple of questions on the margin development, but more on a sequential basis. I think I understand what you mentioned on sanitary back end loaded demand. But on the other hand, the equipment margin improved sequentially from 12.8% to 15%.
So given what you said, I wouldn't have expected an improvement in the margin in that business. And then also on Marine and Diesel, I do understand what you said year on year. Makes total sense. But if I look at it sequentially, despite 10% higher sales, you had 0 contribution margin. So I was just wondering what happened sequentially in that business.
And then just finally also coming back to your sanitary comment. I think in Q4 last year, you saw that business slowing throughout the quarter, I think, whatever it was in Q3. Did you see something similar just on the kind of stocking behavior because of the euro issues again and then people kind of normalize that behavior towards the end of the quarter.
When it comes to equipment your and the equipment volume your comment is of course fair Sven. But I did mention mix. I did not mention price. And I can report that equipment did achieve a positive price effect in the quarter. Then your comment about sanitary, our assumption is that we have a re restocking situation.
We've seen somewhat of a restocking situation during the Q2. And that sort of gave this pattern of increased demand towards the end of the quarter in some of the segments.
But it was not a destocking at the beginning of the quarter followed by restocking at the end or not?
Well, possibly we've seen somewhat of a destocking from earlier even earlier in the year. And maybe the estimates of our channels, they were incorrect to begin with in the early part of this year. So they have restocked.
And on the sequential Marine margin development?
Well, again, we have elaborated quite extensively on the development of margins. And we are seeing a normalization of the margins for all
bore products. We are also adjusting the costing methods for the
all bore range. And those are the main elements of the explanation.
But this does also have a sequential impact not only year on year?
Yes, it do. Yes.
Okay. Thank you, Thomas.
Our next question comes from the line of Peter Froelen. Please announce your company name and go ahead with your question.
Hey, good morning. Peter Froelen
from Handelsbanken. A couple of questions, if I may. Thomas, you mentioned that the savings are coming through according to plan from the savings program by the end of the quarter. Could you please try to help us with the profile of the savings? Have you reached sort of an ongoing rate now that we could expect?
Or are we still on a climbing phase? And how much were those savings in the quarter? That's the first question. The other question is to both of you, Iliment, regarding the outlook of demand on about the same level. Last quarter, given the very high activity of large orders, you excluded sort of the large orders in the outlook.
When now combining the outlook again, does this mean that an activity of around €600 plus 1,000,000 of large orders, is that what you see currently? Is that the new normal? I mean, even that is a very high level. So please leverage it about maybe the ongoing activity for larger size projects.
That's it. Yes. Well, I can start with your final question. And we see a continued high activity level in the Process Technology division, high activity level, high quotation level. And that is the main reason why we maintain or why we have our outlook.
And it's correct that we haven't made any comment on large orders. So this is the total we say that we will come in demand will be on about the same level.
Yes. Thank you.
Then on the savings and the achievements under the savings program, we have realized between €30,000,000 €40,000,000 on the sales and admin line in the savings program. Then of course, we do have activities ongoing as far as manufacturing overhead is concerned as well. You have not seen the full impact yet. We will see a further increase in these savings effects during the Q2. Remember as far as total savings for the full year are concerned, we estimated with the launch of the program savings of overheads to the tune of €200,000,000 for the full
year. Yes. Very clear. Okay. Final, you mentioned prices, Thomas, that limited price changes for Standard Products at the same time input in terms of metal is down.
But I guess the price changes on standard products is slightly up, right?
We are adjusting. Our list price is up.
Yes. I mean, I have more to clarify. I have
to say that everybody accepts those, of course, unfortunately. I understand.
Okay. That's it for me. Thank you.
Our next question comes from
the line of Martin Crossenstein. Please announce your company name. You may go ahead with your question.
Good morning, gentlemen. It's Martin from Bernstein. Two questions, please. The first on the strength we saw in orders in Europe and Nordic. Were you surprised by the level of demand in the quarter given the broader macro trend?
Can you kind of expand a bit in terms of where kind of the strength is the strongest? And then second question in terms of your guidance, how important is the parts and service kind of order outlook there? Do you expect to see continued level of growth around the 4.5% to 5% range of the storm team?
Europe,
where we saw growth year on year and sequentially, It was mainly driven by large orders since base business was unchanged. And then when we look at the large orders that we have communicated in the press in press releases, we had an order to offshore for Norway. We had to a vodka distillery in Russia. We had to a chemical plant in Germany. And we also had an order for let's say, where half of the contract for an FLNG plant outside Australia was booked in France through Technip.
So there you see the large orders that have been visible to you. And we see that these sectors have been quite active in the Q2 and that explains why we saw growth due to large orders. And we think it's quite positive that despite the macroeconomic outlook that we came in on this level.
And then you had the second question was? It was about the port and service impact on our outlook and whether there was any reason to expect a change from sort of the growth pattern of 4% to 5% in parts and services. And I think there is nothing that to us proposes that we should see a change in that trend. We are continuously building our presence and resources as far as parts and service are concerned. So we're anticipating a continuation of the trend, yes.
And just one follow-up on that. In terms of marine, are you seeing any change in service and parts and service demand there given kind of slow operating rates on ships, etcetera?
Yes. But I would say still global trade is growing this year. That is one thing we should remember. Global trade is projected to grow with about 3% in 2012. And what we saw was an increased activity level when it came to upgrades and repairs.
So we have seen continued good level of activity in parts and service in the marine sector. Thank you.
Our next question comes from the line of Andre Kuehnin. Please announce your company name and go ahead with your question.
Hi. It's Andre from Credit Suisse. Thank you for taking my questions. I just wanted to take a step back and look at your margins, say, versus the worst period we've seen of 2,009 and we're trending at sort of broadly same level or slightly below. Should this trigger a reaction from you at some point in terms of an acceleration of cost cutting or launching a further restructuring program like you did in 2008, 2009?
We do not have any intentions of any further cost savings initiatives at this juncture, no. We continue to implement what we initiated at the back end of last year and that's where we are. But of course, it's a continuous in an engineering company, it's a continuous work to improve productivity and look at all various cost elements. That's a continuous effort to adjust. And that is regarding the operation side and cost of goods sold as well as in the overheads.
Okay. That's clear. So
thinking about margins further, I think before you cited there were a couple of relatively one off reasons for margins to be under pressure like abnormally high IT spend and investment in SG and A. Has this now been normalized? Or are we still running at high level?
Well, when it comes to certain IT projects related to distribution and channel sales, we are still year on year running at a higher rate in the second quarter.
And would you expect this to normalize later in the year or in 2013?
That is absolutely our intention, yes.
Great. And the last question is, we talked about stock levels in the sanitary segment. But I wonder if you could comment on a bit more broadly about the segments that are sort of more faster moving and shorter cycle for Alfa Laval. What are you seeing in terms of customer stock levels? Are we up compared to the beginning of the year?
Have we now destocked?
Well, as we've elaborated a bit on earlier on the call, our take on the uptick in orders in sanitary and industrial equipment towards the back end of the quarter is evidence that quite a few of our channels, they are restocking. They probably went a bit too far in the early part of the year and then they are restocking. That is our take on the order pattern we've seen through the quarter.
And is this something you see continuing still?
We have no comments when it comes to order inflow in July at this juncture.
Fair enough. Great. Thank you very much for your time.
Okay. No further questions. Then I would like to thank the audience for your attention and your questions and wishing you a nice summer wherever you are. Thank you and goodbye.
Ladies and gentlemen, thank you for your participation. This concludes today's conference.