Morning, ladies and gentlemen, and welcome to the Alfa Laval Q2 reports conference call. At this time, all participants are in a listen-only mode until we conduct a question- and- answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star and then zero on your telephone keypad. Just a reminder, this conference call is being recorded. I would now like to hand over to your Chairperson, Lars Renström. Please begin your meeting, sir, and I will be standing by.
Good morning, ladies and gentlemen, and most welcome to the presentation of the second quarter reports. I will start by giving you my three highlights. First of all, order intake increased by 18% to SEK 7.4 billion, with all business segments and regions contributing to the growth. Eastern Europe, Latin America, and Asia made up 50% of the group's order intake. My second highlight concerns the Process Technology division that had a very strong quarter where large orders exceeded SEK 500 million, the highest level since the fourth quarter 2006. Finally, Alfa Laval continues to deliver a strong operating margin, 19.0%, despite increased resources in R&D and sales presence. You should also notice that a non-recurring cost of SEK 80 million for integration of Aalborg influences EBIT as well as profit before tax. Let's take a look at the key figures.
Order intake rose 18% to SEK 7.4 billion, and net sales increased 11% to SEK 7 billion. Adjusted EBITDA was up 12% to SEK 1.3 billion, and the growth rate of the adjusted EBITDA continues to be higher than the sales growth. The EBITDA margin reached 19.0%, and for the first six months, orders received rose 22% to SEK 13.9 billion. Net sales increased 10% to SEK 12.9 billion, and adjusted EBITDA was up 12% to SEK 2.5 billion, and the EBITDA margin reached 19.1%. We move over to the next slide with orders received that now, on rolling 12 months, rose to SEK 26.4 billion. The increase in order intake was 32% year-on-year at constant exchange rates, and the SEK 7.4 billion is equal to the record of the first quarter 2008.
Moving over to the order analysis, you find that acquisitions contributed with 9.4%, and we had negative currency effects of 14%. The organic growth was 23%. Moving over to the adjusted EBITDA margin, we can see that in the quarter, we reached 19.0%, and the operating result was SEK 1.3 billion. Let's take a look at the highlights in the quarter. In the quarter, we won large orders for more than SEK 500 million, the second-best quarter ever. In the U.S., we won a very significant order for plate heat exchangers to the world's largest concentrated solar power plant. In Russia, we won an order for heat exchangers to a refinery. In Russia, there are 30 refineries, out of which 25 are customers to Alfa Laval. In India, we won an order for a process line to a vegetable oil plant.
In Brazil, we won an order from one of the world's largest brewery groups. Aalborg Industries was consolidated from the first domain, and annual synergies are expected to reach a run rate of SEK 100 million during the latter part of 2013. Cost and revenue synergies contribute 50/50. Non-recurring integration costs of SEK 80 million were booked in the quarter, and Aalborg added SEK 402 million to order intake and SEK 556 million to sales, with an operating margin of 20%. Parts and service made up 42% of the order intake. A more normal level is 20%- 25%. Now, we take a look at the development per business segment. In the Process Technology division, demand from oil and gas exploration remained high. Food was lifted by investments in brewing and vegetable oil in fast-growing countries, and the process industry had strong growth across the line.
Moving over to the Equipment division, Sanitary benefited from the demand situation in the fast-growing economies. Marine and Diesel was up on the back of contracting late last year, and high utilization rates continue to trigger demand for parts and service. Moving over to order intake for the first six months, we see that all segments delivered growth, and I will give some forward-looking comments here. First of all, we expect the high activity level in oil and gas exploration to continue. We expect a continued good demand from Food and Pharma markets benefiting Sanitary and Food segments. Finally, we expect a high activity level in the segment Process Industry to continue. Let's move over to the regions. We can see that all regions delivered double-digit growth. Eastern Europe and Latin America have had excellent growth, and they make up 50% of the group's order intake.
Asia and Latin America were supported by the acquisition of Aalborg. It is also very positive to see Western Europe growing with 20%. Now, we move over to the Americas. In North America, all segments reported growth, and the base business had a good development. In Latin America, we had a very strong development boosted by large orders, and we had good growth in Food Technology and Industrial Equipment segments. Moving over to Europe, in Western Europe, including Nordic countries, the base business had a very good development, and the Industrial Equipment and Energy and Environment performed the best. In Central and Eastern Europe, we had an excellent development for base business and large orders alike. Process Industry and Marine and Diesel did particularly well, as did Russia, Turkey, and the Baltics. In Asia, the positive development was broad-based across most segments and countries.
Energy and environment and marine did particularly well, and we had continued strong performance in China and Southeast Asia. Now, we move over to the first six months, the order intake for the first six months by region. There, we can see that Latin America, Asia, and Eastern Europe, they all delivered about 50% growth year-on-year. Perhaps more remarkable is the strong growth in North America and Western Europe. By that, I hand over to Thomas for the financials.
Okay. Thank you, Lars. Good morning, all of you. If we move on to the next slide, Lars, that, of course, commented extensively on orders received. Just a few words on sales. As you see from the slide, sales were SEK 7 billion. On a like-for-like basis, we were up 10%. Acquisitions added 13.6%.
The weaker U.S. dollar and the stronger Swedish krona, in particular, gave a big adverse translation effect, almost 13%. Another comment on sales is that, of course, we've had a few issues with suppliers, but this has been given specific attention and has not given any material impact on our deliveries. Moving on to gross profit margin, gross profit margin ended at 41.1% in the quarter. This is an increase of 0.7% sequentially and 1.5% year-on-year. Let's move on to the next slide, and I will give you some more color on this. If we start off with the FX effects, the transaction effects, they were negative year-on-year as well as sequentially, 0.6% and 0.1% respectively. Let me then give you our first forward-looking statement. Not surprising, we expect the FX transaction effects to increase somewhat in the coming two quarters, all in accordance with what we've stated already in the first quarter.
Moving on to mix effects, it was also adverse sequentially as well as year-on-year, as you see from the slide. There were two main factors providing this adverse effect. Firstly, Aalborg reported a 37.5% gross profit margin. Generally, it is to be expected that gross profit margin is lower in the Aalborg Industries business. Secondly, the strong growth in capital sales has an impact on the mix effect. To our second forward-looking statement, we expect the mix effect for both of these reasons to continue to generate an adverse effect in the near term. If we then move on to the other element influencing gross profit margin, volume and productivity have given nice positive effects in the quarter.
With that as a base, the third forward-looking statement, given this large backlog that we have now and assuming that there will be no major hiccups in our supply chain, this is expected also in the near term, year-on-year. As for cost for metals, we had a limited adverse effect in the quarter. Looking forward, sequentially, this effect can be marginally positive in the near term. Finally, let me comment on the impact from orders in the backlog. Project orders had an adverse effect on the gross profit margin reported. It is important for you to note that going forward, we expect that this will continue also in the coming quarters. Moving on to the next slide, further down the P&L, before I get into the individual P&L items, let me comment on headcount development.
If we look at the headcount development in the first half of 2011 and then only focus on the overhead area, we've had an increase of just over 200 FTEs. In the overhead area, just over 200 FTEs. The very, very large majority is, of course, through expansion of sales presence and service presence. Looking into the P&L, sales and admin was up 10.3% like-for-like, which is, of course, partly to do with the just-mentioned increase of headcount. That's very much the general increased activity level towards our customers. R&D also up quite substantially, 17% like-for-like, which, of course, comes from the fact that more monetary resources were approved for projects in the R&D area. Coming back to human resources, another forward-looking statement, we still continue to add resources to support structural growth and service. This, of course, will continue to add to our sales and admin costs.
When it comes to financial net, positive FX differences influence the net positively about to the same extent as in 2010. As for taxes, we report a tax rate just over 30% of profit before tax, and this was then influenced by some non-recurring effects, particularly in Korea and Italy. Going forward, we maintain our guidance of 30% of profit before tax. Moving on to the slide covering EPS. EPS was, of course, influenced by the non-recurring items in the second quarter of this current year as well as last year. The combined effect of last year's bring-back of restructuring provisions and the interrogation provision this year had an effect of EPS between the years of approximately SEK 0.25 per share. Looking forward, the difference between EPS and EPS excluding step-up will, of course, increase following the consolidation, the acquisition of Aalborg.
The step-up amortizations coming from the Aalborg acquisition will amount to approximately SEK 140 million per annum. Moving on, cash flow for operations, just over SEK 1.4 billion. I'll get back to more details in a moment. Return on capital employed, 34%, just below the levels from last year. Of course, the numbers, they were somewhat influenced by the increase in capital employed from the Aalborg acquisition. Return on equity, just over 24%. Quite a competitive number, of course, and just below the level of last year. Moving on to cash flow, working capital. Please note, working capital increased with only SEK 62 million in the first half of 2011. That followed through a reduction in Q2 of almost SEK 300 million. All of this despite the large volume increases. I think that is evidence that the supply chain is working quite well in Alfa Laval.
Looking at CapEx, SEK 168 million compared to SEK 135 million in the first half of 2010. We maintained for the full year a level of CapEx in the range of SEK 650 million-SEK 700 million. At the bottom of the slide, you find that we generated a free cash flow of almost SEK 2 billion in the first half of 2011. We considered this a very good outturn, again, considering the strong growth that we've experienced in this first half of 2011. Moving on to FX, we've seen sizable FX effects in the quarter. Not surprising, but still SEK 189 million. We expect increased transaction effects in the coming two quarters and reduced translation effects in the coming couple of quarters, giving a total of SEK 455 million for the full year. This then compared with our projection of SEK 425 million after the first quarter report.
The difference is entirely due to volume effects, the increase in volume that we anticipate following the order intake in quarter two. Moving on to the order backlog, at the end of June, the backlog totally amounted to just over SEK 14.5 billion, of which SEK 2.8 billion came from the Aalborg Industries activity. If we look at orders to be delivered before year-end, Aalborg added SEK 1.2 billion. That is, on a like-for-like basis, orders to be delivered in 2011 amounted to SEK 8.1 billion, i.e., up some SEK 300 million compared to last year. Of course, there are some few other minor acquisitions involved in the SEK 300 million. With that as a base, let's take a look at the bridge on sales. We had a full-year sales of SEK 24.7 billion last year. FX translation is now SEK 1.7 billion
It's slightly less than what we calculated after the first quarter as the Swedish krona has lost a bit. Adding the anticipated effects of acquisitions of SEK 2.4 billion, we have a starting point, if you like, of SEK 25.4 billion. If we then, similar to after the first quarter, make an example, assuming that in-for-out orders and price increases together give an increase of 15%, that would add a further SEK 2.1 billion to sales. With a starting point and with the assumption of a 15% increase in in-for-out and price, this example would imply whole-year sales of SEK 27.5 billion. With that comment, I hand back to Lars for the outlook.
The outlook is as follows: we expect that demand during the third quarter will be higher than in the third quarter of 2010. If we look at it sequentially, excluding large orders, we expect demand to remain on about the same high level as in the second quarter. By that, we have completed our presentation, and now we hand over to the operator for the Q&A session.
Thank you, sir. Ladies and gentlemen, if you do have a question at this time, please press the star followed by one on your telephone keypad. To cancel your session, please press the hash or pound key. Once again, that's star one to register, requesting option hash or pound key to cancel. Our first question comes from Sven Weier, please go ahead with your question, attending that to the company name.
Good morning. It's Sven from UBS. Just one question on Aalborg. I think when we had the pre-close period conference call, you said that in terms of marine, you have a lot of end markets there, obviously offshore, the merchant market, and so forth, so that you see a pretty, yeah, kind of stable development despite the weakening in global shipyard orders. Would you also make that statement for Aalborg, or how would you qualify the outlook for Aalborg in that respect? Thank you.
We have the same view with regards to the Aalborg business as for our own. We have a very positive view on the marine business in general. Of course, the fact that we made the Aalborg acquisitions further strengthens Alfa Laval's position. You know, there is no difference in the view as regards to Aalborg compared to Alfa Laval.
Pretty similar end market split in marine between the two of you.
Yeah. If we look at the value per ship type, there are differences between Alfa Laval and Aalborg, but that's a detail in the total context.
Okay, that's it. Thank you.
Our next question comes to the line of Glen Liddy. Please go ahead with your question and announce your company name.
Morning. It's Glen Liddy from JPMorgan. Could you give us an update on what's happening to prices, and if any particular segment is very strong or very weak relative to another? Also, in the food segment of the business, geographically, where are you seeing the sort of best growth?
Okay. Glen, let me start with a comment on prices. We made that too, a general price adjustment for transactional sales in 2011 at the very beginning, and then initiated in March following the sharp further increases in metal prices. I think we have, in general, had a good experience in pushing these price adjustments through. When it comes to project-based sales, we had, of course, during the worst part of the trough, zero price pressure, and we've seen that there is somewhat less of price pressure in project-based sales at this point. When it comes to food, generally, we see the best demand in markets with a growing population that are increasing their living standard. For instance, in Brazil, we've had a very good demand. We have a very good demand for both vegetable oil and the brewery.
Brazil is also preparing for the Olympics and so on, so there's an expansion ongoing there. In India, food and the food-related business makes up one-third of our business, and that is developing very nicely. China is very strong when it comes to the food sector. All in all, you can say it's the emerging markets that contribute the most to the positive development of food.
Are these growth rates increasing or just stable at a high level?
They have a positive development, and we foresee also that they will continue to do that.
Okay, thank you very much.
Thank you.
Our next question comes to the line of Peder Frölen . Please go ahead with your question and announce your company name.
Yes. Good morning. Peder Frölen in Handelsbanken Capital Markets. My first question relates to the orders of Aalborg. Is there anything here in sort of in the beginning of acquisition that have affected the orders versus sales like we saw in the Olmi case, i.e., the book-to-bill is below 1? A follow up on that, is the book-to-bill similar here in the Alfa Laval marine segment than we saw in Aalborg? That's my first question. Maybe I can get back to the gross margin one after that.
If we look at the difference between orders and sales in Aalborg, that was anticipated. They are having a very long backlog in Aalborg, and we anticipated that sales would exceed orders. However, we should also say that the order intake in May was somewhat lower than we anticipated, but that is more we consider coincidences depending on when individual customers are placing orders because they were exactly back on the anticipated level in June. If we look at marine, excluding Aalborg, we had a reduction in orders of about 10%. That is like-for-like between Q1 and Q2. Again, we see that merely as the fluctuations in when orders are placed because there is still a lot of the orders placed to the yards in the second half of last year where orders have not been placed for our type of equipment.
Okay. The book-to-bill here of 70%+, is that similar given the Alfa Laval marine sort of order book profile?
The book-to-bill in Alfa Laval marine is currently just over 0.8%.
Great. Thank you for that. On the gross profit margin, sorry for maybe missing out here, but first of all, your forward-looking statements, I guess, were on a year-on-year basis. Secondly, I missed out the comment on the price and volume effect. Finally, could you help us with the mix here? Because there's the mix that you refer to, but also the backlog effect. Quantify the mix. Is it the 1%- 2% point, or is that way too high sort of anticipation?
I'm not going to provide you with any further detail, Peter, but if we look at mix, I said that we will have, we will continue to have adverse effects also going forward. That goes for sequential as well as year-on-year. If we look at volume and productivity, I said that we will continue to have positive effects year-on-year. I did not say sequentially. We're not anticipating a further increase in the load. Cost of metals, sequentially, a marginal positive. Project orders, continued adverse effect, and that is sequentially.
Yep. Perfect. Thank you for the clarification. That's it.
Our next question comes to the line of Ben Maslen. Please go ahead with your question and announce your company name.
Yeah. Good morning, everyone. It's Ben Maslen from Merrill Lynch. A couple of questions, please. Firstly, Thomas, you gave maybe you had positive financial items during the quarter. I know there were some maybe some FX gains in there. What's the right underlying run rate for us to assume for financial costs going forward by quarter? That's the first one. Secondly, you're saying that a strong pickup in marine contracting at the end of last year is giving your orders a boost at the moment. Based on the data, we can see that contracting has gone down again so far this year. If that stays at that level, would you expect your orders to soften again heading into 2012? Finally, just a kind of financial point. The amortization of step-up values for the quarter was SEK 109 million. I guess that's more amortization or step-up on Aalborg. Is that the right rate to assume going forward? Thank you.
Okay, Ben. I start with financial items and step up, and then last, we'll deal with the contracting to marine. Looking at financial items, yes, there were big influences from FX. Looking at the interest net as such, at this point, I estimate that we will be on a level of SEK 60 million to SEK -75 million interest net. When it comes to step up, you should expect on the level of SEK -115 million per quarter on step up amortization, everything included, Aalborg, the other acquisitions made during this year.
Is that SEK -65 million for the whole year on the interest net?
SEK 60- SEK 75 per quarter.
Per quarter. Okay. Thank you.
When it comes to order intake to the yards, we can follow the data reported, but that is for the first half. There is a well-known tendency of slow reporting, which means that it normally takes another few months before the figures are reliable. We saw exactly the same in the second half of 2010, and it turned out to be a good second half. We have to wait a few months before the figures are reliable.
There's maybe a follow-up on that. I mean, if the book-to-bill in marine is 80% for Alfa and 70% or so for Aalborg, I mean, at what point do you think you'll see growth in your marine segment?
When we see it, we will tell you.
Okay. Thanks for the thought. Thanks.
I promise.
All right, thanks.
Thanks.
Our next question comes to the line of [Matt Fliss]. Please go ahead with your question and announce your company name.
Yeah. Hi. [Matt Fliss], FedBank. Gathering here a bit from the last comment. Three questions. Looking at Outlook, you're sort of upgrading it, leaving some of those likely out this time. Should we see that as an upgrade? Secondly, about cash flow, I mean, you presented a very strong figure during the second quarter. Have you sort of harvested the low-hanging fruits, or could we expect that to continue? I think I'll start with those two.
Okay. If I comment on the cash flow, I think that going forward, you must anticipate that working capital is going to develop corresponding to the development of orders and sales combined. You know, there are not really, if you look at our numbers, Matt, it's hard to argue that there's a lot of low-hanging fruits. There are always opportunities, and we're making continuous efforts in collection as well as improvements in the supply chain and firms with suppliers. There's not a low-hanging fruit, and that was not the reason for the cash flow we saw in the first half. When you talk about our outlook, if you talk about the sequential outlook, we say that we expect demand to remain on about the same high level as in the second quarter, excluding large orders. Yeah, that's it. Maybe we should add there, Matt, of course, that you know we only had Aalborg for two months in the second quarter, and we expect Aalborg for three months in the third quarter, so that might give a bit of an effect as well.
All right. All right. Just coming back to sort of the financial position, it starts to recover faster on the back of strong cash flow. Do you have any other Aalborgs coming up later this year, or should we wait until next year?
We don't have any large acquisition in the pipeline right now.
Is that because you're not sort of looking for them, or is it that there are a lack of objects out there currently?
We are constant. We have a list of companies that we are constantly following, and it's a matter of timing when they become available. We have the financial resources. When the targets become available, there is a good chance. Nothing in the pipeline.
Okay. Okay.
Our next question comes to the line of [Guillermo Puno]. Please go ahead with your question and announce your company name.
Hi. Good morning. It's [Guillermo Puno] from Morgan Stanley. Just a couple of questions. First, regarding your retrofit and aftermarket businesses, could you give details about growth in those markets, especially in marine retrofit? Have you seen anything there that is different from what sort of Watchler reported recently? Secondly, I'll leave it there, and then I'll probably ask the second question.
You're referring to what Watchler reported recently. Could you specify what they reported?
It's just basically suggesting that it's a slowdown in demand for marine retrofit or marine services.
No, we have not seen that in our end markets.
Okay, thank you.
Not for Aalborg.
Okay. Thank you. Secondly, I'm looking at some of the container ship orders that A.P. Moller-Maersk has put to the South Korean shipbuilders. I was wondering if, let's say, those orders were finally granted to a heat exchanger producer or a marine producer such as yours, what sort of size would we be looking at? Are they above SEK 100 million, or?
First of all, they have not placed the orders for equipment to those ships yet. Of course, we are present with a large variety of products to those ships. When the order will be placed, it will be less than SEK 100 million.
Okay. Thank you.
Thank you.
We have a follow-up question from the line of Peter Fröhling. Please go ahead with your question.
Yes. Hello again. Yes. The clarification on the Outlook. You generally get this question, so there's nothing strange by that. Given the FX and stuff, the quarter-on-quarter demand on about the same level, excluding large-size orders and adding an extra amount of Aalborg, is that in absolute terms, or is it in ex-FX?
That's actually it. We are talking about demand in SEK.
Yeah, you usually do. I just want to clarify that. Thanks a lot.
I have a follow-up question from the line of Sven Weier. Please go ahead with your question.
Yeah. Just one follow-up, please, on your statements on the global shipyard orders. You said that they were misleading last year, so we should probably take it with some caution how it develops in the first half of this year. Are you making that statement because what you see in real life is different from what Slagsma is telling us, or is that simply because it was wrong last year?
It's simply because it was wrong last year. We read the same statistics as you do. If you look at the statistics there and then you read the forecast for the full year, they're quite different to the levels for the first few months of this year. The lag in reporting is a significant factor to take into consideration.
Yeah, I mean, I think it's just a diverse picture, right? I mean, offshore is good, but on the other hand, freight rates are extremely weak. There's a lot of capacity being added. I think there is a point of expecting some weakness, at least in the merchant segment. I think it's a mixed bag, right, between the different types of end markets.
We are active in so many different end markets in the marine industry and the offshore industry.
Fair point. Thank you.
Thank you.
We have a follow-up question from the line of Ben Marslin. Please go ahead with your question.
Hi. Just one follow-up, please. You're guiding basically the orders sequentially are fairly flat at a high level. I think in a forward-looking statement, you said you expected the kind of process industry and oil and gas to sequentially still get better. What's compensating that in the overall picture? Which end market sequentially would you expect to soften either seasonally or because those markets are peaking? That gives you a flat overall outlook. Thank you.
What we said was that the high activity level in the process industries would remain. We said when it comes to oil and gas, we expect the high activity level in oil and gas exploration to continue.
Okay. In other way then, would you expect all markets you serve to be flat sequentially, or are there certain things you would expect to sequentially get better and some that you would expect to get worse? Any color around that, please.
You know we are serving, we have 10 different business segments, so we are serving a lot of end markets. What will have an impact for an individual market unit or an individual segment is, of course, if there is a big order kicking in. The underlying demand is generally on a very high level, I would say, with the exception of construction-related, where we still have not seen any large pickup in orders following the financial crisis. With the exception of construction-related, I would say that we are on a very high level.
Okay, thank you.
Our next question comes to the line of [Alexis Zinov.] Please go ahead with your question and announce your company name.
Yes. Good morning. It's [Alexis Zinov] from BNP Paribas Exane. Could you give us the details around the development of base orders within the quarter? Was June as strong as the rest of the quarter? Thank you.
Yes, there was no difference in the level of orders during the course of the quarter. It was stable on this quite high level, yes.
Thank you. Thank you.
Good morning, ladies and gentlemen. If you wish to register a question at this time, please press star followed by one on your telephone keypad. To cancel your question, please press the hash or pound key. Once again, that's star one to register a question, the hash or pound key to cancel. We appear to have no further questions at this time, sir. I'll hand the conference back to you.
Thank you, ladies and gentlemen, for your interest and your attention. We are wishing you a nice summer wherever you are. Thank you very much. Thank you and goodbye.
Ladies and gentlemen, thank you for your participation. This concludes today's conference, and you may now disconnect your lines. Thank you.