Alfa Laval AB (publ) (ALFA) Earnings Call Transcript

Good morning, and welcome to Alfa Laval's earnings call for the third quarter 2026. Fredrik and I will take you through the quarter, and then we open for Q&A, as always. Let me then start with a few introductory comments. Although we had strong tailwinds from both data centers and ship contracting in the quarter, the growth was broad and balanced. Global market conditions remained firm in the quarter, driven by the U.S. and China. While part of our portfolio is benefiting of some cyclical growth short term, Alfa Laval continues to invest for long-term structural growth. We continue to invest in R&D, in market positions, competitive supply chains and service. With substantial investment for the future market leadership, the group delivered still on the expected profitability level in the quarter at 18%. All 3 divisions were at their respective profitability target ranges. Finally, we continue to optimize the CapEx program within the current footprint. Due to the accelerated growth, our CapEx guidance in the short term is increased from SEK 3 billion to SEK 4 billion yearly. So with that, let's move on to the key figures. The quarter was special with regard to order intake with a SEK 23.2 billion new record order level, perhaps a bit unusual in the seasonally somewhat lower third quarter. Invoicing and profits grew on a more normalized level with an 8% and 6% growth, respectively. As a result, the order book reached a new record level of just below SEK 60 billion. On the divisional level, starting with Energy, it was a significant growth quarter, both for orders and for invoicing. The data center business amounted to approximately SEK 2 billion in the quarter in terms of order intake and the 12-month rolling or rolling pace right now is in line with the earlier guidance, now at the level well above SEK 5 billion. To ensure a healthy order book, we do not recognize orders in this area more than 12 months forward. The return to growth in the important HVAC segment, including heat pumps, started earlier this year and continued well during the third quarter. Then over the last 12 months, we have, as a firm and in the division, concluded 3 important acquisitions. The first one some time ago was the Fives Cryo business, and our expectations on the strategic fit on the Cryo business and performance have been met, and we continue to invest to build market share in this important area. The last 2 acquisitions are heat exchanger companies in China, the last one closed just a week ago. As we build our market share in China, the 2 acquisitions complements Alfa Laval well, both in technologies and in market positions. They add approximately or somewhat above SEK 1 billion in revenue on a yearly basis, mainly in China, and it will serve as important growth platforms going forward. Moving on to the Food & Pharma division. Again, it was a solid quarter for the division, including some important project wins in the biofuel sector. The transactional business continued strong and is on a record level. The recent capacity increases in the U.S. specifically was arriving timely in the quarter in that respect. All 3 key markets for the division, U.S., China and India, had a strong quarter. Invoicing was a bit below expectations, but influenced by delivery schedules rather than supply chain constraints. And with that, on to the Ocean division. Ship contracting is on an exceptional level at the moment, driven by longer shipping routes and high freight rates. As an asset class, ships -- for ships, new orders are supported both by traditional shipowners and financial investors. The final contracting number for ships for this year 2026 will be well above 3,000 ships, substantially ahead of the forecast a year ago. For Alfa Laval, it resulted in a new record level of orders at SEK 8.3 billion in the quarter. And in all, 2026 is far beating our expectations compared to a year ago. Cargo pumping was, as always, converting early into Alfa Laval's order book. The major CapEx program at Framo in Bergen is expected -- is executed with priority on upgrading the production lines for cargo pumping systems specifically. So while order intake was solid across all of the business units, and the current ship contracting has not still translated fully into the Alfa Laval order books. The product pipeline in offshore continues to build stronger and the current turmoil in the global energy markets is expected to create a new CapEx boom in the offshore segment going forward. Then on to Service. Service is one of several important structural growth drivers, and it grew 6% organically, however, a bit uneven across the 3 divisions. The Energy division had a very strong quarter and growing well above double-digit level for the quarter. Food & Pharma was okay with a more modest growth, while Service declined in the Ocean division due to sanctions and due to a degree, the high utilization of the remaining fleet. For your reference, approximately 4,000 ships are out of the global merchant fleet of 60,000 ships are out of scope for Alfa Laval's service activities. With the rapid growth in capital sales, service as a share of total sales is now clearly below 30%, while a positive challenge, it does perhaps impact the group margin somewhat in terms of the mix change going forward. Then on to a couple of comments on the key markets and regions. As you know, U.S. and China are our 2 top markets, currently accounting for above 40% of new orders. Both markets are currently growing faster than the other regions in the world. We have strong Alfa Laval teams in both markets, and we allocate a substantial part of our CapEx program to these markets as well to ensure strong local presence and reliable supply chains. On the overall global map, as indicated earlier, growth was broad-based globally with all regions except one growing on a good level. The India, Middle East region declined somewhat. After a record quarter in Q2, Middle East specifically struggled for obvious reason in a complex environment. We do everything we can to keep our customers, our own staff and their families safe. India specifically still had a strong quarter and is expected to be an important growth engine over the next decade. For this reason, we have allocated our Indian CapEx plan a higher priority and increase the efforts there substantially going forward. And with that, I hand over to Fredrik.

Thank you, Tom, and good to have you all here for the quarter 3 earnings call. Some additional details around the strong SEK 23.2 billion order intake in quarter 3. In the Energy division, beyond the strong booking in data centers, power and fuel applications booked some SEK 2 billion in the quarter. HVAC and refrigeration, in particular, heat pumps continue to grow and better utilization of the capacity added a few years ago is a fact. Traditional Food & Pharma applications also posted strong orders in brewery, dairy and Prepared Foods and Beverages. Transactional business continues to outperform comps and Pumping Systems in the Ocean division continued to benefit from a high contracting level of tankers. Contracting for bulk carriers, container ships and ferries, including Ro-Ros contributed with a good order intake for the Marine product portfolio. SEK 63.1 billion in order intake year-to-date represents a 23% growth, of which 22% is organic. Good momentum heading into quarter 4 with an all-time 2 high quarters behind us. After another record quarter with a book-to-bill of 1.25, the order book closed the quarter at just shy of SEK 60 billion. The order book is deemed to be priced well in line with input costs and current cost levels. Quarter 3 sales reached SEK 18.6 billion, a growth of 7.8% compared to quarter 3 last year. The transactional part of the business outpaces the total, meaning that the manufacturing capacity is well utilized in the majority of our manufacturing units. In certain areas and applications, a higher delivery pace and capacity will require more further investments. Those investment cases will be planned and executed over the coming years with investment peaks in 2027 and 2028. These investments in capacity lead us to revise our CapEx guidance to a range between SEK 3 billion to SEK 4 billion per year for the next 3 years and up from the guidance of SEK 2.5 billion to SEK 3 billion that we currently have. Year-to-date sales of SEK 52.6 billion and organic growth of 4.5%. However, to provide more context to our future investment plans, the transactional business revenue, including service has grown with over 10% in the last 9 months. Now to some P&L highlights. Gross profit margin of 37.6% is in line with quarter 3 last year and well supported by a high utilization rate of manufacturing assets and a favorable mix effect from transactional business. Sales and administration costs increased in the quarter with 10% with 3 major contributors of equal weight: inflation, acquired businesses with no comps and growth-driven addition of resources. R&D also continues to grow at 7%, which is in line with innovation ambitions and product development initiatives. Operating income increased with 5%, but does not drop through fully into EPS due to one-off bookings in the financial items related to the termination of a JV. Year-to-date gross profit margin at 38.2%, which after all costs and taxes results in an EPS of SEK 14.91. Adjusted EBITA in quarter 3 in money is at all-time high of SEK 3.4 billion, equaling a margin of 18.1%. On a divisional level, the margins in the quarter are representative of a good level going forward with the Energy division at 18.1%, Food & Pharma division at 15.5% and the Ocean division at 21.3%. Year-to-date, the EBITA margin stands at 17.7%, which is above the external target for the group. Our debt position remains stable compared to quarter 3 2025, with all ratios improving in relation to EBITDA last 12 months. Net debt, including leases in relation to EBITDA last 12 months at 0.94. Good cash balance generated from a good cash conversion, which takes us to the cash flow analysis. Cash flow from operating activities in quarter 3 amounted to SEK 3.4 billion, a marked improvement from the year before. CapEx continues at a high pace in the quarter at SEK 819 million. A positive final line cash flow caps off a strong quarter 3. Year-to-date, the pattern is similar with a strong cash flow contribution from operating activities, capital expenditures at SEK 2.4 billion, acquisitions for SEK 600 million so far and financing activities representing mainly the shareholder dividend of SEK 3.7 billion. Now to some guidance. In line with raising the guidance on CapEx going forward, we have also increased the CapEx guidance for 2026 with SEK 1 billion expected in quarter 4 and 2027 on a level of SEK 4 billion. Amortization of step-up values in the order of SEK 180 million in quarter 4 and SEK 730 million for 2027 based on current acquisitions. Tax rate guidance remains in the range of 24% to 26%. And with that, I hand over back to Tom for some closing remarks.

Thank you, Fredrik. And then finally, the forward-looking comment. It is for us, and I think globally, the demand trends are strong, and we expect the overall demand trends to remain favorable and solid into Q4. With that said, after 2 record quarters, we are somewhat more modest when it comes to how we believe this will convert for us. So we believe overall on a somewhat lower demand in Q4 than in Q3. And on the divisional level, we expect the Energy division to remain at about the same level, Food & Pharma to be at a somewhat lower level and the Marine division or Ocean division, sorry, specifically at the lower demand level. And so with that, we are open for Q&A.

[Operator Instructions] The first question comes from Yang Meihan from Goldman Sachs.

I just have 2 questions. First of all, like, on the rationale behind your increasing CapEx in '27, '28. You mentioned that you expect data center demand to remain stable over the next 2 years, which is a bit surprising. But given that, why did you decide to increase your CapEx? And secondly, if you can give us more color on the visibility of your cargo pumping orders now? Is it well into '27 and '28 now?

Yes. Let me start with the second question. That's an easy one. '27 covered. We are well into '28. So -- and overall, if we look at the delivery schedules for the ships now after this year completed, the delivery schedules for the marine side will remain quite strong into 2029 as well. We already know that. So overall, we look at the favorable scenario in general for the Ocean division over the coming years. The CapEx is obviously well thought through. And some of these investments have been planned and decided to be executed now, and it's been sort of part of a long-term growth plan. It's not only data center that is driving it. But as we are ramping to the full level that we have indicated on data centers, we will need some additional presence in it's capacity to get the job done. So that takes us up to what we, at this point in time, would say is probably the peak of the CapEx cycle for us. We have not guided yet beyond the next 2 years because those are quite firm right now. But I think Fredrik and my expectations will be that this will be the peak of the cycle. I remind everybody that we have rebuilt the manufacturing footprint substantially over the last 5, 7 years. And we are coming to an end also of that. Included in the CapEx going forward, we still have the decisions made in Norway in Bergen for the cargo pumping and a number of areas that are spilling over into '27, '28 when it comes to the cash out for the company. So I think we are slowing in our decision-making process right now, but we have still a number of years on ongoing programs in ocean, in energy and to some degree, also in Food & Pharma to cover for the expected level.

The next question comes from the line of John Kim from Deutsche Bank.

I'm wondering if we could talk a little bit about the visibility on your energy exposure. I know you don't book orders beyond 12 months. But given what we're seeing in peers and the build-out, how would you argue your energy backlog cover would work if you remove the 12-month constraint?

Well, I mean, we are -- let me start with the basic principle. We are conservative when it comes to order recognition. We require clear projects, clear project delivery schedules and clear down payments in order to recognize orders. So we put a lot of emphasis on having a current order book at any moment in time. And so in line with that, when we look at, for example, the data center business, which to a degree are frame agreements and to a degree are anticipations, we find that the visibility beyond 12 months is somewhat unclear. And for that reason, we prefer to be a bit stringent in how we recognize it in the order book. And for that reason, we've also given a bit of a forward-looking comment when it comes to how we look at the ramping and rolling 12 months in the data center business. And as indicated, we may arrive to a number around SEK 10 billion or so going forward, but we are communicating what we're seeing right now, what the current rates are. Everybody is aware about the upside and the potential risks in terms of how far will the CapEx program be able to materialize in the coming years. So we are just taking a moderate view -- but as you can see from the CapEx programs, it doesn't mean that we're going to leave our customers standing in the dark on this. We are ramping fully to be able to handle what we see as the customers' business case right now.

Okay. Helpful. Follow-on question, if I may. If we think about the Framo investments, should we think of it more as capacity expansion or more efficient production? And how should we think about phasing, let's say, the next 3 years?

Yes, I would kind of split it in 2. As you know, it was about a SEK 4 billion program that we approved. It was a multiyear program. So it will run into 2030 plus before completed. The first part is really capacity automation efficiency investment in the cargo pumping production line. So that's what we are executing first. It comes in handy to say the least. And so that's a modernizing of a 20-, 25-year-old machine and equipment situation at the units, and we are taking a giant step there. The second part of it is more structural. We have outgrown a number of our other sites around Bergen, and we are spread there in a bit of a distributed footprint, if you like. And so we are consolidating ourselves into a new area. And that is -- if there is 2 main drivers for that is to improve the service workshop and the space that we need for that and to allow for much better flow and space and growth for our offshore business, which has been growing significantly over the last 5 years. So it was time to redo it. We put it in one big package, but those are the 2 main big parts of that, approximately 50-50 split.

The next question comes from the line of Klas Bergelind from Citi.

Klas at Citi. So my first question is looking at capacity at the yards and particularly around product tankers. There's obviously nothing wrong with demand, but we've seen this before, strong contracting and then lead times, they get extended, yards get full, and we see contracting fading. I don't think it will be as dramatic this time as last time, but curious on your thoughts, Tom, into '27, if you think the new capacity in areas like China will be enough here or if we should start to see an order normalization in Framo next year. You're guiding for lower demand in Ocean into the fourth quarter might be linked here to these extended lead times. I'll start there.

Difficult to forecast yard contracting. We were -- everybody were wrong coming into this year. And so we have 2 strong years of contracting behind us and 2 strong years for tankers in general and product tankers as well. And so of course, at some point in time, it needs to narrow down somewhat. And I think it's not unlikely that we will see that in terms of the order intake adjustment for 2027. With 2 years of orders in the books, I think it doesn't add much value to us or to anybody to sit with too long order books on this one. So I think our best estimate would be that we will see a moderation on those orders. With that said, if you look at the aging of the fleet and the merchant fleet in general and for product tanker specifically, we don't have an exceptionally young fleet even after the replacement of these ships. And scrapping has been exceptionally low for many years. So we'll see what this means. But the only thing we know for sure is that the global shipyard capacity is being extended at the moment. And it's not only China. There are some other markets where you see clearly signs of initial investment to increase ship capacity. So I think the expectations in general is that we will continue to have a reasonably firm contracting market for the years to come.

Sounds good. Then my second one is on the margin performance in Ocean. You had lower invoicing, somewhat lower service. You explained the reasons and then you had somewhat higher cost. The current level, is that the level we should assume also into the second half? Or could the margin go up again? I mean the service business, depending on the conflict, the conflict might not recover in the short term, but I'm interested on the cost side and the load into the second half.

The load is good. As Fredrik said, I think we are priced reasonably when it comes to input costs. So the order book is healthy from that point of view. There are mix changes quarter-by-quarter that affects this. I don't want to be more specific than what we said about the profitability ranges before when we increased our overall group target to 17% on EBITA margin, we indicated that we wanted to see the Food & Pharma above 15% at the -- the Energy at 17% plus, and we expected Marine to remain at 20%-plus for a period of time. And that's where we are in the guidance right now. You will see some oscillations quarter-by-quarter. But in terms of ranges, that's what you should expect.

Okay. Absolute final one is on the base order growth in Food & Pharma. I mean it's still a good level, but it was a bit lower than I thought. Can we talk through what you saw there sequentially and particularly around the indirect growth that you had from data center last quarter, the valves, the fittings on the flow side. Did you move some of this business into energy to have everything sort of data center related under the same roof?

Yes. And Klas, you're actually quite right. We have done that going forward. We have not done it retroactively into quarter 2 and quarter 1, but we have from -- starting quarter 3, moved the volume that comes in for pumps and valves related to data centers from Food & Pharma to the Energy division simply to be clear and transparent about where the products are ending up from an industry point of view. That means that the revenue, the order intake and the cost will also come over to the Energy division. So it's not only the volume that's being moved over. It's a total activity.

The next question comes from the line of Akash Gupta from JPMorgan.

It's actually Jeremy on Akash. I've got 2, if I may. Firstly, can you give us a bit more insights into how much of your data center business is U.S. hyperscalers versus non-U.S. and especially China? Basically, I'm trying to understand how you can benefit from investments from different customers and in different regions of the world?

I'll be maybe not 100% precise, but I think right now, if we look at this year and last quarter, U.S. accounts for approximately 80% of our data center business. The Chinese side, we started to see the growth coming into our books in the beginning of the year, and that's a lion's share that is outside of the U.S. And that's approximately how the mix looks like. We from the trends we are seeing, we will see a clearly continued increase in China for the next couple of years. And in fact, part of the CapEx guidance is related to us making sure that we are capacity balanced in the Chinese market specifically. Was there a second part to the question?

No. Maybe that was it. You have to repeat it otherwise.

No, that was it. That's helpful. The second one then maybe, can you talk about the margin drag you are currently experiencing due to the planned capacity expansion in energy? And I'm asking because you're guiding for an elevated level of CapEx in the next couple of years. And I'm just wondering how should we think about this drag going forward?

Well, we have -- for these capacity investments, we have about 24 months lead time. So it is a leap of faith in terms of where we believe the demand trends will be over the coming years. I think I don't -- we don't have a guidance to a very big impact on margins going forward. We expect to load this pretty much with the average margin mix. So I think the key for us is to see where the demand trends will be in terms of volumes. Right now, the only thing I can say is that this is not only about future demand. If we look at our current units, there are too many places where we run 24/7. And 24/7 operations in mechanical engineering industry is not an optimal shift structure. And so we need to ease off the pressure in our existing pressing lines. And so part of what we're doing now is creating a more balanced production schedule in our units. I don't think it will have a big impact in terms of our product cost and the margin per se, but the increased capital allocation into the supply chain is partly being balanced by a better cost structure in the manning structures and the plant structures of operating them. So I can't give you the exact split, but I would say maybe 1/3 of what we're doing right now is just helping us to balance the plants better and about 2/3 will flow into direct increased capacity. And if we need to run harder even after that, so we can do it, but that's what we're aiming for.

I think it's also fair to say that it's accelerating the removal of older assets or keeping older assets as a peak capacity level and then bringing in new capacity a little bit earlier than we would have done otherwise. But it is part of a normal replacement schedule as well. And then I would add that the interchangeability of these presses is pretty good. So if we say that the data centers doesn't turn out or doesn't pan out to the same volumes that we expect, there are other growth verticals that will take up those volumes.

The next question comes from the line of Andreas Koski from BNP Paribas.

So, I would like to start with a question about your backlog and deliveries in Ocean. So, with yards expanding in China, how do you think about the delivery potential for Ocean in the coming years? You are saying that your backlog covers '27, large part '28 going into '29. But do you see that your deliveries in Ocean can pick up in '27 and '28? And is it possible to reach a revenue level well above SEK 25 billion plus? Or are we capped because of the shipyard constraints for the coming years?

I think we are under delivery pressure into 2027. I think our invoicing -- on our side, in the supply chain, our issue is not the manufacturing capacity, it's the commissioning capacity and commissioning of new ships, especially on advanced equipment with new yards with inexperienced staff, the demands on us are very high. So we have a major effort at the moment to ensure that the commissioning can follow the -- what we see as the current yard production schedules. So I think we will fulfill our part of the equation. What I think Klas was on to this earlier, sometimes we see that when the delivery schedules are very tight at the yards and especially we see new yards coming on stream, they sometimes fall behind their delivery schedules that are planned. So I think we will have to see how it affects. But I still believe that net-net, we will have a higher production capacity and the global yards in 2027 and most likely, it will result in some tailwinds for the invoicing side on Marine. I don't know, Fredrik, if you want to.

No, I think that covers it well.