Alleima AB (publ) (ALLEI) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Alleima Q3 Interim Report 2026 Conference Call and -- please also note that today's conference will be recorded. I would now like to hand the conference over to your first speaker, Frida Adrian. Head of Investor Relations. Please go ahead.

Thank you very much, and hello, everyone, and a warm welcome to the presentation of Alleima's Third Quarter 2026 results. My name is Frida Adrian, I'm Head of Investor Relations. And joining me today are our President and CEO, Goran Bjorkman; and our CFO, Johan Eriksson. Goran and Johan will walk you through the results and the key highlights of the quarter. And following the presentation, we will open up to a Q&A session, and you can ask questions via the conference call just as our operator instructed. The presentation materials will be available to download at alleima.com. And as always, safety is our top priority. Please take a moment to ensure that you are familiar with the safety procedures at your current location. And with that, I will hand over to you, Goran.

Thank you, Frida, and hello, everyone, and thank you for joining us today. So starting with the highlights for the third quarter, and we start with the order intake, which declined organically by 1% on a rolling 12-month basis. The timing of the project business is an important factor in understanding our third quarter performance. As you know, we operate in several project-related segments. Order intake can vary significantly between quarters. And we, therefore, prefer to assess it externally on a 12-month basis rather on isolated quarters, and that is to get a clearer picture of the underlying development. So on that basis, the declining order intake reflected weaker development in OCTG in Industrial and in the Nuclear segment, while umbilicals, industrial heating, medical and Transportation maintained solid momentum. Overall, market conditions have remained broadly unchanged since quarter 2 and it's simply more the timing effect, and that's also reflected in a couple of good orders booked in both umbilicals and nuclear now in October. Our OCTG business has been and still is affected what is ongoing in the Middle East. Our customer have reduced its pace in the region where our CRA tubes are needed, while our specific niche on that market has pretty much come to a standstill. Revenues declined 2% organically driven by the low pace of OCTG as well as lower activity in the Chem-Petrochem segment in China, which we flagged for in quarter 2. Also on revenues, industrial heating and Medical showcased strong growth. Looking at earnings, negative impact from the volume shortfall related to OCTG, the lower invoicing in Chem-Petrochem in China as well as a slower-than-planned production pace of steam generated tubes in 12. I will come back to that later. But we're again very pleased with the development in Kanthal who managed to maintain its solid performance in quarter 2, also now in quarter 3. And the targeted measures we communicated a year ago yielded some SEK 40 million that is according to plan. So I'm also pleased that we, during the quarter announced the next expansion phase of our tube site in Mehsana in India, an investment of about SEK 220 million, of course, made possible by our strong financial position. We will increase capacity, and we will continue to add new capabilities, further strengthening our already strong position in that region. And on that theme, we look forward to, at the end of the year increasing capacity for industrial heating via our expansion at our existing site in Sakura in Japan. Moving over to sustainability update, where we continue to generate a positive impact through our offers. On a rolling 12 basis, our sustainable product portfolio accounted for 27% of total revenue during the third quarter, up from 23.8% and that is primarily driven by growth in industrial heating and in the medical segment. As always, safety remains our top priority. The total recordable injury frequency rate increased to 5.4 on rolling 12 compared to 5.3 while the quarterly rate increased to 6.9 from 5.1. This is, of course, not a positive development, and not good since every incident is one too many. The share of recycled steel increased to 82.3% rolling 12 from 80.7%. In the third quarter, it reached 84%, and that is supported by product mix with a lower share of high nickel steel. And CO2 emissions increased by 7% on a rolling 12 basis. However, quarterly emissions declined 5%, mainly driven by lower energy use in our production. So let's look at the market development. Well, the market is volatile. We have wars, trade policy changes, energy prices. And as of right now, there is no clear end in sight. This is impacting us in several ways and the impact on OCTG being the most obvious one. But I will take you through each segment, starting with oil and gas. And -- but in short, we can say umbilical is still very strong and the opposite can be said about OCTG where it still looks rough. Industrial, Europe is weak. Asia and North America improved somewhat, but from low levels. Chem-Petrochem Europe and North America grew from low levels, Asia more flat. Industrial heating, Asia and North America continue to drive growth. Europe is still on the lower side and it's still subsegments like electronics and semiconductors that are the main drivers. Consumer flat on an okay level, while medical, strong momentum, no signs whatsoever on a slowdown. Transportation, aerospace and space still strong, Marine somewhat slower and automotive weak. And mining construction, stable demand overall. Nuclear, that is project-based and therefore, uneven order intake by nature. And we booked several orders now in the beginning of October, both for cladding, nuclear business and pipe, and also for steam generators. Renewable energy is stable on low levels. So let's discuss a little bit the Middle East. I mean that crisis has now been ongoing for 8 months, and the OCTG market remains really challenging with a great majority of our OCTG volumes exposed to the Middle East area. Prolonged disruption has resulted in fewer well completions and consequently lower consumption of OCTG tube, contributing to elevated upstream inventories globally. And this is, of course, a challenge for us as for other companies active in the OCTG market in the Middle East. Lower volumes had an increasing impact on the tube division's earnings during the quarter, resulting in a greater underabsorption of fixed costs. And the volume decline significantly reduced capacity utilization in the large diameter production flows in Sandvik, particularly in the large Pilger Mills, but also in the large extrusion press. And as these tubes are large diameter representing also substantial tonnage, the decline also has a negative effect on the primary production flow. I would say that the situation remains unstable and this uncertainty is negative for the market as it affects stability, customer sentiment and decision-making. And we have said it before, the OCTG business is CapEx driven. The impact on Alleima's other businesses remains limited, and we are, of course, closely monitoring volatility in energy prices and also on shipping costs. So moving over to order intake and revenues. Order intake rolling 12 is still around SEK 18 billion, however, down 1% organically, negatively affected by the weak OCTG market and a canceled order of SEK 250 million that were booked in quarter 2, now reported as negative order intake in quarter 3. And the lower order intake in Industrial Nuclear also affected negatively. Industrial Heating, Medical and Transportation contributed positively and also Chem-Petrochem was growing but from low levels. Revenue declined 2% organically where the weak OCTG and Chem-Petrochem in China were the biggest factors, while Industrial Heating and Medical were positive. Book-to-bill rolling 12, 99%. Moving to earnings. Adjusted EBIT amounted to SEK 202 million with a margin of 4.8% which, although it's in line with last year, we should be honest and say that this is a disappointingly weak quarter. We are, of course, affected by the OCTG business. We lost the volume bringing under absorption effects. This is something external, which is difficult to mitigate fully short term, but there are also things that we could have done better. The slower-than-anticipated production pace of steam generator tubes in the quarter is one thing. Let me be clear, this is related to Tube 2012, so it has nothing to do with the mill that we now are ramping up. And it's related to one specific order of a tube dimension we normally don't produce. It's an unusual large size, which made us slower than we planned. And this is something we should have done and also will do better moving forward. In terms of positives, Kanthal stands out once again, volumes in industrial heating have returned. And given the mitigating action they took in the downturn now, they get to solid leverage. On a group level, the targeted measures exceed some SEK 40 million in the quarter. Minor FX of SEK 3 million year-over-year and free operating cash flow of SEK 373 million, which Johan will get back to. So let's look at the division performance during the quarter, starting with Tube. Tube is still a mixed picture where umbilicals in oil and gas is still strong, also titanium improvement for aerospace and space within the Transportation segment is solid. The main issue is the aforementioned OCT business in all aspects, affecting order intake, revenues and earnings. Some bright spot in the Chem-Petrochem segment, but I think it's too early yet to see since the volumes are low. Rolling 12 order intake declined 8% affected by OCTG and nuclear, but we're happy to see that orders we received now in the beginning of October, further strengthening our view on the Nuclear segment going forward. Revenues declined 6% organically, mainly related to OCTGs, but also Chem-Petrochem in China. Book-to-bill rolling 12 on 96%. Earnings were affected negatively by 3 major variables: underabsorption stemming from the OCTGs, slower than planned production of steam-generated tubes in the old mill as well as ramp-up costs related to the new mill and ramp-ups will not be material in Q4 and also weaker tube in China, which we still believe is a temporary slowdown. And this offsets the positive effects from the targeted measures as well as a strong performance in Umbilicals, plus an FX headwind of SEK 7 million year-over-year. So let's move to Kanthal. Kanthal delivered yet another strong quarter, double-digit top line growth. And I would like once again to take the opportunity to congratulate and thank the entire global Kanthal for a very well job done. Thank you. Rolling 12 order intake grew organically with 18% when Medical and Industrial Heating segments were the main drivers. Revenues grew 10% organically also on the back of Medical and Industrial heating, strong performance in North America and the APAC regions. Rolling 12 book-to-bill of 109%. And the adjusted EBIT margin, 19.4% is a solid level supported by the target measures, higher volumes in Industrial heating as well as a continued solid development in Medical. FX had a positive effect of SEK 5 million year-over-year. And then Strip had another challenging quarter and has continued to work to strengthen its cost position with ongoing mitigation actions. Some of those actions are related to investments in increased productivity so that one needs to understand takes some time. Rolling 12 order intake declined organically with 15% with negative development in all segments, but especially within the hydrogen business. Revenues declined 10% organically, negatively impacted by the Transportation and the Industrial segments. Book-to-bill 93% and adjusted EBIT margin on minus 4.3%, impacted by FX negative SEK 4 million year-over-year, and the underlying margin was minus 3.1%. All in all, a tough quarter for Strip. And with that, Johan, I'd like to hand over to you.

Thank you, Goran. So if we start from the right-hand side, order intake for the rolling 12-month period amounted to almost SEK 18 billion, corresponding to an organic growth of minus 1%. We have some negative impact from FX of 4% and a neutral effect from alloys, indicating a total growth of minus 4%. Quarterly revenues reached almost SEK 4.3 billion with a negative organic growth of 2% and positive impact from FX and alloys of 1% and 2%, respectively, indicating a total growth of 1%. We now move to the table on the left-hand side, and I'll get back to adjusted EBIT in the coming slide. The reported EBIT increased to SEK 315 million, and the increase is mainly coming from positive metal price effects of SEK 107 million. Items affecting comparability amounted to plus SEK 5 million, mainly coming from positive effects on net pension liabilities in connection to a site closure. The net financial items for the quarter amounted to minus SEK 18 million compared to plus SEK 6 million last year, mainly driven by revaluation of derivatives. And the reported tax rate was 30.9% for the quarter, while the normalized year-to-date figure was 23.6%. The free operating cash flow came in at SEK 373 million in the quarter, and we'll get back to that in a later slide. And finally, adjusted EPS decreased slightly compared with the same quarter last year to SEK 0.46. Looking at the EBIT bridge. So the adjusted EBIT bridge, as you can see, the net effects are quite modest. We have -- we made SEK 197 million in quarter 3 last year with a margin of 4.7%. For Q3 this year, we had a positive SEK 7 million in organic development despite the organic revenue decline. From currency, we had some minor FX headwind of SEK 3 million and a minor M&A cost last year, resulting in SEK 1 million of structure in the bridge. This takes us to SEK 202 million and a margin of 4.8%. And as Goran touched on, Kanthal is the main positive driver with another solid performance -- in addition to that, the targeted measures continue to deliver approximately SEK 40 million in savings during the quarter, and that brings the permanent part of the activities that we announced last year to their full year savings run rate already now. This was offset by effects in tube coming mainly from the under absorption relating to lower OCTG volumes and a slower-than-planned production pace for the steam generator tubing in the old mill. Looking at the balance sheet then and our capital efficiency. The net working capital increased in both absolute terms year-over-year and as a percentage of revenues, mainly due to higher metal prices affecting inventory and currency. The sequential decrease of net working capital in the graph can be derived from -- I mean, it's normal seasonality, I would say. Capital employed, excluding cash, increased year-over-year to SEK 16.8 billion, mainly driven by higher net working capital, while the return on capital employed, excluding cash based on reported operating profit then was 8.8% for the rolling 12-month period, up from 8.1% last year, coming from a higher rolling 12-month reported operating profit. Looking at the cash flow, the free operating cash flow amounted to SEK 373 million coming from a higher EBITDA, including the positive metal price effects. We have plus SEK 170 million of those this year versus minus SEK 70 million last year. The noncash items, which most commonly refers to cash or noncash effects from provision or provision releases was this year affected by cash flow effects from the ongoing restructuring activities. The changes in net working capital during the quarter contributed positively, and that is normal seasonality in the third quarter. The CapEx was slightly lower than last year. On the other hand, amortization of lease liabilities was slightly higher this year. But all in all, this leaves us with a very healthy free operating cash flow of SEK 273 million. And -- from that, we then turn to the financial position, and it continues to be very solid. We are well below our financial target of a net debt-to-equity ratio below 0.3x. At the quarter end, we were at a negative 0.03x. The net pension liabilities decreased to SEK 566 million from last year's SEK 735 million, mainly as a result of higher discount rates. The leasing liabilities are somewhat lower than last year, and our cash position continues to be strong, and that gives us room to operate and execute growth investments like the next phase of our investment in Mehsana in India that we announced in the quarter. Then let's have a look at the guidance we gave prior to the quarter and the outcome of that. On CapEx, we guide on full year. And so far, the year-to-date CapEx spend is SEK 658 million. Normally, the second half of the year is more CapEx heavy. Currency transaction and translation effects came in at SEK 1 million, where we guided for a neutral effect. And in the total currency effect, the total bridge effect, which also then includes bridge effects from this year's hedges and revaluations and last year's revaluations, the total currency effect was minus SEK 3 million. Metals affected us positively with SEK 107 million, where we guided for SEK 100 million. And the normalized tax rate year-to-date is at 23.6%, where we are guiding for the range of 23% to 25% for the full year. As for the guidance for the fourth quarter, we slightly lowered the full year CapEx to SEK 1 billion, down from SEK 1.1 billion due to the timing of our CapEx projects. Currencies based on the rates per the 21st of October, we expect a positive transaction and translation effect on EBIT of about SEK 100 million for the fourth quarter, while on the metal prices also based on October 21 values, we anticipate a neutral effect on EBIT in the fourth quarter. And the normalized tax guidance is left unchanged at 23% to 25% for the full year. And by that, I hand back to you, Goran.

Thank you, Johan. So outlook, looking ahead to quarter 4, we so far expecting continued mixed market activity. umbilicals, industrial heating, medical, nuclear and as well aerospace are strong with solid backlog and have also good momentum going forward. While we, in other segments are running shorter backlogs, for instance, in OCTG, also in industrial and in petrochem, where we expect lower volumes and therefore, some underabsorption effects in tube also in quarter 4. For nuclear, we expect a negative impact also in quarter 4 from the lower-than-planned production phase as we complete that order during the quarter. So to sum up this challenging quarter. Market conditions remain mixed, and we are -- we experienced some uneven order intake, although we secured some good orders now early in quarter 4. This resulting in negative order intake for the third quarter rolling 12 months. We saw continued good momentum with profitable growth in Kantar driven by the medical and industrial heating segments. Within oil and gas, the Umbilical business was still positive, while OCTG was weak, and this is negatively impacting Tube. And we also saw a slower demand in Chem-Petrochem in China.These volumes and invoicing shortfall also impacting earnings alongside a slower-than-planned steam generator tubing production phase. Target measures are progressing according to plan. And as always, we continue to review measures to adjust capacity and costs to the current market conditions. And we have a stable financial position. We continue to execute our long-term strategy focus on attractive niches and a strong product mix. And with that, back to you, Frida.

Thank you both very much. And we will now move over to the Q&A session. Operator, could you please open the line for the first question?

[Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Kaleb Solomon from SEB.

You described some timing effects and say several orders sort of moved into October. Can you give us a rough magnitude of how much of the decline was simply due to timing that I guess that implies some of it should reverse next quarter?

Difficult to say. I think -- I mean the cancellation is a bridge effect of SEK 500 million between the quarters. We were expecting some umbilical order in quarter 3, which did not come through. That market is still very positive. So I would say the main effect between quarter 2 and quarter 3 are the timing effects and then also weak. But I'm not sure I can tell you sort of number-wise.

Okay. And last quarter, you also mentioned roughly SEK 20 million in quarterly ramp-up costs for the new steam generator tubing mill. And you sort of clarified that the slower nuclear production is a separate issue. So can you give us a rough sense of how much that impacted earnings in Q3 on top of the sort of planned ramp-up cost? And as a follow-up to that, how big do you expect that impact to be in Q4?

Well first of all, it's ramping up is in the new mill and the problems is in the old mill. So they have nothing to do with each other. The ramping up is cost we have before we start full absorption effects in the new mill. And we don't expect any of those costs during quarter 4. So that is something we are through because we have now started to pack in the new mill. The problems are fully related to the old mill. And I've been along so long. This is a very unusual tube size. I think it's the third or fourth time we have done it in more than 35 years. And it's bigger, and we've had problems to come up in pace. We have new bottlenecks. And it's not what I expected. I think it's a real performance issue, but it's isolated to this individual order of a very unusual size, and that will be done in just a couple of weeks. So that's sort of the good part of that story. How much of this I think Johan touched upon it. I cannot give you the exact number. But if you look, we're pretty flat year-over-year on adjusted EBIT. And if you take the good things, Kanthal and the target measures, I think they bring up the results almost 200 basis points. And then we have 2 main issues. One is the under absorption due to OCTG and the other is these issues in the steam generator factory. And those are roughly minus 200 basis points. And I would say to give you some more is that I mean with the market conditions we have, I'm not pleased with the results. We should have been close to 6% margin.

Okay. That's helpful. And you also -- you've taken on more contribution business to sort of support utilization. With OCCG weakening further and the sort of canceled orders you mentioned or the canceled order that was scheduled for Q4 production. Do you expect to increase the sort of contribution part more in Q4? And can you give us a rough sense of any additional margin dilution compared to Q3?

Good question. I mean we report that the Industrial segment is pretty weak in Europe. So it's not that easy, and there is a limit for how much we should price ourselves to that. So far, it looks like the worst under absorption will come from the cold work from the Pilger Mills. I think extrusion and upstream is still okay-ish in the fourth quarter. And it's there, we have the opportunity to take other orders. In the pilger mills, I mean, these big tubes, we have no other product to put there. So it's more in the cold flow.

Okay. That's helpful. And just lastly, on cost savings. You delivered roughly SEK 40 million this quarter compared to SEK 45 million in Q2. Can you explain that decrease and give us sort of a rough sense of any additional benefit we should expect in Q4 as you sort of reach the full run rate? Bridge effect?

No, I think what we alluded to in this is the permanent savings of at SEK 40 million. So it's the same -- when you add the volume part, we get to 45%. So it's the same level. I just -- what I pointed out was the 40 for the permanent savings. So we're still at -- we are sort of continuing that pace and now we're on the permanent part at the targeted savings rate.

We are now going to proceed with our next question. And the questions come from the line of Anders Akerblom from Nordea Markets.

I wanted to ask firstly on sort of OCTG and just how we should think about the order book quality in OCTG. Could you sort of give us any indication on how much of the sort of Middle East linked volumes remain in the backlog?

Yes, it's low, Anders. I mean that is sort of the development or lack of development in quarter 3 is the problem related to Middle East because nothing has changed. And still a war ongoing. Right now, at the limited pace we're running because we're running right now at a lower pace than normal because we need to help our customer not to be overstocked due to the low pace. I would say we have roughly 4 months of backlog at the lower pace.

Okay. Very clear. I wanted to ask also in tube, you were through this on the past couple of questions. So apologies if I didn't get that. But I mean, even if we adjust for savings and last year's production stoppage, I mean, obviously, it was quite meaningfully weaker year-over-year. I would just appreciate if you could just help us a bit in size sort of respectively, where the margin decline in tube came from under-absorption to from OCTG, nuclear production ramp-up, respectively. So how should we just think about those respective buckets, so to speak?

Then I'll repeat, I think there are -- just to simplify 2 positive bringing up the margin in the quarter. One is Kanthal performance, they are performing better this quarter than quarter 3 last year. And I think this is not what you asked for, but I think the biggest positive actually comes from the heating part of Kanthal, which I think is facing continued strong growth as well. And the savings, those together is almost plus 200 basis points. On the negative side is the OCTG and steam generated ramp-up and the problems with a lower pace. The ramp-up is the lower part of that, and that is negative about 200 basis points.

Okay. Okay. Then I understand. It was about tube specifically, but you answered there at the end. And I wanted to ask sort of finally on Kanthal. If we just look at sort of organic operating leverage in Kanthal, it was quite healthy, almost 50%. Could you help explain a bit what drove this apart from the sort of cost-out measures you've taken? And I mean, how should we think about that sort of level of organic operating leverage going forward as you also ramp up new production?

I think, first of all, I mean, Kanthal is delivering a really strong quarter. But I have to say it's nothing strange. It's no specific one-offs. It's sort of the level that you could expect. Of course, they have some savings from what we presented last year as well. But I think an important part of the Kanthal result is when they were coming in the heating part from lower volumes '23 and '24 -- '24, '25 maybe. And they did, I think, did it good from a mitigation point of view took out cost. And now when volumes are coming back and they are not adding back all the resources and the cost, they get a very healthy leverage on the results, especially in the heating business. I think it's roughly a year ago when we started to see growth in industrial heating, I was not sure we could claim growth. But it was -- and we see no signs of -- so the market not continuing strong. Then numbers-wise, percentage-wise, it will be not as strong growth-wise because they are meeting higher comps. But I think it's -- what I'm saying, I think one could expect Kanthal to deliver on these levels.