Alfa Laval : 2021 Q4 Transcript

ALFA LAVAL AB Moderator: Tom Erixon 02-02-22/10:00 a.m. CET Confirmation # 7893734 Page 1

ALFA LAVAL AB

Moderator: Tom Erixon

February 2, 2022

10:00 a.m. CET

OPERATOR:	This is Conference #: 7893734
Operator:	Good day, and thank you for standing by. Welcome to the Alfa Laval Q4
	Earnings Call. (Operator Instructions) I must advise you that this conference is
	being recorded today on Wednesday, the 2nd of February 2022.
	I would now like to hand the conference over to your first speaker today, Tom
	Erixon. Please go ahead.
Tom Erixon:	Thank you, and welcome to our fourth quarter earnings call. I will start with a
	few general reflections on 2021, and then we'll move into the numbers in the
	quarter.
	First, let me say that 2021, as you probably have realized now, was
	strategically a very important year for us. It was a year when we established
	the product platforms and the future customer offerings to support them in the
	energy transition and the emergence of a new energy system in the world.
	We also launched last year the supporting CapEx program partly to cope with
	the growth and capacity demands in our existing core businesses, but also to
	lay the foundation on the future product offerings as well.
	In addition to the customer offerings part, we also advanced our own
	sustainability agenda, significantly. I don't have the opportunity to go into
	details here, but our carbon-neutral plan is well established and understanding
	in terms of what we need to get there by 2030 is getting quite clear and driven

Classified by Alfa Laval as: Business

ALFA LAVAL AB Moderator: Tom Erixon 02-02-22/10:00 a.m. CET Confirmation # 7893734 Page 2

by a clear action plan. So it was, in summary, a year when our 10-year road map sort of came into place, and we have a good idea of what to do now and up to 2030, both externally and internally.

Now as to the financials, we reached a new all-time high in terms of order intake at almost SEK 46 billion. And it was driven by - partly by strong demands in almost all end markets and in all geographies.

But I also have to stress that the work we've been doing on competitiveness and strengthening our market positions in several of our core business areas has paid off during the last years and certainly in 2021. And we feel good about our market position, and it helped us in the growth throughout last year.

Finally, the operating margin for the year was stable at 17.4 percent, almost identical to the year before. And that was despite some challenges in the sense that we knew well that while order intake was going to grow in last year, the invoicing would remain fairly flat, which, in fact, it did.

In that context, we had to absorb the sales and admin costs, returning back to more normal levels after a sharp reduction in 2020. And we also had to manage relatively stable, aggressive across the board inflationary pressure in the supply chain. So all in all, coming out neutral under those circumstances, we felt were a good year and a good achievement for the year. So let me leave my evaluation of 2021 as a year there and go to the Q4 key figures.

Now as you've seen, we finished the year strong with order intake growth in the quarter, 24 percent above last year. As expected, our invoicing picked up based on the strong order book and the supply chain that continued to deliver relatively well despite some turbulence and bottlenecks in the supply chain as a whole.

The margin decrease sequentially was affected largely by sales and admin costs returning back to a bit more of a normal level, and there were some mix effects in the quarter as well. The inflationary pressure, while it was present, was largely offset by good operational performance and volumes.

Classified by Alfa Laval as: Business

ALFA LAVAL AB Moderator: Tom Erixon 02-02-22/10:00 a.m. CET Confirmation # 7893734 Page 3

I'll remind you, when you look at the comparative numbers in Q4 2020 that those numbers and the margin specifically was significantly impacted by positive one-offs, primarily in the Marine division.

I'll go through the additional perspective in the Food & Water division first. The demand remained on a high level in almost all end markets and geographies in the quarter. We reached a record invoicing in the division as expected after the building of a substantial order book during all of 2021. The margin weakened a bit, mainly as a consequence of mix, both geographically and the decreasing share of service.

The Energy division continued strong growth as before, mainly driven by sustainability trends in energy efficiency solutions. In addition to that, in the Oil and Gas sector, service, as I early indicated, started to grow already mid- '21, as I indicated to you then. And in fact, now in Q4, we've seen capital sales improving from a low level. And specifically, I would say that is happening in the gas sector related to the elevated price level and demand for LNG.

After a relatively weak margin in Q4 in 2020, we had a good improvement despite challenging inflationary pressure, primarily related to the metal prices. The increase in material prices were largely offset by good operational performance and positive volume effect.

The Marine division had a very important quarter, where we started again to build the order backlog after 2 years of invoicing being ahead of order intake. The demand was solid with order intake above SEK 4 billion in the quarter, and the demand trend was positive in almost all parts of our business, but especially in the environmental applications.

The underlying factor was, of course, the increased contracting of new ships at the yards. The final count is not yet complete. It will take another month or 2, but it may reach approximately level of 2,000 vessels for 2021.

And I remind you that, that is the first time that we are back to a historic average trend line after a long period of very muted demand and contracting at the yard. So it was a rather big shift from a long period of depressed demand.

Classified by Alfa Laval as: Business

ALFA LAVAL AB Moderator: Tom Erixon 02-02-22/10:00 a.m. CET Confirmation # 7893734 Page 4

The increased environmental regulations and in general, the increased fuel cost, both in terms of hydrocarbons, but also a different energy mix may, in fact, support a healthy level of new contracting all those - also in the years to come, although as we know the market year-by-year tend to be somewhat volatile.

Let's turn to service. We had a good growth across all 3 divisions in the service. And all in all, for the year, we were 10 percent plus compared to

2020. And in the quarter, we were 14 percent above the same quarter last year. The service was especially strong in the Marine division, but as I said, positive in all 3 areas.

Many factors contributed to the good development in the year and the quarter with customers plus returning to normal operational mode after the restrictions being one of those factors. I would also stress that over the last year, we have invested quite heavily both in our service organization and our service infrastructure, creating a broader and more competitive service offering. That is also a factor behind the growth that we are seeing at the moment.

Some overall comments regarding the order intake. We have now, as you can see, 3 quarters of very strong demand behind us, including the Q4. And as indicated, it resulted in a new all-time high of SEK 46 billion in the year. Now if you look at it in some perspective, we had also a very strong year in 2018 in terms of order intake. And I remind you that those - that was the year and the period when we contracted a lot of orders in the temporary scrubber business.

We knew that business would go away. And when you look at the - which it has to a large degree, although the business is clearly still there and present, but you should - when you look at the comparative numbers realized that we have compensated then replaced a big share of contracting of scrubbers and in other core areas. So the underlying growth in the remaining areas is substantially stronger than what you see on the chart.

Large orders are returning to normal levels after a period of lower CapEx in many end markets. Our capability and performance when it comes to the project business, especially in the Food & Water division, has been

Classified by Alfa Laval as: Business

ALFA LAVAL AB Moderator: Tom Erixon 02-02-22/10:00 a.m. CET Confirmation # 7893734 Page 5

	substantially improved over the last couple of years, both in terms of our
	executional capability, our focus and also the profitability. So the large order
	returning to a more normal level is a piece of good news.
	Now I come back to my forward-looking comments later, but let me, at this
	point, just say that as a whole, the demand looking into the first quarter is
	expected to increase compared to where we were sequentially in quarter 4.
	Finally, some regional comments. You've seen this picture many times before.
	We've used it for many years. It is the first time in our memory that all the
	numbers, the comparison between '21 and '20 and the comparison of Q4 last
	year versus '20, all numbers in all regions are positive. It reflects a very
	healthy industrial cycle and macroeconomic environment across the board.
	Some special comments perhaps just to give a few highlights. China had a
	very strong year despite the somewhat financial uncertainty in that market.
	And it is now also getting some tailwind in - from the Marine business and
	the ship contracting, which is now increasing and affecting the Chinese
	number now and going forward.
	Eastern Europe has been strong in Q4 and throughout the year. Despite the
	geopolitical tensions, we have not seen any effects of that as of yet. North
	America has performed very well in 2021 when it comes to order intake, and
	we enter 2022 also with a good pipeline of projects.
	So all in all, it was a good year of 2021, and we'll be back with some forward-
	looking comments later and hand over to Jan for some financial comments.
Jan Allde:	Thank you, Tom. And I will start looking at sales. So we expect the invoicing
	in Q4 to be somewhat higher than the same quarter last year. We realized
	sales of SEK 11.7 billion, which is 9 percent higher than last year and a bit
	better than our expectations, considering also that some of the ongoing but
	stable supply chain challenges.
	With regards to sales in Q1 2022, my outlook is as follows: Considering the
	strong increase in order backlog during 2021, especially in Food & Water and

Classified by Alfa Laval as: Business