Alfa Laval (Stockholm:ALFA) Q2 2026 Earnings Call

0:00 Over the next few years. So we have estimated that the demand cycle could be relatively stable, but of course that is also dependent that we are not seeing a raise to extremely high delivery numbers in this year or next year based on ramping, but that we are rather containing global capacity somewhere north of 2,000 ships a year, but certainly not at the 3,000. So I would hope that we see going forward, I'm leaving quarter aside right now, but my hope and expectation is that we will see somewhat of a less cyclical business, somewhat more stable. And with that, we should see a reasonable but perhaps slightly slower growth than we've been at the moment. Yes. Last question is very brief.

0:47 We had this preordering situation for the pumps in the past couple of years and then the unwinding of it. Do you currently notice a kind of a trend towards preordering again? Or is the orders that you get in Marine the equipment that is actually needed for the next six months in the shipyards? Thank you very much. Yes. I don't see any I wouldn't call what we see preordering. What we do see is that some ships are contracted on speculation. And so we see some people entering into the market who are not long term operators or ship owners in that sense. So from that point of view, the numbers are perhaps somewhat elevated. But with the current capacity, the current tonne mileage situation on the global trade, we certainly don't feel that there is. And even with the current level, we look at the age of MRLR tankers specifically, the aging of those fleets is normal. It's not exceptionally young. So we don't, in the context of a couple of years, see a big shift in that market.

2:08 But I would still say that, of course, when orders are coming in very high over a year or over a number of quarters, typically, it should come down a little bit, reflecting more of the delivery output and invoicing cycle than just an elevated order intake situation. I hope that gives some clarity to it. Perfect. Thank you so much. And the next question comes from Claus Bergerlund from Citi. Please go ahead. Hi, Tom and Fredrik. Claus at Citi. So my first question was also on Marine, and I'm thinking about lead times. Obviously, strong orders on the cargo pumping side following the strong contracting of product tankers, and you talk about solid demand from the LRs.

2:55 When you look at the Framo order book now, how should we think about the sales growth ahead? You're obviously now backfilling for the second half twenty seven, where we previously had expected some softer sales. So is growth in the P and L in pharma likely here? Or are we going to see flat '27 and '28? Or can we grow from revenues? That is my first question on the current order book as you see it now. Well, if we start with our own capacity, we are going at full speed at the moment. As you know, we are in the biggest CapEx cycle for the FARM operations in their history. It's SEK4 billion program over five years or so covering a number of areas.

3:44 Cargo pumping is just one of them. The offshore is another and there are some other things and cryo and others that is affected by this CapEx program. But we are we put priority to execute the productivity program and capacity program for cargo pumping as a first step in that program, and we've come quite far. So it is a tough situation in Bergen when it comes to replacing old equipment and automate a whole range of processes at the same time as our delivery machine is going at the all time high level. So credit for the team. We haven't missed a single delivery yet and we don't expect to do it.

4:30 But we can't go much higher than we are right now. And I would not see that for 2026 or 2027. I think the question on the cargo pumping specifically is going to be related to a possible long term position in LR tankers, which is an area where we have had a minor presence so far. Some opportunities have opened up. We've taken advantage of that. And that will potentially provide a structural growth option for the cargo pumping business in the coming years. I'm a little bit hesitant to predict that too strongly or to make a call on the market share changes in that market long term.

5:16 But of course, it has been a very important milestone for us in this quarter. I have to recognize that, and we will see where we go from there. So it sounds to me like flattish sales growth maybe from 27% and then 282028% depends on new capacity and how you can utilize that potentially. I leave the interpretation to you. Yes, yes, yes. Okay, fine. Then my second one is on Food and Pharma. Not only larger orders there on biofuel driving this growth, base orders solid as well. And I want to come back to the Capital Markets Day in November last year. You launched a new intelligent separator, the single use separator geared to pharma, etcetera. I'm trying to understand how much of this growth is market share versus market improvement.

6:05 I guess it's a combination of both, but any comment here on reception around the new launches, etcetera, would be interesting. Yes. I think at the Capital Markets update, in all likelihood is a digital event this time and slightly shorter, I think we will be in a better position to comment on that development specifically. I think my overall sense is that our product program and there's been you saw some of the high speed separation development when you were in Flemingsburg.

6:53 But on the fluid handling side, it's been a massive two years of product launches as well. And our feeling is that we have strengthened our market share. We have strengthened our distributor network. And our feeling is that we probably are somewhat growing our market share. And what we've seen in this quarter and this year is especially on the transactional side, which is somewhat easier to measure in terms of pace, We have been quarter for quarter just running on an all time high level that we haven't seen before. And we are running a very, very tight ship when it comes to capacity and output versus customer demand.

7:47 I might add, I don't want to make a too big thing on this, but coincidentally, when we talk about the data center market, it actually is a hygienic application when it comes to the white room applications, it comes to handling fluids. And so at this point in time, our channel partners are also working into the data center area and we're ending up with some products from our valves business that is now starting to flow in some volume into that. So on top of a fairly healthy market in dairy and some new orders in brewery and our traditional business, we actually have a bit of flow into the famous data center business also here in fact. So it makes the growth, I think, more understandable and potentially structurally as an important component in the coming years.

8:47 A very quick follow-up on HVAC. Claus, I think we could also add that we have capacity coming online in The U. S. In the form of investments that were done a year ago or almost one years point ago that comes online, and that should also give us an ability to better meet the expectations of the market when it comes to lead times when it comes to fluid handling. Sorry. Sounds good. My final one is on HVAC. Within HVAC, what size is the heat pump business today, if you would annualize it? It must be more than CHF 1,000,000,000 now versus CHF 2,000,000,000 at the peak in 2023. I'm just trying to understand the size and what you're seeing into the second half, Tom.

9:33 Let me see. I think we are We're trending towards two. We're towards two. Yes. Already? Okay. Yes. With that said, it is a very competitive market at this point in time. Everybody built capacity. And so it's a market where the OEM business shows its typical sign of volume, price pressure and that type of situation. So we are not returning that business on the same level of profitability as it was. However, we are very focused on and execute on a plan where we are maintaining our market share long term for the heat pump business in Europe.

10:30 It is not the best contributor of profitability right now, but we believe it's the right thing to do. Thank you. And the next question comes from Akash Gupta from JPMorgan. Please go ahead. Yes, hi. Good morning. Thanks for taking my questions. It's actually Jeremy asking on Akash's behalf. I've got two, please, if I may. The first one is just on margins. You've talked about an uneven load in some manufacturing units across the company, which impacted margins in the quarter. Now after those record Q2 orders, how should we think about the load across the various businesses in the coming quarters, please?

11:17 Well, I think the general comment is that in the whole group and in the Energy Division specifically, most of our load factors are really high. They are high to a level where it starts to become less productive, air shipments and whatnot in order to manage lead times and customer delivery programs. So it is a high utilization period. And consequently, we also guide that the CapEx program will most likely remain in place on the current level of DKK2.5 billion to DKK3 billion a couple of years going forward. But all in all, if we look at the decisions made and some of the ones that are coming now this year, beginning of next year, I think we probably have created the basis for a supply structure for the 100,000,000,000 plan. That's sort of where it is. Now there's a couple of areas where we are low on utilization.

12:24 There is the odd spot on the Marine side and there is the odd spot in the Energy side, particularly on welded products. Utilization was affected by partly the shutdown on the business in Russia some years ago. And then on top of that, we had the Middle East Crisis where a fair amount of our product typically goes. So with that recovering and with the breakthrough in The U. S, the cryo situation is more or less resolved. We may have another quarter before we are sort of fully up and running on the order book. But the order book on cryo and the pipeline for cryo looks promising and good.

13:05 On the welded side, in Europe particularly, we are a bit on low utilization. We may remain there for a while. With that said, if I look at the overall supply system in Alfa Laval at the moment, I would not blame low utilization as a specific factor pushing us down. It's a very good situation for most of it. But as Fredrik was on to when we reviewed the Energy division, there were a couple of headwinds that all put together had some impact on the margin. This was one of them. And so we will work to fix it. Half of the problem is fixed and half of it we need to think through.

13:49 Okay, understood. That's helpful. And then the second one just on Ocean, where you obviously had a strong quarter in terms of orders driven by Marine Pumping Systems. Now can you please also comment on the pricing side? And I'm especially interested on what you are seeing in terms of pricing of those equipments and how it compares to the margins that you currently are delivering in the P and L? I think on the pricing, I don't see a lot of change in Marine. I think we are long term strategic partners in most product areas with the ship owners, and we don't typically try to take advantage of high demand cycles.

14:41 We try to do our job properly and price correctly. And so there's not, I think, in the order book, a different gross margin perspective than what we've been having looking backwards. The one area where we have been a bit concerned on the pricing side is probably more than anything on the Energy division. And we have in parts of the group, not only in the Energy division, but maybe the effect is biggest there. We did do some price adjustments as of July 1, and that was mainly driven by the cost inflation, driven by energy costs and fossil fuel costs. And so we had some significant cost escalation in those supply chains, and we did a modest compensation for that in July 1. So that's sort of on the pricing side, I would say, the one action that we have been taking during this year.

15:46 Understood. Thanks very much. And the next question comes from Andreas Koski from BNP Paribas. Please go ahead. Thank you very much and good morning Tom, good morning Frederic. I want to come back to something you touched on earlier. Can you maybe share a bit more information about your expansion in the long range tanker segment? What have you done? What kind of products? And how is the value opportunity increasing for you here? Well, again, maybe we come back with a bit of a review on this when it comes to the Capital Markets Day. Just shortly, I would like to say that from a product point of view, an LR tanker is, from an engineering standpoint and product standpoint, very similar. So we are not developing a completely new system that is

16:48 totally different from the MR side. But it's a large installation. It has some implications for product design and engineering solutions and all of that. I think what is different partly, if you look at the tanker situation, the value of our offering in MR is a very speedy time in harbor in changing cargo. And in MR specifically, with small tanks, there is a lot of variations of what products they are carrying. And consequently, our pumping solutions are providing a very clean tank and very short time at harbor in order to pump out and pump in the new products. And so the value proposition is very, very high in a hydraulic pumping solution to our customers compared to a lot of other applications, compared to the electrical pump solutions, which will leave a lot of contamination in the tanks as they are evacuated.

17:57 So the business model for MR is completely developed on our hydraulic pumping solution value proposition. Now if you go to the other extreme and go to crude oil, obviously, the value of cleaning out the crude oil tanks is relatively limited because the contamination will be zero. There will always be a new crude oil coming in and the crude oil variations are not that important when it comes to the decimals.

18:27 So all in all, we don't expect that hydraulic pumping solutions will have any particular impact on large crude oil tankers now or in the future. And then you have the LR side, which in my mind comes somewhere in between. It is larger tanks, larger ships, more continuity in the load they are carrying and the cargo that they have. And consequently, the value proposition there on our solution historically has been a bit less. And for that reason, a lot of ship owners have stayed with the solutions they are used to. Now that we are in and we have provided a number of cargo pumping shipsets, I think our hope is that a number of ship owners will reconsider the technical solution they have. And although the value proposition and dynamics may be a little bit different in LR, the validity of the hydraulic pumping solution is certainly there. So we will see how the market dynamics plays out here.

19:37 But we are hopeful this is the beginning to a change in our market position long term for LR. Understood. Thank you. And then jumping to data centers. You mentioned that your order run rate LTM is now SEK 5,000,000,000 or so. I think that must mean that you had an order intake of more than SEK 2,000,000,000 now in the second quarter. Maybe if you want to confirm that. And does all of that fit in light industry and tech? Well, it does essentially sit in light industry and tech, at least the orders that are coded as data center orders. There may be some product creeping in from other areas from channel partners and others, but the lion's share is certainly in so the light tech gives you a good feeling. We are not at DKK 2,000,000,000 in

20:33 the quarter. We are below that. But maybe it's more correctly to say that in the pace we are at, at this year in the €5,000,000,000 sort of level, we don't see it going dramatically up from as you know, we've been guiding you a little bit the last couple of quarters on running rates of 2%, 2.5%. I think this is kind of where we are right now. And what determine the order intake numbers right now when we look at the data center is essentially how far out in the future we book the orders. And right now, it's not in our interest to do a full order booking late into 2027 and 2028. So you could say we are managing the order intake level from our point of view quite closely.

21:28 And so what you will see in the coming quarter is a managed number from that point of view in that we are not necessarily extending the time period where we book orders right now. And that's why I think it's relevant for you to think about it a little bit in terms of running rates and not so much about the order intake. So we try to give you a reasonable clarity on approximately the size of that business in terms of the underlying dynamics right now. Yes. And this SEK 5,000,000,000 that you it sounds like you expect to stabilize at that level, that does not include the capacity expansion that you're working on? Or does it include that? If it doesn't include it, where will it go? No, it certainly does. We there are a number of capacity increases that are coming online, not least in the beginning of twenty twenty seven.

22:26 And so when we book the orders now into 2027, we are already pretty much fully

22:34 booking up the capacity increases that short term will come on stream partly in this year and an important part in the beginning of 2027. So the invoicing rate right now is not on that level, and we could not reach the full five at this point in time. However, we will in 2027. Then we are making additional capacity investment decisions, more or less as we speak. And right now, those capacity investment decisions, they are looking at what we believe is the underlying demand situation in 2028 and going forward. Understood. And then just quickly on your outlook.

23:19 Do you want to confirm that somewhat lower demand should still imply an order level above 20,000,000,000? Well, you saw how exceptionally incorrect we were in the guidance last quarter. And so I will not give you a good indication of what it's actually going to be. But the way we express ourselves in terms of somewhat lower would historically indicate that we would end up above 20%, yes. Understood. Thank you very much. Thanks. And the next question comes from Anders Itborg from ABG Sundal Collier. Please go ahead.

24:06 Yes. Good morning, Tom and Frederic. Just another one on data center and a bit on your market share and how you think about your position there. I get the sense that you have become gradually more confident about keeping a very high share, and I see that you have good growth not only in North America.

24:25 Do you think you are growing or outgrowing the market at this point or growing with the market? And do you feel more confident about basically technology evolving in the sense that you can keep this high share? We are very confident that our market share has increased during this year. And it's not only about technology. I think the industry struggles in many areas, including thermal, to scale with the demand growth that we are looking at. And so it is a tough situation for the hyperscalers and the people who are working with system installation in this area. I think our ability to scale, being the world leader in this area, sitting on an already very strong global footprint and ability to time wise and balance sheet wise go all in to support the CapEx plans required in order to deliver into this makes us somewhat unique.

25:33 So I think it's fair to say that we are the go to

25:37 partner and the anchor partner for most of the data center expansion plans when it comes to the data center side. And you may look at this as a fantastic thing and all of that, and of course, it is, but it is also a place of huge responsibility that we carry in making sure that we are not the place where the bottleneck appears when it comes to the biggest industrial investment program that we have ever seen in history. And so we are very committed to go with this and play our role in the supply chain. Okay. That's good to hear. And as a follow-up perhaps, I mean, do you see the opportunity to increase your scope here? I think you I mean, you are working with products that would fit into

26:31 more parts of the entire water loop, I suppose. So could you do that organically and if not inorganically, perhaps? Well, I don't think we will have very high on the agenda to do M and A work in order to increase our exposure into data centers. I think part of our the beauty of our business and our company is that we have many legs to stand on and we don't want to be we're not seeking a position where we become a one legged animal. And so I think our growth opportunities in data centers is good enough in the product assortment that we have. I indicated earlier that the data center is starting to creep into the flow side as well. And so we do have a product assortment for clean water applications in Flow that are relevant.

27:33 It starts to become a meaningful volume. And so I think it's fair to say that there is an opportunity of €1,000,000,000 here or so in terms of long term what we can do on complementary products other than the thermal control. And in the thermal control, there may be some further expansion opportunities when it comes to thermal technologies that we are working with in parallel. So I think we haven't reached the plateau on five. We are where we are. There are some reasonable growth opportunities above and beyond going forward. Of course, the big question is where is the underlying demand going to be, not this year, next year, two years from now, but five years from now, where are we plateauing, how do we need to long term strategically plan our capacity in the various areas.

28:28 That's a little bit a challenge we will have in the coming years. But for now, we are all in with the key customers to make sure that we meet our commitment. Very helpful. Thank you. And the next question comes from Gustaf Schwerin from Handelsbanken. Please go ahead.

28:54 Yes, good morning. I have a follow-up on the long range tanker comment, Tom. Can you help us on how much that drove Pumping Systems order growth in Q2? And perhaps how much of that you think is driven by a shift in contracting to more LRs? And what is actual market share gains? Thank you. I'm a bit cautious to go too much into details. We would have had a very good quarter without the LR side. So let's not

29:28 overdo it. I we can follow-up with you separately to give you an order of magnitude. I'm not sure in percentage terms when it comes to the cargo pumping side exactly how it fell in there, but it's not it's certainly not the lion's share. It's obviously MR tankers that is driving our underlying demand growth overall, but we can give you a comment on that. But I think the numbers that you should have in your head is that if you consider the LR tanker segment in general being approximately the same size as MR, and we are have historically been close to zero in that area, and we've been on a very high number On the MR side, it gives you the order of magnitude of where is the market opportunity.

30:18 As I said, the dynamics, the margins, the whole host of things are different between the two segments, so I wouldn't equate them, but it gives you a sense of an order of magnitude opportunity for us.

30:34 Okay. Thank you. And I think we'll take the last question here. And today's last question comes from John Kim from Deutsche Bank. Please go ahead. Hi, good morning. Thanks for the opportunity. Was wondering if we could go to invoicing for a second. If we think about the Q2 results, would you argue that late invoicing featured at all? Or is kind of the cadence of invoicing really more driven by the client side at this point or in this quarter? So I mean, if we look at invoicing, it is very much driven by a transactional business. There is, of course, an element of percentage of completion there for larger projects. But since larger projects, of course, have been on a lower level now for about at least the last twelve months, of course, the incidence or the share of project invoicing decreases.

31:34 We have it still a little bit in the Food and Pharma side and we have it a little bit on the Welded side. But other than that, it is mainly transactional business. I mean, Our ability to invoice is very much dictated by capacity. And as you've heard, we have quite a few factories that are operating now on a very high level. That means, of course, that the invoicing that we have is on a higher level.

32:02 It probably has a little bit more space to go, but it will require the capacity investments that we're doing towards the end of the year or that are coming online towards the end of the year to see a step change in the invoicing pace. And any color on how that capacity add towards the end of the year expands volumes just in quantums or percentages? No. It depends a little bit how it comes online. If it doesn't ramp up from zero to 100 either. So it is a little bit of a linear ramp up over a period of time. Great. And one last question. Can you just remind us on the payback period or how we should think about the restructuring costs versus OpEx savings on a go forward basis?

32:53 Well, we haven't really spoken about the reorganization costs as a form of a savings or as a form of something that's going to yield a calculable saving space there. We have spoken about the reorganization as an enabler to scaling for growth. It's more about positioning ourselves where we can have a better drop through from every euro of growth that we have on the top line. Understood. Thank you. Thank you. Thank you very much. Thank you for the interest in taking your time. And if we don't speak before, I think the Q3 earnings call in October will be the next time we meet. So thank you very much, and have a good day. Thank you.