Alfa Laval AB (publ)

Tom Erixon - President and Chief Executive Officer Thomas Thuresson - Chief Financial Officer

Max Yates - Credit Suisse Andreas Koski - Deutsche Bank Sven Weier - UBS Deutschland AG Peter Murdoch - Morgan Stanley Glen Liddy - JP Morgan Cazenove Wasi Rizvi - RBC Capital Markets LLC

Thank you. And good afternoon and welcome to the call.

This is our first earnings call in the new operational structure of Alfa-Laval. You have received or have access to the pro-forma statements from last couple of years since some weeks back.

So I hope you feel reasonably comfortable when you follow and try to understand the quarter report and the results as presented. Before going into details, let me make a couple of overall comments on the quarterly report.

First, order intake came in stronger than we expected as you have seen. And it was partly driven by a higher intake of large orders that came into the quarter as opposed to what we had expected.

But it was also a result of a generally better business climate than we have anticipated in the beginning of the year. I would like to highlight though that although the order intake as such was stronger than we expected, we did not see any particularly effects of an improving oil and gas situation in the quarter.

The upstream oil and gas investments were still on a low level. And while the business sentiment in the sector has improved during the year, the potential upside on the oil and gas is not included in the order book in the first quarter.

On the marine side, the business sentiment, demand, ship owners, and to a degree, shipyards has improved also in the year and it has also resulted in upgraded forecast for the number of contracted ships in the market forecast. We sense the market sentiments on the same way.

But you should be aware that the order intake for Alfa-Laval during the first half of this year is reflecting the low level of contracting during the second half of last year. So any possible upside resulting from a better Marine climate is not included in the Q1 numbers.

To a small degree the upside on the environmental products, both PureSOx and ballast water is included in the quarter result. They have improved somewhat on a still a fairly low level.

So they are as we have indicated to you earlier a balancing factor on the overall order intake, which makes the Marine Division go sideways when it comes to the order intake over the last couple of quarters, and in fact, also in our forward-looking guidance for the division. So with those comments, let me go to the specifics.

Year on year, the order intake was up 14%, excluding currency effects an organic growth of 9%. And the margin, although invoicing was relatively weak in the first quarter as expected, stayed firm and ended on the 15.7% level.

The large orders that you have probably seen as we have announced them partly fell on Packinox heat exchanger systems mainly in the petrochemical industry side, three nice and large orders on that side. And on the Marine, we had two, of which one is related to power production, but it's booked within the Marine division.

And then we had a good order for two ships on the PureSOx products amounting to SEK 125 million. So all in all, SEK 585 million in large order, which is in connection with also what we saw in Q4, two straight quarters with fairly strong order book on the large order side.

On orders received, you see Q4, Q1 being relatively similar. We're 1% up in Q1 versus Q4.

They are both just short of SEK 9 billion and both with - looking back at least over the last four quarters, relatively good on the large order side. You should note that Q1 is the first positive book-to-bill quarter since eight quarters back actually.

It's been two years of declining order book, and we were building order book for the first time in a relatively long period in Q1. It was a good quarter from that perspective.

The EBITDA margin development, we saw small strengthening partly backed up by good development in the gross margin. But it's also backed up by early effects of the restructuring program that was announced in the second half of last year.

We saw good effects both sequentially and year-on-year on the sales and admin spending, despite the fact that we are increasing the R&D spend compared to earlier. An overview on the divisions and business units as we organized now, and this is based on the year-on-year comparison.

Basically, we are positive on some areas, flat in all areas except the boilers. And the boiler order intake in Q1 is a straight reflection of a lower contracting at the shipyards compared to one year ago in terms of the resulting order intake there, so that one is in the decrease.

Other than that, generally speaking, it's a positive year-on-year comparison across the board. Food & Water, generally very positive, pumping systems are far more positive, and the brazed heat exchangers, the OEM business that we run continued a very good momentum in the quarter that was ongoing already during most of last year.

Now let's go to division by division, starting with the Energy. And here you see the sequential comparison when it comes to the plus and minuses.

And when you look at the Energy, you should remember that last quarter for Energy was indeed very strong and consequently the benchmark there is a tough one. As I indicated, the brazed business is going very strong.

It's backed by good development among customers such as Cummins, and the Daikins, and a number of other large OEMs. So it's a very stable business.

We are growing with our customer base. Again, Q1 was very strong and continue the good momentum that was building already during last year.

The two units for gasketed plate heat exchangers and separations, that's solid base operating on a good level, but were to a degree affected by all large orders from the previous quarter that didn't repeat itself on the same level, so although a minus, still running on a good level. And then finally the welded heat exchangers, that unit you should now and for the future expect a relatively high volatility because that is very largely dominated by large orders.

So the three orders in Packinox that you saw in the quarter, they obviously all booked within the welded heat exchanger business unit. So those numbers will be up and down.

We still had a good order intake for projects in Q1. So it's not the disappointment, but the larger orders during Q4 were all booked in the Energy segment essentially there.

So again, we are doing a comparison that is relatively tough. So we were pleased with outcome on the Energy side at large.

On the Food & Water, we had a very strong Q4. And we thought those numbers would for several reason be hard to beat in Q1, but in fact we did.

So we were a little bit surprised by the strength in the Food & Water business. We came out good essentially in all areas.

We are marginally weaker on the Food Systems, which are project sales on Food. As you've seen, we did not have any large orders announced but we did have a good inflow of orders between €1 million and €5 million with a good and healthy mix of the Food System developed.

Despite the minus sign, relatively good in the quarter. The one unit you saw performing very well last year was called sanitary in the old organization.

It is now going under the Fluid Handling business unit name. And they had a great development to last year.

We remained on a very strong and high level in Q1. So we are also pleased with the outcome of that.

Decanters and the High Speed developed slightly positive. So from a high level already Q1 was a good quarter for Food & Water.

You can see in the absolute numbers as well. On the Marine division, the market conditions remains difficulty, based on the fact that the contracting level was at all-time low, well, 30 year old low during last year.

And we are in that sense not shifting gears in the marine industry by any means right now. But with that said, the sentiment, the forecast and to some degree also the contracting view in the first four months has increased compared to the extremely low level that was recorded during the last year.

So we do expect, as does the official forecast, a somewhat better development when it comes to contracting volumes during this year. During the quarter, the ship mix has been favorable and we expressed a number of times to you that it's not only a question of number of ships; it's also related to business opportunity in the different segments of the business.

We had a good ship mix situation in Q1 and that was specifically favorable for Framo. And so the order booking for pump systems was very strong indeed.

We did have a positive impact from both SOX primarily, but to a degree also ballast water systems that are still remaining on a low level. And it should be noted that most of the systems that we are selling at this point in time, they are not retrofit; they are new-build.

So we don't see yet the big effects of the retrofit period that we expect. With that said, I'd like to highlight that the market activity and dialogs with customers is significantly higher at this point in time than it was during last year as we expected.

We have indicated to you a somewhat increasing activity level and order level from these units as we go forward in 2017. Service for Marine was good in Q1 and we were on a solid level on the service sale.

Last year, we struggled a little bit with delayed maintenance and some concerns on the service business in Marine, given the financial difficulties for ship-owners during the year. The Q1 broke with that.

Then we had a firm quarter in the Marine service and the highest level since Q1 2016. So that's the divisional reviews.

Let me then go to - let me call it an educational slide. Since we are in a new divisional structure, we just wanted to indicate to you how the service split looks like between the different divisions.

And as you can see for Food & Water and Energy, both are in the region of about 30% share of service relatively similar, and with relatively low capital sales in the Marine Division, we are now at 42% service as of total. We are working with relatively big changes in the service organization with global service organization with harbor based services in Marine, and number of other initiative.

So it is, as we have announced in our strategic plan, high priority for us to continue to build strengthen the service business as part of the total. Then to the Greenhouse, as you know we step rated out units that we felt were difficult to develop within the traditional Alfa-Laval structure, and they were low performing compared to what we had reasons to expect.

And we put them in independent Greenhouse structure as we call it. And they announced separated out, operate on their own, and we are pleased to see that the carve-out process has been completed and we are getting early result from that process.

Compared to approximately minus 10% margin that these units having our own structure, we are now at breakeven in the quarter, it's related to actions taken regarding cost is related to reasonably healthy order intake in Q4 and Q1 despite the changes that we have been doing. And it's also a decrease of allocations from the Alfa-Laval cost structure.

That is all affecting the business performance of the unit. All in all we have a good spirit in these companies and the return of entrepreneurial spirit that these companies need to thrive and develop in a good way.

So a positive development on the Greenhouse initiative was such. Let's go to some geographical comments in the new global organization for sales and services.

And all in all, all our regions were essentially positive with exceptions of South America, which is about 4% of the total order intake of the group. We had a weak quarter in South America both sequentially and year-on-year, it's not necessarily an indication of a very bad business environment in South America for the rest of the year.

But it was to be recognized the weak quarter, you mainly driven by Mexico and some other smaller market. Turning to North America, positive both sequentially and year-on-year.

Canada was positive mainly driven by the Energy sector and the U.S. was positive mainly driven by the Food & Water business.

So compared to a weak beginning of the business last year, we actually had a good start in North America from where we are right now. West Europe had a tremendously strong for us in 2016, and hence you also see a very strong and positive year-on-year numbers, we are little bit down in Western Europe compared to strong Q4 with number of large orders booked in Europe for delivery outside.

And so the comparison is tough, but Western Europe is off to a good start. And the same holds true for Nordic, which had a relatively weak year last year, overall.

But it good and solid year-on-year comparison and a little decline compared to good finish of the year in Q4. And you see - essentially the same situation in Eastern Europe, we were pleased with the development especially in Russia during 2016 and we feel that we are in a good position and on a good track in that market too.

Then finally Asia, and it's very nice to see that after having taken the effects of the Marine sector during 2015 and 2016 with continuous declines in China and certainly in Korea, we are now back on growth track in China and in Asia as a whole. China was positive in all three divisions, including Marine on the back of good orders for pumping systems, and most markets in Asia were positive with some exceptions especially perhaps India after strong quarter four, and the Middle East with relatively low bookings for the Energy sector in the quarter.

So we felt good about the development in Asia. And it may be interesting for you just to take a quick glance on our top ten markets.

And these are the LTM curve, so the differences between now and then, it's not so big in each of the markets, because of the LTM trend characteristics, but you might kept to know this that we are positively in all of those markets, except Japan, which has a small decline. For Korea, which had a big reduction of order booking resulting from the Marine crisis, it's nice to be back on the growth track.

All in all, we are positive to even in all of the other nine markets, so a fairly broad-based good development in most geography with the exception of South America in the quarter. So with that I would like to hand over to Thomas for a more detailed review on the financial side.

Thank you.

Okay. Thank you, Tom.

Good afternoon all of you. So let's go right into it and let me start off with a couple of comments on sales.

You may recall that after quarter four I commented that we believe that it's reasonable to expect lower invoicing in quarter one than that of quarter four, mainly because of a normal seasonal pattern with relatively lower level of revenue recognition in contracts based business in the early part of the year. We realized, as you see from the slide, SEK 8.1 billion in quarter one.

In comparison with quarter four, we were down 17% at constant rates. Compared to last year quarter one, we were down approximately 6%.

We'd like to say that in terms of invoicing, we ended up in line with our own expectations. The lower backlog was somewhat compensated by translation effects, looking at the absolute outcome as reported.

Moving on to service and service revenues, the service activities represented 31.4% of total revenues. This was an increase sequentially, as well as year-on-year, 1.4% and 1.7% respectively.

That of course means we're getting some help from the positive mix effect between capital sales and after sales year on year as well as sequentially. Having said that let me then deliver the first forward-looking statement.

We believe it's reasonable to expect a slightly higher invoicing in quarter two than we just reported for quarter one, largely because of a, let's call it, seasonal pattern and that is despite a smaller backlog. Let's then move on to gross profit margin.

We have reported 37.1%, an increase of 0.1% year on year and 2.8% up sequentially. Then with the last - the quarter four report I set in the near-term, we expect adverse effects from declining load.

We expect continued positive FX transaction effects and positive purchase price variances. The action for gross profit margin or gross profit was influenced by the foreseen parameters in the expected direction.

In addition, we recognized adverse mix effects within capital sales for the Marine and the Energy divisions. So for some further detail, let's move on the next slide.

Year on year, we were suffering adverse effects from a negative mix in capital sales, as well as a weaker load in certain factories, then we're talking particularly certain marine related factories. We had the positive purchasing variances and, of course, the FX, transaction FX supported the margin as well.

Purchasing variances were those somewhat smaller than anticipated following the development of the price for certain methods. Sequentially, we enjoyed a positive overall mix effect, different to the year on year development.

Now, then the second forward-looking statements, in the near-term we expect adverse effects from mix within capital sales. So they are to continue.

Load will decline only in a few factories. We expect continued positive FX transaction effects and positive purchase price variances.

Let's then look a bit at the overhead costs. For R&D, we ended at SEK 197 million in the quarter, an increase year-on-year, like-for-like of 3.8%, and this then represented 2.4% of revenues a slight increase from last year.

And this increase is really to be attributed to further supporting focused efforts in certain product groups. Moving on to sales and admin combined, we ended with SEK 1.45 billion of sales and admin costs in the quarter.

This was a reduction like-for-like, year-on-year of 2.6%. This reduction is explained by savings of course including employee reduction somewhat countered by salary inflation.

This is really evidence that the savings program has been implemented to a very large degree, when it comes to the sales and admin part. As for profit before tax, we ended at SEK 1.27 billion, an increase where slightly lower EBIT was more than compensated by a significantly better financial, and that of course coming from FX differences to a large extent again unrealized FX differences.

Before leaving the P&L, let me then also point out that we had a tax charge of SEK 492 million a high level, and this is explained by a non-recurring item, a negative SEK 113 million coming from a settlement on taxes with the earlier owners of Framo. We maintain the underlying guidance of 28%.

EBITDA [ph] somewhat lower for lowering [ph] the tax charges at SEK 1.84 compared to last year SEK 2.06. Finally, return on capital employed, return on equity of course we influenced by the quarter three and quarter four one-off charges ending at 15% plus and 11% plus.

If I allow myself to exclude the one-off charges from the return on capital employed number, we would have reported 17% plus. Let's then take a somewhat deeper look into the effects of the reorganization and the capacity adjustment program.

Let's start with the employee impact, our baseline for this program was end of June last year, we have totally reduced headcount with 754 FTEs in these nine months, some 475 of these are attributed to the reorganization and capacity adjustment program connected to one-off charges. The balance is to do with regular ongoing adjustments particularly in the supply chain in the operations area.

Looking at the distribution of the 475, the bulk of course has to do with the overhead 375 and the balance 100 to do with the cost of goods area. As for savings, we have realized some SEK 60 million on the overhead side, and near SEK 1 million on the cost of goods side really primarily to do with the closure of an air assembly shop in China.

We do maintain and I think this is important, we do maintain the targets we announced initially for the full effects of the program, a reduction of 1000 FTEs, and savings of SEK 500 million, where we expect to savings to reach a level of say 75%, SEK 500 million by the end of 2017, and be fully implemented by the end of 2018, so full effect in the P&L in 2019. With then moving on to divisional performance.

Before getting into the details, I think it's essential to remind you that we're comparing with pro forma numbers. When it comes to order sales in gross profit, there's hardly any element of allocation whatsoever, but of course when it comes to overheads, there are elements of allocations in the pro forma numbers.

Having said all that, Energy came out lower than last year due to somewhat lower sales volume and negative mix in capital sales. Marine ended lower then mainly due to lower volume, but also again, a negative mix in capital sales and the lower load in a couple of factories, and then supported by FX, very much to do with U.S.

dollar against Norwegian krone. Finally, Food & Water came out better than last year, really explained by higher sales volumes.

Cash flow to continue, cash flow from operations, SEK 0.8 billion, a reduction of roughly SEK 100 million compared to last year, explained by lower profits and higher taxes paid, somewhat compensated by a better working capital development. Regular CapEx somewhat higher than last year.

Cash flows were not as you have seen, you may have seen, not influenced by any outflows related to two acquisitions, nor inflows from any divestments. Financial net pay was only a negative SEK 3 million.

So all in all, a free cash flow of SEK 7 billion compared to just under SEK 0.8 billion a year ago. This cash flow has brought us to a debt to EBITDA of 1.70, compared to 1.81 at the end of last year.

And, of course, a continued deleveraging as a result. FX in the quarter, positive SEK 75 million.

As we expected we have made an update for the full year to SEK 280 million, really tiny increase from the previous SEK 275 million. Main contributing factors to the outcome is of course the continued strength of the U.S.

dollar and realization of hedges in place. Then the order backlog as per end of March, SEK 18.1 billion, about 6.1 months of LTM sales, an increase of course compared to quarter four following the book to bill of 1.08 as Tom mentioned earlier.

For shipments, this year a backlog of SEK 12 billion, SEK 0.9 billion less than a year ago. With that, and I think that's important SEK 0.9 billion lower, with that let's take a look at the sales bridge.

The known parameters, 35.6 of sales last year, backlog like for like was 2.7 down at the beginning of the year. And the FX translation effect that we expect has been up a couple hundred million to SEK 0.8 billion.

So we have a new subtotal of what we call known parameters of SEK 33.7 billion. Then, of course, you have to make up your minds about in-for-out orders as well as prices.

When it comes to in-for-out orders, what will happen to demand for fast moving parts compared to last year for prices. As commented earlier, we've made small adjustments to standard products at the beginning of the year.

And following price increases on certain methods, we made some selective adjustments to prices during the course of the quarter as well. With that, the word back to Tom for outlook and closing comments.

Thank you, Thomas. So let's go straight to the outlook then.

You should see the outlook from the perspective that we had. A relatively good Q1, ahead of our expectations when it came to order and our outlook for the second one is to be in line or somewhat lower than quarter one.

And on the divisional level, as indicated to you earlier, on the Marine division, we expect demand to be unchanged compared to the first quarter. On the Energy division, subject to large orders and how they will fall, our expectations is that demand will be unchanged or somewhat lower.

And the Food & Water division, as indicated to you running on a very strong level with significant growth in Q4 and Q1, we expect demand to be somewhat lower in the second quarter. And that's our outlook comments.

And with that, I leave the word open for questions. Thank you very much.

Thank you. Just the first question I have be around sort of oil and gas end-markets.

You mentioned just a little bit about upstream markets. Could you maybe talk a little bit about the conversations and quotation activity that you're seeing in mid and downstream markets, given obviously that's the sort of probably the larger part of your exposure within oil and gas?

Yes, thank you. And it is the one area, which has been obviously the weak one in the downturn of the oil and gas side.

On the petrochem and ref [ph] side the order activity, also as you have seen on the large order has been reasonable in Q1 and also in Q4. We've said for some time that we are ready to handle uptick the day when it comes.

We also indicated in Q4 that that was the quarter where we generally saw a small sign of improved business activity and also orders in essentially all parts of the upstream business service as well less as CapEx. But our feeling then and our feeling now is that it will still take some time before we see any meaningful effect on the order books for us.

And I think that hasn't changed in the quarter. What has changed a little bit is that the activity level and market sentiment is more positive than it was.

So there are investment projects in the markets. There are some dialogs now that wasn't there six months ago.

So it's reasonable to expect the somewhat return market in the upstream as the year go forward. But we do not have any big short-term expectations for a big change in the order intake, at least not as long as we are looking at the Q2 numbers.

I think that's as far as we can go in our comments. We feel better, but it's not going to hit us significantly in Q2.

Yes, just - I mean, the second question would just be on the Energy margin that you've put in for this quarter. Just when you look at the mix of your backlog, and obviously, you have some visibility of what you're going to be delivering within this division within capital equipment, is the mix of what's likely to be delivered over the next few quarters very different to what we saw in Q1 or does it look broadly similar when you look at your backlog?

We don't give a forecast on how margin develops. But I would say this, the effects on the Energy side is not the structural change in the business or [priced to duration] [ph] or anything like that.

It was the mix of the capital sales and the service mix that we had in the quarter. And that was that, and that may change in both directions going forward.

We'll keep you in the dark on that. But it is - if we were on a significant trend slope, I think we would have given you that indication.

Okay. And just - so the final one is sort of more housekeeping.

Just in terms of your - the other operations and other line, and obviously sort of sales compared to what I think most people expected. Is that a function of basically some of those costs have been internalized within the divisions and we should think about, I think it was 60 in the quarter being a decent run rate going forward or should we expect that to sort of go back up to the more normalized levels?

Some of it is today, with what you mention, it is part of the selling divisions. Some of it is to do with that - we have less of projects ongoing that we, say, pay for in the other division, as we have the change program running.

Okay. So, I mean, what would you expect to sort of quarterly run rate to be of the other operations?

We are not providing any forecasts as far as results or margins are concerned for the individual divisions.

Not even for the cost line?

No.

No? Okay.

Thank you.

Thank you. Hi, Thomas.

Hi, Tom. Firstly, on Marine and Diesel Division, and Frank Mohn, you mentioned during the call that you had a stronger order intake in Frank Mohn.

Could you think this was related to the chemical and product tankers orders that came in January or do you think that is yet to come in the second quarter? And then secondly on Frank Mohn, what was the book-to-bill for Frank Mohn?

Yes, we don't do individual - we have on the Frank Mohn, I think immediately after the acquisitions have been special, so we have full transparency. And now it runs as an operating side.

So I don't think, Thomas, we want to go into book-to-bill on the Frank Mohn specifically. But on the question of the contracting cycle, I couldn't give you a clear - I would not expect that we'd seen a lot of effects on the contracting levels.

And you've seen and I see, we all have seen I think the number of chemical tankers that have been contracted. I think that number is 38 up until end April, which is a better number than the past.

I don't think those ships have been up for - into our order book at this point in time.

Okay. May I ask the book-to-bill question in another way, so is it fair to still expect Frank Mohn revenues to come down throughout the year, which you have talked about, yes, in previous quarters?

With the state of the backlog today, yes, we still anticipate that revenues for the pumping business unit will come down compared to last year, yes.

And then, secondly, may I ask on large orders, what kind of expectations you have for large orders in the second quarter?

They are built into the overall outlook and the qualifications by division as you got just before.

Yes, yes, I understand that. But for the…

And you would see them when they come.

For us to know what you expect, because for the first quarter you said that you had an expectation of fewer large orders. Is that also the same for the second quarter now, or…?

Well, we recognize that at SEK 585 million, that was relatively high number if you look at it over a period of time. So it would be maybe a little bit of surprise, if we would reach that number again.

Okay.

So we certainly had a better outcome than we anticipated by a long way in quarter one.

And I guess you were also surprised by the performance in Greenhouse, because I think you had a target to be back at the reasonable margin level by the end of 2018 or in 2019. Now, you are already at breakeven in the first quarter of 2017.

And the performance seems to be related to volumes and cost savings, demand has continued to improve throughout the quarter. So for me by reading the report, it sounds like we now should expect Greenhouse to be closer to breakeven for 2017 and then maybe be back at a reasonable margin level already by the beginning of 2018 or am I wrong there?

That's you're right, Andreas.

Yes, okay.

But it was - when you carve something out and you put it on, obviously, we have some volatility. You may see some oscillation on the results on the Greenhouse.

But it was a very - I think I would say this, when you signal to customers and employees that things are moving over in a different box and all of that, we obviously were wary and concerned that we may see the lost confidence or something like that that may affect independent of business technicalities, some negative effect, that we have not seen. I would say, if anything, maybe we've seen a boost of morale and the good spirit, and in some areas, business ownership which is a little bit beyond our expectations.

So that part of it, I think is reassuring for us. There is still some business to be handled.

Our action programs are absolutely on track. And we know what to do this year so, it was a good start for us.

But it was nothing extraordinary, the supported EBIT in the quarter for Greenhouse?

No. There is no one-off things, it's came out good, and - the Q1 doesn't give you reason to think that is going to explode upwards or downwards as such, it was a good step forward.

Okay. May I then lastly on your increased efforts in R&D.

You're saying in your comment on that. You have to renew important product groups faster.

Can you explain a little bit, what kind of products group you have renew, and is it because you have lost market share that you have feel that you need to renew them or why is this very important for you?

Well, of course, we're looking at the project proposals in the various product groups, and based on that of course we prioritize, and with the change of structure we will also be more firm, we will be more strict in prioritizing sort of allocate less evenly between the different technologies be harder in making a choice on a total level not by product group. So I think is more reflection that we're going to prioritize more on a total level.

Okay.

All in all, I mean, there is very good investment proposals on the table, and they've been a little bit too slow, in my opinion, if it's - so I see it more as an opportunity, then dealing with a big threat. We are both in the high-speed separation and in gasketed plate heat exchanger as a point in time, when we know what to do we basically have the plans in the drawer, so we have accelerated them in both of those two very important product areas.

The one thing that we have communicated to you earlier is that in connection with the restructuring in operations that fit very well together with our new product program for gasketed plate heat exchangers, because just the tooling up for new press tools. When the new product generation comes, would be extremely expensive in the old structure, so we took the opportunity to redo the production structure.

At the same time as we are facing in then, and new product program starting probably beginning next year or something like that and then over a period of time. So I think we've got a good way forward on the products, and the same is true for high speed where it will be a multi-year program of changing sizes one after the others, so we are rolling through these programs over the number of year, so there's no magic date for when the big splash is going to happen, it's going to be a sequential introduction of the new platforms over three, four years.

So that's how it looks, it's going to give us a better cost picture on the products we have, and this is going to give a better product performance for the same product equivalent as we have. So we will be more competitive gradually over the next four years.

But do you feel that you're lagging competition, right now?

I wouldn't change job to work for any of competitors in order to get better products that's for sure.

Thank you.

Yes, good afternoon. Thanks for taking my question.

Three questions, please. First one, I was just wondering if you could comment on the in-for-out orders in Q1, whether they were developing more strongly than the overall orders are weaker than that?

And second question is on Marine services that flow was quite confident that offshore margin services would be improving towards the second half. If I understood you correctly your orders and service haven't been or your sales and service haven't been so weak in the first place.

Anyhow, so maybe any color you can give us on that? And then last question is, you gave the granularity again in the appendix of the presentation, 36% from the orders from the yacht in Marine.

I was just wondering if you could give us some direction how much of that is really with the traditional merchant, and how much is outside of that segment? Thank you very much.

If we - Hi, Sven. If we start with the development of in-for-out, we had for service a sideways development.

If we look at fluid handling, a slight decline from a very strong quarter four. And Marine Services, which was somewhat up as Tom commented on initially, so no major shift sequentially from quarter four.

And year-on-year?

Again, no major change, remember we had a declining development for Marine from the beginning of 2016, and continuing during the course of 2016. And we had an improvement on fluid handling, so the net of the two is no significant change.

Okay.

You had two more questions, you had Marine services as well, right. Where, I mean, Tom commented earlier that Marine service is up sequentially, which is of course a nice to see, because it was going slightly south during the course of 2016.

And then the final question, can you repeat that one, Sven, on this one, Marine, this one.

Hello?

Yes. Can you repeat the last question please, Sven?

Yes, I think on Page [ph] 31 you gave the breakdown of the Marine orders, then 36% was on the yacht. And I was just wondering, if you could quantify how much out of that is the traditional merchant, and how much outside of traditional merchant?

From the top of my head at least back on really give you a solid number, remember we had a good level in quarter four for crews, and of course that has gone down as a relative share. So that means compared to end of quarter four there is on an LTM basis, an increased share of merchant.

That's a fair comment, I think.

Okay, thank you.

Hello, and thank you for taking my questions. Just to get your view on, how do you see that competitive landscape, and maybe focusing mostly on the heat exchanger business?

We have seen one of your major competitors kind of having shut down two plants in the last 12 months, one in Germany, and more recently one in Pennsylvania. So how do you see the supply demand in this particular segment and how do you see the competitive pressure.

Do you see yourself taking market share or losing market share towards the larger competitors like [Currently in the Ramo] [ph] and toward the smaller competitors?

Yes, it's a good question, I'm a little bit - I'm sure on how far I can go on my comments. I would say like that [Kal the former gas] [ph], is a traditional competitor to us in the heat exchanger market as well as in the gas structure and some other areas.

You can say, we've been growing up together over a long period of time, and so the competitive dynamics with us, I think is fairly established and it hasn't remarkably shifted since the change of ownership. So I don't see a very strong dynamic in that sense, looking at the quarter or looking at the last year.

Whether they will become a more efficient and stronger competitor in the future as a result of the actions they are taken or whether they will create some challenges for themselves that's obviously to be seen. But - for us for me I expect them to get strong and we will have tough competition from them, and others in the future as well.

I think the one area, if we look at the gasketed plate heat exchanger area specifically. I think it's been more a challenge of the low cost competition in easier and low tech applications and partly in the residential markets, where maybe we've been finding a challenge to find a model where we actually can make a decent return on the sales we're having, so I think it's fair to say that we've been decreasing our business volumes there, as a result of competition of voluntarily based on the way we look at their pricing in value add, and so that has maybe affected us over the last two years to a degree with a lower cost competition.

But, then if you look at other areas of our heat exchangers business you've seen the strong orders in Packinox, where we have a very unique product technology. We're not affected by competitive pressures in that way, in that business, and it's true in some of the other high-tech businesses for us.

The one area, where I would say clearly we are gaining market share is in the brazed heat exchangers and our OEM business it's been performing strong. We built it over five years in a very efficient way and have very strong momentum.

So I would say looking at the Energy and heat exchangers assortment as a whole, you have some pluses and some negatives, we are really trying to grow where we'd make money.

Okay. I understood.

And looking at some smaller competitors with heat exchangers segment seems to have been fairly challenged both in terms of volumes and margins for the last two years. Have you seen this causing some smaller competitors maybe local competitors shutting down and going out of the market?

Unfortunately, it's difficult to people stay too long in business as without making any money, unfortunately that is - it is true in this area. I mean for, I would say, it is only again when we talk about heat exchangers to some degree in tube and shell, where we see low-tech competitors, and to some degree we're moving out of some of those areas within the Greenhouse structure that we just don't find attractive enough unless we have a strong technology component as we do in the Packinox or in that type of context.

So that we found our way, I think otherwise we don't see low small competition, and low cost competitive other than in the gasketed plate heat exchangers, because it is feasible to actually press a plate and put a gasket on top of it. So there we do have the situation.

Most of the small guys are Asian, and I wouldn't say that that has changed dramatically in the short-term. And I think for us - again, I think our response is more than trying to stick it out the table [ph] price.

We're trying to focus our future growth opportunities in areas, which require application expertise and know-how, and a global service structure as opposed to winning every building project in China.

Okay, this is clear. And my second and last question is about - again about the profitability, and I understand that you don't give guidance regarding the better [ph] profitability.

But we have experienced very strong growth in the commodity prices, but in the metal prices. And these are the raw materials going into your product.

Have you seen or should we expect any impact on the margin either positive or negative from this movement?

With the comments, I made earlier, I said that we have had less of purchase price variance is positive than anticipated coming from what you just said, I also mentioned that we've made certain adjustments to prices during the course of the quarter. And the net of that, then I would like to go back to comments from the earlier metal price hike.

We are convinced as we do have the pricing power to compensate ourselves for movements in metal prices.

Okay. Thank you very much.

Hi, Tom. Hi, Thomas.

Just a quick question for me, and it concerns Marine. Could you talk a little bit about the difference in profitability for each division in Marine, so Framo versus the traditional boiler business and then environmental?

It just because each one is growing at different rates, now what I'm trying to understand is the mix in the orders today, are they improving versus the mix that you had basically six to 12 months ago?

We have made one specific comment already with the divisional development for quarter one. And that is a negative mix effect within capital sales in Marine, and this is explained by less pumping systems revenues.

So pumping systems is above average. And then secondly, as far as the environmental products are concerned, if we look at the gross profit margins of these products, they are similar with the average of capital equipment on, say, traditional Alfa-Laval products.

But what you must remember is that, we are sharing half of the bottom line of ballast water systems with our JV partner. So as far as the net operating margin is concerned, there is an adverse effect from ballast water increases.

That is as far as we go in the specifics.

Got it. But just on orders though for the quarter, because Framo was increased year on year, now, is it just the orders with perhaps higher profitability-wise?

Yes, I think.

[It'd be, I'd say, lower ship mix] [ph], yes.

We hear your question, but you got to be happy with the answer.

Okay. Okay.

Thank you. Thank you, guys.

Good afternoon. In the Marine business, you've highlighted that the cruise was weak.

Is that just because customers are delaying or the shipyards are delaying placing the orders with you because they are very busy at 2021?

Well, I did say it was weaker than a very strong quarter four. And that of course is not considering the exhaust gas cleaning order.

But for the rest, we had a very, very strong quarter four. And there is less that came in, in quarter one.

It's still on a good level being a cruise as part of the total.

Okay. And on ballast water, I mean, there are lots of different technologies available today.

Do you have type approval from the U.S. Coast Guard for all the product types that you wish to have in your portfolio?

We have one technological solution. And we have today approval for two out of four sizes.

And the other two sizes there we have provided documentation. And it is in the process, and what was anticipated to get approval for the remaining two sizes in the future, not too distant future.

Okay. But you're not expecting to launch any new technology solutions, the same technology but just different sizes?

We have them launched, but they simply don't have U.S. Coast guard approval.

We are not into launching any new technology. Let me remind you that we are now selling the third generation of our ballast water solutions.

So as far as cost performance is concerned, we have come a long way since the first launch.

Okay. And just a final question, on your standard products, you said you had small price increases earlier this year.

And just to be clear, that's fully offset any rise in your input costs, is that correct?

That is absolutely what we are looking at, yes.

Okay. Thank you very much.

Hi, good afternoon, gentlemen. Just a couple for me.

Well, I was hoping for just a bit more understanding on Food & Water. I mean, you had orders up 17% year on year.

And I can't see - and none of them were large orders as the way you report them. And so I'm just interested in some commentary on what's going on there, whether you think that's the underlying level of demand or whether there is some pent up demand in pharma and bio?

And then just from a - the second question was on the environmental side. You said that the conversations with customers are increasing on retrofit.

And what do you think is the trigger to get those to turn into orders, moving on for conversations?

Well, let's start with Food & Water then. Large orders in food tends to be either VOT or brewery.

The VOT side, vegetable oil side, were during a period of time or was during a period of time, I will say overinvested. So there's been lot of capacity in that area.

It's been creating some problems for customers in various areas. At some point in time that's probably going to level out and change.

And there are some dialogues on larger VOT projects right now. When they will come, we will see.

But that's an explanation for why there have been an absence of large orders in 2016, largely on the VOT. The brewery orders about €5 million, they are always relatively rare.

The majority of the brewery orders are below €5 million, so you don't see it. We do.

And the brewery side, particularly on microbrewery, has been very active and good for us over a period of time. So that part is moving forward well.

There are occasional large orders for brewery that we announced, but I wouldn't say there's been a trend shift there. They come and go, and then - but they're not so frequent.

So that's about how we've seen the food side and perhaps a word on our expectations on how that will develop as well. In terms on the conversations on the retrofit, it is not - the key in those areas are, it's not our ability to hold a smart conversation with the ship owners, it is about when they go dry-dock.

And since this legislation is coming into place, now those dry-dock visits are coming. So at this point in time, we will only announce.

You will only see those orders as they materialize and as we recognize them when down payment is paid by customers. And that will be in relationship to their business to dry-dock.

And consequently, we don't expect to have had a lot of order intake for retrofits in Q1 as we said and we don't expect a huge amount in Q2 either. But it's very natural that the ship-owners are getting ready for these programs.

Particularly, if you run 500, 600 ships around the world, you have an ongoing stream. We will most - as things stands we will not announce any frame agreements.

We don't consider them orders, and at this point, we don't. So in that sense, don't expect a lot of announcements around this.

You will see it in the order book as it happens. And we will guide you as to whether we see any changes.

But the direction of the market in both areas is pointing in a positive direction, as we should expect. And we see some signs in the order book in Q1.

Great. I'm sorry.

And just going back to the Food & Water side, so it sounds like there is nothing lumpy in there, so that 17% year-on-year order growth is that reflecting just the underlying strength of the business at the moment?

I think so. It's been strong.

We've seen the strong development across the board in pharma, in biotech, in food. And to some degree, also positive development on the water-side.

So it's been - it was most clear for you last year in the way the sanitary components grew. But in fact, it's been positive also in other parts of the business.

We had a good run when it comes to orders, below 5 million, but about €0.5 million, that sort of we look upon from a management accounts perspective. And we have, as Tom commented, seen VOT coming back.

It seems like some of overcapacity has been absorbed already.

Great. Thank you.

All right. Thank you.

So with that I think we've come - we need to come to a close. We have an AGM to take care of.

So we like to thank you very much for participating in the call and thank you for your questions.