Alfa Laval AB

STO:ALFA

Earnings Call Analysis

Alfa Laval Reports Strong Q2 Performance with Record Orders

Alfa Laval delivered a strong Q2 with a 10.4% revenue increase, reaching SEK 17.5 billion. Order intake hit a record SEK 18.9 billion, with robust demand in Marine and Energy divisions. The operating income margin improved to 15.6%, boosting earnings per share by 12%. Cash flow from operations nearly doubled to SEK 2.6 billion. The company forecasts Q3 demand to slightly decline but remains confident in strong project pipelines, particularly in the Energy division. Capital expenditure is expected to be between SEK 2 billion and SEK 2.5 billion for the year, with a focus on maintaining and expanding capacity.

Introduction and Overview

Alfa Laval's second-quarter earnings call highlighted a strong start to 2024 with record demand and order intake, reaching an all-time high order book of SEK 50 billion. This growth was driven by robust project execution and solid invoicing levels, resulting in positive financial KPIs, strong cash flow, and a return on capital employed of 22%.

Energy Division

The Energy division experienced good demand, although the HVAC segment remained weak. Despite this, margins held up well due to short-term cost adjustments and long-term structural improvements. The third quarter is expected to be the low point for brazed heat exchangers, which are heavily exposed to the European heat pump market. From the fourth quarter onwards, demand is expected to be driven by other applications such as data centers.

Food & Water Division

The Food & Water division saw market conditions develop as expected, with lower order intake in part of the product portfolio but a strong improvement in the transactional business. In particular, the market in China showed significant transactional improvement. Invoicing also improved significantly compared to the first quarter of 2024.

Marine Division

The Marine division recorded strong growth, particularly in the tanker segment, driven by environmental portfolio requirements. This segment now accounts for approximately SEK 4 billion annually or about 20% of the division's total order intake. Additionally, the division's margin pressure from last year has been resolved.

Service Segment

Service has been a strong growth area for the last few years. Although there was a slight trend shift in the second half of 2023, the first half of 2024 showed good sequential growth, particularly in the Marine and Energy divisions. The underlying growth momentum in the Service remains solid.

Regional Performance

Northeast Asia, including China, was particularly strong, supported by high Marine demand. Southeast Asia was stable despite a decline in large HVO projects. Europe saw variations due to normal fluctuations in large orders. North America showed a slight decline after a long period of strong demand, while Latin America continued its positive growth trend.

Financial Highlights

The second-quarter financial highlights included record-breaking order intake of SEK 18.9 billion, equivalent to 3.5% organic growth, lifting the first half's order intake to SEK 37.2 billion. Revenues grew by 10.4%, reaching SEK 17.5 billion, with an adjusted EBITA margin of 16.7%. Cash flow from operating activities doubled compared to the previous year.

Debt and Cash Flow

Debt levels decreased significantly by SEK 4.7 billion compared to the previous year, settling at SEK 11.7 billion. Free cash flow for the second quarter was SEK 1.9 billion, well above the previous year's level. Capital expenditure is expected to be in the range of SEK 2 billion to 2.5 billion for the year.

Outlook for Q3

For the third quarter, demand is expected to be somewhat lower compared to the second quarter, although not significantly. The Energy division is expected to see higher demand, while the Food & Water and Marine divisions are expected to see slightly lower demand. Overall, the outlook remains strong with a solid project pipeline and high contracting levels in the Marine sector.

Earnings Call Transcript 2024-Q2

[Tom Erixon, executive]

Good morning, and welcome to Alfa Laval's Second Quarter Earnings Call. Fredrik and myself will run through the quarter with some details, and then we open up for Q&A as always.

So let me start with a couple of introductory comments. 2024 started well with solid demand and a record order intake for the same quarter and also for the first half of 2024 as a whole. The order book now stands at SEK 50 billion, also a new all-time high. We expect markets to remain on a similar level in Q3 sequentially, although order intake is expected to be somewhat lower.

In all, we had a clean quarter in a stable operating environment with solid project execution and a good invoicing level as a result. In fact, all financial KPIs moved in a positive direction, including a strong cash flow and a return on capital employed of 22%. The balance sheet matters, and it is now in a very good shape.

So with that, let me go to the divisional review. The Energy division, to start, had good demand with the exception of the HVAC segment that continued to be weak in the quarter. Otherwise, demand was firm across almost all end markets.

The order intake decreased sequentially and year-on-year was more than accounted for by the HVAC/heat pump market, whereas the rest remained slightly positive sequentially. Margins held up well despite the low utilization level in parts of the portfolio due to a combination of short-term cost adjustments and longer-term structural improvements in part of the product portfolio.

Looking forward, we expect the third quarter to be the bottom cycle for the brazed heat exchanges, with a significant exposure to the European heat pump market. Volumes in Q3 are expected to remain low and the low utilization during the summer months may affect Energy division's margin somewhat in the quarter. From Q4 onwards, the trend in the brazed heat exchange area is expected to turn positive, irrespective of the heat pump market, with other applications, including data centers, driving the demand going forward.

So moving on to the Food & Water division. Market conditions developed as expected with a lower order intake in part of the product portfolio and the continued improvement in the transactional part of the business. The transactional improvement that started already in China in Q4 2023 is now stronger and geographically more broad based.

The growth with our channel partners was solid in the quarter, with the exception of a weaker business climate in the U.S. specifically. Invoicing recovered after a lag in the first quarter 2024, and as a result, both the operating margin and EBITA improved to a good level, especially given the high share of project invoicing in the quarter.

Then on to the Marine division. Ship contracting at the yards remained very strong, especially in the tanker segment. The growth in the second quarter was obviously mainly driven by the headwinds -- sorry, the tailwinds in the contracting market, but also to some degree by the environmental portfolio, adding to a higher sales potential per ship.

In all, the environmental portfolio accounts for approximately SEK 4 billion on a yearly basis and 12 months rolling, or about 20% of the total order intake for the division. The margin pressure during the last year is now fully behind us, as indicated already in the Q1 earnings call. The order book looks solid for 2024 and for 2025 at this point.

Then a couple of comments on Service. Service has been on a strong growth path for the last few years. But during the second half 2023, it looked a little bit like a small trend shift. In the first half of 2024, however, we are back to good growth numbers sequentially and about flat in Q2 versus a very strong Q2 2023. Both the Marine division and Energy division continue to grow sequentially and year-on-year, whereas Food & Water division decreased somewhat. Looking forward, the underlying growth momentum in Service remains in place.

Then finally, a couple of comments on the regional situation. Northeast Asia was strong, including China. China is now at an all-time high level on a rolling 12 months basis. The region is obviously supported by a strong Marine demand.

Southeast Asia was overall okay, but some large HVO projects last year resulted in an order decline year-on-year, but otherwise, market conditions were okay. India was slow in the beginning of the second quarter due to the election. Otherwise, the region, including Middle East, was stable.

Europe had both some positive and negative variations in South and Northern Europe, but it was mainly driven by normal fluctuations in large order bookings. And then finally, North America was weaker after a long period of strong demand, whereas Latin America continued on a positive growth trend.

And that sums up my comments on the quarter, and I hand over to Fredrik for some further financial details.

[Fredrik Ekstrom, executive]

Thank you, Tom. So good morning, everyone. Let us get started with a summary of the main financial highlights for quarter 2, starting with an order intake that was record breaking at SEK 18.9 billion or equivalent to 3.5% organic growth, lifting the order intake for the first half of the year to SEK 37.2 billion, equivalent to 1.1% growth. Service accounted for 27% of the order intake.

Energy division order intake continues to be burdened by the market demand in HVAC in general, with particular weight from heat pumps. Food & Water grew across most of the business units with an expected contraction of HVO volumes coming down or rather normalizing from high demand levels. Marine order intake was strong across most end markets, and it was another strong quarter with a good margin contribution to backlog.

Backlog continued to grow with a book-to-bill of 1.08, reaching a record level of SEK 50 billion, which divides equally into deliveries in 2024 and 2025 or later. This represents a growth of backlog of 10% and corresponds to about 9 months' worth of revenue on an LTM basis, where our evaluation is that the backlog is well in sync with current commodity and input prices.

Revenues in the quarter grew with 10.4%, with an organic contribution of 11.2%, reaching SEK 17.5 billion. The mix is tilted towards project business, and Service represents 20% -- 29% of the total. The current delivery capacity, current throughput of supply chains and the current backlog support a continued good revenue recognition level for the remainder of the year. In line with the quarter, the first half of the year has been strong with a revenue growth of 8%, sales to an accumulated level of SEK 32.4 billion.

The gross profit ratio improves with 1% to a level of 33.4%, driven by good factory and engineering results and good profitability yields from invoice projects. S&A increases with 11% in the quarter, of which about half is initiative-driven and half is inflation-driven. R&D costs decreased with 1% in the quarter, which is related to more -- is related more to cost phasing than a reflection of activity levels. Operating income margin improves with 2.2% to 15.6% compared to the same quarter last year, which after tax yields and earnings per share increase of 12% in the quarter to SEK 4.08 per share and SEK 8.15 for the first part of the year.

Quarter 2 yielded an adjusted EBITA margin of 16.7% or SEK 2.9 billion in money terms. Organic impact was accretive with 1.7%, boosted by increased revenues and good capacity utilization. Currency and structure have negligible impact in the quarter. Energy division posted an adjusted EBITA ratio of 19.1%, which is a normalization in line with what we have indicated before from the elevated levels of last year. Food & Water division posted an adjusted EBITA ratio of 15.3%, which compares favorably to quarter 2 last year, with increasing levels of invoicing. Finally, the Marine division posted an adjusted EBITA ratio of 18.4%, in line with restructuring programs, a healthy backlog, capacity utilization and a backlog in line with input costs.

Cash flow from operating activities just about doubled in comparison to quarter 2 last year to SEK 2.6 billion. Capital expenditure continues in line with guidance and accumulates to SEK 1.5 billion after the first 6 months of the year. Free cash flow in quarter 2 at SEK 1.9 billion, well above quarter 2 last year.

Some substantial movements in finance activities with the payment of dividends to shareholders of SEK 3.1 billion, maturity of a bond of EUR 300 million, of which the latter was refinanced with only SEK 1.6 billion in newly issued commercial papers that we expect to repay during the year. More on debt position in the next slide.

Debt decreases with SEK 4.7 billion from quarter 2 last year to a level of SEK 11.7 billion, where net SEK 1.7 billion was not refinanced in the quarter. As a consequence of the latter, cash and cash equivalents decreased compared to quarter 1, remain on a healthy optional level of SEK 4 billion. Average funding rate continues to increase, both compared to last year, but also sequentially to 2.4%. Current net debt ratio, excluding leases, closes quarter 2 at 0.62, which is half the same amount of quarter 2 last year.

And to finalize the financial summary of quarter 2, some guidance going forward. CapEx for the year is expected to land in the range of SEK 2 billion to SEK 2.5 billion. Currency is expected to have a positive impact on the result based current FX levels. Amortization of PPA is expected to be on the level of SEK 700 million. And finally, we expect average tax rate for the group to be in the interval of 24% to 26%.

With that, I hand over to Tom for an outlook on quarter 3.

[Tom Erixon, executive]

Thank you, Fredrik. And as you see, we expect demand to be somewhat lower compared to where we were in the second quarter. I remind you that we're coming out of a new record level. So we don't really see any major shift in the market moving into Q3. Specifically, on a divisional level, we expect demand in the Energy division to be higher, we expect the Food & Water to be somewhat lower and we expect demand in the Marine division to be somewhat lower.

So that's how we see the trend. In terms of market expectations, the contracting market in the shipping sector is expected to remain high throughout the second half of the year, as you can see on Clarkson data and other publicly available sources. And we also have a very strong project pipeline on the Energy division side for the second half. So all in all, a pretty solid base for how we go forward and an expected Q3 that will be, compared to last year and in general, quite positive.

So with that, we hand over to questions.

[Operator]

[Operator Instructions] The first question comes from the line of Sebastian Kuenne with RBC.

[Sebastian Kuenne, analyst]

I have two questions. My first is on Marine. I was wondering that if the strong demand that you see is driven by preordering from the shipping sector, where you have basically fairly long lead times and that basically clients try to secure the slots at the shipyards, and therefore, those big orders may not immediately turn into revenue. So I was wondering if the lead times here are expanding, maybe you can comment a little bit on that.

[Tom Erixon, executive]

Yes. We don't feel it's a speculative preordering on our behalf but it's absolutely correct that the lead times for ship deliveries is increasing. And consequently, the length of our order book is decreasing. So we are now putting orders into 2026 on the Marine side specifically.

There have been -- on the contrary, I would say, there's been some swapping of slots in the short term. So we also rushed in a couple of short-term orders during this year, which is not normally the sequence we do in those areas. So I think all in all, we have a fair representation of what the market demand is. And we are building the order book going forward.

I think yard capacity is fully utilized this year, next year. We do see some yard expansions at this point in time. So we will see where the current capacity of about 2,000 ships per year goes, but it may go slightly north in the coming few years. And as I said, we don't expect a trend shift on the demand side in third quarter.

[Sebastian Kuenne, analyst]

Very good. And my second question is on Energy and HVAC in particular. You have now a chart in there showing that HVAC and refrigeration is minus 31% year-to-date and that demand was even softer in Q2 versus Q1, and that refrigeration was flat. So that indicates that HVAC must have been down maybe, I don't know, 50% or even more. Do you think this is mainly destocking or this is underlying demand currently? What is the trend there? It seems like it's an unsustainably low demand level from HVAC. Would you confirm that?

[Tom Erixon, executive]

Yes, we have the same picture. I don't dare to split between destocking and underlying demand. But clearly, the sales level of new -- if you stay with this heat pump side, the sales level of new heat pumps is higher than what is reflected in our numbers as a supplier into the supply chain.

The big guess, obviously, has been how long will the destocking process continue. I think there are probably some -- I don't know that anybody sits on the absolutely accurate number, but we have assumed that we will see a gradual improvement from Q4, primarily at least as a result of the destocking process being finalized. And so that's kind of where we are on that.

I think our comment also to the heat pump situation is that the products we deliver into that application is brazed heat exchanges, and we have always been and more so now continue to work on other applications for brazed. And so our view on the brazed product group as such is that, irrespectively of whether we see an improvement or not in HVAC and heat pumps, we will come back to a growth period and a more better financial stability in that unit specifically after the third quarter, which is expected to be the bottom on this cycle.

[Operator]

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

[Klas Bergelind, analyst]

Klas at Citi. I thought it was positive from orders into results, but this is something else. And can I just ask on the backlog and the delivery time for you, Tom? We know that orders in cargo pumping coming quite quickly after a tanker has been contracted, but the revenue recognition, if I understood it correctly, can be pretty long and you also say that you're effectively taking orders here into 2026.

Am I right here that we mainly have offshore revenues now in the P&L, looking at from and that we're waiting to see the sort of positive mix impact from cargo pumping? And when do you expect that to gradually sort of feed through into the P&L? I'll stop here.

[Tom Erixon, executive]

Yes, there is some truth to your observation. If we look back a few quarters, we had strong offshore order intake and order pipeline, and that was clearly weaker in the quarter and more than compensated on the cargo pumping side. Looking forward, we see offshore projects starting to come through again.

So I think what we can safely say is that we are moving into a territory where we have better load both on the offshore side and on the cargo pumping side. We are still ramping somewhat in our operations on the cargo side. Exactly how that will -- may play out financially, I will not guide you. I will just caution you that there are many moving parts in our P&L for Marine. But what we do feel is that we put the current margin level on a stable ground looking into next year.

[Klas Bergelind, analyst]

Yes. But just a follow-up here on the margin in Marine. I mean the scrubber business obviously boosted the previous peak, but it wasn't a major boost as far as I can see it. What I'm trying to say here is the Marine margin, as you start to deliver on the cargo pumping order, should start to -- I mean, it's a very high margin, typically could get the whole business to go above 20% on Marine.

I mean, obviously, offshore is low margin, but on cargo, and I'm just -- I know that you don't guide beyond a quarter and sorry for that. But if you can sort of -- whether you agree on my reasoning, whether the margin compared to when you bought it, obviously, over a decade ago, is very different now? Or if you think there is going to be a positive mix ahead as you deliver more on the cargo pumping side?

[Tom Erixon, executive]

I think you have to take your own view on this without guiding comments. But one thing that I would like to emphasize is that we've done a lot of work on the offshore side over the years. Let me make two comments, the first one on offshore. So we are in a better margin situation in our offshore portfolio already now. It used to be a single-digit profit margin, it's not anymore.

And so I think we've turned the corner into something that used to be a side business for us where we are now quite a credible and strong supplier with a good product offering. So that's one comment. I think that reflects where we are at the moment.

The other comments I will just remind, not you, Klas, but just from the calls we had maybe a year ago, where we had a lot of discussions on what we were doing in order to cut our costs and protect our margins during the downturn. What we did do was continue to invest financially in equipment, machinery capacity, and we continue to invest in our organization in the sense that we protected our cooperators, blue collars and the organization in order to be ready once the market turned.

And obviously, as you can understand right now, I cannot express how much shareholder value is created by the fact that we built the company stronger during the headwinds and that is making us, despite very high order intake, not having to turn a single customer down even when we have to go on short delivery times. So I think the team in Norway should be proud of what they've done and we put ourselves in a good position there.

[Klas Bergelind, analyst]

That's great to hear. Maybe a quick final one on Energy. You said, Tom, Energy orders have bottomed in the third quarter. Obviously, HVAC heat pumps still tough, but some improvement and support by data center into the fourth quarter.

But I just wanted to zoom in on like the industry impact, the 10% growth here, I know it's not all data center, you have other things in there. I had expected a bit more growth though, year-over-year on that year-to-date number. Did you see any project delays in there as well? Or was that more on sort of the clean fuel side?

[Tom Erixon, executive]

No, I think it is the clean fuel side that we are sort of worried about, not so much worried in terms of our company, but more worried about where we're going in the whole energy transition. And I think we need a certain momentum for people to get comfortable as end customers, as fuel buyers, as shipowners in terms of what they're going to do and how they're going to source. So I have a worry on that side, which you can see on the CEO comment.

I think otherwise, the light industry developed pretty much as we expected, but we also see a pipeline that is promising. So I think the phasing probably is turning out more or less where we have been expecting it to be. And my comment to the heat pump side was that as -- even if it doesn't go up in the near term, we will see traction in other areas. So we feel it's been a tough period for sure. We -- it's not exactly the same presence and the same supply lines for the different applications. But at large, we will see a recovery in that area Q4 onwards.

[Operator]

The next question comes from the line of Daniela Costa with Goldman Sachs.

[Daniela Costa, analyst]

I have two as well. One is just to ask you having -- leading up to the U.S. elections, there's a lot of questions about sort of potential tariffs and tariffs on all countries outside of the U.S. So can you remind us like our operating system in the U.S., are you like fully localized? Are there any imbalances? How would you deal with potential tariffs?

And my second question is just for an update on your CapEx plans. I know you've sort of had slowed them down a bit, while some of the energy developments were weaker. Are you reaccelerating them now given your commentary on the trough?

[Tom Erixon, executive]

Let me take the first one and I pass the second one to you, Fredrik. We never really put IRA into our business plan and -- in terms of upside, and we never put too much of trade headwinds too aggressively into the business plans either.

The difference between China and U.S. from our point of view, how we've been building our footprint, is a little bit related to commodity supplies. And we have struggled in the past to find the right steel and titanium and other producers in the U.S. So no matter what value add we put in the U.S., we are dependent on imports of commodities to have our supply chain working, at least over the next couple of years.

And so it's difficult for us to deal with -- and I think it's going to be similar for our competitors. If we can't find our appropriate commodity suppliers, I would assume that our competitors will have similar problems. So I think the question on how the import duties potentially will play out, we will have to see a little bit.

But what is still happening at the moment is that we are rebuilding our distribution system in the U.S., we are increasing our manufacturing footprint in the U.S. and so we're taking step in that direction. But not because of the duties, I'm not sure we will be safer in terms of exposure to the duties just due to the commodity situation. So that will be my comment on that. And then on the CapEx?

[Fredrik Ekstrom, executive]

Yes. I mean we continue to invest in our businesses. And the guidance that we gave you of SEK 2 billion to SEK 2.5 billion for the year still holds. We do take -- we have rephased a lot of our investment sort of road map to better suit the demand as we see it. But we take a long-term view on this, Daniela.

So we continue to invest in our capacity and we continue to invest in the areas that we see are going to have a positive development in the end markets going forward. And about 30% of our CapEx is still going to maintenance and renewal of existing manufacturing base, about 40% is going to improve capacity and new production capacity, 20% towards footprint and then another 10% towards technology, and that's in line with what we discussed in the last CMD as well.

So to summarize, no, we are not passing anything substantially from our CapEx program, but we are rephasing it to better suit the demand that we see going forward. And again, we take a long-term view.

[Operator]

The next question comes from the line of Andrew Wilson with JPMorgan.

[Andrew Wilson, analyst]

I wanted to ask around the oil and gas and, I guess, the process complex more broadly. It seems as if that has been weaker after, obviously a number of periods, particularly in refinery I think which has been strong. Is that something you are expecting to be temporary? Or is it just a sort of a sense that the pipeline there has slowed down? I guess I was expecting that market still be relatively robust for a bit longer at least.

[Tom Erixon, executive]

Yes. I think you're right. Our oil and gas business is very project driven compared to many others, so the trends tend to be related to a little bit how we convert pipelines into a project at any given quarter. We have already indicated that on the offshore side, we see another wave of investments continuing and so that is positive. It's not shown in the -- as you know, we show that in the Marine division, but that is part of it.

And then I think on oil and gas, we've been having, especially on the gas side, some good traction in a number of areas. And I think our pipeline looking into Q3 and onwards looks quite promising. That's also one reason why we are guiding a stronger demand in the Energy division for the third quarter.

[Andrew Wilson, analyst]

Okay, very clear. And I guess -- and this is, I appreciate, a broad question, but I'm kind of -- I'm interested in you taking it. The sort of the commentary around the U.S. more broadly, it sounded as if that was slower in terms of the kind of the broad demand commentary after, obviously, a period of it being very strong.

I'm just interested, how broad a comment is that? Is that specifically -- I know you mentioned some specific project delays or delays in customers making decisions on investments. But is that just a broader comment on U.S.? And I guess just how you see, I guess, the U.S. for the balance of the year, because we've obviously seen some kind of weaker top-down data points? Just interested in how you see that.

[Tom Erixon, executive]

Yes, we are a little bit unsure ourselves. I mean there was only in February when I was over in the U.S. where just the pace and steam going forward looked across the board very solid and very good. And then a quarter later, there starts to be some question marks as to how strong it will hold.

So I think we need to wait for a quarter or 2 to read out if we see a strong trend line. I can't really make full sense of the numbers in terms of where they were a little while ago and where we are at the moment. So it could be that we just see a bit of a lag on projects in general, and we will see that coming back.

But we felt, nevertheless, geographically, when we for a long time have talked about the challenges in China and the drive in the U.S., as you see on our 12-months rolling, China is really taking a step forward and U.S. is slowing a bit. So we'll see where it goes. I'm not quite clear how to read it.

[Andrew Wilson, analyst]

That's super helpful. And maybe if I can just actually just squeeze, I guess, a similar question on China, actually. You made the comment around obviously China being helped by Marine. But it sounded as if, and if I take Food & Water as well, I sounded as if China has just generally been a pretty positive picture for Alfa. Is that a fair comment if we exclude specifically, I guess, shipbuilding and Marine out of that?

[Tom Erixon, executive]

Yes, it is fair. We were on the low level, as you know, for quite some time, and it was very visible on the transactional part and not least Food & Water. And so we turned that corner in Q4 last year, and it has been a bit more stable and a bit more positive now moving into the second half.

So I don't think we've changed our view that maybe this enormous expansion boom in China is over when it comes to industrializing the country but that we should come back to a more normal developed country growth scenario that we are in the western world. And so our expectations are that we have stability on the parts outside of Marine. On top of that, there still is an agenda in China to ensure the energy independence, and so we see some renewed investment activities related to the Energy sector as well.

[Operator]

The next question comes from the line of Max Yates with Morgan Stanley.

[Max Yates, analyst]

Tom, I just wanted to ask around how you're currently thinking about balance between M&A and buybacks. Obviously, kind of strong balance sheet, you have done buybacks in the past. And so I just wanted to get your latest thinking on the M&A opportunities, and at what point, if any, with the leverage, you would consider doing another buyback?

[Tom Erixon, executive]

Yes. I mean, we really feel our balance sheet is getting strong. We are on the way to eliminate our debt if we don't do anything else. We think at the time with higher interest rates and more investor concerns on stability, it's a good place to be. And so our borrowing costs are still, if I average, I think 2.4 or something like that on a decreasing debt. So in one sense, it's a nice and good position to be in for us.

Going forward, we would always prefer to develop our business and use our capital for M&A purposes as opposed to share buybacks. So that's going to be our priority. M&A comes and goes a bit unpredictably. So I think if we are a bit overcapitalized from a capital market point of view over a shorter period of time, that's okay. But we are working with an M&A pipeline.

And so I'm hopeful that we will see some expansions of our business along those lines in the coming 12 months. So that would be our priority. I think if not, we will, at some point, obviously hit the point where we will look at share buyback. We prefer that method to -- compared to extra dividend.

[Max Yates, analyst]

Okay. And just a quick follow-up. Maybe a kind of general comment on Marine. I think your Marine orders have kind of taken, I think, all of us by surprise, positively how strong it has been recently. We obviously don't have market shares by end market, we kind of have them by product type. Do you think there's anything in terms of the products you're selling, the product development that you made, that means that you're seeing market share gains? Or do you see this all as kind of underlying market developments in Marine?

[Tom Erixon, executive]

We have -- in the Marine market, it's probably the market where we have the biggest transparency exactly where we are quarter-by-quarter, year-by-year on all our product technologies. I would characterize the overall picture as stable. We haven't seen a huge shift in market shares.

We have, in some area, because of cost and pricing, been a little bit defensive and we've been slacking our market share a little bit as a conscious decision. And in some areas where we have invested and moved forward, we've done a good job in strengthening somewhat on a number of areas.

But it is -- it's almost, in our company, a strategic decision in terms of where do we want to be. And the stability, stability plus is probably the right way to characterize it at the moment.

I think the broader product portfolio is having some impact on what we do compared to the past. And the big driver is just a very high contracting level, with a very solid ship mix from our point of view. So that is, at the end of the day, the big factor.

[Operator]

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

[John-B Kim, analyst]

If we could just spend a bit of time on Food & Water, can you help us understand the impact of late invoicing in Q1 on your Q2 numbers? How should we think about kind of trend growth rates in the division right now?

And just a second question on mix and margin. It did look like the transactional business had recovered, but you do have dilutive effects from project. How should we expect those two variants to play out the rest of the year? Which one is the bigger factor, you feel?

[Fredrik Ekstrom, executive]

Yes. I mean if you look at it from a margin point of view, the strengthening of the transactional business is, of course, accretive to the margin in a ratio perspective. We are also seeing that the backlog that we are executing in Food & Water, particularly then on the Desmet side, has a good contribution to the margin actually on expected levels, and in some cases, on some projects, above expected level. And that's a good trend, and we expect that trend to sustain itself during the remainder part of the year. So a good margin development.

[John-B Kim, analyst]

Okay. Would you argue that your previous guide for low single-digit growth for the division holds? Or are there other factors we need to consider?

[Tom Erixon, executive]

I think this year, if we just look this year, I think we indicated that last year, we had just a very strong demand for large projects coming in, particularly via Desmet. This year, Desmet is more back to normal, which means a couple of billion SEK in lower order intake compared to last. Whereas our own Food Systems engineering business is getting a bit of a high load than they had last year.

So I think those -- the volatility on the project and product bookings, and there are some big projects out there that may or may not come, is -- don't read too much trend line onto it. I think looking into where we're going to be next year, the question on where the transactional business is going and where the Service business is going are the two most important factors that we are monitoring.

And we are trying to guide you a little bit as to the trend curve on those two. So I think I would expect that we continue to have an underlying normal business growth in the Food & Water division, and then we maybe skewed by some large order bookings here and there.

[Operator]

The next question comes from the line of James Moore with Redburn Atlantic.

[James Moore, analyst]

I wondered if I could ask one on Marine and one on Energy. Very strong orders, nearly SEK 15 billion in the first half. Could you talk a little bit about the number of ships versus the shipset value? And just help us understand how much this is a function of increasing value per ship versus units of ships?

And when you think about the Marine cycle into '25, '26, we've had a good run. Are we peaking here? Or is there more to go? How do you see that? That's really the first question. Maybe come back on the next.

[Tom Erixon, executive]

The -- I think what we -- I have a lot of time to break down exactly to your question. But one thing that is happening at the moment is that due to booking cycle in the cargo pumping area, specifically as new product tankers are being contracted, they come very quickly into our order books. And so the discussion that we had earlier today in terms of having a slightly longer order book than we normally have is affecting this thing.

So we are not necessarily, at this point in time, reflecting all our orders into increased invoicing in '24, 2025. We are just, over a period of time, building up the order book also into 2026. And with that said, 2024 and 2025 is solid from an order book point of view.

So part of what we see is a non-sustainable growth trend, in the sense that at some point in time the extension of the order booking timing is going to come to an end point. I don't know that we are exactly there at the moment, we don't think so, but it will have some impact in the future, and we will have an invoicing growing to catch up to where our order book is and where the delivery pace is. So we are not invoicing fully on the pace at the moment compared to the bookings we've done for 2024, 2025. So that's one aspect of it.

The second aspect that is important is that the ship mix is driving the value. And the difference in the ship mix is easily EUR 1 million or EUR 2 million per ship compared to just an average mix. So that has a big impact on it.

And the third point, which is not huge still and there is still an opportunity that we are working for, is to have full implementation of our environmental product portfolio. So I remind you that, as of now, we're taking the full decrease of the retrofit period on scrubbers already earlier. And now we are sort of taking the whole decrease of the ballast water portfolio from the retrofit point of view. And we are now rebuilding, from a decent level, the penetration of our environmental portfolio and that hasn't reached its full potential, I should hope.

And so there are a couple of factors in terms of more value per ship potentially coming as a result of the development that is not in the books yet and a bit of an exaggeration on the order intake level based on an extension of the timing of the project plan and the deliveries that is probably going to slow as we move into 2025.

[James Moore, analyst]

That's very helpful, Tom. And just switching to Energy, if I could. I know it's relatively small, but can we talk a little bit about data center? And maybe the size today, the order growth in the first half and the book-to-bill, just to put some scale on it.

But what I'd really like to ask is, how do you see the traction of cooling technologies out there versus traditional air and rear door heat exchanger? And where do you think we are in that versus the discussion of the shift to liquid, and how that plays out for your business in the coming years?

[Tom Erixon, executive]

Yes, it is a good question, and we are monitoring this carefully. We obviously have various technologies applicable to various type of cooling and energy situation on the data center side. What is specifically positive for us other than the general growth per se is that for the liquid cooling side, we are using the same technology platforms as we are for heat pumps.

So in that sense, it's volume coming into the supply chain, where we are well equipped, we are good in capacity. Not exactly perhaps 100% fit on everything. But by and large, it means that we are returning to a good growth and a good project pipeline on the brazed technology irrespective of where heat pumps goes. And hopefully, we'll see that coming back also towards the end of the year.

The good thing and the bad thing with us is that when we look at one of these verticals that we all think are super hot, it is a couple of percent of our turnover. So the benefit of having a stable operating situation in the company is that we don't get an enormous upside on any specific thing.

But I think data centers is likely to move the needle with a few percent points in terms of volume looking into 2025 from the data center specifically. So it's becoming a factor. We see it happening. We see the product portfolio building, and we see an increased penetration of liquid cooling, yes.

[James Moore, analyst]

And just to clarify on that. So we've got some traditional air, we've got some more advanced air and then we've got cooling. Are you relatively -- and we got immersion versus direct-to-chip. Are you relatively agnostic about which technology path we go down for cooling?

[Tom Erixon, executive]

Well, yes, from our point of view, let's make -- I mean, agnostic, I think the more -- we will see what's going to happen. I think we will see two things happen in the data center market. One is a transition to more advanced cooling technologies, and that's going to be needed, is good for us.

I think that plays into our capabilities well. And we might see a slightly higher value per data center, given also the capacity increases in terms of processing and heat generation that they are developing. So that is good in itself.

I think there is also going to be a renewed focus on energy efficiency on the existing infrastructure. We had a lot of data center build that are not exactly energy-efficient, placed in a difficult environment.

And so I think also along the traditional lines, for traditional data centers, I think we will see some growth in just driving traditional energy efficiency solutions in a good way. So all in all, it looks as a good opportunity to us. We are not exceptionally dependent on one technology or another, we'll play the full piano on this one.

[Operator]

The next question comes from the line of Weier Sven with UBS.

[Sven Weier, analyst]

My questions, I'll take them one at a time, please. The first one is around the Energy guidance for Q3, you're saying higher. I was just wondering what gives you the confidence this time in a higher order conversion than last quarter?

Because I remember, for Q2, you also guided somewhat higher Energy orders and you ended lower. So what is just causing that difference in conversion? Because you also mentioned there's more uncertainty maybe in the U.S. market. But that's the first one.

[Tom Erixon, executive]

We are -- I never feel certain, we are trying to be helpful in giving some indication of where we are. But I have to say that the project review in the Energy division for the quarter has been unusually strong. And as you correctly noted, Q2 did not come in on an exceptional level. So it was giving us an easier benchmark if it comes to the sequential guiding.

So I think we are as comfortable as we ever are with all the uncertainties in the world on the guidance for Energy division, and we don't feel that the U.S. situation will play much into those numbers. That has been our best guess.

[Sven Weier, analyst]

Understood. The second question is just on product tankers. I was just wondering if you could see a similar situation occurring as we had in offshore, right, where you had very strong orders and then there were some supply chain issues.

And on the product tanker side, I guess the orders have been benefiting from slot conversions, where, I guess, the potential for that has become a bit more limited. Do you see that potential for supply chain issues, like you mentioned it on offshore, also on product tankers potentially?

[Tom Erixon, executive]

I think as for our capabilities, we are comfortable that we don't have to decline any orders and we are comfortable and extremely aware about the need for 100% delivery position, so that supply line works well and I'm not concerned about our position in that.

What I do think we should expect is that, as we build the order book fully for this year, for next year, and then into 2026, at some point in time, we're going to see clearly a slowdown in the order intake without that impacting our financial performance or invoicing performance over the next few years for the Marine division.

So I think just be aware that just reading the numbers on order intake for the Marine division going forward a number of quarters may vary quite a lot. Nevertheless, when the delivery capability for a year ahead or 2 years ahead is full, the value for anybody to throw in tons of money and tons of orders into our supply chain 3 years in advance is not going to be there.

So we feel very good about how the whole industry is developing, how the demand side appears to be looking, the financial health of the ship owners and the need to continue to drive the decarbonization in terms of energy efficiency on board, it provides a good solid backdrop to how we look at the Marine business for the next 3, 4 years.

[Sven Weier, analyst]

And then offshore. But in offshore, it was also not your supply chain issue, right? It was outside your hands.

[Tom Erixon, executive]

Yes. We felt there was a bit of a slowdown on the -- most of those orders are quite large. They are, often for us, in the order of magnitude of $20 million or so. And we just felt that those projects were not coming through on the same level for a couple of quarters.

And we felt that in a number of areas, including in Brazil and North Atlantic, that pretty much the pipeline of projects was fully in place. What we did see is that the number of quotes started to come back into the market during the second quarter, and that's also one reason for our guidance. We believe that we will see offshore slightly stronger in Q3 than in Q2.

[Operator]

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

[Andreas Koski, analyst]

A couple of follow-ups, starting with the Marine division. Very strong order intake again in Pumping Systems, and it accounts for 51% of Marine's order intake year-to-date. Could you please give an indication of how much of Marine's revenue is Pumping System? Is that around 25% or something like that? And if you look at your delivery plans, will we move towards 40%, 50%? Or is the extension of the backlog so long that the Pumping Systems will continue to account for around 25% of sales also in 2025?

[Tom Erixon, executive]

Do you want to...

[Fredrik Ekstrom, executive]

It's -- your guess around 20%, 25% is probably not completely off, if I think about it. We haven't thought about it in those terms. We haven't done that. But yes, that's about.

[Tom Erixon, executive]

And we -- I mean, we will expect it to increase. I mean to the earlier question, is the mix changing, are we going to a slightly higher share of cargo pumping in the portfolio for '24 going forward? Somewhat perhaps for '25, we believe so.

[Andreas Koski, analyst]

Yes. Okay. And then I think you've made it quite clear that you expect Pumping Systems orders to weaken in 2025. I mean if I look at Pumping Systems orders in the first half, it is around SEK 7.5 billion, annualized level around SEK 15 billion. And before 2023, Pumping Systems used to run at an order level of SEK 4 billion, SEK 5 billion a year.

So when I look at this, it looks like orders could come down, I guess, maybe 50% in Pumping Systems when your customers decide to not extend the backlog further. Would -- how do you look at the risk of such a significant decline in Pumping Systems orders going to 2025, 2026?

[Tom Erixon, executive]

Yes, I'm not going to correct your numbers. Your reasoning is not completely off. But I just would like to remind you all about the question of volatility in the Marine business and in our division specifically.

Orders -- ship contracting will also have an element of volatility in it. And consequently, the quarterly order intake pace will vary to some degree with that. The deliveries of ships is far less volatile. In fact, it is rather stable. And consequently, our deliveries on to the marine sector is also a lot more stable than the order intake.

So I think we certainly don't feel that the cargo pumping business is a SEK 15 billion business on an ongoing basis year after year. But we can see order intake booming. Maybe not exactly, I wouldn't quote that number. But we can see it moving high for a period of time, and then naturally, it's going to come down.

So I'm just suggesting to you that do not interpret the order intake side in this vertical specifically as a pace or a trend, or it's just a very strong period for the booking. We are filling our delivery capabilities and it provides a solid base for invoicing in the coming years. And -- but certainly, I would be surprised if we have a repeat on cargo pumping in 2025 first half on the level that we had in 2024, that does not seem to make sense to me.

[Andreas Koski, analyst]

Yes. Understood. And then lastly, just on your outlook because I get questions if that is seasonally adjusted and if we should add normal seasonal Q3 weakness on top of your guidance of somewhat lower demand.

[Tom Erixon, executive]

I -- we would probably see a somewhat higher order intake had it not been the seasonally slightly weaker third quarter. The transactional part of the business tends to be a little bit affected. The Service business tend to be a little bit affected. But the main thing driving our guidance is how we look at the project pipeline and the project conversion.

So to ask the question of where we come down in exact financial terms is very much related to project conversions on the Marine side and project conversions in the other two divisions. And we felt that, overall, those pipelines look quite solid. Otherwise, I think we would have been a bit more cautious.

The SEK 19 billion is a big number for us. And so we sometimes get a bit scared of heights, but we still felt that the guidance was in absolute terms what we felt was most reasonable to come out. So I wouldn't -- you may choose to put a risk premium on it, but we didn't take any particular cautions regarding seasonality in this. We think we're going to come in somewhat lower all in all. And that's it.

[Andreas Koski, analyst]

Yes, but still higher than Q3 last year, if I understood you correctly from your presentation.

[Tom Erixon, executive]

I think that's where we would be. And I think we are at 10:00. Maybe we'll take a last question if there is one.

[Operator]

The next question comes from the line of Anders Idborg with ABG Sundal Collier.

[Anders Idborg, analyst]

Okay. Last one, I'll make it quick hopefully. Just on the Service, we've had this very high growth for 3 years basically and now we've come back to -- well, actually see basically no growth in orders in this quarter. So just your take on this. Have we basically plateaued now after sort of filling up that Service deficit? And I guess part of it is also internal, what are you doing right now to push Service growth, fill gaps, et cetera? Is this now a matter of just growing with the market, so returning to sort of just mid-single-digit growth of Service?

[Tom Erixon, executive]

Thank you, and it's a very good question. We actually feel very positive to Service order intake in the first half of the year. The trend curve was a bit -- we were not particularly worried in the second half of last year, but nevertheless, the order intake slowed a little bit sequentially. And sequentially, then we saw a good recovery from second half last year into this year. So I think we feel quite good about where we are with it.

We -- as I indicated in my introductory comments, we don't feel that the growth period is over. We actually saw good solid growth in the Marine side, and we saw good growth in Energy division sequentially and year-on-year. And we missed out a little bit on the Food & Water side.

We are not -- we don't conclude that it's a negative trend on the Food & Water. We feel it was just a weak quarter. We had some large bookings last year as well. Sometimes we do occasionally have Service orders that come in, in the order of magnitude of EUR 5 million to EUR 7 million, and I believe we had one of those second quarter last year.

So we feel quite good about the momentum. The development on the Service side, on the infrastructure, on connectivity, on field service, training, development, hiring of engineers, et cetera, is ongoing full speed. So I think we are still at the point where we expect Service growth to be, over the business cycle, higher than for the group as a whole. And so we expect to continue that journey.

All right. Thank you. And with that...

[Operator]

Ladies and gentlemen...

[Tom Erixon, executive]

Yes. So yes, you may round off. I will round up on my side but just with a small comment. I remind you all that we're organizing the Capital Markets Day in San Bonifacio outside of Verona, where we have one of our most modern and advanced heat exchanger factories.

We will go through with you a lot of what happens on product technologies, data centers, heat pumps and the energy transition as a whole. So I really hope you have the opportunity to join us there. I can assure you we will do everything we can to make it worthwhile the trip, and we are excited to see you there.

So with that, Fredrik and I, we say thank you. And see you in -- I think we are in the third quarter before we're in Verona, right?

[Fredrik Ekstrom, executive]

That's true.

[Tom Erixon, executive]

So we see you at the third quarter. Thank you.