Alfa Laval AB

STO:ALFA

Earnings Call Analysis

Alfa Laval sees stable Q3 results with strong order intake and cautious Q4 outlook.

In a strong Q3, Alfa Laval reported a revenue growth of 2.8% year-on-year, boosted by a robust marine sector demand, leading to a book-to-bill ratio of 1.17. The cash flow reached SEK 3.75 billion, underlining operational stability. While service revenue grew by 11%, the Food & Water division faced a decline in large project orders. Looking ahead, Q4 is forecasted to maintain a stable demand in Food & Water but expect a slowdown in the Marine sector. Overall, the company remains optimistic about its order book, now valued at SEK 52 billion with SEK 15 billion expected to be invoiced this year.

Strong Demand Across Divisions

In the third quarter, Alfa Laval reported robust performance with a book-to-bill ratio of 1.17, indicating strong demand across all three divisions: Energy, Food & Water, and Marine. Orders exceeded expectations, particularly driven by a solid uptick in marine ship contracting. Overall, the company recorded an order intake of SEK 18.9 billion for the quarter, achieving organic growth of nearly 15%. This demand surge is primarily attributed to the marine sector while maintaining visibility in the service segment, which grew by 11%.

Quarterly Financial Highlights

The revenue for Q3 was SEK 16.2 billion, a year-on-year growth of 2.8%, translating to a 6.3% increase for the year-to-date total of SEK 48.6 billion. The gross profit margin improved to 36%, thanks to a strong service revenue mix which constituted 31% of sales. Cost increases in selling and administrative functions, primarily due to expanding the employee base and R&D investments, were approximately 11% against the previous year's figures, bringing the operating income up to SEK 2.7 billion and resulting in an EPS of SEK 4.77.

Energy Division Showcases Stability

The Energy Division displayed resilience, reviving order intake following a decline in the HVAC market. Notably, clean energy applications, particularly carbon capture, showed positive signs, although challenges persist in the energy transition pace. Despite this, the division is expected to maintain sales on par with Q3 levels and benefits from increased demand in data center applications. However, no immediate recovery is projected in the European heat pump market, with expectations of stability rather than fast rebound.

Food & Water Division Updates

The Food & Water Division saw a decline in large project orders compared to last year's elevated levels. However, the short-cycle business continued to recover, driven by positive trends in China, which have returned to a slow growth path after reaching the bottom of the cycle a year ago. Management expresses confidence that investment levels for biofuels, notably in ethanol, are expected to increase in the medium term, indicating potential for future growth.

Marine Division's Ongoing Strength

The Marine Division's order intake remained strong, particularly for cargo pumping systems, despite an anticipated moderation in demand moving into Q4 from record levels. The division stands with an impressive order book of SEK 26 billion. The demand is bolstered by robust shipbuilding activity, primarily driven by the tanker market but may normalise slightly as shipyards begin catering to an order backlog.

Debt Management and Future Guidance

Alfa Laval successfully reduced its debt by SEK 5 billion year-on-year, bringing it to a manageable level of 0.39 times EBITDA, which ensures flexibility for future acquisitions. For Q4, investments are likely to remain stable at SEK 0.4 to SEK 0.6 billion. Importantly, while the Energy Division expects steady demand, the Marine division may experience lower levels of demand due to saturation. Overall, the management remains optimistic about maintaining strong performance moving into the next quarter.

Looking Ahead

As we approach Q4 and beyond, Alfa Laval's leadership expects a continued positive performance across most markets. However, management acknowledges expected fluctuations due to the variable nature of contract completion and invoicing. Going forward, maintaining service growth while observing market responses in Energy and Marine divisions will be crucial to navigating the upcoming fiscal periods.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome, everyone, to Alfa Laval's Q3 '24 Report. I will now hand over to Tom Erixon. Please go ahead.

[Tom Erixon, executive]

Good morning, and welcome to our earnings call for the third quarter. Let me start with a couple of introductory comments as always. We had another strong quarter with elevated demand in the marine sector and the book-to-bill of 1.17 for the group. The service growth continued on a high level of 11% in the quarter, the strategic focus on the service business since many years, continues with investments in both infrastructure and people.

And finally, the cash flow was strong in the quarter at SEK 3.75 billion, the operational stability in the supply chain is on a good level. After several years of work in restoring a normal level of operating working capital has given positive results with maintained customer service levels.

And so with that, let me go to the key figures. Orders were a bit stronger than expected with good demand in all 3 divisions and sequentially stable compared to the second quarter. Invoicing is on a stable growth track, supported by a record strong order book, but part of the project invoicing was on the low level supplied in Q3, specifically in the Energy division.

The project execution is stable and good, but the phasing in terms of forecasting and recording percentage of completion creates a little bit of volatility perhaps between quarters. The margin strengthened in the quarter, both year-on-year and sequentially, a positive mix and strong margins in several business units compensated for the slightly lower invoicing level.

Now let's go to the division, starting with the Energy divisions. A strong quarter for the division returning to order intake growth despite a weak [ HVAC market ] as previously guided. Several end markets were growing in the quarter, including process industry and demand for data center applications.

While demand for energy efficiency remains a strong structural driver of the growth, the key verticals in the energy transition does not develop in the speed needed to reach the climate goals. Still, the order intake for what we call clean energy applications continue to grow from a low level with the most promising steps in the pipeline for carbon capture applications.

The margin was solid in the quarter with a limited negative effect from low utilization levels in brazed heat exchanges related to the heat pump market, significant efforts to ensure operational performance, together with growth in adjacent applications had a positive impact. There will be no speedy recovery in the European heat pump market specifically. But as previously guided, the third quarter was slightly the low point in the demand cycle for this time.

Moving on to the Food & Water division. As expected, the order intake declined compared to the last year due to the elevated level of large project orders from timed in Q3 '23. The rest of the portfolio grew in the quarter on a solid level, supported by a continued recovery in the short-cycle business, including service.

The weaker market conditions in China reached the bottom of the cycle in Q3 last year and returned to a slow growth path since then. The positive trend continued in the third quarter on a higher level and the market sentiments are overall more positive in China at this moment.

Most end markets had a good development in the quarter, but biofuels remain low compared to last year. The project pipeline is, however, getting stronger and the investment level, both in ethanol and other fuels is expected to recover in the medium term. The margin was good in the quarter with better utilization in the short-cycle businesses and the strong project execution level above our financial targets.

And with that, let's move to the Marine division. The demand in the tanker market continued to drive the order intake to record levels, especially related to cargo pumping systems, all business units in the division grew and the order book in the division now stands at SEK 26 billion until recently normal level for the entire group. While strong demand most likely will remain for service and new applications for decarbonization, it will not compensate fully for a more normalized demand level in cargo pumping moving into the fourth quarter. The margin recovery continued as expected.

Compared to the earlier record levels in 2019 at about 21%, 22%, the existing portfolio is back on historic levels. The difference compared to 2019 is related to the high-margin scrubber retrofit portfolio, which is no longer in the invoicing mix and the slight reallocation of corporate cost, which is higher on divisional level, but neutral on group level.

And with that, let's go to service. So service continued to grow in all 3 divisions and most of the service scopes, including spare parts. We are comfortable that the service strategy works, and we'll continue to invest in the growth plan going forward. The service margin is stable for spare parts and other comparable service scopes, but the mix is gradually tilting somewhat towards service works and invoicing from our service centers, which has, for some time, had limited effect on service margins, although it remains a healthy and accretive business, obviously.

Then finally, a few comments on key markets. And as you can note, China is currently developing well and strong and is on a role in 12-month basis, the largest market in Alfa Laval by far. Although both Energy & Food & Water has a cautiously optimistic view going forward, the shipbuilding market has been the main driver of the growth. As shipyard capacity is getting fully booked, the order levels from China will perhaps normalize somewhat up to a slightly lower level.

The U.S. has been strong in recent times, but the order intake declined in Q2 '24, EBIT unexpectedly. And the third quarter was also a little bit on the weak side. Given the strength of the U.S. macro and the current -- the current order intake weakness is considered mainly as delayed final investment decision in part of the product pipeline, especially related to the Food & Water division. Otherwise, U.S. looks solid.

Some weaknesses in both India and Southeast Asia were present in the quarter, but prospects are looking positive going forward, especially in India after the completion of the election process and the return of the investment levels in the ethanol business, among others. Market conditions in other geographical markets were generally stable to positive.

And with that, I hand over to Fredrik for some further details on the financial performance.

[Fredrik Ekstrom, executive]

Thank you, Tom. So let's start with a quick recap on orders received. Quarter 3 closed well above expectations, mainly driven by marine ship contracting. However, we have also recorded good order intake in many of our transactional businesses and in particular, in the Food & Water division. Energy efficiency continues to drive good demand in the Energy division with a good order intake development in data centers, but a continued lackluster demand in HVAC.

Currency has a negative impact on order bookings with 3.9% while organic growth is almost 15% in the quarter, yielding a quarter order intake of SEK 18.9 billion and year-to-date order intake of SEK 56.1 billion. Book-to-bill in the quarter was 1.17, adding to the order book which now equals SEK 52 billion, of which SEK 15 billion is expected to be invoiced this year and the remainder in 2025 and 2026.

The order book is judged to be on a good level with current and expected input costs. In a calendar year, quarter 3 is typically the lowest quarter for revenues as holidays disrupt and shortened invoicing routines. Having said that, we continue to see a growth trend in comparison to quarter 3 last year with 2.8%, which after eliminating currency impact actually is a healthy organic increase of 6%. Total for the quarter is SEK 16.2 billion in revenues. And year-to-date, it's a growth of 6.3%, equaling SEK 48.6 billion.

Sales in the quarter generated a gross profit of SEK 5.8 billion, a gross profit margin of 36%, which is 2.8% better than the corresponding quarter last year. The latter as a result of a good service revenue mix of 31%, a higher factory and engineering results that entirely offset the lower capacity utilization rates of our brazed heat exchanger factories.

S&A cost of SEK 2.5 billion marked an increase of 11%, of which more than half is related to increased number of employees. R&D costs increased in line with our ambitious and innovation programs. Operating income at SEK 2.7 billion, which after the financial net and taxes yield an EPS of SEK 4.77, an increase of 11% to round off a strong financial quarter.

Adjusted EBITDA margin is above 17% for the first time since quarter 1 2022 at 17.3%, which is 0.6% higher than the same period last year where currency has only a marginal negative impact. Instead, we have a substantial positive contribution from service mix, a good factory and engineering result and good project execution outcomes on our projects.

Good cash flow from operating activities at SEK 3.7 billion continues to build on a strong EBITDA contribution. At quarter 3, a cash positive change in working capital, stemming primarily from accounts receivable. CapEx was slightly above guidance levels in the quarter at SEK 0.7 billion, bringing the free cash flow to a level of SEK 3 billion. No acquisitions or disposals of note in the quarter, while financial activities, mainly reflecting the continuing servicing of debt.

Debt has decreased from -- further in quarter 3 with another SEK 1.3 billion since quarter 2, 2024 and almost SEK 5 billion since quarter 3 last year. Excluding leases, now at 0.39 of LTM EBITDA and including leases 0.61. The current debt position continues to build our ability for future acquisitions without exceeding our debt target thresholds.

Finally, to some guidance. Quarter 4 investments are expected to remain on similar levels as we have seen in the previous 3 quarters with an indicative range between SEK 0.4 billion to SEK 0.6 billion. Currency impact in quarter 4 is expected to be low as major currency pairs stay within the current ranges.

And with that final bit of financial guidance, I hand over back to Tom for a view on quarter 4.

[Tom Erixon, executive]

Thank you, Fredrik. And then let me come to a couple of comments on the outlook for Q4. In general, as you may have noticed, we feel that most end markets and geographies remain stable to positive for us. Also, the Marine sector is in a very strong demand period, which is not expected to stop in the short term. But after record level in the tanker segments with substantial order books in the shipyards and in Alfa Laval, this is expected to moderate the order intake looking into Q4 and slower total demand in the next quarter for the group.

So on a divisional level, for the Food & Water division, we expect a somewhat higher demand in the quarter. For Energy division, we expect demand to be on approximately the same level as in Q3. And for Marine division for the comments from earlier, we expect demand to be on a lower level in Q4.

And with that, we are happy to take any questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Magnus Kruber from Nordea.

[Magnus Kruber, analyst]

A couple of questions from me. So first, congratulations on a good set of numbers. I just wanted to continue with the Marine segment. You called out a sustained high vessel contracting in the tanker segment, in particular. Is that Q3 specific? And is it all tanker segments? And the orders you gathered in the Marine Pumping business in the quarter, is that related also to orders or contracting that you saw in Q2?

[Tom Erixon, executive]

Well, let me answer the question a bit generically first. We have been in a situation for a number of years where we've been feeling that the pent-up demand for increased scrapping and increased ordering of new ships should at some point in time come. And of course, the timing of that has always been uncertain.

Now we are in that period. We still don't see scrapping to increase because the freight rates are positive almost across all of the end segments. So all the ships that are available are keeping running, but obviously, the order books at the yards are now filling up, and we are now last year, this year on the order level of about 2,000 ships per year with a fairly strong tilt towards the [ Alfa ] sweet spots, including the tanker side.

If you look -- so -- and in principle, we don't think this demand situation will change a lot. And if you look at the bookings at the yards, the orders that comes to us early at the time of the contracting even if the delivery dates are a couple of years out, they come to our cargo pumping units very early. And so we are signing up the tanker orders earlier than the rest of our product offering.

And so what we see in the order books in Q2, in Q3 is an effect of that. It doesn't mean that the entire contracting is in our order books at this point in time, but on the important cargo pumping segment it is. And if you look at the numbers for product tankers, we are in this year specifically, so far this year already about 3x the order volume of product tankers that we have been on average over the last sort of 5, 6 years.

So we think this is a bit of an elevated level, but market demand in -- so that will need to be adjusted in at least in the next quarter and maybe in the next few quarters. But overall, we see a very healthy demand situation for tankers and product tankers over the years to come.

So we are not particularly concerned about volatility. We are certainly not concerned about volatility on invoicing over the next couple of years, but you will see fluctuations between quarters in the years to come based on this.

[Magnus Kruber, analyst]

Got it. And that was a good segue to my next one. How should we think about sort of the order delivery time within Marine business now in the context of the tighter yard capacity, do that diverge dramatically from the past or anything you can do to help us on the invoicing would be helpful.

[Tom Erixon, executive]

Well, I will hesitate to be too detailed on long-term invoicing. But my general comments that also from the previous question is that we have provided now for a pretty solid order book for deliveries in '25 and to some degree into 2026. So we don't expect a lot of volatility on the invoicing line as such. So as without guiding you what everything is going to be in 2025, we are moving in with a nice level of short-cycle business on the service side. And -- we expect that the high level of orders on early cargo pumping orders is, to some degree, going to translate into other product segments as we move forward. So we feel we have a reasonable stability in the growth trajectory for the Marine business as we look into 2025.

[Magnus Kruber, analyst]

Fantastic. That's good to hear. And then I guess, finally, if I can squeeze one in the audio broke up a little bit. Did you talk about an adverse mix in service ahead to some degree? Was that right?

[Tom Erixon, executive]

Well, yes and no. I think I just wanted -- I didn't indicate it as a major issue for how you have to think about the margin development in the group. The overall growth, what I thought was prudent to say was that we have been growing well above our historic averages for a number of years. And to some degree, I flagged even moving into this year after very strong growth last year that we may see a temporary moderation on the service side. We were a little bit unsure whether we saw some pent-up demand service demands from past the COVID period or any abnormality in terms of the demand.

But in effect, the growth has continued on a very solid level. One of the reasons why it does that is that our service scope has been broadening as we are building capabilities and people. And of course, the main driver of the margin strength of the service business for everybody in the industry is the spare part side. So as the mix in the service side is tilting a little bit towards services, that margin doesn't hold completely. But I thought it's -- I just felt it was a fair statement to make.

[Operator]

We now have the next question coming from the line of Klas Bergelind from Citi.

[Klas Bergelind, analyst]

So as you described Tom, the lower guide in Marine is obviously driven here by short cycle pumping. There's obviously much more than tankers with a lag from shipyard contracting typically is 9 to 12 months, and that's obviously yet to come through. If you take out tankers, do you think the orders outside can increase sequentially here going forward in the coming quarters? I'll start here.

[Tom Erixon, executive]

Well, I'm not going to guide you too clearly, but the momentum in the Marine business in Q3 was positive on everything. On StormGeo, on Alfa Laval Classic separations, on new fuel systems, on decarbonization and sustainability solutions. And what's maybe is not obvious to everybody is that we are -- we have taken the whole decrease of the retrofit period of PureBallast and scrubbers over the last few years and the -- and that period is now out.

So when we compare year-on-year numbers, we have a quite significant PureBallast planned negative delta that we are compensating for in other parts of the business. So I feel the momentum is very good, and I completely understand your question, I hesitate to be too detailed, but the momentum is in the third quarter was strong even leaving the cargo pumping side.

[Klas Bergelind, analyst]

All right. That's good to hear, Tom. My second one is on the lower revenue recognition. I was late on the call, there's a lot of companies reporting this morning. I think, Fredrik, -- you said third quarter is always the lower revenue quarter. I agree. But did we also see any customer pushouts, i.e., customers being a bit hesitant perhaps around the upcoming U.S. election, et cetera.

[Fredrik Ekstrom, executive]

So no, we don't see any extraordinary pushout from customers. There's always some element of push out by customers in any year, but nothing extraordinary or nothing that stands out in quarter 3 or any quarter this year. And my comment was actually more a sequential comment to quarter 2 that quarter 3 is traditionally a lower revenue recognition month simply because of vacations and there's disruptions to the routines. But in the end, it was a growth organically between quarter 3 last year and quarter 3 this year as we would expect from the backlog that we're carrying.

[Klas Bergelind, analyst]

Yes. Very clear. Then my third and final one is on the energy guide of stable. I think, Tom, last quarter, you said that third quarter could be a low point, and you saw some solid demand ahead, obviously, in data center, oil and gas, i.e. segments outside of the heat pump segment. You're guiding for flat demand here into the fourth quarter in Energy. I'm keen to understand the moving parts, please.

[Tom Erixon, executive]

Yes. The -- I mean, we came out stronger than we expected on the energy margin side based on how we compensated in the brazed heat exchanger side. We also had a reasonable mix invoicing in the quarter. So if we were a bit slow on invoicing in some parts, it was probably some project execution in the energy side that was a bit lower and it didn't affect -- if anything, it affected our margins almost positive. So the quarter came out strong. We had a lot of project order bookings in Q3 in the Energy division.

And we had a record pipeline of projects for welded units, partly driven by the investment boom in gas and partly the fact that we are converting some green energy projects into that unit. So that gave a good basis for the fact that we came out with organic growth year-on-year in the Energy division in what we thought would be our most troublesome quarter. And so that outcome was quite good. We expect the project ordering to be less in the Energy division in Q4, and we expect the other transactional parts of the business related to some of the underlying trends that we have been talking about and you referred to, to grow.

And so that puts us on a net-net. But I would say from a business cycle point of view, we feel we are moving into a stronger quarter Q4 than Q3, and it's entirely related to project bookings in Welded that you see a flat guidance.

[Operator]

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

[Max Yates, analyst]

Could I just ask on the Marine business. Could you just remind us in your pumping systems business where revenue capacity sits today. I remember from when you acquired Frank Mohn, it was, I think, around SEK 4 billion. I'm just wondering kind of how much capacity you've added here? And what is the maximum this unit can actually physically do in revenues?

[Tom Erixon, executive]

We -- it's a very good question. And you're quite right when you refer to the historic number. We have -- let's -- let me talk a little bit around that business because I think there is an important context. We -- I think we thought about the business when we acquired it back in 2014 as a high-margin business maybe a little bit volatile in the demand cycle.

So we didn't see a large structural growth. That wasn't the predominant reason for the acquisition. And so it was in our books for many years, SEK 4 billion to SEK 5 billion business. We have been in a very elevated demand situation for a period of time now. And it started in offshore and offshore has doubled since we acquired it. We -- it was a low margin business when we acquired it. We are getting it into -- well into Alfa Laval normal margin territory at this point in time.

We have a strong order book. We have a broad service business linked to offshore in the North Atlantic. And so at this point in time, it's a business kind of twice the size than it was in the past. We don't consider it at this point in time, super cyclical. We have a good pipeline going forward. And the investment projections in the North Atlantic look stable. So that's -- that part of the business.

The cargo pumping part of the business as you well know, went a little bit dry for us when it came to our order book, and it came back very strongly. And we see now a number of years going forward when demand is going to be significantly higher in terms of booking, but also in terms of deliveries.

We will -- we haven't lost a single order because we don't feel we can support the timeline. We are taking exceptional steps, not only in the supply chain, but also in the commissioning of new systems in preparation of what needs to happen in a number of Chinese shipyards right now. So we will be able to follow the market for every single order. And -- where will it take us revenue-wise compared to historic level. It's clear that for a number of years now, we're going to be on a significantly higher invoicing level than we were used to in the SEK 4 billion to SEK 5 billion. And that will most likely also lead that we will guide you on some future investment decisions for our facilities in Norway that we are preparing at this moment.

[Max Yates, analyst]

Okay. That's helpful. Just second question would be on the Energy division. It looks like you'll do kind of around SEK 20 billion of orders this year. Could you give us a rough feel of how much of that will be data centers? And also just a feel so maybe not quarterly data center growth rates, but maybe trailing 12 months or year-to-date, just on how those orders are growing?

[Tom Erixon, executive]

I think I mean, data centers is becoming gradually a more important part of the Energy division mix. I think as a component supplier or subsystem supplier, the data center orders are coming into our books a bit later than for some others in the sector. So we've seen for us, the data center growth, while discussions with end customers have been ongoing for a long period of time, the actual frame orders and order recognitions has accelerated the last 2 quarters and maybe especially the last quarter. So we feel we are early in that phase.

At this point in time, we are looking at data center applications that are directly booked under that code, specifically in those projects is probably around 10% of our Energy division order intake. I would not exclude that we have some equipment that ends up on data center applications, and we are just through the supply chain, not recognizing the order code correctly. So I would say it could be slightly higher, but that's about where we are.

[Max Yates, analyst]

Okay. And just -- that's helpful. And just final quick one. I thought your comments last quarter on the U.S. were quite interesting. You were kind of maybe not putting words in your mouth, but a bit sort of puzzled on -- it wasn't exactly clear what was happening in the U.S. There was maybe a little bit of uncertainty. Could you just give us a sense of kind of how you feel and how things have developed in the U.S. and whether kind of that uncertainty has continued? And is it specific to any product types or end markets that you would particularly call out?

[Tom Erixon, executive]

Yes. No, your memory is correct. And I was a little bit surprised because I was in the U.S. in the beginning of the year with a whole pile of our customers and everything was booming and everybody was sold out. So we didn't expect any big changes. The Q2 was clearly weaker than we expected. Q3 was a step forward. I think the remaining uncertainties that we have was -- is the closing of larger projects in the Food & Water division.

And I think a little bit of that is related to energy transition and the speed of investment decision into biofuels and the like, which we are booking in the Food & Water division. But there still, in general, has been we feel a slower decision-making on large project in that sector. On the energy side, it's okay. Our Marine business is okay. It's relatively small on equipment. It's a bit bigger on service. So we're just monitoring where we are going on the Food & Water large projects. That's the remaining uncertainty we have. But overall, we feel reasonably okay with the situation in the U.S.

[Operator]

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

[James Moore, analyst]

I've got 3 questions, if I could. One of them is on the brazed heat exchanger business. Could you say what capacity utilization is today versus the peak? Should we go one at a time?

[Tom Erixon, executive]

Well, for us, the question hasn't been what the peak was, it was what our business plan was. So we kind of running -- if you remember, about 1.5 years ago, I think it was -- we were going 24/7. We were booked for Christmas Eve. We did everything we could to support our customers that we could and we still fell short. So basically, we went into an investment program where we -- for this size of equipment, I think we more or less doubled our capacity.

And with that investment program more or less coming to completion, we completely fell from the all-time high level to in heat pumps to well below half. And so we are completely -- I mean, we are completely off from the capacity. It's -- and we obviously have taken steps to delay the program as much as we can and sort of -- but in principle, we are -- for the heat pump side, probably off about 80% compared to the capacity that we planned for to throw a number.

This has partly then been compensated by working with adjacency. The air conditioning market is pretty good. Our channel partners, we had to limit supply in that channel for a number of years when demand was high. And then we see growth in completely other applications, data centers being one of them. So although it doesn't go on exactly the same product specs for the unit as such, we've been able to manage what could have been a really problematic situation at the margin drop that has been significantly smaller than we calculated with when we went into this problem.

[James Moore, analyst]

That's great. And if I could switch to pumping systems, Tom. I mean just thinking about how Framo, you talked about offshore versus Marine. I have some understanding of the great marine margins of old and how much they fell, just versus the sort of the part peak, if you like, and how far we got to a year or so ago, how far back are we currently? And I'm just trying to gauge how this plays out really going back to Max's question as revenue comes back up to the past high-water mark and presumably goes above it. When do you think we meet the old peak marine pumping system margin. Is that now or is that a year or 2 years' time? And then maybe we can go beyond that? Just trying to think about the shape.

[Tom Erixon, executive]

No, I think kind of -- we are kind of operating -- that was my -- what I tried to say earlier. We are operating essentially all of our existing businesses, including Framo at the level of the peak at this moment. I think what -- can things change? Absolutely. And it probably will.

There are a few areas where we have profit improvement programs in place and working to drive it to a better place we have. But I think what will be the driver of the marine margin, if you want to sort of think about how you work with it, I think it's mix changes in the invoicing. There are various profitabilities in different areas.

So depending on how they grow in the invoicing mix, it will affect the margins one way or another. Right now, it's clear that pumping system is well loaded going forward, but it is also a long order book. So we will not completely go super growth quarter after quarter on the cargo pumping side. But I hope we will sort of keep a similar level of growth in the rest of the portfolio. But I think it's the mix side that's going to decide whether we can move the Marine margin up a notch or 2.

[James Moore, analyst]

So just to clarify, if I could, because I'm a bit confused. I got the sense that you were saying earlier that the offshore pumping had improved its margins over time. Are you saying that the cargo pumping is now back to margin is now back to where it was or just the whole pumping because if you've had an increase in offshore, you could still be behind where you were in cargo, if you get the gist.

[Tom Erixon, executive]

Yes, that question is almost too insightful for me to wanting to give you an answer. But I mean, you are kind of correct. But I would add to this that from a mix point of view, in the Framo business specifically, the invoicing on offshore as a share of the invoicing is probably somewhat higher.

And so -- but it's -- but in and of itself, it is a well-functioning supportive kind of around the average margin of the Marine division at this point in time. I think on the cargo pumping, we are back on the old level. It could be that the ramping still has a little bit of a step to go looking into Q4. But I'm just hesitant to guide you too optimistic on the question on the leverage we're going to get out of that.

But if you want to be very positive, there may be a little bit of truth to your analysis that it possibly could go slightly higher. But let's see where we go in this ramping and how the phasing of the completion of these projects will happen.

[Operator]

The next question comes from the line of Sebastian Kuenne from RBC.

[Sebastian Kuenne, analyst]

My first is, yes, again, on Marine. So we hear the strong order intake for cargo pumping. I was wondering when is the delivery expected for these ships for the orders that you got in Q3, you must have the timelines already. I was wondering how far out we have to look here?

And then is Alfa Laval still accepting all the tenders for pumping even if the lead times are extremely long. Because to me, it feels like it increases the risk that you have to hedge cost, hedge steel prices, hedge, labor costs and so on. I was wondering how far out you are now planning and whether you keep accepting these orders? That would be my first question.

[Tom Erixon, executive]

Yes. We are accepting all orders. To my knowledge, we haven't let go of a single one that we had the opportunity to win on conditions that we think are reasonable. The -- it's difficult to give you a precise timeline, but '25 is -- there are a few -- there's almost no capacity at yards nor at our place take rush orders at this point in time. But we have squeezed in the odd rush order from Q3 into deliveries next year.

But I think that door is pretty much closed. So '25 is down, '26. So we're looking at '26 and maybe some flow into '27 on that. So that's where the order book is. Your question on the risk on the order book is relevant and good. If we look at our overall order book of SEK 52 billion, the one that is longer than typically is the Marine one. So for the rest of our business in Food & Water and Energy, that looks normal. So it's the normal volatility.

And what I would say on that was that we had some problems across the board when we have the hyperinflation period, and we were not fully managed to compensate for that in the contract. And we are getting a little bit of the opposite effect now. We have better commodity prices and some positive deviations on project and product execution, and that was clearly visible in the Food & Water division, for example, in this quarter.

So there is some elements of risk and opportunity in the cycle for the way the order book looks. We have done a review in the Marine division on all of the long contracts in terms of our exposures and what degree we are able to negotiate some variability or renegotiation opportunities. So we think we got it under, under good control.

We are hedging on material costs. And the long order book on the cargo pumping, it is a solid margin business. So even if we have some exposures on a couple of percentage points, it doesn't really change the underlying attractiveness on the order book. So we feel good about it. We're increasingly monitoring contractual risks in long-term contracts, but I think we have an okay balance on it.

[Sebastian Kuenne, analyst]

That's very clear. My second question is on energy. If I run rough numbers, it seems that the product business is down 8%, 9% year-on-year. I assume this is mainly the brazed heat exchanger business. So you already indicated the low utilization for the Italian plants.

At the same time, you seem still reluctant to do anything on the capacity there. Does that -- is it fair to say that you are hopeful that the heat pump business is coming back in the next 12 months because otherwise, you would probably at least consider capacity cuts there? Or maybe you do capacity cuts, but it's only 10 brokers. Maybe you can elaborate a little bit on your expectations there.

[Tom Erixon, executive]

Yes. On the capacity side, we struggled in Yanjin in China, in [ Lund ] in Sweden, in San Bonifacio in Italy and in Richmond in the U.S. So this is a broad-based problem in the supply chain. We have done 2 things when it comes to limiting the financial impact on the capacity problem. One is that we simply as much as possible, have slowed the full implementation and commissioning of the new capacity. And so we're not carrying the full depreciation and the full cost of those investments in the P&L as of yet, although obviously, we carry some.

And then we used all the variable opportunities for limiting direct costs, especially in Italy where we used the [indiscernible] solutions. And I think the team has done globally a fantastic job in trying to modify the short-term financial impact. So it has been not as big as we thought, which means that in terms of revenue growth, we will see an impact in the years to come. The margin effect positive consequently is not going to be that big as the downturn was soften.

But when we took the investment decisions, we -- so let me first comment on the heat pump. Our view is that starting slowly in Q4, we will see a gradual ramp-up into some sort of normal levels coming into Q2 next year. That's sort of when the whole inventory reduction program is over, and we get some stabilized market on some sort of level. I don't expect that, that level necessarily will be higher than the peak. But of course, we will -- the peak included a lot of inventory building.

So I think we will have probably a normality level restoring somewhat below where we were at the last peak. And from there on, we will see the growth trajectory. When we made the investment decision, we were aware that we took a risk on the heat pump market. But one reason that we felt comfortable is that the same size and technology will be used in, for example, in hydrogen applications. And we are at the moment, investing more into hydrogen technology than we've ever done before, as you know.

We will showcase what we're doing in that area at the Capital Markets Day in San Bonifacio just a month from now. So really encourage all of you to come there. We will try to give you a good view on what we see happening on the heat pump side but also in the energy transition side. And that's the basis for why we feel that, of course, the timing of the capacity investments, put it at around EUR 250 million, EUR 300 million. The timing wasn't perfect looking back. But we are still comfortable that we will move into the new close gradually over the next couple of years.

[Operator]

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

[John-B Kim, analyst]

Congrats on the numbers. I'm wondering if we could talk about Food & Water for a second. I understand that Desmet and large projects has executed well. But how should we think about kind of margin and revenue mix normalization over the next few quarters? I'm trying to parse out the different factors and how you're -- how the division is performing? Start there.

[Tom Erixon, executive]

Yes. Let me move back a year. A year ago, when Fredrik and I was sitting here, we were a bit worried for 2025 from the point of view that we knew that the high level of project orders would decrease a bit during this year, and it is, especially on the fats and oils and the biofuel side.

And so the large order book would probably decrease somewhat during this year. At the same time, we were unsure where we were going to go on the short cyclical side. We saw early signs in China, maybe a bit of a recovery, but we were in volume terms compared to the peak in the short cyclical business down approximately 20%.

And so then we have been going through a level of good growth on the service side for a period of time, and we were unsure whether we could sustain that level. So when we looked to a year forward at that time, we were a bit concerned how will the invoicing base for '25 look like. And we said the most -- and I told you guys that the most important things for you to look at and that we are monitoring is, where is the short cyclical business going on the Food & Water side because on the project side, we are pretty much -- we think we're going to be okay.

But on the short cyclical, that's going to be the basis for how we look at 2025, and we were sort of prepared that we may have to prepare us cost-wise into more troublesome 2025. As the year has played out now 3, 4 quarters later, the short cyclical side has continued to grow. The third quarter was, by far, the best one that we had for a long period of time. We see a return on the pharma business side that was sort of slowed after the accelerated level in -- during the COVID period.

Service has continued to grow despite the fact that it's been very high over a number of years, and our project execution looks very good at the moment with higher margins than we normally have been guided for in the project business. So we feel quite good.

If we look at the quarter, as we indicated in the comments on the Q4, the Desmet orders are lower after the exceptional levels they had last year, all of the other units within the Alfa Laval Food & Water division grew. And so we feel, when we're looking forward into 2025, that normal -- the unit that normally should be the stability in Alfa Laval, the Food & Water division is maybe going to play that role a little bit.

[John-B Kim, analyst]

Super helpful. One unrelated question. We're starting to see some sizable projects around industrial feed pumps. So BASF as an example. I'm just wondering if you could give us a bit of color on the role you play in these very large installations and how big a market opportunity that is for you?

[Fredrik Ekstrom, executive]

Yes. And for us, the opportunity with a large heat pumps is, of course, mainly on the gasketed and heat exchangers. But for some of the really large ones, for example, you quote the one for BASF now. There, the media start also getting aggressive and there, we were starting to look a lot at our welded range as well. So now it's become a little bit of our welded range and our gasketed heat exchanger rate. That's primarily what's going into the really large heat pump projects.

[Operator]

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

[Andreas Koski, analyst]

Starting with the question on Food & Water. So we've seen weakness in Desmet. Would you say that the Desmet orders are now close to a trough? And is that the reason why you're guiding for somewhat higher demand for the Food & Water division in the fourth quarter?

[Tom Erixon, executive]

No, it's not. The Desmet orders is actually not too far away from the normal. I think we guided you when we bought the company that sort of the order level a normal year would be somewhere north of EUR 300 million, and we were twice that last year. And so we said it's not -- we don't expect that this level of invoicing -- the corresponding invoicing growth that suddenly the company is twice the size. It would be problematic to say the least.

So -- but the order level is not that exceptionally low. It may be somewhat lower than on a normal year, but I think it's -- in my recollection, Desmet is coming in on an acceptable level. And we don't think that's going to change in Q4. So it's not driven by project bookings when we are guiding. It's the continuous momentum on the short-cycle thing. And in general, in several end markets, including dairy, including pharma, including a good product structure and product launch pace in the Food & Water, we feel good about that part.

Our feeling, though, is as we look into 2025, the situation for biofuels, including ethanol, so for the Food & Water division as a whole, both on the Desmet side and in our traditional food systems, we expect the investment activity on the biofuel side to increase. So we are not calculating that into the order intake for Q4 at this point in time.

[Andreas Koski, analyst]

That's great. And then did you have any delays in deliveries during the third quarter? And the reason why I'm asking this is because you have the backlog now of SEK 15 billion that we delivered in the fourth quarter. And if I look at infra-out orders last year, we should be at a total revenue level of around SEK 20 billion in the fourth quarter. And I don't think you ever done above SEK 18 billion in the past. So it would be a strong new record high if that plays out. And do you have capacity for that? So -- or is it because you have produced products that was delivered in Q3 and will be delivered in Q4?

[Tom Erixon, executive]

Well, when you say SEK 20 billion, and we are also running the calculation, it's possible to arrive that. And do we get a bit nervous on that number? Yes, we do. But it's not -- I think the issue we have we were maybe a little bit slow on the Energy division side. But I think the main struggle for us is to get the phasing right. It's not super easy on percentage of completion projects to have the revenue recognition process exactly tuned in, in hundreds of projects around the world.

But we do expect a good invoicing level in Q4, and we don't feel that there are any structural capacity limits. That's not what's going to hold us back. And as Fredrik was on to before, we don't feel that there is any particularly customer delay processes that is hindering. We think the execution of the order book is pretty much -- operationally, it is where it should be. We are trying to guesstimate the phasing of the order book on what's there to invoice in the quarter, in the next year and so forth. So -- but that's not the science. We are trying to get it approximately right. I think, Fredrik, is that fair?

[Fredrik Ekstrom, executive]

Yes, that's quite fair. I mean just to reiterate, I mean I think our judgment is that the quality of the backlog in relation to cost is good. We don't see any structural reasons why we shouldn't be able to deliver on our order book in quarter 4 and going forward. There's no operational reasons why we shouldn't be able to deliver. It is a phasing question and sometimes the percentage of completion delays and sometimes the invoicing lands on a week or 2 later than the quarter close, and that's just the way it goes. But we expect a strong quarter 4 given the backlog, whether it's 20, I wouldn't put a number on it.

[John-B Kim, analyst]

Yes. Understood. And then just quickly, is it possible to give us an indication of how much of the order backlog is for delivery in 2025?

[Fredrik Ekstrom, executive]

You will get a clearer sense of that when we give our first reported quarter 1 and you see it in the form of current and backlog later. So I don't want to give an indication that's going to be wrong.

[Tom Erixon, executive]

I think we are at the last question at this point in time.

[Operator]

Okay. The last question comes from the line of Weier from UBS.

[Sven Weier, analyst]

It's Sven from UBS. Just a quick one on the service business, which has been, again, quite strong. I mean, could you just give us a sense how much that is replacing maybe the pushout in new investment, right? And to what extent are customers sweating the assets, using them longer of the more service and pushing out the decision for OE? And would that -- if that's the case, I mean, would that mean if the OE comes back more strongly that in dense a little bit to service? That's the first one.

[Tom Erixon, executive]

We have been hesitant to draw clear conclusions for a long time. But I think at this point in time, we feel comfortable that we have done a job on the service side that's giving us actually a different position in the service market than before. Investment in people, in leadership, in technology, in service centers, in spare parts inventory and distribution capabilities. We are penetrating our installed base better. In some areas, we have broadened our service scope to multi-brand.

And in some areas where we thought the service opportunity was limited, we have actually driven a service strategy that's taken us to a level of 20%, 25% of service content in areas where we were single digit before. So I think there is a big part of what we are doing that is the right thing long term. We were underserving the market for a long period of time, and we are gaining our fair share and hopefully, over time, a bit more of where we should be compared to our installed base.

So I think I would say that's probably the big part of the answer. If there is one area where we see an elevated service demand because of sweating the assets, as you are saying, it is in the marine industry where we see a lot of older vessels being maintained because ship rates are very good and delivery times for new ones is quite long. So I think maybe we have elements of overinvesting in the service on the marine side at the moment. On the other hand, we are increasing our installed base. We are gradually moving ballast and scrubbers and other new applications more and more into the service periods of normality. So there -- I'm not suggesting that we are super worried about the service level in Marine.

But I think the reason that the Marine has been so high as opposed to a more normalized growth rate is maybe impacted to a degree of old ships being kept on the seas, and that probably will come to an end within the next couple of years. So that would be my [ SEK 0.05 ] worth on it.

[Sven Weier, analyst]

Okay. And the second one, if I may, is just on -- because you called out China, obviously, as the most important country. I do remember that in the past, you had quite some refinery orders, petrochemicals in China. I was just wondering how you see the refinery market specifically, given that obviously, we have this huge boom in e-mobility we see lower gasoline demand. Do you see that in the pipeline already as an impact? Or is it -- are we more focused on petrochemicals in China?

[Tom Erixon, executive]

No, I think we've seen a mix change in China. China is, by far, the world's largest energy transition country, and that's visible also on the investment side. So we have energy efficiency solutions, and we have investment that goes into the renewable side in a different way than in the past.

So I think all in all, and there still has been some elements of energy independence in China with investments on the petrochemical and refinery side also now in recent time and still ongoing. So I think our sense is that slow growth in energy and slow growth in Food & Water from the current levels. That's where we are in Q3. And we feel reasonably comfortable with the short-term development in China outside of the marine as well.

All right. And with that, I thought that was great to end on an energy question. I advertised a number of times already in for you to come down to Verona. We will share with you on November 21, our best thinking on how we see the energy transition not only related to Alfa Laval, but how we see and read the trends in most of the relevant sectors. We will show you a part of our laboratory initiatives in order to get efficiency in electrolyzers and fuel cells up to an acceptable level and more. So I think this will be a good one. I hope you have the opportunity to join us in Verona and San Bonifacio. So thank you very much for a good hour.