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Operator: Ladies and gentlemen, welcome to the Alfa Laval Q3 '25 Report Conference Call. I'm Valentina, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Tom Erixon, CEO. You will now be joined into the conference room.
Tom Erixon: Good morning, and welcome to Alfa Laval's Third Quarter Earnings Call. And Fredrik and I, we're going to take you through the quarter. So let me, as always, start with a couple of introductory comments. Now with a solid order book and good demand in service and short-cycle businesses, sales grew 8% organically in the quarter. It was a stable and clean quarter operationally and earnings increased to a new record level of SEK 3.2 billion in the quarter on the EBITA level. And then finally, as you noticed, we have adjusted our financial targets to better reflect our financial performance levels. And I will comment on the financial targets a bit later. So let me go to the key figures. Order intake was good in the quarter with a 10% organic decline as expected due to the normalization of demand in cargo pumping applications. In the short-cycle business, both order intake and factory utilization are is at high or record high levels in several end markets and product groups. Sales developed well, supported by all 3 divisions and generated a margin of 18.4%. In all, it was a well-executed quarter with mix effects contributing to the margin improvement. Moving on to the Energy division. The market dynamics are shifting towards a stronger HVAC, heat pump data center growth and moderate expectations on CapEx projects in the fossil fuel business. Cleantech remains on a positive growth track across a wide range of applications despite growing concerns regarding the political support for the decarbonization journey in Europe and in the U.S. Strong momentum in energy efficiency, growing demand for nuclear and an expected scaling, making new technologies financially sustainable are the foundation for future growth in the cleantech sector. The margin was sequentially stable, but note that transaction costs related to the Fives Cryo acquisition was charged to the P&L in Q3 on the Energy division. So moving on to Food & Water. Order intake was firm in most end markets. Large order bookings were relatively slow, although the project pipeline still remains healthy in terms of outstanding quotations. Short-cycle demand drove a positive mix change with a healthy margin. The project business generated a positive margin improvement in the quarter, but we are still working through some project execution issues in the quarters to come. Then coming to Marine. Profitability remained sequentially stable on a high and good level with good order execution in the quarter. While the record ship contracting year in 2024 will not repeat, contracting at the yards is expected to remain at about 2,000 vessels per year pace, approximately matching the global yard capacity. As expected, the 2024 contracted ships are now converted into our order books with record level orders in several product groups within the Marine division. The order intake decline compared to last year was entirely related to the expected normalized order level in cargo pumping with new orders at a normal rate for the business. So on to service. Service has grown substantially over many years and now accounts for 31% to 32% of orders, structurally somewhat higher than historically. Still, this year, we have worked through a lot of operational challenges, both related to physical distribution centers and the digital systems supporting the spare parts flow in the Energy division. It is and was a needed scaling project to cope with the larger volumes. And with the troubleshooting behind us, we expect the Energy division to return to service growth in line with other divisions. In the Marine division, service accounted for 40% of order intake, supported by a larger installed base and an aging global merchant fleet. If the aging fleet provides some tailwinds, the constant transfer of older tankers to the Russian dark fleet is a headwind and obviously outside our business scope. Then finally, a few comments on key markets. China and the U.S. accounting for approximately 40% of our business had a strong quarter with good demand in many areas. Note that the cargo pumping affecting an otherwise growing business in both China and Korea. Most markets are stable to positive at this point in time in the quarter, but looking forward, Middle East CapEx projects may be negatively affected by the lower oil price. And with that, I hand over to Fredrik for some further comments.
Fredrik Ekstrom: Thank you, Tom. So hello, everyone. Let us get started by recapping the order intake in quarter 3 at SEK 16.6 billion. Organic growth contracted with 10% in the quarter. A substantial part of this contraction stems from the lack of large project orders. In the Energy division, both the welded heat exchangers and Circular Separation Technologies noted the absence of large orders. Desmet and food systems in the Food & Water division denoted the same pattern. And finally, in the Marine division, the continued normalization of tanker vessel contracting impacted the numbers. Important to mention in this context is that the project list remained strong, both in quantity and quality. It is the conversion to orders that is occurring at a lower pace, reflecting uncertainty in the market driven by external factors. Transactional business has a different development, up 8% in the quarter comparatively, excluding currency movements. Both gasketed and brazed heat exchangers booked orders above the same period last year in the Energy division. Fluid handling equipment, separators and decanters also booked higher order intake levels than in quarter 3 last year in the Food & Water division. And finally, our traditional marine products are also continuing to outperform quarter 3 last year. Service was up 8% in the quarter, excluding currency movements. Currency has an overall negative impact of almost 6% and, our acquisitions so far this year have a positive impact of 3% on the total. The same pattern repeats on a year-to-date basis and is an important input to any trend analysis. Book-to-bill in the quarter was 0.96 with a remaining strong backlog of SEK 51 billion, of which SEK 16 billion is slated to be invoiced in quarter 4. The backlog price levels are well in line with current input prices and in line with current tariff levels. Now on to sales. SEK 17 billion in sales in quarter 3 represents a strong historical level for quarter 3. Our manufacturing entities are delivering to our customers on commitment and on high utilization levels, which is clearly visible in the gross profit boosted by a strong factory and engineering result. Currency once again impacts negatively on a comparative basis, but prominently organic growth is up 8% in the quarter. Worth mentioning here is that the proportion of large project business in the invoicing mix is high. Transactional volumes are up, but not to the same extent. Net sales for service grew 3.1% compared to the same quarter last year, accounting for a mix of 30%. We expect this mix pattern to continue into quarter 4. Gross profit improved to 36.8%, boosted by better factory and engineering results and positive purchase price variances compared to the same quarter last year. Operating income increased with 12.6%, to SEK 3 billion. Sales and administration expenses were SEK 2.6 billion during the third quarter, corresponding to 15.4% of net sales. Research and development expenses were SEK 427 million during the third quarter, corresponding to 2.5% of net sales. Earnings per share in the quarter amounted to SEK 5.53 and SEK 15.22 for the first 9 months. The corresponding figure, excluding amortization of step-up values and corresponding tax was SEK 15.97 for the first 9 months. Now on to profitability. The Energy division posted an EBITA margin of 16.6%, which is lower than previous quarters due to a shift in mix towards large orders and costs related to the acquisition of Fives Cryogenics. Continued strong sales in the transactional business portfolio and service compensated for a large project mix invoicing in the quarter, yielding an EBITA of 16.1% for the Food & Water division. The Marine division continued with a positive mix of invoicing from cargo pumping systems and service, which yielded a 23.5% margin. On a group level, the adjusted EBITA margin of 18.4% is a record with a -- sorry, is high with a record SEK 3.2 billion in money terms with a negative currency impact of SEK 178 million. Now on to the debt position. Post 3 acquisitions so far this year, most notably the Fives Cryogenics business, debt stands at SEK 18.6 billion or 1.3x last 12 months EBITDA. Net debt, excluding leases at 0.86 and including leases at 1.1 last 12 months EBITDA. Given our stated thresholds, the group retains sufficient debt power to complete further quality acquisitions as those opportunities arise. Cash flow from operating activities was SEK 2.2 billion in the third quarter and SEK 5.8 billion for the first 9 months. The lower cash flow is mainly due to an increased working capital compared to the same period last year, driven by inventory and predominantly [ WIP ] and decreasing advance payment as large projects are invoiced. Acquisition of businesses in the first 9 months was SEK 9.3 billion, whereof SEK 8.8 billion for the Cryogenics acquisition, and SEK 529 million was due to two minor acquisitions. Financing activities amounted to SEK 3.9 billion in the quarter and SEK 4.5 billion in the first 9 months. These numbers primarily composed of the additional debt added for the acquisitions of SEK 8.7 billion and a shareholders' dividend of SEK 3.5 billion. Before concluding, some guidance for the quarter ahead and looking into 2026. CapEx guidance for the fourth quarter is SEK 700 million, and reiterated guidance of SEK 2.5 billion to SEK 3 billion in 2026. PPA amortization of SEK 175 million in quarter 4 and SEK 580 million in 2026. These numbers include the preliminary purchase price allocations for the three acquisitions in 2025. Tax rate is guided to stay in the interval of 24% to 26%. And with that, I hand back over to Tom for some words on quarter 4.
Tom Erixon: Thank you, Fredrik. Some forward-looking comments then as a summary. Let me start with the financial targets. The change in financial targets should not be seen as a change in guidance. We are making the adjustment because of two main reasons. First, we tend to overshoot the targets and consider them a floor level for performance. Now we are moving the targets into the present performance range, and it's important for us, including for internal reasons that we have similar objectives externally and internally. Second, we want to recognize that the investments during the last 5 years into technology and capacity were made for good reasons. We believe we have invested our shareholders' money responsibly and profitably, and we expect to continue to convert those investments into profitable growth in the next 5-year period. So finally, our crystal ball is no better than yours. If global macro deteriorates, if the energy transition stumble, if AI and data centers run into difficulty, we and others would find financial targets challenging. But with that said, we have changed the targets in terms of growth to 7% sales growth. And the EBITA margin moved up to 17% over the cycle. And we kept the ROCE target at the current 20% just to allow for the effects of future potential acquisitions. Regarding the next quarter, we believe demand in the fourth quarter is sequentially stable and on about the same level as in the third quarter. And on a divisional level, we expect the Energy demand to be higher, the Marine to be somewhat lower and the Food & Water to be stable compared to the third quarter. So with that, let's get over to the Q&A session.
Operator: [Operator Instructions] The first question comes from Gustaf Schwerin from Handelsbanken.
Gustaf Schwerin: Can I ask on the Energy division orders? If we look at this organically, they are largely unchanged versus Q2, so a bit lower than what you guided back during the summer. You, of course, mentioned the decision-making here. So given that you're now saying this should increase in Q4, has anything underlying really changed? Or is this just a matter of slower commercial rates on the orders? Yes, that's the first one.
Tom Erixon: It's a good question. I think our perspective is that it is a fairly stable growth curve and sometimes projects end up in one quarter or another. So we are relatively positive to the demand trend in Energy. And given that we see improvement on the HVAC side and in a number of areas, the outlook for Q4 is reasonably positive. So I think it's more a question on when bookings are taking place than any change. We had a reasonable positive view 3 months ago in terms of the growth perspective, and we remain committed to that.
Gustaf Schwerin: Okay. Then secondly, on the margin in Energy, can you give us a rough sense of the M&A costs here, and if we should expect this going forward as well?
Tom Erixon: You should expect that the margin was essentially unchanged compared to Q2, excluding the cost related to the transaction. There will be some costs also in Q4, but I believe on a lower level. And we are not dealing with them as adjusted earnings. We're just [ charging ] them straight off.
Operator: The next question comes from Magnus Kruber from Nordea.
Magnus Kruber: Magnus from Nordea. Could you -- with respect to Cryogenics, does that business sit completely within the process industry end market?
Tom Erixon: Yes. I mean it depends. There are essentially three application areas for Cryo at present. One is normal industrial gases, and the other one is LNG. And gradually, we expect hydrogen and energy transition applications, including carbon capture, be growing as part of the segment. So those are the end markets that we are dealing with. Largely, the applications are for larger projects in the industrial space. But I remind you that there's also Cryogenics pumping side that may fit well with our Marine business and some other applications as well. So I think the Cryo side may be a bit wider as we go along. But presently, essentially, you could consider it the process industry-related application.
Magnus Kruber: Perfect. And secondly, light industry and tech saw a second quarter of declines year-over-year. Of course, FX is part of that. But could you comment a little bit about the momentum in data centers and other parts of the business, please?
Tom Erixon: Yes, I think it's a correct observation. We are very comfortable with the development on the data center side. And we are entering into the expected frame agreements. And -- but I think what happens is that in terms of the actual quarterly bookings of the order, there are some variations. So in terms of progress on the data center side, it was good in the quarter. We expect that to continue into Q4 and next year. So we're on track with our plans, but the actual order intake bookings in Q3 was not that strong.
Operator: The next question comes from Carl Deijenberg from DNB Carnegie.
Carl Deijenberg: So first, I want to come back to the acquired Fives Cryogenics. I know you've talked about in the past that the aftermarket exposure in this entity relative to the, let's say, core Alfa Energy division is lower. And I just wanted to understand is there any difference here in the seasonality on the earnings given the sort of differences in the operational character? And also maybe going forward, I saw that you were adding roughly SEK 2 billion in the backlog. I guess this relates to the acquired entity. And given, let's say, the longer cycles you're addressing there relative to the transactional exposure in the Energy division, is there any significant quarter here going forward that you're set to finalize something or any large order that is going to come in that we should be aware of?
Tom Erixon: I will not comment on individual orders, of course, but we always monitor our pipeline of outstanding quotes. And if I look at that pipeline, both in the Food & Water division and in the Energy division, it is relatively positive. The conversion time and if it gets through the final CapEx decision, there's always some uncertainties. But in general, we have a positive feeling around the pipeline in the Energy division, specifically for Q4. The Cryo, I don't -- it is, as you say, low on service. It will probably remain that way. The order intake will vary over the quarters. We had, I think, a normalized Q3. We expect a relatively strong Q4 on the Cryo applications. But in terms of earnings and how we execute those projects, it's percentage completion. I think we will -- Fredrik will work to have that as a stable and correct representation of progress every quarter. So I don't think -- if you want to add something?
Fredrik Ekstrom: No, there's no particular seasonality to the percentage of completion. It's when the projects come to fruition and commissioning starts. So there's no deviation from that point of view, and there's no seasonality from that point of view.
Carl Deijenberg: Okay. Very well. And then secondly, just very quickly on the pumping systems side. I see here in Q3 that orders seem to be stabilizing and actually being up slightly Q-on-Q, not by a huge amount, but a little bit. And could you just talk a little bit now on the sort of backlog or the timing on the orders you're taking in now on Framo and the lead times, just to understand the phasing of the backlog and so forth in Marine?
Tom Erixon: Yes. I will not give you the full timeline on everything, but we are clearly fully booked for Q4, and we are essentially fully booked for 2026. So what we expect to see now is the normalized level renewing normal order flows as the contracting in '26 is expected to remain at about the 2,000 ships. And we don't see huge fluctuations in tanker contracting either. We think sort of with some variations between quarter, we will see a reasonable amount of new orders being signed, new contracts being signed. And so we were at Q3, if you think about it historically, actually perhaps somewhat on the high side when it comes to sort of our average order intake level. So we were pleased with the quarter. I think it substantiates that although we are not going to be at 2024 level in terms of order booking expected for a long time, we will continue to run that business on a good level. And that is also reflected in the investment decision we announced with our biggest CapEx decision in our history of SEK 4 billion. Although spread over a number of steps, a number of sequences and over 5 years plus, it is a big commitment to a business we believe in.
Operator: The next question comes from Uma Samlin, Bank of America.
Uma Samlin: My first one is on your guidance. So would you be able to help us to clarify how should we think about your growth guidance of 7%? What component of that is organic versus inorganic? And also on the margin guide, did I hear you clearly that the guidance is not a floor, but more of a through-cycle average margins? If that's so, where do you think we are in terms of the cycle?
Tom Erixon: Yes. The growth ambition includes the possibility of acquisitions. We will make those judgments as we go, partly on where we are on the organic side and the macroeconomics and partly what opportunities we have on the M&A side. But we feel we have built a stable foundation for organic growth in the coming years. So without that, we would not have stretched our growth targets above the 5% we were at historically. And obviously, as you see, current level is higher. And at some point in time, the spread between the target and the floor level versus where we were just becomes a little bit problematic. So we think this is a good reflection on the growth side. On where we are in the cycle? If you asked me 10 years ago, I would give you a reasonable answer. After the last 5 years when we've been going through a COVID, shutdown, hyperinflation, a trade war, I have no clue where we are. The only thing I know is that with all of the turbulence that we've been living with in global markets, we come through that in a good way. And if we get some stability in the world regarding wars, regarding trade routes, regarding tariffs, I expect that we will have a couple of good years ahead. But to predict the macro events at this point in time seems to be a bit problematic. So we will deal with it as we go. But obviously, if we have a sharp downturn in the coming years, it will affect our financial performance just as everybody else.
Uma Samlin: That's super helpful. May I just have one more follow-up on Marine. So how should we think about your expectation for Marine orders into Q4 and into '26, given the contracting has been fairly weak year-to-date. We just heard from your competitors who's expecting sort of like for '26 and '27 marine contracting to be up 30%. What's your thinking on that? Where do you see is the normalized level for Marine orders?
Tom Erixon: Well, as I've said a couple of times, if we look at our invoicing path in Marine, it's a somewhat better way to track us financially than on the order intake and the contracting side. The global shipyard capacity in terms of deliveries is at about the 2,000 ship level, thereabouts. It may increase somewhat in the years to come, but we are not quite there yet. So that means that irrespective -- and basically, the yards are fully loaded for the years to come. So we see a lot of stability in terms of our delivery path in the coming years. In some areas, we are obviously tight on capacity now, but we are meeting our commitments and our obligations towards our customers. And there's a team who's doing a very, very good job on that. But sort of the downward risk in terms of volumes of invoicing for the foreseeable future is not -- does not look as a huge challenge at this point in time. I remind you that last year, we had an order intake of SEK 30 billion, about 50% ahead of the normal numbers. And so I said then, and I repeat that we are not a SEK 30 billion division in terms of invoicing, but we are on the SEK 20 billion plus. And I think it's from that level that we work with the organic growth and potential acquisition growth going into '26.
Operator: The next question comes from Andreas Koski, BNP Paribas Exane.
Andreas Koski: So three questions. First, on Marine sales. Can you give an indication of your pumping systems sales in the quarter? Are we at a level around SEK 2.5 billion or even closer to SEK 3 billion? And did I understand it correctly that you are fully booked through 2026. So the sales level that we're seeing in Q3, we should also expect through 2026?
Tom Erixon: I will not give you detailed numbers to the million on individual path. But I want to remind you that the pumping systems include an offshore business. It does include a small aquaculture business. And so the whole thing is not and will not be on cargo pumping applications for tankers. So just for you to keep that in mind. But with that said, all of those businesses are in a good shape. And the demand situation looks -- despite some concerns on the oil and gas side, the demand situation for offshore looks reasonable going forward. The service business in that area remains strong. So that's sort of the backdrop of the business. I think in terms of invoicing, we are more or less at capacity, and the big investment program that we are doing is partly going to cope with the existing demand pressure, modernization, efficiency, automation and site consolidation improvements. But that will not have any major impact on invoicing capability for next year. And in any case, I think at the end of the day, it's the yard capacity that is determining the invoicing level in 2026. And I think they are pretty much running at full pace as we see it.
Andreas Koski: Yes. The reason for asking is to try to understand if we should expect a margin of 23%, 24% also for the full year 2026 because the mix will remain as positive as it is today, but maybe you don't want to give any indications of that.
Tom Erixon: I have full confidence in your ability to make your own calculation on that.
Andreas Koski: Yes. Okay. And then on the order intake side in Q3, I understand Fredrik -- I think Fredrik mentioned that you lacked large project orders in Q3, but that the project business remains strong, both in quantity and quality. So I just wonder, in your outlook statement, have you assumed that the larger part of that project pipeline will convert into orders?
Fredrik Ekstrom: No. To say that a larger part of the project list that we have right now would convert into quarter 4, then we would be giving you a different guidance...
Andreas Koski: No. I mean a larger part than in Q3, I mean.
Fredrik Ekstrom: Well, the conversion rate is determined by a lot of factors, and some of them are clearly external and clearly are held back on uncertainty. And if we see the uncertainty decreases in the coming 20, 30 days and assuming that, that's sufficient for somebody to make the final decision on an investment, then we might see that we have orders that have slipped in from quarter 3 that we expect to come into quarter 4, and there will be orders in quarter 4 that may very well slip into 2026. So it's hard to give you an exact guidance more than the one we already provided for quarter 4.
Andreas Koski: Understood. And then lastly, if I may, on your new financial targets. If you want to elaborate and explain why you didn't go for a more ambitious margin target? And how much of your new growth target is expected to be organic?
Tom Erixon: Yes. I think on the organic, some people already observed it was quite in line with our 2030 target of SEK 100 billion. We stick to that one. And let's see how the mix is. Obviously, the reason we are increasing the growth target is for organic reasons. We may or may not have some M&A opportunities converting in 2026 and 2027. But we think we have a good growth platform installed, build up, invested into capacity-wise created space for. So the organic growth is, I think, for us, the most important part of the growth story for us. So I leave it at that. We see where it comes. On the profitability target, I said this during many years, at the 15% level that our ambition is not at this moment in time to optimize our margin at all costs. We are a growth company. We are investing what we think is responsibly and profitably into technology and capacity. We continue to do so. And we think the long-term shareholder will benefit from long-term growth plan, stability in our execution. So we don't want to put ourselves into a type of a profit escape opportunity where we are acting everything that is not generating 17% plus. So this was a measured step reflecting approximately where we were and leaving the floor of 15% a little bit behind us and accepting that the current performance level is perhaps about the target range that makes sense for us.
Andreas Koski: So does that mean that we shouldn't expect 17% to be sort of the floor as the 15% was?
Tom Erixon: No. I think we did the 15% 20 years ago. I don't think it was, at that time, a floor. It was an ambition. We are not super guiding you on the margin. I mean, as you could notice this quarter, we were above. I think we will fluctuate. I think my point is saying, and I've told you this before, that it would be a very simple trick to increase the margin in Alfa Laval from where we are today with a percentage point or 2 if we decided that the long-term future was less opportunistic. And so we are committed to our long-term growth plan. We are investing in that, and we don't want to cut and limit our opportunities for the long-term growth potential that we see. So that will, in a sense, determine a little bit where the margin will be, and that's why we don't want to go too high on our ambitions because we think there are opportunities. But we also recognize that the 15% is not all that relevant as a financial target. And if you look at your own and everybody else's assumptions, I think the market estimates for the coming 3 years is pretty aligned with our targets. So that's why we're saying that don't think about this as a very strong guidance comment. It's more creating a relevance, not least internally for what we expect ourselves to work with.
Operator: The next question comes from James Moore from Rothschild & Co. Redburn.
James Moore: Can I just go back to Fives and the charges and just confirm that the Fives integration costs were SEK 215 million in the quarter and that the charge is basically exactly in line with the 430 bps impact on the energy margin year-on-year. And would it be fair to say about SEK 100 million for the fourth quarter? And attached -- maybe we start there, and I could follow up.
Fredrik Ekstrom: Yes. No. So what we have indicated is that if you look at the sequential development and you look back a quarter, you probably get a better indication of what that charge was in relation to where we were -- finished in quarter 3 and that the same will probably hold true into quarter 4. Of course, some of this is also dependent on the invoicing mix that we have in quarter 4 with the invoicing mix that we had in quarter 3. decreased the margin. I think a good guidance is to look at quarter 2. So sequentially stable.
James Moore: Sequentially, not year-on-year. My mistake. And the underlying performance of Fives, did -- it looks like you did SEK 620 million of revenue for, I don't know, [ 2.75 ] months, which to me looks like it's growing 20%. I don't know if that is the case. And if you strip out the charges, what was the underlying operating margin at Fives slightly accretive to Energy in the kind of low 20s margin range as you previously hoped? Or did it go up with growth? Or was it below due to seasonality? And how does the Fives seasonality play out over the coming few quarters, please?
Fredrik Ekstrom: Yes. And as we indicated before, there's no real seasonality to the Fives or to the Cryogenics business unit, as we call it. There's no real seasonality to that invoicing. It's more how it's delivered to the customer and the milestones that are agreed with the customers from a percentage of completion point of view. Of course, the invoicing was good in quarter 3 for the Cryogenics business, and the margins were in line with expectations as we took on a business. There are some -- there is an element of onetime charges and integration charges, but we include those as part of the operating business.
James Moore: I understand. And lastly, if I could. I understand the philosophy behind your new targets through cycle, internal benchmarking, et cetera. But obviously, behind that is a fair degree of confidence on long-term organic growth potential. I was just wondering to what degree is that underpinned by existing backlogs? And to what degree is it once you've got through those backlogs, you still see a high pace of growth continuing? And what is it that gives you renewed confidence on that apart from recent growth trends being better? Or is it just recent growth trends being better?
Tom Erixon: Yes. We think it's better to look at -- if you're a debt analyst, you will look at the last couple of years and make a prediction of the future. If we do that, and we look at all the investments we've done, and how we described the 2030 target last year, and we will go through that again in our Capital Markets Day in November, there is the basis for our belief. We have, I think, an end market exposure that couldn't be better. And so I think it's up to us to utilize those positions in Energy, in Marine and in Food & Water alike. And are we convinced that we will reach the targets? We think this is the best indication we can give to ourselves, and we communicate the same to you guys that this is where we think we will be. But I would recommend you to come to the Capital Markets Day for a little bit of a review of the verticals and the business opportunities, the way we see the plan going forward rather than just a quick Q&A here.
Operator: The next question comes from John Kim from Deutsche Bank.
John-B Kim: I was wondering if we could speak a little bit about Marine regulations. You may have seen the MEPC 84 session in October delayed the decision on, I guess, stronger emissions controls. I'm wondering if you're seeing any knock-on impact in terms of how your customers are ordering, not ordering, delaying orders?
Tom Erixon: Yes, it's a very good question. And it's, of course, a situation we monitor extremely closely. It does potentially impact the way a customer will decide. I think our best estimate at this moment in time is that one of the main drivers other than efficiency and fuel efficiency and such, for environmental technology and multi-fuels capabilities, is to create an insurance against having a stranded asset some years from now when and if a new regulatory environment is forcing a decrease in the emissions. Now obviously, for many reasons, not only Alfa Laval's business, we are hoping that there will be a framework implemented in terms of emissions control on the Marine side as well as in other areas. And I think short term that the fair amount of ship owners will continue to hedge their bets as they order new ships. And I remind you that if we look at the multi-fuel levels in the industry right now about -- if you take ammonia and LNG and a couple of other sort of main alternative fuels to heavy fuel oils, the current level of orders are representing about 15% or so of the global fleet, equipping themselves with multi-fuel capabilities. So even if it should go down somewhat, it's not going to be a major impact on us in the next quarters or so. If we look at the current trend curves as they are, they are continuing to grow. But of course, those trend curves are back to time almost driven by decisions prior to the delay of the implementation side. So it's a bit early to really make a call on what is the immediate effect. But I would be surprised if we will see a dramatic change in the trend curve over the next couple of quarters while the uncertainty remain.
John-B Kim: Great. And if I may, I'm sorry if I missed this, but can you update us on your newer product offerings in energy? I'm speaking specifically about the liquid-to-chip offering?
Tom Erixon: Well, it's -- listen, it is our normal product ranges that are going into air and water cooling, and it's a question of capacities for certain sizes and formats and things like that. So the product mix in our supply chain is changing somewhat. But we are not in a technology development -- we do an awful lot of technology development, but for the data centers, it actually is in line with our current supply capabilities. And so our main challenge is to figure the volume demands in the coming years and matching sort of the supply chain capacities that we need in order to serve that market. So that's where we are on that one.
Operator: The next question comes from Klas Bergelind from Citi.
Klas Bergelind: Klas at Citi. I had -- coming back to the Energy and Food & Water margins. In Energy, obviously, some costs are linked to the recent acquisition, but you still have the R&D ramp. I was under the impression that, that R&D ramp concluded already in the second quarter. So I'm interested in how you look at this into the fourth. And then in Food & Water, you booked quite a lot of large orders in the second quarter. And obviously, this is a very good margin you're delivering right now. But I'm just trying to understand whether the mix from having then that backlog built up on the larger side will start to weigh on the margin here a bit in Food & Water. I'll start here.
Fredrik Ekstrom: Well, if I take Food & Water first, of course, the -- we have a large percentage of large orders invoicing out in quarter 3. But we also have a substantial resurgence of the transactional business, and that's been happening over the last 6 quarters that we have seen an increase in the transactional business, including service. And of course, the fundamental margin accretion that we get from that transactional business and the service mix into Food & Water, of course, lifts the margin overall. So it's not that we have drastically changed the margin profile of large project orders. It's rather the mix that we see in the current quarter. That mix may look different, of course, in coming quarters. But -- so it's a little bit based on that mix. And if we then look at the Energy division. Well, the Energy division, we have spoken a little bit about the margin development before. And if we look at specifically the R&D as your question was, well, we have not put an end date to R&D. R&D is something we continue to do over indefinite period really. I mean, it's about product development. And if I take it one step further back to the question that Tom answered just a second ago around data centers, yes, we have a lot of products that are directly applicable and have a really good fit with the current demand for data centers, but we also have the ability to adapt those products further. And that's part of the R&D that we continually do, and that we do in dialogue with our customers. So I don't think, Klas, you should see the investment into R&D as something that has an end date when it comes to the Energy division or any of our other divisions for that matter. And I don't know if Tom wants to complete more on that.
Tom Erixon: I agree.
Fredrik Ekstrom: Agreed.
Klas Bergelind: Okay. Okay. That's good to hear. Then looking at project orders in Energy, I mean, last quarter, and I'm zooming in now on clean energy. I mean, last quarter, i.e., second, you said that decisions were pushed to the right, reflecting increased uncertainty. It looks like orders are coming back here this quarter. So I'm interested in what happened here. And if you see this elsewhere, i.e., that decision-making on the larger side, Tom, is easing a bit or whether it's just normal lumpiness.
Tom Erixon: I think maybe a little bit of both. There is a normal lumpiness in that. We have been having and we continue to have, a rather diversified cleantech order book and order pipeline. And that holds both geographically and application-wise. So the bookings were good in Q3. And although good means that the comparable quarter was maybe a bit weak side, so -- but anyhow, it was in line with what we were hoping for. And if we look at the pipeline, which obviously stretches more than a quarter forward, we see a number of projects and some of them, I would say, financially sustainable without being based on regulatory frameworks or such. So there are -- we have obviously moderated our expectations in the 5-year period as to what the energy transition will do. But we are still following an interesting track on a steady growth area in related to carbon capture, in related to plastic and packaging replacement materials in relation to possibility of SAF, and biofuel coming back a bit after a very low investment period during the last few years. So we are cautiously hopeful that we will see the energy transition continuing in a good way.
Klas Bergelind: Good. Finally, back to you, Fredrik, on the ROCE target. It's unchanged despite lifting the margin by 2 percentage points. I guess this is just incremental intangibles from recent M&A? Or how should we think about it? Obviously, you're going to invest now in Framo, quite over capacity, but also curious to hear about your further working capital ambition within that.
Fredrik Ekstrom: Yes. No. And the reason we have retained the return on capital employed target at 20% is because of exactly the dynamics that you bring up here. It is about a continued CapEx ambition going forward, we reiterate the SEK 2.5 billion to SEK 3 billion a few years going forward. We have announced the investment package in Framo, and we should expect that there will be other acquisitions, beyond the one -- acquisitions we've already made. We have the firepower in our balance sheet to make sure that we can also add on inorganic growth beyond the organic growth opportunities that we have. And a reflection of all of that ambition is why we have returned the return on capital employed target as it is. And it may temporarily -- should all of those things align very much in a short period of time, go below 20%, but with the ambition of going to 20% and above 20% in the long run, of course.
Operator: The next question comes from Johan Eliason from SB1 Markets.
Johan Eliason: I was just going to ask about the return target that you kept unchanged, but you sort of already replied to it. But I was wondering a little bit. I remember you did lower -- this was before you, but the Board lowered the target from 25% to 20% when you did the Frank Mohn acquisition. How has your major acquisition delivered versus the 20% return target? I guess Frank Mohn today is probably benefiting well above this 20% target. But what about the Norwegian weather forecasting service? Is that also performing well in line with these return targets?
Tom Erixon: Well, may I first say that it's so nice to meet an analyst who's been longer with us than ourselves almost. So I appreciate the question very much. And I was not present at the Frank Mohn acquisition, but I think you are completely right that although it was a highly profitable business at the time, but when you put -- I think it was around SEK 13 billion on the balance sheet, to get a 25% return on that number is very hard. We have commented. And of course, as we go forward now, if we look at the Framo acquisition, in today's books, as you know, we are conservative on the goodwill side. So we put as much as we can into amortization, and that is almost completed for the Framo side now. So I think next year is the last year, if I remember correctly. And so we have a slightly smaller balance sheet post on it. We have a company that may be close to twice as big and at maintained margin, I think the return on capital on that investment, now, 12 years later, will start to look quite good. We haven't run those numbers, I think. But we may actually do this ahead of the Capital Markets Day. It's an interesting question. When we have looked at the entire M&A portfolio in recent times, we have concluded that if you take out the acquisitions over the last 15 years or so, our return on capital for the traditional Alfa Laval business or Alfa Laval classic is about 50%. And with the current multiples in the M&A market, we struggle to get to 20% regardless of the profitability. The pricing on those assets allows us maybe to get to a double-digit return number, but definitely not to close to 20%. So we don't see that our CapEx program into our existing businesses is affecting ROCE negatively. We were actually a little bit worried about that when we started the big investment programs years ago, but growth has compensated for that. So we -- the returns on our organic growth journey are excellent. And the question that's going to decide whether we are 25% or 20% or below 20% is the amount of capital we deploy on M&A. We'll get back to that question, I think, at the Capital Markets Day. It's a good one.
Fredrik Ekstrom: It's well noted.
Tom Erixon: Yes, well noted.
Johan Eliason: Yes. No, but it will be interesting. I think the return target is important because it does give you some top price that you're willing to pay, that's obviously interesting for the investors. Looking forward to Capital Markets Day, as I said.
Tom Erixon: I think with that, we take the last question.
Operator: We have a follow-up question from Magnus Kruber from Nordea.
Magnus Kruber: I just wanted to see if you could comment a bit about the development in the other end market category in Food & Water. You've seen a very good pickup there over the past few quarters, and you break out starch and sugars in this quarter specifically. Could you comment a little bit how sustainable this level is?
Tom Erixon: Yes. We are reasonably -- well, it tends to be the stability of Alfa Laval, right? It doesn't change that much. The normal dynamics of GDP growth and a happier middle class is taking demands forward. When you think of stability in the Food & Water side, the thing I want you to remember is that we actually dropped quite significantly on the biofuel side 2 years ago. And it's been a very low project activity on the biofuel side other than some exceptions on the ethanol side. And so I think that is still not quite in the books. Pharma came down for us a bit after the COVID, where we had a lot of vaccine-related implementations on pharma. We expect that to come back. Dairy has remained quite good. Beer has been a bit up and down after years of consolidation. We see less of that now, but still the return of CapEx on the brewery side has been a bit better recently than before. So all in all, we see the coming years as reasonably interesting. What I would add to that, if I round up your question with that and say thank you for that, I'll just do a little marketing campaign for the Capital Markets Day. So we will meet in Flemingsberg, which is the technology center for Food & Water and the high-speed separation centers. We are inaugurating that, and we are also displaying part of the technology that we are developing there. And in that context, we will do divisional reviews. And one of the things that is changing is that we are redoing the strategy in the Food & Water division under new leadership with new growth aspirations and new opportunities. So we will review a number of interesting things, some things you will see visually and some things you will see on the slide. We hold those tools as realistic growth opportunities. So I hope you are excited about it. We are almost sold out. Ticket prices are rising. So I would recommend you to sign up quickly, and we look forward to welcome you in Flemingsberg in November.
Operator: We have no more questions.
Tom Erixon: Thank you.
Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.