Alfa Laval AB (publ) (ALFA) Earnings Call Transcript & Summary

Welcome, everyone, to Alfa Laval's Capital Markets Day 2020. I am Johan Lundin, and I will guide you through this digital event. We actually do miss having you here, but we will put our faith in Teams, and we will try to create some digital magic until we meet in person once again. The Capital Markets Day will run for about 2 hours and consists of 3 parts. First, our CFO, Jan Allde, will talk about our 3 divisions and some highlighted areas within each division. And then we would also go through some key metrics going forward. Secondly, our CEO, Tom Erixon will talk about Alfa Laval's growth journey and group transformation. And more specifically, about how strong global trends will continue to drive demand for Alfa Laval's solutions both here today, but also for the longer perspective. Finally, we will have a lot of time for an open Q&A session. So with that said, I am convinced that you will find this to be a very, very interesting day. So stay alert. Stay muted. And let's kick it off with the first presentation from our CFO, Jan Allde. Welcome, Jan.

Thank you, Johan. The purpose of my presentation today is to go a bit deeper into the industry perspective of our divisions and provide some commentary on the market growth drivers and also on the outlook on the specific industries. Secondly, is to show our performance in the group versus our financial targets, i.e., growth, profitability and the capital efficiency and with a focus on the strategy period from 2016 and onwards. Now starting with the growth. So we have achieved an organic growth in orders of 7% and in sales of 6% during the strategy period despite the impact from the COVID pandemic in 2020, clearly above market growth. We have seen growth across all the business units and most of our regions. We have currently an order backlog of about SEK 21 billion, representing an LTM sales of approximately 6 months. We have not seen any material order cancellations in 2020 despite the uncertainty in the market. Now we'll go a bit deeper into the Energy Division, with a focus on the end-customer industries that they serve. We have made a new industry segmentation for the Energy Division, better reflecting how they serve these markets. More than 2/3 of the capital sales volumes in Energy Divisions are coming from stable end market, such as HVAC and refrigeration, process industries and refinery. 40% of the capital sales comes from HVAC and refinery -- sorry, refrigeration with a growth of 7% during the strategy period. In the case of process industries, we have included chemicals, petrochemicals, pulp and paper and metals, representing about 20% of capital sales in the Energy division. All these industries have shown a growth CAGR of 4% during the strategy period. The refinery segment has shown a strong growth during the period, driven by the refinery transformation in China. In total, the Energy division has generated a growth of 6% in capital sales during the strategy period despite a challenging 2020 in some sectors, such as upstream oil and gas. Looking at the key market drivers in the Energy Division. They are very closely linked to the sustainability trends we see today, which is natural as the core technology within this division is to help our customers increase their energy efficiency and thereby reduce their CO2 emissions as well as reducing their energy cost, which is a significant part of the operation cost in any industrial process. In HVAC, decarbonization and green deals are driving investment in district heating and heat pumps, and the shift in natural refrigerants are driving investments in the refrigeration. In addition, the strong digitalization trend is driving investment in data center, which is part of this industry segment. The same applies also in the process and refinery industries, where our new product platform of heat exchangers can significantly reduce the carbon footprint and energy consumption of our customers. From a market outlook point of view, we see its highest growth projection to come from the HVAC and refrigeration industry. Now looking at the Food & Water Division. Overall, the market served by the Food & Water division has shown a very stable growth, and the division has achieved a growth CAGR of more than 4% in capital sales during both the strategy period and also over a 10-year period. The largest-single market, you see their segment, representing about 18% -- sorry, 28% of sales and which has shown a growth CAGR of 6% during the strategy period. We have seen an even faster growth in wastewater and pharma industry with a growth CAGR of 8% and 11%, respectively. In the largest customer of food and beverage industries, we have seen a lower growth at some industries such as brewery, have been negatively impacted by the COVID-19 pandemic, but otherwise, a good underlying market demand situation. The key drivers in the Food & Water market includes food safety and the overall health trend, but also very much linked to sustainability trends such as alternative proteins, water scarcity, energy efficiency and the maximum use of raw materials. We see a continued positive outlook for most end user markets in the Food & Water Division, but particularly in the wastewater and pharma and biotech industries. Now looking at the Marine Division. Approximately 40% of the sales in this division is coming from the new shipbuilding market, where our volumes have kept up quite well despite the market being on historical low levels. Due to our early investment into a portfolio of environmental products called Pure Thinking introduced 15 years ago, we have been able to develop a very sizable marine environmental business during the last years, driven by regulations in the Marine industry, and it now represents approximately 1/3 of our total capital sales in this division. In total, the Marine Division has generated a growth CAGR of more than 20% in capital sales during the strategy period. The key drivers in the shipbuilding market is related to the world trade growth, the size of the order book of new vessels versus the overall fleet and, of course, industry regulations. Due to the uncertainty related to the future fuel technology, the low oil price and also COVID-19, the market has reached historical low levels. However, considering the aging of existing ship fleet and a record low supply order book, the market is expected to recover from today's very low levels. For the marine environmental market, we expect the water segment to continue to grow in the mid-term, while the emission related part to decline. We will continue to develop our marine environmental portfolio around new fuels and energy efficiency solutions to serve the sustainability agenda of the marine industry going forward. Now looking at the Service business, which represent approximately 1/3 of the total business in Alfa Laval, and the split is as follows: our parts business represent 2/3; and the repair business, close to 20% of our Service portfolio. The parts business has shown good growth during the recent years, but has been negatively impacted by the COVID-19 situation. Finally, our field service and value-added services, which represent 15% of the Service portfolio has grown fast, and this is important as it represents more of the proactive and front-end parts of our Service portfolio. The key market drivers for the parts and also the repair business are primarily related to keeping our customers' equipment up and running in a reliable way. For the Field Service business, the key is to ensure availability and speed of our field service resources, which can be exemplified by our international marine service operations, where we measure the availability of the service technicians at what we call first harbor. The final part of the portfolio, which is still small but growing fast, is our value-added services where the key strategic elements include servicing agreements related to our connected products and the digitalization of our service offering, including remote services. And the outlook for all of these service scopes are good. Now looking at the profitability. EBIT margin has developed well during the strategy period. During 2017 to 2019, we had a positive impact from higher volumes and higher productivity, but also a negative impact from a lower service mix. In 2020, we saw a negative impact from lower volumes offset by good cost control and a positive or slightly positive service mix. The graph to the right shows the overall sales volume while its trend line shows the service share of total sales. Our Service sales is more stable over the business cycle and also more profitable than our capital sales. It works as a profit protection for the group, especially during tougher market conditions. The cost reduction program launched in March of this year is expected to generate savings close to SEK 700 million for the full year of 2020, and it will partly continue into 2021 as traveling costs will continue to be reduced and also be positively impacted by the new digital way of working. T&E cost was roughly 40% of the cost-saving program. We have also reduced some 600 employees during 2020 as we have adjusted our workforce in preparation for the lower factory volumes. Now looking at the quality cost of the company. The focus on quality has increased in the new organization, both in the development of new products, sourcing and production, but also in the sales process in terms of project selectivity. The graph to the left illustrates how the quality costs have decreased during the strategy period and is now below 1% of sales, positively impact our profitability. Looking at the capital utilization part. Return on capital employed has improved in the beginning of the strategy period, driven by the improved profitability, but has flattened out in 2019 and '20 due to the implementation of IFRS 16 and also due to increase in the working capital. The increase in working capital, approximately 1.5% of sales versus historical levels, is due to the buildup of the marine environmental business, the manufacturing footprint program and also the launch of the -- or the many new product introductions. We expect to normalize this as this is a major focus area for us. With regards to our CapEx, we expect to continue investing in optimizing and manufacturing footprint, with a focus on product serving industries with a good growth outlook and CapEx levels expected to remain around 2.5% of sales going forward. Our strong cash flow has resulted in a net debt position at the end of September of 1.9 billion, excluding these liabilities, which now represents a net debt to EBITDA ratio of 0.2. Our strategy for the capital structure going forward will include having a strong M&A capability, a continued strong credit rating, but also look to further optimize our gearing level and we are considering different options for this in the months to come. Now over to the macro and business portfolio outlook. From a macro economic situation, we do expect the global economy to improve in 2021. However, it will probably take until mid-2022 until the U.S. and Europe recover to pre-Corona levels. China, on the other hand, is expected to recover already this year. From a geographical point of view, our strong presence in Asia, in China will help us in this recovery. From an industry and business portfolio point of view, we can conclude the following: 30% of our business comes from service, which is normally quite stable and has a positive outlook in the mid-term; close to 50% of our total volume is capital sales related to industries and businesses where the driver -- the key drivers are sustainability-related and described earlier in my presentation; 10% of the volumes are related to marine shipping contract markets where the industry very likely to have bottomed out in 2020; this leaves about 10% to 15% of our business, which is related to sector with a more structural demand imbalance, such as oil and gas, onshore and offshore, which we will address through the targeted restructuring program. Henceforth, we will not go into a large structural restructuring program across the organization, but focusing on some of the businesses related to the market, highlighted in the pie chart you have on the picture. And then finally look at some guidance topics. As commented earlier, CapEx is expected to remain at about 2.5% of sales in the years to come. Our step-up amortization levels are gradually reducing from around SEK 875 million in 2020 to SEK 730 million in 2021 and then further down to SEK 630 million in '22. Also, as communicated earlier, the transaction and translation FX impact in 2020 is expected to be positive SEK 180 million, while the transaction-related FX impact in 2021 is expected to be positive SEK 250 million based on the FX rates at the end of September of this year. These figures will be reduced slightly if you look at the current FX rates. The remaining guidance topics regarding R&D, taxes and dividends are unchanged. And that concludes my presentation. And I, therefore, hand back to Johan for the next part. Thank you.

Thank you, Jan. It's now time for our CEO, Tom Erixon, to talk more about the growth journey and group transformation ahead. Welcome, Tom.

This is probably one of the most exciting and changing times that most of us have experienced in the industry over a long period of time. Not only are there important sustainability trends affecting us at this moment, there's also a lot of consumer behavior changes affecting our business. And on top of that, of course, short term, we've been facing the challenges relating to the pandemic, although that is probably easing off during 2021. What I would like to do here is partly kickoff in sharing a little bit where we got operationally in our strategy 2017 to 2020 in terms of technology and service and these type of things. From there on, we will look into how is the landscape changing for us and what opportunities and trends are creating the best bets for Alfa Laval in terms of where we are going with our business. And finally, we will round off with a little bit more of long-term perspective of some of the emerging areas that may play a role for us in the not-so-distant future. As you know, we've been working with our technology leadership for a long period of time. And right now, we are in the final stages of replacing and introducing the new product platforms that we've been working on for several years. There are some common denominators across most of those product groups. And some of the more common features are: increased energy efficiency; to serviceability; in many instances, some range expansions; and also, of course, improved connectivity for a lot of products. As a result, during these years, we have essentially doubled the amount of new product launches. And as a result, the newness factor of our sales will continue to grow in the years to come. We don't have time for a lot of details at this point in time, but let me just refer to a couple of the products where the changes are the biggest. Starting in the heat transfer area. We are doing a lot of changes in the business units for brazed heat exchanges. Those heat exchanges are generally used in heat pump applications as well as air conditioning applications, Evac as the general word. And of course, the environmental demands in those areas are changing dramatically. As a result, we are adjusting our product portfolio, in some instances, also our process technology in order to deliver the relevant products into that segment. The other area in heat transfer is the workhorse of most of the large heat transfer applications in the world, the gasketed plate heat exchangers. We are in a huge industrial transformation in this area where we are replacing all of the large product platforms over a long period of time. The new product range is a lot more energy efficient, is much better for service and is protected by a lot of patents for the future. So we are very comfortable where we are in the heat transfer area, and we do have a similar situation in separation technology. Let me refer to 2 examples. In the decanter area, we are now in the process of developing a more specialized decanter solution for various applications. And again, here, the customer advantage is a much lower energy consumption on the equipment, but also a lower consumption of consumables. For high-speed separators, you could have thought that after more than 100 years of development, we've reached the peak in terms of what you can do from an engineering point of view. However, it's not true. The new generation is significantly better than the old ones. Again, energy efficiency and equipment is a large contributor to customer benefits, but there are also many other aspects of the technology that is getting better, including the sensor equipment used in order to optimize its performance. We are also changing the way we make our products. And here, I will not go into the process changes we are working with, but obviously, Industry 4.0, additive manufacturing and a host of other process changes is affecting the way we make our products. But I would like to refer to the significant footprint program that we have been executing over the last 4 years. To a large part, that program is now completed, although, of course, we will always continue to invest in competitiveness. You can see that we passed the peak in terms of CapEx spending a couple of years ago, and we are now returning to a more normalized level of maybe around SEK 1 billion per year or so. On the picture to the right, you can see our largest manufacturing unit worldwide. It is the marine boiler manufacturing unit in Qingdao. It's recently inaugurated, and we really have some exciting and spectacular improvement in terms of the working environment, health and safety aspects as well as part of the production technology there. They're taking great steps forward. We've also, in the process of completing a brand-new unit in Northern Italy for brazed heat exchanger. That will be a future factory integrated with a lot of new technology and certainly with a great improvement in the environmental footprint of the unit in itself. That unit will be fully operational, inaugurated in Q1 next year. And with that, we have completed essentially all of our undertakings when it comes to the footprint that we call 2.0 and that we've been guiding you on for a couple of years at this point in time. And instead of describing them to detail, take a look at the recording of those 2 units, and you will get a feel for what's going on there. [Presentation]

Part of our strategy over the last 2 years has also been to build a more service-driven company with the customer in focus. It has been, during 2020, a rather challenging time when it comes to service execution. But regardless of that, the trend towards increased customer value and increased revenue has been clear and will continue so for years to come. It is interesting, though, how the business has been changing over the last few years and especially during 2020. And let me refer to some specific data points on that. But you could say in short that from a situation years ago, when service was essentially shipping spare parts, we are now moving into much more digital service operation mode. There are a number of aspects to this digital transformation. One is how we are able to connect machines today compared to the past. We are now with more than 1,000 machines connected becoming quickly, particularly for rotating equipment, very much connected to all of our customers in the way our equipment operate real-time. We have also accelerated the remote diagnostics and remote service works through digital means very quickly. In the beginning of this year, we essentially had 0 hours of service revenue from remote. This year alone, from 0, we've gone to more than 9,000 service hours before the year is over. The third aspect is the importance of artificial intelligence and the way algorithms are helping us to troubleshoot operating problems in equipment in various parts of the world. Another aspect of the digital way of working is that for the first time, we now have a very global and broad covering installed base database. And that means that we can, today, pretty much for any customer around the world, track exactly what equipment is located in exactly what location and exactly what service work has been done on that equipment over the years. That allow us to be much more proactive in selling to those customers who are not using Alfa Laval for service, and certainly that is, although a majority are service customers, still a large number of customers who are not currently actively working with our service organization. An opportunity for us to change. I think the pandemic has helped us change faster in this regard. But also at this point in time, the technology is mature and the customer behavior is changing as well. So service as well as all other changes that we are driving in the company is related to behavior and to people. And obviously, we have been working with our culture and the way we are operating as a company. We started some years ago with de-matrixing the organization, creating faster and more agile business units with clearer lines of responsibility. The leadership team now on a business unit level as well as divisional level after 3 years of operation is strong. We have also built new capabilities. Obviously, many of those capabilities are in the digital arena, where we, today, have professional teams in areas like connectivity and a stronger team in e-commerce that is gradually becoming more and more important for us. We are also, as a global company, becoming more diverse. This is partly reflected in the group management, but it needs to continue throughout our organization. We need our talent management, our recruiting and our -- over time, our senior management to reflect the global company we are, and not just a Nordic export company. So we have still some steps to take there, and we are working actively with it. At the end of the day, if you want to drive the service side, it is a lot about culture. And instead of me discussing culture too much, allow me to show a little example, a little bit on the life side perhaps in terms of what we mean with Alfa Laval culture when it comes to service. [Presentation]

So where does all this take us? Where are we today? All in all, we feel we have strengthened our competitive position in almost all of the business areas and product groups where we operating. In this picture, there are 2 areas where we have a weaker market share. And the reason for that is that those are 2 areas with a heavy degree of engineering and projects, and we have spent a couple of years in focusing the product portfolio and the business focus, and we are getting a little bit leaner, a little bit more narrow, but also more profitable in terms of what projects we undertake. And from where we are today, we are probably back in a position to start to grow again. So in summary, we feel quite good about where we are, but it doesn't change the fact that we have a lot of changes ahead. The landscape will be different, and we have a need to address it in many areas. Let me start with the question of Asia. Asia is driving the economy of the world. It's not only China. The rest of the Asian region is increasingly playing a large role. Already today, for Alfa Laval, we are more than 40% of our business in Asia, despite the fact that we have an important market, the shipbuilding market in turmoil at the moment. It is just a matter of time until more than 50% of our business will be generated in Asia. Our footprint is strong, and Asia is clearly critical for our success long term. But as indicated on the diversity issue, we still have more to do in order to build our Asian footprint and our Asian management team in a stronger way. Asia is not just China, but China is important. And China for us has doubled in revenue over the last 10 years and will probably continue to do so. But China is not just the market. To some degree, some of big global trends are emerging from China or at least are heavily supported from China. And one example is the 5-year planning cycle used, which is very relevant for Alfa Laval, latest one, called the Blue Skies. It is a massive investment and change in the environmental area, and the programs are indeed impressive. They are tackling, among other things, of course, pollution, the CO2 and the climate issues. And it's not only China that is doing that, we have a similar situation in Europe where now the Green Deal has been launched. And I expect that we will see similar initiatives in the U.S. as the Biden administration takes charge as of January next year. Of course, this tremendous macroeconomic impact does create opportunity for us in areas where we are active. So let's start looking at some of those trends resulting from this situation, and start with the CO2 issue. There is not 1 answer to how to solve the CO2 challenge. As you can see on this picture, doing nothing will take the CO2 to an unprecedented high level, and the gap towards what we need to achieve according to the Paris Agreement will just continue to increase. There will have to be a number of efforts and initiatives to drive the CO2 side lower. And essentially, in all of those, you find critical Alfa Laval technologies and equipment involved. I will not go into all of those, but let me refer to 2 of the important improvement areas, the energy efficiency area and the biofuel renewables energy area. And let me start with the efficiency area first. We have worked with waste heat recovery for a long time. In fact, we argue at Alfa Laval that the cleanest energy is the one already produced, and waste heat is actually produced energy and nothing else. Traditionally, our waste heat recovery projects tended to be in the process industry. On the picture, you see an example from a copper smelter. We capture that energy, turn it over into a district heating network, and it can heat 5,000 households, saving about 20,000 tonnes of CO2 per year. That's still a business for the future, but it's also one of the past. Today and in the future, data warehouse is becoming much more important in terms of energy recovery. It's quickly becoming one of the world's largest energy consumers and consequently, one of the largest CO2 creators in the world. And if you look at what's being produced in the data warehouse, approximately 90% of the energy used is being turned into heat. Heat that is not needed, becoming waste heat. How we capture that waste heat and how we develop it into useful energy is a great concern for the years to come. All of the large data warehouse operators are tremendously environmental conscious. We are working in partnership with several of those, helping them to cool the equipment more efficiently and helping them to capture the energy in a better way. It's a huge task ahead for one of the largest energy-consuming industries in the world. We also had the issue of transiting from fossil fuels to other sources. Let me touch on 2 of those. One important is the trend towards the biofuels, and it's expected that the biofuels will quadruple in the years to come. We certainly noticed that in our project pipeline. For Alfa Laval, compared to oil, biofuels add the process steps before the refinery. If you start by producing vegetable oil or taking residual fats, it needs a pretreatment process before you go into the refinery. That involves traditional separation and heat transfer solution. It's an area where Alfa Laval has been active for years when it comes to edible oils, and we are applying exactly the same technologies and treatment processes for biofuels. After that, you go into a bio refinery and consequently, you have a similar process as you have with oil. From that point of view, we argue that from a strict Alfa Laval perspective, we have a bigger equipment opportunity on biofuels than on oil. We are seeing that process happening as we speak, and we are very comfortable that we are best positioned in order to take advantage of that. Another important trend is the importance of hydrogen as a fuel. And similar to natural gas, hydrogen needs to be produced in storage, and that is exactly where Alfa Laval is working with a lot of gas applications. It requires a lot of temperature control, and it is within our core. So also the hydrogen growth will require a buildup of new infrastructure, including a lot of critical Alfa Laval technology. There is another aspect of hydrogen, which is the fuel cells, and I will come to them a little bit later. With that, let's move on to some of the changes affecting the Food & Water Division. They are also important. And let me start in the biotech area. Biotech is quickly becoming the main part of all pharmaceuticals, and we've seen the growth we have experienced in biotech applications over the last few years. We have, for a long time, been present with advanced separation equipment in this sector. This year is different, though. It was a year when we launched the first single-use separator equipment in the world. The importance of that cannot be overestimated. Until now almost all of the value chain for a batch in biotech production was in single-use state. That is you want to eliminate contamination from the previous batch, you want to eliminate long clean-in-process times and consequently, you want to have a consumable that you replace for every batch. That has been difficult to do in a high-speed moving separator, and consequently, it has taken some time to get there. We expect this application to continue to grow significantly in the years to come. We clearly have the world leadership position in this area. Historically, it's been traditional animal production. Today, a lot of it is going vegetarian, but not all. If it's vegetarian, we tend to be there as Alfa Laval, but we're also there for alternative sources of protein. Last year, we launched a technical partnership, where we're involved in the cultivation of insects and the extraction of protein from insects as a source. It may not primarily be a source for humans when it comes to protein intake, many of you may have some reservations regarding that. However, it is a great source for animal feed, including fish farming, replacing, for example, the necessity to fish for cray. In traditional protein sources, there are also opportunities to improve. Although we clearly have a trend away from traditional sources of protein to new ones, still the old sources can be quite productive. Let me show you an example of how we managed to extract all of the proteins available in new ways from existing old protein sources. Here we go. [Presentation]

Let's take a look at the issue of water scarcity, which is a not hot topic in the Food & Water Division as well, in fact, as in our other divisions. Our direct business into wastewater plants is approximately at the level of SEK 1 billion per year and growing. However, the water scarcity question is affecting a much broader part of our offering than just the wastewater side. In fact, to the right, you see the newly improved think top, which is a valve control units, which is being used in the beverage industry. The valve control unit alone by effectivizing the way the valves work in a large brewery is saving an enormous amount of processed water. And there is not a single brewery or, for that matter, beverage manufacturer who does not have processed water reduction as one of their key KPIs in the years to come. Our ability to implement a better valve control solution saves this brewery alone about 1 million liters of processed water a year, a huge contribution to the targets they are looking for. So in fact, if you look at the whole picture in Alfa Laval when it comes to our UV technologies used for water in the marine industry, the evaporation technologies used in the energy division and all of the improvements to process water in the Fluid Handling business unit in the Food & Water Division, we estimate that approximately SEK 3 billion per year in terms of sales is driven by the need to improve the usage of water and eliminate the wastewater problem in the world. Let's move on to the changes affecting the Marine division. It's a dramatic change from before, driven by increased environmental concerns of ship owners, but also a more intense regulatory environment. On the picture, you see the test center -- the marine test center in Aalborg. Some of you had the opportunity 2 years ago at the Capital Markets Day to visit the facility, but maybe not all. And some things, in fact, are new there since then. It is a unit that is completely built on developing the future solutions for environmental challenges related to fuel, exhaust and water in the marine industry. Let me take you through the facility, so you get a feel for what it looks like and what they can do. [Presentation]

We cannot go into all aspects of the product offering in the marine industry when it comes to environmental performance, but let me just use the trend of LNG as a fuel and what that means for Alfa Laval and our product range as an example. Sometimes, as analysts, you asked the question of isn't heavy fuel oil a needle fuel for us to be successful commercially in the engine room? And our answer to that has always been, we are pretty fuel neutral. Any type of fuel will have its challenges and its needs for products and solution, and we develop them accordingly. On the picture, you see specifically in the product portfolio used for an LNG-driven ship when it comes to LNG as a fuel. I will not go into them in detail. There are combustion units, heat exchangers and a range of other products. But the one product I wanted to talk a little bit about is the one to the left. The PureCool product, which was just officially launched a couple of weeks ago. The product deals with the problem of LNG as a fuel called methane slip. Methane is a very problematic greenhouse gas, and it's about 20x worse than CO2. So although methane saves CO2, if you have so-called methane slips, which you do in certain engine types, that destroys the whole picture. The PureCool addresses the methane slip problem by taking the exhaust from the engine, cleaning the exhaust and feeding the methane back into the engine a second time. By doing that, we can reduce the methane slip with 50% at this point in time and maybe more in the future. It's a very important contribution to making LNG sustainable and viable, at least as a bridge solution to a more common free shifting industry. So with that, I'll try to give you a little bit of a feel for the trends affecting us and how we are dealing with them from an industrial point of view in the years to come. There are, however, as I indicated, a couple of more important long-term projects where we are currently in the lab level, and we are exploring them as important business opportunities in the medium term around the corner, so to say, but maybe not next year. Let me give you a feel for 3 important areas that we believe can make up for a sizable part of Alfa Laval revenue in the future. Let me start with a question of energy storage. As you know, probably, we invested some years ago in a start-up company called Malta. The objective on Malta is to develop the first viable large-scale energy storage facility. The energy storage is absolutely crucial and needed in order for wind power and solar power being volatile in its power generation to even out the grid and even out to the functioning of the systems. There are probably many technologies that will be involved in developing the solutions, but we firmly believe that thermal storage will be one important component. We are a couple of years ahead of schedule. We are building a plant with traditional technology as opposed to the next-generation technology that partly Alfa Laval is developing right now in the lab and in the pilot scale, and we are looking forward to a very interesting period of a growing installed base of heat exchange installation related to thermal energy storage. And not only is it a very interesting application for helping solving the renewables challenge, it also helps driving certain manufacturing technologies that we can use in different areas. And that takes us to the area #2, fuel cells. We discussed very briefly hydrogen and hydrogen as a fuel earlier in the presentation. Of course, they need to be converted into energy by way of the fuel cell. And it so turns out the part of the bonding technologies we are using for the thermal energy storage is also suitable for the fuel cells. So we are right now working in partnership with a couple of customers to look in terms of how can we produce an energy-efficient, but also a cost-efficient fuel cell solution for certain applications relating to engine makers. We think there will be a number of opportunities for Alfa Laval as a heat exchanger manufacturer to move over to the area of fuel cell manufacturing as that market takes off. We will see. The third and last example is the question of fish farming. If you look at fish farming around the globe, there are about 12,000 open fish cages in ocean environment, of which half, 6,000, are located on the shores of Norway. It is a great source of food and especially of salmon, but there are also some problems with the open cages. Part of that is contamination of the seafloor, but there is also problems in terms of yield and premature death of the fish that could be significantly improved. On the picture, you see a pilot installation of a pumping solution for controlling the flow in an open cage. That is up and running. It doesn't solve all of the challenges for the fish farming, but it does hold some promise in terms of fish yield and fish growth. However, the next generation, and that is ongoing work as well, is to find a way to do semi-enclosed or closed fish cages at sea. That requires very sophisticated pumping solutions, and we have taken the technology that we have in our marine technology for pumping and transferred it into the fish farming environment. It requires energy-efficient pumping, which we can solve, and it requires a good understanding of flow, and we have that as well. So there is a promise for us in the future to be able to be part of a solution for delivering closed cage sea type of fish farming solution that will eliminate most of the problems related to the fish farming of today. So with those 3 examples, I just wanted to show how we, as a technology company, is leveraging our technology base into emerging applications and emerging businesses that we see interesting for us 5-plus year ahead from now. We think they're all promising. We will see where they go. But it's an example of what's in the lab and what you may see coming out in the marketplace in the coming years. Not all can be done organically. We have indicated to you earlier that there are 2 strategic areas where we are specifically looking for M&A candidates and to complete some transaction. One is related to strengthening our technology portfolio in the water area and the other one is to build a presence in the industrial flow market. Both of those remain target areas for us in the years to come. Apart from that, we have done and will continue to do technology deals that are supporting our existing businesses to grow. One very clear example was a small technology and IP company we bought in Malmö a couple of years ago. That is, in a couple of years, generating additional sales in our brazed heat exchanger business of a few hundred million SEK. You don't notice so much about it, but certainly, those are the type of activities that helps us keep to the 5% plus growth target we have as a corporate target for growth. Finally, then, and to round off. As you notice, we are deeply involved in dealing with some of the sustainability challenges the world is facing. We are energized by it. It's part of our purpose and it's part of our business. You cannot be in this business without looking into your own situation as well. And for that reason, we decided to sign the carbon-neutrality target for 2030 during this year, and we are now actively working to eliminate the carbon footprint we have in our operations. I cannot give you the full scope and results of that work yet. We are still early. But what I can say is that, when it comes to the carbon effects from our own operations. I am very comfortable we will reach carbon neutrality in that part well before 2030. We know how much it is, and we know what we need to do. There are 2 areas that concerns me going forward, where we don't have the full solution, and we have a lot of work to do, not only ourselves but with our business partners. Part of it is related to logistics and distribution where especially in the air cargo side, as long as we don't have biofuels for jets, has a substantial CO2 footprint effect for us, and we need to find ways around that over the 10-year period. And the perhaps biggest challenge we have is the fact that we are large metal buyers, and the production of metals has a significant CO2 component to it. There are ways of dealing with this related to using more scrap material and related to using perhaps hydrogen as a fuel in metallurgical processes in a better way. But right now, this is a problem we cannot solve on ourselves. And I think as in many areas of society, we need to be manic together, working on the solutions for the future. And with that, we have a clear ambition for 2030, and we are going at it. So with that, I would just like to thank you for your attention, and we will turn into question-and-answer period. Thank you.

Thank you, Tom. And that concludes the presentation block, and we will now start our Q&A session.

I will be your moderator, and I promise I will take your questions one by one in an orderly fashion. [Operator Instructions] With that, I have 2 super-eager guys ready to get started. And the first question today comes from Lars Brorson.

Thank you, Johan. Can you hear me?

We can hear you.

If I can try 3 quick ones, please. Number one, Jan, I see a CapEx guidance going forward of 2.5% at least for '21 and '22. Appreciate Tom's point, you're not providing a huge amount of detail, unlike what you did a couple of years ago when you talked about a few specific sites and projects. Can you help us understand a little bit better? Just -- is this more of the same? Is it more capacity build out? You talked briefly about Asia. Or is it more sort of new capabilities around 3Ds, et cetera? That will be question number one. Question number two, just briefly really, the data centerpiece, Tom. Interesting, I agree. Can you help us understand how big data centers is for you? And then thirdly and finally, is there any detail you can give around the impending restructuring plan? I take Jan's point that we've already done a lot in 2020. We've taken out 600 FTEs. I wonder whether there was any sort of reassessment about what you plan to do next year, given things are arguably improving as you look into your end markets for the foreseeable future.

Maybe I'll take the first 2, and you take the last, Jan. In terms of the CapEx program going forward, we have our ideas where to go. They are involving Asia. They're not uniquely Asia. I think you may see some areas of the expansion related to -- and relocation related to Food & Water. There are some opportunities and needs in our global logistics distribution structure that we may address and a couple of other areas. So it will not stop, but we will not return to -- we don't plan to return to the CapEx levels we were in 2018 or so. I would say, when it comes to Capex, depending where some of the new technologies go. They may drive certain Capex. But then again, it will add a business -- a stream of business that is new to Alfa Laval if they materialize. And consequently, they need to be funded accordingly, but we are not there right now. In terms of data centers, I don't want to go into specifics. I just want to make you aware that the Evac area is growing, data centers are an important part. And as of today, there are a lot of data centers that have been located remote and in cooler areas in order to reduce the cooling cost of the data centers, which means that you use natural cool air. That's a great thing in terms of the cooling cost, but it doesn't allow you really to capture the waste heat in a good way. And so a lot of the existing data center infrastructure still needs to deal, even if we continue to build new ones closer to urban centers, where you may have abilities to link to district heating systems and others. There is a big installed base already today where you still have the waste heat problem. So I think the big part on this business is still ahead of us. And Jan...

What was the third question?

The restructuring program, how do you look at that? Are we reassessing that because we have already reduced so many people? Or are we going to do anything further?

Yes, let me frame that question such that we don't see -- as I showed in the picture, we don't see that this has been a program across the company. It's more of a targeted program towards those businesses that I showed you on the pie chart there. So there's a few businesses that we will specifically look for to doing some adjustments. So in terms of size and such, we will come back to you just in connection with the Q4 report.

Okay. We are moving over to the next question coming from Johan Eliason at Kepler.

Yes. Can you hear me?

We can hear you.

Excellent. So I was just wondering about the areas you mentioned regarding M&A. You pointed to 2 new areas, water technologies and the industrial flow. Now let's obviously fit in the industrial flow, but it's out of the question. Do you have any acquisition opportunities of the same size as Neles, as you see it? Or will there be a multitude of smaller ones?

Well, the point with the industrial flow and the fact that the Neles opportunities was a relatively large acquisition is that we feel in that area, we need to start from a strong platform and position. So while there are small niche companies in industrial flow, we would have preferred to go on the larger acquisition platform first and then do the add-on acquisitions later on. We will see how that plays out now. Obviously, we were looking at industrial flow companies before Neles, and I expect we will look at the industrial flow companies after Neles as well. There are several of relatively medium to large size out in the market. I think the main challenge for us is to find a platform, which is not too skewed towards the oil and gas/refinery side, which is probably not for the long-term growth area, although it will remain as a good product area for the long term with a lot of service and installed base. That's not exactly where we want to target our business going forward as you will notice from several of our initiatives right now. And so that's a bit on the challenge, on that side.

And then maybe if I may to Jan. You talked about the optimal gearing. What sort of metrics are you looking at then?

Well, the way we look at capital and how we prioritize it is -- I mean, of course, first of all, we need to have the capital to drive organic growth, which we have indicated. We want to have a good capacity for M&A. We want to ensure that we have a continued good rating, that's important for us. And then we will look for, let's say, different options here to optimize the gearing. I don't want to give you a specific level at this point, but this is something we will come back to with some guidance going forward.

Our next question comes from Klas Bergelind.

Yes. Can you hear me?

We can hear you.

Fantastic. Tom and Jan, Klas from Citi. So first among the 10% to 15% of sales that is more structurally challenged today. If you would look 10 years out, Tom, and with the growth in new, more sustainable areas such as energy storage, fuel cell, sustainable fishing and so on, where can we end up by 2030? If you would give us some hint, i.e., new versus conventional, more structural sales.

Yes. I'd hate to give you a forecast, as you know, for 2030. But if I stay on a fairly high strategic level on it, the opportunities we have in areas described today are in order of magnitude on a completely different level than the existing oil and gas upstream business. We think when we look at the oil and gas side, it's -- irrespective of that, we see a bit of a hike in the oil price at the moment and all that. We sort of expect that there might be another cycle in that market. And we've been considering that business after 2030, maybe mainly a service business and so much CapEx may not continue to go into the sector, but we might have another cycle ahead of us. So I don't want to be over negative to where we are in that business, although at the moment, for good reasons, it's on a low level. But if you take the adjacencies that I've been talking about today, they certainly hold the promise of going way beyond the 10% you are referring to. And if you look at the potential of establishing a high-margin business compared to where we are in the oil and gas sector today, I would suspect that we may have a mix/margin opportunity on top of that. So I'm not losing sleep about what we stand to lose. I am losing sleep about how do we capture the opportunities we have ahead of us.

Okay. Thank you. And next question comes from Karl Bokvist.

So I have a question on the environmental side within Marine. And last year's Capital Markets Day, you gave a bit of an assessment of the potential market size. I think it was SEK 8 billion in ballast and SEK 3 billion to SEK 5 billion for scrubbers. So given what has happened so far this year, what is your assessment today on the 2 markets and their potential going forward? How you feel uptake has been so far and whether or not the peak installations were to be changed, given what you mentioned on the emission side too also?

I don't think we've -- I think the numbers we referred to at the -- during last year were the whole retrofit period from beginning to end, so to say. So it didn't indicate what's ahead of us, it indicated where we were. I think we haven't changed our view very much over the last 12 months. We've passed the peak on the exhaust gas side, clearly. That will remain a business in the years to come. We see that from our pipeline, but it will not be on the level in terms of order intake where we were in 2018, and will not go back there. But we expect and feel and see at the moment that the business is continuing on a lower level and a more competitive level, if you like, but nevertheless, it's there. On the ballast water side, we are -- it's been a little bit more difficult to read the cycle because this year has been so affected from a repair yard point of view of the pandemic. So the availability of slots, the availability and capability to do planned retrofit and maintenance work for the world merchant fleet has been really troublesome. So our suspicion is -- and there's also been regulatory approval to delay the implementation process a little bit. So we've been running a little bit lower this year than we expected. Nevertheless, it is on a good level, and that will continue for the years to come. So I would say on ballast water, probably the curve is stretched for another year, flattened a little bit, but overall volume assumptions remain where they were at the last Capital Markets Day. I think the other thing you should be aware, and I tried to give you a little bit of feel for that is that, of course, in terms of volume over these years during a retrofit period, those 2 areas are very large. But over the longer term, our environmental portfolio of product is much larger than that. They will not reach individually that type of annual sales numbers. But in terms of building presence on ships, building an installed base and supporting a number of environmental challenges our portfolio is and will continue to become much, much larger than on just those 2 issues.

Thank you, Karl. Our next question comes from Mattias Holmberg.

Can you hear me?

Loud and clear.

Perfect. Mattias Holmberg from DNB here. You've talked some about the interesting opportunities driven by sustainability trends. And I understand that this may be a premature question, but in the not-too-distant future, you will need to disclose how much of your operations are considered environmentally sustainable after looking at the EU taxonomy. So it would be great if you could possibly give an indication of how much of your business you think is aligned? And if that's not possible, perhaps just elaborate a bit on how you're thinking about this topic and the potential impact of the taxonomy, perhaps?

Yes, I'm not sure. I mean, positioned to comment on the taxonomy at this point in time. What I would say is that in terms of our way of operating, I think we're in a good place already today, and we will be in a very, very strong place a couple of years from now. So I'm very comfortable in our own footprint on that side. If you're looking at what part of our revenue would be considered, let's say call it, clean tech or be predominantly driven by the environmental trends per se. We tend to estimate that, that's probably a good half of what we do. And related to a number of the trends that I referred to, and there are a whole host of other ones that we didn't discuss specifically today. So I think we are sitting pretty well. But I think regarding the EU regulations, we're going to have to come back with how to fit our numbers with that framework.

Thank you. And our next question comes from Daniela Costa.

I hope you can hear me. It's Daniela from Goldman. Actually, 2 questions. You talked about the number of machines that you're now tracking connected and how sort of that moves from very little to a lot throughout the year. And I was wondering if you could elaborate on how does that change like your -- how do you see that going forward, changing your revenue and profitability profile? Do you charge extra today? Is this part of like existing -- you offer this for free? How will this actually change your business? And actually, 3 questions, sorry, another one related to that, which is a lot of the cap goods companies at the moment talk about equipment-as-a-service. Is that a business model that you consider maybe navigating towards? And my third question just relates to how -- for M&A, sort of how do you think about what the KPIs that you consider? So I guess your ROIC will be impacted near term, what's the sort of time horizon over which you want to return back to ROIC? How should we think about the KPI's track?

Thank you. The -- let's -- well, let's start with question one. There is more than one model or service model or revenue model, if you like, when it comes to how our connectivity works. There are, in a number of applications, simply a subscription fee related to this. And that's not just the subscription fee that goes towards having the equipment connected that the customer or us or both of us may monitor in various ways, but it's also related to compliance, for example, and compliance regulations where that is needed. So there are a number of value creators, let's say, in the connectivity solutions that motivates the subscription fee. There is another model, and I think that, over time, is probably the prevailing or most common model, and that is that it's been shaped as part of a service agreement. We see that when we sell connected solutions in new equipment, that the penetration or the likelihood of a full-blown service agreement going with the product is much higher than in the past. And that's partly a conscious strategy, but it's also a result of the technology. And one reason why service agreements are also better for us today is that when you can monitor the product, then we can also give a product guarantee or a service cost and estimate because we can control or at least monitor how it's being operated. Without that transparency, it's very difficult for us to work with some sort of fixed cost arrangement or some sort of lifetime service cost because operator mistakes may be a significant part of the service cost otherwise. So I think those are the 2 models that we see, the service agreement and the subscription fees, both of them, obviously, pointing in the same direction, but service agreements over time is probably the right way for us to go in most of the areas. Question two, I'm not so sure, I don't have a good answer to it. I don't think the trend is super important for us, but we'll think about it. And on number three, Jan, can we keep our return on capital when we do expensive acquisitions with a lot of goodwill?

Yes. I mean, I would say this is one of our key metrics, the way we drive the business, the way we measure people on. So this is something we -- it is a high priority for us. Of course, when you make large acquisitions, we would add a lot of goodwill. That's normally how it works. So short term, that will be a challenge. But I do felt your question was a little bit about new business models coming in related to the service and we kind of sell uptime and we sell availability and things like that. And that is a model that we are testing out in some businesses and having a dialogue with different stakeholders, how to learn, how to best do business. So I think there's a learning curve there that we are going through right now. But I can guarantee you that, for us, the balance sheet is something we care very much for, and we want to continue to use it efficiently.

Okay. Thank you, Daniela. Our next question comes from Sven Weier, UBS. Can you hear us?

Yes. I can hear you. Those would be 3, and I'll ask them one at a time, if that's okay. The first one is on the point you made about LNG. And as you said, it's not the perfect fuel. It's not zero-emission fuel. I guess that's why Maersk is not going to embrace it. I was curious, how do you see other Marine customers starting to embrace the technology? And what here is going to be your product offering? Are you going to be also neutral when we think about the fuel types beyond LNG. So like green ammonia and so forth?

Yes. I think it's a good question. Let me start with the LNG side. It has obviously been the talk of the town in terms of how much and how fast the LNG infrastructure is being built out and the advantages from a shipowner point of view. I would still say at this point in time, obviously, LNG is becoming the fuel of preference for LNG ships, that is cargo ships that is carrying LNG in any case. There, obviously, it's the dominating fuel type. And there are some LNG ships being put on order at this moment. It is still one of the segments in the shipping market, which is relatively active. So it does have an impact. However, outside of that, at the end of the day, still this year, we don't see a large penetration of LNG as a fuel. And will it come? Maybe, but let's say, the amount of buzz has not transferred into LNG orders for ships outside of the strict LNG segment at this point in time. That's where we are. Otherwise, whether it's ammonia or any other, let's call it, green. I think what's important to note here is that the type of business we are in, in the Marine sector will not likely be a battery type of solution or storage type of solution other than hydrogen to a degree, because the distances and energy needs are too big. So we are not on the close-to-coast business. We are not in the ferries segment. We are not in -- we're just in the transocean business. And there, we will have some sort of combustion ending being the main source of power for the absolute foreseeable future. So the only question is about fuel types. And what we see there, apart from LNG, is multifuel is becoming more in play. You need much more versatility in the engine room when it comes to handle various fuel types. And that, to a degree, is a positive driver for us in our business.

Okay. And the second question was on the Food & Water business, and I was a bit surprised that you didn't mention food and beverage as a structural growth area. I mean, I do understand at the moment that the brewing business is a bit impaired, obviously, by the pandemic. But if we look beyond that, I would have thought that this is also an area that should be quite attractive.

Well, you're right. But what we try to avoid in this discussion was to get into these normal megatrends of the growing middle classes and this and that, and the other thing. I mean, you will sell more hats and more cows and more cars and more houses and whatnot, when the middle class is growing. It has -- it doesn't have any unique impact on Alfa Laval's revenue generation capability or the size of our business market. Those drivers tend to be drivers that moves along with the GDP. So I think for most of our businesses, we are one way or another, exposed to, let's say, the GDP growth or in the Marine side to a degree with the global trade volumes. So what we tried to pinpoint here was not the underlying structural growth, but actually change factors that is affecting us, which is changing the nature of our business, but to some degree, also the scope of our business. Other than that, there is all kinds of trends there that's going to affect us one way or another. I agree with your comment, it's there, but I didn't -- we didn't point it out at this point in time.

Understood. And the last question is a follow-up on CapEx. You mentioned 2.5% for the next 2 years. I thought when you started some of the investments in 2018 that in the long term, we would probably come back to a level of around 2% or lower. Is that still the long-term goal? Or should we brace ourselves for like the 2.5% also for longer?

Yes. I would say, I mean, if we look into the midterm so the next 2, 3 years, this is the level that we think we're going to be at. I think there will be times, of course, when we have done a lot of this program and done a lot of the efficiency where there might be a lower levels. But I think as we see it now for the next 2, 3 years, that's the level that we're going to be. As Tom was saying, there's a number of areas that we see that we can drive further efficiency. We can get good returns of those investments. And if we see it a healthy business, profitable business, with a good demand outlook, then I think that's the best use of the shareholders' money that we can do.

Thank you, Sven. Our next question comes from Andreas Koski. Welcome, Andreas.

Can you hear me?

Absolutely.

Perfect. So firstly, I would like to ask about your growth target of 5% because you demonstrated during your presentations that you have been able to achieve growth above your target level during the strategy period. You're also optimistic about your growth opportunities in many of your end markets. You are launching more new products today than you did earlier, which should help you drive growth. And I think you are more explicit that you will drive growth through acquisitions as well. So can you please, firstly, elaborate how you're thinking about your future growth between organic and acquired growth? And also explain why you are not raising your growth target?