Alleima AB (publ) (ALLEI) Earnings Call Transcript & Summary

Hello, everyone. Welcome to Alleima's presentation of the second quarter results 2026. My name is Frida Adrian, and I'm Head of Investor Relations. I'm joined by our President and CEO, Goran Bjorkman; and our CFO, Johan Eriksson. Goran and Johan will take you through the highlights of the quarter. And following the presentation, we will open up for a Q&A session. You're welcome to ask questions via the conference call or submit your questions through the webcast interface. The presentation materials are available for download at alleima.com. And as always, safety is a top priority for us. So I trust that you are familiar with the safety procedures at your current location. And with that, I hand it over to you, Goran.

Thank you, Frida. I would like to begin this webcast by addressing a very sad event that happened on May 5. And I want to express my deep sorrow with the tragic traffic accident at our industrial site in Sandviken, in which one of our colleagues sadly lost their life. Our thoughts are with our colleague's family, friends, and colleagues, and our deepest sympathies go to all of those affected. This tragedy is a painful reminder of why safety must always remain Alleima's highest priority. We are cooperating with authorities while continuing our long-term work to strengthen our safety culture, mitigate risks and ensure a safe working environment for everyone. This is an ongoing effort that is never complete and that requires our full commitment every single day. So while this loss has been deeply felt across the organization, I will now turn to the key developments and highlights for the quarter. So let's look at them. Overall, I think it's a strong quarter on several fronts. We are, for the first time since quarter 1, 2025, again showcasing top line growth where both order intake and revenues grew organically. The 12-month rolling order intake went from minus 12% organic order intake in quarter 1 to now plus 3% in quarter 2, supported by strong performance in key segments like parts of oil and gas, medical, industrial heating and transportation. And as you have seen, we received the largest order yet in the history of Alleima on almost SEK 1 billion for umbilical tubing. At the same time, there are still uncertain markets where the situation in the Middle East still affects us, mainly in the OCTG business, but creating overall uncertainty in other areas as well. While we are pleased with the quarter, but remain cautious going forward. Earnings-wise, we saw a strong contribution from Kanthal, which I will get back to, but also strong performance from the umbilical business as well as titanium tubing to aerospace. This is somewhat offset by weaker short-cycle business within tube where the weak Europe continues to dampen the result. We also noted a slight FX tailwind. We'll continue our journey on long-term value creation. During the quarter, Alleima inaugurated Tube Mill 2026, expanding capacity for steam generator tubes to the nuclear industry by 60%. Also paid a dividend to our shareholders on total of SEK 625 million, an increase of 9% compared to 2025. And in addition, the targeted measures announced in the third quarter last year are progressing according to plan and are delivering cost savings in line with expectations. I think taken together, these actions position Alleima well to continue creating value going forward. Moving to sustainability, which remains an important part of our strategy. And during the quarter, the share of revenues from a sustainable product portfolio increased, mainly driven by the growth in medical and industrial heating segments. Health and safety, always our highest priority, rolling 12-month accident frequency improved versus quarter 2 last year, but sequentially increased due to more accidents this quarter than quarter 2 last year. And we need to continue and to maintain a strong safety focus across the organization. CO2 emissions increased mainly due to a lower share of biogas and a higher use of natural gas. At the same time, the share of recycled steel remained high at above 80%, both on a rolling 12-month basis and year-on-year. If we take a look at our view on the market development, we still view it as mixed, uncertain or challenging, whichever word you like, stemming from the uncertainty around the Middle East and an already weak Europe. Volatility is expected to linger, but we also expect momentum to continue in key segments. Maybe you noticed it changed that we changed a few arrows, but I will walk you through each segment, starting with oil and gas. And I can say that I feel confident to say that it was a good decision to increase output pace for umbilicals in the beginning of the year. Major order received is a confirmation that the market is strong, and we stick to a positive view as the project list still is very attractive. For OCTG business, on the other hand, we talked last quarter about the effects from the situation in the Middle East, and we flagged for a weaker outlook already in the Q4 report, and we stick to that view as well where we land in a flat arrow. Industrial, European demand is still weak. Asia also declined, but North America improved but on low levels. Chem, petrochem volumes in Europe and North America are low, while Asia has been holding up better, but we -- where we now have a slight slowdown. Industrial heating, we continue to see growth driven by Asia and North America, while Europe is still on the weaker side. And it's still some segments like electronics and semiconductors are still the main drivers. Consumer, flat demand on a good level and medical, strong momentum, no signs of slowing down. And let me remind you again of our greenfield investment in Malaysia that will be up and running towards the end of the year. Transportation, titanium tubing for aerospace, also including space is continued to be strong. Mining and construction demand was stable overall, again, driven mainly by the mining industry. Nuclear, nothing has changed where the outlook remains positive. And last, renewable energy, there are some bright spots, for instance, biofuel, but all in all, still weak. So let's turn to the Middle East. Market uncertainty continues. The situation remains unstable. And as you know, there is new information emerging almost every other day. The uncertainty is negative for the market as it affects visibility, customer sentiment and decision-making. And just as previous quarter, it's important for us to focus on what we know and to avoid speculation, whether it's negative or positive. Our larger exposure in the region is within OCTG, which is part of the Oil and Gas segment. And this business has both direct and indirect exposure to the Middle East and is being negatively affected by the developments in the region. We continue to see a slowdown in new well completion, which is expected to negatively impact our order intake in coming quarters. And as I said, in quarter 1, we have reduced our output to support our customers in avoiding excess inventory, which has had a negative impact on revenues. We also have a chemical and petrochemical business in the Middle East, and that is also effective, although this is a much smaller part than OCTG in that region and therefore, less significant from an overall exposure perspective. And at the same time, the impact on Alleima's other businesses remains limited. Moving to order intake and revenue. Order intake rolling 12 amounted to SEK 18.6 billion, again, up 3% organically compared to the minus 12% we had in quarter 1. And this is supported by strong development from umbilicals, including the large order, but also excluding the large order umbilicals was good and also strong development in industrial heating, medical and aerospace. And we are growing despite the lower OCTG volumes we flagged for previously, and we are still low in chem, petrochem, while we strategically have booked some more contribution business in the quarter to cover cost, which will have a somewhat dilutive effect in the margin near term. Revenues grew organically by 2%, supported by the same key segments that drove order intake. Tube and Strip declined while Kanthal grew. And book-to-bill rolling 12 recovers to 102% from the 90% we had in quarter 1. Earnings. Adjusted EBIT improved to SEK 519 million and a margin of 10.6%, a strong performance despite lower volumes in the OCTG and the short-cycle businesses. This is explained by solid performance in umbilicals, aerospace and I would say all of Kanthal. And in addition, we see positive effects from the targeted measures announced in quarter 3 last year and somewhat helped by FX. Cash flow of SEK 330 million, which Johan will get back to show some details later. So let's look at the division performance during the quarter, starting with Tube. And I would say it is a mixed picture. Some parts of the business like umbilicals within oil and gas, titanium tubing within transportation are performing really well. While short-cycle business, mainly industrial and chem, petrochem still are weak. Our APAC unit has previously held up strong both in terms of top line and earnings, but we now expect a somewhat weaker Chinese market. Rolling 12 order intake grew 1% organically on the back of the major umbilical order, held back some by high comps in both SGT and OCTG. Revenues declined by 3%, again, affected by the short-cycle business, OCTG and also some timing effects in nuclear. Book-to-bill grew to 101%, recovering from the 85% sequentially. Adjusted EBIT margin of 11.2% on par with last year despite lower revenues coming from strong contribution in umbilical and aerospace as well as savings from the targeted measures, mitigating the negative effect from the short backlog in short-cycle business and the lower volumes in OCTG. And currencies had a positive effect on SEK 18 million year-over-year. Kanthal, let me take a moment and really highlight the great performance of Kanthal. In the recent downturn where volumes in industrial heating were low, while facing a significant FX headwind throughout most of 2025, they've done an excellent job in taking actions to protect profitability. And now when volumes have recovered and with growth investments ready to scale, I would say the future of Kanthal looks really bright. Rolling 12 order intake grew organically with 19%, where medical and industrial heating were the main drivers. And the same can be said for revenues, which grew 21% organically. Rolling 12 book-to-bill of 109%. And the adjusted EBIT margin of 19.6% is a record high in the quarter, and we see contribution from several product groups, both within medical and industrial heating. FX had a minor positive effect of SEK 4 million year-over-year. So to Strip. It's been a challenging quarter for the Strip division. We have experienced some production disruptions in Sandviken. I would say these issues have now been resolved. mitigating actions are ongoing, and Strip is working to strengthen its cost position with, of course, the aim to once again contributing positively to the group margin. Rolling 12 order intake declined organically with 16%, heavily impacted by a negative development with the hydrogen business, but also a weaker Industrial segment. Revenues declined 1% organically with the consumer segment contributing positively. Adjusted EBIT margin was 2.5%, but impacted negative SEK 3 million year-on-year and underlying margin was 3.3%. And book-to-bill amounted to 89%. And by that, I'll leave over to you, Johan.

Thank you, Goran. So looking at the financial summary and starting with the table to the right. So order intake for the rolling 12-month period amounted to SEK 18.6 billion, corresponding to an organic growth of 3%. We had a negative impact from FX and alloys of 4% and 1%, respectively, indicating a total growth of minus 2%. If we look then at the quarterly revenues, we reached SEK 4.9 billion with organic growth of 2% and still some impact from FX, which in total had a negative impact of 1%, while alloys had turned to a slight positive effect of 2% on quarterly revenues. If we look ahead into the quarter 3, we see on revenues, a neutral currency effect, and we expect roughly plus 2% from alloys. And for -- on the order intake side for the rolling 12 months, we expect minus 3% on currency and a neutral effect from alloys. So -- and we have no contribution from structure, we can conclude. We haven't done any acquisitions in the last 12 months, and then there are no structure effects on top line then. And then back to the big table on the left, where I'll get back to adjusted EBIT in the coming slide. The reported EBIT increased to SEK 715 million coming from higher revenues and positive metal price effects. Net financial items for the quarter amounted to minus SEK 10 million compared to plus SEK 18 million last year, mainly driven by valuations of derivatives, which mostly were in the comparison period last year. Normalized tax rate at 21.1% for the quarter, but preferably we look at the year-to-date figure, which is 22.5%, so on the lower side of our guidance. Free operating cash flow came out at SEK 330 million in the quarter, and I'll get back to that in a coming slide. And finally, adjusted EPS for the quarter at SEK 1.57, impacted possibly -- positively by a higher adjusted EBIT. So let's have a look at the bridge for adjusted EBIT. We start at last year's SEK 454 million and a margin of 9.5% compared to this year's SEK 519 million with a margin of 10.6%. And this is a solid organic development, I must say, with a healthy leverage of 46% and a strong contribution from, as Goran also mentioned, from Kanthal and parts of the tube business and of course, the targeted measures that we announced after the Q3 closing last year. So these -- all of these mitigated then the under-absorption effects that we saw from the lower OCTG volumes and the weaker short-cycle business. And we are pleased that the targeted measures are proceeding according to plan, both the permanent ones and the volume-related ones. So in total, they yield some SEK 45 million in the quarter, putting us roughly at 85% of our targeted run rate. And we saw no contribution from structure in the EBIT bridge this quarter. Moving over to the balance sheet and looking at the capital efficiency. Net working capital increased in absolute terms year-over-year, mainly due to the higher metal prices, but it decreased as a percentage of revenues, so in relative terms, down to 35.5% due to higher quarterly sales. Sequentially, we increased net working capital. You can see that in the graph, and that can be derived from increase of accounts receivable and higher inventories then driven by the increasing metal prices and some volumes as well. Capital employed that you have on your right-hand side, excluding cash increased year-over-year to SEK 16.6 billion, mainly driven by higher net working capital. And the return on capital employed, excluding cash based on the reported operating profit, so that includes metal price effects and items affecting comparability, that was 7.7% for the rolling 12-month period, down from 9.2% last year, coming from a lower rolling 12-month period reported operating profit. Looking at the cash flow. And what's worth mentioning and some food for thought is that we have been talking for some quarters now about a challenging market and not being 100% satisfied with our own performance. But this graph shows that we, despite that, are generating and continue to generate a healthy cash flow. And moving to the table on the left, EBIT and EBITDA, I think we've touched on already. The noncash items, which mostly -- most commonly refers to cash or noncash effects from provisions or provision releases. And this year, it was affected by cash flow effects from the ongoing restructuring activities. We note the negative impact from changes in working capital, mainly due to increased inventory, and that comes from the higher raw material prices then and some volume effects as well. And this -- and also higher accounts receivable affect this net working capital number. And CapEx for the quarter is almost on par with last year. Amortization of lease liabilities is slightly higher this year. And all in all, this leaves us with a free operating cash flow of SEK 330 million. And please remember that cash flow normally is lower in the first half of the year when we have seasonal buildup in preparation for the maintenance stops that we have in the third quarter. Looking at our financial position. And overall, our financial position remains strong, where we are well below our financial target of a net debt-to-equity ratio below 0.3x. At the quarter end, we were at negative 0.02x. And net pension liabilities has decreased to SEK 604 million from last year's SEK 813 million, mainly as a result of higher discount rates. And the leasing liabilities are slightly lower than last year, and our cash position continues to be strong. Despite paying dividend of SEK 625 million in May, we have a net cash position of SEK 283 million. Let's look at the guidance we gave ahead of the quarter and the outcome of that. On CapEx, we guide on full year. And so far, CapEx spend for the first half of 2026 is almost SEK 400 million. And normally, half year -- the second half of the year is more CapEx heavy. Currency, transaction and translation effects came in at minus SEK 39 million. where we estimated minus SEK 60 million. In the total currency effect, the transaction and translation effects were more than offset by hedges and bridge effects from revaluations. So this year, we had positive hedges and positive revaluations. And last year, we had some negative revaluations, resulting in a total bridge effect from those items of plus SEK 57 million. So that takes us to the positive SEK 19 million that we have in the total currency effect. If we then look at the metal price effects driven by increased metal prices, the metals affected us positively in EBIT with almost SEK 200 million, where we guided for SEK 150 million. And the normalized tax rate year-to-date is 22.5%, where we are guiding for 23% to 25% for the full year. so at the low end, but quite close to the range. And looking into the third quarter and full year and the guidance for that. Full year CapEx, we keep the full year CapEx guidance of SEK 1.1 billion coming from growth projects for the year of the one that you know that we have inaugurated the steam generated tubing capacity increase in Sandviken, but also investments like the industrial heating in Japan and medical in Malaysia. And a little less than half of the total is also for maintenance. Currency effects for the third quarter based on the rates per the 15th of July the transaction and translation effects are estimated to be neutral. On the metal price side, based on the metal prices and currency rates per the 15th of July, we anticipate a positive effect also in the third quarter of SEK 100 million. And here, it's probably worth reminding about the dynamics that the price increase for -- especially for nickel, but also for molybdenum and chromium over time leads to positive metal effects in our EBIT, while a stronger SEK against the U.S. dollar, as an example, has the opposite effect. On the tax rate for the full year 2026, we expect a normalized tax rate in the range of 23% to 25%, just as before. And by that, I hand back to you, Goran, for outlook and summary.

Thank you, Johan. So the outlook for quarter 3, I would say the start of the third quarter has been influenced by new tensions in the Middle East, further dampening for us an already weak regional business within tube in Europe and North America and also some indication of a slowdown in APAC and especially China. In contrast, umbilicals, industrial heating, medical, aerospace as well as space as well as nuclear remains strong with solid backlog and the momentum going forward. Product mix is expected to be similar to quarter 2, but there might be some diluting effects from the product mix given that we short term have taken more contribution orders to compensate for the lower OCTG volumes. Earnings in quarter 3 will also be somewhat impacted by some planned ramp-up costs for the new SGT mill. And as always, cash flow is normally higher in the second half of the year. Coming to summary. Overall, I think we delivered a strong second quarter with organic order intake growth moving from minus 12% in quarter 1 to plus 3% in quarter 2, supported by strong development in umbilicals, medical, industrial heating and aerospace. At the same time, profitability improved, supported by a strong performance across several segments and particular by an excellent quarter from Kanthal. That said, market uncertainty remains, visibility is still limited in parts of the market and the external environment continues to be unpredictable, while we maintain our discipline and our focus. And we constantly execute on our long-term strategy, focus on profitable growth, attractive niches and a strong product mix. And we continue to implement the target measures introduced in October last year, driving cost savings and efficiency improvements, which we continue to see the effects from. And I would say, overall, I think the quarter shows that we are progressing well despite a still uncertain market. And with that, back to you, Frida.

Thank you. We will now begin the Q&A session. Please feel free to ask your question via the webcast or directly through the conference call. Operator, please go ahead.

[Operator Instructions] The first question comes from the line of Kaleb Solomon from SEB.

You mentioned there will be some ramp-up costs related to the reopening of the facilities for steam generator tubing. Can you give us a rough figure of how much that is and maybe a rough split of how that will be divided in Q3 and Q4?

You can look like this. We're leaving the project phase and now entering into sort of real production. And during the ramp-up, there is no invoicing. And with roughly 100 people, it's roughly SEK 20 million cost in the quarter that we will have -- until we have invoicing. So quarter 3 worse than quarter 4, I would say. So in the size of SEK 20 million.

And just as a follow-up, how long do you expect the ramp-up will sort of take before you reach normal utilization rate?

I mean I don't have the date right now, but our plan is to be operational end of the year, so including [Audio Gap] so then we will have absorptions from the factories exactly when the first invoicing will happen, I don't know right now. So sometimes even in quarter 4, that ramp-up cost will be reduced.

Okay. That's clear. And another one for you, maybe, Goran. After the sort of previous ramp-up issues in Sandviken, you mentioned that catching up to the OCTG backlog would take until mid-'26 and that it should be sort of fully operational by summer. So first, just sort of wondering what, if any, impact it had this quarter and if the backlog reduction is now fully sort of done? And then second, is there any sort of impact to consider for Q3?

I didn't follow the question.

The delay related to the last year's ramp up.

That effect was not so big in quarter 3. It was more in quarter 4, wasn't it?

Yes, the delay into this year. If I may, I believe you referred to that we had delays due to that, that would sort of linger into OCTG then into quarter 1 and quarter 2 this year. And that has been caught up now and it's more the market that.

Yes, absolutely. The market has changed heavily since we were in those times.

Yes.

Okay. And Mining and construction was a negative contributor this quarter, which seems to be sort of a common theme among companies reporting today. Can you maybe give some color on what you're seeing from that segment and if you're sort of expecting anything else for Q3?

We see a stable good order intake from a couple of big Swedish customers.

Okay. And just a final one. You give the same sort of comments just related to general uncertainty that you've done in the previous quarters, but it sounded a little bit in the CEO letter that you -- like you were somewhat more optimistic, Goran. Is that correctly interpreted? And why is that?

Probably colored by sort of the strong order intake we have had in quarter 2. And to some extent, I think we were kind of getting used to operate in a very uncertain times because when you look around weak Europe, more in Middle East, U.S. with tariffs, China, maybe a little bit slower growth. But it looks like we are sort of managing that pretty well. And of course, some of our important key segments like umbilical, industrial heating, medical, aerospace, nuclear will be positive. I think that is what is probably coloring my approach there.

The next question comes from the line of Adrian Gilani from ABG.

A couple of questions from my end. First of all, a follow-up on the nuclear line ramp-up. When it does start ramping up significant volumes, should we see this as sort of extra volumes coming in that you didn't produce before? Or is it volumes being redirected to the nuclear site, which would be sort of more of a mix effect rather than a growth effect?

No, it's extra volumes. We will be able to make 60% more, and we have a backlog for that.

No, I'm talking at the group level. So I understand it's more nuclear volumes, but is it volumes that you would have produced in other segments being rerouted to nuclear, creating a positive mix effect...

We wouldn't and it's open for this product. And if we didn't open this, we wouldn't produce something else. And in the backup system -- back-end system, I mean, the nuclear part is a small part. So it's more the value on the added value product.

Yes. I understand. And then just on the orders in tube. When you talk about orders at the group level, you talk about it being somewhat broad-based improvement. If we look at tube specifically, would you say that the majority, even if you strip out the one larger oil and gas order, would you say the majority of the improvement is still in oil and gas improvements? Or even within tube, is it a broad-based improvement?

So it's -- I mean, talking about order intake, of course, they are heavily impacted by the umbilical. And of course, we had almost SEK 1 billion order. But even if we wouldn't have had that order, umbilical would have looked good. So as you can imagine now how strong it was. But if I look at other segments, I think they are strong in aerospace, that was good. And I would say those are the 2 segments that are the strongest within the tube division in order intake-wise. Then as you know, I mean, we don't book nuclear orders every day. So that is quite unstable from that perspective, but we have very strong backlog. So that would still create revenues starting from end of the year.