Fifth consecutive year with improved operating income
“In the aftermarket business, the types of initiatives we have taken in recent years will continue and their importance will actually increase.”
Alfa Laval’s favorable business trend continued during 2008. Revenues rose 11.5 percent to SEK 27,850 million, at the same time as operating income increased, for the fifth consecutive year, to slightly more than SEK 6 billion. The operating margin, which has improved gradually in recent years, was 22.1 percent. The stable earnings trend was attributable to such factors as a favorable product mix and high capacity utilization in most parts of the business.
During the year, China overtook the US as Alfa Laval’s largest market, due to strong demand from the shipbuilding industry. Asia, Eastern Europe and Latin America jointly accounted for nearly half of the Group’s order intake, which, however, declined slightly to SEK 27,464 million, due to diminishing demand in the wake of the global financial crisis.
Strengthened resistance to economic decline
Alfa Laval’s well-diversified business, both geographically and in terms of customers, results in a healthy spread of risks during periods of economic decline. In addition, the following activities, which have been implemented in recent years, have contributed to strengthening our resistance:
Alfa Laval has refined its ability to optimize its customer and product mix in order to improve profitability.
In the past three years, the installed base of aftermarket-intensive applications has increased sharply, providing conditions for a continued favorable trend. During the same period, the number of employees in the aftermarket has risen by 30 percent, which has additionally enhanced our presence and our service offering. In 2008, the aftermarket business grew by 9 percent and accounted for 23 percent of consolidated sales. This portion will continue to increase, in part because of our investments in organic and acquired growth. In January 2009, for example, Alfa Laval completed two acquisitions, which will increase the aftermarket business by an estimated 5 percent annually.
Since 2005, Alfa Laval has increased its investments in research and development by 75 percent. At the same time, we have become faster at taking our products to the market. In total, this means that during 2008 and 2009, significantly more new products will be launched compared with prior years. Notable examples include products in the separation technology area, where we have doubled the number of new products in order to satisfy current and future requirements. Many of Alfa Laval’s products reduce the energy or water consumption of customers, which remain prioritized areas even when economic conditions are weak. New and efficient products form the foundation for profitable growth and a favorable price trend.
We are adhering to our strategy of focusing on acquisitions to further strengthen those areas in which we already occupy a leading position.
Continued acquisitions
During 2008, we acquired companies that jointly added 2.5 percent to our sales growth. In January 2009, we completed acquisitions that added a further 2 percent to our growth. Over the past four years, acquired growth has averaged 3-4 percent annually.
Alfa Laval mainly prioritizes acquisitions that complement the company’s current business in terms of products, geographically or by adding new sales channels.
The acquisition of Standard Refrigeration in the US, which has annual sales of slightly more than SEK 200 million, complements Alfa Laval’s range of heat exchangers in the North American market. Standard Refrigeration is a leading supplier of shell-and-tube heat exchangers for refrigeration and air conditioning. As a result of this acquisition, Alfa Laval strengthened its position as the supplier that offers the most complete range and has the best market presence.
A minority stake was acquired in the Swedish company Ageratec. Sales in 2008 amounted to more than SEK 50 million. Ageratec develops and sells innovative manufacturing processes for producing biodiesel in small-scale plants. Several different types of fats can be used in the process, including used vegetable cooking oil.
The companies Høyer Promix and Pressko jointly added nearly SEK 100 million of supplementary products in the fields of sanitary flow equipment and heat exchangers, respectively.
Alfa Laval also acquired the company Hutchison Hayes Separation, a leading supplier of equipment and services for energy-related industries in the US. As a result of the acquisition, Alfa Laval gained a further channel through which it can reach more customers by offering a differentiated range. The company, which will be operated as a separate organization, had sales of approximately SEK 150 million in 2008.
Sustainability – a natural component in the daily business
Alfa Laval’s wide offering includes products, solutions and services that help our customers save energy, produce fresh water and reduce emissions. Ultimately, we hope that our products will help create better conditions for people in their everyday life.
However, the aim of creating better conditions for people is not limited to offering efficient and clean products. It includes all parts of our operations. We want our processes to have as little impact on the environment as possible and we want to ensure that our way of doing business does not add to social injustices or corruption. Accordingly, Alfa Laval’s operations are managed in terms of their environmental impact, social responsibility, business ethics and transparency. We continuously work towards integrating our goals for sustainable development into our daily operations, throughout the company.
In 2008 for example, we implemented an environmental impact lifecycle assessment as a standard for new product-development projects. We also continued to carry out social audits, to try to improve employment conditions for our sub-supplier workforces.
Ability to implement changes
Alfa Laval celebrated its 125th anniversary in 2008. The main reason for our success in developing throughout the years has been our ability to rapidly adapt to changed conditions.
We have refined our operations and implemented a series of activities that jointly enhance our resistance during periods of economic decline. However, we are not immune. Even Alfa Laval is affected by a protracted and widespread recession. Given the current economic conditions, it is therefore necessary in the short term to adapt resources and costs to the prevailing demand situation and to implement structural improvements. At the same time, we are continuing to invest in research and development, which remains a prioritized area. In the aftermarket business, the types of initiatives we have taken in recent years will continue and their importance will actually increase. We will adhere to our strategy of strengthening our existing operations through supplementary acquisitions. We have the financial strength and the management resources required to implement this strategy.
In a business environment focusing increasingly on finding various ways of saving energy, protecting the environment and securing hygienic food production, we are convinced that over the long term structural demand for our products and solutions will continue.
During the year, we implemented a share split to facilitate trade in Alfa Laval shares. Accordingly, I am delighted to be able to state that the number of shareholders rose by 74.5 percent in 2008 and ended the year at 28,078.
Finally, I would like to thank all the employees of the Alfa Laval Group for their excellent performances under challenging conditions.
Lund, March 2009
Lars Renström
President and Chief Executive Officer