Customer-driven approach – a way to achieve the goals
Alfa Laval’s business concept is to optimize the performance in customers’ processes. Time and time again.
This also applies internally. Each person in the company must contribute with results so that Alfa Laval continuously develops. Alfa Laval’s employees are also driven to exceed the established goals, both large and small. The attainment of financial goals is the final confirmation of the company’s success.
Foundation for successful operations
The prerequisites for Alfa Laval being able to realize its business model is in the company’s three key technologies, engineering expertise and application know-how. The company has additional support from its global organization and the resources invested in the further development of products and markets.
The company is organized into three divisions. The Equipment and Process Technology divisions market the company’s products and solutions – based on the key technologies, heat transfer, separation and fluid handling. The Operations division is responsible for procuring, producing and delivering the company’s products. To ensure the long-term functioning of the supplied equipment and to nurture and develop customer relations, Alfa Laval has a well-developed global service organization – Parts & Service.
Strategies for continued growth
Alfa Laval’s strategies are based on developing and expanding the company’s leading positions in well-defined market segments. This can be achieved through systematically working with existing products, developing the aftermarket sector and finding new market concepts and key products.
It can also be achieved through acquisitions and alliances that supplement and strengthen the company.
Alfa Laval has both the expertise and capacity to successfully acquire and integrate operations that strengthen the company’s offerings.
Financial goals for development and dividends
Alfa Laval manages operations to achieve financial goals for growth, operating margin and return.
Favorable earnings mean that the company is able to further invest in line with strategies, which include investing in organic and acquired growth. This also contributes to creating shareholder value through an annual dividend to the shareholders and increased value of the company.
Financial goals
Alfa Laval’s management manages the operations based on the financial goals and benchmark values established by the Board of Directors. The combination of the three financial goals indicate the company’s ambition levels in terms of growth, profits and capital utilization – three fundamental components regarding business. The Board establishes the financial goal levels, based on Alfa Laval operations and the markets in which it conducts business. The overall target is that Alfa Laval shall be among the most successful companies.
Invoicing growth, %
Goal: Minimum average of 5 percent annually over a business cycle.
The goal is to be attained through a combination of organic and acquired growth. The underlying organic growth of Alfa Laval’s markets is expected to be on par with global GDP growth. To this is to be added technological substitution that is favorable for Alfa Laval, which increases growth, and the structural changes in the world that contributes to increasing demands for Alfa Laval’s products. Globalization, an increasing need for energy, improved standard of living, and more stringent rules and regulations in the area of environment are all driving forces that highlight the demand.
Goal fulfillment in 2008: Growth in invoicing was 11.5 percent. 9 percent was organic and 2.5 percent was acquired growth.
Operating margin*, %
Goal: 15 percent over a business cycle.
Goal fulfillment in 2008: The margin amounted to 22.1 percent. Growth was attributable to a very strong product mix, high productivity and large volumes.
*Adjusted EBITA
Return on capital employed, %
Goal: at least 25 percent.
Despite the substantial goodwill and allocated surplus values, the goal for the return on capital employed is a minimum of 25 percent. The level has been set taking into account the low level of capital tied-up in current operations.
Goal fulfillment in 2008: The return was 53.8 percent. During the past three years, the return goal has been exceeded as a result of continuous improvements in capital employed and higher operating earnings.
Financial standards
As a supplement to the financial goals, the Board of Directors has established target standards for three key financial ratios. These will provide additional support with regard to Alfa Laval’s goals for operating the company.
Debt/equity ratio, %
Target: below 100 percent.
In the long-term, the debt/equity ratio is to be less than 100 percent, which means that borrowed capital may not exceed 100 percent of the carrying amount of shareholders’ equity. Although the ratio may increase in connection with major acquisitions, this should be viewed as merely a temporary rise, since cash flow and earnings are expected to offset this effect. At year-end 2008, the debt/equity ratio was 20 percent.
Cash flow from current operations*, %
Target: 14 percent of sales.
The value is just below the goal for operating margin, since organic growth normally requires an increase in working capital. Regardless of the debt/equity ratio, the free cash flow will be considerable but within the framework of the debt/equity ratio standard set by the Group. During 2008, cash flow from current operations was 14.6 percent.
*Excluding taxes paid and including investments in fixed assets.
Investments, %
Target: 2.5 percent of sales.
This investment level creates scope for replacement investment and an expansion of capacity in line with organic growth for the Group’s existing core products. To meet the rising demand for the Group’s products more effectively, investments represented 2.7 percent of sales in 2008. The assessment is that investments in 2009 will be in line with or slightly below the long-term target of 2.5 percent.