ALFVF - Alfa Laval Corporate AB (ALFVF) Q1 2023 Earnings Call Transcript
2023-04-25 17:05:24 ET
Alfa Laval Corporate AB (ALFVF)
Q1 2023 Earnings Conference Call
April 25, 2023, 08:00 AM ET
Company Participants
Tom Erixon - Chief Executive Officer
Fredrik Ekstrom - Chief Financial Officer
Conference Call Participants
Nancy Ni - Goldman Sachs
Klas Bergelind - Citi.
Sven Weier - UBS.
Andrew Wilson - JPMorgan
Max Yates - Morgan Stanley.
Sebastian Kuenne - RBC Capital Markets
James Moore - Redburn
John Kim - Deutsche Bank
Sebastian Kuenne - RBC Capital
Gustaf Schwerin - Handelsbanken.
Johan Eliason - Kepler Cheuvreux
Presentation
Operator
Tom Erixon
So hello, and welcome to Alfa Laval's First Quarter Earnings Call. We are standing from the studio in Lund, Fredrik and I. So, welcome to this hour. We will keep a tight deadline today. We have our AGM following this. So Fredrik and I will need to take off, as we conclude latest at 3:00 p.m. our time.
With that, let me go to the presentation and a few introductory comments as always. And I think this time, let me help you frame the quarter a little bit. First on the demand side, we obviously had a very strong demand, driven primarily by global sustainability trends together with a cyclical rebound in LNG and offshore applications. The demand trends are expected to remain positive, but we do not expect to repeat the elevated level of order intake in the next quarter compared to this one.
On the supply side, you may remember that in the supply chain imbalances we had in 2022, they resulted in a restructuring program that was launched in the second half of 2022, in both the Energy Division and in the Marine Division for particular areas. With the strong order intake in these areas of low utilization in the fourth quarter and certainly in the first quarter this year, and the good progress we have in the restructuring program in the weak parts of the portfolio, we are expecting that these parts of our business will continue to gradually improve margins as of Q3 2023, as earlier indicated.
The large capacity expansion project that we initiated about half a year ago is moving on as planned. The current demand trends are reinforcing both the need and opportunity related to the investment program and the longer-term growth of Alfa Laval as a group.
And with those comments, let me move on to key figures. As I said, the order intake was exceptionally strong in the quarter at a new record level of SEK18.4 billion. And despite good invoicing, the order book reached a new high of SEK42 billion or a book-to-bill of 1.3. The margin - the EBITDA margin grew in line with invoicing as it should, and it was a good outcome given all the volatility in currencies, commodities and supply chain challenges that we've been working with during 2022, and to some degree also in Q1.
On the divisional level, let's start with the Food & Water Division. The order intake remained on a good level of SEK5.8 billion in line with invoicing in the quarter. Compared to last year, we added Desmet as an acquisition, and on the other hand, we also had a distortion with a USD65 million brewery order that was booked last year. So the comparison versus last year is a little bit difficult to make. All together, we feel the Food & Water Division was relatively stable in terms of order intake with an exception of some weakness in China. Since the second half of 2022, we have commented that the demand has been somewhat soft in the Food & Water Division, specifically. The margin was solid in the quarter for Food & Water Division with all units performing well on a margin level based on good volumes and based on solid growth in service across the board.
Going to the Energy Division. It was a very strong, solid and clean quarter across all of the business units. The demand was strong in all parts of the portfolio, and the order intake was well balanced covering all product groups. The big utilization issues we had in 2022 for welded heat exchangers, particularly driven by the cancellation of the order book in Russia, are now gradually being resolved with some positive margin effects expected from Q3 and onwards.
The margin was elevated in Q1 just as it was last year. There were some re-val effects in the quarter, as it was last year. Last year, we indicated to you that the one-time effect was around SEK180 million in the quarter. This time the net effect is approximately SEK150 million. You should not expect that to repeat. But as we said last year, there are many moving parts as we move into the next quarter, including price adjustments and PPV adjustments. So it's difficult to take it out as an individual number.
However, for the year, you should expect a similar margin development in 2023, as you saw last year. In other words, the Energy Division market in Q1 will not be expected to be repeated in Q2 and onwards. Still, the underlying profitability in the Energy Division was better than last year, and with a good order book for the starting point is solid and positive for the divisional outlook.
In this context, I would like to remind you that the large CapEx project that we decided on end last year and partly beginning of this year, that capacity expansion project is mainly focused in the Energy Division. As part of this project execution, we expect costs of around SEK100 million per quarter being charged to the P&L during the remaining quarters of 2023 and in 2024.
That takes us to the Marine Division. Order intake was exceptionally high despite ship contracting remaining on a fairly modest level. All parts of the portfolio, except the planned ramp down of ballast water applications developed well. Structurally, sustainability applications and service continued on a very steady growth in the quarter, and in addition project orders in both offshore applications and cargo pumping were at high levels.
Although the market trends and forecast remain stable near term, a repeat of this rather elevated order intake for the Marine Division is not expected in the second quarter. Marine margin remained on approximately at the same level as - during the last quarters, which is a low level compared to historic levels, and in line with our guidance as before. With the old order backlog in boilers being gradually resolved and order intake in cargo pumping gradually improving utilization rights in our supply chain, we expect a gradual margin recovery as of Q3 this year as we have indicated in the previous quarter, well in line with our earlier guidance.
That takes us to Service. The Service growth remained at elevated levels in all three divisions and grew organically at a very high level of 18% versus last year. I have commented on this before in terms of both the underlying demand being strong, but we have, during the last 5 years, made significant improvements and investments into our customer service capabilities. It is now clearly yielding results in terms of higher growth levels.
On a regional perspective, North America is the only negative territory in this quarter. However, it is mainly affected by the large brewery order, as I indicated earlier. The business sentiment in the U.S. remains positive at large. For the rest of the regions, it is an all positive situation with especially strong demand in Asia corresponding to almost 45% of order intake.
May I also repeat our guidance for Russia briefly. We stopped all new orders as of March 2022, and wrote off all of the sanction-related already booked orders since then, amounting to a number well above EUR100 million. As part of a controlled wind-down process, the business activities are gradually closed down from Q2 onwards with essentially one open project remaining in the Food & Water area to a value of approximately €1.5 million in fisheries remaining possibly until year-end. Our approach to deliver on the contractual, non-sanctioned orders has been driven primarily by respect for our employees' security and the legal system in Russia.
Let me just finish this by giving you a brief overview on our top 10 markets. On a rolling 12-month basis, China took over as our largest individual market from the U.S. in the quarter. The difference is not big, but nevertheless, it is a historic moment. India is back on the top 10, rather logically, we see strong demand development in India as a whole. And in general, you can see a rather stable growth level on the last 12 months versus all of 2022 in most markets, and it reflects fairly well how we read the current economic environment for Alfa Laval as we're moving forward.
And with that, let me hand over to Fredrik for the financial update.
Fredrik Ekstrom
Thank you, Tom, and hello. Order intake, as mentioned, reached an all-time high in the quarter, were up 39% total growth, was -- of that growth, 25% was organically driven, 7% structurally and 7% by currency. Base business also set a new record level in the quarter. Noteworthy is that, that puts Alfa Laval on a 9.5% compounded aggregate growth for the last 3 years. Invoicing in the quarter has remained strong and on a high level.
Gross profit margin landed at 34.5%, which is below last year, however, sequentially higher than quarter 4, and on a comparable basis for the whole year last year. S&A costs are in line with expectations, given acquisitions, expected inflationary increases, and increased activity levels in a growing business.
Cost-to-sales ratio reflected a positive development, landing at 15%, down with 2% from the quarter -- same quarter last year. R&D increases are mainly related to inflation and increased activity levels.
Operating income in money terms is 68% about the same period last year, which then increases the earnings per share to SEK3.6 compared to SEK2.2 per share last year, a strong first quarter.
Improving or rather less disrupted supply chains have facilitated more deliveries to our customers. New capacity resulting from the multiple CapEx programs has also boosted our delivery capability, 15% organic growth, 33% in total growth. Nevertheless, backlog continues to increase with a strong book-to-bill in the period.
Adjusted EBITA is 31% above last year in money terms on about the same level in margin as previous quarter 1 and improved sequentially. As previously noted by Tom, the development of the EBITA margin on a divisional level is positive across the company. Adding some further detail, the development of the EBITA margin has had a dilutive effect from acquisitions of 0.6%, which was in line with expectations and in line with project business.
Currency had a marginal effect, while the organic impact coming from a favorable mix and pricing had a positive impact of 0.5% EBITA margin. Commodity prices and inflationary prices are well offset. And finally, restructuring programs to address capacity imbalances are well underway and will start to have a meaningful impact in quarter 3.
Working capital continues to burden cash flow, where inventory levels are the main contributors. We have initiated multiple activities to address purchasing volumes and optimizing inventory levels to reflect the current remaining supply chain disturbances and uncertainties. We expect capital expenditure to accelerate during the coming quarters, bringing 2023 close to the top of our guidance, some SEK3 billion. Financing activities is negative, and we have chosen -- as we have chosen not to refinance one of our commercial paper tranches that matured in the quarter. We expect a strong cash flow development during the year.
Order backlog stands at SEK42.2 billion, of which SEK24.8 billion are for delivery in 2023, SEK17.3 billion are for delivery in 2024 or later. That represents a 59% increase year-on-year and the current backlog corresponds to 5.3 months of the current sales. Quarter 4 book-to-bill was SEK1.3 billion -- 1.3, sorry, and Energy backlog was at SEK10 billion, Food & Water backlog at SEK15 billion, and Marine backlog at SEK17 billion.
Finally, a reminder of some of our guidance. On CapEx, we guide the market to a SEK2.5 billion to SEK3 billion investment pace over the next 3 years. We guide on a currency impact on EBITA for SEK130 million in quarter 2 and SEK375 million for the full year. And then we have amortizations of almost SEK1 billion in 2023. We expect the tax rate to be between 24% and 26%.
And with that, I hand over back to Tom.
Tom Erixon
Thank you, Fredrik. And then, let me just round off with a few comments on the outlook for the next quarter. And may I first say that the weakness as we see in some consumer-driven segments and in construction and some other areas of the global economy are not yet affecting Alfa Laval's end markets in any meaningful way, perhaps with some modest exceptions in the Food & Water area. However, even with good structural demand trends going forward, the all-time high first quarter is not expected to repeat sequentially. On a group level, we expect demand to be sequentially lower and on a divisional level, we expect demand in the Food & Water Division to be somewhat higher, in the Energy Division to be somewhat lower, and in the Marine Division, after the SEK7 billion plus order intake, we expect the demand situation to be lower.
And with that, we open for questions.
Question-and-Answer Session
[Operator Instructions] The first question is coming from Nancy Ni from Goldman Sachs. Please go ahead.
Q - Nancy Ni
Hi, good afternoon. Thank you very much for taking my question. I suppose I'll just start with one question first then. It's -- I'd like to sort of touch on your pricing. If you could sort of help us understand just how much of the kind of order growth and the margin improvement that you saw this quarter was due to pricing and also how much of that was sort of carried on the price increases you did last year versus any new pricing? Thank you very much.
Tom Erixon
Yes, it's a good question. And as you point out, when you look at the growth numbers, you need to be careful in terms of understanding what is volume growth and what is value growth here. We - our feeling around our pricing is that, we are keeping pretty much an even level with our price increases and the cost inflation we've seen over the last 2 years. So, we are fairly balanced last year. There are variations between product groups, but we made up to 3 price increases in order to compensate for a very problematic situation. And this year, we expect it to slow into a more normalized level. We see some commodities going down, some transport going down, but on the other hand, we see escalations in titanium, in molybdenum and a couple of other areas that are very high and somewhat problematic. So the situation is still not stable, but we think it's going to soften a bit this year compared to last year.
We think we are pretty much in balance with the cost increases that we have. Obviously, there is -- when we talk about re-val effects, they will obviously not repeat themselves into the rest of the year. On the other hand, we have overhang from price increases last year and the price increases we did this year that, to some degree, are compensated enough for that. So that's about how the metrics looks for us.
Nancy Ni
Okay, great. I'll jump back in the line.
Operator
The next question is coming from Klas Bergelind from Citi. Please go ahead.
Klas Bergelind
Yes, hi. Klas from Citi. So thank you for the SEK150 million in the re-val effect. Can we talk about the margin in Energy? Did you say, Tom, that you expect same margin year-over-year for 2023? You obviously have a similar inventory revaluation on both sides. You still have welded moving through the backlog, which is lower margin. Is this because of the higher margin in the new greener verticals? Or are the cost savings linked to welded progressing better than expected? I'll start there.
Tom Erixon
As you know, we are a little bit cautious as when it comes to guidance on margin development. But given the elevated level we had last year and this year in the Energy Division, specifically, we were trying to help you guys out a little bit how to look at it. The reason we have that big effect is that, with the cost inflation we have and the big standard cost changes, this effect becomes much bigger these years than it has been historically and hopefully what it will be in the future. So we will have this sort of elevated level a bit resolving itself, I hope.
Now, the guidance we were giving as to the margin development this year is that, the shape of the curve, if you like, will probably similar this year as it was last year. The last year, we were at 22%, 23% in Q1, and we were coming down gradually to 16%-something. I'm not giving you an absolute guidance number, but I'm just saying that the shape of that curve, as we move into this year, you should probably expect that to have a similar shape as it did last year. And then there is a number of pluses and minuses in terms of what's going to make it better, and potentially what's going to burden it, as we look for the comparison versus last year.
Klas Bergelind
Yes. Very clear. My second one is on the Marine margin. Obviously, low factory loading pumping systems, you have some FX hedging as well. And now we see the strong growth on the pumping system side is both FSPO, but it also seem to be on the merchant side, you also have the cost savings kicking in more in the second half. Can you talk about how the pumping systems orders are likely to move through the backlog? Did you say better factory load from the third quarter? Because I thought, lead times out of backlog was a bit longer than that until you see the revenues kicking in.
Tom Erixon
Yes. And I think your assumption in the end there is correct. Normally, lead times do take a little bit of time. And actually, this year, we have some infra out coming even from Q1. So, I would say like this, we have guided all along that we expect demand imbalances and restructuring to create a better situation for us in cargo pumping and the Marine Division from Q3 onwards since already last year. And we are very much strengthened and reinforced in that belief based on what we have in our order backlog.
Now, that is what will be invoiced during the rest of the year, and we feel confident that we've turned the page as of Q3. Q2 is going to be an intermediate quarter. So we see exactly where we are, our guidance have been, expect us to be on about the same level as we were Q4, Q2. But we feel quite positive about both the cargo pumping that we are through the worst and it's going to come to better level, but we have also worked through the boiler backlog to a large degree and we are looking better and more stable in that business, in Marine Division, as well as we come into the second half.
Klas Bergelind
Great. Very quick final one to you, Fredrik. So it says that you have SEK400 million a year in investment in Energy. So is this OpEx then? Because I thought most of the step up that you announced last quarter was CapEx linked, if we can sort of understand the split there a little bit better?
Fredrik Ekstrom
Yes. So when we approve, of course, this big investment program, some parts of it are capitalized and put onto the balance sheet, and some of those investments, of course, come into the profit and loss in the form of OpEx or in the form of project costs to run these investments. And that's what we are flagging that we expect about SEK100 million in each quarter for the coming -- for the year -- for the remainder of the year and even into quarter 1 of 2024.
Operator
The next question is coming from Andrew Wilson from JPMorgan. I am sorry, Andrew, I miss collect. The next question is coming from Sven Weier from UBS.
Sven Weier
Yeah. Thanks for taking my questions. First one is on the Marine business. And, Tom, you singled out again the decarbonization as a driver for orders next to the pump business. I was wondering if you could go into a little bit more detail, I guess, at the moment it's still mostly the fuel systems, where you benefit. If you could probably confirm that one? But also if you could shed some color on the other areas like smart navigation, air lubrication, the sail business, and CCS, eventually, how you see those going up from here?
Tom Erixon
It's a good question, Sven. I'll be a little bit brief on it. I think as we come to the Capital Markets Day, again, we will do a bit of an update on the development projects as such that we sort of introduced clearly at the last Capital Markets Day. But you're right in your hypothesis that the main driver for us right now short term is on multi-fuel side, and that's part of our recovery in our boiler business, and it's part of the growth in the engine room, when it comes to complexity. And so, that's moving along well. It's a relatively high share of ships that now go on multi-fuel equipment as opposed to just on a single fuel. So that is a helpful trend for us in the short-, medium-term.
The -- we completed the transaction on the air lubrication project. It's as a product will be called Ocean Glide. We have a very strong pipeline of projects there. Very little is booked in the quarter, so you don't see any effect of that in quarter 1. But I suspect, you will see somewhat of an effect on that in quarter 2, already it progresses well according to plan.
Regarding the wind propulsion, that is still complete development projects. We are doing the first mounting of wings in the fall of this year for test trials. And we still hold on to the general time plan that first commercial orders we may be looking at late 2025 or beginning of 2026. So we are on target with that, and the whole development portfolio, as we introduced it in November is giving a good pace.
Sven Weier
And are you seeing benefit on the smart navigation side already as well?
Tom Erixon
Yes. We have -- since the acquisition of StormGeo, it's been growing well in line with our acquisition plan, and from a margin point of view, well in line with the profitability targets as well. So we are very pleased financially with an acquisition that was a little bit out of the box for us compared to what we normally do. The work now is very much focused on how we use that platform in navigation and in routing to also include the decarbonization monitoring on board ships and integrated with our other equipment when it comes to helping shipowners to reach their objectives of cutting carbon emissions with 50%. So we are taking it step by step, but this is not a straightforward ECA project. So we have some work to do. There are a number of, let's say, software or Software-as-a-Service type of applications trying to find its path to the bridge. We have one option, and I'm not sure we're going to see a lot of industry or company-specific platforms with shipowners in the future. We may see a consolidation somehow that makes it easier for shipowners and captains to monitor the ship performance in navigation, as well as in related areas.
Sven Weier
And then you said the ballast water business obviously winding down. How big a share of the order intake was it still in Q1?
Tom Erixon
It was -- do we -- I actually don't have a full number. My -- let us get back to that, but it was significantly smaller than it was the first quarter last year, was a meaningful change, SEK400 million, okay. It was SEK400 million in the quarter.
Sven Weier
SEK400 million?
Tom Erixon
Yes.
Operator
Now the next question comes from Andrew Wilson from JPMorgan.
Andrew Wilson
My first question, I was going to ask around China. Obviously, you've had a very good period in China, and I think that includes a large order that you had in Energy. But, I guess, just interested more generally in terms of kind of sentiment around on the ground post -- I guess, reopening post and the disruption around COVID, and just kind of thoughts for China as a market in 2023, Tom, perhaps.
Tom Erixon
Well, I'll give you sort of our verticals. There may be variations on the theme in other industries. But for the Energy side, as you sort of indicate, we had a good quarter and the sentiment is good, the pipeline is good. It's partly related to the fact that China drives that climate policy quite intensively. And on top of that, they are continuing to build energy independence. And so, that drives also some refinery type of investment programs in China as well. So on the Energy side, we look at it very positively in the years to come.
On the Marine side, depending on the cycle, we obviously positively affected by what we saw in Q1. And I think the Marine cycle, depending on how it evolves now, essentially it looks rather good. And we see idle yards being ramped up again both in Korea, but mainly in China. And so, I think on those 2 sides, there is a positive undertone for us.
On the Food & Water side, we have been, for the last 3 quarters, been somewhat on the low side. We are looking into whether that is partly our specific segments that are affected or whether we have missed out on something. But, in general terms, we are somewhat positive as to the second half of this year. We may have seen a bit of a shutdown type of effects in our Food & Water market. We see a little bit of moderation in the pharmaceutical market, where vaccine producers and others have been quite strong in order for separation technologies. So there are some swings here in China that have been moderating the order intake in the Food & Water division. But I think that's the color I can give you. We are not crystal clear as to the root cause of Food & Water number in China.
Andrew Wilson
Yes, that's really helpful color. And I just wanted to ask on the Marine side, I mean, I appreciate it's a difficult question, and there's only a limit to what you've said. But clearly, the guide lower sequentially makes sense given that the Q1 was just so fantastically good, frankly. If I'm trying to think about really what the messaging is there, if I look at consensus orders for 2023, it's around SEK20 billion, obviously, the Q1 puts you way ahead of that. And then if I kind of tie that with your last comment about feeling better about Marine in China. Can you just help us sort of -- what are you sort of messaging in terms of lower? I appreciate lower than SEK7 billion is directionally. But, I mean, is this kind of a SEK5 billion run rate? Is this better than that? It obviously feels like there's more optimism there than maybe last time we spoke.
Tom Erixon
Yes. I think we feel better of the Marine cycle today than we did 3 months ago, 6 months ago. As you know, there is a lot of volatility in this market. So I'm a little bit -- let's put it like this. As for invoicing this year, we're pretty much have booked the orders that we will invoice. So at SEK17 billion -- as Fredrik said, at SEK17 billion in order backlog, whatever comes in now is '24 and onwards. And we feel that the outlook for the Marine Division is relatively good in, let's say, a year's perspective or so. That's where we are at the moment. And so, how it will fall exactly in Q2, I hesitate. One reason we came as high as we did was that some of the orders that we expect the down payment in Q2 came in towards the end of March. So end of March was a really high booking period for us in the Marine. And so, we would have thought that part of that would have flown over to next quarter, and it didn't. So that's why we really are somewhat convinced that we'll see a change, but the sentiment moving into Q2 is better than it was last year. That was a wobbly answer, I know, but I'm trying to get it as well as I can.
Andrew Wilson
No, I can understand. It's difficult. It's very helpful for us. And just in, obviously, from such an exceptional level lower has quite a wide range. That's very helpful.
Operator
The next question is coming from Max Yates, Morgan Stanley.
Max Yates
I guess, my first question is just around the pumping systems business. And, I mean, it looks like you're winning kind of clearly very good orders for the number of ships that are out there. So, I guess, my question is, just trying to understand, do you think you're taking some share here? I mean, particularly in things like offshore, you seem to be doing kind of the majority of the FPSOs out there. Is it a case of you're selling more on them? Is it taking share? Is there any kind of color you can give? And would you agree with that, that you do seem to be picking up kind of more than you have historically from a share perspective?
Tom Erixon
Yes. For -- on the tanker side and the cargo pumping, there, I would say, there is no change in share. We always been holding a strong market share in that area. We still do. So it's just a matter of ships being ordered, booked and converted into the order book. So there is no change other than the cyclical rebound of the product tanker market. That is having a positive effect in Q1.
On the offshore, we have, I think, a combination of two things. One is that, the investment level in the offshore business is at the high currently and probably remain so for a period of time. And I think secondly, we are more competitive in that area than we've been. We spent a lot of time effort in product, cost development, competitiveness. And to some degree, product extensions that may have a bit of an impact going forward. So we feel good about our presence on the Marine side in the offshore.
Max Yates
Okay. And maybe just a quick follow-up on the P&L costs that you said you expect to take in relation to the investment program, the SEK100 million a quarter. I just wanted to double check, you said the most of the expansion is in Energy. And basically all these costs above the line part of why you are talking about flat margins for Energy [ a bit ]. Is that the right interpretation?
Tom Erixon
Well, flat market is your own estimate, it's not my comment. But what we were saying is that, about -- compared to -- we always have some -- if you think about our result development over a couple of years, we spend a number of years with elevated R&D. We spend a number of years in sales force development and building our platform. And that was a cost level that sort of we're burdening our P&L between 2017 and 2019, '20. Now, when we get the growth, we have to run big capacity expansion programs. And part of those expansion costs will fall on the P&L above the line. And compared to historic level, we estimate in the Energy Division that that will be on the level of about SEK100 million per quarter in above the line costs. So when you look at sort of the underlying gross margin, the underlying positive volume effects, some of the turnaround work and improved utilization in certain areas, you need to balance that with SEK100 million and whatever else you put into the PPV and other assumptions in your margin development.
Max Yates
Sorry, did you not say stable margins in Energy? Did I miss?
Tom Erixon
No. Yes. I did not say that. I think what we said was that, you should expect a similar margin development curve as you saw in 2022, that is an elevated level in Q1 and is somewhat more modest level on the margin during the remaining 3 quarters. It doesn't mean that it will match those numericals per se. You will have to make a number of adjustments based on the commentary that we have been giving today. So that would be your calculation.
Operator
The next question is coming from Sebastian Kuenne from RBC Capital Markets.
Sebastian Kuenne
Out of respect from my peers and the request from the company, I will limit my questions to 1 subject and then go back in the line. On Page 16 of your presentation, you show the deliveries -- expected deliveries from the backlog that you have. And if I run the numbers, you expected -- at the same time last year, you expected SEK18 billion deliveries in 2022, and now this has jumped to nearly SEK25 billion for '23. It would then indicate some 30% growth year-on-year for the rest of the year. These numbers, is this the deliveries you actually think you can do for the rest of the year? Or it's just -- or is this just booked as a delivery? So, is there a risk that this will flow into 2024 because you just don't have the capacities?
Fredrik Ekstrom
Yes, I think your question is, the quality about our backlog here and the backlog assessed according, of course, to the agreed delivery with the customer. And if we make an assessment, of course, of that backlog or that request from the customer based on where our supply chains are, based on the capacity, based on the number of orders that we have in the manufacturing units. So I would say the
quality of the backlog is high. And we expect limited slip of that backlog into 2024.
Operator
Next question is coming from James from Moore (sic) [ James Moore from Redburn ].
James Moore
It's James Moore from Redburn. I wondered if I could ask a question on the Energy business, and looking at the very strong orders. You made the comment about energy transition and recovery in the refinery sector. And when I look at the split of orders, it looks like the 2 fastest-growing segments are HVAC and oil and gas. And I wondered if you could talk through those 2 businesses, let's say, a little bit about the color of what's driving it. I'm guessing HVAC is data center-led. But if you could talk through the HVAC business? And where are the regions in oil and gas? Is it particularly the Middle East where I hear from others we're seeing some strength? Or is it more in the North Sea?
Tom Erixon
Yes. In terms of HVAC, I mean, that is multiple applications. Certainly, the data center business for us is strong at the moment, not least in the U.S. But you also have the growing heat pump business in Europe, and a number of other heat recovery -- waste heat recovery trend. So it is, all in all, a good drive across multiple end applications. So while data centers are playing a role, I wouldn't overplay the investment part in them as the fundamental driver of growth here, but it is certainly one of many contributing components.
On the refinery, I'd like to point out that we see both biorefinery and traditional refinery growth. So actually part of the energy transition is visible also on the refinery side. I agree with your comment that Middle East is certainly moving. China is moving in the same energy pendency direction too. But as the biorefinery, we see also investments coming into Europe. So, it is a fairly broad-based situation. But as two important growth drivers in the quarter, HVAC and refinery, certainly 2 of them. Yes.
Operator
The next question is coming from John Kim from Deutsche Bank.
John Kim
I was wondering if we could spend a bit of time on the water [Technical Difficulty]. You mentioned the large brewery order [Technical Difficulty] investment. My understanding is that, that would impact [Technical Difficulty] a little bit sort of business [Technical Difficulty]. Is that a fair assessment? Or is there any [Technical Difficulty]?
Tom Erixon
Sorry, but the line here was really problematic. I heard large brewery order comparison. But do you think you can clear your line a little bit or make a brief rephrasing because I couldn't quite pick up the question?
Operator
I think John disconnected and we'll call again. We have a follow-up question from Sebastian Kuenne from RBC Capital.
Sebastian Kuenne
Yes. My follow-up is regarding dairy and edible oil investments, where you see a significant slowdown in the demand. Would you -- I want to leave it open to you to answer. But is this driven by the volume impact from the buyers of, let's say, dairy products that with inflation comes trading down and does fewer growth investments? Or is there anything else behind this slowing down? Because it seems to be quite broad here.
Tom Erixon
Yes, a good question. And I think if you're looking for consumer spending impacting orders, it's a reasonable question. We actually don't quite think so. The one area where we possibly see a trend line between consumer spendings and CapEx investment of customers is on alternative proteins, and plant-based proteins, functional foods. The change towards different dietary requirements is perhaps, at the moment, a little bit slowing, and we see some carefulness on CapEx in that segment.
On the dairy side, you're right that the beginning -- end last year, beginning this year was not super strong on the dairy segment, but we think that's more of a normal seasonality or cyclicality. So we are not particularly concerned about the dairy level looking forward, if anything, maybe somewhat strengthening.
Veg oil, the same. Veg oil for us tend to be rather dominated by in larger projects or larger orders, I should say. And they come and book a little bit with variations over the year. So, I think our overall sense from seeds to vegetable oil, HVO refinery processes, we feel the demand side is probably fairly decent in terms of outlook for the rest of the year.
Operator
We have another question from John Kim.
John Kim
Sorry about that. Back to Food & Water for a second. I wanted to understand how we should think about the quarterly development, the numbers this year, given the inclusion of Desmet? Is it fair to say that it's back-end loaded, project-oriented, margin dilutive? Or is there a certain lumpiness of the growth that we should be aware of?
Tom Erixon
Well, there is an order intake pattern and there is a margin pattern. As we guided, when the acquisition was done, historically, they tend to be conservative in the release of profitability and the percentage of completion during the year. And so, fourth quarter tend to be a high profit margin quarter for them, whereas the beginning of the year tend to be weaker. This time, we have commented that actually Desmet had the best first quarter ever, partly probably as a way of adjusting a little bit to Alfa Laval accounting principles. But all in all, it was a very good finish for them last year and was a good beginning, so the dilution effect was a little bit smaller than we have guided normally. I think otherwise, our guidance was about 1.5% on the Food & Water margin, specifically. That effect was a bit smaller. On a yearly basis, we also have guided that you should expect that the Desmet margin, as well as our own Food Systems margin in project business, we are aiming to keep at around 10%, 10% plus. And we are on track for doing that with a somewhat weaker start of the year, of course, but as a full year, that's our target.
When it comes to the order intake, that spreads more as project. We didn't have a super strong order intake on Desmet side on Q1. The pipeline is okay. So we are -- we indicated to you, if you look at Desmet at around EUR400 million per year in order intake pace and we're certainly not deviating from that guidance right now. So somewhere around there.
Operator
We have another question from Gustaf Schwerin from Handelsbanken.
Gustaf Schwerin
I have a question on one of the large orders, the heat exchanger hydrogen one. Is that the same project that you booked in Q3?
Tom Erixon
In -- I suppose this was the Neom -- second chunk of the Neom, which means that we had a larger chunk on the Neom City project booked in last year and then we had the second part of that project booked in Q1. So yes, that remains the largest hydrogen project for us to date.
Gustaf Schwerin
But basically, this is the remainder of the order you announced back in [ October, was it right ]?
Tom Erixon
Yes. The contract negotiations covered a number of positions and parts of the project. And so, this was just from a contracting point of view a later part. But we are very pleased with the, let's say, the market share or the customer share that we have in the positions of the project as a whole.
Gustaf Schwerin
Maybe just follow-up on that, I think you were quite clear previously that you are far from done on this specific project. I mean, when would you see or when do you think we'll see more order, say, on the separation side or more equipment in general?
Tom Erixon
Now, on the -- I think if we talk hydrogen, I don't think the issue for us is one specific project any longer. We are working really broad-based with the global pipeline in a number of applications related to hydrogen. And so, we are rather positive as to how the hydrogen demand situation will develop during the rest of the year and this was just the first project. It was an important and large scale project, but nevertheless, we believe the hydrogen growth is here to stay for a number of years.
Operator
The next question is coming from Johan Eliason from Kepler Cheuvreux.
Johan Eliason
Yes. This is Johan. Just a follow-up on the Energy side here. You talk about this extra OpEx of SEK100 million per quarter, including Q1 '24. Could you sort of indicate what sort of volume or revenue benefit we should start to see from those investments? I guess, it's primarily for the plate heat exchangers in Lund, if I remember it correctly.
Tom Erixon
No, it's much broader. We are doing out of the, let's call it, this is fluid material, right? So we always do investments and they come and go. But if you want to take that chunk, approximately SEK1 billion out of the SEK4 billion is on Lund site, specifically. And they're both related to distribution and to production and to tool shops and whatnot. But the other SEK3 billion are going to capacity extensions in Ronneby, in San Bonifacio, in Jiang Yin, and also in India. So, we are maximizing our footprint expansion within the current brownfield areas that we are in. It covers both gasketed plate heat exchangers and brazed and fusion-bonded heat exchangers that go into the heat pump application. So, it's fairly -- it is a heat exchanger focused investment program, but covering a fair amount of applications and products.
Johan Eliason
And can you size it somehow what -- when is it up and running? It sounds like it should be running then by Q1 next year. Is it 5% addition to the Energy Division? Or what are we talking about?
Tom Erixon
It's a little bit, let's say, both confidential and difficult to give you like that. But I think what we can say is that, it will allow us to continue to grow double-digit in several of the product areas in the Energy Division over the next 3 to 4 years. That's about I think where we are getting on this program. And after that, we will have to consider some further CapEx side, I believe.
Operator
There are no further questions at this time. I hand back to Tom Erixon for closing comments.
Tom Erixon
Okay. Thank you very much, and thank you very much guys for your time. I know it's a busy reporting day today. If no further news occurs during the quarter, we will be back from Lund quarter from now with our Q2 report. So thanks a lot.
Operator
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day.
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Alfa Laval Corporate AB (ALFVF) Q1 2023 Earnings Call Transcript