Tom Erixon: Good morning, and welcome to Alfa Laval's earnings call for the Q3, 2026. Fredrik and I will take you through the quarter, and then we open for Q&A, as always. Let me then start with a few introductory comments. Although we had strong tailwinds from both data centers and ship contracting in the quarter, the growth was broad and balanced. Global market conditions remained firm in the quarter, driven by the US and China. While part of our portfolio is benefiting of some cyclical growth short term, Alfa Laval continues to invest for long-term structural growth. We continue to invest in R&D, in market positions, competitive supply chains, and service. With substantial investment for the future market leadership, the group delivers still on the expected profitability level in the quarter at 18%. All three divisions were at their respective profitability target ranges.
Tom Erixon: Finally, we continue to optimize the CapEx program within the current footprint. Due to the accelerated growth, our CapEx guidance in the short term is increased from SEK 3 to 4 billion yearly. With that, let's move on to the key figures. The quarter was special with regard to order intake, with a SEK 23.2 billion new record order level. Perhaps a bit unusual in the seasonally, somewhat lower Q3. Invoicing and profits grew on a more normalized level, with an 8% and 6% growth, respectively. As a result, the order book reached a new record level of just below SEK 60 billion. On the divisional level, starting with Energy, it was a significant growth quarter, both for orders and for invoicing.
Tom Erixon: The data center business amounted to approximately SEK 2 billion in the quarter in terms of order intake, and the 12-month rolling pace right now is in line with the earlier guidance. Now at the level, well above SEK 5 billion. To ensure a healthy order book, we do not recognize orders in this area more than 12 months forward. The return to growth in the important HVAC segment, including heat pumps, started earlier this year and continued well during Q3. Over the last 12 months, we have, as a firm and in the division, concluded three important acquisitions. The first one, some time ago, was the Fives Cryo business, and our expectations on the strategic fit on the cryo business and performance have been met, and we continue to invest to build market share in this important area.
Tom Erixon: The last two acquisitions are heat exchanger companies in China. The last one closed just a week ago. As we build our market share in China, the two acquisition complements Alfa Laval well, both in technologies and in market positions. They add approximately or somewhat above 1 billion SEK in revenue on a yearly basis, mainly in China, and it will serve as important growth platforms going forward. Moving on to the Food and Pharma division. Again, it was a solid quarter for the division, including some important product wins in the biofuel sector. The transactional business continued strong and is on a record level. The recent capacity increases in the US specifically, was arriving timely in the quarter, in that respect. All three key markets for the division, US, China, and India, had a strong quarter.
Tom Erixon: Invoicing was a bit below expectations, but influenced by delivery schedules rather than supply chain constraints. With that, on to the Ocean division. Ship contracting is on an exceptional level at the moment, driven by longer shipping routes and high freight rates. As an asset class for ships, new orders are supported both by traditional ship owners and financial investors. The final contracting number for ships for this year, 2026, will be well above 3,000 ships, substantially ahead of the forecast a year ago. For Alfa Laval, it resulted in a new record level of orders at 8.3 billion SEK in the quarter, and in all, 2026 is far beating our expectations compared to a year ago. Cargo pumping was, as always, converting early into Alfa Laval's order book.
Tom Erixon: The major CapEx program at Framo in Bergen is executed with priority on upgrading the production lines for cargo pumping systems, specifically. While order intake was solid across all of the business units, the current ship contracting has not still translated fully into the Alfa Laval order books. The product pipeline in offshore continues to build stronger, and the current turmoil in the global energy markets is expected to create a new CapEx boom in the offshore segments going forward. Service is one of several important structural growth drivers, and it grew 6% organically, however, a bit uneven across the three divisions. The Energy division had a very strong quarter, and growing well above double-digit level for the quarter.
Tom Erixon: Food and pharma was okay with a more modest growth, while service declined in the Ocean division due to sanctions and due to a degree, the high utilization of the remaining fleet. For your reference, approximately 4,000 ships out of the global merchant fleet of 60,000 ships are out of scope for Alfa Laval's service activities. With the rapid growth in capital sales, service as a share of total sales is now clearly below 30%. While a positive challenge, it does perhaps impact the group margin somewhat, in terms of the mix change going forward. A couple of comments on the key markets and regions. As you know, US and China are our two top markets, currently accounting for above 40% of new orders. Both markets are currently growing faster than the other regions in the world.
Tom Erixon: We have strong Alfa Laval teams in both markets, and we allocate a substantial part of our CapEx program to these markets as well, to ensure strong local presence and reliable supply chains. On the overall global map, as indicated earlier, growth was broad-based globally, with all regions except one growing on a good level. The India Middle East region declined somewhat. After a record quarter in Q2, Middle East specifically struggled for obvious reason, in a complex environment. We do everything we can to keep our customers, our own staff, and their families safe. India specifically still had a strong quarter, and is expected to be an important growth engine over the next decade. For this reason, we have allocated our Indian CapEx plan a higher priority and increased the efforts there substantially going forward. With that, I hand over to Fredrik.
Fredrik Ekström: Thank you, Tom. Good to have you all here for the Q3 earnings call. Some additional details around the strong SEK 23.2 billion order intake in Q3. In the Energy division, beyond the strong booking and data centers, power and fuel applications booked some SEK 2 billion in the quarter. HVAC and refrigeration, in particular, heat pumps, continue to grow, and better utilization of the capacity added a few years ago is a fact. Traditional food and pharma applications also posted strong orders in brewery, dairy, and prepared foods and beverages. Transactional business continues to outperform comps, and pumping systems in the Ocean division continue to benefit from a high contracting level of tankers. Contracting for bulk carriers, container ships, and ferries, including RoRos, contributed with a good order intake for the marine product portfolio.
Fredrik Ekström: 63.1 billion in order intake year to date represents a 23% growth, of which 22% is organic. Good momentum heading into Q4 with two all-time high quarters behind us. After another record quarter with a book-to-bill of 1.25, the order book closed the quarter at just shy of SEK 60 billion. The order book is deemed to be priced well in line with input costs and current cost levels. Q3 sales reached SEK 18.6 billion, a growth of 7.8% compared to Q3 last year. The transactional part of the business outpaces the total, meaning that the manufacturing capacity is well utilized in the majority of our manufacturing units. In certain areas and applications, a higher delivery pace and capacity will require further investments. Those investment cases will be planned and executed over the coming years, with investment peaks in 2027 and 2028.
Fredrik Ekström: These investments in capacity lead us to revise our CapEx guidance to a range between SEK 3 billion to SEK 4 billion per year for the next three years, and up from the guidance of SEK 2.5 billion to SEK 3 billion that we currently have. Year to date sales of SEK 52.6 billion, an organic growth of 4.5%. However, to provide more context to our future investments plans, the transactional business revenue, including service, has grown with over 10% in the last nine months. Now to some P&L highlights. Gross profit margin of 37.6% is in line with Q3 last year and well supported by a high utilization rate of manufacturing assets and a favorable mix effect from transactional business. Sales and administration costs increased in the quarter with 10%, with three major contributors of equal weight: inflation, acquired businesses with no comps, and growth-driven addition of resources.
Fredrik Ekström: R&D also continues to grow at 7%, which is in line with innovation ambitions and product development initiatives. Operating income increased with 5% but does not drop through fully into EPS due to one-off bookings in the financial items related to the termination of a JV. Year to date gross profit margin at 38.2%, which after all costs and taxes results in an EPS of SEK 14.91. Adjusted EBITA in Q3 in money is at all-time high of SEK 3.4 billion, equaling a margin of 18.1%. On a divisional level, the margins in the quarter are representative of a good level going forward with the Energy Division at 18.1%, Food and Pharma Division at 15.5%, and the Ocean Division at 21.3%. Year to date, the EBITDA margin stands at 17.7%, which is above the external target for the group.
Fredrik Ekström: Our debt position remains stable compared to Q3 2025, with all ratios improving in relation to EBITDA last 12 months. Net debt, including leases in relation to EBITDA last 12 months, at 0.94. Good cash balance generated from a good cash conversion, which takes us to the cash flow analysis. Cash flow from operating activities in Q3 amounted to SEK 3.4 billion, a marked improvement from the year before. CapEx continues at a high pace in the quarter at SEK 819 million. A positive final line cash flow caps off a strong Q3. Year to date, the pattern is similar, with a strong cash flow contribution from operating activities, capital expenditures at acquisitions for SEK 600 million so far, and financing activities representing mainly the shareholder dividend of SEK 3.7 billion. Now to some guidance.
Fredrik Ekström: In line with raising the guidance on CapEx going forward, we have also increased the CapEx guidance for 2026, with SEK 1 billion expected in Q4, and 2027 on a level of SEK 4 billion. Amortization of step-up values in the order of SEK 180 million in Q4 and SEK 730 million for 2027, based on current acquisitions. Tax rate guidance remains in the range of 24% to 26%. With that, I hand over back to Tom for some closing remarks.
Tom Erixon: Thank you, Fredrik. Finally, the forward-looking comment. It is, for us, and I think globally, the demand trends are strong, and we expect the overall demand trends to remain favorable and solid into Q4. With that said, after two record quarters, we are somewhat more modest when it comes to how we believe this will convert for us. So we believe overall on a somewhat lower demand in Q4 than in Q3. On the divisional level, we expect the Energy Division to remain at about the same level, Food and Pharma to be at the somewhat lower level, and the Marine Division or Ocean Division, sorry, specifically at the lower demand level. With that, we are open for Q&A.
Operator: We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to disable the loudspeaker mode when asking a question. Anyone who has a question may press star and one at this time. The first question comes from Yang Mei Han from Goldman Sachs. Please go ahead.
Meihan Yang: Hi. Good morning. Thank you for taking my question. I just have two questions. First of all, on the rationale behind your increase in CapEx in 2027, 2028. You mentioned that you expect data center demand to remain stable over the next two years, which is a bit surprising. Given that, why did you decide to increase your CapEx? Secondly, if you can give us more color on the visibility of your cargo pumping orders now. Is it well into 2027 and 2028 now? Thank you.
Tom Erixon: Yeah. Let me start with the SEK question. That is an easy one. 2027 covered. We are well into 2028. Overall, if we look at the delivery schedules for the ships now after this year completed, the delivery schedules for the Marine Division will remain quite strong into 2029 as well. We already know that. Overall, we look at the favorable scenario in general for the Ocean Division, over the coming years. The CapEx is obviously well thought through. Some of these investments have been planned and decided to be executed now, and it has been part of a long-term growth plan. It is not only data center that is driving it, but as we are ramping to the full level that we have indicated on data centers, we will need some additional presence in this capacity to get the job done.
Tom Erixon: That takes us up to what we, at this point in time, would say is probably the peak of the CapEx cycle for us. We have not guided yet beyond the next two years because those are quite firm right now. I think Fredrik's and my expectations will be that this will be the peak of the cycle. I remind everybody that we have rebuilt the manufacturing footprint substantially over the last five, seven years, and we are coming to an end also on that, included in the CapEx going forward. We still have the decisions made in Norway and Bergen for the cargo pumping and a number of areas that are spilling over into 2027, 2028 when it comes to the cash out for the company.
Tom Erixon: I think we are slowing in our decision-making process right now, but we have still a number of years on ongoing programs in Ocean, in Energy, and to some degree, also in food and pharma, to cover for the expected level.
Meihan Yang: Got it. Thank you very much.
Operator: The next question comes from the line of John Kim from Deutsche Bank. Please go ahead.
John Kim: Hi. Good morning. I am wondering if we could talk a little bit about the visibility on your energy exposure. I know you do not book orders beyond 12 months, but given what we are seeing in peers and the build-out, how would you argue your energy backlog cover would work if you remove the 12-month constraint?
Tom Erixon: Let me start with the basic principle. We are conservative when it comes to order recognition. We require clear projects, clear project delivery schedules, and clear down payments in order to recognize orders. We put a lot of emphasis on having a current order book at any moment in time. In line with that, when we look at, for example, a data center business, which to a degree are frame agreements and to a degree are anticipations, we find that the visibility behind 12 months is somewhat unclear. For that reason, we prefer to be a bit stringent in how we recognize it in the order book. For that reason, we have also given a bit of a forward-looking comment when it comes to how we look at the ramping and rolling 12-month phase in the data center business.
Tom Erixon: As indicated, we may arrive to a number around SEK 10 billion or so going forward. We are communicating what we are seeing right now, what the current rates are. Everybody is aware about the upside and the potential risks in terms of how far will the CapEx program be able to materialize in the coming years. We are just taking a moderate view. As you can see from the CapEx programs, it does not mean that we are going to leave our customers standing in the dark on this. We are ramping fully to be able to handle what we see as the customer's business case right now.
John Kim: Okay. Helpful. Follow-on question, if I may. If we think about the Framo investments, should we think of it more as capacity expansion or more efficient production? How should we think about phasing, let us say the next three years? Thank you.
Tom Erixon: I would kind of split it in two. As you know, it was about a SEK 4 billion program that we approved. It was a multi-year program, so it will run into 2030 plus before completed. The first part is really capacity automation efficiency investment in the cargo pumping production line. That is what we are executing first. It comes in handy, to say the least. That is a modernizing of a 20, 25-year-old machine and equipment situation at the units, and we are taking a giant step there. The second part of it is more structural. We have outgrown a number of our other sites around Bergen. We are spread there in a bit of a distributed footprint, if you like. We are consolidating ourself into a new area.
Tom Erixon: Two main drivers for that is to improve the service workshop and the space that we need for that, and to allow for much better flow and space and growth for our offshore business, which has been growing significantly over the last five years. It was time to redo it. We put it in one big package. Those are the two main big parts of that, approximately 50/50 split.
John Kim: Okay. Thank you.
Operator: The next question comes from the line of Klas Bergelind from Citi. Please go ahead.
Klas Bergelind: Thank you. Hi, Tom and Fredrik. Klas at Citi. My first question is looking at capacity at the yards, particularly around product tankers. There is obviously nothing wrong with demand, but we have seen this before, strong contracting and then lead times, they get extended, yards get full, and we see contracting fading. I do not think it would be as dramatic this time as last time, but curious on your thoughts, Tom, into 2027, if you think the new capacity in areas like China will be enough here, or if we should start to see an order normalization in Framo next year. You are guiding for lower demand in Ocean into Q4 might be linked here to these extended lead times. I will start there. Thank you.
Tom Erixon: Difficult to forecast yard contracting. Everybody were wrong coming into this year. We have two strong years of contracting behind us and two strong years for tankers in general and product tankers as well. Of course, at some point in time, it needs to narrow down somewhat. I think it is not unlikely that we will see that in terms of the order intake adjustment for 2027. With two years of orders in the books, I think it does not add much value to us or to anybody to sit with two long order books on this one. I think our best estimate would be that we will see a moderation on those orders. With that said, if you look at the-
Klas Bergelind: Yeah
Tom Erixon: aging of the fleet and the merchant fleet in general, and for product tankers specifically, we don't have an exceptionally young fleet, even after the replacement of these ships. Scrapping has been exceptionally low for many years. We'll see what this means, but the only thing we know for sure is that the global shipyard capacity is being extended at the moment. It's not only China. There are some other markets where you see clearly signs of initial investment to increase ship capacity. I think the expectations in general is that we will continue to have a reasonably firm contracting market for the years to come.
Klas Bergelind: That's good. My SEK one is on the margin performance in Ocean. You had lower invoicing, somewhat lower service. You explained the reasons, and then you had somewhat higher cost. The current level, is that the level we should assume also into the H2? Could the margin go up again? I mean, the service business, depending on the conflict, the conflict might not recover in the short term, but I'm interested on the cost side and the load into the H2. Thank you.
Tom Erixon: The load is good. As Fredrik said, I think we are priced reasonably when it comes to input costs. The order book is healthy from that point of view. There are mix changes quarter by quarter that affects this. I don't want to be more specific than what we said about the profitability ranges before. When we increased our overall group target to 17% on EBITA margin, we indicated that we wanted to see the food and pharma above 15%, the energy at 17% plus, and we expected marine to remain at 20% plus for a period of time. That's where we are in the guidance right now. You will see some oscillations quarter by quarter, but in terms of ranges, that's what you should expect.
Klas Bergelind: Okay. Absolute final one is on the base order growth in food and pharma. It's still a good level, but it was a bit lower than I thought. Can we talk through what you saw there sequentially, and particularly around the indirect growth that you had from data center last quarter, the valves, the fittings on the flow side? Did you move some of this business into energy to have everything data center related under the same roof? Thank you.
Tom Erixon: Yeah. Klas, you are actually quite right. We have done that going forward. We have not done it retroactively into Q2 and Q1, but we have from starting Q3, moved the volume that comes in for pumps and valves related to data centers from food and pharma to the Energy Division, simply to be clear and transparent about where the products are ending up from an industry point of view. That means that the revenue
Klas Bergelind: Okay
Tom Erixon: the order intake, and the cost will also come over to the Energy Division. So it is not only the volume that is being moved over, it is the total activity.
Klas Bergelind: Okay. Then it makes sense. Thank you.
Operator: The next question comes from the line of Akash Gupta from JPMorgan. Please go ahead.
Jérémy Caspar: Hi. Good morning. It is actually Jeremy on Akash Gupta's line. Thanks for taking my questions. I have two, if I may. Firstly, can you give us a bit more insights into how much of your data center business is US hyperscalers versus non-US, especially China? Basically, I am trying to understand how you can benefit from investments from different customers and in different regions of the world.
Tom Erixon: I will be maybe not 100% precise, but I think right now, if we look at this year and last quarter, US accounts for approximately 80% of our data center business. The Chinese side, we started to see the growth coming into our books in the beginning of the year, and that is the lion's share that is outside of the US. That is approximately how the mix looks like. From the trends we are seeing, we will see a clearly continued increase in China for the next couple of years. In fact, part of the CapEx guidance is related to us making sure that we are capacity balanced in the Chinese market specifically. Was there a SEK part to the question? No, maybe that was it.
Jérémy Caspar: Sure.
Tom Erixon: You have to repeat it otherwise.
Jérémy Caspar: That was it. That is helpful. The SEK one then maybe, can you talk about the margin drag you are currently experiencing due to the plant capacity expansion in Energy? I am asking because you are guiding for an elevated level of CapEx the next couple of years, and I am just wondering how should we think about this drag going forward?
Tom Erixon: For these capacity investments, we have about 24 months lead time. It is a leap of faith in terms of where we believe the demand trends will be over the coming years. We do not have a guidance to a very big impact on margins going forward. We expect to load these pretty much with the average margin mix. I think the key for us is to see where the demand trends will be in terms of volumes. Right now, the only thing I can say is that this is not only about future demand. If we look at our current units, there are too many places where we run 24/7. 24/7 operations in mechanical engineering industry is not an optimal shift structure. We need to ease off the pressure in our existing pressing lines.
Tom Erixon: Part of what we are doing now is creating a more balanced production schedule in our units. I do not think it will have a big impact in terms of our product cost and the margin per se, but the increased capital allocation into the supply chain is partly being balanced by a better cost structure in the manning structures and the plant structures of operating them. I cannot give you the exact split, but I would say maybe a third of what we are doing right now is just helping us to balance the plants better, and about two-thirds will flow into direct increased capacity. If we need to run harder even after that, we can do it. That is what we are aiming for.
Fredrik Ekström: I think it is also fair to say that it is accelerating the removal of older assets or keeping older assets as a peak capacity leveler, then bringing in new capacity a little bit earlier than we would have done otherwise. It is part of a normal replacement schedule as well. Then I would add that the interchangeability of these presses is pretty good. If we say that the data centers does not turn out or does not pan out to the same volumes that we expect, there are other growth verticals that will take up those volumes.
Jérémy Caspar: That is very clear. Thanks very much.
Operator: The next question comes on the line of Andreas Koski from BNP Paribas. Please go ahead.
Andreas Koski: Thank you and good morning. I would like to start with a question about your backlog and deliveries in Ocean. With yards expanding in China, how do you think about the delivery potential for Ocean in the coming years? You are saying that your backlog covers 2027, a large part of 2028, going into 2029. But do you see that your deliveries in Ocean can pick up in 2027 and 2028? Is it possible to reach a revenue level well above SEK 25 billion plus, or are we capped because of the shipyard constraints for the coming years? Thank you.
Tom Erixon: I think we are under delivery pressure into 2027. I think our invoicing on our side in the supply chain, our issue is not the manufacturing capacity, it is the commissioning capacity. Commissioning of new ships, especially on advanced equipment with new yards, with inexperienced staff, the demands on us are very high. We have a major effort at the moment to ensure that the commissioning can follow what we see as the current yard production schedules. I think we will fulfill our part of the equation. What I think Klas was onto this earlier, sometimes we see that when the delivery schedules are very tight at the yards, and especially we see new yards coming on stream, they sometimes fall behind their delivery schedules that are planned.
Tom Erixon: I think we will have to see how it affects, but I still believe that net-net we will have a higher production capacity in the global yards in 2027, and most likely it will result in some tailwinds for the invoicing side on Marine. Andreas, if you want to-
Fredrik Ekström: No, I think that covers it well.
Andreas Koski: Yeah. Thank you. Just on the margins in Ocean, you referred to a negative mix and under absorption, but can you give us an idea maybe of the year-to-date margins in Ocean excluding pumping systems, or maybe talk a little bit how much of the sequential margin decline that we saw in Q3 was related to the mix of maybe less pumping system sales, more other equipment sales, and how much was related to the under absorption?
Fredrik Ekström: Well, first of all, I don't think we have many units in the Marine division or manufacturing units to the Marine division that have an under absorption in the factories.
Andreas Koski: Okay.
Fredrik Ekström: The load is good and we have a good planning horizon on that. So that's not where you find the reason for the lower level of margin compared sequentially. However, this is well in line with where we expect to be when it comes to the margins in the Ocean division. I would also add that the mix is the biggest component of it, and we have discussed this before, that we were going to have quarters where pumping systems wouldn't be as dominant together with a very high degree of service revenue. When you have those two together in a quarter, you very well get the 24%, 23% margins that we have seen over the last past quarters.
Fredrik Ekström: Now that we see that the revenue starts to have a larger component of the traditional Alfa Laval portfolio and a lower component of service and pumping system in this particular quarter, well, then you have the effect that we come down to the level that we are now, which is +21%, which is still a fantastic profit margin for the Ocean division.
Andreas Koski: Okay. So all of it is mix related, you could say. That is understood. Thank you. Lastly on CapEx. With the higher CapEx plans now for 2027, 2028, do you see that CapEx levels can come down post 2028 at the same time as you have now or will now have invested for the SEK 100 billion revenue target in 2030?
Tom Erixon: Yeah, I think when we have completed the CapEx program in 2028, then we are geared for what we need to do in 2030. There will not be
Andreas Koski: Yep
Tom Erixon: any new decisions that will, in a meaningful way, impact our capacity into 2030. So our best estimate is that this is the peak. We actually thought that the SEK 3 billion was going to be the peak before. So we have been wrong in our crystal balls on a number of dimensions. But I think we just feel it has been a long run now of positive industrial growth since the start of COVID and through all this period. I think my stomach tells me that at some point in time, this positive business cycle will also come a little bit to an end. So I just doubt that we will see this thing continue to just the industrial machine in the Western world, and we will continue to develop that in line with the last eight years.
Tom Erixon: The SEK 100 billion plan, we feel comfortable with at this point in time. Capacity-wise, we will be there by 2028, and return to a more normal CapEx program. That is our best estimate.
Fredrik Ekström: That was a long-term forward-looking comment.
Tom Erixon: It was indeed. But that is our ambition, that we do return to a lower level. Yes.
Andreas Koski: Thank you very much.
Tom Erixon: Thank you.
Operator: The next question comes from the line of Anders Idborg from ABG Sundal Collier. Please go ahead.
Anders Idborg: Oh, hi. Morning. Thanks. Could you just talk a bit more about the service business in Ocean? It has been another quarter with flattish demand. I suppose, can this go on indefinitely as long as there is just high pressure to keep or high incentives, you should say, to keep ships sailing? How is profitability developing and mix within services in Ocean?
Tom Erixon: The service business in the Ocean division is negative in the quarter. We are down a high single digit in volume compared to last year. There are not so important changes in the service mix and the service margin, so we are not concerned with that. Why is service declining? It is partly a guesswork on our side. We have stated that the one factor we know is that around 4,000 ships are under sanctions and are out of our service scope, and this is typically ship classes that we are working with. So obviously we are taking out part of our customer base from the service. I would say that is the main structural shift that we see in the service business.
Tom Erixon: I have a hard time to see that that will continue in the sense that out of this merchant fleet of 60,000 ships, there is a limit to how many can be put into the sanctions regime and how many are needed in that part of the global trade. We do not expect that to continue to rise, and consequently will be a neutral factor going forward until the war in Ukraine is over. The other side is a bit of a guesswork for us. Normally, when ship owners are making a lot of money, also the service business tend to grow. At this point in time, we have the feeling that the extremely high utilization rates and need for shipping capacity keeps the ships running a bit more intense than normally, and we see a delay factor in the service business. That is our best estimate for the situation.
Tom Erixon: As long as the pressure is on, that will continue a little bit. But obviously service intervals to some degree are needed, and they are given cycles on that. So I think we will see better conditions and the trend shift coming at some point in time. I will not predict it by the quarter, but reasonably short, medium term, we ought to see a return back to growth.
Anders Idborg: Okay. That is clear. Just a follow-up on energy and LNG. It has been an active market out there. I did not see any mentioning of it or your cryo business in this release. Maybe I missed it, but could you just tell us what happened and what the pipeline looks like in that segment?
Tom Erixon: Yeah. The pipeline is obviously complicated by the warlike conditions in the Middle East, so new projects there are obviously a bit unclear, and that is one of the big LNG markets. We booked a good order in the US for large LNG installation in the quarter. We see, generally speaking, quite a good trend, not only for LNG, but for industrial gases that are used in a number of areas, including spaceflight. So there is a good underlying demand on the cryo side, and we have a positive view compared to when we acquired the company, of our abilities to grow, both in terms of market and market share.
Anders Idborg: Okay. Thank you.
Operator: Next question comes from the line of Sebastian Kuenne from RBC Capital. Please go ahead.
Sebastian Kuenne: Yeah. Thank you for taking my questions. First, I would like to understand a little bit better the underlying margin in energy. You speak of good utilization, but you are still also aggressively ramping output for the data center-related heat exchangers. But then the margin also improved. So I try to understand how much of ramping costs or one-off costs or extra costs you still have within energy that at some point will fall away when this business matures and then leaves just the underlying business without any one-off. So I try to understand whether the 17% is now the endpoint or whether there is more to come simply because you ramp up and have ramped, and then production goes more smoothly, if that makes sense. Thank you.
Tom Erixon: Well, the problem is there is going to be 20 factors affecting the margin going forward, and the scaling cost is just a small part of everything that goes into the equation. That is why we typically are a little bit cautious in terms of predicting the plus and minuses on all the dimensions. I think what the best guidance we can give you on the specific number, on the ramping is the fact that in any CapEx program, it consists of both CapEx and OpEx. I guess, Fredrik, that OpEx share on the current program is around 20%. Yeah, something like that.
Fredrik Ekström: Yep.
Tom Erixon: If you look at the 3 billion or 4 billion, consider about 20% of that dropping down into the P&L, and when it goes away, it goes away. I would still caution you to use a model where you have a 20% profit improvement just because of that input cost, material costs, load, pricing, et cetera, will mix service, will pay a huge part. But the guiding comments I will give you is that we thought that the energy margin in last was a bit depressed. So Q2 was not the normalized level. We indicated we want to see this division at 17%, 17% plus. So the quarter was not exceptional in our point of view.
Fredrik Ekström: If I could just add to that, and to everything Tomas said, the ramping costs, we've had them now for a long time related to investment. So I think you can almost say they're a normalized part of the cost. What's really different, I think, in this quarter is that it's really come up now that we have a better balance in our manufacturing, the use of our manufacturing assets, particularly for those going into the HVAC industry. And then there's a mix shift. There's a lot of transactional business and service in this quarter, which is good, and that's the level we expect it to be at. We'd like to see, of course, good project business come through as well.
Sebastian Kuenne: Yeah, understood. Thank you. Then for Food and Pharma, you seem to get a bit more projects now, and I would guess there's also projects in the pipeline for biofuels, especially. Should we see this as an indication of mix going down a bit because you have more engineering hours, more project-related business, or is this priced at the level where Food and Pharma is now because it's a higher demand, it's incremental business, and you have some leverage on the pricing? Maybe a comment there. Thank you.
Tom Erixon: Mix will affect, and the difficult with projects is that we don't know exactly where they're going to end until they are commissioned and ready and paid for and invoiced and all that. Our forward-looking comments are a little bit less clear when it comes to the mix impact. What I think is important in this is that our transactional business is running extremely strong. We are growing with 10% in the quarter, and the service business in the Food and Pharma division is going by mid-high single digit numbers as well and expected to continue to do so. So against an increase in product orders, there is a fairly large transactional business that is growing at a good rate. So I don't think even in a slightly stronger product environment, we will have a big negative mix effect from the project growth. That's. That would be my estimate.
Fredrik Ekström: I would agree with Tom. I would just add to the fact that, of course, now when we get more project business, we are utilizing engineering hours and that capacity, which then offsets the dilutive nature of a project business margin compared to the transactional one. So it balances out.
Sebastian Kuenne: Yeah. Last question, briefly. Outside of data center, marine, and food. Offshore, petrochem, nuclear, could you give us some indication of what the market is doing at the moment? Thank you.
Tom Erixon: I think I will be very quick on that. Nuclear is going to be important in the future. We believe that we cool a lot of reactors, and we have important relationship with some of the reactor technology suppliers. So, as it grows, we will follow with it, but of course, it is many years of implementation of the new reactor, so it does not hit our invoicing very quickly. On offshore, I think we will see more of a short-term effect. As I indicated, the transparency of the lead pipeline is quite good. We see it strengthening. So, we believe in 2027, we will see a stronger year for offshore than before. I think the energy resilience and security issues are going to highlight this in a substantial way in the years to come.
Sebastian Kuenne: Perfect. Thank you so much for your help. Much appreciated.
Operator: The next question comes from the line of Carl Deijenberg from DNB Carnegie. Please go ahead.
Carl Deijenberg: Thank you very much. Good morning, Fredrik and Tom. So two questions from my side. First of all, Fredrik, if you could help us a little bit on the sales bridge in the Energy Division. I see that the structural impact is almost 18% here in Q3, and I thought that the cryo business was included from beginning of Q3 last year, that is, the organic sales figure for this year. First of all that, if you could share some color on that, and maybe also with regards to the currency impact on the same division here for Q3 as well, would be interested to hear about.
Fredrik Ekström: Sure. When you look at the structural part of it when it comes to the sales bridge for the Energy Division, it is primarily related then to the acquisitions that we have in China from a structural point of view, when it comes to the sales bridge. There is also an element of movement of businesses, and that is also affecting the structural part of it. The currency, well, the exposure that you have at any given point in time, we have a lot of invoicing now going to the US. We have had a marked movement of the dollar versus the SEK, and of course, the euro has also gained ground on the SEK. Both of those have a negative impact here when you look at the sales bridge.
Carl Deijenberg: Mm-hmm. Okay, very well. And maybe secondly to that as well, would it be possible to say on that 18% structural impact, the magnitude of those Chinese acquisitions, is that half-half? Just to get a ballpark sense of what the impact was here in Q3.
Fredrik Ekström: Yeah, I think that is a fair assessment on that.
Carl Deijenberg: Mm-hmm. Great. Secondly, I also wanted to ask Tom if you could share some more color on your views of the heat pump market here. Obviously, you have had a couple of quarters without the utilization and the inventory drawdowns that followed the previous upcycle and so forth, and now we are seeing gas prices coming up in Europe and so forth again, and we seem to be heading into winter here with a quite stressed energy situation, which could be favorable for heat pump adoption. So what are you hearing from the OEMs out there, and do you see that demand already now is being positively impacted by those factors?
Tom Erixon: Well, I think when it comes to the external factors, I think the situation will be a little bit less clear. While we see higher gas prices, we also see the risk of higher electricity prices in Europe. So I think the balancing between the different sources of energy perhaps is not affecting so much the implementation of heat pump solutions in Europe this winter. The growth in the heat pump business has been going on now for quite some time. We are, I think, four to six quarters into the growth period. We are in running rate, maybe 30% to 40% below the peak, where we were in 2023. At that peak, we know now afterwards that part of that was actually an inventory buildup. So the market is getting back to a reasonably healthy level.
Tom Erixon: Our best view of this is that we will continue to see a steady organic growth climbing. We do not expect another peak. Should we have one, we are pretty well supplied with pressing capacity since the last peak, and so we are ready to go. But I think we do not expect to see the same type of rapid growth that we had at the last cycle. It was your business at the time.
Fredrik Ekström: Yep.
Tom Erixon: Maybe you have a further comment on that.
Fredrik Ekström: No. I think, as you say, we are catching up to the growth trend we had pre-invasion of Ukraine.
Carl Deijenberg: Mm-hmm. Okay. Very well. Thank you, guys.
Tom Erixon: Okay. I think with that, we are done for this time. I remind you, in a couple of weeks, we have our digital capital markets day. We will do a couple of interesting deep dives in a number of, for us, very important business verticals. So I encourage you to spend the, I think, 3 hours together with us in November. Otherwise, we will meet in early February for the full year report and the Q4 quarter earnings call. Thank you very much.
Fredrik Ekström: Thank you.
Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your line. Goodbye.
