Annual Report 2020 Preserving solar energy to brighten gloomy days Contents ABOUT ALFA LAVAL FINANCIAL STATEMENTS Alfa Laval in brief 3 Board of Directors’ Report 72 President’s comments 6 Consolidated cash flows 86 2020 in brief 8 Comments to the consolidated cash flows 87 Purpose, business concept and goals 10 Consolidated comprehensive income 88 Strategic priorities 12 Comments to the consolidated Customers 14 comprehensive income 89 Products 16 Consolidated financial position 92 Service 18 Comments on the consolidated Key technologies 20 financial position 94 Heat transfer 21 Changes in consolidated equity 94 Separation 22 Comments on changes Fluid handling 23 in consolidated equity 95 Division overview 24 Parent company cash flows 96 Food & Water 26 Parent company income 96 Energy 32 Parent company financial position 97 Marine 38 Changes in parent company equity 98 Operations 44 Notes to the financial statements 99 Employees 46 Accounting principles 99 Sustainability and reporting 48 Objectives, policies and processes UN Sustainable Development Goals for managing capital 107 and Alfa Laval 51 Financial risks 108 The share 52 Operational risks 112 Notes 118 Auditor’s report 152 Ten-year overview 156 CORPORATE GOVERNANCE Definitions 158 Introduction by the Chairman of the Board 56 Corporate Governance Report 2020 57 Board of Directors and auditors 64 Financial information 159 President and Group management 66 Annual General Meeting 159 Board of Directors’ report on internal control 68 Auditor’s statement on the Corporate Governance Report 70 Alfa Laval Alfa Laval is a world-leading, global provider of first-rate products in the areas of heat transfer, separation and fluid handling. With these as its base, Alfa Laval aims to help enhance the productivity and competitiveness of its customers in various industries throughout the world. We define their challenges and deliver sustainable products and solutions that meet their requirements – mainly in energy, the environment, food and the marine industry. What? Heat transfer Compact heat exchangers that recycle heat, optimize customers’ energy consumption, cut costs and reduce negative environmental impact. Separation Separators, decanter centrifuges, filters, strainers and membranes that separate liquids from other liquids and solid particles from liquids or gases. Fluid handling Pumps, valves, tank cleaning equipment and installation material for industries with stringent hygiene requirements as well as pumping systems specifically for the marine industry and the offshore market. For whom? The need to heat, cool, transport and separate arises in many industries: food, energy, pharmaceuticals, refineries or petrochemicals – Alfa Laval can help in the majority of them. End customers are reached through the Energy, Food & Water and Marine divisions. How? Operations handles production-related procurement, distribution and logistics on a global basis and ensures that anything sold by the three divisions is produced and delivered in line with the promise made to the customer. Where? Alfa Laval’s products, systems and services are sold in more than 100 countries. More than 110 service centers deliver services in over 160 countries This means that Alfa Laval is close to its customers, ready to help at a moment’s notice when the need arises. Sustainability? Alfa Laval is helping to achieve 15 of the UN’s Sustainable Development Goals through products and solutions that improve energy efficiency, reduce emissions, purify water, minimize waste and lead to the efficient use of raw materials. Solar and wind Two renewable sources of energy that bring hope of a brighter future. They reduce the carbon footprint dramatically and are expected to account for half the world’s electricity generation in ten years’ time. There is only one big problem: when the sun is not shining and the wind does not blow, no power is generated. Unless the energy can be stored effectively on a large scale. As part-owner of a new company, Alfa Laval’s knowledge and expertise is playing an important role in turning this challenge into reality. Our unique and specially designed heat exchangers convert electrical energy from solar and wind plants into thermal energy. The heat is then stored and preserved in gigantic bays of molten salt – like a natural battery – waiting to be awakened and transformed back into electricity when needed in the grid. So, even on grey days, the forecast looks bright. 5 President’s comments 2020 was a remarkable year in many ways. We navigated our company in unprecedented circumstances while seeing many global transformational trends accelerating, with the sustainability agenda continuing to gain momentum and high pace in the digital transformation. Alfa Laval performed well in 2020 and we remain fully committed infrastructure for hydrogen are expected to greatly increase over to our long-term strategy while leveraging the changing market the next ten years and Alfa Laval intends to play an important conditions. Increased investments in our technology leadership, role in this transition. During 2020, we increased our invest- a stronger focus on expanding the service offering, and the ments into fuel cells to take an early position in this market. development of a more customer-oriented culture with faster decision making continue to be our key strategic ambitions. After many years of investments in new product platforms and a more focused sales organisation, the results were evident in Strong global trends driving demand the Food & Water division. While most of the traditional appli- Sustainability cations for the division are growing in line with the growth of We all need to gradually change our way of life for the sake of the global middle class, the division is also adjusting to signifi- our planet and future generations. To Alfa Laval, sustainability cant changes in consumer behaviour. Investments into plant- is both a necessity and a business opportunity and our tech- based proteins as well as insect-based proteins are increasing. nologies promote a more responsible use of natural resources. Alfa Laval´s extraction technologies, as well as other process equipment, are needed for cost and energy efficient production The most tangible change related to the environmental trends of these proteins and have continued to see good momentum was seen in the Energy division. The division´s heat transfer during 2020. technology is critical in driving energy efficiency in a wide range of applications. Energy-efficient solutions for heat pumps and Sustainability is a key focus also in the Marine division. From a reducing the energy consumption in energy intensive data centers volume perspective, the applications for cleaning ballast water are just two applications that are growing in importance. The and exhaust gases, PureBallast and PureSOX, dominated the increased need for renewable energy sources drives a long- portfolio. New marine fuels to reduce the C02 impact of world term demand for radically improved energy storage solutions. trade will continue to drive technology and new product offer- Alfa Laval has continued to invest heavily in a new technology ings for many years to come. LNG as a fuel was one of the fuel for thermal energy storage and the market for larger scale initiatives with most traction in 2020. An important step in thermal energy storage is expected to gain momentum over making LNG a climate positive fuel in the marine industry was the the next three years. Finally, the importance of hydrogen as a launch of PureCool a new technology to reduce the problem fuel became evident in 2020 and is an important component of methane-slip in LNG applications. in reaching the Paris agreement. Investments into the global 6 President’s comments President’s Digitalization Despite lower volumes, profitability remained on a high level at During the first quarter in 2020 Alfa Laval had to adjust the global 17.4 percent, essentially unchanged compared to 2019. The workforce to start working remotely. More than 50 percent of strong operating margin was supported by our well diversified the white-collar employees have worked from home since then. portfolio and aftersales exposure, but also a result of the cost Although the changes posed challenges to the organisation, savings program launched in February focusing on short-term the people, technology and infrastructure was already in savings with maximum flexibility. In total, the program reduced place to manage the situation and secure business continuity. fixed costs with 700 MSEK compared to 2019. At the end of 2020, a restructuring program was announced with the objective Our customers also adjusted quickly to digital interaction. to adjust certain businesses in the Marine and Oil & Gas sectors The most important area of development was in service, which to more structural changes in demand. The program is estimated historically has required physical interaction with the customers to generate annual savings of approximately 300 MSEK with full and the equipment. Our service organisation had already de- effect from 2022. veloped the required tools for connected equipment and remote diagnostics. The number of remote diagnostics and service Finally, it has been a challenging year from an operational per- hours grew from essentially zero in 2019, to more than 10,000 spective. I would like to express my gratitude to both our suppliers service hours in 2020. The change to digital service is here to stay and our customers for being able to quickly adapt to difficult and will continue to grow in years to come, and Alfa Laval is circumstances. Despite all the challenges the industrial supply committing to developing and growing in this area going forward. chains remained intact during 2020. May I also express my sincere gratitude to all our committed employees for a job Business performance well done in a challenging 2020. In a year of volatility caused by the COVID-19 pandemic, Alfa Laval proved resilient and showed a good ability to act fast. In all, order intake declined by 10 percent compared to 2019 Lund in February 2021 and amounted to 41 BSEK and total invoicing was 42 BSEK, a decline of 11 percent compared to previous year.