Insights

Alfa Laval, one of the businesses we own at the Global Moats Fund, is an interesting business. The company operates within three business areas, namely Heat Transfer, Separation, and Fluid Handling. In each one of these businesses, Alfa Laval is the worldwide leader occupying the number-one position.

One of the driving forces of our time is a renewed focus on Sustainability. Societies and companies globally, are trying to reduce the environmental impacts of industrial processes.

Alfa Laval’s businesses help reduce their customer’s environmental footprint by improving energy efficiency and efficient heat recovery, superior water treatment and separation, and reduction of chemical emissions.

Its Heat Transfer business, for example, is the leader within the compact plate heat exchangers, a significantly more efficient technology compared to other such solutions. The company’s plate heat exchangers allow for the transfer of heating or cooling from one liquid to another and lower overall costs. The superiority of Alfa Laval’s offering is represented in its global leadership. The company has the industry’s broadest product portfolio in the business with a worldwide market share of 30% plus, more than twice the market share of its number two competitor.

In its efforts to stay ahead of the competition, the company continues to spend a significantly higher proportion of its revenues on R&D. The result is that it owns an extensive patent portfolio. The company’s development efforts have increased even further, with new products being introduced running at more than double the historical levels.

An important element of a business such as Alfa Laval to maintain its superiority and longevity is having owners and managers with a long-term orientation. Alfa Laval scores very well on that count with a customer-first approach to the business. The discussion below summarises its financial objectives.

Growth. As against being driven by short-term growth targets, Alfa Laval focuses on business growth over a complete business cycle as its driving metric.

Profitability. Focus on healthy profitability over a business cycle. This is an important metric as a mindless focus on boosting profit margins results in the alienation of customers.

Capital efficiency. The company holds itself accountable to its shareholders by focusing on generating a return on capital of at least 20%.

The mix of a healthy focus on business growth and capital efficiency ensures that Alfa Laval stays innovative and competitive while ensuring the avoidance of wasteful spending.