Ladies and gentlemen, thank you for standing by. Welcome to the Alfa Laval Q3 Earnings Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I must advise you that this conference is being recorded today, Thursday, 24th October, 2019.
I would now like to hand the conference over to your first speaker today, Tom Erickson. Thank you. Please go ahead.
Thank you. Good morning to everybody and welcome to the call. We're going to follow the normal procedure. So I'll start with a couple of intro comments and then Jan and myself will go through the presentation briefly. First, let me back off from the quarterly report a little bit and just observe that we are now at the end of a 3 year program that was launched in the beginning of 2017, and it included a significant effort related to renewal of the product programs, rebuilding of our manufacturing infrastructure and a host of other activities with the main objective to drive the organic growth in the company.
And I think this quarterly report was a testament to the fact that we are on the path to achieve that objective in a good way. And let me at this point, then also say that we have the Capital Markets Day coming up 5th December. I hope you have a chance to join us. We will then start to outline a little bit how we will continue this path and how the next year plan will look. So I welcome you to that already now.
Secondly, the service side was an important part of our 3 year plan and has been for this period. And we've worked a lot with various ways of strengthening our service offer to customers, and we still have a lot of work to do. It was still very good for us to see that the organic growth, excluding currency, reached almost 10% in the quarter, which is a high level, and I will get back to that later. Finally, let me then say also that in terms of the guiding going forward, the next quarter, we expect a somewhat higher demand across all three divisions. And that means that our expectation is that we will enter 2020 with a strong order book.
And even so, our readiness and focus to be ready for a possible negative effects and downturn later on in 2020 will remain high and the focus on efficiency activities will increase no matter what. So with those comments, let me go to the key figures. As you well know, when you follow us, you've noticed that our invoicing has lagged behind the strong order intake during a rather long period of time. And in Q3, finally, we saw the order book being translated down into the profit and loss statement with very strong invoicing and a good growth in earnings. In fact, in the quarter, earnings per share increased with 34%.
So we got a good drop through from a good order book coming into Q3. In terms of order intake, we guided last quarter for sequential somewhat higher demand, and in fact, that's what we saw in the quarter. Excluding the PureSOx business, our organic growth year on year was approximately 10%, excluding currency. And I'd like to highlight for you that if you look on the Q2 order intake as well as the Q3 order intake, the underlying strength of the order intake has been a little bit obscured by the exceptional order intake on the PureSOx business 12 months back. There is not a huge difference in the order intake patterns between Q2 and Q3 other than the specific volatility in part of the marine order intake.
We noticed some negative effects from the political uncertainties around the globe, but we have to conclude that it has not been a major factor in how our order intake has developed during the quarter. In terms of profitability, Q3 was operationally a good quarter with a fair amount of tailwinds in a number of aspects. We had a favorable outcome in metal prices. We certainly have a favorable currency and was all in all a good load in factories that brought us to good margin development. The main factor obviously in terms of our earnings level and our margin has been a good invoicing growth that drove the margin improvement, including a good leverage in the sales and admin costs for the quarter.
You should also note that we had a relatively positive mix in the capital sales. So despite the fact that service sales is relatively low, the gross margin stayed up reasonably well in the quarter. Going to the divisional level, the Energy division had a strong quarter with a very high order intake for Q3 and invoicing at record levels. The steady demand growth is related to the need for energy efficiency solutions and to a degree with new refrigerants in a number of applications. We can notice that the sustainability related applications is increasingly the dominant factor in the short and long term growth perspective for the division.
The margin stayed stable year on year. Sequentially, we had a negative effect entirely driven by changes in the product mix for the quarter. The Food and Water division had a good invoicing and margin in the quarter. It was largely a stable demand situation for the division. We always have some fluctuations in the various end markets of the division.
I wouldn't put too much emphasis on it. The only thing I'd like to highlight in this context is that we have for a period of time seen a structural growth in the wastewater applications and we expect those to continue also going forward. The Marine division is still working in a market scenario where the yard contracting for new ships remains weak, and that is obviously still a factor in terms of the development of the division. Still, most product groups showed solid growth both sequentially and year on year when it came to the order intake in the quarter. Last quarter, we had a shortfall both in the pumping shortfall in orders, both in the pumping systems business and in the PureSOx business.
This quarter, as expected, we saw an improvement in the pumping system returning to a more normalized level of order intake, whereas the PureSOx remained on the low level for the quarter. Here I would like to add that we see the project pipeline for PureSOx orders getting stronger and the market activity is higher. We have indicated to you already a year ago that we were expecting a weaker market ahead of the end of the 2019 and the IMO regulations in January. And that is in fact what we've seen. And with those comments, we think that we will have some return on the PureSOx business, maybe not to the extreme levels, but into some sort of sense of new normality level going forward.
Service, overall, as I indicated, it was a good service quarter and 10% organic growth is not very frequent in our business. The service business was especially strong in the marine business, which is the main driver of the growth for the quarter. And it's a number of factors that came together in the quarter. The traditional service business that we always had was okay in the quarter. We see the start of service business growing on the back of the new environmental applications that we didn't use to have in the order book.
And on top of that, we see a strong reconditioning service business growing on the back of increased multi fuel solutions on board and partly as a result of the IMO regulations coming into effect. So those factors combined gave us a strong quarter and the structural tailwind that we have is expected to a degree remain also going forward. Then finally to the regions, a couple of overview reflections on that. China and Asia remain strong. Although you see a big minus on the order intake, those are entirely related to some aspects of the marine business.
But leaving that aside, underlying business conditions in China has remained favorable in the quarter. North America continued on the good level, but I would still say that the Q3 last year in U. S. Was not exceptionally good. And so although we are in a positive number there, the business sentiment in the U.
S. Is maybe not at the same level as it was about a year ago. But with that said, we continue to have positive development in the U. S. And certainly in Canada for now.
Eastern European was perhaps the best area for us. It includes a good level of business in Russia and a very strong development in the rest of Eastern Europe, whereas Western Europe was generally okay. I might add the geographical excursion anecdotally by indicating that taking Europe, both Turkey and the U. K. Were examples of 2 markets with relatively high political volatility and still a very strong order intake this quarter as well as in the previous quarter.
So, some of this political turmoil, although it remains a worry, does not immediately translate itself into negative effects in the order book. And with that, I would like to hand over to Jan for some further financial comments.
Thank you, Tom. So as Tom has covered order intake, I will move directly to sales. So we expect the invoicing to be up in Q3 over last year and about the same level as Q2. Now we realized sales of $12,100,000,000 in Q3, which is an all time high for the group. And as you can see from the slide, we ended up stronger than we expected, especially due to a very strong invoicing in the Marine division.
With regards to Q4 sales, my outlook is as follows. We expect invoicing to be somewhat higher than the same quarter of last year. Then looking at the gross profit margin. So the gross profit margin came in about 100 basis points below Q3 of 2018. What are the reasons for that?
Well, the service share of total invoicing was low in Q3 at 25.4% versus 27.6% last year and quite a large negative service capital sales mix impact. This was partly offset though by favorable product mix within capital sales from Manchin. The load volume impact ended up somewhat negative year on year as we had slightly lower productivity in Q3 versus last year as we have ramped up new manufacturing capacity to meet the higher delivery volumes. This negative impact was, however, fully offset by positive impact from PPV Metals, partially due to successful cost reduction actions by our sourcing organization and partly because we have not seen the impact from the increased metal prices in recent months. We do, however, expect to see the impact from the increased metal prices coming through in Q4 of 2019.
Finally, we saw a tailwind from FX in the quarter as expected. Now over to my outlook for Q4. So the starting point is the 35.4 percent gross profit margin that we reported in Q4 of last year. We anticipate a negative product mix in the quarter as we expect to recognize the larger share of projects versus component and spare parts sales in the quarter. As stated earlier, we expect the load and PPP methods impact to be negative in Q4 versus last year considering the metal pipe development after the summer.
And finally, we do expect to see a continued positive FX effect in the quarter. Now moving over to the key figures. The development of sales and gross profit was covered in previous slides. So let's go to sales and admin, which increased 4.5% in Q3 versus last year, excluding FX and structural changes. So S and A in percent of sales decreased from 15.5 percent in Q3 2018 to 13.9% in Q3 2019.
R and D expenses increased by 70% in the quarter on a comparable basis connected to our product innovation program. Moving then over to other cost and income. Excluding the nonrecurring income booked in Q3 of 2018 of $39,000,000 other costs and income showed a net cost increase of $36,000,000 in Q3 2019 versus last year. This increase is fully explained by the increase in royalties paid to our Ballast Water joint venture partner following recent quarter's strong increase in volumes. The footprint cost was about the same level as last year but is expected to be higher in Q4 as we are finishing the 1st wave of the footprint program.
Regarding operating income, just please note that we had a loss of $15,000,000 in Q3 '19 versus a profit of $20,000,000 last year in the greenhouse position. This is due to residual costs related to the sale of the Air and Heat Dfixture business. Financial net, excluding FX impact, was minus EUR 46,000,000 dollars and the tax rate came in at 24.1% in the quarter 23.8% year to date. And as Tom mentioned, EPS increased by 34% in the quarter, primarily due to the strong operational performance and also due to the reduction in the company's tax rate. Now looking at cash flow.
So cash flow from operating activities decreased versus last year as the strong operating results could not offset the buildup in working capital of approximately $800,000,000 in the quarter. This increase in working capital is primarily due to the buildup of inventory to execute the order backlog. A big portion of the inventory buildup is related to the marine environmental business. Normally, such an inventory buildup is to a large extent offset by increasing customer advances. However, at the order intake of PureCircle where we normally receive customer advances were low in Q3, we had a negative cash flow impact.
We believe our net working capital levels will normalize over the next quarters. Investing activities included CapEx investment of $228,000,000 and which follows the execution of our Putbin program. Financial net paid, excluding FX impact, was minus $96,000,000 This means that our free cash flow in Q3 came in at 995,000,000 dollars slightly higher than the same quarter last year. And finally, our net debt to EBITDA ratio now stands at 1.13 and excluding the lease liabilities at 0.82. Then looking at the FX impact on EBITDA in the quarter, it was a positive SEK 85,000,000.
Both transaction and the translation effect were positive around €60,000,000 to €70,000,000 each, primarily due to the stronger euro versus SEK. The FX revaluation impact in the quarter was a negative $45,000,000 due to the strengthening of the U. S. Dollar versus NOK in Q3, negatively impacting the Marine business. Looking at the projection for full year 2019, we expect a total positive FX impact of close to SEK 500,000,000 Now this estimate is based on the FX rate at the end of Q3 2019 and hence includes quite a lot of uncertainty considering the volatility in the FX rate.
Then looking at the order backlog. At the end of September, we had a total order backlog of SEK 23,300,000,000, a decrease of approximately 2% since year end as we are successfully executing from the large order backlog. That means our order backlog now represents 6.2 months of LTM sales. For shipments in Q4 2019, the backlog amounts to SEK 8 point 1,000,000,000, which then leads us to the sales bridge for full year 2019. Starting with the year to date sales of $33,600,000 Then we have the backlog for shipment in Q4, which is 8.1 percent, and this adds up to 41.7 percent.
On top of that, you will need to make your estimate on in for out orders and FX translation impact. And for your reference, the level of in for out orders in Q3 of 2018 was SEK 3,300,000,000 excluding the business divested out of the Greenhouse division. So by that, I will hand back to Tom.
Thank you, Jan. And I already indicated how we were looking at Q4. As I've said, the business sentiments in the coming quarter in most parts of our business still remains favorable. And our guidance for the group as well as for all three divisions individually is that we expect somewhat higher demand in the Q4 compared to the 3rd. So with that, we are done with the presentation and we are open for questions.
Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Max Yates. Please go ahead. You may ask your question.
Thank you. Just my first question was around the comments you made on PureSOx and the outlook for scrubbers sort of modestly improving. I just wanted to understand kind of with your kind of best estimates, how we should think about demand for this market sort of settling next year and maybe over the coming years after that and maybe referencing that versus, I think, around the sort of SEK 4,500,000,000 peak of orders in 2018. So that was my first question, just how should we think about that business settling into next year in terms of demand?
It is a bit of a speculation, and I don't feel I want to go into forecasting for the coming years. What I would say is that I think we have to consider the demand peak that we saw a year ago as somewhat exceptional also when we will look back a couple of years from now, that the scrubber business would disappear because of whatever reasons. We don't believe that's going to be the case either. So we're going to be in at some point here in between those two extremes. I think you will find other sources who may give the market estimates for where things are going to be.
I don't want to be responsible for that one. But I think the other aspect that you could look at this is that when we estimated the penetration of scrubbers some years ago, we have gradually upgraded that forecast somewhat in terms of the number of ships that will implement the scrubber solutions. We took a conservative view initially back in 2016. It's been a fairly large part of that volume was already is already under contract. So based on that, our assumption has been that we will exceed that to a higher number, and I think that is in line with a lot of the external market forecast at this point as well.
Okay. And just the second question would be on the strong service growth in the quarter. So I just wanted to understand kind of whether there was anything any kind of longer term contracts in that 14% growth number or whether that was effectively all underlying? And maybe when we think about the sustainability of that number, could you talk a little bit about how sustainable that number is? And also kind of what initiatives specifically that are really getting traction with customers driving that?
Well, I'm very hesitant to express sustainability on any number. I'd be happy to express my view on the coming quarter, but over time, we have to win the business every day. So I leave that open. There is some tailwinds coming specifically. There's no long term contract in this, but I would say that when you start to grow a business like the reconditioning business, it is different from in terms of its in for out effects in terms of compared to spare parts deliveries, which are on the spot and immediate, right?
So there are maybe some difference in mix, some difference in timing and some difference in margin when it comes to that type of work versus the traditional spare parts deliver work. So there are some mix changes in that, but I don't want to put too much drama around it. The question on how long multi fuel work and for that matter the implication from the IMO will affect order intake positively, Difficult to say, it is not a 1 quarter phenomenon. I think you may want we often in these earnings calls have discussions about the risks related to heavy fuel oil decreasing as a main fuel over time in shipping. I think from this quarter shows to a degree that we are less dependent on a particularly fuel type in our business.
We have significant business related to fuel conditioning on board and as the complexity grows with multi fuels that is obviously in the short to medium term a positive factor for how the Marine division looks.
Okay. And maybe just finally, would you be able to tell us what the pure ballast order size was in the quarter out to the 4th quarter?
I don't have a special number for it, but that is ramping as we've planned and it's certainly to a degree compensating the weakness in the PureSOx.
Okay. Thank you.
Your next question comes from the line of Johan Eliason. Your line is open.
Yes. Good morning. This is Johan Eliason at Kepler Cheuvreux. Now I was also asking the mix in your scrubber ballast. I understand the good margin in the Marine business was due to the good scrubber volumes.
But obviously, the order for the Marine was driven a lot by the good orders for the ballast water. So how should we sort of look at the margin projection here for Marine? Will there be a negative mix so this margin is some sort of a peak when you have the very good scrubber margins coming through in sales? Thank you.
I will not guide you on the margin development going forward. I also would appreciate if questions coming will go beyond the scrubber because as I indicated to you a couple of times, the market cap for Alfa Laval relating to the scrubber market is not that big. So I would advise you to think about the rest of our business as well.
Good. Let's move to the rest of the business then. In the Energy Division, order intake was still pretty good. We have seen energy prices coming off. Is that sort of the reason why you're expecting a weaker market sometime during 2020?
Or do you see any specifics out there in the demand as well that makes you feel more cautious on the general demand?
Not really. If we look at the pace right now, the investment pace downstream is quite good. And I think it's driven by a couple of long term aspects. One is the need for China to gain an increased energy independence. So we see investment activities there downstream relatively high.
And we have a bit of the same phenomenon related to Saudi Arabia and Middle East. So and even on the refinery side in the U. S, we do see some investments going on. So I don't see an immediate shift to that. And in fact, those investments do not tend to be very much affected by the oil price as such.
There is not a they may actually be favored by a slightly lower oil price. What is clear is that the drilling and upstream part of the business is a bit weaker. But with that said, I mean, we are running at around a yearly pace of around 7,000,000,000 dollars on the energy side right now compared to about 8,000,000,000 at the previous peak. So it is a it's still a good market situation there. But I think what's more important for the Energy Division is the fact that the energy efficiency and of course, we sell energy efficiency solutions also into the refinery segment.
So let me scope this correctly, but the importance of the energy applications growing outside of the hydrocarbon chain is for every quarter more and more important. And there, we certainly have a long term view that, that will continue in a good way. Even an application that may seem relatively narrow like data centers is today a reasonably important part in certain product segments for our energy business. So we are not particularly negatively based on the Energy Division compared to the rest at this moment.
Okay, excellent. And then I was also wondering in the Food and Water, you talked about this wastewater continued with a positive trend. Is that something you think will sort of also continue in a potentially weaker macro scenario going forward? Is there some sort of legislative sort of drive here? Or is the World Bank pushing something in the emerging market?
Or what's driving this mining
When it comes to public sector tendering, it is normally not the main profit pool for a company. So when it comes to World Banks and these type of projects, they seem to be sometimes from a tendering perspective and a profitability perspective less attractive for us. So we tend to go private sector wastewater and to a degree municipal where the need still remains very big around the world, but rather on the local financing. But the resilience in the food and water division as a whole tend to be reasonably good. We I don't want to single out a particularly business segment as immune, but I think we have to expect that if we see a significant deterioration into 2020 at some point in time, it will have an across the board effect of delayed projects and such.
For the moment, the pace as you can notice in the Food and Water division has, I would characterize it as fairly stable, whereas 2016, 2017 into 2018, we had a fairly solid growth path. Part of that is related to larger projects. So in fact, the business unit food systems is behind this year compared to last year, whereas our components business and machine equipment business remains on a good level and in many instances continue to grow on a reasonable level. So that's about what it looks like as a spot observation on the food and water.
Okay. Thank you very much.
Your next question comes from the line of Ben Wier. Your line is open. You may ask your question.
Yes, morning. Thanks for taking my questions. Those are 2 and more maybe long term questions. The first one is just what you mentioned on your fuel independence in marine. I was just wondering if you include LNG into the equation, how you feel positioned on LNG?
You think that transition would be also neutral for you in the long term? Or do you still feel you need to cover some gaps on the LNG side to be ready for that? That's the first question please.
Yes. It's a fair question. I would say, we as markets evolve, we also need to look and address our product offering. So, I don't want to give the picture here that we are fully invested and up to speed on any development that's going to go on. But generally speaking, LNG on board has implications in positive terms also for our existing product program.
You need to handle cooling applications and other things on board. It drives infrastructure investments and other things. So, I think the and it's not going to be a pure LNG solution here. It's just going to be a range of options that the ship owners are requiring. So let's say that to your question, yes, there are still some add ons that may be relevant, but all in all, it is in the short, medium term a positive development for us.
Okay. Thank you. And the second question is just more with regard to the plastic debate that we're currently having and obviously increasing number of regulation here, also probably more longer term question. But of course, I would probably see you more benefiting on the food side with the carton packaging and so forth. But do you see already a starting of a mind shift among your chemical clients?
Are you seeing increasing hesitance on maybe PET projects and things like that? Or is this way too early to talk about
that?
I don't have a super answer to you on it. What I would say is that we do see increased activities from our point of view in what we typically would call green chemicals. So when I talk about the importance of sustainability applications driving us forward, they haven't taken over as the big bang, but we certainly see a host of small applications that are starting to grow. And that is also related to green chemicals, which is then the at the end of the day, the alternative to the petrochemical process. So I cannot give you a fair answer on saying is that is the mix of that neutral to us in terms of business, I'm not sure.
But I find that when we see process changes in industry, our technical capabilities allows us to take a forward position on those markets as opposed to the well established 50 to 100 year old applications where everybody has been around for a long period of time. So I see the trend shift relatively positive. If you think on the petrochemicals as such, the part of the petrochemical production that goes into plastics for, let's say, food and beverage type of application is relatively small. The large volumes of petrochemical products are going to industrial use, to car manufacturing and other places, and we don't really see any change process going on there. So at this point in time, it's there was not a dramatic shift in the petrochemical side the way I see it.
But I think it's a good question.
Thank you, Tom.
Your next question comes from the line of Matthias Holmberg. Your line is open. You may ask your question.
Thank you. Matthias Holmberg from DNB Markets here. I have a question on the balance sheet. And I guess, ultimately, it's a matter for the Board to decide. But I assume that you have some thoughts at least on how you best could utilize the strong position that you have.
And I'm thinking, most in particular, what your thoughts are on M and A and how you view that landscape and if there's anything that you think is particularly interesting at this point?
Yes. And you're asking a speculative question. A couple of reflections on it is, we will never feel that we should be obliged to do a bad M and A deal in order to activate our balance sheet. So we've been very disciplined in the projects we've been working on. There's certainly been a host of more projects you have seen materializing for sure.
We have found the M and A market over the last 3 years to be to a degree overpriced and we have opted for not creating major goodwill positions on M and A in those areas. So we have opted for walking away for those areas of relevance. We continue to have a pipeline And if we see that market expectations and our ability to generate a positive return for our shareholders meet, then there are a number of interesting options for us. If we are not coming to any major M and A deals in the next 24 months, then obviously we will have a balance sheet, which begs the question. And I think we will leave it to the Board and to the AGM to make the final decisions on how we're going to go with that.
But from management's point of view, we don't have any particular interest to be over capitalized in the long term. There may be a reason to tactically sit on a stronger balance sheet temporarily in order to take advantage of market situations. But as a general principle, we are a cash generating company. We have no need for surplus liquidity over longer periods of times. Very clear.
Thank you.
Your next question comes from the line of Robert Davies. Your line is open. You may ask your question.
Yes, morning. Thanks for taking my question. Just a question on your Energy division. I guess within your HVAC exposure, could you give us some sort of regional trends in terms of what's going on within HVAC? That would be helpful.
That would be my first question.
We are struggling a little bit with the answer here. I'm not sure I have a clear view on the regional differences for the HEVAC specifically. We've been going in depending on sort of how we want to scope the HEVAC business, the one regional point that we've been seeing over a period of time is growth of heat pump solutions in China. That has in certain quarters been a fairly strong factor. It tends to have a little bit of volatility in it.
The data center business and the semiconductor business tends to be relatively globally spread. So it's not given. So I don't think I have a lot of color on Jan, do you have any wisdom on?
I think if we talk generally about Food and Water division, I think what we say is that we see a pretty good growth in North America and also Asia. I would say Europe, let's say, a little bit slow. Yes, this is I'm just saying general for the full water division.
And then I just wanted to pick up on something you mentioned about the sort of downstream refinery investments in Asia. It's China that looks for greater energy independence. What are the customers telling you in terms of time line there and when they're sort of planning to execute on some of those things? Is that a 2020 or sort of beyond? Are people starting to kind of tender for some of those projects yet?
Is it just a sort of strong pipeline and they're looking for interest? Or where are they
in their investment cycle on that
region specifically? No, I think it's in
China in China, Pindalian, just that was pretty much concluded during the beginning of this year. So there are and there are other large projects that are in the pipeline and is following. So I think this is as we speak process. If anything, over the last year, I think, geopolitically, that is accelerating. So I think I would sort of just sketch it by saying it's already in the pace of our order book and I don't think it's going away short term.
That's great. And then maybe just a final one on the Marine business. Could you just flesh out some of the trends that you're seeing within the different vessel types? I mean, obviously, Clarkson data has been quite weak recently. And you have, I think, mentioned in the past sort of disconnect sometimes between what you're seeing and what the Clarkson data is telling everyone?
I guess I'd be quite interested in just kind of your view across the different vessel types in terms of current trends would be helpful. Thank you.
Yes. When we say that sometimes we have a bit of a mismatch, it can be interesting for you to go back and look at the contracting levels in 2017 and 2018. Once they have been updated, back updated, the numbers actually sits on around 1200, 1300 ships, whereas during those years, the running rate had seemed to be significantly below. So there has been some surprises in our order intake. And I think they come from the in a positive way.
And they come from the fact that the actually registration data is lagging behind the actual pace. So what we saw in 2017 2018 was a somewhat better order intake than was indicated during those years. The beginning of 2019 has been weak, that's for sure. I think the sentiment was weak, and I think there has been a hesitance in the market. In fact, also related to the LNG question and the fuel options and what's the right way to design a new ship in the engine room when it comes to all of the uncertainties in the market.
So 2019 is relatively speaking a weak year. We see and you notice that on the pumping system last quarter and to a degree this quarter as expected compared to the year before. So 2019 is likely not a great year for contracting, whereas if we look at the forecasting for 2020, the mix expectations for container, for product tankers, certainly for crude, remains relatively strong. The color I'd like to add to that is if there's any area right now where is reason for optimism is probably on the large crude vessels. The freight rates are exceptionally high at the moment and it tends to drive short term market behavior as well.
So in terms of money making segments in from a ship owner point of view, for various reasons right now the crude rates are very, very attractive and it may change also for short term a little bit the order patterns here, but that's it.
That's great. Thank you very much.
Your next question comes from the line of Klas Berglund.
Yes. Hi, Tom and John. It's Klas from Citi. So my first question is on Energy. I was late on the call, sorry for this, but maybe you talked about it.
Could we talk about the margin mix impact? How much was project deliveries versus service growth that was basically flat in the quarter? And how should we think about this mix impact going forward? And Tom, if you could comment more on Upstream outside of North America. You're talking about the total oil and gas business running at EUR 7,000,000,000 versus EUR 8,000,000,000, but that number is obviously boosted by a weaker SEK.
If you would do this in dollar, like for like, you're still well below. So there could be some upside on the upstream side outside of shale, I would have thought. So that's my first question.
Yes. It was a number of topics you touched on. Let me start with the service side. It's correct, as you say, the development on the service order intake for the Energy Division was on the low side in the quarter. With that said, we've seen a very good underlying growth trend in service over quite a period of time.
It has actually been the strongest part of our service business for at least a year. So the running rates are still pretty decent in service. So yes, it was a weaker quarter, but not the big alarm and I don't think any there was any structural thing happening there. So we look favorably to what's going on, on the service side of energy going forward. It's true, currencies volatility has been so big that it actually is becoming a factor.
So it's a prudent question, and you are right. I mean, we outside of shale and outside of land base, probably the offshore side will remain fairly committed to their CapEx plan and their plans and they look positive right now. The offshore order side for us has remained pretty good. And I think that's still where we are mentally in the years to come. But I mean, if you go back to compare to the previous peak, it was a strong contribution of on land investments.
And today, we just don't see that level of activity at all, partly because the efficiency on the land bank side has increased substantially. So utilization of equipment and CapEx per produced unit is much, much better than it was 5, 6 years ago. So they've done their homework for good reason and made it competitive. But with the slowdown of the oil price as well, I think it has we see that it's holding back investments on that side. We still see on the gas side a fair amount of activity, on the distribution side a fair amount of activity, but right now it's a downstream that holds it up.
Okay. My second one is coming back to the previous one on marine. And promise, I won't ask anything on subscribers, Tom, but I was wondering if on the pumping system side, ex offshore, I. E, Framo on the conventional side, whether you have seen some positives already on the tanker side? I mean, this market, right, as you say, I mean, tanker rates are up strongly, but you also have that potential boost from IMO with the ships now shifting over to low sulfur from October onwards that could drive rates also on the product side.
Have we seen any sort of green shoots from the trough on frano?
Well, the order intake comes with some volatility without necessarily being an expression of big investment cycles back and forth. So I don't want to over interpret individual quarters here when it comes it's a little bit like large orders sometimes. Sometimes they come around and sometimes not. Sometimes they shift between quarters and based on down payments and all of that. So I we cautioned a bit when the order intake was very high a year ago on Fromo, obviously providing us with a great order book for this year.
Now we've been seeing a slower activity at the moment, not seeing the order book for next year in the same way. Let's see where we come in. We have seen the occasional rush order coming in, which is not so frequent for the Fromo business. But so that's my honest answer. But on that side, I don't want to over interpret that as to that we are heading into a new heavy investment cycle.
That is not the basis of our makes sense. My final one is on service in
Okay. That makes sense. My final one is on service in marine.
You've changed the service organization here a
couple of years ago. You're now more global following Albor, Framo, etcetera. And there was this service push. How much of that push, Tom, is driving that better service growth this quarter?
I'm very tempted to say that thanks to good decisions we are now driving our service structure. I still honestly have to say that a lot of the things that we have been doing over the last few years, I think is putting a foundation for the next 3 years rather than affecting last quarter's order intake. We have very positive feedback from customers in certain parts of our business like the boiler business, for example, the value of this service is very big. We so the feedback is good. We have a very good global monitoring on in terms of number of ship visits.
Our visibility on how we deal with the service in terms of First Harbor service availability rates and things like that is really fantastic. So I think we are very much on the right track on this. But I still have to say that probably for the quarter, it's been a minor factor. Let's give it a little bit of a cred, but not more than that.
Okay. Thank you.
Your next question comes from the line of Andreas Koski. Your line is open.
Thank you. I have a couple of questions as well. And maybe I can start with the outlook of somewhat higher demand. It is not surprising to me that you guide for somewhat higher demand because if we look at the past 6 years, we have seen a Q4 order intake being on average 10% above the 3rd quarter order intake. So I just want to understand here if it is mainly because of the seasonality that you normally reach higher order intake in the Q4 or if you're seeing strong underlying trends and that is the main reason for your guidance?
Yes. That's a good question. I think your observation on seasonality carries some weight. The Q3, if anything, tends to be seasonally lower and affected by summer holidays and other things, whereas we tend to get some orders in before year end and consequently the Q4 is often reasonably good. I'd say there's probably we haven't made that clear distinction as management in terms of saying that these are the components going in.
We look at our pipeline and our view of where it's going to take us and that's where we came down.
I still think
our assumption and your assumption should probably be that the underlying pace of the business, call it base business or whatever, we still look at most of those areas as remaining in a positive development phase. So and that is reflected by the fact that this is not a 1 division or 2 division guidance. It's actually unusually for all three divisions expected to go forward in a decent way in the quarter. I would still say that there's probably an effect of what we expect on the larger orders that is a bit seasonal, call it seasonal or just call it that it looks good for the moment. But our forward looking guidance comment is obviously related to what we see in the pipeline and we tend to see the larger orders clearer than the smaller orders.
So
May I just follow-up on that? Because I think maybe on every call this year, you have pointed out that you expect 2020 to be a weaker year, I guess. Are you surprised that the underlying trends are still so strong as they are?
Maybe a little bit, yes. I've been hoping, but not planning for order intake to remain. But you can say the scenario that we've been working on in terms of our let's say, those decisions that we are taking that has long lead times like CapEx decisions that you make in 2017, 2018 and we are paying for it right now in order to get it online. When you have lead times of 2, 3 years, you need to have some view on where is the macroeconomics going. So we were hoping and working for a scenario in terms of our investments and our CapEx profiles and a number of other initiatives that if the market stay reasonably favorable into 2019, then we will go into 2020 with a decent order book and that will give us in case we see a weaker market about a 6 months leeway until we have invoiced our order book and all of that.
So and that has been our planning. So we will come down in CapEx and we will come down in some of the initiatives as we move into 2020 and that is a good fit should we see a weakened economy. But as I said, I don't want to predict it other than saying that we are ready and we have planned a lot of the initiatives around the possibility that we will come into that market situation, allowing us to bring down cost levels and improve situations in a couple of times. But I'm happy for every quarter where we keep steaming.
Okay. And then, yes, you have been focused quite a lot on R and D. Could you just give us a sense of maybe some qualitative numbers of how many products you will launch next year compared to how many products you launched 3, 4 years ago or something like this to get the feeling for us to understand, what kind of benefit you get from this increase?
Yes, you're going to get a sketchy answer because we one answer is please join us at the Capital Markets Day December 5 because you will see a lot of the fireworks going on, on the product side right then. Otherwise, as just a quick answer, we in terms of number of product launches, not qualifying them as important or less important or major or whatever, but in terms of the just pure numerics, we are at 2, 3 times our historic product launch rates, and that takes us up to around 100 a year, which means 2 a week. And if anything, I would say from a launch perspective, we are actually on the high side. If you really want to launch a product and go to market and do it properly, this page is, if anything, maybe a little bit too high. But that's where we are, and we're going to take the maximum benefit of it.
What you see on the cost increase now is not actually driven by increased design engineers in the lab. It is actually the running in new products into the operational systems and industrializing the new product side. So that's why actually we see a bit of a higher spend increase right now because taking them to market at the final stages is what drives the cost at the moment, not feeding in new ideas into the lab. So I think this is a reflection on where we are on the launch side that you see the financial consequences short term of a somewhat increased R and D level when we industrialize these projects. But I really recommend all of you join us at the Capital Markets Day.
It's going to be great.
Yes. Thanks. And lastly, may I just follow-up with you, John. Did you say that invoicing in Q4 is expected to be in line or so with the Q3 level?
Yes. What we said was that
or
what I said was the invoicing to be somewhat higher than the same quarter of last year.
Okay. And before that, you didn't say that it should be in line with Q3?
No. That was the comment regarding the outlook that we gave for Q3.
Okay, okay. Great. Thank you very much.
Your next question comes from the line of Mark Schulz. Your line is open.
Hi, good morning. Also, my question has been already answered, but I would like to maybe to first start. Do you see any impacts from the recent political developments, particularly going forward on the tariff side or on the trade deals? Anything where you're particularly exposed to some new regulations or some flows in your production chain, which gives you some worry? Or will you see more opportunities maybe next year also on easing tensions, particularly, for example, Turkey or so?
Well, we had our highest quarter order intake in Turkey in our history. So it is a bit odd sometimes how these things play out in the short term. Similarly, I think part of the Chinese energy independence is driven by the trade war and all of that. So there are positive sides. There are, of course, negative sides as well.
So when you look at the overall portfolio, I would say right now, the trade war situations is there's not any specificity in that issue that worries me. What worries me is that we will see a general economic decline globally as a result of increased tensions and increased uncertainties in the world. And that has certainly been one factor in our macroeconomic thinking for 2020. If you would pinpoint any particularly areas that if there are some positives on the trade war side, there are certainly some observations on the other direction too. The one I think we have indicated previously as well is that biofuels and ethanols, not least in the U.
S, is badly hit by the trade wars. It is both on the capital sales and on the service side, a business that has declined compared to previously. And but with that said, we always have ups and downs in our product portfolio without that necessarily being escalates to something that would be visible to you guys. So we are fairly neutral to what's going on that other than, as I said, the fact that we may be seeing a tougher economic condition. Whether the sentiments in the U.
S. Are affected by that specifically, maybe. It's been a heated situation in the U. S. Economically for a long period of time.
It still is obviously a very good economic situation in the U. S, but I think I indicated to you that although the order intake was clearly better this year than last year in the U. S, the sentiment and underlying drive in the U. S. Seems to be a bit cooler now than it was 12 months ago.
Okay. And maybe also as you mentioned the fuel mix quite often also, do you have already view on how the fuel availability at medium sized ports will look like in the next year when IMO 2020 is active?
Well, no well, yes and no. If we let the market tell the story, the price spread between low and high sulfur fuel have increased back to some sort of expected level recently. The price spreads were relatively low during a period of time. They are on the increase. We are not sure what's going to happen.
Globally, the total, total, we do notice that there is a lot of preparation ongoing. I don't think there is a lot of alarm signals. So that's positive for our customers, and we certainly don't want to see too much turmoil around the new legislation. But I think we feel that the way the market is coming down on this, we will see the expected price spread between heavy fuel and low sulfur fuel. And that tells you that the demand supply situation will be a little bit tight on the low sulfur side.
That's where we are right now.
Okay. Thank you.
Your next question comes from the line of Lars Brorson. Your line is open.
Hi, thanks. Just two quick ones for me, Tom, if I can. Just on Marine, sorry to come back to the service growth, but I've got that in the high 20s, low 30s, so real uptick in service growth. And you were obviously talking about that being partly supported by IMO 2020 regulation. Can you help me?
It goes back a little bit to the earlier question, I think, around sustainability of the service growth in marine specifically. What drove that? And what is the nature of that service business coming through for you
there? Well, my comments were that in general, the service business has been good for the historical part. We suddenly start to see an impact on the environmental applications, which didn't really have an installed base 2 years ago, where we see an increase both in terms of the service, but it's also an area where we are starting to do condition monitoring. It's not a big factor in the big numbers, but still we see a growth of the subscription revenue for condition monitoring of equipment that we didn't do before. And then we have a good level of reconditioning work, which is related to the IMO and multi fuel side.
And I think if you disregard the other two areas, which I think we are working with to have just a continuous slow and steady growth, certainly not on the level that of 10%, 15%, but still as a reasonable underlying growth pace. The one area where we may have some volatility over the coming years is related to the multi fuel side. Now I don't think that the multi fuel will go away. I think the answer to how ship owners will decide to go in the future is very much related to multi fuel options. So I think in that sense, there is a reasonable expectations that we will see reconditioning work on the existing fleets as well as business opportunities on newbuild related to multi fuel trends.
And so that I certainly don't want to predict that our service business has entered into a new phase where we over the coming years will see growth rates like this. But it wasn't the 1 quarter phenomenon that's put like that. That's not what we believe. We believe we have some level of sustainability on this going forward in the next quarter.
Helpful color. Thanks, Tom. Just a quick one and maybe more to Jan on footprint cost. Can you remind me what the guidance is Jan for footprint cost? And you were saying, I think they were ramping somewhat in Q4.
I presume they were somewhat low in Q3. Can you give me some specific numbers around that? That would be helpful, please.
Yes, sure. So footprint cost in Q3 was similar size of last year, meaning around that SEK 30,000,000. They will be hiring in Q4 probably towards, let's say, a little bit more than or let's say, maybe around $5,000,000 $60,000,000 $6,000,000 which would bring then the total impact to, let's say, around $170,000,000 for the full year.
And sorry, just to be clear, are they all booked in operations and other? Or is there anything coming through in the divisions?
They're mostly booked in operations and other, yes.
And for 2020?
We'll probably touch on that on the Capital Markets Day on December
Okay. All right. Okay. Fine. Thank you.
Yes.
All right. We go for our last question, and then it's time to break.
Okay. Your last question comes from the line of Johan Eliason again. Your line is open. You may ask your question.
Yes. Hi. This is Johan again for a follow-up here. Just on the comment you said on the Marine Business Services, where you mentioned that the new environmental technologies are driving service business as well. Was this simply this €200,000,000 plus service agreement you got for the ballast order that you announced?
Or are there more service contracts like that, that you expect to see coming going forward as well? Is that valid for both ballast? And sorry for saying this, but the scrubbers. And for the ballast business, will that improve the profitability picture for you? Because I guess on services, you might not have to pay license fees or?
Okay. Let's take the last point of it. I think the our joint venture includes the full scope of the business. Diligently share it with our joint venture partner for sure. So I don't think we have any impact on that.
No, I don't see that any we have frameworks in the marine business or frame agreements both on service and capital sales occasionally. But when it comes to the order booking, they don't flow through in the order book until we have the normal commercial routines there. So I don't think that was a similar question, I think, earlier. I didn't catch that aspect of it. But I don't see that we have taken in a long order book of future service revenues coming in here.
Jan, I don't know if you have any color on it on top.
No. And if I understand your question, you said, it's the split of the service growth in environmental thing that I would say it's both coming in both environmental products.
Yes. But the frame agreement does not are not recorded as service or in another quarter. So there's nothing of large frame agreement that is flowing in at this point in time. It is it's not in for out necessarily because the reconditioning takes a little bit of time, but I don't think you've seen anything going in that will not be invoiced over the next 6 months. That's my guess.
Most of it in 3.
We are building, let's say, a large install base on the on both environmental products, and that's, of course, what we see the effect of.
Yes. All right. With that, thank you very much, and hope to see you all in just close to Copenhagen this time and other side of the straits on December 5, and we will be talking about new products and a whole host of other things. So you're very welcome to that. Thank you very much.