Good afternoon, everybody, and welcome to second quarter earnings call. Let me, as always, start with a few introductory comments, and then Jan Allde, and myself will go through the presentation material for the call. In most aspects, we felt we had a solid and a good quarter in the second one. We recorded both invoicing and earnings on a record level for the quarter based on a strong order backlog. We had specifically a good growth in the service orders, which grew approximately 11%, which is an unusually high number for us in the service area. In terms of the order intake, obviously, we were considerably impacted by the low orders for business unit pumping systems and the business for scrubbers, which declined approximately SEK 2 billion, reflecting somewhat unusually high order volatility between the high quarter back last year and the rather low one in this quarter.
You should note that the remaining part of the business portfolio grew with approximately SEK 500 million organically, which compensated from the divestment effect of the Greenhouse, which impacted order intake numbers with approximately the same number, SEK 500 million. Finally, despite there are macroeconomic uncertainties in many areas of the world, the business climate remained positive in the vast majority of Alfa Laval's end markets, with organic growth in capital sales in eight out of the remaining 11 business units in the quarter. In fact, we do expect a continued positive market situation in the short term and a somewhat higher demand in the third quarter, specifically, for the Marine division. I will come back to outside comments later on. Let me move to the key figures. The quarter overall developed well.
Profit continued to grow faster than sales, which is a positive sign. The margin remained stable and somewhat higher than in 2018. While costs remain high for both the footprint program and for the elevated R&D activities we had, sales and admin costs grew with 2% in the quarter only, which was reflecting a good quarter in terms of cost control. The order intake was clearly lower year-on-year and sequentially. Note that the successful divestment of the Greenhouse impacted order intake with approximately SEK 500 million. Large orders were also low, reflecting, of course, normal volatility between quarters. Nevertheless, the bookings on the large orders were low in the quarter. Consequently, you saw a more positive development on the base business as such. Most importantly, the decline in business unit pumping and for the exhaust gas amounted to about SEK 2 billion year-on-year.
The margin development, while earnings continued to grow with higher invoicing and is well in line with the trend from 2016 and onwards, the operating EBITA is now on an all-time high level. Moving to the divisional side, on the Energy division, business conditions were favorable despite few large orders in the quarter. Order intake is at an all-time high level, reflecting good demand in almost all of the end segments of the Energy division. Margins continued to strengthen, reflecting a full recovery after the operational issues that impacted our results negatively in Q4 and has since been fully recovered. In addition, we clearly had a positive mix in capital sales, which was a significant factor in the margin improvement for the Energy division in the quarter.
The Food & Water division had an order intake which remained on a high level where we've been for a period of time, although in the quarter there were mixed trend between different end markets in the Food & Water division, all in all, evening out the order intake on a high level. The margin did decline after a strong first quarter and a couple of quarters where we had relatively good margin development in Food & Water. There were two main factors impacting the margin development in the quarter. One was that invoicing lagged somewhat behind expectations in certain area, affecting utilization and absorption rates somewhat in parts of the business. The second issue was that costs associated to the footprint program in parts of the Food & Water business was relatively high, specifically on the Food & Water division in the quarter.
Other than that, the business was running pretty much as usual. Moving on to the Marine division, both invoicing and margin continue to develop well, or even very well, I may say. Despite the low order intake in Q2, the order book remains on historic high level for the Marine business. In several areas, in fact, the division continued to grow. The service grew, as I indicated before, with double digits for the first time that I've seen, at least in my history in Alfa Laval. Boilers grew based on strong yard contracting for tankers in the second half of 2018, which was materializing for orders in the boiler business at this point in time. As expected, of course, the ballast water environmental applications continued to grow in the quarter as a part of the ramp-up that is expected.
Let's move to the two areas of weakness then. Regarding the pumping systems, yard contracting has been weak the first half of 2019 for product tankers. The decline in the tankers was already, as you know, included in our comments already half year ago, after a strong contracting cycle in the second half of 2018. Largely, this is an effect of normal fluctuations between quarters and is not any fundamental change in the business per se. Regarding scrubbers, as we have indicated before, we did expect a slowdown in orders for scrubbers in the second half of 2019, and this follows a period of very strong demand with a long order book for Alfa Laval, resulting in long lead times for new orders.
Although there certainly has been a market for scrubber contracting also in quarter two, the orders in the market has favored clearly a short delivery time based on the fact that the payback cycles right now for scrubber implementations look favorable for the ship owners, and consequently, they have favored to get it installed as quickly as possible. Let me then say that compared to the scenario from the Capital Markets Day in 2016, which we have made public to you now for a couple of years, the ramp-up of orders has been somewhat quicker than we assumed back in 2016, with a strong focus on the implementation deadline of January 1, 2020. Looking forward, we have not changed our view of the scrubber market during the retrofit period, other perhaps than what we already started to indicate last year.
If anything, our original assumption of a retrofit period covering about 5,000 vessels will possibly be exceeded as a result of the very strong beginning of the ramp-up period up until today. Moving to service, it was a record strong quarter and in fact growth in all three divisions. Both Energy division and the Marine division grew double-digit, not so usual in our business. Partly, internal efforts are paying off, but partly, we also had tailwinds from reconditioning demand in certain sectors and some large orders that were further driving the growth of the service business orders in the quarter. You may want to notice that we also had a slight change in composition, especially in the Marine side, as capital sales decreased in the quarter and the service grew in the quarter. In fact, of the order intake in the Marine division, 38% came from service.
That was some time we were there, but it also show a little bit of the resilience of the business model that we have. Moving to the divisional summary, we had a sound financial development in the Marine division and in the Energy division with good invoicing and a good margin development. For Food & Water, we had some negative margin effects from certain costs in the footprint program, some elevation in the R&D cost, and in parts of the business, a bit of a temporary shortfall in the invoicing. Although order intake came in low in parts of the Marine division, we feel it was overall a good quarter, reflecting a good business condition in most parts of our business. Let me round off with a couple of geographical comments, let me start on the positive side.
We had two regions that stood out in terms of strong demand growth. It was Latin America and Eastern Europe, specifically both Russia and Brazil is now trending very favorably in terms of our order trends. In the three large regions of U.S., China, and Western Europe, they were all affected by partly the Marine contraction that we already discussed, and to a degree, also the low level of large orders that were affecting parts of their base markets in the quarter. Even with that said, the underlying business conditions in all three regions for us showed positive indications in Q2. With that, I'd like to hand over to Jan for some further comments on the financial performance of the quarter.
Thank you, Tom. This time, I will go straight into the presentation and make some final comments at the end. Starting with sales. We expected invoicing to be up in Q2 over Q2 last year, and we realized sales of SEK 11.3 billion in Q2, which is an all-time high for the group. As you can see from this slide, we ended up in line with our expectations, even as Food & Water came in a bit on the low side. With regards to Q3 sales, my outlook based on year-on-year performance is as follows: We expect a strong order backlog to support an invoicing level higher than the same quarter of last year and about the same as, level as in Q2. Looking at the gross profit margin, it came in 50 basis points above Q2 of 2018.
If you look at the reason for this, the net mix impact ended up being neutral year-on-year. While we did see a negative mix effect coming between capital sales and aftersales, this was compensated by positive impact from pricing updates made in late 2018. The impact from load ended up somewhat negative as we have built up capacity in the last 12 months. We had some productivity losses associated with ramping up the factory in Krakow. This negative impact was, however, fully offset by a positive impact from the net of PPV and metal prices. Finally, we did see a tailwind from FX in the quarter. To my outlook statement for Q3. This is what I do year-on-year. The starting point is the gross margin of 36.6%, as reported in Q3 of last year.
We do expect a negative capital sales after sales mix in Q3 as a consequence of the large increase in order intake we have experienced over the past year. We expect the load and PPV metals as a total impact to be neutral to slightly negative in Q3, considering recent metal price development. Finally, we expect to see a positive FX impact or effect in the quarter. Then, looking at key figures. The development of sales and gross profit we covered in previous slides. Then, looking at S&A, excluding FX and divestment acquisitions, S&A expenses were up 2% in the quarter and also year-to-date. This means that S&A in percent of sales have decreased from 16.6% to 16% year-to-date. This shows that we had a good cost control year-to-date and also in the quarter.
We continue to invest in product portfolio. R&D increased by 4% on a comparable basis. Moving over to other cost and income. Other income included a realized gain of SEK 196 million from the divestment of our air heat exchanger business in Greenhouse. While other income in Q2 last year included a gain of SEK 31 million from the sale of the shell-and-tube heat exchanger system business. Excluding these two non-recurring items, other cost and income showed a net cost increase of SEK 40 million. The main reason for this is the increased royalties paid to our ballast water joint venture partner following recent quarter of volume uptick. Regarding the operating income, please note that we had a loss of about SEK 15 million in Q2 2019 versus a profit of SEK 22 million in Q2 last year.
This loss in Q2 is related to cost for the sale of the air business. Financial net, excluding FX impact, was SEK -53 million. The tax rate was at 22.9% in the quarter. It was favorably impacted by low tax expense on the capital gain from the sale of the air business. We maintain our tax guidance of 26% going forward. EPS increased by 27% in Q2, partly due to the stronger EBITDA performance and partly due to the capital gain from the sale of our air business. Then, looking at the cash flow statement. The cash flow from operating activities decreased versus last year, as the strong operating result could not offset a buildup in working capital of approximately SEK 1 billion in the quarter.
This increase in working capital was primarily due to a buildup of inventories in the preparation of executing the very large 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 in customer advances. However, as the order intake for pumping systems and PureSOx, where we normally receive large customer advances, showed a significant decline in Q2, we have a temporary negative cash flow impact. We believe our working capital levels will normalize over the next quarters. Investing activities included CapEx investment of SEK 172 million, which follows the execution of our footprint program, as well as receiving a SEK 374 million payment from the sale of our air business in Greenhouse. The financial net pay, excluding FX impact, was a SEK -37 million.
This means our free cash flow in Q2 came in at SEK 479 million. On a separate note, Alfa Laval returned to the bond market this summer and issued a EUR 300 million bond in the quarter. This was a five-year bond to refinance a bond of similar size maturing in September of this year. The bond was oversubscribed close to 3x . Our net debt to EBITDA ratio stands now at 1.3, but excluding the lease liabilities that came in with the IFRS 16 implementation, it stands at 0.96. Looking at the FX impact in the quarter, it was a SEK +95 million. Both the transaction and the translation effects were a SEK +45 million each, primarily due to the stronger euro versus SEK.
The FX revaluation impact in the quarter was very small. Our projection for the full year of 2019 expects a total FX impact of a SEK +395 million. Then, looking at the order backlog, at the end of June, we had a total backlog of SEK 24.6 billion, a decrease to a negative book-and-bill of 0.88 in the quarter. Still, our order backlog has increased by close to 4% since end of 2018 at constant exchange rate and now represents 6.9 months of LTM sales. For shipment in 2019, the backlog amounts to SEK 13.5 billion. Looking at the sales bridge for full year 2019, starting with the sales in the first half of 2019 was SEK 21.5 billion. You had to add the backlog for shipment for the remaining part of 2019, which is SEK 13.5 billion, and this adds up to SEK 35 billion.
On top of that, you will of course have to estimate impact from prices, in-for-out orders, and FX effects. For your reference, the level of in-for-out orders in Q3, Q4 of 2018 was SEK 8.7 billion, excluding the business divested out of the Greenhouse division. That leads me to some final remarks from my side before I hand back to Tom. We had a record high invoicing quarter, which means we are executing well from our order backlog. We started to slow down our S&A towards the end of last year, which is now visible in our reported numbers.
We have now more or less concluded on the divestments from our Greenhouse division with capital gains that supported our EPS growth of 27% in the quarter. Our return on capital employed has improved and was 22.2% in the first half. Finally, we have a strong order backlog to support our sales growth going forward, and we have a strong balance sheet, which gives us possibilities to act from a strategic point of view. Back to Tom.
Okay. Thanks, Jan. Just rounding off with the forward-looking statement for the group, let me then first reiterate that we saw a firm demand situation in the second quarter other than specifically for the two areas in the Marine Division that we discussed earlier. We do not see a trend shift in our end markets moving into the short term and moving into Q3. Overall, we expect somewhat higher demand for the group in Q3 compared to the Q2 numbers. Specifically on the divisional level, we expect demand to be on about the same level for the Energy division and for the Food & Water division, and we expect demand for the Marine division to be somewhat higher. With that, we have concluded our presentation, we open for questions.
Thank you, ladies and gentlemen. We will now begin the question and answer session. As a reminder, if you wish to ask a question, you will need to press star and one on your telephone keypad. Your first question comes from the line of Klas Bergelind. Thank you. Please ask your question.
Yes. Hi, Tom and Jan, it's Klas Bergelind from Citi. The first one is on Food & Water, I guess several questions in one here. The lower project invoicing, was that demand related with customers delaying projects? How much sales was it? Should we expect invoicing here to pick up already in the third quarter? Finally, if that doesn't happen, is the 14% margin roughly what we should expect also into the second half? You said that you had costs for the footprint program, but I thought those costs were largely in operations and other and not in the divisions. The first question is really talk to sales and margin and how we can move in Food & Water into the second half.
Hi, Klas. Let me comment on your questions there. I would say the lower invoicing we saw in Food & Water in Q2 was really because of some lower revenue recognition of large projects. Hence, I think you should expect that this will come through in the coming quarters. No fundamental, let's say, reasons or problems that's causing this. It's more of a timing issue. When it comes to the footprint cost, that is sort of true that if there are specific footprint projects, they are sitting in operations. Of course, as we are implementing changes in the supply chain as we are doing, you could have, let's say, productivity situations that temporarily impacts also the business divisions.
On your guidance, Tom, you're guiding flat in Energy and Food & Water, and somewhat higher at the group level. That, when I do the numbers, suggests a pretty big pickup there in Marine if two divisions are flat, somewhat higher group level. Could you comment on what should pick up? Is it pumping systems, scrubbers? I would guess scrubbers as the weakness in pumping systems. Have you started or will it be more boilers? Just to understand a little bit your thinking there on Marine.
I understand your questions. The only thing I'm sure of is the more detail we go on guidance going forward, the more wrong we're going to be. Taking it to the divisional level, I think it's already as detailed as we would like to be. The comment I would make is that we will have difficulties to achieve our forward-looking statement unless we see a certain pickup in the areas that showed the biggest decline in the past quarter. I think from our comments on the quarterly volatility, all the quarterly volatility is to a degree a little bit difficult to nail down on the decimal. We haven't changed our fundamental belief that we are in two attractive businesses and how the orders will come. Let's see. For the quarter, in our outlook statement, certainly they play a role for us to be able to get there.
My final one is on services. When we look at some other machinery companies out there and those that have a lot of moving parts in their product portfolio, it's possible to grow services high single-digit in good times. This is a very solid quarter. When you look at the heat exchanger, for example, it doesn't have that many moving parts. Here's my question, really. What is the likely growth level for Alfa Laval in services when you look up an annual basis? Can it go to high single-digit organic? Thinking about what you're doing on the Marine side, better sales coverage, et cetera, or shall we live with sort of mid-single-digits also on an annual level?
Well, I think what we've communicated in the past is the mid-level. That's how we expressed ourselves. Given that for quite a few quarters, we've been below that, sure, to a degree, in some more challenging environment from 2016 onwards, changes in hydrocarbon drilling and other things that impacted us. We can look for all kinds of reasons for why our service growth was negatively impacted over a period of time, and that it to a degree is changing. I'd be happy to see, let us establish us on a new level now. I think per se that, and we've indicated that in our business plans and our strategy work in the group, that we may have the chances to take steps beyond the traditional nitty-gritty in the service business. We've been working on that for a couple of years now.
We see some indications coming through in the quarterly order intake. We should also recognize that there's a few larger orders reflecting a better hydrocarbon chain, by the way, that are coming back now after a couple of years of absence. There's also some effects from a more complicated fuel systems on board, from the result of the IMO January 1, 2020. It means that many ships will carry a more complex fuel composition on board. In the Marine Division, we see the impact on service reconditioning work specifically, and that will stay with us for a period of time. There will be a date when that will go back to normal as well.
Thank you.
Thank you. Your next question comes from the line of Jack O'Brien. Thank you. Your line is now open.
Hi. Thanks for taking the question. My first one is just on the environmental applications for Marine. I think, my notes serve me correct, you did about SEK 4 billion of scrubber orders in 2018 and SEK 1.6 billion for ballast, and obviously 2019 got off to a very good start in 1Q. What was the sort of proportion of environmental orders within Marine for 2Q, and what are your latest expectations for the full year, please?
Expectation for full years, we don't give that forecast. For Q2 alone, environmental amounts to about SEK 700 million. That reflects an okay development from the ballast side and obviously a big decline on the PureSOx side. I think our outlook statement gives you some indication. I don't think it's just that you should draw clear trend curves on the PureSOx. Because of the implementation schedule, it's been difficult to assess how orders will come, whereas as you know, the ballast side is a five-year implementation program for the ship owner. It's a much more consistent performance if we look quarter to quarter and the ramp-up process that we see. The way we feel around the ballast water right now is that we are in a ramping period still, and that may continue if things go well.
Whereas the scrubber, I think we will partly live with the volatility between quarters. At the end of the day on the scrubber side, we will have to see what the final retrofit market will be. We have indicated before and continue to do so that our original market scenario for scrubbers, which was around 5,000 vessels that we've been working with since the Capital Markets Day 2016, for those of you who have been with us, we have indicated already six months ago that there is a possibility due to the big ramp-up of scrubber implementations that we will see a higher penetration of scrubbers than the original 5,000. Let's see where it goes, that will obviously determine a lot, not only how the scrubber order intake looks next quarter, but let's say over the next two years.
Okay, thank you. Just switching tack to Energy, you mentioned one of the drivers behind your improving EBIT margin was positive mix from capital sales. Can you just help me there? Is that sort of end market related or product related? How should I think about that?
I would say it's mainly a product-related side. We don't give full transparency down on product levels when they come to margin, but you could look at it this way. Last year, I think we actually made that comment to you when we looked at the energy margin, we were invoicing some large petrochemical refinery orders in China, and they were large orders booked. We are very pleased that we had them.
We have a very strong position in that market in China, but they were taken at a very competitive situation. We had a certain margin dilution then. Now we've been executing a lot on base business, smaller orders that typically provide a better margin. This was not as an effect of service versus capital sales. It was really a pure capital sales mix. We have a number of capital sales product lines that provide margins well into our group margin target. That was what was happening.
Okay, thank you. Just one brief question to finish. You highlighted the Greenhouse divestment that completed. Should we be expecting any further divestments through the second half, or do you think we're done for now?
There is a very small unit left in the U.S. For technical reasons, we will maintain the reporting on the Greenhouse up until year-end because it is the most practical thing to do. In reality, there is only a few million U.S. dollars of sales in the remaining company, and we will find a way to divest it, or at least so it does not merit any attention from the capital markets at this point in time.
At a group level, sorry, I meant more at a group level. Should we be expecting anything from the other divisions?
Okay. Sorry. That is a good question. I obviously do not have a straight answer to you, but I think the fair answer is that the Greenhouse has given us both some experience tools for how we deal with turnaround situations within our own companies, because in broad-based industrial companies, you always have individual business that are not performing according to level. I think step number one for us is that there are some weakness areas in our group, of course, that we have under the loop, and we work with appropriate tools and a little bit of self-confidence in how we deal with it. It is also at the end of the day, there is a task of portfolio management for us on a group level to make sure that we are spending our efforts on businesses that have the potential to perform over time.
What we will not do is to create new Greenhouses. That is not going to happen. I will not exclude that we will not get into a situation here occasionally over the years to come, where we find that there are assets that simply need a better parent than Alfa Laval. It is not a big restructuring job in the group, but it is a prudent work on making sure our capital allocation and our management efforts are spent on those things that have the potential in the future.
Brilliant. Thank you very much.
Thank you. Next question comes from the line of Johan Eliason. Your line is now open.
Yes, it's Johan Eliason, Kepler Cheuvreux. Thank you for taking my question. I was just coming back to the scrubber again, looking at your presentation from the Capital Markets Day in 2016. You talked about this total 5,000 vessels, but that included both retrofits and new builds. Now you mentioned it seems that the retrofit market alone seems to be bigger than 5,000. Is this correct?
Sorry, it's a good analysis. I was maybe not specific enough. My comment was relating to the retrofit period. Of course, you're totally right. There is an element of scrubber installation also on the new build. For us, we always assume that the retrofit market, both in ballast water and in scrubber, the retrofit market would be the more attractive one because it is based on retrofitting ships where we already are with ship owners that we already have a tight collaboration with.
I think in hindsight, a couple of years in, we have realized that we certainly have a market potential and a market opportunity also in the new build. The variation hasn't perhaps been as big in terms of market share in the two sectors as we originally expected. You are right. We see a high degree on scrubber installations, I'm not talking about the market share now. I will not move into that. In general terms, in terms of large new-build ships, we see a high degree of scrubber installation on those as well. Yes, you're correct.
Good. That's what I thought. Just talking about this SEK 2 billion drop in orders pumping and the environmental, this seems to be a segment with above divisional margin. Should we worry about the margin those in a year's time or so?
Let me just remind everybody about the comments we made way back then. It is correct that the pumping systems has a higher than average group margin, that is supporting our margin development in the Marine division this year based on the order book from 2018. We've already made the comment that order book has a duration beyond end of 2019. There is no impact on invoicing and margin for the Marine business during 2019 when it comes to quarterly volatility in the pumping system business. With that, I have to add that, back then, we had a bit of a hesitant attitude in the pumping system business towards the offshore business because it is a large order type business, and different applications, by the way, also.
The offshore business as such doesn't necessarily hold the same margins as the cargo pumping, which is a critically important factor in the ship owner's profitability. There are some variations also within pumping systems. Depending on how the mix develops, there may be some variations on that. Largely, your comment and your reflection is correct. Pumping system provides above average margins. What the implications will be in 2020, I think that is too early to say. We may have relatively short cycles on the product tanker side. I think it's too early to speculate in terms of how will that play out in 2020. For the scrubber side, it is a similar situation what we've said in terms of comments.
Of course, you will appreciate that that business started almost from scratch a year ago in terms of actually starting to invoicing and order backlog. We want to see where this thing goes in terms of cost and implementation and commissioning and a whole host of challenges in order to handle a very quick growing business, which is starting from a very low level. That ramp-up is a big challenge for our organization as it is. The comment we've made and we stand by is that the scrubber business and the ballast water business combined, will not deteriorate the group margins, which is on, well, between the 15%-17% or whatever you want to call it then. That is including the fact that we pay half of the profits for the ballast water to our JV partners.
That gives you some indication on where you should expect to be. I would like to emphasize too that the order backlog for scrubbers is complete for 2019. We are non-affected this year by any order intake volatility in both of those areas. It's a bit too early, I think, for anybody, including yourself, to be overly aggressive in one way or another when it comes to the order intake implications for the invoicing in 2020. I'd leave that a quarter or so, if I were you, before moving into large conclusions.
Excellent. Just on the delivery schedule for your scrubbers. I understand you started invoicing significantly already this quarter. Will it be higher in Q3 over Q2 and Q4 over Q3, or how does the delivery schedule look for you?
I'm hesitating a bit because I'm not 100% sure what the answer is. We did have a fairly significant invoicing in Q2 already. Jan, do you have a-
You have to recognize that this is primarily something where we recognize revenue on a project basis. The revenue piece is a fairly smooth, let's say, development. Remember, we are still sort of ramping up that business during this year, executing on that backlog. My point is, from a revenue point of view, it is a much smoother development to be expected.
Okay. Thank you very much.
Thank you. Next question comes from the line of Max from Credit Suisse. Please ask your question.
Hi. Thank you. Just a quick question on scrubbers. I just wanted to understand, we've seen quite a lot of competitors bringing on some new capacity in the scrubber space. You've obviously been quite focused on maintaining margins, only taking profitable contracts. I just wanted to understand whether from your sort of team in that business, whether you've been more selective perhaps, and that had an impact on orders, or you recognize this as more of a broader slowdown in the market and your share remains fairly constant. Just any color on that would be helpful.
Yeah. I think it is a good question. In our mind, we've been having a product strategy, a pricing strategy, and a capacity strategy which we have stood by. I think this last quarter, there has been orders in the market that has not gone our way. I think with relatively long order lead times for us compared to what's been requested in the market, I think any change in commercial strategy would maybe have had limited impact. As we move into Q3, Q4, we already are past for any supplier in the market, the 2020 deadline, and I feel our lead times are back into a competitive territory almost automatically.
I think maybe that we've seen a tendency that with a 2+ year payback for a large vessel to implement the scrubber, perhaps the lifetime guarantee of Alfa Laval Global Service and Alfa Laval product quality with long lead times has been, rather to put the bet on getting something installed and get it to work and get the payback for the period that they were looking at. The risks, perhaps technical risks, has been assessed as not so big for certain ship owners during this quarter. My assumption is that our market share in a general speaking, a relatively weak quarter when it comes to new order is probably lower than it has been. That's a fair assumption.
Okay. Just on broader pricing in scrubbers, why would we not start seeing prices coming down when it looks like even if you look at your 5,000 forecast, and you look at what that implies for annual additions, it is a decrease versus the 1,500 additions we had in the market in 2018. At the same time, more capacity is coming on. I can't really see any possible reason for why pricing wouldn't start coming under pressure in this business.
You may be right. You may be wrong. I think our proposition when it comes to You can look at it two ways. You can look at welded product, that from a pure manufacturing point of view is not all that complex. That's true. You can also look at the lifetime performance guarantee with the global service organization. You have a significant issue when it comes to compliance in different jurisdiction, which will require advanced technical solutions, system solutions, and to a degree, connectivity solutions. Hence my comment is, for somebody who is looking for a two-year payback, get something on board in order to hustle through, in order to avoid a price delta, which make them uncompetitive in the market for a couple of years in terms of freight rates. The low-cost option may provide an attractive solution.
I'm not so sure as a ship owner with a lot of complex installations on board that you want to hassle too much with individual parts of your equipment without serviceability and without a track record in Marine. We moved into this for very strategic reasons as part of the broad part offering when it comes to exhaust lines and fuel conditioning lines.
What we see on the service side right now is a complex environment for the operators in terms of managing multi-fuels on board, and the growth in the Marine service business is to a reasonable degree driven by reconditioning in the engine rooms to be able to handle a complex fuel composition. I think any complexity for a ship owner when it comes to managing compliance on the other end of it, on the exhaust, is a significant challenge. Therefore, I think our belief is that there is a market for the Alfa Laval product offering and value offering in this business, which is distinct from providing a piece of welded metal on board.
Okay.
We'll see in the quarters down the road who's right, you or me.
Okay. That was a question, not a view. Anyway. Just the final question is on acquisitions. Is there any sort of update on how the pipeline is evolving, and how you're thinking about M&A in the current environment? Are you seeing opportunities out there? Do you feel this is the right time in the cycle to pursue larger M&A?
Well, we certainly set ourself up for being able to take advantage. My feeling around the M&A market is not that valuations from a structural point of view has changed dramatically. I think at least Alfa Laval is well set up to take advantage of it. In that case, should we hit a somewhat tougher macroeconomic environment down the road, I think from that point of view, it will only be beneficial for our opportunities.
I think it's also fair to say that as we moved into the new organization and our line managers has got comfortable and got their arms around their own operations, we are in the process of developing a stronger pipeline. As always, it's difficult to predict the outcome of it, but my own feeling is that we are getting a slightly more broad-based pipeline, both on the smaller complementary areas as well as perhaps some of the more structural opportunities we may see.
Okay, perfect. Thank you very much.
Thank you. Your next question comes from the line of Matt Scott. Please ask question.
Hi. Thank you for taking my question. First one is on scrubbers. How much of your 2020 pipeline is already filled? I think by this time of last year, you had already filled 2019. Maybe also, if we look at regions, China sales were down a little bit. Do you see the general more cautious ordering or sales environment or any general macro concerns also beyond China, where you see that some clients are delaying orders particularly, or a little bit more hesitant to sign as before. The last one, maybe on oil and gas. We've seen relatively strong declining rig counts over the past, I would say, weeks. Is it also what is shared by your clients? Do they overthink some investments in this area, or is it as planned as you have seen it at the beginning of the year?
I think, let's be a bit short on scrubbers now because we spent a lot of time on that. We are reasonably well contracted including Q1. After Q1, more and more opportunities are opening up. Something like that. I think by the end of this year, we will have a clear picture on the 2020 pipeline, and given that we have revenue recognition, as Jan says, on percentage of completion, this may be a more or less a smooth transition, depending on where things go. In terms of China, I would say, we don't really see any... There's somebody here who should be on mute. You have a lot of noise from the trading room or something. Okay. China, not a lot of uncertainties there when it comes to our business. If anything, we have seen somewhat strengthening tendencies in certain areas of our Energy business.
We are well aware, of course, and very attentive to the fact that we may see implications on trade wars and others on our Chinese business. That's not what we experienced so far. In fact, I would say that in certain areas like the oil and gas sector, we may see a drive towards more Chinese independence when it comes to the hydrocarbon chain going forward, which may actually drive some regional investments in Asia and China specifically, compared to where we've been historically. It may change, but we haven't seen that in Q2.
Finally, oil and gas. No, overall, no, we saw relatively few offshore orders in the quarter. We think that's a phasing more than a change of sentiments. I think overall, hydrocarbon were good. We were a bit weak on drilling and relatively good downstream. It wasn't a large order quarter, but all in all, we feel positive around the Energy as a whole and oil and gas specifically. All right. Are we good for one more or-?
No further questions at this time.
One or two questions, yeah.
No further questions at this time. Please continue.
Okay, very good. In that case, thank you very much for your attention, and have a good summer to all of you. Thank you.
Thank you.
Thank you.