Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Alfa Laval Q1 earnings conference call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you this conference is being recorded today, Monday 23rd of April 2018. I would now like to hand the conference over to your speaker today, Tom Erixon. Please go ahead.
Thank you very much. Again, welcome to the Q1 earnings call. Let me also, before starting, welcome Jan Allde to the team and to the first earnings call. You will hear from Jan in just 10 minutes in the presentation. Before going into the presentation, as usual, a couple of overall comments as introduction. We had a positive demand development, especially during the later part of 2017, and that trend clearly continued into the first quarter of 2018. We do expect demand to continue on approximately the same level into Q2 this year. We had a positive development on both gross margin and the profit margin in the quarter, and largely the effect were coming from improved productivity across the entire organization.
We had on top of that, I might add, a relatively clean quarter, so a lack of bad news you could say, but also some unexpected tailwind from purchase price variances due to old hedging positions and others. We came in well on the profitability in the quarter. Finally, we are continuing the investment program into our supply chain with the already announced footprint program that is running according to plan. In addition, as a result of the increasing demands, we are taking measures to further make selective capacity investments during 2018-2019, and as a consequence, we will bring up our forecast for CapEx 2018 somewhat. With that, let me then go to the presentation mode, starting with the key figures. Essentially, obviously it's positive numbers this time on the year-on-year comparison, we are up on all dimensions.
What is nice to see is that the invoicing is now showing a clear positive trend following as expected, of course, the order intake growth that we started to see in 2017 and that continued in this quarter. It's also good to see that the profits are growing faster than the volume, which means that we had a reasonable drop-through in the quarter, and getting some leverage out of the increased volumes that we are passing through Alfa Laval at the moment. In terms of the highlights, we announced a large brewery order in the beginning of the quarter to the value of 300 million SEK. That project is up and running as it should. Perhaps the biggest surprise for us was related to the number of large offshore orders.
As you've seen throughout the quarter, we announced a total of SEK 415 million of large orders in the offshore sectors, orders that are totally referable to pumping systems and consequently booked in the marine division. That came in perhaps a bit higher than we expected and also account for the fact that our guidance was a bit on the low side given where we ended up in the quarter. You may also notice that we don't have any explicit reference to the environmental products in terms of invoicing or order values for ballast water and scrubbers. We will at this quarter cease with a detailed guidance on those numbers.
We consider it as of now an integrated part of our product portfolio, we will talk about the progress in those areas as we do with the rest of our business in the context of our various business units. I'll be back with a few comments on that later on in the presentation. In terms of the orders, you may see a quarter in Q4 2014, which was in fact looks like the highest one in our history, but that numbers contained a currency revaluation of the existing order book to a value of SEK 800 million. Excluding for the revaluation effects, actually Q1 2018 was an all-time high. It's all-time high for the group. It's also all-time high in a number of specific product areas in the company.
It was a good quarter from an order intake point of view, well ahead of last year as indicated. It is relatively strong across most markets and most applications, so it's not a specific area which is driving the growth at this point in time. In terms of profitability, we had a margin improvement at just below 17%, a bit higher than we were. I would say most of the effect, as I indicated to you, came from the improved gross margin. All in all, of course, we are meeting an increased volume and increased load, after we have finished the restructuring program largely in 2017. We have a good productivity development in the group. We have good control of headcounts. We got good results of it. From the entire organization, it was a well-executed quarter.
Looking at the business units, again, it's pretty much positive across the board. There are two business units with a negative comparison in terms of volumes compared to first quarter 2017. It is business unit welded and the business unit for decanters. Those two are mainly affected by individual projects that are placed within or outside a specific quarter. Order books in both areas is strong, and demand remains solid in those areas. I don't see it as a trend number, but anyhow, compared to the first quarter in 2017, it is somewhat down. The rest of it is positive, as I said, it mirrors the fact that we see a fairly broad-based recovery in our markets at this point in time. I will be back to Greenhouse comments also later. Let us cover then the divisions, starting with the Energy Division.
We had a strong development in the Energy Division, especially given the fact that we didn't have any large orders placed in this first quarter, whereas last year we had several large orders within the area. The benchmarking numbers were tough. Year-on-year, they were positive across the board, and in the sequential comparison, it's still good. Perhaps the one area which you should put some attention to is Energy Separation. That was on the weak side during 2017, but picked up significantly in Q1, a little bit as expected, I must say, given the fact that we see increased activities in the drilling sector and upstream energy markets in general. Moving to the Food and Water Division, we had a strong 2017 in the Food and Water Division, and we continued on a strong level and improved level during the first quarter of 2018.
There are some variations between the end segments in Food and Water, but generally speaking, our end segments are developing well. Perhaps what is also nice to see in the first quarter is that we continue with a very solid execution of our large projects, which means that we didn't have any bad news coming from the product portfolio, which is currently under execution. That was a trend that we highlighted to you during last year. It remained in this quarter, and it's an integral part of the profit improvement that we've seen in the Food and Water Division over the last few quarters. Going on to the Marine Division, we have a very strong order intake on a year-on-year comparison, somewhat down sequentially.
The sequential downturn is entirely related to the fact that we had an exceptional order intake from the tanker market for pumping systems towards the end of 2017, and as we guided you already at the last quarter, we did not expect that to be repeated in first quarter, which indeed it wasn't. On the other hand, we did book a number of offshore businesses, as you know, and that compensated to a degree for that. All in all, it was a good order intake quarter for the Marine Division. Boiler and gas systems were flattish, but boilers were actually a bit up based on contracting volumes from end last year, whereas discover demand was a bit down compared sequentially to Q4.
The business unit separation and heat treatment grew sequentially, and that is entirely related to the improved contracting rates during 2017 and we see those effects in our books in the first quarter of 2018. In addition, we had a very solid quarter on the ballast water side. All in all, if we look at our environmental applications for scrubbers and ballast water, we are sequentially relatively flat, which means that the business level of around SEK 2 billion on a running 12-month level during Q4 is repeated in Q1. Our indications to you in terms of the environmental applications for marine, which we gave at the Capital Markets Day '16, has so far proven to be relatively accurate. The market has developed in line with those curves. You have them in our presentation material from the Capital Markets Day.
We, as a company, have developed well in line with that situation. Today, if anything, we are perhaps somewhat more optimistic around the business opportunities in these areas. As I said, we will update you within the context of our BUs going forward, as opposed to providing specific numbers on each application. Moving on to service. I indicated to you at the Q4 report that the service development in 2017 was not entirely to our satisfaction. It was a black zero in terms of growth, a little bit positive, but really not on the level we want to see. We've been working hard in 2017 and are continuing into this year to develop our service offering, the product offering, and a number of support systems in the service area.
I'm happy to say that, at least in this quarter, we had a good development on the service business order intake overall. We are 7%-9% up sequentially and year-on-year. It was, especially for the Energy Division, a very good performance on the service level. I'm very cautious to extrapolate a trend on this. We've seen variations between quarter and expect also to see that during 2018, but at least we're off to a good start in service for this year, and that feels good after all the work that we've been investing into this area. That takes us to the Greenhouse. You've seen us announce two transactions during the quarter, two smaller parts of the Greenhouse activities in heat exchanger systems and shell and tube products. We've signed agreements to divest those two. We are expected to close those transaction in Q2.
They will not have any major impact on the financial statements of the group. The impact from a order intake point of view on an annual basis will be in the order of magnitude of SEK 400 million. Obviously, there is more like a half year effect this year expected. As I indicated, it will not be a major impact on the financial statements from the group. Other than that, from an operational point of view, the profitability on the Greenhouse activities has stayed on the level we want to see it, approximately at the 5% profitability margin. We do have some restructuring costs still charged to that division. The public number is a bit lower, but we are comfortable in terms of where we are in the Greenhouse and its development. Let's then round off with some comments on the different regions and top 10 markets.
Asia remains strong. Last quarter, you might remember that we had 40% of the group intake coming from Asia. It was a very high number. We are still on a very good number, but perhaps at a slightly more normal level of 35% of the group order intake. Sequentially, Northeast Asia is affected by the reduction of orders in pumping systems. Leaving that sequential development aside, especially China has been strong across the board in a number of application, and the development in the Asian region as a whole has been positive. North America, positive sequentially and year-on-year. Especially, I would say in the quarter, Canada came in very strong and made up for the entire growth of the North America, to a large degree driven by increased demand in the Energy Division. Latin America looks stronger than it is.
Obviously, the large brewery order affects the numbers in Latin America, they are good. Even without the order, we've been having a slightly better situation in Latin America this year so far than during last year, which was weak for us in general, we felt. It's trending in the right direction from a relatively modest level. Europe, Western, Eastern Europe, a bit of a mixed picture. Western Europe, strong last year, a little bit down, partly driven by large orders and how they are booked, but not a big trend change in Western Europe, and variations between individual markets, pluses and minuses. Eastern Europe, approximately the same situation.
Nordics, very strong numbers, but again, it was a good quarter for the Nordics, it was also highly influenced by the big offshore orders, that gives the explanation for why the growth numbers are as high as they are. All in all, when we look across the globe, markets in general are developing still positively, good momentum in China, good momentum in North America, stable in Europe. That was the quarter, that takes us to the top 10 markets. I'd like to quiz you on which market has left the top 10. You might not remember, but if you don't, it's France. India, maybe as they should, have taken the position number 10. They've been there before, and we've been seeing a better business environment in India later, that's a positive development.
The other positive change that we have is that, after actually a period of time now, we finally have Japan in positive numbers compared to last year. That's not only a marine event. It's actually a more positive development in Japan in general in the quarter than we've seen in the past. Other than that, there are some variations between markets compared to the full year 2017, they're relatively minor. It remains strong in most areas. The bigger deviations are more relating to large order placement. That rounds up my comments on the quarter. With that, I will hand over to Jan for some further financial details on the quarter. Jan?
Thank you, Tom. Let me just make some comments before I jump into the detailed numbers here. Well, first of all, I'm excited to be part of Alfa Laval and come back to Sweden after 23 years outside the country. As you might know, I've been part of the ABB Group during the last 26 years, in various global and regional roles. During the last two months, I've met a lot of people and visited quite a few operations and really received a great welcome into the company. I can tell you the energy level in Alfa Laval is very high, I can see the new organization have created a lot of positive momentum. Some reflections on the first quarter. We see a good volume growth, driven by high demand in all our key end markets, energy, marine, and food and water.
As we are coming out of a cost reduction program, this volume growth gives us a good leverage on our EBITDA margin. This, in combination with the reduction of our tax rate, contributed to the strong net income and EPS growth of 35% in the quarter. Secondly, although we are investing in both our new product development, in our manufacturing footprint, as well as our increasing our working capital tied to our volume growth, we could increase our return on capital employed to 18.5% and further reduce our net debt to EBITDA ratio to 1.23. As Tom covered the order intake, I will make some comments on the sales figures. The guidance for sales after Q4 was that we believe that a lower invoicing should be expected in Q1 compared to Q4, a guidance based on seasonal pattern.
As you know, we realized sales of SEK 8.8 billion in the first quarter, which is down 12% sequentially at constant exchange rates. Compared to Q1 of 2017, we were up 9%. All divisions were up, but sales were especially strong in Energy Division at +27%. Net sales in service increased by close to 8% versus last year. Let me then deliver the first forward-looking statement. We believe that invoicing should be somewhat higher in Q2 compared to Q1. Looking at gross profit margin. The margin for the quarter was 38.3%, an increase of 1.2% compared to Q1 of 2017, and 2% compared to Q4 of 2017. Historically, a strong margin level. The guidance that we gave after Q4 was, in the near term, we expect adverse effects from somewhat higher metal prices.
We expect positive impact from increased service share of total revenues, and we expect FX transactions effect to be very limited and low is foreseen to remain on the level from Q4. That means with the gross margin at 38.3%, we came out somewhat better than our expectations. Let's move on to the next slide for some further comments on the gross margin. If we start by looking year-over-year, we benefited from higher volumes and a better load in many of our factories and also positive PPVs. We saw a small negative mix effect between service and capital sales. Sequentially, we benefited from positive mix effect between service and capital sales, as well as strong margins on our service deliveries in Q1.
We also had a positive impact from PPVs, meaning that the headwind from metal prices we expected did not materialize in Q1, but rather a net positive impact. Load and FX ended up as expected. The second forward-looking statement. In the near term, we expect adverse effects from somewhat higher metal prices, negative FX transaction effect due to the weaker US dollar, as well as a small negative mix effect between capital sales and service. Load is foreseen to remain on the high level of Q1. To some highlights for the first quarter. R&D ended at SEK 217 million in the quarter, which is an increase year-over-year of 8.7%, and this is really to continue the support, the focus efforts that we've done in certain product groups, such as high-speed separation and the gasketed plate heat exchangers.
S&A was at SEK 1,555 million in the quarter, which is up 8.2% year-on-year, but down about a half a percent sequentially. Please note that other income included sales of a building in Peru with a gain of SEK 67 million, and secondly, we only had limited costs related to the footprint program in Q1, some SEK 20 million out of the SEK 150 million that we expect for the full year, and we expect these costs to come through mainly in the second half of 2018. Taxes ended up with a charge of SEK 420 million, i.e. lower than last year as Q1 2017 was impacted by a non-recurring item of SEK 113 million, if you remember, related to the Framatome tax arbitration case.
Please note there was also a small one-time negative impact on deferred tax provisions in Q1 2018 of about SEK 30 million due to the reduced tax rate. Yes, we are sharpening our guidance in taxes. You should expect an average tax rate to the tune of 26% going forward, as several countries have reduced their tax rate, such as the U.S. and Norway. As I said, as I started this, earnings per share increased by 35%, primarily due to the strong EBITDA performance and the lower tax expenses. Talk about the restructuring program. We now consider the S&A part of the program closed after having realized the last SEK 50 million in savings. The remaining part of the program to be achieved in terms of people and savings relate to the restructuring of our manufacturing footprint. This runs, as Tom said, according to plan.
As I said earlier, it's fair to expect that the remaining initiatives only will be implemented towards the end of the year. We maintain our savings target for the complete program of SEK 500 million, with the remaining savings to have a gradual effect in 2019. A few comments on footprint initiatives already completed. As you probably know, we have moved our PureBallast production to the marine center in Aalborg to enable the ramp-up of delivery volumes, and our automated distribution center in Kolding is fully up and running. Other projects already under implementation include the move of the decanter factory from Søborg to Kraków, as well as the move of factory in Qingdao. This latter move was triggered by local government in China, but it comes with opportunity since it enables us to scale up the scrubber production volumes.
On a regular capacity adjustment, it is important to point out that given the order volume development over the past year, we will eventually have to start adding people. On the divisional performance, let me just give some short comments on the operating profit performance by division. Energy came in higher than last year, thanks to much better volumes, as I said before, despite a worse capital sales to service mix. Marine was also stronger than last year, thanks to better volumes and a positive price mix in capital sales. Food and Water also came in higher, again, thanks to better volumes, but also thanks to continued good project execution. We'll move forward talking about the cash flow.
Cash flow from operations ended at 666 million SEK, a decline compared to last year, coming from higher working capital due to the increased activity level, partly then compensated by higher profits and lower taxes paid. CapEx ended above last year level for the first quarter at 181 million SEK, an increase of roughly 50 million SEK. Please note that the sale of the real estate in Peru, which explains why investing activities are down versus last year. We are investing more than previous years because of footprint-related investment and investment to increase our manufacturing capacity, as for example, in the brazed heat exchangers and in our environmental products. Financial net paid, excluding FX impacts, were minus 5 million SEK compared to minus SEK 27 last year.
Free cash flow was at 428 million SEK, a decline compared to last year really for positive reasons, meaning an increased level of activity in the company. The cash flow in Q1 brought our net debt to EBITDA ratio down to 1.23, as I said before, which compares to 1.31 at year-end. Just to round off our cash flow comments, you should expect CapEx somewhat above 1 billion SEK, as Tom was commenting on earlier. Secondly, as we grow our volumes, we will build working capital in line with our sales growth. Let's talk a little bit about FX impacts in the year. FX impact on EBITDA in the quarter was positive, some 35 million SEK. Transaction effects were positive SEK 25 million due to the stronger euro versus SEK, while the negative impact from the weaker US dollar could be offset by favorable hedges.
The translation effect in Q1 was a positive impact of some 10 million SEK. As we look at the projection for full year, we do expect a negative transaction effect from the weakening of the US dollar, impacting open exposures of approximately 65 million SEK, offset by a positive translation effect of the same amount due to the weaker krona. Let's talk about the order backlog. We had a total order backlog at the end of March of 19.5 billion SEK, representing approximately six and a half months of sales, an increase due to a positive book-to-bill of 1.13 in the quarter. If we look at the shipments in 2018 from the backlog, it now stands at 13.4 billion SEK at the end of March. This means an increase compared to the same period of 2017 with 1.4 billion SEK.
That kind of leads us to the sales bridge for the year. If we start then with the sales that we achieved year to date, it stands at SEK 8.8 billion. As I just talked about, the backlog of shipment for the remainder of this year amounts to 13.4 billion SEK, which again is an increase of SEK 1.4 billion compared to the same period last year. We got then to the FX translation. This impact is of course, very difficult to estimate considering the volatile FX situation. If we use the average FX rates during Q1, we would see quite a limited impact for the full year. However, if we use the closing rate at the end of March, we see a fairly large impact up to 1 billion SEK.
In this analysis, we are basically taking a midpoint of the SEK 500 million for this purpose. Thirdly, as you know, we expect to close on two divestitures within the Greenhouse division during Q2, which will take out sales of some SEK 200 million for the full year 2018. This should add up to SEK 22.5 billion. We have some unknowns, let's say. If we start with in and out, well, for your reference, the level of in and out orders in the remaining nine months of the year was SEK 15.2 billion in 2017, so it should give you good reference there. As you know, we had no acquisitions in 2017 to consider, but there's obviously an opportunity for new acquisitions in 2018. That concludes my part, and I hand over to Tom.
Thank you. For the forward-looking statement, as indicated, we expect the demand in markets to continue on a good level in the second quarter. Our outlook for the intake is on about the same level as in Q1. We have variations between the divisions, mainly related to large orders. Marine is expected to continue on about the same level. Food and Water is expected to be lower, primarily driven by a non-repeat of the large brewery order booked in Q1. We have the opposite situation in Energy, which did not have any large order bookings. The pipeline looks stronger for Q2, consequently, our guidance comment for order intake for the Energy division is higher. With that, presentation is concluded, and we are now open to 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, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one on your telephone. Your first question comes from the line of Klas Bergelind. Please ask your question.
Hi, Tom and Jan. It's Klas from Citi. A couple of questions, please. On the Energy side, we have solid growth in services which we have been waiting for, this is boosting the mix there. You still have a negative mix between capital sales and services. I wonder what can happen to mix within capital sales going forward. You have built a nice backlog in the hydrocarbon chain where gross margins are typically healthy. We previously talked about that most of the orders in oil and gas last year will be invoiced this year and could improve the mix. How will this be phased? Should we see the mix within capital sales improve already here in the second quarter, or is that weighted more to the second half?
We are a little bit hesitant to predict profit margin development over the quarter. We had on a year-over-year basis, a good improvement of the margin on energy. Clearly, service orders tend to be in and out in the year. That gives us some tailwind, but we also see a steady growth from the capital sales period as well. I think I'll leave my comments there. You're going to have to do all your conclusions as to how the mix are. You should though remember perhaps that the upstream oil and gas, it's good now in Q1. It's been a little bit subdued also in 2017.
Thank you. If you remember when we in Q4 talked about where are we in the oil and gas business, we said that at the peak we were about 8 billion SEK, and we were at the running rate in Q4, if I remember correctly, of around SEK 5 billion-SEK 6 billion, and a fairly big part of that was related to the upstream hydrocarbon chain as opposed to the downstream petrochemicals, if I remember correctly. Opposite. Okay. I'm getting guidance here from my bad memory. Anyhow, we are not fully back on the level where we were, although it's a healthy growth compared to Q1 last year.
Thank you. My second one is on the scrubbers question on lead times. What kind of lead times are we talking about on your side? If someone orders a scrubber today, when can you deliver it? We're hearing 6 months, but that lead times can soon be extended to 9, 12 months as we approach IMO 2020. This could effectively lead to a bit more front-loaded ordering of scrubbers. I'm interested to hear if this is the case, if you're seeing the quotations improving here on the scrubber side this quarter.
The quotations have been high for a period of time. I don't see any big change on that. It's clear that, if you look at the scrubber business, it is a business which has its, let's say, bottleneck related to engineering capacity for the systems and to a degree, perhaps, welding capacity fabrication. It's not a very machine-intensive area, it's not capital intensive in that sense, therefore, relatively easy to scale as long as you have the people. That's where the bottleneck sits. I think it's fair to say that lead times are in the process of getting longer. I will not give a definite number of months because it may depend on the size of the orders, the number of ships that are relevant for the installation.
It's obviously, at this point in time, easier with quotations that are not for a single ship, requiring engineering on one as opposed to a ship class. I think you've seen in the market some announcement related to a longer order time, and I think it's fair to say that that's the direction it's heading.
My final one is on operations and other. Are we still looking for SEK 150 million or more costs for the year, or are you increasing this as well, given your comments on CapEx? You're increasing CapEx because of the strong growth. Does that mean that we should see higher cost in operations and others?
No, I think, Klas, you should expect that we stick to our previous guidance. I don't see a reason to change that now.
Thank you.
Your next question comes from the line of Max Yates. Please ask your question.
Thank you. Just my first question would be around marine margins. Obviously, you've seen pretty good development year-over-year in the last couple of quarters, and I really wanted to understand what was driving that, given the growth has only just started coming through. If you could give a little bit of color, how we should think about the operational leverage of the division as we move into the next few quarters where the top-line growth will be accelerating given where the backlog is. Just a little bit on how we should think about that going forward.
Yeah. It's true there's been a bit of bumpiness in the marine margin looking back. I think we are approximately where we expected to be, at the current level and current activity level. On a gross margin level, we see the marine side being relatively stable. We've also, I think, indicated to you previously that while pumping system for us is a very good area, the pumping system business for offshore is not on the same level as it is when it comes to product tankers. The way you might want to think about that is that a system to product tanker is critical for the earnings potential of a ship as they go in and out of the harbors.
Whereas our offshore business is related to fire pumping water and other water applications, of course, it's critical should it be needed, but it's not in the immediate cash flow of the offshore operator. I think that reflects the fact that the competitive level and the pricing margins in offshore are not on the same level. I would give that as a slight caution. We are back to the normal guidance that as volume grows, of course, the mix between service and capital sales will be somewhat affected. I think you will see some arrows pointing upward and some pointing downwards in your diagram. I think that's as far as we can go in comments.
Okay. Thank you. Just one follow-up would be around the balance sheets and acquisitions. Just maybe if you could comment a little bit on how you're thinking about acquisitions at the moment. Is this taking up more of management's time this year than it did last year? Perhaps also how you're viewing valuations at the moment for any potential targets out there. Are they at levels that you find acceptable, or are you still finding things, on balance, relatively expensive when you look at the pipeline of deals?
Yeah. I think the honest comment on if we look at what we did last year, we ended up working a lot with our strategic agenda, perhaps we didn't have the capacity to be as active on the M&A side as we normally would have been. It wasn't that we didn't consider it important or have made any particular strategies around it. It's just that, I think we're probably honest there to say that we asked for organic growth, we got it, and now we are where we are. The pipeline on M&A is probably, if you look at it historically, reasonably strong, that's driven by the fact that there is a lot of owners that find it an opportune moment to look for a divestment.
Of course, as you are alluding to, the reason why the transaction volume is going up is that the prices are good for seller. Whether they are good for buyer, totally different thing. We've been walking out of a number of processes based on price. We will not execute transactions that we don't feel are appropriate for the company, but also for the shareholders, that has held us back in some processes. Of course, our balance sheets and firepower is in place. We are probably working a bit more actively with it now just because we've come through a very intense period internally, 2016, 2017. Let's see. I will not give you any commitment what's going to happen, but we are actively looking and working on it.
Okay. Is it fair to say that the processes you've been involved with are skewed towards any one of your divisions, or are they sort of broadly across each of the divisions that you've been involved?
No, it's a relevant question. We realize that there is a fairly large element of opportunism in M&A. An asset is up there, it's a yes or no, we can't control what the lead flow looks like. We do consider that there are opportunities in all areas of business. Out of principle or out of portfolio management only, we will not say no to any given deal. As I have indicated before, if we strategically are looking a bit stronger into any particular area, I would say it is within the area of the Food and Water Division, covering water applications, food application, and to a degree, biotech applications. After a string of M&A activities in Marine and Energy, it would be nice to be able to make some adjustments to the balance between the divisions, let's say.
I think for long-term capital allocation, that obviously has some importance for us.
Perfect. Thank you very much.
Your next question comes from the line of Sven Weier. Please ask your question.
Yeah, thank you. Good afternoon. Three questions, please. Maybe you can answer them one by one. The first one is a follow-up on the scrubbers. I was just wondering if the quotations are still very much focused on new builds, or do you also see a bit of a pickup in the retrofit? That would be the first one, please.
I think it's fair to say in both the scrubbers and the ballast water, we see retrofit orders coming. As you're correctly noting, initially there was a bit of a new-build phenomenon, as expected. Yes, now there are discussions on existing fleets, that are under dialogue or under quotation processes, yes.
Okay. Thank you for that.
I might add to you in this context, that is perhaps also part of the reasons for why, if anything, compared to our original estimates 2016, we might be on margin a little bit more positive to how we see the business opportunities going forward.
Okay, thank you. The second one is on offshore. The big tickets you saw obviously was quite a crowding of orders towards the end of the quarter and in offshore. Do you see that largely as pent-up coming through that has built over the last three years of the downturn? Would you take that for any initial sign of a pickup in offshore, given that oil is above 70 now more sustainably, possibly?
Well, they come and go a little bit in terms of projects, so I wouldn't over-interpret the fact that we had a number of them coming relatively close. With that said, it's clear that a lot of the boardroom decisions for new capital expenditures into offshore drilling, that was happening probably second half of 2017 or something like that. The pipeline was there, the leads were there. We have a problem sometime to guess which one we are winning and which quarter they're going to come in, so it came in a little bit stronger. I think our read is that we will see a period now where the offshore will certainly be stronger than it had been for a number of years for good reasons. We see projects under dialogue which are not exclusively related to the North Atlantic.
We will see offshore projects in other parts of the world, too. I will not give a prognosis for what that means for Q2, Q3, but generally speaking, we are in a much better place with offshore now for a period of time than we were.
The last question is just on the cost savings, the remaining 155 to come mostly next year. Is there any divisional skew of those?
Yeah. I'm thinking about whether I, in the back of my head, have a number. I would indicate that probably in 2019, the effects should be biggest on the Energy Division, if there's any skew.
If there's any skew.
Okay. Thank you very much.
Thank you.
Your next question comes from the line of Peder Frölén. Please ask your question.
Yes, good afternoon. On the leverage, Tom, you mentioned reasonable leverage in your opening remarks. You didn't sound entirely happy to that. Given what you see in terms of raw material increase, and also you need to add personnel to handle the order book, what have you done in terms of prices so far this year, and what are you looking at here?
Well, the raw material part is, as Jan said before, reasonably hedged. We are not driven by cost reasons internally to manage our pricing that actively this year for that reason. To the degree we are pricing according to cost, which is not our main pricing philosophy, by the way, that is not a big pressure on us this year. We made some adjustment end of last year to our general list pricing, as we always do, and that's really what we've done. When it comes to manning, yes, we are expected to increase. We are below the headcount, everything included, contractors and temps and all of that. In operations, we're lower than we were in 2016. Consequently, right now, at some point in time, I think we are hitting, how much can we get out of the existing team?
We had a very good development now over the last six to 12 months. We see it in multiple ways in our books. I think we will expect to see additional resources, additional shifts coming in some areas, and to a degree, that will be offset by divestments in Greenhouse, and to a degree, it will be offset by implementation of the new operation structure and footprint coming into play in 2019. I think we hit the mark as of now, and I think as long as we stay on the current production volumes or in the region, we are good for a year plus.
That sounds good. When it comes to the Energy Division, it was quite lumped when it comes to large size orders. Given what you talked about, where we are versus the peak and also the other signals that you have been pretty clear in telling us, what do you think is likely here? Large size orders in my book should be at least to some extent correlated with the base business, which has been very strong. Do you see the quarter as unusual in that sense, or is it just large size orders in the energy side is extremely lumpy?
Well, it's always a bit lumpy when it comes to large orders. Let's say it was not any surprise for management the way the large orders came through, other than perhaps a little bit on the offshore side, as I indicated before.
It's true, as you say, the base business was indeed very strong. The orders booked in Q1 was a good mix, solid from a base business point of view, solid from a service point of view. It certainly indicates, in general, strong end markets pretty much across the board. The one area which is weak for the Energy Division in the quarter is the petrochemical side, which is as it should normally be, very dominated by large orders. In the absence of those, that was really the only end segment that didn't show a significant positive growth year-on-year.
Very clear. Final one. You mentioned the Greenhouse divestments not being a large financial impact, could you tell us whether it's dilutive or the opposite on the profitability? Although, the profitability is a couple of %, even though.
What we see operationally right now is for the Greenhouse as a total, around 5% margin. There are some cost burden on that. That's why you see two point something as opposed to the five.
We don't have a guidance exactly how that hit, but let's say that they are not above average for the Greenhouse. With the SEK 200 million of impact, the profit impact is relatively small. The margin impact is weak positive.
Very clear. Thank you so much for your answers.
Thanks.
Your next question comes from the line of Andreas Koski. Please ask your question.
Thank you very much. I also have three questions. The first one is on CapEx. You increased the CapEx guidance for 2018. I just want to make sure that you are confident that you will be able to return back to 2% or less in relation to sales going forward.
Maybe I can start answering that question. I think the earlier guidance that we gave was that you would see an additional SEK 700 million coming through in 2018-2019 on top of the normal SEK 600 kind of level. I think you should look at the additional guidance that we gave to kind of follow that same pattern. Meaning that if you look at about the SEK 1 billion level this year with some, or should we say a couple of hundred SEK on top of that, but not a significant, I think, change for 2019 at this point.
I think when you look at the capacity, again, I think you have to look at it from a stage approach. We have added the capacity in terms of adding shifts, adding some temporary people. Eventually, you have to start adding some more full-time. We have also announced capacity investments earlier, for example, in brazed and some of the environmental products. It is a continuous decision that we are taking here.
Okay. It sounds like you are not confident that we will return to sub-2% CapEx to sales ratios in the longer term.
Yeah. I think the guidance is that we've given is for 2018 and 2019. I think once we are further down the line, we can give you more guidance.
Okay. That's good. I want to follow up on environmental product as well. I think, Tom, you mentioned during your presentation that the 2016 picture that you gave at your Capital Markets Day was valid. I just want to make sure that you meant 2017.
No, I typically mean exactly what I say. The curve and projection that we gave was originally at the Capital Markets Day 2016, we didn't make any adjustment to that market, in any major way. I meant 2016. I don't think that's an issue.
There are actually quite big differences between 2016 and 2017. It's now back to 2016 that we should look at.
No, that's not what I said. The ballast water projection was affected by the fact that we had. Okay, here's the story. After 2016, the delay of implementing the Ballast Water Management Convention happened. Of course, all of us, including you, wondered, "What's going to happen to the ballast water retrofit business, given that there was a two-year delay? Was it going to go to zero? Was it going to stay flat? Where was it going to go?" We said that we expect the market to be the same, but it will be dragged out in an additional two years, which from my point of view, was not necessarily a bad thing, because it will give us a longer period to actually meet the demand, which otherwise would be very tight and compressed when it came to the whole retrofit period.
I think, the shape of the curve changed a bit, but the area under the curve was the same. That's what we've been standing by. My comment today, just not to create a lot of unease or bad feelings around the financial community here, was just to say that if anything, when we look at those projections for scrubbers and ballast markets today, if anything, we are probably somewhat more positive in our outlook. I think, as we go forward, you will see other people than us making predictions for what that market should be. It was very difficult 2016 for us as well as for you to judge what is this business, how should you look at it, what is the potential, where can Alfa Laval be?
We felt it was our duty to give you at least a scenario to the best of our knowledge for what it potentially could be. Of course, we still don't know. We just conclude that for these two years, we've been reasonably in line with that forecast that we gave to you. We still believe that that is, to the best of our knowledge, how it will go. As indicated, maybe given the activities in the retrofit market, that the upside overall is a bit larger than we thought during 2016. I hope that clarifies the situation to you. That is as accurate as we can provide.
We appreciate that you actually provided us with your forecast. I just wanted to make sure whether you were actually referring to 2016 or 2017, that makes sense. May I ask you, maybe you don't want to give an answer to this, looking at your projections, demand is expected to more than double basically this year compared to last year. As far as I understand, those charts are actually talking about installations or revenues and not necessarily order intake. When looking at your order intake in 2017, I think you had orders in combination of ballast water treatment systems and scrubbers of SEK 1.6 billion. If your projections are right and you maintain your same market share, could we see a doubling in order intake for you also in 2018?
I leave that to your own analytical capability. Come what come may, at the moment, we are on a healthy level, you can figure out where we are Q1 versus Q1 last year, because we gave you those numbers back then. The year started well. Let's see where we end up. I think in general, we were still on an uptick trend in this area. That's our expectations, I confirm in three quarters whether you were right.
Thank you very much.
Your next question comes from the line of Alexander Virgo. Please ask your question.
Thanks very much for squeezing me in. Just a quick couple. One, I wondered if you could talk a little bit about the visibility that you have, I guess, particularly in Marine and Energy in terms of the pipeline. I know you said you have a strong pipeline in energy as you look forward. I'm just thinking more about what surprised you in this quarter and how that affects your outlook. Just a comment on visibility there. Then a last, just a quick one on working capital. I wondered, obviously, a manufacturing business builds working capital as growth is so good, and that's fine, but I just wondered if you could talk a little bit about how that develops over the rest of this year and into next. That would be super helpful. Thank you.
All right, thanks. I'll take the first one, I'll let Jan take the second one. In terms of the order situation for the quarter, what surprised us, as well as I indicated a bit, the offshore strength was a bit of a surprise. If anything else, it was probably the base business in Energy. We came in well in Energy despite no large order. As it came out, the end number was good with a mix that was good. I guess our guidance into Q2 is driven by that to a degree when we're saying that the transparency on some of the large order discussions indicates to us that you might see a couple of announcements on large orders for Energy.
If not, tone down my guidance as we approach the Q2. All in all, we think end markets and demand levels in general are stable at this level for the quarter. That's how we feel about it.
Very helpful. Thank you.
Your next question.
Well, I think I owe you an answer on the working capital side there, Alexander, right? I think there's a couple of pieces here. If you look at the receivables side, I think not abnormally developed along with your volume, your invoicing pattern. We haven't seen any extension of the terms in any way or overdues growing in any way. I think that's quite natural, that develops with your volume growth. On the inventory side, the way we look at it is that we net that off the customer advances. We are working very actively, and I can tell you the cash culture here is very strong, meaning that you have the strong push for advances to net off the inventories. It doesn't mean that inventory won't grow. They will, you know that's part of manufacturing. I would say that's how I see it.
Yes, it will grow as the invoicing grows, and we are trying to, of course, do everything to control that in a good way.
Okay. Thank you.
Your next question comes from the line of Glen Leedy. Please ask your question.
Good afternoon. On the Greenhouse businesses, you're clear that you're still expecting a margin of around 5%. Should we expect further disposals during the course of this year?
You shouldn't expect it. It's a possibility. I think we have now divested three units from Greenhouse, one in the U.S. last year and two in this quarter. That is three smaller units, and we felt that they, in various ways, benefited from sitting in an ownership structure with a strategic owner with a vested interest specifically in those. We are very pleased with the homes, and we've taken great care when it comes to the processes for our existing customers as well as employees that we'll find a good way for these businesses to go forward. The biggest unit that we have left now in the Greenhouse is Air. That is the lion's share of the Greenhouse. From our business portfolio and the size of it, probably the more strategic asset.
As we indicated before, we're going to have to make a decision there whether there's a way to reintegrate at a higher profitability than it was or to find an investment. I should hope that towards the end of this year, we will have a good answer for you.
Thank you. On the CapEx, the increase, you're saying that's because of growth. Are there any capacity bottlenecks at the moment that would prevent you from growing any of the elements of the business during the course of this year?
Well, yeah. Just so we are clear, the original increase of CapEx beyond our normal level of SEK 600 million-SEK 700 million, that is the Footprint Program, and that's a one-off program that is concluded in 2019, and that's that. If there are any further investment decision taking, they are on a separate-
Program and under a separate decision, and we are not there. What comes in addition now, and we'll see where we'll be exactly during this year, for the CapEx side are some selected capacity investments that we are making. One of them have been announced before. That was in the brazed unit, for the U.S. There are some areas that we are now reviewing and making decisions on during this year for implementation, with a lead time of about 12 months, I would say in general, for those. They are across a number of the units where we see we will run out of capacity in the short term. There are ways to deal with capacity situation in the meantime. One of them is to go up in shifts, for example.
That's not necessarily great in our operations to run on a five-shift basis, but we can, and we will in some areas. In some areas, we have additional capacity within our Footprint Program because we are investing in new facilities for the footprint consolidation. For the moment, we haven't closed any of the existing operations, and we may look at temporarily for quarter two, keeping some parallel activities going to match a high-demand situation. I think we are in a relatively good position, but the net answer that you're asking for is that, yeah, we probably would have sold a little bit more if we were big on capacity in some areas. That makes us a little bit more selective, and maybe going forward, a little bit more conscious about the pricing situation.
Okay. Finally, on the welded heat exchangers, you said the decline was the non-repeat of the large downstream orders.
Yeah.
If you exclude that, how much growth is there in the normal business, excluding the large orders?
We're not too detailed on that, but we have a very good growth on the service business in that area. When it comes to base business, which has been historically the smaller part of welded, I believe it's okay in the quarter. I'm waiting to get a different comment on the room, but I think that is my recollection. I have indicated to you when we formed the business unit structure that you should expect welded to be perhaps the most volatile unit of them all because they tend to go with a relative big share in terms of large orders. Obviously, with no large orders in the quarter, that was a direct effect on welded. I hope that gives you sort of the.
That's great. That's everything from me. Thank you.
Your next question comes from the line of Krister Maneej. Please ask your question.
Hi. Krister Maneej from DNB. Short question. You mentioned raw material costs and that you expected that to be a headwind in Q1, but that your hedges saved you. We actually saw a tailwind in Q1. Is it possible to give some kind of specification or how big the hedges actually helped you in Q1?
Not in EUR, but maybe I'm expressing myself a little bit careless here. We, of course, are well aware about the hedges that we have. Typically they run on the alloy side for 12 months. When we do our standard costing, at the end of every year, we were working with our material assumptions into the standard costing for 2017. In fact, we had a positive carryover from 2017 into Q1 2018 that was bigger than we expected. I don't want to make it a major part of the results analysis. I think my comment is more to be taken that sometimes you get a little bit of headwind in a number of areas. It helps you to deliver a strong result. Certainly this was on the plus side of the result analysis for the quarter.
For the rest of the year, we expect to be more or less in line with where we were at the costing update and our standard costing for the year. We don't expect a lot of surprises when it comes to changes in material costs as the way it looks right now compared to our assumptions for the year.
Okay, thanks.
Your next question comes from the line of Lars Brorsson. Please ask your question.
Yeah. Hi. Actually, my question was exactly around that, the purchase price variances. Just to be clear, Tom, can I just ask how much of your U.S. sales is manufactured domestically, and how much of that steel and aluminum is sourced domestically in the U.S.?
Well, we did a review on our manufacturing footprint and where we were in the U.S. Aluminum is not a big issue for us, not in the U.S. and not elsewhere. We have some exposure for steel imports, depending on where they come from and depending on who is exempt. That will not have a-- Even if it would be implemented, it doesn't look like it would have a major impact for us for the year. I wouldn't lose sleep over the raw material situation the way it looks like right now. I think we got it under control.
Got it. Thanks.
Can I just also add, we're going to have to take a last question here. We are having our AGM very shortly. You're all welcome, but I suppose most of you will not come. We're going to have to run off here in a few minutes, so we'll take the last question now.
There are no further questions at this time, sir. We thank you.
Okay, wonderful. Thank you very much. Well, in that case, thank you all, and if not before, we will meet up after the second quarter in July. Thank you.
That does conclude our conference for the day. Thank you all for participating. You may all disconnect.