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 a listen only mode. There will be a presentation followed by a question and answer session. I must advise you this conference is being recorded today, Monday, 23rd April, 2018.
I would now like to hand the conference over to your speaker today, Tom Erickson. Please go ahead.
Thank you very much. And again, welcome to the Q1 earnings call. Let me also, before starting, welcome Jan Alder to the team and to the first earnings call. And 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 Q1 of 2018. And 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 effects 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. So 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 20 eighteen-nineteen. And as a consequence, we will bring up our forecast for CapEx 2018 somewhat.
And with that, let me then go to the presentation mode, starting with the key figures. And 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 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 SEK 300,000,000. That project is up and running as it should. Perhaps the biggest surprise for us was related to the number of large offshore orders. And as you've seen throughout the quarter, we announced a total of $415,000,000 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. And 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, and 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. So 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 'fourteen, which was in fact looks like the highest one in our history, but that number has contained the currency revaluation of the existing order book to value of SEK 800,000,000.
So 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. So 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. And all in all, of course, we are meeting an increased volume and increased load after we have finished the restructuring program in largely in 2017. So we have a good productivity development in the group.
We have good control of headcounts, and we got good results of it. So 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 2 business units with a negative comparison in terms of volumes compared to Q1 2017. It is business unit welded and the business unit for decanters.
Those 2 are mainly affected by individual projects that are placed within or outside a specific quarter. So order books in both areas is strong and demand remains solid in those areas. So I don't see it as a trend number. But anyhow, compared to the previous to the quarter in Q1 2017, it is somewhat down. The rest of it is positive.
And 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. So 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 Q1, whereas last year, we had several large orders within the area. So the benchmarking numbers were tough.
Year on year. They were positive across the board. And in the sequential comparison, it's still good. And 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 Q1 of 2018. There are some variations between the end segments in Food and Water. But generally speaking, our end segments are developing well. And perhaps what is also nice to see in the Q1 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. And 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 'seventeen. And as we guided you already at the last quarter, we did not expect that to be repeated in Q1, 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. But 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 the scrubber 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 Q1 of 2018. And in addition, we had a very solid quarter on the ballast water side.
So 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 2,000,000,000 on a running 12 months 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 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. And 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. But as I said, we will update you within the context of our DUs 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 'seventeen and or continuing to this year to develop our service offering, the product offering and a number of support systems in the service area. And 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% to 9% up sequentially and year on year. So it was, especially for the Energy division, a very good performance on the service level. Now I'm very cautious to make and 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. And that takes us to the greenhouse. You have seen us announce 2 transactions during the quarter, 2 smaller parts of the greenhouse activities in heat exchanger systems and shell and tube products. We've signed agreements to divest those 2. We are expected to close those transactions in Q2.
They will not have any major impact on the financial statements of the group. The impact from order intake point of view on an annual basis will be in the order of magnitude of SEK 400,000,000. Obviously, there is more like a half year effect this year expected. So 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 with 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. So the public number is a bit lower, but we are comfortable in terms of where we are in the greenhouse and its development. So 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. But leaving that sequential development aside, especially China has been strong across the board in a number of applications 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. So 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.
So 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, but it was also highly influenced by the big offshore orders, and that gives the explanation for why the growth numbers are as high as they are. So 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. So that was the quarter, and 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. So 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. And 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, but they are relatively minor. It remains strong in most areas. The bigger deviations are more relating to large order placements. So that rounds up my comments on the quarter.
And with that, I will hand over to Jan for some further financial details on the quarter. Jan? Thank you, Tom. So let me just make some comments before I jump into the 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. And during the last 2 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 El Torval is very high, and I can see the new organization have created a lot of positive momentum. Some reflections on the Q1. So we see good volume growth driven by high demand in all our key end markets, energy, marine and food and water.
And 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 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. So 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 SEK8.8 billion in the first quarter, which is down 12% sequentially at constant exchange rates. Compared to Q1 of 'seventeen, we were up 9%. All divisions were up, but sales were especially strong in Energy Division at plus 27%. And 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. Then looking at gross profit margin. So the margin for the quarter was 38.3 percent, 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 off to Q4 was in the near term, we expect a diverse effect from somewhat higher metal prices. We expect positive impact from increased service share of total revenues, and we expect FX transactions effectively very limited and load 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 then move on to the next slide for some further comments on the gross margin. So if we start by looking year on 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 for metal prices we expected did not materialize in Q1, but rather a net positive impact. Loads and FX ended up as expected. Now the second forward looking statement. In the near term, we expect adverse effects from somewhat higher metal prices, negative FX transaction effects due to the weaker U. S.
Dollar as well as a small negative mix effect within capital sales and service. Load is foreseen to remain on the high level of Q1. Then to some highlights for the Q1. R and D ended at SEK 217,000,000 in the quarter, which is an increase year on year of 8.7%. And this is really to continue to support the focus efforts that we've done in certain product groups, such as high speed separation and the gated heat exchangers.
S and A was at SEK 1555 1,000,000 in the quarter, which is up 8.2% year on year, but down about 0.5% sequentially. Please note that other income included sales of the building in Peru with a gain of SEK 67,000,000. And secondly, we only had limited costs related to the footprint program in Q1, some SEK 20,000,000 out of the SEK 154,000,000 that we expect for the full year, and we expect these costs to come through mainly in the second half of twenty eighteen. Taxes ended up with a charge of SEK 420,000,000, I. E, lower than last year as Q1 of 2017 were impacted by a nonrecurring item of SEK113 1,000,000, if you remember, related to the Framat tax arbitration case.
Please note there are also a small one time negative impact on deferred tax provisions in Q1 2018 of about SEK 30,000,000 due to the reduced tax rate. And yes, we are sharpening our guidance and taxes. You should expect an average tax rate to the tune of 26 percent going forward as several countries have reduced their tax rate such as the U. S. And Norway.
And 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. Then talk about the restructuring program. So we now consider the S and A part of the program closed after having realized the last SEK 15,000,000 in savings. The remaining part of the program to be achieved in terms of people and savings relates to the restructuring of our manufacturing footprint. This runs as Tom's redeployment plan.
And as I said earlier, it's fair to expect that the remaining initiatives only will be employed towards the end of the year. We maintain our savings target for the complete program of SEK 500,000,000 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 pure ballast 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 Serbog to Cracow, as well as the Mover factory in Qingdao.
This latter move was triggered by local government in China, but it comes with opportunity as it enables us to scale up the scrubber production volumes. Separate separately 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.
Through the water also came in higher, again, thanks to better volumes, but also thanks to good continued good project execution. Then we'll move forward talking about the cash flow. Cash flow from operations ended at SEK 6 66,000,000, 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 Q1 at SEK 181 1,000,000, an increase of roughly SEK50 1,000,000. 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 braised heat exchangers and in our environmental products. Financial net paid, excluding FX impacts, were minus SEK 5,000,000 compared to minus SEK 27,000,000 last year. Free cash flow was at SEK 428,000,000, a decline compared to last year for 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 SEK 1.31 at year end. And just to round off our cash flow comments, you should expect CapEx somewhat above SEK 1,000,000,000 as Tom was commenting on earlier.
And secondly, as we grow our volumes, we will build working capital in line with our sales growth. Then let's talk a little bit about FX impacts in the year. And FX impact on EBITDA in the quarter was positive, some SEK 35,000,000. Transaction effects were positive SEK 25,000,000 due to the stronger euro versus SEK, while the negative impact from the weaker U. S.
Dollar could be offset by favorable hedges. The translation effect in Q1 was a positive impact of some SEK 10,000,000. Now as we look at the projection for full year, we do expect a negative transaction effect from the weakening of the U. S. Dollar, impacting open exposures of approximately SEK65 1,000,000 offset by a positive translation effect of the same amount due to the weaker krona.
Then let's talk about the order backlog. So we had a total order backlog at the end of March of SEK 19,500,000,000, representing approximately 6.5 months of sales, an increase due to a positive book to bill of 1.13 in the quarter. And if we look at the shipments in 2018 from the backlog, it now stands at SEK 13,400,000,000 at the end of March. This means an increase compared to the same period of 2017 with SEK 1,400,000,000. And that kind of leads us to the sales bridge for the year.
And if we start then with the sales that we achieved year to date, it stands at SEK 8,800,000,000. Then as I just talked about, the backlog of shipment for the remainder of this year amounts to SEK 13,400,000,000, which again is an increase of SEK 1,400,000,000 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. Now if we use the average FX rates during Q1, we would see a quite a limited impact for the full year.
However, if we use the closing rate at March, at the end of March, we see a fairly large impact up to SEK 1,000,000,000. And in this analysis, we are basically taking a midpoint of the SEK 500,000,000
for this purpose.
Then thirdly, as you know, we expect to close on 2 divestitures within the Greenhouse division during Q2, which will take out sales of some SEK 200,000,000 for the full year 2018. And this should add up to SEK 22,500,000,000. Now of course, then we have some unknowns, let's say. If we start with the in and out, well, for your reference, the level of in and out orders in the remaining 9 months of the year was SEK 15,200,000,000 in 2017. So should give a good reference there.
Finally, as you know, we had no acquisitions in 2017 to consider. But it's obviously an opportunity for new acquisitions in 2018. So that concludes my part, and I hand over
to Thor.
Thank you.
So for the forward looking statement, as indicated, we expect the demand in markets to continue on a good level in the second quarter. So our outlook for 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.
And we have the opposite situation in Energy, which did not have any large order bookings. The pipeline looks stronger for Q2, and consequently, our guidance comment for order intake for the Energy Division is higher. And 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. Your first question comes from the line of Klas Bergelind. Please ask your question.
Yes. Hi, Tom and John. It's Klas from Citi. A couple of questions, please. First, on the energy side, we have solid growth in services, which have been which we have been waiting for, and this is boosting the mix there.
But you still have a negative mix between capital sales and services. But 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. But how will this be phased?
Should we see the mix within capital sales improve already here in the Q2? Or is that weighted more to the second half?
Well, we are a little bit hesitant to predict profit margin development over the quarter. We had, on a year on year basis, a good improvement of the margin on energy. Clearly, service orders tend to be in for out in the year. So 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 the 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. If you remember, when we in Q4 talked about well in the oil and gas business, we said that at the peak, we were about SEK 8,000,000,000 and we were at the running rate in Q4, if I remember correctly, of around SEK5 1,000,000,000 to SEK6 1,000,000,000 and a fairly big part of that was related to the upstream carbohydrate chain as opposed to the downstream petrochemicals, if I remember correctly. So opposite.
Okay. I'm getting guidance here from my sorry, getting guidance here from my bad memory. But anyhow, we are not fully back on the level where we were, although it's a healthy growth compared to Q1 last year.
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 subscribers 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 could effectively lead to a bit more front end 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.
Well, the quotations have been high for a period of time, and 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 at the fabrication. It's not a very machine intensive area. So it's not capital intensive in that sense and therefore relatively easy to scale as long as you have the people, right? 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 waters, 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 1 as opposed to a ship class. But 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 EUR 150,000,000 or more costs for the year? Or are you increasing this as well, given your comments on CapEx? So you're increasing CapEx because of the strong growth. Does that mean that we should see higher cost in operations than others?
No, I think, Lasse, I think 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 sort of what was driving that given the growth has stayed, sort of recently while the growth has only just started coming through. So 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 growth the top line growth will be accelerating given where the backlog is.
So just a little bit on how we should think about that going forward.
Yes. 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.
And 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 and typically doesn't have of course, it's critical should it be needed, but it's not in the immediate cash flow of the offshore operator. And I think that reflects the fact that the competitive level and the pricing margins in offshore are not on the same level. So I would give that as a slight caution. Then we are back to the normal guidance that as volume grows, of course, the mix between service and capital sales will be somewhat affected. So 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. And just one follow-up would be around the balance sheets and acquisitions. Just maybe if you could comment a little bit on sort of how you're thinking about acquisitions at the moment? Is this taking up sort of more of management's time this year than it did last year?
And 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 sort of relatively expensive when you look at the pipeline of deals?
Yes.
Yes. 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 and perhaps we didn't have the capacity to be as active on the M and A side as we normally would have been. It wasn't that we didn't consider it important or have made any particularly strategies around it. It's just that I think we're probably on a step to say that we asked for organic growth, we got it. And now we are where we are.
The pipeline on M and A is probably, if you look at it historically, reasonably strong, and that's driven by the fact that there is a lot of owners that find it an opportune moment to look for a divestment. And 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.
And that has held us back in some processes. But of course, our balance sheet and firepower is in place. And we are probably working a bit more actively with it now just because we've come through a very intense period internally 2016, 2017. So 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 things that you 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's where we have been involved?
Well, it's a relevant question. We realize that there is a fairly large element of opportunism in M and A. An asset is up there, and it's a yes or no. And we can't control what the lead flower looks like. And we do consider that there are opportunities in all areas of business.
So out of principle or out of portfolio management only, we will not say no to any given deal. But 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 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 is obviously has some importance for us.
Perfect. Thank you very much.
Your next question comes from the line of Sven Wier. Please ask your question.
Yes. Thank you. Good afternoon. Three questions. Please maybe you can ask them 1 by or answer them 1 by 1.
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. And as you're correctly noting, initially, that was a bit of a new built phenomenon as expected. But yes, now there are discussions on existing fleets that are under dialogue or under quotation processes, yes.
Okay. Thank you for that. And then
and 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 20 16, we might be on margin a little bit more positive to how we see the business opportunities going forward.
Okay. The second one is on offshore. The big tickets you saw, obviously, was quite crowding of orders towards the end of the quarter and in offshore. I mean, do you see that largely as pent up coming through that has built over the last 3 years of the downturn? Or would you take that for any initial sign of a pickup in offshore given that the oil is above 70 now more sustainably possibly?
Well, I mean, they come and go a little bit in terms of projects. So I wouldn't over interpret the fact that we had a number coming of them coming relatively close. But 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 twenty seventeen or something like that. So 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. But 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. And 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.
So 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.
And the last question is just on the cost savings, the remaining SEK 155 million to come mostly next year. Is there any divisional SKU of those?
Yes. I'm thinking about whether I in the back of my head have a number. I would indicate that probably in 'nineteen, the effects should be biggest on the Energy Division if there is any SKU. Okay. Thank you very much.
Thank you.
Your next question comes from the line of Peter Froelen. Please ask your question.
Yes. Good afternoon. On the leverage, Tom, you mentioned reasonable leverage in your opening remarks. I didn't sound entirely happy to that. And 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. So 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. The we made some adjustment then 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 16%. And consequently, right now, we 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 6 to 12 months. We see it in multiple ways in our books. I think we will expect to see additional resources, additional ships 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. So I think we hit the mark as of now. And I think it's 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, I mean, it was quite lumped when it comes to large size orders. But 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 sort of is likely here? I mean, large size orders in my book should be at least, to some extent, correlated with the base business, which has been very strong.
So do you see the quarter as sort of unusual in that sense? Or is it just large size orders in the energy side is sort of extremely lumpy?
Well, it's always it's a bit lumpy when it comes to large orders. So it was 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. But 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. So it certainly indicate in general strong end markets pretty much across the board.
And 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. And in that absence of those, that was really the only end segment that didn't show significant positive growth year on year.
All right. Clear. Final one. You mentioned the greenhouse divestments not being a large sort of financial impact. But could you tell us whether dilutive or the opposite on the profitability, although I mean the profitability is not it's a couple of percent, but even though?
Well, 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 2 point something as opposed to the 5%. We don't have a guidance exactly how that hit, but let's say that they are not above average for the greenhouse. And so with the $200,000,000 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. So I also have three questions. The first one is on CapEx. You've increased the CapEx guidance somewhat 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 to answer that question. I think the earlier guidance that we gave was that you would see an additional SEK 700,000,000 coming through in 20 eighteentwenty 19 on top of the normal 600 kind of level. So I think you should look at the additional guidance that we gave to kind of follow that same pattern. So meaning that if you look at about the $1,000,000,000 level this year with some, or should we say, a couple of 100 on top of that, But not a significant, I think, change for 2019 at this point. But I think when you look at the capacity, again, I think you have to look at it from a kind of a staged approach.
I mean, 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 Braze and some of the environmental products. So it is a continuous decision that we are taking here.
Okay. So it sounds like you're not confident that we will return to sub-two percent CapEx to sales ratios in the longer term.
Yes. I mean, I think the guidance is that we've given is for 2018 2019. I think once we are further down the line, we can give you more guidance.
Okay. That's good. And then I want to follow-up on environmental products as well. I think, Tom, you mentioned during your presentation that the 2016 picture that you gave at your Capital Markets Day was valid. But 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 in the originally at the Capital Markets 16, and we didn't make any adjustment to that market in any major way. So I meant 16, But I don't think that you should
There are actually quite big differences between 2016 2017. So 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, so here's the story. After 2016, the delay of the implementing the ballast water directive happened. And of course, all of us, including you, London, said what's going to happen to the ballast water retrofit business given that there was a 2 year delay? Was it going to go 0?
Was it going to stay flat? Was it going to where was it going to go? And we said that we expect the market to be the same, but it will be dragged out in an additional 2 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. So I think the shape of the curve changed a bit, but the area under the curve was the same. And that's where we've been standing by.
My comment today is 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 market today, if anything, we are probably somewhat more positive in our outlook. But 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. And 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. And of course, we still don't know.
We just conclude that for these 2 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. But as I indicated, maybe given the activities in the retrofit market that the upside overall is a bit larger than we thought during 'sixteen. So I hope that clarifies the situation to you. That is as accurate as we can.
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, but that makes sense. And then may I ask you, maybe you don't want to give an answer to this, but looking at your projections, I mean, demand is expected to more than double basically this year compared to last year. But as far as I understand, those charts are actually talking about installations or revenues and not necessarily order intake. So when looking at your order intake in 2017, I think you had orders in combination of ballast water treatment systems and scrubbers of SEK 1,600,000,000 Could we 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. We may come what come may. At the moment, we are on a healthy level and we are and you can figure out where we are Q1 versus Q1 last year because we gave you those numbers back then. So 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. And I confirm in 3 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, 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 can or how that affects your outlook.
So just a comment on visibility there. And then last, just a quick one on working capital. I wondered, obviously, 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 next, I guess, 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 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. It was strong and we came in well in energy despite no large order. We didn't necessarily know whether there would be an order or 2 of large or not in the quarter. But 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 of the large order discussions indicates to us that we are you might see a couple of announcement on large orders for energy.
And if not, tone down my guidance as we approach the Q2. But 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 is a couple of pieces here. I mean, if you look at the receivable side, I think that normally kind of develops along with your volume, your invoicing pattern. We haven't seen any extension of the terms in any way or overdue is growing in any way. So 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 netted off the customer advances. So 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, that's part of manufacturing. But so I would say that's how I see it. So 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 Liddy. Please ask your question.
Good afternoon. On the Greenhouse businesses, I mean, 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 the we have now divested 3 units from Greenhouse, 1 in the U. S. Last year and 2 in this quarter.
And that is 3 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. So 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 will 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. It's from our business portfolio and the size of it, probably the more strategic asset.
And as we indicated before, we're going to have to make a decision there whether there is a way to reintegrate at the higher profitability than it was or to find an investment. And I should hope that towards the end of this year, we will have a good answer for you.
Okay. And on the CapEx, the increase, is that 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, yes, the increase is just to be so we are clear, the original increase of CapEx beyond our normal level of $600,000,000 $700,000,000 that is the footprint program, and that's a one off program that is concluded in 2019, and that's that. So if there's any further investment decision taking, they are on a separate program and under a separate decision, and we are not there. So what comes in addition now, and we'll see where we'd be exactly during this year for the CapEx side, are some selective capacity investments that we are making. 1 of them have been announced before. That was in the braced 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. And 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 5 ship 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. And for the moment, we haven't closed any of the existing operations, and we may look at temporarily for quarter 2, keeping some parallel activities going to match a high demand situation. So I think we are in a relatively good position. But the net answer that you're asking for is that, yes, we pricing.
And maybe going forward a little bit more conscious about the pricing situation.
Thank you. And finally, on the welded heat exchangers, you said the decline was the non repeat of the large downstream orders. If you exclude that, how much growth is there in the normal business, excluding
the large business? Well, we're not too detailed on that. But we have a very good growth on the service business in that area. And 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. And so obviously, with no large orders in the quarter, that was a direct effect on welded. So 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 Christer MacNeger. Please ask your question.
Hi. Christer Meinegold 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 and 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?
I mean, not in euros, but maybe I'm expressing myself a little bit uncareful here. We, of course, are well aware about the hedges that we have, and typically they run on the alloy side for 12 months. So 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. And in fact, we had a positive carryover from 'seventeen into Q1 'eighteen that was bigger than we expected. So I don't want to make it a major part of the results analysis, but I think my comment is more to be taken that sometimes you get a little bit of headwind in a number of areas, and it helps you to deliver a strong result.
And certainly, this was on the plus side of the result analysis for the quarter. For the rest of the year, we expect to be sort of more or less in line with where we were at the costing update and our standard costing for the year. So we don't expect a lot of surprises when it comes to changes in material cost 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 Brorson. Please ask your question.
Yes. Hi. Actually, my question was exactly around that, the purchase price variances. But 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. But that will not have even if it would be implemented, it doesn't look like it would have a major impact for us for the year. So 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 then, we're going to have to take your last question here? We are having our AGM very shortly. You're all welcome, but I suppose most of you will not come. So but we're going to have to run off here in a few minutes. So we take the last question now.
There are no further questions at this time, sir. We continue.
Okay. Wonderful. Thank you very much. Well, in that case, thank you all. And if not before, we will meet up after the Q2 in July.
Thank you.
That does conclude our conference for today. Thank you all for participating. You may all disconnect.