Welcome to the Alfa Laval Q3 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. I must advise you this conference is being recorded today, Wednesday, October 25, 2017. And I would now like to hand the conference over to your speaker today, Mr.
Tom Erickson. Thank you. Sir, please go ahead.
Thank you very much, and good morning, everybody, to the Q3 earnings call. And Thomas and I, we will share this presentation. Let me start as usual with a couple of upfront comments before we go into the presentation. Firstly, we felt we had another solid quarter in terms of order intake with year on year plus 15%. It was clearly a quarter with strong base business for us across the board.
And as you noticed in terms of large orders, relatively weak compared with the latest quarters where we've been on a higher level. In terms of the division, in order intake, it's clearly the Marine division that stands out, driven by both solid demand for Alfa Raval's environmental products in both areas as well as a positive ship mix with effects on both pumping systems and boilers. And lastly, when it comes to the profitability margin, we are pleased with the slow but still steady margin improvement that we saw in the quarter, ending at 16% despite somewhat weak invoicing supported by the restructuring programs that we're going through and clear improvements in profitability in both Energy Division and in the Food and Water Division, more than compensating for the somewhat expected decline on the marine side. And with that, let me go to the key figures. And just reflecting on the year to date numbers, our order intake year to date is plus 15% just as we end quarter 3, So a stable growth trend that we've seen this year and with a marginally positive book to bill again for the Q3 in a row.
We see a small decline in the sales for year to date as well as in the quarter. And despite some pressure on the sales line reflecting the weak order book from last year, the profit margin goes in the right direction. In terms of the large orders, there were 2 announced in the quarter. Both are really good projects for us, waste keep recovery, which is the stronghold of Alfa Laval. So 2 good orders on the value of €11,000,000 clearly a bit lower than we've seen in the last few quarters.
I'd also like to highlight the order intake side on pure ballast, which is continuing on a relatively strong level and way above last year's and pretty much flat compared to last quarter with €192,000,000 And as we indicated to you earlier, when the implementation was delayed on the PureBallast side, we still expect the business to continue to a degree, we certainly see that in the market. And Pure Stocks also delivered on a good value and a good number for the quarter at 170. So let me go over to the trend chart on the orders received. And as we indicated 2 years after Q2 that the Q2 was really a significantly strong order intake quarter for us. And in fact, you see that cleared on the chart.
We feel we pretty much ended up in our guidance comments to you where we said that we expect a significantly better order intake than the quarter 3 last year, but not on the same level as the brutally strong Q2. And that's in fact exactly where we ended up. I will come back to the guidance for the Q4, but let me already now mention that we expect the somewhat higher demand and order intake in Q4 compared to Q4. On the EBITA margin, as indicated, we see a stable to stable positive development in this year. We are at 15.9% year to date, up a little bit compared to last year, and we are on 16% in the quarter.
We had a good development in productivity in this quarter, well a job well done in operations and all in all, a solid development on the profit margin side. If we look at the orders on a business unit level and compare year on year, obviously, with 15% plus, most of the areas, almost all are, of course, positive. Let me mention that the greenhouse order intake, which is declining in Q3, is mainly related to the shutdown in one of our
Greenhouse Businesses in the U.
S. That has been loss making for a long period of time, and we obviously stopped order taking in that unit already during Q4, and that has affected the order intake in Greenhouse together with some other minor effects. There are also result effects on the greenhouse from the shutdown in the U. S. In quarter 3, and Thomas will come back to that on the profitability description.
Marine, it's nice to see positive across the board. As I indicated, this is partly a reflection of the good progress on Environmental Products, but we've seen a better ship mix developing this year than expected on both crude tankers and product tankers, and that has a good effect on our order intake for pumping system as well as for boiler systems. So Marine, we've seen an improved situation. And I remind you that we already at the Capital Markets Day last year indicated that the environmental product should be considered a balancing factor to the rather weak contracting at yards that was done in 2016. And this is in fact exactly what we are seeing.
All in all, we had in this quarter for the first time in a while a positive book to bill situation in the Marine division. And in that sense, there has been questions on when we hit the bottom, and I think now you see little bit the results on that. I would strongly at this point encourage you to join us at the Capital Markets Day in our Technology Center for the Marine Division in Orbois. And I know it has a bit of a traveling complications for you. We realized that when we booked it.
But if
you ever want to understand what we
are doing in the marine side and you're interested in this part of the business, you should really be there. Now let me go to the sequential comparison. And given that we are 11% below the order intake in Q2, which was really strong across the board, we obviously see mostly negative sequential comparisons here. In terms of the Energy division, if we start here, it is some effects both in terms of seasonality The The Braced unit, which has been a growth driver for us for quite some time, had a very exceptionally strong Q2. So the Q3 level there is still a very, very good level for us.
So while it does look a little bit tough with the minuses, we feel it's pretty okay in terms of its underlying performance. The food and water had a decline, but again, they remain on a high level. We've been having a good growth trend in food for quite some time, And we do see some sequential decline there to some degree related to non repeats. But nevertheless, it is the good level. And the one unit that has been performing very well for us for some period of time in the Fluid Handling business unit is also sequentially stable.
So all in all, relatively strong quarter from the Food and Water division. And then finally, again, back to the Marine division, we touched on it. There are good drivers in the Marine division with a good quarter. So we are very pleased with that, and I will not go further into that at this time. In terms of the development of our service business, I would say it's a little bit of a mixed picture.
All in all, year to date, we are 3% up. That's good. We are on a growth trend. Sequentially, we are down a little bit from a strong Q2, but we are making progress. With that said, in the growth period that we are in, we would like to see and have a slightly higher ambitions for the service growth.
So the 3% is perhaps not the stellar number that we want to see, but it was still for us year to date a reasonable situation and development on the service side. Then let me touch on the greenhouse. And I think the one number that you see there in terms of greenhouse making a loss is the decline compared to Q2, and that is totally related to our shutdown procedure. There are shutdown costs that we take over the P and L in Q3. The shutdown is completed.
We've been able to handle that process well when it comes to employees and to customers, but we're also taking a cost And the deviation you see compared sequentially compared to Q2 is entirely related to the shutdown of the unit in the U. S. Period. There's no other change in the underlying performance of the greenhouse businesses sequentially. Looking at the regions.
Obviously, the one number that stands out is the growth situation in Asia. And again, the recovery in the marine side has a big impact on our Asian business. We've seen some big minuses in the past when we took the decline, and we see obviously very strong development in Asia overall. Not only Marine, I would say, but it is reporting the very big number of 47% versus last year. In fact, in the quarter, Asia accounted for 40% of the group's total order intake, which is a high number for us and a currency situation.
The numbers in North America overall was very solid. We have a good growth situation. It was supported by a recovery, continuing recovery, I should say, in the oil and gas business, primarily in the upstream activities. Canada had a great quarter and to a degree so did the U. S.
On that note. So the slow but steady recovery that we were expected in oil and gas from an oil price somewhere in the region of 60 dollars continues pretty much as we have expected and commented to you earlier. The European order intake shows some minuses times. We've been having a good development in Western Europe for a period of time. So we think that the comparison is on a relatively high level.
We think Europe remains solid for us. And the two areas where we see some weaknesses in the quarter is Latin America, which has been a weak year for us all in all, although it's only 4% of our intake, but nevertheless. And in Eastern Europe, we've seen a weaker situation now in the quarter. So that gives you pretty much the picture, strong Asia, solid U. S, Europe okay on high level and some weaknesses in Latin America and Eastern Europe.
And let me, with that, go to the final Sorry, we got to hang up here on the hold a second, please. Okay. We're on. So let me then round this off with our top 10 markets. And in this picture, I would like to make 2 positive comments first.
The first one is South Korea used to be our 3rd largest market, and we had a significant downturn in Korea related to the marine situation. We had we were 70% down very quickly during last year, and now we see a combat in the Korea number. They are back on number 4, and they will clearly be shooting for position number 3 again. So that's a very nice development. The other aspect is that if you look across all of our top 10 markets, except Japan, we have a stable growth year to date.
And in fact, our 2 largest markets, the United States and China, is developing well this year, and that's obviously very positive to us. So the only negative slip there is Japan, where we haven't, for our order book, seen the positive development on the marine side yet. So with that, let me hand over for Thomas for some further details
on the financial development. Thank you. Thank you, Tom. So let's talk a bit about sales to begin with. Let me start off by reminding you that my forward looking statement for sales after quarter 2 was that we believe it's reasonable to expect an invoicing on about the Q2 level in quarter 3.
We realized sales of only SEK 8,200,000,000 in quarter 3, which is, of course, a decline of 5% like for like compared to quarter 2, and it's also a decline of 2% compared to last year. So in terms of invoicing, we ended up somewhat below our own expectations. The explanations being a lower invoicing mainly in the Marine Division and also slightly in the Energy Division. The vast majority of the shortfall is explained by a delay in delivery or revenue recognition for contract orders and will be recovered in the coming couple of quarters. I think it's very important to note here that it is not lost in any sense.
The orders are obviously there. It's merely a delay of either the delivery on the request of customers or a delay in Yes, then move on to a couple of comments on service. Service activities represented 31.2% of revenues in the quarter, a slight increase quarter on quarter or sequentially that is and year on year a 1.2% increase. So we are getting support, a mixed support from a higher proportion of aftermarket sales in this quarter. With that, let me then give you the first forward looking statement.
We believe that a higher invoicing should be expected in quarter 4 compared to quarter 3, a familiar seasonal pattern, as I'm sure you can recall from previous years. With that, let's move on to a couple of words on gross profit margin. We ended 37%, an increase of 1.3% compared to last year and an increase of 0.6% sequentially. Then again, let me remind you what I said 3 months ago. Then I said in the near term, we expect continued adverse effect from mix within capital sales.
We expect continued positive FX transaction effects and positive PVs. Load is foreseen to improve somewhat in a number of factories on the back of the increased order levels. The actual means that gross profit margin, I'm happy to be able to say, came out somewhat better than our expectations. The main reason being a better mix in capital sales in energy and a somewhat better project execution in food and water more than compensating the expected negative mix in capital sales in the Marine division. A few more words on that on the next slide.
Year on year, we were benefiting again from a better mix after sales to capital sales, as I mentioned before, certainly a better load in certain factories and as Tom said, giving a productivity improvement. FX transaction, of course, contributing. Purchasing variances, however, they were relatively small following the development of the prices for certain metals until recently. Sequentially, basically, the similar development as year on year with positive mix effects and so on. Let me then give you the second forward looking statement.
In the near term, we expect adverse effects from mix following expected higher capital sales revenues. We expect continued positive FX transaction effects. Load is foreseen to at least remain on the current level on the back of the increased order levels, but that's with a caveat for the effects of Christmas and New Year. Moving on to the rest of the P and L. R and D, just over SEK 200,000,000 in the quarter, an increase like for like of 6.3%, totally in line with our planning to support focused efforts in certain product groups.
In percent of revenues, R and D ended at 2.5%, an uptick with 0.2% compared with a year ago. For quarter 4, I think I can say already now that you should expect an absolute increase in R and D cost in quarter 4, a typical, let's call it, seasonal effect when it comes to R and D projects are completed, tools are delivered and so on. Sales and admin ended just under SEK 1,400,000,000 in the quarter, a like for like reduction of 3.8% year on year, which is, of course, largely explained by the change program. And I think it's important to bear in mind that, of course, this includes salary inflation. So the like for like resource and activity reduction is more like, I would say, somewhere between 5.5% 6%.
So clearly evidence that we are realizing the effects of the change program. And even more importantly, we're holding on to the effects of the change program. Profit before tax, of course, a very significant increase compared to last year, almost entirely explained by the one off charge last year, but also somewhat reduced by negative FX differences in this year's financial net. Finally, taxes. There I mentioned with the quarter 2 report that you should expect a one off in quarter 3 relating to dividend distribution taxes from taking dividends out of our main subsidiary in India.
That actually happened, of course, and we're talking about a one off of SEK 100,000,000. The underlying tax charge is corresponding to our guidance of 28%. Obviously, the bottom line of all of what I've said is a significant improvement in EPS to 1.59 percent. And finally, on the returns, return on capital employed and return on equity, 17.3%
and 12.7%
to So then a few words on the change reorganization and capacity adjustment program. Totally, since end of June last year, we've reduced the headcount with 921 FT feet feet feet
feet feet feet feet feet feet feet
feet feet feet feet
feet Es. Some 700 of those are attributed to the program. The rest is, of course, regular adjustment of capacity. As for savings, we realized $90,000,000 in the quarter, and that means we are at 72% of the target of €500,000,000 on an annualized basis. So we are certainly very well in line with our plan.
Looking at the outcome for S and A, EUR 80,000,000 in the quarter means we're actually overshooting the target if we annualize the EUR 80,000,000. Euros But we are anticipating to add some overhead cost in completing the footprint the remainder of the footprint initiatives. We will be adding resources with the relocations to build up structures, to build up organizations and that will add some cost on the S and A side. Footprint, so far limited savings, but it's ramping up as we had expected. And another comment on the footprint, we closed the plant in Germany for welded heat exchangers end of September.
And as you heard from Tom, we closed the Shell and Tomb factory outside Chicago as per the end of September as well. So two loss sources are with that closed down. We maintain the overall targets of €500,000,000 1,000 FTEs. Then a few comments on the divisional operating profits. Energy came out higher than last year, thanks to better mix and, of course, benefits from the change program that I just talked about, that is to say lower costs.
Marine ended lower than last year, mainly, of course, due to volume and that, of course, combined with a negative mix due to less deliveries of pumping systems. That's where we had the vast majority of the decline in revenues in the quarter. FX and lower costs supported the operating profit on the other hand for Marine. Finally, food and water came out somewhat higher than last year, a combination of slight volume increase and lower cost basically explained by a better outcome for project execution. And then let me also repeat some of what Tom said about Greenhouse.
With the wind down of the factory outside Chicago, of course, substantial under absorption arose. We went from just under 100 people to 0 in the quarter. And of course, we've also had to realize some bad debts as we were closing down. So this closure is more than explaining the negative profit in or the loss in the quarter for Greenhouse. Underneath, there is a profit on the level of quarter 2.
Then cash flow. Cash flow from operations ended well above provision. Exclude the effects of the nonrecurring charge in provisions and accruals in last year's number. Regular CapEx, just under the level of last year. Cash flow was influenced on the investing side from the acquisition of remaining outstanding shares in a company named Changshan Engineering in Korea, a former Pharmo subsidiary.
And then finally, financial net paid negative €145,000,000 a negative some €125,000,000 larger than last year, of course, to do with realized FX variances and interest payments. Free cash flow just under SEK 800,000,000 almost exactly as last year. All in all, this cash flow has brought us to a debt to EBITDA of 1 point 6% compared to 1.9% a year ago. So a continued stable deleveraging of our balance sheet. Then FX, a small positive in the quarter, EUR 19,000,000, EUR 40,000,000 plus on transaction as expected and also as expected at the beginning negative translation due to the decline, the weakening of the U.
S. Dollar that we started to see in quarter 2. If we look at the full year forecast, slight increase from last quarter, EUR 20,000,000 from EUR 180,000,000 to EUR 200,000,000 on the back of the FX variations we've seen from end of quarter 2 to end of quarter 3. So for the last quarter, continued positive transaction effects and an increasing negative translation effect. Backlog on the next slide, SEK 18,700,000,000 as per end of September, representing 6.4 months of LTM sales, an improvement, of course, on the back of a book to bill just above 1.
For shipments before year end, a backlog of SEK 7,000,000,000 compared to just over SEK 6,900,000,000 last year, so a slight increase there as well. With that, let's move on to the sales bridge. Year to date sales, SEK 25,200,000,000 as you just saw, backlog for delivery this year, SEK 7,000,000,000 and I think it must be noted that there is, of course, a risk of delays for some of this backlog into 2018. Please remember what I said on my first slide when it comes to the lower invoicing in quarter 3. We expect a recovery over the next couple of quarters.
Then finally, orders in for our quarter 4 last year, SEK 3,000,000,000. With that, you get a subtotal of SEK 35,200,000,000 and a number is SEK 500,000,000 smaller than after end of the quarter 2. And of course, it is up to you then as always to think about what can be expected for infra auto orders this year compared to last year and consider any price effects. With that, I give the word back to Tom for the outlook and the closing remarks. Okay.
Thank you very much, Thomas.
Well, I already gave you a heads up on where we are on the guidance for Q4. We believe, all in all, as a group that we will have a somewhat higher order intake in Q4 compared to Q3. And let me give you the divisional outlooks as well. For the Energy division and for the Marine division, we expect a somewhat higher order intake. For the Food division, which I indicated before, where we feel we're on a reasonably high and solid level, we expect approximately the same level of order intake as in Q3.
And with that, we have concluded our presentations, and we open to questions. Thank you.
Thank you, ladies and gentlemen. And our first question comes from the line of Lars Brorson. Please ask your question.
Hi, good morning, Tom and Thomas. Three quick ones for me, if I could. First of all, on oil and gas, Tom, I thought I heard you say recovery is continuing as expected. I mean, I'm looking at an oil and gas segment, which is down at the lowest level in 4 quarters. And I appreciate, obviously, particularly the Petrochem side is very lumpy.
I'm looking at an upstream business, the drilling part, which has moved sideways now really since early 2016, that surprised me a little bit given your big exposure to the U. S. Onshore market. Can you help me understand a little bit what you see in your oil and gas market, particularly on the upstream part that makes you more constructive?
Well, Lars, if we take into consideration the size of the very sizable orders that we've gotten in quarters 2 and 1, we have underneath an increase we had an increase in the quarter sequentially of some 13%. So I think as far as the sort of base business is concerned, we continue to see an increase in yourself, there is a lumpiness and when individual orders are coming in. But if we look at the total and exclude the very sizable orders that must be considered as non repeat, we do have an increase in the oil
greenhouse, what was the revenue impact from the shutdown of the U. S. Xilinx line? And how much more is there to go here in terms of discontinuing business within and closing down, as you say, product lines within Greenhouse?
If we look at the Wood Dale activities outside Chicago, we're talking about an activity that generated revenues last year in the order of $15,000,000 plus And for the rest, of course, we are still in process of adjusting the supply chains and the presence in the greenhouse. So there are certain adjustments still to come, but major adjustments like this one or closing down product lines, there we're done with this, I would say. But still adjustments ongoing as far as supply chains are concerned and as far as presence in certain markets is concerned.
That's helpful, Thomas. So just speaking, you're done also on your industrial air heat exchanger business as far as shutdowns are concerned?
I'm not quite sure what you refer to when you say industrial heat exchanger business.
No, the heat exchanger system I look at.
Pardon me?
No, if I look at back at what you were looking to prune and what went into greenhouse at the time of the announcement, of course, there was a quite sizable component that related to industrial air heat exchanges in Europe in particular. I just wonder where you were there in terms of shutdowns.
Well, that is certainly not going to be shutdown. That is the vast majority of the greenhouse activities, and it's certainly there. And it continues for industrial applications, it continues for commercial applications and it continues for marine applications.
That's helpful. Finally, just on Food and Water. Can you help us understand a little bit where you are in the process of becoming more selective on projects? You've done that very well, particularly, I think, in Food Systems, an area where you've struggled, should we say, historically with nonperforming projects. This move towards more narrow scope and the impact on profitability, how far into that are we?
Well, you're right in the comment that we have in the past as we moved from PPD to the new organization already before that change. We've gone through a cleaning up process on some projects that didn't go as planned. We are working with a more narrow scope on the food division since January. You have not seen us comment on any bad projects for a while. So that is an indication, I think, on where we are.
We see an improved gross margin in that business, including having an effect and impacting the operating margin in the Food and Water division as you see. I'm not going to give a forecast on what is to come on that, but we certainly feel we've done good progress. And the encouraging thing is that we perhaps expected that we would have to shrink the Food Systems business to profit. That, in fact, does not happen. We had a significant increase of the business despite the narrow focus.
So we our hit rate on project is good. Gross margin is going in the right direction. So we are pleased with where we are.
That's helpful. Thanks both. See you in Albo.
Thank you.
Thank you. Our next question comes from the line of Peter Mordo. Please ask your question.
Yes. Hi, Thomas. Hi, Tom. A few questions if I can. Can I just start with the outlook comment?
It might seem a bit silly, but just somewhat higher. Can you quantify that? And then just on the pipeline for large orders as well in 4Q. That's the first question.
Yes. You're not going to get
a great answer on that. I mean, we use the language. Otherwise, we would have used the percentage term. So you have to go back in history and take a look. But it's a cautiously optimistic outlook, as you can understand.
The large order we will see where we go, we will announce them as they come in the quarter. I think without going into detail on that, obviously, we did comment that the Q3 large order intake was relatively low compared looking back, and you might expect that to be somewhat higher. But let's leave it with the guidance as it is, and we'll see as the quarter progresses.
Okay. Thank you, Tom. And then on if I could ask on the margins in Energy, the 16%, I mean, how do you view that, Tom, now going back through history? Is that a level you think this business can do? Or is it an exceptional quarter?
I'm just trying to think how we should think about it going into next year for that business.
Let me make one comment first,
and then I'll link it to Thomas to comment on further. As you know, we have financial targets in the group that are communicated externally, and we're not encouraging any of our units and divisions to over any long period of time run below that. So obviously, our expectations are that we are owning and developing and working with businesses that can meet our corporate targets. We had a very significant change in the from the quarter before. So before we take that as steady state, let's hand over to Thomas for a comment on that.
Yes. As you very well know, there are many moving parts giving us the operating margin, but a few comments. I think very important is discipline. We touched upon that with Food Systems. But of course, discipline when it comes to what orders, what opportunities are really the right ones for us.
Discipline there is important. And then, of course, the execution when it comes to project orders. Mix also plays a role depending on application area, depending on industry. Of course, we have a different scope of supply. So mix certainly plays a role as well.
16%, it is not, I would say, exceptional in any way. You will see variations from 1 quarter to the other also going forward. But there are a lot of good efforts going on when it comes to productivity, when it comes to selectivity, when it comes to discipline in execution. But you will continue to see variations also going forward.
Okay. Perfect. Thank you, Thomas. And then just final one. I just want to ask about backlog margins and prices.
I mean, how have they developed through the year? How have they developed this quarter? I presume that they are higher year on year, but I just wanted to understand the backlog is the mix and price in your favor now going into 2018?
Well, as far as margin in the backlog income is concerned, there is nothing specific to report other than that, of course, we are now we believe that we are we'll now be sort of oscillating on some kind of a trough level when it comes to deliveries of pumping systems in the Marine Division. We did take a big decline in deliveries of pumping systems, as I commented in quarter 3, and now we believe we're oscillating on a trough level as far as that is concerned. When it comes to prices, we have seen for some months an increase in metal prices, and we have demonstrated historically that we do have pricing power, we do have a good amount of pricing discipline. But with escalating metal prices, you, in certain cases, end up behind the curve a bit. So if there is any effect, it should be that one.
But we're certainly ambitious when it comes to managing these variations.
Okay, perfect. Thank you very much, Tom Thomas.
Thank you. And our next question comes from the line of Klas Bergelnik.
Tom and Tomas, it's Klas from Citi. Firstly, on the guidance in Marine. Pumps are flat quarter on quarter, and Froma has the shortest lead time to contracting. If my model is right, you should see a further accelerating momentum for Frama in the Q4 given previous contracting. And these boilers are also seeing strength.
And from and the boilers together should drive a bit stronger growth here than just somewhat higher, I would have thought. So if you could comment on why you guys guide somewhat higher, I thought the month could be higher.
When you mentioned Rambo, I suppose you referred to pumping systems. And we had a good level of orders in Pumping Systems and in Boilers already in Q3. We have a positive book to bill. And whether that will continue to strengthen in Q4 or not, I would leave that as an open question at this point in time. We obviously have been cautiously optimistic overall in the project portfolio.
So we've taken some hike on that, but we feel that the ship mix effect of contracting this year already had spilled over in Q3 in our order book. And I don't think we want to be more specific on that going into Q4.
Okay. My second one is on mix and maybe looking into 2018. So mix is obviously already improving in Energy, so we have a solid margin here. Looking ahead, you have previously, I think Thomas said that you have managed to keep the gross margins in promo at a high level in the downturn and same thing for Energy. So if we start with Energy, the stronger larger orders that you booked in the first half, not this quarter, I would think this is more for invoicing in the first half of next year, which can drive a positive mix further.
And for the Froma deliveries, maybe to drive a positive mix later in the year. Is that the right way to think about it?
Well, the large orders in energy, they are to be delivered in 2018 early 2019. And what what they involve is, of course, delivery of products in demanding applications. So that's good. But then again, of course, it means an increased share of capital sales to total revenues. So that's a negative, assuming everything else is about the same.
Then when it comes to marine, well, we've seen a good run-in orders a couple of quarters now in Pumping Systems. And the lead times from order to delivery, they are everything from 12 months and up depending on the schedule of the individual vessel. So certainly, some of the orders we got in quarter 2, they are going to be delivered during the late spring, early summer of 2018.
Good. My final one is coming back to Greenhouse. The factory shutdown in the U. S. Weighed on numbers.
Do you foresee more closures like this? Or was this just a true one off? And are you on track to still to achieve a high single digit margin here back in 2018? It looks
a bit more difficult now.
Coming back to last question from or my response to last question from before,
this was
as far as greenhouse is concerned. We are still working on adjustments when it comes to individual supply chains. We're working on adjustments when it comes to presence in certain markets for certain products. The target as far as greenhouse is concerned remains. We expect to and we are targeting to achieve something that is certainly north of 5% operating margin as a result of these activities.
That means we are in the same neighborhood as the better suppliers in these markets. Remember that these are products with basically no aftermarket whatsoever.
And let me reinforce Thomas' comments on that too. You wanted before Thomas that we are not exiting or shutting down, I should say, any of the other greenhouse businesses. This has been a company that has generated substantial losses over a long period of time. We did not see how we could turn this business profitable in the foreseeable future. And consequently, we looked for ways to exit it.
And the reason why we didn't do it immediately was that we were hoping that we would find some other way to find an industrial solution for the company. We were, in effect, partly able to secure continuous work for part of the employees and handle some of the customer demands and requests in the process. But now as of this quarter, this business is out of our books. We have eliminated the sources of losses that we didn't see that we could fix. As for the rest of the businesses, we are running them and they are on the right track and we are working on the plan, as Thomas said.
There are some changes that are within the footprint program that is related to the greenhouse. And so there are still actions on the table, but not of this magnitude And so this is done and completed and out.
Thank you.
Thank you. And our next question comes from the line of Sveen Wayer. Please ask your question.
Yes, good morning from my side as well. Three questions from my side. First one on the Marine margin of 15.5% and what you said in terms of pump sales now oscillating at a low level. So is it fair to assume that should be to an extent reflecting the trough margin of the business? The second question, the usual one and following up on the previous one regarding the order delay between the yards and yourself.
I mean, if I bear in mind the average delay of 3 to 9 months, I'm not sure about Q4, but in general, it's probably fair to say that the full extent of the recovery hasn't really been reflected in your Q3 orders, if I'm not mistaken. And the last point is also on the M and A side. I think you've been looking for something in Foods U. S. Components type area for some time.
I was just wondering on your updated thoughts on the M and A. And is it simply that everything is too expensive at the moment to close a deal? Thank you.
Let me start perhaps in the tail end. We do not have a specific food It is true that multiples are high in the market, and it's true that it affects our interest in certain circumstances. So we are cautious with shareholders' money, but we are still both opportunistic and strategic when it comes to how we look at the M and A going forward over the medium term. I think on the demand on the Marine side, we are now or last month in terms of yard contracting approximately at the same level as we reached full year last year. So we will see what the growth rate on the yard contracting is by the end of the year.
It looks like the original growth estimate of some 20%, 30% when it comes to contracted ships, maybe with a slightly more favorable ship mix added to that, does create somewhat of an upside for the Marine going forward. That is partly reflected already in Q3, as I said. It's partly reflected into the Q4 somewhat positive order outlook, and we will refrain from starting to give guiding comments to further away. That has to be on your own account. And Tom, you talked about the margin.
Yes. Then you had another 2 questions. When it comes to whether the reported marine margin is the trough margin. Well, let me comment like this. I think we've seen marine handling a very, very substantial decline in oil and gas basically going from SEK 1,000,000,000 plus in pumping systems for oil and gas to nothing, and that has been compensated for within the 15.5% reported operating margin.
We have seen a decline of some 20 percent year on year in terms of revenues, which represents a gross margin loss of close to €200,000,000 and certainly a contribution loss that is even bigger than that. And then you have this kind of decline in operating margin. I also said earlier on the call that we believe we're now oscillating on a trough level as far as revenues are concerned. But again, we will continue to see variations in margins from 1 quarter to the other. But as far as revenues are concerned, we believe, again, we are oscillating on a trough.
As far as ordering is concerned, you claim that the uptick in contracting is not fully reflected in our uptick in orders in Marine. And we provided you with a forecast qualification or an outlook qualification, and we did say that we do expect a somewhat higher demand in quarter 4 compared to quarter 3. So assuming that we are right, I guess that confirms that you are right in your statement as well.
Makes sense. Maybe I can follow-up with one question, Thomas, and that's on the currency. You didn't give a guidance for the translation effect next year, but I guess it's going to be a negative one. So we expect an update on that after Q4 or already at the Capital Markets Day?
Well, I think let's wait until we pass the year end because it becomes quite speculative given the size of the movements between the various currencies. And if you go back the last couple of years, I refrain from providing any forecast on translation before the year end report.
Okay, makes sense. Thank you very much both.
Thank you.
Thank you. And our next question comes from the line of Peter Frode. Please ask your question.
Yes. Thank you. Good morning, Tom and Thomas. On the service side, you mentioned, Tom, that although it's sort of steady, you have higher ambitions. There was a pretty vast a large section of this at the Capital Markets Day last year.
Maybe you could give us some pointers to your actions here in order to drive that growth higher. That's my first question. My second question is just the nitty gritty. You mentioned on Greenhiles, you mentioned that in the Q4 last year, these revenues from the U. S.
Business were starting to sort of go down. Are we meeting the right comp already in Q4 now? Or is that into the 1st part of next year? And finally, on FX, any transaction comment on 2019 given the hedges? That's it.
It's a broad it's a good question, but it's a broad question on service. As you know, we have started a number of changes in, let's say, how we work commercially with product as well as with service in order to drive organic growth. And I think we feel, all in all, we are making good progress clearly on the back of a stronger business cycle as well. But nevertheless, we think we're going in the right direction. We don't have the target to decrease the share of service.
So over time, with some cyclicality, the service numbers should stay on par with the development of our capital sales business and hence my comment, I would like to see a little better. There were some effects on the service side related to commissioning work on pumping systems and others that make maybe the comparison a little bit tougher for us in that sense. We do see in several areas growth numbers that are on a much better level. So I think this is not a generic issue for us. It's related right now the way we see it to a number of specific areas, and we are trying to tackle them best we can.
We are focused, energized around it, and we hope we'll have the 3 as a basis and move forward from there.
Your view sort of given the market position, the type of products, I mean, taking greenhouse out of the equation, these ball base and all that, is it fair to assume that your view that a business like this should generate a growth of north of 5% on service over time?
Well, if you remember Thomas' presentation at the Capital Markets Day in last year, We had a picture reflecting the historic growth, all from a smaller level, of course, at the time, but we have been achieving the 5% growth historically. I would say that in the process we've been going through, we sometimes say the service is not cyclical, but of course, it's been tough in the shipping sector and among ship owners with limited profitability and also in some other areas, including the oil and gas sector, where I would say it would be naive to say that there are no cyclical effects on the service business on these 2. So I think as we start to return to a normal state, we may have some tailwinds coming into those sectors. And with that said, I think if you walk out of those two areas, we see a pretty healthy development on the service business on a more detailed level. So I think there you have a little bit of the answer for why we feel we are not super happy with the number, but we think there is opportunity.
That's very clear. Thank you.
Then you had a couple of questions, one on greenhouse and whether we had sort of the right comparison for quarter 4 year on year. And my answer to that is no. I mean basically, a stop to taking new orders that happened towards the end of quarter 1, 2017. So we are getting sort of square with comparison more like in quarter 2 of 2018. As far as transaction effects, I think you answered or you asked about any effect in 2019.
And I think that's too far out into the future. Who knows where the dollar will be, which is the main factor when we get to 2019. You have any indication for 2018, and that's as far as we're prepared to go at this point.
Okay. Thank you very much.
Thank you. And our next question comes from the line of Piotr Ozovich. Please ask your question.
Good morning, gentlemen. Thank you for taking my questions. Let me start with a few questions about the growth. So when you're giving guidance for growth in Q4, especially in the Energy and Marine, can you please give us a bit more color where this growth is going to come from? And also Q4 2016 was already pretty solid.
So how do you see Q4 2017 on a year on year basis?
I understand your question. We are a little bit hesitant to be over specific in our guidance. We've been trying to paint the general view of where we are. And then once we close the quarter, let's see. I think on the marine side, we already had a fair amount of discussions in this call on the contracting situation and the underlying demand in some segments relating to some segment environmental product and such.
So I think actually there you have the answer. On the energy side, it is maybe a bit less transparent, but nevertheless, we do have a certain belief in the oil and gas sector as we've seen underlying developing reasonably well, oil price being stable for now. And so all in all, I think that gives you some basis for the guidance that we see. We did an exception last quarter in terms of our guidance in referring to the previous year, but we felt that given the extremely high order intake level in Q2 and we didn't want our guidance for Q3 to be taken as a more pessimistic view than it really was. So we just took the opportunity to remind you that compared to the Q3 in 2016, we really wanted to give you the sense that this is not a new market situation, a negative situation developing.
It's just we came off of a super hot Q2. We don't feel that comparison is very useful at this point in time. We had an okay Q3 on orders. We expect it to be somewhat better next quarter. So in that sense, I think you see the direction of the arrow a bit clearer than perhaps if we would have left you in the dark after the Q2 situation.
Okay. That's appreciated. Moving on to Greenhouse. What is the like for like order intake and revenue performance excluding the plan to close? Pardon me once more, please?
On the greenhouse? Yes. Well, you said that the decrease in order intake, that this was partially caused by plant closure, if I heard you right? So what
No, I did not say it was to do with order intake. The profit or the loss rather, the loss was more than explained by the closure in Chicago, the Wood Day factory outside Chicago. So the operating loss reported was more than explained. The loss in the Wood Dale plant represented more than the $34,000,000 negative of operating income that we report in the quarter 3 for Greenhouse.
Okay. Perhaps I misheard it. So then on the higher level, we have seen quite a bit of consolidation and capacity removal, especially in the heat exchanger area, both from yourselves and from your competitors like Calibion. And so recently, we have seen that, well, Triton, the owner of Calibion, one of your main competitors, has acquired our OKOR, so one of heat exchanger manufacturers in the U. S.
Do you see more consolidation and more capacity coming out or being rationalized in the industry? And where do you see your role in this trend?
I think you should be cautious when you draw conclusions from this. You have to segment the various types of heat exchangers. What we are doing or what we did with the closure of the plant outside Chicago is that we have now left the North American market for industrial shell and tube heat exchangers. We continue very much continue our focus on gasketed plate heat exchangers, on braze heat exchangers, on welded heat exchangers. We do have significant improvement activities when it comes to air heat exchangers, certain makes of tubular heat exchangers with a base in Europe and to some extent Asia.
So I think you have to segment very much when you sort of look at what is going on. The acquisition by Calvion in the U. S. Is certainly not a company that I'm familiar with. So I doubt that this is an operator of any significance in any area that we're operating within.
Remember that the KELVION scope of supply of heat exchangers involves cooling towers and the likes markets where we're not at all active in.
Okay. Thank you.
I would perhaps add to that. If you look at our greenhouse, you can say that the heat exchanger business, as Thomas referred to, that we are committed to our areas where the concentration has gone fairly far. We made an attempt to consolidate and drive this in air heat exchangers and other areas, which for us ended up not being high margin global businesses, but rather a fair amount of regional fabrication units that where we didn't get the scale advantage. And that's why we decided to walk out of it or separate it out from our operating model because while we do believe that these are underlying profitable business as we already indicated and as we, to a degree, have proven in Q2 and presumably will return to in Q4, we didn't see that it could meet our margin objective overall. So I think this question on how in shell and tube and in air heat exchanger to what degree family owned companies will consolidate the larger structure, I remain hesitant to such an investment hypothesis.
If I were you as an investor, I would not go into it.
Okay. Thank you for that. And last question for me. Can you please remind us what is the difference in general between in profitability between the large projects and what you refer to as baseline business?
That is an impossible comparison to do. The only guidance I can give you is that because there are variations on the team, the issue that you have to be aware of there apart from any executional risk on the project, is related to the fact that when we have a large scope of supply with a lot of purchase components, we can typically not take a fitting and add a 15% profit margin on it. And that makes typically our project business swing a little bit when that's a high share of our order.
You should be clear on that. The guidance we're giving as far as gross profit margin is concerned is only that the aftermarket gross profit margin is above average and capital sales is below average. And that is as far as we're going to go. And then as Tom rightly said, there are variations based on scope of supply. All right.
Thank you very much.
Thank you. And there are no further questions at this time. Please continue.
Thank you very much. With that, again, let me repeat my sincere invitation to Orborg. We almost sold out, so you got to sign up quickly. And look forward to continue the conversation on our markets at that point in time. Thank you for your time today, and have a good day.
Thank you.
Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect. Speaker, please stand by.