Welcome to Alfa Laval Q3 earnings conference call. At this time, all participants in listen-only mode. There will be a presentation followed by question and answer session. At which time if you wish to ask a question, please press star and one on your telephone. I must advise you this conference is being recorded today, Wednesday, 25th of October, 2017. I would now like to hand the conference over to your speaker today, Mr. Tom Erixon. Thank you. Sir, please go ahead.
Thank you very much, good morning everybody to the third quarter earnings call. 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 +15%. It was clearly a quarter with strong base business for us across the board, and as you noticed in terms of larger 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 Laval's environmental products in both areas, as well as a positive ship mix with effects on both pumping systems and boilers.
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 the somewhat weak invoicing supported by the restructuring programs that we're going through. 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. With that, let me go to the key figures. Just reflecting on the year-to-date numbers, our order intake year-to-date is +15%, just as in quarter three. A stable growth trend that we've seen this year, and with a marginally positive book-to-bill again for the third quarter in a row. We see a small decline in the sales for year-to-date as well as in the quarter.
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 two announced in the quarter. Both are really good projects for us. One important biotech order in India, and another one in waste heat recovery, which is the stronghold of Alfa Laval. Two good orders, on the value of EUR 11 million, clearly a bit lower than we've seen in the last few quarters. I also like to highlight the order intake side on PureBallast, which is continuing on a relatively strong level and way above last year's, and pretty much flat compared to last quarter with EUR 192 million.
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, and we certainly see that in the market. PureSOx also delivered on a good value and a good number for the quarter at SEK 170. Let me go over to the trend chart on the orders received. As we indicated to you after Q2 was really a significantly strong order intake quarter for us. In fact, and you see that clear 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 Q3 last year, but not on the same level as the brutally strong Q2. That's in fact exactly where we ended up.
I will come back to the guidance for the fourth quarter, 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, 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%+, 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. 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 Q3, 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 on 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.
That has a good effect on our order intake for pumping systems as well as for boiler systems. So Marine, we've seen an improved situation. I remind you that we already, at the Capital Markets Day last year, indicated that the environmental products should be considered a balancing factor to the rather weak contracting at yards that was done in 2016. 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. In that sense, there has been questions on when we hit the bottom, and I think now you see a 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 Aalborg.
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're doing in the marine side, and you're interested in this part of the business, you should really be there. Let me go to the sequential comparison. 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 and the amount of large orders, but the base business as such, remains strong in Energy Division in the quarter. The brazed unit, which has been a growth driver for us for quite some time, had a very exceptionally strong Q2.
The Q3 level there is still a very good level for us. 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. We do see some sequential decline there to some degree related to non-repeats, but nevertheless, it is a good level. 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. All in all, a relatively strong quarter from the Food and Water Division. Finally, again, back to the Marine Division. We touched on it.
There are good drivers in the Marine Division with a good quarter. We are 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. 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. Let me touch on the Greenhouse.
I think the one number that you see there in terms of Greenhouse making a loss, is the decline compared to Q2. That is totally related to our shutdown procedure. There are shutdown costs that we take over the P&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. The deviation you see 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 business sequentially. Looking at the regions, obviously the one number that stands out is the growth situation in Asia. 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. We see obviously a 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 the current situation. The numbers in North America overall was very solid. We have a good growth situation. It was supported by a 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.
The slow but steady recovery that we were expected in oil and gas from an oil price somewhere in the region of 60 continues pretty much as we had expected and committed to you earlier. The European order intake shows some minus signs. We've been having a good development in Western Europe for a period of time. We think that the comparison is on a relatively high level. We think Europe remains solid for us. 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. In Eastern Europe, where we've seen a weaker situation now in the quarter.
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. Let me with that, go to the final. Sorry, we got a hang-up here on the PC. Hold a second, please. Okay, we're on. Let me then round this off with our top 10 markets. In this picture, I would like to make two positive comments first. The first one is South Korea used to be our third largest market, and we had a significant downturn in Korea related to the marine situation. We were 70% down very quickly during last year, and now we see a comeback in the Korea number. They are back on number 4, and they will really be shooting for position number 3 again. 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. In fact, our two largest markets, United States and China, is developing well this year, and that's obviously very positive to us. The only negative slip there is Japan, where we haven't, for our order book, seen the positive development on the marine side yet. With that, let me hand over for Thomas for some further details on the financial development. Thank you.
Thank you, Tom. 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 8.2 billion 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. 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. Let's 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. We are getting support, a mixed support from a higher proportion of the aftermarket sales in this quarter. With that, let me 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 percentage points compared to last year and an increase of 0.6% sequentially. Again, let me remind you what I said three months ago. 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 PCV. 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 aftermarket 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 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 with a caveat for the effects of Christmas and New Year. Moving on to the rest of the P&L.
R&D, just over SEK 200 million 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&D ended at 2.5%, an uptick with 0.2% compared with a year ago. For quarter four, I think I can say already now that you should expect an absolute increase in R&D costs in quarter four. A typical, let's call it seasonal effect when it comes to R&D projects are completed, tools are delivered and so on. S&A ended just under SEK 1.4 billion in the quarter, a like-for-like reduction of 3.8% year-over-year, which is of course largely explained by the change program. I think it's important to bear in mind that, of course, this includes salary inflation.
The like-for-like resource and activity reduction is more like, I would say, somewhat between 5.5%-6%. 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 two report that you should expect a one-off in quarter three 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 million. 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 SEK 1.59. Finally, on the returns, return on capital employed and return on equity, 17.3% and 12.7% respectively. If we exclude the one-offs, we would have reported a return on capital employed of an excess of 18.5%. 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 FTEs. Some 700 of those are attributed to the program. The rest is, of course, regular adjustment of capacity. As for savings, we realized SEK 90 million in the quarter, and that means we are at 72% of the target of SEK 500 million on an annualized basis. We are certainly very well in line with our plan.
Looking at the outcome for S&A, SEK 80 million in the quarter means we're actually overshooting the target if we annualize the SEK 80 million. We are anticipating to add some overhead cost in completing 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&A side. Footprint, so far limited savings, but it's ramping up as expected. Another comment on the footprint, we closed the plant in Germany for welded heat exchangers end of September. As you heard from Tom, we closed the shell and tube factory outside Chicago as per the end of September as well. Two lost sources are with that closed down. We maintain the overall targets of SEK 500 million and 1,000 FTEs. 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 cost. 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 cost 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. 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 zero in the quarter. Of course, we've also had to realize some bad debts as we were closing down. This closure is more than explaining the negative profit or the loss in the quarter for Greenhouse. Underneath, there is a profit on the level of quarter two. Cash flow. Cash flow from operations ended well above SEK 1 billion, an increase with some SEK 130 million compared to last year. It's explained by better working capital development, basically, and that is, of course, when you exclude the effects of the non-recurring 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 Changsan Engineering in Korea, a former Framo subsidiary.
Finally, financial net paid negative SEK 145 million, a negative some SEK 125 million larger than last year, of course, to do with realized FX variances and interest payments. Free cash flow, just under SEK 0.8 billion, almost exactly as last year. All in all, this cash flow has brought us to a debt EBITDA of 1.6 compared to 1.9 a year ago. A continued stable deleveraging of our balance sheet. FX, a small positive in the quarter, SEK 19 million, SEK 40 plus on transaction as expected, and also as expected, a beginning negative translation due to the decline, the weakening of the US dollar that we started to see in quarter two.
If we look at the full year forecast, slight increase from last quarter, SEK 20 million from SEK 180 to SEK 200, on the back of the FX variations we've seen from end of quarter two to end of quarter three. For the last quarter, continued positive transaction effects and an increasing negative translation effect. Backlog on the next slide, SEK 18.7 billion as per end of September, representing 6.4 months of LTM sales. An improvement, of course, on the back of a book-to-bill of just above one. For shipments before year-end, a backlog of SEK 7 billion compared to just over SEK 6.9 billion last year. A slight increase there as well. With that, let's move on to the sales bridge. Year-to-date sales, SEK 25.2 billion as you just saw, backlog for delivery this year, SEK 7 billion.
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 three. We expect a recovery over the next couple of quarters. Finally, orders in for quarter four last year, SEK 3 billion. With that, you get a subtotal of SEK 35.2 billion, a number some SEK 500 million smaller than after end of quarter two. Of course, it is up to you then, as always, to think about what can be expected for in for out 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. 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 are on a reasonably high and solid level, we expect approximately the same level of order intake as in Q3. With that, we have concluded our presentations, and we open to questions. Thank you.
Thank you, ladies and gentlemen. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. 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'm looking at an oil and gas segment, which is down at the lowest level in four 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 surprises 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 very sizable orders that we've gotten in quarters two and one, We had an increase in the quarter sequentially of some 13%. I think, as far as the sort of base business is concerned, we continue to see an increases in activity.
You haven't though, on your drilling business. That's what surprises me a little bit.
As you said yourself, there is a lumpiness and when individual orders are coming in. 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 and gas activities.
Understood. Secondly, on Greenhouse, what was the revenue impact from the shutdown of the U.S. shell and tube line, and how much more is there to go here in terms of discontinuing business within, and closing down should 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 million plus. For the rest, of course, we are still in process of adjusting the supply chains and the presence in the Greenhouse. There are certain adjustments still to come. Major adjustments, like this one or closing down product lines, there we're done with this, I would say. Still adjustments ongoing as far as supply chains are concerned and as far as presence in certain markets is concerned.
That's helpful, Tom. Just quickly, 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 air heat exchanger business.
Pardon me?
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 exchangers in Europe in particular.
Yes.
I actually wonder where you were then in terms of shutdowns.
That is certainly not going to be shut down. 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 project? You've done that very well, particularly I think in food systems, an area where you've struggled, should we say, historically with non-performing 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 PTD to the new organization already before that change, 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. 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. Our hit rate on project is good. Gross margin is going in the right direction, we are pleased with where we are.
That's helpful. Thanks both. See you in Aalborg.
Thank you.
Thank you.
Bye.
Our next question comes from the line of Peter Nordell. Please ask your question.
Yeah. 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? Then just on the pipeline for larger orders as well in 4Q. That's the first question.
Yeah. You're not going to get a great answer on that. We use the language, otherwise we would have used a percentage term. You have to go back in history and take a look. It's a cautiously optimistic outlook as you can understand. The larger order, we will see where we go. We announce them as they come in the quarter. I think, and 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. If I could ask on the margins in energy, the 16%, 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 leave it to Tomas 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. Obviously our expectations are that we are owning and developing and working with businesses that can meet the corporate targets. We had a very significant change from the quarter before. Before we take that as a steady state, let's hand over to Tomas for a comment on that.
As you very well know, there are many moving parts giving us the operating margin. 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. 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 one quarter to the other also going forward. 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.
You will continue to see variations also going forward.
Okay, perfect. Thank you, Tom. Then just final one, I just wanted to ask about backlog margins and prices. 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?
As far as the margin in the backlogging is concerned, there is nothing specific to report other than that, of course, we believe that we'll now be 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.
If there's 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, Tomas.
Thank you. Our next question comes from the line of Klas Bergelind. Please ask your question.
Yes. Hi, Tom and Tomas. It's Klas from Citi. Firstly, on the guidance in marine. Pumps are flat quarter-on-quarter. Framo has the shortest lead time to contracting. If my model is right, you should see a further accelerating momentum for Framo in the fourth quarter given previous contracting. If boilers are also seeing strength, and Framo and the boilers together should drive a bit stronger growth here than just somewhat higher than I would have thought. If you could comment on why you guys guide somewhat higher, I thought the margin could be higher.
When you mention Framo, I suppose you refer to pumping systems.
Correct.
We had a good level of orders in pumping systems and in boilers already in Q3. We have a positive book-to-bill. 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 had been cautiously optimistic overall in the project portfolio. We've taken some height 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 than that going into Q4.
Okay. My second one is on mix and maybe looking into 2018. Mix is obviously already improving in Energy. We have a solid margin here. Looking ahead, you have previously, I think Tom said that you have managed to keep the gross margins in Framo at a high level in the downturn, and same thing for energy. 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 the positive mix further. For the Framo deliveries, maybe to drive the 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 and early 2019. What they involve is, of course, delivery of products in demanding applications. That's good. Again, of course, it means an increased share of capital sales to total revenues. That's a negative, assuming everything else is about the same. 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. Certainly some of the orders we got in quarter two, they're 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 achieve a high single-digit margin here back in 2018? It looks a bit more difficult now.
Coming back to the last question from before, my response to the last question from before, this was a substantial adjustment 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.
You guys-
Let me reinforce Tom's comments on that, too. You wanted before, Tom, 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. 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. 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 Tom said. There are some changes that are within the footprint program that is related to the Greenhouse. 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. Our next question comes from the line of Sven Weier. Please ask your question.
Yeah. 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. 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 a previous one regarding the order delay between the yards and yourself. If I bear in mind the average delay of three to nine 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. The last point is also on the M&A side. I think you've been looking for something in food, U.S. components type area for some time.
I was just wondering on your updated thoughts on the M&A, is it simply that everything is too expensive at the moment to close a deal? Thank you.
Right. Let me start perhaps in the tail end. We do not have a specific food U.S. acquisition program. That's going a bit too far. We are still open for business when it comes to the M&A side. It is true that multiples are high in the market, and it's true that it affects our interest in certain circumstances. We are cautious with shareholders' money, but we are still both opportunistic and strategic when it comes to how we look at the M&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. 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, we will refrain from starting to give guiding comments to further away. That has to be on your own account. Talking about the margin-
Yeah. You had another two 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 substantial decline in oil and gas, basically going from a billion-plus in pumping systems for oil and gas to nothing. That has been compensated for within the 15.5% reported operating margin. We have seen a decline of some 20% year-over-year in terms of revenues, which represents a gross margin loss of close to SEK 200 million, certainly a contribution loss that is even bigger than that. 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.
Again, we will continue to see variations in margins from one quarter to the other. 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, we provided you with a forecast qualification or an outlook qualification, we did say that we do expect a somewhat higher demand in quarter four compared to quarter three. 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. Should 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. If you go back the last couple of years, I've refrained from providing any forecast on translation before the year-end report.
Okay. Makes sense. Thank you very much, both.
Thank you.
Thank you. Our next question comes from the line of Peder Frölén . 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 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 greenhouses, you mentioned that in the fourth quarter last year, these revenues from the U.S. business started to sort of go down. Are we meeting the right comp already in Q4 now, or is that into the first part of next year? Finally, on FX, any transaction comment on 2019 given the hedges? That's it. Thanks.
It's a good question, 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. I think we feel all in all, we are making good progress, clearly on the back of a stronger business cycle as well. Nevertheless, we think we're going in the right direction. We obviously don't have the target to decrease the share of service. Over time, with some cyclicality, the service numbers should stay on par with the development of our capital sales business and hence my comment that we 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. 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 the best we can. We are focused, energized around it, and we hope we'll have the three as a basis and move forward from there.
Your view, sort of given the market position, the type of products, taking Greenhouse out of the equation, these ballast and all that, is it fair to assume that your view that a business like this should generate the growth of north of 5% on service over time?
Well, if you remember Thomas' presentation at the Capital Markets Day last year, we had a picture reflecting the historic growth, although 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 were no cyclical effect on the service business on these two. I think as we start to return to a normal state, we may have some tailwinds coming into those sectors.
With that said, I think, if you walk out of those two areas, we see a pretty healthy development on the service business on the more detailed level. I think there you have a little bit of the answer for
Yeah
why we feel we are not super happy with the number, but we think there is opportunity.
It's very clear. Thank you.
You had a couple of questions, one on Greenhouse and whether we had sort of the right comparison for Q4 year-over-year, and my answer to that is no. A stop to taking new orders, that happened towards the end of Q1 2017. We are getting sort of square with comparison more like in Q2 2018. As far as transaction effects, I think you asked about any effect in 2019. 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. Our next question comes from the line of Peter Frolund. Please ask your question.
Good morning, gentlemen. Thank you for taking my questions. Let me start with a few questions about the growth. 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? Q4 2016 was already pretty solid. How do you see Q4 2017 on a year-on-year basis?
I understand your question. We're 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 products and such. 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. All in all, I think that gives you some basis for the guidance that we've seen.
We did an exception last quarter in terms of our guidance in referring to the previous year. We felt that, given the extremely high order intake level in Q2, we didn't want our guidance for Q3 to be taken as a more pessimistic view than it really was. 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.
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 it like for order intake and revenue performance excluding the plant close?
Pardon me once more, please.
On Greenhouse.
Yes.
Well, you said that the decrease in order intake, that this was partially caused by a plant closure, if I heard you right.
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 Dale factory outside Chicago. The operating loss reported was more than explained. The loss in the Wood Dale plant represented more than the SEK 34 million negative of operating income that we report in the quarter three for Greenhouse.
Okay, perhaps I misheard it. 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 Kelvion. Recently, we have seen that, well, Triton, the owner of Kelvion, one of your main competitors, has acquired Rocore, 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? 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 brazed 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. I think you have to segment very much when you look at what is going on.
The acquisition by Kelvion 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 for-
I would perhaps add to that, if you look at our Greenhouse, you could say that the heat exchanger business, as Thomas referred to, that we are committed to our areas where the consolidation 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 where we didn't get the scale advantage. 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.
I think this question on how in shell and tube and in air heat exchangers, to what degree family-owned companies will consolidate to 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. Last question from me. Can you please remind us, what is the difference, in general, 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 purchased components, we can typically not take a fitting and add a 50% profit margin on it. 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. Then as Tom rightly said, there are variations based on scope of supply.
All right. Thank you very much.
Thank you. There are no further questions at this time. Please continue.
Thank you very much. With that, again, let me repeat my sincere invitation to Aalborg. We are 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.