Welcome to today's Alfa Laval Q1 Earnings Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Wednesday 26th April, 2017. And I would now like to hand the conference over to your speaker today, Tom Erickson.
Please go ahead, sir.
Thank you, and good afternoon, and welcome to the call. This is our first earnings call in the new operational structure of Alfa Laval. You have received or had access to the pro form a statements from last couple of years since some weeks back. So I hope you feel reasonably comfortable when you follow and try to understand the quarter report and the results as presented. Before going into details, let me make a couple of overall comments on the quarterly report.
First, order intake came in stronger than we expected, as you have seen, and it was partly driven by higher intake of large orders that came into the quarter as opposed to what we had expected. But it was also a result of a generally better business climate than we anticipated in the beginning of the year. I would like to highlight though that although the order intake as such was stronger than we expected, we did not see any particularly effects on an improving oil and gas situation in the quarter, the upstream oil and gas investments were still on a low level. And while the business sentiment in the sector has improved during the year, the potential upside on the oil and gas is not included in the order book in the Q1. On the marine side, the business sentiment among ship owners and to a degree shipyards has improved also in the year, and it has also resulted in an upgraded forecast for the number of contracted ships in the market forecast.
We sense the market sentiments on the same way, but you should be aware that the order intake for Alfa Laval during the first half of this year is reflecting the low order the low level of contracting during the second half of last year. So any possible upside resulting from a better marine climate is not included in the Q1 numbers. To a small degree, the upside on the environmental products, both PureSOx and ballast water is included in the quarter result. They have improved somewhat on a still a fairly low level. So they are, as we have indicated to you earlier, a balancing factor on the overall order intake, which makes the Marine division go sideways when it comes to the order intake over the last couple of quarters and in fact, also in our forward looking guidance for the division.
So with those comments, let me go to the specifics. Year on year, the order intake was up 14%, excluding currency effects and organic growth of 9%. And the margin, although invoicing was relatively weak in the Q1 as expected, stayed firm and ended on the 15.7% level. The large orders that you have probably seen as we have announced them partly fell on Pakenox heat exchanger systems, mainly in the petrochemical industry side, 3 nice and large orders on that side. And on the Marine, we had 2, of which one is related to power production, but it's booked within the Marine division.
And then we had a good order for 2 ships on the PureSOx products amounting to SEK 125,000,000. So all in all, SEK585,000,000 on large order, which is in connection with also what we saw in Q4, 2 straight quarters with fairly strong order book on the large order side. On orders received, you see Q4, Q1 being relatively similar. We are 1% up in Q1 versus Q4. They are both just short of SEK9 billion and both with looking back at least over the last 4 quarters, relatively good on the large order side.
You should note that Q1 is the 1st positive book to bill quarter since 8 quarters back, It's been 2 years of declining order book, and we were building order book for the first time in a relatively long period in Q1. Was a good quarter from that perspective. The EBITA margin development, we saw a small strengthening, partly backed up by good development in the gross margin, but it's also backed up by early effects of the restructuring program that was announced in the second half of last year. We saw good effects, both sequentially and year on year on the sales and admin spendings, despite the fact that we are increasing the R and D spend compared to earlier. An overview on the divisions and business units as we organize now, and this is based on the year on year comparison.
Basically, we are positive on some areas flat in all areas except the boilers. And the boiler order intake in Q1 is a straight reflection of the lower contracting at the shipyards compared to 1 year ago in terms of the resulting order intake there. So that one is in the decrease. Other than that, generally speaking, it's a positive year on year comparison across the board. Food and water, generally very positive.
Pumping systems are far more positive. And the braced heat exchangers, the OEM business that we run continued a very good momentum in the quarter that was ongoing already during most of last year. Now let's go to division by division, starting with the energy. And here you see the sequential comparison when it comes to the pluses and minuses. And when you look at the energy, you should remember that the last quarter for energy was indeed very strong.
And consequently, the benchmark there is a tough one. As I indicated, the Brace business is going very strong. It's backed by good development among customers such as Cummins, some say Daikins and a number of other large OEMs. So it's a very stable business. We're growing with our customer base.
Q1 was very strong and continued a good momentum that was building already during last year. The 2 units for gasketed plate heat exchangers and separations, they had a solid base operating on a good level, but were to a degree affected by all large orders from the previous quarter that didn't repeat itself on the same level. So although a minus still running on a good level. And then finally, the welded heat exchangers, that unit you should now and for the future expect a relatively high volatility because that is very largely dominated by large orders. So the three orders in Packinox that you saw in the quarter, they obviously all booked within the welded heat exchanger business units.
So those numbers will be up and down. We still had a good order intake for projects in Q1. So it's not a disappointment. But the larger orders during Q4 were all booked in the energy segment essentially there. So again, we are doing a comparison that is relatively tough.
So we were pleased with outcome on the energy side at large. On the food and water, we had a very strong Q4, and we thought those numbers would, for several reasons, be hard to beat in Q1, but in fact, we did. So we were a little bit surprised by the strength in the food and water business. We came out good essentially in all areas. We are marginally weaker on the food systems, which is the project sales on food.
As you've seen, we did not have any large orders announced, but we did have a good inflow of orders between €1,000,000 €5,000,000 with a good and healthy mix. So the food system developed, despite the minus sign, relatively good in the quarter. The one unit you saw performing very well last year was called sanitary in the old organization. It is now going under the fluid handling business unit name. And they had a great development last year.
We remained on a very strong and high level in Q1. So we're also pleased with the outcome of that, The Kantis and high speed developed slightly positive. So from a high level already, Q1 was a good quarter for Food and Water as you can see in the absolute numbers as well. On the Marine division, the market conditions remained difficult based on the fact that the contracting level was at all time low, well, 30 year old low during last year. And we are, in that sense, not shifting gears in the marine industry by any means right now.
But with that said, the sentiment, the forecast and to some degree also, the contracting during the 1st 4 months has increased compared to the extremely low level that was recorded during the last year. So we do expect, as does the official forecast, a somewhat better development when it comes to contracting volumes during this year. During the quarter, the ship mix has been favorable, and we expressed a number of times to you that it's not only a question of number of ships, it's also related to the business opportunity in the different segments of the business. We had a good ship mix situation in Q1, and that was specifically favorable for Framo. And so the order booking for pump systems was very strong indeed.
We did have a positive impact from both SOX primarily, but to a degree also ballast water systems that are still remaining on a low level. And it should be noted that most of the systems that we are selling at this point in time, they are not retrofit. They are new build. So we don't see yet the big effects of the retrofit period that we expect. With that said, I'd like to highlight that the market activity and dialogues with customers is significantly higher at this point in time than it was during last year as we would expect it.
And we have indicated to you a somewhat increasing activity level and order level from these units as we go forward in 2017. Service for Marine was good in Q1, and we were on a solid level on the service sale. Last year, we struggled a little bit with delayed maintenance and some concerns on the service business in marine given the financial difficulties for ship owners during the year. The Q1 broke with that, and we had a firm quarter in the marine service and the highest level since Q1 2016. So that's the divisional reviews.
Let me then go to let me call it an educational slide. Since we are in a new divisional structure, we just wanted to indicate to you how the service split looks like between the different divisions. And as you can see, for Food and Water and Energy, both are in the region of about 30% share of service, relatively similar And with a relatively low capital sales in the Marine division, we are now at 42% service as of total. We are working with relatively big changes in the service organization with the global service organization, with harbor based services in marine and a number of other initiatives. So it is, as we have announced in our strategic plan, a high priority for us to continue to build and strengthen the service business as part of the total.
Then to the greenhouse. As you know, we separated out units that we felt were difficult to develop within the traditional Al Falafal structure, and they were low performing compared to what we had reasons to expect. And we put them in independent greenhouse structure, as we call it, and they are now separated out, operated on their own, and we are pleased to see that the carve out process has been completed, and we are getting early results from that process. Compared to the approximately minus 10% margin that these units had in our own structure, we are now at breakeven in the quarter. It's related to actions taken regarding cost.
It's related to a reasonably healthy order intake in Q4 and Q1 despite the changes that we have been doing. And it's also a decrease of allocations from the Alfa Laval cost structure. That is all affecting the business performance of the unit. All in all, we have a good spirit in these companies and a return of entrepreneurial spirit that these companies need to thrive and develop in a good way. So a positive development on the greenhouse initiative as such.
Let's go to some geographical comments in the new global organization for sales and services. And all in all, all our regions were essentially positive with the exceptions of South America, which is about 4% of the total order intake of the group. We had a weak quarter in South America, both sequentially and year on year. It's not necessarily an indication of a very bad business environment in South America for the rest of the year, but it was, we recognized, a weak quarter, mainly driven by Mexico and some other smaller markets. Turning to North America, positive both sequentially and year on year.
Canada was positive mainly driven by the energy sector, and the U. S. Was positive mainly driven by the food and water business. So compared to a weak beginning of the business last year, we actually had a good start in North America from where we are right now. West Europe had a tremendously strong year for us in 2016, And hence, you also see a very strong and positive year on year numbers.
We are a little bit down in Western Europe compared to strong Q4 with a number of large orders booked in Europe for delivery outside. And so the comparison is tough, but Western Europe is off to a good start. And the same holds true for Nordic, which had a relatively weak year last year overall, but a good and solid year on year comparison and a little decline compared to a good finish of the year in Q4. And you see essentially the same situation in Eastern Europe. We were pleased with the development, especially in Russia during 2016, and we feel that we are in a good position and on a good track in that market, too.
Then finally, Asia. And it's very nice to see that after having taken the effects of the marine sector during 'fifteen and 'sixteen with continuous declines in China and certainly in Korea, we are now back on a growth track in China and in Asia as a whole. China was positive in all three divisions, including marine on the back of good orders for pumping systems. And most markets in Asia were positive with some exceptions, especially perhaps India after a strong quarter 4, and the Middle East were relatively low bookings for the energy sector in the quarter. So we felt good about the development in Asia.
And it may be interesting for you just to take a quick glance on our top 10 markets. And these are the LTM curve. So the differences between now and then is not so big in each of the markets because of the LTM trend characteristics. But you might care to notice that we are positive in all of those markets except Japan, which has a small decline for Korea, which had a big reduction of order bookings resulting from the marine crisis, it's nice to be back on the growth track. And all in all, we are positive to even in all of the other 9 markets.
So fairly broad based, good development in most geography with the exception of South America in the quarter. So with that, I would like to hand over to Thomas for a more detailed review on the financial side. Thank you.
Thank you, Tom. Good afternoon, all of you. So let's go right into it, and let me start off with a couple of comments on sales. You may recall that after quarter 4, I commented that we believe it's reasonable to expect lower invoicing in quarter 1 than that of quarter 4, mainly because of a normal seasonal pattern with relatively lower level of revenue recognition in contracts based business in the early part of the year. We realized, as you see from the Slide, dollars 8,100,000,000 in quarter 1.
In comparison with quarter 4, we were down 17% at constant rates. Compared to last year quarter 1, we were down approximately 6%. We'd like to say that in terms of invoicing, we ended up in line with our own expectations. The lower backlog was somewhat compensated by translation effects looking at the absolute outcome as reported. Moving on to service and service revenues.
The service activities represented 31.4% of total revenues. This was an increase sequentially as well as year on year, 1.4% and 1.7% respectively. That of course means we're getting some help from a positive mix effect between capital sales and after sales year on year as well as sequentially. Having said that, let me then deliver the first forward looking statement. We believe it's reasonable to expect a slightly higher invoicing in quarter 2 than we just reported for quarter 1, largely because of a, let's call it, seasonal pattern and that is despite a smaller backlog.
Let's then move on to gross profit margin. We have reported 37.1%, an increase of 0.1% year on year and 2.8% up sequentially. Then with the last quarter four report, I said, in the near term, we expect adverse effects from declining load. We expect continued positive FX transaction effects and positive purchase price variances. The actual for gross profit margin or gross profit was influenced by the 4 same parameters in the expected direction.
In addition, we recognized adverse mix effects within capital sales for the Marine and the Energy divisions. So for some further detail, let's move on to the next slide. Year on year, we were suffering adverse effects from a negative mix in capital sales as well as a weaker load in certain factories than we're talking particularly certain marine related factories. We had positive purchasing variances and of course FX transaction FX supported the margin as well. Purchasing variances were though somewhat smaller than anticipated following the development of the price for certain metals.
Sequentially, we enjoyed a positive overall mix effect different to the year on year development. Now then the second forward looking statement. In the near term, we expect adverse effects from mix within capital sales, so they are to continue. The load will decline only in a few factories. We expect continued positive FX transaction effects and positive purchase price variances.
Let's then look a bit at the overhead costs. For R and D, we ended at SEK 190 $7,000,000 in the quarter, an increase year on year like for like of 3.8 percent and this then represented 2.4% of revenues, a slight increase from last year. And this increase is really to be attributed to further supporting focused efforts in certain product groups. Moving on to sales and admin combined, We ended with €1,450,000,000 of sales and admin costs in the quarter. This was a reduction like for like year on year of 2.6%.
This reduction is explained by savings, of course, including employee reduction, somewhat countered by salary inflation. This is really evidence that the savings program has been implemented to a very large degree when it comes to the sales and admin part. As for profit before tax, we ended at $1,270,000,000 an increase where slightly lower EBIT was more than compensated by a significantly better financial net, of course, coming from FX differences to a large extent, again, unrealized FX differences. Before leaving the P and L, let me then also point out that we had a tax charge of 492,000,000 dollars a high level, and this is explained by a nonrecurring item, a negative 113,000,000 coming from a settlement on taxes with the earlier owners of Promo. We maintain the underlying guidance of 28%.
EPS somewhat lower following the tax charges at 1.8 $4,000,000 compared to last year $206,000,000 Finally, returns, return on capital employed and return on equity, of course, influenced by the quarter 3 quarter 4 one off charges ending at 15 percent plus and 11% plus. If I allow myself to exclude the one off charges from the return on capital employed number, we would have reported 17 plus percent. Let's then take a somewhat deeper look into the effects of the reorganization and the capacity adjustment program. Let's start with the employee impact. Our baseline for this program was end of June last year.
We have totally reduced headcount with 754 FTEs in these 9 months. Some 475 of these are attributed to the organization and capacity adjustment program connected to the one off charges. The balance is to do with regular ongoing adjustments, particularly in the supply chain in the operations area. Looking at the distribution of the 475, dollars The bulk, of course, has to do with the overhead, dollars 375,000,000 and the balance, dollars 100,000,000 dollars to do with the cost of goods area. As for savings, we have realized some €60,000,000 on the overhead side and a mere €1,000,000 dollars on the cost of goods side really primarily to do with the closure of an air assembly shop in China.
We do maintain and I think this is important. We do maintain the targets we announced initially for the full effects of the program, a reduction of 1,000 FT feet feet feet feet feet feet feet feet feet feet
feet feet feet feet feet feet feet feet feet feet feet feet
feet feet feet feet feet feet Es and savings of 500,000,000 dollars where we expect the savings to reach a level of say 75% of 500,000,000 dollars by the end of 2017 and be fully implemented by the end of 2018. So full effect in the P and L in 2019. But then moving on to divisional performance. Before getting into the details, I think it's essential to remind you that we're comparing with pro form a numbers. When it comes to orders, sales and gross profits, there's hardly any element of allocation whatsoever.
But of course, when it comes to overheads, there are elements of allocations in the pro form a numbers. Having said all that, Energy came out lower than last year due to somewhat lower sales volume and a negative mix in capital sales. Marine ended lower than mainly due to lower volume, but also again a negative mix in capital sales and a lower load in a couple of factories and then supported by FX very much to do with U. S. Dollar against Norwegian krona.
Finally, food and water came out better than last year, really explained by higher sales volumes. Cash flow to continue. Cash flow from operations, 800,000,000 a reduction of roughly $100,000,000 compared to last year, explained by lower profits and higher taxes paid, somewhat compensated by a better working capital development. Regular CapEx, somewhat higher than last year. Cash flows were not, as you have seen, you may have seen, not influenced by any outflows related to acquisitions nor inflows from any divestments.
Financial net pay was only a negative €3,000,000 So all in all, free cash flow, dollars 700,000,000 compared to just under $800,000,000 a year ago. This cash flow has brought us to a debt to EBITDA of €170,000,000 compared to €181,000,000 at the end of last year. And of course, a continued deleveraging as a result. FX in the quarter positive SEK 75,000,000 as we expected. We have made an update for the full year to $280,000,000 really tiny increase from the previous $275,000,000 dollars A contributing main contributing factors to the outcome is, of course, the continued strength of the U.
S. Dollar and realization of hedges in place. Then the order backlog as per end of March, dollars 18,100,000,000 about 6.1 months of LTM sales, an increase, of course, compared to quarter 4 following the book to bill of 108, as Tom mentioned earlier. For shipments this year, a backlog of $12,900,000,000 less than a year ago. With that, and I think that's important, dollars 900,000,000 lower.
With that, let's take a look at the sales bridge. The known parameters, dollars 35,600,000,000 percent of sales last year, backlog like for like was 2.7% down at the beginning of the year. The FX translation effect that we expect has been up a couple of 100,000,000 to 800,000,000. So we have a new subtotal of what we call known parameters of €33,700,000,000 Then, of course, you have to make up your minds about in for out orders as well as prices. When it comes in for out orders, what will happen to demand for fast moving parts compared to last year?
For prices, as commented earlier, we have made small adjustments to standard products at the beginning of the year. And following price increases on certain metals, we made some selective adjustments to prices during the course of the quarter as well. With that, the word back to Tom for outlook and closing comments. Thank you, Thomas. So
let's go straight to the outlook then. You should see the outlook from the perspective that we had a relatively good Q1 ahead of our expectations when it came to order. And our outlook for the second one is to be in line or somewhat lower than quarter 1. And on the divisional level, as indicated to you earlier, on the Marine Division, we expect demand to be unchanged compared to the Q1 on the Energy Division, subject to large orders and how they will fall, our expectation is that demand will be unchanged or somewhat lower. And the Food and Water division, as indicated to you, running on a very strong level with significant growth in Q4 and Q1, we expect demand to be somewhat lower in the Q2.
And that's our outlook comments. And with that, I'll leave the word open for questions. Thank you very much.
Thank you, ladies and gentlemen. We'll now begin the question Your first question comes from the line of Max Yates from Credit Suisse London. Please ask your question.
Thank you. Just the first question I have would be around sort of oil and gas end markets. You mentioned a little bit about upstream markets. Could you maybe talk a little bit about the conversations and quotation activity that you're seeing in mid and downstream markets, given, obviously, that's a sort of probably the larger part of your exposure within oil and gas?
Yes. Thank you. And it's it is the one area which has been obviously the weak one in the downturn of the oil and gas side. On the petrochem and rat side, the order activity also as you've seen on the large order has been reasonable in Q1 and also in Q4. We've said for some time that we are ready to handle uptick the day when it comes.
We also indicated in Q4 that, that was the quarter when we generally saw a small sign of improved business activity and also orders in essentially all parts of the upstream business service as well as CapEx. But our feeling then and our feeling now is that it will still take some time before we see any meaningful effect on the order books for us. And I think that hasn't changed in the quarter. What has changed a little bit is that the activity level and market sentiment is more positive than it was. So there are investment projects in the markets.
There are some dialogues now that wasn't there 6 months ago. But so it's reasonable to expect a somewhat return market in the upstream as the year go forward, but we do not have any big short term expectations for a big change in the order intake, at least not as long as we're looking at the Q4 Q2 numbers. I think that's as far as we can go in our comments. We feel better, but it's not going to hit us significantly in Q2. Yes.
Just the I mean, the second question, mix of your backlog,
and obviously, you have some visibility over what you're going to be delivering within this division within capital equipment. Is the mix of what's likely to be delivered over the next few quarters very different to what we saw in Q1? Or does it look broadly similar when you look at your backlog?
We don't give a forecast on how margin develops. But I would say this, the effects on the energy side is not a structural change in the business or a price deterioration or anything like that. It was the mix of the capital sales and the service mix that we had in the quarter, and that was that. And that may change in both directions going forward. We'll keep you in the dark on that.
But if we were on a significant trend slope, I think we would have given you that indication.
Okay. And just the final one is sort of more housekeeping. Just in terms of your the other operations and other line, it obviously sort of fell compared to what I think most people expected. Is that a function of basically some of those costs have been internalized within the divisions and we should think about, I think it was 60 in the quarter being a decent run rate going forward? Or should we expect that to sort of go back up to more normalized levels?
Some of it is to do with what you mentioned. It is part of the selling divisions. Some of it is to do with that. We have less of projects ongoing that we say pay for in the other division as we have the change program running. Okay.
So I mean, what would you expect to sort of quarterly run rate to be of the other operations? We are not providing any forecast as far as results or margins are concerned for the individual divisions.
Not even for the cost line?
No. No. Okay. Thank you.
Thank you. Your next question comes from the line of Andreas from Deutsche Bank London. Please ask your question.
Thank you. Hi, Thomas. Hi, Tom. Firstly, on Marine and Diesel division and Frank Moon. You mentioned during the call that you had a stronger order intake in Frank Moon.
Do you think this was related to the chemical and product tankers orders that came in, in January? Or do you think that is yet to come in the Q2? And then secondly, on Frank Moon, what was the book to bill for Frank Moon?
Yes. We don't do individual we handle the Frank Moon, I think, immediately after the acquisition is a bit special. So we had full transparency and now it runs as an operating site. So I don't think, Thomas, we want to go into book to bill on the Frank Moon specifically.
But
the on the question of the contracting cycle, I couldn't give you a clear I would not expect that we've seen a lot of effects on the contracting levels. And you've seen and I've seen we all seen, I think, the number of chemical tankers that have been contracted. I think that number is 38 up until end April, which is a better number than the past. I don't think those ships have been up for into our order book at this point in time.
Okay.
May I ask a book to bill question in another way? So is it fair to still expect francmoon revenues to come down throughout the year, which you have talked about in previous quarters?
With the state of the log today, yes, we still anticipate that revenues for the pumping business unit will come down compared to last year, yes.
Secondly, may I ask on large orders, what kind of expectations you have for large orders in the second quarter?
They are built into the overall outlook and the qualifications by division as you've got just before.
Yes, I understand that, but
And you will see them when they come.
For us to know what you expect, because for the Q1, you said that you had an expectation of fewer large orders. Is that also the same for the Q2 now? Or
Well, we recognized that at $585,000,000 that was a relatively high number if you look at it over a period of time. So it would be maybe a little bit of a surprise if we would reach that number again.
Okay.
So we certainly had a
better outcome than we anticipated by a long way in quarter 1.
And I guess you were also surprised by the performance in Greenhouse because I think you had a target to be back at the reasonable margin level by the end of 2018 or in 2019. Now you are already at breakeven in the Q1 of 2017. And the performance seems to be related to volumes and cost savings. Demand has continued to improve throughout the quarter. So for me, by reading the report, it sounds like we now should expect Greenhouse to be closer to breakeven for 2017 and then maybe be back at the reasonable margin level already by the beginning of 2018?
Or am I wrong there?
That sounds that you're right, Andreas.
Yes. But
it was when you carve something out and you put it on your own, obviously, we have some oscillation on the results on the greenhouse. But it was a very I think I would say this, when you signal to customers and employees that things are moving over in the different box and all of that, we obviously were wary and concerned that we may see lost confidence or something like that, that may affect independent of business technicalities, some negative effect. That we have not seen. I would say, if anything, maybe we've seen a booster of morale and a good spirit. And in some areas, business ownership, which is a little bit beyond our expectations.
So that's part of it, I think, is reassuring for us. There is still some business to be handled. Our action programs are absolutely on track, and we know what to do this year. So it was a good start for us.
But it was nothing extraordinary that supported EBIT in the quarter for Greenhouse?
No. There's no one off things. It came out good. And the Q1 doesn't give you reason to think that it's going to explode upwards or downwards as such. It was a good step forward.
Okay.
And may I then lastly on your increased efforts in R and D. You're saying in your comment, Tom, that you have to renew important product groups faster. Can you explain a little bit what kind of products group product groups you have to renew? And is it because you have lost market shares that you feel that you need to renew them? Or why is this very important for you?
Well, of course, we're looking at the project proposals in the various product groups and based on that, of course, we prioritize. And with the change of structure, we will also be more firm, we will be more strict in prioritizing, sort of allocate less evenly between the different technologies, pretty harder in making a choice on a total level and not by product group. So I think it's more a reflection that we're going to prioritize more on a total level.
All in all, I mean, there is very good investment proposals on the table, and they've been a little bit too slow, in my opinion, if it's so I see it more as an opportunity than dealing with a big threat. We are both in high speed separation and in gas with the plate heat exchanger. At the point in time when we know what to do, we basically had the plants in the drawer. So we have accelerated them in both of those two very important product areas. The one thing that we have communicated to you earlier is that in connection with the restructuring and operations, that fit very well together with our new product program for gas to the plate heat exchangers because just the tooling up for new press tools when the new product generation come would be extremely expensive in the old structure.
So we took the opportunity to redo the production structure at the same time as we are phasing in a new product program starting probably beginning next year or something like that and then over a period of time. So I think we've got a good way forward on the products. And the same is true for high speed where it will be a multiyear program of changing sizes one after the other. So we are rolling through these programs over a number of years. So there's no magic date for when the big splash is going to happen.
It's going to be a sequential introduction of the new platforms over 3, 4 years. So that's how it looks. It's going to give us a better cost picture on the products we have, and it's going to give a better product performance for the same product equivalent as we had. So we will be more competitive gradually over the next 4 years.
But do you feel that you're lagging competition right now?
I wouldn't change job to work for any of my competitors in order to get better products, that's for sure.
Thank you.
Thank you. Your next question comes from the line of Sven Weier from UBS Francsert. Please ask your question.
Yes, good afternoon. Thanks for taking my questions. Three questions, please. First one, I was just wondering if you could comment on the in for out orders in Q1, whether they were developing more strongly than the overall orders or weaker than that? My second question is on Marine Services.
Wartsila was quite confident that offshore merchant services would be improving towards the second half. If I understood you correctly, your orders and service hasn't been or your sales and service haven't been so weak in the 1st place anyhow. So maybe any color you can give us on that. And then the last question is, you gave the granularity again in the appendix of the presentation, 36% from the orders from the yards in Marine. I was just wondering if you could give us some direction how much of that is really with the traditional merchant and how much is outside of that segment?
Thank you very much.
If we if hi, Svein. If we start with the development of in throughout, We had
for service
a sideways development. If we look at Fluid Handling, a slight decline from a very strong quarter 4 and a marine services, which was somewhat up as Tom commented on initially. So no major shift sequentially from quarter 4.
And year on year?
Again, no major change. Remember, we had a declining development for Marine from the beginning of 2016 and continuing during the course of 2016. And we had an improvement on fluid handling. So the end the net of the 2 is no significant change.
Okay. Thank
you. Are you ready for your next question?
You had 2 more questions. You had marine services as well, right? Where I mean, Tom commented earlier that marine service is up sequentially, which is, of course, nice to see because it was going slightly south during the course of 2016. And then the final question, can you repeat that one, Sven, on this one? This one, Nui, this one.
Sven, could you press star 1 again?
Hello.
Can you repeat the last question, please?
Yes. I think on Page 31, you gave the breakdown of the marine orders and 36% was on the yards. And I was just wondering if you could quantify how much out of that is the traditional merchant and how much outside of traditional merchant?
From the top of my head at least, I can't really give you a solid number. Remember, we had a good level in quarter 4 for Cruise. And of course, that has gone down as a relative share. So that means compared to end of quarter 4, there is on an LTM basis an increased share of merchant.
That's a fair comment, I think.
Okay. Thank you.
Thank you. Your next question comes from the line of Piotr Arcewicz from Ironside Capital. Please ask your question.
Hello and thank you for taking my questions. Just to get your view on how do you see competitive landscape and maybe focusing mostly on the heat exchanger business. We have seen one of your major competitors, Calavion, having shut down to plants in the last 12 months, 1 in Germany and more recently, 1 in Pennsylvania. So how do you see the supply demand in this particular segment? And how do you see competitive pressure?
Do you see yourself taking market share, losing market share towards the larger competitors like Caribbean or Ramon and towards the smaller competitors?
Yes.
It's a good question. I'm a little bit unsure on how far I can go on my comments. I would say like that Kallvion or the former GEA, as you know, is a traditional competitor to us in the heat exchanger market as well as in the gas structure in some other areas. You could say we've been growing up together over a long period of time. So the competitive dynamics with us, I think, is fairly established and hasn't remarkably shifted since the change of ownership.
So I don't see a very strong dynamic in that sense looking at the quarter or looking at last year, whether they will become a more efficient and stronger competitor in the future as a result of actions they are taking or whether they will create some challenges for themselves. That's obviously to be seen. But as for me, I expect them to get strong and we will have tough competition from them and others in the future as well. I think the one area, if we look at the gasketed plate heat exchanger area specifically, I think it's been more a challenge of low cost competition in easier and low tech applications, partly in the residential markets where maybe we've been finding a challenge to find a model where we actually can make a decent return on the sales we're having. So I think it's fair to say that we've been decreasing our business volumes there as a result of competition or voluntarily based on the way we look at pricing and value add.
And so that has maybe affected us over the last few years to a degree with the lower cost competition. But then if you look at other areas of our heat exchanger business, you've seen the strong orders in Pakenox, where we have a very unique product technology. We are not affected by competitive pressures in that way in that business, and it's true in some of the other high-tech businesses for us. The one area where I would say clearly we are gaining market share is in the braze heat exchangers and our OEM business. It's been performing strong.
We built it over 5 years in a very efficient way and have very strong momentum. So I would say, looking at the energy and heat exchange assortment as a whole, you have some pluses and some negatives. We are really trying to grow when we make money.
Okay. Understood. And looking at some smaller competitors, the heat exchanger segment seems to have been fairly challenged both in terms of volumes and margins for the last 2 years. Have you seen this causing some smaller competitors, maybe local competitors shutting down and going out of the market?
Unfortunately,
it's difficult to
people stay too long in businesses without making any money. Unfortunately, that is it's true in this area. I mean, 4, I would say, it is only again, when we talk about heat exchangers, to some degree in tube and shell, where we see low tech competitors. And to some degree, we are moving out of some of those areas within the greenhouse structure that we just don't find attractive enough unless we have a strong technology component as we do in Pakenox or in that type of context. So there we found our way.
I think otherwise we don't see low small competition and low cost competitors other than in the gasket and plate heat exchangers because it is feasible to actually press a plate and put the gasket on top of it. So there we do have the situation. Most of the small guys are Asian, and I wouldn't say that, that has changed dramatically in the short term. And I think for us, again, I think our response is more than trying to stick it out at every price. We're trying to focus our future growth opportunities in areas which require application expertise and know how and a global service structure as opposed to winning every building project in China.
Okay. This is Kieran. And my second and last question is about again about the profitability. And I understand that you don't give guidance regarding the backup profitability, but we have experienced very strong growth in the commodity prices, especially in the metal prices. And these are the raw materials going into your products.
Have you seen or should we expect any impact on the margin, either positive or negative from this movement?
With the comments I made earlier, I said that we've had less of purchase price variance is positive than anticipated coming from what you just said. I also mentioned that we've made certain adjustments to prices during the course of the quarter. And the net of that, then I would like to go back to comments from the earlier metal price hike. We are convinced that we do have the pricing power to compensate ourselves for movements in metal prices.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Peter Murdock from Morgan Stanley. Please ask your question.
Hi, Tom. Hi, Thomas. Just a quick question for me and it concerns marine. Could you talk a little bit about the difference in profitability for each division in marine? So framo versus the traditional boiler business and then environmental, it's just because each one is growing at different rates.
Now what I'm trying to understand is the mix in the orders today, are they improving versus the mix that you had basically 6 to 12 months ago?
We have made one specific comment already with the divisional development for quarter 1. And that is a negative mix effect within capital sales and marine. And this is explained by less of Pumping Systems revenues. So Pumping Systems is above average. And then secondly, as far as the environmental products are concerned, if we look at the gross profit margins of these products, they are similar with the average of capital equipment or, say, traditional Alta Laval products.
But what you must remember is that we are sharing half of the bottom line of ballast water systems with our JV partner. So as far as the net operating margin is concerned, there is an adverse effect from ballast water increases. That is as far as we go in the specifics.
Got it. But just on orders though for the quarter, because Framo was increased year on year, that would suggest that orders were perhaps higher profitability wise.
We have to do a ship mix, yes.
We hear your question, but you got to be happy with the answer.
Okay. Thank you. Thank you, guys.
Thank you. Your next question comes from the line of Glen Liddy from JPMorgan. Please ask
In the Marine business, you've highlighted that the cruise was weak. Is that just because customers are delaying or the shipyards are delaying placing the orders with you because they're very busy at 2021?
Well, I did say it was weaker than a very strong quarter 4. And that, of course, is not considering the exhaust gas cleaning order, but for the rest, we had a very, very strong quarter 4 and there is less that came in, in quarter 1. It's still on a good level being cruise as part of the total.
Okay. And on ballast water, I mean there are lots of different technologies available today. Do you have type approval from the U. S. Coast Guard for all the product types that you wish to have in your portfolio?
We have one technological solution and we have today approval for 2 out of 4 sizes. And the other 2 sizes there we have provided documentation, and it is in the process. And we will anticipate to get approval for the remaining two sizes in the future, not a too distant future.
Okay. But you're not expecting to launch any new technology solutions, the same technology but just different sizes?
We have them launched, but they simply don't have U. S. Coast Guard approval. We are not into launching any new technology. Let me remind you that we are now selling the 3rd generation of our ballast water solution.
So as far as cost performance is concerned, we have come a long way since the first launch.
Okay. And just final question. On your standard products, you said you had small price increases earlier this year. And just to be clear, that's fully offset any rise in your input costs. Is that correct?
That is absolutely what we are looking at, yes.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Wazee Bazzi from RBC. Please ask your question.
Hi, good afternoon. Just a couple left from me. I was hoping for just a bit more understanding on Food and Water. I mean, you've had orders up 17% year on year and I can't see and none of them were large orders the way you report them. So I was just interested in some commentary on what's going on there, whether you think that's the underlying level of demand or whether there's some pent up demand in pharma and bio?
And then this one was the second question was on the environmental side. You said the conversations with customers are increasing on retrofit. But what do you think is the trigger to get those to turn into orders of moving on from conversations?
Well, let's start with food and water then. Large orders in food tends to be either VOT or brewery. The VOT side, vegetable oil side were during a period of time or was during a period of time, I would say, over invested. So there's been a lot of capacity in that area. It's been creating some problems for customers in various areas.
At some point in time, that's probably going to level out and change. And there are some dialogues on larger VoT projects right now. When they will come, we will see. But that's an explanation for why there been an absence of large orders in 2016, largely on the BOT. The brewery order is above €5,000,000 They are always relatively rare.
The majority of the brewery orders are below €5,000,000 so you don't see it. We do. And the brewery side, particularly on microbrewery, has been very active and good for us over a period of time. So that part is moving forward well. There are occasional large orders for brewery that we announced, but I wouldn't say there's been a trend shift there.
They come and go and but they are not so frequent. So that's about how we've seen the food side and perhaps a word on our expectations on how that will develop as well. In terms of the conversations on the retrofit, It is not what is the key in those areas are when it's not our ability And since this legislation is coming into place now, those drydock visits are coming. So we at this point in time, we will only announce you will only see those orders as they materialize and as we recognize them when down payment is paid by customers, and that will be in relationship to their visits to dry dock. And consequently, we don't expect to have had a lot of order intake for retrofits in Q1, as we said, and we don't expect a huge amount in Q2 either.
But it's very natural that the ship owners are getting ready for these programs, particularly if you run 5, 600, 6 100 ships around the world, you have an ongoing stream. We will most as things stand, we will not announce any frame agreements. We don't consider them orders, and at this point, we don't. So in that sense, don't expect a lot of announcements around this. We you will see it in the order book as it happens, and we will guide you as to whether we see any changes.
But the direction of the market in both areas is pointing in a positive direction as we should expect, and we see some signs in the order book in Q1.
Great. And I'm sorry. And just going back to the Food and Water side. So it sounds like there's nothing lumpy in there. That 17% year on year order growth, is that reflecting just the underlying strength of the business at the moment?
I think so. It's been strong. We've seen a strong development across the board in pharma, in biotech, in food and to some degree, also positive development on the water side. So it's been it was most clear for you last year in the way the sanitary components grew, but in fact, it's been positive also in other parts of the business.
We've had a good run when it comes to orders below €5,000,000 but above €500,000 that sort of we look upon from a management accounts perspective. And we have, as Tom commented, seen the EOT coming back. It seems like some of the overcapacity has been absorbed already.
Great. Thank you.
All right. Thank you.
So with that, I think we've come we need to come to a close. We have an AGM to take care of. So we'd like to thank you very much for participating in the call, and thank you for your questions.
Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect. Speakers, please stand by.