Welcome to
the Alfa Laval Quarter 2 Earnings Call. At this time, all participants are in a listen only mode. Following the presentation, there will be a question and answer session. I must advise you that this conference is being recorded today, 18th July 2016. I would now like to hand over to the President and CEO, Mr.
Tom Erickson. Please go ahead, sir.
Thank you, and good afternoon. Welcome to the call. You just received our Q2 report, and I will give some initial comments to that and afterwards hand over to Thomas Thurston, CFO, for some further details. Let me start with a couple of overall comments before addressing some of the numbers specifically. The year on year outcome reflected largely the situation in the oil and gas and marine industry where there are some clear weaknesses and the year on year figures both for order intake and sales come in about 11% to 12% down compared to the same quarter last year.
Also the and sorry, and also in terms of our cost base and the situation to adjust. We are continuously working with that, and you can see that partly reflected in stable gross margins. In a sequential perspective, our numbers are more positive. We see good development in a number of areas, and I will come back to that shortly. In terms of the financials, perhaps the most strongest number is the cash flow, which came in very strong at $1,200,000,000 in the quarter and reflecting a 35 percent growth compared to the previous quarter.
So that was a rock solid number for the quarter. And finally, as an overall comment, as you know and as was indicated at the last quarterly call, we have initiated the strategic review. We were not specific about the timing at that point in time. The work has progressed well, and we are now at the path where we will clearly address the details and get back to you on the details of the outcome of that review prior to year end. So with that, I'll go to some of the key figures for the Q2.
And as I indicated, it was reflecting the market situation in oil and gas and marine to a large degree with a year on year decline of 11% to 12%. And similarly, the EBITDA declined to $1,400,000,000 We were mainly affected by mix effect compared to the earlier year and also the capacity utilization in our factory and in the industrial system is obviously affected by the decline. With that said, we have good stability in gross margin and an active work on the cost side. If we go to the sequential numbers, order intake grew 5%, net sales grew 9% and our EBITDA grew also 4.5%. So sequentially, the development was significantly more positive.
We have sequentially netted out the decline in oil and gas and marine essentially with stability in most part of our portfolio in the quarter. And I would say the picture is similar to Q1. We are relatively stable or positively growing in several areas of the businesses outside those two key segments. And I will come back to some details on how that looks geographically and in the different parts of the portfolio. If you look at the order trends in a bit of a longer term perspective, you'll see that in the quarter, we continued with a few large orders.
There are not much activities for larger CapEx projects in the market at this point in time. We announced in the period 2 larger orders amounting to total of just about SEK100 1,000,000. So it was 1 more than last quarter. But as you see in the historic comparison, we have been up at SEK 300,000,000, $500,000,000 in the quarter. So it is a very low level.
Other than that, the base business and services businesses are developing okay. And as you see on that note, the development both historically but also sequentially, it is a relatively strong quarter, I would say. The 9% decline that we have year on year is if you look on the structure of that on the next page, it is reflecting about 2% 2.5% of currency effect in that. So organically, it is a decline, but the decline is around 9% as a whole. The margin development is slightly negative, although the EBITDA result as such increased sequentially.
We did have a further decline on it. It is a reflection of the invoicing of oil and gas, which is still decreasing, and that is a profitable part of our mix. But and there's also some utilization effects in there. But other than that, there is no big drama in the market when it comes to pricing and such. That takes us then to the divisional reviews.
Let me start with the equipment division. As in the previous quarter, the Equipment division was very stable. We had good growth in the quarter. The strongest part of it was in sanitary related to food and the pharma, which saw a very strong growth in the quarter, both year on year and sequentially. In Industrial Equipment, we have some seasonal effects in especially in Q2 and those we had this year as well.
And all in all, it was a good quarter for order intake. We built order book. Margins remained stable, although we didn't repeat the Q1 margins. As already indicated at last call, there were some one off effects in that result. So we came in as expected in on a good level for the Equipment division.
Going to marine and diesel. Sequentially, we were stable in the order intake for the marine sector. There were variations between areas this quarter. The pumping system area was strong. We had good sequential growth in that area.
And all in all, we stayed stable for the division as a whole. And margins remained on a good level with good profitability in the quarter. In Process Technology, we saw a stable or positive development on order intake. However, the low activities in oil and gas means that our mix is still challenged and our profitability remained at around 10% in the quarter. And as indicated in the quarterly report, we don't see the mix change in a positive way coming in during the rest of this year.
And that takes me to the summary for orders received in the customer segments, and there is no surprise in that for you. If you look at the growth the clear growth areas for the 1st 6 months of the year, sanitary equipment remains very positive. The Process Division service business has grown nicely, particularly in Q1. But all in all, it's a good first half in that area, reflecting efforts to develop the business when large orders are not very present in the market. Most of the other areas are stable with small variations in pluses and minuses with the exceptions of part of the marine segment and energy and process as you can expect.
From a geographic point of view, again, there is big impacts on marine and oil and gas. And you see the marine effects in the invoicing in Asia primarily where the numbers are negative year on year and sequentially. But as in the Q1, excluding the marine business, China is growing and Asia is growing as a whole. And if you move to the U. S.
Where most of the effects in oil and gas are being seen, we are still down year on year, but sequentially, we are back in growth in the U. S, and it was all in all a good and stable development of the base business and larger orders in the U. S. For this quarter. Eastern Europe and Russia continues year on year and sequentially to grow.
We think Russia has turned the page. We have seen a strong quarter there. And all in all, those numbers are good. We've seen a return to growth in Nordic and Western Europe in the quarter, and that has been reflected among other things in the EPD numbers as well as you've seen before. Latin America may look negative sequentially with the 13%, but it should be remember that the Q1 in Latin America was very, very strong indeed.
We are growing year on year. And for the first half, we are still on positive numbers. So we are positive around Latin America as a whole for this year. And that is the review on the order situation for the group, and I hand over to Thomas for a further discussion on the numbers.
Thank you. Thank you, Tom. Good afternoon, all of you. Let me jump right into sales. Let me start off by reminding you of what I said after the quarter one report with regard to expected sales in quarter 2.
At the time, I said, we believe it's reasonable to expect a somewhat higher level of sales in quarter 2 compared to quarter 1. This is explained by the phasing of delivering the order backlog as well as a certain seasonality. As you've seen from the report, we realized sales of $8,950,000,000 in quarter 2. In comparison with quarter 1 then, that was an increase of approximately 9% at constant exchange rates. So then compared to quarter 2 of last year, we were down 8% plus again at constant rates.
So I think to conclude, in terms of invoicing, we ended as expected or even slightly better in relation to our own view of quarter 2. A few words about service. The service activities represented 28.7% of total revenues in the quarter. That is to be compared with 25.8% a year ago and 29 point 7% in quarter 1. That is to say that aftermarket is providing a positive mix effect year on year and a negative mix effect sequentially.
However, the content and this is important, however, the content of service versus part within the aftermarket activity was higher having an adverse effect on the service margins if we look at it year on year. Let me then deliver the first forward looking statement. We believe it's reasonable to expect a somewhat lower quarter 3 compared to quarter 2. And this is because of the following main reasons. It's of course to do with the phasing for delivery of the backlog, the demand development in certain sectors during the spring and a certain seasonality when it comes to revenue recognition due to the vacation period in some regions.
Let's then move on to gross profit margin. Gross profit margin for the quarter was 36.2% or almost exactly on the level of last year and representing a decline of 0.8% sequentially. Again, with the Q1 report, I said, in the near term, we expect adverse effects from volume that is to say load and mix. We expect positive FX effects and lower metal prices to provide some compensation. I think it's correct to say that the actual means that gross profit margin was influenced by the mentioned parameters as expected.
Let's then move on to the next slide for some further comments on the gross profit margin. As just said, the actual came in on the level of last year and below the Q1. We were suffering adverse effects from a negative price mix effect in capital sales year on year to do with declining oil and gas content and PTD and mix in marine and diesel as well as, of course, a weaker load in certain factories. Compensation was given by positive mix from relatively more after sales year on year and more so the FX transaction effects. Sequentially, the relative reduction of service was a negative, a worse mix in capital sales and then again, a weakening load.
Compensation again was provided by FX and metals. And of course, the number of pluses and minuses gives you a sense of the magnitude of the various parameters. Let me then give you the second forward looking statement. In the near term, we expect adverse effects from volume or load to further increase. We expect slightly reinforced positive FX effects, And that is, of course, assuming a relatively weak SEK that is as weak as today.
The FX then to provide some compensation. With that, let's continue to look at overhead cost development. For R and D, as you may have seen from the report, we ended $213,000,000 in the quarter, which is an increase year on year of 15.5%, representing 2.3% of sales that is to be compared with 2% last year of sales. In summary, R and D has consciously been increased to support future sales despite a declining trend in current orders. But remember, you have seen swings in the development between quarters and that is of course to do with an uneven occurrence of things like models and test versions of individual product designs.
So this is not to be seen as a continuing increase to the tune of 15% in R and D. But again supporting the conscious decision to increase as I just commented. Moving on to sales and admin. We had sales and admin of $1,550,000,000 in the quarter, representing an increase like for like of 5% year on year, an increase explained by, of course, salary inflation, increased pension costs in the U. S.
And the UK. And I think it's also important to mention that, of course, housekeeping measures are continuously initiated. We're having a very tight control on headcount, but the resources initiated resource reductions initiated in particularly oil and gas, they will only be coming on stream during the second half of this year. Sequentially, the level represented an increase of 8%. And of course, that is more a question of coming back to the kind of level that you saw during the second half of last year.
Remember, we had a sequential decline of 6% between Q4 and Q1. And then on top of that, of course, salary adjustments from Q2 in certain geographies. Profit before tax, dollars 1,260,000,000 1,270,000,000 explained by the lower invoicing, but of course also the somewhat lower operating margin then compensated by a better financial net. Before leaving the P and L, few words about taxes. We had a tax charge of $334,000,000 which represents 26.4 percent of profit before tax, below guidance for taxes, but still the guidance stays at 28%.
Then EPS 2.21, of course, explanation again lower invoicing and somewhat lower margin. And finally, the return numbers, EUR 19.9 percent and 20.2 percent, respectively, for return on capital employed and return on equity. Even if somewhat lower than last year, good levels of return despite the decline in profitability. If we then move on to the divisional performance on the coming on the next slide. The comments that I will give you relate to operating margin.
The comments on the slide, they relate to profit and absolute terms. So again, as I always say, you get it both ways. Equipment came out higher than last year, however, lower than quarter 1. The sequential decline is due to a combination of positive mix still, but reduced through somewhat higher cost and a lower volume or load. Process Technology operating margin came out lower than last year, but slightly above quarter 1.
Sequentially, the increase in margin is thanks to slightly better outcome in project execution, which I think is worthy of note. Margin was negatively impacted by somewhat higher overhead costs and again, their share of lower load in certain factories. Finally, Marine came in almost exactly on the same level as Q1 in terms of operating margin and this is of course explained by more positive FX, particularly U. S. Dollar, Norwegian kroner and then reduced by lower sales volume, lower load as well as slightly higher overheads.
With that, let's move on to the cash flow statement. Cash flow from operations amounted to just over $1,200,000,000 a reduction of $300,000,000 year on year. The explanation is, of course, the lower profit net of taxes paid and then a somewhat smaller reduction in working capital. Regular CapEx ended at $128,000,000 as last year. And then remember here, for the full year 2016, add $200,000,000 to last year's numbers for the investment projects going on in Kolding, Denmark and Pune, India.
Financial net paid was positive $21,000,000 an outcome some $100,000,000 better than last year and explained by to some extent lower interest paid, but of course, mainly more favorable FX differences. All in all, free cash flow of 1 point $16,000,000,000 compared to almost $1,300,000,000 a year ago. The year on year decline is in summary due to the net of lower earnings compensated by better financial net pay. This cash flow has brought debt to EBITDA to 1.74. We were at 1.97 a year ago.
Then let's look at FX. FX effects in EBITDA in the quarter were positive with $137,000,000 an outcome as expected a quarter ago. The forecast we've updated and with the weakening Swedish krona during the Q2, we see bigger positive effects from transaction exposures. So a total positive of 4.75000000 for the full year. That is compared with EUR 350,000,000 a quarter ago.
So more positive this time around. Let's move on to backlog then. We had a total backlog of $18,600,000,000 by the end of June, representing 6.6 months of LTM sales. Of that backlog, some $10,800,000,000 are scheduled to be shipped before year end. This means a reduction of $2,250,000,000 compared to June of 2015.
Then let me just remind you, we were down $1,700,000,000 in terms of order back to be shipped in the coming year by January 1, but 2.25 less in H2 compared to 2015. Having said that, let's finally look at the bridge into whole year sales. We have sold we have revenues of $17,100,000,000 for 6 months, down $2,000,000,000 from last year. To that, of course, we add the $10,800,000,000 for delivery before year end. Then last year, we received in fraught orders, orders in with shipment before year end of SEK 7,400,000,000 last year.
That gives us a total of SEK 35,300,000,000. With regard to demand, you know that we've seen a decline for a number of quarters by now and we, as you have seen, expect the same level or slightly lower level of demand in quarter 3. So I think that sets the scene for what kind of development year on year can we expect in quarter 3 for in product orders. And then of course, prices, small adjustments on standard products, as I've commented before. So I think this gives you a good basis for projecting full year sales Alpala Valle.
And with that, I give the word back to Tom for the outlook and the closing remarks.
Okay. Thank you very much, Thomas. We'll go straight to the outlook comments for the group and for the divisions. For the group, you're already in the quarterly report. You've seen our outlook, which is that we expect demand during the Q3 to be in line or somewhat lower than in the Q2.
And as per the divisions, the outlook goes as follows. For the Marine Division, we believe demand to be somewhat lower. In the EQD division, we believe the demand will be on about the same level or slightly lower. And in the Process Technology division, we believe demand will be on about the same level as in quarter 2. And as you realize, these are our expectations also based on what's happening in the marketplace.
You've seen downgradings in the expected number of contracted vessels in the marine area. And that was as expected from our point of view. And if you look at the process technology development, you've also seen rig count stabilizing or even slightly improving. And we believe that all in all, for Process Technology, the same level is the most appropriate forecast. So there you have it.
I think I'll leave it at that, and we'll go to questions and answers. I hand over.
Your first question comes from the line of Klas Pinklund from Citi. Please ask your question.
Yes. Hi, Tom and Thomas. It's Klas from Citi. A couple of questions, please. Firstly, on the margin, ProcessTech margin continues to disappoint a bit as the backlog unwinds, negative price mix and factory reload.
The margin in Marine and Diesel is still holding up. Obviously, different operational gearing to volumes in Marine and Diesel, diesel, but still difficult for us with visibility here. Could you comment a bit on the backlog, whether we're just waiting for a big margin decline in MDD as well or if we could hold the margin here?
Well, Claus, I'm sure you would love to get the forecast of margins in the various divisions, but you know that we are not providing forecasts as far as margins are concerned other than what you have just gotten. But this is where we are. Please have in mind that the aftermarket content in the Marine business is the highest of the 3 divisions. And I think that is a factor to have in mind when you assess the margin development in E and A declining sales in declining sales for the various divisions.
Yes, exactly because it feels like the service business took a leg down here in the quarter. And I'm just obviously going into the second half, this is shorting throughout. So some sort of margin decline should be expected, I guess.
I think now you're referring to orders. The percentage of aftermarket revenue to total revenue is higher in marine and diesel than any of the other 2. And that, of course, provides more stability to operating margin than for the other 2.
Okay. My second question is on oil and gas. Orders are bottoming in energy and process, oil prices moving higher. I appreciate what you said, Tom, but have we seen any positive development at all on the quotation side, your discussion with your customers with oil price moving higher or is that still too early?
Well, let me say that the there's certainly one area in oil and gas where we see a high level of quotation that's related to the changing situation in Iran. It's not going to mean a total turnaround for AltaRaval as a company, but we see spots which are positive. We see a breakeven situation or even a profitable situation for shale oil and gas, at least in the Texas region based on current levels. And that drives the stop of decline in rig count and probably turning to a high level. We see announcement in Kazakhstan, as you might have seen, which is one of the biggest CapEx projects announced in recent year in the sector.
So I think there are as to be expected, there is some underlying positive fundamental to the business going forward. But we still have to take a fairly prudent view here in Alfa Laval when it comes to how will that move towards possibly materializing in our order books. And we feel that after the big CapEx write downs in the sector, there will be some time before the investment decisions are being taken and the capital is committed. So we are not we are obviously very positive to what has been happening over the last 6 months in the sector. We have to be, but we are still cautious in terms of how quickly we expect that to come into the water book.
So as we speak today, we are I would say, our focus is to make sure that our cost base is in shape as opposed to hoping for a big order book to fill in the short term.
Then finally, on underlying demand versus seasonal. It's obviously good to see that we're improving quarter on quarter, but the second quarter is always stronger on seasonality. Could you help us understand what surprised you positively quarter on quarter, if anything, thinking particularly about the equipment division?
Yes. I think it's clear to us that the areas within food and pharma and to some degree water came in strong in the quarter. You see that in the cemetery business in EQD, but it was also true if you look at some of the sectors in PTD, especially for the brewery and the vegetable oil side. So we had a good quarter in the food and pharma sector as a whole. And I think that came in perhaps a little bit stronger than we had expected, I have to say, especially given the fact that also in the food sectors, the amount of large orders is not terribly big.
So I think the organization is working well in the absence of these large orders that sometimes drives our sales development, there is an increased focus on the base business to a degree on the service business. And I think when you look at the incoming orders excluding the large ones, we feel that, that was a relatively good performance overall, but especially in the food and pharma sector.
Thank you.
Your next question comes from the line of Matt Yates from Credit Suisse. Please ask your question.
Hi, thank you. Two questions from me. Just firstly on the Process Technology margin. I think you said in Q1, there were a couple of exceptional items in that margin where you had a cost overruns in a few projects. Was there anything in the Q2 margin that we should think about as exceptional?
Or was that 300 basis points year over
year decline? The pipeline? I tried to express that in my comments just before. There was a better engineering performance in Process Technologies. So no mishaps in quarter 2 in Pay Today as far as engineering or project delivery is concerned.
Okay. And when you look at the mix of orders coming through that division as we move into Q3 and Q4 of this year, I mean, is the mix sort of incrementally worse than we've seen currently? Or is it actually stabilizing in terms of the share of oil and gas versus other end markets in that division?
No material variations in at this point. We cannot see any material variations in the coming quarters.
Okay. And I guess a second question on the marine and diesel business. The current mix, I mean, we don't see it anymore, the current mix of francmoan revenues versus the original Alfa Laval orders in that division. But I mean, should we assume that actually in the order backlog or the orders being currently taken now, the mix is very different than the revenue mix between francmoan and Alfa Laval? And I obviously, we know the margin differential between the 2.
I guess what I'm asking is, is that going to be a mix headwind as we move through the back end of this year and into next year?
Well, as we have commented already late last year, Frank Mone is was full for 2016 in terms of deliveries. So a decline in revenues, material decline in revenues in Frank Mon is only to be expected later or really late in 2016.
And have those I mean, has the Frank Moen business I mean, it seems to me that the Frank Moen businesses underperformed the overall Alpha Marine and Diesel business year to date quite considerably. Is that a fair assumption?
No, it's not. I cannot see how you came to that conclusion. No, not at all. And then of course, the FX effect there of course, we got some support from the weak nought to dollar. Sorry, I meant the francmoin business
in terms of orders relative because of the $1,200,000,000
So when it comes to Frank Mone, remember after quarter 4 when we had an extraordinarily strong booking, we said we expect a large decline in quarter 1. And remember, that really happened and it happened exactly as we predicted. We have now seen a good recovery in orders for pumping systems in quarter 2. So we were right in that we'd say we said we believe that we will have a pickup from the very low in quarter 1 as well. So no.
Okay. Thank you very much.
Your next question comes from the line of Lars Brosson from Barclays. Please ask your
question. Thanks very much. Hi, Thomas. Three questions. Tom, first of all, on strategic review, you still come back a bit before year end.
I wonder whether you can talk a little bit about what you're doing on the side outside of the review currently on costs. I think I heard Thomas talk about a resource reduction in oil and gas, not sure whether that relates to your cost levels. And if it is, what are you doing there specific? And perhaps just more generally on your strategic review, what's holding you back from announcing something earlier than year end, particularly on costs? If I want to just maybe just take them in order.
In terms of secondly, in terms of your outlook for Marine into Q3, just on Pumping Systems in Q2, can you talk about what drove that? I mean, I see tank orders still running at very depressed levels according to Clarkson. I wonder whether you are baking in a reversal of that recovery you saw in Q2 on Pumping Systems in Q3? And maybe also if you could talk a little bit about what you see on Marine Services as you go into the Q3, obviously down year over year and Q over Q in Q2? And then finally, just Thomas, a quick one, a bookkeeping one, net interest in Q2, the interest expense of SEK 104 million.
Can you just talk about what that was and how we should think about modeling that net interest level for the remainder of 'sixteen? Thanks.
All right. Let me start with some comment on the cost side. The work that we call the housekeeping work is ongoing full speed as normal. And you should look to the gross margin numbers being stable at just over 36% as an example of what's being done in terms of efficiency and in terms of sourcing in a situation where we are struggling with smaller volume and lower capacity utilization. So there is a program in place for handling a decline and that's running up until year end with clear targets.
And we are following that as a matter of business as normal. It is clear that with the declines that we have, we have reason to consider what in addition to the normal measures do we potentially need to consider. And the reason we are not dealing with that as a specific issue is that I want to make dead sure that what we do in the short term is consistent with what we want to achieve in the long term. And consequently, you will have to wait for our announcement in this case. The guidance that we are giving you on the timing is that it's going to happen within this year.
So you should not expect the next conference on the topic to happen on New Year's Eve. We haven't given a particularly timing during the second half as to how things would play out. We just want to signal that what is coming out of this review is happening in the second half. Regarding the marine and the pumping system, we our opinion in the market is, 1st of all, there is a lot of the order negotiations ongoing. It's not happening on the ships that are contracted right now or in quarter 2.
There are still negotiations ongoing with already contracted fleet, which sits in the book of the yards at present. So the activity level in pumping systems in quarter 2, as you've seen and looking forward, is not necessarily reflecting the, let's say, the Clarkson numbers on where is the total ship contracting going. It's also so that the product tankers, which is one of the main drivers of the pumping system business, is a relatively healthy business with both ships and ship owners making money. And we see growth in the downstream oil and gas side in general when it comes to the refinery business in general and related to the product tankers and transportation needs in general. So there are variations in the marine sector when it comes to the health.
And I would single out the cruising segment and the product tankers as 2 areas which are still in good health, while certainly we are impacted by the overall difficulties in the sector as a whole. And I think I'll leave that on those 2. And then on the third point, Thomas, if you would Yes.
When it comes to marine services, what creates a certain amount of lumpiness in the numbers is that the contracts for overhaul of larger boiler systems is no doubt lumpy. So that sort of creates variations in marine service. There is stability in the underlying spares volumes. Then finally, Lars, you said we had a net positive interest net, but we didn't. We had a positive financial net, but we had a negative interest net, and we will continue to have a negative interest net.
But what the FX difference is in Financial Net will be, well, your guess is as good as mine. Will we have another Brexit? Will we have another issue similar to what's going on in Turkey and so on? Again, your guess is as good as mine. As far as interest up and so on, let's say that we are in the neighborhood of $30,000,000 to $40,000,000 per quarter of interest paid.
So no change there really.
That's helpful. Thanks.
Your next question comes from the line of Andreas Koski from Deutsche Bank. Please ask your question.
Yes, hi. It's Andreas Koski from Deutsche Bank. Can you hear
me? Yes.
Perfect. So I would like to come back to the sales bridge that you provided and ask a question about in for out orders. Could you please explain how in for out orders in the first half of this year compares to in for out orders in the second half of last year?
From the top of my head, I can't give you a number, Andreas. But of course, if we look at the base orders, they to a very large extent come from aftermarket, which has shown a slight increase in volume over the last 12, 15 months. If we look at capital sales in equipment, that is basically base business, again, flat to slight growth. And then the 3rd component of base business is a share of Process Technology Capital Sales, where of course it's more of a mixed bag. But I mean, all in all, I would say with the decline in base business in Process Technology, there is some decline in Improut orders.
But not the big one?
It's not of course, not as large as the decline in overall orders because there, of course, you have longer lead time contract orders as well.
Yes. Okay. Perfect. And then regarding to Marine and Diesel division, you are referring to a negative price mix when you discussed the year over year margin drop that you had seen there. Could you please just explain where you're seeing this negative mix or if it is also on the pricing side?
There is a negative price mix effect. And of course, again, the mix is not the same from 1 quarter to the other, and we have seen a decline because of the price mix effect. And remember, many of these orders, the vast majority of these orders, they're based on negotiations between us, the yard and the ship owner. So of course, there are variations in both elements.
But would you say that the pricing pressure becomes bigger and bigger now when we are seeing fewer and fewer ship orders?
No, there is nothing that proposes that pricing pressure is different to what it was 3 months ago or 6 months ago.
And then lastly, on quotation levels around large orders. During your presentation, I felt that you do not expect a significant pickup in large orders during the second half of this year. Would you say that it is correct in depreciation from my side?
Well, we're not giving an outlook on large orders specifically. So you will have to look at our overall demand outlook as a basis for those assumptions. It's also like this that I mean these large orders are from a communication perspective, we draw a firm line at €5,000,000 and consequently, €4,000,000 doesn't hit the communication line, whereas the €5,100,000 does. So from our perspective, there is a spectrum of from small to large. And while the ones that are communicated are few and clearly fewer and it reflects a reality, In fact, we do negotiate ongoing as part of what you see as the other part in addition to the base business.
There is a healthy pipeline and there's been a healthy closure of projects. For example, the brewery and the vegetable oil revenues or sorry, the order intakes from the quarter, there are a number of those projects involved. So the market for project is certainly alive, but the large CapEx spendings are very, very limited.
Okay, perfect. Thank you very much.
Your next question comes from the line of Ben Maslin from Morgan Stanley. Please ask your question.
Thank you. Hi, Tom. Hi, Thomas. Can I just ask on sales and admin costs, please? It says in the text that they were up 5% and 3% year on year organically and sales obviously down 10%.
Just maybe more comment on why there is such a mismatch on the overhead. And I guess why you're not squeezing it harder? Is that something that you'll be addressing in the strategic review? That's the first question.
Yes. Well, as we've tried to vocalize earlier here, we are having a tight control as we have for a very long time during our through our processes in terms of headcount, and that is providing some effect. We have initiated adjustments of capacity as referred to earlier in particularly in the oil and gas area. We do have some effects going into the other direction as you know and as I mentioned, we have the salary inflation, We have some pension issues in EU and U. S.
And UK. We see increased costs for pensions. But it is now housekeeping and we will see more of the effects from the referred oil and gas adjustment during the second half. But as Tom commented earlier, we combine the short and the long term in the strategic review, and that's why you have not seen any kind of programs for adjustment as you are asking for.
Got it. Okay. Thank you. Then on the currency, the tailwind you had of EUR 137,000,000 in the Q2. Thomas, can you give us any sense as just how that benefit is split across the different divisions just so we can work out the kind of underlying development?
Relative to the size of the divisions, one division got a bit more than its relative weight and that is clearly marine and diesel because of the weaker NOK today than a year ago or 2 years ago. So somewhat more benefit to Marine and Diesel than its relative weight.
Great. And then just finally on the backlog. I mean, are you seeing any delays or deferrals, revenues being pushed from this year into next year in any parts of the business?
Nothing worth reporting, nothing material. There are adjustments in both directions continuously to adapt to customer demands depending on where they are in their installations.
Got it. And then maybe just finally on the gross margin. I mean, it was flat year on year, but you're probably getting a reasonable boost from currency transaction. So on an underlying basis, it is down year on year. Is that because of divisional mix in the Marine business, which is higher margin has started to come down?
Or is that gross margin pressures within the individual
business areas? Well, it is load, and it is mix in year on year in PTD and in Marine and Diesel. When mix is negative in equipment, we've seen positive price mix effects year on year.
Got it. Okay. Thanks. Thanks very much.
Your next question comes from the line of Nathalie Folkman from Carnegie. Please ask your question.
Yes. Good day, Tom and Thomas. Just a couple of questions. My first question on the service. You mentioned the different mix between parts and services.
Do you see that as a temporary change? Or is it something that you see will stay in this current rate cap?
Well, there will be variations between quarters going forward. If we look at orders received, certain quarters, we have a good inflow of boiler refurbishment orders, others, we have less of that. And of course, that influences margins when these orders are completed. Then of course, we do see, if we take a longer term perspective, an opportunity to build the service business by expanding the service as in services part of our aftermarket business. But that is more of a longer term direction.
Thank you. That's clear. And then the question, you mentioned that the U. S, excluding oil and gas, started to show some signs of strength. Is it more connected to food and sanitary?
Or is it also industrial demand?
I think for the U. S, it was pretty good across the board, including the base business on the oil and gas sectors was positive in the quarter. So I think what it reflects is what we said last quarter that we think we've taken sort of the essentially we've taken the downturn in the books on oil and gas already, and we have a bottom out scenario and we'll see where we'll go from there. And U. S.
Was solid, including base business in oil and gas. It was broad based.
Your next question comes from the line of Sven Vahya from UBS. Please ask your question.
Yes, hi. A couple of questions from my side as well. The first one is coming back to your strategic review because I think one of your targets that you've also said at the last year's Capital Markets Day was on M and A, but so far you haven't announced something big. Is it that the strategic review is keeping you so busy at the moment that there is no resource for M and A at the moment? Or is it just the pipeline is empty?
Maybe some color on that. The second question on the increase in the R and D. Was one of the reasons behind it also you making the ballast water equipment ready for the type approval in the U. S? And then the last question also coming back on marine and diesel.
You said a slight decline in Q3. Is it that you also continue to expect order intake related to ballast water equipment and scrubbers to be relatively good? Or is that the reason that keeps the decline limited? Thank you.
Okay. So let's start with M and A. I think we've said actually on the M and A side that certainly that has been an important part of AlfaVale growth historically, and it will remain an instrument going forward. I think it's rather natural when we are trying to assess our future growth opportunities and focus within the strategic review. The highest priority right now is not closing deals.
So but with that said, as you know, when you work with an M and A pipeline, if there is a wonderful bride and it's only available at this point in time, I mean, there is no total stop in those processes. So I think we are comfortable in this situation of working through the group and the group's priorities. And M and A will be a part of going forward, but it I would say it's a conscious decision at this point in time not to chase every possible target to the very end. We will be back to that. On the R and D side, I think we will be back in the strategic review in terms of how we look at it.
But we don't see and as Thomas said, there are in terms of there are some periodization questions in terms of how those R and D costs comes in. So the numbers looks perhaps a little bit more elevated than in the quarter than there will be at the full year level at the current status. But as you've seen so far, we will make sure that we have a competitive product platform in place now and in the future, and we don't see the R and D spendings at the current level as a big problem. But we will come back and qualify how we look at those programs and what they're supposed to deliver to us as a group as part of going forward in the future. The final question
The outlook for marine and whether it's supported by ballast water and exhaust gas claiming. The ballast water, we possibly all know that it might be closed until the ratification process is completed and the clock starts to tick. But there is one important other hurdle that many ship owners require to be in place before they really push the button and that is U. S. Coast Guard approval.
No one has gotten that. We've done tests and we believe that we'll submit application shortly. So we're among the first ones in the line as we know it at least. So ballast water, no material change is what I'm trying to say in the short term. Exhaust gas cleaning, yes, there are some opportunities for exhaust gas orders in this quarter and also later on.
But again, the expected decline or somewhat lower level of demand in marine and diesel is only a reflection of all of the different segments, all of the different product groups weighed together.
It's not a huge mix change assumed in the forecast.
Thank you.
Your next question comes from the line of Glen Liddy from JPMorgan. Please ask your question.
Hi. Just coming back to the environmental things. Could you give us an idea what proportion of the overall sales are related to all the environmental products that you sell? And also, is there a material aftermarket in any of these products yet? Or does it take a long time to materialize?
Well, Glen, if you with environmental product, I saw referring to the environmental products in marine and diesel. And then specifically thinking about ballast water and exhaust gas cleaning, then we are currently in the neighborhood of, say, EUR 90,000,000 to no, sorry, €80,000,000 about €80,000,000 on an LTM basis. That's where we offer the 2 combined. But then, of course, there is a number of other environmental products. We could add pure dry and pure bilge marine.
We could add the crankcase gas ventilation, and we have water products and so on, but concentrated to those 2 in the neighborhood of AT on an NTM basis.
And then when you're talking about good level of interest in those in environmental, it's those particular products you're talking about?
It's particularly those that we are talking about in relation to marine. But then again, of course, we have a number of other products that are directly or indirectly having sort of an environmental effect.
Okay. And the aftermarket for environmental, is it too small to be of any consequence still?
Yes. But again, let's be precise. There's a whole host of our products that are serving energy efficiency or wastewater applications, which involves the normal part of our product program. So in that sense, the environmental trend and what it may do for us is, I would say, not generally changing the structure and the mix of our business. We think it's a long term growth driver for us.
But looking specifically at the marine side, as long as we define it only in terms of scrubbers and ballast, then I think it's fair to say that that doesn't have the same amount of consumables and almost spare parts in it other than scrubbers will go through boiler renovations. And we already talked about the boiler services business for other applications that are today a little bit down. They come and go a bit. They are a bit more capital intensive than, let's say, for lube oil separators or freshwater generators or some of the other areas where we are more typically working with spare parts sales. So I think the day when you see a substantial growth in the marine ballast water and also on the scrubbing side, we may see somewhat lower services at least initially.
That's probably a fair assumption, but And as far as ballast water treatment systems are concerned,
they are largely not in use at this current point because the regulations are not in force. So no, but it will even be fairly low once they're used.
Okay. Thank you.
Your next question comes from the line of Wazee Rizvi from RBC Capital Markets. Please ask your question.
Hi, good afternoon. Just 2 for me. Firstly, on your ongoing cost measures, could you give us an idea of roughly what amount of cost that's aiming to take out or what you typically do in a year given it's something that happens on an ongoing basis? And then secondly, I was interested to hear whether you've seen any difference in your shorter cycle business in Europe, so mainly equipment, I guess, since the referendum result in the U. K.
So at the back end of the quarter? And since then, whether there's been any change in customer behavior?
Let me start with the second one, and Thomas, you can take the first one largely. I think as Thomas was on to before, we don't expect that the referendum as such will have any major effects on our business. We hesitate to comment what's already is happening in our business in quarter 3. We don't typically do that. But let me say that the forecast or the outlook that we have presented has not been materially affected by the referendum.
As such, it would have remained the same in and out. In fact, we still don't know whether you guys are in and out. So we will see what happens on that one. On the COGS side, we are not we have not announced the housekeeping as a program. So we haven't given a detailed account of that.
We've done that to some degree in the discussions on the COGS and the gross margin. But Thomas, I leave it to you for Yes.
Well, I think to begin with, to give you an amount, I think the only relevant amount is to the extent we're talking about overheads because in COGS, well, I think the ambition must be to adjust capacities to the prevailing demand or the prevailing load. And we are doing that to the extent possible within the framework of our current structure. So that is being done. That is being done by applying reduction in working hours in a number of jurisdictions. It is done by adjusting the number of consultants, the number of temporary staff.
But as far as the overhead is concerned, yes, there are certain adjustments to amount of resources in particularly oil and gas. For the rest, it is by keeping control of the hiring. The replacement hiring is very, very restrictive at this point, but we are not providing any specific number around the housekeeping matters. There are many, many small things continuously happening to adjust. Okay.
Got it. Thanks.
And there are no further questions at this time.
Thank you. Well, ladies and gentlemen, thank you for a good interactive session. And I look forward to speaking to you later when we arrive with the Q3 results. So thank you very much.
Ladies and gentlemen, that concludes the conference. Thank you for your participation. You may disconnect.