Welcome to the Alfa Laval quarter two earnings call. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question and answer session, at which time you may ask a question by pressing star and one on your telephone keypad. I must advise you that this conference is being recorded today, the 18th of July, 2016. I would like to hand over to the President and CEO, Mr. Tom Erixon. Please go ahead, sir.
Thank you and good afternoon. Welcome to the call. You just received our second quarter report. I will give some initial comments to that, then afterwards hand over to Thomas Thuresson, the 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. The year-on-year figures, both for order intake and sales, come in about 11%-12% down compared to the same quarter last year. 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. 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 SEK 1.2 billion in the quarter, reflecting a 35% growth compared to the previous quarter. That was a rock-solid number for the quarter. 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. 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. With that, I'll go to some of the key figures for the second quarter.
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%-12%. Similarly, the EBITDA declined to SEK 1.4 billion. We were mainly affected by mix effect compared to the earlier year. 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. An active work on the cost side. If we go to the sequential numbers, order intake grew 5%, net sales grew 9%. Our EBITDA grew also 4.5%. 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. 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. 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 will 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 two larger orders amounting to total of just about SEK 100 million, so it was one more than last quarter. As you see in the historic comparison, we have been up at SEK 300 million, SEK 400 million, even SEK 500 million in the quarter. It is a very low level. Other than that, the base business and services businesses are developing okay.
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-over-year is, if you look on the structure of that on the next page, it is reflecting about 2.5% of currency effect in that. 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. There is also some utilization effects in there. Other than that, there is no big drama in the market when it comes to pricing and such.
That takes us 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 and related to food and pharma, which saw very strong growth in the quarter, both year-over-year and sequentially. In industrial equipment, we have some seasonal effects, especially in Q2, and those we had this year as well. All in all, it was a good quarter for the intake. We built the order book. Margins remained stable, although we didn't repeat the first quarter margins, as already indicated at last call. There were some one-off effects in that result. We came in as expected 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. 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. That takes me to the summary for orders received in the customer segments. There is no surprise in that for you.
If you look at the clear growth areas for the first 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 1st 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 plus 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. As in the 1st quarter, excluding the marine business, China is growing, and Asia is growing as a whole.
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 EQD numbers as well, as you've seen before.
Latin America may look negative sequentially with the 13%, but it should be remembered that the 1st quarter in Latin America was very strong indeed. We are growing year-on-year, and for the 1st half, we are still on positive numbers. We are positive around Latin America as a whole for this year. 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.
Okay. 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 Q1 report with regard to expected sales in Q2. At the time, I said we believe it's reasonable to expect a somewhat higher level of sales in Q2 compared to Q1. 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 SEK 8.95 billion in Q2. In comparison with Q1 then, that was an increase of approximately 9% at constant exchange rates. Compared to Q2 of last year, we were down 8+% again, at constant rates.
I think to conclude, in terms of invoicing, we ended as expected or even slightly better in relation to our own view of quarter two. 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 29.7% in quarter one. That is to say that aftermarket is providing a positive mix effect year-over-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-over-year. Let me deliver the first forward-looking statement. We believe it's reasonable to expect a somewhat lower invoicing in quarter three compared to quarter two, 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 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 first quarter 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 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 first quarter. We were suffering adverse effects from a negative price mix effect in capital sales year-over-year to do with declining oil and gas content in 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-over-year, and more so, the FX transaction effects. Sequentially, the relative reduction of service was a negative, a worse mix in capital sales, then again, a weakening load. Compensation, again, was provided by FX and metals. Of course, the number of pluses and minuses gives you a sense of the magnitude of the various parameters. Let me 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, 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&D, as you may have seen from the report, we ended SEK 213 million in the quarter, which is an increase year-over-year of 15.5%, representing 2.3% of sales. That is to be compared with 2% last year of sales. In summary, R&D has consciously been increased to support future sales despite a declining trend in current orders. Remember, you have seen swings in the development between quarters, that is, of course, to do with an uneven occurrence of things like models and test versions of individual product designs.
This is not to be seen as a continuing increase to the tune of 15% in R&D. Again, supporting the conscious decision to increase, as I just commented. Moving on to sales and admin. We had sales and admin of SEK 1.55 billion 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 U.K. 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 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%, 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. Then on top of that, of course, salary adjustments from Q2 in certain geographies. Profit before tax, SEK 1.26 billion, SEK 1.27 billion. In a year-on-year comparison, the reduction is largely explained by the lower invoicing, of course, also the somewhat lower operating margin, then compensated by a better financial net. Before leaving the P&L, a few words about taxes. We had a tax charge of SEK 334 million, which represents 26.4% of profit before tax, below guidance for taxes, still the guidance stays at 28%. EPS SEK 221, of course, explanation again, lower invoicing and somewhat lower margin.
Finally, the return numbers, 19.9% and 20.2% 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 next slide. The comments that I will give you relate to operating margin. The comments on the slide, they relate to profit in absolute terms. Again, as I always say, you get it both ways. Equipment came out higher than last year, however, lower than Q1. The sequential decline is due to a combination of a positive mix still, reduced through somewhat higher cost and a lower volume or load. Process technology operating margin came out lower than last year, slightly above Q1.
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 again, their share of the lower load in certain factories. Finally, Marine came in almost exactly on the same level as Q1 in terms of operating margin, this is of course explained by more positive FX, particularly USD, NOK, 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 SEK 1.2 billion, a reduction of SEK 0.3 billion year-on-year. The explanation is, of course, the lower profit net of taxes paid, a somewhat smaller reduction in working capital. Regular CapEx ended at SEK 128 million as last year.
Remember here, for the full year 2016, add SEK 200 million to last year's numbers for the investment projects going on in Kolding, Denmark and Pune, India. Financial net paid was positive SEK 21 million, an outcome some SEK 100 million better than last year, explained by, to some extent, lower interest paid, but of course, mainly more favorable FX differences. All in all, a free cash flow of SEK 1.16 billion compared to almost SEK 1.3 billion 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. Let's look at FX. FX effects in EBITDA in the quarter were positive with SEK 137 million, an outcome as expected a quarter ago.
The forecast we've updated. With the weakening Swedish krona during the second quarter, we see a bigger positive effects from transaction exposures. A total positive of SEK 475 million for the full year. That is compared with SEK 350 million a quarter ago. More positive this time around. Let's move on to backlog. We had a total backlog of SEK 18.6 billion by the end of June, representing 6.6 months of LTM sales. Of that backlog, some SEK 10.8 billion are scheduled to be shipped before year-end. This means a reduction of SEK two and a quarter billion, compared to June of 2015. Let me just remind you, we were down SEK 1.7 billion in terms of order backlog to be shipped in the coming year, by January 1. SEK 2.25 billion less in H2 compared to 2015. Having said that, let's finally look at the bridge into whole year sales.
We have revenues of SEK 17.1 billion for six months, down SEK 2 billion from last year. To that, of course, we add the SEK 10.8 billion for delivery before year-end. Last year, we received in-route orders in with shipment before year-end of SEK 7.4 billion last year. That gives us a total of SEK 35.3 billion. 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 three. I think that sets the scene for what kind of development year-on-year can we expect in quarter three for in-route orders. Of course, prices, small adjustments on standard product, as I've commented before. I think this gives you a good basis for projecting full-year sales for Alfa Laval.
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 already in the quarterly report have seen our outlook, which is that we expect demand during the third quarter to be in line or somewhat lower than in the second quarter. 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. In the process technology division, we believe demand will be on about the same level as in quarter 2. 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. If you look at the process technology development, you've also seen rig count stabilizing or even slightly improving. We believe that all in all, for process technology, the same level is the most appropriate forecast. There you have it. I think I'll leave it at that, and we'll go to questions and answers. I hand over.
Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. If you find your question has already been answered, or you wish to cancel your request, you may do so by pressing the hash key. Your first question comes from the line of Klas Bergelind 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. Process tech margin continues to disappoint a bit as the backlog unwinds. Negative price mix and factory load. The margin in marine and diesel is still holding up. Obviously, different operational gearing to volumes in marine and 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, Klas, I'm sure you would love to get the forecast on 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. This is where we are. Please have in mind that the aftermarket content in the marine business is the highest of the three divisions, and I think that is a factor to have in mind when you assess the margin development in declining sales for the various divisions.
Yeah, 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 a short in route, 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 two, and that, of course, provides more stability to operating margin than for the other two.
Okay. My second question is on oil and gas. Orders are bottoming in energy and process, oil price is 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?
Let me say that 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 Alfa Laval as a company, but we see spots which are positive. We see a break-even 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 higher 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. I think as to be expected, there is some underlying positive fundamentals to the business going forward.
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. We feel that after the big CapEx writedowns in the sector, there will be some time before the investment decisions are being taken, and the capital is committed. We are obviously very positive to what has been happening over the last 6 months in the sector. We have to be, we are still cautious in terms of how quickly we expect that to come into the order book. As we speak today, 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.
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 sanitary 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. We had a good quarter in the food and pharma sector as a whole, 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. 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.
I think when you look at the incoming orders, excluding the large ones, we feel 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 Max 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 cost overruns on 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-decline?
No. I tried to express that in my comments just before. There was a better engineering performance in process technology, so no mishaps in quarter two in PTD as far as engineering or project delivery is concerned.
Okay. When you look at the mix of orders coming through that division as we move into Q3 and Q4 of this year, 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 at this point. We cannot see any material variations in the coming quarters.
Okay. I guess a second question on the marine and diesel business. The current mix, we don't see it anymore, the current mix of Frank Mohn revenues versus the original Alfa Laval orders in that division. Should we assume that actually in the order backlog or the orders being currently taken now, the mix is very different from the revenue mix between Frank Mohn and Alfa Laval? Obviously, we know the margin differential between the two. I guess what I'm asking is that going to be a mix headwind as we move through the back end of this year and into next year?
As we have commented already late last year, Frank Mohn was pulled for 2016 in terms of delivery. A material decline in revenues in Frank Mohn is only to be expected later or really late in 2016.
It seems to me that the Frank Mohn business has underperformed the overall Alfa 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.
Okay.
Not at all. Of course, the FX effect there, of course, we got some support from the weak NOK to USD.
Sorry, I meant the Frank Mohn business in terms of orders relative, because of the SEK 1.2 billion-
No. When it comes to Frank Mohn, remember after quarter four, when we had an extraordinarily strong booking, we said we expect a large decline in quarter one, 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 two. We were right in that we said we believe that we will have a pickup from the very low in quarter one as well. No.
Okay. Thank you very much.
Your next question comes from the line of Lars Brattbakk from Barclays. Please ask your question.
Thanks very much. Hi, Thomas. Three questions. Tom, first of all, on strategic review, you say come back a bit before year-end. I wonder whether you can talk a little 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 specifically? Perhaps just more generally on your strategic review, what's holding you back from announcing something earlier than year-end, particularly on costs? Secondly, in terms of your outlook for marine into Q3, just on pumping systems in Q2, can you talk about what drove that? I see tank orders still running at very depressed levels according to Clarksons.
I wonder whether you are baking in a reversal of that recovery you saw in Q2 on pumping systems in Q3, maybe also if you could talk a little about what you see on marine services as you go into the third quarter, obviously down year-over-year and quarter-over-quarter in Q2. Finally, just Thomas, a quick one, a bookkeeping one. Net interest in Q2, the interest expense, a positive 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 2016? 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. 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. 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.
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. You should not expect the next conference on the topic to happen on New Year's Eve. We haven't given a particular 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, our opinion in the market is, first 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 two. There are still negotiations ongoing with already contracted fleet, which sits in the book of the yards at present. The activity level in pumping systems in quarter two, as you've seen and looking forward, is not necessarily reflecting the, let's say, the Clarksons 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. 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 two areas which are still in good health, while certainly we are impacted by the overall difficulties in the sector as a whole.
I think I leave that on those two, and then on the third point, Thomas, if you would.
Yeah. 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. That sort of creates variations in marine service. There is stability in the underlying spares volumes. 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. We will continue to have a negative interest net. 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 off and so on, let's say that we are in the neighborhood of SEK 30 million to SEK 40 million per quarter of interest paid. 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?
Sure.
Perfect. 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. 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. Then the third component of base business is a share of process technology capital sales, where, of course, it's more of a mixed bag. All in all, I would say with a decline in base business in process technology, there is some decline in in-for-out orders.
Not a big one.
It's of course not as large as the decline in overall orders, because there, of course, you have longer lead time contract orders as well.
Okay, perfect. Regarding to marine and diesel division, you are referring to a negative price mix when you discuss the year-over-year margin drop that you have 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, of course, again, the mix is not the same from one quarter to the other, and we have seen a decline because of the price mix effect. Remember, many of these orders, the vast majority of these orders, they're based on negotiations between us, the yard, and the ship owner. Of course, there are variations in both elements.
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 three months ago or six months ago.
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 a correct interpretation from my side?
Well, we're not giving an outlook on large orders specifically, you will have to look at our overall demand outlook as a basis for those assumptions.
Okay.
It's also like this, that these large orders are from a communication perspective, we draw a firm line at EUR 5 million, consequently, a EUR 4 million doesn't hit the communication line, whereas a EUR 5.1 million does. From our perspective, there is a spectrum from small to large, while the ones that are communicated are few, 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 order intakes from the quarter, there are a number of those products involved. The market for project is certainly alive, but the large CapEx spendings are very limited.
Okay, perfect. Thank you very much.
Your next question comes from the line of Ben Maslen from Morgan Stanley. Please ask your question.
Thank you. Hi, Tom. Hi, Thomas. Could I just ask on our sales and admin costs, please? It says in the text that they were up 5% and 3% year-over-year organically, and sales are 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 will be addressing in the strategic review? That's the first question.
Well, as we've tried to vocalize earlier here, we are having a tight control as we have for a very long time through our processes in terms of headcount, and that is providing some effect. We have initiated adjustments of capacity as referred to earlier, particularly in the oil and gas area. We do have some effects going in the other direction, as you know and as I mentioned. We have the salary inflation. We have some pension issues in E&U, as in U.K., we see increased costs for pensions. It is now housekeeping, and we will see more of the effects from the referred oil and gas adjustment during the second half. 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're asking for.
Got it. Okay, thank you. On the currency, the tailwind you had of SEK 137 million in the second quarter. 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, that is clearly marine and diesel because of the weaker NOK today than a year ago or two years ago.
Yeah.
Somewhat more benefit to marine and diesel than its relative weight.
Great, thank you. Then just finally on the backlog. 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. Maybe just finally on the gross margin. It was flat year-on-year, but you're probably getting a reasonable boost from currency transaction. On an underlying base, 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 very much.
Your next question comes from the line of Natalie Falkman 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 feel will stay in this current breakup?
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. Of course, that influences margins when these orders are completed. 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. That is more of a longer-term direction.
Thank you. That's clear. 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. I think what it reflects is what we said last quarter, that we think 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 go from there. U.S. was solid, including base business and oil and gas. It was broad-based.
Thank you. That was all for me.
Your next question comes from the line of Sven Weier from UBS. Please ask your question.
Yes, hi. A couple of questions from my side as well. I think one of your targets that you've also said at the last year's Capital Markets Day was on M&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&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&D, was one of the reasons behind it also you making the ballast water equipment ready for the type approval in the U.S.? 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. Let's start with M&A. I think we've said actually on the M&A side that certainly that has been an important part of Alfa Laval 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. With that said, as you know, when you work with an M&A pipeline, if there is a wonderful bride, and it's only available, at this point in time, there is no total stop in those processes.
I think we are comfortable in this situation, of working through the group and the group's priorities, and M&A will be a part of going forward, but, 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&D side, I think we will be back in the strategic review in terms of how we look at it. We don't see, and as Thomas said, there are some periodization questions in terms of how those R&D costs comes in, so the numbers looks perhaps a little bit more elevated than in the quarter than they will be at the full year level, at the current status.
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&D spendings at the current level as a big problem. 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 cleaning. The ballast water we possibly all know that it might be close until the ratification process is completed, and the clock starts to tick. There's 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. We're among the first ones in the line as we know it, at least. 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. 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. No.
Thank you.
Your next question comes from the line of Glen Liddy from JP Morgan. 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? Also, is there a material aftermarket in any of these products yet? Or does it take a long time to materialize?
Well, Glen, with environmental products are referring to the environmental products in marine and diesel.
Yes.
Specifically thinking about ballast water and exhaust gas cleaning, then we are currently in the neighborhood of EUR 80 million. About EUR 80 million on an LTM basis. That's where we are for the two combined.
Okay.
Of course, there is a number of other environmental products. We could add PureDry and PureBilge in marine. We could add the crankcase gas ventilation, and we have water products and so on. Concentrated to those two, in the neighborhood of EUR 80 on an LTM basis.
When you're talking about good level of interest in environmentals, 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 a sort of an environmental effect.
Okay. The aftermarket for environmental, is it too small to be of any consequence still?
Well, yeah. 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. 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. 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 or normal spare parts in it other than scrubbers will go through boiler renovations. 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. 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. 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. No, but it will even be fairly low once they're used.
Okay. Thank you.
Your next question comes from the line of Wajid Risley from RBC Capital Markets. Please ask your question.
Hi. Yeah, good afternoon. Just two from me. Thanks. Firstly, on your ongoing cost measures, could you give us an idea of roughly what amount of cost perhaps aiming to take out or what you typically do in a year, given it's something that happens on an ongoing basis? 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.
Well, let me start with the second one, Tomas, you can take the first one largely. I think as Tomas was onto before, we don't expect that the referendum as such will have any major effects on our business. We hesitate to comment what already is happening in our business in quarter three. We don't typically do that. 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, We will see what happens on that one. On the COGS side, 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. Tomas, I leave it to you. 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. We are doing that to the extent possible within the framework of our current structure. 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. 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 measures. There are many, many small things continuously happening to adjust.
Okay. Got it. Thanks.
There are no further questions at this time.
Thank you. Well, ladies and gentlemen, thank you for the good interactive session, and I look forward to speaking with you later when we arrive with the third quarter results. Thank you very much.
Ladies and gentlemen, that concludes the conference. Thank you for your participation. You may disconnect.