Welcome to the Alfa Laval Q2 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you would like to ask a question, you will need to press star 1 on your telephone. I must advise you the conference is being recorded today, Thursday, July 16, 2015. I would now like to hand the conference over to your speaker today, Mr. Lars Renström. Please go ahead.
Thank you very much. Good morning, most welcome to our presentation. I will, as usual, start by highlighting three matters. Firstly, both sales and operating results reached new record levels for a second quarter. Sales increased by 21% to SEK 10.2 billion, and the operating result of SEK 1.8 billion meant an increase of 35% compared to previous year. This gave a very good operating margin of 17.9%. Secondly, despite weak demand from oil and gas customers, the order intake for the Process Technology Division declined only 2.5%. We believe that we can see a stabilization of the demand within oil and gas on the current level. For the other capital sales segments, the development was stable to positive. Finally, the order intake reached SEK 9.1 billion, which meant 3% decline sequentially when the revaluation of the backlog in the first quarter due to currency fluctuations is eliminated.
Let's move to the key figures that I have basically covered for the quarter, further down on the slide, you see that this is the best first half year ever in absolute terms. Let's move on to orders received and margins. Orders received on rolling 12 months reached SEK 39.2 billion, in the quarter, we saw a decline of 7% at constant exchange rates. Let's move over to the order analysis. From the order analysis, you find that Framo contributed with 3%, organically, we declined with 10%. Currency effects were 9%, giving a total of +2%. Sequentially, the organic development was -7.6%, we had positive currency effects of 0.5%, giving a total of -7%. When we adjust for the revaluation of the backlog in the first quarter, the organic decline sequentially is 3% instead of 7.6%. Next slide.
The EBITA margin reached 17.9%, the operating result of SEK 1.8 billion was the best second quarter ever. Now we move on to highlights in the quarter. In Process Technology, we booked large orders for air coolers to a power plant in the Middle East, a separator module for an FPSO to be moored off the coast of Brazil. It is unusually large orders in equipment, we were very pleased to secure an order for heat exchangers to a district heating network in China. In Marine & Diesel, we signed a frame agreement with Mediterranean Shipping Company, one of the world's largest container shipping companies, for supply of ballast water treatment systems to be retrofitted during 2015 and 2016.
Finally, Framo won an order for fire water pumping systems to be installed on four oil platforms to be operated in the Johan Sverdrup field in the North Sea. We move on, we enter development per segment. You can see that we have 10% negative organic growth year-on-year in the quarter. You see that in equipment, all segments except one were unchanged or grew, and the same applies for Marine & Diesel. Hence, the main impact comes from Process Technology, where the three largest segments declined. We take a look at the development per division. Remember that all comments are now sequential. We start with equipment division that grew 11%. Industrial equipment was up on seasonality and a large district heating order in China. Sanitary was lifted by dairy, brewery, and pharma. OEM was lifted by seasonal demand.
Let's move over to Marine & Diesel. Marine & Diesel declined 23%. Equipment grew thanks to increased demand for retrofit installations of ballast water treatment systems. Marine and offshore declined due to fewer orders for SOx, as well as inert gas systems. Marine and offshore pumping systems declined due to lower yard contracting and fewer large offshore orders. Service saw somewhat lower activity for parts sales. Let's move to Process Technology that declined 2.5%. Energy and process was affected by CapEx limitations in up- and midstream oil and gas. Petrochemicals also declined amid continued uncertainty as to the implications of the drop in the oil and gas prices. Food and life science saw stable development for base business and large orders. Finally, water and waste performed very well. On the next slide. Year to date, our decline is 7% for the first six months.
Here you see that all segments in equipment have been stable. Marine & Diesel has a mixed picture. In Process Technology, the three large segments have declined. Now we continue with the geographical development. Here you see the development year-on-year in the quarter at constant exchange rates. Latin America has had a significant decline reflecting the geopolitical situation in Brazil and the continent's dependence on raw material prices. The decline in Central and Eastern Europe reflects the challenges in Russia and some of its neighbors. The decline in North America is due to the drop in oil and gas prices. In Western Europe, the decline comes from fewer large orders, mainly in oil and gas, and lower demand for exhaust gas cleaning aboard ships. In Asia, lower demand from the shipyards is the main reason for the decline. In Nordic, pharma has boosted the order intake.
We will take a look at the regions, all comments are sequential. The decline in Asia came from lower yard contracting that impacted marine and offshore pumping systems. Excluding that, the region had a positive development with growth in both equipment and Process Technology. In absolute terms, it was the best quarter ever for service. In China, we saw growth in all capital sales segments and most service segments. Korea declined somewhat due to marine and offshore pumping systems. We move over to Europe. To begin with, Western Europe, including Nordic, saw slight growth thanks to favorable development for both base business and large projects, while service remained unchanged. In Central and Eastern Europe, the good growth came from base business and service while large orders were unchanged. In Russia, the focus on local food production lifted food-related business. Moving over to the Americas.
North America was down due to fewer large projects in the oil and gas sectors, and also base business and service was affected. The U.S. held up quite well, thanks to segments outside oil and gas. In Latin America, the geopolitical situation in Brazil and Argentina continued to dampen the business sentiment, while other markets performed well. Moving over to the next slide. There you can see orders received year to date at constant exchange rates. Latin America is the low performer for reasons already mentioned. In Central and Eastern Europe, you see the impact from lower oil and gas prices and the Russian sanctions. The boost in Asia and Nordic is thanks to the acquisition of Framo. Moving over to the next slide. Here you see the top 10 markets in 2014, and the yellow bar is the last 12 months.
There you can see that the U.S. has strengthened its number 1 position thanks to currency effects. China, South Korea, Nordic, Japan, and Southeast Asia have all benefited from the acquisition of Framo. Now I hand over to Thomas for the financials.
Thank you, Lars. Good morning, all of you. Let's get into the details of the P&L and the cash flows then. Let's jump right into sales. Let me start off with what I said after quarter 1. The first forward-looking statement at that point was, we expect that sales will increase slightly in quarter 2 compared to quarter 1. We realized sales of SEK 10.2 billion in quarter 2, as you have seen. In comparison with quarter 1, sales was then up almost 13% at constant rates. Compared to quarter 2 of last year, we were up 11.5%. Compared to last year, Frank Mohn contributed with just under 11%. Like for like, an increase of not quite 1%. We were not surprising, correct in our expectations, I would like to add. Moving on to service.
The service activities represented 25.8% compared to 27% in Q2 of last year and 27.6% in quarter 1 of this year. This obviously means an adverse mix effect year-on-year, as well as sequentially on gross profit margin, I'll get back to that in a moment. Let me then deliver the first forward-looking statement for this presentation. We believe it is reasonable to expect a slightly lower level of sales in quarter 3 compared to quarter 2. The reasons being the limited reduction in orders received over the last few quarters and the vacation period in quarter 3 in many geographies. With that, let's move on to gross profit margin. In the quarter, gross profit margin reached 36.3%, meaning exactly the same level as in quarter 2 of last year, and a decline of 0.4% sequentially.
I would argue that we've actually delivered as predicted after the Q1 report. Let's move to the next slide and look at some further details. Let me start off by reminding you that after the Q1 report, I said literally, "In the near term, we expect gross profit margin to be negatively influenced by a somewhat increased invoicing and, as a consequence, a worse mix. In addition, we see a risk of an adverse impact from load, and we expect a continued positive and reinforced impact from FX transaction." The actual for quarter two, as I just said before, came out as expected, I would argue, in all respects. Sequentially, gross profit margin was negatively influenced by mix, mainly between capital, sales, and service, and then positively influenced by transaction FX effects.
In this slide, you get an indication of the magnitude as well as the direction of the main factors influencing gross profit margin. Let me then deliver the second forward-looking statement. In the near term, we do not expect any material changes in gross profit margin compared to the outcome in quarter two. The risk of an adverse impact from load, we believe, can be compensated by lower metal prices and FX transaction effects. Let's move on and look at overhead costs and other items in the P&L. Let's start off with R&D. R&D ended at SEK 186 million in the quarter, which is a reduction year-on-year, like for like, of 14.4%, a sizable reduction. In % of sales, R&D then represented just 2%.
The explanation for this decline to this relatively low level is mainly the efficiency program or the savings program that we launched last fall, but it's partly also to do with phasing of individual projects. Looking at sales and admin, costs amounted to just over SEK 1.5 billion in the quarter, representing a reduction like for like of 3.7% year-on-year. Sequentially, we saw an increase of just over 3%. With this outcome, we would like to establish that the savings or efficiency program has delivered the promised results earlier than we have anticipated. A very good outcome as far as sales and admin is concerned in this efficiency program. Other costs and income came out with a bigger negative than in quarter two of last year. In addition to what I would like to call normal variations between quarters, we have a couple of specific items in this quarter.
We have costs for the closure of a small manufacturing operation in India. We've taken a cautious view on certain receivables items in Greece. We're looking at FX. We had total positive FX effects of SEK 182 million to EBITA in the period. As predicted, we saw more sizable positive transaction effects than in quarter one. Profit before tax ended at SEK 1.46 billion, and of course, profit before tax is year-on-year influenced by the acquisition of Framo. Before I leave the P&L, taxes ended with a charge of SEK 382 million. This is below our guidance for taxes, but still well within the range of normal variation. We maintain the 28% guidance for taxes in relation to profit before tax. Let me point out, EPS was up 34% year-on-year in the quarter. If I allow myself to exclude the effects of step-up amortization, EPS was actually up 45%.
Looking at the return numbers, return on capital employed and return on equity, we ended with 20.3% and 20.4% respectively. I think considering the goodwills added with the Framo acquisitions, these are still quite attractive levels. Let's look a bit at the divisional performance and a few short comments on that. Please note that my coming comments, they will relate to operating margin. The comments on the slide, they refer to operating profit in absolute terms. That is to say, you get it both ways. To start off with, equipment came out somewhat higher than quarter one 2015, and about as quarter two in terms of margins. Quarter two last year, that is, in terms of margin. The sequential improvement is largely thanks to FX and non-repeat of restructuring charges for our products.
For Process Technology, operating margin was on the same level as in Q1 2015. This is based on adverse price mix effects compensated by positive FX. Finally, marine improved further sequentially in terms of operating margin from 20.1 to 21.7, and this came from a combination of the sales increase and positive FX effects. Before I leave this slide, as some of you may be concerned about swings in EBIT margins or profits in the divisions, let me again repeat some of my earlier comments. We will also, going forward, have swings in the divisions because of variations in load in the various supply chains, having a varying effect on the different divisions. We will also continue to have variations on the basis of the mix in sales, particularly in Process Technology and in marine.
Marine must be considered being at the higher end of its cycle right now in terms of sales, and that is likely to remain for still a few quarters to come. Let's get on to cash flows. I think we can summarize the cash flow statement as follows. Cash flow from operations amounted to SEK 1.5 billion, an increase year-on-year of 28%. The explanation is, of course, mainly the increase in sales and the following increase in profits. Despite quite an increase in taxes paid, a reduction in working capital was delivered this year to the same tune as last year, quarter two. As far as regular CapEx is concerned, they ended at the same level as last year. Financial net pay came out negative SEK 82 million against a positive of SEK 52 last year. This difference is entirely explained by negative realized exchange differences.
The free cash flow ended with SEK 1.29 billion compared to SEK 1.09 billion last year. The year-on-year increase is, of course, very much coming from the addition of Framo. Before I leave this slide, I would like you to note that we're already below two in terms of debt to EBITDA. We ended at 1.96 at the end of June, despite dividends of SEK 1.7 billion paid in the quarter. This really means we're well ahead of the earlier expressed expectations as far as deleveraging is concerned after the Framo acquisition. Let's get on to FX. FX effects, as I stated before, were a positive SEK 182 million in the quarter. Of course, the strengthening of the US dollar is the main contributor to this rather substantial effect. The forecast for the full year 2015 remains on exactly the same level as after Q1.
We expect total FX effects of a positive SEK 545 million on an EBITDA level. We've also maintained the same indication of possible transaction effects in 2016, a positive SEK 450 million. Let's look at the backlog. We had a total order backlog as per end of June of SEK 23.3 billion, representing approximately 7.1 months of LTM sales. For shipments in 2015, the backlog amounted to SEK 13 billion as per end of June. To be considered for whole year sales 2015, please note that on a like-for-like basis, the order backlog as per end of June was about 1.2% smaller, or about SEK 150 million smaller than at the end of June last year. This, of course, means somewhat less of support for sales in the second half of this year compared to last year. Let's move on to the bridge to whole year sales.
We'll, as we normally do, walk through the known and the unknown parameters, projecting full-year sales, or if you like, look upon it as the third forward-looking statement. Starting with year-to-date sales of SEK 19.2 billion, we can add the two known parameters, the backlog for shipment this year of SEK 13 billion. I have added the orders that we got during the second half of last year and shipped and invoiced before the end of last year. They amounted to SEK 7.7 billion. Everything the same, you could add SEK 7.7 billion, of course, for this year as well. You end up with a subtotal of SEK 39.9 billion. The unknown, will there be a change in in-for-out?
With regard to demand, you know that we've seen a limited decline in the last couple of quarters. We, as you may have seen, expect the same level of demand in Q3 as in Q2. This sets the scene for in-for-out orders, at least in the first half of H2. Of course, it is for you to judge. Finally, when it comes to price effects, we've only made small adjustments for standard products at the beginning of the year. Nothing material to report in that regard. With that, I give the word back to Lars for the outlook and the closing remarks.
The outlook is as follows. We expect that demand during the third quarter will be on about the same level as in the second quarter. For each division, our demand expectations for the third quarter is as follows. Process Technology, somewhat higher, thanks to expected large orders, while the underlying demand is unchanged. Equipment, unchanged. Finally, Marine & Diesel, somewhat lower due to lower contracting at the yards in 2014 and 2015. That completes our presentation. Now we hand over to the operator for the Q&A session.
Thank you. As a reminder, if you'd like to ask a question, please press star and one on your telephone and wait for your name to be announced. If you'd like to cancel that request, please press hash again. We do have a few questions in the queue already. The first one is from the line of Max Yates from Credit Suisse. Please go ahead.
Hi, good morning. Just two questions from me. Firstly, on the Marine & Diesel margin. If I try and back out of that the profitability of Framo, assuming normal quarterly development for the rest of the Alfa Laval business, it looks significantly higher than the previous two quarters of this year. Could you just give us any guidance on whether there was anything unusual in the Framo margin this quarter that made it particularly more high than the previous two quarters. The second question was just on the Framo orders. If I have a look at the quarterly number, it looks like there was around SEK 900 million of orders. Based on the end market demand, is that the kind of run rate that we should be considering going forward for this business over the next three to four quarters? Thank you.
Well, as far as the margin in Marine & Diesel is concerned, let me repeat what I said during my presentation. The improvement in margin is to do with the increase in sales for the division, and the positive FX effects. There is nothing particular to report other than that. When it comes to the level of orders for Framo, let me remind you of the qualification that Lars just delivered for orders in Marine & Diesel. On the back of lower contracting to the shipyards, we anticipate a somewhat lower demand for the Marine division.
Okay. Thank you. Maybe just one follow-up on the Process Technology guidance. Could you maybe elaborate a little more on what is giving you the confidence that large orders will be coming back in Q3, and what you're seeing in the market that has allowed you to give that guidance to Process Tech being somewhat higher in Q3? Thank you.
Well, there are a few large orders where we have a good visibility, and we have good reasons to believe that they will be booked in the third quarter. As you know, large orders come in a bit lumpy.
What I think is important to remember is what Lars qualified as well. We believe that the underlying demand remains unchanged.
Okay. The guidance up is to do with the orders that you're seeing for your business rather than any change in the underlying market demand. Is that fair?
Correct.
Correct. Okay. Thank you very much.
Thank you. Your next question comes from the line of Peder Rosén from Handelsbanken. Please go ahead.
Yes. Good morning, gentlemen. Let me follow up with the Marine & Diesel Division margin there. I heard the comments on load and effects. Could you please share with us on how does it look on mix? Would you say that this is above average given the backlog or below? I'm thinking product mix to begin with, also mix between capital sales and aftermarket.
Well, again, let me remind you of the qualification as far as margin in Marine & Diesel Division is concerned. Marine & Diesel Division was benefiting from an increase in sales volume and the positive transaction FX effects. There is nothing in particular other than that. Of course, you do have a slight effect from mix between capital and aftermarket, that is still compensated by mainly the volume.
Okay. If we look ahead here, would you agree that these parameters would be slightly the same? I'm not talking about load and FX, because that you have been very clear in your guidance, I'm talking about mix within the different parts of Marine & Diesel Division, i.e., Old Alfa, Framo and Aalborg Industries, also on service versus capital sales. Is that heading up or heading down or neutral sequentially ahead?
Peder, in our generosity, we have provided you with a forward-looking statement on gross profit margin as a whole. I said we do not expect any material changes to gross profit margin compared to the outcome of quarter two. We are not providing any individual comments by division.
I hear you. It's still the fact that the Marine & Diesel margin was very strong, at least compared to my expectations, and I would like to understand if that is sustainable or not. I hear you. Okay. Let's move over then to the outlook for oil and gas. On your belief that the demand for you and oil and gas is stabilizing, could you please share some light on that? Discussions with your customers, is it only on large orders? Share some more light on that, please.
We believe we see a stabilization within oil and gas on the current level for the Process Technology Division. Upstream and midstream, we are down 70% in volume, and that corresponds well with the decline in rig count.
Yep.
Further, we saw that we had a positive development for service for oil and gas related customers in the second quarter. Finally, we see a good tendering activity for downstream. However, if that will materialize into orders, that's another thing. At least it's a good sign.
That's very clear. Thank you for that. That's it for me. I get back in line.
Thank you.
Thank you. Your next question comes from the line of Sven Weier from UBS Frankfurt. Please go ahead.
Good morning. A couple of questions from my side. The first one being on what you said on the Sanitary business, and I was just curious if you could remind us of your dairy exposure, because I was a bit surprised that this business was doing better in Q2. We've now seen dairy prices at a 12-year low. I was just wondering if you could give us some color on that, probably a little bit smaller part of your business, and how you see that developing. On the scrubber side of things, how do you evaluate the business here now after the oil price fall and the difference between heavy fuel oil and marine gas oil having come down quite substantially? Do we have to reevaluate the opportunities for that business? Thirdly, a question on your exposure to Daewoo Shipyards.
Probably seen the share price decline there and some of the concerns relating to their offshore backlog. Just lastly, I was just curious if there was also a revaluation effect on the backlog in Q2 or if this has been really minor. Thank you.
Okay. I start with SOx, there we see a lower demand 2015 versus 2014. Of course, the lower cost for the fuel impacts, also you can say the gap in price between the clean fuel and the heavy fuel oil, that gap has also been reduced. That means that the payoff time becomes a bit longer than previously. That has made some ship owners being hesitant whether they should proceed or not. We still see it's a good activity level, but lower than last year. We continue to believe that this is a good business to be in.
When it comes to exposure to dairy, what we've seen is a sequential uptick in Sanitary and a flat development on total level for food and life science. If we start with the Sanitary segment, where we really have the dairy exposure through Tetra Pak, we've seen a good increase in orders from Tetra Pak, that is really our exposure to dairy. For the rest, we are looking at other application areas in food, then, of course, personal care and pharma in the Sanitary segment. It was really.
Tetra Pak or Tetra?
It's Tetra Pak, yes. It's Tetra Pak, a contributor to the positive sequential development in Sanitary. For food, the development is strong in olive oil, food solutions, vegetable oil, but has been weaker sequentially in brewing, for instance.
In the end, you have no real exposure to dairy processing firms or farmers?
Well-
The milk that is packed into the Tetra Pak.
We do have through channels in the Sanitary segment.
That is too small to really comment on the demand in those channels.
There is an uptick sequentially for food outside of Tetra Pak as well in the Sanitary segment, but it's still only a part of the Sanitary segment. We then move on to our exposure to Daewoo Shipyards. Daewoo is, of course, an important customer of ours. We are not aware of any issues related to, say, any orders we have in our backlog to Daewoo at this juncture. I cannot qualify further. Finally, as far as revaluation of backlog is concerned, there was not any material effect coming out of revaluation of the backlog in the quarter. That's why we're coming to the conclusion a decline of 3% organically like for like.
Understood. Thank you both.
Thank you.
Your next question comes from the line of Andreas Koski from Deutsche Bank. Please go ahead.
Yes, good morning. It seems like your marine and diesel equipment orders were held by ballast water treatment systems. I remember you said you had a run rate of SEK 45 million in order intake from ballast water treatment systems in Q2. In Q1, I mean. Could you please share with us what the run rate or the quarterly order intake was in Q2?
Well, if we look at ballast water treatment systems in the quarter, they represented about SEK 170 million of orders received.
May I ask if you expect this to be a new run rate, or do you expect it to come down in Q3 and Q4? I suppose this was part of the frame agreement you announced during the quarter.
We've seen orders under the MSC agreement come in during the quarter, that is certainly a part of the SEK 173 million. This MSC order we communicated as this was, we think, a strong indication that the retrofit market for ballast water treatment systems is really starting to open up. I think you can see that from articles in marine-related papers as well. Andreas, we are not providing a forecast for quarterly orders in a specific application.
No, I can understand.
Yeah. We had SEK 173 in quarter two. We are happy with that, but that's as far as we go.
Then on cost savings, because you said that SG&A cost savings are coming through faster than you had planned. Can you please give us an update? How much of the SEK 300 million you aim to take out in cost have you now materialized?
We look at the sales and admin part, I would say that we are done with the program that we put in place. As far as R&D is concerned, this is a reduction of the R&D limits for the various product centers for 2015 over 2014. We've realized, well, basically 50%. For the cost of goods, we have seen parts of it. I'm not prepared to give you an exact number because the closure in the Netherlands, for instance, will only be complete by sometime mid quarter four. I think we are, as far as operations related or supply chain related is concerned, in line with our plans.
Perfect. Thank you very much.
Your next question comes from the line of Christer Magnergård from DNB Markets. Please go ahead.
Hi. Firstly, just two follow-up questions. Firstly on, you mentioned the Daewoo, and I guess there are more shipyards that have some kind of problems now. Do you see an increased price pressure from the shipyard industry for Marine & Diesel? Secondly, when it comes to ballast water treatment, we are approaching now 35%, I think it's 33% of the flag countries that has ratified the convention. What do you see here? Have you heard anything that we are getting closer to a full ratification yet?
Well, we do not see any change in the price picture when it comes to the shipyards. When it comes to ballast water treatment, I think in reality, more and more of the ship owners, they are taking the decisions to go ahead regardless of if the documents are signed or not, because people expect that it will come through. There is still some missing before it formally becomes valid, the regulation. We can see from the activities that it's moving ahead anyway.
Okay. Secondly, you said in Q2 and on the call that the order pipeline for big projects are shrinking, but still you see an increase for PT in Q3. Has anything changed or what do you see beyond Q3? Is that when we're going to see that effect from shrinking order tender activity for big projects?
Well, we take one quarter at a time, the large orders tend to come in a bit lumpy.
Okay. Thank you.
Thank you.
Thank you.
Your next question comes from the line of Daniel Schmidt from SEB Stockholm. Please go ahead.
Yes, hello. Good morning. Can I just ask you, sorry for coming back to this subject again, when it comes to vessel contracting at the yards, if you look at the Clarksons data so far this year, it looks to be down quite dramatically, even though we know it's continuously being restated, of course, but it's a drop of over 50% year-to-date. Surely that must be much steeper than your expectations by the second half of last year when you launched your cost-saving program, which you are executing very fine on, as you said. Do you feel that this drop is? Are you prepared in terms of your cost base for this? Could you shed some light on that?
Well, you are right, of course, that we have a decline in contracting. Let me remind you that Lars commented in his qualifications of the outlook that we see a somewhat lower demand for Marine & Diesel following lower contracting. I think we try to reflect what we see in the very near term of ramifications in the outlook. As far as capacity is concerned, in most of our product groups, let me again remind you that we have common supply chains for the three selling divisions. It's the combined demand of the three divisions that decides the capacity in the supply chain. To the extent there is a need to adjust capacity, I can only assure you that we will take action.
Our colleagues in operations, they are really on the ball, and they are watching this, not on a quarterly basis as you do, but they look upon it on a weekly basis, and they take action.
Okay. This will, of course, not be that much affecting you guys in Q3. It will be really sort of rather towards the end of this year and start of next year. Okay. Can I just then also then ask you mentioned the savings program and sort of the realization of savings in R&D. You also said earlier during this call that the fact that R&D spend was down 14% year-on-year was also partly on the back of phasing of projects. Does that mean that R&D spend savings will be less in the coming quarter, or could you shed some more light on that?
That's reasonable to expect. The phasing has a lot to do with things like receiving bills for models of new products, first sets of tools for testing production and things like that. That inevitably, to use one of Lars' expressions, they come lumpy. That's why. Yes.
Yeah. It's fair to assume that the realization of savings in Q2 on R&D was abnormally good.
Yes, absolutely. The expectation as far as we're concerned is a reduction of 10%, nothing more.
Thank you so much.
Thank you. Your next question comes from the line of Natalie Falkman. Please go ahead.
Good morning, gentlemen. I have a couple of questions. The first one on the Process Technology margin, the 13% number for EBIT. Is it a new normal given the volumes that you have right now, or are there any latent fixed cost that are able to be adjusted to this new volume levels? I also wanted to ask you about the corporate elimination that has been now quite low three quarters in a row. It is also something that is the new normal now that you have completed, for example, the Frank Mohn acquisition.
Well, as far as the Process Technology margin is concerned, well, it has become the normal for the last two quarters at least. We have all of the parameters influencing PTD going forward as well. We are not providing forecasts, as you know, on a divisional basis for margins on any level. We are right now in the range of 13%-13.5%, 13.5%+. That's where we are right now. I think we try to describe the reasons why in margin as well as in absolute terms. As far as corporate eliminations are concerned, well, things like acquisitions may have an impact on the size of these eliminations, but I'm sure you agree with me, they are quite small and under normal circumstances, they should remain quite small.
Just the last one, regarding the outlook. I think you already said that, but just to clarify, the majority of the large orders are foreseen in the PT Division. Is that correct?
Yes, that's correct.
Thank you.
The underlying demand remains unchanged for the PT Division.
Yes. Thank you.
Thank you.
Thank you. Your next question comes from the line of Lars Brorson. Please go ahead.
Hi. Good morning, Lars. Good morning, Thomas. Just a couple of questions from my side. First of all, on offshore, can you remind us how much of your order backlog is offshore today? Within that, perhaps can you give us your assessment of what you think is the risk of delays and cancellations here? Secondly, if I could just on slide 28, sorry, I was a bit late on the call. It wasn't clear to me whether the comments are sequential or year-over-year, but on your 300 basis point decline in PTD margins year-over-year, if that's only price mix, can you give us a sense for how much is price and how much is mix?
Perhaps if you could give some comment around pricing generally in PTD in your backlog, particularly on the oil and gas orders that you've taken in the last few quarters, that would be very helpful. Thank you.
Well, Lars, as far as offshore is concerned, I can't give you a sort of sizing of the offshore backlog, but let me just remind you that the offshore share of Marine & Diesel was 11% LTM per March. That gives you a size, say, a magnitude of, say, the offshore exposure. Of course, there is some in product sales in PTD. As far as Process Technology margin is concerned, you find the comments in the divisional performance slide, and you have comments to the operating profit underneath on that very slide. As far as margin is concerned, the sequential comments were adverse price mix compensated by FX effect as we were on the same level as in quarter one.
I think we missed your further questions, Lars. Can you repeat those, please?
It was more that if it's only price mix that's negative offsetting the positives from volume and FX, I appreciate it's a sequential comment, but the question was more around pricing generally in the backlog within process technology, particularly if you could comment on the pricing on your oil and gas orders taken in the last couple of quarters, and what we should expect from a pricing standpoint as that gets invoiced in the next few quarters. Thanks.
Well, we provide a forward-looking statement as far as gross profit margin is concerned for the coming quarter. That is, of course, a strong indication of what we have in the backlog. There we say that we do not expect any material change to gross profit margin in quarter three over quarter two. Other than that, there is nothing in particular to comment as far as the margin content of the backlog is concerned.
Thanks.
Please go ahead.
Hello? Operator, we don't hear anything from our side.
Okay. Unfortunately, Mr. Gibson, I have opened his line.
Okay. Sorry, I didn't hear you say my name.
Yeah.
Hi, it's Colin at HSBC. Morning, everybody.
Hi.
Three quick questions on regional trends, please. First was, you write on slide 18, I think it is, that you saw growth across all capital sales segments in China, which sounds quite encouraging and couldn't be more different from SKF's assessment yesterday. Perhaps you could just remind us what the big capital sales segments are for you in China. I guess we think of probably construction and shipbuilding, but is there anything else that's significant in the mix there? Secondly, Russia, it's all over the place. I think up 17% sequentially this quarter, down 44% sequentially last quarter. You continue to sound a bit more optimistic than some companies do when they talk about Russia. How do you see things developing there? Final question is on South America, which seems just resoundingly awful.
I just wondered whether volumes are low enough there now that you have to think about additional restructuring measures. Thanks.
Well, starting with China. Except the very obvious marine exposure we have, we have process industry, we have food. Food and beverage is important for us. We also have a good exposure. I would say, in China, we have a good exposure of almost all of our business segments. Sequentially, we had a good demand, a good growth in the second quarter. However, you should still bear in mind that there is a wait-and-see mode among many of our customers. They want to see the impact from the stimulus measures that have been launched or will be launched. It's still wait and see to a large extent. When it comes to Russia, we are positive when it comes to food-related business, because with the decision in Russia to be more self-sufficient on food processing, there are significant investments going into that sector.
In general, Russia still is facing a challenging period. When it comes to Latin America, we don't see any need for the time being for any restructuring measures based on the order intake so far.
Okay, thank you very much.
Thank you. Your next question comes from the line of Sven Weier from UBS Frankfurt. Please go ahead.
one follow-up question, given that nobody has asked it on metal prices. You kind of indicated a bit of a windfall here in Q2. We all can see nickel and so on. Maybe you can also give us a taste on how the titanium prices have developed for you because that's a less visible market for us, I guess. If your expectation would be that next time in your pricing adjustments that you have to pass on some of that windfall, or are you confident to keep it for yourself? Thank you.
Sven. We didn't say that we've had any windfall on metal prices in quarter two, but what I said was, I believe that some of the possible risks we may have in load, we can compensate by lower metal prices going forward. Remember that we are hedging a bit of the exposure on nickel and copper, in particular, to reduce the swings and give ourselves time to make adjustments. We see following the phasing of the hedging that we have some tailwind going forward. As far as titanium is concerned, you're right, titanium is less visible, and of course, we've gotten better deals
When it comes to titanium over the last several years, there's been a gradual decline in titanium prices, really from the peak as far back as in 2008. That, of course, we have seen reflected in price levels for these kinds of products as well. Remember, there was a scarcity situation for titanium as well when we go back. Will we be forced to pass on? Our ambition is to drag our feet as much as we can when it comes to that, and we'll continue to have the same approach.
Is it fair to say that your clients at the moment have other worries than to track raw material prices on a daily basis?
Let's express a hope that is the case.
Okay. That's clear. Thank you, Thomas.
Thank you.
Thank you. Your next question comes from the line of Andreas Koski. Please go ahead.
Yes. May I just ask on the currency impact on orders and sales? I was a bit surprised that the currency contribution only was 8.9%. Of course, it's high from a historical perspective, but compared to Q1, where it was 13.1%. Did you have an abnormal order exposure geographically this quarter and that we can expect good or even higher support in Q3? Can you say anything about the current impact on orders in this quarter?
Well, Andreas, there are inevitably variations between quarters. What are we receiving in terms of orders? Are we receiving larger contracts denominated in euros or dollars? Of course, that can play a role. Of course, that applies for sales as well. It's something that is very difficult, if not impossible to project. I'm very sorry. We've given indications of what we anticipate of translation effects for the full year. Remember the SEK 2 billion, we have nothing other than that to add at this juncture.
Thank you.
Let's see if we have a final question.
There are no further questions coming through at the moment.
Yeah.
Actually, sorry. Just to say that another one comes through.
Okay.
Would you like to take that one?
Absolutely.
Yeah. It's from the.
We promised the last question.
It's from the line of Max Yates from Credit Suisse in London. Please go ahead.
Sorry. Hi, just one quickly on that others line. I know you mentioned it earlier in the call, but I just wanted to come back on that and clarify whether you gave guidance for the full year on how that should step up in the second half of the year versus the first half, because obviously on a year-on-year basis, we're running considerably below last year. Did you qualify that earlier?
No. We did not provide any specific forecast for the other cost and income line, in quarter three. No. The only thing is that I qualify that we had some out of the ordinary items inside of the charges. We had the closure of a small manufacturing plant in India, and we had a charge for prudence when it comes to receivables related to Greece.
Okay. Just in terms of if this number was minus SEK 200 in the second half of last year, should we be thinking around that kind of level for the second half of this year? Is there any reason it should be different?
There will still be charges on the other cost line, there will still be income in the other income line. I'm sorry, Max, we are not providing a forecast for the individual P&L lines.
Okay. Thank you.
All right. Thank you. That completes the session. Thank you very much for your attendance and interest, and have a nice summer wherever you are.
Bye.
Thank you.
Thank you. That does conclude the conference for today. Thank you for participating. You may all disconnect.