Alfa Laval AB (publ)

Thank you. Good morning to everybody and welcome to the call.

We’re going to follow the normal procedure. So I’ll start with a couple of intro comments and then, Jan and myself will go through the presentation briefly.

First, let me back off from the quarterly report a little bit and just observe that, we are now at the end of the three-year program that was launched in the beginning of 2017, and it included a significant effort related to renewal of the product programs, rebuilding of our manufacturing infrastructure and a host of other activities. With the main objective to drive the organic growth in the company, and I think quarterly report was a testimony to the fact that we are on the path to achieve that objective in a good way.

And let me at this point and also say that we have the Capital Markets Day coming up 5th of December, I hope you have a chance to join us. We will then start to outline a little bit how we will continue this path and how the next year plan will look, so I welcome you to that already now.

Secondly, the service side was an important part of our three-year plan, and has been for this period and we’ve worked a lot with various ways of strengthening our service offer to customers and we still have a lot of work to do. It was still very good for us to see that the organic growth, excluding currency it reached almost 10% in the quarter which is a high level and I will get back to that later.

Finally let me then say also that, in terms of the guiding going forward the next quarter, we expect a somewhat higher demand across all three divisions. And that means that our expectation is that we will enter 2020 with a strong order book and even though our readiness are focused to be ready for possible negative effects and downturn later on in 2020 will remain high and the focus on efficiency activities will increase, no matter what.

So with those comments, let me go to the key figures. As you well know when you follow us, you’ve noticed that our invoicing has lagged behind the strong order intake during a rather long period of time.

And in Q3 finally we saw the order book being translated down into the profit and loss statement with very strong invoicing, and a good growth in earnings. In fact, in the quarter earnings per share increased by 34%, so we got a good drop through from a good order book coming into Q3.

In terms of order intake, we guided last quarter for a sequential somewhat high demand and in fact, that’s what we saw in the quarter. Excluding the PureSOx business, our organic growth year-on-year was approximately 10%, excluding currency.

And I’d like to highlight for you that if you look on the Q2 order intake as well as the Q3 order intake, the underlying strength of the order intake has been a little bit obscured by the exceptional order intake on the PureSOx business 12 months back. There is not a huge difference in the order intake patterns between Q2 and Q3 other than the specific volatility in part of the marine order intake.

We know noticed some negative effects from the political uncertainties around the globe, but we have to conclude that this has not been a major factor in how our order intake has developed during the quarter. In terms of the profitability, Q3 was operationally a good quarter with a fair amount of tailwinds in a number of aspects, we had a favorable outcome in metal prices, we certainly have a favorable currency and it was all-in-all a good load in factories that brought us to a good margin development.

The main factor obviously in terms of our earnings level and our margin has been in good invoicing growth that drove the margin improvement, including a good leverage in the sales and admin costs for the quarter. You should also note that we had a relatively positive mix in the capital sales, so despite the fact that service sales is relatively low, the gross margin stayed up reasonably well in the quarter.

Going to the divisional level, the Energy division had a strong quarter with a very high order intake for third quarter and invoicing at record levels. The steady demand growth is related to the need for energy efficiency solutions and to a degree with new refrigerants in a number of the applications.

We can notice that the sustainability related applications is increasing the dominant factor in the short and long-term growth perspective for the division. The margin stayed stable year-on-year, sequentially we had a negative effect entirely driven by changes in the product mix for the quarter.

The Food & Water division had a good invoicing and margin in the quarter, it was largely a stable demand situation for the division. We always have some fluctuations in the various end markets on the division.

I wouldn’t put too much emphasis on it. The only thing I’d like to highlight in this context is that, we had for a period of time seeing a structural growth in the Wastewater applications and we expect those two continue also going forward.

The Marine division is still working in the market scenario where the yard contracting for new ships remains weak and that is obviously still a factor in terms of the development of the division. Still most products groups showed solid growth, both sequentially and year-on-year when it comes to the order intake in the quarter.

Last quarter, we had a shortfall in orders both in the Pumping Systems business and in the PureSOx business. This quarter as expected, we saw an improvement in the Pumping System returning to a more normalized level of order intake, whereas the PureSOx remained on the lower level for the quarter.

Here I would like to add that we see the project pipeline for PureSOx orders getting stronger and the market activity is higher. We have indicated to you already a year ago that we were expecting a weaker market ahead on the end of the 2019 and the IMO regulations in January, and that is in fact what we’d seen and with those comments we think that we will have some return on the PureSOx business maybe not to the extreme levels, but into some sort of sense of new normality level going forward.

Service, overall as I indicated, it was a good service quarter and 10% organic growth is not very frequent in our business. The Service business was especially strong in the Marine business, which is the main driver of the growth for the quarter.

And it’s a number of factors that came together in the quarter, the traditional Service business that we always had was okay in the quarter. We see the start of Service business growing on the back of the new environmental applications that we didn’t use to have in the order book.

And on top of that, we see a strong reconditioning Service business growing on the back of increased multi-fuel solutions on board and partly as a result of the IMO regulations coming into effect. So those factors combined gave us a strong quarter and the structural tailwind that we have is expected to a degree remain also going forward.

Then finally to the regions, a couple of all of your question – reflections on that. China and Asia remained strong, although you see a big minus on the order intake, those are entirely related to some aspects of the Marine business, but leaving that aside, the underlying business conditions in China has remained favorable in the quarter.

North America continued on the good level, but I would still say that the third quarter last year in US was not exceptionally good and so although we are in a positive number there, the business sentiment in the US is maybe not at the same level as it was about a year ago. But with that said, we continue to have a positive development in the US and certainly in Canada for now.

Eastern European was perhaps the best area for us. It includes a good level of business in Russia and a very strong development in the Rest of Eastern Europe, whereas Western Europe was generally okay.

I might add the geographical excursion anecdotally by indicating that taking Europe, both Turkey and the UK were samples of two markets with relatively high political volatility and still a very strong order intake this quarter as well as in the previous quarter. So, some of these political turmoil although it remains a worry does not immediately translate itself into negative effects in the order book.

And with that, I would like to hand over to Jan for some further financial comments.

Thank you, Tom. So as Tom has covered order take, I will move directly to sales.

So we expect that invoicing to be up in Q3 over last year and about the same level as Q2. Now we realized sales of 12.1 billion in Q3 which is an all-time high for the Group, and as you can see from the slide, we ended up stronger than we expected, especially due to a very strong invoice in the Marine division.

Regards to Q4 sales, my answer is as follows. We expect invoicing to be somewhat higher than the same quarter of last year.

And looking at the gross profit margin, so the gross profit margin came in about 100 basis points below Q3 of 2018. What are the reasons for that?

Well, the service shared for total invoicing was low in Q3 at 25.4% versus 27.6% last year, and quite a large negative Service capital sales mix impact. This was partly offset though by a favorable product mix within our capital sales as Tom mentioned.

The lowest volume impact ended up somewhat negative year-on-year as we had slightly lower productivity in Q3 versus last year as we have ramped up new manufacturing capacity to meet the higher delivery volumes. This negative impact was however, fully offset by positive impact on PPV and metals partly due to a successful cost reduction actions by our sourcing organization and partly because we have not seen the impact from the increased metal prices in recent months.

We do however expect to see the impact from these increased metal prices coming through in Q4 of ‘19. Finally, we saw our tailwind from FX in the quarter as expected.

Now over to my outlook for Q4. So the starting point is the 35.4% gross profit margin that we reported in Q4 of last year.

We anticipate a negative product mix in the quarter as expected recognized the largest share of projects versus components and spare parts sales in the quarter. I stated earlier, we expect the load and the PPV and metals impact to be negative in Q4 versus last year, considering the metal price development after the summer.

And finally, we do expect to see a continued positive FX effect in this quarter. Now moving over to the key figures, the development of sales and gross profit was covered in previous slides.

So let’s go to sales and admin, which increased 4.5% in Q3 versus last year, excluding FX and structural changes so estimated in percent of sales decreased from 15.5% in Q3 ‘18 to 13.9% in Q3 2019. R&D expenses increased by 70% in the quarter on a comparable basis connected to our product innovation program.

Moving then over to other cost and income, excluding the non-recurring income book in Q3 of 2018 of SEK 39 million, other cost and income showed a net cost increase of SEK 36 million in Q3 ‘19 versus last year. This increase is fully explained by the increase in royalties paid for ballast water joint venture partner following recent quarter’s strong increase in volumes.

The Footprint cost was about the same level as last year, but is expected to be higher in Q4 as we are finishing the first wave of the Footprint program. Regarding operating income, just please note that we had a loss of SEK 15 million in Q3 ‘19 versus the profit of SEK 20 million last year in the Greenhouse division.

This is due to residual cost related to the sale of the air heat exchanger business. Financial net, excluding effect impact was minus SEK 46 million and the tax rate came in at 24.1% in the quarter and 23.8% year-to-date, and as Tom mentioned, EPS increased by 34% in quarter primarily due to the strong operational performance and also due to the reduction in the company flagship.

Now looking at cash flow, the cash flow from operating activities decreased versus last year at the strong operating results could not offset the buildup in working capital of approximately SEK 800 million in the quarter. This increase in working capital is primarily due to the buildup of inventories to execute our order backlog.

A big portion of the inventory buildup is related to the Marine environmental business. Normally such an inventory buildup is a large extent offset by increasing customer advances.

However as the order intake of PureSOx where we normally receive customer advances were low in Q3, we had a negative cash flow impact. We believe our net working capital levels will normalize over the next quarters.

Investing activities included CapEx investment of SEK 228 million, which follows the execution of a Footprint program. Financial net paid, excluding FX impact was minus SEK 96 million.

This means, the free cash flow in Q3 came in at SEK 995 million, slightly higher than the same quarter last year. And finally, our net-debt-to-EBITDA ratio now stands at 1.13 and excluding the lease liabilities of 0.82.

Then looking at the FX impact on EBITDA in the quarter, it was a positive SEK 85 million, both transaction and the translation effects were positive around SEK 60 million to SEK 70 million each primarily due to the stronger euro versus and SEK. The FX revaluation impact in the quarter was a negative SEK 45 million due to the strengthening of the US dollar versus NOK in Q3 negatively impacting the Marine business.

Looking at the projection for full year 2019, we expect the total positive FX impact of close to SEK 500 million. Now this estimate is based on the FX rate at the end of Q3 ’19 enhancing through a quite a lot of uncertainty considering the volatility in the FX rates.

Then looking at the order backlog, at the end of September we had a total order backlog of SEK 23.3 billion, a decrease of approximately 2% this year end as we have successfully executing from the large order backlog. That means that the order backlog now represents 6.2 months of LTM sales.

For shipments in Q4 ’19, the backlog amounts to SEK 8.1 billion, which then leads us to the sales bridge for full year ‘19. Starting with the year-to-date, sales of SEK 33.6, then we have the backlog for shipment in Q4 which is SEK 8.1 million and it adds up to SEK 41.7 million.

On top of that, you will need to make your estimate in-for-out order and FX translation impact and for your reference, the level of in-for-out orders in Q3 of ‘18 was SEK 3.3 billion, excluding the business divested out of the Greenhouse division. So, by that I will hand back to Tom.

Thank you, Jan and I already indicated that how we were looking at the Q4. As I’ve said, the business sentiment in the coming quarter in most part of our business still remains favorable, and our guidance for the Group as well as for all three divisions individually is that we expect somewhat higher demand in the fourth quarter compared to the third.

So with that, we’re done with the presentation and we are open for questions. Thank you.

Thank you. Just my first question was around the comments you made on PureSOx and the outlook for scrubbers’ sort of modestly improving.

I just wanted to understand kind of with your kind of best estimates how we should think about demand for this market sort of settling next year and maybe over the coming years after that, and maybe referencing that versus, I think around the sort of SEK 4.5 billion peak of orders in 2018. So that was my first question, just how should we think about that business settling into next year in terms of demand?

You know it is a bit of a speculation, and I don’t feel I want to go into, you know, forecasting for the coming year. So what I would say is that, I think we have to consider the demand peak that we saw a year ago as somewhat exceptional also when we will look that a couple of years from now that part of the business would disappear because of whatever reasons, we don’t believe that’s going to be the case either.

So we’re going to be in at some point here in between those two extremes. I think you will find other sources who may give a market estimates for where things are going to be.

I don’t want to be responsible for that one. But I think the other aspect that you could look at this is that, when we estimated the penetration of scrubbers some years ago, we had gradually upgraded that forecast somewhat in terms of the number of ships that will implement the scrubber solutions.

We took a conservative view initially back in 2016 it’s been a fairly large part of that volume is already under contract. So based on that, our assumption has been that we will exceed that to a higher number and I think that is in line with a lot of the external market forecast at this point as well.

Okay. And just the second question would be on the strong service growth in the quarter.

So I just wanted to understand kind of whether there was anything, any kind of longer-term contracts in that 14% growth number or whether that was effectively all underlying and maybe when we think about the sustainability of that number, can you talk a little bit about how sustainable that number is and also kind of what initiatives specifically that are really getting traction with customers driving that?

Well you know I’m very hesitant to express sustainability on any number. You know, I’d be happy to express my view on the coming quarter, but over time we have to win the business every day.

So I leave that open. You know, there is some tailwinds coming specifically, there’s no long-term contract in this, but I would say that when you start to grow a business like the reconditioning business, it is different from in terms of its in-for-out effects in terms of the – compared to spare parts deliveries, which are on the spot and immediate, right.

So, there are maybe some difference in mix, some difference in timing and some difference in margin when it comes to that type of work versus the traditional spare parts delivery work. So, there are there are some mix changes in that, but you know, I don’t want to put too much drama around it.

The question on how long, multi-fuel work and for that matter, the implication from the IMO will affect order intake positively, difficult to say it is not a one quarter phenomena, I think you may want – we often in these earnings calls have discussions about you know, the risks related to heavy fuel oil decreasing as a main fuel over time in shipping. I think from this quarter it shows to a degree that you know, we are less dependent on it, particularly a fuel type in our business, we have significant business related to the fuel conditioning on board and as the complexity grows with multi-fuels that is obviously in the short to medium-term, a positive factor for how the Marine division looks.

Okay, and maybe just finally, would you be able to tell us what the PureBallast order size was in the quarter out of the –

I don’t have a special number for it. But that is ramping as we’ve planned and it’s certainly to a degree compensating the weakness in the PureSOx.

Okay, thank you.

Yes, good morning. This is Johan Eliason I’m from Kepler Chevreux.

Now I have a sort of asking the mix in your scrubber versus ballast. I understand the good margin in the Marine business was due to the good scrubber volumes, but obviously the order for the Marine was driven a lot by the good orders for the ballast water.

So how should we sort of look at the margin projection here for Marine, will there be a negative mix to this margin is some sort of a peak when you have the very good scrubber margins coming through in sales? Thank you.

I will not guide you on the margin development going forward. I also would appreciate if a question is coming will go beyond the scrubber, because as I indicated to you a couple of times, the market cap Alfa Laval relating to the scrubber market is not that big, so I would advise you to think about the rest of our business as well.

Good. Let’s move to the rest of the business then in the –

Thank you.

Energy division order intake was, they look pretty good. We have seen Energy prices coming off.

Is that sort of the reason why you’re expecting a weaker market sometime during 2020 or do you see any specifics out there in the demand as well as to make you feel more cautious on the general demand?

Yeah, I’m not really. If you look at the pace right now, the investment pace downstream is quite good.

And I think it’s driven by a couple of long-term aspects. One is the need for China to gain an increased energy independence so we see investment activities there downstream relatively high.

And we have a bit of the same phenomenon related to Saudi Arabia and Middle East, so and even on the refinery side in the US, we do see some investments going on. So I don’t see an immediate shift to that and in fact, those investments do not tend to be very much affected by the oil price as such, so it’s not a – they may actually be favored by slightly lower oil price.

What is clear is that, the drilling and upstream part of the businesses is a bit weaker. But with that said, I mean, we are running at around a yearly pace of around SEK 7 billion on the Energy side right now compared to you know, about SEK 8 billion at the previous peak.

So, it’s still a good market situation there. But I think what’s more important for the Energy division is the fact that the energy efficiency, and of course, we sell energy efficiency solutions also into the refinery segment.

So you know, let me scope this correctly, but the importance of the Energy applications growing outside of the hydrocarbon chain is for every quarter more and more important. Then there we certainly have a long-term view that as we continue in a good way.

Even an application that may seem relatively narrow like data centers is, today a reasonably important part in certain product segments for our Energy business. So, we are not particularly negatively based on the Energy division compared to the rest at this moment.

Okay, excellent. And then I was also wondering in the Food & Water, you talk about this Wastewater continued with the positive trend, is that something you think will sort of also continue in a potentially weaker macro scenario going forward?

Is there some sort of legislative sort of drive here or is the World Bank pushing something in the emerging markets or what’s driving this mining –

Yeah, it’s, you know, when it comes to public sector tendering it is normally not a main profit pool for a company. So when it comes to World Banks and these type of projects, that there seems to be you know, sometimes from a tendering perspective and a profitability perspective, let’s attract it for us.

So we tend to go private sector wastewater and to a degree municipal where the need still remains very big around the world, but not on the local financing. The resilience in the Food & Water division as a whole tends to be reasonably good.

I don’t want to single out this particularly business segment as immune, but I think we have to expect that, if we see a significant deterioration into 2020 at some point in time, it will have then across the board effects of delayed projects and such. For the moment, the pace as you can notice in the Food & Water division has, I would characterize it as well as stable, whereas 16, 17 into 18 we had a fairly solid growth path.

Part of that is related to larger projects. So in fact, the business unit food systems is behind this year compared to last year, whereas, our components business and machine equipment business remains on a good level and in the many instances continue to grow on a reasonable level.

So, that’s about what it looks like as a spot observation on the Food & Water.

Okay, thank you very much.

Yeah, good morning. Thanks for taking my questions.

Those are two and more maybe long-term questions. The first one is just what you mentioned on your fuel independence in Marine.

I was just wondering, if you include LNG into the equation, how you feel positioned on LNG, you think that transition would be also neutral for you in the long-term or do you still feel you need to cover some gaps on the LNG side to be ready for that? That is the first question, please.

Yeah, I think it’s a fair question. I would say you know, as markets evolve, we also need to look and address you know, our product offering.

So I don’t want to give the picture here that we are fully invested in and up to speed on any development that’s going to go on, but generally speaking, LNG on board has implications in positive terms also for our existing product program, you need to handle cooling applications and other things on board. It drives infrastructure investments and other things.

So I think the most – you know and it’s not going to be – if your LNG solution here, it’s just going to be a range of options that the ship owners are requiring. So you know, let’s say that and you have two question yeah, there are still some add-ons that maybe relevant.

But all-in-all, it is in the short, medium-term of positive development for us.

Okay, thank you. And the second question is just more with regards to the plastic debate that we’re currently having and obviously increasing number of you know, regulation here also probably more longer-term question, but of course, I would probably see you more benefiting on the Food side with the carbon packaging and so forth.

But do you see already starting of a mind shift among your chemical clients are seeing increasing hesitance or maybe PET projects and things like that or is this way too early to talk about?

Yeah, I don’t have a super answer, to be honest. What I would say is that, we do see increased activities from our point of view in what we typically would call green chemicals.

So when I talk about the importance of sustainability applications driving us forward you know they haven’t taken over as the Big Bang, but we certainly see a host of small applications that are starting to grow, and that is also related to green chemicals, which is then at the end of the day, the alternative to the petrochemical process. So I cannot give you a fair answer on saying is the mix of that, you know useless ones in terms of business, I’m not sure, but I find that when we see process changes in industry, our technical capabilities allows us to take a forward position on those markets as opposed to you know the well-established you know, 50 to 100 year old applications, where everybody has been around for a long period of time.

So I see the trend shift relatively positive. If you take on the petrochemicals as such, the bottom of the petrochemical production that goes into plastics for let’s say you know, food and beverage type of application is relatively small, the large volumes of petrochemical products are going to industrial use, to car manufacturing and other places and we don’t really see any change process going on there.

So, at this point in time, it’s – that is not a dramatic shift in the petrochemicals side, the way I see it, but I think it’s a good question.

Thank you, Tom.

Thank you, Mattias Holmberg from DNB Markets here. I have a question on the balance sheet.

And I guess ultimately, it’s a matter for the board to decide, but I assume that you have some thoughts at least on how you best could utilize the strong position that you have and I’m thinking most in particular, what your thoughts are on M&A and how you view that landscape and if there’s anything that you think it’s particularly interesting at this point?

Yeah and you know, you’re asking a speculative question. You know a couple of reflections on it is, we will never feel that we should be obliged to do a bad M&A deal in order to activate our balance sheet.

So we’ve been very disciplined in the projects we’ve been working on that we certainly have been a host on more products than you have seen materializing for sure. We have found the M&A market over the last three years to be to a degree overpriced and we have opted for not creating a major goodwill positions on M&A in those areas.

So, we have opted for walking away for those areas you know of relevance. We continue to have a pipeline and if we see that market expectations and our ability to generate a positive return for our shareholders’ meet then there are a number of interesting options for us.

If we are not coming to any major M&A deals in the next 24 months, then obviously we will have a balance sheet which begs the question, and I think we will leave it to the board and to the AGM to make the final decisions on how we’re going to go with that. But from management’s point of view, we don’t have any particular interest to be overcapitalized in the long-term you know there may be a reason to tactically sit on a stronger balance sheet temporarily in order to take advantage of market situations, but as a general principle, we are cash generating company and we have no need for surplus liquidity over longer periods upfront.

Very clear, thank you.

Yes, good morning. Thanks for taking my question.

Just a question on your Energy division. I guess within your HVAC exposure, can you give us some sort of regional trends in terms of what’s going on within HVAC will be helpful, will be my first question.

We’re struggling a little bit with the answer here. I’m not sure I have a clear view on the regional differences for the HVAC specifically.

We’ve been going in depending on sort of how we want to scope the HVAC business, the one regional points that we’ve been seeing over a period of time is growth of heat pump solutions in China, that has in certain quarters been a fairly strong factor. It tends to have a little bit of volatility in it, the data center business and the semiconductor business tends to be relatively globally spread.

So it’s not you know given so. I don’t think I have a lot of color on the – Jan, do you have any wisdom on –

I think, if we talk generally about Food & Water division, I think what we say is that, we see a pretty good growth in North America and also Asia. I would say, Europe but let’s say a little bit slow.

Yeah, this is just in general for the Food & Water division.

And then I just wanted to pick up on something you mentioned about the downstream refinery investments in Asia and if China is in looks for greater energy independence. What are the customers telling you in terms of timeline there and when they’re sort of planning to execute on some of those things?

Is that a 2020 or so beyond that people are starting to kind of tender for some of those projects here just to start a strong pipeline and then looking for interest or where are they in their investment cycle on that region specifically?

Now, I think it started a couple of years ago and we were a big part of their – the biggest refinery project in China finale on just that was pretty much concluded during the beginning of this year. So and they are the large projects that are in the pipeline and it’s following.

So I think this is, as we speak, a process, if anything over the last year, I think geopolitically that is accelerating. So I think I would sort of just sketch the thing, it’s already in the pace of our order book and I don’t think it’s going away short-term.

That’s great and then maybe just a final one on the Marine business. Could you just flesh out some of the trends that you’re seeing within the different vessel types?

I mean, obviously the Clarkson data has been quite weak recently and that I mentioned in the past sort of disconnect sometimes between what you’re seeing and what the Clarkson data is telling everyone. I guess I’d be quite interested in just kind of your view across the different vessel flights in terms of current trends, it will be helpful.

Thank you.

Yeah. When we say that sometimes, we have a bit of a mismatch.

It can be interesting for you to go back and look at the contracting levels in 2017 and 2018, once they had been updated, back updated, you know, the numbers actually sit on around 1200, 1300 ships, whereas during those years you know the running rate that seem to be significantly below. So there has been some surprises in our order intake.

And I think they come from the – in a positive way. And they come from the fact that you know they actually registration data is lagging behind the actual pace.

So what we saw in ’17, ‘18 was a somewhat, you know better order intakes and was indicated during those years. The beginning of 2019 has been weak, that’s for sure.

I think the sentiment was weak. And I think there has been a hesitancy in the market, in fact, also related to the LNG question and the fuel options and you know, what’s the right way to design a new ship and an engine room when it comes to all of the uncertainties in the market.

So ‘19 is relatively speaking a weak year, we see and you noticed that on the Pumping System last quarter and to a degree this quarter as expected compared to the year before. So 2019 is likely not a great year for contracting, whereas if we look at the forecasting for 2020, the mix expectations for container, for product tankers, certainly for crude remains relatively strong.

And the color I’d like to add to that is, if there’s any area right now where there is reason for optimism is probably on the large crude vessels, the freight rates are exceptionally high at the moment, and it tends to drive short-term market behavior as well. So in terms of moneymaking segments in – from a ship owner point of view for various reasons right now, the companies are very, very attractive and it may change also for a short-term a little bit to the order patterns here, but let’s see.

That’s great. Thank you very much.

Yes. Hi Tom and Jan it’s Klas from Citi.

So my first question is on the Energy. I was late on the call, sorry for this and maybe you talked about it.

Could you talk about the margin mix impact? How much was project deliveries versus service growth that was basically flat in the quarter and how should we think about this mix impact going forward?

And Tom, if could you comment more on upstream outside of North America, and you’re talking about the total oil and gas business running at SEK 7 billion versus SEK 8 billion key, but that number is obviously boosted by a weaker SEK. If you give this in dollar are likely still well below so that could be some upside on the upstream side outside of shale I would have thought.

So that’s my first question.

Yeah, it was a number of topics you touched on. Let me start with the Service side.

It’s correct as you say, the development on the service order intake for the Energy division was on the low side in the quarter. With that said, we’ve seen a very good underlying growth trend in service over quite a period of time.

It has actually been the strongest part of our service business for at least a year. So the running rates are still pretty decent in service.

So yeah, it was a weaker quarter, but not the big alarm, and I don’t think there was any structural thing happening there. So we look favorably to what’s going on, on the service side of Energy going forward.

It’s true, currency’s volatility has been so big that is actually is becoming a factor. So it’s a prudent question and you’re right.

I mean, outside of shale and outside of land base, probably the offshore side will remain fairly committed to their CapEx plan and they had plans and they look positive right now. The offshore order side for us has remained pretty good.

And I think that’s still where we are mentally in the years to come. But I mean, if you go back to compared to the previous peak, it was a strong contribution of on land investments and today, we just don’t see that level of activity at all, partly because the efficiency on the land base side has increased substantially so utilization of equipment and CapEx you know produced the unit is much better than it was five, six years ago.

So they’ve done their homework for good reason and made it competitive, but with the slowdown of the oil price as well I think it has – we see that it’s holding back you know investments on that side. We still see on the gas side a fair amount of activity on the distribution side a fair amount of activity, but right now it’s a downstream that holds it up.

Okay, my second one is coming back to the previous one on Marine and I promise, I won’t ask anything on scrubbers side, but I was wondering on the Pumping System side ex-offshore i.e., from on the conventional side, whether you have seen some positives already on the tanker side, I mean, this market rightly as you say I mean tanker rates are up strongly, but also have that potential boost from IMO where the ships now shifting over to low sulfur from October onwards that could drive rates also on the product side. Have you seen any sort of green shoots from the trough on the trauma?

Well you know, the order intake comes with some volatility without necessarily you know, being the administration of big investment cycles you know, back and forth so I don’t want to over-interpret individual quarters here when it come you know, it’s a little bit like the large order sometimes you know, sometimes they come around and sometimes they’re not, sometimes you know they ship between quarters and based on down payments and all of that. So you know, we’re cautioned a bit when the order intake was very high a year ago on from obviously providing us with a great order book for this year.

Now, we’ve been seeing a slow activity at the moment not [technical difficulty] order book for next year in the same way. You know, let’s see where we’re coming.

We have seen the occasional Russia order coming in, which is not so frequent for the formal business, but so that’s my honest answer. But a better side, I don’t want to interpret that you know that we are heading into a new heavy investment cycle.

That is not the basis of our forward-looking comment for Q4 in any case.

Okay, that makes sense. My final one is on service in Marine.

You’ve changed the service organization here a couple of years ago, you’re now more global following [indiscernible] et cetera. And there was a service push, how much of that push down is driving that better service growth this quarter?

I’m very tempted to say that thanks to a good decision. So we are now driving ourselves.

I feel honestly, I have to say that a lot of the things that we have been doing over the last few years, I think is putting a foundation for the next three years rather than affecting you know, last quarter’s order intake. We have very positive feedback from customers in certain parts of our business like the boiler business for example, the value of this service is very big so you know the feedback is good.

We have a very good global monitoring on in terms of you know, number of ships visits you know, our visibility on how we deal with the service in terms of you know, first harbor service availability rates and things like that is really fantastic. So I think we are very much on the right track on this stuff.

I still have to say that probably for the quarter it’s been a minor factor. Let’s give it a little bit of a credit, but and not more than that.

Okay, thank you.

Thank you. I have a couple of questions as well.

And maybe I can start with the outlook of somewhat higher demand. It is not surprising to me that you guide for somewhat higher demand, because if we look at the past six years, we have seen a Q4 order intake being on average 10% above the third quarter order intake.

So I just want to understand here, if it is mainly because of the seasonality that you normally reach to get higher order intake in the fourth quarter or if you’re seeing strong underlying trends and that is the main reason for your guidance?

That’s a good question. You know, I think your observation on seasonality carries some weight, the Q3 if anything tends to be seasonally lower and you know affected by summer holidays and other things, whereas we tend to get some orders before yearend and consequently the Q4 is often reasonably good.

I’d say there’s probably – we haven’t made that clear distinction as management in terms of saying that these are the components going in, we look at our you know our pipeline and will always going to take us and that’s why we came down. I still think you know our assumption and your assumption should probably be that you know the underlying pace of the business call it base business or whatever, we still look at most of those areas that’s remaining in a positive development phase.

So and that is reflected by the fact that this is not a one division or two division guidance, it’s actually unusually for all three divisions expected to go forward in a decent way in the quarter. And I will still say that there’s probably an effect of what we expect on the large orders that is a bit seasonal call it seasonal or just call it that it looks good for the moment.

But our forward-looking guidance comment is obviously related to what we see in the pipeline and we tend to see the larger order is clearer than the smaller order so.

Yeah. May I just follow-up on that, because I think maybe on every call this year, you have pointed out that you expect 2020 to be a weaker year, I guess.

Are you surprised that the underlying trends are still so stronger just as they are or?

Maybe a little bit. You know, I’ve been hoping, but not planning for order intake to remain, but you can say the scenario that we’ve been working on in terms of the sales outcome, you know, those decisions that we are taking that has long lead times like CapEx decisions that you make in 2017-2018 and we are paying for it right now in order to get down like, when you have lead times of two, three years, you need to have some view on where is the macroeconomics going.

So we were you know, hoping and working for a scenario in terms of our investments and now CapEx profiles and a number of other initiatives, that if the market stay reasonably favorable into 2019, then we will go into 2020 with a decent order book and that will give us you know, in case we see a weaker market about a six months leeway until we have invoiced our book and all of that. So and that has been our planning.

So we will come down in CapEx and we will come down in some of the initiatives as we move into 2020 and that is a good fit, should we see a weakened economy. But as I said, you know I don’t want to predict it other than saying that you know we are ready and we have planned a lot of the initiatives around the possibility that we will come into that market situation allowing us to bring down costs levels and the improved cash flow situations in the tougher times.

But you know I’m happy for every quarter where we keep steaming.

Yeah. Okay and then yeah, you have been focused quite a lot on R&D.

Could you just give us a sense of maybe some qualitative numbers of how many products you will launch next year compared to how many products you launched three, four years ago or something like this to get the feeling for us to understand yeah what kind of benefit you get from this –

Yeah, you’re going to get a sketchy answer, because we – one answer is, please join us at the Capital Markets Day at December 5, because you will see a lot of the fireworks going on on the product side right then. Otherwise, you know it’s just a quick answer you know, we in terms of number of product launches, not qualifying them as important or less important or you know major or whatever.

But in terms of the just pure numerics we are you know two, three times our historic product launch rates and that takes us up to around the 1,00 a year, which means two a week. And if anything, I would say from the launch perspective, we are actually on the high side.

If you really want to launch your product and go-to market and do it properly in this basis, if anything maybe a little bit too high, but that’s where we are and we’re going to take the maximum benefits of it. What you see on the cost increase now it’s not actually driven by you know increased design engineers in the lab, it is actually the running in new products into the operational systems and industrializing the new product side.

So that’s why actually we see a bit of a higher spend increase right now, because taking them to market at the final stage is what drives the cost at the moment, not you know feeding in new ideas into the lab. So I think this is a reflection exactly on where we are on the launch side that you see the financial consequences, short-term of a somewhat increased R&D level when we industrialize these projects, but I really recommend all of you join us at the Capital Markets Day is going to be great.

Yeah. Thanks.

And lastly may I just follow up with you, Jan, did you say that invoicing in Q4 is expected to be in line or so with the Q3 level?

Yeah, what we said was that or what I said was the invoicing to be somewhat higher than the same quarter of last year.

Okay, and before that you didn’t say that it should be in line with Q3?

No, that was the commentary regarding the output that I gave for Q3.

Okay, okay great. Thank you very much.

Hi, good morning also my question have been already answered, but I would like to maybe to first start, did you see any impacts from the recent political developments particularly going forward on the tariff side or on the trade deals, anything where you’re on particularly exposed to some new regulations or some flows in your production chain which gives you some worry or where you see more opportunities maybe next year also on easing tensions particularly for example, Turkey was there?

Where we had our highest quarter order intake in Turkey in our history. So you know it is a bit odd sometimes how these things play out in the short-term.

Similarly, I think part of the Chinese energy independence is driven by the trade war and all of that. So there are positive sides, there are of course, negative sides as well.

So you know when you look at the overall portfolio, I would say right now, the trade war situations is – there is not any specificity in that issue that worries me. What worries me is that, we will see a general economic decline globally as a result of increased tensions and increased uncertainties in the world and that has certainly been one factor in our macroeconomic thinking for 2020.

If you would pinpoint any particularly areas that you know if there are some positives on the trade war side, there are certainly some observations on the other direction too. The one, I think we have indicated previously as well is that, the biofuels and ethanol not at least in the US is badly hit by the trade wars.

It is both on the capital sales and on the service side business that has declined compared to previously and but you know with that said, we always have ups and downs in our product portfolio without that necessarily you know escalates to something that would be visible to you guys. So you know, we are fairly neutral to what goes on that other than, as I said, the fact that we may be seeing a tougher economic condition, whether the sentiment in the US are affected by that specifically, maybe it’s been a heated situation in the US economically for a long period of time.

It still is obviously a very good economic situation in the US, but I think I indicated to you that although the order intake was clearly better this year than last year the US, you know the sentiment and underlying driving the US seems to be a bit cooler now than it was 12 months ago.

Okay. And maybe also as you mentioned the fuel mix quite often on, so do you have already view on how the fuel availability of medium sized ports will look like in the next year when IMO 2020 back to?

Well, no, well yes and no. You know, if you look and let the market tell the story.

The price spread between the low and high sulfur fuel have increased back to some sort of expected level recently, the prospects were relatively low during a period of time they are on the increase. We are not sure what’s going to happen you know globally, the total we do notice that there is a lot of preparation ongoing I don’t think there is a lot of alarm signals and so that’s positive for our customers and we certainly don’t want to see too much turmoil around the new legislation.

But I think we feel that you know the way the market is coming down on this, we will see the expected price spread between the heavy fuel and low sulfur fuel, and that tells you that you know, the demand-supply situation will be a little bit tight on the low sulfur side, that’s where we are right now.

Okay, thank you.

Hi, thanks. Just two quick ones for me, Tom if I can just on Marine so to come back to the service growth, but I’ve got that in the high 20s, low 30s, so a real uptick in service growth.

And you’re obviously talking about that being partly supported by IMO 2020 regulation. Can you help me with that, it goes back a little bit to the earlier question, I think around sustainability of the service growth in Marine specifically, what drove that?

And what is the nature of that service business that’s coming through for you there?

Well, as my comments were, I think in general, the service business has been good. For the historical part, we suddenly start to see an impact at the environmental applications which didn’t really have an installed base two years ago, where we see an increase both in terms of the service but it’s also an area where we are starting to do a condition monitoring you know, it’s not the big factor and the big numbers, but still we see a growth of the subscription revenue for a condition monitoring of equipment that we didn’t do before.

And then we have a good level of reconditioning work, which is related to the IMO and mostly fuel side and I think you know if you disregard the other two areas, which I think we are working with to have just a continuous slow and steady growth, certainly not on the level that of 10%, 15% but still as a reasonable underlying growth is the one area where we may have some volatility over the coming years is related to the multi-fuel side. Now I don’t think that the multi-fuel will go away.

I think the answer to how ship owners will decide to go in the future is very much related to multi-fuel options. So I think in that sense, there is a reasonable expectation that we will see a reconditioning work on the existing fleet as well as business opportunities on new built related to multi-fuel trends.

And so that you know I certainly don’t want to predict that our service business has entered into a new phase where over the coming years we’ll see growth rates like this, but it wasn’t the one quarter phenomenon that what I’d like to add. That’s not what we believe.

We believe we have some level of sustainability on this going forward in the next quarter.

Helpful color. Thanks, Tom.

Just a quick one and maybe mostly to Jan, on footprint cost. Can you remind me what the guidance is, Jan for footprint costs and you were saying I think they were ramping somewhat in Q4; I presume that was somewhat low on Q2?

Can you give me some specific numbers around that that would be helpful, please?

Yeah, sure. The footprint cost in Q3 was similarly sized of last year, meaning around the SEK 30 million, there will be a hiring in Q3 or probably towards let’s say a little bit more than you know in fact, maybe around 5 – let’s say SEK 50, SEK 60 which would bring then the total impact to let’s say around SEK 170 million for the full year.

I’m sorry, just to be clear, are they on booking operations and other or is there anything coming to in the divisions?

So that are mostly booked in operations and other –

And for 2020?

We will probably touch on that on the Capital Markets Day on December 5th.

Okay. All right, okay.

Fine, thank you.

Welcome.

All right, we go for our last question and then it’s time to break.

Yeah, hi. This is Johan again for a follow-up here.

Just on the comment you said on the Marine business, services where you mentioned that the new environmental technologies are driving a service business as well. Was this simply this SEK 200 million plus service agreements you got for your ballast order that you announced or are there more service contracts like that that you expect to see coming going forward as well?

Is that ballast for both ballast I’m sorry, for saying this, but the scrubbers, and for the ballast business will that improve the profitability picture for you, because I guess on the services you might not have to pay license fees for it? Thank you.

Okay. Let’s take the last point of it.

I think that our joint venture includes the full scope of the business. So I don’t see the drift, we will put the money in the pocket on our own, we will diligently share it with our joint venture partner for sure.

So I don’t think we have any impact on that. Now, I don’t see that any you know, we have frameworks in the Marine business operating agreements both on service and capital sales occasionally, but when it comes to the order booking, they don’t flow through in the order book until we have you know the normal commercial routines there.

So I don’t think – that was a similar question you know I think earlier that I didn’t catch that aspect of it. But I don’t see that we have taken in a long order book of our future service revenues that coming in here.

Jan, I don't know if you have any color on it on top?

No, I don’t know, if I understand your question that if the flick of the service growth in environmental thing that I would say is both coming in both environmental products.

Yeah, but the frame agreement does not – are not recorded as service or anything to the quarter so. So there’s nothing of large share frame agreement that’s flowing in at this point in time, it’s not being throughout necessarily, because recondition it takes a little bit of time, but I don’t think you’ve seen anything going in that will not be invoiced over the next six months.

That’s my guess, most of it been three.

We are building a sort of a large installed base on both the environmental product and that’s of course what we see the effect of.

All right, thanks.

With that, thank you very much and I hope to see you all in just close to Copenhagen this time and I have to say – see you all side up there, I’ll be straight on December 5, and we will be talking about new products and a whole host of other things. So you’re very welcome to that.

Thank you very much.

Sorry?

Continue what?

Operator, I think you just had the last Q&A. So I think we’re done.

Continue with what?