Welcome, everyone, to Alfa Laval's Capital Markets Day 2020. I am Ioannis Dinn, and I will guide you through this digital event. We actually do miss having you here, but we will put our faith in teams, and we will try to create some digital magic until we meet in person once again. The Capital Markets Day will run for about 2 hours and consist of 3 parts. First, our CFO, Yon Alde, will talk about our 3 divisions and some highlighted areas within each division.
And then he will also go through some key metrics going forward. Secondly, our CEO, Tom Eriksson, will talk about Alfa Laval's growth journey and group transformation and more specifically about how strong global trends will continue to drive demand for AlfaVald solutions, both here today but also for the longer perspective. Finally, we will have a lot of time for an open Q and A session. So with that said, I am convinced that you will find this to be a very, very interesting day. So stay alert, stay muted, and let's kick it off with the first presentation from our CFO, Jan Alden.
Welcome, Jan.
Thank you, Johan. The purpose of my presentation today is to go a bit deeper into the industry perspective of our divisions and provide some commentary on the market growth drivers and also on the outlook on the specific industries. Secondly is to show our performance in the group versus our financial targets, I. E, growth, profitability and the capital efficiency and with a focus on the statutory period from 2016 and onwards. Now starting with the growth.
So we have achieved an organic growth in orders of 7% and in sales of 6% during the strategy period despite the impact from the COVID pandemic in 2020, clearly above market growth. We have seen a growth across all the business units and most of our regions. We have currently an order backlog of about SEK 21,000,000,000 representing an LTM sales of approximately 6 months. We have not seen any material order cancellations in 2020 despite the uncertainty in the market. Now we'll go a bit deeper into the Energy division with a focus on the end customer industries that they serve.
We have made a new industry segmentation for the Energy division, better reflecting how they serve these markets. More than twothree of the capital sales volumes in the end of divisions are coming from stable end markets such as HVAC and refrigeration, process industries and Refinery. 40% of the capital sales comes from HVAC and Refinery sorry, Refrigeration, with a growth of 7% during the strategy period. In the Cluster Process Industries, we have included chemicals, petrochemicals, pulp and paper and metals, representing about 20% of capital sales in the Energy Division. All these industries have shown a growth CAGR of 4% during the strategy period.
The refinery segment has shown a strong growth during the period driven by the refinery transformation in China. In total, the Energy division has generated a growth of 6% in capital sales during the statutory period despite a challenging 2020 in some sectors such as upstream oil and gas. Looking at the key market drivers in Energy Division, they are very closely linked to the sustainability trends we see today, which is natural as the core technology within this division is to help our customers increase their energy efficiency and thereby reduce their CO2 emissions as well as reducing their energy cost, which is a significant part of the operation cost in any industrial process. In HVAC, decarbonization and green deals are driving investment in district heating and heat pumps, and the shift in natural refrigerants are driving investments in the refrigeration. In addition, the strong digitalization trend is driving investment in data center, which is part of this industry segment.
The same applies also in the process and refinery industries, where our new product platform of heat exchangers can significantly reduce the carbon footprint and energy consumption of our customers. From a market outlook point of view, we see its highest growth projection to come from the HVAC and refrigeration industry. Now looking at the Food and Water division. Overall, the market served by the Food and Water division has shown a very stable growth, and the division has achieved a growth CAGR of more than 4% in capital sales during both the strategy period and also over a 10 year period. The largest single market is the dairy segment, representing about 18% sorry, 28% of sales and which has shown a growth CAGR of 6% during the strategy period.
We have seen an even faster growth in wastewater and pharma industry with a growth CAGR of 8% 11%, respectively. In the largest cluster of food and beverage industries, we have seen a lower growth as some industries, such as brewery, have been negatively impacted by the COVID-nineteen pandemic, but otherwise a good underlying market demand situation. The key drivers in the food and water market includes food safety and the overall health trend, but also very much linked to sustainability trends such as alternative proteins, water scarcity, energy efficiency and the maximum use of raw materials. We see a continued positive outlook for most end user markets in the Food and Water division, but particularly in the wastewater and pharma and biotech industries. Now looking at the Marine division.
Approximately 40% of the sales in this division is coming from the new shipbuilding market, where our volumes have kept up quite well despite the market being on historical low levels. Due to our early investment into a portfolio of environmental products called Pure Thinking, introduced 15 years ago, we have been able to develop a very sizable marine environmental business during the last years, driven by regulations in the marine industry. And it now represents approximately onethree of our total capital sales in this division. In total, the Marine division has generated a growth CAGR of more than 20% in capital sales during the strategy period. The key drivers in the shipbuilding market is related to world trade growth, the size of the order book of new vessels versus the overall fleet and of course, industry regulations.
Due to the uncertainty related to the future fuel technology, the low oil price and also COVID-nineteen, the market has reached historical low levels. However, considering the aging of the existing ship fleet and the record low supply order book, the market is expected to recover from today's very low levels. For the Marine environmental market, we expect the Water segment to continue to grow in the midterm while the emission related part to decline. We will continue to develop our marine environmental portfolio around new fuels and energy efficiency solutions to serve the sustainability agenda of the marine industry going forward. Now looking at the Service business, which represent approximately 1 third of the total business in Alfa Laval.
And the split is as follows: Our parts business represent twothree and the repair business close to 20% of our service portfolio. The parts business has shown good growth during the recent years but has been negatively impacted by the COVID-nineteen situation. Finally, our field service and value added services, which represent 15% of the service portfolio, has grown fast. And this is important as it represents more of the proactive and front end parts of our service portfolio. The key market drivers for the parts and also the repair business are primarily related to keeping our customers' equipment up and running in a reliable way.
For the field service business, the key is to ensure availability and speed of our field service resources, which can be exemplified by our International Marine Service operations, where we measure the availability of the service technicians at what we call First Harbor. The final part of the portfolio, which is still small but growing fast, is our value added services, where the key strategic elements include servicing agreements related to our connected products and the digitalization of our service offering, including remote services. And the outlook for all of these service scopes are good. Now looking at the profitability. EBIT margin has developed well during the strategy period.
During 2017 to 2019, we had a positive impact from volumes and higher productivity but also a negative impact from a lower service mix. In 2020, we saw a negative impact from lower volumes offset by good cost control and a positive or slightly positive service mix. The graph to the right shows the overall sales volume, while the trend line shows the service share of total sales. As service sales is more stable over the business cycle and also more profitable than our capital sales, It works as a profit protection for the group, especially during tougher market conditions. The cost reduction program launched in March of this year is expected to generate savings close to €700,000,000 for the full year of 2020, and it will partly continue into 2021 as traveling costs will continue to be reduced and also be positively impacted by the new digital way of working.
T and E cost was roughly 40% of the cost saving program. We have also reduced some 600 employees during 2020 as we have adjusted our workforce in preparation for the lower factory volumes. Now looking at the quality cost of the company. The focus on quality has increased in the new organization, both in the development of new products, sourcing and production, but also in the sales process in terms of project selectivity. The graph to the left illustrates how the quality costs have decreased during the strategy period and is now below 1% of sales, positively impact our profitability.
Looking at the capital utilization part. Return on capital employed has improved in the beginning of the strategy period, driven by the improved profitability, but has flattened out in 2019 2020 due to the implementation of IFRS 16 and also due to increase in working capital. The increase in working capital, approximately 1.5% of sales versus historical levels, is due to the buildup of the Marine Environmental Business, the manufacturing footprint program and also the launch of the or the many new product introductions. We expect to normalize this as it's a major focus area for us. With regards to our CapEx, we expect to continue investing optimizing our manufacturing footprint with a focus on product serving industries with a good growth outlook and CapEx levels expected to remain around 2.5% of sales going forward.
Our strong cash flow has resulted in a net debt position at the end of September of SEK 1,900,000,000 excluding lease liabilities, which now represents a net debt to EBITDA ratio of 0.2. Our strategy for the capital structure going forward will include having a strong M and A capability, a continued strong credit rating, but also look to further optimize our gearing level as we and we are considering different options for this in the months to come. Now over to the macro and the business portfolio outlook. From a macro economic situation, we do expect the global economy to improve in 2021. However, it will probably take until mid-twenty 22 until the U.
S. And Europe recover to pre corona levels. China, on the other hand, is expected to recover already this year. From a geographical point of view, our strong presence in Asia and China will help us in this recovery. From an industry and business portfolio point of view, we can conclude the following: 30% of our business comes from service, which is normally quite stable and has a positive outlook in the midterm close to 50% of our total volume is capital sales related to industries and businesses, where the driver or key drivers are sustainability related and described earlier in my presentation.
10% of the volumes are related to marine shipping contract markets where the industry is very likely to have bottomed out in 2020. This leaves about 10% to 50% of our business, which is related to sector with a more structural demand imbalance such as oil and gas, onshore and offshore, which we will address through the targeted restructuring program. Hence, we will not go into a large structural restructuring program across the organization, but focusing on some of the businesses related to the market highlighted in the pie chart you have on the picture. And then finally look at some guidance topics. As commented earlier, CapEx expected to remain at about 2.5% of sales in the years to come.
Our step up amortization levels are gradually reducing from around €875,000,000 in 2020 to €730,000,000 in 2021 and then further down to EUR 630,000,000 in 2022. Also, as communicated earlier, the transaction and translation FX impact in 2020 is expected to be positive EUR 180,000,000 while the transaction related FX impact in 2021 is expected to be positive EUR 250,000,000 based on the FX rates at the end of September of this year. These figures will be reduced slightly if you look at the current FX rates. The remaining guidance topics regarding R and D, taxes and dividend are unchanged. And that concludes my presentation.
And I therefore hand back to Johan for the next part. Thank you.
Thank you, Jan. It's now time for our CEO, Tom Ericsson, to talk more about growth journey and group transformation ahead. Welcome, Tom.
This is probably one of the most exciting and changing times that most of us have experienced in the industry over a long period of time. Not only are there important sustainability trends affecting us at this moment, there's also a lot of consumer behavior changes affecting our business. And on top of that, of course, short term, we've been facing the challenges relating to the pandemic, although that is probably easing off during 2021. What I would like to do here is partly and kick off in sharing a little bit where we got operationally in our strategy 2017 to 2020 in terms of technology and service and these type of things. From there on, we will look into how is the landscape changing for us and what opportunities and trends are creating the best bets for Alfa Laval in terms of where we are going with our business.
And finally, we will round off with a little bit more of long term perspective of some of the emerging areas that may play a role for us in the not so distant future. As you know, we've been working with our technology leadership for a long period of time. And right now, we are in the final stages of replacing and introducing the new product platforms that we've been working on for several years. There are some common denominators across most of those product groups. And some of the more common features are increased energy efficiency, better serviceability, in many instances, some range extensions and also, of course, improved connectivity for a lot of products.
As a result, during these years, we have essentially doubled the amount of new product launches. And as a result, the newness factor of our sales will continue to grow in the years to come. We don't have time for a lot of details at this point in time, but let me just refer to a couple of the products where the changes are the biggest. Starting in the heat transfer area, we're doing a lot of changes in the business units for brazed heat exchangers. Those heat exchangers are generally used in heat pump applications as well as air conditioning applications, HEVAC as a general word.
And of course, the environmental demands in those areas are changing dramatically. As a result, we are adjusting our product portfolio and some instances also our process technology in order to deliver the relevant products into that segment. The other area in heat transfer is the workhorse of most of the large heat transfer applications in the world, the gasketed plate heat exchangers. We are in a huge industrial transformation in this area where we are replacing all of the large product platforms over a long period of time. The new product range is a lot more energy efficient, is much better for service and is protected by a lot of patents for the future.
So we are very comfortable where we are in the heat transfer area. And we do have a similar situation in separation technology. Let me refer to 2 examples. In the decanter area, we are now in the process of developing a more specialized decanter solution for various applications. And again, here, the customer advantages is a much lower energy consumption on the equipment but also a lower consumption of consumables.
For high speed separators, you could have thought that after more than 100 years of development, we've reached the peak in terms of what you can do from an engineering point of view. However, it's not true. The new generation is significantly better than the old ones. Again, energy efficiency and the equipment is a large contributor to customer benefits, but there are also many other aspects of the technology that is getting better, including the sensor equipment used in order to optimize its performance. We are also changing the way we make our products.
And here, I will not go into the process changes we are working with. But obviously, Industry 4.0, Additive Manufacturing and a host of other process changes is affecting the way we make our products. But I would like to refer to the significant footprint program that we have been executing over the last 4 years. To a large part, that program is now completed, although, of course, we will always continue to invest in competitiveness. You can see that we passed the peak in terms of CapEx spendings a couple of years ago, and we are now returning to a more €1,000,000,000 per year or so.
On the picture to the right, you can see our largest manufacturing unit worldwide. It is the marine boiler manufacturing unit in Qingdao. It's recently inaugurated and we really have some exciting and spectacular improvement in terms of the working environment, health and safety aspects as well as part of the production technology there. They're taking great steps forward. We're also in the process of completing a brand new unit in Northern Italy for brazed heat exchanger.
That will be a future factory integrated with a lot of new technology and certainly with a great improvement in the environmental footprint of the unit in itself. That unit will be fully operational and inaugurated in Q1 next year. And with that, we have completed essentially all of our undertakings when it comes to the footprint that we call 2.0 and that we've been guiding you on for a couple of years at this point in time. And instead of describing them too detailed, take a look at the recording of those 2 units and you will get a feel for what's going on there. Part of our strategy over the last few years has also been to build a more service driven company with a customer in focus.
It has been during 2020 a rather challenging time when it comes to service execution. But regardless of that, the trend towards increased customer value and increased revenue has been clear and will continue so for years to come. It is interesting though how the business has been changing over the last few years and especially during 2020. And let me refer to some specific data points on that. But you could say in short that from a situation years ago when service was essentially shipping spare parts, we are now moving into much more digital service operation mode.
There are a number of aspects to this digital transformation. One is how we're able to connect machines today compared to the past. We are now with more than 1,000 machines connected, becoming quickly, particularly for rotating equipment, very much connected to all of our customers and the way our equipment operate real time. We have also accelerated the remote diagnostics and remote service works through digital means very quickly. In the beginning of this year, we essentially had 0 hours of service revenue from remote.
This year alone from the world. Another aspect of the digital way of working is that for the first time, we now have a very global and broad covering installed base database. And that means that we can today pretty much for any customer around the world track exactly what equipment is located in exactly what location and exactly what service work has been done on that equipment over the years. That allow us to be much more proactive in selling to those customers who are not using Alfa Laval for service. And certainly, that is, although a majority of our service customers, still a large number of customers who are not currently actively working with our service organization, an opportunity for us to change.
I think the pandemic has helped us change faster in this regard. But also at this point in time, the technology is mature and the customer behavior is changing as well. So service as well as all other changes that we are driving in the company is related to behavior and to people. And obviously, we have been working with our culture and the way we are operating as a company. We started some years ago with dematrixing the organization, creating faster and more agile business units with clear lines of responsibility.
The leadership team now on a business unit level as well as divisional level after three years of operation is strong. We have also built new capabilities. Obviously, many of those capabilities are in the digital arena where we today have professional teams in areas like connectivity and a stronger team in e commerce that is gradually becoming more and more important for us. We are also, as a global company, becoming more diverse. This is partly reflected in the group management, but it needs to continue throughout our organization.
We need our talent management, our recruiting and our over time our senior management to reflect the global company we are and not just a Nordic export company. So we have still some steps to take there and we are working actively with it. At the end of the day, if you want to drive the service side, it is a lot about culture. And instead of me discussing culture too much, allow me to show a little example, a little bit on the light side perhaps in terms of what we mean with Alfa Laval culture when it comes to service. So where does all this take us?
Where are we today? All in all, we feel we have strengthened our competitive position in almost all of the business areas and product groups where we are operating. In this picture, there are 2 areas where we have a weaker market share. And the reason for that is that those are 2 areas with a heavy degree of engineering and projects, and we have spent a couple of years in focusing the project portfolio and the business focus. And we are getting a little bit leaner, a little bit more narrow, but also more profitable in terms of what projects we undertake.
And from where we are today, we are probably back in a position to start to grow again. So in summary, we feel quite good about where we are, but it doesn't change the fact that we have a lot of changes ahead. The landscape will be different, and we have a need to address it in many areas. Let me start with the question of Asia. Asia is driving the economy of the world.
It's not only China. The rest of the Asian region is increasingly playing a large role. Already today for Alfa Laval, we have more than 40% of our business in Asia despite the fact that we have an important market, the ship building market, in turmoil at the moment. It is just a matter of time until more than 50% of our business will be generated in Asia. Our footprint is strong and Asia is clearly critical for our success long term.
But as I indicated on the diversity issue, we still have more to do in order to build our Asian footprint and our Asian management team in a stronger way. Asia is not just China, but China is important. And China for us has doubled in revenue over the last 10 years and will probably continue to do so. But China is not just a market. To some degree, some of the big global trends are emerging from China or at least are heavily supported from China.
And one example is the 5 year planning cycle use, which is very relevant for Alfa Laval, latest one called the Blue Skies. It is a massive investment and change in the environmental area and the programs are indeed impressive. They are tackling among other things of course pollution, the CO2 and the climate issues. And it's not only China that is doing that. We have a similar situation in Europe where now the Green Deal has been launched.
And I expect that we will see similar initiatives in the U. S. As the Biden administration take charge as of January next year. Of course, this tremendous macroeconomic impact does create opportunity for us in areas where we are active. So let's start looking at some of those trends resulting from this situation and start with the CO2 issue.
There is not one answer to how to solve the CO2 challenge. As you can see on this picture, doing nothing will take the CO2 to an unprecedented high level and the gap towards what we need to achieve according to the Paris agreement will just continue to increase. There will have to be a number of efforts and initiatives to drive the CO2 side lower. And essentially, in all of those, you find critical Alfa Laval Technologies and equipment involved. I will not go into all of those, but let me refer to 2 of the important improvement areas: the energy efficiency area and the biofuel renewables energy area.
And let me start with the efficiency area first. We have worked with waste heat recovery for a long time. In fact, we argue at Alfa Laval that the cleanest energy is the one already produced and waste heat is actually produced energy and nothing else. Traditionally, our waste heat recovery projects tended to be in the process industry. On the picture, you see an example from a copper smelter.
We capture that energy, turn it over into a district heating network and it can heat 5,000 households, saving about 20,000 tons of CO2 per year. That's still a business for the future, but it's also one of the past. Today and in the future, data warehouse is becoming much more important in terms of energy recovery. It's quickly becoming one of the world's largest energy consumers and consequently one of the largest CO2 creators in the world. And if you look at what's being produced in the data warehouse, approximately 90% of the energy used is being turned into heat, heat that is not needed becoming waste heat.
How we capture that waste heat and how we develop it into useful energy is a great concern for the years to come. All of the large data warehouse operators are tremendously environmental conscious. We are working in partnership with several of those, helping them to cool the equipment more efficiently and helping them to capture the energy in a better way. It's a huge task ahead for 1 of the largest energy consuming industries in the world. We also have the issue of transiting from fossil fuels to other sources.
Let me touch on 2 of those. One important is the trend towards the biofuels. And it's expected that the biofuels will quadruple in the years to come. We certainly notice that in our project pipeline. For Alfa Laval compared to oil, biofuels add process steps before the refinery.
If you start by producing vegetable oil or taking residual fats, it needs a pretreatment process before you go into the refinery. That involves traditional separation and heat transfer solution. It's an area where Falaval has been active for years when it comes to edible oils and we're applying exactly the same technologies and treatment processes for biofuels. After that, you go into a biorefinery
and consequently, you
have a similar process as you have with oil. From that point of view, We are seeing We are seeing that process happening as we speak and we are very comfortable that we are best positioned in order to take advantage of that. Another important trend is the importance of hydrogen as a fuel. And similar to natural gas, hydrogen needs to be produced and storage And that is exactly where Alfa Laval is working with a lot of gas applications. It requires a lot of temperature control and it is within our core.
Flava technology. There is another aspect of hydrogen, which is the fuel cells and I will come to them a little bit later. With that, let's move on to some of the changes affecting the Food and Water division. They are also important. And let me start in the biotech area.
Biotech is quickly becoming the main part of all pharmaceuticals. And we've seen the growth we have experienced in biotech applications over the last few years. We have for a long time been present with advanced separation equipment in this sector. This year is different though. It was a year when we launched the first single use separator equipment in the world.
The importance of that cannot be overestimated. Until now, almost all of the value chain for a batch in biotech production was in single use state. That is you want to eliminate contamination from the previous batch. You want to eliminate long clean in process times. And consequently, you want to have a consumable that you replace for every batch.
That has been difficult to do in high speed moving separator. And consequently it has taken some time to get there. We expect this application to continue to grow significantly in the years to come. We clearly have a world leadership position in this area and we'll continue to do so. Another dramatic change is sources of protein.
Historically, it's been traditional animal production. Today, a lot of it is going vegetarian, but not all. If it's vegetarian, we tend to be there as Alfa Laval, but we're also there for alternative sources of protein. Last year, we launched a technical partnership where we're involved in the cultivation of insects and the extraction of protein from insects as a source. It may not primarily be a source for humans when it comes to protein intake.
Many of may have some reservations regarding that. However, it is a great source for animal feed, including fish farming, replacing, for example, the necessity to fish for crib. In traditional protein sources, there are also opportunities to improve. Although we clearly have a trend away from traditional sources of protein to new ones, Still, the old sources can be quite productive. Let me show you an example of how we managed to extract all of the proteins available in new ways from existing old protein sources.
Here we go. Let's take a look at the issue of water scarcity, which is another hot topic in the Food and Water division as well, in fact, as in our other divisions. Our direct business into wastewater plants is approximately at the level of €1,000,000,000 per year and growing. However, the water scarcity question is affecting a much broader part of our offering than just the wastewater side. In fact, to the right, you see the newly improved ThinkTop, which is a valve control unit, which is being used in the beverage industry.
The valve control unit alone, by effectivizing the way the valves work in a large brewery, is saving an enormous amount of processed water. And there is not a single brewery or for that matter beverage manufacturer who does not have processed water reduction as one of their key KPIs in the years to come. Our ability to implement a better valve control solution saves this brewery alone about 1,000,000 liters of processed water a year, a huge contribution to the targets they are looking for. So in fact, if you look at the whole picture in Alfa Laval when it comes to our UV technologies used for water in the marine industry, the evaporation technologies used in the Energy Division and all of the improvements to process water in the Fluid Handling business unit in the Food and Water division, we estimate that approximately SEK 3,000,000,000 per year in terms of sales is driven by the need to improve the usage of water and eliminate the wastewater problem in the world. Let's move on to the changes affecting the Marine division.
It's a dramatic change from before driven by increased environmental Aalborg. And some of you had the opportunity 2 years ago at the Capital Markets Day to visit the facility, but maybe not all. And some things, in fact, are new there since then. It is a unit that is completely built on developing the future solutions for environmental challenges related to fuel, exhaust and water in the marine industry. Let me take you through the facility so you get a feel for what it looks like and what they can do.
Though situated on land, it has all the key equipment and processes you would find on board. More importantly, the center is a focal point for innovation. This is where new ideas, equipment and technologies take form. In order to create a more sustainable world, We develop and optimize our systems for compliance and efficiency. Much of what we do in this space is done together in partnership with customers, universities and others in the marine industry.
We cannot go into all aspects of the product offering in the marine industry when it comes to environmental performance. But let me just use the trend of LNG as a fuel and what that means for Alfa Laval and our product range as an example. Sometimes as analysts, you ask the question of isn't heavy fuel oil a needle fuel for us to be successful commercially in the engine room. And our answer to that has always been we are pretty fuel neutral. Any type of fuel will have its challenges and its needs for products and solution and we develop them accordingly.
On the picture, you see specifically the product portfolio used for an LNG driven ship when it comes to LNG as a fuel. I will not go into them in detail. There are combustion units, heat exchangers and a range of other products. But the one product I wanted to talk a little bit about is the one to the left, the pure cool product, which was just officially launched a couple of weeks ago. The product deals with the problem of LNG as a fuel called Methane Slip.
Methane is a very problematic greenhouse gas and it's about 20 times worse than CO2. So although methane saves CO2, if you have so called methane slips, which you do in certain engine types, that destroys the whole picture. The PureCall addresses the methane slip problem. By taking the exhaust from the engine, cleaning the exhaust and feeding the methane back into the engine a second time. By doing that, we can reduce the methane slip with 50% at this point in time and maybe more in the future.
It's a very important contribution to making LNG sustainable and viable at least as a bridge solution to a more carbon free shipping industry. So with that, I'll try to give you a little bit of a feel for the trends affecting us and how we are dealing with them from an industrial point of view in the years to come. There are however, as I indicated, a couple of more important long term projects where we are currently in the lab level and we are exploring them as important business opportunities in the medium term, around the corner, so to say, but maybe not next year. Let me give you a feel for 3 important areas that we believe can make up for a sizable part of Alfa Laval revenue in the future. Let me start with a question of energy storage.
As you know probably, we invested some years ago in a start up company called Malta. The objective of Malta is to develop the 1st viable large scale energy storage facility. The energy storage is absolutely and needed in order for wind power and solar power being volatile in its power generation to even out the grid and even out the functioning of the systems. There are probably many technologies that will be involved in developing the solutions, but we firmly believe that thermal storage will be one important component. We are a couple of years ahead of schedule.
We are building at land with traditional technology as opposed to the next generation technology that partly Alfa Laval is developing right now in the lab and in a pilot scale. And we are looking forward to a very interesting period of a growing installed base of heat exchange installation related to thermal energy storage. And not only is it a very interesting application for helping solving the renewables challenge, it also helps driving certain manufacturing technologies that we can use in different areas. And that takes us to the area number 2, fuel cells. We discussed very briefly hydrogen and hydrogen as fuel earlier in the presentation.
Of course, they need to be converted into energy by way of a fuel cell. And it so turns out that part of the bonding technologies we are using for the thermal energy storage is also suitable for the fuel cells. So we are right now working in partnership with a couple of customers to look in terms of how can we produce an energy efficient but also a cost efficient fuel cell solution for certain applications relating to engine makers. We think there will be a number of opportunities for Laval as a heat exchanger manufacturer to move over to the area of fuel cell manufacturing as that market takes off. We will see.
The 3rd and last example is the question of fish farming. If you look at fish farming around the globe, there are about 12,000 open fish cages in ocean environment, of which half, 6,000 are located on the shores of Norway. It is a great source of food and especially of salmon, but there are also some problems with the open cages. Part of that is contamination of the seafloor, but there is also problems in terms of yield and premature death of the fish that could be significantly improved. On the picture, you see a pilot installation of a pumping solution for controlling the flow in an open cage.
That is up and running. It doesn't solve all of the challenges for the fish farming, but it does hold some promise in terms of fish yield and fish growth. However, the next generation, and that is ongoing work as well, is to find a way to do semi enclosed or closed fish cages at sea. That requires very sophisticated pumping solutions. And we have taken the technology that we have in our marine technology for pumping and transferred it into the fish farming environment.
It requires energy efficient pumping, which we can solve, and it requires a good understanding of flow, and we have that as well. So there is a promise for us in the future to be able to be part of a solution for delivering closed cage sea type of fish farming solution that will eliminate most of the problems related to the fish farming of today. So with those three examples, I just wanted to show how we as a technology company is leveraging our technology base into emerging applications and emerging businesses that we see interesting for us 5 plus year ahead from now. We think they're all promising. We will see where they go.
But it's an example of what's in the lab and what you may see coming out in the marketplace in the coming years. Not all can be done organically. We have indicated to you earlier that there are 2 strategic areas where we are specifically looking for M and A candidates and to complete some transaction. One is related to strengthening our technology portfolio in the water area and the other one is to build a present in the industrial flow market. Both of those remain target areas for us in the years to come.
Apart from that, we have done and we'll continue to do technology deals that supporting our existing businesses to grow. One very clear example was a small technology and IP company we bought in Malmo a couple of years ago That is in a couple of years generating additional sales in our braised heat exchanger business of a few SEK 100,000,000. You don't notice so much about it, But certainly, those are the type of activities that helps us keep to the 5% plus growth target we have as a corporate target for growth. Finally then and to round off. As you notice, we are deeply involved in dealing with some of the sustainability challenges the world is facing.
We are energized by it. It's part of our purpose and it's part of our business. You cannot be in this business without looking into your own situation as well. And for that reason, we decided to sign the carbon neutrality target for 2,030 during this year and we are now actively working to eliminate the carbon footprint we have in our operations. I cannot give you the full scope and result of that work yet.
We are still early. But what I can say is that when it comes to the carbon effects from our own operations, I am very comfortable we will reach carbon neutrality in that part well before 2,030. We know how much it is and we know what we need to do. There are 2 areas that concerns me going forward where we don't have the full solution and we have a lot of work to do not only ourselves but with our business partners. Part of it is related to logistics and distribution where especially the air cargo side as long as we don't have biofuels for jets has a substantial CO2 footprint effect for us.
And we need to find ways around that over the 10 year period. And the perhaps biggest challenge we have is the fact that we are large metal buyers and the production of metals has a significant CO2 component to it. There are ways of dealing with this related to using more scrap material and related to using perhaps hydrogen as a fuel in metallurgical processes in a better way. But right now, this is a problem we cannot solve on ourselves. And I think as in many areas of society, we need to be manic together working on the solutions for the future.
And with that, we have a clear ambition for 2,030 and we are going at it. So with that, I would just like to thank you for your attention, and we will turn into a question and answer period. Thank you.
Thank you, Tom. And that concludes the presentation block, and we will now start a Q and A session. I will be your moderator, and I promise I will take your questions 1 by 1 in an orderly fashion. You likely know the Teams routine by now. But to ask a question, press the raise your hand symbol on the dashboard.
Stay muted at all times unless you are the one asking a question, and please be mindful of time. We have many on the line, so you can always raise your hand again. With that, I have 2 super eager guys ready to get started. And the first question today comes from Lars Brushon. Welcome, Lars.
Thank you. Johan, can you hear me?
We can hear you.
Thank you. Hi, Tom and Jan. If I can try 3 quick ones, please. Number 1, Jan, I see a CapEx guidance going forward of 2.5% at least for 2021 2022. Appreciate Tom's point, you're not providing a huge amount of detail unlike what you did a couple of years ago when you talked about a few specific sites and projects.
Can you help us understand a little bit better just is this more of the same? Is it more capacity build out? You talked briefly about Asia or is it more sort of new capabilities around 3 ds, etcetera? That will be question number 1. Question number 2, just briefly, really, the data center piece, Tom, interesting, I agree.
Can you help us understand how big data centers is for you? And then thirdly and finally, is there any detail you can give around the impending restructuring plan? I take Jan's point that we've already done a lot in 2020. We've taken out 600 FTS. I wonder whether there's any sort of reassessment about what you plan to do next year, given things are
Is now exiting. As you
look into your end markets for the foreseeable future? Thanks.
Maybe I take the first two and you take the last one. In terms of CapEx program going forward, we have our ideas where to go. They are involving Asia. They are most uniquely Asia. I think you may see some areas of expansion related to and relocation related to food and water.
There are some opportunities and needs in our global logistics distribution structure that we may address and a couple of other areas. So it will not stop, but we will not return to we don't plan to return to the CapEx levels we were in 2018 or so. I would say when it comes to CapEx, depending on where some of the new technologies go, they may drive certain CapEx. But then again, it will add a business, a stream of business that is new to Alfa Laval if they materialize and consequently they need to be funded accordingly. But we are not there right now.
In terms of data centers, I don't want to go into specifics. I just want to make you aware that the HVAC area is growing. Data centers are an important part. And as of today, there are a lot of data centers that have been located remote and in cooler areas in order to reduce the cooling cost of the data centers, which means that you lose natural cool air. That's a great thing in terms of the cooling cost, but it doesn't allow you really to capture the waste heat in a good way.
And so a lot of the existing data center infrastructure still needs to deal even if we continue to build new ones closer to urban centers where you may have abilities to link to district heating systems and others. There is a big installed base already today where you still have the waste heat problem. So I think the big part of this business is still ahead of us.
And Jan? What was the third question?
The restructuring program. Yes. How do you look at that? Are we reassessing that because we have already reduced so many people? Are we going to do anything further?
Yes. Let me frame that question such that we don't see as I showed in the picture, we don't see that this has been a program across the company. It's more a targeted program towards those businesses that I showed you on the pie chart there. So there's a few businesses that we will specifically look for to doing some adjustments. So in terms of size and such, we will come back to you just in connection with the Q4 report.
Okay. We are moving over to the next question coming from Johan Eliason at Kepler. Welcome, Johan.
Yes. Thank you. Can you hear me?
We can hear you.
Excellent. So I was just wondering about the areas you mentioned regarding M and A. You pointed to 2 areas: Water Technologies and Industrial Flow. Nellis obviously fit in the Industrial Flow, but it's out of the question. Do you have any acquisition opportunities of the same size as Nelles as you see it?
Or will there be a multitude of smaller ones?
Well, the point with the industrial flow and the fact that the Nellis opportunities was a relatively large acquisition is that we feel in that area we need to start from a strong platform and position. So while there are small niche companies in industrial flow, we would have preferred to go on the larger acquisition platform first and then do the add on acquisitions later on. We will see how that plays out now. Obviously, we were looking at industrial flow companies before Nellis and I expect we will look at the industrial flow companies after Nellis as well. There are several of relatively medium to large size out in the market.
I think the main challenge for us is to find a platform which is not too skewed towards the oil and gas refinery side, which is probably not for the long term growth area, although it will remain as a good product area for long term with a lot of service and installed base. That's not exactly where we want to target our business going forward, as you will notice from several of our initiatives right now. And so that's a bit on the challenge on that side.
If I may to Jan, you talked about optimal gearing. What sort of metrics are you looking at then?
Well, the way we look at capital and how we prioritize it is I mean, of course, first of all, we need to have the capital to drive organic growth, which we have indicated. We want to have a good capacity for M and A. We want to ensure that we have a continued good rating. That's important for us. And then we will look for, let's say, different options here to optimize the gearing.
I don't want to give you a specific level at this point, but this is something we will come back to you with some guidance going forward.
Okay. Thank you very much.
Thank you, Johan. Our next question comes from Claus Beiland. Welcome, Klas.
Yes. Can you hear me?
We can hear you.
Fantastic. Hi, Tom and Jan, Klas from Citi. So first, Tom, on the 10% to 15% of sales that is more structurally challenged today. If you would look years out, Tom, and with the growth in the new more sustainable areas such as energy storage, fuel cell, sustainable fishing and so on, Where can we end up by 2,030? If you would give us some hint, I.
E. New versus conventional more structural
sales? I'd hate to give you a forecast, as you know, for 2,030. But if I stay on a fairly high strategic level on it, The opportunities we have in areas described today are in order of magnitude on a completely different level than the existing oil and gas upstream business. We think when we look at the oil and gas side, irrespective of that we see a bit of a hike in the oil price at the moment and all that. We sort of expect that there might be another cycle in that market.
And we've been considering that business after 2,030 maybe mainly a service business and so much CapEx may not continue to go into the sector. But we might have another cycle ahead of us. So I don't want to be over negative to where we are in that business, although at the moment for good reasons it's on a low level. But if you take the adjacencies that I've been talking about today, they certainly hold a promise of going way beyond the 10% you are referring to. And if you look at the potential of establishing a high margin business compared to where we are in the oil and gas sector today, I would suspect that we may have a mixmargin opportunity on top of that.
So I'm not losing sleep about what we stand to lose. I am losing sleep about how do we capture the opportunities we have ahead of us.
Okay. Thank you. And next question comes from Carl Buchlist.
Thank you. Good afternoon. So I have So I have a question on the environmental side within Marine. And last year's Capital Markets Day, you gave a bit of an assessment of the potential market size. I think it was SEK 8,000,000,000 in ballast and SEK 3,000,000,000 to SEK 5,000,000,000 for scrubbers.
So given what has happened so far this year, what is your assessment today on the 2 markets and their potential going forward? How you feel uptake has been so far and whether or not the peak installations were to be changed given what you mentioned on the emission side too also? Thank you.
I don't think we've I think the numbers we referred to during last year were the whole retrofit period from beginning to end, so to say. So it didn't indicate what's ahead of us. It indicated where we were. I think we haven't changed our view very much over the last 12 months. We passed the peak on the exhaust gas side clearly.
That will remain a business in the years to come. We see that from our pipeline, but it will not be on the level in terms of order intake where we were in 2018 and it would not will not go back there. But we expect and feel and see at the moment that the business is continuing on a lower level and a more competitive level, if you like. But nevertheless, it's there. On the ballast water side, we are it's been a little bit more difficult to read the cycle because this year has been so affected from a repair yard point of view of the pandemic.
So the availability of slots, the availability and capability to do planned retrofit and maintenance work for the world merchant fleet has been really troublesome. So our suspicion is and there has also been regulatory approval to delay the implementation process a little bit. So we've been running a little bit lower this year than we expected. Nevertheless, it is on a good level and that will continue for the years to come. So I would say on ballast water, probably the curve is stretched for another year, flattened a little bit, but overall volume assumptions remain where they were at the last Capital Markets Day.
I think the other thing you should be aware and I tried to give you a little bit of feel for that is that, of course, in terms of volume over these years during a retrofit period, those two areas are very large. But over the longer term, our environmental portfolio product is much larger than that. They will not reach individually that type of annual sales numbers. But in terms of building presence on ships, building an installed base and supporting a number of environmental challenges, our portfolio is and will continue to become much, much larger than on just those two issues.
Thank you, Karl. Our next question comes from Matthias Holmberg.
Thank you. Can you hear me?
Loud and clear.
Perfect. So Matthias Holmberg from DNB here. You've talked some about the interesting opportunities driven by sustainability trends. And I understand that this may be a premature question. But in the not too distant future, you will need to disclose how much of your operations are considered environmentally sustainable looking at the EU taxonomy.
So it would be great if you could possibly give an indication of how much of your business you think is aligned. And if that's not possible, perhaps just elaborate a bit on how you're thinking about this topic and the potential impact of the taxonomy perhaps? Yes.
I'm not sure I'm in a position to comment on the taxonomy at this point in time. What I would say is that in terms of our way of operating, I think we're in a good place already today. And we will be in a very, very strong place a couple of years from now. So I'm very comfortable in our own footprint on that side. If you're looking at what part of our revenue would be considered, let's call it, cleantech or be predominantly driven by the environmental trends per se, we tend to estimate that that's probably a good half of what we do.
And related to a number of the trends that I referred to and there are a whole host of other ones that we didn't discuss specifically today. So I think we're sitting pretty well. But I think regarding the EU regulations, we're going to have to come back with how to fit our numbers with that framework.
Thank
you.
Thank you. And our next question comes from Daniela Costa.
Hi, good afternoon. Hope you can hear me. It's Daniela from Goldman. Actually, two questions. You talked about the number of machines that you're now tracking connected and how sort of that moves from very little to a lot throughout the year.
And I was wondering if you could elaborate on how does that change like your how do you see that going forward, changing your revenue and profitability profile? Do you charge extra to this? Is this part of like existing when you offer this for free? How does it how will this actually change your business? And actually three questions.
Sorry. Another one related to that, which is a lot of the cap goods companies at the moment talk about equipment has a service. Is that a business model that you consider maybe navigating towards? And my third question just relates to how for M and A sort of how do you think about what the KPIs that you can see there? So I guess your ROIC will be impacted near term.
What's the sort of time horizon over which you want to return back to ROIC? How shall we think about the KPIs to track? Thank you.
Thank you. The let's well, let's start with question 1. There is more than one model or service model or revenue model, if you like, when it comes to how our connectivity works. There are in a number of applications simply a subscription fee related to this. And that's not just a subscription fee that goes towards having the equipment connected that the customer or us or both of us may monitor in various ways.
But it's also related to compliance, for example, and compliance regulations where that is needed. So there are a number of value creators, let's say, in the connectivity solutions that motivates the subscription fee. There is another model and I think that over time is probably the prevailing or most common model and that is that it's being shaped as part of a service agreement. We see that when we sell connected solutions in new equipment that the penetration or the likelihood of a full blown service agreement going with the product is much higher than in the past. And that's partly a conscious strategy, but it's also a result of the technology.
And one reason why service agreements are also better for us today is that when you can monitor the product, then we can also give a product guarantee or a service cost and an estimate because we can control or at least monitor how it's being operated. Without that transparency, it's very difficult for us to work with some sort of fixed cost arrangement or some sort of lifetime service cost because operator mistakes may be a significant part of the service cost otherwise. So I think those are the 2 models that we see, the service agreement and the subscription fees, both of them obviously pointing in the same direction, but service agreements over time is probably the right way for us to go in most of the areas. Question 2, I'm not so sure why I don't have a good answer to it. I don't think the trend is super important for us, but we'll think about it.
And on number 3, Jan, can we keep our return on capital when we do expensive acquisitions with a lot of goodwill?
Yes. I mean, I would say this is one of our key metrics, the way we drive the business, the way we measure people on. So this is something we it is a high priority for us. Of course, when we make large acquisitions, we would add a lot of goodwill. That's normally how it works.
So short term, that will be a challenge. But I do felt your question was a little bit about new business models coming in related to the service and where we kind of sell up time and we sell availability and things like that. And that is a model that we are testing out in some businesses and having a dialogue with different stakeholders how to learn how to best do business. So I think there is a learning curve there that we are going through right now. But I can guarantee you that for us, the balance sheet is something we care very much for, and we want to continue to use it efficiently.
Okay. Thank you, Daniela. Our next question comes from Sven Weier, UBS. Can you hear us?
Yes, I can hear you. Thanks for taking my questions. Those would be 3 and I ask them 1 at a time, if that's okay. The first one is on the point you made about LNG. And as you said, it's not the perfect fuel.
It's not 0 emission fuel. I guess that's why Ma'k is not going to embrace it. I was curious, how do you see other marine customers starting to embrace the technology and what is going to be your product
question. Let me start with LNG side. It has obviously been the talk of the town in terms of how much and how fast the LNG infrastructure is being built out and the advantages from a shipowner point of view. I would still say at this point in time, obviously LNG is becoming the fuel of preference for LNG ships, that is cargo ships that is carrying LNG in any case. There obviously it's the dominating fuel type.
And there are some LNG ships being put on order at this moment. It is still one of the segments in the shipping market which is relatively active. So it does have an impact. However, outside of that, at the end of the day still this year, we don't see a large penetration of LNG as a fuel. And will it come?
Maybe. But let's say the amount of buzz has not transferred into LNG orders for ships outside of the strict LNG segment at this point in time. That's where we are. Otherwise, whether it's ammonia or any other, let's green. I think what's important to note here is that the type of business we are in the marine sector will not likely be a battery of solution or storage type of solution other than hydrogen to a degree because the distances and energy needs are too big.
So we are not on the close to coast business. We are not in the ferry segment. We are not in we are just in the transocean business. And there we will have some sort of combustion ending being the main source of power for the absolute foreseeable future. So the only question is about fuel types.
And what we see there apart from LNG is multi fuels becoming more buoyant. You need much more versatility in the engine room when it comes to handle various fuel types. And that to a degree is a positive driver for us in our business.
Okay. Thank you for that, Tom. The second question was on the food and water business and I was a bit surprised that you didn't mention food and beverage as a structural growth area. I mean, I do understand at the moment the brewing business is a bit impaired obviously by the pandemic. But if we look beyond that, I would have thought that this is also an area that should be quite attractive.
Well, you're right. But what we tried to avoid in this discussion was to get into these normal megatrends of growing middle classes and this and that and the other thing. I mean, you will sell more hats and more cows and more cars and more houses and whatnot when the middle class is growing. It doesn't have any unique impact on Alfa Laval's revenue generation capability or the size of our business market. Those drivers tend to be drivers that moves along with the GDP.
So I think for most of our businesses, we are one way or another exposed to let's say the GDP growth or in the marine side to a degree with the global trade volumes. So what we tried to pinpoint here was not the underlying structural growth, but actually change factors that is affecting us, which is changing the nature of our business, but to some degree also the scope of our business. Other than that, there is all kinds of trends that is going to affect us one way or another. I agree with your comment. It's there, but I didn't we didn't point it out at this point in time.
Understood. Thank you, Tom. And the last question is a follow-up on CapEx. You mentioned 2.5% for the next 2 years. I thought when you started some of the investments in 2018 that the long term we would probably come back to a level of around 2% or lower.
Is that still the long term goal? Or should we brace ourselves for like the 2.5% also for longer?
Yes. I would say, I mean, if we look into the midterms of the next 2, 3 years, this is the level that we think we're going to be at. I think there will be times, of course, when we have done a lot of this program and done a lot of the efficiency where there might be lower levels. But I think as we see it now for the next 2, 3 years, that's the level that we're going to be. As Tom was saying, there's a number of areas that we see that we can drive further efficiency.
We can get good returns on those investments. And if we see it's a healthy business, profitable business with a good demand outlook, then I think that's the best use of the shareholders' money that we can do.
Okay. Thank you, Jan. Thank you, Tom.
Thank you, Sven. Our next question comes from Andreas Koski. Welcome, Andreas.
Thanks, Johan. Can you hear me?
Absolutely.
Perfect. So firstly, I would like to ask about your growth target of 5% because you demonstrated during your presentations that you have been able to achieve growth above your target level during the strategy period. You're also optimistic about your growth opportunities in many of your end markets. You are launching more new products today than you did earlier, which should help you drive growth. And I think you are more explicit that you will drive growth through acquisitions as well.
So can you please, firstly, elaborate how you are thinking about future growth between organic and acquired growth? And also explain why you are not raising your growth target? Thank you.
If I start on the target side, I understand your question. I think some of us feel a little bit humble in the year where the pandemic and some of the worst turmoils we've been seeing in the world economy, sure, it's supported by a lot of financial packages at the moment, But it is a bit of a humbling period to move away from 5% annual growth and more aggressively. At the moment, I would take the 5. But with that said, the reason for your question to a degree, I agree, I'm more comfortable strategically, operationally with a 5% growth target today than I was 4 years ago. We've proven we can do it.
We are in a better position now than 4 years ago. So given a bit of tailwind from the world economy, I think we are fairly well set to continue on the growth track. I would also say that today it's much clearer for us what are if we look if we forget the M and A label and more think about it in terms of the business development, whether we do it ourselves organically or whether we acquire something, in my book doesn't really matter. Whether the capital allocation go to building a fuel cell factory or acquiring 1, I don't really care. We'll do the best of the 2.
But I see clear opportunity for us to allocate capital to build our own businesses where we weren't in the past compared to just go on the acquisition stream. It doesn't take away the fact that we are looking, as you well know and as you well know from the Nela side, if there is a good opportunity, we will go for it. And I should hope let's see where we go with that. We are for the moment the 3rd largest shareholders and we are staying there for now and we see how that venture goes. But irrespective of that, of course, we will move on M and A as well.
Should we do something should we do a capital allocation in the region of SEK 10,000,000,000, SEK 20,000,000,000? Certainly, I would expect that we are exceeding the 5% growth target significantly over, let's say, a planned period. That's for sure.
Okay. Thanks. And then could
I ask on new products because you have increased your R and D and you're launching more new products today than you did in the past. Do you feel that you have better price mix component or pricing power today compared to earlier? And do you feel that you are gaining market shares?
Yes. The arrows that you found on one of the pages in the presentation were indicative of what we believe of the market shares. And we feel we've been moving. And you should be aware that for this period, most of that market share gain has been done on the old product range since the launches have been coming 20, maybe some 2018, some 2019 a year ago. It takes time for new product to enter the market and sell in and all that.
So I don't think we have, up until today, a very large impact on the new product range when it comes to a market position. I think it has given us energy. It has given us a way to approach the market, but the products themselves are making it into the market as we speak. If you look at the gross margin of new products, I'm not going to guide you specifically old versus new, but obviously there is either an improved market or utilizing sorry, an improved margin on those products or an opportunity to utilize that as a competitive tool in order to strengthen our position in the market. So we will see a bit I think it will differ from area to area how we used to how we play that scenario, but certainly it gives us a strategic opportunity to work the market in a slightly different way.
I would also add that I think on most of the products launched today, our ability for guaranteeing product performance in service agreements and other parts is penetrating more heavily than in the past. So I think the tail of service revenue from the new product generations will probably be somewhat on top of what it used to be historically.
Okay, great. And then sorry for coming back to CapEx, but Jan talked about 2.5% of sales and you, Tom, talked about a level of around SEK 1,000,000,000. I guess for next year, both of them will be about right. But if we have the cyclical recovery, SEK 1,000,000,000 will probably account for a smaller share of sales and 2 point 5%. So which one should we look at?
Is it around SEK 1,000,000,000 or 2.5% of sales?
Okay. I think the way you should look at that, when we had the Capital Markets Day last time, I think we gave you guidance which was around 2% for 2021. I guess what we are saying here, we are taking that up a little bit as we see simply very good opportunities to continue in our in a portfolio that we like, where we make money, where we see a good outlook. So it's really taking it up a notch, but not a significant difference. Whether that will then lead to 1% or a little bit plus 1%, we will have to see.
Okay. So it's more about the percentage than the absolute numbers. Okay. Thank you.
It's good to hear that you pay attention. Next caller is Sebastian Kuehne. Welcome, Sebastian.
Yes. Hi, gentlemen. I hope you can hear me. I have three questions I would like also to ask them 1 by 1. First of all, in your presentation on the products, you talk about heat exchangers and separators being more efficient, significantly better.
But of course, they are. Otherwise you wouldn't launch new products, right? But I think the market is interested in it. How much better is it compared to 5 years ago or how much better is it compared to competitors' products? I mean, can you give us an indication of what the improvement is?
Is it do we talk 0.5% energy improvement or do we talk 5%? I mean is it a leap or is it just marginal?
Yeah, Yes, it is a good question. It's a demanding question because obviously you will have huge variations. But let me say for rotating equipment, which consumes energy in order to rotate, right, where electricity is a cost in your operations, When we go to vacuum based rotation solutions, you can cut the energy consumption bill with up to 50%. So that
We are
not using it. It's not compared to a competitive product, right? I just want to find out how much where are you better than others or is it is everyone swimming in the same kind of efficiency?
I'm not sure if I'm being unclear.
Is it now exiting?
I'm not sure if I'm being unclear. If I take the technology move that we have been doing in some of our rotating equipment that I referred to, the energy efficiency cut is 50%. Is there anybody of our competitors who can match that? There may be some. There may be some for certain applications.
But I would say generally speaking for this technology, we are the most efficient company and we are leading it. So it is a quantum leap and I can assure you that there's not a lot of people out there who can do it at all. In heat transfer areas, the technology leaps are typically not on that level. There you're looking at ways to increase the efficiency of heat transfer surfaces and you can move the needle there in various ways and you can do 5% here and 10% heat transfer already before we were launching the new range, we had the most efficient transfer solutions in the world. I don't know of anybody who matches us on that.
As we come out with a new generation with a lot of patented features on it, we move the needle even further. So I would say the distance that I see from a customer value point of view, generally speaking, in that range is becoming quite significant.
That's very helpful. Thank you. 2nd question is on the Pure Cool Technology. I was a bit surprised that you that you work together with winter tour rather than with M A N because I mean, I think it's like 6, 7 times larger than winter tours like completely dominating the market. Doesn't that limit you a little bit in the market if you connect yourself with winter tour rather than with a blind guy in the market?
Yes. I understand your relative positioning of the 2 relative positioning of the 2 are a little bit different today. Even so, in principle, you're right. The question takes us into engine and fuel injection technology. And I'd rather not go there in this call at the moment, but there's a reason for why the opportunity to deal with this specific problem is bigger with the partner we've chosen than with going any other way.
And I'll leave it there for now.
Okay. The third question is on the ESG theme. I was hoping a little bit that you start off the Capital Markets Day with kind of a vision for Apple Awhile to move completely or to be perceived as an ESP company because in my view, all your products fit the bill, saving resources, hygienic production of food and beverages, wasted recovery. Wherever I look, everything screams ESG. Yet you started the Capital Markets Day with discussion on end markets and on specific products.
And yes, you discussed a few of the ESG themes with some examples, but it gives me no picture of how big that business is, how big is your involvement in the world of ESG where we clearly are moving now into? The question I guess would be, if you look at your portfolio of all your products you're selling, how what percentage of the value of these products would fit ESG teams and what percentage does not fit into ESG? You
know, ESG is not a business. ESG is an abstract concept about improving the conditions on the planet. And so if you know it to segment you know and we are not in the business of of green washing a company. We are in the business of solving particularly challenges where our technology can be helpful. And that's why we go to end markets.
When we save processed water in a brewery, in our book, it's a brewery business. You're totally right in saying, well, it helps the brewery resolve some of the ESG challenges that they are having. Yes, that's true. But the segment of ESG is not a business segment. It is an underlying driver of what we do.
And as a technology company, I don't think the ESG labeling is particularly helpful for us in how we drive and run our business and how we interact with our customers and how we develop the technology, it becomes more of an umbrella name for a general trend in the market that is important. And that's why we're trying to indicate today that those trends are visible. We are proactive versus those trends. They are clear business drivers for us in most parts of our business, as you rightly point out. And if you would ask me to guesstimate how much would we classify, we would typically say that, well, it's probably fair to say that more than 50% of our current business portfolio could one way or another be labeled with that.
Could you make that number a little bit higher? It takes you into a territory which is kind of difficult. And to just give you one example of why it is difficult, you could say, all right, so some of our most energy efficiency solutions that we apply where we have the biggest impact in reducing CO2 is in a refinery. Now do you consider the refinery business as being ESD 1? I don't know.
I think there's a lot of people who would argue that if you want to be an ESG company, you shouldn't be doing business in the refinery sector. We have a different view on that. Our view is that where there is a CO2 problem, we will use our technology to help reduce it. And so you get into a lot of classification issues in terms of what is your definitional basis for this. And that's why I prefer to stay a little bit vague.
You can take the refineries in or out. You can take this in or out. You will get to a number that is 50% plus regardless. And I think that is a decent cleantech company. It represents €2,000,000,000 €2,500,000,000 of our revenue.
I think that's a fair game. I have no problem with that number. You could probably push it a bit higher, but I'm not going to get into detailed metrics about a definitional discussion of what is an ESD and what is not.
And you don't consider this a bit of a lost opportunity to embrace ESG a bit more aggressively?
No. I mean, my
opportunity is very specific. Where we find it, we go for it.
What you are the attract ESG investors and all of that. Then I say, okay, the ESG investors, they have also to do their analysis and their work. I think if they do, they will find what you find. This is a pretty well positioned companies when it come to that area. But in terms of driving change, I should hope that today's presentation and what you know about us gives you a fair feeling that where our investments are going and they're going exactly in that direction.
It's not because we lack understanding or knowledge about the end markets. It's just we are a little bit cautious with labels and sustainability. There's too much wish washy discussions about sustainability in this world. We're not going to be part of that. We're going to try to do
solutions. Thank you, Sebastian. Our next question comes from Johan Eliason. Johan, are you with us?
Yes. Just a follow-up on Andreas' question about your well, your growth target, but your general financial targets, growth margin and capital returns. You have a little bit of a history of changing those as you made an expensive acquisition, you lowered the return target. And in 2016, you sort of lowered your growth target as you saw probably as I understood it at the time less M and A going forward. Now you say your strategy period was 2017 to 2020, so I suppose you're entering a new strategy period.
Are these the targets that we should now look for, the 5% growth, 50% plus margins and the return on capital employed above 20%? Or should we expect anything different now in the coming strategy period?
I mean, if we would have changed our financial targets, naturally, we would have communicated them, but we have decided to keep them. We think they serve us well. Again, it's the growth target is primarily based on organic growth with some complementary acquisition and, as Tom was saying, not based on a larger acquisition. We would have to then look at that at such an occasion. I think the profitability target serves us well.
It has shown us it is more of a threshold as we work through the business cycle, and we don't want to limit ourselves when we look at M and A. The return on capital employed, I think given the history we've had with the goodwill we've had, it has, sort of, say, been on a level. So I think the financial targets, as they look right now, as they stand, we don't see a need to change them.
Excellent. And then just one follow-up on M and A. You mentioned once again the Water Technologies and Industrial Flow as concrete focus areas. The last major acquisitions have been to the Marine's side. Is Marine done and dusted with in terms of acquisitions or how do you look at it?
No, it's not done. The moment it's done, you're not a good parent anymore. So my view is that are going to have to drive the marine business as a responsible owner and do the right thing for that business and that may include acquisitions at some point in time. I still think it's fair to say that if you look back since 2012, essentially all our capital allocation into the M and A sector and it's a significant number of close to SEK 20,000,000,000 has gone into the 2 large marine acquisitions. So from a capital allocation into important strategic growth areas for us, I think it's clear that we are predominantly strategically looking for the 2 other areas in opportunities in energy and food and water.
With that said, there is a pipeline also for the marine industry and you need to be a little bit opportunistic as to what comes around and where do you have an opportunity to make a meaningful addition to the portfolio. But let's say we are not particularly opportunistically driven on the marine side at this point in time. We are more strategically driven. If we can complement the portfolio in the right way, given what we believe about where the marine industry is going, we will do it. But we haven't put it as the prime strategic focus for the next 3 to 5 years.
Excellent. Many thanks.
Thank you, Johan. Our next question comes from Karl Bucht.
Thank you. So a follow-up there on the terms of in absolute terms or percentage of a group or biofuels compared to traditional ones? And also a follow-up on this one would be the potential of 4 biofuels, is it mainly in the refining space as you define it?
Well, it's a good question. I think the big answer is at some point in time we will come back. It's still relatively small. The pipeline is growing. And if you look at the pipeline from our point of view, actually the first part that I was talking about in the presentation about the pretreatment, the starting in vegetable oil process plant is actually the technology we are working with in the Food and Water division in the engineering sector in the unit called Food Systems.
So we're actually booking part of our revenue from biofuels at the moment in the Food and Water Division and the refinery part would go to the Energy division as always. So there is a certain, let's say that at the moment we are not accurately showing the dynamics of that. It doesn't play a huge role when you look at the growth in the 2 divisions up until to date. But if we are right in our assumption that we will see a relatively intense growth period for the biofuels over, let's say, the next 5 to 7 years, then I think we will find a way to make it a bit more transparent to you. But we're still starting from a relatively small number.
And if you look in our quarterly report, we show the food systems order intake rate. So it's part of that in the food and water systems that is taking it. And then it's a small part of our refinery in the energy division which is related to biofuel at the moment. So not strategic from that point of view of the analysis, but I think as part of the growth journey it is.
Understood. And a follow-up also on Marine. I think correct me if I'm wrong here, but I think you said that you believe that 2020 would be the trough year for you in Marine. Apart from just 2020 being an incredibly low year in terms of orders, do you feel that there are any other drivers or indications from your customers that make you feel more confident that marine general demand or contracting would be set to improve from 2021 and onwards?
No, not really. We said 2020 will be low. It is. In fact, it's lower than at the moment than what we expected. Given the circumstances, you could see from Jan's presentation that despite the fact that we are again in a 30 year low type of scenario this year, this year may come in slightly lower than even in 2016.
That's not what we thought in the beginning of the year. So with all these weaknesses in the market still the sweet spot for Alfa Laval, certain segments of the market that are important for us have remained a little bit better than the market at large. So when you look at the capital sales side of Jan's presentation on the Marine division, It's not great. There's certainly upside when the market comes back, but it's perhaps a bit firmer and better than you would expect given how we talk about the market. But in reality, this year has not been a year that has surprised positively.
It's been on the weak side. But we also know that when you look at the Clarksons forecast, all the curves are smooth looking forward. But if you look back, they were never smooth. They either tend to fall apart or they go exponentially quickly up. And the reason is that when people start to place orders then the slots are being sold out, the lead times are growing and the chance that you missed the boat to excuse me the pun is obviously there.
So I'm not so sure we will see this slow recovery and a little bit better. When the market turns, it may turn relatively quickly, but we certainly don't have the indications of that right now.
That's hopefully exponential upturn then. Thank you.
Thank you.
Thank you. And we have a follow-up question from Sven. Sven, are you
with us?
Yes. Thanks. Yes, I am. Thanks for taking the follow-up question. It's just one.
And it's a follow-up question on the comments you made on the capital structure optimization where you wanted to give an update in the coming months. Am I still right to assume that a share buyback is not an option because of the shareholder structure situation?
No. I would say that, that is one of the options that we're looking at.
And how would that work out given that they are just slightly below 30%. Doesn't that limit the potential?
Just to be clear on the regulatory side, if a share buyback does not trigger the obligation to make an offer to all shareholders if you pass 30%. So it would not create a problem if the total shares were reduced and our largest shareholder will pass 30%. It wouldn't have any consequences. Okay.
So it is part of the toolkit then?
It is part.
Yes. Perfect. And our last question of the day comes from Andreas Koski. Andreas?
Thank you, Johan. And that is also a follow-up question, and it's only one. It's for you, Tom, because during your presentation, you said that you have always said that you are fuel neutral when it comes to the marine industry. But at the CMD in 2015, largely instrument Pieter Leifland communicated that the value potential was significantly higher for ships with LNG propulsion compared to ships with diesel engines or oil engines. So if you exclude the scrubber business, is that not still the case that you have a much higher value opportunity for ships with LNG propulsion?
Thank you.
You're putting me in a somewhat difficult position to answer for my predecessor's comments. My interpretation of those comments would be that they referred to LNG ships being driven by LNG. I would hesitate to come to the conclusion that if it's a normal ship that is just choosing between LNG as a fuel or something else as a fuel to come to a dramatic different upside when it comes to there are other factors that drives even if you stay with heavy fuel oil as a fuel, if you look at the capital sales opportunity on a ship given the same fuel mix, depending on the ship classes, our sales opportunity would go between €2,000,000 €15,000,000 per ship. So the spectra as to how much equipment we are putting on a so large cruise ship, for example, offers a lot of opportunity for surrounding equipment for Alfa Laval, whereas a dry bulk type of ship is relatively low in value. So the fuel type is really just one aspect of what drives the equipment value for our oil capital sales opportunity for us.
So I would hesitate to say that the LNG as a fuel alone is such a big deal. What is definitely true is that LNG carriers as a ship class is definitely important to us. And as you could see on some of the equipment, those are being used also for the LNG tanks, the carrier tanks. And so the scope is relatively large. I think that's what I can say.
I'm not sure exactly what was referred to otherwise in 2015.
Because I remember your slide from the Capital Markets Last year, you showed your product offering for the marine industry and you had several plus signs. I think it was 4 or 5 plus signs for new products that you are going to sell into the LNG propulsion landscape. And when looking at the C and D slide from 20 15, they are talking about the value opportunity that is €1,500,000 to €2,500,000 larger for ships with LNG Propulsion. And that would be quite a big upside potential for LNG.
Well, yes, I hear your comment and your question. And I guess my I was trying to frame it by saying that on any given ship class, our opportunity is between €2,000,000 €15,000,000 So 1,000,000 plusminus on the LNG side is not a big strategic driver. So I would say LNG as a fuel is fine. It may add on a couple of opportunities for us. But versus ammonia, I don't know.
Versus multi fuels, unclear. Even the fuel landscape today, when it comes to high sulfur, low sulfur and all kinds of fuel mix, the engine room composition has changed relatively dramatically compared even to 2015. So that together with the fact that at the moment we don't see LNG penetrating very much above and beyond for LNG carriers, which as I said is a significant opportunity for us. So I don't think it comes into the equation very much whether it's a million extra here or there for non LNG carriers when it comes to LNG as a fuel. Don't make too much
sense. But your view of the LNG market has not changed from the Capital Markets Day last year where you have some slides how you and I think it was Clarkson who used as a source as well and projected the future for LNG propulsion.
And I have not been back to the Clarkson forecast exactly. My sense is that the penetration is going slower than anticipated. And whether that is an indication decisions by ship owners when they order a ship is to opt out of LNG to a larger degree than we expected perhaps a year or 2 ago.
Great. Thank you very much for the opportunity to discuss with you. Thank
you. Thanks.
Thank you. We actually have one last question coming from Lars Brochamps. Lars, you opened up this session. Why don't you close it down?
Thank you, Johan. Sorry to come back. I thought I would just revert back, Tom, to the debate on M and A. It's obviously a key topic for you and for us looking at the company. And maybe just get a bit of perspective from you if you look back at the, should we say, last couple of decades of M and A for Alfa Laval and how that might or might not give you any sort of pause for hesitation around M and A.
My perspective is this, or at least part of my perspective is this, we've seen 3 relatively big waves of M and A back in the mid-2000s. Your predecessors undertook a pretty big consolidation effort around industrial air heat exchangers, particularly in Europe, subsequently divested through your Greenhouse division. Earlier this decade in 2012, 2013, 2014, big push into oil and gas, particularly in North America. We don't know where your oil and gas business is sitting today from a margin standpoint. I'm guessing margins have halved in most of those businesses versus where they were a decade ago.
And then thirdly, of course, in the past decade, big push into Marine, Olbo, Frank Mon, arguably great businesses, but they were also done during periods when vessel contracting was sitting at around 3,000 units. If we're lucky, we may get back to half of that over the medium term. So when you look at that, I wonder whether you see M and A has created meaningful value for the company over the last couple of decades? And as I said, does that give you any pause for reflection or hesitation as you think about what stands ahead of you as far as bigger M and A is concerned?
Well, Lars, it's an insightful question and one that maybe takes a few minutes to walk you through. I'll do it with pleasure. If I'm too long, this is the last question, so you can hang up and do something else. But let me start with the marine side. We are clearly strategically well positioned in the marine business as a result of the 2 acquisitions you referred to.
And both of those have performed very well. I think part of it is that they've been strong technology companies, leaders in their segments and especially for the From acquisition. We've been ahead of the acquisition plan from the very beginning. So they have in terms of value accretion and meeting the expectations we had on them at the time of the acquisition really met their targets. So that's great.
Should we would have been nice with and if you look at the contracting, thing, I would say for product tankers specifically, which is the segment for Fromo, the demand situation has not really been as weak as the general market at all. So they've been operating in a more stable environment. Looking forward for Allboy, although there I think your overall market observation is correct and has been impacting the company, I would add to that in this period of some difficulties, we've been launching the scrubber business completely out of the oil boiler capabilities and that business alone has been in terms of invoicing and profitability, maybe not half of oilboy, but not so far away from it. So it certainly has made up for any weaknesses we see in the traditional boiler business. Looking forward on the boiler side right now, the trend towards LNG, the trend towards multi fuel capabilities drives needs for efficient boiler solutions in the future.
So I think I would say, in short, we are fine with those marine acquisitions. They have some ups and downs. That's reality. But they've been far more stable than the overall market and I expect they will continue to be. On the oil and gas side, I think to some degree looking from today's standpoint, I'm not sure we would have made all of those investment decisions at this point in time.
They were done at what today looks a little bit like a peak. As I said before, I think we may have another peak or at least upcycle before we are done with it in the 2020s. So that's our base business plan. You're correct that the margin situation is not what it was in 2013. And we are dealing with some of those issues also related to the restructuring program that Jan will come back to in a couple of months' time.
In terms of the rest of the M and A, which partly was I mean the air heat exchanger that we divested was a relatively small part still of the M and A that we did. There are a number of smaller companies that continue to perform well in our portfolio. So while we always have certain challenges in running in smaller companies into a large company setting and that we typically are more successful with larger units that can stand on their own feet and be part of Alfa Laval based on their own strong technology. While that has been the preference and will be the preference going forward, I would say the rest of the portfolio, generally speaking, continues to operate on a fairly decent level.
Thank you.
That was avoiding saying too much about the future. But as you can see from our activity, I would say like this, our leaving the Finnish acquisition aside, the pipeline today is stronger than it was 3 years ago. And I think looking back, another reflection is that when we did the big turn in the Alfa Laval direction, organization and structural setup, the need for the new management team to get their arm around their business, the products, the basics, the end markets and the growth plan was making M and A a little bit difficult to combine at the same time. And I can see now how essentially across all our 13 business units that the lead generation coming up small to large is bigger and more relevant I think in building the technology platform going forward. So I think if it's been a little bit empty on that side, I expect that we will see somewhat of an acceleration of that in the 3 year period we're coming into now.
Okay. That wraps it up, everyone. Thank you for taking part of our CMD 2020. I will hand over to Tom and Jan for just some last remarks. Thank you.
Okay. Thank you very much. This was the 1st Digital Capital Markets Day and I think Johan and certainly ourselves will be very interested in your feedback afterwards. This year we had no choice. Next year I expect we will have a choice.
And this may be an adequate format, more time efficient, more to the point. On the other hand, we miss the direct interaction with you and we don't have the opportunity to show you a site or part of our operations and part of our management team that we otherwise regular would meet at the Capital Markets Day. So I think I'd appreciate if you give it a little bit of thought after this season is over in terms of how we should plan for the next one. I will look forward to meet you possibly physically next year. But if we prefer to go a different way, we will probably be flexible and customer oriented and do it digital also next year.
So let's see. Thank you very much. Jan, do you want to close out?
Yes. Well, I think we've tried to give you a view of how we look at the future and also being transparent in the way we look at the business. But we're always open for feedback from you and how we can do this even better. But I also think it would be nice to meet you guys in person and also take you through some of our operations next time. So thank you for today.
I think it's been a good session. Thank you, Johan.