Welcome to Alfa Laval's Q4 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you'll need to press star and one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Tuesday, 30th of January 2018. I want to hand the conference over to the first speaker today, Tom Erixon. Thank you, sir. Please go ahead.
Thank you very much, good morning, everybody. Let me start the Q4 report by giving a couple of comments on 2017, a year as a whole. It has clearly, for us, been a year where the business climate improved significantly compared to 2016, specifically, we saw that both in the marine industry and the oil and gas sector accelerating in the second half. We also had significant progress and some impact on the restructuring program that was decided and launched at the end of 2016, carrying in with some effect into the 2017 results. We established new product plans and marketing strategies in our business unit structures. All in all, these measures together with a good market gave us a good growth of 14% year to date. Perhaps, I would say, better than we expected when we looked into 2017 about a year ago.
We also feel we have established a good platform and lots more work to do during 2018. With that, some reflections as usual on Q4 specifically before we go into the presentation. We had about SEK 10 billion in order intake, somewhat ahead of the guidance that we gave at the Q3 report. I would say that the deviation compared to the way we looked at it then was the effects from a stronger tanker market than we expected, a good ship mix in contracting, and short lead times between contracting at the yards and booked orders, especially in the pumping systems.
On a divisional level, we were stable in our margins, I still would like to point out the fact that Food & Water not only had a stable growth throughout the year and in the Q4, also a solid margin improvement in the fourth quarter related to a reasonable degree to efficiency measures taken. Thirdly, while we progress a lot in our restructuring programs, we have, as you know, in 2018, a big part of the implementation of the manufacturing footprint project left to do. This has some impact on the CapEx level guidance that Thomas will come back to, and it also will weigh in on our results for 2018 with approximately SEK 150 million. Thomas will be back to the specificity of that later on. With that, let me go to the key figures.
Perhaps somewhat surprisingly, despite an order intake of about SEK 10 billion, we actually had a slight negative book-to-bill. We had a very strong invoicing of just above SEK 10 billion, as partly a result that our invoicing in Q3, as you might remember, was on the weak side, also according to our expectations, and we had a full catch-up of any delays or lags from Q3 into the Q4. So invoicing came out strong. Again, the SEK 35 billion achieved plus achieved on the full year, perhaps somewhat above our expectations looking back to where we were about a year ago. In terms of large orders, it's been a reasonable quarter. We announced somewhat above SEK 300 million, and it's been mainly in the energy sector, and actually, a small sign of recovery even for the offshore with an order booked in pumping systems for the North Sea.
In terms of the highlights in the quarter, perhaps the environmental products is the most positive aspect, where we had a steady growth both for ballast water and for scrubbers, and a total booking of just above SEK 500 million for the quarter at a running rate of just above SEK 2 billion on a yearly pace. That compares to about the SEK 1.5 billion pace that we had after the third quarter. So it's been a gradual strengthening in these two important areas. Going back to the order trend as such, at just below SEK 10 billion level, we are actually just slightly below our all-time high in Q4 2014. So it is, comparing to all historical quarters, a good strength. As you can see, while we do have large orders booked, it's not dominated by that effect.
It is actually a quarter that's been characterized of a very strong base business across a lot of areas. In terms of the margin development, it is as usual, stable. We remained at 15.9% as normal. However, the profit in absolute terms, given the strong invoicing, came out well. Factors affecting the margin as such, certainly a negative effect from mix. We invoice a lot of projects in the fourth quarter, so there are some negative mix effects, and that's counterbalanced by a very good productivity development both in sales but certainly also in the factories. With a strong quarter, obviously, the year-on-year comparison on the business unit level is pretty much positive across the board. As we've indicated already in Q3, we have a pretty broad-based positive development across our businesses. There are a few negatives on the chart.
The Greenhouse is slightly negative versus last year, entirely due to restructuring in the U.S. and the closure and divestiture of one of our businesses there. Otherwise, we are flat to positive. We do have a negative on Food Systems, but we should remember that Food Systems as a whole full year has a very solid growth and a very good year. So it is not a trend issue as such. It's a quarterly issue with some volatility due to when we book large projects. Thirdly, the Energy Separation unit is a bit weak, and it is maybe the one area where we feel a bit disappointed with the development given the strengthening of the oil and gas business as a whole. However, it is a relatively small negative in the totality of things. Let me move on to some divisional comments in further detail.
Starting with energy, we had a good year, solid year for energy. We are +10% in order intake, there are mainly positives in energy. The one I'd like to highlight perhaps is in the brazed and the fusion-bonded heat exchangers. That is an OEM-driven business that's been on a steady growth path for quite some time now. As you know, we're working with capacity expansions to meet the demands, that's going according to plan. Fourth quarter, again, a stable organic growth from this unit. Otherwise, perhaps the most interesting reflection on the energy division is the oil and gas market and what it has implied during 2017. All in all, for 2017, we booked slightly above SEK 5 billion in orders, that is an increase versus 2016 of approximately 40%.
We've seen a relatively broad recovery in the oil and gas market and a clear effect of the increased order price on our order bookings, not the least in the U.S. We, as you know, when we highlighted it about a year ago when times were tough, we knew what we did when we invested into oil and gas. We've been sticking to all our structural and capabilities in the oil and gas market, waiting for the comeback, certainly we see an element of payoff on that there in the year, not the least in the fourth quarter. For your reference, at the peak, we were at approximately SEK 8 billion in order intake. For this year, we were at about SEK 5 billion. The pace in Q4 was at around SEK 6 billion.
The trend remains positive in oil and gas, it's been all in all, with some variations across segments, a good year for oil and gas. Let me turn to Food & Water. As indicated, we had a solid year in Food & Water. Basically, across all applications, we have been having a positive environment, the positive demand trends, that together with a good margin improvement in fourth quarter makes for a good year in Food & Water. The one area that is contributing specifically is a lot of the work that we've been doing related to project execution, project selectivity in the Food Systems area. I indicated already earlier that we feel we are coming to grips with part of the costs in project execution from the past.
At least in Q4, we could realize a good gross margin on the projects that were closed at that point in time. A good progress in that area. On to marine. The contracting of ships landed as a whole, pretty much where the forecasts have been, at least for the last six months, somewhere up at around 900 ships. We don't have the final numbers quite as of yet. That was not a particularly big surprise. What was a bit of a surprise to us was the strength in the tanker market, in the second half of the year, certainly in Q4. That, combined with the fact that the lead times between tanker contracting at the yards and booking predominantly in our pumping systems business, was unusually short, made the order intake effects in marine for the quarter coming a bit higher than we expected.
All in all, for pumping systems, that means that the year ended with a 70% growth in order intake compared to the weak 2016, a healthy recovery of an important business for us. At this point, I just ask you to keep in mind that the lead times we have between order booking and pumping system and actual deliveries tends to be a year plus. The main effect of the strong order intake at the end of the year will not be seen in invoicing until we hit 2019. A quick review on the service situation in the somewhat busy slides, but it gives you the overall situation in service. This is an area where I have to say we are not entirely happy with the outcome of the year.
All in all, for the group, we are the odd percent up for the full year versus 2016, but it's not exactly where we'd like to be in terms of the long-term growth of our service division. It did grow well in Food & Water, where we met our objectives well, and we are up in both the year-on-year for the full year and on the quarter. The sequentially is a marginal issue. All in all, we are happy with the outcome of that. As you know, we've been impacted by the marine sector problems in the service business already last year. It is flat to positive sequentially, but we haven't seen a recovery in the service business in marine. It stayed stable during these years, but we haven't seen the growth yet. The same holds true for energy, where we are pretty much flat on the year.
Comparing with the quarter and looking at it sequentially, we are down. The numbers are affected by non-repeat. We, at times, have large service order bookings in the order of magnitude of 6, 7 million EUR, and we didn't have it this year, so there is a non-repeat. Nevertheless, even if we overlook that, the growth in our service business as a whole for the group is a bit below our expectations. We are obviously working with that question in management. The Greenhouse, as indicated, we are on track. The business development side of that is stable. The underlying earnings for the Greenhouse is on the range of 4%, 5% where we wanted it to be year-end, so we are on that target. We have some distorting items, so our shown numbers is marginally lower than that.
But we are pleased with where we are in terms of executing our Greenhouse plans. Let's turn to the regions for a few comments. Obviously, with order intake we have sequentially, it looks pretty good across the board. We are positive essentially in all areas. We have a small negative in North America. It is actually a positive for the U.S. sequentially as well, but we did have a very strong order intake in Canada in Q3 that was not repeated. That gives you the explanation for the minus two. Other than that, it's a very solid situation across the board. We are perhaps not fully happy with the development in Latin America. It's a little bit below our expectations, and we haven't seen the pickup that we expect to happen there. That is a bit of a weakness on that on Q4 and 2017 as a whole.
Obviously, the big strength is coming from Asia, no surprise. You may know that in fourth quarter, 40% of our order intake came from Asia. Clearly, the ship side has contributed to that number, but it is not only the ship side. Energy has been having a great quarter in China and a great year in China, and we see generally a positive picture of our business and how it develops in Asia in the fourth quarter. With that, let me turn to our top 10 markets. When you look at that picture, the first thing you got to observe and reflect on is Korea. Korea is back, is my comment. It used to be our number three market. We had a very difficult situation in Korea 2016 on the back of a troublesome shipping market in Korea.
We lost 60%-70% of the pace of our order intake within a six-month period, and it's very nice to see that we are on a strong comeback in Korea in 2017 as a whole. Of course, our two biggest markets are growing nicely, China and United States. Again, I emphasize the Chinese growth is actually not primarily driven by the marine side. It is impacted by other parts of the business, specifically the Energy side, also supported by a couple of large project bookings that happened in 2017. The only country on the top 10 that has a slight negative is Japan. We haven't seen the marine effects in Japan yet to the extent that we have in Korea.
All in all, it was behind in the beginning of year, so I think we are more or less on par towards the end of the year now, but that is the one small decline. Otherwise, all our markets are slightly positive and in a broad-based growth scenario. That is my review on the quarter. A few comments on the year, with that, I'd like to hand over to Thomas for a financial review. Thomas?
Thank you, Tom. Good morning, all of you. We typically do, let's move on to a couple of comments about sales, as Tom has covered orders. Let me start off by reminding you that after quarter three, I commented that we believe that a higher invoicing should be expected in quarter four compared to quarter four, a familiar seasonal pattern. You have seen, we realized sales of SEK 10.1 billion in quarter four. In comparison with quarter three, that was an increase of 21% and an increase year-on-year of 5%. In terms of invoicing, we clearly ended up somewhat above our own expectations. We actually delivered everything promised for 2017 in 2017, including the shortfall that we reported on in quarter three due to delays in delivery and revenue recognition. We move on to service, the service activities represented 28.7% of total revenues.
This was a decline sequentially of 2.5% and a reduction year on year of 1.3%. This alone, of course, is giving a negative mix effect sequentially as well as year on year for the margin. Let me then, before leaving sales, deliver the first forward-looking statement. We believe that a lower invoicing should be expected in quarter one compared to quarter four. Again, what I would call a familiar seasonal pattern. Let's turn to gross profit margins. We reported 36.3% as gross profit margin in the quarter, an increase of 2% year on year, and a decrease sequentially of 0.7%. Let me then come back again to what I said three months ago. In the near term, we expect adverse effects from mix following expected higher capital sales revenues. We expect continued positive transaction effects from FX.
Load is foreseen to at least remain on the current level on the back of the increased order levels, with a caveat for the effects of Christmas and New Year. I would say that the actual means that gross profit margin came out somewhat better than our own expectations. The main reason being, as Thomas already alluded to, a better project execution in Food & Water. For some further comments, let's move on to the next slide. Year on year, we were benefiting from a better mix representing better project execution in Food & Water, and also a good margin development in marine, given the mix that we've had. Better load in many of our factories than a year ago. We enjoyed positive FX transaction effects. The purchasing variances, they were turning marginally negative following the development of prices for certain metals.
Sequentially, we were suffering from negative mix effects between aftersales and service, and capital sales, as well as in some areas within capital sales. Of course, marginally negative purchase price variances as I just mentioned. Before leaving margins, the second forward-looking statement. In the near term, we expect adverse effects from somewhat higher metal prices. We expect positive impact from increased aftersales and service share of total revenues. We expect FX transaction effects to be very limited, and load is foreseen to remain on the level from quarter four. Let's move further down the P&L and look at the development of overhead costs. To begin with, R&D ended at SEK 266 million. This is an increase year on year like for like of almost exactly 10%. The usual increase in quarter four compared to earlier quarters, as we predicted three months ago, of course occurred as well.
In percent of sales, R&D represented 2.5%. If we look at the full year, we had an increase in R&D of 5.3%, again expected in order to support the increased efforts in certain product groups. Sales and admin, we ended in quarter four with SEK 1.552 billion, representing an increase like for like compared to 2016 of 4.2%. This increase is more than explained by increased activity level and salary inflation. It must be noted at this juncture that the number of employees in S&A is flat from end of quarter three. That is to say, the underlying benefits from the change program are retained. Let me then move on to other costs and income. We came out with a large negative net in the quarter, a negative SEK 245 million.
This is partly explained by costs related to the change program and partly due to an accounting flaw in Alfa Laval India. As mentioned already at the Capital Markets Day, you must anticipate an increase in other costs and income of some SEK 150 million in 2018. This relates to revenue investments for the change program, mainly the footprint activities. Moving further down the P&L, profit before tax ended at SEK 1.358 billion, an increase mainly explained, of course, by improved performance, and then somewhat reduced by FX differences in the financial net. Tax ended with a charge of SEK 297 million. This is a relatively low level. This is partly explained by a one-off effect of the U.S. tax reform of some SEK 29 million.
If we look at taxes going forward, you can expect a lower average tax rate for the group to the tune of at least 1.5%, thanks to the just mentioned U.S. tax reform. EPS finally ended at SEK 252 against SEK 146 a year ago. Of course, the better performance this year and the non-repeat of one-off charges last year are the explanations. The returns on capital employed and return on equity continue to move in the right direction. They were ending 17.7% and 13.9%, respectively. We are getting closer to our return on capital employed targets of at least 20%. A few comments on reorganization and capacity adjustment program. Since the end of June 2016, we have reduced our headcount with 942 FTEs.
Of this reduction, some 800 FTEs are attributed to the program. The balance, of course, has to do with regular adjustments of capacity and other ongoing changes. We are, to conclude, very well in line with our planning from the fall of 2016. As for savings, we realized SEK 100 million in the quarter, and we are now at a pace annualized of 80% in relation to the target of SEK 500 million. Again, very well in line with the plan. For S&A, the program was completed already last quarter, as commented. For footprint, part of the program has been implemented. We have delivered relatively limited savings this far, but it is ramping up. Again, as expected and planned. We maintain the target for completion of a reduction of 1,000 FTEs and savings of the SEK 500 million, which will be reached in the early part of 2019.
A few words on divisional performance. Remember, the 2016 numbers, they are, of course, pro forma. We're comparing with pro forma due to the reorganization from January 1 of 2017. Having said that, Energy came in higher than 2016, thanks to better volume and despite a worse mix and somewhat higher overhead costs. Marine ended far above last year, mainly due to good gross margin in general. Of course, the non-repeat of the one-off charge for certain product deliveries that we had in the end of 2016. Food & Water came in better, very much thanks to better project execution, as we mentioned already earlier. Despite a worse mix and slightly higher costs. Cash flow.
Cash flow from operations ended just under SEK 1.6 billion, a decline of some SEK 350 million year-over-year in the quarter, coming from more taxes paid and an increase in working capital. Of course, this increase in working capital is due to the increased level of activity in our company as a whole. A negative because of something very positive underlying the growth that we've enjoyed in terms of orders. Of course, we had a compensating factor, the higher profits we generated. CapEx, slightly above last year at SEK 282 million. Financial net, slight positive. Free cash flow, just over SEK 1.3 billion, about half a billion less than Q4, but largely for a very positive reason, as I just mentioned, the increased level of activity.
As far as indebtedness is concerned, we ended the year at the debt to EBITDA of 1.31, compared to 1.81 a year ago, a very good level of deleveraging. I think I'd like to say that now we have really absorbed the SEK 14 billion acquisition of Framo from three and a half years ago. Before I end my comments on cash flow, let me give you three items that you need to consider when it comes to cash flow for 2018. Expect CapEx of somewhat above SEK 1 billion. This is in line with the details I provided at the Capital Markets Day. There will also be a cash out due to repayment of a tax credit that we've enjoyed in Sweden.
We are forced by law to release risk reserve in our captive insurance company, that will mean a cash out of SEK 200 million in 2018, one-third of the total tax credit that we've enjoyed. This will not have any P&L effect. There will also finally be cash out from restructuring provisions related to the footprint projects of a couple of hundred million. Let's move on to FX. In the quarter, we had a positive SEK 33 million only of FX effects, an outcome slightly better. As expected, translation turned negative in the quarter, exactly as anticipated. It's of course, a reflection of the weakening dollar. Looking at the projection for 2018, it must be noted that we expect a limited negative transaction effect, which is then a combination of favorable hedges that we have done, and an adverse effect from the weakening U.S. dollar impacting the open exposures.
We do not foresee any translation effects compared to 2017 at this juncture. Moving on to backlog. As for end of 2017, we ended with a backlog of totally SEK 18.3 billion, representing 6.2 months of LTM sales. Due to a book-to-bill below 1 in the quarter, due to the high invoicing, we had a slight reduction over end of September. If we look at shipments in 2018, the backlog amounted to SEK 13.9 billion. This means an increase of SEK 1 billion compared to the starting point that we had going into 2017. Having said that, let's look at a bridge from whole year sales 2017 to whole year sales 2018. We start off with the SEK 35.3 billion achieved in 2017. Again, we have a better current backlog going into 2018, we're adding SEK 1 billion. We're not expecting any translation effects at this juncture.
We are not having any acquisitions to consider at this point. That gives us a subtotal of SEK 36.3 billion. We have two unknowns, as always, to consider. The level of in-pro-out orders in 2018. How will that develop compared to what we actually achieved in 2017? We achieved in-pro-out orders of SEK 22.4 billion in 2017. Finally, of course, any price effects to be considered. We have, as we traditionally do, we have made small adjustments to prices for standard products at the beginning of 2018. Finally, dividends. The board proposes a dividend of SEK 4.25 a share, the same level as for 2016, and entirely inside the guidance of 40%-50% of adjusted EPS. To be more exact, 48% of adjusted EPS. With that, I hand the word back to Tom for the outlook and the closing remarks.
Thank you, Thomas. Let me turn to the forward-looking statement. Before going to that, let me say that in terms of, to give you some context, we've experienced a favorable and positive business environment in 2017. We don't expect any change to that situation coming into the first quarter of 2018. We do recognize in our forward-looking statement that the strength of the tanker market, where we saw a significant effect in Q4 on Alfa Laval's order intake, will not likely repeat itself in the first quarter. On top of that, we see order intake that came in very high in Q4 all in all, compared to historic levels. Given the context of that, our outlook statements are as follows. For the Marine Division, we expect a lower order intake than in Q4. For the Food & Water, we expect a higher order intake.
For the Energy Division, somewhat lower. That all in all, for the group, gives an outlook for this first quarter of a somewhat lower intake compared to the Q4 of 2017. That was my first forward-looking statement. I have a second forward-looking statement at this point in time. As you know, this is the last quarter that Thomas and I are closing together, and Thomas will retire from Alfa Laval after 25 years as CFO. He's not only the longest-serving CFO in the Swedish share stock exchange, he's also one of the most prominent and best CFOs that we've been having. He has a unique ability to put the company first always. He has always done so, and he has had significant impact on how the company has developed. He's been a tremendous help for me during my first two years at Alfa Laval. Thank you very much.
Thank you.
You owe him a big thank you as well, you guys. Okay, questions
Ladies and gentlemen, if you wish to ask a question, please press star one from the telephone and wait for your name to be announced. If you wish to cancel your request, you can press the hash key. Once again, star one to ask a question. Our first question comes from the line of Klas Bergelind. Your line is open.
Yes. Hi, Tom and Thomas. It's Klas from Citi. First on the guidance. I appreciate that we're coming off a high level here in the quarter, we have some seasonality. Separation and heat transfer in marine is yet to improve, which has longer lag versus contracting. We're yet to see the impact from higher activity in upstream and oil and gas. Is the somewhat lower guide, is that entirely explained by the mix that you think will get worse from here in the short term for the pumping systems coming from a high level, or is it something else? If we get some more color on the guidance there.
I thought we were unusually explicit on our forward. We don't have a crystal ball. We had a good outcome in Q4. We gave a sequential guidance. I've given the reasoning for the judgment that we are making in the various areas. As indicated, we were already quite high. Even if you take the oil and gas side, yeah, sure, there's potentially some upside, but we are already at pace Q4 on 75% of the peak, and I think we have certainly not expected to bounce back to that historic level. I think we indicated all along that even in a recovery, we may not be at the full level that we were at the peak. I would be somewhat cautious to change. I don't think we had a reason to change that viewpoint today. I think we made that comment all along.
I think we've come a long way. There's still some to go, whether we see that in Q1 or not, I think, let's leave that as an open issue.
Tom, the reason for asking is that obviously, I appreciate how you guide in terms of energy to be somewhat lower on the back of lower larger orders. I'm thinking about marine because we have the 12-month lag in separation heat transfer, so that's a longer lag versus the boilers and the pumping systems. You don't expect that within marine to basically start to impact positively here in the first half.
Klas, to begin with, maybe talking about a year of lag is to extend it beyond what we normally say. We normally say three quarters for the traditional Alfa Laval products. You have to remember that we had an extraordinary situation in pumping systems where we in fact had kind of a negative lead time for orders. We got the order before the hull had actually gotten a Lloyd's number, so an extraordinary situation in December, and of course, there is a lag. We had orders in the last month of 2017 over 100. That's a very high level, and of course, that indicates a certain amount of lag. Hopefully we'll enjoy some of that as we get further into 2018. We've certainly seen a strong recovery in 2017 from the increase in contracting already.
My second one is also marine, just to understand what happened to the revenue recognition in the quarter and on the margin, obviously very strong. How much was this owing to the slower recognition coming back versus new invoicing, if you like? Obviously, pumping systems sees very strong growth in orders, those deliveries I thought would come through more in the second half of 2018. You also highlighted better mix within marine sending the margin to this level. Thomas, could you explain a little bit what happened in terms of revenues plus the mix there sending up the margin here to 19%?
remember that we had a very big one-off in 2016, so compared to 2016 is not really relevant. Certainly a good level, and I think the marine organization has done a good job in defending both their position as well as prices. We have to remember that we've seen a big increase in steel in China towards the latter part of 2017. I think our organization has done a good job when it comes to compensating, but we will see effects of the increased steel prices in the Chinese production going into 2018.
Okay. My final one is on Energy and thinking about revenue recognition and mix for 2018. The mix was a bit weaker now, and it was positive last quarter. If you could explain a little bit the moving parts there and then for 2018 mix within capital sales. I think when we've been speaking before, Thomas, you said that most of the larger orders in Energy in 2017 will be invoiced in 2018 and that these orders carry a solid margin. Should we expect the mix in Energy to improve here going forward?
You will inevitably have variations between quarters because of differences between individual contracts and to some extent, between different applications in different industries. You will see variations also going forward. There is no definite trend in either direction as far as margin content in the backlog is concerned. There will be variations between quarters also going forward.
The larger orders for invoicing here, particularly in oil and gas, still has the same gross margin, right? It has been a mix effect down to the margin, it should be a mix effect up to the margin. Is that correct?
Klas, we do have a margin that we are happy with and that we consider healthy in the backlog that we will have. As I said, you will see variations between quarters. There is nothing specific to report as far as the margin going forward is concerned. You will see three months from now, six months from now, and so on.
Very good. Thank you.
Thank you. Our next question comes from the line of Sven Weier. Your line is open.
Good morning from my end, especially to Thomas. I have three questions. Maybe we can take them one by one. The first question relates to the other line, which was quite inflated in the fourth quarter. You mentioned in the quarterly report there were increased activities within the change program. Does that mean there were some extraordinary expenses booked into the other line that you obviously did not adjust? Is that also related to the SEK 150 million you're going to have then obviously in 2018? That's my first question, please.
Yes. I mentioned two specific items in relation to other cost and income in my short presentation. One was costs due to the change program. There are clearly things that you cannot take as a one-off charge according to IFRS. They are revenue investments. That's part of the high level. The other one was an accounting flow in Alfa Laval India that influenced with some SEK 40 million in the quarter. If we take a different perspective of other cost and income, we have over the years reported some SEK 450 million, SEK 500 million per annum. An average per quarter of a negative SEK 100+ million. On that basis, you should expect an increase in net other cost and income of some SEK 150 million in 2018, and that is due to revenue investments in the footprint program.
Understood. Second question, probably for Tom. Good morning. It's on the service side and your commentary from a divisional point of view. I was just wondering, especially on the Energy side, that there is no pickup in the service activity, a rather small decline. Has that got to do with the fact that maybe during the oil price downturn, there was more activity on the service, and now that activity is picking up again, oil prices are picking up again, there's less time reserved for service, or is that completely the wrong direction where I'm thinking here?
It's a good and relevant question. I would say I know what the facts are when it comes to Q4. We did not see a specific pickup in the oil and gas service-related business. That goes a little bit against perhaps what we expected, because given that there was equipment out in the market when the downturn came, I think our hypothesis was that we would perhaps pick up on service side and refurbishing, reconditioning work prior to seeing any particular growth on the capital equipment. That's in fact not what happened in Q4. I'm not sure what conclusion to make out of it when it comes to, let's say Q1 and 2018. That's where we are. I think you have an interesting question. We ask ourselves the same thing.
I might be able to shed some more light on that at Q1, but I'm not sure what the logic is behind it.
Okay, understood. The third and last question is just with regard to M&A. I think you said on Reuters that you have plenty of ammunition to carry out acquisitions. I was just wondering where we currently stand on that, and then just maybe repeating my question from Q3 on that, and also if you don't find anything big in the next 12 months, what your view on using the cash would be. Thank you.
Yeah. For the time being, we still have a significant net debt. I don't think while we do have also cash, we still have some debt that we can bring down to a good level. I would say like this: If I were you, I wouldn't panic in a situation where we strengthen our balance sheet at the same time as multiple acquisition markets are on record levels. In that sense, we are biding our times. We are working with the pipeline. We have dry powder, and that's going to increase. I think over the next 12 months, I don't see an issue around that. Of course, if we see this situation over the next 3 to 4 years, I think the question at some point in time obviously will come on the table. I realize that too. For now, we are working with the pipeline.
There are activities going on. I think we honestly have to say that the work that we've done on Greenhouse, on strategy, on restructuring, has taken a little bit of focus off on the M&A pipeline, and that is not by strategy. It's a consequence of what we're doing. We have to recognize that. We are of the mindset that there are opportunities for us in all our three divisions, and maybe with some emphasis towards the Food & Water side as we go forward.
Okay. Thank you both.
Thank you. Our next question comes from the line of Peter Murdoch. Your line is open.
Yeah. Hi, Thomas. Hi, Tom. First question was just on, I guess for Thomas, it's just on FX. It was just, when was that guidance set? Did you do that on end of December rates? That was question number 1. Question number 2, I guess is more for Tom. Look, you've done 19% margins in Marine now. If we go back to peak, we're still some far away, but next year you're looking for invoicing, it sounds more or less flat. How do you think about that business now? How do you think about that margin? Do you think that 19% reflects where we are in the cycle, or do you think that because of the mix in Supramax, there's uplift to that margin? Just your thoughts about that would be interesting going forward.
I didn't quite hear your question about the FX. I think you asked when the guidance was given on FX. The most recent before today was, of course, the Capital Markets Day where we indicated numbers in the same ballpark as we actually came out. Obviously, with the weakening of the US dollar, we do see a change. We're getting headwind from FX going forward. Yeah, on questions two, what we can share in terms of where we are is a couple of facts. Looking into 2018, we don't expect that the invoicing for pumping system will change dramatically. I think that's an indication we've given before. The pickup that we had specifically in the second half is more of a 2019 effect than a 2018 effect.
When it comes to the margin development in Q4, as Thomas was onto in the Marine side, it was a result, leaving the one-off aside, of an effect of the good control in operations and the strengthening and generally speaking, a slightly stronger gross margin than we had a year ago. Obviously, you could say that product by product, that is not likely to dramatically change. I don't have any prediction for change on that as such. In Q4 it was what it was. I think the one aspect that will affect the way you calculate your margin is the fact that as order intake increases in all parts of our capital sales business, in the Marine side, obviously the share versus the service sales, even if service will see a better development, if it would in 2018, you will see that part maybe pushing downwards.
There are various factors at play here, but we don't see that we are structurally changing the underlying profitability per se, in any particular part of the business.
Okay. Perfect. Thank you, Thomas, Tom.
Thank you. Our next question comes from the line of Max Yates. I'm sorry, from Alexander Virgo, your line is open.
Good morning. Thanks very much, gentlemen. Couple of quick ones. The margin development in Energy, we've obviously talked a lot about Marine at the moment. I wondered if you could just talk a little bit about how that develops through Q4 and also into 2018. I wondered if you could just clarify your comments on pricing. I think I slightly missed, Thomas, your comments in the bridge. Then just on in-for-out. Am I right in thinking that grew about 10% last year? Would it be fair to assume that momentum continues in 2018? Thank you.
When it comes to the Energy division and the margin generated, a decline of half a % year-on-year as you've seen. We of course enjoyed a positive volume effect, but a negative mix effect having to do with what we actually recognized with revenues in the quarter and delivered. Then we had a cost increase in Energy year-on-year, as you also saw for the company as a whole. When it comes to pricing, we have adjusted prices for standard products and standard components at the beginning of this year as we normally do. That is, of course, on the back of the uptick in prices, not least for certain alloys during the last several months. As far as in-for-out is concerned, we did enjoy an increase in in-for-out 2017 over 2016.
I mentioned to you that we realized SEK 22.4 billion of in-for-out in 2017. It's of course, your judgment. Will we see a continued strengthening of the demand? Will it again be positive for 2018? Will it be flat? Do you have a more cautious view and anticipate a decline? That's your call.
Okay. Thank you.
Yeah.
Thank you. Our next question comes from the line of Max Yates. Your line is open.
Thank you. First question from me is on the environmental businesses. You said you did about SEK 500 million of, I think, orders in Q4. Could you clarify, is that just the SOx and ballast water equipment, or is there also the waste oil recovery in there when you talk about environmental? Could you give a little bit of color also on to what extent the environmental business or the environmental orders that you're getting is retrofit versus new build, and how roughly that splits with that SEK 500 million.
The SEK 500 plus, that is, as you indicate, only the business we do in PureB allast and SOx scrubbers. There are, of course, other applications that you could label environmental products in a fairly broad application span. Let's not go into that. These two, on the SOx side is SEK 300 million plus, and on the Pure Ballast water is about SEK 200 million plus. As you've noticed, given the concern in the market after the delay of the ballast implementation from 2017 to 2019, in fact, the ballast water implementation has continued on a steady pace despite that. We see on ballast water a clear demand for Alfa Laval solutions for the new builds, and we also see the retrofits coming in. On scrubber, I think the vast majority is certainly a retrofit, but of course, it's a mix of both.
I don't know for a fact that we are going into the detailed splits here in how it goes, but both are in play. Let's put it like that.
Okay. Secondly on this business, obviously, we'd expect this to continue to grow quite nicely given the regulation that's coming in. Could you give a little bit of commentary around how the margins work on this business, how they compare, perhaps relative to the Marine Division or the group? Maybe talking specifically about the SOx scrubbers, because we've talked about the JV and ballast water, which obviously makes it lower margin. If we can talk about the margins on SOx scrubbers and how you think those compare versus group.
Well, the current level of gross profit margin for capital equipment for these two products is well in line with the average for capital equipment in the Alfa Laval Group as a whole. There is no adverse mix impact from these two products at this juncture if we look at capital sales. There is, of course, an adverse impact on net operating margin, on EBITA margin, as we are kind of, in inverted commas, giving away half of the net to our joint venture partner. The way we operate this JV is that we are doing all of the sales in Alfa Laval. We are handling the supply chain, and the profit is shared with our joint venture partner. There is a negative on one specific line just before EBITA in our P&L as specified. No impact on growth margin, adverse impact on net margin from ballast water.
Okay. Thank you. Just a final question, it is more just a sort of confirmation. You mentioned the sort of accountancy issue in India costing SEK 40 million. Could you maybe just for sort of our comfort, give us a couple of lines on exactly what happened there and how confident you are that you have sort of drawn a line under this issue? Because obviously, we have seen some other companies in the sector where some accountancy issues have dragged on a little too long.
Incorrect accounting treatment of revaluation of investments of surplus cash. It should have gone into other comprehensive income, but it was taken into the P&L above the line, so to speak, in quarter three, and of course, that had to be reversed in quarter four. It was too good in quarter three, and it is consequently now worse in quarter four. That is the end of it. Our Indian colleagues, they know where to account for revaluation of investments of surplus cash now. We do not worry about it, not at least in the near-term future.
Okay, great. Thank you very much, Thomas.
Thanks.
Thank you. Our next question comes from the line of Andreas Koski. Your line is open.
Thanks. I want to come back to raw material prices, because you have mentioned several times now that steel prices are up, and that will impact you going forward. Maybe if you could elaborate a bit about the sensitivity you have to raw material prices, and what kind of headwind we could expect in 2018 based on current price levels. Are we talking about SEK billions or only a couple of hundred SEK millions, or what are we talking about?
We are definitely in a range below the lower amount that you mentioned at this juncture. What I was particularly referring to before was the cost development we've seen in China over the second half of 2017. I think our colleagues in Marine, they've done a good job to reflect that in their work with quotations during the second half. No doubt we will see effects in cost of goods for the products that we manufacture, for instance, in our plant in Qingdao.
Yep. That was actually my follow-up question. Do you think that you will be able to offset headwinds through price increases, selling price increases?
We have a responsibility as a market leader, I think we have demonstrated historically that we have such ambitions. We also manage to push it through. That's absolutely what we have in mind and what we believe we can do also in this situation.
On the Energy Division, orders grew organically by 1% in the quarter. Looking at the four different product areas, it seems to be Energy Separation that is dragging down the organic growth for the whole division, because all other are flat or up in the quarter. Could you just elaborate a bit what area of Energy Separation goes into-
I think you're going into the dilemma of the more you dissect the product lines and markets, you eventually will find a minus somewhere. I think all in all for the division, the full year is a solid 10% growth. I think it's a very significant improvement on the order intake compared to 2016, which is not only an oil and gas effect, but in fact a pretty good performance across the board. A number of our businesses, specifically in Energy, is driven by large projects. Consequently, the occurrence of those in various areas affect order intake a lot. I would say on Energy Separation, we didn't see any large projects being booked in Q4. That creates the negative number. I wouldn't make the issue larger than that.
I think in terms of volatility, I've said that before, the one area where you may want to be focused on from that point of view is on the welded, which is also very much driven by large orders. A big part of that was booked on the large Chinese project that we announced in the beginning of this year in a number of instances. The comparability of the numbers in some of the units in Energy, I think there will be volatilities without us drawing huge strategic conclusions at every juncture.
I'm sorry, according to the report, it says the decline is due to lower demand in the base business. That's why I was asking.
Yeah
I misunderstood.
Yeah. Base is up to half a million EUR orders, and half a million EUR orders is pretty sizable for a business like Energy Separation.
Okay. Just Energy Separation, what does that go into? Is it to separate oil from other particles, or what is the main end market for Energy Separation?
It's cleaning of lubrication oils, it's preparation of fuel oils for engines as large applications. They're used in gas turbine plants, energy power plants. There's a long variety of applications. Generally, in manufacturing industry, as I just mentioned, for cleaning of lubrication oils, for cleaning of cooling liquids and other ones.
Okay
A large number of different industries where you actually apply the separators.
I see. Okay. Thank you very much, and thanks for all those years, Thomas.
Thank you.
Thank you. At the moment, we have three more questions from the line. Our next question comes from the line of Malte Schulz. Your line is open.
Thank you for taking my question. I have two quick questions. First one would be on marine. You mentioned already that there was a significant change in the order pattern, we had significantly shorter lead time. Should we expect this pattern to continue, or do you expect the order pattern to reverse to the old pattern? My second question is on Greenhouse and what we should expect there in 2018.
I think on the order pattern, we can't give you a term. In principle, we would expect order patterns to stick to the historical level. Of course, there might be some effect. The reason for high bookings towards the end of the year is partly that lead times are shorter at shipyards right now. They have a shorter order book. The prices that you can book at the shipyard with short order book has been favorable. Eventually, a number of ship owners decide to make a move, and that is what's happening in the end of this year. Maybe that had some effect also on the speed of booking some of the orders with Alfa Laval. In principle, we were a little bit surprised, in Q4, and I think it would be too early to say that there has been some structural change on that.
I would stick to our normality when it comes to the order cycles. You had a question about Greenhouse going forward as well, we spelled out that we want to bring these activities up to kind of market standard, if you like, as far as operating margin is concerned, that is somewhere between six and eight %. We still have some way to go to improve these activities. We gave ourselves two years. We are a bit more than halfway into these two years. Eventually, when we are happy with the work done, we will conclude on how to take this forward. Guys, I think we are running short of time because we have a further appointment very shortly. I think we have to stick to one more question. Who's next?
Sure. Our next question comes in the line of Lars Bersen, the line is open.
Oh, hey. Hi, guys. I will keep it short. Thomas, 25 years is enough as a CFO, well done. Very impressive. Thank you, and good luck. I was really just after a quick follow-up on Marine margins. I do not know that I got a lot out of the answer that you provided. We are looking at a 16% level we have been cruising at for a few quarters now. We are seeing a 300 basis point step-up. Can you maybe try and give us a sense for the impact of the catch-up you are seeing in the invoicing from the Q3, and also give us a sense of what was it within mix specifically that drove margins?
Marine, I said that marine has no doubt done a very good job in defending not only their position, but they have also done a good job looking at what we have seen of cost development for metals in China, and as far as pricing is concerned in general. They have also initiated, over the last couple of years, a great number of cost down projects for individual products. That is clearly carrying and giving benefits. We started to see that in a meaningful way. That is part of the positive development in marine.
Just on the catch-up on invoicing from Q3, can you give us a sense for the order of magnitude of that?
There are variations between quarters. We've said that we have reached the trough, and we will oscillate on a trough level. We do not foresee any sizable recovery in sales until the second half of 2018 as far as revenues are concerned. There are variations between quarters. We do have a tendency that we complete deliveries because of CapEx programs among customers, not least, that gives that high revenues in the fourth quarter. It's a well-known pattern. With that, I'm sorry, but we have to dash off to the next meeting. Before that, I would also like to say thank you so much for an enjoyable collaboration over, for some of you, great many years. Thanks a lot, and stay close to Alfa Laval. I'm sure that Tom and team will continue to develop Alfa Laval. Bye, guys.
Thank you. That was the end of our conference for today. Thank you all for participating. You may all disconnect.