Welcome to the Alfa Laval 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. I must advise you that this conference is being recorded today, Tuesday 30th January 2018. I would now like to hand the conference over to your first speaker today, Tom Erickson.
Thank you, sir. Please go ahead.
Thank you very much, and good morning, everybody. Let me start the Q4 report by giving a couple of comments on 2017 year as a whole. It has clearly for us been a year where the business climate improved significantly compared to 2016. And 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 in 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. And 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 of more work to do during 2018. And with that, some reflections as usual on Q4 specifically before we go into the presentation. We had about SEK 10,000,000,000 in order intake, somewhat ahead of the guidance that we gave at the Q3 report.
And 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 the divisional level, we were stable in our margins, but I still would like to point out the fact that food and water not only had a stable growth throughout the year and in the Q4 and also a solid margin improvement in the 4th quarter related to a reasonable degree to efficiency measures taken. Thirdly, while we progress a lot in our restructuring programs, we had, 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 150,000,000. Thomas will be back to the specificity of that later on.
So with that, let me go to the key figures. And perhaps, somewhat surprisingly, despite an order intake of about SEK 10,000,000,000, we actually had a slight negative book to bill. We had a very strong invoicing of just above SEK 10,000,000,000 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. And again, the SEK 35,000,000,000 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 $300,000,000 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 system for the North Sea. In terms of the highlights in the quarter, perhaps the environmental products is the most positive aspects where we had the steady growth, both for ballast water and for pumping and for scrubbers and a total booking of just about SEK 500,000,000 for the quarter at the running rate of just above SEK 2,000,000,000 on a yearly pace. And that compares to about the SEK 1,500,000,000 pace that we have after the Q3. So it's been a gradual strengthening in these two important areas.
Going back to the order trend as such, at the just below SEK 10,000,000,000 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. And as you can see, while we do have book 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 usually stable.
We remained at $515,900,000 as normal. However, the profit in absolute terms, given the strong invoicing, came out well. Factors affecting the margin as such, certainly negative effect from mix. We've invoiced a lot of projects in the Q4. 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 1 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.
And 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 additional comments in further detail. Starting with energy, we had a good year, solid year for energy. We are plus 10% in order intake, And there are mainly positives in energy.
The one I'd like to highlight perhaps is in the braced 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 are working with capacity expansions to meet the demand, and that's going according to plan. So Q4, 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 5,000,000,000 in orders, and that is an increase versus SEK 16 of approximately 40%. So 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.
And certainly, we see an element of payoff on that in the year and not the least in the Q4. For your reference, at the peak, we were at approximately SEK 8,000,000,000 in order intake. For this year, we were at about SEK 5,000,000,000. The pace in Q4 was at around 6. So the trend remains positive in oil and gas, and it's been all in all, with some variations across segments, a good year for oil and gas.
Let me turn to food and water. As indicated, we had a solid year in food and water. Basically, across all applications, we have been having a positive environment, a positive demand trends, and that together with a good margin improvement in 4th quarter, makes for a good year in Food and Water. The one area that is contributing specifically is a lot of the work that we've been doing related to project execution and project selectivity in the food systems area. And I indicated already earlier that we feel we are coming to grips with part of the costs in product execution from the past.
And at least in Q4, we could realize a good gross margin on the projects that were closed at that point in time. So a good progress in that area. On to Marine, the contracting of ships landed as a whole pretty much where the forecasts were have been at least for the last 6 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 and certainly in Q4. And 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 twenty 16, a healthy recovery of an important business for us. And at this point, I just ask you to keep in mind that the lead times we have between order booking and bumping system and actual deliveries tends to be a year over year plus. So the main effect of the strong order intake at the end of the year will not be seen in invoicing until we hit 2019.
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 'sixteen, 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 and 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. Sequentially, it's a marginal issue.
So 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. And the same holds true for energy, where we are pretty much flat on the year.
But 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 €6,000,000 €7,000,000 and we didn't have it this year. So there is a non repeat. But 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 in year end. So we are on that target.
We have some distorting items. So our show 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, very strong order intake in Canada in Q3 that was not repeated. So that gives you the explanation for the minus 2. 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.
So that is a bit of a weakness on that on Q4 and 'seventeen as a whole. And then obviously, the big strength is coming from Asia, no surprise. And you may note that in 4th 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 Q4.
And with that, let me turn to our top 10 markets. I think 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 3 market. We had a very difficult situation in Korea 2016 on the back of a troublesome shipping market in Korea.
So we lost 60%, 70% of the pace of our order intake within the 6 month period, and it's very nice to see that we are on a strong comeback in Korea in 2017 as a whole. Then, of course, our 2 biggest markets are growing nicely, China and United States. And 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. And all in all, it was behind in the beginning of the 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. So that is my review on the quarter, a few comments on the year.
And with that, I'd like to hand over to Thomas for a financial review. Thomas? Thank you, Tom. Good morning, all of you. As 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 3, I commented that we believe that a higher invoicing should be expected in quarter 4 compared to quarter 4, a familiar seasonal pattern. As you have seen, we realized sales of SEK 10,100,000,000 in quarter 4. In comparison with quarter 3, 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 3 due to delays in delivery and revenue recognition.
If we move on to service, the service activities represented 28 point 7% of total revenues. This was a decline sequentially of 2.5% and a reduction year on year of 1.3%. So 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 1 compared to quarter 4, again, what I would call a familiar seasonal pattern.
Then 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 3 months ago. In the near term, we expect adverse effects from mix following expected higher sales capital sales revenues. We expect continued positive transaction effects from FX.
The 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 and 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 and 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. However, 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 after sales and service and capital sales as well as in some areas within capital sales and, 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 after sales 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 4. Then let's move further down the P and L and look at the development of overhead costs. To begin with, R and D ended at 2.56 6,000,000.
This is an increase year on year like for like of almost exactly 10%. And they usually increase in quarter 4 compared to earlier quarters, as we predicted 3 months ago, of course, occurred as well. In percent of sales, R and D represented 2.5%. If we look at the full year, we had an increase in R and D of 5.3%, again, expected in order to support the increased efforts in certain product groups. Sales and admin.
We ended in quarter 4 with SEK 1,552,000,000, representing an increase like for like compared to 16 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 and A is flat from end of quarter 3. That is to say the underlying benefits from the change program are retained. Let me then move on to other cost and income.
We came out with a large negative net in the quarter, a negative $245,000,000 This is partly explained by costs related to the change program and partly due to an accounting flaw in Apalavel, India. Going forward, as mentioned already at the Capital Market Day, you must anticipate an increase in other cost and income of some $150,000,000 in 2018. And this relates to revenue investments for the change program, mainly the footprint activities. Then moving further down to P and L. Profit before tax ended at $1,358,000,000 an increase mainly explained, of course, by improved performance and somewhat reduced by FX differences in the financial net.
Taxes ended with a charge of EUR 297,000,000. This is a relatively low level. This is partly explained by a one off effect of the U. S. Tax reform of some 29,000,000 dollars 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 $252,000,000 against $146,000,000 a year ago. And of course, the better performance this year and the non repeat or one off charges last year of the explanations. Finally, the returns, 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 target of at least 20%. Then a few comments on reorganization and capacity adjustment program. Since the end of June 2016, we have reduced our headcount with 942 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es. Of this reduction, some 800 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es are attributed to the program, and 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 EUR 100,000,000 in the quarter, and we are now at the pace annualized of 80% in relation to the target of €500,000,000 So again, very well in line with the plan. For S and 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 FTAs and savings of the EUR 500,000,000 which will be reached in the early part of 2019. Then a few words on divisional performance. Remember, the 2016 numbers, they are, of course, pro form a. So we're comparing with pro form a due to the reorganization from Jan 1, 'seventeen. Having said that, energy came in higher than 'sixteen, 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 and, of course, the non repeat of the one off charge for certain product deliveries that we had in the end of 2016. Food and water came in better, very much thanks to better project execution, as we mentioned already earlier, and despite a worse mix and slightly higher costs. Now cash flow. Cash flow from operations ended just under $1,600,000,000 a decline of some $350,000,000 year on year in the quarter, coming from more taxes paid and an increase in working capital. Of course, this increase in working capital is, of course, due to the increased level of activity in our company as a whole.
So a negative because of something very positive underlying the growth that we've enjoyed in terms of orders. And then, of course, we had a compensating factor, the higher profits we generated. CapEx, slightly above last year at 282,000,000 financial net, slight positive free cash flow, just over SEK 1,300,000,000, about SEK 500,000,000 less than quarter 4, 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 a debt to EBITDA of 1.31 dollars compared to $1,81,000,000 a year ago. So a very good level of deleveraging.
I think I'd like to say that now we have really absorbed the SEK 14,000,000,000 acquisition of Frommer from 3.5 years ago. Then before I end my comments on cash flow, let me give you 3 items that you need to consider when it comes to cash flow for 2018. Expect CapEx of somewhat above €1,000,000,000 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 the tax credit that we've enjoyed in Sweden. We are forced by law to release risk reserve in our captive insurance company, and that will mean a cash out of €200,000,000 in 'eighteen, onethree of the total tax credit that we've enjoyed.
This will not have any P and L effect. There will also finally be cash out from restructuring provisions related to the footprint projects of a couple of €100,000,000 Let's then move on to FX. In the quarter, we had a positive SEK 33,000,000 only of FX effects and outcome slightly better. But as expected, translation turned negative in the quarter exactly as anticipated is, of course, a reflection of the weakening dollar. Looking at the projection for 2018, it must be noted that we expect only very limited 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 'seventeen at this juncture. Moving on to backlog. At the end of 'seventeen, we ended with a backlog of totally $18,300,000,000 representing 6.2 months of VLTM sales due to a book to bill below 1 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 13,900,000,000. This means an increase of SEK 1,000,000,000 compared to the starting point that we had going into 2017. Having said that, let's look at a bridge from whole year sales 'seventeen to whole year sales 'eighteen. We start off with the SEK 35.3 1,000,000,000 achieved in 'seventeen. Again, we have a better backlog, current backlog going into 'eighteen, So we're adding $1,000,000,000 We are 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 36,300,000,000 There are 2 unknowns, as always, to consider. The level of improut orders in 2018, what how will that develop compared to what we actually achieved in 2017? We achieved improut orders of $22,400,000,000 in 'seventeen. And then 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. And then finally, dividends. The Board proposes a dividend of DKK 4.25 a share, the same level as for 2016 and entirely inside the guidance of 40% to 50% of adjusted EPS, to be more exact, 48% of adjusted EPS. With that, I hand the word back to Tom
for the outlook in the closing remarks.
Thank you, Thomas. Let me then turn to the forward looking statement. And before going to that, let me then say that in terms of to give you some context, we've experienced a favorable and positive business environment in 20 17. We don't expect any change to that situation coming into the Q1 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 Q1.
Considering though and on top of that, we see order intake that came in very high in Q4 all in all compared to historic levels. So 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 and Water, we expect a higher order intake and for the Energy Division, somewhat lower. So that, all in all, for the group, gives an outlook for this Q1 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 Rall after 25 years as CFO. He's not only the longest serving CFO in the Swedish 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 a 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.
And you always have a big thank you as well, you guys. Okay, questions?
And our first question comes from the line of Klas Bergelind. Your line is open.
Yes. Hi, Tom and Tomas. It's Claus from Citi. First on the guidance. I'd appreciate that we're coming off a high level here in the quarter and we have seasonality.
But separation and heat transfer in Marine is yet to improve, which has longer lag versus contracting. And then we are yet to see the impact from higher activity in upstream in oil and gas. So 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? So yes, we'll get some more color on the guidance there.
I thought we were unusually explicit on our forward looking. We don't have a crystal ball. We had a good outcome in Q4. We gave a sequential guidance. And so given the reasoning for the judgment that we are making in the various areas.
As indicated, we're already quite high on the even if you take the oil and gas side, yes, sure, there's potentially some upside, but we are already at the pace 75 percent 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. So I would be somewhat cautious to change. I don't think we have 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 or lower larger orders. But 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. But you don't expect that within marine to basically start to impact positively here in the first half?
But Claus, to begin with, maybe talking about a year of lag is to extend it beyond what we normally say. We normally say 3 quarters for the traditional Alfa Laval products. But 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 of 100. So that's a very high level. And of course, that indicates a certain amount lag. So hopefully, we'll enjoy some of that as we get further into 2018.
But we've certainly seen a strong recovery in 2017 from the increase in contracting already.
My second one is also Marine. And just to understand what happened to the revenue recognition in the quarter and on the margin, obviously, very strong. And how much was this owing to
the slower recognition coming back versus new invoicing, if you like? Obviously,
thought, would come through more in the second half of twenty eighteen. And you also highlighted that a mix within Marine sending the margin to this level. So Thomas, could you explain a little bit what happened in terms of revenues plus the mix there sending up the margin here to 19%?
Well, remember that we had a very big one off in 2016. So compared to 2016, it's not really relevant. But 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. So 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.
So should we
expect the mix in Energy to improve here going forward?
You will inevitably have variations between quarters because of all differences between individual contracts and, to some extent, between different applications in different industries. And you will see variations also going forward. There is no definite trend in either direction as far as margin contact in content in the backlog is concerned. But there will be variations between quarters also going forward.
But the larger orders for invoicing here, particularly in
oil and gas, still has the
same gross margin, right? I mean, there has been a mix effect down to the margin, so it should be a mix effect up to the margin. Is that correct? Or
with and that we consider healthy in the backlog that we will have. And 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 3 months from now, 6 months from now and so on.
Very good. Thank you.
Thank you. And our next question comes from the line of Benoit Meyer. Your line is open.
Yes. Good morning from us and especially to Thomas. I have three questions. Maybe we can take them 1 by 1. The first question relates to the other line, which was quite inflated in the Q4.
And you mentioned in the quarterly report there were increased activities within the change program. So does that mean there were some extraordinary expenses booked into the other line that you obviously did not adjust? And is that also the kind of related to the €150,000,000 you're going to have then obviously in 2018? That's my and $50,000,000 you're going to have then obviously in 2018. That's my first question, please.
Yes. I mentioned 2 specific items in relation to other cost and income in my short presentation. 1 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.
So that's part of the high level. The other one was an accounting flow in our fella valley India that influenced with some SEK 40,000,000 in the quarter. If we take a different perspective of other cost and income, We have, over the years, reported some EUR 450,000,000, EUR 500,000,000 per annum. So an average per quarter of a negative EUR 100 plus 1,000,000. On that basis, you should expect an increase in net other cost and income of some $150,000,000 in 'eighteen, and that is due to revenue investments in the footprint program.
Understood. And second question, probably for Tom. It's on the service side and your commentary from a divisional point of view. I was just wondering, especially on the energy side, 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? Yes. No, it's a good and relevant question. I would say the facts 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. And that goes a little bit against perhaps what we expected because given that there was equipment out in the market when the downturn came, we 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. And 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 then and 2018. But that's where we are.
I think you have an interesting question. We asked ourselves the same thing. I might be able to shed some more light on that than Q1, but I'm not sure what the logic is behind this. Okay. Understood.
And the third and last question is just with regard to M and A. I think you said on Reuters that you have plenty of ammunition to carry out acquisitions. So 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. Yes. For the time being, we still have a significant net debt. So I don't think while we do have also cash, we still have some debt that we can bring down to a good level. In a situation, 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 in acquisition markets are on record levels.
So in that sense, we are biding our times. We are working with the pipeline. We have dry powder, and that's going to increase. So 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. But 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 and A pipeline, and that is not by strategy. It's a consequence of what we're doing.
We have to recognize that. But we are of the mindset that there are opportunities for us in all our 3 divisions and maybe with some emphasis towards the food and water side as we go forward. Okay. Thank you both.
Thank you. And our next question comes from the line of Peter Marduk. Your line is open.
Yes. Hi, Thomas. Hi, Tom. First question was just on, I guess, for Thomas, it's just on FX. It was just
when was that guide set? Did you down end
of December raise? That was question number 1. And question number 2,
I guess, more for Tom. Look, you've done 2019 margins in Marine now. If we go back
to peak, it's still some far away, but next year, you're kind of 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's because of mix and supply, there's uplift in that margin? Just your thoughts about that would be interesting going forward.
I didn't quite hear your question about the FX, but I think you asked when the guidance was given on the FX. And 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. And obviously, with the weakening of the U. S. Dollar, we do see a change, and we are getting headwind from FX going forward.
Yes. On questions 2, 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. So the pickup that we had specifically in the second half is more of a 'nineteen effect than an 'eighteen effect.
When it comes to the margin development in Q4, as Thomas was on to in the marine side, it was a result leaving the one off aside of an effect of good control in operations and 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 to dramatically change. I don't have any prediction for change on that as such. So 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 'eighteen, you will see that part maybe pushing downwards. So 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. Thank you, Thomas Stone.
Thank you. And our next question comes from the line of Max Yates 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 make just clarify your comments on pricing. I think I slightly missed, Thomas, your comments on the bridge. And then just on in for out, am I right in thinking that that grew about 10% last year? And 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 0.5% 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 of revenues in the quarter and delivered. And 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. And 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 Improv is concerned, we did enjoy an increase in Improv, 2017 over 2016. I mentioned to you that we realized $22,400,000,000 of improut in 'seventeen. And it's, of course, your judgment, will we see a continued strengthening of the demand? Will it again be positive or 'eighteen? Will it be flat?
Or do you have a more cautious view and anticipate a decline? That's your call. Okay. Thank you. Yes.
Thank you. And our next question comes from the line of Max Yates. Your line is open.
Thank you. Just first question for me is on the environmental businesses. So you said you did about SEK 500,000,000 of, I think, orders in Q4. Could you just clarify, is that just the SOX and ballast water equipment? Or is there also the sort of waste oil recovery in there when you talk about environmental?
And could you give a little bit of color also on sort of to what extent the environmental business or the environmental orders that you're getting is retrofit versus newbuild and how roughly that splits with that 500,000,000
dollars Yes. The 500,000,000 plus, that is, as you indicate, only the business we do in pure ballast and socks and scrubbers. There are, of course, other applications that you could label environmental products in a fairly broad application span. So let's not go into that. These 2, on the SOX side, is €300,000,000 plus and on the pure ballast water is about €200,000,000 plus.
As you noticed, given the concern in the market after the delay of the ballast implementation from 'seventeen to 'nineteen. 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 newbuilds. And we see also see the retrofits coming in. On scrubber, I think the vast majority is certainly 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. And just secondly, on this business. Obviously, I mean, we'd expect this to continue to grow sort of 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?
And maybe just talking specifically about the sort of SOX scrubbers because we've talked about the JV in ballast water, which obviously makes it lower margin. But if we talk about the margins on SOX, scrubbers and how you think those compare versus group?
Well, if we the current level of gross profit margin for capital equipment for these two products is in line, well in line with the average for capital equipment in the Al Falaval Group as a whole. So there is no adverse mix impact from these two products at this juncture if we look at capital sales. But 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're handling the supply chain, and the profit is shared with our joint venture partner.
So there's a negative on one specific line just before EBITA in our P and L as specified. So no impact on gross margin, adverse impact on net margin from Ballast Water.
Okay. Thank you. Just a final question is more just a sort of confirmation. You mentioned the sort of accountancy issue in India costing EUR 40,000,000. Can 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've sort of drawn a line under this issue?
Because obviously, we've seen some other companies in the sector where some accountancy issues have dragged on a little bit?
Incorrect accounting treatment of revaluation or investments of surplus cash. So it should have gone into other comprehensive income, but it was taken into the P and L above the line, so to speak, in quarter 3. And of course, that had to be reversed in quarter 4. So it was too good in quarter 3, and it's consequently now worse in quarter 4, but that's the end of it. Our Indian colleagues say nowhere to account for revaluation of investments of surplus cash now.
So we don't worry about it, not at least in the near term future.
Okay, great. Thank you very much, Thomas.
Thanks.
Thank you.
And our
next question comes from the line of Andrea Koski. Your line is open.
Thanks. So I want to come back to raw material prices because you have mentioned several times now that the steel prices are up and that's the impact going forward. So 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 1,000,000,000 or only a couple of 100,000,000? What are we talking about?
We are definitely in a range below the lower amount that you mentioned at this juncture. And what I was particularly referring to before was the cost development we've seen in China over the second half of twenty seventeen. I think our colleagues in Marine, they've done a good job to reflect that in their work with quotations during the second half. But no doubt, we will see effects in cost of goods for the products that we manufacture, for instance, in our plant in Qingdao.
Yes. And 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, and I think we have demonstrated historically that we have such ambitions, and we also managed to push it through. So that's absolutely what we have in mind and what we believe we can do also in this situation.
And then on the Energy division, Orders grew organically by 1% in the quarter. And looking at the 4 different product areas, it seems to be energy separation that is shutting down the organic growth for the whole division because all other either flat or up in the quarter. So could you just elaborate a bit what area of energy separation goes
into the dilemma of the more you dissect the product lines and markets, you eventually will find a binder somewhere. And I think all in all for the division, the full year is a solid 10% growth. I think it's a very significant improvement of the order intake compared to 'sixteen, 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. And consequently, the occurrence of those in various areas affected order intake a lot.
I would say on energy separation, we didn't see any large projects being booked in Q4. So that creates the negative number, but I wouldn't make the issue larger than that. I think in terms of volatility, and 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. And so 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, but according to the report, it said the decline is due to lower demand in the base business. So that's why I was asking, but maybe I misunderstood. Yes.
But base is up to €500,000 orders, and €500,000 orders is pretty sizable for a business like Energy Separation.
Okay. But just Energy Separation, what does it go into? Is it 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. So there is a large number of different industries where you actually apply these separators.
I see. Okay. Thank you very much. And thanks for all those here, Thomas.
Thank you.
Thank you. At the moment, we have 3 more questions from the line. And our next question comes from the line of Malte Hsu. Your line is open.
Thank you for taking my questions. So I have two quick questions. First one would be on Marine. You mentioned already that there was a significant change in your order pattern, so 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? And my second question is on greenhouse and what we should expect there in 2018. I think on the water pattern, we can't give you a firm. 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 fleet banks are shorter shipyards right now. They have a shorter order book. The prices that you can book at the shipyard, the short order book has been favorable. So 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.
But in principle, we were a little bit surprised in Q4, and I think it's it would be too early to say that there has been some structural change on that. So I would stick to our normality when it comes to the water cycles. You had a question about greenhouse going forward as well. And 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. And then that is somewhere between 6% 8%.
So we still have some way to go to improve these activities. We gave ourselves 2 years. We are a bit more than halfway into these 2 years. And eventually, when we are happy with the work done, then 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, very shortly.
So I think we have to stick to one more question. Who's next?
Our next question comes from the line of Lars Borsa. Your line is open.
Hey, hi guys. I'll keep it short. Thomas, 25 years now 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 don't know that I got a lot out of the answer that you provided. I mean, we're looking at a 16% level we've been closing for a few quarters now. We're seeing a 300 basis points step up. Can you maybe try and give us a sense of the impact of the catch up you're seeing in the invoicing from the Q3?
And also give us a sense of what was it within mix specifically that drove the gross margins? Again, Marine, I said that Marine has no doubt done a very good job in defending not only their position, but they've also done a good job looking at what we've 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 projects, and that is clearly carrying and giving benefits. And we see that we started to see that E and A in a meaningful way. So that is part of the positive development in Marine.
And 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 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 us high revenues in the Q4. So it's a well known pattern. With that, I'm sorry, but we have to dash off to the next meeting. But 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 TORM and team will continue to develop Alfa Laval. Bye, guys.
Thank you. And that does conclude our conference for today. Thank you all for participating. You may all disconnect.