Welcome to today's Alfa Laval Quarter 4 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, 31st January, 2017. I would now like to hand the conference over to your first speaker today, Mr.
Tom Arison. Thank you. Please go ahead.
Good morning and welcome to our Q4 update. And let me start by saying that this is a bit special perhaps. We are closing 20 16 today, and we are closing our old operating structure, our divisional structure that we've been reporting to you for many years. And we are as of January 1 operating in New 1, as you are well aware. So let's take some highlights on Q4 then and then through the normal presentation on the quarter.
Let me start with some overall reflections on Q4. Order intake was relatively strong sequentially. We were up 16% overall and especially PTD contributed to the growth in orders with a clear strengthening, especially on the large orders side, which we indicated to you with our pipeline already back in Talos' quarterly update. EQD continued well, closing the year strongly on growth and orders, but also with the good profitability improvement for the year. And finally, marine, although of course operating in a rather tough market situation, we were happy to record sequential growth across the board in the sectors, including the service side on the Marine business.
So given the circumstances, a good final quarter in 2016. 2nd item on the cost side, there's been, as you can well understand, a clear focus on managing our cost base in the market that we are in, and we saw that focus paying off in the quarter, partly on the A and S side where we are 3% down versus Q4 last year, and we contribute that apart from cautiousness on the spending side, also the early effects of our restructuring program despite fact that we continue to increase our investment into R and D as we go forward. We also have several cost programs running related to cost of goods sold, both in our supply chain, including both production and engineering, and we've seen a stable gross margin also into Q4 despite some negative absorption effects with the lower activities in the business overall. And we see that both in the gross margin and to a degree in the uptick of the PTD profitability numbers in Q4 versus the rest of the year. The new organization, as indicated, is operational as of January 1 this year.
We are on track with the restructuring program that we announced during the fall of 2016 And we are in quarter 4 charging the remaining $400,000,000 one time charge as part of the restructuring program of $1,500,000,000 in total, that was charged to the 4th quarter. That means that all of our one off charges are now taken within 2016. And you should take that as an indication that we are probably running our footprint program a little bit ahead of schedule and a little bit faster than we perhaps indicated at the Capital Markets Day, and we are pleased with that. That also means that the visibility on the effect on the COGS side with the footprint program is clarifying And we have indicated in the report that the total savings from our restructuring program overall will be in the magnitude of SEK 500,000,000 on a yearly basis, and Thomas will give some further details to that program as he goes into the financial reporting in more detail. Let me before I go on in the presentation just indicate to you that we do have one time charges and costs in the Marine division in the Q4, both relating to some supply chain restructuring outside of our program as it's been running and also some one time cost related to certain product deliveries over the last few years that are charged as a one time item on the Marine and that is the main driver of the decrease in the Marine margin in quarter 4.
So although there are some volume effects on the margin, the vast majority of the margin decline in Marine is attributable to this. With that, let me go to the highlights in the quarter. As you've seen, we've announced a number of large orders, and we think this was, as you know from last quarter call, not a big surprise to us. We indicated the transparency of a pipeline that we would see a pickup towards the end of the year. It maybe became slightly stronger than we thought ourselves, but anyhow, we had a number of large projects coming through in the PPD area.
And I would also say that on large projects below €5,000,000 the activity was fairly good, overall supporting the order intake growth in of the PTD in the quarter. So that was a good quarter. The other main event was obviously related to the U. S. Coast Guard approval.
It came before Christmas for a part of our product range, the size ranges. It was important for us to have that approval prior to year ending. It confirms partly our solutions and the approval of those. It confirms the UV technology within the ballast water segment as one of the 2 technologies applicable in this area. And we are early in this approval process as 1 of 3 moving forward in the sector.
As we've said, and we have been back to that, we don't have any particularly effects in the order books on the ballast water approval of U. S. Coast Guard nor on the SOX regulations spilling into the order book of Q4 2016. As we said in the Capital Markets, they we expect a gradual effect from 2017 as a result of that. Going to orders received, here you see the trend curves over a period of time.
You see the relative strength on the Q4 order intake. It is a negative number year on year and I would remind you that in the Q4 2015, we had a significant one time effects of pre ordering in the pumping system. Overall, that number was $1,200,000,000 and way above the normal order intake level for Pumping Systems. So even compared to the very strong Q4 2015, the numbers this year holds up fairly well. You can also see that there is an effect of the return of the larger orders in the end of 2016.
It's not a number which is equivalent to the strong period in 2014 and to a degree 'fifteen, but from an historical comparison, the return of the large project business in Q4 was relatively meaningful. Going to the EBITDA margin, we landed in absolute terms due to good invoicing on positive number compared to the quarters prior in 20 16. On margin, we held it relatively stable at the 15% mark. There are obviously positive and negative factors affecting the 15% margin in the quarter. Clearly, the one time effects in marine weighs in the gross margin and weighs on to the EBITDA margin in the quarter in a negative way.
On the other hand, we should recognize that there are positive currency effects and positive effects from cost down projects as well contributing to the upside of the numbers. So all in all, the 15% was the result of those factors. I indicated already that the work on the cost side has supported the development in the A and S cost, So although it is up a little bit sequentially as it normally is due to seasonality compared to the Q4 last year, it is a meaningful impact on the number, both in terms of restructuring and general cautiousness on spending in the quarter. Let me from here go to the performance on the divisional level. And starting with EQD, as you've been noticing EQD has been on a good run throughout this year and it continued in a very stable way in the Q4.
The year on year comparison is across the board positive except from service, which has been flat and relative to the sequential relatively strong Q3 and a very strong Q2, we felt we ended up on a good way also on volume for the year. It's visible in many ways, but you can also see it in the operating margin at percent 14%, which was very good in the quarter and was a record profitability level for the year. You should note that we did have an important operational failure in the summer period in our OEM business, which affected both order intake and invoicing for the year negatively. I think our OEM business would have been even stronger without the press failure. We have obviously addressed that problem and we are since August running in a normal way.
So we are way up to speed again and we've dealt with all our issues there. But all in all, it did have an effect on a number that otherwise would have been even more positive and the development in OEM business was strong in Q4. On sanitary, it's been a very good year as a whole and in fact after an extremely strong Q2 and a relatively strong Q3, we have been to a degree working with extended lead times in the sanitary as well due to bottlenecks and also those have been dealt with. So we are more or less eliminating them as we speak. And in Q2, we will be operating on a normal level with higher capacity addressed in a couple of our units.
So it's been positive challenges in some of the areas of EQD throughout 2016 and a good finish of the year. Let us go to Marine and Diesel. And let me start by saying that the contracting level for the marine industry as a whole in 2016 indeed ended on a weak note. We still have less than 500 vessels contracted for 2016 and there will be some corrections of those numbers in the beginning of this year. So we expect that the final number will be above 500, but most likely not above 550.
So it is way below the forecast at the beginning of the year. So it reflects what we've been seeing and feeling in the market. And so markets forecast that we hit the bottom in this year at the 30 year low is probably a reasonable judgment. We may well see an improved order activity and contracting activity in the sector in 20 17, but you should remember that we are on a low level and even a high percentage term is still leaving a number well below the historical averages for 2017. In that environment, we are positive to the fact that we saw sequential growth in all of the areas of the Marine business.
And there are a range of reasons for that. One is that the ship mix, especially on the cruise side, was very strong. So we see that in the European numbers. We see it on the cruise side. And that goes through on the traditional equipment business that we have positive year on year and positive sequentially.
The pumping system was positive. You should remember that it has been very weak in Q3, especially and certainly weak in the year after we had a huge pre ordering in 2015. So it may be natural, but nevertheless, it was a recovery of certain order level in the pumping system as well. And across the board, it was positive. Maybe for us, one of the more important signals was that also service recovered a bit in Q4.
We are negative for the full year on the service development affected by ship owners holding back on service, but still the Q4 was a return to a somewhat better number for year end and certainly sequentially a clear improvement compared to Q3. So all in all, if we look at the order intake side of Marine for the quarter, it was relatively good, but of course, still on a low level given the circumstances in the industry. Finally, on Process Technology Division, a big jump in orders sequentially. Perhaps the most interesting part is related to the oil and gas side of the industry. And our comment to that is that a relatively stable oil price in the order of magnitude of US55 dollars per barrel, a small increase in the rig count and a slightly more optimistic spirit in the oil and gas industry upstream is showing in an increased market activity and to a degree also in an increased order activity across the board in our oil and gas sector.
As you know and as we have indicated previously, we have dropped approximately 90% in our upstream business compared to the peak. We are nowhere near on the way back to those historical numbers, but it is a more positive aspects in the oil and gas industry related both to the amount of spent in service as well as in maintenance of existing projects, and it reflects in a slightly better order intake in Q4 that we saw early in the year. And with that said, we have already guided you that we don't expect 2017 to be a major shift in CapEx activity and there are relatively long cycles from decision to the fact to the time when it hits the order books of Alfa Laval. So I would not overestimate the impacts of the better sentiment in the sector. But nevertheless, it was a step in the right direction in the quarter.
With that, a brief summary on the segments, the way we see them for the full year. As I said on EQD, generally positive on OEM and sanitary, industrial equipment weak in the quarter based on seasonality, but also some weakness in general demand and service for the year flat. On the marine for the full year, clearly a sizable decline in orders as you're well aware. But with that said, a little bit of a better situation in Q4. And finally on the PTD side, we are very pleased with the full year growth of the service business, took a big step forward in the year with a 6% growth, positive sentiments in the wastewater business as well.
Food and Life Science, pretty good overall, but a clear impact of lower investments into vegetable oil related among other things to biofuels. And finally, the Energy and Process segments, which finished the year strongly, but overall with a relatively low level of large CapEx projects early in the year, we are behind on a full year basis. So that's where we are on these segments. Let me give you some comments on what's happening on a regional level. And let me start off with Western Europe, which shows really great numbers both sequentially and year on year.
I would say there are 2 main factors contributing to this. One is that we've had a positive organic growth development in Southern Europe, both France and Italy have been very positive for us from a daily business throughout the year and perhaps a bit of a positive surprise and turn from a period of low activity in those markets. At the same time, we also have a big impact in Western Europe from the large orders. And many of the large orders, which eventually will be delivered to Middle East or other places, are entered through international contractors often based in Western Europe or in Spain or other places. So those numbers are not only reflecting demand in Western Europe, but also the international contractor activity.
Going to Eastern Europe, Russia, overall a good development in the year for sure, a slightly weaker finish in Russia in Q4. But all in all, we turned the page in Russia for sure with a good year and certainly a clear change from the economic crisis period that Russia experienced prior to 2016. So Eastern Europe, including Russia, was a good year for us. Nordic, still negatively affected on offshore business and overall a relatively weak year for the Nordic region. Going to Asia, we for the first time saw sequential growth in Asia, mainly attributable to the fact that the marine order intake improved in Q4 versus Q3.
So you see the 14% positive being the main driver of the change just as well as the minus 41% is largely attributed to the marine sector and I will I'll give some further comments to that on the next slide. Latin America came in well. I would say that the full year or the comparison on last year, you should remember that we had a cleanup of the order book in Brazil that year. So the numbers look a bit stronger than they are, but all in all, still outside of Brazil. Strong growth in many areas, Brazil also generally positive on a relatively low level for the year.
And finally then North America, the numbers overall are impacted negatively on Canada, which had difficult years on large projects and on oil gas related business for 2016, whereas U. S. Is a bit stronger than the numbers for the region as a whole. And especially the U. S.
Numbers relative to last year improved in the second half. So reasonable pace in the U. S. Business and reasonable stability. And let me with that take you to our top markets to give you a little bit of flavor for what happens in individual place.
So in the United States, you see 2016 what we said a level off on a low level of the oil and gas business. So the negative effects of that started to be out of our order books, especially in the end of the year. And we'll see where that goes going forward. But all in all, a stable year, and you could say 2016 is a year when the U. S.
Asserted itself as by far our most important market. We feel good about that. In China, we have a decrease was in many segments a relatively good year in China. We were affected in some CapEx related areas, but primarily the decline in China is the result of the Marine Industry. And if you want the real example of the marine industry impact, you see it in our numbers in South Korea.
It was in 2015, our 3rd biggest market. And relative to 2015, almost 2 thirds of our business in Korea disappeared in 2016. And this is, of course, a huge impact from the marine industry on our order books in South Korea. But I would add that in general, the economic situation in Korea was not good last year and it had impact on CapEx projects also to a degree outside of the Marine. But clearly, this was a big item for us in the year.
And all in all, if you compare, it's about SEK 2,700,000,000 in orders that we dropped in South Korea long related to this issue. So if there's any good news in that, you could say it's better to know where you have the problem than if you don't know it. Nordic, commented on before, Japan down a little bit, relatively stable in Japan. The Marine business is also and the order books for the shipyards in Japan is a bit more stable than in other places. So we see a smaller impact in Japan as a whole.
Southeast Asia, I would say, vegetable oil issue, otherwise Southeast Asia is stable, stable plus. And you see the more positive situation in Mid Europe and Adriatic that I indicated before as well as in Benelux. India as a whole year, not a fantastic development, it's flat versus the year before, but a very, very strong finish in India after a weak start of the year. So at least we walked out of the year in India on a strong note in Q4 that was good. And I think with that, we covered the business review from an order point of view.
And I would like to hand over to Thomas for some further details on the financials. Thomas?
Thank you, Thomas. Good morning, all of you. Let's start off with a few comments on our sales development. And let me start off by reminding you of the forward looking statement on sales that I did with the quarter 3 report. There I said that we believe it's reasonable to expect an invoice in quarter 4 somewhat higher than that of quarter 3, mainly because of the phasing of delivery of the backlog and giving due consideration the sideways development due to demand for short lead time items and services.
Well, we ended up with sales of 9,900,000,000 dollars and in comparison with quarter 3 that means an uptick of 12% at constant rates. And year on year then we were down 12% as well. We ended up, I would say, slightly above our own expectation also for sales. Particularly, I think that is to be attributed to significant translation effects. But of course, we also had an underlying somewhat bigger higher level of deliveries than we anticipated ourselves.
If we move on to service, the service activities then compared to last year, quarter 4, 27%. That means year on year, we got a mixed support from higher service content in our sales. We have also within service recognized a minor positive effect through an increased share of parts deliveries of total service revenues. Finish off on sales, let me give you the first forward looking statement. We believe it's reasonable to expect a lower invoicing in quarter 1 than that of quarter 4, mainly because of the normal seasonal pattern with relatively lower level of revenue recognition in contract based business in the early part of the year.
And with that, let's move on to gross profit margin. Gross profit margin in the quarter was 34.3 percent, an increase of 0.1% year on year and a reduction sequentially of 1.4%. And then coming back to my forward looking statement after quarter 3, then I said in the near term, we expect adverse effects from load and an increased share of capital sales. We expect continued positive FX transaction effects increased share of capital sales, as I mentioned before, but for the remaining parameters, gross profit margin developed in the expected direction. To elaborate on some of the main parameters influencing gross profit margin, let's move on to the next slide.
We were suffering adverse effects from a negative price mix, including one off course in certain deliveries in marine, and I will be coming back to that on the divisional comments in a moment. We were also suffering from a weaker load in certain of our factories. We were positively affected by purchasing variances. So initiatives on the purchasing side, they delivered. And of course, we also got support from FX transaction effects.
So let me then move on to the 2nd forward looking statement. In the near term, we expect adverse effects continued on a declining load. We expect continued positive transaction effects and also positive purchase price variances. Let's then look further down the P and L and talk a bit about the development of our overhead costs. R and D ended in the quarter at EUR 232,000,000 an increase year on year like for like of almost 14%.
If we look at R and D in relation to revenues, we ended at 2.3% compared to 1.9% in 2015, that is for the full year. In summary, I would say that this fairly sizable increase in R and D has been a conscious increase, a very conscious increase to increase R and D efforts to support a positive organic development going forward. Then let's get to sales and admin. We ended in the quarter at SEK 1,530,000,000 representing a reduction year on year like for like of almost 3%. Again, as Tom already commented, any indication that our efforts to save on cost and adapt to market circumstances is really having an effect.
And of course, this is coming from reduction in headcount as well as savings on other items in the S and A area. Then if we move further down the P and L account, profit before tax ended at only $877,000,000 a sizable reduction year on year from the almost $1,400,000,000 a year ago. Of course, this decline is mainly explained by the one off charge of €400,000,000 in the quarter and the reduction in sales volume of $1,000,000,000 Then, of course, we also get a support from a better financial net compared to last year coming from FX differences in financial net. Before leaving the P and L as such, taxes ended with a charge of €261,000,000 looks high compared to the profit before tax of under $900,000,000 And the explanation is a combination of that we are not having any tax effect from the write off of goodwill being part of the $400,000,000 one off charge. And then this is partly compensated by lower deferred taxes from a tax rate cut in particularly Norway, in fact.
But going forward, we maintain the 28% guidance. Connected to the P and L, EPS ended lower than last year at 1.46 percent, of course, explained again by one off charges and the lower volume. And then finally, returns on capital employed as well as equity, very much influenced by the one off charges. We ended at 15.3% and 11.8% respectively. Then let's move a bit into the details of the comparison distortion items or the one off charges if you like.
The program for reorganization that we launched in quarter 3, there we took the 2nd step in quarter 4. Decisions were taken for the remaining elements of this program giving a charge of €400,000,000 out of which €100,000,000 is write offs and consequently a non cash item. And for the rest, you see that the very vast majority, almost all of it relates to footprint adjustments, dollars 285,000,000 out of the remaining €300,000,000 If we look at the one off charges for quarter 3 quarter 4 combined, the total charge is 1,500,000,000 write offs, so non cash, dollars 380,000,000 of the charges relates to adjustments in the overhead area, predominantly sales and admin and $420,000,000 has to do with cost of goods sold adjustments to be implemented. As far as employee impact is concerned, we anticipate a reduction of some 1,000 employees, out of which $450,000,000 comes from the overhead side and $550,000,000 from cost of goods. Then finally on savings, a total of €500,000,000 €300,000,000 for sales and admin and €200,000,000 in the cost of goods area.
So what about the implementation then? Well, we believe that we will have implemented some 75% of the savings by the end of this year, by the end of 2017. So we will be on a level of 75% of €500,000,000 that is to say €375,000,000 by the end of this year. We also believe that we will have 100 percent of the program implemented by the end of 20 18. And of course, 2018 implementation is entirely to do with the footprint initiative within this program.
But that, of course, means we will only have the full €500,000,000 in the P and L account in the fiscal year 2019. With this, I think to conclude, this means you must not expect more in terms of charges relating to this program for employee reductions or savings. So as far as charges are concerned, this is closed by now. Let me then move on to divisional performance. Equipment came out better than last year, thanks to somewhat higher volume and a better price mix, then reduced by lower load in some factories and then marginally higher overhead costs at a 14% EBIT margin.
Process Technology ended lower than last year, but better than quarter 3. Compared to last year, the decline is mainly due to lower volume, but also again the lower load in certain factories and lower margin on certain projects and then finally slightly higher cost. However, it should be noted that it is a meaningful improvement on quarter 3 on the journey back to historical performance levels for these businesses. Then let me finish off with Marine. We came out lower than both last year as well as quarter 3.
Mainly, if we look at the absolute decline of some $350,000,000 the main reason is lower volume, but we also had to recognize one time costs in the quarter. And these one time costs, they correspond to approximately 400 basis points out of the total decline sequentially of some 500 basis points in margin. And this is connected then to certain product deliveries. And I think it's important to recognize that we're talking product deliveries. We're not talking project business here.
And we are also making changes in the supply chain outside of the overall restructuring program that influenced the profit in the quarter. So total effect corresponding to 400 basis points. So underlying a limited decline from quarter 3. Then let's move on to cash flow. Cash flow from operations amounted to just over 1.9 €1,000,000,000 in quarter 4.
This is a slight increase compared to 2015. And I would say it's a good outcome despite substantially lower EBITDA, thanks to a handsome release of working capital and then also lower taxes paid. Regular CapEx ended somewhat lower than last year for the quarter as well as for the full year, I think, well in line with the kind of demand situation that we've been faced with in certain sectors. Investing activities also included acquisitions of $187,000,000 and this refers to the acquisition of the remaining minority in Alfa Laval India Limited. So the formerly listed company is now a wholly owned subsidiary of the Alfa Laval Group.
Finally, financial net positive EUR 129,000,000 dollars an outcome $173,000,000 better than last year explained by a combination partly of lower interest paid, but very much more so favorable FX differences. Free cash flow, €1,800,000,000 in the quarter compared to
SEK 1,650,000,000
a year ago. For the full year, a free cash flow of $4,500,000,000 a reduction of only $300,000,000 compared to 15,000,000 dollars despite a reduction in EBITA of $1,250,000,000 I would argue that this is at least partly thanks to a good stability in the underlying way that we do operate in the company. This cash flow has brought us to a debt to EBITDA of 1.81% compared to 1.56% a year ago. And if I exclude the one off charges, then we're in fact back to about 1.5 percent to EBITDA continued good level of deleveraging. FX effects positive the quarter with SEK 141,000,000,000.
No doubt an outcome below our expectations as far as translation effects are concerned that this is attributed to an adverse translation effect on working capital. The strengthening of the U. S. Dollar where we have handsome advanced payments in the marine on the marine side that caused a one off adverse translation effect. But of course, assuming a continued strong U.
S. Dollar, this effect will come back as increased invoicing and increased EBITDA in the coming quarters. Transaction effects, I would say, came in as exactly as expected. The forecast for next year for 2017, this year in fact, from Capital Market Day is confirmed at a positive $275,000,000 totally. Then our backlog, dollars 16,900,000,000 at the end of the year, representing just under 6 months of LTM sales For shipments in this year 2017, the backlog amounted to 12,900,000,000 dollars This is a reduction of 2,700,000,000 compared to the starting point for 2016.
With that in mind, let's look finally at the bridge to sales for 2017. Starting with the 35.6% for 2016, Again, the backlog lower backlog of 2.7% and negative 1%, applying the closing rates on in for out sales, we anticipate a positive translation effect of the €200,000,000 This gives us a subtotal of €33,500,000,000 And then of course the unknowns. Considering demand development during 2016, I think it's reasonable, at least at this point, to expect a lower level of in for out orders in 'seventeen compared to 'sixteen. However, this of course may change. And then finally with regard to prices, we've only made small adjustments to compensate for recent metal price increases.
And then before I give the word back to Tom, let me just confirm that the Board of Directors yesterday in their meeting decided to propose to the AGM that the dividend remains at SEK 4.25 per share. And then with that back to Tom for the outlook and the closing remarks.
Thank you, Thomas. Now as for the outlook, as you may appreciate, we closed the year based on our old structure and we are moving into a new divisional structure. So the normal guiding comments are a little bit difficult to handle in this situation. We obviously, starting from the Q1 report, will guide you in a similar way, but based on our actual numbers from Q1 as presented. Now so let me make the following comments based on that.
As a whole for the group, we expect demand in the Q1 to be somewhat lower in the Q4. Now regarding Marine, which will continue to operate more or less exactly as it is today, the forecast for forward looking comment for that division is unchanged or somewhat lower compared to Q4. For the remaining part of the business, we think the pipeline for large projects is perhaps somewhat weaker than in the Q4. So we expect fewer large orders in the Q4 and for the rest of the business an unchanged or somewhat lower demand in the base business. So but I think what you should pay attention to is the group statement where we will be on a somewhat lower level for Q1 compared to Q4.
And with that, we close the presentation. We will have 50 minutes for Q and As, and I'll leave the word back to the conference leader. Thank you.
Thank you very much. Ladies and gentlemen, we will now begin our question and answer Our first question comes from the line of Klas Bergelind. Please ask your question.
Yes. Hi, Tom and Tomas. It's Klas from Citi. A couple of questions, please. Firstly, can I come back to the cost savings?
We have SG and A down 3% in the quarter. How much was this in PTD? And you're obviously ahead of the plan. Is there not an upside risk here that you keep beating on the OpEx side? I appreciate that COGS savings always a bit more tricky to realize, but aren't your OpEx savings a bit conservative?
Then my second question is on PTD and the margin again. You had cost overruns in the past. You had issues with certain projects. Are these effects annualizing also the reason why the margin is better? Or is it just pure cost savings?
And then the final question is on MDD and the margin. Can we come back to the impact from the onetimers, Thomas? This is certain product deliveries weighing on the margin. You could almost call this a negative mix. How long will this impact last for?
And if you could also comment on whether you had any pure mix impact from lower deliveries in franc
Okay. If I understood your first question correctly, you have you are of the opinion that the OpEx savings are conservative, particularly attributed to process technology. And let me then just repeat that our expectation is that we will realize $300,000,000 of savings out of the S and A line and that is well, that's our expectation as far as this program is concerned. So that's really it. If we then look at the Freso Technology margin, we had an improvement sequentially and I think that is evidence that measures taken to balance the E and S activities and solve the problems related to certain deliveries, certain project deliveries, they are well, they are getting sorted out.
Then finally, marine and diesel, well, this is related to product deliveries. So it's not projects involving engineering and the like. It is delivery of products. We are of the opinion that we have the issues very well defined and this is to be considered a one off charge. So this is nothing that we believe will specifically influence going forward.
It is not a mix per se between one size or the other of a particular product or a variation between different types of products. It is to do with deliveries of a specific product and we've taken the hit for these deliveries in this quarter.
Okay. Just to follow-up, Thomas, in terms of francmoan, the backlog here, how much are we down and how much is will sort of weigh on the mix going forward? Obviously, the higher margin in Frank Mon.
As we get further into 2,007, as we gradually get into the year, we will see declining revenues from Frank Mown, but there is no substantial impact really in quarter 4 compared to say quarter 3 of 'sixteen. But yes, we will see declining deliveries in Frankfurt in 'seventeen.
My final follow-up is just to come back on the cost savings. What I meant was the 3% like for like down in S and A in the quarter. This is obviously on top of the SEK300 1,000,000 or should we include that within the SEK300 1,000,000 OpEx, I. E, is the discretionary spend that can come on top of the SEK300
dollars? There is this is, of course, the first signs of effects from the program.
Okay. Thank you, guys.
Thank you very much. Our next question is coming from Max Yates. Please ask your question.
Thank you. Just two questions from me. Firstly, on the marine orders, obviously, those are now growing sequentially. If we look at the Clarksons data that's out there and we think about your lag of sort of 3 to 9 months, are we effectively now saying that we've reached a trough in this business and we should think about this as a sensible quarterly run rate for going into next year? Or do we see potential for another leg down in terms of ordering from the levels where we're at now?
Well, I think I've been cautioning you to be too mathematical in looking at this market because it is more complex than assuming standard lead times and that you have an absolute correlation quarter by quarter on following the trend curves on the level of contracting with the shipyards. And I think Q4 was an example for that. I think though that our general guidance to the market has been that we have not necessarily seen the full impact of the low level of contracting in 2016 on our order books. And with that said, we have also indicated that the impact from environmental products in 2017 should be considered a balancing factor to the downside that we may see on the capital order side. With that said, obviously, we've taken as you've seen among others in the Korea numbers, we've taken a substantial decrease on capital equipment ordering already in our books.
If you look at the running rate right now, I think we are just top of €800,000,000 on a yearly pace. We are over 30% on service. So obviously, by the sheer numbers and given that I think we were up at the pace of 1,400,000,000 at over EUR 1,000,000,000 in CapEx only on the Marine side 2 years ago, it starts to get to a level where you have to think a bit carefully in terms of how dramatic assumptions you can make going forward. But of course, we should probably expect that over a period of time now into 17, we may on specific quarters or over a couple of quarters see some further downward pressure on the CapEx order intake in the sector. I think that's reasonable.
Okay. And just my second question, just on Marine Services. Did I hear it right that you were saying the outlook on Services could still be difficult because of downward pressure on merchant ship spending?
No, you did not hear that nor will you hear forward looking comment on Marine Services specifically. What I did say was that we had pressure on the service volumes, particularly in the middle of the year, and we saw an improved level of orders in the marine service in the Q4 numbers sequentially. It didn't make up for the total service revenue for the full year of 2016. So for the full year, we ended behind in service, above in PTD and equal on EQD. So our service revenue in absolute numbers was flat in 20 16, but we have not given the guidance, only the fact that we saw an improved situation in Q4.
Okay. And just very last one, you mentioned within marine that we were sort of potentially ballast water and some of the environmental equipment could offset some of the negative impact across other parts of the Marine business. Could you give us a little bit of feel of how the different margin profiles of those businesses might impact the overall mix of the division, I. E, if ballast water is coming in at a materially lower margin than the rest of the division or than other OE within the division?
Well, qualitative comments on that to repeat what we've said over the last couple of years. Ballast water treatment there, we recognize the full revenue, but with the joint venture set up, we only get half of the profits. So, certainly an adverse effect mix wise on the bottom line. If we look at SOX, this is of course CapEx at this juncture basically and there we're looking at margins comparable to other capital equipment.
Okay. Thank you very much.
Thank you very much. Our next question is coming from Andreas Koski. Please ask your question.
Thank you. Can you hear me? It's Andreas Koski from Deutsche Bank. Yes, we
hear you.
Perfect. So firstly, on the organic drop through, because despite you had a 12% organic revenue decline, if we adjust for one off charges in marine and diesel, it looks like you had a low organic drop through of only 21%, which is significantly lower than what we have seen in Q1, Q2 and Q3. So I just wonder if you could quantify what the savings were in the quarter?
Well, the savings from the program, I mean, we are not really seeing any savings in the cost of goods area from the reorganization and restructuring program. I mean, we're only in the starting of this. We have, of course, gone into of course, gone into implementation of a few of these individual situations, but not really any impact on cost of goods. We have benefited from purchase price variances, as I said, and we've had an adverse effect from lower load in certain factories. We've taken a big hit on the oil and gas related factories in the United States, for instance, they are, if not empty, running at a very, very low pace at this juncture.
So we have swings and roundabouts in this context, but load is certainly a factor.
And savings in SG and A?
Savings in SG and A, again, down sequentially some 2.7% like for like and that is the first indication that the program is having effect. We've held back on certainly adding resources that has not happened in the entire organization. And we have also held back on replacement of people leaving the organization. So we have a decline of some 200, 250 FT feet
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Feet Feet Feet Quarter on Quarter Sequentially. So of course that is an effect. And then a general cautiousness on spending. That is what it takes when we see this kind of decline in revenue.
Okay. But you could say that most of the sequential SG and A decline was related to the announced restructuring program?
That's certainly a contribute an important contributor, yes. General awareness that where we are.
And may I also ask on financial net going forward because this quarter you actually had a positive financial net. And if we look at interest income and interest costs, they, again, were almost net 0. Could you give any guidance on what to expect in financial net in
20 13? On the back of our net debt, it's fair to assume an interest net in the order of, say, SEK 30,000,000 negative per quarter.
Thank you. And may I just lastly, on the one time item in Marine and Diesel division, why do you not report that as a comparison distortion item?
Because it is a part of the regular business. This is related to specific product deliveries. It is not a matter of restructuring. It is a matter of deliveries that we have made and where we've faced issues relating to a particular product.
There is also some changes in supply chain, which is influencing that number. But I'd like to highlight that in the past and in the future, we will work with efficiency measures run as part of our ongoing business. And you should assume looking back and looking forward that we are, as we go forward, taking some costs for that as we need and we will see the benefit of it too. That's part of business. The fact that we took a 1.5 charge was that the actions we needed to take now were so substantial, we felt it was not correct running the business that way.
But we think that the measures that we are taking in Q4 are part of ordinary business, and you should consider it such. But of course, the effects are marketable in this quarter and therefore, we pointed out very clearly so you understand what's behind.
Did you mention which product group this was related to?
We did not and we stay a bit low on that.
Okay. Thank you very much.
Thank you. So we take a last question and then we're going to have to go. So please.
Okay. Thank you. Our last question is coming from Sven Weier. Please ask your question.
Yes. Good morning from my side as well. I may follow-up on your comments on the cruise side of Marine. I was just wondering, if I look at the cruise market, the ordering activity for cruise vessels in the first and the second half last year was pretty similar. So the orders that you saw, would you be able to tell us if those were the cruise ships that were ordered in the first half?
Or were those ships from the second half just in terms of we were talking about the balancing from lower merchant orders this year by ballast water and scrubber, but I was wondering if there's still a tail of other cruise ships that the order needs to be passed on to yourself? And then I was just wondering, you mentioned also higher scrubber activity in Q4, which surprised me a bit. Do you see that now also coming as a more sustainable flow of orders? Or was this kind of a one off project there? Thank you very much.
Let me make a comment on the scrubber side. I mean, there is a SOX regulation that is potentially the bigger driver of the scrubber market in the future. We don't see the order intake in Q4 as a result of that. We have on and off scrubber orders in our books. And as project business, they are a bit unevenly divided, but they happen to come in Q4.
I think the big question on the scrubber market going forward is how the regulation of socks will impact that market. And we've talked about that extensively in the Capital Markets Day and cautioned you a bit in terms of how to calculate it based on the fact that it's driven by legislation and not by underlying business. So there are some uncertainties on how the volume development will look there, but obviously it is a big legislation issue when it comes to the potential demand in that area. It's not visible in the Q4 books. On the cruise, I mean, this is back to the question of how mathematically you want to be on when the ship is signed and when the order is coming.
We
2023 or early as 2022.
So there's a 4, 5 year 2023 or early as 2022. So there's a 4, 5 year order backlog, so on the shipyard. So I think you need to be a little bit cautious in terms of how you look at the 6 months order, the contracting level for cruise versus our order intake. There is a healthy cruise business pipeline in the shipyard's order book at this point in time. Q4 came in well.
We have not given you a specific forecast on how our order will look, but our indication on Marine as a whole is similar or somewhat lower and that's where we stand on that.
All right.
Okay. Thank you. We are unfortunately forced to close. We'd like to thank you. Thank you for the years in our Q2D and EQD structure.
We look forward to and maybe you want to give a comment on the preparation for next quarter report.
Yes. Well, as I mentioned already at the Capital Market Day, we will make sure that you have some historical pro form a data well ahead of the quarter one report in order that you can prepare for the quarter one report coming late April. But we will certainly come back to you with details of when this information is available on our website. So thank you for now. Thank you very much.
Thank you all. And that does conclude our conference for today. Thank you all for participating. You may now disconnect.