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, at which time, if you wish to ask a question, please press star 1 on your telephone. I must advise you that this conference is being recorded today, Tuesday the 31st of January, 2017. I would now like to hand the conference over to your first speaker today, Mr. Tom Erixon. Thank you. Please go ahead.
Good morning, and welcome to our Q4 update. Let me start by saying that this is a bit special perhaps. We are closing 2016 today, and we are closing our old operating structure, our divisional structure that we've been reporting to you for many years. We are as of January 1, operating in a new one, as you are well aware. Let's take some highlights on Q4, 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 order side, which we indicated to you with our pipeline already back in the last quarterly update.
EQD continued well, closing the year strongly on growth and orders, but also with the good profitability improvement for the year. 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. Given the circumstances, a good final quarter in 2016. Second 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. We saw that focus paying off in the quarter, partly on the S&A side, where we are 3% down versus Q4 last year.
We contribute that apart from cautiousness on the spending side, also the early effects of our restructuring program, despite the fact that we continue to increase our investment into R&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. We've seen a stable gross margin also into Q4, despite some negative absorption effects with the lower activities in the business overall. 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.
We are in quarter four charging the remaining SEK 400 million one-time charge as part of the restructuring program of SEK 1.5 billion in total. That was charged to the fourth quarter. That means that all of our one-off charges are now taken within 2016. 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 COG side with the footprint program is clarifying. We have indicated in the report that the total savings from our restructuring program overall will be in the magnitude of SEK 500 million on a yearly basis. 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 fourth quarter, 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. That is the main driver of the decrease in the marine margin in quarter four. Although there are some volume effects on the margin, the vast majority of the margin decline in marine is attributed to this. With that, let me go to the highlights in the quarter. You've seen, we've announced a number of large orders. 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 PTD area. I would also say that on large projects below EUR 5 million, the activity was fairly good overall supporting the order intake growth of PTD in the quarter. 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, 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 two technologies applicable in this area.
We are early in this approval process as one of three, moving forward in the sector. As we have said, and we'll be back to that, we don't have any particularly effects in the order books on the ballast water approval of US Coast Guard, nor on the SOx regulations, spilling into the order book of Q4 2016. As we said, in the capital markets, 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 of the Q4 order intake. It is a negative number year-on-year. 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 SEK 1.2 billion and way above the normal order intake level for pumping systems.
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 2015, but from an historical comparison, the return of the large project business in Q4 was relatively meaningful. Going to the EBITDA margin. We landed, obviously, in absolute terms due to good invoicing on a positive number compared to the quarters prior in 2016. 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 onto 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. 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 S&A cost, although it is up a little bit sequentially as it normally is due to seasonality. Compared to the fourth quarter 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. 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 fourth quarter.
The year-on-year comparison is across the board positive, except from service, which has been flat. 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 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.
We are way up to speed again, and we've dealt with all our issues there. 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. Also those have been dealt with, so we are more or less eliminating them as we speak. In Q2, we will be operating on a normal level with higher capacity addressed in a couple of our units. 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. 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. We expect that the final number will be above 500, but most likely not above 550. It is way below the forecast at the beginning of the year. Market 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 2017, 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. There are a range of reasons for that. One is that the ship mix, especially on the cruise side, was very strong. 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.
We 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. It may be natural, but nevertheless it was a recovery of a certain order level in the pumping system as well. 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, still the Q4 was a return to a somewhat better number for year-end and certainly sequentially a clear improvement compared to Q3. 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. Our comment to that is that a relatively stable oil price in the order magnitude of $55 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 than we saw early in the year. 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 time when it hits the order books of Alfa Laval. I would not overestimate the impacts of the better sentiment in the sector. 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. With that said, a little bit of a better situation in Q4. 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.
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. 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-over-year. I would say there are two 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. 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. 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 fourth quarter. 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. Eastern Europe, including Russia, was a good year for us. Nordic, still negatively affected of 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 attributed to the fact that the marine order intake improved in fourth quarter versus third quarter. You see the 14% positive being the main driver of the change, just as well as the -41% is largely attributed to the marine sector. I 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. 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.
Finally, North America, the numbers overall are impacted negatively on Canada, which had difficult years on large projects and on oil and 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. Reasonable pace in the U.S. business and reasonable stability. Let me with that, take you to our top markets to give you a little bit of flavor for what happens in individual places. In the United States you see 2016, what we said, a level off on a low level of the oil and gas business. The negative effects of that started to be out of our order books, especially at the end of the year. We'll see where that goes going forward.
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 a result of the marine industry. If you want a real example of the marine industry impact, you see it in our numbers in South Korea. It was in 2015 our third biggest market, and relative to 2015, almost two thirds of our business in Korea disappeared in 2016. This is of course a huge impact from the marine industry on our order books in South Korea.
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. Clearly, this was a big item for us in the year. All in all, if you compare, it's about 2.7 billion SEK in orders that we dropped in South Korea alone related to this issue. 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, I commented on before. Japan down a little bit, relatively stable in Japan. The marine business is also in the order books for the shipyards in Japan, is a bit more stable than in other places. We see a smaller impact in Japan as a whole.
Southeast Asia, I would say vegetable oil issue, otherwise Southeast Asia is stable plus. 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 strong finish in India after a weak start of the year. At least we walked out of the year in India on a strong note in a Q4 that was good. I think with that we covered the business review from an order point of view, and I would like to hand over for Thomas for some further details on the financials. Thomas?
Thank you. Good morning all of you. Let's start off with a few comments on our sales development. 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 invoicing in quarter 4, somewhat higher than that of quarter 3, mainly because of the phasing of delivery of the backlog and giving due consideration to sideways development of demand for short lead time items and services. We ended up with sales of SEK 9.9 billion. In comparison with quarter 3, that means an uptake of 12% at constant rates. 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.
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 represented 30% of sales in the quarter, exactly, as a matter of fact, the same as in quarter 3. 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.
With that, let's move on to gross profit margin. Gross profit margin in the quarter was 34.3%, an increase of 0.1% year-on-year, and a reduction sequentially of 1.4%. Coming back to my forward-looking statement after quarter 3, 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 and positive PPVs. The actual outcome for quarter 4 means that gross profit was not influenced by an increased share of capital sales, as I mentioned before, but for the remaining parameters, gross profit margin developed in the expected direction. 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 costs in certain deliveries in marine, 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, initiatives on the purchasing side, they delivered. Of course, we also got support from FX transaction effects. Let me then move on to the second 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 look further down the P&L and talk a bit about the development of our overhead costs. R&D ended in the quarter at SEK 232 million, an increase year-on-year, like for like, of almost 14%.
If we look at R&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&D has been a conscious increase, a very conscious increase to increase R&D efforts to support a positive organic development going forward. Let's get to Sales and Admin. We ended in the quarter at SEK 1.53 billion, representing a reduction year-on-year, like for like, of almost 3%. Again, as Tom already commented, an indication that our efforts to save on cost and adapt to market circumstances is really having an effect. Of course, this is coming from a reduction in headcount as well as savings on other items in the S&A area.
If we move further down the P&L account, profit before tax ended at only SEK 877 million, a sizable reduction year-on-year from the almost SEK 1.4 billion a year ago. Of course, this decline is mainly explained by the one-off charge of SEK 400 million in the quarter and the reduction in sales volume of SEK 1 billion. 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&L as such, taxes ended with a charge of SEK 261 million. Looks high compared to the profit before tax of under SEK 900 million.
The combination of that, we are not having any tax effect from the write-off of goodwill being part of the SEK 400 million one-off charge, and this is partly compensated by lower deferred taxes from a tax rate cut in particularly Norway, in fact. Going forward, we maintain the 28% guidance. Connected to the P&L, EPS ended lower than last year at SEK 146 million, of course, explained again by one-off charges and the lower volume. 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. 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 three, there we took the second step in quarter four.
Decisions were taken for the remaining elements of this program, giving a charge of SEK 400 million, out of which SEK 100 million is write-offs, and consequently a non-cash item. For the rest, you see that the very vast majority, almost all of it, relates to footprint adjustments, SEK 285 out of the remaining SEK 300 million. If we look at the one-off charges for quarter three and quarter four combined, the total charge is SEK 1.5 billion, SEK 700 write-offs, so non-cash, SEK 380 million of the charges relates to adjustments in the overhead area, predominantly sales and admin, and SEK 420 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 comes from the overhead side and 550 from cost of goods.
Finally, on savings, a total of SEK 500 million, SEK 300 for sales and admin, and SEK 200 in the cost of goods area. What about the implementation then? 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 SEK 500, that is to say SEK 375 million by the end of this year. We also believe that we will have 100% of the program implemented by the end of 2018. Of course, 2018 implementation is entirely to do with the footprint initiative within this program. That, of course, means we will only have the full SEK 500 million in the P&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. As far as charges are concerned, this is closed by now. Let me 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 marginally higher overhead costs at a 14% EBIT margin. Process Technology ended lower than last year, but better than quarter three. 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 finally, slightly higher costs.
It should be noted that it is a meaningful improvement on quarter three on the journey back to historical performance levels for these businesses. Let me finish off with Marine. We came out lower than both last year as well as quarter three. Mainly, if we look at the absolute decline of some SEK 350 million, the main reason is lower volume. We also had to recognize one-time costs in the quarter. These one-time costs, they correspond to approximately 400 basis points out of the total decline sequentially of some 500 basis points in margin. 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. We are also making changes in the supply chain outside of the overall restructuring program that influenced the profit in the quarter.
Total effect corresponding to 400 basis points, underlying a limited decline from quarter three. Let's move on to cash flow. Cash flow from operations amounted to just over SEK 1.9 billion in quarter four. 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 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 SEK 187 million, and this refers to the acquisition of the remaining minority in Alfa Laval India Limited. The formerly listed company is now a wholly owned subsidiary of the Alfa Laval Group.
Finally, financial net positive SEK 129 million, an outcome SEK 73 million better than last year, explained by a combination, partly of lower interest paid, very much more so favorable FX differences. Free cash flow SEK 1.8 billion in the quarter compared to SEK 1.65 billion a year ago. For the full year, a free cash flow of SEK 4.5 billion, a reduction of only SEK 300 million compared to 2015, despite a reduction in EBITA of SEK 1.25 billion. 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 EBITA of 1.81 compared to 1.56 a year ago. If I exclude the one-off charges, we're in fact back to about 1.5 to EBITDA. Continued good level of deleveraging. FX effects positively quarter with SEK 141 billion.
No doubt an outcome below our expectations, as far as translation effects are concerned. This is attributed to an adverse translation effect on working capital. The strengthening of the US dollar, where we have handsome advance payments on the marine side, that caused a one-off adverse translation effect. Of course, assuming a continued strong US dollar, this effect will come back as increased invoicing and increased EBITA 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 SEK 275 million totally. Our backlog, SEK 16.9 billion at the end of the year, representing just under six months of LTM sales. For shipment in this year 2017, the backlog amounted to SEK 12.9 billion.
This is a reduction of SEK 2.7 billion 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 SEK 35.6 for 2016. Again, the lower backlog of SEK 2.7, a negative one. Applying the closing rates on in-route sales, we anticipate a positive translation effect to the tune of SEK 0.6 billion. This gives us a subtotal of SEK 33.5 billion. 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-route orders in 2017 compared to 2016. This, of course, may change. Finally, with regard to prices, we've only made small adjustments to compensate for recent metal price increases.
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. With that, back to Tom for the outlook and the closing remarks.
Thank you, Thomas.
As you may appreciate, we've closed the year based on our old structure, and we're moving into a new divisional structure. 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. Let me make the following comments based on that. As a whole for the group, we expect demand in the first quarter to be somewhat lower in the fourth quarter. 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.
We expect fewer large orders in the fourth quarter, and for the rest of the business, an unchanged or somewhat lower demand in the base business. 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. With that, we close the presentation. We will have 15 minutes for Q&As, and I 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 session. If you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, you may press the pound or hash key. Once again, it is star and one for any questions. Our first question comes from the line of Klas Bergelind. Please ask your question.
Yes. Hi, Tom and Thomas. It is Klas from Citi. A couple of questions, please. Firstly, can I come back to the cost savings? We have SG&A down 3% in the quarter. How much was this in PTD? You are obviously ahead of the plan. Is there not an upside risk here that you keep beating on the OpEx side? I appreciate that COG savings always a bit more tricky to realize, but aren't your OpEx savings a bit conservative? 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? The final question is on M&D and the margin. Can we come back to the impact from the one-timers, 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? If you could also comment on whether you had any pure mix impact from lower deliveries in Frank Mohn.
Okay. If I understood your first question correctly, you are of the opinion that the OpEx savings are conservative, particularly attributed to process technology. Let me just repeat that our expectation is that we will realize SEK 300 million of savings out of the S&A line. That's our expectation as far as this program is concerned. That's really it. If we then look at the process technology margin, we had an improvement sequentially, and I think that is evidence that measures taken to balance the NS activities and solve the problems related to certain project deliveries, they are getting sorted out. 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. 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 Frank Mohn, the backlog here, how much are we down and how much will it weigh on the mix going forward? Obviously, it's a higher margin in Frank Mohn.
As we get further into 2017, as we gradually get into the year, we will see declining revenues from Frank Mohn. There is no substantial impact really in quarter four compared to, say, quarter 3 of 2016. Yes, we will see declining deliveries in Frank Mohn in 2017.
My final follow-up is just to come back on the cost savings. What I meant was at the 3% like for like down in S&A in the quarter, this is obviously on top of the SEK 300 million, or should we include that within the SEK 300 million OpEx? I.e., if the discretionary spend that can come on top of the SEK 300 million.
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 three to nine 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. 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. 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 EUR 800 million on a yearly pace. We are over 30% on service. Obviously, by the sheer numbers, and given that I think we were up at the pace of SEK 1.4 billion, at over SEK 1 billion in CapEx only on the marine side two 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.
Of course, we should probably expect that over a period of time now into 2017, 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. 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 a 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. For the full year, we ended behind in service, above in PTD and equal on ETD. Our service revenue in absolute numbers was flat in 2016. We have not given a guidance, only the fact that we saw an improved situation in Q4.
Okay. Just very last one. You mentioned within marine that we were 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 profit. 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.
Yeah. We hear you.
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. I just wonder if you could quantify what the savings were in the quarter.
The savings from the program, we are not really seeing any savings in the cost of goods area from the reorganization and restructuring program. We're only in the starting of this. We have, of course, gone into implementation of a few of these individual situations, but not really any impact on cost of goods. We've 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 U.S., for instance. They are, if not empty, running at a very, very low pace at this juncture. We have swings and roundabouts in this context, but load is certainly a factor.
Savings in SG&A?
Savings in SG&A, again, down sequentially some 2.7% like for like. 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. We have also held back on replacement of people leaving the organization. We have a decline of some 200, 250 FTEs quarter on quarter sequentially. Of course, that is an effect and a general cautiousness on spending. That is what it takes when we see this kind of decline in revenue.
Yeah, okay. You could say that most of the sequential SG&A decline was related to the announced restructuring program.
That's certainly an important contributor, yes. General awareness that where we are.
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 cost, they were almost net zero. Could you give any guidance on what to expect in financial net in 2018?
I think on the back of our net debt, it's fair to assume an interest net in the order of, say, SEK 30 million negative per quarter.
Thank you. 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?
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. What 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. You should assume, looking back and looking forward, that we are, as we go forward, taking some cost 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 SEK 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. We think that the measures that we are taking in Q4 are part of ordinary business, and you should consider it such.
Of course, the effects are marketable in this quarter, and therefore we point it out very clearly so we understand what's behind.
Did you mention which product group this was related to?
No, we did not. We stay a bit low on that.
Okay. Thank you very much.
Thank you. We take a last question. We're going to have to go. Please.
Okay. Thank you. Our last question is coming from Sven Weier. Please ask your question.
Good morning from my side as well. If I may follow up on your comments on the cruise side of Marine. 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. 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 was wondering if there's still a tail of other cruise ships that the order needs to be passed on to yourself. 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 a one-off project there? Thank you very much.
Let me make a comment on the scrubber side. 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 SOx will impact that market. 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.
There are some uncertainties on how the volume development will look there, 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, this is back to the question of how mathematical you want to be on when the ship is signed and when the order is coming. We record those orders when down payments are being made. Today, if you book an order for cruise in Europe, you will have deliveries probably 2023 or early as 2022. There's a four or five-year order backlog on the shipyard. I think you need to be a little bit cautious in terms of how you look at the six months order, the contracting level for cruise versus our order intake.
There is a healthy cruise business pipeline in the shipyards 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, our indication on marine as a whole is similar or somewhat lower, and that's overall where we stand on that.
Okay. Thank you.
We are unfortunately forced to close. We'd like to thank you. Thank you for the years in our PDD and EQD structure. We look forward to, and maybe you want to give a comment on the preparation for next quarter report.
Well, as I mentioned already at the Capital Market Day, we will make sure that you have some historical pro forma data well ahead of the quarter one report in order that you can prepare for the quarter one report coming late April. We will certainly come back to you with details of when this information is available on our website. Thank you for now.
Thank you very much.
Thank you all. That concludes our conference for today. Thank you all for participating. You may now disconnect.