Welcome to the Alfa Laval Q1 Earnings Conference Call. At this time, all participants are in listen only mode. There will be a presentation followed by a question and answer session. I must advise you that the conference is being recorded today, Monday, April 25, 2016. I would now like to hand the conference over to your first speaker today, Tom Erickson.
Please go ahead, sir.
Thank you, and welcome to the conference call on our quarterly report. It's a pleasure to have you online. I haven't had the opportunity to meet you at this point in time. I'm sure I will in the future. For those of you who tend to follow the Alfa Laval conference call, I think you will find that we follow pretty much the usual procedure on how these are taking place.
So let me give you initially then just a few overview comments before we go into some further detail on the quarter. We had a clear decline as expected and also as communicating earlier in the order intake on the marine side and also to a degree on the oil and gas upstream business. Apart from those 2, the rest of the Al Talaval business portfolio was stable or slightly in growth mode. So the decline that you see on the numbers are to 100% dedicated on those two areas. Specifically in the business portfolio, the aftermarket business performed well, and we had good organic growth number for the quarter, both year on year and sequentially in the order of magnitude to 3% to 4% organically.
In a situation with declining invoicing and declining order intake, we are obviously looking after our cost situation very carefully as always. And the quarter was characterized by good cost control, both reflecting cautiousness when it comes to spending and hiring, but also active capacity management at a lot of our production units. And obviously, given the situation, the cost management issues going forward will remain on the top of the agenda, and we will continue to perform accordingly. And the final point before we go to the details, as you've seen in the report, we have initiated a strategic review in the group. I will not give any detailed comments as to neither timing nor the specific solutions we are coming to, but I will share a couple of reflections towards the end of our presentation on my initial impressions from Alfa Laval and then at least you see where we are in our reflecting mode.
With that, let's go to the key figures. As you have seen, sales were down 10% year on year and 6% if you exclude the currency effect on the invoicing. The EBITDA margin was stable sequentially at 16.3%, we're down 1% year on year. On the next page,
Ladies and gentlemen, thank you for standing by, and welcome to the Alfa Laval Q1 Earnings Conference Call. At this time, all participants are in listen only mode. There will be a presentation followed by a question and answer session. I must advise you that the conference is being recorded today, Monday, April 25, 2016. I would now like to hand the conference over to your first speaker today, Tom Erickson.
Please go ahead, sir.
Thank you, and welcome to the conference call on our quarterly report. It's a pleasure to have you online. I haven't had the opportunity to meet you at this point in time. I'm sure I will in the future. For those of you who tend to follow the Alfa Laval conference call, I think you will find that we follow pretty much the usual procedure on how these are taking place.
So let me give you initially then just a few overview comments before we go into some further detail on the quarter. We had a clear decline as expected and also as communicating earlier in the order intake on the marine side and also to a degree on the oil and gas upstream business. Apart from those 2, the rest of the Al Talaval business portfolio was stable or slightly in growth mode. So the decline that you see on the numbers are to 100% dedicated on those two areas. Specifically in the business portfolio, the aftermarket business performed well, and we had good organic growth number for the quarter, both year on year and sequentially in the order of magnitude to 3% to 4% organically.
In a situation with declining invoicing and declining order intake, we're obviously looking after our cost situation very carefully as always. And the quarter was characterized by good cost control, both reflecting cautiousness when it comes to spending and hiring, but also active capacity management at a lot of our production units. And obviously, given the situation, the cost management issues going forward will remain on the top of the agenda, and we will continue to perform accordingly. And the final point before we go to the details, as you've seen in the report, we have initiated a strategic review in the group. I will not give any detailed comments as to neither timing nor the specific solutions we are coming to, but I will share a couple of reflections towards the end of our presentation on my initial impressions from Alfa Laval and then at least you see where we are in our reflecting mode.
With that, let's go to the key figures. As you have seen, sales were down 10% year on year and 6% if you exclude the currency effect on the invoicing. The EBITDA margin was stable sequentially at 16.3%, we're down 1% year on year. On the next page, orders received, it is down year on year, and I think the numbers reflect very much the guidance that was given at the end of last quarter. And it's by and large effects for marine when you look at the year on year number.
The rolling 12 month number at this point in time is at SEK 35,000,000,000 What was noteworthy also in the quarter was the very low level of large orders. As you have seen, there was only one order announced in the quarter, was interestingly in Russia, which performed fairly well given the circumstances. And I would say that the limited amounts of large orders, it does reflect a certain cautiousness in the investment climate among our customer groups. Some comments on EBITDA, which as I said was stable sequentially. We had good cost development during the quarter.
We had some positive mix effects, including the increase both in absolute terms and in relative terms of our aftermarket business. On a divisional level, the Equipment division was positive, the Process Technology division was negative, and the Marine division was stable. So that's sort of an overview on the divisional level before we go to some further detail on each one of them. So let's go to the equipment division, which had a stable quarter. We had some variations on the order intake.
It was mainly on the negative side impacted by weak market in the Comforts area, part of the industrial equipment. But otherwise, the business portfolio was stable and the underlying business performed as expected. The positive side with the equipment was clearly the profitability at 15%. That was a good number for the equipment division. It was reflecting a number of years of work on the cost side that paid off.
And we also experienced continued growth in our e channel called Anytime and the work that we've done with channel partners for many years. And that sales channel is establishing itself well and grew in the quarter. On the Marine and Diesel division, the profitability was marginally down to 90% margin. And as communicating, the slowdown was largely related to pumping systems with a lot of pre ordering taking place in last quarter 2015. In fact, both year on year and sequentially, the downturn on the marine side was almost completely relating to the pumping system, whereas the rest of the marine division has remained rather stable up until now.
For the division, orders received, it is 90% down year on year, and I think the numbers reflect very much the guidance that was given at the end of last quarter. And it's by and large effects for marine when you look at the year on year number. The rolling 12 month number at this point in time is at SEK 35,000,000,000 What was noteworthy also in the quarter was the very low level of large orders. As you have seen, there was only one order announced in the quarter, was interestingly in Russia, which performed fairly well given the circumstances. And I would say that the limited amounts of large orders, it does reflect a certain cautiousness in the investment climate among our customer groups.
Some comments on
EBITDA, which as I said was stable sequentially. We had good cost development during the quarter. We had some positive mix effects, including the increase both in absolute terms and in relative terms of our aftermarket business. On a divisional level, the Equipment division was positive, the Process Technology division was negative, and the Marine division was stable. So that's sort of an overview on the divisional level before we go to some further detail on each one of them.
So let's go to the equipment division, which had a stable quarter. We had some variations on the order intake. It was mainly on the negative side impacted by weak market in the comforts area, part of the industrial equipment. But otherwise, the business portfolio was stable and the underlying business performed as expected. The positive side with the equipment was clearly the profitability at 15%.
That was a good number for the equipment division. It was reflecting a number of years of work on the cost side that paid off. And we also experienced continued growth in our e channel called Anytime and the work that we've done with channel partners for many years. And that sales channel is establishing itself well and grew in the quarter. On the Marine and Diesel division, the profitability was marginally down to 90% margin.
And as communicating, the slowdown was largely related to pumping systems with a lot of pre ordering taking place in last quarter 2015. In fact, both year on year and sequentially, the downturn on the marine side was almost completely relating to the pumping system, whereas the rest of the marine division has remained rather stable up until now. For the division, service grew to 40% share of total invoicing of total orders received, which is, by historical standard, a relatively high number in the higher end of where we tend to end up in the business cycles for the Marine Division. Yacht contracting for quarter 1 is still not in a final number, but the early numbers indicating that contracting in the Q1 was low and clearly lower than last year. We do expect for the full year the yard contracting number to end up below last year's numbers of 1300, and the market forecasts are, at this point in time, around 900 vessels.
We have no other opinion on that matter at this moment. Process Technology Division
came in
weak on profitability margin at just below 10%. If you look at the mix in Process Technology, the area that has been in decline has been particularly related to oil and gas upstream, and that affects both the mix negatively, and it also brings down their overall capacity utilization within the division's units. So both of those two effects are impacting the result. At this point in time, the decline in oil and gas has reached a level where we think we've bottomed out, and we are probably going to oscillate around this level before we see any recovery in the market. Although the oil price is stabilizing and improving at this point in time, we believe it's going to take a bit of time before we see any CapEx expenditures having impact on our order intake and revenue numbers.
For PTD, the good news is, was the growth in the service business. It was particularly strong in PTD, and we had a 9% growth year on year organically on the service business, partly supported by a couple of large orders that were taken in the quarter. If we go to a divisional summary of the order intake, you will see on that page that there are a number of minuses and pluses. I wouldn't over interpret those. The overall story is, as I indicated initially, that if you exclude the upstream oil and gas and marine numbers, the entire rest of the portfolio remains at a slightly positive 0.
And of course, there are some variations in the portfolio on a quarterly basis, but there are no big trend issues there other than maybe the fact that specifically the comfort market in industrial equipment was a bit weak in Northern Europe, Russia in Q1. Again, underlying that was a good service margin with order intake of SEK 2,600,000,000 and then almost 35% share of group orders, both record high for the group in absolute terms. And so we are pleased with that development. Finally then, let me make a very brief summary on the regions, which obviously to a large degree reflects the comments that we already made. If I start with Asia, you see negative numbers there sequentially and year on year.
Obviously, they are largely impacted by the Marine segment. So it's the same reason that I already mentioned. However, looking at China, excluding the Marine division, China is growing for us, and it was a good market in the Q1 with stable growth and a good result overall. Going to Europe, Europe was affected by the low level of large orders. So excluding the absence of large orders on the comparison numbers, the rest of the business was stable in Europe.
So we saw no big trend shifts in demand in Europe other than, as indicated, some of the large orders didn't materialize in quarter 1. And then finally, in North America and Americas as a whole, you can see that the sequential order intake in United States and North America was at minus 2%, which indicates that the oil and gas decline for both Canada and United States has leveled off on a low level. We've taken that in our books already, we believe, and the rest of the portfolio stable. Latin America performed well, inclusive of Brazil that grew for us both year on year and sequentially. So from an organic growth point of view, actually, Latin America, inclusive Brazil, was the best news in our portfolio for this quarter.
And with that, I would like to hand over to Thomas for some further details on the financial performance in the quarter. Thank you.
Thank you, Tom. Good afternoon, all of you. So let's move to sales as Tom has covered orders received already. Remember, after quarter 4, I commented that we believe it's reasonable to expect a lower level of sales in quarter 1 compared to quarter 4 due to seasonal variation and a smaller order backlog. As you've seen from the report, we realized sales of $8,200,000,000 in quarter 1.
That is compared to quarter 4, we were down 23% at constant rates. But then comparing with last year, we were down 6 plus percent applying constant exchange rates. In terms of invoice, I would say that we ended up as expected in quarter 1 for sales. Moving on to service. The service activities represented 29.7% compared to 27.6% a year ago and 20
7 percent a year ago. And so we are pleased with that development. Finally then, let me make a very brief summary on the regions, which obviously to a large degree reflects the comments that we already made. If I start with Asia, you see negative numbers there sequentially and year on year. Obviously, they are largely impacted by the Marine segment.
So it's the same reason that I already mentioned. However, looking at China, excluding the Marine division, China is growing for us. And it was a good market in the Q1 with stable growth and a good result overall. Going to Europe. Europe was affected by the low level of large orders.
So excluding the absence of large orders on the comparison numbers, the rest of the business was stable in Europe. So we saw no big trend shift in demand in Europe other than, as indicated, some of the large orders didn't materialize in quarter 1. And then finally, in North America and Americas as a whole, you can see that the sequential order intake in United States and North America was at minus 2, which indicates that the oil and gas decline for both Canada and United States has leveled off on a low level. We've taken that in our books already, we believe, and the rest of the portfolio stable. Latin America performed well, inclusive of Brazil that grew for us both year on year and sequentially.
So from an organic growth point of view, actually, Latin America, inclusive Brazil, was the best news in our portfolio for this quarter. And with that, I would like to hand over to Thomas for some further details on the financial performance in the quarter. Thank you.
Thank you, Tom. Good afternoon, all of you. So let's move to sales as Tom has covered orders received already. Remember, after quarter 4, I commented that we believe it's reasonable to expect a lower level of sales in quarter 1 compared to quarter 4 due to seasonal variation and a smaller order backlog. As you've seen from the report, we realized sales of $8,200,000,000 in quarter 1.
That is compared to quarter 4, we were down 23% at constant rates. But then comparing with last year, we were down 6 plus percent applying constant exchange rates. In terms of invoicing, I would say that we ended up as expected in quarter 1 for sales. Moving on to service. The service activities represented 29.7% compared to 27.6% a year ago and 27% in quarter 4.
That is to say, we got support mix wise from Service in this quarter year on year as well as sequentially. Let me then give you the first forward looking statement. We believe it's reasonable to expect a somewhat higher level of sales in quarter 2 compared to quarter 1. This is explained by the phasing of the delivery of our order backlog as well as a certain seasonality. With that, let's move on to gross profit margin.
We ended the quarter with 37% gross profit margin, slightly above the level of a year ago and an increase sequentially of almost 3%. Then let me remind you what I said 3 months ago. In the near term, we expect adverse effects from volume, load, we expect continued positive FX effects and lower metal prices to provide compensation. The actual means that gross profit margin was influenced by these mentioned parameters as expected. In addition, there was a positive price mix variance sequentially for the group, which is usually the case between quarters 4 and quarters 1.
Let's move on to the next slide to get a bit more into the details of what actually happened with the gross profit margin. We were suffering adverse effects from, 1, a slight negative pricemix effect year on year to do with the declining oil and gas content. And that is to say despite the positive effect in mix from the increase in service. We had a weaker load in certain factories as well as a worse engineering performance due to overspend on some customer projects, the latter has to do with the Process Technology division. FX transaction effects, they provided compensation.
If we look at the sequential development, the relative increase of service, a better mix in capital sales for EQD and Marine and Diesel as well as FX contributed positively, and load and volume gave an adverse effect. However, I think we would like to say there that the adjustments of capacity, they have certainly reduced the adverse effect from load volume in the quarter. Now let me then give you the second forward looking statement. In the near term, we expect adverse effects to continue from volume or load as well as mix. We expect positive FX effects and lower metal prices to continue to provide some compensation.
Let's then start in quarter 4. That is to say, we got support mix wise from Service in this quarter, year on year as well as sequentially. Let me then give you the first forward looking statement. We believe it's reasonable to expect a somewhat higher level of sales in quarter 2 compared to quarter 1. This is explained by the phasing of the delivery of our order backlog as well as a certain seasonality.
With that, let's move on to gross profit margin. We ended the quarter with 37% gross profit margin, slightly above the level of a year ago and an increase sequentially of almost 3%. Then let me remind you what I said 3 months ago. In the near term, we expect adverse effects from volume, load, we expect continued positive FX effects and lower metal prices to provide compensation. The actual means that gross profit margin was influenced by these mentioned parameters as expected.
In addition, there was a positive price mix variance sequentially for the group, which is usually the case between quarters 4 and quarters 1. Let's move on to the next slide to get a bit more into the details of what actually happened with the gross profit margin. We were suffering adverse effects from, 1, a slight negative pricemix effect year on year to do with the declining oil and gas content. And that is to say despite the positive effect in mix from the increase in service. We had a weaker load in certain factories as well as a worse engineering performance due to overspend on some customer projects, the latter has to do with the Process Technology division.
FX transaction effects, they provided compensation. If we look at the sequential development, the relative increase of service, a better mix in capital sales for EQD and Marine and Diesel as well as FX contributed positively, and load and volume gave an adverse effect. However, I think we would like to say there that the adjustments of capacity, they have certainly reduced the adverse effect from load volume in the quarter. Now let me then give you the second forward looking statement. In the near term, we expect adverse effects to continue from volume or load as well as mix.
We expect positive FX effects and lower metal prices to continue to provide some compensation. Let's then move further down the P and L and look at the overhead costs. R and D costs ended at $186,000,000 in the quarter. That is a reduction like for like of 1.1%. If we look at R and D in percent of sales, we were at 2.3% compared to 2.1% a year ago.
In summary, I'd like to say that R and D has been retained to support future sales despite a declining trends in sales of volume, if you like. Sales and admin amounted to 1 point $43,000,000,000 in the quarter, representing an increase of 1.3% year on year. This is an increase explained by salary inflation, but also reflecting a cautious attitude to spending because clearly, if we look at our global presence, the 1.3% increase is substantially less than the average salary inflation for Apo Laval. Sequentially, the sales and admin spend represented a reduction of 6%. I would call that a typical variation between quarters 4 and quarters 1.
Then profit before tax, dollars 1,090,000,000 in a year on year comparison, this reduction is largely explained by the lower invoicing and the resulting lower operating profit. Before I leave the P and L, let me say a few words about the tax line. Taxes ended with a charge of only EUR 219,000,000. This is, of course, well below our guidance for taxes and the explanation is mainly to do with the effects of reduced income tax rates in Norway and Denmark. And for us, this has an impact on the valuation of deferred tax items for step up and goodwill in Danish and Norwegian kroner.
EPS ended almost exactly on last year's level, EUR 206,000,000 despite this lower invoicing, thanks to the just commented lower tax charges. Return numbers, 21.1% 21.2%, respectively, for retirement capital employed and return on equity, very competitive for engineering activities, we argue. Let's talk a bit more about divisional performance. Please note that my comments, they relate to operating margin and what you find on the slide is really comments in relation to the absolute development. If we start off with equipment, we came out higher than last year as well as quarter 4 of the 15.
The sequential improvement is thanks to a combination of FX, positive price mix and lower cost. And this is then partly reduced by the lower volume and equipment division's share of the overall lower load in the supply chains. For Process Technology, operating margin came from a move further down the P and L and look at the overhead costs. R and D costs ended at $186,000,000 in the quarter. That is a reduction like for like of 1.1%.
If we look at R and D in percent of sales, we were at 2.3% compared to 2.1% a year ago. In summary, I'd like to say that R and D has been retained to support future sales despite a declining trends in sales or volume, if you like. Sales and admin amounted to 1 point $43,000,000,000 in the quarter, representing an increase of 1.3% year on year. This is an increase explained by salary inflation, but also reflecting a cautious attitude to spending because clearly, if we look at our global presence, the 1.3% increase is substantially less than the average salary inflation for Apo Laval. Sequentially, the sales and admin spend represented a reduction of 6%.
I would call that a typical variation between quarters 4 and quarters 1. Then profit before tax, dollars 1,090,000,000 in a year on year comparison, this reduction is largely explained by the lower invoicing and the resulting lower operating profit. Before I leave the P and L, let me say a few words about the tax line. Taxes ended with a charge of only 219,000,000 dollars This is, of course, well below our guidance for taxes and the explanation is mainly to do with the effects of reduced income tax rates in Norway and Denmark. And for us, this has an impact on the valuation of deferred tax items for step up and goodwill in Danish and Norwegian kroner.
EPS ended almost exactly on last year's level, 2.06 despite this lower invoicing, thanks to the just commented lower tax charges. Return numbers, 21.1percent21.2percent respectively for return on capital employed and return on equity, very competitive for engineering activities, we argue. Let's then talk a bit more about divisional performance. Please note that my comments, they relate to operating margin and what you find on the slide is really comments in relation to the absolute development. If we start off with equipment, we came out higher than last year as well as quarter 4 of the 2015.
The sequential improvement is thanks to a combination of FX, positive price mix and lower cost. And this is then partly reduced by the lower volume and equipment division's share of the overall lower load in the supply chains. For Process Technology, operating margin came out lower than both last year as well as quarter 4 of 2015. Sequentially, the reduction in margin is due to worse mix in capital sales, a lower load in certain factories that is to a larger degree than in the other divisions as we have some factories specifically exposed to oil and gas. And then we had a worse outcome in engineering due to overspend in some customer projects.
This was then somewhat compensated by lower costs and FX. Finally, Marine came in slightly lower sequential in terms of operating margin at just under 19%. This is explained by the lower sales volume and its share of general load compensated by FX. Let's then move on to cash flow. Cash flow from operations from operating activities amounted to just over SEK 900,000,000, a reduction of of SEK 200,000,000 compared to a year ago.
The explanation is, of course, the lower profit net of taxes paid compensated by a somewhat better development of working capital compared to a year ago. If we look at regular CapEx, we ended just under EUR 100,000,000,000 to be exact. And this is, of course, largely explained by the 2 major investment projects that we initiated during 2015, that is in Denmark and India. In this context, please allow me to remind you to add about EUR 200,000,000 for the full year 2016 compared to 2015 to do with these two projects in Kolding, Denmark and Pune, India. Financial net was a negative SEK 23,000,000 and outcome some SEK 100,000,000 better, and this is entirely related to realized FX differences.
The bottom line is a free cash flow of almost SEK 0.8 billion compared to SEK 0.9 billion a year ago. And the year on year decline is, of course, to do with the lower earnings and compensated by better financial net pay. The effects or the results of this cash flow is that we have brought debt to EBITDAO EBITDA down to 1.51% compared to 2.07% a year ago, so quite a decline in indebtedness. Then a few words about FX. We were positive SEK 93,000,000 totally for the quarter as expected.
We've updated our calculations on forecast for 2016 when it comes to certain exchange rates. We've applied the closing rates as per end of March, calculating the translation effect. But the bottom line is that we remain with a positive total FX effect for the year of some SEK 350,000,000. Then the order backlog. We had a total order backlog of SEK 19,400,000,000 lower than both last year as well as quarter 4 of 2015.
Sequentially, the reduction in margin is due to worse mix in capital sales, a lower load in certain factories that is to a larger degree than in the other divisions as we have some factories specifically exposed to oil and gas. And then we had a worse outcome in engineering due to over spend in some customer projects. This was then somewhat compensated by lower costs and FX. Finally, Marine came in slightly lower sequential in terms of operating margin at just under 19%. This is explained by the lower sales volume and its share of general load compensated by FX.
Let's then move on to cash flow. Cash flow from operations from operating activities amounted to just over SEK 900,000,000, a reduction of SEK 200,000,000 compared to a year ago. The explanation is, of course, the lower profit net of taxes paid compensated by a somewhat better development of working capital compared to a year ago. If we look at regular CapEx, we ended just under EUR 100,000,000,000 to be exact. And this is, of course, largely explained by the 2 major investment projects that we initiated during 2015, that is in Denmark and India.
In this context, please allow me to remind you to add about EUR 200,000,000 for the full year 2016 compared to 2015 to do with these two projects in Kolding, Denmark and Pune, India. Financial net was a negative SEK 23,000,000 and out comes some SEK 100,000,000 better, and this is entirely related to realized FX differences. The bottom line is a free cash flow of almost SEK 0.8 1,000,000,000 compared to SEK 0.9 1,000,000,000 a year ago. And the year on year decline is, of course, to do with the lower earnings and compensated by better financial net pay. The effects or the results of this cash flow is that we have brought debt to EBITDA down to 1.51% compared to 2.07 a year ago, so quite a decline in indebtedness.
Then a few words about FX. We were positive $93,000,000 totally for the quarter as expected. We've updated our calculations on forecast for 2016 when it comes to certain exchange rates. We've applied the closing rates as per end of March, calculating the translation effect. But the bottom line is that we remain with a positive total FX effect for the year of some SEK 350,000,000 Then the order backlog.
We had a total order backlog of SEK 19,400,000,000 at the end of March. This represented approximately 6 months of LTM sales. For shipments in 2016, the backlog amounted to SEK 12,900,000,000 as per end of March. This means a reduction of SEK 2,850,000,000 compared to end of March a year ago. But let me remind you that going into 2016, the order backlog was about SEK 1 point $7,000,000,000 lower compared to the beginning of 2015.
Having said that, let's look at the bridge from whole year sales 2015 to 2016. To start off with $39,700,000,000 of sales last year, dollars 1,700,000,000 negative, as I just said, because of a lower backlog going into the year. Applying the exchange rates as per end of March, we expect a negative translation effect of about $1,400,000,000 for this year, dollars 200,000,000 worse than after December. The small acquisitions, hardly any impact. That gives a subtotal for the known parameters of SEK 36,600,000,000.
Then we're getting to demand as well as price to be considered for the full year sales. It's important for you when you assess the einfrault demand to remember that like for like demand in quarter 1 was some 20% below quarter 1 a year ago. And on an LTM basis, order intake has been approximately 17% to 18% lower than 12 months ago. With regard to prices, we've only made smaller adjustments to prices for standard products at the beginning of the year. With that, I have completed my presentation and give the word back to Tom for the outlook and the closing remarks.
Okay. Thank you, Thomas. So on our outlook, we expect that demand during the Q2 will be on about the same level as in the Q1. On a divisional level, our outlook is for Marine and Diesel and Process Technology on about the same level as in the Q1. And for the Equipment division, our outlook is somewhat higher demand, mainly driven by normal seasonal
effects. Okay. So that was
the financial report and the outlook, and let me just round off this before we start to take some questions with just a few reflections after 6 weeks on the job. And the answer that you are getting now is not what Alfa Laval is going to do in the next 5 years. It's just giving you opportunity to hear where we are as a team and where we
are at the end of March. This represented approximately 6 months of LTM sales. For shipments in 2016, the backlog amounted to $12,900,000,000 as per end of March. This means a reduction of $2,850,000,000 compared to end of March a year ago. But let me remind you that going into 2016, the order backlog was about EUR 1,700,000,000 lower compared to the beginning of 2015.
Having said that, let's look at the bridge from whole year sales 2015 to 2016. To start off with $39,700,000,000 of sales last year, dollars 1,700,000,000 negative, as I just said, because of a lower backlog going into the year. Applying the exchange rates as per end of March, we expect a negative translation effect of about $1,400,000,000 for this year, dollars 200,000,000 worse than after December. The small acquisitions, hardly any impact. That gives a subtotal for the known parameters of SEK 36,600,000,000.
Then we're getting to demand as well as price to be considered for the full year sales. It's important for you when you assess the einfraud demand to remember that like for like demand in quarter 1 was some 20% below quarter 1 a year ago. And on an LTM basis, order intake has been approximately 17% to 18% lower than 12 months ago. With regard to prices, we've only made smaller adjustments to prices for standard products at the beginning of the year. With that, I completed my presentation and give the word back to Tom for the outlook and the closing remarks.
Okay. Thank you, Thomas. So on our outlook, we expect that demand during the Q2 will be on about the same level as in the Q1. On a divisional level, our outlook is for Marine and Diesel and Process Technology on about the same level as in the Q1 and for the Equipment division, our outlook is somewhat higher demand, mainly driven by normal seasonal effects. Okay.
So that was the financial report and the outlook. And let me just round off this before we start to take some questions with just a few reflections after 6 weeks on the job. And the answer that you are getting now is not what Alfa Laval is going to do in the next 5 years. It's just giving you opportunity to hear where we are as a team and where I initially after a couple of weeks in the chair, what I see and hear. And I indicated when I started this that I think I come to a well run company and so is the case.
We have a lot of good things in the group that we have to take care of going forward, whatever changes we decide to do. There is a great deal of competence and a strong culture in the backbone of this company. And as you all know, culture beats strategy, as they tend to say. So we don't want to gamble too much with that. Alfa Laval has a fantastic global sales network, and the strength in the sales muscle is substantial.
The knowledge that has evolved in our sales companies in all local markets around the world is a great asset, and we'll that's another thing that we are going to make sure we take good care of going forward. We have very strong technology platforms. And with technology platforms, I specifically refer to separation, heat transfer and fluid handling, which are the 3 basic core product technologies in our portfolio. We are very likely to continue to develop those 3 in the future. As you know, the aftermarket to service business has been in a long development for Alfa Laval, and I think we've done a good job in covering our installed base in a better way.
And with the infrastructure built up around service networks and spare parts, we have created a big muscle, and we are sure to continue to take good care on that. In fact, the first investment decision that I made in my new role was the approval of the service center in the very promising market of Iran, which will be up and running as of October probably this year. And finally, on the strength side, Al Falaval has succeeded well in the M and A strategy, I think both in terms of the acquisition part, but also the integration part of companies. I find that the big acquisitions that we've made are strong, find a good way to develop within the Alfa Laval brand and the Alfa Laval portfolio. And you can rest assure that the Framo has been the biggest one up to date has performed very well certainly up until today, and we made a very strong 2015, even performing above expectations from management at the time of the acquisition.
So there's a lot of good strength to continue to build on. We also are fairly clear that we have challenges to address. And maybe the first one, the organic growth issue is the number one for good reasons. We have struggled with our organic growth over the last 5 years. It has been below what we would like to see.
And although we have some temporary difficulties in some of our customer segments related to the cyclicality of those businesses, We're going to take a hard look as to ways to find organic growth to develop in a more positive way. I initially, after a couple of weeks in the chair, what I see and hear. And I indicated when I started this that I think I come to a well run company and so is the case. We have a lot of good things in the group that we have to take care of going forward, whatever changes we decide to do. There is a great deal of competence and a strong culture in the backbone of this company.
And as you all know, culture beats strategy, as they tend to say. So we don't want to gamble too much with that. Alfa Laval has a fantastic global sales network, and the strength in the sales muscle is substantial. The knowledge that has evolved in our sales companies in all local markets around the world is a great asset, and we'll that's another thing that we are going to make sure we take good care of going forward. We have very strong technology platforms.
And with technology platforms, I specifically refer to separation, heat transfer and fluid handling, which are the 3 basic core product technologies in our portfolio. We are very likely to continue to develop those 3 in the future. As you know, the aftermarket or service business has been in a long development for Alfa Laval, and I think we've done a good job in covering our installed base in a better way. And with the infrastructure built up around service networks and spare parts, we have created a big muscle, and we are sure to continue to take good care of that. In fact, the first investment decision that I made in my new role was the approval of the service center in the very promising market of Iran, which will be up and running as of October probably this year.
And finally, on the strength side, Al Falaval has succeeded well in the M and A strategy, I think both in terms of the acquisition part, but also the integration part of companies. I find that the big acquisitions that we've made are strong, find a good way to develop within the Alfa Laval brand and the Alfa Laval portfolio. And you can rest assure that the Framo has been the biggest one up to date has performed very well certainly up until today, and we made a very strong 2015, even performing above expectations from management at the time of the acquisition. So there's a lot of good strength to continue to build on. We also are fairly clear that we have challenges to address.
And maybe the first one, the organic growth issue is the number one for good reasons. We have struggled with our organic growth over the last 5 years. It has been below what we would like to see. And although we have some temporary difficulties in some of our customer segments related to the cyclicality of those businesses, We're going to take a hard look as to ways to find organic growth to develop in a more positive way. We live, as you know, in very exciting times, technology wise.
There's a lot of things going on. Sometimes the buzzword digitalization is being used for a lot of different things, but it's true that the development of electronics is very important for our customers and to a degree affects our products and our system solution in the future. It also affects distribution and sales channels. So while I think we've taken good advantage of the development of an e commerce platform, we probably have on the technology side and product technology side some opportunities to think whether we could do more in that area. The resource allocation has been, both in terms of people and in M and A, been driven by the way the market has looked over the last 10 years.
If we look at our footprint and our customer segments today, we need to take a step back and see where is growth coming in the next 5 to 10 years, what are the areas where we will decide to play more and what are some areas where we maybe decide to play less. And that will not only affect the M and A programs, but it may also affect the way we allocate sales resources, R and D and other resources within the group to develop in line with our future goals. And finally, word on complexity. Alfa Laval has grown tremendously since the organization was set up some 12 years ago, And we are now a lot bigger company. We have a lot more products.
We have a lot more companies. And I'm not a big advocate for big reorganizations just for the sake of it. But I think we will look through to find better processes and easier ways and clear lines of accountability to drive our business forward. And let me conclude with that as the four areas which will be under scrutiny as part of our strategic review. And with that, our presentation is at an end, and we hand over for questions.
Thank
you. Your first question comes from the line of Andreas Koski. Please ask your question.
Thank you. Hi. It's Andreas Koski from Deutsche Bank. So I have three questions, please. And the first one is on Process Technology division.
The margin of 9.9% was very low from a historical perspective, and you are referring to mix, volume, load and also project related issues. So two questions on that one. Firstly, if you can quantify what kind of project related issues you had in the quarter? And then secondly, if you look in the backlog, do you see a continued negative mix in capital sales?
Okay. Andreas, if we look at the adverse effect from the cost overruns in individual projects, we're looking at cost to the tune of some SEK 40,000,000 in the quarter. Then secondly, as far as the backlog is concerned, we have seen a decline in oil and gas for a number of quarters now. And of course, the continued decline in all the ink.
We live, as you know, in very exciting times, technology wise, there's a lot of things going on. Sometimes the buzzword digitalization is being used for a lot of different things, but it's true that the development of electronics is very important for our customers and to a degree affects our products and our system solution in the future. It also affects distribution and sales channels. So while I think we've taken good advantage of the development of an e commerce platform, we probably have on the technology side and product technology side some opportunities to think whether we could do more in that area. The resource allocation has been both in terms of people and in M and A, been driven by the way we We need to take a step back and see where is growth coming in the next 5 to 10 years, what are the areas where we will decide to play more and what are some areas where we maybe decide to play less.
And that will not only affect the M and A programs, but it may also affect the way we allocate sales resources, R and D and other resources within the group to develop in line with our future goals. And finally, word on complexity. Alfa Laval has grown tremendously since the organization was set up some 12 years ago, And we are now a lot bigger company. We have a lot more products. We have a lot more companies.
And I'm not a big advocate for big reorganizations just for the sake of it. But I think we will look through to find better processes and easier ways and clear lines of accountability to drive our business forward. And let me conclude with that as the 4 areas which will be under scrutiny as part of our strategic review. And with that, our presentation is at an end, and we hand over for questions. Thank
Your first question comes from the line of Andreas Koski. Please ask your question.
Thank you. Hi. It's Andreas Koski from Deutsche Bank. So I have three questions, please. And the first one is on Process Technology division.
The margin of 9.9% was very low from a historical perspective, and you are referring to mix, volume, load and also project related issues. So two questions on that one. Firstly, if you can quantify what kind of project related issues you had in the quarter? And then secondly, if you look in the backlog, do you see a continued negative mix in capital sales?
Okay. Andreas, if we look at the adverse effect from the cost overruns in individual projects, we're looking at cost to the tune of some SEK 40,000,000 in the quarter. Then secondly, as far as the backlog is concerned, we have seen a decline in oil and gas for a number of quarters now. And of course, the continued decline in oil and gas will mean a smaller content of oil and gas in sales in PTD going forward. So an adverse mix effect because of less oil and gas.
Yes. Thank you. And then secondly, on your outlook, could you please confirm that you are taking an expectation of large orders into account in your outlook? And what do you expect in terms of large orders in Q2?
We have taken that into account when we say that we believe that demand will be on about the same level. And as Tom said, we qualify by saying that we believe marine and PTD will be on about the same level as well. And that is, of course, considering the opportunities for large orders.
Okay. And then lastly, I'm sorry, but I have to ask about the strategic review. When should we expect you to communicate something around this? And also, I sense that you are talking more about a longer term review how to maybe change the company. But do you also feel that you need to adapt the cost base to the weakening demand?
Well, let me give you one clear answer and one highly unclear answer. On your question number 2, you can rest assure that we will address the short and the long term at one go. Regarding the time plan, we will not communicate anything on that specifically at this point in time. We will get back to all of you in a coordinated fashion, but don't expect us to think for 2 years.
Okay. Thank you very much.
The next question comes from the line of Matt Yates from Credit Suisse. Please ask your question.
Hi. Thank you. Just firstly on the sort of regarding something you mentioned on the strategic review and the performance of your organic growth versus end markets, that it had been sort of not where you wanted it to be. I mean, when you talk about improving that, do you think about investing more in new products? Do you think about investing in sales and marketing?
If you could just give a little bit more about how you think about picking up organic growth in this business? That would be the first question.
Yes. I think as I so I tend to be clear on whether I answer questions or not answer questions. This is the questions on strategy and what we're going to do different is something that we're going to work through thoroughly. We're going to be united in the management team of what we feel is the right measures to take. But I think it's fair to share with you the fact that I think both you and we have seen organic growth in the past as a bit of a question mark.
And the first steps that you need to take then is to get your arms around what are the root causes and is there something we can do about it. And we will come back with our view on those topics in due course. But so what you will know at this point in time is that we've seen it and maybe that's enough for now.
Okay. And just the second one would be on the implied Gas will mean a smaller content of oil and gas in sales in PTD going forward. So an adverse mix effect because of less oil and gas.
Yes. Thank you. And then secondly, on your outlook, could you please confirm that you are taking an expectation of large orders into account in your outlook? And what do you expect in terms of large orders in Q2?
We have taken that into account when we say that we believe that demand will be on about the same level. And as Tom said, we qualify by saying that we believe marine and PTD will be on about the same level as well. And that is, of course, considering the opportunities for large orders.
Okay. And then lastly, I'm sorry, but I have to ask about the strategic review. When should we expect you to communicate something around this? And also, I sense that you are talking more about a longer term review how to maybe change the company. But do you also feel that you need to adapt the cost base to the weakening demand?
Well, let me give you one clear answer and one highly unclear answer. On your question number 2, you can rest assure that we will address the short and the long term at one go. Regarding the time plan, we will not communicate anything on that specifically at this point in time. We will get back to all of you in a coordinated fashion, but don't expect us to think for 2 years.
Okay. Thank you very much.
The next question comes from the line of Matt Yates from Credit Suisse. Please ask your question.
Hi. Thank you. Just firstly on the regarding something you mentioned on the strategic review and the performance of your organic growth versus end markets, that it had been sort of not where you wanted it to be. I mean, when you talk about improving that, do you think about investing more in new products? Do you think about investing in sales and marketing?
If you could just give a little bit more about how you think about picking up organic growth
in this business? That would be the first question. Yes. I think as I so I tend to be clear on whether I answer questions or not answer questions. This is questions.
This is the questions on strategy and what we're going to do different is something that we're going to work through thoroughly. We're going to be united in the management team on what we feel is the right measures to take. But I think it's fair to share with you the fact that I think both you and we have seen organic growth in the past as a bit of a question mark. And the first steps that you need to take then is to get your arms around what are the root causes and is there something we can do about it. And we will come back with our view on those topics in due course.
But so what you will know at this point in time is that we've seen it, and maybe that's enough for now.
Okay. And just the second one would be on the implied operational leverage in the quarter. If I look at the sales decline ex FX, it looks like it's about EUR 600,000,000 I then look at the EBITA, the decline ex FX, it looks close to €300,000,000 So kind of implying decremental margins of 53% in the quarter. Consensus, obviously, has that getting materially better through the year. What gives you confidence?
I mean, is there further cost taken out through the year? Is there an improvement in pricing and the backlog? Is there some confidence that we can get that the EBITA declines on top line declines will be less negative than they have been in Q1?
Well, I think I'd like to come back to what Tom said a few minutes ago is that you can rest assured that we will address not only the long term, but also the short term requirements to adjust capacity and adjust cost to a lower level of activity, particularly in marine and oil and gas. So we're certainly adjusting capacities. We are cautious on spending as you have hopefully seen from the outcome in quarter 1.
We might add the comment too that the adjustment in PTD for oil and gas upstream is painful, and we believe we've taken that at this point in time. So sequentially, those effects are probably fully taken, although they may have some, although, decremental or smaller effects as we go by in the quarters in the year compared to the previous year.
Okay. And just the final one would be on, I think the comments at the full year results around the EUR 1,200,000,000 of pumping orders that we didn't have this quarter. That negative should be becoming less as we go through the year. Has anything changed in the market that doesn't give you confidence that we will see some of that negative impact caught up through the rest of the quarters this year? Or is that still the outlook for the remaining quarters this year?
We do not have a materially different view on that particular part of the marine market today compared to what we had 2 plus months ago. Then, of course, the allocation between quarters can vary, but the underlying assumption is the same as 2 plus months ago.
Okay, great. Thank you very much.
Your next question comes from the line of Sven Vaija of UBS Frankfurt. Please ask your question.
Frankfurt. A couple of questions from my side. The first question being on the impact of currency on the backlog. I know you didn't specifically mention a negative impact of backlog revaluation, but is it still fair to assume that there was a slight negative one? Then the second question just coming back on what you said on the pre close call in terms of the activity on the big tickets that we should not see Q1 as being representative.
So would you repeat that? And also I think in the call you said that some of the orders were dependent on when you
Preparational leverage in the quarter. If I look at the sales decline ex FX, it looks like it's about €600,000,000 I then look at the EBITA, the decline ex FX, it looks close to €300,000,000 So kind of implying decremental margins of 53% in the quarter. Consensus, obviously, has that getting materially better through the year. What gives you confidence? I mean, is there further cost taken out through the year?
Is there an improvement in pricing and the backlog? Is there some confidence that we can get that the EBITA declines on top line declines will be less negative than they have been in Q1?
Well, I think I'd like to come back to what Tom said a few minutes ago. He said that you can rest assured that we will address not only the long term, but also the short term requirements to adjust capacity and adjust cost to a lower level of activity, particularly in marine and oil and gas. So we're certainly adjusting capacities. We are cautious on spending as you have hopefully seen from the outcome in quarter 1.
We might add the comment too that the adjustment in PTD for oil and gas upstream is painful, and we believe we've taken that at this point in time. So sequentially, those effects are probably fully taken, although they may have some, although, decremental or smaller effects as we go by in the quarters in the year compared to the previous year.
Okay. And just the final one would be on, I think, the comments at the full year results around the EUR 1,200,000,000 of pumping orders that we didn't have this quarter. That negative should be becoming less as we go through the year. Has anything changed in the market that doesn't give you confidence that we will see some of that negative impact caught up through the rest of the quarters this year? Or is that still the outlook for the remaining quarters this year?
We do not have a materially different view on that particular part of the marine market today compared to what we had 2 plus months ago. Then, of course, the allocation between quarters can vary, but the underlying assumption is the same as 3 plus months ago.
Okay, great. Thank you very much.
Your next question comes from the line of Sven Vaija of UBS Frankfurt. Please ask your question.
Yes, thank you. A couple of questions from my side. The first question being on the impact of currency on the backlog. I know you didn't specifically mention a negative impact of backlog revaluation, but is it still fair to assume that there was a slight negative one? Then the second question just coming back on what you said on the pre close call in terms of the activity on the big ticket that we should not see Q1 as being representative.
So would you repeat that? And also, I think in the call, you said that some of the orders were dependent on when you received the prepayment. But given that you haven't announced anything so far, I guess that this was not really an issue for Q1. And then just the last question on cash flow. Despite the sales reduction, you still had a slight build of working capital.
So is it fair to assume that in the next 9 months, you should have an inflow from working capital reduction? Thank you.
Okay. If we start off with your obviously, your first one, Sven, the revaluation of the backlog. Well, yes, there is a slight negative on the back of changes in exchange rates from end December to end of March. But I mean, it's not material to the kind of extent that we have seen in some quarters historically, particularly related to Framo. Then I didn't quite get your question on the big ticket orders.
I mean, we have seen a low level of large orders in quarter 1. And when we provide our qualification of the outlook for quarter 2, then of course, we've taken the expectations of large order opportunities into consideration. But as you know, we tend to have variations between quarters because it boils down to the decision of one specific customer when that is taken and when the advance payment actually lands in our Till. So variations are not possible to avoid. Then finally, cash flow.
If we look at cash flow, we've seen quite a reduction in accounts receivable. And if you look at it year on year, a quite a reduction on the level. And of course, that is reflecting a lower business volume. If we look at inventory or the net of inventories in Advanced Payments, a slight increase in the net of these 2. And that is to do with, on the one hand, a certain increase of inflow of materials, but less inflow of advanced payments from customers, but very, very small variation.
And if you assume a decline in the business volume, Sven, yes, then of course, there should be a release of the working capital as well. But please remember, we are enjoying substantial advanced payments throughout a cycle in this business.
Thank you.
The next question comes from the line of Lars Brauston of Barclays. Please ask your question.
Yes. Hi. Good afternoon, Tom and Thomas. Just a couple of things from my side on the Marine and Diesel outlook for Q2. Tom, it sounds like it's very much predicated on larger orders here.
Perhaps the marine pumps are coming back a little bit. I wonder whether outside of marine pumps, you can give us some sense of what you're seeing both in the short term and in slightly longer term. I mean, you mentioned obviously vessels contracting very weak in the last sort of 6 months or so. But also outside of that on your offshore segment, what are you seeing here both on pumps and across the broader Alpo and Alfa product portfolios?
Seized the prepayment, but given that you haven't announced anything so far, I guess that this was not really an issue for Q1. And then just the last question on cash flow. Despite the sales reduction, you still had a slight build of working capital. So is it fair to assume that in the next 9 months, you should have an inflow from working capital reduction?
Okay. If we start off with your obviously, your first one, Sven, the revaluation of the backlog. Well, yes, there is a slight negative on the back of changes in exchange rates from end December to end of March. But I mean, it's not material to the kind of extent that we have seen in some quarters historically, particularly related to Framo. Then I didn't quite get question on the big ticket orders.
I mean, we have seen a low level of large orders in quarter 1. And when we provide our qualification of the outlook for quarter 2, then of course, we've taken the expectations of large order opportunities into consideration. But as you know, we tend to have variations between quarters because it boils down to the decision of one specific customer when that is taken and when the advance payment actually lands in our Till. So variations are not possible to avoid. Then finally, cash flow.
If we look at cash flow, we've seen quite a reduction in accounts receivable. And if you look at it year on year, a quite a reduction on the level. And of course, that is reflecting a lower business volume. If we look at inventory or the net of inventories in Advanced Payments, a slight increase in the net of these 2. And that is to do with, on the one hand, a certain increase of in flow of materials, but less inflow of advanced payments from customers, but very, very small variation.
And if you assume a decline in the business volume, Sven, yes, then of course, there should be a release of the working capital as well. But please remember, we are enjoying substantial advanced payments throughout a cycle in this business.
Thank you.
The next question comes from the line of Lars Brauston of Barclays. Please ask your question.
Yes. Hi. Good afternoon, Tom and Thomas. Just a couple of things from my side on the Marine and Diesel outlook for Q2. Tom, it sounds like it's very much predicated on larger orders here.
Perhaps the marine pumps are coming back a little bit. I wonder whether outside of marine pumps, you can give us some sense of what you're seeing both in the short term and then slightly longer term. I mean, you mentioned obviously vessel contracting very weak in the last sort of 6 months or so. But also outside of that on your offshore segment, what are you seeing here both on pumps and across the broader OPPO and Alpha product portfolios?
Yes. Just an overall comment. I don't want to go too detailed into specifically areas. What we can say is that actually in the quarter that there was we had a good development on the boiler side was favorable for us in the quarter. So and as I mentioned, apart from the pumping systems, the portfolio in marine was pretty stable.
And our outlook for the quarter being sequentially stable reflects that we are working off a project backlog in this quarter that was contracted last year. So we don't see any immediate changes versus the last quarter. Offshore is obviously affected by the low investment activity in the oil and gas side, and that was true already last quarter for your information. Then the question of the contracting and its effect on the second half is too early to say. We, in fact, don't know the number of contracts that were made in the quarter yet.
There is a lag time also for registering them and there is quite some volatility between quarters months in this business. So we will have to wait and see. But at current levels, number of contracts are lower than they were last year for sure. And if that continues, it will have impacts on our order intake second half of this year, first half next year. To what degree?
We cannot possibly guide you on in a good way, but that's a trend that we see in the market.
That's clear. Secondly and lastly, if I just could on your reflections as it were, I mean, your reflections in the presentation, really sound and feel like there's sort of more incremental changes and you're looking for sort of areas of improvement. In the report, of course, a review of strategic direction clearly is more of a, should say, profound assessment of where the business is heading. Can you give us some sense or some color around where you see the greatest scope for improvement, whether that's by division, by end market or product area? I appreciate you're somewhat constrained in what you can say about this, but obviously, it did sound like you're going through sort of a larger rethink of the future of the
group. Well, I refrain from going into the content, but it's clear that when you think about an organization of the size of Alfa Laval, we need to be both have a long term 10 year perspective of where is our end segments and end markets going and what do we do as well as being responsive to the more short and medium term situation. So I would just say like this, I'm very comfortable that on the one hand, we need to adjust ourselves into the business environment and context that we are in right now, and that will be will have to be a part of the plan, obviously. But with that said, we're going to develop that in a way that we think it's in line with where we think our business can develop in a sound and good and proper very good and pragmatic way. Yes, just an overall comment.
I don't want to go too detailed into specifically areas. What we can say is that actually in the quarter that there was we had a good development on the boiler side was favorable for us in the quarter. So and as I mentioned, apart from the pumping systems, the portfolio in marine was pretty stable. And our outlook for the quarter being sequentially stable reflects that we are working off a project backlog in this quarter that was contracted last year. So we don't see any immediate changes versus the last quarter.
Offshore is obviously affected by the low investment activity in the oil and gas side, and that was true already last quarter for your information. Then the question of the contracting and its effect on the second half is too early to say. We, in fact, don't know the number of contracts that were made in the quarter yet. There is a lag time also for registering them, and there is quite some volatility between quarters months in this business. So we will have to wait and see.
But at current levels, number of contracts are lower than they were last year for sure. And if that continues, it will have impact on our order intake second half of this year, first half next year. To what degree? We cannot possibly guide you on in a good way, but that's a trend that we see in the market.
That's clear. And secondly and lastly, if I just could on your reflections as it were, I mean, your reflections in the presentation, really sound and feel like there's sort of more incremental changes and you're looking for sort of areas of improvement in the report. Of course, a review of strategic direction clearly is more of a, I should say, a profound assessment of where the business is heading. Can you give us some sense or some color around where you see the greatest scope for improvement, whether that's by division, by end market or product area? I appreciate you're somewhat constrained in what you can say about this, but obviously, it did sound like you're going through sort of a larger rethink of the future of the group.
Well, I refrain from going into the content, but it's clear that when you think about an organization of the size of Alfa Laval, we need to be both have a long term 10 year perspective of where is our end segments and end markets going and what do we do as well as being responsive to the more short and medium term situation. So I would just say like this, I'm very comfortable that on the one hand, we need to adjust ourselves into the business environment and context that we are in right now, and that will be will have to be a part of the plan, obviously. But with that said, we're going to develop that in a way that we think it's in line with where we think our business can develop in a sound and good and profitable way in the next 5 to 10 years. So I think you will see that we are addressing both of those areas in hopefully a very good and pragmatic way. The only color I would give to you apart from that was that I really do not believe in large organizational changes or large flashes just to be appear to be decisive.
I think we're going to take care of the good things in this company, but I'm sure we're going to end up with a couple of profound areas where we want to do a few things differently. But let's see what will come out specifically on those. Thanks.
The next question comes from the line of Daniel Schmidt of SEB Stockholm. Please ask your question.
Yes. Hello, Tom and hello, Thomas. Can I just ask you a follow-up on the Process Technology margin, which was quite below on cost or cost overruns of 40,000,000 tons? And you basically said that the mix will stay unfavorable. And looking forward, should we just sort of exclude these EUR 40,000,000 and then sort of stay with the same mix as we model the coming quarters in terms of profitability for Process Tech?
Well, if we look at the SEK 40,000,000, I mean, we have made an assessment of the outcome of the relevant projects as best we can at this juncture. And of course, we believe and we hope that there's nothing further coming. Looking at the mix, well, we have not seen the full impact of the decline in oil and gas on sales yet. So that will give further adverse mix effects to Process Technology. But again, the EUR 40,000,000, we believe at this point that they will not be repeated.
Okay. So the mix will be unfavorable, but maybe a bit more so in the coming quarters and then sort of a non repeat on the overruns, of course. Is that That's
what I said, yes.
Yes, yes. Okay. Then maybe for Tom, on your strategic review, you mentioned technology transformation as one part. Alpha and maybe there's been some underinvestments. If you when you look at this particular area, does this include ERP systems as well in terms of investments?
I mean, we have not let me guide you in the following way. At this point in time, I would not, let's say, put into a model that we're going to increase capital expenditures or spendings in general. We are a profit oriented company, and we will seek very hardly to find profitable ways to grow as opposed to finding a different way forward. With that said, we are in the beginning of a process. And I know I open up to a lot of question by being explicit about the review work that we are doing, but I thought it was better to communicate it clearly to you.
You could have suspected that anyway. It's not a big cliffhanger, I think, for you that this is what we need to go through. But bear with us for a little while, and we will be very specific on what we want to do down the road. Only color I would give to you apart from that was that I really do not believe in large organizational changes or large flashes just to be appear to be decisive. I think we're going to take care of the good things in this company, but I'm sure we're going to end up with a couple of profound areas where we want to do a few things differently.
But let's see what will come out specifically on those. Thanks.
The next question comes from the line of Daniel Schmidt of SEB Stockholm. Please ask your question.
Yes. Hello, Tom and hello, Thomas. Can I just ask you a follow-up on the Process Technology margin, which was quite below expectations, I think, for Q1? And you mentioned overrun cost or cost overruns of CHF 40,000,000. And you basically said that the mix will stay unfavorable.
And looking forward, should we just sort of exclude these SEK 40,000,000 and then sort of stay with the same mix as we model the coming quarters in terms of profitability for Process Tech?
Well, if we look at the $40,000,000 I mean, we have made an assessment of the outcome of the relevant projects as best we can at this juncture. And of course, we believe and we hope that there is nothing further coming. Looking at the mix, well, we have not seen the full impact of the decline in oil and gas on sales yet. So that will give further adverse mix effects to Process Technology. But again, the EUR 40,000,000, we believe at this point that they will not be repeated.
Okay. So the mix will be unfavorable, but maybe a bit more so in the coming quarters and then sort of a non repeat on the overruns, of course. Is that
That's what I said, yes. Yes,
yes. Okay. Then maybe for Tom, on your strategic review, you mentioned technology transformation as one part where I understand it there is more to be done in ALFA and maybe there's been some underinvestments. If you when you look at this particular area, does this include ERP systems as well in terms of investments?
I mean, we have not let me guide you in the following way. At this point in time, I would not, let's say, put into a model that we're going to increase capital expenditures or spendings in general. We are a profit oriented company, and we will seek very hardly to find profitable ways to grow as opposed to finding a different way forward. With that said, we are in the beginning of the process. And I know I open up to a lot of question by being explicit about the review work that we are doing.
But I thought it was better to communicate it clearly to you. You could have suspected that anyway. It's not a big cliffhanger, I think, for you that this is what we need to go through. But bear with us for a little while, and we will be very specific on what we want to do down the road.
Sure. All right. Thank you.
Can we take a final question, please?
Your final question comes from the line of Nathalie Folkman of carnegies.com. Please ask your question.
Thank you very much for taking my question. Nathalie from Carnegie. I have just a couple of them. You mentioned cost adjusting capacity and cost savings. Do you think that cost for cost savings and adjusting capacity will fit into the normal frame of your cost budget?
Or do you think that you will, going forward, might need additional cost to take out of the to adjust your cost structure and cost to the new volumes?
Yes. Well, Nathalie, we've said that we're continuously adjusting. And to the extent that there will be something on top of continuously adjusting, we will, of course, communicate that to all of you at the same time if and then when this is concluded.
Okay. Understand. Then just a question on the E channel. Could you just share with us how large parts of your current equipment sales are going through the E channel? And also how the margin structure looks at this distribution channel?
Is it better, worse or in line with the rest of division?
Well, it's a good question. The in terms of the share of e commerce on the equipment division, it is at around 30 plus percent at this point in time. And it is still growing and we still haven't implemented it in all markets. There are special local conditions in many places, which although technically we could perfectly well run it globally, there needs to be commercial conditions
and taxation issues to be handling this. So we have some
work to do to roll it out steady. Comment specifically on the margin, but let me just give you an indication that we don't see it as a below average margin business for EQD.
Thank you. And just on refining, you got you mentioned in the report that you got some good refining orders. Are there any similar or common characteristics from your customers who order refinery or had the refinery orders geographically? Or was the majority of them integrated? Just kind of to understand who are the customers behind ARC.
I mean, from the top of, at least, my head, Tom, I cannot say exactly who the customers were for the refinery orders in the quarter. But let's say that we realized some of what we had in the tender backlog, obviously, and I think that's a good thing as such. I'm sorry, we don't have the customer names.
No, not specifically. And I think we feel that it's a fairly broad based ordering pattern. The big one we announced was in Russia, but we see now tendering activity and in general that I don't need to see any particular geographical aspects there. They tend to be a bit all over the place, I think. But we may need to come maybe we can come back at a later time.
We haven't seen the signs of a geographical difference right now. Okay. With that, I think we're done with the Q and A. I'd like to thank you all for participating in this meeting and wish you a good day. Thank you.
That does conclude the conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.
All right. Thank you.
Can we take a final question, please?
Your final question comes from the line of Nathalie Folkman of carnegies.com. Please ask your question.
Thank you very much for taking my question. Nathalie from Carnegie. I have just a couple of them. You mentioned cost adjusting capacity and cost savings. Do you think that cost for cost savings and adjusting capacity will fit into the normal frame of your cost budget?
Or do you think that you will, going forward, might need additional cost to take out or to adjust your cost structure and cost to the new volumes?
Yes. Well, Nathalie, we've said that we're continuously adjusting. Course, communicate that to all of you at the same time if and then when this is concluded.
Okay. Understand. Then just a question on the E channel. Could you just share with us how large part of your current equipment sales are going through the E channel? And also how the margin structure looks at this distribution channel?
Is it better, worse or in line with the rest of division?
Well, it's a good question. The in terms of the share of e commerce on the equipment division, it is at around 30 plus percent at this point in time. And it is still growing and we still haven't implemented it in all markets. There are special local conditions in many places, which although technically we could perfectly well run it globally, there needs to be commercial conditions and taxation issues to be handling this. So we have some work to do to roll it out steady and we will continue to do so.
We will not comment specifically on the margin, but let me just give you an indication that we don't see it as a below average margin business for EQD.
Thank you. And just on refining, you got you mentioned in the report that you got some good refining orders. Are there any similar or common characteristics from your customers who order refinery or had the refinery orders geographically? Or was it independent? Or was the majority of them integrated?
Just kind of to understand are the customers behind ARC.
I mean, from the top of at least my head, Tom, I cannot say exactly who the refinery orders in the quarter. But let's say that we realized some of what we had in the tender backlog, obviously, and I think that's a good thing as such. I'm sorry, we don't know the customer names.
No, not specifically. And I think we feel that it's a fairly broad based ordering pattern. The big one we announced was in Russia, but we see now tendering activity and in general that I don't need to see any particular geographical aspects there. They tend to be a bit all over the place, I think. But we may need to come maybe we can come back at a later time.
We haven't seen the signs of geographical difference right now. Okay. With that, I think we're done with the Q and A. I'd like to you all for participating in this meeting and wish you a good day. Thank you.
That does conclude the conference for today. Thank you for participating. You may all disconnect. Speakers, please