Welcome to the Alfa Laval Q4 earnings call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Tuesday, the 2nd of February 2016. I would now like to hand the conference over to your speaker today, Lars Renström. Please go ahead.
Good morning, and most welcome to our presentation. I will start by highlighting two matters. Firstly, the order intake was SEK 9.4 billion, a sequential upturn of 9%, mainly explained by an exceptionally strong order intake for marine pumping systems, driven by the shipowners pre-ordering. This is expected to influence the first quarter negatively concerning demand for pumping systems with about SEK 1.2 billion compared to the fourth quarter. The other marine business is expected to be unchanged. Secondly, the full year 2015 was a record year in many aspects. Invoicing and operating result increased with 13% and 16% respectively to new record levels, and earnings per share rose 30%. Further, Alfa Laval continues to deliver very strong cash flows that took down the ratio net debt to EBITDA to slightly above 1.5. Let's take a look at the key figures. Orders received in the quarter declined 10% to SEK 9.4 billion.
Net sales was unchanged at SEK 10.8 billion. Adjusted EBITDA dropped 10% to SEK 1.8 billion, and adjusted EBITDA margin reached 16.2%. For the full year, orders received rose 1% to SEK 37.1 billion. Net sales grew 13% to SEK 39.7 billion. Adjusted EBITDA increased 16% to SEK 6.8 billion, and adjusted EBITDA margin reached 17.1%. Next slide. The board of directors proposes a 6% increase of the dividend to SEK 4.25. Now we move over to orders received and margins. Orders received on rolling 12 months reached SEK 37.1 billion. In the quarter we saw a decline of 11% at constant exchange rates. You see that the level of large orders is quite high, SEK 815 million, since some orders were pushed from the third to the fourth quarter.
You should also bear in mind that in the fourth quarter 2014, order intake was inflated by SEK 1 billion coming from the revaluation of Frank Mohn AS's backlog due to the weakening of the Norwegian krone versus the US dollar. If we adjust for that, order intake was unchanged. Moving over to the order analysis. There you find that year-on-year, we declined with 11% organically. Currency effects were plus 0.7%, giving a total of minus 10.3%. Sequentially, the organic development was plus 11%. Currency effects were minus 2.4%, giving a total of 8.5%. Next slide. Adjusted EBITDA margin reached 16.2%. In absolute numbers, it is our third-best quarter ever. Let's move on and take a look at the highlights in the quarter. In process technology, large orders of in total SEK 615 million were booked with a good mix of applications like food, beverage, power, gas processing, refinery, and petrochemicals.
In Marine and Diesel, Framo booked two offshore orders for the North Sea. Only one SOx order was booked since the low oil price has reduced the willingness to invest. Order intake for SOx for the whole year 2015 fell 60% compared to the previous year. In 2016, we expect demand to remain on about the same level. Moving over to the development per segment. We had 11% negative organic growth year-on-year in the quarter. In Process Technology and Equipment, service was stable while we had a minor decline in Marine and Diesel. In Process Technology, the capital sales segments, Food and Life Science, and Water and Waste had double-digit growth, while Energy and Process declined.
In Marine and Diesel, capital sales segment pumping systems had an exceptional growth thanks to a pre-buying effect due to the new NOx emission legislation that is implemented from the 1st of January, while the other segments were affected by lower yard contracting during 2015. In Equipment, Sanitary and OEM were stable, while Industrial Equipment declined. Let's take a look at the development per division. Now all comments are sequential. We start with Equipment that was unchanged. Industrial Equipment was affected by Russia, as well as the ongoing transfer from direct to channel sales. Sanitary saw good growth from customers in both Food and Pharma. OEM saw order growth for traditional products, while demand for products for construction equipment declined. Moving over to the Marine and Diesel Division. There we see that segment Marine and Diesel Equipment was affected by lower yard contracting earlier in the year.
Marine and Offshore Systems saw higher marine demand. Marine and Offshore Pumping saw extraordinary growth for cargo pumping systems due to pre-buying, as already mentioned. Service saw higher spare parts activity and demand for pumping systems service grew as well. Moving over to Process Technology. There, segment Energy and Process was affected by the oil and gas sentiment, and we had some cancellations. Demand from petrochemicals remained on a good level. Food and Life Science was stable on a good level with strong growth in Protein and Brewery, while Vegetable Oil and Food declined. Service was stable. In the hydrocarbon chain, Up and Midstream declined, while Downstream demand was strong. Next slide. For the full year, in Equipment, all segments except Industrial Equipment were unchanged. In Marine and Diesel Division, the capital segments were down due to lower yard contracting in 2015, while service was unchanged.
In Process Technology, Food and Life Science, as well as Water and Waste were up, while Energy and Process declined significantly, mainly due to the subdued demand from oil and gas that also affected service. We move over to the geographical development. Here you see the development year-on-year in the quarter at constant rates. Four regions have significant declines, and the drop in oil and gas prices is the common denominator. In Western Europe, the decline of SOx retrofits contributes as well. The macroeconomic challenges that Brazil and Russia are facing significantly affect their regions. In Nordic, we have a substantial positive impact from two large offshore orders. Asia remains stable, supported by Framo cargo pumping systems. Let's take a look at the regions. Now all comments are sequential. In Asia, there was an extraordinary demand for Framo pumping systems. Excluding pumping systems, orders were unchanged.
We were pleased to see that base business grew. Energy and Process was lifted by a large petrochemical order, and Marine & Offshore Systems did well. South Korea and Japan did the best, while China declined due to a non-repeat order. Demand in China was mixed, with customers still in a wait-and-see mode. We are pleased to see that India grew 15% for the full year. Moving over to Europe. In Western Europe, including Nordic, we had a positive development for large orders, as well as base business and service. In Central Eastern Europe, Russia continued to be negatively affected by oil prices and the sanctions. In the region, both base business and large orders declined. We were pleased to see that our focus on service generated strong growth. Moving over to the Americas.
In North America, there was a positive development in the U.S. for both large orders and base business. In the hydrocarbon chain, there was a generally positive development in mid and downstream. In Latin America, Brazil had a weak development, mainly due to cancellations in oil and gas. Next slide. For the full year, the regions with double-digit decline have the drop of oil and gas prices as common denominator. Macroeconomic challenges of Brazil and Russia have resulted in an order decline of 50% and 30%, respectively. The acquisition of Framo has affected Nordic and Asia positively. Oil and gas prices, as well as lower demand for SOx systems, has negatively impacted Western Europe. Now I hand over to Thomas for the financials.
Good morning, all of you. As Lars has covered orders in depth, let's talk a bit about sales. To begin with, let me remind you of what I said literally after quarter 3. I said, "We believe it's reasonable to expect a higher level of sales in quarter 4 compared to quarter 3. However, the sequential decline in orders during 2015 is expected to result in lower in-for-out orders in quarter 4 compared to last year. In addition, I would also like to mention that the likelihood of delays in deliveries initiated by customers, we believe, is somewhat greater this year compared to a year ago." As I'm sure you have seen from the report, we realized sales of SEK 10.8 billion in the last quarter. That is an increase of about 12% compared to quarter 3 at constant rates.
It's also a decline of about 2% at constant rates compared to quarter 4 of 2014. We were, I would argue, coming out slightly better than our prediction, as there were no material delays in deliveries demanded from customers, and as Process Technology and Framo delivered somewhat above expectations. If we look a bit deeper at service, the service activities represented 27% of revenues. That is compared to 26.2% a year ago and 26.1% in quarter 3. That is to say, causing a certain positive mix effect. However, the content of service, understood as service hours versus parts, was higher than earlier, having a counter or an adverse effect. Let me finish off my comments on revenues with the first forward-looking statement. We believe it's reasonable to expect a lower level of sales in quarter 1 compared to quarter 4.
That is due to a seasonal variation and, of course, a smaller backlog going into 2016 compared to when we went into 2015. Let's move on to gross profit margin. We delivered 34.2% in gross profit margin in the quarter. This is almost exactly the same level as a year ago and a decline of 1 percentage unit sequentially. Let me again remind you what I said after the quarter 3 report. I said, "In the near term, we expect adverse effects from mix due to higher capital sales and from a somewhat lower load in some factories. We expect positive FX effects and lower metal prices to provide some compensation." In our view, gross profit margin came in almost but not quite as expected, and consequently, almost as we predicted after the quarter 3 report. Let's move on to the next slide and dig a bit deeper.
As I just said, quarter 4 came in almost but not quite as expected. However, gross profit margin was negatively influenced by further adverse FX effects coming from revaluation of foreign currency denominated items in working capital. Effectively, the positive transaction effects were smaller than we expected 3 months ago. The referenced adverse effect corresponded to about 0.4% on gross profit margin level. As for Process Technology engineering activities, there was not any further overspending customer projects. The measures taken to improve productivity, they will gradually have effect. The engineering-related comments that I just gave are reflected in this slide as load/volume. A2D was primarily influenced by somewhat lower load in certain factories with a heavy production, of course, of equipment-type products. Regarding mix, we saw a slight positive influence from a bigger share of service sales.
The mix was influencing gross profit margin negatively within both service and capital sales. What do I mean with that? Well, we had a bigger share of service hours compared to parts in our service revenues, which gave an adverse effect. We also had an adverse mix effect from a different content of the different end user industries in capital sales. Let me give you the second forward-looking statement. In the near term, we expect adverse effects from volume/load. We expect continued positive FX effects and lower metal prices to provide compensation. With that, let's move on to overhead costs and the remainder of the P&L account. R&D ended at SEK 200 million in the quarter, which is a reduction year-on-year of just under 10%. In percent of sales, R&D represented 1.9% for the full year. Excuse me.
The explanations for this reduction is mainly the efficiency program initiated, but another effect is also that we've seen a substantial positive translation effect on the denominator, the revenues, but a very limited one on R&D costs, the nominator. Sales and admin amounted to SEK 1.54 billion in the quarter, representing a reduction like-for-like year-on-year of just 0.2%. Sequentially, there was an increase of 9.3%, a normal seasonal variation, I would argue. On a whole year basis, sales and admin is down 1.1% like for like. Quite a good saving on sales and admin. Other costs and income came out with a higher negative net in the quarter, minus SEK 192 million compared to SEK 131 million in quarter 3. Just as a reference, let me say that the average per quarter for net other income and other costs has been about SEK 165 million in 2015.
Slightly higher, of course, due to variations between quarters on certain initiatives. Profit before tax was ending SEK 1.39 billion. The year-on-year comparison is, of course, influenced by the one-time charge we had a year ago of a negative SEK 440 million due to the derivatives in Framo. Before leaving the P&L, let me talk a bit about taxes. As you may have seen, taxes ended with a charge of SEK 455 million in the last quarter. This is clearly above guidance for taxes. This is explained by some one-time effects. We've seen a reduction in corporate income tax rates in certain countries. That has led to a revaluation of deferred tax items. We have also taken a further cautious approach to the valuation of temporary differences, other temporary differences, such as loss carry-forwards in some countries. This totally amounts to a non-recurring effect of about SEK 90 million.
Going forward, however, our guidance stays at 28% of profit before tax. EPS up 30%, of course explained by increased operating profits and the non-repeat of the non-recurring charge in the financial net, as I just mentioned. Return on capital employed and return on equity ended 21.6% and 21.7%, respectively. Still very competitive in the engineering arena, according to our view. Let me then move on and give you a few short comments on performance by division. My comments, they will relate to operating margin. The comments that you have on the bottom of the slide, they are relating to profit in absolute terms. We try to cover this both ways, if you like. To start off with, equipment came out lower than last year as well as quarter three.
The sequential decline is due to a combination of load, as I commented earlier, price mix, partly compensated by lower overhead costs. For Process Technology, operating margin came out higher than both last year and quarter three. Sequentially, the improvement in margin is explained by what I would like to call a normalized performance on delivered customer projects, so no new substantial overspend. Volume contributed as well as lower cost in the overhead. Mix had a certain adverse effect. The measures to improve productivity in engineering will only gradually have effect on performance. Finally, marine was lower sequentially in terms of operating margin with 19.4%. This is explained by a negative mix and higher costs in the overhead, partly compensated by volume. With that, let's move on to the cash flow statement. In short, Lars has already given you the conclusion on cash flows.
It was a very good quarter, and we have a record in terms of free cash flow for the full year 2015. Cash flow from operations, almost SEK 1.9 billion, an increase compared to a year ago of 11%. The explanation is entirely a release of inventory based on the high level of shipments. Regular CapEx ended some 10% above last year's level, and of course, that is partly to do with the full year effects of Framo. In this context, let me remind you, for 2016, remember to add about SEK 200 million coming from the Kolding and Pune CapEx projects that we talked about, for instance, at the Capital Market Day. Financial net paid was positive, explained by realized positive exchange differences. For the quarter, free cash flow was almost SEK 1.7 billion compared to just under SEK 1.2 a year ago.
The year-on-year improvement is in summary due to the release of working capital and the positive financial net paid. This tremendous free cash flow, a positive free cash flow of SEK 4.85 billion, means that we are already at a debt EBITDA of 1.56, almost one turn down from a year ago. That is, of course, a continued fast deleveraging after the Framo acquisition. Let us talk a bit about FX. FX effects in EBITA in the quarter were positive with SEK 80 million. An outcome worse than anticipated. The reasons, as I commented earlier, is attributed to non-realized revaluation effects on working capital items. This is basically to do with the continued weakening of the Norwegian krone against the US dollar, where we get the bulk, or in which currency we get the bulk of the advances in Framo.
The forecast for 2016 has been updated, and expected translation effects have been included. The translation effects of a negative SEK 200 million has been calculated based on using the closing rate as per December 31, 2015. The estimation of transaction effects in 2016 has been updated to reflect realization of the revaluation effects that have arisen during the quarters three and four. The full-year net effect on FX is estimated to a positive SEK 350 million at this juncture. Then we are getting to our order backlog. The backlog amounted to a totally SEK 20.6 billion at the end of December. That is representing approximately 6.2 months of LTM sales. For shipments due in 2016, the backlog amounted to SEK 15.6 billion. As you can see from the yellow parts of the bars, that is SEK 1.7 billion lower than when we started 2015. Really important to have in mind.
Having said that, let us move on to the bridge into whole year sales for 2016. As always, let us talk about the known and the unknowns. As I just showed you, SEK 1.7 billion smaller order backlog going into 2016 than we went into 2015. Everything else the same. Secondly, using the closing exchange rates for end of December, we expect a negative translation effect on revenues to the tune of SEK 1.2 billion. The very small acquisitions that we completed during 2015 will only provide an immaterial increase to sales. This gives a subtotal for the known parameters of SEK 36.8 billion. For the rest, as always, it is up to you to form an opinion about demand and its implications on sales for 2016. With regard to prices, the second unknown, we have made small adjustments to prices for standard products just now at the beginning of 2016, as we normally do.
With that, I give the word back to Lars for the outlook and the closing remarks.
The outlook is as follows. We expect that demand during the first quarter 2016 will be somewhat lower than in the fourth quarter, excluding a substantially lower demand for pumping systems. Here comes our demand forecast for each division. Marine and Diesel division, significantly lower due to Framo, while demand excluding Framo will be unchanged. Framo had an exceptionally strong quarter for marine cargo pumping systems due to the pre-buying effect. Framo also booked two large offshore orders that will not repeat in the first quarter. In total, this means an expected decline for Framo between the quarters of SEK 1.2 billion. Process technology, somewhat lower as we expect fewer large orders. Finally, equipment, on about the same level.
Since this is my last quarterly report, I want to thank all participants for the trust you have shown in the management of Alfa Laval during all these years. Thank you very much. Now we hand over to the operator for the Q&A session.
Thank you. As a reminder, if you'd like 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 that request, please press the hash key. Your first question comes from the line of Lars Brorson of Barclays. Please go ahead.
Thanks very much. Good morning, Thomas. Good morning, Lars. Lars, congratulations on almost 12 years on a job. Well done. Good luck. Three quick questions from my side, if I could. Demand pull forward into 2015 in pumps, can you just confirm, we're talking about SEK 1.2 billion in Framo sequentially, and what do you see in the ex-Framo business within Marine and Diesel? Secondly, just on cancellations, can you give us a number for that? I think you mentioned SEK 300 million on the media call earlier. Is that all oil and gas, and is that the right number? Then thirdly, just in equipment, you talk in the report about a change structure within the sales organization. I thought that was behind us, but apparently not. Can you talk about where we are there as we move, I presume, from indirect to direct?
Where are we in, should we say, a normalization of that cost curve as that reorganization gets completed? Thank you.
To your final question, we are in the later stage of this transition from direct to distributor sales.
If we take the other two, demand in marine, exclusive of pumps, we believe that demand for the rest of the marine operations will be unchanged. As far as cancellations are concerned, the SEK 300 million concerned, they relate to oil and gas, predominantly relating to customers in Brazil. Of course, there have been certain cancellations in marine as well, but that is something that is there on a certain level continuously. The SEK 300 million, oil and gas, really to do with Brazil.
Understood. Thank you.
Your next question comes from the line of Andreas Koski of Deutsche Bank. Please go ahead.
Yes, good morning, Thomas. Good morning, Lars. two, three questions, please. Firstly, you expect a significant sales decline in 2016, before unknowns. As you have said a couple of times before, we have seen a decline in demand throughout 2015. It's likely that in-for-out orders will be down in the beginning of 2016. At the Capital Markets Day, you mentioned that you have a decremental margin of around 50%. Can you explain what you're doing now to lower this impact that we will see on EBITA from the decremental margin, from the lower volumes? Thank you.
Of course, we are continuously adjusting the capacity in our supply chain following a decline in certain product groups in the backlog. As for instance, two weeks ago, we announced certain adjustments of capacity in our decanter facility north of Copenhagen, as an example. Of course, we are reducing the amount of temporary staff in our supply chain. There is a continuous tweaking and adjustment of the supply chain in order to adjust. Of course, we continue to run a tight ship when it comes to the overhead as well, with well-established routines for replacement and expansion of overhead resources.
Okay, thanks. You don't think it's necessary with the new cost savings program?
If and when, of course, we will all let you know at the same time.
Yeah. Okay. On your outlook, you expect somewhat lower demand if we exclude the advanced orders you had in Q4. What to use as a base here? Is it SEK 9.4? You had some cancellations and you had all those advanced orders as well. Is it SEK 9.4 that is the base for your guidance of somewhat lower demand, and after that, we have to adjust also for the advanced orders?
What we're trying to say is that starting from SEK 9.4, we take off SEK 1.2 for the extraordinary run on pumping systems. In addition to that, we say equipment is expected to be unchanged, the rest of marine is expected to be unchanged, and Process Technology is expected to come out somewhat lower due to fewer expected large contracts. The starting point is SEK 8.2, we believe there will be somewhat less of large contracts in Process Technology. Remember, they had about SEK 600 million in quarter four. If we look at quarters two and three, they came in just under SEK 200 million on large contracts.
Perfect. That's great. Lastly, on your comment on the gross margin where you expect adverse effects from lower volume load, you said the effects and lower raw material prices will provide compensation for this. Do you expect this to fully offset the negative effect from lower volumes and load?
I did not qualify in the forward-looking statement, and that was intentional.
Okay. Thank you very much.
Your next question comes from the line of Max Yates from Credit Suisse. Credit Suisse, please go ahead.
Hi, good morning. Two questions from me. Just firstly, on the process business and the outlook for oil and gas. I think you've mentioned before that sort of last quarter from here, we were expecting the mid and downstream oil and gas-based business to be broadly flat. You've talked about process being lower due to less large orders. Could you talk a little bit about how you're feeling on the base business in oil and gas within process technology?
We can see in petrochemicals, we have seen a continued strong demand, both for service and capital sales. When you go upstream to drilling, of course there it has been impacted by the cancellations that Thomas mentioned. When it comes to refinery, we see a good activity for retrofits and let's say de-bottlenecking. However, we don't see any large greenfield projects in the near future.
To complement the picture on drilling, we were of course, negatively affected by the cancellations, but we were also positively affected by the two offshore contracts in marine. On a total level, the drilling was not that bad. We do not expect a repeat on cancellations, of course, in PTD. Then again, we do not foresee the same amount of large contracts in offshore drilling for [front lighter], as reflected in the negative 1.2.
Okay, thank you. Just one follow-up. Given where rates are across most of the marine segments versus history, how confident are you in being able to keep your marine aftermarket business broadly flat in 2016? Do you see risks of this going sort of lower as we go through 2016? Thank you.
We continue to work hard in our aftermarket activity. We have invested in presence, very much, of course, to do with onshore applications, but also to further enhance our abilities on the marine side. I think we've seen that has paid off during 2015 with a good increase on the service. That is to say, the service hours element of the aftermarket, we continue to believe that we have good opportunities. I think that is what there is to say at this juncture.
Okay. Just a final question on Frank Mohn. Could you give us how much of this year's order intake was Frank Mohn? Could I just sort of qualify whether I heard rightly. Did you say on an annual basis in 2016, Frank Mohn demand should be broadly flat, or did I hear that wrong?
You heard that wrong.
Yeah.
We said a decline of SEK 1.2 billion sequentially, then a gradual pickup from that low level towards the later quarters in the year. When it comes to Frank Mohn totally, I think orders in 2015 were in the order of SEK 5.5 billion.
Great. Thank you very much.
Your next question comes from the line of Peder Frölén of Handelsbanken Capital. Please go ahead.
Yes. Good morning. Thank you. First of all, a question on the outlook. Again, sorry for this, but given your outlook comments there, Thomas, no more cancellations expected in the oil and gas. Normally, very high large size orders in Q4 for process, but still no cancellations in Q1. The delta there shouldn't be that large or do I read you incorrectly?
Well, what I said literally before, Peder, was the starting point is 9.4.
We take off 1.2 for pumping systems. For the rest, the rest of marine is expected to be unchanged. Equipment is expected to be unchanged. We expect a somewhat lower level of demand in Process Technology because of fewer large contracts.
Yeah. On the other hand, you don't expect any cancellations. They were SEK 300 million. The net of those two might not be that negative or?
Peder, I started with SEK 9.4, which is the net of cancellation. What I'm saying is SEK 9.4 minus SEK 1.2 gives you SEK 8.2. From that, we have had SEK 600 million of large contracts in quarter four in process technology. If we take as a reference, we had about SEK 200 million in quarters two and three of last year.
Yeah. Okay. On the others, there were a sort of larger impact there this quarter. You talk about around SEK 165 million per quarter in 2015. First of all, could you talk about more in detail what those effects were? What do you actually do in order to take down the cost base? Is the SEK 165-ish by quarter a good proxy for next year?
There is no better approximation for next year than the average of what we've seen on other cost and income in quarter five. We will not qualify that further. What are we doing to adjust? As I comment on the earlier question here, we're continuously adjusting the various supply chains for the different product groups. As one example, we had an initiative launched in our Søborg factory for large decanters two weeks ago as one example. Of course, that is ongoing continuously in order to adapt to variations in demand and as the backlog for delivery is varying over time. When it comes to overhead, we continuously monitor the amount of resources we have in sales and admin. We will continue to run that on the basis of all the individuals.
Yeah. Okay. Thank you. Final question. On the exceptionally strong orders in the fourth quarter from Framo, could you please comment something about the profitability, since they were pushed into last year?
Well, in terms of price levels, there is nothing outside of what we have seen historically. Not at all. The only thing is, of course, the exchange rate. Given that we are having a fair amount of the cost in Norwegian krone, of course, there's a benefit. That is also reflected in our projection for FX transaction for 2016.
Anything left in FX for 2017?
Well, we'll let you know as we get a bit into 2016. We have no projection for that at this juncture.
Yeah. Projections for Subsea systems for 2017? I mean, flattish this year, but I guess you expect something to happen in 2017. Anything updated there?
That depends on the oil price. If we see a recovery in the oil price, we will for sure see a recovery also in Subsea.
Makes sense.
We continue to believe it's an interesting area to be in, and we are constantly developing new products to improve our position even further.
Okay. From me also, Lars, thank you for all these years and good luck.
Yeah. Thank you very much. Same to you. Bye-bye.
Your next question comes from the line of Sven Weier of UBS. Please go ahead.
Yeah. Good morning. Couple of questions from my side. First one on the cancellations, did you actually book that as a negative order intake in Q4? Second question, when we look for the backlog for delivery in 2016 and 2017, did you also have some push outs from 2016 delivery into 2017 delivery? The third question, just on your latest stance on ballast water regulation, there has been some noise about it. On the other hand, there were some issues with US Coast Guard, so maybe you could give us an update on that. And then what you said on the NOx effect in Q4, if I deduct the large orders, SEK 1 billion. Did I understand you correctly that, obviously in Q1 that goes to zero, but it will recover by the end of the year, obviously, probably depending how the tanker market develops?
That would be it from my side. Thank you.
If we start with the cancellations. Yes, of course, they've been reflected as an adverse orders received. If we look at the backlog 2016 versus 2017. Well, in the graph we show you, of course, we reflect the delivery schedules as they are today. We are not speculating, we are merely reflecting the delivery schedules as we have agreed with our customers. When it comes to Ballast water treatment regulations, yes, you know that IMO has recalculated how much of the tonnage has now ratified, and they are just underneath the hurdle of 35%, so we are still underneath. U.S. Coast Guard, yes, U.S. Coast Guard has made up their minds about the testing procedures for the efficiency of the system.
The choice they went for will cause certain delays in ordering from ship owners as U.S. Coast Guard, they did not go for the kind of testing procedure that we anticipated and we were hoping for, with others, I would like to add. The final question, I did not quite get that, when it comes to pumping systems and demand, we were enjoying orders to the tune of SEK 1.7+ billion in Q4, or pumping systems in capital sales. We expect a decline of SEK 1.2 billion in Q1 compared to this SEK 1.7 billion. From that, further into 2016, we expect a gradual pickup in orders for pumping systems. We do not provide any full year forecast for pumping systems. Of course, we are watching the Clarksons forecast, for instance, very closely to gauge our expectations.
Okay, if the tanker market demand was flat in 2016 over 2015, would that mean you are back to go at the end of 2016, or would you still be at a lower level than in 2015?
It is fair to expect that the level would be somewhat lower in 2016 than 2015 because of this pre-ordering effect, which, as we judge, it has to do with the new regulations for NOx kicking in at the beginning of 2016.
Okay, it would be somewhat lower, in Q1 you have a bit of an.
Absolutely
Yeah. On ballast water, I think in the pre-close call, you said that the issues with the Coast Guard should be sorted relatively swiftly. You're still expecting to get type approval in the coming months. Is that still the case, or is that further pushed out?
We have not said in the coming months, we expect to get type approval. Of course, as the US Coast Guard is going for a different testing methodology, there is a delay.
Okay. Thank you.
Thank you.
Your next question comes from the line of Ben Maslen from Morgan Stanley. Please go ahead.
Yeah. Hi, Lars. Hi, Thomas. It's actually Ben Maslen from Morgan Stanley. First question, please, on marine and diesel, where we haven't yet seen any revenue drop. It still had 5%, 6% organic growth, sales growth in Q4. At what point in 2016 would you expect revenues to start to decline based on the backlog? Maybe you could separate that between pumping systems, equipment, and offshore, just the phasing of the backlog. Thank you.
To start off with, across the board, there is a bit of a seasonal variation between quarter four and quarter one. I think that is important to remember and to have in mind. Outside of that, we have differences between the three main, say, product groups. As far as traditional Alfa Laval equipment is concerned, we start to see a decline during this spring. We will see a decline of all byproducts when we're getting towards late spring or mid-2016, and we will only start to see a decline in Framo when we're getting towards the end of 2016.
Got it. Thank you. As a follow-up, given, as I understand it, there are much higher gross margins in marine and diesel, should we expect more of a negative kind of cross-divisional mix to pull the gross margin down as we go through 2016?
I don't think we have qualified the gross profit margins in marine by product group, so I'm sorry, there will not be a response to that one.
Okay, thanks. A final one. Just on working capital, where you've obviously had a very strong reduction over the year. Just what scope do you see to improve the ratios from this level in terms of inventory to sales or working capital to sales? How much further can you squeeze cash out of the business? Thank you.
Yeah. A very important factor in this context is what will the inflow of advanced payments be? To the extent that we can have a reasonable flow of advanced payments coming in from customized solutions orders from customers. Of course, there is an opportunity to reduce working capital as we see a decline in revenues, as I've shown you from the lower backlog going into 2016. Given that we continue to get orders for customized solutions generating advances, there is an opportunity to reduce working capital based on the lower level of activity. Again, let me remind you that net working capital in relation to revenues is not that shabby in Alfa Laval to begin with, right?
No, exactly. Okay, great. Thanks a lot. Yeah, best of luck for the future, Lars. Thanks.
Thank you very much. Thanks.
Your next question comes from the line of Wasi Rizvi from RBC Capital Markets. Please go ahead.
Oh, hi. Good morning, all. Just a couple from me on Framo again. I'm just trying to understand how much of that 1.2 decline in that 1.7 is a change in the underlying level of demand and how much is pulled forward. I understand that you're saying that a lot of it is down to new regulations, if we just have some idea what you think the underlying market is doing.
Okay, sure. I think the best way for you to get the sense of what the underlying market is like is to look at the Clarksons statistics and see the evolution of product tankers, chemical tankers. I think that is absolutely the best sense to see what is happening in the market and what is expected to happen when it comes to demand for these types of vessels.
Okay, sure. Just another one on those orders in Q4. Given that you were saying that they were in response to regulation coming out start of this year, should we expect them to convert to sales perhaps sooner than normal, or is it just your normal order conversion timeline?
Well, the order conversion is, of course, reflected in the order backlog to be delivered in 2016 and what remains to be delivered later on. I think you have the answer in the backlog specification that we have provided.
Okay. Just in terms of within the H1, H2 seasonality here, should there be any difference?
Well, as far as Framo pumping systems, as I just commented, we are only foreseeing a decline in revenues from Framo towards the latter part, towards the end of 2016. The backlog or the delivery capacity is completely utilized since quite some time for Framo in the first half year.
Sure. Got it. Thank you.
Thank you very much. That completes the Q&A session. Thank you for your attention and thank you for all these years. Thank you and goodbye from all of us.
That does conclude our conference for today. Thank you all for participating, and you may now disconnect. Please remain on the line.