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. I must advise you that this conference is being recorded today, Tuesday, 2nd February 2016. I would now like to hand the conference over to your speaker today, Lars Renstrom.
Please go ahead.
Good morning, and most welcome to our presentation. I will start by highlighting 2 matters. Firstly, the order intake was €9,400,000,000 a sequential upturn of 9%, mainly explained by an exceptionally strong order intake for Marine Pumping Systems, driven by the ship owners preordering. This is expected to influence the Q1 negatively concerning demand for pumping systems with about EUR 1,200,000,000 compared to the Q4. 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% 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 on 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 EUR 9,400,000,000 Net sales was unchanged at EUR 10,800,000,000 Adjusted EBITA dropped 10% to EUR 1,800,000,000 and adjusted EBITA margin reached 16.2%. For the full year, orders received rose 1% to €37,100,000,000 Net sales grew 13% to €39,700,000,000 Adjusted EBITA increased 16 percent to €6,800,000,000 and adjusted EBITA margin reached 17.1%. Next slide. The Board of Directors proposes a 6% increase of the dividend of SEK 4.25. Now we move over to orders received and margins.
Orders received on rolling 12 months reached SEK 37,100,000,000. And in the quarter, we saw a decline of 11% at constant exchange rates. You see that the level of launch orders is quite high, EUR 815,000,000, since some orders were pushed from the 3rd to the 4th quarter. You should also bear in mind that in the Q4 of 2014, order intake was of the Norwegian krone versus the U. S.
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 +11%, and currency effects were minus 2.4%, giving a total of 8 point 5%. Next slide. Adjusted EBITA margin reached 16.2%. And in absolute numbers, it is our 3rd 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 EUR 615,000,000 were booked with a good mix of applications like food, beverage, power, gas processing, refinery and petrochemicals. In Marine and Diesel, Frommer booked 2 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. And in 2016, we expect demand to remain on about the same level.
Moving over to the Development 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 prebuying effect due to the new NOx emission legislation that is implemented from the 1st 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. And 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. And 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.
And Marine and Offshore Pumping saw extraordinary growth for Cargo Pumping Systems due to prebuying, as already mentioned. Service saw higher spare parts activity, and demand for pumping systems service grew as well. Moving over to Process Technology. Their 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. Now we move over to the geographical development. Here you see the developments 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 affects their regions. In Nordic, we have a substantial positive impact from 2 large offshore orders. Asia remained stable, supported by promo Cargo Pumping Systems. Let's take a look at the regions.
And now all comments are sequential. In Asia, there was an extraordinary demand for Fromo 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 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 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% 30%, respectively. The acquisition of Promo has affected Nordic and Asia positively. Oil and gas prices as well as lower demand for SOX systems has negatively impacted Western Europe. And 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 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 intrauter 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've seen from the report, we realized sales of SEK 10.8 1,000,000,000 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 Pharma 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 percent a year ago and 26.1 percent 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 then 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 then 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 results. 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 was smaller than we expected 3 months ago. The reference 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 loadvolume. EQD 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. However, the mix was influencing gross profit margin negatively within both service and capital sales.
What do I mean with that then? 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 then give you the second forward looking statement. In the near term, we expect adverse effects from volumeload.
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 and L account. R and D ended at EUR 200,000,000 in the quarter, which is a reduction year on year of just under 10%. In percent of sales, R and 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 and D cost, the denominator. Sales and admin amounted to EUR 1,540,000,000 in the quarter, representing a reduction like for like year on year, 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.
So a quite a good saving on sales and admin. Other costs and income came out with a higher negative net in the quarter minus €192,000,000 compared to €131,000,000 in quarter 3. Just as a reference, let me say that the average per quarter for net of other income and other costs has been about EUR 165,000,000 in 2015. So slightly higher, of course, due to variations between quarters on certain initiatives. Profit before tax was ending EUR 1,390,000,000.
The year on year comparison is, of course, influenced by the onetime charge we had a year ago of a negative EUR 440,000,000 due to the derivatives in the promo. Before leaving the P and L, let me talk a bit about taxes. As you may have seen, taxes ended with a charge of EUR 4.50 5,000,000 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 nonrecurring effect of about SEK 90,000,000. Going forward, however, our guidance stays at 28% of the profit before tax.
Finally, 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% 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.
So 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 3. The sequential decline is due to a combination of load, as I commented earlier, pricemix partly compensated by lower overhead costs. For Process Technology, operating margins came out higher than both last year in quarter 3. Sequentially, the improvement in margin is explained by what I would like to call a normalized performance on delivered customer projects.
So no substantial overspend. Volume contributed as well as lower costs in the overhead. Mix had a certain adverse effect. The measures to improve productivity engineering in engineering will only gradually have effect on performance. And then 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 EUR 1,900,000,000, 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 the pharma. In this context, let me remind you for 2016, remember to add about EUR 200,000,000 coming from the Kolding and Pune CapEx projects that we talked about, for instance, at the Capital Markets Day.
Financial net paid was positive explained by realized positive exchange differences. For the quarter, free cash flow was almost SEK 1,700,000,000 compared to just under EUR 1,200,000,000 a year ago. The year on year improvement is in summary due to the release of working capital and the positive financial net pay. This tremendous free cash flow, a positive free cash flow of EUR 4.85 billion means that we are already at the debt to EBITDA of EUR 1.56, almost one turn down from a year ago. That is, of course, a continued fast deleveraging after the promo acquisition.
Then let's talk about a bit about FX. FX effects in EBITA in the quarter were positive with EUR 80,000,000, an outcome worse than anticipated. And the reasons, as I commented earlier, is attributed to non realized revaluation effects on working capital items. And this is basically to do with the continued weakening of the Norwegian krona against the U. S.
Dollar where we get the bulk or in which currency we get the bulk of the advances in Framed. The forecast for 2016 has been updated and expected translation effects have been included. The translation effect of a negative EUR 200,000,000 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 34. The full year net effect on FX is estimated to a positive EUR 350,000,000 at this juncture.
Then we're getting to our order backlog. The backlog amounted to a totally SEK 20,600,000,000 at the end of December. That is representing approximately 6 0.2 months of LTM sales. For shipments, due in 2016, the backlog amounted to EUR 15,600,000,000. As you can see from the yellow parts of the bars, that is SEK 1,700,000,000 lower than when we started 2015, really important to have in mind.
Having said that, let's move on to the bridge into whole year sales for 2016. As always, let's talk about the known and the unknowns. As I just showed you, EUR 1,700,000,000 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 EUR 1,200,000,000. The very small acquisitions that we completed during 20 15 will only provide an immaterial increase to sales.
This gives a subtotal for the known parameters of EUR 36,800,000,000 For the rest, as always, it's 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.
And the outlook is as follows. We expect that demand during the Q1 And here comes our demand forecast for each division. Marine and Diesel division, significantly lower due to Fromo, while demand excluding Fromo will be unchanged. Fromo had an exceptionally strong quarter for marine cargo pumping systems due to the prebuying effect. Fram also booked 2 large offshore orders that will not repeat in the Q1.
In total, this means an expected decline from between the quarters of EUR 1,200,000,000. Process Technology, somewhat lower as we expect fewer large orders. And finally, equipment on about the same level. And 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.
And now we hand over to the operator for the Q and A session.
Thank Your first question comes from the line of Lars Borson of Barclays. Please go ahead.
Thanks very much. Good morning, Thomas. Good morning, Lars. And Lars, congratulations on, well, 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 €1,200,000,000 in Framo sequentially and what 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 300,000,000 on the media call earlier.
Is that all oil and gas? And is that the right number? And then thirdly, just in equipment, you talk in the report about a chain structure within the sales organization. I thought that was behind us, apparently not. Can you talk about where we are there as we move, I presume, from indirect to direct?
And where are we in, should we say, a normalization of that cost curve as that reorganization gets completed? Thank you.
Well, when it comes to the final question, we are in the later stage of this transition from direct to distributor sales. And when it comes
Yes. Then if we take the other 2, demand in marine, exclusive of pumps, we believe that demand for the rest of the marine operations will be unchanged. And as far as cancellations are concerned, the EUR 300,000,000 concern, they relate to oil and gas and predominantly relating to customers in Brazil. And of course, there have been certain cancellations in Marine as well, but that is something that is there on a certain level continuously. But the EUR 300,000,000 oil and gas and 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. And as you have said a couple of times before, we have seen a decline in demand throughout 2015. So it's likely that in for out orders will be down in the beginning of 2016.
And at the Capital Markets Day, you mentioned that you have a decremental margin of around 50%. So 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.
So 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, 2 weeks ago, we announced certain adjustments of capacity in our Decanter facility north of Copenhagen as an example. And of course, we are reducing the amount of temporary staff in our supply chain. So there is a continuous tweaking and adjustment of the supply chain in order to adjust. And 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. But you don't think it's necessary with the new cost savings program?
When if and when, then of course, we will all let you know at the same time.
Yes. Okay. And then 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 9.4% because you had some cancellations and then you had all those advanced orders as well?
Is it 9.4% that is the base for your guidance of somewhat lower demand? And then after that, we have to adjust also for the advanced
orders. What we're trying to say is that starting from EUR 9,400,000,000, we take off EUR 1,200,000,000 for the extraordinary run on pumping systems. And 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. So the starting point is 8.2 and then we believe there will be somewhat less of large contracts in Process Technology.
Remember, they had about €600,000,000 in quarter 4. If we look at quarters 23, they came in just under EUR 200,000,000 on large contracts.
And then lastly, on your comment on the gross margin, where you expect adverse effects on lower volume load. But you said the FX and lower raw material prices will provide compensation for this. But do you expect this to fully offset the negative effect from lower volumes on 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 Mark Yates from Credit Suisse. Please go ahead.
Hi, good morning. Two questions for 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?
Well, we can see in Petrochemicals, we have seen a continued strong demand, both for Service and Capital Sales. And when it comes to when you go upstream to drilling, of course, there it has been impacted by the cancellations that Thomas mentioned. And when it comes to Refinery, we see good activity for retrofits and, let's say, debottlenecking. 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 2 offshore contracts in Marine. So on a total level, the drilling was not that bad. We do not expect to repeat on cancellations, of course, in PTD. But then again, we do not foresee the same amount of large contracts in offshore drilling for Frano either as reflected in the negative EUR 1,200,000,000.
Percent. Okay. Thank you. And 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?
Or 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. And 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. And we continue to believe that we have good opportunity. I think that is what there is to say at this juncture.
Okay. Just a final question on franc Mone. Could you give us how much of this year's order intake was franc Mone? And then could I just sort of qualify whether I heard rightly? Did you say on an annual basis in 2016, franc mode demand should be broadly flat?
Or did I hear that wrong?
You heard that wrong. We said a decline of SEK 1,200,000,000 sequentially and then a gradual pickup from that low level towards the later quarters in the year. When it comes to Frank Mone, 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 Peter Frohnen of Handelsbanken Capital.
First of all, a question on the outlook again. Sorry for this. But given your outlook comments there, Thomas, and no more cancellations expected in the oil and gas, Normally, it's very high large size orders in Q4 for full process, but still no cancellations in Q1. So the delta there shouldn't be that large? Or do I read you incorrectly?
Well, what I said literally before, Peter, was the starting point is 9.4 percent. We take off 1.2 percent for Pumping Systems. And for the rest, marine and the rest of marine is expected to be unchanged. Equipment is expected to be unchanged, and we expect a somewhat lower level of demand in Process Technology because of the fewer large contracts.
Yes. But on the other hand, you don't expect any cancellations. They were SEK 300,000,000. So the net of those 2 might not be that negative or
I started with SEK 9,400,000,000 which is the net of cancellation. So what I'm saying is €9,400,000,000 minus €1,200,000,000 gives you €8,200,000,000 And from that, we have had €600,000,000 of large contracts in quarter 4 in Process Technology. If we take as a reference, we had about €200,000,000 in quarters 2 and 3 of last year. Yes. Okay.
On the Others, there were a sort of larger sort of impact there this quarter, and you talk about around SEK 165,000,000 per quarter in 2015. First of all, could you talk about more in detail what those effects were? What would you actually do in order to take down the cost base? And is the 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 5. We would not qualify that further. What are we doing to adjust? As I comment on the earlier question here, we are continuously adjusting the various supply chains for the different product groups. And as one example, we had an initiative launched in our Subway factory for large decanters 2 weeks ago as one example.
And 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. So we will continue to run that on the basis of individuals. Okay.
Thank you. Final question. On the exceptionally strong orders in the Q4 from Framel, Could you please comment something about the profitability since they were pushed sort of 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 krona, of course, there is a benefit. But that is also reflected in our projection for FX transaction for 2016. Anything left in FX for 4.70?
Well, we'll let you know as we get a bit into 2016. We have no projection for that at this juncture.
And projections for SOX Systems for 2017,
I mean flattish this year, but I guess we expect something to happen in 2017, anything uplinked 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 SOX. And 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. So from me also, Lars,
thank you for all these years and good luck.
Thank you very much. Same to you. Bye bye.
Your next question comes from the line of Sven Weier of UBS. Please go ahead.
Yes, good morning. A couple of questions from my side. First one, on the cancellations, did you actually book that as a negative order intake in Q4? 2nd 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 the U. S. 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 order of EUR 1,000,000,000. So did I understand you correctly that obviously in Q1 that goes to 0, but it will recover by the end of the year, obviously probably depending how the tanker market develops? And that would be it from my side. Thank you.
If we start with the cancellations, yes, of course, they have 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're 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 many how much of the tonnage has now ratified, and they are just underneath the hurdle of 35%.
So we're still underneath. U. S. Coast Guard, yes, there U. S.
Coast Guard has made up their minds about the testing procedures for the efficiency of the system. And the choice they went for will cause certain delays in ordering from shipowners 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. Then the final question, I didn't quite get that, but when it comes to pumping systems and demand, we were enjoying orders to the tune of SEK 1,700,000,000 in quarter 4 of Pumping Systems in capital sales.
And we expect a decline of EUR 1,200,000,000 in quarter 4 in quarter 1 compared to this 1.7. And from that into further into 2016, we expect a gradual pickup in orders for Pumping Systems. We do not provide any full year forecast for Pumping Systems. But of course, we are watching the Clarkson forecast, for instance, very closely to gauge our expectations.
Okay. But if the tanker market demand was flat in 2016 over 2015, would that mean you're back to go at the end of 2016? Or would you still be at a lower level than in 2015?
That would it is fair to expect that the level would be somewhat lower in 2016 than 2015 because of this preordering effect, which as we judge it has to do with the new regulations for NOx kicking in at the beginning of 2016.
Okay. So it would be somewhat lower, but in Q1, you have a bit of an extreme Absolutely. Yes. And then 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, but we expect to get type approval. But of course, as the U. S. Coast Guard is going for a new for a different testing methodology, there is a delay.
Okay. Thank you.
Thank you.
Your next question comes from the line of Peter Murdock from Morgan Stanley. Please go ahead.
Yes. Hi, Lars. Hi, Thomas. It's actually Ben Mazzan 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? And maybe you could separate that between pumping systems, equipment and offshore, just the phasing of the backlog? Thank you.
To start off with, there is across the board, there is a bit of a seasonal variation between quarter 4 and quarter 1. I think that is important to remember and to have in mind. Outside of that, we have differences between the 3 main, say, product groups. As far as the traditional Alfa Lavalin equipment is concerned, we start to see a decline during this spring. We will see a decline of all board products when we're getting towards late spring or mid-twenty 16.
And we will only start to see a decline in pharma when we're getting towards the end of 2016.
Got it. Thank you. And then 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 kind of 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 byproduct group. So I'm sorry, there will not be a response to that one.
Okay. Thanks. And then 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.
Yes.
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. So given that we continue to get orders for customized solutions generating advances, then there is an opportunity to reduce working capital based on the lower level of activity. But then again, let me remind you that working 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. And yes, best of luck for the future, Lars. Thanks.
Thank you
very much. Thanks.
Your next question comes from the line of Wasi Rizzi from RBC Capital Markets. Please go
ahead. 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 pull forward? Just I mean, I understand that you're saying that a lot of it is down to new regulations, but if we just have some idea what you think the underlying market is doing?
I think the best way for you to get the sense of what the underlying market is like is to look at the Clarkson 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. And then just another one on those orders in Q4. I mean given that you're saying that they were in response from regulation coming out the start of this year, Should we expect them to convert to sales perhaps sooner than normal? Or is it just your normal order conversion time line?
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. So I think you have the answer in the backlog specification that we have provided.
Okay. But just in terms of within the H1, H2 seasonality, should there be any difference?
Well, as far as Pharma 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 Fromo in the first half year.
Sure. Got it. Thank you.
Thank you very much. And that completes the Q and A session. So thank you for your attention, and thank you for all these years. So 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.