Welcome to the Alfa Laval Q4 earnings call. At this time, all participants are in a listen-only mode. There'll be a presentation followed by a question and answer session. If you would like to ask a question over the telephone lines, you will need to press star one on your telephone keypad. I must advise you all that the call is being recorded today on Tuesday the 3rd of February, 2015, and I shall now hand over to your first speaker for today, Lars Renström. Please go ahead, sir.
Good morning. Most welcome to our presentation. I will start by highlighting three matters. Firstly, both sales and operating results reached new record levels. Sales increased by 25% to SEK 10.8 billion, and the operating result of SEK 1.94 billion means an increase of 37% compared to previous year. Secondly, the focus on service that was launched in 2013 continues to deliver results. Organically, we grew 6%, excluding currency effects, and in total, 25% compared to previous year. Finally, order intake reached SEK 10.5 billion, where revaluation of Frank Mohn's backlog contributed with SEK 1 billion. The balance of SEK 9.5 billion is what our outlook refers to. Let's move over to the key figures. Orders received rose 29% to SEK 10.5 billion. Net sales grew 25% to SEK 10.8 billion, and adjusted EBITA increased 37% to SEK 1.94 billion. The adjusted EBITA margin reached 18%.
For the whole year, orders received rose 21% to SEK 36.7 billion. Net sales increased 18% to SEK 35.1 billion. The adjusted EBITA grew 20% to SEK 5.9 billion. The adjusted EBITA margin reached 16.8%. Now I hand over to Thomas for comments regarding the integration of Frank Mohn.
Good morning, all of you. The integration of Frank Mohn got into a new phase in Q4. That was particularly the case when it comes to the implementation of IAS and IFRS in the daily accounting as well as the regular reporting. The transfer from earlier accounting practices to IAS, IFRS revealed a number of variations as specified in some detail on the slide that you have in front of you on the screen now. You find some of these details in the column Framo certain items in the slide. To start off with, orders in foreign currency in the backlog were traditionally in Frank Mohn, not valued at current rates, but historical or hedged rates were applied. Applying current rates has led to a very substantial increase in orders and order backlog that will eventually be turned into sales.
Only a small part of this revaluation was actually realized as sales in quarter 4, that is to say SEK 50 million. Secondly, working capital items had traditionally not been revalued at closing rates after each reporting period. Adjustment, again, to customary practice of using closing rates has led to an adverse effect of some SEK 89 million to gross profit. A number of other adjustments have given a positive effect to EBITA in quarter 4. These other adjustments, they've been reported as a positive net in other costs and income of SEK 34 million. Finally, I have to say that the hedging practices at Frank Mohn have neither been consistent with effective hedge accounting as defined by IAS 39, nor have they been based on operational exposures to some degree.
This has led to a substantial adverse effect to the financial net in quarter 4, a negative of SEK 440 million, of which SEK 200 million, they are still unrealized as per end of last year. It is important to note that these effects have largely arisen during quarter 4 as a consequence of the weakening of the Norwegian krone against primarily the USD and the JPY. You see the effect of bringing things in line in consistent with IAS, IFRS in the financial net for quarter 4. To finish off, please note that despite all of what I've just said, Framo is as a company, at least as good as we thought when we made the acquisition. With those comments, I give back to Lars for continuation of the presentation.
We move on to the next slide. The board of directors proposes an increase of the dividend with 7% to SEK 4. Now we move on to orders received and margins. Orders received on rolling 12 months reached SEK 36.7 billion. The increase year-on-year was 22% at constant exchange rates. If we deduct SEK 1 billion corresponding to the revaluation of Frank Mohn's backlog, we reach SEK 9.5 billion for the quarter, which should be compared to the previous record quarter of SEK 9.7 billion. Moving to the next slide. There we see from the order analysis that acquisitions contributed with 22%, and the organic growth was up 0.7%. Currency effects were 6.7%, giving a total of 29%. Sequentially, the organic growth was 6%, and we had positive currency effects of 2%, giving a total of 8%. Let's move over to the next slide.
There you see that the EBITA margin reached 18%, and the operating result was over SEK 1.94 billion, was the best quarter ever. The previous record was set in the fourth quarter 2008, when we were in the boom before the financial crisis. Moving over to highlights in the quarter. It was a very good quarter for large orders, and in total, we booked SEK 780 million, exactly the same as in quarter 3. We had a good mix of end customer industries like oil and gas production, both on and offshore, petrochemicals, power generation, pulp and paper, and food. In marine and diesel, we enjoyed a continued strong order intake for exhaust gas cleaning systems with 12 systems booked. For the whole year, we booked 47 systems, which confirm our leading position and the competitiveness of our system. We continue with the development per segment.
We had 1% organic growth year-on-year in the quarter, and you see that all segments in marine and diesel grew or were unchanged, while it was a mixed picture in process technology and equipment. We are very pleased that the organic growth for service in total was up 6%. Let's take a look at the development per division. Now all comments are sequential, and we start with equipment. Industrial equipment was down due to seasonality, while sanitary saw generally higher demand from food and pharmaceutical industries. OEM was lifted by a good demand from boiler and air conditioning manufacturers, while service was unchanged. Let's move over to marine and diesel. Equipment declined mainly due to lower demand for environmental solutions, while demand for traditional products going into new ships was unchanged. Marine and offshore systems was boosted by exhaust gas cleaning systems and boilers for offshore.
Pumping systems, excluding backlog revaluation, was down due to non-repeats, as well as weaker yard contracting. Service was up significantly as ship owners increased their maintenance activities. Let's move to process technology. Energy and process booked the group's largest order ever in oil and gas. Power, petrochemicals, and refinery also did well. However, did oil and gas-based business decline due to lower demand. Food and life science was up with good activity in protein, vegetable oil, brewery, and life science. Service declined somewhat, affected by lower activity in energy and process. Next slide. For the whole year, you see that all marine and diesel segments have been growing. All equipment segments have been stable, while there is a mixed picture in process technology, where we are very pleased with the growth in service.
Now we continue with the geographical development. You can see that year-on-year, Asia stands out and is inflated by the backlog revaluation. Excluding that, Asia is still up 18%. Western Europe is boosted by the large oil and gas order of SEK 290 million. The underlying business was unchanged. North America is up, boosted by large orders in oil and gas and petrochemicals, while base business was unchanged. We are very pleased that Central and Eastern Europe grew 5% on top of a very strong 2013. The other regions declined somewhat. Now we will take a look at the regions. Now all comments are sequential. Excluding the backlog revaluation, orders were slightly lower, mainly due to lower contracting at the yards earlier in the year. Marine offshore projects remained on a high level. In process technology, both base business and large orders grew.
Equipment was slightly down as continued weak construction industry affected industrial equipment. Now we move over to Europe. Western Europe and Nordic as a whole increased, as both base business and large projects grew, and Western Europe was boosted by the SEK 290 million order in oil and gas booked in the U.K. We are very pleased that in Central and Eastern Europe, both base business and large orders grew, contributing to the 40% growth, with Russia being the main driver. Moving over to the Americas. Both U.S. and Canada declined due to non-repeat large orders, and base business declined somewhat. Sanitary and marine developed favorably. The strong growth in Latin America was driven by Brazil, where a number of larger orders were won in the food and oil and gas industries. Base business across the region had a generally good development, thanks to food, dairy, and marine customers. Next slide.
For the whole year, Asia stands out, thanks to the high demand from traditional marine and offshore. Frank Mohn was also a major contributor to the growth. North America has grown 18%, and we have had a generally good development, in particular from oil and gas and the re-industrialization of the process industry. The 11% growth in Western Europe comes from a number of large orders and exhaust gas cleaning. Central and Eastern Europe has only declined 2%, despite the political crisis around Ukraine. In Latin America, the impact from lower raw material prices and internal problems at Petrobras caused a decline of 5%. We move over to the next slide now. Here you see the top 10 markets in 2013 and how they have developed in 2014. The U.S. has had a generally good development, supported by one acquisition.
In China, where you see a significant growth, there we have had two years of solid, broad-based growth coming from our investments in increased local presence, topped up by strong demand from the shipyards. South Korea's boost came from strong demand from traditional marine and offshore industries, and here Frank Mohn has been a major contributor. Russia and Brazil have declined and will be replaced by Japan and U.K. next quarter. Now I hand over to Thomas for the financials.
Okay, thanks, Lars. Let's move on to the next highlight slide directly and get onto the sales development. After quarter three, we commented that we expect that sales will increase in quarter four compared to quarter three, in accordance with the seasonal pattern. In the quarter, we realized sales of SEK 10.8 billion, an increase of 29% year-on-year, with an organic increase of just under 1%. In comparison with quarter three, sales was up a good 16%, including an organic increase of 14.5%. I have to say, the higher than expected outcome on sales came from three main elements: bigger shipments of boilers, that is the old boil product family and pumping systems out of Framo, as well as somewhat bigger than expected FX translation effects, not surprising. If we look at Frank Mohn, they contributed with almost SEK 1.5 billion of revenues in the quarter.
Looking at sales, the service activities represented 26.2% of total revenues, almost on the same level as in quarter three, and an increase of just under 13% sequentially. Having said all this about sales, let me deliver the first forward-looking statement. We expect that sales will decrease in quarter one compared to quarter four, in accordance with, I would argue, a known seasonal pattern. Let's move on to gross profit margin. In the quarter, gross profit margin ended 34.3%, representing a decline of 2% year-on-year and a decline of 1% sequentially. To start with, I would argue that the actual for quarter four came out largely as expected in all material respects, but for one element. Let's move on to the next slide and get into some more details.
In the near term, we expect gross profit margin to get a limited positive influence from FX transaction effects. However, gross profit margin in quarter four will be adversely influenced by the seasonal increase in capital sales. No further adverse price mix effects within capital sales are expected. Again, as I just said, the actual for quarter four came out largely as expected in all material respects, but for one element. Sequentially, gross profit margin was adversely influenced by unrealized FX effects in Framo to the tune of 0.8% of sales on an Alfa Laval level. Basically, all of the sequential decline is to do with the unrealized FX effects, the revaluation of working capital in Framo.
For the rest on this slide, I've tried to show to you that we're only looking at none or very small variations sequentially, as well as year-over-year, including the small predicted positive transaction effects on FX. Let me wrap up with the second forward-looking statement. In the near term, we expect gross profit margin to get a positive influence from price mix as invoicing is expected to decline sequentially, and as a consequence, improve the mix, i.e., more off the market relative to total sales. In addition, and this is something that will be valid for the total year, I would like to point out that the Framo backlog revaluation alone will have a certain adverse effect on gross profit margin during the course of 2015, as there is still hedging of revenues in place.
If we move on to the next slide, let's look at the development of overhead costs. R&D ended at SEK 221 million, an increase year-over-year of 4.8%. I think I'd like to point out here that the whole year increase has gradually, during the course of the year, come down and ended 6.4% up on a like-for-like basis. In % of sales, R&D ended 2.3% as opposed to 2.4% in 2013. Sales and Admin, SEK 1.55 billion in the quarter, representing a reduction like-for-like of 4.3% year-over-year. Of course, this year-over-year reduction is the first evidence of the effectiveness of our savings program. With this reduction, we've undoubtedly delivered, and only with this item, we've delivered the anticipated saving of SEK 50 million from the savings program in 2014. To other costs and income.
These two items came out with a small positive net in the quarter, SEK 19 million to be exact. This is, of course, an anomaly. We normally anticipate to come out about SEK 100 million negative. This is thanks to, among others, the mentioned positive net from accounting adjustments in Framo of SEK 34 million, as well as, for instance, refunds from pension plans in Holland and Sweden, partly to be considered as non-recurring. If we just add up these three items, Framo and the two pension plans, they represent approximately SEK 80 million positive. Profits before tax, SEK 1.177 billion, as well as the financial net, was very much influenced by the FX charge of SEK 440 million related to Framo that I commented on initially. Before leaving the P&L, taxes ended with a charge of SEK 266 million in the quarter below our guidance. However, we maintain our guidance of 28% taxes on profit before tax.
If you look at the full-year outcome, we actually ended up 28%. EPS was up 5% year-over-year in the quarter. If I allow myself to exclude the FX charge of SEK 440 million in financial net on the basis that it is, say, non-recurring, EPS would have been up approximately 40%. Return on capital employed and return on equity, they are, of course, both impacted by the acquisition of Framo, particularly as the numbers are not presented pro forma. Moving on to the divisional performance, just a few short comments on operating profit and margin by division. Equipment came out above Q3 of 2014, and also better than Q4 of 2013. In relation to 2013, the sales increase and reduced sales and admin gave a contribution, partly offset by an increase in R&D. For process technology, operating income was up substantially compared to Q3 due to volume.
Year-over-year operating income was down due to price mix and an increase in R&D, partly compensated by volume and FX. Marine, finally, was benefiting from the sales increase, of course, very much to do with Frank Mohn, and then offset by higher cost, and not least, the increase in step-up amortization, again, coming from the acquisition of Framo. Let's move on to cash flow then. To summarize cash flow, cash flow from operations amounted to SEK 1.69 billion in the quarter and well above the year before, and slightly above Q3. The contributor is, of course, the increase in sales. Taxes paid being up, and then a certain increase in working capital as a consequence of the increase in invoicing. Financial net paid is coming with a negative of SEK 320 million, and of course, SEK 240 million has to do with the realized FX contracts in Framo.
Free cash flow in the quarter, SEK 1.16 billion compared to SEK 1 billion a year ago. The sales increase in Frank Mohn, of course, contributed. If we look at the full year, free cash flow was almost SEK 4.1 billion and SEK 450 million more than in 2013. A bit more about FX. We had positive FX of SEK 97 million in the quarter, including a change to positive in transaction. We have, of course, updated our forecast for 2015. We have applied the rates stated on the slide for EUR-USD and EUR-SEK for open transaction exposures. We have applied closing rates as per December for calculating translation. On that basis, we estimate a positive SEK 280 million on EBITA level 2015 compared to 2014. Quite a substantial positive if things stay where they are right now. Order backlog.
We had a total order backlog per end of the year of SEK 22.3 billion representing, and that is including Frank Mohn, approximately seven and a half months of the last 12 months' sales. Excluding Frank Mohn, about six-plus months of LTM sales. What is more important is that on a like-for-like basis, the order backlog to be shipped in the current year is about SEK 1 billion above the end of December 2013. An improvement in backlog year-over-year. Having said that, let's move on to the bridge for whole year sales 2014 to 2015. Starting with SEK 35.1 billion in 2014, the order backlog like for like provides an opportunity for an increase in sales of SEK 1 billion in 2015. FX translation, we estimate to be positive, SEK 1 billion 2015 over 2014.
We estimate that Frank Mohn will add SEK 1.6 billion on top of the sales of SEK 3.3 billion in 2014, giving total sales of SEK 5 billion for Frank Mohn in 2015. If I add it all up, there's a subtotal of SEK 38.7 billion. Of course, as always, it's up to you to make up your minds when it comes to the unknowns. The orders coming in and shipped before year-end, the orders in for out, price effects. When it comes to prices, I can confirm prices for standard products at the beginning of 2015. That finalizes my presentation, and I hand back to Lars for the outlook and the closing remarks.
The outlook is as follows. Please note that our reference point is SEK 9.5 billion. We expect that demand during the first quarter will be somewhat lower than in the fourth quarter. For each division, our demand expectations for the first quarter is as follows. Process technology to decrease somewhat due to non-repeat large orders. Equipment, somewhat lower. Finally, marine and diesel to be unchanged. That completes our presentation, and now we hand over to the operator for the Q&A session.
Thank you. As a reminder, ladies and gentlemen, if you wish to ask a question, you need to press star one on your telephone keypad. First question today comes from the line of Klas Bergelind from Citi Research, London. Please go ahead.
Yes. Hi, guys. It's Klas from Citi. Sorry to labor the point about oil and gas, Lars, but I just wanted to understand what happens here to your orders outside your direct exposure. I'm thinking about the scrubbers, the heat recovery systems. Obviously, you could argue that fuel's now become cheaper, which could be negative for scrubbers longer term, and the incentive to invest in heat recovery could go away here with the falling oil price. Are we seeing any weakness here as of yet, or is this a potential issue further out?
Not at all. We do not see any weakening. On the contrary, when it comes to scrubbers, we had a very strong fourth quarter, and we have a long, very active tendering backlog. We expect growth 2015 over 2014 when it comes to the scrubber systems. When it comes to waste heat recovery, we see a continued high interest in those applications. No concern from our side when it comes to that.
Okay. My second question is really on Process Tech in the service business. I think last time when you highlighted some sequential weakness, it was due to lack of large repeats. It seems like you left that commentary out. You talk about, the Energy division potentially seeing some aftermarket pressures. Is that the case, and is that impacting the margin negatively?
We could see that in the fourth quarter, base business and service declined for the parts addressing, let's say, for oil and gas drilling. When it came to large orders, it continued on a high level in the third quarter.
Thank you.
Your next question today is from the line of Eric Carlson. Please go ahead.
Hello. I had a question on the service business. I think you said service grew 5% organically in Q4 year-on-year. Looking forward, is there any reason to believe that wouldn't be sustainable, thinking about the focus you have on this business and the increase we have seen in the installed base?
We expect continued growth in 2013 for service. We can see that when it comes to ship owners, that there's been a higher activity when it comes to maintenance. For some of the ship owners, the lower oil prices means better revenues. We have seen, as I said, a decline when it comes to service going into oil and gas drilling. If we sum it all up, absolutely, we will see a continued positive development in 2015.
Thank you.
The next question today is from the line of Peder Frölén from Handelsbanken. Please go ahead.
Yes. Thank you. Good morning, Lars. Good morning, Thomas. Thomas, you alluded to the savings program now have generated the expected effects. What's still to be captured here from the initiatives taken? Also, have you more initiatives ongoing? That's my first question. Thank you.
Hi, Peder. Well, we stick to our plan. We realized SEK 50 million, as I alluded to. Of course, we expect to realize SEK 150 million during the course of 2015. Then as we get the effects of the factory closures, we expect another SEK 100 million in 2016, adding it up to SEK 300 million or the total effect that we presented with the launch of the program.
Okay. That's still valid. You mentioned also the gross profit margin effect from the backlog revaluation, affecting first quarter but also the entire 2015. Is this gradually diminishing, or is it flattish over the year? Could you also
Of revaluation for the effect in quarter four. The 0.8% adverse effect in quarter four has to do with revaluation of working capital items. Of course, if exchange rates stay about where they are today, that will not reoccur. Going into 2015, the revaluation, the increase in the order backlog, will mean that we, if you like, inflate the top line, but there is no corresponding or not the corresponding effect on gross profit as there is still hedging in place. That, of course, with a bigger denominator, you will have a lower margin as a consequence.
Okay. I get back in line. Thank you.
The next question today is from the line of Ben Maslen from BAML. Please go ahead.
Thank you. Morning, Lars. Morning, Thomas. Firstly, Framo, I think as you said Thomas, it has stronger revenues than you guided for us in the quarter, I think around 300 million SEK better than you suggested at the Capital Markets Day. Can you just give us a sense, I know you won't give us the margin, but just what's the seasonality on Framo as we go through the year? Was Q4 particularly strong in terms of the margin so that extra 300 million SEK of revenues would have had a disproportionate positive effect on group EBIT? Is it fairly flat? What's the profile? I guess if we don't get that right, we just start extrapolating the wrong number. That's the first question. Thank you.
Honestly, we cannot see any seasonality in the business of Framo. This is simply a matter of delivery schedules to the shipyards. That's really what decides the level of revenue. Then, of course, to the extent we're looking at the offshore business, we're applying percentage of completion, and there, of course, you have a smooth revenue recognition. There is no particular impact in the margin as such, in the gross profit margin in Framo. Of course, with bigger volumes, there was a good drop through, particularly considering the very low overhead levels you have in Framo and being very much a kind of OEM business, if you know what I mean.
Yeah. No. I was more getting at EBITDA margin than gross margin.
Of course, a large amount of drop through, the increment becomes quite substantial to EBITDA.
Okay. You can't give us any help as to the level of the margin?
We are not specific as far as the operating margin in Framo is concerned, no. An adverse gross effect, but a positive operating margin effect.
Great. Thank you. On the order intake for Framo, it looks like if you strip out the SEK 1 billion of revaluation, the orders were about SEK 730 million in Framo for the quarter. Run rating SEK 3 billion, and you've guided SEK 5 billion of sales, I think, for 2015. Was there anything exceptional in that order intake in Framo? Are there any cancellations? That's the first question. If the Framo order rate carries on at this level, at what point would you expect revenues in Framo to start to be negatively affected? Thank you.
There were no cancellations in the order intake of Framo. The nature of the business in Framo is very much project related. There are big swings in the order intake between the quarters. They have a very solid backlog for 2015 and 2016.
Okay. You need a prolonged period of order weakness for Framo revenues to start to be under pressure?
Correct.
Okay. Thank you.
As a reminder, ladies and gentlemen, if you do wish to ask a question, it's star one on your telephone keypad. The next question today is from the line of Colin Gibson from HSBC. Please go ahead.
Hi there. Morning, everybody. Couple of questions from my side, please. Both are on the regional comments. You talked about orders in Asia, saying they were slightly lower on the effect from shipyard contracting. Obviously, we saw quite a lot of downside in shipyard contracting as we went through 2014, and I guess that would hit your order book as a tier 2 supplier with a delay. Should we expect declining orders for that same reason as we go through 2015, or at least the first half of 2015? That was my first question. Then my second question, please, again, a regional question, that was on Russia, where you were talking quite positively, and obviously, that's running counter to the flow of most things we hear about Russia nowadays. I'm just wondering how you see the outlook for Russian business in 2015. Thank you.
When it comes to the order intake for marine, we will see a somewhat lower level in 2015 compared to 2014 when it comes to capital sales. However, you should notice that we say in the outlook for the first quarter, we expect the order intake to be unchanged between Q4 and Q1. We see a good backlog of orders for the first quarter. When it comes to Russia, we had a very strong quarter in Russia, and it's a very mixed picture. You can see that for customers that rely on public financing, there seems to be plenty of funds available. For instance, if you take district heating, had a fantastic quarter, whereas it's a bit tougher for customers that rely on foreign financing. For the full year, Russia came out significantly better than what we anticipated in the beginning of the year.
We expect to see a decline in Russia 2015 over 2014.
Okay, thank you.
The next question today is from the line of Nick Wilson from BESI. Please go ahead.
Good morning. Two quick questions from me, please. With apologies coming back to the gross margin. If I just want to recap maybe the three moving parts there. Potentially, there's a price mix effect, which you said in the near term is a positive. Then we've got obviously the underlying FX effect, which at the capital markets day looks like a positive impact on the gross margin. Offsetting that obviously is the Framo impact, which you've tried to outline. I guess my very simplistic question is, in the mix, in your view, do you think that gives you either a higher or lower gross margin 2015 on 2014, just in terms of the scale? And then the second question on the cost savings. You've been very predictable and managed to achieve very nicely your Q4 expected savings.
As you work through the program, is there any opportunity actually for the program to deliver slightly in excess of what you were expecting? Are you very much still sticking to just the SEK 300 million potential yield?
Thanks, Nick. Well, your first question on gross profit margin. I commented on one item that really was to do with the entire 2015, and that was the Framo order backlog revaluation that inflates the denominator. That's a negative, as you rightly said. That was a comment for the full year 2015. That will be valid for that year. Quarter one, you're right, we expect a positive effect from mix as we anticipate capital sales will go down sequentially. Of course, there is a positive transaction effect in FX as well. You see the magnitude for the full year on the slide. There are two positives, and we expect them to happen in quarter one. As far as the negative one, we will have an adverse effect throughout the year as it looks now.
Thank you.
On the cost savings program, well, as you all know, we try to do our best, and we try to do better all the time. We cannot, at this juncture, promise that we will come out with a saving bigger than the SEK 300 million. Yeah. That was my promise.
Thank you.
The next question today is from the line of Sven Weier from UBS. Please go ahead.
Yeah, morning, Thomas. Morning, Lars. Just two housekeeping questions left. The first one is just on the EBIT impact of the Frank Mohn revaluation and the pension. If I'm getting this right, you have a net negative impact on your adjusted EBIT of SEK 9 million because you said SEK 80 for the pensions and the positive other operating costs and SEK 89 for gross profit. I guess net, it's SEK 9. And then I was just wondering if you could give us the full year sales and order intake number for Frank Mohn for last year. Thank you.
Okay. I wasn't quite sure if I understood you correctly on the EBIT impact of the other cost and income items. What I said was, from accounting adjustments that did hit the other income lines was a net positive of SEK 34 million. In addition to that, we have further positive effects coming out of two pension plans in the Netherlands and in Sweden, giving another, say, SEK 45 about positive. That gives three items being positive to other cost and income. Starting with a net positive SEK 19, the SEK 80 deducted, we're at negative SEK 60. Of course, we still have some further positive effects compared to, say, a norm of a negative about SEK 100. That's what I meant really. Of course, some of these elements, they ought to be considered non-recurring. For instance, the Dutch pension plan issue.
You said in the bridge that the negative impact from Framo on EBIT was SEK -55.
SEK 34 positive on other cost of income and a negative SEK 89 on gross profit.
If I would subtract from the SEK -55 to SEK 45, SEK 46 from the pensions, that would bring me to a net negative impact on EBIT.
Yeah, now that's separate. It has nothing to do with Framo.
No, I'm just trying to get my arms around about your overall
Yeah. Sure.
net one-off effect, I still arrive at SEK -10 despite the pension plan benefit.
Yeah. That's one way to look at it, Sven. I agree to that.
Okay.
Full year sales, SEK 3.3 billion for 2014. In my bridge, I said another SEK 1.6, so SEK 5 billion full year 2015. SEK 3.3 billion and SEK 5 billion.
That was also the sales number for 2014 for Framo?
For seven and a half months, it was SEK 3.3 billion.
You won't provide us with the 12-month number.
Simply because I don't know it by heart, Sven. I'm sorry. I don't want to give you a number because I'm not totally sure, and I want to provide you with the right data.
The SEK 1.6 for this year from Frank Mohn is not just simply the pro rata share of last year, it is really based on your specific backlog.
It's based on our specific backlog and valued as per end of 2014.
Okay. Understood. Thank you.
The next question is from Max Yates from Credit Suisse. Please go ahead.
Hi. Good morning. Just two questions from me. Firstly, on the equipment margins, obviously, the Q4 result was strong there. Could you give us a bit more detail as to why that was so strong given organic growth didn't appear to pick up hugely? The second question was just on the Frank Mohn margins historically. If the order environment is getting a bit tougher, as it is likely to do with Marine getting a bit softer, could you give us an idea of how the margins have performed historically in that business now you've spent more time looking through the numbers? Thank you.
Yeah. Okay, Max. Well, when it comes to equipment, there was a sales increase that, of course, contributed. Equipment has done well when it comes to the savings program, then a slight increase in R&D. Of course, equipment is putting a lot of focus on increasing its channels to the market, making more use of e-business, and they put a lot of effort on service, as Lars has alluded to earlier on. That's really the combination of all of these effects that has given them a good result in the quarter. Moving on to Framo. Remember that this business is, as I commented before, a kind of an OEM business, a very low level of overhead. Of course, a high level of drop through when you have good sales, but then again, eventually when sales goes down, of course, you have the opposite effect.
I think it's very important to remember that the backlog today in Frank Mohn will mean that there will not be any material impact to revenues, even if there's a decline in orders received until, I would say, towards mid-2016. As far as capital sales is concerned, the backlog for full year 2015 and well into 2016 is in the books today. With no other changes, we're well taken care of. The way that the company is set up, very low level of overhead, an OEM business.
Okay, maybe just one follow-up on that. Would you say if I looked at the sort of seven or eight-year margin history of Frank Mohn, at any point in that, has the margin fallen below the Alfa Laval margin? The current Alfa Laval margin.
We have not seen that in the historical records that we looked at in our due diligence, of course, that goes back a number of years. Even if we did not go back seven years, we went back a number of years, we've seen a very good level of margin, even in troughs, in Frank Mohn.
Okay, that's great. Thank you very much.
The next question today is from Lars Brorson from Barclays. Please go ahead.
Thanks very much. Good morning, Thomas. Good morning, Lars. Maybe I could just ask to the demand outlook, Lars, for you to perhaps give a little more granularity divisionally here. I'm particularly interested in PTD and Marine and Diesel. On PTD, you've talked about it slowing down sequentially due to non-recurrent and large orders. You also talk in the report about the base business declining somewhat, particularly in North America, as customers are slowing down their activities following the lower oil price. I wonder whether you could give us a sense of what you see in the underlying base business in PTD as you move into Q1. Secondly, on Marine and Diesel, keeping your outlook flat I guess I'd love to understand what's holding up Q1 here. Is it still large orders coming through, is that more so on the boiler side or perhaps the aftermarket?
Q4 order intake in Framo was down 50% sequentially on an underlying basis, perhaps unsurprisingly, given the shorter lack here to vessel contracting. What are you seeing in your boiler business and your legacy Alfa business? You talked about Marine and Diesel, you're seeing somewhat lower in 50%. When do you expect that weakness to come through? Thanks.
Well, talking about the first quarter and the Marine and Diesel, we see a good backlog of orders on its way to come in from FPSO vessels, from LNG ships, to take two examples. We see a good level of activity. Of course, over the year we will see a somewhat lower level. When it comes to process technology, we still see a good level of activity in most areas. As I already mentioned, it's a given that oil and gas drilling goes down swiftly, that we have already seen in the fourth quarter, both for base business and for service, that we have recognized from previous downturns. It's no surprise to us.
When it comes to, we see a continued good activity level in petrochemicals, for instance, where the reindustrialization in the U.S., when it comes to petrochem, is going on at a continued good pace. As you could see on the large orders in the fourth quarter that we had a good activity level in food-related business. We had one large order for starch. We had another large order from pulp and paper for tall oil distillation. Let's say, the good thing, the strength of Alfa Laval is that we are present in so many end markets and so many geographies. That gives us a good stability in both order intake and in invoicing. I think that's as far as I can take it for the time being.
Okay, thanks.
The next question today is from the line of Rix Mady from Barclays. Please go ahead.
Hello? Hello?
Rix Mady, your line is now open. Please ask your question.
Sorry, my question has been asked. Thank you.
Okay, thank you.
Okay.
The next question is from the line of Natalie Falkman from Carnegie. Please go ahead.
Good morning, Lars. Good morning, Thomas. Thank you for the good report. I have two questions. The first one, in the Capital Markets Day, you mentioned that in your oil and gas exposure, the upstream or drilling exposure, 4% is the key risk area. While you said that the midstream and transportation, I think it was 9%, you didn't see as a larger risk to that with the lower oil prices. Have you changed your view on that or do you feel the same, that is the 4% that is still at risk? That was the first question.
Well, our view from the capital markets day is still remaining. We can see also in the fourth quarter that our view that we expressed has also been confirmed by reality in the fourth quarter. We feel confident with our statement from that point in time. Just to give you a little bit of flavor, this what we call processing and transportation. I just mentioned that we expect good order intake from LNG vessels now in the first quarter of 2015.
Thank you. The second question I had on the Equipment Division, you have had two quarters now with negative organic sales growth there. You have talked for one, two quarters about the growth initiatives, foremost in the distribution channels. Could you give some just color on what you do and when do you think that could start to show in the numbers?
Well, with activities when we are increasing the number of distribution channels, of course, we build a better local presence that over time will give us an organic growth. What has held back the growth in the last two quarters is, let's say, the slowdown in the construction industry in East Asia and to some extent also here in Europe. We maintain our view that this will start to pay off in the future. That's it. During 2015, we expect that to pay off.
I think it's important to remember the seasonality effect here. We have the heating and cooling installations are typically made during the warm season towards the heating season. That, of course, had a negative impact on quarter four as well.
Thank you. My questions.
As a reminder, if you do wish to ask a question on the call today, you need to press star one on your keypad. We do have a follow-up question from the line of Peder Frölén from Handelsbanken. Please go ahead.
That has to be the last question, because after that, we have to take off.
Okay, Lars, let's make it a fast question then. You mentioned the base in oil and gas being down in sales during the quarter sequentially. Could you please help us with the magnitude and numbers? You talked about a significant in the Americas, but on total. That's my first question. The second, Thomas, very briefly on FX. Looking into 2015, are you still having a significant net negative transaction exposure to euro? Is that one of the reasons why the effect is rather limited? Have you prolonged your hedge decision further?
Well, remember, as far as FX is concerned, the main element of our exposure is being long in dollar and short in Swedish krona. Of course, with the strengthening of the dollar, and then applying our hedging practices of 12 months revolving forward, this is the number we're coming to, given what we have of contracts and given the amount of open exposures. As the dollar continues to strengthen, if we assume that that would be the case, eventually there would be further effects, obviously, from transaction.
Yep. Okay.
All right. Then when it comes to drilling, it's too early to make an assessment of what the magnitude of the downturn could be. Remember, it's in total only 4% of Alfa Laval.
Yeah, I hear you. I just wanted to get the feeling for the size of the downturn in sales sequentially in the fourth quarter. Was that in double digits? Is it sort of.
I would say around 25%.
Yeah. That sounds logical. Thank you very much, gentlemen, and have a good day.
Thank you.
You too.
Bye-bye.
Bye.
There are no other questions at this time.
Okay. I guess, Lars, we thank you all so much for the attention.
Do you have the number of participants?
That does conclude the call for today. Thank you for participating. You may now disconnect.