Welcome to the Alfa Laval Q1 earnings all conference call. All participants are on a listen-only mode. There'll be a presentation, followed by a question-and-answer session, at which time, if you'd like to ask a question, you'll need to press star one. I must advise you that this conference is being recorded today, on Monday the 28th of April, 2014. I'd now like to hand the conference over to your speaker today, Lars Renström. Please go ahead, sir, and thank you.
Thank you very much. Good afternoon, and most welcome to the presentation. I will start by giving you my key highlights. Marine & Diesel grew significantly year-on-year and increased somewhat from the high level established in the fourth quarter, and the number of exhaust gas cleaning systems booked were at a record level. The second highlight is that Asia grew slightly as a positive development for the base business compensated for fewer large orders. Also in China, the positive trend for base business continued. Finally, on the 7th of April, we communicated that Alfa Laval had signed an agreement to acquire the Norwegian company Frank Mohn AS, a leader in pumping systems for Marine & Offshore. We expect to close the transaction during May, after approval from competition authorities. Now we move over to the key figures. Orders received rose 5% to SEK 7.5 billion.
Net sales increased 1% to SEK 6.6 billion. Adjusted EBITDA, unchanged at SEK 1.1 billion, and adjusted EBITDA margin at 16.1% versus 16.4% a year ago. Now we move over to orders received and margins. Orders received on rolling 12 months reached SEK 30.6 billion. The increase year-on-year was 5%. Sequentially, orders declined mainly due to an exceptional order intake of large orders in the fourth quarter. Next slide. From the order analysis, you find that year-on-year acquisitions contributed with 1.2 percentage units, and organic growth was up 3.8%. Negative currency effects was 0.2%, giving a total of 4.8%. Sequentially, organic growth was minus 8.1%, mainly due to non-repeat large orders. On the next slide, we see that the EBITDA margin reached 16.1%, and the operating result was SEK 1.1 billion, which is the same as one year ago. Now we move over to highlights in the quarter.
Process Technology booked large orders for SEK 280 million, the largest being for an offshore platform in the North Sea. The rest were for refineries of crude oil and vegetable oil. Marine & Diesel booked 17 open-loop exhaust gas cleaning systems from both existing and new customers, giving a total of 40 systems since the product was commercially launched. The open-loop systems will be prepared for closed loop, and we expect a continued positive developments. On the 7th of April, we communicated that we had signed an agreement to acquire Frank Mohn AS. We expect to close the transaction during May, after approval from competition authorities. On the next slide, we take a closer look at the company. The Marine Pumping Systems made up 50% of sales in 2013. Frank Mohn AS is the global market leader for cargo pumping systems for product and chemical tankers.
The company also supplies cargo heaters and coolers. Oil and gas offshore pumping contributed with 23%. Here they supply water injection pumps, fire water pumps, and submersible seawater lift pumps. Frank Mohn also has an interesting environmental business supplying oil recovery systems. It is both Equipment that collects oil spills from the surface of the sea, and equipment for emergency offloading, also from sunken ships. Finally, 21% came from Service, where Frank Mohn has 50% of the installed base covered by Service contracts. Now we move over to the development per segment. We had 4% organic growth year-on-year in the quarter. You see that seven segments grew, two were decline. Let's take a look at the development per division. Now all comments are sequential. In Equipment, S anitary declined due to non-repeat larger orders, despite that pharma performed well.
Industrial Equipment was affected by non-repeats, a cold winter in the U.S., and political uncertainty in Russia. OEM as well as Service was unchanged. Next slide. In Marine & Diesel, Equipment saw overall higher demand following the ship contracting growth in 2013. Marine & Offshore Systems declined somewhat from a very strong fourth quarter. Demand for exhaust gas cleaning systems was very good. Service grew, favored by improved freight rates that increased demand for parts and repair work. Next slide. In Process Technology division, base business was stable, while large orders declined from extraordinary levels. Food technology was down due to non-repeats, while market unit food solutions and vegetable oil had strong growth. Process industry was virtually unchanged, with substantial growth in refinery, while life science and petrochemicals declined. It is also worth mentioning that oil and gas remains on a high level, even if there were fewer large projects.
Now we move on to the geographical developments. There you see that year-on-year, Asia has grown 17%, boosted by the recovery in the marine industry. Follows Latin America with 11%. We see a positive trend in Western Europe and Nordic. A modest decline in North America. The decline of 21% in Central and Eastern Europe is caused by Russia and Turkey, that have been affected by political uncertainty. Let's take a look at the regions. Now all comments are sequential. In Asia, base business continued to develop well, while the project business was more mixed, reflecting a cautious approach from some customers. The Marine & Diesel Equipment continued to benefit from higher yard contracting. Refinery, petrochemical, and vegetable oil also did well. In China, base business had a continued good development, while non-repeats made total China decline. Now we move over to Europe.
When we combine Western Europe and Nordic, both total and base business was unchanged. In Central and Eastern Europe, we had a significant drop as the record in large orders was not repeated. Base business declined as Russia and Turkey were affected by political uncertainty. Moving over to Americas. In North America, we declined as we had fewer large orders. Positive was that base business remained unchanged. Energy and environment and OEM did particularly well, while others declined due to less of larger orders. In Latin America, fewer large orders in Brazil caused the region to decline. However, we are very pleased that we had a broad-based growth in Service. Moving on to the next slide, you see our top 10 markets. The green bar is full year 2013. Yellow bar is last 12 months. You can see that most countries are virtually unchanged.
Changes of significance are China, driven by the marine industry, and that also applies for South Korea, where also offshore industry contributes. Russia's had a very slow start due to political uncertainty triggered by Ukraine. Now I hand over to Thomas for the financials.
Thank you, Lars. Good afternoon, all of you. Highlights. Let me jump right into sales, as Lars has covered orders received in quite some depth. In the quarter, we realized sales of SEK 6.6 billion, an increase of 1.4% year-on-year, of which the organic element was 1.1%. Even if we report growth in sales, the number was some SEK 200 million-SEK 300 million below our own expectations. However, given that we have the orders expected to have been shipped in our order backlog, we expect to recover the shortfall in the coming couple of quarters. In comparison with quarter four of 2013, sales was down quite a bit. This was a regular seasonal difference, as I'm sure you recognize, and totally in accordance with our prediction from February.
Let me also point out that Service represented 29.2% of total revenues in the quarter, compared with 28.1% in quarter one of 2013. Let me give you the first forward-looking statement. Not surprising, we expect sales to come in higher in quarter two than what was achieved in quarter one. Let's move on to gross profit margin. Gross profit margin ended 39.4% in the quarter, an increase of 1.2% year-on-year and 3% sequentially. Let me remind you that with quarter four report, I said, in the near term, we expect a positive mix effect, mainly from a reduction in capital sales. FX transaction effects are expected to be negative. The actuals for quarter one came out slightly better than anticipated. This is mainly thanks to a better mix within capital sales, but also factory results and mix between aftermarket and capital equipment contributing.
With that, let me give you the second forward-looking statement. In the near term, we do not expect product mix to be as favorable as in quarter one. We expect very limited positive price effects, no material change to factory results, and FX transaction effects are expected to continue to be slightly negative. With that, let's move on further into the P&L account. Looking at the overhead costs, we can report the following. R&D ended at SEK 188 million in the quarter, which is an increase year-on-year like-for-like of 11.4%. The explanation being phasing of project-related individual cost items, and also a certain increase in resources. Moving on to sales and admin. They amounted to SEK 1.27 billion in the quarter, representing a like-for-like year-on-year increase of 5.6%.
Explanations are a salary inflation, combined with selective increases of resources to improve presence, and also increased activity to catch the contracting in Marine & Diesel. Other cost and income. Please let me point out that this includes a non-recurring charge of SEK 60 million related to the acquisition of Frank Mohn. A non-recurring charge of SEK 60 million in other costs. EBITA margin 16.1%, as Lars pointed out before. Moving on down the P&L, profit before tax was SEK 794 million in the quarter, a reduction of 14% over last year, and this includes a difference in financial net due to exchange differences being some SEK 43 million worse than last year. Before leaving the P&L, taxes ended with a charge of SEK 230 million, slightly above our guidance of 28% of profit before tax. As far as EPS is concerned, the quarter ended SEK 134 and SEK 157, excluding amortization on step-up.
This is a decline compared to quarter 1 of 2013 with approximately 20%. Let me point out again that this decline is almost in its entirety explained by acquisition-related non-recurring costs and the FX differences in financial net. Return on capital employed and return on equity ended exactly on the same level as per year-end. That is 26.4% and 20.4% respectively. Let me give you a few comments on divisional performance on the next slide. Equipment came out above quarter 1, mainly thanks to increased sales volume and a better mix, and a positive R&D efforts. All in all, an increase in operating profits and an improvement in operating margin. Process Technology division was benefiting from a positive mix effect year-on-year. Sales and admin increased somewhat, giving a slight adverse impact, still, the net was a positive impact on operating margin with 0.4%.
Marine was adversely impacted by increased sales and admin costs, that is entirely explained by the high level of activity, giving a build-up in order backlog. The increased contracting to the yards, of course, is an opportunity that is captured through increased activity in the sales area. The development in gross profit margin, I should mention for Marine, was slightly positive, thanks to mix, though. If we move on to cash flow, I think we can summarize the cash flow statement for the quarter as follows. Cash flow from operations amounted to just under SEK 600 million, some SEK 370, SEK 380 million below quarter 1 of 2013. The main reasons being an increase in inventories on the back of the increased backlog and somewhat higher receivables due to, among other volume. The free cash flow ended SEK 567 million compared to SEK 933 million a year ago.
The main reason, of course, for this deviation is the working capital, as I just commented. Let me point out, this variation in working capital is not to be considered anything but ordinary fluctuations in working capital due to volume. Moving on to FX. We had an adverse effect in the quarter of SEK 10 million, of course, we've updated our full-year forecast. We've concluded on the back of the rates on the slide, as well as applying closing rates as per end of March for calculating the expected translation effect, we believe will come in a negative SEK 50 million for the full year. As you see from the slide as well, a very small positive in 2015 if everything remains the same. Moving on to the backlog. We had a total order backlog as per end of March of just over SEK 15.3 billion.
That represents just over six months of LTM sales. On a like-for-like basis, the order backlog to be shipped in 2014 is some SEK 700 million above the end of March 2013. In monetary terms, as seen from the slide, the backlog for shipment is about SEK 900 million above the status a year ago. Having said that, let's move on to the bridge for whole year sales 2013 to 2014. As we typically do, let's look at the known and the unknown parameters. Let me, to begin with, point out that full-year sales 2014 is about SEK 100 million lower than what was reported in the P&L for 2013, that is, of course, to do with the changes due to changes in IFRS 11 on accounting for joint ventures. Order backlog, like-for-like, some SEK 200 million lower at the beginning of the year.
Closing exchange rates as per end of March, as end of December, an adverse effect of SEK 100 million. Acquisitions, that is Niagara Blower, assumed to give a boost to sales of about SEK 100 million additionally in 2014. That gives a subtotal of the known parameters of SEK 29.6 billion. Of course, it is up to you to form an opinion about demand in 2014. As for prices, let me just point out that we made some small adjustments to prices for standard products at the beginning of the year, that is expected to give only limited effects to the total of sales. With that, I hand back to Lars for the outlook and closing remarks.
Thank you. The outlook is as follows. We expect that demand during the second quarter will be on about the same level as in the first quarter. For each division, our demand expectations for the second quarter are as follows. Process Technology, unchanged, with continued high tendering activity. Marine & D iesel, unchanged. Equipment division, somewhat higher due to seasonality. That completes our presentation, now I hand over to the operator for the Q&A session.
Thank you. Ladies and gentlemen, if you would like to ask a question today, please press star one and wait for your name to be announced. If you wish to cancel this request, please press hash key. Once again, that is star one to ask a question. Your first question today comes from the line of Peter Frolund from Handelsbanken. Please ask your question.
Yes. Good morning, thanks for taking my questions. Now it seems like we are closing in on the consolidation of Frank Mohn. Is it possible to share some light on the deliveries this year on a full-year basis? That's my first question. My second question relates to the scrubber orders. Could you please remind us on the deliveries here, 2013, 2014, and beyond that of the, in total, 40 systems? I stand back there and wait in line.
Well, when it comes to Frank Mohn its impact on deliveries, i.e., sales in 2014. Please, we would like to come back only once we've closed and with the second quarter report, we will certainly do our best to give you a very good sense of what the implications of the Frank Mohn will be. We are not prepared to provide any detail at this juncture.
When it comes to the deliveries of the exhaust gas cleaning systems, it's some in 2014, but most of them will be delivered in 2015.
Okay. That's very clear. Thank you.
Thank you. Once again, that's star one to ask a question. Your next question comes from the line of Nick Wilson from Espirito. Please ask your question.
Good afternoon. It's Nick from Espirito. Just two related sales questions, if I may. I think, or you've been quoted saying that sales in Q1 were perhaps SEK 200 million- SEK 300 million below expectation. You were talking about a recovery in the next couple of quarters. I presume that's more likely to be in Process Technology and Marine as some of these larger orders that were booked in Q4 start to be delivered. I'm just checking which divisions have the catch-up. Then also, given your guidance Q2 on Q1 that you think Process Tech and Marine are fairly unchanged, I'm just trying to work that out given the sales catch-up that you've implied from that comment.
Well, Nick, to begin with, yes, the delay in revenue recognition has to do mainly with PTD, but to some extent, Marine & Diesel, yes. The qualification on the outlook was relating to demand, i.e., orders as far as we're concerned and not related to sales.
Okay. That's a lot clearer. Thank you very much.
Thank you very much. Your next question comes from the line of Colin Gibson from HSBC. Please ask your question.
Thanks very much, indeed. Good afternoon, everyone. Couple of questions, please. First of all, you mentioned the slowdown in Equipment orders, at least in part due to the weather in North America. If that's the case, can you then confirm that you saw a pickup in orders in March compared to January and February? I think most companies that experienced weather disruption in North America saw a better March than January and February. I'm just wondering whether you also saw that. Secondly, I have to ask, since we last spoke, GEA's HX division has been, as expected, sold to a PE buyer. What reaction do you see in the marketplace from that, and do you anticipate any impact on your business? Thank you.
First of all, when it comes to the U.S. and order intake, we do not comment individual months when it comes to order intake for Alfa Laval. The second one, it's too early to tell, let's say, what the impact will be from the acquisition of GEA's heat exchanger division. From Alfa Laval's perspective, we do not expect any material impact from the sale of that division.
Thanks.
Thank you. Once again, that's star one to ask a question. Your next question comes from the line of Ben Nelson from Bank of America. Please ask your question.
Hi, Lars. Hi, Thomas. Just firstly on the gross margin, even with the comments you make, it seems like a fairly big sequential step-up, especially given currency didn't move too much. Can you give us any more color on the different favorable mix effects that you saw in the quarter, either by region or product line? Are there new products coming in that are helping it? Just so perhaps we can understand the sustainability of that. Secondly, I guess against it, you mentioned higher costs in the quarter for SG&A and R&D. Are there any kind of one-off effects in there when you look at it year-on-year, or is this a kind of sustainable step-up in the rate of spending that we should see for the rest of 2014? Thank you.
Okay. Ben, if we start with gross margin, I think it's important to stress then what I said before on the outcome of quarter one. The mix within capital sales was better. That has to do with the mix within Process Technology, where with a lower revenue recognition, i.e., with less of larger, wider scope contracts with revenue recognition, you get a positive impact on gross profit margin. This was more an impact in the quarter, and as I stated in the second forward-looking statement, in the near term, we do not expect product mix to be as favorable as in quarter one. I think that is quite explicit. It is relating to the lower than expected sales figure. Moving on to the overheads.
In SG&A, no doubt, Marine & Diesel had higher sales and admin costs, partly due to the increased level of activity towards yards and ship owners on the back of the uptick in contracting. Underneath, of course, there is the salary inflation, but particularly in Marine & D iesel, you have an impact of the higher activity level in the market. For R&D, 11.4% certainly is not what we're looking for the full year. This is due to individual cost items. For instance, in specific projects, we're buying tooling, the first set of tools for testing the new product. That is something that in Alfa Laval terms is an R&D spend, and that is expensed immediately. They kick in to quarters randomly, so that is not an ongoing level.
Got it. Thank you. To summarize then, the improvement in the gross margin is more Process Technology driven, and the step up in SG&A is more Marine & D iesel driven. Is that a fair assumption?
That's a fair conclusion. All of the three divisions had an improvement in gross profit margin, but it was particularly strong in Process Technology for the reason I mentioned. Yes.
Thank you. If you have, a very brief follow-up, in terms of the more cautious comments you made around Russia and Turkey. Just how do you expect those markets to develop in the second quarter? In your flat guidance, what have you assumed, that those markets deteriorate further or they're fairly flat, or maybe orders missed in Q1 come back a bit? Thank you.
We believe that we will see a recovery in Turkey since the elections have been completed, and Mr. Erdoğan has been a clear winner, so then people know who is in charge. When it comes to Russia, we do not see any significant change to what we saw in the first quarter. You can say what we saw in the first quarter we believe will continue in the second quarter as well, since this is linked to the situation in Ukraine.
Got it. Thank you.
Thank you very much. Your next question comes from the line of Max Yates from Credit Suisse, London. Please ask your question.
Hi, good afternoon. If you could just firstly, on the overall Marine and Diesel market trends, if you could just give us an idea whether there's any update on what you're seeing relative to the pre-close call that you did. I think a second question on the exhaust gas cleaning orders that you've received this quarter. Have those mostly been retrofits, or I assume most of those have been on new ship orders? Thank you.
Well, when it comes to the Marine & D iesel and the demand situation, we maintain our view that for the full year, we will see a slight decline in order intake compared to a very strong 2013. Sorry. What I'm talking about is contracting at the yards, and we believe that we will see a slightly lower contracting at the yards 2014 compared to a very strong 2013. When it comes to the exhaust gas cleaning equipment, it is mostly retrofit, and we had orders both from existing and new customers.
Thank you. Maybe just very quick follow-up. On Process Technology, obviously, we mentioned there was a lack of large orders this quarter, and it was exceptionally strong in the fourth quarter of last year. Are there any orders that have been pushed out from this quarter that maybe sign next quarter, or would you say it's just we've seen most of the large orders in Q4, and we haven't seen them in this quarter, but there hasn't been any push-out?
Well, we saw in the first quarter that there were some customers that postponed their decisions, whether that will materialize in the second quarter or not, that remains to be seen.
Okay. Thank you.
Please remember that we commented with the full year report that we had some of the large contracts pushed forward into quarter four. There was an element of things reported already before year-end, sort of impacted quarter one as well. I think it's important, Lars' qualification to demand, that we see a high level of tendering and quotation in PTD still.
Okay, thank you.
Operator, can you increase the level from your end? We have difficulties to hear the questions.
No, sir, I can't increase the volume level from our side.
We ask the persons that ask the questions, please speak up a little bit.
Your next question comes from the line of Daniel Schmidt from SEB. Please ask your question.
Yes, hello. Do you hear me better?
Loud and clear.
Okay, good. Can I just ask you two questions? Firstly on exhaust gas system orders, the value per order, has that been coming down compared to what you delivered last year in terms of order per value? Secondly, what should we expect in terms of the impacts on margin from partly SOx being executed and also Service orders picking up? What's going to be the net out of that going forward for the Marine and Diesel division?
Okay. If we start with the value on the orders landed in the quarter, they were open-loop systems, but still prepared for closed loop. Being open-loop systems, that means without separation equipment, so a lower value in average. It is clearly lower than the average SEK 2 million we mentioned for closed loop. They are more like SEK 1 million each on the scrubbers. When it comes to impact on gross margin, the EGC orders, they are comparable to other capital equipment in Marine, so no impact as far as, say, the capital equipment is concerned. Yes, we've seen an uptick in Service, and of course, that is beneficial for gross margin. Enjoying an uptick in orders will eventually mean an uptick in sales. You will have an adverse mix with more capital equipment, eventually.
Great. Thank you.
Thank you. Once again, that's star one to ask a question. Your next question comes from the line of Anders Idborg from ABG.
Hi there. Most of my questions have been answered. If you look at the energy and environment piece, it came down sequentially quite a bit. You still say it's on a high level. What do you see specifically on the oil and gas side there in terms of tendering activity?
We see that we have good tendering backlog. We see there's still good activity in the North Sea. The only thing that differs compared to a couple of quarters ago is that there are less of the very large orders. We continue to believe that going forward, there will also be a good activity level. We should remember, the absolute level is quite good.
Yes. Then perhaps just a few small items. The SEK 60 million charge that you take in this quarter for the Frank Mohn acquisition, is that the total of extraordinary costs that you will book? Then I would also ask you, just the tax rate, a little bit higher this quarter than last quarter. What should we expect for the year there?
As far as the SEK 60 million are concerned, that relates to the cost for the acquisition, for actually making the due diligence, set up the SPA, and get to closing. As far as any costs for integration are concerned, that is work in progress, and to the extent we see any material costs for integration, we will come back on that subject. As far as the tax rate is concerned, nothing else than the overall guidance of 28% of profit before tax.
Got it. Thanks.
Thank you. There are no further questions at this time. Please continue.
Okay. We complete our presentation, thank you everybody that participated. Thank you and goodbye.
My apologies, sir. One final question has just come through.
All right, we are happy to answer that.
Okay, the question comes from the line of Peder Silfverskiöld from Handelsbanken. Please ask your question.
Okay, gentlemen, sorry for that. Okay. Just wanted to ask you, Lars, order activities so far. We hear your guidance. In particular, are the parts and service order activities so far in the quarters continue to increase sequentially? Could you please tell us a bit about the tendering on large orders? We have seen the press releases or the lack of press releases, could you share some words regarding the activity?
Yeah. The tendering activity, it's still on a high level. Whether they will materialize into orders in the second quarter, that remains to be seen. You can see the fluctuations are quite big. We had all-time high in the fourth quarter, SEK 900 million, and in the first quarter, we had the lowest in nine quarters, SEK 280 million. It is hard to predict the behavior.
When it comes to service, we continue to believe that we will grow our Service business at a steady pace. More specific than that, I cannot be. Thanks.
Thanks for that. That's it for me.
Thank you very much, Peder. Thank you all the rest of you. Thank you and goodbye.
Ladies and gentlemen, that does conclude our conference call today. Thank you all for your participation. You may now disconnect.