Welcome to the Alfa Laval Q4 earnings call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question and answer session, at which time, if you wish to ask a question, you will need to press Star and One on your telephone keypad. I must advise you this conference is being recorded today, Wednesday, the 5th of February, 2014. I would now like to hand the conference over to a speaker today, Mr. Lars Renström. Please go ahead, sir.
Thank you very much, good morning, most welcome to the presentation. I will start by giving you my three highlights. First of all, both orders received and invoicing reached all-time high. Orders received came in on SEK 8.2 billion, large orders were the main drivers behind the record. The second highlight is that marine and diesel grew significantly, both year-on-year and sequentially, driven by the increased contracting at the yards earlier in the year, environmental solutions like PureSOx and PureDry. Finally, process technology reached all-time high when base business and especially large orders grew. The growth was well-distributed both geographically and in applications. Let us move over to the key figures. There you see that orders received rose 13% to SEK 8.2 billion. Net sales increased 6% to SEK 8.6 billion. Adjusted EBITDA grew 5% to SEK 1.4 billion, and adjusted EBITDA margin reached 16.3%.
For the full year, orders received were unchanged at SEK 30.3 billion, net sales unchanged at SEK 29.9 billion, adjusted EBITDA unchanged at SEK 4.9 billion, finally, adjusted EBITDA margin reached 16.4%. On the next slide, you see that the board of directors proposes a dividend of SEK 3.75, an increase of 7%. Further, the board proposes a mandate to buy up to 5% of the number of outstanding shares. Now we move over to orders received and margins. Orders received on rolling 12-months reached SEK 30.3 billion. The increase year-on-year was 16% at constant exchange rates. The significant increase sequentially was mainly driven by large orders, also base business developed well, we reached an all-time high level. Here I have a forward-looking statement.
Compared to the fourth quarter, we expect demand in the first quarter to be in line with or somewhat lower due to fewer large orders. We move over to the next slide. From the order analysis, you find that year-on-year acquisitions contributed with 1.3 percentage units, organic growth was up 14%. We had negative currency effects of 2.9%, giving a total of 12.7%. Sequentially, organic growth was 9.5%, 0.2% positive currency effect gives a total of 9.7%. Next slide. The EBITDA margin reached 16.3%, we have now had eight consecutive quarters around 16.5%. The operating result was SEK 1.4 billion, the highest absolute value in more than two years. Let us take a look at the highlights in the quarter. Process technology reached all-time high in large orders, SEK 820 million.
We are very pleased that the orders are well distributed geographically, and there is a good balance between food and energy. In Marine & Diesel, we booked a large repeat retrofit order for exhaust gas cleaning, confirming that our system is reliable and well proven. From another customer, we booked an order for 40 ships that will be equipped with PureDry. That saves 1%-2% of the fuel oil. This significant order confirms that ship owners are prepared to install the equipment on a large scale. Next slide. We have opened a new test and training facility in Aalborg, Denmark, that shows our commitment to the marine industry. The full-scale engine room is equipped with a diesel engine and 10 different products supplied by Alfa Laval. All equipment is integrated and managed by a control system that enables us to test, monitor, and control the complete system from remote.
We can test and evaluate innovations in full scale before we run the tests on board ships. This reduces time to market and increases precision in R&D. Next slide. For the full year, you see that large orders exceeded SEK 2.1 billion, somewhat less than in 2012. In absolute value, year-on-year, food is up significantly, whereas Energy & Environment is down. We are very pleased with the distribution between the three areas. Next slide. We are also pleased with the distribution between the geographical areas, which well reflects the actual market sizes for Alfa Laval and confirms our excellent global presence. We move over to the development per segment. There you see that we had 14% organic growth in the quarter, and you can see that year-on-year, seven segments grew, two were unchanged, and two declined.
Let's take a look at the development per division. Now all comments are sequential. In Equipment, Sanitary was lifted by good demand from personal care and food. Industrial equipment saw a slight decline due to seasonally lower demand for HVAC. OEM was unchanged as demand from boiler manufacturers grew, while demand from HVAC declined due to seasonality. Next slide. In Process Technology Division, Energy & Environment saw oil and gas rise, boosted by large orders. Power booked a large nuclear order following increased activity. Large protein and brewery orders contributed to the growth in Food. Process Industry declined due to non-repeat orders in refinery, whereas other areas in the segment grew. Let's take a look at Marine & Diesel. In the division, the Equipment segment saw overall higher demand following ship contracting growth throughout the year.
Marine & Offshore Systems grew significantly with a positive development across the board. A large exhaust gas cleaning order contributed to the growth. Demand for Service was down due to lower repair activity. Next slide. For the full year, five segments are up, three unchanged, and three down, reflecting that we had 1.6% organic growth like-for-like. The Service segments in Process Technology and Equipment grew, giving a total growth like-for-like of 5.8%, despite the decline in Marine & Diesel Service. We move over to the geographical development. Order intake in the quarter shows that year-on-year, Central and Eastern Europe stands out with an outstanding growth of 89%, boosted by Russia, followed by Latin America with 29%. All regions delivered good growth except Western Europe. Let's take a closer look at the regions. Please notice that all comments there are sequential. Asia was unchanged.
The base business did very well, while service was unchanged, and large orders were affected by a non-repeat. Marine & Diesel had a strong quarter, lifted by a high activity level among shipyards in South Korea, China, and Japan. China grew, lifted by marine, food, process industry, and service. Equipment was at a slightly lower pace than previous quarters, and we have now had three consecutive quarters with growth. Next slide. Nordic grew 12% and Western Europe grew 3%. Both base business and large orders had a positive development. Sanitary Marine & O ffshore Systems and Energy & Environment did particularly well, and service demand rose. Central and Eastern Europe grew 35% due to a very positive development in Russia and Poland-Baltics. Russia reported a record quarter boosted by three large orders for nuclear power, starch processing, and protein processing. Next slide.
North America grew 15%. In both U.S. and Canada, we booked large projects and service contributed to the growth. Sanitary, industrial equipment, process industry and food contributed to the positive development. Latin America grew 4%, and Brazil did particularly well with growth for both base business and large orders. Argentina has strong base business in the Process Technologies Division. Next slide. For the full year, Latin America delivered 12% growth. All our other regions delivered a moderate growth except Western Europe, that was unchanged. We are pleased with the good balance between the regions. On the next slide, we have our top 10 markets. The U.S. continued to grow, supported by acquisitions. China has delivered three consecutive quarters of growth, supported by the recovery in the marine industry. Nordic grew, supported by oil and gas investments in the North Sea and marine environment.
In South Korea, the recovery of marine and offshore almost managed to compensate for the decline of the EPC contractors. After several consecutive years of growth, Southeast Asia was hampered by political as well as financial instability. Mid Europe reflects the good development of the German economy. After a strong quarter 4, Russia reached the record level of 2012. Adriatic, which is mainly Italy, did a very good year, and we have good momentum in our local organization. Brazil delivered good growth despite challenging business climate. Petrobras contributed well to the growth. Finally, thanks to oil and gas investments, Canada almost managed to compensate for the large SEK 300 million environmental order we booked in 2012. Now we move over to Thomas for the financials.
Thank you, Lars. Good morning, all of you. Let's get right to it. Let me jump right into sales as Lars covered orders received in depth. In the quarter, realized sales of SEK 8.6 billion, a new record level for Alfa Laval. We were, of course, supported to some extent by a weakening of the Swedish krona, but still, let me confirm that sales ended some SEK 300 million to SEK 400 million above our own expectations. The Process Technology Division, as well as the Marine Division, managed to ship somewhat above expectations. The shortfall that we talked about in quarter 3 was obviously recovered as expected. To emphasize the record, sales was up 7.5% organically compared to quarter 4 of 2012. Acquisitions added 1.6% to sales, and in absolute terms, sales was up 6.5% year-on-year.
Sequentially, we report a like-for-like increase in sales of 19.4%, an outcome consistent with earlier years, i.e., a seasonality pattern similar to earlier years. If we look at the service component, it represented 25.7% of total revenues in the quarter against 25.8% in quarter four, so a small variation. The same goes for the full year, 26.7% against 26.6% in 2012. Let me finish the comments about sales with the first forward-looking statement. Sales is expected to come in substantially lower in quarter one than what was achieved in quarter four. With that, let's move on to gross profit margin. Gross profit margin for the quarter ended 36.4%, representing a decline of 0.6% year-over-year and 0.3% sequentially. Let me remind you what I said after the quarter three report.
I said, in the near term, we expect a negative mix effect, mainly coming from an increase in capital sales. FX transaction effects are expected to be negative. Finally, we do not foresee any material changes to load of factory results. The actual for quarter four came out slightly below our own expectations. This is mainly due to a somewhat worse factor result than expected. The mix effect was negative as anticipated, and that was not only because of the split between capital and service, but also within capital sales. To finalize comments about gross profit margin, let me give you the second forward-looking statement. In the near term, we expect a positive mix effect, mainly from a reduction in capital sales, relatively speaking. FX transaction effects are expected to remain negative.
If we move on to look at overheads and the rest of the P&L, R&D ended SEK 194 million in the quarter, which is a reduction year-over-year like-for-like of 7.5%. The explanation being phasing of individual cost items such as tooling of new products. The increase in R&D for the full year was 3.5%, i.e., we had a slight increase in R&D in real terms. The R&D spend represented 2.4% of sales for the full year 2013, which is in line with our guidance for R&D spend. S&A amounted to SEK 1.4 billion in the quarter, representing an increase like-for-like of 3.4% over 2012. Salary inflation and selective increases of resources to increase presence is behind this increase of 3.4%. The full-year increase was 1.5% like-for-like.
The net of other cost and other income compared to 2012 is somewhat higher in the quarter, which reflects charges for certain restructuring measures amounting to a couple of EUR million. We had adverse FX effects to the tune of SEK 45 million on the EBITA line. This gave us all in all an EBITA margin for the quarter of 16.3%. Let me just give you a few short comments about operating margin by division. The equipment division came out below average for the year and below quarter four of 2012. An important factor was cost related to the buildup of web-based sales and other channel development activities. The process technology division was benefiting from an increased sales volume, still having higher sales costs. Finally, the marine and diesel division was benefiting from reductions in overhead costs, measures that were initiated already towards the end of 2012.
Profit before tax was just over SEK 1.2 billion in the quarter, an increase of 2% over last year. This includes a difference in financial net due to exchange differences being SEK 83 million worse than last year. Before leaving the P&L, taxes ended up with a charge of SEK 330 million, which is somewhat below our guidance for taxes of 28% of profit before tax. EPS SEK 207 and SEK 229, excluding amortization on step-up, a slight decline from quarter four 2012. Finally, the return numbers, return on capital employed 26.4%, return on equity 20.4%, limited changes from where we were at by the end of quarter three. Let us move on to the cash flow statement. The cash flow statement can be summarized as cash flow from operations well above quarter four 2012, reaching SEK 1.2 billion. The main contributor is a refund of prepaid taxes in Sweden.
Free cash flow reached SEK 970 million compared to just over SEK 700 million in quarter four of 2012. I've said it on many instances before, but I say it again, to conclude, I think it's fair to say that we had another really good year as far as cash flow is concerned. Let's talk a bit about FX. FX effects in EBITA were, as I stated before, SEK 45 million negative, SEK 17 million from translation and SEK 28 million from transaction. We came consequently out at the bottom of the range that I indicated at the Capital Markets Day in November. An important contributor was, of course, the weakening of the Swedish krona. We have, as we normally do, updated our forecast for 2014.
With the rate stated on the slide as far as transaction effects are concerned and applying the end of December rates for calculating translation effects, we expect a net adverse FX effect for the full year 2014 of SEK 60 million. Let's take a look at the order backlog situation for end of December. We had a total order backlog of almost SEK 14.6 billion, representing just under six months of LTM sales. On a like-for-like basis, the order backlog to be shipped in 2014 is some SEK 200 million below the situation for end of 2012 for shipment in 2013. From the slide, as you see, the absolute difference is SEK 130 million. The balance is, of course, the impact of our acquisition of Niagara Blower during 2013. Having said that, let's move on to the bridge for whole year sales 2013 to 2014.
Looking at the known and unknown parameters, the following can be said. As stated just before, like-for-like, the backlog for January 1 will, of course, reduce sales of approximately SEK 200 million compared to 2013. Based on the end of December exchange rates, we will have a negative translation effect of just SEK 100 million, so substantially less than in 2013. The acquisition of Niagara Blower, we estimate, will give a boost to sales of SEK 100 million. Summarizing the known parameters, we should expect to be at a sales level of SEK 29.7 billion. Of course, it's always up to you to form an opinion about demand for the coming 12 months and its implications on sales in 2014.
As far as prices are concerned, we have, as we normally do at the beginning of the year, made small adjustments to prices for standard products, and that, of course, is anticipated to give a limited effect to the total sales number for the group. With that, I hand back to Lars for the outlook and the closing remarks.
The outlook is as follows. We expect that demand during the first quarter will be in line with or somewhat lower than the fourth quarter. Remember that we are now comparing with an all-time high quarter. For each division, our demand expectations for the first quarter is as follows. Process technology, somewhat lower since we expect less large orders, even if tendering activity continues to be high. Equipment, unchanged, and marine and diesel, unchanged. That completes our presentation, and now we hand over to the operator for the Q&A session.
Thank you. As a reminder, if you would like to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Your first question comes from Andre Kukhnin from Credit Suisse. Please ask your question.
Good morning, everybody. It's Andre from Credit Suisse. Thank you for taking my questions. Firstly, just on the quarter operational gearing effect, your sales obviously grown and, as you said, faster than you expected. Historically, that's resulted in an operating profit margin effect, while it basically stayed flat. Could you just give some color on what the headwinds within the quarter that offset that SEK 200 million operational gearing effect that I estimate entirely, and how they are likely to pan out over 2014?
Hi, Andre. Yes. I commented a somewhat worse factor result than anticipated, and that relates to a more uneven load among factories than we anticipated, which means a few factories, they were having a load substantially below the expectation towards the end of the quarter. Of course, we had increased sales, but as we have seen a growth in contract-based sales over the last several years, we have also seen a growing application of the percentage of completion method for revenue recognition. That, of course, does not automatically mean an impact on the, say, factory load as such. This is rather sort of accounting on the back of completion of contract. There is not such a obvious relationship as you normally have if it relates to, say, straightforward manufacturing of parts or product.
Got it. Would you say, given the sort of the broad-based pickup in demand that you saw in Q4 and the guidance, would you say that that sort of unevenness of the factory load could normalize in 2014?
It's impossible to tell at this juncture what the load will be like over this year. We have a backlog which is like for like, as I stated before, somewhat lower. To be a bit specific about the short term, we do not see any material changes in load as far as the short term is concerned.
Got it. The second question, just on environmental products. On SOx, can you just update us on how many ships you've installed your systems on, and what is your current market share or the share over 2013? On ballast water, whether you are maintaining the assumptions you gave at the CMD, or whether you're more or less confident in them. Thank you.
When it comes to SOx, by the end of the year, we have booked orders for 18 ships, in total, 23 scrubbers. Going forward, we expect continued positive development for SOx, we see a good activity level in the markets.
Yeah. As far as ballast water is concerned, we have not seen a ratification of the convention yet, as I'm sure you're aware. That, of course, means we are not seeing anything happening in the retrofit market. There's a very high % of new-built or newly ordered ships that are ordered with ballast water system. As far as retrofit, no change, because no ratification.
Got it. Thank you very much.
Your next question comes from the line of Lars Brorsson from DNB London. Please ask your question.
Thanks very much. Hi, Lars. Hi, Thomas. Three questions, if I could, from my side. Just on the order delays from Q3, can you give us a sense of what the order of magnitude of that was? Also on your outlook into Q1, I wonder what your assumption is for base orders in some of your key emerging markets, and whether you see any signs of potential hesitation here, in the early parts of Q1. Secondly, if I could, on your other operating cost of SEK 257, that's about SEK 100 million above the level you've been running at in the past. Can you give us a sense for what's driving that, and whether there's been any operating costs shifted out of any of the divisions into other?
Thirdly, if I could, just on your seasonality and your divisional margins, we don't have much pro forma history here, particularly on marine and diesel. They're up 500 basis points quarter-over-quarter. They were up 400 basis points in Q4 last year. How should we think about the seasonality in margins here? Also, if you could, talk a little bit about the seasonality in PT margins here. They're obviously seasonally lower in the second half. Now we're seeing a very big quarter in Q4. That would be my three questions. Thanks.
Okay. If we start with emerging markets, there, in the fourth quarter, we didn't see any impact from the financial instability in the emerging markets. Going forward, of course, higher interest rates will dampen the, let's say, the willingness to invest. However, you should bear in mind that we are active in three areas: energy, environment, and food, that are prioritized areas in all emerging markets. What the net balance of that becomes, that remains to be seen.
You started off by asking about order delays from quarter three, well, we had expectations when it comes to customers' decisions about individual orders. As we all know, the customers decide at the end of the day. I don't know whether it's really meaningful to give you a number, but I guess we could say that we are talking about in the range of SEK 200 million. That could have come in quarter three, but actually came in quarter four. As Lars stated earlier, we had a bit of a similar situation in the other direction towards the end of quarter four, i.e., customers made decision already in quarter four instead of in quarter one. Other costs, well, Lars, let me point out that operating income for others was SEK 581 on a full year basis, SEK 541 in 2012.
I think level, as far as that is concerned. I mentioned before a few SEK million in charges for restructuring measures. That is, of course, one thing that plays a role. When it comes to margin seasonality in marine and process technology, you have implications from, well, the usual main parameters of volume, of course, and price. I think when you were worried, pretty much all of you, about the margin marine reported in quarter three, I said we are oscillating at what we believe is the trough of the cycle. The intention with that statement was, of course, to give you comfort that this was, well, the very trough. I think the outcome in quarter four is evidence of just that. I think it is incorrect to talk about seasonality. It is more about cycle as far as marine is concerned.
It is inevitable that we have oscillation at a trough as well as a peak. As far as PTD is concerned, margin is, of course, influenced to a great extent by mix.
That's clear. Thank you. One follow-up, if I just could, on your other operating costs. I appreciate they were level year-over-year for the full year, but obviously in Q4, quite high. Even if I take EUR 2 million-3 million out of that you talked about in restructuring charges, there's still a good SEK 100 million or so in the quarter. I just wonder whether you could give us any sense for what that might have been.
There is no further detail to be provided at this juncture, no.
Thanks.
Your next question comes from the line of Peder Frölén from Handelsbanken Capital. Please ask your question.
Yes, thank you for taking my questions. Good morning, Lars. Good morning, Thomas. Let me start to ask you about your view of how much of your orders today, or say revenues is much easier, which is exposed to the upstream oil. That's my first question. Secondly, tied to the Marine & Diesel profitability, if it's not about seasonality, more the cycle, would you dare to comment on a very, very high profitability level? Is this a level that you expect on a more longer-term horizon ahead? Finally, the buyback mandate. If you look at history, from what you are now and what you see, are you expecting to use parts or the entire mandate in the upcoming year? That's it for now.
Okay. If we take our exposure to oil and gas, if we start with that one.
Yes, please.
If you take up and midstream, that means drilling, production, transportation, there it is around EUR 300 million on rolling 12 months.
Yeah.
Downstream, that is refinery and petrochemicals, in the span, EUR 250 million to EUR 300 million. Yeah, that's it.
How much, sorry, on the up and midstream, how much of those are actually gas? It's the oil part I would like.
Oil is roughly 60% of the combined sum of oil and gas up and midstream. It's 60% of the total numbers I mentioned.
That's great. Thanks for clearing that up.
You had a question about margins in Marine. Well, I think you will have to live with swings between quarters, depending on what we're actually shipping in the individual quarters. As we've stated before, we expected to be at the trough of the cycle mid to late 2013. That is what we still think. You have seen a build-up of backlog during 2013, is maybe not so obvious from the report, but remember, there is a substantial adverse translation effect. In like for like terms, there is quite an increase in order backlog in Marine, which is evidence that we're moving upward again in Marine. On the back of the contracting from the yards, we anticipate orders to be at least on the same level in the short term. Buyback, finally. We do have a mandate. There's a proposal for renewed mandate to the AGM.
There are no decisions whatsoever to actually make use of the buyback mandate. Of course, to the extent a decision is taken by the board of directors to execute under the mandate, this will be made public according to the rules of the stock exchange.
Very clear. Thank you.
Wait, Peder. I have to correct myself. The 60% oil, that is for up and midstream. That is the 60% of the EUR 300 million.
Okay. That's very, very clear. Thank you for that, Lars.
The next question comes from the line of Colin Gibson from HSBC London. Please ask your question.
Good morning, gentlemen. It's Colin. A couple of questions, please. The first one is for Thomas on the gross margin slide. You've given us quite a lot of comment about the impact that mix has had on that slide over the last 12 months. Could you talk in a little bit more detail about the impact which price has had on that, if any? Are prices stable currently across your businesses, and are there any businesses where they are more stable than others, if I can put it that way? Then a question, perhaps more for Lars. Your balance sheet, despite the payout of, what is it, just over 50% for 2013, your balance sheet remains pretty generously funded, and it is quite some time since you made a major acquisition. Should we expect one in 2014? Thank you.
Well, Colin, let's start with prices. We did comment for quite some time after the earlier peak about normalization of price levels particularly in marine. With sales in 2013, we dare to say that we've seen the normalization. As stated earlier, we are back to price levels and pre-cycle gross margins that we recognize in capital sales since the time before the earlier peak. For the rest, a great deal of stability when it comes to the components business in the equipment division. For process technology, of course, you have variations between the different segments, depending on scope of supply and the competitive situation in the individual bids. But for the underlying component business, the base business, no change. As I stated in my presentation, we made minor adjustments to prices on standard products and parts with the beginning of the year.
No drama in any way.
Thank you.
Coming over to the acquisition question. As we have many times stated, you can assume 3%-4% bolt-on acquisitions per annum. Yes, we have the financial muscles to make a major acquisition. Of course, we are actively looking for that, but it takes two to tango, and it's impossible to predict when it will happen. That's all.
Okay. Thank you very much.
Thank you.
Your next question comes from the line of Sven Weier from UBS Frankfurt. Please ask your question.
Yeah, good morning. It's Sven. Three questions from my side, please. The first one refers to your comments on the marine service having been a bit weak in Q4 on lower repair activity. How do you look at that structurally? Is that just a one-off, or is that what you see as an impact of the new tonnage coming to the market? At the same time, you still have a high level of anchoring and scrapping. Do you see that improving quickly again, or what kind of outlook would you give on that? The second question is, if you could please remind us about the order delay you see between the yards and Alfa. Is it correct to assume that for your old Alfa Marine business, it's still nine months, and it is only much shorter for Aalborg?
Combined with that, wouldn't that mean that the order intake should go up further given that the shipyard orders have improved quite strongly also throughout last year? Lastly, in terms of what you said of percentage of completion accounting impact of large orders, I think you also mentioned in the past that you have quite a different margin mix between large orders. Given what you had last year in terms of large orders, would that imply any change in terms of the mix of the large orders, or is that no impact for this year? Thank you.
We said that in marine service, we had lower activity in repair. That is very much related to lower repair activity offshore platforms. We had a number of large service orders in the past that didn't repeat, and we also had one cancellation. I would say it is not a structured change. When it comes to the delay or the lead time from order at the yards until we see it in our books. The nine months that we mentioned at the Capital Markets Day is still valid, and for our, let's say, traditional products. When it comes to the boiler side, it is more like six months.
Our best estimation is that the high order intake level that we had in the fourth quarter for marine and diesel, that we will remain at that level in the first quarter as well. We will not see any further increase from the fourth quarter. Finally, Sven, on percentage of completion. Well, there are variations in gross margin between various contract orders. An important factor there is, of course, the scope of supply. The amount of third-party product and engineering involved in the delivery plays a role when it comes to the gross profit margin. On the basis of the backlog we had as per end of December, we cannot say that we foresee any major variation for contract-based sales in terms of margin in the short to medium term. There is no basis for that.
This, of course, may be influenced by, say, demand of components, base orders. At this juncture, we cannot foresee any major implications from the backlog as such.
Thank you. Maybe one follow-up question regarding the M&A comment you made. Is there, in terms of your end markets, any preference for a larger acquisition, or do you have the scope for two large deals in all the end markets that you have?
We are interested in all our three technologies: separation, heat transfer, and flow.
Thank you.
Thank you very much. Who's next?
Your next question comes from the line of Ben Maslen from Bank of America. Please ask your question.
Yeah, morning, Lars. Morning, Thomas. Three questions, please. Just firstly on currency, I think your guidance was based on the end of December rates. We've seen some kind of fairly large moves since then in emerging markets. Would it be different if we used end of January rates? That's the first question. Secondly, on the equipment division margins, I may have heard it wrong, but I think you said you had some extra costs in the quarter, whether you could quantify that and just give us a bit of color on how long those extra costs will last for, if it's a one-off, or if it runs for a few quarters.
Just coming back to percentage of completion, I was just wondering to what extent this contributes to the quarterly volatility we see in margins, in process, and maybe marine, where in the early stage of the contract, you're prudent in terms of the earnings that you recognize, and then when you get a big delivery quarter like Q4, you get contingent provisions released, profit catch-up, and it drives a spike in margins. Just to understand how that affects the numbers and margins quarterly. Thank you.
If we look at FX end of January compared to December, I think what is important to remember here is the balance between the SEK and other currencies. The main exposure we have is the fact that we are long in dollars and short in Swedish krona. Some difference, of course, some implication from what we've seen in some of the emerging markets. Remember that for quite a few of these markets, most of capital sales is actually happening by means of letters of credit in EUR or USD. We are not exposed to the full extent or nowhere near the full extent in most of these emerging markets. Equipment and cost for channel development. Well, this is a process that has been ongoing for some time and will continue.
Of course, there is an expectation in this program to generate more with less or more with the same, it will be an evolution over time, and we are likely to talk about years rather than anything else. Finally, revenue recognition in percentage of completion differences over time. Well, we do tend to take a prudent approach in the early stages of revenue recognition, and one hurdle that we typically apply is that we do not start to recognize revenue before we've completed at least 50% of the contract in terms of delivery. Then we start recognizing revenue, and we try to do it in a prudent manner not to get any surprises at the end. Well, there might be a bit of an impact from that approach, but I think it's the right approach to take, applying percentage of completion.
Got it. Thank you very much.
Your next question comes from the line of Nic Wilson from Espirito Santo. Please ask your question.
Good morning. Again, with apologies, three questions. The first one, just going back to guidance. I note that Q1 seasonally was the weakest quarter in 2012, and it was the weakest quarter in 2013. I guess I'm trying to work out that if you're flat to slightly down on Q4, I guess that means you're going to still be quite nicely up on Q1 2013. The second point is in terms of, with apologies coming back to this operating cost question, would it just be prudent to assume that they go up slightly from the SEK 581 annual level? The final question is just coming back to environmental opportunities. We know that the ballast water ratification has been slightly delayed.
Is that changing at all your quantification of either the opportunities for ballast and the opportunities for scrubbers, or do those numbers very much stay as you outlined at the CMD? Thank you.
Nic, the first question, was that relating to orders?
Just generally in terms of demand levels, I think in terms of seasonality, you said flat to slightly down Q1 on Q4. I'm just checking that Q1 seasonally has been the weakest quarter for the last two years anyway. I'm just wondering whether that just reflects normal seasonality or whether there's anything to bear in mind over and above that to comment.
I think, Nic, remember Lars' qualification by division, we anticipate a lower level of demand from process technology, mainly explained by less of large orders despite high tendering activity. For marine, on the back of the contract in 2013, about the same level of demand, and for equipment division, also the same level of demand. Sequentially, that is the comment. We stick to a sequential comment. I think that is the most meaningful in our view. As far as other costs are concerned, the SEK 581. I'm sorry, Nic, but I will not be providing you with a forecast on the total of other costs outside the divisions for the full year 2014. I pass on that one. Finally, ballast water ratification or lack thereof.
With the lack of the ratification and the high percentage of contracted ships being equipped with ballast systems, with no change, we do not see any change in demand for ballast water systems, really. No ratification, no change in demand in the short to medium term. That is our prediction.
Okay. Thank you very much, Thomas. Thank you.
The next question comes from the line of Anders Idborg from ABG Sundal Collier. Please ask a question.
Morning. Yeah, it was obvious that the large orders were strong in the quarter, but it looks to me that also base orders had a bit of a trend shift going up by about 10% after having done very little earlier in the year. Would you attribute that to any specific end markets, and would you expect that trend to continue?
We can say base orders grew in the process technology division. You could see that came from, for instance, oil and gas end markets. To give any forecast on base orders going forward, we will not do that. We stick to our overall forecast for the first quarter.
Okay, that's fine. Just as a follow-up, the marine and diesel aftermarket still seems to be pretty slow. Any update you can give there?
Yeah, you can say it was flattish in 2014, sorry, in 2013. At least global trade will grow with, let's say, 4% in 2014. If the rates that the ship owners are earning, if those rates are going up, we will see an increase in order intake for service, at least for service for equipment. It's very much linked to how the rates will develop.
All right. Yeah. Thank you.
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