Welcome to the Alfa Laval Q4 Earnings Call. At this time, all participants are in a listen only mode. There will be a I must advise you this conference is being recorded today, Wednesday, 5th February, 2014. I would now like to hand the conference over to your speaker today, Mr. Lars Randstrom.
Please go ahead, sir.
Thank you very much and good morning and 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 SEK8.2 billion and launch 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 and environmental solutions like PureSOx and Pure DRY.
And finally, process technology reached all time high when base business and especially launch orders grew. The growth was well distributed both geographically and in applications. So let's move over to the key figures. There you see that orders received rose 13% to €8,200,000,000 net sales increased 6% to €8,600,000,000 dollars adjusted EBITDA grew 5 percent to $1,400,000,000 and adjusted EBITDA margin reached 16.3%. For the full year, orders received were unchanged at 30.3 $1,000,000,000 net sales unchanged at $29,900,000,000 adjusted EBITDA unchanged at $4,900,000,000 and finally adjusted EBITDA margin reached 16.4%.
On the next slide, you see that the Board of Directors proposes a dividend of SEK3.75 an increase of 7%. Further, the Board proposes a mandate to buy up to 5% of the number of outstanding shares. And now we move over to orders received and margins. Orders received on rolling 12 months reached $30,300,000,000 The increase year on year was 16% at constant exchange rates. The significant increase sequentially was mainly driven by large orders, but also base business developed well and we reached an all time high level.
And here I have a forward looking statement. Compared to the Q4, we expect demand in the Q1 to be in line with or somewhat lower due to fewer large orders. Now we move over to the next slide. From the order analysis, you find that year on year acquisitions contributed with 1.3 percentage units and 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% and 0.2% positive currency effect gives a total of 9.7%. Next slide. The EBITA margin reached 16.3% and we have now had 8 consecutive quarters around 16.5%. The operating result was €1,400,000,000 the highest absolute value in more than 2 years. Let's take a look at the highlights in the quarter.
All time high in large orders, dollars820,000,000 We are very pleased that the orders are well distributed geographically and there is a good balance between food and energy. In Marine and Diesel, we booked a large repeat retrofit order for exhaust gas cleaning, confirming that our system is reliable and well proven. From customer, we booked an order for 40 ships that will be equipped with pure dry that saves 1% to 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 Alborg, 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 and D.
Next slide. For the full year, you see that large orders exceeded 2,100,000,000 dollars somewhat less than in 2012. In absolute value year on year, food is up significantly, whereas environment and energy 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. Now we move over to the development per segment. And there you see that we had 14% organic growth in the quarter. And you can see that year on year 7 segments grew, 2 were unchanged and 2 declined. Let's take a look at the development per division and 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 seasonality 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 and Environment saw oil and gas rise boosted by large orders and 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 and Diesel. In the division, the equipment segment saw overall higher demand following ship contracting growth throughout the year. Marine and 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, 5 segments are up, 3 unchanged and 3 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 and diesel service.
Now we move over to the geographical developments. 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 and 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 and 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 3 consecutive quarters with growth. Next slide.
Nordic grew 12% and Western Europe grew 3%. Both base business and launch orders had a positive development. Sanitary, Marine and Offshore Systems, and Energy and 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 book boosted by 3 launch orders for nuclear power, starch processing and protein processing. Next slide. North America grew 15%. And in both U.
S. And Canada, we booked launch 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. And 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 3 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 Q4, 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. And finally, thanks to oil and gas investments, Canada almost managed to compensate for the large SEK300 million environmental order we booked in 2012. And 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 losses covered orders received in-depth. In the quarter realized sales of 8 point $6,000,000,000 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 €300,000,000 to €400,000,000 dollars 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 4, so a small variation. The same goes for the full year, 26.7% against 26.6% in 2012. Let me then finish the comments about sales with the first forward looking statement.
Sales is expected to come in substantially lower in quarter 1 than what was achieved in quarter 4. With that, let's move on to gross profit margin. Gross profit margin for the quarter ended 36.4 percent representing a decline of 0.6% year on year and 0.3 percent sequentially. Let me then remind you what I said after the quarter 3 report. Then 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. And finally, we do not foresee any material changes to load of actual results. The actual for quarter 4 came out slightly below our own expectations. This is mainly due to a somewhat worse factory 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 then move on to look at overheads and the rest of the P and L, R and D ended $194,000,000 in the quarter, which is a reduction year on 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 and D for the full year was 3.5%, I. E. We had a slight increase in R and D in real terms. The R and D spend represented 2.4% of sales for the full year 2013, which is in line with our guidance for R and D spend. S and A amounted to 1 point $4,000,000,000 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 €1,000,000 We had FX effects adverse FX effects to the tune of €45,000,000 on the EBITDA line. This gave us all in all an EBITDA margin for the quarter of 16.3%. Let me then 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 4 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. And 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 $1,200,000,000 in the quarter, an increase of 2% over last year. This includes a difference in financial net due to exchange differences being 83,000,000 worse than last year. Before leaving the P and L, taxes ended up with a charge of $330,000,000 which is somewhat below our guidance for taxes of 28% of profit before tax.
EPS $207,000,000 $2.29 excluding amortization on step up, a slight decline from quarter 4, 2012. And finally, the return numbers, return on capital employed 26.4%, return on equity 20.4 percent, limited changes from where we were at by the end of quarter 3. Let us then move on to the cash flow statement. The cash flow statement can be summarized as cash flow from operations well above quarter 4, 2012 reaching 1,200,000,000 dollars The main contributor is a refund of prepaid taxes in Sweden. Free cash flow reached $970,000,000 compared to just over $700,000,000 in quarter 4 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 then talk a bit about ForEx. FX effects in EBITDA were as I stated before $45,000,000 negative, dollars 17,000,000 from translation and 28% 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 rates 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 60,000,000 Let's then take a look at the order backlog situation for end of December. We had a total order backlog of almost $14,600,000,000 representing just under 6 months of LTM sales. On a like for like basis, the order backlog to be shipped in 2014 is then some $200,000,000 below the situation for end of 12 for shipment in 2013. From the slide as you see, the absolute difference is 130.
The balance is of course the impact of our acquisition of Niagara Blowers 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 force reduced sales of approximately 200,000,000 dollars compared to 2013. Based on the end of December exchange rates, we will have a negative translation effect of just €100,000,000 so substantially less than in 2013.
The acquisition of Niagara Blowers, we estimate will give a boost to sales of $100,000,000 So summarizing the known parameters, we should expect to be at a sales level of €29,700,000,000 euros Then 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.
And the outlook is as follows. We expect that demand during the Q1 will be in line with or somewhat lower than the Q4. And remember that we are now comparing with an all time high quarter. And for each division, our demand expectations for the Q1 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. And that completes our presentation.
And now we hand
Your first question comes from Andre Kerkhnim from CS London. 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. While it basically stayed flat.
Could you just give some color on what were the headwinds within the quarter that offset that $200,000,000 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 actual 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. Then 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. And that of course does not automatically mean any impact on the say factory load as such.
This is rather the is rather sort of accounting the on the back of completion of contracts. So there is not such an obvious relationship as you normally have if it relates to say straightforward manufacturing for
parts or products. Got it.
And would you say
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 whether we will have a what the load will be like over this year. We have a backlog, which is like for like, as I stated before, somewhat lower. But 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. And the second question just on environmental products. On SOX, could you just update us on how many ships you've installed your systems on? And what is your current market share or kind of the share over 2013? And 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, we have by the end of the year, we have booked orders for 18 ships, in total 23 scrubbers. And going forward we expect continued positive development for SOX and we see good activity level in the markets.
Yes. As far as ballast water is concerned, we have not seen a ratification of the convention yet, as I'm sure you're aware. And that of course means we are not seeing anything happening in the retrofit market. There is a very high percentage of new built or newly ordered ships that are sort of ordered with ballast water system. But as far as retrofit, no change because no ratification.
Got it. Thank you very much.
Your next question comes from the line of Lars Bronson 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? And 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 $257,000,000 that's about $100,000,000 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? And then seasonally or so secondly or 30 rather if I could just on your seasonality and your divisional margins, we don't have much pro form a 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 PT margins here? They're obviously seasonally lower in the second half. Now we're seeing a very big quarter in Q4.
That will be my three questions. Thanks.
Okay. If we start with emerging markets, there we in the Q4, we didn't see any impact from the financial instability in the emerging markets. And going forward, of course, higher interest rates will dampen let's say the willingness to invest. However, you should bear in mind that we are active in 3 areas: energy, environment and food that are prioritized areas in all emerging markets. And what the net balance of that becomes that remains to be seen.
You started off by asking about all the delays from quarter 3. And well, we had expectations when it comes to customers' decisions about the individual orders. But as we all know, the customers decide at the end of the day. So I mean, 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 a couple of 100,000,000 that could have come in, in quarter 3, but actually came in, in quarter 4. And then as Lars stated earlier, we had a bit of a similar situation in the other direction towards the end of quarter 4, I.
E. Customers made decision already in quarter 4 instead of in quarter 1. Other costs, well loss, let me point out that operating income for others was $581,000,000 on a full year basis $5.41,000,000 in 2012. So I think level as far as that is concerned. I mentioned before a few millions of 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 3, I said we are oscillating at what we believe is the trough of the cycle. And 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 4 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. If I could just 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 a €2,000,000 to €3,000,000 out of that that you talked about in restructuring charges, there's still a good €100,000,000 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 now.
Thanks.
Your next question comes from the line of Peter Frohnen from Handelsbanken Capital. Please ask
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 oil 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 sort of comment on a very, very high stability level? Is this a level that you sort of 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 inquiry mandate in the upcoming year?
That's it for now.
Okay. If we take our exposure to oil and gas, if you start with that one. Yes, please. If you take up and midstream and that means drilling, production, transportation there it is around €300,000,000 on rolling 12 months. And downstream that is refinery and petrochemicals in the span €250,000,000 to €300,000,000 And yes, that's it.
And how much sorry, on the UP and Midstream, how much of those are actually gas? It's the oil part I would
like to Oil is roughly 60% of the combined sum of oil and gas up in midstream. So it's 60% of the total numbers I mentioned. That's great. Thanks for clearing that up.
Okay. Then 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 expect it 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.
So in like for like terms, there is quite an increase in order backlog in marine, which is evidence that we are moving upward again in marine and on the back of the contracting from the yards. We anticipate orders to be at least on the same level in the short term. Then buyback finally, we do have a mandate. There's a proposal for renewed mandate to the AGM. There are no decisions whatsoever to mandate, this will be made public according to the rules of the stock exchange.
Very clear. Thank you.
Wait, wait, Peter. I have to correct myself. The 60% oil that is for up and midstream that is the 60% of the €300,000,000
Okay. Okay. That's very, very clear. Thank you for that, Lars.
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. 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 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? And 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 1 in 2014? Thank you.
Well, Karl, let's start with prices then. We did comment for quite some time after the earlier peak about normalization of price levels, particularly in marine. With sales in 2013, we'd have to say that we've seen the normalization. As stated earlier, we are back to price levels and pre calc 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 bits. But for the component, the underlying component business, the base business, no change. We did, as I stated in my presentation, we made minor adjustments to prices on standard products and parts with the beginning of the year. So no drama in any way.
Thank you.
And then coming over to the acquisition question. As we have many times stated, you can assume 3% to 4% bolt on acquisitions per annum. And yes, we have the financial muscles to make a major acquisition. And of course, we are actively looking for that, But it takes 2 to tango. And it's impossible to predict when it will happen.
And 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. So do you see that improving quickly again?
Or what kind of outlook would you give on that? And the second question is, if you could please remind us about the order delay you see between the YAS and Alpha. Is it correct to assume that for your old Alpha Marine business it's still 9 months and it is only much shorter for Albury? And 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? And then 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.
And 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.
When it comes to 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 order or large service orders in the past that didn't repeat and we also had one cancellation. So I would say it is not a structured change. And then when it comes to the delay or the lead time from order at the yards until we see it in our books.
The 9 months that we mentioned at the Capital Markets Day is still valid and for our let's say traditional products. And when it comes to the boiler side, it is more like 6 months. And so we our best estimation is that the high order intake level that we had in the Q4 for marine and diesel that we will remain at that level in the Q1 as well. We will not see any further increase from the Q4.
Then finally Sverd on percentage of completion. Well, there are variations in gross margin between various contract orders. This an important factor there is, of course, the scope of supply. The amount of 3rd party product and engineering involved in the delivery plays a role when it comes to the gross profit margin. But 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 on of components base orders. But at this juncture, we cannot foresee any major implications from the backlog as such.
Thank you. Maybe one follow-up question regarding the M and A comment you made. Is there in terms of your end markets, any preference for large acquisition or do you have the scope for do large deals in all the end markets that you have? We are interested in all our 3 technologies,
separation, heat transfer and flow.
Thank you.
Thank you very much.
Next question comes from the line of Ben Maslin from Bank of America. Please ask your question. Yes.
Good morning, Lars. Good 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 it runs for a few quarters?
And then 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. And 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. But remember that for quite a few of these markets, most of capital sales is actually happening by means of letters of credit in euros or U.
S. Dollars. So 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 to will continue.
Of course, there is an expectation in this program to generate more with less or more with the same, but 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.
So well, there might be a bit of an impact from that approach, but I think is the right approach to take applying percentage of completion.
Got it. Thank you very much.
Your next question comes from the line of Nick Wilson from Asperito Santo. Please ask your
Good morning. Again with apologies, 3 questions. The first one, just going back to guidance. I mean, I note that Q1 seasonally was the weakest quarter in 2012 and it was the weakest quarter in 2013. So 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 13.
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 581 annual level? And then 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.
Nick, 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, but I'm just checking that Q1 seasonally has been the weakest quarter for the last 2 years anyway. So I'm just wondering whether that just reflects normal seasonality or whether there's anything to bear in mind over and above that comment?
I think Nick remember loss 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. So sequentially that is the comment. We stick to a sequential comment. I think that is the most meaningful in our view. Then as far as other costs are concerned, the 581, I'm sorry, Nick, but I will not be providing you with a forecast on the total of other costs outside the divisions for the full year 2014.
So I pass on that one. Then 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. So no ratification, no change in demand in the short to medium term.
That is our prediction.
Okay. Thank you very much, Thomas. Thank you.
Your next question comes from the line of Anders Imbolc from ABG Sundal Collier. Please ask your question.
Morning. Yes. So 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. So would you attribute that to any specific end markets? And would you expect that trend to continue?
Well, we can take it. Base orders grew in the Process Technology division. And you could see that that came from, for instance, oil and gas end markets. And but to give any forecast on base orders going forward, we will not do that. We stick to our overall forecast for the Q1.
Okay. Fine. And 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. And at least we would global trade will grow with, let's say, 4% in 2014. And 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.
So it's very much linked to how it how the rates will develop.
All right.
Thank you.
And now we have time for one final question.
There are no further questions on the phone lines currently.
Thank you very much. Thank you all of you for the attention and we wish you a good day. Thank you. Thanks, Brian. Thanks.
That does conclude the conference for today. Thank you for participating. You may disconnect.