Ladies and gentlemen, thank you for standing by, and welcome to today's Alfa Laval update. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Also, I must advise that the call is being recorded today, Monday the 13th of July 2020. Without any further delay, I would now like to hand over to our speaker today, Mr. Tom Erixon. Thank you. Please go ahead.
Good afternoon. Welcome to our call regarding the announcement of Neles today. I know that a fair amount of you were present at our press conference earlier today. We're going to do the presentation relatively quick, Jan Allde and myself, then we go to the Q&A session. Let me just reiterate a few important points. I'll do it, as I said, schematically. The announcement was made today earlier at 7:30 our time. We've made a public offer, cash €11.50 per share, representing a 33% premium on the trading price as the market closed on Friday. We have an irrevocable with Cevian supporting us. We also have a recommendation from the board of directors of Neles for the offer, which, of course, was very important for us.
As I indicated this morning, and as it's clear in the announcement, our ambition is to, of course, to have all shareholders, a minimum 90% accepting the offer. However, the conditionality is on two-thirds, and if we get to two-thirds, we will move forward, and then we will consider options for the various alternatives we may have in order to close the transaction fully. I think by now, those of you who didn't follow Neles before have done so during the day, I suppose. A newly established independent entity, I should say, as of July 1st in Finland, a leader in industrial flow, a market we've been looking at for a long period of time.
Those of you who followed us in capital markets and others, I think, have been aware, I can see from many of your comments today that there is not a huge surprise that we are moving in this direction. That has been one of our core areas where we've been looking and scouting for business opportunities and growth for a long period of time. Now that we are mainly with our finance analyst, I expect you clearly know us since before most of you as a long-standing global company in a number of important areas of what we are normally describing as three technology platforms in heat transfer, separation, and fluid handling.
Here you have basically the matrix between our three divisions in energy, food & water, and marine, and the three technology areas where, in fact, the energy division has not found its entry up until now into the fluid handling market, whereas in the food & water division specifically, we have a very strong business in valves and in pumps and in fluid handling. This white spot is the one that we have as an objective to fill out, and obviously, our ambition is to be able to close the transaction with Neles towards the end of the year. The business model with Neles we think will work very well in terms of integration. We've done so successfully with our large acquisitions over the last 10 years.
We are now in a product-based business unit structure, which means we can easily plug in Neles as a strong product company within our group without doing a lot of changes to Neles' operational structure or span of control from the management team in Neles. The way we've been running our transformation program over the last three years, those of you who followed us knows well the emphasis we've been placing on investing into new products and new technologies, including process technologies in our manufacturing. You also know the very strong focus we've been placing on developing our service business over time, and in a period where we have big changes in the service business, how it's executed, including the connectivity and digitalization effects on the service business.
To some degree, I will say, even emphasized and reinforced by the pandemic problems, where we are launching new products and services and remote ways of working in a pace that is higher than before. This is also an area which obviously is very clearly adjacent to what Neles needs to develop and possibly can co-develop together with us going forward in the future. You also know our transformation program in our supply chains. We will be investing massively over the last three years in a competitive supply chain with state-of-the-art facilities and high level of investments and CapEx in order to drive productivity. A program which now is largely coming to an end, obviously opening opportunities to direct our capital allocation stronger towards the industrial flow area as we will see what opportunities may arise around a possible Neles acquisition related to DLM.
Finally, you who follow us know well the emphasis we've been putting on the changes around sustainability over the last few years, the investments we are doing into green chemicals processing, the investment we're doing to energy storage, new protein production, and various environmental/climate initiatives that we're working with also on the marine business. Our experience and drive to ensure that we transit from the traditional oil and gas business that we partly have been carrying within Alfa Laval into the new green chemical and biofuels areas, to just mention one example, is something that seems very appropriate to address also within Neles. We have a similar footprint when it comes to the hydrocarbon chain, and we can reinforce each other in those transition exercises as well. We find this to be a very good fit with us going forward.
The rationale, I will not spend so much time on. Let me just point out that the financial profile and objectives that Neles set as an independent company in connection with a Capital Markets Day recently is very close and similar to what we have put as the financial objectives of Alfa Laval. I think this is a reflection that the businesses are, in terms of its business model and attractiveness, rather similar to each other. I think that's a clear strength.
Finally, in terms of the integration, as I was indicating before, the acquisition of Aalborg Industries in Denmark and of Framo in Norway in recent years has proven that we can use a model of independence and respect in terms of our acquisitions at the same time as those companies are able to grow into the Alfa Laval ecosystem and utilizes some of the platform capabilities that we can offer the operating companies under our umbrella. That is, I think, an important point that we have emphasized that in terms of integration, our objective in this sense is not to get the short-term payback in terms of cost reduction activities related to synergies. In fact, most of the operating structure of Neles will stand firm on its own, given that it's complementary to us and not overlapping.
The main drive for us in terms of creating value in this is enhancing the established business plan in Neles for growth and supporting Neles in the areas where we can in order to achieve the growth objectives and profitability objectives better and faster than possibly they could do alone. It is way too easy to discuss a business plan that is anchored within Alfa Laval. We are still looking at two independently listed companies, and we both have our operating agenda. Let me just reflect on a couple of areas where we obviously see the rationale for why we think there is a good collaboration opportunity between us. The first one, up left, the fact that we have more than 2,000 service engineers and around 100 service center around the globe is a platform and an infrastructure already paid for, already invested, already up and running.
Obviously, there is an opportunity for Neles to link into that, considering that 70% of Neles' sales is replacement or service sales, or at least OpEx sales, as opposed to the large capital investments, which both of us sometimes participate in. The size of Neles' product range fits well with the sizes of Alfa Laval's spare parts and parts distribution. Consequently, the global network of automated warehouses and infrastructure we have in place in order to serve customers in a good and cost-efficient way when it comes to shipping and logistics is something which is available should it be appropriate for a kind of a plug-and-play solution. Upright, you see a picture from our valves business.
I can assure you our valves are rather different from the valves that Neles is selling due to the fact that our valves is used exclusively in the pharmaceutical industry and in the beverage industry. Consequently, the specifications are rather different for our product range. With that said, we are dealing with valve controls, and we are dealing with a lot of technology issues that will overlap, and I can see a picture where we both have something to learn from each other and best practice from each other when it comes to how the valves technology and projects and connectivities and digital solutions are being formed and shaped around the valves businesses. I think we have an interesting overlap there from a technology point of view. Finally, in the energy division, you see the pie chart of the end market exposure that we have.
If you map that against Neles end market exposure, you would see a fair amount of overlap, which means that we are going to the same contractors, to the same end markets, to the same end customers in many instances, and our install base is in many instances in the same place. The fact that both companies, Alfa Laval and Neles, has a premium and technological profile towards the customers makes the fit quite well. I don't believe that the cross-selling is the main driver here, but I think our knowledge and understanding of where the products are, where their markets are, and our capability to reach the customers will support both of us in the sense of our presence in these important market segments. I will leave it at that.
That's a bit of the background for how we've been looking at it, and I'll hand over to Jan Allde for a few comments on the financial side.
Thank you, Tom. Tom was saying one of the key criteria that we looked, of course, is the financial profile of Neles. In this slide, you see the strong growth the company has demonstrated over the last years with a CAGR of 5% growth since 2011, and more than 10% since 2016. Of course, what is attractive is the large share of recurring revenue stream coming from the MRO type business. Secondly, they have shown a good and resilient profitability, around 15% over the cycle, and also shown a strong cash conversion of around 90% the last years. If you then put these two companies, Alfa Laval and Neles, side by side, of course you see the size or the scale of the company using 2019 pro forma figures would then end up around SEK 53.5 billion, and employees around 20,400, with an EBITDA margin at 16.8%.
Finally, a good geographical balance with EMEA being 36%, Asia Pacific 40%, and Americas at 24%. This offer the financing is a combination through using our own funds and a fully committed debt facility from SEB. If you look at some of the gearing metrics, in this instance, we are using net debt including IFRS 16 lease liabilities and how it would develop using end of March balance sheet. Of course, you would see an increased gearing here, but we have, of course, the ambition to remain a solid investment-grade company.
Finally, if you look at Alfa Laval's capital structure over the last years, our strong cash flow has enabled us to deleverage the company significantly, and we are now down at a leverage similar to one before the acquisition of Framo in 2014, to the point that we've also been claimed to be overcapitalized. We are now using that capacity for looking at this acquisition. Finally, we believe that we remain confident of the high cash conversion of the combined entity going forward, so that we can again show that we have the capability to deleverage the company going forward. With that, here are the indicative timetable. The estimated date for publication offer documents August 13, and also start of the offer acceptance period being August 13, and expiration of the offer acceptance period then on 22nd October.
With that, we hand over back to open up for Q&A, we should say.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Again, as a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, star one should you wish to ask a question. Our first question is from the line of Klas Bergelind from Citi. Thank you. Please ask your question.
Yes. Hi, Tom and Jan. It's Klas from Citi. A couple from me. The feedback from investors today is the relatively high multiple against what seems to be mainly sales synergies, not much on the cost side. I want to dig deeper into that growth opportunity, Tom, which could be pretty big. When you say that you want to use Neles as a platform for further growth, is this saying that you're supporting the SEK 1 billion sales ambition by 2025 at Neles, or do you see further upside potential? It seems like that. The reason we're asking is obviously the valves market is very fragmented. Neles only has a 2% market share, it's a top 10 player. Using your global scale, I would have thought that this could be much bigger. It's how we started.
Well, reflection number one, if we consider our M&A opportunities in various markets, as many of you know, we have market shares that in areas outside of the valves business that are so high that there are no major consolidation activities that can be made. This doesn't exclude small add-ons here and there, but any meaningful acquisition program in our core technology areas are not really there, and that's why the industrial valves market provides potentially an area of a significant long-term capital allocation opportunity. In that sense, I wouldn't put a lid on what are the growth objectives here. I think it's an open playing field. We are still in a situation where we are just making an offer. We are not really in any tense debate with Neles management and their planning and how they think about the future, obviously.
As an independent listed company, they can make publicly available information available to us, but not really more than that. I think we are a little bit early to start to consider the planning after a successful completion of this. There are clearly opportunities here. I would add to that I do not think necessarily that in all of the years when Neles was Metso Flow, that the core role of the unit was to drive growth. The core business was probably more on the mineral side. There may certainly be an opportunity just in the way that the management team wants to develop its business along its own plans presented at the Capital Markets Day. We are in general support of that plan. There will be, hopefully, a day where we can sit down together more intimately and discuss priorities and upside.
It should be a good area to continue to develop for many years to come.
Very clear. My second one is coming back to oil and gas. Tom, you talked about it, but I think it moves up by 4 percentage points to 17% of performance. It is obviously not a huge uplift, but feedback today is, this could be seen as a negative at the first glance. At the same time, I think you are two-thirds into being carbon neutral by 2030. 50% of your sales is geared to clean tech, energy efficiency. Could you talk a little bit more about whether this can be a net positive against that absolute number in oil and gas going up?
Yeah. I will reflect on it mainly from an Alfa Laval point of view. I have a difficulty to do an accurate assessment on how it looks on the Neles side. My assumption is that there are at least some parallels that can be drawn. When we look at our hydrocarbon chain exposure in Alfa Laval, we have approximately the following view. We've talked about this, I think, at Capital Markets and other instances as well. Number one, the upstream drilling side is already quite small with us. It's in the single-digit % of revenue, just as it is with Neles. It's not an area which we consider strategically will grow in the future.
There will always probably be a little bit, but it will, over time, not be a meaningful part of our business, although it may carry some presence even for the medium long term. The refinery business, if we move downstream, in our view, is in the last phase of expansion, and that expansion is driven by regional priorities. China's energy independence, and to some degree, Saudi Arabia's 2030 strategy and a few other things, drives value add strategies downstream from crude oil in those markets, and we see those projects coming through. Once they are completed, our assumption is that we will not see so much activity on the refinery side. Remaining, of course, will be a long-term service business or replacement business, if you like. As you've noticed, in Neles' case, 70% of their business is MRO type of business, replacement sales.
The new projects CapEx on the refinery side doesn't form any major part of our strategy in Alfa Laval other than service and maintenance type of job. Then we come down to the petrochemicals side, and I think that's where we have most of the dynamics in the future from our point of view. One is that the petrochemicals side for sure will continue in many aspects. It's not a matter of the plastic decreasing and the petrochemicals going down the drain. There will be a lot of petrochemical needs and development and value add going forward. The other aspect of what will happen downstream is that there we also have the projects that are driving towards green chemicals and driving towards biofuels. Those chemical processes are more equipment intensive than the hydrocarbon traditional ones.
To the degree we will see replacement of fuels and green jet fuels and vegetable oil going into the fuel mix of traditional hydrocarbon, we see that change process net as a positive for us. We don't see a big downside when we come very far down the chain. I would suspect that we will see a similar picture for Neles. The conclusion of that is that as long as we are moving forward, investing, driving our presence and our product offering into those areas, there it's not trivial. It's similar equipment, of course, but new applications, new customers, new processes needs to be handled. The switch from hydrocarbon to green is something that is happening right now, and we are in it, and we will drive it. We think it's more of a mix change than a downside.
Really, my view is that most of the downside in the oil and gas side, as far as Alfa Laval is concerned, is taken. We've indicated that we could see some percentage of our revenue go down over the next 10 years compared to what we do in energy storage and other areas. It seems like a relatively modest decrease in our overall portfolio. We are certainly investing for the next step. I think we will have a similar type of transition with Neles. I think my net-net, when I look at the combination, is an increased stability in revenue and earnings as opposed to increased volatility because of the MRO OpEx type of structure of Neles, rather than overplaying the volatility of certain end markets on the energy sector. That's the assessment we did.
Okay. Thank you, Tom.
Sorry for my very la--
No, it's a good one. My very last one is on the synergies, maybe for you, Jan, through the aftermarket and through an improved supply chain. Obviously, I get in terms of the ability to sell more through an improved supply chain that you have worked on for the last three to four years. Also on the purchasing side, Neles is its own company than Alfa Laval, and typically that means a lot of purchasing synergies that get realized as well. Coming back to the cost side, aren't we going to expect something then on the purchasing side, or is it only sales growth that we talk about here?
Yeah. I think important here is, as Tom was saying, we are still early. These are two separately listed companies. We will have to go, of course, into close discussion with the management team to understand what opportunities there are. I think at this point, it's probably a bit too early to say. Granted, there will be some synergies that we will find and we will explore. I don't think at this moment it's good to make guess estimates away with that. I think what Tom was saying, I think the way we look at this is that we are practically seeing a possibility to support the growth of Neles through the platform that we have on the service side. We will explore these cost synergies and as we have a closer dialogue with the company going forward.
Thank you.
Thank you. Next question is from the line of Max Yates from Credit Suisse. Thank you. Please ask your question.
Thank you. Just my first question is for Jan. On the pro forma net debt that you show, so 2.6 times, you said is within keeping a strong investment grade rating. Could you give us a little bit of help understanding what the upper limits of that staying within that investment grade rating that you see appropriate is? Also you don't list your explicit covenants in the annual report, but I was just wondering, could you give us what your current covenants are on debt that you have? That was my first question.
I think a couple of comments there. Those net debt view is, of course, as the balance sheet looked like at the end of March. We'll see how this develops towards after Q2. We have, of course, the ambition to continue to be generating a strong cash flow, and we have a track record of deleveraging fairly fast after an acquisition of this size. That's the ambition that we have to follow the same pattern as we did in the Framo case or the same sequence, let's say. I think from a covenant, the covenant that we have today is such that we would have to first trigger event, which would be that we would be a non-investment grade company. The second test would be that we would have to exceed a net debt EBITDA of three and a half times. That's actually excluding lease liability.
We feel confident that we will not be close to that, those covenants.
Okay. Just my second question is just on return on capital. You obviously at Alfa have the ambition of a return of above 20% over the cycle. You talk about the deal being EPS accretive in year one. I'll be quite blunt. When I look at the Framo deal, I can quite easily see a path to covering your cost of capital quite quickly. Could you give us a little bit of detail about how you think about the return on capital on this deal, and also when you think you would be covering your cost of capital from this acquisition?
Well, again, we are still early days of this, I would say the couple of things. First, this is not an asset intensive company in the sense if you look at the CapEx, from a CapEx maintenance point of view, historically, it's not been very capital intensive. We see ambitions to continue to drive down working capital, both in Alfa Laval and as a combined company.
As I said, the cash flow conversion that we have seen hence has been good both on Alfa Laval and Neles. I can't give you a specific timeframe here, but I feel confident that we can work towards our return on capital target.
Okay, great. Thank you.
Next question is from the line of Mattias Holmberg from DNB Markets. Thank you. Please ask your question.
Hi, everyone. Thanks for taking my question. Could you elaborate a bit on the terms of the offer, considering the ownership structure and that there's been some news out today? Is the offer final, if not, would you consider perhaps splitting up the company or a joint venture in order to sort of get to what we're looking for, or is what it is today?
We are not aiming for anything else than a full consolidation of Neles at the end of the period. Our hope is that as the process moves along, that all shareholders will agree that this is a good and fair offer, just as the board of Neles has unanimously recommended. That is our base case. As we indicate in the announcement, we have made the offer conditional of two-thirds of acceptance of the shares, which gives an additional deal certainty to the shareholders who decide to accept the offer. It gives a deal certainty to the board of Neles in the sense that certainty of completing the deal is an important aspect of the board recommendation. That has obviously been a very important aspect.
The path to complete this deal, should we not reach the 90%, is a possibility to consider what in Finland is called a cross-border merger, which you can exercise with industrial logic, should you choose to do so. Our assumption is that that's not a mechanism that is a priority mechanism for us, and there are no decisions taken in that direction. We are aware that there are more than one path towards completing this transaction, and so we consider our possibilities to be good in order to reach our objective down the road.
Thank you. One more question from me, if I may. Could you talk a bit about the timing of this deal, if there's anything in particular that's triggered it to happen at this point, and how long you've been working on it, or if it's at all related to Neles becoming a standalone traded company recently?
Yeah, we've been quite transparent with how we've seen the landscape in the industrial flow area before, and we continue to be so. We've been analyzing and looking at this space for years. I think we've been giving you as analysts and our investor base an indication that that is one of the areas we're looking at. We've also been looking at the water space and a couple of industrial areas where we feel we are well-positioned to add value as owners, and where we believe there is a long-term growth potential for the company above and beyond where we are today. We've been involved in a number of sales processes as a potential acquirer in valves-related business or industrial flow-related businesses.
Let me perhaps just point out in that context that while we discussed oil and gas exposure of Neles, it's very difficult to find any industrial flow company that doesn't have an oil and gas exposure. In our experience, the breadth of the end customer exposure of Neles is much broader and wider what is typical. It's not unusual that you find almost oil and gas or refinery or petrochemical focus companies entirely in this area because the hydrocarbon fluids are such a big share of the overall industrial fluid market, so it's difficult to sort of get around.
We found when the announcement was made in July last year for demerger and the possibility to look at Neles as an independent unit as opposed to part of the Metso group, then it was obvious that the aspects of the business portfolio, the market positioning, the next door Finnish markets, which we are very well used to, and so am I as a professional throughout the last 20 years, we thought immediately that this could be a potentially interesting situation for us. We've been working on that for a year. Our expectation for the process was from the beginning that we certainly have approached this from a friendly offer perspective. We have no interest whatsoever to move into the Finnish equity market with an elephant strategy here.
We've been cautiously moving forward in that process, expecting perhaps that the company needed to release a quarterly report or two and establish itself, including its board of directors, to be in a position to consider what is best for the company. With the preemptive Valmet move, it was obviously that the timeline had to be moved, and so we moved our timeline significantly, and that's why we are here today. I think otherwise the timeline would have been delayed out of respect for Neles and the team and the board of directors there. That was made impossible, and consequently, the option was to either leave this or to go quicker, and we decided to go quicker. We think this is the right industrial logic.
We think it's the right solution for the employees of Neles and for the shareholders of Neles, and we think it will be a very good industrial combination, and that is reflected in the bid premium that we actually provided. We feel comfortable that this is a good solution, and we will continue to build both a Finnish presence and the global presence within Alfa Laval.
That's great. Thank you so much.
Thank you. Next question is from Sven Weier from UBS. Thank you. Please state your question.
Yes. Hi, Tom. Hi, Jan Allde. Thanks for taking the questions. The first one is coming back on your point regarding the exposure to the hydrocarbon chain. I know that one of your value propositions in that market is really the energy efficiency part and how the plate heat exchangers are much more energy efficient than the shell-and-tube, which I guess is part of your pitch. Is there something comparable with the valves and something you can improve on that end?
I don't think we have a very clear answer on how to address the sustainability challenge in this from the industrial flow point of view. I think it's a good question, but I'm a bit cautious to speculate as to how our answer will look. It will certainly be one of those things that we'll be eager to address in our long-term business planning. I'm sorry to be vague at this point.
Mm-hmm. Okay. Just with regards, obviously, you haven't been doing a deal the last six years, so you've been looking at M&A more cautiously. This has come up now, but I was just wondering, what were the alternatives in the pipeline? Of course, you cannot talk about that specifically, but was there something similarly large, but maybe with exposure to other industries, or was this one now, in terms of the size, in terms of the impact, really no alternative to the deal?
Yeah, it is difficult to be so very specific. As you indicate, the fact that a couple of comments to the M&A strategy, if you like. Number one, if we look at our acquisition history, although we did a couple of big deals, we tended to have a fair amount of smaller M&A transactions. I think we may have concluded that to get any strategic change in Alfa Laval and our portfolio and our long-term trajectory, the smaller M&A deals tend to be somewhat status quo oriented. They are not moving the needle for us strategically, and therefore, we've been having less appetite for them.
On the small side, we've rather gone towards, I wouldn't call it the startup scene, but almost a startup scene in terms of testing new technologies and engaging in part of the technology development for the future without necessarily committing a lot of capital into that, but at least creating partnership networks and understanding and knowledge, and to some degree, at times, a little bit of seed money in order to get verification on some of the business concepts. On the small side, that's where we've been. On the small, we've gone smaller. Of course, if we go back to 2015, we didn't have the balance sheet to do anything of substance in 2016. Since then, we've been in a number of processes, although they're never material. You saw them. We've been working through them.
I would make on the area of industrial flow, I think there have been two to three hurdles. Number one hurdle has been, as I indicated, a number of flow companies that have been very much focused on the oil and gas market. Consequently, and typically in these markets, focused, they are very strong, but it doesn't provide a platform from which to grow. You end up more or less buying a bond, a high-yield bond with low risk, to put it that way. Often profitable, but they are where they are, they are strong where they are. To move outside of that, they may not provide much leverage other than starting to buy other companies.
The breadth of the product platform and application platform for Neles was in our experience, if not unique, at least an attraction for us in order to see that we can go forward with the platform. The other aspect is that I can assure you that the sales processes where a private equity company is trying to dispose of an asset are not necessarily attractive for Alfa Laval shareholders. Consequently, both in terms of pricing and in terms of contractual terms and reps and warranties and whatever you go through in these transactions, they've been very seller-friendly and very buyer-hostile. We backed out due to concerns about loading risks onto Alfa Laval and offloading them from the private equity owners, and that's not my job as CEO of Alfa Laval, we discontinued a number of those processes.
In that sense, you can look at this process and say, "Is the premium high? Is it low?" It is what it is. It is the market level. It is fair. We think we can defend that price premium towards our board and towards our shareholders. You don't get full transparency right now. History will show. Certainly, we feel that it is a company that is well-run. It has been running under the governance rules of the Finnish stock market. I personally know some of the managers who've been involved in the running this business over the years, individuals and professionals that I respect. We are very comfortable as to the status of the company, as to the integrity of the balance sheet, as to whatever exposures and risks that any industrial company is involved with.
I think the risk-sharing between us, and the seller, in this case, Neles shareholder, is much more appetizing than what we've seen in other sales processes.
Understood, Tom. The last question is just on what you said on cross-selling, right? Because you said cross-selling is not the main driver. It would appear to me that maybe they can really benefit from you also and from some of your strong market positions outside their core industries. I was just wondering, is there also regulatory hurdles for cross-selling the product? Like for example, in food, I know there's huge regulatory hurdles to get approval for the product. Is this also why you say it's not the main driver, at least initially?
Yeah. I think the cross-selling, I think the product specifications are very unique in different application areas. I don't think we can move one product from one place to another. When I talk about cross-selling and the issues around cross-selling, I think, I'm back to the principle that we are applying here in Alfa Laval, which is, we need a specialized, as far as we can, a specialized dedicated sales force for a specific product area. You cannot, in this world, go out and be a jack of all trades and think you can go to a petrochemical plant and sell all kinds of products. It doesn't work like that. These sales engineers that Neles has, that know the product and application, my expectations are that they are world-class in their areas, and they should be.
I don't expect to load them up with a lot of other products, just as well as I don't expect to take the Alfa Laval sales engineers and load them up. I think they will meet. I think they will know the same customers. We will tender in some of the same quotations. We will know when projects are coming up. I think there is a lot of knowledge-sharing as to what goes on in certain plants, and where are things moving, and where we can help each other out. I think it is two parties that are helping each other out as opposed to broadening the product portfolio that each individual sales engineer will be responsible for. I don't see that as a prime driver. We may find some areas.
I always say, nobody can afford dedicated sales people in Romania because the market is too small. Yeah, there might be some areas where a representation is valid and feasible under the Alfa Laval brand work. If you think about the main markets in the U.S., in China, and certain other areas, I think for sure that the dedicated Neles sales force will be intact and stay. I think the contact can nurture business opportunities on both sides. That's where I see the overlap in practice.
Very clear. Thank you, Tom.
Thank you. The next question is from the line of Lars Boersen from Barclays. Thank you. Please ask your question.
Thanks. Hi, Tom. Hi, Jan. Three questions, if I can. I guess we've had Valmet's CEO, Tom, come out and say he's not accepting the offer. I guess the base case is you're not going to hit your 90%. I just wonder what the implications might be, in terms of the economics of the deal, the timeline, et cetera, from a cross-border merger standpoint, as you point out as being one of the alternatives you might be seeking should you not get to 90%.
I think first comment is, we will have to wait and see how shareholders decide. I think it's too early for everybody to dig down. We have made an offer. We think it's a good one. If we find that opinion is shared by shareholders at large, let's see where we are then down the road. Of course, we were fully aware that there was a recent transaction of another industrial company that had a long-term view on this. Obviously, we have to live with the possibility that we have conflicting interest down the road. My only view, I will not evaluate that nor their position. I fully respect it. What has been important for us is that we have planned for long-term process to play out, and we will be patient.
I think the issue with taking some time apart from that I'm sure that our shareholders would prefer to have this done quickly and move on is, I think, the main issue is I don't think it will be necessarily beneficial for all the Finnish employees and all the Neles employees to sit in a long process that is for the wrong reason, creating uncertainty over a longer period of time. There may be a time where responsible shareholders need to sit together and see if there's a solution that can be found.
Understood, Tom. Secondly, can I just ask a little bit to the future of Neles within the context of Alfa Laval? You highlight Framo as a successful integration. I guess I would argue that is perhaps one of the more separately run entities within Alfa Laval. Separate footprint, separate brand, separate go-to market, separate service centers to a large extent. I wonder what is the ambition level here as far as the operational integration of Neles is concerned, and is that the kind of integration you are targeting or something quite different?
Well, I think you're right. We are very respectful of Framo. It was a hugely successful, enormously customer-oriented and customer service-oriented company with a very strong culture. I think we've been adapting to that in seeing that the main value of Framo was exactly what it brought to the table. It's so easy to start to integrate it left, right, and center, and suddenly the pride and the identity and the culture start to erode, and you don't necessarily compensate those changes with increased sales or increased employee motivation. I think the way we look at Framo, and each company is unique, but the way we look at Framo today is that from an integration perspective in Alfa Laval, it is a success. If you ask, I'm a little bit cautious to state what Framo employees would say.
I think maybe at some point in time you would have the opportunity to ask the question yourself. The ambition we've been having is that as much of it is operating very much in a similar fashion as before, we hope that the Framo employees are proud of being a part of the Alfa Laval Group, and that they are leveraging on some of the platform and know-how that we have. If we look today, the number of collaboration areas when we're switching IT systems, when we go into Industry 4.0, when we go to purchasing contract for new CNC machines, when we go to area after area, we found a professional mutual respect between the Framo team and the rest of the Alfa Laval team, which is not an imposition on them.
It's just that colleagues get to know each other, and we see that actually we can leverage and learn from each other. With that said, what Alfa Laval has learned from Framo is how to drive customer excellence and service culture in a company where we have been having a lot to learn from Framo, and we still have some steps to go. It's been a really mutual constructive process where it's taking time. Had we pushed for the last cost synergy dollar in this merger, we would have lost much more than we would have gained. We are happy where we are. It could be that there are some further refining collaboration things that could be done with Framo going forward, if they choose so, and if we decide to do so.
Certainly, we still have that upside in the bag, whereas we still have a phenomenally run strong business that we have continued to invest in over the last five years. We are very pleased where we are. I think if we look at Neles, it has obviously a bit more of connection to our operating structure than Framo did. Remember that Framo has only about 30, 40 customers worldwide. They are all located in Korea. They deliver to a certain spot. It's a very consolidated structure. It's very lean on the front-end side of global service organization and global sales representation because it is so consolidated in its market structure. With Neles, we have a different situation, and we have a broader platform available in Alfa Laval to support that.
I think the structural benefits, both in terms of creating opportunities, but also perhaps of getting some cost efficiency out, I think the opportunity there is somewhat bigger. Add to that the fact that Neles will need a balance sheet to continue to execute the M&A growth that I think they see, and certainly we would be positive to support. That balance sheet can be put into use in a constructive way, makes for us, I think, the Neles acquisition a bit more intimate, if I use that word. Again, we will take exactly the Framo approach. It will start with a discussion of where does the managed team want to go? What do they see in Alfa Laval that they could leverage from, and that they see useful?
I think we will at the same time look at Neles and say, "Where are you good and what can we learn?" One area that I have pointed out in that context is the fact that Neles is really good at industrial distribution, and they built a good distributor network. It's something that we perhaps not always have been so commercially skilled at doing, and we've been more going back into the technical sales aspects than the commercial sales. It's too early to say, but we can certainly see areas where we can dialogue and have mutual benefits from each other.
Thank you, Tom. Finally, if I can, maybe more to Jan, when might we hear more from you around synergies, around value creation from the standpoint of return on capital? I guess it's a little bit unusual, as you have understood from the questions, I guess, on this call, not on a deal of this size to get some more visibility on your calculations, particularly around synergies and return on capital. When might we get some more detail from you in that regard?
Yeah. I don't want to sit here and promise something. I think when we are ready, we will provide that. Hopefully it won't be too long down the road. I think if and when we do that, we need to feel comfortable that we've had the dialogue, and we know that we can provide substance to those. I think it's simply too early to sit here and make guess estimate. Yeah.
Thank you.
All right. I think we are maybe at the last question, then we're going to have to close for today. Is there any more?
Yes, sir. Our next question is from the line of Johan Eliason from Kepler Cheuvreux. Thank you. Please ask your question.
Yeah. Hi, this is Johan at Kepler Cheuvreux. Just a final question then on these potential outcomes between your acceptance level of two-thirds, but the wished 90% level, obviously. I guess the ultimate decision-maker on this is the Finnish government through Solidium. In that perspective, would you consider sort of giving any sort of guarantees that Neles head office on R&D will stay in Finland or employment guarantees or anything similar like that? Do you think that's in the card of your negotiations going forward?
Well, as you know, it's difficult to establish all positions prior to a negotiation, so maybe that's not so advantageous. I think we've been very sincere and honest, and obviously we dialogued with Neles board on this too. I think Neles board's consideration was, of course, to an important degree, financial, but I think there's also been a consideration for the company and its employees in the recommendation from the board. We have put our thoughts clearly forward on this topic, and you'll find it also when you read the announcement that I cannot see that Alfa Laval as an owner will have a negative impact on the Finnish footprint of Neles compared to where they're going themselves. Now, I want to be cautious in terms of what I would put down as a guarantee in the sense that I'm not sure exactly what plans Neles is running.
I know how much change we have in Alfa Laval and how much we are moving and changing and adapting to market conditions and whatnot. Of course, it's never status quo, but I cannot see anything. I think the principle difference with us as an owner is that the listing is in Sweden as opposed to Helsinki. I don't think there is a footprint implication of us coming into an ownership situation. In that sense, I have absolutely no problem in expressing that, or let's see if there is needed anything more than a sincere comment, but there is nothing in the way we see it. We see it rather as we will invest. With investment, normally you see growth also in terms of employment.
I'm not so worried about that we should be a negative to employment situation in Finland or the business leadership out of Finland or the technology development out of Finland. I think there is another aspect on this, which is purely related to the ownership, and that is the fact that all of you who follow industry, especially process industry, we are extremely tightly knit together between Finland and Sweden in paper, in pulp, in mining, in steel, in area after area. I myself have been leading companies with big operations on both sides. There is a long history of Swedish-Finnish mergers that has been happening. Some of them are owned and led out of Finland, and some of them are owned and listed out of Stockholm, if you like. I think this is not a very controversial issue, nor in Finland, nor in Sweden.
I think we found a very good way of operating together. I should not see this as a big obstacle. In the landscape of Finnish-Swedish mergers, this is certainly on the smaller side compared to all of the others that has been done over the last 20 years. I think this is a small step in a process that been going on and probably will continue to go on for the years to come.
Okay, excellent. Let's hope for the best. It looks like a good deal for you.
Thank you. Thank you for your attention. I'm sure we will talk very shortly on a slightly different topic, that is the Q2 report. See you next week. Thank you very much.
Thank you.
That does conclude our conference for today. Thank you all for participating. You may all disconnect.