Good morning and most welcome. I will start with an introduction before we look at the slides. We have been following Frank Mohn AS for several years, and we are delighted that we have reached an agreement to acquire the company. The timing is right for both seller and buyer, and I will highlight three things. First, we now extend our fluid handling portfolio with high-performance products and systems for customer segments where we already have a strong position. Hence, we stick to the technologies and industries we know and where we have a common customer base. Second, the pumping system is critical to the operation of a tanker, which makes it a key decision for the ship owner. For a product tanker, the system normally makes up 5%-7% of the total value of a ship and boosts productivity and overall energy efficiency.
Third item, the transaction risk is limited, both from a cultural and financial perspective. Our companies share the same core values and both enjoy a premium position with our offerings. A solid order backlog and stable historical operating margins over the business cycle gives us financial comfort. Finally, we have successfully acquired 20 companies in the last five years with combined sales of about SEK 7.5 billion. Most of them have been fully integrated, including our previous major acquisition, Aalborg Industries, in 2011. With this good experience, we were ready for more. Now we move over to the slide presentation. Here you see a summary of the press release that was sent out this morning. We are paying NOK 13 billion on a cash and debt-free basis, and the transaction is EPS accretive as from closing.
In 2013, the sales of Frank Mohn was NOK 3.4 billion, and the order intake was NOK 6.1 billion. Hence, we anticipate a significant increase in sales in 2014 and 2015, based on the large order backlog. The operating margin is significantly above Alfa Laval average. Moving over to the next slide. Frank Mohn is a global leader in pumping systems for the shipping and offshore oil and gas industries with about 1,200 employees. The vast majority is based in the Bergen area in Norway. The activities in Bergen will form a center of excellence for marine and offshore pumping systems. Next slide. The marine pumping systems made up 50% of sales in 2013. Frank Mohn is the global market leader for cargo pumping systems for product and chemical tankers. The company also supplies cargo heaters and coolers. Oil and gas offshore pumping contributed with 23%.
Here, the company supply water injection pumps, fire water pumps, and submersible seawater lift pumps. Frank Mohn also has an interesting environmental business supplying oil recovery systems. It is both equipment that collects oil spills from the surface of the sea and equipment for emergency offloading, also from sunken ships. Finally, 21% came from service, where Frank Mohn has 50% of the installed base covered by service contracts. Now we move over to the rationale. Alfa Laval is extending the fluid handling portfolio by adding high-performance, high-quality products and systems. These additional systems are critical to the operation of the ship and offshore installations. We are acquiring a market-leading position in pumping systems since Frank Mohn is the market leader in its core business, and it strengthens our leading position by adding another unique high-technology offering. Frank Mohn is benefiting from favorable market trends and attractive long-term growth prospects.
Next slide. It is an excellent fit. On this slide, you see the segments where Alfa Laval has flow products today. With the addition of Frank Mohn, we strengthen our offering. On the next slide, you see all the products that the combined companies will offer on board a ship, which makes us even more attractive to our customers. On the next slide, you see what we jointly will offer on board an oil and gas offshore installation. Here we anticipate revenue synergies from our combined offering. We will be an attractive supplier with an even more comprehensive product portfolio. Next slide. Frank Mohn and Alfa Laval share three structural growth drivers. Globalization that drives transportation by sea, demand for energy, and finally, increased environmental demands. On the next slide, you see favorable market trends that affect product and chemical tankers.
Refineries are built closer to the source, giving increased need for transport of refined products instead of crude oil. Shale gas in the U.S. means less import of crude oil and more export of refined products. Fossil fuel continues to be the dominant energy source, with liquids being the larger part. High demand for petrochemicals for plastics production, especially in Asia, means demand for chemical tankers. The need for larger product and chemical tankers favors Frank Mohn, since this is where they have their strongest position. Ship owners want higher flexibility in transporting multiple products and maximize efficiency in offloading and loading. Frank Mohn is the given choice for these demands. On the next slide, we see the split between the divisions before and after the acquisition, based on sales in 2013. Equipment, 29%, Marine & Diesel, 30%, and Process Technology, 41%.
We see that there is a more even distribution of the sales between the divisions. The three divisions have different business cycles. This contributes to the stability of the Alfa Laval group. We move over to the next slide. Here you see the pro forma distribution of sales for the Marine & Diesel division. Traditional sales to shipping stands for 40%. Sales to offshore oil and gas contributes with 10%. Sales driven by environmental legislation and focus on fuel cost reduction, 10%. Land-based diesel power stations, 7%. Finally, we have service with 33%, contributing to stable revenues. Now we move over to the next slide. The role of Frank Mohn in Alfa Laval. The company will be included as a segment in the Marine & Diesel division.
The company will be kept together, led by the same management as today. The activities in Bergen will become Alfa Laval's operational center for marine and offshore pumping systems. As you see to the left, we already have three centers in Sweden and Denmark. We have a track record of successfully operating from a Scandinavian base. Now I hand over to Thomas Thuresson for the financial part.
Good morning, all of you. Let me, as Lars said, give you some numbers related to this transaction. To start with, let me give you a sense of the impact on Alfa Laval in terms of orders, backlog, and sales. The slide you have on the screen gives you the pro forma numbers for 2013, including Frank Mohn AS. Note the substantially higher orders received than sales for 2013. To be explicit, orders received amounted to SEK 6.5 billion in 2013. Sales was only SEK 3.6 billion. This gave a backlog end of 2013 of SEK 5.9 billion. This is, of course, giving a good deal of comfort for 2013 and to 2014, and to some extent, quite some extent I should say, also for 2015. How are we then going to fund this acquisition? Well, let me start with some real news.
We have today a totally unutilized senior facility. We will make use of approximately 40% of this senior facility, SEK 2 billion. In addition, we will utilize a bridge facility of SEK 12 billion provided by one of our banks, SEB. We will, of course, establish a longer-term solution gradually, starting shortly after closing. If we move on, what will the implications be on Alfa Laval's balance sheet? Well, to start with, the price agreed will give a value in addition to the net asset value acquired of approximately SEK 12.3 billion, or in NOK 11.6 billion. On the slide, you see the expected implications on our capital structure in terms of debt to EBITDA on a pro forma basis. We expect to end up about 2.5 pro forma 2013, and debt worth listing we expect to be about 1.
With regard to rating implications, we've analyzed the possible impact in-house of increase in indebtedness. We believe that the new situation post-closing is likely to render a downgrade with, let's say, one notch. We are currently rated at single A-, and that would then mean BBB+. However, we will all know shortly when S&P has analyzed the new situation and come to their conclusion. With that, I hand back to Lars for a summary.
To summarize, Alfa Laval is acquiring a leader in marine and offshore pumping systems, and extends the current fluid handling portfolio with systems that are critical to the operation of the ship and offshore installations. The combination will provide a very attractive offering to the marine and offshore markets. The operating margin is significantly above Alfa Laval average. Transactional risks are limited, both from a cultural and a financial perspective. Frank Mohn is present in areas with attractive long-term growth prospects. That completes our presentation. Now I hand over to the operator for the Q&A session.
Thank you. As a reminder, if you wish to ask a question, please press star one on your telephone keypad and wait to be answered. The first question comes online. Then after, please ask your question.
Thank you. Sorry. It's [audio distortion] . Hi, Lars. Hi, Thomas.
Hi.
A question on margins, please, because you haven't given us a pro forma EBIT in your presentation. Can you just say what level of profitability Frank Mohn did in 2013, and maybe in terms of the range of margins we've seen over the last few years? What is a kind of key picture of range and profitability? Thank you.
Well, we will not disclose the details on the operating margin simply for competitive reasons. We think this is in the best interest of Frank Mohn and of course, going forward, Frank Mohn as a part of Alfa Laval. We stick to the statement in the press release. The operating margins are significantly above what we've generated over the last few years in Alfa Laval, and the company has shown a very large amount of stability when it comes to these margins throughout the cycle.
Okay. Thank you. On orders, you've given us guidance that sales will grow in 2014, as we've seen, on the basis of a big backlog. We obviously had really strong markets in both offshore and traditional shipping over the last eight months or so. Is that SEK 6 billion order figure sustainable? Are there any large orders in there that fixed it? What would you expect orders going forward? Thanks.
If we look at the forecast, for instance, from Clarksons, we know that they are forecasting somewhat of a reduction in contracting to shipyards 2014 compared to 2013. Of course, that we expect will have implications on Frank Mohn AS as well. It is not in any way a dramatic decline looking at the forecasts. If we look at the lead time from a contract to a yard until there is a contract placed for pumping systems, we have learned during our diligence process that the lead time tends to be shorter than what we're used to for traditional Alfa Laval products of nine months and for onboard products of six months. We're rather talking two to three months as a common delay in placing orders by yards or ship owners.
Got it. Thank you. A final one. You said this deal is accretive from the beginning of timing. To help us a bit, can you give us a sense of how accretive it is, and at what point you would expect it to cover the cost of capital of the deal? Thank you.
Well, we can give you one number. We can say that our current analysis indicates that we will have something like SEK 120 million per quarter of step-up amortization hitting the P&L. Of course, the deal as such, with SEK 12.3 billion of value paid surplus to net assets, will, of course, have an adverse impact on return on capital employed. Again, being EPS accretive, it should have a positive impact on return on equity.
Okay. To help us back out the numbers, Frank, can you help us with the accretion on return on capital employed at this point?
We will not provide any details because that would mean we are providing a forecast for 2014, and as you know, that is not our tradition.
Okay. Thank you.
The next question come online from Please ask your question.
Thanks very much. This is from First question is, can you give us some insight as to why the seller is selling? Second question is, in what sense are you saying that these assets, the Framo submerged pumping systems are unique? Can you describe in what ways they are unique? Then lastly, I know that the aftermarket is 21% sales for Frank Mohn. Is that well above the average, which is 6% to 7%? Is this the driver behind that? Thank you.
Well, the seller has decided to sell. This has been the right timing. The seller wants to sell, we see it's a good timing for us to buy since the markets have been good 2013, we also see going forward that it looks promising. Why it is unique, that is, you can say that Frank Mohn is, if you talk about product and chemical tankers, which is the majority of their business, they are supplying a complete system, not single components. It is a complete system with a hydraulic power unit, pumps, and pipings. By supplying the complete system, they can guarantee the reliable operation of offloading and loading. This is absolutely crucial for the ship owner. That's why in these cases, it is the ship owner that is the decision maker.
Once the ship owner has specified, usually this system is specified before the ship owner decides what yard that will build the ship. The 21%, well, they are doing a very good job today with Frank Mohn. However, we believe with our very good presence, we have more than 100 service centers around the world. We believe that we will be able to contribute to continued positive development for the service business of Frank Mohn. I think if I may inject, Lars, according to the diligence information we've gotten, they now have service contracts for about 50% of their installed base. Well, that, of course, represents a bit of an opportunity considering, as Lars touched upon, our presence.
Thanks very much.
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Two more related questions. The first one is, Alfa Laval is a significant supplier to Frank Mohn. Effectively, is it possible for Mohn to give some more granular view on the cost savings, or the potential synergies from the structure side of the product range? Thank you.
Alfa Laval is a fairly small supplier to Frank Mohn. We are supplying gas-cooled plate heat exchangers that are included in their systems, but it is a relatively small value.
Okay, thanks.
Moving on to your questions about the synergies. The bulk of the synergies specified to NOK 120 million net, gradually kicking in over a three-year period. The bulk of it is on the cost side, and primarily there it's about procurement synergies. With the size of Alfa Laval and with a combined base of suppliers, we're convinced that we will be able to generate savings. For the rest, on the overhead side, it's a truly slim organization and it's a high-performing organization. Of course, there are no regular opportunities to do anything on the overhead side. That is not foreseen. On the revenue side, yes, we see opportunities, but then again, we only see those coming in towards the back end of this three-year period, because it all takes time to get organized around cross-selling opportunities.
Okay. Thomas, as a follow-up on the orders. You mentioned fairly short lead time. At the same time, [audio distortion] . Would you say that the ordering behavior is also reflecting a longer-term order situation in books, i.e., order volume, and accounted for, or is the scalability that Frank Mohn will bring with this step-up will be closer to the ship stability and the yard?
Well, again, the lead time from order for the yard until pumping systems are actually ordered is, as I mentioned before, quite short compared to what we're used to, only a few months. That, of course, indicates that the uptick we saw from late 2012 and then on a high level through 2013 is largely reflected in the level of orders that Frank Mohn has enjoyed during 2013. I mean, you got access to the thoughts on forecast for 2014, so you know what is anticipated. Then coming back to this backlog. It means a great deal of comfort for 2014. Of course, there is a backlog into 2015, a good part into 2015. Then for the offshore oil and gas, of course, we have orders that are going to be delivered into 2015 as well.
Okay. Thanks.
The next question comes from the line of Adam Hall. Please ask your question.
Hello, I've got two questions. One, could you give us a sense of how, compared to the financing costs on the bridge loan with regular Alfa Laval debt and then the second question, more cash flow. How does this depreciation or annual CapEx as a percentage sales compare with the old Alfa Laval? Thanks very much.
Well, if you look at terms on the bridge loan as opposed to our regular funding, of course, the validity of a bridge loan is typically shorter. That's the nature. Even if we have gotten, we think, good terms on this bridge, of course, it's a lot shorter. The fees will be more expensive in relation to the time the loan is actually running, but otherwise not vastly different. As far as regular depreciation is concerned and CapEx going forward, it is not vastly different from what you're used to from today's Alfa Laval. As I said, when it comes to amortization on step-up values, our current estimates indicate about SEK 120 million per quarter.
Thanks very much.
Once again, if you wish to ask a question, please press star one on your telephone keypad. The next question comes from the line of Aaron Gibson. Please ask your question.
Yes. Hi, Aaron here. Good morning. Again, as you say, very little coherence question at this moment. I'm not sure if you hear me. Can you hear me?
We hear you fine. Do you hear the answers well?
We hear the answers, not the questions. I don't believe this is enough. I'm interested in if the current management that you've announced is staying, having any earn-out, and also what the overlap with the retained management and owners are? Are we now having some very newly rich Norwegians that will be running the company, or are they separate entities? Thank you.
Well, we are very glad that the existing management team of Frank Mohn, they are excited about the acquisition. They see that they have got another long-term owner of the company with a long-term industrial view. They intend to continue with the company. That's the way we normally operate, that when we buy well-managed companies, we want them to stay. They are happy to stay with us. You had the second question, I didn't hear fully.
My first question was, are there any earn-out, yes or no? The second question was whether there is overlap or if it is the same, the current management and the previous owner, or I guess current owner of the business.
Well, there is no earn-out. When it comes to possible overlap, if we look at today's senior management in Framo, they have been co-owners next to the Mohn family for years. As a well-managed and very profitable organization, of course, they have, as co-owners, benefited from those profits historically. I believe that we have some new colleagues that have been enjoying a good return historically, and we look forward to continue to work with them as colleagues. As Lars said, there is no earn-out.
Okay. Thank you.
Our next round of questions. At this time, please continue. We've got a question from who is live on the line. Andre, can you repeat his/her question?
I've been calling it Andre from Credit Suisse. Just a couple of fairly simple questions. Firstly, on geographical exposure of this business, what is it? Especially in the offshore segment, whether this is the traditional European customers or there's a different function of South American customer base, et cetera. Secondly, the total value on the ships now, you mentioned that the Framo supplies is 5%-7%. What would be your value on the ships now with the whole sorts of Alfa Laval or Framo products ? I know it's very substantially pending whether it's [audio distortion] product or not. Thirdly, you said this business has [audio distortion] . Could you comment on what level of market share it has, and what sort of next set of market share is for us to get the full picture of the competitive landscape? Thank you.
Well, we don't disclose the market shares for competitive reasons, but we can clearly state that they are by far the market leader in their focus areas, and they are significantly bigger than anyone else. You find the install base, the ship owners, if you take the four biggest, there you have, first of all, you have Greece, second is Japan, third is Norway, fourth is Germany. That shows that there you have the ship owner. The ship owners that are the decision makers. Most of these types of ships are built in Korea. The invoicing address is Korea, so it will significantly increase our invoicing to Korea. Korea as a market will increase significantly.
On the value per ship, of course, as you said yourself, Andre, that can vary a great deal. Just looking at the value of Frank Mohn's offering and what traditional Alfa Laval and Aalborg is entailing, you can easily get to something which is between 5% and 10% of the value, of course.
When it comes to offshore, there Frank Mohn has pretty much the same customer base as we have. When we have been going through their books, we see that they are supplying to a good extent to the same type of rig owners and whether it's in the North Sea or outside the Australian coast or outside Brazil.
Got it. Thank you.
Thank you.
Our next round of questions. At this time, please continue.
Okay. Thank you very much for your attention with so short notice.