Good morning, everybody. I would like to welcome you all to investor presentation of FLSmidth annual result for 2021. I would like to present to you the presenters today. I'm Mikko Keto, I'm our new CEO for the company, accompanied by Roland M. Andersen, who's our CFO. We have quite smiley faces here. It means that we are pleased about last year's result. If you want to look at our roles as well, you might want to highlight that I will focus a lot on EBITDA and EBITDA improvement, and then Roland is focusing on cash. I'd like to remind you about forward-looking statements that we will be discussing during this call, and of course, the future that can deviate. I'm extremely proud of FLSmidth result for the fourth quarter and for full year.
If I talk about full year, we've been advancing in all of our key KPIs: orders, revenues, and EBITDA, and at the same time, strong cash flow for the company. Also, there were some significant milestones during the year for the company. ThyssenKrupp acquisition was announced in the summer of 2021, and we successfully raised capital to fund it. We committed to Science Based Targets. It's a significant milestone in sustainability commitment. We introduced MissionZero Mine, and in cement, first full-scale clay calcination order that we received. We'll talk today more about market outlook in a bit, but what we can say about mining market, mining market is positive. It was good last year; it's good this year. In cement, the market is still challenging with overcapacity, and we are looking at recovery mid-term and emergence of the green cement market.
Roland will go more into the guidance in a bit, but in the guidance figures, it's impacted by a backlog that we have and the backlog what we're executing, especially in mining and large share of the capital, but we will go into details for that in a bit. Mining revenue grew 10% during 2021, and that is evidence that we were successful with our supply chain and deliveries. We updated in January also that the execution of capital projects even exceeded a little bit our expectation in the last part of the year. Backlog has been increasing a bit for the aftermarket service. It means that order-to-delivery cycles are getting a bit longer, but of course, that is also applying for the capital market. As a whole, we've been successful in executing our deliveries.
The challenge in the market has been more with the cost escalation in the supply chain and some logistic challenges. Results show that we mitigated impact of the material cost increases and increases in logistics costs, and we were able to post EBITDA margin of 9%. On the bottom, there's a note that EBITDA margin adjusted for the TK acquisition cost, taking that out, would have been 9.9%. I was actually talking to Roland that if we add enough decimals, that is round up to the 10%, but Roland said it's 9.9%. That is what it is. We are focusing on EBITDA margin improvement in the mining going forward. We had a stellar fourth quarter in terms of the order intake for mining. Significant growth in order intake, both in service and capital.
On annual level, it's 4%, but if you remember the first quarter 2020, we got one of the biggest orders ever in the history of FLSmidth for mining. On back of that, then the growth rate for the order intake is 4%. If you neutralize impact of that one, it's really high growth, both in capital and service for mining business. Strategic rationale of acquisition of TK Mining is solid. We've gone through the portfolio in detail, and it's highly complementary, and we are adding some critical elements to FLSmidth portfolio that we are weaker today. It's adding to our full flowsheet ambition from pit-to-plant, so that we can cover pit better, but also, of course, adding some critical products to the plant portfolio.
The significant opportunity with ThyssenKrupp Mining to improve the aftermarket service performance. Synergy case is compelling, based on cost synergies, and we know that we can deliver that. Integration planning is on track and so is antitrust process. No surprises there. In Cement, we talk about value over volume, and we change the focus in Cement for profitability over volume. It means that this year we will be making profit in the Cement business with a positive EBITDA margin. Also last year, there was significant improvement from a year before. In Cement business, we focus on process technology, products, and services. On projects, we are very selective where we participate, and they need to have green credentials for us to be interested in that. We are working with the customers who are committed for green transitions, applying new technologies, new processes to achieve that one.
It's value over volume for Cement. Quarterly order intake development wasn't very strong for Cement for the last quarter, but I'm more interested in progress in the service. On annual level, the service progress has been really good for Cement in terms of getting new orders. As Roland will touch the forecast for the year, we are estimating Cement to move sideways in terms of volume, but we are improving profitability. That is our strategy, that we focus on profitability and don't take orders that we might regret two years later. Now handing over to Roland for more detail of the financials.
Thank you for that, Mikko. Let's just have a quick glance at the financial headline numbers. As Mikko mentioned, we're moving ahead on most of the key KPIs. Order intake is up by 4%, and revenue is up by 7% consolidated. Also, our gross margin is up a notch, and our EBITDA moves forward by 34% to an EBITDA margin of 5.9%. Clearing financial costs and taxes, we end up with a profit and loss for the group of DKK 357 million. Included in this result is acquisition cost of DKK 107 million related to TK acquisition. Without that, the EBITDA margin would be 6.5%.
If you look a little bit on our revenue for Q4 grew by 19%. It grew approximately 20% in both of the two industries. But what is important here is that our capital revenue grew significantly more than service in Mining and also slightly more in Cement, where capital grew by 25% versus service of 20%. This is important to understand in terms of that this translates directly to an EBITDA margin. As you know that the capital revenue is weighing down on our average EBITDA margin, especially in Mining.
If you look at the right-hand side, we're moving forward 7% for the year and a Q-by-Q increase in revenue and a traditionally strong Q4 here, 2021, where we executed better, and especially in Mining, capital led us to also beat our guidance from around DKK 17 billion to DKK 17.6 billion in revenue. If you look at our gross margin in nominal kroner, gross profit is going up Q-by-Q during the year, which looks good. Our gross margin, though, is trailing a little down the last two quarters, again impacted by the capital share of total revenue, especially in Mining, but also a little bit supply chain costs sitting in these margin numbers.
On the right-hand side, we see that Mining is down by a percentage point compared to same quarter last year, and this is directly attributable to the higher capital revenue. Cement is impacted by final closure of an O&M contract that we finally closed out by end of the year. Our SG&A ratio improved to 13.9% for Q4. Compared to same quarter last year, it's up by 4%. The percentage obviously benefit from a relatively high revenue in Q4 that was seasonally driven. In this number sits, for the fourth quarter this year, DKK 37 million of costs related to the ThyssenKrupp Mining business acquisition. If we look at the EBITDA margin development, we posted 6.6% in Q4 alone.
This is now the highest quarterly EBITDA margin we have had since the pandemic outbreak. On the right-hand side, we see that this is predominantly the revenue pickup, so a significant operating leverage. The decrease in gross margin of DKK 74 million is a little bit supply chain costs and so on, but predominantly the capital revenue share. Also the DKK 37 million in this quarter sits in the EBITDA margin, and we ended at DKK 338 million of EBITDA in Q4 2021. Our net working capital improved significantly in Q4. Net working capital ratio went down as good as 6%. On the right-hand side, we see that this is predominantly driven by a large amount of prepayments that came in in Q4.
We had actually expected some of this later in 2022, but we managed to get that in Q4. Also, we have cleared a chunk of our WIP assets, and we continue to do quite well. The organization have done really well in steering our receivables, and our total receivables out of Q4 revenue is improving compared to the same quarter last year. All that leads to a strong cash flow in Q4 2021. On the right-hand side we see that this is predominantly driven by the EBITDA as it should be, but also a strong positive change in net working capital. Clearing taxes and financials, CFFO for the group was DKK 1.449 billion for the year.
Deducting CFFI and a few M&A adjustments, then a free cash flow for the group of DKK 1.185 billion for the year. That leaves us with a strong capital structure. We're well within our own targets and equity ratio of 45%. Also our net interest-bearing debt turned to a net asset after we raised capital of DKK 1.4 billion net in September 2021. Obviously, this is now sitting and waiting for us to pay for the TK Mining acquisition that anticipatedly closes in second half of 2022.
In line with our intention to drive the mining industry and the cement industry a bit more independently, we are also now stepping forward and start to guide separately on the two industries. For the mining industry, that means, as Mikko said, that we are positive on the mining industry and the market outlook. We think 2021 was a good year for mining, and 2022 will be similarly a good year. Mining revenue and EBITDA is expected to grow in 2022. A lot of that is driven by our existing backlog. It's important, bullet three here, to understand that the mining EBITDA margin will be impacted by a relatively high share of capital revenue.
Capital revenue that we are converting from our backlog, and this is orders all the way back from 2020 that we are now executing for the first predominantly three quarters of 2022. There will also be a bit of a higher logistics cost and a little bit inflationary pressure in our cost base. Further, we have for now anticipated that we will spend EUR 110 million in integration costs between now and until the ThyssenKrupp Mining transaction anticipatedly close in second half of 2022.
That all means that revenue in the Mining industry is now expected to be between DKK 12 billion and DKK 13 billion and an EBITDA margin of 8.5%-9.5%, including, as I mentioned, the higher capital revenue share and also including DKK 110 million in integration cost. Similar for Cement, as we have said, you know, we will move sideways in Cement revenue-wise. In this context, that means DKK 5.5 billion-DKK 6 billion in turnover. We have closed a few O&M contracts down during 2021, so this is a low-margin revenue that will drop out. Also the Cement market is not expected to improve significantly in the short term.
Our business will be impacted by logistics costs and also a certain element of inflationary pressure. As we have promised, or at least planned for, during 2021, 2022 will now be in black EBITDA numbers, however low. 1%-2% in EBITDA margin. That is quite well done by the industry cement industry organization here that they brought the business back to black numbers for second half of 2021 and now continue to move forward with profitability and with focus on profitability over volume. If we add up these numbers on group level, that means that the group will deliver a revenue of between DKK 17.5 billion and up to DKK 19 billion and an EBITDA margin of 6.7%.
Just important to note that this is a standalone FLSmidth guidance. It does not include any impact from the combination with the ThyssenKrupp mining business, and it includes EUR 110 million in integration costs. We expect, as soon as the transaction closes, we will update our financial guidance and include impact from the TK Mining business accordingly as we move forward from there on. This guidance is obviously subject to uncertainty, primarily from the pandemic, the global supply chain situation, and also the geopolitical turmoil we see around the world these days. With that, I will give it back to Mikko.
Thank you, Roland. We introduced MissionZero Mine in 2021. The idea is that we take holistic view from pit to plant and optimize the whole mining operation from sustainability point of view. We've done the same for all different applications, copper, gold, lithium, you name it. We are looking at how to maximize the productivity and minimize impact for this environment. With that combination, we know that we can achieve significant benefits for our clients, and we are engaged with many of our customers in detailed discussion about what can be done for the greenfield and of course for the brownfield operations. Important is always to have a holistic view rather than picking one product out of the flowsheet and say that this will change everything.
Holistic view is the only right view in mining. We've done the same for cement operations. Big commitment. What we have done last year is our commitment for Science Based Targets. We set internal KPI targets for our personnel to improve economic intensity year on year. Now we're in the process of unbundling that KPI so that we can tell people exactly what to do and how to influence that KPI positively. It's not only about the high level KPI, but the organization understanding what actions, what improvements help us to improve economic intensity. We have very clear management agenda for the company. For mining, profitability, and growth. We know that in the good market like mining market, we can do both at the same time. We only take business that is good business also in two years of time, as I said.
For cement, growth is a bit more challenging. In cement, we make sure that it's profitable business and run it sustained, a sustained profitable cement business going forward. We are able to invest money back then to the R&D for the green future. MissionZero sustainability remains cornerstone of our strategy and management agenda. One of the biggest events this year will be integration of ThyssenKrupp Mining business into FLSmidth in the second half of the year. That is clear management focus. At the same time, we started de-risking our project portfolio already last year. We continue to do that. When we talk about order backlog, I know from last year that the quality of the orders is improving. When I talk about quality of the orders, I talk about low risk and higher margin.
We know that we are working through the portfolio and order intake, and we are advancing in that area as well. I would like to invite questions from the investors and from the audience for me and Roland, please.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 0 and 1 on your telephone keypad and your Enter key. After you are announced, please ask your question. Please hold until we have the first question. The first question is from Magnus Kruber , UBS. Your line is now open. Please go ahead.
Hi, Mikko, Roland. Magnus here from UBS. A couple of questions from me. First on the revenue guidance. It strikes me as a bit conservative. I think you have about DKK 2 billion more for deliveries this year compared to last. Even at the upper end of the guidance range, I think your sales growth only implies a DKK 1.5 billion increase. What is the delta here, and why should we expect the inflow of orders this year to be down?
I think first of all, there will be a large part of capital revenue that comes from the backlog, and that will be timed accordingly, especially in mining. Secondly, I think there will also be a little bit of delay. You know, we are not expecting supply chain challenges to be, you know, completely gone within a quarter or two quarters. That's not only things we can, you know, mitigate by cost and so on, but it may also delay things a little bit. There's a little bit of elasticity in the execution plans, and that's how you should think about the revenue guidance.
We are all the time working with our capital or especially capital organization looking at the backlog or looking at estimated delivery times and so forth. As Roland said, there's it's a bit of a moving target, so because of the global logistics.
What can be perceived as being somewhat conservative, that's mainly due to logistics challenges rather than geopolitical risks or anything else that you have taken into-
It's actually not meant as conservative. It's meant as realistic. We will see how we go as we play. If we look at Q4, obviously we delivered a bit more than we had guided. Important to note is that the margin was not necessarily following because there was a large chunk of capital revenue. I think that's what's important when understanding our guidance for 2022.
Okay. Got it. Thank you so much. That was my first one. Could you also add some color on what drove the higher than expected equipment invoicing through 2021 on the mining side, on the OEM side? Is that sort of project specific dynamic, or was it a sort of a broad-based over-delivery?
I think it has to do with some of the capital projects because we were anticipating that end of the year there's sometimes issues in logistics and delivery. The logistics flow was slightly better than anticipated, and it had mainly to do with capital projects rather than anything else.
Okay. It was a broad-based impact being driven by logistics rather than some of the bigger projects that you had last year that was sort of particularly better, right?
Well, both, right. The logistics issues were not as harsh as we had anticipated, and that also meant that we were clearing some of the bigger projects faster.
Got it. Thank you. Then on the mining service revenue growth, it came in at 5% in the quarter, and that compares to high teens or even twenties growth over the final three quarters of last year. When should we expect the aftermarket invoicing to kick in at the same rate?
What we've seen in the aftermarket order to delivery cycle getting a bit longer. Lead times from order to delivery are a bit longer than they used to be. We don't have a major issue in deliveries, but just kinda it's getting longer. That is visible that we are building a backlog of basically more than we can deliver. That was visible also in the latter part of the year that order intake was growing faster than revenue. It's kind of building backlog on back of the a little bit longer delivery times for parts.
Okay. Got it. Thank you. And just one final one, if I can squeeze it in. I think, Roland, you mentioned higher OEM invoicing in the first three quarters of this year. Could you sort of add a little bit more color on sort of how the invoicing sort of trajectory will be? Will Q1 be the highest and then slowly slope down towards Q4, or how should we think about the development?
I think Q1 and Q2 will most likely be the highest ones, and slightly better in Q3, and then it starts to trail off.
Got it. Thank you so much. I'll get back in line. Thank you.
Thank you.
The next question is from Lars Topholm, Carnegie. The line is now open. Please go ahead.
Yes. Hello, guys. Thanks for taking my questions. A couple on your cash flow slide, I can see that the cash flow from continuing activities is almost DKK 200 million higher than the group cash flow from operations. I just wonder what makes up the difference. Is that a cash outflow of almost DKK 200 million from discontinued activities? How does that work? And then a second question, and I apologize, but it goes to again to the revenue guidance. I am not sure I completely understood your answer. Revenue that is not currently in the backlog should, according to your guidance, drop from around DKK 8 billion to somewhere between DKK 6 billion and DKK 7.5 billion, and I simply don't understand why you expect that.
If you can explain it so even I understand, I'd be grateful. Then a final short question that goes on the cash flow outlook for 2022, because you elaborated on prepayments having ticked in somewhat earlier than expected, and you also had a significant positive net working capital swing. Taking that into account, what kind of I guess underlying pressure on cash flow would it be fair to assume for 2022, if any? Thank you.
Yeah. Thank you for that, Lars. Maybe I should start on that. The discontinued activities, remember in Q2, Q3, we had a bank guarantee pulled against us of DKK 130 million on a case that is currently running on the discontinued business. There's also been a few operational costs in trying to sort of get that sorted and also a clearance of a VAT issue. That explains the difference between the group and the discontinued activities. On the revenue guidance, I'm not sure what the uncertainty is. We have a backlog that will need to be converted at. Some of those capital projects are relatively low margins.
That's one thing. The second thing is that the delivery times on both what's in the backlog and also the order intake in our orders, as we refer to, you know, will be impacted by longer delivery times as a function of expected supply chain issues. That's how you should think about it. Then I think there was a question on the cash flow, and obviously we had a lot of prepayments in Q4, and those prepayments will be used, so to speak, to execute on the projects. That means that, when thinking about our total cash flow, our working capital, I think we're not improving the level of working capital as a percentage of total revenue.
We should still think about a through the year sort of working capital of 10-10+% of total revenue. That also means that cash flow will swing back during the year as we start using some of these prepayment to execute, so to speak.
Very clear. Thank you very much, Roland.
Next question is from Claus Almer, Nordea. The line is now open. Please go ahead.
Thank you. Yeah, also a few questions from my side. I will take them one by one. The first one, you talked about this capital orders and service revenue. Could you provide a likely split between these two revenue streams? And would it be more as we have seen in the second half of 2021? That'll be the first one.
The capital split will be closer to what we saw in Q4.
In whole 2022?
Yes. Especially for the first three quarters, yes.
Okay.
Of course, if you remember that traditionally is more 60/40, and now we are more talking about more 55/45, so it's a fairly significant shift in terms of the mix.
More than half of the revenues will come from capital.
Yeah. Okay. Looking at the projects you have in the backlog that was signed before commodity prices went up or before the cost inflation started to happen, how are they, you know, impacted by cost inflation? That will be the second question.
Most of the contracts that we had had a cost escalation clause. That's pretty well covering the capital business. Of course, it's not automatic, so that triggers negotiations with the customers and then we had many of those during last year. We managed to neutralize impact of significant cost escalation in the capital business through those negotiations. Of course, for that reason, you can see that the EBITDA margin, for example, for Mining, held up. We didn't see declining in the margin because of that. It was very significant and at times quite painful to talk to customers about that we need to now increase prices by X% because of this and that.
I would say that that's one of the successes of last year that I would like to highlight that we were able to neutralize impact of very significant cost inflation. I'm bearing in mind that in capital equipment, 80% of the product cost is mainly material cost, which is the main product cost item.
Okay. Does that also account for the Cement Division? I can understand that the miners is probably easier to talk to all the way. Of course, not that easy, but easier. Within Cement, it might be a different story. How is it in the Cement Division?
It has been similar. On supply side, then of course, cement market is not booming, so that if they have sub-suppliers that are more working with the cement, there's not inherent ability of the sub-suppliers and component suppliers to increase prices as there is in mining. Also in cement, the EBITDA results shows that we were able to mitigate the impact of that one. That inflation impact is more on the mining, not only because of material cost increases, but also the increase of global demand for the components and products, and therefore of course, sub-suppliers having more bargaining power.
Okay. Just final question regarding the backlog, and sorry about, you know, also coming back to your revenue guidance or the comments about revenue 2022. We're a little bit, you know, uncertain how to really understand your backlog comment. The number you have in the annual report, is that your best guess or is it a? Yeah, how do you reconcile that number with the comment about longer sales cycles and supply chain issues and so on?
Yeah. This is, you can say, our best. This has been somewhat adjusted for the expected delays, you can say. Yes. That's right. 69%.
Okay. Thanks. Okay, thanks. That was all for me.
The next question is from William Turner, Goldman Sachs. The line is now open. Please go ahead.
Hi there. A couple of questions from me. The first one is, again, kind of related to your backlog, but a slightly more broader question. Obviously, we're experiencing a much more inflationary environment, and some cost items are increasing quite rapidly at short notice. How do you feel about the current hedges and contractual agreements you have with your backlog, that you might not get any kind of margin pressure in the future when it comes to actually shipping these orders in the future if the costs have increased? Do you feel like you have enough levers and feel comfortable with that scenario?
If I talk about firstly capital equipment, which is kind of large unit equipment for the significant part of the price is basically material cost. What we are trying to do is that we are making quotations to customers with a short validity, and at the same time we get commitment from the main suppliers for same period of time, so it's back to back the commitment. Then that has led to the fact that quotation, for example, the validity is not three months, it's not four months, it's rather one month. Then we for that period of time, we secure sub-suppliers commitment for the price or cost to us, and then delivery time.
Typically, if there's a delay, we tell the customer that we need to recost, reprice the quotation because we only had validity for 30 days. We are pretty well covered in the capital business, getting key sub-suppliers to commit at the time when we get commitment from the customer. It's managed in the window so that, in that one-month window, we have a commitment from supply chain, we have a commitment from the customer, and if there's delay, we need to recost, reprice the whole thing once again.
Okay, great. My second question is on the ThyssenKrupp Mining integration. The costs that you've incurred so far, they were currently around DKK 100 million. When the deal was announced, it was initially guided that it would be DKK 110 million to be incurred prior to closing. It feels like the integration costs are running kind of ahead of schedule. Is there anything meaningful behind this? Is this just been a bring forward of your kind of overall integration costs? Or do you expect that the total costs will be higher than what's previously guided?
Oh, the way we actually is a little bit hot and cold worldwide, but the money we spend in 2021 is related to the transaction. That's how we think about it. The money we spend from now on and onwards is integration cost. Those relate to the 20% that you recall when we announced the deal. Is that clear?
Okay. Yeah, that's clear.
The 110 million that we now start spending in 2022 is part of our EUR 75 million in total cost to complete.
Yeah. Makes sense.
The next question is from Vladimir Sergievskiy, Bank of America. Your line is open. Please go ahead.
Yes. Good morning, gentlemen, and thanks for taking my questions. I'll start with ThyssenKrupp. I mean, you announced the deal about six months ago. Do we have visibility on what has happened to, like, project execution, backlog order intake since mid last year? Are you receiving any periodic updates from Thyssen on how these operations are performing? And also, ThyssenKrupp obviously recently published their carved-out balance sheet for this operation, which showed a pretty big increase in contract liabilities, but no increase in cash. Is it in any case a concern for you, what this balance sheet evolution, I would say? That's the first cluster of questions.
If I start, and then Roland can complement. That information would be in the clean room, and myself and Roland don't have access to that because we are very strict on the antitrust rules. So we don't have access to the kind of clean room information. On day one, we will open it, and it will be available. So we are relying on what ThyssenKrupp is publicly quoting. Publicly they are quoting that the strategy of improving profitability in the multi-track businesses and de-risking what they have commented publicly. We have no concern that it will not be progressing accordingly, based on the public information.
As you know, because of the rules, we don't have access to clean room data at the moment. Roland, do you want to?
I think we can point back to what we have said in Q2 and Q3, where ThyssenKrupp indicated that especially their mining restructuring were progressing ahead of plan and significantly better than they had anticipated. That's the latest we sort of are allowed to communicate on.
That's great. Thanks very much. If I can ask about contingent liabilities which you have reported. I mean, it's a pretty sizable increase, about DKK 600 million compared to early last year. I think most of them happened before Q4, but probably Q4 has a small increase as well. Any chance you could disclose what actually drove this increase in these contingent liabilities?
We did this. This is before Q4. This was Q1, Q2, and also Q3. First of all, there was a case on our discontinued business where we had a bank guarantee pulled against us, so that's a contingent liability. That's not a cost we have taken. This is clearly an issue that we are disputing. We have an older case of over DKK 200 million referred to as the Tunisia case at our annual general meeting back in 2020. That is part of this increase. There are a few other cases in Northern Africa and in India. They are not strong enough for us to expense them, so they are just highlighted under contingent liabilities.
Okay. Thanks for the color. The last one from me, if I may. On the supply chain financing utilization, are you able to disclose the actual capacity of your supply chain financing arrangements? Are we close to this capacity? Do you expect any further increase in supply chain financing in the coming quarters? Also if you would be able to comment on any financing receivables facilities which you have or don't have.
Yeah. Thank you for that. On our supply chain financing, I think a couple of years ago we had drawn about DKK 1 billion. By the end of 2020, it was around DKK 270 million, and now we have drawn DKK 490 million. We have more capacity. I don't think we anticipate that the suppliers will go back to the 2019 level, but we do have the capacity. That was one question. What was the other question? Was that a question to our committed debt facilities?
No, it was more about do you have any financing for receivable facilities like factoring or things like that?
Oh, we don't. No, we don't have that. We have the supply chain financing arrangement that we see as a little bit of a loyalty program with certain of our suppliers. Then we have a strong book of committed bank facilities, both permanent revolving credit facilities, but also an acquisition line that we will utilize once we clear the TK acquisition sum.
That's great, Roland. Thanks very much indeed.
The next question is from Dominic Hudson, RBC. The line is now open. Please go ahead.
Yes. Hi, everyone. Thank you for taking my questions. I have a couple. First one, I guess we can compare our forecasts about the mining cycle and the impact from the ThyssenKrupp acquisition. It seems realistic to me at least that, you know, within a few years, possibly 90% of Group EBITA will come from Mining and, you know, correspondingly potentially less than 10% from Cement. Mikko, your background is Mining. It feels like, you know, most of the messaging has very consistently been that the company is much more of a Mining equipment supplier than it is a Cement supplier.
I'm just wondering whether we're making movement closer to a possible sale of that cement business and maybe whether sort of the successful integration of the ThyssenKrupp business could be sort of the catalyst for looking at that more seriously. Thanks.
The line wasn't actually very good, so we might have missed part of the question because I don't know, Roland.
Right. Yeah.
I think if we talk about I think around ThyssenKrupp acquisition and just maybe when mentioning that we've introduced strict kind of controls on our business on profitability targets both for the capital and service business. We apply very similar principles then to ThyssenKrupp Mining when we take over. Of course then also kind of de-risking, continue to de-risk the portfolio. But I missed actually part of the question because of the line.
Okay. Sorry if the line's not that good. It was more about, you know, as the group becomes sort of 90% geared towards mining on a profit basis, whether, you know, cement is becoming a bit redundant in group structure.
Now I understood the question. Though, of course, from turnover point of view, if we are roughly 70% mining, 25% cement, and we know that the EBITDA ambition and our ability to deliver EBITDA is greater in mining because the underlying growth of the business and also that our customers are very profitable. It over time, of course, probably the mining share will increase. At the same time, we have profitability target for cement, and we don't sacrifice profitability for growth. We, as I said earlier, are very selective what we do in cement.
We really focus on making the business profitable and then investing back to the R&D to make sure that we have a best position in the market when green cement kicks off. In the meanwhile, you are right that share of the cement in relative terms most likely will decrease in FLSmidth.
Okay. That's very clear. Thanks. Then just a second question about the margin guidance, which, you know, maybe was a bit softer than consensus was expecting. Can you maybe just talk about the balance within that guidance, between the negative mix effects from, you know, having a higher equipment share, the benefits from operating leverage that you're expecting, you know, pricing benefits presumably, and then also kind of the scale of the commodity and supply headwinds within that guidance?
We are actually internally setting targets to advance in profitability, both for capital business and service business independently. We want to see improvement in both pockets. When you have a mix impact then, at the totality or group level, then mix has an impact. We have a clear advancement. If I look at the backlog in the capital business, the new order intake coming to a backlog is of slightly higher margin. We see also positive development in the service business. We are pushing profitability EBITDA improvement in both businesses standalone. There's volume, then there's a mix impact.
We see already during last year improvement in both. Might refer to our auditors when they made a report. One of their findings was that this year everybody talks about profitability, and I think that's a culture change that we want to have profitability on everybody's agenda when they do their daily business.
That's great. Thank you very much.
The next question is from Klaus Kehl, Nykredit Markets. Your line is now open. Please go ahead.
Yeah. Hello. Most of my questions has been asked by now, but a question about Russia. Could you give us any flavor on what kind of assumptions you have used about your Russian equipment orders for 2022? And, yeah, any thoughts about what would be delivered in 2022 and 2023 to Russia?
We actually analyzed our Russia business carefully and we've used in our Russia business typical principles for the project business that at any given time we are cash positive in the cash curve for the project against our kind of cash commitments, not only outgoing cash, but also cash commitment to the supply chain. Some of the prepayments what Roland mentioned earlier are actually coming from those projects. Regarding Russia, we are also working closely with the customers. The key customers we have there. Our customers are high quality operators and very professional and we are managing the projects and business today as before.
Of course, we've done scenario planning for all eventualities and mapped that if something happens end of this quarter, end of the month, so we have all the scenarios fully kind of planned for. It is, of course, concern that if the situation escalates, of course, from the mining industry globally, Russia is significant market. We are not overly concerned. We are concerned about, of course, about conflict, but we are not overly concerned about impact of any potential sanctions. Roland, maybe you can
I think it's as Mikko says. I think we are pretty well structured from a contract point of view in Russia. The way we monitor this daily and the way we think about if sanctions are being introduced, we will of course comply with them completely. That also means that eventually we may have to pull out resources from ongoing projects in Russia and Kazakhstan and some of the vicinity states, and then deploy them elsewhere. In terms of how we look at it at our business, that means that there will be revenue that we cannot execute on in 2022, and then we'll have to come back once the sanctions are lifted.
I think it will impact maybe 5%-8% of the group's combined revenue, depending on when and how the sanctions will potentially may be introduced.
As earlier, our customer base in Russia is very, they're good, high quality operators and if there's a delay in the project, they will not cancel it. Certain things will be postponed, but they are strategic and they would execute those as it becomes possible.
Okay. Great. Thank you very much.
The next question is from Dominik Graulich, DNB. Your line is now open. Please go ahead.
Hi, this is Dominik from DNB. A couple of questions. Firstly, on the inflation, you mentioned higher pressures, logistics, supply chain issues. Can you give any numbers, how much were these kind of elements last year, and how much of pressures are you expecting for this year?
Looking at last year, the inflation of course is different for different components. Of course, if you look at the steel price increase in the beginning of the year, that's good guidance what is for some of the capital equipment had an impact in the beginning of the year. As the pressure's off from the steel price, it's more the overall inflation driven by the demand than actually raw material increases. From logistics cost there was cost impact, but in the bigger scheme of things, it wasn't very significant. It was more how we execute the logistics rather than actually cost increase.
We actually had good long-term agreements for the main operators in the world and the fixed prices. Only in the case that we need to go outside that fixed agreement with the logistics providers, we saw significant. We were hit by the hike in the container prices, this and that, but we have committed routes, committed volumes, and for that, the logistics partners held pretty much the cost base and prices what we had before. Looking at this year, we are looking at the inflation, Europe 5%, U.S. 7%.
I would say that overall inflation in the world in everything is also impacting us and a good guidance is that it's impacting us at roughly the same rate. I don't think we are low or necessarily higher inflation, but it's just inflation is back, and we are ready for that one in basically in our internal estimates. We are taking that into account in our pricing. We are taking that into account of all the validity of the offer so that it's or quotation sort of validity, and we have back-to-back commitment from suppliers then for that period of time. It's a little bit maybe limiting the upside short term for the EBITDA improvement.
I think we can manage the downside. I don't think there's a downside for us. I would say it's rather limiting upside.
Okay, thank you. In cement, if I understood correctly, you have cleaned the backlog somewhat. Is there a number for that? How much have you removed those lower margin projects from the cement backlog?
Yeah. Not so much the backlog. We have had a few ongoing contracts that is not now being sort of shut down or not extended. That may be, you know, DKK 200 million.
Good. Thank you. Then lastly, just in terms of demand environment, how has the year started in terms of customers' decision making?
No, I think we've seen high level of activity to continue. There isn't anything from the high level activity last year. We haven't seen any change. It seems that world continues, mining world especially continues as it was last year. We haven't seen any big variation in activity if we talk to our regional organization. It's just continue as it was last year.
Thank you.
The next question is from Christian [uncertain] , SEB. The line is now open. Please go ahead.
Sorry, is that me?
Yes, it's you.
Oh, yeah. Okay. Sorry. I was just a bit worried here. Thank you. My first question, you just mentioned before that the cost inflation will have a somewhat negative impact on your margin, at least in the short term. I was wondering if you could elaborate a bit on just how strong your pricing power is in this current market. Basically, my question is, to which extent you're able to offset the supply-based cost inflation with higher prices and whether you're able to charge an additional margin on top of these cost hikes.
Basically whether we should expect this short-term margin pressure to kind of be a new baseline, a new normal, or if you're able to kind of charge margins on top of this as well going forward?
If I look at the last year as a guidance for this year, and if you look at the numbers, we were able to offset cost escalation with our price increases. There are two different markets. One is the service, which is more price list driven market and value-based pricing driven market, and then of course, heavy capital equipment where the cost plays a bigger element in the total pricing. Last year, if I look at order intake, our order intake margin compared to the backlog improved both in capital and service. As I said, it's limiting the upside. We are advancing a little bit above the inflation and it's already visible in some of the numbers.
We are pushing for the same this year. As I said, I think we can manage the downside, but it's a little bit limiting the upside because then if there's underlying inflation and then you are trying to do something on top, then it's a bit harder for the customers to accept. Limiting upside, we are managing that there's no downside out of that one. I'm confident of that.
Okay. Thank you. Just a very short question as well. Can you tell us anything? Now you've provided guidance for 2022 for Mining and Cement as well, and thanks for that. Can you tell us anything about when you expect to be back with the mid- and long-term guidance as well?
So the plan is that first of all, we're waiting to welcome our new colleagues from TK and get that integrated, and then we'll update the 2022 guidance. Thereafter, we plan to most likely have an updated update to our strategy, and then we'll do a capital markets day, and there we will announce a little bit more on our long-term financial ambitions.
Great. Thank you. I just have one last question, and I apologize if I'm just repeating questions. I had some problems with my line before. My last question is on the impairment of your inventories. I was wondering if you could elaborate just a bit on what was driving the impairments of inventories in 2021. Because I guess with the continued high raw material prices, that's not the driver of the impairments. Why is it that you expect lower selling prices for some of your inventory?
We have had a few r estructuring initiatives on our geographical footprints. In connection with the changing that and also selling sites and so on, there's been a clean up in what has been on inventories, and that's what you see in that number.
Okay, great. Thanks. That's all from my side.
Thanks. You're welcome.
The last question is a follow-up question from Magnus Kruber, UBS. The line is now open. Please go ahead.
Yeah, thanks a lot for taking my follow-up. I just wanted to come back to the M&A related costs you incurred in 2021. I mean, now you're talking about the integration cost for 2022, but should we expect that the M&A related costs suddenly stops now when we're going to 2022, or will that run rate continue also until the deal closes? How should we think about those costs?
Yeah, no, there's no more M&A related costs. They've been taken in connection with the transaction. Now there will be only integration cost as we move forward.
Perfect. That's very clear. Could you comment a bit on where you see the proportion of aftermarket sale from consumables at the moment in the business? You had a target a while back of reaching above 10% by 2019, and I think you achieved that. Where are you now?
I think the ballpark is similar to what it was in the past, and it's one of the considerations that we need to look at when we look at the strategy and portfolio and dive inside the service business and look at the areas to grow. As you said, it could be higher.
Got it. Just a final clarification. I think the logistics cost until end of 2021 had they not been affected by the higher freight rates because you had longer term contracts on those. Was that right?
Most of the deliveries were done using the kind of long-term agreements with our logistics partners. We also tightened up the delivery terms, whether it's DDP or Ex Works. We've actually done work because we realized that for certain products that we use too much DDP. Suddenly if there's a freight cost, then it's a big difference between kind of DAP or Ex Works and then DDP. We've been tightening the kind of delivery terms to kind of not to leak any and have a cost leak because of deliveries.
Actually, for overall costs, had some impact, the increased freight cost, but I would say it's not material in the bigger scheme of things.
Okay. Got it. Into 2022 then we should expect that the sort of delivery cost on the contract that you're signing will sort of roll over to a quite substantially higher base than we saw in 2021 then.
That is correct.
In line with, I guess, what we said on the contract rates. Okay. Got it. Brilliant. Thank you so much.
There are no further questions. I hand back to you, speakers.
I would like to thank you for your time with us and just keep in mind our management agenda, what we have. We are fairly religious about that one, so it's quite clear where we will be focusing on in the coming months and years. That is good guidance also for the future priorities of FLSmidth's management. Keep that in mind and look forward talking to many of you during the road shows or meeting in other occasions. Thanks for your time and your interest for FLSmidth. Thank you.