Welcome to the investor presentation for FLSmidth result for quarter one 2022. My name is Mikko Keto, here joined by Roland, and as you can see from the pictures, we're happy faces, so we are very pleased with the result of the first quarter. Sun is shining outside the office in Copenhagen, so life is quite good at the moment. Forward-looking statement, please note that there's a high level of uncertainty because of geopolitics and other events. When we are making future statements, you need to use this disclaimer in the back of your mind. Starting with a more somber note regarding war in Ukraine and impact it has for the people and for the business.
We told the market that we were forecasting DKK 1.5 billion revenues out of Russia this year. In the first quarter, we realized about DKK 380 million out of DKK 1.5 billion, and there's still a high level of uncertainty what will happen during this year for the difference between DKK 1.5 billion and DKK 380 million. We are winding down our activities in Russia, and of course it has an impact on our profitability as well. We talk about employees, we talk about supply chains, sub-suppliers, customers, but we are winding down activities in Russia, and that comes with a cost. Therefore, it has some negative impact on our profitability this year.
On the highlights for the year or for the quarter, the main highlight is that mining business is growing fast in terms of order intake, both capital and service. Second highlight is that, cement is profitable. Very important points for the business. Third point is that we can deliver, which is visible in the revenues. We'll talk about orders in a minute, and I would like to highlight that the four large orders in mining capital are product orders. We are fully committed to de-risking our portfolio to make sure that then when we see those orders as revenues in one and a half years of time, two years of time, we execute the orders with as sold margin.
We have announced partnership with Microsoft and AVEVA, where we use those platforms to accelerate digitalization and sustainability, what ambitions we have in-house. We will talk about details of that at a later date, but those are important partnerships. TK acquisition is progressing well, and I come back to that in a minute about in which countries we got clearances. On MissionZero sustainability credentials, we got an important order for clay calcination for cement business. We are guiding the market that we keep the guidance, but then on mining EBITDA margin, we will be at the lower end of the guidance because that is a cost from winding down the business in Russia. A very significant growth in order intake in mining. 30% growth in service, 60% growth in capital business.
You of course need to bear in mind that capital business is quite spiky, so you will see variation between the quarters, and typically, I would encourage you to look at the trend of the capital order intake. We still have a theme, value over volume, especially for the capital business. We started de-risking the portfolio, which is maybe not so evident in this picture, where we see significant growth. We've taken more product orders, and we turned down, we made no bid decisions on some of the riskier products and projects. It's quite evident now in the market that we have pricing power. If I look at the order intake quality in terms of profitability and risk, we are advancing there.
The pricing power is based on products, technology what we have, and also our supply chain. Supply chain is increasingly important decision criteria for customers. Just highlighting couple of large product orders that we received during the quarter. Australia is a single product, ship loader. Argentina is mills and cyclones. In Brazil is kiln and a dryer. Southeast Asia, mills and thickeners. What we've done with these orders and in rest of the business that we spent time scoping out the content that is not good for us in terms of risk and profitability. We focus on core technology, core products of ours, and all these cases are evidence of that one. The message in the revenue of mining is that we can deliver. We can deliver and therefore we saw increase in service revenue, and we saw significant hike in capital revenue.
That mix has an adverse impact on the overall margin. We saw margin staying flat. The best comparison point between last year first quarter and this quarter is adjusted EBITDA margin, because we did not see too much of the TK acquisition cost in the first quarter last year. In very simple terms, EBITDA has stayed flat despite significantly higher share of the capital business. The good news out of the TK mining acquisition and integration planning and antitrust process is that we got unconditional clearances in very significant markets: Australia, South Africa, Peru, and Chile. Those are the key mining markets. There are still few countries where we're expecting clearance, but this evidence that those countries saw no need to require any remedies as a result of this acquisition. Very pleased about that one.
We will open up this approach to the risk and profitability management even more in the capital market day in maybe fourth quarter this year. What we are doing now is that we go for strict global P&L management, where we have three main P&L units, service, products, and systems. As you can guess, the profitability and risk is low in service business, low-ish in products, and higher in systems business, which is more engineered products, higher risk products like stackers, reclaimers, and the types. Then in each business line, we have a fairly self-sustained product lines, and the product lines are, for us, EBITDA units, and they are like Lego blocks that we can performance manage and actively manage our portfolio across the business.
At the same time, we started de-risking the capital business, which means that we are targeting more for the product business and less projects. We defined risk categories starting from service, low risk products, bundle of products, process packets, and the onwards. We're also looking at complexity of the product. As I said, in system business, we have more complex products and deliveries compared to the products business line, which is more standardized. We will be setting quotas for higher risk business and then higher margin targets to cover the risk in those deliveries. We will implement very systematic approach for this one, quota-based. We've done the definitions, we started the work, and we will bring this more under control in latter part of the year.
The good news in the cement business is that service business is growing. We are very careful about the capital business, where we focus more on products and technology deliveries and less on projects. We will implement similar principles for risk and quota for cement as we are doing for the mining. I'm really proud of our cement business, that they posted positive EBITDA margin for the quarter. Here, the best measure is adjusted EBITDA because 3.6% is including one-off gains from sale of the property. For the first quarter, we are posting profitable result. That is a focus in cement, profitable growth only. We don't go after volume.
We focus on service, we focus on products, and then we focus on MissionZero credentials in everything what we do. Then I hand over to Roland to continue with the more detailed financials.
Thank you for that, Mikko. Adding up the numbers, a more than 40% growth in order intake, 27% growth in revenue, leaving us with an EBITDA of DKK 302 million and an EBITDA margin of 6.4%. Clearing financial costs, clearing taxes, leaves us with a net profit of DKK 123 million, consolidated for the first quarter. If we look at the combined revenue, it's growing by 23%, and as Mikko says, it shows that, we can deliver. It's notable that, the capital share of total revenue is significantly up compared to the same, quarter last year, and this is driven by mining. Also, it's clear that our order intake now, the book-to-bill ratio is significantly above one.
We're generating significantly more orders than we are executing revenue. If we look at our gross profit, our gross profit is moving forward in terms of million Danish krone. However, compared to the quarter last year, our gross margin is down. This sits primarily in mining, where the capital share of total revenue is significantly higher, but also a little bit from inflation and from longer lead times in the supply chain. Cement is more stable with regard to capital and service split, and the impact from the reshaping is now starting to sit in the numbers and bringing cement forward also on their gross margin for the quarter.
If you look at our SG&A costs, they are up by 12%, driven by both extraordinary costs of DKK 37 million related to the TK integration and also netted back a gain of DKK 23 million from a sale of property in the U.S. that sits in our cement business. There's also a little bit of wage inflation and some higher travel costs compared to the same quarter last year. However, in terms of revenue, our percentage is now down to a bit more than 15% of revenue. Our EBITDA margin is moving forward on consolidated basis to 6.4% from 5.1%, same quarter last year, and it's predominantly driven by revenue. Our gross margin is slightly down, as we talked about, predominantly because of the higher share of capital revenue.
That leaves us with a reported EBITDA margin of 6.4%. If we adjust for both the TK integration cost, but also the income from sale of property, the adjusted margin would be 6.7% for the quarter. If we look at our net working capital, as expected, net working capital increased in Q1. We have decisively chosen to raise our inventory levels a few places in the world, predominantly to cater for potential and uncertainty in delivery times in the supply chain. There's also a little bit of currency in this number. Then, as expected, we have executed significantly on the capital backlog and thereby also built work in progress.
Expected increase in working capital of about DKK 300 million for the quarter. Total net working capital ratio is still well below 10%-11%, so sits at 7.3% for the quarter. That leaves us with a slight negative cash flow for the quarter. EBITDA of DKK 366 million, correcting for the change in net working capital and also taxes has been paid, leaves us with -DKK 70 million in CFFO, cash flow from operations for the group. CFFI here is positive due to the sale of property in U.S., and that leaves us with a free cash flow of -DKK 35 million for the quarter.
Our capital structure in terms of equity ratio is largely unchanged. Our net interest-bearing debt remains negative. We still have cash sitting waiting for the TK acquisition to be paid out when it expectedly closes during second half of 2022. With regards to our 2022 guidance, we maintain our guidance. However, we will make a precision for mining, and that means that we expect to trend towards the lower end of the EBITDA margin guidance of 8.5%-9.5%. This is predominantly driven by the war in Ukraine that leads us to lose revenue in Russia and also incur significant costs in terms of winding down the business that we have in Russia.
We maintain the guidance for cement and also the guidance for group remains unchanged. With that, I'll give it back to Mikko.
Some of the highlights regarding sustainability. I would like to highlight that we had some part of last year where we saw negative development in safety. Now we are back on track. We have renewed focus on that one, so that's important to note. Heavily focused on that by the management around the globe. A second highlight is that the Clay calcination installation in Ghana. It's one of those credentials and references that cement needs to build to be the market leader in sustainability. It's really important reference case for us. And then partnership for the Microsoft and AVEVA , both accelerating our journey in digital and digital related services and then sustainability. Those are the highlights here.
Before going to the Q&A, maybe a summary of the quarter is that super order intake in mining, both in service and capital. With the capital, you need to bear in mind that there's significant quarterly variations. It's evident that we have a pricing power. We can compensate for significant inflation in the cost base with the price increases. We don't see profitability erosion as a result of inflation. We had continue de-risking portfolio. We are doing it more and more tighter and tighter quarter by quarter, and also highlighting the fact that we can deliver. It has some impact on increase in inventories and a few other things, but we focus that we can deliver both in the capital and service.
The final highlight is that we have a profitable cement business. For the Q&A. We move on to the Q&A.
Thank you. Ladies and gentlemen, if you do have a question, please press zero one on your telephone keypad to register. Once again, that's zero one on your telephone keypad to register. Our first question just come from the line of Magnus Kruber from UBS. Please go ahead. Your line is open.
Hi, Mikko. Roland, Magnus here from UBS. A couple of questions from me. First, if we start with the aftermarket orders in mining, obviously very strong. Is there something there in particular this quarter that drove the solid order intake? Perhaps some spare part order or something associated with other large announced orders. And also, how should we think about the conversion of the backlog at this stage? And should we expect an acceleration through this year, or is there anything else holding back the invoicing of the orders and services backlog?
We saw significant order intake in a more profitable part of the service in spare parts and wear parts. We saw also what I said about pricing power that we are able to compensate inflation plus maybe a bit more about the pricing. It has been really driven by the kind of most profitable part of the service. Some growth in labor-related services, but longer term, we are looking more to move away from the basic labor services because of the low profitability and then transforming more into high expertise service company. Over time, you see a relative reduction of the labor services and then higher sale of the spares and wears.
We saw some of that already in the first quarter. Growth was really healthy in spares and wears. The upgrade or retrofit was quite stable. Good growth in healthy part of the business. There's been slightly longer lead times. You asked about the conversion. We've seen slightly longer lead times for these spares and wears because of logistics. It's not really impacting the customer operations and our kind of future revenues too much, but it's a longer lead time than in the past. We are working with the supply chain, we are working with the increase in inventory so that we can ensure excellent service level to our customers. Roland commented about slight increase in inventories for that reason.
Got it. Thank you so much. It was quite a strong sequential pickup there. There's nothing unusual about this or nothing that's related to the larger orders that you announced on the OE side?
No, it was broad-based, and it's driven by our customers being whatever is record profitable, but it is at really profitable businesses what our customers are running. Of course, uncertain about Russian production, it makes even more incentive for the rest of the world, North America, South America, Australia, many other countries to kind of maximize the production what they can bring to the market, and that has positive impact for the spares and wears as well. Nobody's holding back anything.
We see the positive impact also for the CapEx that the business case is, for example, if you're a Lithium producer, super good and almost regardless of your CapEx, whether it's up or down 50% or 40% or 60%, the business case has improved significantly for many commodities, and that is driving also the CapEx.
Perfect. Thank you so much. Also, could you talk a little bit about the component availability and the availability of logistics? I mean, to what degree are these impacting your cost level and your invoicing capabilities at this point? It seems to have been doing well so far, but how do you see the balance of the year? Is this getting difficult, more difficult, or is it sort of stable or improving?
Lead times are getting longer in some of the components. It's more impacting capital business, so if you talk about service business, then we talk about maybe lead time instead of 60 days is 70 days, or instead of 30 days is 40 days. It's still within the kind of reasonable kind of frame. In the capital business, in some of the capital goods mills, for example, large capital goods, then lead time for large mill has gone up maybe from one year to two years. We see more that the delay or long lead times between order and then delivery in the big capital orders.
Customers are also sometimes splitting the orders so that if they have a project, then they are looking at the long lead time orders prior to ordering the rest. Customers are planning for that one already, or have been doing so for the last half a year.
Interesting. Thank you so much. Then finally, could you comment a bit more on how we should think about the backlog conversion on the larger project in mining? That would be very helpful. I mean, given you have a balance this year on maybe DKK 600 million in Russia, but I'm asking for the rest of the year. Could you just talk a little bit about that and what you expect
Yeah. In terms of backlog conversion, I think we are roughly on track compared to what we had planned to. Obviously the Russia situation will lead us to you know redirect some of the equipment that was meant for Russia somewhere else. Some of that revenue will be delayed compared to our initial thinking. You know the anticipation is now that we can partly compensate the Russian revenue loss with redirecting some of the resources, some of that equipment to other places in our backlog that will then be accelerated. Slower, but you know partly mitigating.
Got it. The comment from last quarter about the stronger Q1 to Q3 and the weaker Q4, is that still largely relevant?
Yeah. Q4 will largely be unchanged. The large orders was expected to be delivered in Q1, Q2, Q3, and then the split would slowly but surely change.
Perfect. Thank you so much. I'll give it back to Matt. Thank you.
Thank you. Our next question comes from the line of Max Yates from Credit Suisse. Please go ahead. Your line is open.
Thank you. Just my first question is a clarification on the mining guidance. I think you mentioned that the margins would be at the lower end of the prior guidance because of winding down of the Russia business. I just wanted to understand, is that just a function of not delivering and that causes inefficiencies? Or are you actually taking any above the line charges or provisions related to that business? Therefore, I'm just trying to think about kind of is it just to do with the deliveries or actually is it a kind of provision that you've taken that would subsequently drop out next year?
Thank you for that. We have not taken any extraordinary write-downs or charges. Obviously, winding down the business in Russia will lead us to lose a certain margin. That's admittedly not the largest margin we have. Then there's also cost of refurbishing equipment. There's significant cost to legal assistance in terms of what we need to do. There will be rerouting costs related to whatever option we will choose to do. It's a number of extra operational costs and also a certain loss of margin. That's how we should think about it. There's no write-down of assets in Russia. We don't have a lot.
We have offices, and we also have a few spare part warehouses and so on, but they have not been taking charges on those. We haven't impaired any of anything in the backlog either.
Okay. Just a second question. I mean, when we're obviously in a kind of fairly inflationary environment. Just when we think about the large orders that you're taking now, obviously it's quite difficult to sort of understand where logistics costs will be in 6-12 months' time, where wages will be. Could you just walk us through kind of exactly what you do potentially around surcharges, hedging on kind of projects that we're taking at the moment that kind of can help us get comfortable that the subsequent margins on these will be perhaps the ones that you're kind of assuming today? How does that work in practice?
For the large capital orders, we have back-to-back arrangements with our key sub-suppliers. If I use, for example, mill as an example, which is maybe 90% material cost. When we get a customer order, at the same time we have a commitment from foundry and casting supplier for their price. We are fixing sub-supplier price at the same time as we are creating customer price. We have a kind of window of one or two or three weeks when we can do that. When we are quoting, we say that price is valid for two weeks or three weeks. If we don't have agreement for the customer before that, we need to price check from sub-supplier because sub-suppliers are giving similar type of commitment.
We are kind of locking in the most critical parts of the supply. Most of the material cost, what is in the product cost, is actually kind of locked. Then we are more and more looking at logistics as cost plus, so that if we are organizing logistics, then we say that we do cost plus, that we cannot even forecast the cost of logistics. Either customer is organizing
The pickup or then if we organize that one, then we typically have more cost-plus type arrangement because that's the only way to control the kind of the logistics cost. I said about pricing power that we have a certain target margins for the capital goods and despite the inflation in the cost base, we've been able to secure the target margins for capital goods. We more now focus on de-risking the order so that we can actually execute and deliver with the as sold margin. I think we are pretty much there with the kind of order intake margin, but then we have still work to do de-risking the portfolio so that we don't have any margin erosion at the time of delivery.
That's now the focus.
Okay. Maybe just two kind of very quick ones. Just firstly, kind of as we moved into kind of this quarter and obviously things with kind of China logistics, China lockdowns have accelerated, so I'm just wondering whether kind of across your suppliers as we move into this quarter, have you seen any kind of material disruption in your ability to sort of finalize and finish deliveries of, or manufacturing of, or assembly of your offering and delivery to customers? How's that? Has that impacted you at all?
We have a fairly agile logistics and supply chain. We see month-on-month variations with the on-time delivery from suppliers from us to our customers. As you said, there's a flare up of the restrictions suddenly in China, in Shanghai. Then a month later you have a kind of a big issue in the port of Los Angeles that for the incoming goods. We've been able to navigate that one. If I look at second and third months of the quarter for the spares and wears, for example, we saw the improvement in on-time delivery between second and third months.
There are of course challenges every now and then, but we've been able to to improve those. Now we again see improvement in OTD. That's why I said that I'm actually proud of our supply chain and logistics. It has been. It's not perfect because nothing can be perfect at this time, but it's actually we believe that it's one of the reasons why we are getting orders, why we are competitive, because customers get a nice feeling that that it's kind of under control. Far from perfect, but well under control.
Fantastic. Very, very quick housekeeping one just on thyssenkrupp integration costs. Do you have any kind of idea or any sort of guidance on what those costs could be in Q2? Should we anticipate, I think you had DKK 42 million in costs last year. Is there any kind of guidance within the DKK 110 million what the costs could look like in Q2?
I would anticipate similar level in Q2 as you saw in Q1.
Okay. Clear. Thank you very much.
Thank you. Our next question comes from the line of Gustaf Schwerin from Handelsbanken. Please go ahead, your line is open.
Thank you. A few questions from me. Firstly on the DKK 1.5 billion in sales for Russia this year. How much of that was expected to be serviced? In the upper range of your guidance on sales now, does that imply that you can sell a majority of the equipment intended for Russia to other geographies? That's the first one.
Yeah. By far the majority of the expected Russian revenue was capital business. The second part of the question is that equipment we will pursue to have redirected under other orders, and that will partly mitigate that revenue loss out of Russia. That's how we're thinking about it.
Okay. Very clear. Secondly, on the order intake, how much was Russia in Q1?
Next to nothing. Yeah. Next to nothing, because we don't take any new business. There was something out of existing contract, but we don't take any new business in Russia, so basically nothing.
Yeah. I mean, you did an excellent deal a couple of months into the quarter, but okay. Limit the numbers. Lastly, on the gross margin decline in mining, can you give a rough indication of how much inflation was dragging year-over-year?
The inflation, if I think about product cost, which has a significant impact on capital business. It varies a lot between different products. Kind of inflation, if you look at overall inflation in North America and Europe, I think it's in many products is higher than that. It depends really a lot on type of product, what we talk about, but it's quite significant.
in terms of how it impacts our gross margin, if that was the question, it would be less, probably less than 1%.
That's the one. Okay. Perhaps a last one. Do you get any signs of miners bringing back idled capacity over the past couple of months in response to-
What's happening with Russia, et cetera?
I don't think there's too much idle capacity. I think with the current commodity prices, I think everybody's trying to maximize their production in most of the commodities. That is also evident in our spares and wears business as nobody's holding back anything if you need to get the spares and wears to keep the running. That we see an increase in the smaller kind of capital orders, which has to do with the kind of increase in capacity either in existing plants or then good level activity in Lithium and Gold, kind of small, smaller new developments. We see that operators outside Russia is looking to compensate potential decline in the output from that region.
Okay. Thank you.
Thank you. Our next question comes from the line of Aurelio Calderon from Morgan Stanley. Please go ahead. Your line is open.
Hi, Mikko and Roland. Thanks for taking my questions. The first question is coming back to Magnus' question on the aftermarket or the growth in mining. Obviously, very strong number. I wonder if you could break down a little bit how much of that was pricing, how much do you think could be down to some double ordering ahead of, as you mentioned, the customers really increasing production or keeping production at very, very high levels. I'm just trying to sense check what an underlying level of demand would be going forward once we kind of strip out pricing, we strip out potential effects of double ordering, what would be the real volume number?
Real volume number is actually, of course, slightly impacted by pricing, but it's less than the capital goods because. It's actually the growth is real volume. Most of that is real volume growth rather than kind of a price and inflation on the cost base because of the different type of business. The product cost, of course, out of the spares and wears is significantly less than in capital. It's mostly volume growth. Of course, some small impact on pricing and kind of inflation of the materials. It's mainly through volume growth.
Just to clarify, the kind of 30% growth that you had is mainly volume. Is that what you're saying?
Yes.
Okay. Perfect. Second question is, obviously, when you look at the backlog for delivery beyond the next two years has grown quite significantly. I think it's now standing at 20-odd% versus 11% last year. What is driving that? Is it just the nature of the project or is it the global supply chain, which is basically pushing your deliveries forward into the future?
Yeah. If it's our allocation of the backlog you're referring to, and I think it is. There was a little bit bad line.
Correct.
We have put the DKK 2.6 million that relates to Russia. We have put that in the bucket saying 2024 and later because we don't know what's gonna happen with it. You need to take the backlog, pull out the DKK 2.6 million, and then we'll deliver the rest, 40% this year, 40% next year, and then some 20%, from 2024 and onwards.
I see. It's just the effect of putting the DKK 2.6 billion of Russia.
Yes
... into that bucket.
Yeah.
Okay. Maybe a final question from my side, and it's coming back to this DKK 2.6 billion of backlog that you have in Russia. I think you mentioned your balance sheet exposure is quite small in terms of spare parts and so on. I wonder if you can, if you have any warranties, any down payments within. I think you disclosed DKK 3.2 billion of continuing liabilities. Can you disclose how much of that is linked to this DKK 2.6 billion of backlog that you have in Russia?
Yeah. We had some prepayments in Q4 last year, and that related to the Russian business. I think it's important to highlight there's some uncertainty on how that will end, that you know that we have decided to wind down our business in Russia, and we have a backlog of DKK 2.6 billion ahead of us. So far, you know, we expect that we'll be able to handle that, but there's uncertainty as to how. You know, I will not give details on our net work in progress and so on on the Russian business, but say that we received a significant chunk of prepayments on the Russian projects in Q4, and we still have those.
Okay. That's very helpful. Thank you very much.
Thank you. Our next question comes from William Turner from Goldman Sachs. Please go ahead. Your line is open.
Hi there. Just following on from the last question, actually. Given the comments that you've made, so far with material cost and procurement being the biggest, largest part of the capital business, when we look at that obviously strong growth, is the largest part of that price increases? And has there obviously been meaningful volume growth there as well?
It's largely non-price or cost escalation related, but it's just significantly supported by, basically by cost increase in the material cost and our pricing target. That is supporting the growth. It will be less if you think about in terms of physical volume, but still dominantly just kind of a proper order growth, not take into account the cost increase and then pricing targets. It's definitely that is supporting the number. It would be less than if you would take out the impact of the cost increase in the products and then our margin targets. Again, it's very product specific that in some products, the product cost escalation has been very significant. In some other product areas, it's much less.
It's very product specific, so it's difficult to give you one number.
Okay. That's fair. Then, in terms of the outlook for the capital business, you emphasized how it's lumpy. I can understand why you're still pretty cautious on the services. Can you just give us a bit more kind of color on how you're expecting the capital business to develop during the remainder of the year? Is there any particular vertical where you're seeing particularly high activity?
I think we will see some lower quarters in terms of order intake, because of course the first quarter is extremely high and sometimes has to do also with the timing of individual orders, and it's not really in our hands. Customers decide when they decide. But I still expect the healthy growth also for the capital business for the year. But there's of course uncertainty about global inflation, this and that. Of course then as long as the commodity prices are good, it's supporting the growth. But at the same time, we are putting more emphasis of selecting. I discussed briefly about the model that we start putting quotas and higher margin targets for the riskier stuff.
We actually don't go for growth at any cost, and we will be more selective what orders we take in, and it means that in some cases, we don't go for the maximum volume or we will not go. I know that. Because we want to see when we execute these orders in 1.5-2 years' time, we want to see the same margin as what we sold them to. I said earlier that I feel that we've advanced a lot in our pricing in capital business. We still have work to do de-risking the portfolio. We are taking de-risking portfolio very seriously now.
Okay, great. On the final question. On the working capital, I was a little bit surprised with the large order intake, the large capital order intake growth, that the working capital didn't go down more with higher prepayment. Going forward, is this shift towards being more product-focused rather than systems focused, meaning that you will probably see a higher working capital intensity in the future? How should we expect that to develop going forward?
We are shifting. You're right. What you've seen in my some of the earlier commentary as well, we are shifting much more to become more product and service-focused company. We started already restricting the so-called extended scope, what is sometimes available in the projects. We could do it, but we don't want to do it because it's high risk and low margin, and then there's no aftermarket. Steel structures, this and that, you have lots of extended scope available when customers are building the plants. We feel that we are not the best company to be involved with that type of business. There are other companies who do that better.
We more strictly focus on our products, bundle of products, and kind of give a process guarantee for customer that basically our kind of flow sheet performs to the standards and to the specs. We are scoping out the rest. That is clear trend, and we started doing that already.
We're not necessarily guiding on working capital, but what we have said is that the level of working capital in Q4 and also out of Q1, even though it went the wrong way, is relatively low. A more realistic working capital level is 10% or 11% of revenues moving forward. I think that's what you should be guided by.
Great. Thanks.
Thank you. Our next question comes from Claus Almer from Nordea. Please go ahead. Your line is open.
Thank you. Yeah, I have a few questions also. The first is about the greenfield opportunities. In the report, you mentioned greenfield opportunities in Australia. I think this is, you know, the first time in a very long time that you're actually talking positive about greenfield projects. Is this meaning we should expect greenfields orders this year in order to pick up, or it's more into next year? Or how should we actually understand this comment in the report? That would be the first one.
There's been already some greenfield orders what we have today in our books. I think we announced the gold flow sheet order. Typically, they are small at the moment. Typically, large investments are more going for the copper and then iron ore.
There's lots of activity in lithium, other battery metals, then gold. Typically those from investment point of view, they're small. Lithium is extremely active, as all of us know, because of the high demand. Lithium order for us is kind of medium-sized order and typically bundle of products. We see that kind of activity quite high in different parts of the world. The timing is an issue because that has to do with authorities giving operating license and environmental license, and in many countries, kind of social license that they are able to start operation. Lots of activity, but it's not less in super large copper kind of iron ore investments. Battery metals and gold is active at the moment.
Okay, just to be sure. We should hope, expect more greenfield orders this year, but in the same magnitude size as we saw in Q1?
I would say it's a stable development there, but it's not making sometimes big headlines because from an investment point of view, those are a kind of what we categorize kind of large product orders. It's kind of, for us, it's like a day-to-day business. It's low risk, good product business, what we can do in those opportunities.
Sure. Okay. Coming back to the remark about the order intake timing. You said something like, yes, it was very strong in Q1, but there could also be quarters with soft or lower activity level. That was at least as I understood your comment. Is that a comment about Q2, that now you have this very strong Q1, the pipeline might be a little bit, you know, taken in Q1, and therefore you have to use one or two quarters to move forward the pipeline? Or how should we actually understand that comment?
I wouldn't pay too much attention to the quarterly order intake. Now we celebrate, of course, the great quarter one, but then I am typically looking at kind of rolling averages for the capital business because making estimates on quarter-over-quarter is quite difficult because it has to do with the customer's decision about award of the contract and that can easily be delayed by one quarter, two quarters, and we see much of that. It's unpredictable. Just noting that it's not gonna be like the first quarter repeated every quarter. It will be. There will be quarters that we see more muted growth in capital just because of timing.
It's good to look at over the course of the year, rolling 12 months and then you get the picture of what's happening in the capital business. Kind of quarter-on-quarter comparison is good in the service, but then more challenging for capital.
Okay, that makes sense. Just a final question as to the guidance for the cement business. You did underline 2% and including the gain with 3%+, and you're keeping 1%-2% for the full year. How should we think about that? Is it cautious, or are you predicting margins to decline in the coming quarters?
It was 2% excluding that sale of the property. The underlying business was 2% and that is within our target range and we know that we are not out of the woods yet regarding cement business. I think guidance is right in our opinion. Then we will continue focusing more on the service business, product business, and then try to, as I said earlier, de-risk, reduce the project part of the business because that's best way to assure consistent quote-unquote profitability. But as long as we have projects in the backlog then there is more variations always. We go for the sustainable profitability also in cement business.
That's why we are keeping the guidance the same. We are of course on top of the guidance now and we will stick with our guidance.
Okay. Just a small final one about TK Mining. You know, looking from the outside in your view, all this price adjustment, you know, the strong pricing environment and demand situation, should this also help TK Mining given the product assortment they have?
Of course it should. It's the right comment because of course I don't have clean room access, but I see the market activity. What we discussed in the past that we are expecting better mix between capital and service. That is from our point of view good. Of course TK will have some impact from Russia as well. I think we expect more balanced mix between service and capital and then orders and revenues having some impact from Russia as well because just looking knowing from outside the activity of TK Mining.
Okay. Thank you so much.
Thank you.
Thank you. Our next question comes from the line of Vlad Sergievskiy from Bank of America. Please go ahead. Your line is open.
Good morning, gentlemen. Thanks very much. Can I start with following up on pretty spectacular services orders in mining? Can you comment on book-to-bill there? It's around 1.4 x, and I don't think you have ever seen these levels in the past. What's driving that? Is it basically because what used to be book and churn quick orders before is now being pre-ordered by the customer?
If I think about starting from customer activity, quite often, if you're building a new plant, you place long lead time items first and in some cases might be mills. In large mills the delivery time is very long. It can be two years for example. That means that it's getting longer between book and then we can actually bill it. Of course, POC progress reporting on that one has some impact on that. I don't know if you want to comment. Basically, lead times are getting longer in capital equipment compared to the past. Significantly longer.
Yeah, that makes sense. Thanks very much. I was also thinking about services part, right? In services it's also was quite extensive, and I'm wondering what's really driving that. Is it some potential pre-ordering from your customers due to supply chain constraints that all of us are seeing or not?
No, I think maybe it's also that all the mining or most of the mining companies are extremely profitable at the moment, and then kind of maintenance budget is they don't want to take any risks in having any issues in operations so that because the end product prices are so good. They take all the measures, and it might mean that they're taking some more easily order spare parts also to the site to make sure that if something happens, then they have a part available at the site.
I think the overall good business climate in mining and with our customers is creating incentive not to hold back any spares orders that maybe not trying to optimize too much what they have in stock at the site and. It has to do with that kind of making sure the operations run smooth and that is the showing that that increase in spare parts orders.
That's very helpful. If I have, like, two quick ones unrelated to that. One is on Russia. You mentioned some potential headwinds to margins from unwinding of Russian business. Would you be able to give any comment on the cash flow implications from this unwinding? Is it positive, neutral, negative? There was some increase in work in progress assets during this first quarter. Would you be able to comment what was that increase related to?
Cash flow impact is. It's uncertain, you know, how that will play out. As I indicated before, we still have a meaningful prepayment amount on the Russian business. There's some work in progress, but the work in progress is also built by other capital business around the world. It's too soon to say how that will play out.
Understood. All clear. Thank you very much.
Okay.
Thank you. Our next question comes from the line of Klaus Kehl from Nykredit. Please go ahead. Your line is open.
Yes. Hello, Klaus Kehl from Nykredit. A follow-up question related to Russia. I know this is a very complex situation, and you probably have some contractual obligations towards the clients, and it must be more or less a nightmare. The point is that you still have DKK 2.6 billion in the backlog related to Russia. If you're not able to deliver these projects to Russia, how easy would it then be for you to sell it to other clients? That would be my first question. I guess it also comes down to whether I should more or less take this out of the backlog or I should keep it in the backlog, assuming you could sell it to other countries.
I think, first of all, the DKK 2.6 billion is a big number, but a big chunk of that has not even started yet. What we're currently unwinding is our existing business in Russia, and a few projects under execution. That's what we are focusing on. That means what has already been produced and equipment that we have on hand or on site, that can be used to deliver other parts of the backlog. It's not both. That means that this equipment will be used to other parts of the backlog, and internally in FLSmidth, most of the DKK 2.6 billion is gone, is not gonna happen. We just don't know yet how we will unwind it.
I'm also. It's the situation is helping that around the world there's quite a lot of demand for the capital goods and then longer lead time, so that helps deployment of the kind of backlog elsewhere.
Okay. For instance, if it's mills for delivery in 2024, just to say something, sorry, then you can deliver the mills to, let's say, South America rather than Russia. Is that correctly understood? Then probably you would have something in the pipeline as well.
Yeah. We are exploring those options and for the really latter part of the backlog, if we haven't even started production, it might be that we have booked a slot in the supply chain for the production, but physical production may not have started yet. It means that it's easier then to direct that to somewhere else because you can still change the specs even a bit because it's not in physical production. As Roland said, now we are focusing on goods that are in production or almost ready to be shipped, and that is now the focus or semi-finished.
The ones we are not in active production yet is more easy because it's sometimes even directing that reservation or slot that we have in the supply chain to somewhere else. Now we are dealing with a short-term priority, which is what we have in our hands or in production.
Okay. Got it. Then my second question is that you've talked quite a lot about the de-risking the portfolio, de-risking order intake, de-risking backlog. How come you talk that much about this right now, and when have you started to implement this change?
Well, when I was heading the mining business last year, I started doing that, but we are kind of squeezing it more and more. And why we do it is that you see that the margins are quite low for some of the capital revenue what we have going through our books now, and then we've seen some kind of cost overruns because of the risk involved in certain products. We have pretty good information now when we have visibility for the product line EBIT, our product line profitability that we know better which are the riskier products from a kind of profitability point of view, and then what scope not to go after.
We started actually descoping the project already last year so that we go more for the products, bundle of products, process packages, and avoid even EPS. We never do EPC in mining, but even EPS, we are shrinking all the time the portion of that one. Then we are putting different products to different risk categories. Let's say crusher is quite standard. Mill is mass customized. It's almost standard, small variations. But then if you talk about stackers, reclaimers, sometimes conveyors, there's much bigger engineering element, both in the product cost, but also in the actual design and execution. Typically, that's inherently more riskier. Of course, we want to make sure that we cover that risk with the margin, risk provision, and then Terms and Conditions so that we are not so exposed.
We started that journey already last year, but I think we will make a much stronger implementation now this year. It's also, we are looking at cement business, we are looking at all the mining business, and then that P&L structure for global P&L product line, EBIT, will give us visibility what we need to performance manage, and reduce risk more, even more.
Okay. If you say you started last year, when will this then start to show up in your P&L for real? Would that be in 2023?
That, you know, the first sign should be in 2023, right? There's lead time between 12 and 24 months. What we started last year should show up maybe end of this year and then into 2023 and into 2024. It's a little bit of a lead time in this. You know, now we're flagging that we're doing it and I think that's the important point.
Okay. Great. Thank you very much.
Thank you. Our next question comes from the line of Gustav Høegh from SEB. Please go ahead. Your line is open.
Thank you. My first question is in relation to your revenue split between service and capital. You came in at 56% service and 44% capital in Q1, which is very close to what you previously guided for. I was wondering, is it still looking to be the same for the next couple of quarters? What about 2023, now that we've seen a lot of, yeah, well, a very big increase in especially capital orders. What should we expect in regards to the split in, yeah, in 2023 and beyond?
Yeah. I thank you for that. When we guided roughly this split, and that of course included the Russian orders. To the extent that we can sort of back them out and then place them elsewhere in the backlog, that will still be capital revenue. I think you should assume that this split continues for another at least two quarters and then starts to converge back to where it was. That's how I would think about it. It all of course depends on the backlog now coming in over the next two or three quarters.
I think important also to note that the orders coming in now is a lot more product orders and less, project orders, and that would be accretive to the margins compared to what you've seen in Q1.
All right. Thank you. My next question, now that we are hopefully getting closer to the closing of the transaction, TK Mining, I was wondering if you could perhaps elaborate a bit on exactly how you expect to realize the synergies from this transaction. For instance, if you could put a number on your expected employee overlap or redundancy, or where you expect to kind of get the main synergies from this transaction.
As we have said before, and there's no change to that, there's a lot of synergies in this transaction. There's overlap in assembly and operations. We have overlap in engineering. We have overlap in the physical footprint and also in certain parts of the support functions. All that needs to be integrated and merged. That's where the synergies will come from. Hopefully we will also see more than planned for from procurement and supply chain initiatives.
All right. Perfect. Thanks. Yeah, then just my last question here. Now that you announced another Clay calcination order in Q1, which is yeah, nice to see that your green ambitions are starting to yield some revenue. You talk a lot about your focus on sustainable profitability in cement. I was just wondering if you could tell us anything about the margins for these kind of perhaps more strategic projects that you're also doing and want to do more of in the future.
We are also doing same shift in cement that it will become more service and product technology-oriented business and we do less projects and well, some of these orders, the scope is maybe more than what we would liked, but we want to get these technology references. We will also implement similar quota model for the cement that the quota for this riskier part of the business out of total business so that we can always keep it under check, so that if it's smaller, then we can sometimes do something which is needed for the reference, but low margin. It will be very strict management for those.
If there's no green credentials, references, that we can gain a lot strategically, we don't want to do that. It's a couple of those orders. Now we are credible. We develop technology together with customers. We are leading player in cement in that area. That's important. We are very selective going forward with any project orders.
Perfect, thanks. Then if I can just add a very last question. Now that we talk about, especially volumes and the risk in that you won't take volume over profitability, and so through that you're lowering your risk. Now you also told us that most of your EBITDA improvement in the quarter was from increased revenue. Is there any risk that perhaps lowering volumes in order to lower risk could have a negative impact on your margin instead of a positive one?
We will do careful portfolio analysis. When I was talking about business line EBITDA, then we talk about product line EBITDA. Once we have a fairly good understanding already today, we make it even better so that we need to be active in our portfolio management in terms of what products we have, what we don't have, or what we do, what we don't. So it's about choices. Choices sometimes means that we choose not to do certain things that will reduce volume a bit, but at the same time, the EBITDA percentage goes up. Then we are forming a strategy, a fairly solid strategy for that.
We are using then once we have the TK numbers in, we will have a capital market day where we detail our strategy going forward. It will be very much profitability-focused in addition to the MissionZero.
All right. Thank you. That's all for my time.
Okay. Thank you very much for your time and spending time with me and Roland. Thanks very much for the questions, and I look forward to meeting you soon again in either face-to-face or then online. Thanks a lot. Have a great day.
Thank you.