Ladies and gentlemen, welcome to the FLSmidth Quarter One Investor Presentation. I'm here joined by our CFO, Roland Andersen. I would like to give some highlights of the Quarter One result. I'm extremely pleased about profitability development. Mining gross profit has gone up from 27.3% to around 23%, so it's a very significant improvement. It's showing that self-help, what we are doing and what we've been doing over the last year and a half, two years, it is working. Order intake in service is at a good level. Very pleased about that. Also, cement development is good. We are preparing cement for the sale. Underlying business development and strategic choices and strategies that we have implemented is working. We've taken a significant reduction in the workforce since last year. If I look at the high of the headcount, it was well above 12,000.
So altogether, in a year and a half, we've reduced the headcount about 3,000 people. It is very significant. We know that we still have a too high SG&A burden for the remaining mining business, and it will come down over the next year and a half. We have introduced a small head office concept, and we are looking at how we can design mean and lean head office with efficient support function operations. That is what we will implement over the next year and a half. Regarding sustainability, mostly good development. Safety is still not where it should be, and we are working with our manufacturing repair sites in the U.S. to improve it. So that's where the challenge lies. If you look at slight negative development in overall women managers, it's impacted by a reduction of total management level in the company due to business simplification.
In terms of management layers, managers, there continues to be lots of changes in the company as we are streamlining our operations. The really positive news in order intake is that service order intake is DKK 2.8 billion in mining. For me, that's really high level. That's good level. It shows that the service market is stable. We are developing well our service business. Our profitability is good there. There's a peak in capital order intake because of a couple of large orders. Of course, we are especially pleased about extending our leadership position in high-pressure grinding. Both large orders had HPGRs included in them, one in South America, another one in Asia. That further proves that acquisition of thyssenkrupp and high-pressure grinding product line was the right strategic choice. Service sale of the order intake is very healthy. The decline in mining revenue is mainly about timing.
If you look at the fourth quarter, capital revenue, execution, invoicing, it was at a high level. It typically means that the next quarter is lower. This is what we've seen. We knew at the end of the year that the first quarter revenues will be less in CapEx business as a result. Service is somewhat impacted by the exit from the large labor service contracts in South America. In the first quarter last year, we still have revenues from those. Later in the year, we've exited those contracts. If you look at the good order intake, both in capital and service, we have no concerns about the revenue. It will turn into revenues, and we will see the pickup in revenue in the second quarter. The best news of the day is that profitability is improving fast.
You can also see that the gap between adjusted EBITDA and reported EBITDA is narrowing. The biggest improvement is actually in the reported EBITDA from 6.5 to 10.3. That is very significant. It means that the gap between adjusted and non-adjusted profitability is becoming less. That was a concern for some of you at some points of the transformation, but it is coming through. We know that we are still burdening ourselves with the too high SG&A levels, and that will go out and down in the next year and a half. We have a plan for that one. Cement order intake is difficult maybe to understand because we have quite a lot of moving parts. We've been selling some product lines. We stopped all the project order intake and are taking orders only in for products.
But the positive, which is hidden maybe from this top-line view, is that the remaining business what we have in cement. If you look at what's happening in the spare parts and professional services, there's actually growth in the core service business in the cement, which is low risk, high profitability, recurring business. That is actually growing. Then the top-line numbers impacted by sale of the MAAG and quite a lot of changes. Remaining cement business is healthy, and service is developing well. Revenue still is reflecting a decline in the projects. We are executing most of the projects out of the books. About the end of the year, relatively little left after the end of the year. Then it's mainly products and services. We continue to see, of course, comparison to last year that this is totally different business.
It's low risk, high service, and product content going forward. We continue to see a sale of the service out of the total revenue developing well. There's a positive mix impact. So the medicine that we have taken in cement business is working. There's a gain of sale of one of the product lines included in that adjusted 7.7 number. Without that gain, it would be 5.2 percentage points the adjusted EBITDA. So it means that the underlying profitability in cement is developing well. We've done right sizing for cement, and some of those benefits are only kicking in as we speak. As I said, remaining business, what we have in the books is low risk, high margin. Strategically, we said that at the end of the strategy period, we get to 8% EBITDA.
Looking at this picture, looking at the mix, what we sell, we know that we cannot achieve the strategic target. We are well on our way. We cannot achieve that one. But at the same time, this is supporting the sale of the cement. It's a low risk, okay margin asset, and this is really supporting the process what we are going through at the moment. And it's good business what we have in our hands. NCA, no big surprises. This is one of the biggest achievements for the company. End of the year, we are out of the NCA, and we are out of the NCA sooner than the original plan year before. So this has been really successful to exit from NCA. Then I'll hand over to Roland to go through the numbers in more detail.
Thank you for that, Mikko. As usual, let's have a quick glance on the group's consolidated financials. Order intake of DKK 5.2 billion, revenue of DKK 4.8 billion, and a gross margin up by 6% compared to the same quarter last year, so 29%, leaving us with an adjusted EBITDA margin of 9.2% and a reported EBITDA margin on group level of 7.5%. Clearing financials and taxes, our net profit for the group is DKK 194 million. Employees here down by a bit more than 1,500 people, as we can see, compared to the same quarter last year. Gross margin, as Mikko mentioned, is up considerably compared to Q4 and even more compared to the same quarter last year, 29.2%. It's predominantly driven by mining that is close to 33% for the quarter.
Cement is more flattish and NCA with a negative gross margin on a very low revenue. So predominantly driven by the mining business. Our SG&A costs continue to decline. As a percentage of revenue, it's going up as our revenue is declining a bit. And as Mikko mentioned, SG&A savings here are predominantly in cement, as we in mining have reinvested a lot of the synergy savings in our service business and especially ramping up our front end in our pumps business. Group EBITDA margin also moving forward, both adjusted and reported on the same quarter last year. On the right-hand side, there's a number of moving parts, but on the right-hand side, we're trying to highlight the most important elements in that bridge.
So coming from a reported group EBITDA Q1 2023 of 3.9, adding back integration costs from those days, it gives us 6.0 in adjusted group EBITDA last year. Revenue since then is down, both in cement and the mining business, and that's more than compensated by a pickup in our gross margin. Savings in SG&A and also bits and pieces give us 9.2% group adjusted EBITDA margin by the end of this quarter one. Deducting the transformation cost in both cement and mining gives us a group EBITDA margin of 7.5.
Net working capital went up again in Q1 as expected, predominantly driven by our payables, but also compensated partly by receivables. Work in progress increased a bit, but that's partly compensated by increased prepayments from the customers. So net-net an increase in DKK 553 million in net working capital, bringing the ratio to 8.4% for the quarter, net working capital ratio. So that gives us a CFFO for the group of DKK -352 million, deducting cash flow from investments. Also we sold a product line in cement and we bought a company in mining, so net-net of free cash flow adjusted for M&A of DKK -454 million.
That means that our financial gearing remains largely flat compared to Q4, so 0.5 turns, with a slight increase in our net interest-bearing debt driven by the negative cash flow. We maintain our financial guidance for the full year, so in mining, that's DKK 16 billion-DKK 17 billion in revenue and an adjusted EBITDA margin of 11.5%-12.5%. In small parentheses here, we have the Q numbers. And for cement, DKK 4 billion-DKK 4.5 billion in revenue for the year and an adjusted EBITDA margin of 5.5%-6.5%, and that includes the DKK 30 million gain from the sale of MAAG.
activity is unchanged revenue of DKK 250 million-DKK 350 million and a loss of DKK 200 million-DKK 300 million. So the sticky part of the backlog is left to handle, and then we will exit this segment by the end of 2024, a year ahead of plan, as Mikko stated. For the group, we will then enter the revenue of DKK 20 billion-DKK 21.5 billion, an adjusted EBITDA margin of 9%-10%, and a reported EBITDA margin of 7.5%-8.5%. In the adjusted numbers for mining, we have DKK 200 million of transformation and separation costs, and in cement, we have DKK 100 million in transformation and separation costs. Loss of the non-core activities, our NCA segment of DKK 1 billion for the total lifetime since we started this segment in Q4 2022 remains unchanged.
If we look a bit on our transformation plan, we continue with simplification of our operating model for the next year, year and a half, and that will further reduce our SG&A. Implementation of principal company model and further optimization of our SG&A footprint. We have initiated commercial investments, especially in our pumps business. Technical sales force have been ramped up, and we are 70%-80% done with that, so that's now up and full running. And at the same time, our ramp-up in service center, mill liner capacity is progressing in line with our plans.
Also, the de-risking of our backlog continues, the 74% is a modest progression, and we are not going to get much higher than maybe 80%, between 80%-90% of that. We have internal targets on where this number should go. If we look at cement, cement has been basically fully de-risked. 90% of the order backlog now relates to low-risk orders, the orders that we want. And the simplification of the operating model is also more or less completed. We have reduced by 900 FTEs since same quarter last year, and there's a bit more to do. And then that cement business is right-sized and ready for sale later this year.
Full exit of NCA, less than DKK 500 million left in the backlog to do for the remainder of the year. And on group level, we are on track for full separation of cement. That's basically completed, and we are currently wrapping up the vendor due diligence process, and then the sales process will continue full steam over summer and hopefully conclude a signed deal selling the cement business no later than end of the year. With that, we will give it over to Q&A.
We now begin the question and answer session. To ask a question, you will press star and one on your telephone keypad. If you're using a speakerphone, please speak up your answers before pressing the keys. To withdraw your question, please press star then two. The first question is from Khristian Tornøe with SEB. Please go ahead.
Yeah, thank you. I have two questions. So just for mining, if I heard you correctly, you are sort of indicating revenue from both services and products to trend up again from Q2. Can you confirm that? And then secondly, how should we then think about gross margin? Because obviously, gross margin is extremely strong in Q1. So is that level sustainable, and how is the potential mix change between services and products going to impact the gross margin development for the remainder of the year?
Yeah, thank you for that, Christian. So traditionally, our Q1 is a low-season quarter, so we expect the revenues to trend up during Q2, but there can be volatility in that. I think the important stuff is that we stand by our revenue forecast for the year, DKK 16 billion-DKK 17 billion. On the gross margin, the 33% is a relatively clean number. I think be careful maybe plugging that in forever in your spreadsheets, but it's on a relatively steady level. So whether it's 30, 31, or 33 as we move forward, it's a relatively clean gross margin number.
Yeah, and I think in gross margin, you need to look at the mix of the revenues so that most likely the variation between whether it's 33 or 31, as Roland said, has to do with the mix. So now the mix was very positive for the service, and therefore it is very stable. So there will be more mix impact rather than underlying business being very different margin level.
Okay, that was good. Very clear. Thank you. Then my second question, SG&A cost in mining before integration and transformation cost in Q1 compared to Q4 is actually up 4% quarter-on-quarter. The comment you make that the SG&A should come down within a year and a half, is that comment reflecting SG&A cost before the transformation cost or more that the DKK 200 million transformation cost should obviously be gone by next year? And generally, how should we think about the trajectory for SG&A mining?
Yeah, so SG&A is roughly flat compared to the same quarter last year if we look at mining alone. Both quarters have sort of similar one-off elements in it. Now, we are still running our simplification exercise, so that means that over the next year, year and a half, SG&A will come down further, also in nominal terms, both in percentage terms but also in nominal terms. So that's the intention.
Maybe I could also highlight that in our future operating model, we like this small head office because we used to be group, meaning that group over mining and cement. While we are selling cement, there will be some stranded cost because of a kind of negative synergy from the volume. But we have a plan that we are exiting those costs also not only in percentage terms but also in absolute terms. So with this business simplification , we are looking at our operating model, and our operating model is that we have a small head office and most of the people close to the business, business being product line or customer. So that we will shift basically SG&A mix to be more operational, less GA, and more in sales and customer interface.
Understood. Just to follow up, so when should we expect the SG&A to start trending down? What's the basis of this exercise?
So I think that it will start trending down measurably coming into next year, but it's too soon to be specific on guidance on that.
Fair enough. That was all from me. Thank you.
The next question is from Claus Almer with Nordea. Please go ahead.
Thank you. Also a few questions from my side. Roland, coming back to the SG&A cost, what should we expect, not about timing, but how low can it go next year, do you think?
Yeah, it's too soon to guess about, Klaus, right? But we don't need an SG&A burden of 19%-20%. It needs to come down by some percentage points. So that's the ambition.
Right. Okay. And then the second question is about service orders within the mining. When you look at the timing between getting the order to get the revenue, this time difference, is that unchanged compared to last year, or do you see mining companies being in more rush to get equipment or in less of a rush?
So, I think the timing difference typically I oversimplify a bit but if I look at operational spare parts, the order that they recycle is 1-2 months. But if I look at what is called capital spares, significant mill parts, that might be a year and a half. So, let's say 70% of the service order intake is kind of more fast-moving, and 30% is maybe what one might call capital spares, that it's a longer delivery time. And those kind of big lumps of orders for capital spares, order intake, and then the delivery will cause some variation in that order intake and revenue number. So, in very rough terms, 70% high-cycle deliveries between order intake and revenue, and 30% is a bit lumpier capital spares and then some refurbishment upgrade type of jobs. So that causes lumpiness also in the service business.
It's more or less unchanged like-for-like versus last year?
So yeah, we are actually very happy about the underlying service order intake. So we have no concerns. The market is stable. We are very pleased for the DKK 2.7-DKK 2.8 number for the order intake. If we can keep it roughly at that level, small variation between quarters, I think we are really happy. And of course, we are pushing for the growth in different areas, but we are happy with the level what we have in quarter one.
Sounds good. That was all from my side. Thank you so much.
The next question is from Lars Topholm with Carnegie Investment Bank. Please go ahead.
Yes, thank you. I'm sorry, also some questions on SG&A cost. Before that, on gross profit, and here I'm talking mining, last year, some of the TK integration costs had a negative effect on gross profit. Just to compare apples to apples, what would the mining gross margin have been last year stripping out the integration costs? That was the first question.
That was a detailed one, Lars. Thank you for that. As I recall it, we had integration costs of about DKK 120 or 130 in Q1. Half of those, maybe a bit more, were sitting up on the gross profit.
So when you write about gross margin expansion being resolved with execution, that's actually only half the truth, just to be absolutely sure?
The truth is that the 33 is a clean number. But Q1 last year was.
Last about the change, Roland, not the 33.
What I'm saying is that the 33 is a clear number, but the number from the same comp last year had about half of the 120 or 130 in it as one-offs.
Okay, that's clear. Then jumping to the SG&A cost. So if I look at the discrepancy between gross profit and adjusted EBITDA, i.e., before all special items, last year in Q1 in mining, it was DKK 665 million. This year in mining, it's DKK 768 million. That's a very significant increase. So I wonder if you can break down what that increase is and maybe also highlight if there are any sort of special charges that, on one hand, are not special items, but on the other hand, do not recur. For example, are there any write-downs of receivables or inventory or anything else in this increase?
First of all, Lars, I'm not exactly sure how you get to the 660 or so. But if we look at the mining SG&A, it's roughly flat Q1 last year to Q1 this year. And it had roughly the same elements of one-offs in it.
Roland, if I look at your Q1 2023, you had a gross profit of DKK 1.065 billion, and you had an Adjusted EBITDA of DKK 400 million. That gives DKK 665 million in difference. This year, you had DKK 1,180 million in gross profit and DKK 412 million in Adjusted EBITDA. That gives DKK 768 million. So clearly, the discrepancy is not unchanged.
I think you're forgetting to move some of the one-offs up on the gross profit.
I'm just reading numbers from your own report, which is before special items.
I agree. I agree. But if you look at the segment note, Lars, SG&A is unchanged, depreciations are unchanged, and one-offs are allocated, let's just say, evenly between SG&A and gross profit last year.
So then let me ask in another way. The growing discrepancy between operating profit, sorry, between Gross Profit and Adjusted EBITDA, how is that composed?
So our Adjusted EBITDA is driven by an improved gross margin that this quarter is clean, and we have adjusted sitting under SG&A. Now, last year, we had a Gross Profit that had part of the integration cost sitting there, and under SG&A, the other part. Is that clear?
Roland, no, it's not clear at all, Roland. Your gross profit grows by DKK 115 million from Q1 last year to Q1 this year. Your EBITDA before all these special items only improves DKK 12 million. So there is an underlying cost increase. I simply wonder what that is.
Yes, so the underlying, but that's what we've said, right? So we have reinvested in the commercial front end on PCV and in some of our service deliveries. So that sits in SG&A.
How much is that, Roland?
How much is that? I don't think we're disclosing that, but that's a significant, that's a meaningful number.
I wouldn't ask if you disclosed it, but okay.
It's a meaningful number.
Are there any costs of a one-off character in that difference between gross profit and Adjusted EBITDA?
Yes.
Any write-downs, etc.? And then how much is that?
No, no, no, no. We had integration cost last year of DKK 127, evenly allocated.
They're below, Roland. So forget the integration cost. They're below Adjusted EBITDA. I'm talking about the costs between gross profit and Adjusted EBITDA. So all that is not related to integration, transformation, and separation.
No, I don't think so. Not meaningfully. There's an underlying cost takeout of SG&A and then put it back in for the commercial front end.
But you clearly put back in a lot more than you take out then. Else the net would increase by.
That's about the same. That's about the same. If you look at the segment note, Lars, if you look at the segment note, SG&A is unchanged. Q1.
Yeah, but that includes all your separation cost and integration cost, Roland. I'm asking you, if you strip that out, you go from DKK 665-DKK 768.
But that's not right.
It's your own number. So I just want an explanation, a bridge on that.
Yeah, but that you can have, but that's not right. You're not going from 665 to 768. Then there's a misunderstanding somewhere.
It's simply the numbers on page 10 in your Q1 2024 report, which are wrong because that's where I find these numbers.
I don't think they are. Lars, can we take them on a one-on-one? I think it's important to take away that SG&A is unchanged, depreciations are unchanged, and one-off elements.
It's simply, with all respect, incorrect when I look at your report. It's simply not correct. They might be unchanged, including integration cost, transformation, and separation cost. But if you strip those out, you have a significant cost increase, which I understand you don't want to disclose.
No, no, we have cost increase.
But then why, Roland, if you are correct, how can your Adjusted EBITDA just increase DKK 12 million on a DKK 115 million gross profit increase?
We're putting back the commercial front-end investments in our SG&A. That's why our SG&A is unchanged.
But, Roland, it's not unchanged. Let's take it bilaterally, yeah.
Bilaterally, or we could look at the segment note.
Roland, can we look at page 10 in your report, please?
Yeah.
So for this year, you have a gross profit of DKK 1,180, correct?
Yes.
You have an Adjusted EBITDA of DKK 412. Is that also correct?
Yes.
Is it correct the difference between those two numbers are DKK 768 million?
Yes.
If I then look at the same numbers for last year, your gross profit was DKK 1.065 billion. Is that correct?
Yes.
Your Adjusted EBITDA was DKK 400. Is that correct?
Yes.
Is it correct the difference between those two numbers are only 665?
Yes.
How can you say costs are unchanged if the difference goes from 665 to 768?
Because you have a significant one-off element up under the Gross Profit last year.
But that affects the 1065, Roland. I'm talking the difference between the 1065, i.e., your gross profit, after that one-off cost.
Lars, I disagree on that. But can we take that one-on-one then?
Yeah, I simply don't understand your numbers. I regret to say, and your explanation. But let's save it for another place.
Lars, on the big picture, if we look at the macro picture, we are simplifying operations a lot. We've taken from the peak of the kind of headcount, 3,000 people out, and we continue simplification. In reality, the SG&A saving will kick in. Now we are looking at then also the stranded cost that if cement goes out, what is the cost burden then remaining in mining and if we need to do any corrections. We actually continue that simplification journey. We see a significant reduction in the underlying SG&A in the coming year or two years. It will be very significant also in absolute terms. I think maybe we do this kind of detailed discussion about these numbers then one-on-one when we meet.
Yeah, let's take that on one-on-one, Lars. Then I.
I understand all that. I think you're doing good job. But the problem here is you can't explain your own numbers. We still have a situation where there's traffic between Adjusted EBITDA and EBITDA. There's traffic between EBITDA and EBIT. When I can't even get a bridge on your own numbers, I just.
You'll get the bridge.
It's slightly possible.
I'll explain exactly how this works. I'll explain exactly how this works.
Amazing. Looking forward.
Thank you.
I have one final question, actually. So on the separation and transition costs, are all these costs that in full will disappear once this exercise is done? Or is there an element of staff costs, for example, going to people who are now working on transformation? And then when that is done, will work on something else so they stay on the payroll?
Lars, if I take that one, I think we are looking that when we are doing streamlining of the support functions with the business simplification, taking cost out, reducing headcount, that we are assuming that we can absorb that cost as an ongoing business because there's not going to be one big date that this date we make a big downsizing or reduction somewhere. So it's kind of a continuous program where we make kind of support functions lean. So there will be no kind of one quarter that it would have a big impact. So I think what we are looking at now that we should be able to absorb that extra cost as a part of the kind of ongoing business.
That's very clear. Thanks, guys.
The next question is from Christian Hinderaker with Goldman Sachs. Please go ahead.
Yes. Good morning, everyone. Thanks for the opportunity. I'd like to start on the mining products business, please. If I strip out the large orders there, I get to a DKK 712 million order intake, which is down versus the DKK 925 million large order number from last year in Q1. You've talked about the slowness in decision-making by miners, which is similar to what we hear from peers. I think the drivers are there well understood as it relates to large-scale orders in greenfield and everything else. Can you talk a little bit about what's happening with the smaller order side in the products business, though, given that decline? Is this about junior miner financing issues? Is it a channel inventory adjustment of certain product categories? Just welcome some more color.
If I look at then, are most of our customers' behaviors driven by the fact that, despite the our biggest commodities are gold, second biggest copper being by far the biggest commodity? So that they aim to optimize short- and mid-term profitability. It's not about for the large miners, not lack of funding. It's nothing to do with that one. They have plenty of funding available, but they are driven by the kind of profitability drivers. And for them, of course, then if you look at kind of potential movements between the mining companies trying to acquire assets from the others, you see that the licensing is so difficult that large players try to acquire smaller players to acquire the asset rather than building more capacity. So in the big scheme, the licensing is slower than ever.
So from discovery to building the mine, now it's typically 17-18 years from discovery. So it's actually slower than ever before if I look back 20 years. So licensing is not getting faster, despite what politicians sometimes say. It's slower than ever in most of the countries. And that is on the back of the miners' mind. They are trying to optimize what they have, which means that that is driving the small product orders, upgrades, and refurbishments. They look at existing operations if they can debottleneck, squeeze a little bit more out of that. Then it might be individual product orders. It might be upgrade and retrofit orders. But it's not going to be anything large. So that kind of there will be not many new mines in the foreseeable future. And gold is at the record levels, the commodity prices.
But still, I think the junior miners, I think their financial situation is not the best because of the CapEx cost in terms of how much they need to invest in order to build a mine has gone up a lot over the last few years. Significant increase, meaning that the equipment is more expensive. But then the EPC part, which is the biggest part of the new mine investment, has gone up a lot. So the actual CapEx number in absolute terms is much higher. Then cost of capital is higher. So that is curtailing a little bit the investment of the junior miners.
But the large miners are maximizing production from existing assets. They are driven by the short mid-term profitability. And they have little appetite to kind of put CapEx money out despite they have it. They have the money. They can finance everything from their cash flow. But the preference is to maximize short mid-term profitability. So that is, I think, driving the kind of softness in the products market. And I think we see this product market to continue like this maybe another year or so. We don't see a big change there.
Thanks, Mikko. So maybe to summarize, are you saying high commodity prices today actually imply potentially orders stable as opposed to moving up with the price of, say, copper?
Yeah. But if you look at then the kind of you have a cost of capital, which is another thing. But cost of the investment, there has been high inflation on equipment prices. There has been high inflation on the EPC portion of the investment, which is much bigger than anything to do with equipment. So let's say that that has gone up, EPC portion, 30% over the next two, three years. It's not the exact number. So it's much more expensive to invest.
In absolute terms, from the capital outlay point of view, it means that it needs much higher commodity prices than in the past to create big incentive to invest. And also that if you and it has to do with the boardroom dynamics of the large mining companies. Are they shareholders driving for the payout of the dividends, share buybacks, that sort of thing? It's the boardroom dynamics of the large mining companies. I think today we see that it's very much kind of about profitability than long-term growth. In their books, it's value of a volume as well as what we are talking about.
Very clear. Maybe just on the cement margins, and this is a bit long, so apologies. But firstly, wondered what the basis was for including the gain on the MAAG sale in Adjusted EBITDA, given that's a one-off. Second would be if you can help scale and understand the inventory write-down comment in the release. And then just thirdly, on the margin again, I appreciate still flattish if you strip out the MAAG gain. But I guess just wonder then how we can get to the sort of year-end bridge number of 5.5%-6% in the margins for this year. Thank you.
Yeah. So we had about DKK 30 million included in 7.7%. And if we docked that, then we had 5.2%. And then we have had inventory write-downs this quarter that sits in the gross profit. So had we not had them, the underlying EPC would have been higher. Is that the question?
Yeah. I guess I was just curious as to why, when you're not going to sell MAAG twice, that would not be treated as an exceptional.
Yeah. So the reason why we're doing it that way is because we guided the 5.5%-6.5%, including the MAAG sale. And then I think the accounting gain of 30% was probably slightly higher than we had expected. So you're right in the sense it should be on adjusted items if you want to calculate run rate. So if you take the 7.7%, take the 30% out, then the run rate is 5.2%.
Understood.
And also that taking significant inventory write-off is kind of cleaning the cement books because we are preparing the asset for the sale. It's a low-risk asset with a good underlying development in core services, good order intake margin. So it is a healthy asset to sell and a healthy asset to buy. And cleaning of the inventory is part of that one so that any buyer looking at the asset, they see a very attractive asset to acquire.
Thank you.
The next question is from Chitrita Sinha with JP Morgan. Please go ahead.
Morning, both. I have two questions, please. So firstly, just to come back on mining revenues this quarter. We've obviously seen a similar weakness across peers this quarter. So I was wondering if the decline in sales this quarter was specific to your own operations, or do you see something more broadly in the market?
No. I think in terms of revenues, I think if we separate the CapEx and OpEx business so that in CapEx business has to do that we had a kind of a really strong fourth quarter where maybe we accelerated too much even kind of execution and invoicing and that sort of thing. So you saw a really strong quarter. And typically, if you do a strong fourth quarter, meaning that you're pushing out kind of invoicing or that sort of thing, then you have a slow start of the year. So the CapEx business actually had quite a bit to do that. So if you even out the kind of fourth quarter and first quarter, it's kind of at a good level. So some impact there. In services, we expect it to come back up.
The comparison quarter a year before still had, as I said, on revenue, not in the order intake, but on revenues, it had some basic labor services contracts in South America, Chile in particular, that had some impact on that comparison number. During the year, we exited those contracts. That revenue is no longer there. That was slow margin, low-profit revenue, and that strategic choice not to do basic services anymore, basic labor.
Thank you. Then one more technical question.
So we are expecting some recovery there in service.
Okay. Very clear. Just on provisions, we saw an increase this quarter, in particular driven by other provisions. Other Q4, you said that you were expecting a decline in provisions driven by both restructuring and other. How do you see this developing for the rest of the year? And what do you expect for cash for the full year?
Yeah. So thank you for that. So on provisions, we have had a bit of use of our restructuring provisions as expected. And then we have added a bit more new provisions which has to do with projects. And the thinking as we move forward over the next couple of years is that the restructuring provision needs to come closer to zero. It will never be zero. I think the group other will decline significantly as we move forward over the next one or two years. And I think the warranty part of it will be roughly here, volatile with the sales of products predominantly.
So all in all, provisions should come down. I think we had a slide showing that in our investor presentation from Q4 for reference, which gives a little bit more guidance on this. On the cash flow from operations for the rest of the year, we're saying that it will not be a great cash year this year either. So cash flow from operations will be between DKK 0 and then no higher than last year. So roughly between DKK 0 and +DKK 600.
Thank you very much.
The next question is from Casper Blom with Danske Bank. Please go ahead.
Thank you. Two questions also. I think the first is pretty simple. Within your non-core business, you now have a backlog of DKK 500 million. Basically, you are guiding for revenue of DKK 250 million the last nine months of the year. What will then happen with the remaining backlog of DKK 250 million by the end of the year? Will that be written down, or how will we be treating that? That's the first one, please.
So thank you for that, Casper. So we expect actually to descope a lot of this or maybe even cancel part of the deliveries. So that's the thinking. If there's a small chunk back, then it will be delivered in mining. But the intention is that everything is out by year-end.
Okay. That's very clear. Thank you. Then apologies, but yet another question about SG&A. Mikko, if I've heard you correctly in the beginning of your presentation, you said that SG&A within mining would come down over the next one and a half years. So basically, up towards the end of 2025 would be my math. Having the gross margin already at this level of 31%-34% you mentioned, then if you get the SG&A right within 18 months, would that mean that by end 2025, you would then basically be at the run rate you need to get into your 2026 EBITDA target zone?
Oh, I think you are reading me well. So that's the exact timing, of course, how fast and how much SG&A will come down. But if I look at the playbook for us to meet our strategic targets, it's actually gross profit comes first. We've been doing price increases. We've done right-sizing in the customer interface so that the S part is actually pretty well under control. It's way it should be. And now we are more working on the back end of the cost. But we've been quite aggressive in the commercial front end.
So that is, I would say, that at a good level to deliver the target. And you're totally right that while we work the SG&A level down, that will basically deliver the result. But then, of course, we don't always work exactly on the calendar years. That's a target that we know that that's the holy grail. That we get the SG&A under control and down, then we deliver the target. It's quite simple, actually.
Yeah. I hope the execution is as simple as well. Thanks a lot, Mikko.
Thanks very much. And of course, then looking at what we've done in the past, that we reduced the headcount in FLSmidth across mining and cement to about 3,000 people. So I think it's not nice, but I think we can deliver the SG&A saving as well.
Thank you.
The next question is from Klaus Kehl with Nykredit. Please go ahead.
Yes. Hello. Can you hear me?
Yes, we can.
Yeah. Excellent. Yeah. Hello. Klaus Kehl from Nykredit. Just kind of two small boring questions. First one is on discontinued operations, my favorite topic surrounding FLS. And I see that this quarter, it's actually zero for the first time in I can't remember how long time. And yeah, that's positive. So are we there where it would be fair to assume that there will be a zero on this line from here on?
Yeah. That's exactly right. I think if memory serves me right, you asked the same in Q4, Klaus. And discontinued is out of the books.
Okay. Perfect. Thank you very much. Then you mentioned this write-down in cement where you are cleaning out some inventories. When you mentioned it, you said it was a rather large cleanup. Could you try to quantify the amount?
Oh, we're not disclosing it. We're not disclosing it.
But it's significant. Basically, that's, of course, then if you think about there was a gain from a sale of the MAAG. And I think there's a significant because basically, we could afford to do it as well. We are cleaning the books. We are preparing the asset for the sale. We know that the better shape the business is in, the more interested parties we have. And we decided to while we are streamlining operations, we are going through the factory sites. We are going through all the sites. And then if there's anything to do, we can do it because in reality, the underlying profitability is kind of okay so that there was no reason to delay it. We wanted to have a kind of cleanup of the books.
Yeah. But then again, the underlying profitability is then higher than the 5.2%, actually.
Yeah. Slightly higher. Yes.
Okay. Okay. Great. Thank you very much.
The next question is from Peter Sehested with ABG. Please go ahead.
Yes. Thank you. Just two. The first one pertaining to the gross profit line. If we just look forward at the end of this year to the end of this year and then compare with end of 2022 before TK Mining and restructuring and transformation, etc., etc., what is the numerical difference between the gross margin in the service versus capital business, which we expect at the end of 2024? So that's the first part of the first question. So the numerical difference on average, and I know you said that between 33 and 31 I mean, let's just talk about average number, the absolute difference between the gross margins in those two revenue lines.
We don't actually give kind of profitability for service and capital separately. But if you look back, we can estimate this mix. 33 is good. And we expect it to keep it. And if the capital share of the revenue goes up, then it might go beat up. So there's some movement, but we don't give out the profitability of service versus capital.
No, actually, I don't think you are giving out the profitability by just stating the difference between the two because there could be a difference between 20 and 40 or minus 5 or whatever it is.
There's a significant difference in service and products. We don't give indication how big is the difference.
Okay. Then comparing end of 2024 by end of 2022, could you then say what is the numerical difference, the step up between the two line items?
I think, Peter, maybe so we've done a lot on product mix, right? So the mix in our service business will change. Is that what you're looking for? Is it between products and service?
No. Basically, what I'm just looking for is trying to get some sort of figure, I mean, in the spreadsheet such that we can have an average number for the profitability of those two and then work from there. And then we can put all the one-offs, etc., in it. So I'm not asking you to give sort of the exact numbers, but at least now what kind of numerical increases should we expect from end 2022 to 2024 for each of those product lines, i.e.,
the gross profits in service increased by five basis points and gross profit in capital orders increased by, I don't know, 10 or? That we are not disclosing. I think it's important for you to work with the 33 ± and then the remarks around the split between service and products. The split between products and service will have the gross profit move slightly up or down between 30%-33%, maybe 34%, depending on the volume of products being delivered in the revenue line. That's how we explain it.
Fair enough. We also have to do some work on our side as well. So that's okay. I just have to come back to these SG&A costs in mining and just to understand it fully. So what you're saying, if we clean out the, so it's the clean-out number. If you take out the DKK 200 million out of that or whatever that is sort of allocated, then that is that number, underlying number that will go down over the next 18 months. And what are the key components that will drive that decline?
Yeah. So key components is part of our simplification effort. So we will still consolidate ourselves in fewer but bigger sites. We will have a more efficient back-office operation. So that back-office operation, so that means finance, IT, procurement, that will be partly outsourced. Some will be what we call nearshore. And also, we will take a bit of capacity out. So there's a number of elements in that that will lead to that improvement.
Okay. Perfect. I think that's it. Thank you very much.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to the host for any closing remarks.
Just to kind of highlight that personally, I'm very pleased about the quarter development. The main highlight of the quarter is gross profit and also healthy order intake in services. And at the same time, when you look at the cement, cement is a good asset for somebody to buy, low risk, profitability improving, right-sized to run that business in a profitable manner long term. And at the same time, I'd like to invite all of you to the Meet the Management event in Salt Lake City. Salt Lake City is our global technology and product center for the condition monitoring, remote monitoring of the mining sites and operations. So it's an impressive facility what we have in Salt Lake City.
That's our global center for mining. And if you would be able to join, you can meet much of our management. Then you can look at the biggest mining laboratory test environment in the world. And also that if you haven't been ever visiting the mining site around the corner from our offices, you have the Kennecott Copper Mine, which is also impressive to give a feeling who our customers and how the operations look like. So hopefully, you can join us for this event. So on that note, I would like to thank you for your participation and for your questions. And looking forward to meeting many of you later in the week when we do the roadshow. Thanks very much.