Welcome to the presentation of FLSmidth quarter two first half result. My name is Mikko Keto. I'm the CEO of FLSmidth, and I'm joined by Roland Andersen, who's the CFO. We actually today very proud presenters of the result because we can show steady good progress in all our key initiatives and financial performance. Just reminding you of the disclaimers for forward-looking statements, what we will do during the presentation. The key takeaway from second quarter is that underlying mining EBITDA margin is 10.5%. Full year last year was 9.9%, and typically latter part of the year is good. Reported margin is 7.8%, and we have adjusted the underlying EBITDA with two main items. One being TK integration planning costs, DKK 45 million .
Second one is cost related to winding down operations in Russia, which is DKK 50 million. My opinion is that we've been successful winding down Russia with a cost, which of course is unwanted cost, but still limited and not excessive. Second good news is that cement continues its profitability journey. 2.1% EBITDA margin for cement is good, and we will continue to increase that one. For that reason, we will also increase cement EBITDA guidance for the full year to 2%-3%. This quarter was big for us also in other aspects. We managed to get all the merger clearances for TK. We are now on our way to complete and finalize the acquisition end of the month. Still going back to the mining order intake.
When you look at the mining order intake, significant growth in service order intake. You of course need to bear in mind the impact of the US dollar and Chilean Peso, and it has a positive impact about 10% for the mining order intake. Still underlying order intake growth is very significant, and especially pleased about service order intake. Within service order intake, the mix is good. Less labor, more spare parts. If we think about mining EBITDA, as I said, this is one of the best achievements for quite some time for our organization. Underlying EBITDA 10.5%, it means that we are have a steady progress in our financial performance.
Given also the fact that, if you look at the mix of capital versus service this year and last year, service sale was higher last year. Mix is more capital than service in the quarter, and yet we come up with a good result. TK is very significant milestone for us, and we got all the approvals from the authorities, and there's no remedy requirement. There's no remedy requirement from anybody, so it's all clear. Therefore, we can complete the acquisition end of the month, and then Roland will talk about when we are sharing the information with all of you about the headline financials.
End of the month, 31st of August, we are closing, and then myself and Roland can access the data clean room at midnight, where we can burn some midnight oil to understand the details. We started talking about de-risking the portfolio last time. We are using terminology Scope 1 to 5, and we have clear definitions internally for 1 to 5 Scope, 5fiv being highest risk, either in terms of scope or in terms of the product in question. We systematically are de-risking the portfolio and are pushing more business into Scope 1, 2, and 3, where the risk profile is much less and profitability higher. We did year-on-year comparison for our backlog. It proves that our backlog quality is much better.
When I talk about backlog quality, I talk about both profitability and risk. With a poor quality backlog, you tend to erode the margin while you're executing. We can see already now that we have a steady progress in improving the quality of the backlog and quality of the earnings. Cement. We are creating more standalone pure play cement as we go forward. We are accelerating journey in cement for higher profitability and more service centricity in the business. We've been able to increase our order intake volume, but at the same time, the order intake quality is better. We've done the same as for mining. Margin for service order intake and capital is higher margin and lower risk. We do exactly the same for cement business. We believe that we can deliver 2%-3% EBITDA for cement for the year.
It's a journey, and we are accelerating the journey in cement. Good result for cement is also supported by the mix for the quarter. In relative terms, the service portion is quite high in revenues compared to the capital, and that is supporting the profitability. Maybe if you look at the bottom of the page, you can look at last year and this year, and you can see significant jump in the profitability. Our aim is to create sustainable, profitable cement business which will be run standalone pure-play business owned by FLSmidth. We know that we can do much more in this area. I hand over to Roland.
Thank you for that, Mikko. Adding up the numbers for Q2 this year, 23% growth in revenue, 17% organic. We ended with an EBITDA of DKK 307 million with a 6.1% EBITDA margin. After tax and interest, profit and loss for the group was DKK 134 million. Sitting in the group's margin is the mining acquisition integration cost, as Mikko mentioned, of DKK 45 million, and also wind down cost of our Russian activities of DKK 50 million. Adjusting for that, our underlying EBITDA consolidated would have been 8%. Looking at the revenue growth of 17% on the left-hand side, still a higher capital market share this year than last year.
If you look on the right-hand side, our revenue, first of all, is still growing. Two important things to note is that our order intake remain higher than our revenue, so positive book-to-bill. Our service revenue is increasing significantly faster than our capital revenue, which is exactly what we want to happen. If we look at our gross margin, we are a notch down in Q2 compared to the same quarter last year. It's predominantly mining that suffers a little bit from a higher capital share, as we have also indicated in the beginning of the year and also a little bit of Russia, a little bit of supply chain logistic cost sits in this margin. Cement, as Mikko said, have continued their positive traction.
They have a healthy service share. Last year was a little bit of a bad comp, but they're moving forward on most of the initiatives. The reshaping initiatives we did last year is starting to show their sustainable impact. If we look at our SG&A ratio, it's down a percentage point compared to the same quarter last year. In our SG&A sits a currency impact of DKK 31 million. We have acquisition-related costs from TK sitting at DKK 45 million. There's Russia wind down activity sitting in this cost bucket. Also wage inflation starts to be visible, and we are traveling slightly more in this quarter than we did a year ago.
If you look at the EBITDA margin on consolidated basis, it has improved from 4.8 to 6.1. On the right-hand side, we are trying to outline the most important drivers. Last year, we had a 4.8 EBITDA margin. We had TK cost last year and also a little bit of other stuff we informed about, so an adjusted EBITDA margin last year of 6.8%. We are now growing predominantly. The revenue impact is increasing margins. The higher CapEx share in mining is reducing our gross margin a bit. Adjusted for a few other things, our underlying EBITDA margin is 8%.
Now, deducting the TK mining integration planning cost and the Russia wind-down cost, we end up at a reported EBITDA margin of 6.1%. Our working capital development grows a percentage point from 8.2% to 9.2% in second quarter of 2022. Predominantly, this is driven by a buildup of inventories that we deliberately have done. This has supported our regional sales and our service business line significantly, especially in mining, but also in cement. Our receivables are up, driven by a higher revenue, and also we have started to spend the prepayments that we received on the larger projects in Q4 last year.
That means that our cash flow for the quarter is negative on the right-hand side and EBITDA adjusted of DKK 395 and a negative development in working capital brings us to a cash flow from operations from the group of DKK 214 million. Deducting cash flow from investments leaves us with a free cash flow of DKK -297 for the quarter. That means that our capital structure targets are roughly stable, equity ratio slightly up. Our NIBD position is still a positive cash position, and that's the last quarter we're gonna see that for a while as we will pay the acquisition to TK come first of September here, 12 days from now.
As Mikko indicated, we are quite satisfied with the performance for the first half in mining. A revenue of DKK 6.8 billion. A lot of this or some of this is currency tailwind, and that means that leads us to adjust the revenue guidance for the remainder of the year from DKK 12-13 billion up to DKK 13-14 billion, and this is predominantly driven by currency. That also means that it's due to currency and we have a bit more Russian wind-down costs to come.
that means that we are maintaining our EBITDA guidance of 8.5%-9.5% and saying that we expect to end up in the lower end of this range, so an unchanged guidance compared to last quarter. For cement have done DKK 3 billion in first half, and we expect them to do maybe slightly less or similar in second half, and that means we're maintaining our revenue guidance of DKK 5.5 billion-DKK 6.0 billion in turnover. But the traction, the underlying performance is cement is good. Service sales is healthy and execution has become better and also the reshaping initiatives from last year is kicking in.
We are raising EBITDA guidance for the year from 1%-2% up to 2%-3% for 2022. On group level, that means that we're raising our revenue guidance from DKK 7.5 billion-19 billion to a revenue guidance of DKK 18.5 billion-20 billion. EBITDA margin of 6%-7% remains unchanged as the lift in the cement margin is not enough to push the group's combined EBITDA margin further up. We are quite satisfied with that.
A quick flash, as Mikko mentioned, we expect to get access to TK midnight the 31st of August, and we will do a quick webcast, a conference call at 8:00 A.M. the 1st of September in the morning, where we will inform you guys of what we know. It will not be a lot, but we think we will have information that is interesting. Let's see how much we have access to at that early point in time. We will inform the market as we move forward from there, no later than Q3 reporting in beginning of November of revised guidance for the combined entity.
Then, hopefully, we'll reserve the day also on eighteenth of January, where we expect to have a Capital Markets Day, where we will lay out more details about our plans strategically for FLSmidth and for mining business and for the cement business and also do a bit more on financial target setting and so on. With that, I'll give it back to Mikko.
Sustainability, ESG remains cornerstone of the company, and happy to note that safety is at a good level and continue to be a focus, especially in our operations. We have significant service and manufacturing operations, repair operations, and we want everybody to be safe there. It is at a good level today. Also improvement in water. At the same time, we are working with many other aspects of ESG and I know that we can do more about communicating what we've done. We've done living wage corrections in the company. We've done gender pay gap corrections in the company.
I know that we should communicate maybe more what we are doing because we are doing a lot in those areas. We will update this communication going forward and highlight kind of points of emphasis within ESG frame in the coming months and especially emphasis in Capital Markets Day. Now we go to the Q&A part, please.
At this time, if you would like to ask a question, please press the star and one keys on your touch tone phone. Once again, that is star one to ask a question. Our first question comes from William Turner with Goldman Sachs.
Morning, everyone. I've got a couple of questions. The first one is on the working capital development. Could you just give a little bit more color as to the exit during working capital consumption, in particular, the higher work in progress assets. Are they concentrated in any one particular project? Does this have any thing to do with your Russian order deliveries? Then kind of related to this, how would you expect working capital to develop in the second half of the year?
I might actually just comment exit from Russia, and then Roland will talk about the financial kind of aspects of that one. Our exit from Russia is progressing well. We have much less than 50% of the start of the year workforce still in Russia, and we are migrating out fast. Our backlog is down a lot from DKK 2.6 billion to DKK 1.5 billion. We recognized DKK 260 million revenue from Russia for the quarter.
The gap actually between reduction in the backlog and then the revenue recognized has also a lot to do with that we've been scoping down, and we've been scoping out content from our contract. Basically talking to customers that we have delivered small parts of the contract and say that we agreed actually with the customer that we would not deliver certain parts of the contract. That's why the backlog has come down way more than actually the revenues that we recognize. Roland, maybe you can comment on the other aspects of the Russia.
Yeah. Thank you. Thank you for that. If I understood the question correct, work in progress, is that impacted from Russia? It is to a certain extent as some of the stuff that we have not yet solved in the backlog sits partly in work in progress. It needs to, of course, be seen up against our prepayments received from the customers. There are still some things to clear in work in progress in order for that to come somewhat down. Then in terms of net working capital, I think all along we have guided that it should not go much more up than 10%-11% of revenue.
Obviously, the more currency can drive that up a bit more and also to the extent we succeed in pushing our service business line even further up revenue-wise. That is good news, and typically, that will tie up a bit more inventory and potentially also receivables. We don't expect that to come much higher than 10%-11% of revenue. Did I answer the question, William?
Okay. Yeah . That's clear. On the aftermarket order intake growth, on organic basis, what's been the driver behind this? How do you expect the organic aftermarket growth, particularly in mining, to develop throughout the remainder of the year, given the strong order intake in the recent quarters?
If you take out the impact of the Forex, let's say 10%, then you are left with a kind of a 30% underlying growth. It's driven actually by spare parts. The mix inside the service, you have spares, wears, labor, and then upgrades. The biggest growth actually has been in actual spare parts, which of course from profitability point of view is good. We have not yet seen any slowdown in that one. We have a weekly reporting that we follow the order intake for the spares so that we are checking any signs of any slowdown, any softening of the order intake.
So far not. Of course we can have a discussion about macroeconomics and what's gonna happen next year. That's a little bit. Short-term, we still expect that the service spare parts order intake continues at a good level than for this quarter. Of course, if we see anything changing there, we would then in our next call indicate that one. In day-to-day operations, no slowdown yet.
These spares that you're selling, they're often held as inventory from your customers and miners. Do you have any idea of where that kind of inventory level of spares and parts are relative to a normal year?
We don't believe that inventory levels are going up at all with the mining companies. What we've seen is that it's less just-in-time type of order. Miners have been more relaxed about that if you need a spare part. They are anticipating a slightly longer lead times. If you anticipate slightly longer lead times and you are not financially pressed, it means that you might order it a month before, two months before that you otherwise would. I don't believe that we've seen stocking of customers at the sites, but what we're seeing is that they are more relaxed kinda because business has been good. They're running operations at full.
They don't want to have any risk of missing a spare if there's a shutdown or kind of a small shutdown to change a part, so they don't want to be missing any parts. They've been more relaxed ordering those. We haven't seen real stocking. Too, they are more relaxed about ordering and then they anticipate little bit longer lead times and therefore, we see really good order intake.
Okay, great. A final question from me. As we kind of look into the second half of the year and beyond, obviously miners have seen metal prices come down quite significantly since the beginning of the year. At the same time, some production costs have obviously increased a lot, and also, CapEx costs will have increased just given the inflation environment. Have you seen any change in kind of decision-making activity? Is there any more hesitation to invest, or is it still a very strong market?
On the OpEx side, no. As I said, OpEx is still because they're running the plants at full. Still demand is in many cases outstripping supply. So still on the kind of operation side is kind of full capacity, not that they are restricting capacity, that it would be 70% or 80% of the site capacity. So in that sense, that is supporting the service business and part business. But we see maybe some impact in the kind of longer term, smaller kind of capital projects that if you talk about kind of small or midsize mining companies, of course, they are more dependent on kind of funding arrangements for any new investment as the main miners. I think they have access to capital.
Maybe slight signs that there's a little bit more concern about capital and cost of capital for funding. Long-term business cases for most of the mining investments are still very good. Of course, if you are a smaller company, medium-sized mining company, then the cost of funding is more of a concern than for the majors.
Great. Thanks all.
Our next question will come from Nick Housden with RBC Capital Markets.
Yes. Hi. Thanks for taking my questions. I have a couple of, maybe more strategic, wider questions. The first one, the adjusted EBITDA margin in mining, you know, 10.5% looking very solid. If I look at the minerals business of your main Finnish peer, the margin there is closer to 15%. You know, if you look at the two businesses, there's quite a lot of technological overlap. The operating models aren't fundamentally that different. I'm just wondering, if we look out over, say, you know, a 10-year horizon, is there any reason why your mining margin can't be closer to that 15% mark?
No. I think of course if you look at some of our peers across Finland and Sweden, then you need to look a little bit inside the divisions, what the divisions that or business area compare against. Your question about that, why shouldn't be at adjusted the EBITDA level closer to some of our peers. I think we are closing the gap little by little, and I think strategic longer term I think there should not be too much of a difference.
Inside the mix there might be small differences, but we have a view where we can get in what kind of levels we can achieve in our businesses, and we will communicate that more clear than in Capital Markets Day. We have a firm view where we can get.
Okay. Great. You mentioned a couple of times in the presentation about making cement a standalone business. Can you maybe just explain what the rationale of this is? Because presumably, if cement is more independent, then the synergies that exist with the mining business will be a bit more limited in the future.
The plan is that we have a pure play mining business which is the main part of the company, and then we would have a more pure play cement business. What we are doing now for the cement is that we are consolidating cement operations in the second part of the year because it's too spread out for the size of the business and then making it more service-centric rather than capital-centric where the business is coming from. Strategically, we haven't seen too many synergies when we had a combined management in the regions for cement and mining. We saw them still kind of operating quite independently and we had a management layer there.
Of course, our aim is that it is and would be a valuable asset for FLSmidth. We need to get that cement asset into a level, and I believe that we can achieve that one. Many of you have done analysis and as indicated that it's actually not adding any value for FLSmidth at the moment, and it might be actually quite the opposite. We have firm steps toward consolidating and then making it even more independent. We can address the underlying issue what we have in cement, which is actually too heavy SG&A structure for the size of the company it is.
Because it can be good medium-sized business, but then of course the operations need to reflect that one, and then do the service transformation. We see them more going even more standalone than today. We started the journey. End of the journey, you might see the kind of pure play cement business even more than today.
Understood. Thanks. Just quickly on the assets that you're acquiring. Can you remind us what the Russian exposure of those assets are? I think I remember from the presentation slide that it's not that high. Just some color there would be helpful.
We are not really privileged to that information. I hope to hear from you at the 1st of September at eight o'clock, then we will see if we can disclose this information.
Okay, great. Thank you very much.
Our next question will come from Tomi Railo with DNB.
Yes, good morning. It's Tomi from DNB. First question is the currency impact on EBITDA, are you able to provide that?
The currency impact on EBITDA is relatively limited, hence also why we are lifting top line due predominantly to FX. That's because we have a significant dollar exposure, but we also have a relatively large presence in the U.S., similarly in Chile and South Africa and Australia for that matter. There's a sort of natural hedge you can say in terms of currency exposure.
Yeah. As you mentioned, the revenue impact, but presumably it has also been supporting the EBITDA, but you are not, in a way, able to comment any numbers.
No. They. It's limited.
Yeah. Okay.
That's what we would say. Yeah.
Second question is on Russia. Are you able to provide a guidance of costs winding down the operations for the full year, in other words, second half?
Yeah. Our intention is to exit Russia fully. Up to date, we have reduced our organization in Russia by almost half. We continue those efforts, and then we're working hard in finding a solution to the DKK 1.5 billion left in the backlog. Our intention is to exit Russia fully, full and finally by end of the year, and by the same token, also have a solution to the contractual obligations in the backlog. That will come with some sort of cost. We don't expect that to be excessive, but that's also why we're saying our guidance will be in the low end of the mining range.
All right. Yes. Okay. Thank you.
Thank you. Our next question will come from Kristian Johansen with SEB.
Yes. Thank you. I have two questions, please. First question is on your slide eight and the backlog complexity. Obviously appreciate the detail here. Just looking at your backlog at the end of Q2, it looks like, say, roughly 30% is what you characterize as high complexity. First of all, could you elaborate on what proportion of the high complexity backlog will be recognized as revenue this year? And also, how much of your first half order intake has been high complexity orders?
Just to kind of maybe a little bit more strategic note, and then Roland can comment the actual. We are setting quotas for the revenue that, for the different categories, so that we have a quota for Scope 5, for example, which is riskiest part of the business, and then Scope 4. We always in turn look at that. You cannot exceed that quota.
Basically, we stop taking orders for that category if we hit the quota, and therefore it doesn't pollute the backlog with too excessive risk at any given point of time. Of course, we anticipate, we are looking at sales funnel and we encourage sales organization to descope and de-risk, because then you can avoid that quota. We built a kind of inbuilt incentive for sales organization to avoid coming to this quota and risk review.
I think, maybe Roland you can comment on the actual numbers a bit.
Yeah, as you know, we have talked a bit about this separately also, Christian, right? We're moving from driving the business with focus on volume and a lot more with focus on quality of earnings. That means that larger, bigger capital projects with relatively low margin and higher risk, we simply don't want. At least we only want a certain limit of it. If that has been, I'm just saying these numbers as an example, 20% or 25% of our intake.
That will now come considerably lower in our intake. We have started this decisively Q4, Q1, and that means that the order intake from that point in time is expected to develop as we're trying to illustrate here. I'm not gonna put numbers on this, and I know there's a danger of showing a graph like this because then you will ask about numbers. What's important here is that we will be truthful to what we internally call value over volume, i.e. quality of earnings. There will not be large, lumpy, relatively low-margin projects with relatively high risk taken in going forward. That's what we're illustrating here in a bit more committing way.
Reaction from the customers has been quite positive because if you think about C part, if we would do a kind of E. We haven't done EPC for two years at all in mining, so nothing at all. It's not benefit of the customer that we would actually take that scope because then we'll subcontract it and add margin on margin. Customers do understand this better that we focus on the kind of process technology and technology part can do the kind of performance guarantee for that. It's not customer's benefit that we start to venture outside that one because we would contract that out, add margin on margin. It's nobody's interest that we do it.
Customers and EPCMs who we see as our partners are actually quite happy about this approach. Of course maybe losing little bit of top line, but all in all, the customer response and response from EPCMs who are typically important in capital business has been positive.
Understood. Maybe just to follow up and ask in a slightly different way. The proportion of your backlog which is highlighted as preferred or low risk or low complexity, is that expected to continue to grow then in the coming quarters? When do you think you will be at the right balance in your backlog?
I think we are still executing. I think the backlog, the new backlog is actually starting to be the kind of right mix, but we still have a challenge of executing older backlog, which is not that we would like to have. Of course, we need to flush that through the books and then you have a kind of. For the new order intake, recent order intake, we are happy with the quality, but we still have an issue with the because the kind of from contract to actual revenue in major capital business it's often two years. Well, basically one-three years, so it takes time. Of course, then we plug in TK exactly to the same model.
The day we get access to the TK numbers, we are resetting. That's why we don't communicate in clear manner what is our target. We have internal target, but then of course we are resetting the targets, based on what we get in from TK. We put all the TK backlog into these five categories, see where we are, and then we decide where we want to go.
Understood. Looking forward to hearing more about that. My second question, just reading your commentary on the cement market, it almost sounds like these rising energy prices is a net positive for cement demand as far as cement customers to do a productivity improvement. Is that correctly understood? Or how would you in general say the rising energy prices is expected to hit cement demand?
I think if I look at the cement market globally, there are not many new plants, there is not much CapEx in the market. If you still look at our books, it's almost 1/2 is capital. It means that we are more capital-oriented in cement than the cement market. Of course we should look like a market. If it's a service market, cement market, we should look more service. I think how the market is today is not necessarily how we look like, and that's why I said about transition to be more service-centric because then we look like a market, we act like a market because it's really a service market in many respects.
In relative terms, we want to grow service faster than capital and be very selective in capital. Also, then it's quite spread out. As I said earlier, in so many countries our operations and the volume of the business is still limited, meaning it's like a good medium-sized company and of course we need to make it look like a good medium-sized company, which is service and parts centric rather than project and engineering centric. I believe that the market is. When we look at the cement market order intake, we're actually getting better margins for new order intake compared to a year ago.
The capital order intake, service order intake both have a higher product margin in order intake than a year ago. It's we are able to provide premium service to our customers, and customers are willing to pay premium, so which is good sign for the cement.
I guess my question was equally focused on demand you have seen in Q3 now that we're seeing energy prices skyrocket. Is cement demand slowing down or is that not the case?
We've seen small signs of that one, but my expectation is that we see a decline next year. If you think about impact of the inflation to infrastructure build, if the infrastructure build cost goes up a lot, typically it will dampen the demand. Of course, if we go into downturn, recession next year, then governments try to boost a bit of infrastructure build. Whether that's enough to compensate the kind of slow demand in the other sector, we don't know. My expectation is that cement will see slowdown next year, and we are getting ready for that one.
That's very clear. Thank you so much. That was my questions.
Our next question will come from Claus Almer with Nordea.
Thank you. Yeah, just a clarification question first. When are we talking about the FX impact, is the net impact on EBITDA, is that on the margin or on the absolute EBITDA? That will be just for clarification.
Margin. On the margin.
I thought so. Okay. Good. Coming back to the underlying 10.5% EBIT margin within mining, I guess you are still running behind on passing through the cost inflation. How much does this dilute your margin? That'll be the first question.
Nothing at all is the answer. What I've seen actually in the new order intake we've been able to do inflation plus price increases. We have some other operational challenges, of course, exiting Russia and that type of things. If I put the one-offs aside, integration planning cost and Russia exit cost, and underlying order intake and order intake product margin, which is of course the product cost and then the sale price. That is going up both in service and capital, means that we've been able to compensate the inflation in the material cost and labor cost plus base. Of course, it has an impact on our SG&A and other items.
If I look at clean product cost, capital product, service product, there we haven't seen inflation. It's of course overall inflation a bit for the company.
Okay. That makes sense. The second question goes to the cement division. I think as you also have mentioned and also been mentioning in the report is that energy efficiency is a main driver for the order intake, but I guess you're still early in that journey. How much more potential do you see from that aspect?
We actually will use also the Capital Markets Day to have a longer term vision for the volumes of cement. I believe that we need to do the transformation in our own operation first to take full advantage of the green cement market and because we cannot wait and grow out of our challenge today. What we do is that we transform the operations to be more product and service centric rather than project. Of course, product is both IP and competitive technology. We believe that we need to do transformation first and then capture the growth second and because we can influence the green cement market a bit, but we cannot fully impact the timing.
Also for the green cement market, we don't know how the downturn will play out. Are the governments less ambitious for their kind of CO2 targets? Are they more relaxed if there's a downturn? It tends to have a bad impact on the decision makers and politicians regarding environment if there's a downturn. It seems that often they look at the employment, look at other things first, and then delay difficult decisions regarding emissions, kind of, push it out maybe a year or two years. We don't actually know how the downturn will play out and impact of that one for the kind of when the green cement will take off.
We are getting our operations ready, become more service centric, and then looking at valuable IP and technology what we have in-house and build on that one rather than kind of projects.
Sure. I agree on this green cement is probably more into the future, but it was more about the order intake this year, how much of that is actually driven by CO2 emission concerns or reductions and also reducing the use of electricity. Is that 10%-50% or what share of your order intake is actually driven by these bigger trends?
Of course, most of the cement producers are looking at energy because of course that has become super expensive over the course of the year because of the war in Ukraine. That is of course driving the decision making not only for sake of environment, but it's for sake of money. In that sense, energy cost peak is putting producers under real pressure. Whatever they can do to kind of reduce and make it more efficient is driving both financial agenda, what they have, a necessity and then green agenda. In that sense, sometimes a shock can be good for the green transition because they sometimes go hand in hand.
In this case it does because the skyrocketing energy prices are putting cement producers under pressure.
Okay, thanks.
Our next question will come from Lars Topholm with Carnegie.
Yes. First, congrats with a very strong quarter. Impressive. I do have a couple of questions. The first one goes to slide 14 on SG&A costs. So if I net out the one-offs in Russia, the one-offs for TK and the FX, you're only up by DKK 5 million, which is almost nothing. I just wonder in that context what should I put into models going forward? What is sort of a reasonable assumption for underlying run rate? Then a second question. In your comments to cement and the guidance you set, you assume slightly less revenue in H2 than produced in H1.
I just wonder why since your order backlog in cement by the end of Q2 is actually the highest since Q3 2019, and presumably you have some FX tailwinds compared to Q1. A final question, in relation to Kristian's question before on your new sort of risk profile. I just wonder how we should think about the net effect of this. Of course, I understand that if you take fewer risky projects, everything else equal, that will be revenue negative. And then of course margin accretive. I also assume if you give up some projects, there's possibly a scope for taking out some overhead costs as well. This whole exercise, I understand less risk, better margin, but in terms of total earnings, what kind of impact should we assume?
Will this be, dilutive for absolute earnings or accretive, or how do we think about it? Thank you.
Lars, I might take a couple of first points, and then handing over to Roland. Regarding the SG&A, that will be then of course impacted by two main factors. One is the synergy plan, what we have for combined TK FLS entity. Synergy plan what we have, and of course that will address the SG&A, which is kind of. Then you get TK numbers on September, some headlines September first. Then of course when we are combining, we are taking out SG&A costs because this overlaps in many areas. Secondly, we are looking at consolidation of operations into fewer locations in cement, which allow again us to take out the SG&A because we have a bigger issue of SG&A burden in cement than in mining.
In mining, it's that we have a cost target for integration, and in cement it's more about consolidating the operations into fewer locations so that we are not so spread out. Other question that you ask about impact of the risk to the top line, and there are kind of areas that because we have three business lines. Service, it doesn't really have an impact on that one. We have products, which is more standardized products, less engineering, and it means that in products often are delivered to a mining customer. We can do bundle of products that they buy multiple different products, and we give a process guarantee. If we don't go beyond that, it doesn't have an impact on the volume.
We have a third business line, which is systems, and there it will have a more impact on the volume. Systems is material handling, mining systems, stackers, reclaimers, stacker reclaimers, ship loaders, ship unloaders. That is a bit where it will have a impact. Today we are refusing more quotation orders in that area because that part of the business is 30% engineering and 70% steel, if I oversimplify. There is less standardized products, and more engineering. There we of course look at the risk profile for that systems business line is where it will have an impact. We have been already limiting order intake and cases there quite a bit this year.
We've been not bidding, we've been not taking some contracts there, and yet we are growing. That has to do with the mix.
Yeah. Maybe zooming in a little bit on the numbers with that note.
I think now with this.
Sorry, Lars. Go ahead.
Yeah, if I can just follow up on that. I understand the things you used to do, which you won't do. The question is more, will we see a slightly smaller FLSmidth with higher absolute earnings or a slightly smaller FLSmidth with slightly lower absolute earnings? Of course here, without taking TK Mining into account. I'm just asking about the net effect from this whole exercise if, as you say, become less risky, but that the sacrifice is lower absolute earnings, and that's not clear to me.
Thank you for that, Lars. I know exactly what you're asking for. You're not gonna get exact numbers, but what we want and what we're gonna do is we're gonna focus on quality of earnings, and that is we're gonna focus on getting our percentage margin up. That means, as Mikko is explaining, we won't take large projects in wide scopes with semi-empty revenue. You will see an FLSmidth that will most likely grow slower on top line, but improve the percentage margin. That means that over time our earnings will increase, but our percentages will go up. That's the reflection to that.
The raw exercise, you do sacrifice some incremental earnings before you start growing. That's correctly understood, right?
That's correctly understood. The reason why we're doing that is because we think that marginally has not benefited us anything. That's why we're doing it. That's correct.
Completely. I completely buy into the strategy, and I think it's brilliant. I just wanna understand what it means to numbers. Now I understand. Thanks.
Good. Just a brief comment on your SG&A. Actually, the run rate in Q2 is probably relatively reflective of where we are currently. As Mikko then add, we will do a few adjustments also in our existing business, especially in the cement business, but also in our mining business once TK comes in. For now, if you want a run rate on our existing base business, I would use the SG&A here, and then you need to think about what you think about the currency, the US dollar, and maybe the inflation rate you will put on top of this one. Adjust for the one-offs and then progress it from there.
That's very clear. Then the final question on cement and why sales should be lower in H2 when the backlog is higher and the currencies are more favorable?
Yeah. Let's see, Lars, where we end up. We're also pruning the portfolio a little bit in cement and let's see where we end up. I'll leave it at that.
That's perfect. Thanks guys for answering my questions.
Thanks, Lars.
Thanks.
Our next question will come from Vlad Sergievskiy with Bank of America.
Gentlemen, good morning, and thank you for taking my questions, and congratulations on the progress you're making. A few ones from me. I would like to start with the adjusted EBIT margin of 10.5% in mining, which you are highlighting. I just want to be absolutely clear how you treat Russia within this 10.5%. I understand you are taking out DKK 50 million of one-off costs. Do you still see a gross margin on the revenue in Russia which you made last quarter as recurring? In other words, the question is how consistent to still record gross margin in Russia and yet to take out costs because you're winding down this operation. That's the first one.
I'm not quite sure what you're talking about, but what we will do as we move forward, we will work on unwinding the backlog. That will come with some legal costs. Regarding our organization in Russia, that will come with very little restructuring costs. We're not many people there. We are less than 50 left and a few offices. They will be shut down and redundancy packages will be paid out, and so on. There will not be a large number. The question is, what will the cost of unwinding the backlog be in terms of compensation, in terms of legal fees, and so on, if that is required?
There's very little left in terms of receivables, inventories to be written off, and so on.
Understood. Just to clarify this thing. You recorded roughly DKK 250 million of Russian revenues in Q2. Was there any gross profit in the P&L which was related to those revenues? That basically was my first question.
Yeah. That is a good question, and we're not disclosing that. It's a relatively low gross margin because it's larger capital projects. There's costs associated with winding it down, regrouping, relocating, and so on. There has been very little gross margin. We have had SG&A costs on top.
Understood. You already mentioned there some limited asset exposure. Would you be able to give us some idea of what currently your gross asset exposure to Russia is, including work in progress, including receivables, et cetera?
To Russia? No, that we're not disclosing. There will be very little revenue from Russia moving forward. Very little. Revenue has gone down in Q2, will continue to go down, and then hopefully we are completely done once we are coming out of the year.
Understood. The last one from me, if I may, related to a follow-up on one of the prior questions. I mean, you're indeed delivering an impressive aftermarket of services growth in mining of like 30%+. You are saying it's driven by spare parts, so presumably spare parts are growing more than 40%+ year-over-year. I'm just keen to hear your thoughts, what's really driving this growth, right? Because the installed base probably not changed by very much. The intensity of how this installed base is run probably not changed very much either, particularly in the environment where most of the miners are actually disappointing on their production rates. Keen to hear your thoughts on
What's behind this very impressive growth in spare parts?
I might take that one because as you said, I said earlier that within that significant service growth, let's say for removing the FX impact, 30% order intake growth and higher growth in spare parts compared to rest of the service kind of portfolio. The customers are still running at the full rates of production. They're still behaving in the way that they're concerned about supply chain and lead times. Lead times are a bit longer than before, but we've been managing that. It's just that because they're still running kind of machines red hot, they don't want to have any kind of mistakes during shutdown that you are missing part.
They order things in early and anticipate small delays in the lead time. Our on-time delivery is good, but thinking of customers is that there's still some risks in the logistics chain, so they order earlier. And also they are still quite relaxed about spending money on OpEx supporting operations, so meaning that they don't have a squeeze on the OpEx expenditures as of today. That's what we're seeing. As you said, if you think about installed base, incremental increase of the capital is very little impact. It's old installed base which is feeding the service business, and any new installed base is marginal impact. But we see that behavior still continuing for a while.
We haven't seen any tightening of OpEx spending on mining sites and by the operators.
That's great. Thank you very much, and very best of luck with thyssenkrupp Group integration.
Thanks for asking.
Yes.
Once again, that is star one to ask a question. Our next question will come from Klaus Kehl with Nykredit. Klaus, your line is open.
Sorry, was it me that you opened up for?
Yes.
Excellent. Okay. Sorry, I didn't hear that. Yes, hello. Klaus Kehl from Nykredit. First, a fairly simple clarification question related to the service order intake in mining. You have stated that you don't see any meaningful slowdown in Q3, and you have talked about the effects that you are seeing, et cetera. I just wanted one clarification question. Do you have any large product orders here in Q2, or is it fair to see this as a normalized level? That would be my first question.
It's a normalized level, so there's nothing out of the ordinary in the books.
Okay. Excellent. Yeah. Fairly strong, I have to say.
To your note about, we haven't seen a slowdown yet, but if we see recession next year, it will also impact the demand for the kind of commodities and then somewhat the mining operations. We are kind of aware that it may slow down. But as of today, we get weekly reports for order intake what we follow, and it's a good pulse for the market. Not strong signs of slowing down yet.
Yes. I truly understand that. My second question is related to the market conditions in mining for equipment. We haven't talked that much about that. Do you have any comments for that? Yeah, comments about your dialogues with customers here for the second half. Yeah. Any thoughts about that?
It is quite evident now that the kind of finance cost will go up for the small operators as interest rates are going up, and then of course the kind of WACC what is used in calculations. There's some concern about that one, but we haven't seen any big decisions to delay things. Typically, if I look at sales funnel, it's difficult to predict because it's very slow how they are progressing for kind of planning different phases, approval for CapEx, raising funds, getting authorities approval. It's very slow-moving process, and there's very little you can see impact short term.
What I've seen is maybe for smaller companies a bit of concern about funding now that if there's a downturn that they I think we might see the impact. We haven't really seen any big slowdown in the capital markets and of course as Russia is going down we see activity in Central Asia going up and mining companies in Kazakhstan and a few other places expediting things rather than slowing down because anticipation of less volume in Russia.
Okay. Great. Finally, a pretty boring question for Roland. Could you talk a little bit about the development in your amortization? Because they keep going down and whether the level that we see in Q2 is yeah what we should expect for second half of the year, and yeah, of course, excluding TK Mining.
Yeah, that was indeed a boring question. The amortization is running off. As you say, this is a mix of acquisitions that has been done over the past five and eight years, so they will be running off. Then we will, as you say, add a lot of new ones once the TK guys comes in. The existing level will run off over the next couple of years.
They will run down to zero or what?
Not zero. Not zero. They're running off.
Okay. Thank you very much.
Thank you. At this time, we have no further questions in the queue.
Okay. Hey, I'd like to thank you for your time and questions. For me and Roland, it has been exciting quarter. We are very pleased about progress, what we are making. It's not only quarter, but we want to see underlying progress for the kind of strategic focus what we have for the profitability and especially for the capital business. It will take time, but we are very pleased for the result and hope to meet you all soon again. Thanks for your time.
Thank you.