I would like to welcome you all to FLSmidth's annual report presentation of the 2024 result. As a summary, we are posting record profitability in FLSmidth for a long time. It has been a good year despite weak market conditions. And as we promised before, there's no compromise on quality of earnings, no compromise on quality of the order intake. Some of the highlights of the year and the quarter: we highlighted to you all earlier in the year and in the meetings that we have a few areas of focus for growing the business. HPGR: we have a record year in order intake, and we sold the largest HPGRs in the world, which is cementing our market-leading position with regard to that technology. We are advancing well with the service contracts and service of the HPGR fleet around the world. The second focus area has been pumps.
And in pumps, we have increased market share globally through the conversions. The third focus area: mill liners. Again, mill liner has been a fast-growing product in our portfolio. So that is a little bit behind the order intake numbers: annual level, 2% growth, strong quarter. But quarters are different, and therefore it's best to look at the average of four quarters. Mining product market continues to be weak, but in the weak market, we are getting the product orders and technology orders that we want. We continued improving our profitability and are posting record profitability in many areas. In cement business, we are in the middle of the sale process, and we are happy with the order intake for services, which is significant for the process. We continue to progress in all our science-based targets. We are also winding down the non-core activities and discontinue reporting that segment going forward.
That is well ahead of the original plan of winding it down in three years. We are one year ahead of the schedule. If I pick up one area from sustainability, which is most important to me and to our customers, it is safety. We are not yet meeting the targets what we have for safety, but we improved between 2023 and 2024. There has been improvement, but that continues to be our focus area going forward. That is the most important KPI on this chart for me and to our customers. Strong quarter for the order intake in services. We noted in the last quarter that the quarter three this year was slightly weaker. Then if you look at the average of the four quarters for the year, we are at the level that we planned in the beginning of the year.
Very happy with the service order intake. In products, we continue to win critical product orders that we want to win, especially in the HPGR space. That has been a big success for the year. If you look at the order intake for the last quarter, just shy of DKK 4 billion, for me that is a good level, and also mix is important to highlight that if you look ahead, mix between service and products, 73%. Optimal for us would be 65%- 70%, but that of course depends on the status of the capital market. Important to note that we are back on track in service revenue. We had a couple of quarters that we were a little bit behind, and now the revenue for the service, DKK 2.8 billion, is at a good level, so we are happy with that one.
And then product revenues, deliveries reflect basically backlog and timing of the backlog. But I'm especially happy about service revenues in this page. At just above 40% margin for quarter four. That's for the organization and for myself; it's a tremendous result. Very happy about that one. And then if you look at the underneath reported-margin EBITDA improvement year- on- year, about 4 percentage points. You don't often see that fast improvement in profitability. So we are really happy with this result. And it's reflecting the transition that we do in the company. It is like a train that continues nice, steady, continuous improvement. We've done it so far and continue to do so in the future as well. A few highlights for Cement.
We are in the middle of the sale process, but the number that you need to look at, which is important for cement, is service order intake. 650-700, anywhere thereabouts, we are happy, then it shows that it's year- on- year, like for like, small growth or steady service business with a good profitability. At the same time, we've done portfolio choices for cement that we don't take projects, we focus on service and products only, and now it's also reflective in the revenues, so the revenues of the products are going down quite fast by choice. We don't want to do loss-making bad business in cement. The level of revenues is good, and also mix is getting better. It's 66% service, but it continues to improve going forward.
As I said, service is the key number here to look at both in orders and revenues because of the sale process. I'm also happy to report that cement has met the long-term EBITDA target that we announced in the Capital Markets Day, and we are there quite early. There was a little bit of lack of confidence after the capital market that we could never reach 8% EBITDA in cement, and now we've done it in two years. Also, one area where I'm extremely proud is that we are out of the NCA at record time. It has been internally and externally a painful process, but now we are out of it, and we are moving the remaining tiny backlog to the Mining products, Mining capital business. We have a few people remaining just dealing with the backlog-related matters.
It's fully provided for, but for all intents and purposes, we are closing down the segment. And that is, I would say, a big achievement from the organization. Then I'll hand over to Roland for more detailed numbers.
Thank you for that, Mikko. So having a look at the quarter's consolidated financial performance, a revenue of DKK 5.33 billion with a gross profit margin of 33.7%, SG&A of a bit more than a billion, and an adjusted EBITDA margin of 12.1%, and after tax and financial cost, a profit and loss for the group of DKK 360 million. If we have a look at the gross margin, I think I'll just spend two minutes explaining a reclassification we have done. So we have decided to reclassify IT-related costs from SG&A to gross profit. And the reason why we're doing it is that it follows typically the staff-related IT costs. And that means that we get swings in the SG&A as and when blue collars move in and out of the P&L. And secondly, it belongs more rightfully under production costs.
The way we have done it, we have reclassified in 2023, DKK 127 million of IT costs from SG&A to gross profit, and we have put it all in Q4 2023. So that's negatively impacted by this reclassification. Similarly, we have reclassified 127 million DKK for the year 2024, and we have put it all in Q4 2024, so negatively impacting gross margin in Q4. It's a pure coincidence that it's 127 million for both years. So if we look at the gross profit hereafter, it's basically like for like that the gross profit from Q4 last year to Q4 this year is increasing significantly. And also Q-on-Q, [audio distortion] is improving despite the reclassification. Gross profit is increasing both in Mining and cement, and even NCA had positive gross profit this time as we are closing out the last pieces before virtually shutting that segment down.
That moves us to SG&A, where we have the same reclassification. This is obviously negatively impacting this, sorry, positively impacting this one as costs are taken out and moved to production cost. Hereafter, we have 1,885 million DKK in Q4 2024. 51 million of those are called out as transformation and separation costs. Then we have restructuring provisions in that quarter also, predominantly severance in both Mining and cement of about 200 million DKK. Group EBITDA, as Mikko also went over, combining it obviously also moves forward to an adjusted EBITDA of 12.1% and reported group EBITDA margin of 11.1%. There on the right-hand side, our traditional margin bridge. Taking integration cost out from last year brings us to an adjusted group of 9.2%.
Then we have less revenue now in NCA out and capital revenue down in Mining and a bit also in cement. Gross margin significantly improved and then negative flow in SG&A and others leaves us with adjusted group EBITDA margin of 12.1%. We have transformation and separation cost of 1%, and that gives us a group EBITDA margin in Q4 2024 of 11.1%. Net working capital slightly better in Q4 than Q3, predominantly driven by significant trade receivables collections and then a few other bits and pieces moving work in progress and offset by trade payables increase. If we then look at the combined cash flow, that gives us a CFFO of DKK 621 million for the quarter. Deducting CFFI, including acquisitions and disposals of DKK 222 million, leaves us with a free cash flow for the quarter of DKK 422 million.
That we spend on reducing our debt, and that means that we come out of the year with a leverage ratio of 0.4x and an NIBD of DKK 847 million. We're ready with the new full-year guidance for the year 2025, and we expect Mining to deliver a revenue of about DKK 15 billion plus minus and an adjusted EBITDA margin of 13.5%-14%. We will be calling out one-off costs to transformation and separation of about DKK 200 million as one-off cost for the full year 2025. In cement, we will be guiding a revenue of about DKK 4 billion and an adjusted EBITDA margin of 9%-9.5%.
And excluding DKK 50 million for transformation and separation costs and adding that up, the group will deliver a revenue of about DKK 19 billion and an adjusted EBITDA margin of 12.5%-13% and a reported EBITDA margin of 11%-11.5%. Our transformation work streams are progressing quite well. We still have some simplification to do, and the operating model also needs to fall in place during the course of 2025, moving predominantly support functions to global business service centers and a few other adjustments. We will continue to follow that closely. Commercial investments and risk management and de-risking is basically done. It's not like we won't do it anymore, but we will stop reporting on it as a strategic initiative. This is now fully ingrained as part of doing business in FLSmidth.
And similarly for cement, risk management and de-risking is fully implemented, and also the simplification and the operating model is roughly done, so we will stop reporting on that. And that means that this follow-up slide here will be a bit simpler as we move forward. NCA is virtually done and will exit the P&L as from 2025 and onwards most likely. And thereby back to Mikko.
I'm just highlighting some of the key priorities for 2025. Just as a reminder on the map, what we launched in the Capital Markets Day where we defined the core, streamlined the portfolio, made portfolio decisions, value over volume, and so forth. I hope that this is the last year of major transformation. Of course, everything is transformation in a bit when you're pushing forward, but hopefully most of the big ticket items are done this year and completed, and therefore we are creating foundation for future growth, and why do I say foundation? As I said in the beginning, we make no compromises on order intake quality and quality of the earnings, so there will be no nasties when the growth comes back from the backlog, so we want to have a clean, good backlog to execute when the market is back.
Some of the focus areas today is that we see lots of volatility in the supply chain, and we still can improve the supply chain a lot, operating in all key supply markets, and of course, geopolitics is creating new dynamics for that supply chain market, and sometimes there are also opportunities that we can take advantage of in this instance, so we continue to optimize procurement, supply chain, logistics for improved efficiency and reliability. We are also looking to expand our market presence. We still have a few white spots in the market that we don't cover well enough, and then we will be driving sales excellence. During 2025, we will have new initiatives how we deepen customer intimacy and create stronger relationships.
We will have some ideas that we believe that nobody else is doing in the market that can take us much closer to the customers, customers' business planning, customers' operations than typically is done. So we are launching those initiatives during the year. And we continue to try product innovation and first market references. And that's why, for example, the win in India for the Lloyds HPGR was particularly important because that is the biggest, largest modern HPGR in the market. And then it's setting us apart from anybody else in the market. So we are by far the largest player in the HPGR market, and at the same time, we have the largest ones that will be in operation in India. We continue to transform the company. In Mining, which is simplifying the way of doing business, simplifying operations at the same time, looking at the principal company model.
And we talked earlier about new corporate model means that we will have a lean and mean head office model, and then most of the resources are close to customers, part of the business lines and regions, or then in shared services setup in our global business centers in Mexico, Romania, and India. And that will generate us efficiency, not only cost savings, but efficiency and scalability when the market will come back. And we are, of course, in the middle of the disposal of the cement asset. And then we go to the Q&A.
We will now begin the question and answer session. To ask a question, you may press Star, then One on your telephone keypad. If you are using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press Star, then Two. At this time, we will pause momentarily to assemble our roster. First question is from Kristian Tornøe , SEB. Please go ahead.
Yes, thank you. A couple of questions from my side. So maybe just first of all, on your market view, has anything changed? I recall, Mikko, you've said that you sort of hope Mining product orders could start to pick up towards the end of the year into the beginning of next year. Would that still be your view?
My view is similar to what we discussed last time. The level of activity in 2025 is going to be very low, so we see no improvement in 2025. It's at historically very low level of investment, but we are hoping to pick up in 2026, and we refer to the high level of activity in EPCMs regarding study work. But we don't see those activities turning into projects in 2025, so of course, there is activity in 2025, but it's going to be another slow year for capital business. Service is stable, but there's a price pressure around capital and service. So in heavy capital equipment, we will see deflation in absolute prices. Means that when we are getting savings in procurement, those savings will be handed over to the customer in form of the absolute price reduction.
So we've seen deflation in heavy capital equipment in 2024, and I think we continue to see that in 2025. So the capital equipment prices are going down in absolute terms, which are then compensated by the procurement savings.
Understood. Second question is on these transformation and separation costs of DKK 200 million you expect for Mining in 2025. Can you maybe just elaborate exactly what this goes to, and more specifically, do you expect any of such costs in 2026 as well?
Yeah, so there will, thank you, Kristian. There will be costs related still to close a few sites we have out there, legal entities and so on. We're not 100% done with the carve-out of cement. And also the move from certain of our countries to global business centers will require transformational costs in nature. In terms of our Mining, there will be costs that we will capitalize, and there will be a part of this one-off that also goes to that. And there will also be some in 2026, whether we call it out or not, that we have not decided yet. But even if we call it out, we're still having our long-term target of 13%-15% as a reported EBITDA number.
Understood. Quite clear. And then if I may just the very last one here. On this reclassification of the IT cost, why do you do the reclassification in Q4? I'm just thinking ahead. When we get the Q1 numbers, will we then look at SG&A for Mining where it's reclassified in Q1 2025 and not reclassified in Q1?
Yeah, so we will do like for like from Q1 and onwards. When you do a reclassification, there's also some audit requirements. I cannot just do a quarter of it and then reopen historical quarters. So we had to do it the way we did it. And I appreciate it's not super pretty, but from Q1, we will make sure we do like for like comparisons. And for your forward-looking analytics and so on, you just use the 127 divided by 4 per quarter. That would be reflective.
That is very excellent. That's all from me. Thank you.
Next question is from Claus Almer, Nordea. Please go ahead.
Thank you. Yeah, also a few questions from my side. But first of all, congratulations with a very strong performance in 2024 and not least in Q4. You mentioned this divestment of cement that you wouldn't give a lot of color. But could you possibly say a little bit about timing? Is it first half? Is it second half? Is it dragging out? That would be very helpful if you could give some more details. That would be the first one.
Thank you for that, Claus. So as Mikko says, the cement process, we are in the middle of selling the cement. We are in the middle of the process. And I think politely, we will say that we don't have any more comments to that for now. So as soon as we have news, we will disclose it to the stock exchange.
Fair enough. Hopefully, you're not in the middle, but in the end of the process.
Hopefully, exactly. I think it's important to say we will sell the cement business. So it's still the intention to sell the cement business.
Perfect. Going to the Mining guidance, to what degree have you included an impact from the added salespeople and also the investment in service centers you announced yesterday?
In the guidance, it's fully included.
So what have you included? Is there an impact?
Yeah, impact has been included. These service centers are not that heavy on manpower. We started service centers up in 2024, and the ones we announced yesterday are sort of a continuation. These are not huge factories with hundreds and hundreds of employees. But running costs have been included in guidance for 2025.
Claus, where we've been adding people is pumps, cyclones, a valves business, people to the front end, and we see the payback from that investment in 2024, so we are increasing our market share in pumps, and how we measure the market share is that conversions, how many competitors we currently are converting out and what's the kind of competition balance, so we see actually that investment to the front end is paying off.
I was also more thinking about the revenue impact. I know there will be some costs, but do you also see a revenue impact already in 2025? That was actually the question.
We see some. That's not a lot. That will come gradually.
Okay. And then just my final question, cash flow. And I know you don't guide on cash flow, but in past calls, you have given some color to what we should expect, and given the guidance for 2025 for the Mining, cash flow should be pretty solid. So could you give a bit of help on what we should expect for 2025?
Yeah, so we expect to improve CFFO in 2025 over 2024. But you should not expect it to come higher than DKK 1 billion.
Okay. That's very clear. Thank you. That was all from my side. Thanks.
Next question is from William Mackie, Kepler Cheuvreux. Please go ahead.
Yeah, good morning, Mikko and Roland. Thank you for the time. First question relates to Mining service and maybe conceptual. But when we think about your product categories, you've called out your focus on building pumps and valves and HPGR capture rates. But how would you describe your capture rates across the service business in relation to the installed base? And what is the upside opportunity across some of those categories? I'll follow up with the second one.
So the capture rates are highest in our pumps business because we have a design in the pumps, which is a little bit more difficult to copy. So it's extremely high in pumps. So oversimplifying, if we get the pump in, we get the aftermarket or service as a result. In HPGR, it has been improving. ThyssenKrupp, before acquisition, lost some business to third parties. And we've been gradually, steadily winning it back. We've signed kind of long-term HPGR service contracts in quarter four, for example, for five years with an important customer. And it's still too low, but we see significant recovery in HPGR aftermarket. But of course, we have a good success in the equipment sales as well. So that continues to be one of our focus areas.
Thank you. Staying with Mining, the second question relates to the OE business. You talked about a rising level of project preparation activity. Maybe you could speak to which parts of the world are beginning to see a pickup around perhaps critical mineral strategies or copper, for example. And then more specifically, you called out deflation in heavy capital equipment. I mean, why is that deflation? Is that something to do with an increased competitive tension, or is there a separate factor?
So where we most likely see the pickup first will be in copper and expanding existing operations. We see very little greenfield activity. And of course, greenfield is dependent on licensing. And we don't know yet what's going to happen in the U.S. But the area which will pick up soon is these copper expansions, South America, and then a few important copper assets elsewhere. So that's where we see the quickest recovery. Of course, gold price is record high. But of course, when the price is super high, then all the gold producers don't want to interrupt their operations. They just want to get everything out what they can as long as it's kind of what is 2,900 or so. But copper, South America will be the first one to pick up, and then others will follow later. And also that copper price has been good.
It was okay last year, but we've seen some pickup in the beginning of the year. And of course, if that continues throughout the year, that should kind of support the sentiment to kind of release some of the work or turn studies into projects. And deflation has to do with when I talk about capital equipment. I talk about heavy capital equipment with the large castings and where the material cost is very significant. So we've seen intense competition in the market. And in order to kind of compete successfully, we've been looking at different sources, developing new suppliers. So as a result, the market has seen reduction in heavy capital equipment prices, but we've been able to compensate that in our savings in our procurement. But of course, in the down market, you get a saving.
It goes fully to the customer instead of us making higher margins. So we see margins kind of stable, small downside in heavy capital equipment, but the absolute price is, there's a deflation in the market.
Thank you very much, Mikko. The final one. In this fast-changing world with regard to tariffs, I just wonder if you can speak to how the operational structure of the company sits with regard to cross-border flows, particularly in North America or the USA. And what, if at all, you are exposed to in the event that some of these worst-case scenarios unfold?
Beyond the scenarios, and I think if I look at the Mining supply market, I think our position is quite good because we do have significant operations inside the United States. And we also have sourcing options for components from other markets. So it's a very dynamic market. Nobody knows what's going to happen in one week's time. But we've done all the analytics where we source components and products from, and we have alternatives. So I think, and also that we have a significant manufacturing operation inside the U.S. for pumps and cyclones. We have an operation of mill liners inside the United States. So we do have actually operations inside the U.S.. And therefore, everybody will be impacted. But I think in relative terms, we should be quite okay.
Of course, in kind of where the product lines are also focused, most of our product lines are based in southern cities in the United States. We're actually quite U.S.-centric in our Mining operations.
Super. Thank you very much. I'm back in line. Thanks.
Next question is from Chitrita Sinha , J.P. Morgan. Please go ahead.
Hi everyone. Thank you for taking my question. My first one is on the Mining OE side, just on the base equipment level. Previously, I think it was said that the run rate that we can expect is about DKK 500 million-DKK 800 million. But obviously, in Q4, it was slightly better than this. So with the commentary that you've given for 2025, what kind of run rate should we expect for base OE levels?
Yeah, so I think we're maintaining what we said also for 2024. So base level DKK 500 million-DKK 800 million, and then bigger orders come when they come. That's a bit more erratic.
Okay, thank you so much. And my second question is on provisions. I know this time last year, you were guiding to provisions coming down both on the restructuring side and then the other basket. How should we model this going forward into 2025 from here?
Yeah, so I think warranty is a relatively stable thing, right? Some slides out, some comes in. On restructuring, obviously, we have taken restructuring charges in Q3 and especially in Q4. And they should be expected to turn to cash over the next 12 months or so. These are predominantly severance charges, both in cement, but predominantly also in Mining. So they will turn to cash. And theoretically, that should go to zero. So when we stop restructuring dramatically, that would be a zero thing. Then the other bucket, that is things from the NCA, things from we inherited from TK and so on. And some of that will have to be reduced over the next two to three years. And what we said earlier, said that that should be cut in half. And that will still be my best guess over the next two to three years.
That's a hard one to predict because that has to do with when we do the settlements on individual projects. There's a few legal cases as well as bits and pieces. And that we solve as we go. There hasn't been a lot of outflow this year, surprisingly, actually. So I think over the next couple of years, we will probably expect a bit more of that.
Thank you very much.
Next question is from Lars Topholm, Carnegie Investment Bank. Please go ahead.
Yes, hello. Also congrats with a solid quarter. Very well done. I have a couple of questions. Firstly, I'm trying to figure out the underlying run rate of OpEx in Mining. And of course, I understand now you took DKK 721 million as OpEx in Q4. And then I add the DKK 110 million and deduct DKK 28 million to get, what would you say, a number where the reclassification of cost is sort of probably annualized. So that's a run rate of DKK 803 million. But then, as you say, there have been significant provisions in Q4 that you have charged. I just wonder if you can specify the level of provisions net in Mining in Q4 so I can get the underlying cost run rate. That was question number one.
Yeah, so we're doing DKK 200 million in Q4 on group level, right? And the majority of that is Mining. There's not an exact number for that, but the majority of that is Mining. And I think it's a difficult one to break. I understand what you want to do, Lars. So we have provided a lot of severance. That means that certain people will leave over the next three to six months. So expectedly, SG&A will start to come down Q by Q as we move forward. On the other hand, Q4 is a little bit of a seasonal low. SG&A bonuses and other stuff comes out in Q1 and a bit also in Q2, so that will be slightly higher. So all in all, run rate will start to come down over the course of 2025. That's what I'm going to give you, right?
Also we are guiding towards the long-term targets next year. We're also guiding on the gross profit. That means that the residual that I think you call OpEx will lead you to 13%-15% reported.
And also that, W hen cement is out, I think we have a better visibility for stranded cost as well because we simply don't know it at that time because when we have a buyer, then we have service level agreements and they cover part of the cost. So we simply don't have the exact number for the stranded cost at the point of cement departure yet.
What I'm trying to understand is also the guidance because if you have DKK 15 billion in revenue with a 32% gross margin, let's say that's a gross profit of DKK 4.8 billion, you guide an Adjusted EBITDA of DKK 2-2.1 billion, sort of in round numbers. And that means your cost run rate should be around DKK 700 million. But if you have significant provisions in 2024 and don't have significant provisions in 2025, doesn't that actually imply a decrease in underlying profitability in Mining for 2025? Or where are my calculations wrong?
No, I think that the way you should look at it is that we will come in and maybe have a relatively high Q1, and then it will start to drop over the course of the year. That's how you should think about it. And the guidance is not too low if that was the question.
Okay, yeah. Then separate question on your net working capital and your capital employed. So on group level, you have 10.4% in net working capital. I wonder if you can give the standalone number for Mining. And also you have DKK 17.8 billion in capital employed. I wonder also if you can say how much of that is Mining.
By far the most, I'm not going to give you the exact number because we are in the middle of carving out, and bits and pieces can change, but by far, most of the working capital, most of the goodwill, most of the balance sheet is Mining. By far, and I understand you want precise numbers, Lars, but we're not ready to give that until in a month or two, and then.
This is fine. I thank you very much. Appreciate it. That was actually all I had. Again, congrats with solid Q4.
Okay, thanks.
Next question is from Tore Fangmann, Bank of America. Please go ahead.
Hello. Hi, and thank you for taking my question. My first question would be on, could you just specify a bit more what has been the big driver of the margin improvements in Q4, and especially the driver in the gross margin improvements? And just going forward, how sustainable is it? And then could you quantify a bit more of how much of SG&A savings we actually can expect going into 2025 and 2026? Thank you.
I start by commenting the kind of order intake and product margins. We see them remaining stable in service, even though it's the stable market service, we expect that to remain at this level what we have, and then in the capital business, heavy capital equipment, occasionally we see small downside, small reduction in order intake margins, but we've been able to compensate that mainly with the procurement savings, so starting really from the top, which is order intake, product margin, we see net-net that being stable in the kind of coming years. We will not see significant kind of change one way or the other there, and I think Roland, you can go further down in the kind of line items.
Yeah, so I understand the question. In Q4, what drove our gross profit? So we're a little bit positively impacted, of course, by positive split service compared to our OE business. And I think going forward, what we're saying is that our gross profit will be between 31%-33%, and that you can count on for 2025 and also into 2026. And then we are guiding our EBITDA to 13.5%-14%. I understand you want the run rates on SG&A. We're a little hesitant in being specific on that. That also Lars was asking about. But that adds up to our EBITDA guidance, and eventually we will deliver on the long-term targets, which is 13%-15% reported next year.
Okay, thank you. And I would have just one follow-up question on the pricing comment around the heavy equipment in Mining that you've made. To me, at least, this was news that we see negative pricing in Mining right now. When has this started, and do you see the same? Is it for every competitor, basically, or is it just something that currently you do to win more orders?
I think what we see, of course, is that because it's so slow, the capital market, and of course, the few ones which are moving, the case is, of course, customers are taking advantage of the kind of everybody fighting for the small part of the business. And that competitive pressure has, I think, pushing down the prices. And I'm mainly talking about heavy capital equipment because it means that the big stuff, with the kind of large casting, lots of steel and sort of things. But then at the same time, of course, we are looking at savings in our procurement cost around the world. But in absolute, so it has been going on now maybe for six months, nine months. And we expect intense competition to continue still throughout the year because the market is quite weak.
But it's more the little bit of the cost game in product cost that you need to find new sources of supply, develop suppliers, sub-suppliers, and get better costing. But the top line prices are going down. But also at the same time, we've been focusing on high-quality orders. So we are not desperate for the volume. So we will not go after the because earlier there was a question to us when we started transformation, can you hold your nerve when the market is quiet? And yes, we can. So we don't take material handling business in, which is extremely low margin high risk. So we are true to our commitment for quality of the earnings. So we are selective. We are picking up the orders that we want to win and also that which has a kind of significant return through the aftermarket.
But there's deflation in heavy capital equipment for the last, I would say, nine months.
Okay, thank you.
Next question is from Christian Hinderaker, Goldman Sachs. Please go ahead.
Morning, Mikko. Morning, Roland. Thanks for the time. I want to start on the SG&A cost, if I may. DKK 4.2 billion for the year. They were DKK 4.3 billion in 2023. But then you've reduced the employee number at the firm quite significantly, down around 1600 people or 17.5% of the employee count. I appreciate you've got slightly lower revenues, but I want to understand how it is that SG&A costs are only down modestly relative to that shift in headcount. Maybe we can start there.
Yeah, thank you for that, Christian. So 24 have been, again, a restructuring year, right, where we have made people redundant to a large extent. We have also been closing down sites and offices, moved to bigger sites, but fewer of them. And that has an underlying run rate. Also, a lot of the employees, or some of the employees that we let go, are blue-collar workers. That's among others why we are replacing SG&A here. So that part follows the blue-collar workers that sits under production cost. And lastly, we've also outsourced a bit, and that is pulling down the headcount, but not necessarily cost in the outset. So savings of outsourcing only came over the course of the years as we progressed both on IT, on finance, and other operational back-office support. So that's why we don't see SG&A come down significantly yet coming out of 2024.
Thank you, Roland. And maybe a bit of a niche one here, but can you give us a bit more color on the deferred tax asset that you've got in note 4.3? It's DKK 2.1 billion on a net basis. That's about 10.5% of your revenue, two and a half times the tax you paid last year. I just want to think about how we can think about the potential release of that and what impact it could have on future profitability.
Yeah, so the future, the tax asset predominantly sits in Denmark, but we also have tax assets in the U.S., a bit in Chile, and a bit in a few other countries. So the faster we move our principal company model to the right structure where most of the handling and the substance and the decisions are made in Denmark, we will make use of that tax asset. And that's how we're going to get to a more normalized effective tax rate as we progress beyond 2026. I think we are releasing, or I don't think I know, we are releasing a tax report where we give a bit more granularity.
Thank you. Maybe just a quick final one on the service network expansion. I don't know if you've given a number there in terms of we talked about the potential SG&A implications or rather, sorry, cost implications in the round. Do you have an indication of what the CapEx spend might be and over what time frame?
That's not going to be a lot. That's going to be less than, am I going to say a number here, less than DKK 30 million. That's not a lot over the next 18 months or so.
We also have some of the service centers we are building it up over time so that we start a little bit more with a more asset-light, and then we are building it as the business is coming in. So it's not a massive number, but it's more the presence. Then as the business is growing, those service centers, then we are also adding more machining, more type of equipment in the shops.
I think some of this has already started, right? So some of the CapEx sits already in 2024, and then we hit the ground running over 2025.
Thanks.
This concludes our question and answer session. I would like to turn the conference back over to the speakers for any closing remarks.
I would like to thank you for your time, and as I said in the beginning, we feel that this has been a good year for FLS in a kind of weak market. And of course, the whole idea is that, as I said earlier, that we return to growth in the coming years, but this is still creating foundations for the future growth, and then hopefully when the market will come back, we are ready for that market, and then we have a quite scalable SG&A, quite scalable COGS structure with our new operating model, so we are able to take full advantage of the market recovery, so we are optimistic about the future and happy about 2024.
And as I said earlier, using a train reference, so that we hope to be like a train that we continuously kind of continue our kind of profitability journey and performance improvement with no nasty surprises. And that's why we are extremely focused on quality of the order intake, quality of the backlog, not having any nasty coming up later. Thank you very much for your time.