I would like to welcome everybody to FLS earnings call for quarter two and first half of the year. It's the 20th of August, and I'm in the studio celebrating my birthday with Roland, and we are going through the numbers. There has been a lot of changes in how we are reporting, and the reason for that is that Cement is now discontinued business. What we decided to do, we are actually opening up, as requested by you and the market, to give a little bit more visibility for the performance of different businesses. The split is Service, business line, Product, and Pumps, Cyclones & Valves. Pumps, Cyclones & Valves includes both capital business and service business. In typical steady state, it's 25%, 75%. It's very simple. If you think about our business model, we sell products to sell spare parts and wear parts.
We focus on excellent lifetime service to our customers, and we want to be technology leader in our products. If you look at the picture of the Pumps, Cyclones & Valves, you see the picture 25%, 75%. You can also plot the same combination looking at Product and Service. It means that we sell products that are service intensive. In this quarter, around DKK 0.7 billion Product and then about DKK 2 billion Service. It looks a bit similar to Pumps, Cyclones & Valves. In terms of overall performance, PCV business line is our internal benchmark for high performance. High performance for growth, high performance for profitability, and we try to replicate that in Service business. If you're looking at the picture, I was trying to think how to describe it to you, and one word came to my mind, which is money tree.
25% capital with a high aftermarket intensive service business. It's sort of money tree for investors. Some of the highlights are that we have continued disciplined execution of our priorities, and it shows that we are able to execute, get stuff done. We've been also talking over the last few quarters about SG&A and need to reduce SG&A, and now you can see that the fixed cost is coming down in absolute terms. What it means is that we are aiming to have lean support functions, lean head office, and scalable business. Scalable business means that we have a fixed cost, which is steady over the cycles, and then the cycle returns, upmarket turns, it's totally scalable. We have extremely good order intake in the PCV area. Product is good, but of course, the comparison point is low.
Organic service order intake was only - 1%, and that's mainly due to low order intake in North America. Cash is good, and cement disposal continues exactly as planned. We have a firm, unconditional agreement to sell the headquarters in Copenhagen, so we get cash in from that sale as well. Out of this chart, all KPIs are green, and my personal main focus is safety. Safety is of fundamental importance in mining and in mining operations. It's still not at a good enough level, but I'm happy that it's positively developing. If you think about the market a bit, service is stable. There's no big change in the market. The market activity in products, and products means heavy capital equipment in our terminology, continued to be soft, and we are still expecting market recovery in the latter part of 2026.
I would like to also remind that our strongest market is South America, big copper plants, big equipment, and that is still slow. When that market will return, you will see good growth in the products area. That is our sweet spot. PCV, impressive development, both in terms of growth and profitability. The biggest improvement or big area where we are excelling is also conversions at the brownfield sites. We have quite a few nice big pump conversions from third-party equipment to Krebs pumps in different parts of the world. If you think about service, organic order intake - 1% and reported - 8%. It was a low quarter. I highlighted in the beginning of the year after the first quarter that we have a weakness in North America. That weakness continued, and it's in the area of retrofits and upgrades.
That has been slow in North America, in the U.S. in particular. All the other markets are doing fine. We have plans in place how we can turn around North America in terms of order intake. We have targeted measures in place. If you look at the book to bill at the moment, it's around one. We are able to deliver and execute, and now we can focus on growth. What I highlighted sometime in the past is that we need to have improvements in the supply chain and supply chain performance, our execution works, and now it's more about order intake and getting more orders in. If you think about service EBITDA, 19.9%, adjusted around 20%. For me, it's reasonably good. We focus on a high-profit mix, and that's to support profitability long term. Our mix in Service is dominantly spare parts and selected consumables.
We don't want to go all into all consumables because some parts of the consumables business is very low margin, so we are selective there. We don't do basic labor services anymore. It means that the mix is good, and it will support long-term profitability. Product markets continue to be soft. The comparison point last year was low, so therefore there's a fairly significant percentage growth. The market is still slow. In the first quarter, we saw orders from India, lots of HPGRs, and 18 vertical mills. That's why the quarter one was good for us. The baseline business, what we have, is quite slow. It also has to do with the portfolio of what we have. We have a market-leading position in lots of mining equipment, HPGR, secondary crushers, and they are not volume products. They are one-off products. One year you sell eight, another year one.
It might be a year that you don't sell any. The demand pattern for those orders is very lumpy. If you think about EBITDA, you might be surprised that it's negative, and that has to do with the lack of volume. Lack of volume both in orders and revenues. We promise to you that we will not fill up the capital volume with third-party products. We are very disciplined. We don't take third-party products into our order intake because there's no aftermarket business. We don't want to do extended scope because there's no aftermarket for that one. We've been reducing risk. The backlog and the business is low risk, and the margin on the products, product margin is actually all right. We are lacking volumes, and when volume will come back, this goes into positive territory.
In the meanwhile, we are streamlining our Product business operations in a way that it becomes totally scalable because we are focused on products, technology, and not in engineering, not material handling. It means that the platform what we will create for Service, sorry, for capital business is totally scalable. We will have product lines which can support with the same number of resources in the low end of the cycle and high end of the cycle. It will be totally scalable. That is action that is ongoing by Julian, who's heading this business. I think PCV business is quite easy to comment. I would say it's an in-house performance benchmark, both in terms of growth and profitability. This is evidence that our investment to PCV business is paying off. We invested to the front end of the business. We invested by separating this from the rest of the businesses.
Those two decisions have resulted in continued growth of the business. We are trying to repeat this success also in the services. This is an internal benchmark. If you think about profitability, historical profitability, there's variation, but a steady state with a steady mix, it should be around 24%, 25% EBITDA if you are doing things all right. Anything lower is not really, then you are not really managing this business too well. It means that it's a very good business, and the underlying profitability in this space would be around 24%, 25%. Roland, I think you will go through numbers a little bit in more detail.
Yeah, thank you for that. Looking at the consolidated financial performance now, the continued business is our mining business. Orders up by 3% and another good quarter gross profit margin-wise north of 35%. That means that we are delivering an adjusted EBITDA of 15.2% and a reported EBITDA margin of 15.5%. The profit and loss from our continuing operations then yield DKK 260 million. Cement has been moved below the line as a discontinued operation. In that connection, the activities and the liabilities sold have been impaired and the sales proceeds deducted, and that leads to a total loss of minus DKK 715 million, fully in line with what we communicated when we disclosed the cement sale and financial impacts to the company. That means that the profit for the period for the group and this quarter equals minus DKK 455 million.
Gross margin is still improving to a note of 35%, driven by revenue mix, still relatively low revenue from the Product business line, but Service and the Pumps, Cyclones & Valves business lines are pulling the relatively higher gross margin forward. SG&A costs continue the tractions down in nominal terms and now also as a percentage of revenue. This bucket here includes DKK 50 million of transformation and separation costs in Q2. The higher gross margin combined with continued lower SG&A leads us to improve EBITDA margin and therefore an adjusted EBITDA margin now of 15.2%. That compares to 10.3% last year in Q2. Admittedly, with NCA in that number and without NCA in that number, we would be around 13% versus now 15.2%. Still good progression forward on this metric. Net working capital is improving significantly this quarter. It's a mixed bag of cement net working capital moving out.
We have had a relatively good quarter in collecting receivables and also reducing our work in progress, and then currency tailwinds. The effect from the cement move out here is around DKK 145 million. All that leads us to a strong cash flow from operating activities, DKK 527 million for the quarter. This includes the group's combined cash flows, including cement, and a free cash flow of DKK 309 million and adjusted for small stuff M&A, a free cash flow of DKK 332 million for the quarter. Q2 was the quarter where we started our share buyback program. We didn't do a lot of it. Started only late June. We also paid almost DKK 460 million out in dividends to shareholders. We still keep our leverage ratio of 0.6x comfortably below our target of around 2x through the cycle.
The 15.2% margin in Q2 and also a good margin in Q1 led us to revisit the full-year guidance. We announced last week for our revenue guidance that used to be DKK 15 billion. We last week adjusted it to DKK 14.5 billion-DKK 15 billion, predominantly because of the relatively low intake in the Product business line and slightly slower execution there than we had expected. The EBITDA margin for the full year for the continuing business was previously 14 % 14.5%, and we last week adjusted that up to 15 %- 15.5%. Let's just recall that adjusted means that we are deducting the transformation costs and the separation costs that we have announced since the beginning of the year of DKK 200 million. We are also now excluding other operating net income. This is sales of bits and pieces, summer houses, and a few other real estates.
For the first half this year, that has equaled an income of DKK 77 million. It's a true adjusted EBITDA margin that reflects the underlying business performance. We will ask all of you that are interested to save the date, 11th of March. As you know, we're spending some time updating our strategy as we speak, and we'd like to tell all of you more about that on the 11th of March, where we will invite for a capital markets day and deep dive a bit further on what we have to come up with. With that, we move to questions and answers.
Thank you. 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 speaker phone, please pick up your 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. The first question is from Chitrita Sinha with JP Morgan. Please go ahead.
Morning all. First, thank you for the increased color on the three reporting lines. It's very helpful. I have three questions, if I may. My first question is on the margin in the Product segment. This has clearly been volatile in recent quarters, and as you said, it's linked to low volumes. What is the best way to think about the margin going forward? Is it simply that as volumes come back, this will get into positive territory? Is the Product margin in the Pumps, Cyclones & Valves business positive or at a similar level?
There was a little noise on the line, but I think you were asking about the margin in the Product business line. The intention here is that we are restructuring that business line a bit on the cost side. Also, once volume comes a bit back in that business line, it has to go into positive territory. We're not guiding on margin by segment this time, but this we can say on a normalized volume, that business line should be positive.
I'm sorry, the second part of that question was what the product margin is in PCV. Is it at a similar level or positive at the moment?
You mean product margin in PCV, in the product business?
Yes, exactly.
Yeah, if you look back when we said that the capital business is not high margin, but positive territory, that was a combination of PCV products and the heavy capital equipment. Now they are separate. PCV definitely is better because that combination, when we said commentary in the past, that it's around kind of break-even or low profit, that was a combination of both. It depends on the volume, but it's definitely better than heavy capital equipment, which is described in maybe the product business line.
Very clear, thank you. My next question is just on the gross margin. At 35%, 35.5% actually in Q2, this was higher than the rate you previously gave for mining. Is this the new gross margin range now, slightly higher, or how should we think about that?
No, we still say that through the cycle, the gross margin you should expect is 31% - 33%. Obviously, for a while now, at least for the next two quarters and part of the guidance, the Product business line won't get significantly higher seen from the order intake. That means the mix will still be in favor. The combined mix will be in favor as Service and PCV will have a relatively larger share than hopefully further on where the Product business line will have higher volumes.
Perfect, thank you. My final question is just on the delays you're seeing from customers on deliveries. How many of these orders were already H2 weighted, and how much of it is due to the push-out from Q2 into H2?
If the question was more about orders, not revenue, I will comment on the orders first. We've seen continued delays in customers deciding. Last time, we discussed a high level of activity by the engineering companies in the main engineering centers: Perth, Vancouver, and then Santiago. It seems that customers are delaying sanctioning large capital projects, typically expansion. There is activity ongoing as we speak. If I think about South America in particular, things have been delayed. We know it will come, which is why we're expecting order intake for the capital business, heavy capital equipment products, to pick up toward the end of 2026. That's how we see it at the moment. Remember that our sweet spot is the HPGRs, large circulatories, large equipment, South America, and copper. When that market comes back, you will see that in numbers.
Great, thank you. Happy birthday, Mikko.
Thanks very much.
The next question comes from Christian Hinderaker with Goldman Sachs. Please go ahead.
Hi, Mikko, Roland, and happy birthday from me as well. I wanted to start on the product margins if I can, but maybe tackle it from another direction. I guess just curious how we think about the sort of SG&A for this business structurally versus the other parts of the portfolio. Maybe there's two parts to it. Is there a higher SG&A burden today versus those other segments? How do you see that evolving?
We have been very transparent about the tracks of the business. We are saying that the three business lines have a kind of 95% control of the P&L, and it means also the fixed cost. We do not move too much kind of cost around between the businesses. It means that at the low end of the cycle, it is quite clear that our fixed cost, fixed SG&A, fixed COGS is too high in the Product business line. We knew it, and now it is transparent. Of course, we are now looking at right-sizing, streamlining how we do business in non-volume Product area. Our aim is that we can get, we do the kind of right-sizing and focus on core competencies, what we need to keep in-house, core technical competencies, and make it scalable.
The idea is that in the future, even at the low end of the cycle, it should be closer to break-even. When the volumes will come back, it will be positive territory. We make it scalable, meaning that the fixed cost SG&A is the same whether you have a DKK 3 billion volume or DKK 5 billion volume. It should not vary. Fixed cost can be 100% scalable in that business. We would scale the business for the, we have a good engineering center in India. We will scale in the upmarket that for our COGS engineering resources in India. It would mean that the fixed cost of that business, lower in a cycle, should be closer to the break-even and then pushing to positive territory when the market will come back.
As you see from the number, we are not there yet, but we wanted to be transparent of this transformation. Christian, also the other thing is that we focus on the products that generate significant aftermarket. That is what I was referring to as a money tree, our kind of business model. We took out the material handling, third-party stuff, steel structures, all that sort of things, which would actually help to pay for the SG&A. You are kind of fooling yourself, kind of that you take bad business in just to pay for the fixed cost. We decided we do not do any of that. We are super strict with the order intake. We rather right-size, streamline the operation to reflect the volume because then it is the kind of clear link that these are the products we get in.
We get significant aftermarket kick then once also installed on operations. That is our logic. We did not want to do anything to lower the quality standard because it is quiet at the moment.
Understood, Mikko. Thank you for that cut out. I wanted to then ask on the second one, you're talking about South America strength. Obviously, as well in North America, you have quite a strong presence in terms of footprint. I just want to understand maybe on the sort of country-level basis how we think about your positioning in terms of competitive strengths. Is that more led by where your footprint is, or is it more led by, say, strength of relationships with given customers? I'm sort of thinking, you know, if we should think of certain parts of South America as better, or sorry, as FLS being better positioned in certain parts of South America, for example.
If I pick one country, which is the most important country to us, and then our market share is the highest, is Chile. Chile is still producing 50% of the copper in the world. We are leading in the Chilean market if I look at the install base today. Typically, mining companies are quite conservative, so if you do an expansion, incumbency gives you an advantage because of the conservative nature of the customer base. Also, if you have another line with similar equipment, you tend to use the same piece of equipment for the extension. It's not guaranteed, but it's quite common. It means that when that market will come back, and it will, we don't know exactly when, I think we would be in a good position. Of course, Peru is a strong market for us as well, and then the U.S.
If I need to pick one country, I would say Chile, 50% of the world copper supply. We are a leader there in terms of install base and market presence.
Noted. Thank you.
The next question is from Klaus Almer of Nordea. Please go ahead.
Thank you. Also from my side, Mikko, congratulations with the birthday.
Thanks very much.
The first question goes to you. You are in the report mentioning that you will do some initiatives to make the Service division more resilient. Which initiatives are you talking about? That would be the first one.
I think what we see in the service is that technically we are very strong. Sometimes when we looked at our organization, kind of commercial acumen wasn't strong enough in some parts of the world. In some parts of the world, we were too much office-based. We are basically improving our commercial skills of our sales force and also kicking people out from the offices. We don't want to have in-service salespeople sitting in the office because customers are at the site. We empty the office and send people to the sites, and at the same time, improve the commercial skill sets. Actually, it is quite simple. It still takes time to do it. I think that's the area where we can actually improve. We do some changes in North America, Australia, a few other places, just to strengthen our kind of customer interface and presence at the sites.
I guess this has been an ongoing process for the last quarter, so maybe longer than that. How far are you with this? Is it index 20%, index 50%?
Regarding the whole change of the company, you mean?
The initiative to become more commercial.
I think that is actually, we see differences in different parts of the world. The commercial excess, as I said, we have a benchmark inside the company, which is PCV, high growth, kind of high profitability. For example, we are rotating some people out from PCV into other areas just to speed up that best practice sharing. I think you will see improvements in service soon. I can't tell you exactly when, but I'm confident that we can replicate PCV success. That's why I said that we have a benchmark in-house. We need to be able to leverage that one and take learnings to the other businesses.
Okay, makes sense. My second question goes to the PCV segment. The order growth we're seeing or the order growth potential given all these initiatives you have done, the added salespeople and so on, should we expect a more stable growth going forward, or could it also be even an acceleration in the growth?
I think, Klaus, that's a good question, right? PCV should definitely grow, but we are not guiding on growth now. The 13% organic growth we had in Q2, I think, is a good quarter for us, but we are not guiding. PCV is definitely set to grow, so I'll leave it at that.
That was why I didn't ask for an exact number. I was more about the momentum or the direction of the growth.
That will be up, Klaus, but 13% is definitely a good quarter. I'm not going to quantify it more than that. There's a reason we have separated out PCV. We have strengthened the commercial front end. It looks like it works for that business line now. There will be more momentum, but Q2, albeit, was a good quarter.
Okay, that's all. Thank you so much.
The next question is from Casper Blom of Danske Bank. Please go ahead.
Thanks a lot. Obviously, also a happy birthday from my side. First of all, I would like to ask, given your new updated business split into the three divisions, Mikko, could you comment what split you would like to see longer term between service and products, taking away the PCV business? Is it service to have double the order intake of products? Is that a guiding star?
Of course, it's so circular called the product business, and so it's difficult. I think 70/ 30, 67/ 33. I think I'd like to see it kind of service be above 60% of that split. It's highly volatile because product order intake is highly volatile. I think that's why we are not concerned that if the product business is not growing as fast, as long as we are picking up our markets, we're picking up the right orders. That is more important than the volume of the product business, so that we pick up the kind of high aftermarket intensive product orders there. I would say maybe ideally 70/ 30, but there will be a high end of the cycle where we see more capital order intake and revenue coming in as well. Pumps, which is a more steady business, of course, there's variation in the pumps as well.
Now it's around 25/ 75. That's more steady because the fluctuation in the capital business is less in pumps. That's why I say that if you create a similar picture that as in the pumps, put product and service together, even though they're running it as two different businesses, 70/ 30 would be optimal, but you will see times when order intake and revenue for products will be higher.
That's very helpful. Secondly, you mentioned now, Mikko, that you expect to see an improvement in the market. I think first in the call, you said second half 2026, and then you said late 2026, something like that. Is there any, how could you say, tangible evidence that that sort of allows you to now put, yeah, maybe a little bit more precise timing on it than it's been before? I think until now, it's been a lot that you saw things happening, but you couldn't really say when it would pick up. Now at least you're saying, you know, a year from now. Has something happened or is it discussions have become more precise or tangible with customers?
Typically, what happens, why we see, let's say, maybe nine months ahead more or six months, because then the EPCMs, they've done three quarters of the cases, EPCMs are running the process of expansion. They are kind of fronting suppliers together with the customer. Typically, we've been working with the EPCMs, specifying, doing engineering for the process line and so forth. We've given buzz story prices for the kind of flow sheet and the products. Typically, EPCMs are waiting for customers to sanction the project. Once their board will sanction it, typically, suppliers give final prices because we don't know the cost base today, what it is in one year's time. Therefore, typically, once it's sanctioned, they come back to suppliers, say, now you need to quote firm prices for all of this equipment. There's a kind of commercial and technical selection process.
Typically, that would mean that if you were given now the firm prices, then we are hoping to get some decisions by the customer six, nine months later. There are not so many cases yet which would ask for the firm prices. They are still stuck in the previous phase that plans are done based on buzz story prices. In many cases, customers who could have decided already technically this year, it's quite clear some of those cases will be decided next year. It's really, I would say, this boardroom dynamics of the mining companies when they will release those projects. Sorry not to be more specific, but if we would be in the kind of bidding phase of many of these, final bidding phase of many of the cases, I would say it's imminent, but I think it's still a little bit more further out.
Okay, they're in the sanctioning process still.
Yeah, of course, there's something always moving. We got the India orders for HPGRs and vertical massages. What I'm thinking about, volume of activity is still low in relative terms. If I look, for example, three years ago, 2022 was kind of a mini peak in our business. Since 2022, it has been declining up to this point. I think it stays at the low point also in 2026.
All right, that's very helpful to understand the process. Thanks. My last question, you've previously expressed your appetite to do M&A and basically grow the company to have a larger size. Obviously, you still have left with a strong balance sheet, and you'll also get money from the sale of the headquarter next year. Any comments on those processes, when we could or should expect announcements from the M&A scene of larger sizes, obviously?
Thank you for that, Casper. There's nothing imminent on that. We have a shortlist that we are working with, working on, but there's nothing imminent. That's where that is. We have allocated resources. We're starting to spend a lot more time on this now, but it's not forthcoming within the next month or so.
All righty, thanks a lot.
The next question comes from Kristian Tornøe with SEB. Please go ahead.
Yes, thank you. If I can just pick up on your commentary, Mikko, on the market recovery by the end of next year. Just curious, sort of the increased customer hesitations you've seen here in Q2, you're not concerned that that will continue and postpone the recovery further out?
Actually, I'm not concerned because of our business model, meaning that if you look at what we spoke in the beginning of my presentation, that Pumps, Cyclones & Valves business, because there's so much brownfield conversions, and which is more like a customer's point of view, is more OpEx business than CapEx business, that activity is good. Also, our business model that we are reducing our SG&A, leaning out the company so that we can ride with a kind of well across different cycles. I'm hoping that it will come back. It will make life easier. It will make everything better. I'm not concerned because of our business model. We are not dependent on volume at all. We continue to improve our profitability regardless of whether the capital market is active or not.
That's why I like the model of what we have, that we focus on the products with a high aftermarket potential. At the same time, our fixed cost in the corporate center and support functions are and will be extremely lean. Also, now we are kind of reorganizing the Product business so that it can sustain different phases of cycles. I'm actually not concerned because as a company, that's why I used a monetary comparison in the beginning that we should do well over the cycles and we are not volume dependent. When volume will come back, of course, then if you have a lean cost base, then you're a little bit riding on the wave when the volume will come back.
Okay, that's quite clear. I assume that you are right that the product demand will improve towards the end of next year. Is it unrealistic that your Product division can reach break-even by 2027?
We are not guiding on that one, but I'm expecting that we will be in the future profitable over the cycle. As you see that now the loss making 10% is actually, we have a fixed cost of volume issue. It's not a product margin issue what we have. Order intake, what we get in, we get with a decent margin. It's more the fixed cost that is too high at the moment.
Okay. That actually leads into my last question because we cannot see the gross margin on your newest segment here. Can you give any sort of indications on where the levels are so we can sort of get the mixed effects thought into?
Christian, thank you for that one. We will not do that. I think you will not be surprised to hear that it somewhat follows the EPC margin, right? We are not going to give granularity on this for now.
Understood. Thank you. That was all for me.
Thanks.
The next question is from William Mackie of Kepler Cheuvreux. Please go ahead.
Yeah, good morning. Happy birthday. Thanks very much for taking the time. I'd just like to come back firstly conceptually to the margins. You've talked about the operating margin in Product being positive through the cycle, and you've given a structure to the mid-term margin potential, I think, for PCV, which you talked about 24 %- 25%. Can you just round that off with conceptually where you would expect the Service margin to trend mid-term, or at least to touch on each of those areas? That's the first question. The second is relating to your simplification of the business. You've talked about the SG&A having reduced significantly, but can you just describe or provide some more color on where you are on that journey, where we should ultimately see the SG&A come down to?
To that extent, or the enablers for that, will the transformation costs continue into 2026 now if we think about the additional restructuring? Thank you.
Maybe I start and then Roland will cover the SG&A bit. When I was saying that if I look at the Pumps, Cyclones & Valves spaces, and then remember that there's now more granularity than before, it means that there's a little bit more variation than before between the quarters, depending on the mix and a few other items. I would say that 24%, 25% is sustainable in Pumps, Cyclones & Valves. That's just inherently what you should do in that business. I think if you don't, then you have a kind of other challenges. Service, I would expect it to be stable around 20%. One reason is that we focus on growth. Different categories have different margin profiles. Of course, spare parts being highest, and consumables is kind of tricky because some areas of consumables is high margin, some is really low.
We are very selective where we, what business we do there because we don't want to enter into metallic mill lining, which is really bad business. We need to kind of pick and choose carefully what we do in consumables as we are doing. I would say it's stable. We don't guide, but I would say stable 20%, and hopefully we can then focus on the growth. In Product, we will push through the transformational activities in terms of how we operate, fixed cost base, and that. I don't know exactly where we end up, but of course, when we get volume, it will help us. We also have a fixed cost issue in that area.
We don't guide, but of course, you would like to be on the kind of at the low end of the cycle, close to around break-even, and when you get the volume push for the positive territory. We discussed in some of the previous calls about order intake margin, and in Product business, it has been stable. Order intake margin is not an issue. It's basically the fixed cost and lack of volume. You have SG&A, Roland.
I think there was a question to SG&A. The SG&A cost out and us converting to the new operating model with a lot of our transactional business with the global business centers will continue for three, maybe four quarters more. We also have a bit of a stranded cost from when cement leaves the company, hopefully during the second half year. That means there'll be more work to do at least until summer next year. Hopefully, famous last words, but hopefully we are about to be done by the end of 2026. Whether we will have callouts of adjustment as extraordinary costs, transformational costs next year, we've not decided yet. If we will, we will still be able to deliver the 13 %- 15% reported margin as we have promised. If they are there, that just means that the adjusted margin will be equally higher.
How we operate internally is that we have really ambitious targets for different areas like fixed cost. Typically, let's say that you make 78%, 80% of that stretch target. That's why we don't want to commit to a certain number in fixed cost, but we have aggressive targets. We rather tell you about progress, what we are able to kind of achieve rather than kind of blue sky, high sky kind of promises. We have aggressive targets, and hopefully we can report continued progress in that area.
Thank you. Two quick follow-ups, if I may. The first one relates to tax. You have a substantial deferred tax asset, which you're carrying on the asset side of the balance sheet. Any sort of color on utilization levels and perhaps more longer term as you move towards the simplified corporate structure? What is the pathway to reducing your tax or optimizing your tax to perhaps a lower, much lower target level? The second relates perhaps to capital allocation. I heard what you said. You just started looking, but can you give us a little flavor of the sort of areas that you might prioritize as you start the hunt? Thank you.
Yeah, thank you for that. As you may recall, we've been talking about moving into a so-called principal company model. We are in the process of doing that. That means that a lot of the core decisions will be made from the principal. In this case, the principal will be Denmark. Most of the deferred tax assets sit in Denmark. That means as we progress and move the core decisions and the core transactions via the principal in Denmark, more and more of that tax asset will be utilized. It's clearly the expectation that we can utilize it. The timing in terms of one, two, three, or four years is a bit more uncertain. That depends on how fast we can do it, but that will definitely be utilized.
It will also be a trigger for us bringing our effective tax rate below 30% after 2026, as we have indicated, we will do. With regards to our tax or cash or capital allocation policy, we continue to pay out in dividend 50% of our net profits. We will look at the M&A track or options that we have near to midterm and sort of keep some dry powder. If there's anything in excess, we will move to share buyback as we have done this year. We think we have the cash either available or expectedly generating it from the cash flow from operations that continuously improve as we move forward. We are currently executing a share buyback program, and there's also more debt capacity in our balance sheet, as you can see. That is the thinking on the capital allocation.
Thank you very much. Enjoy the cake.
Thanks.
The next question is from Nick Housden of RBC. Please go ahead.
Yes, hi everyone. Happy birthday, Mikko. My first question is on PCV margin. You've mentioned that 24 %- 25% steady state. That is quite a bit higher than what we see at your big competitor here. I'm certainly not asking you to comment on the competitive cost structure, but are there any structural differences between the two businesses that you can identify that might explain at least some of that margin difference?
Of course, I cannot comment on the competition and peer group, but basically, our structure delivers that in a sustainable manner over the cycles. If you look a little bit back, the EBITDA profile that is in the deck, you've seen it being also above 25%. In the past, maybe our cost allocation in the corporate is less accurate because we restated the numbers for the past quarters, but it has been at the higher level with us. I think at least our structure delivers that. I don't say easy. I never say easy, but I think it's sustainable 25%. I think it's what we can do. Because it's sustainable 25%, it can go up or down a bit because of the mix. Therefore, we can focus on growth rather than in some other areas where we have a margin and EBITDA issue.
The focus is all in for growing and supporting our customers.
Great. My second one, it's just a follow-up on the tax allocation regarding CapEx because at DKK 145 million in Q2, that looked like quite a high level. I was just wondering if you could talk about that and maybe some of the expectations there going forward.
Yeah, we thought about that. We have a bit of carry in CapEx, but the intention is that CapEx should be around 2% of revenue in peaks 3%. 2% is sort of the goal, but 2% - 3% of revenue you can count on.
Understood. Thank you very much.
The next question is from Xin W ang of Barclays. Please go ahead.
Hi, there. Thank you for taking my question. I want to have two very quick follow-ups. The first one is I want to know if Q2 is a clean quarter or if there's any special items that help margins. For example, did you have any provision release?
Yeah, I think thank you for that. It's a clean quarter. It's a clean quarter. The gross margin is held up by mix. Relatively low revenue level in the Product business line, and the -1 0% in the Product business line is a volume and a little bit of cost structure thing. There's no special items at all, actually.
Okay, good to hear. Maybe a follow-up on that is obviously you made lots of provisions over the past two years. Can you maybe remind us of the expected utilization and associated cash outflow for the remainder of the year again?
Yeah. As you see now, of course, a few of them have left with cement. We have spent some of the restructuring bucket, so that has come down as well. The so-called other provision, which is the bucket that's a little uncertain, has come down to about DKK 1 billion now. That bucket is a bucket of stuff that can take two, three, four years. We just last quarter had a settlement from 2011. It's very unpredictable to say when that turns to cash. It will rather be longer than shorter. What we say for your cash planning purposes to be safe, assume that it is cut in half over three years.
That's very clear. Thanks very much. Maybe very quickly, with cement now gone, how should we think about a new sustainable net working capital ratio?
Yeah, that's a really good question. This quarter we are at 12%. I'm not going to give you a new long-term guidance, but I would expect that it should not go above 15% for the remainder of this year. The networking capital in this quarter is a little bit with tailwind from currency. The dollar and also the Chilean peso and so on may bounce back a bit. We also had a few good collections this quarter and so on. All in all, it shouldn't go back to more than 15% plus minus. That's the indication for the remainder of the year.
Okay, that's very clear. Thank you very much.
The next question is from Klaus Kehl of Nykredit. Please go ahead.
Yeah, hello, Klaus Kehl from Nykredit. Most of the interesting questions have already been asked, so I will ask some of the boring questions. If we start with your cash flow, then I noticed a pretty solid cash flow here in the quarter and also actually in the first half of the year, and especially before taxes paid. Could you update us on your thoughts about the cash flow for the full year? That would be my first question.
Yeah, we guided for the full year that operational cash flow would be more than last year, which was a bit more than DKK 600 million, but not more than DKK 1 billion. That target still stands. We will expect for the full year to generate an operational cash flow between DKK 600 million and DKK 1 billion.
To be clear, when you say that, is that including or excluding taxes paid?
That's cash flow from operations with us is after taxes paid.
Okay, great. That's very helpful. Yes. Obviously, there's a lot of one-offs in this quarter due to the deconsolidation of cement. That's fair enough. How should we think about one-offs related to the cement divestment going forward? Should we expect further one-offs or, yeah, any thoughts on this? Obviously, I'm asking about the big picture. I'm not asking whether it will be DKK ± 10 million in the next quarter, but big picture.
Okay, thank you for clarifying that, Klaus. You would not expect anything else because the way it works is that you do an impairment test and then you dump the whole thing, pardon my French, in Q2. Depending on when there is closing, there will be closing adjustments and a little bit back and forth here and there. If that takes five months, there may be a bit more adjustments. If it closes next month, we are close to where we should be. The majority of the adjustments that need to be done below the line under discontinued operations have been done. May I just remind you that the impairment charges are a non-cash item?
I know that. Could they, in any circumstance, become a positive one-off in the second half of the year?
Yeah, they could go both ways. They could go both ways.
I wouldn't count on that.
Excellent. Thank you very much.
Welcome.
The next question is from Lorenzo Di Patrizi of Bank of America. Please go ahead.
Hello. I think this is a mistake because the questions that I had to ask have already been asked. Thank you anyways and happy birthday.
Okay, thanks for that.
This was the last question. Yes, please.
I was about to start closing, but I think you were about to say the same thing. I'd like to thank the callers and the questions. I think it's an exciting time for us because we give you more transparency to the business than ever before. I think we like that transparency. It creates a performance pressure for us, but I think it also makes the dialogue more fruitful between you and us. We continue to execute the strategy, what we have. In the capital market, we'll detail how we're going to grow the business in the coming years. Thanks very much for your.