Welcome to the presentation of the annual report and Q4 results. I'm presenting here together with Roland, and we go through the highlights of the quarter and of the year. Bearing in mind the small print in the photo regarding forward-looking statements. The Q4 is evidence of relentless execution of strategy what we decided. The evidence there is that we are moving forward, and we don't look sideways. We have full conviction for the strategy that we decided. In mining, it has been a good year. Significant growth in revenues, in particular in service. Our full year EBITDA margin adjusted is 10.6%, which I'm happy about. We are looking at additional cost synergies that we communicate to the market, and we have a good plan to take those costs out during this year.
There was some concern about order intake for the quarter four for mining, and if you look at the quarter four for mining and order intake, you need to bear in mind that when we talk about organic comparison point of year quarter four and talk about 5% order growth, last year quarter four, we still took business from Russia. Russia is out. We still took business for Non-Core part of the business, and that is out. The Russia is out, NCA is out, and taking that into account, the order intake growth quarter-on-quarter would have been between 10 and 15. I'm actually really pleased about that one. The big achievement for cement in the quarter is that the profitability looks really promising, and it's further evidence that profitability over volume works for cement.
We are able to increase profits both in DKK terms and in % terms. Sustainability, we are improving all our ratings, it's going well, and also the KPIs are developing over time, trend-wise, the right direction. It's all about execution as we communicated in the Capital Markets Day. Key highlights for the sustainability, MissionZero. There's only one negative KPI development in the quarter, and that has to do with the increased activity level in our own operations post-COVID. Everything else is developing to good direction. Also in these KPIs, the trend is the most important and the rest relevant quarter-on-quarter. We are happy about development all in all. Mining order intake is very significant in my opinion in Q4. Last year, we took orders, as I said earlier, from Russia.
We took orders for NCA part of the business, and that is out. We still were able to increase profit growth 5%. Positive impact of course is from acquisition of Thyssenkrupp Mining, which is contributing to the order intake number. Revenue, another significant milestone for us. We're really happy about revenue growth, especially in service part of the business. If you look at 45% growth in service revenue, it is very significant. It also further evidence that our supply chain works, our supply chain for wares and spares functions well. At the same time, we are reducing our business in basic labor services, both in order intake and revenue, and therefore really happy about the service number in particular. The service is about 60% of the revenue.
The adjusted EBITDA for the quarter in mining is particularly high. It's 12.4%, and understanding that there's also underlying loss-making Thyssenkrupp Mining, loss-making Mining Technologies business still in the books, which is diluting the profitability. Underlying, FLSmidth legacy business is performing really well. There are also technical reasons why the EBITDA margin is very high for the quarter, and Roland will come back to that one. This is not indication of the run rate yet. That is important to bear in mind. Extremely good quarter, but it's not a run rate for the, for the business yet. It's evidence that execution works. We see light at the end of the tunnel. It shows where we can go into in two or three years of time.
Cement revenue declined, order intake declined 20%, and that has to do more with the capital business. The Capital business, we've been very selective about product orders that we take in. We will not take any orders that generate no EBITDA profit for the capital business, so very selective there. We've been de-risking cement business, looking at risks and profitability on the capital business. Service business has been performing well, at the same level compared to the comparison quarter, but small decline on the previous quarter three. We are going through in cement full transformation to become more service-centric and more profit-centric operation compared to the past. We've done major transformation during the quarter four.
On back of that, I'm happy that we were able to have a decent order intake for the service. Why do I say it works is actually evident here. If you look at Q4 2021 and Q4 2022, you can see doubling of the EBITDA in terms of DKK, and of course, similar uplift in the EBITDA %. It shows that the profitability of volume works, and we are able to grow the bottom line even with a small revenue. This is a full transformation of the cement. During the Q4, we also took out the layers of management in cement, and the new team is really energized to grow the service business. This is evidence that it works, and it's great foundation to start 2023 for cement.
In Non-Core Activities, everything's going according to plan. We've gone through the backlog in detail. We have a good visibility, good understanding of the projects in the backlog, risks, current situation, and estimated execution of those over the next couple of years. There's still some order intake for the segment from existing customers, from contracts that we need to honor, so we've been supporting our customers while we're exiting the business. That number will come down fast, we don't expect too much order intake this year for the wears and spares. We are diverting customers to alternative suppliers. No surprises there. The estimated cost of the exit, estimated speed is as planned, there has been no surprises there. I'll hand over to Roland for the more details of the financial performance.
Thank you for that, Mikko. Looking at the consolidated financial performance for Q4 2022, an order intake of DKK 6 billion on group level, revenue of DKK 6.5 billion, and when we adjust for integration cost for integrating TK and costs related to exit of Russia, an adjusted EBITDA of 3.2%. Clearing financials, tax true-up and a few other things, then a net loss for the quarter of DKK 67 million. If we look at our gross margin for Q4 2022, it's significantly impacted by a non-recurring exit cost in Non-Core Activities of DKK 270 million.
If you look at the right-hand side, both mining, but in particular cement, is moving their gross profit forward, the negative cost of a one-off nature in Non-Core is pulling the group gross profit down by a bit more than 4% to 19.9%. If you look at our SG&A cost, SG&A cost is also up. This is now a full quarter where we have included ex- TK. Also, the SG&A cost here have elements of integration costs from integrating TK and exit cost from our last finalization of the full exit of our activities in Russia. SG&A ratio of 18.2%.
If you look at the group's EBITDA margin, it's admittedly some of some moving parts and most of that is of non-recurring nature. We have tried to illustrate that on the bridge on the right-hand side. If we start with the group's reported EBITDA margin Q4 2021, there was a little bit of acquisition cost from TK, and that meant that the Q4 2021 EBITDA margin adjusted was 7.3%. Since then, we have grown organically, and we have added TK, and that adds 4.5% from revenue increase. The Non-Core Activities exit cost cost us 4% or a bit more on the quarterly margin, and we have also included Mining Technologies now fully in the company.
That cost us 3% on the margin base. With a few other elements of minus 1.5%, we end Q4 2022 in 3.2% as an adjusted group EBITDA margin. When we then deduct integration costs of integrating TK and also exit costs from exiting our Russia activities, the group's reported EBITDA margin for Q4 come in at around zero. If we look at our net working capital, we steered our inventories firmly during Q4 2022, and also collected well on our trade receivables. That all meant that we improved our net working capital with almost DKK 300 million. It also means we, in nominal terms, bring, of course, our net working capital down, but also our net working capital ratio sits at 7.8%.
If we look at our cash flow, a improvement in net working capital, but also a strong cash flow from operations leads to a CFFO for the group of DKK 776 million. Investments of DKK 116, we had a free cash flow for the group of DKK 660 million for Q4. On the next slide, we see we have spent most of that reducing our debt. That also means that our leverage ratio coming out of the year is down to 0.6x and well within our capital structure target of staying below 2.0x. That just summing it up, full year 2022, fully in line with our guidance. The group ends with a revenue of DKK 21.8 billion.
Our service share is moving up to 59%, up 2 percentage point compared to previous year. This is exactly the direction we want. An adjusted EBITDA margin of 6.4% for the year and a reported EBITDA margin of 4.3%. Our financial guidance for 2023 fully in line with what we talked about at the Capital Markets Day a month ago. Our mining business is now a clean, continuing business, clean for or most of the adjustments we saw in 2022. Mining will turn over DKK 16 billion-DKK 17 billion, and we will have an adjusted EBITDA margin of 9%-10%.
What we adjust for here is DKK 550 million that is set aside to take out the remaining synergies from the TK integration by the end of this year. Also, it's worth noting that in this guidance here, TK includes around 2% dilution for 2023 in mining. Our cement business will have a flat 2023, DKK 6 billion-DKK 6.5 billion in revenue. We will continue in cement to improve our EBITDA margin to 4%-5% reported for the year. Our Non-Core Activities will turn over DKK 800 million-DKK 1 billion in line with our plans and lose about DKK 250 million-DKK 350 million .
As Mikko stated here, we still expect that the total wind down from we started the Non-Core Activities in Q4 2022 until we are done in the end of 2025, we'll lose accumulated DKK 1.2 billion. There's no change to that, so in terms of that, we are in line with our plans. This means for 2023 that the group will turn over DKK 23 billion-DKK 24.5 billion in top line. Revenue adjusted EBITDA will be 6%-7%, and our EBITDA margin reported will be 4%-5%. On the Capital Markets Day a month ago, we launched our new financial targets. Our CORE 2026 strategy in mining will lead us to a full year 2026 result of 13%-15% reported EBITDA margin in mining.
Likewise, in cement, a reported EBITDA margin of some 8% is expected in cement for the full year 2026. We also announced our capital structure targets. We'll keep our financial leverage between 2x. We came out of 2022 at 0.6x, well below that target. We will continue to pay our dividend to 50% of our net profit. We do that also in 2022, where we have proposed a dividend of DKK 3 per share, approximately 50% of our net profit. That remains for the AGM to approve later this year in March. We will also allocate capital to selective M&A opportunities to support our sustainability journey and to further strengthen our service business and selective areas of our product business.
As and when expectedly our cash generation increase during 2024, 2025 into 2026, we may also decide to pay out extraordinary dividends in terms of jumbo dividends or structures like share buyback programs. With that, I'll give it back to Mikko.
Thanks, Roland. As we said in the Capital Markets Day, it's all about execution, a relentless execution, and we have full conviction as management and extended management to deliver the plan, both in mining and cement, and we have a line of sight for all our commitments for the guidance that we gave in Capital Markets Day. It's all about execution. It's full on. We continue as presented, and also quarter four is evidence that what we are doing actually we walk the talk. We go to the Q&A, please.
At this time, if you would like to ask a question, please press star and one on your touchtone phone. Again, that is star and one if you would like to ask a question. You can remove yourself from the queue at any time by pressing the pound key. We'll go first to Christian Hinderaker with Goldman Sachs. Your line is open.
Yes, good morning, everyone, and thanks for the opportunity to ask the questions. Firstly, I just wanted to ask about the commercial strategy within minerals, in particular, you know, it's been well flagged that you've got ambitions here to move up the value chain in terms of product mix and also concentrate efforts on service. There's obviously been good progress in terms of raising that service penetration to north of 60%. I just wonder if you could elaborate on what's driving that shift and also how we should think about pricing and competitive positioning more broadly, given what seems to be a concentration of efforts on service and on moving up the value chain across both FLS and your peers. I'll come on to the second one.
If I start from the for the product side of the business, we've done, as presented in the Capital Market Day, full analysis of the portfolio. Basically, we want to be where we play today is concentrate the plant and then in-pit crushing and conveying. Our absolute target is that we are market number one or two in each of the core products what we have. We have certain growth areas that we feel that we can do still much better in terms of growth, like pumps and pumps, where we are market number two or three, but then we have a kind of market-leading product. There are areas we can improve.
We feel that this kind of product technology-centric approach is better than having lots of empty kind of revenue, kind of bad quality earnings. If we stick with this technology and product scope, that will result in better order in the quality, both in terms of profitability, but also risk. We've been moving away from extended scope in the project, steel structures, this and that, what you do above and beyond technology and product. That seems to be working for us well.
In service, we are moving away from cost-plus pricing, and in service, we can do much more with value-based pricing because we add lots of value to customers with our offering and our solutions in service space. We are moving away from kind of doing cost-plus pricing, and I think that will give us some room to maneuver when it's more based on the value what we provide to the customer. I think there's still room to improve in pricing.
Also that, we at the same time going through the install base with a kind of, finer detail just to make sure that we cover all our full install base, that we don't have any kind of, blind spots in any customers or markets that we don't cover our existing install base with our services. We have a huge install base if I look at FLS and Thyssenkrupp Mining combined.
Thank you, Mikko. Maybe now just turning to M&A. You talked about selective M&A opportunities. Be grateful for a little bit more color there. I guess there seems to be quite a good level of headroom versus your two times net debt threshold. Obviously, at the same time, you said the broadest product offering in the market and the TK integration is ongoing. I just wonder how we should think about that in terms of scale, product areas, and so forth. Thanks.
Regarding acquisitions, I think what we are looking this year is more bolt-on acquisitions and to strengthen our capabilities, especially in service. We've done some organic CapEx as well, investing to Mill Liner factory in Chile. Of course, we are also looking at smaller companies that we can acquire and then add to our competence base. Area to watch is consumables and wear space because there our market is still far too small in our liking. Of course, we keep our eyes open also for if we have any product companies that might add either to our technology scope or then improve our markets in the areas that we are not strong enough, in our opinion.
Adding a product might the driver might be the kind of market access or install base or then piece of technology. Technology, we are happy with our portfolio, so it'll be more market adding kind of acquisitions. What we are now looking at for Roland is kind of small, medium-sized. We are not having any eyes on any massive, big acquisitions in 2023. Beyond 2023, we might look at more kind of a significant transformation acquisition as well.
Thanks, Mikko.
We'll take our next question from Lars Topholm with Carnegie. Your line is open.
Yes, congrats with a good Q4. For a couple of questions from my side, it's basically about how we should go from earnings to cashflow in 2023. First of all, I wonder if you can give some color on where you see network and capital going. Secondly, which level of CapEx do you see? Thirdly, I can see that you have quite a big increase in provisions, and I can see you have DKK 1.6 billion of current provisions, suggesting they will come into play within the next 12 months. Just wonder the EBITDA guidance you are giving for 2023, does that include a very significant level of provision reversals, and what is that level? Thank you.
Yeah. Thank you. Thank you for that, Lars. With regards to cashflow, we will... And, you know, the 7.8% out of Q4 I think was a good one. We would expect the networking capital to start drifting up against the 10-11% against during 2023. On the investment level, you know, it's a good proxy to apply 2% of our revenue. That's approximately what we expect to do in investment level. Now, provision is admittedly a moving, a bunch of moving parts in Q4. We have included TK in the provisions, and we have also made a number of provisions.
Here under the DKK 270 million in NCA, we have provided for some of the synergy takes out in mining and also a certain of the delayering that cement is currently undertaking. That means that some of those provisions will run off and become cash in 2023, some of those will hopefully be reversed or, you know, just used as part of the guidance. The DKK 1.6 you can clearly not assume will turn into cash. That's not gonna happen. The DKK 270 million in NCA will turn most likely into cash over the next two years.
There will be certain elements of the mining provisions also, maybe a couple of hundreds, that will turn into cash next year. That should be about it. You'll take your piece of guidance, reduce it with, you know, some hundred of millions in provisions, your CapEx, assume the same level in taxes, and then you're close to a cashflow forecast.
Fantastic, Roland. Very clear answer. Thank you very much.
Once again, if you would like to ask a question, please press star and one on your touch tone phone. We'll go next to Nick Housden with RBC Capital Markets. Your line is open.
Yes. Hi. Thank you for taking my questions. My first one is on the Non-Core Activities. I was just wondering if you could give us some indication about the assets on your balance sheet that are related to these activities. Just thinking about how, you know, return on capital employed will develop in the next few years. Obviously, you know, the CMD, you spoke a lot about the trajectory for profitability for the group, but I'm just curious about how the capital employed is going to evolve over the same timeframe. Yeah, any comments there would be helpful. Thanks.
On the Non-Core Activities, as you saw, we had a significant negative gross profit for the Q4, that means that we provided for the DKK 270. We have also provided a few loss-making contracts where we have accrued the entire loss already upfront. That means that will then turn to cash over, as I explained to Carnegie before, that will turn to cash over the next couple of years towards the end of 2025. That will run off the balance sheet. What you have then left on the balance sheet, obviously we have some DKK 6 billion in goodwill.
We have, trade receivables and net working capital that you could estimate, you know, between, going upwards from here as we become more of a service company, so 12%-15% net working capital, and then do your return on capital employed on that. We, we have taken the capital employed or return on capital employed out as a, as a core, KPI in our long-term target as we carry a lot of goodwill, and we think a lot of the value here is now improving our EBITDA margin as we move forward. That is our focus internally over the next 2-3 years. I don't know if that was meaningful.
Right. That's very helpful. Thank you. On the mining service business, could you maybe just explain, you know, the trends that you're seeing there? We've seen a bit of a deceleration from a very strong level in Q3 to, you know, what looks like still an okay level in Q4, but, you know, obviously not quite as good. Any kind of explanation around that and, you know, the kinds of conversations that you're having with customers, about the sort of level of service that they are looking for, and yeah, just any commentary there would be helpful. Thank you.
On quarter three, there was some exceptional order intake also in the service space, and sometimes in service, what we call capital spares is like a non-annually recurring parts.
We have a couple of big orders then for those, which might be significant part of the mill, for example, that you replace every 10 years. We have a couple of those, which is kind of a non-annual recurring part of the business. I think it's just timing of those. We got a couple of good ones in South America for that. I think quarter four is actually good for the service, but I would say that's more the level that this we look to grow. I think quarter three was a bit odd one out in terms of high order intake.
On annual basis, we still feel that we can grow the service year-on-year between 2022 and 2023. There will be a mix impact that we highlighted in the Capital Markets Day. We are exiting some large labor services contracts basically as they expire. And that will have some impact on the top line. We want to compensate that impact on top line with the growing space and ware. Over time, within the service, the mix is getting better because we don't feel that labor service is low-level labor service is value-adding for us. It's not value-adding for customer or us to do it. We focus on the kind of high end of the services.
That will have a positive impact on the, on the bottom line, slightly negative impact on the top line. It's not an overnight process because we have those contracts in the backlog. It's over the next one or two years, we out of those service contracts.
That's really clear. Thank you very much.
We'll take our next question from Roy Smith with UBS. Your line is open.
Good morning, gentlemen. Thank you for taking my question. It's Roy Smith from UBS. Apologies if you answered this in the preamble. I missed start of the call. Talking about mining order intake in Q4, the split between service orders and capital orders at 55%, 45% respectively. What was that on an organic basis, please? If there's any difference across regions or commodities in order intake in Q4, if there's anything notable to call out there, I'd be appreciative of any color you could give on that as well. Thank you.
So we don't actually give exactly the slit on organic basis . But the strong market for the order intake has been South America, North America and Central Asia being [inaudible] . I think we have announced significant product a bundle of order from there. So, basicly we expect those markets to continue to be active. South America, Central Asia been the most active markets from the investment point of view. But, we don't give out the split between sales and capital on organic basis.
Understood. Thanks very much. Cheers.
As a reminder, that is star and one for your questions. We'll go next to Tomi Railo with DNB. Your line is open.
Hi, Mikko and Roland. This is Tomi from DNB. Just a question on the legacy mining capital orders. This is now the Q2 in a row where the unannounced order level is, let's say, roughly DKK 500 million-600 million. You mentioned that the comparison includes Russia and Non-Core Activities. To what extent does this reflect your own decision, being selective on orders? If you could comment if this level is sort of a fair assumption for 2023 the quarter?
The plant instrument in quarter-to-quarter comparison is that we are out of Russia, we are out of NCA in terms of. Even within the kind of core business, we've been much more selective with some of the orders. We have a risk quota, as we've explained in the past, so that we have risk category from one to five, kind of, with our definition.
Then we say that we are looking at order intake and then how it turns into revenue, that scope four to five, which is riskier either in terms. It can be customer risk, country risk or scope risk or product risk, so that it cannot exceed certain percentages of the revenues in 2023 and 2024. Then, and we're actually selective. We've have declined some orders because we felt that it's empty revenue, meaning that the risk was quite high profitability low. As a company, we don't want to have empty revenue. We've have declined some cases, but I don't have the quantification of that one, how much.
We are still able to grow, but, we are much more selective.
Okay. Thank you.
We'll take our next question from Claus Almer with Nordea. Your line is open.
Thank you. Also a few questions from my side, and I will take them one by one. The first question goes to cost inflation or deflation and the whole pricing environment. Maybe you give an update on this both within the mining and the cement division. That would be the first one.
If I look at, there's no cost deflation, there's a cost inflation, it's broad-based inflation. We haven't found any index that could explain the inflation. If you pick up steel price, if you pick up any individual index, it's not explaining our kind of inflation in our cost base, it's broad-based. We assume that inflation continues still both in mining and cement. If I think about organizational inflation, meaning meaning people cost. If I think about the product cost, we believe that the product cost in terms of a kind of a P&L continues to go up. Product cost is of course, it's material, it's engineering, it's transportation, logistics, it's all inclusive, the product cost.
We are expecting that to continue going up and we continue to price above inflation both in product and service business. We are able to mitigate that one. We don't expect deflation in our cost base. There might be deflation in one index or KPI, but that will not explain. That is not big enough to kind of bring down the only overall inflation in our cost base.
Okay. Just to be sure, because did you say that you are pricing above, inflation rates?
At least, meeting. Depending on the product, but basically, we are able to guarantee that there's no reduction in product margins in any of our offering in capital or service. we are able to.
Yes.
Able to mitigate that impact of that one. Of course, different product, different parts have a slightly different dynamics. All in all, if you look at the component level, we are able to mitigate impact of the inflation.
Okay, that sounds good. My second question goes to the Non-Core business and this DKK 209 million order intake. First of all, why did you take this order, and does that also come with your normal very high loss-making margin?
Thank you for that, Claus. Some of these orders, we have a contractual obligation to do variation, support our customers, and so on. There's an element of us having to do it. You know, we are also supporting the customers on the way, we can't just pull the plug from one day to another. There's an element of being, you know, we have to do it and then supporting the customers. We are not doing them loss-making. We are not making them loss-making. That's one thing. Second thing is, as Mikko Keto said, over the course of time, this will decline swiftly as we move forward over the next quarters.
As I remember the CMD, it was mentioned that you hadn't taken in any orders in this types of projects for the last nine months. I might recall this incorrectly.
No. The way we said it, we introduced in our legacy business, we introduced a so-called Risk Management Board back in March. Since then, we have not taken any new project orders in. That's what we said. We, you know, we are running off our existing backlog, we are getting TK on board. We are taking in, you know, small variation orders and in out spare requests to support the customers. That's how it was meant to be said at least.
We had restrictions earlier in place for FLSmidth part of the NCA portfolio, and of course, we could only introduce those after we completed the second group acquisition. We can't of course impose restrictions for third-party company.
Okay, that makes sense. Just a small follow-up. The TK Mining part of the business, so what's your updated view on the backlog and your possible liabilities, and how is employees taking the new strategy?
Yeah. Maybe I can start. As we discussed, there's a number of moving parts and provisions and so on, right? We have spent a lot of time now in Q4 being through the backlog, both on the NCA side and also on the continuing business. To the best of our belief, everything is now provided for in the PPA or opening balance with regards to projects in the TK backlog.
Your question regarding employees, I think the same medicine what we've used for FLSmidth now a bit longer. It takes a bit of time to have a culture that you think about the profitability over the volume. We started that transformation a bit earlier in FLSmidth, and then on day one we started same transformation with the ex-TK employees. Of course, transformation is not easy, but regardless, we do it and I think, yeah. It's a kind of difficult medicine for some, but it's we still do it.
Okay. Thank you so much. That was all for me.
Once again, that is star and one for your questions. We will pause to allow any further questions to queue. It does appear that we have no further questions at this time. I'd like to turn the program back to our speakers for any additional or closing remarks.
Thanks very much for your time and questions and your support for the transformation of FLSmidth. As you can see, we are well on our way and we have a line of sight for our long-term targets. There might be bumps on the road, but as you see commitment of myself, Roland, and the rest of the executive team, we are full on with this transformation and we will not look left, we will not look right. We just we execute what we agreed. Thanks very much for your time and questions.