Good morning, everybody. I would like to welcome you to FLSmidth, Q1 2023 Investor Presentation. Together with me, I'm joined by Roland Andersen, our Group CFO. The usual forward-looking statement, caveats are on the screen now. The highlight of the Q1 was that we have a excellent start on our transformation journey. Mining EBITDA was 9.6% adjusted, and also that, take into account that, there's underlying dilution from Mining Technologies part of the portfolio, 2 percentage points. Adjusted EBITDA, 9.6%, and without TK, 2 percentage points higher. It's good start for the year. Order intake growth was solid, 50%, supported by volume that we acquired from Mining Technologies. Revenue was especially good for the quarter. We are progressing well with our transformation journey, also regarding synergy takeout.
We are slightly ahead of the plan, and we reduced about 800 full-time employees in mining, and also as a part of the cement transformation journey, about 500 from cement. Moving on to cement. The cement order intake mix starts to be pretty good, so it's 60% services and 40% products and capital. Profitability is at our target level of 4.3. In cement, also everything is going according to plan. Transformation has started. It's full on this year, and out of this transformation, we will come leading mining technology and service company, and cement will be green cement technology and service company. Our company will look very different for what it was, some time back.
One of the significant achievements in restructuring has been reduction of the NCA backlog. That reduction has been mainly achieved by negotiating exits from contracts. From the start of the NCA, we have come down in the backlog 45% only in the space of about half a year. I would say that's very significant achievement. We are exiting NCA fast. We are also maintaining our guidance for the year. When you're looking at the KPIs for this first quarter, we are right on guidance as we planned.
Regarding sustainability, there are a couple of positives, which is, improvement in spend with the suppliers who are committed to Science-Based Targets, improvement in women managers, and slight concern regarding health and safety, and we are addressing that one, and there's a link for that one when we are exiting labor service contracts. We are now putting extra emphasis on that one while we're exiting those contracts that until we have that contract that everybody's working in a safe manner and with full attention to the safety. If you look at the mining order intake, product order intake is modest due to timing of the opportunities. We announced one significant order for the first quarter, which was full gold flow sheet. Since closing on the books, there was another good order from, significant order from, Chile regarding mills.
From our point of view, the capital order intake is more about timing and activity level is still good, stable in mining. We are focused on getting orders that we want, so we are very selective with the orders. We want to get orders which are technology product orders with a good margin and low risk. We choose the orders, and pipeline is still good. Service order intake, growth was solid, supported by volumes coming from Mining Technologies. In both categories, our order intake margin is increasing. You will be very proud when you will see the result from the revenues later on. You will be proud of us. We don't venture into the areas that we don't want to go. We are solid technology, product, and service company.
Revenue is very good, mix in terms of having 60% of the revenue mix coming from services. Also growth in service revenue shows that our supply chain works like a Swiss clock. We can deliver spares, wares on time as planned. One of the biggest highlights compared to the consensus estimates is that, we are right on guidance for the adjusted EBITDA margin for mining. As I said earlier, it will be 2 percentage points higher with a dilution impact from Mining Technology volume. So well progressing in our EBITDA journey. Cement order intake decreased year-on-year. We are very selective in capital product order intake, what we take in. The mix starts to be better in order intake, showing 60% share of the service and 40 of the capital.
The start of the year for service order intake was a bit slow. First month, second month. End of the quarter we saw increase in the service order intake. Year on year is down 14%. If you look at the sequential, there's a growth between quarter four and quarter one. Our focus is to continue growing services in the coming years, and that will fund our journey to create technology company. Slightly different mix in the revenues. Service share 56%. All in all, happy with the revenues and happy with the EBITDA percentage. As we speak, we are reducing operating entities in cement as a part of the simplification. We are moving toward principal company model, simplifying all the operations. We completed first round of delayering in cement, where we saw 500 colleagues leaving the company.
We are much leaner operation in cement compared to the past. One of the most significant achievements in my books is that we are very fast exiting NCA. We've seen, since the start, more than 40% reduction in the backlog. When you look at the numbers, the revenue for the quarter was modest, so most of the exits have been through contract terminations and negotiations about exit. That has been successful. We continue to support our customers, finding new suppliers while we're exiting. We continue negotiating with a few parties about possible sale of some of the assets here. I'll hand over to Roland, please.
Thank you for that, Mikko. If we have a look at the total thing consolidated, a revenue of DKK 6 billion, a gross profit margin of 23.2%, an adjusted EBITDA of DKK 362 million, an adjusted margin of 6%. Reported EBITDA margin of 3.9% and clearing financials and tax and so on, a bottom line of DKK 84 million. If we look at the next slide, gross margin reflecting good improvement in Mining, but also that the exit of non-core activities is required and still loss-making on gross profit level. 23.2% for Q1. Mining moving forward to 25.4%. Cement roughly flattish. Non-core activities still loss-making on gross profit level.
Our SG&A cost compared to the same quarter last year is obviously up. Mining Technologies is now included in our cost base, and we also have integration costs sitting here. It drops a bit compared to Q4 as a percentage of revenue. As we move forward here, we will increasingly see synergies taken out of the SG&A cost base over the next three, four, five quarters. The group's combined EBITDA is 6% still reflecting ongoing transformation journey. On the right-hand side, we've tried to do the traditional EBITDA margin bridge.
Compared to the same quarter last year, where we had a little bit of acquisition cost before the closing, an adjusted EBITDA margin last year of 7.2, then our revenue is considerably up, give us a 4% EBITDA margin increase. Predominantly NCA is pulling that a bit back again, as we saw on the previous slides. Mining Technologies is about 1.5 dilutive on group level basis and with a few other adjustments, an adjusted group EBITDA margin of 6%. Integration cost of DKK 127 million, equal to about 2%, that leaves us with a group EBITDA margin reported for first quarter of 3.9%. Our net working capital increased. It's mainly driven by lower accounts payable, but also a build-up in work in progress.
We end at 10.6%, which is in the range we have sort of indicated we will be between 10% and 11%. That means that the net working capital is increasing by DKK 720 million for the quarter. If you go to next slide, that means that on group level, our CFFO is minus DKK 404 million. Little CFFI, we had some CapEx and also sale of some real estate back and forth. Free cash flow for the quarter, for the group, minus DKK 428 million. That brings us to financial gearing that is well below our capital structure targets. A leverage ratio of 1.0x, slightly up compared to previous quarter, but well below our target of 2x.
All in all, we will maintain our guidance, mining DKK 16 billion-DKK 17 billion in revenue and 9%-10% EBITDA margin. We are well out of the gate for the first quarter of the year. Cement, DKK 6 billion to DKK 6 and a half billion in revenue and an EBITDA margin of 4%-5%. Non-core activities will still be DKK 800 million-DKK 1 billion for the year and an expected loss of DKK 250 million-DKK 350 million. On the group that adds up to a revenue of DKK 23 billion-DKK 24.5 billion, with an adjusted EBITDA margin of 6%-7% and a reported EBITDA margin of 4%-5%. We are still expecting to spend around DKK 550 million in integration costs during the course of the year.
We have spent DKK 127 coming out of Q1. The adjusted EBITDA margin is still roughly diluted by 2% from the inclusion of Mining Technologies. The guidance for non-core activities is still included as part of the DKK 1.2 billion total expected loss that we guided in the outset last year for the three-year period that we expect to close down that business. We have included a slide here that illustrates a little bit progression on our transformation plan on the different groups in our business. First of all, in mining, we're progressing well on the synergy outtake. We have reduced by more than 800 people in Q4, Q1, in line with what we communicated and expected.
We're planning the next wave of synergy takeouts during the second half of this year, when we finally will merge the acquired legal entities of TK and start shutting down the systems from them and merge data into one FLSmidth unit, country by country, region by region. A little flavor on our risk and management de-risking approach. 84% of our POC revenue is now related to what we de-classify as lower risk orders and the comparable numbers. In last quarter, same quarter last year was 58%. Moving forward on the de-risking part. Same for cement. A little flavor here that cement is also de-risking both their percentage of completion, but also their backlog. Cement has continued the simplification of the operating model.
They've reduced the number of employees by some 700 people since same quarter last year, predominantly by pulling away from smaller countries where we no longer want to be present in cement, and also a significant delayering of the organization. NCA, most predominantly, the order backlog reduction, as Mikko mentioned, significant progress in that part of the business. On group level, we communicated that we are simplifying across the board. We have about 150 offices that needs to go to half, and about 30 of them have now been vacated. Admittedly, the easy ones first, but yet, significantly progress, and that will start to sit in the numbers as we move forward.
On a pure play separation of mining and cement, we have now defined the separation principles. Internally, a project has been defined to complete a full separation of mining and cement, no later than end of next year, and that is progressing well. With that, I think we can give it over to Q&A.
Thank you. At this time, if you would like to ask a question, please press the star and one keys on your touch tone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star one to ask a question. Our first question will come from Christian Hinderaker with Goldman Sachs. Your line is open.
Yes, good morning, everyone, and thanks for the opportunity. Like to start with orders, please. If we back out the billion or so lower level of large orders that we've seen this quarter versus the first quarter of last year, I think we get to about DKK 3.8 billion mining order number for the quarter, that effectively is flat year-on-year. I'm just interested in how that's developed with regard to the split between price and volume, as well as the extent to which you think orders might have been impacted by your active decision to de-risk the order intake. Secondly, mining service orders were up 15%.
You said that that's been supported by the acquisition of TK or Mining Technologies. I just wondered if you could quantify the contribution from TK within the service business specifically.
If I, if I start with the, with the service orders. Most of the growth in service orders is actually coming from additional volume coming from Mining Technologies. What we've been doing in service is that the mix is getting better. We canceled some of the larger labor contracts in the first quarter, and it means that it could have been renewed. We are exiting kind of basic labor and moving away from that one. That will have a slight negative impact on the volume.
At the same time, if I look at the mix of the service is dominantly spare parts, wear parts, higher level services which are possessing higher margin as well, and no labor issues, and then kind of a refurbishment and upgrade. Actually the mix is getting much better, but that is a little bit limiting our ability to grow top line fast. We actually In the other categories, we continue to increase order intake. I think it's what we see for full year, my expectation is that on top of the mining technology added volume, that there will be small growth in order intake for services. In order intake, we've seen improvement in margin compared to last year.
Top line margin in service is better than year course, so that will support the volume a bit. On the capital side, what we see is that the market is good, active, stable. Good, active, stable means that it's similar to last year, because last year was really good for the capital business. We are quite selective what we do there. I would say that we are getting orders that we want to get. I know that in the first quarter that there was opportunity to take more volume in, but we decided not to because that was kind of low quality orders just to kind of support the top line.
Our focus is that if you look at our technology and product portfolio, that we focus on the core elements, mills, crushers, HPGR, pumps, so for the core elements. I believe that we are doing well there, and also that it's also the timing. Since closing of the books, we got a nice order for large mills in Chile. In capital it's quite a lot about timing, but my expectation is that it's positive, stable for the year. So far we are getting the business that we are targeting to get so. We are turning down more business compared to the past, so that if there's a low, low margin, high risk, kind of cases with a lot of engineering, it is not our business anymore. It has some impact.
Thank you, Mikko. Maybe we can turn to margins now. Clearly a stronger than expected performance, and you've highlighted the mix from higher service revenues and the improvement in SG&A from restructuring. I just wonder if you can talk about the impact of price cost dynamics, and I guess in particular, how underlying costs are trending, if we ignore the headcount and sort of structural office reductions that you've taken, in other words, sort of on a per head or a footprint basis.
I could actually comment the kind of product cost, and I think Roland could comment on the overall company cost, where we're heading there. If I look at the margin improvement in order intake, both in capital and service. We've been able to cover inflation plus bit more, so that means that the top line margin is higher. What we've seen is that the last year, still in the first quarter, we have not seen decrease in input costs. There seems to be still inflation in the supply chaining. Meaning that if you look at the prices of the component sourcing, there's still inflation in the chain. It will be less this year than last year.
My expectation that input costs, which are kind of product cost for the production cost, both in service and capital still go up this year, but less than in 2022. I think, Roland, if you want to comment about the kind of organization synergy.
Yeah. What we're planning to do on the SG&A side, if I understood it correctly, I think Cement, of course, will complete their delayering over the next half year or so. In mining, we have taken first wave out of the synergies, which was basically our front end with double rolls and so on. In second half, we are now preparing to do the legal entity merger, combine the systems into one system, one entry module. That means there's a second wave of synergy take out in the entire support functions, of the company.
That will happen in Q3, Q4, and then have full run rate impact from first of January with the DKK 560 that we have communicated. All the stuff that Mikko talks about and I talk about is still, you know, giving mining an EBITDA adjusted for the year of 9%-10%.
Thank you, Roland. Thank you, Mikko. Finally, on just inventories, they're around DKK 4 billion and only up really
A little bit sequentially, I think DKK 88 million you said in one of the slides. I'm just interested in the development in inventories. You had a very strong sales mix in service towards spares and wears. One might assume that that might lead to lower inventories. Secondly, how we should look at potential working capital developments more broadly as we move through the remainder of the year.
Yeah. Inventory is actually expected to be slightly up, the more service business we get on a relative basis. Inventory is slightly up in Q1, and that has supported the, our order intake in service and also our revenue execution in service. What we have said is that net working capital for the year will hover between 10% and 11% in total. Also longer term, when service becomes a bigger ticket of our combined business, working capital should stay below 15%. To the extent we succeed in building a bigger and stronger service business, we will most likely have inventories on slightly higher levels than we currently see.
Thank you, Adam. Thanks.
Thank you. Our next question will come from Lars Topholm with Carnegie. Your line is open.
A couple of questions on my side. Maybe to start with a follow-up on the net working capital from the question just before. Are you seeing any change in the net working capital level or for that matter, the cash generation in Q2? The reason I ask is because you're stating your work in progress will be invoiced in the coming quarters, but that just makes it a receivable, which is still working capital. Then a slightly related question. Can you comment on your free cash flow from core and from non-core activities respectively, because a cash flow statement doesn't give that split. Then a final question, you mentioned on page 13 on non-cores that you're in negotiations that could lead to a sale of out of these activities.
I just wonder if you can comment on what the cash flow implications could be of that. Would that result in any significant cash outflow? Thank you.
Thank you for that, Lars. On our net working capital, we are currently executing on projects both in our own legacy business and also in the former TK business. I think it's fair to say that some of the projects on the TK business have different milestone profiles, milestone payment profiles than our own business. That means that we're currently building up work in progress. As you say, work in progress will then be invoiced and then collected. There's no issues with that. That's how it will play out. To the extent that we execute as we should, it'll be invoiced, the customer will accept that and then pay the invoices.
That's also why we have said that net working capital will be between 10% or 11%, and it will be swinging over the year. It's not the only cash flow item. We also have restructuring costs, we have severance payments, we have significant losses in our NCA business that needs to be cleared out, and we're also clearing Russia out. Nothing new in that. That's exactly as we have communicated it. 2023 is not a great cash flow year. We've said that we expect CFFO to be positive for the year, but not large. That's still how it is. I'm not gonna give you a precise guidance for Q2. Now, on the sale of NCA, we are contemplating potentially to sell parts of NCA.
You know, we don't know where that ends, but the talks are ongoing, and then we will come back once we know more. That's not gonna be a great cash inflow or outflow. This is a loss-making business. That's not great. It's business where we have strong IP rights. That is great, but some of the parts, it will not be a great value on that expectedly. Yeah. I hope I answered some of it, Lars.
Yeah. Yeah, yeah, you did. Good job on the integration. Well done. Thank you.
Thank you. Our next question will come from Gustaf Schwerin with Handelsbanken. Your line is open.
Yes. Hello, Gustaf Schwerin, Handelsbanken. I have a few questions on NCA. First of all, if we look at the reduction of the backlog here, how much more of the remaining part do you think is in scope for termination? Have you done it all now, or should we expect the remainder of the backlog plus the additional DKK 300 million-DKK 400 million actually being sold? That's the first one.
There's no change in what we have guided the market wide. We still expect the majority to be either executed or canceled over the course of 2023, 2024, with the tail end in 2025. That's still the expectation. If or when or we may sell part of that, we will revisit the full execution timeline of the remaining back order and then come back. For now, there's no change in that expectation. The remaining DKK 2.1 billion will predominantly be delivered this year, next year, and the tail end in 2025.
Our evaluation criteria for potential buyers is that how much they would take backlog and then people involved in the NCA business. In as Roland said before, the purchase price is not a matter. It's basically backlog and then numbers of people and offices related to the NCA, and that will be our criteria, whether it makes sense to sell it if there's a buyer or just to execute the backlog. We are ready to execute the backlog fully ourselves and exit the business that way as well. If there's a buyer and meets the criteria that we have, then we are willing to sell parts of it. We are also equally ready to execute it fully.
Yeah. Can you comment roughly how much is in scope for sale of the DKK 2.1 billion?
No, no, we're not gonna comment on that now.
Okay. Just lastly, can you explain how you get to the same number as you've guided previously of DKK 1.2 billion accumulated loss given that you're actually making a big reduction now in the backlog?
Yeah. So in the outset, we estimated to lose DKK 1.2 billion. Some of it is already lost. We lost a big ticket last year. We've lost something in Q1, the rest over the course of the remaining execution period.
All right. I would imagine that the accumulated losses would be below it, given that you've terminated a significant part of the, of the backlog.
That is not the case for now.
Okay. All right. Thank you for that.
Our next question will come from Claus Almer with Nordea. Your line is open.
Thank you. Also, a few questions from my side. Roland, you mentioned that you expect a positive free cash flow from operations. What about the free cash flow? How do you see that for this year?
Yeah.
Is that also going to be positive?
That's a good question, Claus, and we talked about that before, but I'm not gonna comment more on that. I'm not gonna comment more on that. It's not gonna be a great cash flow year. We're doing a lot of restructuring, the remaining backlog on Russia, NCA, back and forth. It'll be a little wobbly. You know, we are in relatively good control, and my best guess is that we will have positive CFFO for the year. Then you can deduct a bit of CapEx and tax payments. Then we are there.
Okay. It was worth a try. Then, talking about the mining margin, then, you know, 9.6% in Q1 adjusted. Traditionally, you have a lower margin in Q1 compared to rest of the quarters or the full year. And in this year, we should also start to see the benefit from the cost saving initiatives. Everything equal, shouldn't the mining division at least aiming for the high end of your margin guidance?
Yeah, I hope so, Klaus. Let's see. Let's see how it plays out.
Okay. Just a follow-up on that part. You know, Mikko, you mentioned that we were going to be proud when we're going to see the margins, in the orders you're signing, currently. How should we translate that to a thing we put into the Excel spreadsheet?
Well, it's, of course, difficult to translate the kind of levels of proudness in terms of numbers. When we look at the backlog and the old backlog when it's turning to revenues and most of the kind of old backlog will be out then in 2024. Then the mix in terms of new stuff and old stuff is getting better. In that sense, I say it's very good actually what will come out. Of course, it's gradual change because especially in the capital business, it's about mix of the kind of low margin backlog and higher risk backlog, what we are now executing.
Because execution quite often, for example, for if you talk about mill, what we now got an order last week, it's easily two years. Also, it's not only about margin but also the risk, that risk profile is much better. As Roland highlighted at the end, that we've been really selective, that we focus on quality of the orders for the core technology, not engineering this and that and steel structures.
Okay. Thank you so much. We're looking forward to see those projects being delivered in the P&L. Well done.
You can tell me when you feel that we can be proud.
I will do that.
Our next question will come from Kristian Johansen with SEB. Your line is open.
Yes, thank you. Just regarding this 2 percentage point dilution from Mining Technologies. From what I understand, there was this 2 percentage point dilution in Q1, and that's also what you expect for the full year. Does that imply that we should expect sort of 2 percentage point dilution in each quarter during the year? Can you just elaborate a bit more on the phasing? I would expect that to eventually start to level off.
The pickup in service will be faster because then, of course, the first level we need to pick up the new orders for the higher margin. I would expect to start to see in service revenues a gap kind of closing the fourth quarter. The capital business, it takes a bit longer because I don't think we execute any new capital orders for Mining Technologies this year. That would be then for the following year.
The service, I'm expecting order intake to be at the same level as, if current FLSmidth end of toward fourth quarter, then, it's starting to kind of come in as a revenue. I don't know, Roland, if you want to comment about timing?
That logic is right. It's gonna be a little wobbly, right? As Mikko says, service will turn around faster, right? There's a backlog to be delivered that we can't change. Expectedly, this dilution will then fade off once we come into the new year. On average, 2% is best guess for now.
Understood. just asking again about the NCA backlogs, just to understand the dynamics. When you cancel or rescope these orders in the backlog, the cost or the loss you originally expected from that project, I mean, do you still carry that or what? I mean, what's the impact on the P&L in the quarter from these backlogs reductions?
Yes, I understand the question. If it's loss-making and we just cancel it, are we then not saving money? You know, that may be the case in some of the orders. In some of the orders, we may pay our way out. For now, you know, plus/minus, we are not changing the full DKK 1.2 billion rev, the question we had before also. Everything else equal, if you're doing it properly and a bit more and so on, it should be better doing it than not doing it. For now, we're not changing the full guidance.
Oh, no, that's perfectly clear. The cost related to lowering the backlog, is that fully taken in the quarter or is there any delayed cost into Q2?
That varies a little bit. Most is taken in the quarter. There may be a few more coming in Q2 on the stuff we did in Q1.
Understood. That's all for me. Thank you so much.
Thanks.
Our next question will come from Nick Housden with RBC Capital Markets. Your line is open.
Hello. I actually thought I exited the queue. I suppose two very quick ones I could ask would be, firstly on the mining service orders, could you maybe just give us a sense of how much of that order intake relates to mid-life overhauls, which I think for some of the peer group has been, you know, quite a, you know, profitable source of orders and revenues in recent quarters? That'd be the first one. Thanks.
If I look at the order intake and mix is dominantly spare parts, wear parts, and there could be what is sometimes called as a capital spare, which means that the expensive spare, which is the kind of main body of the crusher or then a mill. There are some large kind of spares as well, but less on refurbs. In refurbs, we are also careful that we are undertaking refurbishments that are upgrades for our own technology, existing technology, rather than engineering assignment for the NCA type of refurbishment. Sale of that one is smaller and quite small for the quarter. It's mainly spare parts, wear parts, and then high value-add services, less refurbs.
Great. Thanks. Then, a related second question, would be on the 70/30 order split, between service and equipment in the mining division in Q1. Is that about the level that we should be thinking of going forward, sort of now that you're, you know, very much focused on lower risk, sales? Or do you think that maybe it will maybe trend a little bit towards?
I would say that over time, we would like to be closer to that number, but still, for the next 1 or 2 years, I think the split is closer to 60/40. Because as I said, in product business, there's a timing, lots of timing difference between the quarters. But over time, while we are increasing increasing service business, we would like to be closer to 65-70, but that needs to come from growth of the service rather than decline in the capital business of our core products. That's why I said it will take a bit of time. And there are areas in service that we are planning to grow much faster than the market.
We talk more about that in the kind of coming months, what we have done there. Service needs to grow into that split rather than capital to shrink. I think once we've done the kind of restructuring, once we define it as we have now, what are our core products and technology, we want to keep and win market share there, and then grow service faster than the capital over time to increase the share. I don't know if that was kind of clear enough explanation.
Yeah, yeah, very clear. Thank you very much.
Thank you. As a reminder, that is star one to enter the question queue. Our next question will come from Tommy Rönnlund with DNB. Your line is open.
Hello, it's Tommy from DNB. Can you comment, the old decision group, orders and sales, levels in the first quarter?
We're not calling out separately the order intake from TK. We're not doing that. We will be saying is that out of total revenue, our revenue expected is below DKK 3 billion for the year.
How much was that, in the first quarter?
We're not calling that out, but, No.
Okay. Thank you.
All right. At this time, there are no further questions in the queue. I would like to turn the call back over to management for any additional or closing remarks.
I would like to thank you for your time and questions. As I said in the beginning, we are well on our way with our transformation journey, it will be visible in the EBITDA improvement, both in mining and cement. We will go for pure play mining, pure play cement, both being separate entities early next year. Focus on quality of the earnings and be very selective with the order intake, what we have. Be leader of the pack in terms of having technology in mining what is needed for the customers. Thank you for your time and look forward to talking to you soon again.