Good day, everyone, and welcome to today's Day One Update on TK Mining. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer period. You may register to ask a question at any time by pressing star one on your touch-tone phone. Please note this call may be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn today's call over to the Head of Investor Relations Jannick Denholt. Please go ahead.
Good morning, everyone, and welcome to this FLSmidth conference call where we'll give a Day One Update on our TK Mining acquisition. My name is Jannick Denholt. I'm the Head of IR, and joining me today on this call is our CEO Mikko Keto, and CFO Roland Andersen. This call is scheduled to last no more than 30 minutes, including a short Q&A at the end. Please note that we only got the keys to TK Mining about eight hours ago, so there will be significant limitations to what information we're able to provide at this point in time, and we will refrain from making speculations. We hope you can appreciate this. We want to be as transparent as possible by providing as much high-level preliminary information as we possibly can at this time. And with this, I'll hand over the word to you, Mikko.
Thank you, Jannick. Good morning, everybody. We are calling live from Essen, Germany, and in one hour, we are about to meet all our new colleagues in the conference hall in Essen. Just recapping some of the reasons for acquisition, we are accelerating with this acquisition our growth ambitions and strategic focus on mining. It means that FLSmidth will become more pure-play in mining, which is our strategic ambition. At the same time, we are adding key technology to our portfolio, and I would like to highlight that we are absolute global market and technology leaders in high-pressure grinding. Absolute leaders, and that is one of the key reasons for the acquisition, so we have great technology additions to our portfolio, just to name one particular one. We can improve the business mix of thyssenkrupp Mining by focusing on the service and aftermarket.
And we know that we can improve profitability compared to the existing level of performance of thyssenkrupp Mining. We have a high sustainability agenda. We are adding capabilities there: tailings management, in-pit crushing, and conveying. And we will deliver compelling run rate synergies from this acquisition that will support our performance. And I will hand over to Roland to walk through the headline figures.
Thank you for that, Mikko. Next slide, please. If we take a look at the first quarter numbers here that we are comfortable in displaying, of course, all numbers here are still subject to audit and review, but having a look at TK's order intake for the first nine months of their fiscal year and their fiscal years from 1st of October to 30th of September, so since 1st of October last year, they have had an order intake of EUR 433 million. It's split between a service of EUR 250 million and new-build order intake of EUR 183 million, and on the right-hand side, we see that the split is well above 50% in favor of service order intake, exactly as we wanted. Also, the order intake has gone up compared to the same period last year.
And so all in all, especially on the service side, but also on the new-build order intake side, that looks positive. The total outstanding order backlog as per end of July 2022 totaled EUR 698 million. Next slide, please. So if we have a look at the revenue and the profitability, so total revenue for the first nine months of this fiscal year was EUR 356 million. Service revenue totaled EUR 195 million, and new-build revenue totaled EUR 161 million. So notably here, service is moving slightly forward, and new-build revenue is down, partly driven by the backlog, but also impact from the Russia situation. And on the right-hand side, we have outlined the split, and here it shows that the service year also on revenue is moving forward now at 55% of the total revenue. The first nine months of the year was service revenue, and this is exactly as we wanted.
On the earnings, on the EBIT margin, we are a bit more careful, but we can say here that the result on EBIT level for the first nine months of the year was low single-digit negative, and then we will have a review on this, and we will go back with a full-year outlook for finances as soon as we are ready to do that, and with that, I'll give it back to Mikko.
I will say a few words about the situation in Russia. TK Mining has been winding down activities in Russia, and there's one office with 14 employees, and all new business has been suspended. There's been some limited revenues from execution this year, and there might be a little bit still revenues left to be executed, but it's very little. It's mainly service-related.
In the bigger scheme of things, we don't expect any significant revenues in the remaining part of the year. The backlog, as it stands end of July from Russia, is EUR 43 million. We are analyzing and will be analyzing other potential exposure and risk related to Russia, while we are auditing the books. It might have to do with receivables and different types of details, but we will be auditing the books and auditing projects and auditing activities there and come back for more detail. Next one, please. As I said in the beginning, we are now in Essen, Germany, and we will be meeting all our new colleagues or a big part of new colleagues in about one hour, welcoming them to be part of FLS. Integration process is commencing today without any delay.
As said before, we do full integration of thyssenkrupp Mining into FLSmidth operations and operational model. We have a thorough review of the product portfolio on both sides, full portfolio review of FLS, full portfolio review of thyssenkrupp portfolio. We are looking at financial performance. We are looking at strategic KPIs for all technologies that we have, and we will make fact-based decisions on portfolio. We are commencing synergy takeout without a delay, and we believe that it's better to do all at one go rather than do incremental synergy takeout. Most of the synergy, as we said before, EUR 50 million is cost synergy. We are implementing one FLS go-to-market, so there will be no two faces to customer from this end onwards. There's only one face to customer FLS.
We are also reviewing all the commercial activities in the sales funnel and apply FLSmidth de-risking and margin targets for all future business. We will communicate further details about the financial performance in connection with Q3 financial results. Just summarizing, the numbers are as we expected. Thyssenkrupp Mining is still a loss-making business, but showing improvement. We also remind you to save the date for the Capital Markets Day, 18th of January, where we go through all the details for the future of FLSmidth regarding our strategy, portfolio, and the rest of the decisions that we are taking. Now we go into the Q&A section.
At this time, if you would like to ask a question, please press star one on your touch-tone phone. If at any time you would like to remove yourself from the queue, please press the pound key. Once again, that is star and one. We will take our first question from Lars Topholm with Carnegie. Please go ahead.
Yes, thank you, and congrats with getting the keys. I have a couple of questions. First, on the revenue, when you announced this acquisition and announced you bought it ex-India, TK Mining had revenue of EUR 680 million. Now you do EUR 356 million in nine months. If I just take that run rate, the EUR 680 million you announced will become EUR 480 million this year. I just wonder why this significant decline in revenue in TK Mining, if at this stage you have some explanation. It's roughly 30% less than when you announced the acquisition. And then a question number two, which also might be premature, but in the EBIT margin you indicate, what is the net effect of possible reversals of project provisions? Thanks.
Yeah, thank you for that, Lars. Good question, so when we acquired TK, I think we indicated also that our ambition with this was to reduce significantly the level of new-builds, and at that point in time, new-build was a larger chunk of the total revenue, and that is now declining. This is exactly what we wanted, and also service revenue to come up, so we also said all along we would expect actually top line to decline quite significantly, and that's what we are seeing here exactly as you point to, predominantly driven by a decline in new-builds. We will then have a close look on the product portfolio, and we will start immediately to drive the service business on the installed base harder than we believe TK has done, so this is actually in line with what we expected.
And then on the EBIT, and then of course this year, there's also an element of Russia. On the EBIT side, it is too soon to say. We will now have some time to have a look at how accounting has been done for the first nine months. There will be a review of how they have treated Russia projects. We will have an operational review of all the projects, the entire portfolio. We will have a financial review of the project portfolio, and then we will make our mind up on how provision levels need to be. And that will lead us to say impact EBIT as soon as we are ready to make that decision.
Yeah, Roland, that's hard to understand, but in the nine-month figure, i.e., the numbers before you do your thing, are there any significant impact from project provision reversals in that number?
It is too soon to say, Lars. I understand the question perfectly. It's too soon to say. We know what to look for, and I will have a clear picture on that. Maybe I will add something about India. It was actually always not to have India in the deal because it's heavily in coal. Secondly, it's a lot of EPC type of business, which is low profitability, high risk. So it didn't actually fit into our portfolio from an ESG point of view, not from a profitability and risk point of view. So that was our wish not to take the India business in.
Thanks, guys, and congrats with the keys.
Thank you.
We'll take our next question from Kristian Johansen with SEB. Please go ahead. Your line is open.
Yes, thank you. So three quick questions from me. So first of all, the Russian exposure, just curious whether this is in line with what you expected or if it's actually lower than you feared. Secondly, you repeat the cost synergies of EUR 50 million. Can you also tell us whether the integration cost of EUR 75 million still holds? And then lastly, is it at this stage possible to say anything about the complexity of the backlog? In your latest presentation, you obviously discussed that for your own backlog. So obviously, just curious what the composition of scope and complexity is in the TK backlog. Thank you.
If I take the Russian one, so actually the backlog and Russia-related costs are less than what we anticipated. When we audit these numbers, and if it stays like this, we're actually quite happy with the outcome. It means that thyssenkrupp Mining has been successful in winding down the activity. So actually to us, I think this confirmation was positive news. Yeah, and then just commenting a little bit on the synergies. So we are maintaining our view on synergies so that we will immediately commence the synergy takeout. It will be no less than EUR 50 million once we are done. We expect cost to complete still to be around EUR 75 million, and we reiterate what we said back last year, that this company standalone will be net profit positive no later than 2024, and also cash flow positive in its own right. So that's where we are.
And then my last question on the complexity of the backlog.
From what we see, it's what we expected, but that is of course where we focus in our audit and level of detail in our risk review. So we are looking at all the details of the project risks. We will look at the provisions for the project and correctly provided for. So that is actually requires deep dive on each and every project one by one, and that's what we are commencing today. So it's too soon to comment, but that is our main focus when we go through the books, project backlog, and then risk-related.
Understand. Thank you so much.
And once again, as a reminder to ask a question, that is star and one. And we will take our next question from Tomi Railo with DNB. Please go ahead. Your line is open.
Yes, good morning. It's Tomi from DNB. Just a question on seasonality. Would you assume or have you seen already a pattern that would be typical for you as well, that second half sales and earnings are higher? Maybe I'm just trying to get the feeling that second half of last year was more profitable than maybe the first half of this year in thyssenkrupp Mining.
Yeah, I think it's too soon to say for TK, but we would assume that we are operating in the same industry, and for us, high season or relatively strong quarters is Q2 and especially Q4 in the calendar year, financial calendar year, so that means also that they will finalize their 12-month run rate now, and that will be an average quarter. That will be my best guess for now, then TK will move immediately into our fiscal calendar. We will consolidate four months of TK in 2022, and from there on, they will be in our fiscal calendar, so once we are beyond September, we will close out TK and then include them in our combined numbers.
Okay, thank you.
And we'll go next to Claus Almer with Nordea. Please go ahead. Your line is open. And Joe, your line is open. And Joe again, your line is open. Joe? We'll take a follow-up from Kristian Johansen with SEB. Please go ahead.
Yes, thank you. So obviously, you give us the full year and nine months for their last financial year from 2020 to 2021. Given that they made -3% for the full year on margin and -7.9% for the first nine months, it implies that the EBIT margin in the fourth quarter was + 7.6%. So just curious whether there are any sort of extraordinary gains or something like that in the fourth quarter, and elsewhere the -3% is really representative for the underlying earnings.
Yeah, that I simply don't know, Kristian, how they allocated it over the quarters. So that would be speculation on my part. I think what we take away from this is that looking at the numbers compared to what we said a year ago and what we said all along, this is as expected. So the level of turnover as Lars was asking to us is exactly as we expected it. They are doing well on improving the split in favor of service, and it also looks like their EBIT margin is improving, but it is still negative. So we need to make some fast decisions on how to improve that swiftly. That is our, I think, conclusion on this.
Understood. Thank you.
And we'll go next to Claus Almer with Nordea. Please go ahead. Your line is open.
Thank you. Yeah, also a question from my side about the profitability. We have heard these stories, these, about TK Mining being in the black territory this year, and now you're saying it is, yeah, losing a bit loss-making. Do you have any flavor on this difference in these two numbers?
Yeah, thank you for that, Claus. So this is a reported EBIT margin, right? So technically speaking, that is as well as the guess, right? So they are also operating with an Adjusted EBIT margin, and we just know exactly what they are adjusting for because they have been running an improvement program, and obviously they have had adjustment costs associated to it. But to the best of our understanding, their reported EBIT margin is low single digit. Even if we adjust for what we would call adjusted or restructuring costs, we still think they are slightly EBIT negative. That's the best view in the first nine months we can give now, and that's obviously because they are still in a regrouping mode, and they are impacted by Russia and so on, but that's all the details I have for now.
Okay, and then the second question goes to the order intake. I'm sorry I was a little bit late to the call. If you have said this, but you're saying the order intake split is improving, but the growth in new-build is significantly faster than the service order intake. So at least nine months versus nine months, it is not an improvement versus service orders.
I think that's a little bit to do with timing, Claus, right? Because the order intake on new-build can be allocated over more than one year and so on, so we need to understand when this will hit the P&L, so notably in the revenue, their service share is improving, and expectedly from now on, that will happen in the order intake and continue in the revenue in the P&L also. Also, I might highlight that looking at the historical performance of the business, our wish has been that they will be closer to 50/50 in terms of the kind of business mix to give us a good starting point, and as we are putting in controls for new order intake, we apply the same principles as we apply for all FLSmidth business today.
We are de-risking the capital business, meaning that we are much more selective in business what we take in, and also that we will have quotas for riskier business so that we basically plot thyssenkrupp Mining business into exactly the principles what we have. And then we see where we are, and then we start de-risking all the new order intake. And in very practical terms, we are starting early next week final reviews with our TK colleagues or now FLS colleagues, and then we go through all the opportunities, and we will not take any new business in unless it meets our criteria in capital business. So we are taking control of that fast.
That makes sense. Just a final question regarding the backlog. Have you had the time or insight to how thyssenkrupp has adjusted its selling prices to inflation, to compensate for inflation?
We don't have that level of visibility. So when we do the deep dive into the projects, we see that basically provisions what there is in the projects and any potential cost escalation. So as of today, we don't have that level of detail in these first eight hours.
That's fair enough. Okay, that's all from me. Thanks a lot.
Once again, as a reminder, that is star and one for your questions. We'll go next to Magnus Kruber with UBS. Please go ahead. Your line is open.
Hi, Magnus Kruber with UBS. There are two questions. First, could you comment a little bit about the definition of scope of the TK aftermarket business? Does it significantly—is it a different significant scope for their reported aftermarket compared to you? Because you're already at close to 60% now. So if you want to get that higher, maybe the margin contribution from the mix shift to a large extent already happened. Could you comment a bit on that?
It's actually dominantly spare, so it's actually true service. So there shouldn't be too much revamps or something like that would resemble a project with a risk profile and low profitability. So it's dominantly spare.
Got it. And then if it's predominantly spares, is it fair to believe that the profitability of those spares doesn't diverge materially from what it should be in the long run and what you're reporting on your corresponding business?
So in the long run, basically we have the same targets for all businesses: Capital and Service. And if there's any non-alignment today, we will correct that alignment very fast. So we don't have a pricing level of information at the moment, of course, in these eight hours, but we will look at the pricing that it needs to be exactly as we have targets in FLS today.
On the profitability level on the aftermarket, is it broadly in line with what you have on that business? Just to get a sense for where the margin uplift is coming.
We don't actually know that because we have in FLS service EBITDA levels. We have capital EBITDA levels, and then we don't know exactly how they are allocating different cost items for different businesses. So they have more reasonable P&L, and we need to convert the numbers first into our kind of quarterly P&L model, which is business lines and product lines, and then we can actually see that one. But we need to do the conversion into our model first.
Got it. Thank you so much.
With that, we are unfortunately running out of time as we have a lot of new colleagues we need to say hello to. So with that, we'd like to thank everyone joining the call. We fully acknowledge that you want to know a lot more, so do we, and we will do our utmost to get that to you in due time as well. So thank you all, and have a great day.
Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.