Ladies and gentlemen, welcome to the half-year interim report. For the first part of this call, participants will be in the room only, and afterwards there'll be a question-and-answer session. As a reminder, this call is being recorded. Thank you. Today, I'm pleased to present CEO Thomas Schulz. Please begin the meeting.
Hello everybody. Here is FLSmidth out of Valby, Copenhagen here in Denmark. We will today talk about our Q2 result, and I have with me our new CFO, Roland M. Andersen, who will later in the presentation take over with financial figures. If we come to the Q2, the Q2 was definitely marked by the pandemic impact. What we can see too is Cement was more impacted than Mining. Our order intake and revenue declined, and the profitability was affected by the lower revenue predominantly. We had a strong cash flow, and our business improvement measurements are on track. From a market outlook point of view, we clearly see that the capital business is more impacted than the service. We have a positive mining outlook, and Cement is with a relative uncertain outlook. We have, based on the COVID-19, based on the pandemic, still low visibility into the markets.
We suspended the guidance on the 23rd of March, and we informed on the 28th of April that we are below the initial guidance, and today we reiterate that the guidance remains suspended. Now into the market, the current market outlook. When you look into the market, then the spare and wear part business of the aftermarket is a result out of the production rates and the accessibility for the sites. But more, the technical service, the co-project commissioning is based on that, what companies can open up and where suppliers can assess sites and go there. That was in the market situation quite hit. We saw that customers were not ongoing with what we call non-critical investments, no matter that the investment environment on that what was already discussed and placed before the pandemic is still ongoing.
If we then look into Mining, 96% of the sites are back in operation, which is quite an improvement from the end of quarter one, which was 90%. We have the largest impact of the pandemic and the operations in India, South Africa, and in Peru, but it's, of course, time-changing. It started in Asia, came more into Europe, and now very much in the Americas but in the mining industry, the commodity prices are more or less all on the way up, and we see quite a good demand level ahead of us. If we then look into Cement, 92% of the cement plants are back in operation, which is quite an improvement of the 80% what we had at quarter one but most of the plants are still working with reduced capacity, which, of course, has quite an impact.
The largest COVID impact, the largest pandemic impact we see in India, South America, South Africa, Middle East, actually all around the world, and it's country-by-country specific. Now to our own operations. We are a reflection of the world where we could open up, where we can work. That works. We are back fully in the job. Of course, in other areas, like if I take India, there, of course, we are quite under restriction. Despite the fact that, especially here in Europe, there is a kind of a relief versus the pandemic when you see it worldwide, we still have only 60% of our people working actually in the offices and on-site. When you make the difference between white collar and blue collar, actually less than half of our white collar people are back in the office based on the lockdown measures.
A big impact on our own operations is the travel restrictions, and that is what we see all over. For any supplier to assess sites is very difficult, and yeah, we have to see how that opens up towards the end of the year and how that develops. If it comes to our sub-supply base, same as with our customers, same as with our own operations, our sub-suppliers are, of course, in disruption or more in disruption in countries like India, South Africa, and large parts of South America. But in general, they, most of them are quite back, and we see that there's quite a flexibility in our sub-supply base to move from one country to another if restrictions with the pandemic are hitting a country. Overall, what we see is a gradual recovery up to the later end of the year in that situation.
And Mining is definitely less impacted in the pandemic than Cement, which experienced quite a significant step down in the quarter two. And, last but not least, when you look into what is announced as stimulus and recovery packages, there's quite a lot into digitalization and sustainability and partly into infrastructure, which is overall quite positive. Now to the business improvement program. We announced actually the first part of that program already on the Q3 announcement 2019. The program in total will deliver a run rate at the end of 2020 of 150 million DKK EBITDA improvement. The total cost of the program is 180. We utilized of the 180, 74 in the quarter two. This business improvement targets site consolidation, enhanced logistics setup, and, of course, our labor force, adjustment based on that what we see as a business activity ahead of us.
When you look into that, we announced that 750 of our colleagues have to go and 600 are realized in that, which means the rest of the program, the leftover of the program with the site consolidation and so on, will come in the second half of the year. Temporary costs out of the pandemic and temporary savings, costs like work organization to work from home or temporary savings like furlough or reduced travel costs, that is not part of that program. If we then look into the current situation, we had quite a negative result in Cement for the Q2, and we still have the low visibility. The Cement backlog with what we went into, the pandemic was already low and lower versus what we saw at a similar time last year, but mining backlog was actually quite healthy.
When you look into that, we can say that, not only from the mining backlog, if you see the growth rate for Mining in the first half of this year, it's organically 25% up versus the first half last year, which, of course, is quite a good situation. But as I said before, Cement was definitely more impacted with the lockdowns in the different countries than the mining industry. What we learned in that pandemic is that the flexibility what we normally have with the cost base was quite limited based on lockdowns. We had countries which didn't allow to adjust our cost base as well as countries where we had not only to go on, with having all our people on board. On top of it, we had to pay and to, remunerate actually external consultants and contractors too.
That was, of course, limiting us very much in the flexibility to adjust the cost base where we are normally quite known for. We see that the Mining business will come back and grow, but the timing is uncertain. And in Cement, we see that it will come back, but timing at the extent of the rebound ply remains uncertain. Out of that, we moved already in the quarter two and onwards that we go more into the buy mode. That means customers opened up and said they are not that interested any longer that we supply everything, and everything means for us auxiliary material which is not productivity impacting.
They are in such a market situation, and from there on, we see that there is more openness to have a sub-supply in it, which changed our make and buy decisions for auxiliary non-productivity impacting material more towards buy than producing on our own. With that, we had an additional reduction of 240 employees on top of the Business Improvement Program. Further, we see that this pandemic strengthened the synergy setup between Mining and Cement, and we look into with the step change what we see with the mentality of our customers to be more open on digital and sustainable solutions to make a faster step into sustainable, sustainable solutions for our company to keep a good position and leading position in mining and in cement. It is a good time for innovation. It is a good time for digital solutions.
The mentality on the customer side, both in Cement as well as in Mining, changed, so out of that, our acceleration journey definitely got speed in that pandemic towards the MissionZero what we have for Cement and Mining, then the guidance. We had a midpoint of a guidance of 19.5 for 2020. We realized 8.5 in the first half of the year, which is clearly indicating that we will stay below the initiated initial guidance. Our EBITDA margin was 4.3 for the first half of the year versus the midpoint what we had in the original guidance of 8 and a half.
Based on the visibility what we have on government decisions to lock down or to ease down restrictions, it is, it gives us for the low case for this year and the best case for this year what we will deliver on revenue as well as on EBITDA, such a big gap that we are still not in the position to guide. Of course, with each day, each week, we go further in the year, we believe that the gap will close more, and as quick as we can do it, we go immediately public to inform what then the guidance will be. Now into the figures. The order intake. When you look on the left side, it's Mining and Cement divided by service and capital. We had a minus 23% organically, impact on growth in the mining industry. There was quite an FX effect.
Service was hit with minus 15% and capital with minus 49%. On the right side, it's Cement with minus 30% on service and minus 45% on capital. The service impact comes out of the situation that our aftermarket, as communicated before, is with around 20% of the total technical service where we send in people to help customers, to support customers, to make a more productive setup. That, of course, in such a pandemic is not possible to do, and that created then this drop where we had quite a good service order intake actually for Cement and Mining in the development in the last few quarters and in quarter one two.
That, of course, gets in such a situation where you are not allowed, where you have to ground your own technical force quite a lot, where you are not able to travel to let them travel around and visiting mine sites. That has, of course, immediate impact on the order intake. That explains then the 32% order intake drop what we had in quarter two, what you see on the right side, and it's, of course, for a very long period of time the lowest order intake. Out of that, into the revenue. We had 66% of the business and of revenue in Mining and 34% in Cement. We delivered a 7.8% EBITDA in the quarter, which is lower, quite significantly lower than last year, but quite an improvement versus quarter one despite the lower revenue.
Cement delivered a negative result, which was, of course, not good, but after a relatively good year with a 5.7% EBITDA for last year and the dramatic impact what we actually saw in quarter two, that explains with the cost overrun in the people cost and the cost structure with the limitation, the minus 4.9%, and we will get more into that where it comes from. If we then look into capital and service, we had a 61% service business versus a 39% capital business, which is versus Q2 2019 where we had a 51% service business, an improvement of 10%, and a 3% improvement in service share versus quarter one. With that, I would like to give to Roland and again a welcome for the financial performance.
Thank you for that, Thomas.
We will start with a review of the P&L headline numbers, and revenue for the quarter is down by 30%, primarily driven by the pandemic impact. That translates into an EBITDA of DKK 131 million despite a flat gross margin. Lastly, it results in an EBITDA margin of 3.4%. We've had financial costs of DKK 55 million, of which the larger part is currency adjustments primarily from the emerging markets, South Africa and Chile, and it all ends up in a profit for the group of minus 17. By the end of the quarter, we had 11,500 employees compared to 12,500 in the same quarter last year. If we have a look at the top line, the revenue decreased by 26% organically. On the left-hand side here, we divided it into Mining and Cement.
Mining is down by 16% organically, reported service down by 14%, and reported capital down by 32% for basically the same reasons as Thomas mentioned on the order intake, whereas Cement is significantly harder hit, minus 40% organic decrease, and service down by 21% reported and 55% reported on capital. On the right-hand side, it gives a long-time low revenue number and also an order intake that is below the revenue for the quarter. If we look at the next slide, gross profit is 23.7% for the quarter compared to 24% same quarter last year. It is up a few percentage points compared to Q1, and the primary reason for that, if you split in Mining and Cement, is that Mining is up by 0.3% to 26.4% gross margin.
Mining has a bit better service split versus capital in the quarter, and on the Cement side, they are considerably harder hit, and the gross margin is down by one percentage points. I think in some countries, we were severely impacted by under-absorption in the quarter. For example, in India, we have been having zero activities in large part of the quarter, and at the same time, labor restrictions restrained us from adjusting our cost base and reducing pay to subcontractors. So our cost base has not been as flexible as you would normally have expected us to be. If we go to the SG&A cost, slide 12, cost decreased by 7% down to DKK 689 million from DKK 741 million in 2019, same quarter 2019.
If we adjust for the underlying one-offs and also underlying, underlying cost, one-off cost from the Business Improvement Program and for the one-offs we have had from COVID impact, less travel, furlough, etc., underlying SG&A would have been DKK 676 million. Of course, as a percentage of revenue, that percentage is up to 17.9% because revenue drops quite steeply and also for the same reasons as on the gross margin that our limited flexibility to adjust our cost base has somewhat impaired our ability to move on cost reductions. Slide 13, if we look at EBITDA, it has obviously been impacted by a very extreme quarter down to DKK 131 million and an EBITDA margin of 3.4%. On the right-hand side, we are explaining the major developments in this quarter compared to last quarter, same quarter last year.
Coming into Q2 this year, we knew that we had a lower backlog, and that will translate into DKK 122 million lower EBITDA for the quarter. We have been impacted on revenue from COVID, and that translated into DKK 245 million for the quarter. COVID cost and savings, extraordinary cost to protective gear, people are working more from home, but also savings from furlough and travelings is a plus 3, so largely a wash. The Business Improvement Program and other initiatives have increased our gross margin by 49 million, and an adjusted SG&A gives underlying savings of DKK 65 million in SG&A. Then we have extraordinarily spent DKK 74 million from the Business Improvement Program, and the 32 million is the reduced margin on mining capital that we carry forward from as announced last year in Q4, and that ends up with DKK 131 million.
And if you then do an adjusted EBITDA for the quarter, you would take the DKK 131 million, add the DKK 32 million from the mining capital projects, and add back the DKK 74 million, and then you would end up with DKK 234 million in adjusted EBITDA, and that equals a 6.1% EBITDA margin, adjusted for the quarter. If we go to the next slide 14, our net working capital decreased significantly in the quarter. As a percent of revenue, it came in at 12.3% versus 13.5% last quarter. There's several reasons for that. We have had extraordinary focus on our trade receivables focus as well as adjustments in our underlying billing procedures. It needs to be seen in connection with the work in progress. We have had extraordinary focus in having things finalized, milestones met, and invoicing sent off to customers in order to safeguard trade receivables and work in progress.
Trade payables are largely down, driven by the reduced volume, and prepayments from customers is driven down from smaller progress on the projects, but also the fact that no new projects has come in and thereby prepayments received from that. So we are quite satisfied with the development in net working capital. And if we then look at the cash flow for Q2 2020 and adjusted EBITDA, EBITDA of DKK 235 million on the continuing activities, smaller change in provisions and a large movement in net working capital as just described, taxes paid, and then we end up with a cash flow from operations of DKK 538 million. Cash flow from operations for the group of DKK 433 million, investments of DKK 65 million, ends up with a free cash flow of DKK 468 million.
If we then have a look at our capital structure, it is well in line with our targets. Equity ratio up to 40.3%, but more importantly, on the right-hand side, our NIBD is down below DKK 2.3 million by the end of Q2. Our leverage ratio is one notch up from 1.4x to 1.5x, and that debt reduction is obviously primarily driven by the improvement in net working capital. Slide 17. We have a strong financial position: DKK 7 billion of available committed credit facilities, of which DKK 4.2 billion is undrawn by the end of Q2. Our primary revolver of DKK 5 billion is up for refinancing during 2025, five years from now. With that, I give it back to Thomas.
Thank you, Roland. So then, some information about our own performance on sustainability. We are always proud to report on that, and you know that we are focused on the four sustainable development goals. If I start with the safety part, we are down to 1.0 on the TRI, and that is quite an improvement from a 1.6 what we had at the same time in last year, and it actually follows a track since 2012 where we year on year improve our safety setup, which is good. Then we look into where we are explicitly proud of our relative carbon footprint dropped from 2.5 to 2.3, and that with a quite significant lower revenue is quite a positive message, and it shows that not only with the technology what we develop, our own doing goes in a more sustainable future, which is good. Out of that, innovation.
We have in that pandemic enjoyed a significant change in mentality on the customer side, both Cement and Mining, into digital and sustainable solutions. Here we highlight digital solutions. It is not a surprise that we had more than 5,000 customers in the last, in the quarter two alone on so-called webinars where we had educational training, information, common work over big video conferences. Actually, the amount of customers asking for that is increasing, which shows a very strong customer relation. Here we present the Augmented Field Engineer. What does it mean in regular words?
What we can say is that we enable own colleagues or customer colleagues on a site to use digital systems, the whole competence range what we have in FLSmidth by assessing the right people online, online anywhere in the world, as well as the whole database what we have collected and worked with for decades to build that up and the analytics out of it. So the response time to improve directly on site is significantly faster, which reduces downtime, which improves productivity, and with that, the earnings of our customers and then, of course, for us too. If we then look into the overall message, we had definitely, and we have definitely the business improvement on track.
We see that our global supply chain is quite flexible despite severe lockdown measures in quite a lot of countries where we are quite big in, and we see that the opportunities for digital and sustainable solutions is significantly increasing. We see the stimulus packages as a support for the recovery as actually an essential driver of business, additional business in Cement as well as in Mining. But the pandemic had quite a severe negative impact on our business in the quarter two, as we already said in quarter one. We have a continued uncertainty on the COVID-19, and when you look into that, we act in a lot of countries with strong and big setups of own employees and a lot of revenue recognition where the pandemic actually hit quite significantly more than an average, throughout the world.
We enjoyed with that a limited flexibility to adjust our cost base, which is actually a very specific thing of that crisis what we didn't see in other crises in a similar way. Our focus stays on navigating through that pandemic to create cash where we had some success, more to come, and of course, how to manage the cost in such a situation is very high on our agenda. Customer relation, not only with the webinars, not only with not seeing any cancellation of a large project, idea or investment opportunity, clearly shows that we use the time for the right things. If we then look long-term, customer focus is important. I think it's clear that our MissionZero for Cement and Mining is the right thing to do.
The pandemic gives a step change towards speed and accelerates the whole thing. Innovation and digitalization is by far more in an open-minded situation with Cement and Mining than we saw it before, and this pandemic clearly shows it as more standardized and modularized you are, as easier it is to do business with. Out of that, this Q2 was definitely marked with the pandemic impact. Our order intake and revenue declined. The profitability was quite significantly impacted by the lower revenue. We had a strong cash flow, and for the time being, we keep the guidance suspended, and with that, I would like to go into the Q&A.
Thank you. If you wish to ask an audio question, you may do so by pressing one zero on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Again, that's zero one on your telephone keypad if you wish to ask a question. Our first question comes from Christian Hansen , Danske Bank. The floor is now open to you.
Thank you, and first of all, welcome to Roland. My first question, Thomas, sort of, before the pandemic, you have on several occasions expressed the importance of not cutting too much in terms of employees in order to avoid letting go of critical resources for when demand returns. Now, looking at the first six months here, you've cut 840 employees, and you still expect that mining demand will fully recover. So can you just elaborate on how you balance this exercise with the risk of cutting too much for when demand recovers?
Yes. At first, when we look into the whole thing of cutting, it is, of course, not a good thing. That's number one, to make that fairly clear. But we had in the last 12 months, out of several countries, the order legally to employ contractors and consultants, what we normally have as an outsourcing, to cover the peak with what we call standard engineering, which is not too complicated. That increased, of course, our workforce, and that is, that takes flexibility away. Second, we see, of course, under-absorption in several businesses. If it's pure under-absorption where we believe the business comes back in a foreseeable time, we will not do anything with the labor force, definitely not. But where we see under-absorption for a very long period of time, we have to act. And that flexibility we have built into our model, into our people structure and company structure.
And last but not least, what we see is that customers are now pushing very much for localizing auxiliary equipment and auxiliary delivery on sites more local, which then, of course, takes away the need and the demand for us to produce that on our own. That business, of course, we can let go. That all together gives actually the picture on, on the 240, what we announced in for the quarter two on top of the business improvement program. Then the 750 of the business improvement program, that was, as we already communicated in quarter three, the, the program to reduce the sites, to get bigger assembly centers and bigger sites, which then at the end, of course, reduced the overall amount of employees. That actually explains the figure what we have there with 840.
Okay, ma'am. Thank you. Then just a follow-up on your comments on India. So it sounds like you wanted to cut more in India in terms of cost than what you've been allowed to. Does that mean that when restrictions are lifted, there's sort of a pent-up cost exercise for you in this market?
Actually, what it means is we were ordered by law that we had to pay all the consultants and contractors what we normally have on a month or two months jobs to cover sites or to make, how to say, to clean up a site when we are done with the commissioning. In the moment when we went into the pandemic, the Indian government decided that we had to go on to pay these consultants and contractors despite the fact that they didn't work. And that, of course, limited very much our flexibility in it. That is actually what we mainly talk about when we highlight here India as a case where we have not the flexibility on the cost base.
And just for clarification, how long do you have to continue to pay these consultants?
Yeah, that's a good question. We get, of course, we had information a few weeks ago that they will ease that down. We had that for a few days, then we started to act on it, and then it came back again. That is actually a good question because it shows why the visibility is so low. These government decisions, it's very difficult, not only in India, it's very difficult to predict. When we know that, it will be part, of course, in the guidance that we have a better visibility on it.
All right. That does quite clear. That was all for me. Thank you.
Question.
Thank you. Our next question comes from Artem Tokarenko, Credit Suisse. The floor is now open to you.
Good morning, guys. That's Artem from Credit Suisse. Thank you very much for taking my questions. My first one is around your comments on Q3 in the statement where you say that you were expecting a gradual recovery in Q3, and then now there is a bit more uncertainty and maybe the recovery is coming later in the year. Could you maybe elaborate on this comment? How should we shall we read it as, as this, guy, as basically a guidance for sequential and flat demand in Q3 versus Q2? And maybe also, as part of this question, could you maybe help us with, exit run rates or any color on June and, July across different business lines in terms of year-over-year growth rates, which you've seen so far?
Yeah. You know that we have the guidance suspended, and there is, of course, reasons for it. I'll give you one example. Two days ago, one and a half days ago, the Australian government announced to shut down the state of Victoria. Why is it actually not a big mining state, but why is that important? Because we have a big facility there in Melbourne. That, of course, has immediately a business impact, and that's only one of the news what we get daily in and out where countries build up lockdown or take it away, or they give the hope that they take it away and then they don't, and vice versa. And that gives, of course, immediately a business impact.
So out of that, we built that into our scenarios, and the gap between what we call the low case for the year and the best case for the year is still too big to call that a guidance. We work on it, and we think in the near future, we will be able to guide because then, of course, the year is more done, but we think that the governments are getting, how to say, more used to the situation and not making these traumatic in-on and off decisions, what we see. Of course, when we look here into Europe, this is more or less all relatively well managed and settled and more or less, knowing how the year will go, no matter that there's uncertainty too. Please don't believe that this is in a big part of the rest of the world, the same case.
Then, regarding Q2, Q3, Q4, we said in Q1, in the Q1 announcement that we expect Q2 will be the biggest impact and Q3 more and Q4 more than Q3. What we see with the visibility, we see that at the end of the year, we will have a gradual recovery of the business. How that plays between the quarters, we have to see. And that will come, of course, more visible with the guidance.
Okay. Thank you. And in terms of the, maybe exit run rate, which we've seen in June, just to help us to with modeling H2, because obviously, it was very helpful to understand how there was down 15 capital and the decline which we had in services, what was the magnitude between April, May, and then later in the year?
Yeah. Of course, what we can say is we don't see worsening. That is what we can say, and it's actually normal business, and that's what we saw before. Important in our business, I know that people like to look purely on the quarter, what we generated as order intake on the quarter, and then talking us up or down. Fact is we have quite in service too, not only in the project business, long-lasting business, where what we enjoy in service are service contracts. They are not on a high priority for the customer to proceed to give it to us as an order intake until that with the lockdown is clear. So we enjoyed quite a good service order intake in quarter one. Service, the technical service to visit sites to help customers was a big part of it.
We enjoyed actually quite a good capital order intake too, and as I said in the presentation, if I take Mining alone, we have a 25% organic growth in Mining up to the end of quarter two versus last year. Yes, the Q2 gave quite a significant impact, but there is no order cancellation, not in Cement, not in Mining. There's no information that any of the projects what we were working on to get order intake was canceled, not at all. The only thing what we see is everything is a kind of on a pause, on a hold, but it will come back.
Okay. Thank you. And my second question is around services. Can you maybe talk a little bit about what you see in terms of those restrictions from customers, giving you access to their sites, to do maintenance? How has that situation improved in July already? And also, kind of taking into consideration that not all of your customers are back to full operations, do you think there is likelihood that service business will come back to growth in Q3, in terms of orders and revenues?
Yeah. The what you can say is, or what we can say is, the lockdown started in the east in Asia. Then it moved into predominantly Europe very much as a hotspot. And in Q2, you all know the situation in northern Italy, especially in Bergamo. Not a surprise that we have a big factory there. In Asia, in Wuhan, where the whole virus started, not a surprise. We have our world's biggest assembly center very close to it. And then today, it moved more into the Americas. You all know about the situation in US, but there are some countries in Latin America which are worse hit in the lockdowns and in the COVID pandemic, plus some social unrest if you take Chile, for example.
On top of it, we have, of course, the situation in India where the main hit of the pandemic is in Chennai. No surprise. That is where most of our people are sitting, and only to give a light on that, between 20%-25% of our employees are sitting in India and the majority of them in Chennai, so that has all the impacts on how we can act or not act, and on customer side, the same. We see areas where customers are, especially Mining, back on full operation and running and doing everything to proceed, and we are with a lot of working together with the customer, trying then to get people there. In Cement, it's different. There, the production rates, no matter that 92% of the operations are back.
In more or less all cement plants, the production rates are lower. And that's a reflection of that construction business, what they have in the territory where the cement plant is. Cement is very quick in ramping up and very quick in ramping down if the market is better or lower. It's a very cash-driven business. And that explains, of course, the magnitude and the speed of the slowdown in the second quarter. So overall, we can say worldwide, we think that more sites are getting assessed in the last few weeks, and we see that trend ongoing.
Thank you very much. And a last question, very briefly from me. I think you somewhat changed the structure, the way you report the EBIT bridge and in particular, you referred to EBIT related to COVID-related costs in Q2 and gave some color on how they will evolve into Q3. Can you maybe help us with understanding how much those COVID-related costs were in Q3 and whether you, sorry, in Q2, and whether you expect them to continue into the coming quarters as well?
The thing we can say is that we will report on what we see when we come with the quarterly announcements, what is in, what is out. In the Q1 announcement, the COVID costs what we had in was, I think, as far as I remember, DKK 47 million. Yeah, DKK 47 million. I had to remember that. That was net impact. This quarter two, we have a net impact of plus DKK 3 million. Where's that coming from? In quarter one, we already had quite a lot of cost, but we didn't have a real advantage of travel savings and no furlough predominantly. These are the two positive measurements. Now in quarter two, of course, we used wherever we could the furlough.
And we have, of course, with all the service technician or most of the service technicians not allowed to travel, of course, quite a reduction in travel cost. When we then take the cost what we had to make the protection and working from home and all the additional costs what we had in the quarter on the pandemic, plus the positive inflow of less travel cost and furlough, that gave us a plus three million DKK bottom line result in quarter two.
Okay. But maybe just thinking into how this will evolve into H2, I guess a lot of governments, the furlough schemes across a lot of countries are coming to an end. So would you expect the net number to become more negative considering this?
Yeah. When business comes back, travel costs will go up. That's clear, and normally when business comes back, furlough will go away too, and then we have to see how much of the COVID cost is disappearing too. But that is what we have to evaluate then when it comes, so the lower revenue, of course, especially in the service part, creates significant lower travel cost. That impact of that too, and
Okay.
Well, I understand the questions. The reason why we actually are that specific is we know that you all calculate what is temporary impact, what is sustainable impact, and that is what we try to give you as a bridge, as transparent as we can be, so that you see these are temporary effects, and then they are the sustainable effects. The COVID cost is a temporary effect. It's not a sustainable effect.
Sure. Thank you very much.
Thank you. Our next question comes from Magnus Kruber, UBS. The floor is now open to you.
Hi, Thomas. Roland, Magnus here with UBS. A couple of questions from me. Could you talk a bit about how your order book across margins looks at the moment in Cement and Mining respectively versus what you delivered, on an adjusted basis in Q2?
Yes. Actually, we see the same level of order intake margin what we had before the pandemic as we see it today. There is no difference. There's no difference.
Perfect. Thank you.
We have in Cement the same price and pressure situation as we enjoy for several years now, and in Mining, the same situation as before. The difference what we will have into next year is, of course, that we have not the additional cost in mining what we had with DKK 32 million this quarter, what we announced actually in quarter three, that this will go on for several quarters. That will, of course, not be in the result next year.
Excellent. And that was actually one of my follow-ups. And it's now four quarters we have had this, mining equipment headwinds in the profit line. Should we expect that to go away now, or is it sort of a further step up in the breach we should expect in Q3, or is it sort of neutral now?
We actually said that it will be throughout the year 2020, and we had it for three quarters, but we report on it very detailed, and as we said, it will stay up to the end of the year.
Okay. At the same or similar rates, most likely?
Yeah, a little bit up and down, but not big movements.
Okay. Got it. And then, could you talk a bit about how much savings you actually realized in the P&L in Q2 and how that's split between the two businesses?
Yeah, that's, of course, we have quite a synergy effect between the two, and that makes it a little bit blur and maybe wrong, if we share figures on that. And that's not really important. Important is what is the overall saving part. But you can imagine that a cement business which got quite hit, that of course there you have quite a lot of cost to adjust savings. And versus a mining which actually, despite the order intake thing, from a revenue point of view, with that what we could do and realize runs on a reasonable okay level.
Okay. But if we sort of ignore how it splits, what was the actual impact on group level in the quarter? I see the run rates, obviously, but.
Then it's in the EBITDA bridge. Actually, it's exactly listed in the EBITDA bridge. Yeah, the net, net savings are in. Did I understand you right? Was it about the COVID impact or what? What do you mean? The sustainable improvement or?
No, the sustainable savings, yeah, the sustainable improvement sort of impact in the quarter from the sustainable.
Yeah, but that is exactly in the EBITDA bridge named.
Okay. I'll, I'll refer to that. Thank you. Thank you so much.
Thank you.
Thank you. Our next question comes from Claus Almer, Nordea. The floor is now open to you.
Thank you. Thank you for taking my questions. The first question goes to the suspended guidance. Thomas, if you're going to rate the biggest uncertainty, would that be the timing of the backlog, or would it be the in and out of orders in the second half when you talk about revenue, obviously? That would be the first question.
Yes. I think no. Actually, the biggest uncertainty what we have is not one of the two. The biggest uncertainty is government decisions, what they do, because it has a significant impact on our revenue recognition. That's clear, and it has an impact on our order intake too because if it comes to service orders, for example, you have to be on site. You have to go with the customer on site. Out of that, that is actually the biggest uncertainty in what we see there.
Okay. So when you talk to clients, do you see the pipeline of projects is just developing as expected, or is also part of the pipeline being paused? Or how is that part of your business developing?
What we can say is the pipeline we went into the pandemic is more or less the same. Actually, in Mining, slightly increased than before the pandemic. So Mining is actually with a healthy pipeline. There is no question mark. In Cement, we went already with a lower pipeline, as communicated, because we expected the lower revenue this year than last year already in the original guidance. And that is what we see in the pandemic. We have no cancellation in the pipeline. We have no cancellation in any informed project, which is still not really on quotation side, which is good. The only thing what we see is on a lot of things it got postponed.
The comment from customers is very often that they at the moment more deal with getting their operations back on track and producing a lot, especially in mining because commodity prices are quite good. Overall, when you look into the mood, especially mining, quite good.
Okay. Then, my second question, I'm not sure if that's for Roland or you, Thomas, but coming back to the EBITDA bridge you gave in the presentation, the DKK 245 million negative impact from lower revenue due to COVID-19, is that delayed in the second half of this year or into 2021, or who knows?
Yeah. Yeah. Thank you that you say who knows. I would like to meet the who knows. No serious. Of course, when you look into that, what we have as a backlog, when you look into that, what we normally generate, we think in or we see in mining, it's a pure timing thing. And that's the tricky thing for the guidance. When does it hit us really? That's the thing. So from, from that point of view, to predict that is quite the tricky thing, today. When we look into Cement, there the timing is an issue, the same like in Mining. And we see in some parts of the business that actually explains the 240 partly, letting colleagues go.
There we see that some of the business which is, what we call, non-productivity impacting auxiliary business is not coming back on the level as we had it before.
Right. Okay. But the 245, I mean, could turn to profit in the second half this year. And could you maybe talk between Cement and Mining how this splits?
Yeah. You know, I make it like that. The purely theoretical, a lot is possible. But from experience, to have a full catch-up in the next few months is unrealistic from our point of view. It's unrealistic. Why is that the case? Because it's not only how goods can travel and how things are possible to move and to send in people or not. It has to do with the workload what a customer can take on site and where the focus is. In Cement, the focus for more or less all customers is on how to get cash out of the actual business situation. Mining there is more settled. They are more long-term. It's a global business.
They actually can have advantages in that some countries have currency devaluation, higher debt level, and with that then lower cost on the mine site to produce, when in Cement where you sit, you sell in the majority of the cases. And that, of course, makes it more tricky. So to believe that we will have a full catch-up effect this year, very unlikely.
Okay. And in the split between these two, Cement and the Mining, would you give any color to that?
We think that Cement is more hit than Mining. That is what we think throughout the year will be the case.
Okay. Thank you so, so much, Thomas. And first and also just, congratulations, Roland, with your new job.
Thank you.
That's all from me.
Thank you. Our next question comes from William Ashman, J.P. Morgan. The floor is now open to you.
Yes. Hi, Thomas and Roland, thanks for taking my question. Just one from me. You talk about in the release how you want to better utilize synergies between Mining and Cement to help address some of the longer-term issues in the Cement business, and I'm just wondering if you can provide a bit more detail on that and sort of how much is to go for. Thank you.
Yes. What we see is, thank you. It's a good question. What we see is, before, in the last few years and, yeah, actually quite a while ago, there was quite a difference in a lot of things how Cement customers and Mining customers were acting on the site and doing things and technical solutions can make it like that. Normally, Cement builds lighter than Mining. With the sustainability, with the digitalization, the focus is actually more on the performance in both industries and the digital and sustainable performance, and they come closer with that what they demand. If you have that situation, of course, you can combine teams which were before separated but acting in similar technologies more into one team, which, of course, increase your firepower, your knowledge, and, of course, gives you possibility to make it more cost-efficient.
Then, if it comes to other synergies, we see in mining as well as in Cement that customers more and more demand that we localize some of that what we supply in the countries where we have to build. That has to do with the political push to create more jobs in the countries and with that, tax pay. And a lot of customers think that pressure to create more tax pay in the countries where they operate will increase. So they actually ask us, look into what can you localize more. We are actually quite good in localizing, sourcing for different projects. And that is what we can do now more together between Cement and Mining. Because in Cement, you can imagine this is more local business. That already happened quite a while ago when in Mining now that comes more and more.
Actually Mining leverage the expertise here out of Cement, which makes bigger teams. Bigger teams means you can be more efficient and overall, of course, with a cost reduction in that too.
Okay. That's very clear. Thank you very much.
Thank you.
Thank you. Our next question comes from Lars Topholm, Carnegie. The floor is now open to you.
Yes. Thank you very much and also welcome on board, Roland, from here. A couple of questions on my side. Now, of course, Cement incurring a loss this quarter because of COVID-19. It is also a business where the backlog is small. The order intake momentum is questionable right now. Lead times are normally long. I guess a couple of questions based on that. First of all, the cost initiatives you have taken now, are they sufficient to turn Cement profitable within the foreseeable future, whatever that is, say, over the next 12 months? Secondly, if I ask if you ever wanted to spin off Cement, Thomas, I know extremely well what your answer will be. The tendency we are seeing is a focus.
We saw Epiroc spun out of Atlas Copco. We saw Metso Outotec focus on mining as a result of that merger, and if you on one hand have the synergies and on the other hand have the risk that investors want a discount on your share because you have Cement, is that a discussion you consider and weigh up when you look at your group structure?
Yeah.
I don't know if the question made sense.
Oh, of course, it makes a lot of sense, Lars. Definitely. At first with the cost out, to start with that, we gave in the current situation slide quite a clear comment that we know that mining will come back and from there will grow again, which will be then, if we compare that with the pre-pandemic time, be a bigger business. That is our clear belief. Timing is the issue: when and I can compare a little bit. It's not a lot what we can compare with the financial crisis, but in Mining in the financial crisis got of course a severe hit, but then it came relatively good back. Don't expect that Mining will come back as after the financial crisis because that's not the same fundamentals in it, but it will come back.
In Cement, what we see is we already went with a lower backlog in. That was in the original guidance quite built-in and communicated. The order backlog is lower. What we see is that the impact on Cement, more or less on a full stop in a lot of areas, of course, is quite significant. Then you look into timing is uncertain, like with Mining. Yes. Comparable a little bit with the construction business and the financial crisis. Same. Timing was uncertain in these things in these days. It came back, construction business, after the financial crisis, which is similar with Cement. But it came later back than the Cement, than the Mining business.
Second, we look, of course, into how much of that business what we had before will come back as a premium supply and how much we really would like to have in the future. Because we strongly believe that the MissionZero, the sustainability to enable the industry in 2030 to be CO2 neutral is a hell of a task. And it's a technical task. And we can add a lot of value. And we have a lot of questions and demands and interest from customers on it. And that requests to focus more on it. And of course, such a crisis gives us a possibility to look into the offering to strengthen that in that area faster than we maybe could have been doing it before. Then and that triggers which kind of cost reductions and measurements we will do.
It's not about to reduce cost by doing here and there a little bit. It's a structural approach. What is the offering for the future, what we should have? And that is what we should have in the company. And that's it. Then regarding the spin-off, yeah, of course, you know what I say. But of course, management always looks into what to do with the business what we have. Is it core or is it based on performance dropping into adjacent business or a non-core? That's clear. And we would not justify a business purely based on synergy effect. That would be completely wrong. But the outlook for Cement is a healthy outlook on sustainability, on digitalization. And the premium market in Cement will get consolidation, as you know, which will help on the pricing pressure.
In that regard, we should not forget one thing. Last year's profit warning and underperformance of us came predominantly or came out of Mining and not out of Cement. They had actually quite a good year. We were on a good track. That the pandemic here pushed us years back is not nice to see. That's what I can say to it.
And then, if I may continue on a different note, I thought it appropriate just to praise you for the free cash flow and also the net working capital improvement. Just one follow-up question on that. Your supply chain financing, how has that developed over Q2 amidst COVID-19?
Thank you for that, Lars. So if you look at our payables, it's primarily driven down by lower volumes, and the same for supply chain financing.
Yeah. [crosstalk].
In the same ratio, yeah.
In the same ratio as the revenue.
So financing is the.
Yes. And I know that we have there a different opinion on supply chain financing. But for us, it is a loyalty program. It's very important for a company like us that we have access to the premium key suppliers in the world where we make less than 0.1% of their turnover. This is for a premium supplier, which is very much close to asset light, a key important thing. So out of that, it's not a surprise that it went down in line with the revenue.
Thank you very much for answering my questions, guys. Thanks.
Thanks, Lars.
Thank you. Our next question comes from Mikael Petersen, SEB. The floor is now open to you.
Hi. Thank you for taking my question. I have two questions, if I may. You mentioned that you were aiming to manufacture less and source more. What impact on margins will this have?
Actually, I can say a positive impact. Why, why I cannot say that? It has to do that we are not talking here about the core of our technology, of the differentiator, of the competence what we sell. This is auxiliary equipment. I'll give an example. We have quite a lot of fans to cool down different places in a cement plant. I don't know how many fan suppliers are in the world, but I would guess 200-300 easily. Why should we produce fans on our own? It's not helping the productivity or anything. It's a consumable. And before customers were very clear, we would like to have on everything what you supply an FLSmidth stamp. That is not the case today.
They are interested that we deliver a fully digitalized, sustainable plant where the core technology is from us and everything around we should localize, which means source locally because their customers are sitting there, so that's a business advantage for them, so out of that, this auxiliary equipment or non-core equipment what we have to source to finalize a project and to finalize a plant doesn't need to come from us. What does it mean? We can actually reduce our offering, which means we can focus more on the important stuff and with that, you get overall actually a better cost ratio what you when you buy it instead of making it yourself. Everything what you do in-house needs management attention and structure. The less you do of these smaller, not important stuff, the more you dilute focus in structures and management teams, which means higher cost.
Okay. Thank you. And then my second question. As you mentioned, there is like your recovery packages targeting sustainable investments, etc., where the limiting of the emissions within the cement factories, of course, is a hot topic. Does this move forward the timeline in terms of projects for you guys? You mentioned that it will take time for Cement coming back. But shouldn't this move up the timeline for these kind of products like upgrades of factories, etc.?
Yeah. That would be in an ideal world and that is how customers actually discuss it with us, but the reality is they have to, they are normally mid-sized companies, smaller to mid-sized companies. They have two, three, four cement lines or cement plants and with that, they have to act, so for them, the most important is that they sell cement and that they generate cash. If they see that under threat like in the pandemic where the construction, their end customers, the construction sites, are not operating as before, then they are very hesitant to go the next step. The positive in it is today the things and we have full visibility on what we get in, what are we getting asked.
The amount of sustainable and digital or combined digital sustainable requests what we have from customers by far outperforms the regular demand and is a significant increase versus the pre-pandemic, so the pandemic actually accelerated that push in the direction, and I can bring it a little bit different. A few weeks ago, actually, the European cement organization announced that they think that their group, the cement producers in Europe, will be CO2 neutral in the year 2050. We announced in November last year to enable the industry with technology if they would take that, then we can do that in 2030, which is 20 years earlier, which is quite a significant thing. That clearly shows how ambitious we are.
In that case, we have to be more demanding than anyone else because our customers, they have an installed base, which is quite a lot of them built in a time where sustainability was not on the agenda. We are pushing very much for it. We see quite a big business out of that.
Okay. Thank you very much.
Thank you.
Our next question comes from Klaus Kehl, Nykredit Markets. The floor is now open to you. Klaus?
Yes, hello. My first question is about the cement division. There's a lot of moving parts in this quarter. And we also have a pretty tough short-term outlook for this division. But would you expect to be profitable in this division in 2020? Or is there a risk that it will be loss-making this year? Second question, you have made an additional reduction of 240 employees in this quarter on top of the Business Improvement Program already initiated in the start of the year. But could you talk a little bit about what kind of cost reductions these will carry out, this will result in when it's fully implemented, and what kind of implementation cost it will have for 2020? That would be my questions. Thank you.
See, if I start with the 240. That is out of the business, as I explained it before. It has to do with the absorption and what we see which business we think will come back in a foreseeable time. If that is not the case, we have to reduce the cost base. No matter that we are limited in quite a lot of countries, we already did that. How to evaluate the whole thing when we know how really the extent of the Cement business will come back when we have a better visibility, then we can inform better what actually we will do about it. It is, as we said, for several years since 2018, management's main task to make that business profitable. We succeeded in it from 2018 on up to the end of 2019 with pure internal measurements.
The market didn't help at all. We see that the market still doesn't help, but it will when the pandemic gets, yeah, how to say, better in a way that normal business comes back, and we see consolidation in that sector, so out of that, the situation will improve on that. At the same time, you asked about the profitability of Cement. Of course, it's our task that the full year result of Cement is a positive on the EBITDA line. That's really our ambition. We will fight for that with whatever we have.
Okay. Thank you.
Thank you.
Just as a reminder, if you do wish to ask another question, you may do so by pressing zero one on your telephone keypad. Our next question comes from Artem Tokarenko, Credit Suisse. The floor is now open to you.
Hey, guys. That's Artem from Credit Suisse. Thank you very much for taking a follow-up. Just two technical questions or housekeeping questions. On FX, could you maybe help us with what effects should we expect at current spot rates for the remainder of the year? Also on working capital, maybe you can give us some color on what you expect for the coming quarters. Again, I appreciate you have that longer-term target of 10% of sales, particularly if business starts coming back. Would you expect working capital to build up in Q3?
You take FX?
Yeah. I think I think that, thank you for that one. That's a little difficult to say, right? But I think some of the currency movements we've seen in the emerging markets may not come back anytime soon. So, so the levels you have have seen in in Q2, you know, I think is sustainable for Q3 and and Q4 as well. So, so that's a little bit of headwind.
Mm-hmm.
Out of the DKK 55 million, about two-thirds of that is currencies.
Mm-hmm.
Then on the net working capital, of course, if, when business comes back, of course, our accounts receivable should go up and so on. And it has a net working capital effect. But very important is to understand that the net working capital effect what we saw in the quarter two, actually, we saw it a little bit in quarter one too. But the currency and so on really didn't enable us to show it properly. We changed quite a lot since end of last year on how we treat net working capital. We changed different processes. We have a significant more focused on cash collection organization with different procedures. I will not go into details what we all did in the last nine and 10 months to improve that a lot. It is a good result with the net working capital. It is a nice cash flow.
But I was very loud and clear. I'm not satisfied about the cash generation of FLSmidth for a very long period of time. A company like us, not in the highest range of the profitability, has to generate more cash than we proved in the last decade or so, if not longer. Out of that, when you look into the net working capital, for us, it's very important that we have a fast move out of the WIP into the accounts receivable to reduce further, and going the good way to reduce the long-term overdues. That all is part of it. We see advance payment, of course, as a positive. But that is something what we get from customers. For us, very important is to look what is the sentiment in the inventory.
We know that the inventory level what we have today is roughly that what we need to make our bigger service business happen, so that is another thing in it, and to make a long story short, on the net working capital, to make the bridge to cash flow, actually, the main cash should come out of a higher profitability, which means EBITDA, and that, of course, despite the good cash flow, we didn't have a satisfying EBITDA in quarter two.
Okay. Thank you very much. And just a follow-up. Apologies, but just a follow-up on the EBIT costs, which you had from on those plus DKK 3 million of net cost savings from COVID. So your cost related to COVID were obviously DKK 47 million in Q1. And they were just for one month. Is it fair to assume that you had those now for three months and the size of related furlough and travel savings was around DKK 100 million in the quarter?
No. That is not, that what we can say, and I think that's already quite a lot of detailed information. What we can say is that all the cost what we can identify as additional cost based on the pandemic that is working from home. You would not imagine how expensive it is in some of the countries to build up proper protection for our colleagues and for the setups that they can come back to office. All these things are on the negative impact, and we have on the positive impact predominantly the travel cost, then the furlough, and then other things of working more efficient. I can say that too. Working from home, we saw some efficiency improvements in some areas, some other areas not, but that gave a plus DKK 3 million in the quarter as a net result.
Okay. Well, thank you very much for your answers. Thank you.
Thank you.
Thank you very much. There appears to be no further questions. So I'll now hand back to the speakers for any other remarks.
Okay. Thanks a lot, everybody, for listening in. And we wish you all the best, and especially to you and your families, a safe stay. See you soon. Bye.