Hello, and welcome to the FLSmidth H1 2021 Interim Report. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question-and-answer session. As a reminder, this call is being recorded. Today, I am pleased to present CEO Thomas Schulz. Please begin your meeting.
Hello, everybody. I welcome you all to our interims report for the first half of 2021. Of course, with a lot of information on the Q2 performance here out of Valby in Denmark. If we look into the quarter two directly with the key highlights, we had a very strong order intake and cash flow in the quarter. We increased revenue and EBITDA. Our net working capital showed a very strong performance, all together done by a great performing organization. We announced on the 29th of July the acquisition of thyssenkrupp Mining, which will then, when we have it and integrate it, create a big global industrial leader into the mining industry under the top 10. If we then look into the market, mining is in a growth cycle, and it will go on.
Question is if it's a normal growth or a bigger growth cycle. We will come later a little bit more in details to that. We see clearly a midterm recovery for cement. Already an increased demand for green solutions. The guidance for 2021, we updated. We narrowed the revenue guidance from DKK 15.5 billion-DKK 16 billion as the low point. We kept the DKK 17 billion as the high point for the revenue guidance. EBITDA margin stays 5%-6%, it now includes cost of around DKK 100 million regarding the TK Mining acquisition. If we look into the mining market, this is a positive market. Really good commodity prices. Demand, great. Demand outlook, great. Driven by sustainability, by digitalization, infrastructure builds, infrastructure demand et al. It's a good industry to be in.
What we clearly see in the industry is that the outlook, the demand for bigger CapEx investments into stationary equipment and stationary solutions, like in the processing or in-pit crushing systems, is quite good. It is there. Engineering orders are all there. The demand discussions are there. What is not there is the big order boom in it. The reason for that lies in the COVID, with restricted access, as well as the managing of the mine sites to avoid to have too many non-own employees on the site, as well as the situation regarding sustainability. To have more clarity, what are the sustainability targets and regulations for the miners? With that, with the investments, if they can be done or not under new regulation and which impact that has.
On top of it is important to recognize that the miners are producing all-time record high production rates, and any disturbance in that production leads to, of course, disruption for them, and they will not allow that. Overall, this is a good industry to be in. When we look to the right side to our revenue, we have an organic growth of 13% in the quarter two. Service grew 11% and capital 12%. Especially in the capital, that's a result more or less out of the order intake situation from last year. We performed with a 8.2% EBITDA margin versus a 7.8% what we had last year. If we take back the M&A costs, what we had in the quarter, then we are actually around 9.7% EBITDA. Now to the order intake. Service went up 12% and capital, great 86%.
In total, 32% in the quarter two. Yes, the capital order was a larger, around DKK 200 million order in it. If we look to the right side, how the development is for the orders, you see that we are, with the order level, coming closer to that what we had pre-COVID. The level what we had pre-COVID, that means in the mid of 2019, we are in the way to go there, which is positive news. If we look into the setup of the service, this is a bumpy road. Service is the light blue bar. When you look more detailed into the industry, you will see a difference in order intake growth for service between the mobile suppliers into the industry and the stationary suppliers into the industry.
It is clear that the stationary suppliers, as we are one of them, are lagging versus the mobile ones. The explanation is a purely operational, simple thing. It is easier for mobile equipment to make refurbishment or any change and work on the units by simply taking them off the mine site into a refurbishment center because they can drive, they are mobile, and bringing something in between. When you have at the same time in stationary equipment, you can't move out a SAG mill for a week. That's not possible. That means to make a big refurbishment there or big aftermarket investments, you have to stop the production, and that is not what they like with these fantastic commodity prices. If we talk about the outlook, we talk of course about thyssenkrupp Mining. We have three main pillars for that acquisition. One part are the employees.
We are in a growth cycle. The war for talent to get the right competence into the right seat in the right location will get more and more difficult. We will get more than 3,000 top mining competences through all layers into our company. This additional talent pool to our talent pool creates one of the top 10 in the industry, and it creates a situation for the employees with multiple career opportunities, and we get more attractive in the future for other people outside the company to join us. If we then look to the customer side, we are able to cover digitalization, sustainability, MissionZero from pit to plant. Whatever happens there, we can cover. We can add value. We can make business out of it. We can improve productivity.
On top of it, a bigger company supplying into the mining industry has more money, more talents available to drive innovation, to drive new developments, which are absolutely necessary to fulfill sustainability goals. Beside that, an improved coverage closer to the customer, more sales and refurbishment offices in the combined business are, for the customers, very important. Last but not least, on our shareholders. This is a transformational deal. It gives us a possibility to do the same with that, what thyssenkrupp Mining has today, what we had eight, 10 years ago, an engineering service business to transform it into a product service business with some engineering in it and project business in it. The potential, the synergy potential of DKK 370 million, the transformational potential, and the potential to create value with the new business coming on board as we deliver it in our mining business is significant.
Big part of that is the aftermarket business, and the aftermarket business is, in that thyssenkrupp part, around 25% to 30% in a normalized year, and we can bring it to 60%. That is where we should play, and that is a huge additional on top of it. If we then look into what we have here, the transaction has a total consideration of DKK 2.4 billion. That's the enterprise value. The revenue in 2020, which was the COVID year, the toughest year after the Second World War and global economy, was DKK 5.8 billion. Of course, the EBITDA out of such a year is very much scrutinized. When we then look into when we expect to close it, in the industry, in that magnitude, in average, you have 12 months closing time. That's nothing special. This is normal. This is more or less standard.
The strategic rationals on it that we get as FLSmidth bigger in mining, up to 80%, 85% of the whole group, that we drive growth, that we drive profitability with that is clear. We get a significant stronger value proposition for our customers, who more and more will look into the whole value chain, what they have, to get more sustainable, more productive, and we can offer everywhere something. We have a potential with the aftermarket opportunity, which is, from our point of view today, still untapped. The colleagues in thyssenkrupp work on it, but it's still, from our point of view, untapped. Huge potential. We will drive sustainability and digitalization throughout the industry. Our MissionZero gets more real with that acquisition. Of course, the compelling synergy is what we have. If we look into what the timeline is, which kind of points we have to do.
At first, in 2020, which is the reference here, they have a high single-digit negative EBIT margin. They are part of a huge corporate organization, multiple headquarters, quite complex as these multi-industry corporates can have. They recognize that they have to do something already in 2019 and initiated a restructuring program, what they already run. As you could hear yesterday out of the thyssenkrupp, for them, quarter three announcement, they highlighted multiple ways in the text as well as in the webcast that they are very much pleased with the performance versus that what they expected out of the restructuring undertaken. They highlighted mining in the upcoming profitability, what they have versus last year in that part of Multi Tracks.
That, from our point of view, proves the competence and the knowledge. The willingness, the attitude, the positive attitude of that group, which will work towards a positive result when we get that business into us. There we are with the corporate structure and what we really get. It is a carve-out business. thyssenkrupp carves that out of the existing structure. Carving out means we get roughly 3,500 colleagues and more than 95% mining business related, not a lot of overhead-related people. No headquarters, no nothing of that. It is actually an unbelievable asset-light organization and business what we get into our group, and that fits us very well. The synergy run, what we have is DKK 370 by end of 2024. When you look into the timeline, if we assume in the mid of 2022 closing happens, then we will have the integration realization, the execution.
Integration planning already started after signing directly. The execution of the integration will start in the second half of 2022, and we will run through in 2023 with that integration. Then of course it's clear that the first time we can show the full synergy run rate effect in 2024. Then it's up to us where we already proved that we can transform a project service business as we did with our own into a product, projects, and service business, market leading, to show that to the market with the same profitability as we have it in our mining business. Now into cement. Cement market got, of course, last year quite a hit. What we can say is short-term, difficult. As we said before, no change. Mid to long-term, good, great potential.
The industry demand already for green solutions actually outperforms that what we saw coming a year ago. That is very good. We see that the industry can deal better with the pandemic. We see, of course, that big CapEx investments are still deferred. They preserve cash. The demand, the talk, the information getting on the industry side from us regarding sustainable solution is really, really high. Our organization does a great job in serving customer base with that. We are leading in that, and it's not only about CO2, to make that clear. We said it before, cement will transform in a multi-commodity industry where clay is, beside limestone, one of the resources utilized in the future to make more green cement. To the figures. We had a slight down in the reported figures on the revenue. Organic, more or less unchanged.
That is out of the low order intake, significant low order intake, what we had last year. Still, with the business improvement and the reshaping and the top work of our cement colleagues, we were able to improve the result. Still negative, but significant less negative than we had it last year. If we look into the order intake, which is of course showing the competitiveness and the attraction of our offerings versus others in the industry, you see that we were growing the service by 42% and the capital by 59%. It's a 55% organic growth, which is great. If we there look to the right side with the period from Q2 2019 to now, you see that we are able to build order book same as we did in mining.
Actually, our order book, what we have for the whole group after the first half of 2021, is more or less spot on with the order book what we had in the mid of 2019, pre-COVID time, which is a positive news for us. When you look here in cement, I would like to highlight the service performance quarter-on-quarter now for five quarters, increasing. That shows what we as FLSmidth with our regional organization can do to serve customers and sustainability on the service side, too. Out of that, we got to inform, we got the first clay calcination project regarding here in Europe to cut 16% of the CO2 with our French customer Vicat. This is again a landmark investment from their side, a landmark order for us, showing how competent we are in sustainability and that this is not only talk.
On the right side, it's about, linked actually with that, the Fit for 55, the Europe Climate Deal. When you calculate what it means for the cement industry to give some crisp figures here, we have roughly 180 million-200 million tons of cement production, 150-200 in the EU 28. What comes up is a EUR 90 per CO2 ton taxation. Not to make it too complex, but fact is there is still up to the year 2025 quite a lot of exceptions and allowance for the cement producers not to have that taxation. You see when you have that situation what it means.
The reduction in CO2 from 1990 to 2018 in that industry is only 10.5%. That's not enough to fulfill the Fit for 55, and it's not enough to serve the purpose and to fight against that, what we heard at the beginning of the week in the climate report. Fact is that we, from 2025 on, get an additional on top CapEx opportunity to transform the industry more into less CO2. It means, in reality, that you have around DKK 100 billion for the period '26 to '30 additional taxation in the industry. Of course, this is not all potential for us because a part of it, maybe the bigger part, will go to the end customers like you and me in higher cost for cement.
A big part of it goes into new technology, and that is where we play number one, and that's the reason why we think midterm, this is a great business to be in. With that, I would like to give to Roland, our CFO.
Thank you, Thomas. Financial performance continued to improve in Q2. We increased our order intake by 38%, our revenue grew by 9% organically. Our gross margin increased and also our EBITDA margin increased compared to the same quarter last year. In fact, our nominal EBITDA increased by 50% compared to the same quarter last year. All this is well supported by our business improvement activities from last year, including a 12% workforce reduction. If you look a little bit on our revenue, it increased 9% organically. On group level, we're maintaining a 61% service share of total revenue. If we look at the right-hand side, revenue is growing. We are not yet back to 2019 levels, but for the fourth consecutive quarter, we are having a higher order intake than we have revenues, so positive book-to-bill, and also continuously a good and healthy service share.
If we look at our gross margin, it also improved in nominal term, well supported by the business improvement activities. Percentage-wise, we are up compared to last year, and that goes for both mining and cement. They both benefit from the improvement activities, but also from a healthy service and aftermarket share, even though cement had an element of reshaping cost included in this. If you look at our SG&A, our SG&A cost is up in Q2 versus Q2 last year and also versus Q1 this year. It includes DKK 40 million of TK acquisition costs, and it also includes cement reshaping costs and certain other costs for our physical footprint optimization that also includes mining and has group impact. If we adjust for the DKK 40 million, our underlying SG&A ratio was 17.1%, and our underlying SG&A cost is in line with our planning.
We expect another DKK 60 million in the second half of 2021 related to the TK acquisition. A total of DKK 100 million in SG&A cost for the year of 2021. If we look at our EBITDA margin, that also went up compared to last year, slightly down on Q1, as we also had expected it. If we look at the right-hand side and compare Q2 last year to Q2 this year, our increase in revenue is yielding us a DKK 56 million, an increase in gross margin from both industries is yielding DKK 35 million. We have DKK 74 million of non-recurring business improvement costs from last year, and then we have a smaller increase in SG&A.
More notably, we have the DKK 40 million in acquisition costs from the TK deal, then we have DKK 42 million that has to do with primarily reshaping costs in cement, but also other costs related to our physical footprint optimization, that will impact both mining and the group as such, thereby ending up at DKK 197 million EBITDA in Q2 2021. Looking at our working capital, that performs strongly in Q2. A strong effort here by our organization, bringing our net working capital ratio below the magic 10% limit for us. 8.2% net working capital ratio is the lowest we have seen, the best we have seen for several years. Looking at the right-hand side, inventories are largely flat. They are being steered and also a little bit thinking about a potential uptick in service and aftermarket.
We, or the organization, have focused tremendously at creeping our trade receivables at check. Our trade payables went up a little bit in a positive way, also supported by an increase in our supply chain financing. We have started to execute on the projects we won in Q1 last year, and thereby WIP starting to increase. We received a few prepayments from customers connected to the projects that was posted in Q2, and thereby our net working capital improves to DKK 1.3 billion, coming down from DKK 1.678 billion in the previous quarter. Really well done on this one. That leads us to a strong cash flow for Q2, both the cash flow from operations, but also our free cash flow. On the right-hand side, we see that composes of healthy EBITDA cash earnings that converts to cash, strongly supported by a positive change in net working capital.
That leads to a cash flow from operations on group level to DKK 407 million. We have CFFI or investments of DKK 64 million, and thereafter, free cash flow to the group of DKK 443 million. A strong outcome here for the quarter 2, and thanks to the organization for this one. That means that our capital structure is well in line with our targets. Our NIBD is being reduced to DKK 1.159 billion, and a leverage ratio of 1.0X. On this basis here, we are updating our guidance. Our initial guidance in 2021 was a revenue guidance of DKK 15.5 billion-DKK 17 billion. We are narrowing that to DKK 16 billion-DKK 17 billion for the full year revenue 2021.
We will maintain our EBITDA margin of 5%-6%, and this will now include costs related to the acquisition of thyssenkrupp's mining business at around 100 million DKK for the full year, including, as previously guided, costs reshaping the cement business. This guidance is obviously still subject to uncertain due to the pandemic around the world. With that, back to Thomas.
Thanks a lot, Roland. Now we are there. The last slide, what I would like to show here, in the total package as a detail is about our own in-house performance. We have since 2012, a fantastic performance improvement on safety. This year, based on the COVID impact, restriction chain opening, not only in our industry, we see in a lot of industries that actually safety got on a slight worsening path. We take, of course, mitigating actions, but we are at the moment on a 1.7. Actually, when we had, last year, a 1.0. This is not good, but I'm actually impressed about all the activities throughout our organization to improve that. If we highlight another thing, there we are especially quite proud of the greenhouse gas emissions. We are now on 16,000 around.
The target is 38 for the year, this is already significant lower than the year before, where we had not a lot of things happening based on COVID. That's an outstanding top performance in our own sustainability part. To summarize a little, strong cash flow, strong order intake, increase in revenue, real good increase in EBITDA, unbelievable strong net working capital performance for the quarter two. We announced the acquisition of thyssenkrupp Mining, we updated slightly the guidance on the revenue line. With that, we would like to go for the Q&A.
Thank you. If you would like to ask a question, please press 01 on your telephone keypad. If you need to withdraw your question, you may do so by pressing 02 to cancel. There will now be a brief pause while questions are being registered. The first question comes from the line of Christian Johansen from Danske Bank. Please go ahead. Your line is open.
Thank you. I have three questions. I'll do them one by one. The first one on the restrictions to mine site. Can you just give us an update on what the situation is as of today?
Yes, I can. What we see is that we have, in some areas of the world, actually no restrictions any longer. Of course, tests to go on site and so on, but customers demand us not to send in too many people. What is the impact for us, despite the fact that it's actually open? Normally, we send in two, three, four engineers to make due diligence, to go around with the customer to look here and there, what we can improve. That is, of course, on a low level at the moment. That, of course, has an impact on order intake.
We have on the other extreme side, areas where customers decided still to block the mine sites based on the risk not to get the COVID on their site, because they are very far away from residential areas, and the capacity what they have on mine site would be totally overrun on the health side if the COVID outbreak would happen very quick. We know that the Delta variant gets very fast into a bigger group. Overall, we have a more stable picture. The miners are dealing, they are more professional with it. The governments still more professional with it, but still it has an impact on the order intake development, because for stationary equipment, you have to be significant more on-site than for mobile equipment.
Understood. Quite clear. My second question is on these DKK 100 million in costs related to the thyssenkrupp acquisition. First of all, the remaining DKK 60 million, can you give any indication of how that would be split between Q3 and Q4. Also, just to be completely clear, this is not part of the EUR 560 million you are guiding in integration cost related to the rest?
Yeah, thank you for that one. We estimate that the DKK 60 million will be split evenly between Q3 and Q4 this year, and a very little part of this is part of the integration cost.
Understood. Okay. Looking into next year, should we expect that DKK 30 million run rate to continue?
No, that is not the.
What's the dynamic essentially of the cost you have now?
There will clearly be a cost next year, but this is very much subject to when we do closing and when proper integration can start. That's too early to guess about.
Okay, understood. My last question, you also mentioned on the call that thyssenkrupp reported the other day, for calendar Q2. Are you able to share any details on the financial performance of TK Mining for the first half of 2021?
Yeah. We are only allowed to share that what they say themselves. They had reporting yesterday, and on multiple occasions in the text, what they have on the webcast, you will find the result for Multi Tracks, and then of course, comments like that the profitability in the same year before in Multi Tracks was -EUR 249 million, and at the moment it's -EUR 35 million. They highlight, beside AST, of course, mining as a contributor in that improvement. That goes well aligned with the comments what they have verbalized, that they are quite satisfied with the performance of the restructuring ongoing in mining and that they are ahead of plans. More we can't share because we have here a clear competition situation. That's the situation.
If you want, you can go on the thyssenkrupp.com site, and then they have on the section where they report on the so-called summary for Q3, as well as a year-to-date text. Both texts are around 50 pages. There you find multiple comments regarding mining, that it's part of the improvement.
I understand, and I've seen those. I guess obviously what would be nice is to have some exact figures on the mining part. Maybe just to understand the reason you cannot share exact figures, is that due to competitive reasons, or is this a deliberate choice from thyssenkrupp that you do not want to share that?
At first, it has nothing to do what they want to share and what not. It's purely legal binding based on competition. Second, if it comes to expectation, how we see, of course, we see that the business will come into a quite significant better situation than it performed last year when we have the closing. Why we are confident about that is 2020 is the worst global economy year since 1945, and it hit all the companies. Second, they have a restructuring. What they themselves publicly say, they are ahead of plan. Third, when we take over that business, it's a carve-out, so we will not enjoy all the headquarter structures, building structures, whatever they have in the corporate group, which is quite significant in large corporations as they are. We get a carved-out business restructured in their way, and that is what we get in.
The profitability, what we will enjoy when they come over, will be significantly better. The colleagues know that we expect that.
I understand. Got you. Thank you so much. That was all my questions.
Thank you, Christian.
Thank you. The next question comes from the line of Claus Almer from Nordea. Please go ahead.
Thank you. Yeah, a few questions from my side as well. The first question goes to you, Thomas. You mentioned in the beginning that the mining industry has a great outlook and a great demand. When do you think we will start to see this in your order intake? That will be the first question.
Yes. I don't want to make it as a joke, we have already a significant order intake growth, 32%. We have a growth in service. We have a growth in capital of 86%. We have an order backlog mainly driven by mining, which is already on the level of the mid of 2019, which is pre-COVID time. I think it's obvious that the hit what the mining industry got, our industry, the supply industry got into COVID, we are moving out step by step. That is what we already see, an 86% capital growth quarter-on-quarter. What you will see more is, and we reported on that before, we can see what is in the pipeline. The pipeline in mining looks good. It looks really good. We have a lot of engineering orders. We know that the peers have a lot of engineering orders.
The industry is definitely intact for that. The reason that it's not released in a bigger amount, because only a few were awarded to all of the suppliers. The reason why it didn't happen is the miners in the boardroom look into managing the COVID, managing the fantastic cash flow, what they have, by pushing unbelievable hard to produce as much as possible. Of course, they look into what are the upcoming sustainability regulations there where they have the mine sites. That all together gives opposite to that they create a lot of cash flow, positive cash flow, that they have a fantastic demand, high commodity prices. They are, yeah, not that ambitious now to go out and to place the big CapEx orders. They will come. That's a given. Otherwise, they will be not able to supply that cash.
They will be not able to serve the demand. They will be not able to serve an increasing demand based on infrastructure builds, no matter if it's out of U.S. or China or anywhere else, digitalization and sustainability. We are not at the peak of the cycle. We are at the, yeah, in a very bumpy road, in a growth cycle, but definitely more at the beginning than in the mid or at the end of that growth cycle.
Well, if you look at the situation after Q1, and I know three months period for a long cycle industry like the mining sector is quite short. Do you see the mining companies are getting closer to push the CapEx button? Are they still considering and figuring out whether commodity pricing will stay at the current level, et cetera?
You will not see huge movements this year. That is what we see. The big capital releases, some will happen, but the majority in the years to come. That is clear. Based on the three reasons what I gave. It is not logical to believe that with the situation what we have, that they're now out of any pre-warning all come with big CapEx orders. We don't see that coming. That's not the information what we have from them. Their wording is, "Guys, no hectic, no panic. Dear FLSmidth, you will get your orders. At the moment, we look into high production rates, managing the COVID, and we need some more clarity in some parts of the world on the regulations, what we have regarding water, tailings dams, and so on.
There is no belief on our side that we really see a downward swing on the commodity prices, which is out of the normal. Sorry, Claus, you had another question.
No. That's very fine. A question for Roland. This impressive growth in the profitability you saw in Q2, how much of this is mix and how much is maybe pricing?
Yeah. The profitability we saw in Q2 is driven by a few things, right? First of all, we still enjoy a healthy service and aftermarket share, and that applies both for mining and for cement. Secondly, our business improvement activities is kicking in, right? That means, for instance, on gross profit level, we are running at better capacity utilizations, right, in our operations. That's driving profitability. If we look at second half, most of this will continue, but we will start deliver on the orders in, especially in mining, that we received last year in Q1, and that means that capital will be a larger part of our revenue, and thereby weigh down on the overall mining margin in second half. That's how we think about it.
Okay. Makes a lot of sense. By the way, thank you so much for the more color on your guidance per division. That was all for me.
Thanks a lot, Claus.
Thank you. The next question comes from the line of Klaus Kehl from Nykredit Markets. Please go ahead.
Yes. Hello, gentlemen. A couple of questions about the Cement division. Your backlog is now starting to point up, and based on some fairly conservative assumptions about the order intake for second half, I guess that at the end of the year, you will have a backlog that will point up by about 10%. You are also starting to reshape the business and taking out cost. I guess, outlook for 2022 is actually not that bad. Could you, yeah, comment a little bit about that?
Yeah, we can comment on that. The good job what the whole organization does is, as you rightly said, with the profit improvement, and on top of it, what we always highlight, the repositioning out of the CO2 producing more into a CO2 avoiding technology for the cement industry, which costs money, which is part of the reshaping, which is quite significantly hanging in the figures, not only last year, this year too. We said before in Q1 that we expect that cement will be positive on the bottom line in 2022. We stick with that. Of course, we don't guide for 2022, I have to say that, but of course, with the order backlog, with the demand and green technology, we will have a year where we really can see, yes, the positive bottom line will come.
When you say positive bottom line, do you mean the EBITA or do you mean net profit?
I mean the EBITA. It's a fair question.
Okay. Also, I guess that your order intake must have accelerated during Q2. Could you just give us any indication on the exit run rate for order intake in end Q2 or beginning of Q3? Yeah, just to have a feeling for where the world is right now.
Yeah. Of course, what you have at the end of Q2 is, you have in the Northern Hemisphere, quite a lot of vacation time. Not that we appreciate long vacation times, but it happens partly in the world. That always has an impact, which means that towards the end of Q2, you have a slowdown in business activities. That's normal. That's absolutely standard. Then it will get speed again in the Q3, and then it hypes normally into Q4. That's the normal regulation in the year. If we don't have too much disruption out of COVID and lockdowns and blockages of transport and so on, then we foresee that roughly the same behavior this year. By the way, that's as we already guided, and we think that with the guidance and the COVID guidance, what we had, we are actually spot on.
Okay. Excellent. Thank you very much.
Thank you. The next question comes from the line of Robert Davies from Morgan Stanley. Please go ahead. Your line is open.
Yes, thanks for taking my question. My first one was just on your expectations within the mining part of the business for breadth to the aftermarket coming into the second half of the year. Are you getting any indications from clients that they are going to give you a bit more site access? Should it accelerate through the second half? Are you expecting a similar trajectory through H2 versus 2Q? I'm just trying to get a feel for whether there's further momentum to come in that aftermarket business, in mining specifically through the second half. Thank you.
Yeah. What we see is on one side that we have customers are really trying to limit any downtime to produce as much as they can. That has, of course, an effect that our service realization there is lower. On the other side, we see more and more miners going actually public saying that they under-invested in maintenance and that they are now coming into very critical stages. That was a little bit a new thing, that miners are going public with that and saying, "We have to do more on maintenance and replacement business, substitution business, to keep the high production rates up." What people from outside maybe don't see so much, we have quite a lot of miners, they produce over the 100% capacity what actually the plant should deliver. You can do that.
You can do that especially with premium equipment, and we are always proud that you can run a FLSmidth equipment quite higher than the norm capacity. Of course, you can't do that all the time. It's like a little bit in a car. You should not drive with a car more than 200 permanently. That is not good for the engine. It's similar with the mining industry. Anytime it will come significant more in the aftermarket. Do we see that for this year? No. We see as we guided it for. Normal year with the outlook in mining, and when they take a breath by force because they have to stop because it doesn't work any longer, or they see a possibility to have some downtime, then you will see immediately quite a positive development in the stationary sector of the aftermarket in the industry.
We see significant more differences in the order intake behavior between the stationary suppliers and the mobile suppliers than we actually see towards commodities regarding in the mining industry. That is quite good for us because we know we always lag behind in that what comes as growth versus the mobile ones we are almost 16 years in.
Thank you. My follow-up question was just actually along a similar vein, really, around site access issues. I know you had, I think it was early in 2020, you had quite a big order, over DKK 3 billion on the OE side in mining. I'd just be curious to know, are you having trouble with sort of deliveries, installations, and commissionings on some of these bigger pieces of equipment? I guess the crux of my question is really, are we likely to see pressure on some of the delivery of the sales numbers through 2021 and 2022, and then a pick up from there as the COVID restrictions ease? Are you kind of circumnavigating some of those headwinds and with testing and isolation and I'm just kind of curious to get a bit more color. Thank you.
Yeah. It's actually the same picture as we had a quarter ago, two quarters or three quarters ago. It's not a big change. What does it mean? In some areas, we know there are restrictions that is factored in. In some other areas, and this is really then the hurtful one, if things are happening out of the no information before, a lockdown, we are not allowed to cross a border, or like this morning, for example, in China, one of the biggest, if not the biggest harbor shut down based on one COVID case. That, if we would have equipment there, what I don't know yet, that will have an effect. We know, to give a little bit what it means, if in China that harbor goes one day down, we see the effect in Europe, actually three days delay, and so on. We can calculate that.
We have a very agile supply chain and procurement organization. We track that. What we see today and what we saw up to now and what we expect up to the end of the year is actually completely factored into the guidance. It comes really out as we profiled it.
Thank you. Maybe just one final one. Just on, you mentioned some of the bigger projects. The miners themselves are not necessarily pulling the trigger, I guess it sounds like you've got some confidence that they're going to come through. Any idea around sort of timing? Are you expecting a sort of power wave of these larger orders to come through in 2022? Is it sort of too dependent on COVID to make that prediction yet? Could you wait until 2023 or even 2024 before bringing these on, or would that be too late, in terms of the sort of supply-demand balances your customers are talking about thinking?
Yeah, we know it side by side. If they would like to keep the production rates in that demand or in that level as they want, we know exactly where they have to do the investment and where they can delay it further. That is openly discussed with the customer, and the customer knows that very well, too. Second, when we look into that, based on the fact that we don't see a demand drop, we really don't see a demand drop. I take now the infrastructure bill, which will have not an effect on us this year in U.S., but this is not only building materials, this is driving minerals, too. This is driving significant minerals, too. It will create a situation that other countries will look into infrastructure, too, because there is then a competition who has in the future the best infrastructure.
China did a lot with Silk Road. Now the U.S. is coming. Let's see what Europe, Latin America, Southeast Asia is doing in that. The demand for minerals, the commodity prices, we really don't foresee in that cycle that it will significantly go down. If it goes up, yeah, maybe a little bit here and there, but we think the level where it is is a very healthy level. The customers have the money. The issue, what they have is the timing based on production rates today, and that there is a clear regulation, what is allowed with water treatment and so on. When we look into that and then I'm done, what we quote, we always quote options to upgrade towards sustainability if there's any change happening. That's a stronghold of us in the market, and we will enforce that further.
That's great. Thank you for taking my question.
Thank you, Robert.
Thank you. The next question comes from the line of Magnus Kruber from UBS.
Hi, Thomas, Roland, Magnus here from UBS. A couple of questions from me. First, and apologies, it's slightly of a bookkeeping nature. I think when you commented around the announcement of the TK acquisition, you talked about returning to profitability in 2024. Is that sort of the TK business as it stands with their restructuring, or is that also including the PPA, net of PPA, that is?
What we are saying is, in 2024 is going to be the magic year in the sense that that is where TK standalone, if you will, that's not realistic to talk about, but if they were standing alone, would turn around. That's also the year where we will see full run rate effect of our synergies by year-end. If the question goes to whether there are PPA effects, yeah, there will be some, but they will most likely not be material, right? Just by looking at the way and the enterprise value and so on. There will be some, but they are included in that.
Okay, that's sort of all in with the synergies, with PPA, with everything? All in?
Yes.
Perfect. Thank you so much. That's great. Secondly, on the aftermarket opportunity in TK. I'm not sure at which point you actually really started going for growth in FLSmidth's aftermarket business. I noticed you grow your aftermarket revenue by over 60% between 2011 and 2016. Is there anything fundamentally different in the TK Mining business that would sort of stop you from doing the same with the TK business?
No. I can say more if you want, but no.
Yeah. Please, if you have anything more to say on that'd be great.
You know, Magnus, when you look into it, of course, we had in the business a big project business, which was creating very little aftermarket in these days. The world changed. aftermarket today is sustainable investments, too, here and there a little. Upgrading, getting digital solutions upgraded. These big, how to say, non-aftermarket driving projects. Western companies, as we see it with the ones who disappear off the market, and quite a lot disappeared in the last five to 10 years, is not really for Western premium suppliers. We will transform that business into a clear product line aftermarket service business with dedicated project business where we really can contribute the full potential of sustainability and digitalization, the same as we transformed the FLSmidth business into it. From that point of view, we don't see there anything different.
No, that's good. That's very promising. Just 1 final one. I think you opened the books a little bit about reshaping costs now in the quarter. This level that we saw in Q2, should we expect that to be a run rate going forward until we meet the same cost that was rising up late last year or?
No, what you should expect is slightly less in Q3 and then even less in Q4, and then we should be out of the mist in terms of talking about reshaping costs. Q2 is expected to be the worst, and less in Q3, and then even less in Q4, and then hopefully we're out of the mist.
Got it. That's sort of the cost level that's just meeting sort of-
We're talking about reshaping.
comparable comps.
That's talking about the costs.
Yeah.
Yeah.
Perfect. Thanks. That's all for me.
Thank you, Magnus.
Thank you. The next question comes from the line of Gustaf Schwerin from Handelsbanken. Please go ahead, your line is open.
Yes, thank you very much. Two questions from my side. First one was related to the reshaping cost for cement and the bridge. If you could also comment on how much negative impact was in the first quarter for that.
Can you please repeat? The connection was slightly gone for a second.
Can you hear me now?
Yes.
Yeah.
Okay, perfect. Sorry about that. First question is also related to the reshaping costs in the bridge. I appreciate that you gave that for the second quarter, but can you perhaps say how much that was impacting Q1 as well?
Yeah, exactly. What we said in Q1 is that there were reshaping costs in Q1. They were not that big, and Q2 and Q3 would be the heavy ones. The way it plays out now is that a lot of it has been taken in Q2, so we will take less in Q3 and then even less in Q4. Now, just referring to the bridge, the bridge is not only reshaping costs. It's reshaping costs, but also other stuff we do in consolidating our physical footprint, and that has to do also with mining and the group's general activities and so on. There's a few other things going on in our business.
Okay, you don't want to give out a number for Q1, because if I remember, you didn't give anything in the bridge then.
Yeah, I understand.
profitability potentially.
Yeah. Most of what you see in that bridge is cement, but the rest has to do with other stuff that we do and that we consider normal operational business.
Okay, fair enough. Secondly, I'm sorry to give back to the mining pipeline again, but just want to understand a bit more what you're hearing from your customers in terms of larger investments now. When you speak to the industry, if we look at sort of underlying demand and not taking these sort of short-term production focus into account, is your customers becoming more and more willing to invest for every day? I know the industry typically say that they don't mind or take investment decisions on short-term mineral pricing. If you look at history, there's typically a correlation. What I'm trying to understand here is that, is the pipeline improving for every day? Do you have better visibility and a better-looking pipeline than you had perhaps a quarter ago?
Yeah. At first, there are not these fast movements on quarter-on-quarter. The decisions of the miners regarding an investment is actually commodity price has an impact, but it's more the commodity price, what they foresee for the years to come. That defines the value of the deposit and then the possibility what they can invest. What we see is depleting ore grades, more infrastructure cost because the sites are getting more remote, and on top of it, higher sustainability measurements, which always cost money. Which always costs more money, minimum in the CapEx investment. Out of that is a little bit what they see and what they deal with.
I said that before, the amount of deposits we work in the future on are significant lower in the ore grade than 5 years or 10 years ago, which means you have to process significant more material to get the same amount of, I take copper now, copper out, with more restrictions on water, tailings dam and so on. That all creates a higher cost to produce the commodity, which brings automatically a higher commodity price. They price that in, and at the moment, they get, of course, big advantage with the high commodity prices, and that is not all in yet.
That money they give to shareholders back, as well as looking into where to invest for the future, taking over deposits or junior miners and having future plans, engineering orders, what we got awarded quite a lot, to plan for expansions as well as green lines. That is how the people work. When you look into, and it's actually available on Internet, you look into the cash cost, what they have versus the commodity price. It's one indicator. You see why they can pay so much dividend out. Second, you look into the CapEx investment versus production rates, and you will figure out this is one of the lowest, if not the lowest, for a very long time. When a miner says long time, 10 years is nothing. That mixture, of course, is that why we know the investments come.
Okay. Let me put it this way, because I agree with you that the margin over the cost curve is looking great, and it's understandable why miners are focusing on getting as much out as possible, given where profitability is. In your eyes, if you look at your pipeline for the coming years now versus a quarter ago, have things improved or are we sort of still at the same underlying demand level?
Yeah. What we see between quarter one to quarter two, it's the same situation. We don't see a change. It's still quite positive. That's the reason why we have in the outlook more or less the same wording as before.
Okay. Thank you.
Thank you.
Thank you. We have one final question from Lars Topholm from Carnegie. Please go ahead. Your line is open.
Yes. Hi, guys. I just have a couple of small questions on TK Mining. One question is, now you are going to acquire its potential closing around 1 year from now, and you are targeting synergies, which probably implies a couple of TK Mining employees who will eventually be without a job. What can you do to make sure the good staff is still around at the time of closing? The 2nd question, and that goes to the project portfolio you're taking over from TK Mining eventually, and the performance right now. I assume there are project provisions on these projects, and if the provision reversals, that can, of course, boost reported earnings, but not cash flow. I simply wonder what the cash flow situation is in that business, and I also wonder about its capital intensity.
I don't know if you can give some comments on that, maybe some comments on how net working and capital-intensive it is. That's all from my side.
Yeah. Hey, Lars. Let me start with regarding the people, and the good thing in that, or bad thing, no matter how we take it, I was myself in such a situation. When you sit in a business where you know that a peer is taking you over, and in that case, it was an 18 months, 18, 19 months journey, wherever. This one, what we see here, it's a very complementary business, but we still have merger control filing all over. In the industry, as you know, 12 months with a peer-on-peer acquisition situation is a realistic figure how long it takes from signing to closing. How to motivate the people?
Yeah, I think alone, and that is what we see over the different social medias as well as the discussions, what we were allowed to have with the different levels in the group, of course, under supervision of the thyssenkrupp setup and management setup, was very positive on us. German companies like Danish culture. That is what you can see all over. We have actually in a German city like Rostock, a Dane being the chief mayor, as an example. That's liked. Our way of talking with them, our way how we explain and what we want to do is engaging them a lot. Of course, it helps that the owner today doesn't want to have them any longer in the group. These people, we are interested in more than 3,000 mining people, and that's the big advantage. They know mining. They know what we do.
They know what we want to do. We get unbelievable, tremendous positive feedback from them. They are good people, and we will get good people. The motivation lies in it that we are transparent, like on this webcast, what we want to do, where we go, what we expect, like the profitability and so on, and that we clearly say, "You perform well, you have a great career." That's exactly how we take it. Our fear or concern is actually not there because in the thyssenkrupp Mining setup are quite a lot of good managers in it, a good management team driving it regarding restructuring and driving it for the long term, too. That all convinced us, and as you know, we know the industry quite well. We know the guys from thyssenkrupp forever. They know us forever. We are more than 100 years in the same industry.
Out of that, we know what they got as orders. They know what we got, and so on and so on. There I'm on the next thing regarding the projects. Of course, we come out of a time, as we know it in our own order book, where large orders are actually not so many as they were, let's say, in the years before 2011 and 2012. That in itself lowers the order book on projects. With that, we know projects have a higher risk than aftermarket business, has then a lower risk profile. We know that you need provisions in the projects, of course, when we looked and negotiated with thyssenkrupp, we required to utilize and to take our provision build-up, our way of handling, our way of seeing risk as the method to judge what they have in their project portfolio.
That explains a little bit why from non-binding offer to signing, which is normally two to three months, it took actually close to seven months. That is it. It's the risk mitigation, which was for us number one priority before anything else. Then to the net working capital and cash flow, Roland.
T hat was elegant. Thank you for that, Thomas. We are a little limited in what we can say, right? In generic terms, like Thomas says, a business with overweight in projects would be expected to have healthy working capital levels. Maybe a little more flavor, as you know, Lars, we spend a lot of time in the due diligence in order understanding the risks and the provisions in the projects and also whether we agreed with that or not. In the agreement you do with seller, you can regulate issues coming up, things where you don't think warranty provisions or others have been done properly. We are also transferring/renewing insurances on that portfolio, so that resembles what we have in our own business. All that is stipulated in a share purchase agreement that we do between buyer and seller.
That's what we have done. When that is said, then we have, of course, taken over the project portfolio and all the execution risks and risk going forward is on us.
Understood. Thank you very much.
Thank you, Lars.
Thank you. We have one final question from Tomi Railo from DNB. Please go ahead, your line is open.
Hello, this is Tomi from DNB. Thank you for taking my questions. Firstly on the mining base order activity. In the first quarter, you said that base activity was around DKK 1.4 billion, probably impacted by some pre-buying activity, and that's doubled from the previous year's first quarter. It appears that the second quarter base activity was around DKK 900 million. Wondering, how do you see that, in a way, drop? Was the first quarter fully impacted by the pre-buying? Were you satisfied with the base activity in the second quarter? Do you think that this sort of DKK 900 million is representative for the mining base activity levels currently?
Yeah. At first, when you look into the base orders, we actually reflect in the quarter one, reporting that the quarter two will be a little bit less active. You have that movement. The movement, if you two or three larger ones have in, can be then DKK 100 million-DKK 150 million on top of it or down. That movement, what you see between that what you described is absolutely normal. It doesn't make the world better or worse. This is the normal level. You see that bumpy road. When we look ahead, this replacement orders, of course, we act relatively quick. We can supply quick if it's standard equipment, and then it comes quick in. It all depends then can we assess the site or not. Is it possible to transport and then to assess the site?
Last thing what I have is, there are quarters where you, I don't want to say lucky, but you get all the bookings in the quarter because you supplied it, you were able to supply, and others, other quarters, it drops out into the next. From that point of view, absolute normal behavior, and we stick to the same message what we had regarding the base orders. It's a very healthy situation for base orders. It goes on, of course, as we always say, it's a bumpy road over the quarters. To the figure level what you have. Yeah, you are roughly in the range where we should be. The DKK 900, DKK 1 billion, DKK 1.1, and that range is actually not too bad. There's so much movement always in and out that we are actually not giving guidance on the base orders.
That would be too detailed in that highly volatile business.
Understand. Thank you. The second question is really to Roland on the tax rate, which was very high in the second quarter due to the reasons you mentioned, but any guidance for the full year or the second half?
Yeah. I think on tax, we are currently a little negative impacted as long as cement is not profitable because cement is taxed in, amongst others, Denmark, that are relatively low on corporate taxation. The combination of the split between the two industries and also certain countries imposing fixed withholding taxes and so on, the expectation to the average tax percentages, that it will stay between 35% or 40% for the remainder of the year.
Thank you very much.
Do we have further questions?
No, that's fine. Thank you very much.
Thank you.
Thank you. We have no further questions, so I will pass back for any closing comments.
Okay. Thanks a lot. I would like to close down our announcement of the first half year. Out of FLSmidth was, from our point of view, in more or less all dimensions, quite a good improvement. Definitely, not only versus last year, quarter two, and we are especially proud of the performance on the order intake and the cash flow of our organization. With that, all the best. Thanks for participation, and stay safe no matter where you are in the world.
Thank you.
Bye.