Flsmidth & Co A/S B Shs

Ladies and gentlemen, welcome to the F.L. Smith quarter one investor presentation. I'm here joined by our CFO, Roland Andersson. I'd like to give some highlights of the quarter one result. I'm extremely pleased about profitability development. Mining cross-profit has gone up from 27.3% to around 23%, so it's a very significant improvement, and it's showing that self-help, what we are doing and what we've been doing over the last year and a half, two years, it is working. Auto intake and service is at a good level, very pleased about that. and also cement development is good. We are preparing cement for the sale and underlying business development and strategic choices and strategies that we have implemented is working. We've taken significant reduction in the workforce since last year. And if I look at the height of the headcount, it was well above 12,000. So altogether in a year and a half, we've reduced the headcount about 3,000 people. It is very significant. We know that we still have a too high SG&A burden for the remaining mining business and it will come down over the next year and a half. We have introduced the small head office concept and we are looking how we can design mean and lean head office with efficient support function operations. That is what we will implement over the next year and a half. Regarding sustainability, mostly good development, safety still not where it should be, and we are working with our manufacturing repair sites in the US to improve it, so that's where the challenge lies. If you look at slight negative development in overall women managers, it's impacted by reduction of total management level in the company due to business simplification. In terms of management layers, managers, there continues to be lots of changes in the company as we are streamlining our operations. The really positive news in order intake is that service order intake 2.8 in mining. For me, that's really high level. That's good level. It shows that service market is stable. We are developing well our service business. Our profitability is good there. There's a peak in capital order intake because of a couple of large orders. Of course, we are especially pleased about extending our leadership position in high-pressure grinding. Both large orders had HBCRs included in them, one in South America, another one in Asia. And that further proves that acquisition of Dyssen Group and high-pressure grinding product line was the right strategic choice. Service share of the order intake is very healthy. Then the decline in mining revenue is mainly about timing. If you look at the fourth quarter, capital, revenue, execution, invoicing, it was at the high level. And it typically means that the next quarter is lower. And this is what we have seen. We knew end of the year that the first quarter revenues will be less in CapEx business as a result. Service is somewhat impacted by the exit from the large labor service contracts in South America. In the first quarter last year, we still have revenues from those. Later in the year, we've exited those contracts. And if you look at the good order intake, both in capital and service, we have no concerns about the revenue. It will turn into revenues, and we will see the pickup in revenue in the second quarter. The best news of the day is that profitability is improving fast. And you can also see that the gap between adjusted EBITDA and reported EBITDA is narrowing. And the biggest improvement is actually in the reported EBITDA from 6.5 to 10.3. That is very significant. And it means that the gap between adjusted and non-adjusted profitability is becoming less. And that was a concern for some of you at some points of the transformation, but it is coming through. And we know that we are still burdening ourselves with too high SDNA levels, and that will go out and down in the next year and a half. And we have a plan for that one. Cement order intake is difficult maybe to understand because we have quite a lot of moving parts. We've been selling some product lines, we stopped all the project order intake and are taking orders only in for products. But the positive which is hidden maybe from this top line view is that the remaining business what we have in cement, And if you look at what's happening in the spare parts and professional services, there's actually growth in the core service business in the cement, which is low risk, high profitability, recurring business. And that is actually growing. but then the top line numbers impacted by sell of the mark and quite a lot of changes, but remaining cement business is healthy and service is developing well. Revenue still is reflecting a decline in the projects, so we are executing most of the projects out of the books towards the end of the year, very little left after the end of the year, so then it's mainly products and services. So we continue to see, of course, in comparison to last year, that this is a totally different business. It's low risk, high service, and product content going forward. And we continue to see the sale of the service out of the total revenue developing well, and there's a positive mixed impact. So the medicine that we have taken in the cement business is working. There's a gain of a cell of one of the product lines included in that adjusted 7.7 number. And without that gain, it would be 5.2 percentage points, the adjusted EBITDA. So it means that the underlying profitability in cement is developing well. We have done right sizing for cement, and some of those benefits are only kicking in as we speak. And as I said, remaining business, what we have in the books, is low risk, high margin. And strategically, we said that at the end of the strategy period, we get to 8% EBITDA. And looking at this picture, looking at the mix, what we sell, we know that we can achieve the strategy target. We are well on our way. We can achieve that one. But at the same time, this is supporting sell of the cement. It's a low risk strategy. Okay margin, asset, and this is really supporting the process what we are going through at the moment. And it's good business what we have in our hands. NCA, no big surprises. This is one of the biggest achievements for the company. End of the year, we are out of the NCA, and we are out of the NCA sooner than originally planned year before. So this has been really successful, the exit from NCA. Then I hand over to Roland to go through the numbers in more detail.

Thank you for that, Mikko. And as usual, let's have a quick glance on the group's consolidated financials. So order intake of 5.2 billion, revenue of 4.8, and a gross margin up by 6% compared to the same quarter last year, so 29, leaving us with an adjusted EBITDA margin of 9.2%, and a reported EBITDA margin on group level of 7.5%. Clearing financials and taxes, our net profit for the group is 194 million. Employees here down by a bit more than 15 hundred people as we can see compared to the same quarter last year. Gross margin, as Mikko mentioned, up considerably compared to Q4 and even more compared to same quarter last year, 29.2%. It's predominantly driven by mining that is close to 33% for the quarter. Cement is more flattish and NCA with a negative gross margin on a very low revenue. So predominantly driven by the mining business. Our SG&A costs continue to decline as a percentage of revenue it's going up as our revenue declining a bit and as Mikko mentioned SG&A savings here is predominantly in cement as we in mining have reinvested a lot of the synergy savings in our service business and especially ramping up our front end in our pumps business. Group EBITDA margin also moving forward, both adjusted and reported on the same quarter last year. On the right hand side, there's a number of moving parts, but on the right hand side we're trying to highlight the most important elements in that bridge. So coming from a reported group EBITDA Q1 23 of 3.9, adding back integration costs from those days, and it gives us 6.0 in adjusted group EBITDA last year. Revenue since then is down, both in cement and the mining business, and That's compensated, more than compensated by a pickup in our gross margin. Savings in SG&A and also bits and pieces gives us 9.2% group adjusted EBITDA margin by the end of this quarter one. Deducting the transformation cost in both cement and mining gives us a group EBITDA margin of 7.5. Networking capital went up again in Q1 as expected. predominantly driven by our payables, but also compensated partly by receivables. Work in progress increased a bit, but that's partly compensated by increased prepayments from the customers, so net net an increase in 553 million in net working capital, bringing the ratio to 8.4% for the quarter, net working capital ratio. So that gives us a, A CFFO for the group of minus 352 million, deducting cash flow from investments. And also we sold a product line in cement and we bought a company in mining. So net net a free cash flow adjusted for M&A of minus 454 million. That means that our financial gearing remains largely flat compared to Q4, so 0.5 turns with a slight increase in our net interest bearing debt driven by the negative cash flow. We maintain our financial guidance for the full year. So in mining, that's 16 to 17 billion in revenue, and then adjusted the beta margins of 11.5 to 12.5. In small parentheses here, we have the Q numbers. And for cement, four to 4.5 in revenue for the year, and then adjusted the beta margin of 5.5 to 6.5. That includes the 30 million gain from the sale of Mark. Non-core activity is unchanged revenue of 250 to 350 and a loss of 200 to 300 million. So the sticky part of the backlog is left to handle, and then we will exit this segment by the end of 2024, a year ahead of plan, as Mikko stated. For the group, we will then enter the revenue of 20 to 21.5 billion. and adjusted the beta margin from 9 to 10%, and I have reported a beta margin of 7.5 to 8.5%. In the adjusted numbers for mining, we have 200 million of transformation and separation costs, and in cement, we have 100 million in transformation and separation costs. Loss of the non-core activities, our NCA segment of 1 billion for the total lifetime since we started this segment in Q4 22 remains unchanged. If you look a bit on our transformation plan we continue with simplification of our operating model for the next year, year and a half and that will further reduce our SG&A's implementation of principal company model and further optimization of our SG&A footprint. We have initiated commercial investments, especially in our pumps business, technical sales force have been ramped up, and we are 70-80% done with that, so that's now up and full running, and at the same time, our ramp-up in service center and mill liner capacities is progressing in line with our plans. Also, the de-risking of our backlog continues 74% is a modest progression and we are not going to get much higher than maybe 80% between 80 and 90% of that. We have internal targets on where this number should go. If we look at cement, Cement has been basically fully de-risked. 90% of the order backlog now relates to low risk orders, the orders that we want. And the simplification of the operating model is also more or less completed. We have reduced by 900 FTE since same quarter last year and there's a bit more to do and then that cement business is right sized and ready for sale later this year. Full exit of NCA, less than 500 million left in the backlog to do for the remainder of the year. And on group level, we are on track for full separation of cement that's basically completed and we are currently wrapping up the vendor due diligence process and then the sales process. will continue full steam over summer and hopefully conclude a signed deal selling the cement business no later than end of the year. And with that, we will give it over to Q&A.

We now begin the question and answer session. To ask a question, you will press star and one on your telephone keypad. If you're using a speakerphone, please pick up your answers before pressing the keys. Do we draw your question? Please press Start and 2. The first question is from Christian Torno with SEB. Please go ahead.

Yes, thank you. I have two questions. So just for mining, if I heard you correctly, you are sort of indicating revenue from both service and products to trend up again from Q2. Can you confirm that? And secondly, how should we then think about gross margin? Because obviously gross margin is extremely strong in Q1. So is that level sustainable? And how is the potential mix change between service and products going to impact the gross margin development for the remainder of the year?

Yeah, thank you for that, Christian. So traditionally, our Q1 is a low season quarter. So we expect the revenues to trend up during Q2. But that can be volatility in that. I think the important stuff is that we stand by our revenue forecast for the year 16 to 17 billion. On the gross margin, the 33% is a relatively clean number. I think be careful maybe plugging that in forever in your spreadsheets, but it's on a relatively steady level. So whether it's 30, 31 or 33 as we move forward, it's a relatively clean gross margin number.

I think in cross-margin, you need to look at the mix of the revenue so that most likely the variation between whether it's 33 or 31, as Roland said, has to do with the mix. Now the mix was very positive for the service, but it is very stable, so it will be more mix impact rather than underlying business being very different margin level.

Okay, that was very clear. Thank you. Then my second question, SG&A cost in mining before integration and transformation cost in Q1 compared to Q4 is actually up 4% quarter-on-quarter. The comment you make that the SDNA should come down within a year and a half, is that comment reflecting SDNA costs before the transformation costs or more that the 200 million transformation costs should obviously be gone by next year? And generally, how should we think about the trajectory for SDNA mining?

Yeah, so SG&A is roughly flat compared to the same quarter last year if we look at mining alone. And both quarters have sort of similar one-off elements in it. Now, we are still running our simplification exercise, so that means that over the next year, year and a half, SG&A will come down further. also in nominal terms, both in percentage terms but also in nominal terms. So that's the intention.

And maybe I could also highlight that in our future operation model, we like the small head office because we used to be group, meaning that the group of mining and cement. And while we are selling cement, there will be some stranded cost because of a kind of negative synergy from the volume, but we have planned that we are exiting those costs in also not only percentage terms, but also in absolute terms. So we are, with this business inflection, we are looking at the operation model, and the operation model is that we have a small head office and most of the people close to the business, business being product line or customer, so that we will... We will shift basically SG&A mix to be more operational, less GA, and more in sales and customer interface.

Understood. And just to follow up, so when should we expect the SG&A to start trending down? What's the basic of this exercise?

So I think that... I think that it will start trending down measurably coming into next year. But it's too soon to be specific on guidance on that.

Fair enough. That was all from me. Thank you.

The next question is from Klaus Salmer with Nordair. Please go ahead.

Thank you. Also a few questions from my side. Roland, coming back to the SG&A costs. What should we expect, not about timing, but how low can it go next year, do you think?

It's too soon to guess about, Claus, right? But we don't need an SG&A burden of 19, 20%. It needs to come down by some percentage points. So that's the ambition.

Right, okay. And then the second question is about service orders within the mining sector. When you look at the timing between getting the order to get the revenue, this time difference, is that unchanged compared to last year, or do you see mining companies being in more rush to get equipment, or in less of a rush?

So I think the timing difference typically, I oversimplify a bit, but if I look at operations, spare parts, there the order delivery cycle is one to two months but if I look at what is called capital spares significant meal parts that might be a year and a half so let's say 70% of the service order intake is kind of more fast moving and 30% is maybe what one might call capital spares that it's a longer delivery time and those kind of big lumps of orders for capital spares order intake And then the delivery will cause some variation in that order intake and revenue number. So in very rough terms, 70% high cycle deliveries between order intake and revenue, 30% is a bit lumpier capital space and then some refurbishment upgrade type of jobs. So that causes lumpiness also in the service business.

but it's more or less unchanged like-for-like versus last year.

So, yeah, we are actually very happy about the underlying service order intake. So, we have no concerns. The market is stable. We are very pleased with the 2.7, 2.8 number for the order intake. If you keep it roughly at that level, small variation between the quarters, I think we are really happy. And, of course, we are pushing for the growth in different areas, but we are happy with the level what we have in quarter one.

Sounds good. That was all from my side. Thank you so much.

The next question is from Lars Koppholm with Garek Investment Bank. Please go ahead.

Yes, thank you. I'm sorry, also some questions on SG&A costs. But before that, on gross profit, and here I'm talking mining, last year some of the TK integration costs had a negative effect on gross profit. So just to compare apples to apples, what would the mining gross margin have been last year stripping out the integration costs? That was the first question.

That was a detailed one, Lars. Thank you for that. As I recall it, we had integration costs of about 120 or 130 in Q1, and half of those, maybe a bit more, were sitting up on the gross profit.

So when you write about cross-margin expansion being a result of execution, that's actually only half the truth, just to be absolutely sure?

The truth is that the 33 is a clean number.

But Q1 last year...

So what I'm saying is that the 33 is a clear number, but the number from the same comp last year had about half of the 120 or 130 in it as one-offs.

Okay, that's clear. Then jumping to the SG&A class. So if I look at the discrepancy between gross profit and adjusted EBITDA, i.e. before all special items, Last year in Q1 in mining, it was 665 million. This year in mining, it's 768 million. That's a very significant increase. So I wonder if you can break down what that increase is and maybe also highlight if there are any sort of special charges that on one hand are not special items, but on the other hand do not recur. For example... Are there any write-downs of receivables or inventory or anything else in this increase?

So, first of all, Lars, I'm not exactly sure how you get to the 660 or so, but if we look at the mining SG&A, it's roughly flat. Q1 last year to Q1 this year. And it had roughly the same elements of one-offs in it.

And... Olin, if I look at your Q1 2023... You had a gross profit of a billion and 65 million, and you have an adjusted EBITDA of 400 million. That gives 665 in difference. This year, you had 1180 in gross profit and 412 in adjusted EBITDA. That gives 768. So clearly, the discrepancy is not unchanged.

I think you're forgetting to move some of the one-offs up on the gross profit.

I'm just reading numbers from your own report, which is before special items. I agree.

I agree. But if you look at the segment note, Lars, SG&A is unchanged, depreciations are unchanged, and one-offs are allocated, let's just say evenly between SG&A and gross profit last year.

So let me ask in another way. The growing discrepancy between gross profit and adjusted EBITDA, how is that composed?

So our adjusted EBITDA is driven by an improved gross margin that this quarter is clean. and we have adjusted sitting under SG&A. Now, last year, we had a gross profit that had part of the integration cost sitting there and under SG&A, the other part. Is that clear?

No, it's not clear at all, Roland. Your gross profit grows by 115 million from Q1 last year to Q1 this year. your EBITDA before all these special items only improves 12 million. So there is an underlying cost increase. I simply wonder what that is.

Yes, so the underlying, but that's what we've said, right? So we have invested, reinvested in the commercial front end on PCV and in some of our service deliveries. So that sits in SG&A.

And how much is that, Roland?

How much is that? I don't think we're disclosing that, but that's a significant, that's a meaningful number.

I wouldn't ask if you disclosed it, but okay. It's a meaningful number. And are there any costs of a one-off character in that difference between gross profit and adjusted EBITDA? Yes. Any write-downs, et cetera, and how much is that?

No, no, no. We had integration costs last year of 127%.

Evenly allocated. Forget the integration cost. They're below adjusted EBITDA. I'm talking about the cost between gross profit and adjusted EBITDA. So all that, that is not related to integration, transformation and separation.

No, I don't think so. Not meaningfully. There's an underlying cost take out of SG&A and then put it back in. For the commercial front end.

But you clearly put in, put back in a lot more than you take out then. Right, that's about the same.

That's about the same. So if you look at the segment load, Lars, if you look at the segment load, SG&A is unchanged.

Yes, but that includes all your separation cost and integration cost. Yes. I'm asking you, if you strip that out, you go from 665 to 768 in your own numbers. I just want an explanation, a bridge on that.

Yeah, but that you can have, but that's not right. You're not going from 665 to 768. Then there's a misunderstanding somewhere.

Then it's simply the numbers on page 10 in your Q124 report which are wrong because that's where I find these numbers.

I don't think they are. Lars, can we take them one-on-one? I think it's important to take away that SG&A is unchanged, depreciations are unchanged, and one-off elements... It's simply, with all respect, incorrect when I look at your report.

It's simply not correct. They might be unchanged including... integration costs, transformation and separation costs. Yes. But if you strip those out, you have a significant cost increase. No. Which I understand you don't want to disclose.

No. No, we have cost increase.

But then why, Roland, if you are correct, how can your adjusted EBITDA just increase 12 million... on a 115 million gross profit increase.

So we're putting back the commercial front-end investments in our SDNA. That's why our SDNA is unchanged.

But it's not unchanged. Let's take it bilaterally.

Bilaterally, or we can look at the segment note.

Roland, can we look at page 10 in your report, please? So this year you have a gross profit of 1180, correct?

Yes.

And you have an adjusted EBITDA of 412. Is that also correct?

Yes.

Is it correct the difference between those two numbers are 768 million?

Yes.

If I then look at the same numbers for last year, your gross profit was 1 billion and 65. Is that correct?

Yes.

Your adjusted EBITDA was 400. Is that correct?

Yes.

Is it correct the difference between those two numbers are only 665? Yes. So how can you say costs are unchanged if the difference... goes from 665 to 768.

Because you have a significant one-off element up under the gross profit last year.

But that affects the 1065, Roland. I'm talking the difference between the 1065, i.e. your gross profit, after that one-off cost. Lars, I disagree on that.

But can we take that one-on-one then?

I simply don't understand your numbers. I regret to say it. Let's save it.

On the big picture, if you look at the macro picture, we are simplifying operations a lot. We are taking from the peak of the headcount, 3,000 people out, and we continue simplification in reality. the SG&A saving will kick in. And now we are looking at also the stranded cost that if cement goes out, what is the cost burden then remaining in mining and if we need to do any corrections. So we actually continue that simplification journey, we see a significant reduction in the underlying SG&A in the coming year or two years, so it will be very significant, also in absolute terms, and I think maybe we do this kind of detailed discussion about these numbers then one-on-one when we meet.

Yeah, let's take that on one-on-one last.

I understand all that, and I think you're doing a good job, but the problem here is you can't explain your own numbers, and we still have a situation where There's traffic between adjusted EBITDA and EBITDA. There's traffic between EBITDA and EBIT. And when I can't even get a bridge on your own numbers, I just... You'll get the bridge.

I'll explain exactly how this works. I'll explain exactly how this works.

Looking forward.

Thank you.

I have one final question, actually. So on the separation and transition costs... All these costs that in full will disappear once this exercise is done. It is an element of staff costs, for example, going to people who are now working on transformation and then When that is done, we'll work on something else.

Lars, if I take that one, I think we are looking that when we are doing streamlining of the support functions with the business simplification, taking costs out, reducing headcount, We are assuming that we can absorb that cost into as ongoing business because there's not going to be one big date that this date we make a big downsizing or reduction somewhere. So it's kind of continuous program where we make kind of support functions lean. So there will be no kind of one quarter that it would have a big impact. So I think what we are looking at now that we should be able to absorb that extra cost as a part of the kind of ongoing business.

That's very clear. Thanks, guys.

The next question is from Christian Hinderaker with Goldman Sachs. Please go ahead.

Yes, good morning, everyone, and thanks for the opportunity. I'd like to start on the mining products business, please. If I strip out the large orders there, I get to a 712 million order intake, which is down versus 925x large order number from last year in Q1. You've talked about the slowness in decision-making by miners, which is similar to what we hear from peers, and I think the drivers there well understood as it relates to large-scale orders in Greenfield and everything else. Can you talk a little bit about what's happening with the smaller order side in the products business, though, given that decline? Is this about junior minor financing issues? Is it a channel inventory adjustment of certain product categories? Just welcome some more color.

If I look at most of our customers' behavior, it's driven by the fact that despite our biggest commodities are gold, second biggest copper being by far the biggest commodity, so that they aim to optimize short and mid-term profitability. For the large miners, it's not lack of funding. It's nothing to do with that one. They have plenty of funding available, but they are driven by the kind of profitability drivers. And for them, of course, then if you look at kind of potential movements and between the mining companies trying to acquire assets from the others. You see that the licensing is so difficult that the large players try to acquire smaller players to acquire the asset rather than building more capacity. So in the big scheme, the licensing is slower than ever. So from discovery to building the mine, now it's typically 17, 18 years. from discovery. So it's actually slower than ever before, if I look back 20 years. So licensing is not getting faster, despite what politicians sometimes say. It's slower than ever in most of the countries. And that is on the back of the miners' mind. They are trying to optimize what they have, which means that that is driving the small product orders, upgrades and refurbishments. They look at the existing operations, if they can dip bottlenecks, squeeze a little bit more out of that, then it might be individual product orders, it might be upgraded retrofit orders, but it's not going to be anything large. There will be not many new mines in the foreseeable future. And gold is at the record levels, the commodity prices. But still, I think the junior miners, I think their financial situation is not the best because of the capex. cost in terms of how much they need to invest in order to build the mine has gone up a lot over the last few years. Significant increase meaning that the equipments are more expensive but an EPC part which is a big part of the new mine investment has gone up a lot. So the actual capex number in absolute terms is much higher, then cost of capital is higher. So that is curtailing a little bit the investment of the junior miners. But the last miners are maximizing production from existing assets. They are driven by the so-called mid-term profitability, and they have a little appetite to kind of put CapEx money out, despite they have it. They have the money, they can finance everything from their cash flow, but the preference is to maximize short-midterm profitability. So that is, I think, driving the kind of softness in the products market. And I think we see this product market to continue like this maybe another year or so. We don't see big change there.

Thanks, Mika. So maybe to summarize, are you saying high commodity prices today actually imply potentially orders stable today? as opposed to moving up with the price of, say, copper.

But if you look at the cost of capital, which is another thing, but cost of the investment, there has been high inflation on equipment in prices. There has been high inflation on the EPC portion of the investment, which is much bigger than anything to do with equipment. So let's say that that has gone up EPC portion 30% over the next two or three years. it's not the exact number but so it's much more expensive to invest in absolute terms from the capital outlay point of view it means that it needs much higher commodity prices than in the past to create big incentive to invest and also that if you and it has to do with the boardroom dynamics of the large mining companies are they shareholders striving for the for the pay out of the dividends, share buybacks, that sort of thing. It's a boardroom dynamics of the large mining companies. I think today we see that it's very much kind of all about profitability than long-term growth. In their books, it's value over volume as well as what we are talking about.

Very clear. Maybe just on the cement margins, and this is a bit long, so apologies. But firstly, I wondered what the basis was for including the gain on the mag sale in adjusted EBITDA, given that's a one-off. Second would be if you can help scale and understand the inventory write-down comment in the release. And then just thirdly, on the margin again, I appreciate still flattish if you strip out the MAG gain, but I guess just wonder then how we can get to the sort of year-end bridge number of 5.5% to 6% in the margins for this year. Thank you.

Yeah, so we had about 30 million included in 7.7. And if we docked that, then we had 5.2. And then we have had inventory right down to this quarter that sits in the gross profit. And so had we not had them, the underlying EBITDA would have been higher. Is that the question?

I guess I was just curious as to why when you're not going to sell MAG twice, that would not be treated as an exceptional.

Yeah. So the reason why we're doing it that way is because we guided the five and a half to six and a half, including the mark sale. And then I think the accounting gain of 30 was probably slightly higher than we had expected. So you're right in the sense it should be an adjusted item if you want to calculate run rate. So if you take the 7.7, take the 30 out, then the run rate is 5.2.

Understood.

And also that taking significant inventory write-off is kind of cleaning the cement books because we are preparing the asset for the sale. It's a low-risk asset with a good underlying development in core services, good order intake margins. So it's actually, it is healthy asset to sell and healthy asset to buy. And cleaning of the inventory is part of that one so that any buyer looking at the asset, they see very attractive asset to acquire.

Thank you. The next question is from Chitrita Senior with JP Morgan. Please go ahead.

Morning, both. I have two questions, please. So firstly, just to come back on mining revenues this quarter, we've obviously seen a similar weakness across peers this quarter. So I was wondering if, you know, the... The decline in sales this quarter was specific to your own operations or do you see something more broadly in the market?

No, I think in terms of revenues, I think if we separate the CAPEX and OPEX business, so that in CAPEX business had to do that, we had a kind of a really strong fourth quarter where we maybe we accelerated too much, even kind of execution and invoicing and that sort of thing. So you saw a really strong quarter. And typically if you do a strong fourth quarter, meaning that you're pushing out kind of invoicing all that sort of things then you have a slow start of the year so the capex business actually had quite a bit to do that so if you even out the kind of fourth quarter and first quarter it's kind of at a good level so some impact there in services We expect it to come back up. And the comparison quote a year before still had, as I said, on revenue, not in the order intake, but on revenues, it had some basic labor services, contracts. in South America, Chile in particular, that had some impact on that comparison number. And during the year, we exited those contracts, so that revenue is no longer there. And that was low margin, low profit revenue, and that strategic choice not to do basic services anymore, basic labor.

Thank you.

Then on my second question... We're expecting some recovery there in service.

Okay, very clear. Just on provisions, we saw an increase in quotient, particularly driven by other provisions. At the Q4, you said that you were expecting a decline in provisions driven by both restructuring and other. How do you see this developing for the rest of the year? And what do you expect for cash for the full year?

Yeah, so thank you for that. So on provisions, we have had a bit of use of our restructuring provisions as expected. And then we have added a bit more new provisions which has to do with projects. And the thinking as we move forward over the next couple of years is that the restructuring provision needs to come closer to zero. It will never be zero. I think the group other will decline significantly as we move forward over the next one or two years. And I think the warranty part of it will be roughly here, volatile with the sales of products predominantly. So all in all, provisions should come down. I think we had a slide showing that in our investor presentation from Q4 for reference, which gives a little bit more guidance on this. On the cash flow from operations for the rest of the year, we're saying that it will not be a great cash year this year either. So cash flow from operations will be between zero and then no higher than last year. So roughly between zero and plus 600.

Thank you very much.

The next question is from Kasper Blom with Danske Bank. Please go ahead.

Thank you. Two questions also, and I think the first is pretty simple. Within your non-core business, you now have a backlog of half a billion, and basically you are guiding for revenue of 250 million the last nine months of the year. And what will then happen with the remaining backlog of 250 by the end of the year? Will that be written down or how will we be treating that? That's the first one, please.

So thank you for that, Kasper. So we expect actually to de-scope a lot of this or maybe even cancel part of the deliveries. So that's the thinking. If there's a small chunk back, then it will be delivered in mining. But the intention is that everything is out by year end.

Okay, that's very clear. Thank you. Then, apologies, but yet another question about SG&A. Mikko, if I've heard you correctly in the beginning of your presentation, you said that SG&A within mining would come down over the next one and a half years. So, basically, towards the end of 2025 would be my math. Having the gross margin already at this level of 31% to 34% you mentioned, then if you get the SG&A right within 18 months, would that mean that by end-25, you would then basically be at the run rate you need to get into your 2026 EBITDA target zone?

I think you are reading me well. So that's the exact timing, of course, how fast and how much SG&A will come down. But if I look at the playbook for us to meet our strategic target, it's actually cross-profit comes first. We've been doing price increases. We've done right sizing in the customer interface so that the S part is actually pretty well under control. It's where it should be. And now we are more working on the back end of the cost But we've been quite aggressive in the commercial front, and so that is, I would say, at a good level to deliver the target. And you're totally right that while we work the SG&A level down, that will basically deliver the result. But then, of course, we don't always work exactly on the calendar years, but that's the target. We know that that's the holy grail, that we get SG&A under control and down, then we deliver the target. It's quite simple, actually.

Yeah, I hope the execution is as simple as well. Thanks a lot, Mikko.

Thanks very much. And of course, then looking at what we've done in the past, that we reduced the headcount in FL Smith across mining and cement about 3,000 people. So I think it's not nice, but I think we can deliver the SG&S saving as well.

Thank you. The next question is from Klaus Kehl with Nikredit. Please go ahead.

Yes, hello, can you hear me? Yes, we can hear you. Excellent. Yeah, hello, Klaus Kehl from Nikredit. Just kind of two small borrowing questions. First one is on discontinued operations, my favorite topic surrounding FLS. And I see that this quarter it's actually zero for the first time in I can't remember how long time. And that's, yeah, that's positive. So are we there where it would be fair to assume that there will be a zero on this line from here on?

Yeah, that's exactly right. I think if memory serves me right, you asked the same in Q4, Klaus, and discontinuous is out of the books.

Okay. Okay, perfect. Thank you very much. And then you mentioned this write-down in cement, where you are cleaning up some inventories. And when you mentioned it, you said it was a rather large cleanup. Could you try to quantify the amount?

Oh, we're not disclosing it. We're not disclosing it. But it's significant, basically that's of course then if you think about there was a gain from a sale of the mark and I think there's a significant, because basically we could afford to do it as well, we are cleaning the books, we are preparing the assets for the sale, we know that the better shape the business is in, the more interested parties we have and it's we decided to while we are streamlining operations we are going through the factory sites we are going through all the sites and then if there's anything to do we can do it because in reality the underlying profitability is kind of okay so that there was no reason to delay it we wanted to have a kind of cleanup of the books yeah but then again the underlying profitability is then higher than the 5.2 percent actually

Yeah, slightly higher, yes. Okay, okay.

Great, thank you very much.

The next question is from Peter Seister with ABG. Please go ahead.

Yes, thank you. Just two questions. The first one pertaining to the gross profit line. If we just look forward to the end of this year and then compare with end of 22 before TK mining and restructuring and transformation, et cetera, et cetera, what is the numerical difference between the gross margin in the service versus capital business which we expect at the end of 2024. So that's the first part of the first question. So the numerical difference on average, and I know you said that between 33 and 31, I mean, let's just talk about average number, the absolute difference between the gross margins in those two revenue lines.

We don't actually give profitability for service and capital separately, but if you look back, we can estimate, well, this makes 33 is good, and we expect to keep it. And if the capital share of the revenue goes up, then it might go a bit up. So there's some movement, but we don't give out the profitability of service versus capital.

No, actually, I don't think you are giving out the profitability by just stating the difference between the two, because there could be a difference between 20 and 40 or minus five or whatever it is.

There's a significant difference in the service and products, but we don't give indication how big is the difference.

Okay, then comparing end of 24 by end of 22, could you then say what is the numerical difference, the step up between the two line items?

I think, Peter, maybe you said, so we've done a lot on product mix, right? So the mix in our service business will change. Is that what you're looking for? Is it between products and service?

No, essentially, basically what I'm just looking for is trying to get some sort of figure, I mean, in the spreadsheet such that we can have a sort of average number for the profitability of those two and then work from there and then we can put all the one-offs, et cetera, in it. So I'm not asking you to give sort of the exact numbers, but at least now what kind of numerical increases should we expect from N22, N24 for each of those product lines, i.e. the gross profits in service increased by five basis points and gross profit in capital was increased by, you know, I don't know, 10 or... That we are not disclosing.

I think it's important for you to work with the 33 plus minus and then the remarks around the split between service and products. So the split between products and service you know, we'll have the cross-profit move slightly up or down between 30, 33, maybe 34, depending on, you know, the volume of products being delivered in the revenue line. That's how we explain it.

Fair enough. We also have to do some work on our side as well, so that's okay. I just have to come back to these SG&A costs in mining and... Just to understand it fully. So what you're saying, if we clean out the, so it's the clean out number, if you take out the 200 million out of that or whatever that is sort of allocated, then that is that number, underlying number that will go down over the next 18 months. And what are the key components that drive that decline?

So key components is part of our simplification effort. So we will still consolidate our self in fewer but bigger sites. We will have a more efficient back-office operation. So that means finance, IT, procurement, that will be partly outsourced. Some will be what we call near short. And also we will take a bit of capacity out. So there's a number of elements in that that will lead to that improvement.

Okay. Perfect. I think that's it. Thank you very much.

Okay. This concludes our question and answer session. I would like to turn the conference back over to the host for any closing remarks.

Just to kind of highlight that personally, I'm very pleased about the quarter development. The main highlight of the quarter is cross-profit and also healthy order intake in services. And at the same time, when you look at the cement, cement is a good asset for somebody to buy, low risk, profitability improving, right-sized to run that business in a profitable manner long-term. At the same time, I'd like to invite all of you to meet the management event in South Lake City. South Lake City is our global technology and product center for the condition monitoring, remote monitoring of the mining sites and operations. impressive facility what we have in South Lake City. That's our global center for mining. And if you would be able to join, you can meet much of our management, and then you can look at the biggest mining laboratory test environment in the world. And also that if you haven't been ever visiting the mining site around the corner from our offices, you have the Kennecott KopeMine which is also impressive to give a feeling who our customers are and how the operations look like. So hopefully you can join us for this event. On that note, I would like to thank you for your participation and for your questions, and looking forward to meeting many of you later in the week when we do the roadshow. Thanks very much.