Flsmidth & Co A/S B Shs

Welcome to the earnings call from F.L. Smith for the second quarter 24. I'm joined by my colleague Roland Andersson, who's the Group CFO, so it's the usual duo here. I'm very pleased about the result for the second quarter. The result confirms that our transformation is progressing ahead of the schedule. You also see that service business, both in mining and cement, is growing faster than the market, and the service-oriented business model works. We both delivered high EPT profitability, both in mining and in cement segments. Mining posted adjusted EPT margin above 13%. Cement posted an adjusted EPTA margin of more than 9%, so both businesses performed well. And I'm especially proud in both businesses about service growth. In mining, 7% growth in auto intake, whereas market was flat. Products was low due to timing, and I will talk about that in a bit. In cement, what we celebrate is that for the remaining portfolio, as you remember, we've been selling some businesses, the spare part business grew year on year more than 10% and a significant achievement in the cement business. Sustainability KPIs are progressing well, still concerned about safety and improvement of the safety. We've been right-sizing the company for a year now, and we've seen a reduction of more than 2,000 people from the workforce. At the same time, we are looking at cost-efficient operating model and corporate structure that we will implement over the next year, year and a half. When Cement is exiting the F.L. Smith portfolio, we will become a corporate rather than a group. So stability KPIs, they are impacted also by difficulty looking at the baseline. There's quite a lot of noise in the baseline in comparison because we've been restructuring the business. We've been selling some assets in cement. But all in all, good development and safety continues to be our focus, especially in North America, FS-MIT operations going forward. mining order intake, significant growth in services, and the market was flat. Of course, a comparison point, Gieco was on the low side, but still very good achievement, and it's proving that our business model, which has become much more service-centric, is working well, and then services turning into high-quality revenues quite soon thereafter. The capital market has continued to be slow. We saw some really nice product orders. We sold a gold plant with a lot of good products and with a significant aftermarket potential as a part of that 600 number. But there was no significant large orders in the quarter. And when you look at the order intake for products, you can combine quarter one, quarter two, and divide it by two, so you see the baseline business what we have. The baseline business is high quality product orders, which turns into great aftermarket, high quality revenues. And when we are assessing our market share in capital products, we see no change in the market share in the rolling 12 months amongst the players. But the capital market is slow and continues to be slow in the coming six months, one year. When we look at the mining revenues, there's a fairly significant decline in products. And there's some legacy projects from TyssenKrupp times where we saw that we halted them or stopped some of the projects. There's no P&L impact, so everything has been provisioned for, but some of those projects might result in low revenues than earlier anticipated. But no P&L impact, so we are in full control of all of the projects and have full visibility for everything. Mining services, you see sequential improvement in revenues. 2.4 first quarter, 2.5, 2.6 this quarter. And a comparison point last year, the difference is that we are exiting basic labor services, which was strategic decision, and therefore there's less and less basic labor service revenues in our books. And there's some timing topics in service deliveries as well. But all in all, service revenue, we are happy with the development and it's gathering speed. Last quarter 2.4, now 2.56 and it's progressing well. Maybe the most important achievement for the quarter is improvement of EBITDA. If you look at reported EBITDA, almost three percentage points year-on-year improvement is very significant, year-on-year, and the market is not booming. Adjusted EBITDA reaching 13.1 level. This is what I'm most proud of, of our achievements in this company. We said that we will focus on quality of earnings, de-risking the portfolio, delivering great return, great profitability for our business, and this is a sign that we can do it. We are still burdened by too high SG&A and we are in the process of defining a lighter corporate and operational model that will deliver SG&A savings that will again support in turn our EPT improvement in the coming year, year and a half. We've been restructuring Cement now for a while as well. We've been selling individual product lines, which were impacting comparison points. But inside these numbers, the most important is to point out that for the remaining part of the portfolio, spare part business, which is the biggest part of the aftermarket, has grown more than 10% on the portfolio that we have. As I said, we sold some businesses, we sold Mark's business for the good aftermarket. That's no longer in our books in the second quarter 24. But like for like, excellent development in service. So it has paid off through de-risk, stopped the project, Fulcrum services also in cement. Revenue. Revenue is catching up, service revenue and capital revenue is impacted by the portfolio decisions. We have such a peak in order intake for the spare parts, so that means in turn that the pickup in revenues is coming a bit later. So we've been increasing our order backlog for spare parts deliveries and that will result in good revenues going forward and also high quality earnings. If you remember the capital markets day and we communicated that we can make cement 8% EBITDA business regardless of the volumes. And now evidence that we've done it. And that level is sustainable going forward as well. 100% sustainable to have that type of profitability in cement. And we can do more in the coming years. And new owner can do even more. Still the SG&E level is too high in cement. And despite that fact, we delivered 9.6 adjusted performance and reported 8.5. NCA is no longer an issue for the company. You look at, we have 28 remaining employees in the business. We started at the level of 3.6 billion backlog, and backlog is coming down fast. We are canceling, still exiting some of the remaining contracts, and we will close this segment end of the year. There will be very little left, everything fully provisioned for, so we absorb it to the mainstream business. And then I hand over to Roland with more details for the for the financials.

Thank you for that, Mikko. So the consolidated financials revenue coming in a little less than five billion for Q2 24. Gross margin improving to 30.8% for the group and slightly lower SG&A leaves us with an adjusted EBITDA margin of 10.2% and a reported EBITDA margin of 8.7%. And after financials and tax, bottom line for the group, 187 million Danish kroner. Gross margin continued to improve to 31.8% as we see on the right hand side, slightly up in mining compared to last quarter. And now cement on a plus 30% level, so a total of 31.8% for the group. SG&A cost slightly down compared to the same quarter last year. Transformation activities sits predominantly in cement and there's more to come in mining. And we have invested a considerable part in in our front end, including in our PCV business line, and a few inflation adjustments here and there also. In this number here sits all one of our items of 75 million for this quarter, 75 million Danish kroner. Our group Ibiza continue to improve as also Mikko alluded to. on an adjusted basis, but also on a reported basis. And on the right hand side, just a brief bridge compared to the same quarter last year, adjusting for integration costs. Obviously, for the group, the revenue is down, costing us some margin, but it's more than compensated by considerably improvements in gross margin. Few savings here and there, SG&A and others leaves us with 10.2% adjusted EBITDA margin. And adjusting for the 75 million in one-offs, 1.5%, the group post 8.7% EBITDA for the quarter reported. Networking capital increased slightly. Predominantly by the end of the quarter, we had a lot of cleanup in our work in progress and receivables or invoicing to a number of customers that sits in receivables. So slightly up for the quarter to 9.4%. And that means that our CFO was only slightly positive for the quarter. EBITDA of 524 million. Provisions had cash in use of 190 million this quarter and a smaller change in working capital. 14 million left for CFFO and deducting our CFFI, excluding acquisitions, that was zero for the quarter, a free cash flow of 89 million. That leaves us with a leverage of 0.7x for the quarter, so still well below our capital structure targets. We adjusted our guidance in all three segments some days ago. So in mining, we used to have a revenue target for the year of 16 to 17 billion. We adjusted that down to 15.5 billion. The EBITDA margin, however, was adjusted upwards from 11.5 to 12.5 initially, adjusted up to 12.5 to 13% adjusted for mining. Cement, we left revenue unchanged, but the adjusted EBITDA margin is now expected to be 8% to 9%. On our non-core, we moved the revenues a bit as backlog is being canceled and re-scoped, so we now expect full year revenue to be two to 300, and the loss unchanged at two to 300. That also means that for non-core, we still expect that in the lifetime of that non-core activity segment to lose one billion as we have guided before. And that means that the group We'll have revenue of 20 billion and an adjusted EBITDA margin of 10 to 11 and a reported EBITDA margin now 8.5 to 9.5% for the full year. If you look at our transformation follow-up dashboard here in mining, the most significant item that's still to be done is our simplification and operating model. So we've done a lot on the organization and footprint set up, more than 600 people reduction since same quarter last year. We are on track to implement a more cost efficient operating model, a new corporate structure, but it will take us another 12 to 18 months until we are more significantly through that process. On our commercial investments to enhance our front line and also our service offerings, we are almost done. PCV technical sales force has been significantly ramped up and also our service centers and mill liner capacity has gone up and progressing in line with plan. Also our de-risking efforts are starting to sit probably in the backlog 80%. of the Orca backlog now relates to lower risk orders and that is plus minus roughly where we want it to be. In cement we're a bit further on the simplification and also in the de-risking basically all risk is now out of the backlog in cement and there's a bit more simplification and also tuning on the operating model over the next six to nine months but otherwise we're basically done with that business. NCA we talked about on group strategic level. The legal entity separation with mining and cement is done. There are still bits and pieces on the TSA but we will be done with that over the next couple of months or three. And the divestment process for our cement business is progressing according to plan and that means that we may have signing later this year and it will very earliest be by the end of 24. And with that, we will give it over to Q&A.

Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star and then one on your telephone keypad. If you are using speaker phones, please pick up your handsets before pressing the keys. To withdraw your questions, please press star and then two. One moment for the first question, please. And the first question comes from Christian Hindenegger from Goldman Sachs. Please go ahead, sir.

Yes, good morning, everyone, and thanks for the opportunity to ask the question. My first one is on the comment in the mining release. You mentioned that there's been an increase in customer appetite for upgrades and rebuilds of equipment for equipment life extensions and to improve operational efficiency. Can you just remind us whether the modernization and refurbishment mix sits within your aftermarket OE side of the business, and then what proportion it represents, and maybe just add a bit of context around that dynamic in terms of the demand backdrop. Thank you.

Upgrades and refurbishments are part of the service business. If you look at the service P&L, we have three main categories. Spare parts, wear parts, and professional services. And typically, upgrade and retrofit includes some spare parts, some wear parts, some professional services. So upgrade and retrofit is really a bundle or package that we target to upgrade HP, GR, upgrade and refurbish of our existing install base. So it sits for the service, it's part of the 7% service growth. So we saw, because there's less capital investments going to the mines, always slow there, but we saw a high level of activity in service, maybe not increasing, so the service market is kind of flattish, but we were able to convince customers to do some improvements to their operations.

Thank you, Miko. My second one, then, is on the gross margin in minerals, 33.4%, obviously, at the top end of, I think, the guide you'd given before of 30 to 33. How do we think about that development just in the context of what was obviously a favorable mix in the quarter, and then just thinking forward to 2026 and that 13% to 15% target for adjusted EBITDA? What are you factoring in in terms of gross margin? Is most of the improvement forward more of an SG&A dynamic? Thank you.

Thank you for that, Christian. I know exactly as you said last time, I think we said 31 to 33 percent in that gross margin. And this is in the upper end and favorably pushed by the mix. So this is a clean gross margin once again. So this is a If you will, a run rate number, 31 to 33% is where we expect to be. There will be variations, obviously, depending on where we are on the product and equipment sales. But that's the expectation, and also in terms of EBITDA improvements, we need a bit more growth in the service business, and we need significantly lower SG&A costs. So I think that's sort of what you're looking for.

Thank you. I'll get back. Thank you.

We're still saying that SG&A is maybe the biggest lever for us to deliver basically what we promised to the market.

And the next question comes from Klaus Alma from Nordea. Please go ahead.

Thank you. Also, some questions regarding the gross margin for both divisions. So, a bit more on the mining. After Q1, you mentioned this nearly 33% was a clean gross margin. Now it's a bit higher in Q2. It's still a clean gross margin. But you're also still having projects in your backlog that is probably priced at a higher level, given the price hikes you did last year. So, maybe you can try to explain a bit on... How is the backlog gross margin compared to what we have seen in the first half of this year? That will be the first one.

Thank you for that, Klaus. So I think what we're saying is that 31% to 33% is a gross margin level you can expect moving forward in a clean quarter. This water is clean, and also Q1 was clean. We will continue to have product sales, obviously. And we will have less of the risky projects as we move forward. But inherently, the margin on product sales are lower than in our service business. So the swing between 31 and 33 is This quarter has to do with the mix between service and products more than anything else. So we are at a relatively clean level you can count on.

So we don't think we should say 34% in Q3. So we just keep crawling up despite being an underlying clean gross margin.

Exactly, Klaus. Thank you for that one. No, we say 31% to 33%. That's what we're saying.

Right, okay, fair enough. Then the same question going to the cement division. It was quite amazing gross margin and obviously also EBITDA margin. There's no unusual gains in Q2, right?

It's also a clean number and I think I promise to you that I will make you proud with the order backlog and I hope you are proud of us now with that result.

Absolutely. So just for the slide where you said that this level will be the future level, I think you put in 8.5%, but that is the reported EBITDA margin. So you did 9.6%. Shouldn't that be your going forward level?

So it also includes impact from the sale of Mark, right? So on a reported basis, we are around 8%. So we're not changing our long-term targets.

9.6, that was Q2. So there's no underlying, right? There's no gain in that number.

No, but there will be for the full year. So we're guiding 8 to 9, right? That's an adjusted number. So our long-term targets has continued to be around 8 on a reported basis.

Okay. I hear what you're saying, but that was all from my side. Thank you so much. Thanks.

And the next question comes from Ben Healan from Bank of America. Please go ahead.

Yeah, morning, guys. Thank you for taking the question. I was hoping to touch on the order pipeline in minerals and how you're seeing things there. How has that developed over the past couple of months and how should we think about Q3 and Q4? And then a second question was around the outlook for services growth in the second half of the year. It came in slightly weakened in Q2. You mentioned some execution issues. Should we assume that those execution issues continue into Q3 and Q4, or should we assume that services revenues and minerals will return to growth? Thank you.

Maybe about the capital business pipeline. It's stable at a low level. So we don't see many large greenfield opportunities in the pipeline. And if you look at quarter one was higher, this was lower. So if you take quarter one, quarter two together, divided by two, it's about kind of $1 billion difference. sort of volume for the capital business, and we don't see a quick change in that one. But we've seen good order intake for products for the high aftermarket potential. We will see some swings between the quarters depending on timing on individual orders, but we don't see uptick in the market yet. Maybe it's a year out, maybe it's a year and a half out, we don't know. But we expect the capital business to stay at least low level for still a period of time. And if we look at the kind of rolling 12-month back as well, that we don't see... really any changes in the market shares between different suppliers either. There are quarterly variations, but we focus on products, and we don't want to have any, and also that the order intake is high quality in terms of conditions and price, so we don't want to expand our scope beyond our technology, which was a strategy decision, meaning that we don't want to balloon the order intake by taking steel structures and that sort of things into our books. I think the first half of the year is a good predictor for the near-term capital order intake. For service, we are very pleased with the level what we have today in order intake. And last year, still we were executing labor contracts in the revenue side that we are exiting. So, there's a bit of that in the last year's revenue numbers. And we've seen nice development in the service order intake, and it's more the timing. So, we don't really have any concern for the revenues of service at all.

Okay, very clear. Thank you.

And the next question comes from Nick Houston from RBC Capital Markets. Please go ahead.

Yes. Hi, guys. Thank you for taking my questions. My first one is, again, on the margin in the mining business. So it's obviously quite a strong development despite a 19% decline in products revenue. So I'm just wondering at what point does negative operating leverage from lower volumes offset the benefits that you get from the servicemaker?

We actually gave a promise to you guys in the Capital Market Day that the kind of fluctuations in the capital business, which is in mining always has been very cyclical, will not much impact our profitability projections. So we are leaning out the organization in the way that capital businesses lean, and we are building it on a certain baseline, so that capital business, the baseline, direct SG&A is this, and company SG&A is this, and then we rather focus on then getting When the market will come back, we want to ride on that wave of recovery in the CapEx business. So we have certain SG&A targets for all our businesses, but we don't look at today, we don't look at yesterday, we look at what is true baseline business for CapEx business, have a lean organization supporting that one, which will then, there's a leverage when the market will come back. Long explanation, but our future corporate structure is not dependent on volume. So, we addressed the SG&A issue as we speak.

Great. And then my second question, I'm just wondering if you could give us an update on the sale of the cement business. I think you've previously suggested that you would rather kind of execute the sale quickly rather than fight for every single decimal point price. But given that the margin development has been going very well and seems like there's still some good opportunities to streamline the SG&A footprint, is there an argument that you should maybe take a more patient approach and hold out for a higher price, even if that means waiting an extra three or six months?

So thank you for that. No, not at all. So the way we see it is that the cement business is now pulling on all cylinders, so to speak. So it's a profitable asset. It's a healthy asset. Risk is out of that asset. And thereby, it's also more sellable, we think. And therefore, we stick to the plans, and we will start distributing sales materials over the next month or so, and then the process will gain steam. And hopefully, we will be closer to concluding an agreement by the end of the year, or at least by the end of the year, or Q125. So no change in plans, and we are on track to do that.

Okay, great. And if I could just squeeze one more in, if you could just explain the loss from associates and what exactly that was about and whether we should be expecting any more kind of charges like that in the remainder of the year, that would be very helpful. Thanks.

No, there's no more. There's no more to come. No.

Great. Thank you very much.

Ladies and gentlemen, as a reminder, anyone who wishes to ask a question may press star and one at this time. And the next question comes from Lars Topholm from Carnegie Investment Bank. Please go ahead.

Yes, first, congrats with the solid margins. It's very impressive. I have two questions. Roland, one is really stupid maybe, but on your wording around cement production, I have in my old notes a disposal or an agreement to sell could be entered into by the end of the year with closing 2025. Now you say a sale of cement at the earliest by the end of the year. I just wonder if there's any change in the messaging around that. And then a second question. When we have discussed the margin gap between you and Metso, One of the points you've been making in the past is that there's a significant size difference between the two operations. So you simply need a bigger revenue base. I just wonder if anything is going on with regards to screening for hold-on acquisitions, for example, in pumps, which is an area you have expressed your interest in. Thanks.

I'll start the first point, then I'll take the second point. So just on cement, we're still on track, and I think all the time we said this, and we're chasing a signature this year, but we think earliest this year, so there's no change in our thinking around that, and we have full force and full intention of selling it as soon as possible.

And bankers often go on Christmas holiday. We've seen that before. And then we are trying to close it in early December. Then everybody's gone and they're coming back in January. So that's a kind of sensitive timing that if you have a counterparty, but it's progressing well. About volume, for that reason, we are updating because we are no longer F.L. Smith Group going forward. we are corporate because we have only one business. And therefore, we are defining the model that we have a lean corporate center, head office, and then three businesses, and then pushing most of the support function activities to the shared service concept. So we are creating a corporate model that the head office is very lean, people in the businesses, and then support functions in shared service setup. So we believe that we can lower significantly SG&A and make it scalable, that that small head office is the same size, same cost, regardless of the volume and we are making sure that in the back office is not too heavy and people are in the front line. So we are looking at that, we do recognize that we are from turnover point of view not very big after we sell cement and we are adjusting the operation model for the new reality but at the same time we make it scalable when we grow. We are actively looking at acquisitions, and of course, when our financial performance is improving, we have much more firepower to actually, we get proceeds from cement sale, profitability is improving. So actually, we have more firepower to go after bigger acquisitions. So we are definitely looking actively at that area.

Thanks, Mikko. That's very clear. Thanks for taking my questions.

Ladies and gentlemen, as a final reminder, anyone who wishes to ask a question may press star and one at this time. Seems there are no further questions at this time, and I would like to turn the conference back over to the speakers for any closing remarks.

I would like to thank our organization and investors alike on your support on this journey. And as we see some slowness in the capital business in mining, I remember the question that will you be true to your strategy, not sacrificing quality of the order intake and earnings and start to take bad business in. So we are true to our kind of strategy, high quality order intake, keeping our markets in products and become more service centric company. And we know that end of this journey, there will be big reward. We will be high in our financial performance. We have also firepower to make strategic moves in our segment. So thanks for your support and let's continue to keep you up to date about our progress.