Flsmidth & Co A/S B Shs

I would like to welcome everybody to FLS earnings call for quarter two and first half of the year. It's 20th of August and I'm in the studio celebrating my birthday with Roland and we are going through the numbers. There has been a lot of changes in how we are reporting. And the reason for that is that Cement is now a discontinued business. So what we decided to do, we are actually opening up as requested by you and the market to give a little bit more visibility for the performance of different businesses. And the split is service, business line, and pumps, cyclones, and valves. Pumps, cyclones, and valves include both capital business and unserviced business. A typical steady state is 25-75. It's very simple if you think about our business model. We sell products to sell spare parts and wear parts. We focus on excellent lifetime service to our customers, and we want to be a technology leader in our products. And if you look at the picture of the pump cycles and valves, you see the picture 25-75. But you can also plot the same combination looking at products and service. It means that we sell everything. products that are service intensive. And in this quarter, around 0.7 billion products and then about 2 billion service. So it looks a bit similar to pump cycles of ours. And in terms of overall performance, PCV, business line, is our internal benchmark for high performance. High performance for growth, high performance for profitability, and we try to replicate that in service business. And if you're looking at the picture, I was trying to think how to describe it to you, and one word came to my mind, which is money tree. 25 capital for the higher aftermarket intensive service business. It's sort of monetary for investors. Some of the highlights are that we have continued disciplined execution of our priorities. And it shows that we are able to execute, get stuff done. We've been also talking over the last few quarters about SG&A and need to reduce SG&A. And now you can see that the fixed cost is coming down in absolute terms. What it means that we are aiming to have lean support functions, lean head office and scalable business. Scalable business means that we have a fixed cost, which is steady over the cycles, and then the cycle returns, upmarket turns, it's totally scalable. We have extremely good order intake in the PCV area. Product is good, but of course the comparison point is low. Organic service order intake was only minus 1%, and that's mainly due to low order intake in North America. Gas is good, and the cement disposal continues exactly as planned. And we have a firm agreement, unconditional agreement to sell the headquarters in Copenhagen. So we get cash in from that sale as well. Out of this chart, all KPIs are green, and my personal main focus is safety. Safety is of fundamental importance in mining and mining operations. It's still not at a good enough level, but I'm happy that it's positively developing. Then if we think about the market a bit, service is stable, there's no big change in the market. But the market activity in products, and products means heavy capital equipment in our terminology. It continues to be soft, and we are still expecting market recovery in the latter part of 26. And I would like to also remind that our strongest market is South America, big copper plants, big equipment, and that is still slow. And when that market will return, you will see good growth in the products area. So that is our sweet spot. BCV, impressive development, both in terms of growth and profitability. And the biggest improvement or big area where we are excelling is also conversions at the brownfield sites. We have quite a few nice big pump conversions from third-party equipment to Krebs pumps in different parts of the world. Then if you think about service, Organic order intake minus one. and reported minus 8, so it was a low quarter. I highlighted in the beginning of the year, after the first quarter, that we have a weakness in North America. That weakness continued, and it's in the area of retrofits and upgrades. That has been slow in North America, in the US in particular. All the other markets are doing fine. And we have plans in place how we can turn around North America in terms of auto intake. we have targeted measures in place. And if you look at the book to bill at the moment, it's around one, so we are able to deliver and execute. And now we can focus on growth. So what I highlighted sometime in the past, that we need to have improvements in the supply chain, and supply chain performance, our execution works, and now it's more about order intake and getting more orders in. If you think about service EBITDA, 19.9 adjusted around 20. For me, it's reasonably good. And we focus on high profit mix, and that's to support profitability long term. So our mix in service is dominantly spare parts and selected consumables. We don't want to go all into all consumer pools because some parts of consumer pools business is very low margin, so we are selective there. We don't do basic labor services anymore, so it means that the mix is good and it will support long-term profitability. Product markets continue to be soft. The comparison point last year was low, so therefore there's a fairly significant percentage growth. The market is still slow. In the first quarter, we saw orders from India, large HPTRs and 18 vertical mills, and that's why the quarter one was good for us. So the baseline business, what we have, is quite slow. And it also has to do with the portfolio, what we have. We have market-leading position in large mining equipment, HPTR, chariotry crushers. And they are not volume products. They are one-off products. One year you sell eight, another year one. It might be a year that you don't sell any. So the demand pattern for those orders is very lumpy. And then if you think about EBITDA, you might be surprised that it's negative, and that has to do with the lack of volume. And lack of volume, both in orders and revenues. But we promise to you that we will not fill up the capital volume with third-party products. So we are very disciplined. We don't take third-party products into our order intake. because there's no aftermarket business. We don't want to do extended scope, because there's no aftermarket for that one. And we'll be reducing risk. So the backlog and the business is low risk, and the margin on the products, product margin, is actually all right. So we are lacking volumes, and when volume will come back, this goes into positive territory. In the meanwhile, we are streamlining our product business operations in a way that it becomes totally scalable. Because we are focused on products, technology, and not in engineering, not material handling. So it means that the platform that we will create for capital business is totally scalable. We will have product lines which can support the same number of resources in low-end cycle and high-end cycle. It will be totally scalable. So that is action that is ongoing by Julian who is heading this business. Well, I think PCV business is quite easy to comment. I would say it's an in-house performance benchmark, both in terms of growth and profitability. And this is evidence that our investment to PCV business is It's paying off. We invested to the front end of the business. We invested by separating this from the rest of the businesses. So those two decisions have resulted in continued growth of the business. And we are trying to repeat this success also in the services. But this is an internal benchmark. And then if you think about profitability... Historical profitability, there's variation, but a steady state with a steady mix, it should be around 24-25% EBITDA business if you're doing things all right. Anything lower, then you are not really managing this business too well. It means that this very good business and underlying profitability in this space would be around 24, 25. And Roland, I think you will go through numbers a little bit in more detail.

Yeah, thank you for that. So looking at the consolidated financial performance now, the continued business is our mining business orders up by 3% and another good quarter across profit margin wise north of 35%. And that means that we are delivering an adjusted EBITDA of 15.2% and a reported EBITDA margin of 15.5%. And the profit and loss from our continuing operations then yield 260 million Danish kroner. Cement has been moved below the line as a discontinued operations. And in that connection, the activities and the liabilities sold have been impaired and the sales proceed deducted. And that leads to a total loss of minus $715 million. fully in line with what we communicated when we disclosed the cement sale and financial impacts to the company. And that means that the profit for the period for the group in this quarter equals minus 455 million DKK. Gross margin still improving to an order of 35%, driven by revenue mix, still relatively low revenue from the product business line, but service and the PCV business lines are pulling the relatively higher gross margin forward. SG&A costs continue the tractions down in nominal terms and also as a percentage of revenue. This bucket here includes 50 million of transformation and separation costs in Q2. So the higher gross margin combined with continued lower SG&A leads us to improve EBITDA margin and therefore an adjusted EBITDA margin now of 15.2%. And that compares to 10.3% last year in Q2. Admittedly with NCA in that number and without NCA in that number we would be around 13% versus now 15.2%. So still good progression forward on this metric. Networking capital is improving significantly this quarter. It's a mixed bag of cement networking capital moving out. Us have had a relatively good quarter in collecting receivables and also reducing our work in progress and then currency tailwinds. The effect from the cement move out here is around 145 million Danish kroner. And all that leads us to a strong cash flow from operating activities, 527 million Danish kroner for the quarter. This includes the group's combined cash flows including cement and a free cash flow of 309 and adjusted for small stuff M&A and a free cash flow of 332 million for the quarter. And Q2 was the quarter where we started our share buyback program. We didn't do a lot of it. It started only late June. And we also paid almost $460 million out in dividends to shareholders. But we still keep our leverage ratio of 0.6x comfortably below our target of around 2 through the cycle. And the 15.2% margin in Q2 and also a good margin in Q1 led us to revisit the full year guidance. And we announced that last week for our revenue guidance that used to be 15 million. We last week adjusted it to 14.5 to 15, predominantly because of the relatively low intake in product business line and slightly slower execution there than we had expected. And the EBITDA margin for the full year for the continuing business line were previously 14 to 14.5% and we last week adjusted that up to 15 to 15.5%. And let's just recall that adjusted means that we are deducting the transformation cost and the separation cost that we have announced since the beginning of the year of 200 million. But we're also now excluding other operating net income. This is sales of bits and pieces, summer houses and a few other real estates. And for the first half this year, that has equaled an income of 77 million. So it's a true adjusted EBITDA margin that reflects the underlying business performance. And then we will ask all of you that are interested to save the date, 11th of March. As you know, we're spending some time updating our strategy as we speak, and we'd like to tell all of you more about that on the 11th of March, where we will invite for a Capital Markets Day and deep dive a bit further on what we have to come up with. And with that, we move to questions and answers.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question is from Chitritasina with J.P. Morgan. Please go ahead.

Good morning, all. First, thank you for the increased color on the three reporting lines. It's very helpful. I have three questions, if I may. So my first question is on the margin and the product segment. This has clearly been volatile in recent quarters, and as you said, it's linked to the low volumes. What is the best way to think about the margin going forward? Is it simply that as volumes come back, this will get into price? business, positive or at a similar level?

So there was a little noise on the line, but I think you were asking about the margin in the product business line. And the intention here is that we are restructuring that business line a bit on the cost side. And then also once volume comes a bit back in that business line, it has to go into the positive territory. But we're not guiding on margin by segment this time, but this we can say on a normalized volume, that business line should be positive.

And sorry, the second part of that question was, you know, what the product margin is in PCB. Is it at a similar level or positive at the moment?

So product margin, you mean in PCV, in the product business? Yes, exactly. If you look back when we said that the capital business is... Not high margin, but prohibited territory. That was a combination of PCV products and heavy capital equipment. Now they are separate, so PCV definitely is better. Because that combination, when we said commentary in the past, that is around kind of break-even or low profit, so that was a combination of both. So it depends on the volume, but it's definitely better than heavy capital equipment, which is describing maybe the product business line.

Very clear, thank you. My next question is just on the gross margin. So at 35%, well 35.5 actually in Q2, this is higher than the rate you previously gave for mining. So is this the new gross margin range is now slightly higher or how should we think about that?

No, so we still say that through the cycle, the gross margin, you should expect it 31 to 33. But obviously for a while now, at least for the next two quarters and part of the guidance, is that the product business line won't get significantly higher. seen from the order intake. So that means that the mix will still be in favor, the combined mix will be in favor as service and PCV will have a relatively larger share than hopefully further on where the product business line will have higher volumes.

Perfect. Thank you. And then my final question is just on the delays you're seeing from customers on deliveries. I mean, how many of these orders were already H2 weighted and how much of it is due to the push out from Q2 into H2?

So if I think about the question more about orders, not revenue, so if I comment the orders first. We've seen continued delays in customers deciding. Last time we discussed about high level of activity by the engineering companies in the main engineering centers, Perth, Vancouver, and then Santiago. But it seems that customers are delaying sanctioning a large capital project, so typically expansion. So of course there's activity ongoing as we speak, but if I think about South America in particular, things have been delayed. We know it will come, but now that's why we're expecting regarding auto intake for the capital business, heavy capital equipment products to pick up toward end of 26. That's how we see it at the moment. And remember that our sweet spot is the HPTRs, large aeratories, large equipment, South America and copper. So when that market will come back, then you see that in numbers.

Great. Thank you. And happy birthday, Mikko. Thanks a lot.

The next question comes from Christian Hinderaker with Goldman Sachs. Go ahead.

Hi, Mika, Roland, and happy birthday from me as well. I wanted to start on the product margins, if I can, but maybe tackle it from another direction. I guess just curious how we think about the sort of SG&A for this business structurally. versus the other parts of the portfolio? Maybe there's two parts to it. Is there a higher SG&A burden today versus those other segments? And how do you see that evolving? That's the first one.

So we've been very transparent about the structure of the business. So we are saying that the three business lines have kind of a 95% control of the P&L, and it means also the fixed cost. And we don't move too much kind of cost around between the businesses. It means that at the low end of the cycle, it's quite... clear that our fixed cost, fixed SCNA, fixed COX is too high in the product business line. And then we knew it and now it's transparent. And of course, we are now looking at right sizing, streamlining how we do business in non-volume product area and our aim is that we can get, we do the kind of right sizing and focus on the core competencies what we need to keep in house, core technical competencies and make it scalable meaning that the idea is that in the future even at the low end of the cycle it should be closer to break even and then of course then when the volumes will come back It will be positive territory. And we make it scalable, meaning that the fixed cost SG&A is same whether you have 3 billion volume or 5 billion DKK volume. So it should not vary. So fixed cost can be 100% scalable in that business. And then we will scale the business. We have a good engineering center in India, so we will scale in the upmarket that with our Cox engineering resources in India. So it would mean that the fixed cost of that business, a lower cycle, should be closer to the break-even and then pushing to positive territory when the market will come back. But as you see from the numbers, We are not there yet, but we want to be transparent of this transformation. And Christian, also the other thing is that we focus on the products that generate significant aftermarket. That's what I was referring to as a money tree, our kind of business model. And then we took out the material handling, third-party stuff, steel structures, all that sort of things. which would actually help to pay for the SCNA, but then you are kind of fooling yourself, kind of that you take bad business in just to pay for the fixed cost. So we decided we don't do any of that. We are super strict with the order intake. We rather right-size, streamline the operation to reflect the volume, because then it's the kind of clear link that these are the products we get in. We get significant aftermarket kick then once also I installed an operation. So... So that's a logic. So we didn't want to do anything so low the quality standard because it's quiet at the moment.

Understood, Mikko. Thank you for that, Kjellert. I wanted to then ask on a second one, you're talking about South America's strengths. And obviously as well in North America, you have quite a strong presence in terms of footprints. I just want to understand maybe on the sort of country-level basis how we think about your positioning in terms of competitive strength. I mean, is that more led by where your footprint is, or is it more led by, say, strength of relationships with given customers? I'm sort of thinking... You know, if we should think of certain parts of South America as better, sorry, as FLS being better positioned in certain parts of South America, for example.

If I pick one country, which is the most important country to us, and then our market share is the highest, it's Chile. Chile is still producing 50% of the copper in the world, and we are leading in Chilean market if I look at the install base today. And typically, mining companies are quite conservative, so that if you do an expansion, incumbency gives you an advantage because of the conservative nature of the customer base and also that if you have another line with a similar equipment you tend to kind of use the same piece of equipment for the extension it's not guaranteed but it's quite common so it means that when that market will come back and it will we don't know exactly when I think we would be in a good position Of course, Peru is a strong market for us as well, and then the US. But if I need to pick one country, I would say Chile, 50% of the world's copper supply. We are a leader there in terms of install base and market presence.

That's it. Thank you.

The next question is from Klaus Almer of Nordea. Please go ahead.

Thank you, and also from my side, Emiko, congratulations with the birthday. Thanks very much. The first question goes to, you are in the report mentioning that you will do some initiatives to make the service division more resilient. Which initiatives are you talking about? That will be the first one.

So I think what we see in the service is that technically we are very strong. And sometimes when we looked at our organization, kind of commercial acumen wasn't strong enough in some parts of the world. And in some parts of the world, we were too much office-based. So we are basically improving our commercial skills of our sales force and also improving kicking people out from the offices. So we don't want to have in service sales people sitting in the office because customers are at the site. So we empty the office and send people to the sites and then at the same time improve the commercial skill sets. It is actually quite simple. It still takes time to do it and I think that's the area where we can actually improve. So we do... some changes in North America, Australia, a few other places, just to strengthen our kind of customer interface and presence at the site.

I guess this has been an ongoing process for the last quarter, so maybe longer than that. How far are you with this? Is it, you know, index 20, index 50?

Regarding the whole change of the company, you mean? You mean... Or the initiatives to become more commercial? I think that is actually... So we see differences in different parts of the world. So the commercial X, as I said, we have a benchmark inside the company, which is PCV. High growth... kind of high profitability. And for example, we are rotating some people out from PCV into other areas just to kind of speed up that best practice sharing. So I think... You will see improvements in service soon. But I can't tell you exactly when, but I'm confident that we can replicate PCV success. That's why I say that we have a benchmark in-house. We need to be able to leverage that one and take learnings to the other businesses.

Okay, makes sense. Then my second question goes to the PCV segment. The auto growth we are seeing or the auto growth potential giving all these initiatives you have done, the added sales people and so on, should we expect a more stable growth going forward or could it also be even an acceleration in the growth?

I think, Klaus, that's a good question. PCV should definitely grow, but we're not guiding on growth now. So the 13% organic growth we had in Q2, I think, is a good quarter for us, but we're not guiding. PCV is definitely set to grow, so I'll leave it at that.

That's why I didn't ask for an exact number. It was more about the momentum or the direction of the growth.

That will be up close, but 13% is definitely a good quarter. So I'm not going to quantify it more than that. There's a reason we have separated out PCV. We have strengthened the commercial front end. It looks like it works for that business line now. There will be more momentum, but Q2, albeit, was a good quarter.

Okay, that's all.

Thank you so much.

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

Thanks a lot, and obviously also a happy birthday from my side. First of all, I would like to ask, given your new updated business split into the three divisions, Mikko, could you comment what split you would like to see longer term between service and products, taking away the PCV business? Is it service to have double the order intake of products? Is that a guiding star?

So, of course, it's so cyclical, the product business, and so it's difficult, but I think 70, 30, 67, 33, so I think I'd like to see it kind of service be above 60% of that split, but it's highly volatile because product order index is highly volatile, but But it's – yeah, I think – so that's why we are not concerned that if the product business is not growing as fast, as long as we are picking up our market share, we are picking up the right orders, that is more important than the volume of the product business. So that we pick up the kind of high aftermarket intensive product orders there. So it's – but – I would say maybe ideally 70-30, but there will be a high end of the cycle where we see more capital order intake and revenue coming in as well. But pumps, which is more steady business, of course, there's variation in the pumps as well. Now it's around 25-75, but that's more steady because the fluctuation in the capital business is less in pumps. But that's why I say that if you create a similar picture that as in the pumps, put product and service together, even though we are running it as two different businesses, 70-30 would be optimal, but you will see times when auto intake revenue for products will be higher.

That's very helpful. Then secondly, you mentioned now, Mikko, that you expect to see an improvement in the market. I think first in the call you said second half 26 and then you said late 26, something like that. Is there any, how could you say, tangible evidence that sort of allows you to now put Yeah, maybe a little bit more precise timing on it than it's been before. I think until now it's been a lot that you saw things happening, but you couldn't really say when it would pick up. Now at least you're saying, you know, a year from now. Has something happened or is it discussions have become more... precise or tangible with customers?

Typically what happens, why we see, let's say, maybe nine months ahead more or six months, because then the EPCMs, they've done three quarters of the cases, EPCMs are running the process of expansion. So they are kind of fronting suppliers together with the customer. So typically, we've been working with the EPCMs, specifying, doing engineering for the process line and so forth. And then, we've given budgetary prices for the flow sheet and the products. And then typically, then, EPs are waiting for customers to sanction the project once the board will sanction it. then typical suppliers give final prices, because we don't know the cost base today, what it is in one year's time, and therefore typically, once it's sanctioned, they come back to suppliers and say, now you need to quote firm prices for all of this equipment, and then there's a kind of commercial and technical selection process. And Typically, that would mean that if we would give now the firm prices, then we are hoping to get some decisions by the customer six, nine months later. So there are not so many cases yet which would ask for the firm prices, so they are still stuck in the previous phase that plans are done based on budget prices, and in many cases customers who could have decided already technically This year, it's quite clear some of those cases will be decided next year. So it's really, I would say, this boardroom dynamics of the mining companies when they will release those projects. So, sorry not to be more specific, but if we would be in the kind of bidding phase of many of these, final bidding phase of many of the cases, I would say it's imminent, but I think it's still a little bit more further out.

OK, so they're in the in the sanctioning process still.

Yeah. And of course, there are something always moving. So we got the India orders for HBCUs and vertical choice. But what I'm thinking about volume of activity is still low in relative terms. If I look, for example, three years ago, 22 was sanctioned. kind of mini peak in our business. And since 22, it has been declining up to this point. And I think it stays at the low point also in 26.

All right. That's very helpful to understand the process. Thanks. Then my last question, you've previously expressed your appetite to do M&A and basically grow the company to have a larger size. And obviously, you're still left with a strong balance sheet and you'll also get money from the sale of the headquarter next year. Any comments on those processes when we could or should expect announcements from the M&A scene of larger sizes, obviously?

Yeah, thank you for that, Kasper. So there's nothing imminent on that. We have a short list that we are working with, working on, but there's nothing imminent. So that's where that is. We have allocated resources. We're starting to spend a lot more time on this now, but it's not forthcoming within the next month or so.

All righty. Thanks a lot.

The next question comes from Christian Tourneur with SEB. Please go ahead.

Yes, thank you. If I can just pick up on your commentary, Miko, on market recovery by the end of next year. Just curious, sort of the increased customer hesitations you've seen here in Q2, you're not concerned that that will continue and postpone the recovery further out?

Actually, I'm not concerned because of our business model, meaning that if you look at what we spoke in the beginning of my presentation, that pump cycles, valve species, because there's so much brownfield conversions happening. And which is more like a customer's point of view is more OPEX business than CAPEX business. That activity is good. And also our business model that we are reducing our SG&A, leaning out the company so that we can ride kind of well across different cycles. So I'm hoping that it will come back. It will make life easier. It will make everything better. But I'm not concerned because of our business model. So we are not dependent on volume at all. We continue to improve our profitability regardless of whether the capital market is active or not. And that's why I like the model that we have, that we focus on the products. with a high aftermarket potential but at the same time our fixed cost in the corporate center and support functions are and will be extremely lean and also now we are kind of reorganizing the product business so that it can sustain different phase of cycle so I'm actually not concerned because as a company that's why I used like a monetary comparison in the beginning that We should do well over the cycles and we are not volume dependent. But when the volume will come back, of course, then if you have a lean cost base, then you're a little bit riding on the wave when the volume will come back.

Okay, that's quite clear. So I assume that you are right that the products demand will improve towards the end of next year. Is it then realistic that your products division can reach break-even by 2027?

We are not guiding on that one, but I'm expecting that we will be in the future profitable over the cycle. So that as you see that now the loss making 10% is actually, we have a fixed cost of volume issue. It's not a product margin issue what we have. So auto intake, what we get in, we get with a decent margin. So it's more the fixed cost that is too high at the moment.

Okay. And that actually leads into my last question, because we cannot see the gross margin on your newest segment here. Can you give any sort of indications on where the levels are so we can sort of get the mixed effects thought into our modeling?

Christian, thank you for that one. So we won't do that. I think you will not be surprised to hear that it somewhat follows the EBITDA margin, right? But we're not going to give granularity on this for now.

Understood. Thank you. That was all for me. Thanks.

The next question is from William McKee of Kepler Chevreux. Please go ahead.

Yeah, good morning. Happy birthday. Thank you very much for taking the time. So I'd just like to come back firstly conceptually to the margins. You've talked about the operating margin in products being positive through the cycle, and you've given a structure to the midterm margin potential, I think, for PC and V, which you talked about 24% to 25%. Can you just round that off with conceptually where you would expect the service margin to trend midterm or at least to touch on each of those areas? That's the first question. The second is relating to your simplification of the business. You've talked about the SG&A having reduced significantly, but can you just describe or provide some more color on where you are on that journey, where we should ultimately see the SG&A come down to, and to that extent or the enablers for that, will the transformation costs continue into 2026 now if we think about the additional restructuring? Thank you.

Maybe I start and Roland will cover the SCNA bit. So when I say that if I look at the pump cyclones of wild species and remember that there's now more granularity than before and it means that there's a little bit more variation. than before between the quarters, depending on the mix and few other items. But I would say that 24-25 is sustainable in pump cycle and valves, and that's just inherently what you should do in that business. And I think if you don't, then you have kind of other challenges. Service, I would expect it to be stable around 20%. One reason is that we focus on growth and then different categories have different margin profiles. So, of course, spare parts being highest. And consumables is kind of tricky because some areas of consumables is high margin, some is really low. So we are very selective what business we do there because we don't want to enter into metallic mill lining, which is really bad business. So we need to kind of pick and choose carefully what we do in consumer as we are doing but I would say a staple we don't guide but I would say a staple 20% and hopefully we can then focus on the growth but then in products it's uh we are we we will push through the transformational activities in terms of how we operate fixed cost base and that i don't know exactly where we end up but but of course when we get volume it will help us but but we also have a we have a fixed cost issue in that area And we don't guide, but of course, you would like to be on the kind of, at the low end of the cycle, close to break even, and then when you get the volume push for the positive territory. We discussed in some of the previous calls about order intake margin, and in product business, it has been stable. So order intake margin is not an issue. It's basically the fixed cost and lack of volume. And you have STNA, Ron.

I think there was a question to STNA. So the STNA cost out and us converting to the new operating model with a lot of our transactional business with the global business centers will continue for three, maybe four quarters more. We also have a bit of a stranded cost from when cement leaves the company, hopefully during a second half year. And that means that there'll be more work to do at least until summer next year. And then hopefully, famous last words, but hopefully we are about to be done by the end of 2026. Now, whether we will have call-outs of... adjustment as extraordinary costs transformational costs next year we have not decided yet but if we will we will still be able to deliver the 13-15% reported margin as we have promised so if they are there that just means that the adjusted margin will be equally higher

And how we operate internally is that we have really ambitious targets for different areas, like a fixed cost, and typically, let's say that you make 70-80% of that stretch target, so that's why we don't want to commit to a certain number in fixed cost, but we have aggressive targets, and we rather... tell you about progress what we are able to kind of achieve rather than kind of a blue sky high in the sky kind of promises so but we have aggressive targets and hopefully we can report continued progress in that area

Thank you. Two quick follow-ups, if I may. The first one relates to tax. You have a substantial deferred tax asset, which you're carrying on the asset side of the balance sheet. Any sort of color on utilization levels and perhaps more longer term as you move towards the simplified corporate structure? What is the pathway to reducing your tax or optimizing your tax to perhaps a lower, much lower target level? And then the second relates perhaps to capital allocation. I heard what you said. You just started looking. But can you give us a little flavor of the sort of areas that you might prioritize as you start the hunt? Thank you.

Yeah, thank you for that. As you may recall, we've been talking about moving into a so-called principal company model. And we are in the process of doing that. And that means that a lot of the core decisions will be made from the principal. And in this case, the principal will be Denmark. And most of the deferred tax assets sits in Denmark. And that means as we progress and move the core decisions and the core transactions via the principle in Denmark, more and more of that tax asset will be utilized. So it's clearly the expectation that we can utilize the timing in terms of one, two, three or four years is a bit more important. It's a bit more uncertain. That depends on how fast we can do it. But that will definitely be utilized. And it will also be a trigger for us bringing our effective tax rate below 30 percent after 26, as we have indicated we will do. With regards to our cash or capital allocation policy, we continue to pay out in dividend 50% of our net profits. Then we will look at the M&A track or options that we have near to mid-term and sort of keep some dry powder. And then if there's anything in excess, we will move to share buyback as we have done this year. So we think we have the cash either available or expectedly generating it from the cash flow from operations that continue to improve as we move forward. We are currently executing a share buyback program, and there's also more debt capacity in our balance sheet, as you can see. So that is the thinking on the capital allocation.

Thank you very much. Enjoy the cake.

Thanks.

The next question is from Nick Huston. of RBC. Please go ahead.

Yes. Hi, everyone. Happy birthday, Miko. My first question is on the PCB margin. You've mentioned that 24%, 25% steady state. That is quite a bit higher than what we see at your big competitor here. And I'm certainly not asking you to comment on the competitive cost structure. But are there any structural differences between the two businesses that you can identify that might explain at least some of that margin difference?

So, of course, I cannot comment the competition and peer group, but basically, our structure delivers basically that in a sustainable manner over the cycles. If you look a little bit back, the EBITDA profile that is in the deck, You've seen it being also above 25. But in the past, maybe our cost allocation in the corporate is less accurate because we restated the numbers for the past quarters. But it has been... uh at the higher level with us i think at least our structure delivers that i don't say easy i can never say easy but i think it's sustainable uh 25 i think it's what we can do and and then because it's sustainable 25 it can go up or down a bit because of the mix Therefore, we can focus on growth rather than kind of like in some other areas where we have a margin and EBITDA issue. So then the focus is all in for growing and supporting our customers.

Great. And then my second one, it's just a follow up on the capital allocation regarding CapEx, because it's 145 million DKK in Q2. That looks like quite a high level. So I was just wondering if you could talk about that and maybe some of the expectations going forward.

Yeah, so we thought about that. We have a bit of carry-in CAPEX, but the intention is that CAPEX should be around 2% of revenue in peaks 3. So 2 is sort of the goal, but 2 to 3% of revenue you can count on.

Understood. Thanks very much.

The next question is from Seng Vang. of Barclays. Please go ahead. Oh, hi there.

Thank you for taking my question. I want to have two very quick follow-ups. The first one is, I want to know if Q2 is a clean quarter or if there's any special items that helps margins. For example, did you have any risk provision relief?

Yes, thank you for that. It's a clean quarter. It's a clean quarter. The gross margin is held up by mix. So relatively low revenue level in the product business line. And the minus 10% of the product business line is a volume and a little bit of cost box, I think. There's no special items at all, actually.

Okay, good to hear. And then, yeah, so maybe a follow-up on that is... Obviously, you made lots of provisions over the past few years. Can you maybe remind us of the expected utilization and associated cash outflow for the remainder of the year again?

Yeah. So as you see now, of course, a few of them have left with cement. And also we have spent some of the restructuring bucket. So that has come down as well. And the so-called other provision, which is the bucket that's a little... uncertain has come down to about a billion now. That bucket is a bucket of stuff that can take two, three, four years. We just last quarter had a settlement from 2011. So it's very unpredictable to say when that turns to cash. It would rather be longer than shorter. So what we say for your cash planning purposes to be safe, assume that it is cut in half over three years.

That's very clear. Thanks very much. And then maybe very quickly, with cement now gone, how should we think about new sustainable networking capital ratio?

That's a really good question. So this quarter we are at 12%. And I'm not going to give you a new long-term guidance, but I would expect that it should not go above 15% for the remainder of this year. So the net working capital in this quarter is a little bit of a tailwind from currency. The dollar and also the trillion peso and so on may bounce back a bit. And we also had a few good collections this quarter and so on. So all in all, it shouldn't go back to more than 15% plus minus. That's the indication for the remainder of the year.

Okay, that's very clear. Thank you very much.

The next question is from Klaus Kell of NY Credit. Please go ahead.

Hello, Klaus Kell from NY Credit. Most of the interesting questions have already been asked, so I will ask some of the boring questions. If we start with your cash flow, then I noticed a pretty solid cash flow here in the quarter and also actually in the first half of the year, and especially before taxes paid. But anyway, could you update us on your thoughts about the cash flow for the full year? That would be my... First question.

So we guided for the full year that operational cash flow would be more than last year, which was a bit more than 600 million, but not more than a billion. And that target still stands. So we will expect for the full year to generate an operational cash flow between 600 and 1 billion.

And just to be clear, when you say that, is that including or excluding taxes paid?

That's cash flow from operations with us is off the taxes paid.

Okay, great. That's very helpful. Yes, and then obviously there's a lot of one-offs in this quarter due to the deconsultation of cement. That's fair enough. But how should we think about one-offs? related to this cement divestment going forward. Should we expect further one-offs? Oh, yeah. Any thoughts on this? And obviously, I'm asking about the big picture. I'm not asking whether it will be plus or minus 10 million in the next quarter. But big picture.

Okay. Thank you for clarifying that, Klaus. Then you would not expect anything else. Because the way it works is that you do an impairment test and then you dump the whole thing, pardon my French, in Q2. And then depending on when there is closing, there will be closing adjustments. And a little bit back and forth and here and there. So if that takes five months, there may be a bit more adjustments. If it closes next month, we are close to where we should be. So... The majority of the adjustments that need to be done below the line under these continued operations have been done. And may I just remind you that the impairment charge is a non-cash item.

Yeah, I know that. And could they in any circumstance become a positive one-off in the second half of the year?

Yeah, I could go both ways. I could go both ways. Okay, excellent. Thank you very much. Welcome.

The next question is from Lorenzo Di Patrizzi of Bank of America. Please go ahead.

Hello. I think this is a mistake because the question is that I had to ask, you've already been asked, but thank you anyways and happy birthday.

Okay, thanks very much for that.

This was the last question. Yes, please.

I was about to start closing, but I think you were about to say the same thing. So I'd like to thank the callers and the questions. And I think it's an exciting time for us because we gave you more transparency to the business than ever before. And I think we like the transparency. It creates a performance pressure for us, but I think it also makes the dialogue easier. more fruitful between you and us. And we continue to execute the strategy that we have. And then in the capital market, we'll detail how we're going to grow the business in the coming years. Thanks very much, Jota.