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.