Flsmidth & Co A/S B Shs

Good morning from Copenhagen and welcome to the FLS Q3 earnings call. I'm extremely upbeat about the FLS result and where we are at the moment. And if we reflect where we are coming from, we are fairly close to completing the major transformation of the company. And I'm especially happy about service and PCV performance, which are now at a good level, 80% of the business. 80% of the business is high margin, low risk, recurring with a fantastic growth potential. Also another major milestone has been closing of the cement cell. So that is a major milestone for the FLS. For the quarter, We are extremely proud about the service development. Service orders increased organically 10% and the positive market momentum will continue. We are also looking that this positive development would continue in Q4 and then also that we will highlight our growth ambitions in service in our capital market day in Q1. When we look at the product business, we've done lots of portfolio pruning over the last 2-3 years. We stopped taking material handling orders, we closed down the business, we don't do any conveyors. So we focus only on high technology products with a big aftermarket potential. It has been quiet on that side in terms of orders, but we are extremely busy with the engineering orders and engineering work that we do for the future orders. PCV, fantastic performance year to date, nine months. Not so high on the quarter because of a lack of the project orders. But one of the best developments in PCV has been that we are converting a lot. We continue to be successful converting Brownfield third-party install base out and replacing third-party pumps for the F.L. Smith Krebs pumps. So that is a big success in that part of the business. We are in the low end of the guidance in terms of revenue for the year, but we will deliver EBITDA result that we promised to the market. There are also positives regarding cash flow that Roland will highlight, that has been asked about some of you in the past. Good progression in all sustainability targets. And you also see a highlight, which is part of our product strategy. We sold the largest filter tailing system in the world. during the quarter and that also plays our product strategy that we want to be leader in all core products typically large heavy equipment for the big mines because they generate big aftermarket for us. So that is one example that of the big wins which on the headline number is not so significant but then huge generation of the aftermarket in the coming years. Overall market is same as in the previous quarter. We see both service and PCV market remaining stable and we can continue growth in both of those segments, incremental growth in the coming quarter and then hopefully then also in the next year. But we will highlight the growth strategy for those in the capital market day. Engineering activities are higher than maybe for a very long time. We have engineering orders for projects that have not been sanctioned. It in practice means that we know what product orders we will get when the project is sanctioned, but it also means that we don't know exactly the timing, because it depends on the customer releasing the project. Still a good level of activity in gold, but the headline value of a small gold project is always smaller, so that it's a $10-20 million type of business there. We've turned a corner in service and now we start to see growth in service and we continue building on that one. We've done lots of changes to service business this year and we expect that there will be big payback now that start to be visible then in the future. But signs are that the updated organization and the improvement in many areas starts to pay off. So we see order intake growth despite there has been no project related orders because if you get project related orders it means that you sell project spare parts, wear parts. We haven't had any support from that one so it's really organic through service growth for the existing install base and therefore I'm really happy about that one. Service profitability is a bit on the low side because of the low revenue month, but a good baseline for service is in around 20% EBITDA. And then there will be slight variations, as we discussed last time, depending on volume, low volume, high volume type of quarter. So there will be some variation. But for me, the baseline for FL Smith service is around 20%. We talk about that product market activity is slow at the moment. But of course, there's a big, big underlying trend in critical minerals. There will be a shortage of copper in the coming years. And we see fantastic potential for this business when the market will come back. And we have a good position, especially in big copper plants. If you think about the copper market in the world, about 20 mines generate about 40% of the world's copper. And then, if you turn that what it means to us, it means that roughly 70% of the world's copper goes through our giratory crushers. and we will be giving some of the more data on this one then in the capital market day but big copper critical minerals is where we play and then when that market will come back you will see a trend changing in the product business. But you need to also bear in mind that we focus on the quality of the order intake. It means that we don't do third-party content through our books. We don't do EPC. We don't do any loss-making material handling business. We don't do conveyors. We don't do stackers. We don't do reclaimers. All that is gone because that is bad business and no aftermarket. So everything what we have in the order intake of products is there to generate aftermarket. And again relationship between product business and then service and PCV is about 20% product business, 80% high profit, low risk recurring business in our books. This will be still swinging in the coming quarters, but we've done a cost out in product business line. We right-sized the organization. We are taking about 250 to 300 people out from the organization, but we focus on having core engineering capability to support all our important products. Because of low volume, this will be swingy, but the target is that this business will be breaking even on steady state toward the end of next year. As I said earlier, the organization is super busy. They are doing engineering orders, engineering for future projects. So we know that there will be what we describe as a ketchup bottle impact at some point of the future, maybe toward the end of next year when we start to see the new capital orders coming in, projects being released, sanctioned by the customers. PCV is our best business. This is the most valuable part of FL Smith. And how we are running PCV is that it's a standalone business, high level of independence, go-to-market is independent from the rest. Synergy element in FL is that we can sell pumps, cyclones, valves as a part of the project bundles. and then sometimes sharing the service facilities between the service business line. But this is a very independent business, so it's independent go-to-market, independent support, independent manufacturing, customer support and sales. And if you look at, despite the slowest quarter, if you look at the year-to-date performance, 9% organic. We're actually doing really well here. I'm really, really proud of this business. And I have a live feed from the head of this business, Pat Turner. Whenever we are converting out significant competitors, I always get a WhatsApp message from him. And we in the head office and also in the PCV always celebrate these conversions because that is meaning that we are gaining market share. We don't see any prospect of significant variation going forward in PCV, EBITDA margin. It's stable and it's all about how fast we can grow the business. Low risk, high profit business. And these numbers include both capital products and also service. then handing over to Roland for more detailed finances.

Thank you for that, Mikko. And adding up the three business lines, which is now our continued business, yields a revenue of 3.4, almost 3.5 billion Danish kroner, 34.7% in gross margin. And netting out our operating income and also our transformation separation costs with one-off nature, our adjusted EBITDA equals 530 Danish million and an adjusted EBITDA margin of 15.3%. Profit and loss from our continuing operations after tax and finances is then 298 million Danish and adding this continued total profit for the period for the group is 394 million Danish kroner. Our gross margin compared to the same quarter last year is up. It's driven by a better mix, obviously, also better mix within the business lines, and also compared to the same quarter last year, our non-core activity segment is obviously out of the numbers. SC&A costs is on a good trend downwards, as we have talked about for a while now. Now it sits in the numbers. And the total 664 million in the continuing business includes our transformation and separation costs of 52 million Danish in Q3. All that means that our underlying earnings in combination continues, so we are now at 15.3% EBITDA margin for the quarter, absolutely in line with our expectations. Our net working capital is flattish, Q and Q. We have had a good run on trade receivables collections, and we have, so to speak, spent that in building inventory up, especially in the service business line, but also a bit in the PCV, and we expect that most likely to continue in Q4. So our net working capital ratio on the continuing business of 12.4%. Also, again in Q3, we had a healthy cash flow, cash flow from operating activities, 478 million Danish, and netting of investments, a free cash flow of 358 million Danish kroner, so a couple of good quarters cash flow-wise, the last two quarters. That means that our leverage remains low, 0.66 like we had it last quarter and at the same time our share buyback program is progressing well. We are a bit more than half done yesterday and we will continue steaming forward with that. As Mikko mentioned, we have adjusted our guidance to the lower end of our previous guided interval on revenue. So previously we guided 14.5 to 15.0 billion Danish kroner, and we are now saying we will be in the lower end of that range, so around 14.5 billion Danish kroner. The adjusted EBITDA margin of 15.0 to 15.5 remains unchanged. And when we talk about adjusted EBITDA, we are excluding transformation and separation costs of around 200 million for the full year in 2025. And we are also taking out what we call other operating net income of one of nature. And this year, this has been sell-off of a few sites and service center in a small site in Turkey and a few other bits and pieces we took over from TK that is now starting to leave the balance sheet. And with that, I'll give it over to Q&A.

We will now begin the question and answer session. To ask a question, you may press star and one on your telephone keypad. If you are using a speakerphone, please pick up your handset before asking the question. If at any time your question has been addressed and you would like to restore your question, please press star and two. Our first question comes from Chitrita Srinia with JP Morgan. Please go ahead.

Good morning. I have three questions, please. My first question is just regarding the comment and release on execution in the quarter and just wondering what level of confidence you have for Q4 deliveries and then 2026 as well.

You mean basically revenue, how well we do revenue in the fourth quarter? Yes, exactly. We expect that service to improve. It was a low revenue quote for service, and we were building a backlog book-to-bill, and we are expecting service to improve in revenue. And PCV to do well as well. So, normalize that there wouldn't be build-up of the book-to-bill so much on fourth quarter.

Okay, understood. And then my second question is just on the product orders. I mean, of course, it can be quite lumpy, and you're talking about some softness there. But even taking into account the India order, I guess the underlying order intake was weaker than the 500 to 800 million that you've previously spoken about. Looking into Q4, I mean, is the 500 to 800 million still the ballpark that we should be thinking about, or perhaps could the range be a bit lower?

Yeah, thank you for that. I think that range was before the business line split, right? So that included the capital part that now sits in PCV. So I think it's important to remember that 100 to 200 sits in PCV on a quarterly basis roughly. And that means that 500 to 800 is now maybe closer to 400 to 700 or so.

Okay, really clear. And then my final question is just on the pump cyclos and valves business. Could you give the magnitude of the order in the comparison period, just so we can understand the underlying development?

Yes, I think that's a rough guess, right? So, we have included comparison numbers to the extent that we can. but it may be 100 that is of large nature or so. Thanks a lot.

Thank you. So service and conversions continue at that good rate and we were missing a bit of that boost from projects where PCV is part of the bundle. Thank you.

Our next question comes from Christian Hinderaker with Goldman Sachs. Please go ahead.

Morning, Miko. Morning, Roland. My first question is on modernization, where you've talked about some adverse timing effects. I guess, first off, can you remind us the scale of that within service over a typical year? And then, do those third quarter effects in any way relate to some of the production issues that are facing customers, Grasberg, QB, Cobra Panama, et cetera? I guess, just curious why growth there is soft when your nearest peer is growing double digit in that area and calling out quite strong backdrop.

I think how we do the service is that we don't have a multi-year contracts in our book so we like the kind of steady going so as I said earlier how we book things is transactional we don't like to book kind of multi-year contracts at one call because then it creates a kind of fluctuation in order intake so our business is Mostly spare parts, wear parts, and then there has been modernization of mill, for example, that we are doing in South America, replacing critical parts of the mill, shells and that sort of thing. So how we do things is that we try to keep it steady rather than kind of... kind of booking multi-year contracts at one go because the service should be stable so that's one thing regarding our philosophy of bookings but 80% of the businesses wear parts and spare parts. And of course, a big part of the spare parts, there's an element which goes to modernization. And typically that part of the spare part, what we call capital spares, because you are refurbishing, upgrading meal maybe once in every 10, 15 years, not more often. So in spare parts, recurring is in rough terms, maybe 70%. And the capital spares, which are often part of modernization, is 30%. So that is a very helpful part of the service business. So regarding the sites, Cobre de Panama was the biggest PCV customer in our books. So that was when the site is still not active, I think for two years or more. it was a big loss for PCV but we have recovered that one so that of course year-on-year comparison no impact anymore. Then Krasberg is customer wow so that will impact our service and PCV business in 26 but we believe that we can compensate Krasberg kind of lack of business because of the disaster there at the site. And then QP2, we're actually very active at the site helping customers to kind of fix some of the underlying issues. So we actually do a lot of work for QP2 in helping customers to resolve the technical challenges what they had at the site. Maybe the only one which is Anakamoa, which is an HPTR customer, it has less of an impact because it's an HPTR service site for us. So it's mainly the biggest impact is Crossburg and we believe that in the APAC area we are able to compensate for the increasing other businesses in the region.

Thank you, Mika. That's very thorough. You mentioned success in the pump field trial conversions. I just wonder if you can elaborate on that in terms of the composition of those winds, in terms of regional mix or metals exposure.

I think we are typically working in the major sites so our strong presence is in the large kind of typically most common is a copper site in South America so that's the most and we are focused on converting large pumps where our performance basically is superior against the other competition so we have quite a good success for the mill discharge pumps which is the large pump after the mill which is a high wear rate higher aftermarket so we are focusing on kind of high value conversions so it's typically where we are strong otherwise we have good presence at the site which is a big copper

Thank you. Maybe just an extension there. Obviously, PC&V, you've made a lot of progress in terms of improving that product in recent years and obviously seeing some wins, which is nice. I guess just curious about as you seek to grow that business and indeed maybe other peers have sort of followed suit in terms of strategy, how do we think about pricing in that segment going forward?

I don't see any pricing pressure because conversions are always technical decisions. It's never a price decision because for the mining side it's not a big capex or item to replace the pump and you can convert it to OPEX as well. So we don't have any pricing pressure on the conversions. Pricing pressure is only if the pumps are part of the project bundle and there's a pricing pressure for the full bundle. So that's the only case where there's pressure. And regarding our go-to-market, I think it's different from the competition because, as I said, you can think of it almost as an independent business. It's the most valuable part of FLS. We run it independently. With Synergy in capital sales, in the project sales, Synergy sometimes sharing same service asset as the rest of the service. But if you look at the pumps, it's independent business and that's how you should run it. With Synergy in capital sales, Synergy sharing some of the assets. But you can look at it as an independent business.

Thank you very much.

The next question comes from Christian Toroy with SAP. Please go ahead.

Yes, thank you. Miko, you mentioned that the service revenue was low in Q3, and you expect that to pick up. So, again, we see service orders up quarter on quarter, but revenue down. Can you just elaborate a bit on what's slowing it down in the third quarter?

We made a massive transfer of the kind of resources to the shared service locations, and there was a little bit longer time in certain admin part of the business, so executing orders, so it's something that we knew was going to happen, but it's nothing significant. So underlying business in terms of supply chain, performs well in terms of sub-suppliers or full supply chain and I would say there's a slowness a little bit in internal order execution is having some impact but we knew that when you change the operation model there's always a small slowness there but it has been fixed and therefore there's nothing underlying issues in execution of a service in terms of revenues.

Okay, so here in the beginning of Q4, you are back at sort of a normalized execution level again?

Yeah, we are expected to recover. I don't have the exact number in my mind, and of course we don't even know it, but we don't have underlying execution issues in service. So the supply chain is in good shape.

Fair enough. And then my other question was just on the impact of high gold and copper prices. So just curious whether this increased cash flow to your customers is having any impact on your direct dialogue with customers. And equally, you mentioned this record high engineering activity. To what extent do you think that's influenced by very high massive prices?

So inside our baseline numbers if you look at the full year and we don't announce smaller contracts, there's quite a lot of activity in gold and one area where we've seen it is Africa and Central Asia which are kind of where more and more small gold mines are developed and of course then the capex for smaller gold mines is always less but we have good position there so we have a number of totally new customers in central Asia and in those customers typically that if you help them to build a plant then it supports the kind of healthy aftermarket in the coming years so behind the kind of slowness in copper which is the big numbers we see in healthy activity in gold and there are new gold mines popping up here and there and typically licensing is easier because the footprint is smaller and now they are coming up in the regions where the licensing is faster and permitting is faster that's why I'm highlighting the Central Asia as a region and Africa where the activity is high. COPE is still in waiting and we are a leader, that's a sweet spot to us. Big COPE, as I said, if you would calculate how much of the world COPE goes through our equipment and our crushing and milling, we have outsized markets here and there compared to the rest of the mining. When the copper will come back, we have a huge benefit that we are incumbent existing supplier to most of the big copper mines. So typically have a significant benefit and higher chance of winning expansion if you're existing supplier to the kind of previous two lines. And most of the engineering activity goes for the, at the moment where we are really busy is mining. copper plant expansions, adding a line, adding capacity. So that's where the activity is high at the moment. But we don't know when customers will sanction, release the projects. There has been continuous delays. But typically mining industry, everybody does it at the same time. When it starts to happen, then that's why this part is super cyclical. But in the meanwhile, we focus on 80% of the business, which is service and PCV. And we are adjusting our cost base, so we are not actually dependent in our performance too much on the capital cycle. And that has been the whole idea, that service PCV is 80%, high profit, recurring, growing, And then the extra bonus is that when the copper cycle will come back and we get new store base that we can service. So it's the whole business model is like that.

Understood. Very clear. Thank you so much.

Our first, excuse me, our next question comes from Kasper Blum with Danske Bank. Please go ahead.

Thank you very much. Most of all, actually, a couple of follow-ups. You've just touched upon, Luke, that it takes sometimes a bit longer to execute orders given your movement to share a service center. Is that also the comment that you gave in the introduction to the quarterly report where you Well, you say that you recognize that you need to do more to strengthen all execution. Is that specifically that, or is there other areas also where you think that execution is not good enough yet? That's the first question.

So in terms of order execution and revenue, we've been improving our supply chain a lot, meaning that concentrating the few critical suppliers, helping them to improve the performance and also streamlining our internal operations. And because historically we've had not super efficient internally, so now The quicker wins in order execution is actually in our hands. So it's FLS internal, kind of how we process orders, how we do all that. So it's continuously improving and still not where it should be, but it's all right. And then regarding capital business order execution, we are in better control of the backlog than ever before in the history of this company. So the kind of risky stuff is out, we know exactly what's going on. So there's more predictability now in the product business for the revenue. So I think So I think and also that maybe highlight is that we've done the new ERP system in Tucson PCV operations and you haven't seen any negative impact from that one so we are slowly but carefully improving the internal operations that ensure the execution so PCV the biggest pumpers factory what we have in the world has a new ERP system that they've been running and And we haven't really seen significant issues during that transition to ERP. So I think I'm confident that this low-risk approach to the internal processes, that we do improvements in the way that it doesn't upset the company in terms of operation.

I don't know if I really answered your question, but... Ah, well, probably as far as we can take it. Then a second follow-up on... On the comment that Roland gave about what to expect on product orders, you mentioned 400 to 700 million per quarter in product orders. I suppose that's only until you expect to see some sort of turnaround at some point. And when that turnaround hopefully comes towards the end of 2026, Any kind of idea, you know, how fast we could see it improve and to what kind of levels are we talking about? Are doubling or can you give any kind of indication?

Yeah, I think we addressed that in the capital market day more in detail, because I think we are in the low end of the cycle and we are super, super disciplined what we are taking in, because in the low end of the cycle, we promise actually to the market, because I remember when we started transformation set that somebody asked, hey, if there's going to be low end of the cycle, do you have a kind of stomach that take only good orders in and don't take anything that you regret later and I think we've been super disciplined in our portfolio and what orders we take in making sure that when the business will turn we only have a high quality backlog but we will detail those estimates what What would that be in the high end of the cycle? Now we are looking at the low end of the cycle, and then we will show you some estimates what it could be. But we don't want to do that before the CMD.

Fair enough. But if I may just follow up, Mikko, when you say you've been disciplined, full respect for that, I think it's the right thing to do. But I think also maybe you came to a point where maybe you were a little bit too disciplined. With the new heads in service and products, are you now sort of taking the orders that you should? Or are you still missing out on something where you may be a little bit too conservative?

I don't think so. And I think now we turn the corner in service as well, that if you remember that we exited basic labor so that services also is basically spare parts and wear parts to 80%. And of course, that's all high profit, low risk business. And a part of those spare parts go to the upgrades, refurbishment. And if you look at the world market, I think what has been moving is actually small mines and the regions that are not in our sweet spot. As I said, our sweet spot is critical minerals, copper in particular, and when the South America, North America, copper is quiet, then you see that one, because we are dominating the market in largest of the equipment, largest mills, large HPTRs, all that kind of things, that's where we, when that market will come back, then that's where we are dominant. So it depends also on which part of the world, which segment is moving. And if you look at the demand estimates for the COPE in the future, you can see that the current capacity in the world is not able to fulfill the demand. Short-term customers are focused on maximizing profitability, dividends, share buyback. But the CapEx will come back to COPE and there are lots of plans in South America. for expansions, but when they are released, we don't know exactly.

Thanks a lot for the flavor.

The next question comes from Klaus Almer with Nordia. Please go ahead.

Thank you. Also a few questions from my side. First of all, congratulations with the strong margin you again achieved in the quarter. The question goes to the PCV and the order intake. It is a bit difficult to compare the momentum given how strong Q3 last year was. So how did Q3 actually develop compared to your own expectations? That would be the first one.

It was in line with the expectation because the project activity was slow. And I think now with the smaller reporting segments, I think you should look at quite a lot kind of rolling averages year to date over two, three, four quarters. So that will tell a story. I think because the size of reporting segments, there's more variability. But if you look at them, year-to-date development, organic 9% is, I think it's fantastic. I don't think anybody's growing faster than the pumps market and we expect that to continue at a good level. And also that we have plans to more boost, even further the PCV sales. And as I said, it's quite independent business. And if you look at it, it's underlying profitability of the business, how steady it is, is really, really valuable part of FLS. But we are investing to that business as we speak. We are taking cost out from other parts of the business. We are investing, as Roland has highlighted quite a few times, that we are investing in the front line to make sure that we are close enough to the customers. Yeah, it's a fantastic business and we expect to continue to grow that. But look at it a little bit over the quarters. One quarter is just a kind of snapshot of the business.

Sure. Okay, thanks. And then my second question goes to these backlog delays we have heard about or learned about during this year. So the project that has been delayed from this year what drives the delay and secondly have a new delivery date been agreed with the customers?

So I think in the projects there has been some discussion of the customers for example they didn't want to receive the equipment so early and that type of thing so it's more customer related in the projects and in service is is okay the revenues but it could be higher in the quarter so in services is more internal not supply chain related that we are in the process of fixing and then in project business in the capital usually it's more customer dependent that customer wants us to delay something or we have a we are trying to resolve some of the issues related to that particular project so it's but I don't really have a concern for the revenues and order execution but you're right that we need to get back on track in service so that that we can estimate better and generate more revenues. But there's no big underlying issue, as I said, supply chain works, we are getting orders and it's more the internal process and admin that has caused some small delay. But it's not massively big, but it's having some impact.

But, Mikko, I know the change of your revenue guidance has been both impacted by these delays, but also effects. So it's a little bit difficult from the outside to know what is what. But I guess it's, what I know, half to one billion of revenue that has been delayed from 2025 into the future. Should we expect that to come in 2026 instead, or is it even far out before the revenue recognition would happen?

Yeah, so Klaus, we expect that to come in 26. Now, what happens to FX is a different thing, but the delays that we talked about in the products business and also us getting in place in the global business centers, order execution and so on in service business line, that will slowly improve and improve revenues in Q4 and also first half of next year. So it's not lost.

Sure.

That sounds great. Thank you so much.

Thanks. The next question comes from Tore Fangman with Bank of America. Please go ahead.

Hi, thank you for taking my question. Just one more from me. You flagged the near-term demand from the small gold projects. Could you maybe elaborate a little bit on the size of potential orders? And basically, what does near-term actually mean for you? Is it something that we will see in the next one or two quarters already or just something maybe into 26? Thank you.

The gold are so small so that they are part of the baseline that we don't announce. So as we said a few times, we don't have so many day-to-day small products and orders there. So everything's related to expansion or then new capex or new project. And those baseline figures, if you look this year, they include the gold projects. So they are below our reporting threshold typically. So in that sense, it's part of the baseline business. So you will not see any massively big orders in that business because most of the new plants are smallest and the CapEx is small, but it's still a good business for us and we have a good position there.

Thank you.

The next question comes from Lars Topholm with DNB Cardinals. Please go ahead.

Yes, a couple of questions from me. First, a household question to the order backlog in products, which is up from 4.9 to 5.1 billion, even though your revenue is 300 million higher than your order intake. I just wonder how that can happen.

that I have to come back on, Lars. That I have to come back on.

That's okay, Roland. Then the second question, Mikko, you mentioned in PC&V there's a capital business and a service business. And now, of course, I guess the capital business is somewhat subdued for all the reasons you have mentioned. I just wonder if there's a difference in the margin between between those two parts of the PC&V business and if there is any implication for your ability to defend current margins into an upturn?

The margin in the service side or aftermarket is most of the business, let's say, depending on the quarter, let's pick 70-75%. That is very steady and good in terms of margins. And only margin differences are in the product. Let's say that the product part of the business is 25 or 30 percent. So within that mix, if we sell product as a part of the project, then it's much lower margin than if we sell the conversion, because conversion product is a technical decision by the site. price doesn't matter if the product performs so in that sense it has small impact but then you're talking about within that 25 percent that there's a difference that if it's a project order for product and it's low margin and then if it's a conversion then it's higher so it's a We can defend the margin, so variability is so small, but it's all in that kind of, let's say, 25% bucket, and a mix between project-related orders and conversions.

Okay, that's very cool. Then a question on the cash flow. So, you have a lower use of supply chain financing I guess that hurts your cash flow. So I wonder if you sort of neutralize that, what would the cash flow impact be?

So I think utilization of that supply chain financing out of the quarter was about 300, right? And 100 belongs to cement. So the continued business would have 200 left. And we roughly say that half of that is improving networking capital.

The land cash flow is actually a notch better than what we can see in the raw numbers.

Yeah, you can say that, excluding the supply chain, yeah. A third of that supply chain is disappearing with the cement business. There was a lot of the cement customers on that, and we have been unwinding that over the last six months or so.

Then one final question. How should I think about absolute SG&A costs going forward? I'm thinking Q4 and 2026 versus the current run rate.

So SG&A costs will come down from where they are today. And then there's some FX back and forth in that, of course. But we are still not done taking costs out.

And last, the whole idea is that we make a platform that is totally scalable, both in service products and PC, so that we have a lean corporate center, lean SG&A, and then we can scale with the volume. So we are still addressing the support function costs, pushing... activities out from expensive countries to cheaper countries and getting efficiency. So, as I said, products business line have taken out 250 to 300 people and it's not sitting in yet with the STNA reduction. Of course, there's some inflation always in the labor cost as well, but you will see improvement in absolute terms. And also that full benefit is visible when the market will come back and we keep it the same. So we are becoming a highly scalable platform for the future growth.

That is very clear. Final questions on my side. You have previously mentioned that to close the margin gap to Metro, you needed to be one third larger and you needed to do M&A. I just wonder, is that still your view today? Are you actively looking at anything? Should we expect bolt-on acquisitions, say, before the end of 2026? What's the status of that?

So we have a number of bolt-ons in the pipeline. Of course, timing is a little bit difficult to say, but we have... And now when we are... We've been focused on selling and shutting down the bad businesses, kind of exiting them and selling... Getting rid of the material handling businesses. So it's... We will actually, we don't know when those will kick in, but we do have an active pipeline, and we will detail in CMD to your disappointment, based on some of your earlier comment that we are in limbo, but we have a good pipeline, and now we are focused, instead of selling, we are focused on buying.

Very clear, Mikko.

Thank you so much for answering my question. The next question comes from William McKee with Kepler Superall. Please go ahead.

Oh, hi. Good morning. Thank you for fitting me in. A couple of questions, three actually, areas. So, firstly, sticking with products, Miko, you've talked about lowering the structural cost base and reaching a break-even by the end of 2026. Could you just share some of the core assumptions about reaching breakeven? And with regard to, are you thinking volumes flat and you've brought the cost base down to reach breakeven? Or are there some assumptions for growth embedded in your 26? And at what point should the products area start to reach a kind of normalized margin through cycle margin flight path? That's the first question.

So we don't expect growth in 26 yet. And we are building the baseline based on the kind of steady volumes and then to be close to break even end of the year. And we are taking costs out where we can. And at the same time, we need to have enough engineering capacity because we are winning future orders. now because the engineering activity is ongoing but all the initiatives to bring the cost level down is completed over the next six to nine months and then the full benefits should kick in before end of the year but then it's just a kind of a headline estimate so that whether it's zero or plus one or minus one it's just a kind of a there about but we want to make it scalable so that when the market will come back and we will estimate what is then the upside in the kind of a peak market that we can support the business with the same SG&A and then just scaling the engineering resources what we have in India but I think we will again detail that we are actioning it as we speak, but we will detail the impact then in CMD.

Following on from that and the discussion about cleaning the product portfolio, to what extent should we look at the 25 numbers as you having fully exited the non-attractive conveyors, material handling and other areas that you've mentioned as lower margin and less attractive? Has that all left the portfolio or is there more of a transition effect that will take place this year and into next year?

A normal transition effect and if you look at the business today most of the business is coming from nine to ten core product areas and those nine to ten core product areas generate most of the aftermarket so it is complete and the portfolio what we have is basically, yeah that portfolio change is complete now.

Thank you very much. The second question area was related to service. perhaps you would just run through the major changes you've made to the reorganization, which we've touched on a couple of times, and the verticals, either regional or the verticals you're now focused on, but perhaps more specifically in relation to working capital. Are you happy with the footprint? And I saw you've invested in inventories to raise service levels this quarter. Is that process now over, or should we expect further growth in inventory days?

So first about footprint, we still have some white spots in the market. If we look at the global market where we are less present, so we will continue increasing coverage either with targeted acquisitions or then investing our own resources. So we still need to continue that work. And the business is basically what is called Atlas Copco model, the commercial is driven by the global business line and product lines. And then the sales front is, of course, in front of the customer. And we are investing a lot to sales excellence. We are upping the organization has been not commercially enough in the front end, and that kind of organization update continues, but the operation model is what we want to have, it's working well, and now it's more about people, getting right people into right places, and inventories continue to increase, and I think, Roland, the kind of network capital continues to go up, and if you look at the peer group, it will be, for percentage points, possibly go to that.

Yeah, so thank you for that. So as I said, we will continue to invest in inventories, right? And the 12% may be going up from here. And also on the capital market, they will give you more longer-term numbers on that. But the intention is to support both the PCV business and the SBL business with inventories a bit closer to customers. Not dramatically up from where we are today, but more proximity, right?

Thank you very much. The last question area related to Peace TV again. Great that you have an open WhatsApp line for product wins on your pumping business. What happens if you lose a competition? Do you also get a red WhatsApp line? So more seriously...

Yeah, we do actually follow what somebody might call competition balance, what we are losing, what we are winning. But it's quite evident looking at the losses and wins that it's mainly winning. But of course, you... lose something every now and then as well so it's uh but it's it's it's very positive what we see and it's building the confidence that we have a best product in the market traditionally our footprint hasn't been wide enough our local present has not been wide enough so it has been not about product in the past but it has been more about operation model and that's why running it independently having dedicated pcv resources close to customers at sites assembly repair facilities near the site so that has been not about product we know we knew that we have a winning product but we haven't had a winning kind of presence in front of the customers and now when we are improving presence then it seems that we are winning the business because technically the product is really good

Thank you. I mean, there's one very large competitor in the market and one of your German competitors gave a CMD and called out a number two position. How would you describe your market share in pumps and where could it go?

I think we are number two in the market. And of course, if you start including water pumps and something that nobody should be interested in because there's no aftermarket, you can have a different market. But if you look at what is really going to hardcore mining, which is mill discharge pumps and slurry pumps at the mining site, we know that we are number two in the market. The pumps market as a whole is huge. You have a world full of water pumps, but of course, you know that if you're at home, that you don't need to replace them ever and they last forever. So that is not our business. But in the core mining, we know that we are number two.

Thank you very much. Our next question comes from Klaus Kael with Nikredit. Please go ahead.

Yeah, hello. There's been quite a few questions about this ongoing cost-out program, but you didn't really answer the questions about the absolute cost reductions going forward, and perhaps that's fair enough. But did you say that you have taken out 250 people, which is not reflected in your SG&A right now, and therefore, yeah, I can see that the cost saving in the P&L? That would be my first question.

So that exercise is ongoing in the product business line, and they are not all SG&A resources. So there will be resources also on the cost of goods sold, so it sits in the gross margin. So you can't move it directly one-to-one. But you will see the headcounts changing over the next couple of quarters.

But we are really pushing hard for the absolute DKK cost targets internally, but we don't communicate the absolute target externally. But we continue, and I think once we are out of it, I think... Despite the decrease in the volume which is because of portfolio changes there was a concern that we would take bad business in just to kind of justify SG&A so we haven't done that. When we kind of trim the portfolio to have right products in the portfolio we are rather taking cost out than taking bad business in to justify higher SG&A so we have a really really aggressive cost target internally and sometimes you get to 80 percent of your aggressive cost target so that's why we don't communicate externally but you can continue to follow the absolute number in the SG&A line and you can see that trending down.

Okay, but did you say 250 people?

Yeah, but it's Cox and SG&A people. Because sometimes you need to look at both. You have inefficiency both in Cox and SG&A. So we are looking at, because it's just a different line on there, but it's still a cost.

Okay, got it. And then my second question is that, yeah, we talked quite a lot about goals. But what about silver? The silver price has also been skyrocketing here in 25. So any comments to that, or is it a very small market for you guys?

It's a small market. We have some activity. We are working with a couple of silver customers who are looking at new investments. So there's activity, but the market is smaller. But we have a good position on silver, so it's a... Just if you look at the size of the market, copper is biggest, gold is second biggest. That's why we talk more about that. And then you have a whole host of other commodities. But yeah, there's some activity in silver and we are working with a couple of cases there as well. Okay, great. Thank you very much.

Our next question comes from David Farrell with Jefferies. Please go ahead.

Hi, thanks for squeezing my questions in. I've got two quick ones. Firstly, just can you talk about cash flow from operations clearly performing very well in the quarter. You've previously given guidance that this wouldn't exceed a billion for the year, but it's on trend to do so. So maybe you might like to clarify that guidance around CFFO for the year, please.

Yeah, thank you for that one. And we still expect a positive CFFO in Q4. So I think we'll have to say that CFFO for the year will be slightly above 1 billion.

Okay, great. Thank you very much. And my second question just comes back to kind of the dynamics between PCMV and the products business in terms of thinking about some of these major tenders you've got going forward. How likely is it that you would combine your team to kind of tender together for a project and not allow the PT&V business to operate wholly independently in that tendering process?

So basically, we have a capital sales team, which is project sales, and they are pulling together a kind of portfolio from different parts of the organization, something also from service, some first-time spares, some wear parts. and they do also include the pumps and regarding that big India case that we had I don't know in the first part of the year we got all the pumps to that site so all parts of the process and so it is independent and that's why I said the Synergy areas for PCV's project sales, they are included in the bundle. PCV gives a price and the kind of, but it's part of the bundle, but it's a sales channel for PCV in major capital opportunities. But if you look at then the conversions at the site is totally independent of course there's synergy that we have a service present at the site and PCV so we are more present as a company but that is totally PCV independent and then services independent so we know that we get more out of the business if we run it kind of standalone fully focused but of course the team is using capital sales or project sales as one channel to get into the bundles but But the numbers are totally different. So if it's part of the bundle, there's incentive for the project sales team to sell those. But then the number still sits for the PCV.

Okay, that's clear. Thank you.

The last question comes from Xin Wang with Barclays. Please go ahead.

Morning, guys. Thank you for taking my questions. I'll be quick. The first one is adjust the EBTA margin in the quarter. Is there any one-offs in there? Any disposal impacts or provision release?

Yeah, so provision release, not so much, but what we have had, we've sold a few summer houses, so that's an income. And then we have our transformation and separation costs, so both are netted off. And it's 52 million in costs and it's 22 million in income. So net-net, 30 out.

That's very clear. Thanks very much. My second question is on HPGR. ThyssenKrupp has recently decided to re-enter the mining equipment market through its cement arm. they will offer a suite of products, including an HPGR. Do you think they will be able to capture more market share equipment or recoup some of the installed base in aftermarket?

Absolutely not, because we have all the service facilities close to the mining sites and we have much better supply chain. So we have a total different supply chain to what Duce Group has. So it's much better in terms of the cost. We have service repair centers around the world. So They may make a noise, but we have zero concern about them. I think they are not capable of entering the mining market. So we are not really concerned at all. And I think we've done so many improvements since we took over the business.

Great. Thanks very much. My last question maybe is a follow-up on the service business. I think you've given this vast split of the business being 80% spare parts. Can you maybe give us a rough idea of the relative profitability of different types of service orders as well?

I think typically we don't give the details but if you that 80 percent if it's wear parts and then spare parts so the spare parts is higher than wear parts but we don't give for competitive reasons we don't give the details but basically within that 80 percent spare wear mix space is higher wear parts is lower but as I said for competitive reasons we cannot give more detail.

Okay, understood. Thank you very much.

The last question comes from Gustav.

Yes, morning. Just one topic I want to take up. Mikko, did I just hear you right that you're not planning for higher product sales in 2026?

So, talk about the product versus service mix.

No, if I heard you right on the profitability improvement in products, I think you just said on a previous question that you're not really planning for higher volumes year over year. Did I get that right?

Yeah, so if I look at the market, this market estimate that we expect... 26 to be still flattest market and then we're expecting pick up toward end of the 26 and in 27 so that's how it looks you're right so the don't plan for growth in 26 we might see the pick up toward end of 26 It's basically the same what we saw last year and we are super busy with all engineering orders and engineering and we expect that we see more and more kind of sanctioning of the expansions and projects then toward the end of the year. So you are spot on.

Okay, the final one, because that's relevant. I mean, I know we're one quarter away from talking about 2026, but if I try and discuss the trajectory here a bit, your run rate gross margin is now sitting around 35%, maybe a bit higher over time, but then it's hard to see a big negative mixed shift next year, given what you just said on products and the fact that PC&V orders have been growing faster than 30% here today. With the SG&A pace that we're seeing now and what you have previously communicated on ambitions here, Mikko, you know, mathematically, we could get to a pretty high margin number for next year. So I'm just curious if we're missing something in this reasoning. Thank you.

I think you're missing a number of things there, Gustav. So first of all, we can't discuss the 26 guidance here, but the service business this year is not growing. It's not growing in nominal terms, and we have significant FX headwinds. And then when there's no reason to believe we will be a bigger company next year when we look at the order intake. And then it will take a little longer to get to the percentages that may have been indicated earlier on STNA out of revenue. So I think we will talk a bit more about this in the capital market day and how it's gonna play out going forward.

And I think, of course, you're looking at full potential of the business, which is really good. But then also that we will need to get a little bit more support from volumes as well. And we are highlighting growth ambition in service and PCV in CMD. And I think based on that one, then you can... better estimate kind of what numbers we can hit and when and as we indicated service EP tie is kind of steady hovering around 20 and then PCV is same as what is today and then turning around the capital business.

Okay, I will just try to push it before I let you go, because even without sort of estimating any big change here, I mean, I don't see a mixed shift next year. If you take current gross margins and you assume that at some point the one of cost will end, that takes you to a significantly higher level than what we're seeing right now. So, yeah, I guess that's my question slash statement.

Gustav, I think you're fishing for guidance for 26, so we're not going to engage. On a one-on-one basis, I'm happy to take you through whatever assumptions you have made and how it may or may not stack up, and I think we should do that. We cannot have guiding statements here now, and we will have a lot more about this in the CMD.

Sure, sure. Okay, thank you.

Thanks for understanding.

Ladies and gentlemen, this was our last question. I would now like to turn the conference back over to the management for any closing remarks.

Yeah, thank you very much for the call. And I think we have a really good situation at the moment. We completed the portfolio changes, what we needed to complete. We are today 80% service and PCV, high margin, low risk, recurring business for the growth potential growth. And also that we are sitting in a good position long-term, being leader in critical minerals, COPE in particular. So I think I'm quite upbeat about the long-term performance of FLS, and we continue to build on this one. Thank you very much for your time.