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.