FLSmidth & Co. A/S (FLS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the FLSmidth Annual Report 2020. Today, I'm pleased to present CEO, Thomas Schulz; and Group CFO, Roland M. Andersen. [Operator Instructions] As a reminder, this call is being recorded. Speakers, please begin.

Hello, everybody. I welcome you here to our FLSmidth Annual Report 2020. And I would like to start directly with the key highlights. First to the quarter 4. Quarter 4 was in order intake, revenue and EBITDA, an improvement to the quarter 3 2020. We had a significant reduction over the whole year actually in net working capital, and with that in the net debt, too. If we compare 2020 with 2019, revenue and EBITA was definitely impacted by the pandemic situation. But the order intake were more or less in line with 2019. The whole year 2020 delivered a very strong cash flow. If we now look into the markets, we see short-term recovery in Mining coming. That is related and correlated with the pandemic situation. If we look into Cement, there, we only see the midterm or no short to midterm recovery for Cement, as we said it in quarter 3. And we see in the first half of the year, a continued pandemic impact. The guidance for 2021, based on that, is DKK 15.5 billion to DKK 17 billion, EBITA 5% to 6%, and we proposed a dividend of DKK 2 per share. The key events in the year 2020, of course, is the pandemic. And I have to say that our organization based on the locations where we are and the business where we are in, handled that very professional. If you look into our customer group, to mention here our 4 large orders, 3 in Mining and 2 in Cement, which combined, gave a DKK 3.2 billion in the year, and we had more than 100% growth in remote digital services. We did quite a lot of investments in digital, sustainability and in R&D, actually more than in the years before. And if we look into that, we are proud to say that we have several more partnerships with our customers like VICEM and TITAN and AVAS, and we launched, what we call, MissionZero flagship innovations. That means equipment or processes or services, which makes a real step in the right direction for sustainability. And we talked about it, for example, the clay calciner system. And we committed here in January to the Science Based Targets in sustainability. The year was active on acquisitions and divestments, too. We acquired the Mill-Ore Group and knowledgeScape within the mining industry. And we sold, based on the Cement reshaping, the fabric filter technology as well as pneumatic conveying systems, what we run under the name of Möller. And we have ongoing negotiation with ThyssenKrupp about their mining business. If we then look into the business improvement program that was completed already in -- after the third quarter with a run rate of DKK 150 million EBITA annually. But the reshaping in Cement, as it was in the fourth quarter, will go on into 2021. If we then look into the markets, at first, the Mining market. Revenue was down 13% versus 2019, and you see there's a 5% FX effect in it. We had a 63% service, which is a 2% increase in service share versus '19. The EBITA margin for Mining was 8.4%, coming down from a 9.6%. What we clearly see is, especially with the second corona wave in -- starting in October around the world, that we have a strong correlation between our Mining business and the pandemic. We have very good fundamentals in the Mining industry, high production rates, good commodity prices and a huge willingness to invest. But based on the pandemic and the uncertainty, very much not focused on investments and activities on their side. We have very limited travel possibilities into the different sites and with that, of course, with the services. We had in April, May, quite a lot of shutdowns. But when we look over the whole year, we are actually on a fairly high production rate around 100%. Currently, close to 100%, 97% of the mine sites are in operation. What we can see, too, is that our reorganization in 2018 with 2 industries and a regional structure with a strong common supply chain actually served us well and enabled us to deliver to customers and to work with customers, what we had before in the divisional structure, not the same possibility. If we then look into the order intake. On the left side, you see the quarter 4 order intake. That increased versus '19 by 8%. Despite the fact that we had a 10% FX hit, if you look into the details, we are 15% down in service and 5% up in capital. If we then look to the right side over the whole year, the whole Mining order intake for 2020 in the year of pandemic increased by 6%. It came from DKK 12.1 billion to DKK 12.8 billion. When you then look quarter-on-quarter, you see that we -- kind of a seasonality with a little bit lower activity on order intake at the end of the year was getting repeated. But when we see the organic growth, which was 13% in 2020. And looking that forward, it is a clear reflection of a positive market where we operate in and only subdued over the pandemic. Important to say is that our service share in the year 2020 with the lack of access of sites, dropped from 62% to 54%. Out of that, into Cement, and that's a completely different picture. If you look into the Cement revenue, we are down 30%. And we increased actually the service share out of the capital downturn, which was quite significant from 40% to 55%. But still our EBITA margin in Cement, despite all the efforts with the business improvement program and reshaping, was minus 2% EBITA, coming from 5.7% in 2019. Here, the same as with Mining, a strong correlation between the pandemic and the business activities. The customers in the Cement, more or less all over the world, defer all possible investments. They produce, but most of them, not on full capacity. We have regional differences, but the utilization rate on the kiln lines is one of the lowest ever measured. We see that the lack of possibility to visit the sites, the lack of drive for investment is hitting all the lines in Cement. And we see that Cement in that market really has a structural change, what I will come a little bit later to. If we then look into the order intake. We had actually an order intake of 30 -- increase of 34% in the quarter 4. And it was minus 28% on service and a plus 176% in capital. That is based on a large order what we got in Africa in the fourth quarter, which was the first real large order since beginning of '19. If you look to the right side, the order intake in Cement decreased by 24% in 2020 versus 2019. When you look into the different quarters here, we had an improvement in business active -- slight improvement in business activities. But if you calculate, of course, the large order in the fourth quarter out, then you see that the capital part is fairly much under pressure there. The service share over the whole year was more or less in line with that what we had in the year before. If we then look into the financial performance, and then I give to Roland.

Thank you, Thomas. So wrapping up the whole year for the group, as Thomas went over, order intake is down by 5%, but organically, largely flat. Our revenue drops by 20%, and that with a 4% currency headwind, that's an organic decline of 16%. Our gross margins remain flat in percentage terms, and we are reducing our SG&As by over DKK 100 million. And we end up with an EBITA of DKK 771 million, and that equals an EBITA margin of 4.7%. If we adjust for the Cement reshaping costs we had and the business improvements over the year, the adjusted EBITA margin would be 5.9%. If we just finalize the 2020 P&L here, we have had financial costs and also tax payments of DKK 155 million, and we end with a profit and loss for the group of DKK 205 million. Our return on capital employed is then 5.1%. If we look at the revenue for fourth quarter, it is down 24% organically. And as we see here, it's most hardly hit in capital, especially Cement is hardly hit less by currency, but a lot by a lower backlog coming into the year and also by, of course, the pandemic and the obstructions we have had in terms of converting the backlog during the year. Mining, less so, also hit by the pandemic, but with a good healthy backlog coming into the year, but also on capital, relatively largely hit. If we look at the service business revenue for Mining in Q4, it's largely unchanged, only hit by a few percentage points compared to the same quarter in 2019. If we then look at the right-hand side, Q4 revenue, our revenue is slightly up. There's a little bit of seasonality in this, not a lot, but we pushed through more revenue, both on capital and also in the service business. So that is one point. And if we compare to the same quarter last year, we have a significantly higher service share of revenues than we had in Q4 '19, which is supportive of a better gross margin. Now just a reflection here on seasonality. If we look at the 4 quarters for 2019, not that we should dwell on the numbers, but the seasonality here in 2019 is actually reflective of a normal seasonality of our revenue pattern. And this becomes important when we later on talk about guidance. And in a normal year for us, the lowest quarter is Q1, and our best seasonal quarter will be Q4. And then comes Q2 and Q3. And that also means that expectedly, first half of the year would be lower than second half of the year. If we move on to the next slide here, we improved the gross margin in Q4. The margin is significantly supported by an improved service share of total revenues, but also impact from our business improvement activities is kicking in, in this quarter. If we look at our total SG&A costs, they are down 8% year-on-year. So DKK 685 million. Our SG&A ratio was up to 16.2%. That is largely driven by the decline in revenue. And if we then look at our SG&A cost, the development from Q3 into Q4, they are up a notch, and that's primarily driven a little bit by currency headwinds. And then we have had Cement reshaping costs, and we have had some digital spend costs and also costs to ongoing M&A activities, as you have seen, externally. And if we then look at our EBITA development. EBITA in nominal terms is down significantly compared to last -- or the same quarter last year. But it has also, in nominal terms, improved over the course of 2020 since the low point in Q2. There's a little bit of seasonality effect in that, as we mentioned, and also a healthy service capital split in Q4. And again, if we adjust for the Cement reshaping costs here, the adjusted EBITA run rate would be 6.0%. On the right-hand side, explaining the bridge from Q4 last year to Q4 this year. Predominantly driven down by the decrease in revenue, but the business improvement program is now kicking in full run rate for the fourth quarter there in 2020. And it's included in the improvements in the gross margin and also in the decreases in our SG&A cost bucket. The gross margin is obviously also supported by a few other initiatives and the healthy service mix. And then we have less business improvement costs in Q4 '20 than we had in Q4 '19, where, as you recall, we started up the business program initially. We continued the good traction of reducing our net working capital in Q4. The net working capital ratio is now close to 10%, 10.7% of last 12 months' revenue. I think if we're wrapping up the year here, we have done tremendously well in focusing and centralizing our steering of inventories, admittedly also driven down by currency and lower activities, but the footprint optimization and a lot of initiatives in our central steering of inventories has made that a lot more transparent for us and has enabled the strong steering on inventories. The majority of the improvements here, however, comes from receivable. And there has been a strong effort made by the organization in reducing receivables during the course of 2020. Overdue receivables cleaning up, speeding up invoicing and making sure that they are absolutely cleared by the customers before they have received, a lot of operational issues had made this possible faster and also the collections more smooth than we have seen back in 2018 and 2019. On trade receivables, that has dropped by over DKK 1 billion, and that's predominantly because of less use on the supply chain financing and, of course, also an element of drop in activities. Work in progress. We are executing on less projects than we did last year. But also here, there has been focus on the projects managers on driving work in progress forward, clearing punch lists and making sure that milestone invoices are raised fast and swift. And otherwise, that has also trimmed this bucket. And prepayments from customers is coming down because we're doing less projects. However, in Q4, we had a prepayment coming in from the project in Ethiopia. All in all, almost DKK 1 billion improvement of net working capital, DKK 158 million of that is currency, the rest is actually activity based and hard work from the organization. I think moving forward, we should not expect further improvement from here, but more in line with our business activities. Moving to the next slide. On left-hand side, we're looking at the quarterly breakdown of cash flow from operations. We had, had strong improvements in net working capital from Q2 to Q3 and also in Q3, less -- marginally less on net working capital in Q4, and we also had tax payments. Still a relatively strong cash flow from operations in Q4. And all in all, netting up on the right-hand side, in a cash flow from operations on group level, DKK 1.4 billion. We have had CapEx or investments for DKK 339 million. The net of our acquisitions and disposal of companies for DKK 37 million. And thereafter, a free cash flow of DKK 1.45 billion for the year. If we then move on and have a look on our capital structure. We are still well in line with our targets and solvency ratio of 39.7%. And we are continuing to reducing our net debt level in Q4. However, we are now dividing that by lower last 12 months' EBITA level -- or EBITDA level, and thereby, our leverage ratio is going up by 0.2 notches from 1.4 to 1.6x. Yes. And with that, back to Thomas.

Yes, thank you. And now we enter the year 2021. And the year 2021, of course, overall, when we look into that, what we see in the market, we analyzed with internal, external experts, how the year will go regarding the pandemic, and we say that we will have an improvement of the pandemic situation from the mid of the year on. That is important when we look into the year 2021 and beyond. If we then look into the industry outlook, starting with Mining. The fundamentals are really positive. We have quite a big need for investments. Investments in capacity improvement, investments into sustainability, into energy reduction and a lot of other things, greenfield and brownfield. It is all over the green transition to drive minerals demand. There is a very strong correlation in both businesses what we cover between the pandemic and our business activity. To give a flavor on that, when we entered into the -- what we call the second wave in October, we immediately could see in the weekly performance how activity was dropping in line with increasing restrictions in the different countries, and in the other way, when they ease down the restrictions. So the correlation is quite clear. We see that the EBITA and the revenue, or the revenue and then the EBITA out of it will grow out of that in Mining when the activity level allows us to visit the site and doing the work. And there is, of course, a lot to do. Because our customers produce a lot, and they have fantastic good commodity price level, they have good cash flow and the sentiment in that industry is really positive. But what we see, too, in the year 2021 is based on the order backlog and a good run what we had in the capital order intake that we will have a higher capital share than the service share as we headed in the main crisis year 2020. So the business improvement programs and, of course, all the activities what we did since quarter 3, quarter 4 2019 will be positive on the figures, on the bottom line. If we then look into where the focus is of the customers, the focus is to get more out of that what they have and to digitalize more and at the same time to open up the flexibility to be more sustainable in countries, in areas where the regulation is not clear. There are some significant messages out of the industry. I only take one. Russia is investing more than $1 billion to get rare earth more up, which is a stronghold for us. I can actually list it on a very, very long list, how positive that all looks like. Then we look into Cement. Cement, that already had a low activity level when we moved into the pandemic. But what we clearly see is there is a structural change in Cement. We don't see, as we communicated quite open in quarter 3 already, there is no short to midterm recovery. We believe in a midterm recovery, which will be for a premium supplier as we are, mainly driven by the digitalization and the green cement agenda. And we see that already, the need and the demand for that part of the business is increasing. And when we talk about the digital remote services are growing more than 100%, quite a big share is out of the Cement guys for that. If we look into the revenue, what we expect there, we have -- we expect a slight decline in the revenue versus 2020 in that year. It is out of the backlog, it is out of the pandemic and it is out of that structural change what -- what the whole industry has. And to give a little bit of flavor of what that means. We normally calculate that utilization rate of the kilns in an area between 70%, 75% is a growth situation. If we drop below 65%, it gets actually thin. We had last year in the mid of the 50s what we see. So we are really from an activity level, quite low. Out of that with the reshaping, which means that we size the business as it is for that activity level what we see short to mid-term in front of us, plus to position Cement into the leading provider for sustainability and digital solutions, we will have a very hard time to reach a positive EBITA. Out of that, I would like to give to Roland.

Thank you, Thomas. And what does that then mean in numeric terms? So let me just dwell a little with that. Today, we are guiding for 2021 a top line of between DKK 15.5 million and up to DKK 17 billion, and an EBITA margin of between 5% to 6%. And I think the overriding assumption here is the pandemic. There will be another year with pandemic for FLSmidth. And the way we look at it is that the pandemic will continue unchanged until summer, after which a gradual improvement will kick in. And that's the underlying assumption. And then back to what we talk about with seasonality. So we will have pandemic in first half of '21, like we had pandemic in second half of '20. By the same token, we saw on the revenue slide that Q1 seasonally is our lowest quarter and then comes Q3 and then Q2. So expectedly, everything else equal, H1 '21 will be lower than H2 '20. So on that basis, let's have a look at the revenue bridge. So as Thomas says, we absolutely, we believe in the positive fundamentals for Mining. But Mining will only really take off, again, once we are on the other side of the pandemic. So we are looking at growth in Mining, starting from when we are on the other side of the pandemic, ease of backlog conversion and increase in site access and thereby in our service and aftermarket business. Now for Cement, they are operating in the same environment, obviously, but we're looking at a lower backlog. And therefore, we are guiding that the Cement business will be with lower revenue for 2021. And on top of that, FLSmidth is facing some currency headwinds, and this is admittedly harder for Mining, also expected for '21, like we saw it in 2020 than it is for Cement. And that means that if all this is dragging out, forex is really against us and so on, we could have a revenue that is lower in '21 than it was in 2020. And if it's less so against us, we will be in the high range towards DKK 17 billion. Now what does that then mean for the development in margins. And we have put in a few building blocks here that is the most important for us in our own understanding of the business. And we're coming out of 2020 with a 4.7% EBITA margin. We will move into 2021 with a full run rate impact of our EBIT program that is already in from Q3 '20. We will obviously not have our one-off costs in '21, and there will be a little bit extra run rate on top compared to what we had in 2020. Then we are now clearing out of the low-margin Mining projects that we announced to you guys, the market, back in Q3 '19, that's also given. Then we are back to the revenue bridge on the left-hand side, we will have forex headwinds in 2021. There will be a more negative capital service mix, i.e., we will have more capital than service business in '21 that we had in '20. And Cement business will still be loss-making. And then there's a bucket of costs to reshaping, pruning, sizing, maybe changing some of our products over towards the more green cement area and other initiatives. At some point after summer, we will have COVID costs kicking in again, people back in the office, travel starting off. And that will kick in before extra revenue or growth will translate into earnings in our P&L. And as you know, there will also be M&A activities during the course of 2021. And that leads to our EBITA margin bridge, our guidance of 5% to 6%. If we look at the next slide, that's basically summing up what we've just been through. So fundamental assumption is the pandemic assumption clearing from summer. And there's considerable uncertainties on these assumptions, obviously. Then we have also decided to withdraw our mid- and long-term financial targets. And there's 3 key reasons for that. So first of all, compared to 2 years ago when we did these targets, the Cement and the Mining industry for FLSmidth has diverged considerably with regards to the end markets. And thereby also with regards to the outlook we have for those 2 industries and the way that they will develop and have to be managed. Secondly, as Thomas went over, there's a structural change in the cement industry, and we no longer see short to midterm recovery in that part of the business. And for both Mining and Cement, we need to say that the pandemic has postponed a potential pickup towards targets by at least 1.5 years or 2 years' time. And that means that there is increased uncertainty around the target levels as well as the timing for achieving our mid- and long-term financial targets. So they are withdrawn as from today. We will, however, keep our capital structure targets, and they remain unchanged. And these are the financial gearing, our leverage target to stay below 2.0x through the cycle. We also want our solvency ratio to be above 30%. And our capital stock dividend policy remain unchanged, 30% to 50% of net profits. And we will then resume with investor communication on our longer-term prospects for both the Mining and the Cement business once we have sufficient visibility. And with that, over to you again, Thomas.

Thank you. Then from that, from the guidance into what we delivered in 2020 on sustainability, I would like to highlight 2 elements here, safety. The lowest safety record, what we ever had, quite well below the target set, which was 2.5 now on 1 for the TRIR, which is a great performance. Yes, supported by the pandemic, but don't forget, the pandemic put on us quite a lot of significant more safety hazards than we had before. Another part is the carbon footprint. The relative carbon footprint dropped from 2.6 to 2.2, which is a good and a great performance in that direction, too. Then we have new sustainability targets for 2030 on ourselves and actually the value chain where we act in. And we committed to the TCFD and Science Based Targets. And I would like to highlight here the Science Based Targets, where we committed and looked and worked with it since January, which means that we are on scope 1 and 2 carbon neutral in 2030 as FLSmidth, and we will have a 7% year-on-year improvement. That is in line with that what we give as a target towards our customer and as a opportunity towards our customer, with our solutions, with our processes in Cement as well as in Mining to be MissionZero. That is important for us and for the whole industry. We know that we are quite advanced and quite ambitious with it. But what we see in Cement as well as in Mining is that the pandemic actually gave a significant step change, not only in the direction of digitalization, in the direction of sustainability, too. And when I talk about digitalization, then something about innovation. We have, which is well-known in the industry, cement as well as mining, the process expert, ECS, and it's now the version 8.5 already. It started decades back with fuzzy logic and so on. Now we are on artificial intelligence, which means we provide to our customers a software which is self-learning and without any impact and working from an operator or from customer into that setup, that system is always looking for the best energy setup and getting energy down and at the same time, increase in production. It's a permanent, ongoing, self-learning setup. And that is what the market demands more and more. And as I said at the beginning, especially in Cement, where the customers are so much under pressure regarding their end markets. Out of that into the key messages. We had a strong cash flow focus. We said that from the day 1 when the pandemic hit us that we look into to be capitalized properly and that having a very healthy balance sheet. And we came out actually quite good and a big thank you to my organization. We had a sequential improvement in financial performance from quarter 4 to quarter 3 -- from quarter 2 to quarter 3 to quarter 4, not as much as we hoped for, not as much as we communicated in quarter 2, but relatively at the quarter 3. We have a strong regional setup, which gave us in a time where travel and restrictions to visit sites was quite traumatic, still opportunities to work with customers. And our supply chain proved that it's very agile. And the reduction of suppliers in a significant amount as we did it in the 5, 6 last years was very beneficial. On the negative side, there is an ongoing negative impact of the pandemic. We have now 2 waves in what we have data points. And we have a clear correlation in Cement as well as in Mining on that activity, predominantly on the service activity. And the other part is, it is, of course, a pressure on us. But an opportunity too, the reshaping of Cement business because it will be not profitable, most likely as we see it for 2021. But from there on, with the sustainability run and the increase for sustainability demand, which is significantly higher in complexity than the regular cement will help us and support us. You will see cement in the foreseeable time in midterm as a multi commodity industry, a little bit like bulk handling in mining. The focus for 2021 for us is clearly to navigate through the pandemic until that is out of the business. We strengthened our industry setup, as we said, in quarter 3, which means whatever we invest in Mining comes out of the Mining result, whatever we invest in Cement comes out of the Cement result. And we actually invested in digital R&D innovation more in 2020 in absolute numbers, not only in percentage, than we had in the years before. Cash, cost and pricing now is important, especially with increasing raw material prices. This is important to drive. Customer relationship is always an important part. We see that our sustainability and MissionZero is very attractive in both industries that our leading position in innovation and digitalization helps us quite a lot. And standardization is a given in that business what we have to do in the future, too. Out of that, we had, as a key highlight for 2020, of course, a negative impact from the pandemic. We have a positive outlook for Mining, more than for Cement, if it comes to short term. Strong cash flow, revenue order intake and EBITDA improved in quarter 4 to quarter 3, and the guidance for 2021 is DKK 15.5 billion to DKK 17 billion on revenue and EBITA 5% to 6%. Thank you.

[Operator Instructions] Our first question comes from the line of Lars Topholm of Carnegie.

A couple of questions from me. The first one is around Cement, and Thomas, what you referred to as reshaping. So the market for green cement, is that going to be retrofit of brownfield market? Or is it going to be a greenfield market? And if it isn't going to be a greenfield market, should you sustain, what you're calling, the greenfield capacity you have today? Or should you structure Cement completely different, I guess, in a retrofit market, its access to installed base that is maybe more important than the ability to deliver whole Cement plant? Then a question on cash flow. What would happen to your cash flow when mining activity begin to pick up? Because as far as I remember, you have a situation where you need to place orders before you begin to generate revenue [indiscernible]. So I'm just wondering if cash conversion might come down, what comes up. And then a related question because you have announced you may or may not be acquiring the mining activities of Thyssen. With a net debt to EBITA of DKK 1.6 right now, is this at all realistic to make such an acquisition without issuing new equity? That would be my 3 questions.

Thank you, Lars. At first, I'll start, and Roland with the Cement and the structure. What you see is, at the beginning, brownfield investments. You see, for example, clay substituting limestone, not 100%, and we built installations to substitute a part of the limestone, and we are already able to reduce with these kind of brownfield installations 40% of the CO2. If we would put in, that maybe as a mark, 7% to 8% of the world CO2 is from cement. If we take already technology, what we have in-house, yes, quite a big part of that is very expensive because not a lot are buying it. We could reduce up to 70% CO2 already. And we promised 100% up to 2030. What does it mean for the structure? We already announced in '19 on the Capital Markets Day that we are only interested to keep project business for the whole group and Cement, too, below 20% of the total revenue line and only going for it when it's profitable and risk-low of risk-free. To be and to stay partly in that what we have today in the project business, gives us the knowledge of the whole process and the chemistry throughout the whole line what you have to have to get the whole industry to MissionZero. But we strengthened with the region structure, of course, the retrofit and the upgrade business and with that the brownfield installation for sustainability. Last thing, what I have to mention, which I think is a very good question, Lars, on that. Yes, we have to let other business go. And we did that. We announced with Möller üller. We announced the fabric filter. We will let to have business go which will not contribute and substituting that with sustainable business, what we are actually doing quite big steps ahead, and that is part of that reshaping, and it's actually built into the guidance, too. And out of that to the cash flow, Roland.

Yes, thank you, Lars. So as I understood your question, what's going to happen to the cash conversion if we start growing in Mining. And I think admittedly, we have taken some low-hanging fruits in 2020 on bringing down our net working capital. And if we start to grow in Mining, I think it's crucial to segregate whether we grow our service business or we grow our capital market business because the service business will tie up inventories and therefore, also working capital. And that needs to be steered firmly as we start growing, whereas the projects business, to a larger extent, will have milestone payments and maybe not large prepayments, but milestone payments as we move forward. So I think for us, internally here, there are operational targets set for the organization to further improve on our receivables. There's a lot of structural things we can do to make that more smooth. But everything else equal, if we start to grow in Mining, say, for mid-summer, I would expect working capital to follow up a little bit in line with that activity. Then secondly, as with regards to financing of the ThyssenKrupp deal, it's a little premature to discuss it because we don't really know the structure of that deal or what are we taking, what are we not taking yet and so on. But if you look at our capital structure target, we are currently at 1.6, and it's not an issue to go above 2.0. We have been there historically as well. So we have a number of options available to us. But currently, it's too early to speak about exactly how we want to finance it.

Okay. And maybe comment on -- in this environment, where cement is under pressure and visibility is subdued because of the pandemic, how high would you be willing to go during short term?

That's -- I won't sit here and guess on that, Lars.

I thought that was a super good question.

Thank you. It was a super good question, but -- yes.

It was kind of small question. Sorry, Thomas, go ahead, please.

But you know that we look very much into our balance sheet and our capital structure. This is so important for us.

Yes. No chance. One final small question. You mentioned that demand for digital remote services was more than doubling. Just to understand that in numbers, how much of the Cement business is there?

It's only a single-digit number in Cement of the total revenue as a separated business. But what happens if you have the remote control and the digital business with the customers, when we are able to go on sites, again, and customers are willing to invest actually, both in Mining and Cement, of course, we have a preferred position, a significant preferred position. Maybe that as a final thing on the remote. When we talk about that, we are not talking here only FLSmidth sites to make that clear. That is independent of the original supplier of the equipment or the whole line.

And your next question comes from the line of Artem Tokarenko of Crédit Suisse.

I have 3, please. My first question is around your 2021 guidance. Could you maybe give us some color about the major moving parts determining whether you will end up in the lower end of the high end, the major swing factors between low and high end of your revenue and EBIT margins? And maybe as part of this question, maybe you could comment on the thought processes behind the margin ranges for the divisions? And also how much of delayed revenue recognitions from existing backlog that you're factoring as a headwind into your guidance?

Yes. So it's a little bit back to the bridges that we had. And the biggest uncertainty for us is really the pandemic because not only does it drive how fast we can build our service business. And within the year book and bill, but it's also the speed of which we can convert the backlog into project and capital revenue. So for us to reach the higher end of that range, the pandemic needs to ease on us in the sites where we are currently predominantly operating. That's one thing. Then secondly, the faster we can get right shaped in Cement will, of course, improve the speed at which we can come back both top line-wise and also with regards to the bottom line. And then frankly speaking, the dollar exchange rate to Danish kroner is, we are a little sensitive to that on the top line. So to the extent that, that goes stronger, we will be in the high end and vice versa. So that's really the main drivers for our guidance.

All right. And just to clarify in terms of the comments of pandemic easing on the existing sites. Does it largely refer to service order intake? Or does it largely refer to the delays which you see in your backlog deliveries because of the pandemic?

Yes. As far as I got it, the -- yes, the normal -- we have roughly 1/3 of our service business, aftermarket business is actually that we sent out experts to help customers to get productivity improvement. That is what we do. We go there. And based on the fact that this industry is absolutely not standardized, not in cement, absolutely nil in cement, I have to say, and to a large extent, in mining too. And I will not go in why that is the case. It's simply borne out of the fundamentals in both industries. So we send out our people. They get then with this or with the visits, the order intake and then, of course, realizing the revenue by sending in experts to help customers or that we do the rework and the aftermarket work on our own. So we are very much depending on the access to the sites, maybe more than others because our business model is that we offer at any equipment, at any point in the process productivity improvement.

Understood. My second question is around the Cement business and the outlook for short to midterm. I guess, when I look at all the lead indicators and all the kind of reports from cement companies, they have been quite rapidly improving recently and also infrastructure plans look quite optimistic. So I guess maybe talk a little bit about why this is not turning into a more positive outlook for the cement industry at the moment [indiscernible]

Yes. It has to do. When we look into that what our Cement clients are reporting on. Of course, they have an installed base, and that's the important thing in the cement plant that kiln needs a minimum capacity to be fired up and to operate, to actually produce clinker. If you get too less material through, which means you have not enough demand, then you get a problem. Then the quality drops, and actually, the whole thing is not good. So out of that, they are now -- we see in a lot of countries based on short-term infrastructure projects or the business comes step-by-step in some areas, not everywhere back, then they produce more. But the overcapacity in the market with a 55%, 56%, 57% utilization rate on the kilns is not triggering any capacity increase. And at the same time, the uncertainty, what they have in all the different markets, I take India, I take the whole Eastern block, I take South America, partly North America, South Africa, in Asia, in some countries, which were booming before, that triggers for them not to spend money as much as possible. And we see that with the remote digital service. When we come and say, you have now to look into to make that service on the site and they try to postpone as much as possible, the amount of calculations we do to prevent customers to have what we call a hotspot on the kiln. That means that you get a breakthrough, the liners, which is very costly when it happens, is rocket high. That's actually the situation what we have. Then to the outlook, what we should not, and I know that Cement always gets negatively discussed, that's clear. But don't forget, we had an DKK 8.5 billion business with close to 6% in Cement in '19. And that -- and the year '20 didn't start that bad, too, yes, on a lower revenue, but actually quite profitable. Out of that, the pandemic brought a step change and a structural change because customers now whatever they invest, look into: Can it be transformed into a more sustainable setup? Do I fulfill with my cement plant, the regulation coming up? And when we come with a 2030 technology to have nil emission, and the European cement industry says, we will be carbon neutral in 2050, you can imagine which kind of potential is out there. But based on the technology, the regulation and the planning for that, it takes 2, 3 years, until that really drops into our order book, and it will drop into our order book. We already see 2022 significant better than 2021 in the cement industry.

And my last question is around THK mining business negotiations. I guess, 2 questions. Is there any time line for the negotiating process? And the second question, considering that THK mining business has been a long-standing underperformer with currently being loss-making, what gives you confidence in your ability to turn around that business?

Yes, I have to say -- I'll start with the second part. The confidence, what I have is we proved that we can underperform, too, and we prove that we can recover out of that. We think we have quite significant knowledge in about how to make projects wrong and how to improve them again. So we are actually quite experts in that. And we know the industry and the market. It's actually quite a lot complementary, what they offer, which we miss in our offering. And especially in sustainability, the whole in-pit crushing set up what they have is quite strong, and that is definitely an added value into FLSmidth Group if it comes to an M&A. Then the time line, that depends really on ThyssenKrupp. That is actually more -- and that's typical. The vendor actually gives the time line.

And our next question comes from the line of Nick Housden of RBC.

I have a couple. My first one, and this is maybe a question you're expecting, and it's certainly one that you've had before. But have you had any further thoughts about potentially divesting the Cement business? Both the 2021 guidance and the medium- and long-term outlook you gave, they seem quite pessimistic about Cement. And it seems like there's no clear time lines when that business will see a meaningful improvement. And then also with the discussion about the TITAN assets, that's a further shift towards mining. So I'm wondering if you could just start by talking about the value that Cement brings to the business?

So the -- at first, there is improvement visible. And we said it in quarter 3 that the recovery will be midterm, 3 years roughly, heavily with the green cement. And that is what we see, and we worked a lot in the last few months to get visibility on it, not only internal, with external experts, customer groups, consultants, no matter what you can imagine. And there is definitely a significant business for premium suppliers in cement upcoming. And as I said, actually in the Financial Times, too, based on the pressure, what cement industry will enjoy in the next few quarters on sustainability, especially on CO2, you will see that cement moves into a multicommodity industry. Clay, 3 types of clay is unbelievable, important to make a CO2-neutral cement. There are other minerals and other materials, what we work on based on our Mining competence on all the different commodities, what we can substitute limestone into. It will be a multicommodity, more processing-related industry, which is then with a high technical entry barrier and with that profitable. Then if it comes to divestment, we look for years, each year, strategic-wise, together with the Board, what is the setup of the company. What are the synergies and what are the different elements where we cooperate and where we shouldn't cooperate. And we announced it last year already, with the 2018 re-org, we are able to finance, Mining wish list, no matter what it is, out of the Mining result. And the same we do out of Cement. We have quite industry-focused management style already today. But at the same time, we use the synergy on the region setup, service as well as supply chain, procurement. And that makes the company quite strong. If we would see that the diverging industry or any other thing is reducing the synergy package so much that it actually gets negative, then, of course, the picture will change. I can make it in one sentence: Mining and Cement are not married in it. And it's not an emotional thing, we have clear business reasons and synergy advantages why we are together with both industries in one company. And in 2016, colleagues of you on the phone here actually asked me quite emotional, very detailed, why I'm not letting or why I'm not shutting down Mining. That was at the beginning of 2016, roughly. Nick, any other question?

That's good. Yes. Another one from me. So your order backlog in mining has developed very nicely. It was up 18% in 2020. Why should we not expect a similar growth rate in sales for that division in 2021? Is that purely because of the pandemic headwinds that we're still facing in the first half of the year? Or is there also some project timing issues with that? Can you maybe just explain that one for us, please?

There are 2 elements. At first, the large orders, what we got, will not have a big revenue impact in 2021, only towards the end of the year. But the big impact is really the pandemic. Please understand we had to sit here and to forecast something, which hits us quite traumatic with the business activity, the pandemic when it will ease. And we decided to go for the OECD model, which says because that was, for us, the most logical, which says from the mid of the year, the restrictions in the different countries, that's actually the main thing what we have, will improve and governments will be more dedicated in the lockdowns and then the restrictions than they were before. I have to give a little bit a sentence of cautious here because there was exactly the same wording what we heard out of media after the first wave. If a second wave comes, governments are more dedicated. They were not everywhere. I can tell you that. Second, with the pandemic, our miners, the main sentence, what we hear from them is, guys, FLSmidth, no panic. You get the orders, everything is fine. But at the moment, we are focused on producing a lot because commodity prices are good. And we have to be careful that we are not getting the virus on the site. So when you calculate that in the first half of the year still under the same pressure as we headed in the second half of 2020, and then an improvement, no matter that it will be there in the second half for Mining, then you can imagine which kind of impact it has on the full year. And that is what we calculated into the guidance, and that is what we then come out with.

And our next question comes from the line of Claus Almer of Nordea.

Also 2 questions from my side. The first question goes to the order intake in '21, and I know you don't guide on that. But Thomas, in the past, you have provided some color to how -- your order intake trends. So maybe you could do the same this time. How do you expect order intake in the 2 divisions or on group level to change this year? That will be the first one.

Yes. If I would give you figures, some people here would really, really have a problem, Claus, with me. But the -- what I can say is we are actually positive on the Mining side. And in Cement, we have to see how that year goes. We think that large business, large deals in Cement in 2021 will be very questionable based on the pandemic. That is because we know there's a lot of infrastructure work needed around with a lot of approval and regulation. And we see quite in the areas where we normally would expect some larger orders in Cement. We see that a lot of government offices are working from home or not working at all. So they will simply not have the permits. And with that, it will not come into a real order intake. Not to talk about the banks, which then have to give their blessing, too. But in Mining, we are more positive if we look into the order intake.

So does that mean that -- let's just take it as a scenario that Mining business could be growing double digits in the order intake this year or more? -- I know you can't give any specific numbers. So more in broad terms?

Claus, the -- you are quite good in asking. But the -- Claus, I can't give you a figure. Of course, it depends on if some of the -- we have quite a long list of engineering projects in our books. And these engineering projects will end in larger capital orders. And if they are very large, normally, they ask, at first for the long lead items. That is normally the thing. And that is what you then see with order announcement, which really moved the needle upwards in -- percentage-wise on year-on-year. We have to see what happens there. The sentiment is there, the fundamental is there, the hot list, the orders of engineering orders is there, that's all looking healthy. But about the timing, it's very, very difficult to forecast because our customers can't give us any information on it. If the year goes well, yes, it will be a good growth in order intake. If the pandemic goes on and gets a third wave, what we all -- or fourth wave, then in end of 2021, then, of course, it would look different. Our assumption is that the Mining in the second half of the year will develop quite positive if the pandemic goes out of the business.