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

Good morning, everybody. I would like to welcome you all to investor presentation of FLSmidth annual results for 2021. I would like to present you the presenters today. I'm speaking, Mikko Keto, and our new CEO for the company, accompanied by Roland Andersen, who is our CFO. And we have a quite smiley faces here. it means that we are pleased about last year's results. And if you want to look at our roles as well, you might want to highlight that I will focus a lot on EBITA and EBITA improvement, and then Roland is focusing on cash. I'd like to remind you about forward-looking statements that we will be discussing during this call and of course, the future that can deviate. I'm extremely proud of FLSmidth results for the fourth quarter and for the full year. And if I talk about full year, we've been advancing in all of our key KPIs: Orders, revenues and EBITA, and at the same time, strong cash flow for the company. Also there were some significant milestones during the year for the company, thyssenkrupp acquisition was announced in the summer of '21, and we successfully raised capital to fund it. We committed to Science Based Targets, it's a significant milestone in sustainability commitment. We introduced MissionZero Mine. And in Cement, first full-scale clay calcination order that we received. We will talk today more about market outlook in a bit, but what we can say about mining market, mining market is positive. It was good last year. It's good this year. In Cement, the market is still challenging with overcapacity. And we are looking at recovery midterm and emergence of the green cement market. Roland will go more into the guidance in a bit. But in the guidance figures, it's impacted by the backlog that we have and the backlog, what we're executing, especially in mining, a large share of the capital, but we will go into details for that in a bit. Mining revenue grew 10% during 2021. And that is evidenced that we were successful with our supply chain and deliveries, and we updated in January also that the execution of capital projects even exceeded a little bit our expectation in the last part of the year. Backlog has been increasing a bit for the aftermarket service. It means that order-to-delivery cycles are getting a bit longer, but of course, that is also applying for the capital market. But as a whole, we've been successful in executing our deliveries. The challenge in the market has been more with the cost escalation in the supply chain and some logistics challenges. Results shows that the mitigated impact of the material cost increases and increases in logistics costs. And we were able to post EBITA margin of 9%. On the bottom, there's a note that EBITA margin adjusted on the TK acquisition cost, taking that out would have been 9.9%. I was actually talking to Roland that if we have enough decimals, let it round up to the 10%, but Roland said it's 9.9%. So that is what it is. And we are focusing on EBITA margin improvement in the mining going forward. We had a stellar fourth quarter in terms of the order intake for mining. Significant growth in order intake, both in service and capital. On an annual level, it's 4%. But if you remember, the first quarter 2020, we got one of the biggest orders ever in history of FLSmidth for mining. And on back of that, then the growth rate for the order intake is 4%. But if you neutralize the impact of that one, it's really high growth, both in capital and service for mining business. Strategic rationale of acquisition of TK Mining is solid. We control the portfolio in detail and it's highly complementary, and we are adding some critical elements to FLSmidth portfolio that we are weaker today. Is adding to our full flow sheet ambition from pit to plant so that we can cover a pit better, but also, of course, adding some critical products to the plant portfolio. The significant opportunity in thyssenkrupp mining to improve the aftermarket service performance. As synergy case is compelling. It's based on cost synergies and we know that we can deliver that. Integration planning is on track and is under trust process. No surprises there. In cement, we talk about value over volume, and we change our focus in cement for profitability over volume. It means that this year, we will be making profit in the Cement business or the positive EBITA margin, but also last year, there was a significant improvement from a year before. In Cement business, we focus on process technology, products and services. And projects, we are very selective where we participate, and they need to have a green credentials for us to be interested in that. We are working with the customers who are committed for green transitions applying new technologies, new processes to achieve that one. But it's value over volume for Cement. Quarterly order intake development wasn't very strong for Cement for the last quarter, but I'm more interested in progress in the service. So on an annual level, the service progress has been really good for Cement in terms of getting new orders. And as Roland will touch the forecast for the year, we are estimating Cement to move sideways in terms of volume, but we are improving profitability. And that is our strategy that we focus on profitability and don't take orders that we they must regret 2 years later. Now handing over to Roland for more details on the financials.

Thank you for that, Mikko. So let's just have a quick glance at the financial hit numbers. So as Mikko mentioned, we're moving ahead on most of the key KPIs. Order intake is up by 4% and revenue is up by 7% consolidated. Also, our gross margin is open notch and our EBITA moves forward by 34% to an EBITA margin of 5.9%. So clearing financial costs and taxes, we end up with a profit and loss for the group of DKK 357 million. Included in this result is acquisition cost of DKK 107 million related to the TK acquisition. And without that, the EBITA margin would be 6.5%. If you look a little bit on our revenue, our revenue for Q4 grew by 19%. It grew approximately 20% in both of the 2 industries. But what is important here is that our capital revenue grew significantly more than service in mining, and also slightly more in cement, where capital grew by 25% versus service of 20%. And this is important to understand in terms of -- that this translates directly to an EBITA margin. And as you know that the capital revenue is weighing down on our average EBITA margin, especially in mining. But if you look at the right-hand side, we're moving forward, 7% for the year and a Q-by-Q increase in revenue and a transitionally strong Q4 here 2021, where we executed better, and especially in mining capital led us to also beat our guidance from around DKK 17 billion to DKK 17.6 billion in revenue. If you look at our gross margin in the nominal [ kroner ] gross profit is going up Q-by-Q during the year, which looks good. Our gross margin, though, is trading a little down the last 2 quarters, again, impacted by the capital share of total revenue, especially in mining, but also a little bit supply chain costs sitting in these margin numbers. And on the right-hand side, you see that mining is down by 1 percentage point compared to same quarter last year. And this is directly attributable to the higher capital revenue and Cement is impacted by final closure of an O&M contract that we finally closed out by end of the year. Our SG&A ratio improved to 13.9% for Q4 compared to the same quarter last year, it's up by 4% and the percentage obviously benefit from a relatively high revenue in Q4 that was seasonally driven. In this number sits for the fourth quarter this year, DKK 37 million of cost related to the thyssenkrupp Mining business acquisition. If you look at the EBITA margin development, we posted 6.6% in Q4 alone. This is now the highest quarterly EBITA margin we have had since the pandemic outbreak. On the right-hand side, we see that this is predominantly the revenue pick up, so a significant operating leverage. The decrease in gross margin of DKK 74 million is a little bit supply chain costs and so on, but predominantly the capital revenue share and also the DKK 37 million in this quarter sits in the EBITA margin. And we ended at DKK 338 million of EBITA in Q4 '21. Our net working capital improved significantly in Q4. Net working capital ratio went down as good as 6%. On the right-hand side, we see that this is predominantly driven by a large amount of prepayments that came in, in Q4. We had actually expected some of this later in 2022, but we managed to get that in, in Q4. Also, we have cleared a chunk of our WIP assets, and we continue to do quite well. The organization have done really well in steering our receivables. And our total receivables out of Q4 revenue is improving compared to the same quarter last year. And all that leads to a strong cash flow in Q4 2021. On the right-hand side that we see that this is predominantly driven by the EBITDA as it should be, but also a strong positive change in net working capital. And including taxes and financials then CFFO for the group was DKK 1.449 billion for the year and deducting CFFI and a few M&A adjustments, then a free cash flow for the group of DKK 1.185 billion for the year. And that leaves us with a strong capital structure well within our own targets an equity rate of 45%. And also our net interest-bearing debt turned to a net asset, we raised capital of DKK 1.4 billion net in September 2021, and obviously, this is now sitting and waiting for us to pay for the TK Mining acquisition, that anticipatedly close in second half of 2022. So in line with our intention to drive the mining industry and the cement industry a bit more independently, we are also now stepping forward and start to guide separately on the 2 industries. And for the Mining industry, that means as Mikko said that we are positive on the Mining industry and the market outlook. We think 2021 was a good year for mining and 2022 will be similarly a good year. Mining revenue and EBITA is expected to grow in 2022. A lot of that is driven by our existing backlog. And it's important, bullet 3, here to understand that the mining EBITA margin will be impacted by a relatively high share of capital revenue. Capital revenue that we are converting from our backlog. And this is orders all the way back from 2020 that we are now executing for the first predominantly 3 quarters of 2022. But they will also set a bit of higher logistics costs than a little bit inflationary pressure in our cost base. And further, we have for now anticipated that we will spend DKK 110 million in integration costs between now then on to thyssenkrupp Mining transaction anticipatedly closed in the second half of 2022. And that all means that revenue in the mining industry is now expected between DKK 12 billion and DKK 13 billion and an EBITA margin of 8.5% to 9.5%, including, as I mentioned, the higher capital revenue share and also including DKK 110 million in integration cost. Similar for Cement. As we have said, we will move sideways in Cement revenue-wise, and this context, that means DKK 5.5 billion to DKK 6 billion in turnover. We have closed a few O&M contracts down during 2021. So this is a low-margin revenue that will drop out. And also Cement business is not expected to -- or the Cement market is not expected to improve significantly in the short term. And our business will be impacted by logistic costs and also a certain element of inflationary pressure. And as we have promised or at least before during 2021, also 2022, will now be in black. EBITA numbers, however, low. So 1% to 2% in EBITA margin and that is quite well done by the industry -- cement industry organization here that they brought the business back to black numbers for second half of '21 and now continue to move forward with profitability and with focus on profitability over volume. And if we add up these numbers on group level, that means that the group will deliver revenue of between DKK 17.5 billion and up to DKK 19 billion and an EBITA margin of 6.7% (sic) [ 6% to 7% ]. It's just important to note that this is a stand-alone FLSmidth guidance. It does not include any impact from the combination with the thyssenkrupp Mining business, and it includes DKK 110 million in integration costs. Then we expect as soon as the transaction closes, we will update our financial guidance and include impact from the TK Mining business accordingly as we move forward from there on. This guidance is, obviously, subject to uncertainty primarily from the pandemic, the global supply chain situation and also the geopolitical turmoil we see around the world these days. And with that, I will give it back to Mikko.

Thank you, Roland. We introduced MissionZero Mine in 2021. The idea is that we take a holistic view from pit to plant and optimize the whole mining operation from a sustainability point of view. And we've done the same for all different applications: Copper, gold, lithium, you name it. And we are looking at how to maximize the productivity and mini margin impact for this environment. And with that combination, we know that we can achieve significant benefits for our clients, and we are engaged with many of our customers in deeper discussion about what can be done for the greenfield and of course, for the brownfield operations. And important is always to have a holistic view rather than picking one product out of the flow sheet and say that this will change everything. Holistically, it's only right view in mining. We have done the same for Cement operations. Big commitment what we have done last year is our commitment for Science Based Targets. And we set internal KPIs targets for our personnel to improve economic intensity year-on-year. And now we're in the process of unbundling that KPI, so that we can tell people exactly what to do and how to influence [ point ] of that KPI. It's not only about the high-level KPI, but organization understanding what actions, what improvements help us to improve economic intensity. We have very clear management agenda for the company, for mining, profitability and growth. We know that in the good market, like mining market, we can do both at the same time. We only take business that is good business also in 2 years of time, as I said. For Cement, growth is a bit more challenging. But in Cement, we make sure that it's profitable business and run it as a sustained profitable Cement business going forward. And we are able to invest money back then to the R&D for the green future. MissionZero sustainability remains cornerstone of our management agenda. One of the biggest events this year will be integration of thyssenkrupp Mining business into FLSmidth in the second half of the year. That is clear management focus. And at the same time, we started derisking our product portfolio over the last year. We continue to do that. And when we talk about order backlog, I know from last year that the quality of the orders is improving. When I talk about quality of the orders, I talk about low risk and higher margin. So we know that we are working through the portfolio and order intake, and we are advancing in that area as well. Then I'd like to invite questions from the investors and from the audience for me and Roland, please.

[Operator Instructions] The first question is from Magnus Kruber, UBS.

Magnus Kruber from UBS. A couple of questions from me. And first on the revenue guidance. So it strike me as a bit conservative. I think you have about DKK 2 billion more for deliveries this year compared to last. And even at the upper end of the guidance range, I think your sales growth all implies that DKK 1.5 billion increase. What is the delta here? And why should we expect in for out orders this year to be down?

I think -- so first of all, there will be a large part of capital revenue that comes from the backlog. And that will be timed accordingly, especially in mining. And secondly, I think there will also be a little bit of delay. We are not expecting to supply chain challenges to be completely gone within a quarter or 2 quarters. And that's not only things we can mitigate by costs and so on, but it may also delay things a little bit. So there's a little bit of elastic in the execution plans, and that's how we should think about the revenue guidance.

And we are all the time working with our capital -- especially our capital organization looking at the backlog, looking at estimated delivery times and so forth. And as Roland said, there is a bit of a moving target because of the global logistics.

Okay. So what can be perceived as being somewhat conservative, that's mainly due to logistics challenges rather than geopolitical risks or anything else that you have taken into...

It's actually not meant as conservative. It's meant as realistic. And so we will see how we go as we play. If we look at Q4, obviously, we delivered a bit more than we had guided. But important to note is that the margin was not necessarily following because there was a large chunk of capital revenue. I think that's what's important when understanding our guidance for 2022.

Okay. Got it. Could you also add some color on what drove the higher-than-expected equipment invoicing through '21 on the mining side on the OE side. Is that sort of a project-specific dynamic? Or was it just sort of a broad-based over delivery?

I think it has to do with some of the capital projects that -- because we were anticipating that end of the year, there's sometimes issues in logistics and deliveries. So the flow through -- the logistics flow was slightly better than anticipated, and it had mainly to do with the capital projects rather than anything else.

Okay. So it was a broad-based impact then driven by logistics rather than some of the bigger projects that you had last year that was sort of particularly better, right?

Well, both, right? So the logistics issue, we were not as harsh as we had anticipated, and that also meant that we were clearing some of the bigger projects faster.

Got it. And then on the mining service revenue growth, it came in at 5% in the quarter, and that compares to high teens or even 20s growth over the final 3 quarters of last year? Should we -- when should we expect the aftermarket invoicing to kick in at the same rate?

So what we've seen in aftermarket order to delivery cycle getting a bit longer. So lead times from order to delivery are a bit longer than they used to be. We don't have a major issue in deliveries, but just kind of -- it's getting longer. And that is visible that we are building backlog, basically, more than we can deliver, and that was visible also in the latter part of the year that order intake was growing faster than revenue. So it's kind of building backlog on back of the -- a little bit longer delivery times for parts.

Okay, got it. I guess one final one, if I can squeeze in. I think Roland, you mentioned higher OE invoicing in the first 3 quarters of this year. Could you sort of add a little bit more color on sort of how the invoicing sort of trajectory will be with Q1 be the highest and then slowly slope down towards Q4? Or how should we think about the balance...

In Q1 and Q2 will most likely be the highest ones, and slightly better in Q3 and then it starts to trail off.

The next question is from Lars Topholm, Carnegie.

Yes, a couple. On your cash flow slide, I can see that the cash flow from continuing activities is almost DKK 200 million higher than the group cash flow from operations. I just wonder what makes up the difference? Is that a cash outflow of almost DKK 200 million from discontinued activities? How does that work? And then a second question, and I apologize, but it's close to again to the revenue guidance. I'm not sure I completely understood your answers, so revenue that is not currently in the backlog should, according to your guidance, drop from around DKK 8 billion to somewhere between DKK 6 billion and DKK 7.5 billion. And I simply don't understand why you expect that. So if you can explain it so even I understand, I'd be grateful. And then a final short question that goes on the cash flow outlook for 2022 because you elaborated to prepayments having taken in somewhat earlier than expected. And you also had a significant positive net working capital swing. So taking that into account, what kind of, I guess, underlying pressure on cash flow would it be fair to assume for 2022, if any?

So for the discontinued activities, remember, in Q2, Q3, we had a bank guarantee pulled against us of DKK 130 million on a case that is currently running on the discontinued business. And there's also been a few operational costs in trying to solve, get that sorted and also a clearance of a VAT issue. So that explains the difference between the group and then the discontinued activities. And on the revenue guidance, I'm not sure what the unclarity is. So we have a backlog that will need to be converted at -- and some of those capital projects are relatively low margins. So that's one thing. The second thing is that the delivery times on -- both on what's in the backlog and also the order intake in [ our ] orders, as we refer to will be impacted by longer delivery times as a function of expected supply chain changes. So that's how you should think about it. And then I think there was a question on the cash flow. And obviously, we had a lot of prepayments in Q4 and those prepayments will be used, so to speak, to execute on the projects. And that means that when thinking about our total cash flow, our working capital, I think we're not improving the level of working capital as a percentage of total revenue. So we should still think about through the year sort of working capital of 10%, 10-plus percent of total revenue. That also means that the cash flow will swing back during the year as we start using some of these prepayments to execute, so to speak.

Next question is from Claus Almer, Nordea .

Also a few questions from my side. I will take them one by one. The first, Roland, you talked about this capital orders and service revenue. Could you provide a likely split between these 2 revenue streams? And would it be more as we have seen in the second half of '21? That would be the first one.

Yes. So the capital split will be closer to what we saw in Q4.

In whole 2022?

Yes, especially for the first 3 quarters, yes.

Okay.

Of course if you remember that traditional is more 60-40 and now we are more talking about 55-45. So it's a fairly significant shift in terms of the mix.

So more than half of the revenues will come from capital.

Okay. And then looking at the projects you have in the backlog that was signed before commodity prices went up or before the cost inflation started to happen. How are they impacted by cost inflation? That will be the second question.

Most of the contracts that we had, had cost escalation clause. So that's pretty well covering the capital business. And of course, it's not automatic, so that triggers negotiations with the customers, and we had many of those during last year. And then we managed to neutralize the impact of significant cost escalation in the capital business through those negotiations. And of course, for that reason, you can see that the EBITA margin, for example, for mining held up. So we didn't see declining in the margin because of that, but it was very significant and at times quite painful to talk to customers about that mean it to not increase prices by X percent because of this and that. So it's -- but I would say that's one of the successes of last year that I would like to highlight that we were able to neutralize impact of very significant cost inflation. And bearing in mind that in capital equipment out of the product cost is mainly material cost, which is the main product cost item.

Okay. And does that also account for the Cement division? I can understand that the mining -- miners is probably easier to talk to, of course, not that easy, but easier but within Cement it might be a different story. So how is it in Cement division?

It has been similar. And on supply side, then, of course, Cement market is not booming, so that if w have sub-suppliers that are more [indiscernible] to cement, there's no inherent ability of the sub-suppliers and component suppliers to increase prices as [ they ] in mining. Also in Cement, the EBITA result was that we were able to mitigate the impact of that one. But that inflation impact is more on the mining not only because of material cost increases, but also the increase of global demand for the components and products. And therefore, of course, sub-suppliers having more bargaining power.

Okay. And then just a final question regarding the backlog. I'm sorry about that. Also coming back to your revenue guidance or the comments about revenue 2022. But a little bit uncertain how to really understand your backlog comments. So the number you have in the annual report, is that your best guess? Or is it -- how do you reconcile that number with the comment about longer sales cycles and supply chain issues and so on?

Yes. So this is -- you can say, this has been somewhat adjusted for the expected delays, you can say, yes, that's right. The 69%.

Next question is from William Turner, Goldman Sachs.

A couple of questions from me. The first one is again, kind of related to your backlog but a slightly more broader question. Obviously, we're experiencing a much more inflationary environment and some cost items are increasing quite rapidly at short notice. How do you feel about the current hedges and contractual agreements you have with your backlog that you might not get any kind of margin pressure in the future when it comes to actually shipping with these orders in the future. If the costs have increased, do you feel like you have enough levers and feel comfortable with that scenario?

If I talk about -- firstly, capital equipment, which is a kind of large unit equipment was a significant part of the price is basically material cost. So what we are trying to do is that we are making quotations to customers with a short validity. And at the same time, we get commitment from the main suppliers for the same period of time. So it's back-to-back the commitment. And that has related to the fact that quotation, for example, the validity is not 3 months, it's not 4 months, it's rather 1 month. And then we -- for that period of time, we secure key sub-suppliers commitment for the price or cost to us and then delivery time. And then typically, if there's a delay, we talk to customers that we need to recost, reprice the quotation because we only had validity for 30 days. So we are pretty well covered in the capital business, getting key sub-suppliers to commit at the time when we get commitment from customer. But it's managed in the window so that in that one month window, we have a commitment from supply chain. We have a commitment from customer. And if that's delayed, we need to recost, reprice the whole thing once again.

Okay, great. And my second question is on the thyssenkrupp Mining integration. The costs that you've incurred so far they are currently around DKK 100 million. And when the deal was announced, there was initially guided that, that would be DKK 110 million to be incurred prior to closing. So it feels like the integration costs are running kind of ahead of schedule. Is there anything meaningful behind this? Has -- is this just been a bring forward of your kind of overall integration costs? Or do you expect that the total cost will be higher than what's previously guided?

So the way we actually -- it's a little bit hot and cold water, right? But the money we spend in '21 is related to the transaction. That's how we think about it. And the money we spent from now on and onwards is integration cost. And those relate to the 20% that you recall when we announced the deal. Is that clear?

Yes, that's clear.

So the DKK 110 million that we now start spending in 2022 is part of our EUR 75 million in total cost complete.

The next question is from Vlad Sergievskii, Bank of America.

I'll start with thyssenkrupp. I mean you announced a deal about 6 months ago. Do we have visibility on what has happened to like project execution, backlog order intake since mid last year. Are you receiving any periodic update from thyssenkrupp on how these operations are performing? And also, thyssenkrupp obviously recently published their carved-out balance sheet for this operation, which showed a pretty big increase in contract liabilities, but no increase in cash. Is it, in any case, a concern for you what this balance sheet evolution, I would say. That's the first cluster of questions.

If I start and then Roland can complement. So that information will be in the clean room. And myself and Roland don't have access for that because we are very strict for the antitrust rules. And so we don't have access to the kind of clean room information. On day 1, we will open it and it will be available. And so we are relying on what thyssenkrupp is publicly quoting, and publicly they're quoting that the strategy of improving profitability in the multitrack businesses and derisking what they have commented public. We have no concern that it will not be progressing accordingly based on the public information. But as you know, because of the rules, we don't have access to clean room data at the moment. Roland, do you want to...

I think we can point back to what we have said in Q2, our Q2 and our Q3 where thyssenkrupp indicated that especially their mining restructuring, we're progressing ahead of plan and significantly better than they had anticipated. And so that's the latest we sort of allowed to communicate on.

That's great. And if I can ask about contingent liabilities, which you have reported. I mean it's a pretty sizable increase, about DKK 600 million compared to early last year. I think most of them happened before Q4, but probably Q4 has a small increase as well. Any chance you could disclose what actually drove this increase in contingent liabilities?

So we did this. This is before Q4. This was Q1, Q2 and also Q3. So first of all, there was a case on our discontinued business where we had a bank guarantee pulled against us, so that's the contingent liability. That's not cost we have taken. This is clearly an issue that we are disputing. And also, we have an older case of over DKK 200 million referred to the Tunisia case at our Annual General Meeting back in 2020, that is part of this increase. And then there's a few other cases in Northern Africa and in India. But they are not strong enough for us to expense them. So they are just highlighted on the contingent liabilities.

Okay. And the last one for me, if I may. On the supply chain financing utilization, are you able to disclose the actual capacity of your supply chain financing arrangements? Are we close to this capacity? Do you expect any further increase in supply chain financing in the coming quarters? And also, if you were able -- to be able to comment on any financing receivable facilities, which you have or don't have?

Yes. So on our supply chain financing, I think a couple of years ago, we had drawn about DKK 1 billion. And by the end of 2020, it was around DKK 270 million, and now we have drawn DKK 490 million. So we have more capacity. I don't think we anticipate that the suppliers will go back to the '19 level, but we do have the capacity. So that was one question. What was the other question. Was that a question to our committed debt facilities?

No, it was more about do you have any financing for receivable facilities like factory or things like that?

No, we don't have that. We have the supply chain financing arrangement that we see as a little bit of a loyalty program but certain of our suppliers. And then we have a strong book of committed bank facilities, both permanent revolving credit facilities, but also an acquisition line that we will utilize once we clear the TK acquisition.

The next question is from Nick Housden, RBC.

I have a couple. First one, I guess we can compare our forecast about the mining cycle and the impact from the thyssenkrupp acquisition, but it seems realistic for me at least that within a few years, possibly 90% of group EBITA will come from [indiscernible] 10% for Cement, and Mikko your background is mining, it feels like most [indiscernible] has very consistently been at the company is much more mining equipment and suppliers, the cement suppliers. So I'm just wondering whether we're maybe moving closer to a possible sale of that cement business and maybe whether the sort of the successful integration of the thyssenkrupp business could be sort of the catalyst for looking at that more seriously?

The line wasn't actually very good. So we might have missed part of the question because I don't know, Ronald. But I think if you talk about, I think, around thyssenkrupp acquisition. And this might be well mentioning that we even introduced strict kind of controls on our business on profitability targets, both for the capital and service business, and we apply very similar principles then to thyssenkrupp Mining when we take over. And of course, then also kind of derisking, continue to derisk the portfolio. And -- but I missed actually part of the question because of the line.

Okay. Sorry, if the line was not that good. It was more about the group becomes sort of 90% geared towards mining on a profit basis, whether Cement is becoming a bit redundant in group structure?

Yes, now I understood the question. Of course, from a turnover point of view, we have roughly 70% mining, 25% cement, and we know that the EBITA ambition and our ability to deliver EBITA is greater in mining because the underlying growth of the business and also that our customers are very profitable. So it's over time and of course, probably the mining share will increase. But at the same time, we have profitability target for cement, and we don't sacrifice profitability for growth. So we -- as I said earlier, we are very selective what we do in cement. So we really focus on making the business profitable and then investing back to the R&D to make sure that we have a best position in the market when green cement kicks off. But in the meanwhile, you're right that sale of the cement in relative terms, most likely will decrease in FLSmidth.

Okay. That's very clear. And then just a second question about the margin guidance, which maybe was a bit softer than consensus was expecting. Can you maybe just talk about the balance within that guidance between the negative mix effects from having a higher equipment share the benefits from operating leverage that you're expecting, pricing benefits presumably, and then also scale the commodity and supply headwinds within that guidance?

So we've actually internally setting targets to advance in profitability, both for capital business and service business independently. So we want to see improvement in both buckets. And then of course, when we have a mix impact then at the totality or group level, then it -- mix has an impact. But we have a clear advancement. If I look at the backlog that in the capital business. The new order intake coming to the backlog is of a slightly higher margin. And we see also positive development in the service business. So we are pushing profitability, EBITA improvement in both businesses, stand-alone. And then, of course, then in terms of volume, then there's a mix impact. And we've seen already during last year, improvement report. And I might refer to our auditors when they made a report and one of the findings was that this -- everybody talks about profitability. And I think that's a culture change that we want to have profitability on everybody's agenda when they do the daily business.

The next question is from Klaus Kehl, Nykredit Market.

Yes, most of my questions have been asked by now, but a question about Russia. Could you give us any flavor on what kind of assumptions you used about your Russian equipment orders for '22. And yes, any thoughts about what would be delivered in '22 and '23 to Russia.

It's actually analyzed, our Russia business carefully. And we've used in our Russia business, typical principles for the project business that at any given time, we are cash positive in the cash curve for the project against our kind of cash commitments, not only our outgoing cash but also cash commitment to the supply chain. And also some of the prepayment, what Roland mentioned earlier, actually coming from those projects. So regard to Russia, we are also working closely with the customers. The key customers we have there, actually, our customers are high-quality operators and very professional, and we are managing the projects and business today as before. But of course, we've done scenario planning for all eventualities and mapped that if something happens end of this quarter, end of the month, so we have all the scenarios fully kind of planned for. But it is, of course, concerned that if the situation escalates, of course, from the mining industry globally, Russia, is a significant market. But we are not overly concerned, we are concerned about of course about conflict, but we are not overly concerned about impact of any potential sanctions. And Roland, maybe you can...

I think as Mikko said, I think we are pretty well structured from a contract point of view in Russia. And so the way we monitor this daily and the way we think about it if sanctions are being introduced, we will, of course, comply with them completely. And it also means that eventually, we may have to pull out the resources from ongoing projects in Russia and Kazakhstan and some of the vicinity states and then deploy them elsewhere. So in terms of how we look at it at our business, that means that there will be revenue that we cannot execute on in 2022, and then we'll have to come back once the sanctions are lifted. So I think it will impact maybe 5% to 8% of the group's combined revenue depending on when and how the sanctions potentially may be introduced.

And as earlier, our customer base in Russia is very -- they are good, high-quality operators. And if there's a delay in the project, they will not cancel it. Certain things will be postponed. But they are strategic and they're going to execute those as it becomes possible.

The next question is from Dominic [indiscernible], DNB.

Dominic from DNB. A couple of questions. Firstly, on the inflation, you mentioned higher pressures, logistics, supply chain issues. Can you give any numbers? How much were these kind of elements last year? And how much of the pressures are you expecting for this year?

So looking at last year, the inflation, of course, is different for different components. But -- of course, if you look at the steel price increase in the beginning of the year, that's good guidance, what is for some of the capital equipment had an impact in the beginning of the year. And then as the pressure's off from the steel price is more the overall inflation, more driven by the demand than actually raw material increases. And from a logistics cost, there was a cost impact, but in the bigger scheme of things, it wasn't very significant. It was more how we execute the logistics rather than actually cost increase. So we actually had a good long-term agreements for the main operators in the world and fixed prices only that if we incur the case that we need to go outside that fixed agreement with the logistic providers we saw significant, then we were hit by the hike in the container prices this and that. But we have committed routes, committed volumes. And for that, the logistics partners held pretty much the cost base on prices, what we had before. And then looking at this year, we are looking at the inflation, Europe, 5%, U.S. 7%. So I will say that overall inflation in the world in everything is also impacting us. And a good guidance is that it's impacting us roughly at the same rate. So I don't think we are lower or higher inflation, but it's just the inflation is back. And we are ready for that one in -- basically in our internal estimates. So we have taken that into account in our pricing. We have taken that into account to the validity of the offer so that it's a quotation sort of validity, and we have back-to-back commitment from suppliers then for that period of time. So it's a little bit maybe limiting the upside short term for the EBITA improvement. But I think we can manage the downside. I don't think there's a downside for us, but it's, I would say, it's rather limiting upside.

Okay. And then in cement, if I understood correctly, you have cleaned backlog somewhat. Is there a number for that, how much have you removed those lower margin projects from the cement backlog?

Yes. So -- not so much a backlog. We have had a few ongoing contracts that is now being sort of shut down or not extended. And that may be a couple of hundred million Danish krone.

And then lastly, just in terms of demand environment, how has the year started in terms of customers decision-making?

Nothing we've seen a high level of activity to continue. So there isn't anything from the high level activity last year, we haven't seen any change. So it seems that world continues, mining world [ especially ] continues as it was last year. We haven't seen any big variation in activity if we talk to our regional organization. So it has continued as it was last year.

The next question is from Christian Thålin, SEB.

My first question, you just mentioned before that the cost inflation will have a somewhat negative impact on your margin, at least in the short term. But I was wondering if you could elaborate a bit on just how strong your pricing power is in this current market? So basically, my question is to which extent you're able to offset these broad based cost inflation with higher prices and whether you're able to charge an additional margin on top of these cost hikes? So basically whether we should expect this short-term margin pressure to kind of be a new baseline, a new normal or if you're able to kind of charge your margins on top of this as well going forward?

If I look at the last year as a guidance for this year, and if you look at the numbers, so we were able to offset cost escalation with our price increases. And there are 2 different markets. One is the service, which is more price list driven market and value-based pricing driven market. And then, of course, heavy capital equipment, where the cost plays a bigger element in the total pricing. And last year, if I look at order intake, our order intake margin compared to the backlog improved both in capital and service. But as I said, it's limiting the upside. So we are advancing a little bit above the inflation and it's already visible in some of the numbers. And we are pushing for the same this year. But there's -- but as I said, it's I think we can manage the downside, but it's a little bit limiting the upside because then if there's underlying inflation and then you are trying to do something on top, then it's a bit harder for the customers to accept. So limiting upside. We are managing that there's no downside out of that one. So I'm confident of that.

Okay. And just a very short question as well. Can you tell us anything, now you provided guidance for 2022 for mining and Cement as well? And thanks for that. But can you tell us anything about when you expect to be back with the mid- and long-term guidance as well?

So the plan is that, first of all, we're waiting to welcome our new colleagues from TK and [ get that ] integrated, and then we'll update the 2022 guidance. And then thereafter, we plan to most likely have an updated -- update to our strategy and then we'll do a Capital Markets Day. And there, we will announce a little bit more on our long-term financial ambitions.

Great. And so I just have one last question, and I apologize if I'm just repeating questions, I had a -- some problem with my line before. But my last question is on the impairment of your inventories. And I was wondering if you could elaborate just a bit on what was driving the impairment of inventories in 2021? Because I guess with the continued high raw material prices, that's not the driver of the impairments. So why is it do you expect lower selling prices to some of your inventory?

So we have had a few restructuring initiatives on our geographical footprints. And in connection with changing that and also selling sites and so on, there's been a cleanup in what has been on inventories, and that's what you see in that number.

Last question is a follow-up question from Magnus Kruber, UBS.

I just wanted to come back to the M&A-related costs you incurred in '21. I mean now you're talking about integration costs for '22. But should we expect that the M&A-related costs suddenly stops now when we're going to '22? Or will that run rate continue also until the deal closes? So how should we think about those costs?

Yes. No. There is no more M&A related costs. They've been taken in connection with the transaction. Now there will be only integration costs as we move forward.

Perfect. That's very clear. And then could you comment a bit on where you see the proportion of the aftermarket sales from consumables at the moment in the business? You had a target while back of reaching about 10% by 2019. I think you achieved that. So where are you now?

I think the ballpark is similar to what it was in the past, and it's one of the considerations that we need to look at when we look at the strategy and portfolio. And then dive inside the service business and look at areas to grow. But it's -- as you said, it could be higher.

And then just a final clarification. I think the logistics cost until end of '21, have they not been affected by the higher freight rates because you had longer-term contracts on those. Is that right?

Yes. Most of the deliveries were done using the kind of long-term agreements with our logistics partners. And also, we tightened up the delivery terms, whether it's DDP ex-work, so we've actually done work because we realized that for certain products that we use too much DDP. And then finally, if there's a freight cost, then it's a big difference between kind of DAP, how it works, and then DDP. So we've been tightening the kind of delivery terms to kind of not to leak any -- and have a cost leakage because of deliveries. But -- actually, for overall cost had some impact, the increased freight cost, but I would say it's not material in the bigger scheme of things.

Okay. Got it. So into '22, then we should expect that sort of the delivery cost and the contracts that you're signing will sort of roll over to quite a substantially higher base than we saw in '21? Than in line [ I guess with other] contract rates?

That is correct.

There are no further questions. I hand back to you speakers.

I would like to thank you for your time with us. And just keep in mind, our management agenda, what we have, we are fairly religious about that one. So it's quite clear that we will be focusing on in the coming months and years. And that is good guidance also for the future priorities of FLSmidth management. So keep that in mind and look forward to talking to many of you during the roadshows and also meeting in other occasions. So thanks for your time and your interest for FLSmidth.

Thank you.