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

Good day, everyone, and welcome to today's day 1 update on TK Mining. [Operator Instructions]. Please note, this call may be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn today's call over to the Head of Investor Relations, Jannick Denholt. Please go ahead.

Good morning, everyone, and welcome to the FLSmidth conference call. We will give a day 1 update on our TK Mining acquisition. My name is Jannick Denholt, I'm the Head of IR. And joining me today on this call is our CEO, Mikko Keto; and CFO, Roland Andersen. This call is scheduled to last no more than 30 minutes, including a short Q&A at the end. Please note that we only got the keys to TK Mining about 8 hours ago, so there will be significant limitations to what information we're able to provide at this point in time, and we will refrain from making speculations. We hope you can appreciate this. We want to be as transparent as possible by providing as much high-level preliminary information as we possibly can at this time. And with this, I will hand over the word to you, Mikko.

Thank you, Jannick. Good morning, everybody, and we are calling live from Essen, Germany. And in 1 hour, we are about to meet all our new colleagues in the conference call in Essen. Just recapping some of the reasons for acquisition. We are accelerating all these acquisitions, our growth ambitions and strategic focus on mining. It means that FLSmidth will become more pure player in mining, which is our strategic ambition. At the same time, we are adding key technology to our portfolio, and I would like to highlight that we are absolute global market and technology leaders in high-pressure grinding, absolute leaders. And that is one of the key reasons for the acquisition. So we have great technology additions for our portfolio, just to name one particular one. We can improve the business mix of thyssenkrupp Mining by focusing on the service and aftermarket. And we know that we can improve profitability compared to existing level of performance of thyssenkrupp Mining. We have high sustainability agenda. We are adding capabilities there; tailings management, in-pit crushing and conveying. And we will deliver compelling run rate synergies from this acquisition that will support our performance. And I will hand over to Roland to walk through the headline figures.

Thank you for that, Mikko. Next slide, please. If we take a look at the first quarter numbers here that we are comfortable in displaying, please note, of course, all numbers here are still subject to audit and review. But having a look at TK's order intake for the first 9 months of their fiscal year and their fiscal year is from 1st of October to 30th of September. So since 1st of October last year, they have had an order intake of EUR 433 million. It's split between service of EUR 250 million and new build order intake of EUR 183 million. And on the right-hand side, we see that the split is well above 50% in favor of service order intake, exactly as we wanted. Also, the order intake has gone up compared to the same period last year. And so all in all, especially on the service side, but also on the new build order intake side, that looks positive. The total outstanding order backlog as at the end of July 2022 totaled EUR 698 million. Next slide, please. We will have a look at the revenue and the profitability. So total revenue for the first 9 months of this fiscal year was EUR 356 million. Service revenue totaled EUR 195 million and new build revenue totaled EUR 161 million. So notably here, services moving slightly forward and new build revenue is down, partly driven by the backlog but also impact from the Russia situation. And on the right-hand side, we have outlined the split and here it shows that the service share also on revenue is moving forward now at 55% of the total revenue in the first 9 months of the year with service revenue, and this is exactly as we wanted. On the earnings on the EBIT margin, we are a bit more careful, but we can say here that the results on EBIT level for the first 9 months of the year was low single digits negative. And then we will have a review on this and we work back with a full year outlook for financials as soon as we are ready to do that. And with that, I'll give it back to Mikko.

I will say a few words about situation in Russia. TK Mining have been winding now down activities in Russia. And there's one office with 14 employees and all new business has been suspended. There's been some limited revenues from execution this year, and there might be little bit still revenues left to be executed, but it's very little. It's mainly service related. So in the bigger scheme of things, we don't expect any significant revenues in the remaining part of the year. The backlog, as it stands end of July, from Russia is EUR 43 million. We're analyzing and will be analyzing other potential exposure and risk related to Russia. And while we are auditing the books, might have to do with receivables and different type of details. But we will be auditing the books and auditing projects and auditing activities there and come back with more detail. Next one, please. As I said in the beginning, we are now in Essen, Germany, and we will be meeting all our new colleagues or big part of new colleagues in about one hour, welcoming them to be part of FLS. Integration process is commencing today without any delay. As said before, we do full integration of thyssenkrupp Mining into FLSmidth operations and operational model. We have a thorough review of product portfolio on both sides, full portfolio review of FLS, full portfolio review of thyssenkrupp portfolio. We are looking at financial performance. We are looking for these KPIs for technologies what we have, and we will make fact-based decisions on portfolio. We are commencing synergy take-out without the delay. And we believe that it's better to do all at one go rather than do incremental synergy take-out. And most of synergy, as we said before, EUR 50 million is cost synergy. We are implementing one FLS go-to-market. So there will be no 2 faces for customer from this day and onwards. There's only 1 face to customer, FLS. We're also reviewing all the commercial activities in the sales funnel and apply FLSmidth derisking margin targets for all recent business. We will communicate further details about the financial performance in connection of our Q3 financial results. So summarizing, the numbers are as we expected. Thyssenkrupp Mining is still loss-making business, not showing improvement. And reminding also you that -- to save the date for the Capital Markets Day, 18th of January, where we go through all the details of the future of FLSmidth regarding our strategy portfolio and on rest of the decisions that we are taking. And now we go into the Q&A section.

[Operator Instructions] We will take our first question from Lars Topholm with Carnegie.

Congrats on getting the keys. I have a couple of questions. First on the revenue, when you announced this acquisition and announced you bought it ex-India, TK Mining had revenue of EUR 680 million. Now you do EUR 356 million in 9 months. If I just take that run rate, the EUR 680 million you announced will become EUR 480 million this year. I just wonder why this significant decline in revenue in TK Mining, if, at this stage, you have some explanation. It's roughly 30% less than when you announced the acquisition. And then question #2, which also might be premature but in the EBIT margin, you indicate what is the net effect of possible reversals of project provisions?

Yes. Thank you for that, Lars. Good question. So when we acquired TK, I think we indicated also that our ambition with this was to reduce significantly the level of new builds. And at that point in time, new build was a larger chunk of the total revenue. And that is now declining. This is exactly what we wanted it and also service revenue to come up. So we also said all along, we would expect actually top line to decline quite significant, and that's what we are seeing here exactly as you point to, predominantly driven by a decline in new builds. We will then have a close look on the product portfolio, and we will start immediately to drive the service business on the installed base harder than we believe TK has done. So this is actually in line with what we expected. And then on the EBIT -- and then, of course, this year, there's also an element of Russia. On the EBIT side, it is too soon to say. We will now have some time to have a look at how accounting has been done for the first 9 months. That will be a review of how they have treated Russia projects. We will have an operational review of all the projects, the entire portfolio, and we will have a financial review of the project portfolio. And then we will make our mind on how provision levels needs to be and that will, needless to say, impact EBIT as soon as we are ready to make that decision.

Yes. That part I understand. But in the 9 months figure, i.e., the numbers before you do your thing, are there any significant impact from project provision reversals in that number?

It is too soon to say, Lars. I understand the question perfectly. It's too soon to say. We know what to look for and I will soon have a clear picture on that.

Maybe I will add something about India. It was actually always not to have India in the deal because it's heavily in coal. Secondly, it's a lot of EPC type of business, which is low profitability, high risk. So it didn't actually fit into our portfolio from ESG point of view, from profitability and risk point of view. So that was always not to take the India business in.

We'll take our next question from Kristian Johansen with SEB.

So 3 quick questions from me. So first of all, the Russian exposure, just curious whether this is in line with what you expected or it's actually lower than you've heard? Secondly, you repeat the cost synergies of EUR 50 million. Can you also tell us whether the integration cost of EUR 75 million still hold? And then lastly, is it, at this stage, possible to say anything about the complexity of the backlog in your latest presentation? You obviously discussed that with your own backlog. So obviously, just curious what the composition of scope and complexities in the TK backlog.

If I take the Russian one. So actually, the backlog and Russia-related costs are less than what we anticipated. When we audit these numbers and it stays like this, we are actually quite happy with the outcome. It means that thyssenkrupp Mining has been successful in winding down the activities. So actually to us, I think this confirmation was most positive news.

Yes. And then just commenting a little bit on the synergies. So we're maintaining our view on synergies so that we will immediately commence the synergy take-out. It will be no less than EUR 50 million once we are done. We expect cost to complete still to be around EUR 75 million. And we reiterate what we said back last year that this company stand-alone will be net profit positive no later than 2024 and also cash flow positive on its own right. So that's where we are.

And then my last question on the complexity of the backlog?

From what we see, it's what we expected. But that is, of course, where we focus in our audit level detail and our risk review. So we are looking all the details of the project risks. We will look at the provisions for the project is correctly provided for, but that is actually requires deep dive on each and every project one by one, and that's what we are commenting today. So it's too soon to comment, but that is our main focus when we go through the books, project backlog and then risk related.

[Operator Instructions] We will take our next question from Tomi Railo with DNB.

It's Tomi from DNB. Just a question on seasonality. Would you assume or have you seen already a pattern that would be typical for you as well that the second half sales and earnings are higher? Maybe I'm just trying to get the feeling that second half of last year was more profitable than maybe the first half of this year in thyssenkrupp Mining.

Yes. I think it's too soon to say for TK. But we will assume that we're operating in the same industry. And for us, high season or relatively strong quarters is Q2 and especially Q4 in the financial -- in the calendar year -- financial calendar year. So that means also that they will finalize their 12 months run rate now and that would be an average quarter. That will be my best guess for now. Then TK will move immediately into our fiscal calendar. We will consolidate 4 months of TK in 2022 and from there on, they will be in our fiscal calendar. So once we are beyond September, we will close our TK and then include them in our combined numbers.

And we'll go next to Claus Almer with Nordea. [Operator Instructions] We'll take a follow-up from Kristian Johansen with SEB.

So obviously, you gave us the full year and 9 months for the last financial year of 2020-2021. Given that they made minus 3% for the full year on margin and minus 7.9% for the first 9 months, it implies that the yield margin in the fourth quarter was positive 7.6%. So just curious whether there are any sort of extraordinary gains or something like that in the fourth quarter? And as far as the minus 3%, is it really representative for the underlying earnings?

Yes, that I simply don't know, Kristian, how they allocated it over the quarters. So that would be speculation on my part. I think that -- what we take away from this is that, looking at the numbers compared to what we said a year ago and what we said all along, this is as expected. So the level of turnover, as Lars was asking too, is exactly as we expected it. They are doing well on improving the split in favor of service. And it also looks like their EBIT margin is improving, but it is still negative. So we need to make some fast decisions on how to improve that swiftly. That is our, I think, conclusion on this.

And we'll go next to Claus Almer with Nordea.

Also a question from my side about the profitability. We have heard these stories at least about TK Mining being in the black territory this year. Now you're saying it is mid-single-digit loss-making. Do you have any flavor on this difference in these 2 numbers?

Yes. Thank you for that, Claus. So this is a reported EBIT margin, right? So technically speaking, that is as worse as it gets, right? So they are also operating with an adjusted EBIT margin. And we just know exactly what they are adjusting for because they have been running an improvement program and, obviously, they have had adjustment costs associated to it. But to the best of our understanding, their reported EBIT margin is low single digit. Even if we adjust or what we would call adjusted restructuring costs, we still think they are slightly EBIT negative. That's the best view in the first 9 months we can give now. And that's obviously because they are still in a regrouping mode and they are impacted by Russia and so on, but that's all the details I have for now.

Okay. And then the second question going to the order take. I'm sorry, I was a little bit late to the call if you have said this. But you're saying the order intake spread is improving, but the growth in new build is significantly faster than the service order intake. So at least 9 months versus 9 months, it is not an improvement versus service orders.

I think that's a little bit to do with timing, Claus, right? Because the order intake on new build can be allocated over more than 1 year and so on. So we need to understand when this will hit the P&L. So notably, in the revenue, the service share is improving. And expectedly from now on, that will happen in the order intake and that's a contributor in the revenue in the P&L also.

Also, I might highlight that looking at the historical performance of the business, which has been that they will be closer to 50-50 in terms of the kind of business mix, could give us good starting point. And as we are putting in controls for new order intake, we apply same principles as we apply for all FLSmidth business today. We are derisking the capital business, meaning that we are very -- much more selective in business what we take in and also that we will have a quota for a riskier business so that we -- we basically plot thyssenkrupp Mining business into exactly the principles what we have, and then we see where we are, and then we start derisking all the new order intake. And in very practical terms, we are starting, early next week, final reviews with our TK colleagues, or now FLS colleagues, and we go through all the opportunities and we will not take any new business in unless it meets our criteria in capital business. [indiscernible].

That makes sense. Just a final question regarding the backlog. Have you had time or insight to how thyssenkrupp has adjusted its selling prices to inflation -- to compensate for inflation?

We don't have that level of visibility. So when we do the deep dive into the projects, we see that basically provisions, what there is in the projects, any potential cost escalation. So we don't have -- as of today, we don't have that level of detail in these first 8 hours.

[Operator Instructions] And we'll go next to Magnus Kruber with UBS.

Magnus with UBS. I have 2 questions. First, could you comment a little bit about the definition of scope of the TK's aftermarket business? Does it significantly -- is it different with significant scope that they reported aftermarket compared to you? Because you're always close to 60% for now. So if you want to get that high, maybe the volume contribution from the mix [indiscernible] could you comment a bit on that?

It's similar to -- it's actually dominantly spare, so it's actually true service. So the kind of -- there shouldn't be too much revamps or something like that would be more resembled in project for the risk profile and low profitability. So it's dominantly spare.

Got it. And then if it's dominantly spare, is it fair to believe that the profitability of both those spare could emerge materially from what it could be in the long run, how much you're reporting on your corresponding business?

So in the long run, basically, we have the same targets for all businesses, capital and service. And if there's any nonalignment today, we will correct that alignment very fast. So we don't have a pricing level of information at the moment, of course, in these 8 hours. But we will look at the pricing that it needs to be exactly as we have targets in FLS the same.

And on the profitability level on the aftermarket, is it broadly in line with what you have on that business? Just to get the sense of where the margin OpEx is coming.

We don't actually know that because we have, in FLS, service EBITDA levels. We have a capital EBITDA levels, and we don't know exactly how they are allocating different cost items for different businesses. So they have more regional P&L, and we need to convert the numbers first into our kind of global P&L model with this business lines and product lines, and then we can actually see that one, but we need to do the conversion into our model first.

With that, we are unfortunately running out of time, as we have a lot of new colleagues, need to say hello to. So with that, we'd like to thank everyone joining the call. We fully acknowledge that you want to know a lot more, so do we. And we will do our utmost to get that information to you in due time as well. So thank you all, and have a great day.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.