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

Thank you for standing by, and welcome to the strategic update on Cement and FLSmidth's trading update. [Operator Instructions] This call is scheduled to last around 30 minutes. There will be a presentation followed by a question-and-answer session. I'll now hand over to CEO, Mikko Keto. Please go ahead.

Good morning, and welcome to the investor presentation regarding Cement and trading update. This is very significant milestone for FLSmidth, given the history of company, which started 140 years ago in the Cement business, very significant milestone. Next one, please. I'm here in the studio with Roland Andersen, who's Group CEO -- CFO, and we cover also the trading update in the end of the presentation. Next one, please. The usual forward-looking statement caveats. Next slide. So announcement today is about that we start to explore divestment options for Cement business. In other words, we are starting a sales process for Cement business. The business is in the good shape at the moment. It's a healthy asset. You will see in the quarter 4, full year result is actually in a good condition. And also that the recent sale of the MAAG product line is indicating that we have valuable assets in terms of technology and services as belonging to Cement business. We also are increasing our cost to net fees from previous, and we are now raising run rate cost synergies to DKK 600 million. And reason for this 1 is that we are able to have a lean organization than early anticipated. So much of this synergies hard to resist from headcount savings and facilities. So it's hard synergies not softness synergies what we are having there. And we are confirming that we are reaching our guidance for full year '23. And also, we are giving out guidance for '24. Next slide. This actually exactly what we said in the Capital Markets Day, reasons for pure play. And now upon completion of the pure play, which means separation of Mining and Cement businesses operationally. And now from legal point of view starting January 1, we completed the separation. We are still continuing separating support functions in the first half of the year. But what we presented in the CMD, reasons for pure-play, reasons for separation of 2 companies are still 100% valid. Next one. So next steps regarding looking at the divestment options is that we have a legal entity for Cement in place. We have a new company structure. We continue separating some of the shared support functions, and that's what we complete by middle of the year. We continue executing our strategy that we presented in the CMD. And in very simple terms, is service, product-centric business model and focusing on transition in the Cement industry. We have been derisking the Cement asset, and that is 1 of the reasons why the order intake is down. So project risk has been brought down and we have had a focus on quality of earnings also in Cement business value over volume. And we are expecting a potential transaction to transpire at the earliest late '24. As typically, it would take 9 to 12 months for the process. We are in a process of selecting adviser for this process and then kicking off the work together with the adviser. And I'm handing over to Roland to look at the financial update.

Thank you for that, Mikko. So yesterday, we announced our preliminary numbers for '23 and then also issued our '24 guidance. And we hope for your understanding that there will be a limit to how details, we can go with the questions as we will have a lot more details when we announce our annual report on February 21 this year. So we're saving the best for last. But if we just look at -- stand back a bit and we took over Mining Technologies, the first of September '22, in the outset, before knowing anything about the asset, we estimated our synergies to about DKK 360 million, and 6, 7 weeks into the ownership period, it became clear to us that the synergy potential was considerably higher. And the noncore activity segment was established, and we said that in the remaining Mining business, there would be synergies for at least DKK 560 million. And we basically had concluded the full integration of Mining Technologies by the end of '23 and happy to announce that total synergies is now around DKK 600 million. So about DKK 200 million of those were harvested in '23, and the remaining DKK 400 million will be having a full year impact in 2024. Next slide, please. Preliminary numbers for '23 unaudited. So a top line in mining of DKK 17.1 billion versus guidance of around DKK 17 billion. Our adjusted EBITA margin is of around 10.8%. We guided 10.5% to 11%. The full year Mining result here will be adjusted for DKK 408 million in integration costs. And this is a considerably smaller number than the DKK 550 million. We had initially anticipated when we started out the year. For Cement, we guided around DKK 6 billion and revenue will end at DKK 6 billion. Our EBITDA margin for the full year would be 6.7%. And that margin as we recall, includes an accounting gain from the sale of our filter media business in Q3 of about DKK 100 million. So this is also in line with our predictions. Noncore activities revenue of DKK 950 million, we guided DKK 900 million to DKK 1 billion, and we will lose about DKK 345 million in the higher end of the guidance range, but that just reflects that we are executing that segment slightly faster than we had anticipated. Important to note here that we have guided that we will lose DKK 1 billion in total during the exit period of that segment, and that number is still our best estimate. Next slide, please. Let's have a look at our '24 guidance. This guidance reflects our ongoing transformation journey, especially in the Mining business. Our Mining revenue is estimated to DKK 16 billion to DKK 17 billion. We estimate an adjusted EBITDA margin of 11.5% to 12.5%. In Mining business, we will be calling out one-off costs of about DKK 200 million. This is predominantly transformation costs that goes to changing our operating model into what we call a principal company model or what we internally call a core company program, where we will place all our products, our technical specs, but also a large part of our supply chain in terms of PO order flows and so on. We'll run through that platform, and that will require some changes to our operating model, and that is what we will spent the majority of the DKK 200 million in one-off costs in 2024. That will be a smaller ticket. Here also, as part of the DKK 200 million for separation from Cement. Cement is guided at a top line of DKK 4 billion to DKK 4.5 billion. And adjusted EBITDA margin of 5.5% to 6.5%. We recently announced that we have sold our gearbox business MAAG. And that business is expected to close during Q1 and that's included in the guidance. And that will leave a relatively small accounting gain in Q1 expectedly. Now in EBITDA, we're also calling out DKK 100 million in one-off costs. Those DKK 100 million is partly for separation -- final separation activities from the mother ship. It's also sales readiness costs. And finally, a smaller ticket for finalizing the transformation Cement is currently finalizing their geographical footprint and the organizational structure that needs to fall 100% in line with plans. Then in '24, we will finalize our noncore activities and closed sales segment latest by the end of the year, and we estimate a loss of DKK 200 million to DKK 300 million, and that's basically the residual that gives us the DKK 1 billion loss during the course of the exit period. And we recall that the exit period has been from Q4 '22 until the end of 2024. Yes. Next slide, please. And then we will just give a little flavor on the development in our EBITDA margin in mining. And yesterday, we announced that our adjusted EBITDA margin is 10.8% for full year '23. If we deduct the integration cost that we spent during the course of '23 of DKK 481 million, approximately 3%, we will end at an EBITDA margin reported for the full year of 8%. Now moving into 2024. Those DKK 148 million is obviously not coming again. So that's the 3% we are adding here in green. Additional cost synergies of 2.5% and which is the extra DKK 400 million in 2024, so a total of DKK 600 million, DKK 200 million came in '23, DKK 400 million in '24, 2.5%. Then we are deducting a bit of inflation. Inflation years, predominantly on the SG&A base as all inflation on cost of goods sold are expected to be able to pass on. We have also spend a bit of the synergy savings here and reinforcing the commercial front end to support growth, especially in our PCV pumps business, but also certain parts of our consumables business, midliners and others, where we are stepping up the game. Then the DKK 200 million I discussed in the previous slide, 1.5% in transformation and separation costs will give us an implied reported EBITDA margin for '24 of 10% to 11% and deducting the transformation and separation costs of DKK 200 million leaves us with the adjusted EBITDA margin guidance of 11.5% to 12.5%. This is fully in line with our plans that this is on the path to delivering the long-term targets in 2026 of a reported EBITDA margin of 13% to 15% in Mining. And with that, next slide, please. I'll give it back to Mikko.

I'm very pleased about how fast we have been able to transformation. We are ahead of the plan, means that transforming the company into focusing on quality of earnings, the risk business model. Some of the money is, as Roland said earlier, that what we are using this year is to make the operation model scalable, simple that allows us to grow in the coming years without adding too much SG&A. And that requires a principal company model that requires simple order flow that requires simplified ERP landscape. And that is a platform for future growth. Of course, there would have been choice not to spend the money, but then we want to achieve sustainable platform for long-term growth. So we are using some of that money there. And at the same time, while we are still transforming the company in '24, we are already now to have a kick start the growth in the areas that we want to grow. So we are creating a platform for long-term growth in '24, whether it's a pumping business, whether it's a midline business, whether it's consumables business. So we are doing all that work in the background. We've seen profit continued profitability improvement, both in Mining and Cement, and that has been our main focus in the company and also derisking the backlog of Mining, derisking backlog of the Cement so that there are healthy, high-quality backlog in both businesses. We've been increasing synergy cost takeout, mainly with the people. When the full year result comes out, you will see significant reduction in our headcount in 1 year and a quarter. So it means that we will be mean and lean going forward in our operational model. We are looking at options for Cement divestment will be that -- we believe that the asset is high quality and also some of the MAAG product line is indicating that there's an interest for that asset. It's a high-quality asset in terms of improved profitability, reduced risk and ability to play green ticket in the Cement market going forward. And we remain fully committed to long-term targets, what we have, but we are committed to deliver those targets in a sustainable way rather than not spend the money for transformation this year. We want to spend the money so that then we can deliver continued result -- good results in the coming years when we grow the business. And then we'll go for the Q&A session, please.

[Operator Instructions] Your first question comes from Claus Almer from Nordea.

Of course, I will do 1 question. One, just 1 regarding your margin bridge for 2024. So this 1.5 percentage point negative from SG&A cost inflation. If I do some quick math, that indicate that you expect to see a 10% cost inflation in the SG&A in the Mining division. That sounds a lot. So can you try to explain this negative margin impact?

It's not 10%. It's -- I think we are on a global level a bit more than 5% on our salaries on certain parts of our admin also. So there may be a bit of overlap in what we do on our commercial investments and then in the inflation adjustment. So those 2 may have to be seen together.

Can you explain that again? So it is an overlap between what, sorry?

Yes. So we are adding headcount in the commercial front end, right, the 1 that we call commercial, the ramp up in the bridge. So those who will have to be seen because those people have flown in during Q3 and Q4.

But I guess you're not adding 5% more employees. So it sounds like you are taking as always, the conservative math when you calculate that market?

Thank you for that, Claus. So we're pretty precise and also these percentages, of course, rounded numbers, right.

Your next question comes from Casper Blom from Danske Bank.

Just a question on the development within Cement in Q4. On my numbers, it looks as if the Cement margin comes in rather strong here in Q4 compared to Q1 and Q2 in 2023, probably an EBITDA margin up towards the 7%. Could you explain if there is any nonrecurring things, extraordinary items or anything in Cement in Q4?

Thank you for that. So there's a few adjusting items at year-end items. And the 7.4% is not a run rate number. We had a bit more flavor on that when we announced the annual report. So it's not a run rate number.

Okay. And you can't give any details to what it is that is affecting it?

Yes. As we have had some restructuring during the course of the year. And that means when we end the year, right, and most activities have been concluded. There's a few provisions that would have been released and so on. But these are sort of nonrecurring year-end adjustments. We'll give a bit more flavor when we announce the annual report.

[Operator Instructions] The next question comes from Klaus Kehl from Nykredit.

Yes. Also a question related to the Cement business. I'm a bit surprised about the guidance or margin guidance for Cement in '24. And yes, to be honest, I'm surprised on the upside. You're guiding for an adjusted margin of 5.5% to 6.5%, even though your top line more or less collapses. So what's behind this very strong margin guidance? Is there any impact from the divestments here in '24? Or -- yes, just a few thoughts on that.

So we are still expecting the service business to develop positively. And you've seen the decline in the service order intake in '23, and that has been dominantly from upgrades and retrofits, which is kind of project type of our service business in that same category. But now the underlying service business going forward is about spare parts and professional services, which means that it's higher profit and lower risk. And of course, we see less large orders coming in for the kind of capital business because in capital business, we are becoming product-centric instead of project-centric. So you see, actually, going forward, hopefully then the mix will play into the kind of profitability as well. And we are expecting that the service business will be stable with the high profitability. So that will also improve it. And of course, we're taking cost actions for the SG&A of the Cement business, we saw big part has been already done, but it's ongoing throughout the year still. So we are still looking at support functions, overlap or the support functions between Mining and Cement. So the SG&A cost continues to go out, and we are expecting service business to stabilize it at a good level in terms of kind of margin.

Okay. But just to be clear, there's not any one-offs related to divestments included in the adjusted EBITA margin for '24?

So there's a very small accounting gain from market, but that's not driving the margin. It is, as Mikko said, pruning of that of the service portfolio and then the fact that we are now derisking the Cement business significantly and the projects are fading out, and we'll be focused on selling products that supports our service business.