FLSmidth & Co. A/S ($FLS)

Good morning, everyone and welcome to the Q1 Investor Call from FLS. My name is Toni Laaksonen, and I will be presenting today with our CFO, Roland Andersen. And we start from the Q1 highlights. So, first going to the market and commercial highlights. On the service and PCV side, we saw very strong development with our organic growth. So in both business lines, the order intake was growing with double-digit numbers. With services, we captured 19% organic growth compared to last year and with PCV, 16%. So very strong development, which reflects that the market activity remains high at the brownfield sites. Then with the products, we saw a different development. There, the market is more like subdued, and we didn't capture growth. The order intake was declining compared to last year, but still the underlying market activity remains positive. Then when going to the revenue figures, our revenue declined organically by 7%, and that was driven by the timing and order mix based on the recent quarters. On the profitability side, we saw positive development compared to Q1 '25. So our EBITA margin percentage increased, and it was 15.2% in Q1, and it was in line with our financial forecast for this year. Then with the cash flow, we saw satisfactory development. So the cash flow improved compared to last year. So, a good year-on-year development, and that was a positive sign for this year. Then a few strategic and corporate highlights from Q1, and one highlight after the quarter. So the sale of the former corporate headquarter was completed, and we received the cash from the deal, and that was one major milestone for us. Then we had certain changes with our executive leadership team as we are gearing towards the new strategy and new period in the company's development. And then one positive milestone, which is then reflecting the product activities and the underlying market is that we received one repeat order from South Asia for 1 iron ore beneficiation project, and we were awarded this in May 2026. So, good development over there and reflects that there are certain underlying activities within the products market as well. Then a couple of updates on the ongoing investigation, which we have with the potential non-compliance case related to sanctions. So as announced previously, we have identified a potential sanctions-related compliance matter, and this is part of an ongoing internal investigation and it's related to the pre-contract tender materials, which we have submitted to a limited number of projects in Kazakhstan. And the case is only related to the tender materials. We have not signed any agreements. We have not delivered any equipment or services to these customers. And these customer cases are not part of our sales funnel, financial forecast and neither our estimates for this year. So, they will not impact on our guidance and that there are no material impacts on any of our businesses. We have informed the U.S. and Danish authorities on the issue and that the process is ongoing, and that the initial information has been shared as we want to be transparent and compliant with the case. And then later on, we will do then the final filing of the case. Due to this, we continue reviewing and strengthening our compliance programs and risk management processes globally. And we want to ensure that we prevent similar actions happening again in the future. With our key sustainability targets, we were seeing mixed results in Q1. So, certain positive development with our suppliers and Scope 3 emissions. But then on the other hand, as one negative highlight, I must say that on the safety side, we saw a declining development. And that this is definitely something that we wouldn't like to see with our figures. So, safety will be a key focus area for us in the coming quarters and we will strengthen our safety practices, processes and policies when moving forward. All in all, the market conditions are pretty much unchanged compared to last year in Q1. And as mentioned, we saw positive development with our service and PCV business lines, in line with the market development in Q4. So in Q4, we were seeing uptick with our orders, the same in Q3. And this positive momentum with the brownfield sites is continuing. So, most of the miners are investing in their brownfield operations, which is then visible with our service and PCV business lines. Then on the other hand, with the products, the market was relatively soft still in Q1. So, no major changes over there. But then as the commodity prices are at the high level, especially copper and gold, it means that the miners are assessing investment activities even to the greenfield sites. And therefore, the underlying demand might pick up in the end of this year or early next year. And that was also visible now when we booked that one order in May with the iron ore project. Then moving on to the business lines, starting from the services. As mentioned, order intake-wise, very strong development. So the organic growth was extremely strong in Q1. But then on the revenue side, the development was negative and it was primarily driven by the timing of the orders. So, most of the orders we received in the back end of the quarter. And of course, then we couldn't revenue recognize them in Q1, which was impacting on our revenue. And then on the other hand, there were certain mix-related things also which were impacting on the bookings on the revenue side. But all in all, we see that the positive development with our order intake is then reflected to the revenue in the coming quarters. So, we don't see any major issues here. When it comes to the profitability, the profitability was lower with our service business line compared to the previous quarters and that was mainly driven by the low revenue figure. So with normal revenue level, we would have had clearly higher profitability. So, that was impacting on us. Then, of course, certain mix-related things impacted the Q1 revenue and margin level and so as well the input cost inflation, which we were seeing. But all in all, the normal level which we have had for the service business line, which is 19% to 20% EBITA, we expect that to continue in the coming quarters. So, this was not a big surprise to us that what was the profitability level. So, this was in line with our budgeted figures. Then on the product side, the Q1 was low, as described previously. So order intake-wise, we were down and as well as with the revenue. And revenue, of course, is something that we can estimate pretty accurately based on last year's order intake. So the bookings continued in line with our expectations. From the order intake point of view, we saw this uptick already in May with that one booking, and we believe that the underlying demand is such that, especially with the copper and gold projects, we should see some positive development in the back end of this year. Then with the products margin, we saw positive movement. So, we were at the 0 level practically with the products business line. One big impact was that certain project close-outs were happening, and therefore, we were capable of releasing some provisions related to these projects, and that created positive momentum. But we have been also doing cost initiatives to take the cost level down so that it's in line with the current revenue level, and that's helping us then from the profitability point of view. So, we can be happy with this development with our margin on the product side. Then with PCV, the strong development continued. So like I said, significant order intake growth. We were definitely gaining some market share with our Pumps, Cyclones & Valves when comparing to the peers. Then with revenue, the development was stable. And also with this business line, the bookings were done in maturity during the back end of the quarter. So, we expect that the following quarters will be a bit better than from the revenue point of view, and we should see solid performance from the business line. On the margin side, PCV was again very strong. So, continued at the same level with the profitability, and we were really happy about this. So, no issues over here, positive movement, and we expect the similar trend to continue in the end of this year and in the next quarter.

Okay. Thank you for that, Toni. So the financial performance overview here for Q1 and order intake of DKK 3.9 billion, revenue a little less than DKK 3.3 billion, healthy gross profit and obviously, a very large item here, other operating net income, which is predominantly the sale of our former head office in Valby in Copenhagen. And running through the P&L, that, of course, leaves us with a relatively high profit for the period of DKK 985 million. The gross margin for the quarter remains healthy. This is predominantly the mix in a period where the product business haven't picked up revenue yet and service business line. And our PC&V business is 80% or plus of our revenue stream, healthy gross margin and an absolute number, lower or lower than last year, predominantly driven by the nominal revenue level. Our SG&A costs continue to decline slowly but surely. So lower Q-on-Q, but also lower than the same quarter last year. And that is a significant result from our simplification exercise and also the change to our new corporate model that now starts to sit more steady in the numbers. The adjusted EBITA margin is improving to 15.2% compared to the same quarter last year on an adjusted basis. And the nominal number here, of course, impacted by the sale of the Valby office. Net working capital is driven up this quarter, predominantly by inventories. So, inventories from the relatively high order intake in both service business line and the pumps business. There's a bit of commodity inflation in that as well. And the fact that the orders were back-end loaded in the Q1 means that now sit in inventories and will be delivered over the remaining part of the year. And all this leads to a solid cash flow for the quarter, traditionally a relatively low cash flow quarter, but cleaned for the Valby sale, cash flow from operating activities of DKK 103 million. This means that our leverage continues to be low 0.6x, and that leaves us ample room to do the M&A that we want to do as we move forward. Our financial guidance for '26 is maintained, and that means an organic revenue growth of minus 1% to plus 4% for the company and an adjusted EBITA margin of 15.5% to 16.5%, and we are on track to deliver on that. The revenue bridge, a bit more stable underlying how to get to minus 1% to plus 4%. Service business line unchanged, expected to deliver 2% to 5% organic growth. The product business line in revenue terms, minus 5% to minus 15% of organic growth and the pump business, PC&V will deliver 4% to 7% organic growth for the full year. And if we then apply the ForEx rates from the 11th of May for the remainder of the year, by coincidence, our organic growth will equal our reported growth for the full-year 2026. And the EBITA margin bridge here, not so much here, the adjusting items for our PC&V ERP implementation is about 1 percentage point. And other operating income here is the sale of our Valby office that makes up the difference between the adjusted EBITDA margin and the full-year forecasted EBITDA margin. Then we are ready to invite all of you to our Capital Markets Day. It will be on the 17th of November, and we have decided to welcome you all to our new headquarter offices in Copenhagen, where we think we can host most of you guys. So, we are looking very much forward to that event, and that will be again on the 17th of November 2026. And with that, I think we can move to Q&A.

[Operator Instructions] The first question we have comes from Chitrita Sinha of JPMorgan.

I have 3 please, but I'll take them one by one. So, first one is just on the service margin. You previously spoke about this 19% to 20% range. So, I guess the 16.6% margin was a bit surprising. Just wanted a bit more color on what drove that big shift in mix? Was it some kind of legacy issue or more consumables? Just trying to understand the swing in margin outside the range and the confidence you have to return back to that range in subsequent quarters.

Yes. Thanks for the question. So, a very valid one. So actually, the service margin was almost completely in line with our budget for this year and with our forecasted model. So the revenue side was, of course, taking the margin down. And then there were certain like bigger cases in the mix, which we had booked last year and we knew that they will impact on the margin. But then it was already taken into account when we did the financial planning for the year. So therefore, this was in the model and we see that the EBITA margin, which we have been promising to the market, which is 19% to 20% will remain as the target.

Okay. And then my second question is just on the product margin. You've talked about kind of reversal of provisions, which supported the margin outside of the cost initiatives that you've taken. What would the margin have been excluding this impact, please? Or maybe another way to phrase it, maybe what's the breakeven rate now? Is it close to the DKK 3 billion rate or DKK 4 billion?

Yes. So the releases, they are not that much, DKK 25 million, maybe DKK 30 million. So it positively impact the margin by 5 percentage points or so. Was there a second part of the question?

Yes. I just wanted to ask you what the breakeven rate is, DKK 3 billion or DKK 4 billion?

Yes. So the breakeven rate that we're planning for coming out of this year will be a level of DKK 2.8 billion to DKK 3 billion.

Okay. Very clear. And my final question was just on service orders. I believe that some of the consumer products that you sell have a bit of tungsten in it. So, I was just going to ask if there's any pull forward demand that you saw in the service order numbers in the quarter.

Yes. So, you are right there. We have tungsten in our service deliveries. Of course, the price impact was evident. So, we are pricing our products and services accordingly when there are cost changes with the suppliers. So, that we did take into account. And there was some impact from the tungsten market that our customers wanted to maybe order a bit more in advance in Q1, which impacted positively on our order intake. But the impact was not major.

The next question we have comes from Edward Hussey of UBS.

Maybe just a couple from me. So first of all, as you alluded to, obviously, a very strong book-to-bill in PC&V and service. Do you mind just running through the phasing of deliveries through the year? I mean, should we expect a sharp revenue pickup in Q2? Or should it be a bit more towards the back end of the year?

Yes. Thank you for that, Ed. So, I think you need to expect that it will pick up slowly throughout the year, and it will be back-end loaded just like last year. So it will pick up in Q2, come over Q3 and Q4 expected to be the high quarter once again.

Okay. And then maybe just touching on net working capital and the buildup there. Do you mind just kind of fleshing out exactly where net working capital has been building up?

Yes. So, that's predominantly on the inventories. So the inventories have been building up and they will also run off slowly throughout the remainder of the year as we deliver the orders and the year will be back-end loaded. So it's been building up from -- predominantly from the orders in the service business line and in the pump business line. There's an element of commodity inflation. There's an element of pricing from tungsten in that number, and it will run off slowly over the course of the year.

The next question we have comes from Christian Hinderaker of Goldman Sachs.

You mentioned in the report that you've seen some clear market share gains in PCV. I wonder whether you can add some color there in terms of whether there's any specific regional SKU in those share gains or indeed across the 3 product areas, PC&V, whether there's any notable difference? Any color here would be most appreciated.

All right. Okay. Very good. So on the PCV side, of course, we are following closely that what type of numbers our peers are reporting. And based on the reports what we have seen from their side, our estimates say that at the global level and overall, we have been taking market share. And it's evident when looking at our order intake figures. We don't have any specific geographical areas where we see better or worse like development. So it's overall throughout the product categories and throughout the countries where we operate.

And just how do we think about your pricing in this segment as well? Interested in the trends on pricing for PCV.

So from the pricing point of view, what we can say is that when you look into the margins, the margins have been solid quarter-by-quarter. So, no negative development there. So, we are not using the price as the main argument to win business for us.

Understood. And then maybe finally, just on margins, and apologies, Toni, because I know this was the first question, but I didn't quite follow the answer. You're saying that service margins were in line with budget. I understand you said revenue weakness brought that down. Are you saying that effectively gross margins on the revenues delivered were in line with your expectations and that it was the, should we say, revenue timing that was the issue? Or is there also something in terms of the service mix as we think about the basket of consumables, modernizations and things to flag as well? I just didn't quite understand that.

So, both gross margin and EBITA were in line with our expectations. So, we were expecting a bit slower quarter with services in Q1 and are based on the bookings. So some of the bookings, for instance, which we did in Q4 were in the end of December, and we know that we will be delivering them then in Q2, Q3. And this was then in our model, what we developed for this year. So the revenue, the top line was pretty much according to our expectations and we knew that it will impact on our margin. And then it was visible now in the numbers. But even though Q1 was slower as expected, the whole year has been developed so that we are reaching that 19% to 20% level. So despite of this Q1, we should be in a solid place to deliver the results in the end of this year. Then of course, we knew the margin profile of the deliveries for Q1, and this was also in line with our expectations. So, no big surprises there. So, we knew that this is the level we would be seeing.

[Operator Instructions] The next question we have comes from Tore Fangmann of Bank of America.

Two questions here from my side. First is a follow-up on the PC&V where you're taking market share. Could you let us know if you're taking market share, you think from like smaller players, third-party local players? Or is it something where you are also taking business away from the large players such as Weir and to a lesser concern, Metso?

So, how we see the market is that we have been taking market share across the board. So, there are no specific companies from where we have been gaining market share. So, our estimate is so that it's across the board throughout the companies. Otherwise, we wouldn't see this strong development with PCV quarter-by-quarter.

Okay. So just to clarify, it's not that you go into the mine and you're like replacing Weir's equipment, for example, but it's just like rather you're just growing faster than your peers?

Yes. Correct. So, that's one way for us to grow that we are selling to the brownfield sites and replacing the competitors' pumps or valves or cyclones. So, that's one significant way for us to gain market share.

Understood. And then just secondly, on the -- one follow-up on the reversal in the product segment. I mean, it seems like you're performing better than you would have initially expected here. So, could we see more of these reversals come through in -- basically coming through in the coming quarters? Or is this really one-off in Q1?

Yes. So these reversals, it's not a reversal for the reversal, right? We will close out the projects when they are ready to close out. And this was part of the plan. But we're just calling it out because we've been talking about us getting the business line back in black on a run-rate basis. And we just want to call out that's not the case for this quarter. So, there may be a few others of this nature and then we'll call it out. But the fact remains that we expect only by Q4 to have it back in black numbers on a run-rate basis.

The next question we have comes from Lars Topholm of DNB Carnegie.

Yes. A couple of questions here. First, on your, what should we say, somewhat muted comments on market activity, which comes on the back of a book-to-bill of 1.2 in both service and PV&C (sic) [ PC&V ], and that just surprises me a little bit. So, is this just your normal conservatism? Or have you, in fact, seen any indications of slowdown maybe in April, maybe as a function of what goes on in the Middle East? That would be my first question.

Yes. Starting from the Middle East, so for us, the market in the Middle East is not a significant one. So, that does not have any major impact on us. Then with both service business line...

I was more thinking maybe it inflicts decision-making among your customers?

No, no, not really. So with service business line and PCV, we are mainly selling to the brownfield existing mine sites. And all those sites are heavily like utilized and that they're running their operations in full speed and they are continuously like investing to improve their operational efficiency. And this uptick, we are definitely seeing with our service business line and PCV and then also the fact that we have been taking maybe some market share on the PCV side from the competition. Then with the products business line, the Q1 was still slow, but we expect that the activity level would improve in the back end of this year and early next year based on the engineering activities, what we are seeing on the customer side.

But still when I read your comments to the demand outlook in service, it seems it's still -- you're still talking about hesitation from customers.

That's related to the products market. So with the service side...

I think you used the phrase muted in services.

With services and PCV, we say that the market continues to be stable or active. And with the products, we see some softness.

That's fair enough. Then it's just me. Then related to what goes on in the Middle East, do you in your supply chain see any beginning bottlenecks, any red flags and maybe also do you begin to see some input cost pressures you will have to deal with?

So, no major red flags and issues with the supply chain as such. So, we haven't seen any delays because of the Middle East situation. Of course, the oil prices are a bit higher than it used to be. So, that might impact on the logistics costs to some extent, but it's not a major cost item for us.

Okay. Then I have another question. And I know, of course, this happened on somebody else's watch, but if you look at FLSmidth, you have done very impressive rightsizing over the years. But now we have an issue with order backlog in products in Q3 and also a sanction issue. Is there any risk that rightsizing has been taken too fast or maybe you're wrong-sized that your overhead functions are not sufficient to, what we say, to deal with the magnitude of your activities?

No, we are not seeing anything like this. And quite opposite, I would say that, for instance, the possible sanctions-related case was identified by our own compliance. So it just also proved the fact that if something is happening, our system and processes work efficiently and we can track down the issues. So on that side, no issues. And then on the other hand, we have been keeping up with our delivery schedule. So, we don't have anything major ongoing with our supply chain so that we would see any red flags over there. So, we have been keeping up with the targeted delivery time line. So in that sense, the organization should be at the right level at the very moment.

That is very clear. One final question for me. I'd like to know if you can give any news or update on your M&A pipeline? I think after Q4, you indicated that you had some active discussions, which might lead to something before the end of the year. I just wonder if that has changed or is it the same?

Yes. We continue developing the M&A pipeline. And what's then happening is that at the moment, we are preparing our new strategy. And of course, the M&A cases will be then linked to the strategy. And of course, we would like to then introduce already some wins during this year and especially when we start launching the new long-term plan. We have a couple of active cases ongoing and hopefully, further news coming on them in the later part of this year.

The next question we have comes from Vlad Sergievskii of Barclays PLC.

Two questions. First one on service. I know you are saying service margin was in line with your expectations, but I think it was certainly below market expectations. So, my question is what we as a market have underestimated? Have we underestimated the volatility of this business line from quarter-to-quarter? And going forward, there will be quarters with big swings in margins up and down in service? Or there was something very exceptional about this quarter and we should hope for a more consistent performance from now onwards?

Yes. So, thank you for that, Vlad. So the predominant factor why the margin was down is because the revenue level was low. Q1 is a seasonally low quarter and this in particular. And then in combination with a few bigger orders, a little bit with inflation and so on, the margin was slightly suppressed. So going forward, you can count on the service business line being 19% to 20% margin business. There will be slight swings, not big swings around that and we will steer that business through with that margin number.

And now hopefully.

So this quarter, it was a matter of leverage.

Understood. That's helpful. If I can ask about market share gains in pumps. That's obviously a more positive topic over here. Do you see or have any of your proprietary data that confirms market share gains? Or are you just comparing your growth to public disclosure of competitors, including Weir Group to make this conclusion? Also, what are you doing differently to your competitors to win in this market? And is your ambition to continue gaining share from here?

Yes. So, how we see the situation is that we are tracking continuously our installed base when we are winning these deals. And based on that data, we see that we should have been gaining market share. And as mentioned, most of the Pumps, Cyclones & Valves are sold to the brownfield sites. And that the existing operations, the existing mines, they make the decisions mostly based on performance. And we are usually selling based on the performance metrics, and that's then definitely impacting on the decision-making and not like the price level as discussed previously during the call. So, we are winning based on our technical performance. And then, of course, when we gain more installed base, that then impacts positively on the aftermarket on the PCV side.

Can I just clarify this last point? Do you believe, or do you think that indeed FLS now has superior technical offering in pumps compared to some major competitors?

So, of course, like I said, we have the performance benefit clearly when selling to the brownfield sites, and we have been winning based on that. And clearly, there are certain technical advantages, which the customers appreciate because we have been gaining so many orders.

The next question we have comes from David Farrell of Jefferies.

I've only got one, but I contradict one of the previous questions. I actually thought you sounded more positive in terms of the evolution of order intake going forward. I wondered to what degree that is triggered by the levels of order intake we're seeing from the upstream competitors? I think I'm right in saying historically and typically, you'd expect a 6- to 9-month lag between the likes of Epiroc and Sandvik securing orders and then that flowing through downstream. Is that fair? And if that theory is correct, in reality, what's driving that? Is that more ore is going to get reduced, which then needs to be crushed and grinded, et cetera? Or what are the exact dynamics?

Yes. So, you are right there that the upstream players are seeing the order intake uptick first. And of course, it's easier to invest in the mobile equipment than in the processing plants and gain the efficiencies from there because with the processing plants, it takes more time to configurate the new setup and then also implement the greenfield operations. But we are seeing now that the upstream players receiving more orders, which then indicates positive momentum, but it can be more than 1 year before we see the impact on our side. But clearly, the market is picking up already with the upstream players and we have recognized that. And the engineering activity on our side is gaining momentum, which indicates that in the back end of this year or early next year, we should also see positive movement with our products business line.

[Operator Instructions] We have a follow-up question from Christian Hinderaker of Goldman Sachs.

I just want to come back on the shipment phasing issues in the revenue lines. I wonder specifically if there was any impact from delayed deliveries as a function of the events in the Middle East or perhaps as a separate point, there's been a number of specific mine site issues, Indonesia, Boliden, I think, as well has had some challenges. Yes, any specific site issues would be helpful to understand.

No specific site issues as such from our perspective, and the Middle East has not impacted on our deliveries as such. So as mentioned previously in the call, the Middle East market is not a big one for us. And then on the other hand, we don't have any suppliers, any significant suppliers in that territory and that most of our deliveries are then coming from other countries to our main markets. So, no significant issues there. And then with the mine sites, there are certain mines which are like down, for instance, Grasberg. But then during these shutdowns, they are also ordering services, which is then visible on our side with our service business.

The final question we have comes from Klaus Kehl of Nykredit.

Yes. Klaus Kehl from Nykredit. Roland, a question related to your cash flow. Could you update us on your thoughts about cash flow from operations and investments, et cetera? That would be my first question.

Yes. So normally, we guide you a bit on where we think CFFO is going. And so the thinking is that the CFFO for the year will be up to DKK 1 billion. So, that was a short answer. Yes. Go ahead, Klaus.

Yes. And what about your CapEx level?

CapEx level is around 3% of our revenue.

Okay. And then in this regard, you have announced that you most likely would start a share buyback here in Q2. But do you see financial room for both making a share buyback and at the same time, perhaps carrying out M&A in the second half of the year?

Yes, we do. We think we can do both. So, there's no change in our stance on that.

Ladies and gentlemen, there are no further questions on the conference. I will now hand back to management for any closing remarks. Please go ahead.

Yes. Thank you for joining the call today. Great questions, and we welcome you to then join the Capital Markets Day in November. So, please save the date and join the event. The invites will follow. Thank you.