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FLSmidth & Co A/S
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Ladies and gentlemen, welcome to the FLS First Quarter Interim Report for 2021. [Operator Instructions] As a reminder, this call is being recorded. Today, I'm pleased to present CEO, Thomas Schulz. Please begin your meeting.
Hello, everybody. I welcome you to our quarter 1 2021 result and interim's report together with our group CFO, Roland.If you look into the key highlights for that quarter. We had a solid order intake. Revenue was as expected. And with that, an EBITA margin of 5.1%. That margin was positively impacted by a higher service share, and the first or the results out of the business improvement activities from the last 1 year.The quarter showed quite a positive cash flow and with better reduction in the net debt. And our reshaping of cement industry continues, which means to make it profitable again and positioning it into the green cement agenda.If we then look into the market, we have definitely a short-term recovery in Mining as an expectation. In Cement, it will be a midterm recovery. And we have, clearly, in the first half of this year, quite a significant impact still from the pandemic.Out of that, we keep our guidance maintained. And the quarter 1 actually proved that, that we will fulfill the midterm of the guidance in the revenue as well as in the margin.Now to look into the Mining market. Mining is in a commodity growth cycle. That's clear. It's a positive outlook. It's driven by the different investments of the governments around the world with the big packages as well as underlying with a huge movement into what we call the green transition.That drives a significant mineral demand. At the same time, some of the commodities struggle with supply. That, of course, creates high commodity prices, and we have high levels, which is very positive and another indicator of a growth cycle in the mining industry.But at the same time, we see a strong correlation between the pandemic and the business activities. And the pandemic is more and more a country-specific, a geography-specific thing. Out of that, to manage the pandemic, to manage the mine sites and to manage the huge demand for supply, large capital investments, any kind of disturbance is deferred and postponed.If we then look to ourselves and that our local organizations, our regional structure definitely supports us very much in that pandemic. And in that line, our agile supply chain gives us a lot of opportunities to maneuver in these critical times.If you look to the right side regarding the Mining revenue, we are down 7% on organic growth, that means minus 7%. And when you look into service and capital, service is down 4% and capital is down 24%. If you take into these figures, the currency, then service is more or less on the same level as we had it into Q1 2020. Out of that, combined, we delivered an 8.8% EBITA margin for the Mining business, out of a 7.3% what we had in quarter 1 2020.Now we look into the order intake. And in the order intake, on the left side of the slide, let me start with the overall. It's a minus 31% versus quarter 1 2020. Service is 6% down versus last year, and the capital is 48% down. But when we look into the capital, we had several large orders last year in the figures.And actually, the base orders in -- that means smaller orders below DKK 200 million, substitution equipment and so on, actually, in this quarter, quarter 1 2021, amount to more or less double to that what we had last year at the same period. Organically, it was a minus 27% growth what we had in the order intake in Mining.If we then look to the right side of the slide, from quarter 1 2019 to quarter 1 2021, you clearly see that the pandemic in quarter 2, quarter 3, partly in quarter 4, too, had an impact on our order intake. And that, of course, is what we will see then as an effect in the revenue already in quarter 1, but so in quarter 2 and -- in the year 2021. But it's definitely with the result out of the quarter 1, a step in the right direction out of that pandemic situation and back into the growth cycle.If we, out of Mining, look then into Cement. Cement already moved with a low-business activity into the pandemic, but the pandemic in itself gave another step down. And that step down was quite significant. Despite that, sustainability and digitalization is definitely what all the customers, if they invest anything, ask for.There is the same -- exactly the same in Cement as well as in Mining, the strong correlation between the pandemic situation in a geography and the business activities. And it's so close to correlation that you actually can say in the moment when restrictions open up, we have better business activities and vice versa.Out of that situation that Cement is very sensitive to any local crisis as well as the uncertainty of their end market, no matter that the big investment packages from the different governments around the world will come. Of course, big investments, capital investment, OpEx investment as much as they can do, they defer. The same in Cement as well as in Mining for our structure -- our reach and structure, our local service organizations as well as our agile supply chain helps us a lot to be still strong on our customers.If you then look to the right side, we have a minus 23% organic growth in the revenue. It's minus 15% in service and minus 41% in capital. And that is, of course, clearly a result out of the order intake behavior, what we saw in the middle -- towards the end of last year. Our EBITA was negative. It was minus 1.7%, and we couldn't repeat the 1 -- positive 1.8% from quarter 1 2020.If we then look into the order intake, we had a plus 7% order intake versus quarter 1 2020, which is definitely a positive highlight. The main contribution here was a 29% growth on the capital part, which then brought us from the DKK 464 million to DKK 598 million, which is a good movement.If you then look to the right side, where we track from quarter 1 '19 to quarter 1 '21, you see that we are actually now having 2 quarters in a row where our revenue is lower than our order intake, which, of course, we like to see. The other thing what you see is that we, in service, move step-by-step out of the pandemic. Though it is positive but as you see, too, if you look towards the 2000 -- beginning of 2019, we are definitely a step down in the cement industry towards the years before 2019, but higher than we were at the low points in the year 2020.Out of that, I would like to give to Roland for the financial performance.
Thank you for that, Thomas. And let's just have a quick glance at the group's financial performance for Q1 '21. So as Thomas mentioned, order intake down by 19%, and our revenue is down organically 13% compared to the same quarter last year.We managed to improve our gross margins and also with lower SG&A cost, our EBITA margin ended at 5.1% versus 5.0% at the same quarter last year. And clearing financial costs and taxes, a net profit for the group of DKK 54 million for the quarter.If you look a little bit on our revenue, revenue was the lowest for some quarters and decreased 13% organically. But good news here is that our service revenue now equals 65% of the total revenue pie versus 58% in the same quarter last year.And also, we managed to improve our gross margin. Gross margin is now 25.2% for the quarter versus 23.1% in the same quarter last year, and also up 1.1% compared to Q4 in 2020. And on the right-hand side here, we see that actually, both our industries, both Mining and Cement, managed to improve gross margin. Both industries managed to improve their service share of total revenue that is supporting margins. And that is despite relatively low travel level in both industries and also the impact of our business improvement program from last year had its positive impact to the gross margin.If you look at our SG&A cost, they decreased by 11% to DKK 648 million. This was predominantly driven by our business improvement activities from last year and also some lower travel cost levels. If we look a little bit forward, SG&A costs are expected to creep up a little bit as we will continue our cement reshaping and also our ongoing M&A activities are being expensed here.If we then jump to the EBITA margin slide here, EBITA margins are largely unchanged at 5.1% versus 5% same quarter last year. And if we look at the bridge on the right-hand side, obviously, the drop in revenue here is a contributor to the reduced EBITA level. But our efforts in improving the gross margin is yielding an additional DKK 81 million, supported by both business improvement activities, but also a larger service share, and a decrease in SG&A and the other bucket supported primarily by business improving activities and also somewhat lower travel costs adds positively DKK 68 million to the EBITA, and we will end the quarter with DKK 190 million EBITA for '21.And if we then jump to the development on our net working capital, that improved for the fourth consecutive quarter in a row, both in nominal terms to about DKK 1.6 billion, but also the net working capital ratio as a percentage of last 12 months revenue continued the positive trends downwards.And if we look at the right-hand side, this quarter was positively impacted by prepayments from customers that needs to be seen in connection with clearance of certain payables on those projects and also work in progress. And also, we had reduced utilization of our supply chain financing. But in combination with strong focus by the organization on receivables, net working capital improved by DKK 74 million for the quarter, a result we are quite content with.And moving to the cash flow, we are then posting another positive cash flow for the quarter. If we look at the right-hand side, cash flow from operations on group level of DKK 285 million, and we invested DKK 53 million, which is a little bit low, primarily due to timing. And adjusted for a few small technical things, we posted free cash flow for quarter 1 of DKK 232 million.And that, on the next slide, lead us to be well in line with our capital structure targets. Equity ratio is above 40%, and the free cash flow -- with the free cash flow, we reduced our net interest-bearing debt to DKK 1.577 billion, and this is also after having cleared dividend payouts to our shareholders as approved on the AGM in Q1. Also, our leverage ratio here reduced from 1.6x by the end of 2020 to 1.4x coming out of Q1.And that leads us to the guidance slide, and let me just add a little bit of color to that. We maintain our full year guidance with a revenue of DKK 15.5 billion to DKK 17 billion and an EBITA margin of 5% to 6%. And when we communicated the guidance back in February when we released our annual report, we assumed a pandemic impact throughout first half, and this is definitely still the case.Since then, the pandemic has gone from bad to worse in certain parts of the world, especially South America, Chile, Peru, Brazil and especially in India. And this will impact activity levels in Q2 and potentially into Q3. These are areas of the world where we have significant commercial and operational activity. When we then get towards the second half of the year, exactly as we said in February, we assume that top line will start growing again, especially in Mining, but with an increasing share of capital revenue. Cement reshaping will continue according to our plans, expectedly, with higher share of costs in the coming 2 quarters relative to Q1.And with those comments in mind and on the back of Q1, lastly, as expected, we maintain and reiterate our full year guidance. And with that, back to Thomas.
Thanks, Roland. As a leading solution provider into mining and cement industry, leading in MissionZero, leading in sustainability, of course, we show what our own performance is.This quarter, I would like to highlight the achievements during the quarter. We have approved decarbonization targets for FLSmidth by the Science Based Targets initiative. We joined the Copper Mark, an international framework established from the copper industry, to demonstrate responsible production practices. And that makes us, especially management, unbelievably proud of our organization, all around the world in very difficult times, in very -- partly in very difficult and challenged geographies.We had a lost time injury frequency rate of 0.1. For the ones who follow us longer, our ambition is to be on nil. And an 0.1 is already very, very close to it, and an outstanding performance in a very, yes, challenging, volatile time. Well done.If we then look into innovation, and again, sustainability part this time in Mining, it's about a new automatic filter press. Standard, regular filter presses recover between 85% to 87% of the process water. Here with that new, highly digitalized unit, we are able to recover 93% to 95% of the process water.Not only that it has a fantastic, good sustainability, water-related impact for the miners, for the customers utilizing that technology, it has, on top of it, a significant reduced downtime by an improved design, both contributes to higher productivity and with that to higher profitability of our customers utilizing that technology.When we then look into the key message what we have to send, we had cash focus, and we delivered -- our business improvement activities delivered the result, too. We had a sequential improvement in the order intake, both, is based on a strong management culture and a strong organization around the world. Our regional setup, our agile supply chain has proven beneficial for our business. And we see great opportunities within the digital and the sustainable solutions.On the other side, we see continued negative impact from the pandemic. Countries like in Latin America, India, these are outbreaks or new waves just appeared here in the quarter. And we foresee that we will have geographies in the future where that will happen again and again. So our forecast for this year, that we see a significant impact of the pandemic up to the middle of the year, is actually, from our point of view, proven right. We see midterm recovery for cement and especially in the green cement, which is a demand of high tech in cement. And we go on with our reshaping to improve profitability and to position us there.Our focus is to navigate through the pandemic. The customers, cash, cost and pricing are in high focus. We further strengthen our Cement as well as strengthening our Mining setup in the organization. And M&A, of course, like the discussions what we have with ThyssenKrupp about their mining business is on the list. Ongoing is our MissionZero ambition to fulfill that as well as to be innovative and digitalizing as much as we can, and that on top of standardization.To look into the Q1, we had a positive -- we have a positive outlook for Mining, definitely significant more positive short-term than for Cement. Cement will recover in the midterm. Our order intake and revenue declined year-on-year, but was a solid quarter. We had an EBITA margin of 5.1%. We reduced, again, net working capital and net debt. And out of that, what we said, we are very confident to stay in the midpoint of the guidance in the revenue as well as in the profitability.And with that, we would like to go to the Q&A.
[Operator Instructions] Our first question comes from the line of Artem Tokarenko from Crédit Suisse.
I have a couple, please. My first question is around your messaging, I guess, when we were at the end of Q4, you were sort of guiding to broadly flat H1 '21 versus H2 last year, then throughout the quarter, the message has been much weaker -- on sequentially weaker results in Q1 and Q2.So I guess my question is what has changed throughout the quarter? Where have you seen major improvements? And keep in mind that there has been -- results are much better than your recent message. Should we take this as Q2 and Q3 -- some of the weakness will be postponed towards Q2 and Q3, or that's not what we should expect?
Yes. First, thanks, Artem, for that question. Actually, the message what we send is that what we fulfilled if it comes to the revenue and the EBITA because we had actually quite low revenue in the quarter. One of the lowest, if not the lowest, for several years. 3.7% is not a great result to make that fairly outspoken. Then the 5.1% is in line with the guidance, but that is what we said. We see throughout the year with the pandemic impact that we are in between the 5% to 6%.Coming back to the revenue. If you take that times 4, we are not in the revenue guidance, we are below that. So it's, from that point of view, fully fulfilled. Where we were slightly better than expected was in the order intake. And that came out in March, where we think in service, there was a kind, in the mining industry, of a restocking event. And we saw that in some countries when they opened up for 2 weeks. We had that in Latin America, then they stocked up and then it was shut down again. So the pandemic has a big impact in the quarter and will have a big impact in the quarter 2, too.
Right. Okay. Maybe I'll ask differently. Could you talk a little bit about sustainability of your margins in the Mining business? How should we think about progression of Mining margin throughout the year? And maybe more broadly on the group level, how do you see phasing of revenues and margins throughout the rest of the year to get to the midpoint of your guidance, please?
Yes. So thank you for that, Artem. So think for Q1, we were -- the margins were supported by business improvement activities and also by a healthy service level. And moving into Q2 and considering the pandemic development in areas of the world that are important for us, I think such stepping into Q2 activity-wise is a fair assumption. And also, we assume that the cement reshaping activities will be more costly in Q3 and potentially also Q3 than we saw it in Q1. So that is a few data points to that.In second half, we still assume that Mining will start to grow again. And that will be with a larger capital share than you have seen in Q1, Q2. And obviously, that will weigh down on our margin expectations. So that's how you should think about the year.
Right. So just to check as a follow-up to this question, in terms of the very strong margins in Q1, is it fair to say that some of maybe -- the phasing of order backlog was different to what you expected and some of the maybe bigger capital orders took longer to deliver and hence, the mix was better or it's a wrong assessment?
Yes. No, actually not. We guided on and we informed as much as we saw it and very transparent that we actually saw in the first half of the year the significant weaker business activity versus the second half of the year based on the pandemic. The thing what we see is, and we measure that with a very high data point density. The thing what we see is in the moment when an area opens up, our business activity immediately jumps up and vice versa.That correlation is so -- I never saw in the business such a strong correlation. So out of that, we have up to the middle of the year. That is what we foresee, still a significant impact of the pandemic. And that is calculated in, and that is actually what we see. We think with the -- what we see now in Latin America, what we see in India, proven as we forecasted for the year.
Okay. Understood. And my last question, and apologize for taking too much of your time. But my last question is on Mining capital business and services business, I guess you had DKK 200 million large order, but the base level order intake was very strong. So could you maybe talk a little bit about how you see sustainability of these levels of order intake in Q2 and Q3?
Yes. It is, at first, as I said, the pandemic has an impact if we have assessed to the sites, then we can negotiate and discuss with the customer how to improve supply, how to improve productivity. And then these space orders are coming in relatively good because Mining is in a growth cycle. They have good commodity prices. They have a very good outlook, and we have a fantastic good offering for them.If we are not allowed to go in, that will be very low to nil. Then we work with the miners to replace some of the equipment -- if we are allowed to be on-site, to replace some of the equipment to ensure that they can go on to supply, in a lot of cases, over the 100% capacity what they normally have on the site. So that we go fast and replace smaller equipment and then go out again that we are not disturbing the supply a lot. So the base orders is actually based on that predominantly.How do we see that going forward? We think towards the end of the year that will be a good business, definitely. We have to see how the impact of the pandemic up to the middle of the year is. This order intake, same like with service, is a reflection of the opening or closing down of the assess of the sites, actually both in Cement and in Mining.
Our next question comes from the line of William Ashman from JPMorgan.
I just had a question on your sort of Mining EBITA guidance where you're saying that it will grow in the H2 this year. Just given that we've already seen growth in Q1, I'm just trying to think what that implies for Q2? I mean are we expecting a fairly weak top line in Q2, and therefore, EBITA, just to make that guidance make sense?
Yes. Thank you. Thank you for that, William. I think -- so important to understand here is that we had a relatively higher share of service in Mining in Q1, and that positively impacted the margin. Now moving forward, Mining will also be impacted by COVID, especially Q2, potentially into Q3, and then from there on, we expect growth to come back also in Mining. But we have a large -- relatively large order backlog that came in last year that we will start to execute on Q2, Q3 and then coming through the year into '22. And that will change the relative relation of revenue in Mining between capital and service, and that will weigh down on the average margin. And that's why the -- when we guided in February, we said that Mining for the year would be high single-digit EBITA margins, and that still stands throughout the year.
Okay. That's clear. And I just had a follow-up on the previous question around the sort of order sustainability in Mining going forward. So from what I understand, there was some restocking and maybe be a bit of preordering ahead of anticipated lockdowns in some key markets. And can -- I would expect this to then reverse in the Q2 given these markets won't be as open as possible. Is that a fair way to look at it?
I think that's a fair assumption. That's clear. Take only now India as an example. The situation in India actually started at the beginning of April. That means at the beginning of quarter 2. We have similar situations, not that dramatic, but with lockdown and restrictions in Latin America in several areas. And Latin America, for us, especially in Mining, is very, very important.So we see clearly that correlation. And we know when we deliver such a solid quarter that we have to inform very much in detail why that looks actually quite strong here and there, and that we are cautious towards the middle of the year, but we are in line with that -- what we said actually in the quarter 4 announcement that the pandemic versus business, the correlation is unbelievable close. On the day and we measure that -- on the day when we get an opening, we have more business activities. On the day where we have a shutdown and the customer decides to limit the access to decide, we immediately see that it goes down. And that is what we forecast, and we think we are and we see that we are proven with our forecast.
Okay. Just 1 final question for me is just on the DKK 70 million of costs that were outlined in Cement and DKK 40 million were taken in 2020, but you haven't given a Q1 number. I'm just wondering how much was taken in the Q1? And how much should we think about it for sort of Q2 and Q3?
Yes. So we are not really disclosing the one-offs now, but we are saying that Cement will be negative for the year. And we're also saying that the reshaping cost in Q3 -- and -- Q2 and Q3 will be more than in Q1. So you should think about the Cement losses to be more losses in Q2 and in Q3 compared to Q1.
Our next question comes from the line of Magnus Kruber from UBS.
A couple of questions from me as well and following up on Artem's question originally on revenues. Could you help us a bit with how the revenue recognition trended through the quarter? And if you're ability to invoice or finalize projects improved towards the end of the quarter and into Q2? I think my understanding as well was that somewhat concerned about invoicing Q1-related total backlog and COVID and so on?
Yes. Magnus, thanks a lot for that question. At first, from a business point of view, regarding the revenue, of course, we have to have access to decide, otherwise, it's not revenue. And for our larger projects, we see actually quite a lot of them postponed since the pandemic actually started.So the low revenue what we had actually in quarter 1 as a result out of that. Where we can supply quick, we try to do that. And normally, quick supply is more towards the service part than towards the capital part. And that drives what we see for the year. That's actually the reason why we say that this year, the normal seasonality what we have a weak quarter 1 in top line and then a strong quarter 2, a weaker quarter 3 and a very strong quarter 4 is broken. That will not happen in quarter 2. That is not what we see because the pandemic doesn't allow us to do that.If it comes to the Mining part, it is unbelievable healthy industry to be in. And that is, of course, what we have to maneuver when we inform you. On one side, we have a big demand. We have a good hot list, all looks great in that mining industry. On the other side, if we can't act because we are limited in the access and so on, then, of course, it will not end up in our figures. And that is what we guide on and what we say.So out of that, we didn't see an increase in revenue activity actually towards the end of the quarter so much. It was in the order intake where we had -- especially in Latin America, 2 weeks, we had opened up, we could supply some service, and we got actually quite activity then on the service order intake.
Okay. Got it. And I think, Roland, you said something about sidestepping on revenues in Q2 from Q1. Could you clarify that comment, please?
I said something -- sorry, can you repeat that?
Yes. I think to Artem's question before you said something about sidestepping on revenues from Q1?
Yes. So what we're seeing is, obviously, if there was an element of restocking by the end of March, you would expect that to be taken out a little bit of April. And also, the pandemic impact to Q2 in regions that are important to us will -- is what Thomas is talking about a broken seasonality. So we won't expect a significant pickup in Q2, and that's what I call sidestepping. So an activity level in Q2 similar to the one we saw in Q1. And then in addition, accelerated activities on the cement reshaping, then I think you have what you need for revenue and also margin modeling.
Excellent. And just 1 final one. Can you talk a bit about the impact you expect on margins from the invoicing on the larger projects in Mining as they come through into the second half? Any help there would be very useful.
Yes, impact of margin. But when we're talking about the capital and service split, our margins on service are considerably higher than it is on capital. But there's no other significant change in that compared to what it was last year. So just the fact that our revenue composition in second half will be more to capital as we see it now, means that the average margin will be subdued from that. Is that the question?
Yes. But you also have a larger proportion, not the capital, but also from the project business. So interesting to see what those larger orders will have an impact like what the project margins are effectively?
Of course, there is purely mathematically. There is, on 1 side, the -- as we call it, the product mix between capital and service, which has -- if capital goes up, a negative impact on the contribution margin, gross margin part. But of course, you get leverage into the cost structure because you drive normally then a higher volume. But that only takes off if you are really higher in the revenue. And we have to see how that develops then towards the end of the year.What we calculated in actually based on that what we have in the order backlog, what we have in the contracts, with the milestone deliveries and the expected activity level quarter-by-quarter led us to the overall revenue guidance of DKK 15.5 billion to DKK 17 billion. That is what is calculated in.To get a positive -- more than normal positive effect on the EBITA, you significantly have to deliver higher volume. We had that at the end of 2019, I think, where we had a huge -- especially in Cement -- a huge revenue come in with more or less the same cost structure, which was very positive on the profitability line. Do we foresee that in any quarter this year? Not in that magnitude, not in that magnitude.
Our next question comes from the line of Mikael Petersen from SEB.
The first one goes to the restocking effect you mentioned a couple of times. Can you try to quantify this?
No. The -- we have -- it's not restructuring, it's reshaping. And reshaping has 2 elements, and we talk here cement. Sorry, I didn't get you -- sorry, restocking. The restocking is actually...
Restocking, yes, or preordering.
Yes. What happened is -- or what we see in the mining industry is and partly in cement, too, in some areas, of course, they produce. And in Cement, they didn't want to invest. And in Mining, they couldn't invest based on restrictions, no matter that they had the money.Then in area like Chile, Peru, which is very important for us, opens up, and they know that there's a high risk that they shut down again. So then they go in and ask immediately what all can you supply? Can you come over in doing that? And that's the restocking. And we had that effect in the second half of March. That is what we see. That's a restocking effect in it.
Okay. I was asking if you could quantify it, let's say, like millions or percentages?
That granularity, we can't give. Sorry.
Okay. And then maybe a question regarding the business improvement. Can you try to quantify that for Q1? I know last year, you had DKK 15-some million savings, DKK 53 million in costs and netting out for DKK 40 million. So in Q1 2021, what is the positive effect from the business improvement program?
So we're not really quantifying that, but it's significantly less, Mikael. We will leave it at that. Significantly less, and the Cement business, which is the one we're talking about here, is negative by DKK 23 million, and it will be more negative in Q2. Yes.
What we can say is, in that respect, the reshaping, and that is what I actually started before with. The reshaping has 2 elements in it. One is to improve profitability, and we really target to be positive in Cement next year, again, to make that very outspoken.The other part is to reposition Cement because the green cement with a lot of sustainability, digitalization in it is not only that you go into a new demand area, you have to let other things go. And that is like operation maintenance, contracts and so on, things which are not contributing in the future to our MissionZero. You have to let go. We announced that we sold some product lines, some businesses around Christmas. That's all in that reshaping.So if this is not a pure cost improvement program, where we then normally report the figures on it, this is a bigger thing. We move cement out of the regular limestone, high CO2-contributing business into the leading sustainability, green technology, building material supplier. That is actually what we do. And that is more than only cost out or getting things more simple and so on. It has a big element of innovation, it has a big element of education and so on.
Our next question comes from the line of Nick Housden from RBC Capital Markets.
Yes. I have a couple. My first one is about the Mining order backlog. And I'm just wondering, how do you see the Mining order backlog in comparison to the beginning of previous up-cycles? And then within that backlog, how big is the proportion of large orders within that? And by backlog, sorry, I also mean pipeline, the nonrecognized orders?
Yes. It's actually a very good question. And if you take previous cycle, I actually have to go quite a long time back, which is the so-called super cycle, what we had 10 years ago. What we see is, at first, this growth cycle, what we have in front of us, is not driven by 1 country. It is driven by 2 main elements in Mining. One is the COVID and all the special investments what the governments do around the world. There is a lot of direct and indirect commodity and cement-driven business in it, which is very positive in the mid to long term. No question mark.And the other one is the green transition. And the green transition means more digitalization, more electrification, more green energy with new grids and so on, and that drives especially the copper, for example. And that is, from our point of view, more solid, better, long term, longer lasting than actually the China development-driven super cycle. Why is that important? Because we look, of course, always half a cycle ahead, very detailed. Half a cycle is roughly 5 years.And if you have a super cycle, then you have a super downturn, too. And here, we have a solid growth cycle, which then will be not that dramatic peak and drop as we saw it and that let us call it China-driven super cycle what we had roughly 10 years ago. So the fundamentals are quite solid in it. And it's all over to commodities because when you go more digital, when you go more electrical, it's not only 1 element which is important, it's the whole variation. And that is really the positive in it.
Okay. And just related to that, so you used the word super cycle and in the press there have been reports that we might be in there. I was just wondering if you could tell us how your customers are communicating about what they're expecting in terms of demand? And whether it differs meaningfully from what you just said?And then also, maybe if you could comment about the capacity utilization at your customers' mine site? Are they capable of expanding production by, say, 10% with their existing sites or would they need major greenfield projects to be able to cater to a significant upswing in demand?
Yes. But first, I only used the word super cycle for that what happened at the end of the 2000s and up to 2011, maybe '12, not for this growth cycle. We are not a big fan of that wording for that what happens now in Mining. I will not use that word for that.Second, you heard the question before regarding what we had in the backlog and to show that how solid that is. We had, in the super cycle, significant more larger projects in the backlog. We are today more a service and a product company -- significant more service and a product company than we were 10, 15 years ago. So our backlog is more, how to say, fragmented in smaller orders and not into very, very large -- a lot of very, very large orders.Then regarding the subsupply, the supply chain subsuppliers. We don't see a shortage of that. We have a very agile supply chain. We track, of course, price increase, price decrease, currency variances and so on. And we can maneuver very quick from 1 country into another to get supply from there. So we have no sign of any bottleneck in the supply. And we don't see that if the business comes back and that's how we see it coming back, that this will be an issue. We don't see that.The only disruption what we have in the supply chain and that actually since the beginning of the COVID outbreak is on the logistic part. When we have to cross borders or we need capacity on container ships and so on, that is where we have to look into how to organize that. But that's, at the moment, really not a big thing for us.So subsupply chain is not an issue for us. And we have actually a good argument in it, not only that Cement has a lower business activity, our supply chain financing is on a lower point because most of our suppliers agree with our payment terms. And that's all okay. It's a good indicator.
Our next question comes from the line of Kristian Johansen from Danske Bank.
Yes. So as I understand you, this window in the second half of March in Latin America is primarily what boosted your Mining services orders. But is that also what can explain the uptick in the medium-sized Mining capital orders?
Partly, yes. Partly, yes, definitely. But we had in the order intake, when you look into Mining, we had a larger capital order in it, around DKK 200 million, not to forget about that. There was a -- as you know, that always comes in, yes, lumpy, as we always say, not actually a nice word, but it comes like that. And then, of course, the opening up or shutting down, of course, opens time windows to get then capital orders, especially if it comes to smaller equipment to help here and they are quite quick.I can make it like that, Kristian. The order intake was better in the quarter 1 than we foresee it, slightly better than we were foreseeing it. Revenue, profitability, product mix and so on, actually more or less in line with that as we expected and as we see the full year.
And just to clarify, these restrictions have been enforced again, so this window was closed in the beginning of April?
Yes, partly. The problem is I can't give you a country information because we have some miners still keeping it open and some actually earlier shutting it down. It's actually side-by-side, customer by customer. It is quite a detailed view what we have to have and we have that.
Okay. I understand. And then my second question on the gross margin improvement year-on-year. You stated both this capital service mix and your business improvement initiatives is the reason for it. Can you quantify how bigger proportion of the margin improvement is coming from your business improvement initiatives?
No, we're not quantifying that. But it's a mix -- it's a fair mix, Kristian. I'll put it that way. It's quite beneficial to our gross margin when our service business, relatively speaking, is higher. And also, we had significant run rate impact Q-by-Q from the business improvement program, both on gross margin level and also on SG&A. So yes, fair mix. That's how I will say it.
Our next question comes from the line of Laurits Kjaergaard from ABG.
My first one is in terms of the mix of the large and small orders in the Mining capital orders, where we see there's quite good growth in the lower part of the size of the orders. And here you're flagging that there's some stocking effects in Latin America and in India. Could you talk about the timing from order to execution? Can you confirm if the orders needs to be executed faster than normally due to the stocking effects?
Yes. If it comes to service, the -- normally, you can say, when you get a service order in average, you take a quarter roughly to realize it into revenue. If it comes to smaller capital orders, 2, 3 quarters. If it comes to larger, 4 and more quarters. That's roughly the line.Then you put the layout of the COVID above it. That means when a customer sees, now I can open up, then I open the gate, come in. Then, of course, we try to do it faster. That's clear. And we try to be prepared for that. What we up to now actually could proof that we are.What you should be careful in the first half of the year is to use the normal business operandi in it, that the normal way from one -- for example, in aftermarket, 1 quarter to the next, you get it realized into revenue, because it really depends that we can go there. Otherwise, it's not revenue. Otherwise, it's not in. That's very important.Then regarding the smaller -- the bigger amount of smaller orders, it lies actually a little bit in the nature of the operation of mine sites why we saw that movement. Of course, we have a very competitive offering. That's number one. Number two is what we offer is productivity improvement, which means we help our customers to produce more, to go on to supply more. And at the moment, there is more demand than supply.So they really do everything as much as they can. At the same time, smaller investments, smaller capital units, need less or create less disruption in the process flow on the mine side because you stop for a shorter time when you replace a pump, a crusher, a screen, a part of a filter press and so on, then refurbishing a whole line. And that helps the clients to go on to supply a lot. That explains the significant higher share of smaller orders, too.And last, but not least, we are very vocal towards our customers. If you do this, then you get that improvement in percentage. We can calculate that. And they can make quick decisions if that works or not. And smaller investments, they can locally decide. They don't need big Board decisions and so on. That altogether is a part of that explanation why we saw a significant better, what we call, base order situation in quarter 1 '21 than quarter 1 2020.
And just a follow-up. You mentioned 2 to 3 quarters is, let's say, a normal business cycle where you deliver or you gain an order until you execute on the order and gain revenue on the smaller orders, 2 to 3 quarters. In these very unordinary times, what would you say it was now?
That's -- you have to ask me by country and partly by my insight. It's very difficult to say. It's really difficult to say. But when we...
I understand, there's a big spike in India.
Yes. India is a problematic area. That's definitely there.
[indiscernible] America in terms of the smaller orders?
Yes. Latin America in the second quarter will have a challenge. That is what we see. And that's not a surprise because we thought and we saw that up to the mid of the year, the pandemic will have a significant impact.
Okay. That's very clear. And then my second question was on the HeidelbergCement order that you mentioned. Here, there is a -- here, there's an element of carbon capturing, which is something that you haven't really talked about too much before, but we're hearing it from many customers that this in carbon capturing will be a large part of the CapEx in order to reduce CO2, how are you looking at that part of, let's say, the industry?
Very positive. It's part of the sustainability. It's carbon capture. It's clay calcining. It's the overall CO2 improvement. You saw the European taxation with 50 euro talks out of countries in the south of Denmark, now 60 euro to 100 euro coming up. And when you then see the profit level on the cement industry, for example, in Europe, then it will get problematic for our cement customers in the future. And we see with the legislation coming up, less and less possibilities to have exceptions of these kind of taxations.What does it mean? Customers seek then. And we already -- whatever we do in cement is already related with sustainability. They seek for solutions to get the CO2 down. And carbon capture is, of course, an element in it.Where can we contribute in it? We are actually specialists in relation to cleaning gas and cleaning systems and working with, let's say, hot environment. No matter if it's the clinker, that means hot material or hot gas. And that, of course, is for carbon capture in some areas, quite beneficial. And we extend that offering and the partnership and the work together with other companies fully focused on it because we are not in drilling, we are not in the storaging of CO2. That's not where our expertise is, and it will be not, but we offer technologies to make all these things easier and simpler. And that comes out of cement technology. This is really close to our heart, part on the core part -- core business what we have.
Do you suspect that you will get more similar orders in the carbon capturing markets like the one you had in HeidelbergCement throughout 2021?
We think -- let's see if it's 2021. But we see that this is an area where we will get more orders, definitely. There is, when you look into the start-up range, quite a lot of new ideas, what to do with CO2. And as more as come, as more we can contribute.
Our next question comes from the line of Robert Davies from Morgan Stanley.
My first one was just trying to get a little bit more color between your typical contributions from smaller versus bigger projects. The reason I ask, obviously, you mentioned a couple of times site access issues and being able to more easily install some of these smaller pieces. Just if you could give us a little more color, maybe specifically on this quarter and then versus what you typically see? I know it's very hard to pick big orders, but just on average, how big a proportion of your business would typically be small installations, quick projects -- quick kind of work around rather than sort of a bigger project or a bigger installation on a typical quarter?
The -- on a quarter, especially with larger projects, not a real fair comparison because it's a too short timing. But we gave on the Capital Market Day in 2019 that our ambition is to have the large capital business in total for the group below 20%. The large orders, that is our ambition. And that we want to be in the north of 50% with the aftermarket and everything what is in between is product business, what we call then the base order part. So that's roughly what we run for. It is company intention since very long time that we decrease the dependency on large projects.Then regarding the contribution on it, of course, it's clear that the aftermarket is the most profitable part. And it's clear that the large projects are the least profitable. The reason for that lies in -- in the large project business, what we get, there's a lot of external into it, which is normally on a significant lower margin than our own staff. And that makes the overall profitability lower.And then it's clear that when we go into base orders and smaller capital orders that the profitability lies in between the projects and the aftermarket. That's roughly how we see it. But it's impossible to say on a quarter because if you get 1 large order in, 1 order makes a hell of a big difference.
Yes. Okay. Yes, understood. And then just -- you've referenced a couple of times sort of catch-up effect in the quarter. Just to be kind of interested in a couple of angles on that. So I guess, is it fair to assume you're assuming a sort of normalization into the second quarter after that catch up effect? You mentioned it was only sort of mid-March, you really started to see that coming in and I just wondered if that continued into April, and I guess we're only not far past April now. So I guess, did that sort of catch up effect continue at all into April?
I think I don't know a catch up effect. I think we used the word restocking in some of the regions. And so that's one thing. And to the extent that it was restocking just before a shutdown in Chile and Peru, it would be fair to say that April will then be correspondingly low or May also. But what we're also saying about the Qs is that we're moving sideways. So Q2 on activity level equal to Q1, maybe slightly higher, would be fair to assume.
Okay. And then my final one is just I guess -- you mentioned, obviously, there's a more midterm recovery trajectory in Cement rather than short term in Mining. I'd just be curious, has there been any sort of change of view around holding on to that Mining business? I know you've obviously -- you mentioned in the release you were in discussions with ThyssenKrupp around their Mining assets. Is that -- should we take that as an indication that you're kind of trying to double down on Mining and potentially get out of Cement? Or just is there a good opportunity to sort of push forward on the Mining business? Just be kind of interested in the latest thought process around Cement given the kind of longer-term horizon before you think that business is going to do better?
We are very happy to have Cement business in our group. We have a lot of synergies between Mining and Cement. And actually, in the pandemic, actually, it's more than proven what the synergy effect is between the 2. What we say in Cement is midterm recovery will come, and it will be the highly digitalized, actually more high-tech sustainable green cement where we are after.There, the competition is significantly lower. It's not a mid-market business, it's not commoditized and so on. It has a lot of very positive elements. And I gave a few months ago, and I stick with that or we stick with it, we see Cement being, in the future, a multi-commodity industry, where clay and other secondary and tertiary resources will play a bigger part in it. And limestone will be still part of it, but others will come up. And that makes it that complex that it's actually high tech needed to make a good business for our customers.So from that point of view, the outlook is good. But of course, we use that crisis for getting the business profitable again and on the other side to position it there. And I said it before, it is very important to understand when you reposition the business that you are not only opening up new avenues where you can offer something, you have to shut down or to let go other things where you don't want to play in it any longer because it tracks you down in your new avenue. And that is exactly what we do with the Cement part.And in Mining, it's a short-term recovery because all the fundamentals are so much on green as I never saw it since I'm here in FLSmidth, which is already more or less exactly 8 years, which is great. But as I said before, the miners have to reprioritize their task list away from the pandemic, what they will do if pandemic is not that big issue any longer as well as looking into how to have a sustainable, long-term related, higher supply into the demand what we see coming.And that will trigger a lot of investments, especially in the processing side. And it sounds very bullish and it is because processing is a big, big impact for depleting ore grades, more sustainability regulation on it. This is the field to play in, in the long term. This is where the growth cycle will play a lot. That's our clear belief.
Our next question is a follow-up question from William Ashman from JPMorgan.
I just had a sort of question on input costs and your ability to sort of pass those through to miners, I mean, given miners are much more focused on costs currently versus sort of prior cycles. So I'm just wondering how that dynamic works with you in your projects, certain products?
Yes. Thank you. At first, customers, especially the mining customers are more focused on getting a technology which helps them to fulfill all the regulations than on cheap supply. That actually changed. And I have good -- some good examples. You remember 5, 6, 7 years ago, there was a lot of talk that the miners only will source in China and very cheap and so on. We see actually that the miners are looking for the original, the OEM suppliers, the original suppliers. Why? Because there is a clear understanding if it comes from the original supplier as a whole life cycle approach that it's better for the return of the miners. It's more sustainable. And the whole system -- the whole mine system, the whole value chain operates more solid.Then we see another trend, a so-called defragmentation trend, not to give a new investment to 20, 30 different suppliers, if possible, to 2. Because the learning out of the last few years and actually out of the super cycle is as more interfaces between you -- you have between different suppliers on the same line as more problems you have. And that both actually works in favor of the few premium suppliers what we have in the industry. If that helps, William.
Our next question is another follow-up question from the line of Magnus Kruber from UBS.
One of my questions was actually on the cost inflation. So it doesn't seem like you will see any material headwind from that, and most of the companies talking about Q3 as a peak cost inflation quarter. Is that something that you would call out as well? Or is it immaterial for you as you see it now?
We see that with definitely higher commodity prices always triggers than higher subsupplier prices, that's clear. And we are prepared for that. And of course, we do, as other premium suppliers do too, trying to bring that into the pricing towards the end customer. And you saw on our key notes for the quarter that pricing, besides customer, cost and cash, has a very high importance.What is important in that is we are not under pressure regarding subsupplier capacity. And that, of course, helps a lot. The picture would look different as we see it as far as we can with our limited knowledge in other industries where they talk about bottlenecks in the subsupply line. And then, of course, you have a problem with your own cost structure and maybe how to get that towards your end customers into a price increase.Here, in our business, and that how we are built up with our agile subsupply and supply chain, we don't see these bottlenecks. So we are not under pressure. Of course, we see the increase. But if one of our suppliers, let's assume theoretically, gets out of line completely, then we switch over to another one. That's the way it is. And we are, especially here in Denmark, quite debated regarding our subsuppliers. We see it like that. You are part of the family, you go with us in good times and you go with us in bad times. If you don't want to go with us in bad times, don't work with us at all. And that's exactly how we see it. We are not, how to say, inert and not touchable in it, but we think that we can manage it as good as it is possible.
Perfect. And just the final one, if you could refresh our memory a little bit on what you saw on temporary cost savings in Q2 last year? And how much of those you have retained, I mean, just exclusively on the temporary working and specific actions that you took that will not stay with us into the second quarter, just to get the baseline right on that side?
These are the questions what we really -- the Q2...
But maybe I can answer this way, we ran our business improvement program, and the run rate impact was fully up and running out of Q4. So you can assume that, that everything that we did then is now full run rate included.
Okay. Got it. Got it. And on the temporary side, the short time working as well?
Short-term working. Well, that is -- I'm not quite sure that's before my time, but that is pretty much activity driven, right? So to the extent that our activity level is down, we can assume that these costs are out of the system.
And if it comes in general to the cost -- Magnus, if it comes in general to the cost. Of course, as more absolute amount of aftermarket business we have as more cost we drive because that -- there you need feet on the ground and so on. That's clear, too. So there is, in the capital product mix, of course, a cost element in it, too. And we were very loud and clear over the last few years how that works and so on only to remind.
[Operator Instructions] We have a question from the line of Artem Tokarenko from Crédit Suisse.
My first one is about ThyssenKrupp. Could you maybe remind us about the most recent timeline and also progress on your conversations?
Thanks a lot. The negotiations and discussions with ThyssenKrupp are ongoing. We are still interested, and they are still interested to sell it. But of course, the timeline is mainly driven by the seller, not so much by the one who is interested. We are very much interested to do things quick. That is what I can say.
Understood. And in terms of the capital structure, I guess, if such a deal will potentially require an equity raise, is this something you will be prepared to do?
So in terms of the capital structure, if the question goes to how we will fund a potential deal, that is too soon to say. We still need to know exactly how valuation and so on will be ironed out.
Okay. But I'm just trying to understand the thought process, like if a deal like this would require an equity raise, is this something you will be prepared to consider or that's a no-go for you?
Well, I understand the question, Artem, and I think that was the answer.
Okay. That's fair. And my last question is around the large order deliveries, which you expect towards the year-end. I mean considering that a lot of industrial companies are talking about bottlenecks in the logistics chain, is this something which could trigger some postponement of those orders? How big is that risk?
Yes. Regarding the postponement with the logistics, we see actually the main impact on the logistics based on the COVID restrictions. So what we look into is which area we supply, how is the COVID situation, and we know that can change overnight. And that is what we then calculate in. What is actually the logistic restriction? It could be the overall capacity what is available to go into that territory. If it's a restricted territory, it's more difficult. We don't foresee with that what we have to supply actually too much a problem with container capacity or so. Because we have a relatively long working time on it when we supply, we know that early enough to make it like this.What we have as restrictions or as a -- what can happen from a negative point of view if pandemic would hit such a larger delivery is if the custom service offices are not properly set up to deal with going over the border of a country with the goods or it could be that if we need special equipment to load or unload and then we can't keep the timeline based on having problems in the border by not getting clearance on that what we would like to supply. And these are normally the things where we have to look if that works out in a quarter or not.We see from customer general behavior, that's the reason why I bring that up actually with these loading and unloading tools, there's always more trend to finalize delivery towards the end of the quarter so that they can close their books, too. And if there is no pandemic, actually, we can perform quite well, spot on as the milestones are. If there is a restriction, then it would slip over into the next quarter. We can give more information on that if we are more into the year. It's a little bit too early to say.
There are no further questions at this time. Please go ahead speakers.
Okay. Then I would say thanks a lot for a lot of very good questions here on our quarter 1 webcast. We wish you all stay safe wherever you are and hope to see you soon in person in the near future. Take care. Thanks a lot. Bye.