FLSmidth & Co A/S

CSE:FLS

Earnings Call Analysis

Rising Profits Amidst Strategic Restructuring

The company reported significant improvements in profitability for Q1, with a gross margin increase to 29%, driven mainly by the mining segment. Adjusted EBITDA rose to 9.2%, while reported EBITDA was 7.5%. Revenue from cement and mining declined slightly but was offset by higher gross margins and SG&A savings. The company confirmed its financial guidance for 2023, with mining expected to generate DKK 16-17 billion in revenue and adjusted EBITDA margins of 11.5-12.5%. The cement segment is being prepared for sale, with a targeted adjusted EBITDA margin of 5.5-6.5%, factoring in a $30 million asset sale gain.

Quarterly Performance Highlights

In the first quarter, the company reported a notable improvement in gross profit, which increased from 27.3% to an impressive 33%. This boost was attributed predominantly to significant gains in the mining sector, amidst stable services. The overall gross margin for the company stood at 29.2%, showcasing a reduction in selling, general, and administrative (SG&A) costs, which represents a concerted effort to streamline operations.

Revenue Trends and Guidance

For the mining segment, revenue is projected to range between DKK 16 billion and DKK 17 billion, accompanied by adjusted EBITDA margins of 11.5% to 12.5%. The cement division's expected revenue growth is modest, estimated at 4% to 4.5%, with projected EBITDA margins between 5.5% and 6.5%. The company anticipates overall revenues for 2023 to hit between $20 billion and $21.5 billion with an adjusted EBITDA margin between 9% and 10%, moving towards a reported margin of 7.5% to 8.5%.

Operational Efficiencies and Transformations

The company's strategic direction includes significant workforce reductions, having cut about 3,000 positions from a peak of over 12,000 employees. This reduction aims to lower SG&A costs, which are expected to decline significantly over the next 1.5 years. Management is focused on restructuring, advocating for a leaner operational model with minimal overhead and more resource allocation toward customer-facing roles.

Order Intake and Market Dynamics

The mining sector showed a healthy service order intake of EUR 2.8 billion, indicating stability within the services market. Despite lower capital orders, the company ensured strong order preservation, with emphasis on steady progression in core services, primarily low-risk, high-profitability segments. The reduction in large orders resulted in a comparative slowdown due to previous high-level recoveries at year-end, but Q2 is projected to reflect recovery.

Financial Health and Cash Flow

Cash flow from operations showed a deficit of SEK 352 million, reflecting ongoing investment flows and operational adjustments. The company maintains a stable financial gearing ratio of 0.5, with net interest-bearing debt seeing slight increases. Moreover, management acknowledged a challenging cash year ahead, aiming for a conservative operational cash flow constraint between 0 and SEK 600 million.

Cement Segment Outlook and Asset Management

The cement business is prepared for sale, with significant rightsizing efforts completed. The remaining backlog is reportedly low-risk, constituting 90% of total orders. The exit from non-core activities is accelerating faster than previously planned, targeting completion by year-end 2024. This divestment, alongside ongoing simplifications, strengthens the potential attractiveness of the asset for potential buyers.

Focus on Sustainability and Long-Term Profitability

Management noted a push for sustainability within operational practices, albeit acknowledging challenges in maintaining safety standards. The organizational structure is being optimized to balance sustainability with profitability, ensuring that the company can transition successfully post-asset sales. This aligns with future profitability targets, with ambitions to hit an EBITDA margin of 8% by the end of the strategic cycle.

Earnings Call Transcript 2024-Q1

[Mikko Keto, executive]

Ladies and gentlemen, welcome to the famed Quarter 1 Investor Presentation. I'm here joined by our CFO, Roland Anderson. I would like to give some highlights of the quarter 1 result. I'm extremely pleased about profitability development. Mining gross profit has gone up from 27.3% to around 23%. So it's very significant improvement and is showing that self-help what we are doing and what we've been doing over the last 1.5 years, 2 years, it is working. Order intake in service is at a good level, very pleased about that. And also cement development is good. We are preparing cement for the sale and the underlying business development and strategic choices and the strategies that we have implemented is working. We've taken significant reduction in the workforce since last year. And if I look at the height of the headcount was well above 12,000. So altogether in 1-year half, we reduced the headcount of about 3,000 people. It is very significant. We know that we still have a too high SG&A burden for the remaining mining business, and it will come down over the next years. And we have introduced a small head office concept, and we are looking at how we can design mean and lean head office -- the efficient support function operations. And that is what we will implement over the next year half -- regarding sustainability, mostly good development, safety still not where it should be, and we are working with our manufacturing repair sites in U.S. to improve it. So that's where the challenge lies. If you look at a slight negative development in overall women managers, is impacted by a reduction of total management level in the company due to business simplification. In terms of management layers, managers, there continues to be a lot of encasing the company as we are streamlining our operations. The really positive news in order intake is that service order intake, EUR 2.8 billion in mining. For me, that's really high level. That's good level. It shows that service market is stable. We are developing well our service business. Our profitability is good there. There's a peak in capital order intake because of a couple of large orders. Of course, we are especially pleased about extending our leadership position in hyper spending. Both large orders had HPGRs included in them, one in South America, another one in Asia. And that further proofs that acquisition of Tuxen Group and high-pressure grinding product line was a right strategic choice. Service share of the order intake is very healthy. Then the decline in mining revenue is mainly about timing. If you look at the fourth quarter capital revenue, execution, invoicing, it was at the high level. And it typically means that the next quarter is lower, and this is what we have seen. We knew end of the year that the first quarter revenues will be less in CapEx business as a result. Service is somewhat impacted by the exit from the large labor service contracts in South America. In the first quarter last year, we still have revenues from those later in the year. We've exited those contracts. And if you look at the good order intake, both in capital and service, we have no concerns about the revenue. It will turn into revenues, and we will see the pickup in revenue in the second quarter -- the best news of the day is that profitability is improving fast. And you can also see that the gap between adjusted EBITDA and reported EBITDA is narrowing. And the biggest improvement is actually in the reported EBITA from 6.5% to 10.3%. That is very significant. And it means that the gap between adjusted and non-adjusted profitability is becoming less. And that was a concern for some of you at some point of the transformation, but it is coming through. And we know that we are still burdening ourselves for too high SG&A levels, and that will go out and down in the next 1.5 years. And we have a plan for that one Cement order intake is difficult maybe to understand because we have quite a lot of moving parts. We've been selling some product lines. We stopped all the project order intake and are taking orders only in for products. But the positive, which is hidden maybe from this top line view is that the remaining business what we have in cement. And if you look at what's happening in the spare parts and professional services, there's actually growth in the core service business in the segment, which is low-risk, high profitability, recurring business, and that is actually growing. But then the top line number is impacted by a sale of the mark and quite a lot of changes, but remaining cement business is healthy and service is developing well Revenue still is reflecting a decline in the projects. So we are executing most of the projects are out of the books towards the end of the year, rate left after end of the year. So then it's mainly products and services. So we continue to see, of course, comparison to last year that is totally driven business. It's low risk, high service and product content going forward. And we continue to see a sale of the service out of the total revenue developing well, and there's a positive mix impact. So the medicine that we have taken in cement business is working -- there's a gain of sale of one of the product lines included in that adjusted 7.7% number. And without that gain, it will be 5 and 2 percentage points the adjusted EBITDA. So it means that the underlying profitability in Cement is developing well. We have done rightsizing for cement and some of those benefits are only kicking in as we speak. And as I said, remaining business, what we have in the books is low risk, high margin. And strategically, we said that the end of the strategy period, we get to 8% EBITDA. And looking at this picture, looking at the mix, what we sell, we know that we can achieve the strategic target. We are well on our way. We can achieve that one. But at the same time, this is supporting sale of the cement is a low-risk, okay margin asset, and this is really supporting the process what we are going through at the moment. And it's good business what we have in our hands. NCA, no big surprises. This is one of the biggest achievements for the company end of the year, we are out of the NCA and we are out of the NCA sooner than originally planned a year before. So this has been really successful to exit from NCA. Then I hand over to Roland to go through the numbers in more detail.

[Roland Andersen, executive]

Thank you for that, Mikko. And as usual, let's have a quick glance on the group's consolidated financials. So order intake of SEK 5.2 billion revenue of EUR 4.8 billion and a gross margin up by 6% compared to the same quarter last year to 29%, leaving us with an adjusted EBITDA margin of 9.2% and our reported EBITDA margin on group level of 7.5%. Clearing financials and taxes. Our net profit for the group is NOK 194 million. Employees here, down by a bit more than 1,500 people as we can see compared to the same quarter last year. Gross margin, as Mikko mentioned up considerably compared to Q4 and even more compared to same quarter last year, 29.2%. It's predominantly driven by mining that is close to 33% for the quarter. Cement is more flattish and NCA with a negative gross margin on a very low revenue. So predominantly driven by the mining business. Our SG&A costs continue to decline. As a percentage of revenue, it's going up as our revenue declining a bit. And as Mike mentioned, SG&A savings here is predominantly in cement. As we in mining have reinvested a lot of the synergy savings in our service business and especially ramping up our front end in our pumps business. Group EBITDA margin also moving forward, both adjusted and reported on the same quarter last year. On the right-hand side, there's a number of moving parts. But on the right-hand side, we're trying to highlight the most important elements in that bridge. So coming from a reported group EBITDA Q1 23 of 3.9%, adding back integration costs for -- from those days, and it gives us 6.0 in adjusted Grupotel last year. Revenue since then is down both in cement and the mining business and that's compensated more than compensated by a pickup in our gross margin, savings in SG&A and also bits and pieces gives us 9.2% group adjusted EBITDA margin by the end of this quarter 1. Deducting the transformation costs in both Cement and Mining gives us a group EBITDA margin of 7.5%. Net working capital went up again in Q1 as expected, predominantly driven by our payables, but also compensated partly by receivables, work in progress increased a bit, but that's partly compensated by increased prepayments from the customers. So net-net, an increase in SEK 553 million in net working capital, bringing the ratio to 8.4% for the quarter, net working capital ratio. So that gives us a CFFO for the group of minus SEK 352 million, deducting cash flow from investments. And also, we sold a product line in Cement, and we bought a company in mining. So net-net of free cash flow adjusted for M&A of minus NOK 454 million. That means that our financial gearing remains largely flat compared to Q4, so 0.5 turns with a slight increase in our net interest-bearing debt driven by the negative cash flow. We maintain our financial guidance for the full year. So in mining that DKK 16 billion to DKK 17 billion in revenue and then adjusted EBITDA margins of 11.5% to 12.5%. In small provinces is here, we have the Q numbers. And for cement, 4% to 4.5% in revenue for the year and then adjusted EBITDA margin of 5.5 to 6.5 million, and that includes the $30 million gain from the sale of Mark. Noncore activities unchanged revenue of SEK 250 million to SEK 300 million and a loss of EUR 200 million to EUR 300 million. So the sticky part of the backlog is left to handle, and then we will exit this segment by the end of 2024, a year ahead of plan, as Mikko stated. For the group, we will then enter the revenue of $20 million to NOK 21.5 billion and adjusted EBITDA margin of 9% to 10% and our reported EBITDA margin of 7.5% to 8.5%. In the adjusted numbers for mining, we have SEK 200 million of transformation and separation costs. And in cement, we have SEK 100 million in transformation and separation costs. Loss of the noncore activities, our NCA segment of SEK 1 billion for the total lifetime since we started this segment in Q4 '22 remains unchanged. If you look a bit on our transformation plan, we continue with simplification of our operating model for the next 1 year, 1.5 years, and that will further reduce our SG&A, implementation of principal company model and further optimization of our SG&A footprint. We have initiated commercial investments, especially in our pumps business. Technical sales force have been ramped up, and we are 70%, 80% done with that. So that's now up and full running. And at the same time, our ramp-up in service center Milliner capacities is progressing in line with our plans. Also on the de-risking of our backlog continues to 74% is a modest progression and we are not going to get much higher than maybe 80%, between 80% and 90% of that. We have internal targets on where this number should go. If we look at cement, cement has been basically fully de-risked 90% of the order backlog now relates to low-risk orders, the orders that we want. And the simplification of the operating model is also more or less completed, we have reduced by 900 FTEs since same quarter last year, and there's a bit more to do and then that cement business is rightsized and ready for sale later this year. Full exit of NCA, less than EUR 500 million left in the backlog to do for the remainder of the year. And on group level, we are on track for full separation of cement that's basically completed, and we are currently wrapping up the vendor due diligence process and then the sales process will continue full steam over some and hopefully conclude a signed deal, selling the cement business no later than end of the year. And with that, we will give it over to Q&A.

[Operator]

We now begin the question and answer session. [Operator Instructions] the first question is from Christian Reinholdt.

[Christian Reinholdt, analyst]

I have 2 questions. So just for mining, if I heard you correctly, you are sort of indicating revenue from both service and products to trend off again from Q2. Can you confirm that? And then secondly, how should we then think about gross margin? Because obviously, Westside extremely strong in Q1. So is that level sustainable? And then how is the potential mix change between service and products going to impact the gross margin development for the remainder of the year?

[Mikko Keto, executive]

Yes. Thank you for that, Christian. So traditionally, our Q1 is a low season quarter. So we expect the revenues to trend up during Q2, but there can be volatility in that. I think the important stuff is that we stand by our revenue forecast for the year '16 to DKK 17 billion. On the gross margin, the 33% is a relatively clean number. I think be careful maybe plugging that in forever in your spreadsheets, but it's on a relatively steady level. So whether it's 30, 31 or 33% as we move forward, it's a relatively clean gross margin number. I think in gross margin, you need to look at the mix of the revenue so that most likely the variation between whether it's 33 or 31% as Roland said, has to do the mix so that now the mix was very positive for the service, and therefore, it's -- but it is very stable. So there will be not -- it will be more mix impact rather than underlying business being a very different margin level.

[Christian Reinholdt, analyst]

Okay. That was clear. Then my second question, SG&A costs in mining before integration and transformation costs in Q1 compared to Q4 is actually up 4% quarter-on-quarter. The comment you made that the SG&A during could come down within 1.5 years. Is that comment reflecting SG&A cost before the transformation costs of more that the EUR 200 million transformation cost should obviously be gone by next year? And generally, how should we think about the trajectory for STM?

[Mikko Keto, executive]

Yes. So SG&A is roughly flat compared to the same quarter last year, if we look at mining alone. And both quarters have sort of similar one-off elements in it. Now we are still running our simplification exercise. So that means that over the next year, 1.5 years, SG&A will come down further, also in nominal terms, both in percentage terms, but also in nominal terms. So that's the intention. And maybe I could also highlight that in our future operations, we like the small head office because we used to be group, meaning that the group of mining and cement. And while we are selling cement, there will be some stranded cost because of a kind of a negative synergy from the volume, but we have planned that we are exiting those costs and also not only in percentage terms, but also in absolute terms. So we are -- with this business implication, we are looking at operational -- our operational model is that we have a small head office and most of the people close to the business, business being product line or customer so that we will shift basically SG&A mix to be more operational, less GA and more in sales and customer interface.

[Christian Reinholdt, analyst]

Understood. And just a follow-up. So when should we expect the SG&A to start trending down? What was the phasing of this exercise?

[Mikko Keto, executive]

So I think that it will start trending down measurably coming into next year, but it's too soon to be specific on guidance on that.

[Christian Reinholdt, analyst]

Fair enough. That was all for me.

[Operator]

The next question is from Claus Almer with Nordea.

[Claus Almer, analyst]

Also a few questions from my side. One, coming back to the SG&A cost. What should we expect, not about timing, but how low can it go next year, do you think?

[Mikko Keto, executive]

Yes. It's too soon to guess about towers, right, but we don't need an SG&A burden of 19%, 20%. It needs to come down by some percentage points. So that's the ambition.

[Claus Almer, analyst]

Right. Okay. And then the second question is about service orders within the mining. When you look at the timing between getting the order to get the revenue this time difference, is that unchanged compared to last year? Or do you see mining companies being involved rush equipment or in less of a rush?

[Mikko Keto, executive]

So I think the timing typically away simplify a bit, but if I look at operational spare parts there, the order dev cycle is 1 to 2 months. But if I look at what is called capital space, significant mill parts that might be 1.5 years. So let's say, 70% of the service order intake is kind of more fast moving and then 30% is maybe what one might call capital space that it's a longer delivery time. And those kind of big lumps of orders for capital space, order intake and then the delivery will cause some variation in that order intake and revenue numbers. So in very rough terms, 70% high cycle deliveries between order intake and revenue, 30% is a bit lumpier capital spreads and then some refurbishment upgrade type of drops.

[Claus Almer, analyst]

So that causes lumpiness also in the service business. But it's more or less unchanged like-for-like versus last year?

[Mikko Keto, executive]

So yes, we're actually very happy about the underlying service order intake. So we have no concerns. The market is stable. We are very pleased for that 2.7%, 2.8% number for the order intake. If you keep it at roughly at that level, small variation between the quarters. I think we are really happy. And of course, we are pushing for the growth in different areas, but we are happy with the level of what we have in quarter 1.

[Claus Almer, analyst]

Sounds good. That was all from my side. Thank you so much.

[Operator]

The next question is from Lars Topholm with Carnegie Investment Bank.

[Lars Topholm, analyst]

Yes. I'm sorry, also some questions on SG&A cost. But before that, on gross profit, and here I'm talking mining. Last year, some of the Teekay integration costs had a negative effect on gross profit. So just to compare apples-to-apples, what would the mining gross margin have been last year stripping out the integration cost? That was the first question.

[Mikko Keto, executive]

That was a detailed one, Lars. Thank you for that. As I recall it, we had integration cost of about EUR 120 million or EUR 130 million in Q1 and half of those may be a bit more we're sitting up on the gross profit. So when you write about gross margin expansion being a result of execution, that's actually only half the truth just to be absolutely sure... The truth is that the 33% is a clean number. But Q1 last... Was the change rule and that's the third 3... So what I'm saying is that the 33 million is a clear number, but the number from the same comp last year had about half of the EUR 120 million or EUR 130 million in it as one-offs.

[Lars Topholm, analyst]

Okay. That's clear. Then jumping to the SG&A cost. So if I look at the discrepancy between gross profit and adjusted EBITDA, i.e., before all special items. Last year, in Q1 in mining, it was NOK 665 million. This year in mining, it's SEK 768 million -- that's a very significant increase. So I wonder if you can break down what that increases and maybe also highlight if there are any sort of special charges that, on one hand, are not special items, but on the other hand, do not recur. For example, are there any write-downs of receivables or inventory or anything else in this increase?

[Mikko Keto, executive]

So first of all, Lars, I'm not exactly sure how you get to the 660 or so. But if we look at the mining SG&A, it's roughly flat Q1 last year to Q1 this year, and it had roughly the same elements of one-offs in it.

[Lars Topholm, analyst]

And if I look at your Q1 2023, you had a gross profit of EUR 1.065 billion, and you have an adjusted EBITA of SEK 400 million. That gives EK665 million in difference. This year, you had EUR 180 million in gross profit and EUR 412 million in adjusted EBITDA, that gives EUR 768 million. So clearly, the discrepancy is not unchanged.

[Mikko Keto, executive]

I think you're forgetting to move some of the one-offs on the gross profit.

[Lars Topholm, analyst]

I'm just reading numbers from your own report, which is before special items.

[Mikko Keto, executive]

I agree. But if you look at the segment note, Lars, SG&A is unchanged. Depreciations are unchanged and one-offs are allocated, let's just say, evenly between SG&A and gross profit last year.

[Lars Topholm, analyst]

So let me ask in another way. The growing discrepancy between operating profit -- sorry, between gross profit and adjusted EBITDA, how is that composed?

[Mikko Keto, executive]

So our adjusted EBITDA is driven by an improved gross margin that this quarter is clean, and we have adjusted sitting on the SG&A. Now last year, we had a gross profit that had part of the integration cost sitting there and on the SG&A, the other part. Is that clear?

[Lars Topholm, analyst]

And No, it's not clear at all land. Your gross profit grows by $115 million from Q1 last year to Q1 this year. Your EBITDA before all these special items only improved SEK 12 million. So there is an underlying cost increase. I simply wonder what that is.

[Mikko Keto, executive]

Yes. So the underlying -- but that's what we have said, right? So we have invested -- reinvested in the commercial front end on PCV and in some of our service deliveries. So that sits in SG&A.

[Lars Topholm, analyst]

And how much is that?

[Mikko Keto, executive]

How much is that? I don't think we're disclosing that. But that's a significant -- that's a meaning.

[Lars Topholm, analyst]

I don't ask if you disclosed it, but are there any cost of a one-off character in that difference between gross profit and adjusted EBITDA Yes, any write-downs, et cetera? And then how much...

[Mikko Keto, executive]

No, we had integration costs last year of 127 million -- even the...

[Lars Topholm, analyst]

So I forget the integration pest below adjusted EBITDA. I'm talking about the cost between gross profit and adjusted EBITDA. So all that, that is not related to integration, transformation and separation.

[Mikko Keto, executive]

No, I don't think so. Not meaningfully. There's an underlying cost take out of SG&A and then put it back in for the commercial front end...

[Lars Topholm, analyst]

But you clearly put back in a lot more than you take out then about?

[Mikko Keto, executive]

That's about the same. So if you look at the segment loss, if you look at the segment note, SG&A is unchanged.

[Lars Topholm, analyst]

So one includes all your separation cost and integration Yes, I'm asking you, if you strip that out, you go from 665 to 768, but that's on... Your own number. So I just want an explanation, a bridge on that...

[Mikko Keto, executive]

Yes. But that you can have, but that's not right. You're not going from 665 to 768 -- then there's a misunderstanding somewhere.

[Lars Topholm, analyst]

Then it's simply the numbers on Page 10 in your Q1 24 reports, which are run because that's where I find these numbers.

[Mikko Keto, executive]

I don't think they are. Last can we take it one-on-one. I think it's important to take away that SG&A is unchanged. Depreciations are unchanged. And one-off element...

[Lars Topholm, analyst]

It's simply with all respect, incorrect on a look as you report, it's simply not correct. They might be unchanged, including integration costs, transformation and separation costs -- but if you strip those out, you have a significant first increase I understand you don't want to disclose...

[Mikko Keto, executive]

No. No, we have cost in land.

[Lars Topholm, analyst]

if you are correct, how can your adjusted EBITDA just increased SEK 12 million on EUR 115 million gross profit increase?

[Mikko Keto, executive]

So we're putting back the commercial front-end investments in our SG&A. That's why our SG&A is unchanged...

[Lars Topholm, analyst]

But all the things are not unchanged.

[Mikko Keto, executive]

Let's take it bilaterally yes. Bilateral... We can look at the segment note...

[Lars Topholm, analyst]

Alan, can we look at Page 10 in your report, please... Yes. So for this year, you have a gross profit of 180, correct?

[Mikko Keto, executive]

Yes.

[Lars Topholm, analyst]

And you have an adjusted EBITDA of 12%. Is that also correct?

[Mikko Keto, executive]

Yes.

[Lars Topholm, analyst]

Is it correct the difference between those 2 numbers are NOK 768 million?

[Mikko Keto, executive]

Yes.

[Lars Topholm, analyst]

If I then look at the same numbers for last year, your gross profit was 100 -- EUR 1.065 billion. Is that correct?

[Mikko Keto, executive]

Yes.

[Lars Topholm, analyst]

Your adjusted EBITDA was EUR 400 million. Is that correct?

[Mikko Keto, executive]

Yes.

[Lars Topholm, analyst]

Is it correct? The difference between those 2 numbers are only EUR 665 million...

[Mikko Keto, executive]

Yes.

[Lars Topholm, analyst]

So how can you say costs are unchanged if the difference goes from EUR 665 million to EUR 768

[Mikko Keto, executive]

because you have a significant one-off element up under the gross profit last year.

[Lars Topholm, analyst]

But that affects the 165 million then? I'm talking the difference between the EUR 165 million, i.e. your gross profit... I just see that one-off cost...

[Mikko Keto, executive]

I disagree on that, but can we take that one on one, then...

[Lars Topholm, analyst]

Yes. I simply don't understand your numbers, and I regret to say and your explanation let's save it...

[Mikko Keto, executive]

On the big pick, if you look at the macro picture, we are simplifying operations a lot. We've taken from the peak of the kind of headcount 3,000 people out and we continue simplification in reality, the SG&A savings will kick in. And now we are looking at then the -- also the stranded cost that if cement goes out that what is the cost burden then remaining in mining and if we need to do any corrections. So we actually continue that simplification journey, we see a significant reduction in the underlying SG&A in the coming year or 2 years.So it will be very significant also in absolute terms. And I think maybe we do this kind of a detailed discussion about these numbers then one-on-one when we meet. Yes, the second on one-on-one question.

[Lars Topholm, analyst]

I understand all that. And I think you're doing , but the problem here is you can't explain your own numbers, and we still have a situation where there's traffic between adjusted EBITDA and EBITDA, there's traffic between EBITDA and the EBIT. And last when I can't even get a bridge on your own numbers. I just...

[Mikko Keto, executive]

You'll get the bridge slightly I'll explain exactly how this works. -- explain exactly how this.

[Lars Topholm, analyst]

Do you think looking forward? I have one final question, actually. So on the separation and transition costs all these costs that in the -- in full will disappear once this exercise is done or is an element of staff cost, for example, going to people who are now working on transformation. And then when that is done, we'll work on something else to the stand the payroll.

[Mikko Keto, executive]

As if I take that one. I think we are looking at when we are doing streamlining of the support functions for the business simplification, taking cost out, reducing headcount that we are assuming that we can absorb that cost into as an ongoing business because there's not going to be one big date at this date, we make a big downsizing or reduction somewhere -- so it's kind of a continuous program where we make kind of support functions lean -- so there will be no kind of one quarter that they would have a big impact. So I think what we are looking at now that we should be able to absorb that extra cost as a part of the kind of ongoing business.

[Lars Topholm, analyst]

That's very clear... Thanks, guys.

[Operator]

The next question is from Christian Hinderaker, Hinda Indra with Goldman Sachs.

[Christian Hinderaker, analyst]

I'd like to start on the mining products business, please. If I strip out the large orders there, I get to $712 million order intake, which is down versus 925 large order number from last year in Q1. You've talked about the slowness in decision making by miners, which is similar to what we hear from peers. And I think the drivers there well understood as it relates to large-scale orders in greenfield and everything else. Can you talk a little bit about what's happening with the smaller order side in the products business, though given that decline? Is this about junior miner financing issues? Is it a channel inventory adjustment of certain product categories? Just welcome some more color.

[Mikko Keto, executive]

If I look at then most of our customers' behavior is driven by the fact that at this point, the -- our biggest commodities are second-biggest copper being by far the biggest commodity so that they aim to optimize short and mid-term profitability. It's not about -- for the large mine it's not lack of funding. It's nothing to do with that one. They have plenty of funding available, but it's -- they are driven by the kind of profitability drivers. And then for them, of course, then if you look at kind of potential movements and bite the mining companies trying to acquire assets from the others. You see that the licensing is so difficult that large players try to acquire smaller players to acquire the asset rather than building more capacity. So in the big scheme, the licensing is slower than ever. So from discovery to building the mine now is typically 17, 18 years from discovery. So it's actually smaller than ever before if I look back 20 years. So licensing is not getting fast despite what politicians sometimes say, is slower than ever in most of the countries. And that is on back of the miners mine. They are trying to optimize what they have, which means that, that is driving a small product orders, upgrades and refurbishments, -- they look at existing operations. If they can debottleneck squeeze a little bit more out of that than it might be individual product orders. It might be upgraded retrofit orders, but it's not going to be anything large. So that kind of -- there will be not many new mines in the foreseeable future. And gold is at record levels, the commodity prices. But still, I think the Tonia Miners, I think it's -- the financial situation is not the best because of the CapEx cost in terms of how much they need to invest in order to build the mine has gone up a lot over the last few years, significant increase, meaning that the equipment are more expensive. But in EPC part, which is picked part of the new money investment has gone up a lot. So the actual CapEx number in absolute terms is much higher than cost of capital is higher. So that is curtailing a little bit the investment of the junior miners. But the last miners are maximizing production from existing assets. They are trained by they saw midterm profitability and they are a little appetite to kind of put CapEx money out despite the have it. They have the money. They can finance everything from the cash flow, but the preference is to maximize short midterm profitability. So that is, I think, driving the kind of softness in the products market. And I think we see this product market to continue like this, maybe another year or so we don't see a big change there.

[Christian Hinderaker, analyst]

So maybe to summarize, are you saying high commodity prices today actually imply potentially orders stable as opposed to moving up with the price of say copper?

[Mikko Keto, executive]

Yes. But if you look at the kind of -- you have a cost of capital, which is one thing, but cost of the investment, there has been high inflation on equipment in prices. There has been high inflation on the EPC portion of the investment, which is much bigger than anything to re-equipment. So let's say that, that has gone up, EPCs30% over the next 2, 3 years. It's just -- it's not the exact number, but -- so it's much more expensive to invest in absolute terms, from a capital outlay point of view, it means that it needs much higher commodity prices than in the past to create big incentive to invest. And also that if you -- and caster the boardroom dynamics of the large mining companies, are they shareholders striving for the payout of the dividends, share buybacks, that's something -- it's the boardroom dynamics of the large mining companies. I think today, we see that it's very much kind of about profitability than long-term growth is in their books this value over volume as well as what we are talking about.

[Christian Hinderaker, analyst]

Very clear. Maybe just on the cement margins, and this is a bit long, so apologies. But firstly, I wondered what the basis was for including the gain on the MAG sale and adjusted EBITDA given that's a one-off. Second would be if you can help scale and understand the inventory write-down comment in the release. And then just thirdly, on the margin again, I appreciate it's still flattish if you strip out the MAG gain. But I guess just wonder then how we can get to the sort of year-end bridge number of 5.5% to 6% in the margins for this year?

[Mikko Keto, executive]

Yes. So we had about SEK 30 million, including in 7.7 billion. And if we talk that, then we are 5.2%. And then we have had inventory write-downs this quarter that sits in the gross profit. So had we not had them, the underlying EBITDA would have been higher. Is that the question?

[Christian Hinderaker, analyst]

Yes, I guess I was just curious as to why -- when you're not going to sell MAG twice, that would not be treated as an exceptional.

[Mikko Keto, executive]

Yes. So the reason why we're doing it that way is because we guided the 5.5% to 6.5%, including the mark sell. And then I think the accounting gain of 30 was probably slightly higher than we had expected. So you're right in the sense it should be an adjusted item if you want to calculate run rate. So if you take the 7.7 million, take the 30 million out, then the run rate is EUR 5.2 million.

[Christian Hinderaker, analyst]

Understood.

[Mikko Keto, executive]

And also that taking significant inventory write-off is kind of cleaning the cement books because we are preparing the assets for the sale. It's a low-risk asset at a good underlying development in core services, good order intake margin. So it's actually -- it is a healthy asset to sell and healthy asset to buy. And then the cleaning of the inventory is part of that one so that in any buyer looking at the asset, they see a very attractive asset to acquire.

[Operator]

The next question is from Chetrite Senior with JPMorgan.

[Chitrita Sinha, analyst]

I have 2 questions, please. So firstly, just to come back on mining revenues this quarter. We've obviously seen similar weakness across peers this quarter. So I was wondering if the decline in sales this quarter was specific to your own operations? Or do you see something more broadly in the market?

[Mikko Keto, executive]

No, I think in terms of revenues, I think if we separate the CapEx and OpEx business so that in CapEx business, had to do that we had a kind of a really strong fourth quarter, where maybe we accelerate too much, even kind of execution and invoicing and that sort of thing. So you saw a really strong quarter. And typically, if you do a strong fourth quarter, meaning that you're pushing out kind of invoicing, all those things, then you have a slow start of the year. So the CapEx business actually had quite a bit to do that. So if you even out the kind of fourth quarter and first quarter, it's kind of at a good level, so some impact there. In Services, we expect it to come back up. And the comparison quarter a year before, still had, as I said, on revenue, not in order intake, but on revenues, it had some basic labor services contracts in South America, Chile, in particular, that had some impact on that comparison number. And during the year, we exited those contracts, so that revenue is no longer there. And that's a slow margin low profit revenue and not strategic choice not to do basic services anymore basic labor. We're expecting some recovery there in service.

[Chitrita Sinha, analyst]

Okay. Very clear. Just on provisions, we saw an increase this quarter, in particular driven by other provisions. Are the Q4, you said that you were expecting a decline in provisions driven by both restructuring and other. How do you see this developing for the rest of the year? And what do you expect for cash for the full year?

[Mikko Keto, executive]

Yes. So thank you for that. So on provisions, we have had a bit of use of our restructuring provisions as expected. And then we have added a bit more new provisions which has to do with projects. And the thinking as we move forward over the next couple of years is that the restructuring provision needs to come closer to 0. It will never be 0. I think the other -- the group other will decline significantly as we move forward from over the next 1 or 2 years. And I think the warranty part of it will be roughly here volatile with the sales of products predominantly. So all in all, provisions should come down. I think we had a slide showing that in our investor presentation from Q4 for reference, which gives a little bit more guidance on this. On the cash flow from operations for the rest of the year, we're saying that it will not be a great cash year this year either. So cash flow from operations will be between 0 and then no higher than last year, so roughly between 0 and plus 600.

[Operator]

The next question is from Casper Blom with Danske Bank.

[Casper Blom, analyst]

Two questions also. And I think the first is pretty simple. Within your noncore business, you now have a backlog of EUR 0.5 billion. And basically, you are guiding for revenue of EUR 250 million in the last 9 months of the year. What will then happen with the remaining backlog of EUR 250 million by the end of the year? Will that be written down? Or what -- how will we be treating that? That's the first one, please.

[Mikko Keto, executive]

So thank you for that, Casper. So we expect actually to descope a lot of this or maybe even cancel part of the deliveries. So that's the thinking. If there's a small chunk back, then we -- it will be delivered in mining. But the intention is that everything is out by end.

[Casper Blom, analyst]

Okay. That's very clear. Then I apologize, but yet another question about SG&A. Mikko, if I've heard you correctly in the beginning of your presentation, you said that SG&A like within mining would come down within -- over the next 1.5 years. So basically, up towards end of 2025 would be my math. Having the gross margin already at this level of 31% to 34% you mentioned. Then if you get the SG&A right within 18 months, would that mean that by '25, you would then basically be at the run rate you need to get into your 2026 EBITDA target?

[Mikko Keto, executive]

So... I think you are reading very well. So that's the exact timing, of course, how fast and how much SG&A will come down. But that's the -- if I look at the playbook for us to meet our strategic target, it's actually -- gross profit comes first. We've been doing price increases. We've done a rightsizing in the customer interface so that the spot is actually pretty well under control its way it should be. And now we are more working on the back end of the cost. And -- but we've been quite aggressive in the commercial front. And so that is, I would say, that at a good level to deliver the target. And you are totally right that while we work the SG&A level down, that will basically deliver the result. But then, of course, we don't always work exactly on the calendar years. But that's a target that -- we know that that's the holy Crail that we get SG&A under control and down then we deliver the target. It's quite simple, actually.

[Casper Blom, analyst]

Yes. I hope the execution is as simple as well, Thanks very much. And of course, then looking at what we've done in the past that we reduced the headcount in FL Smith, across mining and cement, about 3,000 people. So I think it's not nice, but I think we can deliver the SG&A savings as well.

[Operator]

The next question is from Klaus Kehl with Nykredit.

[Klaus Kehl, analyst]

Yes, hello, can you hear me? Ask from Nuclear. Just kind of 2 small borrowing questions. First one is on discontinued operations, my favorite topic surrounding FLS. And I see that this quarter, it's actually 0 for the first time in, I can't remember how long time. And that's -- yes, that's positive. So are we there where it would be fair to assume that there will be a 0 on this line from here on?

[Mikko Keto, executive]

Yes. That's exactly right. I think if memory serves me right, you asked the same in Q4, Claus. And this continues is out of the books. Okay.

[Klaus Kehl, analyst]

Okay. Perfect. And then you mentioned this write-down in cement where you are cleaning up some inventories. And when you mentioned it, you said it was a rather large cleanup. Could you try to quantify the amount?

[Mikko Keto, executive]

We're not disclosing it. We're not disclosing it. But it's significant -- basically, that's, of course, then if you think about there's a gain from a sale of the mark, and I think there's a significant -- because basically, we could afford to do it as well. We are cleaning the books. We are preparing the assets for the sale. We know that the better shape the business is in, the more interested parties we have and it's -- we decided to -- while we are streamlining operations, we are going through the factory sites. We are going through all the sites and then if there's anything to do, we can do it because, in reality, the underlying profitability is kind of okay so that there was no reason to delay it. We wanted to have a kind of cleanup of the books.

[Klaus Kehl, analyst]

Yes. But then again, the underlying profitability is then higher than the 5.2% actually. Yes, slightly higher.

[Mikko Keto, executive]

Yes.

[Klaus Kehl, analyst]

Okay. Great. Thank you very much...

[Operator]

The next question is from Petersen with ABG.

[Mikael Petersen, analyst]

Yes. Just 2. The first one pertaining to the gross profit line. If we just look forward at the end of this year -- to the of this year and then compare with end of '22 before TK Mining and restructuring terrain, et cetera, et cetera. what is the different than numerical difference between the gross margin in the service versus capital business, which we expect at the end of 2024. So that's the first part of the first question. So the numerical difference on average, and I know you said that between 33% and 31%, I mean, just talk about average number, the absolute difference between the gross margins in those 2 revenue lines?

[Mikko Keto, executive]

We don't actually give kind of profitability for service and capital separately. But if you look back that we can estimate will this mix 33 is skewed in we expect to keep it. And if the capital share of the revenue goes up, then it might go it up. So it's -- there's a movement, but we don't give out the profitability of service versus capital.

[Casper Blom, analyst]

No, actually... I don't think you are giving out the profitability by just stating the difference between the 2 because there could be a difference between 20 and 40 or minus 5 or whatever it is...

[Mikko Keto, executive]

There's a significant difference in service and products. So it's -- but we don't give indication how big is the difference.

[Casper Blom, analyst]

Okay. Then comparing end of '24 by end of '22, could you then say what is the numerical difference the step-up between the 2 line items? I think, Peter, maybe -- so we've done a lot on product mix, right?

[Mikko Keto, executive]

So the mix in our service business will change. Is that what you're looking for? Is it between products and service?

[Casper Blom, analyst]

Is basically what I'm just looking for is trying to get some sort of figure. I mean in the spreadsheet such that we can have an average number for the profitability of those 2 and then work from there, and then we can put all the one-offs, et cetera, in it. So I'm not asking you to give sort of the exact numbers, but at least now what kind of numerical increases should we expect from N22,24 for each of those product lines, i.e., the gross profits in service increased by 5 basis points and gross profit in capital orders increased by, I don't know, 10.

[Mikko Keto, executive]

That we are not disclosing. I think it's important for you to work with the 33 plus/minus, and then the remarks around the split between service and products. So the split between products and service will have to gross profit move slightly up or down between 30%, 33%, maybe 34%, depending on the volume of products being delivered in the revenue line,

[Casper Blom, analyst]

That's how we explained it. Fair enough. We also have to do some work on our side as well. So that's okay. I just have to come back to the SG&A costs in mining. And I just want to understand it fully. So what you say, if we clean the cleanout number, if you take out the EUR 200 million out of that or whatever that is sort of allocated then that is that number on the line number that will go down over the next 18 months. And what are the key components that will drive that decline?

[Mikko Keto, executive]

Yes. So key components is part of our simplification efforts. So we will still consolidate ourselves in fewer but bigger sites. We will have a more efficient back-office operations, so that back office operations, so that means finance, IT, procurement that will be partly outsourced. Some will be what we call nearshore. And also, we will take a bit of capacity out. So there's a number of elements in that that will lead to that improvement.

[Casper Blom, analyst]

Okay. Okay. I think that's it.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to the host for any closing remarks.

[Mikko Keto, executive]

Just to kind of highlight that personally, I'm very pleased about the quarter development. The main highlight of the quarter is gross profit and also healthy order intake in services. And at the same time, when you look at the elements good asset for somebody to buy low risk profitability improving, rightsized to run that business in a profitable manner long term. And at the same time, I'd like to invite all of you to the Meet the Management event in South Lake City. Salt Lake City is our global technology and products and for the condition monitoring, remote monitoring of the mining sites and operations. So it's an impressive facility what we have in Salt Lake City. That's our Global Center for mining. And if you would be able to join, you can meet much of our management. And then you can look at the biggest mining laboratory test environment in the world. And it's -- and also that if you haven't been ever visiting the mining side around the corner from our offices, you have the Kennecott copper mine, which is also impressive to give a feeling who are our customers and how the operations look like. So hopefully, you can join us for this event. So -- on that note, I would like to thank you for your participation and for your questions. And looking forward meeting many of you later in the week when we do the road so. Thanks very much.