FLSmidth & Co A/S

CSE:FLS

Earnings Call Transcript 2021-Q3

[Thomas Schulz, Group Chief Executive Officer]

Hello, everybody. I welcome you all around the world here to our beautiful Copenhagen, the headquarter of our company FLSmidth for the third quarter report in the year 2021.So the highlights for the quarter, we had quite a strong order intake and revenue. We had a really good improvement in the EBITDA, especially in cement. We had a higher net working capital and with that negative cash flow and in the quarter free we issued successfully new shares.The market outlook in mining good momentum this is growth cycle and in Cement mid-term recovery definitely expected mid-term, long-term, quite a good outlook. And the demand, actually in both industries for green solutions is very high. We maintain the guidance which means on the revenue DKK 16 billion to DKK 17 billion and on the EBITDA margin 5% to 6% and as we flagged before on the full year, we will have around a DKK 100 million cost in based on acquisition activities.Top of it, as we announced yesterday evening, I will leave that position at the end of this year and Mikko Keto, our good colleague from mining will take over from 1st of January next year. Mikko is with us already since the first January of this year. He has a significant good track record in mining and other industries in multiple leadership functions. His attitude, value set, ethics, fits into FLSmidth as he would be born here. I'm very happy, we and the Board, myself, we are very happy that Mikko will take that role.And that role, based on the Thyssenkrupp's acquisition will be in the future so much in the overlap with the mining President position based on being 75%-80% Mining when the Thyssenkrupp acquisition is done that we combine the role. This will give FLSmidth, a very strong focus on profitability on the MissionZero on the Thyssenkrupp execution what already Mikko is leading since he is on-boarded here into our company. You will meet him of course on several occasions in the near future.Out of that into the mining market, it is a positive outlook. It is a green transition. It is a long-lasting growth cycle where we are in, which is driven by e-mobility, green energy and of course, all the infrastructure work what we need to fight against the climate change. The commodity prices are on a high level. And yes, they are volatile, but we all can remember the times in the darkest hour of the mining recession, 4, 5 years ago where we were in copper less than half of that what we have today.We have high production rates out in industry, the industry moves back into normal activity, but customers stay cautious with the large capital investments actually combination out of the COVID and sustainability permitting talk. If you look to the right side of the slide mining revenue is 20% up organically, the service 4% and the capital 52% up.The reason for the service is we have good order backlog, but of course some of the restrictions, logistic things were not enabling us to deliver the full potential. But as you see when you look back gradually, we move more and more positively, which is good to see. On a very positive note, our EBITDA margin improved from 9% to 9.5% in the quarter 3 in the 9.5% is roughly DKK 30 million M&A costs included.If we then look into the order intake. On the left side, you see the order intake for the quarter 3 comparison. There we have a 19% growth in the service, again a strong performance, and the 6% growth in capital business. On the right side, you see from quarter 3, 2019 to the quarter 3, 2021, the development of the different elements of our business in Mining.For example, if you look into the service part, you see that we are more or less on that where we were in 2019. Actually, order backlog look similar, like in 2019, so that we are not always comparing with the COVID impacted year, which is for us and management and the way forward quite important to see. So overall quite good move out of that very low activity year in 2020.Out of that we go on the TK acquisition. As you know, we had the signing a few months ago where we flagged and informed the market that we are on the way to take over the Thyssenkrupp's Mining business into our Group. It's roughly revenue of DKK 5 billion and what you see is -- and what we can report on is the timeline and for closing is completely on track, we are absolutely pleased with the performance what we get out of our future colleagues as well as what we do ourselves to get that business on board.Generally, I have to say the market approach of the Thyssenkrupp's Mining colleagues management, well done, guys you fight good and that's great to see, we are happy when we have you on board. One thing what we would like to mention here is our equity issue that is completed, that was quite successful and we raised DKK 1.4 billion to fund the acquisition.On the other side, the EV is reduced to DKK 2.1 billion that means a reduction of more than DKK 330 million. The reason for that is that the India business of Thyssenkrupp's Mining is excluded from that transaction. The background for that is at first, we are very strong as FLSmidth in India already, you know that roughly each fourth colleague of us is Indian citizen and the activities from Thyssenkrupp's Mining are for us strategically not important. It has no effect on the transfer, it has no effect of IP technologies and we keep of course, the synergy effect what we announced exactly on the same level.Out of that, I would like to go into Cement. Cement has quite a lot of talk and more and more actually real facts around green offering. We are unbelievable well positioned there if you followed a little bit the COP26, how much we as FLSmidth were there and helping and supporting a lot of discussions and initiatives there.This screen solution is the future for Cement premium, that's clear. But we have an overcapacity and a lot of regions, customers are still actually deferring big investments, they are on cash preservation. But we see with the stimulus packages, with the infrastructure builds around the world that this business will come strong after the midterm or in the midterm.What is it, what will drive it, I give one example everyone talks about climate change, huge change of weather conditions, a lot of humans are living on the coast line, we have to protect them, we have to build infrastructure, look into that what Japan yesterday announced, we will be heading that, we will offer Green Cement Technologies to make it happen and to protect the people. That's our position, that's our MissionZero.So for that, the sustainability and digitalization investments what we did will great pay off. If we then look to the performance of us in the revenue, in the quarter 3, it's a 22% organic growth, where, the capital business got a 61% increase and service is 5% down. Where does that come from? We actually in the reshaping activity let some of the business go, we announced that fabric filter and so on. We derisked the company by minimizing our exposure into some of the O&M areas that all in that quarter ended up that we didn't have a growth in the service part.But on a very positive note from a minus, from a not good minus 4.8% EBITDA, we improved to 0.2% and a big thank you to my organization to make the reshaping and that way that we already can show a positive bottom line in the quarter 3, 2021. Well done.If we then look into the order intake another good story, when we look especially into service, where we are very much focused on, we have is 44% increase in service for Cement, which is great in capital orders with these relatively low figures to get a larger order in or out moves the needle quite a lot that is minus 18% than in the quarter, but organically, it's a 17% growth in a market which is fairly under pressure.If we then look to the right side again from the quarter 3 '19 to the quarter 3 '21, you see that we are coming out very well out of the quarter 2 the main hit in the COVID time, especially to service, has now the fifth quarter in a row in order intake growth in service, which is phenomenal and quite great.Out of that, we look into the supply chain situation, logistic procurement, there is a lot of talk in the global economy, not only in Cement and Mining actually more in other industries about the challenges, what we can say is we are of course not inert against these challenges. But the impact on us is low in quarter 3 and absolutely in line with our expectations. Where does it come from?We have a business model which is close to asset light, we invested significantly in the last 5, 6, 7 years into procurement logistic supply chain set up and that pays off. We are quite agile and we're active in that area. So from that point of view, we can mitigate to a certain extent these challenges by being flexible and actually moving from one continent or country where we have restrictions or anything else into others. And that makes us only below impact.Out of that into R&D, we are always proud to show something this time about Mining. It is the REFLUX Flotation Cell. To describe it fairly quick in it, this cell delivers the same performance than 3 to 4x bigger conventional flotation cells and actually on a lower energy consumption and for some of the deposits for a higher recovery. This is again a technology where we take an existing one, improving it for sustainability reasons, to come closer to our MissionZero target where we promised to be in the position to offer technology to be emission zero in the year 2030 in Mining too.Out of that, I would like to give to Roland, our CFO for the financial performance.

[Roland Munkerod Andersen, Member of Group Executive Management & CFO]

Thank you for that, Thomas. And a quick glance on the Group's financial results for the quarter. So as Thomas mentioned the revenue is moving forward 22%. We are keeping our gross margin largely for that and that means that the company is moving forward also on EBITDA to DKK 305 million and improving EBITDA margin from 4.6% to 6.5% compared to the same quarter last year and after clearing financing costs and taxes and so on profit and loss for the group equals DKK 95 million.If you look at our revenue, revenue growth of 22% compared to the same quarter last year. Most notable here is that our total capital revenue, our capital revenue, out of total revenue increases from 38% to 48%. And if we look at the right hand side, we also increasing total revenue as compared to previous quarter, but more notably we are largely back at the level we saw in Q3. Not 2020 but in 2019, which in many ways is more relevant comp.Our gross profit increased in nominal terms for the quarter and our gross margin stayed largely flat and the increase of capital revenue out of total revenue from 38% to 48%, obviously, way down on this margin percentage. And also a little bit of extra logistics cost and so on sits in this margin percentage by no more than we had expected.On the right hand side, we see that mining is the one carrying most of this saw a slight decline in gross margin. The same actually for Cement, a larger share of capital revenue but the reshaping activities in Cement now starts to kick in and also truly sit in the numbers and hereby improving gross margin.Our SG&A ratio improved down to 14.6%, DKK 682 million for the quarter and in that number, we carry DKK 30 million of acquisition cost related to TK, a little bit of Cement reshaping cost and also our sales cost is up a notch, driven by an increased level of travel and so on compared to same quarter last year.In general, our SG&A is well under control, our headcounts kept flat and that's also gives us some leverage from the significant increase in revenue that we have seen this quarter. And all in all, thereby improving our EBITDA strongly, we're moving forward to DKK 305 million and the EBITDA margin was up from 4.6% to 6.5% and this has driven both by Mining and Cement, Cement that is now back in the small but black territory for the quarter EBITDA lies.On the right hand side, we see that the improvement in EBITDA is largely driven by the revenue pickup and then there's a few other things up and down for acquisition costs and reshaping costs and so on. But ending up in DKK 305 million for the quarter in EBITDA. Our net working capital went up for the quarter after 5 consecutive quarters in roll off, reducing net working capital. We went up to 10.4%.On the right hand side, we see this is primarily driven by an increased level in activity and revenues, we are building a little bit inventories to circumvent the logistics challenges, but also to be able to deliver a higher level of service and aftermarket business. Trade receivables is up driven by an increased invoicing activities predominantly from our projects towards the end of the quarter, but also from our service and aftermarket business that did quite well through August and September.And administer the, we end the quarter at a net working capital of about DKK 1.7 billion in large -- in line with our expectations and also what we previously have communicated. And the increase in net working capital leads to a negative cash flow for the quarter, cash flow from operations, and also free cash flow. And if you look at the right hand side, the increasing the EBITDA significantly, the net working capital is increasing, I mean cash flow from continuing activities of minus DKK 48 million. We then have a negative cash flow from our discontinued activities of minus DKK 144 million and thereby the Group's cash flow, free cash flow ended minus DKK 253 million for the quarter.Our capital structure as Thomas mentioned we issued new equity of DKK 1.4 billion in the quarter, byways of a direct placing that money is meant for consideration of the TK Mining business that expected to close the second half next year and thereby also be fully paid. And on the right-hand side, that also means that currently our net in IBD position is zero, cash position zero and a leverage of 0.0x if we exclude the capital increase, our leverage would have been 1.4x coming out of Q3.And let lead us to guidance and our guidance is maintained for the full-year 2021 a revenue of DKK 16 billion to DKK 17 billion and an EBITDA margin of 5% to 6%. There is still some uncertainty due to the pandemic and potential logistic issues for Q4 around the guidance.And with that, I'll give it back to Thomas.

[Thomas Schulz, Group Chief Executive Officer]

Thanks a lot, Roland. Then of course as all quarters our in-house sustainability performance, it is important as a leading provider of sustainable solutions into Mining and Cement of course to report and to show what we do internally. I always highlight the safety performance and this year is not a good performance. We actually dropped back, we are on 1.8, we do a lot of activities to come back on track, last year we had 1.0 on the safety target, but it seems to be not only us with more activity out in the market and COVID measurements are lower down that the safety situation worsened a little bit.All activities are in place to show a better performance next year what we definitely expect. But quite important in the quarter 2 is actually on the mine side, we had the MINExpo in Las Vegas and the first time we showed the MissionZero mine concept to offer customers with existing plants, planning for greenfield, new sustainable, more sustainable related offerings into the Mining industry which was unbelievable well received.On the other side with our Cement colleagues, there we have the first commercial offering for carbon capture and that is what we do in collaboration with our colleagues from Carbon8. Out of that to wrap it up, strong order intake, good revenue, really good EBITDA improvement and guidance maintained for this year.And with that, I would like to go to the Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Magnus Kruber from UBS.

[Magnus Kruber, Associate Director and Research Analyst]

A couple of questions from my end. First on the revenue guidance, I mean given the very solid print in the quarter. I think even the upper end of the guidance just conservative. And if I look at your prior years, I think in the past 10 years, I think you've never delivered a lower revenue in Q4 than in Q3 and a lowest sequential improvements you have was 400 last year in there in the context of COVID. So if we should see similar sequential improvement this year that puts us around DKK 17.5 billion for the full year. So what am I missing here in terms of the revenue guidance?

[Thomas Schulz, Group Chief Executive Officer]

Magnus, thanks for the question. What we see is that we go towards the DKK 17 billion, that is what we, -- when we give a comment on the guidance. The important thing here to know is that we have to see how the end of the year, which is, as you rightly said, normally always a strong finish how that develops with logistic and other things. If that works very well, then it could be a good quarter. If it works really not well, then it could be not a good quarter. So and that is what the guidance actually covers in it. We know, -- I know you always think or we are too cautious or too conservative, but we know that some impact on logistic, I take NIMPAVA in China or any AVA event can have quite a harming situation in the short term, not in the long term. But December in itself is very important for us that actually is the reflection on it.

[Magnus Kruber, Associate Director and Research Analyst]

Okay. Got it. And secondly, of course, again very solid revenue in the quarter and the margins, of course, also impressive in the context of that. So for Mining, could you add this a bit on how you saw the mix in OE deliveries in the quarter between larger projects and other OE? And what we should expect into Q4? I mean given the implications for sequential margin development, sort of the mix there is quite important to get the numbers into it.

[Thomas Schulz, Group Chief Executive Officer]

Yes, the very good question. Yes. At first you see of course, and the EBITDA improvement, leverage regarding the top line cost versus top line but you see in the quarter 2, that we have significant higher capital business, then we had a year ago. So with that, the margin development, actually was good, but it was really more the leverage because the product mix was on the counter on the counterpart, you see that in the gross margin development. But overall, as expected, I have to say, there was no surprise in it, good performance of the organization then regarding the mix in the, in the -- because you see the mix with service and capital already presented then if it's smaller units and bigger deliveries it's actually mix out of both. We had a lower impact of logistic challenges, so we were able to deliver in the quarter some of the bigger stuff, too. So it was actually quite a I have to say, a normal quarter.

[Magnus Kruber, Associate Director and Research Analyst]

Okay. And in terms of the mix into Q4 is there any sort of notable change in the invoicing over the larger orders in Q3 into Q4 that we need to account for?

[Roland Munkerod Andersen, Member of Group Executive Management & CFO]

So thank you for that, Magnus. So to the extent that we are able to convert the backlog, you should expect the same type of capital service mix in Q4 and also that will weigh on the margin for Q4.

[Magnus Kruber, Associate Director and Research Analyst]

Okay, got it. And then, just finally, if I would, I think that, I mean I noticed the equipment orders, adjusted for the announced or like it to be down a little bit year-over-year in the quarter which surprises me given the solid backdrop, is that you are starting to the normal lumpiness or how should we think about that into next year?

[Thomas Schulz, Group Chief Executive Officer]

Yes, you know how it is in some cases, you are lucky to get it into a quarter or others are jumping out. We announced an order then at the beginning of October that could have been in the third quarter 2, then the picture immediately looks completely different. So we have a good order pipeline, we see that the Mining industry looks very, very healthy. We definitely can't complain about that good future ahead of us in it, and this is simply from one quarter to now about the variation, nothing special and our competitiveness is actually quite good.

[Operator]

Our next question comes from the line of Claus Almer from Nordea.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

First of all, Thomas, congratulation with your new job. I have 2 questions. I will do them one by one, the first question goes to the service orders which both within Cement and Mining was relatively strong, is this a new level or do you see a positive impact from customers placing orders ahead of a possible lockdown? That'll be the first one.

[Thomas Schulz, Group Chief Executive Officer]

Yes. Thanks for the congratulations. But I'll actually hope for that you congratulate us for a good quarter 3. If we look into the service part, if you take Mining, we are in line with the industry in it. We have a strong run actually you see that the stationery equipment suppliers into the mining industry on the same level actually, the mobile ones are on a higher level or we have minimum in the last few quarters, and that reflects the accessibility of the mine sites, because the demand is there, they have high production rates, they have high commodity prices and we see that service level actually not dropping back, you will see variances quarter-on-quarter, up and down, but in general, we are actually at 2019 level and taking it from there. Then in Cement, that is of course a very strong performance, especially of our regional organization to have a 44% increase. And in that of course we promote to help customers in the Cement part with upgrades and retrofits to fulfill on one side more sustainability regulations and on the other side to tackle that we have the overcapacity and that of course came in the quarter quite well. We have a very strong position in that and that is what you see reflected, do we expect that this journey what we see now for 5 quarters in Cement each quarter higher order intake? I would wish for but that's unrealistic, but we will have a good aftermarket time in Cement too, but don't expect that it will go on now with that growth rate, that is unrealistic.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

But still growth?

[Thomas Schulz, Group Chief Executive Officer]

You will more see the same picture like in Mining. Some quarters with growth, some with little bit down based on where we come into next year, or mid of next year when we compare with stronger quarters this year, then you will see different percentage figures because one thing what we should not forget, all the figures of all the suppliers in 2021 are compared with an extremely low year 2020, but we expect that we are in a similar level, slight growth up a little bit down. So you can say new norm. But I would more look that is what we do, not so much to 2020, we look more to 2019 to compare with, that is more realistic comparison.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Sure. Okay. Then my second question goes to the pricing given the improving activity level in general are you starting to see a better, should we say contribution margin in the backlog? Are you actually able to price up in your order intake?

[Thomas Schulz, Group Chief Executive Officer]

Yes, what we see is at first, you know that the pricing has 2 sides, one what we get towards the customers and one what we get towards our suppliers. And our suppliers enjoy quite a cost increase and we are able with our, as I said in the presentation. I think really good supply chain procurement and logistics organization to take a debt in a good way and that's what we see there we are able to get that towards the customer and to communicate that in a positive way and that is already in itself quite a big figure. If that situation, what we see is ongoing longer, what we believe a few quarters more that gives, of course, companies like us the possibility to raise the pricing more and more, and we are not the only one you see McDonald's now out with price increase and of course we utilize the tool not only over the Big Mac Index. And with that, we will come out of that situation stronger in the pricing situation. So we see pricing actually neutral to more positive in that range.

[Operator]

Our next question comes from the line of Max Yates from Credit Suisse.

[Max Yates, Research Analyst]

So Thomas, just my first question would be around the margins and thinking a little bit further forward in Mining and so you used to have a 11% to 13% margin target for Mining, it looks like you'll be around 9% this year with would still DKK 100 million scenario percent of impact from the on costs. So I just wanted to get your perspective on kind of when you think back to when you did have that margin target for the division, how has the business changed or how has the market environment changed? Because clearly from a volume perspective, things are looking relatively good. So just wondering kind of in your perspective, is there any reason versus the environment when you gave those targets and compared to today, assuming you execute on your backlog and the market continues to grow which capex indications would suggest it will. Is there anything fundamentally different today versus when you have that target?

[Thomas Schulz, Group Chief Executive Officer]

Yes. At first, the fundamentals or the difference what you have is we come out of the COVID situation and COVID is, forget about the viruses and so on, you have to look into the logistic challenges and logistic challenges cost money. That's as simple as it is, what we do and you saw that a little bit in the networking capital movement in the quarter, we are trying to supply as quick as we can because if you stay in the supply time as agreed with the providers with the logistic providers at the beginning of the year as the additional cost is not high, but if you move one week out it gets unbelievably expensive. So that is an uncertainty what we see in the next few quarters still hanging over us. Then you have higher commodity prices which goes into that whole calculation tool and of course, we are very much -- and actually we are quite good in bringing the prices towards the customers up but you'll always have a little bit of a lagging effect in that too. So these 2 give a kind of an uncertainty that I can't stand here until now, we are then coming, coming back into the old range or so, it takes a little bit more time, we will see. I think we move, what we see we move in the right direction and we will communicate if we have more clearance on it absolutely open to the market, how we see that the longer-term part.

[Max Yates, Research Analyst]

Okay, that's helpful. And maybe just then Roland. If you could help us with, just when we think about your purchasing agreements, any sort of hedging that you have on raw materials. Is there anything when you look at your sort of hedges and all the way that you purchased raw materials all the agreements with component suppliers that mean the current commodity prices are not sort of fully reflected in your cost of goods sold so far and that we should see those kinds of meaningfully rise from here based on commodity price increases that happened earlier in the year. So I'm just trying to understand if there was any lagging effect that you would expect to come through in your business in the next couple of quarters?

[Roland Munkerod Andersen, Member of Group Executive Management & CFO]

That's a good question. And it links back to what Thomas was saying so, first of all in many of our larger contract we have price adjustment clauses. So that's one way of hedging it and as Thomas says there may be delays from these adjustments happened and also we can implement and then in our commercial terms side and then hangs a little bit in our Q2 and in our Q3 may also being in Q4 and Q1, but these are things that we are working quite intensively with as Thomas also said it and that I think we are mitigating relatively well. So I wouldn't see a large commodity exposure risk on the company. So that's one thing and second thing is actually for many of the commodities increasing commodities is also good for our customers, because many of these guys are actually living from this. So it's, it's a balanced picture. And I think that our hedging or mitigation policies works quite strongly for the company.

[Max Yates, Research Analyst]

Okay. And just my final question. I just wanted to ask on the sort of new technologies that you talk about, I mean the one that I hear a lot about is in-pit crushing both from you and from the industry. So I just wanted to know I mean could you put any sort of numbers around or help us understand kind of how mature this is within the industry? I mean are you doing, is it literally a couple of pilot project? Is this something where it is that kind of meaningful product within your order intake? I'd just love to know kind of a little bit more about sort of where we are actually in the rollout there and kind of how applicable this is across the entire industry or whether it's only really in more specific Mining applications.

[Thomas Schulz, Group Chief Executive Officer]

As a mining engineer, I really love that question. Thank you very much. So make a long story short this in-pit crushing technology is offered to the industry for 3 to 4 decades. But what we see now with the sustainability run, with the run to how to say we have open pit mines, not so open any longer and to get more energy efficiency to electrify, to replace trucks which are difficult to electrify with belt conveying systems and in-pit crushing, this is the last 2 years or 1.5 years is a hell of a run on that technology. We have a lot of cases where we work with clients, how to mitigate it or how to bring it into their pit in existing pits and especially with greenfield. When we look into what does it mean, it means actually for the customer, not to have a truck fleet of 200 big trucks to have a 2 or 3 belt conveying systems and crushers in the pit. If we look into one of these installations, we talk normally if it's a bigger pit, bigger copper mine and so on. We talk in the range of EUR100 million for such an order and can be significant more, can be some less based on what the customer already has. If you look into how many hundreds of open pit mines we have and some of the greenfield are going open cost, open pit too. And that makes it, especially for the greenfield very likable to go into input crushing because the design of the pit looks different than in the conventional method. So from that point of view, this is a big business to come in from the industry and to finalize it a big part or one part of the Thyssenkrupp Mining acquisition is actually targeting that business, our colleagues of Thyssenkrupp Mining, as well as the business what we took over from the Sandvik Mining system. They are experts in that and we have all the equipment, we have all the competence to be favorably positioned there and that's the reason why whatever is out in the market we work on.

[Max Yates, Research Analyst]

Okay. I mean I completely agree it sounds, and makes a lot of sense. Is this something that is largely sort of still on the discussion or have we actually seen sort of orders flowing through? I understand that it's kind of talked about, but I'm just trying to understand whether kind of we're still in discussions or it has actually translated into? Do we have working example, not just from you, but from any?

[Thomas Schulz, Group Chief Executive Officer]

Yes. We have orders in the already it's orders in the order backlog in, but they are smaller ones where we replace here and there. And don't forget, if a customer in an existing plant go into that, then the design has to change. So it's a little bit the bigger thing. The most important is that customers that we are not going to the customers, any longer to offer it. It's actually that the customers come to us to get a quote on it. And that's really a breakthrough. Then the order pipeline for it looks good and they will come, it's not only discussions.

[Operator]

Our next question comes from the line of Lars Topholm from Carnegie.

[Lars Topholm, Co]

I had a couple of questions. So I know it's probably difficult to answer, but if I look at Cement's Q3 and compared to Q3, '19 you sort of back to the pre-pandemic level in terms of order intake, but 20% below in sales. And if you look at Mining, you are back on order intake and slightly up on sales. I wonder if you have any soft assessment on how order intake and sales might have been affected by the pandemic? That's the first question. And then a second question is, to your slide about the RFC technology. So if customers can get much more out of our flotation cell. How is capex per capacity units affected, because presumably it means less business for you to sort of generate the same amount of the copper or gold? And then a third question, I can see that after H1 you wrote that the use of supply chain financing had slightly increased and after Q3 you say it has increased. So I wonder if you can put a number on the increase and comment on how this affects your net working capital position? And then a final question. So the DKK 130 million in cash withdrawal from your discontinued business, I just wonder what the dispute is about, and now you treated as a receivable if you are wrong and the customer is right would it then be DKK 130 million that is booked as an expense? So how should we look at that, from an accounting perspective?

[Thomas Schulz, Group Chief Executive Officer]

Yes. Lars, good to have you here on the call. At first, with the Cement and order conversion into sales, what we have in Cement is that big part of the Cement market worldwide is still looking into not to spend too much cash and too much investment money. On top of it, of course, based on the restrictions, Cement is more local organized, they -- most of these clients we work with are not having this global setup and global internal company logistic as we see it in Mining. That's actually the reason regarding the realization of the order intake into sales. Then we have the reflux classifier question. As it is with all equipment in the processing part, it never ever fits to all sites and everywhere, it is specialized, you can't replace copper, we see it in gold, we see it in some other, some of our commodities and especially deposit specific quite a utilization of that technology. It doesn't reduce our offering, actually it increase. Because when we look into conventional flotation then we buy a lot of steel. The tank, all the beams, all everything around the building actually and that is the part what we reduce. So with the relative portion of our equipment versus the total supply for flotation installation is getting significant bigger. And with that our margin improves relatively too because we don't need to buy a lot of let's say unintelligent steel like beams and stairways and handrails and I don't know what else. Then the third question was on.

[Roland Munkerod Andersen, Member of Group Executive Management & CFO]

The third question, I think that was supply chain, financing loss. Thank you for that. And you're right, we haven't given you the number of what we're seeing is that is significantly less than it was by end of the year last year and there was a billion and today it's less than half. So it's not big swings between the quarters up and down, so that was on supply chain, financing on...

[Lars Topholm, Co]

But it increased in Q3 right? And when it increases you book payables at 150 days of credit, which boost your net working capital, which is still a drag on cash flow. So I wonder if you can put a number on the drag on cash flow if you?

[Roland Munkerod Andersen, Member of Group Executive Management & CFO]

Yes. But that's a very little loan book. I understand the question, Lars. So we are sitting at a relatively stable amount of supply chain, financing that is less than half of what it was when we came out of last year, it's going a little bit up and down and this quarter it has gone up, but the impact on net working capital is negative, right. That's right. But it's very, very little number. Then you had a question on the, some...

[Thomas Schulz, Group Chief Executive Officer]

And that was the -- we already flagged in the at the interim's report, effect is that we have a very extraordinary situation, which we don't like and what we rejected the claim, that the customer took the performance guarantee. This is very rare, not only in the year. This is very rare in my whole being here in the company and that happened. Yes, that happened and of course we rejected the claim with everything what we have and we strongly believe that we are on the right position there. So we know that we are on the right position, our concern more confidence on that, then I just do, if you would see any risk of it, then we would treat it differently.

[Roland Munkerod Andersen, Member of Group Executive Management & CFO]

And so, to your question loss we have treated that as a contingent liability is on the other receivables that means that if against all our expectation, we will have to pay, it has to be expense.

[Lars Topholm, Co]

Okay, that's clear. Just getting back to my first question Thomas on Cement order intake being on par with pre-pandemic levels. Is it too optimistic to interpret that there might be a slight underlying improvement in that market, if level on par with pre-pandemic levels still drag down to some extent by the pandemic, or is this just wishful thinking?

[Thomas Schulz, Group Chief Executive Officer]

I make it like that. If you remember back in 2019, 2019 was already a very, very low year. This was not a good year for Cement. We had a good revenue recognition in the fourth quarter. But actually, when we look at the order intake in the activity level in '19 that was not a good year. And to go back in Cement on 2019 level is not satisfying. So the second thing is, it's predominantly service where we really perform here and that is the green agenda and to help with upgrade and retrofit where we invested in the reshaping a lot. You remember that we took out fabric filter, the Moller brand and a lot of capital stuff where we think it's not core and or was not profitable and we refocused and invested quite a lot in offering customers competent services to help them now, today to reduce environmental footprint, what they have, and that pays off. But no matter that it's a 44% increase of course we compare that with 2020 which is not a great year at all for Cement, but '19 was already, not a good order intake here for Cement.

[Operator]

Our next question comes from the line of Laurits Kjaergaard from ABG.

[Laurits Louis Kjaergaard, Lead Analyst]

I'd like to congratulate you on a strong Q3, very impressive. Thomas, today you have been very upbeat it seems from my perspective on today's conference call in the future of FLS. I understand that you've been offered a new position and congratulations. But, may I ask you why are you leaving FLS?

[Thomas Schulz, Group Chief Executive Officer]

At first, I don't see that I'm more upbeat than I was before, no matter that we, thank you for the question, actually. But no matter that we really rehearse, which kind of words I use in which tone. But it is difficult. So don't take it as an upbeat. It's the same as before. The company is in a good shape. We have a good balance sheet. We have a fantastic good strong management team, the best management team what I enjoyed, since I'm in FLSmidth, I can say that loud and clear, the top organization around the world. This is important. Our MissionZero is good, and I have to say I'm unbelievable happy at the Board so too, to have such a competence like Mikko in the company to take then the next step of the company's development. So that I leave is clear. It has to happen. That's with the role of the CEO and I'm definitely of the opinion that CEO should not stay too long. The change from time to time, so is quite good and I'm already one, if not the longest lasting in the whole sector. And to, maybe in the C25 too. If we then look into why timing now, take the Thyssenkrupp acquisition as one argument. We have the signing. Now the integration planning comes and in the mid of next year, most likely, we have the closing. And then the full impact of the performance will be in 2024. It is never ever good that the manager is leading the integration planning, but then not being available to make the execution. That would mean I would have to stay up to 2024, which is from my point of view and Board's point of view, definitely too long for CEO to stay. Then it is logical that it's now the time. Our succession planning process, which is an ongoing thing. And what we do since years and it's quite well done is a logical step that you can trigger it and on the other side Mikko is in since 1st of January and his performance throughout the year in leading the Thyssenkrupp, in leading Mining really brought us, the Board and myself to the conclusion. Now this is the time to do it. It is from a personal point of view. Of course, that I can say that too, because I don't like to leave but that's the way it is that's life so, and the company will have a good future of course.

[Laurits Louis Kjaergaard, Lead Analyst]

Just a quick follow-up, I completely understand the rationale and the points but nevertheless Mikko has very much been given the role of integrating TK Mining in FLS from the former manager I, you wouldn't have been better perhaps for him to have made decision back in the day as a CEO, because now he's very much given the role to integrated.

[Thomas Schulz, Group Chief Executive Officer]

You mean that he should have been taken the role earlier?

[Laurits Louis Kjaergaard, Lead Analyst]

Yes.

[Thomas Schulz, Group Chief Executive Officer]

Yes. Okay, that's of course another as you see, we didn't do that and as you see Board and myself and top management, had our thoughts on it. And when you look into the CV of Mikko, he worked in Metso, he worked in Nokia, he worked in KONE. He has a very broad range. And of course, it's always good if a CEO all is an internal recruit. I came from outside, was a challenge for all the people working with me, I guess and maybe for me too little but with Mikko as he acts today, it is as he would be forever already in the company. This is a fantastic smooth transition and yes, great.

[Laurits Louis Kjaergaard, Lead Analyst]

Okay, fair enough. Then just on your guidance. Usually many of your customers they stock up in Q4, shut down operations for maintenance, etcetera. So it's a great opportunity for less to generate sales also from aftermarket services. I think the dynamics will discuss a little bit before, but I didn't find it's too clear. Some of the revenue pulled forward from Q4 into Q3, given the more cautious Q4 assumptions relatively to normal season, or is there something fundamentally going on in Q4, which we should be aware of?

[Roland Munkerod Andersen, Member of Group Executive Management & CFO]

Thank you. Thank you for that, Lars. So there is nothing fundamentally we should be aware of. Yes, we had a strong Q3 revenue wise, strong conversion, strong end in September and high invoicing and so on, but at the same time, we are still uncertain of our full ability to execute the backlog, convert the backlog to revenue through Q4 and into December and hence that's why we are saying, if everything goes reasonably according to our expectations, we will trend towards the other end of the revenue range, that's how we're thinking about it.

[Laurits Louis Kjaergaard, Lead Analyst]

So there is no sales, which have been put forward from Q4, into Q3?

[Roland Munkerod Andersen, Member of Group Executive Management & CFO]

No, no, no.

[Laurits Louis Kjaergaard, Lead Analyst]

And just last question. If we look on the 9 month results on the number of employees in Cement. They are down 22%, it's almost 1,000 people at the same time order intake is up 24% in the same period. Do you have enough employee capacity to execute on the orders? I'm just wondering about the dynamics there between the 2 numbers.

[Thomas Schulz, Group Chief Executive Officer]

Yes, yes, we have and we have an agile system if though, if you would run into a squeeze what we don't. Fact is that we took some business out, there were people related with fabric filter, Moller and O&M, which normally, which always has quite a lot of people in one O&M contract. That is a big part besides the reshaping of the industry. So don't get concerned with that negative figure. A big part of it is actually to let business go, which is not profitable, not strategic important and or too high in risk.

[Laurits Louis Kjaergaard, Lead Analyst]

Can you just fabric, Moller and O&M? Can we say how many of the 1,000 people engaged with those 3 operations and how much so, yes I think reshaping?

[Thomas Schulz, Group Chief Executive Officer]

I could. But I think this is getting too much into details, really.

[Operator]

Our next question comes from the line of Klaus Kehl from Nykredit Markets.

[Klaus Kehl, Chief Analyst]

Two questions from my side. First of all, if you look at Cement. What would be reasonable to expect for Q4 and especially in terms of earnings? And secondly, and so how much you've been fairly bullish on the mid-term outlook for where for Cement. But could you try to quantify that in any way for instance when could you be back to let's say revenues of DKK 6 billion DKK 7 billion and an EBITDA margin of 5% or anything? Any color on that would be helpful.

[Roland Munkerod Andersen, Member of Group Executive Management & CFO]

Yes, thank you for that Klaus. So maybe on the Cement. As we have said we are continuing the reshaping activities and Cement will be negative for the year that's still the case, but now we have turned back in Q3 and we expect to continue to do that in Q4.

[Thomas Schulz, Group Chief Executive Officer]

And then the question regarding the mid-term outlook. Yes, I can't guide on the mid-term outlook. And that is -- that would be, that would be not fair to make it like that. We are upbeat about that what the demand side shows. The demand side with the stimulus packages, with the infrastructure bills, with all the necessary communicated out of Societies, Governments, Companies communicated infrastructure investments to tackle the climate change, that is where we dwell on. If you look into, I take now to COP26 from this week and last week 7% with 8% CO2 contribution in the world is seen as one of the, yes, let us say not so positive industries on earth. And there is a huge push, a huge push that Cement gets from a technology point of view, better and with that reducing significantly the CO2 and other emissions. And we are in the top position there. We invested a lot in the last few years, or actually for quite a while not only in digitalization and sustainability, in technology development. This is high-tech what they ask for, high-tech and that is where we play. So out of that to finalize it, we had in the mid of the 2000, the situation that with the China boom, a lot of mid-market more standard equipment, more commoditized equipment is hitting the Cement industry and we saw that year-on-year which challenges we had as a premium supplier. And this market, the mid-market took 60% - 70% of the whole market range. And I can give the figure, we had roughly 60 to 70 new plants awarded to suppliers in the year 2012. In the year 2019, it was 6. So that is what Cement was about. But now with the request of sustainability and digitalization, the premiums are back and we foresee that the premium market, which was before maybe 30% - 35% will grow again, will not get bigger than the mid-market. But definitely bigger than it is today as a share of the total. Cement. And on top of it the whole Cement growth. That's the reason why Cement will be in a few years, a good business to be in.

[Operator]

Our next question comes from the line of Debashis Chand from Societe Generale.

[Debashis Chand, Equity Analyst]

I have 2 questions remaining. First question is on mining. Some of your peers are also flagging more of the larger size orders to come through next year. I appreciate you also had mentioned a strong pipeline. But do you share this sentiment or is it still too early to make such a call?

[Thomas Schulz, Group Chief Executive Officer]

Yes. We are not different to the – to peers and that we actually had quite a good run and the lead in the peer group, but that moves, of course, quarter to quarter and we are positive on larger orders next year, too. Absolutely.

[Debashis Chand, Equity Analyst]

Understood. My next question was on the Mine service growth, but I just want to understand how much was it driven by the pent-up demand? And do you see further and before pent-up demand to continue in the coming quarters?

[Thomas Schulz, Group Chief Executive Officer]

Yes, the situation, what we have in the Mining industry is that they -- as we said, they are still not completely through to make the large investments all over. COVID related and a big part of that is actually sustainability because when you make today a big installation investment, then you have to be sure that the new rules, which are coming and loss regarding water, emissions and so on, that this new investment fulfils that all in the future too. So that is where the governmental bodies and permitting bodies in the different countries have to finalize their setting of rules. If that is true, and COVID, it's not a big issue than any longer, then you will see significant more of these activities getting into the order intake. Then when we look into the service part, service is of course reflection of the production rates and at the same time of lower investment into capital as I described at the beginning. And that shows that we have a fundamental good base for service activities. But when you look the last 3, 4 quarters back is a little bit a bumpy road, some quarters are higher, some lower in the order intake that is normal in the Mining service behavior based on that how customers in the different areas of the world and commodities like to order or not to order. But we are quite positive in the demand for service in the Mining industry stays as it is.

[Operator]

We currently have no further audio questions. I'll hand back to the speaker for any final remarks.

[Thomas Schulz, Group Chief Executive Officer]

Thanks a lot for all the questions. Thanks a lot for all the good attention and participation here. We would like to say goodbye here out of Welby, and wish you a safe being no matter where you are, all the best. Bye.