FLSmidth & Co A/S

CSE:FLS

Earnings Call Analysis

FLSmidth Exhibits Stable Service Market and Growth Prospects

FLSmidth's Q3 performance reflected solid profitability, achieving 13.3% adjusted EBITDA in Mining and 10.8% in Cement. Order intake stabilized around DKK 2.7 billion, aligning with annual expectations. A notable strategic agreement in Uzbekistan positions FLSmidth to dominate the local market. The company foresees a potential uptick in capital orders starting in late 2025, contingent upon current study work translating into projects. They aim for a tax rate reduction, reaching around 30% by 2026. Despite current slowness in capital markets, FLSmidth is focused on cost control and high-margin services to prepare for future growth.

A Business in Transition

In the latest earnings call for FLSmidth, executives highlighted a significant phase of transformation the company is undergoing, particularly in its Mining and Cement segments. They reported a consolidated Q3 revenue of over DKK 5 billion and detailed efforts to streamline operations and enhance profitability. FLSmidth is pursuing a strategy to shift towards higher-margin, lower-risk business models, especially focusing on mining services. This focus arises from a broader trend in the industry where global ore grades are declining, increasing the need for efficient mining operations.

Profitability Gains Steeped in Strategy

The adjusted EBITA margin improved significantly to 12.6%, marking a high point in recent quarters. The company reported an increase from last year's group margin of 8% to the current 12.6% through rigorous cost management and a favorable gross margin that benefited both Mining and Cement operations. The strategic focus on services as a core revenue stream is anticipated to bolster further profitability as the company shifts resources away from capital-intensive projects.

Guidance on Future Performance

Looking ahead, FLSmidth adjusted its revenue guidance for 2024. The Mining segment is expected to maintain revenue at around DKK 15.5 billion (unchanged), with an improved expected adjusted EBITA margin now forecasted at approximately 13%, up from a previous range of 12.5% to 13%. For the Cement segment, anticipated revenue is set to remain between DKK 4 billion and DKK 4.5 billion, but the adjusted EBITA margin guidance has been increased to approximately 9%, from a prior estimate of 8% to 9%. Non-Core Activities segment is expected to generate a total revenue of around DKK 200 million, while losses are projected to be between DKK 200 million to DKK 250 million, improving from earlier guidance.

Navigating Economic Pressures

The ongoing economic landscape presents certain pressures, particularly regarding mining operators who are facing declining asset values due to lower ore grades. This results in increased operational expenses and necessitates investments in upgrades and retrofits. FLSmidth's executives expect a gradual recovery in capital expenditure (CapEx) in the mining sector, with significant activity anticipated by the end of 2025 and into 2026. The timing of this recovery remains uncertain; however, study activities among engineering firms indicate preparedness for future projects.

Streamlining Operations Amidst Challenges

FLSmidth is in a position to further reduce its Selling, General & Administrative (SG&A) costs. Executives have noted that the ongoing restructuring efforts are essential for maintaining a lean organizational structure as revenues ebb and flow. They emphasized targeting absolute reductions in costs rather than percentages, which reflects a strategy aimed at enhancing operational efficiency. Additionally, the company is poised to finalize its Cement divestment process, which is progressing on schedule, with potential deal signings expected by year-end.

Looking for Growth in Services

As FLSmidth navigates through this transformative period, there are promising signs regarding its service business. Executives expressed optimism about future growth prospects driven by increased service demands stemming from mining operators needing to process more materials due to declining ore grades. This shift aligns with the company's strategy to cooperate strategically, evidenced by a notable agreement signed in Uzbekistan. FLSmidth is expected to be a significant player in upcoming mining projects in the region.

Conclusion: A Strong Position for Future Opportunities

In summary, FLSmidth is making strategic and calculated efforts to enhance profitability while navigating economic hurdles in the mining industry. With successful cost reductions, improved margins, and a clear path toward increased service revenue, the company is poised to emerge from its transitional phase stronger. Investors should closely monitor its progress and respond to any evolving market conditions that may impact operations and growth trajectories.

Earnings Call Transcript 2024-Q3

[Mikko Keto, executive]

Good morning, and welcome to the Q3 earnings call. I'm here joined by Roland, our CFO, and we walk through the main events and results for quarter 3. You might see the slightly updated visuals on the first slide. So myself and Roland has been busy here in the head office looking at that.

Firstly, highlights for the business [indiscernible] quarter 3, and it is exactly as we planned, namely focusing on the profitability. We achieved adjusted EBITDA for Mining business 13.3% and then for Cement, 10.8%. And I would say that's a good achievement of the team here in FLSmidth. If you look at then the total market, service market is stable. And we indicated in the beginning of the year that the service market is stable. In our terms, it means that typically, order intake would be between DKK 2.6 billion and DKK 2.8 billion. Last month was on the high side, this is on the low end of the range. But year-to-date average, DKK 2.7 billion. We are actually happy with that one. And at the same time, the profitability journey in service continues so that all that order intake is high profitability.

Positive of the execution is that we implemented new ERP system in our largest production facility in Arizona related to the pumps and cyclones, and that has been successfully completed, and the order execution is back on track in pumps and cyclones. So that was a good achievement from our organization.

Then I would like to highlight strategic cooperation agreement that we signed in Uzbekistan in October. And if you look at the value of that one, estimated value, it's the largest -- one of the largest, if not the largest, agreement we signed as an FLSmidth, and it's a clean supply of products and services, which means that there's no third-party content, and that is exactly what we want. And we are supplying 80% of the flow sheet in Uzbekistan. We like the country. We are established in Uzbekistan. And if I look at the prospects in the country, we are and we will be a fairly significant player in the country for all mining investments going there. Capital market is still on the slow side, and the activity will remain subdued until, I would say, maybe end of '25.

I've visited quite a few EPCM companies around the world, the engineering companies, everybody is busy with the study work. They are full on doing study work. And study work typically is the pre-phase of the order and then for them order and then project execution. So we expect that all the study work that EPCMs are doing in all the mining hubs will result in significant CapEx investment probably in end of '25, '26. And mining would be very cyclical. It will be like a ketchup bottle opening that once it starts, it will start at a fairly significant pace.

Cement business, we are preparing cement for sale. And we've been selling over the last year or so 2 product lines already, and that has an impact for the comparison numbers. So that order intake comparison year-on-year is difficult to do because of the divestments. We continue derisking the asset, meaning that we have declined any risky order for the capital business because we don't want to bring risk in that would actually slow down or make the sale of the asset more difficult.

The service business is progressing in Cement. It's a little bit on the low side for the quarter, but we expect some pickup in the fourth quarter. Sustainability, we continue progressing in all our science-based targets, more focus is needed for the safety. We are investing at the same time as we are doing cost out in the company. We are investing in the front end. And in the future, we are pushing more and more resources to the customer interface and less in the back end.

We continue our business simplification journey, which means that we will have lean, small corporate office. And then most of the resources are in businesses, in the product lines, close to customer, and then the support functions are largely located in the global business centers, where we automate and streamline the activities. Cash flow is positive for the quarter.

If I need to pick a point from here where we focus on improvement, it is the safety. We've been improving safety year-on-year, but it's still not at the level we want safety to be in. So we continue investing to safety in all our operations. That is a point of emphasis for us.

Then if you look at then the service order intake for the Mining, we indicated in the beginning of the year range DKK 2.6 billion to EUR DKK 2.8, and now it's slightly in the low end of that range. But year-to-date, DKK 2.7 billion, and we are happy with that one. And we expect some more pick up again in the fourth quarter for the orders. You need to also bear in mind that year-on-year comp includes last year some still order intake revenue from basic labor services. We have exited basic labor services and doing spare parts, wear parts and professional services only going forward and upgrades and retrofits. So there's a small impact to the order intake and revenues from exiting those large labor service contracts.

We expect the market to remain stable for services for '25. And then in '25, we expect capital order intake and capital business to be roughly at the level it is this year. So no big change for that one. As I said earlier, we see a high level of study activity amongst the EPCMs. And sooner or later, that study activity will result in more CapEx investments, especially brownfield expansions and new lines to existing plants.

In revenue, the positive point in revenue is that we did a full new ERP implementation in our facility in Tucson, which is the main operation for pumps and cyclones, and it has been successfully executed over the last couple of months, and we had a learning curve, which had a small impact on the revenues. And now we are back up and running with the new ERP system. And so that was extremely good learning. So that is where the revenues are picking up.

Year-on-year comparison, still some labor service contracts in revenue as well in the last year. We only have one remaining now. So going forward, you will see very little impact from the business mix. One might say that the highlight of the quarter is the fast improvement in our profitability. And also the gap between adjusted EBITA and reported EBITA is shrinking. If you look at the bottom of the right side of the slide, you can see reported EBITA improvement from 8.2% to 12.4% is very significant. So it means that also the gap between adjusted and non-adjusted EBITA is shrinking. So this is a big achievement. And in our terms, we are well ahead of the transformation of the company, almost 1 year. So the profitability improvement is progressing fast.

Then if you look at the Cement, I wouldn't pay too much attention to year-on-year comparison for the order intake for the quarter. We would expect typically service to be between DKK 650 million and DKK 700 million, and now it's on the low side. There was slowness in a couple of the markets, and then we are expecting some pickup in the fourth quarter. So between DKK 650 million, close to DKK 700 million is a good level for the service portfolio or for the portfolio we have remaining.

We have not taken any risky business in for the capital business, so only clean low-risk product orders. And we continue to be restrained in that area until we find out who will be the owner of the Cement asset. And then, of course, new owner can decide the strategy, whether they want to take more capital business in and what is the risk level that they want to have in the Cement business. But we are preparing the asset for the sale. We keep it nice and clean, high profit, low-risk asset. And this is also reflected in the revenues. And if you look ahead, still the share of the service revenues will continue to increase in relative to the capital revenues that will further improve and support the continued profitability journey. So the share of the service will continue to increase if we look ahead.

Also very significant achievement in Cement is improvement in profitability. And if you may recall, last year, we recorded one-off gain of around DKK 100 million from sale of one of the product lines. So if you look at comparable numbers, it is very significant profitability improvement for Cement. And as I said earlier, we have a nice, clean asset, service-oriented, low-risk asset to sell now, and we are happy with the recent development of the Cement.

NCA, we are seeing back end of the NCA, and we are looking to close the segment fully end of the year and having accumulated loss below DKK 1 billion, which was actually our target. It started for DKK 1.2 billion estimated loss at most. And then we turned it down to about DKK 1 billion, and we will close the segment below that number. And as we discussed before, the speed of the -- getting rid of the backlog has been amazing in starting third quarter '22 and then ending end of the '24, it's amazing speed of the backlog execution, canceling contracts and getting out of this hugely loss-making and risky business what we had in our books. So very pleased with that one.

And then handing over to Roland to go through the numbers in more detail.

[Roland Andersen, executive]

Thank you for that, Mikko. So looking at the consolidated picture, a revenue of a bit more than DKK 5 billion for the quarter and adjusted EBITA of 12.6% and a reported EBITA margin of 11.4%. And net-net of everything, a profit and loss for the group of DKK 289 million. If you look at the gross margin, we have had a strong gross margin quarter. It's the best quarter for a long time, both in nominal Danish kroner terms, but also in terms of our margin. And on the right-hand side, we see this is driven both by mining, that is in the higher end of 31% to 33% that we have talked about the last 2 quarters and also Cement had a strong Q3.

SG&A cost is coming down. Predominantly the restructuring efforts we have done in Cement and also in NCA is driving it down. And the ongoing simplification efforts and move to operating model in the Mining segment, we will see impact as we move forward from here over the next year or so where the next wave of SG&A reductions will come from. All that, as Mikko said, stacks up to a group EBITA margin that is also many quarters high, both in nominal terms and also in terms of margin, 12.6% adjusted EBITA margin and 11.4% reported.

On the right-hand side, we in broad strokes, illustrating where that comes from. So same quarter last year, we had a reported group margin of 8%, 2.1% in integration costs related to our integration of thyssenkrupp mining division. So an adjusted group EBITA of 10.1% [Audio Gap] down in CA Cement and also in Mining, but gross margins is outweighing that. So adding that plus a few savings in SG&A, our adjusted group EBITA margin is now 12.6%. And deducting the transformation and separation costs we have spent in Q3, we ended the group's 11.4% reported margin.

Our net working capital is up a notch 10.6% of revenue, predominantly driven by work in progress. All that leads to an EBITDA adjusted of DKK 662 million and adjusting for noncash items from provisions and also the change in net working capital, cash flow from operations of plus DKK 357 million and adjusted for investments and disposals, we end up with a free cash flow of DKK 129 million for the quarter. And that means we're reducing our debt a notch, maintaining 0.6x leverage, well below our capital structure target.

All this has led us to review and update our full year 2024 guidance. And if we start with the Mining segment, unchanged revenue guidance, we expect to end around DKK 15.5 billion worth of revenue. If we look at the adjusted EBITA margin, previously, we said we would end between 12.5% and 13% adjusted EBITA margin, and we will now adjust that to around 13%, so the higher end of that range.

Cement, likewise, unchanged revenue guidance of DKK 4 billion to DKK 4.5 billion. And instead of 8% to 9% adjusted EBITA margin, we now expect to end around 9% adjusted EBITA margin, so again, the high end of that range. Non-Core Activities are progressing well. The scope in cancellation means that we won't do as much revenue as we had planned, which is a good thing. So instead of revenue of DKK 200 million to DKK 300 million, we now expect the full year to end around DKK 200 million. And also the loss will be less than expected. So now expected to be around DKK 200 million to DKK 250 million instead of DKK 200 million to DKK 300 million. And that also means that the total loss in our Non-Core Activities segment over the lifetime of that segment will be less than DKK 1 billion when you add the whole thing up. So we are content with that.

If you look at our strategic transformation road map, most of the derisking is done in both in Mining and in Cement. We are also on track to shut down our Non-Core Activities segment by end of 2024. What still stands out is our simplification and move to the operating model in Mining, and that will happen over the next year, 1.5 years, where we will bring our -- mainly our support functions in place in our global -- 3 global business centers around the world and also a few more adjustments in the business lines.

And if we look at the group level, we're basically done with the legal separation of Mining and Cement and ready to sell Cement, and the divestment process is moving forward, as Mikko said, according to plan, and that means that we are able to sign a sales deal at the earliest by end of this year. And if that won't happen, it will be in the beginning of the new year. So fully as expected.

And with that, we'll give it over to Q&A.

[Operator]

The first question we have is from Christian Hinderaker of Goldman Sachs.

[Christian Hinderaker, analyst]

My first one is on the hesitation you're seeing in terms of the CapEx environment for large brownfield and greenfield projects, seeing a bit of divergence here, I think, in the messages from the upstream and downstream equipment suppliers. I realize hard to quantify maybe, but based on your customer discussions, how much of that do you chalk up to permitting challenges versus perhaps financial considerations like interest rates or customer budget approvals? And how much might even be fatigue with recent price increases post COVID? I'll start there.

[Mikko Keto, executive]

No, no. I think, of course, the underlying issue in the whole industry is permitting apart from a few countries, where it's kind of government support. So for example, in Central Asia, permitting is faster because of the government support for the industry. But in many other parts, the permitting causes big delay. But you talked about -- or you asked about miners challenges at the moment. And of course, if you think about many of the mining assets, what our customers are holding, the economic value of the assets is under pressure because the ore grades are going down and hardness is going up. And at the same time, the CapEx and OpEx have seen increase.

So it means that if you discount the value of the kind of mining asset and look at it, so I think there's a little bit of economical pressure for the operators to optimize operating the mining asset. And we believe that some investments will be needed to increase economical life of the mine and economic viability. So that is typically more upgrades, retrofits, improvements, debottlenecking, all that sort of thing, so which has an impact on the kind of the mine site. So that will kick off, in my opinion, quite soon when situation is better. But I mean that many customers are still looking at the CapEx spend, OpEx spend and then the whole kind of value of the asset. So I think -- but we can help customers to improve the asset value a lot over time.

But I mean that -- of course, if the commodity prices would go up a notch, for example, in copper, that might trigger some of the kind of nearer-term investments. And of course, nearer term, which are kicking off soon as always upgrades, retrofits, improvements, brownfield expansions because there's less of a permitting delay there. So that will kick off first. And then big new mining projects, greenfield, they live in their own life in many ways. So that -- but I'm expecting activity to go up a lot by the end of '25, early '26 because it just needs to happen because there will be a shortage of copper in the world.

And then Christian, also reminding that our exposure is to best commodities. So copper and gold, they are the kind of really good commodities and a big part of our exposure there. So there will be lots of activity there. But I see delay between study activity of the EPCMs and then project starting, and I see maybe being 1 year out from that.

[Christian Hinderaker, analyst]

That's really helpful, Mikko. Maybe one for Roland, and apologies because it's not brief. But just on provisions for the quarter, and I guess, 2 parts. Maybe firstly, the Cement margin, you had a boost from provision release there on some of the legacy projects completing. Are you able to quantify that?

[Roland Andersen, executive]

Yes. So we're releasing what equates 1.5% to 2% in the Cement business -- in the Cement business. Yes.

[Christian Hinderaker, analyst]

Okay. And then just secondly, on the balance sheet figures, I think if we look back to the fourth quarter of last year, you were splitting these out into the warranty provisions, restructuring provisions and the other provisions bucket. It looks like the warranty number at around DKK 900 million guided, we're not far off that at DKK 824 million on Page 28. And then restructuring has come down, again, I think, as you've suggested back in Q4 of last year. I'm just curious on the other provisions bucket, which was about DKK 1 billion last year, and you'd suggested with half going forward as you run down the Non-Core Activities segment, that's actually gone up closer to DKK 1.28 billion. I'm just curious what's driving that and whether we still expect that to move lower into next year?

[Roland Andersen, executive]

Yes. So I think some of the runoffs that could have happened this year have not yet run off. So we have a few bigger projects that have come to a halt, so to speak, that we took over from TK. And then there has been provisions -- smaller provision buildup both in the NCA as we prepare to exit that and a little bit also in Cement. So that's a little bit of a mixed bag. It's a little bit unpredictable when that will start to come off. That has to do with how we can progress a few of the bigger tickets that are more or less on hold as we speak.

[Operator]

The next question we have is from Claus Almer of Nordea.

[Claus Almer, analyst]

Also a few questions from my side. The first is to you, Mikko, this comment about a potential significant uptick in the end of '25. I guess when you are mentioning this on a conference call, you are pretty certain this will happen. And did you say on the last reply that you expect for you, it will be more 2026 effect? So that's a double question.

[Mikko Keto, executive]

Yes. Klaus, I was asking this from the ones who know, which is the EPC. I met a number of EPCMs, who are busy, busy working, not executing projects, but doing study, as I said. And everybody said that we don't know when it's going to happen. So actually, timing is uncertain, but it will be like a ketchup bottle opening, so that this is highly cyclical industry, and it's never smooth riding in the CapEx business. So we expect that ketchup bottle to open at some point. But even the EPCMs who are actually doing the execution work on behalf of the end customers, they said we don't know the timing. But we are very busy doing study work.

So when that will turn into projects, which in turn turns into orders for us, they said that we don't know. But it's just my own thinking. Typically, if they are feasible studies, it's 1 year, 1.5 years when we start to see the activity in execution side, which leads into orders on our side. And so it's uncertain, but I know that it will happen, and it's just the nature of the Mining business. And between the cycles, you need to just ride on profitability of the service and then when the business will pick up, then you are riding on the wave. And I might also say that the slowness in capital business is helping us to clean the house because if there's slowness in revenues and we have a strict target to our cost in the support function in the businesses. So it's easier to clean the house when it's not a total upmarket.

And when the upmarket will return, then you just control the cost so that it doesn't start to grow in line with the order intake growth. So it will come. And this kind of slight slowness in the CapEx market and revenues help us to clean the house. It's much easier as people say that never miss a kind of a small downturn to do something useful for your company. So we are doing exactly that.

[Claus Almer, analyst]

Sure. It looks like that. So are you more positive compared to 1 quarter ago as to this uptick in capital order?

[Mikko Keto, executive]

Timing is uncertain. So I think we do not have visibility for more than maybe 2 or 3 quarters ahead of us. And as I said, I visited a large number of EPCMs. Everybody says they are busy with study activity. And they told me, we don't know yet when this will turn into projects. And -- but it's still for the next 3 quarters, I would say it looks the market like it is today. But then we keep you updated if we see really it kind of picking up sooner or later, it will, but we don't know the timing.

[Claus Almer, analyst]

Perfect. Okay. So my second question goes to the underlying Mining EBITA margin. So when I do the math and trying to strip out the non-repeated, like, of cost, I'm getting at a minimum 15% margin here in Q3. Is that roughly correct?

[Roland Andersen, executive]

That depends on what Matthew did, Claus. So we have the adjusted EBITA, and that's adjusted by what we spent on transformation and separation costs of about DKK 38 million. And that's what we adjusted for. Underlying, we have also provided for a bit restructuring costs for the ongoing exercise on the operating model. We're not disclosing that number.

[Claus Almer, analyst]

But when you try to make that adjustment, do you sort of agree that it could be more than 50% on the underlying margin?

[Roland Andersen, executive]

It could be more than 13.3%. That's what I agree to.

[Operator]

The next question we have is from Kristian Tornøe of SEB.

[Kristian Tornøe Johansen, analyst]

And first question is again on this outlook comment on the Mining orders. So if Mining product orders are not going to pick up until 2026 and given the lead time of backlog conversion, would that mean that we shouldn't expect Mining revenue to sort of materially increase until 2027?

[Roland Andersen, executive]

Yes. Thank you. Thank you for that, Kristian. So as we say, it's somewhat uncertain when this will pick up again and starting to materialize in terms of higher order. So what you should do now is, as we have said, average product intake of DKK 1 billion per quarter. That's what we're currently doing and plan that as revenue in '25 and into '26. That's how you should think about it before that changes significantly.

[Kristian Tornøe Johansen, analyst]

Understood. And then in this period, considering that your gross margin is already where you say you aim it to be, is the only EBITDA margin driver then reducing the SG&A cost?

[Mikko Keto, executive]

I would say it's a main driver until we pick up the volume again. And we can achieve all our targets by leaning out the company. We have internal plans how we can take a cost out. As I said, we will have a lean corporate office. Then we have -- we are pushing resources to customer front, either technical and sales resources in the business line to have more customer-facing people. We have enough resources, but sometimes they have too much in the back end, too little it in the front end. So we are pushing resources out. And so that is one of the main levers. But of course, mix -- in the meanwhile, mix is also getting better so that if we have less revenues for capital, the mix is supporting profitability as well. So we might see quite significant uptick in the percentage share of the service against the capital, but it's mainly SG&A and mix.

[Kristian Tornøe Johansen, analyst]

Understood. And then my second question is on the provisioning levels. Again, you mentioned the impact in Cement and NCA, but I just want to clarify whether there is any sort of change to the provisioning levels for Mining in Q3 and maybe sort of referring to the adjustment in the cash flow statement, which sort of suggests that you would have provisioned more in the quarter than previously? But maybe just help me if there's any impact on the underlying Mining.

[Roland Andersen, executive]

Yes. So those provisions are a little bit across the board, but there is a restructuring provision in Mining that goes to the reductions in SG&A that Mikko is talking about. So the restructuring part is predominantly Mining and a bit in NCA. The rest is Cement, NCA and Mining.

[Kristian Tornøe Johansen, analyst]

Okay. And the restructuring you referred to here, would that go into the restructuring line in your provisioning note?

[Roland Andersen, executive]

Yes. Yes. That's the DKK 87 million and change you can see from Q2 to Q3.

[Operator]

The next question we have is from Lars Topholm of Carnegie Investment Bank.

[Lars Topholm, analyst]

Yes. Before I start, congrats with the impressive job on the margin, having followed this company for 30 years plus. It's actually quite remarkable. That being said, I also have questions around your comments on the outlook. So it's more simple math. If I look at your backlog by the end of Q3 in Mining, it's DKK 11.3 billion. That's DKK 1 billion down from the beginning of the year and your book-to-bill is lower than 1. So the question is, what is the likelihood of a revenue decline in '25 and '26? And in that context, since you now have an impressively high gross margin, doesn't that imply your leverage has gone up and leverage also works on the downside. So in other terms, do you have plans to do more on the cost side if top line dips to protect your margins? Or how should I think about that?

[Roland Andersen, executive]

Yes. So maybe I can start, Lars. Thank you for that. So your logic is right. We're not guiding on '25 revenues yet. But obviously, our order intake is down. We're doing billion per quarter. So that would imply roughly where we may end on an average over the next 1 year, 1.5 years. And the SG&A exercise that we are currently doing is aiming at adjusting our internal cost level to exactly that. So you're right, operational leverage is also applying downwards.

[Lars Topholm, analyst]

And then I have a question on these 150 salespeople you took on to gain some market share in the pump market. I just wonder if you can put some comments on how that has gone? How much -- how many orders have they won? What's the status?

[Mikko Keto, executive]

So just giving -- not giving in detailed numbers. So we are happy actually with the investment and return what we are getting for the pumps business. And the capital business is impacted by kind of shortage of large project orders, including pumps. But we have managed to compensate that by converting competitors' pumps out so that if I look at the conversion rate, we have the KPIs like how many new pumps we have kind of orders of new pumps, not only DKK, but also numbers of pumps. Then we have a target for conversions and that conversions is running double the rate compared to last year. So that's indication that our product is good, technology is good, and then we are getting return for the investment. So that has compensated the slowness in the capital business related to the projects. So in that sense, we are getting return. And of course, pumps is high-margin business. So highlight of that one is that we are doing well, converting competitors' pumps out, replacing them with the Krebs FLSmidth pumps.

[Lars Topholm, analyst]

And then a related question to that, Mikko, because you guys have also been very clear that one of the differences between you and Metso is sheer size. So to completely close the margin gap to them, you need bigger size. So if we have a situation where demand is subdued for the next 1 year, 1.5 years and then picking up, is it now you would do M&A? Is this realistic within a 6-, 12-month horizon?

[Mikko Keto, executive]

So I think the biggest constraint in the large is -- let's say that when the market will pick up, the biggest constraint is the large capital equipment. And within that one is the biggest constraint is there's a large castings. And typically, that part is outsourced by all of the companies because it's the largest casting suppliers are supplying castings for multiple different industries, not only Mining. And that is typically when the market will turn. Looking at '22, that was the kind of large mills, large castings was kind of the bottleneck for the orders and lead times.

So we see that if the market will come back, the same constraint will remain. And of course, we need to be vigilant when we see the market coming back so that we secure the supply early on so that we can win orders by being able to supply kind of heavy capital equipment faster than the competition. So -- but then in smaller products, it's less capacity issue. Then there's our own in-house manufacturing for pumps and cyclones is scalable. Small mills, small crushers is more scalable because there's less constraints in the supply. But you are right that when the market will turn, some of the core products will have a constraint in kind of with the lead time to supply.

[Lars Topholm, analyst]

One final another household question. The capitalized R&D, can you comment on the split of that between Mining and Cement? I would assume it's predominantly mining. Is that fair?

[Roland Andersen, executive]

Yes, it's predominantly mining, absolutely. It's a lot to do with what we do in our EPCM.

[Operator]

The next question we have is from Tore Fangmann of Bank of America.

[Tore Fangmann, analyst]

Two from my side. The first one would be, could you please give us a reminder on the reduced labor services, until when this should impact the year-on-year comparison? And then secondly, -- do you have an SG&A midterm target for The mining as a stand-alone business post potential Cement disposal?

[Mikko Keto, executive]

Regarding -- we have only -- so we separate between basic labor services, which are large labor service contracts, 200, 300 people at the mining site, cleaning the site and also the basic stuff, not related to the technology itself. So we have one contract left. And in South America, all the other contracts we are out. And we don't give an exact number. But I don't know, Roland, if you want to indicate anything for that one.

[Roland Andersen, executive]

Yes. I think we indicated that it's about DKK 200 million in [ OI ] in 2024. So that has come down significantly.

[Mikko Keto, executive]

Then remaining portfolio is -- just to remind you, remaining portfolio is spare parts, consumables, professional services, which is high-end technical services and technical support and then upgrades and retrofits. So that's the remaining portfolio what we have.

[Tore Fangmann, analyst]

And the second question on the SG&A target, is the midterm target for stand-alone Mining business?

[Roland Andersen, executive]

So there we're not disclosing an SG&A target, but we're saying we will do an EBITA of 13% to 15% in '26 reported.

[Mikko Keto, executive]

But we can say that we are targeting significant reduction in SG&A. And our internal target is based on conservative volume estimates so that we want to make sure that even though it's a low part of the cycle, in the CapEx business that we have a kind of lean organization. And the target is that when the market will return, then we keep it under check, under control so that we become kind of scalable -- scale up on that side of things.

[Operator]

The next question we have is from Chitrita Sinha of JPMorgan.

[Chitrita Sinha, analyst]

So my first question is on the mining SG&A cost. So this has obviously come down as a percent of sales sequentially. Do we expect this to come down steadily from here? Or will there be some headwinds like further hiring that you're planning to do?

[Roland Andersen, executive]

No, it will come -- so the plan is it will come down from here. It's not super evenly because in bonus quarters and so on, but it will come down significantly from where we are.

[Mikko Keto, executive]

And we are targeting absolute reduction, meaning that absolute DKK, euro, dollar, whatever you want to use. So not relative. We are not looking -- our internal target is absolute DKK, not the percentage. So then we know that we can squeeze more of the cost out, making sure that it will come down.

[Chitrita Sinha, analyst]

Okay. Very helpful. And my second question is we've not got too long now until the end of the year. Where do we stand today in terms of the Cement divestment process?

[Roland Andersen, executive]

Yes. So what we said on the Cement process, it's going according to plan, and we are running the process. There's no change in that. And we can technically sign that deal before year-end at the earliest. And if we won't make that, it will be beginning of the new year. So that's where we stand on that, and that has been the plan all along.

[Operator]

The next question we have is from Peter Sehested of ABG.

[Peter Sehested, analyst]

Actually, most have been answered. But just delving on the comments that you made about your meetings with the EPCMs. What minerals exactly are we talking about? Because when tapping into what the big miners are saying, I mean, the rhetoric still appears the same that you're optimistic about the transition, et cetera. But when it comes to investments, copper price still needs to be relatively high before something material is happening there. So yes, that's essentially what I have left...

[Mikko Keto, executive]

Yes, that's why I said that the pickup will be initially in the kind of improving existing assets and that's because exactly what you said. So the pickup will be soon start rather in greenfield, it will be improving existing operations in South America, debottlenecking, adding a new line, adding a new mill, adding a new crusher just to kind of increase capacity because there, the licensing is less of an issue. And of course, you have existing operations that you are improving. So the first pickup will be there. And then the long-term greenfields leave their own life in terms of timing. And sometimes you cannot even time them for a year. It might be this year or it might be in 5 years' time. It's so uncertain. But this expansions, debottlenecking, improvements of the existing ones, adding a line, that will happen quite fast.

And I think most of the EPCMs were saying that, that's what they are looking at, at the moment. And of course, big greenfields like -- it's not really a greenfield, but we announced that strategic agreement for Uzbekistan. It's going to be a massive concentrator for Uzbekistan that we are supplying the 80% of equipment. And why we say that we didn't book it this quarter is that the timing depends on the EPCM progress, so that how the site construction is progressing and then we are kind of booking, delivering as per that one. So always timing is uncertain. So we want to kind of caution everybody for timing issue. But kind of brownfield improvements will pick up very fast when the market is better.

[Peter Sehested, analyst]

And then just perhaps a follow-up. If we just assume that final metal consumption is unchanged at these levels. But as you mentioned, ore grades going down and hardness going up, I mean, if you have a same consumption, but with lower grades, harder rock, it just means more stuff has to go through the processing plant, i.e., that implies increased wear and tear, et cetera, et cetera, doesn't that suggest that even with stable end metal consumption that your services business should actually increase?

[Mikko Keto, executive]

You're absolutely spot on there. And if you look at global statistics of the ore grade using copper as an example, there's a trend-wise year-on-year decline, and it's -- that continues. So it should have a positive impact on our opportunities in the service business because you need to process more to get the same volume of copper concentrate out. So you are spot on.

[Peter Sehested, analyst]

And so what does your technicians or specialists say about the sort of growth impact from this sort of scenario...

[Mikko Keto, executive]

So I think -- yes, I think we are actually -- we will go back to growth in service. And I think we have certain strategies for that one. We are not talking to the market about them, but we have an idea of how we can help miners to kind of improve their assets with our service. So it's -- of course, then that will manifest itself for the selling more spare parts and upgrades and retrofits. But we are -- we will come back to the market then in more specific details about going back to growth, but we have an idea how to do that one, but it's -- we'll come back to that sometime next year. Ron, at least, that's what we agreed.

[Operator]

The next question we have is from Casper Blom of Danske Bank.

[Casper Blom, analyst]

Just a couple of quick ones here. Mikko, did I hear correctly that you said that you were more or less a year ahead in the transformation of the company? And I would then just be -- if you can confirm that, be interested to hear if we should also think about you reaching your targets 1 year ahead of time. That's the first one. And the second one on the Non-Core business. It looks as if there will be some backlog left by year-end. Is there any concerns that we should have about that giving a loss in 2025?

[Mikko Keto, executive]

If I comment on the transformation that we have, we are ahead in some areas like NCA. We are closing the segment this year. Early expectation was end of '25. And we are also progressing slightly faster in our profitability improvement despite softness of the capital market -- capital business. And I think -- so in many areas, we are progressing faster. We are not done yet with all areas. SG&A is still too high. Cost levels still too high for the volume what we have and other things. But we are ahead of the strategy plan, especially in NCA. And -- but then, of course, we have some headwinds from the kind of lower volume in capital business.

[Roland Andersen, executive]

And on your question on NCA, so that backlog will come down further, Casper. And also the provision to see we have made is also done in NCA. So once we sort of end that segment, if there's a piece left, the intention is that it is properly provisioned for. So there won't be any P&L impact as we move forward.

[Operator]

The last question that we have is from Klaus Kehl of Nykredit.

[Klaus Kehl, analyst]

You've been working on this new operating model for quite a time, which ultimately should result in a lower tax rate going forward. But it's still kind of high here in '24, and I guess that's no surprise. But do you have any high-level thoughts how we should think about your tax rate for '25? That would be my first question.

[Roland Andersen, executive]

Yes. So the way we have said it is that once we come into '26, going through '26, our tax rate will start to drop towards the 30% we have talked about in our Capital Markets Day. I think we are well progressed. We are also aware that some of this may be challenged in the countries we are leaving. So we will also accrue for that. So you won't see our ETR drop like a stone until we come towards the end of 2026. So that's how we should think about it.

[Klaus Kehl, analyst]

Okay. Great. And then, yes, you still have some transformation to do in '25. But should we -- on group level, should we expect further transformation costs in '25?

[Roland Andersen, executive]

There will be costs for us to move towards the new operating model, yes. Now if the question goes to whether we will call it out as one-offs, that we haven't decided yet.

[Klaus Kehl, analyst]

Okay. And do you have any high-level thoughts about the amount?

[Roland Andersen, executive]

No, no, not yet. We do, but we will come and inform about it once we are a bit more crisp.

[Mikko Keto, executive]

As my closing comments, we try to make you fall in love with FLS. I think it's -- some of the comments, I think you are starting to kind of feel that we are a high-quality company, but we go further. So if you think about FLS, we will be pure-play mining services company. We have a high exposure to copper and gold. We have a leading position in most of the portfolio items in flow sheets. And we have a clear strategy how we move into higher margin, higher earning, low-risk business and also that when we are launching next year new ideas for the service growth and business growth, we hope that then that's kind of end of the transformation journey, profitability, transformation, cleaning the house and then go back for growth. And I think, hopefully, then that's the kind of last bit of when you fall in love with us. But I see some nice comments from already from some of you, who've been following us for a long time. So we do our best to earn your trust.

So thanks for the call.