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Edited Transcript of FLS.CO earnings conference call or presentation 8-Aug-19 9:00am GMT

Q2 2019 Flsmidth & Co A/S Earnings Call

Valby Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Flsmidth & Co A/S earnings conference call or presentation Thursday, August 8, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lars Vestergaard

FLSmidth & Co. A/S - Group Executive VP & CFO

* Thomas Schulz

FLSmidth & Co. A/S - Group CEO

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Conference Call Participants

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* Andrew J. Wilson

JP Morgan Chase & Co, Research Division - Analyst

* Claus Almer Nielsen

Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT

* Julia Kochendoerfer

Goldman Sachs Group Inc., Research Division - Business Analyst

* Klaus Kehl

Nykredit Realkredit A/S, Research Division - Chief Analyst

* Kristian Tornøe Johansen

Danske Bank Markets Equity Research - Senior Analyst

* Magnus Kruber

UBS Investment Bank, Research Division - Associate Director and Research Analyst

* Mikael Petersen

SEB, Research Division - Analyst

* Robert John Davies

Morgan Stanley, Research Division - Equity Analyst

* Tomi Markus Railo

DNB Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the FLS Half Year Interim Report 2019. Today, I am pleased to present CEO, Thomas Schulz; and Group CFO, Lars Vestergaard. (Operator Instructions) And just as a reminder, the call is being recorded. Speakers, please begin your meeting.

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [2]

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Hello, everybody. We welcome everybody for our interims report quarter 2 2019 out here of our headquarter in Valby, Copenhagen.

At first, to the key highlights: we had a strong revenue and profitability growth; we had a similar level of order intake; we had positive free cash flow despite a net working capital impact; and the acquisition of IMP was completed in the quarter.

Market outlook. Still positive sentiment in mining and cement market, unchanged.

The guidance is maintained, but we see today a higher likelihood that the revenue will be at the higher end of the guided range and the EBITA at the lower end of the guided range. There will be no implications for the return on capital employed.

Before we go into the financials and market details, we are always, yes, encouraged to show that what we can contribute in the sustainability agenda in the world.

As you know, we focus on 3 areas: the climate actions, the clean water and sanitation as well as responsible production and consumption. That is -- these 3 areas we can add the most and having significant positive impact.

If we look into the safety, we had a safety TRIFR of 1.6, which is well below the target for '19 of 2.7. It is more or less on the same level as in quarter 1, with 1.5 despite very high activity level, what we saw in the market and in the businesses where we are. On a very positive note, our relative carbon footprint declined from 3.2 to 2.5 tonnes in million DKK revenue. This is a very positive development.

Now to our completed acquisition with the new colleagues from IMP. It is automated/digitalized laboratory equipment and services for the mining industry. It enables us, the same as we have today already as market-leading in cement, to reap and to get data -- digital data out of the deposit where we operate and where we have the processing. This is very important to get that as early as possible into our digital system to optimize and to improve productivity for our customers. It's a very strong global customer base, especially in Australia and South Africa. And our existing efforts with organization will contribute a lot -- to open a lot of untapped market for that business.

We welcome a little bit more than 130 new colleagues, and we expect that the annual revenue is in the excess of DKK 150 million. But there is a 50% share in an associate, which will be accounted for below EBIT and above the EBT.

The other part, what we are actually always proud of is the innovation work we bring, and this time it is clearly a sustainable innovation. Today, for Cement, it's a new design for a new low NOx calciner. And this new design, this new technology, can reduce the NOx in a calciner up to 60%. This is a real breakthrough in handling emissions related to NOx. This new technology is patent pending, and we have already some field tests for quite a while, and we actually develop on it for more than 5 years to get that new technology done and into the field, which will then with commercial launch happen in the second half of the year.

Important to know here is that our customers use ammonia and urea to inject to get NOx under control. With our technology, we can reduce that dramatically or completely ban it, which is not only from a sustainability point of view, from an environmental point of view positive, it adds a significant productivity improvement and would set a better earning for our clients. Important to say is this is not only for new calciners, we can upgrade existing ones in the direction of the new design, too.

Out of that into the market. Let me start with cement on the right side. As it was before, selected opportunities and significant regional differences. There's no change for that. And quite a few tenders for large orders and intensive pricing competition stands on the same level as it was before. But what we see was the good level of midsized order opportunities, what we see is actually quite a change in the market for increased push for sustainable production. And sustainable production, as I showed you, the low NOx calciner design or alternative fuels or more digitalization to optimize the process and to reduce emissions and at the same time, to increase output. That push is quite significant, and that push comes indirect from regulators and societies and with that, direct from our customers. And that is, for us, as FLSmidth, very positive because we are well established in that area.

If we then look into mining. The demand for equipment, the demand for projects remains at a good level. It is in more or less all commodities but especially in copper and not only out of the development of the gold price in the last few weeks, in gold, too. But it's all over the commodities [what we see]. We have an increased feasibility activity for both brownfield and future greenfield. There is a very high interest in new technologies. That is a change over the last few years what we clearly see. This change for new technologies open up opportunities for suppliers like us coming in with sustainable digital new products and creating with that a market within the mining market.

For both industries, the OpEx spend is stable and looks good, and customers, whatever we do in cement as well as in mining, look that we improve with whatever what we do the productivity.

If we then further look in, especially into the mining market, you all saw that we have a bigger consolidation in the direct peer group where we act in. That, of course, is, on one side, a proof of our business model where we, for quite a while, actually enforce the understanding and the view to offer productivity improvement, you have to be in processing, you have to be in all the core products, and you have to be in all kind of services. The combination brings us the competence to offer the best productivity improvement. We established that over several years. We are done that. We are well established in that. It is good to see that we have, in the market, similar thinking on our peer group.

That a reduced peer group is, in general, positive for the supplier industry is clear, too.

Then let us go into the financial figures. The order intake, roughly on the same level than last year. We have volatility in the capital orders, that's clear. We have volatility in Cement, and we have volatility in Mining. Where we don't have too much volatility, in it is, of course, in service. And we can see that we had, in service, in Mining again, a high level because last quarter -- or quarter 2 in 2018 was a high level for service order intake in Mining. And we see in Cement, actually, quite an increase in service order intake. That comes out from the change how we approach the customers. We announced a reorganization, a restructuring to help our aftermarket more through local organizations for regions out of our 2 industries in the middle of last year, and we see the real first payoffs coming in.

If it comes to the capital business, there we see that Cement was growing slightly and Mining was dropping. But in Mining as well as in Cement, there is volatility in the capital business, and we are quite positive for both, for the service as well as for the capital business, of growth in the second half of the quarter more than we had in the first half of the quarter.

If I look to the right side, you see, in general, the split between service and capital orders. Service came out after several quarters being a little bit below that what we had at the beginning of 2018 higher again. And we had a fantastic run on revenue.

When we look into that, we would like to give you one statement regarding our Cement business. Yes, the cement market is stable and with a lot of pricing pressure, but we have a very strong position in cement. And we are actually, since several years now, can say that we actually see our cement market, the FLSmidth cement market, ahead slightly more positive.

Out of that, I look into the revenue. This is -- and order intake. This is the breakout slide, what we showed the last time. On the left side, you see, with the red line, the revenue curve; and with the white one, the order intake; and on the very far right, the guidance range. We showed that the last quarter the first time, where we were at the bottom of the revenue guidance with the run rate. Now we are going really into the MIT, and that gives us, of course, a lot of good confidence regarding the revenue guidance.

On the right side, we have order intake versus revenue. And there, you see -- and divided by industries. And there you see, let me start with Cement, that we are quite flattish if it comes to the Cement revenue over the last few quarters and with a healthy order intake above.

If you then look into Mining, we see order intake quite in a healthy zone and now, step-by-step, getting our revenue out of the backlog into the figures, which is good.

Then to the revenue split in Q2 2019 on the next slide. If you look left, there you see Mining delivered 59% of our business with a 10.4% EBITA. And Cement delivered logically 41% of the business with a 6.3% EBITA. It is always important to mention that, especially in Cement, our return on capital employed is on a very good level, it's above 20%.

On the right side, you see the split between capital and service. And there, despite the profit improvement versus last year, our service share dropped a little bit to 51% versus the 55%, what we had in 2018.

So out of that, I would like to give to Lars, our CFO, for the financial performance.

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [3]

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Thank you, Thomas. And in my presentation, I'll go a little bit through how we successfully started to convert our higher backlog into order intake and how that increased activity level impacts our ratios throughout the business.

In general, I would say we're very pleased with the strong improvement we had in revenue. And when you see our cost level, you can see our SG&A cost is stable and that reduces the SG&A percentage of our business, so we see good operating leverage in the second quarter. I'll touch a little bit more about that as we go through the presentation and how that impacts our EBITA margin, where we're up 28%. We'll also touch a little bit about the cash flow and what happens in the remainder of the year.

So if you look at the revenue, you can see that we had a very strong improvement in Mining capital, where we're up 44%. So that is a very good development we see in this page, and this is where we've had strong order intake in previous years, and now it really starts to pay off in terms of higher revenue.

And in Cement, we had a good development, both in service and in the capital part. In the capital part, we'll talk a little bit about the mix we have in there as the margins we are executing right now are lower than what we've had in previous years. For the whole group, we had a good step-up in revenue in the second quarter. And when you look at the graph, you can see that it is in line with the troughs we've seen in previous quarters. So we are at a good level when it comes to revenue and are picking up on the order intake that have been running ahead of revenue for quite a while.

Gross profit. We had the highest level of gross profit for many quarters, so that's very positive. As I mentioned on the previous page, that comes primarily from higher activity level in Mining capital as well as in Cement, and that drives down the group gross margin from 25% to 24%.

If we look into the 2 segments. In Mining, we are down 0.5%. This can, to a large extent, be explained by the mix we have in there where the high growth in capital and less growth in service, of course, have an impact on the margin that goes down in the quarter.

If you look into Cement, here, we do not see the same mix impact. But as we've communicated for quite a while, we are executing a backlog of Cement projects that has lower margins. So this is very much the effect of that we see in this quarter.

As we look out in the remainder of the year, we will start to execute some of the Cement projects that has a stronger margin than what we have seen in the P&L in the last couple of quarters.

SG&A costs, flat compared to last year. And when we look out through the remainder of the year, we expect to keep the level we've had in the first half, so on average of quarter 1 and quarter 2 is what we see for the coming quarters. So this is, of course, very positive as we have substantially more revenue that is supported by the same SG&A costs. So this is really where you see the operating leverage come through, and this is a very important part of how we reach, what you can say, the guidance we have and get to higher margins in the second half compared to the first half.

A good high level in absolute EBITA, up 28% compared to last year and a strong improvement on the first quarter. On the bridge, you can see that this is very much driven by the increase we have in revenue, and of course, the mix has a negative impact on the gross margin, and that drives it down. But overall, a good step-up of DKK 106 million compared to the same period last year.

Net working capital increased in the second quarter. Part of the increase is the acquisition of IMP as that brought in some working capital. But we do and have seen, for the last number of years, see an increase in other liabilities in the second quarter. So this is very much related to employee obligations that has some specific movements in the second quarter. And here you can see that, that is a fairly substantial numbers under the other liabilities number.

What we also saw was a very strong pickup in activity towards the end of the quarter, and therefore, our WIP assets as well as our trade payables were coming up quite a lot in the second quarter.

As we look out through the remainder of the year, we do see that there is strong opportunities to improve our capital, and our target remains to get close to the 10% at the end of the year.

If we look into discontinued activities, not a lot to report in the second quarter. We had a smaller cash outflow. And our target remains the same, in terms of total cash outflow, on executing the remainder of the projects we have from discontinued operations.

Cash flow. We had a strong improvement on last year on the CFFO line, driven by higher EBITA and a smaller increase in working capital than in the comparison period last year. As we go into the remainder of the year, we see that the change in the net working capital should start to become positive and therefore improve our cash flow in the remainder of the year.

If we look at the investments, you can see we had a very strong and a very high number in acquisitions, DKK 293 million that we paid out in the second quarter. Our investment level was at DKK 80 million, and we expect to end the full year of around DKK 400 million in terms of total CFFI if we exclude the acquisitions and disposals.

The free cash flow was DKK 63 million if we exclude M&A from the calculation.

All our capital structure ratios are within our own targets, so that's all good. We saw an increase in the net debt in the second quarter as we paid out the dividends of DKK 450 million, and we acquired the IMP for around DKK 300 million. So those 2 increased our net debt in the second quarter, and we do see that, that will come down in the remainder of the year.

Return on capital employed, an increase of 0.7% compared to the same period last year. We do see an improvement in the remainder of the year as the absolute profitability will be substantially higher than last year. You see that the revenue is expected to be higher than the guided range where the percentage margin will be lower, but the absolute number is more or less at the same level and that, of course, drives a higher return on capital employed. So the drivers for the higher profitability at the second half is the higher revenue and the associated increase in operating leverage as well as we are starting to execute a stronger backlog of projects in the Cement part of our business.

Back to you, Thomas.

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [4]

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Thanks a lot, Lars. So guidance maintained. As you see, realized, we were close to DKK 10 billion in the first half of the year. We said already in the keynotes and in all announcements that we see a likelihood that we will end at the higher end of the guided range, a high likelihood for that. And we see a high likelihood that we end in the lower EBITA margin range within our guidance, with no implications on return on capital employed.

Where does it come from, and to make it in simple words, actually, we see in the year 2019 a higher run rate, good run rate in the capital business versus the good run rate in the service business. And that product mix, of course, explains then the movements within the guided ranges what we have.

So when we see the EBITA margin of 8.1%, which is similar to that what we had last year but with a significant difference in quarter 1, quarter 2 movement. And then going forward, yes, the business will deliver that what we guided for and what we saw and what we forecasted.

If we then look into the management agenda, on the left side, our well-known customer, cash and cost area, the 3Cs: our return on capital employed is up, order intake is slightly down; EBITA is up, especially EBITA in absolute numbers is quite significant up; and net working capital is up as a seasonality behavior. But our 2 more internal quality-related KPIs with TRIFR as well as the DIFOT are in the same -- in a good direction.

The focus for us for the second half of the year is to keep and to maintain that high activity level what we have together with our customers. That was very encouraging and a very good work of our organization throughout the world, I have to say that.

And of course, with that, to reduce our net working capital and to driving more in the aftermarket where our new structure not only opens up of -- what we call the white spots, areas where we didn't sell our products before in the same range as in the areas where we are well established, it is actually a new focus in the old structure on the service business and to cover and to help customers more to improve their productivity.

Our long-term issue to be to all customers, close to all customers, is -- and potential customers is very much on the agenda. We have a good position in innovation in both industries, we have a good position in digitalization in both industries, we have a good position in sustainability in both industries, and we will enforce that. But we will not give up on standardization and modularization because it contributes quite a lot on our bottom line.

On top of that what we normally announce, we invite for our Capital Market Day on the 6th of November, starting at 11:00, not so far away here from our headquarter, only a few hundred meters. And there are some informations, of course, available on the media. The theme is driving sustainable productivity improvement. And we know that we will offer you quite interesting themes and insights into that, how we do the business and how we see the future.

Out of that, to summarize: the quarter 2 had a strong improvement in revenue and profitability; we have a positive sentiment in mining; we have a stable cement market with the slight change that we, as FLSmidth, see cement slightly more positive than we had it the last few years; we had a positive free cash flow despite the net working capital impact; and the acquisition of IMP is completed; and of course, the guidance is maintained.

So with that, we are through our presentation and wait for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from Kristian Johansen from Danske Bank.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [2]

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So first of all, I just want a clarification to the comment you made earlier, Thomas. You said that you're more positive on orders for the second half of the quarter versus the first, was that correct, and what do you mean by that?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [3]

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Yes. That is correct. We have normal pattern of our company when we are in a more stabilized market environment, actually, the second half of the year shows more activity than the first half of the year. Last year was a little bit different, but that came out that actually '17 was the trough for the industries where we, in mining especially, where we act in. So normally, the second half of the year has on, more or less, all areas of higher activity level.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [4]

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So you mean second half of the year because you said second half of the quarter, that's probably why?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [5]

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Sorry. Second half of the year, of course.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [6]

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All right. Great. Then I fully understand. Then my other question is regarding this cancellation of the Egyptian cement order. Can you elaborate why it was canceled and also what impact on the P&L and net working capital the cancellation had?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [7]

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I take that to why it was canceled. We can't give information because that's a direct end customer information, what we don't share. That's not possible.

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [8]

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Yes. And when we have the canceled contracts, it normally has a very small impact as we have [projected] through our contract. So you did not see any impact from the cancellation in the second quarter.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [9]

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And on both net working capital and P&L?

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [10]

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Yes.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [11]

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All right. Very clear. And then my last question is a bit on the leverage. I mean you do mention business product mix as the reason for lowering the margin in the guidance range. But I'm just trying to understand that now that revenue is going to be in the other half, I would expect a positive margin effect as well from the leverage. Is that there, and then it's just being fully diluted by product mix, is that the way to understand it?

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [12]

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So when we talk about the operating leverage, this is very much about that we have more revenue and a stable SG&A cost race -- cost base. And then we see that the mix in our revenue for the full year has a tendency to more revenue and less service than what's built into the guided range.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [13]

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So more capital and less services?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [14]

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Exactly. We have -- as I've tried to say, we have a good run in service, and that will not end. That will not stop. But we have a higher-than-anticipated run on capital business. And the capital business is of lower margin versus the service business. And of course, we have a leverage effect, which is positive. But with the run, what we see that creates, when we look into it, the view that there is a likelihood that we end up at the lower end of the EBITA, high likelihood for that.

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Operator [15]

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Next question is from Magnus Kruber from UBS.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [16]

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[It's Magnus Kruber with UBS]. A couple from me as well, and I want to actually continue on the same line of inquiry there. In terms of the capital business, how would you say is sort of the mix there is between pure equipment sales and projects? And is it fair to say that the margins in the Mining project business remain on largely the similar level as we saw between 2012 and '17?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [17]

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Yes. At first, the mix is actually -- we have in the material, what we give out, there is information about projects and products in and there you see the capital split. What I have to say is when we talk about projects, then we actually talk about a little bit bigger, more complex with more engineering process knowledge in it. Normally, all our products -- or most of our product sale have some engineering and processing in it, which is good because there, you can really play the competitive card. If it comes to the profitability, we had, as you remember, years back, when the recession really got negative speed, there was '14 -- roughly '14, '15, there we saw an increased pricing pressure because not a lot was available. But we are out of that phase. It's not so that now big price increases are there, but it is stable, and the level is as you see it in the EBITA margin development of the Mining -- of our Mining business is actually on a reasonable, okay level. What can in -- or what will that -- what will impact that in the longer run? It will be impacted by the amount of competitors where we see a consolidation and a change. And it will be, of course, impacted about all the things what you have in the global economy and the amount of orders available or not available. So that's a little bit difficult to predict. Out of that, we work, as I've said, very much on standardization, modularization and other things to improve the bottom line out of own activities.

And Lars showed a very good and very detailed -- our SG&A level is more or less the same than last year with a significant increase of revenue. And I gave a positive comment on my organization for that, and that shows really the leverage competence and potential what we have in the company.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [18]

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Okay. But is it fair to say that there's a lot of margin on what was previously a Mining project, is that positive now as you see it?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [19]

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I didn't understand the question from -- can you repeat?

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [20]

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Yes. Sorry. In terms of how you reported Mining before Q3 '18, would you say that the margins on that business is positive now?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [21]

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The margin on that business is positive. Yes.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [22]

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Okay. Great. Perfect. And then also on the back of a very solid Cement margins in Q2. I wanted to understand a little bit the dynamics we face when going into the second half year. We obviously talked about already the mix improving in the projects, right, executing better margin project. But how do you see the service develop? Should we see sort of a normal type of seasonality there that strengthen into year-end?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [23]

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Yes, the -- Yes. There is seasonality in it as it is with all our business in the year. We have [said] when you -- when we're on a normalized market environment, we have a lower quarter 1, we have a stronger quarter 2, a little bit lower versus quarter 2, quarter 3 and a very, very strong quarter 4. That's seasonality we have. And I have to say, I have it since I'm in that industry, which is for a very, very long time.

Yes, Lars alluded on it that we have a better margin projects what we will execute. We should not forget, we did last year, with the low profitability, what we had in the middle of the year and what we saw coming, we took corrective actions to take the cost out and that -- you see that in the results, too, which is positive. And on top of it, if it comes to service growth, we are, of course, very positive that we see quite a growth in service because we had -- years back, a big part of our service in Cement was the O&M, and we derisked that and lowered that, so our service level in Cement was going quite down simply to derisk, and that was very positive for the bottom line, too. And going forward, we see there growth.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [24]

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Perfect. I guess the final one, you also comment on market outlook in Mining in terms of increased feasibility activity. Did you see a step-up there between Q2 and Q1?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [25]

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No. Actually, not between the last Q1. The -- What we track is actually more year-on-year. And we had already last year, at the beginning of last year, significant increased activity. And we have, this year, significant increased activity versus last year. So it's actually going in the right direction. And I said that in several webcasts, that to get from an engineering work, what we do quite a lot, into then a capital order, takes quite a while based on the fact there are other regulatory issues in it, on top of it now with environmental impact and social impact and so on. So we have quite a good visibility what we have ahead of us. Where we have not that good visibility is when it hits us.

If I take the order what we announced yesterday, then we had in order from Australia in the second quarter. When we looked to the bigger orders over the announce-able level and importance level, what we do, we had one in quarter 1 2018, and then the next one was quarter 2 2019. And now, directly at the beginning or more or less -- actually more or less the [middle] already, in quarter 3 with a big one, too. So that's all positive when we see that. So from -- the only thing where we have a little bit an issue is when does it hit us. That it will hit us, we know. So that visibility we have.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [26]

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Okay. Do you still have a sense following Q2 that you can reach high single-digit growth in order intake for the full year, underlying?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [27]

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We don't guide on order intake. We don't guide on order intake, and it would be not fair to give a percentage figure here because if one drops in or not, change it dramatically. It change it dramatically. So from that point of view, that would be not really right to say. But we have quite a positive view of the order intake behavior in the second half of the year versus the first half of the year.

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Operator [28]

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The next question is from Claus Almer from Nordea.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [29]

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Also a few questions from my side. First question is about the net working capital. In Q1, I think also in the full year conference call, you mentioned that the percentage as revenue should come down during 2019. Do you still expect it around 10% by end by '19 to be reached? That will be the first question.

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [30]

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Yes. That is our expectation. And as I mentioned when we went through it, there are some seasonal element in it. And if you go back many years, you can see that we always have an increase in the second quarter on some other items. If you split them out, we were actually at a fairly stable level year-to-date. So our plans and what we see from the projects we have and our plans, we should be getting down towards the 10% towards year-end.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [31]

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Okay. Good. Then second question is about these feasibility studies, and I totally understand that the exact timing on when these projects may turn to orders is very difficult to predict. But Thomas, could you say something a bit about should we hope that it will turn to orders by the latter part of '19, or it's more likely it is a 2020 scenario?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [32]

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The -- You are a smart person to ask. The -- I make it like that, again because we don't guide on order intake. The second half of the year will have a higher order intake than the first half of the year. What we see is quite a lot of feasibility studies in engineering work, what we do on these projects and brownfield, greenfield. And it is very difficult to give a clear comment about when it drops and then when not. Why is that the case? Because our customer doesn't know it too because they have to go out and wait for regulatory allowances and very often when then residential areas and so on are putting a roadblock in, it's very difficult to say how long that takes. So out of that, we are quite positive on the second half of the year with the order intake development. How much it will be is very, very tricky to say.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [33]

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Okay. Fair enough. And then just on the service order intake. Are you surprised by the level of service orders, or are you disappointed? Positively surprise so far this year in the pipeline you're looking into?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [34]

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We are -- we were not -- in general, we were not pleased with the start of the year, how the business started of the year, I think I can say that. So the second quarter was definitely better and was a good quarter. It's okay, done.

What we see with the new structure is, of course, a good business out of service in both industries, cement and mining. But the new structure, as you -- we implemented it mid of last year, it takes a while until it really comes up and running. So that doesn't come with huge changes from the structure.

To make a long story short, we see a good outlook for service business, but it will be volatile. It will be not each quarter then a growth to the quarter before. There is seasonality in it, too. We have normally, in the first half of the year, more with service contracts where we work with, and at the end of the year, it gets really more in fast spare part delivery packages. So there is seasonality in it too, but we are positive on service development.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [35]

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Well, I guess positive year-over-year. So we look at second half '19 over second half '18, there will still be a positive trend?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [36]

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Yes. That is what we expect.

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Operator [37]

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Next question is from Robert Davies from Morgan Stanley.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [38]

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I guess I was just looking for a little bit more color on the Mining business. I know you mentioned this sort of volatility quarter-by-quarter. I mean we've seen the number of the mining equipment names actually post negative trends on the original equipment business this year with positive outlook for the second half. I guess if you could just kind of give us a little color there because then your Mining orders on the OE side are obviously down. Is it just -- is any of that down to kind of more nervousness amongst the customers of signing projects, projects kind of taking longer to sign off just because of a more nervous macro backdrop? Or you're sort of purely putting that down to the lumpy nature of the orders in the quarter?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [39]

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Thanks for a good question. It's always a mixed bag in everything. We had very strong order behavior at the beginning of last year because we came out of a recession. There was -- sky was the limit in the industry, the global economy didn't have that negative impact or tweets as we see it today. And that, of course, created quite a positive momentum for us in the first half of the year, which is in our industry, actually, not typical. There normally it's the second half of the year, which delivers more.

The second part in it is, of course, Mining as well as Cement is not resilient against global economy. But when we look into the nature of the projects and the investments, there is -- one thing is to get more capacity. The other thing is existing of future capacity more digital and more sustainable. So there are within what is done not only global economy-related issues, there are technology, innovation, sustainability issues in it where customers want or have to invest to get further approval, for example, a mining license. If you don't do that investment, the whole mines have -- get shut down, and the cost for that is significant higher.

Then the last thing what I would like to mention is despite all the global economy talk and so on, the commodity price levels are not the greatest in what we saw in the last 20 years, but they are still on a good level if I look -- or if we look into copper and iron ore, actually, coal, too, they are quite healthy levels. If miners are not earning money on these commodity price levels, then I think they have a bigger problem than only the commodity price.

And then you look into gold or silver or nickel, you see significant improvement of commodity prices in gold, for example. We bought in -- we acquired a big part of the gap what we had in the gold flow sheet from -- or we took over AuTec last quarter with quite a product range, which established a fairly good offering into gold. Gold yesterday touched $1,500. It's not that long ago that people asked me, "Do you think the gold will drop below $1,000? And what does the cost level what gold miners have at the moment, $850, $900 in average?" So it's pure money printing what they have, and there will come something, too. I think we should -- I understand there is a lot of nervousness from the global economy and mining as well is cement is not resilient against if a downturn really will happen in a dramatic way.

Absolutely, we said that when we announced the guidance, what the risk is. But at the same time, we have to look into what is demand and supply, what is the commodity price level, what is the production level, what is demanded on technology. And when you all put that together, we can't say that Mining doesn't look good. I know you asked for Mining, but I have to stress here a little bit Cement too because there's always so much negative talk about Cement. Cement is a local business and there we clearly see -- -- for us, after several years of keeping the same message, we see, actually, a slight positive development for that what we, as FLSmidth, do in the Cement business.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [40]

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And then maybe one follow-up where it's just around you obviously said there's been a bit of a shift, a notable shift, recently towards the sort of productivity and digitalization. What's sort of causing that within the customer, and maybe more specifically, what areas are people doing it? Are they reallocating spending from other parts of the budget that they would normally do? Are they putting incremental money into that on top of the other stuff? I'd just be interested in where that money's going and where it's coming from?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [41]

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Yes. That is a very good question too, I have to say, the -- because it's different customer by customer. It's not that they go out and buy software. What they want to have is to be more in control what will happen with that what they have installed to influence their return. That is actually the driver. You are not selling anything in innovation, digitalization if you can't prove that they are able to regulate and to influence positively their future better. There are several models how it's done. Some are buying immediately a big digitalization base, putting it on all equipment, others are coming step-by-step. And that has a cultural background, that has a commodity mindset background. There's a lot of differences. We contribute in all areas.

But fact is that this limitation, what we saw a few years ago, that they don't want to share data, that seems to go away step-by-step. We have more allowance to go into data, we have more allowance if we can clearly directly prove that it improves their productivity setup.

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Operator [42]

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Next question is from Mikael Petersen from SEB.

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Mikael Petersen, SEB, Research Division - Analyst [43]

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I have a question on the profitability within Mining. If you look in Q2, you have the share of service, but you have a better margin year-over-year. Is that due to the capital business, or is it due to the service business because you do mention that capital deliveries are low margin. So you have better profitability year-over-year, but you do have worse mix, let's say, and you do have low-margin capital deliveries. So is it a service that's very strong, or what is causing this?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [44]

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Actually, what -- you are completely right. We had a 66% service share last year in the quarter, and this year, it's quite significantly down on -- in that share. What we can say is that we have definitely some improvement how we execute our projects, which makes it, of course, yes, faster, better and with that, our profitability has a better reaction because you need less cost for it. It's shorter done. We have a good leverage on costs in general. We have a significant increase in revenue and not a lot, if at all, an increase in the cost.

If it comes to the service profitability, there is -- when you have a higher share of what they call standup technical service versus spare parts, then the profitability is slightly lower. And if you have a higher spare part content, then the profitability is higher. But it's not really to that what the profitability is in the service part, actually, it's more the capital business, which was on a better profitability.

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Mikael Petersen, SEB, Research Division - Analyst [45]

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All right. Then I have a second question that's also related to the service orders within Mining. If you look to other competitors, those have been growing the past 2 quarters, and you have been in decline the past 2 quarters in service order intake. Are you losing business to your peers? Or what is causing this?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [46]

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No. That's -- at first, I guess you refer not to absolute figures. You'll refer more into the relation of percentage growth to the last year. And there, I can say, we had a very, very strong start in '18, and we explained it in '18 where it came from. It was unusual strong based on having, as far as I remember, quite a lot of big service contracts in and some regarding first-time spares. There was good sentiment in the package what we got in quarter 1, quarter 2 '18, that was unusual good. If I then look into the service order intake, what we have, we actually had the best quarter since quarter 2 last year. So our service in Mining is growing not only through the quarter 1, actually, through the quarter 3 and quarter 4 from last year, too. And that's the trend what we like to see.

And last thing on it, what we have, a 1,900 figure, what we have in service and order intake for the quarter is actually quite good. It's one of the highest ever achieved.

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Operator [47]

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Next question is from Klaus Kehl from Nykredit Markets.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [48]

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Two questions from my side as well. Thomas, you mentioned a couple of times that the outlook for Cement is getting better, but you haven't really told us why. And could this ultimately result in improved prices? That would be my first question.

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [49]

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Yes. We actually talked about if we do that, if we say it, but it's so visible for us in the FLSmidth Group. It's not a comment about the cement market, to make it clear. This is not the same for the cement market. This is a pure FLSmidth thing. And when we look into and talk with customers, where it comes from, that our outlook that we have actually put pipeline in front of us, it has to do that the combination, how we run the business model to bring all the different resources together to help customers with the productivity helps a lot as well as our in-force aftermarket push through the regional structure as well as, and that is very important, our innovation on sustainability and digitalization.

This low calciner, NOx calciner design, that will be a big, big thing, again, in the market. And that is, of course, outside the normal market development because you can refurbish and with that you create additional business which has actually nothing to do with the normal market development. This is where customers see that they would like to reduce the emissions to fulfill more future regulations, to be actually ahead of that. So we were able to create in our Cement business, with our strong position, a little bit an FLSmidth growth.

Then to the pricing pressure, when you hear that, it is actually then not changing the pricing pressure. And we hear talks in the market that pricing will change to the positive, but I will come, or we will come out to the market to say it when we saw it, when it happened. As long as it is only talk, we can't prove it, and we don't see it yet. That's the only thing what we can say.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [50]

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Okay. Okay. And then my second question is about your dry stack tailing technology. Could you talk about customer interest and what you're seeing about this product? And ultimately, when would you expect to see the first order for this new technology?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [51]

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We have already some in it, and that's to do with what we call tailings management. There's more feasibility studies in it, same as we have with other process technology.

The interest is very high, that is clear. And the interest is that high that we can say it's actually globally. There's -- if you have these tailing dams, not in every commodity, in every country, you have wet tailings. But there, where you have it, the interest is high. You saw that the ICMM, the London-based miners association, has an own group now working on it. There's a lot of activity all over, and believe me, we are everywhere in and working with a lot of people and a lot of companies to improve the tailings management, what they have.

I guess one, actually, public comment on it. A few weeks ago, we had close to 100 customers, 70 to 100 customers, in Salt Lake City, in our competence center where we showed the 5x3 meter design for filtration, which is huge, it's really big and will help the industry to handle wet tailings better than ever before. There was a huge interest to look into and to work with that. We are very confident to finalize that the tailings management business, what we put under sustainability business, will have a good future.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [52]

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Okay. But would it be reasonable to expect some meaningful orders in this area in the second half of the year? Or are we still talking about 2020?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [53]

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When we are under feasibility studies, with that technology, some already dropped in, in smaller areas, in smaller parts and more to come. If it then really happens, then at the end of the year is a little bit difficult to predict.

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Operator [54]

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Next question is from Julia Kochendoerfer from Goldman Sachs.

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Julia Kochendoerfer, Goldman Sachs Group Inc., Research Division - Business Analyst [55]

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I think most of the questions have already been answered. But just in terms of net working capital, you talked about that you've seen a pickup at the end of the period. Can you just maybe comment a little bit in terms of activity in which segment you've seen a pickup and maybe general more kind of a current trading of the last month?

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [56]

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So what happened towards the end of the quarter was that we had, I would say, after a slow first quarter, the activity level picked up through quarter 2. And that meant that we had a big step-up in project revenue and associated WIP assets towards the end of the quarter. And that also led to higher accounts payables. So that was really what drove the development towards the end of the second quarter.

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Julia Kochendoerfer, Goldman Sachs Group Inc., Research Division - Business Analyst [57]

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Was that in specific -- was it even Mining or Cement or both of them, can you maybe...

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [58]

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That was both industries where we had some larger projects that -- where we saw good progress, but the invoicing milestones as per the contract was not in quarter 2, that was in the second half of the year. So that's why you see this increase in WIP assets in quarter 2.

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Operator [59]

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Next question is from Andrew Wilson from JPMorgan.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [60]

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Just a couple of quick ones, actually. On the comments from around the orders picking up in the second half, I'm not sure if I missed it, or maybe you can just clarify. Is that an expectation of orders in Cement or orders in Mining or orders in both businesses will be up in the second half?

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [61]

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It's both.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [62]

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That's very clear. And maybe I could just ask you on the Cement margin. Obviously, more encouraging development in the Q2. Can you just talk a little bit about kind of how much of that is coming through, I guess, internal actions because it sounded, from what was said, that there's still -- you're still sort of working through some lower-margin projects. So it sounds like the actions that you've taken in kind of sort of reshaping and improving that Cement business are actually coming through quite meaningfully in the margin. Is that a reasonable conclusion?

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [63]

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I think there's 2 things that really drives -- or 3 things that drives the improvements we see in margin. The first thing is that we have, over the last couple of years, been standardizing quite a substantial part of the equipment packages that goes into our Cement projects.

Second is, of course, that we have some impact from the program we launched in the third quarter last year.

And then we have been more selective in what kind of orders we get in. So there is also a -- what you can say, a deprioritization of the very low margins that have been in some Cement orders that's been out of [mark] where we walked away from them, and therefore, we've had a backlog with better margins on the Cement projects that we have.

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Operator [64]

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Next question is from Tomi Railo from DNB.

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Tomi Markus Railo, DNB Markets, Research Division - Analyst [65]

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This is Tomi from DNB. Really continuing on the same lines as previous questions. Still coming back to the second quarter order issue, whether it's lumpiness (inaudible) I understand, but is there really some specific timing issues that customers showed, a tendency that they are not ready to make decisions which could obviously continue into the third and fourth quarter?

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [66]

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Yes. We have since years -- since -- yes or minimum, quite a while and several quarters, we say that the way of working for a mining company to make investments from the idea, from the feasibility, engineering, into ordering and finalizing, that timeline increased a lot. And the reason for that is, actually, the change of regulation around mining, that's one part.

The second part is the visibility of mining in social media.

And the third part is, of course, the disasters, the accidents, what happened in Brazil where, of course, mining industry sees that they need more, yes, studies and quality investigation, how things look and if they invest, what will happen. Because it has not only an impact on the company, it has a direct impact on the employees of the company too if things are happening which are not allowed or which are questions in the way of doing. That all together, lengthen the process and lengthen the time from finalized engineering work, then going into capital order intake and then into capital revenue. But that is not because they are hesitant. It's simply because they are cautious versus that what I just explained.

On the impact of the global economy in these fields, if that would go on negative, more negative and intensified in the future, will definitely then come into the mining industry, too. But a lot of that, what we discuss, what we work on with our mining customers is actually something which is decided earlier, which is in the plan, in the 5- to 10-years plan and/or is absolutely necessary to keep productivity up on a good level in the future with a volatile commodity price level.

So that describes it. I know it's a little bit technical, but that describes the situation where we are in. And that makes it for us so difficult to give a clear, 100% outlook here and there, that is not possible any longer based on these variables coming in, and it makes the capital business more lumpy.

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Tomi Markus Railo, DNB Markets, Research Division - Analyst [67]

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Fully understand. The second question, on the Cement profitability, has been asked also before. But were you surprised by yourself that the second quarter was as good as it was, and does this have an implication on the guidance sort of range commentary that you already gained, in a way, something in terms of the better margin business in the second quarter and hence, the second half could be looking a little bit less positive than you previously have said?

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [68]

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So that was not really a big surprise for us in terms of the Cement business in the second quarter. What you saw, really, from the first to the second quarter was a pickup in the activity level, and then the operating leverage gave us the improvement in the EBITA margin. What we see in the remainder of the year is that we will be executing better margin orders, and that is, what you can say, explaining part of why we expect higher EBITA margin for the whole group in the second half compared to the first half. So of course, that's really what drives it.

So not a lot of surprise in this number. We are expecting that the profitability will improve as we move through the year.

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Operator [69]

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And we do have a follow-up question from the line of Kristian Johansen from Danske Bank.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [70]

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Just a follow-up on the net working capital-to-sales ratio, which was 12.8% in the quarter, which you say is just driven up by some seasonal effects and that you expect to hit 10% by year-end. I mean how should we think about this ratio in Q3? Should it be sort of a gradual improvement towards the 10%? Are there any sort of seasonal effects which should continue to keep the ratio high in the third quarter?

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [71]

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I think we will see a gradual improvement as we move through the year. But I think you know that this is a very volatile number where one prepayment, more or less, could really move the numbers quite a lot, a payment from the customer. So we have a number of items on the balance sheet where we know we can drive improvements in the remainder of the year. So it will come in during the year. And -- But this, some very big movements that happens in the working capital item. So exactly on what date it happens is difficult to say.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [72]

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But it's fair to say your expectation is we will see a lower ratio in Q3 versus Q2?

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Lars Vestergaard, FLSmidth & Co. A/S - Group Executive VP & CFO [73]

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Yes. That's our expectation.

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Operator [74]

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And that was our final question for today, so I'll hand the call back to the speakers. Please go ahead.

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Thomas Schulz, FLSmidth & Co. A/S - Group CEO [75]

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Thank you very much for the participation. We wish you all a safe trip wherever you are and see you soon. Thank you.

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Operator [76]

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This now concludes your conference call. Thank you all for attending. You may now disconnect your lines.