FLSmidth's interim 1Q20 report sees COVID-19 impact business results
FLSmidth reports that the COVID-19 pandemic is intensifying the cement industry's apprehensiveness to start large capital investments, but producers in both mining and cement are increasingly looking at digitalised solutions, driven by the restrictions of on-site services. Cement service order intake was stable in 1Q20 compared to 1Q19, but total cement order intake declined 50 per cent, due to hesitation on capital investments and the absence of large project orders.
Order intake for cement in 1Q20 fell by 50 per cent YoY to DKK1312m from DLK2632m in 1Q20. In 1Q20 cement revenue decreased by three per cent to DKK1790m from DKK1837m in 1Q19. Cement service revenue rose by 23 per cent while capital revenue declined by 20 per cent. Cement profitability was affected by a combination of lower revenue, increased costs due to the COVID-19 pandemic, as well as costs related to the implementation of business improvement initiatives.
Group revenue increased two per cent to DKK4525m in 1Q20, explained by a six per cent growth in mining, partly offset by a three per cent decline in cement. Organic revenue growth for the group was four per cent. EBITA decreased 27 per cent to DKK228m, as a result of extraordinary costs related to business improvement initiatives and COVID-19, as well as the previously-announced lower profitability in the mining capital business. Consequently, the EBITDA margin decreased 2.1 percentage points to five per cent. Cash flow from operating activities decreased to DKK-35m in 1Q20.
FLSmidth Group CEO, Thomas Schulz, commented: "The COVID-19 outbreak has resulted in extraordinary times for all countries around the globe. Throughout the quarter, we have navigated the unpredictability and our clear top priority has been on the safety of our employees and customers. Around 70 per cent our employees are currently working from home and a safe working environment has been established for the remaining employees. At the same time, we have been adapting our operations to the changing circumstances to support our customers the best way possible.
"The COVID-19 pandemic has a significant impact on the current and future business and impacted our first quarter results, especially in the month of March, as the pandemic has led to higher costs associated with more complex logistics and lower capacity utilisation. There will be economic impacts for both of our core industries, but we see a relatively resilient mining industry, and the extensive global policy response already seen, such as the proposed US$2trn infrastructure package in the USA, could fuel a rapid growth in metals demand and boost construction and cement markets worldwide."
Outlook
On 23 March, FLSmidth suspended its financial guidance for 2020 as a consequence of the global uncertainty caused by the current pandemic and pending further clarification of market developments and the actual financial impact on the business. Visibility remains low and our guidance remains suspended.
FLSmidth is increasingly seeing disruptions to cement plants and mine sites which could impact near-term demand for equipment and services. Lockdowns and mobility restrictions are affecting suppliers and parts of our own operations, resulting in more complex logistics and lower capacity utilisation. The company expects the biggest direct impact in 2Q and a more moderate impact in 3Q, but the duration of disruptions and the extent of the impact cannot currently be assessed.
Approximately 80 per cent of cement plants around the world, excluding China are understood to be in operation but some with reduced capacity. The largest impact has been felt in India and the Middle East, but all regions are impacted, said FLSmidth. The market for services was relatively stable in the first quarter, but cement consumption is being impacted by reduced construction activity, and plant shutdowns and restricted access to sites has reduced the activity level within technical services and commissioning. Despite the pandemic, there is still an ongoing market activity in most regions.
"In Europe, Russia and north Africa, cement plants are still in operation in most countries and the supply and demand situation has so far only been slightly negatively impacted. In Asia (excluding China), most plants are operating, but we see shutdowns in Malaysia and the Philippines. In January and February, Chinese cement consumption declined by 30 per cent, but the Chinese government is now pushing to get construction and production back on track.
"In North America, about 15 per cent of our installed base is currently shut down (all Mexican sites are closed), but the demand for service bundles remains strong with a record high order intake the first quarter. In South America, FLSmidth is seeing significantly reduced activity. In Peru and Argentina, national lockdowns have reduced activity at cement plants, and in the case of Colombia, some customers have decided to either reduce or suspend production. In Australia, plants are running at full capacity," said the company.
FLSmidth sees the biggest impact from COVID-19 in India and the Middle East, where activity is very low. Across regions, many cement producers are suspending capital investments until the COVID-19 impact on the macroeconomic outlook is clearer. As for many other industries, the virus outbreak is having negative implications for the cement industry, but the duration and impact of the disruption is still unknown. Strong supportive measures are being implemented world-wide to boost the economy, including prospects for infrastructure stimulus, which could speed up the recovery in several local cement markets.
