Epiroc AB (publ)

Hello everyone and a warm welcome to this EPROC Q1 results presentation. My name is Karin Larsson and I'm heading the IR department. With me today to present the results I have our CEO, Irena Hedlund, and our CFO, Anders Lindén. And some of you might wonder why we pre-announced the results. Well, the reason is that the board yesterday decided to change its proposal to the AGM regarding the dividend. And as a consequence, we found it very logical to also release the report at the same time. For the presentation today, we will follow the same format as we always do, which means we first do the presentation and then we do Q&A. Today, we only do the Q&A over phone as we do not have any external visitors in the office. We have one hour for this call. So without further ado, please, Helena, the stage is yours.

Thank you very much. So from my side as well, welcome to the Epiroc Q1 presentation. This is my first report as CEO, and I must say I'm very honored to have the opportunity to lead this fantastic company. There will be a lot of talk about the COVID-19 pandemic today, and of course, the impact it has on Epiroc. But I would like to start with highlighting my priorities, because the priorities are valid also in the middle of this pandemic as well as in the long run. So I will, as new CEO, continue to focus heavily in innovation to secure that Edbrock are in the forefront when it comes to technology shifts ongoing right now, both in mining as well as infrastructure. I will continue to focus in growing our aftermarket, because this is what gives us resilience over a cycle, and it's also where we make a huge impact for our customers to become a productivity partner. We will strive for operational excellence in administration, in our service operations, as well as in our supply chain. Sustainability will also be very high up on my agenda and I'm really happy that we now have committed to goals for 2030 in line with the UN Agenda for 2030 and the Paris Agreement. If we then move over into Q1. So of course the COVID-19 pandemic has impacted the world and of course also our operation. but I must say that I'm really happy to see how well the organization have acted to mitigate all the challenges we have seen during the quarter and as you can see on the result we have had limited impact on the Q1 result still high customer activity and I'm really pleased to see the growth in parts and service close to 12 percent also good to see stable orders for equipment sequentially down year over year, but still more or less in line with what we saw in the later part of 2019. And of course, orders received in Q1 is slightly higher than in Q4, so that's good to see. We see lower revenue, and here we have an effect of the COVID-19, close to 400 million SEK. Most of that is related to equipment, where we had challenges to do commissioning. Good to see improved underlying margin despite the lower revenue. We have also communicated and put new members into the group management from the 1st of March to create a more efficient working structure. So I now have the presidents reporting directly to me. As you can see in the report, we expect to have a challenging Q2 in front of us. and we have therefore initiated a number of efficiency actions, and I will come back to that later on. So if we then look at the financials in detail, order intake declined 4% organic, and revenue declined 8% organic. Still operating profit at 1.9 billion, positive from currency and mix, and we had adjusted margin on 20.9%. Also an improvement in operating cash flow at 1.5 billion. Also yesterday we announced that the board proposed to the AGM to decide only on the first installment of the dividend and to postpone the decision for the second installment. Then I would like to give you an update on the situation with the COVID-19. So, of course, in Q1, we saw an impact in China. We had our factory in China closed three, four weeks. China represents 4% of our revenue, so that was a minor impact. But of course, the pandemic has impacted our operation now both in Q1 as well as in the beginning of Q2. If we start with the impact on equipment, We are operational in all our major sites, which is Sweden and in US, but we have some negative impact on supplier components, mainly from Europe. We have two of our smaller equipment factories closed due to lockdowns of countries, and that is in India and in Italy. And as I said, we saw during Q1, in the later part of Q1, challenges with commissioning. And commissioning is when we send technicians out to site to commission the machines to get them up running. And this, of course, has an impact on our revenue recognition. And we expect this to continue to be challenging during Q2 as well, depending on the mobility restrictions within countries. If we look on then on the aftermarket impact, our distribution centers globally are up running and fully operational. We are prioritizing the aftermarket, which means that if we have a shortage of components, we are directing those components to the aftermarket to keep our customers fleet up running. We have our sales and service operations up running in more or less everywhere in the world, except of course, where there's countries in full lockdown. Our consumers factories are also up running, all our major factories, but we have some impact of the lockdowns in India, South Africa and Canada. What we also saw in the later part of Q1 and what we also have seen in the beginning of Q2 is that some mines are temporarily stopped or have reduced activities to take care of the health situation. We also see that some construction customers have an impact, mainly in US as well as in Central Europe. So of course, with less activities or mines temporarily stopped or countries in complete lockdown, we foresee that this would have an impact on our aftermarket during the beginning of Q2. And of course, we'll say depending then on how long the restrictions will be in place. Of course, we have our resilience in the aftermarket, and that's where we focus on aftermarket, and we have a very agile setup in the organization. So we have initiated a number of efficiency actions. A number of short-term actions that includes reduction of additional workforce and consultants. We have implemented work-time reductions and temporary layoffs in Sweden, in the US, and in some of the countries where the country is in complete lockdown. And we have, of course, reduced external expenses. But we have also taken measurements to reduce our costs for the long term. We talked in the end of 2019 about an efficiency activity within admin and marketing. Then we expected this to be 300 million SEK on annual basis. We have added initiatives to this and we are executing now initiatives that will give us 500 million SEK in yearly saving. And we expect to have all of that implemented now at the end of Q2. We are also consolidating manufacturing sites. We have announced that we close one of our factories in Italy and moving that to India. And we also yesterday announced that we are consolidating two of our factories in Canada within tools attachment. And we continue with our work to improve our supply chain as well, since that is key for the future. As I said, I will focus a lot on the aftermarket, both short-term as well as long-term. It was good to see the performance in Q1. The aftermarket now represents 72% of our revenue. Solid development in service, very much related to the service products that we have developed with midlife rebuilds, with the components upgrade, etc., The rock drilling tool business was affected in the quarter still by the optimization of the product offering as well as an impact from COVID-19. But still good to see the development here in the quarter. Then I would like to spend some minutes on the priorities around innovation and sustainability. So in Q1, we entered into a partnership with Roy Hill. which is a large iron ore producer in Australia, to automate their full fleet of haul trucks. This is one of the larger automation orders that we have received. It will be different phases, and we booked the first phase, which is eight trucks, now in Q1. Very exciting project. We also launched HATCOM, which is part of our digitalization journey. This is remote monitoring for hydraulic attachment, and it's connected to my EPROC. So this is connectivity for attachment and drum cutters. We also launched a new DM-30 surface drill for single pass, especially for quarries and smaller mines. And together with that, a new assortment of Tricom bits for rotary drilling. And then back to the long-term sustainability goals. Really happy that we have developed goals for 2030. So we have set ambition to halve the CO2 emission from our operations, from transports, as well as from our equipment. Of course, our biggest opportunity here lies within our equipment. And we have committed ourselves that the equipment we sell 2030 should have halved the CO2 emission compared to the equipment we sell today. ambitious but possible with electrical vehicles so really looking forward to to drive that agenda also ambitious targets when it comes to health and safety and code of conduct and we're doing a lot of efforts now to create a safety culture in the company also ambitious targets on diversity and inclusion with the ambition to double the number of women in operational roles So by that I leave over to you Anders to go through the financials more in details.

Thank you Helena. I will as usual take you through the numbers briefly and you will be able to see the numbers clearly on the presentation. So if we then look at the result, the reported operating profit was on the same level as last year with the 1932 versus the 1930 or 1.9 billion SEC for the quarter. Comparable numbers, slightly lower with the 1911 versus the 1989, but obviously with a lower revenue. So the adjusted margin was 20.9 versus 20.3. This, of course, as you have noted, is supported by a currency and also with a little bit of a mix effect. If we look at the bridge, the currency contributed 1.3 percentage points, and we have had some tailwind in the quarter from the currency, but as you have seen, especially in March, in the beginning of March in particular, The currencies have been very volatile and we have seen some period end effects helping us. Also should be noted, of course, that this is a year-over-year bridge. It's not sequential. And so the base, the starting point, the base is last year's quarter one. The acquisition effect for the quarter is very, very small. And in fact, it's for the quarter, it's only the acquisition we made last year in South Africa, new concert mining that we have as an acquisition effect. All in all, organic decline of 0.3 from the lower volumes, but helped a little bit with the mix effect. If we then take a look at the segments, the equipment and service to start with, the effect on the financials is minor from the COVID-19, a little bit of revenue, but on the margin side, it's small. We expected a decline versus last year in orders to seed was stable though, versus Q4 also as expected. Both the underground and the surface orders received declined. The adjusted margin was actually an improvement. The reported margin stayed the same year over year, but an improvement of the adjusted margin if we adjust then for the efficiency costs, which... We can see on this one, this is to confirm the improvement of 24.8, despite the revenue decline organically of 8%. So we obviously have some support from currency and mix here. The flow through is negative, 30 to 35%. It's more than we would have liked, of course, but with the rapid change in demand and the situation, it's not unexpected. But this is only one quarter, as you know. If we then look at tools and attachments, the orders went down by 7% organically. It's a decline both in consumables and the hydraulic attachments. A little bit more negative in hydraulic attachments with the impact mentioned on construction. And also consumables as well as attachments had a negative impact from the situation and weakness in North America. Revenues of minus 5% organically, most of which is an effect of the COVID-19. It was almost flat if we exclude. It's not all that easy to calculate, but our estimate is that it's an impact of COVID-19. The margin at 13.5% is lower than last year, but if we adjust for the efficiency costs or improvement costs, it's 13.9%, which is in line with last year. Also here we see a little bit of a mix effect since the decline on the attachments is a little bit more than on the consumables. So if we then look at the profits bridge as confirmed organic decline, 5%, but the structure and other cost efficiencies adding back, as you can see, that's the 10 in the bridge. Then we get to the 13.9% and also a little bit support from the currency. Flow through also here, more negative, but mentioned by Helena, we continue to take actions on tools and attachment segments, for example, with the consolidation of production in Canada. And this is, of course, then a quarter. If we continue and look at the costs, financial, net, and tax, costs are sequentially trending down. If we compare like for like year over year as well as Q4 in 2019, they're a little bit higher in relative terms, and that is also what we are addressing with the programs that Helena mentioned. Interest net is rather stable. We have our base funding in place and there are not much of a movement. It can vary a little bit both the financial net and interest net from currency derivatives, but otherwise it's fairly stable at the 33 roughly. Exchange rates has been a challenge. in for us it's it was very much up and down in the in the quarter and I think we've all seen that it stabilized a little bit more towards the end of the quarter in the beginning of April taxes as expected below the 25% mark as we have as our guidance Looking at the capital structure, and this is obviously a slide I like to talk about, the net cash position has, for the first time as Epiroc, we now have a positive Net debt or actually a net cash position of 1.2 reported. In fact, if we then take away the 1.9 billion roughly effect of debt from IFRS 16, we have 3.1 billion in cash position. So it's a strong financial position and our first maturity on the base funding is in April of 2022 of 1 million euro. And we've also recently confirmed extension of our RCF, which was put in place as part of the listing. of 4 billion SEC. So that is now maturing in 2025. You also have heard and seen that the board of directors will propose to proceed with the first part of the dividend. We believe that we have a strong financial position that has not changed, but nobody knows how long or how severe this crisis will be. So I think it's prudent to take this approach and the second part will be decided on later this year. If we then look at the capital efficiency, we had a little bit of increase in working capital in the quarter. It's down from last year. It's normal that we have a little bit of an increase in working capital in the Q1. It's typically very low in the end of the year, in particular the inventory, but inventory is still very much a focus area for us, of course. We will continue to work on that. Maybe I should mention also on the return on capital employed, which has reportedly been gone from 31.7 to 26.2, but mainly from our increased cash position and the effect from IFRS 16. In fact, 4% of the drop is related to those two items. Finally, a word about the cash flow improvement compared to last year, quarter one of around a billion SEC. It's a good cash flow. It's not great. We have lower taxes, which we expected last year. We had a little bit of a catch-up effect from 2018. we have a little bit of a higher working capital that was also expected as I explained earlier and we have some other impacts but the 1.5 billion SEC in operating cash flow is from in a historical perspective it's good for Epiroc but I would call it decent not great and with that I conclude the the numbers part and the Helena will come back. Then we switch.