Epiroc AB (publ)

Hello, and a warm welcome to Epiroc Q2 results presentation. In Stockholm today, we have our CEO, Helena Hedblom, our CFO, Anders Lindén, and myself, Karin Larsson, head of IR. We're all trying to keep a safe distance from each other throughout the day. We have one hour for this call today, and we will allocate the time as we always do, which means Helena will start with an introduction. Anders will take you through the financials, and we will end with a Q&A session. In the Q&A session, we would like you to keep it short if possible. One question with one follow-up, please. And thank you in advance for helping us with this. So without further ado, Helena, please, the stage is yours. Thank you.

Thank you so much, Karin. And also from my side, welcome to the EPROC Q2 presentation. As we expected, it has been a challenging quarter, and we will cover the development in detail later in the presentation. But also in times like this, it is important with clear priorities. And in the quarter, as always, we have had a strong focus on the health and well-being of our employees and our business partners. We have also prioritized the aftermarket to help our customers to stay up running. And we have focused on lowering our cost. But at the same time, we have also invested more than we have ever done in innovation to enable future growth and to secure that we will be in the lead of technology moving forward. And we have also continued to invest in the activities that will take us to our sustainability goals for 2030. If we then move to the highlights of the quarter, well, it is clear that the pandemic had an impact on us. As an organization, we are experienced. We have been through challenging situations before. And also this time, we have demonstrated our agility. I'm happy to see how fast the organization has responded to the situation across the organization. But it was a rapid change. In the early part of April, it was clear that this was going to be tough. Countries in lockdown, mobility restrictions, it impacted our customer activities. And a large number of customers, both within mining and within infrastructure had to be temporarily closed. So it had an impact on our orders and on our revenues. But the situation improved towards the end of the quarter. June was clearly better than April and May, but still lower activities than what we saw in Q1. So we have throughout the quarter focused on lowering our cost structure, and this has given us resilience in our profitability. We also managed to deliver a strong cash flow in the quarter. And we saw an increased interest in our automation and digital solutions. And I will come back to that later on. Mindful of time, Anders will take you through the financials in details, but our orders dropped 17% organic and revenue dropped 15% organic. The drop in revenue impacted our profit. The profit is also impacted by low capacity utilization in our factories, as some were closed during part of the quarter. But we managed to save cost throughout the organization, but there was still a negative impact on the operating margin in the quarter. Still, I think given the drop in revenue, we showed resilience in our profitability, adjusted margin at 18.7%. I think given the situation, a good level. We also managed to reduce our working capital and the operating cash flow was better this quarter compared to last year, close to 2 billion SEK. I will now try to take you through the different developments in the different regions in the world. because there has been a large difference in activities in the different countries, and this is still the case. If we start with North America, clearly we saw a drop in activities, both related to mining as well as infrastructure. The activity has recovered somewhat, but it's not yet back to the level we saw in Q1. If we move to South America, it is a mixed picture. Countries that have been in complete lockdown, like Peru and Argentina, there we saw a significant drop in activity. But on the other hand, mining in Chile as well as in Brazil have kept steady high throughout the quarter. In Europe, we saw a drop in activities, mainly within infrastructure in the southern part of Europe. And activities has come back since restrictions has been eased in Europe. If we move over to Africa, we could also clearly see there a significant drop in activities, mainly in South Africa that has been under lockdown. But that situation has also improved in June. If we then move over to Asia, it is a mixed picture. With China has recovered well, activities are back on a good level, while India is still impacted, both by the lockdown when it comes to infrastructure as well as mining. And then moving over to Australia, Australia has been very strong throughout the quarter. So all in all, it is fewer customers today that are temporary closed than we saw in April and May. If we then move over to our operation, all our manufacturing sites and all our distribution centers are fully operational today, and the supply chain is up running in a stable way. So to summarize the status, the situation is clearly better now compared to when we entered into Q2, but the situation is still fragile in many parts of the world. So there is no doubt that we still are impacted by the pandemic. Operational excellence is one of my key priorities for the coming years for EPROC, and this is of course more important than ever given the situation. So we have taken a number of long-term actions and from these we expect savings of 500 million SEK annually as from Q3 2020. We still have some actions to go and we expect more savings to kick in in the later part of this year. And that is related to the planned layoffs that we have announced in Sweden. We have given notice to 425 employees in Sweden. We have of course also made a number of short-term actions in the quarter and that has supported the operating margin. We continue the work developing our supply chain. For our customers this means better availability of parts and on tools and here we have good progress. For us, it means a more efficient supply chain. And here we also have good progress when it comes to the ratio of sea and air shipment. So we're shipping more and more by sea. And that can also be seen in our CO2 emission from transports. Unfortunately, freight costs have risen sharply in the quarter. So we don't really see the effect on the transport cost. Another priority for myself is the aftermarket, of course. So this is key now and always. And this is where we can make the difference for our customers. And the positive trend continues. The number of customers that want us to service their fleet is increasing. And for us, it is about supporting our customers and create long-term relationship potential for future growth. And it, of course, gives resilience over a cycle. But, of course, aftermarket is driven by the activity levels. And as mentioned, this was impacted in Q2. Still, service held up very well. It's minus 3% organic on orders compared to last year. Compared to Q1, however, it's down 6% organic. As you can see on tools and attachment, we had a larger drop, and this is mainly related to country mix, some countries that have been heavily impacted by lockdowns and restrictions. But our aftermarket business is expected to be resilient and to grow over time. And then over to my favorite topic, innovation. So as I said, we continue to invest more than we have ever done in innovation to safeguard our leadership position for the future. So we want to be the enabler for safe, sustainable and productive mining and infrastructure. And this is why we keep investing in R&D also in times like this. So we're up 6% in investment in R&D year over year. And as I said in the beginning, there is a clear interest for our automation and digital solutions. So we have received in the quarter multiple orders for automation, both for underground as well as for surface solutions. And one example is the order that we also did a press release on to Codelco in Chile. Here is multiple underground units with all our automation and connectivity features embedded in the deal. We also continue to see a strong interest in our battery offering. And we recently signed an agreement with Vale in Canada and offer batteries as a service. And here we will also provide charging stations. We have also launched a new core drilling rig for exploration, which is safer and mobile. And we have extended our range for silent demolition tools with concrete busters. Then over to sustainability. So we have high ambitions, and it is encouraging to see the positive development of many of our non-financial KPIs. For example, on safety and on CO2 from transports. In the quarter, we also announced the details of the goals for 2030. So we will further advance the group's ambition related to climate change, safety, ethics and diversity. So with that, I conclude this very brief introduction and I leave it over to you Anders to take us through the numbers.

Thank you, Helena. The COVID-19 impact was indeed large for us during the quarter. I've been in finance for 35 years and I've never experienced such a quarter. As a CFO, of course, this was hard to handle. foresee and to plan for. But I fully share Helena's view that our managers and leaders, in fact the entire organization has managed well to quickly adapt to this situation. Our reported operating profit was 1 billion 418 million SEK, of which 165 million SEK related to items affecting comparability, which we can divide into two different parts. First, the changing long-term incentive programs of 91 million SEK. Again, I would like to point out that this is a good thing for the shareholders. An increase in share price leads to a higher cost for the long-term incentive program and vice versa. Epirog A share was around 98%. at the end of quarter one and around 116 at the end of June. And we will, mind you, see this change and impact in our income statement every quarter going forward. The second part, 74 million restructuring costs, mainly planned activities and not so much COVID-19 in these numbers. And before you ask, I would like to mention that government grants around the world have not had any material impact on Epiroc. And we have not utilized any support related to short-term work in Sweden. If we look at the bridge, I would like to mention four things on this slide. The profit, obviously negatively impacted by the lower volume and also by currency. Closing the adjusted operating profit at 18.7 for the quarter. Secondly, of the total drop of 4.5 percentage points versus last year, around 3.5 percentage points came from organic. The reported margin of 16.8%. But if we add back the restructuring costs and the LTIs, we arrive at the adjusted margin of 18.7%, as mentioned before. Thirdly, on the flow-through, it was negatively of about 40%, driven largely by the volume drop, of course, but the under-absorption in both the production and in service was difficult to manage. We adapt where we can, but in COVID-19 times, normal adjustments are not always doable. The sharp volume drop was very difficult to manage. Finally, on currency in the quarter, it had a negative impact on the P&L, but on the margin it was neutral. But if we look forward here, I think it would be good to mention that with the currency or exchange rates by the end of June, we will have quite a negative impact on the bridge in Q3 compared to last year. If we then go into the segments and start with equipment and service, orders received 15% down organically. Service orders minus 3% organically, as mentioned. Service is activity-based and organic. That was, of course, impacted by restrictions and the lockdowns. And remember that we saw both complete and partial lockdowns in many of the countries where Epiroc operates. Equipment orders down 29%. Also here, remember last year at this time, we were quite on a good level while we saw a softening demand already during the second half of 2019. Also mentioned, we did get a large order from Codelco in Chile. Sequentially, we did about minus 10% organically compared to the first quarter of this year. On the revenue side, minus 13% organically, operating profit for the segment of 1,441,000,000 SEK. including the restructuring costs of 17, which leads to an adjusted margin of 22.7, which can compare to 25.5 last year. If you then look at the bridge for equipment and service, it looks similar as for the group. The organic decline of 13% in revenue led to a margin effect of about 3 percentage points. The main reason for the lower margin here compared to last year is the lower volume. Part of this under-absorption in production and in service operations in the lockdown countries This was worse in the beginning of the quarter and improved towards the end of the quarter. And as a consequence, the flow through was negative of about 40% from these challenges with sharp demand drop and rapid change. If we then move over to tools and attachments, orders received minus 22%. Organically, the decline relatively larger for hydraulic attachments, where the share of distributed sales is larger. And also here we saw a large variation among the countries depending on how restrictions were implemented. Also revenue were minus 22% organic. And I will take the profit details on the next slide. The large decline in revenue under absorption and the temporarily closed manufacturing facilities and the restrictions around the world had an impact, a large negative impact on tools and attachments. A reported margin of 7%, volume and organic had the largest impact. And during the quarter, several factories have been closed, partly for a longer or shorter period of time due to the restrictions. And the majority of the restructuring costs in the segment are related to the moving of the production in Canada from North Bay to Montreal, as we announced earlier. And this leads to the adjusted margin of 9.8%. As mentioned, we are lowering the costs, and to see the costs going down is, of course, a good thing. This allows us to prioritize, and as Helena mentioned, for example, in innovation. The graph here includes a minor currency effect, also taking it down, but the majority year over year, as well as sequentially, are falling. on organic savings, and that is clearly showing a downward trend. And it is the administration and marketing costs coming down and being reduced, while the R&D investments have been increased somewhat. Tax expenses are on a normal level for the quarter, and we keep our guidance here to stay below the 25%. Looking at the capital structure, we have continued a strong financial position. We have a net cash position still, strong cash flow for the quarter, even if we paid 1.4 billion in Q2 in May as dividend in accordance with the revised proposal from the board. Yes, we have a strong financial position, and this has not changed. So what about the second part of the dividend? That is ultimately a question for the board and shareholders. And as we are now just through half the year, if the situation allows, we will come back on that later during the fall. We did also increase our borrowing, our funding with 2 billion SEC in response to the COVID-19 uncertainty and also the uncertainty going forward for the future. Networking capital and capital in general, we decreased nominal terms 18% versus last year, of which 6% was currency. The main reason is lower receivables, and as such, we did see good collections during the quarter, and we also managed to lower the inventory organically somewhat, despite all the COVID-19 challenges. Return on capital employed at 22.7%, quite a drop from 30.8% of last year. mainly from the lower profit and increased capital, where cash had a large impact. There is also still a small impact year over year from the IFRS 16, but that is minor and fading out during this year. In total, for cash and IFRS 16, the impact on return on capital employed was approximately 5%. On cash flow. Over time, every company has to turn profit into cash, and Epiroc is no exception. During the challenging situation, we had a strong cash flow in the quarter. So what do we see here? The operating cash flow improved with half a billion compared to last year. The lower profit obviously had a negative impact, but we managed to release working capital to compensate. mainly as the receivables decreased, but also some from lower inventory, and naturally the lower payables had a negative effect. Taxes paid were also lower. but in line with the tax cost in the income statement. If we look at the development over time, the net profit has turned into cash flow. In the recent quarters, the cash flow has been strong, operating cash generation. So to summarize Q2, a strong cash flow during very challenging times. And with that, I conclude the financial part and hand over to Helena again.