Epiroc AB (publ)

Hello and a warm welcome to the Epiroc Q3 results presentation. My name is Karin Larsson and I'm heading the IR department here at Epiroc. And with me today, I have our CEO, Helena Hedlund. our CFO, Anders Lindén. And I must say I'm very glad to see you guys and all of the other colleagues here today in person because because of safety measures, we have been working very much from at home and we do still encourage people to take safety measures. Today, we will present the result, excuse me, Today we will present the results, and it's good results, so I know you're eager to hear the presentation. We will do it like we always do. First we do the presentation, and then we do Q&A session, and we will have quite some time for the Q&A today. Please keep your questions short, maximum one each, maybe two as a follow-up. And with that, and without further ado, Helena, please, the stage is yours. Thank you.

Thank you, Karin. So welcome to the EPROC Q3 presentation. I will lead you through the results today together with Anders, our CFO. I will also highlight the development of my prioritized areas, which is innovation, aftermarket, operational excellence and sustainability. But before we go into the results, I really would like to say that I am proud of our organization. We have adjusted in a challenging situation. We have found new ways of working. We have supported our customers and we have stayed safe. So great job done by the organization. Then we move over to the key highlights of the quarter. All in all, recovery in orders and solid results. We achieved organic growth compared to last year, and the order intake was clearly stronger than in the second quarter, both for equipment as well as for aftermarket. The customer demand improved compared to Q2, and we have seen less impact and restrictions from COVID-19. In Q2, if you remember, June was clearly better than April and May, and that continued also into Q3. I'm really pleased to see the strong development in our service business, and that our customers also took decisions to invest in equipment. There were a couple of larger orders in the quarter, including the order to Norilsk Nickel that we announced this week. but we could clearly see more smaller and medium-sized orders in the quarter. The restrictions in the world, in some parts of the world, did, however, impact the aftermarket business negatively, mainly in our tools and attachment segment. There is also a strong interest for our technology solutions, and that is why we keep on investing within these areas. And we've won several new automation orders in the quarter. So far, 2020 has been a year heavily impacted by the pandemic with many related challenges. We have managed the situation well. Our efficiency actions were executed according to plan, and we have made permanent adjustments to our cost base. The savings have supported the profit, and all in all, this translated into a solid result and cash flow in the quarter. Epiroc's financial position is strong, and that is also why the board has proposed a second dividend for the year 2019. And now some comments on the financials. Anders will dive deeper into this later on, so I will be brief. Our orders received increased 10% organically, equipment up 25%, and service up 9%. 2,000 attachment orders were down slightly. Revenue decreased 3% organically, however, with growth in service, which was up 3% organically. Operating profit was negatively impacted by the decline in revenue and currency, while restructuring cost was clearly lower this year compared to Q3 2019. We managed to reduce cost in administration and marketing, but we were impacted by lower activity levels in our manufacturing and we had under absorption in our operations. Our margins were supported by currency and the adjusted operating margin improved to 21.7%. And cash flow solid came in at 1.4 billion SEK. Then I will give you an update on the latest related to COVID-19. So today, fewer customers are temporarily closed or working with reduced capacity compared to quarter two. In the quarter, however, the overall number has been relatively stable since the middle of July. Our aftermarket was still impacted in Q3 in some parts of the world, and we see it mainly in consumables. In North America, we see that the mining activities are coming back in Canada, but that the US activities are still impacted, both for mining as well as infrastructure. In South America, it is a mixed picture, with Peru and Argentina still impacted by restrictions, while Chile and Brazil are going strong. Europe is recovering well, and Russia has stayed strong throughout the quarter. In Africa, the southern Africa has recovered from the big drop we saw in quarter two, but there is still an impact in South Africa. In Asia, China is going strong, and also the mining activities in Australia have stayed strong throughout both Q2 and Q3. Within our operations, all our distribution centers and our manufacturing facilities are operational, and we are adjusting the capacity to the demand. Our supply chains, both on inbound and outbound, are also operational and stable. And we have been able to do commissioning of equipment and to perform our services in a more normal way during Q3. So to summarize, I would like to highlight that there are still, of course, some uncertainties regarding the COVID-19 pandemic, and certainly with the most recent development in Europe. So we say that the situation is stable, but that it is fragile. And we are, of course, monitoring the situation carefully. So we continue to do what we have done so far. We prioritize health. We support our customers with aftermarket so they can stay up running. And we adapt to the situation. Then over to my priorities, and this time we start with aftermarket. We stay focused on supporting our customers to the best of our ability with our aftermarket services and products. And this is to safeguard that they can stay up running. Our organization has a very strong focus on the aftermarket, and we work in a structured way to develop the aftermarket further. And the work pays off. Also, in challenging times, we increase our customer share, which is really good to see. In line with this, we also continue to invest in our service presence. We hire and we educate service personnel, and we continue to invest in our supply chain program. In the quarter, we have secured several new service contracts in Asia, in Africa, and in North America. And we have also received orders for midlife rebuilds, including one nice one in South America. And this had a positive impact on the order growth in the quarter. Sequentially, organic order and revenue for aftermarket grew double-digit. And in total, our aftermarket now corresponds to almost 70% of revenue. And we will continue to stay focused on our aftermarket to grow it even further. If we then move over to operational excellence, so we continuously strive to be better, to do things in a smarter way and improve. And we have quite a few actions ongoing internally to make Epiroc stronger, both in the short and in the long run. The cost-saving programs of more than 500 million SEK annually was implemented successfully with full impact now in Q3, and this is mainly impacting the functional cost. Additional savings is expected from year-end, including savings from the organizational changes we're doing in Sweden. We also see positive effects from short-term actions this quarter. I also briefly mentioned the supply chain program, and this is a long-term program which aims to improve delivery performance to our customers, to reduce cost from transports, and to reduce tied capital in inventory. And we already now see good results with improved availability on both parts and consumables. But still, we're just halfway, and we have more work to do here. So we will continue to build an even stronger company to strive for operational excellence while allowing us to continue to prioritize innovation and further develop our technology leadership. And talking about innovation, it is exciting times with the major technology shifts ongoing in our industry. And as an organization, innovation is in our DNA. And there is a strong interest and demand from our customers for our solutions. Our automation solutions in operations are delivering good value to our customers now. And we have won several new automation orders in the quarter. For example, we will deliver another fleet of autonomous surface drill wigs to another customer in Southern Africa. And also happy to report that we have successfully deployed advanced traffic management solutions for OEM agnostic mixed fleet automation, both for underground and surface application. For underground, we have automated our loaders together with machines from another OEM. And for surface, we are automating haul trucks. Very exciting step forward. We also continue the rollout of our connectivity system. to get more and more machines connected. And we have also a growing demand for our powerful and reliable battery electrical vehicles. And within our niches, we have the broadest range of battery equipment product in the market. This quarter, we also write about a new type of service agreement, a TCO supervisory agreement, and a new rotary drill bit with improved service life. Then moving from innovation to sustainability, it is clear that our innovation agenda goes hand in hand with our customers' sustainability agenda. So this is a great growth opportunity for us. And we have major technology shifts in the industry that will transform the industry to become more productive and also more sustainable. With automation, we can remove people from the dangerous areas so it enhances safety. Also, our customers wish to reduce CO2 emission. And we have our battery electrical mining equipment here with zero emission. So that's a great benefit for our customers. Beyond this, we, of course, carry out a number of actions also to improve sustainability performance within EPROC. And I'm really pleased also that we also achieve results here. Our supply chain program that I mentioned has led to lower emissions from transports. The share of air freight is lower than ever. And we have also a reduction in accidents and incidents and sick leave are on a stable level, which I think is good given the COVID-19 situation. And we also continue to invest to build an even better safety culture in the company. We are rolling out the Safe Start program and that is progressing well. So with that, I conclude this brief introduction and I leave over to you, Anders.

Thank you, Helena. So from sustainability results to financial results. Our operating profit was 1,820,000,000 SEK and the operating margin was 20.9%. But if we exclude items affecting comparability, the margin came to 21.7% compared to the 21.3% last year. On this slide, I would like to highlight three different things. Firstly, the profit. It was down $107 million to $1,820,000. We have focused our actions on permanent cost savings. It means that we have used reduction in time to much lesser extent in Q3 than in Q2. For example, in Örebro and Fagersta, where we gave notice, all employees have been on full-time work during Q3. Also, transport costs have been higher than normally due to capacity constraints around the world, and it also means that we have had underabsorption in our operations as we have been doing this. We have not received any material government support for COVID-19 and we have not utilized any support in Sweden for short-time work. We have seen positive results from our actions that we took both the long-term and the short-term that we took in Q2. The positive results from the activities and initiatives taken in Q3 will mainly come with a time lag, and we will see that later during the year. We had less restructuring costs this year than last year. Last year, it was the 179 million in tools and attachments. This year, we had restructuring costs of 55 million, mainly related to the changes of the organization in Sweden. The change in provision for long-term share-based incentive programs was 21 million this year, and it was 54 million last year. On margin, the second point, of course, Lower one-time items have also improved the margin. Excluding these, as mentioned, the operating margin was 21.7%. Thirdly, on the exchange rates, of course, we do not hedge, as you have seen and heard before. We don't hedge, which means that we are more exposed to the spot rates. and also noted that the operating profit was negatively impacted by currency. but not to the extent that we had anticipated. And if we look at the margin, it was a positive currency effect in the bridge, and that is partly related to the one-time effects. And the reason is, of course, that we do a little bit of revaluation and a flex revaluation of inventory around the world. Having said that, we have to remember that this is also a bridge effect compared to the same quarter last year. Overall, currency was headwind, not the least, on revenue and on orders received. If we look ahead then on currency, of course, with these current rates, we estimate a negative profit effect also in Q4. So coming to the segments and we start with equipment and service. Strong organic growth development both year over year with 15% organic growth but also sequentially with 22%. Service orders plus 9%, equipment orders plus 25% as already mentioned by Helena. And compared to the previous year, orders received in local currency increased in all the regions except in North America and South America, where there was a negative development. Orders for underground as well as for surface equipment increased together with our automation solutions orders. Revenues down minus 2% organically, but with the growth in service of 3%, as mentioned. And now I'll move to discuss the profit a little bit. Operating profit, 1,646,000. million in total reported margin of 25.4 negative impact from the lower volumes and restructuring costs and over 33 million SEC but with a little bit of support from mix and the currency the adjusted margin came to 25.9 percent and also note we had a negative impact on the profit from currency But the exchange rate comments that I made on the group level is also valid for the segment equipment and service. Now looking at tools and attachments. Orders received for tools and attachments decreased by 16%, but with a strong negative impact on currency of 11%, so organically 3% down. Orders received increased for hydraulic attachments decreased. but decreased for rock drilling tools. Depending on restrictions to the COVID-19 pandemic has created, the order and take varied very much between countries and regions. So compared to previous year, orders received in local currency increased in Europe, but decreased in all other regions, especially for rock drilling tools. However, globally, It improved for rock drilling tools sequentially during the quarter, and also sequentially orders to seed for tools and attachments increased organically by 20% compared to Q2. Revenues decreased by 21%, also with a lot of currency impact, so 8% organic decline. Also impacting the profit, of course. I will elaborate a little bit more on the profit on the next slide. Profit came in at 254 million, including the restructuring costs of 22 million SEK. Last year, as mentioned, we had the restructuring costs of 179 million SEK. Now, of course, that means we have a big jump in the positive effect in the bridge on structure. Last year, the restructuring costs were related to the rock drilling tools as we divested the handheld drilling and also the geotechnical consumables. Also in this segment, not yet having the full effect of the long-term efficiency actions, so we'll see that come later. Adjusted margin 12.6% compared to 12.2% last year, with lower volumes and currency having a negative impact. This graph speaks very much for itself. We have managed to lower administration costs and the marketing costs also when taking the currency into consideration. And that is, of course, very good to see that we now see progress on all the actions. And it also allows us to prioritize, which was mentioned by Helena, for example, on innovation and on the aftermarket. The financial net came in slightly higher than last year when it comes to tax expenses. It's rather normal quarter. We keep our guidance below the 25%. If we look at last year, it was higher slightly, but that was due to the restructuring in tools and attachments where it was mostly deemed not to be tax deductible. If we look at the capital, We had a strong financial position already by the end of the last quarter and it's even stronger now. That is also why the board has proposed a second dividend for the fiscal year of 2019. A second dividend of 120 SEK per share, which means that the total dividend including the May part or the May payment of 240 SEK per share. Looking at the net working capital, it went down by 22% compared to last year, out of which 12% due to currency. On the net working capital percent, yes, it's somewhat higher, comparable. But the rapid change in volumes and the fact that we're using an average capital employed from the last four quarters in the calculation gives a lag in the KPI calculation. Return on capital employed during the last 12 months were 21.6%. affected by the lower profit of course as well as increased capital employed mainly from the accumulation of cash. The effect from these two components were about half-half lower profit and more cash. Now coming to cash flow. How did we manage the cash flow? I would say we did so rather well. It was a solid cash flow in the quarter and operating cash flow was very much in line with the net profit. Despite the challenges, lower profit naturally had a negative impact and we had a small outflow of working capital compared to last year. But in fact, inventory organically went down. And the increase came from higher receivables from the higher sales that we experienced in Q3 compared to Q2. And with that, I conclude the financial part and hand over to Helena again.