Epiroc AB (publ)

Hello, and a warm welcome to Epiroc's Q2 results presentation. My name is Karin Larsson. I'm head of IR, and with me today, I have Helena Hedlund, CEO, and Anders Lindén, CFO. As always, they will briefly present the results before we go into the Q&A session. We have a strong set of results to present today, quite a difference if you compare with Q2 last year. That said, the pandemic is still ongoing around the world, And our thoughts go out to everyone that have lost near and dear ones and to those fighting against the COVID-19 disease as we speak. At Epiroc, we do put safety first. So with that, thank you. And Helena, the stage is yours. Thank you, Karin.

And also my side, welcome. So I will thank you for taking the time today. So let me start with some of the highlights of the quarter. We really had a strong quarter financially. The order growth was 45% organically and reached a record high, 11.1 billion SEC. The customer activity remained high, and just like in the last quarters, our customers continued to take investment decisions. We also had high revenue growth. and our profitability improved significantly compared to Q2 2020 when restrictions impacted customers' activity and investment decisions. At that time, we took quick measures to adapt to a challenging situation, and that has served us well. Revenues increased both compared to last year and sequentially. And just like most companies, we experienced supply chain challenges, but with limited impact on revenues in Q2. and higher revenues contributed to improved profitability. A highlight is the advancement for battery electric vehicles, and we received several orders for battery-powered machines, including one significant order from South Africa for a greenfield project. We also received our first orders for our retrofit solution. So it is encouraging to see that our customers are embracing battery technology as it provides CO2 emissions-free operations, as well as increased productivity and lower operating costs. We continue to invest in innovation and in our aftermarket to support our revenue growth target of 8%. And in addition, we create options for the future through acquisitions. And since April, we have announced four acquisitions with state-of-the-art technology. And I will talk more about them later, but I can already say that the acquisitions will strengthen our technology leadership further. So here are the key financials. As mentioned, record high orders received at 11.1 billion. The organic growth for equipment was 76%. We won four large orders, about 100 million sec in the quarter, and also several medium-sized orders. The order intake looked quite similar as in Q1, actually. The aftermarket had also a strong development year on year, plus 26% organically for service and plus 42% organically for tools and attachments. and service orders were also higher compared to Q1, supported by high activity and also by some larger orders for component upgrades, rebuilds, and the first orders for battery retrofits, as I mentioned. Revenues and profit increased strongly year on year and sequentially, and the adjusted margin was 22.6%, up near 4 percentage points over last year and at a solid level. That said, it was also slightly diluted by the acquisitions. The operating cash flow was lower than last year, but still at a solid level, given the strong growth that we are experiencing. And Anders will tell you more about the financials later. So now I will come into our priorities, and I start with innovation, and also some words about acquisitions and partnerships. All of these will strengthen our position as a leading global productivity and sustainability partner. So starting with a couple of innovations launched in the quarter, the dynamic tunneling package software. With this, the drill rig can set its own drilling plans directly at the face of the tunnel, and by digitally matching the profile of the tunnel to a set drilling plan, the drill rig creates specific tailor-made drilling plans for each and every section, and this improves productivity. We have also launched our essential line of working tools for hydraulic breakers, and these tools are suitable for most of the everyday construction jobs. And in the EU, the range is sold via drop shipment, which means lower transport costs and emissions and less packaging material. On the partnership side, we have announced an exciting collaboration, the NextGen SIMS project, which we are coordinating. It is a new EU-funded collaboration project with several mining companies, equipment, and system manufacturers and universities. And a key aspect of the project is to develop autonomous carbon neutral mining processes. And this includes the use of battery electric equipment, 5G connectivity for positioning and autonomous mode, as well as AI powered traffic and fleet control. And finally, a few words on acquisitions. Epiroc has completed and announced several acquisitions since Q2 started. And with these, we show our commitment to support our customers in their productivity and sustainability journey. Kinetic Logging Services, MineRP, and MiningTag expands our digital product offering. CDP enables automation, providing wireless technology, and MegLab supports the transition to electrification and battery electric vehicles. and the DNA heavy industries extends our offering of hydraulic breakers. The aftermarket is another strategic priority, and with the aftermarket, we continuously build strong relationships with our customers and support them in improving availability and productivity. The aftermarket is stable and growing over time, and it provides us with resilience in revenues and profits. This quarter, it generated 69% of our revenues, which is more than two-thirds. The customer activity was high in the quarter, and we continued to develop our offering. I mentioned the essential line working tools and the retrofit for battery solutions. But there is, of course, much more going on, and we continue to increase the number of machines that are delivered with connectivity. We now have more than 5,300 machines connected, which is 30% up compared to last year. We also work continuously to become better and more efficient. We call it service excellence. And we also develop and work with training programs and certifications of our technicians. The supply chain program is also key for the aftermarket business, but more on that on next slide. as this is linked to operational excellence, our third priority. Our supply chain improvement program continues, and we see a positive development when it comes to availability to our customers, and we are managing well despite challenges in the supply chain. The pandemic is not over, and we are experiencing the challenges daily, and I really appreciate the hard work and dedication that our organization is showing. Despite challenges both when it comes to sourcing of components and in transports, the impact was limited on the revenue in Q2. And we expect that this will remain in the second half of the year. The challenges have delayed some of the positive financial effects that we expected from the program. Transport costs, for example, have increased, and the positive effects we anticipated by using more sea freight has not yet realized as expected. As you know, the previously announced efficiency initiatives are finalized and we have not announced any new major saving programs, but still we continuously work to become more efficient in all parts of the organization, in service, in manufacturing, and in the supply chain. And one example is RPA, robotic process automation processes, where a software robot is doing repetitive standardized work previously performed by employees. And here we have a number of processes in place, and we add new ones every month. So now coming into sustainability, which is included in everything we do, and also at our virtual leadership conference that we hosted in June. We had more than 500 managers participating from 67 countries. We are on an exciting journey together. We are guided by our strategy, our priorities, and our vision, Dare to Think New. And we are driving the productivity and sustainability transformation in our industry. For example, we have an ambitious target of halving the CO2 emission from equipment sold in 2030 versus 2019. And this is where we can make the largest impact. Our analysis shows that 83% of the CO2 emissions from EPROC comes from when the equipment is being used. So it's therefore encouraging to see that our customers are embracing battery electric vehicles and we made good progress in the quarter. With electrification and battery electric solutions, we will strongly contribute to reducing the industry's CO2 emissions. To the right you can see pictures of the conversion or retrofit of our most sold diesel loader to a battery electric version. We have also lowered our CO2 emissions from transport compared to last year. Also a few words on people. We see a positive trend in the share of women in the organization and we have a lot of initiatives ongoing in this area. And now when we add people in manufacturing and service, there are more and more women coming on board, which is encouraging to see. As I mentioned before, we aim to double the number of women in operational roles by 2030. So due to the pandemic, the organization has experienced an increase in sick leave, and safety is, of course, a top priority, and we are doing everything we can to keep employees, customers, and partners safe. So Anders, now it's time for financials.

Thank you, Helena. Some comments on the financials. One on our operating profit, it increased 54% to 2.2 billion with 15 million in provision for share-based long-term incentive programs. The profit was positively impacted by increased volumes, but negatively by currency. Plus 54% is high, of course, but we should not forget that Q2 last year was heavily impacted by the COVID-19 pandemic, as well as by restructuring costs to make Epiroc stronger going forward. Adjusted, which means excluding items affecting comparability, the operating margin was 22.6% compared to 18.7 last year. If we go into the details in the bridge, we have plus 766 million SEC organic contribution, which supported the margin with 4.4 percentage points. Currency was negative again in absolute terms, but less so compared to previous quarters, and it had only a minor effect on the margin. Structure and acquisitions together contributed with 137 million, Most of this is the effect of the restructuring costs and LTI effects from the previous year, 165 million in total. This year we had LTI of minus 15 and some other minor one-time items. The margin was negatively affected by acquisition, roughly 0.2 percentage points. Also, looking sequentially, the mixed equipment versus aftermarket had a minor dilution effect on the margin. So please remember, this is a mixed effect to think about going forward with equipment being a larger share of orders today. It will translate into revenues at some point in time. The current lead times around six to nine months are at the normal levels. And then in total, we ended up with an adjusted margin of 22.6%. If we then go into the details of the segments, orders received for equipment and service increased 37% to 8.4 billion, corresponding to an organic growth of 46%. Currency impacted negatively with minus 10%, while acquisitions contributed with a plus 1%. Sequentially, orders received increased 4% organically. For equipment, order intake was strong, supported by a few large orders and several medium-sized orders, as Helena already mentioned. Customers are taking investment decisions, and the equipment orders were up 76% compared to last year, reaching more than 4 billion, about the same level as in Q1. For service, orders were also strong. A 26% organic growth is not only an effect of higher market activity. It is also proof that we do things right and that our customers appreciate our offering. The revenues increased 12%, with FX impacting negatively by 8%. The operating profit increased 30% to 1.9 billion, and the operating margin was 26.2%. I will cover the details on the profit and margin on the next page. So starting with a profit of 1.4 billion last year, adding 555 million in organic contribution, removing the FX headwind of 125 million, and adding the structure, we end up with 1.9 billion, up 30% was mentioned. The margin, both reported and adjusted, increased to 26.2%, supported by increased volumes. but somewhat diluted by acquisitions. For the segment, the acquisitions dilute the margin with roughly 0.3 percentage points. The three acquisitions completed in the quarter are MinorP, Kinetic Logging Services, and 3DP, and they all report in this segment. In total, the acquisitions contributed with revenues of 39 million and an operating profit of minus 7 million since their respective dates of acquisition. And again, there is a mix effect to think about here going forward, equipment versus service. However, the mix effect has not yet impacted the margin to any larger extent. Coming to tools and attachments, the orders increased 35% to 2.7 billion, which corresponds to an organic increase of 42%. And there was a currency headwind here as well, impacting orders negatively with minus 7%. both hydraulic attachments and rock drilling tools which also refer we refer to as consumables had a good development and just as in q1 exploration drilling tools were particularly strong we had more than 30 organic growth in local currency in all regions the world in the world compared to last year sequentially orders largely on the same level as in q1 I would like to highlight also that Q1 and Q2 are typically the strongest quarters when it comes to orders for tools and attachments. Revenues increased 24% to 2.5 billion, up 31% organically. And I will cover the operating profit on the next slide. The operating profit almost tripled to 416 million supported by increased volumes and cost savings. But then, of course, the profit last year was negatively impacted by underabsorption due to temporary closed manufacturing facilities and by restructuring costs of 57 million. The operating margin improved to 16.5 year on year, remaining flat from Q1. And I get the question often on the direction here. We do not provide the guidance, but we obviously work hard to maintain this level. Looking at costs, we are growing, and we also see that our costs are increasing. There has been more activities in Q2 compared to Q1, and also some of the administration costs are quite linked to volume. For example, costs for distribution centers, they are in admin costs. We are also investing in growth initiatives, and I would say that overall the cost control remains good, and the efficiency measure that we have finalized are generating positive effects. And the net financial items, lower than last year, while interest net was flat and tax expenses were lower. That said, the effective tax rate is lower than we typically guide for, but because of some retroactive one-time effects, We maintain our guidance on the tax level going forward. A few words on capital structure as well. The financial position is strong, and we have now a net cash position of $322 million, despite the distribution to shareholders of more than $5 billion in the quarter. And we paid the first part of the dividend, 1.25 SEC per share, and the mandatory redemption, 3 SEC per share. So last but not the least slide from my side, the operating cash flow was 1.2 billion this year compared to nearly 2 billion last year, positively impacted by higher operating profit. Working capital was however negative in the quarter, which is perfectly normal when we are growing. Last year a lot of cash was released from working capital, nearly 1 billion. So looking at the cash conversion rate, or rather how well do we transform the net profit into cash? We are at a good level, 105% on 12 months. It is lower than last year, but it is also reflecting the business development with growth at the moment. So overall, a solid performance in a growth environment. Helena, over to you again. Thank you so much.

Thank you, Anders. So if I then conclude the quarter, we have high customer activity and record high orders received. We have high revenue growth and improved profitability. We have announced or finalized several acquisitions. We have good development for battery electric equipment with, for example, one significant order in South Africa and our first orders for retrofit solutions. So guided by our vision there to think new, we are driving the productivity and sustainability transformation in our industry. So if we then look ahead, what do we expect? Well, we expect that the demand both for equipment and for the aftermarket will remain at a stable high level in the near term. Please note that this comment refers to the demand and that is the underlying market activity, not the level of orders received in Swedish krona. And I would like to end this presentation as we started it today, that the pandemic is not over. So stay safe, everyone, and thank you all for listening. And now over to Karin to kick off the Q&A session. Thank you, Helena.

So before we go into the Q&A session, I would like to put in a gentle reminder that on December 1st, we will host our Capital Markets Day, and we will have it virtually this year again, just like we did last year. And by that, I would say, operator, you are most welcome to start up the lines. As always, keep your questions short, maybe one follow-up at most, too. And yes, operator, please go ahead. Thank you.

Thank you. If you wish to ask a question, please dial 01 on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question has been answered before it's your turn to speak, you can cancel by dialing 02. And our first question comes from the line of Arsalan Ovadova from Deutsche Bank. Please go ahead. Your line is open.

Hi. Good afternoon, everyone. Thank you for taking my questions. I just on in terms of the sort of now on the growth and electrification obviously you've got the new orders coming through both in terms of new equipment and retrofits what's your sort of is this sort of the start of sort of now you know further orders down the line is your pipeline quite encouraging for this now going forward again both on sort of green field projects as well as then retrofit and do you have within that now do you have sort of targets that you are working towards in terms of your installed base and the sort of penetration level that you're looking to get to on that side of things and then what would be the sort of corresponding your thoughts on even directionally the margin impact of this and this sort of movement in that direction thank you so I would say it was really encouraging to see that that

We landed several orders in the quarter, both for new equipment as well as retrofits. I think we have seen the interest for quite some time, but it's also good now to see that in this quarter we have a greenfield operation that has decided to go fully electric. So I think that is clearly a step forward. I would say the pipeline is good when it comes to electrification, and we are in in-depth discussions with many customers around the globe. on this technology. When it comes to the installed base, of course, it's still yet small. But of course, this is where we invest the most when it comes to our R&D. And we have, of course, work as well to do with electrifying our full fleet, which we are busy doing. So I expect that this will gradually move in and become a bigger, bigger share in the coming years. Then when it comes to To the margins, this is very much related to the value that we can generate for our customers. We always, you know, that's how we defend our prices. Everything is related to the value that we can generate for our customers. And as we have talked, said many times before, electrification brings a lot of value, both when it comes to productivity, of course, reduce costs for ventilation, as well as lower TCO. So there's a lot of value that comes with this technology.

Thank you. And if I may, and also one last on the same thing, just following up. And then in terms of the aftermarket side of things, is there, is that potentially sort of then greater opportunity as this, as your kind of install base becomes more electrified or is that, is it sort of somewhat of a headwind then moving away from sort of diesel based, traditional diesel based equipment?

I quite often get this question, and today we are not really doing so much aftermarket on the diesel engines. Very often the diesel or the engine manufacturers do the service themselves. So I see this rather as an opportunity because the machines will become more and more technically advanced, which of course then very skilled technicians is needed to handle that service. One of the acquisitions that we have landed now in Q2 is Meglab, which comes with expertise in electrification infrastructure in mines. And that will of course enable us also to take a larger responsibility for rolling out electrical vehicles in the coming years. So that's a good strategic fit with our direction.

Brilliant. Thank you very much.

Thank you. And our next question comes from the line of Gustav Schering of Handels Banken. Please go ahead. Your line is open.

Yes, thank you very much. Two questions from my side. Firstly, on your battery electric orders in Q2, if you could comment on the size on top of the larger IVANO order you announced. Secondly, the supply chain challenges you're mentioning, Is there any way to put that into hard figures? And when you're saying that this is going to continue into age two, do you think bigger risks of delays on executing your equipment orders, or is this mainly related to somewhat higher costs? Thank you.

So on the electrification side, we have announced the Ivanplatz order. So that's one of them. The other ones we have not announced. But we have several orders in the quarter together with retrofit orders. When it comes to the supply chain challenges, we have experienced challenges for quite some time now, you know, many quarters. And it is disturbances on the inflow as well as challenges on the outbound. I think that's the total situation for logistics in the world. But I would say that the organization is managing this very well. But, of course, it requires a lot of hard work to daily prioritize the components and the flow lines. But we are managing well. So the impact in Q2 was not really material. And I think we have learned how to manage the situation in a good way. But it's, of course, a lot of work operationally.

Okay. Thank you.

Thank you. Our next question comes from the line of Claes Berglund of Citi. Please go ahead. Your line is open.

Thank you. Hi, Helena and Anders. Claes at Citi. Also a question on battery. Obviously more momentum, which is good to see. So a couple of questions here. So first is what is the split between battery as a service and outright equipment purchases? And I mean in the discussions with customers. Obviously we're coming from a low level, but when you, This comes with the customer, Selena. Battery as a service is obviously a win-win in that the customers will always have access to the latest technologies. Do you think battery as a service will become the bigger share going forward?

I will start here. I think it is a mixed picture out there. You know, some customers want to own the batteries. Some customers really like this battery as a service business model. So I think it will be, you know, a mix moving forward as well. But, you know, this is new revenue streams for us, the battery as a service, and it's tightly linked to the technology and, of course, the technicians and the level of competence that is needed to manage this. So I see this as a great opportunity. It also allows for a circular way of thinking where you reuse the battery and make sure that you have a full circularity on it. I think we will have a couple of years ahead of us now where there will be retrofits as well, where there is still life left on an equipment and then customers want to do a retrofit to battery technology. So I think we will have you know, a mix of battery as a service, new equipment, and retrofits, you know, for, you know, quite some years now.

Good for the recurring business. My second one is on that 50% green sales target by 2030. Is that effectively saying that you think battery can be near that number in roughly 10 years, or is it a mix between outright battery vehicles and other things you can do to the equipment? Because it sounds like quite a big number given the, replacement intervals of your equipment? Or do you factor in any greenfield ramp linked to copper, lithium, and so forth, and all the structural growth drivers that we can see in mining?

The target is on sold equipment. And it's a combination of battery technology, most probably, you know, there will need to be trolley solutions, and maybe also other technical solutions for the larger surface machines. So I think that's how I see it.

I think with any new technology that is introduced, it's slow in the beginning, but then it takes off. And I think when we look back at, let's say, technology shifts in, let's say, other industries, once it takes off, it will go very fast.

A very, very quick final one, I promise. On pricing, I think the TCO is similar on the battery machine versus conventional as the machine is often more productive. It's simply faster. That productivity improvement, can you try that as well, Helene? I'm not sure you will say this, but keen to understand the price difference if you get out more price on battery, net pricing.

A lot of the value that is being created is related to TCO. As you say, that is very often our selling point. And, of course, part of the TCO that comes, you know, how long, you know, the service intervals, how long each and every component will last. So I think that's, you know, it's very much a TCO-driven business that we are in. Thank you. And productivity is one component into TCO, you know, if the machine can run faster or load faster.

Thank you. And our next question comes from the line of Max Yates at Credit Suisse. Please go ahead. Your line is open.

Thank you. Just I had a couple of questions. So firstly, I just wanted to ask about kind of the growth rates that we've seen in your aftermarket business. They're obviously incredibly strong in tools and attachments and service as well and quite a bit above where we were in 2019. So Maybe if you could give a little bit of color, if we sort of compare back to 2019 levels, what is really different in these businesses? Is it that you're selling a lot more spare parts because production is higher? Is there maybe a bit of restock in here, or is this still the effect of those sort of additional service offerings that you've talked about, some of the sort of midlife services and things like that that are actually driving that sort of step up versus, what the business looked like in 2019?

I think it's a combination of all of this. So we are, you know, every quarter we add new service contracts, which has been, you know, that has been the way we have been working for many, many years. And, of course, for each and every contract we land, that is a revenue stream that will then be there for maybe three to five years. It's also these service products that we have developed, the upgrades, the midlife rebuilds, et cetera, that has generated also contributed good to the growth. But then it's really this hard work on driving the customer share, understanding where we have the machines. I mentioned the connectivity here. Now, of course, it's much easier for us to drive the aftermarket when we know where the equipment, where they are and how much they are running, et cetera. So that structured work in growing the customer share is paying off. So I think it's a combination of all of it. Then on tools and attachment, we have a very strong offering on both consumables as well as on attachment with, you know, good production base, a good footprint. And here I would say also that the supply chain, the availability is key. So, of course, with us now transforming the supply chain and delivering better availability to our customers, that is also an enabler for growth in tools and attachments.

Okay, that's helpful.

Really good numbers in the quarter.

I think we can see this also. I mean, there was a little bit of a bump in the road in 2020. obviously we have been working with this for quite a few years now when it comes to structuring our aftermarket products and and service products and uh i think that is now also paying off but with a little bit of a slowdown in 2020 now we see that we really get the payback for all the hard work that we also did during the have done during the pandemic so far but obviously now we we see the efforts paying off

Sure. And just, Helen, maybe a very quick follow-up on the service contracts that you mentioned. Could you give us a feeling, say, if we look back maybe three years ago, when you sell a piece of equipment today, how often is it coming with a service contract versus maybe where the business was three years ago? And if there's any kind of idea you can give us on what kind of additional revenue opportunity comes with a service contract when it's compared to just selling equipment and then providing sort of ad hoc spare parts. I'm just trying to understand kind of how, as that business evolves to more service contracts, how much bigger the addressable market becomes.

So I could say that, I don't think we share the numbers, but I can say that, you know, the penetration of service agreements is increasing, and that is also structured work that we are doing. It all boils down to that we need to demonstrate more value than if the customers are doing the service themselves. It is very much for customers to outsource their maintenance department to us. That's very much what it's all about. So I think we have also... you know, during many, many years, you know, you gain experience for each and every service contract, and then you can be more professional also in the service contract. So I think we are, you know, we have really a good understanding now of how to drive, say, a healthy win-win service contract with our customers, and that is what we are building upon.

And just maybe...

With the development of more technology-advanced products and digitalization, I think it also requires more expertise, and here we can add value to the customers. I mean, have a competence that it's difficult for them to maintain and improve themselves.

And just maybe very quickly, a final question just on the software business. Obviously, we have MineRP being added to the offering, but I was just wondering whether you have a number in mind for kind of how big your software business is now as a percentage of the total group. It would be interesting kind of how much of the business is on sort of recurring, I guess, software as a service within the group.

Of course, we have step-by-step built our, I would say, digital offering and acquisitions that we have landed now during the quarter, both with the mine RP as well as kinetic logging as well as mining tag in Chile. They will all contribute to our digital product offering. we are not quantifying, let's say, the percentage of revenue coming from licenses, but it's small.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Maddy Singh at Bank of America. Please go ahead. Your line is open.

Yes. Hi. Thanks for taking my question. Just a couple of quick ones, I hope. Firstly, I really found your presentation point on the aftermarket opportunity and electrification are quite interesting. So just on that, if you could talk about who are your diesel engine suppliers currently and do you share any revenue in the maintenance part of the business at all currently with them? And secondly, on the And have you seen any impact from the ongoing raw material, you know, price increases as well as logistical supply chain issues on your earnings in the second quarter? Has that in any way depressed your margins for the quarter? If we were operating in a like-for-like environment, let's say, what could have been the margins in the quarter?

maybe I can start with the last question I think we see increases in raw material prices but we are working very actively with our prices as always so I think it had no material impact in the quarter for us when it comes to To our end, the work related to our engines, we don't split any type of work with the engine suppliers. So it's either us doing it or them doing it. And that's really the setup in each and every mine that decides how we do it. But very often, the engine suppliers are doing the maintenance themselves.

And who are the engine suppliers?

we share that. Not sure. No, I don't think we would like to share that.

No, I think we don't share that. But it's, you know, we use the available engine suppliers globally.

Okay. Thank you.

Thank you. Our next question comes from the line of Nick Housen at RBC Capital Markets. Please go ahead. Your line is open.

Yes. Hi, everyone. Thank you for taking my question. It's just a quick one from me. You mentioned that demand for exploration tools was particularly strong in the quarter. Does that mean that customers are looking more at greenfield projects than in previous quarters? Or am I maybe reading a bit too much into that? Thanks.

It's both greenfield, I would say, and brownfield exploration ongoing. We see high activities in North America as well as in Africa. But it's a clear uptick in activities on exploration globally, I would say.

Thank you.

Thank you. Our next question comes from the line of Guillermo Pena of UBS. Please go ahead. Your line is open.

Hi, Guillermo Pena from UBS. I just wanted to ask maybe a couple of questions. Are there any indications of a T-buy effect at the moment that is there to secure production slot given your current, you know, supply chain issues? And then, you know, maybe a follow-up question on the large borders mix. Do you expect that to grow? in your mix as we go through maybe 2022, and what would that do to the overall margin mix, if I can ask? Thank you.

So we are, of course, busy ramping. Since volume are increasing and orders are increasing on our equipment side, we're ramping up, and we're doing it in exactly the same way as we have always done. We have an asset-light model. Majority of the pre-assembly is done at subsuppliers, and then we do the final assembly. And that's what we are busy ramping up. Of course, the... The supply chain disturbance is there, but as I said, we are managing, so I'm really happy with the progress there. We still hit that normal lead times, so it's not that it has impacted the lead time to any material level. The large orders are, of course, lumpy. As we have talked about before, Q1 we had a number of large orders and the same now for Q2. But it's very difficult to predict when they will come. But the pipeline is there. It's a healthy pipeline, and we have said that for many quarters. But then, of course, the timing of the large orders, it will come when the decision is taken. But I don't see any, I would say, margin impact on that. It's more the mixed effect between equipment and aftermarket, as Anders mentioned, that we have had really strong growth now on equipment for a couple of quarters.

Thank you.

Thank you. Our next question comes from the line of William Turner at Goldman Sachs. Please go ahead. Your line is open.

Hi, thanks for taking my question. I just have one question, given most of the ones that I had have already been asked. One thing that we've seen in recent months is some civil instability in South Africa and then also some political changes in Latin America. And I know that both of these points are quite new, so there may be not be much you've seen so far but I was wondering if you have seen any changes in kind of like order quotation activity or just general investment sentiment as a result And given that you do have a local footprint in both of these countries, do you have any ideas on how this will impact you? Like, for example, do you have a large tax liability in Peru or Chile? And, yeah, your impact from recent events in South Africa in the last week.

So, of course, we follow the development closely. managing the situation, you know, from a safety standpoint, for example, in South Africa, et cetera. But we don't see any changes in demand or in projects in the pipeline. So the activities are still at the same level as before. So no changes there. And that goes both for South America as well as for South Africa.

Maybe to add on this, I mean, this is happening and has happened in the past. And most of the time, the industry where we are present is important for the country. It typically could be a time of a little bit of uncertainty and instability, but typically this is an industry, and we saw that during the pandemic as well, that when a country closed down very quickly, they realized that they need to keep this industry up and running. Yes, it could be short-term. It's early to see, as you said. It's quite recent, but long-term, we're quite positive anyway, whether it's Chile, Peru, or Southern Africa.

Sure. And do you have a large tax liability in South America that we should be aware of? I mean, there does seem to be... Well, in Peru, for example, they are targeting – well, some of the tax suggestions are targeting minors quite specifically. They haven't actually announced, from my understanding, any, like, concrete plans. But just out of curiosity, is there a big tax liability there? Are you asking if we have a tax liability?

Yeah, yeah, yeah.

No. Okay. Great, thank you. Thank you.

Thank you. Our next question comes from the line of Robert Davies at Morgan Stanley. Please go ahead. Your line is open.

Yes, thanks for taking my questions. One I had was just on the recent movements in metal prices. They've come off recently after a very strong run in things like copper. I just wondered on the ground whether that actually made any differences in terms of willingness for customers to pull the trigger because most of the backdrop you were painting has been obviously quite positive. I just wondered if that correction that added the impact was my first question. Thank you.

I would say that the industry is not reacting that quickly on movements in a month or so. Expanding a fleet or expanding a mine is much more long-term plans. And with the mine plans, it's many, many years. So we don't see any changes in activities related to changes on a monthly basis. Generally speaking, if we compare With historical levels, it's still, you know, really high levels. Okay.

Thank you. Understood. And then my follow-up was just around the sort of aftermarket component to the battery electric vehicles. How much, is there a significant change in footprint or cost base that you're going to need to add to service those, or is it, because you mentioned you weren't really sort of servicing the diesel engines very much. That's typically what the engine providers themselves. I'd just be wondering, I was just wondering what you needed to sort of put in place to provide that service to those customers.

Thank you. So the service footprint we already have. So it's the same facilities where we do all the service that we will use for this. But of course we're investing quite a lot in training. We have certifications that our technicians need to pass to be allowed to do service on battery machines. So that is the type of investment we're doing. But the footprint, we already have a very solid service footprint that we will use.

That's great. And then one final one, if I could. I was just on the outlook for the sort of non-mining markets around infrastructure. Just would you give us a bit of color regionally? It's obviously quite a quickly changing, you know, kind of set up, I guess, across different regions as COVID kind of flares up and goes back down again. Just if you could give us a regional overview of the trends you're seeing on the infrastructure side of the business. Thank you.

So we have seen, if we look in Q2 now, we had really high activity levels in North America as well as in Europe. A little slower activity level in India related to the pandemic, good activities as well in China. Then, of course, over a year, typically the construction season is very, very dominant in the first half of the year, less so during the autumn. But very high levels both in Europe and in North America, which is the two main markets for us.

That's great. Thank you.

Thank you. Our next question comes from the line of Anders Ulstrand for Securities. Please go ahead. Your line is open.

Yes. Hello. I have a question regarding the mining capex cycle. Do you see any structural changes regarding replacement capex, greenfield, brownfield, etc.? ? I would like, if you could elaborate a little on that topic.

We see both replacement, the majority of the orders are replacement and brownfield expansions. Then there are, you know, fewer greenfields and this, the one that we mentioned now and that we landed now in Q2 here in South Africa is one of these greenfields that are being now put in place. But I would say the majority of the orders are replacement and expansion of existing mines. And it has been the same for quite some time. And that's, I think, would say the normal split that we see.

Okay. And you said that lead times were normal so long. So you don't, you haven't seen any sort of pre-ordering due to delayed delivery times.

No, I wouldn't say that we see any pre-ordering. That's very seldom, I would say, the case. It's more that investment decision has been taken to expand the fleet or to go into nearby asset or to replace a fleet. So if you look on the large orders, several of them are also replacement of existing fleet that we had out there.

Okay, interesting. Okay, thank you for my part.

Thank you. And our next question comes from the line of Andrew Wilson at J.P. Morgan. Please go ahead. Your line is open.

Hi, good afternoon. Thanks for taking my question. I just wanted to ask a couple of questions on the same theme, I guess. The supply chain actions which you've been taking for, I think, a number of years now, it sounded as if the benefits of that were coming through, but obviously being offset by some of the challenges which, you know, I guess you saw some industry players are seeing. So I just wanted to check that was the case, i.e. there hadn't been any change to your expectation of, I guess, the cost benefit of that. And I guess secondly, and Anand has mentioned the change in net worth and capital, which obviously makes sense as the volumes come back. Just to get a sense of, you know, are you confident that you're going to be in a structurally lower position from a networking capital to sales perspective as a result of the supply chain action? So I guess, broad question, but really trying to understand what the longer-term impact of that supply chain program is going to be and how confident you are in terms of delivering on it. Thank you.

Yeah, so the supply chain program has its three components. It's to increase availability towards our end customers, to enable an even better growth for the aftermarket, it's to improve the networking capital, and to shift the transport mode from air to sea, and by that, both saving CO2 and transport cost. Where we are today, we see good improvements on availability, We also see a better efficiency on the tide capital, but as I said, we have a delay in, we see that we have done the shift from air to sea, so that you can see in our CO2 numbers from transport, but yet we have not seen the full benefit of the savings there related to the increased freight cost, both for air shipment and sea transport. But the overall ambition is to be more efficient long-term with our networking capital. So that's an overall ambition with the project. Then, of course, the COVID situation last year, you know, has caused some delays and some challenges operationally on top of this, but we will continue according to plan when it comes to rolling out the structural changes of this program.

Okay, so this is very much a case of it just being a matter of time before it's a bit more apparent for us.

No, I just wanted to add, sorry, but... Given the situation that we have experienced over the last year and a half, obviously we have, let's say, forces going in the different directions. So it's not easy to see what is actually going in our favor and not. But we have managed quite well in terms of reducing inventory and being more efficient today. despite also taking some decisions to stock up actually to secure availability and to support the customers. So it will be clearer if we at some point in time are coming back to some type of normal situation.

Yeah, that's perfect. That's just exactly what I wanted to check. Thank you.

Thank you. Our next question comes from the line of Dabashish Chand of Societies General. Please go ahead. Your line is open.

Thanks for taking my questions. I have two left. First, on the service business, I was wondering how much of the growth in the business was driven by the pent-up demand with some of these component upgrades now coming through and how much was due to the strong underlying activity? uh secondly again coming back on the margins given there was no material impact from raw materials and logistic costs so could you give us an idea like how much of an impact maybe the ramp up cost had on the sequential decrease in the margins we have seen in the second quarter thank you

I can start on the service growth there. So it's a combination of high activity levels in general out there. As I said, you know, new service contracts coming on board. There is, of course, when production levels are high out there, a faster way to get productivity up is to do rebuilds on the equipment. So that is what we are experiencing now. The customers also want to do upgrades which is a quicker way then to make sure that you have a higher productivity from the equipment or from certain components. So I would say it's a combination of the ambition to produce a lot of minerals out there in mining that has built up this really nice water growth. I think underlying we see healthy activities out there. But, of course, these service products that we managed to land a number of them during Q2, they will not be there every quarter. You know, that's also, you know, like a lumpy thing that comes and goes depending on, you know, which customer wants to do an upgrade during a quarter. But I think systematically we have step-by-step. increase our offering of service products. And that is also to make sure that we are ready when this opportunity comes so that we can make sure that we can generate this productivity improvement also with old machines. Do you want to comment on the ramp up cost?

We obviously have some influence, but it's not really material on the cost side, but we are not immune to what's going on around the world. So, we see some, but it's not dramatic.

So, sorry for interrupting the Q&A session. Already one hour. Thank you very much, everyone, for listening. It was a good question, good conversation and answers. If anything is still unclear, please reach out. All of us are happy to help, as always. We wish you a wonderful summer and stay safe. And as always, we wish you successful investments. Thank you. Thank you so much. Thank you so much.