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.