Epiroc AB (publ)

Hello, everyone, and a warm welcome to the Epiroc Q2 results presentation. My name is Karin Larsson, and I'm head of investor relations here at Epiroc. And with me today, I have our CEO, Helena Hedblom, and our CFO, Håkan Folin. They will briefly present the results before we do the Q&A, and it's possible to listen to the presentation and the Q&A session in the webcast, but the questions will be handled over the phone as normal. Helena, please, the stage is yours.

Thank you so much, Karin. So I will start with some highlights. The demand and the customer activity remained high and orders received increased 21% to 13.4 billion. There was a large impact from Russia, both year on year and sequentially, including an effect from order cancellations. If we exclude Russia from the comparison, the organic growth was 18% year on year. We won five large orders above 100 million SEK in the quarter, and the large orders were in total more than 800 million. Service performed very well with strong organic growth. Also, the order intake from construction customers was high. And a special highlight this quarter is electrification. It was our best quarter ever with several equipment orders, orders for battery retrofits and for electrical infrastructure. And we are further strengthening our capabilities here. We acquired another provider of electrical infrastructure solutions, and this time in Australia. Our revenues were record high with double-digit organic growth in the aftermarket. And the operating profit was impacted by some one-time items, including a provision of 400 million for Russia. If we're just for these, the operating profit and margin were record high. So all in all, a strong quarter. The organization has managed to deliver in a good way despite many challenges. So very well done, everyone. A major challenge is the war of course in Ukraine. It is horrifying and we continue to take measures to protect our colleagues and manage the complex situation both in Ukraine and in Russia. And if we look more broadly, we continue to see higher impulse costs and supply chain challenges. However, our agile organization can adapt quickly to changes and challenges, and our large aftermarket business also provides resilience. And we are also investing and building for the future, and I will come back to this later on. But first, some key financials, and I will be brief, and Håkan will come back with more details later on. So high order intake, as mentioned, with 6% organic growth, but with a large negative impact from Russia. 9% organic revenue growth and record high revenues. And I think this is solid considering the supply chain challenges and the impact from Russia. So even in this situation with record revenues, we are building backlog and we have long delivery times. So many of the machines that we booked this quarter will be delivered in 2023. Our operating profit was 2.8 billion, adjusted for items affecting comparability, which gives an adjusted operating margin of 23.6%. And that is the highest ever for Epiroc. So a strong quarter overall, but also remember that the second quarter is a solid quarter from a seasonal point of view. The third quarter is typically somewhat softer on orders and on revenues compared to the second quarter. so now over to page four you know that innovation is one of my priorities so a couple of examples we continue to expand our digital offering and we have now implemented a solution for tunneling construction and the solutions improve both safety and at the same time it is improving productivity Also, it's exciting that we will try the first ever battery electric surface drill rig in this quarter. We did not write so much about our large orders in the report, but I would like to mention a few here. As you see, we are really partnering with our customers. For example, we work together with Glencore and Boliden, which both ordered a fleet of battery electric equipment and automation solutions. Fresnillo in Mexico is a long term partner for us, and now they've ordered underground equipment with several automation features. So we are proud to be selected as partners by our customers. And as you can see, we have a very comprehensive offer in the areas of electrification, automation and digitalization. And with our acquisitions, we build for the future and we develop even closer relationships with our customers. We completed the acquisition of GTMEC, a provider of electric infrastructure solutions in the quarter. And we also agreed to acquire RMP, a rock drill manufacturer in Mexico. So these will be great contributors to EPPROC and I welcome our new colleagues. So then over to aftermarket, we are successful with our service products and our structured way of working, which is visible in the order intake. We have also introduced new innovations and I would like to mention some highlights here. The V cutter is setting a new standard when it comes to effectiveness in trenching. And our new drill bit assortment with diamond protected buttons prolong the replacement intervals, which gives many benefits. It's safety, productivity and lower CO2 emissions. So that's really good if you ask me. And our connected fleet is also growing. We are close to 7,000 units now delivered with connectivity. I also want to mention here that we continuously invest in our aftermarket footprint. And this year we are, for example, building for the future and investing in service facilities in North America, in Africa and in Asia. And these investments will support our growth in the coming years. As you know, we always try to make good things even better. And in the quarter, we announced a couple of changes to make EPROC better for the future. So we will relocate the production of a range of surface drill rigs from Japan to China. And this move will improve our long-term competitiveness and our agility. Our facility in Nanjing in China is larger and have a significant infrastructure for production, sourcing and logistics. And in Japan, we are instead investing in our sales and service organization. Also, we have decided to enhance focus on our digital solutions, so we have created a dedicated division with commercial responsibility for our digital solutions, including the recent acquisitions in this space. We have also appointed a chief technology officer, a CTO, who will have responsibility for the development of common automation and digital platforms, as well as for group IT. So then over to sustainability. And if I start with people, we are pleased to see that the share of women employees continued to rise and we continue to promote inclusion and diversity. And we have many initiatives ongoing in the company. When it comes to injuries, this is concerning. We continue to have a negative development here with more work-related injuries. Fortunately, we did not have any severe injuries in the quarter, but we need to bend the trend here, and we are taking many actions to achieve an improvement. On planet, our CO2 emissions from operations decreased, and we have installed many solar panels on buildings, and we are buying and using a higher share of renewable electricity. The picture shows our factory in Hyderabad in India. For transport, the CO2 emissions increased, mainly due to higher volumes transported. But relative to revenues, however, the CO2 emissions decreased. So I will now leave the speaker line to Håkan, who will give some more details on the financials.

Thank you, Helena. Before we go into the details and analysis of the financials, some words on Ukraine and Russia, our financials and our exposure there. For us, the number one priority has been and is the safety and well-being of our colleagues. During the quarter, we have continuously evaluated the situation, which is very complex. Now it is our assessment that it's currently not possible to conduct business in Russia. It also means that we make adjustments in our Russian operations to adapt to the current situation. And in a difficult situation like this, we want to do this in a controlled manner and with respect for our employees. Therefore, we have taken a provision of 400 million relating to accounts receivables, inventories and restructuring costs in Russia. And after this, the value of assets in Russia and Ukraine amounts to in total one billion. During the quarter, we have collected outstanding receivables, which means that the majority of the assets are now in cash. If we adjust for currency and the provisions, the assets have decreased by more than 400 million Swedish kronor since the end of March 2022. And at the end of June, we have orders on hand of about 1.4 billion combined in Russia and Ukraine. The number is heavily impacted by currency here as well. If we adjust for currency, orders on hand more than half since the end of March, mainly due to the cancellations of 480 million in Russia. And also in the second quarter last year, close to 8% of the order intake was related to Russia and Ukraine. Some revenues have been recognized in Ukraine and Russia during Q2 2022, but significantly less than in Q1 and then in Q2 2021. And then finally, a reminder that Ukraine and Russia represented almost 77% of revenues in 2021, and we do not have any manufacturing in these markets. Okay, if we then look at the development in Q2, our operating profit increased 9% to 2.4 billion, but we also had 420 million of items affecting comparability. 400 of these for the provision in Russia that we talked about, 95 million relating to restructuring in Japan, and then a positive impact of 75 million from the LTI program. So the reported margin was 20.1% and the adjusted margin 23.6%, which, as Helena said before, actually the highest ever for Epiroc. If we look into the details then on the profit bridge, the organic growth, volume and price contributed with 445 million, 2.4 percentage point to the margin. So a good flow through compared to last year. Currency supported the operating profit as such, but actually diluted the margin slightly with 50 basis points. Structure and acquisition together, large negative, as mentioned on the last page. Acquisitions had a negative impact on the profit and the margin. And the dilution of margin from acquisition was about 80 basis points. Now I'll focus on the segments, and I'll start with equipment and service. Here, order increased 10% organically. If we exclude Russia, organic order growth was actually 25%. Orders received supported by currency by 11% versus last year. We had a contribution from acquisition with 5% to orders, and about half of this came from the acquisition of JTMEC, which we closed during the quarter. As Helena mentioned, we won orders above 100 million, five of them, and in total 800 million. And as we have said before, these equipment orders are lumpy, but we see that the underlying demand was healthy during the quarter. Organic growth in service was 14%, very strong and supported by some large orders, for example, for midlife services. And also in this quarter, we saw examples of customer placing orders for parts to safeguard deliveries, but I would say to a lesser extent than what we saw in the first quarter. On the revenue side, organic increase was 8%, actually with a negative growth in equipment, but a strong growth of 18% in service. I will cover the details on profit and margin on the next page. But before this, I want to follow up on the financials of the relocation of manufacturing from Japan to China. We took a restructuring cost of 95 million this quarter, as mentioned. We have sold our property in Yokohama. We will have a capital gain of about 350 million Swedish kronor from this. And in our press release, we indicated that this capital gain will occur sooner. But now we expect it to be realized first in 2024 when the property actually changes ownership. Okay, the reported operating profit was the same as last year, 1.9 billion. But if we adjust for the provisions in Russia and the restructuring cost in Japan, total 422 million, adjusted profit was 2.3 billion. The adjusted operating margin was 26.6%. Organic growth and mix contributed to the margin with 2.6 percentage point. This was almost offset by currency and dilution from acquisition. The share of service revenues was 63% compared to 58% last year, which impacted profitability positively. And as you know, we do not guide on margin, but the mix effect, and in this quarter a very strong mix effect from service, we expect this to taper off once we deliver and invoice more equipment. So over to tools and attachment, orders increased by 5%, but actually decreased 8% organically, mainly due to Russia. And if we exclude Russia, organic order decrease was 2%. Order intake, 2.8 billion, clearly lower also than in Q1. Typically, there is a seasonal lower order intake in Q2 versus Q1. And then we have Russia on top of this. Revenue, however, grew 11% organically and was, as usual in the second quarter, seasonally strong. This was actually the highest revenues ever, and the focus right now for this division is to maintain a good level of profitability and deliver on our orders on hand, which are at historically high levels. And the profit bridge for tools and attachment, where we had a reported operating profit which increased 20%. If we adjust for the provision in Russia, it increased 38% to 573 million, supported by the organic growth, currency and also acquisitions. Adjusted margin was 18.2% and also the margin was supported by the organic growth and currency, while there was no bond in impact from acquisitions. And now we have actually had four quarters in a row with an operating profit margin above 18% for tools and attachments. Back to group level then, and we dig down in cost, net financials and tax. We saw again after lower Q1, higher cost. This is logic with more activities, more cost and logistic, continued investment in R&D, etc. And the absolute number is also impacted by currency and acquisition, both year on year, but also sequentially. If we measure as a percentage of revenue, costs were at 16.7%. Net financial items, 89 million versus 44 million last year. Volatility here is mainly exchange rate related, while interest net was actually quite stable. Income tax expense was 590 million. This corresponds to a tax rate of 22.6% versus last year, 20.8%. And last year, we had some one-time effect, which lowered the overall tax rate. If we then look at cash flow, our operating cash flow in the quarter increased to 1.5 billion from 1.2 last year, positively impacted by higher operating profit, but negatively impacted from change in working capital. We increased working capital with about half a billion during the quarter. And we do tie up more working capital when we grow. And for inventory, we also secure availability of components. And as you know, both inbound and outbound lead times are unusually long and also unreliable. Cash conversion last 12 months was 82%, slightly higher than in Q1. And on this page, you can see the increase in working capital. It's up 18%, excluding acquisitions and currency. We tie up more working capital when we grow, but if we relate it to revenues, it's still lower than last year at 29.5%. Capital employed is increasing, mainly due to the growth and due to acquisitions, and we had an impact this quarter from the dividend payment that we performed. Return on capital employed, however, continues to improve, and mainly this is due to the higher operating profit, and we are now at 28.1%. We have a strong financial position. We have net cash of 876 million, and this is despite the first payment of the dividend of 1.8 billion that we did in May. The second payment will be done in October, and we'll be the same amount, Swedish krona 150 per share. So that's it from me. Back to you, Helena.