Epiroc AB (publ)

Hello everyone and a warm welcome to Epiroc Q3 results presentation. My name is Karin Larsson. I'm head of IR here at Epiroc and with me today I have our CEO Helena Hedblom and our CFO Håkan Folin. We will do like we always do. That means that Helena and Håkan will briefly present the results before we do a short Q&A session. And that will be done over the phone. All in all, we have one hour for the presentation today. And I know you are all eager to hear more about this strong set of results. So without further ado, Helena, please, the stage is yours.

Thank you so much, Karin. And also from my side, welcome. Yes, it was indeed a strong quarter. Demand remained high. Excluding Russia, the order intake increased 5% organically. The aftermarket developed well with a particularly strong growth in service. Orders up 22% organic year over year. We also won a handful large equipment orders totaling more than one billion, and many of them included automation, digitalization and electrification solutions. And these solutions help our customers to increase safety and productivity, as well as lower emissions, which is critical regardless of business climate. We have published three large orders, but we have also some smaller ones worth mentioning. In Africa, we got an order for our collision avoidance system for more than 60 underground machines to increase safety. And in Australia, GTMEC, one of our recently acquired companies, got their largest order ever for electrical infrastructure solutions for a tunneling project, about 70 million. We also successfully managed to increase the output in the quarter despite supply chain challenges. And this translated into record revenues. We also did well on compensating for increasing cost. And this led to a record adjusted margin. So profitable growth indeed. So we are a productivity and sustainability partner to our customers and together we drive the transformation in the industry. And we emphasize innovation and we continuously expand our offering. And we also complement our innovations with acquisitions that accelerate our efforts. And we have signed five acquisitions this quarter, which shows that we are executing well on our acquisition plan. And we have more in the pipeline. So I will tell you more about innovations and acquisitions later on. Briefly then on the financials, as Håkan will present more details later on. Reported orders were 12.3 billion. And all orders in Russia have now been removed from the order book. Excluding Russia, our orders were 13.3 billion, corresponding to an organic order growth of 5%. Revenues increased 28% to record high 12.8 billion, corresponding to 12% organic growth. And reported operating profit, but also record high at 2.9 billion. We took another provision related to Russia amounting to 150 million and the adjusted margin was 23.9% up from 23.4%, also a record. The cash flow came in at 1.8 billion versus 1.6 last year. Not bad, but I think we can do better on working capital going forward. So now some comments on innovations, attractive acquisitions and partnerships that strengthen our leading position. I will start off with innovations. We have launched our new Boomer E10 and E20 phase drilling rigs, and they are suitable both for the mining and construction industry. So with the tele remote features, the operator can now monitor the machine safely from a control room and still be as much as 25% more productive. Both rigs are available with optional battery electric driveline for zero emission tramming, of course. Another interesting innovation is the auto-bolt reload. In short, it is automation for bolting and it removes the need for manual interference. And this is key for operator safety. Since the end of June, we have been very active on the acquisition front with five completed or announced acquisitions. We started off with RNP Mexico. They developed, manufactures and sells rock drills and related components, serving both mining and the construction customers, mainly in Latin America. AARD mining equipment, they are specialized in low-profile underground machines and they complement our underground offering and strengthening our position in Africa. Then we have Redlink. They provide wireless connectivity solutions. And robust wireless networks are vital to support mining automation, including autonomous and tele-remote solutions and digitalization, which in turn strengthens safety and productivity. Then we have GeoScan. GeoScan provides digital geological imaging solutions to mining companies and complements our current offering within ore body knowledge. And ore body knowledge is very important to make the whole mining process more efficient. And finally, Wayne Roy will strengthen our presence in the North American construction market and increase our capacity for manufacturing advanced attachments in that region. So all in all, this means that we are executing well on our acquisition strategy, which is very pleasing to see. And all these companies will strengthen our market leading position and our aftermarket footprint. So a warm welcome to our new colleagues. And before I move to the next slide, I want to mention our green bonds. We issued green bonds amounting to 2 billion in September. And there was considerable interest and the proceeds will enable us to finance sustainable investments and achieve our sustainability goals for 2030, including halving our CO2 emissions. So now we will take a look at the aftermarket. The customer activity was high in the quarter and our service business developed very well with strong growth. Excluding Russia, the orders for service increased 22% organically and the growth reflects a high activity level, larger rebuilds and a meaningful order within electrical infrastructure, as I mentioned in the beginning. For tools and attachments, the development on orders excluding Russia was more or less in line with the previous year. We do see a somewhat lower order intake for attachments and exploration tools, which were very strong last year. On the positive side, it's good to see that we are reducing our orders on hand and we are shortening our lead times. An enabler to grow our aftermarket is connectivity and the number of machines delivered with connectivity is growing. Another way of growing our aftermarket is to have the most skilled service technicians. And currently we have roughly 6,600 around the globe. And to increase customer focus and build even stronger relationships, we will establish regional parts and service divisions as from 2023. And the regionalization of the service business will also improve internal performance and efficiency. In short, increase operational excellence. And we are in a constant improvement mode, as you know. Over the last few years, we have changed our supply chain. We have created a more focused organization and realized our distribution network. And we have seen some good results despite the challenges within the supply chain. We have improved in availability. We have reduced environmental footprint as we ship less with air freight. And in Q3, we also successfully managed to increase equipment output from our factories. Our ambition going forward is to continue to improve availability, efficiency and inventory cost. We always strive to do better. And that leads me to the topic of sustainability. In a world where speed and digitalization are ever more important, it's vital that we attract the right people to future-proof our organization. And this includes attracting and retaining people that are collaborative, creative, and adaptable. And for this, we need to utilize the whole talent pool And it's pleasing to see an increased share of women employees and women managers in EPPROC. It's less encouraging to see the development within safety. The total recordable injury frequency rate has increased compared to last year. And we are now increasing our efforts even further to bend this trend. And this includes additional training and dedicated task force teams for certain entities. We must make sure that all EPROC employees come home safe and sound after a working day. On carbon emissions, the trend is better. In our operations, we decreased our emissions, and in relation to sales, we also decreased our emissions in transport. However, in absolute numbers, the emissions from transport have increased as we deliver higher volumes. And then a few words on Russia. It has been more than eight months since the war started in Ukraine, and it is truly horrifying. We stopped all deliveries to Russia on March 1st, and it is our assessment that it's currently not possible to conduct business in the country. So all orders in Russia have been removed from the order book, which impacted the reported orders received with one billion. We also took a provision of 150 million in the quarter, which is in addition to the provision taken in the second quarter of 400 million. And the provision is related to receivables, inventories and restructuring cost. So Håkan, please guide us through the financials.

Thank you very much, Helena. Let me start with the operating profit. It was very strong at 2.9 billion, negatively impacted by the provisions related to Russia of 150 million and also a change in provision for the share-based long-term incentive program of 14 million. Adjusted for this, the profit was above 3 billion, which is the highest level ever for Epiroc. On the margin side, we had tailwind from the strong organic growth, but acquisitions and currency diluted. The adjusted operating margin was 23.9%, up from 23.4% last year, and this was also record high. Looking into the bridge, the profit is rather straightforward, with a strong organic contribution. The margin impact from currency, however, might be different from what you had anticipated. Currency was positive in absolute contribution to profit, plus 260 million, but negative on the margin side. And this is largely explained by period end effects when revaluing local inventory. If we then move on to equipment and service, excluding Russia, the orders received were 10.5 billion, corresponding to an organic order growth of 8%. Currency contributed with 12%, while there was no contribution from acquisition. Previous years included order on hand from acquired companies of approximately 3%, and then we reversed that in the bridge, and that's why we get the 0%. For equipment, excluding Russia again, the orders declined 7% organically. As Helena said, we had a handful of large orders amounting to more than 1 billion. And the orders are rather diverse when it comes to metal and geography, but it's clear that our customers seek solutions to increase their productivity, safety, as well as improving their carbon footprint. For service, excluding Russia, the orders increased 22%, and this is of course really strong. The growth reflected a high activity level in both the mining and the construction segment. Revenues were also strong at 9.8 billion, as was the adjusted operating profit, both record high for equipment and service, and the adjusted margin was 26.2%. acquisitions and the regional structure. Helena has already covered that, so I will move on to the next slide. And also here, the profit is rather straightforward. We started with 1.9 billion last year. We add 480 million in organic contribution and then another 159 million from currency. And then we have the structure, which is mainly then the provision related to Russia impacting negatively. Reported operating profit of 2.4 billion and adjusted them for the provisions. It gives us a record high profit of close to 2.6 billion. Adjusted margin of 26.2% was marginally lower than last year. And here the positive contribution from organic growth was offset by a negative effect from currency. Dilution from acquisition was small, around 30 basis points. Moving on then to tools and attachment, and if we exclude Russia here as well, orders received were 2.9 billion, which correspond to an organic order decline of 2%. Last year, one should remember, we had a very strong organic growth of 14%, so comparables are rather tough here for tools and attachment. Currency contributed with 12%, while acquisitions were negative, minus 5%. And again here, previous year in the bridge included orders on hand from acquired companies of approximately 7%, which we then reversed now in the bridge. Revenues increased 12% to 3 billion, and this was almost entirely due to currency. And the adjusted margin was record high at 19.2%. So what has happened then if we look back a year in the bridge? Well, the positive effect year on year came mainly from currency, plus 74 million. Once we add back the provision related to Russia, we have a profit of 583 million. The adjusted margin increased to 19.2%, which is mainly then due to this positive currency contribution. And there was no impact, dilution or accretion from acquisition. So is this margin sustainable, you might ask? Well, we don't provide guidance on margin, but we are very pleased to say that tools and attachments now have five quarters in a row with a margin above 18%. Looking into cost, they are higher. The reasons are a combination of currency, acquisition, and we also continue to invest in the business with more activity in marketing and R&D. The high activity level is also reflected in higher cost for logistic resources as these are including admin cost. However, if we look in relation to revenues, the costs are relatively stable and they are actually somewhat lower than what we saw in Q2. Net financial items were minus 24 million. Last year, they were positive, and there we had a positive exchange rate difference. The interest net was 23 million, and given the overall higher interest rate level, this will be somewhat higher going forward. We had an effective tax rate of 22.0%, and looking ahead, an effective tax rate for us will be roughly between 22 and 24%. We continue to deliver solid cash flow, operating cash flow, and in this quarter it amounted to 1.8 billion, somewhat higher than last year. In the table, we see that the change in working capital was more negative than last year, and I will cover that also on the next slide. And this is the main reason as to why the cash flow isn't even higher than Q3 last year. So on the net working capital then, compared to the previous year and excluding acquisitions and currency, net working capital increased 23% to 7.7 billion. The increase is mainly in inventories, is explained by growth and in combination with challenges in the supply chain. The average net working capital in relation to revenues in the last 12 months is now at 30.4%. It's up from 29.8% last year. And you can trust me, this is very high on our agenda. I feel encouraged by the fact that we managed to increase our output in the factories this quarter, and we strive to continue to do that also in the fourth quarter. Return on capital employed improved compared to last year to 27.9%, and that's an increase of almost three percentage points. Our financial position remains strong. We have a net cash position of 1.5 billion. And a strong financial position allows us to invest in organic and inorganic growth. And we are quite active when it comes to acquisition, as you heard from Helena before. In the near term, we will close and pay for three acquisitions, and also we will pay for the second part of our annual dividend. And actually, this dividend will be distributed tomorrow, 1.5 kronor per share, and in total 1.8 billion. So Helena, that was it for me and back to you.

Thank you so much. So to briefly conclude then this strong quarter, we have won several large orders that improve safety, increase productivity and lower emissions. And we have yet again a strong service business. We have successfully managed to increase our output despite the supply chain challenges and we deliver profitable growth. We have acquired several companies, proving that we're executing well on our M&A strategy. And finally, by collaborating closely with our customers, partners and innovation leaders in other industries, we drive the transformation of the mining and construction industries. So together we make it happen. And also to conclude a few words then on what to expect onwards. So we expect that the underlying demand both for equipment and aftermarket will remain at a high level in the near term. But that said... The economic uncertainty with rising inflation around the globe makes it increasingly important that we remain agile and resilient in EPROC. And our long history of decentralization and our close customer relationships serves us well. So over to Karin then, and we will start the Q&A.

Yes, thank you, Helena. Thank you, Håkan. Well done, as always. It's time for the Q&A session, and we will do it over the phone, as we always do. And to me, operational excellence in the Q&A session means that you keep your questions short and we keep the answers clear. So, operator, please open the line.

Thank you. Just as a reminder to participants, if you do wish to ask a question, please dial 01 on your telephone keypads now. When it's your turn to speak, you'll be announced and you can ask a question. And if you find your question is answered before it's your turn, you can dial 02 to cancel. Our first question comes from the line of Claes Berglind of Citi. Please come ahead, your line is open.

Thank you. Hi, Helena Håkan, Claes at Citi. So my first one is on the equipment side. Obviously, it's great to see the service business yet again showing strong growth. I wanted to zoom in on the equipment business ex-Russia. We know that orders typically are weaker quarter on quarter into the third. There is some seasonality in there. But you are singling out, it seems like, Helena, North America now being weaker. Is that also linked to the construction, infra side, or is it mining? Also, did you say larger orders were over one billion? I think I heard same as second quarter around 800 million when I put up a car in before, but might have been an equipment comment, not group. Thank you.

No, so I would say so. So we have seen a softening of the construction market in North America. And as you know, that's a big, big portion of the equipment or a big portion of our market there. So softening both there as well as in China on the equipment side. And of course, when you're comparing a quarter with a previous quarter, you can always have these large orders that plays with the numbers, so to say. But if we look on the equipment orders in total, we continue to see, you know, roughly half is expansion orders, roughly half is replacement orders. If you look on it from a total perspective.

Okay. And it was one billion total group. And then, yeah, that was on the large side, right? Yeah. Okay. Yes. My second one is on... It's on services. I doubt that you have seen this already, given the organic growth that you deliver at the moment. But we're getting some questions on potential pushouts of rebuilds should we enter a recession. And I appreciate that the miners are focusing on productivity right now. And this business is growing very fast for you. But it has really been a positive decoupling versus production rates last couple of years. And I just wonder, Helena, if you could help us maybe a little bit with how much is rebuilt relative to spare parts and service contracts right now of the orders?

But it's contributing well, not only normal rebuilds, but also the service products that we have developed over the years. I don't share that view that we see that customers are pushing that out in time. I would say it's the other way around, that we see more and more rebuilds. And that is, of course, to keep up productivity, waiting for machines to be delivered. and to keep productivity up for our customers. So we have not seen, you know, delays when it comes to these type of rebuilds, contrary, I would say.

Yeah, but if you look back on the previous downturns, I know that you don't see it now, it's the contrary, but is this a risk to the service growth and to recession? Or are we going to see the decline more on the equipment side and then rebuilds keeps going?

I think rebuilds will keep going, especially if you include, you know, it's not just rebuilds and you put the same machine back. When you include also new features, it's a way for our customers to improve productivity or safety. much faster than waiting for new equipment. It's also the difference between OPEX and CAPEX for our customers. So I don't see that we will... I think this trend is clear. And also from a sustainability perspective and a circularity perspective, it's a win-win.

Okay, very quick final one on the share of battery electric. If you could help us with how much of orders are now battery electric versus a year ago? We heard from one of your peers, a pretty big step up here in the teens. And also if battery as a service is still around two thirds of the order and your quotations. And to what extent you recognize the revenue stream in the equipment division more relative to service. I think that's the case, but would be good to get an update.

So year to date, clearly, you know, electrification is taking off both on the equipment side. And we have also other products now with electrical infrastructure, as we have talked about. It was really pleasing to see that large order of 70 million that we landed in the quarter. It was the largest order ever for those type of products. We continue to see majority of our customers, they choose battery as a service. So that is good. The revenue you see in equipment.

Yeah. Okay. No sharing total. I'm trying.

No, not yet. Not yet.

Okay. All right. Thank you.

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

Thank you. Maybe a couple of questions from my side. One is a little bit of a bookkeeping one. With regards to your backlog margin after excluding Russia, is that accretive or dilutive to your backlog margins overall? I'll stop there and ask the second one later.

You mean if we have managed to increase prices to compensate for the increased costs? I think when we look at it, we have been very active now for many, many quarters since it has been such a dynamic environment with increased costs. And the organisation has done a tremendous job in protecting the margin, as you can see. So I feel very comfortable that we have done our homework when it comes to pricing and we continue to be very active since it is a dynamic environment.

I guess maybe if I understood you correctly, Julian, your question was more on the profitability in Russia and if it will change now when we don't have Russian orders being delivered. I mean, Russia was a big and large market for us, but we don't comment on profitability by specific end markets.

That was my, I think Helena answered my second question, so I don't need to ask it anymore.

Thank you. That's how good she is.

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

Thank you. Just my first question was around your supply chains, and obviously you have a fairly outsourced business model. So I just wanted to understand, where do you buy most of your components from? Because we're hearing across Europe quite a lot of increases in component costs, and particularly from European suppliers. given higher energy costs. So I just wanted to understand a little bit around your supply chains, whether you are seeing any sharp increases in your component costs. And I appreciate while we're not seeing any impact now, is there risk that maybe over the next couple of quarters, some of the orders taken earlier in the year, maybe see a bit of margin pressure and how you go about managing that? So that's my first question.

So we have for a number of years now been maximizing the potential with our footprint. So we have a strong production base in US, one in Europe, then we have China and India. So we have moved quite a lot of volumes from Europe actually over the years, especially on equipment to both China and India. And of course, the sub-suppliers are following that footprint to shorten lead times. And I do see that work will continue. So I think we have a good spread from a risk perspective when it comes to the supplier base today. And we're in a better position today than we were a couple of years ago. But I share your view that we have seen a steep increase of costs, mainly in Europe. So, of course, this is something also to continue to work on and source closer to the end market, which we are busy doing in the supply chain set up for the aftermarket as well. And that, of course, reduced transports and lead time, etc., and tied capital. So it goes hand in hand. So I really see that that regionalization, both from production footprint, as well as from a sourcing of the components into the aftermarket, that is the way forward. And it's something that we have been working with for, for a number of years now.

Okay, and just my my follow up was around you talked about sort of changing the setup in tools and attachments to more of a regional one, and the work would start on that next year. Could you just elaborate a little bit just on how it's set up today, what the changes look like, and should we think about sort of the potential financial benefits here being kind of faster revenue growth, or is this more something where you feel you can improve profitability? Just a little bit of color around that would be helpful.

Yeah, so for Tucson Attachment, we have already a very good footprint with factories in all regions, but we have not really maximized the potential producing all different products, you know, in all these factories. So that is what we are planning to do and executing on as well. And it's not really to get the cost down. I think that is not the main purpose. It's really lead times, shorter lead times since these are heavy products and you need to ship by sea. So it's very much to consolidate those type of products so that you produce them closer to the end market. Then I would say another thing that we're also doing now, preparing for, is the regionalization of the parts and service division, as you have seen. We have announced that and we are preparing everything now to be ready from 1st of January next year. And that comes with the same logic, to be closer to our customers. That will give more focus. when it comes to interacting with customers, better efficiency, and the supply chain will then follow the aftermarket and that regional structure as well. And that is how we have transformed the supply chain over the last couple of years into a more regional setup. So this is to enable continued focus, good growth in the parts and service business as well.

Okay. And so it's a very quick housekeeping one. Can you quantify the FX revaluations that you had in the quarter? And so what FX sort of should have been excluding those?

I don't go into exactly those details, but like I commented on before, you can say we were also expecting more contribution from the FX than what we had in the quarter. So it's still positive in absolute terms, as mentioned, 260 million, but then slightly dilutive on margin. And FX is always a bit depending on the... exact rate on the exchange date, etc. It's a bridge, so it's a comparison to last year as well, which makes it a bit more complicated than one might think.

Yeah, understood. Thank you.

Thank you. Our next question comes from the line of Andrzej Kukmin at Credit Suisse. Please go ahead. Your line is open.

Good afternoon. Thank you very much for taking my questions. It's Andrzej from Credit Suisse. Firstly, on tools and attachments, the order run rate there kind of ticked down a little bit, and I understand this is due to your early pricing action and some selectivity. Could you help quantifying that impact, if possible at all? And primarily, is competition following your early price move?

First, I think we should remember that we have quite tough comparison, as Håkan mentioned. We had really strong growth last year. And I think there are certain segments and certain products in the tools and attachment business where the cost increases for material have been material. and we have compensated with pricing to protect the bottom line. And that, of course, means that certain deals you have to walk away from to protect the margins. We are in the profitable growth business, and that is the way forward for us. And it is, as I said, also very dynamic when it comes to pricing. And I think when you look at... When you look at our performance in this division, with that steep increase of the ingoing cost, I think they have done a tremendous job in protecting the margin. And you also know that we have been working for many, many years to get up to this level where we are at right now.

Yes, got it. Thank you. And on the connected remotely monitored devices, Can you provide any numbers on that, on how many units you do have in that portfolio that are kind of connected and remotely monitored and how that's evolved in the last six to 12 months?

Yeah, so it's growing every quarter. We have more than 7,000 connected machines right now, which gives us very valuable insights, both when it comes to the activity levels out there, of course, but also the consumptions of tools, attachments and parts. So it's growing every quarter. And I think we started this journey four years ago, and then we were more or less at zero. So it's growing fast. All machines that leave the factories are prepared with connectivity. And then we also retrofit.

Great, thank you. And the last one, just to follow up on Max's previous question, I wondered if that change to regionalization of your parts and services division and in tools and attachments, does that differentiated versus competition, or is this how competition is set up already?

It's not to my knowledge how our competition has been set up. I strongly believe in focus. If you look on the last five years, the personal service division has been growing in a tremendous way. And our ambition is to continue to grow. to grow with very good numbers. And then we strongly believe that regional setup will serve us well into the next phase here to continue this journey.

Great. Thank you very much, Hanna.

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

Yes. Hello. Thanks very much. A few questions on the outlook, if I may. First, on new equipment, just thinking about the backdrop, right? Your customers are seeing a decline in earnings, plus a certain macro. And at the same time, costs of building new projects actually have gone up a lot. So under this backdrop, is it possible, is there a chance that customers just stop converting the pipeline and we see an air pocket in orders? Do you see any risk of that? And do you see any signs of that? That's the first one.

When it comes to our order stock on equipment mainly, we always look and do a risk assessment of that order stock. And we don't see a risk related to that. And with the lead times we have had, many of these equipments are related to expansion projects that will move ahead. So I don't see any larger risk in that order stock should the environment change.

Yeah, thanks. Thanks, Elena. I'm more asking about the new project, right? The new orders to new equipment. Is it possible that there will be a slowdown in project sanctioning, the projects which are not sanctioned yet, and therefore, obviously, a slowdown in the inbound orders?

I think if we look on the commodity prices are still holding up well, then, as you say, the cost for our customers are also going up. I think it will differ between the different commodities. If we look on some of the commodities, if we take copper, for example, you know, there must be more copper mines or copper assets coming on board in the coming years, also to keep production at the same level and to be able to deliver upon the green transformation for the world. So I still believe that there will be need for expansion projects. And if you look also on... the the mix on the capital equipment side for us on orders half of it is still expansion projects then as always you know in tough in a tougher market environment it's it's more likely to do brownfield expansion than a greenfield expansion

Yeah, makes sense. Thank you very much. And perhaps the last one from me on the more positive side on services. Here is obviously exceptionally strong order levels, right? And not a quarter. Obviously, you are telling us the equipment is running hard. At the same time, if we look at the miners' production targets, they all be missed. How do we reconcile those two things? And just maybe a question on sustainability of this. 6 billion plus of services orders per quarter going forward. Thank you very much.

And of course also the equipment, the fleet out there is growing older. So that consumes more parts. We also have a stronger offering now when it comes to rebuilds that we did not have before. So that is also supporting the growth. But then it's also this very hard work that we actually take in customer share. So it's not only, of course, the activity level is not 22% up in the quarter, if you look on, you know, if you compare with the output in the mine. So it's a combination of You know, us doing a good job in capturing more shares, you know, our new products and also contribution then from everything we have been doing over the last couple of years. You know, investing in workshops, training our technicians, taking on more and more service contracts, etc. So it's a combination of many different things.

This is great to hear. Thank you very much.

Thank you. Our next question comes from the line of Nicholas Green at Bernstein. Please go ahead. Your line is open.

Hello there. Good afternoon. Thanks for taking my question, Nick Green at Bernstein. I'd like to talk about order intake, please, and just trying to get a little bit of clarity around the movement in order intake. The Russian adjustment has been done in quite an unconventional way, deducting the Russian sort of, you know, the removal from the order book, deducting it from intake. does complicate the numbers quite a bit. And I think in your table on page 22, where you show the European order intakes down 72% for the year, it would be nice to try and work out what that real data point should be. Because from my understanding of looking into it this morning, we're not comparing apples with apples here. The Q3 comparative last year does include Russia. The Q3 comparative this year doesn't include Russia. So maybe if you could just try and delve into this a bit, I would say roughly on our numbers, it looks like something like 16% year-on-year reduction in Europe, but that would include an FX benefit, presumably. So maybe that beneath this, there is still quite a large reduction, decline in European order intake. Can you clarify or validate whether that is the case? Thank you.

Do you want to start on it?

On that table, I think you got it right. Maybe we're just talking about it differently. It does include Russia, but then for Q3 this year, of course, Russia is negative with one billion, as we said before. So that's where you get this minus 72 percent. Then on the demand as such in Russia. The demand in Europe.

I think what we have seen is... when we look at the comparison, also weaker for attachment in Europe and, you know, construction related in Europe.

So do you feel then the, because the tools and attachment business didn't really have a great deal of exposure to Russia, to my understanding.

Not Russia, but Europe.

Yes, okay, so the minus 37% we're seeing in Europe tools and attachments Do you feel that's a fairly representative data point of the organic decline that you've seen in Europe in this quarter?

I think we also need to remember we had extremely strong growth last year in Europe related to attachments. So if you just look on that product line, we had tremendous growth in Europe. But maybe we can come back with more details to you. Off the call.

Thank you very much.

Thank you. Our next question comes from the line of James Moore at Redburn. Please come ahead. Your line is open.

Yeah, good afternoon, everyone. Thanks for putting me in. I've got one conceptual question and then one, some more technical on price. Maybe if I start with price. Is there any chance, I know you don't disclose it, but you did for 20 years in the old Atlas format. You could give us some of what the gross pricing is doing at the moment, given the current inflationary topics on the planet. And then also, could you just help us understand how the net price works? accretion dilution has been moving. I'm not expecting you to give a net number. That would be great. But just more, was it more dilutive a couple of quarters ago and now break even? And if they are current inflationary prices before you might expect to be more accretive. Just trying to understand how that's shifting and impacting margin. That's on price. And then my, maybe come back on the second one.

Mm-hmm.

I think on pricing, we are not sharing the numbers. But if you look on over the last year, I would say, with the very dynamic situation we have been in, of course, you can be quicker in adjusting pricing in the aftermarket. And that also translates into an impact on the revenue side much quicker compared to the equipment side where we had longer lead times. I would say, you know, during the year, we have compensated now well also on the equipment side. So all in all, I think that, you know, when you look at the performance of the company, of course, you know, it's because we have been active and been agile, I would say, when it comes to price management.

Okay. Is the net price... versus all inflationary topics broadly break even for the group these days? Or is it still a headwind? Or is it even an accretion?

It's not a headwind, if I say so.

Nice. And the conceptual question is just, about the cycle so historically when metal prices fall i know they're holding up a bit but we're still down 25 in copper 15 in gold april then typically we see equipment orders roll over and also if we see an industrial economic downturn which i would imagine going to see next year typically equipment orders roll over yet you make good points there's a lot of need on family there's all great deteriorations permitting problems etc etc I just wonder when you talk to your customers, whether you have a flavor for whether they're going to do what Rio says they're going to do and invest through a downturn and just keep going, or whether you'll see any of that discretionary pullback.

I think, as you say correctly, we see typically equipment going down in a downturn. I think what is different this time is, of course, also the opportunities with the technology and the push for ESG. For our customers to deliver upon their promises on ESG, you know, some of these technologies needs to be implemented. So I think that it's a different environment today and it's much more focused, I would say, on a sustainable development of the industry rather than just maximizing output. But everything is about productivity and sustainability when it comes to discussions with our customers today.

Thank you very much. Thank you. Our next question comes from the line of Anders Yggboi of ABG. Please go ahead, your line is open.

Yeah, hi, good afternoon. So yeah, most of my questions were answered, but could you come back, Helena, to what you said about exploration equipment or exploration tools rather being slightly weaker? I know you talked about this being strong earlier in gold, copper, and sometimes you mentioned this just being a good leading indicator for spending.

Yeah. So we have seen a softening on the consumable side for exploration and mainly related to the juniors in North America. And that is, of course, related to their financing situation. So not really among the mining companies doing exploration, you know, from a brownfield perspective, more the juniors. That's where we have seen a slowdown.

Okay. She wouldn't really regard this as a signal, you know, that things are about to change.

We are always watching all signals, but that's what we have seen in the quarter, and we did not see that in the previous quarters.

Okay, I get it. Just a second one. You talked earlier about sort of some of these orders to Russia being possible to reroute, you know, perhaps to other places. Now that you've sort of effectively decided to let it go, do you think that this could sort of speed up deliveries and free up a few bottlenecks or how do you feel about that?

No, absolutely. So, you know, we have a long order book. And of course, this gives us opportunity to then reroute and, you know, change our production schedule to, we'll say, deliver quicker to other regions as well. And also, you know, we're busy rebuilding, we've been busy rebuilding the machines that we had in the flow to other regions as well.

Okay, got it.

Thank you. Thank you. Our next question comes from the line of Joel Spungen at Barenburg. Please go ahead. Your line is open.

Yeah. Hi. Good afternoon. Just a couple. Maybe I can start a relatively simple one. Just coming back again on the question of Russia and the billion of orders that you pulled out. I was just wondering if you could give us the rough split of that one billion between service orders, equipment and tools and attachments.

Majority is equipment. The vast majority.

The significant majority.

Yes, yes.

The vast majority is equipment.

Right. Okay, okay. And just so I've understood this correctly, presumably we'll see a similar effect when you report Q4 and Q1, Q2 next year in terms of there being this ex-Russia adjustment until it annualizes out.

In the next quarter, we will not have these cancellations from Russia, given that we have now, in lack of better words, cleaned out the order book in Russia. But of course, when we compare Q4 this year, 2022, with Q4 2021, there will be an impact in 2021 of orders received from Russia.

Of about the same level as Q3?

Yes, I would say. I mean, not the difference, of course, but the orders received in Russia, likely the same level in Q4 as in Q3 2021. If that's what you meant, yes.

Okay. Yeah, that's exactly what I meant. Yeah, exactly. Yeah, yeah. And then maybe just sort of a slightly different topic, which is just rereading my notes from the Q2 call. I think you talked there, we were talking about the tools and attachment orders in Q2, and you talked about how you deliberately slowed down some of the order intake to focus on service and things like that. Is that still something that affected Q3 in the same way? Or is it different now?

I think in Q2 we had fairly high order stock for consumables, which is not a good thing to have because that needs to turn. quickly and customers cannot wait. So we have been focusing on going down and I'm also pleased to see that revenue is increasing in that division so that it's good output is going up. So it's more, that is what we have seen. It's more related to, I would say in Q3, it's more related to that we're protecting the bottom line and certain segments have been impacted from the cost increases and its material increases. And we have compensated for that. And that means also that you need to walk away from some deals to protect the bottom line.

Got it. That's all. Thank you very much.

Thank you. And our next question comes from the line of Mathias Hombay of D&B. Please go ahead. Your line is open.

Hi, thank you for letting me in. I have a question on the mix in equipment and services where a couple of quarters ago you used to mention quite often the difference in profitability between service and equipment and flagging. We should expect the dilutive effect on the margin as the sales mix change in favor of equipment. So we'd be curious if you have a status update on this and also when should we expect this mix headwind to be fully reflected in the P&L, please?

But it is so that there is a profitability difference between equipment and service. And of course, we had for many quarters, very strong growth on the equipment side. But if you look now in what we turn into revenue, of course, we have also been over the last quarter has been growing in a really nicely way on the service side. So that has more or less compensated this expected mix shift that we expected or that we thought we were going to have. But at the same time, it's a fact, you know, the day we start to invoice more of this equipment, of course, you will have an impact from a mix standpoint.

But with the strong service growth that we have had, like Helena said, if we manage to, if we invoice more of equipment, but we still continue to invoice more of services as well, then that's not going to give a negative impact on the margin.

That's clear. Thanks. Thank you. And we have one further question in the queue. That's from the line of Lars Brossom of Barclays. Please go ahead. Your line is open.

Yeah. Hi, Helena. A couple of quick follow-ups from me, if I can. It's a bit late in the course. I apologize if you have talked to this. But just on the T&A margin, I mean, you've obviously pushed through some selectivity, lots of footprint savings coming through. Where are we in this margin journey? I mean, last year, you talked about keeping the 17% level. Now we're closing in at 20%. I'm also curious on the downside in T&A. If we see a more material sustained downturn, how to think about the drop through or Or the decrementals is obviously a business that struggled quite a lot back in 2015, 16. Obviously, big structural changes since then. But just trying to sort of scope where we might be in the margin story here for T&A and what the downside risks might be going into a downturn.

No, but, you know, we have been working for at least five years now to bring the margins up to this level where we are at right now. And I'm pleased, you know, that now that they have been, you know, been about 18% now for several quarters. I think, you know, that's a good level to be at. If we look from a resilience standpoint, especially the consumer side is very resilient over a cycle. So I don't see any reason why we would not be able to protect bottom line. Of course, you need to be mindful then that sometimes you need to sacrifice growth to protect the bottom line like we have been doing now in Q3. Because I think the key here, what we have addressed is the portfolio and we have addressed the efficiency potential in that division. So that's not really related on cycle or anything extraordinary. It's many years of hard work addressing the efficiency and weak product lines that we had historically in these divisions. So I think we will do our utmost to stay on this level. But I think it's a solid level. And I would say it's also best in class if you compare with other competitors.

Briefly, if I can, on electrification, it stood out to me, Sandvik, seeing in terms of percentage of load and haul order intake in the quarter, sort of teams' contributions, from battery electric. I appreciate it's just a quarter, but that was a lot higher than I thought. I wonder whether you can help us a bit with where you are, whether you see some market share shifts there. And also, if you could, please, in terms of electrification impact on your services business, can you help us a little bit with what battery as a service is as part of your broader service business? Thank you.

So when we look year to date, we had a very strong set of orders in Q2 on electrical vehicles, and that is very much reflected on the LHD side. That's where you see the greatest benefits from a TCO standpoint, and that's where the big saving comes from being able to reduce ventilation. So it's quite normal that customers want to go on the LHD side rather than on drilling. I think on your second question there on battery as a service, can you repeat that one?

I was trying to get some numbers, really. I was trying to understand whether battery as a service is similar to Sandvik's sort of teens as a percentage of your new order intake in Loden Hall, new orders for the quarter and similarly for services, please.

We don't share the numbers for different products in our service, in parts and service. And that's generally, we don't share those numbers. But it's growing as we speak. And as I said, roughly two-thirds of what we have on orders for our battery machines comes with battery as a service.

Thank you. Thank you. And if there are no further questions at this time, I'll hand back to our speakers.

Wonderful. Thank you, everyone, for good questions. I just want to add on to what Håkan said about Russia in Q4. So the order book, the existing order book, has been cleaned out. So basically in Q4, you can anticipate the year-on-year effect mainly. And on page eight in the PowerPoint presentation, you can actually see per quarter the Russia orders. And in Q4 last year, it was about one billion. So that's what we were referring to when we speak about Q4 onwards. And then it's time to end this presentation. And to those of you that actually see me on the screen, you have noticed my very yellow jacket. And it is a beautiful color. And if you want to see more yellow and hear more about how our yellow equipment drives the transformation for the construction and mining industries onwards, please add the dates June 1st and June 2nd, 2023 to your calendar. We will then host our Capital Markets Day in Örebro in Sweden. And those of you that are very eager to see more of Epiroc, they can come to Munich tomorrow. Håkan and myself, we will go to Bauma, the world's largest construction fair. And we will be in the Epiroc booth between 12 and 3. Thank you very much, everyone. And reach out if you have any questions. We're happy to help you. And we wish you successful investments. Thank you.

Thank you.