Epiroc AB (publ)

I knew that it was the company for me. I wasn't being judged by the way I looked like you normally are judged when you're a female engineer. I was being judged for my person and my intelligence as an engineer.

In Epiroc, you have the capacity to be yourself. You can be authentic, and I think that's a really strong asset that the company culture is trying to promote.

I learned within my first week of working at Epiroc that the management really had an open-door policy. So if you had a voice, you were going to be heard.

This company is unique because they trust that every one of us, from me down and from me up in the company, is doing the right thing and is doing it for the right reasons. And I think that's pretty special.

Hello, and a warm welcome to the Epiroc Q2 results presentation. My name is Karin Larsson, head of IAR and media here at Epiroc, and with me today, I have Helena Hedblom, CEO, and Håkan Folin, CFO. They will briefly present the results before we host a shorter Q&A session. Helena, please, the stage is yours.

So thank you, Karin, and thank you to everyone listening in today. So Q2 was a record quarter. The customer activity remained high, especially in mining, and the order intake increased by 15% to 15.4 billion. We won several large equipment orders and the service business continued to perform well, supported by larger rebuilds of customers' equipment. We also had strong contribution from acquisitions. Our revenues increased 34% to record high 15.9 billion, driven by organic growth, particularly within equipment, as well as from acquisitions. And I'm pleased to see that our recent acquisitions have performed even better than anticipated. We had an especially strong development for solutions for automation. Our operating profit, EBIT, increased even more, 43% to 3.4 billion, leading to an adjusted operating margin of 21.6%. And the margin was diluted from acquisitions and we had a negative revenue mix effect in the quarter. It has been an eventful quarter. One highlight is the EPROC World Expo that we hosted in May in Örebro, Sweden. The event gathered almost 200 underground customers from 25 countries. And during the week, we showcased innovations and solutions that will increase productivity and sustainability for our customers. And in conjunction with the event, we also hosted our Capital Markets Day with more than 100 external guests. And while our roots trace back 150 years to 1873, we celebrated our fifth birthday as a standalone company in June. And we have several milestones to be proud of. For example, we have successfully established the Epiroc brand, innovation is thriving, we have had a high acquisition pace, and we have set ambitious sustainability goals for 2030, which have been validated as science-based. And we have launched our vision, Dare to Think New, to name a few things. So well done to everyone in the organization. So we are a leading productivity and sustainability partner, and innovations and solutions that bring increased productivity and sustainability to our customers, that is what makes us successful. And in the quarter, EPROC completed one acquisition, AARD Mining Equipment in South Africa, and it complements EPROC's underground offering within low-profile underground machines. The company has an annual revenue of around 650 million and 200 employees. We have also strengthened our offering within reverse circulation when we bought key assets from SRAM Australia. And it is a company well known for quality and performance within exploration globally. So 85 of SRAM Australia's employees have also joined Epprock in the quarter. So a warm welcome to the almost 300 new employees joining the Epprock family this quarter. We have also launched an MTVR multi-terrain vehicle reanimator, which improves operational agility by reducing the reliance on mine site infrastructure. So in short, it's a self-contained wagon mounted power pack that supports electric blast hole drill rigs. We have also deepened the partnership with SSAB further for fossil carbon emission free recycled steel. So we will use SSAB Zero for use in EPROC's battery electric range of underground mine trucks and loaders as of Q3 2023. And we are also jointly exploring possibilities to collaborate on using fossil free steel when manufacturing spare parts and components with additive technology. And we have also launched a new flagship construction drill rig, the Surface Raid Remote Drill Rig Smartrock T25R, has a number of valuable features such as exceptional coverage area, excellent trainability, as well as a rig control system that reduces fuel consumptions. So let me share a video which is also a perfect example of how many of our customers show passion and commitment to the task of building our society.

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So coming to our strategic focus areas and starting with aftermarket. In general, the customer activity was high in the quarter, especially in mining, and service remained strong, both organically and with contribution from acquisitions. The organic growth was 5%, which was also supported by larger rebuilds. Within 2000 attachments, the development was flat year on year, but in total demand increased due to strong support from acquisitions. The hydraulic attachments were weaker than anticipated given the season. Europe, which is an important market, has been somewhat weaker. And then coming to operational excellence, doing things better. So we are good in providing world-class service, but we can always do better. So we keep on investing in being even closer to our customers. And in the quarter, we have inaugurated one new service center in Antofagasta in Chile and one in Kato in South Africa. So we are already at 100 plus service centers and we keep on expanding quarter by quarter. And inspired by the ongoing work with Roy Hill in creating the world's largest fully autonomous mine, we are now launching an automation competence center for haulage in Perth, Australia, to support customer centers in the global rollout of automation. It will be developed during 2023 and finalized during 2024. Also, the top modern heat treatment plant for rock drills in Örebro was inaugurated in April, but I told you about it already last quarter. So mindful of time, I move on to the topic of sustainability. And starting with the best news, after a rather long period of increased injuries, we finally see a trend change. We have had and we still have several initiatives and trainings to make sure that all employees always prioritize safety. And it's good to see that we now move in the right direction again. To the right, you see a picture from the safety day in Santiago. So at the end of the quarter, we were over 18,000 employees and with acquisitions contributing strongly. We have also increased the proportion of women employees and women managers in the group, which is positive because I'm convinced that diverse teams produce better results. Our CO2 emissions from operations decreased, driven by several initiatives, including the installation of solar panels and a higher share of renewable electricity. And the emissions from transport, however, increased due to higher volumes delivered. And in an annual ranking of 500 companies conducted by the Financial Times, EPROC was named as Europe Climate Leader and came out among the top one third of the companies. EPROC was the highest ranked among the Swedish-based companies in the machines and industrial equipment category. Climate is important both to us and to our customers. We invest more than ever in innovation to keep providing customers with equipment and services that increase productivity as well as reduce emissions. Year on year, our R&D expenses are up almost 40% to SEK 500 million. So with this, I leave the word to Håkan to cover the financials.

Thank you, Helena. Starting with orders, the order intake was record high at 15.4 billion. Organically, excluding Russia, it was down 4%. And as you might remember, we had cancellations in Russia of roughly 400 million in Q2 last year. The underlying demand is good. Customer activity is high, particularly in equipment and service. We received four large orders in the quarter, and with large, we mean over 100 million. And in total, large orders represent around 550 million to be compared with what we had in Q2 last year, when we had large orders of around 800 million. On revenues, which were also record high at 15.9 billion for the group, we are really pleased to say that our acquisitions are actually exceeding our expectations. And I will cover now EBIT and cash flow on the coming slides. So taking a look at the profit bridge, a year ago we had 2.4 billion in profit in EBIT. With quite some contribution from acquisition and organic growth, we ended up Q2 with 3.4 billion. So it's actually an increase of 1 billion. In the meantime, the reported margin improved from 20.1% to 21.5%. And previous year include provision of 400 million related to Russia, restructuring cost, and also we had restructuring cost related to when we moved manufacturing from Japan to China of 95 million. On group level, dilution from acquisition was 0.9 percentage point and the mix effect that we spoke about previously with more equipment being in moist is also slowly showing. We had some headwind from currency and here I would like to point out that this is the bridge effect. So it's not the actual impact in this quarter, but it's when we compare it with Q2 last year. And in Q2 last year, the Swedish krona weakened quite a lot. And we also had some abnormal effect. For example, the ruble strengthened a lot in the Q2 last year. And then we had some revaluation effects on accounts receivables and accounts payable, which were positive last year. And when you then compare it with this year, then you get the negative impact. Adding back the cost for the long-term incentive program, we get to an adjusted margin of 21.6%. If I then move into the segment and I start with equipment and service, we achieved 12.3 billion in orders, and again, customer activity remains high. Organically, we had a flat development year over year, but looking into the different revenue streams, there's actually a mixed picture. Service is still going strong, plus 5% organic, whereas equipment had a decline of 6% organically. However, we had tough comparables for equipment when we look at Q2 versus last year. Revenues increased 22% organically, and even if we still struggle somewhat with outbound shipment, we have improved the output from our sites even further, and we finally then get to see it as invoicing. The operating profit, EBIT, came in a billion higher, mounting to almost 3 billion, resulting in a margin of 23.9%. As Elena mentioned, we closed one acquisition in the quarter. Our mining equipment in South Africa that complements our offering within underground low profiling machines. And if we look at the profit before equipment and service, 23.9% margin with good tailwind from organic growth. The flow through from the segment is 37% and the mix effect that I just mentioned with more equipment being invoice is showing. And also our acquisitions grew more than we expected, but with a somewhat lower margin than overall Epiroc, therefore diluting the group margin. Of the reported EBIT margin of 23.9%, the dilution from acquisition is 1.1%. The margin in previous year Q2 was negatively impacted by the provisions related to Russia and Japan, as I mentioned before. If we then move on to tools and attachments, order came in at 3.2 billion with a very strong contribution from M&A, 25%. And during the last 12 months, we have acquired two companies in the tools and attachments segments, CR and Wainroy. Customer activity remains fairly high here as well, particularly within mining. On the construction side, we have not seen the strong seasonality that we normally see in Q2. And within hydraulic attachment, mainly in Europe, which is an important market, we see somewhat more cautious behavior from our customers. Revenues for the segment came in at 3.4 billion, indicating a flat organic development. On the profit side, we had some headwind in the quarter organically and especially from currency. Acquisitions, on the other hand, are contributing well, both in absolute and in relative term. And we ended the quarter with a profit of 524 million and margin of 15.3%. If I then move on to cost, net financials and tax, despite the growth and the high activity level, we have maintained a good cost control in the quarter. In total, our administration cost, marketing and R&D is roughly 16% of our revenues. And on the R&D side, last year in Q2, we invested 363 million and now we are investing almost 500 million in R&D. And as Helena said, we are investing more than ever to make sure that we keep our leading productivity and sustainability partner position to our customers. Our net financials were positive, 15 million versus minus 89, which is due to exchange rate differences. Our interest net was minus 131 million, considerably higher than previous year, which is given as we have finalized several acquisitions. We have increased our debt and also the overall higher interest rate level. We remain stable with our effective tax rate at 22.6%. If we then move on to the operating cash flow, we had a strong contribution from higher profit, more than 1 billion. But we also paid higher taxes and tied up more working capital, especially in receivables and some higher net financial items. So all in all, we had 1.5 billion in cash flow in the quarter. And the cash conversion rate, which is looking at 12-month rolling, was 54%. And diving into a bit more into working capital, which is a very prioritized topic for me. We say the same thing as we said last time. We think that there's still room for improvement for us. The net working capital, excluding acquisitions and FX, increased 29% in the quarter compared to last year. And it corresponds to 33.5% of revenue. The explanation is very much the same as in previous quarter, that after a period of strong growth, higher equipment volumes, in combination with some supply chain issues, now mainly on the outbound side, as well as that we are implementing the regional distribution centres, we tie up a little bit more working capital than we would like. Still, we do, however, expect that the ratios relating to working capital will improve throughout the year. So after a successful year of acquisition, in total we have actually finalized 14 the last 12 months with a total cash outflow of 7.7 billion. We now have a net debt position of 9.1 billion. So we have moved from being positive cash to net debt and now net debt to EBITDA is at 0.6. We have also increased the return on capital employed. We are now at 28.6% which is actually the highest level Epiroc have been at since 2019. So thank you for now and back to you, Lena.

Thank you, Håkan. So before concluding the quarter and speaking about what to expect onwards, I would like to take this opportunity to also thank all customers and employees for five great years. In the beginning of the presentation, I mentioned a few achievements during these years. I will not repeat them, but I would like to highlight that as a team, we have demonstrated great strength and resilience amid major and unforeseen challenges during the past years. In Q2 2018, our rolling 12-month revenue were 34 billion and now we are at 57 billion. And this corresponds to an increase of 65% and an annual growth rate of 11%. And at the same time, our adjusted EBIT has grown even more, almost doubling from 6.7 billion to 13 billion, corresponding to an annual growth rate of 14%. So that is a strong achievement that we can be proud of. So now to summarize the quarter, it was a record quarter and an eventful one. We continue to achieve and deliver profitable growth for our shareholders. Innovation is thriving and we are becoming more and more an important productivity and sustainability partner for our customers. We have made many great acquisitions and they are contributing well now. The safety ratios are improving and we are a climate leader. And we have a legacy of 150 years and we are grateful for all achievements as a standalone company the first five years. So looking ahead then, in the near term, we expect that the underlying demand, both for equipment as well as the aftermarket, will remain at a high level. And in the long run, automation, digitalization and electrification are transforming the industry. But it is the people that actually makes it happen. So to conclude the presentation, please let me share a short video from our successful customer event in Örebro. And in this video, you will see some of our more than 18,000 passionate colleagues who share a relentless ambition to bring value to our customers, not only today, but also in the future. And seeing their drive, I'm certain that the best is yet to come. Thank you very much.

So hello again. Now it's me again, Karin, with Helena's wonderful words of wisdom that the best is yet to come and the video we just saw. I would like to thank both Helena and Håkan for an excellent presentation and everyone online for actually listening in. And it's time for the Q&A. Operator, would you please open the line?

If you wish to ask a question, please dial star five. on your telephone keypad to enter the queue. If you wish to withdraw your question please dial star five again on your telephone keypad. The next question comes from Klaas Berglind from Citi. Please go ahead.

Thank you. Yes, hi, Karin Håkan, Klaas at Citi. So the first The question I had was on the drop-through, Håkan. Can I just confirm that the drop-through you report is the residual from whatever FX you report, i.e. the drop-through would be different if there was a lower FX impact, i.e. we can't add back all of the balance sheet or valuation effect? I'll start there.

Well, the drop-through we report is excluding currency impact, if that was the question. I wasn't really sure if I followed, but the drop-through is basically, you know, what have we grown in terms of volume and what we're in revenue and what terms of profit do we generate out of that, excluding FX impact. Did that answer your question, Klaus?

Yeah, I can ask you sort of in a different way. What happens to profitability? Because obviously you have two effects. You have quarter-on-quarter currency change, and then you have a higher volume effect from inventory still being an issue in your supply chain. What happens, do you think, when this is normalizing, i.e. when you get your outbound logistics in order, basically?

I would say, as you could see on the equipment side in this quarter, we actually managed to invoice quite a lot. If you compare with last quarter, we were struggling even more on the outbound logistics side. This quarter now we finally got, we still are struggling a bit, but we were performing better and we managed to get more equipment out, which meant that we actually got more We got the mix effect that we talked about in the conference just before, that we had 33% of equipment this quarter versus 30 a year ago. But then on the other hand, we got more revenue, and hence we got some flow through from that.

Yeah, I can get back to you on that later. It's concerning sort of the inventory revaluation that should start to reverse, I guess, quite a lot when you get the inventories reduced, I suppose.

That's part of FX, Klaus.

No, exactly. Then my second question is on the trends here into the third quarter. When we back out currency and M&A and larger orders, looking at underlying orders in dollar terms, then there seems to be some seasonality of some 5% to 10% down quarter on quarter, third from second. So even if you guys say that demand will likely to remain at a high level, is that how you see orders in the near term? Are we going to be down sequentially?

We comment on the underlying activity levels. So the small and mid-sized equipment orders and activity levels we see on the aftermarket. And here we see it's good, healthy underlying activity levels. Then as always, the large orders are lumpy and can come not evenly spread between the quarters. But the underlying activity levels, that's stable.

My quick final one is on the mix effect. I'm trying to understand here how we should think about the equipment backlog being invoiced further. What quarter do you think you are peaking out, so to speak, on the equipment deliveries here, thinking about lead times, i.e. when the mix can start to normalize again? And then also in tools and attachment, I guess you expect this strong growth out of the backlog in mining tools relative to construction attachments to continue for a while. I'm just trying to understand further the mix into the second half. Thank you.

So we sit at quite high orders on hand when it comes to equipment. And of course, we have been reporting also that we have had good output in our factories now for quite a couple of quarters. And finally, now we start to see that that is translating into revenue, which is really good. But of course, we still have high orders on hand on equipment. So we will continue, of course, to do everything we can to push equipment out to get the lead times back to more normal lead times, which is important for our customers. When it comes to tools and attachments, we saw weaker activity levels within attachments in the quarter. Q2 is very often, from a seasonal standpoint, a strong quarter, and when we compare with last year, Q2 has been weaker, so we have seen a mixed effect. What we see in construction is that housing and aggregates, that's where we have seen a softening, while tunnelling and civil engineering is still at a stable level. So it's a mixed picture within construction.

Thank you.

The next question comes from Christian Hinderaker from Goldman Sachs. Please go ahead.

Thanks for the opportunity for the questions. My first is on free cash flow and I guess specifically the inventory dynamics. I wonder if you can help us scale the respective contribution to the build in inventory from the bottlenecks in outbound freight, from the migration of the group stock from country-level sales companies to your new regional distribution hubs, and also to the strength of equipment orders on hand and hence flow through from production and, I guess, the WIP element. And then, I guess, related to this inventory dynamic, you're continuing to expect inventory ratios to improve through the year. That obviously puts a greater onus on inventory reductions in the back half, given that the second quarter inventories are around $20 billion. was somewhere ahead of the 18.5 consensus forecast, the 19.3 we had forecast. I wonder if you could just add some color on that as well, please.

I can start maybe and say just on, maybe you can help to quantify it. But if you look on the freight side, it's mainly related to the sea transportation lead times that has been prolonged, you know, during many, many, actually many years now. We start to see that this is improving. Many of the lines or lanes are improving in lead time, which is good to see. The regional distribution setup, we are done with setting up all these regional distribution hubs. And right now we are then bringing the inventory back in the value chain. So that is what is ongoing. But we also have a VIP effect within service, which is mainly related to the very strong growth we have had in larger rebuilds consume more inventory. So that's the three main contributors to the level of inventory we have right now.

And we don't divide it into so specific quantification of each item, but just to give you some figure, more than 50% of our inventory is either finished goods or it's finished goods, which is goods in transit on the way out to our customer.

Thank you for that. Maybe just on the infrastructure side, you've mentioned a soft backdrop in Europe and that has softened further sequentially versus last quarter. I just wonder if that's more a comment on volume. We've heard some indications that, particularly in the aggregate space, there's increased price sensitivity. You normally have a seasonal uplift in demand, as you touched on, but it sounds like expectations should be a bit more muted from here.

But I think it's a volume comment. And I think also, you know, it's fair to remember that or to understand that this is very much an indirect business as well. So there are, of course, dealers. So I think part of this is also a destocking thing that is ongoing in that industry.

Thank you very much.

The next question comes from Guillermo Peñu from UBS. Please go ahead.

Thanks for the opportunity to ask questions. I guess I wanted to ask first about the normalization of lead times. I guess you saw an improvement on that, but you continue to mention outbound logistics and all other things as being constrained in your ability to deliver it. Wanted to ask, when do you expect this normalizing? I think in the previous conference call you suggested towards the end of the year. Has this changed with your abilities as we stand?

I think we stick to that statement. If I look into the quarter, I have seen an improvement, you know, throughout the quarter. So, you know, step by step, it is improving. And for us, you know, being, you know, we have a big manufacturing hub here in Örebro in Sweden, and we are heavily dependent on the rural capacity from Gothenburg. So it has been very specific to the to the outflow from the urban facilities when it comes to equipment. Container freight, that has seasoned up much, much, much, much more. So that's not really a problem, which of course is then how we ship consumables and parts. We use container freight for that. But it is the role of capacity that is needed to transport the large equipment. That is where we still have some challenges, but it's going clearly in the right direction.

And the improvement in the container transport is also important for us in terms of inbound shipments, because two are factories, then we get it mainly through containers. Last year, we struggled a lot with component shortages. We are still struggling to some extent, but it's definitely at the better page, and that will also then help us get better throughput in our facilities.

Thank you. And in other indices, as lead times normalized, we saw all the intake patterns also normalizing to some extent as lead times were cut. Is that something that is to be expected here or demand as you stand and in your outlook statement, it encapsulates that already? Thank you.

No, but I think hopefully it will even out because, of course, if you go back, you know, of course, there has been, especially during last year, of course, you know, some customers were pre-ordering because, you know, they did not really trust the supply chain. So I think as supply chain and lead times are getting more and more back to normal, it will be a more stable and more normal situation when it comes to the demand as well.

Thank you. And last one, I promise. Gas flow conversion, I guess, you expect it to normalize it, but can you give us some timing as to when, on what level would it be stable, i.e. basically when the gas flow conversion will be normal and at what level do you expect it to normalize it? Thank you.

Well, in terms of cash conversion, it varies usually with our growth. If you look at 2020 and then first half 21, when growth was going down, then we had an extremely strong cash conversion. And now as we've been growing, cash conversion is clearly at a lower pace. And what we have said is that we believe that our inventory ratios will improve throughout the rest of the year. That will obviously help the cash conversion as well. Now, we measure it as rolling 12, which means that even if we get a slightly better cash flow in the next quarter, it's not immediately going to have a huge impact on the rolling 12 figure.

Thank you.

The next question comes from Max Yates from Morgan Stanley. Please go ahead.

Hi, good afternoon. Just the first question I had is just how to think about FX impact for the second half. So you will likely have positive impacts on your sales in the second half. I'm just wondering when you look at sort of what happened last year with FX revaluations, Do you think there is a scenario in the second half where we have a positive effect on sales and a continued negative effect on EBIT from FX? I'm just trying to understand to what extent we just put this down as a one-off or this trend of sort of positive sales, negative EBIT impact from FX may continue into the second half.

I think what's important to remember, as I tried to explain in the call as well, is that what we are measuring here is the bridge effect. So it's not fully the actual impact in the quarter. Also in this quarter, from a pure translation effect, we had a positive impact in this quarter. But then when we compare again with last quarter, then we got this negative impact on the revaluation of accounts payable and accounts receivables. Now, would the currency stabilize? We would, of course, not see that same big changes. And also, would we reduce our inventories in the second half of the year? There would be an opportunity that you would see some positive FX from that. And again, the big revaluation impacts we had in Q2 last year, we did not have the same impact in Q3 and Q4. So from a bridge effect, I don't expect to see that same development.

Okay, I guess that was my question because you see the revaluation effects last year, but it's a bit harder for us to see in the numbers. So I guess your point is there isn't the same revaluation effect in the base of Q3 and Q4 next year, so it shouldn't really continue. Exactly. Is that fair? That's fair. Yeah. Okay, understood. The second thing I just wanted to understand was could you just comment on sort of your broadly how your customers are behaving and I guess, have you seen any impact either in customers preferring to extend the lives of equipment as opposed to ordering new equipment as commodity prices have sort of come off the very high levels where they are? And I guess an extension of that is given we have seen sort of a few quarters of negative order growth organically in the equipment business, do you see Now we start to hit those easier comps. Is there any reason for a sequential acceleration in orders over the next few quarters? Just wondering what you're hearing from your customers and whether anything is changing with some of the commodity prices 20% lower than where they were this time last year.

Well, I think if you compare with historical levels, of course, it's still high level. So our basket is still at a very high level compared to, you know, to go back to 2015, 16, for example. So it is, you know, what I hear from customers that it's still, you know, a strong focus on replacing old fleet. We have, you know, we continue to see that the fleet is step by step has grown older. And that's a fact. You come to a point where you need to do the reinvestment. So that is happening. We also see expansion of existing mines and also new mines. So for me, I don't see a shift in behavior due to, let's say, the the weakening of the commodity prices here now in Q2. It's roughly 50-50% when it comes to replacement and expansion. I think that also tells that there is still a lot of investment willingness to prepare for higher production output. When it comes to the aftermarket, it's clear that many customers are seeing the benefits when it comes to rebuilding machines. And I think that is both from, you know, it's a faster way to get higher productivity. You can also incorporate different new technologies related to safety, related to ESG. So it's a faster way really to bring productivity to a new level. And we continue to see that. And I think that will be the case moving forward as well. Also giving, you know, thinking of this as a more circular approach economy, rebuilds of machines, I think that is here to stay and for us that is good business because it also ties us closer to our customers. We help them really to increase their productivity and their ESG performance. But of course you come to a point when you need to replace the machine and For us, the performance in the aftermarket is so tightly linked to our probability to also get next equipment order. So for me, it's a strong focus really to perform in the aftermarket.

That's great. Thank you very much.

The next question comes from Mathias Holmberg from DNB Markets. Please go ahead.

Hi, Mathias Holmberg, DNB. I'm trying to understand the strong equipment sales a bit better. And if you please could explain if there's anything that, say, you shouldn't be able to maintain the Q2 run rate for equipment deliveries going forward or Would you basically need to see further improvement in the outbound logistics in order to keep revenues in this region? Thank you.

I think we have, for a number of quarters now, we have seen the improved output from our factories, but we have not really been able to translate it into revenue. So, of course, as Håkan also said, when it comes to our inventory, a big portion of the inventory is either on the ship somewhere or it is at the final update or upgrade close to our customers in our customer centers. So I expect us to continue to have good output when it comes to revenue contribution from equipment in the coming quarters. Especially also related to that the inbound situation has improved when it comes to the container of freight, when it comes to the inflow of components for us.

Perfect. Thanks.

The next question comes from Andreas Koski from BNP Paribas. Please go ahead.

Thank you and good afternoon. I have a couple of questions. And if you could start with the service business and the organic order growth of 5%. I think that is a quite significant slowdown from what we have seen in previous quarters if we exclude Russia. I think you saw organic growth of 11% in Q1. Would you say that this year-over-year slowdown is mainly related to lower volume growth or is it more relating to the pricing side?

I would say that it's more related to the number of larger rebuilds that we have managed to grab in the quarter. So I think the underlying activities when it comes to service contracts, etc., that is going at the same pace. I think pricing, we don't see any change in our ability to work with pricing. I would say that it's mainly related to how many rebuilds have we actually landed in a quarter. So I think you can also, you know, between quarters, I think you can also expect that there will be swings also in the parts of service business related to that. We have, you know, a bigger and bigger share coming from larger rebuilds.

Understood. Thank you. And then on large orders on the equipment side, I think you said that you didn't reach the same kind of level as you did in Q2 last year. And in that quarter, you had 800 million in large orders, right? if I have the correct numbers. So would you say that large orders in this quarter amounted to around 600-700 million? 550.

550, okay.

Thank you very much. Thank you.

The next question comes from Nick Husden from RBC. Please go ahead.

Hi, everyone. Thank you for taking the questions. I have a couple. The first one, just going back to the margin bridge, and in particular, the comment about the 90 basis point dilution from M&A. I could be wrong, but I think that's the first time you've given that number. If that is the case, could you tell us what that number has been in previous quarters and roughly how we should think about that going forward, please?

I don't think it's the first time we have been given that figure. We don't specify it in the report, but we usually talk about it in the presentation. And it was roughly on the same level in Q1. Going forward, that obviously again depends on how our acquisitions perform. As we mentioned, they actually performed in terms of revenue really well, but when we buy companies, they usually tend to be at a slightly lower level than our EBIT, and then we try to bring them up. So now we have only, we added one company in the quarter, Ard, and they were added first of April, so they were basically part of the group the whole quarter. And since then we have not added any new companies. So to make it simple, if these companies perform at the same level in the next quarter as in this, we would get a similar dilution impact. Over time, obviously, we want to bring it up and get a reduction.

Okay, great. And then just a quick follow-up on a related note. So you mentioned a few times that the acquisitions perform very well, certainly from a sales standpoint anyway. Is that mainly because a lot of the acquired companies were quite localized and now you're scaling them? Or what exactly have they been doing to sort of perform as well as they seem to have done?

So it's scaling. So several of the players have had a strong presence in certain regions, and we have been successful in scaling them globally now.

And presumably that will continue for the foreseeable future, right?

That's the plan.

Okay, great. Thank you very much.

Thank you.

The next question comes from Ben Helan from Bank of America. Please go ahead.

Hey, thank you for the question. The question I have is around the trends in tools and attachments. The margin came in a little bit weaker than I expected. I think part of that was FX, which you've kind of explained. In the past, you talked about investment and integration costs. So as we think about that round 15, 15.5% margin, is that a fair assumption as we go through the second half of the year, or do you think you can do better than that? Thank you.

So we had a currency impact in the quarter when it comes to TLD, but it's also a division where we sit with too much inventory. So we have slowed down the production level in several of the factories to bring the inventory back to where we want it to be. So part of this is also under absorption in our factories. But that's temporary, of course, to bring inventory down.

Okay, that's clear. Thank you. And then a second question, the order trends in tools and attachments have been negative organic for the last four to five quarters now, and you've highlighted there the kind of weaker European trends in the hydraulic attachments business. Is that the sort of level we should be expecting as we move through the second half of the year, that the construction side of that business is going to weigh on the mining attachment side of the business? Thank you.

I think construction will continue to show a softer demand. However, there is great opportunity within mining to grow the TLD business. But as we have said also several times, it must be profitable growth. That's what we're after.

Okay, great. Thank you.

The next question comes from James Moore from Redburn. Please go ahead.

Hi, everyone. Good afternoon. Thanks for the time. I've got two. Maybe we could go one at a time. The first one's really on order pricing, Helen, in aftermarket and on equipment. I know pricing was up a lot in the last couple of years, particularly in aftermarket. So the comparative is going to be kicking in. But if you think about sequential Q on Q pricing, if you like, Are you still lifting prices or are we now holding flat given what's happening to the input prices that are down around the world, steel, oil, etc.? Or actually, is there potential to start or are we already start seeing Q&Q pricing dropping? I'm thinking about the cyclical piece versus your pricing power.

We continue to have a strong pricing power. And for us, it's always tied to the innovation, the value that we bring to our customers. So I don't see any change in the environment to not be successful when it comes to pricing. But it must be tied to the value that we bring to our customers, of course. And that's the same both when it comes to aftermarket as well as equipment.

Very helpful. And the second one, if I could, just to go back to the 270-bit FX impact, is it possible to desegregate how much of the 270-bit was your usual transaction translation versus how much specifically with the revaluation of the inventories and receivables? I ask because I get that inventories have gone up from $17 billion to just over $20 billion and receivables from sort of $9.5 billion to $11 billion and a bit. But if I add the two together, last quarter... Inventories and receivables jumped 2.5 billion and they jumped 2.2 this quarter. So it's a broadly comparable move. And last quarter you had plus 20 bps of FX and this you have minus 270 bps. And I don't think the Q1Q period end FX rates have moved enough. So I just can't quite figure out why such a discrepancy in the quarter versus last quarter.

No, you're right. It hasn't moved all that much between Q1 and Q2. The big difference is actually when we compare with Q2 last year. So from a translation impact, we have a positive impact this quarter if we compare to last year as the Swedish krona is somewhat weaker. So then when we translate the profit back, we get a somewhat positive impact. But the reason for the large negative impact is that in Q2 last year, we had a lot of positive revaluation of accounts receivables and accounts payable as the Swedish krona was weakening. And then when we compare this quarter with last quarter, the isolated impact in this quarter is not that large. But when we compare it with last year, then we get the large impact.

I get it.

That's very helpful. Thanks. So it's not the change in how much inventory accounts receivables we have.

The next question comes from Andrew Wilson from JP Morgan. Please go ahead.

Hi, good afternoon. I've got two. I think they're both clarification questions, if I maybe take them one at a time. I think it's just to kind of clarify on Klaus's question right at the start. When you talk about the guidance being on an underlying basis, and I think Klaus made the point that seasonally the Q3 orders are typically lower in constant currency. So if we were to assume that the underlying conditions were unchanged as you described and that the large orders were basically consistent Q2 and Q3. Is that messaging saying that you would expect that usual sequential decline of 5% to 10% or are you talking kind of X seasonality when you talk about the underlying number? I'm just trying to clarify whether you're really talking about flat underlying or actually down underlying if we take seasonality into account.

I think, you know, if we look over many, many years, Q3 is typically weaker. So there is weaker orders received typically in Q3 compared to Q2. So I think that, you know, that is there. But when I say the underlying activity levels, that's then OK. how many customers are replacing equipment, how much do we have in the must-win deals, etc. So I think there is still, there is, you know, healthy, the overall picture is healthy, but, you know, if you look on this sequentially, historically Q3 has been weaker, historically. But, of course, that can always shift, you know, and it depends all about the large orders as well, but our comments is related to the underlying activities. And it's demand, it's not orders, really.

Yes, that's really helpful. And then maybe just on the margin, and again, I know it's difficult because there's been many moving parts and I know there's been a lot of questions about it, but maybe if I simplify it to this, if we talk about a kind of, in round numbers, 22% margin on an adjusted basis, so removing some of the one-off effects and Is that the run rate we should be assuming going forward? Because I kind of ask in the context, obviously, recent quarters have kind of been 23% and north, and recognizing that there's lots of moving parts and that the effects, particularly in this quarter, was significant. But, I mean, are we talking to a 22% run rate to think about, or are we thinking about the sorts of numbers that we've seen in recent quarters, i.e. north of that 23%? I don't know if I can try and simplify it to that.

Well, of course, I think we are at a good level. If you look on the journey that we have been on the last couple of years, we have taken the margin up to a very nice level. Of course, we also need to grow. And of course, now we have successfully landed a number of acquisitions that are contributing nicely to the growth, actually better than we planned, which is diluting. But of course, this is next horizon of growth. And I think that is important to remember also. Several of these acquisitions, we are taking steps into nearby segments and areas where we see growth. you know, potential growth for the coming years. So it's also investments for the future. But as always, I think for us, you know, profitable growth is the name of the game. And that's what we're looking at.

Okay, so we should be continuing to incorporate some of that investment and some of that dilution from M&A because the appetite is there to continue to invest and appreciating that 22% is a very good margin as much as 23% is an exceptional margin. But we do need to be thinking about that.

I think we need to secure growth as well. And I think when we do the inorganic piece of the growth, then, of course, we very seldom find companies with the same margin as our margin. And, of course, that's always the plan to bring these companies up over time. But that takes time. And we have been... We have landed many acquisitions during last year, and that is now contributing really nicely when it comes to the growth during this year. But I think, as always, we always try to improve and to drive efficiencies, of course, crucial in the coming quarters and years as well.

That's really helpful context. Thank you, Lena.

The next question comes from Guillermo Peñu from UBS. Please go ahead.

Thank you for taking my question. Maybe one for me, and it's again on the sequential movement in potential orders into Q3 and then obviously Q4. If I look at the book-to-bill ratio, and you can obviously answer this at a group level or in particular just to the mining segment, but you look at book-to-bill and it's being below one. And obviously, given by the fact that you are now importing more because your abilities are improving in terms of supply chain and given the fact that sequential orders have that seasonality pattern that we have to take into account, is it the case that we're actually thinking about book-to-bills below one for the next two quarters? Because typically and seasonally, Q4 tends to be also below one. Thank you.

I think with the orders on hand, we have right now, and that's both when it comes to aftermarket as well as on the equipment side, we're doing everything we can to translate that order book into revenue because that is what our customers need. And with the prolonged lead times, of course, It has been prolonged lead times for quite some time now. So, you know, will it be below one? It all depends, I would say, on how many large orders we will be able to land in the coming two quarters. But I expect, you know, strong output when it comes to the revenues in the coming quarters, mainly related to that the supply chain. It is easing up and we have good output from our factories and a strong order book. So, of course, that... you know, that supports the growth when it comes to revenue.

Thank you. The next question comes from Anders Eidborg from ABG. Please go ahead.

Yeah, hi there. Just wanted to understand the comment about mix in equipment and services. So, yeah, I mean, I can see that, obviously, you know, with the big deliveries that you had in equipment, you have, you know, fewer percent of services. But how meaningful is that impact? I mean, you could also think that when you have such a release, basically, of production that comes with a very high dropped through on the equipment side. So was there also sort of within the service part a negative mix, sort of less spares, more services, that kind of thing?

I would not say that that was the case. Of course, it could always be, you know, it could be a country mix, could be a product mix, but I would not say that it was something standing out. So I think that when we say mix, it was more related to the equipment and service mix. And when we talk about tools and attachments, it's more that it's less attachments in the quarter.

Right. So in terms of sort of equipment margins as well, they were pretty normal in a sense, you know, despite the big release.

Yes.

Okay. Thank you.

So thank you very much, everyone. That was the last question for today. Thank you, everyone, for taking the time. I hope all of you have, as always, successful investments, a wonderful summer. And Håkan, Helena and I, we hope to see you all soon again. Thank you very much.

Thank you. Thank you.