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 like 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 IRN Media here at Epiroc and with me today I have Helena Hedblom, CEO and Håkan Follin, 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 Epiroc 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 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 there 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, Epiroc completed one acquisition, AARD mining equipment in South Africa and it complements Epiroc'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 Epiroc in the quarter. So a warm welcome to the almost 300 new employees joining the Epiroc 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 Epiroc'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, as 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 build 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 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 Cato 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 CO2e 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 have ever increased due to higher volumes delivered. And in an annual ranking of 500 companies conducted by the Financial Times, Epprock was named as Europe climate leader and came out among the top one third of the companies. So Epprock was the highest ranked among the based companies in the machines and industrial equipment category. And climate is important both to us and to our customers. And we invest more than ever in innovation to keep providing customers with equipment and services that increase productivity as well as reduce emissions. And year on year, our R&D expenses are up almost 40% to 500 million SEC. 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 was down 4%. And as you might remember, we had cancellation in Russia of roughly 400 million in Q2 last year. The underlying demand is good. Customer activity is particularly high in equipment and service. We received four large orders in quarter and with large we mean over 100 million. And in total large order 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. And 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 .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 actually impact in this quarter, but is when we compare it with Q2 last year. And in Q2 last year this Swedish Corona 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 center program, we get to an adjusted margin of 21.6%. If I then move into the segments 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 amounting to almost 3 billion resulting in a margin of 23.9%. As Elena mentioned, we closed one acquisition in the quarter, Ard 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, .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 and therefore diluting the group margin. Of the reported EBIT margin of 23.9%, the dilution from acquisition is .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 Wayne Roy. 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 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 in 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 Elena 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 .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 centers, 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 EBTA 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 that we 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 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 Klas Berglind from City. Please go ahead.

Thank you. Yes, I'm Karin Håkan, Klas at City. So the first question I had was on the drop through Håkan. Can I just confirm that the drop through your report is the residual from whatever effects you report? The drop through would be different if there was a lower FX impact. We can't add back all of the balance sheet revaluation effect. I'll start there.

Well, the drop through we report is excluding current 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, Klas?

Yeah, can I 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? When you get your outbound logistics in order, basically?

Yeah, 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 drop through flow through from that.

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

That's part of FX, Klas.

No, exactly. Then my second question is from the trends here into the third quarter. When we back out currency M&A and larger orders looking at underlying orders in dollar terms, then there seems to be some seasonality of some five 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?

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

My quick final one is on the mix effect. I'm trying to understand here. I wish I think about equipment backlogging invoice further. What quarter do you think you are peeking 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 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 for the mix into the second half. Thank you.

So we, you know, we have, you know, we have, 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 some, some, you know, 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 a high, high orders on hand on equipment. So we will continue, of course, to do everything we can to push, push equipment out to get the lead times back to, to more normal lead times, which is important for our customers. When it comes to tools and attachments, we saw weaker, weaker activity levels within attachments in the quarter. Q2 is very often, you know, from a seasonal standpoint, a strong quarter. And when we compare with last year, Q2 has been weaker. So we have seen a mix effect. What we see in, in construction is that housing and aggregates, that's where we have seen a softening while tunneling and civil engineering is still, still at a stable level. So it's a mixed picture within construction.

Thank you. The next question comes from Christian Hinder Eker from Goldman Sachs. Please go ahead.

Thanks for the opportunity for 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 building inventory from the bottlenecks in outbound freight, from the migration of the group stock, from country level sales companies to your new research and development, and then regional distribution hubs and also to the, to the strength of equipment orders on hand and hence flow through from production and I guess the whip 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, on inventory reductions in the back half, given that the second quarter inventories of around 20 billion were somewhere ahead of the 18 and a half consensus forecast. The 19.3 we had forecast. I wonder if you could just add some colour on that as well, please.

I can start maybe and say just on, on maybe you can, can help to quantify it. But if you look on the freight side, it's mainly related to the sea, 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, let's say, setting up all these regional distribution hubs. And right now we are then, you know, 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 rebuilds, larger rebuilds consume more inventory. So that's what see 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 know, 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 up list 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 that we're 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 de-stocking thing that is that is ongoing in that industry.

Thank you very much.

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

And Helena, Håkan and Kari, 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 of all other things as being straining your ability to deliver. I wanted to ask when did 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 you 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 outflow from the Örebro facilities when it comes to equipment. Container freight, you know, that has eased up much more. So that's not really a problem, which of course is then how we ship consumables and parts. You know, we use container freight for that. But it is the rural capacity that is needed to transport the large equipment. That is where we still have some challenges, but it is going clearly in the right direction.

And the improvement in the container transport is also important for us in terms of inbound shipments, because to our 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 is definitely at the better page, and that also then help us get better throughput in our facilities.

Thank you. And in other industries, as lead times normalized, we saw all the intake patterns also normalizing to some extent as lead times were 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, the, 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-log conversion, I guess, you expect it to normalize it, but can you give us some time as to when and what level would it be stable? I basically, when the gas-log 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, you know, even if you 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 impacts 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 try 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 currencies 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 impact in Q3 and Q4 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.

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 kind of now we start to hit those kind of easier comps? Is there any reason for a sequential acceleration in orders of the next few quarters? Just wondering kind of 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 go back to 2015, 2016, for example. So it is what I hear from customers that it's still a strong focus on replacing old fleet. We continue to see that the fleet 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 the weakening of the commodity prices here now in Q2. It's roughly -50% when it comes to replacement and expansion. I 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. 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 thinking of this as a more circular 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. 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 Matthias Holmberg from DNB Markets. Please go ahead.

Hi, Matthias Holmberg from DNB. I'm trying to understand the strong equipment sales a bit better and if you could please explain if there's anything that 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 at our close to our customers in our customer centers. So I expect us to continue to have good output when it comes to our revenue contribution from equipment in the coming quarters. Especially it 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.

Great, thanks.

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 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 -over-year slowdown is mainly related to the 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, between quarters, I think you can also expect that there will be swings also in the parcel service business related to that. We have a bigger and bigger share coming from larger rebuilds.

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 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.

The next question comes from Nick Husten 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 forwards please?

I don't think it's the first time we have been giving 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 and going forward that obviously again depends on how our acquisitions perform. As we mentioned they actually performed in terms of revenue really 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 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?

Yeah 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.

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

Hey thank you for the question. The question I had was 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 around -15.5 percent 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.

Yeah 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. But 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 on Q pricing dropping? I'm thinking about the cyclical piece versus your pricing power.

We continue to have you know 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.

That's 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 and receivables from sort of 9.5 to 11 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 bits of FX and this you have minus 270 bits. And I don't think the Q1 Q period end FX rates have moved enough. So I just can't quite figure out why such a discrepancy in the quarter versus last.

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 Krone 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 Krone 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 really it's not the change in how much inventory accounts receivables we have it's more. 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 five to ten percent 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 a weaker orders received typically in Q3 compared to Q2. So I think that is there but when I say we'll say the underlying activity levels then that's then okay 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 when it depends all about the large orders as well but our comments in on the is related to the underlying activities and it's it's demand it's not orders really.

Yes yeah no that's 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 kind of if I simplify it to this if we talk about a kind of in round numbers 22 percent 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 of obviously recent quarters have kind of been 23 percent and north and recognizing that there's lots of moving parts and that the effects particularly in this quarter was was significant but I mean are we talking to a 22 percent 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 it's you know it's it's I think we are at you know if we are at a good level you know when we have if you look on the journey that we have have been on the last couple of years you know we have taken the the margin up to to to a very very nice level of course we also need to to to to grow and and of course now we have successfully landed a number of acquisitions that are contributing nicely to the growth actually better than than we 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 are we are taking steps into you know nearby segments and areas where we see 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 is the name of the game and that's what we're looking looking at.

Okay so we should be continuing to incorporate some of that investment and some of that dilution from them there because the appetite is there to continue to invest and appreciating that 22 percent is a very good margin as much as you know 23 is an exceptional margin but that we do need to be thinking about that.

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

That's really helpful contact thank you Elena.

The next question comes from Guillermo Pena from UBS please go ahead.

Thank you for taking my question maybe one follow-up for me and 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 driven by the fact that you are now importing more because your abilities are improving in terms of supply chain and and doing 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 with the orders on hand we we have have right now and that's both for when it comes to aftermarket as well as as on the equipment side we're doing everything we can to to to say to translate that that order book into into revenue because that is you know 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 to 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 the growth in 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 a you know few fewer percent of services but 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 drop 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 could be could be read you know 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 attachment 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.