Epiroc AB (publ)

Hello, and a warm welcome to the Epiroc Q3 results presentation. My name is Karin Larsson, Head of Investor and Media Relations here at Epiroc. As always, when we present the results, I have the pleasure to stand here with Helena Hedblom, our CEO, and Håkan Folin, our CFO. They will briefly present the results before we host a shorter Q&A session. Helena, please, the stage is yours.

Thank you, Karin. Hello and a warm welcome from my side as well. Let me jump straight into the quarter. As anticipated, the demand in the third quarter was seasonally weaker than in the previous quarter. The demand and activity level remained high within mining and several large mining equipment orders were won. Construction customers, on the other hand, remained hesitant and tentative. So within mining, it was a particularly strong demand for automation and connectivity solutions, both for acquired solutions as well as for our own solutions. So in total, our orders increased 17% year on year to 14.4 billion. In September, we announced our largest ever order, 700 million, to provide Kamoa copper in Democratic Republic of the Congo with underground equipment. So after several years with local presence and highly skilled and committed service technicians on site, the collaboration between EPROC and Kamoa copper has deepened into a real productivity and sustainability partnership. And it's especially exciting to contribute to the success of the Kamuakakula copper mining complex, as it is projected to be among the world's lowest greenhouse gas emitting copper mines per unit of metal produced. Our revenues increased 17% to 15 billion, driven both by acquisitions and the organic development. And our operating margin EBIT increased sequentially versus last quarter, but decreased year on year. It was supported by currency, but acquisitions under absorption, investments in R&D and marketing, as well as product mix impacted negatively. And Håkan will elaborate more on the margin later, but I can assure you that we are taking measures where needed while continuing to invest to remain a technology leader also in the future. So with more advanced technology, automation, digitalization and electrification, it is more likely that we at EPPROC will also perform the service on the equipment. And this drives both revenues and profit. But the increasing number of service technicians in the field comes with a great responsibility. We must continue to make sure all our employees always act with safety in mind. Several actions have been taken to reduce injuries, and we have a positive trend in the development of our safety indicators. But that said, I'm very sad to share that we have lost a service employee in a fatal accident in the quarter. Safety is our top priority, and it is crucial that all Epbrock employees come home safe and sound after the working day. In my next slide, I would like to speak about that partnership is the new leadership. So this is something that I truly believe in. And the order I just mentioned from Kamowa Copper is one good example. But there are more good examples, like our partnership with Newcrest, one of the world's largest gold mining companies. In 2021, we announced that we created a semi-autonomous production level in the Acadia mine. And this project with mixed fleet equipment is developing well. And in this quarter we now take our collaboration even further. So we will now take a holistic approach towards the entire mining processes at several of Newcrest's mines, supported by EPROC's leading portfolio of automation, digitalization and electrification solutions. So in short, it means that we share a vision on how to make the whole mining process more efficient. And we will together invest to finding the best solutions to do so. Another collaboration we are engaged in is with Boliden and Algoryx and Örebro University. And the project includes the creation of a digital twin of a mine, a simulated testing environment for artificial machine learning, which greatly reduces the need for physical testing. And speaking of reducing the need for physical interaction, do you remember our automatic bit changer, which enables hand-free bit changes and enhances productivity and safety by eliminating human interaction with the drill string? So following the very positive customer feedback, we have now extended this solution to include a wider fleet of pit wipers. So please let me share a short video on the automatic bit changer.

At Epiroc, we strive to eliminate live work and improve the mining value chain through solutions that enable automation and digitalization. And after years of meticulous research and thoughtful design in collaboration with our partners, we engineered an automatic drill bit changing solution that's simple, safe, and effective, whether you're in the cab or operating remotely. Carefully developed to deliver effective bit changes, Epiroc's automatic bit changer is the next future ready advancement in autonomous drilling. With the ability to change out bits significantly faster than any single manual exchange, the automatic bit changer eases your team's workloads and ups drill times. The unique removable bit carousel design enables you to select a range of bit types and sizes, while the hands-free bit change and above deck design ensures ease of maintenance, ideal operator viewing angles, and retrofit opportunities. Plus, the decrease in manual live work and machine downtime helps support a more productive and profitable operation, making Epiroc's automatic bit changer a game changer in bit replacement.

So as a short refresher, I would like to remind you of our strategy. So we focus on attractive niches and outperformance. And the way forward is defined by innovation, aftermarket and operational excellence, all of which rely on a foundation of a strong company culture and sustainability mindset. So innovation is to a large extent already covered today when I spoke about us being a productivity and sustainability partner to our customers. And now I would like to cover the aftermarket, another very important part of our business. So it represents roughly 70% of our revenues in the quarter and includes service and tools and attachments. And within service, we see continued high activity, especially in mining. With an aging fleet around eight and a half years on average, we also see a strong demand for parts and for rebuilds. For tools and attachment the demand picture is more mixed. The largest portion of the revenues in tools and attachment is rock drilling tools used both in mining and construction applications and the demand there is good. The smaller but more profitable revenue stream is the hydraulic attachment and here we see good demand for infrastructure projects while the construction demand within housing and aggregates is lower. Q1 and Q2 that are normally strong quarters for construction work were weaker this year and we see that the demand is still at low levels and we anticipate that the construction demand will remain weak. And this brings me to the next topic within our strategy operational excellence. So we are adjusting operations to remain agile and resilient and we have taken actions and we will take more actions to improve our performance. So within production, we are adjusting to reduce under absorption. We are also improving our manufacturing footprint, for example, moving production of low profile machines from Örebro, Sweden to Johannesburg in South Africa. On the admin side, we continue with the rollout of our regional centers of excellence for finance and HR to improve processes, efficiency and quality. So coming then over to sustainability, as I said, always safety first. And as I said in the beginning of the presentation today, I'm very sad to report a service employee fatality in Kazakhstan in the quarter. And we are working with the customers and local authorities to investigate the circumstances around the accident. On the safety metrics, we do, however, see improvements and we have taken several actions to reduce injuries even further. On head counts, we are still growing. We are now a little bit more than 18,000 employees in our Epbrock family and we have continued to increase the proportion of women employees and women managers. We also have 1,800 additional employees that are also contributing to our progress. On the emissions, we have managed to lower the CO2e emission from our operations for comparable units during the last 12 months with 26% thanks to several initiatives, including installations of solar panels and a higher share of renewable electricity. And the CO2e emissions from transport has, however, increased somewhat, which is explained by higher volumes delivered. But as you all know, the emissions from us is mainly related to scope three, the use of products. So let me share an example of what our solutions can bring. In February this year, we finalized the acquisition of CER, and that has widened our portfolio to also include GET system, and GET is short for Ground Engagement Tools. So with the right cost lip and GET system, customers can enjoy 10% more productivity while saving both energy and carbon emissions. So one bucket, like you see in this example, can reduce emissions by over 350 tonnes. So with this, Håkan, over to you to cover the financials.

OK, thank you very much, Helena. So I will start with the key financials and sequentially our orders were down, which was anticipated as Q3 is normally a seasonally weaker quarter. But year on year, our orders received increase by 70% to 14.4 billion. Supported by acquisitions, they contributed with 7% and also by currency with 1%. The organic increase was 9%. But if we add back the removal of the Russian order book in Q3 2022, which was 1 billion, we had a flat organic development. Customer activity remained high in mining. Several large equipment orders were won. Revenues also increased by 17% to 15 billion and here we had an organic growth of 7%. Acquisitions contributed strongly by 9%. Then a few words on our cash flow before discussing the margin on the next page. Our operating cash flow increased to 1.9 billion and if we compare to the same period in previous year it was supported by higher operating profit However, negatively impacted from net financial items and also higher taxes paid. Our operating profit, EBIT, increased by 12% to 3.3 billion, so it's up from 2.9 billion last year, and I would argue that this is a meaningful increase. Items affecting comparability in this quarter were negative 12 million, consisting mainly of the change in provision for our share-based long-term incentive program. The comparable period in previous year included the provision of 150 million related to Russia. Looking at the adjusted operating margin, excluding then items affecting comparability, It came in at 21.8%, down from 23.9% last year. Supported by currency, while acquisition, investment in R&D and marketing impacted negatively. And also product mix and under-absorption in tools and attachments had an impact. And looking at acquisitions more specifically, the dilution from them was 1.0 percentage point. As Elena said, we have taken and we will continue to take measures where needed within the organization to improve our profitability. If we then go into the segments and we start with equipment and service, orders received increased by 16% to 11.3 billion with an organic increase of 9%. And if we adjust for Russia again, orders were down 1% organically. For equipment specifically, the orders received amounted to 4.5 billion, which corresponds to an organic increase of 14%. But if we adjust for Russia in equipment, orders were down 5% organically. Having said that, we still feel that investment sentiment among our customers continue to be strong in the corner, and we won several large orders. In total, we won large orders of 1.1 billion, including the two announced orders from Kamua in DRC and also Burncat in Australia. Last year in Q3, we had around 1 billion in large orders, so we are more or less on the same level this year as we were last year. For our service business, orders received increased by 12% to 6.8 billion, with a strong contribution from acquisitions. The organic growth was 5%, reflecting then a continued high activity level, as well as a continued good demand for the large rebuilds that we do. And for service, if we adjust for Russia, service orders were up 3% organically. So our service business continues to perform strongly with a steady and solid organic growth. Operating profit for equipment and service was up 16% to 2.9 billion, and here higher revenues, currency and acquisition contributed to the development. The operating margin was 24.5%, almost flat compared to last year, but then again last year the margin was impacted by provisions related to Russia, and for this segment it was 138 million. If we look at the adjusted operating margin, it was 24.4%, down from last year, 25.9%, supported by currency. However, acquisitions impacted margin negatively. So did also the higher investment we're doing in R&D and sales activities. And within this segment, the dilution from acquisitions was 1.1 percentage points. And as you can see, the adjusted margin is slightly lower than the reported one. That is due to release from an M&A provision in previous year of 7 million. If we then move on to tools and attachment, here orders increased 17% to 2.9 billion, up 2% organically. And acquisitions, and this is mainly CR, which Helena presented one of their products previously, contributed with 15% while currency was flat. And if we adjust for Russia, orders here were down 1% organically. As we said before, the demand from the mining customer was good, but the demand from construction customers continue to be weak. And this impacts mainly the hydraulic attachment business negatively. Important markets such as Europe and US, they have a weaker housing and aggregates market. On the other hand, we see that infrastructure is holding up rather well. On the revenue side, they increased by 18% to 3.2 billion, down 2% organically. Acquisition contributed with 90% and currency added another 1%. For tools and attachment, the operating profit was down 6% to 481 million. The adjusted operating margin was 15.1%, down from 19.4%, negatively impacted by lower revenues and under-absorption, mainly in the hydraulic attachment business, and this in turn also impacted product mistakes negatively for this segment. Currency contributed positively to the margin, while structure had a small negative impact on the margin. However, if we look in absolute terms, structure, which includes acquisitions, then had a large positive impact. And in this segment particularly, we have already taken some actions and we will continue to focus on working smarter and more efficient going forward. Then moving on to the next slide, which is on cost, net financials and tax. As said, we invest in our customer activities, we invest in R&D in order to generate business and develop state-of-the-art solutions for our customers. Having said that, cost control is for us equally important. And here I believe that we can be more efficient on the cost side onwards while we at the same time continue to invest in our business. Net financial items were 331 million, negatively affected by the exchange rate difference, and also the net interest was up. It was 146 million, which is significantly higher than last year, when it was only 23 million, which is explained by our higher debt and also by the overall higher interest rates. On average, our rate has increased from 2.5%, and we are now north of 4%, and that makes a rather big difference. Income tax expense was 685 million and the effective tax rate increased to 23.4% from 22 last year. However, this is still within the guided range we have of 22 to 24%. Moving on to operating cash flow, which has improved both sequentially but also year on year. On the positive side, we have a higher profit and we also have less working capital build up than last year. But we have a negative impact from high financial items, taxes paid and also investment. The cash conversion rate, which is calculated here on a rolling 12 month basis, was 55, which is an improvement compared to the last quarter. I think we can do better here and we do expect better cash flow and better cash conversion onwards. And let's elaborate a bit on the working capital side. Compared to last year, the net working capital have increased 29% and is now at 23 billion. If we exclude the effect of acquisitions and currency, it has increased by 25%. And the increase, I would say, is mainly explained by a long period of strong growth, both in equipment and in service, with corresponding higher level of inventories and receivable. And actually, a fairly meaningful portion of our inventory is equipment that is in transit or at our workshop out at our customer centers on the way to be delivered to our customers. And I mentioned the so-called row-row capacity, roll-on, roll-off within shipping. This is still an issue for us, and it limits our ability to get our equipment delivered to our customers. Our implementation of the regional distribution centers is ongoing. This ties up a meaningful portion of our spare part. It continues, but we are seeing an improvement in our ways of working here. And you can rest assured that inventory management is a very prioritized topic for us. When we look at the total average net working capital in relation to revenues, and also here on a rolling 12-month basis, it was up to 34.8%. So finally, for me, before I hand back to you, Helena, a few words on our working capital efficiency. We have a net debt position of 7.6 billion. Last year, at this point, we were actually cash positive. So it's quite a big difference. And the main explanation is the acquisitions that we have made. If we look on the return on capital employed, we have been rather stable around 28% if you compare to last year. But if you compare to two years ago, we were at 25%. So quite a strong improvement since then. Okay, over to you, Helena.

Thank you. So before speaking about the future then, I will briefly summarize this quarter. So safety is on the top of the agenda always, and we will continue to educate and work on improving safety, both for us and for our customers. We had continued high demand in mining in the quarter and we landed several large orders. Which is the result of good long-term collaboration with customers. I truly believe that partnership is the new leadership. Construction was weak in the quarter while infrastructure had a stable development. We delivered strong revenues, up 17% year-on-year, including a good performance from our acquisitions. And onwards, we will continue to focus on operational excellence while protecting and gaining customer share. The operating cash flow improved both year-on-year and sequentially. And finally then, a few words on the near term. So we expect that the underlying mining demand, both for equipment and aftermarket, will remain at a high level, and that the demand from construction customers is expected to be soft. And I would like to emphasize that this statement is referring to underlying demand trends and not absolute order levels for us at EPPROC. So thank you, and over to you, Karin.

Thank you, Helena. Thank you, Håkan. So before starting the Q&A, I would just like to highlight the important dates for the next year. And especially I would like all of you to mark your calendars for September 24, as we will host our CMD in Las Vegas in conjunction with the Mine Expo. And that's the largest mine fair in the world. So operator, you may now open the line for questions. Thank you.

If you wish to ask a question please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question please dial star 5 again on your telephone keypad. The next question comes from John Kim from Deutsche Bank. Please go ahead.

Hi, good afternoon, everybody, and thanks for the opportunity. Two questions, if I may. If we think about near-term, call it the next two to three years, how should we think about production levels and visibility given issues in key markets like Chinese construction? and perhaps electric vehicles. A more pointed question for the shorter term, can you speak about what you're seeing in underlying demand dynamics within hydraulic attachments? Thank you.

I think if we start with the second one there, so on hydraulic attachment, we see solid demand for the portion of the products that goes into mining as well as infrastructure projects, while the sub-segments that is more related to housing and aggregates, that's where we see lower demand. And if I look on it from a regional perspective, it's the same trend in US, the same trend in Europe, as well as India. which are our main markets. Did I understand you correctly that when you asked about the activity levels, it was more related to construction also in China for the coming years? Was that the question?

Perhaps a little bit different. Both of your business is driven by mining and offers a key exposure. You've had good orders recently, but when you look at kind of key in markets for copper consumption, you could argue construction and perhaps China is a key use. And that looks to be trending negative. I'm just wondering if you're seeing that feed through your part of the value chain.

I would say on copper, yes, I see what you are looking at there, but I think at the same time on copper, there are this supply demand gap that is also will be there in the coming years. leading to that expansion projects will have to happen, also greenfield will have to happen to safeguard production output in the coming years. So I think that should also be taken into consideration when looking at the overall demand. As well as lower grades, I think copper is also the commodity where we see that the grades are going down.

That's fair. Does that give you material advantage on pricing or utilization levels with the declining copper grid?

Yeah, and more complex. You know, you need to go deeper. It's more complex ore bodies. And that is good for us because that, you know, it's more advanced equipment needed, more safety aspects that you need to take into consideration with depth expectations. So I think there are, you know, the overall, the underlying trends are making it more difficult to bring up the same amount of metals in the coming years. And here, of course, also our technology solutions helps our customers to, you know, do the business at a more difficult levels and more difficult environment.

Okay, thank you.

The next question comes from Klaas Berglind from Citi. Please go ahead.

Thank you. Hi, Karin and Håkan, Klaas at Citi. So my first one is on the underlying orders, X to 1.1 billion in large orders. The decline quarter on quarter, X currency and M&A appears bigger than normal seasonality. And you say that the mining outlook has been solid, Helena, and you have indeed received Obviously, big orders, but just on the underlying side, are these sort of neutral push-outs of order decisions because of higher funding costs, or are we having sort of construction exposure also within E&S, not only within P&A, that is sort of driving down orders a bit? If you could comment there, that would be very useful.

Yeah, I would say that that is the case. You're spot on. So, of course, we also have equipment for construction applications, and we see tunneling going strong, but at the same time related, the more smaller machines going towards housing and demolition and quarries, you know, there we see a softer demand, not only on the attachment side, but also on equipment. But when I look at the underlying activity levels, when I look at the

age of the fleet when i look on the pipeline you know it's it's still holding up well in mining good to hear and when it comes to then one for your walk and the drop through in equipment and service the organic drop through is now negative and high similar to sales which is a bit unusual you talk about r&d scna under absorption but i'm trying to understand what kind of drop through we should model going forward here next couple of quarters, you're talking about potentially taking out cost here to improve the leverage. Is this a short-term fix or do you think that this is sort of the level we should model here in the near term? Thank you.

No, I mean, we have, since I started at least, almost every quarter showed a fairly good, solid flow through. And now this quarter was an exception. And this is an area where we think that we can definitely do better. So, no, we don't want you to model in that we're going to have negative flow through in the years going forward. That's something where we're not happy with that performance and we aim to do it better going forward. then we're not going to guide you on a specific level of exactly what the flow through will be. That was a difficult word to say. But we definitely think that we can do better than we did this quarter.

And just to be, you know, from my side as well, you know, we are not happy with our efficiency in the quarter. And we have already taken measures to improve and we will continue to do so.

And then, okay, thank you. My final one for you, Helena, is on the service side, 3% growth in orders, the Russia comp. I guess you still have pricing in that, so volumes are perhaps down a bit. We've seen miners struggling with production with some pent-up production demand ahead in the next couple of quarters. But I'm curious here on the rebuilds, in the same way as we see the equipment push-outs, maybe not for you, but across the whole Suppliers, do you think there is a risk here that this can happen as well on the rebates, or are you still seeing rebates being relatively solid?

I would say rebuilds are solid. So I would say that I think I said the same last quarter, but with, you know, a big portion also or big portion, but a bigger portion of our service revenues coming from these service products and rebuilds. And, you know, it can be variation between the quarters. But when I look at, you know, how much we're landing when it comes to rebuilds, it's a very solid level. And I don't expect that to be, you know, to be to come down, even if there would be no push outs in decision for equipment moving forward. I don't expect rebuilds to, you know, that will not follow the same logic because that's an operational decision. So very often we have seen that, you know, you do larger rebuilds actually when the activity levels are lower in mining, because that's also when you can do it in an efficient way.

Thank you.

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

Hi, good afternoon. Could I just start on the tools and attachments margin and the changes that you're making? I think if I look back at sort of Q1, when you were last doing a 23% margin at group level, you were doing around 17 in the tools and attachments business. I guess my question is, How quickly would you expect, assuming we're not getting a kind of big top line recovery anytime soon in tools and attachments, how quickly do you think the changes that you're making will get margins kind of back up to what I guess we would consider and maybe you would consider a more normalized level? Is that something that happens in a quarter or is that something that happens sort of going into 2024?

I wouldn't say in a quarter, but in a couple of quarters. Then of course, you know, this is it is a mix effect. So of course, to adjust operations is one thing. But there's also a product mix effect here. We have higher margins on our attachment business than on the traditional consumables business. So there will still be a mix effect, but I think the inefficiency that we have in our operations in this quarter due to the lower volumes, that of course we're addressing and addressing quickly.

Okay, and maybe just to follow up, could you help us a little bit with the actual revenue split of your tools and attachments business? And I guess... You talked about kind of the rock drilling tools was good. Hydraulic attachments was a little bit weaker in construction. And the other business I was curious about, given Sandvik's comments, they talked about their business sort of ground support. So sort of steel bars holding up mines was seeing some quite negative price impact. How big would that business be for you? As I kind of had a look, and it does look like you have some exposure here, and are you also seeing sort of similar pricing trends where Sandvik talks about their pricing being down about 10% in that business?

So if we start with the first question, we have not shared the exact split, but if I look on the total, the consumables business is the largest portion of TLD and the attachment business is the smaller one. But we have not shared the split between them. When it comes to rock reinforcements, that is a small piece and I don't see the same things happening on the pricing side. I think we are very focused on deep mines with seismic activities where you have special solutions and where you can sell value when it comes to rock reinforcement. So that's the offering we have towards rock reinforcement and that sub-segment.

And if I may add, Lena, we also now have the fourth type of business within the tools and attachment of the acquisition of CR, so the ground engagement tools as well.

And maybe just a really quick housekeeping question. I mean, just when you show that admin marketing and R&D expenses as a percentage of sales and I look at it, I look at it sort of year over year, it was 16% of sales in Q3 22, it was 16.1 in Q2 23, and it's 16.1% this year. This quarter, I guess that's not really much of a change. So should we sort of infer from that the actual size of the extra kind of investments on margin was maybe 10 basis points and actually it was the other issues that were bigger or is there some investments that maybe aren't in this line? Could you help us size what what the kind of impact was from that extra investment.

But I would say rather that with the growth we have, we expect to have efficiency in admin. You know, that's part of our operational excellence initiative. You know, we always strive for more efficiency on admin. So then, of course, we need that also to be able to continue to invest in product development and our presence. So for me, it's more that, okay, we... With the increase in revenue, of course, we expect admin efficiency, and we have not seen that to the level that we expected.

Okay. Thank you very much.

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

Thank you. It's Ben from B of A. I wanted to come back on the order points because you talked about hesitation and the orders do look as though they're slowing on the OE side. We'd heard some comments from some of the big miners about the current interest rate environment. To your answer of the question a few questions ago. Are you saying that on the mining side, you're just not really seeing any impact at all from the higher rate environment on investments in the sector and it's all about construction or are you seeing that and it's just been benefited by some of these large orders? I'm a little bit confused about the commentary on the mining side of things. And then secondly, if I can, around pricing in general, are there any big changes that you're seeing from a pricing perspective across the business? Thank you.

So we don't see hesitations among our mining customers. And I think, you know what, we landed several large orders, as Håkan said, in the quarter as well, you know, above a billion, which is, you know, that's a big chunk of large orders. And when I look at the pipeline as well, you know, and I think this is, but also, you know, we need to remember that there's also constantly a need for replacement. And the fleet every year now has grown older. So, of course, you come closer also to that replacement need. So I don't see that hesitation from the mining customers, but we see it on construction. So that's why we comment like this. On pricing, we don't see any difference. We work with pricing always, and it's always tied to our innovation and the value that we can create. So I wouldn't say that we see any... We don't behave in a different way than we normally do.

Where we have seen a hesitation, but that we mentioned already, I think already in Q1, but definitely in Q2, is on the exploration side and then especially more for the junior exploration companies. There we saw when interest rates started to go up, we started to see more hesitation.

Okay, great. Thank you. Just a quick follow-up on that. You said that Q3 was seasonally one of your smaller quarters. Should we assume there then that Q4 sequentially should see an improvement from an auditor's perspective? Is that how we should be thinking about the end of the year?

I think it's always, you know, it all depends on large orders, as always, which is always lumpy. So it's very difficult to predict when the large orders will come into our books. So I would, you know, when we comment, we comment on the underlying activity levels. We cannot predict the large orders.

Okay, very clear. Thank you.

The next question comes from Gustav Schwen from Handelsbanken. Please go ahead.

Yes, hello, thank you, Gustav. I have a follow-up question on the leverage and equipment service. So you have a similar service as a year ago. You're mentioning the higher SG&A R&D. Then I look at, for example, Q1 this year, where you have a quite similar mix, I think Q3, quite similar organic growth, even a bit higher on the service side. At the same time, you have a larger increase in the costs year over year, but equipment and services posting 35% leverage in that quarter. So, I mean, I struggle a bit to understand why we are at such a low level now. Is it only the higher cost base year over year? a lower growth versus Q1, or is there actually some kind of negative mixed effect within service or anything else? Thank you.

No, I wouldn't really say there's a negative mix impact. I think coming back to what we talked a little bit about before is that we think that there are things also in equipment and service that we can do better than we did in this quarter. So not a really big mix impact. If you compare, though, to Q3 last year, a large portion of the change in the adjusted operating profit is coming from the dilution of acquisitions where where we made a few acquisitions within the segment and also they are growing quite nicely as we showed with nine percent contribution to the to the revenue but most of them I would argue them with the smaller lower margin and thereby diluting them the overall profit but no no no real mix impact within the service part alright thank you

And then, just secondly, on the equipment deliveries, they look a bit low. Is this only outbound logistics? Because I got the impression before that we will not have much of a seasonal effect on deliveries for Q3. So it's outbound that's still a big problem.

outbound the rural capacity but on top of that we also have say bottlenecks right now in our local modification in our service centers doing the local modifications and one example is Australia for example So we do the last modification from safety aspect according to local legislation. And there we have bottlenecks that we are addressing right now. But that has caused a problem when it comes to actually bringing, because we are not happy with the output on equipment in the quarter. And if you output from factories, yes, but not output in the last stage there. So that we are addressing as we speak as well.

But just follow up on that, because has that worsened quarter on quarter? Because I assume Roro capacity is probably a bit better in Q3 versus Q2.

So this is more related to that these local modifications are competing with the same resources that we do rebuilds for, you know, in the service. So it's the same service workshops. So it's, you know, we have it in our own hands. And of course, you know, it's more assemblers that is needed. So this is pure. capacity, you know, within our own organization, not really related to, you know, the challenges we've had previously on Longyear. Of course, there's still challenges with the role of capacity on the outbound, but I'll say a big portion why we have not really managed the output on the equipment in the quarter is that we have a bottleneck internally in our workshops out in the different customer centers. And specifically, I would say in Australia.

Okay, that's very clear. Thank you.

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

Good afternoon, Helena, Hakan and Karen. I just wanted to ask firstly on the margin headwinds, but maybe ask a little differently. You've cited marketing spend as one of the headwinds. I think that's been a little more than one billion kroner in the past two quarters, up around 28% year on year on sales growth of a similar number at around 30%. this quarter. I'd assume that would have been from the return of travel spend and costs like that coming back after COVID. But then if you look back to pre-COVID, the average was more in the mid 600 levels in Krona terms. I guess not dissimilar actually is a percent of sales though. It looks a little bit shy of 7%. So just interested in what is driving that sequential and year-on-year pickup in marketing expense. How should we think about modeling that relative to sales? Should there be some efficiency as you expand the top line? I'll start there.

Yeah, so I would say that it's mainly initiatives to improve. And of course, it's both presence, it's to capture the future growth. But I think, you know, for this quarter now, we are not in line with, from an efficiency standpoint. So, you know, there is clearly things we can do to improve efficiency in marketing as well. And that we have already initiated that work. So I would say it's the traditional marketing and feet on the street, but also some larger projects that we have ongoing to understand and develop how to capture the future opportunities as well in certain parts of the world.

Thanks, Helena. Can I come back on inventories then and specifically on the consumable side? I just wonder how we should think about your distribution model here. We know that you're moving to regional hubs. Can I ask what proportion of your customers are leaning on your balance sheet to hold their spare parts and requiring sort of 24-7 deliveries relative to the proportion that might opt for vendor-managed inventory? And then what is your outlook for channel inventories in terms of consumables in mining Could there be destocking? We've heard a mixed picture in that sense from the supplier peers this week. So I'd be interested in your thoughts.

So the setup we have is that we have created these regional distribution centers in the different parts of the region, in the different parts of the world, and we have structured that network so that we can deliver both parts and consumers within 24 hours to the customers in that region. On top of that, of course, when we have larger service contracts, we have consignment stock on the sites. So that's very much the model, and that's how we are operating both within parts and services and consumables. When it comes to destocking, we see destocking happening within the infrastructure side. So I think a part of the lower demand there, it's lower activity, but it's partly also destocking. We don't see destocking in the mining space. We have not seen anything like that within mining, but within construction. And because there also we use indirect channels. And with indirect channels, that challenge can be there over time.

Thank you. And thirdly, maybe on the CR acquisition, you made that in the fourth quarter last year, and it was the focus of the case study. but also a driver of some of the acquisition dilution to the margin. Just wonder how that integration is progressing. What are your broader strategic ambitions here as well in terms of growing out the ground engaging tools, product family? Is that organic only or inclusive of M&A? And how should we think about the vertical integration of this business? Because if I'm not mistaken, I think you have your own foundry that you've acquired now. whereas the majority of the group is not vertically integrated to the same extent. Thank you.

So we are very happy with the progress on the integration as well as on the synergies, so I think this is a very good fit with Epiroc. When we look at the CR business or ground engagement tool business, it's very much the same as tools and attachments. It's productivity, offering, long contracts in the same way you sell it on TCO, and you You know, you create contracts, you know, three year up to five year contracts with our customers, which is very similar to the consumer's business. So, of course, our Our ambition now is to grow this organically, I would say, mainly. And on top of that also, you know, there is a nice suite of digital products that came with the CR acquisition that also now we can incorporate in the overall digital solution offering that we have at Epiroc. So, you know, very pleased with that acquisition. When it comes to integration or vertical integration, yes, CR had one foundry, but that is a small portion of the actual total flow of this type of raw material into their business. A majority of the flow comes from external parties, and that's, I think, a very good model. A known foundry is crucial to be able to develop new steel grades and to make sure that you have the right quality, but also that you can lead from an innovation standpoint. But we don't have any... I would say further ambition when it comes to vertical integration. We believe in this asset light model. And I think the setup with CR is a good fit from an asset light perspective with one foundry and not more than that.

Thank you, Helena.

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

Thank you very much and good afternoon. Three quick questions. Firstly, on your outlook, you are saying that you expect construction demand to be soft, but does that mean that you expect it to weaken further from the third quarter or did you consider the underlying demand in Q3 to be soft and we are going to see the same kind of underlying demand in the fourth quarter?

Correct. So when we say soft, we already see it as soft. So not the same level as we have seen in Q3.

Okay. And then two questions just on the margin. Firstly, on the FX impact. At current currency rates, do you see the same year-over-year margin support from FX in Q4 or was the margin support in Q3 sort of a one-off effect?

If I can answer that. In terms of FX, as you know, it depends both on the translation part but also on the transaction part, where the transaction part can be a bit more lumpy in terms of its revaluation of especially AP and AR on the actually balanced day. And in Q2, we had a quite negative margin impact. Now in Q3, we had a positive impact. If you take year to date, it's actually a rather small impact. And now in this quarter, it was more on the transaction side rather than on the translation side. And again, the transaction side is more difficult to estimate what it's going to be on the actual balance day. But in terms of the translation part, as I mentioned, I believe, when I started presenting, since the corona has been fairly weak for a long time now, if there are no major changes, the translation part, we would expect to be fairly limited in Q4. Then the transaction part, that might vary more.

Okay. And then on the 250 basis points organic margin dilution, How much would you say come from mix and under-absorption and how much come from R&D and marketing? The reason for asking is because I guess it's easier to adjust R&D and marketing than mix and under-absorption.

I think you can look at the two segments here and because if you look on group level yes we have a we have lower margin and we have these negative organic the main portion of that comes from the tools and attachment segments where as we mentioned before there we both have the product mix and also we have the the product mix given the lower sales of hydraulic attachment and also the under absorption given that we have produced less and I would add also it's under absorption not only because the sales volumes are lower, but it's also an effect that we're trying to reduce the inventory. So we've also adjusted production from that point of view. So the majority of that you can actually see in that segment. I think that hopefully explains.

Okay. Thank you very much.

The next question comes from Vlad Sajevski from Barclays. Please go ahead. Vlad Sajevski-Barclays, your line is now unmuted. Please go ahead. The next question comes from Anders Roslund from Pareto Securities. Please go ahead.

Yes, hello. I had just one question regarding the bottlenecks you mentioned here in production. It seems that you hardly grew at all volume-wise in the equipment area given a 5% increase and if you take away some price it seems that there must be some bottlenecks and that means also that you have higher inventory levels, how quick could you sort of address those issues? Could we see a better outflow in the fourth quarter and a better cash flow, or is it a gradual process?

Yeah, so the bottleneck is not really in the production lines that we have. The bottlenecks are out in the customer centers, in the workshops where we do the final modifications, which means then that the machines are already in Australia or in Chile, which of course, so you don't have the lead time. And that, of course, helps when we sort of manage to open up these bottlenecks, you know... revenue will happen quicker. So it's not in the factories any longer. The challenge is out in the customer centers in certain markets. But I expect improvements in the coming two quarters, I would say. I cannot promise that we manage to do everything in one quarter, but over the coming two quarters, I think this one will be sorted out. So I would say it's a timing issue, but you're correct. This is also, of course, leading to that we're tying more inventory than we want.

Okay, thank you.

The next question comes from Anders Eidborg from ABG Sundal Collier. Please go ahead.

Yeah, good afternoon. Just love to hear your thoughts. I mean, it seems to be the same way for all the mining equipment companies now orders for equipment are okay in Q3 but not at all at the same level as in Q1 and Q2 I mean with the hindsight that we have now do you think there given that you know lead times are coming down do you think there was a bit of over ordering still inflating you know the first half orders you know to something that was just not sustainable or do you think that sort of the step down now is more sort of junior miners etc are having issues with funding costs etc or a combination of the two I mean what would be your thoughts on that?

I don't really on the equipment side we seldom see customers do speculation orders I wouldn't say that that is maybe towards construction that could happen because you know There, the contractors don't know if they will win or if they will lose something. And there, they can, of course, gamble with an order. Within mining, I wouldn't say that we very seldom see speculation orders like that. We know our customers very well, and it's either replacements or it is expansion. And again, when we look at the orders received, also in Q3, Roughly half of the orders for equipment relates to replacement orders and roughly half relates to expansion orders and mainly then brownfield expansions. So I wouldn't say that there is an impact that we saw pre-ordering earlier. I think it's more timing issues. And that will always be the case when it comes to equipment. You know, when they press the button to actually do the investment.

Right. So maybe the equipment orders that we saw in the first half, I mean, those could very well be repeated, you know, once the market, you know, normalizes, etc. Mm-hmm. Okay. Just secondly, I'm not sure if you mentioned it, just an update also of the uptake of electric, uptake of battery as a service, all of that, you know, what kind of, proportion you have now of ordering tank as electrified that'd be useful. Thank you.

So we have not yet shared the amount, not per quarter at least. We shared it in, you know, we had the capital markets day. But I would say that it's, you know, it's steady, improving. At the same time, it's fair to say the large orders, the customers that want to go fully electric, be there another quarter. I think what is maybe more interesting is this, you know, customers doing repeat orders, you know, putting more orders in for one, two, three machines, etc. Because that proves that, you know, they have tested it and they are convinced. It's lower numbers in total. You know, we don't see these fantastic orders. And we had none of the large orders in the quarter were BEVs. But I'm more focused on these repetitive and smaller ones, because I think that will be how you transform the industry, not just trusting these large orders and greenfield operations to go green.

That's fair. Thank you. Thanks a lot.

Already due to end this call. Thank you, Håkan, Helena. I know we have a few analysts still on the line. We have your names and we will reach out to you after this call to make sure you get your questions answered. But for now, we say thank you very much, everyone, for taking the time today. And as always, we wish all of you successful investments. Thank you. Thank you.

Thank you very much.