Epiroc AB (publ)

Hello, and a warm welcome to the Epiroc Q4 results presentation. My name is Karin Larsson, Head of Investor Relations and Media here at Epiroc. With me to present the results, I have our CEO, Helena Hedlund, and our CFO, Håkan Folin. As always, we will have a brief presentation, and then we will have time for Q&A after the presentation. So, Helena, over to you. Thank you.

It's very slow here. So, I think you need to speed up. Something is... It's very slow. Okay, so sorry. So a warm welcome also from my side. So let's start with a few words on the full year. So 2023 was an intense year defined by major achievements and partnerships. So overall, our order intake increased 11% to 59.3 billion, supported by a strong mining business, while the demand from construction customers decreased. In the year we won several large orders from customers that have been customers or should I say partners of EPPROC for many years. And one example is the largest order we ever received, 700 million, which was from Kamoa Copper in the Democratic Republic of Congo. And this order shows the importance of a consistent commitment and delivery on the service side. And as you know, we focus a lot on improving and strengthening our service presence. And every quarter we open up new service workshops at or close to customer sites. And we also work hard to safeguard high availability of parts and consumables for our customers. And this service commitment led to more equipment orders and growing consumables business in 2023. On the automation side we had a particularly strong development. So we won several large orders and the interest for mixed fleet automation was higher than ever before. So by using our solutions for mixed fleet our customers can strengthen productivity significantly on machines produced by other manufacturers. And as you know, we acquired Remote Control Technologies, or CT, in December last year, and it is growing strongly, which further strengthens our market leadership in the automation space. So all in all, acquisitions contributed with 9% to the order growth in 2023. The acquired businesses within electrification are also growing well, and many of them are enabling businesses, which in short means that the solutions we bring help customers get the battery electric vehicles to perform their best. Our dedicated battery electric architecture means that all our battery electric machines are more productive than the diesel equivalent. So we have a high proportion of recurring orders for battery electric equipment, which means that our customers see the benefit of our solutions. And one customer among many that understands this is Boliden. And they gave us a large BEV order during the year and with them we also collaborate to develop an electric trolley truck system. And ABB is also an important partner in this development. Another supplier with whom we have strengthened the collaboration during the year is the Swedish steelmaker SSAB. And with their help, we can now produce certain equipment with fossil-free steel. Our revenues grew 21% to over 60 billion, a milestone. And our operating profit was also higher than ever before. Our cash generative business enables us to invest for the future, both when it comes to R&D as well as acquisitions. And our investments in R&D were at all-time high, roughly 3.2% of revenues. And we completed three acquisitions and we announced another two in the year. We also celebrated 150 years since our foundation and also five years as a standalone company under the Epiroc brand. And since the end of 2017, the last full year as part of Atlas Copco, we have increased our order intake with 75%, revenues with 92% and operating profit EBIT with 122%. This is a strong performance that we can be proud of. And together as a team, we have shown strength and resilience, and we have overcome major and unpredictable challenges in the recent years. For example, we have managed the COVID-19 pandemic well, and we exited our fourth largest market, Russia, as a result of the war in Ukraine. And it is the Eproc colleagues who actually makes it happen. At Eproc, we have more than 20,000 passionate colleagues who share a relentless ambition to bring value to our customers. Not only today, but also in the future. So thank you all, colleagues, for your hard work and your commitment. If we then look into Q4 specifically, the words I will use to describe the quarter are very much the same as for the year. So we had a strong mining business, we won several large orders and in total these large orders amounted to 1.2 billion. Of course, every order, regardless of size, with every customer is important. But one of the orders that stood out was our largest order ever for digitalization. So we will strengthen safety and productivity at Codelco's El Teniente copper mine in Chile by supplying digital solutions to them. And the total order value for this multi-year order is 250 million SEK, of which 50 million was booked in the quarter. So it's pleasing to see the strong demand also in the digitalization space. Within construction, the customer activities remained weak in the quarter as anticipated. And we do expect that the construction weakness will remain for the foreseeable future. So we have taken and we still take actions to adjust the organization to the lower level of construction demand. On a positive note, we had good equipment output and strong revenues in the quarter. And this in turn led to improved and strong cash flow. Our cash generative business and our strong financial position enable us to invest for long-term growth, for example in acquisitions. And in the quarter we announced two acquisitions and one of them is Stanley Infrastructure. So together we will become a stronger supplier of excavator attachments, especially in the US. We are set to capitalize on the strong growth trends in deconstruction and recycling. and its strong and innovative brands includes Labonte, Paladin, Pengo and Dubois. So Stanley Infrastructure has estimated revenues in 2023 in the range of $450 to $470 million, corresponding to around 4.7 billion Swedish krona. They have an EBITDA margin in the mid to high teens and about 1,380 employees. So we expect that this acquisition will be completed towards the end of the first quarter. And the purchase price is $760 million, equivalent to around 7.8 billion krona. And it is an all cash transaction with secured financing through a bridge facility. The other acquisition is Veiko Preparatory Limited, which manufactures precision-engineered rock drilling parts and expands Epiroc's portfolio of spare parts in the growing and very important African region. And on the topic of large orders and partnerships, I've already mentioned a few large orders, but I also would like to tell you about the ones I haven't. So in Q4, we received an order from Shandong Gold Group, one of China's largest gold mining companies, valued at about $350 million. Eproc has supported the development of Shandong Gold Group with various underground mining equipment since 1986. And another long-term customer is Eti Bakir in Turkey, who gave us a large recurring order in the quarter. It amounted to 280 million and includes an MT42 battery-driven mine truck. Our MT42 is up to 10% more efficient than our diesel equivalent, and I dare say that it is the most productive battery electric truck in the market in this size segment. On the innovation side, we have several interesting things going on, but sometimes it is the small improvements that drive sales and customer share. And our new range of drill bits and rods, the Epprock Grayline, are specifically developed for the European quarrying and surface construction drilling. Manufactured with high quality steel, they increase rock drilling efficiency and they are ideal for less demanding rock conditions. In the aftermarket, we had a mixed demand picture. So for service, we achieved an organic order growth of 6%, which reflected a continued high activity level, as well as a continued good demand for larger rebuilds. The demand from construction customers remained weak, which impacted the hydraulic attachment business negatively. And the strong mining demand was, however, reflected in the consumers' business, for which revenues increased year on year. In total, the aftermarket represented 64% of our revenues in the quarter, unchanged from last year, and the reason for the number being the same is to a large extent explained by our acquisition of CR. The company with annual revenues of around 1.7 billion is growing well and has strengthened our position in ground engagement tools, such as cast lips, teeth and protected shrouds installed on mining buckets and loaders. Operational excellence is a strategic area for us, and we always have initiatives to improve the way we do things. On the supply chain side, especially with important service, we see a positive trend when it comes to availability. With several new distribution centers rolled out, the parts availability has been on a very high level consistently this year, which has led to higher customer share and stronger customer relationships. And this in turn also results in more equipment orders. As I said before, we experienced a mixed demand picture and we need to adjust the organization to match the level of demand it meets. And this means that in tools and attachments, and particularly in attachments, we need to do more and improve profitability. We have several actions implemented, but let me emphasize what we said in Q3. This is not a quick fix. One example of an action taken to improve the profitability for hydraulic attachments is the consolidation of our European manufacturing in this space by planned closing of the manufacturing plant in Essen in Germany. For mining, on the other hand, we see good demand for underground equipment in particular. We had a very strong quarter on all lines and we need to further strengthen our production capabilities. So we have, for example, in the quarter secured an additional facility in Örebro in Sweden, which will increase our assembly capacity and improve our capabilities to produce early stage and prototype machines. On the topic on sustainability, we have seen good progress in the quarter, especially on safety. But that said, in January, we lost a service technician in a road traffic accident. So we are deeply saddened by this as our thoughts go out to his family, friends and colleagues. And we're also sending our thoughts to those who sustained injuries in the accident, of which two further employee colleagues, and we sincerely hope that they will recover as soon as possible. And then on a more positive note, our company is growing at year end. We had 18,200 employees and the increase is mainly explained by acquisition. And in addition, we have more than 1,700 colleagues in external workforce that also contributes to the success of EPROC. We have improved the share of women employees and managers further and diversity in all its forms is still a prioritized topic for us. And for comparable units, we have reduced CO2e in operations with 25%. And this is really an achievement and it's driven by several initiatives, including the installation of solar panels and a higher share of renewable electricity. On the transport side, our emissions are 2% higher, which is mainly explained by higher volumes delivered. So before handing over to Håkan, a few words on the people's side. Our highly appreciated president, Sami Niranen, will leave for a position outside the group. He has done a great job. So thank you, Sami. And luckily, we have many competent colleagues ready to take on new challenges. And we are happy to have appointed Wayne Symes as Sami's successor. Wayne has almost 15 years within the group in different positions and most recently as vice president global customer relationships. And he embraces our values, including putting customers first and building for long term sustainable results. So with Wayne's strong background, experience and positive attitude, I'm convinced he will be successful in his new role. So Håkan, please take us through the financials.

Absolutely. Thank you, Helena. So we are indeed a growing company. Our orders increased 7% organically in the quarter and amounted to 14.4 billion. We see a high activity within mining and we won, as Helena said, several large mining orders. Construction customers, on the other hand, are still cautious and hesitant. Our revenues were strong. They were up 8% organically to 15.6 billion. And I will cover the profitability and cash flow development on the following slides. So our operating profit or EBIT increased by 4% and amounted to 3.4 billion. And in this figure, we have items affecting comparability of 120 million. And these contributed then to the high profit versus last year. Items affecting comparability include positive impact from a capital gain of sale of a property. We have restructuring costs and also earnouts related to acquisitions. If we look at the adjusted EBIT margin, it was 20.7%, while the recorded one was 21%, both down versus last year. And this is mainly explained by the weakness in tools and attachments and also dilution from our acquisitions. And the strong growth of our acquired companies impact the margin negatively, both on structure, but also organically. And in structure, the dilution from acquisition was 0.7 percentage point on group margin. In total, currency contributed positively in the quarter. We have discussed this topic before, and basically, we have revenue streams and we have inventories in many countries around the world, and this leads to several different effects on the margin. The translation effect is rather straightforward, slightly negative as the Swedish krona strengthened in Q4. However, other items, such as revaluation of balance sheets, also currency and internal profit elimination, in total, they were positive in the bridge. Now moving into the segments and we start with equipment and service. Here orders received increased by 8% organically to 11.6 billion. We had a strong order growth in equipment driven by several of these large orders. And we have announced orders that we consider large orders being above 100 million. We have announced 680 million, but we actually have received large orders in a total of 1.2 billion, which is record high for Epiroc. And we believe this clearly shows that many of our customers are committed to invest and they also have the financial strength to do so. For mining contractors, for smaller customers, there's high activity in general. But of course, some customers are impacted by the higher interest rate. And we have said this before, but please note that large orders are lumpy by nature and they come and go and they're not steady in between the quarters. If we look into service, we had an organic growth of 6%, reflected continued high activity level and good demand for larger rebuilds. And if we look at structure for equipment and service, you will see a negative contribution. And this is explained by the fact that previous year, so in Q4 previous year, we had orders on hand from acquired companies, mainly RCT and Radlink, and that had a negative impact on structure. In fourth quarter, the contribution from acquisition was positive with 5%. Revenues increased 8% to 12.6 billion in the quarter. And if we look sequentially, so we compare Q4 with Q3, orders received increased by 5% organically for this segment. When it comes to profit and margin for equipment and service, there are a few comments to be made to explain what actually happened between the quarters. The operating profit increased by 12% to 3.2 billion. Items affecting comparability was positive with 280 million, mainly explained then by the sale of property. As I mentioned before, it was in Japan and it rendered 436 million. And then we had earn-out payments for acquisition of 58 million and other costs of 98 million. And the earn-out related to our digital and automation acquisition is because they have grown better than anticipated. And therefore, we have to pay more earn-out than what we actually had provided for at the time of the acquisition. And in the other costs, we have, for example, write-down of an IT platform. operating margin was 25.6 percent adjusted operating margin decreased to 23.3 percent from 25.5 and the decrease has several explanations we did have support from currency but acquisitions contributed negatively and the dilution from the acquisition was 0.5 percentage points and even if most acquisitions are now in organic moved from structured organic They are still growing strongly, but at a lower margin. And this also has an impact on the overall margin for the segment. And then we have increased our investments in R&D, in sales, and in service. And if you really dig down into the details, we also have a somewhat lower share of service in the quarter, which has an impact on the margin for the segment. So all in all, many things moving when it comes to equipment and service. But I would like to underline this. The good thing is the business is growing well and the demand is still strong for our equipment and service. If I then move on to tools and attachment, it's a bit of a different picture. Here, orders received decreased organically by 6% to $2.8 billion. The demand remained weak, mainly then within the hydraulic attachment. Infrastructure on the other end held up rather well. Revenues decreased by 4% to 3.0 billion. Normally, we say that Q1 and the first half of the year are strong periods for construction, but we anticipate that construction customers will remain cautious, while activity will remain high within mining, which actually supports then the rock drilling tool business. But for hydraulic attachment, we expect continued weak development. If we look sequentially for these segments, the order development was actually flat organically. Operating profit then for tools and attachment was weak in the quarter. The weaker demand impact us in many way. We have lower revenues, we have under absorption. In manufacturing, we also have a negative product mix where attachment is the part being the weaker. We had an EBIT of 243 million in the quarter, but remember this includes then the restructuring cost of 158 million for the planned closure in Essen, Germany. And that resulted in a low reported EBIT margin of 8.1%, but the adjusted margin was 13.4%. Adjusted margin had positive contribution from currency, but acquisitions diluted with approximately 0.7%. And again, as Helene has said, we are taking actions in this segment to make sure that we improve the profitability. And a few words on the general cost. We've said it before, we invest in our business. Our R&D expenses are, for example, 17% higher than they were in Q4 last year. And for the full year, R&D expense in relation to revenues were 3.2% and they were 2.9% in 2022. And in absolute numbers, it corresponds to almost 500 million more being invested in 2023 compared to 2022. That increase is also partly explained by acquisition as they also, of course, invest in order to develop their business. Net financial items were 435 million, negatively affected by exchange rate differences and also higher interest paid. Net interest was minus 110 million. Tax expense in line with previous year, we had an effective tax rate of 22.2%, somewhat higher than last year, 21.4%, but still well within our communicated range of between 22 to 24%. Moving on to operating cash flow, it has improved both sequentially and year over year. It increased to 2.4 billion from 1.5 previous year and was actually the best operating cash flow in a quarter in a long time. Positively impacted that we have lower build up of working capital. We also have lower net financial item paid, lower taxes paid, and maybe most importantly, then improved operating profit. And on the right hand side, you can see the cash conversion rate, which is calculated 12 month rolling. And this was now at 66, which I would say is good to see. You usually say that you need three data points to create the trend. And as you can see, we have now three data points moving in the right direction. And I believe now that we are back on track when it comes to cash flow. Something that still needs some improvement, though, is the working capital. Compared to last year, working capital have increased by 17% to 22 billion. And if we exclude the effect of acquisitions and currency, it increased by 20%. The increase is mainly explained by a long period of strong growth, both in equipment and in service, with corresponding higher level of inventories and receivables. And as we have talked about before, a meaningful portion of the inventory is equipment that is in transit from our factories out to the final customer site. The good thing is that in the quarter we managed to deliver quite well to our customers, which resulted in an inventory decline from Q3 to Q4. However, transport issues are still remaining, especially in what we have discussed before and talked about the so-called row-row capacity in shipping. And that actually limits our ability to get our equipment delivered out to our customers. For our regional distribution center that ties a meaningful portion of our spare parts, we also see a slow sequential improvement on the inventory side. And as you can see in the middle of the slide, the average net working capital in relation to revenues was 35.2%. Then over to capital efficiency. We have a net debt position of 7.8 billion. Since last year, the main use of cash has been paying dividends, acquiring companies, and we have also tied up more working capital, given that we are growing the business. We have a solid cash generating business. And at the quarter end, we had a strong financial position with net debt to EBITDA of 0.49, which enabled us to seize opportunities and invest for profitable growth. And as you know, we invest organically and inorganically. And on the inorganic side, even after the acquisition of Stanley, we will still have a strong financial position. And currently, we have outstanding and committed financing of a total 11 billion, and 63% of this is green or sustainability linked. If we exclude the short-term financing, basically commercial papers, and we only look at the long-term financing, the corresponding figure is as high as 70%. On the return on capital employed, we are down somewhat compared to previous years. We measure this as a 12-year matrix, and you can see that we are still in a good level of 27%, slightly lower than at the end of 2022, but higher than at the end of 2021. So finally, a few comments on the dividend before handing over to Helena again. Our goal is that we should provide long-term stable and rising dividend to our shareholders. And the dividend should correspond to 50% of net profit over the cycle. The board will now propose us to the AGM, which is on May 14, that we should pay 3.80 kronor per share, which is an increase of 12% compared to last year. And it's also equivalent to 49% of our net profit. The dividend will, as usual, be paid in two installments, one in May and one is October. And with that, back to you, Lemma.