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.

Thank you, Håkan. So then I will summarize the quarter. So the year and the quarter was defined by major achievements and partnerships. We had a strong mining business and we won several large orders. The demand is strong for automation and digitalization as well as for electrification. And the demand from construction customers was weak but mixed. Infrastructure kept up well. We had a good equipment output in the quarter and improved cash flow. We have a solid financial position and we will have so also after the acquisition of Stanley Infrastructure. We will continue to invest for the future. We will invest in R&D, in organic growth and acquire companies also onwards. We have had five successful years and I'm very grateful for all EPRO colleagues that have contributed. I'm also grateful towards you, our shareholders, for trusting EPROC with your investments. And we will do our outmost to manage this trust and make 2024 to an even better year. So looking ahead, not for the full year 2024, but in the near term, we expect that the underlying mining demand, both for equipment and aftermarket, will remain at a high level. And demand from construction customers is expected to be soft. So 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.

Yes, thank you very much, Helena and Håkan. So a lot of good things already. Let's see if we have any questions. But before we go into the Q&A, I would like to highlight the most important event this year. September 24, that's the date when we host our Capital Markets Day in Las Vegas. And we will do it in conjunction with the Mine Expo, which is the largest mine fair in the world. You will get to see many of our machines and solutions, including what you see on the picture here, a large ground engagement tools. In the bucket there, you can see big tooth and lips and things like that. that's going to be very exciting so i hope you will join we just sent out the registration so you can register already now so operator without further ado please open up the line for questions thank you if you wish to ask a question please dial pound key 5 on your telephone keypad to enter the queue

If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from class Bergelind from City. Please go ahead.

Thank you. My first one is on the margin in E&S and the weaker drop-through. I understand that this was also driven by the very strong growth in previous acquisitions, such as RCT, now part of Organic, with the lower margin for the overall division. I think RCT was 600 million of sales when you acquired it. What's the sales now, and how big is the margin difference versus overall E&S, and how quickly do you think you can lift the margin in RCT? And if you could also, Håkan, comment on the progress on the general cost actions. I'll start there.

So we are growing very nicely on RCT, as I've been sharing throughout the year. If I look on margin-wise, yes, it's diluting. But we see, of course, this is just a year into the acquisition. So it's delivering according to plan, but we're growing faster than we expected. And that is also the case for several of the other acquisitions that we did the year, the previous year. So several of these technology companies, both in the digital space as well as in the electrification space, are growing really strongly.

And if I answer them on your second question, Claes, in terms of the cost, I would say it's moving along well. We have taken a number of actions, I would say, across the group in order to make sure that we get cost under even better control. Then one should also remember that we both need to push the gas and push the brake at the same time. We are running totally flat out, more or less, in our equipment factories. As Helena summarized, a year we have grown 21%. So we are both investing at the same time and really pushing and driving, while we also need to make sure that we are prioritizing the right things. But it's moving along well.

If I can come back to the sort of organic M&A dilution, if you can call it that. I appreciate you don't want to give so hard numbers on how big the sales is in RCT, but we know the M&A dilution in structure right now. But if you could help us a little bit with this sort of organic M&A dilution, that would be very helpful.

We will not share that number, but it's partly explained the lower margin.

And I think one thing you can do, Klaus, if you just want to see the very latest changes, of course, look at what the dilution was in Q3.

Yeah. Okay, fair enough.

And then you can see the difference now, what it is in Q4, and then you can get, okay, the ones that actually moved just in the quarter, they contributed or diluted rather that much. You see what I mean? Yeah.

Yeah. My second one is on the drop-through in T&A. You're obviously going to face easy compares in attachments as you go through the year. I'm trying to understand how we should think about the drop-through here into the first half. And I know you typically don't guide on margins, but I'm still going to give it a go. You have the incremental cost-cutting. I'm just trying to understand, are we going to stay at this low double-digit level in the first half and then gradually improve towards mid-teens in the second? It would be great to get some feeling in the incremental cost-cutting stuff.

I think as long as construction will be softer, we will not be on the same level as we were maybe a year ago. But of course, as we said, we are taking a lot of actions to correct issues correct the the let's say the workforce in these factories we're consolidating sites and we're taking the let's say the normal type of cost measures so of course you know some of this we will be able to bring back and that is what we're working with but there is a mix effect in this in this segment since consumables is is is growing well and and you know so that that's the healthy part while we have a fairly big big challenge then now related to attachments so it's quite specific and and that is also where we're taking the actions of course

very quick final one on the red sea issue you've said that rural capacity has been a recurring issue on the outbound and now we have the red sea issue on top any signs how this will impact you going forward i don't think you've seen anything so far and if you could say how much do you buy on spot versus contract when we look at freight thanks

So we have contracts on freight. We have not seen impact yet on the Red Sea situation, but that will have an impact of roughly two weeks increased lead time should we take another route for those flows. But the situation when it comes to railroad capacity is still a challenge, and that is purely lack of capacity of railroad capacity globally in the world.

Thank you.

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

Hi, good afternoon, everyone. Thanks for taking my questions. I've got two. The first one's a bit of a follow-up from Cloud's question, I guess. Just on the margin, just trying to understand and appreciate that within this quarter, there are, as you identified, some very specific issues some of which are going to ease, and I guess some of which are going to sustain. So I was just going to try and, I guess, ask for a little bit of help to understand that, because it would feel that we still have a number of quarters where the organic acquisition impact, as Klaus described it, is still a headwind. I'm interested if you're going to be increasing R&D incrementally again. You obviously kind of held us a little bit on the bridge there. You've got some cost savings as an offset. the lower margin businesses clearly have been very successful in terms of the growth. So I guess it's sort of how much of the, if I can call them issues, if that's not unfair, that you can see in the Q4 are actually going to sustain through the first half and maybe even 24 as a whole, just to try and, I guess, help us a little bit on the cadence, even if not with specific numbers.

And I think if you look, as I said, you know, I think the acquisitions are moving according to plan, you know, from a margin standpoint with integration and all of that. But we are growing faster than which is in a way good. But of course, then the dilution is, you know, is higher. So, of course, you know, we are working as always to bring those acquisitions up to the level that we have planned. So that work is ongoing. And of course, there are efficiency, you know, work needed when you acquire, you know, it has been a number of years now with a lot of inorganic growth. And that is also gives opportunities when it comes to efficiency, of course. So that's one we are addressing. When it comes to R&D, I think you can expect us to be on the same level in absolute term. We have gone up slightly now in percentage the last year, but you can expect moving forward that we will more be, you know, on the same level in absolute term.

So we were at 2.9%. We have said always, or not always, but that we're going to be around 3%. We were at 2.9% in 2022. Now we were at 3.2%. And I would say for 2024, we are more going to be around closer to the 3% than at 3.2%.

So I guess if I kind of try and wrap that up, it's likely that this Q4 is almost a kind of, is a low point on the margin, but we probably shouldn't be expecting to get back to, I guess, the recent highs, given that you just have some of these headwinds to the margin given the growth that you're seeing in some of the acquisitions. I appreciate there's a lot of moving parts and I'm trying to simplify, but just to try and think about that kind of cadence through the first half.

Yeah, I think that's, I think that's, I would say, a realistic assumption. Then, of course, we're taking a lot of actions to, I would say, when it comes to cost, cost efficiency. But, of course, you know, we have also, we have been growing a lot and several of these, you know, businesses are growing really nicely now, which, of course, is fantastic, you know, for, you know, for the long term success. But we are paying, of course, you know, we're taking a hit now short term. Yeah.

I would say it's a fair way of describing the picture, and then one needs to remember that we're now in a market which is a bit different. Mining is still moving on very well, construction market not. So in total, obviously, the total market is a bit weaker now than it was a year and a half ago.

Thank you. That's really helpful. The second question I wanted to ask was just on the guidance, and it's Recognizing that, I guess, what you're really kind of communicating is, I guess, a similar picture sequentially in terms of appreciating that it's customer activity rather than specifically absolute orders. Q1 is seasonally typically a very good quarter if we look historically. And I know that large orders can bounce it around, but there's enough, I think, years to kind of at least draw that inference. You mentioned around construction expected to stay weak and not maybe exhibiting that same seasonality.

Mm-hmm.

Does that sort of help us to some extent make this guide simpler in that it really is a kind of customer activity to be flat Q1 versus Q4 and therefore all else equal the orders would be in a similar place or should we still be reflecting some of that usual seasonality in terms of customer activity and I guess particularly in mining?

I think in mining, we expect activities to remain high. And as we said also, normally construction is strongest in Q1, Q2. We don't expect that we will see that this year. But I think so far, if you look on both Q3 and Q4, we have compensated well. The mining activities have compensated well for, even though we have a weaker construction, we still have managed to keep the orders up. And when we look at the pipeline when it comes to business cooking, we see good opportunities when it comes to equipment, both replacement as well as expansion of existing mines.

So just to clarify, and apologies, I know I've asked a lot of questions, very quick one. Does the mining business typically exhibit any seasonality or is it just the construction business?

I would say it's mainly, mainly it's the construction business where we see cyclicality. Oh, seasonality, sorry. Seasonality. Thank you.

That's perfect. Thank you very much for the call. That was really helpful.

The next question comes from John Kim from Deutsche Bank. Please go ahead.

Hi, good afternoon. Just a couple of follow-up questions. Can you give us a sense on the pattern or the, I guess, the profile of weakness in hydraulic attachments? Given activity levels last year, when should we lap the weak comps? Is the hydraulic attachments business now stable at a lower level or is it continuing to decline? That would be kind of question one. Question two, can you just comment on asset intensity and Stanley infrastructure? I'm trying to get a sense on how we should think about asset turns before you start driving better sales through the asset. and how that might affect inventory forecasts for 2024. Thank you.

So I think on the attachment side, we don't see, we'll say, a change in demand. As I said in Q3, there are two components of this. There is a lower demand, but there is also destocking happening since we're going indirect. So we see that that is still the case. We don't see any shift between the quarters. I think that's the intensity when it comes to, if we look on the manufacturing setup, for example, in Stanley, it's very similar to the setup we have in Eproc when it comes to attachments. So I don't see that there is any difference there in how we run it. Then, of course, they go indirect as well, or only indirect, I would say. So I don't see any... And a big difference between the two businesses.

Okay, helpful. Just a quick question on the logistics issue. Have you seen any change in behavior from your mining customers given the

Are people pre-ordering or ordering earlier? No. I would say there's not pre-ordering. I think we saw things like that much earlier. I think container freight is still improving. That one is working well. And the container freight is where we deliver parts and consumables. It is the rural capacity, and that's what we use for transporting our equipment. That's where we have the challenge. So I don't see any, I would say, pre-ordering happening.

Okay, thank you.

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

Yes, good afternoon, everyone, and thanks for the questions. I guess, firstly, just keen to dig into the drivers here in terms of the margin in E&S and the extent to which we might consider this the new normal. If we walk through the dynamics, you had sequentially higher equipment sales versus Q3. That should obviously be a positive, if I'm not mistaken, except there's then been a mixed shift slightly away from service towards equipment if you consider E&S together. but the ENS margin is down 110 basis points quarter on quarter. That primarily seems to be gross profit led, group margins at the gross profit line down 160 bits queue on queue, and actually SG&A slightly down as a percent of sales. Just trying to understand, you know, what's driving this if we take the equipment business in particular, should we not have seen a bigger step up in profitability as you got those machines out of your modification shops? And can we just understand how you book the costs because some of those deliveries you will have produced the machinery, you know, two to three quarters ago, perhaps.

So we have good performance on the equipment side. But in this segment, we also have the digital where we are growing really nicely. So I would say that there is where you have, you know, part of what has diluted the margin.

And if I understand your question from the cost for the machine, Christian, when we produce it, until we have actually sold it, we put it first, it's raw material, then it's VIP, and then it's goods in transit, and it's sales stock, and then in the end it goes out to customer. But it's on the balance sheet until we actually sell it. So we haven't taken the cost in an earlier quarter. We're taking the cost. when we actually sell the equipment. So those matches. So it's actually, it's a little bit the other way around when you compare Q3 to Q4, that when we have a high output of equipment, which on average has lower margin than our service business, you actually get the mixed impact Q4 to Q3 within the equipment and service segment.

Thank you for that. Maybe pivoting to T&A and the weakness there, I guess there's two questions. Firstly, if we think about this quarter versus last, how much of the fixed cost under absorption relates to weak underlying demand and how much relates to your own actions to effectively underproduce and reduce your inventory position?

It's difficult to, but it's both those components. But as you know, we're both focusing on reducing the inventory as well as, so it's both, but it's mainly the destocking at our distributors, I would say. But there is also clearly lower activity levels there. And of course, the way to address this on the fixed cost is consolidation of sites. And that is what we are working on right now.

And then at the same time, that's the long term. We are also taking some short term actions like reducing additional workforce and other similar things like that to make sure we don't only wait for the long term. We want to take the short term actions as well.

Understood. And then maybe just thinking about demand in infrastructure, I think in Q2 you talked about increased price sensitivity in aggregates. Does this weakness in volumes in the market imply more competition in terms of pricing? And then is there any nuance there across the different construction markets, aggregates, tunneling, deconstruction, and so forth?

No, I wouldn't say. It's still the same landscape, I would say, of the players. But of course, everyone sees lower activity levels right now, lower demand right now, I would say. But we play in the value segment. I would state that as well when it comes to attachments, which is... You know, of course, in a situation where if there is overcapacity, then, of course, everyone can work with price. But I think, you know, overall, it's the same landscape of players.

Okay, so there's not a move in markets that reduce pricing.

No.

Okay, thank you. Maybe just as well on... on the sort of lead times discussion those have blown out post the pandemic and I guess they're still long for equipment sales. How do you think that could impact in future if we see an improvement in your delivery times, the midlife refurbishment segments, which has obviously been a big driver of growth?

I don't really see that the midlife upgrades are because of lead times of equipment. So this is a way for... customers a quicker way to get productivity back to the original productivity or to do an uplift you know that could be add safety features or or you know some esg dimension to it or more efficiency so we believe you know i i I don't see that correlation. So, you know, that the midlife businesses will be there also when lead times and equipment are back on the same level. And it's different also part of the organizations that are taking these decisions that are customers. So the midlife upgrades are very much that is a local decision by the operational team in mind. while investments are very much, you know, taken on, you know, higher up on the organization and for the big mining houses, of course, centrally. So it's separate in many ways.

Thank you very much.

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

My question, I just have one left, more of a technical nature. In terms of the net financial items, I'm just wondering if you can maybe give us some indication of what these are likely to be in 2024, just given that we had quite a sharp year-over-year step up in Q4. Thanks.

I would say in general, on average, we will have a higher interest rate in 2024. Now, we don't have the exact figures in my head. We have it in the report. But I think it was something like something below three at the end of 22. And now it's 4.5 or something on average interest rate. So given that's where we're starting from, that will give us overall through the year highest interest cost. And then, of course, after we acquire Stanley, we will also have more debt that we have to service, which will also then, of course, lead to higher interest costs. So we're expecting that we will have higher financial items in 2024 than 2023. I think you can start from the interest rate that we ended the year with and use that as a proxy and then also add on the need for financing related to Stanley. Those are the big moving items, I would say.

Okay, thank you.

The next question comes from Vlad Sergevski from Barclays. Please go ahead.

Good afternoon and thanks very much for taking my question. I have two and I'll start with the one on organic growth. and kind of directional maybe comments on how we should see developing in 2024. I know you don't provide the exact guidance, but high-level comments would be very much appreciated. I mean, if I ask about like T&A business, for example, given the direction of different moves within it, do you think you will be able to grow it organically? On the equipment side, the book-to-bill has been relatively subdued in the last few quarters. Do you think you still have the backlog to grow within 24? And maybe on service, obviously still solid growth, mid-single digit on order intake in the past few quarters. Is it a good proxy, this mid-single digit organic that we should expect sales to develop on the service side next year or this year?

So if we start on equipment, when I look at the business cooking, what is out there, there are good opportunities when it comes to replacement. Some of the machines that we put in the market there, 2011-12, when the market peaked, are up for replacement. So that gives good opportunity for replacement. But there are also plans for expansion, brownfield expansion among the mining houses. So I think on the equipment side, it's of course to make sure that we land orders and that we are successful with the aftermarket to land these orders. When it comes to service, of course, a big portion of the service growth is in our own hand. This is about us taking customer share on existing fleet. I think so far our strategy has worked out very well. We have also now divided... the division into three divisions to make sure that we have the focus and the strategies per region so we can be even more specific but we you know we we We strongly believe that we can continue to grow the service business well. And then, of course, we have the digital business. And as we said several times now during the call, that that one is, even though it's diluting for the time being, it's growing nicely. So we also expect growth from that part of the business. When it comes to tools and attachments, we believe in growth when it comes to consumables related to mining. And that is also very much in our own hand. That is about customer share. While on attachment, that's where we don't see that. That's very much depending on the activity levels in the market, I would say.

Eliana, thanks very much. That's very helpful. And if I may ask another one to Håkon on the technical side, right? So in the breach, the transaction effects impact was meaningful positive this time around. And my high-level calculations based on your exposure suggested it should have been somewhat negative. So where the delta comes from?

Sorry, you're into the currency part?

Exactly.

Okay. Yeah, as I tried to describe it in the call, we have a slightly negative impact on translation, given that the krona is weaker. So basically, when we take back profit from other countries, sorry, krona was stronger in Q4. But then we have other items. We have transaction when we revalue APAR on the balance sheet. We also have something we call inventory profit elimination. We get currency impact on those as well. And when we add those together, then we get this positive bridge impact.

That's great. Is there any way we can try to estimate your currency impact? Some of your peers do provide some sort of at least guidance or indication of what it could be.

Yeah, I know. I would say it takes a little bit longer discussions, but I'm more than happy to take that as a separate time cloud.

Thank you very much.

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

Yes, hello. I just want to follow up, getting back to the drop through in equipment and service. When we just look at the dilution from structure in previous quarters, like you mentioned, Håkan, and how that moves into organic now, and then take the R&D-CNA and also the mixed effect year-over-year into account, I think it still looks like the underlying margin for, say, the legacy equipment and service is also done year-over-year. Am I right there, or, you know, do you actually see underlying margin pressure Or do I get this wrong? Thank you.

I think you might be right. I think if you adjust for those items you mentioned, I think you get closer to kind of the truth. But yes, we have seen some margin pressure. We have a number of smaller various items. We talked about it last quarter. We said we have some inefficiencies in the operations that we need to address as well.

Yeah, but I think we shouldn't read this as inflation starting to bite and that you cannot fully compensate for the gross profit anymore.

Inflation is one thing. I think actually that we've been managing quite well with the pricing that we have taken, but it's one item there, yes. But we usually still say that with the innovation we do on our equipment, we still are able to actually increase prices because we offer all the time a better equipment than we did a year ago. So that's kind of our way to fight inflation.

Can I just make a very short follow-up? And that's the underlying margin pressure. Do you think that will continue into H1 in 2024?

I think on the efficiency, when we say that we are taking a number of actions when it comes to efficiency, that is for both reporting segments. So I think, as I said, we can do better than this. So we are taking actions in both segments to come back to where we want to be on the margin side. But the majority of the problem sits in the attachment side. And that's, of course, where we are also taking most of the actions.

Sorry to jump in, but on the topic of cost, please remember the Capital Markets Day registration has opened. The flights are cheaper now than they will be in a few months. And we need to stop here. I do know we have a few more on the line. We will give you a ring later this afternoon, Alexander and myself. With a little recap movie from the previous Mind Expo, we would like to inspire you to join in September. Thank you very much, everyone. Thank you, Håkan, Helena. Well done. And take care. Thank you.