Epiroc AB (publ)

Hello, and a warm welcome to the Epiroc Q1 results presentation. My name is Karin Larsson, Head of Investor Relations and Media here at Epiroc. And with me today to present the results, I have our CEO, Helena Hedblom, and our CFO, Håkan Folin. And today, before we start, I would like to highlight three things. Number one, don't forget to register to our CMD on September 24th in Las Vegas. More than half of the seats have already been taken. Number two, we have made several improvements in our key figures file online, including an adjusted EBIT bridge. And hopefully the increased transparency can help you all make even better investments decisions in the future. And three, and this is the last quarter, we will speak about orders on hand, i.e. order book impacting the structure in the sales bridge. Onwards, when we acquire companies, we will only add actual orders received in the quarter. So with this said, Helena, please, the stage is yours.

Thank you, Karin. So let me start with some highlights of the quarter. So on the customer side, the first quarter was very similar to previous quarters. Mining activity is high, which is reflected in a strong service business and a high demand for rock drilling tools. The large orders are, as we have said before, lumpy, and we received fewer large orders in Q1 than we did last year. We do not see this as a change in demand. On the contrary, there is a lot of business cooking and the pipeline of potential large orders is solid. The construction demand was weak, and again, this was reflected in the demand for hydraulic attachments. We are increasing our focus on profitability. We are not happy with the level we are at, but we have taken action, and sequentially we have achieved structural savings in SG&A. Our cash flow improved. The working capital is still at levels that we are not satisfied with, mainly due to high inventories of finished goods of equipment, and that is machines ordered by and on its way to customers around the world. We are increasing capacity in customer centers to speed up final modification to shorten delivery time and improve invoicing. And on April 1st, we finalized acquisition of standard infrastructure, which will position us for construction growth in the future. So more on this later on. So first, I would like to spend some time on the demand. So organically, our orders declined 3% versus last year to 14.2 billion SEC. And this corresponds to a total decline of 4%. The demand picture was mixed. As I said, there was a high mining activity among our customers. And this was particularly evident in the demand for service and rock drilling tools. So we had strong demand for automation solutions, including mixed fleet, and a high demand for larger rebuilds. The level of large equipment order was however lower than in Q1 last year. We received 400 million krona in large orders in the quarter compared to 900 million in large orders in Q1 2023. Construction remained weak as anticipated, which was especially evident for our hydraulic attachments. We had a positive 2% contribution from acquisitions, mainly CR and hard mining equipment. And sequentially, that is versus the previous quarter, we had a positive 2% organic order growth. So coming to innovation, then a topic that is especially close to my heart, given that I started my career within product development. So we have a long and proud history of launching innovations. And in the quarter, we built a new training facility in Australia. So our goal with this new facility is twofold. Firstly, we aim to cultivate a highly competent workforce. And secondly, we're passionate about setting a new benchmark for outstanding customer support. So by providing comprehensive training and support services, we're helping customers maximize the value from our products and from our solutions. We have also launched batteries with service, which offer the same benefits as battery as a service, such as battery telematics, equipment audits and extended warranties. But with the difference being that the customers themselves, as opposed to Epiroc, own the batteries. The transition to battery electric vehicle or BEVs is accelerating as more and more of our customers discover the advantage such as higher productivity, less maintenance needs, better work environment and no emissions in operations. And I will speak more about electrification soon. We are also a leading supplier of safety solutions, and we are particularly proud of our collision avoidance solutions. And in the quarter, we won an order valued at 36 million for our CAS9 solution, the highest level of collision prevention system in the market. In short, the system intervenes if or when the operator does not act when the system is warning of a potential collision. So we have seen that when customers combined our Cas9 solution with our real-time positioning solution, for example, from Mobilaris and MiningTag, they enjoy both strength and safety and increased productivity. So I would like to show you a short movie on our safety solutions. So enjoy.

Epiroc Titan is a fourth-generation collision avoidance system assisting minds in implementing level 7 to 9 controls with vehicle-to-vehicle, vehicle-to-pedestrian and vehicle-to-hazard features for surface and underground operations. The solution integrates a variety of in-house developed sensing technologies such as GPS, ultra-wideband time of flight, magnetic field sensing and AI cameras with object detection. It builds on the success of previous generations, reducing risks, saving lives and emphasizing quality and reliability. The system is modular and can be customized with additional sensors for different applications and vehicle sizes, ensuring a purpose-fit solution. Explore our innovations in mine safety to enhance your company's safety, productivity, and profitability.

So coming to the aftermarket, now representing 67% of our revenues and even more on orders, almost 70%. So we had, as you have already heard, a high activity within mining, which translated into strong demand for both service and rock drilling tools. Within service, we had a particularly strong demand for solutions such as mixed fleet automation, as well as for larger rebuilds. The midlife upgrades are increasing in importance as the fleet grows older. We have increased the number of service contracts, and more than 30% of our fleet has a service contract in some form. And this leads to more revenues per machine over the lifetime of the machine, and customers enjoy higher productivity and a longer life for each machine. So that's a win-win. Construction was weak, which was reflected in lower orders for hydraulic attachments. So when it comes to operational excellence, we are increasing our focus on profitability in all areas of the organization. Sequentially, we have lowered the numbers of employees by around 100 and we have reduced the cost within SG&A. And these are structural changes and not short-term actions. And further measures will be taken throughout the organization. For example, we will increase efficiency within our service operations as well as in our manufacturing entities. But we must also stay focused on the goal and invest for the long term. And for example, we have increased our production capacity in Örebro, Sweden, to strengthen our production capabilities and facilitate the development of early stage and prototype machines. This will not have any impact on our CAPEX. Externally, we have two reporting segments, equipment and service and tools and attachments. And beneath these segments, we have had seven divisions. But from May 1st, we will have eight divisions. So within the tools and attachments segment, we will have two divisions instead of one to sustain optimal focus on each business line and continue fostering profitable growth. So Martin Hjerpe currently SVP M&A strategy and supply chain will become president of the tools division and Goran Popovski currently president of the tools and attachment division will become president of the attachment division. Moving on to the people side then, we spoke about our leading position in safety before, and that is our and my top priority. And I'm glad to see that our initiatives are bearing fruit and we have improved our safety KPIs. So well done to everyone and remember, never compromise on safety. The number of employees increased year on year, but was down sequentially, as I mentioned. When it comes to our people goals, we aim to increase the proportion of women as more diverse teams tend to be stronger and more creative. And the trend is good and we have had further increased the number of women employees and are now at 19% up from 16% in 2018 when we created Epiroc. On the planet side, we also see good progress on our goals. Our CO2e emissions from operations decreased 28% thanks to the continuous rollout of solar panels at our facilities and a higher share of renewable electricity. The CO2e emissions from transport, however, increased 5% due to higher volumes delivered. When it comes to our ambitious and science-based validated target to decrease Scope 3 emissions, we work hard to remove the hurdles for customers to choose electrification. And the launch of batteries with service, which I just told you about, is one of many things we do to help customers achieve the most optimal solution for them when they chose to go electric. And we are also developing other electrification solutions. So yesterday we announced that together with Boliden and ABB, We have passed a new technology milestone by successfully deploying the first fully battery electric trolley truck system for an underground mine. And this brings the mining industry a step closer to realizing the all-electric mine of the future. We also see a positive trend for electrification on the surface side as more and more customers want electric drill rigs. And to meet this demand, we have increased our range of electric pit wipers further. And I will show you a short movie before Håkan takes over and discuss the financials.

Thank you, Helena. And as you already covered the demand for the group, I continue with the income statement and the impact on our margins. Our revenues increased 3% organically to 14.1 billion krona, and our EBIT came in at 2.8 billion. And the lower profit is mainly explained by higher cost, negative mix effect, such as a lower proportion of service and attachment revenues. Adjusted, the EBIT was 2.9 billion. And the main difference between the adjusted and the reported figures is explained by transaction and integration costs relating to the Stanley infrastructure acquisitions. And I will go into the details when I speak about the two segments later. All in all, we came in at 20.4% adjusted EBIT margin. And like Helena said, it's a level that we're not satisfied with. We have and we are increasing our focus on profitability. Several measures have been taken to strengthen efficiency and profitability. Costs were indeed higher than in the first quarter of 2023, but sequentially we have already achieved structural savings on SG&A. So if we take a look at the EBIT bridge, we started with 3.2 billion last year. We have a negative flow through or organic. And then we have some tailwind for currency plus 49 million in the bridge. Structure was negative with 88 million. And that can be calculated as an opening balance of plus 26. And then structure including M&A contribution in the quarter of 30 million. And then we have a negative 127 million in items affecting comparability. And 125 of these are then M&A transaction integration cost and two are for the long term incentive program. And adjusting for this, we end up with an EBIT margin of 20.4%. So if we then discuss the segments and we start with equipment and service, there was a strong demand and a high mining activity. Year on year, the organic decrease was 2% and our orders amounted to 11 billion. And the lower level is mainly related to lack of large orders. In the quarter, we had large orders totaling 400 million, which should be compared with 900 million in the previous year. We have said it before and we will say it again, but large orders are lumpy by nature. We see that there's a lot of activity and what we call business cooking out there. So we are not worried about the overall underlying demand within mining. For service, orders grow organically 9%, where we saw particular strong demand for midlife upgrades and also mixed fleet automation. And I must say it's pleasing to see that our wide service offering is received so well by our customers. If we look sequentially, orders declined with 1% organically. If we then go into the details of the revenues and the profit, revenues were up 6% organically to 11.2 billion, which was very much driven by strong equipment revenues, which were up 13%. And that's obviously impacting the mix in the segment. We had 42% equipment revenues in the segment in this year versus 38% in the previous year, which has a negative impact on the margin as equipment has a lower margin than the service business. And we also have somewhat higher cost compared to last year. But I will cover more on the margin on the next page. The profit bridge is actually fairly straightforward. We started with a profit of 2.7 billion last year and we ended up now with 2.5 billion. And in margin terms, it went from 25.3 to 22.3, corresponding to a decline then of three percentage points. Main explanation is the negative organic contribution. I mentioned cost and also negative mix with more equipment being invoiced. In addition to that, we also have strong growth within digitalization, which is diluting the margin within service as well. We have taken actions. We will take further actions here to improve. But again, there is a high demand within mining and we must be mindful to make sure that we capture the growth in a more profitable way going forward. If we then move on to the tools and attachments segment, there was a mixed demand, and I repeat what we've said before, mining activity is solid, and this was particularly evident for rock drilling tools, which more or less drove the positive development in this segment. Construction is still weak, which is impacting the hydraulic attachments. If we adjust for the orders on hand that we had last year, coming from the acquisition of CR, orders were flat year-on-year, 3.1 billion. We did, however, have a strong sequential growth in this segment. It was actually plus 14% organically, mainly driven then by what I just mentioned, the strong development in rock drilling tools. If we move on to the revenues for tools and attachment, it's obviously impacted by the weak development in construction. Q1 is normally a seasonally strong quarter for attachment, but this year, as anticipated then, we did not see the same patterns. Revenues came in at almost $3 billion in the quarter. And the EBIT, if we adjust for the $125 million in M&A-related cost, was $460 million, which corresponds to an EBIT margin of 15.6%. And sequentially, we have actually managed to bend the curve. We have taken actions and they are already showing now in the figures. The strong growth and the development in rock drilling tools is also supporting the sequential improvement. The adjusted EBIT margin has increased from 13.4% in Q4 to 15.6% in Q1. And this to me shows that we have a fast-paced organization that is taking actions when needed. In the bridge, we started with 532 million last year, and then we've had quite a few headwinds. We had negative organic contribution. We had a small negative also on FX. And then structure where we have the 125 million related to acquisitions, obviously make a large difference. But adjusted, we had an EBIT of 460 million in the quarter. In structure, which then is negative 110, we have a positive contribution from M&A of 15 million, which is mainly related to CR. Within tools and attachment, we have several actions ongoing, for example, then closing down the facility in Germany, where we still are having under absorption. It's been addressed, but it's not yet reflected in the figures. If we stay on the topic of cost and the potential onwards, year on year, the cost for admin, marketing and R&D have increased by 4%, which is obviously not good as they have grown faster than the revenues. However, we have taken actions and we have managed to actually reduce costs with 6% sequentially or 146 million kroner. We have lowered admin and we have lowered marketing cost while R&D remains fairly stable. And this is important to us as we also need to invest in innovation for long term being able to bring value creating solutions to our customers also in the future. Net financials were lower, which is very much driven by positive currency effect. The interest net was obviously higher. It was up from 89 to 128 million, driven by high level of debt, but also higher average interest rate compared to last year. Income tax expense is lower in absolute term, but the tax rate is 24.0%. And we do stick to the guidance that we have said that tax will be between 22 to 24%. So coming to the operating cash flow, it increased year on year from 338 million to 1.78 billion, mainly due to lower buildup of working capital in this quarter compared to the previous period. It was not as strong as in Q4, but then in Q4, we had a very strong invoicing quarter, which was not the case now in Q1. We had a cash conversion rate of 83% in the last 12 months, which is meaningfully higher than what we have seen previously. And a year ago, we were only at 59%. And in order to get more cash flow, the working capital obviously plays a very important role. And our focus on working capital is still very high. However, it was up 50% year over year, both actually in total and even if we adjust for acquisition and FX. One good thing, though, is that the increase is not seen in spare parts and tools, but it's actually in finished goods of equipment, which explains the majority of the increase. And it is machines that have been produced and there are either on ships, they're on route to customers or in our local customer centers around the world, waiting for the final modification before we can send them on to the customers. And thereafter, obviously send invoicing as well. We have a 2 billion roughly increase in inventory sequentially, and that's explained by a weaker Swedish Corona and also by machines that are not just invoiced, but will be at some point. So a few words on capital efficiency as well. Our net debt to EBTA was 0.39 at the end of the quarter, which is at a low level. But remember that we closed the acquisition of Stanley on April 1st, so the day after. But even after that, our net debt to EBTA is still below 1%. Return on capital employee was a bit hampered by the large amount of cash that we had on the balance sheet on March 31 in order to do the acquisition on April 1. In February, we issued our first Euro denominated bond, 500 million Euro, and the proceeds were on the balance sheet then until we finalized the acquisition of Stanley. And speaking of that acquisition, Helena, I know that you are eager to tell us more about it.

Thank you, Håkan. So I'm super excited to have Stanley Infrastructure as a part of the Epprock family. So we closed the acquisition three weeks ago, and this is a company that supports our growth strategy long term. So we anticipate that the global construction and deconstruction market is going to grow 45% per year in the foreseeable future. And yes, we are mindful that we are currently in a destocking mode and in a weak construction market, but we do anticipate that this will recover at some point, and the plan is of course to outgrow the market as a stronger and larger company with a full offering. The acquired brands, many times industry leading, are further expanding our high-end attachment portfolio. So we anticipate that we will realize significant sales synergies together and we will have a stronger presence in the US where we will gain access to a broad indirect sales network. So in short, together we are set to leverage our global sales efforts. So since the announcement in December, we have prepared for a smooth integration and we have an excellent culture fit. Our new colleagues share our passion for innovation and solid customer relationships, and they are humble and ambitious. So to all of you, a warm welcome. Welcome to Epbrock. This is still very early days. We can only provide you with preliminary financial indications at this point. So Stanley's revenues in 2023 were $447 million, equivalent to 4.7 billion krona. And the adjusted EBITDA was 16%. That said, this attachment business has, just like our previous attachment business, had a challenging year. The second half of the year was weaker than the first and the destocking amount distributors is still ongoing. The purchase price that we paid was $760 million, equivalent to 8.2 billion krona, and it was an all-cash transaction. We are not done with the PPA, but it's mainly intangible assets and goodwill. The transaction and integration costs in Q1 were 125 million, and in Q2 we estimate another 135 million krona. For 2024, the full year, we anticipate dilution on the group-adjusted EBITDA margin in the range of 0.5 to 0.7 percentage points, the same for tools and attachments. Our net debt to EBITDA is still below 1 after the acquisition, but our debt is higher and the average interest rate at the end of Q1 2024 was 4.8%. So to summarize the quarter. So we enjoyed a high mining activity in Q1, which was evident in the demand for service and rock drilling tools. The large orders were lower than last year, but they are lumpy and we see no change in underlying demand. We are happy to see the positive trend in mixed fleet automation and electrification. Construction continued to be weak. And on the profitability side, we had higher cost and negative mixed effects, but we are increasing our focus on profitability. Our cash flow improved and we are positioning ourselves for growth in attachments. So then looking ahead. So in the near term, we expect that the underlying mining demand, both for equipment and aftermarket, will remain at a high level and that demand from construction customers is still expected to be soft. And this is a comment on the underlying demand and not expected absolute order intake. So by that, I leave the word to you, Karin.

Thank you very much. Thank you, Helena. Thank you, Håkan. So with this said, I would just like to briefly remind you about the Capital Markets Day before we go in for the Q&A session. On 24th of September in Las Vegas, you will get to see a lot of great innovations and also join us at the Mine Expo, which is one of the world's largest mining fairs. So with this, operator, please, you may open up the line. 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 John Kim from Deutsche Bank. Please go ahead.

Good morning. Thanks for the opportunity. Two questions, if I may. Can we speak a little bit about price-cost dynamics that you're seeing in mining right now? And as an add-on to that, if you could help us unpack the organic profit evolution in the next division, that would be really helpful. So if we look at the $270 million organic and profit decline, Is that really mix effect? Is that a number of factors? Could you help us unpack that?

Thanks. So if we look on the, if I start with a price development, you know, we still see, you know, for us, pricing is very much, it's always tied to the value that we create for our customers. So we continue to see, you know, we continue to work with pricing also, you know, during, we continue as always and also during this quarter. Do you want to cover the mix effect?

It's partly mix, but we also talk about the higher cost. So there are a number of factors in that. It's not only mix. It's also, we have taken, as you've seen, a lot of large orders throughout the last year. And normally in a large tender, we might have slightly lower profitability than if we sell one machine at a time. And that's also somewhat reflected in the development this quarter.

Okay, fantastic. Thank you.

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

Hi, Helena, Håkan, Karin, Klaas at Citi. So first on the ENS margin and the group cross margin, maybe not a surprise that this pressure continued as it's not demand related, but I do think I mean, you have still talked about efficiency measures here as well, not only in T&A, in attachments. There was a big equipment versus service mix headwind, as you said, Håkan, which is typically cyclical, but it also seems to be product mix, as you said, large orders, and then price-cost normalization. So help me understand to what extent SG&A can help the margin from here, and also we can talk about the gross margin impact, because this mix, all else equal, shouldn't start to comp out

until later in the year but if you could help us a little bit with with those two lines that would be very very helpful thank you so so so so we are taking measures on on we'll say on functional cost on or admin and marketing and you see the you see the the effect already and we continue to do that but we are also taking we'll say measures within service there is always but when we talk when it comes to the mix there is one mix effect as horkan explained which is then OK, more capital equipment, less service. But there is, of course, a lot of components within service as well. We have a broad offering of service components. So there could also be mixed effects of the different products that we have, you know, which is, you know, in a quarter like this. But as you know, as we said, we are not happy with the margin and we are taking actions. And a lot of those actions are within the service divisions to gain efficiency. There's always room for improvement. This is a big portion of the business. So there's always areas that we can address when it comes to efficiency also in both the service entities, but also on the equipment side in the manufacturing entities.

You asked a bit, you know, will SG&A cost, you know, basically save the margin? No, it will not. We need to do things elsewhere as well. But then I would also like to point out that in the quarter we had, if you compare to Q4, we had 1.5 billion lower in revenue. And some of the SG&A cost might be more stable or most of them are more stable. And then if we had so much lower revenue in Q1 and in Q4, that obviously then the SG&A as in percentage will be a bit higher.

Yeah, that's true. I know you're not guide on margin, but I mean, looking at the gross margin of sub 37%, I mean, is this the low point for the year?

As I said, we are not happy with the level we are at and we are taking a lot of measures to improve from here.

Okay. My second one is on the equipment orders. Lower number of large orders, but also underlying weakness in dollar terms versus my model. We typically have some seasonality. I mean, I understand the whole thing in T&A, but if you focus on equipment orders in E&S, and with this weaker infra quarter on quarter, or do you see that the miners are pushing out decisions linked to zinc, nickel, or is there something else going on? And what do you think, Helena, about this traditional lag between the copper price improving And when we see capex improving next six to nine months, do you think that still holds this cycle or is this time different? Thank you.

If I look on the orders, I don't see any change in behavior out there. Yes, there has been some softening on the nickel side, for example. We have seen that in some parts of the world. But I would say the big commodities like copper, gold, iron are still holding up the activity levels very well. We see that on the rock drilling tools. We see that on the service growth. And I see that also on the pipeline when I look at the projects, the large orders that are in the pipeline. There's big tenders when it comes to both replacing equipment, but also expansion, mainly on the brownfield expansion. So I don't see any change actually on the business cooking side. It's a very solid pipeline.

Very quick final one on rock drilling tools. Typically that's obviously exploration, but you moved exploration to surface earlier, so this must mean mine production. So is this the early bottleneck that miners are now being unleashed, or is the production all of a sudden improving?

So, you know, this is, you know, very much, I would say, tied to, this is drill meters, you know, it's a function of drill meters. So I would say that it's, you know, it's reflected, you know, it's the same as high activity levels in service, that there's high activity levels, high drilling activity, but also that we have gained shares. Thank you.

Thank you.

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

Yes, morning, everyone. Helena, she wanted to talk on drilling first, and I think you touched on it there in terms of share wins. You mentioned that you'd launched three new electric pit vipers. Can you give a sense for scale in terms of market share and drilling, and also be curious as to how significant that business is within E&S?

We have a very strong position in drilling. We've had that for many, many years and we are protecting that position extremely well. And of course, a lot of the innovation we put in place is related to that both when it comes to automation and also electrification. So, you know, for the larger machines like the pit wipers here for surface mining, we do see, you know, high interest now on electrification, not then BEVs, but electric machines. And that's also why we are now step by step transforming our assortment to electric machines. I would say that when it comes to shares, we don't disclose market shares, but we have a very strong position and we're protecting that position with innovation and obviously our solutions.

Thank you. Maybe secondly, turning to the P&L, admin expenses have been more than a billion kroner per quarter last year, 1.1 this quarter. You know, the average was 800 million in the sort of 2020 through 22 period. I'm just interested, I know you've mentioned some savings, but how much of this step up in spend is relating to recent M&A? I guess it'll step up further still. Now we've got the Stanley integration from the 1st of April. And how do we think about the efficiencies you're targeting here? Is this, should we think about absolute Krona terms or is the idea that you're targeting better percent of sales numbers in terms of the savings thank you

I would say short term, and as we saw now in Q1, we're very much targeting absolute krona. However, of course, just like you say, given that we will add Stanley, it will bounce up in Q2. I think we will owe you to come back and show what it would have been without Stanley, since that would be such a big impact. Normally, we don't go into each and every acquisition, but Stanley is the biggest one we've made so far. Short term, absolute terms, I would say longer term, then it's more in percentage of revenue that's the most relevant.

Thank you, Håkan. Maybe I'll just squeeze a final one on infrastructure. Just curious on the state of demand there and whether you have any comment on channel inventories and in T&A, you know, given we've had a lot of weakness here for a number of quarters, you know, how much of the under absorption today is underlying demand led versus your own actions to underproduce against a lower demand backdrop. I'm happy to take that in the context of this quarter versus, say, June last year? Thank you.

I would say that there is still, we'll say, a destocking ongoing, but it varies between the product lines, you know, the different type of attachments, for example, that we have. So we are not, you know, it's not fully, you know, destocked out there in the different channels. But I would say that, you know, soon, hopefully it will be, you know, but we're not there yet on the full assortment.

Thank you.

The next question comes from Edward Hussey from UBS. Please go ahead.

Hi, Helena and Hakan. Thanks for taking my question. Just a very quick one on the aftermarket business. I was just wondering if you could talk us through the shape of orders throughout the quarter. Clearly, copper prices and gold prices picked up towards the end of the quarter. I'm just wondering if you could give us some color on what the shape was like three quarters. Thank you.

I would say that the aftermarket demand, it's of course related to the high activity levels, but it's also related to the service products that we're offering, which is more than us taking customer share. So it's a combination of both. But we have been winning a large amount of midlife service upgrades or larger rebuilds in the quarter. together with automation orders, as I said, for mixed fleet and then also digital orders. So I would say overall, if you take pure parts and service, it's both high activity levels, but also us taking customer share.

Brilliant, thanks. And then just one follow up, just on the larger rebuilds, how much is that sort of cannibalizing equipment orders, in your opinion?

I don't see it like that, to be honest, because this is very often a way for customers to – they both do an upgrade of the machine, very often to higher productivity. So it's very much – we also bring in the latest technology when we do an upgrade like this. And that, of course, it prolongs the life of the equipment, and that gives higher revenue streams on parts during those years. There is, of course, some type of cannibalization, but this is a way to, when you do things like this, and you give customers higher productivity during another two, three years, that's also how you win next equipment order. So for me, it's very much a win-win for both the customers and for us.

Brilliant. Thank you.

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

Yeah, good morning. Can I just ask a question on the tools and attachments margins? I mean, they did jump up from the sort of 13-something in Q4 up to more than 15% here. So can you tell us, you know, where the big sequential improvement, did that come in tools or attachments? And in attachments, is it fair to assume that these structural savings that you're doing in terms of closing the SM plant, etc., will come on top of that, but just to see where that incremental improvement came from.

It came from both, actually, both attachments and rock drilling tools. In attachment, the SM1 that you mentioned, that is not yet visible in the figures. That will take some time. But we don't only have SM for attachment. We have other areas. And if you look at the 100 roughly employees that we are fewer in this quarter compared to Q4, a large portion of those are within the tools and attachment segment. And then as Selena described when we presented, we have seen good development from rock drilling tools. So it's actually coming a bit from both the improvement versus Q4.

Okay, good to hear. And then a technical one on sort of the subject of last quarter, which was currency and reval, etc. When we look at the particularly on equipment and service, I would have still expected the normal translation impact to be a slight negative, and then still you report a positive currency impact here. So were there also in this quarter revaluation of inventory of spare parts, et cetera, that benefited the results?

The positive impact on currency is mainly coming from transaction. And you will see that in the key figures file as well. And the transaction is mainly on the revaluation of AR and AP by the end of the quarter.

Right. And could you split those two up, sort of the translation versus transaction? Is that possible?

Yeah, we actually have that in the updated key figures file. You will find that on the web. Then we have them actually splitted in translation and transaction.

That's fantastic. Thank you so much.

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

Yes, good morning. Thanks for taking my question. The first one I had was around these negative mix impacts within the service business. Could you go into this in a little bit more detail? So by how diluted is the digitalization growth to margins and how can we think of that over the next couple of years? Is that a drag that we need to be factoring in and thinking about? And then secondly, around working capital, obviously, it's very elevated. You highlighted that. Can you talk about where you want to get to in terms of working capital for sales and sort of a timeline that you think is reasonable to get there? Thank you.

Yeah, so if I start on the mix within service, so as I said, there are, of course, different components of this. When it comes to the digital business, of course, this is built up of several of the acquisitions that we have done the last couple of years. we're growing faster than we anticipated in some cases, which, of course, obviously is good. And, of course, depending on what type of acquisition it is, it also takes some time for us to bring the margins where we want it to be. But that's a very strong focus in that space as well. So when we address SG&A, of course, it's across the group and in all divisions. So, you know, I think timing-wise, there will always be mix effects in different quarters. And in this quarter, you know, it was a lot of mix effect. But not really related to digital. It was more related to, okay, equipment, service, and then different service components within the service.

Okay, and then?

Then on the inventory side, yes.

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

Good morning. Thank you very much for the opportunity. I'll have a few questions, and I'll start with the standard deal, please. You're talking about 50 to 70 basis points, EBITDA, margin dilution, and 24. Can I ask, is it a fully annualized number, or it just includes the contribution for the last three quarters? And the other question related to that, would you be able to share estimated EBIT margin dilution, given your comments that the majority of purchase price will be allocated to Intangibles and Goodwill?

And it's a very good question and good that you asked it. No, what we talk about in the 0.5 to 0.7 is what will actually be realized in the full year of 2024, which means we will only have them in nine months. So if you want to actually see what will then the full year impact be when we have them a full year, then you need to then multiply by four and divide by three to get the figures. So it's a bit higher than on a full year basis. But for 2024 specifically, that's then the 0.5 to 0.7. As of now, since we haven't done the PPA yet, we know it will be and it obviously makes a difference if it's goodwill or if it's intangible. And then if we amortize the intangibles, we cannot give you the dilution on EBIT level yet. We will work on this during Q2 and hopefully we can return with a number on dilution on EBIT at the later stage. But we're not ready with that yet.

Understood. Thanks very much for that. If I can also ask you about operating income this quarter, which was a material positive, a little over $100 million. Was it mainly related to currency revaluation or there are some other factors in it?

A large portion of that is the currency revaluation, and that's what we discussed in a previous question. It's when we do the revaluation of AR and AP on the balance day, so by the end of March, and they end up on other operating income and expenses.

That's very clear. And the last question, very quick one. You mentioned that 21% of orders came from construction customers this quarter. If I apply this percentage to reported ordering days, I'm getting to a very big, almost 30% sequential increase in orders compared to Q4 in construction. And if I do the same exercise for mining, I'm actually getting to like seven, 8% sequential decline. Am I missing something over here? Would you be able to comment on that? Thank you very much.

You know, there's still high activity levels in tunneling. So, you know, that part of the infrastructure is still going strong. And, of course, when we land orders, you know, towards that sub-segment, you know, and the pipeline there is also very solid, I would say, when it comes to tunneling. In mining, I would say sequentially, the difference is very much the large orders that I said. We had very strong orders received. We had 1.2 billion in large orders of equipment in Q4 and then 400 in Q1. Thank you very much for clarifying all of that. Yes. So maybe if I go back to that question where, you know, I did not manage to answer it. So if you take on the inventory side or the tied capital, of course, we have a very high level now on equipment out in the customer center. So the increase in inventory in the quarter is It's only equipment and it's either on sea or it is in the last stage out in the customer centers for local modifications. And we are increasing our capacity in workshops and with technicians to get these machines out. So, of course, you know, eventually this will translate into revenue in the coming quarters. But we are, of course, not happy with the level we are at right now. But, of course, this is future revenue and it's, you know, we produce to order when it comes to equipment. So there's, let's say, no risk in that inventory.

the second part of that question was also you know when do we see improvement and where do you want to go i think when helena answered where do we want to go is i would be a bit blurry but we want to clearly be better than where we are right now but at the same time if you look back a few years i think that's too aggressive to think that we're going to come back to that level for a few reasons one is that the shipment capacity is not there in the same way as it was before covid in terms of number of ships and then also the freight time on sea has actually increased quite a bit, which means that we will have longer lead time. And the second reason is that as we expand our business, we grew a lot more outside of the areas where we actually have our facilities, which means that we will have more lead times to build up inventory in those local markets.

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

Good morning and thank you for the time. On the working capital component, you've elaborated here on the finished goods, the main part of it, but I also understood that the move from local to regional spare part hubs would allow for a release in working capital from lower inventories. I would be interested to hear what the status is on this and if you manage to execute on that as planned.

We are step by step improving in that area. So reducing it and bringing the inventory back into the real distribution centers. But we have not yet seen the full effect of it. But step by step we are getting there.

Is it at all possible to quantify sort of how far you've come or how much more potential there is?

There is more potential.

Okay, let's look at that. Another question, just to try to dwell in a little bit more on the margin here, and sorry for dragging on, but could you perhaps elaborate a little bit on, if you look at product categories on a like-for-like basis, is there anywhere where you've seen a slippage in the gross margin that sort of incorporated your attention? Because I think you talked quite extensively about mix here, it would be Interesting to hear if you have any, and you've detected on a more product-specific basis.

So there's no change in, let's say, in profitability for the different components, so it's pure mix.

That's clear.

The next question comes from Olof Larshammer from Danske Bank. Please go ahead.

Good morning, everyone. Just one question on service revenue. I think that since you become listed, we have seen a very stable quarter-over-quarter development with service revenues increasing. While in past quarters, we have actually seen the revenue levels going down a bit. Could you elaborate a bit about the reason behind this? Is it related to new service product offering or anything else? Thank you.

So I would say the service products, you have a lead time before that translates in. If you take rebuilds, for example, you have a lead time because a customer cannot take out 10 machines for rebuilds at the same time. So you do that, you plan that over a period of time, and then the revenue comes later on. So I think that's the difference. And of course, we have a broader offering today of different service products. with longer lead times compared to if we have just service contracts, which is more related to then the production of ore.

Okay, thank you.

So if I'm not mistaken, that was the last question for the day. Thank you very much, Helena. Håkan, thank you, everyone online for asking good questions. We are all here for you, including Alexander in our team, of course, to help you if you have further questions. And with this, we wish you successful investments and have a nice day. Thank you. Thank you.

Thank you very much.