Epiroc AB (publ)

Hello and a warm welcome to the Epiroc Q3 results presentation. My name is Karin Larsson. I'm head of IR and media here at Epiroc. Before we start the presentation, I would like to say thank you to all 80 plus investors and analysts who joined us in Las Vegas for our Capital Markets Day last month. I also would like to thank you who joined on the live webcast. From the feedback that we have gathered, it's clear that you would like to have more color on the margin. And we will do our best today to provide you with more information. And with me today to present the results, I have our CEO, Helena Hedblom, and our CFO, Håkan Folin. They will briefly present the results before we end with a Q&A session. So without further ado, Helena, please, the stage is yours.

Thank you, Karin. So let's get going then. So starting then with the highlights from the quarter. And we had a strong demand from our mining customers with several large equipment orders. In total, they amounted to 1.4 billion, which is record high. And last year in Q3, we had 1 billion in large orders. And the organic equipment growth for orders was strong at 11%, and the demand for service was also high, translating into an organic order growth of 6%. Construction, on the other hand, was weak as anticipated, and it also softened further in the U.S. And this impacted mainly our attachment business. As Karin mentioned, in September we hosted our Capital Markets Day and the main purpose of the event was to provide insights into how Eproc is positioned for profitable, resilient growth in an ever-changing world. And we also provided updates on the progress of our financial and sustainability goals. After the capital markets day, we went to the Mine Expo, which is the world's largest mine exhibit. And there we showcased many of our groundbreaking innovations. Over 44,000 mining professionals from 126 countries gathered in Las Vegas, walking a show floor that presented many interesting concepts in an industry that is rapidly changing. An industry Epiroc aims to remain in the forefront of by offering the best equipment and service and leading the race within automation, electrification and digitalization. And I will tell you more about our innovations soon. If we look into the details on the demand, slide 3, we achieved 8% growth in orders received year on year to 15.5 billion, up from 14.4 last year. And organic growth was strong at 6%, driven by mining, while construction was weak. We had a positive contribution from acquisitions, with Stanley Infrastructure being the largest contributor. Sequentially, compared to the previous quarter, we had a negative organic order development of minus 3%. Moving on to innovation, and here we have many great things to share, which we also did at Mine Expo in Las Vegas. So one innovation that attracted a lot of interest was the large capacity mine truck MT66S eDrive. And this is our first mine truck with both an electric drivetrain and a powerful diesel engine, in other words, a hybrid. and it combines the cost-effectiveness of a traditional mine truck with the productivity of an electrical one, without requiring changes to a mine's infrastructure. Our goal is to provide the best machines for getting the job done and the customers should be able to choose the energy source that is best for them while at the same time reduce emissions. So we believe that especially underground mining will be electric in the future and we are proud to offer our customers solutions that are battery electric, troll electric, hybrid, but also other energy sources that are more fuel efficient than diesel, such as biofuel and HVO. One of our best sellers, the Pit Viper 271 Surface Drill Rig, was also shown in Vegas. And the Pit Viper that was on display was a cable electric version. And today, 11% of the Pit Viper fleet population are in electric versions. Another innovation that's gaining traction in the market is the automatic bit changer, which is an option when customers buy new pit wiper drill rigs. And with this solution, the machine changes drill bits by itself, eliminating the manual work. So thanks to this automation solution, both safety and efficiency is strengthened. And speaking about drill bits at the Mine Expo, we also showcased the PowerBitX, which is enabling much longer drilling time, and is therefore a perfect drill bit for autonomous drilling. The R&D expense in relation to revenues was 3% in the quarter, and this is adjusted for acquisition-related impairment of intangible assets in equipment and service of 346 million. Moving then over to aftermarket, which represented 67% of the revenues in the quarter. We had good mining demand for digital solutions, including mixed-fit automation solutions, as well as high demand for ground engagement tools, which are reported in T&A. The weak construction demand impacted mainly the attachment business, but also tools that are used at construction sites and quarries to some extent. The revenue mix has of course an impact on group margins. Service revenues were 43% in the quarter versus 46% last year. In general, the service business has a higher margin than the rest of the business. So on the operational excellence, we have been working hard to show progress on profitability and more actions have been carried out as planned in the quarter. We achieved a sequential reduction of workforce by around 450. And looking back year to date, this number is now around 1,000. And this is for comparable units. So it's important here to mention that we are really pinpointing what we are doing in regards to efficiency. And this is something that takes a bit of time, but that will strengthen Epiroc in the long run. Obviously, we do a lot in areas where the revenue growth or the profit levels is not satisfactory. But we also take measures where we can do more with the same level of input and resources. So in the end, we will be more efficient. I'm therefore pleased to say that we have lowered our cost level in marketing and administration this quarter. Another improvement is the reduction of inventory by 1.2 billion, and we achieved this by addressing bottlenecks in the final stages of delivery, which led to more machines delivered in the quarter. If we then spend a few minutes on sustainability and starting with people, we have improved our safety metrics yet again, and the total recordable injury frequency rate the last 12 months decreased to 4.4. And I would like to emphasize that it's not only about making our own operations more safe, it's also about helping our customers to become better. And at the Capital Markets Day, we provided numbers on our market-leading position within safety solutions and mixed fleet automation, or in other words, driverless machines, and currently covering around 3,100 vehicles around the world. The number of EPPROC employees increased to 18,900 in the quarter, with acquisitions being the main reason for the increase compared to previous year. And we make good progress on the proportion of women employees and women managers, which both increased now at 19.6% and 24% respectively. And on diversity, I would like to share some positive news. In India, we have increased our female managers from 7% in 2019 when we started this journey to 17% in Q3 2024. And that's something to be proud of. India is a key growth market and an important manufacturing and innovation hub for the EPROC group. And in recent years, we have seen good growth in the Hyderabad product company, and therefore we are now expanding our manufacturing facility for rock drilling tools there. And in Q3, we also opened a new innovation and technology center in Hyderabad. Another achievement related to India was the 13th International Mine Rescue Competition held in Colombia, organized by the National Mining Agency. And in this competition, 26 elite teams from across the world joined, and among them, mining company Hindustan Sinks' first-ever all-women underground mine rescue team participated. In fact, this was India's first-ever all-women team. And one of the members of this team was our colleague Alka Chindalya, a service engineer from Epbrock, India. And that team secured an extraordinary second place. So these women have not just only made history, but they also set the stage for an even more inclusive and diverse future in mining. So well done. And let me show you a video on this.

I am what I always wanted to be. I am a part of something extraordinary. Something that requires strength. What's my strength? Courage. In every challenge, I discover my power. At every chance, I redefine what's possible. I am more than a woman. I am a movement. But when it comes to safety, I can do what you can't even imagine. For some, I'm an inspiration. And for some, I'm a hero. But it's not about becoming a hero. It's about being responsible. It's about facing the challenge. It's about breaking the stereotypes. And together, we are India's first all-women underground mine rescue team. And we are always ready.

For the reduction of carbon emissions, progress was mixed in the quarter. Our CO2e emissions from operations decreased 24%, driven by a higher share of renewable energy purchased and installation of solar panels on our own facilities. The CO2e emissions from transport, however, increased 18%. Good news in the quarter was that Eproc received a sustainability score of 89% from Ecovadis, placing the company in the top 11% of all companies assessed. And this achievement is well above the industry average. Ecovadis is a company that provides sustainability ratings for businesses based on, for example, environmental impact, labor and human rights, ethics and sustainable procurement. And the ratings are often used by customers when they do their sustainability assessment on us as a supplier. So, Håkan, would you like to go through the financials, please?

Absolutely. Thank you very much, Helena. And we are now on slide number 10. So I will start with the revenue. And year over year, our revenue increased 5% to 15.7 billion, while the operating profit was more or less flat at 3.3 billion. And this number includes item effect and comparability of 191 million. And these items are, in order of magnitude, a positive revaluation effect of the shares that we held prior to the acquisition of ASI Mining, also impairment of acquisition-related intangibles within equipment and service, and the net effect of these two is 208 million, as well as we have a change in the provision for the ShareBus long-term incentive program of minus 17 million. As you know, our operating margin is EBIT. In our reports, we also provide you with EBIT A. In the third quarter, it was 24.8%, which means it was up meaningfully versus last year's levels of 23.6%. While at the same time, the adjusted operating margin, the EBIT, was down from 21.8% to 19.7%. And the main deviation here is that we have the impairments of intangible assets, which are 346 million in EBIT, while they are not included in the EBIT-A calculation. Now let's look at the group profit bridge. In organic, we lost 1.3 percentage point compared to the previous year. And this was mainly because of three things. One is the mix effect where we have lower service revenue and higher equipment revenues compared to previous year. Second, we have a dilution from acquisition within tools and attachment. And on group level, this dilution is 1.3 percentage point. In the bridge, however, this is mitigated by the positive effect that we get from the item affecting comparability. And three, we also have higher cost than we had last year. But in this quarter, we have achieved sequential improvements and the reduction of employees that Heleno talked about should give us a lower cost base going forward. On currency, we had a small FX tailwind on the margin and the structure impact was zero. And all in all, we ended up with an adjusted EBIT margin of 19.7%, the same as we had in the last quarter, despite actually invoicing being 800 million krona lower. If we move on to the segments, I will start with equipment and service. And equipment and service had, again, a strong mining demand. Year on year, the orders received organically increased quite strongly, up 9% to 11.8 billion. And this is including then a record high level of 1.4 billion in large orders. And this should be compared with 1 billion that we had in Q3 2023. And we have said this many times, but we will repeat it again. Large orders are lumpy by nature. And this was, as said, a record high quarter for us. One of the large orders we received was from Eurasian Resource Group in Kazakhstan.

And this is a really interesting order because several of these machines... will be operated driverless, tele-remotely.

All of the equipment will be supplied with a collision avoidance system. And this order, valued at about 350 million, also includes some battery electric machines. So we think it's really great when we see that our customers embrace our new technology, like automation and electrification, and also then safety improvements. In addition to the large orders, the service growth was also strong, up 6% organically, despite actually quite tough comparables. And this reflects then a continued high mining activity and a good demand for our digital solutions, as well as also high demand for midlife upgrades. If we look ahead, there is still a lot of business cooking out there, and we remain optimistic on the demand from the mining segment. Moving on then to slide 13, we have the equipment and service revenue, and they were up 5% organically to 11.9 billion. We had 44% equipment revenues in the segment, which is 2% higher than what we had last year, which then lead to a negative equipment service mix effects on the profit margin. Within service, as we talked about at our capital markets day, the strategic Business lines within digitalization, service offering, which has somewhat lower profitability, continue to outgrow the traditional parts and service business. And then coming back to this revaluation of shares, we mentioned it already in Q2, that when we did the full acquisition of ASI Mining, we would get this effect. The final amount was a positive 554 million. It's mainly booked as R&D cost in the quarter. And all in all, we have a net positive of 208 million on EBIT. So page 14, we see the bridge for equipment and service. And here we increased our EBIT by 2%, ended up at 2.9 billion. Adjusted, however, for the items I just told you about, we were down to 2.7 billion, corresponding to an adjusted margin of 22.9. And that should be compared with 24.4 previous year. We had a negative impact on the organic side, which is mainly explained by the mix effect, where we have a higher proportion of equipment invoiced and then also mix effect within service. Year on year, we also have higher costs, but just as for groups, sequentially, we can see organic improvement.

And actions have been taken, and as mining is so important for these segments, we have carefully... ...pinpointed our efforts to remove costs to make sure that we are not harming long-term growth prospects.

were up 25%, but this is solely explained by the acquisitions, which contributed 28%. We closed the acquisition of Stanley Infrastructure in April, and then we closed the acquisition of ACB Plus in September. Currency contribution was negative, while the organic contribution was basically flat. And actually, this is the first time since Q1 2022 where we don't have negative organic growth in this reporting segment. I think, though, that the flat organic development requires some explanation. We have good demand from mining customers, for example, for our ground engaging tools, where demand from construction customers remain weak. And this is mainly impacting the attachment, but also to some extent tools. And in the important U.S. market, we saw a further softening in demand in the quarter. And all in all, orders increased to 3.7 billion up from 2.9 billion last year. If we look at it sequentially, order intake decreased 6% organically for this segment, mainly explained by the weakness in the United States. The weak development in construction also impacted the revenues for tools and attachment, which were down 5% organically to 3.8 billion. In absolute terms, they were up 90% supported by acquisitions. EBIT 429 million down from 481 last year, and this is corresponding then to a margin of 11.3% while we had 15.1 last year. And here acquisitions diluted margin meaningfully around 3.9 percentage point. In this segment, a lot has been done and is still being done to protect our margins. And as an example, we are now consolidating some manufacturing sites in the U.S., Moving on then to the profit bridge, we had a positive 0.6 percentage point impact organically, supported by the measures taken. Also, I would like to highlight that tools had a strong quarter in regards to profitability. We lost 0.6 percentage points from currency, and then the large negative impact was in structure, minus 3.8% on the margin. And here, 3.9% was dilution from acquisitions. No items affecting comparability in this segment, and not in the comparable period either. Okay, so leaving the segments then and moving on to cost. Compared to the previous year, we had higher admin marketing and R&D cost. But if we adjust for items affecting compatibility, we are showing a positive sequential development from 16.6 to 16.3 and actually down from 17.0 in Q1. And we should not forget that we had 800 million lower revenue sequentially. It means our efforts are starting to show. Net financial items were 264 million compared to 331 last year. year, despite the high net interest of 250 million compared to 146 last year.

And the reason is that

we have a currency impact on other items in financial net income tax expense 690 million when we adjust for the non-cash items but actually compared to last year positively impacted by a lower build-up of working capital we can see our cash conversion rate improved another quarter and is actually now at 96 percent on a 12-month rolling basis A few words on the working capital. It increased 6% in a quarter and is now 38% of revenues on a 12-month rolling basis. Despite a reduction in inventory, net working capital actually increased as payables and also then acquisitions contributed negatively building up the working capital.

development we are not happy with. Having said that, if we look sequentially, we have seen a positive development.

Networking capital decreased 3%, driven by the lower inventory and receivables, while actually the lower level of payables mitigated that improvement. But on the inventory side, we decreased by 1.2 billion in the quarter, and we are now more efficient in the final delivery stage. A meaningful portion of this inventory is still within equipment, and at some point, obviously, this will be delivered and invoiced. Our net debt, it was 15.2 billion at the end of the quarter, which means it's up meaningfully since last year. And this is, of course, driven by the acquisitions that we have made.

Net debt to EBITDA is at 0%.

So it's up compared to last year, but it's actually slightly down compared to at the end of Q2, where it was slightly above one. Return on capital employed, we have at 21.5%, and this is impacted by a higher level of intangible assets. At the end of the quarter, we had roughly 38% in sustainability-linked long-term financing, which we are happy with. But when we meet the next time in January, it will actually be even higher, because in October, after the end of the reporting period, we signed a 10-year sustainability-linked loan.

agreement for 150 million us dollar with the nordic investment bank so it's And we added the link, which is great, and it also actually diversifies.

diversifies our financing further. That was a difficult final word. Okay. Thank you. Back to you, Helena.

Thank you, Håkan. So then I will summarize the quarter. So we enjoyed strong mining demand and we won record high large orders, 1.4 billion. The equipment order growth was strong at 11% organic and the service order growth was also strong at 6% organic. However, construction remained as anticipated week. At the Capital Markets Day we provided updates on our strategy.

for resilient, recurring and profitable growth.