Epiroc AB (publ)

Hello and a warm welcome to the Epiroc Q1 results presentation. My name is Karin Larsson. I'm head of IR and media here at Epiroc. And by my side, I have our CEO Helena Hedblom and our CFO Håkan Folin. As always, they will briefly present the results before we do a Q&A session. You all know the drill. Helena, please, the stage is yours. Thank you.

So thank you, Karin, and a warm welcome to all of you. So before I dive into the Q1 results, I would like to spend a few words on a highlight from earlier this month in April, when we announced our largest ever order contract. So the contract size is 350 million Australian dollars, about 2.2 billion krona over five years. And this is not only a large contract, this is the future of mining making its entry in full scale. So we will provide a fleet of more than 50 machines fully autonomous and electric to Fortescue in Australia. The machines we will provide are cable electric pit wipers 271E and battery electric Smartrock D65BE. And if you joined us at Mine Expo in September, you might have seen the machines. So once the fleet is fully operational, it will reduce CO2 emissions by 90,000 tonnes annually, while also boosting safety and productivity. So well done to everyone involved and thank you, Fortescue, for your trust in EPROC. So coming to Q1 and highlights from the quarter. So the mining demand was strong and equipment orders were very strong. We're up 29% organically. We won 600 million in large orders. And this can be compared to 400 million in Q1 last year and 820 million in Q4. So among these orders here in Q1, we had a large one, 280 million from Hindustan Sink for underground trucks and rigs. And we had a large battery fleet order as well, 100 million from Hudbay Minerals in Canada. On the infrastructure side, the demand was more mixed. As in previous quarter, we enjoyed good demand from customers engaged in civil engineering and tunnelling projects. We also won a major contract to support the Western Harbour tunnel project in Sydney in Australia. For attachments, construction customers are still hesitant. That said, we did have a positive sequential seasonality for attachment in the quarter. In the quarter, we increased both our revenues and our operating profit. Our revenues were up 10% to 15.5 billion, of which 3% organic. Our adjusted EBIT increased by 7% to 3.1 billion. And if we look at the demand picture in Q1, orders received were strong both year-on-year and sequentially. Compared to the previous year, they increased 17%, of which 10% organic. So this is the strongest organic growth in three years. Very pleasing to see, and it was driven by strong mining demand. Moving on to our strategic focus areas and first out is innovation. So during the first quarter, we spent quite some time to prepare for Bauma 2025, the world's largest construction trade show, which was held in Germany in the beginning of April. And at the fair we showcased many exciting products for use in deconstruction, recycling, quarrying and tunnelling. So we have a strong offering and a position in the construction niches where we operate. Following the acquisition of AARD mining equipment in 2023, we have successfully integrated a new product family of reliable, durable and high-performance underground utility vehicles into our portfolio. And we have a strong demand for these utility vehicles, which are included in our Terra series. And speaking of a strong offering, so let me bring you to the topic of automation. So do you remember our collaboration on automated mixed fleet in underground operations that were announced in 2021? So let me show you a short film about the achievements.

Never before have we integrated other OEMs into the same system and multiple tasks so we can complete every activity in our extraction level autonomously without putting people at risk. The team should be incredibly proud. The Katie Rees project started in 2008. Our ore body is 1200 meters to 1400 meters deep. Block Caving gave us a mining method that let us mine a large ore body at a relatively low cost. And if we can mine at the right cost and keep our team safe, we can be here for decades to come.

Block cave mining is a method where they use a drill and blast technique and they fragment the material and it will propagate and fall down under its own weight and gravity from an undercut level.

We need automation to be able to remove our people from the hazard of underground inrush and if it wasn't for automation and the systems that we've developed alongside Epiroc we wouldn't be able to recover all the ore safely.

It's one of the first sites in the world to have multi-vendors operating in the same agnostic automation system.

So the main benefit of deep automation out at Katy is to remove people from the hazardous area. But other benefits for the operators is they're not sitting inside a cabin exposed to dust and vibration for 12 hours a day. They're sitting in an air-conditioned office.

I've seen the average performance from Panel Cave 1, which is a fully automated level, improve. And I've seen the record daily times increase as well. It's almost every month, every second month we hit a new record, you see the average chase it. And it's really through this great collaboration and great people that we've been able to do that. Epiroc have really helped us to continuously innovate and improve the system. Working at CADIA is really special. For me, I get to work at Australia's biggest underground mine. I get to utilise these great tools and technology such as the Epiroc automation system and be home every night to see my kids, which is really exciting for me. I can't wait five, ten years and see what our underground mines look like or how we operate them.

So it's great to see customers are confirming that our mixed fleet automation solutions are working well. So on the next strategic topic then, aftermarket, the high mining activity supported the demand for both service and tools, whereas the weak construction market impacted the demand for attachments compared to the previous year. In total, the aftermarket represented 67% of our revenues in the quarter, same level as last year. But within the aftermarket, the tools and attachments portion is higher than in the previous year, which obviously has an impact on group margins, which Håkan will talk about later on. So moving on to operational excellence then. So given the recent geopolitical developments and uncertainty around tariffs, I would like to emphasize that we have an agile, fast-paced and global organization. So we work on what we can control and adapt when conditions change. So we are closely monitoring market developments and we have already started to optimize logistics and distribution flows, leveraging our global manufacturing footprint and explore alternative suppliers as well as discuss potential pricing impact with our customers. And also just like in previous quarters, we have efficiency actions implemented and ongoing and they proceed according to plan. On the sustainability side, we have only positive news to share. By relentlessly focusing on an improved safety culture, we have reduced the total recordable injury frequency rate further. We have also increased the proportion of women in the group to 20%. On the management side, we are even higher, 24.5% of our managers are women. Let me share another positive example. In India, a few years back, the share of women employees was in the single digit and today we are already approaching the group level of 20%. In fact, in our new tools and rock reinforcement manufacturing site in Hyderabad, India, we have only women employees in production. So over and over again, I see positive results from diverse teams within EPROC. By mixing employees from different parts of the world with different education, age, religion and gender, we can see firsthand that we have become more creative, more innovative and as a result also created better results. On the planet side, we are also making good progress. Our CO2 emissions from operations were reduced by 11% thanks to a higher share of renewable energy purchased, installation of solar panels on our own facilities and energy efficiency activities in facilities and processes. CO2 emissions from transport increased 3%, driven by higher volumes delivered. And with this, I leave the word to Håkan to cover the financials.

Thank you, Helena. Our revenues came in at 15.5 billion, corresponding to an organic growth of 3%. And our operating profit, the EBIT, increased 12% to 3.1 billion. It includes 11 million of provision for our long-term incentive plans. Last year, we had M&A-related costs of 125 million. And looking to the right of the slide, our adjusted operating profit increased 7%, but the margin decreased somewhat to 19.9%. The margin development, if we look in this adjusted bridge, was supported by currency, and this is driven mainly by positive currency impact on internal profit elimination, while the organic contribution was negative, mainly explained by mixed effects, such as lower share of service revenues, as Helena talked about before. Last year, our service revenues represented 46% of the group revenues, and in this quarter, only 43%. A few comments also on the sequential development. We see positive profit development both organically and from acquisition in this quarter, which is larger than explained by the efficiency actions we have taken. Dilution from acquisition this quarter was minus 1.0 percentage point, which is an improvement from Q4 when we had minus 1.4 percentage points. If we then move into the segments and we start with equipment and service, here orders received increased 12% year on year, which all was organic. It was mainly driven by equipment, which grew by as much as 29% organically, supported by the large order in India, which Helena mentioned. And again, our large orders amounted to around 600 million. We also have growth in service, but at a somewhat lower pace. We are not worried about the somewhat lower organic growth rate on service in this quarter. We know that the fleet is older and it's larger than ever before. The mines are producing the minerals to which we are most exposed, such as gold and copper. So over time, we expect to see continuous good growth in the service business. Also, if we look sequentially for orders received, we had a good development, 5% organic growth. Revenues for equipment and service amounted to 11.7 billion, which corresponds to a good organic growth of 4%, and the organic growth of equipment and service was 8 and 2%, respectively. The share of revenues from service within this reporting segment was lower this quarter, 57% compared to 58% this year, explained by the strong equipment growth. Still, we managed to increase our operating profit by 9%. The adjusted operating margin improved to 23.2%, supported by currency. And as I said before, also on group level, the positive driver was FX impact on internal profit elimination, mainly in service. The organic contribution was slightly negative, which is explained by service mix, both a lower share, but also that the strongest growth was achieved in part of the business with somewhat lower margins. Also for the segment here, a few words on the sequential development. The profit margin was somewhat weaker, which is mainly then explained by the strong invoicing that we enjoyed in Q4. And if we look historically, the invoicing is more or less always somewhat lower in Q1 than it was in Q4. If we then move on to tools and attachment, year-on-year, order increased 2% organically. Mining activity remains high and also demands from construction customers challenging. Sequentially, however, it was a positive seasonality, supported by demand for attachment driving the organic growth of 10%. And then the big question is, does this mean then that the weak construction market has turned Well, we would be very careful in making that conclusion yet. It is still a challenging construction market, although we are seeing the destocking phase that we have talked about for a while now among distributors is coming to an end. In the bridge, we see a positive 32% from structure, and this is mainly Stanley Infrastructure. They came into our books on April 2nd in 2024, which means that Q1 now was the last quarter when you will see this acquisition as part of structure. And let me give you a brief update on what has gone well and what has not gone so well during the first year now with Stanley Infrastructure. On the positive side, the strong customer relationships that we expected have been proven. We have gained an access to an indirect sales network with more than 2,700 dealers, and we see that there's a good cultural fit with a strong focus on innovation. But then on the not so positive side, well, the end market have of course been weaker than we first anticipated. And this has impacted both revenues and also earnings. We have taken actions in response to the market weakness. And for example, we consolidated three manufacturing sites into one. Long-term, we are still certain that this is a good fit for Epiroc. We have a strong market position in speciality attachment with industry-leading brands, and once the market turns, we are ready to leverage our global sales efforts with a multi-brand strategy. Back to the numbers then. Revenues and profit for tools and attachment. Revenues increased 29% to 3.8 billion, driven by acquisitions, both Stanley then, as mentioned before, and also ACB+. The organic decline was 3% in the quarter. Our EBIT increased 38% and we had no items affecting comparability this year, but last year we had M&A related cost of 125 million. Our adjusted EBIT was flat and the adjusted margin declined from 15.6% to 12.1%. Currency impacted the margin positively while lower revenues and acquisitions was negative. And the dilution from acquisitions included in structure was minus 2.8 percentage point on the adjusted margin and again mainly related to the acquisition of Stanley Inco structure. Sequentially, we had an improvement with lower dilution. We had minus 4.0% in Q4. We now no longer have the inventory step-up value from Stanley. And again, the consolidation of sites and the other efficiency actions we have taken are now starting to show. Okay, getting back to group again and looking at cost, net financials, and tax. In total, our administration, marketing, and R&D cost increased year over year. Admin costs increased, but we had some temporary costs related to efficiency measures. Excluding this, admin costs were actually down both year over year and sequentially. Marketing and R&D cost increased year over year, but also here they were down sequentially. We have net financial items of minus 207 million, an increase mainly driven by higher interest net of 107 million versus 128 million the previous year. For tax, our tax expense was 685 million, which corresponds then to a tax rate of 23.8% in the quarter. If we turn to cash flow, our operating cash flow came in at 1.6 billion compared with the 1.8 billion last year, supported by the increased profit, but we had a buildup in networking capital and also currency, which impacted negatively. Still, if we look at cash conversion, which we measure as rolling 12 months, we are actually at 100%, meaning we are, as Epiroc have almost always been, a very strong cash generating company. If we then dive into a bit more details on working capital, compared to the previous year, net working capital decreased 3% to 22.7 billion, which is 36.9% of revenues. In absolute terms, and if we exclude currency and M&A, the working capital was roughly flat, and the changes in each of them offset each other. Our inventory amounted to 18.3 billion, which is the lowest level in many quarters. As we have talked about before, we work hard on reducing the inventory and becoming more efficient in working capital management. And if we look sequentially, the average net working capital in relation to revenues decreased. Finally then from me, a few words on capital efficiency before I hand back over to Helena. We ended the quarter with a net debt of 12.3 billion and a net debt to EBTA ratio of 0.76. So we do have a very strong financial position entering into this year. Return on capital employed was 20.3%, which is down from 24.5 in the previous year and negatively impacted mainly then by increased intangible assets such as goodwill from acquisitions. And a small reminder, on May 8th, which is next week, we will host our annual general meeting. The board has proposed a dividend of 3.8 krona to be paid in two installments, with the first half being paid now in May. And this corresponds to a 53% payout ratio. So thank you, and Helena, over to you.

Thank you, Håkan. Yes, to summarize the start of the year, it has been good. We have seen strong mining demand with organic equipment order growth being very strong at 29%. On the infrastructure side, the demand was more mixed. For equipment used in larger infrastructure projects such as tunneling, we had a stable demand, whereas the demand for attachments used in construction work remained weak. In the quarter we also increased both our revenues and our operating profit. So many positive things we have spoken about today happened also after the end of the first quarter and I'm again proud to mention that we won our largest contract ever 2.2 billion over five years for a fully autonomous and electric fleet in Australia. So this is really an achievement. So with this great start in Q2 then, what can we then expect onwards? Well, given the demand we see now, we expect that the underlying mining demand, both for equipment and aftermarket, will remain at a high level. Or as I sometimes say, the business cooking and the potential for large orders looks good also onwards. The construction demand is however expected to remain weak. I think that we can all agree on that the general market uncertainty makes it harder than ever to predict the future. So I would like to emphasize what I said before, that EPROC is an agile, fast-paced and global organization, and we are used to work hard and adapt when conditions change. So thank you. And now time for some questions, right?

Thank you, Helena. Thank you, Håkan. Before we start the Q&A session, I would also like to highlight something that makes me very proud. On April 24th, we launched our sponsored ADR Level 1 program with Deutsche Bank. And this is to facilitate for all investors globally to invest in Epiroc in a more cost-efficient way than trading the unsponsored shares that we had before. So now time for Q&A. And as always, try to keep your questions short and concise. And operator, you may please open the line.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from John Kim from Deutsche Bank. Please go ahead.

Hi, good morning. Thanks for the opportunity. Two questions, if I may. First, in E&S, can you give us a bit of color on service order growth and revenues, the underlying segments? Growth rates looked really light in Q1. I understand that Q1 comparative a year ago is a bit odd, but any color there would be helpful between retrofits and things like consumables. And the second question on tools and attachments. When we lapped Q2, you will have owned Stanley for about a year. I think it's fair to say, given tariffs and macro uncertainty, there's probably more headwinds than you anticipated. When will you start thinking about cost and rut sizing for the asset? Thanks so much.

Okay, so if we start with on the service order side, so it was quite tough comparisons compared to the previous year. But if I look on the, I would say the underlying activities is strong, strong towards the different, the large commodities where we're exposed to if you take both copper and gold and iron ore. We have seen some weakness in nickel, so some mines towards nickel are put under care and maintenance, so that impacts a little bit the growth there in the quarter. We also have some, to be quite specific, there are some challenging situations in the northern part of DRC, which also had an impact in Q1, where some mines are under care and maintenance due to the unrest in that part of DRC. But if I look generally speaking, if you look on the components within service, yes, we are growing faster on service contracts and some of the service products than we do on parts in this quarter. On the other question there on Stanley, yes, it's one year into, we have now had them one year into Epiroc. And we are very focused on making sure that we prepare ourselves for the uptick in the market. So the last, I would say, nine months, we have been very focused on making sure that we prepare work on the efficiency side, both when it comes to consolidating sites, but of course also leverage the full potential now with the presence and the strength of Epiroc in the rest of the world. So I do not see that the latest development related to terrorists will impact this in any particular way. I think we have a very strong manufacturing footprint and capabilities in many parts of the world for these type of products.

Okay, thank you.

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

Hi, Helena Håkan-Karin, Claes at Citi. So my first one is on tools and attachment and Stanley looks like Good progression, high single-digit EBITDA margin in the quarter at Stanley. Just to confirm if that was a clean margin, or if you had a one-off and a bright-out fifth quarter, just trying to understand if the underlying margin was even higher, fully adjusted. And if you could tell us what you see in terms of inventories in the channel for Stanley in the US at the moment. Others have talked about the normalization from the second quarter, and I wonder if you are seeing the same thing. I'll start there.

It's a clean result. So there is nothing extraordinary in Q1 in the performance of Stanley. I think what we see is the effect of all the efficiency actions that we have taken the last, I would say, three quarters. So it's trending in a good way. We do see, as Håkan mentioned, that the inventory levels are coming down to a more normal level, meaning then that it's the true demand that we start to see in our factories, which helps with absorption. So that has been one of the main challenges during the last year, I would say, both for our attachment business in general, the low volume. So that is a good development, that we start to see that these inventory levels are...

coming coming down to normal levels good um my second one is on the mix impact in ens 4 organic growth but no drop through to ebit the share of service was lowered by one percentage point i get that but i'm still a bit surprised to see this quite big impact in the bridge job they talked about the internal mixing service being negative with contracts modernization drone cars and parts your parts business is a big chunk of your service business it's still facing this tough comparative as you showed at the market day but eventually this should obviously turn around when inventory levels at the miners are sort of stabilizing i i just want to hear sort of when you look through the year uh helena i know that there are some one notes here you talk about things going on in africa but that's clearly an upside uh potential with the parts business coming back

Yeah, and I think also we are putting a lot of machines on the market. I think the last couple of years, of course, it's also that we're putting more and more machines on the market. So the fleet continues to grow bigger for every quarter. It's also a fact that the first one, one and a half years, a new machine is not consuming that many new parts. It's in the later stage of the age of equipment where the big part consumption starts. So the more we grow on the equipment side, that is an upside of course long term on parts.

And within the service mix. If I can add there also on the service mix, it's not only the traditional parts and service business that's included in service, it's also the digital division that's included in service, as I'm sure you know, Klaus. So that's also impacting.

Of course. My point is parts, highest margin, should be a positive mix when it comes back. Sorry.

Yes, absolutely.

All right. Thank you.

The next question comes from Michael Harlows from Morgan Stanley. Please go ahead.

Good morning. Thank you for the presentation and thank you for taking questions. The first one would be on foreign exchange. Obviously, currencies are hard to predict, but what kind of headwinds should we take into account for the rest of the year? And then if you could, at the group level, update us on cost savings, if you would comment on where we are and what's left to be done, that would be very helpful. Thank you.

Okay, if I start with the FX question, and I think we actually prepared a slide for this because there's been quite a big swings during the quarter, and not the least for the Swedish krona, which actually at the end of the year, it was 11 Swedish krona towards one US dollars. And at the end of Q1, it was basically 10. So we saw almost a 10% difference. And For those of you who followed us for a while, you recognize this slide from our Capital Markets Day, where we show which different components are impacting the FX because we fully understand that it is quite difficult to predict. The one that is a bit more easy to understand and easy to predict, I would say, is the lower part on the transaction side. This is very much related to revaluation of outstanding accounts receivables and payables. Meaning that if we sell something, for example, from Sweden in US dollar and then the krona strengthen as it has during this quarter and we have outstanding accounts receivables, they become worth less in Swedish krona and therefore we get a negative impact. The one that is maybe not that obvious is the top one then, what we call translation, and especially internal profit. So again, if we sell something, let's say a spare part from Sweden to a distribution center in another part of the world, and it's sold in US dollar, we do have a profit in Sweden, but since we haven't sold it yet to the external market, we need to eliminate that on group level, of course. And then if that's a different currency than Swedish krona, we have an FX impact. And if then the currency moves as it has done, and in this case, the Swedish krona strengthens, there is less profit that we need to eliminate. And therefore, we get the positive impact in the quarter on the balance sheet. In this quarter, you see it's really big swings. I have never seen these big swings for us. So it's minus 248 on transaction and then plus 516 on translation. And then in total, that gives us the positive impact of 268 million Swedish kronor.

And then the second one on cost savings. So we continue our efforts when it comes to efficiency. So we are, if you look on it compared to a year ago, we are 1,000 employees less today. And we continue these initiatives. So there are more things in the pipeline when it comes to efficiency initiatives. But also some of the closure of manufacturing sites that we have announced, we have not seen yet the full effect of, for example, the closure of Essen. That is still not seen fully in the results.

Thank you. That was very helpful.

The next question comes from Titrita Sinha from JP Morgan. Please go ahead.

Good morning. Thank you for taking my questions. I have two, please. So firstly, just in ENF, the order intake, excluding large orders, was clearly very strong at 5.1 billion. So how should we think about this going forward, especially in context of your guidance? What are you seeing in the pipeline?

So if I start then, so yes, it's a high, even if we exclude the large orders, it's a strong activity level out there. We see a lot of replacement orders of fewer machines in more or less all parts of the world. And we continue to see that the pipeline looks good. So it's both a strong pipeline when it comes to replacement of the existing fleet, but also a strong pipeline of large orders. And that's why we guide like we do here short term. So it looks solid.

Thank you. And then just on TNA, I just wanted to check if there was any pre-buy impact that you saw in the US.

No, I wouldn't say that we have seen anything like that.

Okay, thank you.

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

Hi, Helena and Hakan. Thank you for taking my question. I guess just first one on tariffs. Could you just please talk us through the direct and indirect effects you expect and maybe some degree of quantification around that? Thank you.

Yeah, so we are not quantifying the effect, but of course there is an impact. So we are busy with mitigating actions, redirecting routes of our distribution, for example, from Europe not going through US and then into Canada or Mexico or South America, we're going direct instead. We're also leveraging our global footprint when it comes to manufacturing. because we have dual capabilities for many products. So that is of course also something that we very quickly now can put in place. We're also then changing suppliers and using our suppliers' global footprint also to mitigate the impact from the tariffs. So I would say of course it's a changing environment but the organization is fast-paced when it comes to taking very tactical decisions like this to mitigate, I would say, the impact.

Okay, thank you. And then just going back to Karth's question on Stanley Margins, so I calculate that if I exclude the 20 million inventory effect or roughly that that occurred in Q4, then we saw a 7% increase in adjusted EBIT margins quarter on quarter. You did mention some one-offs in Q4, but the sort of implication was perhaps they were quite small. I mean, that's a massive change in margins from acquisitions. So do you mind just sort of outlining what you think the trajectory is from here and also again just digging into where that sort of massive uplift came from thank you.

I wouldn't maybe call it a massive uplift it was definitely a clear improvement and you're right about these the inventory step-up that we no longer have, and then we had a few one-off items also in Q4 then that we did not have again in Q1, as we said. And on top of that, the efficiency measures we have taken, for example, and we mentioned these three sites we consolidated, we also looked into a lot of other areas to see basically to adjust our operations to a clearly lower demand level than it was when we acquired Stanley. So all these efficiency measures have now started to show in the result during Q1. Still, we are not getting the help from the market as of yet. That might come, or it will come sooner or later. We don't know exactly when it will come. And when that comes, then obviously we will get an improvement in margin as well. So there was nothing specifically positively in Q1, I wouldn't say. Rather, if we get help from the market, we would definitely see, if anything, we would expect margins to move in the right direction, to put it that way.

Cool, thanks. And then just final question, just on the dynamic in the US. So, I mean, we've seen an announcement from the White House that 10 mining projects have been earmarked for accelerated permitting. I mean, in the sort of midterm, I guess, can you see a sort of more positive environment in the US? I mean, clearly, headwinds in the short term due to sort of an unknown MBV in the sort of mine calculation, how much capex is going to be. But sort of how do you see this dynamic playing out in the US going forward?

We see these type of initiatives actually in several parts of the world with fast tracking, mining permits, etc. And I think raw materials, it is becoming a very strategic thing in this geopolitical landscape to safeguard your capabilities of sourcing. So of course for us that is good news. it's both in us it's both expansion projects of existing mines but also uh also in other parts of the world we start to see more and more than activities around greenfield so that you know all in all is of course positive for us okay thank you very much the next question comes from gustav schwen from handelsbanken please go ahead

Yes, hello, thank you. Can I ask another follow-up on the T&A margin, Håkan? You mentioned that you no longer have the inventory step of effect that was in the range of 20 million, but looking at amortizations now quarter over quarter, they're only down by 2 million. Have I misunderstood this or is there something odd in Q1? Thank you.

No, nothing odd in Q1. This inventory step-up value, you would not see them as amortization because basically what happened is that you revalue your inventory. So if the inventory was first valued at 8 and you were expecting a selling price of 12, you would get a margin of 4. But then when you revalue it, it maybe, let's just say, was worth 10%. 10 instead. And when you sold it, then you only got the profit of two. So you will not see it as amortization. It was part of a higher cost of goods sold.

Okay, perfect. Thank you.

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

Yeah, good morning. Thanks very much for taking my two questions. First one is on inventories. How do you expect your inventories to evolve from here, perhaps through the rest of the year? And is current uncertainty incentivizes you to actually hold a bit more inventories during this period? And second question is on adjustment to tariffs. Elena, how long do you think it will take you to actually fully adjust the organization to the new reality? Is it a question of a quarter or two, or is it longer?

If I start with the inventory part, if we disregard, which you obviously can't, but if we disregard the overall trade situation right now, we would expect us to continue to move working capital over sales ratio downwards during the year. because we still think that we have improvement areas there. Now the trade situation complicates things a little bit because Helena mentioned we are redirecting flows, and sometimes we are redirecting them in order to get a lower cost, but it might actually imply that we need to have some higher inventory in different parts, or we get longer lead times because we want to avoid different routes. So all in all, there is still opportunity for us to do more on inventory and become more efficient. the very fluid trade situation makes it a bit more complicated.

And on the timing for all these mitigating actions, of course, it depends very much on the type of mitigating actions. If it is just rerouting flows of parts, for example, or consumables, that happens immediately. So there's no waiting for something like that to happen. If we have dual capacity, possibilities to move production between sites then I would say maybe it's a quarter to get that to put that something like that input in place if it's to find you new suppliers as long as it is standard steel rates it's also it also goes fairly quick. But of course it's more that it's a lot of workload for the organization and that's what the organization, what we are busy with right now. But as it looks like right now, it's full activity level and I think we have over the years proven that we are We are agile and we are fast when the situation changes and we are now maximizing our potential here with our global footprint and our global sourcing network as well. Several of our suppliers are also located in many different parts of the world and we can of course use those suppliers in the best possible way now to mitigate the impact from the tariffs.

Thank you very much.

The next question comes from James Moore from Redburn Atlantic. Please go ahead.

Yes, good morning, everybody, and thanks for the time. Could I start with equipment, please? A strong quarter, I think the best ever or for a long time on equipment. Can you maintain this Kroner level in the coming quarters, or is it exceptional? And the second question is on service. The softness in nickel and DRC and parts, do you think that's temporary and will reverse quite quickly, or something that's going to drag on for the next quarter or the next two quarters? Maybe we could start there.

As I said on equipment, it's a very strong quarter and it's both a number of large orders, but not that many large orders actually supporting this very nice demand. So it's mostly medium size and small orders and many of those, which is very encouraging to see. We continue to see good opportunities in the coming quarters on equipment demand as well. And I think I said it in the previous calls as well that the replacement of some of the large fleets that we put in the market there 2011-12, those are coming up for replacement and that's quite big ticket items for the large surface machines. when we have a demand and leverage our very strong position in surface mining. So we continue to see that this is a positive outlook for equipment. On parts, yes, as long as nickel is where it is from a price standpoint and the turbulence in DRC, hopefully the turbulence in DRC, I think it already now looks better. I don't dare to predict where Nickel will move moving forward, but there is plenty of opportunities. Of course, we have a strong position on parts and on our service, and the more we grow our service contracts, that is also we're building then the foundation for parts growth long term. And as I said, a portion of the fleet is also a young fleet out there because we have put a lot of equipment on the market the last couple of years, not yet consuming so much parts.

That's really helpful. Can I just ask you a bit about price? Is the price level in orders in the quarter similar to what you've seen in recent quarters? And if there's any way you can quantify that. But how will that move in the back nine months? Will it move up materially with the tariffs? And is there any way you can quantify that? Or do you anticipate it not really moving that much at all?

So I would say that the price effect we see in Q1 is similar to what we have seen in the previous quarters. It's more a normalized price increase level that we normally see. We are doing everything we can to mitigate the effect from the tariffs, as I explained. But if there is a part that we can't mitigate, then of course that will end up in price increases. But we're doing our job to mitigate the impact before we push it on to our customers.

I understand. Okay, thank you, Helena.

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

Yeah, morning. Thank you guys for taking the question. First is on the U.S. construction exposure. I was just wondering if you've seen any changes in ordering patterns since the tariffs came on April 2nd and whether you've seen any changes there. From James's question around pricing, but service contracts have obviously grown quite significantly over the past three, four years. Can you talk about your ability to pass on price through services contracts relative to pricing? I mean, my understanding of a lot of the way these service contracts work is that there's indexation, but sometimes that indexation can be capped. So I was just wondering if that's a situation that you guys will face. And so it will be over a number of years that you pass on any potential price increases versus maybe on parts you could pass it on quite quickly. Just any color there would be super helpful. Thank you.

I would say on the US construction sentiment, we have not seen any change in the last couple of weeks in regards to the tariffs. As I mentioned, we do see that the inventory level at our distributors is coming down to a more normalized level. So that's what I can say on the construction activities in the US. On the service contracts, I would say that we have good opportunities, of course, to push out price increases as well in service contracts. And long-term, service contracts also safeguard the consumption of parts. So it is a way of making sure that we get the full potential of parts into a contract. But I wouldn't say that we are... I would say we have a similar position when it comes to working with prices because in a service contract, you work with value in a different way because that's where you can prove the values and you can prove the KPIs, which is then uptime or TCO, et cetera. So you have different, you have a better, you have more things to work on in a service contract than you have if it's just pure parts.

Okay. Okay, great. Thank you.

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

Yeah, morning. Thank you. Add to questions on digital. Could you help us understand the mechanics behind this dilution? You know, how much is digital or did digital grow in this quarter? How big proportion is it? And what's your margin ambition this year? Do you think margins for digital standalone will go higher? go up or be unchanged. I understand that this is a business that will sort of just gradually ramp up to higher profitability, but any help there would be good.

So if we, you know, we said it when we reported the Q4 that we are in 2024, we're up roughly 30% on orders on digital. That has yet not, we have yet not seen it fully into the P&L, which of course this is about scaling. We have acquired regional players and we are now scaling and with scaling of course margins will improve. On top of that we're also working on the efficiency measures to make sure that we have the organization fit for growth but also fit for long term delivering the profitability that we expect.

Yeah, okay. Secondly, so we saw this deal early in the year of MicroMine in mine software. I think you've said previously that you're pretty happy with the platform that you have on digital, but could you just give us some more details on what you do in those specific areas or if you need to do or want to do more bolt-ons? Thanks.

We are happy with the platform so we have acquired quite many capabilities now and during last year we were putting all of this together into a very precise offering and it is that full offering now and the bundling of all the solutions. And of course, we're developing new solutions based on the capabilities that we have now received from these acquisitions. So we see that we have a good development journey now organically within the digital and we already see it on the orders received, as I said. But there could still be, of course, gaps that we would like to close from an acquisition standpoint. But I think right now I'm pleased with the portfolio that we have and the development of orders. We see that we are providing our customers with the solutions that they need for the future.

Okay, thank you.

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

Thank you and good morning. So can I first ask about the costs related to the efficiency measures that increased admin costs temporarily in Q1? How large were these costs? Will they disappear in Q2? And should I look at them as items affecting comparability?

They were not super large. Basically, there's a bit of an echo here, sorry. In a big company like ours, we always do something. If we have a larger cost item, like when we close the factory in SM, then we take them as item affecting comparability. If we have smaller ones, which we have every now and then, then we treat them as normal costs because basically we will have them fairly often. In this quarter, You know, they were somewhere in between. They were not big enough to be treated as item effect and comparability, but a bit bigger than what we normally see, and that's why we spell them out explicitly.

But you don't want to quantify them?

No, but they were not huge then.

okay thanks and then the second one i know it's moving materia and it's probably difficult for you to estimate as well but you could you please give us an indication what we should expect from fx on ebit in in q2 either based on current rates or the rates that we saw at the end of the first quarter that's a very good and quite tricky questions to make it very simple if the krona is a weaker krona

If the Krona continues to strengthen like it did in Q1, then you would have a similar impact in Q2 on the balance sheet revaluation items. You would then have a negative effect on AR, and so far the Krona has strengthened in Q2. You would have a negative effect on AR, but you would have the positive effect higher up in the income statement on gross margin coming from these internal profit eliminations. Over time, though, those are the balance sheet implications. Over time, though, a stronger corona, when we translate back the profit that we get around the world, a stronger corona makes that profit smaller, so it then becomes negative for us. But it's when we have this So if you put it like this, if the currency rates would be exactly the same as they were at the end of Q1, then you wouldn't have any of these revaluation effect and you would then have less profit translated back into Swedish krona. But if the krona is where it is right now, when it has strengthened, it's likely then that you see the similar type of effect as you saw in Q1. Did that make sense, Andreas?

It makes sense, but I was looking for a number. Thank you very much.

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

Yes, morning everyone. Thanks for the time. I just want to come back in the outlook statement. You've talked about optimizing logistics and distribution flows in response to some of the tariff uncertainty. If I recall correctly, your logistic cost line fits in admin expenses and historically maybe it's been about 2% of revenue. That would imply about 310 million for the quarter. Obviously, we've talked about the step up in admin costs as some of that being one-off, but 1.2 billion is 100 million up versus consensus, versus last quarter, versus last year. So I guess two parts to the question. What are the specific actions you're taking amidst the trade environment that are affecting logistics, and is that structural? And then second, on the one-off side, Is the one-off effect more meaningful than the increase you may have seen in logistics expenses?

Thanks. So the work we have done so far has not led to increased logistic cost, but we are rerouting, so we're using different routes than we did prior to the tariffs. to be very transparent and avoiding to go through U.S. and then out from U.S. for parts, for example. That we're no longer doing. But that is not translated into an increased logistic cost. Of course, if we would start to change our logistic footprint in any way, you know, moving forward, then of course that could come with a cost. But that is not the type of actions we are taking. We're using the existing footprint in a smarter way, given the tariffs. So the one-offs are not related to logistics, I would say.

And in the admin, if you look at the admin cost, Christian, and you compare Q1 this year with last year, you should also remember that, of course, we've added especially standard infrastructure, but also other acquisitions which impact standard total admin costs.

All right, understood. Very clear. And then maybe just a second one finally. Inventory to sales, I think about 28.1%, the lowest inventory days in four years. If I think back to the third quarter of last year, I was asking whether we could see pre-COVID levels in terms of inventory days at 94. We're getting down to similar territory, I'd say. Just how do we think about, I know you've covered it a little bit, but how do we think about the evolution here? I'm just surprised by the strength of that number. on the inventory carry.

Thanks. Like I answered in the previous question, we still think that we have room to improve when it comes to inventory. Some of the bottlenecks that we talked about before, for example, getting the equipment out from the final modifications in certain countries, there we definitely have improved, and that's part of what we saw during the second half of the year when we had a very, very strong cash flow. But going forward, so I think... again adjusting for them the trade situation I think there's definitely room for us to still improve and see a better inventory in relation to cogs or sales given the trade situation that might differ than when we redistribute flows etc and we'll need to maybe put inventory in places where we don't have them at the moment so it's very fluid nature right now in terms of evaluating going forward.

Thank you Håkan.

so that was it thank you very much everyone good questions and reach out if anything was unclear we are as always happy to help you and more than ever and we wish you very successful investments thank you very much bye bye thank you bye