Epiroc AB (publ) (EPIA) Earnings Call Transcript & Summary

Welcome to the Deutsche Bank's Depositary Receipts Virtual Investor Conference Deutsche Bank Virtual Investor Conference, dbVIC. I am [indiscernible] from the Deutsche Bank team. I'm pleased to announce that our next presentation will be from Epiroc AB. [Operator Instructions] Also, all of day's presentations will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Epiroc AB that trades in Stockholm under the symbol EPI A and on OTC using a symbol EPOAY.

Thank you very much for that introduction. My name is Karin Larsson, and I'm Head of IR and media here at Epiroc. And at my side, I have Alexander Apell. And we are going to introduce you to Epiroc AB today. So thank you, everyone, for taking the time. So the mission for Epiroc is to accelerate the productivity and sustainability transformation in our industry. And I'm sure you have heard this hundreds of times from all companies. But the main difference is that we actually, with our technology, help keep people stay out of mines, thereby not dying. And we also help customers to reduce emissions by having new technologies such as electric tramming solutions and batteries and thereby not wasting energy or money unnecessarily. So that's how we actually accelerate the productivity and sustainability and transformation in our industry. And hopefully, by the end of this presentation, you will share our view that we're doing exactly this. So what is Epiroc? Well, we are a productivity partner and we have roots from 1873. And if we start to the left on this slide, you will see that it's a big portion of yellow and that's recurring aftermarket. About 2/3 of our revenue stream is recurring aftermarket such as service revenues. We have revenues in more than 150 countries and 19,000 employees globally. We have EBIT margin of 19.6%, and these are rolling 12 months, 2025 Q1 numbers. And we are basically a very global company, but our origin is in Sweden in -- and we have our headquarters in Stockholm. We serve 2 attractive customer groups, and it's the mining industry and the construction industry. And mining, as you see here on the graph is 78% of our exposure. And within mining, you see that copper, gold, iron ore are the 3 most important commodities. And it's our true belief that by 2030, both gold and copper will be in deficit. And it's also our belief that the construction customers, even though it's 22% of the exposure today will have a good growth in the years to come as well. And the customers we serve also have an important purpose because they drive urbanization and they make sure that our life on this planet is possible. You need a lot of minerals to have a good life. Our strategy is very much also our investment case. So if we start on the bottom, Epiroc has been a very successful company for many years, and our origin is from Atlas Copco, as you might have heard about. And it's really a very, very strong culture. A lot of people compare Atlas Copco, Epiroc with companies such as IKEA, if you heard about them or even the Swedish Handelsbanken. So what we do with this strong culture is that we focus on attractive niches, and that means niches where customers are -- where the equipment has a really, how should I say, critical, it's a performance-critical equipment that you don't want to break down. I will give you one example. In the end of a tunnel in a mine, if your drill rig breaks down, the rest of the mine stops. Therefore, you're very willing to pay for a good piece of equipment in the tunnel that you can also have good service and aftermarket related to it. We drive the strategy with innovation, aftermarket and operational excellence. We always believe that there's a better way to do things. And by doing all this together, we will create outperformance, and we will speak about the financial targets and our achievements a bit later in this presentation. The most important portion here is the innovation part. And with this, I would like to leave the word to Alexander.

Thank you, Karin. So I will start to spend a little time on innovation. And we do spend a little bit north of 3% of our top line on R&D annually. But if you remember on one of the previous slides, around 70% of our business is aftermarket related. That part of the business get very limited R&D spend. So I mean the other piece of the business, the equipment side of the business, get a vast majority of the R&D spend. Then we are a very, I say, asset-light company that -- and we source quite a lot of the direct material that goes into our machines, et cetera. So I mean the very core components and the technologies that is really our core get a lot of care and attention. And we do have a lot of collaboration partners and suppliers, et cetera, that also do a lot of innovation on their end. So we're really leveraging the innovation to remain a technology leader within our space. So I would like to talk about one of the megatrends that we are seeing within our own business. First, we would like to start with automation and basically how automation enables productivity and sustainability transformation. So on this picture here, you can see our largest surface drill rig, the so-called Pit Viper. And what we have identified when we have a Pit Viper that is fully automated versus if you have a human operator operating the machine is that the productivity increase is up to 22% higher per drill meter and also the cost per drill meter is up to 40% lower and the CO2 e-footprint is also substantially lower for with the automation solution. And this is a project that we are super excited about, and this is something we are developing in Australia together with a customer called Roy Hill. And here, we are creating the world's largest OEM-agnostic autonomous mine. So this is a very remote mine site. It's 1,100 kilometers away from Perth. And here, the customer has 78 mine trucks, not a single Epiroc machine on site, but Caterpillar machines and Hitachi machine, but they are trusting our technology and letting us automate their fleet to operate 24/7 at this mine site. So I mean the upside for the customers is huge. I mean, normally for this remote mine sites, there's a lot of fly in, fly out. I mean these remote mine sites is more or less like a small city, you need to have all types of conveniences for -- to have a mine operated. So I mean you can lower the number of people at the mine site. Also, you get a productivity increase and you can operate more hours a day with -- and if you take 78 mine trucks and you can run the mine for more hours, I mean, multiply that for a year, and then you get a real productivity increase with this new technology. So we are super excited about this technology, and we are so happy that Roy Hill is letting us do this together with them.

Yes. And we have many customers also standing in line to learn more about this project and to potentially do the same. But this is for us right now an innovation project, but it's a very interesting project, and we get a lot of attention from it.

And also on automation, our take on this is that we strongly believe in what we call mixed fleet automation, and that's what we're doing, for example, with Roy Hill that we're automating not only our own equipment but also other OEMs' equipment to operate fully autonomously. And here, we are the clear market leader, and we have put over 3,450 driverless machines onto the market.

And this is, to our knowledge, the largest provider of mixed fleet OEMs in this industry in the world. In fact, most other OEMs do not do mixed fleet at all. So we are very proud of this, of course. Electrification, yes, that's my slide. So automation is one of the strong trends that we see, electrification is another. And I know a lot of people discuss carbon emissions, but honestly, our customers are main and foremost interested in actually making good money. And if you look to where the carbon emissions derived from in a mine, you will see that it's not from the machines that we produce. It's actually from the ventilation. So to the right, we see a copper mine in Australia where of the emissions, 35% of the emissions are ventilation related. If we then quickly move to the left of the slide, you see that more than 35%, in fact, 40% roughly of the cost of the OpEx cost of running a mine underground is ventilation. And as the mines go deeper every day and wider every day, you need to increase your fan capacity. Eventually, you need to turn -- when your fan is at maximum and your mine is still expanding, you also need a new ventilation shaft, and that can be very expensive. So the 4 most important thing here with electrification is to save money, but it's also very positive that you save emissions. And how do we do in electrification? Well, 4.2% of the group revenues are electrification related. So it's not only BEV, it's also electrical infrastructure. But if we look to BEV specifically, and BEV means Battery Electric Vehicles, We have seen that the utilization rates of our machines out there have more than doubled in 2024. We have 39 mining sites globally that have ordered the equipment and 1/3 of those roughly have already ordered more machines. And then you wonder why not all of them. Well, this is a quite new technology. So having 1/3 of the fleet already now of the mines that have BEVs wanting more is actually a very, very positive indication of that they're happy with what we have. We have also done a lot of product launches. So if you see here on the list, you will see that we have the Minetruck MT66 S eDrive, and that means that's the largest underground truck with payload 66 tonnes, which we now have as a hybrid. So it's diesel and electric drivetrain together. We also have minetrucks underground with trolley. So it's by going like a tram when it's going up-ramp. But when it goes in the tunnels, you can actually have it with battery. And then we have surface equipment and loaders and also big surface drill rigs in cable electric and in electric versions. So electrification is something we really believe in. And another -- yes, exactly. Looking to -- the combination of automation and electrification in combination, we actually have very good news from April 15 this year when we announced our largest contract in Epiroc's history. So together with Fortescue in Australia, we will develop a very, very energy-efficient mine for them. They will -- they have ordered around 50 machines of the cable electric Pit Vipers, the big surface drill rigs and battery electric smart trucks, which are smaller surface drill rigs. And that amounts to AUD 350 million over 5 years. And this really shows that we will -- we are in the forefront of the technology, even though we are in a global context, a quite small company.

Perfect. So now we have covered 2 of the 3 megatrends that we see within our industry. So I will briefly go through the last one, digitalization. And here, I mean, remember that mining industry has historically been an extremely analog industry, and there are some low-hanging fruits that we can help our customers to increase their productivity. For example, increase the safety and productivity. So for example, with our solution, we can help the customers lower the evacuation time to up to 25% to 50%. And we can also help the customer in optimizing the mine productivity -- production plans, that is called drill to mill, and we can help them increase their production output with up to 8%.

As you noticed, a lot of what we do is productivity driven and cost driven for our customers.

But as always, safety is what is most important for us and also for our customers. So what we can offer to the market is something called Collision Avoidance Level 9. And basically, what it does and what it can help the customer with is that the machine will stop by default if some obstacle is in front of it. So safety is always on everyone's lips. And here we really want to be the leader within our field.

Yes, a lot of accidents; deadly ones would be avoided if more mines actually went to this Collision Avoidance Level 9 System. So looking to Epiroc, we've spoken a bit about innovation and equipment, but equipment is actually only 1/3, a bit more than 1/3 of the revenue stream. So we have to the left here, and we have underground equipment and surface equipment. And I would say underground, we have a very, very strong, if not market-leading position underground in drill rigs, loaders and trucks. If you take the surface equipment, we are very strong in surface drill rigs, but we are not active in surface trucks. So we are not competing with the big mining equipment names on the surface trucks. Then we have a big portion. The biggest portion is the service revenue stream, 43%, obviously, also the most profitable ones. So we're happy about having such a large portion, but we can definitely do more there. And then we have something we report on, which we call tools and attachments, 23%. And here, we do rock drilling tools that are interchangeable. They can be used on our equipment, but also competitive equipment. And also, we do attachments. You can use them on any excavator and you use them when they -- when you tear down old houses, bridges or other hard rock foundations. So basically, when you think about Epiroc, you should think about us being the company helping customers to remove hard rock or hard foundation in any form. That's what we do. We are hard rockers basically. And speaking briefly about the service as revenue stream being 43%, we will not give you the number of the fleet, but we have a lot of machines out there globally. And the fleet is larger than ever before, and it's also older than ever before. And this is obviously a very positive driver for service growth in the future. Also, the more technology we have in the machines such as automation and electrification, the more likely it is that the customer will also choose us to provide for the service in their -- for their machine basically. And Tools & Attachments, I spoke about it briefly. It's quite simple. You see to the left here on the pictures, that's what we do; they are the tools and the attachments. And basically, you have the best equipment, the best service and the best tool. If it may be a tool or attachment, then you will have the best performance. And the yellow circles here, they indicate where we are active. So we do equipment, we do service, we do tools and we do attachments. But we do not do excavator equipment and we do not do service on excavator equipment. That we leave to someone else who's good in that.

Perfect. So how have we performed since we IPO-ed in 2018? So basically, we have grown revenues with 90% and also adjusted operating profit. And when we speak about operating profit, it will always be EBIT.

EBIT is good. Yes.

And that we have increased by 91%, and that relates to a CAGR of 10% on both revenues and adjusted operating profit. And the total shareholder return has been 154% and these figures are as per Q1 2025 rolling 12 months.

Exactly. And you see a bit of weaker margin development here, '24, also into '25, and that's mainly explained by a weaker construction market in Western Europe and in the U.S.

And just a few words on our financial goals. So basically, over a cycle, we have a target to grow our revenues with 8%, and we have delivered that since the IPO. On EBIT level, the goal is to have an industry's best operating margin with strong resilience over a cycle. And we also want to be capital efficient and we also want to have the opportunity to make selective acquisition whenever we get the opportunity. And then we always think about you, the shareholders, and we want to pay out a lot of the profit that we make, and we have said that 50% of our profit should be paid out over a cycle.

Yes. And we did not speak about cash, but cash is king. So you look how we then create -- how much cash we create. And if you look to the cash conversion rate, given that we have been in a quite strong demand environment for mining equipment in the last few years, which ties quite a bit of inventory, et cetera, we are very proud of being so cash generative as we are, and that is because of the service and the recurring aftermarket portion of the business. Alexander mentioned in the beginning here, 2/3, almost 70% is recurring aftermarket business for Epiroc. So we do create quite a bit of cash. And we do pay it as a dividend. And yesterday, actually, we hosted our Annual General Meeting, and we approved the dividend of SEK 3.80. So good for that. And Alexander, do we have any sustainability goals?

We definitely do. So as always, safety is #1. So we don't want to have any work-related injuries. And then we have very -- I mean, one should say that we have science-based target, validated targets for 2030, and we are working extremely hard to fulfill these targets. For example, we will try to half the CO2 emissions from operations and from transport. And probably the trickiest one is from products sold because then when we have sold something, we don't really have control of that product. But then here, again, it's important for us to convince our customers that our automation vehicular solutions or electrical machines are performing better than the diesel ones. So they want to buy the newest, the best technology machines.

Exactly. And that's actually important. We will not launch any electric equipment that is not more productive than the diesel equivalent because, again, our customers are very productivity driven, and they will only buy equipment if they know that they will get a better machine than the next version. So that's a bit of a different versus maybe the car industry, which is not always the case that you get a more efficient machine with a hybrid or with an electric version. But here you do. So Q1?

Yes, some highlights from Q1. So we had a solid start to 2025. Strong mining demand and very strong equipment orders. We grew 29% organically. We had some large orders. I mean, large orders for us are always lumpy, so they vary from quarter-to-quarter. We did have SEK 600 million of large orders in Q1. When it was -- when we speak about infrastructure, the issue was more mixed. The larger infrastructure projects, the tunneling project, the civil engineering and so on, I mean, those projects were solid, but we do have a weaker construction market what is basically affecting our attachment business. We also had higher revenues and operating profit, which was very nice to see.

Yes. And that said, with a higher operating profit, even though the margin you saw was on a declining basis year-on-year, we have taken a lot of actions. In 2024, we actually let go of 6% of the workforce, and we are working actively on being more efficient in response to the weaker construction market, particularly. So looking ahead, Alexander, what do we expect?

So in the near term, we expect underlying mining demand, both for equipment and aftermarket to remain at a high level, while the construction market is, however, expected to remain weak.

Yes. This, we will also discuss potential price increases with customers, unfortunately. But again, as you said, on a competitive basis, we are quite similar to our closest competitors. Yes. So I think, unfortunately, the time is up. I see we have more questions. We will make sure to answer them. And if you didn't ask them now, please send us an e-mail. We're more than happy to help you. You can reach out to [email protected], and we will respond as soon as we can. Thank you very much for listening.

Thank you.