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

Hello, and a warm welcome to the Epiroc Q2 results presentation. My name is Karin Larsson, Head of Investor Relations and Media here at Epiroc. And joining me today are our CEO, Helena Hedblom; and our CFO, Hakan Folin. As this is a very busy reporting day in Sweden, we aim to keep this call shorter than usual and expect to wrap up already within around 45 minutes. And as always, we will have a Q&A session after Helena and Hakan have presented the results. You know the drill. Helena, please go ahead.

Thank you, Karin. So we delivered a strong second quarter, supported by continued high customer activity and a strong demand in mining. Orders received increased 13% organically to SEK 17.3 billion. And organic equipment orders grew 30% and service orders increased 6%. Invoicing was as anticipated, strong in the quarter and increased 11% organically to SEK 16.7 billion. Our profitability improved further, up 17% year-on-year, translating into an EBIT margin of 19.9% adjusted, which is only the LTI program, the margin was 20.1% compared to 19.7% last year. And the improvement was driven by efficiency measures implemented over recent quarters and high invoicing. Looking more into the details on the orders were up 13%, both in total and organically to SEK 17.3 billion, and the growth was driven primarily by mining, and our equipment orders increased organically by 30%. The large orders amounted to SEK 720 million, and these are mainly brownfield and replacement orders. Exploration was one of the strongest growing businesses, and this is encouraging as exploration activity is an important indicator of long-term confidence in the mining industry and future project development. And the investment sentiment within infrastructure and construction projects has improved, which led to stable order development. So this is the ninth consecutive quarter in which we have achieved organic order growth, and I remain optimistic also on the pipeline onwards. Business cooking looks strong, and there are many large tenders in which we are involved in. The tenders are mainly within copper and gold and within brownfield and replacement. We also continue to see encouraging adoption of our automation and digital solutions as customers increasingly integrate these technologies into their operations, our relationships deepen and our position as a long-term productivity partner strengthens. So let me move on to innovation, an important driver of our long-term value creation. This is why customers choose us. And what is particularly encouraging is that our innovation agenda is very closely aligned with our customers' priorities. So in June, we welcomed around 150 customers from across the world to the Epiroc World Expo, where we showcased how technology can help address some of the industry's most important challenges, deeper mining, lower ore grades, increasing safety requirements and the need for higher productivity. A common theme across many of the solutions we presented was to increase safety. And the best way to increase safety is to remove people from dangerous environments. And we showed our customers that we continue to expand the boundaries of what can be done remotely and autonomously from drilling and rock reinforcement to underground exploration and material handling. On digitalization, our OEM agnostic digital solutions, collision avoidance, technologies, and advanced analytics help protect people while providing customers with real-time operational insights, helping them make better decisions and improve performance across their operations. Electrification is another area where we [Technical Difficulty].

We are having some technical difficult, but we hope that we will soon be back again. Thanks.

Thank you for your patience. We had some technical problems here in the studio, and now we're back. So I would like to continue on innovation. So electrification is another area where we continue to lead. And during the Epiroc World Expo, we showcased our growing battery electric offering, including the Minetruck MT66 S eDrive as well as unique and appreciated charging and battery solutions. And finally, we continue also to focus on sustainable productivity, whether through circular solutions, smarter ground support, optimized mine design or advanced service offerings. And our ambition is to help customers produce more with fewer resources and a lower environmental footprint. The strong engagement level that we saw at Epiroc World Expo is very encouraging. So please let me share a video from the event. [Presentation]

So let me now turn to our aftermarket business, one of Epiroc's key strengths and an important contributor to resilience and profitability. Aftermarket accounted for 64% of revenues in the quarter with service representing 41% and Tools & Attachments 23% of group revenues. Service orders increased organically by 6%, while Tools & Attachments grew 4%. Demand for our service solutions remains solid, reflecting the value customers place in availability, reliability and operational performance. And I'm confident about confident about our leading aftermarket offering and position both in the short and in the long run. Through our strong local presence and expanding SOEs footprint, we help customers improve productivity and safety while maximizing equipment uptime. So Hakan, would you mind presenting the financials, please?

Sure, Helena, I would be happy to do so. Our revenues increased 10% to SEK 16.7 billion, and that corresponds to 11% organic growth. We had high equipment invoicing, and it's now 36% of group revenues coming from equipment, which is meaningfully higher than we saw in the previous year. And this is due to that we have successfully ramped up our production after having a quite long period of strong equipment growth. And doing that, our lead times remain at normal levels. Our EBIT increased 17% to SEK 3.3 billion. That corresponds to an operating margin of 19.9% compared with 18.7% a year ago. Items affecting comparability were minus SEK 33 million, and they are fully related to the share-based long-term incentive program. If we look at the adjusted EBIT, our operating profit increased 12% to SEK 3.35 billion, and the adjusted operating margin improved to 20.1% from 19.7%. And as Helena just mentioned, the organic improvement is thanks to efficiency measures that we have taken in previous quarters as well as a high level of invoicing. It's also worth noting that the impact from tariffs was lower than in the previous quarter. In Q1, we said it was 0.5 percentage point on the margin. And the lower level now is both because we have taken mitigating actions and also that the tariffs themselves are at an absolute lower level. Currency was a headwind on EBIT, but the positive effect I just mentioned more than offset the currency. So overall, we are pleased to see that our strong execution is yielding results on the bottom line. And with that, let me turn into Equipment & Service. This was yet another strong quarter, and the orders received increased 17%, all of this being organic to SEK 13.4 billion. Demand for exploration customers was particularly strong with high double-digit growth, while activity in Infrastructure & Construction remained rather stable equipment orders increased by 30% organically, supported by SEK 720 million in large orders. And I would say that the vast majority of orders that we win are from existing customers, that either they replace Epiroc fleet or they expand their current operations. And the mining equipment business is rather sticky and lumpiness of large orders, I would say, it depends more on replacement timing than anything else. Service orders in the quarter continued to develop well, increasing organically by 6%, reflecting both high customer activity and also an aging fleet. And as shown in the group -- sorry, as shown in the bridge, the growth was entirely organic, and there was no material impact from currency or structure. And then on to revenues and profitability in Equipment & Service business area. Revenues increased by 12% to SEK 12.8 billion. And this corresponds to a 13% organic growth, and the development was supported by continued strong mining activity, high equipment deliveries and solid service growth. If we look at the mix then, equipment revenues represented 46% of revenue compared to 44% in Q2 '25. So the underlying mix is negative on the profitability. Still, we were able to improve the operating margin 23.1%, which is up from 22.5% in the same quarter a year ago. On the right-hand side on the slide, if we look at it adjusted, the margin improved slightly to 23.1% from 23.0%. The key driver here for the margin improvement is high invoicing as well as efficiency measures that we have taken. Now moving on to the other business area, Tools & Attachment. Orders received increased here with 3% to SEK 3.9 billion. Organically, the growth was 4%, while currency then had a negative impact of 1%. Demand for rock drilling tools, ground support consumables and other mining-related products remain healthy, whereas demand from construction customers was rather stable. The Tools and detachment revenues increased by 5% to SEK 3.9 billion, and this corresponds to a 7% organic growth, while currency had a negative impact of 2%. EBIT increased by 30% to SEK 488 million, resulting in an operating margin of 12.7% compared with 10.3% a year ago. If we look at it adjusted, again, on the right-hand side of the slide, EBIT increased by 3% to SEK 488 million, while the adjusted operating margin was 12.7% compared with 12.9% in the previous year. And if we look at the bridge then, the underlying business contributed positively to EBIT, again, supported by efficiency measures that we have implemented and this more than offset then the headwind that we got from currency. The increased input costs for Tungsten, which, as you might remember, impacted the Tools & Attachment margin with more than 1 percentage point in the previous quarter has been mitigated to a large extent. The surcharges to customers as well as the recycling program are contributing positively, and the negative impact is therefore significantly less now in the second quarter. So moving on to the next slide. Here, we look at the cost and the cost for admin, R&D and marketing, they were higher in absolute terms, but lower in relation to revenues compared to Q2 last year. So in percentage of revenues, it was 16.2% this year versus 17.0% last year. Net financial items came in at minus SEK 130 million, which was almost exactly on the same level as last year when we had SEK 131 million. On the tax side, the tax expense was SEK 760 million, and this corresponds then to an effective tax rate of 23.9%, which is in the guidance we have given of 22% to 24%. Moving on to the cash flow. Our operating cash flow came in at SEK 1.9 billion, and you can compare that with SEK 1.1 billion in the previous year. Main explanation for the improvement is that we have higher operating profit, and we also paid lower taxes. And when we look at the cash conversion rate, which we do on a 12-month basis, it's now at 93%, which is n line with last year and an improvement from Q1. Okay. If I then turn into net working capital. It amounted to SEK 24.9 billion at the end of the quarter, which is an increase of 10% compared with a year ago. But as a share of revenues, however, net working capital improved slightly to 37.1% from 37.5% a year ago. So why have we then increased our working capital? Well, it's mainly driven by higher inventories and higher inventories are reflecting then the high activity level that we see in the market. Inventories increased by SEK 4.6 billion compared with last year, but accounts payables increased with SEK 2.6 billion, which is then partly offsetting the inventory buildup that we have. On the capital efficiency side, our net debt decreased to SEK 11.4 billion, down by almost SEK 2 billion from SEK 13.3 billion last year, and we do have a strong financial position. Our net debt-to-EBITDA ratio is as low as 0.75 to be compared with 0.82 last year. Our return on capital employed was 19.3% it down from 20.2%, which is explained by lower profit. And here, I would like to remind them that these figures are rolling 12 months figures. And sequentially, we actually had the first positive improvement in the return on capital employed for quite some time, and it was up from 18.5% in Q1. And before I hand back to Helena, I would like to leave you with a bit broader and a more long-term perspective. In June 2018, Epiroc was listed. So it's now 8 years ago, we were listed as a stand-alone company. And since then, I would say that we have proven that we can successfully convert customer demand into profitable growth and strong cash flow generation. So if we look back to 2018, our orders have increased by 80%. But more importantly, we are translating that growth into an even stronger development in earnings and in cash flow. We can see that on the revenues, which have increased by 83%, same as the adjusted EBIT but the earnings per share as much as 94% and the operating cash flow has actually more than doubled since when we were listed 8 years ago. And we do take extra pride in having an EBIT and an adjusted EBIT that over time are more or less the same, and they are up 8% per year. So basically, what you see is also what you get. And these results are created, thanks to that we have a continuous focus on ensuring we have profitable growth. And with that, I will hand back to you, Helena on some comments on the outlook and summary.

Thank you, Hakan. And I would like to add a comment then on our success over time. When I ask our customers why they choose us, they very often say that our people at Epiroc make the difference. We are present in remote areas committed to finding a and innovating new solutions to improve their operations. And most importantly, we are there when it counts as a true partner. So let me conclude by summarizing what has been another strong quarter for Epiroc, we continue to see high customer activity, particularly in mining, resulting in organic order growth of 13% and orders received of SEK 17.3 billion. We also delivered strong revenues, supported by high equipment invoicing and a resilient aftermarket business. Profitability the margin above 20% reflecting both solid operational execution and the benefits from efficiency measures implemented across the group. And continued to strengthen the quality of our business. And in the near term, we expect mining demand to remain high and demand from infrastructure customers to increase somewhat.

Thank you, Helena. Thank you, Hakan. So it's time for the Q&A session. And thank you for your patience earlier when we had the technical issues. We will make sure you will get your questions on please open up the line.

The next question comes from Gustaf Schwerin from Handelsbanken.

I have a few on the Equipment & Service margin. Firstly, if I can ask on the revenue mix within service. If I remember this correctly, you had a fairly high share of parts and kits in Q1 invoicing but at the same time, a pretty high share of midlife rebuilds in terms of how service mix this quarter compares to Q1? That's the first one.

On orders, we have less midlife upgrades in this quarter compared to Q1. I would say on revenue, it was not really that big difference. But on orders received, it's a difference.

Okay. And when we think about the invoicing of those midlife rebuilds you took in Q1, should we expect that to have a negative mix effect as we head into Q3?

Typically, midlife rebuilds are also planned over longer time. So you sell them do it. You don't turn them as quickly as you turn parts and service, the traditional parts and service business. And that part of the business you typically turn in 1 month. Midlife upgrades can be spread out over 6, 7 months, for example. So it's -- I would say it will come gradually. It's not that it would be like the month after we have received the orders.

Okay. And then looking at your equipment sales now, you are pretty much at historical peak levels. So we don't really know what happens on higher invoicing levels. I mean, how much would you say adding another SEK 1 billion in invoicing due to your operating leverage? Or maybe put this way, at what level of equipment sales, do you think it doesn't have a negative mix effect within Equipment & Service?

I think it's fair to say that there will, of course, be a mix effect when invoicing a lot of equipment. But at the same time, the last machines that we deliver, we have very good flow-through in that P&L. So of course, we're growing now very nicely on equipment, but that's also a timing issue because eventually, that will start to generate aftermarket, of course.

Okay. But to push you a little bit, is there a level of equipment sales where you wouldn't see this impacting your margin?

I think that we will not -- I don't think I will comment on that because it's -- that depends totally, I would say, on the type -- what type of equipment you have in that order stock, but there will always be a difference, I would say. I wouldn't say that there will be not the mix effect. There will be a mix effect.

The next question comes from Chit Sinha from JPMorgan.

I have just one question regarding the mining service growth of 6% in the quarter. How does the outlook for aftermarket growth look in the coming quarters? I mean, put another way, can we expect the growth accelerating from here? I'm just trying to contextualize it versus one of your competitors, which has reported double-digit development in this quarter.

Yes. So I think we had higher growth in -- and this can vary between the quarters. As I mentioned, we had fewer midlife upgrades in this quarter compared to last quarter. But the pipeline, of course, with an aging fleet, the potential for midlife upgrade is great out there. So I would say that I don't -- what I read in the aftermarket is that it's high activity levels everywhere now, given the commodity prices and of course, customers trying to maximize, let's say, the production levels.

And if you don't mind me adding here as well, I want to highlight that midlife upgrades are also a very profitable business for Epiroc.

The next question comes from Alex Jones from BofA.

Yes. Can I just follow up, first of all, on the service growth question. I guess, if I average the last 2 quarters, you've done 9%, which is sort of the high single-digit range. we've come to expect in the long term. But one of your peers just talked about sort of upside potential to that given an aging fleet, more advanced machines and digital as well. So should we expect high single digit going forward in service? Or do you see the potential to actually be more in the double digit potentially going forward, including strong spare parts growth, which is what your peer highlighted?

I think we have, of course, our financial target, which is 8% growth. And of course, a big portion of that needs to come from the aftermarket. But as you rightly point out here, with an aging fleet, with more technology in the equipment, our ability to capture customer share is increasing, I would say, as we -- for every quarter that we put more and more technology out in the market. So I would say that -- but high single digit is also -- it requires, of course, a lot of activity to capture that. But of course, the opportunity is there. And I've said that, I think, many times as well, and we said it at the Capital Markets Day as well, I continue to see one of the biggest opportunity for us to continue to grow the aftermarket business.

Okay. And then just secondly, on large orders, the SEK 720 million this quarter, is that sort of disappointing in the current market environment? I recognize your comments about it being lumpy quarter-to-quarter, but should we think about this being a sort of abnormally low level given that lumpiness and potentially higher numbers ahead? Or given the activity you see in the market, is this sort of a reasonable level within normal fluctuations?

I think it's normal fluctuations. If we look -- we had higher numbers in Q1. So it varies quite a lot between the quarters. But if I look on the pipeline and the size of the tenders that are out, it's fairly big tenders. So I would say it's -- I'm more looking into, let's say, the underlying activity levels, which is also healthy in this quarter. But the lumpiness will always be there depending on when customers take their investment decisions.

The next question comes from Christian Hinderaker from Goldman Sachs.

I wanted to ask again on service orders, I'm afraid. Last quarter, obviously, you had 12% organic growth. You said that midlife was driving that and was above the service growth level. Last quarter was anything single digit? And then as we think about that 6 percentage point deceleration, is there anything else in the service mix that slowed? Or you're saying it's all just the services?

There's nothing else that has slowed. So it's healthy growth in all components of service, but fewer midlife upgrades. And the mid-life upgrades can be a sizable amount as well. So that can, of course, create swings between quarters.

And then as we think about the cost efficiencies, you talked about those being a margin boost. But if I look at your SG&A sums, they're up 5% year-on-year. Admin spend is up 7%, both year-on-year and quarter-on-quarter. Should we think about those savings efforts then as just being on the production side, there ambitions to reduce costs on SG&A? How do we think about that?

Yes. So it's a combination. But what we see in the result is it's a clear improvement in our absorption rates in our factories. Of course, we have been consolidating sites and also been, I would say, working on the efficiency in our production sites as well coverage in our workshops. But there is also, of course, a variable portion in our functional costs, which is very much related to volume, logistics, for example.

So it is a bit of gassing and braking at the same time with this strong order growth that we have, and we need to make sure that we can accommodate everything, while at the same time, we want to make sure we drive efficiency in the back office functions as well. So when we looked at it as a percentage, as we showed in the presentation, yes, it's positive. But we're obviously also looking at it just like you did in absolute terms, trying to be -- make sure we are as efficient there as well.

Maybe a quick housekeeping one, if I can. Can you help quantify the tungsten effect quarter-on-quarter?

Sorry, quantify the Tungsten. Okay. I would say when last quarter we talked about it on the BA leve, and then we said it was more than 1%. I would say, for this quarter, on BA level, it's more or less negligible.

The next question comes from John Kim from Deutsche Bank.

I wanted to see if we could get a little bit more color on what you're seeing in the cadence around exploration CapEx. I think previously, you had spoken to business cooking, healthy pipelines. Could you also comment a bit on speed to FID? Are you seeing any changes in behavior, people speeding up, slowing down, given the various things that have happened on geopolitics in the rest of this year?