Welcome to the Epiroc Q3 results presentation. We will follow the same format as we always do, which means we will start with a brief introduction of the quarter presented by our CEO, Per Lindberg, and our CFO, Anders Lindén. We will move on to the Q&A session. In this session, we will be grateful if you just restrict yourself to one question. If you have follow-ups following this presentation, you are most welcome to reach out to me or the team for further questions. With that, Per, please present the results. Thank you.
Thank you so much. Welcome, everyone. It's a pleasure to be here. Let me dive directly into the meat of quarter three, and start with a focus on the areas where I think we see a continued strong and good development. First of all, strong aftermarket. We do have continued good fundamentals with high activity, that means high production activity. We also have that in combination in mining with still a good mineral prices. Fundamentals are still good, driving our aftermarket and not the least, our service business. We also have a solid development of our underlying margins. We have a revenue mix that is positive. We do have some one-offs that is affecting the quarter due to restructuring, I think we maintain margin that we saw in quarter two, we're quite happy with the level that we're at the moment.
We also have good cash flow, I think that's something that we hope will continue also for the rest of the year. It's good to see that the actions that we have taken when it comes to working capital has given effect. Also very good to see that we continue to have a high interest in our solutions when it comes to automation, information management, and not the least for battery electric vehicles. Several areas with continued strong and good development. Of course, we also have our challenges. The order intake when it comes to equipment was lower than expected. We knew in quarter two that typically quarter three is lower than quarter two, and this is also something that we highlighted last quarter, but actually the demand for equipment was lower than we did expect.
We've seen a continued increase of uncertainty when it comes to economic development. We see also our customers being somewhat hesitant to deploy capital, and they tend to postpone or delay decisions. That translates into a relatively slow order intake for equipment. As mentioned, lower than we did expect. What we do is, of course, we adapt to whatever scenario that we have, and we do that continuously, and we've done that throughout 2019, and now we're intensifying that adjustment. We're taking action to improve resilience, but also safety. That's a continuous ongoing work. As you've seen, we've done restructuring in Tools & Attachments. We also have some other actions that we will undertake in order to adapt to the current scenario. Key financials.
Order intake and revenues up slightly, if we adjust for currency and acquisitions down organically, and orders down 6% organically, of course, on the back of the low order intake for equipment. Operating profit up 2% in absolute terms. Currency and acquisitions also contributed here, even though currency contributions were relatively minor as compared to last year. Again, we have restructuring costs of SEK 179 million for what we're doing in Tools & Attachments, restructuring that business, and we will continue to do adjustments of the structure in Tools & Attachments, and the costs taken so far, again, is SEK 179 million. The reported margin, 19%. If we adjust for the restructuring cost and long-term incentive program, we're at 21.3%.
Actually, we can also adjust for some other one-offs Anders will elaborate later, where we end up at 21.7%, and that's pretty much on par with what we had in quarter two. Again, margins, I think we're doing reasonably well. As mentioned, cash flow is strong at SEK 1.9 billion. Now, innovation is clearly a theme that we continue to emphasize. We do have continued strong interest in the solutions around 6th Sense. We have several orders for these solutions when it comes to automation and information management. In conjunction with a very large service order that we received in Chile, we also have possibilities to implement automation. That really demonstrates our capabilities when it comes to automation and certainly also when it comes to deploying our service operations. Also last quarter, we talked about the number of machines connected. We mentioned the number 2,500.
Now we see an increase of well above 10% of connected machines now in quarter three. That number is increasing rapidly. It's very good to see. We also have very strong interest for our battery equipment solutions. Continued interest, on the picture to your right, you see the Scooptram and the Minetruck MT42 at Kittilä in Finland. As you know, perhaps the batteries are supplied by Northvolt, and that gives us an opportunity to minimize carbon footprint and also with the ambitions on Northvolt to increase levels of recycling of batteries. I think that's a very good development in general. We've also launched Scooptram Automation Total. That's an information and fleet management system that really allows the management of several machines simultaneously. That's a good development for us to offer further solutions when it comes to automating fleet underground.
Launched Mobilaris Onboard. That's a real-time awareness system or situational awareness system that really don't need a tracking infrastructure. I don't know exactly how they do this, the technicians, but they do it. That is fantastic. It's really good to see this has been launched. We also launched new Powerbit Underground, which is a new series of power bits or drill bits that delivers up to 37% more drill meters per bit. Several new innovations, and again, that's very good to see. Operational excellence, of course, this is something that we always strive to improve, and we really are increasing the intensity of the adaptation of our costs. We have already this year reduced the workforce with roughly 500 people organically, and this is primarily manufacturing.
The increasing intensity means that we have identified further improvements of our cost base, primarily targeting indirect cost in administration and marketing. This is starting to be carried out as we speak, and we expect to see full effect of this in the beginning of next year and, as it says here, in the first half of 2020. The magnitude of these savings that we now also implement in the indirect cost is, we think, going to be above SEK 300 million in effect, SEK 300 million Swedish. We will also have a restructuring cost between SEK 50 million and SEK 100 million as a consequence of these actions. We also continue our restructuring of RDT. As mentioned, we have divested the geotechnical consumables. We also are restructuring the handheld rock drills in China.
We also, as announced earlier this week, we have sold off a facility in Sweden for also handheld Rock Drilling Tools. This restructuring is ongoing. We've also, of course, worked with our supply chain program. This is something that we, as a long-term initiative, and that progresses according to plan. Also in the line of efficiency, as we also have announced, we are expanding a production facility in Örebro, and the reason behind that is to consolidate production, increase efficiency, and decrease production cost. Sustainability continues to be something that is really close to our hearts, and it is, we believe, a competitive advantage if we do it right, and we think we do it right. We work with safety and wellbeing. We continue to roll out the program SafeStart throughout our operations, and we also see a positive trend and reduction of work-related injuries.
Of course, a good sign given that this is of high importance and a key emphasis of ours. We have also launched an initiative called Speak Up, which is really an internal or a system which allows any employee to highlight any wrongdoings internally if that would happen, which means that we also emphasize the ethics in the company. I think also we've already seen higher activity in terms of highlighting issues internally. Not that something is terribly wrong, but it's good to engage all of our employees and the management of ethics in the company. We have also gathered all the key leaders in the company in the quarter in order to align ourselves when it comes to expectations going forward in terms of efficiency, in terms of results.
I think we do have a very passionate team going forward, and it's also very good to see that we're fully aligned in terms of what we want to achieve into next year. Finally, when it comes to sustainability, of course, the responsible use of resources, a key feature of sustainability, certainly for us as well. Now, we do have a high proportion of recurrent business, and that's really the graph to your right. As you can see, 68% of our business is aftermarket. Should be compared to the 63% quarter three of last year and 66% in quarter two of this year. The portion of aftermarket continues, and that's not necessarily a bad thing because aftermarket is a profitable part of our business. Going into our segments.
Equipment and service, first of all. Orders received are down 4%. The mix is really between service and equipment, of course. Service up 11%, very strong. It's worth highlighting that, of course, service is the key part of our business, the most profitable part of our business. 11% growth is very good to see. Of course, that's on the back of high customer activity, high production, high intensity of service. We expect, of course, our service volumes to continue at a high level going forward. Equipment orders, as mentioned, are down more than expected, and 27% down versus last year. As I mentioned, the investment decisions tend to be postponed in the light of the current uncertainty. We've also seen a cancellation of a large order, and the magnitude of that is roughly 5% of equipment turnover.
It doesn't affect the orders intake all that much, but nevertheless, it's worth highlighting that this is part of the orders received, this cancellation. It's worth commenting also that we do have variability between quarters when it comes to equipment demand. First of all, it tends to be lumpy. Again, the variability is between quarters. We think that the - 27% and where we're at right now in quarter three may not necessarily be representative of the market as such. When we look at the pipeline that we have of potential orders, that's still very strong. Again, we feel that our possibilities to continue to work with improved equipment orders is there, but we have to see. Still uncertain in terms of where this is going to go.
Revenue is up 2%, supported by currency and the margins, again worth highlighting, at 26.3%, very strong, and not the least on the basis of a revenue mix trending towards service rather than equipment. Tools & Attachments orders and revenues up 16%-17%, and if you back out currency and acquisitions, down 3%, primarily impacted by the optimization of product offering, i.e., the voluntary step down from business in Rock Drilling Tools for profitability reasons. We've also seen an organic decline of volumes in hydraulic attachment tools, and this is on the back of a decline of the volumes, the end user volumes, and also adjustments of inventory in our dealer network. Margins at 5.7%, not that impressive, but we of course, if we adjust for the restructuring cost, we are at 12.2%.
Also, again, worth highlighting is that we do have a collection claim versus a distributor that have engaged in financial irregularities. This is now a court case, and we have made full provision for the amount of SEK 41 million as well. That's included in the profits, of course, also. That's the initial summary, Anders. I leave it now to you to go through details.
Thank you, Per. Some more details about the financials. Per has quite well explained the overall picture. I would say, the underlying profit is solid. You see here, we have the non-comparable items of SEK 223 million, which we have described. We adjust for that, we are at 21.3%, and also this collection claim that was mentioned. We look at that as a one-time item, the profit becomes SEK 21.7. The underlying profit is solid. We look at a little bit on the bridge, the details here, coming from last year, we reported SEK 19.0. Obviously, with the bridge, we had a negative effect year-over-year from the structure, positive from the organic altogether arriving at the SEK 19.0. With the non-comparable items, the SEK 223, the SEK 179 for restructuring that we have described, and the SEK 54 change in provision for long-term incentive program.
If we then add also the SEK 41 million for the collection claim, we are at the 21.7% that you see to the upper right. It means a 16% increase of profit in value. A few more words about the segments from equipment to service. Good flow-through continued. We prefer to talk about year-to-date flow-through rather than quarterly. It can be quite difficult to take a single quarter, and we elaborated on that during the Q2 call when you have the nominator and denominator sometimes going in the wrong or different directions. It's good to see for the equipment and service that we actually improved the flow-through year-to-date. We're now at around 33% flow-through, and obviously that was helped by the mix and good service growth that described the 11% organic growth.
Obviously a mix effect here, but solid and good development organically for equipment and service. Tools & Attachments. I would say all in all, the underlying profit is largely unchanged compared to last year. If we do it a little bit more sequentially, there is a seasonality mix with a little bit of less of attachments, which is normal. We still have good flow through. If we then adjust for the claim that we have described, we're largely on the same level as we were in Q2 year- to- date. Although here we obviously can understand that they are a little bit more difficult to follow with the non-comparable items, but the underlying activity is good, and also the high level of actions that we have announced recently, which you have seen in a couple of press releases. That's a good development also.
On the cost side, you can see from the bars here, which is normal, Q3 is typically a little bit lower than the Q2 activity level, vacation periods and so on. In these bars, we have excluded the long-term incentive program provisions as usual, and we've also taken out restructuring costs. This is the part of the restructuring costs that we put in the administration, marketing and R&D. It's the SEK 62. Having said that, we can see that there are signs of our ongoing activities giving some effect. We don't increase anymore in the number comparison year-over-year. Obviously, we have an inflated number from acquisitions and currency, and that together is about SEK 110 million, if you want to compare quarter-over-quarter.
If we look at the net financial items, the increase largely quarter three this year compared to quarter three last year has to do with our acquisitions, where we have funded them in foreign currency, and with that, we also hedge those loans, and the two good-size acquisitions that we've made earlier this year. Part of that hedging goes as interest cost, and that is the majority of the difference here. On the tax expense, we have a higher effective tax rate, as you have noted. The underlying tax rate is still below the 25%. We have cautiously taken the cost for the restructuring as impacting the tax rate as non-deductible. The underlying rate is still where we want it to be. Some words about the capital structure.
Net debt SEK 2.4 billion, and of that, the SEK 2 billion is related to the IFRS 16, and this is largely what we've had the last two quarters, the Q1 and Q2, where we started to implement this according to the regulations. We had a good cash flow in Q3, which I will come back to and elaborate on. We also, in Q4, will pay the dividend, which is approximately SEK 1.2 billion. The second part of the dividend will be paid out preliminary on November 4th, excluding the right on the 29th of October. That will be obviously seen then as a cash flow, not operating, but a cash flow item in Q4.
We look at the capital efficiency a little bit more, the net working capital in nominal terms is up 12%, but if we try to look at the numbers behind, 11% of that 12% is related to currency and acquisitions. Only 1%, you could say, is organic, and in the light of the revenue development, that gives quite a different picture than just looking at the nominal 12%. We look at the return on capital employed, the 29.5%, we still have around 1% impact from the IFRS 16, if we compare year-over-year, last year when the IFRS 16 was not implemented. That is pretty stable since Q1 and Q2. I think you recognize that comment. Cash flow. We had good cash flow in Q3, both year-over-year and sequentially.
The SEK 1.9 billion, it's not the best quarter we've had, as you can see from the graph, but it's the second-best, to be more precise. Inventories are going in the right direction. We had also strong, very good collection in Q3. There was largely then outbalanced by a reduction in payables, which is normal that time of year. We see that every year, to some extent, the reduction impacted by a lower activity on the capital equipment side. Overall, strong development of the cash flow, which is good to see that the trend is as expected. With that, I would like to hand over to Per again to do a little bit of the summary.
Yep. Thank you, Anders. Okay. Quarter three, a quarter with several areas of strength for the company. We do have strong aftermarket driving not the least service. Service is highly profitable, a growth of 11%. We're very happy with this. Also, the aftermarket is driven by strong fundamentals in terms of high levels of production, good mineral prices, and that's certainly a very good sign. Good margins, good cash flow, high interest for automation, given we also have challenges when it comes to orders for machines, and that's on the back of uncertainty, cautious behavior, our customers delaying orders. The consequence of that in turn is that we adapt, and we have continued to adapt. We will continue to adapt to whatever context we have. We also have to realize, I think, that fundamentals will prevail. The fundamentals are still strong.
I certainly hope that there is an upside going forward when it comes to machines rather than anything else. We cannot guarantee that. Looking at the demand expectation, we think that demand will remain largely at the level seen in the third quarter. That being said, the economic development continues to be uncertain, which is pretty much what I just said. It is difficult to say exactly where we will end up in a specific quarter, and that it's definitely the case also for quarter four. Again, fundamentals continue to be strong. With that, we also turn to our Capital Markets Day. I just want to highlight and remind everyone listening that there is a Capital Markets Day, the 14th of November here in Stockholm, and registration is open.
For those of you that have not decided as of yet, please decide and join us. That would be very nice. I think it's going to be a good event. Now Q&A.
Perfect. Thank you very much, Per and Anders. I think it's all clear, but I'm pretty sure there are some questions on the line. Please, operator, would you mind starting the Q&A session?
Yes. Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. We have a first question from Klas Bergelind from Citi. Please go ahead.
Yes. Hi, Per and Anders, Klas from Citi. My first one is on the cost adaptation, the 500 people in manufacturing last couple of months. This is outside of Tools & Attachments. What kind of savings are we talking about here? Are you planning to push through any cost actions also on the OpEx side, or is this manufacturing all in? Maybe squeezing in also how the margin will be impacted by the divestments and closures in Tools & Attachments.
Okay. Well, first of all, the SEK 500 million is a reduction from the beginning of the year. The effect of that is already in the numbers, more or less. Certainly, we've seen also a reduction in quarter three, but the main bulk of that reduction was actually done prior to quarter three. Again, as we mentioned, we have additional initiatives starting pretty much right now or in the end of quarter three. Going forward, we expect that to deliver above SEK 300 million. Again, the effect starting next year, beginning of next year. I think that's what we're trying to say. Again, just remind you that I also mentioned a restructuring cost for the latter SEK 300 million between SEK 50 million and SEK 100 million. That's really what we're trying to say here.
The margin effect of the restructuring Tools & Attachments, yes, there's going to be a margin effect. We have decided to divest the ground engineering. We're also divesting the handheld business in Ockelbo. We're also divesting part of the business in China, and we're also closing down part of the business in China when it comes to handheld tools. All of that will mean an improvement of margins, but also a drop of top line as a consequence.
Okay, makes sense.
Maybe to add, I think it's worthwhile to remind that our operating model means that we do have a fair amount of temporary, and what we call additional workforce and temporary employees, which means that we constantly or continuously review the workforce. That's why the 500 may look like a big number, which it is, but it's also part of the way we operate, how we try to adjust.
Yes.
We don't see that as a major restructuring program.
No, I get that. The second one is to understand the common pattern on hesitations on large orders with underlying activities still being healthy. You, of course, don't announce all large orders, but just so we understand what is underlying demand. The equipment orders that you have reported this quarter, are these what you would say is underlying adjusted for seasonality? If seasonality is perhaps 5% quarter- on- quarter, adding that back, just to understand what is underlying x large.
Well, that's a good question, but also very difficult to answer, I would say. How to define underlying orders? If we look at the SEK 2.7 billion that we are in terms of orders for equipment in the quarter, that's pretty much in line with the average over the last, I think, 10 years, if I'm correct. Right? Yeah, they say. Maybe that's an underlying level then. The number of large orders in Q3, I think we had one basically, and we always have one, last year we had several, but this tends to vary between the quarters. I don't know exactly what this answer means to you, but I'm trying to establish, I think that maybe we're at some sort of an underlying level in the quarter, maybe. Difficult to define.
All right. My final one is on equipment and service. Would you say it's more mix this quarter helping the drop through? Last quarter, the drop through was pretty good because of both mix and productivity. Would you say it's more mix this quarter? It maybe sounds like a too detailed question, but want to understand how productivity moved in the bridge versus the second quarter then.
I would say probably more of a mix issue than a productivity issue.
No, you're right, it's a detailed question, but the mix has certainly helped. You can see also from the revenue going quite significantly between Q2 and Q3 to the aftermarket side. Even though we don't disclose exactly the margins in the segments, you know fairly well that it's quite a big difference between the two parts of the segment, equipment and service.
Thank you.
Sure.
Thank you. Next question from Guillermo [Piña] from UBS. Please go ahead.
Good morning, it's Guillermo [Piña] from UBS. I want to get some ground right in the hesitation that you commented on. Is there any way you can share with us if any particular region or any particular mineral was more hesitant, so to say?
Well, I really don't think so. I think what perhaps stands out is gold, where the optimism has increased over the quarter, and that's obvious, I guess, given what has happened to gold prices. We've seen quite a significant uptick in the exploration activities in gold, but that's exploration. When it comes to the uncertainty and hesitation, as you say, I think that's visible throughout. Certainly not any particular region that stands out. One thing that perhaps should be mentioned, we mentioned that also in quarter two, is that China is doing really well also in quarter three. The Chinese do not seem to hesitate at the moment.
Thank you. With regards to a particular region, Chile, there's been certain volatility from a political environment, from a social environment. Have you seen your customers there preoccupied about the stability of the country, or all seems to be working from a mining companies there?
Well, I have no report. We get daily reports from our customer center there, but I have no reports of anything happening specifically among our customers. The only thing that has been affected is that we did have two seminars planned this week in Chile, one around Rock Drilling Tools, the other one around underground automation. One we did follow through, and the other one we postponed to a later date. That's the only impact so far that I've actually heard.
I think it's fair to expect-
Sorry.
I think it's fair to expect if this goes on for a long time, that obviously it will have an impact also on customer activity.
Yeah, we don't know that.
Yeah. Last question on cash flows, actually. If you look at the progress of cash flow developments, if you also imply some progress in sales evolution and so on, as we see the year could well be that by Q4, you're practically a levered, with almost a net cash position. Unless, obviously there's moves that are missing here. Obviously you're not really participating in large or mid-scale consolidation projects at the moment. Is this an indication that a very solid and rich cash flow statement could actually end up with shareholder returns in some sort of way?
Well, I think that's speculation. It's something that we can't comment on.
Yeah. Also, just a reminder, we're paying the second half of the yearly dividend.
Yes
now in November, which is SEK 1.05, It's 1.2 billion shares. That's some cash flow there as well. You're right. We don't participate at the moment in large-scale consolidation. We have strong cash flow. At the end of the day, this is going to be beneficial to our customers one way or the other. No, not the customers, to shareholders, I mean shareholders.
Don't give money to customers.
No. Shareholders.
All right. Thank you.
Yeah.
Thank you. Next question from Erik Karlsson from [audio distortion]. Please go ahead.
Hi. Thanks for taking my questions. A little bit surprised about your commentary about weakness in infrastructure. Could you just elaborate a little bit what you're seeing then?
Well, our infrastructure market primarily is North America and Europe, and typically Q3 is slower than other quarters, but this Q3 was slower than last year's Q3. I think what we're looking at is a slowdown of activities related to the use of our machines. That's pretty much what we see. Of course, also hydraulic attachment tools, more or less 100% infrastructure. We also see a slowdown of end user demand, and as a consequence, that has kind of a whiplash effect on our division through the reduction of dealer inventory. These are the things that are happening or happened during Q3. I think that's pretty much just how specific I can be at the moment.
That's very helpful. Thank you. A second question, if I may. How would you characterize your current inventory levels?
I think we should admit that they are higher than what we want them to be, that's also one of our focus areas to address. I think we've talked about that, we do see that they are trending in the right direction now. We expect it to continue that way.
Correct. I just want to add to that we don't have any inventories of machines just standing around. We produce to orders. We don't have a huge inventory of machines standing around, as I said. We have inventory in transit, and that's pretty much it.
Yeah. Maybe to elaborate on that, obviously with the business model we have, with all the direct sales, and with the, let's say, where our customers are and where our production facilities are, then obviously the transit part becomes a big number.
Yeah.
Very good. Thank you so much.
Thank you. Next question from Alexander Virgo from Bank of America Merrill Lynch. Thank you.
Thanks very much. Morning, everyone. I wondered, could you just expand a little bit on two things. The first one, I wondered, can you explain how much of your own actions is weighing on the organic decline in Rock Tools? Obviously, I understand that you're actively moving away from lower margin, or trying to move away from lower margin business. Just wondering quite how much of a handicap that is on the top line. On the second point, I just wondered if you can explain a little bit around this customer cancellation of the order. What exactly is that? Your order equipment development has been markedly different than I think what we've seen elsewhere in the market, and I'm just trying to understand what you believe to be driving that.
Yeah. Okay, good. The answer to the first question is about 3%. The answer to the second question, the order cancellation is, we've certainly been looking at this. We don't think it's an indication that all of a sudden we'll see massive cancellations across the board, no. This is related to a contractor, and this contractor has had financial difficulties. It doesn't have anything to do with the development of the mineral that they are engaged in, nor the mines that they're engaged in. We think it has to do with the management of the specific company rather than anything else. It's not related to anything beyond that. This contractor is a European contractor active in another part of the world, basically.
Right. I guess on the first point. Excuse me. How much longer do you think that headwind is something that we need to think about in forecasting the growth of T&A?
Well, I think we probably will continue to do this for the foreseeable future. This is pretty much like the adaptation of our cost base and workforce. We also have to adapt to the profitability of our business and not engage in unprofitable business. When it comes to comparables, that will decrease over time. I think we started doing this end of last year, perhaps.
Mid or Q3.
Yeah, something like that. The comparables effect should decrease come next quarter.
Okay. That's helpful. Thank you.
Thank you. Next question from David Davis from Morgan Stanley. Please go ahead.
Hello. Morning. Thanks for taking my question. My question was just really around some of the trends you're seeing on the aftermarket side. I just wonder how your expectations for aftermarket growth are evolving for 2020, given the extent of the OE order declines that you're seeing through this year, and the recent sort of evolution in metal prices. Are you tempering your enthusiasm for growth for next year for the aftermarket business at all?
Well, I think, we've made significant progress and we've grown service significantly over the last six quarters or so. I don't think we should expect that pace to continue at that level. The reason is pretty straightforward. We've gained market share on our own fleet, and the bigger the market share, the more difficult it will be to continue to grow that market share. I think that's pretty much what we'll be looking at into 2020, without specifying any specific level. We will do our utmost to continue to grow, but it will be increasingly difficult. I think that's fair enough to say that. Also the potential impact of new equipment being delivered. Well, new equipment typically doesn't need all that much service.
I think what we're looking at from a market perspective, i.e., our customers, I think what they're doing, they're using their existing equipment more intensively, and as a consequence, they need more service on existing equipment. Instead of replacing, it translates into more service. I think if that trend continues, and lower equipment deliveries and still high production levels, we will have a push towards increased service intensity. I think that's the dynamic we will be looking at potentially.
Mm-hmm. Thank you. Then maybe just one follow-up. I guess in terms of the discussions you're having with customers at the moment, how frequent is it that you're coming across people taking slightly longer to take delivery of these things? Is it more frequent that they come back to you and hold back on the orders? Is it the actual orders that you've got coming through to sales, where people are actually reluctant to take the delivery in a quarter and wait an extra week or an extra month before they take it? Where are you seeing the biggest pressures? On the order side or the actual deliveries of the orders you have in the backlog?
Oh, it's definitely the order side. Once we have produced and shipped, there's no hesitation when it comes to accepting or taking the delivery as such. It's really on the orders. It's that we see the things being pushed out in time.
Yeah.
Okay. Great. Thank you very much.
Thank you. Next question from [Disat Mitre] from Deutsche Bank. Please go ahead.
Hi. Thanks very much for taking my question. My first question is really around the equipment side of things. Given the equipment sales this quarter as well as orders, could you perhaps talk about how large your backlogs are right now in equipment as a percentage of annual sales?
Well, we don't disclose that number, I'm afraid. I'm not going to give it to you. I think what we've seen over the last quarter three now, is a decline in the backlog, but still a significant backlog. If orders were to decrease down to zero, we would still be busy for quite some time. The backlog is still significant. It also should be noted that this backlog doesn't mean that everything is to be delivered immediately. Some of the orders are to be delivered later. That's why we also, on the back of a decline in orders, also reduce production somewhat in order to not produce too early.
Okay, I understand. Just trying to get a sense of your expected equipment sales next year. Do you think that it's likely that should grow next year given your backlog? Or is it too early to say?
It's too early to say, I would say.
Yeah.
Yeah.
I would agree.
Yeah.
Okay. Understand. Just following up earlier from one of the questions around infrastructure and the mining customers and equipment, could you perhaps give us a sense quantitatively, broadly speaking, about the extent of organic order growth for your mining customers and for infrastructure within equipment?
Well, the overall mix between infrastructure and mining in Q3 was 21% infrastructure and then 79%, of course, mining. It's typically 25/75. I guess if we just apply that math, we lost 4% top line because of the weakness or softness in infrastructure.
Okay. Is that for the group or for equipment?
That's for the group.
Okay.
We don't specify the number in equipment.
Okay, I understand.
Yeah.
Thanks very much for taking the question.
Sure.
Thank you. Next question from Andrew Wilson from JP Morgan. Please go ahead.
Hi, good morning, everyone. I just have, hopefully, a couple straightforward ones. Can you just give us a little bit of help around the usual seasonality in the Q4 versus the Q3? Just trying to get a sense. Obviously, we've made some comments around the Q3 versus the Q2, it'd just be helpful to get a sense, appreciating that large orders and things will move around, but just to get a sense of what you'd expect on a normal year.
Well, Anders, maybe you can help out here.
Well, we see very little seasonality, but if we go a long time back, it's typically that Q3 is slightly lower, but it's not a very strong effect.
Which means that-
And that would be-
Which means that Q4 should be stronger, primarily stronger when it comes to revenues. I think that's the typical pattern that we see.
Well, whether that's going to happen in quarter four of this year, well, we'll have to see, I guess, but that's a typical pattern. I think the average decline that we've seen, if we just apply the statistics to historical quarters, is that the Q3 is 5% lower than quarter two. I think that's the number that we've mentioned historically. Something like that.
Do you have a similar number for Q4 versus Q3?
No.
Can I check, just shifting over to the savings, which you'd outlined. I just wanted to check. Does that apply to both of the business areas, so Equipment and Service and Tools & Attachments?
Yes.
Yep. It does.
That's perfect. I just wanted to clarify, it was actually Alexander Virgo's earlier question on Tools & Attachments. That the comment you were making around the sort of gradual exit of various product lines or effectively walking away from sales, that was an organic comment, and therefore it's an addition to some of the specific comments you've made around divestment. I just wanted to clarify.
That's correct.
That's great. Thanks, guys.
Thank you. Next question from Max Yates from Credit Suisse. Please go ahead.
Thank you. My first question is on the current Tools & Attachments margins. I just wanted to understand, if we look back to sort of 2011/2012 when we were at the sort of previous mining peak, just where were levels of profitability back then versus where they are today? I just wanted to try and understand a bit more what the kind of runway for improvement is in the medium term in this division.
Well, the historical margin was way higher than where we're at right now. Again, I don't think we've specified any details, but they were definitely closer to group average as they are right now than the current level. What does that mean? Does that mean that we can make efficiencies back to the historical level? Well, I think that's gonna be a struggle. Things have changed. The competitive landscape has changed. Of course, all the actions that we're doing and undertaking, the intention of all that is to bring us back to at least close to the historical level. It's gonna be challenging.
To be clear.
Okay
To be clear, it's obviously, and has been in the past also, a margin which has been well below the average. It's a different business, it's different competitive landscape, and I think we have mentioned that a few times, that even though it's even more competitive than maybe five years ago, it was already at that point in time, very competitive, and that goes for most of what we sell in Tools & Attachments, and in particular for the consumables business.
Fair enough.
Okay. Just my follow-up was on M&A, and I just want to understand, when you look at your acquisition pipeline and what's discussed internally, is there a sort of reasonably large proportion of it that includes software, battery-powered equipment? I'm just trying to understand, should we expect over the sort of coming 12 to 18 months that you look at software deals as well as kind of the tools and attachment deals that you've been doing? Should we think that the automation and software business will be developed much more internally and organically?
I think the acquisitions that we made over the last couple of years divided into three categories. Essentially, it's in service, we'll continue to do that. It's in technology, i.e. software, as you say, we'll continue to do that. It has been historically in Tools & Attachments. Whether that's going to continue or not really depends on, first of all, how well we digest the current acquisitions and how well we perform the current restructuring. To specifically, yes, we'll continue to look at and hopefully make acquisitions into the software space.
Okay. Thank you very much.
Thank you. Next question from Mark [Sander] from Kepler Cheuvreux. Please go ahead.
Yeah. Hi, good morning. Mark [Sander] from Kepler Cheuvreux. Just a couple of quick questions. Can you talk a little bit about the differences in your equipment portfolio? How is surface versus underground performing? Do you see any differences there? That's my first question.
In terms of the
Yes, in terms of hesitations and.
No, I think it's pretty much the same.
In terms of-
It's actually very similar, both surface and underground.
Okay.
Yeah.
Okay, thank you. My second question is just a semantic question, but just to understand a little bit more about what you're saying. You say that there are lots of projects or orders being postponed. Are we talking about when you talk to your customers, are they postponing them indefinitely, or is it just more that it takes a little bit more time than it has before to sign the orders? Just to understand exactly how the flow is going here.
I think it's really.
What kind of conversations you have.
Yeah, it's a latter scenario. I think it takes time internally. I think essentially what's happening is that the intention to continue to invest is still there, but the approval processes take time because, of course, our customers is like anybody else. They recognize that there is uncertainty in terms of where the economy is going to go, and therefore things take a longer time to approve. I think that's really what we're looking at here. Which means that typically orders are not postponed indefinitely nor canceled. That is not happening.
Yeah. To be maybe, as you say, semantic, I would rather use the word delayed than postponed. Even though it's a fine line, but-
Okay.
That hence my question, because it's a bit different and that's why I was asking the question about more the flow, what's really going on.
Okay.
That's very helpful. Thank you very much.
Delayed. All right. Good.
Thanks.
Thank you. We don't have any more questions for the moment.
All right.
Ladies and gentlemen, if you wish to ask a question, please press your one on the telephone keypad.
I would say we could actually end the call here. If you have any follow-up questions, you're most welcome to reach out to us. I think despite everyone asking more than one question, we managed fine. You had all good questions and follow-ups for each other's questions. Capital Markets Day on November 14th, and until then, I wish you a lot of successful investments, and please reach out to Per, Anders, myself, Karin Larsson or Mattias Olsson. Thank you very much and have a great day.
Thank you.
Thank you.