Warm welcome, everybody, to this EPRAQ Q2 twenty nineteen Results Presentation. The format for today will be very well known to both of you. We will start with a presentation of the results. Meet our CEO, Pyleenbei, our CFO, Andreas Lindejem, and then we will go in for a Q and A session. But before I had sorry.
Before I hand over to Perr, I would like to briefly introduce myself. My name is Karen Larson, and I'm heading the IR department here at Epiroc since a couple of weeks back. Most of them do you know me since before? I was working for a while with Atlas Copco as well. And if you have any questions, please reach out after the call as well.
And speaking of questions, If you, I must ask you in the Q And A session to restrict yourself to one question per person. So that as many of you can ask questions. So with that, I'll leave it over to you, Pei. Please go ahead.
Welcome to the company. So the, company, Epiroc, turned 1 year the 18th June and what could be better than celebrated with a record quarter. Not very much. So that's really what we're about to present is a record quarter. And, I'm very pleased that this is the case.
And what kinds of records are we talking about? Well, first of all, we had record high order intake. We see very robust demand in the market. The production continues to be high in mining and also in infrastructure activity continues to be high. The demand is primarily driven by a very strong aftermarket.
And when it comes to equipment, it's actually down versus last year. This was very much expected. We had a fantastic second quarter of 2018. We're still at the very good level, but equipment is actually down from last year. But all in all, a very good quarter in terms of order intake.
Revenues also at the record level, obviously supported by the acquisitions that we've made and also by currency. But of course, also, we see a good organic development in terms of the ramp up that we have done in our plants and also, we see good efficiency now in our factories throughout the world. And also, of course, operating profit is at all time high. I primarily want to comment here already on the very strong flow through that we have in the quarter, and it's actually quite astonishing levels. And is driven by the growth and also by our efficiency actions.
It's also very good to see that the efficiency actions that we have undertaken in tools and attachments is actually bearing fruit. I'm also very proud to be able to say that we do have a market leading offer in, automation and battery electric vehicles. We see that there's a very high demand and expectation on us as a supplier to industry to be able to supply these. And I think we do have as mentioned, a market leading offer in place. And we also have now a very strong fleet in operation when it comes to connected automated machines.
Already mentioned the celebration on the 1st year, and we did an employee survey just to, to see what people think about the company. And we got very good response The energy created in the company in conjunction with the split is still there. People perceive that Barak is being a great company to work for. And that is very good to see. And of course, the intention is to maintain that spirit and even improve it going forward.
So I think, for the 1st year, this is a very good place to be with a record quarter and also very engaged employees. Now looking at the financials. As mentioned, we had record order intake we had a fantastic Q2 of 2018, actually better this year, but it's helped by organically were actually slightly down by 4% and that's equipment primarily going down. And, as expected, we, we, but we expected this, because the last year was fantastic. We are still at a very good level.
We are still on par with the end of last year and the first quarter of this year when it comes to orders intake and I'm actually quite pleased with that level. Revenues are up 8%, 3% organically higher than quarter 1, So, we continue to do well there. And operating profit, up 25%. And of course, that's a very good improvement. I already mentioned the very strong flow through.
It's actually almost 50%. And And if you combine that with quarter 1, I think you will arrive at a realistic number in terms of flow through going forward. But clearly, Quarter 2 had a fantastic leverage on top line down to bottom line. Also, currency, contributed positively. We had changed in provisions for the long term incentive program of 39,000,000, And if you back that out of the result, we end up at 21.7% in margin.
We also had some minor spit costs from Atlas Copco is still there, on the first half of twenty nineteen and also in Q2, twenty three million in the quarter. And if you, back that out also, if you have the interest to do that, we actually end up at 21.9% in an adjusted margin. So, quite pleased with the margin development and the flow through. EPS at 1.40 and cash flow at 1,500,000,000, and that's clearly better than what we saw in 41 and also clearly better than what we saw last year. And, Anderson is going to talk more about that.
But clearly, we are now at the level when it comes to cash conversion, to where we should be. Now innovation, talked about that initially. This is a very important area. I think most customers are looking for automation, they're looking for digital solutions and, in order to improve productivity. We launched, 6¢ this quarter.
It's really a way to tied together automation of machines, automation processes and systems integration. To, to optimize processes. And we can do that for a variety of applications, both underground as well as surface, On the ground, we're talking about tunneling, we talk about drilling and also transportation, which essentially is loading and hauling. So we have a very comprehensive offering, and packaged as the 6¢. And of course, the intention here is to deliver productivity and lower operating costs to our customers.
So I'm quite pleased with that. So with this, I think, again, that we do have a market leading offering, when it comes to automation. We also have cooperations around connectivity, 5G. And we also have battery electric vehicles as I'm sure you're aware of. And this quarter, we received orders from Canada and from Finland for battery electric vehicles.
Which is very pleasing. And I think I should mention also that we do not expect this to be an explosive development in terms of battery vehicles, but rather gradual development. And we see that the high interest continues to be very high. And we're also quite comfortable with the solutions that we have to the market that they will deliver what the customers are asking for. Now these types of solutions, the demand for that, it's growing very quickly.
We have already about 2500 connected machines in the market, and we have more than 5.50 machines or drill rigs equipped for complete automation. And to your right, you see the 1st autonomous SmartRock T65 in operation at Goldcorp Hollinger in Timmins in Canada. And this is another development that we saw in quarter 2. And we have a very comprehensive offering in terms of autonomous drill rigs for surface applications. Operational excellence has already mentioned, I think that we have demonstrated in the quarter that we can grow efficiently given the flow through that we had.
But we're certainly not perfect yet. So we, we continue to work with operational excellence. And one of the programs that we've had in place already since last year is the supply chain program for spare parts and consumables, targeting to improve inventory levels, availability, and also transportation costs. And this has, is starting to give effect now, starting to see some effects bottom line, still a relatively small bottom line. But we expect it to be more visible as we move along in 2019 and also into 2020.
And this program is progressing according to plan. We also have positive effects from the efficiency programs and tools and attachments. One of the things that we've done in the quarter is to, divest the geotechnical consumables product, which isn't really noncore products. And you will see more of these types of actions going forward in order prune the portfolio of less profitable and noncore businesses in the product portfolio as well as pruning the the production footprint. We've also made a decision to invest in a heat treatment plant in, or a brew for rock drills, And heat treatment is one of the key processes for for achieving quality in rock drills, and this is something that we do not want to out source.
We want to keep that in house at proprietary technology. And in order to meet the increasing demands for quality and performance, we we that's why we make this investment to keep it in house and also to meet a few demands of increasing performance expectations. Sustainability, obviously, is something that is very close to our hearts. And we see that as a competitive advantage. And, we feel that we are working quite comprehensively with sustainability.
I guess, we haven't talked so much about it historically, but clearly it's something that we honor. First point in that is really safety and well-being. And unfortunately, one of the first things to notice that we did have a fatal accident in India, during the quarter, and this was one of our contracted the employees, who was very unfortunately, subject to an accident, fatal accident, And after investigation and retrospectively, we can conclude that there was very little we could do to prevent this accident, technically. However, we need to continue to work with the Understanding and the mindset around safety. And we launched a program called Safe Start, which is really addressing the mindset for safety.
And we have also seen work related injuries decreasing. So we take this very seriously. And of course, the very unfortunate accident is a stark reminder that we continuously need to work, yeah, with this subject. Passionate people is something that we want to have, and I think we do have that. And it's, as mentioned, we did have the first survey.
People perceive the company is a great place to work. But also they gave us feedback saying that there are areas where we can improve. And of course, there's actually quite good news because, of course, we want to improve. So, I think, the conclusion from the survey is that the engagement is there. We have a good internal reputation, and I hope that we can also spread the word to the external world that this is a great company to work for.
Also very pleased to see that the our environmental footprint is improving. In terms of, resource usage, our CO2 emissions from transfer the CO2 emissions decreased. And the energy, as a function of cost of sales decreased as well. So we're making progress in that, in that subject as well. Now back to the numbers.
We do have a high proportional recurring business in terms of aftermarket, 66% of our businesses aftermarket and the balance there, 34% is, of course, equipment. And as you can see by the breakdown, we did have a decline of equipment of 15% both organically and nominally. Service up 10% and 7% organically and tools and attachments up 14% and down 2%. But I'll comment on this as we move along. Key point here is that we, with the growth that we have and primarily service, will strengthen our aftermarket which will also strengthen our position going forward when it comes to resilience over a business cycle.
So, first segment is equipment and service. Organically down 4% as already mentioned, as primarily equipment, which is down. Service grew with 7% and I'm quite pleased with this growth. It really shows that we do have a potential to grow service, to take market share in our own fleet, which is essentially what we do. And orders for service increased across all regions.
So I'm very happy with the development in service. Equipment, as mentioned, is down, is negative for both underground as well as surface equipment year on year. And, but we saw growth in Asia, Australia year on year, which is essentially the area where we saw growth. And worth mentioning here is that Australia is looking really good, both from equipment perspective, but also for the, the company as a whole. And also worth mentioning here is, of course, in China and in Asia is China.
And there's a lot of, And I can say that our development in China over the last year has been very good. Both over the last year, also sequentially quarter 2 over quarter 1, as well as within quarter 2. So development in China is very sound for us, and we doing really well that even though it's a relatively small portion of our total sales, we are making significant progress. Revenues up 5% already mentioned and margins for the, equipment and service. Increased to 25.6% with a solid flow through of clearly above 30%.
And the, the order scenario is more or less reflecting exactly what we saw in quarter 1, which is relatively few large orders, large being above the 100,000,000. We actually have 1, this, this quarter 2, whereas we in quarter 2 of last year had several of those. And I think that's part of the difference between the two quarters. And also, we see a continued expansion of brownfield operations being the prime driver of orders for equipment. Second segment, Tucson Attachments.
Orders received, up 14%, of course, driven by by, structure and others, it says in the bridge, which is essentially acquisitions, down 2% organic lead, but worth mentioning here is that we voluntarily back off some of the business in, and rock drilling tools, for profitability reasons, more or less, about 3% of potential volume we have backed off. And as rock drilling tools, roughly 80% of tools and attachments that corresponds more or less to the drop organically that you see in the bridge. Hydraulic taittman tools increased organically, and we saw orders increasing in all regions in local currency. Revenue is up 19%, 4% organically. Of course, the 19% being driven by acquisition, to a large extent, And now we have both, acquisitions for you and new concept mining in our books.
Margin at 14.6 percent versus 12.4 percent last year with a fantastic flow through in the quarter. It's a number that is so good that I will not mention it. And we have, as mentioned, already, signed a deal to divest geotechnical consumables product line. And as I said, this is one of the steps that we do to prune the product portfolio to improve the production footprint that continue to increase profitability as well as efficiency within tools and attachments. Again, it's a good place to be in after 1 year, and, I give it now to Anders to go through the financials.
Thank you, pal. Yes, I will comment a little bit more about the, the financials. So, jumping immediately into the, through the numbers. It was indeed a good quarter, a strong quarter with a 21.7% operating profit, if we exclude the provisions for long term incentives to get comparable numbers. And it's, as an independent company, it is the best quarter in percentage as well as in money.
Payer mentioned a good flow through. I think that is also worth mentioning, at the same time, this could and can and will vary between the quarters, a little bit volatile due to the leverage on the top line. So as Perris said, the year to date is probably a good number to compare with around as 23%. We still target and I think it's reasonable to be between 25% 30%. We still see some effects from lack of, let's say, economies of scale on the cost side, nevertheless, from, for example, IT costs and a little bit of corporate that will disappear more and more year over year and you will, we will probably not see that as comparing quarter over quarter, but in Q2, as you obviously know, we are still not fully comparing apples and apples when we look at last year, and that goes for the P and L as well as, maybe in some more So for the balance sheet, as well as cash flow, as we are, we'll comment on later on.
So how do we then get to the 21.7or21.3 as we have reported? Quite clearly, as you see on this right hand side of this slide that we have the organic improvement, and we have the currency effects, still a little bit of tailwind from the currency and the rest we call structure. And, that is, we have little bit less of the long term in incentive provisions, payer mentioned the number 39,000,000 for the quarter. And that is, there are several elements of it, but the main reason is, of course, that the share price increased, somewhat betweenendofMarchtoendofJune. We have also less costs for the split that one time effect that we had last year that will gradually come down as we move on, but, there are still some money spent on that in and also in Q2.
Finally, when it comes to structure or we get a positive contribution from the acquisitions, that's clear. But it dilutes our bottom line somewhat and that is fully in line with what we have expected and planned for. So that is not a surprise. But then we end up at the 21.3%. Or adjusted, as we said, 21.7 percent.
If we then take a look at the costs, we have, overall, the the administration marketing and and R and D costs have increased from Q2 last year, 15 sorry, 1.5 or 15 $9,000,000 to $1745,000,000. Most of that, I would say, more than half of it is related to the acquisitions and currency. And also to some extent, it's volume driven in logistics and, somewhat also in, in IT. As you should also note here, of course, that in this graph, we have excluded the, provisions for long term incentives. So it's comparable.
I mentioned that we do have some lack of economies of scales. So that is obviously part of it. But, while R and D and marketing is flat, the administration is is where we see the organic increase mostly. When we come to the financial items, we had a positive impact of the currency in the quarter, and that's why it's a little bit the financial net is a little bit lower than in Q1. Looking just separately on the interest net was 1,000,000.
We should expect slightly above 1,000,000 per quarter. Why was it higher than last year? Remember that, as I said, not all numbers are completely comparable. We were listed on the 18th June last year. And just before that, we were actually fully financed.
So we don't have comparables. It's a Q3 that we can say that the companies are fully comparable. On the tax, effective tax rate, the 24.5 percent is in line with our expectations. Being below 25%, which we have said before. Capital Structure.
We have visualized the effect of IFRS 16 on this slide as good as we think we can be done. We have increased our balance sheet with more than SEK2 billion just from the pure impact of IFRS 16. That is obviously has an impact of most of our balance sheet related KPIs. For example, the net net debt EBITDA has increased with 0.21. So it would have been 0.22 instead of 0.43 without the IFRS 16 impact.
And also the return on capital employed has an impact of almost a percentage point. In the second quarter sorry, in November, we will pay the second part of the dividend, which was paid So, that will obviously, have an impact going forward. If we then look at, capital efficiency, net working capital, It increased year over year and also from the beginning of the year, almost half the increase in nominal terms, relates to to currency and acquisition again. It's a common theme as you hear, but it's also a reality that we have. Organically, receivables is the most, most of the increase quite natural, especially sequentially with the sequential growth.
So the numbers are quite logical in the quarter. When it comes to working capital, as you see in the cash flow, we have a small increase in the quarter, but if we break that down, the inventory actually came down a little bit and the The increase is primarily from receivables and the sequential revenue growth. So even though we don't like the level of the working capital, it's it's actually, we're going in the right direction and development is trending right. Looking at the cash flow, yes, we had a good cash flow, and it was a major improvement compared to, Q1. With the 1,500,000,000 in operating cash flow.
Obviously, it starts with a good result. That's the, the, the, the baseline for having a good cash flow. And again, here, I would like to mention that if we just line for line compared with last year. It's not 100% comparable. One thing that is comparable though is the development of the working capital where we last year were in a ramp up situation and obviously tied up a lot in working capital.
While this year, we have a smaller increase in the working capital from, as I said, primarily from the, from the sequential growth in revenue. Inventory went down, and that's good to see, in particular, since we, as always, have a little bit of buildup in, for the summer to make sure that we have sufficient availability on consumables and spare parts to meet the customer expectations. So, another thing that to mention maybe, I've many times here, I've talked about IFRS 16. Also in the cash flow, there is an element that you can read that details about IFRS 16 in our report. Nevertheless, we have a positive operating cash flow impact of about 85,000,000 in the quarter that we wouldn't have had, if we IFRS 16 as the lease payments, some of it moves down to become interest in in the accounting treatment of IFRS 16.
I'm I'm sure you're familiar with that and and, we have, given some more details. In the report. So looking at the right hand side of this graph or slide, the we did have a strong cash flow. We were not so pleased, as you know, with the cash flow of Q1, obviously rebounded well in Q2. It will likely vary between the quarters, but over time, we expect to deliver a good cash flow, a good operating cash flow.
And with That, I have, covered the the details on the financials. So, back to you, Pat.
Thank you, Anders. And, The summary is pretty straightforward. As mentioned, we celebrate the 1st year with a record quarter in terms of, orders received in terms of, revenues, in terms of, profits. And we also have engaged employees. And as mentioned already, we do have a market leading offering in automation and battery electric vehicles.
So again, it's a good place to be. Now, what about the future and what about the outlook? Well, we expect demand to remain pretty much at this level. We do not see any major trigger for demand to go up or down. We see, production continuing quite well in mining as well as in infrastructure.
So that's gonna drive both the equipment demand as well as aftermarket. So again, we expect it to continue at this level. However, typically, quarter 3 is, lower in terms of activity than quarter 2. It doesn't say anything about the underlying demand, but for our from, for us, Q3 is typically slightly lower. Now to what extent, well, that remains to be seen, but just as a head up, heads up, and that is typically the case.
So that's what we expect for Q3 and going forward. And also a reminder about save the date for our Capital Markets Day, 14th November here in Stockholm. We are you are all a very welcome. And, we will, essentially focus on all the very exciting off that we have that I just mentioned today in terms of automation and battery vehicles to give you a better insight in terms of what that is and what it could deliver to our customers. So again, keep that in mind in your diaries, and we'll see you there.
So caught in.
Perfect. Thank you very much for a good presentation. And we really hope to see you in November in Stockholm. We will make the trip worthwhile. So coming into the Q and A session and, looking at the audience in here, it's rather limited.
So I would say we would start with the Q and A online. Operator, would you mind starting the Q and
question and answer To cancel your question, please press 2. Thank you for holding. Oh, first question from Graham Phillips. Sorry. Please go ahead.
Yes. Good afternoon, Per Anders and and Karen. My question is around, equipment and service. Can you say just generally does the service margin vary much from quarter to quarter? And when we think, of course, that the main variance here is equipment and equipment sales and volumes.
What's going to happen in the second half with, quite tough comparables on organic sales development in the second half of last year? And with organic orders down 15%, 16% in equipment. Would you be expecting to see lower production in the second half of this year compared to last year? Second half of last year?
Well, first question on the service margins. It does not vary, particularly much, what we've seen, what worthwhile noting is that we are growing the service part of, of service, which is man hours rather than spare parts. So we essentially make the investments in man hours having people on the ground and making sure that we do have that interaction with the customers, which we then expect also to drive spare parts usage. And those investments we did, during the first phase of this growth that was in 2018, and now we're slightly moving over to more, more spare parts and also slightly more profitable, call it volumes within service as a whole. So that change is happening, but it doesn't really vary over time.
And the second part of the question, do we expect lower production in the second half of twenty nineteen? Well, if you, if you, if that's related to our production, that is not what we expect We still have very healthy order books, at a very good level. And, yes, we do have, revenues We've had revenues in 2019, which exceeds, orders received slightly, but still a very healthy order book. So that's going to be supportive for production for quite a while going forward, definitely in the rest of 2019.
And thank you, just as a follow-up, is there any particular area where production, amongst your equipment plants where we'll be able to see higher production or relative to the other types of products you're producing?
I'm just talking equipment here.
Well, I think, yeah, the last quarter, we did mention some of the, you know, the less than less than expected efficiencies that we had in our fact and some of our factories, I think things have become somewhat better. But, there's still, 1 or maybe 2 factories where we would expect production to continue to ramp up somewhat within equipment. And, and so that we expect to happen as primarily related to the surface drill rigs.
I think it's, it's fair to say that we're still on a on a on a good level, not to say a high level. So, We, we, it's still, there are still challenges.
Next question is from Klas Berglink, Citi. Please go ahead.
Yes. Yes.
Thanks,
Lars. Good, good. Had some problems with the line before here in the morning. Thank you. So first on the drop through, I guess, why margin is better in tools and attachments following the order selectivity earlier.
But I had a question on equipment and service. How much is mix versus productivity here. Obviously, services has grown faster than equipment, which is helping the mix, but I was wondering if there is any productivity actions that are now coming through, in addition, obviously, to the production issues abating, of course, versus last quarter, you talked there about improved transportation costs. Obviously, the supply chain effort can help cash flow, but also maybe cost of goods sold. So I'll start here by asking about productivity in equipment and services.
Yes. Maybe I can try to elaborate a little bit. The there is an element of mix, a positive element, in in let's say a product as well as between service and parts and equipment. Absolutely. It's not the it's not, significant, but there certainly is some We have seen some sequentially and year over year.
We have seen some improvements from from the transportation part from service variance and that's what Per also mentioned that some of the efficiency improvements are in service. And also better utilization in the factories, compared to last year. So There is a little bit element of many things in here, but I also want to mention that when you take one 1 quarter, it, it, and the, let's say, the way you, what you call drop through or what we referred to as as flow through, it could vary, of course, depending on what, what the leverage you have on the top line. And if you do the math between the first quarter 2nd quarter, will also see that there is quite a change in year over year in the organic top line.
Absolutely, which is, inflating the drop through mathematically.
So that's why I'm trying to say that, you know, a year to date number is probably more fair to use.
Okay. I had a quick follow-up and to your power, which is on automation and electrification. I'm sure you're aware of this, but there is a discussion in the market, whether you are lagging competition in automation or not. And my view is that the mix is a bit different with you being bigger in drilling versus others being bigger in loading and holding. And that this can create maybe a different perception of where you are stronger in the respective fields.
Could you comment on what you do in automation electrification a bit more in detail and your relative position and whether we should expect an increase in R and D going forward. We hear about all the launches, but we get a lot of questions on whether we will have an R and D creep in Epiroc.
Well, I think, you are, yeah, I mean, we're fully aware of the discussion on the market and, of course, it's not a coincidence that we start talking about it. So we have we still have the perception that we do have a market leading offering, and I know that our competitor has the same perception of themselves. Now we do have slightly different focus, as you mentioned, and, where I think our competition is more focused towards underground loading and hauling. Our focus is, and has been more towards drilling and drilling automation. I think, so we do have different positions of strength.
But, you know, our current offering is definitely targeting all of these areas. And we, we, we feel that the offering that we have that I tried to describe, as, very briefly, obviously, as definitely, market leading in terms of what it can offer to our customers. Now, at the end of the day, it really depends on what the customers think about our offering rather than what we think. So, so we'll see. But we're certainly fully aware of of, of, you know, the different scenarios.
Yeah. My question is sort of boiling down to in terms of whether Epiroc needs to increase R&D to sales. And
Well, what we've said is that we are currently somewhere in between 2.5% 3% I'll turn over in R&D. And in absolute terms, of course, let's just do the math. And then, then I think that's a level where we, where we at least need to be going forward in terms of, you know, absolute terms. And, you know, my perception is that, depending on, of course, where the market and top line goes, I think still think that we need to spend spend a fair amount of money in terms of, R and D on, digital solutions as well as battery vehicles, but not necessarily a creep. And but one should also be aware of that, you know, the the big portion of this goes into development of, of these types of machines.
And, and, it we do not have very much R and D in service, nor do we have that proportion of R and D into tools and attachments. So the big chunk of our R and D really goes into into our, machines and our machining divisions. So if you apply that absolute number into machines, you'll see that the absolute R and D in that area is significantly higher. So I think that should be understood, so, so, and which means that it's quite R and D intense.
Our next question is from Guillermo Phoenix, UBS. Please go ahead.
Thank you. It's Guillermo Pune from UBS. I have two questions, actually, if I may. One is on your installed base, the one that is connected if you're able to monitor utilization levels, could you comment on the direction of the, machine hours so to say if you have, something that you can say with us, And then second to that, I guess, or after recent moves in within the industry with consolidation happening in the midstream and then a downstream part of the industry, The question, I think, is, if at some point you'll see consolidation going all the way up to Upstream or days lead it, in a way angle to or for us, upstream players to remain independent, as equipment produces to the mining value chain. Thank you.
Okay. Well, as we mentioned, 2500 machines plus is a number, the number of connected machines that we have. And that's, first of all, is a number that we expect to continue to increase quite rapidly, actually. And, I think the experience is that once the machines are connected and once they're available to monitor not only from us, but certainly from the mine owners, the utilization tends to improve because you have, you know, immediate access to, to the status of the machine and the utilization. So the experience is that utilization increases, once you're connected.
So, it's obviously a tool, obviously, a very effective tool, one of the tools to improve utilization.
But I think here it's also important to say it's not only utilization that you can monitor with the connectivity. So it it has sort of a, let's say, a preventive and predictive way of improving productivity by by, detecting, issues in advance.
Yes. Correct. And, for the second half of your question, in terms of consolidation? Well, that's an interesting topic. It's, one that perhaps doesn't allow itself to a very simple answer.
We have certainly noticed the consolidation, I guess, you referred to Metso and Autotech. And, you know, that, that's an interesting move. I think, you know, you look at the, One of the arguments around the, the, that, combination is the generational synergies. Fair enough. I mean, that's their estimate.
I think, yeah, for us, being further upstream, we need to, you know, a deal for us need to be very much justified through, significant synergies, and that's not as easy for us. Given, you know, given the position that we have in the market shares in the areas that we're in, it's, the issue of consolidation is not a straightforward thing. So, so, it's not obvious that the combination downstream would have any impact
Next question comes from Alexander Virgo, Bank of America Merrill Lynch. Sir, please go ahead.
Thanks very much. Good afternoon, everyone. Just a couple of quick clarifications. I wondered if you could repeat what you said about the rock tools impact on the bridge. In T And A.
I wasn't quite, I didn't quite catch what you said about the impact. And then maybe talk a little bit about what that means for the the drop through on the margins because obviously it was very high. And I know you called that out saying, expect that to normalize a little bit. And perhaps you could also extend that to the impact on the EBIT of the structure. Obviously, we're moving into a more comparable apples and apples environment in the second half as you mentioned.
I just wondered if you could call out or help us with anything that we need to bear in mind explicitly with respect to separation costs, etcetera, that you can maybe put a little bit more of an absolute number on so that we can factor that into the forecast?
Okay. So what I tried to say in terms of the bridge, the organic, decline in volumes for Tools and Attachments was 2%. And at the same time, the the voluntary backing off, whatever you wanna call it, in terms of volumes, I. E. Volumes that we could have taken, that we historically have taken, that we're now are backing off due to, profitability reasons, roughly 3% of of rock reading tools.
And as rock reading tools is about 80% of tools and attachments, you apply the 80% to 3% and you arrive at, at, possibly at a conclusion that that's more or less exactly the organic decline. That we saw. That's what I was trying to say. I hope that makes sense.
Is that something you're likely to continue to see around the edges
No, I think we'll continue to be firm on because this is essentially about pricing. And, if we can't achieve the prices and profitability that we that we want, we're we're not gonna do the business. So so as a consequence, us being, more firm on pricing, we're also seeing, you know, very a healthy development of pricing within the rock drilling tools division. So So, those 2 those 2 go go sand in hand. Now, if we end up in a scenario where, you know, our previous customers, accept the pricing, fine.
We'll do the business. So it's not, you know, it's not ideological. It's just, you know, profitability driven.
But the other side of that is, of course, that as we go along, as we the bridge is year over year, but the the this say bridge effect will disappear over time. And already in Q3, 2 versus Q1. The effect was less.
And then you had, you had some, you know, other, 2 questions, and I'm actually don't exactly know how to answer those.
Well, it was just to see if you can, if I look at the impact on the profitability in the quarter from structure, Yeah. There was more than just M and A in there, and I'm guessing that's because the the difference in separation costs. And I'm just wondering
whether or not
you can beat you help us out.
Yeah. Tools and Attachments only? Or
No. For the for the group.
Okay. Yeah. In just to clarify, in Tools and Attachments, the the structure part is entirely related to acquisitions. And, although it actually to the bottom line, it obviously is less, it dilutes, and it dilutes even more so on the total. And, infrastructure, other than the, the, the acquisitions, we also have the change in the, what you referred to separation costs, which was this quarter was 23 and was, if I remember correctly, 104 last quarter sorry, last year, same quarter.
So that's quite the difference. And also we had less provisions for LTIs. And you can see that at the one of the tables in the end of the report is quite clearly, shown quarter by quarter, those 2 components. The, and also in structure, we, we have what we call contract manufacturing, which is actually more or less disappeared. We have a very small part left, but as of end of last year, it was almost gone.
And that improves the the bottom line, you could say, margin with about the 10th of a percent, just by by taking that out to that revenue would more or less a breakeven, bottom line. And if going forward, I think that was also your question, what how you should think about separation or split costs going forward. There will be some it will gradually disappear, but there will be, maybe Q3 on the same level as Q2 or a little bit less. But there will be some of it, but it will not be material.
Our next question is from Matthew Spurr, BNP Paribas. Sir, please go ahead.
Yeah. Hi. Thanks for it's Mackiesburg Exane BNP. Yeah, can I have a quick one on the seasonality you mentioned then? So Yeah.
My model going back 8 years doesn't really line up with that. I think most of the time actually Q2 is above Q3, but obviously don't have the same detail on on currency and things that you have internally. What's I think you said you had to quantify them, but so can I ask what's what you think drives that then? So we can just get an idea of, So the drivers behind why Q3 is seasonally weaker than Q2? And also, yeah, do you see that in equipment or do you see that in service or is it something in the construction markets in tools and attachments?
Thanks.
Well, in terms of revenues, it's, primarily our own production. Since we have, you know, a big chunk of our production and Swedish factories, we typically have vacation period.
Get that on revenue side with the delivery. I thought you're talking about orders when you're talking
about seasonality. Okay. I actually was talking about both, but they're right. For orders, Well, I think, you know, this is, this is based out of our own experience, and, we, we clearly had that last year. Actually, we had a drop between quarter 2 quarter 3 of, I think, 10% or something like that.
And it took ourselves and as well as the market by some surprise. And we didn't highlight that, but I think part of it is really that, you know, the activity tends to go down on the Northern Hemisphere during the, the third quarter, and I think that's reflected. Don't expect that to be at the Meghan 2 we saw last year necessarily, but, this is, this is more a heads up in terms of this, we believe this, is going to happen also this year, but it's difficult to predict exactly to what extent.
Okay. Understood. And then could I have a follow-up please then on the equipment and service margins, you basically delivered 26% let's call it EBIT margin. I know they're supported a little bit by currency. You talked about a normal drop through of 25 to 30, but there's still further efficiencies you can do there.
I mean, how far are you, I know we're at sort of a good point in the cycle, but how far do you let that margin go up before you start thinking, actually, let's reinvest a little bit here because you don't need such a high margin necessarily.
Well, I I think that's a difficult question for us to, to share with you, but, I I I also would like to remind you of the fact that we were not thrilled about our drop through in Q1, and and I I want to emphasize that, we should look at these two quarters more together than separate and, and, being mindful of the, let's say, the mathematical consequence of having an organic decline in in equipment and growth in service, so that obviously also have an impact on this. I'm not sure that's a very good answer to your question, but, that's that's an answer.
Better, but it's yeah, well, it's it's a good question, but it's a very difficult answer. I mean, how do how far do we want to seek gold before we reinvest well? First of all, we want to be as light in terms of investment as possible. And, what we did, during, last year was to outsource, some final assembly. And what we did in the beginning of the year in quarter 1 was to, basically bring that back.
Into our own facilities, not all of it, but some of it. So and that's a model that we will continue to deploy. In order to minimize our, you know, our fixed capital. And now, you know, if if, volumes would increase substantially. And when it comes to, our machines, well, then we have to look at what do we do.
But, right now, we're not there.
And I think it's fair to say. We have we intend to be assets light in the future as well as in the past, but definitely make sure that we control and manage the the core competence and our say core production. That's why we actually invested in in the new heat treatment facility in Otterbrook. That's that's also something that that that we, that we do, of course.
Alright. Thanks for the color.
Kepler Chembic.
Can I come back on automation, please? Could you maybe quantify what are the revenues that you're having currently from from the Automation product and just a product per se. And then in the licenses that you have sold, how many of those are you also selling equipment to the same customer. So does it, I mean, has it driven equipment sales or is it more equipment which is already in place and then you connected, so to speak?
Well, it's a combination. I think what we have is, First of all, the automation proportion of our sales is still, relatively small I wouldn't say it's immaterial, but it's it's small. So but at the same time, it's, profitable. So it is, contributing to our bottom line margin. So that's the first observation.
Secondly, you know, if a fair amount of the automation that we have sold so far is has been retrofit, I. E. To, to have automation kits on already, delivered and existing machines. Now the prerequisite of that is that the machines are equipped with the computerized control systems. If they're not, that's not gonna be possible.
It doesn't make sense. So if they're if they do have that already in place, automation is possible. And so that's the bulk of what we've done so far. But increasingly, we're also, have automation ready machines already from from production lines, I would say. So, so, you saw one example, the, the SmartProct D65 is is already from, you know, from from the factory equipped with automation possibilities.
And, and, as we go to the the bigger drill rigs, those, some of those are equipped already from the start majority is still retrofit. So that's the scenario that we're in, but the trend is definitely to have, you know, automation ready machines already in production.
And when when you sell the automation program itself, I assume, is it it's a it's a license fee for it.
Yes.
Is that correct, right?
Yes.
Okay. Okay. Thank you very much. Sure.
So I think we need to finalize. We can take one last question and then we need to wrap this up.
Okay. Our last question is from Andrew Peterson, JP Morgan.
Yes. Hi. It's actually, William Ashland from JP Morgan. Just had a question on the flow through in tools and attachments And why if largely this is a result of sort of productivity and internal measures, and some portfolio rationalization why should we not see the drop through, continue the similar level for the at least the next couple of quarters?
Yeah.
Well, I, I I think also here, we can we we expect to have a good flow through, but not the exception flow through. And and I again referred to the fact that it depends a little bit on the top line and the leverage on the top line, but we certainly expect to have a good flow through. We had very good development on the hydraulic attachments and, and, also, the efficiency measures on the rock drilling tool side. But, to expect the level that you saw in Q2, I I I that we shouldn't do. We should see it over a longer period of time.
But we will, as Perry mentioned, we will have, expected, we will expect some continued efficiency improvements from our supply chain program and other efficiency measures that we're we're taking. And, we also have the I mean, there are many things that are happening like the the divestment that, we announced in June. So.
Perfect. Thank you very much. Thank you. Thank you very much everyone for taking the time to listen to this call and asking good questions. If you have any, please reach out to the, yeah, to the IR department.
All of us are happy to help And, by this, we conclude the call, and we wish you all successful investments and a very great summer. Thank you very much. And thank you.
Thank you so much.