Good morning, everybody, warmly welcome to Epiroc's quarter three result presentation. I am Ingrid Östhols, investor relations of Epiroc. Today, our CEO, Per Lindberg, will start telling us about the performance in the quarter. He will then hand over to our CFO, Anders Lindén, who will deep dive into the figures. After the presentation, we will have a Q&A session. Per, please go ahead.
Thank you, Ingrid, it's a pleasure to be here. I think we are looking at a relatively solid quarter three that we have behind us. We've seen continued strong customer demand. We've seen high production levels, and we have seen also high activity in general. We've also seen our own revenues increasing quite substantially, which means that we have managed to continue to ramp up. Our capacity is now at a good level, and it's more in line with demand in general. I think we made some significant progress there. We've also seen our profitability increase, and from that, I think we are looking at a quite satisfactory quarter. We've also seen our orders increase, but not to the extent that we did expect after the record quarter two and also very strong quarter one.
That was not surprising actually, because we know that quarter three is normally slower than quarter two, which was the case also this year. We also saw large package orders that we had in quarter two and quarter one did not really materialize in quarter three. Of course, these large orders did tend to vary when they actually come in, and it did have an impact also on quarter three. We should also know when we look at quarter three, we should realize that this is actually quite a good quarter historically. It's actually the fourth best quarter ever. The two best quarters are the previous quarters in this year, and the third best quarter is actually quarter one of 2012. Quarter three is actually quite a good quarter from a demand standpoint. Looking at the cash flow is an issue for us.
I think we expect the cash flow to improve significantly during quarter three, but we continue to tie capital and working capital, and we expected that to improve during the quarter. It did not really to the extent that we expected. We will continue to pursue our long-term efforts to improve working capital through supply chain efficiency. We do have a program in place. We will also, as a consequence of this, increase our efforts on the short-term basis to improve working capital and make sure that we do not tie unnecessary capital in our supply chains. Speaking of excellence programs, we also have, of course, numerous excellence programs apart from supply chain. We're working with manufacturing, with sourcing, and service. I think we're making good progress, and we expect that also to continue to contribute to efficiency going forward.
I'm also happy to note that we made an agreement to acquire Fordia out of Canada. It's a supplier of exploration drill bits and casings, which is a very good strategic fit to Epiroc going forward. We expect to close that later on this year or beginning of next year. Turning over to financials. I mentioned the strong revenue growth of 19%, and I think, again, that's a good sign of our ramp up. We have 25% increase of our operating profit, and the adjusted operating margin increased from 20.2% to 21% in the quarter. We do have continued costs for split, even though they are now decreasing. We do have also provisions for the long-term incentive program, and of course, that's tied to the development of the share price. That will have an impact on individual quarters, up or down, depending on the share price.
As mentioned, of course, we expect the split cost to taper off during this year. When we compare quarter three to quarter three of last year, we should remember that quarter three of last year, first of all, was a relatively strong quarter, but also that we were not an independent company last year. The consequence of that is that, of course, now we've built up a corporate function with associated cost, and we do also have some effects when it comes to lack of scale when it comes to some functions internally. They're not totally comparable. If you look at the flow-through, I think you should keep that in mind. Orders received developed as mentioned, and not as strong as expected due to a variety of reasons. Europe developed really well.
Looking at Africa and Middle East, you can see that it actually quite a significant decline, but that's primarily due to very strong comparables last year. Quarter three in Africa, Middle East, last year was actually the best quarter of the year. That's really the reason why we do have that comparable decline. We're still looking at a distribution between mining and infrastructure, where mining is 70% of orders received and infrastructure 30%, which is in line with what we've seen over the last few quarters. Looking at the segments, you can see the change between Q3 of last year and this quarter. Equipment and service is roughly 76% of orders and 74% of revenues this quarter. Aftermarket to the right, orders received 62% of orders received, and revenue is pretty much the same.
Last year's revenue was 67%, aftermarket this year 62%, which means that this year we sell a little bit more equipment in our mix, which has an impact on margins since equipment tends to be a little lower on margin than the aftermarket margins. We'll come back more specifically to the segments, but of course, you can see where the improvement or the growth of service primarily is something that is quite satisfactory. Equipment and service. We see high production levels, as mentioned. Surface equipment primarily had a good development during the quarter. We saw lower development or lower levels of underground sales, especially when it comes to the large package orders that I referred to during the quarter. Equipment grew with 2%, service 13%. When it comes to service, I think our efforts to strategically target the fleet that we have in operation has given effect.
Right now, the service component of the mix in service, there's service, and there's actually spare parts. Service tends to grow faster now than spare parts, which should perhaps be kept in mind. Also apart from the sales efforts, we do also see progress when it comes to our package service offerings. RigScan, for example, is an offering that we have launched, and that is also making good progress in the market. The development certainly within service is quite exciting and satisfactory. Operating margin increased to 24.6% from 23.3%. We have a flow-through of over 25%, and again, I think that's a good sign.
One should keep in mind again that the mix within service is turning more towards service, and when we increase the volumes of service, it tends to be at somewhat less efficiency initially because we introduce new technicians, and it takes time for them to get up to speed and also for us to train them to an appropriate level over time. This is a couple of simple graphs just describing the two parts of equipment and service. As mentioned already, when you look at the equipment to the left, you see that the volume of orders received quite substantially lower this quarter as compared to Q2, and this is primarily due to the lower amount of large package orders, especially in underground.
When you look at service, you see that Q3 is slightly lower than Q2, which was also the case in Q3 of last year, but is still on a very high level. Tools and attachments. I think we see a good demand environment because this is driven primarily by the production levels at our customers. Especially in North America, we're seeing a very good and solid demand for especially our tools. Organic orders declined with 4%, and of course, one may ask the question: why is that if demand is robust? We are right now targeting profitability rather than growth. We have actively stepped out of some orders that we feel are not profitable enough. We of course, will have to continue the orders that we have accepted, but we will not continue to accept orders below a certain profitability level.
If you look at the operating margin, it has increased from 13% last year to 13.6% now, and if you look at Q2, it was 12.4%. We have now reversed the trend, I hope, and we see positive flow-through within tools and attachments, and of course, that's quite satisfactory as well. Again, of course, the Canadian manufacturer of tools is within tools and attachments. Finally, from my side now is business development. I think if you look at our pipeline of innovation, I'm very excited. I think we do have many interesting things in our pipeline. To the right, you can see our control tower in Örebro.
This is a place where we take customers, and we have a very strong interest from customers, where they can see our suite of digitalized products to monitor and manage the flow of operations in a mine from remote. I think this is certainly one of the tools that will help our customer to increase productivity going forward. We've also built automation centers on five continents, the intention there is to help our customers to implement automation solutions in their minds. This is also something that is quite helpful for us, of course, to drive the sales of automation now and into the future. Specific innovations is this Minetruck that you can see. It's pretty much the same frame that we've had historically, but this one loads 10% more than is done historically. We've also launched a range of reverse circulation drill pipes.
These are very specific for the ones that know mining, but it actually does improve productivity for miners. Not the least, I should say, we're now launching generation 2 of our battery-powered vehicles. It will be launched in November now, this is another development that attracts huge attention among our customers, and we expect that to be a very good event with high attention. We, of course, have also quite significant ambitions when it comes to increasing the volumes of battery powered products going forward as a consequence of that. Now into financial specifically, Anders Lindén.
Thank you, Per Lindberg. A little bit of deep dive into the financials, as you would expect. Naturally, there will be some repetition, but that is pretty normal. We start to look at the revenue and, let's say, the top-line bridge. Orders received was lower, but it was then in Q2, but it's typically a slower quarter. Per Lindberg has explained a little bit the background. We had a positive currency effect, overall, in the quarter, it's now flat year to date and slightly negative still on the rolling 12. For the fourth quarter, that will likely change. Going forward here, although we have a situation where the period end rates in September is a little bit different than in June. For our US dollar and Canadian dollar and euro, we have higher period end rates than the average rates.
As you know, we typically say that those three, together with the Australian dollar and the rand, is the five most important currencies that has an impact to us. The Australian dollar and the rand are pretty much unchanged. We look then into the fourth quarter, if the rates don't change, we should likely see a positive with a couple of percentage points, positive currency effect for the quarter. When it comes to structure, it's more or less evenly divided into the recent acquisitions that we did in the beginning of the year and the contract manufacturing that we have explained previously. You then look at the margin, first of all, I've said that before, what the underlying profit margin that we look at is the dotted line, where we have excluded the split cost or project costs and also effects from long-term incentive programs.
Of course, which I will say a few times, but I think it is still worth mentioning that when we compare with last year, we were not a fully mobilized company. Also Per mentioned that we obviously have a difference, and that specifically should be remembered when we look at the flow through which if you do math, then obviously we have a flow through, which is a little bit over 21%, but it is well over 25% if we also do some adjustment for and do like for like comparison. Examples of that is, of course, that we had very little costs for the corporate headquarter last year, and we have also during the last year fully mobilized the hydraulic attachments division that was brought into Epiroc during last year.
We also have a little bit lost economies of scale in some functions with us being a smaller company, an independent company. Of course, when we look at the split, the negative effect in the structure part is SEK 1.5, but really purely related to the split is SEK 1.1. The SEK 0.4 out of the SEK 1.5 is for dilution on the margin from the acquisitions and the contract manufacturing. As we have communicated, the split costs are in the quarter SEK 70 million, and the effect from the provisions of long-term incentives is SEK 56. SEK 126 million for the quarter is related to that part. Those SEK 126, if we take away some of the long-term incentive costs that we had actually last year as well, we did not have any project costs last year.
That together with the effect of the acquisitions, the positive effect from the acquisitions and the contract manufacturing gives the SEK 99 million, which you see as structure and other in absolute terms. Obviously, the long-term incentive provisions will change with the share price of Epiroc. When it goes down, likely the provision will be reduced, and when the share price goes up, the provision will likely have to be increased. If we would have made the calculation today with the current share price, it will not have been the SEK 56 million that you saw. If we continue to the segments, it is okay flow through in equipment and service, and a clear improvement in tools and attachments.
The flow through in equipment and service, you would think could be better, but I think Per explained quite well that we have grown not the least in service, where there are inefficiencies when you grow fast. We also have growth in equipment, and growing with maintained efficiency is a challenge. All segments, even though tools and attachments and also the corporate part is affected by economies of scale or reduced economies of scales. In the equipment and service part, we also have a little bit of a mix effect, of course, to revenue mix towards equipment, which is also having an impact on the flow through. When it goes to tools and attachments, we should again remember that we have mobilized one new organization, which we did not have fully established last year, and that is hydraulic attachments.
That has an impact on the organic improvement as well as then as the flow through. For both segments, you see a currency effect being positive. On the structure side for the equipment and service, then we have acquisitions and the contract manufacturing. Going to the income statement, repeating myself, I would like to make a few remarks when we compare to last year. We obviously see the main differences, I would say, in administration and marketing, or referred to sometimes as SG&A, with the administration part being impacted by the costs for the long-term incentive programs. Also the corporate costs, again, the establishment of a new division. Together with some, let's say, inefficiencies that we have from the split out in the market organization and in IS/IT in particular.
The other point I would like to make on the P&L when we compare it is interest net. While in the past, as you know, we were not a complete company, we didn't have the funding as of June this year and fully then in Q3, we are completely funded. This interest net is more representing the level going forward. We had historically some hedgings, which we don't have anymore to that extent. We still have some hedgings of external loans, but not to the extent we had before. It's definitely lower in the interest net. Also finally, the tax rate here. Even though the number per se seems to be on the same level, it's a very different percentage of effective tax rate, and the 2017 number is obviously not representative of our current operation.
While we are at a level today of well below the 26%, actually, we are on the 25% level year to date. When we adjust for this, as Per said, we have an operating profit of 21.0% when we adjust for the project costs and the long-term incentives provisions, and the profit before tax of 20.6%. On the balance sheet, the main points I would like to make here is, of course, that compared to last year, quite easy to detect, we now have a complete balance sheet with SEK 4 billion in cash, which we didn't have last year, being part of Atlas Copco. We also have a fully capitalized equity with SEK 17 billion. Those are more structure changes compared to the becoming an independent company.
When it comes to the more operational, you can see the changes being in working capital, not the least in inventories and receivables and to some extent in payables. Also some increase in intangibles, the main part there being a consequence of the four acquisitions that we made in the beginning of this year. Some more words on the net working capital. As you can see, there isn't a very different number from a percent of revenue than we had in Q2. This is the average, it will not change dramatically from period to period. While we would have liked the working capital to go down, we still see a little bit of inventory increase from the growth that we have had, especially in the equipment divisions, when they are now ramping up.
We also have a small effect of the supply chain program initiative, where we centralize initially the inventory and to be able to, in the next step, reduce it out in the market. We will start implementing that in Q4. There is no major change in the working capital %. Again, I think we do comparably well in payables. We are average on receivables, but our improvement area is mainly in the inventory, and that you've heard me talk about that a few times already. For Q3, as I said, inventory was the main increase. We also have a slight reduction, seasonally normal for payables, with a lower activity in the parts of the world where we have a lot of activity in the Northern Hemisphere. Talking a little bit about the net debt.
Net debt went up from SEK 3.0 billion to SEK 3.1 billion, not a dramatic change. We had a positive operating cash flow, not to the extent we would have liked. I'll come back to that. We also, I would like to point that out very much, we had obviously a repurchase effect of SEK 1.1 billion net. We bought net 11.3 million shares. The detailed numbers you will find in the report, that is obviously according to the plan where we were allocated SEK 1.2 billion as part of the split for purchasing or repurchasing our shares to the existing long-term incentive programs. Finally, cash flow. Some of the numbers which we compare with, we should not focus on so much. If we go from, let's say, the taxes part and also to other investments, they are really not so comparable.
We have, first of all, I would like to point out that although we had a sequential improvement, we are not satisfied with the working capital, and in particular, the cash flow as such. We had good increase in profit for sure. The main disappointment here is, of course, the increase in working capital. At the same time, I would like to mention a few things to help you to understand the cash flow. During the quarter, we divested almost SEK 300 million of portfolios from our customer finance operation. That due to the, let's say, different characteristics of the contracts, those SEK 300 million or a little bit below SEK 300 million will, in the cash flow statement, show in different lines. Some of it will be shown in non-cash items. That's why it's quite high.
The biggest part is actually in other investments, where the majority of the SEK 292 million in other investments relates to the divestment of customer finance. There's also a minor part in the rental fleet, change in rental fleet. Taxes paid was a little bit higher than normal. Obviously, taxes paid increase when you make a lot of profit. Also we did a little bit of recalibration to make sure that our preliminary taxes match quite better the effective tax together with some retroactive payments from last year's profits. That is also slightly higher than we would have liked it to be, but it is what it is. On the CapEx, if we add up the different lines in CapEx that you see on this, we come to SEK 331 million.
We are about on the pace where we have been, if we adjust for what I said on the customer finance divestment. I don't see any dramatic change going forward in the near future. We see the divestment of credit portfolios in payment solutions as something. We support our customers with financing, but it doesn't necessarily mean that we will keep it on our own balance sheet. It's something we've done in the past, and we will likely continue doing in order for us to have a more efficient cash flow. With that, I will hand over to Per again.
Thank you, Anders Lindén. The summary is pretty much where I started, I guess. I think this is a solid quarter. The good news is that we see a continued strong demand from our customers. One should remember that this is a good quarter if we compare it historically. We see high activity, we see high production levels, which should support demand also going forward. We see revenues going up strongly, again, which means that our capacity is more in line with demand at the moment. Profitability also going up, which is quite satisfactory. Of course, I reminded you, and Anders Lindén did as well, that the comparative quarter of last year was not to a fully developed company.
Cash flow we mentioned several times, of course, when it comes to inventories, when we now are in a situation where our capacity is more in line with demand, we should also be able to improve the flow of the inventory through our production. We will definitely push the organization to make sure that we improve working capital and inventory going forward. When it comes to near-term demand, I think that requires some additional comment. Of course, we've seen a decline in mineral prices during quarter three, we do not necessarily think that that's going to have a material impact on the activities of our customers. We think that the activity level will continue on a high and robust level. The expectation is that it will continue more or less at this level where we are right now.
Of course, we will need to keep an eye on the development going forward because, of course, the metal prices will continue to be relatively volatile, most likely. We will keep an eye on that, but the short-term expectation is that we will be more or less at the same level, which we saw in quarter three going forward. Questions and answers.
Okay. Thank you very much, Per Lindberg and Anders Lindén.
Yep.
We will open up for questions, and I think we will start with the floor. Do we have any questions from the floor? It doesn't seem like it. We will hand over to the telephone conference. Operator, do we have any questions?
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. We already have a question. Please introduce yourself. Your line is now open.
Yes. Hi, Per Lindberg and Anders Lindén. It's Klas from SEB. A couple of questions from me, if you can hear me. Hi. Okay. First on the equipment side, the weaker orders there, you report orders down slightly in underground and more and more miners are moving underground, and we still have replacement demand of the most recent peak yet to kick in. There should be a solid growth story for Epiroc, and others out there haven't seen the same softness on the equipment side to the extent you have. If this was only a tough comp on the larger side, what do you see right now, Per, in the pipeline? Has the weaker price action, in particular copper, started to impact you negatively when you look further out?
I think one should be a little careful comparing individual quarters because, as I mentioned, which is also evident in the numbers for underground, is that individual large orders will have a huge impact on the comparables for the individual quarter. That's one thing, and you're absolutely correct. The trend towards underground continues. It may not necessarily be visible again over a single quarter, but that's a trend that we see for sure. I guess the key message here is not to look at the individual quarter too much when it comes to extrapolating a long-term trend. I think that's important.
A follow-up there on replacement. It was only 30% of orders last quarter, and I guess the same this time, and the peak in 2012 is yet to be replaced.
Yeah.
When I calculate backwards and looking at the replacement cycle of your equipment, this should start to impact you positively in 2019. I was wondering on the timing there, if you share that view. We had two peaks very close to each other, one in 2008 and one in 2012. The first one is replaced, and now it's time to replace the most recent one. Some comments there would be helpful.
No, I think you're right. Personally, I'm a little surprised that we still see expansion being actually over 70% of orders received this quarter. It continues to be my majority of expansion, which means that we are yet to see the replacement cycle being more substantial. I think your observation is probably absolutely correct. I think we will see more replacement going forward than expansion. Just a helpful comment to those that perhaps don't follow this too closely. The life span of underground equipment, typically five to six years, whereas surface equipment is between 10 and 15 years, depending on the type of equipment. Of course, the peak, in 2012, would primarily be related to underground rather than surface.
Mm. My final one is on the service part. The weaker drop through within service, with contracts growing stronger than spare parts. I understand that the majority of the service business is spare parts. Given that we had very strong growth on the equipment side over the last couple of years, and as the warranties drop out, then the spare parts business should start to accelerate. I appreciate obviously that tools and attachments is very linked to production, but I guess on the service side, you have that lagged effect on the spare parts that could come through. I just want to check with you if that reasoning is correct.
No, that's again, absolutely correct. Of course, when we ship a new piece of equipment to our customers, the first thing we do is not to sell the spare part, but we sell service. That means changing oils and changing smaller stuff, which requires some manpower, but not necessarily major spare parts. You're correct. The strong sales of equipment that we've seen will translate into more spare parts going forward. Yes.
Thank you.
Yeah.
Thank you. We have a next question. It comes from Matthew Spero of Exane. Your line is now open. Please go ahead.
Yeah, morning. I'll just check you can hear me okay, because it seems to be a very bad line for people dialing in.
You're very loud and very clear, that's all fine.
Okay, good. The first one is on just what your underlying demand was in Q2. Don't know if you can do it or not, but if you strip out large orders, then adjust for this sequential decline you're typically see in Q3, what was your assessment of underlying demand ex those things versus Q2?
I think we're looking more or less at the flat development between Q2 and Q3, if I'm correctly informed. Our numbers guru here, Mattias, that's what he tells me, more or less. That's what we're looking at.
The second question related to that. Your outlook is demand to remain at a similar level. What does that actually mean in terms of those two things that you said, sequential development and large orders? Is that making assumption around some large orders hitting in Q4, or is that the underlying ex large order sort of run rate?
If we look at the potential pipeline of large orders, if you just visualize a map across the world and look at what the potential orders out there, larger ones, it's still quite significant. Whether those are going to materialize in quarter four or not, very difficult for us to say. What we're basically saying is that the underlying demand we expect to be pretty much on this level where we're at right now. The orders received could change as a consequence of large orders, but we don't know that. I guess the safest bet is to assume a pretty flat development, I guess. That's what we're saying.
Can I have one final quick one on tools and attachments? The margin, you talked about some improvement, both sequentially and year-on-year. It's only up 10 basis points, and flow through is about 15%. You had some efficiency measures dragging that down. Did you have any efficiency measures bringing that up? Underlying, really, it's kind of a flat development.
Yeah, Anders here. We have taken actions in the segment, as Per mentioned, I think. We have started to prioritize profitability over volume, and when it comes to, let's say, the top line and the gross profit margin, and then obviously also addressing other efficiency measures. Yeah, there are plenty of activities to improve the flow-through and the bottom line in the segment. We should not, and I would like to stress that, when we look at the organic flow-through, that if we compare the two segments, the tools and attachment segments is the segment that had the comparably highest impact of the fact that we were not a fully developed company and had not the structure that we have today, last year.
Just to complement that answer. I think it's worth reminding what we said last quarter is that we see in the portfolio, primarily when it comes to consumables tools, that some of that needs to be addressed on profitability. What we've done so far in this quarter is to basically reduce the volumes of non-profitable orders. That's certainly not the end of it. We will continue to improve the profitability overall in tools, and we've started with basically addressing the low profitable segments and orders that we have seen.
Thanks very much for your answers.
Yeah.
Thank you. We have the next question. It comes from Graham Phillips of Jefferies. Your line is now open. Please go ahead.
Good morning. Thank you, Per and Anders, taking my questions. First question really is around the drop-through margin in equipment and service. Obviously, you commented around the mixture, and you said that the equipment, I think you said, was a little lower margin than service. I think in the past you've said it was sort of three times the difference, but perhaps they are a little bit closer, given the sort of volatility of this number, can you give us some sort of feel of where you think it should normalize looking into sort of 2019?
Well, I think the observation that the service part, including spare parts, is about three times as profitable, is historically correct. That refers to a situation where equipment demand is not as strong as we see right now. Now, of course, that relationship is shifted more towards equipment, which means that service right now perhaps not twice as profitable, but maybe in between two and three times as profitable, to be not very precise.
Well-
I think assuming that demand is where we expect it to be, that relationship should be more or less maintained going forward.
Just to add to that, I think we should be pleased with the growth in the service part. It's obviously far higher organic revenue growth in the quarter on the equipment side, which have this effect on the flow-through.
Yeah. Exactly.
Thinking into next year then, you would expect it to normalize the back up, what we'd seen in the earlier couple of quarters, several quarters?
Well, we don't really speculate on what's going to happen in the next year. You have to make your assumptions in terms of where demand is going to be, I guess. The relationship that we see right now is the one that we just described.
Okay, fair enough.
Yeah.
You mentioned a couple of times about the lack of scale sometimes, and I think you included service in that, and clearly equipment will be getting some decent overhead recovery. Were there any costs put through, i.e. sort of rebalancing the offering at all in service that might have impacted the margins here at all, in organic margin?
Well, I think, if I understand your question correctly, I mean, the allocation of costs when it comes to the inefficiencies that is a result of the split. I'm not talking about the split cost, I'm talking about the fact that we are now an independent company, need our own functions. That allocation is primarily done towards the larger divisions, and service certainly being one of those. Looking at it that way, the proportion of such cost is higher for service for sure. That will have an impact on the flow-through of service.
And then-
The point that Sorry, Anders.
No, just to add, and as it was said before, in the times when you grow fast, it's difficult to grow with efficiency and to meet the demands. I think that also has a part to play in this. Like Per said, which we should not be surprised to see that the lack of or a drop in economies of scale for some common functions, and with the growth within Epiroc, but also to become an independent company where we have not only for the corporate functions but also around the world, have had to establish some resources of our own to become a fully separated structure.
Yeah.
Okay. Understood. The point that surface was perhaps growing better than underground. We've seen obviously the bulk commodity prices actually doing better than some of the non-ferrous. When you look at your offering in surface, can you just remind us the difference or the rough ratio between surface and underground exposure to your sales? Is it more competitive in surface than underground, you find in terms of margins and the business there?
No, I think, not really. I think our position in surface equipment is very strong. We do have offerings that are quite niched. When it comes to, we have two divisions offering products. It's Surface and Exploration Drilling, and it's Drilling Solutions, and both of those have very strong positions. I think it is not a material difference, I would say, in terms of competition at the moment. I just want to comment on your previous question when it comes to the inefficiencies of loss of economies of scale. I think, of course, that's something that we are experienced right now. It is not obvious that we will accept this as a matter of fact, going forward. Of course we expect to be able to address that over time as well. Right now, that's the scenario. That's the situation.
Just to mention, I think we need to be respectful to the fact that with the speed that this split has taken place. The speed was a priority because we had this deadline, and obviously, we have some work to do as Per. That's what Per points to that we will obviously continue to work to take away as much as these inefficiencies as possible, but during this process, we obviously had to make some concessions.
Yeah.
Okay, thanks. Just finally on the credit rating, is there any update, Anders, in terms of where your credit position, credit interest rate you might have to pay look like with your borrowings?
No. I remember I said we expect BBB+ as the rating, and I maintain that. I don't see a change.
Okay. Thank you.
Thank you. The next question is from Markus Unruh of Kepler Cheuvreux. Your line is now open. Please go ahead.
Hi, good morning. Markus from Kepler Cheuvreux. My first question is just if you can talk a little bit about how your exploration portfolio is moving along, and also what you see in the market in terms of feasibility studies. I'm obviously interested in the coming greenfield portfolio in the midterm, if you're seeing those kind of moving along at all. That's my first question. My second question is on Fordia. What kind of profitability does it have? Is it in line with the tools and attachments? Finally, if I can, if I get you right, pricing for tools and attachments you talked about in previous quarters about price erosion in that segment. Has that stopped now when you're choosing more between orders? Thank you.
Okay. First of all, the exploration question. We've seen quite the significant pickup of activity when it comes to exploration. That's of course, good news, which means that people are looking for new ore bodies. Timing-wise, we expect the Fordia acquisition to be pretty good. It's not even close to where the exploration activities were in 2010, 2012. We could be just in the beginning of more of an expansive phase when it comes to exploration. Fordia profitability is something that we don't disclose, but we are quite happy with the acquisition, put it that way.
When it comes to price erosion for primarily tools and attachments, as we mentioned, the activities that we've done so far is we're dropping volumes and orders or we're not basically taking orders that have low profitability, and that in itself will stop the price erosion in those segments. There's a big difference if you look at our portfolio in terms of profitability. The areas where we're strong and we want to continue, we do have a pretty decent profitability. The tail, if you like, we don't. Of course, we address the tail. That's the consequence of pricing. If you follow the industry, you can see there are pretty different signals from the various players in the market, which is very interesting to see. I think market shares are shifting around quite substantially at the moment between the different players.
We'll see what the end result of all this is, but certainly that's happening right now. Again, as a side comment on pricing, of course, we still experience the increase in raw material prices that we have to compensate for in tools and attachments. We've done price increases, but we have not been able to, as of yet, compensate ourselves for that price increase. That's still to be done.
Okay. Thank you very much.
Yeah.
Thank you. The next question is from Lars Brorson of Barclays. Please go ahead. Your line is now open.
Hi. Thanks. Good morning. Per Lindberg . I have three, if I could, one on order intake in the quarter, one on exploration, and one on the margins in equipment and service. If I start with order intake, Per, down 10% quarter-over-quarter. I think that's very much what's scaring investors today a little bit. Therefore, I think it would be helpful if you can provide some numbers around the two reasons that you point to. That's seasonality and lumpiness of large orders. For me, seasonality, I pulled out 15 years of history of the old mining business. I see a pretty mixed picture in terms of seasonality, with no clear pattern, really, between Q2 and three in terms of order intake. Last year, obviously, you were flat quarter-over-quarter. It looks like Q3 is much more driven by the cycle than seasonality.
Just on large orders, we're not talking about big projects for Epiroc. We're talking about drill rigs and load and haul trucks. A large order for you is SEK 100 million or so. That's a percent of your quarterly order intake, and you actually did announce 1 order as I saw it in South Africa in Q3. Can you help me define what is normal seasonality in your business? Can you help me define what is large orders? And three, can you help me understand how much each of these two impacted order intake in the quarter? Thanks.
Yeah. I think you have the right approach, first of all, to look at the history. But the problem is, if you look at it with the published numbers, you probably won't be able to extract the core of the business, which is comparable over time, because we have added activities, we have discontinued activities. If we look at the history from 1990, I believe, to 2017, we see more or less an average drop in quarter three versus quarter two of, I think, 10%, more or less. Now, that is not a forecast, nor is it always true, but that's the history. What we've done there is basically to clear out everything that's an addition or that's a subtraction, but just the core of the business. It just happens to be 10% this quarter as well, but that's just perhaps a coincidence.
When it comes to definition of large orders, we typically disclose a large order above SEK 100 million. This we do if we have the consent of the customer. If we don't, we won't disclose it. It's not like you can assemble all the press releases and see the exact amount of orders. Unfortunately that's the case. That would be more or less the definition. As mentioned, if we would extract or just normalize, if you like, for the large orders in quarter one and quarter two versus quarter three, we would be not perhaps exactly flat, I guess, but we would see a lot more even development between the quarters. The underlying development, according to such a definition, would be more even.
That's helpful, Per.
Yeah.
That's very helpful, very clear. I appreciate it. Thank you.
Sure.
We heard Sandvik talk a little bit about a slow start to Q3 in order intake in the mining business and a better September. I know it's not that meaningful to look at monthly orders for your business. I just wondered whether you were making the point earlier specifically that metal prices have not impacted customer behavior, which I take to also include on the copper side, where obviously we had a, what was it, 20% drop in June, July.
Yeah.
I just wondered whether you could recognize a monthly pattern within Q3 with a very slow start and a better September, and to what extent that might be a meaningful observation.
Yeah, of course, we asked ourselves exactly that question. There's no clear pattern, to be honest. As mentioned already, as we mentioned, as you mentioned, of course, mineral prices has come down, and we need to keep an eye on the development going forward.
I think we-
Understood. Secondly, if I can, exploration, clearly encouraging to hear you talk about a pickup there. I know it's very small for you-
Yeah
It does tend to lead the business through a cycle.
Yes.
I'm curious what kind of growth you're seeing at the minute in exploration, and where is that business today relative to peak five, six years ago?
I do not know the exact answers to those questions, to be honest with you. I know that exploration was, as compared to today, if we compare to 2011, 2012, probably three to four times larger than it is right now, in that order of magnitude.
Okay. Thank you very much.
Finally.
Sorry, I think we're running out of time. I think we have to close the call now. I'm sure you can just come back with all those questions that remains. Thank you very much for joining us today. We really hope to meet you again here in February. Thank you very much.