Good morning, everybody, and warmly welcome to EPYC's Q3 Results Presentation. I am Ingreda Solves, Investor Relations of Epiroc. Today, our CEO, Paline Bay, will start telling us about the performance in the quarter He will then hand over to our CFO, Anders Lindian, who will deep dive into the figures. And after the presentation, we will have a a Q and A session. Supper, please go ahead.
Thank you, Ingrid, and it's a pleasure to be here. And I think we are looking at a relatively solid quarter 3 that we have behind us. We've seen a 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 at a good level and it's more in line with demand in general.
So I think we made some significant progress there. We've also seen our profitability increase. And and, I think, from that, I think we are looking at the quite satisfactory quarter. We've also seen our orders increase, but strong quarter 1. And that was not surprising actually because we know that quarter 3 is normally slower than quarter 2, which was the case also this year.
We also saw large package orders that we had in or quarter 2 quarter 1 did not really materialize in quarter 3. And of course these large orders attempt to vary when they actually come in. And it did have an impact also on quarter 3. We should also know when we look at 43, we should realize that this is actually quite a good quarter historically. It's actually the 4th best quarter ever.
The 2 best quarters are the previous quarters in in this year. And the 3rd best quarter is actually quarter 1 of 2012. So quarter 3 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 3, 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. So we will continue to pursue our long term efforts to improve working capital through supply chain efficiency. We do have a program in place. But we will also as a consequence of this increase our efforts on the short term basis to improve our working capital and make sure that we do not tie unnecessary capital in our supply chains. So 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 also to continue to contribute to efficiency going forward. I'm also happy to note that we made an agreement to acquire Fortia out of Canada. It's a supplier of exploration drill bits and casings, which is a very good strategic fit to upper rock going forward. And we expect that to close that later on this year or beginning of next year.
Turning over to financials. I mentioned the strong revenue growth of 19%. 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. And we do have also provisions for the long term incentive program and of course that's tied to the development of the share price. So that will have impact on individual quarters up or down depending on the share price. But as mentioned, of course, we expect the split cost to to taper off during this year. When we compare quarter 3 to quarter 3 of last year, We should remember that quarter 3 of last year, first of all, was a relatively strong quarter, but also that we were not a independent company last year.
And the consequence of that is that of course, now we do have, we've built up a corporate function with associated costs. And we do also have some effects when it comes to lack of scale when it comes to some functions internally. So they're not totally comparable. And 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.
But Europe developed really well. And the and looking at Africa and Middle East, you can see that it's actually quite a significant decline. But that's primarily due to very strong comparables last year. And the quarter 3 in Africa, Middle East, last year was actually the best quarter of the year. So that's really the reason why we do have that comparable decline.
We're still looking at a distribution between the mining and infrastructure where mining is 70% of orders received and the infrastructure 30%, which is in line with what we've seen over the last few quarters. So looking at the segments, you can see the, the change between, quarter 3 of last year and this this quarter. And equipment and services, roughly 76 percent of orders and 74% of revenues this quarter. After market to the right, orders received 62% of orders received and revenue is pretty much the same. Last year's, revenue were 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.
And we'll come back to 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. So equipment grew with 2% service 13%. And when it comes to service, I think our efforts to strategic target, the fleet that we have in operation has given effect. And right now, the service component of the mix in service their service and there's actually spare parts. So service tends to grow faster now than spare parts, which should perhaps be kept in mind.
But also apart from the sales efforts, we do also see, progress when it comes to our package service offerings. A rig, rig scan, for example, is an offering that we have launched and that is also making good progress in the market. So So the development certainly within service is quite exciting and satisfactory. Operating margin increased to 24.6 percent from 23.3. We have a flow through of over 25%.
And again, I think that's that's a good sign. But once you'd keep in mind again that the mix within service is, turning to more towards service, And when we increase the volumes of service, uh-uh, it tends to be, at somewhat less efficiency in actually because we we introduce, new technicians and that it takes time for them to, to get up to speed and also for us to train them to to a to an appropriate level over time. This is a simple, a couple of simple graphs just describing the, the 2 parts of equipment and service. As mentioned already, when you look at that equipment to the left, You see that the volume of orders received quite substantially lower this quarter as compared to quarter 2 and this is due to, primarily due to the lower, amount of large package orders, especially in underground. When you look at service, you see that the quarter 3 is slightly lower than quarter 2, which was also the case in quarter 3 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. So especially in North America, we've seen 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 is robust? Well, we are right now targeting profitability rather than growth. So 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. And if you look at the operating margin, it has increased from 13% last year to 13.6 now.
And if you look at quarter 2, it was 12.4. So we have now reversed the trend, I hope, and we see positive flow through within tools and attachments. And so of course, that's quite satisfactory as well. And again, of course, the Canadian, manufacturer of, tools is within tools and attachments. And finally from my side now, is business development.
And 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. And to the right, you can see our Control Tower in Odebu. This is a place where we take, customers and we have a very strong interest from customers.
Where they can see our our suite of, digitalized products to, monitor and manage the flow of operations in a mine. From from remote. And I think this is certainly one of the tools that will help our customer to increase productivity going forward. We've also built the automation center, some five continents, and the intention there is to help our customers to go to, implement automation solutions in their minds. And 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 the this mind track that you can see. It's, pretty much same frame that we've had historically, but this one loads 10% more than it's done historically. We've also launched a range of reverse circulation drill pipes. Now, these are very specific for the ones that know mining, but it actually does improve productivity. For minors.
And, and not the least, I should say we're now launching, generation 2 of our battery powered, vehicles. It will be launched in November now, and this is another development that attracts huge attention among our customer and we expect that to be a very good event. We'll high attention. And, 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. So, now into financial specifically, Anders.
Yes. Thank you, Pan. A little bit of deep dive into the financials, as you would expect, naturally, there will be some repetition, but, that is pretty normal. If we start to look at the revenue and, let's say, the top line bridge, Yes. It was, it was, an orders received that was, lower, but it was then in Q2, but it's typically a slower quarter So, and Pare has explained a little bit the background.
We had a positive currency effect overall in the quarter and it's now a flat year to date and slightly negative still on rolling 12, but for the fourth quarter that will likely change. Going forward here, we have although we have, you know, a situation where the paired end rates in September is a little bit different than in Yoon, but for our U. S. Dollar and Canadian dollar and euro and, and, we have higher period end rates than the average rates. And as you know, we typically say that those 3 together with the Australian dollar and the rand is is the 5 most important currencies that has an impact to us.
The Australian dollar and the rand are pretty much unchanged. If we look then into the fourth quarter, we, if the rates don't change, we should, likely see a positive with a couple of points, percentage points, a 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. If you then look at the margin, first of all, I've I've said that before what, the underlying profit margin that we look at is the dotted line where we have excluded the split costs or project costs and also effects from long term incentive programs.
And then of course, which I will say a few times, but I think it's still worth mentioning that when we compare with last year, we were not the fully mobilized company. And also, Pam mentioned that we obviously have a difference. And that specifically should be remembered when we look at the flow through, which if you, if you do a math, then obviously we have a flow through, which is a little bit over 21%. But it's well over 25% if we also do, some, 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 not that was brought into Epiroc during last year.
We also have, a little bit last economies of scale in some functions, with us being a smaller company, an independent company. Then of course, when we look at the split, the negative effect is, in the structure part, is, 1.5, but really purely related to the split is 1.1. So the 0.4 out of the 1.5 is for a dilution on the margin from the acquisitions and the contract manufacturing. And as we have communicated. The split costs are, in the quarter, SEK 70,000,000 and the effect from the provisions of long term incentives is $56,000,000.
So $126,000,000 for the quarter is related to to that part. And those 126, then if we take away some of the corporate sorry, if we take away some of the long term incentive costs that we had actually last year as well, we didn't have any project costs last year. That together with the effect of, the acquisitions, a positive effect from the acquisitions and the, contract manufacturing gives the the 99,000,000, which you see as structure and other in absolute terms. Obviously, the long term incentive provisions will change with the, with the share price of Epiroc. So, 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 So if we would have made the calculation today with the current share price, it will have been not have been, the, the, the, the 56,000,000 that you you saw. If we then continue to, to the segments, It's okay to flow through in equipment and service and a clear improvement in tools and attachments to flow through in equipment and service. You would think could be better, but I think Pierre explained quite well that we have grown not the least in service where there our inefficiencies in the, you know, when you grow fast, but we also have growth in equipment and growing with maintained efficiency is a challenge and all segments, even though, tools and attachments and also the corporate part, is affected by economies or 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 for the, we should again remember that we have mobilized 1 new organization, which we didn't have fully established last year and that's hydraulic attachments.
And 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. And on the structure side for the equipment and service, then we have acquisitions and contract Manufacturing. Going to the income statement, repeating myself, I would like to make a few remarks when we compare to, to last year. We obviously see the main differences, I would say, in administration and marketing or the, referred to sometimes as SG And A, with the administration part being impacted by the costs for, but 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 ISIT in particular. The other point I would like to make on the P and 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. So 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 hedging of external loans, but not to the extent we had before. So it's definitely lower. And in the interest debt. And also finally, the tax rate here, we even though the number per se seems to be on the same level, the, it's a very different percentage of, tax effective tax rate and, the the 'seventeen number is obviously not representative of our current operation.
While we are at the level today of well below the 26% actually, we are on the 25% level year to date. So, When we adjust for this, as Perris said, we have an operating profit of 21.0 percent when we adjust for the project costs and the long term incentives provisions and the profit before tax of 20.6 percent. On the balance sheet, the main points I would like to make here is of course that compared to last year, quite easily to detect we now have a complete balance sheet with 4,000,000,000 in cash, and which we didn't have last year being part of Atlas Corpco. We also have a fully capitalized equity with the 17,000,000,000. The 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. The and also some increase in tangibles the main part there being a consequence of the 4 acquisitions that we made in the beginning of this year. Some more words on the net working capital. As you can see, there aren't there isn't a very different number from a percent of revenue than we had in Q2. I mean, this is the average So it will not change dramatically from period to period.
And 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. And then we also have a small effect of the supply chain program initiative that where we centralize initially the inventory and to be able to, in the next step, produce it out in the market. And we will start implementing that in Q4. So there is no major change in the working capital percent. 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, then, as I said, inventory was the main increase. We also have us a slight reduction, seasonally normal for payables with the lower activity in the parts of the world where we we have a lot of activity in the Northern Hemisphere. Talking a little bit about the net debt, yes, net debt went up from 3.0 to 3,100,000,000, not a dramatic change. We have a positive operating cash flow, not to the extent we would like, but come back to that.
We also, and I would like to point that out very much. We had, obviously, repurchase effect of SEK1.1 1,000,000,000 net, we bought a net SEK11.3 1,000,000 the detailed numbers you will find in the report. And that is obviously according to the plan where we were allocated 1,200,000,000 SAC as part of the split for purchasing or repurchasing of shares to the existing long term incentive programs. Finally, cash flow, again, some of the numbers, which we compare with, are, we should not focus on so much. And those are really the if we go from, let's say, the taxes part and also to other other investments, they are really not so comparable.
But I mean, we have, 1st of all, I would like to to point out that although we had a sequential improvement, we are not satisfied with the the working capital and, and, in particular, and the cash flow as such. We had good, increase in profit, for sure. But 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 300,000,000 of portfolios from our customer finance operation.
And that due to the, let's say, different characteristics of the contracts, those 300, or a little bit below 300 will in the cash flow statement show in in different lines. And some of it will be shown in non cash items. That's why it's quite high. And a big the biggest part is actually in other investments where the main the majority the 292 in other investments relates to the divestment of customer finance. There's also a minor part in in the rental fleet, change in rental fleet.
Taxes paid was a little bit higher than than normal. We, obviously, taxes paid increase when you make a lot of profit, but also we did a little bit of recalibration to make sure that our preliminary taxes match quite better the effective tax together with some retractive payments from last year's profits. So 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 CapEx, the different lines in CapEx that you see on this, come to 331,000,000, which is we are about on the pace where we have been with the if we adjust for what I said on the, customer finance, divestment, And I don't see any dramatic change, in going forward in the near future. We see the divestment of, credit portfolios in payment solutions something.
We support our customers with financing, but it doesn't necessarily mean that we will keep it on our own balance sheet. So 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. And with that, I will hand over to Perr again.
Thank you, Anders. And the summary is pretty much where I started, I guess. I think this is, this is a solid quarter. We've seen, the good news is that we see a continued strong from our customers. And once you remember that this is a good quarter if we compare it to us historically.
And 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. And profitability also going up, which is quite satisfactory. Of course, I reminded you and Anders did as well that the compare it quarter of last year was not to a fully developed company.
Cash flow, we mentioned several times in course, when it comes to inventories, when we now are in a situation where our capacity more in line with demand, we should also be able to improve the flow of the inventory through our production and 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 some additional comment. Of course, we've seen a decline in mineral prices, during quarter 3. And that we do not necessarily think that that's going to have a material impact on the activities of our customers. So we will we think that, the activity level will continue on a high and robust level So the expectation is that it will continue more or less at this level where we are right now.
But of course, we will need to keep an eye on the development going forward because the, of course, the metal prices will continue to be relatively volatile, most likely. And so we'll keep an eye on that, but the expectation, the short term expectation is that we will be more or less at the same level, which we saw in quarter 3. Going forward. So questions and answers.
Okay. Thank you very much. Yes. Then 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. So then, we will hand over to the telephone conference and operator. Do we have any questions? We
already have a question Please introduce yourself. Your line is now open.
Yes. Hi. Hi, Pernandes. It's it's Claude from Citi. A couple of questions for me.
If you can hear me. Hi. Okay. So first on the on the equipment side, the weaker orders there, your report orders down slightly in underground. And more and more miners are moving underground and we still have a replacement demand of the most recent peak yet to kick in So 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? Have the weaker price action in particular copper started to impact you negatively when you look further out?
Well, I think one should be a little careful comparing individual quarters because as I mentioned, that's which is also evident in the numbers for underground is that individual barge orders, we have a huge impact on the comparables for the individual quarter. So that's one thing. And you're absolutely correct to trend toward underground continues may not necessarily be visible again over a single quarter, but that's a trend that we see for sure. And I so I guess the key message here is not to be, not to look at the individual quarter too much when it comes to extrapolating a long term trend. I think that's important.
And 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 that you have 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. And I was wondering on the timing there if you share that view because we had 2 peaks very close to each other 1 in 2008 and 1 in 2012. And the first one is replaced, and now it's time to replace the most recent one. So some comments there would be helpful.
I think you're right. And personally, I'm a little surprised that we still see expansion being actually over 70% of orders received this quarter. So it continues to be my majority of expansion, which means that we are yet to, to see the, the replacement cycle being more substantial. So I think your observation is, is mostly, or probably absolutely correct. I think we will see more replacement going forward than expansion.
And it just a helpful comment to those that perhaps don't follow this too closely. The life span of underground equipment typically 5 to 6 years, whereas, surface equipment is between 10 15 years depending on type of equipment. So of course, the peak, in 2012, would primarily be related to underground rather than surface.
My final one is on the service part. The week it dropped 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. And I appreciate obviously that 2 weeks in attachment is very linked to production, but I guess On the service side, you had 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, to sell the spare parts, but we sell service and that means changing oils and changing smaller stuff, which requires some manpower, but not necessarily major spare parts. So So, you're correct. So that the strong sales of equipment that we've seen will translate into more spare parts going forward.
Yes.
Thank you. We have a next question. It comes from Matthew Spare of Exane. Your line is now open. Please go ahead.
Yeah, morning. I'll just check. You can hear me okay. This seems to be a very bad line for people dialing in.
You're very loud and very clear, so that's all fine.
Okay, good. So 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, and then adjust for this sequential decline, you 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, Matias, is, that's what he tells me. More or less. So, that's what we're looking at.
Okay. And then second question related to that. So your outlook is demand to remain at a similar level. So what does that actually mean in terms of those two things that you said, sequential development and large orders. So is that make an assumption around some large orders hitting in Q4 or is that the the underlying X large order sort of run rate?
Well, if we look at the potential pipeline of large orders, if you just, visualize a map across the world and look at what the, you know, the potential orders out there, larger ones, it's still quite significant. But whether those are going to materialize in quarter 4 or not, very difficult for us to say. So, what we're basically saying is that the underlying, demand is pretty much we expect to be pretty much on this level where we're at right now. And which could be, you know, the orders received could change as a consequence of large orders, but we don't know that. So I guess the safest best bet is to to, you know, assume a pretty flat development, I guess.
That's what we're saying.
Okay. And then can I have one final quick one on tools and attachments? The margin you talked about some improvement, both sequentially and year on year, but it's only up ten basis points and the flow through is about 15%. What would you had some efficiency measures dragging that down Did you have any efficiency measures bringing that up? So underlying, really it's kind of a flat development
I mean, we have, yeah, on this here, I mean, we we have taken actions in, in the, in the segment, to, as, Power mentioned, I think we have, started to prioritize, profitability over volume, and, when it comes to, to the let's say, the top line and the gross profit margin, and then obviously also addressing other efficiency measures. So Yeah, there are plenty of activities, to, to improve the flow through and the, and the bottom line in, in the, in the segment. But we should not, and I, 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 or that, we were not a fully developed company, and had not the structure that we have today last year.
And I did just to complement, or, yeah, 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. And what we've done so far in this quarter is to basically to reduce the volumes of non profitable orders. Now that's certainly not the end of it.
We will continue to improve the profitability overall, and then tools And we've started with basically addressing the low profitable, segments and the orders that we have seen.
Okay. Thanks very much. Your answers.
We have a next question. It comes from Graham Phillips of Jefferies. Line is now open. Please go ahead.
Yes. Good morning. Thank you, Per Anders, for taking my questions. First question really is around the drop through margin in equipment and service. Can you it's, obviously, you commented around the mixture, and you said that the equipment I think you said it 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. And given the sort of volatility of this number, can you can you give us some sort of feel of where you think it should normalize looking into sort of 2019?
Well, I I think, you know, the the the observation that the service part, including spare parts, is about three times as profitable as historically correct. Now that refers to a situation where equipment demand is not as strong as we see right now. So now, of course, the that relationship is you know, shifted more, 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. But, and I think if, assuming that demand is where we expect it to be, that relationship should be more or less maintained going forward.
And we, just to add to that, why we are, I think we should be pleased with with the growth in in the service pot. It's, is obviously far higher revenue organic revenue growth in the quarter on the equipment side, which have this effect on the flow through.
And thinking into next year then, I mean, you would expect it to normalize the backup, what we've seen in the earlier couple of quarters, several quarters?
Well, we don't really speculate on what's going to happen next year. So you have to make your assumptions in terms of where demand is going to be, I guess. But you know, the relationship that we see right now is the one that we just described.
You mentioned a couple of times about the lack of, scale sometimes. And I think I think you've included service in that. And clearly equipment, we'll be getting some decent overhead recovery But were there any costs, put through, I I sort of rebalancing, the offering at all in service that might have impacted the margins here at all? In organic margin?
Well, I think this, 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. And I'm not talking about the split costs. I'm talking about the fact we are now an independent company need our own functions. That allocation is primarily done towards the larger divisions and and service certainly being one of those. So so looking at it that way, it's it's the proportion of of such costs is higher for service, for sure.
So that will have an impact on the flow through of service.
And the point that, sorry,
No. And, just to add, and as it was said before, you know, in the times when you grow fast, it's it's it's difficult to grow with efficiency and, you know, to meet the demands. And I think that's also a part, has a part to play in this. And, And, well, like Per said, we have, which we should not be surprised to see that the 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, some resources of our own to, to become a fully separated structure.
Yeah.
Okay. Understood. And the point that, surface, was perhaps growing better than than underground. We've seen obviously the bulk commodity prices actually doing better some of the non ferrous. When you look at your offering in surface, can you just remind us the difference, the or the the rough ratio between surface and underground exposure to your sales?
And what is it more competitive in surface and underground you find in terms of margins and the business there?
No. I think, not really. I think our position in service equipment is very strong. We are we do have offerings that are quite niched and, and, when it comes to, of course, we have 2 divisions offering, products. It's, surface and exploration drilling and it's drilling solutions and both of those have very strong positions.
I think that's It is not a material difference, I would say, in terms of competition at the moment, I would say. And I just want to just 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 experience right now. It is not obvious that we will accept this as a matter of fact going forward. So of course, we expect to be able to address that over time as well.
But right now, that's the scenario. That's the situation.
And just to mention, I think we need to be respectful to the fact that, with the speed that this, split has taken place. So, in, in, you know, the speed was a priority because we had this deadline and, and obviously, we have some some work to do as pair. That's what pair, points to that, we will obviously continue to work to, to take away, as much as these inefficiencies as possible. But, during this process, we obviously had to make some concessions.
Okay. Thanks. And just finally on the credit rating, is there any update on this in terms of where your credit position, credit interest rate, you might have to pay look like into, with your borrowings?
No. I I will I remember I said we expect BBB BBB BBB plus as the rating, and and I maintained that, so I don't see a change.
The next question is from Markus Anrud of Kepler Cheuvreux. Your line is now open. Please go ahead.
Hi. Good morning, Marcus and 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're seeing in the market in terms of feasibility studies? So I'm obviously interested in in the green 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 40, what kind of profitability does it have? Is it in line with the tools and attachments? And then finally, can you just, if I get you right, then pricing for tools and attachments, you talked about in previous quarters about pricing price erosion in that segment? Has that stopped now when you're you're choosing more between orders?
Okay. First of all, the exploration question, we've seen quite a significant pickup of activity when it comes to exploration. And that's of course good news, which means that people are looking for new, new ore bodies. And, so timing wise, we expect the 40 acquisition to be, pretty good. But it's not even close to where the exploration activities were in in, in 2010, 2012.
So, so we're we could be just in the beginning of more of an expansive phase when it comes to exploration. 4 d, our profitability is something that we don't disclose. But, we are, we are quite happy with the acquisition. Put it that way. And when it comes to price erosion for tools, primarily tools and tools and attachments, as I mentioned or as we mentioned, the what the the activities that we've done so far is we're dropping with dropping volumes and orders, or not basically taking orders that, have low profitability.
And that in itself will stop the price erosion in those segments because there's a big difference in if you look at our portfolio in terms of profitability, you know, 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. And of course, we address the tail. And so, that's the consequence of pricing. But if
you, if you follow the, you
know, the fall of the industry, you can see there are, pretty different signals, from the various players in the market, and, and, there's, so, which is very interesting to see. I think, market shares are shifting around quite at the moment between the different players. So, we'll see what the end result of all this is, but certainly that's happening right now. But again, as it's side comment on pricing, of course, we still experienced the 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, been compensate ourselves for that price increase.
So that's still to be done.
Thank you.
The next question is from Vasquarsen of Barclays. Ahead. Your line is now open.
Hi. Thanks. Good morning, Peter. I have 3, if I could, 1 on order intake in the quarter, 1 on exploration. And one on the margins in equipment and service.
If I start with order intake, here, down 10% over quarter. I think that's very much what's scaring investors today a little bit. And so that's why I think it will be helpful if you can provide some numbers around the two reasons that you point to. So that's seasonality and lumpiness of larger orders. I mean, for me, seasonality, I pulled out 15 year history of the old mining business.
I see you put in mixed pitch in terms seasonality with no clear pattern really between Q2 and Q3 in terms of order intake. Last year, obviously, you were fat quarter over quarter. It looks like you know, because it's much more driven by the cycle than seasonality. And just on large orders, I mean, we're not talking about big projects for APROC. We're talking about drill rigs and load and haul trucks.
A large order for you is 100,000,000 or so. That's a percent of your quarterly order intake, and you actually did announce one order as I saw it in South Africa in Q3. So can you help me define what is normal seasonality in your business? Can you help me define what is large orders? And 3, can you help me and how much each of these 2 impacted order intake in the quarter?
Thanks.
Yeah. You know, I think you'd, have the right approach, first of all, to look at the history, but the problem is if you look at it with, with the published numbers, you probably won't be able to, to, extract the core of the business, which is comparable over time, because We have added, we have added activities. We have, you know, discontinued activities. And if we look at and the history from 1990, I believe, to, 2017. We see, more or less an average drop in quarter 3 versus quarter 2 of, I think, 10%.
More or less. Now that is not a forecast, nor is it always true, but that's the history in that, what we've done there is basically to, to, you know, clear out everything that, that just, you know, that's an addition or that's a subtraction, but just to core the business. So, you know, it just happens to be 10% this quarter as well. So, but that's just perhaps a coincidence. When it comes to a definition of large orders, we typically disclose a large order above 100,000,000.
And, this is, this we do if we have the consent of the, customer. If we don't, we won't disclose it. So it's not, it's not like you can assemble all the press releases and see the exact amount of orders, unfortunately. That's the case. But that would be, more or less a definition.
And as mentioned, we would, if we would extract or just normalize you like for the large orders in quarter 1 quarter 2 versus quarter 3, we would be not perhaps exactly flat I guess, but we would see a lot more even development between the quarter. So the underlying development according to such a definition would be more even.
That's helpful, Pierre. That's very helpful, very clear. I appreciate it. Thank you. We hope that big talk a little bit about a slow start to Q3 in order intake in the mining business in a better September.
I know it's not that meaningful to look at monthly orders for your business. I just wondered whether you're making the point earlier specifically that metal prices have not impacted customer behavior, which I take towards or into the on the copper side where obviously we had a, what was it, a 20% drop in in June, July.
Yeah.
I just wonder whether you could recognize a monthly pattern and whether q3 with a very slow start and a better September, and to what extent that that might be a meaningful observation.
Yes. Of course, we asked ourselves exactly that question. And there's no clear pattern, to be honest, But as mentioned already, as you as we mentioned, as you mentioned, of course, Miller prices has come down and we need to keep an eye on the development going forward.
And I think
Secondly, if I
can, exploration, clearly encouraging to hear you talk about a pickup there. I know it's very small for you but it does tend to lead the the the business through a cycle. I'm curious what kind of growth you're seeing at the minute in exploration and where is that business today relative to peak 5, 5, 6 years ago?
I do not know exact the exact answers to those questions, to be honest with you, but I know that exploration was as compared to today, if we compare it to 2011, 2012, probably, 3 to 4 times larger than it is right now. And that order of magnitude.
Sorry. I think we're we're running out of time. So I think we have to to close the call now and, I'm sure you can just come back with all those questions, that remains. But thank you very much for joining us today. And we really hope to meet you again here in February.