Good afternoon, everybody, and warmly welcome to Epirox Q2 Report Presentation. Today, we have our CEO, Peline Baib with us and our CFO, Anders Linde and they will guide you through today's presentation.
And today is indeed an exciting day because this is the first presentation of a quarterly report for Epiroc. And not only as an exciting day, it's a good day also because I think we have some good numbers to show you. And, some highlights to start with. First of all, another quarter with orders received above, 10,000,000,000 Swedish. We had a very strong development for equipment.
We had double digit growth for service and also in in the beginning of the third quarter. Ramp up on manufacturing is going well. We have record high revenues as well very good to see that the efforts to ramp up now is showing results, and we get the response that we are looking for. We have a good operating performance, I think, even though we do have some challenges in the segment of tools and attachments, but I'll come back to that. We also have, a cash flow impact to working capital.
I'll come back to that as well, and Anders will do that also, of course. But there's an impact from the strong growth, but also some inefficiencies that we are addressing when it comes to cash flow. And of course, also the obvious fact that we're listed in the Stockholm Exchange since June 18th. Looking more specifically at orders received and how it's distributed across the world, I'm very happy to see the development, especially in South America and Africa, Middle East, as you can see, very good numbers. In South America, we managed to get some very big orders in the quarter.
And of course, that has an impact on the growth above 50%. But you can also note that, for example, in North America, we do a negative growth number in the quarter, but that is, should be understood, that we do compare this to last year's second quarter where we did have a very strong second quarter in North America with big orders, especially in Canada. If you look at the bottom right hand of this graph, you can see that the distribution between infrastructure and mining is is where it typically is with the 70% in mining and 30% in infrastructure. Some other good news. And I think this is, these are times when the industry is about to change the perception of of how to push and drive productivity through innovation and, and technology.
And one one good example of this is the cooperation and partnership that we have engaged in, driven by LKAB, the Swedish state owned, Mining company, iron ore mining company in the north, with an intention of developing a a new world standard for sustainable underground mining this really means that developing a new standard for automation for digitalization and for for carbon free, production. And in this picture, you can see representatives from ABB from, sub CombiTech or from CombiTech rather, from LKAB and Epiroc and also Volvo. So I think this is, you know, significant development and also signifies what's going on in the industries throughout the world. We've also launched some new products. One of them is the beauty that you see down there, the, Mind Truck 2010.
It's a 2010 a battery driven mind truck. It's the newest addition to our, portfolio of battery driven vehicles. And, this, this particular vehicle can be, quickly charged, or you can exchange the battery in a few minutes, and I think this is also something that creates a lot of attention among customers. We've also launched an automatic ventilation system based on our serpent system, and the the automatic portion of this is really, a system that detects the air quality and also, changes the airflow depending on the air quality. So I think this is a step towards continuous automation of mines.
And we also launched a product called VLOC clam which means that it's, becomes easier and less hazardous to, basically join a drill string, when, when drilling. So These are some of the innovations that we have launched during the We did have an order, growth of 18% organically or 21% in total. Revenue growth of 22% or 25% in total. Book to bill is, is now at 107%. So we continue to build our order book, even though this ratio is more healthy than it was in quarter 1, where where we did have a a much higher, ratio book to bill, meaning that we now are ramping up production.
Our operating profit is, 1,800,000,000 or, corresponding to a margin of 18.4%. In absolute terms, the margin increased with 23%. And included in this is the cost for the split for Matascopko and also the change in provisions for the long term incentive program. All this is about 181,000,000. The same same quarter last year, that number was $53,000,000.
So if you back that out and adjust the operating margin, we're at 20.2 percent this quarter as compared to 19.3% last year. So we do have a positive development of the margin and also a quite a good flow through, when it comes to revenues and profits. The cash flow is mentioned at $199,000,000. Well, that's, a number that is pretty low given the profitability. The big impact there is working capital.
And again, the big impact on working capital is the buildup of of customer receivables as well as inventories to, and inventories, of course, to support the deliveries going forward. And receivables as a consequence of the ramp up of, of invoicing. But, we do also have some inefficiencies in the supply chain that we are addressing, and I expect that to give some improvements over the longer term. And, over the shorter term, of course, improvements in in working capital will be achieved once we get a better balance between our production and order inflow. Looking at the segments, well, you can see the growth is quite healthy and basically in all segments, 31%.
Now we're talking order orders received, 31% for equipment, 14% for service, and also reasonably healthy 6% for tools and attachments. And, the strong growth when it comes to equipment and service means that there is now represents 76% of orders received. And if you look at the distribution between equipment and aftermarket, We are now at the 41% equipment and 59% aftermarket. Last year, we were at 63% aftermarket. And then of course, 37% equipment.
So, we we do have a very strong development when it comes to equipment. And of course, that's good news going forward because will mean that our fleet increases and the potentials for continued to increase aftermarket sales also increases. Equipment and service segment. We do have a continued strong demand for equipment, as mentioned. Most of that is driven by our customer's expansion investments.
It's still about 2 thirds of, the sales is, expansion. And, the alternative to expansion is really a replacement where an expansion means that basically the mines have more equipment in operation and replacement mean that they just interchange they change one piece of equipment for another. And we think that's that's a good sign because it means that the activities increase and also that the potential replacement cycle is is not here yet. We've also increased the efforts to and when it comes to marketing and sales, when it comes to service, again, as you can you could see, the orders received for service increased to 14% and that does have an effect. All in all, order growth of 22 percent, revenue growth of 30% and margin increase from 22.6 percent to 23.9 this year with a very good And breaking that down and looking at equipment and service, individually, you can see to the left, then the bars for the black bars are orders received and the yellow ones are revenues.
And as you can see, a very steep increase of orders received in quarter 1 quarter 2 this year. But I'm particularly happy with the development of revenues in equipment, we actually increased revenues with 43% as compared to last year when it comes to to equipment. And again, that's a good sign because we can see the response in our, in our supply chain and our, factories when it comes consumption of these services. So there's not a big difference between, orders received and service as a consequence, but you can also see that there's very healthy development when it comes to both of those in the first two quarters and not the least quarter 2 of this year. We did increase, as mentioned, orders received with 14% and revenues were 19% for service in quarter 2.
Finally, the segment, the tools and attachments, we did have a healthy demand as mentioned. Order growth of 6% revenue growth of 5% and that really gives us a book to bill ratio of 101%. What I'm not happy with is the operating margin. It actually came down from 14.3% down to 12.4% and with a negative flow through. And, this is, not satisfactory.
We are undertaking actions in order to to mitigate that. We have already increased prices in the beginning of the year. That has not been enough. We've also done some structural changes in the beginning of the year, not has not really given the effects as of yet, but I don't think we have done enough. So we will continue to take action in order to break this trend that we see in profitability when it comes to tools and attachments.
So, well, I'll come back to the summary, I guess. So, before that, I'll leave it to Anders to talk more specifically about financials.
Thank you, Per. Yeah. I will give a little bit of, flavor to the numbers that, pair briefly described first to, talk a little bit about the orders receive the revenues, the bridge. There is a good trend. I think particularly, I would like to highlight that it's good to see that the organic growth for revenue is succeeding the organic growth for orders received.
Obviously, we still are building backlog, as Perry mentioned, with the book to bill being 107%. But, it's a good trend, and we see the result of the ramping up. Most of our currencies actually, improved during the quarter and the end rates are higher than the average rates. It meant that, as you can see, the currency effect turned positive in the quarter and, and, in particular, the strong development of the U. S.
Dollar So, we, we also have a positive effect of, the acquisitions, but it's minor, as you can see. When it comes to going forward, we should be aware that, a big part of our markets are in the vacation period in Q3. So, that normally has a dampening effect on the, on the, on the top line, and from, the Northern Hemisphere. Looking at the margin development, again, Per mentioned, and here, I would like to you to look at the dotted line here, which represent the, what we can refer to as the underlying margin of 20.2, which and has been adjusted for the one time costs related to the split from Atlas Corpcor as well as the the change in provisions for the long term incentive programs. Obviously, higher than Then last year, last year, we didn't have the split costs, of course, and we had a little bit less of the long term incentive program costs, or change in provisions.
Also, we should be aware of that. We have a higher corporate costs this year than last year where we, when we obviously didn't have the full corporate capacity, which we have today. The flow through, around 30% on the organic growth. And in the structure and other, we have a little bit of a dilution effect on the margin from the acquisitions as well as the contract manufacturing that we have. When we go into the segments, also mentioned, by pair, the, we have a very good development in the equipment and service with well above 30% flow through, but we are not satisfied with the development of the tools and attachments, which is quite obvious from, from the bridge that you see here.
Also here, we have a diluting effect from the structure as well as the contract manufacturing, which is in the equipment and service segment. Going, into the the looking at the P and L, I would like to make a few remarks. Obviously, the growth drives the numbers in general. We have, we have a gross profit margin, which has an impact from the the mix effect with more equipment than last year. We have also increased the efforts in R&D, which you can see from the expense I would also like to mention that in the administration, which is obviously here in the marketing and administration expense, we have the the provisions for the long term incentive programs.
And we also see an effect from the higher corporates costs, which are mainly in the administration. And now we are more or less on the reasonable run rate for the, the corporate level, not completely fully loaded. On the interest net. And here, I would like again, when we go down below operating profit, and I think we've mentioned that several times during the Capital Markets Day, for example, we have a situation where last year's numbers are not fully comparable because they we were not a, let's say, a stand alone company at the time. So it means that the interest net is not really representative.
Right now, we have an interest net, which is probably a little bit more negative than it will be going forward. But, we can expect that it will be probably negative also in the near future. It has an impact of the hedging that we do for loans in the foreign currency, but it also, obviously, fluctuates with the exchange rates to some extent, which we cannot really predict. When it comes to the tax, we have landed on a level, which we believe is, reasonable. We said before that we would be below 26%.
This quarter was 25.2 and year to date, 25.5 percent with the effective tax rate. A few notes on the on the balance sheet. The funding is in place, which is we have, according to plan, when we were listed on the 18th June, we also paid back the loans that we had, from Atlas Cocoa and replaced it with a bridge a loan and also with a loan from the European Investment Bank. So, that's all according to plan. Obviously, with the growth, we also have quite an increase in working capital.
There is also a currency effect in, in the balance sheet. Otherwise, it's, it's fairly as expected. When we look at the, the net working capital, it's obviously driven very much by the growth. And when we look at the KPI, the 31.7% It's an average. I mean, if we look at the short term, it's a little bit higher.
The ratio as such, But the and in particular, we would say the inventory has increased and the receivables. And part of it, with the inventory also indicated by power with a limited effect though is the fact that we have the supply chain program, which means in the simple words, short term that we have increased centrally inventory levels to secure availability. Before we can actually do, a little bit of reduction out in in the field. Looking at the debt, net debt, we have we have said we would be around SEK 3,000,000,000 in the net debt by the time of the listing. And we were at 3,000,000,000 with a net debt to EBITDA of 0.4.
It was 0.35 last quarter. And this is obviously, very much according to the plan that we made and with the financing that we'll put in place. So the SEK 7,000,000,000 in loans are roughly SEK 5,000,000,000 from a bridge loan, which we will replace during the, the near future with more long term. And we have about SEK 1,000,000,000 from, in European Investment Bank and also another SEK 1,000,000,000 in local loans around the world. In the, the plan was also to, to, buy back shares for hedging of the long term incentive program.
So we have estimated that to be SEK 1,200,000,000 roughly. We have a mandate to buy back SEK 30,000,000 share and we expect to use around half of it as it seems right now for the programs. 2014 to 2017. All of that, you there are plenty of details in the previous communications, for example, in the prospectus. And then, cash flow, which is, is, obviously, given the profitability level, as Perry expressed, the 199 as operating cash flow, very much, burdening by by the growth.
The growth has been stronger than we anticipated, which has also now in the short term, consumed more more working capital, both inventory and the receivables. So it's weaker than we would have liked. But it, we see an improvement to come. Of course, when it comes to the operating cash flow, we exclude the, the cash flow impact from the hedges of the foreign currency loans, which with a stronger or if you could current, most of the currencies that we work with have, have strengthened during the quarter versus the SEK, which has, with a neutral P and L effect, but it has had with the hedging or the rollovers had a negative effect on our cash flow. On the CapEx side, a little bit higher than in Q1, around SEK 400,000,000, if you add up the different types of of CapEx that we have in our cash flow statement, but it follows quite well the business, the activity of the or the level of activity of the business.
So, with that, I've I've covered the financials, in rough terms and takeaways. I'm sure there will be questions so pair, if you can sum up before we continue.
And of course, summary is basically saying exactly what we just said. So So, I think we're looking at a strong quarter. We have very strong orders received, even stronger development when it comes to ramp up and invoicing. We're quite satisfied with the operating performance, even though we have some issues when it comes to tools and attachments as much but we are dealing with that. And as mentioned, we do have, of course, a negative impact from the incentive program and also from the split costs, but that's highlighted.
So, you know, the level of that. And of course, also the cash flow impact, but overall, we're quite satisfied this quarter. And also, of course, the fact that demand beginning of the quarter 3 now continues to look healthy. And, finally, I would like to point out that we have our quarter 3 report now on October 25th. I think we have communicated another date, previously, but now it is on October 25th.
So that's the brief summary. And, I now turn it over for questions. I think we'll start with the floor now.
Thank you. Is this all? Yeah. Thank you, Peter, for filling Handelsbanken. If I may start on the you mentioned per, on the equipment side that it's mostly or 2 thirds is is sort of a expansion of existing mines.
Given the pattern that we're seeing that been ongoing for a while now. When do you expect the replacement, demand to come on stream? And also tied to that, of course, another demand would be then new mines. And and there were a couple of projects put in the icebox back in 2012, on those type of discussions we you have, obviously, regarding automation products and others, I guess, what's your best guess when we're gonna see those type of orders coming into that hospital or the apparel business?
Well, I think first of all, when it comes to replacement, you know, the last, the last peak, if you like, it comes to equipment was back in 2012. And the typical, lifetime of equipment is perhaps 6 to 7 years underground and 10, maybe to 15 years, surface. And we still haven't seen a big replacement cycle for, neither underground or surface. So, you know, and we're approaching 6 years now. So, it's not unreasonable to assume that replacement could pick up.
I'm not saying should, but I'm saying could. So that's kind of where we are in the replacement cycle. When it comes to, opening up new mines, relatively few. Such discussions. It's still really, in an existing mines.
You can see that also from, the, you know, some interesting is to, to see the exploration is actually quite active. Not the least, of course, in existing mines, trying to find new new ore bodies, on existing mines, but also trying to find a brand new sort of greenfield. More bodies. But, as of yet, not very many discussions on on, greenfield, mines.
Okay. Thank you.
My second question would be on
the, issues within DNA. And, firstly, I just understand, in what business do you see this, or it's both? Is it in production Fogastai? Is it the, attachments business? Maybe open up a bit just so we can understand.
Sure. Sure. And and and also tied to that, of course, the actions that you're planning.
Yeah. No. It's really, 22 some attachments really 22 different parts. It's, it's, our rock drilling tools, and it's tools and attack or it's it's attachments, hydraulic attachments, it's really for infrastructure. The the hydraulic attachments is doing well.
Rock reading tools, obviously, that's where we have our issues. Is not really related to, to the bigger production facilities, such as Fogista. But we do have, we do have a structure where, we have, I think, 16 production units, and for, rock drilling tools and and some of the portfolio, of course, we do have a portfolio also when it comes to rock trading teams part of that portfolio is, under pressure. And, of course, that can be related to some of the production sites that we have across the world. And, so what we've done so far, as I alluded to, is we've worked we have worked with pricing, in order to, you know, to, call it counteract raw material price increases, that we have not been fully successful.
We will continue to work with pricing because we feel, you know, fair enough that, you know, we shouldn't absorb that. We we cannot absorb that. But, there's still a question mark how successful successful we're going to be going forward. And I also mentioned that we've done some restructuring already. We have close to plant, the small plant in the U.
S. So that's historically now. But still, we've done some, some, restructuring also in China. But I think, given sort of the, you know, the footprint that we have, I think we probably need to continue to do some restructuring. Within that area.
Thank you very much. Yeah.
Hello, Andrew. Have you talked anything about the very recent, fall in metal prices? That's something which concerns you and and Have you had any discussions with your clients about that?
Well, I haven't had that myself, but maybe, you know, I'm sure that somewhere in our organization that this that discussion is happening. This is true. I think, what we see obviously is metal prices becoming a little bit more volatile now over the last, last month or couple of months as discussions around the trade is happening and and, trade barriers. Now where this is gonna go, well, I think, it's difficult for anybody to assess And, I cannot see that it has had any material impact on our business.
I just read that you you commented about the short term development saying that what so far you haven't seen any difference.
So far so good.
Yeah. Okay.
Yeah.
Yeah. Thank you.
Okay. I don't think there are any more questions from the floor, then we can turn on the telephone conference Do we have any questions for you?
Yes, we have quite a few today. And the first question is from the line of Graham Phillips at Jefferies. Please go ahead, Graham. Your line is now open.
Yes. Good Thanks for taking my questions. The first one is financial, and then we'll talk to other ones around invest But disburseable on the balance sheet, you talk about the bridge loan and the need to look for some other financing options longer term. Can you give us a bit of indication of what your average interest rate today is? And if you do get a credit rating from the rating agencies, where you think that the average interest rate could go to?
Hello, Graeme on this year.
Hi, Anders.
For, for the interest rates, I mean, we have competitive rates. So so, they are about where where they should be in in the, and it's a combination. You know, the bridge loan is a bridge loan, which means that it's, it's actually changing as we move on. But it's, it's in SEK and it's competitive with SEK race that you can get on the market?
I mean, when you get a independent credit rating, I imagine, you go to the Capital then you should get a better rate or not?
We, yeah, I don't think it will change a lot because we have, we, we have, a pretty strong balance sheet, as you know, and we have worked with our core banks closely to get the best let's say, rates and, we, we can, we can have So, we anticipate to get around BBB plus BBB, BBB plus on the rate seeing once once we have it. Okay.
Thank you. And just around investments, I'm looking at your cash flow segment as well with the increase in CapEx, so both tangible and intangible. Can you give a bit of an idea what sort of annualized figure should we be looking at here, and what the investments are going into, because I appreciate, obviously, the R and D is part of the intangible element, and where particularly are you putting in expansions, in the tangible asset side?
Yeah. The when it comes to the CapEx on on annual, as I as I mentioned, we were a little bit higher in quarter 2 than quarter 1. So roughly 4 versus 300,000,000 in, in, in total between the components that you see in the cash flow. So I think it gives, we, we are not we're not planning any major CapEx projects. So it fluctuates fairly well with the, business level.
So I think you're not far off if you, if you use the numbers that you have first half and, let's say, extrapolating away and consider the business volume.
And just on tools and attachments, I mean, I imagine in here there are consumables, not just for drilling, and for the hydraulic business or infrastructure. The the presumably, the consumables that are being used in the mine, and we're seeing service growing, very strongly that, there should also be an increase in other consumables that are being used in the mobile underground machinery and other machinery. Is that also in here as well? And is that not doing well either?
Well, I consumables for us is really the the drilling tools. And, of course, as, as equipment's being utilized, we also have spare parts and spare parts is part of, of, service. So, our student, you know, the service business that we refer to is really pure service, I. E. Man hours, and also spare parts.
I don't know if that answers your question, but that's the way we, we divide it.
Okay. So for instance, if a bucket needs replacing on the front of a mobile machinery, then that would be treated as a spare part in service and won't show up in the consumer in your other bits of consumables, which would be tools and attachments.
That's correct.
Okay. So we are seeing some operating leverage effectively a little bit in service as well. There's clearly a drop through margin in the bridge for your tools and attachments, sorry, for your equipment and service is very high. I got a number of close to 42%, and is that all equipment, or is there some service, but it sounds like you probably are getting some sort of operating leverage out of the service business as well. Is that correct?
Oh, yeah. We definitely do. I think, the the drop through or or, you know, flow through as we refer to. It's, it's quite high in, in, a service part. We, want you to perhaps note, that we we also within service, as mentioned, we have the pure com service component and also the spare parts component.
And these 2 are a little different in nature. And right now, the the service component is actually increasing. And this is due to the age of the fleet and the spare parts as a percentage is actually decreasing. That's going to, you know, that's going to change over time back to more normal, but that's the distribution we have. And typically, the profitability for services lower than for spare parts.
Okay, that's great.
K. We're now over to JP Morgan and Andrew Wilson. Please go ahead. Your line is now open.
Hi. Good afternoon, everyone. Can I just clarify a couple of of points on the consumable side? I think I I'm alright in thinking that the activity levels are where you thought they were, but the profitability is being a bit disappointed. Is that the correct way of thinking about it?
Yeah. That's exactly the way to think about it.
Perfect. And then then maybe just on the the pricing side, you obviously mentioned you raised prices earlier in the year. And I think you made a comment that you hadn't been as successful as you talked to be in terms of recovering the raw materials. Is that because the price increases weren't large enough or because the market's rejecting the price increases. I just wanted to try and understand
I think, 2 components. I think, we were a little slow when it comes to reacting to, to, you know, input price increases and, So and of course, it always takes time to negotiate them to implement. That's the first component. I think we did perhaps anticipate the magnitude of increases either. So, which means that, we haven't recovered the raw material price increases as of yet.
So that's those are the reasons, basically. That's why we feel that we need to, you know, continue to work with pricing.
And just on that, do you think you're doing anything different for your competitors to do it in terms of pricing, or do you think this is something that the kind of the whole I guess, market is struggling with a little bit?
I have no idea exactly how our competitors are working pricing. So, neither, you know, their strategy nor the levels. So, but, I wouldn't be surprised if they see the same pattern as we do.
Perfect. Can I ask a more general question just on the the M and S side obviously, we talked about quite a lot at the Capital Markets Day and it's clearly a feature of what you're looking to do? Have you seen any change in that environment since you've been sort of separately listed in terms of incoming inquiries to you, or in terms of you getting out in the market just trying to get a sense of sort of what the activity levels are like there?
Well, I think, I haven't seen a material change. Of course, I haven't been with the company since February summer history is, is quite short, I guess, but, not that big of a change. You know, the the thing that it changed, I guess, is that in quarter 1, we made 4 in quarter 2. We we didn't make any acquisitions, but that's what I think, could be expected. Sometimes you strike and sometimes you don't strike, but the activity from us is still high.
And we expect to, you know, to continue to make acquisitions relevant such, going forward. I cannot say that I've seen a major change in interest, you know, for us, as a potential buyer, I guess, you mean, after the listing. No. Maybe it's coming.
And may definitely just ask a quick one for Ana specifically. Just on the FX and the Q3, Could you give us sort of any help in terms of thinking about that at the EBIT line? And we'll see it's quite a lot of moving parts, but any sort of indication would be useful. And unless I've missed that and you've said something previously.
It's always, it's always, let's say, difficult and a challenge to have a, let's say, a a future opinion of FX. But as I mentioned, the, the end rates for, basically, one exception that that I come to think of of our major currencies, the end rates are, let's say, higher than the average rate So it means that, if this stays, obviously, we will have, we we should have a positive impact in Q3.
That's great.
We are now over the line of Klas Bergelind of Citigroup. Please go ahead, Klas. Your line is now open.
Yes. Hi, pardon Anders. It's Klas from Citi. A couple of questions from me. First on the supply chain program that would run for 3 to 4 years.
Can you give us some more concrete actions? I assume some factory closures getting inventories closer to the customers, but also what kind of costs are we talking about? I appreciate that you will likely take this above the line, but just to understand, roughly, is it 2 100 bps of margin, 300 bps And what kind of impact should we see, from savings, both on COGS, but also networking capital. So what is your target there?
First of all, the the, it's true. We're we're talking about a long term program, which means that this is an, you know, call it more or less an entire revamp of the entire, supply chain setup. Now supply chain should be understood as, as the distribution of, spare parts as well as consumables from our factories out to our customers. And, and this does not involve any a factory, you know, considerations of factory closures or anything like that. It has but, of course, it has to do with distribution centers and and, and such.
And, so that's going to have, over time, definitely impact on the entire structure of, both the transportation mode as well as the the how things are distributed. So, So that's really what we're looking at. And, and just as an indication, we, well, it's not really an indication, but, I mean, it's we have done a fair amount of air freight over the last few quarters. As a consequence of low availability in spite of high inventory, and this is something that is really showing that we do have some issues. In our supply chain.
So we're we're about to shift that to a structure where we have, transportation via or marine transportation and another complete setup when it comes to how to, fulfill demand out in the field. Cost for this will be, in the shorter period, we expect the savings to be pretty much in the magnitude of the costs. So it should be more or less neutral, for the the P and L in the shorter period. Longer period, we should the only thing I can say is that we expect see substantial savings when it comes to consumables as spare parts.
That's
good. My second one is on mining and the replacement cycle. You say that the replacement cycle is not here yet. That's a little bit difficult for me to understand. Because it was only in the middle of last year that MRET started to talk about increased expansion of mines or brownfields.
Following 1.5 year of consistent commentary in the reports that all demand was driven by replacement if we're looking at replacement cycles that are short, it seems a little bit strange that you haven't seen any replacement amount, obviously, of levels that we had also before the financial crisis 0708. So could you explain a little bit more power? What do you mean that we haven't seen any replacement demand?
Well, essentially, what I'm trying to say and what I what, you know, the way I think about this is that the the We have obviously a substantial fleet, out in the field. And at one point in time, all of that needs to be replaced because nothing's gonna last forever. And, when and if you look, again, back to the last peak, it was back in 2012. And, there has been a sort of a a perhaps, I'm now saying perhaps a more more consistent level of replacement That level is still here, but it's right now only representing, about a third of of in of all the demand. Right now, the dominating part is, expansion.
So what's different from, what we saw a year and a half, 2 years ago, is that now we have really expansion investments and the lower portion or the small portion is is replacement. So maybe maybe at maybe we're looking it's possible that we're looking at a replacement, which is more stable over time rather than a wave or a cycle that would, you know, everything at the same time. So so, maybe that's kind of maybe it's, skewing the perception a little bit. So and I cannot say exactly what's going to happen, but, that's, that's the way I think about it, at least.
Okay. My final one is coming back to the margin in Tools and Attachment, you're talking about the need to adjust capacity and you are increasing prices. You're a bit late, but now you're increasing. So when can we see price cost turn already in the second half, or do we need to wait until 2019?
Well, that remains to be seen, doesn't it? So, we are, probably more anxious than you to see a turn, believe me. And, we are, and I certainly expect, us to turn the corner when it comes to pricing. As really in relation to raw materials, very soon. And that's my expectation.
Now, is that gonna happen? We have to see. And what I'm saying is that I don't think, you know, what we've seen in terms of pricing, nor the the structural things that we've done. To be enough. I think we need to do more than that.
But we have to come back to you guys once we have the decisions and the actions in place. I think there's a couple of questions from the floor.
Okay. We don't have any more questions from the telephone conference.
The next question is, sorry, we do have, quite a few more questions.
Do you
want to take next one, or do you want to take some more questions from the floor?
No. I think, no. They're shaking their heads here. So go ahead with the phone.
Okay. We're over to Eric Colson at Industry Equity Partners. Please go ahead. Your line is now open.
Thanks for taking my question and, exceptionally, this sort of started the Epiroc story. Sort of to belabor the point with the T and A margin, but it looks to me like it has decreased quite significantly for a couple of years also before raw materials pressures perhaps started in a serious way. You just help us understand the history of the T and A margin a little bit without giving us exact numbers? But perhaps at least the primary reason the decline. Is it more a raw material squeeze, I.
E. More short term in nature, or is it something more structural going on here, I. E. Competitive pressures? Thank you.
I think, I think first of all, the history with tools and attachments is only, is is very short because we didn't have attachments in our portfolio. Up until basically last year where we inherited that from CT in Atlas Copco. And be honest with you, I think perhaps the the compares comparative numbers that we saw, in quarter 2 of last year for for attachment tools, hydraulic attachment tools were perhaps indeed include all the costs. So once you perhaps have that in mind, But nevertheless, your observation is correct. I think we've seen a longer term deterioration of margins within within rock drilling tools.
And that has been more or less happening over the last few years. So, you're correct. And now the exact reasons behind that is, to me, I think, you referred to either pricing pressure or raw material, pressure or competitive pressure. I think, the, I mean, short term, we see raw materials. Yes.
But longer term, it's clearly a competitive pressure.
And so how we should think about it going forward is perhaps that you can offset the raw materials pressure, but not the competitive pressures that we have seen over over the last 2, 3 years?
Well, you know, just, you know, think about it like this, this, I think, you know, like, any other business, rock drilling tools has a portfolio of products. Some of that is very healthy. Some of that is, you know, do have some competitive pressure. And we, we need to think about how do we, how do we shift the balance in our portfolio. And I think that's really, that's really what we're doing right now and thinking about how what is this portfolio going to look like going forward?
And and where we, of course, assume and think that well, the competitive pressures are not of the kind that we, you know, that's a business that we don't wanna do going forward. We'll, you know, we'll make those types of decisions. We're not exactly there yet.
Okay. We're now over to the line of Marcus Alloran of Kepler Cheuvreux. Please go ahead, Marcus. Your line is now open.
Hi, good afternoon. A couple of questions. Many questions have been asked, but can I just talk about demand trends and led somewhere that you, if you look at orders, especially for equipment, they look kind of flattish? You can say that most of the sequential improvement is currencies. Is this correct?
And if you look at your order books and discussions where you with that you're having with your customers, Is that correct also going forward in the near term that we'll see kind of demand flattening out at a very high levels? That's my first question. And then I'm just wondering when you expect to be, to having caught up with your production facilities and the investments so that you will delivering line with the order book? Thank you.
Well, again, I mean, we You know, what we see now is that we see we see that demand being healthy, and that means that we right now, we see demand being pretty much what it what it was in quarter 2. Now one should, you know, remember and understand that, you know, depending on when the exact orders land, or we received this specific order is going to have an impact on the specific quarter. Now, we also we released, I think yesterday, we released a it was a press release from an order that we received in quarter 2, Comidore, and Dominican Republic. Over $200,000,000, of course, if that would have landed in July, the relationship between the quarters would have been somewhat different. So once you keep that in mind, that, you know, the the orders will have an impact on on the quarters as well.
So, so, you know, assuming that everything is flat may not necessarily be correct.
Okay. And then in terms of in terms of metals, is it Is it mainly copper which is driving now or is it fairly balanced?
I think what we've seen, what we saw during quarter 2 is that copper is very active. Yeah. Copper and gold is, seems to be a little bit more flat. But not, again, not necessarily indication what's going to happen forward, but that's what we saw in quarter 2. And again, the big commodities that we're exposed to is copper and gold.
And then in terms of, in terms of the, billing capacity, when do you expect to be, to have caught up?
Well, if if, if orders received continue to increase with 18%, we have to increase production with 18% during the quarter as well. So, that that's that's a good question. We are, as you understand, we are at the more or less, we're a little above the $9,000,000,000 in revenues or invoicing, and that's the pace we were in quarter 2. And it's, I guess it's a fair assumption also that we're increasing throughout quarter 2 as well. So so the pace continues to increase.
I mean, that's a fair assumption. And when we're rebalanced, well, it really depends on where we are when it comes to orders received. So it's kind of difficult to answer, I guess.
Okay. We're now over the line of Matthew Spur at Exane. Please go ahead, Matthew. Your line is now open.
Hi there. Thanks for taking my questions. So the first quick one, which was was the main bottleneck in your production then that stops you being able to catch up to orders?
I think, you know, I think with, the beginning of the year, we clearly was components, specifically hydraulic components. I think in most of those bottlenecks are now shift shifted into our own, you know, assembly capacity. So, I would say, you know, it's on internal capacity. That's the bottleneck right now.
Well, the I I'd like to add that the the, let's say the the sub suppliers, you know, that that hasn't gone away. It's still, you know, a a constant challenge. They obviously will when they ramp up with the same pace as we, it it they obviously are facing the same the same issues. So, it doesn't mean that that, let's say, challenge has disappeared.
Yes.
Okay. And then, can I ask one on the cash flow and how you think about the second half and where there's any catch up there? Obviously, by the time you you take out that, financial net payment with the hedging, you haven't generated that much cash in in H1. How how do you think about H2? What sort of, sort of conversion can you get?
No, I mean, our expectations is obviously to deliver a much stronger cash flow for the rest of the year. We had a very strong finish in the quarter, which meant that we're also tying up a lot of receivables, which you can see when you look at the numbers, So, and traditionally, from a cash flow point of view, we and working capital point of view, there is a relief in Q3. So we expect a strong cash flow in Q3 and the rest of the year.
All right. Thanks. I'll leave it there.
Okay. We now go to Barclays Capital and Lars Prossen. Please go ahead. Your line is now open.
Hi, thanks very much. Pierre Annas, actually, just a couple of very quick follow-up questions, maybe more to Anders. Just on the last common you were making, honest with regards to release of inventories in Q3, is that beyond normal seasonality? I think you, I heard you say early that you've obviously increased inventory centrally before reduction in the field. So should we see some of that beyond normal seasonality impact working capital in Q3 and Q4.
And maybe just more generally, when should we expect to say more normalized working capital level, relative to where we are in the cycle and the ramp beyond these specific initiatives that you've been saying
There are a couple of, let's say, components in this. First of all, I think from the from the supply chain initiative, we shouldn't expect dramatic improvements during, in the short term, meaning Q3, Q4. There will, we expect some improvements, but I also think we, the The growth that we had in, in this year was obviously above our expectations. And if you look at the relative ratio. So working capital, yes, we are, we're a little bit higher than we were, what we would have liked to be.
But it's not exceptional. But, obviously, with the growth rate that we've had, you tie up more capital. You know, if you if you grow 25% just as an example, then then, obviously, you also have, unless you're improving your efficiency, you also grow your working capital 25 percent just to make it obvious. So, But but we are now in a situation where we we we should, we should be able to, to turn a lot of this working capital into cash for for the remainder of the year.
I would like to, you know, I I would like to comment also. I think, this is true, of course. I mean, the the the big consumer our working capital is, is the growth itself. But that doesn't mean that we we don't have any efficiencies. So, we we, we keep an eye on this, and, we will, we will, basically, we will work very intensively to improve, working capital levels as well as the cash flow.
That's for sure.
Helpful. Secondly, and finally, can I just follow-up on the FX question earlier and probe you a little bit on FX impact in Q3 on your EBIT beyond the fact that it'll be positive? I think that's quite obvious. Are you able to put a number to that? Or if not, can you help us a little bit with the transaction impact beyond the translation impact on FX?
I would not like to put a number on it to start with. But I'm obviously, we we have tried to guide in the, in the prospectus where we, where we, say that we, yeah, the 1% on average would give $90,000,000 on the bottom line. But I mean, that's very, very general. And that depends obviously on a number of things. But to to guide you and to tell you exactly how it's going to influence Q3, you know, assuming that we have, the exchange rates that we have as we speak, that would, that I would not like to do.
I think, again, a comment. I think, you know, this, this is a question that I expect to be recurrent over, you know, basically all the quarterly presentations that we have. And of course, we are now a new company and we're still, you know, understanding our own, you know, current exposure and what to expect from ourselves going board. So so I think, you know, we'll work on on understanding the the currency exposure also going forward in a better way than we have perhaps right now. So hopefully we'll be able to guide you a little bit more specifically going forward.
Okay. We now go to the line of Sebastian Crudeyer at Redburn. Please go ahead, Sebastian. Your line is now open.
Hi, good afternoon. First, coming back to the invoicing ramp up, just maybe a clarification, if demand stays in line with what you've seen in Q2 for equipment, should we see a catch up as soon as Q3? Because I mean, the ramp up was pretty steep in Q2. So could we catch up with the current level of demand as soon as Q3? And I have a follow-up question.
You're right.
Yeah. On the on the on the ramp up? Yeah. Yeah. I I think Per mentioned it and expressed it very obviously, we, it it's a moving target, which means that by the end of the quarter 2, we've, have a higher capacity and then then the, the beginning.
So, I don't think we are, far away from from having, a balance, but, it depends obviously on on many things on on the orders coming in and and what kind of orders, but, to say that we are catching up, we still have a book to bill 107%. So we still get more orders than than when we're able to, invoice in, in Q2. So
Okay.
I know. I know it's the
Yeah. It's it's kind of a I understand the the, you know, how you perceive the the nature of the answer, but it is difficult to say. But, of course, it's if, if orders were to to stabilize exactly at the level that we were in in quarter 2, for some reason, and, we, we have made progress during quarter 1. So our quarter 2 when it comes to, wrapping up production. So of course, we would see a catch up in the relatively short term, but that's no guarantee because we don't know where the orders to see the bank go.
I mean, that's obvious.
And on the on tool demand, if we look at the order intake, I mean, it has developed negatively core compared to quarter 1. And that'd be in North America. I mean, are you losing market share in North America with cheaper products? Is it part of the issue, for this business?
Well, I I cannot say that we're losing market share. And the we you're right. We saw a negative development of of sales versus last year in North America, but then again, remember that last year, had a very strong quarter, quarter 2. So it doesn't mean that the sales in itself was Yeah. That's true.
It's, but I, you know, I cannot say that we're losing market share, but again, that's a good question. I guess, yes, we have to see.
Yeah. The the the, I think, we need to remember that when you look at sequential sequential for, for that segment, the Q1 was very strong. It's a little bit of seasonality in it, and it was a very strong quarter.
Okay. And a final question on, again, on the tool business, how much of your revenues are derived from long term contract, you know, 2, 3 years contract versus what is discretionary.
Good question, Donald?
It's, it's not, it's not a major part on if you look at the, if you look at the tools and attachments, first of all, the, the, a big, big part of it, it's attachments rather than, consumables. And in the consumables, it's it's a smaller part of of the consumable side.
Okay. Thank you. Okay.
I think time is running out. So I think that was the last question. So we will close down the session. And thank you very much for participating and hope to meet you again in October. Thank you very much.