Good afternoon, everybody. Warmly welcome to Epiroc's Q2 report presentation. Today we have our CEO, Per Lindberg, with us and our CFO, Anders Lindén. They will guide you through today's presentation. Go ahead, Per, please.
Thank you. Thank you, Ingrid. Today is indeed an exciting day because this is the first presentation of a quarterly report for Epiroc. Not only is it an exciting day, it's a good day also because I think we have some good numbers to show you. Some highlights to start with. First of all, another quarter with orders received above SEK 10 billion. We had a very strong development for equipment. We had double-digit growth for service, and also healthy development for tools and attachments. The good news here is that it continues to be a healthy demand in the beginning of the third quarter. Ramp-up on manufacturing is going well. We have record high revenues as well. It's very good to see that our 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. 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. There's an impact from the strong growth, but also some inefficiencies that we are addressing when it comes to cash flow. Of course, also the obvious fact that we're listed in the Nasdaq Stockholm 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. Of course, that has an impact on the growth above 50%. You can also note that, for example, in North America, we do have a negative growth number in the quarter, but that 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 where it typically is, with 70% in mining and 30% in infrastructure. Some other good news. I think these are times when the industry is about to change the perception of how to push and drive productivity through innovation and technology.
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 new world standard for sustainable underground mining. This really means that developing a new standard for automation, for digitalization, and for carbon-free production. In this picture, you can see representatives from ABB, from Combitech, or from Combitech rather, from LKAB and Epiroc and also Volvo. I think this is a significant development and also signifies what's going on in the industry throughout the world. We've also launched some new products. One of them is the beauty that you see down there, the Minetruck 2010. It's a 20-ton battery-driven mine truck. It's the newest addition to our portfolio of battery-driven vehicles.
This particular vehicle can be quickly charged, or you can exchange the battery in a few minutes. 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. The automatic portion of this is really a system that detects the air quality and also changes the airflow depending on the air quality. I think this is a step towards continuous automation of mines. We also launched a product called V-LOK clamp, which means that it becomes easier and less hazardous to basically join a drill string when drilling. These are some of the innovations that we have launched during the quarter. Looking more specifically at the financials, 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 now at 107%, we continue to build our order book, even though this ratio is more healthy than it was in quarter one, where we did have a much higher ratio of book-to-bill, meaning that we now are ramping up production. Our operating profit is SEK 1.8 billion, corresponding to a margin of 18.4%. In absolute terms, the margin increased with 23%. Included in this is the cost for the split from Atlas Copco and also the change in provisions for the long-term incentive program. All this is about SEK 181 million. The same quarter last year, that number was SEK 53 million. If you back that out and adjust the operating margin, we're at 20.2% this quarter as compared to 19.3% last year.
We do have a positive development of the margin and also quite a good flow-through when it comes to revenues and profits. The cash flow, as mentioned, at SEK 199 million. That's a number that is pretty low given the profitability. The big impact there is working capital. Again, the big impact on working capital is the buildup of customer receivables as well as inventories, and inventories, of course, to support the deliveries going forward, and receivables as a consequence of the ramp-up of invoicing. 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. Over the shorter term, of course, improvements in working capital will be achieved once we get a better balance between our production and order inflow.
Looking at the segments, while you can see the growth is quite healthy and basically in all segments. Now we're talking orders received. 31% for equipment, 14% for service, and also a reasonably healthy 6% for tools and attachments. The strong growth when it comes to equipment and service means that it now represents 76% of orders received. If you look at the distribution between equipment and aftermarket, we are now at 41% equipment and 59% aftermarket. Last year, we were at 63% aftermarket and then, of course, 37% equipment. We do have a very strong development when it comes to equipment, and of course, that's good news going forward because that will mean that our fleet increases and the potentials for continue 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 customers' expansion investments. It's still about two-thirds of the sales is expansion. The alternative to expansion is really replacement, where an expansion means that basically the mines have more equipment in operation, and replacement mean that they change one piece of equipment for another. We think that's a good sign because it means that the activities increase, and also that the potential replacement cycle is not here yet. We've also increased the efforts when it comes to marketing and sales, when it comes to service, again, as you could see, the orders received for service increased with 14%, and that does have an effect. All in all, order growth of 22%, revenue growth of 30%, and margin increase from 22.6% to 23.9% this year with a very good flow-through in this segment.
Breaking that down and looking at equipment and service individually. You can see to the left, the bars for equipment. The black bars are orders received, and the yellow ones are revenues. As you can see, a very steep increase of orders received in quarter one and quarter two this year. 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 equipment. Again, that's a good sign because we can see the response in our supply chain, in our factories when it comes to ramping up production. Service, the relationship, of course, between orders received and revenues is a little different, more immediate consumption of these services. There's not a big difference between orders received and service as a consequence.
You can also see that there's a very healthy development when it comes to both of those in the first two quarters, and not the least quarter two of this year. We did increase, as mentioned, orders received with 14% and revenues with 19% for service in quarter two. Finally, the segment, 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. This is not satisfactory. We are undertaking actions in order 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, that has not really given the effects as of yet, but I don't think we have done enough. We will continue to take action in order to break this trend that we see in profitability when it comes to tools and attachments. I'll come back to the summary, I guess. Before that, I'll leave it to Anders to talk more specifically about financials.
Thank you, Per. I will give a little bit of flavor to the numbers that Per briefly described. First, to talk a little bit about the orders received and 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 Per mentioned, with book-to-bill being 107%. 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 in particular, the strong development of the US dollar.
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 their vacation period in Q3, so that normally has a dampening effect on the top line from the northern hemisphere. Looking at the margin development, again, Per mentioned, and here I would like you to look at the dotted line here, which represent what we can refer to as the underlying margin of 20.2, which then has been adjusted for the one-time costs related to the split from Atlas Copco, as well as the change in provisions for the long-term incentive programs. Obviously higher than 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.
We should be aware that we have higher corporate costs this year than last year, 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 Per, we have a very good development in the equipment and service with well above 30% flow-through. We are not satisfied with the development of the tools and attachments, which is quite obvious from the bridge that you see here. Here, we have a diluting effect from the structure as well as the contract manufacturing, which is in the equipment and service segment.
Looking at the P&L, I would like to make a few remarks. Obviously, the growth drives the numbers in general. We have a gross profit margin, which has an impact from 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 provisions for the long-term incentive programs, and we also see an effect from the higher corporate costs, which are mainly in the administration. Now we are more or less on a reasonable run rate for the corporate level, not completely fully loaded.
On the interest net, 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 we were not, let's say, a standalone company at the time. 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. 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 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 it was 25.2, and year-to-date, 25.5 with the effective tax rate. A few notes on the balance sheet. The funding is in place, which we have according to plan. When we were listed on the 18th of June, we also paid back the loans that we had from Atlas Copco and replaced it with a bridge loan and also with a loan from the European Investment Bank. 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 the balance sheet. Otherwise, it's fairly as expected.
When we look at the net working capital, it's obviously driven very much by the growth, when we look at the KPI, the 31.7%, it's an average. If we look at the short term, it's a little bit higher, the ratio as such. In particular, I would say the inventory has increased and the receivables, and part of it for the inventory, also indicated by Per, 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 the field. Looking at the net debt, we have said we will be around SEK 3 billion in the net debt by the time of the listing, and we were at SEK 3 billion with net debt EBITDA of 0.4.
It was 0.35 last quarter. This is obviously very much according to the plan that we made and with the financing that we have put in place. The SEK 7 billion in loans are roughly SEK 5 billion from a bridge loan, which we will replace during the near future with more long-term. We have about SEK 1 billion from the European Investment Bank and also another SEK 1 billion in local loans around the world. The plan was also to buy back shares for hedging of the long-term incentive program. We have estimated that to be SEK 1.2 billion, roughly. We have a mandate to buy back 30 million shares, and we expect to use around half of it, as it seems right now, for the programs 2014 to 2017. All of that, there are plenty of details in the previous communications, for example, in the prospectus.
Then cash flow, which is obviously given the profitability level, as Per expressed, the SEK 199 as operating cash flow, very much burdening by the growth. The growth has been stronger than we anticipated, which has also now in the short term consumed more working capital, both inventory and the receivables. So it is weaker than we would have liked, but we see an improvement to come, of course. When it comes to the operating cash flow, we exclude the cash flow impact from the hedges of the foreign currency loans, which with most of the currencies that we work with have strengthened during the quarter versus the SEK, which has with a neutral P&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 million, if you add up the different types of CapEx that we have in our cash flow statement. But it follows quite well the level of activity of the business. With that, I have covered the financials in rough terms and takeaways. I am sure there will be questions. Per, if you can sum up before we continue.
Of course, summary is basically saying exactly what we just said. I think we are looking at a strong quarter. We have very strong orders received, even stronger development when it comes to ramp-up and invoicing. We are quite satisfied with the operating performance, even though we have some issues when it comes to tools and attachments, as mentioned, but we are dealing with that. As mentioned, we do have, of course, a negative impact from the incentive program and also from the split cost. But that is highlighted, so you know the level of that. Of course, also the cash flow impact. But overall, we are quite satisfied with this quarter. Also, of course, the fact that demand in beginning of the quarter 3 now continues to look healthy. 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, now it is on October 25th. That's the brief summary, I now turn it over for questions. I think we'll start with the floor now.
Thank you. Is this on?
No.
Thank you, Peter Folin, Handelsbanken. If I may start on the, you mentioned, Per, on the equipment side that it's mostly, or two-thirds is sort of expansion of existing mines. Given the pattern that we've seen that's been ongoing for a while now, when do you expect replacement demand to come on stream? Also tied to that, of course, another demand would be new mines.
Yeah.
There were a couple of projects put in the ice box back in 2012. On those type of discussions you have, obviously regarding automation projects and others, I guess. What's your best guess when we're going to see those type of orders coming into Atlas Copco or the Epiroc business?
Well, I think first of all, when it comes to replacement, the last peak, if you like, when it comes to equipment was back in 2012. The typical lifetime of equipment is perhaps six to seven years underground and 10-15 years surface. We still haven't seen a big replacement cycle for neither underground or surface. We're approaching six years now, so it's not unreasonable to assume that the replacement could pick up. I'm not saying should, but I'm saying could. 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 existing mines. You can see that also from some interesting is to see the exploration is actually quite active.
Not the least, of course, in existing mines, trying to find new ore bodies on existing mines, but also trying to find brand new sort of greenfield ore bodies. As of yet, not very many discussions on greenfield mines.
Okay, thank you. My second question would be on the issues within T&A.
Yeah.
Firstly, I just understand in what business do we see this or it's both? Is it in production Fagersta? Is it the attachments business? Maybe open up a bit here-
Sure
We can understand.
Sure.
Also tied to that, of course, the actions that you're planning.
Yeah. No, it's really tools and attachments, really two different parts. It's our rock drilling tools and its attachments, hydraulic attachments. It's really for infrastructure. The hydraulic attachments is doing well. Rock drilling tools, obviously that's where we have our issues, is not really related to the bigger production facilities, such as Fagersta. We do have a structure where we have, I think 16 production units, and for rock drilling tools. Some of the portfolio, of course, we do have a portfolio also when it comes to rock drilling tools. Part of that portfolio is under pressure. Of course, that can be related to some of the production sites that we have across the world.
What we've done so far, as I alluded to, is we have worked with pricing, in order 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, fair enough that we shouldn't absorb that. We cannot absorb that. There's still a question mark how successful we're going to be going forward. I also mentioned that we've done some restructuring already. We have closed a small plant in the U.S., so that's historically now. Still, we've done some restructuring also in China. I think given sort of 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. Anders Roslund, Pareto. Have you talked anything about the very recent fall in metal prices? Is that something which concerns you and have you had any discussions with your clients about that?
Well, I haven't had that myself, I'm sure that somewhere in our organization 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 month or couple of months as discussions around trade is happening and trade barriers. Where this is going to go, well, I think it's difficult for anybody to assess, I cannot see that it has had any material impact on our business.
No, I just read that you commented about the short-term development, saying that so far you haven't seen any difference.
far, so good.
Yeah. Okay.
Yeah.
Yeah. Thank you.
Yeah.
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 from
Yes, we have quite a few today. The first question is from the line of Graham Phillips at Jefferies. Please go ahead, Graham. Your line is now open.
Yes, good afternoon. Thanks for taking my questions. The first one is financial, and then we'll talk some other ones around investments. Just first of all, on the balance sheet, you talked about the bridge loan, and the need to look for some other financing options longer term. Can you give us a bit of an indication of what your average interest rate today is? If you do get a credit rating from the rating agencies, where you think that the average interest rate could go to?
Hello, Graham. Anders here.
Hi, Anders.
For the interest rates, we have competitive rates, they are about where they should be. It's a combination. The bridge loan is a bridge loan, which means that it's actually changing as we move on. It's in SEK, and it's competitive with the SEK rates that you can get on the market.
When you get an independent credit rating, I'd imagine you'll go to the capital markets, you should get a better rate or not?
Yeah, I don't think it will change a lot because we have a pretty strong balance sheet, as you know. We have worked with our core banks closely to get the best, let's say, rates, and we can have. We anticipate to get around BBB plus, BBB plus on the rating once we have it.
Okay. Thank you. Just around investments, I'm looking at your cash flow statement as well with the increase in CapEx, both tangible and intangible. Can you give an idea of what sort of annualized figure should we be looking at here? What the investments are going into? Because I appreciate obviously the R&D is part of the intangible element. Where particularly are you putting in expansions in the tangible asset side?
Yeah. When it comes to the CapEx on annual, as I mentioned, we were a little bit higher in quarter two than quarter one, roughly SEK 400 million versus SEK 300 million in total between the components that you see in the cash flow. We're not planning any major CapEx projects. It fluctuates fairly well with the business level. I think you're not far off if you use the numbers that you have first half and, let's say, extrapolate in a way and consider the business volume.
Okay. Thank you. Just on tools and attachments, I imagine in here there are consumables not just for drilling, and for the hydraulic business for infrastructure. Presumably, they're 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, consumables for us is really the drilling tools. Of course, as equipment's being utilized, we also have spare parts, and spare parts is part of service. 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 divide it.
Okay. 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 your other bits of consumable.
That's correct
which would be tools and attachments.
That's correct.
Okay. We are seeing some operating leverage effectively a little bit in service as well, because clearly drop-through margin in the bridge for your equipment and service is very high. I got a number of close to 42%. Is that all equipment, or is there some service? 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 drop-through or flow-through, as we refer to, is quite high in our service part. One should perhaps note that we also, within service, as mentioned, we have the pure service component and also the spare parts component, and these two are a little different in nature. Right now, 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 change over time back to more normal, but that's the distribution we have. Typically, the profitability for service is lower than for spare parts.
Okay. That's great. Thanks very much.
Yeah.
Okay, we're now over to J.P. Morgan and Andrew Wilson. Please go ahead. Your line is now open.
Hi. Good afternoon, everyone. Can I just clarify a couple of points on the consumable side? I'm right in thinking that the activity levels are where you thought they were, but the profitability has been a bit disappointed. Is that the correct way of thinking about it?
Yeah. That's exactly the way to think about it.
Perfect. Maybe just on 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'd hoped 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, two components. I think we were a little slow when it comes to reacting to input price increases, and of course, it always takes time to negotiate than to implement. That's the first component. I think we did perhaps anticipate the magnitude of increases either, which means that we haven't recovered the raw material price increases as of yet. Those are the reasons, basically. That's why we feel that we need to continue to work with pricing.
Just on that, do you think you're doing anything different to what your competitors are doing in terms of pricing, or do you think this is something that the whole market is struggling with a little bit?
I have no idea exactly how our competitors are working with pricing. Neither their strategy nor the levels. 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 M&A side, which obviously we talked about quite a lot at the Capital Markets Day, it's clearly a feature of what you're looking to do. Have you seen any change in that environment since you've been separately listed in terms of incoming inquiries to you, or in terms of you going out in the market, just to try and get a sense of what the activity levels are like there?
I think I haven't seen a material change. Of course, I have been with the company since February 1st, my history is quite short, I guess, not that big of a change. The thing that has changed, I guess, is that in quarter one, we made four acquisitions. In quarter two, we didn't make any acquisitions, that's what I think could be expected. Sometimes you strike and sometimes you don't strike, the activity from us is still high, we expect to continue to make acquisitions relevant such going forward. I cannot say that I've seen a major change in interest for us as a potential buyer, I guess you mean, after the listing, no. Maybe it's coming.
Maybe if we can just ask a quick one for Anders specifically. Just on the FX and the Q3, could you give us any help in terms of thinking about that at the EBIT line? Obviously, it's quite a lot of moving parts, any sort of indication would be useful, unless I've missed that you've said something previously.
It's always, let's say, difficult and a challenge to have, let's say, a future opinion of FX. As I mentioned, the end rates for basically with one exception that I come to think of all our major currencies, the end rates are, let's say, higher than the average rates. It means that if this stays, obviously we should have a positive impact in Q3.
That's great. Thanks very much for your time.
Sure.
Thank you.
We are now over to the line of Klas Bergelind of Citigroup. Please go ahead, Klas. Your line is now open.
Yes. Hi, Per and Anders. It's Klas from Citi. A couple of questions from me. First, on the supply chain program that will run for three to four years, can you give us some more concrete actions? I assume some factory closures, getting inventories closer to the customers. What kind of costs are we talking about? I appreciate that you will likely take this above the line, but just so we understand roughly, is it 200 basis points of margin, 300 basis points? What kind of impact should we see from savings, both on COGS but also net working capital? What is your target there?
First of all, it's true. We're talking about a long-term program, which means that this is, call it more or less an entire revamp of the entire supply chain setup. Supply chain should be understood as the distribution of spare parts as well as consumables from our factories out to our customers. This does not involve any considerations of factory closures or anything like that. It has to do with distribution centers and such. That's going to have, over time, a definite impact on the entire structure of both the transportation mode as well as how things are distributed. That's really what we're looking at.
Just as an indication, well, it's not really an indication, but 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. We're about to shift that to a structure where we have transportation via marine transportation and another complete setup when it comes to how to fulfill demand out in the field. Costs for this will be, in the shorter period, we expect the savings to be pretty much in the magnitude of the cost, so it should be more or less neutral for the P&L in the shorter period.
Longer period, the only thing I can say is that we expect to see substantial savings when it comes to both cost as well as inventories in consumables and spare parts.
Yeah.
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 one and a half 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 demand, obviously of the peak levels that we had also before the financial crisis, 2007, 2008. Could you explain a little bit more, Per, what you mean that we haven't seen any replacement demand?
Essentially what I'm trying to say and the way I think about this is that we have obviously a substantial fleet out in the field, at one point in time, all of that needs to be replaced because nothing's going to last forever. If you look again, back to the last peak was back in 2012. There has been a, perhaps, I'm now saying perhaps, a more consistent level of replacement. That level is still here, but it's right now only representing about a third of all the demand. Right now, the dominating part is expansion. What's different from what we saw one and a half, two years ago, is that now we have really expansion investments, and the lower portion, or the smaller portion is replacement.
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, everything at the same time. Maybe it's skewing the perception a little bit. I cannot say exactly what's going to happen, but that's the way I think about it, at least.
Okay.
Yeah.
My final one is coming back to the margin in tools and attachment. You're talking about the need to adjust capacity, you are increasing prices. You're a bit late, but now you're increasing. 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? We are probably more anxious than you to see a turn, believe me. I certainly expect us to turn the corner when it comes to pricing in relation to raw materials very soon. That's my expectation. Now, is that going to happen? We have to see. What I'm saying is that I don't think what we've seen in terms of pricing, nor the structural things that we've done to be enough. I think we need to do more than that. We have to come back to you guys once we have the decisions and the actions in place.
Thank you.
Yeah. I think there's a couple of questions from the floor.
Okay. We don't have any more questions from the telephone conference.
Okay.
Okay.
Sorry, we do have quite a few more questions.
Oh, okay. Okay.
Do you want to take the next one, or do you want to take some more questions from the floor?
No. They're shaking their heads here, we'll go ahead with the phone.
Okay, we're over to Erik Karlsson at Industrial Equity Partners. Please go ahead. Your line is now open.
Thanks for taking my question, exceptionally solid start to the Epiroc story. Sorry to belabor the point with the T&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. Could you just help us understand the history of the T&A margin a little bit without giving us exact numbers? Perhaps at least the primary reasons for 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, first of all, the history with tools and attachments is very short because we didn't have attachments in our portfolio up until basically last year, where we inherited that from CT and Atlas Copco. To be honest with you, I think perhaps the comparative numbers that we saw in quarter two of last year for attachment tools, hydraulic attachment tools, were perhaps didn't include all the costs, so one should perhaps have that in mind. Nevertheless, your observation is correct. I think we've seen a longer-term deterioration of margins within rock drilling tools, that has been more or less happening over the last few years. You're correct. The exact reasons behind that is, to me, I think you refer to either pricing pressure or raw material pressure or competitive pressure. I think, short-term, we see raw materials, yes.
Longer-term, it's clearly a competitive pressure.
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 the last two, three years.
Well, just think about it like this. I think like any other business, rock drilling tools has a portfolio of products. Some of that is very healthy. Some of that do have some competitive pressure. We need to think about how do we shift the balance in our portfolio. I think that's really what we're doing right now in thinking about what is this portfolio going to look like going forward. Where we, of course, assume and think that the competitive pressures are not of the kind that that's a business that we don't want to do going forward, we'll make those types of decisions. We're not exactly there yet.
Very good. Very clear. Thank you so much.
Yeah.
Okay, we're now over to the line of Marcus Almerud 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? I read somewhere that if you look at orders, especially for equipment, that they look kind of flat, as you say, that most of the sequential improvement is currencies. Is this correct? If you look at your order books and discussions that you're having with your customers, is that correct also going forward in the near term, that we'll see demand flattening out at very high levels? That's my first question. Then I'm just wondering when you expect to having caught up with your production facilities and the investments so that you will deliver in line with the order book. Thank you.
Well, again, what we see now is that demand being healthy, and that means that right now we see demand being pretty much what it was in quarter 2. One should remember and understand that depending on when the exact orders land or we receive the specific order is going to have an impact on the specific quarter. We released, I think yesterday, it was a press release from an order that we received in quarter 2, Cormidom in Dominican Republic. Over SEK 200 million. Of course, if that would have landed in July, the relationship between the quarters would have been somewhat different. One should keep that in mind, that the orders will have an impact on the quarters as well. Assuming that everything is flat may not necessarily be correct.
Okay. In terms of metals, is it mainly copper which is driving now, or is it fairly balanced?
I think what we saw during quarter 2 is that copper is very active. Yeah, copper and gold seems to be a little bit more flat, again, not necessarily an indication of what's going to happen forward, but that's what we saw in quarter 2. Again, the big commodities that we're exposed to is copper and gold.
Yeah.
Yeah.
In terms of the building capacity, when do you expect to have caught up?
Well, if orders received continue to increase with 18%, we have to increase production with 18% during quarter as well. That's a good question. As you understand, we're a little bit above SEK 9 billion in revenues or invoicing, and that's the pace we were in quarter 2. I guess it's a fair assumption also that we're increasing throughout quarter 2 as well. The pace continues to increase. That's a fair assumption. When are we in balance? Well, it really depends on where we are when it comes to orders received. It's kind of difficult to answer, I guess.
Fair enough. Thank you very much.
We're now over to the line of Matthew Spurr at Exane. Please go ahead, Matthew. Your line is now open.
Hi there. Thanks for taking my questions. The first quick one, which was, what's the main bottleneck in your production then that stops you being able to catch up to orders?
I think at the beginning of the year it clearly was components, specifically hydraulic components. I think most of those bottlenecks have now shifted into our own assembly capacity. I would say it's our internal capacity that's the bottleneck right now.
I would like to add that the sub-suppliers, that hasn't gone away.
No.
It's still a constant challenge. When they ramp up with the same pace as we, they obviously are facing the same issues.
Sure.
It doesn't mean that that challenge has disappeared.
It's less obvious.
Yes.
Yeah.
Can I ask one on the cash flow and how you think about the second half and whether there's any catch up there? Obviously, by the time you take out that financial net payment with the hedging, you haven't generated that much cash in H1. How do you think about H2? What sort of conversion can you get?
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. Traditionally, from a cash flow point of view and working capital point of view, there is a relief in Q3. We expect a strong cash flow in Q3 and the rest of the year.
All right, thanks. I'll leave it there.
Okay.
Okay. We now go to Barclays Capital, analyst Prateek. Please go ahead. Your line is now open.
Hi. Thanks very much, Per and Anders. Actually, just a couple of very quick follow-up questions, maybe more to Anders. Just on the last comment you were making, Anders, with regards to release of inventories in Q3, is that beyond normal seasonality? I think I heard you say earlier that you've obviously increased inventory centrally before reduction in the field. Should we see some of that beyond normal seasonality impact working capital in Q3 and Q4? Maybe just more generally, when should we expect to see a more normalized working capital level relative to where we are in the cycle and the ramp beyond these specific initiatives that you're undertaking?
There are a couple of components in this. First of all, I think from the supply chain initiative, we shouldn't expect dramatic improvements in the short term, meaning Q3, Q4. We expect some improvements. I also think the growth that we had in this year was obviously above our expectations. If you look at the relative ratios of working capital, yes, we're a little bit higher than what we would have liked to be. It's not exceptional. Obviously, with the growth rate that we've had, you tie up more capital. If you grow 25%, just as an example, obviously, unless you're improving your efficiency, you also grow your working capital 25%, just to make it obvious. We are now in a situation where we should be able to turn a lot of this working capital into cash for the remainder of the year.
I would like to comment also. I think this is true, of course. The big consumer of working capital is the growth itself, but that doesn't mean that we don't have any efficiencies. We keep an eye on this, and we will work very intensively to improve working capital levels as well as the cash flow. That's for sure.
Yeah.
Yeah.
No, I would agree, of course. Yes.
Yeah.
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? 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. Obviously we have tried to guide in the prospectus where we say that 1% on average would give SEK 90 million on the bottom line. That's very general and that depends obviously on a number of things. To guide you and to tell you exactly how it's going to influence Q3, assuming that we have the exchange rates that we have as we speak, that I would not like to do.
Again, a comment. I think this is a question that I expect to be recurrent over basically all the quarterly presentations that we have, of course, we are now a new company, we are still understanding our own currency exposure and what to expect from ourselves going forward. I think we will work on understanding the currency exposure also going forward in a better way than we have perhaps right now. Hopefully we will be able to guide you a little bit more specifically going forward.
Understood. Thanks both.
Yeah.
We now go to the line of Sebastien Gruter 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 have seen in Q2 for equipment, should we see a catch-up as soon as Q3? I mean, the ramp-up was pretty steep in Q2, could we catch up with the current level of demand as soon as Q3? I have a follow-up question.
You all right?
On the ramp-up?
Yeah.
Yeah, I think Per mentioned it and expressed it very well. Obviously, it's a moving target, which means that by the end of the quarter two, we'll have a higher capacity than the beginning. I don't think we are far away from having a balance, but it depends obviously on many things, on the orders coming in and what kind of orders. To say that we are catching up, we still have a book-to-bill of 107%, so we still get more orders than when we're able to invoice in Q2.
Okay.
I know it is. Yeah. I understand how you perceive the nature of the answer, but it is difficult to say. Of course, if orders were to stabilize exactly at the level that we were in quarter two for some reason, and we have made progress during quarter one or quarter two when it comes to ramping up production. 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 received are going to go. That's obvious.
Yep.
Yeah.
On tool demand, if we look at the order intake, it does develop negatively compared to quarter one and notably in North America. Are you losing market share in North America with cheaper products? Is it part of the issue for this business?
Well, I cannot say that we're losing market share, and you're right, we saw a negative development of sales versus last year in North America, but then again, remember that last year we had a very strong quarter two, so doesn't mean that the sales in itself was.
It is still so sharply down versus Q1.
Yeah, that's true. I cannot say that we're losing market share, but again, that's a good question. I guess we have to see.
Yeah. I think we need to remember that when you look at sequential for that segment, the Q1 was very strong. It's a little bit of seasonality in it. It was a very strong quarter.
Okay. A final question, again, on the tool business. How much of your revenues are derived from long-term contract, two, three years contract versus what is discretionary?
Good question. Don't know.
If you look at the tools and attachments, first of all, a big part of it is attachments rather than consumables. In the consumables, it's a smaller part of the consumable side.
Okay. Thank you.
Okay, I think time is running out, so I think that was the last question. We will close down this session, and thank you very much for participating, and hope to meet you again in October. Thank you very much.
Thank you so much.