Hello everyone, and a warm welcome to the Epiroc Q2 results presentation. My name is Karin Larsson, and I'm Head of Investor Relations here at Epiroc. With me today I have our CEO, Helena Hedblom, and our CFO, Håkan Folin. They will briefly present the results before we do the Q&A, and it's possible to listen to the presentation and the Q&A session in the webcast, but the questions will be handled over the phone as normal. Helena, please, the stage is yours.
Thank you so much, Karin. I will start with some highlights. The demand and the customer activity remained high, and orders received increased 21% to SEK 13.4 billion. There was a large impact from Russia both year-on-year and sequentially, including an effect from order cancellations. If we exclude Russia from the comparison, the organic growth was 18% year-on-year. We won five large orders above SEK 100 million in the quarter, and the large orders were in total more than SEK 800 million. Service performed very well with strong organic growth. Also, the order intake from construction customers was high. A special highlight this quarter is electrification. It was our best quarter ever with several equipment orders for battery retrofits, and for electrical infrastructure. We are further strengthening our capabilities here.
We acquired another provider of electrical infrastructure solutions, and this time in Australia. Our revenues were record high with a double-digit organic growth in the aftermarket. The operating profit was impacted by some one-time items, including a provision of SEK 400 million for Russia. If we adjust for this, the operating profit and margin were record high. All in all, a strong quarter. The organization has managed to deliver in a good way despite many challenges, so very well done, everyone. A major challenge is the war, of course, in Ukraine. It is horrifying, and we continue to take measures to protect our colleagues and manage the complex situation, both in Ukraine and in Russia. If we look more broadly, we continue to see higher input costs and supply chain challenges.
However, our agile organization can adapt quickly to changes and challenges, and our large aftermarket business also provides resilience. We are also investing and building for the future, and I will come back to this later on. First, some key financials, and I will be brief, and Håkan will come back with more details later on. High order intake, as mentioned, with 6% organic growth, but with a large negative impact from Russia. 9% organic revenue growth and record high revenues, and I think this is solid considering the supply chain challenges and the impact from Russia. Even in this situation with record revenues, we are building backlog, and we have long delivery times. Many of the machines that we booked this quarter will be delivered in 2023.
Our operating profit was SEK 2.8 billion, adjusted for items affecting comparability, which gives an adjusted operating margin of 23.6%, and that is the highest ever for Epiroc. A strong quarter overall, but also remember that the second quarter is a solid quarter from a seasonal point of view. The third quarter is typically somewhat softer on orders and on revenues compared to the second quarter. Now over to page four. You know that innovation is one of my priorities, a couple of examples. We continue to expand our digital offering, and we have now implemented solution for tunneling construction. The solutions improve both safety, and at the same time, it is improving productivity. Also, it's exciting that we will try the first ever battery-electric surface drill rig in this quarter.
We did not write so much about our large orders in the report, but I would like to mention a few here. As you see, we are really partnering with our customers. For example, we work together with Glencore and Boliden, which both ordered a fleet of battery electric equipment and automation solutions. Fresnillo in Mexico is a long-term partner for us, and now they've ordered underground equipment with several automation features. We are proud to be selected as partners by our customers, and as you can see, we have a very comprehensive offer in the areas of electrification, automation, and digitalization. With our acquisitions, we build for the future, and we develop even closer relationships with our customers.
We completed the acquisition of JTMEC, a provider of electric infrastructure solutions, in the quarter, and we also agreed to acquire RNP, a rock drill manufacturer in Mexico. These will be great contributors to Epiroc, and I welcome our new colleagues. Over to aftermarket. We are successful with our service products and our structured way of working, which is visible in the order intake. We have also introduced new innovations, and I will like to mention some highlights here. The V Cutter is setting a new standard when it comes to effectiveness in trenching, and our new drill bit assortment with diamond-protected buttons prolong the replacement intervals, which gives many benefits. It's safety, productivity, and lower CO2 emissions, so that's really good if you ask me. Our connected fleet is also growing.
We are close to 7,000 units now delivered with connectivity. I also want to mention here that we continuously invest in our aftermarket footprint, and this year we are, for example, building for the future and investing in service facilities in North America, in Africa, and in Asia. These investments will support our growth in the coming years. As you know, we always try to make good things even better, and in the quarter, we announced a couple of changes to make Epiroc better for the future. We will relocate the production of a range of surface drill rigs from Japan to China, and this move will improve our long-term competitiveness and our agility. Our facility in Nanjing in China is larger and have a significant infrastructure for production sourcing and logistics, and in Japan, we are instead investing in our sales and service organization.
We have decided to enhance focus on our digital solutions, so we have created a dedicated division with commercial responsibility for our digital solutions, including the recent acquisitions in this space. We have also appointed a Chief Technology Officer, a CTO, who will have responsibility for the development of common automation and digital platforms, as well as for group IT. Over to sustainability, and if I start with people, we are pleased to see that the share of women employees continued to rise, and we continue to promote inclusion and diversity, and we have many initiatives ongoing in the company. When it comes to injuries, this is concerning. We continue to have a negative development here with more work-related injuries.
Fortunately, we did not have any severe injuries in the quarter, but we need to bend the trend here, and we are taking many actions to achieve an improvement. On planet, our CO2 emissions from operations decreased, and we have installed many solar panels on buildings, and we are buying and using a higher share of renewable electricity. The picture shows our factory in Hyderabad in India. For transport, the CO2 emissions increased mainly due to higher volumes transported, but relative to revenues, however, the CO2 emissions decreased. I will now leave the speaker line to Håkan, who will give some more details on the financials.
Thank you, Helena. Before we go into the details and the analysis of the financials, some words on Ukraine and Russia, our financials, and our exposure there. For us, the number one priority has been and is the safety and wellbeing of our colleagues. During the quarter, we have continuously evaluated the situation, which is very complex. Now it is our assessment that it's currently not possible to conduct business in Russia. It also means that we make adjustments in our Russian operations to adapt to the current situation. In a difficult situation like this, we want to do this in a controlled manner and with respect for our employees. Therefore, we have taken a provision of SEK 400 million relating to accounts receivables, inventories, and restructuring costs in Russia. After this, the value of assets in Russia and Ukraine amounts to, in total, SEK 1 billion.
During the quarter, we have collected outstanding receivables, which means that the majority of the assets are now in cash. If we adjust for currency and the provisions, the assets have decreased by more than SEK 400 million since the end of March 2022. At the end of June, we have orders on hand of about SEK 1.4 billion combined in Russia and Ukraine. The number is heavily impacted by currency here as well. If we adjust for currency, orders on hand more than halved since the end of March, mainly due to the cancellations of SEK 480 million in Russia. In the second quarter last year, close to 8% of the order intake was related to Russia and Ukraine.
Some revenues have been recognized in Ukraine and Russia during Q2 2022, but significantly less than in Q1 and than in Q2 2021. Finally, a reminder that Ukraine and Russia represented almost 77% of revenues in 2021, and we do not have any manufacturing in these markets. Okay, if we then look at the development in Q2, our operating profit increased 9% to SEK 2.4 billion, but we also had SEK 420 million of items affecting comparability. SEK 400 of these, for the provision in Russia that we talked about, SEK 95 million relating to restructuring in Japan, and then a positive impact of SEK 75 million from the LTI program. The reported margin was 20.1%, and the adjusted margin, 23.6%, which, as Helena said before, actually the highest ever for Epiroc.
If we look into the details then on the profit bridge, the organic growth, volume, and price contributed with SEK 445 million, 2.4 percentage points to the margin, so a good flow-through compared to last year. Currency supported the operating profit as such, but actually diluted the margin slightly with 50 basis points. Structure and acquisition together, large negative, as mentioned on the last page. Acquisitions had a negative impact on the profit and the margin. The dilution of margin from acquisition was about 80 basis points. Now I'll focus on the segments, and I will start with Equipment & Service. Here orders increased 10% organically. If we exclude Russia, orders, organic order growth was actually 25%. Orders received supported by currency by 11% versus last year.
We had a contribution from acquisition with 5% to orders, and about half of this came from the acquisition of JTMEC, which we closed during the quarter. As Helena mentioned, we won orders above SEK 100 million, five of them, and in total SEK 800 million. As we have said before, these equipment orders are lumpy, but we now see that the underlying demand was healthy during the quarter. Organic growth in Service was 14%, very strong and supported by some large orders, for example, for mid-life services. Also in this quarter, we saw examples of customer placing orders for parts to safeguard deliveries, but I would say to a lesser extent than what we saw in the first quarter.
On the revenue side, organic increase was 8%, actually with a negative growth in Equipment, but a strong growth of 18% in Service. I will cover the details on profit and margin on the next page, but before this, I want to follow up on the financials of the relocation of manufacturing from Japan to China. We took a restructuring cost of SEK 95 million this quarter, as mentioned, and we have sold our property in Yokohama. We will have a capital gain of about SEK 350 million from this. In our press release, we indicated that this capital gain will occur sooner, but now we expect it to be realized first in 2024 when the property actually change ownership. Okay. The reported operating profit was the same as last year, SEK 1.9 billion.
If we adjust for the provisions in Russia and the restructuring cost in Japan, total SEK 422 million, adjusted profit was SEK 2.3 billion. The adjusted operating margin was 26.6%. Organic growth and mix contributed to the margin with 2.6 percentage points. This was almost offset by currency and dilution from acquisition. The share of Service revenues was 63% compared to 58% last year, which impacted profitability positively. As you know, we do not guide on margin, but the mix effect, and in this quarter, very strong mix effect from Service, we expect this to taper off once we deliver and invoice more equipment. Over to Tools & Attachments, orders increased by 5%, but actually decreased 8% organically, mainly due to Russia. If we exclude Russia, organic order decrease was 2%.
Order intake SEK 2.8 billion, clearly lower also than in Q1. Typically, there is seasonality in the lower order intake in Q2 versus Q1, and then we have Russia on top of this. Revenue has, however, grew 11% organically and was, as usual in the second quarter, seasonally strong. This was actually the highest revenues ever, and the focus right now for this division is to maintain a good level of profitability and deliver on our orders on hand, which are at historically high levels. The profit bridge for Tools & Attachments, where we had a reported operating profit, which increased 20%. If we adjust for the provision in Russia, it increased 38% to SEK 573 million, supported by the organic growth, currency, and also acquisitions.
Adjusted margin was 18.2%, and also the margin was supported by the organic growth and currency, while there was no margin impact from acquisitions. Now we have actually had four quarters in a row with an operating profit margin above 18% for Tools & Attachments. Back to group level then, and we dig down in cost, net financials, and tax. We saw again after lower Q1, higher cost. This is logical with more activities, more cost and logistics, continued investment in R&D, et cetera. The absolute number is also impacted by currency and acquisition, both year-on-year, but also sequentially. If we measure as a percentage of revenue, costs were at 16.7%. Net financial items, SEK 89 million versus SEK 44 million last year. Volatility here is mainly exchange rate related, while interest net was actually quite stable.
Income tax expense was SEK 590 million. This corresponds to a tax rate of 22.6% versus last year, 20.8%. Last year, we had some one-time effect which lowered the overall tax rate. If we then look at cash flow, our operating cash flow in the quarter increased to SEK 1.5 billion from SEK 1.2 billion last year, positively impacted by higher operating profit, but negatively impacted from change in working capital. We increased working capital with about SEK half a billion during the quarter. We do tie up more working capital when we grow. For inventory, we also secure availability of components. As you know, both inbound and outbound lead times are unusually long and also unreliable.
Cash conversion last 12 months was 82%, slightly higher than in Q1. On this page, you can see the increase in working capital. It's up 18%, excluding acquisitions and currency. We tie up more working capital when we grow, but if we relate it to revenues, it's still lower than last year at 29.5%. Capital employed is increasing, mainly due to the growth and due to acquisitions, and we had an impact this quarter from the dividend payment that we performed. Return on capital employed, however, continues to improve, and mainly this is due to the higher operating profit, and we are now at 28.1%. We have a strong financial position.
We have net cash of SEK 876 million, and this is despite the first payment of the dividend of SEK 1.8 billion that we did in May. The second payment will be done in October and will be the same amount, SEK 1.50 per share. That's it from me. Back to you, Helena.
Thank you, Håkan. To summarize then, the demand remained high in the quarter with several large orders won and with strong growth in Service. It was also the best quarter ever for electrification. We achieved record revenues and record high adjusted operating margin. At the same time, we continue to see higher input costs and supply chain challenges, and there is uncertainty about what the future will look like. Of course, we cannot predict exactly what will happen, but there are strong long-term drivers for our industries, and these are still there. The world will need metals and minerals and infrastructure to become more sustainable. I will comment on the near term shortly, but regardless of what will happen, our agile organization can adapt quickly to changes, and our aftermarket business provides resilience. We just turned four years as a listed company.
It has been an exciting journey, and it's clear that we drive the productivity and sustainability transformation in our industry, and we will continue doing this also in the future. A few words about the future looking ahead. We continue to see a high activity and solid demand overall, and therefore we expect that the underlying demand, both for equipment and aftermarket, will remain at a high level in the near term. Remember that we talk about the underlying demand and that large orders are lumpy. Thank you all for listening, and now it's time for Q&A.
Yes. It's indeed time for Q&A. Thank you very much, Helena and Håkan. Great presentation and great results. Good execution. In the Q&A session, everyone, please keep your questions short and limit yourself to one or maximum two questions if possible. This will make it easier for us as well as for you because more of you can get the chance of asking a question. Operator, please open the line.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Klas Bergelind with Citi. Please go ahead.
Thank you. Hi, Helena, Håkan, Karin. Klas at Citi. Can I start by asking on Tools & Attachments? Orders are down a bit, 2%, even if adjusted for Russia. Would you say that this also reflects quarter-on-quarter weakness ex-Russia? I'm thinking mainly about your construction exposure, Helena. I'll start there.
Yeah. I'd say on the construction side, Q1 is very often when you build up the inventory or where you get the orders, and then you deliver it in Q2. I would say also that we sit at very high orders on hand in Tools & Attachments, and it's, you know, the focus now and lead time is not really, you know, where it should be. Of course, when it comes to these type of products, customers can't wait. I think actually it's quite healthy for us to work the orders on hand down. As you saw, we have really solid development on the revenue side in the quarter. Focus is to make sure that we get back to, let's say, more normal orders on hand level for this division.
Yeah. There is no sort of construction weakness that is creeping in?
No. No.
Okay. My second one is on services. Obviously less pre-buy, as you said, versus last quarter, but still very strong growth. You had several retrofit battery orders in there. We know the large orders, you said SEK 800 million, I think, by which I assume is all in equipment. Could you help us with these battery retrofit orders, Helena? Trying to understand how the conventional service business, if you like, grew in the quarter.
The majority of the growth is coming from traditional, you know, rebuilds, so larger component rebuilds.
Mm-hmm.
Customers, you know, rebuilding existing fleet to push the productivity up. That's majority of it. It's supported also, you know, with orders for retrofits for batteries. Majority is traditional rebuilds of larger components.
No, it's good to see. My very final quick one for you, Håkan, on FX. Did you have any revaluation effect at quarter end? Looks like quite low impact compared to other SEC reporting names this reporting season.
No, there was no really specific items, I would say. It always depend for currency on the exact balance day and also, since it's a bridge, what we had in the quarter last year. No, there was no one-time specific items.
Okay. Thank you.
Thank you.
The next question comes from Will Turner with Goldman Sachs. Please go ahead.
Good afternoon, everyone. One thing that I thought was quite interesting from the statement today was that within Equipment & Service, the sales in Equipment, despite the strong order intake in recent quarters, was weaker than any member of the consensus collected from the counterparts, my counterparts likely on this call. Meanwhile, Service was actually stronger in sales recognition than anyone had expected. I just wonder, what's holding back the sales recognition in Equipment?
Are you finding that the lead times in Equipment are extending further? Whereas maybe in Service, just given the nature of that business, it may be improving now.
It's mainly related to the situation in Russia, since we have paused all the deliveries to Russia, that has meant, you know, all the machines that we had on the floor that was planned for Russia is now being rebuilt to be able to send to somewhere else, to other regions. That is the hit we take, you know, in Equipment. It's mainly related to the pause of deliveries to Russia.
Okay, great. Yeah, that makes sense. Another question. I know it's probably too early to say, but obviously we've seen some lower metal prices in recent weeks. There are concerns, you know, quite well frequently documented in the media and in other sources around the macroeconomic environment. Are you seeing any changes in discussions with customers? I know the near-term outlook is looking good, but maybe if we think on the long-term outlook, there's good opportunities there as well. If we look in the medium term, are you expecting the pricing discussions maybe to become a little bit more challenging later in the year?
I think it's difficult to predict. We see, as we said, you know, healthy underlying demands or, you know, replacement of existing fleet, also, you know, the expansion of one to two machines, you know, et cetera. Of course, they say, if we look on it's still that exploration activities is holding up well, since the mining industry need to find more assets, really to safeguard production also in the coming years. Of course, it's all driven by. You know, for us, it's very much driven also, you know, the technology shifts now and us selling value.
I think the ESG focus here is really even though, you know, who knows where, you know, where the future and the world economy will be a year from now. I still think the push towards ESG and the value that our solutions bring is really what the industry is looking for right now. I'm really happy to see that, you know, we have been working with electrification for many years. This is where we have invested a lot, the same with automation, and it is taking off. That's good to see.
Okay, great. Thanks.
The next question comes from Gustaf Schwerin with Handelsbanken. Please go ahead.
Yes. Hello, Gustaf Schwerin, Handelsbanken. Actually a follow-up on the previous question on the Equipment sales. I mean, even if we're just for Russia, there's no step up in sales organically year-over-year or quarter-over-quarter despite the bigger backlog. Could you help us a bit to understand what is actually happening, Helena? Is it mainly that supply chains freight has gotten even worse? Or, you know, I'm surprised that even if we take Russia out of the equation, it doesn't look to grow.
It's both, I would say, the component shortage or the situation with ingoing components that is hurting us. Also that we are still prioritizing aftermarket when we have a situation when we don't have enough components to keep existing fleet up running. This is, of course, something that we prioritize on a daily basis.
Okay. If we think about Equipment sales for Q3, I mean, normal weakest seasonality, but do you think we'll see a step up in deliveries quarter-over-quarter?
On Equipment, we believe that we will see a step up, yes.
Okay.
Mainly related to the-
Uh-
Mainly related to this Russia situation since we had quite many machines in the flow that we had to, you know, stop.
Yeah.
Mm-hmm.
All right. Very clear. Secondly, on the order cancellation in Equipment & S ervice, roughly how much of those SEK 430 was Equipment?
Majority, I would say.
The majority.
Majority.
Yeah.
Mm-hmm.
Okay. Thank you very much.
The next question comes from Lars Brorson with Barclays. Please go ahead.
Yeah. Hi. Thanks, Helena. I was gonna follow up on Klas's earlier question just on orders in Tools & Attachments. Sorry to come back to that. And then I was gonna ask a question around like-for-like pricing and also the business model in battery electric. Just on T&A orders, I mean, we don't have a lot of historical data, but historically, for what the data we do have, there hasn't been a huge amount of seasonality Q2 versus Q1. Appreciate your point around construction in Q1. I think I heard Håkan earlier talk about less tailwind from safety stocking among m iners on the rock tools side. Is that a kind of a meaningful element to maybe the slightly weaker orders we see in T&A? If so, is that something we should expect continue in the second half?
I think it's more related to the orders on hand. As I said, we sit at a very high level of orders on hand and you know, lead time is not really acceptable when it comes to Tools & Attachments. You know, the customers need it immediately. I think it's more related to that. As you know, we have also during the last years been focusing a lot on improving the margin in this business. That is also what we make sure that we in this very, we'll say, complex and dynamic situation right now with cost increases, that we protect the bottom line.
Okay. Can I ask to like for like pricing? I appreciate makes us clearly better in Equipment & S ervice, but like for like equipment pricing, not easy, of course, given the changes from electrification, automation, et cetera. Can you help us a little bit with sort of the price cost equation? I guess we heard Sandvik last week talk about a more material and sustained headwind from raw material prices. Can you help us a little bit there on the equipment side, please?
I think the organization has done a very good job when it comes to being active and would say trying to, you know, bringing more value to our customers and by that also protecting, let's say, protecting the value and protecting the profit. We are always very active when it comes to pricing and of course, in an environment like we are in right now, we are even more active. I'm happy to see to see how well the organization has been able to manage the situation.
Sorry, what does that mean just in terms of price cost for the quarter, if I could press you?
Do you want to take that?
I think if you look at our margin and if you look at the organic flow through, you can see that, like Helena said, we've been managing price in a decent way. We have been more or less, you know, able to make sure that we get the value out and we get the compensation for the increased cost.
Can I squeeze a third kind of bigger picture question in just on battery electric? I mean, obviously it's very encouraging to see the adoption of auto electrification. I wonder when will you come out and talk to us a little bit about how the business model might change. I'm specifically interested in, you know, batteries staying on your balance sheets. You know, what are the thoughts around kind of financing that and getting that off balance sheet? Is there anything you can say at this stage, just given the rapid adoption of battery electric among your customers, please?
It actually varies. I mean, battery, like Helena said, it's taken off, and it was our best quarter ever. We basically do what our customer wants. Some of them, they want us to do battery as a service because they don't want to buy the battery, and they want to make sure that they actually just buy the service, not the battery itself. While some other customers actually feel that, no, we'd rather take this on ourselves, and we buy all the battery as well. It varies a bit. Definitely battery as a service is very interesting for our customers. So far, it is a rather small portion of our business.
Right now we have taken it on the balance sheet, but just like you are hinting to, you know, over time, if this grows as we are seeing it grow right now, we will definitely also look into if we should keep it on our balance sheet or if we could find some other solution for it. Right now, it's not really worth the effort. It's too small.
Helpful. Thank you, Håkan.
The next question comes from Guillermo Peigneux-Lojo with UBS. Please go ahead.
Maybe, hi, thanks for taking my question. Wanted to ask a question, maybe in a different way that has been already asked. How much of your customers' budget is discretionary versus, how much is driven by CapEx budgets, if I may? Do you know the answer to that question? Thank you.
How much of our customers' budgets that are a CapEx compared to OpEx? No, I wouldn't say. I think it of course varies, of course, also between the, you know, different customers and it and I think it varies over time as well. So I can't give you a good answer on that.
Is it fair to assume that a percentage of the budget will be based on discretionary decisions based on the current environment versus others are a bit more on long-term plans, long-term investment plans?
I think the long-term plans, you know, if you take an expansion, if you take a brownfield expansion or a replacement or a full fleet or a greenfield expansion, that's of course very long-term decisions, and it's part of the long-term mine planning. I think that is, you know, that is what we have seen several of those larger decisions coming or happening now. You know, that's when we announce orders like we have been doing now the last couple of quarters. Of course, those type of large expansion CapEx budgets or one type of budget.
Of course, I think when we look at everything that is service related, everything that is conversions, if we talk about you know the battery conversions, for example, that is more seen as OpEx, which of course is a way also to let's say address the potential from different perspectives.
Thank you.
The next question comes from Joel Spungin with Berenberg. Please go ahead.
Yeah. Hi. Good afternoon. I was wondering if I could just come back again on Tools & Attachments. Sorry to labor the point, but just to make sure I've understood correctly what you're saying with regards to the record high orders in hand. Are you saying that you made a conscious decision in this quarter to slow the rate of order intake? Is that the right way to interpret your earlier comment?
I think you know, customers, the market needs consumables, you know, to be delivered at a certain, you know, when you need it. You know, this is a continuous flow of products. Of course, when you build up too long orders on hand or too big orders on hand, we can't really cope then with the delivery times that is needed, and then that leads to lower intake. That's really the logic how this works. It you know, if you look on this from a you know with a historical perspective, we are at a very high level on orders on hand.
Understood. Okay. That's helpful.
We need to-
Maybe if I could just, sorry, go on.
We need to catch up on deliveries. That's really what we. The main focus now to get back to growth mode.
Got it. Okay. Understood. Thank you. Then maybe just changing slightly the subject, just in terms of the I was just wondering with regards to the SEK 1.4 billion of orders on hand that are outstanding still in Russia, are you able to talk about possible outcomes there? You know, is it that those orders can be redirected to other customers? Might they be canceled? Could there be any incremental cost or expense incurred if that happens?
Like we said, we have around SEK 500 million in cancellations now in Q2, and as we write in the report, it's SEK 1.4 billion. It's difficult to see or if and when these will be delivered. I mean, we would expect that we will continue to have cancellations also in the coming quarter. I mean, the specific order as such cannot be redirected, but as Helena talked about before, machines that were planned to go to Russia, we can do smaller or some modifications on because these were delivered by customer, and they were set up for that specific customers, but then we can do modifications, and then we can sell them to other customers. We cannot redirect order by order, but of course, the planned machine we can do modifications on and find another home for.
Would you envisage that might incur any incremental expense, or would that likely be relatively minor?
I would say relatively minor. Yeah.
Okay. Thank you very much.
The next question comes from Andreas Koski with DNB. Please go ahead.
Thank you, and good afternoon. I have a question on your comment about margins and the sales mix going forward. Even though you do not guide on margins, it sounds like you're implying that we should expect margins to come down going forward. I just want to clarify that you expect your incremental margins to come down and be in line or even below your group EBIT margin in the second half of this year.
I'm not sure if I 100% understand what your question, but what I was saying was that we did have in Q2. Now, we had very high share of invoicing coming from Service, which is at a higher margin than Equipment. While if you look on the order intake we have had over the last three, four, maybe five quarters have been higher for equipment. When we catch up with actually we get less component shortage, we also do these modifications on the Russian machine, we can and should be able to get higher invoicing for equipment, and invoiced equipment will be a larger share of the total. That might mean that margin will go down somewhat. I'm not sure if I answered your question, but that's at least what I tried to say before.
Yeah. I guess you answered that in a way. If you grow your Equipment sales, the incremental margin on that sales growth, shouldn't that be above the group margin of 23.6%?
I see what you mean by that. Of course, you know, if we get higher invoicing from one specific business line, yes, that business line we should see higher, we should see a positive flow through on that.
Yeah. It's not that you have reached a level now when you have, you're hitting the capacity ceiling, and you need to put in a lot of investments to be able to ramp up your equipment sales?
No.
No. No. The reason why we are not selling more equipment, given the order book we have, is rather component shortages, and again, Russia. It's not that we are full in our factories.
Okay. That's great. Can you just confirm that the cancellations in Russia had a negative impact on your order intake in the quarter?
Yes.
Yes.
Yeah. Okay. Thank you very much.
The next question comes from Jonathan Day with HSBC. Please go ahead.
Thank you. Thanks for taking my question. I was wondering if you could talk just a little bit about pricing again. I know in the past you mentioned surcharges, and was just wondering whether you could perhaps give us a sense of how much sort of the pricing that's been done recently has been, if you like, underlying price increases, and how much of it has been down to some temporary surcharges. That's my first question.
I think we have been working very actively on the pricing side, you know, for quite some time now and at least for a number of quarters since we have seen that cost has been going up and at the same time both for components as well as for transport. The surcharges that we also have implemented have been more to mitigate the changes that have happened during the second quarter. I would say it's a combination of both. I think, and of course it varies between different regions and different products, et cetera. I think all in all, it's a solid performance.
You know, and as Håkan said, we are compensating for the cost increases and the challenges that we are experiencing in general.
Okay. Thank you. Maybe just a quick sort of follow-up if I could do on your exposure to Germany. I mean, I can see you've got a couple of manufacturing sites in Germany, and was just wondering how you sort of felt about the risk around energy cost, energy exposure, gas rationing, et cetera, in Germany.
We looked into that and all in all electricity in Germany, it's a small cost and it's not all natural gas. It's gonna be minor for us.
Okay, great. Thank you very much.
As a reminder, if you would like to ask a question, please press star then one to be joined to the queue. The next question comes from Nick Housden with RBC Capital Markets. Please go ahead.
Yes. Hi. Thank you for taking my question. I only have one left at this point. If we look at the 100 basis point expansion in the adjusted EBIT margin, 2.4 percentage points of that is listed as being organic. I'm just wondering if you could break out how much of that 2.4 percentage points is due to the mix shift and maybe what's due to other factors, you know, like volume leverage and things like that. Thanks.
We don't specify actually how much is coming from which impact, but I can say it's coming from all three of the ones you mentioned, but we don't specify that exactly.
Okay, great. You know, that there are other factors other than just the mix shift. Because there have been comments about the mix shift.
Yeah.
You know, turning a bit more negative, so okay, good. Very clear. Thank you.
Now it's me again coming in, interrupting here. Thank you everyone for taking the time. It seems like we have no further questions at this point. Thank you, Håkan. Thank you, Helena. Great presentation. For everyone, we wish you a wonderful summer. We want you all to stay safe because COVID is not yet over. As always, we at Epiroc wish you all very successful investments. Thank you.
Thank you so much.
Thank you very much.