Earnings Transcript for EPOKY - Q3 Fiscal Year 2024

Karin Larsson: Hello, and a warm welcome to the Epiroc Q3 Results Presentation. My name is Karin Larsson. I'm Head of IR and Media here at Epiroc. Before we start the presentation, I would like to say thank you to all 80 plus investors and analysts who joined us in Las Vegas for our Capital Markets Day last month. I also would like to thank you who joined on the live webcast. From the feedback that we have gathered, we -- it's clear that you would like to have more color on the margin. And we will do our best today to provide you with more information. And with me today to present the results, I have our CEO, Helena Hedblom; and our CFO, Håkan Folin. They will briefly present the results before we end with a Q&A session. So without further ado, Helena, please, the stage is yours.

Helena Hedblom: Thank you, Karin. So let's get going then. So starting then with the highlights from the quarter. And we had a strong demand from our mining customers with several large equipment orders. In total, they amounted to SEK1.4 billion, which is record high. And last year, in Q3, we had SEK1 billion in large orders. And the organic equipment growth for orders was strong at 11% and the demand for service was also high, translating into an organic order growth of 6%. Construction on the other hand was weak as anticipated and is also softened further in the U.S. and this impacted mainly our attachment business. As Karin mentioned, in September, we hosted our Capital Markets Day and the main purpose of the event was to provide insights into how Epiroc is positioned for profitable, resilient growth in an ever-changing world. And we also provided updates on the progress of our financial and sustainability goals. After the Capital Markets Day, we went to the MINExpo, which is the world's largest mine exhibit. And there, we showcased many of our groundbreaking innovations. Over 44,000 mining professionals from 126 countries gathered in Las Vegas, walking a show floor that presented many interesting concepts in an industry that is rapidly changing. An industry Epiroc aims to remain in the forefront of by offering the best equipment and service and leading the race within automation, electrification, and digitalization. And I will tell you more about our innovations soon. If we look into the details on the demand, Slide 3, we achieved 8% growth in orders received year-on-year to SEK15.5 billion, up from SEK14.4 billion last year. And organic growth was strong at 6%, driven by mining, while construction was weak. We had a positive contribution from acquisitions with STANLEY Infrastructure being the largest contributor. Sequentially, compared to the previous quarter, we had a negative organic order development of minus 3%. Moving on to innovation, and here, we have many great things to share, which we also did at MINExpo in Las Vegas. So one innovation that attracted a lot of interest was the large capacity Minetruck MT66 S eDrive. And this is our first mine track with both an electric drivetrain and a powerful diesel engine, in other words, a hybrid. And it combines the cost effectiveness of a traditional mine truck with the productivity of an electrical one without requiring changes to a mine's infrastructure. Our goal is to provide the best machines for getting the job done, and the customers should be able to choose the energy source that is best for them, while at the same time, reduce emissions. So we believe that especially underground mining will be electric in the future, and we are proud to offer our customer solutions that are battery electric, trolley electric, hybrid, but also other energy sources that are more fuel-efficient than diesel, such as biofuel and HVO. One of our best sellers, the Pit Viper 271 surface drill rig was also shown in Vegas and the Pit Viper that was on display was a cable electric version. And today 11% of the Pit Viper fleet population are in electric versions. Another innovation that gaining traction in the market is the automatic bit changer, which is an option when customers buy new Pit Viper drill rigs. And with this solution, the machines changes drill bits by itself, eliminating the manual work. So thanks to this automation solution, both safety and efficiency is strengthened. And speaking about drill bits, at the MINExpo we also showcased the Powerbit X, which is enabling much longer drilling time and is therefore a perfect drill bit for autonomous drilling. The R&D expense in relation to revenues was 3% in the quarter and this is adjusted for acquisition related impairment of intangible assets in equipment and service of SEK346 million. Moving then over to aftermarket, which represented 67% of the revenues in the quarter, we had good mining demand for digital solutions, including mixed fleet automation solutions as well as high demand for ground engagement tools, which are reported in G&A. The weak construction demand impacted mainly the attachment business, but also tools that are used at construction sites and quarries to some extent. The revenue mix has, of course, an impact on group margins. Service revenues were 43% in the quarter versus 46% last year. In general, the service business has a higher margin than the rest of the business. So on the operational excellence, we have been working hard to show progress on profitability and more actions have been carried out as planned in the quarter. We achieved a sequential reduction of workforce by around SEK450 million and looking back year-to-date, this number is now around SEK1,000, and this is for comparable units. So it's important here to mention that we are really pinpointing what we're doing in regards to efficiency. And this is something that takes a bit of time, but that will strengthen Epiroc in the long run. Obviously, we do a lot in areas where the revenue growth or the profit levels is not satisfactory. But we also make -- also take measures where we can do more with the same level of input and resources. So then we will be more efficient. I'm therefore pleased to say that we have lowered our cost level in marketing and administration this quarter. Another improvement is the reduction of inventory by SEK1.2 billion, and we achieved this by addressing bottlenecks in the final stages of delivery, which led to more machines delivered in the quarter. If we then spend a few minutes on sustainability and starting with people, we have improved our safety metrics yet again and the total recordable injury frequency rate, the last 12 months decreased to 4.4%. And I would like to emphasize that it's not only about making our own operations more safe, it's also about helping our customers to become better. And at the Capital Markets Day, we provided numbers on our market-leading position within safe, in other words, driverless machines and currently covering around 3,100 vehicles around the world. The number of Epiroc employees increased to 18,900 in the quarter, with acquisitions being the main reason for the increase compared to previous year. And we make good progress on the proportion of women employees and women managers, which both increased now at 19.6% and 24%, respectively. And, on diversity, I would like to share some positive news. In India, we have increased our female managers from 7% in 2019 when we started this journey to 17% in Q3 2024, and that's something to be proud of. India is a key growth market and an important manufacturing and innovation hub for the Epiroc Group. And in recent years, we have seen good growth in the Hyderabad product company, and therefore, we are now expanding our manufacturing facility for rock drilling tools there. And in Q3, we also opened a new innovation and technology center in Hyderabad. Another achievement related to India was the XIII International Mine Rescue Competition held in Colombia, organized by the National Mining Agency. And in this competition, 26 elite teams from across the world joined and among them, mining company, Hindustan Zinc's first-ever all-women underground mine rescue team participated. In fact, this was India's first-ever all-women team. And one of the members of this team was our colleague, Alka Chindaliya, a service engineer from Epiroc India, and that team secured an extraordinary second place. So this woman have not just only made history, but they also set the stage for an even more inclusive and diverse future in mining. So well done. And let me show you a video on this. [Video Presentation]. For the reduction of carbon emissions, progress was mixed in the quarter, our CO2e emissions from operations decreased 24%, driven by a higher share of renewable energy purchase and installation of solar panels on our own facilities. The CO2e emissions from transport, however, increased 18%. Good news in the quarter was that Epiroc received a sustainability score of 89% from EcoVadis, placing the company in the top 11% of all companies assessed. And this achievement is well above the industry average. EcoVadis is a company that provides sustainability ratings for businesses based on, for example, environmental impact, labor and human rights, ethics and sustainable procurement. And the ratings are often used when customers, by customers when they do their sustainability assessment on us as a supplier. So Håkan, would you like to go through the financials, please?

Håkan Folin: Absolutely. Thank you very much, Helena. And we are now on Slide number 10. So I will start with revenue. And year-over-year, our revenue increased 5% to SEK15.7 billion, while the operating profit was more or less flat at SEK3.3 billion and this number includes item affecting comparability of SEK191 million. And these items are in order of magnitude, a positive revaluation effect of the shares that we held prior to the acquisition of ASI Mining. Also impairment of acquisition-related intangibles within Equipment & Service, and the net effect of these two is SEK208 million as well as we have a change in the provision for the share-based long-term incentive program of minus SEK17 million. As you know, our operating margin is EBIT. In our reports, we also provided EBITA. In the third quarter, it was 24.8%, which means it was up meaningfully versus last year's levels of SEK23.6 million. While at the same time, the adjusted operating margin, the EBIT was down from SEK21.8 million to SEK19.7 million and the main deviation here is that we have the impairments of intangible assets, which are SEK346 million in EBIT, while they are not included in the EBITA calculation. Now, let's look at the Group profit bridge. In organic, we lost 1.3 percentage points compared to the previous year, and this was mainly because of three things. One is the mix effect, but we have higher service revenues -- sorry, lower service revenue and higher equipment revenues compared to previous year. Second, we have a dilution from acquisition within Tools & Attachment. And on group level, this dilution is 1.3 percentage points. In the bridge, however, this is mitigated by the positive effect that we get from the items that affecting comparability. And three, we also have higher costs than we had last year. But in this quarter, we have achieved sequential improvement and the reduction of employees that Helena talked about should give us a lower cost base going forward. On currency, we had a small FX tailwind on the margin and the structure impact was 0. And all in all, we ended up with an adjusted EBIT margin of 19.7%. The same as we had in the last quarter, despite actually invoicing being SEK800 million lower. If we move on to the segments, I will start with Equipment & Service. And Equipment & Service had, again, a strong mining demand. Year-on-year, the orders received organically increased quite strongly, up 9% to SEK11.8 billion, and this is including then a record high level of SEK1.4 billion in large orders. And this should be compared with SEK1 billion that we had in Q3 2023. And we have said this many times, but we will repeat it again, large orders are lumpy by nature, and this was, as I said, a record high quarter for us. One of the large orders we received was from Eurasian Resources Group in Kazakhstan, and this is a really interesting order because several of these machines will be operated driverless tele-remotely. All of the equipment will be supplied with the collision avoidance system. And this order valued at about SEK350 million, also includes some battery electric machines. So we think it's really great when we see that our customers embrace our new technology like automation and electrification and also then safety improvements. In addition to the large orders, the service growth was also strong, up 6% organically despite actually quite tough comparables. And this reflects then a continued high mining activity and a good demand for our digital solutions as well as also high demand for mid-life upgrades. If we look ahead, there is still a lot of business cooking out there and we remain optimistic on the mining -- on the demand from the mining segment. Moving on then to Slide 13. We have the Equipment & Service revenue, and they were up 5% organically to SEK11.9 billion. We had 44% equipment revenues in the segment, which is 2% higher than what we had last year, which then lead to a negative equipment service mix effects on the profit margin. Within service, as we talked about at our Capital Markets Day, the strategic business lines within digitalization, service offering, which has somewhat lower profitability, continue to outgrow the traditional parts and service business. And then coming back to this revaluation of shares, we mentioned it already in Q2 that when we did the full acquisition of ASI Mining, we would get this effect. The final amount was a positive SEK554 million and this has then been taken as item affecting comparability in the quarter. Also, as I mentioned before, when I talked about the Group, we have impaired intangible assets related to acquisition of SEK346 million. It's mainly booked as R&D cost in the quarter. And all in all, we have a net positive of SEK208 million on EBIT. So Page 14, we see the bridge for Equipment & Service. And here, we increased our EBIT by -- sorry, by 2%, ended up at SEK2.9 billion. Adjusted, however, for the items I just told you about, we were down to SEK2.7 billion corresponding to an adjusted margin of 22.9%, and that should be compared with 24.4% previous year. We had a negative impact on the organic side, which is mainly explained by the mix effect, where we have a higher proportion of equipment invoiced and then also mix effect within service. Year-on-year, we also have higher costs. But just as for Group sequentially, we can see organic improvement. And actions have been taken. And as mining is so important for these segments, we have carefully pinpointed our efforts to remove costs to make sure that we are not harming long-term growth prospects. Moving on then to the Tools & Attachments segment. And here, orders were up 25%, but this is solely explained by the acquisitions, which contributed 28%. We closed the acquisition of STANLEY Infrastructure in April, and then we closed the acquisition of ACB+ in September. Currency contribution was negative, while the organic contribution was basically flat. And actually, this is the first time since Q1 2022, where we don't have negative organic growth in this reporting segment. I think though that the flat organic development requires some explanation. We have good demand from mining customers, for example, for our ground engaging tools, where demand from construction customers remain weak, and this is mainly impacting the attachment, but also, to some extent, tools. And in the important U.S. market, we saw a further softening in demand in the quarter. And all in all, orders increased to SEK3.7 billion, up from SEK2.9 billion last year. If we look at it sequentially, order intake decreased 6% organically for the segment, mainly explained by the weakness in the United States. The weak development in construction also impacted the revenues for Tools & Attachment, which were down 5% organically to SEK3.8 billion. In absolute terms, they were up 90%, supported by acquisitions. EBIT, SEK429 million, down from SEK481 million last year, and this is corresponding then to a margin of 11.3%, while we had 15.1% last year. And here, acquisitions diluted margin meaningfully around 3.9 percentage points. In this segment, a lot has been done and is still being done to protect our margins. And as an example, we are now consolidating some manufacturing sites in the U.S. Moving on then to the profit bridge. We had a positive 0.6 percentage point impact organically, supported by the measures taken. Also, I would like to highlight that tools had a strong quarter in regards to profitability. We lost 0.6 percentage points from currency and then the large negative impact was in structure, minus 3.8% on the margin. And here, 3.9% was dilution from acquisitions. No items have affecting comparability in this segment and not in the comparable period either. Okay. So leaving the segments then and moving on to cost. Compared to the previous year, we had higher admin marketing and R&D costs. But if we adjust for items affecting comparability, we are showing a positive sequential development from 16.6% to 16.3% and actually down from 17.0% in Q1. And we should not forget that we had SEK800 million lower revenue sequentially. It means our efforts are starting to show. Net financial items were SEK264 million, compared to SEK331 million last year despite the higher net interest of SEK250 million, compared to SEK146 million last year, and the reason is that we have a currency impact on other items in financial net. Income tax expense, SEK690 million and this then corresponds to a tax rate of 22.9%, which is just in line with our guidance of tax rate between 22% and 24%. Operating cash flow of SEK1.8 billion versus SEK1.9 billion last year, negatively impacted by lower operating profit when we adjust for the non-cash items, but actually compared to last year, positively impacted by a lower buildup of working capital. We can see our cash conversion rate improved another quarter and is actually now at 96% on a 12-month rolling basis. A few words on the working capital, it increased 6% in the quarter and is now 38% of revenues on a 12-month rolling basis. Despite a reduction in inventory, net working capital actually increased as payables and also then acquisitions contributed negatively building up the working capital. So year-on-year, we are seeing a development we are not happy with. Having said that, if we look sequentially, we have seen a positive development. Net working capital decreased 3%, driven by the lower inventory and receivables while actually the lower level of payables mitigated that improvement. But on the inventory side, we decreased by SEK1.2 billion in the quarter, and we are now more efficient in the final delivery stage. A meaningful portion of this inventory is still within equipment and at some point, obviously, this will be delivered and invoiced. Our net debt, it was SEK15.2 billion at the end of the quarter, which means it's up meaningfully since last year. And this is, of course, driven by the acquisitions that we have made. Net debt-to-EBITDA is at 0.97, so it's up compared to last year, but it's actually slightly down compared to -- at the end of Q2, where it was slightly above one. Return on capital employed, we have at 21.5%, and this is impacted by a higher level of intangible assets. At the end of the quarter, we had roughly 38% in sustainability-linked long-term financing, which we are happy with. But when we meet the next time in January, it will actually be even higher because in October, after the end of the reporting period, we signed a 10-year sustainability linked loan agreement for US$150 million with the Nordic Investment Bank. So it's sustainability link, which is great, and it also actually diversifies our financing further. That was a difficult final word. Okay. Thank you. Back to you, Helena.

Helena Hedblom: Thank you, Håkan. So then I'll summarize the quarter. So we enjoyed strong in mining demand, and we won record high large orders, SEK1.4 billion. The equipment order growth was strong at 11% organic, and the service order growth was also strong at 6% organic. However, construction remained as anticipated, weak. At the Capital Markets Day, we provided updates on our strategy for resilient, recurring, and profitable growth. And in Q3, we are pleased that we had several sequential improvements regarding efficiency and cost. We showed many great innovations at the world's largest mine show, MINExpo and we have a leadership position within safety and mixed fleet automation within our niches. And finally, passionate, people creates exceptional things and female rescue teams are delivering just as good as any other team or even better. So at Epiroc, in collaboration with our customers, we can make a positive difference for increased inclusion and diversity. And finally, looking ahead, in the near-term, we expect that the underlying mining demand, both for equipment and aftermarket will remain at a high level, while the demand from construction customers is expected to remain weak. So thank you, and over to you, Karin.

Karin Larsson: Thank you, Helena. Thank you, Håkan very much. Good presentation and also I would say good results. Now, it's time for the Q&A. And you know us all too well online. So you know ask one question, maybe one follow-up, but try to keep it short, if you can. Operator, please open the line.

Operator: [Operator Instructions]. The next question comes from Gustaf Schwerin from Handelsbanken. Please go ahead.

Gustaf Schwerin: Yes, hello, Gustaf, Handelsbanken. Can we start on the P&L impact now from the workforce reductions you have made? I think we're having a good idea of sort of rough annualized numbers on paper. But can you -- any sense of the sequential effect on the Group roughly between divisions? And also do you see this playing out in Q4 and onwards? I'll start there.

Helena Hedblom: So if we look on -- as we said, we have been very precise in what we're doing, of course, a portion of this is related to, say, bring the attachment business in line with the demand. So that's one focus area. But we have also focused on improving our margins in service. So it's both in service, I would say, it's in manufacturing, some of the entities where we have lower volumes that we have taken us is both in Equipment & Service, but then also, I would say, on the -- general from an admin perspective, so I would say, it's addressing more or less, we have done reductions in all divisions, actually. But of course, the majority of it sits in service as well as in Attachments.

Gustaf Schwerin: I mean, can you give us any sense of the magnitude in numbers on the savings just to get a feeling for how much is still to come here?

Helena Hedblom: I will not share numbers. But of course, in Q3, we had effect from what we did in Q2. And of course, now we're moving forward, we will also have full effect from what the actions we have taken now in Q3. So we expect this to let's say to move in a good direction. So we are pleased we see that costs are trending downs on many lines now.

Håkan Folin: So if you simplify it, if you had the 450 people that left in Q2, well, that you should have seen basically the full effect in Q3 but now we had another 450 people leaving in Q3, and that has not had a full effect it has had, you can say, an average effect in Q3 and then you will have the full effect in Q4.

Gustaf Schwerin: All right, very clear. Then, just a final one in terms of mix now equipment versus a service. When I look at it, you're still taking something like SEK5 billion more in equipment orders versus sales in, say, early 2021 when demand really took off. How long should we expect this kind of elevated equipment mix given that I mean, service has outgrown equipment for something like three years now? Thank you.

Helena Hedblom: I think it all depends on the level of large orders. And we continue to see a strong pipeline. There is still plenty of replacement deals out there as well as expansion of existing mines. Not so much, I would say, Greenfield. So of course, we are working hard to make sure that we land these orders. But they are always lumpy in numbers, as you know, between the quarters. And this quarter, we are very happy with that we managed to land so many in one quarter.

Operator: The next question comes from Olof Larshammar from Danske Bank. Please go ahead.

Olof Larshammar: Good morning, Helena, and Håkan. One question from me. And just looking at the EBIT bridge in terms of Attachment, it seems like no one-time cost at all in the division, but profitability from structure is negative SEK13 million in the quarter. So I'm just a bit curious how that could be the case because I guess that it's related to STANLEY Infrastructure is a bit plus. And when I'm doing some calculations on reported sales from the acquired units when you bought them, and what you're reporting now, I guess, that leverage should be 50%, 60% in order to have a negative EBIT on those companies. So maybe there is some other costs, which you are not true that as one-time it would be interesting if you could elaborate a bit on that, please?

Håkan Folin: In what we call structure there in the part of the bridge, we could have costs that are not one-time item affecting comparability. If we do, for example, smaller restructuring of a unit, we would say that that's part of the normal business. We don't take it as it side effect of comparability. In this case, and as you see that we say that the impact in the bridge is minus 3.8%. We said that the acquisition impact is minus 3.9%. It's basically more or less the same. And also, you should remember, STANLEY is much bigger than ACB+, and we also only had ACB+ for one month. So actually, when you look at it and do the math, you can say that a lot of that is related to STANLEY Infrastructure, where -- which had a lower profitability level in Q3 than in Q2.

Olof Larshammar: Okay. So then I guess that in profitability for STANLEY infrastructure are -- is negative in Q3 and then maybe a follow-up, I guess --

Håkan Folin: If I just -- you need to also bear in mind that for STANLEY Infrastructure, if you remember, we have this inventory step-up items that we have in Q2 -- Q2, Q3 and Q4. And obviously, then we have amortization. So we said in Q2 that STANLEY was on low-double digit EBITA level, and it's positive still on EBITA level, but now it's more mid-single-digit EBITA level.

Olof Larshammar: Okay. And then just a follow-up on this. I guess that the mix in Tools & Attachment is shifting with more Attachment business. And when we get, let's say normalized market, how do you expect this to have an impact on profitability on Tools & Attachment? Thank you.

Helena Hedblom: So I think we have said that historically as well that, that the Attachment business under normal market -- in a normal market is a profitable business for us. And that is, of course, what we're doing right now and now is make sure that we are adjusting the organization to the demand, but also so that we are ready when the market picks up. So for us, this is a long-term ambition to be a leader in the Attachment segment. And let's say the timing-wise now short-term, we focus in adjusting, taking our cost adjusting, the cost structures so that we are ready when it takes off. But it's correct. Attachment will be a bigger share than in that segment, of course, moving forward.

Operator: The next question comes from Klas Bergelind from Citi. Please go ahead.

Klas Bergelind: Hi, Helena, Håkan, Karin. Klas at Citi. First, on the drop-through in E&S. On the organic margin development there, Håkan down 240 basis points versus down around 400 roughly since the fourth quarter 2023. We knew that the organic comparison point was easier this quarter, but I'm trying to understand the impact from mix with higher equipment sales versus service, then I thought you said that the 240 basis points year-over-year was mainly from the mix effect, but you had the digital mix effect in there as well. If you would just normalize for Equipment to Service, what would the margin organically have done down 1%, 1.5%?

Håkan Folin: Well, we're not being that specific. But you had those both mix effects, both the higher Equipment share versus last year, 2 percentage points, but then it's also a mix effect within Service, but we're not specifying those details.

Klas Bergelind: And not like 50

Håkan Folin: We're not specifying that.

Klas Bergelind: Okay. All right. And then my second one is on -- coming back to STANLEY and T&A, obviously, the margin mid-single EBITA, down from low-double digit. And so can I ask you on -- on -- obviously, we know that the construction backdrop in North America is very difficult. But this also enables structural cost measures; I would thought, consolidating sites, et cetera. The deal when you announced it was more revenue synergies. So now we can sort of start to focus on the cost side, I guess, when can we start to see effect there on the margin for STANLEY in particular? And obviously, the rest of the people they're going to leave part of that is STANLEY but also core T&A. So just to understand if you're going to intensify the restructuring in STANLEY now going forward given this set of results?

Helena Hedblom: We have already taken a number of measures on the cost side, given the lower demand within -- for the -- for our products on that, that relates to STANLEY, including them restructuring and consolidation of sites. So that is ongoing. It will take of course, when it comes to moving factories, that is always -- that takes a little bit longer time than let's say, head count reduction that you can do and just reduce or, say, existing, existing, or rightsized the organization. But we're doing both right now. As well as, of course, it's always -- there's always market share that you can try to take even if it's a weak market environment, so we focus on both. But of course, as you said, long-term, we have -- the deal is built up on sales synergies. But right now, we have shifted our focus to cost.

Klas Bergelind: Okay. Very quick final one on equipment orders South America. Your comp is easier this time, but do you see any more positive development in the discussions over there. Other suppliers have said that they expect more activity in 2025. And I'm keen to understand if you're already seeing the effect from permitting issues speeding up in Chile, Peru, Argentina, et cetera.

Helena Hedblom: There's a good pipeline in South America. So -- and some of the large orders in this quarter was also -- will also be -- came from South America even though we have not announced it, but that was the case. So I think I don't see any, there are equal amount of ambitions in South America as in the other regions from an equipment potential.

Operator: The next question comes from Edward Hussey from UBS. Please go ahead.

Edward Hussey: Thanks for taking my question. I guess, the first one is just do you mind giving us a bit of color on where the impairments have come from, which acquisitions they raise it?

Håkan Folin: Yes, I can do that. We have -- since the creation of Epiroc, we have done a lot of acquisitions, around 30 of them, and many of them are performing well. But then out of the 30, we have some that are not performing as well. So we have done this for a few companies, and it's a fairly small and tech-related companies.

Edward Hussey: Okay. Thank you. And then just on the equipment margin year-on-year, is it -- I mean could you just give us a little bit of color as to directionally where it's moved, whether it's been flat, up or down?

Håkan Folin: You mean Equipment specifically?

Edward Hussey: Yes, Equipment specifically.

Håkan Folin: I would say, overall for Equipment, there's no big change in margin. It can vary sometimes if we have a mix effect within equipment as well, but I wouldn't say that there's any big difference between the equipment margin this quarter versus a year ago.

Edward Hussey: Okay. And then I guess, using that and trying to calculate the service margins, would that imply that perhaps the headwinds from the service mix are potentially not quite as negative as they have been previously?

Helena Hedblom: We are also addressing the -- we say, efficiency in service. So a chunk of the restructuring that we have done in the last two quarters are related to service to address. There's always service contracts that are not running in the most efficient way, and that is what we have put a lot of focus on during the last two quarters.

Edward Hussey: Okay, brilliant. That's really helpful. Thank you very much.

Operator: The next question comes from Christian Hinderaker from Goldman Sachs. Please go ahead.

Christian Hinderaker: Yes, good morning, Helena, Håkan, Karin. I've got two questions. First on margins, second on inventory. Just on the margin in T&A, it looks like the organic decremental margins gone down quite considerably on my math from 50% last quarter to around 4% this quarter. Is that just reflective of a less negative volume development? Or is it the case that in prior quarters, earlier this year, you were also seeing fixed cost under absorption as you are cutting production ahead of the decline in demand?

Helena Hedblom: Do you want to?

Håkan Folin: Yes. I would say, it's a lot due to that, that we are seeing cost improvements. As we mentioned, we see for Group, and we see it within parts of Tools & Attachment as well that the cost measures we have taken are yielding results.

Christian Hinderaker: Okay. So is your -- put another way, is your production levels consistent with the growth decline today in T&A?

Håkan Folin: I would say, we have adjusted our -- we have adjusted our manning at the production sites to better match the volume development. I guess, that's what you said as well, I think.

Christian Hinderaker: Okay. Then just on inventory, you've cleared SEK1.2 billion of stock in the quarter. I think that takes inventory days to around 119, pre-COVID, the average was 94. Just curious what level of inventory efficiency you're looking to target as you shift to regional distribution and what you see as a healthy long-term stock level for the Group?

Håkan Folin: I think for inventory, we need to remember, it's -- we are a quite different company compared to pre-COVID as well in terms of how much we have grown and also in terms of how much we are selling in different parts of the world, for example, growing in Africa and in Australia. Very far away from where we normally produce. And we have seen, as you know, a tremendous growth within service. And in order to have that growth within service, we also need to have the stocking points close to our customers, so we actually can have shorter delivery times. So getting back to COVID levels that would be a bit of a stretch, improving from where we are today. Well, that's definitely something we are looking to and expecting to do.

Christian Hinderaker: Very clear, Håkan. Thank you.

Operator: The next question comes from John Kim from Deutsche Bank. Please go ahead.

John Kim: Hi, good morning. It's John from Deutsche. Can we start with T&A for a second? I just wanted to understand where you are on your cost initiative journeys in T&A and STANLEY specifically. If we think about measures to date, is it more workforce side? And when can we expect the communication on the manufacturing footprint? Thanks.

Helena Hedblom: So I think so far, it has been on -- in the manufacturing sites but we also have two consolidations ongoing right now, so which is more than -- it takes some time before we start to see the results of that, and that is the closure of the Essen facility as well as the closure of one of the STANLEY sites. So there's full focus on efficiency in that segment and those divisions moving forward as well. So -- but so far we have -- the results we have -- that we've shown so far is mainly related to what we have done with existing footprint. So more will come where we also start to then consolidate sites, and that will take a couple of more quarters before we have that effect fully.

John Kim: Got you. And I think last time we spoke about electrification in the mining side, a number of pilot programs have gone out there. I'm wondering when -- where we are in kind of the cadence of kind of expanding that rep base?

Helena Hedblom: On electrification, let’s say, I think that one is moving, moving well. We see more and more customers placing repeat orders showing that we have demonstrated, I would say, the performance of our equipment and they like, we'd say, the solution. And also good to see that in some of the deals that we landed this quarter as well, it was also BEVs included. What we showcased at MINExpo was very much fossil-free solutions, everything from trolley systems to hybrid solutions, et cetera. So I think there will be many different solutions here moving forward. And that's -- I think we have a very strong offering, a broader offering today than we had before. But if you look on the utilization of the BEV fleet out there, it's -- it has tripled in the last 12 months. So that utilization of this fleet is trending upwards fast, which is good. So -- but still it's in beginning, I would say, from a revenue standpoint, it's still a fairly small portion of our revenue when it comes to equipment.

Operator: The next question comes from Max Yates from Morgan Stanley. Please go ahead.

Max Yates: Hi, good morning. I've got a couple of questions. Just the first one is on tariffs or potential tariff risk. Could you just talk a little bit around your production base, how much you export into the U.S. and how you're thinking about the potential tariff risk in both events that we get a 60% tariff on imports from China or we get a tariff, a 10% baseline tariff on all imports into the U.S. Is there any kind of thoughts or sensitivities that you can give us on how that may affect your business?

Helena Hedblom: So I can start. So we have a strong manufacturing base in all regions. So we have a manufacturing base in China, in India, in Europe as well as in the United States. And when we are developing our manufacturing footprint, it's for resilience. So we are well aware that things can happen from a tariff standpoint. And we -- if I look now on our footprint in U.S. in specific, we have equipment facilities. We have consumables factories and of course, also the attachments factories now after the STANLEY acquisition. So we have a very strong footprint within U.S. And I think long-term, what we see more and more is a regional production base to produce closer to the end market, and that is something that we are executing on in all directions, I would say. Also when it comes to China, when it comes to India or Asia, but also Africa, we also have a strong footprint in Africa now to serve the African market. So we are building the footprint for resilience.

Max Yates: And you don't get lots of cost -- your cost of goods sold in the U.S. from China or anything like that?

Helena Hedblom: No. No.

Max Yates: Okay. Just in terms of a follow-up, if I go back and I look at kind of 2019 to 2021 or to even 2022 margins in Equipment & Service, you were doing in the kind of 25% to 26% range. I guess, what I'd like to understand is when you look at the margins that you were doing and you look at the equipment bit and the services bit and the kind of price cost or pricing environment, is there anything when you look at those margins and you look at how your business looks today that means you won't be able to get back to those levels in the medium-term? I guess, I'm asking, was there anything kind of abnormal about those levels in terms of what you were able to command on price or price cost relative to how the environment looks today?

Helena Hedblom: I wouldn't say that it's -- I don't think it's cost base or pricing power. There we have the same. But our offering today is different compared to those years. If we look on our service offering, for example, we have many more service products. We have -- we're driving service agreements in a different way to safeguard the resilience of the service business. We also have the digital offering. We're still, of course, in the beginning of that journey. So we have -- within Equipment & Service, it is a different offering today than some years ago. But I think I would say the underlying dynamics when it comes to equipment and parts, that's the same. But of course, between different quarters also, we are growing in a systematic way when it comes to service as well. And in some quarters, we have outgrown on the service side compared to parts, but that also gives the resilience over time. So that has been a strategy for us.

Max Yates: Sure. No, I mean, I guess, look, I kind of completely appreciate kind of safeguarding future growth is obviously the right strategy in growing absolute EBIT, not margins. I guess, what I'm just really trying to kind of better understand is what should we think about in sort of two, three years' time given the mix of the business as a sort of normalized margin for this division and sort of what is a realistic ambition given those changes in mix?

Helena Hedblom: So we are always focused on giving more value to our customers, and that's how we develop our offering so safeguarding both the growth and the value for our customers. And with that, we believe that we will be able to have a profitable growth long-term, but also to deliver on the growth ambition of 8%, which, of course, is much more than the underlying growth in service, for example, which is more related maybe to 2% to 3%.

Operator: [Indiscernible].

Unidentified Analyst: …on margin composition. It looks like there are a number of moving parts this quarter in particular. First thing, could you specify what was the impact of intangible asset impairment on R&D this quarter? And why you haven't adjusted EBIT for that impact? I think you have done something like that previously. Point two would be what is behind the very positive other operating expense line? Did it have any positive impact on adjusted EBIT at all in the quarter? And finally, capitalization of intangibles was very elevated this quarter. Was it your internal cost capitalization or anything related to M&A, please?

Håkan Folin: It was a little bit hard to hear you loud, but I'll try to answer the questions, and then you have to say if I miss something. The intangibles is in total SEK346 million that we are writing down. The majority of that is within R&D. There is some also related to trademarks or customer relationship, but we are treating that as an item affecting comparability. So that's the big negative item, minus SEK346 million. But then if we turn it around, we also have this positive item from the effect when we acquired the remaining 66% of ASI Mining. We revalued -- well, we have to do this according to IFRS, the existing 34% of the share. And there, we got a positive impact of SEK554 million. So when you add this together, you get a positive item affecting comparability of SEK208 million. And then we also had some minus SEK17 million, if I remember correctly, on for the LTI program. So in total, we had plus SEK191 million in the quarter. So we did adjust for this. When we talk about the adjusted operating result, it is adjusted for this intangible write-down. On your other part of the question, if I heard you correctly, you asked about the increase overall on group level in the quarter. That is related to the acquisitions we have done and especially then to ASI Mining, which is very much intangibles. It's obviously different when we acquire a production-based company like STANLEY or ACB+, but ASI Mining is to a very large extent, intangibles. Was that an answer?

Unidentified Analyst: Excellent. Thank you very much, Håkan. Brilliant.

Operator: The next question comes from Chitrita Sinha from J.P. Morgan. Please go ahead.

Chitrita Sinha: Good morning, all. So my first question is on aftermarket. So just if you could talk about the pricing this quarter and perhaps the run rate that you're seeing and maybe how this compares versus last year?

Helena Hedblom: And I think we continue to work with the pricing always. Of course, the last couple of years, it has been -- we have been -- we had to intensify our -- I say, work because the cost and the inflation impacted us a lot. But we -- right now, we're moving -- we're doing exactly the same things that we're doing every year when it comes to the more value we develop for our customers, then we also work on the pricing. So we continue to work on that. And I would say, more under a normal -- as we always do under normal market conditions.

Chitrita Sinha: Thank you. And then I guess, the second question on construction. If you could give us maybe some color as to how much inventory is still in the channel and if this is coming down?

Helena Hedblom: Yes. So we have seen that it has come down in certain markets, in certain channels, of course, because this is dealers or distributors. But there is still too much inventory out there. So we need some more quarters before this has flushed through the system. But I would say that that step by step, of course, it's -- it is improving quarter-by-quarter.

Chitrita Sinha: And then I guess my final question on mining. Is there any -- are there any customers that are looking to delay deliveries or investment decisions because this is obviously something that's been spoken about quite a bit by your peers.

Helena Hedblom: No. We don't share that that view. It can, of course, swings between quarters, the lumpiness of the large orders. But when we look at the pipeline and all the conversations with our customers, I would say that we have not seen hesitations from our customers.

Operator: The next question comes from Andreas Koski from BNP Paribas Exane. Please go ahead.

Andreas Koski: Thank you. Thank you very much, and good morning. So I want to come back to the cost savings. You've now reduced the headcount by around 1,000 people. If I look at the average cost per employee, that would generate savings of around SEK700 million to SEK800 million. And I assume around a third of that will be realized this year and two-thirds should be realized next year. Can you just give me an indication if that is correct? And do you plan for further headcount reductions in the coming quarters? Thank you.

Håkan Folin: I think in terms of the average cost, there is a -- one needs to remember, it's quite a big difference if it's white collars based in Sweden and the U.S. versus service technician in a more in a low-cost country. So I would say that when you take the average or maybe a bit high in terms of the average cost per employee and should maybe lower that a little bit. And we are -- we have now done these. People have now actually left the company. So you will see a majority of the impact on a quarterly basis already in Q4. And then of course, you should see the full impact when we talk about going into 2025.

Helena Hedblom: And on that question, if we are taking further measures, yes, we are taking further measures.

Andreas Koski: The more people will leave. And then maybe the follow-up on that how large part of this is structural and how much is volume-related when volumes come back in attachments and in other areas, should we expect you to rehire the people that are now leaving because of higher volumes?

Helena Hedblom: I think this is always how we try to always adjust the quarter. But of course, you need to do this in a wise way because this inventory reduction dimension of the -- that also plays a role here. That is not reflecting the true underlying demand in Attachment. So you need to be careful so that you don't go too low, so because you also need to be prepared when it picks up because when it picks up, it will also go fast. So -- but we have -- I think we have done this several times going back in time as well. So I think we know how to do this.

Andreas Koski: I think looking at common group functions, the cost level was relatively low, I think, at SEK58 million or so compared to above SEK70 million, SEK80 million in the previous quarters. Is that related to the lower headcount? Or is it related to something else and that we should expect a step up again in the coming quarters? Thank you.

Håkan Folin: I think there are a few items. One is usually in Q3, you have -- in the Nordic countries at least, you have the release of provision for vacation reserves. That has an impact. And then also, it's an effect of us doing less things. We talked about cost savings not only being people, but it's also being more cautious in terms of what activities and what projects you actually run, be it IT project or development project, et cetera. So it's a combination of those things.

Operator: The next question comes from Ben Heelan from Bank of America. Please go ahead.

Ben Heelan: Yes. Good morning. Hi guys, thank you for taking my question. I was just hoping to get a bit more color around the growth that you're seeing within the Equipment & Service business on the mid-life upgrades and how much of a mix drag that that is for you on the margin. And as we think about the mid-life upgrade story into 2025 and 2026, it sounds as though you anticipate that, that is going to continue to be a very big and strong driver of growth, which I do think comes at a diluted margin. So are there ways to offset that pressure from a margin perspective within service? Are there opportunities to improve the margin of mid-life upgrades? Could you just provide a bit of color on how we can think about that? Thank you.

Helena Hedblom: Yes. So the intention is to continue to grow the mid-life -- our mid-life offering because we see that this is what our customers want. It's lower margin on mid-life upgrades compared to if you're just selling parts because you have a fairly big labor component. But when we're talking about service efficiency, then we also include work for -- work say the workshop efficiency, and that is to address to become more efficient in how we do mid-life upgrades as well. But then also one should remember that when you do an upgrade, that machine is then consuming parts for another two to three years. So it's -- so since it is prolonging the life of the equipment, you also safeguard then more revenue streams from a parts perspective, compared to what you have done if that machine would have been replaced because the first couple of years, a new machine is not consuming a lot of parts.

Karin Larsson: So thank you very much, everyone. Now I'm interrupting. I know we have a few still on the line, and we will call you once this webcast is over, but thank you very much, Helena, Håkan, everyone listening in. And if you have questions, as always, you're more than welcome to reach out to us ir@epiroc.com. We wish you successful investments. Thank you.

Helena Hedblom: Thank you.

Håkan Folin: Thank you very much.