Epiroc AB (EPI-A.ST), a leading productivity partner for the mining and infrastructure industries, has reported a significant increase in mining activities for the second quarter of 2024, with large orders up to SEK 950 million from SEK 550 million in the previous year.
Despite challenges in the construction market and increased costs leading to a lower profit margin, the company has seen growth in revenues and is taking steps to improve profitability. Epiroc's focus on innovation in automation, electrification, and recycling has been a highlight, along with their commitment to sustainability, as evidenced by a 32% reduction in CO2e emissions and recognition by TIME Magazine.
Key Takeaways
- Large orders in mining increased to SEK 950 million, up from SEK 550 million the previous year.
- The demand for mining equipment remains stable with a solid pipeline of potential large orders.
- The construction market weakened, negatively impacting the aftermarket business.
- Epiroc completed the acquisition of Stanley Infrastructure and announced the acquisition of ACB+.
- Adjusted operating margin EBIT was 19.7%, down from 21.6% the previous year.
- Group revenues increased to SEK 16.5 billion, with an adjusted EBIT of SEK 3.2 billion.
- Efficiency measures resulted in a decrease of around 450 employees in service and manufacturing.
- The company is recognized as one of the world's most sustainable companies by TIME Magazine.
Company Outlook
- Epiroc expects investments in infrastructure projects driven by ESG commitments to support long-term growth.
- Mining demand is expected to remain strong while construction demand remains weak.
- Efforts are being made to improve export logistics and certification in the equipment business.
Bearish Highlights
- The aftermarket segment was negatively impacted by the weakened construction demand.
- The adjusted operating margin EBIT decreased due to higher costs and negative mix effects.
- The company is still working on improving inventory levels and acknowledges there is a way to go.
Bullish Highlights
- Strong organic service growth in the aftermarket segment, driven by midlife upgrades and demand for mixed fleet automation.
- The Equipment & Service segment saw strong demand from mining customers.
- The Tools & Attachment segment's orders increased by 24% to SEK 3.9 billion, supported by the acquisition of Stanley Infrastructure.
Misses
- Service revenues were impacted by negative mix effects, including earn-out costs for an acquisition and restructuring costs.
- The profit margin for Equipment & Service decreased due to higher costs and negative mix effects within the service.
- The Tools & Attachment segment experienced a 6% organic decrease in demand from construction customers.
Q&A Highlights
- Management discussed the variability of the service mix and its impact on growth.
- Efficiencies in the service segment were implemented to address under absorption.
- Management closed down one entity in the US to improve the cost structure.
- Inventory revaluations were less than half of the overall PPA for Stanley Infrastructure.
- Future margins are expected to see cost improvements in Q3, despite negative FX and ongoing costs.
- There is a long-term need for greenfield projects, especially in the copper sector.
Epiroc's Q2 2024 performance demonstrates resilience in a challenging market, with a strong focus on innovation and sustainability. The company's strategic acquisitions and efficiency measures are aimed at bolstering its market position in the mining and construction sectors, despite current headwinds. Investors and industry watchers will be keeping a close eye on Epiroc's progress in the coming quarters, particularly in light of the expected copper deficit and the potential for long-term infrastructure investments.
Full transcript - None (EPOKY) Q2 2024:
Operator: Welcome to the Epiroc Q2 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to Karin Larsson, Head of Investor Relations. Please go ahead.
Karin Larsson: Thank you. Hello, and a warm welcome to the Epiroc Q2 results presentation. My name is Karin Larsson, Head of IR and media here at Epiroc. And today, we do a telephone conference. You can find the presentation material to this telephone conference on our home page under Investor Relations and Financial Publications. 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 the Q&A session. We have a quite easy agenda today. So without further ado, Helena, please tell us about this quarter.
Helena Hedblom: Thank you, Karin, and hello, everyone. So starting with the highlights. So the mining activities continued to be strong in the quarter as anticipated, and our large orders amounted to SEK 950 million, which is up from SEK 550 million last year. And the demand picture within mining is stable at a high level, and there is a lot of business cooking or in other words, the pipeline on potential large orders is solid. The construction market, on the other hand weakened further in the quarter and impacting the aftermarket business negatively. In the quarter, we completed the acquisition of Stanley Infrastructure, and we also announced the acquisition of ACB+. Together, we will be a leader within attachments and quick couplers, providing customers with a more complete range of productivity solutions. Long term, the construction market is attractive with an anticipated annual growth rate of 4% to 5% and with attachments used for deconstruction and recycling of steel and copper expected to grow even more. When it comes to profitability, we had a lower margin compared to the previous year, and there are several reasons as to why, and we will go through it soon. However, efficiency measures were carried out as planned in the quarter, and sequentially, the number of employees for comparable units decreased with around 450 in the quarter, mainly within service and manufacturing. Within automation and electrification, many exciting things are happening. For example, we have successfully deployed a battery electric trolley truck system for underground mining with ABB (ST:ABB) and Boliden. Moving on to Slide 3, providing some more insights on the development on orders received. So our orders increased 6% versus last year to SEK 16.3 billion, and it corresponds to an organic increase of 1%. The demand picture was mixed. We had a positive 7% contribution from acquisitions, mainly the Stanley Infrastructure acquisition, which came into the books on April 1. Sequentially, compared to the previous quarter, we achieved 5% organic growth, driven by mining equipment. Moving on to Slide 4, innovation, one of our strategic focus areas. So within automation, I'm excited about our solutions, including mix fleet, both for surface and underground applications, which create great value for our customers. Increased productivity, improved safety and lower emissions are some of the benefits confirmed by our customers. On the 3rd of July, we acquired the remaining shares of ASI Mining, one of our collaboration partners in the Roy Hill project in Australia. In this project, we are converting a mixed fleet of around 100 haulage trucks to driverless operations and thereby creating the world's largest autonomous mine [ph] or mixed fleet. There is high demand from customers that want to connect machines from different manufacturers and have these work together fully autonomously. And we are the one-stop shop for mixed fleet automation and remote control solutions regardless of manufacturer or type of equipment, partly thanks to acquisitions such as ASI Mining and RCT. And around recycling is increasingly important for our mining and construction customers. So by recycling and reducing steel and metals also such as tungsten, the need to extract virgin material is reduced, and our recycling program for carbide inserts from drill bits is expanding into even more markets. Another innovation highlight in the quarter was that we successfully deployed a battery electric trolley truck system for underground mining in close collaboration with Boliden and ABB. And this brings the mining industry closer to realizing the all-electric mine of the future with sustainable productive operations and improved working conditions. Another strategic focus area is the aftermarket. I'm now on Slide 5. We had a strong organic service growth of 5%, supported by midlife upgrades and a strong demand for mixed fleet automation. The construction demand, on the other hand, weakened impacting not only attachments, but also tools used at construction sites. Important markets such as United States and Europe were especially weak. When it comes to operational excellence, I'm now on Slide 6, our adjusted operating margin EBIT was down to 19.7% from 21.6% last year. Efficiency measures were carried out as planned in the quarter and actions have been taken to strengthen efficiency and the number of employees for comparable units has decreased with around 450 in the quarter and further measures to strengthen efficiency have already been initiated. We are also taking initiatives within our sourcing. It is a cross-functional effort, including R&D and marketing that will lead to increased resilience within sourcing and delivery, improve the cost efficiency and also ensuring a compliance within sourcing. And as a reminder, on the 1st of May, we split our Tools & Attachment division into two divisions in order to sustain optimal focus on each business line and continue fostering profitable growth. Externally, the reporting segment will, however, remain unchanged. Moving on then to the people slide, number 7. Safety is always our and my top priority, and I'm glad to see further improvements here. The total recordable injury frequency rate decreased further to 4.7, a meaningful decline from 5.5 previous year. As we completed the Stanley Infrastructure this quarter, we have grown our Epiroc family meaningful, but we have also completed the acquisitions of ASI Mining, Yieldpoint and Waco [ph] So a warm welcome to all new employees and we hope that you will enjoy being part of Epiroc family and share our values of innovation, commitment and collaboration. At Epiroc, our work is driven by trust and responsibility in a culture where everyone contributes and feels valued. So we see continued good progress when it comes to increasing the proportion of women and the share of women employees is now 19.2% and women managers are now at 23.6%, both up meaningfully compared to last year. Moving to Slide 8, where we have our planet goals, our CO2e emissions from operations decreased 32%, thanks to a higher share of renewable energy and installation of solar panels. The CO2e emissions from transport, however, increased 11% due to higher volumes delivered. So we have ambitious climate goals that were science-based validated already in 2021. In June, we got the significant acknowledgment of our work to reduce emissions. TIME Magazine listed Epiroc as the world's 95th most sustainable company. And among manufacturing and industrial production companies, we were number 7. So well done to the whole organization. I will now give the word to Håkan to talk us through and discuss the financials.
Håkan Folin: Thank you, Helena, and I will continue with Slide 9, group revenues and EBIT. Our revenues decreased 1% organically. In total, though, they increased to SEK 16.5 billion, up from SEK 15.9 billion last year. The adjusted operating margin was 19.7%, and the lower margin than compared to last year is mainly explained by overall higher cost level, negative mix effects within service and also dilution from acquisition, which was 0.9 percentage points in the quarter. As Helena said, efficiency measures were carried out as planned in the quarter. The number of employees, excluding acquisitions, decreased with around 450 sequentially, and this was mainly within service and manufacturing. Further measures that we have already initiated will lead to a similar reduction of employees in the second half of the year. And in this quarter, we took SEK 104 million in restructuring costs, and we do not foresee further restructuring costs in the third quarter for the actions that we have already initiated. If we then take a look at the EBIT bridge, and this is now on Slide 10. In absolute terms, our EBIT came in at SEK 2.9 billion. This was down from SEK 3.4 billion last year. But in this, we had items affecting comparability of SEK 325 million, and these were including transaction integration costs related to acquisition of 130, restructuring costs SEK 104 million. We have made a provision for earn-out for the acquisition of RCT of 73 and then also for the long-term incentive program, SEK 18 million. And if you -- the reported operating margin EBIT was 17.7%. In the bridge, you can see that we had a negative impact from organic and structure. Currency, however, supported the margin. And I do want to remind you that this is a bridge effect. So it's comparing the outcome in this quarter with the same quarter last year. In Q2 2023, we had a negative absolute breach [ph] effect of SEK 243 million and a negative margin effect of 2.7 percentage points and some of that is now being reversed. So all in all, we ended up with an adjusted EBIT of SEK 3.2 billion and an adjusted EBIT margin of 19.7%. If I then move on to the segments and Slide number 11, and I will start with Equipment & Service. And this segment enjoyed a strong demand from mining. Year-on-year, the orders received organically increased 3% to SEK 12.4 billion and including SEK 950 million in large orders. And this should be compared with SEK 550 million in large orders in Q2 2023 and SEK 400 million in the previous quarter. And we have said this before, and we will say it again, large orders are lumpy by nature. Sometimes you get more and sometimes you get less in a certain quarter, but we still see that there is a lot of business cooking out there in order for us to hopefully grab large orders also for the coming quarters. One of the large orders we received in the quarter was from Hindustan Zinc in India, SEK 250 million. They ordered a fleet of mine track as well as rigs for rock enforcement, phase drilling and production drilling. If we look sequentially, if we compare with the previous quarter, our orders increased 9% organically. On Slide 12, we have the Equipment & Service revenues, which were up 1% organically to SEK 12.5 billion and overall flat year-on-year. We had 44% equipment revenues in the segment, which is actually the same level as we had last year. So that means that the equipment service mix effect was flat this time. But if we look within service, however, we had some negative mix effects. We have a few items affecting comparability in total negative SEK 142 million. This consists of the earn-out for RCT, SEK 73 million that I mentioned before. And this is an acquisition then developing better than anticipated, and then we have to provide more for the earn-out. And then we also had restructuring costs of SEK 69 million. And we did mention reduction of employees before on group level, and this is also the case in this segment. And our actions here are very specific. I can only say - that you can say that they are pinpointed since this is actually a segment where we see good growth, but it is about strengthening our efficiency within this segment in the long run. If I then move on to the profit bridge for Equipment & Service, which you'll find on Slide 13. We started with a profit of SEK 3 billion last year and ended now with SEK 2.7. Adjusted, our EBIT was SEK 2.9 billion, which is then corresponding to a margin of 23% -- sorry, 23.2% and you can compare that with same quarter last year when we had 23.9%. The lower margin is mainly explained by higher costs. And then, as I mentioned, negative mix effects within service, while currency contributed positively. Dilution from acquisition was 0.1 percentage points. Actions have been taken, as I said, we should not forget though that we are experiencing strong growth from our mining customers. So we need to take these actions very carefully to safeguard a profitable growth also onwards. If I then quickly move on to the other segment, Tools & Attachment on Slide 14. Here, our orders increased 24% to SEK 3.9 billion. This was up from SEK 3.2 billion last year and supported by the acquisition of Stanley Infrastructure, which was included in the entire quarter as we closed the acquisition on April 1st. In total, acquisitions impacted the growth positively with 31%. Organically, though, we saw a decrease of 6% as the demand from construction customers remained weak, and this was impacting both attachment and also rock drilling tools used within construction projects. The demand for rock drilling tools from mining customers on the other hand, was good. Sequentially, order intake decreased 10% organically for this segment, explained by weakened demand in important markets such as the U.S. and Europe, as Helena mentioned. The weak development in construction also impacted the revenues for Tools & Attachment negatively, down 10% organically. In absolute terms, though, up 17%, supported by the Stanley acquisition. And I'm now on Slide 15. The EBIT, if we adjust SEK 465 million of items affecting comparability, which was transaction integration costs for M&A, also restructuring costs came in at SEK 448 million, which corresponds to an EBIT margin of 11.2%. In the profit bridge on Page 16, you can see then the margin headwinds. In structure, we had the transaction and integration costs that I mentioned, SEK 130 million and also restructuring cost of SEK 35 million. And we also had dilution from acquisition. If we adjust for the items affecting comparability, the dilution from acquisition was 2.2 percentage points to the Tools & Attachment margin. And the organic weakness then is mainly explained by under absorption and also product mix. Moving on to cost on Slide 17, both year-on-year and sequentially, the cost for administration, marketing and R&D increased in absolute terms with the acquisitions explaining the increase. As a percentage of revenues, though, we are down sequentially, and we hope to continue this trend in Q3 given the actions that we have taken. Net financials were higher, explained by higher interest-bearing debt. Income tax, we had at 23.0%. This is up somewhat from 22.6%. And we do still stick to our guidance that the tax rate should be between 22%, 24%. Next slide, number 18, is on our operating cash flow. If we start looking at the graph to the right, which shows a positive development where we can see now that our cash conversion rate is 90% in the last 12 months, which is meaningfully higher than where we were a year ago when we were at 54%. In the table to the left, you see the operating cash flow, which increased year-on-year from SEK 1.5 billion to SEK 1.6 billion. The lower profit had a negative impact on the cash flow, but this was compensated then by a lower buildup of working capital. And speaking of working capital, we have more details now on Slide 19. It was up 12% year-on-year, both in total and also adjusted for acquisition and FX and now represents 37.8% of revenues. If we dig into the details then, we had an increase of acquired inventory both year-on-year and sequentially as well as a higher level of receivables given the increase in sales, while payables were lower. If we look sequentially and exclude acquisitions, we actually had a positive inventory development, mainly due to the increased sales of equipment. The next slide is about capital efficiency, and this is on Slide 20. We ended the period with a meaningfully higher portion of debt. We are now at SEK 15.8 billion versus SEK 9.1 billion a year ago. And after having acquired Stanley and also paid a dividend of SEK 2.3 billion, we now have a net debt to EBITDA of 1.04 times at the end of the quarter. Return on capital decreased to 22.4% and this was negatively impacted by intangible assets such as goodwill. If we then shift a little bit of focus on Slide number 29, and we look at why we are building a position for future growth within attachment. And in short, you can summarize this slide as we're building a leading position within attachment and quick couplers given the acquisitions we have made of Stanley Infrastructure and also ACB+ and this will provide our customers with a more complete range of productivity solution. And quick couplers then, they are essential for excavated [ph] companies that strive to work with different types of attachment in an efficient and productive way. Long term, as Helena said and we talked about before, the construction market is attractive with an anticipated annual growth rate of 4% to 5%, an attachment used for deconstruction and recycling of steel and copper are expected to grow even more. So this is us positioning to capture future profitable growth. On Slide 22, we have some financial impact from the acquisition of Stanley Infrastructure. Most things on the slide we have actually shown to you before, but I will therefore concentrate on the news. Transaction integration costs were SEK 130 million in the second quarter. We also had cost in the first quarter. And -- but now after Q1 and Q2, we will not have more transaction or integration costs. The Stanley Infrastructure EBITA margin in Q2 was low double digit if we adjust for items affecting comparability and also the impact from step-up valuation of inventory. And if I pause there a bit and talk about what is the step-up value of inventory. Well, when we do the purchase price allocation for the acquisition Stanley, we value the inventory to market value instead of cost. And then this has an impact in terms of lower gross profit as we sell the finished goods. This impact will last until we have turned all of that inventory around, which will be for three quarters. So basically, until the end of 2024, we will have that impact. Previously, we have provided you with the guidance for the full year dilution of EBITA [ph] margin in T&A for 0.5 to 0.7 percentage points from the acquisition. And we do still stick to that comment, given the weakening demand in the second quarter, the anticipated dilution is currently at the high level of the range, but we have identified and taken actions, which will mitigate the effects of lower demand. For example, we will consolidate the manufacturing footprint for Stanley Infrastructure in North America, which is affecting around 130 employees. Also for the group, we stick to this margin comment as this acquisition and its impact on both revenue and profit is smaller now than we originally anticipated. So with this, I will conclude the financial comments and leave the word back to you, Helena.
Helena Hedblom: Thank you, Håkan. So I will then summarize the quarter. So we had strong demand from mining customers with large orders at SEK 950 million. And the business cooking looks promising. And on the service side, we had an organic growth of 5%. Construction, on the other hand was weak and also weakened further in the quarter, which impacted the aftermarket negatively. We have taken actions as planned, and we will take more to improve profitability and restructuring costs for this have already been taken. We are building a leading position within attachments with our acquisitions on Stanley Infrastructure and ACB+. And we are accelerating our leadership within automation, especially within mix fleet by acquiring the remaining share of ASI Mining. And together with Boliden and ABB, we have deployed a battery electric trolley truck system for underground mining, helping the mining industry towards zero emissions. And we've got a significant acknowledgment of our work to reduce emissions from TIME Magazine, who listed Epiroc as the world's 95th most sustainable company. So all in all, a busy quarter for us at Epiroc, and we keep on working hard to provide customers with the right solutions for the future. So together, we make it happen. And finally then, looking ahead now on Slide 24. In the near term, we expect that 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, both well presented. And as you know, we're hosting our Capital Markets Day in Vegas in connection to the world's largest mining exhibit, mine expo in September. For those of you that would like to join us in person, you will get to see many new innovations and meet and interact with most of our division presidents actually. But if you cannot make it in person, you're also most welcome to join online. And please note that if you want to join online, you also have to sign up for the CMD. So with this, operator, thank you, and please open up the line for questions.
Operator: [Operator Instructions] The next question comes from Andrew Wilson from JPMorgan (NYSE:JPM). Please go ahead.
Andrew Wilson: Hi, good afternoon and thanks for taking my question. I guess I just wanted to try and dive into some of the details around the margin, and I appreciate you've kind of given some of the levers for the current challenges. But could you try and help sort of quantify a little bit? I'd just like to understand better the service mix weakness that you talked to, can you just elaborate a little bit on the driver of that and how long we expect that to persist? And also, could you help us a little bit on maybe the size and also the timing of some of the cost savings? And then finally, and maybe it's just repeating what you said, but trying to put some numbers around it, but the inventory revaluations within Stanley, can you just repeat that and try and help us a little bit with the quantum so we can build that in over the next three quarters as well? I appreciate that are quite specific questions, but that would be really helpful to understand. Thank you.
Helena Hedblom: So if I start on the service mix, of course, as we have different components within service and different quarters, we grow different. And of course, we have parts. We have service contracts. We have different type of rebuilds. But I would say -- so that always plays a role, how that mix plays out in a quarter. I think all in all, what we see is that there is a high activity level out there. We see that as we also comment on the orders, we continue to gain a lot of orders on midlife rebuilds. So of course, depending on the mix, we go for growth when it comes to service, but at the same time, we also work with efficiencies. So as Håkan mentioned, quite a lot of the efficiency actions we took during Q2 is also towards the service segment. When it comes to under absorption, that is mainly in the, I would say, Tools & Attachment segment. And with the lower demand there related to construction. And so that is something that we are -- that's part also of this very selective initiatives that Håkan mentioned that we are a big portion of the, of the people that left both during Q1, but also now during Q2 and the initiatives we have initiated that will be executed now in Q3 are related to address that under absorption. And one part of that is also related to Stanley, as Håkan explained. So we are closing down one entity in U.S. and consolidating volumes. So I think we say timing-wise, we expect to see a gradual improvement here step by step here. But it's a fairly big adjustment in cost structure that we have taken out during Q2. But of course, we don't see that effect yet in the numbers.
Håkan Folin: And then if I take the third question you had on the size, on the inventory step-up value. To make it simple, you can say there are less than half of the overall PPA for Stanley Infrastructure or the - sorry, less than half the amortizations that we will have each quarter.
Andrew Wilson: Okay. Thank you.
Operator: The next question comes from Max Yates from Morgan Stanley (NYSE:MS). Please go ahead.
Max Yates: Thank you. And good afternoon. I just wanted to ask about the margins in Equipment and Service. And I guess you were doing kind of roughly 24% margins in 2Q, 3Q, 4Q last year. Most sector earning [ph] companies I speak to are guiding to negative FX in 3Q. And I assume you're also going to have a year-over-year drag from some of these higher costs, which are still going to be there. I guess the reason I ask is because if you didn't have that FX tailwind this quarter, your margins would have been somewhere between 20 to 21. And I guess what's very hard for us to see from the outside is I don't know whether your margins in the second half are going to stay roughly around 23 or whether with negative FX, ongoing costs, they're going to drop somewhere between 20 to 21, and it's obviously a massive difference that people have very low visibility on. So is there any way whether you can help us understand are your Equipment and Service margins about to go to 20 to 21 in the next couple of quarters? Or are we going to see the effect of these initiatives quite quickly? Thank you.
Håkan Folin: I think if I can start by trying to repeat a bit what I said in the call regarding FX is that what you see is a bridge impact. It's a bridge impact comparing with the same period last year. It's not an absolute impact. You cannot just put it back on the margin and say this is what it would have been without the FX. And then gradually, we will see the -- if you look at the number of people that have actually left the company this quarter, quite a large portion of that has been related to Equipment and Service, which means that we should start seeing the cost improvement during Q3 in the Equipment and Service segments.
Max Yates: Okay. But just on the most -- every company, every set company that I have under coverage gives margin -- gives FX guidance for the next quarter. So all of those are pointing to negative FX. I understand it moves around. But typically, when you see negative FX on your top line, it feeds through to EBIT. And I guess what I'm trying to understand is, are you able to help us at all? Like do you think your margins of Equipment and Service get worse before they get better?
Håkan Folin: I would say we actually saw them get better. In this quarter, they were better than they were in last quarter, right?
Max Yates: Okay. So this should be a sensible underlying level, first that is [ph] 23-ish we should be comfortable with for the rest of the year?
Håkan Folin: We don't guide specific margins, as you know, but we don't feel that this quarter was sensationally good in any way and that that's not possible to hold up to that level.
Max Yates: Okay. That's helpful. That's all I wanted to know. Thank you.
Operator: The next question comes from Christian Hinderaker from Goldman Sachs (NYSE:GS). Please go ahead.
Christian Hinderaker: Afternoon, Helena, Håkan, hope you're well. First question is on large orders. You booked SEK 950 million in the quarter. That's broadly in line with the SEK 938 million average last year, but obviously well above the SEK 215 that you'd preannounced. Was that incremental step up the result of orders coming in late in the quarter? Or is this more about customer restrictions on you producing a press release? And then if it's the former, what should we make of that order development heading into the second half, given that you've said the pipeline is solid, but maybe there's some hesitation around the timing and commitments from customers?
Helena Hedblom: Yes. So it's a combination. So some of these orders we got late and some of the customers don't want us to disclose what say, then do a press release. So -- but if I look at -- if you say this is very bulky as we have described every quarter. I think in this quarter, it was good to see so many large orders coming through. And when we look at the pipeline, the pipeline looks very solid. And it is a combination of replacement of old equipment and also expansion, brownfield expansion. So when I look at the pipeline, I don't see -- I don't see that hesitation. It can, of course, sometimes be that the decision happens one week too late, and that can create swings between quarters. But in general, in the conversations with the mining clients, which I mean, on a weekly basis, I don't see any shift in behavior. So I think it's good to see that, that momentum and also that -- I think what is good is to see also that the replacements are coming through in a good way.
Christian Hinderaker: Thanks. And maybe a follow-up then on the outlook in terms of demand. I think you changed the wording on the construction demand from soft to weak. How do we think about that change in narrative? And then in Q2, specifically, can you talk a little bit about the dynamics you're seeing in customer inventory levels? Was that an impact on your growth in T&A specifically?
Helena Hedblom: So I think we see -- we continue to see a soft and weak and say the demand actually weakened in the quarter. And we see both, say, destocking activities happening with the distributor also with some of the OEMs. At the same time, it has also been very low activities if you look in U.S. and in Europe, both Germany, France, for example, which our construction markets has been low activity levels the last month. I think on the construction side, what we are focusing on, of course, now with the Stanley acquisition also long term, this is, let's say, a growth opportunity for us, and we have now created a dedicated division around this, and we are focusing on making sure that we are as efficient as possible now. But of course, that we also address the cost structure given the development. But I don't -- I have not -- I don't think we are not yet out from that situation when it comes to the destocking, unfortunately. So that is still impacting the demand.
Christian Hinderaker: Thank you. And maybe just a final one, I can squeeze in on your own inventories, they're up SEK 780 million sequentially. How much of this -- and Håkan, I think you might have mentioned it relates to the integration of Stanley and other acquisitions. Just curious there as to what the organic change is?
Håkan Folin: Yes. The organic change is actually in the right direction. It's down. So if we exclude acquisition of -- especially of Stanley because that's where we have large items, we are down on inventory from end of Q1 to end of Q2.
Christian Hinderaker: Thank you.
Operator: The next question comes from Vlad Sergievskii from Barclays (LON:BARC). Please go ahead.
Vlad Sergievskii: Yes, good afternoon. Thank you very much for the opportunity. I have two questions, please. First one is to Håkan. How much PPA amortization related to Stanley you recognized this quarter? And will it be a straight line amortization. So basically, the number we can use going forward. And second one, perhaps to Helena as well, on the demand environment, are there any signs of grid shoots in construction activity, which are already perhaps pointing to a better environment, let's say, six months down the road. And the more long-term question on demand and mining. Is there any chance for a meaningful greenfield project cycle in the coming years? Or we are in the environment when demand will continue to be mainly driven by brownfield activity, which is already at a very good level.
Håkan Folin: If I start with the first one, then on PPA, we usually don't specify it by acquisition we do. But if you look at the difference between EBITA and EBIT within tools and attachment in Q1 and in Q2, you can basically calculate it backwards and then you get that it's a little bit more than SEK 40 million. And yes, that's a relevant number to use going forward.
Helena Hedblom: And then some comments on the demand side. I think like I say, short term right now, what we see is there is very, very, I would say, low activity levels, of course, driven by the interest rate but also the inflation. I think what we are, of course, eager to see taking off is the investments in infrastructure projects driven by the ESG commitment, if you look on -- for U.S., for example. There's quite a lot in the pipeline that will support this long term. So that's, of course, what we are watching. On the mining side, when I look at this pipeline of business cooking, when we look at this in 18 months ahead, there is not that many greenfields in that pipeline yet. However, of course, if we look at this long term, there is clearly a need for greenfield, especially within copper to keep up the production level and meet the demand in a couple of years from now. But I'll say midterm, if you talk 18 months, not so many initiatives on greenfield.
Vlad Sergievskii: Excellent. Thank you very much. If I can follow up quickly on the inventory level, Håkan. How far do you think from the inventory levels you would be happy and comfortable with?
Håkan Folin: So how far away we are from being comfortable, is that...
Vlad Sergievskii: On the inventory level? How far from level, when you say yes, this is a great level of inventory, I'm happy with.
Håkan Folin: I would say we still have quite a bit to go. I mean we started moving in the right direction now, but we are not where we want to be. So we still have quite a bit to open.
Vlad Sergievskii: Clear. Thank you very much.
Operator: The next question comes from Klas Bergelind from Citi. Please go ahead.
Klas Bergelind: Thank you. Hi, Håkan and Helena. I was a bit late on the call, a lot going on. So hopefully, you haven't touched on this already. But I just wanted to zoom in on Stanley. Håkan, could you repeat there what you said on the inventory? I understood from earlier today that you didn't have any inventory adjustment to EBIT in the quarter. And in light of that, the clean EBIT margin around 7% when I lift out SEK 44 million or PPA looks quite weak for Stanley. And obviously, it's tough construction markets out there, but could you just confirm that? Thank you.
Håkan Folin: And we wrote in the presentation, you will see that we didn't write a specific figure, but we wrote low double-digit EBITA and then that's to be compared with what they had last year when they had 16% EBITA. So yes, it's definitely lower than where it was last year and where it will be long term. And that's why also we are taking quite a lot of actions related to Stanley during the quarter.
Klas Bergelind: Exactly. So no -- yes, so just to confirm, there was no inventory write-down as part of the EBIT. If I take out the SEK 44 million PPA I get to 7% clean EBIT margin for Stanley. I just want to confirm that.
Håkan Folin: Then what we -- what you have no inventory write-down, but when we do this purchase price allocation, we value the inventory to market value from cost to market value, which means if you simplify it, when we sell it, then we get -- we basically get no margin. And that had an impact as well. It's included in the EBIT. So if you want to adjust for that, you will need to take that away as well. And that will last for three quarters, so two more quarters. And I said then earlier in the call, maybe before you joined that, that was less than half of the PPA value.
Klas Bergelind: Okay. So around SEK 20 million add back to get to super key [ph] margin. Okay, perfect. Yes. Okay, cool. My second one is on the gross margin. If I add back the SEK 104 million of restructuring that I think you have in there, then the gross margin is 36.6% like I thought, but obviously, you don't get the positive mix here of service being bigger than equipment that you've had over the last couple of quarters. And if we take out currency, whether it's bridge impact like Max alluded to, but if you just look at the organic, we are still down around sort of 3.7 percentage points year-over-year on Slide 13. Could you just talk through how much is digital and how much is price cost? Because no longer we have these services mixed benefit, right? So I'm just curious about the moving parts within organic? Thank you.
Helena Hedblom: I think on the organic side, of course, we have growing digital business. And so it's, of course, partly that those acquisitions that are growing with a margin that is step-by-step improving, but not to the same level as I would say, the other business. And then we also have this - this I will way, different components of service that I explained earlier as well. So of course, depending on how we grow the different parts, we can also have an impact here. But also there, we have we'll say, the cost increase.
Håkan Folin: Yes. So an overall cost increase, which then is higher than the price increases that we are still seeing price increases, but the cost increases, obviously, labor, et cetera, has been high over the last year.
Klas Bergelind: And just my final question on this. You're talking about sort of -- I think you said, if I heard it correctly, that SG&A is now sequentially lower ex currency. So step by step, you are improving on the OpEx, but obviously, it's not a weak market, you can't cut OpEx too hard. So you're coming back to the earlier question really. I'm just trying to understand, like can you give us some sort of hint that estimated [ph] sales ambition into the second half, we have the gross margin, we can calculate that, but just so we get the OpEx level in the right place.
Helena Hedblom: I think as we -- it's very much a mixed picture. If we look on it organically overall, we are up 1%. So the mining is -- the strong mining is very much compensating for the softer construction and the pipeline looks very solid. So this is also where we need to be very, we'll say, precise in what we're doing because otherwise, we can jeopardize we'll say, the mining activities and the growth in mining. So where we are focusing our or say, efforts is very much in the areas -- the areas where we're not performing. So that could be in a specific service contract, it could be in one product. It could be one factory, et cetera. So that is the type of preciseness we are working towards. And that's -- it looks okay, it's a rough number when you look at the total number of employees has gone out. But it's very precise, I would say, to address where we have the challenges without jeopardizing the long-term growth, we're not jeopardizing the long-term position from a technology leadership standpoint.
Klas Bergelind: Quick final one just on the SEK 950 million of large orders in mining, there was a bigger share of unannounced orders this quarter. I mean, I think you only announced SEK 25 million. And so it was a little bit difficult to track sort of where you got these, et cetera. Could you comment Helena on like, where do you see this increased activity because it is quite a big step-up quarter-on-quarter in mining while construction is getting weaker?
Helena Hedblom: So several of them came from Africa. So we had good large orders from Africa that is existing customers ordering more, but also Asia, as well as Australia. The one in Australia, which was sizable, that was a replacement order, which is, of course, super good to see that we continue to -- our customers continue to trust us.
Klas Bergelind: Thank you.
Operator: The next question comes from John Kim from Deutsche Bank (ETR:DBKGn). Please go ahead.
John Kim: Thanks for the opportunity. Just a question around activity levels and velocity in Q2. Given the uptick in copper pricing in the period, how would you characterize how that actually translated into your Q2 numbers? And is it fair to say that the pricing should get better through these quarters as production expansion is tight but copper pricing is stronger? Question mark.
Helena Hedblom: I would say it takes longer time for the market let say - for us to see it. But if you say what the correlation is very often, if I look historically, what we have seen with higher prices, of course, we see increased activities in exploration, but also we see customers drilling more hours. So pushing the machines, trying to maximize the output and that you can see then on drilling consumables towards mining. And you can see that on different type of services like rebuilds and trying to bring the equipment up to the let say, the highest possible productivity level. So short term, that is what we expect is very much on the aftermarket where you can see, let's say, higher push and more focused efforts from our customers. Unfortunately, there when it comes to consumables, and that is, I would say, the other way around when it comes to construction, of course, we have lower activity levels on the construction equipment that we have out there, and that I will say, lowers the activity levels there on -- you see that as well when it comes to number of drill meters in construction is trending down, which offsets this increase in mining. When it comes to pricing, we don't let say, our own pricing work is very much tied to our capabilities when it comes to innovation, the value that we deliver, et cetera. So we don't let say -- we don't -- we work independently on where the prices -- where the quality prices are with our pricing activities.
John Kim: Okay. Helpful. And previously, I believe the equipment business was impeded a bit by units either waiting for export logistics and/or being stuck at final production centers for parts of certification. Can you comment on that as to whether that's the same, better or worse?
Helena Hedblom: So that is improving. So we have put a lot of focus on that the last quarters to open up the bottlenecks, to improve our, say, flow-through in these workshops in the different parts of the world. So we see that that is trending in the right direction. That is also supporting then the revenue on equipment. And -- the improvement in inventory level organically is also coming from the equipment side that we have managed to get more equipment out.
John Kim: Okay, helpful. Thank you.
Operator: The next question comes from Ben Heelan from Bank of America (NYSE:BAC). Please go ahead.
Ben Heelan: Yes, thank you. I just wanted to go back to the Equipment and Services margin comments. So you talked about mix within service. Can you help us understand what in services lower profitability and what is higher profitability? It sounds from your comments that these midlife upgrades have been growing very strongly and the implication there would be that they are just not as profitable as the rest of service. So if you can actually help us understand that what is it within service that is driving these mix headwinds? And then I guess the second comment you talked about a general cost increase across the business. Can you talk about the components of that? You talked about labor, but what are you seeing on freight, what are you seeing in raw materials and component costs? If you could just give us the color around that, that would be super helpful. Thank you.
Helena Hedblom: Yes. So on midlife, let say, the quarter when you do the midlife, then you have a lower margin. But of course, we have prolonged the life of that machine, which leads to maybe another 3 years on parts consumption. So over that life of that equipment, that is consolidated a good business. So that is what we need to be. The service product, that's a way of prolonging and making sure that you actually use more large components over the life cycle of a machine. So I would say that the mix effect we're talking about is related to some -- to that we're growing nicely on this midlife rebuild, but also the digital business, as we have comment, we are growing faster on that, on that fast on that business, which is, of course, great, but we are not there yet, margin wise, where we -- you know, so that way. So it's creating a dilution, if you would say like that, for a mix effect. When it comes to cost increases, of course, labor is one, one component. I think freight cost we see trending down. So that one is, I think, we are addressing. We're also doing a lot of work on the direct material, as I mentioned in my presentation. So there's a lot of focus on the direct side of COGS [ph] so to say, which is a big portion of our cost, actually, it's a big part, so that we're putting a lot of efforts into that area as well. Do you want to add anything, Håkan?
Håkan Folin: I've forgotten...
Helena Hedblom: No.
Ben Heelan: Okay. Thank you very much.
Operator: The next question comes from Magnus Kruber from Nordea. Please go ahead.
Magnus Kruber: Hi, there. [indiscernible] A couple of questions around the headcount reduction we saw in the quarter. Could you add some color on when those came through if there are any additional headcount reduction coming through outside of Stanley in the coming quarters? And ideally, if you could add some color to what that meant for our -- in the profit bridge in the quarter?
Håkan Folin: So the 450 headcount that went out in the quarter came gradually throughout the quarter, which means that from a cost point of view, we have not seen the full impact of those SEK 450 million yet that will be seen starting basically from July. And then we also said that we expect during the second half of the year, additional approximately -- approximately in the same level, a reduction throughout the rest of the year. And what we mentioned was we are looking at consolidating the footprint of Stanley Infrastructure and taking down the number of people there. We said that's around 130 people. So then, of course, there will also be quite a bit outside of Stanley Infrastructure during the second half of the year.
Magnus Kruber: Okay. So you have SEK 450 now and then an additional SEK 450 for the balance of the year?
Håkan Folin: In the same level. It's not going to be exactly SEK 450, but it's still...
Magnus Kruber: Fair enough. And so far, it's been a lot in improvement in service. Could you say a little bit anything about the regions or the profit bridge impact so far that would be helpful to sort of - for the rest of the year?
Håkan Folin: Yes. If you look at the -- actually, in Q1, we were down around 100 and then we said it was more into attachment given that that's where we saw the weakness first. And then when we saw a weaker margin in Equipment & Service, we acted there as well. So in Q2, more than half of these 450 are within Equipment & Service. Going forward then, as mentioned, around SEK 113 Stanley, but then the rest is spread, there is some more inclusive attachment, but there's still more in Equipment & Service. And geographically, I would say it's a little bit everywhere. It's where we have people, you can say, it's in our production facilities, where we have reduced additional workforce. We have also reviewed service contracts and where some of them have not been as profitable. We have reduced our staffing and many in those and exited some of them and service contract can obviously be anywhere in the world. So you cannot really say it's exactly in this geography. It's quite well spread actually.
Magnus Kruber: Got it. Thank you so much.
Håkan Folin: And then like Helena said before, is that since they are still growing, we have an organic order intake, on group level we have a 3% on Equipment & Service. We need to be rather precise here. We cannot just do one size fits all, but we need to see where are we at the moment growing, where are we not growing as fast, how can we make this as pinpointed as possible?
Magnus Kruber: Absolutely. Thank you so much.
Karin Larsson: So the last question now, I suppose.
Operator: The next question comes from James Moore from Redburn Atlantic. Please go ahead.
James Moore: Hello, everybody. Thanks for taking some questions. I wondered if I could ask within the service margin. And looking specifically at digital, is that still broadly at the same level or is it sort of heading in the wrong direction at the moment or starting to head in the right direction. And what's the time frame on digital? That's the first question. Maybe we start there.
Håkan Folin: I would say it's heading in the right direction. So we are seeing progress if we compare with where we have been before. We are seeing that we have increased sales, as Helena mentioned before, and we also see profitability moving in the right direction. And time line, I would say, it varies. This digital business comprises very much of acquisitions, some of them being very mature and profitable from day one, like RCT that we mentioned before and some of them being more start-up companies and smaller companies. So it's hard to say that it doesn't really follow a specific curve. It really varies by entity we have acquired. But on the other hand, our expectation is that we should see a gradual improvement. If we look at this at one bulk, we should see a gradual improvement within the digital business quarter-by-quarter.
James Moore: Thank you. And could I switch to T&A, just the weak margin. I listened to all the actions and the bridge comments, a lot of moving parts. But broadly, as we move into the second half, is that still going to be a challenged period for profitability? And could we end up being at a similar level to where we are now on an adjusted basis? Or would you expect that to already start to pick up with the actions in place?
Håkan Folin: I think if we -- let's assume that the market stays exactly where it is right now, which we obviously don't know. But Helena mentioned before, we don't really see any green shoots. So let's assume it stays exactly here. Then we are taking a lot of actions, which means that when those actions kick in, we should start seeing an improvement in profitability as well for T&A.
James Moore: And is there a sort of an anchor target for what you think an entitlement margin is once we get to the cost base that you aim to get to within your plans, whether that's in '25 or '26 that we could somehow anchor off and forecast getting back to?
Håkan Folin: Well, I would say we want to see the improvement of these actions already towards the end of the year. But then we are also -- the actions will help from where we are at the moment. But on the other hand, if we're really going to see an improvement in the Tools and Attachment segment, we also see - need to see the market bounce back.
James Moore: That's fair. And just lastly, on copper deficit. Helena, you've mentioned your thoughts on the '25 deficit over the years. We're getting closer. Do you think now with what's clearly been potentially arguably a worse-than-expected construction environment given interest rates and China being pretty sluggish. And those two blocks being a large proportion of the world's copper demand, say, versus EV, solar, battery, wind and the likes, do you think that that deficit is now sort of pushing to the right, or do you still feel like that is the natural point?
Helena Hedblom: I think it is because I think we also need to remember that the time line before you find an asset you start to - you start to explore it, you start to do the investment. There are maybe 2, 3 years just to put the infrastructure in place before you actually can get to start to get production up or actually - or out. So I think time is ticking, but of course, I would say everyone is -- and I think that is why we start -- continue to see everyone trying to push brownfield more and more because as long as you can do that, that is, of course, less risky way of expanding. But at a certain point, you will run out of ore, and you will have to invest in greenfield. We will provide more color at the Capital Markets on the copper outlook in our view.
Karin Larsson: And I do unfortunately need to interrupt you guys here because it's too - and I know all of you are eager to listen to someone else now. But thank you very much. We will all be here for you. Alexander, Helena, Håkan and I. And have a nice summer, and we wish you successful investments. Thank you.
Helena Hedblom: Thank you, everyone.
Håkan Folin: Thank you very much.+
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