Epiroc AB (publ) (EPIA) Earnings Call Transcript

Hello, everyone, and a warm welcome to the Epiroc Q3 2026 Results Presentation. My name is Karin Larsson, Head of IR and Media. Joining me today are our CEO, Helena Hedblom; and our CFO, Hakan Folin. We will take you through the highlights of the quarter, followed by a Q&A session. And you all know the drill. Helena, please go ahead.

Thank you, Karin. And also from me, a warm welcome to this call. So let me start with safety. This quarter, we have a very tangible example of how our technology can make a real difference. During a fire at a mining operation in the Fresnillo district in Mexico, around 350 people were evacuated. And our situational awareness technology supported the operation and evacuation was completed safely in only 35 minutes, which is significantly quicker than without this solution. And for me this demonstrates what innovation at Epiroc is really about: creating real customer value, making operations safer, more productive and ultimately better. Q3 was another strong quarter for Epiroc with particularly strong mining demand. Group orders increased 12% organically to SEK 17.5 billion. Large equipment orders amounted to SEK 790 million, including a SEK 610 million order for an underground mine in Botswana, our second largest order ever. Revenues increased 7% organically to SEK 16.8 billion. And more importantly, we combined this growth with improved profitability. The adjusted operating margin increased to 20.4%, supported by high volumes and the efficiency measures we have implemented. And while delivering today, we are also investing in initiatives that strengthen our long-term competitiveness and support future growth. So during the quarter, we inaugurated our modernized Kalmar facility in Sweden, a world-leading manufacturing site for hydraulic attachments. We are also making good progress with the expansion of our manufacturing capabilities in Nashik in India, and our new distribution center in Orebro in Sweden and the transfer of tools production from Langley in Canada to Matehuala in Mexico is also proceeding according to plan. So let's look a little bit closer at the demand. So orders increased 15% reported and 12% organically, with mining clearing driving the growth. Infrastructure demand remained stable. What I particularly like in this quarter is the wide span of the mining demand. So we saw a strong demand for exploration and for underground equipment as well as for digital solutions, and organic service growth was 13%. Large orders contributed, of course, but the demand picture is broader than individual large projects. which gives us confidence in the underlying health of our mining business. The business [ cooking ] is good and the pipeline of possible orders remain strong. Our ambition is to be the leading productivity and sustainability partner to the mining and infrastructure industries, and we continue to strengthen that position. Through the acquisition of Eventspec, we have further strengthened our service capability and presence in South Africa. Our innovations are made for mining and infrastructure applications, but in the quarter, we have news on where our solutions are used to safeguard an UNESCO World Heritage Site as well. Our digital monitoring solution Yieldpoint, that detects rock movement at micrometer scale and provides insights into rock stability, has been deployed in a 3,000-year old tomb in Egypt. Our solution safeguards at the site is safe and that it can be protected if rock movements occur. Another exciting development is our technology for seamless autonomous underground-to-surface haulage. Trucks often operate over long distances and many times from an underground production area to a surface dumping location. And by using a common system for automated underground and surface hauling, with advanced obstacle detection, customers can now enjoy real and meaningful productivity gains. So let me show you a short film on the haulage solution from a successful customer event we held this summer. [Presentation]

Aftermarket represented 67% of revenues in the quarter. Service orders grew 13% organically. [ Midlife ] rebuilds and digital solutions for automation and safety were among the strongest growing parts of the service offering. Tools & Attachments orders increased 4% organically, driven by mining. As our installed base becomes more advanced, the opportunity to support customers throughout the equipment life cycle also grows. And that strengthens the recurring nature of our business while increasing the value we can create for customers over time. So with that, I hand over to Hakan to take us through the financial performance in more detail.

Thank you, Helena. Revenue in the quarter increased 10% to SEK 16.8 billion, and this corresponds to an organic growth of 7%. Our adjusted EBIT increased 18% to SEK 3.4 billion, and the adjusted operating margin improved significantly to 20.4% from 19.0% last year. The organic EBIT contribution was 1.5 percentage points to the margin, and this was supported by the higher invoicing but also efficiency measures that we have taken in previous quarters. So while revenue growth has not yet fully caught up with the strong order development we have seen in the last 3 quarters, the revenues we are converting are coming through with good profitability. That is, of course, important. And I would like to highlight that our lead times remain at normal levels, and we have been able to ramp up our production according to the plan. We produce on orders; we don't produce in anticipation of orders. Looking at Equipment & Service, demand was, as anticipated, at the high level. Our orders increased 15% organically and [ 90% ] in total. And to repeat what Helena just mentioned, we saw a particularly strong demand for exploration and underground equipment as well as for digital solutions. And within digital solutions, the automation and safety solutions, like the one we showed an example of in the beginning, were the strongest growing areas. Large orders close to SEK 800 million, SEK 790 million, and this can be compared with SEK 470 million last year. If we look at equipment specifically, there, we had order growth of 16% organically, while service orders grew 13% organically. And overall, we have a broad and healthy demand picture. Equipment & Service revenues increased 8% organically. Service revenues grew 10%, while equipment revenues grew 5% organically. And most importantly, we were able to improve the profitability for this business area. Our adjusted EBIT increased 20% to just above SEK 3 billion, and the adjusted margin increased to 23.8% compared with 21.9% last year. In the quarter, the flow-through was more than 50%, and this should be seen as exceptionally strong. Also here, the higher volumes contributed, but we also operate with a higher efficiency. If we then turn to Tools & Attachment, here, orders increased 4% organically to SEK 3.9 billion. And note that this then does not effect -- does not include the effect of the tungsten prices as this has been booked as surcharges and don't impact the top line. The development continues here to be driven by good mining activity, while demand for attachment remains stable. Revenues in the Tools & Attachment business area grew by 6% organically to SEK 4.0 billion. And here too, we saw a clear improvement in profitability. Adjusted EBIT increased by 23% to SEK 531 million, and the adjusted margin reached 13.2%, which can be compared with 11.6% last year. This is actually the best margin for the business area since the beginning of 2024. And the improvement really reflects the increased efficiency that we are now running the underlying business with. Well, moving on then to a different topic, costs and financials and tax. We are continuing to ramp up the organization to support a higher level of activity. Number of employees, including additional workforce, increased by 5% in the quarter, corresponding to 1,100 people. And these are primarily in production, in service and in logistics. So we are adding resources where they are needed to basically cater to our growth. On the cost side, our administration, marketing and R&D expenses increased by SEK 2.7 billion, representing approximately 16.1% of revenues, which is the same level as in Q3 2025. Net financial items were SEK 225 million, which include a net interest of SEK 172 million, both lower than last year. We had an effective tax rate in the quarter of 24.0%, which is in the upper range of our guidance which is 22% to 24%. Moving on to cash flow. Operating cash flow came in at SEK 1.4 billion, and we can compare that with SEK 2.5 billion last year. And the lower cash flow primarily reflects higher working capital, especially on the inventory side, but also that we are paying higher taxes. Rolling 12 months, the cash conversion rate was now 78%. And following a period of high equipment orders, we are up year-to-date more than 30% organically for equipment orders. We are carrying more inventory [indiscernible] customer deliveries of equipment but also aftermarket availability. And I would say we should view our cash conversion in the context of the growth and particularly then on the equipment growth. We mainly produce equipment to orders. So when we grow, we need to invest in inventory, which then temporarily weighs on our cash conversion. As growth normalizes, our asset-light setup, the flexible cost base that we have and the strong aftermarket will support working capital release and improved cash conversion. At the same time, we work all the time actively to become more efficient. Helena mentioned investments in India, in Mexico and in Orebro in the beginning of this call. And this will, over time, then make us leaner and more efficient. Net working capital was SEK 27.5 billion or 37.7% of revenues. As mentioned, inventories have increased significantly year-over-year, while higher payables partly offset this increase. Two messages here. First of all, inventory then should be seen in the context of the stronger equipment orders that we are supporting. And secondly, with the inventory, we now have a clear opportunity to convert this into revenues and also then into cash over time. We have the demand and now it's up to us to execute. So on the next slide then, capital efficiency. Our financial position, it remains strong. Our net debt is now SEK 11.2 billion and net debt-to-EBITDA has decreased to SEK 0.70 million. Return on capital employed has increased. It's now at 19.8%, especially then supported by the higher operating profit. So we have the financial capacity to invest in growth while maintaining a strong balance sheet. From a CapEx point of view, we have guided -- I did this at the CMD, guided to around 2% to 3%, and that is still what we stick to. And with that, I hand back to you, Helena.

Thank you, Hakan. So before we go to Q&A, let me then summarize the quarter. So we delivered another quarter of strong orders driven by mining. Orders increased 12% organically, supported by exploration and underground equipment, service and digital solutions. At the same time, we improved profitability. Both business areas contributed with good organic flow-through, and the benefits of our efficiency work are increasingly visible. And I am particularly proud that innovation continues to translate into tangible values for our customers. The example from Mexico shows that our technology can make a real difference when it matters the most. The strong order development needs to translate into revenues and cash, and we are focused on improving that conversion while continuing to serve our customers well. So looking ahead, we expect mining demand to remain high and demand from infrastructure customers to remain stable. So we remain committed to profitable growth. Thank you.

Thank you, Helena. Thank you, Hakan. Well presented. Operator, you may now open the line for questions, please. .

[Operator Instructions] The next question comes from Chit Sinha from JPMorgan.

I have 3 please. First question, please, on equipment order growth this quarter. So the 16% order growth slowed down versus the Q2 print. And it seems as though we should maybe be expecting more activity at this stage. Perhaps you could shed a bit of color on the sequential change and then maybe a bit on the mix between replacement, brownfield and greenfield this quarter.

So if I would say that there is -- the same -- it's the same mix. So we continue to see roughly half of the demand being replacement and half being expansion. I would say, of course, also the -- this quarter, we did not have that much of large equipment deals. So that could also swing between the quarters. But I will say, when I look at the underlying activity level, it's very healthy. When I look at the pipeline, it's also very healthy. So of course, this could also be -- it's very often a timing effect when orders come in. So I think overall, it's -- I see the same activity level I have seen the previous quarter when I look at the total activity out there in the pipeline.

Okay. And then you've also called out underground being strong this quarter, but maybe you could touch on development and pipeline you're seeing on the surface side?

Yes. So in this quarter, we had really good demand on underground equipment, which is very good to see. When I look at the pipeline, there is a lot of tenders in the pipeline on surface. So they did not materialize in this quarter into orders, but the pipeline looks equally strong, I would say, on surface as well as underground in the coming quarters.

Very clear. And then my final question, just on the service side. So 13% this quarter is a nice acceleration from the H1 run rate. Is there any lumpiness in this growth, especially on the midlife upgrade side that maybe we shouldn't expect to repeat in Q4? Just trying to understand if we should expect double-digit growth for a period, or will there be some quarterly volatility?

There are some lumpiness in the service orders as well, which is related to midlife upgrade, as you mentioned. So when it comes to, let's say, the underlying activity level when it comes to contracts or the -- which is more tied to engine hours of the fleet, that is improving and going, I'd say, steady. But when I look at the lumpiness, it is very much the midlife factories and how that is being -- when those orders come. Because that could be fairly big in size as well when a fleet -- when a customer decides that a fleet should be upgraded.

The next question comes from John Kim from Deutsche Bank.

Two questions, if I may. Staying on the topic of service growth. I understand that midlife upgrades do create a bit of a tough compare sequentially. But if you just think about the overall activity levels or normalizing that, would you argue that Q2 or Q3 is more representative of what you're seeing in the baseload demand growth in this part of your business? And then the second question, I'll wait on.

I think the baseload activity out there is strong. We see customers are pushing the tonnage out. So I will say it's -- very high activity levels across, I would say, on service. I think when you look at this, of course, sequentially as well, there has been -- earlier this year, we had the event with -- in DRC that is also now coming back into activities. So that supports the growth. On the other hand, we don't see really the nickel activities picking up yet. So there is always this -- there could be a difference between mine sites and commodities. But I think when I speak generally, the activity level is high, and we are also capturing a fair share of this. And 13%, of course, it's a strong number.

Indeed. I'm hoping you can help me a little bit on what you're seeing in the copper end markets. I'm trying to connect the dots or square the circle on what looks like volume declines in [ major ] countries versus a very strong support of pricing and how that connects to ore grades and your ability to price up. So how are the major mines, mine managers behaving? Do you expect better activity, better orders for '27 at this point? Or is it still unclear?

I mean if we look on copper there, when I look at the pipeline, there is a lot towards copper in the pipeline, expansion plans, both greenfields and expansion of existing mines and replacement of fleet. So there's a high share towards copper. When we look at the actual output of copper, especially in Q3, of course, there's been challenges in Chile, weather, fatalities, strikes, different challenges in several of the mines, which has put pressure on the output from that country. But I think overall, when I look at the pipeline moving forward, there is a very strong pipeline towards copper.

Sorry, one follow-on, if I may, cheeky one. Are you seeing any better activity on Copper Panama for your remit?

There are some activities ongoing to bring the machines up to, let's say, to a stage where they can start to operate again. But it's not, let's say -- and you cannot compare it at all with the level we had prior to that mine going into care and maintenance.

The next question comes from Alex Jones from BofA.

Great. Maybe the first one just on the efficiency measures. You [indiscernible] segments helping margins this quarter. Could you just give us an update on where we are in the efficiency measures in both divisions and whether there are still further savings, sort of material savings to come in either of them from here?

As we continue our work on efficiency, as I mentioned, if we take Tools & Attachments, for example, we are coming onto the closure of the facility in Langley and the ramp-up in Matehuala has already started. So that's, of course, one efficiency measure that we yet don't see in our numbers. But I would say when it comes to consolidation of sites, I think we -- after that, we have done a big chunk of what is needed. Then there is always improvement areas that we have discussed over -- in many of the calls when it comes to service operations, working on the efficiency in the supply chain, et cetera, as well as in admin efficiencies. So we continue to stay focused on efficiency always and to safeguard profitable growth.

Great. And maybe just on the sort of project pipeline. I guess several of your mining customers are talking about potentially some pretty large FIDs of copper projects before the end of this year. Could you just talk about whether you're seeing that in your pipeline? And typically, how long you would expect for such large projects between the mining companies taking and you being able to book an order?

Yes, so there is a very strong pipeline towards copper, I would say, for Q4 and Q1. Of course, when a decision has been taken, there is still quite a lot of negotiations that need to happen because there is quite often quite long contracts, et cetera. So that can take some months, I would say. So it's not so that when a decision is taken that it translates. We book an order when it's -- when we have the PO. That's when we put it in our books. The firm PO.