Epiroc AB

STO:EPI A

Earnings Call Transcript 2022-Q1

[Mattias Olsson, executive]

So hello, everyone, and thank you for joining Epiroc's Q1 results presentation. My name is Mattias Olsson, and I'm heading Corporate Communications here at Epiroc. Today, I'm covering for Karin Larsson, who is on parental leave. This time, we are doing only a conference call as we have the Annual General Meeting coming up this afternoon. But still, we will follow the same format as we always do.

First, our CEO, Helena Hedblom; and our CFO, Hakan Folin, will briefly present the results before we do the Q&A. [Operator Instructions]. So now we turn to Page 2 and Helena, please go ahead.

[Helena Hedblom, executive]

Thank you, Mattias. So it was a strong start of the year. The demand continued to be on a high level and orders received reached a new record of SEK 13.8 billion. The organic growth was 18%, and there is a strong demand for our equipment, both for our solutions within automation, digitalization and electrification as well as for our aftermarket offering.

We won 6 large orders above SEK 100 million in the quarter and several sizable orders below that threshold. And many of these included battery electric vehicles and automation. The development for our service products remained robust, and order intake was record high. The revenues almost reached the level of the record fourth quarter 2021, and our reported operating profit was record high and adjusted operating margin came in at 23.3%.

The supply chain challenges that we talked about when we reported Q4 in January are still there, and our teams are really working that extra mile to be able to supply our customers. And I would say that we are managing well given the circumstances. We see cost increases on components and general inflationary pressure but we have been actively working with price management during last year and this year.

The war in Ukraine and the resulting humanitarian catastrophe is truly horrifying, and we take the situation very seriously, and we hope that a resolution soon will be found to end the war. For us, our primary concern is the safety and well-being of our colleagues, and of course, it has also impacted us financially in the quarter.

We will come back with some more details later on. Also, the COVID-19 pandemic had some impact, mainly sick leave in the beginning of the year, but the impact was reduced and it was very limited at the end of the quarter. So then over to the key financials and Hakan will come back with more details later.

I repeat, record order intake at SEK 13.8 billion. Organic growth for equipment was 18% and service even higher, up 22% and Tools & Attachments up 11%. Organic revenue growth was 14%, also here with double-digit growth for all the segments. So we are still building backlog, and we see longer delivery times just as we mentioned last quarter. And many of the large orders that we have received will be delivered in 2023. Adjusted margin came in at 23.3%, which is higher than last year.

So now I turn to Page 4. And as you know, we are a leading productivity and sustainability partner to our customers. So let me start with innovation. So we introduced a more powerful surface blasthole drill rig, the DM30 XC, which can be equipped with our rig control system with several additional safety and productivity features.

Also, we now have Mobius for Drills. Mobius is a system that enables multivehicle command, control and monitoring to maximize productivity and safety. We are a true partner to our customers. I have often talked about the technology shifts that are happening in our industry. Customers are investing in automation, in digitalization and electrification, and we win orders for these solutions, and we have even received repeat orders now for battery-electric vehicles in the quarter. So that's good to see.

I want to mention the large order for equipment, including battery-electric machines and automation solutions from the Canadian Malartic partnership. We also won a large order from them in 2021, and we will also provide service and spare parts as well as expertise on electrification solutions. And the quote on the slide is from the General Manager of the Odyssey mine. It is really a collaboration, and we share their ambition on safety and productivity.

Then a few words about the aftermarket. So this continues to develop strongly with record orders received, and this is very good to see. Customer activity continued to be high which supports the strong growth. Our structured work towards our customers is also paying off, and we are winning service contracts as well as orders for our other service products and also more and more machines are delivered with connectivity.

We have not seen it so much of it earlier, but now we see examples of customers that are placing orders for parts to safeguard deliveries. It is, however, difficult to estimate how big of an impact this has. Aftermarket represented 69% of the revenues in the quarter.

On operational excellence, on Page 6, we continue to work with our supply chain excellence. And in the quarter, we inaugurated a regional distribution center in Belgium that will serve our customers in Europe, in Middle East and parts of Africa with both spare parts and rock drilling tools. It is a very challenging situation within the supply chain, and we are taking some precautionary measures to safeguard availability of components.

The work to improve efficiency in administration and service also continues and no new main initiatives were taken in Q1, but the earlier initiatives taking show positive results.

Then over to sustainability. And if I start with people, we are pleased to see that the share of women employees and managers continued to rise in both categories with 0.5 percentage points since December. When it comes to injuries. On the other hand, we see a negative development with more work-related injuries, even if we have not had any severe injuries in the quarter.

We have many newly employed people, and we can see, for example, that they have higher injury frequency rate on our additional workforce, and this is not a good development, and we are taking measures to bend this trend.

On planet, I'm pleased to announce that we have entered into a partnership with SSAB around fossil-free steel. And this is exciting. We will initially use fossil-free steel in the production of a prototype underground mining machine that will be produced in our factory in [indiscernible], and the plan is to increase the usage of fossil-free steel over time.

We have lower CO2 emissions from operations, mainly due to higher share of renewable energy and installation of solar panels. For transport, the CO2 emissions have increased mainly due to higher volume transported. So now I'll leave the speaker line to Hakan, and he will give you some more details on the financials.

[Hakan Folin, executive]

Thank you, Helena. And we are now on Page 8. Before we go into the details and analysis of the financials, some words on our exposure to Ukraine and Russia. We have received orders and revenues have been recognized in Ukraine and Russia in Q1, predominantly in January and February.

For 2021, our revenues was almost SEK 300 million in Ukraine and about SEK 2.4 billion in Russia. We have only sales and services in this market. At the end of March, when we closed the quarter, we had orders on hand of about SEK 1.8 billion, and it is uncertain if and when these orders will be delivered and invoiced.

If we look at the balance sheet in Russia, we have working capital, cash and fixed assets of about SEK 1 billion in total. It's very little fixed assets and the majority is inventory and customer receivables. There's limited operations at the moment. Some service and deliveries are made in Ukraine for customers that are still operational.

We closed our deliveries to Russia on March 1, and it is a highly complex and fluid situation. There are continuously changing sanctions as response to the Russian invasion, and even sanctions are not targeting the mining industry as such. And at the same time, Russia is proposing legislation with counter sanctions and company actions.

And in addition to the sanctions, there are also continuous challenges with logistical flows and financial transactions. So we are closely monitoring the situation. We will continuously evaluate implications for our colleagues, business and operations, both in the short and in the long term.

Well, if we then look at the development in Q1, and we are on Page 9. Our operating profit increased by 41% to SEK 2.6 billion, and we achieved a record operating profit again. The reported margin was the highest ever at 23.7%, and it was supported by a positive change in provision for our LTI program. But if we instead then looked at the adjusted operating margin, we saw an increase now in Q1 up to 23.3% from 23.0% last year, and this is actually only 10 basis points from the best quarter we had so far, which was Q3 2021.

And if we look into the details on the profit and we do that via this profit bridge then. The organic growth, volume and price contributed in SEK 443 million and 1.6 percentage points to the margin. Currency supported operating profit that was more or less neutral or actually diluted somewhat the margin to 20 basis points.

Structure and acquisitions together was positive SEK 193 million, and this is due to the LTI program. The change in provisions for the program was positive, as I mentioned in this quarter, with SEK 43 million. And in Q1 last year, it was actually negative with SEK 149 million.

Acquisitions had a negative impact on the profit and the margin and the dilution on the margin from acquisitions is about 1 percentage point. This is mainly related to a few of our technology acquisitions where revenues are still relatively low.

During the quarter, we had, as Helena mentioned, challenges in the supply chain and early in the quarter, high sick leaves in many of our operations due to COVID-19. But when we combine all these factors and when we look at the adjusted margin, all in all, it brings us then to 23.3%.

Now I will zoom in on our 2 segments. We start with Equipment & Services, where order received increased 20% organically to a record high level of SEK 10.5 billion. We have, as I mentioned, 6 orders above SEK 100 million each and on top of that, we have many medium-sized equipment orders as well.

All in all, SEK 5.3 billion in equipment orders. But as we have said before, equipment orders are, by nature, lumpy. But still the underlying demand for the small and medium-sized order is at a high level. If we instead look at the organic growth in service, it was actually fairly impressive with 22%. And as mentioned, we see examples of customers that are placing orders for parts to safeguard deliveries. But clearly, the high demand is definitely there. We had a good contribution from acquisition, 4% on the order growth and then also currency contributed to [ 3% ].

On the revenue side, we had a 17% increase organically with strong growth both in Equipment and in Service. And I will cover some more details on profit and margins on the next slide. And we are now at Slide #12. So the operating profit increased 26% to SEK 2.1 billion. The operating margin was 26.1%, supported by strong organic growth diluted by currency and also by expectations. The organic growth contributed to the margin with 1.2 percentage points, but it was then offset by dilution from the acquisition and currency was somewhat with 30 basis points.

On the mix, the share of service revenues were slightly lower compared to last year, 58% compared to 60% in Q1 2021. Now on Page 13, and we switch then to Tools & Attachments. Here, we also had good growth. Orders increased 11% organically. The order intake reached record high SEK 3.3 billion, where we got support by currency with 8% and acquisitions by 3%.

And both hydraulic attachment and the rock drilling had solid growth during the quarter. And also seasonality was there with a strong order intake -- supporting strong order intake in the first quarter. Revenues increased by 10% organically to SEK 2.9 billion and also operating margin compared improved to Q1 last year.

If we look at the profit bridge then for Tools & Attachment, operating profit increased 35% to SEK 520 million, supported by the organic growth, currency and also by acquisitions. We had some onetime costs last year, which is reflected in the structure and the positive margin impact from that. Margin impact from acquisitions was fairly small.

But all in all, the operating margin improved quite a lot up to 18.1% and for Tools & Attachment, this was the third quarter in a row with a margin of above 18%, which we consider being a solid level. If we then dig into cost, net financials and tax. It's good to see we have good cost control.

We saw sequentially somewhat lower costs. Compared to last year, costs are higher. There are more activities. We also continue to invest in R&D at a high level. Some of these costs are also volume related. We have a currency impact on the cost, and we also have acquisitions performed during last year impacting measured as a percentage of revenue, the cost per loan were both sequentially and year-on-year.

Net financial items were minus SEK 63 million. They were minus SEK 33 million last year. Volatility here is mainly exchange distances and interest net was quite stable. During the quarter, the income tax expense was SEK 564 million. That corresponds to an effective tax rate of 22.0% versus last year, 24.2%. They're all lower tax rates in some countries, and this is having a positive impact on our tax rate.

Then a look on the cash flow on Page 16. Our operating cash flow in the quarter was SEK 867 million. It was positively impacted by the higher operating profit. Compared to last year, we paid higher net financial items and also taxes and these payments vary between the quarters, but now for this quarter, they were somewhat higher.

We increased working capital with nearly SEK 1.2 billion in the quarter. We will tie up more capital when we grow. And on top of this, we are taking proactive decisions secure availability of parts and components, which means that we do increase inventories a bit more.

Also for working capital, currency and the cost and the price increases have an impact on the total level. Cash conversion last month was at -- last 12 months, sorry, was 8%.

Now on the capital efficiency, on the next slide, you can see the increase in working capital compared to Q4. It was high than Q1 last year, up 23% in total and 14% when you exclude currency and acquisitions. As mentioned, we do tie up more working capital when we grow. But when we compare it to revenues, it is actually lower at 28.9%, slightly lower than Q4 and actually more than 4% lower than the same time last year.

Capital employed is also increasing, mainly due to growth and acquisition, but at the same time, return on capital employed continues to improve mainly due to the higher operating profit then to 27.7%.

Finally then from me on Page 18. On the capital structure, we have a net cash position of SEK 1.9 billion. It gives us good flexibility going forward. It's lower than last year mainly due to acquisitions and also distribution to shareholders.

Note also that later today, we will have our Annual General Meeting. The proposal for dividend is SEK 3 per share. In absolute terms, that's SEK 3.6 billion that will be distributed in 2 parts to our shareholders, half in Q2 and half in Q4.

And with that, back to you, Helena.

[Helena Hedblom, executive]

Thanks, Hakan, for those financial details. So to summarize then, it was a strong start of the year, 18% organic growth and record order intake. It's encouraging to see the strong demand for equipment, for our solutions, both within automation, digitalization and electrification as well as for our aftermarket, 14% organic revenue growth and record operating profit.

And I am pleased with a solid 23.3% adjusted operating margin. We are delivering this at the same time as there are many challenges. There are constraints in the supply chain and in transport and there is a war in Ukraine. So I really hope that a resolution will be found to end the war and our thoughts are with all affected colleagues. So then a few words about the future.

Looking ahead, we continue to see a strong demand overall. And therefore, we expect that demand both for equipment and of market will remain at the high level in the near term. And please remember that this is a comment on underlying demand. So thank you all for listening, and now it's time for the Q&A.

[Mattias Olsson, executive]

Yes. Thank you, Helena and Hakan. [Operator Instructions] So please, operator, open the line for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Klas Bergelind at Citi.

[Klas Bergelind, analyst]

So first on the drop-through in Equipment & Service. I mean interested around the product mix, it looks to me that the backlog from a product standpoint now has a higher margin into this year as you have more automation and battery in the mix. And I'm talking margin, not just price. And it seems like, I mean, this can be an offsetting factor versus the worsening mix from equipment versus service. If we can start there, if this is correct?

[Helena Hedblom, executive]

Yes, I would say in general, we are selling more and more advanced machines. And if you look on what we -- a lot of the orders that we gained last year included both battery technology as well as automation and more, I would say, of the more advanced machines. So clearly, there is a positive product mix towards more advanced machines.

[Klas Bergelind, analyst]

Very good. And then just to confirm if there were no other one-off, Hakan, then the SEK 43 million LTI impact? No provision releases, no capital gains. This was -- I just want to make sure that this is a keen drop through at 36%.

[Hakan Folin, executive]

Yes, that's correct.

[Klas Bergelind, analyst]

Okay. Very good. Final one is just on pure pricing. Back when we looked at that you within Atlas during the super cycle years before the financial crisis, pricing was running at 4%-plus on a yearly basis. Now we have cost inflation at the new higher level and very strong demand. I mean it might not look like a super cycle when we look at mining CapEx because of permitting issues, et cetera. But is this where pricing is running at, Helena, currently sort of a mid-single-digit level?

[Helena Hedblom, executive]

So I think we have -- we always worked [indiscernible] with pricing. And as I said many times before, it's very much tied to the value that we generate for our customers with more and more innovation, more advanced equipments and services.

Foreseeing the situation, we see cost is trending up. We have been very actively working with pricing during last year, and we have continued that work also now in Q1. So I think you will -- there's always more you can do, of course, on pricing, but I think we -- I'm happy to see how well we have managed so far.

[Operator]

And our next question comes from the line of Mattias Holmberg of DNB.

[Mattias Holmberg, analyst]

You mentioned you see examples of customers placing orders to safeguard spare parts. Would you say that you've seen any trends like this on the equipment side as well? Or is sort of the strong equipment order intake that you reported a reflection of the true underlying demand?

[Helena Hedblom, executive]

I think on the [indiscernible] market side, we see it more just a safeguard availability and uptime. On equipment, we see that customers -- the mining houses are preparing for expansion. So a big portion of the orders are related to expansion or brownfield expansion or even greenfield expansions. So of course, that is planning a plant that is now materializing, that has been there for quite some time.

So I don't see -- it's more that you will say to be in the queue, and of course, to prepare for expansions that will happen then during 2023.

[Mattias Holmberg, analyst]

A quick one on the Russia-Ukraine exposures. Well, you helped us lock with plenty of numbers there. I'm just curious if you could quantify a bit the actual impact in Q1. Is it safe to assume roughly [1/12th] of the exposure that you mentioned, given that you say January and February you had some, but not so much in March?

[Hakan Folin, executive]

And we have, in total, we had around -- on order intake, we had around SEK 900 million from Russia and Ukraine in Q1 in January and February then.

[Operator]

And our next question comes from the line of Guillermo Peigneux of UBS.

[Guillermo Lojo, analyst]

Maybe just to focus in a little bit more on the operating leverage as per before, and I was looking at the admin marketing and R&D expenses up Y-o-Y, but they are actually down sequentially. Can you specify what actions you're putting in place? How sustainable are they as we go forward?

[Hakan Folin, executive]

We -- in Q4, we had -- I would say, we have a few slightly higher cost, you can almost call them onetime item within admin and R&D, et cetera. There was no huge ones. There was no restructuring, but there were a few at the same time during Q4. So I think Q1 is probably more. Q4 was maybe a bit too high and Q1 is a bit more representative of where we should be.

Then of course, we have still not started really to travel all that much yet, given the COVID situation, but that happened maybe towards the second half of the quarter. But in first quarter, that part and travel, exhibitions, et cetera, was still on a low level. But Q1, I would say, is more representable than Q4.

But as we said before, if we continue to grow as we want to, we will also invest in higher R&D, and there will be some additional admin costs, although we're, of course, trying to limit that as much as possible and be as efficient as possible.

[Guillermo Lojo, analyst]

And can I follow up maybe one question regarding R&D expenses, did they go down sequentially?

[Helena Hedblom, executive]

No, I would say they are more or less on the same level. So we continue to invest in R&D. We see that as a top priority for us. So we continue to invest on the same level.

[Operator]

And our next question comes from the line of Max Yates at Crédit Suisse.

[Max Yates, analyst]

Just my first question would be around the lockdowns that we're seeing in China. And I just wanted to understand whether China makes up kind of a large part of your components or whether you've seen any more difficulties in recognizing revenues and producing as a result of sort of shortages of parts coming out of China? That's my first question.

[Helena Hedblom, executive]

We have seen somewhat -- some more challenges on the inbound and also on the outbound related to the situation in China. We are not so much depend in our equipment, let's say, supply chain is very regional, let's say, it's Europe for the factories. And in Europe, it's North American related for the factories in U.S. and then Asia and we both have India and China. So some impact, but I would say maybe not more than we have seen before, let's say it's almost 2 years now with the challenges in the supply chain. So we have been facing difficulties, I would say, throughout the last 2 years in different locations, different hardwares or different airports, et cetera.

[Max Yates, analyst]

Okay. And just a quick follow-up was on acquisitions. You obviously were very -- or have been very active in the last couple of years. So I was just wondering in obviously the more volatile environment that we're in currently. Is it fair to say most of the acquisition discussions have stopped, why you focus on sort of operations and obviously, some of the challenges in Europe? Or would you say we still should expect kind of over the next 6 months a sort of reasonable flow of acquisitions to come through, perhaps more on the bolt-on side?

[Helena Hedblom, executive]

Yes. So we are still very active on the acquisition side. And of course, they come in different -- they don't come evenly spread out over a year. But I think we have not stopped working with that. So I think you can expect that we will come with acquisitions during this year as well. And it will be more a bolt-on, as you said.

[Operator]

And our next question comes from the line of Lars Brorson of Barclays.

[Lars Brorson, analyst]

Maybe just to follow up on the larger order impact, but in kroner terms as opposed to in unit terms, 6 large orders, and I hear a lot more midsized orders, which I guess is defined as probably SEK 50 million to SEK 100 million I wonder whether there are any materially larger orders than the SEK 100 million level?

And maybe more generally, Helena, as you think about going forward, we move to a lot more electric units where all average order sizes are typically moving a lot higher. So I wonder whether we should think of your sort of order trajectory and the period to come as seeing a lot more impact from larger orders as you define it today, i.e., above SEK 100 million and how to think about that dynamic in terms of impact from larger and, I guess, large midsized orders?

[Helena Hedblom, executive]

I think it's a difficult question. If we look at the large orders we had in this quarter now, it's in the range of SEK 800 million. And you are correct that if it's a large order that is fully autonomous and fully electrified then the value of that order will be larger. I think when we look at this, we see that customers are taking decisions now to do brownfield expansions and replacement of a larger fleet and also greenfield investments -- so that is very much what is building up these equipment orders that we have seen so far. But you are correct that the value will be higher if it includes our latest technologies.

[Lars Brorson, analyst]

Secondly, if I can follow up, on the nonanswer to the earlier question around pricing, the 4% level. I wonder whether I could press a little bit for the like-for-like pricing trajectory at the order level today. I appreciate mix is a tailwind. But what are we seeing from a pricing standpoint?

And maybe if you can't be specific at the revenue line, are we at a point where we are pricing through all of the raw mats and kind of logistics cost. Can you talk a little bit about the price/cost equation in the quarter, please?

[Helena Hedblom, executive]

I would say it's a fairly dynamic situation right now with cost increases, especially related to the disruption in Europe related to the situation here with Russia and Ukraine. But we are working extremely actively when it comes to pricing, and we are staying on top of this as we speak.

And I will say we have we have a strong pricing power to start with. And then, of course, it's all about agility and speed and execution. And as I said, I'm happy with the work so far, but we, of course, will have to continue this work because it's not -- it is a fairly fluid situation on the cost side right now.

[Lars Brorson, analyst]

Just a quick follow-up to Hakan, and then I'll close out. On the cash conversion level, you're sitting at an 80% level on an LTM basis, obviously very weak in the first quarter. I appreciate there were some one-off items there. Are we past the worst now? It looks like we are from an inventory build standpoint, and how to think about the cash conversion level in the second half, Hakan? Can we return back to that sort of 100% level that you've been trailing at before we enter 2022?

[Hakan Folin, executive]

Your -- in terms of the inventory buildup, I think it's fair to say that we have done that now during Q1, especially in order to safeguard and make sure we have all components necessary, then all through the [indiscernible] or not, I think that's difficult to answer, but it really depends on how the supply chain evolves.

We were -- when we entered this year, we were saying that, okay, it's probably going to be tough in Q1, maybe Q2, but then second half of the year is going to be much easier. And then we had the situation in Ukraine. So I would say that we have done kind of the most part of the inventory buildup, then if we are through the worst or not, and what's going to look like second half of the year, I think that depends very much on how the overall supply chain situation evolves.

[Operator]

Our next question comes from the line of Andrew Wilson at JPMorgan.

[Andrew Wilson, analyst]

Can I start with just one on the aftermarket side? And I think it's probably more of a conversation around the consumables. But I'm just interested if you think there's been any market share opportunities or indeed if you've taken market share, versus maybe some of the pirate suppliers. I'm just thinking in terms of your customers kind of coming to you given you have supply? And if that has been the case, do you think that's going to be a sustainable share win or do you think people will go back to kind of some of these alternative suppliers?

[Helena Hedblom, executive]

Yes. So if we look on the last, I would say, the last years, we have been focusing a lot on prioritizing the aftermarket also in the situation when there has been, let's say, shortage of components. And we are up on availability, clearly up on availability when it comes to aftermarket products, which is good to see.

And I think we are -- I would say that we are taking share in the aftermarket. And I think if we look on this long term, of course, when we can demonstrate the value from our offering, that is the best chance for us really to demonstrate the productivity and the uptime and utilization, et cetera, on our products. So I think we will have a good possibility, to say, to be at this new level.

And some of the smaller players also, they have a difficulties really to [indiscernible] the situation and to survive long term. So of course, it -- I'm pleased to see the growth. But of course, the growth is much more than the underlying activities look on aftermarket. So clearly, we are taking shares.

[Andrew Wilson, analyst]

Great. And if I can just follow up with a second question. It's just around the demand guide or near-term demand guide. I'm just interested in the positives to me you see fairly obvious with regards to obviously where commodity prices are and electrification and some of the trends we've already touched on, on this call and others.

But I'm just interested sort of how you wear that in terms of what do you think of the downside risk when you look to the outlook? Because to me, that would seem, from a market perspective, less clear than perhaps a number of positives, which we can talk to. So I'm just interested in terms of sort of how you weigh that in terms of thinking about your guide?

[Helena Hedblom, executive]

Yes, but if we look, as you say, commodity prices are at a very high level. There is also a need for more assets to come on board. We see that with the exploration activities. I think the mining industry in general has been under-invested for some years. We also see aging of the fleet continues. So there is lot of healthy underlying trends for us that will continue to drive demand. And then I would say also the ESG dimension of the mining industry where we finally see now battery-electrical vehicles taking off in a really nice way, which is really good to see where we have a number of orders on battery machines now in Q1.

So I think there's a lot of -- even if the -- even if we would end up in a scenario where there will be less of a growth in the world, I still see that the mining industry, there is a healthy situation and healthy demand for us in the coming years.

[Operator]

And our next question comes from the line of James Moore at Redburn.

[James Moore, analyst]

Yes. I really have 2, but they're both about the strong SEK 5.2 billion equipment order. And really, I'm trying to understand the mix of that. I wondered if there's any way you could help us break down what you think is greenfield, brownfield replacement within that? That's my first question. And maybe it would be helpful to go one at a time.

[Helena Hedblom, executive]

So yes, I would say it's still roughly 50-50, let's say, expansion. And that is both brownfield, greenfield and then roughly 50% replacement.

[James Moore, analyst]

That's helpful. And you talked about the autonomous and the EV orders. Is it time for you to perhaps help us all understand a little bit what percentage of your value order intake is now coming from these more advanced machines? Can we assume that you're greater than 10% or are we not at that level or are we materially above that level?

[Helena Hedblom, executive]

It's still, I would say, small in size, but it's a good momentum. So we look on quarter-to-quarter sequentially, it's a very good development. Yes, so exactly on batteries. On automation, that is going strong and has been going strong for several years now.

[James Moore, analyst]

Is there any way you could help us quantify what is sort of automated, nonautomated and battery versus diesel?

[Helena Hedblom, executive]

I think we have not shared those numbers so far. But when we look at it from -- as I said earlier, if you look on the technical level, how technical advanced the equipment leaving the factories are, it's more and more advanced machines going out every quarter, which also means that they are prepared for automation, for example, and connectivity.

[Operator]

Our next question comes from the line of [Aurelio Calderon] of Morgan Stanley.

[Unknown Analyst]

I've got two. I'll go one at a time, if I may, please. The first question is around your exposure to Russian, and you've quantified SEK 1.8 billion of orders on hand. I wonder if you could also quantify if you have any down payments you've taken against those orders or any off-balance sheet guarantees that you may have for those Russian deliveries?

[Hakan Folin, executive]

We do have some advanced payments for some of the equipment, yes. We haven't quantified that, but it's a portion of the SEK 1.8 billion, yes.

[Unknown Analyst]

Okay. And my second question is around market share in, I appreciate if you already answered on aftermarket, but on that historical strength that you had in surface drilling, maybe lagging a bit more in -- on the ground. Has that changed at all? And how do you see the competitive dynamics going -- kind of evolving in especially in the mix between underground and surface?

[Helena Hedblom, executive]

No, I think it's a very stable situation, stable dynamics among the players. And we see that also on the activities and the orders, it's good growth [indiscernible]. They have done a lot of activities both on surface as well as underground. I would say it's very much -- it's a stable market share landscape.

[Operator]

Our next question comes from the line of Will Turner at Goldman Sachs.

[William Turner, analyst]

I have a handful of questions. The first one, I want to go on in a bit more detail on the working capital developments in the quarter. I know you mentioned how some of it is due to you restocking ahead of -- or building up the safety stock. But how much of the inventory growth is just down towards the inflation of your supply chain, which may then become a headwind later on in the year?

[Hakan Folin, executive]

Sorry, when you say a headwind, do you mean -- because we have both kind of we have this headwind when we talk about our incoming goods, but also when it comes to getting things out. So it's a bit of a combination there. So what do you mean exactly?

[William Turner, analyst]

So when we look at the inventories, is it mainly the build up? Is it mainly the building of the stock or is it just inflation of inventories as well? If you could break it down a little bit more granular...

[Hakan Folin, executive]

What I tried to say it's both. I mean our components that we are buying have increasing costs. So from that point of view, we get the items on inventory, you get actually higher inventory value. But on top of that, we have also deliberately then filled up a little bit more than we would otherwise have done in terms of just making sure we managed a very rough supply chain situation we have right now, so it is a mix.

[William Turner, analyst]

Okay. Great. And I guess, more broadly, going forward, would it be reasonable for us to expect lower operating leverage going forward? Given the comments on, for example, higher R&D, there could be a less favorable mix if we do start to see greater greenfield activity from miners? And then also comments on travel expenditures recurring in the second half of the year. Do you think from our sector, it would be reasonable to set that operating leverage to lower?

[Hakan Folin, executive]

Not clear. I mean we had -- we also talked on top -- on the positive side, instead, you have -- we are working actively with pricing. Helena has talked a lot about our good demand for our battery-driven vehicles, et cetera. And also, as I think we demonstrated that quite well, this quarter, we had a very good flow-through around 35% or something like that. So not necessarily.

[Operator]

And our next question comes from the line of Andreas Koski at BNP Paribas.

[Andreas Koski, analyst]

I can start with a question on your service business. looking at the sequential growth, I think it was 6%, but I would assume FX accounted for a fairly large part of that. So could you elaborate a bit on what you're seeing in terms of sequential demand for volumes or organic growth. The reason for asking is, of course, to better understand what kind of year-over-year development we should expect in the coming quarters when comparables are getting tougher. Do you think you will be able to continue to grow double digit?

[Helena Hedblom, executive]

Thank you. If we look on -- we have been growing very nicely for several quarters now on Service. If you look on the actual activity levels there is, of course, a completely different level as such. So what is supporting the growth is very much us than taking new service contracts and it's also growth of service products. So there is a component here when it comes to mid-life rebuilds.

When it comes to Engineered Solutions, and now we also have the service products where we can redo a diesel machine to battery-electric, et cetera. So of course, those type -- orders will be not the same every month and every quarter. So I think it's a little bit -- maybe historically, we looked at this as when you had only service contracts and selling parts, it was one -- it's a type of dynamic.

But now we can have really nice quarters as well with good growth coming from Service products, which will be the one quarter and it's not that you will actually have it the same quarter afterwards. So I think that is important to keep in mind when looking at it and comparing quarter-by-quarter.

[Andreas Koski, analyst]

Okay. And then secondly, I know there has already been discussion about pricing. But where have you been able to push through the largest price increases? Is that on equipment or on the aftermarket business? And could you also give us a better understanding of what your cost inflation was relative to your price increases?

[Helena Hedblom, executive]

Yes. I think, of course, from if we look on returning the aftermarket orders into revenue quicker than returning equipment orders into revenue. So we are more agile when it comes to pricing in the aftermarket than we are on the equipment side. So that's the answer to your first question.

And as I said, on the cost increases, it's very much -- it's complex, and it's a fluid situation, I would say, especially the last 2, 3 months here. And I would say specifically now since the situation here in Ukraine and Russia. So to be very active and work with dynamic pricing is key to make sure that we can compensate for the cost increases. And so far, we have managed well.

[Andreas Koski, analyst]

Yes. And then a very quick 1 on the cash flow statement. And I'm sorry if I'm -- if Hakan mentioned this and I missed it, but the capital gain losses and other noncash items line of minus SEK 196 million in the quarter, what was that related to?

[Hakan Folin, executive]

I did not mention it before, so it's a valid question. Let me get back on that.

[Operator]

And our next question comes from the line of Vlad Sergievskii of Bank of America.

[Vladimir Sergievskii, analyst]

Can I start with a few quick clarifications on your Russian Ukrainian exposure. So firstly, you mentioned SEK 900 million roughly orders from there in the first quarter. Was there any large orders within this SEK 900 million? Then secondly, when I look at the backlog, which you disclosed, SEK 1.8 billion, is it primarily for 2022 execution or that's stretching beyond it? And finally, what's the kind of pre-conflict level of booking churn in those 2 regions, at least a rough level you could potentially give us?

[Helena Hedblom, executive]

On the first one, there are no large orders towards Russia and Ukraine in Q1. Can you repeat the second question? I think we could not really hear it.

[Vladimir Sergievskii, analyst]

Yes, absolutely. So SEK 1.8 billion of backlog, is it primarily for execution in '22?

[Helena Hedblom, executive]

Yes. Yes.

[Vladimir Sergievskii, analyst]

That's great. And final point on that. What's the preconflict level of book and churn, including services in those 2 regions, either within orders or within revenues, let's say, for the quarter?

[Helena Hedblom, executive]

So we had revenue last year of SEK 2.4 billion in Russia and roughly SEK 300 million in Ukraine on orders that have been somewhat higher so -- which has built up these orders on hand. But the exposure, if we look on what we had last year, 2021, it was SEK 2.4 billion for Russia and SEK 300 million for Ukraine.

[Vladimir Sergievskii, analyst]

That's very helpful. And the final one from me. If you can potentially talk about the order growth into your end market, infrastructure and mining, where the growth was strong if you potentially quantify the growth between those 2 end markets?

[Helena Hedblom, executive]

So we see strong activities in both infrastructure and mining. If we start with infrastructure, it's good activities, both on equipment as well as on the aftermarkets and attachments mainly in North America, in Europe. If we look on mining, very strong activities related to copper, gold and iron ore. So it's positive, I would say, overall in all regions.

[Operator]

And our next question comes from the line of Christian Hinderaker of Liberum.

[Christian Hinderaker, analyst]

I've got 2 questions, if I may. Firstly is a follow-up on pricing. Obviously, the value-based strategy is well noted. But interested to understand if you've implemented any temporary price measures, maybe surcharges for raw materials that could roll off as inflation eases? And by extension, I'd be grateful if you could talk a little bit about what you're expecting in the quarters ahead with regards to your price planning and inflation?

And then my second question is on T&A. You've had 3 quarters now with margins above 18%, which is obviously a very solid step up from a 13% average in 2019 and 2020. Clearly, we've got very strong underlying demand at the minute. And I'm just interested in how you see that margin in terms of its sustainability under what might be perhaps a more normal or less strong stage of the cycle in 2023 and beyond?

[Helena Hedblom, executive]

So if we look on the way we have been working with pricing during last year and in Q1 is very much the traditional way of working with pricing. But we are also looking into temporary surcharges for the coming quarters. When it comes to the margin development Tools and Attachment, I'm pleased to see now we have 3 quarters above 18%, which is a clear step up. We have done a lot of cleaning up in the portfolio, also in the manufacturing footprint, et cetera.

So I think we have a new level. Of course, we need to work hard to stay on this level, but the focus for that division now is very much in growth. I think we -- when we were not performing so well on the margin side, we were hesitant to grow too much because it was dilutive for Epiroc. But now, of course, it's a different story. So focus is very much growth.

[Operator]

And we have 1 further person in the queue that's [indiscernible].

[Unknown Analyst]

Can you hear me?

[Helena Hedblom, executive]

Yes.

[Hakan Folin, executive]

Yes.

[Unknown Analyst]

I have 2 questions regarding the Russian order backlog. Could you elaborate on your discussion with Russian customers? How long can Russian mines operate given that you and others such as [indiscernible] have stopped delivering to Russia at this point?

[Helena Hedblom, executive]

Yes. So we have stopped deliveries to Russia since first of March, and it is a very fluid and complex situation with changing landscape when it comes to sanctions. And as Hakan said as well, challenges on both the logistics and on the financial transaction side. So I think it is too early to say, to be honest.

[Unknown Analyst]

Okay. And the second one, how do you ensure, given the situation that no deliveries arising Russia via detours, so to speak?

[Helena Hedblom, executive]

So we have a very strict control of and monitoring this from a group level to make sure that there is no deliveries to Russia through any other -- from any other country in the group. So we are monitoring this very, very closely.

[Operator]

And as there are no further questions at this time, I'll hand the floor back to our speakers.

[Mattias Olsson, executive]

Okay. Great. Thank you all for participating at the Q1 conference call and wish you a successful investing.

[Helena Hedblom, executive]

Thank you.

[Hakan Folin, executive]

Thank you.