Epiroc AB

STO:EPI A

Earnings Call Transcript 2023-Q2

[Karin Larsson, executive]

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 with me today, I have Helena Hedblom, CEO; and Hakan Folin, CFO. They will briefly present the results before we host a shorter Q&A session.

Helena, please, the stage is yours.

[Helena Hedblom, executive]

So thank you, Karin, and thank you to everyone listening in today. So Q2 was a record quarter. The customer activity remained high, especially in mining, and the order intake increased by 15% to SEK 15.4 billion. We won several large equipment orders, and the service business continue to perform well, supported by larger rebuilds on customers' equipment. We also had a strong contribution from acquisitions. Our revenues increased 34% to a record high of SEK 15.9 billion, driven by organic growth, particularly within equipment as well as from acquisitions. And I'm pleased to see that our recent acquisitions have performed even better than anticipated.

We had an especially strong development for solutions for automation. Our operating profit, EBIT, increased even more, 43%, to SEK 3.4 billion, leading to an adjusted operating margin of 21.6%. And the margin was diluted from acquisitions, and we had a negative revenue mix effect in the quarter.

It has been an eventful quarter. One highlight is the Epiroc World Expo that we hosted in May in Örebro, Sweden. The event gathered almost 200 underground customers from 25 countries. And during the week, we showcased innovations and solutions that will increase productivity and sustainability for our customers. And in conjunction with the event, we also hosted our Capital Markets Day, with more than 100 external guests.

And while our roots trace back 150 years to 1873, we celebrated our fifth birthday as a stand-alone company in June. And we have several milestones to be proud of. For example, we have successfully established the Epiroc brand. Innovation is thriving. We have had a high acquisition pace, and we have set ambitious sustainability goals for 2030, which have been validated as science-based. And we have launched our vision, Dare to think new, to name a few things. So well done to everyone in the organization.

So we are a leading productivity and sustainability partner, and innovations and solutions that bring increased productivity and sustainability to our customers, that is what makes us successful. And in the quarter, Epiroc completed one acquisition, AARD Mining Equipment in South Africa, and it complements Epiroc's underground offering within low-profile underground machines. The company has an annual revenue of around SEK 650 million and 200 employees. We have also strengthened our offering within reverse circulation when we bought key assets from Schramm, Australia, and it is a company well known for quality and performance within exploration globally. So 85% of Schramm, Australia's employees have also joined Epiroc in the quarter. So a warm welcome to the almost 300 new employees joining the Epiroc family this quarter.

We have also launched an MTVR, multi-terrain vehicle reanimator, which improves operational agility by reducing the reliance on mine site infrastructure. So in short, it's a self-contained, wagon-mounted power pack that supports electric blasthole drill rigs.

We have also deepened the partnership with SSAB further for fossil carbon emission-free recycled steel. So we will use SSAB Zero for use in Epiroc's battery electric range of underground mine trucks and loaders as of Q3 2023. And we are also jointly exploring possibilities to collaborate on using fossil-free steel when manufacturing spare parts and components with additive technology.

And we have also launched a new flagship construction drill rig, the surface rail remote drill rig, SmartROC T25 R, has a number of valuable features such as exceptional coverage area, excellent trainability as well as a rig control system that reduces fuel consumptions.

So let me share a video, which is also a perfect example of how many of our customers show passion and commitment to the task of building our society.

[Presentation]

[Helena Hedblom, executive]

So coming to our strategic focus areas and starting with aftermarket. In general, the customer activity was high in the quarter, especially in mining, and service remained strong, both organically and with contribution from acquisitions. The organic growth was 5%, which was also supported by larger rebuilds.

Within Tools & Attachments, the development was flat year-on-year, but in total, demand increased due to strong support from acquisitions. The hydraulic attachments were weaker than anticipated given the season. Europe, which is an important market, has been somewhat weaker.

And then coming to operational excellence, doing things better. So we are good in providing world-class service, but we can always do better. So we keep on investing in being even closer to our customers. And in the quarter, we have inaugurated one new service center in Antofagasta in Chile and one in Kathu in South Africa. So we are already at 100-plus service centers, and we keep on expanding quarter-by-quarter.

And inspired by the ongoing work with Roy Hill in creating the world's largest fully autonomous mine, we are now launching an automation competence center for haulage in Perth, Australia to support customer centers in the global rollout of automation. It will be developed during 2023 and finalized during 2024.

Also the top modern heat treatment plant for rock drills in Örebro was inaugurated in April, but I told you about it already last quarter. So mindful of time, I move on to the topic of sustainability.

And starting with the best news. After a rather long period of increased injuries, we finally see a trend change. We have had and we still have several initiatives and trainings to make sure that all employees always prioritize safety. And it's good to see that we now move in the right direction again. To the right, you see a picture from the Safety Day in Santiago. So at the end of the quarter, we were over 18,000 employees and with acquisitions contributing strongly. We have also increased the proportion of women employees and women managers in the group, which is positive because I'm convinced that diverse teams produce better results.

Our CO2e emissions from operations decreased, driven by several initiatives, including the installation of solar panels and a higher share of renewable electricity. And emissions from transport, however, increased due to higher volumes delivered.

And in an annual ranking of 500 companies conducted by the Financial Times, Epiroc was named as Europe Climate Leader and came out among the top 1/3 of the companies. So Epiroc was the highest-ranked among the Swedish-based companies in the machines and industrial equipment category. And climate is important both to us and to our customers, and we invest more than ever in innovation to keep providing customers with equipment and services that increase productivity as well as reduce emissions. And year-on-year, our R&D expenses are up almost 40% to SEK 500 million.

So with this, I leave the word to Hakan to cover the financials.

[Hakan Folin, executive]

Thank you, Helena. Starting with orders. The order intake was record high at SEK 15.4 billion, organically, excluding Russia, was down 4%. And as you might remember, we had cancellation in Russia of roughly SEK 400 million in Q2 last year. The underlying demand is good. Customer activity is high, particularly in Equipment & Service. We received 4 large orders in the quarter, and with large, we mean over SEK 100 million. And in total, large order represent around SEK 550 million to be compared with what we had in Q2 last year when we had large orders of around SEK 800 million.

On revenues, which were also record high at SEK 15.9 billion for the group, we are really pleased to say that our acquisitions are actually exceeding our expectations.

And I will cover now EBIT and cash flow on the coming slides. So taking a look at the profit bridge. A year ago, we had SEK 2.4 billion in profit in EBIT, with quite some contribution from acquisition and organic growth. We ended up Q2 with SEK 3.4 billion. So it's actually an increase of SEK 1 billion. In the meantime, the reported margin improved from 20.1% to 21.5%. And previous year include provision of SEK 400 million related to Russia restructuring costs. And also, we had restructuring costs related to when we moved manufacturing from Japan to China of SEK 95 million.

On group level, dilution from acquisition was 0.9 percentage points. And mix effect that we spoke about previously with more equipment being invoiced is also slowly showing. We had some headwind from currency. And here, I would like to point out that this is the bridge effect. So it's not the actual impact in this quarter, but is -- when we compare it with Q2 last year, and in Q2 last year, the Swedish krona weakened quite a lot. And we also had some abnormal effect. For example, the ruble strengthened a lot in the Q2 last year. And then we had some revaluation effects on accounts receivables and accounts payable, which were positive last year. And when you then compare it with this year, then you get the negative impact.

Adding back the cost for the long-term incentive program, we get to an adjusted margin of 21.6%. If I then move into the segment, and I'll start with Equipment & Service. We achieved SEK 12.3 billion in orders. And again, customer activity remains high. Organically, we had a flat development year-over-year. But looking into the different revenue streams, there's actually a mixed picture. Service is still going strong, plus 5% organic, whereas equipment had a decline of 6% organically. However, we had tough comparables for equipment when we look at Q2 versus last year.

Revenues increased 22% organically. And even if we still struggle somewhat with outbound shipment, we have improved the output from our sites even further, and we finally then get to see it as invoicing. The operating profit, EBIT, came in SEK 1 billion higher, amounting to almost SEK 3 billion, resulting in a margin of 23.9%.

As Helena mentioned, we closed one acquisition in the quarter, AARD Mining Equipment in South Africa that complements our offering within underground low profiling machines.

And if we look at the profit before Equipment & Service, 23.9% margin with good tailwind from organic growth. The flow-through from the segment is 37%, and the mix effect that I just mentioned, with more equipment being invoice, is showing. And also our acquisitions grew more than we expected but with a somewhat lower margin than overall Epiroc and, therefore, diluting the group margin.

Of the reported EBIT margin of 23.9%, the dilution from acquisition is 1.1 percentage point. The margin in previous year Q2 was negatively impacted by the provisions related to Russia and Japan, as I mentioned before.

If we then move on to Tools & Attachments. Order came in at SEK 3.2 billion, with a very strong contribution from M&A, 25%. And during the last 12 months, we have acquired 2 companies in the Tools & Attachments segments, CR and Wain-Roy. Customer activity remains fairly high here as well, particularly within mining. On the construction side, we have not seen the strong seasonality that we normally see in Q2. And within hydraulic attachment, mainly Europe, which is an important market, we see somewhat more cautious behavior from our customers.

Revenues for the segment came in at SEK 3.4 billion, indicating a flat organic development. On the profit side, we had some headwind in the quarter organically and especially from currency. Acquisitions, on the other hand, are contributing well, both in absolute and in relative terms. And we ended the quarter with a profit of SEK 524 million and margin of 15.3%.

If I then move on to cost, net financials and tax. Despite the growth and the high activity level, we have maintained a good cost control in the quarter. In total, our administration cost, marketing and R&D is roughly 16% of our revenues. And on the R&D side, last year in Q2, we invested SEK 363 million, and now we are investing almost SEK 500 million in R&D. And as Helena said, we are investing more than ever to make sure that we keep our leading productivity and sustainability partner position to our customers.

Our net financials were positive, SEK 15 million, versus minus SEK 89 million, which is due to exchange rate differences. Our interest net was minus SEK 131 million, considerably higher than previous year, which is given as we have finalized several acquisitions. We have increased our debt and also the overall higher interest rate level. We remain stable with our effective tax rate at 22.6%.

If we then move on to the operating cash flow, we had a strong contribution from higher profit, more than SEK 1 billion, but we also paid higher taxes and tied up more working capital, especially in receivables and some higher net financial items. So all in all, we had SEK 1.5 billion in cash flow in the quarter, and the cash conversion rate, which is looking at 12-month rolling, was 54%.

And diving into a bit more into working capital, which is a very prioritized topic for me. We say the same thing as we said last time. We think that there's still room for improvement for us. The net working capital, excluding acquisitions and FX, increased 29% in the quarter compared to last year, and it corresponds to 33.5% of revenue. The explanation is very much the same as in previous quarter that after a period of strong growth, higher equipment volumes, in combination with some supply chain issues, now mainly on the outbound side as well as that we are implementing the regional distribution centers, we tie up a little bit more working capital than we would like. Still, we do, however, expect that the ratios relating to working capital will improve throughout the year.

So after a successful year of acquisition, in total, we have actually finalized 14 in the last 12 months, with a total cash outflow of SEK 7.7 billion. We now have a net debt position of SEK 9.1 billion. So we have moved from being positive cash to net debt. And now net debt to EBITDA is at 0.6.

We have also increased the return on capital employed. We are now at 28.6%, which is actually the highest level Epiroc have been at since 2019.

So thank you for now, and back to you, Helena.

[Helena Hedblom, executive]

Thank you, Hakan. So before concluding the quarter and speaking about what to expect onwards, I would like to take this opportunity to also thank all customers and employees for 5 great years. In the beginning of the presentation, I mentioned a few achievements during these years. I will not repeat them, but I would like to highlight that as a team, we have demonstrated great strength and resilience amid major and unforeseen challenges during the past years.

In Q2 2018, our rolling 12-month revenue were SEK 34 billion, and now we are at SEK 57 billion. And this corresponds to an increase of 65% and an annual growth rate of 11%. And at the same time, our adjusted EBIT has grown even more, almost doubling from SEK 6.7 billion to SEK 13 billion, corresponding to an annual growth rate of 14%. So that is a strong achievement that we can be proud of.

So now to summarize the quarter. It was a record quarter and an eventful one. We continue to achieve and deliver profitable growth for our shareholders. Innovation is thriving, and we are becoming more and more an important productivity and sustainability partner for our customers. We have made many great acquisitions, and they are contributing well now. The safety ratios are improving, and we are a climate leader. And we have a legacy of 150 years, and we are grateful for all achievements as a stand-alone company the first 5 years.

So looking ahead then, in the near term, we expect that the underlying demand, both for equipment as well as the aftermarket will remain at a high level. And in the long run, automation, digitalization and electrification are transforming the industry, but it is the people that actually makes it happen.

So to conclude the presentation, please let me share a short video from our successful customer event in Örebro. And in this video, you will see some of our more than 18,000 passionate colleagues who share a relentless ambition to bring value to our customers, not only today but also in the future. And seeing their drive, I'm certain that the best is yet to come. Thank you very much.

[Presentation]

[Karin Larsson, executive]

So hello again. Now it's me again, Karin, with Helena's wonderful words of wisdom that the best is yet to come and the video we just saw, I would like to thank both Helena and Hakan for an excellent presentation and everyone online who are actually listening in, and it's time for the Q&A. Operator, would you please open the line.

[Operator]

[Operator Instructions] The next question comes from Klas Bergelind from Citi.

[Klas Bergelind, analyst]

So the first question I had was on the drop-through, Hakan. Can I just confirm that the drop-through you report is the residual from whatever FX you report? The drop-through would be different if there was a lower FX impact, i.e., we can't add back all of the balance sheet revaluation effect. I'll start there.

[Hakan Folin, executive]

Well, the drop-through we report is excluding currency impact, if that was the question. I wasn't really sure if I followed. But the drop-through is basically what have we grown in terms of volume and what -- or in revenue and what in terms of profit did we generate out of that excluding FX impact. Did that answer your question, Klas?

[Klas Bergelind, analyst]

Yes. Can I ask you sort of in a different way? What happens to profitability? Because obviously, you have 2 effects. You have quarter-on-quarter currency change, and then you have a higher volume effect from inventory still being an issue in your supply chain. What happens, do you think, when this is normalizing, i.e., when you get your outbound logistics in order basically?

[Hakan Folin, executive]

Yes. I would say, as you could see on the equipment side, in this quarter, we actually managed to invoice quite a lot. If you compare with last quarter, we were struggling even more on the outbound logistics side. This quarter now we finally got -- we still are struggling a bit, but we were performing better, and we managed to get more equipment out, which meant that we actually got more. We got the mix effect that we talked about in the conference just before that we had 33% of equipment this quarter versus 30% a year ago. But then on the other hand, we got more revenue and, hence, we got some drop-through -- flow through from that.

[Klas Bergelind, analyst]

Yes. Yes, I can get back to you on that later. It's concerning sort of the inventory revaluation that should start to reverse, I guess, quite a lot when you get the inventories reduced as opposed to...

[Hakan Folin, executive]

That's part of FX, Klas.

[Klas Bergelind, analyst]

No, exactly. Yes. Then my second question is on the trends here into the third quarter. When we back out currency and M&A and large orders looking at underlying orders in dollar terms, then there seems to be some seasonality of some 5% to 10% down quarter-on-quarter, 1/3 from second. So even if you guys said that demand will likely to remain at a high level, is that how you see orders in the near term? Are we going to be down sequentially?

[Helena Hedblom, executive]

When we comment, we comment on the underlying activity levels. So the small and midsized equipment orders and activity levels we see on the aftermarket. So -- and here, we see -- it's good, healthy underlying activity levels. Then as always, the large orders are lumpy and can come not evenly spread between the quarters, but the underlying activity levels, that's stable.

[Klas Bergelind, analyst]

My quick final one is on the mix effect. I'm trying to understand here how we should think about the equipment backlog being invoiced further. What quarter do you think you are peaking out, so to speak, on the equipment deliveries here, thinking about lead times, i.e., when the mix can start to normalize again? And also in Tools & Attachment, I guess you expect the strong growth out of the backlog in mining tools relative to construction attachments to continue for a while. I'm just trying to understand sort of the mix into the second half?

[Helena Hedblom, executive]

So we have received at quite high orders on hand when it comes to equipment. And of course, we have been reporting also that we have had good output in our factories now for quite some -- a couple of quarters. And finally, now we start to see that, that is translating into revenue, which is really good. But of course, we still have a high orders on hand on equipment. So we will continue, of course, through everything we can to push equipment out to get the lead times back to more normal lead times, which is important for our customers.

When it comes to Tools & Attachments, we saw weaker activity levels within attachments in the quarter. Q2 is very often, from a seasonal standpoint, a strong quarter. And when we compare with last year, Q2 has been weaker. So we have seen a mix effect. What we see in construction is that housing and aggregates, that's where we have seen a softening, while tunneling and civil engineering is still at a stable level. So it's a mixed picture within construction.

[Operator]

The next question comes from Christian Hinderaker from Goldman Sachs.

[Christian Hinderaker, analyst]

My first is on free cash flow, and I guess specifically the inventory dynamics. I wonder if you can help us scale the respective contribution to the build in inventory from the bottlenecks and outbound freight, from the migration of the group stock from country-level sales companies to your new regional distribution hubs and also to the strength of equipment orders on hand and, hence, flow-through from production and, I guess, the WIP element. And then, I guess, related to this inventory dynamic, you're continuing to expect inventory ratios to improve through the year. That obviously puts a greater onus on inventory reductions in the back half given the second quarter inventories of around SEK 20 billion was somewhere ahead of the SEK 18.5 billion consensus that forecast a SEK 19.3 billion we had forecast. I wonder if you could just add some color on that as well, please?

[Helena Hedblom, executive]

I can start maybe and say, just on -- maybe you can help to quantify it. But if you look on the freight side, it's mainly related to the sea transportation lead times that has been prolonged during many -- actually many years now. We start to see that this is improving. Many of the lines -- or lanes are improving in lead time, which is good to see.

The regional distribution setup, we are done with, let's say, setting up all these regional distribution hubs. And right now, we are then bringing the inventory back in the value chain. So that is what is ongoing. But we also have a WIP effect within service, which is mainly related to the very strong growth we have had in rebuilds. Larger rebuilds consume more inventory. So that's what the 3 main contributors to the level of inventory we have right now.

[Hakan Folin, executive]

And we don't divide it into so specific quantification of each item. But just to give you some figure, more than 50% of our inventory is either finished goods or it's finished goods, which is goods in transit on the way out to our customer.

[Christian Hinderaker, analyst]

Maybe just on the infrastructure side. You've mentioned the soft backdrop in Europe, and that has softened further sequentially versus last quarter. I just wonder if that's more a comment on volume. We've heard some indications that particularly in the aggregate space, there's increased price sensitivity. You normally have a seasonal uplift in demand as you touched on, but it sounds like expectations should be a bit more muted from here.

[Helena Hedblom, executive]

No. But, I think it's a volume comment. And I think also it's fair to remember that -- or to understand that this is very much an indirect business as well. So there are, of course, dealers. So I think part of this is also a destocking thing that is ongoing in that industry.

[Operator]

The next question comes from Guillermo Peigneux from UBS.

[Guillermo Lojo, analyst]

I guess I wanted to ask first about the normalization of lead times. I guess you saw an improvement on that, but you continue to mention outbound logistics above all other things as being constrained in your ability to deliver. I wanted to ask, when do you expect this normalizing? I think in the previous conference call, you suggested towards the end of the year. Has this changed with your abilities as we stand?

[Helena Hedblom, executive]

No, but as -- I think we stick to that statement. If I look into the quarter, I have seen an improvement throughout the quarter. So step by step, it is improving. And for us, being -- we have a big manufacturing hub here in Örebro in Sweden. And we are heavily dependent on the RoRo capacity from Gothenburg. So it has been very specific to the outflow from the Örebro facilities when it comes to equipment.

Container freight, that has seasoned up much, much, much more, so that's not really a problem, which, of course, is then how we ship consumables and parts. We use container freights for that. But it is the RoRo capacity that is needed to transport the large equipment. That is where we still have some challenges, but it has -- it's going clearly in the right direction.

[Hakan Folin, executive]

And the improvement in the container transport is also important for us in terms of inbound shipments because to our factories, then we get it mainly 3 containers. Last year, we've struggled a lot with component shortages. We are still struggling to some extent, but it's definitely at a better page and that also then help us get better throughput in our facilities.

[Guillermo Lojo, analyst]

And in other industries, as lead times normalized, we saw order intake patterns also normalizing to some extent as lead times were cut. Is that something that is to be expected here? Or demand as you stand -- and in your outlook statement, it encapsulates that already?

[Helena Hedblom, executive]

No, but I think, hopefully, it will even out because, of course, if you go back, of course -- there has been, especially during last year, of course, some customers were preordering because they did not really trust the supply chain. So I think as supply chain and lead times are getting more and more back to normal, it will be a more stable and a more normal situation when it comes to the demand as well.

[Guillermo Lojo, analyst]

And last one, I promise. Cash flow conversion, I guess, you expect it to normalize. But can you give us some timing as to when and on what level would it be stable, i.e., basically when the cash flow conversion will be normal and at what level do you expect it to normalize?

[Hakan Folin, executive]

Well, in terms of cash conversion, it varies usually with our growth. If you look at 2020 and then first half '21, when growth was going down, then we had an extremely strong cash conversion. And now as we've been growing, cash conversion is clearly at a lower pace. And what we have said is that we believe that our inventory ratios will improve throughout the rest of the year. That will obviously help the cash conversion as well. Now we measure it as rolling 12, which means that even if we get a slightly better cash flow in the next quarter, it's not immediately going to have a huge impact on the rolling 12 figure.

[Operator]

The next question comes from Max Yates from Morgan Stanley.

[Max Yates, analyst]

Just -- the first question I had is just how to think about FX impact for the second half? So you will likely have positive impact on your sales in the second half. I'm just wondering, when you look at sort of what happened last year with FX revaluations, do you think there is a scenario in the second half where we have a positive effect on sales and a continued negative effect on EBIT from FX? I'm just trying to understand sort of to what extent we just put this down as a one-off or this trend of sort of positive sales, negative EBIT impact from FX may continue into the second half?

[Hakan Folin, executive]

I think what's important to remember, as I tried to explain in the call as well, is that what we are measuring here is the bridge effect. So it's not fully the actual impact in the quarter. Also in this quarter, from a pure translation effect, we had a positive impact in this quarter. But then when we compare, again, with last quarter, then we got this negative impact on the revaluation of accounts payable and accounts receivables.

Now would currency stabilize? We would, of course, not see that same big changes and also would we reduce our inventories in the second half of the year. There will be an opportunity that you would see some positive FX from that. And again, the big revaluation impacts we had in Q2 last year, we did not have the same impact in Q2, Q3 and Q4. So from a bridge effect, I don't expect to see that same development.

[Max Yates, analyst]

Okay. I guess that was my question because you see the revaluation effects last year, but it's a bit harder for us to see in the numbers. So I guess your point is there isn't the same revaluation effect on the base of Q3 and Q4 next year, so it shouldn't really continue. Is that fair?

[Hakan Folin, executive]

Exactly. That's fair.

[Max Yates, analyst]

Yes. Okay. Understood. The second thing I just wanted to understand was, could you just comment on sort of your -- broadly how your customers are behaving? And I guess have you seen any impact either in customers preferring to extend the lives of equipment as opposed to ordering new equipment as commodity prices have sort of come off the very high levels where they are? And I guess an extension of that is given we have seen sort of a few quarters of negative order growth organically in the equipment business, do you see kind of now we start to hit those kind of easier comps? Is there any reason for a sequential acceleration in orders over the next few quarters? Just wondering kind of what you're hearing from your customers and whether anything is changing with some of the commodity prices 20% lower than where they were this time last year?

[Helena Hedblom, executive]

Well, I think if you compare with historical levels, of course, it's still high level. So our basket is still at a very high level compared to if you go back to 2015, '16, for example. So it is -- what I hear from customers that is still strong focus on replacing own fleet. We have -- we continue to see that the fleet, step by step, has grown older, which we -- and that's a fact. You come to a point where you need to do the reinvestment. So that is happening. We also see expansion of existing mines and also new mines.

So for me, I don't see a shift in behavior due to, I would say, the weakening of the commodity prices here now in Q2. It's roughly 50%, 50% when it comes to replacement and expansion. I think that also tells that there is still a lot of investment willingness to prepare for higher production output.

When it comes to the aftermarket, it's clear that many customers are seeing the benefits when it comes to rebuilding machines. And I think that is both from -- it's a faster way to get higher productivity. You can also incorporate different -- new technologies related to safety, related to ESG. So it's a faster way really to bring productivity to a new level. And we continue to see that. And I think that would be the case moving forward as well, also giving -- thinking of this as a more circular economy. Rebuilds of machines, I think, that will -- that is here to stay. And for us, that is good business because it also ties us closer to our customers. We help them really to increase their productivity and their ESG performance.

And if you -- but of course, you come to a point when you need to replace the machine. And for us, the performance in the aftermarket is so tightly linked to our, well, say, probability to also get next equipment order. So for me, it's super focused -- strong focus really to perform when it come -- in the aftermarket.

[Operator]

The next question comes from Mattias Holmberg from DNB Markets.

[Mattias Holmberg, analyst]

Mattias Holmberg, DNB. Trying to understand the strong equipment sales a bit better. And if you please could explain if there's anything that you shouldn't be able to maintain the Q2 run rate for equipment deliveries going forward? Or would you basically need to see further improvement in the outbound logistics in order to keep revenues in this region?

[Helena Hedblom, executive]

I think we have -- for a number of quarters now, we have seen the improved output from our factories, but we have not really been able to translate it into revenue. So of course, as Hakan also said, when it comes to our inventory, a big portion of the inventory is either on a ship somewhere or it is at the final update or upgrade at or close to our customers in our customer centers. So I expect us to continue to have good output when it comes to our revenue contribution from equipment in the coming quarters. Especially also related to that, the inbound situation has improved when it comes to the container or freight when it comes to the inflow of components for us.

[Operator]

The next question comes from Andreas Koski from BNP Paribas.

[Andreas Koski, analyst]

I have a couple of questions. And if you could start with the service business and the organic order growth of 5%. I think that is a quite significant slowdown from what we have seen in previous quarters, if we exclude Russia. I think you saw organic growth of 11% in Q1. Would you say that this year-over-year slowdown is mainly related to lower volume growth? Or is it more relating to the pricing side?

[Helena Hedblom, executive]

Yes. I would say that it's more related to the number of larger rebuilds that we have managed to grab in the quarter. So I think the underlying activities when it comes to service contracts, et cetera, that is going at the same pace. I think pricing, we don't see any, let's say, change in our ability to work with pricing. I would say that it's mainly related to how much -- how many rebuilds have we actually landed in a quarter. So I think you can also -- between quarters, I think you can also expect that there will be swings also in the parcel service business. Related to that, we have a bigger and bigger share coming from larger rebuilds.

[Andreas Koski, analyst]

Understood. And then on large orders on the equipment side, I think you said that you didn't reach the same kind of level as you did in Q2 last year. And in that quarter, you had SEK 800 million in large orders, if I have the correct numbers. So would you say that large orders in this quarter amounted to around SEK 600 million, SEK 700 million or...

[Helena Hedblom, executive]

SEK 550 million.

[Andreas Koski, analyst]

SEK 550 million. Okay.

[Operator]

The next question comes from Nick Housden from RBC.

[Nicholas Housden, analyst]

I have a couple. The first one, just going back to the margin bridge and, in particular, the comment about the 90-basis-point dilution from M&A. I could be wrong, but I think that's the first time you've given that number. If that is the case, could you tell us what that number has been in previous quarters and roughly how we should think about that going forward, please?

[Hakan Folin, executive]

I don't think it's the first time we have been giving that figure. We have it -- we don't specify it in the report, but we usually talk about it in the presentation. And it was roughly on the same level in Q1. And going forward, that obviously again depends on how our acquisitions perform. As we mentioned, they actually performed, in terms of revenue, really well. But when we buy companies, they usually tend to be at a slightly lower level than our EBIT, and then we try to bring them up. So now we have only -- we added one company in the quarter, AARD, and they were added 1st of April, so they were basically part of the group the whole quarter. And since then, we have not added any new company.

So to make it simple, if these companies perform at the same level in the next quarter as in this, we would get a similar dilution impact. Over time, obviously, we want to bring it up and get a reduction.

[Nicholas Housden, analyst]

Okay. Great. And then just a quick follow-up on a related note. So you mentioned a few times that the acquisitions performed very well, certainly from a sales standpoint anyway. Is that mainly because a lot of the acquired companies were quite localized and now you're scaling them? Or what exactly have they been doing to sort of perform as well as they seem to have done?

[Helena Hedblom, executive]

Yes. So it's scaling. So several of the players have had a strong presence in certain regions, and we have been successful in scaling them globally now.

[Nicholas Housden, analyst]

And presumably, that will continue for the foreseeable future. All right?

[Helena Hedblom, executive]

That's the plan.

[Operator]

The next question comes from Ben Heelan from Bank of America.

[Benjamin Heelan, analyst]

The question I have was around the trends in Tools & Attachments. The margin came in a little bit weaker than expected. I think part of that was FX, which you've kind of explained. In the past, you talked about investment and integration costs. So as we think about around 15%, 15.5% margin, is that a fair assumption as we go through the second half of the year? Or do you think you can do better than that?

[Helena Hedblom, executive]

Yes. So we had a currency impact in the quarter when it comes to [ T&A ]. But it's also a division where we sit with too much inventory. So we have slowed down the production level in several of the factories to bring the inventory back to where we wanted to be. So part of this is also under absorption in our factories. But that's temporary, of course, to bring inventory down.

[Benjamin Heelan, analyst]

Okay. That's clear. And then a second question, the order trends in Tools & Attachments have been negative organic for the last 4 to 5 quarters now, and you've highlighted there the kind of weaker European trends in the hydraulic attachments business. Is that the sort of level we should be expecting as we move through the second half of the year that the construction side of that business is going to weigh on the mining attachment side of the business?

[Helena Hedblom, executive]

Yes. I think construction will continue to show a softer demand. However, there is a great opportunity within mining to grow the [ T&A ] business. But as we have said also several times, it must be profitable growth. That's what we're after.

[Operator]

The next question comes from James Moore from Redburn.

[James Moore, analyst]

I've got 2. Maybe we could go one at a time. The first one is really on order pricing, Helena, in aftermarket and on equipment. I know pricing was up a lot in the last couple of years, particularly in aftermarket. So the comparative is going to be kicking in. But if you think about sequential Q-on-Q pricing, if you like, are you still lifting prices? Or are we now holding flat given what's happening to the input prices that are down around the world, steel, oil, et cetera? Or actually, is there a potential to start? Or are we already start seeing Q-on-Q pricing dropping? I'm thinking about the cyclical piece versus your pricing power?

[Helena Hedblom, executive]

So we continue to have strong pricing power. And for us, it's always tied to the innovation, the value that we bring to our customers. So I don't see any -- well say, any change in, let's say, the environment to say, not be successful when it comes to pricing, but it must be tied to the value that we bring to our customers, of course. And that's the same both when it comes to aftermarket as well as equipment.

[James Moore, analyst]

That's very helpful. And the second one, if I could. Just to go back to the 270 bps FX impact, is it possible to segregate how much of the 270 bps was your usual transaction translation versus how much specifically was the revaluation of the inventories and receivables? I ask because I get that inventories have gone up from SEK 17 billion to just over SEK 20 billion and receivables from sort of SEK 9.5 billion to SEK 11 billion and a bit. But if I add the 2 together, last quarter, inventories and receivables jumped SEK 2.5 billion, and they jumped SEK 2.2 billion this quarter. So it's a broadly comparable move. And last quarter, you had plus 20 bps of FX, and this year minus 270 bps. And I don't think the Q-on-Q period-end FX rates have moved enough. So I just can't quite figure out why such a discrepancy in this quarter versus last?

[Hakan Folin, executive]

No, you're right, it hasn't moved all that much between Q1 and Q2. The big difference is actually when we compare with Q2 last year. So from a translation impact, we have a positive impact this quarter if we compare to last year as the Swedish krona is somewhat weaker. So then when we translate the profit back, we get a somewhat positive impact. But the reason for the large negative impact is that in Q2 last year, we had a lot of positive revaluation of accounts receivables and accounts payable as the Swedish krona was weakening. And then when we compare this quarter with last quarter, the isolated impact in this quarter is not that large. But when we compare it with last year, then we get the large impact.

So it's not really -- it's not the change in how much inventory accounts receivable we have, it's more...

[Operator]

The next question comes from Andrew Wilson from JPMorgan.

[Andrew Wilson, analyst]

I've got 2. I think they're both clarification questions, if I maybe take them one at a time. I think just to kind of clarify on Klas' question right at the start. When you talk about the guidance being on an underlying basis, and I think Klas made the point that seasonally the Q3 orders are typically lower in constant currency. So if we were to assume that the underlying conditions were unchanged as you described and that the large orders were basically consistent Q2 and Q3, is that messaging saying that you would expect that usual sequential decline of 5% to 10%? Or are you talking kind of ex-seasonality when you talk about the underlying number? I'm just trying to clarify whether you're really talking about flat underlying or actually down underlying if we take seasonality into account.

[Helena Hedblom, executive]

I think if we look over many, many years, Q3 is typically weaker. So there is weaker orders received typically in Q3 compared to Q2. So I think that is there. But when I say, we'll say the underlying activity levels, that's then okay. How many customers are replacing equipment? How much do we have in the must-win deals, et cetera? So I think there is still -- there is a healthy -- the overall picture is healthy. But if you look on this sequentially, historically -- Q3 has been weaker historically. But of course, that can always shift when -- it depends all about the large orders as well, but our comments is related to the underlying activities. And it's demand. It's not orders, really.

[Andrew Wilson, analyst]

Yes, yes. No, that's really helpful. And then maybe just on the margin. And again, I know it's difficult because there's been many moving parts, and I know there's been a lot of questions about it. But maybe if I kind of simplify it to this, if we talk about kind of in round numbers, 22% margin on an adjusted basis, so we're moving some of the one-off effects and is that the run rate we should be assuming going forward? Because I kind of ask in the context, obviously, recent quarters have kind of been 23% and north. And recognizing that there's a lot of moving parts and the FX particularly in this quarter was significant. But I mean are we talking to a 22% run rate to think about? Or are we thinking about the sorts of numbers that we've seen in recent quarters, i.e., north of that 23%? I don't know if I can try and simplify it to that.

[Helena Hedblom, executive]

Well, of course, it's -- I think we are -- if we are at a good level, when we have -- if you look on the journey that we have been on the last couple of years, we have taken the margin up to a very nice level. Of course, we also need to grow. And of course, now we have successfully landed a number of acquisitions that are contributing nicely to the growth, actually better than we planned, which is dilutive. But of course, this is the next horizon of growth. And I think that is important to remember also that several of these acquisitions are -- we are taking steps into nearby segments and areas where we see potential growth for the coming years. So it's also investments for the future. But as always, I think for us, profitable growth is the name of the game, and that's what we're looking at.

[Andrew Wilson, analyst]

Okay. So we should be continuing to incorporate some of that investment and some of that dilution from M&A because the appetite is there to continue to invest. And appreciating that 22% is a very good margin as much as 23% is an exceptional margin, but that we do need to be thinking about that?

[Helena Hedblom, executive]

I think we need to secure growth as well. And I think as we -- when we do the inorganic piece of the growth, then of course, we very seldom find companies with the same margin as our margin. And of course, that's always the plan to bring these companies up over time. But that takes time. And we have been -- we have landed many acquisitions during last year, and that is now contributing really nicely on -- when it comes to the growth during this year. But I think we always -- as always, we always try to improve and to drive efficiencies, of course, crucial in the coming quarters and years as well.

[Operator]

The next question comes from Guillermo Peigneux from UBS.

[Guillermo Lojo, analyst]

Maybe one follow-up from me, and it's again on the sequential movement in potential orders into Q3 and then, obviously, Q4. If I look at the book-to-bill ratio, and you can obviously answer this at a group level or, in particular, just to the mining segment. But you look at book-to-bill, and it's been below 1. And obviously, driven by the fact that you are now invoicing more because your abilities are improving in terms of supply chain and given the fact that sequential orders have that seasonality pattern that we have to take into account, is it the case that we're actually thinking about book-to-bills below 1 for the next 2 quarters? Because typically and seasonally, Q4 tends to be also below 1.

[Helena Hedblom, executive]

I think with the orders on hand we have right now, and that's both for -- when it comes to aftermarket as well as on the equipment side, we're doing everything we can to say -- to translate that order book into revenue because that is what our customers need. And with the prolonged lead times, of course, it has been prolonged lead times for quite some time now. So will it be below 1? It all depends, I would say, on how many large orders we will be able to land in the coming 2 quarters. But I expect strong output when it comes to the revenues in the coming quarters, mainly related to that, the supply chain. It is easing up, and we have good output from our factories and a strong order book. So of course, that supports the growth when it comes to revenue.

[Operator]

The next question comes from Anders Idborg from ABG.

[Anders Idborg, analyst]

I just wanted to understand the comment about mix in Equipment & Services. So yes, I mean, I can see that, obviously, with the big deliveries that you had in equipment, you have fewer percent of services. But how meaningful is that impact? I mean you could also think that when you have such release basically of production, that comes with a very high drop-through on the equipment side. So was there also sort of, within the service part, a negative mix, sort of less spares, more services, that kind of thing?

[Helena Hedblom, executive]

I would not say that, that was the case. Of course, there can always be -- could be a country mix, could be product mix, but I would not say that it was something standing out. So I think that when we say mix, it was more related to the Equipment & Service mix. And when we talk about Tools & Attachment, it's more that it's less attachments in the quarter.

[Anders Idborg, analyst]

Right. So in terms of sort of equipment margins as well, they were pretty normal in a sense despite the big release?

[Helena Hedblom, executive]

Yes.

[Karin Larsson, executive]

So thank you very much, everyone. That was the last question for today. Thank you, everyone, for taking the time. I hope all of you have, as always, successful investments, a wonderful summer. And Hakan, Helena and I, we hope to see you all soon again. Thank you very much.

[Helena Hedblom, executive]

Thank you.

[Hakan Folin, executive]

Thank you.