Epiroc AB

STO:EPI A

Earnings Call Analysis

Epiroc Reports Strong Q2 2024 Performance Driven by Mining

Epiroc's Q2 2024 performance was robust, significantly driven by strong mining activity, which resulted in large orders amounting to SEK 950 million, up from SEK 550 million the previous year. The company completed strategic acquisitions like STANLEY Infrastructure, contributing positively to its growth. However, the construction market remained weak, affecting the aftermarket negatively. The company reported an adjusted EBIT margin of 19.7% and implemented efficiency measures that reduced employee numbers by around 450. Looking ahead, Epiroc expects mining demand to remain high, while construction may continue to struggle.

Quarterly Performance Overview

The company witnessed a mixed performance in the recent quarter. While there were areas of growth and improvement, some segments experienced pressures. Notably, gross margin adjustments and costs were significant talking points. The gross margin, adjusted for SEK 104 million of restructuring, stood at 36.6%. This reflects a decrease of 3.7 percentage points year-over-year on an organic basis, signaling that the benefits from service mix seen in previous quarters were reduced.

Impact of FX and Cost Pressures

Foreign Exchange (FX) impacts and increased costs were crucial factors this quarter. Despite some FX tailwinds, margins would have been between 20% to 21% without these benefits, according to company discussions. Analyst concerns focused on understanding whether the margins would sustain or decline in light of ongoing costs and negative FX impacts. Despite these worries, the executive team highlighted cost-saving measures and efficiencies expected to materialize in upcoming quarters, particularly in the Equipment & Service segment.

Segment-Specific Challenges and Initiatives

The Tools & Attachments segment faced hurdles, primarily due to lower construction demand. Overcapacity in this segment necessitated selective initiatives, including personnel reductions and the closure of a US entity to consolidate volumes. On the contrary, the service segment saw initiatives aimed at gaining midlife rebuild orders and efficiencies.

Actions Related to Stanley

Stanley, an essential part of the company's portfolio, experienced a notable performance dip. EBITA for Stanley was significantly lower than last year, dropping from 16% to a low double-digit figure. Inventory adjustments for Stanley had an impact on clean EBIT margins, with an estimated additional factor of around SEK 20 million needed to achieve a clearer margin view. The company is implementing numerous actions to address these challenges, including inventory and cost restructuring, expected to unfold over the next few quarters.

Guidance and Market Expectations

The company refrained from providing explicit margin guidance but emphasized a cautious optimism about maintaining current levels while navigating FX and cost challenges. Analysts sought clarity on future margins, with indications that Equipment & Service margins could be stable around the mid-20s percentage-wise. The executive team remained optimistic about structural and efficiency improvements yielding positive outcomes shortly.

Demand and Market Insights

In terms of market demand, near-term activity levels appeared subdued, influenced by high interest rates and inflation. Nevertheless, there are positive long-term drivers related to infrastructure investments and ESG commitments, notably in the U.S. Mining sector projections showed fewer greenfield projects in the short term, although future necessities for copper production were acknowledged. Inventory levels remained a focus area, with further efforts needed to reach desired benchmarks.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the Epiroc Q2 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to Karin Larsson, Head of Investor Relations. Please go ahead.

[Karin Larsson, executive]

Thank you. Hello, and a warm welcome to the Epiroc Q2 results presentation. My name is Karin Larsson, Head of IR and Media here at Epiroc. And today, we'll do a telephone conference. You can find the presentation material to this telephone conference on our home page under Investor Relations and Financial Publications. With me today to present the results, I have our CEO, Helena Hedblom; and our CFO, Hakan Folin. They will briefly present the results before we end with a Q&A session. We have a quite easy agenda today. So without further ado, Helena, please tell us about this quarter.

[Helena Hedblom, executive]

Thank you, Karin, and hello, everyone. So starting with the highlights. So the mining activity continued to be strong in the quarter as anticipated, and our large orders amounted to SEK 950 million, which is up from SEK 550 million last year. And the demand picture within mining is stable at a high level, and there is a lot of business cooking, or in other words, the pipeline of potential large orders is solid. The construction market, on the other hand, weakened further in the quarter and impacting the aftermarket business negatively. In the quarter, we completed the acquisition of STANLEY Infrastructure, and we also announced the acquisition of ACB+. Together, we will be a leader within attachments and quick couplers, providing customers with a more complete range of productivity solutions.

Long term, the construction market is attractive with an anticipated annual growth rate of 4% to 5%, and with attachments used for deconstruction and recycling of steel and copper expected to grow even more. When it comes to profitability, we had a lower margin compared to the previous year, and there are several reasons as to why, and we will go through it soon. However, efficiency measures were carried out as planned in the quarter, and sequentially, the number of employees for comparable units decreased with around 450 in the quarter, mainly within service and manufacturing.

Within automation and electrification, many exciting things are happening. For example, we have successfully deployed a battery-electric trolley truck system for underground mining with ABB and Boliden.

Moving on to Slide 3, providing some more insights on the development on orders received. So our orders increased 6% versus last year to SEK 16.3 billion, and it corresponds to an organic increase of 1%. The demand picture was mixed. We had a positive 7% contribution from acquisitions, mainly the STANLEY Infrastructure acquisition, which came into the books on April 1. Sequentially, compared to the previous quarter, we achieved 5% organic growth, driven by mining equipment.

Moving on to Slide 4, innovation, one of our strategic focus areas. So within automation, I'm excited about our solutions, including mixed fleet, both for surface and underground applications, which create great value for our customers. Increased productivity, improved safety and lower emissions are some of the benefits confirmed by our customers. On the third of July, we acquired the remaining shares of ASI Mining, one of our collaboration partners in the Roy Hill project in Australia. In this project, we are converting a mixed fleet of around 100 haulage trucks to driverless operations, and thereby creating the world's largest autonomous mixed fleet.

There is high demand from customers that want to connect machines from different manufacturers and have these work together fully autonomously. And we are the one-stop shop for mixed fleet automation and remote control solutions regardless of manufacturer or type of equipment, partly thanks to acquisitions such as ASI Mining and RCT. And around recycling is increasingly important for our mining and construction customers. So by recycling and reducing steel and metals, also such as tungsten, the need to extract virgin material is reduced, and our recycling program for carbide inserts from drill bits is expanding into even more markets.

Another innovation highlight in the quarter was that we successfully deployed a battery-electric trolley truck system for underground mining in close collaboration with Boliden and ABB. And this brings the mining industry closer to realizing the all-electric mine of the future with sustainable productive operations and improved working conditions.

Another strategic focus area is the aftermarket. I'm now on Slide 5. We had a strong organic service growth of 5%, supported by midlife upgrades and a strong demand for mixed fleet automation. The construction demand, on the other hand weakened impacting not only attachments, but also tools used at construction sites. Important markets such as United States and Europe were especially weak.

When it comes to operational excellence, now on Slide 6. Our adjusted operating margin EBIT was down to 19.7% from 21.6% last year. Efficiency measures were carried out as planned in the quarter and actions have been taken to strengthen efficiency and the number of employees for comparable units has decreased with around 450 in the quarter and further measures to strengthen efficiency have already been initiated. We are also taking initiatives within our sourcing. It is a cross-functional effort, including R&D and marketing. That will lead to increased resilience within sourcing and delivery, improve the cost efficiency and also ensuring a compliance within sourcing.

And as a reminder, on the first of May, we split our Tools & Attachments division into two divisions in order to sustain optimal focus on each business line and continue fostering profitable growth. Externally, the reporting segment will, however, remain unchanged.

Moving on then to the people slide, #7. Safety is always our and my top priority, and I'm glad to see further improvements here. The total recordable injury frequency rate decreased further to 4.7, a meaningful decline from 5.5 previous year. As we completed the STANLEY Infrastructure this quarter, we have grown our Epiroc family meaningful, but we have also completed the acquisitions of ASI Mining, Yieldpoint and Weco. So a warm welcome to all new employees, and we hope that you will enjoy being part of Epiroc's family and share our values of innovation, commitment and collaboration. At Epiroc, our work is driven by trust and responsibility in a culture where everyone contributes and feels valued.

So we see continued good progress when it comes to increasing the proportion of women. And the share of women employees is now 19.2%, and women managers are now at 23.6%, both up meaningfully compared to last year.

Moving to Slide 8, where we have our planned goals. Our CO2e emissions from operations decreased 32% thanks to a higher share of renewable energy and installation of solar panels. The CO2e emissions from transport, however, increased 11% due to higher volumes delivered. So we have ambitious climate goals that were science-based validated already in 2021. In June, we got a significant acknowledgment of our work to reduce emissions. TIME Magazine listed Epiroc as the world's 95th most sustainable company. And among manufacturing and industrial production companies, we were #7. So well done to the whole organization. I will now give the word to Hakan to talk us through and discuss the financials.

[Hakan Folin, executive]

Thank you, Helena, and I will continue with Slide 9, group revenues and EBIT. Our revenues decreased 1% organically. In total, though, they increased to SEK 16.5 billion, up from SEK 15.9 billion last year. The adjusted operating margin was 19.7%, and the lower margin than compared to last year is mainly explained by overall higher cost level, negative mix effects within service and also dilution from acquisition, which was 0.9 percentage points in the quarter.

As Helena said, efficiency measures were carried out as planned in the quarter. The number of employees, excluding acquisitions, decreased with around 450 sequentially, and this was mainly within service and manufacturing. Further measures that we have already initiated will lead to a similar reduction of employees in the second half of the year. And in this quarter, we took SEK 104 million in restructuring costs, and we do not foresee further restructuring costs in the third quarter for the actions that we have already initiated.

If we then take a look at the EBIT bridge, and this is now on Slide 10. In absolute terms, our EBIT came in at SEK 2.9 billion. This was down from SEK 3.4 billion last year. But in this, we had items affecting comparability of SEK 325 million. And these were including transaction integration costs related to acquisition of SEK 130 million, restructuring costs, SEK 104 million. We have made a provision for earn-out for the acquisition of RCT of SEK 73 million. And then also for the long-term incentive program, SEK 18 million. And if you -- the reported operating margin EBIT was 17.7%.

In the bridge, you can see that we had a negative impact from organic and structure. Currency, however, supported the margin. And I do want to remind you that this is a bridge effect. So it's comparing the outcome in this quarter with the same quarter last year. In Q2 2023, we had a negative absolute bridge effect of SEK 243 million and a negative margin effect of 2.7 percentage points, and some of that is now being reversed. So all in all, we ended up with an adjusted EBIT of SEK 3.2 billion and an adjusted EBIT margin of 19.7%.

If I then move on to the segments on Slide #11, and I will start with Equipment & Service. And these segments enjoyed a strong demand from mining. Year-on-year, the orders received organically increased 3% to SEK 12.4 billion, and including SEK 950 million in large orders. And this should be compared with SEK 550 million in large orders in Q2 2023 and SEK 400 million in the previous quarter. And we have said this before, and we will say it again, large orders are lumpy by nature. Sometimes you get more, and sometimes you get less in a certain quarter. But we still see that there is a lot of business cooking out there in order for us to hopefully grab large orders also for the coming quarters.

One of the large orders we received in the quarter was from Hindustan Zinc in India, SEK 250 million. They ordered a fleet of mine track as well as rigs for rock enforcement, face drilling and production drilling. If we look sequentially, so if we compare with the previous quarter, our orders increased 9% organically.

On Slide 12, we have the Equipment & Service revenues, which were up 1% organically to SEK 12.5 billion and overall flat year-on-year. We had 44% equipment revenues in the segment, which is actually the same level as we have last year. So that means that the equipment service mix effect was flat this time. But if we look within service, however, we had some negative mix effects. We had a few items affecting comparability, in total, negative SEK 142 million. This consists of the earnout for RCT of SEK 73 million that I mentioned before. And this is an acquisition then developing better than anticipated, and then we have to provide more for the earnout. And then we also had restructuring costs of SEK 69 million.

And we did mention a reduction of NPEs before on group level, and this is also the case in this segment. And our actions here are very specific. I can only say that you can say that they are pinpointed since this is actually a segment where we see good growth, but it is about strengthening our efficiency within this segment in the long run.

If I then move on to the profit bridge for Equipment & Service, which you'll find on Slide 13. We started with a profit of SEK 3 billion last year and ended now with SEK 2.7 billion. Adjusted, our EBIT was SEK 2.9 billion, which is then corresponding to a margin of 23% -- sorry, 23.2%, and you can compare that with same quarter last year when we had 23.9%. The lower margin is mainly explained by higher costs and then, as I mentioned, negative mix effects within service, while currency contributed positively. Dilution from acquisition was 0.1 percentage points.

Actions have been taken, as I said, we should not forget though that we are experiencing strong growth from our mining customers. So we need to take these actions very carefully to safeguard a profitable growth also onwards.

If I then quickly move on to the others segment, Tools & Attachment, on Slide 14. Here, our orders increased 24% to SEK 3.9 billion. This was up from SEK 3.2 billion last year and supported by the acquisition of STANLEY Infrastructure, which was included in the entire quarter as we closed the acquisition on April 1. In total, acquisitions impacted the growth positively with 31%.

Organically, though, we saw a decrease of 6% as the demand from construction customers remained weak. And this was impacting both attachment and also rock drilling tools used within construction projects. The demand for rock drilling tools from mining customers, on the other hand, was good. Sequentially, order intake decreased 10% organically for this segment, explained by weakened demand in important markets such as the U.S. and Europe, as Helena mentioned.

The weak development in construction also impacted the revenues for Tools & Attachments negatively, down 10% organically. In absolute terms, though, up 17%, supported by the STANLEY acquisition. And I'm now on Slide 15. The EBIT, if we adjust SEK 465 million of items affecting comparability, which was transaction integration costs for M&A, also restructuring costs, came in at SEK 448 million, which corresponds to an EBIT margin of 11.2%.

In the profit bridge on Page 16, you can see then the margin headwind in structure, we had the transaction and integration costs that I mentioned, SEK 130 million and also restructuring cost of SEK 35 million. And we also had dilution from acquisition. If we adjust for the items affecting comparability, the dilution from acquisition was 2.2 percentage points to the Tools & Attachments market. And the organic weakness is mainly explained by under absorption and also product mix.

Moving on to cost on Slide 17. Both year-on-year and sequentially, the cost for administration, marketing and R&D increased in absolute terms, with the acquisitions explaining the increase. As a percentage of revenues, though, we are down sequentially, and we hope to continue this trend in Q3 given the actions that we have taken. Net financials were higher, explained by higher interest-bearing debt. Income tax, we had at 23.0%. This is up somewhat from 22.6%. And we do still stick to our guidance that the tax rate should be between 22%, 24%.

Next slide, #18 is on our operating cash flow. If we start looking at the graph to the right, which shows a positive development where we can see now that our cash conversion rate is 90% in the last 12 months, which is meaningfully higher than where we were a year ago when we were at 54%. In the table to the left, you see the operating cash flow, which increased year-on-year from SEK 1.5 billion to SEK 1.6 billion. The lower profit had a negative impact on the cash flow, but this was compensated then by a lower buildup of working capital.

And speaking of working capital, we have more details now on Slide 19. It was up 12% year-on-year, both in total and also adjusted for acquisition and FX, and now represents 37.8% of revenues. If we dig into the details then, we had an increase of acquired inventory both year-on-year and sequentially, as well as a higher level of receivables given the increase in sales, while payables were lower. If we look sequentially and exclude acquisitions, we actually had a positive inventory development, mainly due to the increased sales of equipment.

The next slide is about capital efficiency, and this is on Slide 20. We ended the period with a meaningfully higher portion of debt. We are now at SEK 15.8 billion versus SEK 9.1 billion a year ago. And after having acquired STANLEY and also paid a dividend of SEK 2.3 billion, we now have a net debt to EBITDA of 1.04x at the end of the quarter. Return on capital decreased to 22.4%, and this was negatively impacted by intangible assets such as goodwill.

If we then shift a little bit of focus on Slide #29 (sic) Slide #21 and we look at why we are building a position for future growth within attachment. And in short, you can summarize this slide as we're building a leading position within attachment and quick couplers given the acquisitions we have made of STANLEY Infrastructure and also ACB+. And this will provide our customers with a more complete range of productivity solutions. And quick couplers then, they are essential for excavator companies that strive to work with different types of attachment in an efficient and productive way.

Long term, as Helena said and we talked about before, the construction market is attractive with an anticipated annual growth rate of 4% to 5%. And attachment used for deconstruction and recycling of steel and copper are expected to grow even more. So this is us positioning to capture future profitable growth.

On Slide 22, we have some financial impact from the acquisition of STANLEY Infrastructure. Most things on the slide we have actually shown to you before, but I will therefore concentrate on the news. Transaction and integration costs were SEK 130 million in the second quarter. We also had cost in the first quarter. And -- but now after Q1 and Q2, we will not have more transaction or integration costs.

The STANLEY Infrastructure EBITA margin in Q2 was low double digit if we adjust for items affecting comparability and also the impact from step-up valuation of inventory. And if I pause here a bit and talk about what is the step-up value of inventory. Well, when we do the purchase price allocation for the acquisition of STANLEY, we value the inventory to market value instead of costs. And then this has an impact in terms of lower gross profit as we sell the finished goods. This impact will last until we have turned all of that inventory around, which will be for 3 quarters. So basically, until the end of 2024, we will have that impact.

Previously, we have provided you with the guidance for the full year dilution of EBITA margin in T&A for 0.5 to 0.7 percentage points from the acquisition. And we do still stick to that comment. Given the weakening demand in the second quarter, the anticipated dilution is currently at the higher level of the range, but we have identified and taken actions which will mitigate the effects of lower demand. For example, we will consolidate the manufacturing footprint for STANLEY Infrastructure in North America, which is affecting around 130 employees. Also for the group, we stick to this margin comment, as this acquisition and its impact on both revenue and profit is smaller now than we originally anticipated.

So with this, I will conclude the financial comments and leave the word back to you, Helena.

[Helena Hedblom, executive]

Thank you, Hakan. So I will then summarize the quarter. So we had strong demand from mining customers with large orders at SEK 950 million. And the business cooking looks promising. And on the service side, we had an organic growth of 5%. Construction, on the other hand, was weak and also weakened further in the quarter, which impacted the aftermarket negatively. We have taken actions as planned, and we will take more to improve profitability, and restructuring costs for this have already been taken.

We are building a leading position within attachments with our acquisitions of STANLEY Infrastructure and ACB+. And we are accelerating our leadership within automation, especially within mix fleet by acquiring the remaining share of ASI Mining. And together with Boliden and ABB, we have deployed a battery electric trolley truck system for underground mining, helping the mining industry towards zero emissions. And we got a significant acknowledgment of our work to reduce emissions from TIME Magazine who listed Epiroc as the world's 95th most sustainable company.

So all in all, a busy quarter for us at Epiroc, and we keep on working hard to provide customers with the right solutions for the future. So together, we make it happen.

And finally then, looking ahead now on Slide 24. In the near term, we expect that underlying mining demand both for equipment and aftermarket will remain at a high level, while the demand from construction customers is expected to remain weak.

So thank you, and over to you, Karin.

[Karin Larsson, executive]

Thank you, Helena. Thank you, Hakan. Both well presented. And as you know, we're hosting our Capital Markets Day in Vegas in connection to the world's largest mining exhibit, Mining Expo in September. For those of you that would like to join us in-person, you will get to see many new innovations and meet and interact with most of our division presidents, actually. But if you cannot make it in-person, you're also most welcome to join online. And please note that if you want to join online, you also have to sign up for the CMD. .

So with this, operator, thank you, and please open up the line for questions.

[Operator]

[Operator Instructions] The next question comes from Andrew Wilson from JPMorgan.

[Andrew Wilson, analyst]

I guess I just want to try dive into some of the details around the margin. And I appreciate you've kind of given some of the levers for the current challenges. But could you try and help sort of quantify a little bit? I'd just like to understand better the service mix weakness that you talked to. Can you just elaborate a little bit on the driver of that and how long we expect that to persist? And also, could you help us a little bit on maybe the size and also the timing of some of the cost savings?

And then finally, and maybe it's just repeating what you said, but trying to put some numbers around it, but the inventory revaluations within STANLEY, can you just repeat that and try and help us a little bit with the quantum so we can build that in over the next 3 quarters as well? I appreciate they're quite specific questions, but it would be really helpful to understand.

[Helena Hedblom, executive]

So if I start on the service mix, of course, as we have different components within service, and different quarters, we grow different. And of course, we have parts, we have service contracts. We have different type of rebuilds. But I would say -- so that always plays a role of how that mix plays out in a quarter. I think all in all, what we see is that there is a high activity level out there. We see that as we also comment on the orders, we continue to gain a lot of orders on midlife rebuilds. So of course, depending on the mix, we go for growth when it comes to service. But at the same time, we also work with efficiencies. As Hakan mentioned, quite a lot of the efficiency actions we took during Q2 is also towards the service segment.

When it comes to under-absorption, that is mainly in the, I would say, Tools & Attachment segment. And with the lower demand there related to construction. And so that is something that we are -- that's part also of this very selective initiatives that Hakan mentioned that we are -- a big portion of the -- of the people that left both during Q1, but also now during Q2. And the initiatives we have initiated that will be executed now in Q3 are related to address that under-absorption. And one part of that is also related to STANLEY, as Hakan explained. So we are closing down one entity in U.S. and consolidating volumes.

So I think would say timing-wise, we expect to see a gradual improvement here step by step here. But it's a fairly big adjustment in cost structure that we have taken out now during Q2. But of course, we don't see that effect yet in the numbers.

[Hakan Folin, executive]

And then if I take the third question you had on the size of the inventory step-up value. To make it simple, you can say there are less than half of the overall PPA for STANLEY Infrastructure -- or sorry, they're less than half than the amortizations that we will have each quarter.

[Operator]

The next question comes from Max Yates from Morgan Stanley.

[Max Yates, analyst]

I just wanted to ask about the margins in Equipment & Service. And I guess you were doing kind of roughly 24% margins in 2Q, 3Q, 4Q last year. And most sector earning companies I speak to are guiding to negative FX in 3Q. And I assume you're also going to have a year-over-year drag from some of these higher costs, which are still going to be there. I guess the reason I ask is because if you didn't have that FX tailwind this quarter, your margins would have been somewhere between 20% to 21%. And I guess what's very hard for us to see from the outside is I don't know whether your margins in the second half are going to stay roughly around 23% or weather with negative FX, ongoing costs, they're going to drop somewhere between 20% to 21%. And it's obviously a massive difference that people have very low visibility on. So is there any way whether you can help us understand? Are your equipment and service margins about to go to 20% to 21% in the next couple of quarters? Or are we going to see the effect of these initiatives quite quickly?

[Hakan Folin, executive]

I think if I can start by trying to repeat a bit what I said in the call regarding FX is that what you see is a bridge impact. It's a big impact comparing with the same period last year. It's not an absolute impact. You cannot just put it back on the margin and say this is what it would have been without the FX. And then gradually, we will see the -- if you look at the number of people that have actually left the company this quarter, quite a large portion of that has been related to Equipment & Service, which means that we should start seeing the cost improvement during Q3 in the Equipment & Service segment.

[Max Yates, analyst]

Okay. But just on the most -- every company, every set company that I have under coverage gives margin -- gives FX guidance for the next quarter. So all of those are pointing to negative effects. I understand it moves around. But typically, when you see negative FX on your top line, it feeds through to EBIT. And I guess what I'm trying to understand is are you able to help us at all? Do you think your margins on Equipment & Service get worse or they get better?

[Hakan Folin, executive]

Well, I would say we actually saw them get better. In this quarter, they were better than they were in last quarter, right?

[Max Yates, analyst]

Okay. So this should be a sensible underlying level. So that is 23-ish we should be comfortable with for the rest of the year?

[Hakan Folin, executive]

We don't guide specific on margins, as you know, but we don't feel that this quarter was sensationally good in any way and that we -- that's not possible to hold up to that level.

[Max Yates, analyst]

Okay. That's helpful. That's all I wanted to know.

[Operator]

The next question comes from Christian Hinderaker from Goldman Sachs.

[Christian Hinderaker, analyst]

First question is on large orders. You booked SEK 950 million in the quarter. That's broadly in line with the SEK 938 million average last year. But obviously well above the SEK 215 million that you'd preannounced. Was that incremental step up the result of orders coming in late in the quarter? Or is this more about customer restrictions on you producing a press release?

And then if it's the former, what should we make of that order development heading into the second half given that you've said the pipeline is solid, but maybe there's some hesitation around the timing and commitments from customers?

[Helena Hedblom, executive]

Yes. So it's a combination. So some of these orders, we got late. And some of the customers don't want us to disclose let's say and do a press release. .

So -- but if I look at -- if you say this is very bulky as we have described every quarter. I think in this quarter, it was good to see so many large orders coming through. And when we look at the pipeline, the pipeline looks very solid. And it is a combination of replacement of old equipment and also expansion brownfield expansion.

So when I look at the pipeline, I don't see -- I don't see that hesitation. It can, of course, sometimes be that the decision happens 1 week too late, and that can create swings between quarters. But in general, in the conversations with the mining clients, which I mean, on a weekly basis, I don't see any shift in behavior. So I think it's good to see that, that momentum and also that -- I think what is good is to see also that the replacement, the replacements are coming through in a good way.

[Christian Hinderaker, analyst]

And maybe a follow-up then on the outlook in terms of demand. I think you've changed the wording on the construction demand from soft to week. How do we think about that change in narrative?

And then in Q2, specifically, can you talk a little bit about the dynamics you're seeing in customer inventory levels? Was that an impact on your growth in T&A specifically?

[Helena Hedblom, executive]

So I think we see -- we continue to see a softer, weak -- and I say the demand actually weakened in the quarter. And we see both, say, destocking activities happening with a distributor also with some of the OEMs. At the same time, it has also been very low activities if you look in U.S. and in Europe. Both Germany, France, for example, which our construction markets has been low activity levels the last month.

I think on the construction side, what we are focusing on, of course, now with the STANLEY, STANLEY acquisition also long term basis, this is, let's say, a growth opportunity for us. And we have now created a dedicated division around this and we are focusing on making sure that we are as efficient as possible now, but of course, that we also address the cost structure given the development. But I don't -- I have not -- I don't think -- we are not yet out from that situation when it comes to the destocking, unfortunately. So that is still impacting the demand.

[Christian Hinderaker, analyst]

Maybe just a final one I can squeeze in on your own inventories, they're up SEK 780 million sequentially. How much of this -- and Hakan, I think you might have mentioned it relates to the integration of STANLEY and other acquisitions. Just curious there as to what the organic change is.

[Hakan Folin, executive]

Yes. The organic change is actually in the right direction. It's down. So if we exclude acquisition of -- especially of STANLEY because that's where we had large items, we are down on inventory from end of Q1 to end of Q2.

[Operator]

The next question comes from Vlad Sergievskii from Barclays.

[Vladimir Sergievskiy, analyst]

I have two questions, please. First one is to Hakan. How much PPA amortization related to STANLEY you recognized this quarter? And will it be a straight line amortization? So basically, the number we can use going forward?

And second one, perhaps to Helena as well on the demand environment. Are there any signs of green shoots in construction activity, which are already perhaps pointing to a better environment, let's say, 6 months down the road?

And the more long-term question on demand on mining. Is there any chance for meaningful greenfield project cycle in the coming years? Or where in the environment 20 months will continue to be mainly driven by brownfield activity, which is already at a very good level?

[Hakan Folin, executive]

If I start with the first one then on PPA, we usually don't specify it by acquisition we do. But if you look at the difference between EBITA and EBIT within Tools & Attachment in Q1, and in Q2, you can basically calculate it backwards and then you get that it's a little bit more than SEK 40 million. And yes, that's a relevant number to use going forward.

[Helena Hedblom, executive]

And then some comments on the demand side. I think like we say, short term, right now, what we see is the very, I would say, low activity levels, of course, driven by the mining interest rate but also the inflation. I think what we are, of course, eager to see taking off with the investments in infrastructure projects driven by the ESG commitment if you look on for U.S., for example. There is a quite a lot in the pipeline that will support this long term. So that's, of course, what we are watching.

On the mining side, when I look at this pipeline or business cooking that we see was when we look at this in 18 months ahead, there is not that many greenfields in that pipeline yet. However, of course, if we look at this long term, there is clearly a need for greenfield, especially within copper to keep up the production level and meet the demand in a couple of years from now. But I'll say midterm, if we talk 18 months, not so many initiatives on greenfield.

[Vladimir Sergievskiy, analyst]

Excellent. If I can follow up quickly on the inventory level. Hakan, how far do you think from the inventory levels you would be ahead and comfortable with?

[Hakan Folin, executive]

Sorry, how far away we are from being comfortable, is that...

[Vladimir Sergievskiy, analyst]

On the inventory level. How far from level when you say, "Yes, this is a great level of inventory I'm happy with?"

[Hakan Folin, executive]

I would say we still have quite a bit to go. I mean we started moving in the right direction now, but we are not where we want to be. So we still have quite a bit to go.

[Operator]

The next question comes from Klas Bergelind from Citi.

[Klas Bergelind, analyst]

I was a bit late on the call. A lot going on. So hopefully, you haven't touched on this already. But I just wanted to -- assuming on STANLEY, Hakan, could you repeat here what you said on the inventory? I understood from earlier today that you didn't have any inventory adjustment to EBIT in the quarter. And in light of that, the clean EBIT margin around 7% when I left out SEK 44 million of PPA looks quite weak with STANLEY. And obviously, it's tough construction markets out there. But could you just confirm that?

[Hakan Folin, executive]

As we wrote in the presentation, you will see that we didn't write a specific figure, but we wrote low double-digit EBITA. And then that's to be compared with what they had last year when they had 16% EBITA. So yes, it's definitely lower than where it was last year and where it will be long term. And that's why also we are taking quite a lot of actions related to STANLEY during the quarter.

[Klas Bergelind, analyst]

Exactly. So no -- so yes, so just to confirm, there was no inventory write-down as part of the EBIT? If I take out the SEK 44 million PPA, I get to a 7% clean EBIT margin for STANLEY? I just want to confirm that.

[Hakan Folin, executive]

Than what we -- what -- we have no inventory write-down, but when we do this purchase price allocation, we value the inventory to market value from cost to market value, which means if you simplify it, when we sell it, then we get -- we basically get no margin. And that had an impact as well. It's included in the EBIT. So if you want to adjust for that, you would need to take that away as well. And that will last for 3 quarters, so 2 more quarters. And I said then earlier in the call, maybe before you joined, that was less than half of the PPA value.

[Klas Bergelind, analyst]

Okay. So around SEK 20 million add back to get to super clean margin. Okay. Perfect. Yes. Okay. Cool.

My second one is on the gross margin. If I add back the SEK 104 million of restructuring that I think you have in there, then the gross margin is 36.6% like I thought, but obviously, you don't get the positive mix here of service being bigger than equipment that you've had over the last couple of quarters. And if we take out currency, whether it's bridge impact like [ Max ] alluded to. But if I just look at the organic, we are still down around sort of 3.7 percentage points year-over-year on Slide 13. Could you just talk through how much is digital and how much is price/cost? Because no longer we have the services mix benefit, right? So I'm just curious about the moving parts within organic.

[Helena Hedblom, executive]

But I think on the organic side, of course, we have a growing digital business. And so it's, of course, partly that those acquisitions that are growing with a margin that is step-by-step improving, but not to the same level as I would say, the other business. But then we also have this, I would say, different components of service that I explained earlier as well, of course, depending on how we -- how we grow the different parts, we can also have an impact there. But also there, we have, well say, the cost increase.

[Hakan Folin, executive]

So an overall cost increase, which then is higher than the price increases that -- we're still seeing price increases, but the cost increases, obviously, labor, et cetera, has been high over the last year.

[Klas Bergelind, analyst]

And then just my final question on this. You're talking about sort of -- I think you said, if I heard it correctly, that SG&A is now sequentially lower ex-currency. So step by step, you are improving on the OpEx. But obviously, it's not a weak market. So you can't cut OpEx too hard. So yes, coming back to the earlier question really, I'm just trying to understand like can you give us some sort of hint that SG&A to sales ambition into the second half. We have the gross margin, we can calculate that, but just so we get the OpEx level in the right place?

[Helena Hedblom, executive]

I think as we -- it is very much a mixed picture. If we look on it organically overall, we are up 1%. So the mining is -- the strong mining is very much compensating for the -- the softer construction. And the pipeline looks very solid. So this is also where we need to be very, let's say, precise in what we're doing because otherwise, we can jeopardize or say, the mining activities and the growth in mining. So where we are focusing our et say, efforts is very much in the areas -- areas where we are not performing.

So that could be in a specific service contract. It could be one product. It could be one factory, et cetera. So that is the type of preciseness we are working towards. And that's -- it looks -- okay, it's a rough number when you look at the total number of employees that is going out, but it's very precise, I would say, to address where we have the challenges without jeopardizing the long-term growth, without jeopardizing the long-term position from a technology leadership standpoint.

[Klas Bergelind, analyst]

Quick final one just on the SEK 950 million of large orders in mining. There was a bigger share of unannounced orders this quarter. I mean, I think you only announced SEK 215 million. And so it was a little bit difficult to track sort of where you got these, et cetera. Could you comment, Helena, like where do you see this increased activity? Because it is quite a big step up quarter-on-quarter in mining, while construction is getting weaker.

[Helena Hedblom, executive]

So several of them came from Africa. So we had good large orders from Africa that is existing customers ordering more, but also Asia as well as Australia. The one in Australia, which was sizable, that was a replacement order, which is, of course, super good to see that we continue to that our customers continue to trust us.

[Operator]

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

[John-B Kim, analyst]

Just a question around activity levels and velocity in Q2. Given the uptick in copper pricing in the period, how would you characterize how that actually translated into your Q2 numbers? And is it -- it's fair to say that the pricing should get better through these quarters as production expansion is tight, but copper pricing is stronger?

[Helena Hedblom, executive]

I would say it takes longer time for the market to say, for us to see it. But if you -- what -- the correlation is very often, if I look historically, what we have seen with higher prices, of course, we see increased activities in exploration, but also we see customers drilling more hours.

So pushing the machines, trying to maximize the output and that you can see then on drilling consumables towards mining. And you can see that on different type of services like rebuilds and trying to bring the right equipment up to the say, the highest possible productivity level. So short term, that is what we -- what we expect is very much on the aftermarket where you can see, let's say, higher push and more focused efforts from our customers.

Unfortunately, there when it comes to consumables, and that is we say, the other way around when it comes to construction, of course, we have lower activity levels on the construction equipment that we have out there, and that, we say, lower activity levels there on -- you see that as well when it comes to number of drill meters in construction is trending down, which offsets this increase in mining. When it comes to pricing, we don't -- say -- our own pricing work is very much tied to our capabilities when it comes to innovation, the value that we deliver, et cetera. So we don't would say -- we don't -- we work independently on where the prices -- where the quality prices are with our pricing activities.

[John-B Kim, analyst]

Okay. Helpful. And previously, I believe the equipment business was impeded a bit by units either waiting for export logistics and/or being stuck at final production centers for parts certification. Can you comment on that as to whether that's the same, better or worse?

[Helena Hedblom, executive]

So that is improving. So we have put a lot of focus on that in the last quarters to open up the bottlenecks to improve our, say, flow-through in these workshops in the different parts of the world. So we see that, that is turning in the right direction. That is also supporting then the revenue on equipment. And together, also the improvement in inventory level organically is also coming from the equipment side that we have managed to get more equipment out.

[Operator]

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

[Benjamin Heelan, analyst]

I just wanted to go back to the Equipment & Services margin comments. So you talked about mix within service. Can you help us understand what in service is lower profitability and what is higher profitability? It sounds from your comments that these midlife upgrades have been growing very strongly. And the implication there would be that they are just not as profitable as the rest of service. So if you can actually help us understand that what is it within service that is driving these mix headwinds?

And then I guess the second comment you talked about a general cost increase across the business. Can you talk about the components of that? You talked about labor, but what are you seeing on freight, what are you seeing on raw materials and component costs? If you could just give us the color around that, that would be super helpful.

[Helena Hedblom, executive]

Yes. So on mid-life, the -- I would say the quarter when you do the mid-life, then you have a lower margin. But of course, you have prolonged the life of that machine, which leads to maybe another 3 years of parts consumption. So over that life of that equipment, that is consolidated a good business. So that is what we need to be, the service products that's a way of prolonging and making sure that you actually use more large components over the life cycle of the machine.

So I would say that the mix effect we're talking about is related to some -- to that we're growing nicely on this midlife rebuilds, but also the digital business. As we have commented, we are growing faster on that -- on that business, which is, of course, great, but we are not there yet margin-wise where we -- so that -- so it's creating a dilution, if you would say, like that for a mix effect.

When it comes to cost increases, of course, labor is one component. I think freight cost, we see trending down. So that one is, I think we are addressing. We're also doing a lot of work on the direct material, as I mentioned in my presentation. So there's a lot of focus on the direct side on COGS, so to say, which is a big portion of our cost actually. It's a big part. So that we're putting a lot of efforts into that area as well.

Do you want to add anything, Hakan? Have I forgotten anything? No?

[Operator]

The next question comes from Magnus Kruber from Nordea.

[Magnus Kruber, analyst]

A couple of questions around the head count reduction we saw in the quarter. Could you add some color on when those came through, if there are any additional head count reduction coming through outside of STANLEY in the coming quarters? And ideally, if you could add some color to what that meant for our -- in the profit bridge in the quarter?

[Hakan Folin, executive]

So the 450 head count that went out in the quarter came gradually throughout the quarter, which means that from a cost point of view, we have not seen the full impact of those 450 yet. That will be seen starting basically from July.

And then we also said that we expect during the second half of the year, additional approximately -- approximately in the same level reductions throughout the rest of the year. And what we mentioned was we are looking at consolidating the footprint of STANLEY Infrastructure and taking down the number of people there, we said that's around 130 people. So then of course, there will also be quite a bit outside of STANLEY Infrastructure during the second half of the year.

[Magnus Kruber, analyst]

Okay. So you have 450 now and then an additional 450 for the balance of the year?

[Hakan Folin, executive]

In the same level. It's not going to be exactly 450, but it's ballpark.

[Magnus Kruber, analyst]

That's fair enough. And so far, there's been a lot in Equipment & Service. Could you say a little bit anything about the regions or the profit bridge impact so far that will be helpful to sort of for the rest of the year?

[Hakan Folin, executive]

Yes. If you look at the -- actually in Q1, we were down around 100, and then we said it was more into attachment given that that's where we saw the weakness first. And then when we saw a weaker margin in Equipment & Service, we acted there as well. So in Q2, more than half of these 450 are within Equipment & Service. Going forward then, as mentioned, around 113 in STANLEY, but then the rest is spread. There's some more interesting attachment, but there's still more in Equipment & Service.

And geographically, I would say it's a little bit everywhere. It's where we have people, you can say. It's in our production facilities, where we have reduced additional workforce. We have also reviewed service contracts and where some of them have not been as profitable. We have reduced our staffing in manning in those and exited some of them. And service contracts can obviously be anywhere in the world. So you cannot really say it's exactly in this geographies. It's quite well spread actually.

And then like Helena said before, is that since we are still growing, we have an organic order intake on group level. We have a 3% on Equipment & Service. We need to be rather precise here. We cannot just do one size fits all, but we need to see where are we at the moment growing, where are we not growing as fast, how can we make this as pinpointed as possible.

[Helena Hedblom, executive]

So the last question, I suppose?

[Operator]

The next question comes from James Moore from Redburn Atlantic.

[James Moore, analyst]

I wondered if I could ask within the service margin. And looking specifically at digital. Is that still broadly at the same level? Or is it sort of heading in the wrong direction at the moment or starting to head in the right direction? And what's the time frame on digital? That's the first question. Maybe we start there.

[Hakan Folin, executive]

I would say it's heading in the right direction. So we are seeing progress if we compare with where we have been before. We are seeing that -- we have increased sales, as Helena mentioned before, and we also see profitability moving in the right direction.

Time line, I would say it varies. This digital business comprises very much of acquisitions, some of them being very mature and profitable from day 1 like RCT that we mentioned before. And some of them being more start-up companies and smaller companies. So it's hard to say that it doesn't really follow a specific curve. It really varies by entity we have acquired. But on the other hand, our expectation is that we should see a gradual improvement. If we look at this at as one bulk, we should see a gradual improvement within the digital business quarter-by-quarter.

[James Moore, analyst]

And could I switch to T&A? Just the weak margin. I listened to all the actions and the bridge comments, a lot of moving parts. But broadly, as we move into the second half, is that still going to be a challenged period for profitability? And could we end up being at a similar level to where we are now on an adjusted basis? Or do you expect that to already start to pick up with the actions in place?

[Hakan Folin, executive]

I think if we -- let's assume that the market stays exactly where it is right now, which we obviously don't know. But Helena mentioned before, we don't really see any green shoots. So let's assume it stays exactly here. Then we are taking a lot of actions, which means that when those actions kick in, we should start seeing an improvement in profitability as well for G&A.

[James Moore, analyst]

And is there a sort of an anchor target for what you think an entitlement margin is once we get to the cost base that you aim to get to within your plans, whether that's in '25 or '26 that we could somehow anchor often forecast getting back to?

[Hakan Folin, executive]

Well, I would say, we want to see the improvement of these actions already towards the end of the year. But then we are also -- the actions will help from where we are at the moment. But on the other hand, if we're really going to see an improvement in the Tools & Attachments segment, we also see -- need to see the market bounce back.

[James Moore, analyst]

That's fair. And just lastly, on copper deficit. Helena, you've mentioned your thoughts on the '25 deficit over the years. We're getting closer. Do you think now with what's clearly been potentially arguably, a worse-than-expected construction environment given interest rates and China being pretty sluggish and those two blocks being a large proportion of the world's copper demand say versus EV, solar, battery, wind and the like, do you think that deficit is now sort of pushing to the right? Or do you still feel like that is a natural point?

[Helena Hedblom, executive]

I think it is, because I think we also need to remember that the time line before you find an asset you start -- you start to explore it, you start to do the investment. There are maybe 2, 3 years just to put the infrastructure in place before you actually can get to start to get production up or actually -- or out.

So I think time is ticking, but of course, I would say everyone is -- and I think that is why we start -- continue to see everyone trying to push brownfield more and more because as long as you can do that, that is, of course, less risky way of expanding. But at a certain point, you will run out of ore, and you will have to invest in greenfield.

[Karin Larsson, executive]

We will provide more color at the Capital Markets Day on the copper outlook in our view. And I unfortunately need to interrupt you guys here because it's 2. And I know all of you are eager to listen to someone else now. But thank you very much. We will all be here for you, [ Alexander ], Helena Hakan and I. Have a nice summer, and we wish you successful investments. Thank you.

[Helena Hedblom, executive]

Thank you, everyone.

[Hakan Folin, executive]

Thank you very much.