Epiroc AB

STO:EPI A

Earnings Call Transcript 2022-Q3

[Karin Larsson, executive]

Hello, everyone, and a warm welcome to Epiroc's Q3 Results Presentation. My name is Karin Larsson, I'm Head of IR here at Epiroc. And with me today I have our CEO, Helena Hedblom; and our CFO, Hakan Folin. We will do like we always do. That means that Helena and Hakan will briefly present the results before we do a short Q&A session and that will be done over the phone. All in all, we have 1 hour for the presentation today. And I know you are all eager to hear more about this strong set of results.

So without further ado, Helena, please the stage is yours.

[Helena Hedblom, executive]

Thank you so much, Karin. And also from my side, welcome. Yes, it was indeed a strong quarter. Demand remained high. Excluding Russia, the order intake increased 5% organically. The aftermarket developed well with particularly strong growth in service. Orders up 22% organic year-over-year. We also won a handful large equipment orders totaling more than SEK 1 billion and many of them included automation, digitalization and electrification solutions. And these solutions help our customers to increase safety and productivity as well as lower emissions, which is critical regardless of business climate. We have published 3 large orders, but we have also some smaller ones worth mentioning. In Africa, we got an order for our collision avoidance system for more than 60 underground machines to increase safety. And in Australia, JTMEC, one of our recently acquired companies got their largest order ever for electrical infrastructure solutions for a tunneling project, about SEK 70 million.

We also successfully managed to increase the output in the quarter despite supply chain challenges and this translated into record revenues. We also did well on compensating for increasing cost and this led to a record adjusted margin. So profitable growth indeed. So we are a productivity and sustainability partner to our customers and together we drive the transformation in the industry. We emphasize innovation and we continuously expand our offering and we also complement our innovations with acquisitions that accelerate our efforts. We have signed 5 acquisitions this quarter, which shows that we are executing well on our acquisition plan and we have more in the pipeline. So I will tell you more about innovations and acquisitions later on. Briefly then on the financials as Hakan will present more details later on. Reported orders were SEK 12.3 billion and all orders in Russia have now been removed from the order book.

Excluding Russia, our orders were SEK 13.3 billion corresponding to an organic order growth of 5%. Revenues increased 28% to a record high SEK 12.8 billion corresponding to 12% organic growth. Our reported operating profit was also record high at SEK 2.9 billion. We took another provision related to Russia amounting to SEK 150 million and the adjusted margin was 23.9%, up from 23.4%, also a record. The cash flow came in at SEK 1.8 billion versus SEK 1.6 billion last year, not bad but I think we can do better on working capital going forward. So now some comments on innovations, attractive acquisitions and partnerships that strengthen our leading position. I will start off with innovations. We have launched our new Boomer E10 and E20 face drilling rigs and they are suitable both for the mining and construction industry. So with teleremote features, the operator can now monitor the machine safely from a control room and still be as much as 25% more productive.

Both rigs are available with optional battery electric driveline for 0 emission tramming of course. Another interesting innovation is the Auto Bolt Reload. In short, it is automation for bolting and it removes the need for manual interference and this is key for operator safety. Since the end of June, we have been very active on the acquisition front with 5 completed or announced acquisitions. We started off with RNP Mexico. They develop, manufactures and sells rock drills and related component serving both mining and the construction customers mainly in Latin America. AARD Mining Equipment, they are specialized in low profile underground machines and they complement our underground offering and strengthening our position in Africa. Then we have RadLink, they provide wireless connectivity solutions and robust wireless networks are vital to support mining automation, including autonomous and teleremote solutions and digitalization, which in turn strengthen safety and productivity.

Then we have Geoscan. Geoscan provides digital geological imaging solutions to mining companies and complements our current offering within ore body knowledge and ore body knowledge is very important to make the whole mining process more efficient. And finally, Wain-Roy will strengthen our presence in the North American construction market and increase our capacity for manufacturing advanced attachments in that region. So all in all, this means that we are executing well on our acquisition strategy, which is very pleasing to see. And all these companies will strengthen our market leading position and our aftermarket footprint. So a warm welcome to our new colleagues. And before I move to the next slide, I want to mention our green bonds. We issued green bonds amounting to SEK 2 billion in September. There was considerable interest and the proceeds will enable us to finance sustainable investments and achieve our sustainability goals for 2030, including halving our CO2 emissions.

So now we will take a look at the aftermarket. The customer activity was high in the quarter and our service business developed very well with strong growth. Excluding Russia, the orders for service increased 22% organically and the growth reflects the high activity level, larger rebuilds and a meaningful order within electrical infrastructure as I mentioned in the beginning. For Tools & Attachments, the development on orders excluding Russia was more or less in line with the previous year. We do see a somewhat lower order intake for attachments and exploration tools, which were very strong last year. On the positive side, it's good to see that we are reducing our orders on hand and we are shortening our lead times. An enabler to grow our aftermarket is connectivity and the number of machines delivered with connectivity is growing. Another way of growing our aftermarket is to have the most skilled service technicians and currently we have roughly 6,600 around the globe.

And to increase customer focus and build even stronger relationships, we will establish regional Parts & Services divisions as from 2023. And the regionalization of the service business will also improve internal performance and efficiency; in short, increase operational excellence. And we are in constant improvement mode as you know. Over the last few years we have changed our supply chain, we have created a more focused organization and realized our distribution network and we have seen some good results despite the challenges within the supply chain. We have improved in availability, we have reduced environmental footprint as we ship less with air freight and in Q3, we also successfully managed to increase equipment output from our factories. Our ambition going forward is to continue to improve availability, efficiency and inventory cost. We always strive to do better.

And that leads me to the topic of sustainability. In a world where speed and digitalization are ever more important, it's vital that we attract the right people to future-proof our organization. This includes attracting and retaining people that are collaborative, creative and adaptable. And for this, we need to utilize the whole talent pool and it's pleasing to see an increased share of women employees and women managers in Epiroc. It's less encouraging to see the development within safety. The total recordable injury frequency rate has increased compared to last year and we are now increasing our efforts even further to bend this trend. This includes additional training and dedicated task force teams for certain entities. We must make sure that all Epiroc employees come home safe and sound after a working day. On carbon emissions, the trend is better. In our operations, we decreased our emissions and in relation to sales. We also decreased our emissions in transport.

However, in absolute numbers the emissions from transport have increased as we deliver higher volumes. And then a few words on Russia. It has been more than 8 months since the war started in Ukraine and it is truly horrifying. We stopped all deliveries to Russia on March 1 and it is our assessment that it's currently not possible to conduct business in the country. So all orders in Russia have been removed from the order book, which impacted the reported orders received with SEK 1 billion. We also took a provision of SEK 150 million in the quarter, which is in addition to the provision taken in the second quarter of SEK 400 million and the provision is related to receivables, inventories and restructuring cost.

So Hakan, please guide us through the financials.

[Hakan Folin, executive]

Thank you very much, Helena. Let me start with operating profit. It was very strong at SEK 2.9 billion negatively impacted by the provisions related to Russia of SEK 150 million and also a change in provision for the share-based long-term incentive program of SEK 40 million. Adjusted for this, the profit was above SEK 3 billion, which is the highest level ever for Epiroc. On the margin side, we had tailwinds from the strong organic growth but acquisitions and currency diluted. The adjusted operating margin was 23.9%, up from 23.4% last year and it was also record high. Looking into the bridge, the profit is rather straightforward with a strong organic contribution. The margin impact from currency, however, might be different from what you had anticipated. Currency was positive in absolute contribution to profit plus SEK 216 million, but negative on the margin side and this is largely explained by period-end effects when revaluing local inventory.

If we then move on to Equipment & Service. Excluding Russia, the orders received were SEK 10.5 billion corresponding to an organic order growth of 8%. Currency contributed with 12% while there was no contribution from acquisitions. Previous years included order on hand from acquired companies of approximately 3% and then we reversed that in the bridge and that's why we get the 0%. For equipment excluding Russia again, the orders declined 7% organically. As Helena said, we had a handful of large orders amounting to more than SEK 1 billion. And the orders are rather diverse when it comes to matter and geography, but it's clear that our customers seek solutions to increase their productivity, safety as well as improving their carbon footprint. For service excluding Russia, the orders increased 22% and this is of course really strong. The growth reflected a high activity level in both the mining and construction segment.

Revenues were also strong at SEK 9.8 billion as was the adjusted operating profit, both record high for Equipment & Service, and the adjusted margin was 26.2%. Acquisitions and regional structure, Helena has already covered that so I will move on to the next slide. And also here the profit is rather straightforward. We started with SEK 1.9 billion last year. We add SEK 480 million in organic contribution and then another SEK 159 million from currency. And then we have the structure, which is mainly then the provision related to Russia impacting negatively. Reported operating profit of SEK 2.4 billion and adjusted them for the provisions, it gives us a record high profit of close to SEK 2.6 billion. Adjusted margin of 26.2% was marginally lower than last year and here the positive contribution from organic growth was offset by a negative effect from currency. Dilution from acquisition was small, around 30 basis points.

Moving on then to Tools & Attachment. And if we exclude Russia here as well, orders received were SEK 2.9 billion, which correspond to an organic order decline of 2%. Last year one should remember we had a very strong organic growth of 14% so comparables are rather tough here for Tools & Attachment. Currency contributed with 12% while acquisitions were negative minus 5%. And again here previous year in the bridge included orders on hand from acquired companies of approximately 7%, which we then reverse now in the bridge. Revenues increased 12% to SEK 3 billion and this was almost entirely due to currency and the adjusted margin was record high at 19.2%. So what has happened then if we look back here in the bridge. Well, the positive effect year-on-year came mainly from currency plus SEK 74 million. Once we add back the provision related to Russia, we have a profit of SEK 583 million.

The adjusted margin increased to 19.2%, which is mainly then due to this positive currency contribution. And there was no impact dilution or accretion from acquisition. So is this margin sustainable you might ask? Well, we don't provide guidance on margin, but we are very pleased to say that Tools & Attachment now have 5 quarters in a row with a margin above 18%. Looking into cost, they are higher. The reasons are a combination of currency, acquisition and we also continue to invest in the business with more activity in marketing and R&D. The high activity level is also reflected in higher cost for logistic resources as these are included in admin cost. However, if we look in relation to revenues, the costs are relatively stable and they're actually somewhat lower than what we saw in Q2. Net financial items were minus SEK 24 million. Last year they were positive and there we had a positive exchange rate difference.

The interest net was SEK 23 million and given the overall higher interest rate level, this will be somewhat higher going forward. We have an effective tax rate of 22.0% and looking ahead, an effective tax rate for us will be roughly between 22% and 24%. We continue to deliver solid operating cash flow and in this quarter it amounted to SEK 1.8 billion, somewhat higher than last year. In the table we see that the change in working capital was more negative than last year and I will cover that also on the next slide and this is the main reason as to why the cash flow isn't even higher than Q3 last year. So on the net working capital then. Compared to the previous year and excluding acquisitions and currency, net working capital increased 23% to SEK 7.7 billion (sic) [SEK 17.7 billion ]. The increase is mainly in inventories as explained by growth and in combination with challenges in the supply chain. The average net working capital in relation to revenues in the last 12 months is now at 30.4%. It's up from 29.8% last year.

And you can trust me, this is very high on our agenda. I feel encouraged by the fact that we managed to increase our output in the factories this quarter and we strive to continue to do that also in the fourth quarter. Return on capital employed improved compared to last year to 27.9% and that's an increase of almost 3 percentage points. Our financial position remains strong. We have a net cash position of SEK 1.5 billion and a strong financial position allow us to invest in organic and inorganic growth and we are quite active when it comes to acquisition as you heard from Helena before. In the near term we will close and pay for 3 acquisitions and also we will pay for the second part of our annual dividend. And actually this dividend will be distributed tomorrow, SEK 1.5 per share and in total SEK 1.8 billion.

So Helena, that was it for me and back to you.

[Helena Hedblom, executive]

Thank you so much. So to briefly conclude then this strong quarter. We have won several large orders that improve safety, increase productivity and lower emissions. And we have yet again a strong service business. We have successfully managed to increase our output despite the supply chain challenges and we deliver profitable growth. We have acquired several companies proving that we're executing well on our M&A strategy. And finally, by collaborating closely with our customers, partners and innovation leaders in other industries; we drive the transformation of the mining and construction industries. So together, we make it happen. And also to conclude, a few words then on what to expect onwards. So we expect that the underlying demand both for equipment and aftermarket will remain at a high level in the near term. But that said, the economic uncertainty with rising inflation around the globe makes it increasingly important that we remain agile and resilient in Epiroc. And our long history of the centralization and our close customer relationships serves us well.

So over to Karin then and we will start the Q&A.

[Karin Larsson, executive]

Thank you, Helena. Thank you, Hakan. Well done as always. It's time for the Q&A session and we will do it over the phone as we always do. And to me, operational excellence in the Q&A session means that you keep your questions short and we keep the answers clear.

So operator, please open the line.

[Operator]

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

[Klas Bergelind, analyst]

Klas at Citi. So my first one is on the equipment side. Obviously it's great to see the service business yet again showing strong growth, but I wanted to zoom in on the equipment business ex Russia. We know that orders typically are weaker quarter-on-quarter into the third, there is some seasonality in there. But you're singling out it seems like, Helena, North America now being weaker. Is that also linked to the construction infra side or is it mining? Also did you say large orders were over SEK 1 billion? I think I heard same as second quarter around SEK 800 million when I put up the call in before, but might have been an equipment comment not group.

[Helena Hedblom, executive]

So I would say so we have seen a softening of the construction market in North America and, as you know, that's a big, big portion of the, let say, equipment or a big portion of our market there. The softening was there as well as in China on the equipment side. And of course when you're comparing quarter with a previous quarter, you can always have these large orders that plays with the numbers I would say. But if we look on the equipment orders in total, we continue to see roughly half -- these expansion orders, roughly half is replacement orders if you look on it from a total perspective.

[Klas Bergelind, analyst]

Okay. And it was SEK 1 billion total group and then yes, that was on the large side, right? Yes, okay. My second one is on services. I doubt that you have seen this already given the organic growth that you deliver at the moment. But we're getting some questions on potential pushouts of rebuilds should we enter a recession and I appreciate that the miners are focusing on productivity right now and this business is growing very fast for you. But it has really been a positive decoupling versus production rates last couple of years. And I just wonder, Helena, if you could help us maybe a little bit with how much is rebuilt relative to spare parts and service contracts right now of your orders.

[Helena Hedblom, executive]

It's contributing well not only normal rebuild, but also the service product that we have developed over the years. I don't share that view that we see that customers are pushing that out in time. I would say it's the other way around that we see more and more rebuilds and that is of course to keep up productivity waiting for machines to be delivered and to keep productivity up for our customers. So we have not seen delays when it comes to this type of rebuild, contrary I would say.

[Klas Bergelind, analyst]

Yes. But if you look back on the previous downturns, I know that you don't see it now, it's the contrary. But is this a risk to the service growth as you enter recession or are we going to see the decline more on the equipment side and then rebuild keeps going?

[Helena Hedblom, executive]

I think rebuilds will keep going especially if you include -- it's not just rebuilds and you put the same machine back. When you include also new features, it's a way for our customers to improve productivity or safety much faster than waiting for new equipment. It's also the difference between OpEx and CapEx for our customers. So I don't see that we will -- I think this trend is clear. And also from a sustainability perspective and a circularity perspective, it's a win-win.

[Klas Bergelind, analyst]

Okay. Very quick final one on the share of battery electric. If you can help us with how much of orders in our battery electric versus year-ago and we heard from one of your peers of a pretty big step-up here in the teens and also if battery-as-a-service is still around 2/3 of the order and your quotations and to what extent you recognize the revenue stream in the equipment division more relative to service? I think that's the case, but it would be good to get an update.

[Helena Hedblom, executive]

So year-to-date, clearly electrification is taking off both on the equipment side and we have also other product now with electrical infrastructure as we have talked about. It was really pleasing to see that large order of SEK 70 million that we landed in the quarter. It was the largest order ever in that for those type of products. We continue to see majority of our customers, they choose battery-as-a-service so that is good. The revenue you see in equipment.

[Klas Bergelind, analyst]

Okay. And no share in total.

[Hakan Folin, executive]

I'm trying.

[Helena Hedblom, executive]

Not yet.

[Operator]

Our next question comes from the line of Guillermo Peigneux of UBS.

[Guillermo Lojo, analyst]

Maybe a couple of questions from my side. One is a little bit of a bookkeeping one with regards to your backlog margin. After excluding Russia, is that accretive or dilutive to your backlog margins overall? I'll stop there and ask the second one later.

[Helena Hedblom, executive]

You mean if we have managed to increase prices to let's say compensate for the increased cost. I think when we look, we have been very active now for many, many quarters since it has been so dynamic environment with increased cost and the organization has done a tremendous job in protecting the margin as you can see. So I feel very comfortable that we have done a good -- we have done our homework when it comes to pricing and we continue to be very active since it is a dynamic environment.

[Hakan Folin, executive]

I guess maybe if I understood you correctly, your question was more on the profitability in Russia and if it will change now when we don't have Russian orders being delivered. I mean Russia was a big and large market for us, but we don't comment on profitability by specific end markets.

[Guillermo Lojo, analyst]

That was my -- I think Helena answered my second question so I don't need to ask it again.

[Hakan Folin, executive]

That's how good she is.

[Operator]

Our next question comes from the line of Max Yates at Morgan Stanley.

[Max Yates, analyst]

Just my first question was around your supply chains and obviously you have a fairly outsourced business model. So I just wanted to understand where do you buy most of your components from because we're hearing across Europe quite a lot of increases in component costs and particularly from European suppliers given higher energy costs? So I just wanted to understand a little bit around your supply chains, whether you are seeing any sharp increases in your component costs. And I appreciate while we're not seeing any impact now, is there a risk that maybe over the next couple of quarters some of the orders taken earlier in the year maybe see a bit of margin pressure and how you go about managing that? So that's my first question.

[Helena Hedblom, executive]

So we have for a number of years now been, I would say, maximizing the potential with our footprint. So we have a strong production base in U.S., 1 in Europe, then we have China and India. So we have moved quite a lot of volumes from Europe actually over the years especially on equipment to both China and India and of course the sub-suppliers are following that footprint to shorten lead times and I do see that, that work will continue. So we are -- I think we have a good spread from a risk perspective when it comes to the supplier base today and we're better positioned today than we were a couple of years ago. But I share your view that we have seen steep increase on cost mainly in Europe.

So of course this is something also to continue to work on and source closer to the end market, which we are busy doing in the supply chain setup for the aftermarket as well. And that of course reduce transports and lead time, et cetera, and tied capital so it goes hand in hand. So I really see that regionalization both from production footprint as well as from sourcing of the components into the aftermarket, that is the way forward and it's something that we have been working with for a number of years now.

[Max Yates, analyst]

Okay. And just my follow-up was around you talked about sort of changing the setup in Tools & Attachment to more of a regional one and the work would start on that next year. Could you just elaborate a little bit just on how it's set up today, what the changes look like? And should we think about sort of the potential financial benefits here being kind of faster revenue growth or is this more something where you feel you can improve profitability? Just a little bit of color around that would be helpful.

[Helena Hedblom, executive]

Yes. So for Tools & Attachment, we have already a very good footprint with factories in all regions, but we have not really maximized the potential producing all different products in all these factories. So that is what we are planning to do and executing on as well and it's not really to get the cost down. I think that is not the main purpose. It's really lead times, shorter lead times since these are heavy products and you need to ship by sea. So it's very much, let's say, to consolidate those type of product so that you could use them closer to the end market.

Then I would say another thing that we're also doing or preparing for is the regionalization of the Parts & Service division as you have seen. We have announced that and we are preparing everything now to be ready from 1st of January next year. And that comes with the same logic to be closer to our customers, that will give more focus when it comes to interacting with customers, better efficiency and the supply chain will then follow the aftermarket and that regional structure as well. And that is how we have transformed the supply chain over the last couple of years into a more regional setup. So this is to enable continued focus and so good growth in the Parts & Service business as well.

[Max Yates, analyst]

Okay. And so it's a very quick housekeeping one. Can you quantify the FX revaluations that you had in the quarter and so what FX sort of should have been excluding those?

[Hakan Folin, executive]

We don't go into exactly those details. But like I commented on before, we were -- you can say we were also expecting more contribution from the FX than what we had in the quarter. So it's still positive in absolute terms as mentioned SEK 260 million, but then slightly dilutive on margin. And it is always a bit depending on the exact rate on the exchange date, et cetera, and it's a bridge so it's a comparison to last year as well, which makes it a bit more complicated than one might think.

[Operator]

Our next question comes from the line of Andre Kukhnin at Crédit Suisse.

[Andre Kukhnin, analyst]

It's Andre from Crédit Suisse. Firstly, on Tools & Attachments, the order run rate there kind of ticked down a little bit and I understand this is due to your early pricing action and some selectivity. Could you help quantifying that impact if possible at all? And primarily is competition following your early price move?

[Helena Hedblom, executive]

First, I think we should remember that we have quite tough comparison as Hakan mentioned. We had really strong growth last year and I think there are certain segments or certain products in the Tools & Attachment business where the cost increases for material have been material and we have compensated with pricing to protect the bottom line. And that of course means that certain deals you have to walk away from to protect the margins. We are in the profitable growth business and that is the way forward for us. And it is, as I said, also very dynamic when it comes to pricing. And I think when you look at our performance in this division with that steep increase of the ingoing cost, I think they have done a tremendous job in protecting the margin. And you also know that we have been working for many, many years to get up to this level where we are at right now.

[Andre Kukhnin, analyst]

Yes. Got it. And on the connected remotely monitored devices, can you provide any numbers on that on how many units you do have in that portfolio that have kind of connected and remotely monitored and how that's evolved in last 6 to 12 months?

[Helena Hedblom, executive]

So it's growing every quarter. We have more than 7,000 connected machines right now, which gives us very valuable insights both when it comes to the activity levels out there of course, but also the consumptions of tools, attachments and parts. So it's growing every quarter. And I think we started this journey 4 years ago and then we were more or less at 0 so it's growing quite fast. All machines that leaves the factories are prepared with connectivity and then we also retrofit.

[Andre Kukhnin, analyst]

Great. And the last one, just a follow-up on Max's previous question. I wondered if that change to regionalization of your Parts & Services division and Tools & Attachment, does that differentiate you versus competition or is this how competition is set up already?

[Helena Hedblom, executive]

It's not to my knowledge how our competition have set up. I strongly believe in focus. If you look on the last 5 years, the Parts & Service division has been growing in a tremendous way and our ambition is to continue to grow it with very good numbers and then we strongly believe that regional setup will serve us well into the next phase here to continue this journey.

[Operator]

Our next question comes from the line of Vladimir Sergievskii at Bank of America.

[Vladimir Sergievskii, analyst]

A few questions on the outlook, if I may. First on new equipment, just thinking about the backdrop, right? Your customers are seeing declining earnings plus uncertain macro and at the same time cost of building new projects actually have gone up a lot. So under this backdrop, is it possible -- is there a chance that customers just stop converting the pipeline and we see an air pocket in orders? Do you see any risk of that and do you see any signs of that? That's the first one.

[Helena Hedblom, executive]

When it comes to our order stock on equipment mainly, we always look and do a risk assessment of that order stock and we don't see a risk related to that. And with the lead times we have had, many of these equipments are related to expansion projects that will move ahead. So I don't see any larger risk in that order stock should the environment change.

[Vladimir Sergievskii, analyst]

I'm more asking about the new projects, right, the new orders for new equipment. Is it possible that there will be a slowdown in project sanctioning, the projects which are not sanctioned yet, and therefore obviously a slowdown in the inbound orders specifically?

[Helena Hedblom, executive]

I think if we look on -- the commodity prices are still holding up well. Then, as you say, the cost for our customers are also going up. I think it will differ between the different commodities. If we look on some of the commodities, if we take copper for example, there must be more copper mines or copper assets coming on board in the coming years also to keep production at the same level and to be able to deliver upon the green transformation for the world. So I still believe that there will be need for expansion projects. And if you look also on the mix on the capital equipment side for us on orders, half of it is still expansion project. Then as always in a tougher market environment, it's more likely to do brownfield expansion than a greenfield expansion.

[Vladimir Sergievskii, analyst]

Makes sense. And perhaps the last one for me on the more positive side on services. Last year is obviously exceptionally strong order levels, right, and nice quarter. Obviously you are telling us the equipment is running hard. At the same time if we look at the miners' production targets, they all be missed. How do we reconcile those 2 things? And just maybe a question on sustainability of this SEK 6 billion plus of services orders going forward?

[Helena Hedblom, executive]

And of course also the equipment, the fleet out there is growing older so that consumes more parts. We also have a stronger offering now when it comes to rebuild that we did not have before so that is also supporting the growth. But then it's also this very hard work that we're actually taking customer share. So it's not only of course the activity level is not 22% up in the quarter if you look on -- if you compare with output in the mine. So it's a combination of us doing a good job in capturing more shares, our new products and also contribution then from everything we have been doing over the last couple of years; investing in workshops, training our technicians, taking on more and more service contracts, et cetera. So it's a combination of many different things.

[Operator]

Our next question comes from the line of Nicholas Green at Bernstein.

[Nicholas Green, analyst]

Nick Green at Bernstein. I'd like to talk about order intake, please. I'm just trying to get a little bit of clarity around the movement in order intake. The Russian adjustment has been done in quite an unconventional way deducting the Russian sort of -- the removal from the order book, deducting it from intake does complicate the numbers quite a bit. And I think in your table on Page 22 where you show the European order intake is down 72% for the year.

It will be nice to try and work out what that real data point should be because from my understanding of looking into it this morning, we're not comparing apples with apples here. The Q3 comparative last year does include Russia, the Q3 comparative this year doesn't include Russia. So maybe if you can just try and delve into this a bit. I would say roughly on our numbers, it looks like something like 16% year-on-year reduction in Europe, but that would include an FX benefit presumably. So maybe beneath this, there is still quite a large reduction -- decline in European order intake. Can you clarify or validate whether that is the case?

[Helena Hedblom, executive]

Do you want to start?

[Hakan Folin, executive]

On the table, just I think you got it right. Maybe we're just talking about it differently. It does include Russia, but then for Q3 this year of course Russia is negative with SEK 1 billion as we said before. So that's where you get this minus 72%. Then on the demand as such in Russia, I will try to get...

[Helena Hedblom, executive]

I think what we have seen is when we look at the comparison also weaker for attachment in Europe and construction related in Europe.

[Nicholas Green, analyst]

So do you feel then the -- because the Tools & Attachment business didn't really have a great deal of exposure to Russia to my understanding. So remind us...

[Helena Hedblom, executive]

Not Russia, but Europe.

[Nicholas Green, analyst]

Yes. Okay. So the minus 37% we're seeing in Europe Tools & Attachment, do you feel that's a fairly representative data point of the organic decline that you've seen in Europe in this quarter?

[Helena Hedblom, executive]

I think we also need to remember we had extremely strong growth last year in Europe related to attachments. So if you just look on that product line, we had tremendous growth in Europe. But maybe we can come back with more details to you after the call.

[Operator]

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

[James Moore, analyst]

I've got 1 conceptual question and then one somewhat technical on price. Maybe I can start with price. Is there any chance, I know you don't disclose that but you did for 20 years in the old Atlas format, you can give us some of what the gross pricing is doing at the moment given the current inflationary topics on the planet? And then also could you just help us understand how the net price accretion dilution has been moving. I'm not expecting you to give a net number, that would be great. But just more was it more dilutive a couple of quarters ago, you now breakeven? And if they are current inflationary prices as we move forward, you might expect to be more accretive. Just trying to understand how that's shifting and impacting margin. First on price and then maybe I'll come back on the second one.

[Helena Hedblom, executive]

I think on pricing we're not sharing the numbers. But if you look over the last year I would say with the very dynamic situation we have been in, of course it's much -- you can be quicker in adjusting pricing in the off-market and that also translates into an impact on the revenue side much quicker compared to the equipment side where we had longer lead times. I would say during the year we have compensated now well also on the equipment side. So all in all, I think that when you look at the performance of the company, of course it's because we have been active and been agile, I would say, when it comes to price management.

[James Moore, analyst]

Okay. And is the net price versus all inflation topics broadly breakeven for the group these days or is it still a headwind or is that even on accretion?

[Helena Hedblom, executive]

It's not a headwind if I say so.

[James Moore, analyst]

Nice and that's very helpful. And the conventional question is just about the cycle. So historically when metal prices fall, I know they're holding up a bit, but were still down 25% in copper and 15% in gold in April. Typically, we see equipment orders roll over and also if we see an industrial economic downturn, which I would imagine we're going to see next year, typically equipment orders roll over yet. You make good point. There's a lot of need on [Technical Difficulty] all grade deterioration, there's permitting problems, et cetera, et cetera. I just wonder when you talk to your customers whether you have a flavor of whether they're going to do a [ reassess ] or they're going to do an invest through a downturn and just keep going or whether you'll see any of that discretionary pullback?

[Helena Hedblom, executive]

I think as you say correctly, we see typically equipment going down in a downturn. I think what is different this time is of course also the opportunities with the technology and the push for ESG. For our customers to deliver upon their promises on ESG, some of these technologies needs to be implemented. So I think it's a different environment today and it's much more focused, I would say, on a sustainable development of the industry rather than just maximizing output. But everything is about productivity and sustainability when it comes to discussions with our customers today.

[Operator]

Our next question comes from the line of Anders Idborg of ABG.

[Anders Idborg, analyst]

So yes, most of my questions were answered. But could you come back, Helena, to what you said about exploration equipment or exploration tools rather being slightly weaker? I know you talked about this being strong earlier in gold and copper and sometimes you mentioned this just being a good leading indicator for spending.

[Helena Hedblom, executive]

Yes. So we have seen a softening on the consumable side for exploration and mainly related to the juniors in North America and that is of course related to their financing situation. So not really among the mining companies doing exploration from a brownfield perspective, more the juniors. That's where we have seen a slowdown.

[Anders Idborg, analyst]

Okay. So you wouldn't really regard this as a signal that things are about to change?

[Helena Hedblom, executive]

We are always watching all signals. That's what we have seen in the quarter and we did not see that the previous quarters.

[Anders Idborg, analyst]

Okay. I get it. Just a second one. You talked earlier about sort of some of these orders to Russia being possible to reroute perhaps to other places now that you've sort of effectively decided to let it go. Do you think that this could sort of speed up deliveries and free up a few bottlenecks or how do you feel about that?

[Helena Hedblom, executive]

No, absolutely. So we have a long order book and of course this gives us opportunity to then reroute and change our production schedule to, let's say, deliver quicker to other regions as well. And also we're busy rebuilding the machines that we had in the floor to other regions as well.

[Operator]

Our next question comes from the line of Joel Spungin at Berenberg.

[Joel Spungin, analyst]

Just a couple. Maybe I can start with a relatively simple one. Just coming back again on the question of Russia and the SEK 1 billion of orders that you called out. I was just wondering if you could give us the rough split of that SEK 1 billion between service orders, equipment and Tools & Attachments?

[Helena Hedblom, executive]

Majority is equipment. Vast majority.

[Hakan Folin, executive]

The vast majority is equipment.

[Joel Spungin, analyst]

Right. Okay. And just so I've understood this correctly. Presumably we'll see a similar effect when you report Q4 and Q1, Q2 next year in terms of there being this ex Russia adjustment until it annualizes out?

[Hakan Folin, executive]

Yes. I mean what we will not have -- in the next quarter we will not have this cancellation from Russia then given that we are now, in lack of better words, cleaning out the order book in Russia. But of course when we compare Q4 this year 2022 with Q4 2021, there will be an impact in 2021 of orders received from Russia.

[Joel Spungin, analyst]

Of about the same level as Q3.

[Hakan Folin, executive]

Yes, I would say. I mean not the difference of course, but the orders received in Russia likely the same level in Q4 as in Q3 2021. If that's what you meant, yes.

[Joel Spungin, analyst]

Okay. Yes, that's exactly what I meant. And then maybe just sort of a slightly different topic. I was just rereading my notes on the Q2 call, I think you talked -- there you were talking about lead Tools & Attachment orders in Q2 and you talked about how you sort of deliberately slowed down some of the order intake to focus on service and things like that. Is that still something that affected Q3 in the same way or is it different now?

[Helena Hedblom, executive]

I think in Q2 we had fairly high order stock for consumables, which is not a good thing to have because that needs to turn quickly and customers cannot wait. So we have been focusing on going down and I'm also pleased to see that revenue is increasing in that division so that is good. Output is going up. So it's more -- that is what we have seen. It's more related to -- I would say in Q3, it's more related to that we're protecting the bottom line and certain segments have been impacted from the cost increases and material increases and we have compensated for that. And that means also that you need to walk away from some deals to protect the bottom line.

[Operator]

Our next question comes from the line of Mattias Holmberg of DNB.

[Mattias Holmberg, analyst]

I have a question on the mix in Equipment & Services where a couple of quarters ago you used to mention quite often the difference in profitability between service and equipment and flagging we should expect a dilutive effect on the margin as the sales mix change in favor of equipment. So would be curious if you have a status update on this? And also when should we expect this mix headwind to be fully reflected in the P&L, please?

[Helena Hedblom, executive]

But it is so that there is a profitability difference between equipment and service and of course we have been -- we had for many quarters very strong growth on the equipment side. But if you look now at what we turn into revenue, of course we have also been -- over the last quarters been growing in a really nice way on the service side. So that has more or less compensated this mix shift that we expected or that we thought we were going to have. But at the same time, it's a fact the day we start to invoice more of this equipment, of course you will have an impact from a mix standpoint.

[Hakan Folin, executive]

But with the strong service growth that we have had, like Helena said, if we manage to -- if we invoice more equipment but we still continue to invoice more of services as well, then that's not going to give a negative impact on the margin.

[Operator]

And we have 1 further question in the queue and that's from the line of Lars Brorson of Barclays.

[Lars Brorson, analyst]

Helena, couple of quick follow-ups from me if I can ask. It's a bit late in the call so apologies if you have talked to this. But just on the T&A margin, I mean you've obviously pushed through some selectivity, lots of footprint savings coming through. Where are we in this margin journey? I mean last year you talked about keeping the 17% level, now we're closing in at 20%. I'm also curious on the downside in T&A if we see a more material sustained downturn, how to think about the drop-through or the decrementals because obviously the business has struggled quite a lot back in 2015, '16. Obviously big structural changes since then. But just trying to sort of scope where we might be in the margin story here for T&A and what the downside risks might be going into a downturn?

[Helena Hedblom, executive]

We have been working for at least 5 years now to bring the margins up to this level where we are at right now and I'm pleased that now that they have been about 18% now for several quarters so I think that's a good level to be at. If we look from a resilience standpoint especially I will say the consumer side is very resilient over a cycle so I don't see any reason why we would not be able to let's say protect bottom line. Of course you need to be mindful then that sometimes you need to sacrifice growth to protect the bottom line like we have been doing now in Q3.

Because I think the key here what we have addressed is the portfolio and we have addressed the part efficiency potential in that division. So that's I would say not really related on cycle or anything extraordinary. It's the many years of hard work addressing the efficiency and weak product lines that we had historically in this division. So I think we will do our utmost to stay on this level. But I think it's a solid level and I would say it's also best-in-class if you compare with other competitors.

[Lars Brorson, analyst]

Briefly if I can on electrification. It stood out to me Sandvik seeing in terms of percentage of load and haul order intake in the quarter sort of teens contribution from battery-electric. I appreciate it's just a quarter, but that was a lot higher than I thought. Wonder whether you can help us a bit with where you are, whether you see some market share shifts there? And also if you could please, in terms of electrification impact on your services business, can you help us a little bit with what sort of battery-as-a-service is as part of your broader service business?

[Helena Hedblom, executive]

So when we look year-to-date, we had a very strong set of orders in Q2 on electrical vehicles and that is very much reflected on the LHD side. That's where you see the greatest benefit from a TCO standpoint and that's where the big saving comes from being able to reduce ventilation. So it's quite normal that customers want to go on the LHD side rather than on drilling. I think on your second question there on battery-as-a-service. Can you repeat that one?

[Lars Brorson, analyst]

I was trying to get some numbers really. I was trying to understand whether battery-as-a-service is similar to Sandvik's sort of teens as a percentage of your new order intake in load and haul new orders for the quarter and similarly for services, please.

[Helena Hedblom, executive]

We don't have the numbers for different products in our service in Parts & Service and that's generally we don't share those numbers. But it's growing as we speak and, as I said, roughly 2/3 of what we have on orders for our battery machines comes with battery-as-a-service.

[Operator]

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

[Karin Larsson, executive]

Wonderful. Thank you everyone for good questions. I just want to add on to what Hakan said about Russia in Q4. So the existing order book has been cleaned out so basically in Q4, you can anticipate the year-on-year effect mainly. And on Page 8 in the PowerPoint presentation, you can actually see per quarter the Russia orders and in Q4 last year it was about SEK 1 billion. So that's what we were referring to when we speak about Q4 onwards.

And then it's time to end this presentation. And to those of you that actually see me on the screen, you have noticed my very yellow jacket and it is a beautiful color. And if you want to see more yellow and hear more about how our yellow equipment drives the transformation for the construction and mining industries onwards, please add the date June 1 and June 2, 2023 to your calendar. We will then host our Capital Markets Day in Orebro in Sweden. And those of you that are very eager to see more of Epiroc, they can come to Munich tomorrow. Hakan and myself, we will go to bauma, the world's largest construction fair, and we will be in the Epiroc booth between 12 and 3.

Thank you very much, everyone, and reach out if you have any questions. We're happy to help you and we wish you successful investment. Thank you.

[Helena Hedblom, executive]

Thank you.