Epiroc AB

STO:EPI A

Earnings Call Transcript 2021-Q3

[Karin Larsson, VP of Investor Relations & Head of IR]

Ladies and gentlemen, welcome to the Epiroc Q3 results presentation. My name is Karin Larsson, and I'm head of IR here at Epiroc. And today, we have a strong set of results to present. I'm proud to be here with our CEO, Helena Hedblom; and our CFO, Anders Lindén.As always, they will briefly present the results before we go into the Q&A session, and we will do the Q&A over phone only. So thank you, everyone, for taking the time today, and Helena, please, the stage is yours.

[Helena Hedblom, CEO, President & Director]

Thank you so much, Karin. So please let me start by sharing some of the Q3 highlights. The customer activity remained high, and customers continued to take investment decisions. So the demand was strong as expected. We had several large orders in the quarter, and 5 of them over SEK 100 million. Acquisitions also contributed strongly to the order numbers. In total, this resulted in record orders of SEK 12.2 billion.Revenues and profit increased as well and our adjusted operating margin was well above 23%. So all in all, a really solid financial result. The external supply chain challenges increased during the quarter. But that said, our organization is managing the situation well. So the financial impact on revenues and profits was limited. So well done to everyone involved in the supply chain. You do a great job. We do, however, expect that these challenges will remain also in the coming quarters. But we will do our best to support our customers also going forward, of course.Another highlight in the quarter is automation. Many of the orders that we won include our most advanced technical solutions. And these solutions increase productivity and lower the total cost of ownership for our customers. And in addition, they also contribute to improved safety and lower CO2 emissions. We also work hard to improve diversity and inclusion. I'm convinced that diverse teams are stronger teams and deliver better results. And we foster workforce with a diverse set of nationalities and experiences, and it is a top priority for us to attract more women to the group.And one of our goals is to double the number of women in operational roles by 2030. And in 2021, we have added more than 350 women employees to Epiroc. So this is a good development. Last but not least, we create options for the future by investing in R&D and by acquiring new businesses. And I will dig deeper into this in a few minutes.So when looking into the financials, you can see the record-high orders received at SEK 12.2 billion, and this corresponds to 24% organic growth. Acquisitions contributed with 7 percentage points to the growth, with half of it coming from booking of orders on hand of the acquired businesses.Given the high customer activity level, I just mentioned, we achieved strong organic growth rates in all businesses. Equipment achieved 43% organic growth and orders were, in absolute terms, even stronger than in Q1 and Q2. The aftermarket was up double digits organically for both Service and Tools & Attachments. And this is very strong given that we had solid development in the aftermarket also last year, especially in Service.Revenues and profit increased both year-on-year and sequentially, and the adjusted margin was 23.4%, up nearly 2 percentage points over last year despite dilution from both acquisitions and currency.Also, the operating cash flow was better than last year and came in at solid level given the strong growth. And Anders will, as always, tell you more about the financials later.As you know, we take great pride in being a leading productivity and sustainability partner to our customers, and we invest more than ever in R&D to safeguard that we stay ahead. And therefore, it was great that we, in September, finally could showcase many of our sustainable innovations in-person to our customers that joined the world's largest mining fair, MINExpo. And some of the products that we showcased were the Pit Viper 291 blasthole surface drill rig, which is one of the most powerful drill rigs for surface applications. And of course, it can be configured to be fully autonomous.We also demonstrated the Automatic Bit Changer that will change rotary bits without any human interactions with the drill string, and this is really a game changer in fully autonomous drilling.Also, the Avatel, a mechanized development charging unit that minimize manual work and increase operator safety. And finally, another innovation worth highlighting is the Reman Program. In this program, a customer returns a used component to us in exchange for a remanufactured one, and this instead of buying a new component. So this is a true life cycle perspective.As you heard, many of the innovations that we launch are contributing to higher safety and a better environment. And it's clear that our innovation agenda goes hand-in-hand with our customers' sustainability agenda. And before moving on to acquisitions, maybe you would like to see what MINExpo looked like. So please let me share a short recap and show a short video.[Presentation]

[Helena Hedblom, CEO, President & Director]

So we're moving on to acquisitions then. So since the start of the year, we have finalized acquisitions with a combined annual revenues of more than SEK 1 billion. And in the third quarter, we completed 3 acquisitions: Meglab, Mining Tag and DandA Heavy Industries. We also signed the acquisition of FVT Research, a specialist in conversions. And diesel to battery conversions is something we really believe in. To be -- to our new colleagues, a warm welcome to Epiroc.Partnerships and collaborations are key for success. And in the quarter, we announced a collaboration with Boliden and ABB, with whom we are developing an electric trolley truck system for underground mining in the Kristineberg mine in Sweden. Together, we aim to realize the vision of fossil-free mining.As in every quarter, I keep highlighting aftermarket, as this is really key in our strategy. And this quarter, the aftermarket generated 72% of our revenues. So besides providing our customers with reliable uptime and peace of mind, it gives us stability and resilience. And it's also key to the long-lasting relationships. By supporting our customers in a good way, we increase our chances to win more orders for Equipment. And in the third quarter, the customer activity was high, and we continue to develop our offering. I just mentioned the Automatic Bit Changer and the Reman Program, but we do more, of course.We continue to productify and extend our service offering, and it is clear that we gain a customer share. Units delivered with connectivity also increased with more than 30% compared to last year and are now more than 5,700.And finally, I'm happy that we were also able to improve availability for spare parts and consumables despite the supply chain challenges, and more on that on next slide.So operational excellence is another important part in our strategy. And one example of what we work with is production excellence. And after a period of strong growth, we are ramping up our manufacturing, and we are adding resources in our assembly lines, and we match that with the plans for deliveries. And so far, so good.We normally talk about lead times for equipment of around 2 to 3 quarters. This is somewhat longer now, partly due to the higher volumes and partly as a result of scheduled delivery plans for large orders. Some orders are planned for multiyear deliveries upon the request of the customers. We also strive for supply chain excellence. As you know, we have had a strong -- a supply chain improvement program ongoing for a few years now, and we see good results.We have improved availability while also lowered our cost and carbon emissions as we transport more by sea. However, the positive financial effects are, to some extent, offset by the increased transport costs. And as I said, we manage these challenges well, but it is not easy. The organization is working hard to find alternative suppliers for components, to redesign components when necessary and we are increasing safety stocks as well. So there's much manual work going into managing the supply chain situation.So coming to the topic then on sustainability, and starting with people. So with the help of acquisitions, we are now more than 15,000 employees in the group, and everyone is important and contributes to the success of Epiroc. And I am convinced that diverse teams are stronger teams and deliver better results. And I'm proud of the wide range of nationalities in the group. But to be honest, we can do better when it comes to gender.So digging a bit deeper into this. One of our goals is to double the number of women in operational roles by 2030, and we have several initiatives ongoing in this area, and we are moving in the right direction.As I said, in 2021, we have added more than 350 women employees to Epiroc, and the number of women workers as well as women managers is increasing. And 2 successful initiatives are our service academy for women in India. Many of these women will work with our largest service contract in India, which is also at our largest customer. We also have a 9-week rotation program in our Garland factory in U.S., is also a good example. It aims to increase the number of women in production. And the project was launched in March this year, and we have finalized 2 rounds so far, and we see good results. So since this program started, we have doubled the percentage of female production employees in Garland from 7% to 14%, and you see some of them on the picture here.So moving on to the planet part then. We have implemented several improvements to increase energy efficiency, and our ratios are going in the right direction. However, in absolute numbers, our energy consumption in operations has increased, and it is explained by higher production activities.On a positive note, though, our CO2 emissions from transport is coming down. And in the last 12 months, it is down 9%, mainly due to a higher share of shipments by sea instead of air. However, with limitations in component availability and transport capacity, we could see more air shipments in the short term.So with this, I hand over to Anders to cover the financial details.

[Anders Lindén, Senior VP of Controlling & Finance and CFO]

Thank you, Helena. It will be a pleasure to talk about our financial achievements. Our operating profit increased from SEK 1.8 billion to SEK 2.4 billion or if we look at the adjusted numbers, from SEK 1.9 billion to SEK 2.3 billion, and these are record levels for Epiroc.The operating margin increased to 23.6% from 20.9%, and the adjusted operating margin was 23.4% compared to 21.7% in Q3 last year, an increase of 1.7 percentage points.If we look into the details, the organic growth was contributed with SEK 620 million and with 4.1 percentage points to the margin. Currency was negative both in absolute numbers and for the margin. So for the margin, the impact was a negative 1.3 percentage points, and this is largely explained by period-end effects when revaluing local inventory. Structure and Acquisitions together contributed with SEK 45 million. The change in provisions for the LTI program was actually positive with SEK 21 million in the items affecting comparability this quarter. In times when the share price goes down, the effect on the reported operating profit is positive and vice versa. Last year, though, we had SEK 55 million in restructuring costs, so this is positive in the structural part of the bridge.Acquisitions had, as expected and mentioned, a negative impact on the profit and the margin. The dilution on the margin from the acquisitions is about 1 percentage point. and this is mainly related to one of our technology acquisitions where the revenues are still relatively low. All in all, we ended up the quarter with a margin above 23%.If I then spend some time going through the segments. Orders received for Equipment & Service increased 26% organically to SEK 9.3 billion, and this is strong. The large orders positively impacted the organic growth in Equipment orders. And as Helena said, we had 5 orders that were larger than SEK 100 million each, and that means that we had a somewhat higher level of large orders now in Q3 than we did in Q1 and in Q2. But I would like to repeat, though, that large orders are indeed lumpy in nature. So the underlying demand, meaning small- and medium-sized orders is still at a high level. In total, the orders received for the equipment was SEK 4.5 billion, more than 10 percentage points higher than in Q1 and Q2 and 43% organic growth year-on-year, so very strong. If we then look at organic growth in service, it was also impressive. We had a 13% organic growth, which is quite an achievement given that also Q3 2020 was a strong quarter. Acquisitions contributed with 6% to the order growth, of which close to half was related to orders on hand. Compared to Q2, the orders increased 5% organically.On the revenue side, we had a 9% increase organically with all of the growth coming from Service. And to repeat what Helena said on lead times, for Equipment, there is a lag between getting the orders to sending the invoice. Normally, this is around 2 to 3 quarters, but now the lead times from order to delivery is somewhat longer, partly due to scheduled delivery plans for large orders, as some of them have multiyear delivery plans. And I will cover the details on profit and margin on the next slide.So the operating profit increased 16% to SEK 1.9 billion. The operating margin was 26.4% and was supported by increased volumes, mix and good cost control, but diluted by currency and by acquisitions.Starting with the organic contribution to the margin, it was 3.5 percentage points, and this includes a positive mix effect. The share of Service revenues is higher this year. Service is, as you know, more profitable than Equipment. And note, we have had a period of stronger order growth in Equipment, and these orders will later on, of course, translate into revenues. But when they do, the mix will change, and this will dilute the margin. But again, in Q3, this mix was positive.Currency and Structure. Mainly the acquisitions contributed negatively. The acquisition effect in the quarter is about 1 percentage point.For Tools & Attachments, the orders increased 14% organically to SEK 2.9 billion. Acquisitions contributed with 11%, of which 2/3 was related to orders on hand, and we also had a currency tailwind of 2%. Both hydraulic attachments and rock drilling tools, which we also refer to as consumables, had a good development.All through this year, exploration drilling tools have been particularly strong, and this was also the case in Q3, which is promising for the future. And we often get the question on what minerals are strong in exploration. And with this, I would say most of them that we are exposed to, but mainly the gold and copper. Compared to Q2, orders decreased slightly organically, which is normal seasonality. Revenues increased 21% organically to SEK 2.7 billion, and I will cover the operating profit on the next slide.The operating profit doubled to SEK 502 million, supported by increased volumes and also here, good cost control. And the restructuring we did during 2019 and 2020 has given results. Last year, it was impacted by restructuring costs of SEK 22 million. The acquired DandA business is profitable, but still somewhat diluting the margin. The operating margin improved to 18.6%, significantly better than last year and approximately 2 percentage points higher than in Q1 and in Q2. We are really happy to see the development here, and our colleagues in Tools & Attachments are doing a good job. If we then dig down in costs, net financials and tax. We maintained good cost control. Looking in absolute numbers, of course, it does not look like we are improving. But given that we are growing and that activities are increasing, I would say that we maintain a good cost control throughout the organization. Remember also that some of these costs are volume-related, and we have acquired a number of businesses we also invest for the future. Helena mentioned some great innovations before.And in this quarter, we spent more than ever in R&D, SEK 300 million. The net financial items was positive SEK 73 million, which is quite a change from last year. And the difference here is mainly explained by a positive impact from exchange rate differences.The income tax expense was SEK 496 million, corresponding to an effective tax rate of 20.5% compared to 24.1%. Some onetime effects related to previous periods lowered the tax rate in the quarter as well as lower tax rate in some countries. However, for now, we keep our guidance over tax rate below 25%.We are financially strong, and we have a net cash position. In total, SEK 1.2 billion compared to SEK 3.6 billion last year. I often get this question, what we want to do with all the cash? And I think the presentation today sums it up rather well. We invest to remain the productivity and sustainability leader in our field. We do this by innovation, collaboration and M&A. Twice a year, we also pay dividend. For the full year, we have announced SEK 2.50 dividend per share. The first part was paid in Q2 and the second part will be paid early November. in total, we will distribute SEK 1.5 billion this time, which corresponds to SEK 1.25 per share.Capital efficiency, also a topic close to my heart. Starting with the net working capital. Year-on-year net working capital increased 2%. But if we exclude acquisitions and currency, we actually had a decrease of 1%. So underlying, we have improved. As a percentage of revenues, the trend is also positive, from 35.9% last year to 29.8%. Return on capital employed was 25.0% compared to 21.6% last year, and the return on equity was 28.0% compared to 22.4%.And last but not least, a few words on my favorite topic, cash flow, before handing over the Helena again. Our operating cash flow increased to SEK 1.6 billion, and this is solid and up from SEK 1.4 billion last year. It was positively impacted by higher operating profit, while working capital increased. This is, however, natural in this growth environment, and it mainly relates to higher inventories. So with this, thank you, and Helena, over to you.

[Helena Hedblom, CEO, President & Director]

So thank you, Anders. Yes, if I then conclude the quarter, I would like to highlight these topics. We had a strong demand and we achieved record-high orders. We also managed to increase revenues, profit and margin despite ramping up and being exposed to supply chain challenges, really a proof of hard work in the organization.We also see that our technical solutions, and in particular, automation, continue to gain traction among customers, and we have showcased many sustainable innovations at MINExpo. And also, we continue to improve diversity, and our initiatives to increase the number of women in the group are yielding results.And finally, we create options for the future by acquiring businesses. And with these companies, we will further develop our position as the true enabler for our customers when it comes to increased productivity and sustainability. And we do it by leading the way with automation, digitalization and electrification. And speaking of leading the way, where are we heading in the short term? Well, we expect that demand both for equipment and aftermarket will remain at a high level. And my comment refers to the underlying demand as it is hard to predict large orders.They are lumpy in nature. So thank you all for taking the time today. And Karin, would you like to start the Q&A session, please?

[Karin Larsson, VP of Investor Relations & Head of IR]

Yes, sure. But before we do, I would like to say that the registration for our Capital Markets Day has opened. I know already now we have 90 participants signed up. This is excellent. But if you are keen to listen to the webcast live on the same day, you have to sign up beforehand. But please note that we will also have the material public for everyone after the Capital Markets Day, and then you do not need to register.So moving to the next slide. Then we see the Q&A coming up. And we do it over the phone, as we always do. And please, operator you may open the line.

[Operator]

And our first question comes from the line of Max Yates from Credit Suisse.

[Max Yates, Research Analyst]

Just the first question would be on the 13% service growth that you've delivered. And we're obviously against now kind of fairly tough comps. So I just wanted to understand, are you able to give us sort of any breakdown between kind of how much some of your newer initiatives like Midlife services, like the Reman components program are contributing?And how much of this is just a case of minus just maximizing production, perhaps some catch-up in spending after 2020? I'm just looking for kind of any kind of visibility of what's really driving that number and maybe kind of how sustainable you think this kind of above trend, i.e., 5% growth rates might be? How long can this go on for? That would be my first question.

[Helena Hedblom, CEO, President & Director]

Well, I think generally speaking, we see a high activity level. So we see that the -- let's say, the machines are running at a much higher pace this year compared to last year. And I would say it's a combination. It's a combination of us investing in the new service contracts. It's a combination of successfully that we land larger rebuild orders as well as the underlying, let's say, demand for parts and service.So I would say it's a combination. But it's clear that, of course, with a growth level of 13% that we take in customer share. So it is a lot -- back to what we have talked about during many, many quarters that this systematic approach but also productifying our service and become more and more, I would say, specific in our initiatives that is yielding result.

[Max Yates, Research Analyst]

And sorry, just a clarification on that. When you say you're taking customer share, does that mean kind of you're taking a greater share of the customer's wallet, i.e., kind of services that they may not have done previously? Or may have done internally, as opposed to you taking share from a competitor? Or what exactly do you mean?

[Helena Hedblom, CEO, President & Director]

It's a combination. So it's both that we're doing more for our customers, but also that we're taking shares from smaller players, local players, that serve that specific mine, for example, historically. And I think an enabler here to be able to take customer share is also the improved availability in the off market in the supply chain.

[Max Yates, Research Analyst]

Okay. And maybe just a very quick sort of housekeeping question on revenues. Is there any help you can give us on what Q4 revenues may look like? Because I guess if we look at kind of where equipment orders have been, they were around SEK 3 billion in Q4 2020, and then they jumped to sort of SEK 4 billion at the start of this year. And so I guess my question is sort of, are we able to do given kind of supply chain lead times, much more than SEK 3 billion of revenues in Q4, which is kind of where we were at Q2?I'm just trying to understand because logically, based on historic lags, we should maybe be sort of breaking up sort of SEK 3.5 billion, getting towards SEK 4 billion, but obviously, it's a difficult environment. So just any kind of help with how we should think about where that Q4 revenue number and equipment could get to.

[Helena Hedblom, CEO, President & Director]

I think, as we have said, we -- there are supply chain challenges. And we are also balancing and prioritizing aftermarket versus equipment assembly. So when there is a shortage, we also need to, say, cater for the demand in the aftermarket and keep existing fleet up running at our customers' site. So we are doing that type of prioritization. And of course, with the uptick in volume, lead times are longer. But also, I think it's important to remember that some of the larger orders that we have captured the last 3 quarters now, it's -- they have longer, let's say, planned delivery schedules than maybe if you buy 2 or 3 machines, you get them delivered at once. If you buy a larger set of machines, our customers can't really take onboard so many machines at one time in one go either. So it is planned. Let's say, larger orders has a longer planned delivery time. But we are ramping up in production. If we look on our, let's say, pace in production, it's clear that output in production is clearly higher than during last year and also quarter-by-quarter. Of course, there is a lead time, and we're trying to balance the importance of the aftermarket and the output in equipment in parallel here.

[Max Yates, Research Analyst]

Okay. So I guess by that -- I mean you're ramping up production. You did SEK 3.4 billion of Equipment revenues last year. I guess we should think about kind of that or slightly better would be a reasonable assumption, given you're ramping up?

[Helena Hedblom, CEO, President & Director]

We will do our outmost to, of course, ramp up as quick as possible, but at the same time, keep existing fleet up running, which for our customers is even more important at the moment.

[Operator]

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

[Andreas Juhani Koski, Research Analyst]

I would like to ask about the margin in Equipment & Service. It was a very strong margin, and the margin improved organically by 3.5 percentage points. And I guess you could say that if it were not for the inventory revaluation that had an impact on currency, the margin would have been closer to 28% in Equipment & Service. So maybe you could help me to better understand the moving parts here. What kind of impacted mix have? Did freight cost inflation have a huge negative impact? And what was selling price versus raw materials in the quarter? Just to understand how to think about the margin in Equipment & Service going forward when we will not have the currency impact anymore.

[Anders Lindén, Senior VP of Controlling & Finance and CFO]

No. I think when you take the currency to start with, you have to consider that's also a bridge effect as such. It's not necessarily the P&L effect. But having said that, yes, the -- it -- there is an impact from the currency in the revaluation. Then there is a mix effect. We had a very strong service and revenue. So the mix effect is clear, which I pointed out that as we start to turn the equipment orders into revenue, this will change.So yes, we had a good quarter and a good delivery and a good execution from the service side, which helped, absolutely. And then also some good mix on the equipment. That can also vary what kind of equipment we deliver, if it's in geography and type of equipment and orders. Not all orders have the same margin.

[Helena Hedblom, CEO, President & Director]

And I think just a comment on the -- maybe to comment on the cost there. So we see that costs are, of course, increasing for components and materials as well as freight, as I said, but we are working very actively with pricing. So I think we are managing the situation in a good way.

[Andreas Juhani Koski, Research Analyst]

Yes. And a follow-up on that, on automation and the positive equipment mix. So you are saying now that you are selling more or get more orders for automated products. And does that mean that it will lead to a positive price/mix effect as automated products are more expensive than nonautomated products? And would you also say that the margins are higher on automated products than nonautomated products?

[Helena Hedblom, CEO, President & Director]

Of course, on the orders received in the quarter, we landed many automation orders. And of course, this is our most advanced machines that delivers great value for our customers. So of course, they are priced in a way so that we have good margins on this equipment.

[Andreas Juhani Koski, Research Analyst]

Yes. So to conclude on that, sales levels will be higher for automated products and they will come with a higher margins as well. So a double positive impact on EBIT, I guess.

[Helena Hedblom, CEO, President & Director]

Yes.

[Operator]

And our next question comes from the line of Klas Bergelind of Citi.

[Klas Henrik Bergelind, Director]

Klas at Citi. So first on large orders, it seems like due to the step change recently, both at you and your peers, is this a change in trend, would you say, Helena? We saw [indiscernible] announcement yesterday, first big miner to properly commit capital to the decarbonization trend, both own investments in renewables and battery, but also [ hike in ] growth CapEx linked to the strong demand. It feels like the confidence around mining CapEx and that larger orders seems to be growing stronger. Would you agree with that assessment?

[Helena Hedblom, CEO, President & Director]

Yes. We have seen that now for 3 quarters that it's both larger replacement orders. It's also larger expansion orders. And also in this quarter, greenfield investments, which, of course, is really good to see. But when we look at the pipeline, as I've been describing many times, it's very difficult to predict when they will actually turn into orders and when the decision will be taken. But the pipeline is there. And when we look at the underlying demand, which is more than the small and medium-sized orders, there's also very good activity levels underlying among many customers. But I was really happy to see also that we now start to see some greenfields, which has not really been the case for quite some years.

[Anders Lindén, Senior VP of Controlling & Finance and CFO]

But again, if we look at the large orders, it's -- I know we have said that many times, but they are lumpy and sometimes they are just below the threshold or they are sometimes placed as 1 order and sometimes they are chopped up. But if anything, we follow very well the pipeline and the business cooking and it looks good. But -- and maybe there is a little bit more of willingness to do 1 order instead of chopping them up, and that's what we see, I would say.

[Klas Henrik Bergelind, Director]

Okay. My second one is thinking a little bit of Battery as a Service. And I think when we've spoken before, Helena, you said that most of the sort of orders coming in are more Battery as a Service rather than outright equipment purchases. And I'm just thinking about the aftermarket implications longer term, you have that green sales target of 50% by 2030, I think.But all of this should obviously, over time, also help the aftermarket and could create a positive mix shift outside of what Andreas just said on automation. I'm just thinking, when you are looking at the battery pipeline, is there still more Battery as a Service rather than equipment?

[Helena Hedblom, CEO, President & Director]

I think it's too early to comment on that. I think remember that batteries is still small in the total picture. But it's clear that in the conversations with customers across the globe, more or less all mining houses have committed to CO2 emissions as well and targets for the coming 10 years. And of course then, battery technology will be one of the solutions.But I think we have a good -- we try to have a broad offering here both with Battery as a Service to then take, say, lower the threshold for our customers on the initial purchase of equipment, but also when it comes to the conversion kits. So we signed the FVT Research acquisition here now in Q3, which will also then, of course, help that transformation. Then we can take on a project. We can do the electrical mine infrastructure with the Meglab capabilities. We can convert some of the machines, and at the same time, add new machines and then bundle it with Battery as a Service.But I think it's too early to say what preferences the future customers would like to have here. We try to, I would say, have a broad offering.

[Klas Henrik Bergelind, Director]

Okay. My very final one is on Tools & Attachments. And obviously, a very good margin here as well. And when this business was part of Atlas back in the days, I think the peak margin at some stage reached around 20%. And here we are at 18.6%. And obviously, very good cost control, strong volume growth. But was there anything specific in the quarter, which would sort of say that this was an abnormal profitability level? Or could we see a bit longer term that we can do sort of closer to 20%?

[Helena Hedblom, CEO, President & Director]

I think this is -- we have been working hard with this division for a number of years. As you know, we have streamlined the portfolio. We have sold off some of the factory -- [ closed ] factories. We have strong portfolio that goes very much hand in hand now with our equipment. We're also investing a lot when it comes to innovation, to increase the value of these products.But at the same time, this is -- it's -- this is where we manufacture. So of course, it's heavy on the manufacturing side, heavy on the supply chain side. So I think the team in the Tools & Attachment business have really worked extremely hard on cost control and efficiencies during the last year or 1.5 year, I would say, on top of all the -- maybe the larger changes we did prior to that. And I think it's giving results.Now when volume comes back and you still keep that cost control, we have seen really good development over the last quarters, where we will be -- I think now we had a step change again. I think -- is that sustainable, I think time will see. But I think I'm pleased to see that we have been above 16% now for some quarter, and that is the stability also that I said many times, that I would like to see that stability. Of course this is also a growth opportunity for us to drive customer share on consumables.

[Anders Lindén, Senior VP of Controlling & Finance and CFO]

To add something on this, I think we should remember that this segment is benefiting also from the strong development in exploration, which is obviously helping.

[Klas Henrik Bergelind, Director]

Yes. So it's a little bit of a mix.

[Anders Lindén, Senior VP of Controlling & Finance and CFO]

Yes. It's a little bit of a mix. So yes.

[Operator]

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

[William Turner, Research Analyst]

I have several questions. The first one is just going back to the aftermarket sales growth. Could you just give us a breakdown on how much of it was driven by pricing? And given the mine profitability and utilization rates, are you finding the pricing negotiations materially easier than in recent quarters?

[Helena Hedblom, CEO, President & Director]

I would say that we are working with pricing always, and we always tie it to the value that we create with our products and our services. So this is something that we always, always work with. And I think we just continue to do it in the same way as we have always done it, which is supporting then, of course, helping out when prices are going up on some of the components and the material.

[Anders Lindén, Senior VP of Controlling & Finance and CFO]

Pricing negotiations are never easy. But of course, with the good development of our customers, they have maybe a better understanding that we also need to increase our prices.

[William Turner, Research Analyst]

Of course, yes. And then on the expansions to lead times and the supply chain disruptions, those obviously been implied for a while, and it's very broad across different businesses and [ other end ] markets. But I was wondering, do you think that we're at the worse with this? Are there any like signs of green shoots? Or is it too early to say?

[Helena Hedblom, CEO, President & Director]

No. I think with the lead time expansion, of course, there's always this when volumes are picking up rapidly. So I don't see that it's, let's say, much longer than normal during a very steep ramp-up. And I think the -- as I said here, also our customers are extremely keen on making sure that the existing fleet is up running because that is their output today. So as long as you have very transparent communication with your customers and have realistic lead times, I don't see it as a problem, actually. So there's not really that -- and we're talking -- we say normally 2 to 3 quarters, and now we have a little bit longer. But it's not really a big change. So I think all in all, it's -- we're managing well when it comes to lead times, even though they are longer than they were a year ago.

[William Turner, Research Analyst]

Okay. And my final question is on the taxes. These -- they were quite materially better than previous quarters and years, and you flagged how in the prior year, there was some one-off items. But it seems like a lower underlying freight this quarter. How sustainable is this lower tax rate? Are you expecting it to increase going forward? Or could you -- could we be in the low 20 percentage points going forward?

[Anders Lindén, Senior VP of Controlling & Finance and CFO]

I think it -- this quarter, it was -- as I mentioned, it was a little bit lower. We had some one-offs, yes, and some lower tax rates. But it will be lower than the guided 25%, but it will be somewhere in between likely. We are reviewing the guidance for it. So it's unusually low, but we also expect some initiatives are happening, not the least in the U.S. where we expect the tax rate to be increased.

[Operator]

And our next question comes from the line of Robert Davies of Morgan Stanley.

[Robert John Davies, Equity Analyst]

My first one was just on the comment you made around sort of the bigger orders you'd seen in recent sort of quarters taking longer to feed through to sales with the sort of longer delivery times. How -- is that pretty much all the explanation for the gap between orders and sales at the moment? Or is there anything from sort of COVID-related site access issues? Or anything along those lines? I'm just trying to get some flavor in terms of when we're thinking about the orders to sales lag, how unusual is that? Is that sort of a persistent effect going forward? Is it a one-off in the quarter? Any color would be helpful.

[Helena Hedblom, CEO, President & Director]

It's a combination of what I try to describe there. So it's supply chain challenges on the inbound, then that we also prioritize aftermarket when we have a shortage. And that, of course, builds up some more weeks or could be a month on the equipment. And then just longer lead times because the volumes are -- have picked up so fast. And of course, you have a queue in production then. But as I said, we are ramping up. We have higher and higher output every quarter from production.But then, of course, you have also challenges on the outbound side with longer lead times on sea freight, for example, and that last mile in different regions, in different countries. So I would say it's a combination. Then the large orders which we have landed several of during the last 3 quarters, they are typically spread out in deliveries, and that is how the customers want them delivered because otherwise, they can't -- you can't start up so many machines at the same time. So that is always the case, I would say, when you have large orders. So it's a combination of all 3 things, really.

[Robert John Davies, Equity Analyst]

I see. My second question was just on, I guess, the battery-powered vehicles versus your traditional sort of diesel-powered engines. How do you think about the sort of investment cycle for the traditional part of your business going forward? Obviously, you're trying to get more and more people to buy these battery-powered vehicles. But how are you juggling that with maintaining the sort of day-to-day business on your diesel-powered bid? Are you kind of capping investment? Or kind of tapering it over time? How do we just think about the moving parts there?

[Helena Hedblom, CEO, President & Director]

So in -- I think energy efficiency has always been a very top priority in all R&D investments. And we are both working on that type of efficiency on the diesel machines and on top of that battery electrical versions. So -- and that's the way we -- the fastest way we can have an impact on CO2 for the industry in total. So they go really hand in hand. And of course, we continue to work on the base, which is the machines and the efficiency of the machines. And that could be everything from productivity to energy, diesel consumption or energy consumption. And then we also have the battery alternative and you have the automation alternate. So they all come together in one offering.

[Robert John Davies, Equity Analyst]

I see. Okay. And then my final question is just on the recent movements on the metal prices. You obviously called -- copper and gold have held up quite well. But iron ore has come off. I know you have some iron ore exploration, and it was not your biggest piece. But have you seen anything in terms of customer sort of conversations on that particular commodity exposure, thinking about the trajectory into '22? Or has that not really had any impact on the ground yet?

[Helena Hedblom, CEO, President & Director]

No, it has not had any impact. I think if you look on historical -- compared to historical levels, it's still a very high level, and the planning of an expansion or planning production or investing. You also see the exploration investments are there, many meters drilled, which also, of course, is to find new assets and future expansion. So I think it's -- the mineral prices are holding up very well, I must say.And then there is also a gap in found assets or ore bodies that needs to come onboard, so that would also, of course, support an underlying need for more exploration in the coming years.

[Operator]

And our next question comes from the line of Arsalan Obaidullah from Deutsche Bank.

[Arsalan Obaidullah, Research Analyst]

Just 2 sort of questions. One is on the R&D. You talked about, obviously, that being at a higher level. Just to get an idea of where your kind of focus is on that in terms of, obviously, without too much details, but broadly where you're exploring opportunities on that side of things?And then the second is just a bit more on this -- kind of this dynamic of order shifts and [ nags ]? And you've talked about obviously more greenfield sites coming through. And if the assumption is that those tend to be larger orders, are we expecting to see sort of obviously more of those larger orders and effectively more of a process where we're seeing staged delivery and sort of the disconnect between orders and sales, certainly for the near future as you have those larger greenfield orders?And also, is there an underlying shift change in terms of customer mentality there, whether through the learnings of 2020 or otherwise, where they are sort of being a bit more proactive in getting bigger orders but being sort of more forward thinking and then how they're delivered? Is there a shift change there? Or is this just a function of large orders, really?

[Helena Hedblom, CEO, President & Director]

If we start with the investment in R&D. For us, we have been investing more than we have ever done now for several years and also during the pandemic, which was a key priority for us. And I would say, more or less all of the investments goes into the 3 technology shifts that are ongoing. So it is towards automation, to continue to roll out our autonomous solutions and also to develop mixed fleet automation, both for surface and for underground. It's a lot around digitalization, and that's also the area where we have done a couple of really exciting acquisitions and then towards electrification.And that is also the area where we also -- we do a lot of organic investments, but on top of that, also selective acquisitions. If we look on the underlying, we'll say, the shift here between brownfield and greenfield, I think it's important to remember that in the beginning, when you deliver to a greenfield, it's very much to establish the infrastructure. And then later on, you have the production equipment. Of course, it depends on what stage the greenfield is in.But the first phase is often to do the ramp. Of course, all the -- if you have an underground mine, you need to do the ramp, you need to do the -- all the shafts. So it's very long time when you start to do the greenfield investment for the infrastructure until you actually come into the production phase.If I see a trend towards more greenfield than brownfield, I think, of course, the mining companies try to maximize the existing nearby assets first. So brownfield will always be, we'll say, less risky and less cap intense than if you go greenfield. And that's also why we -- I think, when we look at the exploration drilling, over the last maybe 10 years, you see an increased exploration spend in drilling related to brownfield exploration. So I think the customers are really trying to, of course, maximize the potential they have nearby existing infrastructure. When that is not enough, then greenfield investments will have to come. Did I cover all your questions?

[Arsalan Obaidullah, Research Analyst]

Yes.

[Operator]

Currently, we have one further question in the queue.[Operator Instructions] That question is from the line of Jonathan Day at HSBC.

[Jonathan Day, Analyst of Industrials]

I was wondering if you could talk a little bit about the impact of higher energy prices? Whether you sort of hedge there? How you see those evolving on the business? And maybe also just give us a sense of where you are now with connected products? The -- any sort of numbers around the size of the installed base? I know you said that you saw quite a few more connected products this quarter. So I was just wondering if you could talk a little bit about both of those, please.

[Helena Hedblom, CEO, President & Director]

So we are not energy intense in Epiroc. We have -- a majority of our manufacturing is assembly. So we are not really that exposed to energy prices. If we look on connected machines, we connect more or less all machines that leaves the factories, and we also do retrofits of connected machines. And it serves 2 purposes. Towards the large mining customers, it's very much to drive excellence in service. When it comes to the infrastructure customers and smaller customers in general, it's to drive customer share.So I see connectivity really as an enabler for growth, in growth and excellence in the service area. So that's why it's so key to continue to roll this out. And of course, it also gives us a very good understanding of the actual activities out there. We see that in real time, the engine hours of the equipment, for example, in different regions. So you build intelligence from that and then you can also act based on that.

[Jonathan Day, Analyst of Industrials]

Sure. Are you able to give us a sense of how much of the equipment or how much of the installed base is currently sort of connected? Or is that something for another day, maybe?

[Helena Hedblom, CEO, President & Director]

Maybe for another day. But we continue to grow this part because I see this as this is the future. Eventually, we will -- hopefully, in the future, we will, at one point, have all equipment connected. But we are not there yet. But we're working. Every quarter, you see the numbers are growing.

[Anders Lindén, Senior VP of Controlling & Finance and CFO]

I'm sure we will talk more about that on the Capital Markets Day.

[Helena Hedblom, CEO, President & Director]

Yes.

[Operator]

We've had a few more questions come through. The next is a follow-up from Andreas Koski of Exane BNP Paribas.

[Andreas Juhani Koski, Research Analyst]

I don't think I have another single question just about Tools & Attachments. So I ask about the margin in Tools & Attachments, which was very strong in the quarter. And I understand it was due to higher volumes and good cost control.And my interpretation that as long as volumes remain at this current high level, we are seeing sort of a new normal for Tools & Attachments EBIT margins. Or was it something else that might lead to lower margins in the coming quarters?

[Helena Hedblom, CEO, President & Director]

I would say that we had a very -- an uptick now in this quarter. I think if you look at this, what we have delivered over the last 4 quarters, it is clearly a new level. I think it will always vary. As Anders said, also, we have different product lines in the Tools & Attachment business. So we have the traditional consumables that goes towards mining. We also have exploration, which right now is at a really good level. We also have hydraulic attachment, which is more than related to the construction industry. And of course, you can always have a mix shift between those product lines.

[Anders Lindén, Senior VP of Controlling & Finance and CFO]

And again, I think we've said many times that this is also our, let's say, the segment which is more -- most competitive for us. So obviously, now we -- it's a good situation for a supplier in this business. And -- so I wouldn't say that this is the new normal. Like Helena said, we need to look at this over a longer period.

[Karin Larsson, VP of Investor Relations & Head of IR]

Thank you, everyone, and I do know we have more questions on the line, but we will not have time to take them. Thank you very much, Helena, Anders, great presentation and great results of all employees in this company. Thank you for being a part of this. To all of you that listened in, we wish you, as always, successful investments. Thank you very much, and have a great day. Bye.

[Helena Hedblom, CEO, President & Director]

Thank you.

[Anders Lindén, Senior VP of Controlling & Finance and CFO]

Thank you so much.