Epiroc AB

STO:EPI A

Earnings Call Transcript 2021-Q4

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

Hello, everyone, and thank you for joining this Epiroc Q4 Results Presentation. My name is Karin Larsson, and I'm Head of IR here at Epiroc. We will follow the same presentation format as we always do. And in short, it means that our CEO and CFO briefly present the results before we do the Q&A, which we do over phone.I do, however, have some news today besides the strong results because once our CEO, Helena Hedblom, has presented her slides, we will have the pleasure of having Hakan Folin, our new CFO on stage. I'm very much looking forward to hearing them both presenting, and I hope that you share my excitement.So without further ado, Helena, please, the stage is yours.

[Helena Hedblom, CEO, President & Director]

Thank you, Karin. So with the COVID-19 pandemic still holding the world in a tight grip, our main priority is, as always, safety. So while keeping our customers' operations up and running, we are monitoring the development continuously, and we are taking actions where and if needed. And the actions taken in the last 2 years have made Epiroc both stronger and more successful.So 2021 was an exciting year with both achievements and challenges. And in the end, it turned out to be a record year for Epiroc. High customer activity, in combination with increased investment willingness, led to record high orders received of SEK 46 billion, and this corresponds to 26% organic growth.So despite challenges with the COVID-19 pandemic and in the supply chain, our revenues increased, and our operating profit and margin were record high. We had a solid cash flow and ended the year with a strong financial position. The Board proposes a dividend of SEK 3 per share, in line with our financial target of a 50% payout.We completed 8 acquisitions, and we launched groundbreaking innovations and made good progress in the sustainability area. And all this was achieved while prioritizing health and safety during the COVID-19 pandemic. So we have shown, yet again, that we are a strong team at Epiroc, and we can adapt quickly to changes. And we are always ready to work that extra mile to support our customers. And I'm proud to lead this fantastic company and all the engaged employees in Epiroc.So moving over then to some highlights in the fourth quarter. On the demand side, the pandemic does not seem to damper the activity level, nor the investment willingness. And in Q4, the demand remained strong. Aftermarket performed particularly well, and I am convinced that our local presence with skilled service technicians and aftermarket support functions contribute to this development. The revenues came in at record high levels and as did the profit. We also completed 2 acquisitions, but we will cover them and go into the details later.On the sustainability side, one highlight was that our ambitious climate targets were validated by the Science Based Targets initiative. And this means that our industry-leading position within sustainability has been reinforced. So we are driving the industry's transition towards reduced climate impact and not the least, with our growing offering of battery-electric equipment. And today, we have the broadest offering in the market, and we see good demand.So the key financials in the quarter are strong. Orders received increased 25% to SEK 11.6 billion, and this corresponds to 19% organic growth compared to the previous year, and acquisitions contributed with another 4%. Equipment grew strongly, with orders received increasing 20% organically, and we had an impressive performance, both in service, which is up 19%; and in Tools & Attachments, which is up 16%.Sequentially, the orders received decreased around 5% organically, but then again, we compare with a record quarter in Q3, where we had 5 large orders over SEK 100 million. And to compare, we had 3 large orders in Q4. The underlying demand and activity among our customers remains strong.Revenues increased 9% organically to record high SEK 11.2 billion, and our reported operating profit increased 17% to SEK 2.6 billion, and that's also record high. We had SEK 40 million in positive onetime items, and the adjusted operating margin was 22.9%. The margin was diluted from acquisitions. The constraints in the supply chain intensified in the quarter and had a somewhat negative impact on profit and margin. The operating cash flow increased to SEK 2.4 billion, with a positive cash flow from working capital. And this is quite an achievement given that we are growing strongly.So to remain the leading productivity and sustainability partner for our customers, we always focus on innovations, acquisitions and partnerships to strengthen Epiroc's position. And starting off with innovations. So the reman program, which Jess Kindler told you about at the Capital Markets Day in December, it is a true circular offering. So instead of buying new component, the customer returns a used component to us in exchange for a remanufactured component.It is a lower cost option while maintaining the highest availability and reliability. So we see good demand for this, and it is a win-win for everyone, for customers, for the environment and for us at Epiroc.So following the strong electrification trend, and also following the acquisition of Meglab, we have taken a step further than only just providing electrical vehicles. So to support customers in their transition towards battery-electric equipment, we have added a wide range of flexible charging products, including lifting tools to our offering.And this ensures that battery-electric equipment can be charged at any given time or place. And if connected, the customer can also monitor their charging remotely through a cloud service.And speaking about acquisitions and other acquisition in the electrification space is FVT Research, which converts diesel-powered mining machines to battery-electric vehicles. So we closed this acquisition in November.Also, we finalized the acquisition of Mobilaris MCE. We held 34% of the shares already before, and now we own 100%. So Mobilaris provides advanced situational awareness solutions that increase safety and optimize operations in mining and civil engineering and particularly underground.So I'm pleased to welcome our new colleagues to the Epiroc family, and we are looking forward to leverage our wider customer offering on a global scale in the coming years.Another topic we mentioned at the Capital Markets Day was our collaboration with Newcrest. And there, we have now successfully implemented the first semiautonomous integrated production level. And while a semiautonomous production level can be seen at many operations across the world, this partnership is taking automation to the new level as equipment from other suppliers is automated as well, and this takes safety and productivity one step further.And if you have not seen our Capital Markets Day, the webcast is available on our website, so please have a look.So then coming over to the strategic topic of aftermarket, which represents 2/3 of our revenues. It is resilient, profitable and it's growing. And it's not all about a high customer activity, even if that definitely is a contributor to the growth. But I would say that we gain customer share continuously, and this is thanks to hard work and a strong value proposition.So we have a local presence around the world, and this is appreciated by our customers. We also have an attractive offering. And in this quarter, we had good demand for midlife services or larger rebuilds. And rebuilds are good in many ways. As a start, the value proposition for the customers is attractive. They pay less than buying a new machine, and increase their productivity immediately. At the same time, it prolongs the life of the equipment, which is good from a resource and environmental perspective.The connected fleet is also growing, which makes us even better in helping customers while increasing our internal efficiency. So we have more than 6,000 machines now that have been delivered with connectivity.I cannot speak about the aftermarket without mentioning the supply chain challenges. And if or rather when there is a lack of components, we do prioritize existing customers and their machines. So keeping existing machines up running is many times more valuable to customers than delivering new equipment sooner. So in combination with our progress in the supply chain improvement program, we have actually managed to increase availability for our aftermarket, which is very good given the circumstances.Another focus area for us is operational excellence. And to me and to us, it means that we want to do the right things, and we want to do these things even better. So we have many initiatives ongoing continuously in our organization.First, we work to improve the supply chain excellence. And our work progress is according to plan, but a positive financial effect has been offset by increased transport cost.In administration, we constantly improve our way of working. For example, we simplify and have established regional centers of excellence to align administration processes.And finally, in service, in order to be successful and to be the true partner of choice for our customers, we need competent and capable service technicians with diverse competencies. And therefore, we focus on training, on certifications and sharing of best practices across the different regions. We also focus on making our more than 100 service workshops more and more efficient in a structured way.We have made good progress in the sustainability area, both during 2021 and in the quarter. And the positive trend of increased share of women managers and employees continued also in Q4. On injuries, we saw more lost-time injuries in the quarter while a comparable total recordable injuries decreased. It is concerning that we have more lost-time injuries. It is absolutely critical that our employees and our customers are safe at work and come home after each day or shift. So therefore, we work hard with our initiatives such as SafeStart and Live Work Elimination.On a more positive note, the Science Based Targets initiative has validated our ambitious climate goals. And with this, our position as a sustainability leader has been reinforced, and more important, we contribute to keep global warming at a maximum of 1.5 degrees Celsius.The energy consumption in our operations increased mainly due to acquisitions and higher activity levels. For comparable units, energy consumption increased 5%, and we have several initiatives that have been implemented to increase energy efficiency, but not enough to fully compensate for the higher activity level. The reduction of CO2 emissions from transport continued, which is a very good achievement given the higher volumes, and this is partly thanks to a higher share of shipments by sea and road instead of air.So with this, I conclude the first part of the presentation, and I welcome Hakan to the stage to cover the financials.Welcome, Hakan.

[Hakan Folin, Senior VP of Controlling & Finance and CFO]

Thank you very much, Helena. Hello, everyone. It's a great pleasure to be here today and to represent Epiroc. I have spent now almost 2 months in this company. And I'm happy to have met many new colleagues, unfortunately, however, mostly virtually. And I think they all have a very humble and hard-working approach. It's a fascinating industry to be in, and I fully share the view that Epiroc plays an important role in helping our customers towards sustainability and higher productivity.And speaking about higher, our operating profit in Q4 was higher than ever before. We reported an operating profit of SEK 2.6 billion. If we adjust for items affecting comparability, it was somewhat lower, but yet the record high level of SEK 2.55 billion.When looking into the bridge, we see that we started with an operating profit of SEK 2.2 billion in Q4 last year, and it increased 17% up to SEK 2.6 billion, including items affecting comparability, which were SEK 48 million. These items include a positive revaluation effect of the shares we held prior to the acquisition of the remaining shares of Mobilaris MCE of SEK 167 million. It also includes a change in provision for the share-based long-term incentive programs of minus SEK 127 million.The operating profit was positively impacted by increased volumes, currency and we had an increase in margin to 23.2%. The adjusted operating margin was 22.9%, supported a bit by currency, but diluted by acquisition, roughly about 90 basis points in the quarter.We continue to invest in these high-growth tech companies, and it will drive our business going forward. You will find more details about them in the quarterly report. There, you can also see that the finalized acquisitions during the year have contributed with SEK 641 million in revenues and a negative SEK 56 million in operating profit during the year.So if I then move on into the segments, start with Equipment & Services, demand was strong, as Helena already said, orders increased by 27% to SEK 8.8 billion, which corresponds to an organic growth of 20%. And here, we had a contribution from the acquisitions with another 4%.If we compare with Q4 last year, orders received in local currency in all regions, and we see that North America is where we achieved the highest growth rate.If we look at equipment specifically, orders increased 28% to SEK 3.8 billion and also here organically 20%. And we saw that order intake increased both for underground and surface equipment. And in total, as Helena mentioned, we had 3 orders above SEK 100 million in the quarter.And here, we also want to mention equipment lead times. These are longer than normal, about 1 quarter on average. So now it's about 3 to 4 quarters. However, large variations between different types of products. This is due to a combination of multiyear large order, us ramping up and also some delays in the supply chain.For service, orders increased 25% to SEK 5 billion, 19% organic growth, and this was actually a record. Growth was supported by a combination of a high customer activity, several orders for midlife services or rebuilds. It's worth repeating that our local presence and strong offering has made us gain customer share.Moving over to revenues. They increased 14% to SEK 8.5 billion, corresponding to an organic growth of 9%. Also this actually being record. And here, we had a contribution of the acquisitions with 3%. And we closed the acquisitions of FVT Research and Mobilaris in November, they will bring on a yearly basis, around SEK 90 million in annual sales.We normally have some seasonality tailwind on revenues in the fourth quarter, and I would say that so we did this year again. If we then move over, I will now cover the profit and the margin. Operating profit for Equipment & Service increased 18% year-on-year to SEK 2.3 billion, positively impacted by this onetime effect of Mobilaris, as you already heard about.Acquisitions, however, diluted margin in the quarter for the segment just over 1 percentage point. These are mainly technology and software acquisitions with relatively low revenues at the moment, but we do see good demand, and we look forward to see the future development of these businesses contributing to the growth of Epiroc.The reported operating margin for Equipment & Service was 27.3%, up from last year's 26.4%. Adjusted for the one-off, though it was 25.4%.If we then instead move into Tools & Attachments, this segment also had a strong quarter. Orders increased 20% to SEK 2.8 billion. This was an organic growth of 16%. The acquisition of [ DNA ] contributed 3%. And we saw a good development for both hydraulic attachment and for rock drilling tools in the quarter.Revenues increased 16% to SEK 2.6 billion, up 8% organically. And also, here, we had some support from the acquisition, 5%.Before moving on, I would also like to comment on the margin for the full year. Tools & Attachments has actually made an impressive improvement. The adjusted operating margin was up 4.2 percentage points to 17.5%.Then back to the quarter, and here are the details of operating profit and margin for Tools & Attachment. The profit increased 32% to SEK 480 million and was supported by increased volume, currency and also from the acquisition already mentioned, and also the margin improved and came in at 18.2%. Solid improvement supported both from volumes and slightly from currency as well.Note that, last year, we had SEK 15 million in restructuring. This is including structure on this growth. We had high invoicing from the acquired companies. So there was not really any dilution on the margin as part of the acquisition.Moving on then, I think it's clear to all of you that Epiroc is growing. The growth does carry some cost with it. Some of the administration costs are linked to increased volume. For example, the cost for our distribution centers are booked here in admin costs. We also have more activities. In R&D, we have invested more than ever, more than SEK 360 million in Q4 or 3.2% of revenues. Also, the effect of our acquisitions are included here in administration. In relation to revenue, these costs were fairly stable at around 16%.The cost initiatives that we finalized already last year are still bearing fruit, and this allow us to invest in, for example, R&D. For the future, we, of course, need to keep good control over the cost to allow us to invest in further value-adding initiatives.Net financial items were clearly lower than last year. Last year, we had a negative effect from exchange rate differences. Income tax expense was higher due to that we had higher profit, but the effective tax rate was once again relatively lower. For Q4 specifically, the onetime profit from the Mobilaris MCE shares lowered the overall tax rate since this is a nontaxable income.Our operating profit -- sorry, our operating cash flow in the quarter increased to SEK 2.4 billion, positively impacted and mainly by the higher operating profit and lower net financial items paid. Payment of interest does vary between the quarters, and that's a little bit what you see here.We also managed to have a positive cash flow from working capital, which I would say, is quite an achievement in this growth environment, less positive than last year, but still positive. And all in all, a solid cash flow in the quarter and also for the year. And when we measure cash conversion rate for 2021, this was 97%.Coming back to working capital then. As I mentioned, compared to Q4 last year, the net working capital increased 15% to SEK 12.2 billion. If we exclude the effect of acquisitions and currency, the net working capital increased 6%. We do require more working capital when we grow or in relation to revenues, we have improved. The average net working capital in relation to revenues decreased to 29% from 33.8% last year.Return on capital employed also improved, mainly due to the higher operating profit to 26.1%. Growth and acquisitions contribute to increased capital employed, while shareholder distribution and repayment of loan reduced the cash portion.And this is visible here. We have a net cash position. But as you can see, it is lower than last year, mainly due to the acquisitions we have performed and also distribution to the shareholders. And they, combined, have been more than the operating cash flow. We still have a strong financial position, and we ended the year with a net cash of SEK 1.3 billion. And this, of course, gives us good flexibility going forward.So what are we doing with the cash that we are generating? Well, Epiroc's goal is to provide long-term stable and rising dividend to its shareholders, and this is part of it. The Board has proposed a dividend to the shareholders of SEK 3 per share. This is up 20% from the SEK 2.50 that was paid out last year. The proposal is to do this in 2 equal installments with record dates April 27 and October 24. In total, the dividend amount to approximately SEK 3.6 billion.In the graph, you see a yellow bar that represents the mandatory redemption that we did last year, where an additional SEK 3 per share was distributed to shareholders. There is no redemption proposed by the Board this year.Before concluding the financial part, I would like to say thank you to Anders Linden, my predecessor. And Anders, you have been a great support to me during these 2 months so far. So thank you very much for that.And with that, back to you, Helena.

[Helena Hedblom, CEO, President & Director]

Thank you, Hakan, and well done. This is the first result presentation for you, and we look forward to having you in the team for many more to come.And I also would like to say thank you to Anders Linden. And to repeat what I said at our Capital Markets Day in December, Anders has been an incremental part in making Epiroc a successful stand-alone company. So thank you, Anders.So then concluding Q4 briefly. So we create value for our customers, which is proven by the strong demand that we saw in Q4. We ended the year strongly, and we managed to achieve record high revenues and profit.We are experiencing a continued and increased supply chain challenges, but we work hard to mitigate the negative effects. And to all employees in sourcing, logistics and supply chain, you are doing a great job. And your dedication is most appreciated, and your efforts are not left unnoticed.We have finalized 2 acquisitions and in total 8 in 2021. So a warm welcome to all 925 new employees to the Epiroc family. Our ambitious climate targets have been validated by Science Based Targets initiative, which means that our industry-leading position within sustainability has been reinforced. And we are also seeing several of our initiatives within sustainability bearing fruit.So we make good progress. So we dare to think new, and as a team, and in collaboration with our customers, and our business partners, we achieve great things together.And onwards, what can you expect? Well, we expect that demand, both for equipment and for aftermarket, will remain at a high level in the near term. And as always, this is the comment on the underlying demand.So thank you all for taking the time. And now it's time for Q&A.

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

Okay. Time for Q&A. Thank you, Helena. Thank you, Hakan both excellent presentation. [Operator Instructions]So operator, please go ahead and open the line. Thank you.

[Operator]

Our first question comes from the line of James Moore of Redburn.

[James Moore, Partner of Capital Goods Research]

Helena, Hakan, thanks for taking the questions. My first question is on the supply chain cost increase. You mentioned the higher transport costs. And I wondered if you could, in any way, quantify the overall impact to the group in the fourth quarter versus either the third quarter or year-on-year because you mentioned the word increase. And I wonder as we look forward into the first quarter and the first half of next year, do you see something similar or worse or better?And the second question is on the order environment. I wondered if you could quantify the 3 large orders. But more importantly, could you talk about where you think we are in the equipment cycle? Are we at the top of the cycle? Or do you think there's more to go in the next few years with exploration and greenfield?

[Helena Hedblom, CEO, President & Director]

So on the transportation side and on freight, I think we have seen, of course, high freight cost throughout the last 1.5 years. What we have seen, though, in the last quarter, we saw that we were forced to fly a little bit more than we had planned for. We also -- of course, when you have disruptions both on the out and the inflow, we also have some higher costs than with -- let's say, not being efficient as planned in our factories. So I would say, we are not -- it's not a lot, but it had an impact in the quarter. So that's on the freight side.On the equipment side, when we look at this, we look at the underlying demand and the small and medium-sized orders, and that has continued to be very healthy for the last year, which is really good to see. What we have also seen is that customers are taking decisions to do brownfield investments, larger replacement orders, et cetera. So we have seen that during 2021.So then, of course, it can always vary between quarters and the large orders are always bulk in nature. But when we look at the business [ cooking ], what we have these 18 months that we look into, okay, where are the projects in the world, it is very much the same list that we have been working with for a long time now.If we look on compared to the previous peaks, I would not really compare it from a level standpoint. I would rather say that, today, the customers are much more focused on the technologies that will secure sustainable, more productive solutions. So that's also why we see good demand and good interest in both automation, digital product as well as electrification.

[Operator]

Our next question comes from the line of Klas Bergelind of Citi.

[Klas Henrik Bergelind, Director]

Hi, Helena and Hakan. So a couple of questions, please. First on equipment orders. If larger orders were around SEK 300 million, you said 3 SEK 100 million each, then this suggests equipment orders were down around 8% underlying. And mining seems to have decreased relative to infra a little bit, at least in relative terms. So typically, your down quarter-on-quarter because of seasonality with less infra orders because of the winter. So I'm trying to understand why it looks like mining weaken on an underlying basis. Is this simply because the organization, as you say, Helena, a shifting focus even more towards services, as I said before, prioritizing uptime rather than equipment, I'll stop there?

[Helena Hedblom, CEO, President & Director]

I think if we look on the industry as such, it is very much focused on output. And then, of course, our aftermarket is a vital part of making sure that we keep that output. But when it comes to the order intake for equipment, I would say, it's more related to the lumpiness in orders. So of course, we talk about the large orders that are about SEK 100 million, but there are, of course, many more orders that are, let's say, midsized orders. I would say, it's the lumpiness more that can impact between quarters.But it's good activities also in infrastructure, with high activities both in Europe as well as in North America. And that we also see in the demand for hydraulic attachments, which is very good, let's say, a signal of the actual activity levels out there in the infrastructure segment. So also strong there.

[Klas Henrik Bergelind, Director]

All right. Can you just clarify on the large order comment? Did you say 3 orders, SER 100 million each, or did you say 3 orders, SEK 100 million in total?

[Helena Hedblom, CEO, President & Director]

SEK 100 million each.

[Klas Henrik Bergelind, Director]

SEK 100 million, each. Yes, clear.

[Helena Hedblom, CEO, President & Director]

About SEK 100 million, about. Yes.

[Klas Henrik Bergelind, Director]

About. Then it was like I thought good. My second one is on services then. It's very good to see an increase quarter-on-quarter from an already high level. I'm trying to understand how much of this was pricing that perhaps got stronger towards the end of the year that boosted the 19% year-over-year organic? And could you tell us how the different verticals developed quarter-on-quarter, the rebuilds, reman, spare parts, battery as a service in any of the verticals accelerate more than the others?

[Helena Hedblom, CEO, President & Director]

So we have a good pricing power when it's always tied to the value that we can generate. So there is a pricing component in this. But then I would say that step-by-step, we are growing the customer share by understanding the fleets out there by tailoring our offering also using connectivity as a tool. What we have seen is that we are successful in winning large rebuilds more and more.And as I explained, we have also a strong offering here with reman centers, this type of products that really is a quick alternative to get productivity up and it's a good value proposition for our customers. So several of the service products that we have launched during the year is also taking off now.So I would say, particularly the rebuild supported the growth. But we will be -- with step-by-step, every quarter also continue our work to increase the number of service contracts. So this is -- it's very much an ongoing, very structured, step-by-step approach.

[Klas Henrik Bergelind, Director]

Good. So it was, yes. So it was mainly underlying demand that accelerated quarter-on-quarter rather than pricing. That's good to see.

[Helena Hedblom, CEO, President & Director]

Yes.

[Operator]

Our next question comes from the line of Lars Brorson of Barclays.

[Lars Wauvert Brorson, Director]

Maybe a first one for Hakan, an easy one to start with. Hakan, you gave some helpful color. Thank you around operating expenses in the fourth quarter, but it still looks like quite a material step up SEK 1.8 billion in the quarter, if I exclude other cost and your LTIP, you've been cruising at SEK 1.5 billion, SEK 1.6 billion or so over the last 7 quarters. So we basically back to where we were in 2019. I guess the key question here is, can you sort of try and help us understand how much of this cost ramp is perhaps more transitory in the fourth quarter? Are there some unusual sort of M&A cost and other? Or should we set ourselves up for a more sustained ramp in 2022, particularly in R&D?

[Hakan Folin, Senior VP of Controlling & Finance and CFO]

I think if you compare with Q4 '19, you should remember that we have completed quite a few acquisitions since then, and they will obviously add to this cost level that you're looking at. And then also, we had some, I wouldn't call them maybe one-off item, but a few extra items that we don't expect going forward. So comparing to Q4 '19, it's probably a little bit unfair given that we are a larger business at the moment, but then also Q4 was, I would say, a bit higher than what it should be -- should have been -- could have been.

[Helena Hedblom, CEO, President & Director]

I think what is also important to remember is that logistics is within admin. So pick and pack given this is very much straight correlation with volume growth. So when we grow the aftermarket, we also have a volume component in admin from logistics.

[Lars Wauvert Brorson, Director]

Understood. Secondly, if I can, Helena, a bigger picture question maybe on services. You've delivered 10% organic revenue growth over the past 4 years in your service business. That compares to what I see is about sort of 1% mine production growth over the same period. I appreciate structural tailwind, of course, from lower ore grades, customer share gains as you've highlighted -- some pricing, but it's still an extraordinarily strong growth trajectory, and you keep, of course, highlighting midlife upgrades and rebuilds. Perhaps, if you can help us a little bit and understand the materiality of that as part of your services. So the question really is how big is midlife upgrades rebuild today as a percent of services? And what's been the growth here over the last 4 years?

[Helena Hedblom, CEO, President & Director]

So I think it's -- I think we shared some of the numbers at the Capital Markets Day as well. But it's clear that the service products that we have launched during the last, I would say, 3, 4 years supports the growth. So they are growing faster than, let's say, the components, if we look on parts or service. And I think this is where we are in a way, creating our own market, our own aftermarket by doing this. So by bundling parts and ours into something that adds more value than the pieces. That's really how we have been able to really get a good boost when it comes to growing the service business.So the service products, that's key. But it's also, I would say, everything is linked. So it is the connectivity that we know where we have the equipment so that we can address any gap we have in supply. Also, it is very much linked to the fact that we are step-by-step improving our supply chain.So with higher availability in the aftermarket, we have also managed to capture a bigger share. So I think it's a combination of us being more specific in, let's say, when it comes to products and our offering to different segments. We have talked about that before also, in large mining houses, small mining customers, infrastructure customer, exploration customers, water-well customers, it's completely different type of customer dynamics and buying patents.And we are much more clear now in approaching these customer base in different ways to capture a bigger share of the aftermarket. So I see really the installed base out there of our machines, the machines we have put on the market the last 10 years. That is really the biggest opportunity we have to boost the aftermarket growth.And -- but it's -- of course, it's not really, I would say, rocket science. It's very, very, I would say, hard work and focused efforts from the team. But I think we are step-by-step. If we take a 10-year perspective, I think we are, today, much more professional in running aftermarket for many aspects, and that is paying off.

[Lars Wauvert Brorson, Director]

So if I say your midlife operating business is 10%, 15% of services, it's tripled over the last 4 years, adding 3%, 4% to your annual growth rate. Does that sound about right?

[Helena Hedblom, CEO, President & Director]

I think it's lower. But the first assumption there it's too high. But -- and I would say it's both the product, but it's also the fact that we are step-by-step growing the number of service contracts. We don't talk so much about that because we don't book it. We book at as they come per month, but we also step-by-step every quarter, land more and more service contracts. And that is the best opportunity. That's really where we can demonstrate the true value of our equipment and by delivering securing uptime for our customers.

[Operator]

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

[Andrew J. Wilson, Analyst]

Can I start with just trying to get a bit of an understanding as we look into 2022 and thinking about profitability? The supply chain program and the -- I guess, the other excellence programs that you mentioned, has obviously been a lot of work, which you might not necessarily have seen the benefit from given that, I think, you flagged that the benefits, at least so far been masked by the higher amongst to the thing supply chain costs. Should we expect to see -- if we were sort of bridging '21 to '22 in terms of margin, should we expect to see a benefit coming through from those operational excellence programs in '22?

[Helena Hedblom, CEO, President & Director]

I think we -- as I mentioned, I think we always work with efficiency in everything we do, being it admin, being it service contracts, being it manufacturing or in the supply chain. But it's always a balance also to invest for growth. So we are investing heavily into R&D. It's higher numbers than we have ever invested in and that's really to stay ahead and secure the future growth.So I think this is very much -- we do a lot of the operational excellence initiatives also to safeguard that we will be able to invest so much in growth both be it innovation, being it acquisitions or feet on the street and specific initiatives to secure growth long term. So it's always a balance. But we will always work with operational efficiency to allow us to invest in next horizon of growth.

[Andrew J. Wilson, Analyst]

Second question, it's more of a clarification really. Just on the supply chain challenges, which you mentioned having -- had the cost that your kind of following on from James' question. I just wanted to clarify; do you think that despite some times have also had an impact in the deliveries that you were able to make in the Q4? I guess, what I'm trying to understand is, without the supply chain challenges, what would the sales number have been, and therefore, sort of how much lost or deferred sales do you think you're impacted by in the Q4? Just trying to get an understanding of the run rate.

[Helena Hedblom, CEO, President & Director]

But there is an impact. We have not quantified it, but there is, of course, an impact. And it's mainly, I would say, on the equipment side since we are prioritizing the aftermarket, and that, as Hakan said, leads to longer lead time on the equipment. So that is a conscious decision that we are taking on a weekly basis now how to prioritize when we have a shortage of components. So of course, if you would -- we'd do it the other way around, you would have higher revenue for equipment, but you would then lose out on the aftermarket.

[Andrew J. Wilson, Analyst]

Okay. So I guess, so if I'm thinking about the sort of run rate of the respective equipment's and sort of businesses, I shouldn't really see much of an impact on service revenues. It's really all concentrated in equipment. Just trying to think about kind of heading into 2020 [indiscernible] it looks like?

[Helena Hedblom, CEO, President & Director]

Yes, I would say so. Yes. I think it's also maybe good to remember that when we take larger rebuilds also on the service side, there is also a lead time for rebuilds. So that is not, let's say, moving as quickly as if it's only a part delivery. So -- because that, very often, is then that you do a rebuild of 5 machines. So you cannot take all of them from site at one time because then the productivity go down for that customer. So that is also planned sequence or event, which also builds upwards on hand within service.

[Operator]

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

[Andreas Juhani Koski, Research Analyst]

I would like to know how important do you think the lead times are for your customers? The reason for asking is, do you see a material risk that you could lose market share in your equipment business because you prioritized or aftermarket business?

[Helena Hedblom, CEO, President & Director]

No. I think we have competitive lead times given -- I think the situation is the same for all players. But when we look at the lead times, we have competitive lead times. So I don't see that we are not, let's say, we're not in lead times where we start to lose orders due to the lead time. As Hakan said, you'd say it's a couple of months longer than normal, which is not a lot.

[Andreas Juhani Koski, Research Analyst]

Yes. And then coming back to the -- sorry?

[Helena Hedblom, CEO, President & Director]

No, go ahead.

[Andreas Juhani Koski, Research Analyst]

Okay. Just coming back to the service growth. How much did your new initiatives grow? And how much did you think your additional aftermarket business grow?

[Helena Hedblom, CEO, President & Director]

We have good contribution from both. So it's really strong in -- strong underlying activities.

[Andreas Juhani Koski, Research Analyst]

Yes.

[Helena Hedblom, CEO, President & Director]

It's strong contribution from new service contracts. Its contribution from rebuilds. So it's a combination, I would say, of all of them, but also growth in some of the subsegments that we are focusing on, growing the share on equipment that we have not served previously. So it's -- I would say, it's a combination of all of them, and we have good progress in all areas.

[Andreas Juhani Koski, Research Analyst]

Yes. So the traditional, say, service and spare parts business that is also growing by double digits?

[Helena Hedblom, CEO, President & Director]

Yes. It depends on region, of course, and market and quarter. But I think, if you look on it, I don't think you can compare, let's say, quarter-by-quarter. But when we look at it year-over-year, we see good growth in all the, say, subsegment of our service business.

[Operator]

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

[Max Yates, Research Analyst]

The first question I wanted to ask about was margins into next year. And if I look at your Equipment & Service business, the level or the share of equipment is as low as it's been kind of, I think, since you've been stand-alone as Epiroc. So I just wanted to understand kind of given we're going into a year where equipment will outgrow services, do you think with that sort of shift of mix, it will be possible to push margins higher? I guess, I'm trying to understand sort of how meaningful could some of these kind of other supply chain improvements be given we're already coming from a sort of very healthy margin level? How should we think about that for next year?

[Helena Hedblom, CEO, President & Director]

Well, I think if we summarize the year, clearly, equipment has grown more than the aftermarket, even though it has been a really good year also for aftermarket. So of course, when we invoice those equipment, it will have an impact. It will have a mix effect. But at the same time, we are also doing a lot of work continuously to improve our efficiency in the supply chain, in admin, et cetera.So it's -- and then, of course, it's always a balance, as I said, also, how much do we invest in the future, investments in R&D? And we continue to invest in the future also given the situation we are in right now with challenges. So for me, it's extremely important to always work on the efficiency side also to allow us to invest for the future.

[Max Yates, Research Analyst]

Okay. And then just as a follow-up. The acquisitions contribution has been obviously sort of very healthy this year with good -- quite a few acquisitions made. When you look at your pipeline, do you envisage that we could have a year -- I mean, maybe not exactly the same number, but do you see this kind of rate of acquisitions kind of 7%, 8% per year, is that kind of repeatable when you look at your supply chain? Or should we view this -- sorry, when you look at your pipeline? Or should we think about this year as a sort of relatively unique in terms of building the business?

[Helena Hedblom, CEO, President & Director]

So we have done 19 acquisitions since the announcement of the split, the creation of Epiroc and 8 last year. We have a very healthy pipeline when it comes to acquisitions. So that's also -- we invest organically for the future, and then we complement it with strategic M&A. So I have a good hope that we will be able to continue the good work in -- within acquisitions as well in the coming years.

[Max Yates, Research Analyst]

Okay. I was wondering just one very final housekeeping one. Would you be able to call out how much within Equipment & Service, how much PPA increased year-over-year from the acquisitions that you made and how much of an impact it had within the sort of structure and other line? Because I appreciate that recent acquisitions are dilutive because they're lower margin, but I assume you're also taking more PPA above the line as well.

[Hakan Folin, Senior VP of Controlling & Finance and CFO]

Correct. We'll -- we'll look into that and come back, if that's okay?

[Operator]

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

[William Turner, Research Analyst]

As mentioned, it's likely that price increases helps contribute to your sales growth this year. Given the comments on cost increasing, should we expect there to be greater price increases next year? And given this and also the extension that you've had in lead times, do you think over the last couple of quarters that customers may have been prebuying or bringing forward potential equipment and spare parts orders?

[Helena Hedblom, CEO, President & Director]

I think we have a good pricing power, and it is always tied to the value that we can give our customers. And I think if we look on what we are working with, with the technologies that we are bringing to our customers, when it comes to productivity, when it comes to safety or lower cost, our pricing power is good, and we continue, of course, to use that.When it comes to prebuying, I wouldn't say that we have seen. We have seen it maybe in some -- if you take the infrastructure market where you need to be ready for a certain period, for example, because of the construction market all the work needs to be done in Q2, for example, next year -- or this year. So then we saw, of course, some of -- some customers prebuying attachments, for example.But it's a minor thing, I would say. We have not seen it in service because that's more mining-related and more, let's say, related to the actual demand. And the mining is also more constant, but we always have this type of cyclicality, I would say, when it comes to the infrastructure segment. We see that every year more or less.

[William Turner, Research Analyst]

Okay. Yes, that makes sense. And then just out of kind of curiosity. The decline in working capital intensity, how much of this is out of choice? Or -- and how much of this is just a function maybe of the challenged supply chain? Could you just break down a little bit more of moving parts there? And are you expecting it to stay at this low level?

[Hakan Folin, Senior VP of Controlling & Finance and CFO]

I would say that actually, if you look at the whole year, the main improvement has been on AR and on the AP side, if we look in percentage of revenue. So that has obviously been by choice where there has been, before my time then, very hard work in terms of improving those terms and making sure we collect outstanding that we have. So that's definitely been by choice.On the inventory, I can -- I would say it's a little bit of both. In parts of the organization, we are sitting on to little given the supply chain challenges. Helena talked about and i parts, I think there is still room for improvement. But all in all, I would say that the improvement is definitely to 90% or so by choice.

[Operator]

Our next question comes from the line of Gustaf Schwerin of Handelsbanken.

[Gustaf Schwerin, Research Analyst]

I have one last follow-up on the equipment side. I know you're prioritizing the aftermarket business, but how far are you right now from being fully ramped up on the equipment side with the order backlog you have? I mean, should we just view the growth sequential as normal seasonality minus some increased supply chain disruptions? Or have you actually increased your capacity quarter-over-quarter?

[Helena Hedblom, CEO, President & Director]

Yes. So we have ramped up our capacity. So we did that given the strong order intake throughout 2021. So we have ramped up our capacity. So what is impacting us is this when we have shortages and then the delicate decision to prioritize either component to aftermarket or to equipment. But from a capacity standpoint, we are ramped up.

[Gustaf Schwerin, Research Analyst]

And if we look at your Q1 sales, should we expect to see normal seasonality there on equipment?

[Helena Hedblom, CEO, President & Director]

Yes, I would say so.

[Operator]

Our next question comes from the line of Nick Housden of RBC Capital Markets.

[Nicholas Housden, Analyst]

Yes. My first one actually relates to that last one, just about the seasonality. Obviously, there are a few larger orders in the backlog now, and these presumably will begin flowing through to the P&L a bit more clearly in 2022. I'm just wondering based on the delivery schedules that you've agreed with your customers, whether you can tell us how lumpy sales and profits are likely to be? Or whether you think they will be spread out in a fairly normal manner across this year?

[Helena Hedblom, CEO, President & Director]

I think it will be spread out more across the year. It's not that there is a lot towards the end of the year or in a specific quarter. So I would say it will be spread out.

[Nicholas Housden, Analyst]

Okay. Great. And then just quickly on bolt-on M&A. I'm just wondering, if you can tell us if there are any sort of glaring technology gaps that you see that you were kind of very eager to address with an acquisition?

[Helena Hedblom, CEO, President & Director]

So if we look on, I would say, all the areas that are linked to our digital offering, when it comes to optimizing drill to mill, that's of interest for us, also targets related to automation and electrification is of interest. And I think when you look at what we have announced during the last 3, 4 years is very much in that space, but also acquisitions to strengthen our aftermarket. That is also highly interesting for us.

[Operator]

Our next question comes from the line of Christian Hinderaker of Liberum.

[Christian Hinderaker, Research Analyst]

Helena, you mentioned extended lead times for components and obviously, that's been a factor that's required, I think, additional use of air freights. I know that's been a well-flagged issue, but quite surprised to learn from elsewhere that even the simple product like [indiscernible], there's been an increase in lead times sort of 13 to 73 weeks.Just wondering, if you can offer some color on your ability to adjust your sourcing and procure from different component providers? And maybe put another way, what proportion of the components that you procure are not interchangeable, and hence, where you're seeing long delays as a result? And then I'll ask a separate one.

[Helena Hedblom, CEO, President & Director]

So when it comes to mitigating all these challenges, there is a lot of work going into this from an operational standpoint. It's both to broaden the supplier base to use more suppliers than before. It's to redesign components to open up for more suppliers. We're also leveraging, of course, our manufacturing footprint, the fact that we can produce in China -- if you take equipment now, we can produce in China, in India, in Europe, in Sweden as well as in U.S. So by leveraging also the -- let's say, the regional players from a supplier base, that's also ongoing. So there's a lot of activities going into, let's say, opening up and try to mitigate the shortages that we are experiencing.I think when it comes to components, of course, we have some of the components -- even components are commercial parts, but a big portion, of course, of what we do is proprietary parts that we use or proprietary solutions. And that is also -- so that is -- you cannot shop around all of the components everywhere. We have a part of the assortment that is commercial parts, but a big portion of the other parts are proprietary parts as well. So then you need to do adjustments and you need to have R&D to try to help out to redesign and find more opportunities.

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

Sorry, for interrupting. So everyone, sorry for interrupting this Q&A session. I know we still have a few analysts on the line. I know who you are, so I will reach out to you after this. But thank you for taking the time and for your information also, next quarter, you will not see me on stage. You will see my manager, Mattias Olsson, because I will, if everything goes well, be home on Maternity Leave within a few weeks. But I will send you all the relevant information to those of you that we have a regular contact with.For those of you that still are eager to have questions answered, book meetings, et cetera, you can always reach out to us at [e-mail], and we will do our best to help you with any questions or requests.So with this, thank you very much, everyone. Stay safe. And as always, we, on the Epiroc side, wish you successful investments. Thank you.

[Helena Hedblom, CEO, President & Director]

Thank you.

[Hakan Folin, Senior VP of Controlling & Finance and CFO]

Thank you very much.