EPIPF - Epiroc AB (publ) (EPOKY) Q1 2023 Earnings Call Transcript
2023-04-28 19:40:04 ET
Epiroc AB (publ) (EPOKY)
Q1 2023 Earnings Conference Call
April 28, 2023 8:00 AM ET
Company Participants
Karin Larsson - Head of IR
Helena Hedblom - President & CEO
Hakan Folin - SVP, Finance and Sustainability, and CFO
Conference Call Participants
Klas Bergelind - Citi
Andrew Wilson - J.P. Morgan
Nick Housden - RBC
Christian Hinderaker - Goldman Sachs
Lars Brorson - Barclays
Gustaf Schwerin - Handelsbanken
James Moore - Redburn
Presentation
Karin Larsson
Hello and welcome to the Epiroc Q1 Results Presentation. My name is Karin Larsson, Head of IR and media here at Epiroc. With me today, I have Helena Hedblom, CEO; and Hakan Folin, CFO. They will very soon and briefly present the results before we do the Q&A. But before we start, if you have not already signed up to our Capital Markets Day in Orebro, in Sweden, in June, please do.
There are limited seats and we are rapidly approaching the full capacity. As we are piggybacking on a global underground customer event the very same week, you will get to see exactly what our customers get to see when it comes to our solutions within automation, electrification and digitalization. I'm convinced that this will be a very exciting tour and we hope that you all can join. Helena, please.
Helena Hedblom
Thank you so much. And yes, a warm welcome everyone to join us in Orebro, I think it will be a fantastic event. So we've had a strong start to this year. The customer activity in the quarter remained high and we achieved a record high order intake of more than SEK15 billion. Acquisitions contributed strongly to the order intake and our organic order growth excluding Russia was 1%.
We won several large equipment orders and service continued to perform well, supported by midlife upgrades or customers equipment. So a wide and attractive offering in combination with the excellent work by our 7,300 committed service technicians contributed to the strong development in service.
Our revenues increased 25% to SEK13.9 billion, with strong contribution from both organic and acquired growth. And operating profit EBIT increased 20% to more than SEK3 billion. The adjusted operating margin was 23% supported by organic growth and currency, while acquisitions diluted the margin.
Supply chain challenges, mainly on the outbound transport side were still a constraint in the quarter, impacting inventory and cash flow negatively and more will come on this later. Acquisitions are an important contribution to our growth and year-to-date, we have closed three acquisitions with combined revenues of SEK2.4 billion. So also on this topic, you will get more information within shortly.
So we are clearly leading the way in autonomous mining. For example, did you know that our autonomous surface drills reached another milestone. They have now successfully drilled the equivalent length of more than one lap around the world.
So we are more than happy to showcase our market leading solutions within automation for both loading, haulage and drilling both on surface, as well as on underground. And one project that is attracting a lot of attention is our collaboration with Roy Hill, the iron ore mine in Australia, to create the world's largest single autonomous mine. And this project is so interesting that it gets its own slide today.
So in the quarter, this project resulted in our largest ever automation order, SEK500 million. And we are converting Roy Hill's mixed fleet of almost a 100 mine trucks to driverless operation. And the operators in Perth will be monitoring the trucks from a safe distance, 1,100 kilometers away from the mine site.
So the autonomous haul trucks will run 24/7 and none of the trucks are from Epiroc, they're Caterpillar and Hitachi trucks. So this project will make Roy Hill, the world's largest autonomous mine. And in addition to these mine trucks, we will also convert around 200 utility vehicles to driverless operation.
Another highlight is that we are going to the moon. We have signed a long-term collaboration agreement with a global lunar resource development company, ispace, to provide them with technology for its future moon missions. And this is about being on the forefront of technology and more details on this will come later this year. And that is also why we're acquiring innovative companies because they support us in being on the technological forefront which contribute to growth.
So as I've said, year-to-date, we have closed three acquisitions with combined revenues of SEK2.4 billion. So with acquisition of CR, Epiroc expands its offering of essential consumables and related digital solutions. And Mernok Elektronik strengthen our position as a world-leading provider of automation and safety solutions for mining operations. And then AARD Mining Equipment adds an offering of low profile underground machines for mines with low mining heights.
I also would like to highlight the launch of our Scooptram ST18 SG, which is a green series and it's the most powerful loader yet in Epiroc's growing fleet of battery electric vehicles. And compared to using a diesel loader with similar capacity, the Scooptram ST18 SG eliminates 365 tonnes of CO2 equivalent emissions annually, which corresponds to 100 diesel cars.
And, of course, with mid-life upgrades, the machine life can, of course, be prolonged as well. So the Scooptram ST18 SG also reduces the need for ventilation, which is a major cost item for underground mines. But as you know, Epiroc is not only about mining, it is also about construction and we are committed to take the construction industry to the next level.
So at the CONEXPO 2023 exhibit in Las Vegas, we showcased full range of our latest innovations to make the construction industry more sustainable, efficient and environmental friendly. Products shown included two surface drill rigs in the SmartROC series, smart grouting systems, down the hole hammer, a V-shaped drum cutter and new digital tools as well as related aftermarket solutions.
So please enjoy this video that shows how we lead by innovation within the construction and aggregates.
[Video Presentation]
So in total, the aftermarket had a good development in the quarter. Excluding Russia, the service orders grew 11% year-on-year. And one of the reasons for our success in service again and again is the footprint. We have more than 7,300 committed service technicians all around the world.
And relevant customer offering with high availability in combination with an older fleet age drives demand and the demand for larger components and mid-life upgrades was high in the quarter. The Tools & Attachments had somewhat weaker development in the quarter, but sequentially it was strong and Hakan will talk about this more.
So coming to operational excellence then. In Orebro, where we will host our Capital Markets Day that Karin talked about, is one of Epiroc's global manufacturing hubs. And we employ around 2,900 people in the city, out of a global workforce of almost 18,000 in April. And we recently inaugurated a heat treatment plant in the city. Heat treatment is an essential part of rock drill manufacturing. And the new plant built through an expansion of the current workshop will be able to run 24 hours a day, thanks to automation.
Energy efficiency is the key focus for the sign. For example, residual heat will be recycled internally to heat buildings as well as externally to Orebro's local heating system and the building also has solar panels. Our rollout over regional distribution centers continues and in short, with regional distribution centers in Orebro, Ghent, Johannesburg, Singapore, Nanjing, Ireland, Mississauga and Santiago. So we can increase the service and availability to our customers while reducing lead times. And this will have a positive effect on inventory levels as well. In general, we always try to find areas to improve and we have many initiatives ongoing.
On the sustainability side, we have a mixed development starting with people. At the end of the quarter, we were almost 7,600 employees, but after closing of the acquisition of AARD Mining Equipment in April, we are almost 18,000 employees, up from 13,000 in 2018 when we were listed. The proportion of women employees and women managers at the end of the period increased to 18.6% and 23.5% respectively. So we are making good progress on gender diversity.
And to foster an even more inclusive and diverse culture, we have launched a new genderless parental leave policy granting a minimum of 12 weeks of paid parental leave across the global organization. On the safety side, we have recently been moving in the wrong direction, but several initiatives are in place and actions have been taken to reduce injuries.
Our CO2 equivalent emissions from operations decreased driven by several initiatives, including the instalment of solar panels and a higher share of renewable and electricity. And the emissions from transport, however, increased due to the higher volumes delivered.
So with this, I leave the word to Hakan to cover the financials.
Hakan Folin
Thank you, Helena. Orders received increased 10% to more than SEK15 billion and this is the highest level ever achieved for Epiroc. After this, four orders are what we consider being large ones, which is above SEK100 million and this totaled SEK900 million for this large orders. In other words, it indicates that we have a continued high investment willingness. The larger order was the one that Helena already talked about from Roy Hill amounting to SEK500 million.
For orders received, we had good contribution from our acquisitions, in total 10% where orders on hand were approximately SEK400 million or 3 percentage points. Excluding Russia, the organic growth was 1%. Sequentially, meaning compared to previous quarter, orders received increased 12% organically.
Moving on to revenues. They increased 25% to SEK13.9 billion, which corresponds to an organic growth of 8%. And I will cover the cash flow and also the profit bridges in the coming slides.
If we start by looking into the profit bridge details, our operating profit increased 20% to SEK3.2 billion. And the only item we have affecting comparability is SEK26 million in change in provision for the share-based, long-term incentive program. And the adjusted EBIT margin was 23.0%, supported by organic growth and currency but diluted by acquisitions. And for the group, the dilution to the margin from the acquisition was 1.2 percentage points.
Moving into the segments and starting with equipment and service. Orders increased 7% to SEK11.6 billion and organic order growth excluding Russia was 2% and acquisition contributed with 6% and currency with another 6%. For equipment specifically, orders received was SEK4.9 billion, which was down versus last year. And excluding Russia, it was down 7%.
However, for service, the strong growth trend remained, order increased 25% to SEK6.6 billion, organic growth 6% which reflect the continued high activity level and also good demand for mid-life upgrade. If we exclude Russia, the orders received increased 11% organically. Looking sequentially, orders received increased 5% organically for the segment, again indicating that we have a good customer activity level.
If we move to revenues, they increased 10% organically, acquisition contributed with 9% and in total revenues grew 26%. The operating margin was 25.3%, it was down from 25.8% last year. However, I would say this is strong given that acquisitions diluted the margin with 1.3%.
And also, I would like just to highlight that as of January 1, we have moved the exploration consumables from the Tools & Attachment segment to the Equipment & Service segment. And the logic for this move is to gather all exploration related activities under one umbrella. We have restated the segment figures for 2022 and you can find lot more details about this in our key figures that we have online.
The bridge for this segment is rather straightforward. Absolute contribution on profit from the acquisition was positive, however, diluted to the margin of 1.3%. But we managed to mitigate this -- the majority of this through the strong organic contribution, so indicating we had a good flow through.
Moving onto Tools & Attachment and here orders received increased 19% to SEK3.5 billion. The organic order growth excluding Russia was minus 7%. Worth mentioning here is that Q1 '22 was a particularly strong quarter when it comes to hydraulic attachment and therefore, we had tough comparables. Acquisitions contributed with 24% of orders received, where orders on the hand from the acquisition of CR was approximately SEK400 million or 13 percentage points. Sequentially, we have a good growth and orders received increased 33% organically.
On the revenue side, we had strong development. Revenues increased 21% and also here with a strong contribution from acquisitions. The EBIT margin -- sorry, the EBIT increased 12% to SEK532 million, which corresponds to a margin of 17.0%. The acquisition of CR has been somewhat diluting, 1.2 percentage point and this includes then amortization of intangibles and also some one-time related M&A costs.
And if we continue on the cost topic then, we have maintained cost control in the quarter, while at the same time having a high activity level and a strong growth. We are also investing more than ever in R&D and it was above 3% of the revenues in the quarter.
Net financial items amounted to SEK197 million which is up meaningfully from last year and it's because we now have a net debt position as well as the interest rates have increased quite a lot. This was also reflected in our net interest, which was SEK89 million this year versus SEK16 million last year. On the tax side, our effective tax rate was 22.6%, which is fairly stable and it's also in line with our guidance of a tax rate between 22% and 24%.
On the cash flow then, supply chain challenges, mainly on the outbound transport side were still a constraint in the quarter and this has an impact on inventory and hence also on the cash flow. And if we dive into a bit more details here, the container rates have decreased significantly and also inbound transport, which is mainly on containers, has started to improve and that has given us a good input for production. And we saw in the good quarter, it was a strong production quarter for us.
But the issue we have is rather on the outbound side with so called roll on, roll off shapes that is still not working as we would wish and this leads to us having a firm too big amount of equipment in transit on the way to the customers. And this, of course, has an impact on the inventory. And the operating cash flow was SEK338 million. This is something we are not satisfied with, but we do expect, especially that inventory ratios will improve throughout the year.
If we move to working capital and we compare to previous year, our working capital, excluding acquisitions and currency, increased with 32%. The increase is mainly explained by the strong growth, especially within services. However, sequentially, inventory is also impacted by the produce machines that are in transit on the way to customers. So the problem in the supply chain remain, but mainly done on the outbound transport side as mentioned.
And again, this is not -- we're not happy with the level of inventory, nor the cash flow impact from it. But on the other hand, the strong growth that we have seen in service is partly explained that we have very good availability of parts ready to be delivered to our customers. The average net working capital in relation to revenue in the last quarter was 32.8%. But as said, we have actions in place and we expect to see an improvement on the working capital development throughout the year.
A few words on the capital efficiency as well. We ended the quarter with a net debt level at SEK7.3 billion. The changes to a very largely (ph) explained by the acquisitions we have made and we now have a net debt to EBITDA ratio of 0.52. And as we are now in a net debt position, I thought it might be useful to give some more details about our financing situation.
The average tenure of our loan facilities was at the quarter end 3.3 years and have an average interest duration of 15 months. And on top of this, we also have an unutilized revolving credit facility, which is SEK4 billion. On the right-hand slide -- side of the slide, you have the capital employed development and you can see that it was flat versus last year at 27.7%.
I will give a very quick comment on dividend, as this is actually the same slide as was presented in our last quarterly presentation. And here the Board proposes to the Annual General Meeting which is on May '23 that we pay SEK3.4 per share in dividend, which corresponds to 49% of net profit. And it is also an increase of 13% from previous year.
So with this, thank you very much and back to you, Helena.
Helena Hedblom
Thank you. So then I will conclude the presentation. So we had a strong start to 2023. We see high customer activity, both for equipment and aftermarket. We have proven that we can deliver profitable growth. We have improved -- improvement potential on inventory and cash flow, but we are confident that we will see a positive development onwards.
We have expanded our offering by acquisitions and further strengthen our position as the market leading productivity partner. And we have following the acquisition of RCT, market leading solutions and position within automation.
And finally, we are committed to provide the best solutions to accelerate the transformation towards a more productive and sustainable industry. And innovation is key to achieve this. And to foster innovation and creativity, we encourage our employees to take on responsibility, be open-minded, inclusive, and last but not least, dare to think new. So onwards, we expect that the underlying demand both for equipment as well as aftermarket will remain at a high level in the near term.
So by that, to Karin.
Karin Larsson
Thank you, Hakan, Helena. Thank you very much. So with this impressive picture of two autonomous pit vipers in one of the largest copper deposits on the planet at one of Anglo American's copper mines in Peru, I open up the Q&A session. Operator, please open up the line.
Question-and-Answer Session
Operator
[Operator Instructions]
Unidentified Participant
Hi. Good afternoon. Hi, Helena. Hi, Hakan. Hi, Karin. Just one question from my side and it's regarding Hakan's comments on the roll on, roll out issues, the impact in the outbound transport. I know that you mentioned that throughout the year, you expect this to be solved, but I wanted to get a little bit more clarity as to -- as to when. Is this something that we will start to see improvement in Q2 or is this second half weighted or when would you expect the majority of the outbound transport actually to be unleashed and therefore you were able to decrease significantly your lead times on deliveries? Thank you.
Helena Hedblom
Yes. So I think we have -- in certain lanes, we see improvements on both when it comes to lead times as well when it comes to predictability. And then certain lanes, there is still challenges. So I would rather say second half of the year.
Unidentified Participant
Thank you.
Operator
The next question comes from Klas Bergelind from Citi. Please go ahead.
Klas Bergelind
Thank you. Hi, Helena and Hakan. Klas of Citi. So my first one is on the -- on the drop-through. You had very strong service growth while equipment sales was weaker because of the supply chain issues that leaves us with a better mix than I thought. The drop-through is good, but still a bit lower than I thought despite the better mix. And so can I just clarify if you had any extra cost in the organic element of the bridge linked to, for example, recent M&A or if there is anything else going on if price cost in anyway is getting little bit worse? I'll stop there.
Hakan Folin
No, the M&A related costs would be in structure, so those are not impacting us, as I mentioned. Especially for Tools & Attachment segment, we had some M&A related costs, but that's not in the organic part. And no, I wouldn't say that we have any specific costs related in the inorganic piece. I think flow-through was okay, was not great, but I would still say it was fairly okay and then that can vary a bit between quarters. In terms of, in general, the cost inflation, I would say that we are overall, as we have been now for a while, widely compensating for cost inflation. So no, nothing really especially in the quarter I would say.
Klas Bergelind
Thank you. My second one is on infra which is 5 percentage points lower as part of orders. We obviously have infra stimulus in the U.S., which should be supportive, but we're hearing a weaker trends in Europe. Can you, Helena, talk through where you see the weakness on the infra side by region and by divisions that really rigs in E&S versus the hydraulic attachments in T&A please?
Helena Hedblom
As we see slower activity levels within housing as well as aggregates while I would say underground tunneling is still going very strong. So when you look especially at TLD, of course, we had also very strong comparison last year as Hakan mentioned, but there we see the impact in Europe. But we see actually slower activity levels when it comes to housing in aggregates both in US, in Europe as well as China.
Klas Bergelind
Thank you. My very quick final one is on the greenfield share. We're hearing from others that the share is increasing a bit and our own work suggests that as well, I'm curious to what you hear, Helena, on the split between replacement brownfield and greenfield at the moment?
Helena Hedblom
Let's say in the quarter, we had a bigger portion -- this can vary between the quarters, of course. But for us, it was a bigger portion related to brownfield expansion in the quarter than previous quarters. But when I share your view that if you look in that overall pipeline, there is a good pipeline with greenfield investments as well.
Klas Bergelind
Thank you.
Operator
The next question comes from Andrew Wilson from J.P. Morgan. Please go ahead.
Andrew Wilson
Hi. Good afternoon. Thank you for taking my questions. I have two. I think one is a slight follow-up on Klas's question, so I guess involved price. I'm just interested in terms of your expectations going forward with regards to continuing to push through price and also if there is a big difference in terms of the pricing dynamics between the two business areas, please?
Helena Hedblom
I think we always work with pricing regardless of where we are over time. And for us is, as I've said many times, is always very well connected with innovation and what value that we bring to our customers. And, of course, by being innovative also with business models, et cetera., and different types of our service offering, for example. So I think for us pricing is always something that we work with. So I don't see that anything has changed really on that side. But what's your second one? You had one more question.
Andrew Wilson
Yeah, sorry. It's a follow-up in the sense of the different trends that you see between the two business areas as well as you point to with regards to?
Helena Hedblom
No, I wouldn't say that there is a difference. If you tie it to innovation and with clear productivity improvements, which great -- which is either ESG sustainability value adding or productivity value adding for our customers, then I say we have the same, will say, opportunity in both segments to work with prices -- with -- both with prices and with innovation, of course.
Andrew Wilson
And kind of just -- for a second question, I'm not sure how sort of sad or (ph) easy this question is. But just with the M&A dilution in the bridge that we saw in the Q1, it was -- I mean it was frankly bigger than we expected. Is that something we should expect in the coming quarters? I appreciate the sort of the businesses which are in that line will obviously change as we go through the quarters. But is that a good starting point for thinking about the Q2 or would we expect dilution to be smaller going forward? Thank you.
Hakan Folin
I think it's a good starting point for you. But then we did have -- as I mentioned, we had someone -- some one-off M&A related costs in the quarter this time, which we don't expect to have now in Q2. So from that point of view, slightly less.
Andrew Wilson
That's really helpful. Thank you very much.
Operator
The next question comes from Max Yates from Morgan Stanley. Please go ahead.
Max Yates
Hi. Could I just ask about the service orders? So, they're growing at -- they're growing at 5%, but the order level is slightly below the revenues now I guess partially because you've been delivering a lot than you've been able to service customers. I guess my question is, if we strip out price from that service number, I would imagine that the volumes you're doing in service is slightly negative.
And I wonder if you could sort of help us understand what is happening there? Is this just that we had very tough comps from the last couple of years, we maybe had some sort of pent-up demand that took place around servicing? Because I guess the underlying production activity minus still producing at high cost is still there. So I'm just trying to understand kind of whether this level of service, these kind of growth rates is what we should expect going forward or how best to think about that?
Helena Hedblom
I think it's important. If you go back and you look on, on the orders on hand we have within service, a big portion of the growth is larger rebuilds. So, mid-life rebuilds or larger rebuilds of larger components. And that, of course, takes time to work through with that's like you're bringing a machine and you rebuild it more or less. So I wouldn't say that I see -- I don't see any change in activity levels out there. It's very, very high activity levels everywhere. And, of course, between quarters, it can vary how much of these larger rebuilds that we land as orders received. So I would rather say that it's -- that component, when you compare quarter by quarter rather than the underlying -- the underlying activity levels is very stable.
Hakan Folin
And I think also it might be worth mentioning…
Max Yates
Okay. [indiscernible] sorry.
Hakan Folin
You said 5%, if we would, we have lost our fourth largest market as well. And if we would exclude for Russia, then it would actually have been an organic growth of 11%. So we still see solid organic growth or very good organic growth even, I would say, for service.
Max Yates
No. That's fair. And maybe just to -- would you be able to quantify kind of if we look back, I realize it will be lumpy quarter-to-quarter, but if we look back at sort of 2022, how much would you say these kinds of refurbs and rebuilds makeup of your -- of your service? These sort of larger refurb and rebuilds now makeup of your service business in '22?
Helena Hedblom
I think we will come back to that during the Capital Markets Day, because as we shared also last Capital Markets Day, this is -- it's this type of service products that we have built that offering over the years and that is contributing very well to the growth as -- we will come back in a month from now and share more insights around this, but this has been a key strategic focus areas for us when it comes to service and it's giving very nice results as well.
Max Yates
Great. Okay. Thank you.
Operator
The next question comes from Nick Housden from RBC. Please go ahead.
Nick Housden
Hi. Thank you for taking the questions. Actually I think most of them have been answered, but maybe just a follow-up on the earlier question about the dilution to the margin coming from M&A. Can you maybe give us some sense maybe looking historically that how much you've been able to improve the margins of the acquired company that you fully integrated them? And would you say that within, say, two to three years, you typically get the margin up to the group average or do they remain some way below? Thanks.
Helena Hedblom
I think we sell and find companies that come with the same margin as we deliver. So, of course, there will be dilution initially than ambition is, of course, always to bring -- to bring it up to the level that we -- that we have in, let's say, in our normal offering. But it will take -- takes different time depending on the type of acquisition as well. If it's very close to home or if it's -- of course, it's new technology, I would say, it varies. It's difficult to say that it will take -- to say time span there. But, of course, but the ambition and the focus for us is, of course, always to lift the profitability quarter by quarter.
Hakan Folin
And then it's not only about lifting the profitability in the acquired company because obviously when we buy a company, we usually see synergies with our existing business. So it might be that you would still have the, if you say, the dilution in the acquired company, but we are compensating that by actually getting some synergies from the -- from our current business.
Nick Housden
Understood. That's helpful. And maybe just one more and I have a feeling you might compare it to the CMD. You've been adding a lot of automation capabilities, doing that internally and also through you've some quite active M&A recently. And I believe in the past you've mentioned that something like 50% of the Epiroc and Atlas Copco branded machines out there in the mines are actually not under a service agreement with yourself. So I'm just wondering if in the past couple of years or so, if you've seen kind of a big step change in your ability to recapture those units and bring them into the service portfolio?
Helena Hedblom
Let us come back to that during the Capital Markets Day because clearly it's so that that the new technologies, both when it comes to automation and electrification that, that gives us an opportunity to capture a bigger share of the fleet out there. And we're doing that step by step. So this is -- it's clearly that because, of course, the machines are more and more advanced.
Nick Housden
Great. Thanks very much.
Operator
The next question comes from Sebastian Gruyter (ph) from Redburn. Please go ahead. Sebastian Gruyter, Redburn, your line is now unmuted. Please go ahead. The next question comes from Christian Hinderaker from Goldman Sachs. Please go ahead.
Christian Hinderaker
Yes. Good morning, everyone. Hopefully you can hear me. I guess if I can summarize, demand remains quite strong and lot of the issues that are all at least relative to market expectations came from the supply side with regard to margin and cash. I'm just interested therefore if you could quantify where lead times are today and whether you think that's likely to improve as we move through the year and indeed are those extended lead times potentially driving stronger demand as it currently stands to your mid-life servicing business. Is that something that your competitors have flagged? And then also maybe if you can help us understand whether those bottlenecks in shipping have specific geographic focus areas? And then I'll come back to the other two questions.
Helena Hedblom
I think lead times -- lead times will improve now when we have -- when it's easing up on the inbound side. If you go back during the last two years, we have had severe problems on the inbound side, of course, through the capital equipment division. So that will clearly improve the lead times -- overall lead times for equipment across -- throughout the year. If you know some specific lanes that are still troublesome is from Europe to Australia, for example, where we still very prolonged lead times and also the predictability is not where we need it. And, of course, Australia is a big market for us.
I think, of course, there could be -- when we have prolonged lead times on equipment, that drives demand as well when it comes to rebuilds. But I would say it's also related to some of the fleet that we put on the market there. During the peak, if you take the surface equipment that we put on the market 2011 and 2012, is now ready for some large rebuilds, for example. So that also supports the demand. So it's not only, let's say, related to, let's say, the supply chain issues. It's also related to where -- whether the specific machines are in age.
Christian Hinderaker
Thanks, Helena. Maybe just coming back, linked to that, are you able to provide some color on the working capital and inventory expectations? You talked about an improvement in net working capital ratios as we move through the year. But I guess the question is, do you think inventories can fall in krona terms as we approach the end of 2023?
Hakan Folin
I would say that depends on -- depends actually both on orders received because the more orders received, the more components, the orders we are able to produce, and it also depends on, on our revenue how much we're getting out. So what we said is that in terms of ratios, sorry, then we expect to see an improvement throughout the year. I know that's not what you're…
Christian Hinderaker
Thanks, Hakan.
Hakan Folin
I know that's not what you're asking for, but that's the answer you will get.
Christian Hinderaker
Okay. Maybe then just finally, a little bit more granularity, if I may on -- on the dilution side. Obviously AARD is the sort of newest entry, just seems to me there's a bit of a knowledge gap here in the market with regards to profit and the respective acquisitions. How should we think about relative profit for that business? And then also more broadly, the structural impact from the exploration side, transferring from T&A to equipment?
Helena Hedblom
Do you want to comment on the dilution side?
Hakan Folin
Yeah. So AARD will be part of the -- naturally then will be part of equipment and service and more specifically on equipment. And I would say that for that part, we would not expect a major dilution coming from AARD.
Helena Hedblom
And then over to the change we have done here, together all the exploration under one umbrella. And for the ones of you that has followed us over the years, historically we had that in under one umbrella and then we split it up and now we're bringing it together again and we continue to see good growth opportunities in exploration and we believe that structure like this will enable us to capture the growth opportunities. So it's again…
Christian Hinderaker
Thank you.
Helena Hedblom
It's again trying to do things better and that's always what we strive for.
Operator
The next question comes from Lars Brorson from Barclays. Please go ahead.
Lars Brorson
Thank you. Hi, Helena, Hakan and Karin. Three if I could. One on services, one T&A and one on supply chain. If I can come back maybe to Max's question, I was also thinking that the book to bill in services was a bit of a head scratcher. We hit the lowest level in seven years. We just had the highest level in Q4 in seven years. That was obviously partly because of the boot acquired companies and the orders on hand you reflected then. There's also some structural impact from the creation, I guess, of this new ore bodies solution, but even then, it looks a bit like an underwhelming book to bill, particularly for the first quarter, which is seasonally a little bit bigger on book to bill.
I think what I've understood from your earlier answer, Helena, is this is very much reflection of ramp on deliveries and some of the biggest service contracts, margin rebuilds that you've taken historically. So maybe my question really is, are we entering now a period our book to bill below one as we ramp up on these larger contracts and perhaps the order levels and demand levels start to normalize.
Helena Hedblom
I think actually -- for us is actually healthy if we can work down the orders on hand we have on service. And it's not related to service contracts because that's more ongoing at the same level all the time. It's more related to these larger rebuilds where you put machines out of production and rebuild them. So for us, it's actually good if we can work that orders on hand down because that will enable and that will free up more capacity in our workshops and for us to be able to take on more -- more work.
Lars Brorson
So I take that as yes. We should brace ourselves for a period of below one book to bill.
Helena Hedblom
I would say it's -- of course, there is also plan to growth opportunities, as we have described many times, we have a little bit more than 50% customer share. And, of course, we are also now realized the parts and service divisions. So there is a clear ambition to grow in this -- in this area, but it's healthy for us to work down the -- let's say, the orders on hand we have on the larger rebuilds because that is also, for our customers, it's not good if we have long lead times on rebuilds.
Lars Brorson
That's clear and helpful. And secondly if I can -- if I can ask the T&A negative 7% organic in the quarter ex-Russia. Wonder whether you can help us a little bit with the price volume dynamics within that? There were a couple of earlier questions around pricing in T&A, but you were early in pricing on both T&A, I guess. And we are seeing some pretty heavy price moderation now.
I wonder whether you are now starting to see a bit of price give backs after last year's price hikes. And if I can related to that, Helena, we've had four quarters of negative growth that's now annualizing. Should we expect T&A perhaps to start returning to growth, particularly maybe as China starts to recover over the next quarter or two?
Helena Hedblom
Yes. So I would say that is clearly the ambition. I will say when we look at this specific quarter, it's very much hydraulic attachments that is coming in lower on orders. And as Hakan said, we had a very strong Q1 last year. So the comparisons are quite tough. But I would say overall the activity -- the potential when it comes to Tools & Attachments is the same potential as within parts and service when it comes to driving the customer share. However, as I've said also before, it must be a profitable growth journey because we have worked for many years to lift the profitability to the level we are at right now. So that's what we are looking at profitable growth opportunities, but there's plenty of opportunities out there.
Lars Brorson
Thank you. And on the pricing question, are you able to say whether you're still positively pricing in T&A?
Helena Hedblom
It's the same answer, as I said before. We are investing also in T&A with -- when it comes to innovation and bringing more value to our customers and that gives us pricing power.
Lars Brorson
Understood. Thirdly, maybe one to Hakan, just briefly on supply chain. I understood you, Hakan, on operating cash flow is limited, how much you can say in terms of the ramp through the year, the cadence in terms of improvement. But is this all working capital? Or I mean, I know you're going through a bit of a build out on your regional distribution centers as well. So running with some double inventories, again was trying to understand whether this is really all about rent and equipment deliveries over the next quarter or two or whether something maybe more structural as you build out the business that may hold back operating free cash flow. Thanks.
Hakan Folin
That is actually -- I didn't go into that detail, but you're absolutely right, that's also one of the reasons. When we are, we are building up the Sweden distribution centers, as Helena talked about, and we are doing it globally now basically in all regions. And when we build them up, we will, in a way, have a double inventory.
The idea is that we take the inventory from our customer centers in different countries and we put it in one regional distribution center and then we send it out from the regional distribution centers. But in that process, you will in a way have double inventory for some time. So, yes, that's also part of the explanation and part of the reason why we expect to see an improvement. But now we have set up this regional distribution center, now it's time to get efficiency out.
Lars Brorson
Helpful. Thank you, both.
Operator
The next question comes from Gustaf Schwerin from Handelsbanken. Please go ahead.
Gustaf Schwerin
Yes. Thank you very much. Sorry for coming back to the lead times. But I mean if we look at the decline in equipment orders year-over-year, I mean how far would you say that that number is actually say from underlying demand due to the outbound problems? Are they actually sort of seeing firm orders being pushed forward on that issue. That's first one.
Helena Hedblom
No, I wouldn't say that. I think all OEMs, we faced the same type of challenges when it comes to both the inbound and of course the outbound and that has been the case throughout the last couple of years. So I wouldn't say that we see any change in demand. Customers are prepared to wait for equipment even though the lead times are longer than it has been historically. But I would say that step by step we -- when sea -- when the sea freights are becoming more predictable and shorter, then, of course, we -- lead times will improve and we see that already to certain regions.
Gustaf Schwerin
That's clear. I mean, generally when we think about equipment demand for this year, I don't know if you can answer this, but do you see volumes growing this year? CapEx is maybe not always the best leading indicator, but that continues to look very good. So, any comment on that on would be helpful. Thank you.
Helena Hedblom
I mean we look at the underlying activity levels always. So, of course, we look at the age of the fleet that will lead to replacement orders. We also follow the -- tracking the brownfield investments, of course, and the greenfield investments. But, of course, we are at high levels, but also the ESG again for the mining houses is also pushing the need for upgrades of the equipment. But then as we've said many times, when we comment on the equipment side, it's more the underlying activity levels, that is what I'm looking at the medium and -- small and medium-sized orders because that's the broad set of customers and how they -- their mood, so to say. Then, of course, we have the large deals coming on top of this, which in some quarters they are there and that's great and some quarters we have less of these large orders. But when I look at the underlying activity levels, it's a very healthy underlying activity level.
Gustaf Schwerin
Perfect. Thank you, Helena.
Operator
Please state your name and company. Please go ahead.
James Moore
Hello. Can you hear me?
Helena Hedblom
Yes.
James Moore
It's James Moore from Redburn. Helena, Hakan, one question if I could. You mentioned that you see a positive forward pipe in terms of order business. I wonder if you could talk a bit about the mix of business and where you really see strength, whether it's from the customer type, whether it's larger miners?
I get the sense that smaller and explores had some availability of capital lending issues, whether it's hard rock over soft, whether it's underground over surface or whether you're seeing a mix towards copper? Just I'm really thinking in terms of commodity mix, hard-soft mix, customer mix, where you're seeing that forward pipe looking strong relative to a normal mix?
Helena Hedblom
I think what I see is that, I see high activity levels among the large players as well as the mid-sized players I would say in the different regions. For us, we are more or less fully towards hard rock. So we are not tracking, let's say, the softer formations. But -- so it's more or less, it's hard rock and it's very much related to copper.
In the quarter, we had more towards iron, but that was due to the Roy Hill order, which is an iron ore mine. But I think if I look over the last two years, it has been very much towards copper and that's also reflective when we look at exploration activities that is ongoing. It's also predominantly towards copper and then, of course, gold.
James Moore
Can I follow-up with that. Just to say that mine planning has extended significantly and nimby (ph) is more around the planet has extended. Without massive amount of exploration in the last few years, how do you see the equation being sold with respect to what's needed in copper over the next five, 10 years? Do you think it will be about extending existing mines more or do you think that there will be more of a copper greenfield story coming at some point? And what are you looking for to see whether that's really starting given the lead times on new mines.
Helena Hedblom
No, but for me, it's clear that there is -- there is a clear gap between the supply and demand for copper. And the grades, when it comes to copper, is also going down. And the exploration so far, if we look to close this gap, has not been successful enough. So I think we will continue to see high activity levels around copper when it comes to exploration and more project needs to come on board.
And as you well said, the lead time before -- from when you identify a resource until you actually have production up running, that's a long lead time, especially to establish if it's a greenfield. So I think that is also why we see more and more exploration activities going on in the brownfield environment. Mining companies trying to identify more assets, so that they can reuse existing infrastructure.
James Moore
Very interesting. Thank you.
Karin Larsson
So, that was the last question. Thank you very much. And James, thank you for highlighting the upcoming deficit. In the last Capital Markets Day, we actually set deficit by 2030 in copper and gold. So let's see what we will have to say about that in June. Thank you very much to Hakan, Helena and all the good questions. As always, if anything was unclear, reach out. We're happy to help you and hope to see you soon again and hopefully also in Orebro. Thank you.
Helena Hedblom
Thank you.
Hakan Folin
Thank you very much.
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Epiroc AB (publ) (EPOKY) Q1 2023 Earnings Call Transcript