Epiroc builds momentum in volatile market

Swedish manufacturer has M&A radar on

Epiroc CEO Helena Hedblom says the company remains optimistic about mining market tailwinds in the face of fallout from the Russia-Ukraine war and supply chain upheaval that could yet stunt worldwide economic growth and commodity demand.

“Even if we end up in a scenario where there will be less … growth in the world I still see a healthy situation in the mining industry and healthy demand for us in the coming years,” she said on a call to discuss the Swedish mining and tunnelling equipment manufacturer’s 2022 first-quarter results.

Epiroc reported a 26% year-on-year lift in Q1 revenues to SEK11,088 million (circa-US$1144m) and 41% yoy hike in operating profit SEK2631m (US$271m), while orders surged 29% to a record SEK13,818m (US$1425m).

“Commodity prices are currently at a very high level. There is a need for more [mine] assets to come on board; we see that with exploration activity. I think the mining industry in general has been under-invested for some years – we also see aging of the fleet continue. There are a lot of healthy underlying trends for us.

“And then I would also add the ESG dimension of the mining industry, where we finally see now battery-electric vehicles taking off in a really nice way, which is really good to see.

“In general we are selling more and more advanced machines. If we look at the orders that we gained last year [for] battery tech as well as automation we see a positive trend towards more advanced machines.”

Pressed for more specifics on orders and deliveries of diesel-versus-battery-electric machines, and automated and non-automated equipment, Hedblom said: “It’s still, I would say, small in size, but it’s [seeing] good momentum. If we look at quarter-on-quarter sequentially, it’s very good development. That’s on battery. On automation, that has been going strong for [several] years now. When we look at it from the point of view of how technically advanced the equipment leaving the factory is, [there are] more and more advanced machines going out every quarter, which also means they are prepared for automation, for example, and connectivity.”

Hedblom said Epiroc was focused on the well-being of 111 employees in Ukraine and more than 530 staff in Russia, where it suspended deliveries at the start of March. Russia and Ukraine accounted for 6.8% of the company’s sales last year. Most of the SEK1800m (US$185m) backlog of orders in the two markets were due for delivery this year.

Hedblom said it was too early to provide clarity on potential developments in 2022. There was “very strict monitoring … at group level” to make sure no Epiroc equipment or parts were supplied into Russia via unofficial channels.

Meanwhile, Epiroc continues to carefully manage conversion of orders to sales in a highly volatile cost and pricing environment in which the manufacturer had “strong pricing power to start with”, according to Hedblom. “Then of course it’s all about agility and speed and execution, and I’m happy with the work we’ve done so far. But we of course will have to continue this work because it is a fairly fluid situation on the cost side right now,” she said.

Epiroc’s elevated profit margins in the past three quarters, versus 2020 and 2019 levels, signified a “new level” of returns post portfolio and manufacturing footprint “cleaning up”, Hedblom said.

“When margins were lower we were hesitant to grow too much because it was dilutive for Epiroc,” she said. “But now of course it’s a different story. The focus is very much on growth.”

That includes continuation of robust merger and acquisition activity seen in the past 12 months. Hedblom said: “We are still very active on the acquisition side. I think you can expect we will come with acquisitions this year as well … and it would be more bolt-on.”

Epiroc had net cash of about US$200m on its balance sheet at the end of March.

The company’s stable aftermarket component availability levels, in a market that was seeing higher levels of pandemic-related supply-chain disruption to smaller firms, had presented opportunities to increase market-share, Hedblom confirmed.

“If we look at the last year we have been focusing a lot on prioritising the aftermarket … and we are up on availability when it comes to aftermarket products, which is good to see,” she said.

“Some of the smaller players [are having] difficulties managing this situation.

“The growth [for Epiroc] is much more than the underlying activity in the aftermarket, so we are taking share.”

 

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