Hello, everybody. We welcome you for our quarter o ne 2020 report. At first, of course, this quarter is heavily under the impression and impact of the pandemic outbreak, and we all hope that wherever you are, that you are in a safe and healthy environment. To the quarter one, we had a record service order intake, the highest ever, and that in such a quarter. A strong capital order intake, an increase in revenue. It was actually the strongest revenue quarter one for several years, five, six years. But based on extraordinary cost, a low profitability, a weak cash flow, but the company has a very strong financial position. When we look into the market, it is very low visibility, with daily, weekly changes, quite in a significant amount.
What we see is, what we can say today, we have a relatively stable service demand, parts and wear parts, and we see clearly increased customer hesitation on capital spend. The guidance and dividend, we informed on the 23rd of March that that we suspend the guidance and that we withdraw the dividend proposal based on the pandemic. Today, we informed that we don't expect, with the current situation, that we will hit the initial guidance for the year. I will start with the current market situation, and on purpose, we don't call it really market outlook based on the visibility. We have, and we saw, and we see a stable demand for spare and wear parts in line with production rates, but of course depending on the activity level, which means if sites are shut down, then nothing moves.
But over the year, the spare and wear part business will be in line with the production rates. We clearly see and have a reduced activity level for technical service and project commissioning at the current state. In the capital investment, we see a significant decrease since mid-end of March, but at the same time, a significant improved demand for digital solutions, especially remote-related solutions. When we now look into the customer groups of our two industries, in mining, we see worldwide around 90% of the sites in operation. Some sites operate with reduced capacity. The biggest negative impact we have in South Africa and in India, and somewhat in the Americas. In cement, we are outside China. We are around 80% of the plants in operation, similar like in mining, partly with reduced capacity.
There, the biggest impact is definitely India and Middle East, but actually all regions are a kind of impacted. If we look into our own operations, what is open, what is allowed to be open, runs very well. We have a complete lockdown in India. We are still in a complete lockdown in South Africa. There, of course, the operation can't work, and we have roughly 70% of our employees working remotely, mainly from home, which is a figure around seven and a half to eight thousand people, and it is clear that our own big service organizations for global is grounded, and we have restrictions for our local service organizations. If we then look into the supply chain and our sub-supply chain, we have a fairly high outsourcing ratio. We are close to asset-light, so this is an essential part of our value chain.
It is actually similar as with our own operations. We have there well operation in the sites where it's allowed, but the same as we just announced, India, South Africa, France, Spain, Italy, with restrictions, and based on that, of course, impact on their capabilities, what they can produce. One element here in that whole pandemic, which came very obvious in the root course of March, was logistics is an issue and makes the things more complex. Because we have to switch between countries and then organizing logistics quite quick, and that is not that easy as it maybe looks like.
When we then look into what we believe how the year will go from an impact point of view, we think the highest impact will be in Quarter Two based on all the lockdowns and the long way to come out of it, a moderate Q3 and a low Q4. When we then look through the crisis and a little bit more ahead, there's a lot of stimulus packages, recovery packages announced with huge amount of money, and some of them actually talk about big investments into infrastructure. Investments into infrastructure of governments is the best initiator for a good future cement business. When we then look into the mining industry, the mining industry is actually seen, our customer group is actually seen as relatively resilient throughout the year. Where is that coming from?
At first, you have to look between the different commodities: gold, silver on a good run, copper between 1% to 5% on the full year reduction in supply, which we think the main hit is in the Quarter Two, and then steel, iron ore actually, quite on a good level, and then other commodities up and down to that what I just said. Why we think that the mining industry is relatively resilient has to do with the way how the operation works. We have quite a lot of mine sites in countries where we saw a part or a significant currency devaluation, which makes the production for the miners relatively cost-efficient. At the same time, when they lose on the top line, plus the lower production cost, that will keep the profit level in, yeah, a reasonably good level.
That, of course, what I just said will have an effect on the buying behavior this year as well as then longer term. Out of that, into the guidance, we had an initial guidance of 18.5-20.5, and the EBITDA 8-9. The visibility is very low, and the visibility is low because there are decisions, and there were decisions, you know that very well, of lockdown of countries where within days complete operations stopped. These activities we see in other countries coming up too, and the ease down is, of course, the open up again is, as it seems, quite difficult. It's impossible really to forecast what happens.
On top of it, travel restrictions, which are not only related to lockdown, then more complex and costly logistics, then of course the disruption what we have on the sides of our customers, if they are reducing or if they have had to stop, you can imagine to restart a cement line with a pyro process is not that easy, and everything of that has an impact on customer buying behavior. Out of that, we said already on the 23rd of March that we can't see that, that we have to suspend the guidance because we have such a low visibility. What we know today, and we announced that today, is that we don't believe in that we can hit the initial guidance. With that, how the situation is. If we then look into what are we doing, what actually a little bit what happens, how are we acting?
The first thing what we did was to secure the health and the safety of our employees all around the world, and you can imagine we have them really all around the world. When you did that, then you immediately go into triggering what we call initiatives, crisis initiatives, and that goes by the cookbook: hiring freeze, travel restrictions, reduce CapEx spend, additional credit facilities, all done immediately. At the same time, you get much closer to the customer. You have more time, you have more people available if you have, for example, grounded service technicians, you put them on the phone, you put them on the digital system to get in contact with the customers because they are in the same situation as we are faced with lockdowns and restrictions and the unknown, and that is a good time to work with customers.
We offered webinars. We had a huge amount of customers participating in our web seminars, in our webinars to learn more, to look what to do different and so on. As well as that we very fast reacted on critical part supply to help here and there to keep plants up and running or on a reduced level. Out of that, of course, in parallel, you look into what to do with your business and how to improve and secure financial performance throughout the year, and that is what we call the extended Business Improvement Program. We had before a Business Improvement Program out of last year, but we extended it, and you see the word sustainable on the slide, which clearly indicates they are non-sustainable savings. And non-sustainable savings are not talked here about. These are temporary savings from furlough, lower travel cost, and so on.
These are sustainable savings, and we have now a program of DKK 150 million EBITDA improvement as a run rate at the end of 2020. We already had DKK 75 million as a run rate at the end of Q1. The cost of the program is DKK 180 million. We had cost in Quarter One of DKK 53 million. The total cost for 2020 will be DKK 140 million. What is it, what we do here? As before announced, the Business Improvement Program includes site consolidation, further work on necessary work to improve further our logistic setup, and headcount reduction, as well as termination of colleagues, as bad as it is for business where we see, where we believe the business will not come back that quick and/or that strong as it was before. What are we talking?
We had to inform 350 people in the Quarter One already and another 250 in April up to today. That is what we see with the low visibility what we have to do to get our cost and business activities in line with the demand. Now into the figures. We had a very strong order intake for the Quarter One, and especially it's mining. And you see here on the slide, we had 16% service growth in Quarter One. We came with DKK 2 billion, close one to one and a half billion DKK, close to the absolute record high service order intake for mining ever before. So this is a fantastic good quarter on service. The capital order intake in mining looks very good too. There included our 2.3 billion, around DKK 2.3 billion out of three large orders.
If you take that out, you see that the small order intake in that quarter was actually lower than last year. What's the difference here? We saw definitely in the mid of March towards the end of March, and it's always a high activity time for orders, the last two weeks in a quarter, three weeks in a quarter, and we saw clearly at the end of March a slowdown of activity on order intake for smaller capital orders. When we then look into cement, cement had more or less the same order intake in service, but a significant lower order intake in capital based on the fact that we couldn't repeat two large orders, what we announced at the Quarter One 2019.
When we now look to the right side of the slide, where we show the order intake from Q1 2018 on, you see for the Q1 2020 that we had after three quarters where revenue was higher than order intake turned the tide. But more important on that is actually the light blue bar because it shows the highest service order intake what we had in the company ever. And that in such a time where we know that service actually same as capital is more active in the order intake in the last month of a quarter, which was the March already impacted by the pandemic, is a very good result. Out of that, into the revenue, we had 60% out of mining with a margin of 7.3% and 40% out of cement with a margin of 1.8%. We had 42% capital business and 58% service business.
Important in the revenue to mention is actually how the shift between the geographies based on the pandemic actually happens. Today, on Quarter One, the contribution out of India was significantly lower than it was last year, when this year the contribution out of Latin America was significantly higher than last year. All the other regions were a little bit in line with that what the pandemic actually brought. Asia was up based China could recover, and they could actually move that out what happened at the beginning of the year when others like Europe get slightly down and North America. Out of that, we look into the financial perfo rmance.
Thank you, Thomas. Let me take you through the financial performance for the first quarter in 2020.
As Thomas mentioned, the order intake was strong in the quarter and increased 16% compared to the first quarter of 2019. Also in the quarter, we managed to increase the revenue by 4% organically, and this growth was driven by mining. Remember that Quarter One is always seasonally low in revenue, and if you compare this quarter revenue with other Q1 revenues from previous years, we actually had the highest revenue in this quarter in five years. Gross margin was down 1.1-1.4 percentage points compared to Q1 2019 and was impacted by the extraordinary cost. I will go into more detail with the extraordinary cost when we discuss talk about the EBITDA range. EBITDA decreased 27%, resulted in an EBITDA margin of 5% compared to the 7.1% we had in Q1 2019, and included business improvement cost in the quarter of DKK 53 million.
Profit for the group decreased by 26% to DKK 101 million. Return on capital employed is 10.2%, which is a little more than a half a percentage point lower than we had in the same quarter last year. Number of employees decreased 345 in Q1 compared to Q4 2019. This is a result from the reductions we had in January and February here in the first quarter. If we go a little deeper into the revenue performance in Q1 2020, you will see that we increased revenue in all regards besides the cement capital revenue. The service revenue in mining was up 1% compared to the Q1 2019, and the capital revenue was up 15%. For cement, the revenue or the service revenue was up 23%, and a lower project activity in the quarter caused a 20% decrease in our capital revenue for cement.
Here on the right side, you can see the last nine quarters revenue for the total group, where Q1 2020 is actually consistent with the previous quarters despite the challenge we have had with COVID-19 in the quarter. The order intake line in Q1 2020 is well above the revenue level thanks to the strong mining order intake, as Thomas explained, and that gives us a higher backlog by the end of Q1 2020 than we had end of Q1, Q4 2019. If we move on to gross profit, we see a 3% decrease in gross profit and a gross margin decline of 1.4% compared to Q1 2019. The main reasons for the margin decline in mining was the less profitability in mining capital business, as we announced last year, the business improvement cost, and also the impact from the COVID-19.
The decline in the gross margin in cement was mainly caused by a higher portion of the business improvement cost and COVID-19 impacts. The development in our SG&A cost shows our high activity level for new orders, which is reflected in increased sales cost, as well as our focus to operate with lower administration cost compared to the first quarter in 2019. Business improvement cost impacted the SG&A cost by DKK 34 million in Q1 2020. The SG&A ratio in the quarter is 16.1%. If we adjust for the business improvement cost, it would have been 15.3% compared to the 15.5% we had in Q1 last year. The EBITDA margin for the quarter was 5%, which was a 2.1 percentage point decline compared to Q1 2019. Here at the right side of the slide, you can see that the development in EBITDA from Q1 2019 to Q1 2020.
The development is explained by a higher revenue of DKK 27 million or a higher impact from higher revenue of DKK 27 million, business improvement savings of DKK 15 million, business improvement cost of DKK 53 million, the lower mining capital profitability of DKK 26 million, and the COVID impact of approximately DKK 47 million. The COVID impact includes currency impact, which mainly is hitting mining, the under-absorption mobilization cost due to lockdown, and higher logistic cost, which impacts both industries. If we are taking these extraordinary costs from business improvement and COVID-19 into consideration, the EBITDA margin would have been 7.2%, which is similar to the one we had in Q1 2019. Net working capital increased DKK 53 million compared to the end of 2019, ending at a 13.5% of revenue. Currency impact had a positive impact of DKK 168 million in the quarter.
Inventories were largely unchanged compared to the end of 2019, but a very high focus to collect customer payments in the quarter meant that trade receivable decreased more than DKK 600 million. Work in progress also showed a positive development, which should have been seen in the connection with the lower revenue we have in Q1 compared to what we have in Q4. A reduction in prepayments from customers explained DKK 275 million on the increase in net working capital, and this is due to the high activity we had on a few larger projects in cement.
Decrease in other liabilities is also caused by the lower activity we have in Q1 versus Q4. We still believe that the net working capital level is too high, and reducing it and hereby improving our cash flow is very high on the agenda, not least in the light of the current market environment.
Looking into our Q1 2020 cash flow for the continued business, you will see a lower adjusted EBITDA of DKK 329 million, which is a decrease of 19% compared to the same quarter last year. The development in net working capital resulted in a cash outflow of DKK 207 million compared to a cash inflow in Q1 2019 of DKK 49 million. The outflow reflects the DKK 53 million in net working capital development and the DKK 168 million in currency impact, as I just explained on the previous slide. For the Q1 2020, cash flow from operating activities in the continued business was negative and decreased to DKK 36 million compared to a positive of DKK 306 million in Q1 2019.
Here on the right side, you will see the cash flow details for the entire group, and CFFO for the group is mainly the continuing business and decreased by DKK 270 million compared to the first quarter last year. In the quarter, we spent DKK 41 million on the acquisition of a service center for mining in North America. If we exclude this acquisition, investments are close to the level we had in the same quarter last year. Due to the market, current market situation, we are having a slowdown in our investments. The free cash flow for the group, excluding acquisitions, was negative by DKK 103 million compared to a positive free cash flow in the first quarter last year of DKK 155 million. Our capital structure is still well within our long-term targets. We have an equity ratio of 38.3% and a gearing of 1.4.
The increase in net debt was explained by the lower EBITDA, negative development in net working capital, and the acquisition. Still, the gearing of 1.4 remains well below our maximum threshold of 2. As Thomas mentioned, we have a strong financial position, which is always important, but even more important in a crisis as we have right now. End of March 2020, we had a DKK 6.5 billion available committed credit facility and DKK 3.4 billion was undrawn. Here in the beginning of April, we further boosted our liquidity buffer by obtaining additional committed credit facilities of DKK 500 million. On the right side here on the slide, you can see that we have a very healthy maturity profile where our major part of our credit facility is maturing in 2025. And then back to you, Thomas.
Thanks a lot. So, then some housekeeping here regarding the sustainability.
We had the best-ever safety record in Quarter One 2020, which is not only to lead back to the travel restrictions and lockdowns. It actually leads back to a very intensified taking care of each other in our company, especially towards our contractors and with the customers, because most of the month was not with a lockdown, and then to deliver a one on a LTIFR is quite great. Same is with the relative carbon footprint. An improvement from 2.9 to 2.3 tons per million DKK revenue is quite a significant jump in the right direction.
Another thing, we always come with an innovation. This time, it's a little bit a different thing. Based on the crisis where we are all in, it seems to be in the media and so on that sustainability is not on the same level as it was six months ago, for example.
That's definitely the fact. Don't get led wrong in that. A lot of customers are still running full speed on that, what they would like to initiate and to realize in that. And we said for our Mission Zero, we need partners. We need strong partners in the world to realize it, because quite a lot of that, what we need to do, we have to do with the customers together. Otherwise, it's not possible. And this is an example out of Vietnam, where we line up, where we partner up with the strong cement partner what we have in Vietnam, VICEM, to reduce the environmental footprint of cement production in Vietnam. Government support, society support, business support, all works together, and then with our clear competence, that will make it happen. So, the Quarter One. The Quarter One was on the top line, a good quarter.
It fulfilled roughly that what we as management expected for the Quarter One. It was a very good service in order intake, and that is what we take away. We think over the year, service will be relatively stable if it comes to the parts and in line with production rates, but the additional cost and the activities in the quarter triggered that we had to ramp up our business improvement program to improve profitability and to preserve cash. Our flexible global, and that is what we did, of course, and do. A flexible global supply chain is mandatory for us with that high outsourcing ratio, and we invested a lot in the last few years, and it was well invested money, and we will not stop to do that.
That is essential for us, and in that crisis, we actually show that we can move and, yeah, use and utilize our global supply chain in a good way. There are significant opportunities within digital. The demand and the level of interest is completely changed. This is what mining and cement will have the biggest impact out of that crisis. It's actually the learning. It is digital possible to do significant more than our customers believed before. It's a good business for us. It's a huge demand. We are well positioned. Last but not least, the stimulus packages to recover will trigger some infrastructure, most likely big amounts into infrastructure from governments, which will trigger immediately in cement a higher demand. With that, of course, with the recovery of the economy, then getting mining back. As we said, mining is relatively resilient.
But of course, the uncertainty is poison for large capital investments, cement as well as in mining. We have the additional costs, and we see clearly that the hesitation to do something at the moment today is very much low. The focus of us is to manage through that crisis. The focus is cash and to keep and to improve further our good customer relation and the opportunities. Our supply chain security from our own sides, from the logistic and from our partners, from our subsuppliers is high priority. We didn't change our long-term targets because they fit, of course, as well in such a time too. It is for the customer. Sustainability, especially digital sustainability, is high on the agenda. And standardization and modernization is, of course, mandatory to deliver good on digital remote control and supply.
It was a record service order intake in Quarter One. It was a strong capital order intake. It was an increase in revenue. It was a low profitability impacted by the extraordinary cost. We had a weak cash flow. Our financial position is very strong. We suspended the guidance already on the 23rd of March, but we announced today that we don't believe that we will be in the initial guidance for the year. And with that, I would like to open up for Q&A.
Ladies and gentlemen, if you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw that question, do so by pressing 02 to cancel. Brief pause while questions are being registered. And our first question comes from Artem Tokarenko from Credit Suisse. Your line is now open. .
Yes, good morning, Thank you very much for taking my question. My first question is around the COVID-related costs which you had in Q1. You mentioned a little bit about whether the majority of those costs were in March and how we should think about the run rate into Q2 because you clearly guide for higher costs, but whether those DKK 47 million are representative of kind of monthly costs which you will see in Q2. And also maybe thinking about 2021, how much of those costs do you think will stay? You will keep incurring in 2021 maybe from inflation in logistics and how much of those you think can be reversed? Thank you .
Yes At first, if it comes to the cost, what we have in the COVID impact, we can't give a figure because if we would be able to do that, we really could guide in financial terms. The visibility is very low. That is a fact. But what we can say is, of course, we had in the visibility or in the cost the DKK 47 million ramp-up cost to bring people working from home. That is not what we'll repeat, but of course, we see cost for more complex and costly logistics to maneuver. And to make it clear, what we talk here is, when the country locks down and we can't supply from there, then we have to go to another country.
That means we have relatively quick to organize new logistic setup for that, as well as to come to customer sites and how long that takes and how complex that is, partly then moving from normal shipping into air freight, for example. Then we have increased cost on quality to look around and so on. So to make a simple calculation that we had DKK 47 million in the first quarter and then trying to calculate that into the next few months and quarters is not possible. We have to see how quick the countries ease up. If that is the case in a very organized, organized way, then the cost will be lower and under absorption within with the service technicians and so on will be lower. If that is not the case, then of course cost can be higher.
And that is country by country on the business performance policies and decisions different. That makes it so impossible to give a forecast then to 2021. Of course, later in the year, we definitely know which kind of situation we will have in 2021. But it is very difficult now to give a comment how much of that goes over to the next year. Sorry for that.
Okay. Maybe just to follow up on this, could you maybe elaborate on how much of those costs were incurred in March and also how much of them were FX effects and those costs related to work from home initiatives?
So we have in the cost, of course, some cost out of China where it started. You know that we have a big assembly center in China, so we got actually end of January, it started to get it in. That was actually triggered a change on the top line for the guidance as we announced in February. But that was an epidemic thing. There was similar, as we had the Ebola crisis in 2014 and other similar situations. When it got, global, of course, the cost moved into other areas.
We have big facility in Italy, in Bergamo, in Milan, for example. When you see that, then you can imagine that the maturity of the DKK 47 million cost is actually at the end of the quarter three and not at the beginning. It's mainly March related and second half of March related. Yeah. I think that's what we can say.
Okay. Thank you very much. And my second question is around the extended cost savings plan which you put out. Could you maybe talk a little bit about how much of those cost savings you expect to hit P&L this year?
Yeah, you can actually calculate that when you look into that, what we announced with the run rate, quarter one was DKK 75 million, end of the year DKK 150 million. And then, of course, we expect, for the full year, a cost of the program of DKK 140 million. So what you saw that with the speed, we reduced 250 employees alone in April. So we are running with a high speed on that if it comes to direct cost impact. But we have other elements in that initiative like closing of sites and with that, of course, relocating of smaller production units. That is more at the end of the year.
So the people impact will be relatively quick and the closing of the sites and so on will not show any improvement this year. So the savings in 2020 is, of course, not the DKK 150 million. They will be quite lower. Let's see how fast we get through. Why I'm not more specific? I can make it like that. I take a country like India. In India, we are not allowed to do any activity on people at the moment. Absolutely nil. Nothing. It's completely locked. So that when we can deal there and to see what we can do and not, that will take time. And with that, of course, it will take time when it comes to the bottom line.
Okay. Tha nk you very much. And my last question is on demand.
Could you maybe elaborate on what you've seen in March and late March and in April and maybe try to help us quantify by business line and services and base business and mining and cement what kind of year-over-year run rates you currently see in your businesses? And I'll go back to the queue. Thank you.
It's a good question, but, of course, to give the detailed information, not only that it would give too much detail, but it would take quite a while. I summarize it. What we see is, when you go into a crisis and this crisis is not different, in the moment when it starts, you see actually a higher activity level on the customer side. They call you in more. They have more discussions with you because they get uncertain, which immediately gives you a lot of leads and additional work.
At the same time, bigger investments, everything what is on the plan gets postponed. And we have no cancellation seen up to now. No cancellation up to the end of April to make a pandemic-related cancellation. So out of that, that's normal. Capital things are getting moved forward. If it comes to the aftermarket, the parts and the spare parts, that is actually working quite well until you have a lockdown and a slowdown of possibility to transport in or not because production rates are actually impacted, but not so significantly that you have everywhere a shutdown. When you look into mining, it's roughly 90%, but 90% doesn't mean that each commodity in each country is 10% down. We have some countries significantly down and some other countries not at all. You have some commodities significantly or more down than others. So there's a mixed picture on that.
If it comes to cement, we see that each area in the world has a negative impact. The impact is with the most severe in India, where nil business more or less happens in mining as well as in cement, and then you have other areas like North America, where the rate of cement production is still roughly around 90%. And we measure that side on side, ton on ton, what we see and what we have, so the finalizing sentence, the lockdown and the way how the customers can ramp up again and their willingness then to ramp up will influence very much the sale of wear and spare parts. The travel restrictions will impact very much the underabsorption of the service technicians, especially the global teams, if they can fly in or not because the demand for their support and their competence is very high. I see.
Thank you very much.
Thank you.
Our next question comes from Kristian Johansen from Danske Bank. Please go ahead. The line is now open.
Thank you. So, Thomas, you say you haven't seen any cancellations so far, but have you seen any customers delaying projects? So is there any execution which is delayed due to customer decision and not related to the external factors at lockdown?
Yes. A high question. A very good question. Yes, we saw actually quite a lot of delays and questions to deliver very quick now or later in a few months after the crisis. That is what we hear quite a lot. Please deliver after the crisis. I can't pick up the goods. I can't open the gate. Your delivery will be then on risk because no one will take care. It's not on safe ground then.
We have, for example, Peru, Bolivia, Mexico, Canada partly, South Africa, and as I said, of course, India. There you have quite a lot of delays because restrictions are very high or customers decided to close down or to reduce significantly their mining operations. So no cancellation in cement, no cancellation in mining, but a lot of postponement for capital. Okay. And just to understand the accounting on that, because your revenue are based on percentage of completion, sorry. So does that mean that you have booked revenue for some goods which you cannot deliver to customers? Is that how you think about it? No, that's not how to think about. No, we don't do that. No, that's not how to think about it. Aftermarket, of course, is not falling into POC at all.
And then the POC delivery in a quarter is actually built on milestones if the infrastructure on the customer side is ready or not. If it's not ready, we can't supply. We can't show it as a revenue. And at the moment, for the ones which were postponed, we simply couldn't supply because logistics was not allowed to go through and or the site was not open and or based on the lockdown, the construction companies couldn't fulfill their task so that because we normally unload directly from the transport into the site or into the place where the equipment should sit.
Okay. That's quite clear. Then my second question in terms of prepayments. So as I recall it, this big order you got in Russia in mining has a different prepayment profile.
But if you look at the other orders you received in Q1, is there a different profile on the prepayment level than what you usually see?
Yes. That's another reaction on in crisis. Prepayment comes immediately under pressure. Customers ask for lower prepayments. Customers ask for cost reduction. Customer ask for paying us later in the year. That is an absolute normal thing. And it's not a surprise. We do as a mirror the same to with our subsuppliers. So we look that we manage that value chain. And of course, you can imagine there are quite a lot of discussions in it.
Okay. That was all for me. Thank you so much.
Thank you, Christian.
Thank you. Our next question comes from Magnus Kruber from UBS. Please go ahead.
Hi, Thomas. Magnus here from UBS. A couple of questions from me.
So first, what cost savings do you expect to realize in the short term from furloughing and other temporary savings measures? And at what time do you expect them to hit the P&L?
Good question. It's one of the low visibility issues because furlough programs, that means that government pay or takes over a part of the salary, never the whole, is related. Is it hitting our people? Is it feasible for our people? Not everywhere, you can get it no matter that you have people in that country. Second, how much is it? Third, how long does it go? And fourth, what are the restrictions and so on with it? So it is very difficult to look into. What we see is that the impact overall on the furlough programs for a company like us is fairly, fairly limited.
It's not a lot, but we trigger as much as we can, of course, not to go with termination of colleagues too far. Then other savings like travel cost. When we looked into that, of course, we see significant lower travel cost than before, but we already saw that since mid-end of 2018 because we regionalized the business for the front line quite a lot. And we are very happy that we did that. Otherwise, we would have a significant problem nowadays because you are not allowed to travel international, really. And with that regionalization, we already reduced travel cost quite a lot. So the impact is actually not that big. But on the other side, of course, the additional cost to work from home.
In developed countries here like Denmark with top infrastructure where you plug in your laptop, you go home and you work from home. That works quite good. We have a lot of countries and a lot of colleagues like in India where the infrastructure is different and where we had to take significant additional measures to make it happen that the colleagues can work from home. One word to that, the attitude, the culture, the commitment, of our colleagues around the world is unbelievably great.
Thank you so much. So with, like, a perspective of quite deep downturn ahead of us, do you see the risk of the pricing pressure emerging and increasing again in the cement project business? How do you aim to prioritize between margins and volumes there?
How do you strike the balance there going forward?
Yeah. I think pricing in cement will not increase more. It's already horrible for quite several years. And that's one element. The other element, there is not so much in the pipeline. It's very normal pipeline. It didn't move a lot. And the pricing discussion, which will come, is if the supply gets cheaper. If steel price would get cheaper, then of course, and you deliver quite a big tonnage of steel, of course, then you get these discussions with the end customer. But we don't see an intense pricing pressure in cement. If it then comes to mining, difficult to say if, because pricing pressure there is not that not comparable with the negative situation in cement.
What we think is that customers actually more will look into how the cash flow is on these projects and on the payments to extend that because that is a typical thing. What you see in crisis is out of the mining industry to safeguard their liquidity. Customers try then to extend the payment terms. And as you know, I always say it like that, pricing, payment terms, and so on is more between the peers than really between the supplier and the end customer because it's a competitive game. So we hope that the industry as well as our people, we do, of course, measurements and regulations on it, are keeping the discipline here. But in general, advanced payments, payment conditions will come definitely under pressure more than we see in mining, the pricing.
Got it. Thank you so much.
A final little bit broader question, for cement and mining alike. How do you see customers acting now in this downturn compared to the '09 downturn? Is there any significant differences now than back then?
This is a very good question because there is, of course, a big difference. At first, then when you look into the crisis, this crisis goes like a tsunami around the world. It doesn't hit the world in one go. Some countries, in the mid of the storm, some others like China are out or coming out. Others are on the way to go in. And that, of course, makes it quite complex and low visible. The second thing is on the financial crisis, we came like a full-speed train in 2008, super cycle, more capacity, supply more. We couldn't supply as a supplier. We were overordered.
Then full stop with the financial crisis. Here we come out of a situation. If I look into cement and mining in these both industries, we have relatively low CapEx investment already ongoing in cement for quite a while in mining since the sit and wait based on sustainability from mid of last year. So I said it before on the Q4 announcement. The three large orders what we got in Q1 were actually expected earlier. But with that sit and wait, with that postponing of final decisions already since mid of last year, mainly based on sustainability, we come into that crisis from a lower level. So the step down is actually not looking that traumatic for our customers. For our customers.
For us, it looks different because if you have not a lot of CapEx investments ongoing in mining as well as in cement, and that then gets postponed, of course, it has an impact. And there are, of course, a lot of other things which are different. But these are the main elements what we see towards our both industries.
Got it. Thank you so much.
Your next question comes from Claus Almer from Nordea. Please go ahead. You're on it now.
Hi, this is Claus Almer from Nordea. I also have a few questions. The first goes to your liquidity buffer. As you mentioned, Thomas, you have DKK 3.4 billion of committed but undrawn credit lines. And to that, you added DKK 0.5 billion in start of April. You know, what event or which considerations triggered you adding to your liquidity buffer? That will be the first question.
Yeah. Roland, if you. Yeah, I can take that. Of course, the current, you can say, environment actually was one of the reason why we had put the additional buffer into our liquidity to make sure we have for the future. And at the same time, we also withdrawn the dividend. And that is to in the yeah, in the current environment to make sure you have what is needed.
And this is, I have to say.
That I understand. And I know it's.
Yeah, sorry. Claus, this is automatically. This is we I don't want to say it in a strange way, but we actually have always a crisis ongoing. And, of course, not such a global one. Of course not. But we know exactly what are the different buttons we push when the crisis start.
With that, we said, okay, this is pandemic. When it came out of China and it was clear it gets a pandemic, that was actually in March, not in April. In April, it was finalized. Then we said, okay, these are the different things. We have more or less a date for it around, let us say it was around the 23rd of March to trigger all these buttons. Not to forget, when we look into our own CFFO, we stopped all besides safety investment, absolute low minimum maintenance CapEx as well as ongoing CapEx investments where the stopping of the investment would be more costly than to go on with it. Everything else is stopped. These elements we do with the dividend, what you said, Maja, simply as a liquidity activity.
Yeah. Sorry.
Yes, I fully understand this, but, you know, nearly DKK 4 billion in undrawn committed lines. That sounds a lot, at least. Yes. And why is DKK 3-4 billion that you think is needed?
There really is nothing to read into it then that we simply did our homework as it is in the cookbook if a crisis hits us. That's exactly what we do. You safeguard whatever you have, low visibility. No one could tell us in March what really happens in the world. No one. It could have been that absolutely no business goes on. So, when you are in that situation, you are not saying, okay, I wait and then I start to negotiate or to think about. Nope. That is what we do.
This is crisis management, business improvement program immediately initiated on top of the ongoing activities, immediately initiated two management meetings per week, immediately initiated health and safety management meetings six times per week, immediately initiated liquidity, immediately initiated to call each customer several times, what can we do, what can we support, and so on. It's a long list. It's actually a list which was on my whiteboard, and there was then always a green dot on it if the people triggered it. If not, they got a call. That's exactly how we see it. This is an automated reaction.
Good. Okay. Just my second question then. Is it possible to quantify the effect both within cement and mining, the amount of inventory buildup among your clients? Has that been a major driver for the growth in Q1 order intake?
At first, what we see in cement, cement is very much cash. Our customers are cash-driven. They have to sell to earn money. For them, the profit is not as important than getting a permanent cash flow in. And it's a pyro system. You can't fire it up on a Monday and then down on a Tuesday and firing it up on Wednesday. So what they have is an emergency stock so when they ramp down that they can ramp up again. And we don't see special activities on it. What we saw is that we had a lot of requests in cement to discuss with them if they have to shut down, how to do it in the best way, if we can help, mainly remote, and then what they need to get it up.
But it was really not that big a movement in the direct ordering of parts and wear parts. They, because they are very liquidity-focused. So they would only order and book that if they really would need that. Then in the mining part, it was actually a summary out of several things. We had a warm year. We not a strong winter. So operations were ongoing. That gives always a little bit more in business on the aftermarket. At the same time, customers looked into, yes, we will have lockdown, mainly. Do I have everything in stock? And then they ordered based on that. So you can say in cement less of that effect, in mining more of that effect.
Okay. Thank you so much.
Thank you, Claus.
Your next question comes from Mikkel Emil Jensen from SEB. Please go ahead. You're on the telephone.
Thanks for taking my question. I have a question regarding the cement business and the low EBITDA margin that you delivered here in Q1. In terms of mix, the service share is higher. And as you said in 2019, you said the capital backlog has a higher margin. So I'm a little surprised to see this low margin in Q1, because you should assume positive contribution from mix and positive contribution from higher margin projects. So if you can maybe try to explain why that is. Yes. And you are completely right with everything what you said. And that would have been happening without that crisis.
That's clear. What happened is we have a business improvement program. We have the COVID cost in it. And you can roughly say that this cost impact is divided as revenue is split.
A million DKK of extra cost for cement has a significantly bigger impact on the EBITDA margin than in mining because the profitability in absolute numbers is relatively low, no matter if it's 1.8% or 3.9%. So it's actually the absolute amount of million DKK of initiatives and cost which hit cement. And with that, it has a significant impact on the margin, on the percentage. And that's a mathematical thing. That's really everything. It has nothing to do with the product mix or anything like that. That's not the issue.
Okay. So underlying the capital margin was higher than last year if you exclude the cost related to COVID-19 and the business improvement?
Yes. You know, we said we had a we don't like adjusted EBITDA.
not for you out in the field and in the market, more for internal reasons because people should only work with that, what you really have, and not adjust it. But in such a time as we are, we actually had what we saw in the order intake, what we saw in the revenue, what we saw with all the activities, actually with the original business improvement program, we were a little bit ahead of that, what we wanted to achieve. And then this crisis hit. And with that cost and a lot with underabsorption cost in with international highly educated service technicians who are grounded. That goes fully then to negatively to your bottom line. And that, of course, hits them.
If we look that we are part, we are not taking everything out if we compare quarter one 2020 with quarter one 2019 because you always have something. But we see that we are in line with last year quarter one, maybe a little bit better than quarter one last year in that. But that doesn't help. That happens. And of course, when you sit in the management and you look to each other and saying, okay, what to do, everyone knows with this extended business improvement, with getting the people working from remote, having our service people not charging their hours, not charging their days and weeks, but having them on telephone and on laptops to talk with customers and to help them online, that this will definitely impact us.
From a margin point of view, it looks then horrible in cement as we see it.
Okay. Thank you. Maybe my final question. You're talking about low visibility and it's you're also saying that it's impossible to forecast, but still you say that Q2 will be the trough and then you expect improvement gradually going to Q3 and Q4. How certain are you of this improvement going to Q3 and Q4?
The same certain as you are and hundreds and thousands of people writing that in media and experts are talking about. We take that from the information with the lockdowns and what we see with the impact of lockdowns on our business. That's actually the only thing what we have. We, this is not that we have our own department judging the pandemic. We look into that what is the most likely.
There are actually quite a lot of very good analysis from different companies, consultancies, universities out to talk about how that recession can go on and how that works. And one commonality they all have, the one who are actually reasonable, quarter two looks not good based on all the government measurements to lock down, to ease up, not to allow restrictions. In that look, what we had with quarter two, the biggest impact, we have nothing in of a political crisis between big countries like, if, the dispute between the, United States and China would increase based on the outbreak of that pandemic or, anything else we or a second wave of the pandemic, that's all not what we can judge and we are not competent enough for that.
So we rely on that, what we get from this huge group of experts as well as what we get from our customers too. We talk with our customers, we call them, we say hello and say, how do you see it, how we see it? And then we get an absolute fair and clear picture. And, yeah, what I can say as a slight positive thing here is it seems to be from that, what we heard from customers mid of March versus now end of April, there is a more settled into the crisis. It is more accepting some facts and that normally brings then more rational behavior back, into different areas and our own too.
Okay. Thank you very much.
Next question comes from Andrew Wilson from JP Morgan. Please go ahead. Your line is now open.
I've just got a few hopefully quick questions for you, Thomas. Could you just start with giving us a bit of a breakdown in terms of the aftermarket on the mining side? So obviously seeing some slightly different trends and commentary in the Q1, I expect the Q2, but just obviously where parts has been kind of the big floats in recent years and got the spares and the bigger service work. So just trying to get us up to date so that we can think about that as we go through the balance of the year, please.
Yes. Hey, Andy. The we have in the aftermarket actually the two parts elements in it, the wear parts and the spare parts, consumables we are not in. And you are right. We a few years ago started to have wear parts.
It's still the smaller part of our aftermarket, but of course in such a time, developing, and we have the technical service, for us, is mainly really what we call engineered service, which is a service where we are not competing so much with local service providers. We are simply too expensive for that to make it like that, and there we make a difference between local and international service, so when we then look into the mining part, you can say that the international service is very low, if not completely gone based on the travel restrictions and all the measures. Then you have the local service and that is country by country different.
That means we have some countries like North America where no matter that, there is an impact on the overall supply situation and the operation on the customer. Quite a lot of our service technicians still can go around when we have other areas like in Europe where nothing happens or India, absolutely nil. So from that is on the service part. So that has a negative impact on the order intake too. Then we have big maintenance contracts in Latin America and, in a reduced form in other parts. There we see a mixed picture based on the country and based on the demand of customers. Then if it comes to the parts business in itself, of course, if you have a possibility to order parts digital and to regulate a lot online that it can move from here to there, then of course the business goes better.
And that is where we looked, from already since end of January when we saw that with China because we have a big assembly center, how flexible we are. We have quite a good flexibility in our supply chain to switch very quick from here to there. I give only one example. South Africa had a lockdown. We have in Delmas a big site or relative big site where we produce two. If there's a lockdown, of course, we have to see where we get the same quality, of course, and if possible in the same timing from anywhere else. That is what we were going in and organizing that.
In general, what we can say is that spare parts, wear parts had quite a good run in quarter one and upgrade business, what we call it, that means to help customers onsite or online to get that, their operations more resilient, was actually not that bad too. But it was then more online over the remote control. I know it's a little bit complex, Andy. I'm sorry for that, but it's very volatile because each country, I have to say, all countries behave different. We have actually countries like in the U.S., they behaved inside the country quite different too.
No, no, that's helpful. Just thinking about working capital, you obviously kind of talked about the Q1 and some of the moving parts.
And I don't know how fair a question this is for sort of the full year, but just trying to at least understand how we should be thinking about it because clearly working capital is a focus, but prepayments, if we assume it's going to be quite a difficult environment for large orders, are probably going to be a bit more challenged. I mean, how should we be thinking about working capital, right? Can we see an influence in terms of working capital in the cash flow for this year?
Yeah. The working capital, of course, has a big element. That's profit. You have to have EBITDA. That's very helpful. And then, of course, you have to look into the movements in the working capital. We actually collected quite a lot of money. That was good. And we will not give up on that.
With a lot of customers, we are real good partners and we understand each other. We help each other. There's, there was, and there will be quite a willingness on that. Of course, you have what you pay to your subsuppliers. We have this always debated supply chain financing program. I already forgot the name for it. This is a loyalty program. So there we have a system where the key components, which are so essential for us, a lot of other things we can shop with a lot of suppliers, but these key components are very, very limited and they are secured. So that is not a problem for us. That means, if it comes to how we pay our suppliers, we reflect that how we see that from our customers. We have the inventory.
That's a little bit the tricky thing with the inventory. But when you go in a crisis, you normally have to lower your inventory levels throughout the world. But at the beginning of the crisis, you have to have enough in to supply. And we know what we have to have in to supply. So if the country is up and the demand comes based on the production rate, we are able to supply. This is very important. We said that already last year that we are actually not a big fan to reduce significant our inventory level. Then it comes to the WIP asset. WIP asset, of course, is with the bigger projects and we supply and we work on that and we are only a part of the value chain.
So if a customer says, don't supply, we are normally not the one they target. They have then an issue. You can't supply in or the construction is not done or they would like to postpone the cash outflow on their side. And there are not so many projects we all work on. The industry doesn't have so many. And we are in discussion with each and everyone how to organize and how to maneuver. And I can tell you this crisis creates a high willingness of flexibility on the customer side too. So that's a little bit in a nutshell how we see. And final thing on it, it is still our task to get the net working capital level throughout the year down. Yes, quarter two will be a challenge.
We all know that, but we will work like crazy ongoing with our change procedures, with our significant enforced activity levels on cash generation to get the net working capital down up to the end of the year.
Thanks, Thomas. And maybe I'm going to ask one sort of longer-term bigger picture question. I mean, have you seen anything in either how your customers are behaving or the market's behaving, how your competitors are having to behave? Where do you see any sort of difference to you on the longer term? I guess I was thinking around, you know, potentially some of your competitors in cement having a much harder time than yourselves or, you know, can extend that to mining as well. Just interested if there's anything you're seeing at the moment which informs how you might think about FLS's position over the longer term.
If my peers have a hard time, we have automatically a hard time too because customers always compare us to what we offer. We have a little bit of different picture here. On one side is, I think the easier one is mining. That's relatively resilient as I explained. We think that that industry, actually, will go on, not this year, but next year quite good. That is our real belief. I have a little bit of flavor. I take copper. Copper will have a hit of 1%-5% over the year because the main hit most likely will happen now. If you calculate a hit of 10%-15% in a month or in one and a half months calculated on the full year, it is, let us say, up to -5%.
At the same time, scrap copper is an issue because you can't transport at the moment. You have a problem to move it in, to smelt it, and to bring it out again. It is simply tricky because that's all over and you have to collect all a little bit. And that a little bit at the moment is really under scrutiny in all industries. So that's on the mining side. And then I explained, of course, a lot of them produce in currency devalued areas, which gives them a cost competitive advantage when the top line and with that the profitability comes under pressure. Cement is different. In cement, the majority of our customers is very local, but actually financially strong. But they need, of course, cash inflow.
We know how long they can, each single client, there is not one figure, how long they can maneuver through based on that. When we make a shutdown to refurbishment, then we know what they would like to carry as a leg of production. There we know when the lockdown ends, then a lot of construction sites because they consume a lot of workers, and workers means employment. Employment means money, and they will start again, and wherever you look into the stimulus package, construction is always mentioned, it has to start as quick as possible again. That triggers cement production. You can't do construction without cement in the majority, and then on top of it, there is that like in U.S., in Europe, China, a little bit, India, the announcement we will invest in infrastructure. This is bad, what happens, but we can do something out of it.
We can have better hospitals, better infrastructure to get to the areas in the country which are really remote. That all means cement. Cement is long-term looking, mid- to long-term looking. They are not making a new line when they see for the next one year more cement sale. They make a new line when they see that the government now goes into a three, four, five years, six years plan to improve infrastructure. That demand side in cement, if these stimulus things are coming up, will actually be quite good, but it will not hit this year. That's clear. Then, last but not least, I said it in the presentation because we thought we have to mention that. Sustainability is not very much on the media agenda. It's really not around.
But we believe from what we hear out of the governments, that actually the reduction in industry and so on has a very positive environmental impact. That sustainability agenda will come back very quick. And our customers didn't give up a second. There's not one who said, I will now park that sustainability thing to focus on the coronavirus. No, that is already embedded into mining as well as into cement. So the world will come back with the sustainability agenda when we are through the worst of this pandemic. That's a little bit how we see the world. And that is actually what we hear from our customers too.
Thank you.
Thank you.
The next question comes from Robert Davies from Morgan Stanley. Please go ahead. Your line is now open.
Thanks for taking my questions. My question for good to start on, I guess, cement and the outlook and going into sort of 2Q. Are you expecting that business to be profitable in the second quarter? There may be just a little color around the relative profitability of OE and aftermarket of both mining and cement. OE businesses profitable at the moment?
Thank you. Of course, we don't guide here on the month and especially not on the profit level. But of course, that quarter two will be, as we said, will have the biggest impact. I assure you that we all have a belief a business which is not profitable is not a business. This is horrible. So we will do everything not to have that. That's the only thing what I can say, and you saw the extended business improvement program.
Then maybe to explain that a little bit, that we announced at the beginning of the year to terminate 500 colleagues. Out of the 500, we terminated 350. In April, on top of that, we terminated 250. That's a different group of colleagues what we had to target because that's related with business out of the pandemic what we don't see coming back that quick and or in the magnitude as it was before. So in total, what we talk here, 600 colleagues terminated already and out of quarter one, that original business improvement program is not done, and we explained that before because when it comes to consolidation, it takes simply a longer time.
Are those headcount reductions, based on the demand outlook or the kind of activity outlook you see over the next quarter sufficient, do you think, or do you still have further work to do or further progress to make that standing on the region?
We have actually very limited, as I said, we have very limited visibility on this year. But we see, of course, trends where customers will be more interested and where not. And there's a geography issue in it too. Countries more hit than others. And the way of doing business in the future, more hit than others. Simple example, we see more customers in a special country going more and more significant remote than ever before. All that what we had to have with the different stations around them is not needed in that magnitude.
That's a typical thing where we see the business not coming back in the same as it was before. And on that, we take activity.
Okay. Thank you. And I just, probably I missed it earlier in the call, but the growth in mining aftermarket of 16% in the quarter, what was the key kind of driver? Was that a specific project or a certain region that was very strong? That was quite a strong number when I saw that.
Up to the mid of March, it was in all areas, spare parts, wear parts, upgrades, services. And in the second half, which of the month it was, going on with spare and wear parts. Their services was not that much.
Actually, online services were a lot, but they you charge different or not at all if it's not getting too much.
Got it. Okay. Thank you.
Thank you.
Our next question comes from Klaus Kehl from Nykredit. Please go ahead.
And yes, a couple of questions from my side as well. Service has been doing quite well here in Q1. And Thomas, you have stated a couple of times that you expect a tough Q2. So just to understand it, should we expect the same positive picture for service in Q2, or should we actually expect that service potentially could take a short-term hit in Q2? That would be my first question.
Yes, Klaus, a very good question. At first, what I like in your question that you ask about a short-term hit because this is not an industry hit.
This has nothing to do with how the industry, how the business is actually in cement and in mining. This is simply from the crisis thing. We think that Q2 will have quite a negative impact. We see that throughout. That is what I can say, because we announced that with the 250 colleagues who were terminated already in April. We see a lower activity level in what we measure, especially on the capital side. That is what we see. So we know that the production rates are lower in quarter two. That is what we see. And that is in line with aftermarket. So we can expect that the Q2 in overall is not a good quarter. That is what we see.
That's the reason why we announced it like that, because that is what we hear, what we see out of all the talk, the lockdowns, the complexity, the business, the customers, what they say, and so on. And we have the pity, and we don't feel good with it. I can tell you that too, that we are not able to make a financial guidance. That is the low visibility. It would be not fair to shoot something or the range would be that big that you would really say, what the hell are you doing? But that is what we see at the moment. So we try to give as much information as we can. And I think we all can agree that the main impact of that what happened with the pandemic worldwide is actually happening now in Q2.
Okay. Right.
Here in Q1, you haven't had any cancellations. But if you look, let's say, on the rest of the year, is there any risk of cancellations? Do you have any big clients that are in financial problems already, or is there something you are worried about, or are you perhaps reasonably relaxed about your backlog so far?
You know me. I'm never relaxed, especially not in such a time. We don't see that. We don't see anyone at the moment being under financial stress. But let's see how that works. Let's see how that goes through because we have significant country differences. I take now not always India. I take South Africa. If you have a cement plant in South Africa, and they would on coming Friday, they would like to announce how they do it.
If they would extend the lockdown, that could be then critical for cement customers in South Africa if there's absolutely no business. So from that point of view, we don't know yet. What I can say is a little bit of confidence, and it is clearly that our customer base, what we had, let us say, seven years ago versus today changed. We were in mining predominantly on junior miners. Today, we have actually a fair reflection of the whole customer group. So we are significantly less depending on junior miners who can come earlier under financial pressure if a crisis is quite severe and long. The mining industry in general overall, not all, but the majority by far is in very healthy conditions.
Then when we look into the cement part, the cement, the big group of customers we work in cement are actually very financially strong, family-owned or state-owned cement clients with a very long-term view and already operating for a very, very long time. So with a good knowledge how to maneuver through crises. And one thing in cement, what we have in mining, there is a global cyclicality that it goes up and significantly down. In cement, you have the two in each country. So a cement client of us has its own cycle in the country. So they are used to maneuver in downtimes as well as they are used to maneuver in uptimes. So by saying that altogether, we have a very good view on our customers. If we see something coming, as we did in 2015, we will immediately info rm the market. We don't see anything at the moment today.
Okay. Excellent. And then, finally, a pretty easy question, I guess. The amortization in the P&L dropped DKK 12 million year-over-year in Q1. What's the reason for that? And is the DKK 82 million here in Q1 a sustainable level going forward?
Yeah. The main reason is that we finalized the amortization of some of our R&D projects, and we do expect approximately the level that you saw in Q1 to continue going forward. There was also lower PPA in the quarter, which also would be sustainable going forward.
Okay. Excellent. Thank you.
Okay. Do we have further questions or time to conclude? More questions.
So thanks a lot for all the questions and the participation. And, we're not the only one always wishing that.
Stay healthy and safe and follow the rules and regulations as we try to be good citizens wherever we are. Hope to see you soon. Bye.