Hello everyone, a warm welcome to this Epiroc Q1 results presentation. My name is Karin Larsson, and I'm heading the IR department. With me today to present the results, I have our CEO, Helena Hedblom, and our CFO, Anders Lindén. Some of you might wonder why we pre-announced the results. Well, the reason is that the board, yesterday, decided to change its proposal to the AGM regarding the dividend. As a consequence, we found it very logical to also release the report at the same time. For the presentation today, we will follow the same format as we always do, which means we first do the presentation and then we do Q&A. Today, we only do the Q&A over phone as we do not have any external visitors in the office. We have one hour for this call so wi thout further ado, please, Helena, the stage is yours.
Thank you very much. From my side as well, welcome to the Epiroc Q1 presentation. This is my first report as CEO, and I must say I am very honored to have the opportunity to lead this fantastic company. There will be a lot of talk about the COVID-19 pandemic today, and of course, the impact it has on Epiroc. I would like to start with highlighting my priorities, because the priorities are valid also in the middle of this pandemic as well as in the long run. I will, as new CEO, continue to focus heavily in innovation to secure that Epiroc are in the forefront when it comes to technology shifts ongoing right now, both in mining as well as infrastructure.
I will continue to focus in growing our aftermarket, because this is what gives us resilience over a cycle, and it's also where we make a huge impact for our customers to become a productivity partner. We will strive for operational excellence in administration, in our service operations, as well as in our supply chain. Sustainability will also be very high up on my agenda, and I'm really happy that we now have committed to goals for 2030, in line with the UN agenda for 2030 and the Paris Agreement. If we then move over into Q1. Of course, the COVID-19 pandemic has impacted the world and of course also our operation. I must say that I'm really happy to see how well the organization have acted to mitigate all the challenges we have seen during the quarter.
As you can see on the result, we have had limited impact on the Q1 result. Still high customer activities. I'm really pleased to see the growth in parts and service, close to 12%. Also good to see stable orders for equipment sequentially, down year-over-year, but still more or less in line with what we saw in the later part of 2019. Of course, orders received in Q1 is slightly higher than in Q4. That's good to see. We see lower revenue. Here we have an effect of the COVID-19, close to SEK 400 million. Most of that is related to equipment, where we had challenges to do commissioning. Good to see improved underlying margin despite the lower revenue. We have also communicated and put new members into the group management from the 1st of March to create a more efficient working structure.
I now have the presidents reporting directly into me. As you can see in the report, we expect to have a challenging Q2 in front of us, and we have therefore initiated a number of efficiency actions, and I will come back to that later on. If we then look at the financials in details, order intake declined 4% organic, and revenue declined 8% organic. Still operating profit at SEK 1.9 billion, positive from currency and mix, and we had adjusted margin on 20.9%. Also an improvement in operating cash flow at SEK 1.5 billion. Also yesterday, we announced that the board proposed to the AGM to decide only on the first installment of the dividend and to postpone the decision for the second installment. I would like to give you an update on the situation with the COVID-19.
Of course, in Q1, we saw an impact in China. We had our factory in China closed three, four weeks. China represent 4% of our revenue, so that was a minor impact. Of course, the pandemic has impacted our operation now both in Q1 as well as in the beginning of Q2. If we start with the impact on equipment, we are operational in all our major sites, which is Sweden and in U.S., but we have some negative impact on supplier components, mainly from Europe. We have two of our smaller equipment factories closed due to lockdowns of countries, and that is in India and in Italy. As I said, we saw during Q1, in the later part of Q1, challenges with commissioning. Commissioning is when we send technicians out to site to commission the machines to get them up running.
This, of course, has an impact on our revenue recognition. We expect this to continue to be challenging during Q2 as well, depending on the mobility restrictions within countries. If we look on the aftermarket impact, our distribution centers globally are up running and fully operational. We are prioritizing the aftermarket, which means that if we have a shortage of components, we are directing those components to the aftermarket to keep our customers' fleet up running. We have our sales and service operations up running more or less everywhere in the world, except, of course, where there's countries in full lockdown. Our consumables factories are also up running, all our major factories. We have some impact of the lockdowns in India, South Africa, and Canada.
What we also saw in the later part of Q1, and what we also have seen in the beginning now of Q2, is that some mines are temporarily stopped or have reduced activities to take care of the health situation. We also see that some construction customers have an impact, mainly in U.S. as well as in Central Europe. Of course, with less activities or mines temporarily stopped or countries in complete lockdown, we foresee that this will have an impact on our aftermarket during the beginning of Q2 and of course, depending then on how long the restrictions will be in place. Of course, we have our resilience in the aftermarket, and that's where we focus on aftermarket, and we have a very agile setup in the organization.
We have initiated a number of efficiency actions, a number of short-term actions that includes reduction of additional workforce and consultants. We have implemented work time reductions and temporary layoffs in Sweden, in U.S., and in some of the countries where the country's in complete lockdown. We have, of course, reduced external expenses. We have also taken measures to reduce our cost for the long term. We talked in the end of 2019 about an efficiency activity within admin and marketing. We expected this to be SEK 300 million on annual basis. We have added initiatives to this, and we are executing now initiatives that will give us SEK 500 million in yearly saving, and we expect to have all of that implemented now at the end of Q2. We are also consolidating manufacturing sites.
We have announced that we close one of our factories in Italy and moving that to India, we also yesterday announced that we are consolidating two of our factories in Canada within Tools & Attachments. We continue with our work to improve our supply chain as well since that is key for the future. As I said, I will focus a lot on the aftermarket, both short term as well as long term. It was good to see the performance in Q1. The aftermarket now represents 72% of our revenue. Solid development in service, very much related to the service products that we have developed with mid-life rebuilds, with a components upgrade, et cetera. The rock drilling tool business was affected in the quarter still by the optimization of the product offering as well as an impact from COVID-19.
Still good to see the development here in the quarter. I would like to spend some minute on the priorities around innovation and sustainability. In Q1, we entered into a partnership with Roy Hill, which is a large iron ore producer in Australia, to automate their full fleet of haul trucks. This is one of the larger automation order that we have received, and it will be different phases, and we booked the first phase, which is eight trucks, now in Q1. Very exciting project. We also launched HATCON, which is part of our digitalization journey. This is remote monitoring for hydraulic attachment, and it's connected to MyEpiroc. This is connectivity for attachment and drum cutters. We also launched a new DM30 surface drill for single pass, especially for quarries and smaller mines. Together with that, a new assortment of Tricone bits for rotary drilling.
Back to the long-term sustainability goals. Really happy that we have developed goals for 2030. We have set ambition to halve the CO2 emission from our operations, from transports, as well as from our equipment. Of course, our biggest opportunity here lies within our equipment, and we have committed ourselves that the equipment we sell 2030 should have halved the CO2 emission compared to the equipment we sell today. Ambitious but possible with electrical vehicles. Really looking forward to drive that agenda. Also ambitious targets when it comes to health and safety and code of conduct, and we're doing a lot of efforts now to create a safety culture in the company. Also ambitious targets on diversity and inclusion, with the ambition to double the number of women in operational roles.
By that, I leave over to you, Anders, to go through the financials more in details.
Thank you, Helena. I will, as usual, take you through the numbers and briefly, and you will be able to see the numbers clearly on the presentation. If we then look at the result, the reported operating profit was on the same level as last year with the 1,932 versus the 1,930, or 1.9 billion SEK for the quarter. Comparable numbers, slightly lower with the 1,911 versus the 1,989, but obviously with the lower revenue. The adjusted margin was 20.9% versus 20.3%. This, of course, as you have noted, is supported by a currency, and also with a little bit of a mix effect. If we look at the bridge, the currency contributed to 1.3 percentage points, and we have had some tailwind in the quarter from the currency.
As you have seen, especially in March, in the beginning of March in particular, the currencies have been very volatile, and we have seen some period-end effects helping us. Should be noted, of course, that this is a year-over-year bridge. It's not sequential. The base, the starting point, the base is last year's quarter one. The acquisition effect for the quarter is very small. In fact, for the quarter, it's only the acquisition we made last year in South Africa, Newcrest Mining, that we have as an acquisition effect. All in all, organic decline of 0.3% from the lower volumes, but helped a little bit with a mix effect. If we take a look at the segments, the equipment and service to start with, the effect on the financials is minor from the COVID-19.
A little bit of revenue, on the margin side, it's small. We expected a decline versus last year, orders received was stable though, versus Q4 also as expected. Both the underground and the surface orders received declined. The adjusted margin was actually an improvement. The reported margin stayed the same year-over-year, but an improvement of the adjusted margin if we adjust then for the efficiency costs, which we can see on this one. This is to confirm the improvement of 24.8% despite the revenue decline organically of 8%. We obviously have some support from currency and mix here. The flow-through is negative, 30%-35%. It's more than we would have liked, of course, but with the rapid change in demand and the situation, it's not unexpected, but this is only one quarter, as you know.
If we look at Tools & Attachments, the orders went down by 7% organically. It's a decline both in consumables and the hydraulic attachments. A little bit more negative in hydraulic attachments with the impact mentioned on construction. Also consumables as well as attachments had a negative impact from the situation in and weakness in North America. Revenues of minus 5% organically, most of which is an effect of the COVID-19. It was almost flat. If we exclude, it's not all that easy to calculate, but our estimate is that it's an impact of COVID-19. The margin at 13.5% is lower than last year. If we adjust for the efficiency costs or improvement costs, it's 13.9%, which is in line with last year.
Here we see a little bit of a mix effect since the decline on the attachments is a little bit more than on the consumables. If we then look at the profits bridge as confirmed, organic decline 5%, but the structure and other cost efficiencies adding back, as you can see, that's the 10 in the bridge. We get to the 13.9%, and also a little bit support from the currency. Flow-through also here, more negative, but mentioned by Helena, we continue to take actions on Tools & Attachments segments, for example, with the consolidation of production in Canada. This is, of course, then a quarter or so. We continue and look at the costs, financial net and tax, costs are sequentially trending down.
If we compare like for like, year-over-year as well as Q4 in 2019, they're a little bit higher in relative terms, and that is also what we are addressing with the programs that Helena mentioned. Interest net is rather stable. We have our base funding in place, and there are not much of a movement. It can vary a little bit, both the financial net and interest net from currency derivatives, but otherwise it's fairly stable at the SEK 33 roughly. Exchange rates has been a challenge. For us it was very much up and down in the quarter, and I think we've all seen that it stabilized a little bit more towards the end of the quarter and the beginning of April. Taxes, as expected, below the 25% mark as we have as our guidance.
Looking at the capital structure, this is obviously a slide I like to talk about. The net cash position has, for the first time as Epiroc, we now have a positive net debt or actually a net cash position of SEK 1.2 reported. In fact, if we then take away the SEK 1.9 billion roughly effect of debt from IFRS 16, we have SEK 3.1 billion in cash position. It's a strong financial position, and our first maturity on the base funding is in April of 2022 of EUR 1 million. We have also recently confirmed extension of our RCF, which was put in place as part of the listing of SEK 4 billion. That is now maturing in 2025. You also have heard and seen that the board of directors will propose to proceed with the first part of the dividend.
We believe that we have a strong financial position that has not changed, but nobody knows how long or how severe this crisis will be. I think it's prudent to take this approach, and the second part will be decided upon later this year. If we then look at the capital efficiency, we had a little bit of increase in working capital, in the quarter. It's down from last year. It's normal that we have a little bit of an increase in working capital in the Q1. It's typically very low in the end of the year, in particular the inventory. Inventory is still very much a focus area for us, of course. We will continue to work on that.
Maybe I should mention also on the return on capital employed, which has reportedly gone from 31% to 26.2%, mainly from our increased cash position and the effect from IFRS 16. In fact, 4% of the drop is related to those two items. Finally, a word about the cash flow improvement compared to last year, quarter one of around SEK 1 billion. It's a good cash flow. It's not great. We have lower taxes, which we expected. Last year, we had a little bit of a catch-up effect from 2018. We have a little bit of a higher working capital. That was also expected, as I explained earlier, we have some other impacts. The SEK 1.5 billion in operating cash flow, in a historical perspective, it's good for Epiroc. I would call it decent, not great.
With that, I conclude the numbers part, and Helena will come back. We switch.
Thank you, Anders. To sum it up, a solid Q1, despite the effect of COVID-19. I'm especially happy to see the growth in service, as well as the improved margin. I'm glad to see the speed the organization is now adopting to the new situation and finding new ways to serve our customers and keep our customers up and running with focus on the aftermarket. We are, of course, monitoring the situation closely day by day, and we're taking firm actions to lower our cost, both temporary as well as permanent. Also in times like this, we continue to focus on innovation and sustainability. This is then our guidance for Q2. As it looks like, we expect Q2 to be challenging.
It is, of course, very much depending on to what extent the lockdowns of countries will still be there and the temporary stopped mines, when they will start to resume operation. We expect a lower demand on both equipment and aftermarket, and we expect a significant impact on both revenue and profit in Q1. We will carry out the necessary actions to lower our cost base and adopt our organization to this situation, and at the same time strengthen the company and our customer relations for the future and build a stronger company for the future. Thank you very much.
Perfect. Thank you both Helena and Anders for a great presentation. It is indeed a fantastic company we are working for, and we will try to use these challenging times to get better with the customers indeed. Now it's time for the Q&A session, as always, we would be grateful if you could restrain yourself to just one question with one follow-up to make sure that everyone gets their questions answered. With that, please Operator, go ahead.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press zero one on your telephone keypad now. If you would like to withdraw your question, that's zero two. Once again, if you would like to register for a question, please press zero one on your telephone keypad. Our first question comes from the line of Max Yates from Credit Suisse. Please go ahead, your line is now open.
Thank you. Just my first question is on the 12% aftermarket growth. Obviously, that's quite a lot stronger than what we've seen at peers. Could you talk about what you think is driving this? Were there any sort of larger orders in here? Or did you see any sort of customer restocking potentially ahead of any disruption that they may be thinking about? Just any color on what exactly was driving that is my first question.
We had, we'll say a number of larger service orders, mainly related to mid-life rebuilds, upgrades for major components, et cetera, that supported the growth in service in Q1. Not so much, we'll say the signal that customers are, we'll say, overstocking. It was more larger initiatives using our service products.
Okay. Just my second question, I just wanted to follow up on the cost savings announcement. Could you just confirm that there's two separate programs? One is SEK 300 million and one is SEK 500 million, so the total is SEK 800. I just wanted to understand how much of that saving was recognized in 2019 and what you're expecting for 2020 to come through. How those cost-saving programs phase and just confirming that it is a total of SEK 800.
We have added to what we said in Q4. The total program is SEK 500 million. You can't add them on top of each other. We have added SEK 200 to the SEK 300, so it's SEK 500 in total. We started the execution in Q4. We did not get that much contribution in Q4. In Q1, as Anders said also, we started to see costs going down. The majority of the execution will now happen in Q2.
Okay. Should we recognize the full SEK 500 this year in the P&L or actually is it more run rate and then phased over 2020 and 2021?
It's run rate, and we expect to have it then fully implemented so that we can get the contribution from this in the second half of this year.
Okay. Thank you.
Thank you. Our next question comes from the line of Lars Olsen from Barclays. Please go ahead. Your line is open.
Hi. Morning Helena, Anders, Karin. I hope you're all well. Maybe just clarify Max's question. These larger service orders, Helena, can you give us a sense of the order of magnitude of these? How much might a bigger upgrade or rebuild order be? Then just looking forward as opposed to backwards, on your aftermarket business. If I go back and look historically at your parts and service business, obviously held up really well in prior downturns. I think we saw low single, mid-single digit decline during the weakest quarters in 2008 or 2009 and then 2016. I think your consumables business slightly more cyclical. I think we saw double-digit declines in some quarters and prior downturns.
Maybe with that as a reference, I'm trying to understand how we might think about Q2 and indeed rest of 2020 in your service and consumables businesses, acknowledging, of course, that your visibility is pretty low at this point.
If we start with the first one there, the size of the rebuild, it's not really that, we'll say, the growth comes only from that. It was a higher activity in general in Q1, and then on top of that, a couple of larger rebuilds that supported the growth. If we look on the aftermarket, as you say, that holds up under normal conditions, I would say. The situation that we are in right now with full countries in lockdowns, as well as mines temporarily stopped to handle the health crisis, of course, it's very much dependent on when our customers will resume operations and how long the lockdowns will be in the different countries. To give some flavors on this, of course, South Africa is a big mining market, and they have been in lockdown now for a couple of weeks.
That, of course, has an impact, both on parts and service as well as on consumables. If we take Peru, for example, it's the same. They have also been in lockdown, the mining activities there. We also start to hear more positive signals now the last week that, we'll say mining is seen as essential and that mining starts to resume activities in some parts of the world. It's really depending on how the health crisis develop and when authorities and governments will, we'll say, take away mobility restrictions within a country as well as, of course, if a country is in complete lockdown. Clearly, if a country is in complete lockdown and all the mining activities stop, of course it has a temporary impact as well on our aftermarket.
It sounds like you're not willing to offer much quantification around that. Maybe I could try and be specific for TNA at least. The negative 7% organic in Q2, what was that in March? Just as a reference point.
More or less, Sim, I would. Looking at you now.
Yeah. No, and I think at the same time, there was not so much impact in March, really. We saw a little bit, as I mentioned. We say that the organic revenue is obviously mostly related to COVID-19, but a little bit of slowdown towards the end of the quarter, which means March, but not dramatic.
I'll go back in the queue. Thank you.
Thank you. The next question comes from the line of Guillaume Delmas from UBS. Please go ahead, your line is open.
Hi, good morning, everyone. I wanted to go back to the mid-life retrofit growth that you saw in the quarter. I guess this mid-life crisis, so to say, is not a single quarter event. I wanted to see if you have an estimate of how much of your fleets or installed fleet or available fleet is actually under the same conditions, meaning that they will need to be retrofitted. I understand that it will not be Q2, obviously, but as we go through 2020 and 2021, have you estimated how much is in that niche? Second question is, regarding an estimate of how many of your customers' mines, so to speak, are in production lockdowns, as are the rest of the whole, if I may. Thank you.
If we take the mid-life rebuild, we developed that product a number of years ago, and that is, let's say, to support our customers to resume full productivity from our equipment. Of course, we did this because we saw the tendency that customers wanted to prolong the life of the machines, more hesitations when it comes to placing orders of new equipment. We have successfully been growing the mid-life rebuild product, as we shared at the Capital Markets Day last year. I foresee that, of course, if we end up in a situation where customers are more hesitant to buy new equipment, then of course this is a good alternative. It is very much where we strip the machine down, we replace the major components, and we bring the machine back to original productivity, which of course is very attractive.
That is, of course, an opportunity for us, and we are working hard to offer that product to our customers. When it comes to the number of mines that are temporarily stopped now or under lockdown, we are monitoring this day by day, and it changes also day by day. It's very difficult to say a number or to put a percentage into this, because it really changes every day. As I said, it's very much related to the health crisis development in each and every country. Of course, the countries that are in complete lockdown, their effect right now is, of course, there. I would say that when it comes to temporary stop mines, many of these mines also try to start operation again. I would not like to quantify this because it's really moving every day.
Okay, thank you. As a follow-up, the retrofit or the mid-life rebuilds, can you give us an indication of how profitability is around these projects?
No, we don't disclose that, but it's a good product for us.
Okay, thank you. I'll step back then, ma'am.
Thank you. Our next question comes from the line of Andreas Koski from Nordea. Please go ahead, your line is open.
Yes, good morning. Most of my questions have already been answered. Now you have a very strong balance sheet. Do you think that you will be able to find any larger acquisitions to do? Is it mainly bolt-ons that you're going to do, you think?
Yeah, as I said, we have a very strong balance sheet, and we are of course always looking into opportunities to expand both organic as well as with M&A. We are looking into opportunities close to core, which is very much in the technology area and in the aftermarket area. More, let's say, smaller ones, add-ons to the core of Epiroc.
Yeah. Okay, thanks.
Thank you. The next question comes from the line of Andrew Wilson from J.P. Morgan. Please go ahead, your line is open.
Hi, good morning. I have a sort of bigger picture question, I guess, Helena. Just around some of the supply chain opportunities you talked about and also the portfolio, we've seen some change in terms of exiting some product lines. I just wondered, I guess, if you could get your take coming into the role on what's been said before and kind of whether you think there are bigger opportunities, different opportunities, and where we would potentially see the benefit coming through in the numbers just to try and, I guess, get a fresh take on some of those initiatives.
The supply chain program, as we have described earlier, that's a fairly large revamp of our supply chain. With the main target to improve our availability of parts and consumables to our end customers, to lower the transport cost, and to try to reduce the tonnage that we send by air and move more and more over to sea, as well as, of course, reducing the tied capital. We are in the middle of this program, and this is a project that we need to do very carefully, of course, because it includes closure of a number of stocking locations out there, creating regional distribution centers globally. It's a fairly big exercise to also change from air shipment to sea, of course, from a lead times perspective.
We're in the middle of this project, and I expect it to continue another two years before we see the full effect of it. When it comes to the portfolio, we have mainly been focusing on the portfolio of consumables, as you said. We have exited a number of product lines, and we have exited and we have also restructured quite a lot of our manufacturing facilities within the RDT business or the consumables business. I don't really foresee that there will be a lot of more work needed when it comes to the portfolio. I think we have done what we need to do. The portfolio is now positioned in line with the equipment we have, and also when it comes to tying the consumables together with equipment, and giving our customers a lower total cost of ownership with the digital tools, etc.
A lot focus on the innovation side now on consumables.
Thanks. That's very helpful. Just as a follow-up that's slightly adjacent, admittedly, but just could you just give us a little bit of color around the different trends you've seen in mining and construction specifically? I feel like we've sort of focused more on the mining side in terms of the question. Just interested if you're seeing very different trends and very different customer behaviors. That would be helpful.
No, as I said, we talked a lot about mining. I think when it comes to construction, that has been more impacted by the lockdown of countries and the mobility restrictions as well. We saw that in the end of Q1 and also in the beginning now of Q2, and especially, I would say, in U.S. as well as in Europe. On the other hand, as I said, we also see China picking up again on the construction side. That is good to see. It's very much related to the lockdown of countries on the construction side.
That's great. Thank you then.
Thank you. Our next question comes from the line of Maddy Singh from Bank of America. Please go ahead. Your line is open.
Yes. Hi, this is Maddy from Bank of America. Just one question on the performance in the OE segment. That's one area where I think the pressure still remains quite significant. Could you talk about that? We have also seen CapEx cuts by some big miners. Do you think that OE performance actually gets worse in the medium term before it gets better? Thank you.
Yes. On the equipment side, of course, we saw, during the later part of last year, a drop, but from that point it has been very stable and you could see that also in the numbers now for Q1. Of course, this depends also how long this situation will remain. I think it's quite natural to believe that mining houses will be cautious, especially when it comes to larger investments. I think we saw that also in Q1, but it's more smaller orders. It's not these really large orders that we landed maybe during 2017 and 2018. We see a more cautious behavior, but at a solid level. Difficult to predict how that will play out in the coming quarters. I think our focus is really on our resilience and making sure that we protect the aftermarket now.
I think for our customers, that is the most important thing now to keep their operations up running.
Do you think the progress of growth in the aftermarket side is going to be more than enough to offset any pressure on OE in the future as well?
Difficult to say. It has, of course, a lot to do with the production level in the world within mining, which is very much dependent on the metal prices and of course, the overall demand in the world. Mining is, of course, dependent on a lot of other industries. Difficult to predict what will happen. I think as it is today, I don't think anyone, to be honest, can really predict what we have in front of us. I think we know what we know today, and we need to act based on that. For us, really protect our aftermarket and do whatever we can to support our customers during these difficult times. Really be there for them, and be a partner and help them out now.
Thank you very much.
Thank you. The next question comes from the line of Robert Davies from Morgan Stanley. Please go ahead, Robert. Your line is now open.
Yes, thanks. Morning, everyone. Thanks for taking my questions. The first one was just on your aftermarket offering. I'd be interested in how much of that is possible to do remotely. In between, I guess the balance between spares and consumables versus actual site access and service. I'd just be interested to know how much of that sort of service and repair can be done via video link or via Skype or what have you?
As of today, there's not a lot that can be done, we'll say, in a digital way. Of course, we have our workshops up running close to the mining sites. We have our own workshops, where we can do repairs and do major overhauls. I think the majority of our aftermarket is, of course, related to the sales of parts. Service is, of course, a way to help the growth of parts. The majority is, of course, parts, and that we can deliver even if we can't do the service on site.
Maybe you can also say that if a site is in a lockdown, it's a lockdown for the customer's employees as well as for our employees. There are exceptions, of course, where foreigners are not allowed in. We see that, but those are exceptions. If it's a lockdown, it's a lockdown, and what you can do remotely would need some sort of assistance or somebody at site.
Understood. Thank you. Just a couple follow-up questions. One was just on where you are in terms of some of the logistical disruptions. I know you've mentioned China, I think in some of your prepared remarks. Just wondering in other regions and just tying into that transition you mentioned from doing more air freight into sea and shipping. Is that part of the response that you've seen or part of your response in terms of what you've seen here? Or was that something you had going on in the background anyway that was part of a bigger program?
As I said, of course, we are also impacted by logistic disruptions. On the inbound side, it's mainly in Europe, with the lockdown of Eastern Europe as well as Italy, and where we also have signals now the last week that some of our suppliers are starting to operate again. So far, we have not really had any major disruptions in our supply chain and our ability to really deliver machines or deliver aftermarket to our customers. On the outbound side, of course, there is more challenging because there is simply not enough lanes open, both when it comes to air as well as sea. I think here our team is working day and night now to find, we'll say, re-route the goods and, say, find the best possible way to get the products to our customers.
I expect, we'll say, especially the outbound transport side to be challenging as I think most companies do today, especially in Q2.
You've also probably heard that there are some quite dramatic cost increases on certain lanes or routes as well. We saw that already in March a little bit, and that will probably continue also until this crisis is over.
Understood. Thank you.
Thank you. The next question comes from the line of Edward Hussey from HSBC. Please go ahead, your line is now open.
Hi there. Yes. Good morning, everyone. Thank you for taking my questions. My remaining one really just focuses on gold. I suppose in light of the very strong fundamentals here, what are customers saying as we progress through 2020? Might we still see continued order growth here in both equipment and service? In spite of the sort of positive market dynamics, will operational and supply chain issues weigh in?
As you say, we'll say gold is still holding up and is still strong. We saw in the, I would say, in the beginning of Q1, we saw increased activities on exploration for gold. There are also gold producers now that are under lockdown, because the country is in lockdown. They have also, in some places of the world, been forced to reduce activity to handle the health crisis. I think it's a little bit too early to say what will be, let's say, the later part of this year, what will be the activities in gold. Of course, if the prices are where they are today and the health crisis will be managed, then of course, activity should resume in gold. That's my view, how I see it.
Thank you, Helen. Perhaps just to follow up on service and looking a bit further forward, what impact do you expect this crisis to have on your digital and automation solutions? Have you already observed any acceleration in customer conversations about 6th Sense and other offerings as these restrictions on physical labor are enforced?
Yeah. Of course, in the middle situation we are in right now, of course, our customers are dealing with the situation right now. There's also a lot of discussions ongoing when it comes to automation and digitalization. I foresee that will continue and hopefully also, we'll say, intensify as we move on here. I think that it is the right path for the industry. Of course, here we make sure that we are close to our customers and that we can try to do these type of projects, even if we are not allowed to travel right now. We still have our automation centers built up regionally now. We have teams in Australia, in South Africa, in Canada, U.S., and in Chile to support our automation projects now locally, which of course is good in times like this when we can't travel.
Interesting effect of this situation is the increased use of digital tools. I think we see, let's say, the skill level of using digital tools will increase. We've seen some very interesting examples, not the least within our service when it comes to the operation, when it comes to training remotely. Most of our white-collar people are, like for other companies, are working from home or in split teams, and it's going quite well, to be honest. I think that will be a lasting effect of this crisis, that people will actually be more used to using digital tools and more skilled.
Thank you both.
Thank you. Our next question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is open.
Yes. Hi, Helena. Anders, it's Klas at Citi. I was late on the call. Maybe you touched a bit on it, but I want to come back to the service growth. When we met in February, Helena, we talked about the lag from equipment coming down and how the service growth could be impacted. I think you said then that there is still a positive lag to be seen from the equipment not consuming spare parts until after 18 months. I get that we will have shutdowns, but underlying and looking at spares, are there reasons to believe that underlying demand could still strengthen from that we are utilizing the new equipment as we go forward? If you can comment on that, please.
As we discussed here a couple of weeks ago, of course, I would say our fleet start to consume parts and service after one and a half to two years. Of course, we have put a lot of machines in the market the last couple of years. The underlying potential is there for sure. Of course, very much depending on what happens now. I think what we see now is, of course, it's a temporary situation with healthy mines also now put under care maintenance. Of course, that is temporary. It's very much dependent on now how long this crisis will be there, with lockdowns, with mobility restrictions, but of course underlying there is a healthy potential.
Okay, good. My second one is on equipment deliveries. You commented that we could have a big impact given that key regions are closed for business. That delivery drop, I'm trying to understand how equipment deliveries developed in March and in early April, that significant impact. Are we down 40%, 50% already now, or what is the magnitude roughly?
We have not really quantified it. Really what this is about is our ability to send technicians to site to do the commissioning of an equipment. Of course, in a way, if we can't do it in March, and the lockdown is still there in April, we can't do it in April. Of course, eventually that will happen because the machines are already in the country, but we can't send the technicians to site. Very difficult to predict how that will play out in Q2. If the mobility restrictions are as they are today, and if the countries are still in lockdown, then it will have an impact. You saw the impact in March there, it was SEK 300 million related to equipment.
300 million. Okay, cool. My final one is on something else, leaving COVID-19 for a bit. Could you talk about ASI a bit more and the cooperation there from 2018? It is interesting to see that you are going after automation of mixed fleet. That opens up a new wallet for you on automation. If you could talk a little bit about the latest development there, Helena.
We took a share in ASI Mining two years ago with ambition then to be able to offer our customers in the surface space mixed fleet automation. We have done a couple of pilots with some smaller initiatives during these two years. Now in Q1, we landed this first order with Roy Hill, which is a really exciting project where we will automate 77 haul trucks for them. That, of course, goes well in line with the Pit Viper we have on their sites. That is really a fully integrated solution. This is software, it's hardware, and no equipment that comes from us. Very exciting project.
It will of course take some time for us to establish the product, to work out all the, I would say, challenges that come with developing a new technology, but it's a very exciting step for us.
Good. Okay. Thank you.
Thank you. Our next question comes from the line of Lars Olsen from Barclays. Please go ahead. Your line is now open.
Hi, Helena. Thanks for taking my follow-up. On the different trends across your different metal exposures, I guess a follow-up to the gold question earlier. Obviously, the health crisis has obscured any differences between the different metals as mines have shut down. If you look at what you were seeing maybe before the crisis or what you expect to see post the crisis, can you point to any material differences by metal from a CapEx or from a new equipment standpoint? I'm particularly interested in whether you see gold and perhaps copper be better, stronger or worse than other metals.
I think it's quite difficult to answer that. If I look on the mines that are now temporarily stopped, they are all over the commodities. It's not really related to the price development the last quarter. It's only related, I would say, to the health crisis.
As I said, if gold keeps up, the longer the uncertainty will be there. If gold can still keep up, that would of course support the activities in gold. From a pure demand-supply standpoint, of course, there is a lot of new projects on its way also into operation within copper. Some of these projects are also now temporarily stopped, which, of course, that can't go on forever. The mining houses have already done the big investments in some of these sites, and they are just ready to start operation, and then this happens. I also foresee that activities in copper should continue when the crisis is over. Of course, at what level? That depends very much, I would say, on the development in the world and the growth rate in the world.
Finally, just on mine shutdowns. You pointed to positive signals earlier, which is obviously great news. If instead we see these positive signals reverse and mine shutdowns extend beyond the current three to four weeks into six, eight weeks or even beyond, what will be the implications on your spare parts business? I'm just trying to understand at what point we might start to see cannibalization more broadly across your spare parts business.
Of course, if, let's say that the mines will be closed down for six months or 12 months, then of course it has an impact. That was more what we saw during last downturn there 2015, 2016 as well. Of course, we are agile and resilient, and we adopt organization to whatever level it will be. What we see right now is that, of course, this is driven by the health crisis. Of course, there is a relation with the number of active mines and especially the production level in those mines and the aftermarket. At the same time, as we have also talked earlier about, we have roughly 50% customer share of existing fleet. That is also an opportunity for us, of course, to grow the aftermarket, not really depending on the activity level out there.
That is hard structured work to gain back market share on our own fleet. Of course, we're doing that at the same time.
That's great. Thank you.
Thank you. Our next question comes from the line of Guillaume Delmas from UBS. Please go ahead. Your line is open again.
Hi, Guillermo again. I wanted to get some housekeeping on the savings, I guess. First of all, whether you could give us an indication of which divisions and to what extent actually the savings are going, and how temporary do you expect them to be, if your activity goes back up to the levels that you were in 2019? Should we expect those savings fully disappearing? Thank you.
As I said, we're implementing temporary actions to save cost, and that we're doing in all divisions. When it comes to the permanent savings, I would say that majority of our cost structure is related to the aftermarket, of course. That is the cost we have out in the customer centers. It's related to supply chain, administration. A big portion of the savings from these programs will end up in parts and service as well as Tools & Attachments.
I should also say that the numbers that you are referring to, the 500, they are not temporary.
Permanent
They are permanent cost reductions. Of course, as Helena said, with our business model, we have additional activities to support the agility that we talk about.
Thank you everyone for asking very good questions, and sorry for interrupting you. We need to stop now because we've already filled an hour. In case you have any follow-ups, please feel free to reach out. We, the three of us, and also Mattias Olsson and my stand-in, Jimmy Kristoffersson, are happy to help you with any questions. If anything was unclear, just drop us an email, and we will take it from there. We would like to thank you for taking the time. We would like to wish you successful investments, and above all, stay safe. Thank you.
Thank you so much.
Thank you.