Welcome everyone to Epiroc's Q4 2019 Results Presentation. We will use the same format as always, we will start with the presentation from our CEO, Paul Lindbergh and our CFO, Anders Lindehan, and then we will go into a Q and A session. So With us further ado, please, Pat.
Thank you, Matias. And that's Matias. Also, by the way, in charge of communication repiroc. And, it's a pleasure to be here. This is actually my last quarterly report for Epiroc.
And, again, it's been a pleasure to represent the company. Publicly. And I think we've had a good development of these years. Especially looking at 2019, record revenues record profits. We increased revenues with 7% profits by 10%.
We've had continued high interest for automation and digitalization. We made acquisitions. We we've done fair amount of efficiency actions. We started some, and all of them are not finished. But I think a year with a lot of actions to continue to improve the profitability and strength of the company.
Farlane all resulted in a margin of 21 percent adjusted. And I think again, a year that I can be and we can be happy with. On the back of that, the board will recommend the AGM a dividend of 2.40 And as a result, also the very strong cash flow of SEK 6,700,000,000. So again, 2019, a strong year. Looking at Q4, more specifically, it's clear now that we do have a step down in demand it comes to equipment in the second half versus the versus the first half.
We expected Q3 that the demand would be more or less on a similar lever in Q4, and that turned out to be the case. We had a demand of 9.3 or order received on $9,300,000,000 in Q4 as compared to $9,600,000 in Q3. And the difference there is really, primarily currency. Looking at the equipment, we had an orders received of $2,600,000 in Q4 versus $2,700,000 in Q3. Again, currency.
So, demand is more or less on a similar level, but it's clear again that the there's a step down in demand of equipment in the second half versus the first half. Good news of course is that service continues to grow healthily And that's a good backbone for the future development of the company. And I expect that also to continue into the future. We also had lower revenues in Q4. This is, due to the fact that we adjust down the capacity in production.
We have seen lower orders on hand, And this is a function of the book to bill ratios that have come down. So we're adjusting capacity and that's why we also see lower revenues. We see improved underlying margins. And I think that's, of course, positive. We have seen a positive mix.
And we're also seeing some restructuring costs, of course, that will have an impact on the reported margin underlying margin improves. Cash flow strong in Q4. And of course, we continue to focus on innovation. And when it comes to efficiency actions, again, we've done a lot of things in 2019. We'll continue to do that.
I would have expected actually to see more of that coming through to the bottom line. And, we were we've done a lot of things and we'll continue to do that. The good news there, of course, is that we'll see that coming through beginning of this year rather than in end of 2019. So looking at the key financials, Both orders received as well as revenues down 7% organically up in nominal terms, driven by currency and acquisitions, but organically down 7%. As just explained.
Profits at the limit more than $2,000,000,000. And that includes items affecting comparability of 115,000,000 adjusted as mentioned 20.7%. And we have a cash flow strong, and it's very good news to see that the there's a good improvement in working capital, driven by a reduction in production. But also our efficiency actions. So cash flow is a function of a very good development in working capital primarily.
Now,
Key focus for the company strategically is to work with innovation. And there's several developments that worth highlighting in Q4. One thing that really demonstrates the potential and the interest of our $0.06 solutions which is really a comprehensive package of digital solutions for managing and monitoring the equipment and the production in mines is our delivery of $0.06 to Cobre. And this is a very comprehensive solution for them, and that's going to help them to improve their productivity and the management of the mines. So a good, good indication that we are delivering the right type of solutions to the market.
We also have a partnership with Orica, to develop a system for semi automated explosives deliveries. And this is something that will improve safety and also improve productivity in the charging and the blasting and under ground. Mines. And picture, you can see the pit viper 270. It's a new rig.
Which has, have several automation features. We also launched the Power Rock D60 with a T4 engine, also with the aim of improving the environmental footprint. And we also have some other features when it comes to down the whole hammers, I. E. Our consumables.
And also worth mentioning is that the number of connected machines increased to 3600 versus 3400 that we announced in Q3. So development when it comes to innovation is continues to be very good. Also, when it comes to operational excellence, and I as I just said, we're doing a lot of things it comes to operational excellence and to improve the efficiency. And not all of that has given effect certainly in Q4. Will continue to give effect as we move along into 2020.
Now, what we've seen is a reduction of workforce with over 500 people. Many of those related to the restructuring that we do in rock drilling tools, IEA consumables, but also we've done a normal to speak efficiency actions to improve productivity in our ongoing operations. We have as mentioned, we have initiated efficiency improvements in indirect functions in our functional costs, I. E. Administration and marketing, in order to decrease the cost and increase the efficiency.
And we announced the target of 300,000,000 Swedish in savings effective from Q1 of this year and onwards. And that is rolled out according to plan. We closed down a factory in China. With sold facility in Sweden. And we'll announce also that we will consolidate, I mentioned, stone equipment from Italy to to India.
And all of this, of course, with the aim of improving efficiencies. And as mentioned, That's something what's in focus in 2019, all of the effects not in place yet, but they were come into effect in 2020. When it comes to safety, we we've seen a good development over 2019. We rolled out a safe start program with the intention of really improving the the intention and behavior of our all of our employees. And that is starting to give effect.
So we see some good development continue, of course, to focus on that. Supply chain program, really progressing according to plan. And also, this gives a good effect on CO2 emissions, by the way. So, environmental footprint has also improved as a ones in 2019. Now, to the business, this is just a breakdown of the proportion of sales between the different segments, equipment, 28% in orders received in Q4.
Service 44% and tools and attachments 27%. When it comes to revenues, we see equipment that 36% service 39% and 2s attachments, 25%, all in all, aftermarket 64%. Versus last year, a little less than 60%. So aftermarket is increasing its portion of our total revenues and orders received. Equipment and service.
As mentioned, There's a very big difference between equipment and service when it comes to orders received. Orders for service up 6% again very good development. And this is, this is also a growth beyond the actual production among our customers. So, this is a growth driven by our own actions. We're gaining market share in our own fleet and the rollout of service products has been very successful.
Driving this 6% growth. I expect that to be that we'll be able to continue the growth in the service Now, the percentage remains to be seen, but I think we can continue to have a very healthy development and service. Equipment very different. It's down 22% as already mentioned. And the demand is really what it is.
And the focus of the company, of course, is to adjust capacity and adjust cost base for this variation in demand. Revenues for the segment is down 6% organically. Profitability is at 1,800,000,000. That includes efficiency improvement costs of 28,000,000. Related to the reduction of headcount in order to create these efficiencies.
And margin increased to 23.9 percent versus 23.2 percent last year. And if you look at the graph, bottom right, you can see that the margin goes down from 26.3% to 23.9%. And of course, A good question will be, why is that? Well, it's really 2 things. It's currency and it's mix.
So, in Q4, we the revenues or the sales is really there's a big increase in equipment whereas service is relatively flat as compared to Q3. So that's why we see the drop in the margin for the segment, there is not a drop in margins for the underlying either service or equipment. So that's not the issue. Tools and attachments. Orders up 9% -4 percent organically.
Of course, we've done positions into this segment, explaining that difference. And we see revenues up 3%, down 10% organically. And the difference there between orders received and revenues is really that we've seen a decrease in orders on hand. That's why we also adjust production. But also we are making significant changes in our footprint and with closed factories that mentioned with sold factories as well.
And also, we're we have a voluntary step down from business also in quarter 4. We mentioned that quarter 3 and quarter 2 also. And we continue to do that. So and that's really the reason why we see an organic decline in both orders as well as revenues. Margins at 11.8% versus 13 point 3%.
And essentially, this is an area where I would have liked to see more effect of our efficiency improvements. We do a lot of changes. If we adjust for the costs associated to the efficiency programs, it's a 12.5%. And we also have one time cost associated with an acquisition of 'eighteen. So back that out 13.2%, still not where We should have been, but again, good news is that we are doing the efficiency actions and the effects will roll into the results going forward.
Thank you,
Pat. As usual, the routine, a little bit more of a dive into the numbers. And we have Of course, there will be a little bit of a repetition from what Perj just said, but nevertheless, As you see here, the reported margin of 20.7% and it is higher than last year, the same quarter, but lower than we expected It's okay, but it's not a great quarter. The non comparable items, we have described 115 So I will not talk more about them at this point. But if we look at the profit bridge here then, the reported margin of 19.6 adjusted to 20.7.
As Perry said, the 115 can be divided in the 1,000,000 of LTI provisions that is actually swing compared to last year with 109,000,000. And that you can see as part of the minus 149 in structure and other to the left hand side the graph. 73,000,000 includes, in addition to the 45,000,000 in efficiency improvement costs also a one time item related to the agreement with the departing CEO. This, of course, as before, is supported by currency year over year and also diluted by the organic top line decline. Sequentially, As Farah mentioned already, the currency is actually working against us for the moment.
If we look at the equipment and service adjusted 24.3 percent reported 23.9 of the 45,000,002,008 here you can see is part of the non comparable items that we add back. Again, here, the top line, organic decline has diluted the margin, and it's also supported by the by the currency. Tools and attachments, 12.5 percent adjusted 13.2 percent if we include the 1 time 18,000,000 that Perry mentioned as related to the acquisition, that is what you can see as part of the 30, in the structure and other. So, that is obviously lower than we would have liked and we would have liked to see a better traction in this segment, but it we expect a better 2020 than when we see all the effects of all the activities. If we look at the cost side, What looks like a cost increase for quarter 4 is actually slightly lower costs like for like.
If you take the 1,000,007108,000,000 and compare that to the 1637. If we take out acquisitions and currency and what we have just talked about as the one time items, it's actually slightly lower than last year. On the tax expenses, the lower effective tax some of the activities in this part of the ecosystem is actually only possible to confirm during Q4. So all in all over the year. It's on the level where we expect it to be considering the fact that we do have some items we but costs we have taken during the year that we don't expect to be tax deductible.
Capital structure short net debt at the end of this year of 483,000,000, a negative impact of the IFRS 16, almost 2,000,000,000, which has been fairly stable during the year. When it comes to capital employed, I will come back to that, but obviously that has had a gradual impact as we calculate the average capital employed when it kicks in. And We also have quite a significant impact on the return on capital employed. Pam mentioned the dividend proposed by the board for $2.42 per share and also will be proposed to be paid as last year in 2 equal installments in May November. Networkingcapitalup in nominal terms, but down in comparable terms, and quite significantly down in Q4.
From currency. And we also had good effect from reduction in both inventories and receivables. During the year, with a slightly lower activity on the capital side, we had an offsetting impact of lower payables and and advanced payments, but overall, an organic decline in working capital. However, if you look at the rows, which I indicated before, we have a significant effect, a negative effect from the IFRS 16, 1.4 percentage points. And actually coming down from Q3, that is also one of the main explanations together with the cash generation and also the gradual impact from the recent acquisitions that increase our average capital employed.
Finally, talking about the cash flow. In our short history, sending independent company. This is a record, cash flow quarter, which you can obviously see from this slide. It tend to be higher in Q4, although 2017 doesn't show that where we were not a fully, let's say, independent company or a company with a complete balance sheet which we are since, as you know, since almost 2 years now. But good cash flow from the working capital Actually, operationally, we have 1,500,000,000 improvement from contribution from the working capital.
And as Perris said, the full year 6,700,000,000 operating cash flow. With the focus of, working capital in general and many initiatives on inventory and receivables, we we've seen a good impact in the fourth quarter. And we will continue obviously in 2020. We know that we have some areas here where we need to improve, but so far, a good work at by the teams.
So.
And, the summary is pretty much the same areas that I started out with when it comes to describing Q4. Order intake pretty much in the same level as Q3. We continue to focus on innovation. We continue focusing on efficiency actions to continue to improve the underlying margin. Q4, as such, was not a stellar quarter, but we do have actions in place to continue positive development when it comes to our margins and profitability and also cash flow as mentioned by Anders.
But I think the most interesting news in Q4 is actually that Helena Hedland will take over as CEO and president from March 1st. And I'm very, very happy to hand over to Elena, she's a very good person. She's a recognized and very appreciated leader. She has a very strong drive. Understands the business.
She understands our customers. And, I'm sure she's going to be a very excellent CEO. Leader and representative of Eperolc going forward. So, very pleased to do that. Now, just to firm it up when it comes to demand expectations, it is clear that our customers remain cautious in making investment decisions.
As mentioned, there is a step down, how long this cautious behavior will continue? I'm clear, but when it comes to our outlook for the coming quarter is that we expect it to be more or less on the same level as we saw in Q4. So, that concludes the presentation.
Now, it's time for the Q And A. And as usual, I would like the participants to limit the questions to one question per person. To allow everyone to
questions. The first question is from Guillermo Penney, UBS. Your line is now open.
Hey, Barrett. Good morning, Anders. Good morning, Matias. I wanted to ask one question, regarding the overall demand progression through the year. Obviously, what we see is that Asia Australia demand, especially for equipment and services went up materially, during the year, whereas Africa, South America, North America, and to a lesser extent, but also down in Europe.
So there's, 2 clear ways of basically how the market evolve, but I wanted to understand the reasons behind the strength in in Asia and also area in Australia, why that market behaved differently from the other, the other market?
Well, first, that's a good question. First of all, I think that the market really, is better understood when looking at commodities. Rather than geographies. And I think we'll probably start looking at that going forward. But now, nevertheless, this is now being reported on a GR and geographical basis.
And we've made progress when it comes to Asia, especially in China. We're rolling out a strategy, when it comes to, we call it, territory management. It's been very successful and we're making progress when it comes to capturing market and volumes. So that's visible. In the Asian numbers.
In Australia, we made progress when it comes to aftermarket development as well. And I think that's also visible looking at the very, of course, this is a big contrast to what you see in North And South America. South America, we have very tough, comparables We had delivered many large orders. So, we got many large orders in 2018, which means that we see decline in 2019, just because of that. North America, a little slower when it comes to infrastructure and And I think that's really the explanations that I can think of.
Maybe you guys have something else, but that's what I'm thinking of.
Okay. Thank you. And maybe a follow-up on all the actions. Obviously, you've been Q4 is doing very active. With, plan to enclose business being divested, restructuring actions altogether.
What would you say will be the progression through 2020. At what point do you expect to see, these these actions resulting in bigger incrementals when it comes to profit, sensitivity. I I want to understand a little bit how these actions will actually flow through the year as we go forward.
Yes. And another good question and very relevant, I guess. There's different components in the efficiency actions we're undertaking. The one that you were talking about, are really, it's called the structure of the footprint, plant closures or sales. That with the ones that we've done we did in Q4, end of Q4.
So, certainly, the effects didn't roll into Q4, but they will roll into Q1. We also have additional efficiency actions when it comes to, as I mentioned, when it comes to indirect cost admin marketing, where we make efficiencies. And that's going to roll into also in Q1, Q2 primarily. And then the 3rd area, which we've been working on for quite some time, is, is our supply chain program. That is a more gradual and has a more gradual impact, which will not necessarily have sort of a step change in the beginning of the year, but gradually over over the course of the year, I would say.
And I would I can also say that it is not it's not unlikely that we will do more structural changes in 2020. But if that's those decisions are made, we'll come back to that.
We we did announce one in, the beginning of this month, as you Yeah. As you know, and it's also in the report. But,
Thank you very much, and I thank you for taking the wish you best, sir. Thank you.
The next question is from Mike Seats, Credit Suisse.
Hi. Just my first question is on capital allocation. Obviously, your balance sheet is now looking relatively defensive. And I just wanted to understand how we should read that. Is that a sign that you are sort of pursuing acquisitions more aggressively next year or do you think this is more a reflection that there are some macro risks and it's more an appropriate balance sheet for the environment?
Well, it's not a reflection of the perception of macro will continue to have the solid margins and solid cash flow going forward. And that's So, if anything, it is a reflection that, we would like to have some fire power in case we have opportunities to use the balance sheet.
Okay. And then just as a follow-up, I wanted to check on the services side. Did you see any disruption in your business from what was happening in Chile around strikes, I. E, would that service growth rates have been higher? Had you not seen any impacts there or is that not reissue for your business in this quarter?
No, it was, I mean, very marginal. It's not, I would, it's not material. So it didn't have any impact on the business.
The next question is from John Spurning, Citi. Your line is now open.
Yes. Hi, Pareen Andesk Claus on Citi. So I want to come back to the guidance. You've been guiding for a flat demand for quite some time that equipment orders seem to continue to disappoint at least. Versus our expectations in the market.
And I appreciate that there is a 2% to 3% currency headwind quarter on quarter. Therefore, equipment orders broadly flat organic but I thought there was some high seasonality in the fourth quarter. Are you effectively now guiding for all in flat demand into the first quarter? And could you talk a little bit more about the pipeline? Sandvik talked about a little bit better pipeline towards sort of in the beginning of the year, So we'll start there.
Well, I'm not exactly sure what you mean with all in flat. So maybe we can clarify. And when it comes to Yeah.
I'll clarify
that by saying that
if there are any seasonality in your guidance or do you effectively guide just like what you see? So should we expect the order intake that you have in the 4th quarter and equipment to be the same roughly in the, in the first quarter. Is that how you see your guidance?
That's how you should read that. Yes.
Thank you.
And when it comes to Sandvik and their pipeline, well, that's their pipeline. And at the end of the day, we operate more or less in the same market. Maybe there is a difference in tone in how we describe the market, but essentially I think we're looking at more or less the same type of market. And if you also look at the growth or decline actually in in orders received for them as well as for us. It's, very much on the same level.
All right.
Then my second very quick follow-up is on the cash flow for you, Anders. Receivables are lower in our inventories, how much is, if there's a cyclical effect versus the improvement of the supply chain you're working on, if you could give some steer on how supply chain optimization or progressing, when can we start to see sort of underlying improvements to the working capital?
I would say, you know, it's, the improvement in the cash flow and the reduction of working capital obviously is a composition of of many things. And I would say there is an effect of the supply chain activity, but also the supply chain activity is not only going to have a positive impact on our inventory. We also do this to improve our, let's say, ability to serve the customers in terms of better utilization. So we have various let's say, forces here. We have a reduction in or a small reduction in production for the captivations.
And that has quite a significant impact on the reduction in payables because that's where we do have more of, let's say, contribution from the payables and the long term payment terms that we and the programs that we have in place. But we have absolutely improved and see a clear, let's say, reduction in receivables And we continue to do that. On the inventory side, yes, I've said many times that we are definitely, let's say, below average in performance. So, our activity will continue to be on lowering our inventory in general. I'm not prepared to quantify this, but as you can And maybe that's, you would have expected me to be able to do that or at least be a little bit more, let's say, transparent, but there are so many things in this computation.
So it's really hard to say what is what. But in our terms, our target and ambition when it comes to working capital reduction, we expect and will go down in relative terms in working capital going forward.
The next question is from Marcus Atmanns.
Hi, Marcus at Kepler Cheuvreux. My first question, just on the wording. So when you talk about demand, and push outs, you just use different words. So on the one hand, you say step down in demand and then you talk about push outs of projects and delay a project. So Just when you have the discussions on the ground with the customers, what kind of language are they using?
Because I would assume that the pipeline of orders have not changed. Because that's what we heard across the board from others.
Yes. Okay. So pipeline is We call it business cooking, internally. It's really a pipeline. And that pipeline or business cooking has not changed in terms of its or potential volume, over the course of 2019 and certainly not over the course of Q4.
So The potential business out there is still unchanged. The, the effect of the the cautious behavior when it comes to spending capital has meant that there is de facto in reality a step down in the actual orders placed. And and also, what does that mean? Well, it means that these potential, you know, the potential orders in the pipeline or business cooking is pushed out in time. So that's really what's happening.
Hopefully, the language is not confusing, but the orders that were talking about or pushed out, they're not making not placing an order this month, maybe next month, maybe next quarter. So that's really what's happening. And at the end of the day, materializes in lower orders received for us.
Okay. Yeah, I was more yeah, so I was curious just in terms of when they communicate this to you and when you sit down with the customers, what kind of language they are using in terms of when they're not placing the orders that you had expected, etcetera, etcetera. So that's kind of the base of my question. Okay. So my other question was, yeah,
I don't think I have a very good answer to exactly what language they use in terms of how they explain the situation. So I can't really I can't give you any better flavor of that one.
My second question was just also on type of language used. So you see now that more than half of your orders are from brownfields will expand And I think that before you said that the majority of orders have been from expansion to brownfields. So has there been a change that? That is, as is have you really seen a collapse collapse in new orders whereas whereas the replacement orders have been unchanged more
or less? So can
you just talk a little bit about that?
No, this Q4 replacement No, the expansion was, I think, about 65% business and replacement 35%. The ratio is typically sixty-forty. And that's been historically are these 5% material or significant I don't think so. I think we're still looking at brownfield expansion being on the prime driver. People are expanding capacity due to, of course, higher production, but also deteriorating or grace more complexity in mines, etcetera.
So that's what's driving equipment demand at the moment. And less so obviously replacement.
The next question is from Andreas.
I have a question here in the office as well. So I'm coming back to you.
And that's relating to the off the market. Could you please elaborate a bit on the possibility that you serve for 2020? To continue to grow the off the market business, you know, do you think it's possible to further increase the market share among existing customers Thank you.
I think, you know, the opportunity is still, still very good. I think we made progress as we've seen in service. And no reason to believe that we will have less opportunity in 2020 than we saw in 2019. Now, that is not the forecast saying that we're going to grow with the magnitude that we grew in 2019 2020. But the opportunity is still there.
And I think we're going to grasp that opportunity. And when it comes to the other part of the aftermarket, I. E. Tools, drill rods and drill bits. We are making several changes, the this is driven also by production.
And once we get stabilized, the new footprint and also stabilized. So the changes in our portfolio, I think we'll have opportunities to continue to grow there as well. But one should be should be aware of that we are also backing out of some business for profitability reasons. And we'll continue to do that if these volumes are not profitable. To what extent that's going to happen in 2020, we have to see.
So far this year, we've I think we're around 3%, 4% or something like this. In terms of backing out of that business. Maybe it's going to be more or less the same in 2020.
And we move on with the next question via the telephone line. It is from Andreas Kasquino Dea. Your line is now open.
Thank you and good morning. Firstly, on cost savings activities, could you please give us an indication what the amount of those savings could be?
I think we lost it for a second.
The magnitude of the cost set.
Okay.
Yeah. Yeah. Yeah.
I think the only thing that we've been explicit around are the effect of the efficiency actions on our indirect cost, $300,000,000 effective, from Q1 of this year, I. E. Now. The rest we have not been explicit will not be explicit in terms of its effect on neither top line or bottom line. But certainly will have an effect.
Okay. But the 500 was it 21 people that organization in Q4. Is that related to the indirect cost savings of NOK 300,000,000 or?
Yes, well, part of
it. Yes,
it's a combination It's obviously, we have also, you know, closed down some business. So the 521 that you're referring to? Yes. There is an element of it that is referred to these savings programs, but remember that we've also this is not comparable numbers per se, but it's a nominal term. So we also divested, one factor in Sweden.
So it's the total headcount. But yes, in that number, we have some efficiency improvements. And also, as you, as you know, the $45,000,000 that we discussed as, cost for efficiency activities or restructuring costs, even if they are not a dramatic are related to some people leaving the company. Yes. And we I think we said in Q3 that we expect it to be between 51100 in total, and it's probably going to be closer to the upper than the lower.
But the activities are still ongoing.
Okay. But the total cost savings target for 2020 will be significantly higher than the SEK 300,000,000 you have communicated from indirect costs?
That's correct. And for the clarification, what Anders said, I mean, the vast majority of the $5.21 in headcount reduction in Q4 related to the closures or divestments of our facilities. Portion of it direct efficiency actions.
Okay. And then quickly on tools and attachments, I think you said that It's I think it was at your Capital Markets Day that you said that tools and attachments should return to normalized and positive organic growth levels in 2020. But it seems like you are stepping away from that, the bit that you will see a need for continuous takeout of unprofitable products? Is that
the way we should read you
when you say that there is
I think once you understand it like this, I mean, we're if there is a need for us to continue to back off potential volume for profitability, that is now in the comparables. So, if you can just disregard that in terms of growth. So, I think we'll have the opportunity to continue to grow with healthy product portfolio. So that's how we should be understood.
Already in 2020. Yeah.
But the I would say the focus in 2020 is also to, on the profitability.
Oh, absolutely.
Maybe even more than
the growth. That's good, good clarification. The sort of the focus is exact focuses on restoring profitability. 1st, secondly grow is not the other way around.
Okay. And then can I just quickly squeeze in a question on the service business as well on the organic growth there? Because looking at the past three quarters, the order intake has been roughly SEK 4,100,000,000. So you haven't been growing sequentially for a few quarters now. And you, Perry, you said that you expect continued growth, but it remains to be seen at what rates.
So are you feeling that demand in the service business is stabilizing or leveling of the bit or?
No, I think, you know, I think, well, as mentioned ready. I think there's plenty of opportunities for us to continue to grow. Our expectation is to continue to grow our service business. You know, at one point last year, I also mentioned at the quarterly, you know, I mentioned that it's not unlikely that the growth of service will take somewhat of a breather end of 2019. Maybe that's what we're looking at, but it's not a breather to stop breathing at all.
It's it's just perhaps a temporary effect. So we expect that the growth to be our possibility to grow service continues to be very healthy. And and, you know, I expect us to to grasp that opportunity.
Thank you very much and best of luck there.
The next question is from Andrew Wilson, JP Morgan. Your line is now open.
Hi, good morning, everyone. And can I just ask a question on the the conversations you're having with customers with regards to the transition into areas like electric and autonomous and greater digital products? I'm just wondering how the sort of hesitation in terms of obviously equipment orders is actually perhaps slowing down the transition onto some of these new sort of more innovative areas and just guess, how we should think about sort of penetration rates and whether that might be a little bit slower than we perhaps thought previously?
No, I think, from what I understand, I'm not involved in all the direct discussions of customers. But from what I understand, the, you know, the, as mentioned already, I think the demand and, and our sales of, call it, digital solution in general and battery solutions, continues to be very healthy. Of course, a general cautious behavior in our end market will have an impact also on these the sales But I cannot say that we see a or that we're disappointed or that the sales of of automation products, digital solutions or battery solutions are lower than expected. Actually the other way around, I would say when it comes to battery solutions, it's actually exceeded our expectations to a certain extent. So, I think it continues to look good.
Thanks. Maybe if I could just clarify one of the earlier comments. On the tools and attachments, just thinking about the top line in 2020, you obviously talked about various initiatives you've got in terms of kind of restoring underlying organic growth, if we can call it But was I right in, you think there's going to be a 3% to 4% headwind on the top line in 2020 as a result of walking away from from lower margin product, just to clarify that?
Well, I'm I'm saying that's that's potential so. But once you'd also understand that this was the case already in 2019 from the beginning of 2019. So when it comes to comparables, it's already in comparables. We did that in 2019. If needed, we'll do that in 2020.
So it shouldn't have necessarily effect on growth per se, growth potentials per
se. But maybe to say also this, as Per mentioned, the call it, the voluntary walkway or whatever. It's part of the comparables. It's part of what we call organic, and it's not black or white. You know, what you can include and not include, then obviously it's a little bit of an assessment is this something we walk away from or not because you actually don't accept the price to go below a certain level?
So
no, again, just to be even more clear, there's no reason to think that the market or our volumes will drop with 4% just by us backing away additionally backing away from what we, you know, from volumes compared to what we saw in 2019.
That's very helpful.
The next question is from Robert Davies, Morgan Stanley.
Just had a question really around, again, sort of, I guess, looking at some of the customer behavior, customer conversations, do you feel there's any sort of backup or sort of pent demand of orders from customers that have been on the backbone and whether it was through trade concerns or, waiting to get to sort of fully budget resets this kind of thing that could come through in the next 3 to 6 months. What are what are customers telling you the kind of key reasons for holding back on, on on projects? And you hear anything on the ground that would make you more encouraged over the next 6 months that could see those projects come through? Thanks.
I think what we're looking at is is, people, our customers are, defending their balance sheet. They're really looking at the consequence of not replacing older machines for new machines that you will increase your costs for maintenance and operational cost. And I think it seems like what people are willing to do is to do that trade off. So a consequence of that in turn course, that we see more of aftermarket sales, I. E.
Service. So the growth in service is partly consequence of older machines. Is that now do we now see indications that people will start with more replacement in 2020 than what we saw in 2019? Not necessarily indications that that's going to happen. But of course, I mean, the longer our customers wait in terms of replacement, the more overdue, so to speak, the replacement will be.
So, but it also over the last year, received several questions in terms of when is the replacement wave coming, but I don't think it's going to be wave necessarily. It's going to be more more of a general, you know, positive support for demand going forward rather than anything else.
Thanks. And then maybe just as a sort of follow-up on just around the aftermarket activity, we've obviously seen a number of quarters now where OE declines have been pretty strong, arguably against tough comps, but it has been quite a weak period on OE growth. How long before that starts to feed through and affect that aftermarket business? I know you mentioned there was some reclassification of whether it becomes a a sort of maintenance or a sort of aftermarket part of the revenue, but what sort of typical period do you see of weakness in OE before it starts to have a knock on impact in your the market business? Thank you.
Well, it's kind of difficult to say, I guess. But, the, of course, I mean, if, always sales would drop to 0. We would, over time, of course, also see a decline in service, but it's not going to be 0. But, you know, it's We typically, a a new machine doesn't, you know, generate all that much service for the 1st, you know, months or or or 1000 hours of operation. It's over time.
So it's going to be somewhat of a time lag before that has an effect. That's one the other one is that we're still not at 100% market share when it comes to service on our own fleet. So we still have potential to grow service in the existing fleet, without really considering if you like, any addition to that, that fleet in the field. So I think we'll have opportunities to grow our service, not independently, but, you know, we'll we'll grow the service and the existing fleet, with the actions when it comes to, you know, new service products and and new geographies etcetera. So, I think that's the key opportunity when always sales somewhat sluggish.
The next question is from Edward Perry, HSBC. Your line is now open.
Yes, good morning, Perron Anderson. Thank you for taking my questions. Firstly, perhaps just on infrastructure, you mentioned some softness in North America, but could you please talk a little bit to what you've seen elsewhere perhaps the dynamics in Europe too any distinction between civil engineering and other business lines?
Well, I don't have all that much details as as of right now, maybe some one of you guys do. But what you can see it say is typically the end of the year is somewhat slow when it comes to hydraulic attachment tools, which is part of infrastructure. That was the case also in 2019. It's not as a price as more seasonal. So, but this come for the general demand for for maybe you have some some light to to to share, but I don't at the moment.
Okay. Thank you. And then just one follow-up on M and A and capital allocation. How is the acquisition pipeline looking as we head into 2020? And to what extent would you ever sort of explore moving into other areas of let's say the mining value chain even if that was slightly outside of your preferred niches?
The pipeline of I think we haven't they've solid pipeline doesn't necessarily mean that, all of that will be materialized, but there is a solid, interesting pipeline when it comes to potential acquisitions. It is challenging to make acquisitions into the niches that we are because of market share reasons and other reasons as well. And not the least, the dilution when it comes to margins from an acquisitions. We saw that, by the way, clearly in Q4 and twos and attachments. So, so, of course, here's the balance.
I mean, we do have opportunities, but we we're not going to jump at every opportunity. But we'll, we'll, and the part of your question was, are we looking at stepping out of our niches, going forward? Well, at least my perception has been that we're quite comfortable where we are in terms of, our niches when it comes to, you know, underground position and service drilling. Certainly stay there. And going beyond that, I I've been hesitant.
But I think also there could be potential potentials to perhaps understand the value chain differently in the mine and how to impact the overall efficiency from basically from drilling through blasting and all the way into to crush and ammunition. So maybe there are opportunities arising here.
The next question is from Mehdi Singh Bank of America. Your line is now open.
Yes, hi. Thanks for taking my question. Just very briefly on, if you have seen any impact on your business from the recent coronavirus issue in China? And would you expect any major impact on the business this year? And also, just on that, is there any clarity on whether closures have been, can we extend it further?
Okay. The coronavirus, a good question. First, just some, some basic facts. We have, China represent, a little less than 4% through our total business. We have, a little less than 1000 people employed in China, 25 locations.
And, we have one individual that has been, affected by the virus, and now a recovery. And that's also the facts, basically. And in terms of what do we do? Well, we implement the Trav significant travel restrictions. We monitor, our, Chinese employees, if abroad, and also our employees that potentialer in China, traveling to China, to make sure that we have, you know, to keep track of, where they are and, essentially, if somebody has traveled to China, we put them in in 2 weeks' quarantine, more or less working from home to make sure that if potential virus doesn't spread.
And when it comes to action specifically in China, we basically follow the instructions from low local governments in terms of, keeping business closed, if necessary. That's pretty much it. Maybe, again, you have
Yeah. No, but maybe just, I think you said it, but to be obviously, we are following up and Yes. So we have full track of.
Yes. And then also when it comes to potential impact on business, we're essentially, we're mapping pretty much the supplies of parts, spare parts components to our plants as well as to aftermarket in order to, make sure that we have alternative sources if needed. And if, for some reason, the supplies for my Chinese suppliers would would, be, would not happen due to the virus. That's what I can tell you now.
No, but I'm
sure this will be a question going forward, but, you know, we're still at a reasonably early stage to see the consequences. Correct.
Thanks. And just a very quick follow-up on your workforce breakdown. Would you talk about what portion of the workforce is on permanent payroll versus contracts and outsourcing? And whether any trends, which you could share on that? And the plans going forward?
Thank you.
When it comes to workforce flexibility, we typically try to have somewhere around 20% flexibility. When it comes to temporary blue color workers that is. And of course, when we come to when we look at the headcount reductions, and that we're looking at in production, most of that are temporary the exact number that we're at right now, don't have that specific number. Right now. Maybe, again, we can help you
out there.
Okay. Yeah.
But that's, I mean, it's we have additional work what we count as additional workforce, which is also mentioned in the report that is obviously a blue collar as well
as
other services in service and engineering and so on. So, it's not all in the factories, but the ratio during the year has obviously gone down as you we also take the measures of of reducing the total headcount?
Yes.
Okay. I think with that, we conclude Epirox Q4 results presentation. If you have further questions, don't hesitate to reach out to me, Matias Olsen. We will try to help you.
Thank you so much.
I will not see you next quarter.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.