Welcome everyone to Epiroc's Q4 2019 Results Presentation. We will use the same format as always. We will start with a presentation from our CEO, Per Lindberg, and our CFO, Anders Lindén, and then we will go into a Q&A session. Without further ado, please, Per.
Thank you, Mattias. That's Mattias Olsson, by the way, in charge of communication for Epiroc. It's a pleasure to be here. This is actually my last quarterly report for Epiroc. Again, it's been a pleasure to represent the company publicly. I think we've had a good development over 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've done a fair amount of efficiency actions. We started some. All of them are not finished. I think a year with a lot of actions to continue to improve the profitability and strength of the company. All in all resulted in a margin of 21% adjusted. 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 SEK 2.40, and as a result, also the very strong cash flow of SEK 6.7 billion. Again, 2019, a strong year. Looking at Q4 more specifically, it's clear now that we do have a step down in demand when it comes to equipment in the second half versus the first half. We expected in Q3 that the demand would be more or less on a similar level in Q4, and that turned out to be the case. We had order received on SEK 9.3 billion in Q4 as compared to SEK 9.6 billion in Q3, and the difference there is really primarily currency. Looking at equipment, we had orders received of SEK 2.6 billion in Q4 versus SEK 2.7 billion in Q3, again currency.
Demand is more or less on a similar level, but it's clear again that 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 and production. We have seen lower orders on hand, and this is a function of the book-to-bill ratios that have come down. 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've 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 the focus on innovation. 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. 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 end of 2019. 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 a little more than SEK 2 billion, and that includes items affecting comparability of SEK 115 million. Adjusted, as mentioned, 20.7%. We have a cash flow strong, and it's very good news to see that there's a good improvement in working capital driven by a reduction in production, but also our efficiency actions. Cash flow is a function of a very good development in working capital, primarily. Key focus for the company strategically is to work with innovation, and there's several developments that are worth highlighting in Q4. One thing that really demonstrates the potential and the interest of our 6th Sense 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 6th Sense to Pucobre.
This is a very comprehensive solution for them, and that's going to help them to improve their productivity and the management of the mine. A 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. This is something that will improve safety and also improve productivity in the charging and the blasting in underground mines. In the picture you can see the Pit Viper 270. It's a new rig, which has several automation features. We also launched PowerROC D60 with a Tier 4 engine, also with the aim of improving the environmental footprint. We also have some other features when it comes to down-the-hole hammers, i.e., our consumables.
Also worth mentioning is that the number of connected machines increased to 3,600 versus 3,400 that we announced in Q3. Development when it comes to innovation continues to be very good. Also when it comes to operational excellence, and as I just said, we're doing a lot of things when it comes to operational excellence and to improve the efficiency. Not all of that has given effect, certainly in Q4, but it 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 restructure that we do in rock drilling tools, i.e., consumables. Also we've done normal, so to speak, efficiency actions to improve productivity in our ongoing operations.
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. We announced the target of SEK 300 million 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. We've sold a facility in Sweden. We'll announce also that we will consolidate dimension stone equipment from Italy to India. All of this, of course, with the aim of improving efficiencies. As mentioned, that's something what's in focus in 2019. All of the effects not in place yet, but they will come into effect in 2020. When it comes to safety, we've seen a good development over 2019.
We rolled out a SafeStart program with the intention of really improving the intention and behavior of all of our employees. That is starting to give effect, so we see some good development, and we'll continue, of course, to focus on that. Supply chain program really progressing according to plan. Also, this gives a good effect on CO2 emissions, by the way. Environmental footprint has also improved as a consequence 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 attachment, 27%. When it comes to revenues, we see equipment at 36%, service 39%, and tools attachments 25%. All in all, aftermarket 64% versus last year, a little less than 60%. 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%. This is also a growth beyond the actual production among our customers. This is a growth driven by our own actions. We're gaining market share in our own fleet. The rollout of service products has been very successful, driving this 6% growth. I expect that we'll be able to continue the growth in service. The percentage remains to be seen, I think we can continue to have a very healthy development in service. Equipment, very different. It's down 22%, as already mentioned. The demand is really what it is. The focus of the company, of course, is to adjust capacity and adjust cost base for this variation and demand.
Revenues for the segment is down 6% organically. Profitability is at SEK 1.8 billion. That includes efficiency improvement cost of SEK 28 million related to the reduction of headcount in order to create these efficiencies. Margin increased to 23.9% versus 23.2% last year. If you look at the graph, bottom right, you can see that the margin goes down from 26.3% to 23.9%. Of course, a good question will be, why is that? Well, it's really two things. It's currency, and it's mix. In Q4, the revenues or the sales, there's a big increase in equipment, whereas service is relatively flat as compared to Q3. 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 nor equipment. That's not the issue. Tools and attachments. Orders up 9%, - 4% organically.
Of course, we've done acquisitions into this segment, explaining that difference, and we see revenues up 3%, down 10% organically. 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. Also we are making significant changes in our footprint and we've closed factories, as mentioned, we've sold factories as well. Also we have a voluntary step down from business also in quarter four. We mentioned that in quarter three and quarter two also. We continue to do that. That's really the reason why we see an organic decline in both orders as well as revenues. Margins at 11.8% versus 13.3%, 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 cost associated to the efficiency programs, it's at 12.5%. We also have a one-time cost associated with an acquisition of SEK 18, so back that out, 13.2%. Still not where we should have been. Again, good news is that we are doing the efficiency actions, and the effects will roll into the results going forward. With that, I leave it to Anders.
Thank you, Per. As usual, the routine, a little bit more of a dive into the numbers. Of course, there will be a little bit of a repetition from what Per just said. Nevertheless. As you see here, the reported margin of 20.7%. 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 SEK 115 million. I will not talk more about them at this point. If we look at the profit bridge here, the reported margin of 19.6%, adjusted at 20.7%, as Per said. The SEK 115 million can be divided in the SEK 42 million of LTI provisions.
That is actually a swing compared to last year with SEK 109 million, and that you can see as part of the -SEK 149 in structure and other to the left-hand side of the graph. SEK 73 includes, in addition to the SEK 45 million 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 Per mentioned already, the currency is actually working against us for the moment. If we look at the equipment and service, adjusted 24.3%, reported 23.9% of the SEK 45 million. SEK 28 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 is also supported by the currency. Tools and attachments, 12.5% adjusted.
13.2 if we include the one-time SEK 18 million that Per mentioned as related to the acquisition. That is what you can see as part of the 30 in the structure and other. That is obviously lower than we would have liked, and would have liked to see a better traction in this segment. 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 four is actually slightly lower costs, like-for-like. If you take the SEK 1,708,000,000 and compare that to the SEK 1,637,000,000, 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 rate in Q4 was something we expected.
Some of the activities in this part of the ecosystem is actually only possible to confirm during Q4. 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 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 SEK 483 million. A negative impact of the introduced IFRS 16, almost SEK 2 billion, 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. We also have quite a significant impact on the return on capital employed.
Per mentioned the dividend proposed by the Board for SEK 240 per share. Also will be proposed to be paid as last year in two equal installments in May and November. Net working capital up in nominal terms, down in comparable terms. Quite significantly down in Q4 from currency. We also had good effect from a 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 advanced payments. 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.
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 as an 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, as you know, since almost two year now. Good cash flow from the working capital. Actually operationally, we have SEK 1.5 billion contribution from the working capital. As Per said, the full- year, SEK 6.7 billion operating cash flow.
With the focus on working capital in general and many initiatives on inventory and receivables, we have seen a good impact in the fourth quarter. We will continue obviously in 2020. We know that we have some areas here where we need to improve. So far, a good work by the teams.
Thank you, Anders. 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 our 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. I think the most interesting news in Q4 is actually that Helena Hedblom will take over as the CEO and President from March 1st. I'm very happy to hand over to Helena. She's a very good person. She's a recognized and very appreciated leader. She has a very strong drive.
She understands the business, she understands our customers, and I'm sure she's going to be a very excellent CEO, leader, and representative of Epiroc going forward. Very pleased to do that. 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 is unclear. 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. That concludes the presentation.
Okay. Thank you, Per. Thank you, Per, and thank you, Anders. Now it's time for the Q&A. As usual, I would like the participants to limit the questions to one question per person to allow everyone to ask a question. Please, operator, please give instructions on how to ask a question.
Thank you very much. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. There will be a brief pause while questions are being registered. The first question is from Guillermo Peña, UBS. Your line is now open.
Hi. Good morning, Per. Good morning, Anders. Good morning, Mattias.
Morning.
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. There's two clear ways of basically how the market evolves, I wanted to understand the reasons behind the strength in Asia and Australia, why that market behaved differently from the other markets.
Well, that's a good question. First of all, I think that the market really is better understood when looking at commodities rather than geographies. I think we'll probably start looking at that going forward. Now, nevertheless, this is now being reported on a geographical basis. 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. That's visible in the Asian numbers. In Australia, we've made progress when it comes to aftermarket development as well, and I think that's also visible. Of course, there's a big contrast what you see in North and South America. South America, we have very tough comparables. We delivered many large orders.
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 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. Maybe a follow-up on all the actions. Obviously, you've been, Q4, you've been very active with plants being closed, businesses being divested, restructuring actions altogether. What would you say will be the progression through 2020? At what point do you expect to see these actions resulting in bigger incrementals when it comes to profit sensitivity? I want to understand a little bit how these actions will actually flow through the year as we go forward.
Yeah. Another good question, very relevant, I guess. There's different components in the efficiency actions that we're undertaking. The one that you were talking about are really, let's call it the structure of the footprint, plant closures or sales. 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. That's going to roll into also in Q1, Q2, primarily. Then the third area, which we've been working on for quite some time, is our supply chain program.
That is a more gradual, has a more gradual impact, which will not necessarily have sort of a step change in the beginning of the year, but gradually over the course of the year, I would say. I can also say that it's not unlikely that we will do more structural changes in 2020, but if those decisions are made, we'll come back to that.
We did announce one in the beginning of this month, as you know, and it's also in the report.
Yeah.
Yep. Thank you very much. I take the opportunity to wish you the best there. Thank you.
Thank you.
Thank you.
The next question is from Max Yates, Credit Suisse. Your line is now open.
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? 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 risks. Well, the assumption is clearly that the company will continue to have solid margins and solid cash flow going forward. If anything, it is a reflection that we would like to have some firepower in case we have opportunities to use the balance sheet.
Okay. Just as the follow-up, I just wanted to check on the services side. Did you see any disruption in your business from what was happening in Chile around the strikes? i.e., would that service growth rate have been higher had you not seen any impacts there, or is that not really an issue for your business in this quarter?
No. It was very marginal. It was not material, so didn't have any impact on the business.
Okay, thank you very much.
The next question is from John Spurling, Citi. Your line is now open.
Yes. Hi, Per and Anders, Klas from Citi. Want to come back to the guidance. You've been guiding for a flat demand for quite some time, but equipment orders seem to continue to disappoint, at least versus our expectations in the market. I appreciate that there is a 2%-3% currency headwind quarter-on-quarter, therefore equipment orders broadly flat organic. I thought there was some higher seasonality in the fourth quarter. Are you effectively now, Per, guiding for all-in flat demand into the first quarter? 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 you can clarify.
Yeah, I can clarify that by saying that is there any seasonality in your guidance or do you effectively guide just like what you see? Should we expect the order intake that you have in the fourth quarter and equipment to be the same roughly in the first quarter? Is that how you see your guidance?
That's how you should read that. Yes.
Thank you.
When it comes to Sandvik and their pipeline, well, that's their pipeline. At the end of the day, we operate more or less on 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. If you also look at the growth or decline actually in orders received for them as well as for us, it's very much on the same level.
My second very quick follow-up is on the cash flow for you, Anders. Receivables are lower and so are inventory. Much is if there's a cyclical effect versus the improvement of the supply chain you're working on. Could you give some steer on how the supply chain optimization are progressing? When can we start to see sort of underlying improvements to the working cap trends? Thank you so much.
I would say, the improvement in the cash flow and the reduction of working capital obviously is a composition of many things. 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 a better utilization. We have various, let's say, forces here. We have a reduction in, or a small reduction in production for the cap divisions, that has quite a significant impact on the reduction in payables because that's where we do have a more of a, let's say, a contribution from the payables and the long-term payment terms and the programs that we have in place.
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. Our activity will continue to be on lowering our inventory in general. I'm not prepared to quantify this, and maybe 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. 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.
Thank you.
The next question is from [Marcus Erman], Kepler Cheuvreux. Your line is now open.
Hi, Marcus at Kepler Cheuvreux. My first question is just on the wording. When you talk about demand and push out, you use different words. On the one hand you say a step down in demand, and then you talk about push out a project and delay a project. 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.
Yeah. Okay. Pipeline is, we call it business cooking, internally. It's really a pipeline. That pipeline or business cooking has not changed in terms of its magnitude or potential volume, over the course of 2019, and certainly not over the course of Q4. The potential business out there is still unchanged. The effect of the cautious behavior when it comes to spending capital has meant that there is de facto, in reality, a step down in actual orders placed. Also, what does that mean? Well, it means that the potential orders in the pipeline or business cooking is pushed out in time. That's really what's happening. Hopefully the language is not confusing, the orders that we've been talking about are pushed out. They're not placing an order this month, maybe next month, maybe next quarter.
That's really what's happening, and at the end of the day, materializes in lower orders received for us.
Okay. Yeah, 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, et cetera. That's kind of the base of my question. Okay. My other question was, yeah?
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. I can't give you any better flavor of that one.
Okay. Thank you. My second question was just also on type of language used. You say now that more than half of your orders are from brownfields or expansion, and I think that before you said that the majority of orders have been from expansions or brownfields. Has there been a change there? That is, have you really seen a collapse in new orders, whereas the replacement orders have been unchanged more or less? Can you just talk a little bit about that?
No, the Q4 replacement, no, the expansion was I think about 65% business and replacement 35%. The ratio is typically 60/40. 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 the prime driver. People are expanding capacity due to, of course, higher production, but also deteriorating ore grades, more complexity in mines, et cetera. That's what's driving equipment demand at the moment, and less so obviously replacement.
Okay. Thank you very much.
The next question is from Andreas.
Operator, can I stick in with a question?
I'm sorry.
I have a question here in the office as well. I'm coming back to you.
Thank you, Mattias. Olof Larshammar from [Danske Bank]. One question. That's relating to the aftermarket. Could you please elaborate a bit on the possibility that you see for 2020 to continue to grow the aftermarket business? You think it's possible to further increase the market share among existing customers? Thank you.
I think the opportunity is still very good. I think we made progress as we've seen in service. 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, in 2020. The opportunity is still there, and I think we're going to grasp that opportunity. When it comes to the other part of the aftermarket, i.e., tools, drill rods and drill bits, we are making several changes. This is driven also by production. Once we get stabilized the new footprint and also stabilize all the changes in our portfolio, I think we'll have opportunities to continue to grow there as well.
One should be aware of that we are also backing out of some business for profitability reasons, and will continue to do that if these volumes are not profitable. To what extent that's going to happen in 2020, we have to see. Far this year, 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.
Okay, thank you. Back to you, operator.
We move on with the next question via the telephone line. It is from Andreas Koski, Nordea. 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 you there for a second.
The magnitude of the cost savings.
Okay.
Yeah.
Shall I repeat?
No, that's fine. I think we understand.
Yeah.
I think we understand. I think the only thing that we've been explicit around are the effect of the efficiency actions on our indirect cost, SEK 300 million 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 nor bottom- line. Certainly will have an effect.
Okay. The 500, was it 21 people that left the organization in Q4? Is that related to the indirect cost savings of SEK 300 million?
Yeah, well, part of it.
Direct cost savings.
It's a combination. It's obviously we have also closed down some business. The 521 that you're referring to, yes, there is an element of it that is referred to these savings programs. Remember that we've also. This is not comparable numbers per se, but it's nominal terms. We also divested one factory in Sweden. It's the total headcount. Yes, in that number, we have some efficiency improvements, and also as you know, the SEK 45 million that we discussed as cost for efficiency activities or restructuring costs, even if they are not dramatic, are related to some people leaving the company. Yes. I think we said in Q3 that we expect it to be between 50 and 100 in total, and it's probably going to be closer to the upper than the lower. The activities are still ongoing.
Okay. The total cost savings target for 2020 will be significantly higher than the SEK 300 million you have communicated from indirect costs?
That's correct. A further clarification what Anders said. The vast majority of the 521 in headcount reduction in Q4 related to the closures or divestments of facilities direct efficiency actions.
Okay. Quickly on tools and attachments. 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. It seems like you're stepping away from that a bit, and that you 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 one should understand it like this. If there is a need for us to continue to back off potential volume for profitability, that is now in the comparables. You can just disregard that in terms of growth. I think we'll have the opportunity to continue to grow with a more healthy product portfolio. That's how it should be understood.
Already in 2020?
Yeah.
I would say the focus in 2020 is also on the profitability.
Oh, absolutely.
Maybe even more than the growth.
Yeah. Good clarification. Exactly. Focus is on restoring profitability first, secondly, grow. It's not the other way around.
Okay.
Yeah.
Can I just quickly squeeze in a question on the service business as well, on the organic growth there? Looking at the past three quarters, the order intake has been roughly SEK 4.1 billion. You haven't been growing sequentially for a few quarters now. You, Per, you said that you expect continued growth, but it remains to be seen at what rates. Are you feeling that demand in the service business is stabilizing or leveling off a bit, or?
No. As mentioned already, I think there's plenty of opportunities for us to continue to grow. Our expectation is to continue to grow our service business. At one point last year, I also mentioned at the quarterly 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. It's not a breather to stop breathing at all. It's just perhaps a temporary effect. We expect our possibility to grow service continues to be very healthy, and I expect us to grasp that opportunity.
Okay. Thank you very much, and best of luck, Per.
Sure. Thank you.
The next question is from Andrew Wilson, JP Morgan. Your line is now open.
Hi, good morning, everyone. Can I just ask a question on 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 this sort of hesitation in terms of, obviously, equipment orders is actually perhaps slowing down the transition onto some of these new, more innovative areas, and just, I guess, how we should think about sort of penetration rates and whether that might be a little bit slower than we perhaps thought previously.
From what I understand, I'm not involved in all the direct discussions with customers. From what I understand, as mentioned already, I think the demand 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 sales. I cannot say that we're disappointed or that the sales of automation products, digital solutions or battery solutions are lower than expected. The other way around, I would say, when it comes to battery solutions, it's actually exceeded our expectations to a certain extent. 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 restoring underlying organic growth, if we can call it that. Was I right in, you think there's going to be a 3%-4% headwind on the top- line in 2020 as a result of walking away from lower margin products? Just to clarify that.
Well, I'm saying that's potentially so, one should also understand that this was the case already in 2019, from the beginning of 2019. When it comes to comparables, it's already in comparison. We did that in 2019. If needed, we'll do that in 2020. It shouldn't have necessarily an effect on growth per se, growth potential, per se.
Maybe to say also this, as Per mentioned, call it a voluntary walk away 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.
Yes. No, again, just to be even more clear, there is no reason to think that the market or our volumes will drop with 4% just by us additionally backing away from volumes, compared to what we saw in 2019.
That's very helpful. Thanks, Per.
If that was a clarification. I think so. Yep.
The next question is from Robert Davies, Morgan Stanley. Your line is now open.
Yes, thanks for taking my question. I 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-up demand of orders from customers that have been on the back burner, whether it was through trade concerns or waiting to get to sort of full- year budget resets, this kind of thing that could come through in the next three to six months? What are customers telling you the kind of key reasons for holding back on projects? Do you hear anything on the ground that would make you more encouraged over the next six months that could see those projects come through? Thanks.
I think what we're looking at 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 cost for maintenance and operational cost. I think it seems like what people are willing to do is to do that trade-off. Consequence of that in turn is of course, that we see more of aftermarket sales, i.e. service. The growth in service is partly a consequence of older machines.
Do we now see indications that people will start with more replacement in 2020 than what we saw in 2019? Not necessarily indications that going to happen, of course, I mean, the longer our customers wait in terms of replacement, the more overdue, so to speak, the replacement will be. It also, over the last year we've received several questions in terms of when is the replacement wave coming. I don't think it's going to be a wave necessarily. It's going to be more of a general positive support for demand going forward rather than anything else.
Thanks. Maybe just as a sort of follow-up on, just around 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 an aftermarket business? I know you mentioned there was a reclassification of whether it becomes 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 aftermarket business? Thank you.
Well, it's kind of difficult to say, I guess, but of course, I mean, if OE sales would drop to zero, we would over time, of course, also see a decline in service, but it's not going to be zero. Typically, a new machine doesn't generate all that much service for the first months or 1,000 hours of operation. It's over time. Somewhat of a time lag before that has an effect. That's one observation. The other one is that we're still not at 100% market share when it comes to service on our own fleet. We still have potential to grow service in the existing fleet, without really considering, if you like, any addition to that fleet in the field.
I think we'll have opportunities to grow our service, not independently, but we'll grow the service in the existing fleet, with the actions when it comes to new service products and new geographies, et cetera. I think that's a key opportunity, when OE sales are somewhat sluggish.
That's great. Thank you.
Yeah.
The next question is from Edward Perry, HSBC. Your line is now open.
Yes, good morning, Per and Anders, 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, and any distinction between civil engineering and other business lines?
I don't have all that much details as of right now. Maybe someone of you guys do, what you can 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 a surprise, it's more seasonal. This come for the general demand for, maybe you have some light to share, but I don't at the moment.
Okay. Thank you. Just one follow-up on M&A and capital allocation. How is the acquisition pipeline looking as we head into 2020, 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?
I think we have a 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. Not the least, the dilution when it comes to margins from an acquisition. We saw that, by the way, clearly in Q4 in Tools and Attachments. Of course, there's a balance. We do have opportunities, but we're not going to jump at every opportunity. 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 underground position and service drilling, and certainly stay there.
Going beyond that, I've been hesitant. I think also there could be 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 crushing and comminution. Maybe there are opportunities arising here, but we'll see.
Good. Thank you very much.
Yeah.
The next question is from Maddy 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? Also, just on that, is there any clarity on whether closures can be extended further? Thank you.
Okay. The coronavirus, a good question. First, just some basic facts. China represent a little less than 4% of our total business. We have a little less than 1,000 people employed in China at 25 locations. We have one individual that has been affected by the virus, and now in recovery. Those are the facts, basically. In terms of what do we do, well, we implement significant travel restrictions. We monitor our Chinese employees if abroad, and also our employees that potential are in China, traveling to China, to make sure that we keep track of where they are. Essentially, if somebody has traveled to China, we put them in two weeks quarantine, more or less, from working from home to make sure that if potential virus doesn't spread.
When it comes to action, specifically in China, we basically follow the instructions from local governments in terms of keeping business closed if necessary. That's pretty much it.
Yeah, no, maybe just, I think you said it, but to be even clear, obviously, we are following up and monitoring every individual that we have employed in China.
Yes.
We have full track of.
Yeah. Also when it comes to potential impact on business, we're mapping pretty much the supplies of 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 from my Chinese suppliers would not happen due to the virus. That's what I can tell you now.
Thanks.
I'm sure this will be a question going forward, but we're still at a reasonably early stage to see the consequences.
Yes. Correct.
Thanks. Just a very quick follow-up on your workforce breakdown. Could 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.
Okay. When it comes to workforce flexibility, we typically try to have somewhere around 20% flexibility when it comes to temporary blue-collar workers, that is. Of course, when we look at the headcount reductions that we're looking at in production, most of that are temporary workers. The exact number that we're at right now, don't have that specific number right now. Maybe, again, we can have that.
1,300.
Yeah.
Some.
Okay.
Additional workforce.
Yeah.
Okay.
We have what we count as additional workforce, which is also mentioned in the report that is obviously blue- collar as well. Other services in service and engineering and so on. It's not all in factories. The ratio during the year has obviously gone down as we also take the measures of reducing the total headcount.
Yes.
Okay. Thank you very much.
Okay. I think with that, we conclude Epiroc's Q4 Results Presentation. If you have further questions, don't hesitate to reach out to me, Mattias Olsson. We'll try to help you. Thank you. Thank you, Per. Thank you, Anders.
Thank you very much for your attention.
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.