Hello, and a warm welcome to the Epiroc Q1 results presentation. My name is Karin Larsson. I'm Head of IR and Media here at Epiroc, and by my side I have our CEO, Helena Hedblom, and our CFO, Håkan Folin. As always, they will briefly present the results before we do a Q&A session. You all know the drill. Helena, please, the stage is yours. Thank you.
Thank you, Karin, and a warm welcome to all of you. Before I dive into the Q1 results, I would like to spend a few words on a highlight from earlier this month in April, when we announced our largest ever order contract. The contract size is AUD 350 million, about SEK 2.2 billion over five years. This is not only a large contract. This is the future of mining making its entry in full scale. We will provide a fleet of more than 50 machines, fully autonomous and electric, to Fortescue in Australia. The machines we will provide are cable-electric Pit Viper 271E and battery-electric SmartROC D65DE. If you joined us at Minexpo in September, you might have seen the machines.
Once the fleet is fully operational, it will reduce CO2 emissions by 90,000 tonnes annually, while also boosting safety and productivity. Well done to everyone involved, and thank you Fortescue for your trust in Epiroc. Coming to Q1 and highlights from the quarter, the mining demand was strong and equipment orders were very strong. We are up 29% organically. We won $600 million in large orders, and this can be compared to $400 million in Q1 last year and $820 million in Q4. Among these orders here in Q1, we had a large one, $280 million from Hindustan Zinc for underground trucks and rigs. We had a large battery fleet order as well, $100 million from Sudbury Minerals in Canada. On the infrastructure side, the demand was more mixed.
As in previous quarter, we enjoyed good demand from customers engaged in civil engineering and tunneling projects. We also won a major contract to support the Western Harbour Tunnel project in Sydney in Australia. For attachments, construction customers are still hesitant. That said, we did have a positive sequential seasonality for attachment in the quarter. In the quarter, we increased both our revenues and our operating profit. Our revenues were up 10% to SEK 15.5 billion, of which 3% organic. Our adjusted EBIT increased by 7% to SEK 3.1 billion. If we look at the demand picture in Q1, orders received were strong both year- on- year and sequentially. Compared to the previous year, they increased 17%, of which 10% organic. This is the strongest organic growth in three years. Very pleasing to see, and it was driven by strong mining demand.
Moving on to our strategic focus areas, first out is innovation. During the first quarter, we spent quite some time to prepare for Bauma 2025, the world's largest construction trade show, which was held in Germany in the beginning of April. At the fair, we showcased many exciting products for use in deconstruction, recycling, quarrying, and tunneling. We have a strong offering and a position in the construction niches where we operate. Following the acquisition of AARD Mining Equipment in 2023, we have successfully integrated a new product family of reliable, durable, and high-performance underground utility vehicles into our portfolio. We have a strong demand for these utility vehicles, which are included in our Terra series. Speaking of a strong offering, let me bring you to the topic of automation.
Do you remember our collaboration on automated mixed fleet in underground operations that we announced in 2021? Let me show you a short film about the achievements.
Never before have we integrated other OEMs into the same system and multiple tasks so we can complete every activity in our extraction level autonomously without putting people at risk. The team should be incredibly proud. The Caddy Race project started in 2008. Our ore body is 1,200 meters to 1,400 meters deep. Block caving gave us a mining method that let us mine a large ore body at a relatively low cost. If we can mine at the right cost and keep our team safe, we can be here for decades to come.
Block cave mining is a method where they use a drill and blast technique, and then they fragment the material, and it will propagate and fall down under its own weight and gravity from an undercut level.
We need automation to be able to remove our people from the hazard of underground inrush. If it wasn't for automation, the systems that we've developed alongside Epiroc, we wouldn't be able to recover all the ore safely.
One of the first sites in the world to have multi-vendors operating in the same agnostic automation system.
The main benefit of deep automation at a caddy is to remove people from the hazardous area. Other benefits for the operators is they're not sitting inside a cabin exposed to dust and vibration for 12 hours a day. They're sitting in an air-conditioned office.
I've seen the average performance from panel cave one, which is a fully automated level, improved. I've seen the record daily tons increase as well. It's almost every month, every second month we hit a new record, you see the average chase it. It's really through this great collaboration and great people that we've been able to do that. Epiroc have really helped us to continuously innovate and improve the system. Working at Cadia is really special. For me, I get to work at Australia's biggest underground mine. I get to utilize these great tools and technologies such as the Epiroc automation system and be home every night to see my kids, which is really exciting for me. I can't wait 5, 10 years and see what our underground mines look like or how we operate.
It's great to see customers are confirming that our mixed fleet automation solutions are working well. On the next strategic topic, aftermarket, the high mining activity supported the demand for both service and tools, whereas the weak construction market impacted the demand for attachments compared to the previous year. In total, the aftermarket represented 67% of our revenues in the quarter, same level as last year. Within the aftermarket, the tools and attachments portion is higher than in the previous year, which obviously has an impact on group margins, which Håkan will talk about later on. Moving on to operational excellence, given the recent geopolitical developments and uncertainty around tariffs, I would like to emphasize that we have an agile, fast-paced, and global organization. We work on what we can control and adapt when conditions change.
We are closely monitoring market developments, and we have already started to optimize logistics and distribution flows, leveraging our global manufacturing footprint and explore alternative suppliers as well as discuss potential pricing impact with our customers. Also, just like in previous quarters, we have efficiency actions implemented and ongoing, and they proceed according to plan. On the sustainability side, we have only positive news to share. By relentlessly focusing on an improved safety culture, we have reduced the total recordable injury frequency rate further. We have also increased the proportion of women in the group to 20%. On the management side, we are even higher, 24.5% of our managers are women. Let me share another positive example. In India, a few years back, the share of women employees was in the single digit, and today we are already approaching the group level of 20%.
In fact, in our new tools and rock reinforcement manufacturing site in Hyderabad, India, we have only women employees in production. Over and over again, I see positive results from diverse teams within Epiroc. By mixing employees from different parts of the world with different education, age, religion, and gender, we can see firsthand that we have become more creative, more innovative, and as a result, also created better results. On the planet side, we are also making good progress. Our CO2 emissions from operations were reduced by 11% thanks to a higher share of renewable energy purchased, installation of solar panels on our own facilities, and energy efficiency activities in facilities and processes. CO2 emissions from transport increased 3%, driven by higher volumes delivered. With this, I leave the word to Håkan to cover the financials.
Thank you, Helena. Our revenues came in at SEK 15.5 billion, corresponding to an organic growth of 3%. Our operating profit, the EBIT, increased 12% to SEK 3.1 billion. It includes SEK 11 million of provision for our long-term incentive plans. Last year, we had M&A-related costs of SEK 125 million. Looking to the right of the slide, our adjusted operating profit increased 7%, but the margin decreased somewhat to 19.9%. The margin development, if we look at this adjusted bridge, was supported by currency, and this is driven mainly by a positive currency impact on internal profit elimination, while the organic contribution was negative, mainly explained by mixed effects such as lower share of service revenues, as Helena talked about before. Last year, our service revenues represented 46% of the group revenues, and in this quarter, only 43%. A few comments also on the sequential development.
We see positive profit development both organically and from acquisition in this quarter, which is larger than explained by the efficiency actions we have taken. Dilution from acquisition in this quarter was minus 1.0 percentage points, which is an improvement from Q4 when we had minus 1.4 percentage points. If we then move into the segment and we start with equipment and service, here orders received increased 12% year- on year, which all was organic. It was mainly driven by equipment, which grew by as much as 29% organically, supported by the large order in India, which Helena mentioned. Our large orders amounted to around SEK 600 million. We also have growth in service, but at a somewhat lower pace. We are not worried about the somewhat lower organic growth rate on service in this quarter. We know that the fleet is older and it's larger than ever before.
The mines are producing the minerals to which we are most exposed, such as gold and copper. Over time, we expect to see continuous good growth in the service business. Also, if we look sequentially for orders received, we had a good development, 5% organic growth. Revenues for equipment and service amounted to SEK 11.7 billion, which corresponds to a good organic growth of 4%. The organic growth of equipment and service was 8% and 2% respectively. The share of revenues from service within this reporting segment was lower this quarter, 57% compared to 58% this year, explained by the strong equipment growth. Still, we managed to increase our operating profit by 9%. The adjusted operating margin improved to 23.2%, supported by currency. As I said before, also on group level, the positive driver was FX impact on internal profit elimination, mainly in service.
The organic contribution was slightly negative, which is explained by service mix, both a lower share, but also that the strongest growth was achieved in part of the business with somewhat lower margins. Also, for the segment here, a few words on the sequential development. The profit margin was somewhat weaker, which is mainly then explained by the strong invoicing that we enjoyed in Q4. If we look historically, the invoicing is more or less always somewhat lower in Q1 than it was in Q4. If we then move on to tools and attachments, year- on- year, order increased 2% organically. Mining activity remains high, and also demands from construction customers challenging. Sequentially, however, it was the positive seasonality, supported by demand for attachment, driving the organic growth of 10%. The big question is, does this mean then that the weak construction market has turned?
We would be very careful in making that conclusion yet. It is still a challenging construction market, although we are seeing the destocking phase that we have talked about for a while now among distributors is coming to an end. In the bridge, we see a positive 32% from structure, and this is mainly Stanley Infrastructure. They came into our books on April 2nd in 2024, which means that Q1 now was the last quarter when you will see this acquisition as part of structure. Let me give you a brief update on what has gone well and what has not gone so well during the first year now with Stanley Infrastructure. On the positive side, the strong customer relationships that we expected have been proven.
We have gained access to an indirect sales network with more than 2,700 dealers, and we see that there's a good cultural fit with a strong focus on innovation. On the not-so-positive side, the end market has, of course, been weaker than we first anticipated, and this has impacted both revenues and also earnings. We have taken actions in response to the market weakness, and for example, we consolidated three manufacturing sites into one. Long- term, we are still certain that this is a good fit for Epiroc. We have a strong market position in specialty attachment with industry-leading brands, and once the market turns, we are ready to leverage our global sales efforts with a multi-brand strategy. Back to the numbers then. Revenues and profit for tools and attachment.
Revenues increased 29% to SEK 3.8 billion, driven by acquisitions, both Stanley then, as mentioned before, and also ACB Plus. The organic decline was 3% in the quarter. Our EBIT increased 38%, and we had no items affecting comparability this year, but last year we had M&A-related cost of SEK 125 million. Our adjusted EBIT was flat, and the adjusted margin declined from 15.6%- 12.1%. Currency impacted the margin positively, while lower revenues and acquisitions were negative. The dilution from acquisitions included in structure was minus 2.8 percentage points on the adjusted margin, mainly then related to the acquisition of Stanley Infrastructure. Sequentially, we had an improvement with lower dilution. We had minus 4.0% in Q4. We now no longer have the inventory step-up value from Stanley, and the consolidation of sites and the other efficiency actions we have taken are now starting to show.
Okay, getting back to group again and looking at cost, net financials, and tax. In total, our administration, marketing, and R&D costs increased year- over- year. Admin costs increased, but we had some temporary costs related to efficiency measures. Excluding this, admin costs were actually down both year- over- year and sequentially. Marketing and R&D costs increased year- over- year, but also here they were down sequentially. We had net financial items of minus SEK 207 million, an increase mainly driven by higher interest netto, SEK 107 million versus SEK 128 million the previous year. For tax, our tax expense was SEK 685 million, which corresponds then to a tax rate of 23.8% in the quarter.
If we turn to cash flow, our operating cash flow came in at SEK 1.6 billion compared with SEK 1.8 billion last year, supported by the increased profit, but we had a build-up in working capital and also currency, which impacted negatively. Still, if we look at cash conversion, which we measure as rolling 12 months, we are actually at 100%, meaning we are, as Epiroc have almost always been, a very strong cash-generating company. If we then dive into a bit more details on working capital, compared to the previous year, net working capital decreased 3% to SEK 22.7 billion, which is 36.9% of revenues. In absolute terms, and if we exclude currency and M&A, the working capital was roughly flat, and the changes in each of them offset each other. Our inventory amounted to SEK 18.3 billion, which is the lowest level in many quarters.
As we have talked about before, we work hard on reducing the inventory and becoming more efficient in working capital management. If we look sequentially, the average net working capital in relation to revenues decreased. Finally for me, a few words on capital efficiency before I hand back over to Helena. We ended the quarter with a net debt of SEK 12.3 billion and a net debt to EBITDA ratio of 0.76. We do have a very strong financial position entering into this year. Return on capital employed was 20.3%, which is down 4 percentage points from the high in the previous year, and negatively impacted mainly by increased intangible assets such as goodwill from acquisitions. A small reminder, on May 8th, which is next week, we will host our annual general meeting.
The board has proposed a dividend of SEK 3.8 to be paid in two installments, with the first half being paid now in May. This corresponds to a 53% payout ratio. Thank you, and Helena, over to you.
Thank you, Håkan. Yes, to summarize the start of the year, it has been good. We have seen strong mining demand with the organic equipment order growth being very strong at 29%. On the infrastructure side, the demand was more mixed for equipment used in larger infrastructure projects such as tunneling. We had a stable demand, whereas the demand for attachments used in construction work remained weak. In the quarter, we also increased both our revenues and our operating profit. Many positive things were spoken about today happened also after the end of the first quarter. I am again proud to mention that we won our largest contract ever, AUD 2.2 billion over five years for a fully autonomous and electric fleet in Australia. This is really an achievement. With this great start in Q2 then, what can we then expect onwards?
Given the demand we see now, we expect that the underlying mining demand, both for equipment and aftermarket, will remain at a high level. Or as I sometimes say, the business cooking and the potential for large orders looks good also onwards. The construction demand is, however, expected to remain weak. I think that we can all agree on that the general market uncertainty makes it harder than ever to predict the future. I would like to emphasize what I said before, that Epiroc is an agile, fast-paced, and global organization, and we are used to work hard and adapt when conditions change. Thank you, and now time for some questions, right?
Thank you, Helena. Thank you, Håkan. Before we start the Q&A session, I would also like to highlight something that makes me very proud. On April 24th, we launched our sponsored ADR Level 1 program with Deutsche Bank, and this is to facilitate for all investors globally to invest in Epiroc in a more cost-efficient way than trading the unsponsored shares that we had before. Now time for Q&A, and as always, try to keep your questions short and concise. Operator, you may please open the line.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from John Kim from Deutsche Bank. Please go ahead.
Hi, good morning. Thanks for the opportunity. Two questions, if I may. First, E&S asked, can you give us a bit of color on service order growth and revenues, the underlying segments? Gross rates looked really light in Q1. I understand the Q1 comparative a year ago is a bit odd, but any color there would be helpful between retrofits and things like consumables. The second question on tools and attachments, when we lap Q2, you will have owned Stanley for about a year. I think it's fair to say, given tariffs and macro uncertainty, there's probably more headwinds than you anticipated. When will you start thinking about cost and route sizing for the asset? Thanks so much.
Okay, if we start with on the service order side, of course it was quite tough comparisons compared to the previous year. If I look on the, I would say the underlying activities is strong, strong towards the different large commodities where we're exposed to, if you take both copper and gold and iron ore. We've seen some weakness in nickel, so some mines towards nickel are put under current maintenance, so that impacts a little bit, I would say, the growth there in the quarter. We also have some, to be quite specific, there are some challenging situations in the northern part of DRC , which also had an impact in Q1, where some mines are under current maintenance due to the unrest in that part of DRC.
If I look generally speaking, if you look on the components within service, yes, we are growing faster on service contracts and some of the service products than we do on parts in this quarter. On the other question there on Stanley, yes, it's one year into we have now had one year into Epiroc, and we are very focused on making sure that we prepare ourselves for the uptick in the market. The last, I would say, nine months, we have been very focused on making sure that we work on the efficiency side, both when it comes to consolidating sites, but of course also leverage the full potential now with the presence and the strength of Epiroc in the rest of the world. I do not see that the latest development related to tariffs will impact this in any particular way.
I think we have a very strong manufacturing footprint and capabilities in many parts of the world for these types of products.
Okay, thank you.
The next question comes from Klas Bergelind from Citi. Please go ahead.
Hi, Helena, Håkan, Karin, Klas at Citi. My first one is on tools and attachments and Stanley. It looks like good progression, high single-digit EBITDA margin in the quarter at Stanley. Just to confirm if that was a clean margin or did you have any one-offs and a write-up this quarter? It's trying to understand if the underlying margin was even higher fully adjusted. If you could tell us what you see in terms of inventories in the channel for Stanley in the U.S. at the moment. Others have talked about the normalization from the second quarter, and I wonder if you are seeing the same thing. I'll start there.
It's a clean result, so there is nothing that was extraordinary in Q1 in the performance of Stanley. I think what we see is the effect of all the efficiency actions that we have taken in the last, I would say, three quarters. It is trending in a good way. We do see, as Håkan mentioned, that we do see that the inventory levels are coming down to more normal level, meaning then that it's the true demand that we start to see in our factories, which helps with absorption. That has been one of the main challenges during the last year, I would say, both for our attachment business in general, the low volume. That is a good development that we start to see that these inventory levels are coming down to normal levels.
Good. My second one is on the mixed impact in E&S, 4% organic growth, but no drop through to EBIT. The share of service was lower by one percentage point. I get that, but I'm still a bit surprised to see this quite big impact in the bridge. You obviously talked about the internal mixing service being negative with contract modernization, growing costs of parts. Your parts business is a big chunk of the service business. It's still facing this tough comparative as you showed at the capital markets day. Eventually, this should obviously turn around when inventory levels at the miners are sort of stabilizing. I just want to hear sort of when you look through the year, Helena, I know that there are some one-offs a year. You talk about things going on in Africa, but that's clearly an upside potential with the parts business coming back.
Yeah, and I think also we are putting a lot of machines on the market. I think the last couple of years, of course, it's also that we're putting more and more machines on the market. The fleet continues to grow bigger for every quarter. It's also a fact that the first one, one and a half years, a new machine is not consuming that many new parts. It's in the later stage of the age of equipment where the big part consumption starts. The more we grow on the equipment side, that is an upside, of course, long term on parts.
Parts at the highest margin.
I came out there also on the service mix. It's not only the traditional parts and service business that's included in service. It's also the digital division that's included in service, as I'm sure you know. Close. So that's also impacted.
Of course. My point is parts, highest margin, should be positive mix when it comes back. Yeah, sorry.
Yes, absolutely.
All right. Thank you.
The next question comes from Michael Harlows from Morgan Stanley. Please go ahead.
Questions. The first one would be on foreign exchange. Obviously, currencies are hard to predict, but what kind of headwinds should we take into account for the rest of the year? If you could, at the group level, update us on cost savings, if you would comment on where we are and what's left to be done. That would be very helpful. Thank you.
Okay, if I start with an Epiroc question, and I think we actually prepared a slide for this because there's been quite a big swing during the quarter, not the least for the Swedish krona, which actually at the end of the year, it was SEK 11 towards $1, and at the end of Q1, it was basically SEK 10. We saw almost a 10% difference. For those of you who followed us for a while, you recognize this slide from our capital markets day, where we show which different components are impacting the effects because we fully understand that it is quite difficult to predict. The one that is a bit more easy to understand and easy to predict, I would say, is the lower part on the transaction side.
This is very much related to revaluation of outstanding accounts receivables and payables, meaning that if we sell something, for example, from Sweden in U.S. dollar and then the krona strengthens as it has during this quarter, and we have outstanding accounts receivables, they become worth less in Swedish krona, and therefore we get a negative impact. The one that is maybe not that obvious is the top one then, what we call translation, and especially internal profit. If we sell something, let's say a spare part from Sweden to a distribution center in another part of the world and it's sold in U.S. dollar, we do have a profit in Sweden, but since we haven't sold it yet to the external market, we need to eliminate that on group level, of course. If that's a different currency than Swedish krona, we have an FX impact.
If then the currency moves as it has done, and in this case, the Swedish krona has strengthened, there is less profit that we need to eliminate, and therefore we get the positive impact in the quarter on the balance sheet. In this quarter, you see really big swings. I have never seen this big swings for us. It is minus SEK 248 million on transaction, and then plus SEK 560 million on translation, and then in total, that gives us the positive impact of SEK 268 million. Then the second.
Thank you, on cost savings. We continue our efforts when it comes to efficiency. If we look on it compared to a year ago, we are 1,000 employees less today, and we continue these initiatives. There are more things in the pipeline when it comes to efficiency initiatives, but also some of the closure of manufacturing sites that we have announced, we have not seen yet the full effect of, for example, the closure of Essen. That is still not seen fully in the results.
Thank you. That was very helpful.
The next question comes from Chitrita Sinha from J.P. Morgan. Please go ahead.
I have two, please. Firstly, just in E&S, the order intake, excluding large orders, was clearly very strong at SEK 5.1 billion. How should we think about this going forward, especially in context of your guidance? What are you seeing in the pipeline?
Yes, it's a high, even if we exclude large orders, it's a strong activity level out there. We see a lot of replacement orders of fewer machines in more or less all parts of the world. We continue to see that the pipeline looks good. It's both a strong pipeline when it comes to replacement of existing fleet, but also a strong pipeline of large orders. That's why we guide like we do here short- term. It looks solid.
Thank you. Just on TNA, just wanted to check if there was any pre-buy impact that you saw in the U.S.
No, I wouldn't say that we have seen anything like that.
Very clear. Thank you.
The next question comes from Edward Hussey from UBS. Please go ahead.
Hi, Helena and Håkan, thank you for taking my question. I guess just first one on tariffs, could you just please talk us through the direct and indirect effects you expect, and maybe some degree of quantification around that? Thank you.
Yeah, so we are not, I would say, quantifying the effect, but of course, there is an impact. We are busy with mitigating actions, redirecting routes of our distribution, for example, from Europe not going through the U.S. and then into Canada or Mexico or South America; we are going direct instead. We are also leveraging our global footprint when it comes to manufacturing because we have dual capabilities for many products. That is, of course, also something that we very quickly now can put in place. We are also then changing suppliers and using our suppliers' global footprint also to mitigate the impact from the tariffs. I would say, of course, it is a changing environment, but the organization is fast-paced when it comes to taking very tactical decisions like this to mitigate, I would say, the impact.
Okay, thank you. Just going back to Klas's question on standing margins. I calculated that if I exclude the $20 million inventory effect, or roughly that, that occurred in Q4, then we saw a 7% increase in adjusted EBIT margins quarter on quarter. You did mention some one-offs in Q4, but the sort of implication was perhaps they were quite small. I mean, that's a massive change in margins from acquisition. Do you mind just sort of outlining what you think the trajectory is from here? Also, again, just digging into where that sort of massive uplift came from? Thank you.
I wouldn't maybe call it a massive uplift. It was definitely a clear improvement. You're right about the inventory step-up that we no longer have. We had a few one-off items also in Q4 that we did not have again in Q1, as we said. On top of that, the efficiency measures we have taken, for example, and we mentioned these three sites we consolidated, we also looked into a lot of other areas to see, basically to adjust our operations to a clearly lower demand level than it was when we acquired Stanley. All these efficiency measures have now started to show in the result during Q1. Still, we are not getting the help from the market as of yet. That might come, or it will come sooner or later. We don't know exactly when it will come.
When that comes, obviously we will get an improvement in margin as well. There was nothing specifically positive in Q1, I would not say. Rather, if we get help from the market, we would definitely see, if anything, we would expect margins to move in the right direction. Put it that way.
Cool, thanks. Just final question. Just on the dynamic in the U.S., I mean, we've seen an announcement from the White House that 10 mining projects have been earmarked for accelerated permitting. I mean, in the sort of midterm, I guess, can you see a sort of more positive environment in the U.S.? I mean, clearly, headwinds in the short term due to sort of an unknown NPV in the sort of mine calculation, how much CapEx is going to be. Sort of how do you see this dynamic playing out in the U.S. going forwards?
No, but we see these types of initiatives actually in several parts of the world with force tracking, mining permits, etc. I think raw materials, it is becoming a very strategic thing in this geopolitical landscape to safeguard your capabilities of sourcing. Of course, for us, that is good news. It's both in the U.S., it's both expansion projects of existing mines, but also in other parts of the world, we start to see more and more activities around greenfield. That, all in all, is of course positive for us.
Okay, thank you very much.
The next question comes from Gustaf Schwerin from Handelsbanken. Please go ahead.
Yes, hello, thank you. Can I ask another follow-up on the TNA margin? Håkan, you mentioned that you no longer have the inventory step-up effect that was in the range of $20 million. Looking at amortizations now, quarter over quarter, they are only down by $2 million. Have I misunderstood this, or is there something odd in Q1? Thank you.
No, nothing odd in Q1. This inventory step-up value, you would not see them as amortization because basically what happened is that you revalue your inventory. If the inventory was first valued at 8 and you were expecting a selling price of 12, you would get a margin of 4. When you revalue it, it maybe, let's just say, was worth 10 instead. When you sold it, you only got a profit of 2. You will not see it as amortization. It was part of a higher cost of goods sold.
Okay, perfect. Thank you.
The next question comes from Vlad Sergievskiy from Barclays. Please go ahead.
Yeah, good morning. Thanks very much for taking my two questions. First one is on inventories. How do you expect your inventories to evolve from here, perhaps for the rest of the year? Is current uncertainty incentivizing you to actually hold a bit more inventories during this period? The second question is on adjustment to tariffs. Helena, how long do you think it will take you to actually fully adjust the organization to the new realities? Is it a question of a quarter or two, or is it longer?
If I start with the inventory part, if we disregard, which we obviously can't, but if we disregard the overall trade situation right now, we would expect us to continue to move working capital over sales ratio downwards during the year because we still think that we have improvement areas there. Now, the trade situation complicates things a little bit because Helena mentioned we are redirecting flows, and sometimes we are redirecting them in order to get a lower cost, but it might actually imply that we need to have some higher inventory in different parts, or we get longer lead times because we want to avoid different routes. All in all, there is still opportunity for us to do more on inventory and become more efficient. The very fluid trade situation makes it a bit more complicated.
On the timing for all these mitigating actions, of course, it depends very much on the different what the type of mitigating actions. If it is just rerouting flows of parts, for example, or consumables, that happens immediately. There is no waiting for something like that to happen. If we have dual capacity possibilities to move production between sites, then I would say maybe it's a quarter to get that, to put something like that in place. If it's to find new suppliers, as long as it is standard steel grades, it also goes fairly quick. Of course, it's more that it's a lot of workload for the organization. That is what the organization, what we are busy with right now. As it looks like right now, it's full activity level.
I think we have over the years proven that we are agile and we are fast when the situation changed. We are now maximizing our potential here with our global footprint and our global sourcing network as well. Several of our suppliers are also located in many different parts of the world, and we can, of course, use those suppliers in the best possible way now to mitigate the impact from the tariffs.
Thank you very much.
The next question comes from James Moore from Redburn Atlantic. Please go ahead.
Yes, good morning everybody, and thanks for the time. Could I start with equipment, please? A strong quarter, I think the best ever or for a long time on equipment. Can you maintain this krona level in the coming quarters, or is it exceptional? The second question is on service. The softness in nickel and DRC and parts, do you think that's temporary and will reverse quite quickly, or something that's going to drag on for the next quarter or the next two quarters? Maybe we could start there.
Yeah, as I said, on equipment, it's a very strong quarter, and it's both a number of large orders, but not that many large orders actually supporting this very nice demand. It's mostly medium-sized and small orders, and many of those, which is very encouraging to see. We continue to see good opportunities in the coming quarters on equipment demand as well. I think I said it in the previous calls as well, that the replacement of some of the large fleets that we put in the market there, 2011-2012, those are coming up for replacement, and that's quite big ticket items for the large surface machines when we have demand and leverage our very strong position in surface mining. We continue to see that this is a positive outlook for equipment.
On parts, yes, as long as nickel is where it is from a price standpoint and the turbulence in DRC, hopefully the turbulence in DRC, I think it already now looks better. I do not dare to predict where nickel will move moving forward, but there is plenty of opportunities. Of course, we have a strong position on parts and on our service. The more we grow our service contracts, that is also where we are building then the foundation for parts growth long- term. As I said, the fleet is also some of the portion of the fleet is also a young fleet out there because we have put a lot of equipment on the market the last couple of years, not yet consuming so much parts.
That's really helpful. Can I just ask you a bit about price? Is the price level in orders in the quarter similar to what you've seen in recent quarters? If there's any way you can quantify that, how will that move in the back nine months? Will it move up materially with the tariffs? Is there any way you can quantify that? Do you anticipate it not really moving that much at all?
I would say that the price effect we see in Q1 is similar to what we have seen in the previous quarters. It's more a normalized price increase level that we normally see. We are doing everything we can to mitigate the effect from the tariffs, as I explained. If there is a part that we can't mitigate, then of course that will end up in price increases. We're doing our job to mitigate the impact before we push it on to our customers.
I understand. Okay, thank you, Helena.
The next question comes from Benjamin Heelan from Bank of America. Please go ahead.
Yeah, morning. Thank you guys for taking the question. First is on the U.S. construction exposure. I was just wondering if you've seen any changes in ordering patterns since the tariffs came on April 2nd and whether you've seen any change there. From James's question around pricing, but service contracts have obviously grown quite significantly over the past three, four years. Can you talk about your ability to pass on price through services contracts relative to parts? I mean, my understanding of a lot of the way these service contracts work is that there's indexation, but sometimes that indexation can be capped. I was just wondering if that's a situation that you guys will face, and so it will be over a number of years that you pass on any potential price increases versus maybe on parts you can pass it on quite quickly.
Just any color there would be super helpful. Thank you.
Yeah, I would say on the U.S. construction, I would say sentiment, we have not seen any, I would say, change the last couple of weeks since the, I would say, in regards to the tariffs. As I mentioned, we do see that the inventory level at our distributors, that is coming down to a more normalized level. That is what I can say on the construction activities in the U.S. On the service contracts, I would say that we have good opportunities to, of course, to push out price increases as well in service contracts. Long- term, the service contracts also safeguard the consumption of parts. It is a way of making sure that we get the full potential of parts into a contract.
I would not say that we have, I would say we are in a similar position when it comes to working with prices because in a service contract, you work with value in a different way because that is where you can prove the values and you can prove the KPIs, which is then uptime or TCO, etc. You have more things to work on in a service contract than you have if it is just pure parts.
Okay. Okay, great. Thank you.
The next question comes from Anders idborg from ABG. Please go ahead.
Yeah, morning. Thank you. I had two questions on digital. Could you help us understand the mechanics behind this dilution? How much is digital or did digital grow in this quarter? How big proportion is it? What's your margin ambition this year? Do you think margins for digital standalone will go up or be unchanged? I understand that this is a business that will sort of just gradually ramp up to higher profitability, but any help there would be good.
We said it when we reported the Q4 that we are in 2024, we're up roughly 30% on orders on digital. That has yet not, we have yet not seen it fully into the P&L, which of course is, this is about scaling. We have acquired regional players and we are now scaling. With scaling, of course, margins will improve. On top of that, we're also working on efficiency measures to make sure that we are, we have the organization fit for growth, but also fit for long-term delivering the profitability that we expect.
Yeah, okay. Secondly, we saw this deal early in the year of Micromine in mine software. I think you've said previously that you're pretty happy with the platform that you have on digital, but could you just give us some more details on what you do in those specific areas or if you need to do or want to do more bolt-ons? Thanks.
I mean, we are happy with the platform. We have acquired quite many capabilities now. During last year, we were putting all of this together into a very precise offering. It is that full offering now and the bundling of all these solutions. Of course, we're developing new solutions based on the capabilities that we have now received from these acquisitions. We see that we have a good development journey now organically within the digital, and you can already see it on the orders received, as I said. There could still be, of course, gaps that we would like to close from an acquisition standpoint. I think right now I'm pleased with the portfolio that we have and the development of orders. We see that we are providing our customers with the solutions that they need for the future.
Okay. Thank you.
The next question comes from Andreas Koski from BNP Paribas Exane. Please go ahead.
Thank you. Good morning. Can I first ask about the costs related to the efficiency measures that increased admin costs temporarily in Q1? How large were these costs? Will they disappear in Q2? Should I look at them as items affecting comparability?
They were not large. Basically, there's a bit of an echo here. Sorry. In a big company like ours, we always do something. If we have a larger cost item, like when we close the factory in Essen, then we take them as items affecting comparability. If we have smaller ones, which we have every now and then, then we treat them as normal costs because basically we will have them fairly often. In this quarter, they were somewhere in between. They were not big enough to be treated as items affecting comparability, but a bit bigger than what we normally see. That is why we spell them out explicitly.
You don't want to quantify them?
No, but they were not huge.
Okay. Thanks. The second one, I know it's moving material and it's probably difficult for you to estimate as well. Could you please give us an indication of what we should expect from FX on EBIT in Q2, either based on current rates or the rates that we saw at the end of the first quarter?
That's a very good and quite tricky question. To make it very simple, if the krona is a weaker krona, if the krona continues to strengthen like it did in Q1, then you would have a similar impact in Q2 on the balance sheet revaluation items. You would then have a negative effect on AR. And so far, the krona has strengthened in Q2. You would have a negative effect on AR, but you would have the positive effect higher up in the income statement on gross margin coming from these internal profit eliminations. Over time, though, those are the balance sheet implications. Over time, though, a stronger krona, when we translate back the profit that we get around the world, a stronger krona makes that profit smaller. It then becomes negative for us.
It is when we have this, so if you put it like this, if the currency rates would be exactly the same as they were at the end of Q1, then you would not have any of these revaluation effects, and you would then have less profit translated back into Swedish krona. If the krona is where it is right now, when it has strengthened, it is likely then that you see the similar type of effect as you saw in Q1. Does that make sense?
It makes sense, but I was looking for a number, but it definitely makes sense. Thank you very much.
The next question comes from Christian Hinderaker from Goldman Sachs. Please go ahead.
I just want to come back in the outlook statement. You've talked about optimizing logistics and distribution flows in response to some of the tariff uncertainty. If I recall correctly, your logistic cost line fits in admin expenses, and historically, maybe it's been about 2% of revenue. That would imply about SEK 310 million for the quarter. Obviously, we've talked about the step up in admin costs as some of that being one-off, but SEK 1.2 billion is SEK 100 million up versus consensus versus last quarter versus last year. I guess two parts to the question. What are the specific actions you're taking amidst the trade environment that are affecting logistics, and is that structural? On the one-off side, is the one-off effect more meaningful than the increase you may have seen in logistics expenses? Thanks.
The work we have done so far has not led to increased logistic costs, but we are rerouting. We're using different routes than we did prior to the tariffs. To be very transparent and avoiding to go through the U.S. and then out from the U.S. for parts, for example. That we're no longer doing. That is not translated into an increased logistic cost. Of course, if we would start to change our logistic footprint in any way moving forward, then of course that could come with a cost. That is not the type of actions we are taking. We're using the existing footprint in a smarter way given the tariffs. The one-offs are not related to logistics, I would say.
If you look at the admin cost, Christian, and you compare Q1 this year with last year, you should also remember that, of course, we've added especially standalone infrastructure, but also other acquisitions which impact the total admin cost.
Understood. Very clear. Maybe just a second one finally. Inventory to sales, I think about 28.1%. The lowest inventory days in four years. If I think back to the third quarter of last year, I was asking whether we could see pre-COVID levels in terms of inventory days, about 94. We are getting down to similar territory, I would say. Just how do we think about, I know you covered it a little bit, but how do we think about the evolution here? I am just surprised by the strength of that number on the inventory carry. Thanks.
Like I answered in the previous question, we still think that we have room to improve when it comes to inventory. Some of the bottlenecks that we talked about before, for example, getting the equipment out from the final modifications in certain countries, there we definitely have improved. That is part of what we saw during the second half of the year when we had a very, very strong cash flow. Going forward, I think, again, adjusting for then the trade situation, I think there is definitely room for us to still improve and see a better inventory in relation to COGS or sales. Given the trade situation, that might differ than when we redistribute flows, etc. We will need to maybe put inventory in places where we do not have them at the moment. It is very fluid nature right now in terms of evaluating going forward.
Thank you again.
That was it. Thank you very much, everyone. Good questions. Reach out if anything was unclear. We are, as always, happy to help you more than ever, and we wish you very successful investments. Thank you very much. Bye.
Bye. Thank you.
Thank you. Bye-bye.