Good morning and good afternoon, everybody, and welcome to this presentation of the first quarter results 2020 for Sandvik. With us today, we have our new CEO, Stefan Widing, as well as myself, Tomas Eliasson, Group CFO. Please, Stefan, take it away.
Thank you, Tomas. I would like to welcome you to this first quarter report for 2020. I think I've known or met and talked to a few of you in my previous life, but for most of you, this is the first time we meet, so I'd like to say I'm happy to meet you virtually, although I would have wished it was under slightly different practical circumstances. The setup for today is we're going to have a couple of slides to begin with, where I will share some of my first impressions on priorities in the role. I will give a short update on the corona situation, and then we'll dive into the actual report. Let's get started then. Next slide, please. I was happy that, let's say, the first five, six weeks in the role, things were fairly normal.
I could travel around, meet the people, see our operations. I have to say, I'm very impressed with the people I met. Knowledgeable people, passionate, and with a clear business focus. It's also evident when you're out there that the new operating model that we put in place a couple of years ago with a decentralized model , is taking hold. You can see the responsibility for decisions and the accountability for decisions is out there in the business with the divisional management, where it should be. I'm really pleased to see that. Obviously, we still have a way to go. These things take a long time to get fully implemented, but I think we have made very good progress in the last years. It's also clear that we do have a strong market position in most of our segments.
We have good technology, and we are number one and number two in the segments where most of our divisions operate. Overall, if I take these points, I think it shows we have a very solid foundation. First, now to take us through a challenging period ahead, but then also to grow the company more longer- term. My initial focus area obviously has been, first of all, coming from the outside to get to know the people, the businesses, and some of our key customers. Already coming into the job on this quarter, we were in a slowdown. We have already announced last year efficiency and cost reduction measures. That was also one of my first priorities to ensure that we continue to execute as we have said on that.
We have, of course, SMT, where the internal separation project is ongoing and will be ready around summertime, as previously communicated. The idea is then that then the board will evaluate and discuss potential next steps. In this period now, when I come in, it's obviously now a good time to get to know that business more and form my own opinions around SMT. Of course, growth. We have gone through stabilization and profitability over the last couple of years. It's clear that the focus is now more and more on growth, both organic and through M&A. The corona situation has, of course, emphasized the priorities around execution, savings, and efficiency, and that's very clear. Next slide, please. On the corona situation, as we have said, Q1 was largely as expected.
We had the disturbances in China in the beginning of the quarter like most, with the extended closure after the Chinese New Year. We could say that for us, China has recovered well. If you look at the quarter overall, we were up in China for the group. SMS, that was driven by SMRT. SMS, the short cycle business, is flattish or slightly down -1% for the quarter. That obviously hides a lot of drama within the quarter, with a very big drop in the beginning and then a strong recovery at the end of the quarter. I think we cannot really say yet what is the sort of sustainable run rate there. Obviously, in the recovery, there's also a lot of catch-up involved, and potentially even buffering for a feared second shutdown, if that will happen. We don't really know.
We can just say that China has recovered well for us in the quarter. In March, obviously, we had a global escalation of the situation. We have been impacted by production closures and so on in those regions that have locked down, and also in other places where, for example, for health and safety reasons, we have to temporarily close down or more permanently from now reduce the capacity of plants. I think we have managed that well. We have been able to move around capacity as needed, so we have continued to be able to serve our customers there. On the supply and distribution, there's been a lot of issues during the quarter. For example, most of our air freight is passenger traffic, which obviously has been impacted.
Also we have had quite elevated sick leaves in many locations that have also made things more complicated to manage. I think the team has done a tremendous job to manage that, so that's also not really had a significant impact on our business. We have had some extended customer delivery times, maybe slightly higher freight costs and so on, but overall, not a significant impact. Of course, we saw at the very end of March a sharp decline in SMS and the short cycle business also, in SMT, we know are correlated to SMS. The drop in the week was 25% organically year-over-year. Now, that was the first week where we saw the impact. We will, of course, have to wait and see going through April now, how the run rate will be going through the quarter. We cannot really comment on April.
We think it's not really a relevant compare now these weeks because we have an Easter timing effect. I think once we are through April, we will have a better idea of where the new run rate is for now, so to say. Overall, going forward, we are fully dependent on how the actual health and virus situation evolves, and of course, government decisions, where to close down, where to start to open up, and so on. I think you are probably as suitable as us to try to understand more than that, and what kind of impact that will have given our exposure in various segments that you are aware of. That's what we wanted to say on Corona. Let's go to the next slide, please, and jump into the actual report. We had an order decline of 11% organically.
That is again, all-time high compares. We were happy to see an additional major order in SMT in the energy sector. We could also note continued protracted decision times on the order side in SMRT. We've had that for some time, and if anything, it was a little bit accentuated at the end of the period in March. We continue to see the decline in the short-cycle business at a - 12%, and that also is relevant for SMT, particularly major orders SMT at - 9% orders. As I mentioned, the drop in SMS at the end of March. We also had a revenue decline of 7% organically, which obviously is the main driver for putting pressure on our adjusted EBIT margin, which is 16.6% excluding metal prices and 15.8% including the metal price effect.
We also should note here that we have a FX impact related to hedges in SMRT that had an 80 basis point impact at group level and 180 basis point in SMRT. That was not something we expected, but obviously it is part of the results. We did also see good savings filtering through SEK 360 million in the period, in line with what we have said from the announcements last year. The cash flow, SEK 3.1 billion in the period. We have a strong balance sheet gearing is now the net gearing is now down to 0.17. If we include undrawn credit lines, we have over SEK 30 billion of accessible cash at the end of the period. Despite this solid financial foundation, the board, as a precautionary measure, decided to withdraw the dividend proposal, although we also intend to reevaluate that when the situation stabilizes. Next slide, please.
If we look at the market development overall, I will start with our major markets. Both Europe and North America down 14%. North America would have been down 9% if we exclude the major orders in SMT. Asia, -6%, as I've already said, that if you take China in that, we were actually up 10% for China overall, driven by SMRT, -1% if we only look at SMS. If we look at our major verticals or segments, it's pretty much down across the board except for construction. If we look at general engineering and automotive, obviously being weak also going into the quarter, the corona situation has not improved as the corona situation has escalated during the quarter. Aerospace, I would say, was slightly weaker also going into the quarter as we started to see in January some impacts from the Boeing 737 MAX production closure.
Then, of course, that has also been impacted further later in the period. Sequential trend is primarily down, although we have still held up reasonably well in Australia and South America. Next slide, please. Orders, I think I've covered the most of the things here, -11% organically, but you can see in the graph there that we had very tough compares in the same period last year, and I'll come to that a little bit when we cover the BAs. Revenues, -7% organically. Driven by SMS -12%, SMRT -5%, SMT -3%. If we would have included the alloy surcharges , they would actually have been down -5% in the period. Next slide, please. EBIT development, as I said, pressure primarily from volume decline of -7%. If we normalize for the metal prices, it would have been 16.6%, reported adjusted was 15.8%.
I mentioned the FX revaluation hedge impact in SMRT in the period, driven by very volatile currencies in some of the mining markets that had an impact of around 80 basis points at Group level. Without that, we would have been at around 17.5% on the margin side. I think that gives a good indication on more how we have responded to the overall volume drop at the Group level. Of course, a good positive impact from the savings of SEK 360 million in the period. Next slide, please. To go into the different BAs, starting with SMRT, -8% on order, -5% on revenues. On the order side, the equipment are down in the high teens. That's primarily driven by mechanical cutting. They are the ones that have very high compares in terms of order intake last year. A little bit on crushing and screening.
Otherwise, I think all the equipment held up fairly well. Aftermarket is largely stable. It's actually down -2% in the quarter, but largely stable considering the environment. Again, continued to have somewhat protracted lead times in the customer decision process, and again, potentially even slightly escalated, I think, down for the quarter. On the margin, 17% this year versus 18% last year. There were a slight decline in absolute adjusted EBIT from the volume drop, but actually, from a margin perspective, they were margin accretive due to good savings and good handling of the volume drop. This decline is really driven by FX and construction impacts. If you take away this hedge revaluation impact, operationally, they would have been around 19%. Next slide, please. Machining Solutions, down -12% on both orders and revenues.
I think I've talked to most of the dynamics there end of quarter in China. Margin decline, of course, driven by the volume drop 520 basis points, partially offset by savings of SEK 310 million. We also have a negative impact from destocking around 70 basis points. This is a little bit due to that we sequentially reduced absolute inventory since December, but primarily driven by a bridge effect where we last year actually restocked or overstocked. You get a negative bridge effect there versus last year. This means if we take away that impact, we are down then about 300 basis points on a negative volume drop of 12%, which we think is quite okay for a business like SMS. Of course, very much helped by the existing savings initiatives. We also announced earlier in the quarter the intention to close one of our plants in Germany.
Next slide, please. SMT order intake -14%, -9% excluding major orders . Here, we are happy that we could book major orders in the energy sector earlier in the quarter. It means that we have now filled our order backlog for this quite high value adding business for the remainder of the year. Of course, if the current oil price levels continue where they are, we will have uncertainty in the near term in that business, meaning in 2021. That remains to be seen how things evolve in the next quarter or two. In the short cycle part of SMT, we see continued decline, then it standardized, but we're less concerned, and we are now -9% for excluding major orders . Margin down from 10.4%- 9%, primarily driven by volume drop, partly offset by 50 basis points improvements from the savings.
With that, I'll hand over to Tomas to take us through some of the more detailed financials.
Thank you, Stefan. Let's immediately move to the next slide and jump into the financial summary for the first quarter. If I may draw your attention to the upper right-hand corner, let's start with the top line. Orders down 11%, the revenue 7% organically, as you have heard. Currency impacted the top line of 2% positively. Structure, minus zero. We have a couple of acquisitions, one in SMS and one in SMRT, adding to the growth, we also have the Varel divestiture, which happened in early March 3rd. We're losing a month now of Varel, this will, of course, continue for 12 months going forward in the bridge. All in all, -9% for orders and 6% for revenues. We walk down the income statement. The earnings landed at SEK 3.7 billion.
The operating earnings compared to SEK 4.6 billion a year ago, that's -18% and a margin of 15.8%, compared to 18.3%. We will look at the bridge in a minute here. Finance net, -SEK 416 million compared to -SEK 378 million a year ago. We will look at that as well in some more detail. Tax rate, 23.1%. That's at the lower end of the range. Working capital ticked up a little bit in fixed currencies, given the top-line reduction there, the relative number came up to 26.8%. Cash flow, almost on par with last year, SEK 3.1 billion. Returns, 16%, and earnings per share, -15%. Next slide, please. Let's look at the bridge. Here we have the journey from Q1 2019 to Q1 2020.
If we start with the organic development, -7%, that's short of SEK 1.9 billion down on the top line, SEK 726 million down on the operating earnings. That's a leverage of 39% and a dilution of 170 points. Currency diluted 30 points in the bridge, I should say. Metal prices diluted 50 basis points in the bridge. Structure well, it is zero. It's a little bit less than zero, but rounded off, zero. That's from 18.3%- 15.8%. Now, let's stop a little bit here for a few seconds on currency. Here you can see that we had a positive effect on the top line, SEK 427 million, and the total currency effect was +SEK 12 million, but behind the SEK 12 million, we have quite some movements. The translation effect and the transactional currency effect was more than SEK 200 million positive.
We had negative effects of SEK 200 million on revaluation of hedges and open items in accounts payable and accounts receivable. As Stefan has already touched upon, it was a little bit unexpected. We had too many open positions, especially on the mining side, for various reasons, timing reasons, et c. This happened exactly at the time as the currency started to go very much up and down. This is, of course, more of just a Q1 situation. Some of it will come back, but not all of it. Let's move to the next slide. Here we just want to update you on where we are on the savings plan that we announced after Q2 last year, in July last year. We took a charge in Q3 of SEK 1.6 billion for savings of SEK 1.7 billion, and we have now achieved a run rate of SEK 1.4 billion.
2,000 employees are affected of an estimated 2,500. The remainder of this program will basically fall out in the second quarter of this year. Next slide, please. Now, let's stop a bit on the finance net. We can start at the top line here. The underlying interest net, which is what we're guiding for, is coming down nicely. It's on -SEK 126 million now. It was -SEK 168 million a year ago. -SEK 126 million, that's in line with the guidance we had for the full year, which is SEK 500 million in interest net. Pensions, bank charges, et c, are fairly stable and will just continue along these lines. On the last line here, you can see FX and other asset classes. That's -SEK 210 million. What we have here are hedges which do not yet have a corresponding item in the balance sheet.
These are hedges for electricity contracts, for raw material purchases, and for large orders which haven't materialized yet. As we don't do hedge accounting, you have to take the temporary revaluation in the finance net. This will all go back, 100% of it, back into the operating earnings when they appear in the balance sheet. This is nothing we can guide about, really. You never know where this is going to end up. In any case, it is just temporary revaluations, which, for accounting reasons, have to show up here in the finance net. We can give you some help if you want to model it yourself. The electricity contracts, which is basically for the steelworks in SMT, has an outstanding balance of around SEK 500 million.
The raw material hedges, which is mainly nickel and a little bit of molybdenum, is normally around SEK 400 million-SEK 500 million. The FX hedges for large orders, which we have received, but we haven't started work on it yet, more than have a balance of around SEK 5 billion. Based on that, you can model depending on where you think the market is going. Next page, please. Let's talk a bit about the tax rate. The reported tax rate was 21.8%, and in this quarter, we had quite some one-offs. We had some restructuring going on in SMS. We took a charge for that. We have the last item from the Varel last year that was not a loss, but it was a negative impact of SEK 500 million, et c.
It's close to SEK 1 billion. Those charges, booked as items affecting comparability, are not all tax deductible. When that happens, the tax rate gets pushed up. If you adjust for that, you end up on 19.2%. 19.2%, of course, is a good and low level, but it's not that fun. It's not that good, really. What we have in the quarter as well, apart from items affecting comparability, are some inventory valuation movements, to a large extent connected to internal profit eliminations, et c, which have given us some tax income or some tax credits in deferred taxes. If you take that away, because that will not repeat itself, you end up with 23.1%, which is more like an underlying run rate for the tax rate this year.
The guidance is 23%-25%. 23.1% is in the range, even though it's at the lower end of the range. Let's go to the next slide and take a look at some balance sheet items. Working capital, slight up in fixed rates. Look at the right-hand side, you can see that in SMS it's behaving nicely. SMRT, it's been up for seasonal reasons. SMT is a little bit more volatile. Next slide, please. Cash flow, not too far from the cash flow for a year ago, SEK 3.1 billion. Next slide, please. Here we have the net debt slide. As you can see here now, we end the quarter with a net cash position of SEK 1.4 billion. Just to tie back a little bit to what Stefan said here on accessible cash, we have SEK 17.5 billion in cash.
We have committed credit lines of SEK 9 billion. We have more bilaterals that we can enter into if we want to. It means that we have more than SEK 30 billion in cash and undrawn credit lines, both committed and uncommitted. We do not have any maturities. You can see that in the backup material. We don't have any maturities for this year. There will be SEK 3.5 billion in maturities next year, and then the rest of the debt portfolio is spread out in time, quite a long time into the future.
The cash situation as such is good. Next slide, please. Let's look at some of the guidance here. We guided SEK 150 million on the underlying currency effect. We came in on SEK 224 million. That's transaction and translation. The total currency effect, with a little bit unexpected revaluation operation in the balance sheet, was +SEK 12 million.
The metal prices in quarter was SEK 201 million. We guided for SEK 200 million. The bridge effect was SEK 116 million, in quarter it was SEK 201 million. The CapEx came in at SEK 0.7 billion, the interest net, SEK 100 million or SEK 126 million, and the tax rate was 23.1%. If we look at the next slide, we have a little bit of an update for the full year guidance here now. We now say that for CapEx, we will be below SEK 4 billion. That is an update. We previously said it's going to be around or about SEK 4 billion. Of course, given these times, we have put a little bit of a cap on our CapEx. We're going to take it down, so it will definitely be below SEK 4 billion for the full year.
For currency effects, for the next quarter, transaction translation, which is the only thing we can guide for, we expect +SEK 100 million for the second quarter. Metal prices, with the prices that we had at the end of the quarter, we believe it's going to be -SEK 150 million for Q2. Interest net, we keep at -SEK 500 million, and the tax rate will continue. We haven't changed the range. It's going to be between 23% and 25% for the full year. It keeps coming down slowly because most of the markets where we are big and where we are profitable are tending to move the corporate tax rate down towards 20%. Yeah. With that, I think I will hand over to Stefan again for conclusions and summary.
Thank you so much. I think it's fair to say now, following this quarter, it's all about managing our near-term challenges as smoothly as possible. You saw that we already, in March, announced additional savings measures. We are focused initially on the short- term and temporary savings because they have immediate impact, and that should provide another SEK 1.5 billion in additional savings for the remainder of this year. We have SEK 1 billion in structural savings, SEK 100 million that we announced in January, and SEK 0.9 billion that we announced end of March. That will be fully into effect by the end of next year. We will, of course, continue to monitor the market development, and if needed, we will not hesitate to take additional actions if that's necessary. What we will not do, however, is jeopardize the long-term competitive advantage of the group.
While we do these actions, we are also taking into account the fact that we need to be ready also for a ramp-up and the period that will come after this, hopefully as short as possible downturn. One of the reasons we can do that is of course that we are in a robust financial shape. We have a solid balance sheet, as Tomas mentioned, over SEK 30 billion in cash accessible to us if needed, and we are in a net cash position at the end of the period. This we will use not only to come through this period in a position of strength, we will also use it to take any M&A opportunities that might arise even during this period.
We have a strong balance sheet, and we want to grow the company, and we want to add acquisitions both in our core business, but also, if possible, add good technology and know-how that will help us drive growth in the longer- term. Thank you. That is all, and I hand back to Tomas.
Yeah. Do we have any more questions? Let's see. No. Okay, operator, I think we're moving to the telephone line. May I remind everybody, limit yourself to two questions each, and if you have more questions, I would like to ask you to line up again. Please, operator.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Our first question comes from the line of Magnus Kruber from UBS. Please go ahead.
Hi, Magnus from UBS. On SMS, I think you mentioned a 25% decline in the last week of March. How should we think about this going into the second quarter? Is this as bad as it gets now with the automotive OEMs opening up, or how should we think about the early part of Q2?
We don't know where this will end up. It was the first week of the drop, and of course, what it tells us is that we are now being impacted, and quite substantially. As I said, now we have Easter weekends and stuff, so we don't really draw too many conclusions from how April has started. The decline has started. The rest of the quarter is going to be impacted more by the virus spread and political decisions than anything that we can see or draw any conclusions from in the past couple of weeks. I think you, knowing our exposure to various markets and so on, you can probably model or guess how this will evolve as good as we can.
Absolutely. Thank you so much. The second question on SMRT, on the aftermarket side, you mentioned a flat demand, I think year-over-year. Have you seen any tendencies of miners starting to pull back spending here in early Q2, or is it still stable?
Yeah. In Q1, we were largely stable, as we've said. I don't have any commentary on Q2 as of now.
Got it. Thank you so much, and good luck.
The next question comes from the line of Max Yates from Credit Suisse. Please go ahead.
Thank you. Just my first question is on the cost savings. The additional SEK 1.5 billion of temporary savings you announced, how quickly would you expect those to seed through to the P&L? Should we expect that we get a third of those coming through in Q2 already, or will it be a slightly delayed effect based on putting the measures in place? That's my first question.
I think this is how we have thought about this. On the one side, we're not going to delay, so to say, savings unnecessarily. Rather, we want to push the brakes as hard as we can now in Q2, since it's reasonable, at least with what we know now, to assume that Q2 is going to be more of a tough quarter. That's the one side. We're going to push as hard as we can. On the other hand, of course, there is in some cases maybe a slight delay if we talk about April 1st as the benchmark. I can say that some of the measures went into effect fully in April 1st, and slightly maybe even before that, a few days. There are others where they also adjust to existing backlog and so on, and ramp down as aligned with the business.
There are a little bit different dynamics there. I think you can assume fairly safely that it should be around the 1/3.
Okay. Maybe just to follow up for Tomas, on the managing the inventories for SMS, obviously that kind of started through the back end of last year. How are you thinking about production levels going into Q2? Knowing what we do now, would you have underproduced a little bit more aggressively in Q1, given obviously sitting here now things spread more quickly than we thought? Would the 200 basis point impact we saw in the second half of last year be a good guide for how maybe we should think about this in Q2? Thank you.
We are on the right level in Q1. We have
We have the right inventory levels. Not too much, it's not too little. What's going to happen in Q2, we don't really know. Depending on what's going to happen, we just have to adjust, but we don't really have any guidance for that.
Okay. Thanks.
The next question comes from the line of Klas Bergelind from Citi. Please go ahead.
Yeah. Hi, Stefan, and to Tomas. It's Klas from Citi. A couple of questions, please. The first on SMS. I want to come back to this. If you compare this business with Sandvik Tool back in the days, inventories have obviously come down. You've taken out fixed costs, and lots of factory closures since 2013. It's obviously, as you say, it's impossible to comment on volumes ahead. Assuming that we would have a similar volume decline as during the financial crisis, Tomas, could you help us a little bit on likely effects from under absorption, low utilization? I think that that number in 2009 was over SEK 6 billion. Given the changes that you've done to the business, one would assume that the impact would be lower this time around. I know it's difficult to comment, but any indication would be great.
Maybe you can take that one, Stefan.
Yeah. I think there's been a lot of good improvements in SMS, obviously. Coming in here, at least I've seen the actions that have been taken in the last years. Its footprint, of course, its decentralization activities, which have both, I think, have had a positive from a cost perspective, but also now in terms of speed of taking actions in a downturn. I think what I can see, they have done it well so far. Of course, there's been a delay in the savings. It was structured, savings will take a while to filter through, but they are doing what they said they were going to do. We have a leverage in Q1 of 55% in the operational side, which again, it's a 3% EBIT drop on a -12% volume drop.
How things will or would be if things drop even more, I think is very difficult to predict. I think the 55% in Q1 is as good a guess as anything we can probably give you.
My second and final one is for you, Stefan, on M&A. Obviously, safeguarding margin and cash flow are the key priorities right now. When we're through the pain period, and when you start looking to engage more on the M&A front, what is your key takeaway when you look at SMS and joining the group and expanding into industrial software? When you compare it to what you've done at your previous employer, it's the M&A roll-up story in CAD/CAM . How can you see attractiveness in the data modeling? It would be interesting to hear your reflections so far when you look at SMS.
I want to be a little bit cautious. I'm still only 2.5 months into it, not even past the first 90 days. It's always easy to draw quick or too quick conclusions. I think we should definitely come back to it more probably in the Capital Markets Day in the fall and so on around strategy. What I can say is, I think overall the strategy that we have in SMS around expanding a little bit out into the software, the value chain around component manufacturing, I think it's a good strategy. I think there's merit to it. I also know we have talked about it for some time. We see some good movements lately. We're definitely going to dig further into that. I see potential there, definitely. Exactly what, how big, and so on, I don't know.
I think there's merit to the strategy, and there's definitely potential there.
Thank you.
The next question comes from the line of Gael de-Bray from Deutsche Bank. Please go ahead.
Thanks very much, good morning, or good afternoon, everybody. The first question I had is for Stefan. I know this is probably a follow-up on the earlier question. These are exceptional times, and you didn't get a lot of time. Fundamentally, what has surprised you the most so far at Sandvik in both positive and negative terms? That's question number one. Question number two is about the level of activity in Q1 for SMS, which was perhaps not as bad as one could have feared. In your view, was there any sort of pre-buy effect in the first few months of the year with customers building up some inventories as they possibly fear there could be some potential supply chain challenges? Thank you.
Okay. I'll start with the last one. A bit more straightforward. I think we could see early part of March or up until the drop end of March, that there were certain regions where maybe we were a bit surprised at the activity level in a positive sense. I think we can only interpret that as buffer stocking, securing supply chain, and so on. That was in March. It wasn't a lot, but it was noticeable. Of course, we had the drop at the very last week of March, so I think March overall, in that sense actually became as expected, but there were some dynamics within March. Again, not a lot, but it was noticeable. In terms of surprises, it's a bit of a loaded question because if you say something, it's what you assume you wouldn't find it.
I will say, as I said in the beginning, I'm really pleasantly surprised with the culture in the company and the passion among the people in the company. You meet a lot of people that have been here for 15, 20, 25 years, not in one role. They have been in different roles, different geographies, different business areas, different functions. They have really made a career in the company, and I think that's really positive. It's a really strong culture and a lot of dedication that, in a situation like we are now, that can make a big difference. People go the extra mile, despite troubling times and also health related challenges. On the negative side, I don't know. I'll come back to that when I've had at least 90 days to think about it.
Okay. Thank you.
The next question comes from the line of Andreas Koski from Nordea. Please go ahead.
Thank you very much. Firstly on SMRT. You mentioned that the aftermarket was down 2% in the quarter, but I wonder if that changed dramatically over the quarter, and how did demand look like by the end of the quarter for the aftermarket businesses as SMRT?
Yeah. It didn't change dramatically across the quarter, but obviously logistically, there were more challenges in March and then towards the end of the quarter. Travel restrictions, health-related barriers in terms of visiting customers and so on. There was no dramatic difference that was.
Okay, you didn't see close to a double-digit drop in the aftermarket business at the end of March or something like that?
No.
Okay. The second question is on SMT. When the internal separation of SMT was announced last year, I think it was made very clear that the board's ambition was to separately list SMT, hopefully in the second half of this year. Has that ambition changed with the new CEO, or is that still the clear ambition?
I don't want to comment on what the board's ambition was back then. I can tell you to my knowledge, nothing has changed. That I can say. We are proceeding according to plan. We will reevaluate or we will discuss potential next steps when the internal separation is done later this year.
Okay. The ambition is to separately list it?
We have to say this, that the formal decision that has been taken is to do an internal separation, and then the board will evaluate potential next steps. That's what has been decided, and that's what I think is clear. Of course, you don't start a process like this if you don't have a certain intention. There is a decision point and a discussion to be had once the internal separation is done.
Okay. Thank you very much.
The next question comes from the line of Edward Perry from HSBC. Please go ahead.
Hi there. Yes, good afternoon, and thank you for taking my questions. Firstly, just to follow up on China and SMS, and I appreciate you mentioned the difficulties of interpreting the data so far, but has the recovery that you saw in March been maintained through the first weeks of April? Is the ramp-up in customer activity still as strong as your own ramp-up in production?
Yeah. Again, I don't want to comment on April numbers. In terms of customer activity, I have to be honest and say I don't really have that view. You can see what we are doing.
Okay. Secondly, on the mining side, we've seen cuts to 2020 CapEx and production start to materialize over the last few weeks. From your own conversations with mining customers, what is your sense that these budgets will be rolled into and added back to 2021 budgets? Do you feel spending timelines will simply be pushed further away into the next years?
I'm sorry, I have to give a vague answer on that as well. We see hesitations, definitely. We have seen it for a while, and it has anything, it may strengthen at the end of the quarter. Yes, that it's been announced cuts in the CapEx, whether that is just pushed out, postponed investments, or let's say, that they are gone, I cannot really answer that on behalf of them.
Okay.
You never know until afterwards. The first thing that happens in these big projects is, of course, they postpone it, and then they postpone a bit more, and then they postpone it, and then they may be canceled. You can't really say right now.
Okay. Thank you both.
The next question comes from the line of Andrew Wilson from JP Morgan. Please go ahead.
Hi, good afternoon. Stefan, Tomas. A couple of questions, please. Just on SMS and thinking about the cost base, and there's obviously been a lot of work done in the sense of adding the flexibility. Just wanted to get a sense of sort of where we are in terms of temporary labor in that business at the moment. Do we have sort of those sorts of time needed to pull, obviously, you've got the bigger program, but just sort of how quickly can you be bringing people back on and off, given that there's clearly a huge amount of uncertainty in terms of almost week to week where demand develops. Just trying to get a sense of how you're thinking about that?
The short workweek programs we are using, I think you are aware of how they work in most regions, Germany, Italy, and so on. We have the Swedish program that's fairly new or very new. They give quite a lot of flexibility, I have to say. Of course, it's not that we can vary week over week. We can assume that we can adjust, I would say, on a monthly basis. We have to be aligned with unions and so on. We have regular, we touch base regularly, and we should be able to adjust fairly well on a month-by-month basis with these programs within reasonable ranges, I assume.
That's helpful. Are there any particular regions which are proving more difficult to implement that sort of flexibility, or are you feeling pretty good about the flexibility all over the business?
I think, if you look at where we have production employees, Sweden, Finland have these programs, Germany, Italy. There is not really that much flexibility in countries like India and China, U.S., obviously, a flexible labor market. It varies, but overall, I have to say, we are quite happy with overall, let's say, impact we can have from these programs, which is, of course, only the labor part. You have fixed assets, depreciation, and a lot of other fixed costs. On the labor side, there is some flexibility.
No, that's helpful. Thank you. Then just one for Tomas, please. I guess following up a little on an earlier question, thinking about working capital, if I look through previous downturns at Sandvik, I can see that generally, albeit with a bit of a lag, there was a pretty good improvement in terms of working capital. Just any sort of help or kind of indications you can give us in terms of how we manage the working capital development over the next couple of quarters and sort of what changes or processes you are putting in place there to help drive that?
I can only give you a generic answer, really. Of course, revenues were down 7% in the first quarter, so nothing much has really happened. Of course, going forward, if we would run into more negative numbers, of course, working capital will go down, and we'll have a nice cash flow impact from that as well. That's just how it works. That's how it has worked previously, and this is how it will work in the future. There are no specific measures or techniques or anything like that to manage that. I would say that the decentralization and the distributed ownership of all the various parts of working capital in the group is the most important tool for us, really, to manage it.
That's very helpful. Thanks, Tomas.
The next question comes from the line of Peter Testa from One Investments . Please go ahead.
Hi, thank you for taking the question. I was wondering if you could just help us a bit on the SEK 1.5 billion of short-term cost savings, the extent to which these are really reflecting what you described on taking advantage of flexible labor programs, or also including other costs, and maybe if you have further opportunity in flexible labor plans outside this SEK 1.5 billion?
A big part of the SEK 1.5 billion is the flexible labor programs. There are other things, consultants, discretionary spend, obviously travel, project costs, and things like that. Things that have a temporary in a sense, but also immediate impact. When we have looked at this, the various BAs and divisions have made assumptions on how the volume will evolve throughout the year. Obviously, very difficult, but they have to do some assumptions in their modeling. There are businesses that are sort of planning to going up a little bit again later in the year, assuming there is some kind of recovery. If that would not happen, then obviously we can maintain those programs for longer. There is further potential, but not sort of in the short- term, but more at the tail end of the year in that case.
Okay. The other question was just most industrial companies are talking about restraining CapEx and in some industries, cutting production rates. When you think about what you need to do with Sandvik through Q2 to prepare yourself for these set of customer responses later in the year, what sort of steps do you think you need to take? Where are you focusing to prepare the organization for this kind of customer demand environment in H2?
I think that's what we have announced. I think even though we announced at the end of March, before we actually saw the drop in SMS. We, of course, were expecting this to come in a way. We took the actions we felt based on the assumptions we have made were the right ones, and that caters for exactly what you say, production stoppages and CapEx reductions among our customers and so on. I feel we have the initiatives we need and with the knowledge we have right now.
Okay. You don't feel the need to address on shift patterns or take account on working capital to bring the percentage of sales more in line where it was a year ago and so on?
Well, shift patterns and so on, that is what we are adjusting now. That's included sort of in the temporary labor activities. Much showed also in the guidance, our own CapEx is no longer at SEK 4 billion, it's below SEK 4 billion, so we are definitely reviewing that as well. On the net working capital, I think Tomas has answered that. Of course, also there it's the basic uncertainty on the future is what makes this tricky to manage because we also don't want to be out of stock when the upswing comes. That's the constant balance we are trying to manage.
Okay. Thank you very much for the answers.
Operator, I think we have time for one last question before we summarize and conclude.
The last question comes from the line of Madhvendra Singh from Bank of America. Please go ahead.
Yes, hi. Thanks for taking my question. Just following up on the trends in Asia in second quarter. In first quarter, Asia was actually the source of the virus outbreak. Obviously, the impact was more there. In second quarter, given that the rest of the world actually is shutting down in lockdown, what kind of impact are you seeing in Asia because of that? Secondly, on the SMRT side, if you could talk about the trends on the services. Are you facing difficulties in accessing customer demands and the prices for the services? Especially, in many of the mining markets, the mines were closed, were you able to use any of those shutdown times for doing the essential maintenance or were you able to do any maintenance at all during that period using that downtime at all? Thank you.
Starting with the SMRT question, as I said earlier, there were some disturbances, especially in March, related to travel logistics, access, and so on. We don't think this had a material impact. There were definitely disturbances at the end of the quarter in that regard. Whether our customers now going forward will do more maintenance if they do closures and so on, I cannot really answer that. I guess there is a reason for why they call it care and maintenance when they go into these production stoppages. I cannot really comment on how it would impact our service numbers. In terms of Asia and Q2, as I said, we don't really want to give any forecast for Q2 at this point.
Okay. Thank you.
Okay. Do you want to say some final words, Stefan? Summary conclusion?
No, I'll just end sort of the way I started. We feel this was a quarter that was largely aligned with our expectations. Although the environment is challenging. Of course, we are prepared now for a tough period ahead, as was indicated by the developments in the very last week of March. We have a solid financial position, and we are taking the actions we think are necessary. Thank you.
Okay. Thank you. All right.