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Edited Transcript of EPIRa.ST earnings conference call or presentation 23-Apr-20 8:00am GMT

Q1 2020 Epiroc AB Earnings Call

Apr 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Epiroc AB earnings conference call or presentation Thursday, April 23, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Lindén

Epiroc AB (publ) - Senior VP of Controlling & Finance and CFO

* Helena Hedblom

Epiroc AB (publ) - CEO & President

* Karin Larsson

Epiroc AB (publ) - VP of IR & Head of IR

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Conference Call Participants

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* Andreas Juhani Koski

Nordea Markets, Research Division - Analyst

* Andrew J. Wilson

JP Morgan Chase & Co, Research Division - Analyst

* Edward Perry

HSBC, Research Division - Analyst

* Guillermo Peigneux-Lojo

UBS Investment Bank, Research Division - Executive Director and Industrials Analyst

* Klas Henrik Bergelind

Citigroup Inc, Research Division - Director

* Lars Wauvert Brorson

Barclays Bank PLC, Research Division - Director

* Madhvendra Singh

BofA Merrill Lynch, Research Division - Research Analyst

* Max Yates

Crédit Suisse AG, Research Division - Research Analyst

* Robert John Davies

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Karin Larsson, Epiroc AB (publ) - VP of IR & Head of IR [1]

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Hello, everyone, and a warm welcome to this Epiroc Q1 results presentation. My name is Karin Larsson, and I'm heading the IR department. With me today to present the results, I have our CEO, Helena Hedblom; and our CFO, Anders Lindén.

And some of you might wonder why we preannounced the results. Well, the reason is that the Board yesterday decided to change its proposal to the AGM regarding the dividend. And as a consequence, we found it very logical to also release the report at the same time.

For the presentation today, we will follow the same format as we always do, which means we first do the presentation, and then we'll do Q&A. Today, we'll only do the Q&A over phone as we do not have any external visitors in the office.

We have 1 hour for this call. So without further ado, please, Helena, the stage is yours.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [2]

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Thank you very much. So from my side as well, welcome to the Epiroc Q1 presentation. This is my first report as CEO, and I must say I'm very honored to have the opportunity to lead this fantastic company. There will be a lot of talk about the COVID-19 pandemic today and of course, the impact it has on Epiroc. But I would like to start with highlighting my priorities because the priorities are valid also in the middle of this pandemic as well as in the long run.

So I will, as new CEO, continue to focus heavily in innovation to secure that Epiroc are in the forefront when it comes to technology shifts ongoing right now, both in mining as well as infrastructure. I will continue to focus in growing our aftermarket because this is what gives us resilience over a cycle, and it's also where we make a huge impact for our customers to become a productivity partner.

We will strive for operational excellence in administration, in our service operations as well as in our supply chain. Sustainability will also be very high up on my agenda, and I'm really happy that we now have committed to goals for 2030 in line with the UN Agenda for 2030 and the Paris Agreement.

If we then move over into Q1, so of course the COVID-19 pandemic has impacted the world and of course, also our operation. But I must say that I'm really happy to see how well the organization have acted to mitigate all the challenges we have seen during the quarter. And as you can see on the results, we have had limited impact on the Q1 result, still high customer activities and are really pleased to see the growth in parts and service, close to 12%.

Also good to see stable orders for equipment sequentially, down year-over-year, but still more or less in line with what we saw in the later part of 2019. And of course, orders received in Q1 is slightly higher than in Q4. So that's good to see.

We see lower revenue. And here, we have an effect of the COVID-19, close to SEK 400 million. Most of that is related to equipment, where we had challenging -- challenges to do commissioning. Good to see improved underlying margin despite the lower revenue. We have also communicated and put new members into the group management from the 1st of March to create a more efficient working structure. So now -- I now have the presidents reporting directly in to me.

As you can see in the report, we expect to have a challenging Q2 in front of us. And we have, therefore, initiated a number of efficiency actions, and I will come back to that later on.

So if we then look at the financials in detail, so order intake declined 4% organic and revenue declined 8% organic. Still, operating profit at SEK 1.9 billion, positive from currency and mix. And we had adjusted margin of 20.9%, also an improvement in operating cash flow at SEK 1.5 billion. Also yesterday, we announced that the Board proposed to the AGM to decide only on the first installment of the dividend and to postpone the decision for the second installment.

Then I would like to give you an update on the situation with the COVID-19. So of course, in Q1 we saw an impact in China. We had our factory in China closed 3, 4 weeks. China represents 4% of our revenue. So that was a minor impact. But of course, the pandemic has impacted our operation now both in Q1 as well as in the beginning of Q2.

If we start with the impact on equipment, we are operational in all our major sites, which is Sweden and in U.S., but we have some negative impact on supplier components, mainly from Europe. We have 2 of our smaller equipment factories closed due to lockdowns of countries, and that is in India and in Italy.

And as I said, we saw during Q1, in the later part of Q1, challenges with commissioning. And commissioning is when we send technicians out to site to commission the machines to get them up running, and this, of course, has an impact on our revenue recognition. And we expect this to continue to be challenging during Q2 as well, depending on the mobility restrictions within countries.

If we look on -- then on the aftermarket impact, our distribution centers globally are up running and fully operational. We are prioritizing the aftermarket, which means that if we have a shortage of components, we are directing those components to the aftermarket to keep our customers' fleet up running.

We have our sales and service operations up running, more or less everywhere in the world, except of course where there's countries in full lockdown. Our consumables factories are also up running, all our major factories, but we have some impact of the lockdowns in India, South Africa and Canada.

What we also saw in the later part of Q1 and what we also have seen in the beginning of Q2 is that some mines are temporarily stopped or have reduced activities to take care of the health situation. We also see that some construction customers have an impact, mainly in U.S. as well as in Central Europe.

So of course, with less activities or mines temporarily stopped or countries in complete lockdown, we foresee that this will have an impact on our aftermarket during the beginning of Q2 and of course, we'll say, depending then on how long the restrictions will be in place. Of course, we have our resilience in the aftermarket, and we -- that's where we focus on aftermarket, and we have a very agile setup in the organization.

So we have initiated a number of efficiency actions, a number of short-term actions that includes a reduced reduction of additional workforce and consultants. We have implemented work time reductions and temporary layoffs in Sweden, in U.S. and in some of the countries where the country is in complete lockdown. And we have, of course, reduced external expenses.

But we have also taken measurements to reduce our costs for the long term. We talked in the end of 2019 about an efficiency activity within admin and marketing. Then we expected this to be SEK 300 million on annual basis. We have added initiatives to this and we are executing now initiatives that will give us SEK 500 million in yearly saving, and we expect to have all of that implemented now at the end of Q2.

We are also consolidating manufacturing sites. We have announced that we closed one of our factories in Italy and moving that to India. And we also, yesterday, announced that we are consolidating 2 of our factories in Canada within Tools & Attachment. And we continue with our work to improve our supply chain as well since that is key for the future.

As I said, I will focus a lot on the aftermarket, both short term as well as long term. It was good to see the performance in Q1. The aftermarket now represents 72% of our revenue, solid development in service, very much related to the service products that we have developed with midlife rebuilds, with components upgrade, et cetera.

The rock drilling tool business was affected in the quarter, still by the optimization of the product offering as well as an impact from COVID-19. But still good to see the development here in the quarter.

Then I would like to spend some minute on the priorities around innovation and sustainability. So in Q1, we entered into a partnership with Roy Hill, which is a large iron ore producer in Australia, to automate their full fleet of haul trucks. This is one of the larger automation order that we have received. And it will be different phases, and we booked the first phase, which is 8 trucks, now in Q1, very exciting project.

We also launched HATCON, which is part of our digitalization journey. This is remote monitoring for hydraulic attachment and is connected to MyEpiroc. So this is connectivity for attachment and drum cutters.

We also launched a new DM30 surface drill for single pass, especially for quarries and smaller mines, and together with that a new assortment of tricone bits for rotary drilling.

And then back to the long-term sustainability goals. Really happy that we have developed goals for 2030. So we have set ambition to half the CO2 emission from our operations, from transports as well as from our equipment. Of course, our biggest opportunity here lies within our equipment. And we have committed ourselves that the equipment we sell 2030 should have halved the CO2 emission compared to the equipment we sell today. Ambitious, but possible with electrical vehicles. So really looking forward to drive that agenda.

Also ambitious targets when it comes to health and safety and code of conduct, and we're doing a lot of efforts now to create a safety culture in the company. Also ambitious targets on diversity and inclusion with the ambition to double the number of women in operational roles.

So by that, I leave over to you, Anders, to go through the financials more in details.

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Anders Lindén, Epiroc AB (publ) - Senior VP of Controlling & Finance and CFO [3]

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Thank you, Helena. I will, as usual, take you through the numbers and -- briefly, and you will be able to see the numbers clearly on the presentation.

So if we then look at the result, the -- there is -- our reported operating profit was on the same level as last year with the SEK 1.932 billion versus the SEK 1.930 billion or SEK 1.9 billion for the quarter.

Comparable numbers, slightly lower with the SEK 1.911 billion versus the SEK 1.989 billion, but obviously, with the lower revenue, so the adjusted margin was 20.9% versus 20.3%. This of course, as you have noted, is supported by a currency and also with a little bit of mix effect.

If we look at the bridge, the currency contributed 1.3 percentage points. And we have had some tailwind in the quarter from the currency. But as you have seen, especially in March and the beginning of March, in particular, the currencies have been very volatile, and we have seen some period end effects helping us. Also, it should be noted, of course, that this is a year-over-year bridge, it's not sequential. And so the base, the starting point, the base is last year's quarter 1.

The acquisition effect for the quarter is very, very small. And in fact, it's -- for the quarter, it's only the acquisition we made last year in South Africa of New Concept Mining that we have as an acquisition effect. All in all, organic decline of 0.3% from the lower volumes, but helped a little bit with the mix effect.

If we then take a look at the segments, the Equipment & Service to start with, the effect on the financials is minor from the COVID-19, a little bit of revenue but on the margin side, it's small. We expected a decline versus last year, and orders received was stable, though, versus Q4, also as expected, both the underground and the surface orders received declined.

The adjusted margin was actually an improvement. The reported margin stayed the same year-over-year, but an improvement of the adjusted margin if we adjust then for the efficiency costs, which we can see on this side, it's -- this is to confirm the improvement of 24.8%, despite the revenue decline organically of 8%. So we obviously have some support from currency and mix here. The flow-through is negative 30% to 35%. It's more than we would have liked, of course, but with the rapid change in demand and the situation, it's not unexpected. But this is only 1 quarter, as you know.

If we then look at Tools & Attachments, the orders went down by 7% organically. It's a decline both in consumables and the hydraulic attachments, a little bit more negative in hydraulic attachments with the impact mentioned on construction. And also consumables as well as attachments had a negative impact from the situation in and weakness in North America.

Revenues of minus 5% organically, most of which is an effect of the COVID-19. It was almost flat. If we exclude, it's not all that easy to calculate, but our estimate is that it's an impact of COVID-19.

The margin at 13.5% is lower than last year. But if we adjust for the efficiency costs or improvement costs, it's 13.9%, which is in line with last year. Also here, we see a little bit of a mix effect since the decline on the attachments is a little bit more than on the consumables.

So if we then look at the profit bridge, as confirmed, organic decline 5%, but the structure and other cost efficiencies adding back, as you can see, that's the 10 in the bridge, then we get to the 13.9% and also a little bit support from the currency flow-through also here, more negative, but mentioned by Helena, we take -- continue to take actions on Tools & Attachment segments, for example, with the consolidation of production in Canada. And this is, of course, then a quarter or so.

If we continue and look at the costs, financial net and tax, costs are sequentially trending down if we compare like-for-like, year-over-year as well as Q4 in 2019. They're a little bit higher in relative terms, and that is also what we are addressing with the programs that Helena mentioned.

Interest net is rather stable. We have our base funding in place, and there are not much of movement. The -- it can vary a little bit, both the financial net and interest net, from currency derivatives. But otherwise, it's fairly stable at the SEK 33 million roughly.

Exchange rates has been a challenge in -- for us it's, it was very much up and down in the quarter. And I think we've all seen that it stabilized a little bit more towards the end of the quarter and the beginning of April.

Taxes, as expected, below the 25% mark as we have as our guidance.

Looking at the capital structure, and this is obviously a slide I like to talk about. The net cash position has -- for the first time as Epiroc, we now have a positive net debt -- or actually a net cash position of SEK 1.2 billion reported. In fact, if we then take away the SEK 1.9 billion roughly effect of debt from IFRS 16, we have SEK 3.1 billion in cash position.

So it's a strong financial position. And our first maturity on the base funding is in April of 2022 of EUR 1 million. And we have also recently confirmed extension of our RCF, which was put in place in as the listing -- as part of the listing of SEK 4 billion. So that is now maturing in 2025.

You also have heard and seen that the Board of Directors will propose to proceed with the first part of the dividend. We believe that we have a strong financial position that has not changed, but nobody knows how long or how severe this crisis will be. So I think it's prudent to take this approach, and the second part will be decided upon later this year.

If we then look at the capital efficiency, we had a little bit of increase in working capital in the quarter. It's down from last year. It's normal that we have a little bit of an increase in working capital in the Q1. It's typically very low in the end of the year, in particular the inventory, but inventory is still very much a focus area for us. Of course, we will continue to work on that.

Maybe I should mention also on the return on capital employed, which has reportedly been -- gone from 31% to 26.2%, but mainly from our increased cash position and the effect from IFRS 16. In fact, 4% of the drop is related to those 2 items.

Finally, a word about the cash flow improvement compared to last year, quarter 1 of around SEK 1 billion. It's a good cash flow. It's not great. We have lower taxes, which we expected. Last year, we had a little bit of a catch-up effect from 2018.

We have a little bit of a higher working capital. That was also expected, as I explained earlier. And we have some other impacts. But the SEK 1.5 billion in operating cash flow is from -- in a historical perspective, it's good for Epiroc. But I would call it decent, not great.

And with that, I conclude the numbers part. And Helena will come back, and then we switch?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [4]

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Thank you, Anders. So then to sum it up, a solid Q1, despite the effect of COVID-19. I'm especially happy to see the growth in service as well as improved margin. And I'm glad to see the speed the organization is now adopting to the new situation and finding new ways to serve our customers and keep our customers up running with focus on the aftermarket.

We are of course, monitoring the situation closely day by day. And we're taking firm actions to lower our cost, both temporary as well as permanent. But also in times like this, we continue to focus on innovation and sustainability.

So this is then our guidance for Q2. So as it looks like, we expect Q2 to be challenging. It is of course very much depending on to what extent the lockdowns of countries will still be there and the temporary stopped mines will -- when they will start to resume operation. But we expect a lower demand on both equipment and we -- and aftermarket, and we expect a significant impact on both revenue and profit in Q1. But we will carry out the necessary actions to lower our cost base and adopt our organization to this situation, and at the same time strengthen the company and our customer relations for the future and build a stronger company for the future.

Thank you very much.

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Karin Larsson, Epiroc AB (publ) - VP of IR & Head of IR [5]

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Perfect. Thank you both Helena and Anders for a great presentation. And it is indeed a fantastic company we are working for, and we will try to use these challenging times to get better with the customers, indeed.

So now it's time for the Q&A session. (Operator Instructions) So with that, please, operator, go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And our first question comes from the line of Max Yates from Crédit Suisse.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [2]

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Just my first question is on the 12% aftermarket growth. Obviously, that's quite a lot stronger than what we've seen at peers. I mean could you talk about what you think is driving this? Were there any sort of larger orders in here? Or did you see any sort of customer restocking potentially ahead of any disruption that they may be sort of thinking about? So just any color on sort of what exactly was driving that, that's my first question.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [3]

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So we had, I will say, a number of larger service orders mainly related to midlife rebuilds, upgrades or major components, et cetera, that supported the growth in service in Q1. Not so much, I would say, the signal that customers are, or I will say, overstocking. So it was more larger initiatives in our -- using our service products.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [4]

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Okay. And just my second question, I just wanted to follow up on the cost savings announcement. So could you just confirm that there's 2 separate programs? So one is SEK 300 million and one is SEK 500 million. So the total is EUR 800 million. And then I just wanted to understand how much of that saving was recognized in 2019, and what you're expecting for 2020 to come through. So how those cost-saving programs phase and just confirming that it is a total of EUR 800 million.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [5]

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Yes. So we have added to what we said in Q4. So the total program is SEK 500 million. So it's not -- you can't add them on top of each other. So we have added SEK 200 million to the SEK 300 million. So it's SEK 500 million in total.

We started the execution in Q4. We did not get that much contribution in Q4. In Q1, we -- as Anders said also, we started to see costs going down, but the majority of the -- of execution will now happen in Q2.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [6]

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Okay. And I mean, should we recognize the full SEK 500 million this year in the P&L? Or actually is it more a run rate and then phased over 2020 and 2021?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [7]

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It's run rate, and we expect to have it then fully implemented so that we can get the contribution from this in the second half of this year.

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Operator [8]

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Next question comes from the line of Lars Brorson from Barclays.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [9]

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Maybe just to clarify Max's question. I mean these larger service orders, Helena, can you give us a sense of the order of magnitude of these, how much might a bigger upgrade or rebuild order be?

And then just looking forward as opposed to backwards on your aftermarket business, if I go back and look at historically at your parts and service business, obviously held up really well in prior downturns. I think we saw low single, mid-single-digit declines during the weakest quarters in '08, '09, and then '16. I think your consumables business slightly more cyclical; I think we saw a double-digit declines in some quarters in prior downturns.

Maybe with that as a reference, I'm trying to understand how we might think about Q2 and indeed rest of 2020 in your service and consumables businesses, acknowledging, of course, that your visibility is pretty low at this point.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [10]

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So if we start with the first one there, the size of a rebuild, it's not really that, I will say, the growth comes only from that. So it was a higher activity in general in Q1. And then on top of that, a couple of larger rebuilds that supported the growth.

If we look on the aftermarket, as you say, in -- it's -- that holds up under normal conditions, I would say, the situation that we are in right now with full countries in lockdowns as well as mines temporary stopped from -- to handle the health crisis. Of course, it's very much dependent on when the operations -- when our customers will resume operations and how long the lockdowns will be in the different countries.

And I think if we -- to give some flavors on this, of course, South Africa is one of a big mining market. And they have been in lockdown now for a couple of weeks. That of course has an impact, both on parts and service as well as on consumables.

If we take Peru, for example, it's the same. They have also been in lockdown, the mining activities there. But we also start to hear more positive signals now the last week that, that was mining is seen as essential and that mining starts to resume in some -- resume activities in some parts of the world.

But it's a little bit, we'll say, it's not -- it's really, we'll say, depending on how the health crisis develop and when authorities and governments will, we'll say, take away mobility restrictions within a country as well as, of course, if a country is in complete lockdown.

So that's -- but it -- clearly, if a country is in complete lockdown, that -- and then -- and all the mining activities stop, then of course, it has a temporary impact as well on our aftermarket.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [11]

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It sounds like you're not willing to offer much quantification around that. Maybe I could try and be specific for T&A, at least. I mean, the negative 7% organic in Q2, what was that in March, just as a reference point?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [12]

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More or less (inaudible) I would -- looking at you now.

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Anders Lindén, Epiroc AB (publ) - Senior VP of Controlling & Finance and CFO [13]

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Yes. No. And I think at the same time, we -- there was not so much impact in March really.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [14]

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No, no.

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Anders Lindén, Epiroc AB (publ) - Senior VP of Controlling & Finance and CFO [15]

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We saw a little bit, as I mentioned, we -- the -- we say that the organic revenue is obviously mostly related to COVID-19. But a little bit of a slowdown towards the end of the quarter, which means March, but not dramatic.

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Operator [16]

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The next question comes from the line of Guillermo Peigneux from UBS.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [17]

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I wanted to go back to the legalized retrofit growth that you saw in the quarter. I guess this is not -- this midlife crisis, so to say, is not a single quarter event. And I wanted to see if you have an estimated or an estimate of how much of your fleets or installed fleet or available fleet is actually under the same conditions, meaning that they will need to be retrofitted. I understand that it will not be in Q2, obviously. But as we go through 2020 and 2021, have you estimated how much is it that needs?

And then second question is regarding on an estimate of how many of your customers' mines, so to be, are in production lockdowns as a percentage of all, if I may.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [18]

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So if we take the midlife rebuilds, so we developed that product a number of years ago. And that is, let's say, to support our customers to, we'll say, resume full productivity from our equipment. And of course, we did this because we saw the tendency that customers wanted to prolong the life of the machines, more hesitations when it comes to, we'll say, placing orders of a new equipment. And we have successfully been growing the midlife rebuild products, as we shared at the Capital Market Day last year.

Of course, I foresee that of course, if, let's say we end up in a situation where customers are more hesitant to buy new equipment, then of course, this is a good alternative. Because it is very much where we strip the machine down, we replace the major components and we bring the machine back to original productivity, which, of course, is very attractive. So that is, of course, an opportunity for us, and we are working hard to offer that product to our customers.

We are -- when it comes to the number of mines that are temporary stopped now or under, let's say, under lockdown, we are monitoring this day by day, and it changes also day by day. So it's very difficult to say a number or to put the percentage into this because it really changes every day.

And as I said, it's very much related to the health crisis development in each and every country. But of course, the countries that are in complete lockdown, their effect right now is, of course, there. But I would say that, we'll say when it comes to temporary-stopped mines, many of these mines also try to, say, to start operation again. So it's -- I would like -- not like to quantify this because it's really moving -- it's moving every day.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [19]

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Okay. And then as a follow-up, the retrofit or the midlife rebuilds, can you give us an indication of how profitability is around these projects?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [20]

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No, we don't disclose that, but it's a good product for us.

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Operator [21]

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Our next question comes from the line of Andreas Koski from Nordea.

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Andreas Juhani Koski, Nordea Markets, Research Division - Analyst [22]

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Most of my questions have already been answered, but now you have a very strong balance sheet. Do you think that you will be able to find any larger acquisitions to do? Or is it mainly bolt-ons that you are going to do, you think?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [23]

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Yes. So as we said, we have a very strong balance sheet, and we are of course always looking into opportunities to expand both organic as well as with M&A. We are looking into opportunities close to core, which is very much in the technology area and in the aftermarket area. So I would like -- so more, I would say smaller ones, add-ons to the core of Epiroc.

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Operator [24]

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Our next question comes from the line of Andrew Wilson from JPMorgan.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [25]

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I have a sort of bigger picture question, I guess, Helena. Just around some of the supply chain opportunities you've talked about and also the portfolio, we've seen some change in terms of exiting some product lines. I just wondered, I guess, if you could get your sort of take coming into the role on, on what's been said before and kind of whether you think there are big opportunities, different opportunities and sort of where we would potentially see the benefit coming through in the numbers, just to try and, I guess, get a fresh take on some of those initiatives.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [26]

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Yes. So the supply chain program, as we have described earlier, that's a fairly big -- there's a large revamp of our supply chain with the main target to improve our availability of parts and consumables to our end customers, to lower the transport cost and to try to reduce the tonnage that we send by air and move more and more over to sea as well as, of course, reducing the tight capital.

We are in the middle of this program, and this is a project that we need to do very carefully, of course, because it includes closure of a number of stock locations out there, creating regional distribution centers globally. So it's a fairly, I would say, big exercise to -- also to change from air shipment to sea, of course, from a lead time perspective. So we're in the middle of this project, and I expect it to continue another 2 years before we see the full effect of it.

When it comes to the portfolio, we have mainly been focusing on the portfolio of consumables, as you said, so we have exited a number of product lines, and we have also -- we have exited, and we have also, we'll say, restructured quite a lot of our manufacturing facilities within the RDT business or the consumables business.

I don't really foresee that there will be a lot of more work needed when it comes to the portfolio. I think we have done what we need to do. The portfolio is now positioned in line with the equipment we have. And also when it comes to, I would say, tying the consumables together with equipment and giving our customers, let's say, a lower total cost of ownership with the digital tools, et cetera. So a lot focus on, let's say, on the innovation side now on consumables.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [27]

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That's very helpful. And just as a follow-up, it's slightly adjacent admittedly. But just -- could you just give us a little bit, I guess, sort of color around the different trends you've seen in mining and construction specifically? I feel like we've sort of focused more on the mining side in terms of the question. Just interested if you're seeing very different trends and sort of very different customer behaviors, that would be helpful.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [28]

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No. As I said, we talked a lot about mining. I think when it comes to construction, that has been more impacted by the lockdown of countries and the mobility restrictions as well. And we saw that in the end of Q1 and also in the beginning now of Q2 and especially, I would say, in U.S. as well as in Europe.

But on the other hand, as I said, we also see China picking up again on the construction side. So that is good to see. But it's very much related to, let's say, the lockdown of countries on the construction side.

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Operator [29]

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Our next question comes from the line of Maddy Singh from Bank of America.

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Madhvendra Singh, BofA Merrill Lynch, Research Division - Research Analyst [30]

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This is Maddy from Bank of America. Just one question on performance in the OE segment. That's one area where I think the pressure still remains quite significant. Could you talk about that? And the -- we have also seen CapEx cuts by some big miners. So do you think that OE performance actually gets worse in the medium term before it gets better?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [31]

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Yes. On equipment -- on the equipment side, of course, we saw during the later part of last year a drop. But from that point, it has been very stable. And you could see that also in the numbers now for Q1.

Of course this depends, I would say how -- also how long this situation will remain. But I think it's quite, I would say, natural to believe that mining houses will be cautious, especially when it comes to larger investments. And I think we saw that also in Q1 that it's more smaller orders. It's not these really large orders that we landed maybe during 2017 and 2018.

So we see a more cautious behavior. But at the, I would say, a solid level, difficult to predict how that will play out in the coming quarters. But I think our focus is really, let's say, on our resilience and making sure that we, I would say, protect the aftermarket now. Because I think for our customers, that is the most important thing now to keep their operations up running.

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Madhvendra Singh, BofA Merrill Lynch, Research Division - Research Analyst [32]

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And do you think the progress of growth in the aftermarket side isn't going to be more than enough to offset any pressure on OE in the future as well?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [33]

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It's difficult to say. It has, of course, a lot to do with the production level in the world within mining, which is very much dependent on the metal prices and of course, the overall demand in the world. Mining is, of course, connected to a lot of -- or dependent on a lot of other industries. So difficult to predict what will happen.

I think as it is today, I don't think anyone, to be honest, can really predict what we have in front of us. I think we need to -- we know what we know today, and we need to act, I would say, based on that. And for us, we'll say, really protect our aftermarket and do whatever we can to support our customers during these difficult times, and really be, we'll say, be there for them and be a partner and help them out now.

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Operator [34]

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And the next question comes from the line of Robert Davies from Morgan Stanley.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [35]

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First one was just on your aftermarket sort of offering. I'd be interested in how much of that is sort of possible to do remotely. So I guess, the balance between spares and consumables versus sort of actual sites access and service. So I'd just be interested to know how much of that sort of service and sort of repair can be done sort of via VideoLink or via Skype or kind of what have you?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [36]

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So as of today, there's not a lot that can be done, let's say, in a digital way. But of course, we have our workshops up running close to the mining sites. So we have our own workshops where we can do repairs and do major overhauls.

I think the majority of our aftermarket is, of course, related to the sales of parts, then service is, of course, a way to help the growth of parts. But the majority is, of course, parts and that we can, of course, deliver even if we can't do the service on site.

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Anders Lindén, Epiroc AB (publ) - Senior VP of Controlling & Finance and CFO [37]

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Maybe, as you also say that if a site is in a lockdown, it's a lockdown for the customers' employees as well as for our employees. There are exceptions, of course, where foreigners are not allowed in. We see that, but those are exceptions. But I mean, if it's a lockdown, it's a lockdown. And what you can do remotely, would need some sort of assistance or somebody at site.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [38]

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Understood. And then just a couple of follow-up questions. One was just on where you are in terms of some of the logistical disruption. I know you've mentioned China, I think, in some of your prepared remarks. So I was just wondering in other regions.

And just sort of tying into that, that transition you mentioned from doing more sort of freight into sort of sea and shipping, is that sort of part of the response that you've seen or kind of part of your response in terms of what you've seen here? Or is that something you had kind of going on in the background anyway that was part of a bigger program?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [39]

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So as I said, of course, we are also impacted by logistic disruptions. And on the inbound side, it's mainly in Europe with the lockdown of Eastern Europe as well as Italy. And where we also have, say, signals now the last week that some of our suppliers are starting to operate again. So far, we have not really had any major, let's say, disruptions in our supply chain and our ability to really deliver machines or deliver aftermarket to our customers.

Then on the outbound side, of course, it's -- that is more challenging because there is simply not enough lanes open, both when it comes to air as well as sea. And I think here, our team is working day in and out now to find, say, reroute the goods and, say, find the best possible way to get the products to our customers. But it is -- I expect, we'll say, especially the outbound transport side to be challenging, as I think most companies do today, especially in Q2.

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Anders Lindén, Epiroc AB (publ) - Senior VP of Controlling & Finance and CFO [40]

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And you've also probably have heard that there are some quite dramatic cost increases on certain lanes or routes as well. So we saw that already in March a little bit and that will probably continue also until this crisis is over.

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Operator [41]

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The next question comes from the line of Edward Perry from HSBC.

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Edward Perry, HSBC, Research Division - Analyst [42]

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Yes. My remaining one really just focuses on gold. And I'm suppose in light of the very strong fundamentals here, what are customers saying as we progress through 2020? Might we still see continued order growth here in both equipment and service? Or in spite of the sort of positive market dynamics, will operational and supply chain issues weigh in?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [43]

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So as you say, we'll say, gold has -- is still holding up and is still strong. And we saw in the, I would say, in the beginning of Q1, we saw increased activities on exploration for gold. But there are also gold producers now that are under lockdown because the country is in lockdown. And they have also, in some places of the world have been forced to reduce activity to handle the health crisis.

So I think it's a little bit too early to say what will be, we'll say, the later part of this year, what will be the activities in gold, but of course, if the prices are where they are today and the health crisis, I will say, that the health crisis will be managed, then of course, activity should resume in gold. That's my view how I see it.

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Edward Perry, HSBC, Research Division - Analyst [44]

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And perhaps just a follow-up on service and looking a bit further forward. What impact do you expect this crisis to have on your digital and automation solutions? I mean have you already observed an acceleration in customer conversations about 6th Sense and other offerings as these restrictions on physical labor are enforced?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [45]

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Yes. I think this -- of course, in the middle situation we are all in right now, of course, our customers are dealing with the situation right now. But there's also a lot of discussions ongoing when it comes to automation and digitalization. So I foresee that, that will continue and hopefully also, I will say, intensify as we move on here.

I think that it is the right path for the industry. And of course, here we make sure that we are close to our customers and that we can try to do these type of projects, even if we are not allowed to travel right now, but we still have our automation centers built up regionally now.

So we have teams in Australia, in South Africa, in Canada, U.S. and in Chile to support our automation projects now locally, which is, of course, is good in times like this when we can't travel.

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Anders Lindén, Epiroc AB (publ) - Senior VP of Controlling & Finance and CFO [46]

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I think an interesting effect of this situation is the increased use of digital tools. And I think we see, let's say, the skill level of using digital tools will increase. We've seen some very interesting examples, not the least within our service when it comes to the operation, when it comes to training remotely. Most of our white collar people or like for other companies are working from home or in split teams, and it's going quite well, to be honest.

And I think that will be a lasting effect of this -- yes, crisis, that people will actually be more used to using digital tools and more skilled.

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Operator [47]

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Our next question comes from the line of Klas Bergelind from Citi.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [48]

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Helena and Anders, it's Klas at Citi. I was late on the call, maybe you touched a bit on it, but I want to come back to the service growth. When we met in February, Helena, we talked about the lag from equipment coming down and how the service growth could be impacted. I think you said then that there is still a positive lag to be seen from the equipment not consuming spare parts until after 18 months.

I get that we will have shutdowns, but underlying and looking at spares, are there reasons to believe that underlying demand could still strengthen from that we are utilizing the new equipment as we go forward? If you could comment on that, please.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [49]

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Yes. So as we discussed here a couple of weeks ago, of course our -- I would say our fleet start to consume parts and service after 1.5 to 2 years. And of course, we have put a lot of machines on -- in the market the last couple of years. So the underlying potential is there for sure. Of course, very much depending on now, what happens now. I think what we see now is, of course, it's a temporary situation with healthy mines also now put under care maintenance. Of course, that is temporary.

So it's very much dependent on now how long this crisis will be there with lockdowns, with mobility restrictions. But of course underlying there is a healthy potential.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [50]

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Okay. Good. My second one is on equipment deliveries. And you commented that we could have a big impact, given that key regions are close to business. That delivery drop, I'm trying to understand how equipment deliveries developed in March and in early April, that significant impact. Are we down 40%, 50% already now? Or what is the magnitude roughly?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [51]

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We have not really quantified it. But really, what this is about is our ability to send technicians to site to do the commissioning of an equipment. So of course, in a way, if we can't do it in March, we -- and the lockdown is still there in April, we can't do it in April. But of course eventually that will happen because the machines are already in the country, but we can't send the technicians to site. So very difficult to predict how that will play out in Q2. But if the mobility restrictions are as they are today and if the countries are still in lockdown, then it will have an impact. You saw the impact in March there, close to -- it was SEK 300 million related to equipment.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [52]

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SEK 300 million. Okay, cool. My very last one is -- my final one is on something else leaving COVID for a bit. Could you talk about ASI a bit more and their corporation there from 2018? It's interesting to see that you're going after automation of mixed fleet that opens up a new wallet for you on automation. If you could talk a little bit about the latest development there, Helena.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [53]

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Yes. So we took a share in ASI Mining 2 years ago with ambition then to be able to offer our customers in the software space mixed fleet automation. And we have done a couple of pilots with some smaller initiatives during these 2 years.

And now in Q1, we landed this first order with Roy Hill, which is a really exciting project, where we will automate 77 haul trucks for them. And that is, of course, it's -- goes well in line with the Pit Vipers we have on their sites. But that is really a fully integrated solution. So this is software. It's hardware and no equipment that comes from us. So very exciting project. It will, of course, take some time for us to establish the product, to work out all the, I will say, challenges that comes with developing a new technology, but it's a very exciting step for us.

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Operator [54]

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Our next question comes from the line of Lars Brorson from Barclays.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [55]

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Just on the different trends across your different metal exposures, I guess a follow-up to the gold question earlier. I mean, obviously, the health crisis has obscured any differences between the different metals as mines are shut down. But if you look at what you were seeing maybe before the crisis or what do you expect to see post the crisis, can you point to any material differences by metal from a CapEx or from a new equipment standpoint? I'm particularly interested in whether you see gold and perhaps copper be better, stronger or worse than other metals?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [56]

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I think it's quite difficult to answer that. If I look on the mines that are now temporary stopped, they are all over the commodities. So it's not really related to the price development the last quarter. It's very -- it's only related, I would say, to the health crisis.

As I said, if gold keeps up, the longer the, I would say, the uncertainty will be there. If gold can still keep up, that would of course help support, I would say, the activities in gold.

From a pure, I will say, demand-supply standpoint, of course, there is a lot of new projects on its way also into operation within copper. Some of these projects are also now temporary stopped which, of course, is not, we will say, that can't go on forever. The mining houses have already done the big investments in some of these sites, and they are just ready to start operation and then this happens.

So I also foresee that copper -- activities in copper should continue when the crisis is over. Of course, at what level, that depends very much, I would say, on the development in the world and the growth rate in the world.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [57]

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Finally, just on mine shutdowns. I mean you pointed to positive signals earlier, which is obviously great news. But if instead we see these positive signals reverse and mine shutdown to extend beyond the sort of current 3 to 4 weeks into 6, 8 weeks or even beyond, what would be the implications on your spare parts business? I'm just trying to understand at what point we might start to see sort of cannibalization more broadly across your spare parts business.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [58]

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Of course, the -- if -- let's say that the mines will be closed down for 6 months or 12 months, then, of course, it has an impact. And that was more what we saw during the last downturn there in '15, '16 as well. But of course, we are agile and resilient, and we adapt the organization to whatever level it will be.

What we see right now is that, of course, this is driven by the health crisis. But of course, there is a relation with the number of active mines and especially the production level in those mines and the aftermarket.

But at the same time, as we have also talked earlier about, we have roughly 50% customer share of existing fleet. So that is also an opportunity for us, of course, to grow the aftermarket, not really depending on the activity level out there. And that is hard structured work to, I will say, gain back market share on our own fleet. And of course, we're doing that at the same time.

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Operator [59]

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Our next question comes from the line of Guillermo Peigneux from UBS.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [60]

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I wanted to get some housekeeping on the savings. I guess first of all, whether you could give us an indication of which divisions and to what extent actually the savings are going? And how temporary do you expect them to be, i.e., if your activity goes back up to levels that you were in 2019, should we expect the savings fully disappearing?

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Helena Hedblom, Epiroc AB (publ) - CEO & President [61]

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So as I said, we are implementing temporary actions to save costs and that we're doing in all divisions. When it comes to the permanent savings, I would say that majority of our cost structure is related to the aftermarket, of course. That is the cost we have out in the customer centers. It's related to supply chain, administration. So a big portion of the savings from these programs will, let's say, end up in parts and service as well as Tools & Attachments.

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Anders Lindén, Epiroc AB (publ) - Senior VP of Controlling & Finance and CFO [62]

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But I should also say that the numbers that you are referring to, the SEK 500 million, they are not temporary, they are...

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Helena Hedblom, Epiroc AB (publ) - CEO & President [63]

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Permanent.

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Anders Lindén, Epiroc AB (publ) - Senior VP of Controlling & Finance and CFO [64]

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They are permanent cost reductions. And then, of course, we are, as Helena said, with our business model we have additional activities to support the agility that we talk about.

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Karin Larsson, Epiroc AB (publ) - VP of IR & Head of IR [65]

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So thank you, everyone, for asking very good questions. I'm sorry for interrupting you. We need to stop now because we've already filled an hour.

In case you have any follow-ups, please feel free to reach out. We, the 3 of us, and also Mattias Olsson, and my stand-in, (inaudible), are happy to help you with any questions. If anything was unclear, just drop us an e-mail, and we will take it from there. And also, we would like to thank you for taking the time. We would like to wish you successful investments and above all, stay safe. Thank you.

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Anders Lindén, Epiroc AB (publ) - Senior VP of Controlling & Finance and CFO [66]

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Thank you so much.

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Helena Hedblom, Epiroc AB (publ) - CEO & President [67]

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Thank you very much. Thank you.