Sandvik AB

STO:SAND

Earnings Call Transcript 2020-Q1

[Tomas Eliasson, Executive VP & CFO]

So 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.So please, Stefan, take it away.

[Stefan Widing, President, CEO & Director]

Thank you, Tomas. And also, 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 would 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 and priorities in the role. I will give a short update on the corona situation, and then we'll dive into the actual report. So let's get started now. Next slide, please. So I was happy that, let's say, the first 5, 6 weeks in the role, things were fairly normal, I could travel around, meet the people, see our operations. I am -- 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 with -- the responsibility for decisions and the accountability for decisions is out there in the business with the divisional management, where it should be. So I'm really pleased to see that. Obviously, we still have a ways to go and these things take a long time to get fully implemented. But I think we have made very good progress in the last years. But it's also clear that we do have strong market positions in most of our segments. We have good technology, and we are #1 and #2 in the segments where most of our divisions operate. So 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 areas 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 in this quarter, we were in a slowdown, and we have already announced last year, efficiency and cost-reduction measures. So that was also one of my first priorities to ensure that we continue to execute as we have said on that. Then we have, of course, SMT, where the internal separation project is ongoing and will be ready on around the summertime, as previously communicated. And then the idea is then the Board will evaluate and discuss potential next steps. In this period now, and I come in, is obviously now a good time to get to know the business more and form my own opinions around SMT. And then, 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. Then the corona situation has, of course, emphasized the priorities around execution, savings and efficiency and that's very clear. So next slide, please. On the corona situation, as we have said, Q1 was largely as expected. We have 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 about minus 1% for the quarter, that obviously hides a lot of drama within the quarter and 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 clear second shutdown, if that will happen. So we don't really know. We can just say that China has recovered well for us in the quarter. Then in March, obviously, we had a global escalation of the situation. And 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 had to temporarily close down or more permanently for now reduce the capacity of plants. But 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. And on the supply and distribution, there's been a lot of issues during the quarter. For example, most of our air freight is through passenger traffic, which obviously has been impacted but -- and also, we have had quite elevated sick leaves in many locations that have also made things more complicated to manage. But I think the team has done a tremendous job to manage that. It has 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 significant impact. Then, 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. And the drop in the week was 25% organically year-over-year. Now that was the first week where we saw the impact. So we will, of course, have to wait and see going through April now if -- how the run rate will be going through the quarter. We cannot really comment on April. We think it's not really relevant to compare now these weeks because we have an Easter timing effect. So I think once we were 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. And I think you're probably as suitable as us to try to understand or model that and what kind of impact that will have given our exposure in various segments that you are aware of. So that's what we wanted to say on corona. Now let's go to the next slide, please, and jump into the actual report. We had an order decline of 11% organically. Of course, 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 have had that for some time. And if anything, it was a little bit accentuated at the end of the period in March. Of course, we continue to see the decline in the short-cycle business, SMS, minus 12%. And that also is relevant for SMT. If we take away major orders, SMT, that's minus 9% orders. And then as I mentioned, the drop in SMS at the end of March. This -- 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 an FX impact related to hedges in SMRT that had an 80 basis point impact at group level and 180 basis points in SMRT. That was not something we expected, but obviously, it is part of the results. Then we did also see good savings filtering through, SEK 360 million in the period, in line with what we have said from the announcement last year. The cash flow, SEK 3.1 billion in the period, and we have a strong balance sheet. Gearing is now -- the net gearing is now down to 0.17. And 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 situation softens. Next slide, please. If we look at the market development overall, we 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. On Asia, minus 6%. As I've already said, that if you take China in that, we were actually up 10% for China, overall, driven by SMRT, minus 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, been weak also going into the quarter and then situation has not improved as the corona situation has then 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 3 -- 737 MAX production closure. And 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, minus 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 cover that a little bit when we cover the business areas. Revenues, minus 7% organically driven by SMS, minus 12%; SMRT, minus 5%; SMT, minus 3%. If we would have included the alloy surcharges, they would actually then be down minus 5% in the period. Next slide, please. EBIT development. As I said, pressure primarily from volume decline of minus 7%. If we normalize for the metal prices, would have been 16.6%, reported adjusted was 15.8%. Then I mentioned the FX revaluation and 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. And I think that gives a good indication on more how we have responded to the overall volume drop at the group level. And 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, minus 8% on order, minus 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, also a little bit on crushing and screening. Otherwise, I think also equipment held up fairly well. Aftermarket is largely stable. It's actually down minus 2% in the quarter, but largely stable considering the environment. And then again, we continue to have somewhat protracted lead times in the customer decision process. And again, potentially even slightly then escalated at the end of the quarter. On the margin, 17% this year versus 18% last year, there were a slight decline in absolute adjusted EBIT from the volume growth. But actually, from a margin perspective, they were margin accretive due to good savings and good handling of the volume drop. So this decline is really driven by FX and construction impacts. If you take away this hedge and revaluation impact, operational, they would have been around 19%. Next slide, please. Machining solutions then, minus 12% on both orders and revenues. I think I've talked to most of the dynamics there end of quarter and in China. Margin decline, of course, driven by the volume drop 520 basis points, partially offset then by savings of 210.We also have a negative impact from destocking of around 70 basis points. This is a little bit due to that we sequentially reduced absolute inventory since December, was primarily driven by a bridge effect where we last year actually had restocked or overstocked, so you get a negative bridge effect there versus last year. So this means if you take away that impact, we are down then about 300 basis points on a negative volume growth of 12%, which we think is quite okay for business like SMS, of course, very much helped by the existing savings initiatives. And then we also announced earlier in the quarter the intention to close one of our plants in Germany. Next slide, please. SMT, order intake, minus 14%, minus 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 midterm in that business, meaning in 2021. But that remains to be seen how things evolve in the next quarter or 2. In the short-cycle part of SMT, we see continued decline then in standardized as well as Kanthal. They are minus 9% if we exclude the major orders. Margin down from 10.4% to 9%, primarily driven by volume growth, partly offset by 50 basis points of improvements from the savings. And with that, I'll hand over to Tomas to take us through some of the more detailed financials.

[Tomas Eliasson, Executive VP & CFO]

Thank you, Stefan. And let's immediately move to the next slide and jumping to the financial summary for the first quarter. And if I may draw your attention to the upper right-hand corner, let's start with the top line. Orders down 11%; the revenues, 7% organically, as you have heard. Currency impacted the top line with 2% positively. Structure, minus 0. We have a couple of acquisitions, one in SMS and one in SMRT, adding to the growth, but we also have the Varel divestiture, which happened in early March, March 3, so we're losing a month now of Varel and this will, of course, then continue for 12 months going forward in the bridge.So all in all, minus 9% for orders and 6% for revenues. If we then walk down the income statement, the earnings ended at SEK 3.7 billion, the operating earnings, compared to SEK 4.6 billion a year ago, that's minus 18% and margin of 15.8% compared to 18.3%. We will look at the bridge in a minute here. Finance net, minus SEK 416 million compared to minus 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, just up a little bit in fixed currencies, but given the top line reduction, 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, minus 15%. Next slide, please. Let's look at the bridge. So here, we have the journey from Q1 '19 to Q1 2020. And if we start with the organic development, minus 7%, that's just 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. And structure, well, it is 0. It's a little bit less than 0, but around about 0. So that's from 18.3% to 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 plus 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. But then we had negative effects of SEK 200 million on revaluation of hedges and open items in accounts payable and accounts receivable. And 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 cetera, et cetera. And this happened exactly at the time as the currency starts to go very much up and down. It is, of course, more of a -- just a Q1 situation. Some of it will come back but not all of it. So let's move to the next slide. And 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. And 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. And 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 minus SEK 126 million now, it was minus SEK 168 million a year ago. Minus SEK 126 million, that's in line with the guidance we have for the full year, which is SEK 500 million in interest net.Pension, bank charges, et cetera, are pretty stable, and we'll just continue along these lines. But on the last line here, you can see FX and other asset classes, that's minus SEK 210 million. What we have here are hedges, which do not yet have a corresponding item in the balance sheet. So these are hedges for electricity contracts, raw material purchases and for large orders which haven't materialized yet.And 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 when this is going to end up. And in any case, it is just temporary revaluations, which for accounting reasons, have to show up here in the finance net. But we can give you some help, if you want to model it yourselves. 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 to SEK 500 million. And the FX hedges for large orders, which we have received but we haven't started work on it yet, normally has a balance of around SEK 5 billion.So based on that, you can model depending on where you think the market is going. So next page, please. Let's talk a little 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 which we could charge for that. We have the last item from the Varel divesture, that was a loss of -- not a loss but it was a negative impact of SEK 500 million, et cetera. It's close to SEK 1 billion. Those charges booked as items affecting comparability doesn't all -- are not all tax deductible. So when that happens, the tax rate gets pushed up. So if you adjust for that, you end up on 19.2%. So 19.2%, of course, is a good and low level, but it's not that fun. It's not that good, really. Because what we have in the quarter as well is apart from margins affecting comparability are some inventory valuation movements to a large extent connected to internal profit eliminations, et cetera, which has given us some, let's say, tax income or some tax credits in deferred taxes. So if you take that away because that would not repeat itself, you take that away, you end up with 23.1%, which is more like an underlying run rate for the tax rate this year. The guidance is 23% to 25% and 23.1% is -- it's in the range, even though it's at the lower end of the range. So let's go to the next slide and take a look at some balance sheet items. Working capital slightly up in fixed rates. Look at the right-hand side, you can see that in SMS, it's behaving nicely. SMRT, little bit up for seasonal reasons, and SMT is a little bit more volatile. Next slide, please. Cash flow, not too far from the cash flow of a year ago, SEK 3.1 billion. Next slide, please. And here, we have the net debt slide. And as you can see here now, we end the quarter with a net cash position of SEK 1.4 billion. And 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, that 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 would 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. So the cash situation as such is good. Next slide, please. Now 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 plus SEK 12 million. The metal price in the quarter was SEK 201 million, we guided for SEK 200 million. The bridge effect was SEK 116 million, but in quarter, it was SEK 201 million. The CapEx came in at SEK 0.7 billion. Interest net, SEK 100 million or SEK 126 million, and the tax rate was 23.1%. So 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. Now 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 and translation, which is the only thing we can guide for, we expect plus 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 minus SEK 150 million for Q2. The interest net, we keep at minus 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, 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%. Yes. And with that, I think I will hand over to Stefan again for conclusions and summary.

[Stefan Widing, President, CEO & Director]

Thank you, Tomas. I think it's fair to say now following this quarter is all about managing our near-term challenges as resilient 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. Then we have SEK 1 billion in structural savings, SEK 100 million that we announced in January and then 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 that's necessary. What we will not do, however, is jeopardize the long-term competitive advantage of the group. And 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 has 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, 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 a good technology and know-how that will help us drive growth in longer term. Thank you. That is all, and I hand back to Tomas.

[Tomas Eliasson, Executive VP & CFO]

Yes. Do we have any online questions? Not really. Okay. And then operator, I think we'll move in to the cell phone line. [Operator Instructions] So please, operator.

[Operator]

[Operator Instructions] Our first question comes from the line of Magnus Kruber from UBS.

[Magnus Kruber, Associate Director and Research Analyst]

Magnus from UBS. First, 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?

[Stefan Widing, President, CEO & Director]

I mean we don't know where this will end up. I mean 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 much 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 and anything that we can see or draw any conclusions from in the past couple of weeks. So I think you -- knowing our exposure to various verticals and so on, you can probably model or guess how this will evolve as good as we can.

[Magnus Kruber, Associate Director and Research Analyst]

Absolutely. And the second question on SMRT on the aftermarket side. You mentioned the flat demand, I think, year-over-year. Have you seen any tendency if demand has started to pull back spending here in early Q2 or is it still stable?

[Stefan Widing, President, CEO & Director]

Yes. In Q1, we were largely stable, as we said. I don't have any commentary on Q2 as of now.

[Operator]

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

[Max Yates, Research Analyst]

Just my first question is on the cost savings. So the additional SEK 1.5 billion of temporary savings you announced, how quickly would you expect those to feed through to the P&L? And should we expect that kind of we get 1/3 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.

[Stefan Widing, President, CEO & Director]

I think you -- this is how we have thought about this. We -- 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. So it is reasonable, at least with what we know now, to assume that Q2 is going to be a tough quarter, that's the one side. So we're going to push as hard as we can. On the other hand, of course, the risk, in some cases, may be a slight delay if we talk about April 1 as the benchmark. I can say that some of the measures went into effect fully in April 1 and slightly, maybe even before that, a few days. Then there are others where they also adjust to existing backlog and so on a ramp down as aligned with the business. So there are a little bit different dynamics there. But I think you can assume -- fairly say that it should be around 1/3.

[Max Yates, Research Analyst]

Okay. And maybe just a 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? And kind of knowing what we do now, would you have under produced a little bit more aggressively in Q1, given obviously, sitting here now things spread more quickly than we thought? And would kind of 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?

[Tomas Eliasson, Executive VP & CFO]

We are on the right level in Q1. I mean we have we have the right inventory levels. Not too much, it's not too little. And then, I mean, what's going to happen in Q2, we don't really know. I mean if -- depending on what's going to happen, we just have to adjust but we don't really have any guidance for that.

[Operator]

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

[Klas Henrik Bergelind, Director]

Stefan and Tomas, it's Klas from Citi. A couple of questions, please. First on SMS, and I want to come back to this. If you compare this business with Sandvik Tooling back in the days, inventories have obviously come down. You've taken out fixed costs. A lot of factory closures since 2013. And it's obviously, as you say, it's impossible to comment on volumes ahead. But assuming that we would have a similar volume decline as during the financial crisis, Tomas, could you help us a little bit on likely effect from underabsorption, lower utilization? I think that, that number in 2009 was over SEK 6 billion. I mean given the changes that you've done to the business, one would assume that the impact will be lower this time around. I know it's difficult to comment, but any indication would be great.

[Tomas Eliasson, Executive VP & CFO]

Maybe you can take that one, Stefan.

[Stefan Widing, President, CEO & Director]

Yes. So I mean, I think there's been a lot of good improvement in SMS, obviously, coming in here, at least, I have seen the actions that have been taken in the last years. It's footprint, of course, it's decentralization activities, which have both, I think, have had a positive from a cost perspective, but also now in terms of speed of sort of taking actions in a downturn. And I think what I can see, they have done it well so far. Of course, there's been a delay in these savings. It was structural savings that take a while to filter through. But they are doing what they said that they were going to do. We have a leverage in Q1 of 55% on the operational side, which, again, it's a 3% EBIT growth on a 12% negative volume growth. How things will or would be if things drop even more, I think it's very difficult to predict. I think the 55% in Q1 is as good a guess as anything we can probably give you.

[Klas Henrik Bergelind, Director]

Yes. No. Okay. Makes sense. Then my second and final one is for you Stefan on M&A. Obviously, safeguarding margin and cash flow are the key priorities right now. But when we're through the pains here, and when you start looking to engage more on the M&A front, what is your key takeaway when you look at SMS since joining the group and expanding into industrial software? And when you compare it to what you've done at your previous employer, is through M&A roll up story in CAD/CAM, metrology, so how can we see attractive synergies emerging? I would be interested to hear your reflections so far when you look at SMS.

[Stefan Widing, President, CEO & Director]

Yes. I want to be a little bit cautious. I'm still only 2.5 months into it, not even past the first 90 days. And it's always easy to draw quick or too quick conclusions. I think we should definitely come back to it more during the Capital Markets Day in the fall and so around strategy. But what I can say is, I think overall, the strategy that we have in SMS around expanding a little bit out into the software and the value chain around component manufacturing, I think it's a good strategy. And I think there is merit to it. But I also know we have talked about it for some time, and we see some good movements lately, but we're definitely going to dig further into that. But I see potential there, definitely, exactly what, how big and so on, I don't know. But I think there is merit to the strategy, and there's definitely potential there.

[Operator]

And the next question comes from the line of Gael de-Bray from Deutsche Bank.

[Gael de-Bray]

The first question I have is for Stefan. I know this is -- well, that's probably a follow-up on the earlier questions. These are exceptional times, and you didn't get a lot of time. But fundamentally, what has surprised you the most so far at Sandvik in both positive and negative terms? So that's question number one. And 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 feel that there could be some potential supply chain challenges?

[Stefan Widing, President, CEO & Director]

Yes. Okay. I'll start with the last one, I think it's 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. And then 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. Then of course, we had a drop at the very last week of March. So I think March overall, in that sense, 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 say 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, but not in one role. They have been in different roles, different geographies, different business areas, different functions. So they have really made a career in the company. And I think that's really positive. It's really strong culture and a lot of dedication that, I mean, in a situation like we are now, that can make a big difference. People go the extra mile despite traveling times and also health-related challenges. On the negative side, I don't know. I'll come back to that when I had at least 90 days to think about it.

[Operator]

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

[Andreas Juhani Koski, Analyst]

So 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 business in SMRT?

[Stefan Widing, President, CEO & Director]

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. But there was no dramatic difference.

[Andreas Juhani Koski, Analyst]

Okay. So you didn't see close to a double-digit drop in the aftermarket business at the end of March or something like that?

[Stefan Widing, President, CEO & Director]

No.

[Andreas Juhani Koski, Analyst]

No. And then the second question is on SMT. So 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. So has that ambition changed, new CEO, or is that still the clear ambition?

[Stefan Widing, President, CEO & Director]

I don't want to comment on what the Board's ambition was back then. But I can tell you, to my knowledge, nothing has changed, that I can say. We are proceeding according to plan and then we will discuss potential next steps when the internal separation is done later this year.

[Andreas Juhani Koski, Analyst]

Okay. So the ambition is to separately list it?

[Stefan Widing, President, CEO & Director]

I mean I think what -- 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. Then, of course, you don't start a process like this if you don't have a certain intention. But there is a decision point and a discussion to be had once the internal separation is done.

[Operator]

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

[Edward Perry, Analyst]

Yes. Firstly, just a 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 being maintained through the first weeks of April? And is the ramp-up in customer activity still as strong as your own ramp-up in production?

[Stefan Widing, President, CEO & Director]

Yes. 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. We can see what we are doing.

[Edward Perry, Analyst]

Okay. And then secondly, on the mining side, I mean we're seeing cuts to 2020 CapEx and production start to materialize over the last few weeks. But from your own conversations with mining customers, what is your sense that these budgets will be rolled into and added back to 2021 budgets? Or do you feel spending time lines will simply be pushed further away into the next years?

[Stefan Widing, President, CEO & Director]

Sorry, I have to give a vague answer on that as well. I mean we see hesitations definitely. We have seen it for a while and it has -- if anything, they strengthened at the end of the quarter. And yes, there has been announced cuts in the CapEx, whether that is just pushouts, postponed investments or, let's say, that they are gone, I don't really -- I can't really answer that on behalf of them.

[Tomas Eliasson, Executive VP & CFO]

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 maybe cancel it, so you can't really say right now.

[Operator]

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

[Andrew J. Wilson, Analyst]

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. I mean do we have sort of the shorter time lever to pull? Obviously, you've got the bigger program. But just -- so 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 sort of how you're thinking about that.

[Stefan Widing, President, CEO & Director]

I mean the short workweek programs we are using, I mean, I think you are aware of how they work in most regions, Germany, Italy 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. But of course, it's not that we can vary week over week. But you can assume that we can just -- I would say, on a monthly basis, we have to be aligned with unions and so on, but 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.

[Andrew J. Wilson, Analyst]

That's helpful. Are there any particular regions which are proving more difficult to kind of implement that sort of flexibility? Or is it -- are you feeling pretty good about the flexibility all over the business?

[Stefan Widing, President, CEO & Director]

No. I think I mean, we -- if you look at where we have production and employees, Sweden, Finland have these programs, Germany, Italy. There is not really that much flexibility than in countries like India and China, U.S., obviously, a flexible labor market, so it varies. But overall, I have to say, we are quite happy with the overall, let's say, impact we can have from these programs, which is, of course, only the labor part, then you have fixed assets depreciation and a lot of other fixed costs. But on the labor side, there is some flexibility.

[Andrew J. Wilson, Analyst]

That's helpful. And then just on to Tomas, please. I guess following up a little bit on an earlier question. But thinking about working capital, if I kind of look through previous downturns at Sandvik, I can see that generally, albeit with a bit of a lag, but 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 might see working capital develop over the next couple of quarters and sort of what changes or processes you're sort of putting in place that help drive that?

[Tomas Eliasson, Executive VP & CFO]

Well, I can only give you a generic answer, really. But of course, I mean the -- of course, revenues were down 7% in the first quarter. So nothing much has really happened. But of course, I mean, going forward, if -- I mean, 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. It has -- that's how it has worked previously, and this is how it will work in the future. I mean 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.

[Operator]

And the next question comes from the line of Peter Testa from One Investments.

[Peter Testa, Analyst]

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.

[Tomas Eliasson, Executive VP & CFO]

Yes. And a big part of the SEK 1.5 billion is 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. I mean 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, very difficult, but they have to do some assumptions in their modeling. And 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. So in that sense, there is further potential, but not sort of in the short term but more at the tail end of the year in that case.

[Peter Testa, Analyst]

Okay. And the other question was just most industrial companies are talking about restraining CapEx and then some industries cutting production rates. When you think about what you need to do with Sandvik through Q2 to kind of prepare yourself for these set of customer responses in later in the year, what sort of steps do you think you need to take? Where are you focusing to kind of prepare the organization for this kind of customer demand environment in H2?

[Stefan Widing, President, CEO & Director]

Well, I think that's what we have announced. I think we -- even though we announced our activities end of March before we actually saw the drop in SMS, we were -- of course, we're expecting this to come in a way. So 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. So I feel we have the initiatives we need with the knowledge we have at -- right now.

[Peter Testa, Analyst]

Okay. So you don't feel the need to address on shift patterns or take account on working capital sort of bringing as a percentage of sales more in line where it was a year ago and so on?

[Stefan Widing, President, CEO & Director]

Well, I mean shift patterns and so on, that is what we are adjusting now, that's included sort of in the temporary labor activities. As Tomas 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 uptick comes so that's the constant balance we are trying to manage here.

[Operator]

The last question comes from the line of Madhvendra Singh from Bank of America.

[Madhvendra Singh, Research Analyst]

Just following up on trends in Asia in second quarter. In first quarter, Asia was actually the source of the virus outbreak. So obviously, the impact was more there. But in second quarter, given that rest of the world actually is set in lockdown, what kind of impact are you seeing in Asia because of that? And secondly, on the SMRT side, if you could talk about the trends on the services, are you facing difficulties in accessing customers like the mines and the premises for the services. And especially in many of the mining markets, with the mines workloads, were you able to use any of those shutdown times for doing the essential maintenance or whether you were able to do any maintenance at all during that period, using that downtime at all?

[Stefan Widing, President, CEO & Director]

If I start with the SMRT question. As I said earlier, we -- there were some disturbances, especially in March related to travel, logistics, access and so on. We don't think it has a material impact, but 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, but I guess there's a reason for why they call it care and maintenance, when they go into this production stoppage. I cannot really comment on how it would impact our service numbers. And then in terms of Asia, in Q2, as I said, we don't really want to give any forecast for Q2 at this point.

[Tomas Eliasson, Executive VP & CFO]

Okay. Do you want to say some final words, Stefan, in summary and conclusion?

[Stefan Widing, President, CEO & Director]

No. I'll just end sort of the way I started. We feel this was a quarter that was largely in line with our expectations, although the environment is challenging. Then, of course, we are prepared now for a tough period ahead, as was indicated by the developments in the very last week of March. But we have a solid financial position, and we are taking the actions we think are necessary. Thank you.

[Tomas Eliasson, Executive VP & CFO]

Okay. Thank you.