Earnings Call: Q1 2017

Apr 25, 2017

Good morning, everyone, and welcome to the presentation of the Volvo Group's earnings report for the first quarter. My name is Henry Stenson. I will be your moderator today, and we will start with a presentation by our President and CEO, Martin Lundstedt, and our CFO, Jan Gurander. After that, we will, as normal, have a Q&A session. With that, the floor is yours, Martin. Thank you, Henry. Also from my side, good morning and welcome to this first quarter reporting of 2017. As a matter of fact, it's interesting to see the film here also, where I had a chance to be a couple of days at Conexpo. That is, as you know, one of the biggest mining and construction shows. What is happening today with internet of things that everyone is talking about is also when you have this badge for coming into the exhibition, you can follow exactly the traffic for each and everyone participating. Just as an anecdote, the first two days, given where we were in Las Vegas, we are pretty strong in North America, but maybe not the strongest when it comes to yellow machinery. When it comes to traffic, we had the highest traffic of visitors during the first two days. I think that was encouraging in itself, maybe also a sign of today's presentation. Quarter one, in summary, was obviously a good quarter, as you have seen. It also continues, and I think that is important to state, to follow the pattern that we have seen over a good number of quarters now in a row. We are with that obviously pleased, but still not satisfied about what we still see that we can do. The quarter showed that we are getting more and more of the things in place when it comes to our operational activities and a better alignment in the different value chains. With that, leverage is also coming. We continue to focus in our organizations on day-to-day improvements in our core segments and markets. The organization, I would like to start with that, is doing a very good and dedicated job, not at least when it comes to flexibility and service business. I'm pleased to see that it's also coming through in the financial figures. Both the group sales and profitability increased, as you have seen, 8% when it comes to net sales. Half of it was currency. Operating margin adjusted and non-adjusted, amounting to 9.1%, giving a total operating income of 7 billion SEK. Group Trucks increased operating margin from 7.8% to 9.9% on 4% lower volumes. Also that we have seen over the last quarters also high volatility when it comes to volume swings between regions. That is also showing good flexibility here. Volvo Construction Equipment improved operating margin from 2.7% to 10%, thanks to focused internal transformation activities together with a market recovery in important regions. Regarding the deliveries, trucks, as I said, came in 4% lower than the same quarter last year. There were big shifts between different regions. Europe up 5%. Positive signs both for Renault and Volvo and both for heavy and medium duty. Asia, plus 8%, and Africa, Oceania, 7%, were strong. South America flat on low levels. If something, we see a little bit of an uptick in the order intake, but still early days there. North America down with 34% in shipments. Mack was down with 27%, and Volvo with 40%, reflecting also their strength in different segments where vocational has been holding up better, as you have heard. Volvo Construction Equipment showed good uptake in deliveries following the strong order intake that we had in quarter 4, 34% plus. We are of course pleased to see that our production and operational organization has been able to do that production increase in a good way. We have actually translated the orders into deliveries here. Strong momentum both for Volvo and the SDLG brands. Volvo with 32% in shipments and SDLG with 30%. Across regions also. Service sales continued to increase. In quarter 1, it was 6% up, if we exclude FX. Revenue increased from SEK 16.1 billion to SEK 18.1 billion, an uptick with SEK 2 billion. Main explanations are coming from increased focus of the service business. We see that clearly also with our brand and business area-based organizations, but also with high utilization of the customer's fleet. It was encouraging, obviously, to see that it's coming through in all different business areas. Services will continue to be one of the cornerstones also in the future, as the untapped potential is still on a considerable level in many segments and markets. When we move in then to the truck side, we had a good demand level in Europe, Japan, and China. We see now also that orders are picking up in North America after the stock correction for new trucks that took place during the whole of 2016 and a little bit in the beginning of 2016. Now we see that the new trucks stock levels are on a normal level. We also had a number of important product launches during the quarter, both for emerging markets in Middle East, in Southeast Asia and Africa, and also for our main markets for UD in Japan and for Volvo Trucks in North America. Here I can talk forever, but I will try to keep it short. Here you see the It's fantastic. It's fantastic. The UD Quon, that is opening for the advanced logistical markets, Japan, Australia, South Africa, full-fledged range, heavy duty, all new. Cab comes with all the latest safety features, ergonomy. We have a new powertrain, a driveline, 5% better fuel economy, and still we had leading positions before that in Japan, not at least. More than 200 kilos lighter also for productivity reasons, not at least in weight sensitive markets in Japan. This will be a very important platform for our Japanese endeavor for the coming years here in the heavy-duty. Very pleased with introduction, good customer feedback. Big project and well invested based on our modular cost system, common architecture, shared technology, where we actually can then leverage different components, parts, technologies, and services from the whole group. Also during the quarter, UD Trucks launched the new UD Croner. That is a medium-duty platform for primarily emerging markets. As I said, Southeast Asia, Middle East, Africa. Comes with 21 basic applications and configurations, and on top of that, obviously, you can tailor-make the product. Very important complement now to the UD Quester that was launched a couple of years ago. We also have the broad range that our dealers need to have in order to be competitive with other, not at least Japanese players in those regions. Based also on the cost systems, but obviously also with different performance steps in relation to the mature markets. We are keeping the right value, depending on average mileage, road conditions, infrastructure, and also how the complete cost picture looks for our customers. It's a very strong offering. Good feedback also. We have the global launch now in Southeast Asia, positive feedback here. We have started to take orders also on this range. A beauty, and when you drive it, you don't want to stop. That's a good sign because they have to work. Finally, also in North America, we launched a new VNR range for regional haulage for Volvo Trucks. It has been a need, you can say, in this range for us to upgrade, and we have the most modern platform now. State-of-the-art aerodynamics, very important, obviously, for regional haulers because you have this combination between highway applications and at the same time really being smart and fitted for use in urban areas. Best-in-class maneuverability, comes with a full-fledged uptime services, new driveline, up to 3.5% better fuel economy, to mention some of the parameters. Also looking forward to that. We were launching that actually last week in North America with also big interest. Three big launches on the truck side here. Very encouraging. As I said, based now also on the modular platform, that is also of course very important moving forward. When it comes to the market estimates, we are more or less confirming what we said in January. 300,000 levels, we are sticking to the forecast that we put for 2017 for Europe. We are also sticking to the forecast for North America, 250,000. The initiated person can ask themselves, you have seen the order uptick, et cetera, but you should also remember that the shipments were low in quarter one. It's always a little bit of, so to speak, delay when it comes to the retail shipment. Brazil, we are sticking also to the low level of 30,000, even though that we are starting to see a little bit uptick mainly in resources industry. What we are upgrading is the total market for heavy- and medium-duty in China, up to 1 million from previous forecast of 900,000. A little bit downgrade in India, and that is related to the recent introduction of BS4 standards, more or less Euro 4 emission standards, as from 1st of April. That in combination with the postponement of the GST tax reform, that is to make, so to speak, trade easier between the different states in India, postponed probably to the end of summer. We think that will a little bit halt the market or take down the total market. Japan sticks with a good level of 95,000. When it comes to market shares in North America, in relation to last year, we saw an improvement, even though that we are not happy, obviously, with the market share levels of Volvo primarily. We should see higher levels there, but the main explanation is obviously that the on-road segments where Volvo has a strong position is relatively weaker than vocational segments. Also that we have been reluctant to participate in some of the bigger fleet deals, actually, for price discipline reasons. Obviously, the launch now of the VNR line will support also the development for Volvo. We see good development on Mack, as you can see, a little bit more than one percentage point uptick, primarily driven by then the stronger vocational markets. Europe also, you can say that we are keeping a historically high level on Volvo, a little bit of loss there, 0.3 percentage points since early days, still through February. We see also then a similar uptick from Renault, 0.3 percentage points. What you can say, what is positive for us, what we see with Renault is that we have a better mix, actually, between retail and fleet customers. I think the organization is doing a good job here. Japan, more or less a similar start. We have had lately a strong order intake for UD, we are aiming for taking back some of the lost market shares in Japan that we have seen during the recent years here. We have a strong offering, as I just showed, a big interest, and a strong order book. Brazil, losing out a little bit, very small market obviously, primarily related to our price increases in the medium or semi pesado, as you say in Brazil, the semi-heavy segment. The VM line that we increased prices in order to come back to a reasonable profitability. We're losing out market share, but that's the only way to go anyhow. Also that we didn't participate in some of the bigger deals also on the heavy segments. In all fairness, we saw some small losses. In a relatively small market, it's more about also keeping price discipline for the future and to be credible with your customers. The total picture, both for South Africa and Australia, continues to be good, obviously. When it comes to order and deliveries, as you can see here, we are seeing a positive book-to-bill ratios in all major markets. North America, to start with, positive after a long period of lower activity and de-stocking. In the retail part, orders are showing an uptick, 27% up, whereas delivery is still down, continue to drop to 34%. I have to say that our North American organization, through this cycle of the downturn in 2016 and also in the beginning of this year, has managed that in a very good way. We are happy to see the flexibility. What we are doing now, because we had a pretty considerable number of stop days, not least for Volvo in North America during quarter 1. Now we have been taking out the planned stop days, so we will run actually normal production in quarter 2 here. Europe continued with good order intake, up with 9%, and also deliveries up with 5%. As I said before, development both for Volvo and Renault and heavy and medium-duty. South America, mainly then related to better activities both in mining and agriculture, orders were up 29%, and Asia strong also with 31%. All in all, positive development, and we are closely now adjusting our build rates. We are adjusting them up a little bit then in Europe in order to cope with a better situation, while we are taking out stop days in North America. At the same time, as all of you know, there are geopolitical uncertainties. We need also to keep the high level of flexibility that we have had so far and continue to have that. That we are planning for, obviously. Construction equipment. We are doing a good quarter here. As I already said in the introduction, good combination of execution in our transformation activities that we have been communicating. We are focusing a lot of our efforts into transforming the company. But also combined with an improved market situation, gave good leverage for us. Both deliveries and orders were up with 34%. As I already said, it is satisfying to see how the industrial system of Volvo Construction Equipment has been able to cope with a higher order intake and really got that into deliveries in quarter 1. This is, for me, yet another good example of volume flexibility and that the cooperation that we have been reinforcing in the value chain is working well. It is more fun to work like that also, by the way, so it is just a positive spin-off. As I also started to say, the Conexpo fair was a big success. Lots of fun meeting a lot of customers and some major introductions also. This is, for you that are yellow machinery freaks, this is the L350H, the biggest wheel loader, manifesting our leading position in wheel loader segment coming with all type of new features and very well received. Better comfort, better telematics system, new powertrain, better fuel economy, et cetera. Really manifesting the strong position that we already have. We are also launching now ActiveCare Direct in North America that we have had in place in Europe, for example, where we have a real-time following from the telematics system together with the customers, and that is also very important. We have seen how important that has been to take market shares in Europe, and the demand for this type of solution is increasing big time in order to increase productivity. That is uptime-related, but also how you plan your activities between different functions, for example, on a construction site. Market environment. Generally, as we already said in January, the upward trend continues in mostly all regions, and also in relation to previous forecast for some of the major regions. In Europe, the market continued positively with an uptick of 17% through February, we are now guiding for +5% to +15% in relation to what we said in January, that was 0%-10%. In China, we are changing. We said, I think it was 5%-15% in January. Now we are guiding from 20%-30%. You have seen also that it was a very strong start of the year mainly in excavators, 48% up through March. Asia, excluding China, we see also a strong development, for example, in Korea, India, and with the mining uptick also in Indonesia. Order and deliveries here. Net order intake, as I said, strong increase, 34% in relation to same quarter last year, driven by all regions. Europe up with 28% in order, broad-based as regards countries, particularly strong for larger Volvo-branded products. That is obviously good news. That is our core segments and where we have had a positive development over the last quarters. North America up with 14%, mainly larger machines and road construction. In Asia, including China, orders were up 29%, driven by strong order intake both for Volvo and SDLG in the Chinese markets, but also in several other countries, as I said, Korea, Indonesia, India, to mention a few. Buses. Market situation gave a mixed picture. If you start with Europe, a little bit weaker. At the same time, positive to see the bigger tender interest around electric and electric hybrid solutions, where we have a strong position. South America continuing very low levels, Asia, then in particular, Far East and Oceania, positive development, North America showed good levels both for coaches and transit buses. Mexico, after the standstill related to the election, has shown early signs of recovery. Finally, order intake here was up 34%, that was supported by many regions. We also introduced a number of very important product news here. A new chassis for Asian markets with a Volvo 8-liter powertrain, that we took first bigger order on electric hybrid to Belgium, 90 units, with 12 charging station, meaning that we are getting more and more of a solution provider player in the urban segments in buses. Penta continuing its positive momentum. Strong sales growth across all segments. What is positive is to see also in particular in the industrial off-road segments, where we have put a lot of focus to penetrate better than we have done historically. Orders, as well as deliveries, increased with 12%. In Volvo Penta, we introduced a number of new products and solutions. For example, for the off-road that we are concentrating a lot, new engines to meet the new European Stage V emission levels. In February, we introduced a new power generation, 16 liter, that has the highest power density in its class, just to manifesting the strong position of Volvo Penta. As you also will hear a little bit from Jan, we are continuing to invest quite heavily in R&D in Volvo Penta, given the growth opportunities that we have taken already, but also that we are aiming for in the future. That is market orientation about where we are standing. With that, I will leave the word to Jan Gurander to go through the financial figures. Please, Jan. Thank you, Martin. Thank you. Sales-wise in this quarter, we are coming up from a little bit short of SEK 72 billion last year, up to SEK 77.5 billion. It's 8% up, 4% if we excluded the currency. Currency is at SEK 3.3 billion approximately. You can see when it comes to the different regions, it is of course mirroring what Martin said before, coming strong in Europe in terms of sales, while North America year-over-year is down with almost SEK 2.5 billion. For the other parts of the world, we see sales increases all over the place. You can say only North America where we have the downturn. The adjusted operating income going from SEK 4.5 billion up to SEK 7 billion. Last year, there was an adjustment. The EBIT unadjusted was SEK 800 million higher, a little bit more than that, due to the fact that we sold the external IT business in the first quarter last year. The adjusted goes from SEK 4.5 billion to SEK 7 billion. The SEK 7 billion is a 9.1% EBIT margin compared to just above 6% last year. We are, you can see, increasing in all business areas all over the place. I think that is always a good sign when we see that all the business areas are improving. That shows that the ways of working that we have in the Group, that we are spreading that all over the Group, that it gives results as well. Fairly limited results come, or positive effects on the currency side, yes, short of SEK 300 billion, comes mainly from revaluations on the balance sheet. Looking for the whole year, I think we said before that we anticipate half a billion approximately when it comes to the transaction flows for this year. We think that we are approximately maybe a little bit more on that when we are at the end of the first quarter than when we were at the end of last year, but approximately the same level. If we look at what is contributing to the results, you can see that the positive effects comes out of the gross income at SEK 3.2 billion. We can see that cash R&D, we keep that on more or less the same level as last year. We have the effect of the capitalization and amortization, this bookkeeping effect. We have a negative almost SEK 400 million here in the first quarter year-over-year. What we have said for this year as a whole, the forecast is that somewhere between SEK 1 billion-SEK 1.5 billion, we will amortize more than what we will capitalize this year. That is the same as we said in the last quarterly report. Selling expenses is SEK 400 million higher. That is mainly related to currency in that one. There also is a little bit of an underlying higher level that we have here, partly related to that we now have the different brand organization that we have established, also that we put more, as we say, feet on the street, actually, to take care of the good markets out there. It is important to distinguish between good cost and bad cost. In the past, maybe we have a little bit too much of the bad cost. This is good cost that we put in right now to take care of the developments that we see in the market. On the positive side, good when it comes to service business, 6% currency adjusted, 12% with the currency. That is, of course, improving our P&L. Construction Equipment, big contributor this quarter, going from 2.5% up to 10% in EBIT margin. When it comes to the market mix as well, volumes in Europe and in a well-loaded industrial systems are good from a market mix point of view compared to the volumes that we had last year in Europe. Even though they were not bad either, comparable, it is actually better. Of course, on the negative side, we see the lower volumes in North America and this accounting effect that we have from R&D. Cash flow was a positive SEK 1.5 billion this year. This is still an area that we are maybe not 100% satisfied. You can see that we have what we have said before when it comes to property, plant, equipment. We're keeping that on a stable level as it should be. When it comes to the working capital, we have one effect from the actual payment dates. We had last year, actually, more payment dates in the first quarter than what we had this year to our suppliers, and that's why the trade payables is actually helping us a little bit this quarter. Accounts receivable is pretty okay. Inventory situation is the area where we still need to focus quite a bit on. We have a higher inventory situation this year compared to what we had last year. It is partly seasonal. Of course, also now when we grow our activities in Europe, where we have a bigger part of the value chain as well. This is really an area that we need to have continuous strong focus on going forward. Looking into different business areas, on the truck side, as Martin said before, when it comes to the heavy-duty and medium-duty trucks, we are down in volumes with 4%. We are then down also in terms of sales with 2% when we currency adjust. With the currency, we are positive with 3%. More or less, you can say flat or down on volumes. This is then when we see then the results going from SEK 3.7 billion to SEK 4.9 billion, an improvement from 7.8%-9.9% in EBIT margin. Here we see that service sales is a little bit the same story as we have on the group level, of course, since trucks is so big. It is the service sales. It's the market mix that we have. Also, the earnings in our JVs are swinging actually a bit compared to one year ago. It is coming both from Dongfeng, but also from Eicher, mainly from Dongfeng. Last year, we had a little bit of a difficult first quarter in Dongfeng. Actually lost a little bit of money. Earnings are coming back there. We are positive again, and I think that gives approximately SEK 400 million in swing in earnings compared to one year before. We also have an improvement in terms of quality cost compared to one year. You remember we talked about the first quarter last year where we had, amongst others, recall campaigns in North America and so on, and that we don't have in the first quarter this year. Otherwise, as I said, on the group level, it's the lower volumes in North America and the capitalization of R&D. When we take construction equipment, 30% increase of sales. If we take out the currency effect, it's 25% increase of sales. I think just worth to repeat what Martin said before. I think the ability that Volvo CE is showing right now to turn all the intake that we had in the latter part of last year, mainly in the fourth quarter, into production and also realize sales with such a short period of time, I think that's actually quite impressive. We see also fairly good when it comes to the market mix, Volvo, SDLG more or less growing at the same pace. Compact machines a little bit more than the heavy machines, but nevertheless, 27% increase in the heavy machines. This 27% is, of course, important for our profitability. Then when we come to results going from SEK 341 million last year up to SEK 1.6 billion, 2.7% to 10% in EBIT margin. We see that, of course, higher sales volumes. We had, of course, a great leverage into our industrial system with this increase in sales. We also see that the internal measurements are giving effect. Just to mention, the one that has had the biggest effect is the material cost, actually, in the first quarter last year compared to the first quarter last year. We see that we had last year also credit losses in China of SEK 150 million. This quarter, we did not book any further provisions for credit losses, and I think it's the second quarter in a row that we do not do that. I would say that the situation in terms of credit losses is stabilizing. I think there is still some uncertainty out there, but as I said, two quarters in a row without any further bookings of provisions for that. Also we had in the first quarter, just for visibility, we had some costs related to the right sizing of the R&D organization, a little bit more than SEK 100 million. As you remember, this is something that will give us annual cost saving of somewhere between SEK 400 million and SEK 500 million. Full effect next year, maybe half of that this year. All in all, a strong result from construction equipment. Buses, 10% down in terms of deliveries. Then we see that we have anyway, the sales is up 3%, currency adjusted. The reason for that is that we have pretty good product mix, selling less of chassis and more fully built buses with a higher value content. That's the main reason for that. We can see that we are, in terms of market mix also then affecting our results. We have also here a good service development, and you can see currency adjusted is a positive of 9%. So it's strong contribution here. Then we are at approximately 2% in EBIT margin, and here we had a slight negative currency effect on the bus side. Volvo Penta continue to deliver on result, increasing from SEK 366 million to SEK 419 million. EBIT margin wise, more or less the same level as last year, 15.5%. We see also here a good development in terms of service sales, 12% up currency adjusted. So that is the strong part. We see here that we have, when it comes to the R&D cost, as Martin mentioned, right now, I think we are delivering very good on the strategy to focus. It's a little bit simplified, not only on marine gas, but also then into the industrial segments on off-road. That is really starting to pay off, actually. So we can say the segments mix is changing quite a bit now into a favorable position from that point of view. Financial services, when it comes to new financing, you can say a little bit down compared to last year or on a stable level. We have increase in the operating margin from just short of SEK 500 million up to SEK 530 million, and the return on equity continue to increase up to 13.8%. What we see here is that when it comes to the quality of the credit portfolio, very good in Europe right now. North America, despite the downturn, managed well. We are still working, of course, Latin America. We make money in our finance company in South America, despite the fact that we have a very tough market in Brazil. You can see increased competition from different kind of leasing companies, financial institutions. It's a lot of money out there, so it's a little bit difficult to keep the penetration levels. All in all, a good and stable result in financial services. With that, Martin, back on stage. Coming up to support you again. Yeah, exactly. Thank you. I think we have done the summary already. Maybe just a couple of comments also on the strategy and the way forward. We have been communicating the brand-based organization, more centralized P&Ls, and we see how that is coming through, actually. I think that is a very important effect that I just want to conclude. Given also better opportunities as we see to meet these different swings that we have seen in demands between different regions, use the regional value chains that we have, and also to concentrate on the service business. All in all, I just again would like to say, I think the organization has done a very good and strong quarter one here. At the same time, geopolitical situation, a lot of uncertainties, keeping high flexibility, concentrate on the day-to-day improvements, continuous improvement, excel on the basics is our mantra that we are working with and bringing, so to speak, the business into the right levels of the organization. I think we will conclude by saying that, and open up for questions, Henry. Very good. Thank you very much, Martin and Jan. We will start with a few questions in this room, we'll go over to the telephone conference, see if we can balance that. Please remember to mention who you are when you start your question. We start in this end. Hampus Engellau, Handelsbanken. I have three questions. Starting off with the launches, could you talk a little bit about the common architecture between UD Trucks and Volvo, and maybe on Croner and Quester, if there's any further change to that going forward? Second, related to that question is launch cost, something that Volvo previously has highlighted. Are there any significant launch costs during the second quarter? Last question is more on speculative basis, but we've seen contracting volumes for trucks for quite some time, we continue to see rising margins, quite high margins. How should we think of operating leverage in the group when volumes turn up again? Thanks. Yeah. To start with the launches, obviously what we are continuing to do now, historically we have been, but over the last 10 years, you can say, from mid-last decade, we have gradually getting our act together when it comes to powertrain. What we see now is also that we are leveraging more and more of the common architecture also on the chassis side. Not least that we have a modular pattern on the frames. That sounds like a small thing, but it's a big thing when it comes to really sharing different type of components and parts and being able also to decide, not least for example, emerging products like UD Croner. When that is gradually upgraded to more advanced logistics, you can also change, so to speak, the component content accordingly. We have been very disciplined in working with not only the powertrain interfaces, but also the cab and the frame interfaces. That obviously will continue to give good effect, both when it comes to offering the broad range, but also to leverage the joint ventures also, because when it comes to Quester and Croner, they are also working with interfaces to Dongfeng and Aiways also, so we can use that in a good way. When it comes to Quon, higher content now obviously of shared technology, and that is based on the common architecture. What we have now in technology is a guardian angel organization if I put it like that, and that is the cost organization when it comes to being disciplined around mainly the standardized interfaces. Launch costs will not be disclosed separately because we have a little bit changed the strategy to make it pretty down to earth. That is the answer on that. On the last one, yes, I think you should think like this, Humbert, that what you see is obviously our ability to When you say lower volumes 4%, that's true, but that's true on average, and since average is the mother of nothing, we need to look into the different regions. I think what we have shown with the downturn in, just take Volvo, for example, in North America, down 40% in volumes in quarter one, and still we are, so to speak, being in okay black. That should not have been the case. Our ability to really do that in a good way, both on the hardware, but also a better platform now when it comes to the service business and our proprietary. As a matter of fact, what you say is, if you look into the European system, we see now with the capacity utilization, stability, working closely together, that we are getting leverage also from that, and that is part of the explanation that Jan said also, for example, for Europe and also for international. That's the reason why when we are doing the volume planning, we are really making sure that it is the regions and the whole value chain doing that together and putting, so to speak, the positive pressure that they are following it together and making handshake between operations, purchasing, production, sales, and the different market companies. That is also giving effect in our volume planning process. That's the key for leverage, basically. Very good. We have the next one here. Thank you, Erik. Olav, Nordea. I have three questions. The first one is on services and the strong day. Is there a specific working day effect you would like to highlight in that 6%, given that it's relatively European-centric? Second question is on the positive mix in trucks that you continue to highlight with strength in Europe. I'm guessing based on orders now in North America coming back, the mix at least will shift. Will that mean a significant or material negative mix eventually? The third question is on price increases, what you've done or planning to do to offset material cost increases. Thank you. In terms of service when it comes to, I think we have one or two more working days in the first quarter this year compared to what it was last year, a little bit on average over the globe. You had the Easter holiday in the first quarter last year. Now we have it in the second quarter, so it's a small effect of that one. When it comes to price increases, if you take Europe, I think we have discussed that a couple of times. If you really see the price realization, I think it has been more flat than expected given the strong market, actually. Obviously, that is something that we are working on to see what we can do in realization. When it comes to the material effect, or the purchasing of the raw material, there we are more working on the cost side to see, okay, how can we actually compensate the raw material with the commercial activities and smarter solutions, not only to press our suppliers, but come with smarter solution together with them, so to speak. We are trying to offset that more on the cost side, so we are not, so to speak, diluting our commercial top line, so to speak, with that, because then it's a bad excuse of just having a wash. When it comes to the regional mix, I think the industrial system in North America will be quite good if we get more volumes into that. I think that's the focus that we should have. The mix effect is kind of a mathematical thing that you measure. Take it as a positive if we get volumes into North America rather than anything else. Leverage, of course, is given the stop dates that we've had this. Yeah. Very good. If anything. We continue. Thanks, Björn, Danske Bank. Three questions. If you can shed some more light on the Asian truck JVs. It looks like it's having a more and more significant impact, and if there are any Where you are in that process and how we should look upon that going forward. Second question on service sales, you're talking about untapped potential, do you also see that in Europe in some way to drive that further? It's more of a mature market, of course. Then again on pricing, with the rest of the world, to a large extent, of course, sourced out of Europe, don't you believe one could expect a more positive price environment as capacity utilizations start to improve in the European system further? Thanks. If I start with the last one, I do agree because when it comes to the international markets, obviously going strong as well. When it comes to the European truck manufacturers, generally speaking, obviously a big part of the international volumes, except for North and South America, is coming from the European production system. That will further put, so to speak, pressure on the total capacity utilization, which should at least in theory be a good sign. As I said, we are working on trying to realize that opportunity. It has been pretty hard to see any realization in all fairness. In theory, you are correct, Björnar. When it comes to the services, also for Europe, I think that goes for all segments. One of the key drivers in Europe for us is obviously that we have seen a better penetration also in, for example, the construction segment, for Volvo, in some of the key markets. We have a very strong offering, but it has been historically underperforming in some of the markets when it comes to market shares. That we also know, and you know it also that we have a good opportunity when it comes to service revenues into this because you have first and foremost, the first owner maybe 6 years-7 years instead of 3 years-4 years. Then also having the good habit of actually strolling around the workshop in a better way. It's easier to serve from that perspective and less focus on their own workshop. That is one example of how we are driving it. In total, we see a trend also that outsourcing from the fleets continues when it comes to their own workshop operations. They want to concentrate on their core business. There are further opportunities in that area as well. Obviously when it comes to the service penetration, relatively speaking, it's much higher already because we have the contract penetration that is much higher in Europe than in other markets, but we are working on that as well. What was the final, Joint ventures. Joint ventures. Would you like to say something more? Yes? Okay. We do like that. I think the swing on the Eicher is the long established joint venture. I mean, that's pretty stable, actually. That's not where you see the big swing in the results, actually. It's mainly coming from Dongfeng Commercial Vehicles. When we go back to 2015, which was, we acquired a company or 45% of the company on the 1st of January. That was the year when the market went down with, if I remember correctly, 27% and then came into loss-making figures. A lot of internal work was there actually to improve the profitability, take out cost. That effect you saw gradually coming through in 2016, actually. Dongfeng Commercial Vehicles made money in the whole of 2016, but the start was tough in 2016. I think we are kind of struggling to come back to the levels of profitability that that company had when we acquired it. I think we are on a good way to do that. Also, if you look upon the markets, 1 million vehicles this year, it's a little bit coming back to the volumes that it had when we acquired it as well. I think that's the main reason. A lot of hard work internally, adjusting the cost base, securing also the quality of the business that we do there, not necessarily always go for market share, but also a little bit like we behave in Europe and the rest of the world, looking into having a good gross margin on the vehicles we sell rather than chasing against the market shares and so on. With this market, I think it can actually continue to be pretty good result in DFCV this year as well. I mean, we have also concluded a number of important component contracts and cooperations. I think these type of activities is also building a lot of trust and partnership between the parties, because when you have these type of activities, you must spend a lot of time to build trust and to make sure that the two parties are actually feeling that the contribution is coming from both. Here, I think during the last year, Jan, both you and me and a lot of our senior executives have been working together with Dongfeng senior management. There I see a lot of good progress also when it comes to building a strong relationship build on, based on commercial merits for the two companies, because that's the only way in the long run. I normally say that, if you have 45%, I mean, you are not in control. I mean, I think experience tells you that you can have 0, 20, 40, 60, 80% or 100% in equity, and it could be a failure or a success. It's not related to the equity, even if we tend to think that if you are mastering the game, then you can decide everything. You have seen a lot of companies that have been bought up to 100% and been put into a bad situation anyhow. Here it's based on that the two parties feel that this is good. This is a win-win for real in the long run. There I think we have a very good track right now and good momentum. Very good. We will move over to the telephone conference and those of you who are participating. Please, operator, can we have a question from the audience out there? Thank you. Ladies and gentlemen, if you do wish to ask an audio question, please press 01 on your telephone keypad and you will enter the queue. Our first question comes from the line of Graham Phillips from Jefferies. Please go ahead, your line is open. Yes, good morning. Three questions, please. First, just on the financial services, you talked about reduced financing activity, increased competition. Can you talk whereabouts you are in the rating agency cycle? One of the things there, compared to your competitors, is that you have a lower credit rating. The second question was around warranties. I think there was less provision for warranties. Which division did that help, and how much? Thirdly, and finally, on R&D, SEK 550 million, I think, was the total headwind there. Which division and what proportion of that was trucks versus other divisions? Thanks. To start with financial services, what we see is an increased competition, mainly from banks and leasing companies. That is a little bit the reason why we have a lower penetration compared to last year. There is also a little bit of a mix effect. Some of the markets where we always have a lower penetration, like France and Japan, is actually markets that have been growing. We have a little bit of, once again, one of these mix effects. It's due to the fact that we see the tougher competition, we have talked about it quite a lot before. It is important for a company like Volvo Group to have strong earnings, but also have a decent balance sheet. We are now at a net debt/EBITDA of zero, if we exclude pensions. With all the hard work that we are doing with improving the profitability, cash flow, balance sheet, we will get back also a little bit on rating, because we are not satisfied where we are on rating today. A company like ours, this is a cyclical company, it is a heavy investment company, and we have a financial services arm, should be somewhere around a strong triple B to weak single A in terms of rating, and we are not there. We hope also that all the work that we are doing, that it will pay off gradually also in terms of improved rating. When it comes to the warranty, it was mainly related to the truck side. As we explained, last year, we had, among others, safety recall campaigns in North America that we don't see this year. You can say the main effect from that one is on the truck side. In terms of R&D, it's the same there when it comes to the capitalization and amortization effect. The major effect, if not almost everything, comes from the truck side. When it comes to R&D, for example, construction equipment, as Jan said, we took SEK 112 million for the restructuring charges of taking out 400-500 positions in R&D for Volvo Construction Equipment, by simplifying the setup of Volvo Construction Equipment. That will have a yearly effect of some SEK 400 million or SEK 500 million, whereof approximately 50% this year. On the other hand, we are putting more efforts in Volvo Penta, because in order to continue to have the growth pattern that we have seen, we also want to extend the range where we have the technology and offer customers. We are working really part by part here and don't have an average cap, more depending on cycle and offerings. Just a follow-up. Do you know where you are in the rating agency's cycle of reviews on your credit? They continue, as they always said, and they come and visit us once per year or twice per year, and we continue to update them. I don't know exactly when we have the next meetings. But I think the- I think the message is clear. We have communicated that a number of times. Number 1, steady, continuous increase of earnings that are understandable, why is that happening, and really to drive that underlying quality. Secondly, better cope with volatility that we're shown, for example, now for North American cycle, continue to show that in a steady way. Responsible use of our capital, and not at least when it comes to the balance sheet. Those are the three that we only can show by now I think this is the ninth quarter in a row, we will continue to focus on that to be credible and foreseeable as a company. Thank you so much. Let's go on to the next question. Please, operator. Thank you. The next question comes from the line of Olof Cederholm from ABG. Please go ahead. Your line is open. Yes. Hi, good morning. It's Olof from ABG. A couple of questions. On construction equipment, is there more right-sizing to be done going forward? Also, there was a pretty good leverage on this volume coming through. Was there anything specific in the Q1 this year, or do you still expect normal seasonality in sales and margins as we look into Q1, Q2, sorry, if we start there? Thank you, Olof. First, when it comes to the right-sizing, as we already said in January, that we have a pretty big transformation program that is ongoing in Volvo Construction Equipment in order to make sure that we have a robust company for the future. We are also very clear in both the board of Volvo Construction Equipment, but in particular the management running, that we are separating what is, so to speak, the market effects of our improvements and results and what is, so to speak, the continuing, ongoing self-help, if I put it like that, the transformation of the company. When you have such a pretty significant uptick that we had in quarter four now, it's easy to little bit lose focus on the different parts. We have a good organization in place to cope with both. I think that is how you should think about that. That we will continue with building a really strong Construction Equipment, and they are on track, and we have a good momentum and motivation in the organization. When it comes to, what was the second question? Seasonal effects. The seasonality, if there is normal. Yeah. I think what you can say is obviously that quarter one was given the strong order intake that we had from the regions in quarter four, stronger than it used to be. Otherwise, we see that the seasonality is there, but it tends to be in an uptick that the seasonality is less pronounced depending on not the lack of, but the availability of volumes for customers. What we see is that Construction Equipment has been good in realizing orders into shipments and volumes, and that is what we are concentrating on right now. Very good. Thank you so much for that question. We will have one more from the telephone conference. Then we will go back to this room. Okay. Operator, please. Thank you. Our next question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is open. Yes. Hi, Martin and Jan, it's Klas from Citi. A couple of questions, please. The first one on North American trucks, stronger performance in vocational versus long haul currently. The long haul fleet is still relatively new. There is no real need for replacement. How should we think about how you will run production in the second quarter? You said that you would run normal production. Is that in line with demand, still below demand, or are you planning to run production higher than demand in the quarter? We get a sense for how capacity utilization can improve there. I will start there. No, as I said, just to give an order of magnitude, obviously, if you look primarily then into the Volvo system of North America and New River Valley, we had more or less, a little bit less than half of the available production days were stop days, became planned stop days. For quarter two, we have taken out all the stop days. We are not changing rate. Then on Mack, it's a little bit less pronounced given the fact that vocational has been holding up better. My second question is on productivity. You have talked about a gross improvement of some 5% in the manufacturing system as you optimize the flow in manufacturing from design to purchasing, supply chain, and then final assembly. The improvement in the margin today in trucks is driven by lower cost for the recalls, higher service revenues, and from strong performance in the JVs, and the margin is now around 10%. Here is my question, really. How much do we have left in the journey to reach 5% productivity? If you're only in the beginning of that journey, then I can see an EBIT margin in trucks that can reach north of 12% on my calculations. Just to hear your thoughts, Martin, on that, please. Klas, we keep our normal habit to let you do the calculations in your Excel sheet. Generally speaking, as we said, and we commented on that also, as I said, Klas, we commented on that already, and Jan did it in the financial presentation that obviously, again, region by region, and that has been good for us also, that it has been a gradual upgrade in the European system, for example. We see leverage coming through because utilization rate and continuous improvement on the back of a steady increase is the most favorable, if I put it like that. At the same time, what I would like to say is that also happy to see that, in particular, that North America, but also South America, has been able, actually, to take down production with that high level of flexibility and also coming a little bit north of zero, so to speak, and I think that is a strong achievement to build a more solid platform for the future. Just to follow up, I understand that the European system is well run, and also when you look at excavators in Asia, up in Korea, that's strong. You're still sort of rolling out the seamless flow in other regions, such as in North America, in parts of Asia. You have the self-help also in UD, et cetera. Shouldn't that come going forward, so to speak? Yeah. As we started to say, we said that we are pleased but not satisfied. I think you are onto something that we are working a lot with. That is to really look at flow by flow, and really starting from the customer, going all the way into our T1 and T2 and see that we have a good balance. There, obviously, we have an advantage that we have good experience from different parts of the organization. Having said that, I think it's also valid to say that in some parts of these processes, we see, for example, that Japan is much stronger than our European system. It's a give and take also when it comes to a more granular level on different parts of the process, so to speak. When it comes to North America, you are right that we are currently actually driving a program, which is always painful to do also, by the way, not at least now when it comes to Mack. We are driving a program in order to facilitate the order process, not at least since we have a very high level of variation in the Mack range, so to speak. That will give effects going forward, but currently, that is pretty tough, if I put it like that. Thank you so much. We will move over to questions in the room where we are here in Stockholm, and I hand over the microphone Thank you. Agnieszka Wielecka, Carnegie. I have one question on construction equipment. You said that you were happy with the production ramp-up in Q1. Do you expect a similar realization going forward, or do you see any risks at your capacity at your end, or any risk for bottlenecks from the suppliers? Generally speaking, the list, if I put it like that, not at least in the supplier network of coming closer to bottlenecks has increased because you see higher capacity utilization. Since many of the suppliers are common also not only for construction equipment, but also with Agro and with trucks, among others, there we are working and being proactive. So far it has been okay, but it's true that this is a concern that we have and that we are focusing a lot on, so to speak. So far it has been okay, but when it comes to our own capacity in construction equipment, we will gladly welcome more orders. Thank you. Very good. Are there any more questions in this room? Okay, please. Christian Demers from DNB. Just a round-up question about the governmental sales, if there's been any progress about divesting that business. Goes according to plan. The plan is that it will be ready this year, latter part of this year. Loud and clear. Olof, please. I'll come up to you. Hi. Olof Jonasson, AP1. I just wonder about the Dongfeng sales in China. How much is the improvement due to the more stricter view on overload in China, and how will that affect the mix of sales of trucks and your kind of situation there in a way? I think that is absolutely one of the major effects, obviously because you need more capacity given the fact that you cannot overload. That is also pretty quickly shifting into more tractor-trailer combinations rather than rigids, because that is a more efficient way of doing it, and that in conjunction also with the general development of the logistical system. We have been talking about, for example, the e-commerce segment, where you have completely new actors and they are coming in with logistics as a core on the back of their business model. I fully agree what you say there, but having said that, historically Dongfeng and DFCV has been strong in the rigid segments. That is one of the key areas where we are working together, how we actually are improving our range in the tractor segments. The good news, obviously, is that one of our core segments both for Volvo but also for other brands in the group has been tractors. We are, for example, by far leading on the tractor segment in the heavy-duty in Japan. That is also, as you know, also both for Volvo in South, North and American Europe. The competence is there, but we need to strengthen that range in Dongfeng and DFCV. Thank you. Any more questions in the room? We have two more on the telephone conference, why don't we conclude with those two and then finalize the whole thing? Please, operator, give us another question from the group out there. Thank you. Our next question comes from the line of Theo Morley from Artemis. Please go ahead, your line is open. Yes. Just given the changes of profitability, I was wondering if there was any obvious changes to dividend policy going forward. Thank you. No. No. No? Great. Thank you. That's the question. Thank you so much. The final question, please. The final question comes from the line of Jose Asumendi from J.P. Morgan. Please go ahead, your line is open. Thank you very much. Wanted to come back to this earnings contribution from the joint venture operations in India and China on the truck division. Can you just give us sort of a guidance? What was the EBIT margin or profitability of both JVs or operations last year, first quarter and in this first quarter, please? I think we take a simple way. I think you can contact our investor relations afterwards and they show you where you find this information in the Q1 report. I just lost you there. Hello? Did you go from loss-making to break even? No. We went from loss-making in DFCV to profit in DFCV. We have a pretty stable level on Eicher, no big shifts in Eicher performance. The big difference is coming from DFCV. Got you. Thank you so much. Martin, any final remarks, if you may? I think we have had good questions and hopefully also a valid presentation. We just thank you and wishing you a continuous good Tuesday week. Thanks a lot. Let me then remind everyone that we could meet next time to 23rd of May in Eskilstuna for the Capital Markets Day. Thank you so much. It will be great. See you soon again.