Everyone, and welcome to this press conference covering the Q1 of 2016. Today on stage, we will have our President and CEO, Martin Lundstedt and our Deputy CEO and CFO, Jan Grander. We will start with presentations followed by the questions and answers from you in the audience. And since this is a webcasted event, we do appreciate if you use microphones. So enjoy, and Martin, please go ahead.
Thank you, Gino. So ladies and gentlemen, good morning also from my side to this reporting and press conference for the Q1 reporting for the Volvo Group. Just a couple then of highlights to start with. The highlight really is that the operating margin for the group was maintained despite, as a matter of fact, a lot of volatility in the markets. We were seeing North America coming down from high levels and the organization did a good job to adjusting capacity ahead of that and a good anticipation.
And also that we continue to see both the Volvo Construction Equipment and for Volvo also continuous headwind in mainly emerging markets. Profitability was maintained, thanks to the lower cost base that is continuing to kick off according to the plan and also that we had a good adaptation, as we said, of the volumes mainly done in North America. On the negative side, we also had extra costs related to quality campaigns. We also continue to launch new products and features. You saw that also a little bit ahead here on the films in a number important segments in the off road segments for the trucks, as one example, new engines ahead of 2,007 greenhouse gas emission levels in North America as well as a number of very important product launches also for the Volvo Construction Equipment sector at the Bauma Fair.
And during the quarter, we have also, as we already announced, introduced a new brand based organization with full profit and loss responsibility for the truck side. This implementation is well received in the organization and is now executed step by step with starting effect as of March 1. Volume development for trucks, volumes was down approximately 5%. And then the major effect of that, of course, was the decline in North America, whereas Europe continued to grow. Focus is to continue to be very close to the market demands in North America and in Latin America when it comes to the lower side as well as continue to follow the positive trend in Europe with adjustments upwards.
For the Volvo Construction Equipment side, the volume was pretty flat, but differences between the brands and mainly then the improvement in SDLG was related to the emission legislations that is coming into effect as from April 1 from Tier 2 to Tier 3, whereas for Volvo, the volume drop was related to the slow markets. As of this quarter also, sales of services and spare parts are disclosed separately. This is also for the group, an important part, as you know, of our business. And in combination with our products, they create tailor made customer solutions, greatly contributing to the profitability of our customers through increased availability, improved reliability and lower costs to create the full solution, so to speak. The service penetration is still an important business opportunity for the Volvo Group moving forward.
Sales of services and spare parts, excluding financial services, accounted for 23% of net sales for the group. Service sales for trucks was almost flat when adjusted for currency, whereas buses and Penta showed good progress and Volvo Construction Equipment declined due to the lower shipped volumes in recent years as well as lower utilization rate of equipment in certain markets. When we move into trucks then, as a summary of the truck side, it has been different situations on the markets, as you know, between different continents, good demand in Europe. And the year has started well with regards to market shares, for example, for Volvo trucks. There is a correction in U.
S. Both for stock levels and for mainly the on road segment when it comes to the activity levels. And we have launched a news in the Volvo truck product offering, and I will give you a number of examples here. One example is that we are focusing a lot on the Construction segment. As you saw in the film here, we have a very robust offering with Volvo FMX, and we are now introducing a number of new features to further improve the productivity.
For one example here is the new I Shift functions with crawler gears. That means that you have even better maneuverability, traction that you can use in off road segments, but also in important segments such as heavy haulage, for example, where you can start from 3.25 tons. It's fantastic. And that is hard engineering work, and that means also actually that you can replace more of the automatic gearboxes with captive gearboxes in some of the heavy segments. So this is a very important step for us.
In addition to that, we are also, as I mentioned in the start, introducing new engines in North America for the 2017 greenhouse gas emission levels. We are introducing at the premium end, a turbo compound, a 13 liter engine that will give for similar operations up to 6% of fuel savings. And also for the mainstream 13 and 11 liter engines, we are introducing new features also contributing to fuel improvement of 2.5% approximately. So this is a very important step. In addition to this, we are also introducing features when it comes to the onboard connectivity.
One example is IC, where we actually are recording different roads for that specific application of truck and thereby continue to optimize fuels, acceleration, retardation, etcetera, and the interface between driver and the vehicle. So those are some important steps that we have been taking during the quarter. Another one is that we have been participating in the European Union Truck Platooning Challenge that was initiated by the Dutch presidency. This is a very important part showing that we can do a lot of things already today when it comes to automated functionalities. What you are doing in this type of a platoon is really that you have a Wi Fi connected road train, you can say, with 3 trucks, and that is giving fuel improvements up to 7%.
And this is also showing that we can do a lot of things in order to continue to make a contribution to the CO2 improvements that is necessary for the transport sector. This is also an important showcase that connectivity will be more and more used, both interaction between vehicles, but also using that for off board analysis. And the Volvo Group, as you know, is world leading when it comes to the number of connected vehicles, but also the application of that connectivity. We have more than 500,000 connected vehicles and construction equipment for the time being, and that is, of course, growing rapidly now. We will demonstrate also full autonomous driving in the mining sector in May.
So this part of the business is moving rapidly as we speak. Market environment. In North America, the market declines from very high levels down to a forecasted level for 2016 of approximately 250,000 units, and that is 10,000 less than we forecasted at our quarter 4 reporting. Main reason is, as I said before, the on road segment slowing down as well as continuous stock adjustment at dealers. We predict that stock adjustments shall be over during the summer and return to normal levels.
Other segments such as construction continue on levels from previous year and showing also that there is a good economic activity level in North America. In Europe, the market continues to rise and the new forecast for the full year is expected to be 290,000. We had 280,000 in the quarter 4 reporting. And as a result of, you can say, stability as we feel in the European economy. And that means that also our customers feel that they are bringing on the replacement need that we have been talking about for a while now for the big volumes that were shipped in 2006 to 2,008 mainly.
We also see that, of course, the low oil price among other things are affecting or in a positive way affecting also the profitability levels, even if a major part of that is transferred to them customers or the transferred buyers. In Latin America, it is Brazil that continues to be on a very low level and even declining further. We are taking down forecast now from 35,000 to 30,000 and we are continuing to adjust and I'll come back to that. Maybe one important figure here is that Brazil in quarter 1 stood actually for 2.4% of the shipped volumes when it comes to trucks. So also putting it into relation where we are standing right now.
So here it's really about managing the downturn in a good way when it comes to the industrial system and also when it comes to the supply network and our dealers and customers. Asia. China is expected to flatten out on a level of 750,000 units. So we have this downturn and now we feel stabilization. I think what is important to say about China is that I was actually in China a couple of weeks ago and met with the Chinese leadership, and you feel a very strong movement in the new 5 year plan or more sustainable, innovative and solutions around the transport sector that is promising.
Of course, that will mean short term stabilization, so to speak, short term paying for long term gain. But when it comes to the direction, we are very positive about that development because that will require solutions that we can provide into the Chinese market. This has also been the focus for our joint venture, Dongfeng Commercial Vehicles, to in a good way take down the volumes and adapt to these volume estimates that we have for the time being and the job there has been proceeding well. India is continuing to grow based on the macroeconomic development as well as numerous initiatives from the Moody government also to make it more easy to do business and to drive logistics further on. We have a strong footprint, as you know, both for the Volvo brand in the high end, very small sector still, but also in the JV with Eicher Motors, Volvo Eicher Commercial Vehicles.
There we have very strong position in light and medium duty and there we are step by step increasing our presence also in the heavy duty segment. Japan continues on a good level, and we forecast that will be stable in relation to last year. Of course, the earthquake, the recent earthquakes, we have not seen the effect yet. Fortunately, I can report that our installations have not been damaged when it comes to the industrial footprint. We have had minor damages on the commercial network.
And most important of all, we didn't have any injuries on our colleagues in Japan. But the activity level is still to be seen here. When it comes to market shares, it has been in general good development. If I start to comment in North America and start a little bit on the negative note, you see that we have had a pretty big drop in the Volvo truck market share. And main reason for that, of course, is that we have been very much focusing on taking down stock levels.
We have been conservative. We have an over representation in the on road segment that is decreasing much more. And Class 8 on road segment, that is decreasing more than other Class 8 segments as well as we had also quality campaign disturbances in March, where we now have contained the majority of that also in the market. But that was a disturbance in March. For Mack, positive development mainly related then to the strength of the vocational segment, where Mack trucks have a strong position and in many segments are market leader also.
In Europe, the market share for Volvo Trucks was stable at a good level of around 17.5%. The Renault Trucks actually increased slightly. And what is important to say here is not only that we have starting to see positive effect of the market mix, growing Southern and Eastern Europe, but also that we are seeing that we are gaining market shares in core markets for Renault such as Spain and France. And that we feel is also a result that we have now introduced the full range of Renault trucks and it's very well received also by our customers. In Brazil, Volvo increased the market share to 20.2%.
Even if it's a small market, it shows that we have a strong position. And progress for all brands has also been seen in South Africa and Australia from already strong positions. In Japan, we lost market shares for UD, and that was mainly related to the aftermath of the changeover that we've had in the product and production system. But now we have come back to a normal situation for our value chain in Japan, and that will show effect. In India, Eicher was also continuing to gain market shares.
Order and deliveries. Orders were down 12% on a global scale and deliveries with 5%. In North America, the main focus for us, as I said, has been to manage the downturn from the high levels of last year and get a good balance into the value chain between orders, stocks and deliveries. Organization has done a good job here, and production output has been taken down considerably, approximately 30%, and that was the forecast also, as you remember, we said in the quarter 4 reporting. Orders were down 54% compared to the same quarter last year, and deliveries came down to 33% in total.
So here again, we are managing this very closely, necessary to adjust production when stock it's necessary to adjust production when stock levels are adjusted. But here, we have been pretty clear about what is the main priority. On a very positive note, orders in Europe rose by 23% with a continued positive trend for Volvo Trucks. Many markets showed even stronger order intake, in particular Southern and Eastern Europe. And production in Europe has been in several steps now, been adjusted upwards both for Volvo and it will also come for Renault here.
And deliveries rose by 16%. In the light duty segment also, we had a certain pre buy effect ahead of the Euro 6 introduction. Orders in South America declined by 9%, and that is a consequence of the political and economic turmoil. And here is really to manage now the low levels that we have not only for Volvo Group, but also for our supplier and dealer networks. And in but as a matter of fact, we are still continuing to have a result that is around CLO for Brazil in particular, and we are having a positive result for Latin America.
And that I think is very strong message from the Volvo Latin American organization, well done here. In Asia, orders decreased by 15% with the same pattern for all brands, reflecting the softer demand Southeast Asia to some extent, but also in Middle East, of course, with the political turmoil here. If we then leave trucks and move into construction equipment, in the quarter, we have continued to focus to reinforce Volvo Construction equipment in key segments, key markets, where we have seen a good traction over the last quarters. And I think that improvement continued in a good pace despite harsh market conditions that also continued. There is a continued uncertainty in emerging markets, even though China, thanks to prebio Tier 2, showed a positive trend.
But it is still too early to talk about a turn upwards again for China. On the positive note, there was market growth in Europe. We launched new important products at Bauma, very big interest on that. And also a number of new services for productivity gains as well as that we saw in the quarter also a continuous market share growth in large machines that has been one of the key areas for us. Then at Bauma, we introduced the biggest articulated hauler ever, masterpiece, out from Braos outside Wekwa.
I mean, that is really showing Swedish engineering as its best. And we got the first three orders actually from South Africa even if the market is depressed during Bauma. This will, of course, further enhance productivity for certain applications. And it will also gradually move into the area of rigid dump trucks, but with much better traction capacity, of course. So productivity and efficiency is the name of the game for this fantastic machine here.
In conjunction also with Bauma, also the biggest ever excavator for Volvo Construction Equipment, 95 toner EC950E excavator, the biggest machine ever for Volvo, productivity and efficiency gains, of course, for customers in demanding segments and reinforce the focus of the offering in our core segments. So 2 very important news for us here. Market development for Volvo Construction Equipment. Europe, as I said, showed a positive development of approximately 6%, and our current forecast now is that the growth will be between 0% and 10% here. In the previous forecast, it was hovering around 0, minus 5% to plus 5%.
In U. S, the market was pretty stable, but a change in market mix mainly from the heavy machineries into compact equipment. And the forecast for the full year is maintained at minus 10% to 0%. Continuous decline in a number of major markets such as Latin America and Middle East. And in China, after a slow start, the market gained momentum then for the upcoming changes in legislations, and we saw that mainly of the Chinese brands, including our own SDLG then.
Full cost has moved from up to minus 15% to minus 5% instead of minus 20% to minus 10%. So I think that is what we see. It continues to be, yes, harsh conditions and market headwind, so to speak. The net order intake was 11% below for the Q1 with a decline for Volvo, which was partially offset then by the increase of SDLG due to the pre buy in China. And the year over year comparison is influenced by the unusually large order intake for Volvo also during last quarter ahead of the product exits that we did on Volvo branded backhoe loaders, motor graders and milling machines.
Excluding these products, Exits order intake was down 4% below or was down 4% in comparison to last year. In Europe, order intake was 5% below the same quarter last year, but excluding the impact of product exits, it was 9% above. So I think this is important to understand the effects of that. And that has been a very clear focus that we all continue to concentrate on profitable segments and segments where we can have a very strong and leading position for Volvo Construction Equipment. The main effects here in Europe was higher sales in France, Germany and Scandinavia as well as market share gains also.
That is important information as well. Order intake in North America, 7% below. And in South America, similar pattern as for trucks basically. We have a very low economic activity. So here it's about really managing our value chain in a good way so we can be prepared for the upturn, but that will take a couple of quarters more at least.
So in Asia, deliveries were 2% above the last year and, as I said before, mainly driven then by the pre buy in China and related to
SDLG.
Buses, it was a positive market development in North America, Europe and recovery in Asia. India also moving well here, whereas Latin America again then continued to be sluggish. Bus deliveries increased with 28%, mainly driven by North America and Asia in this quarter, but orders were up 13% where we saw biggest impact for Europe. Volvo Buses received also the first fully commercial order. We have, as you know, already electric bus systems in Gothenburg operating and also in Stockholm.
But we received the full order for 11 electric hybrid buses and 2 electric bus charging stations, so much more of a system thinking to Namur in Belgium. And this is a very important breakthrough, and the interest around this urban solution is big around and across Europe mainly for the time being. But also, I have to say, in other markets, we have discussion with a number of major cities also in, for example, Asia and Latin America. Other major orders in the quarter were big orders to Egypt, 200 units. We had big orders also to Mexico and Ecuador.
And on Volvo Penta, marine leisure market remains pretty stable and marine commercial continues on low levels, but positive signs in certain sub segments, for example, wind farming vessels. Industrial Power Generation Engine shows a positive annual growth rate. And net order intake was 11% lower than last year, driven by the lower demand for marine leisure engines in North America. In the quarter, deliveries showed a year over year increase of 1%. And also and Jan will come back to it, we're very happy to see that also when it comes to the earnings, we have a very positive trend here.
In February, Volvo Penta launched an upgraded glass cockpit system, which is also very important. What is that really? That is that we have the feeling of being the captain or being the driver of the boat or more a car like feeling where you have an integrated instrument cluster where we also launched the latest navigational technology from Garmin, VoloPenta's electronic vessel control system to provide a single interface for the driver. And this is, of course, one of the clear strategies. And to continue to broaden that offer that we are integrating propulsion, efficiency, stabilization, maneuvering, we also have bought 80% of Humphrey that are providing then solutions for treatment stabilization systems.
So that will further enhance the offering in that direction. So with that, ladies and gentlemen, I will leave the word to dear friend and CFO and Deputy CEO, Jan Geranden, for the financial update. Thank you.
Thank you, Martin, and good morning, all of you. So for the CFO of this company, a fairly undramatic quarter, I would say. Looking into the sales situation, I think the sales figures fairly much reflect or very much reflect what Martin just described with the markets coming down in North America and South America compared to 1 year ago and, of course, the stronger markets that we see in Europe. What we see here is that we have a negative development on sales of approximately 4%. If we take away the currency effect, it's approximately negative of 2%.
I think this is a theme that you will see all through the report that the top line is influenced year over year by the currencies. Basically, you can say that it's the Swedish krona is getting stronger towards most of the currencies. So that comes through as a team, both in terms of equipment sales and also in terms of service sales as well. So this one is actually if we had not taken away cut the bars at the end, we would actually have more or less a stable situation in all business areas. You see very, very small fluctuations compared to 1 year ago.
If we compare it, we were at SEK 4.6 1,000,000,000 last year and this year, SEK 4,500,000,000. And then, of course, we have taken out the effect of the Eicherrack, divestment that we did last year and the effect of the IT divestment that we did in the Q1 this year. Furthermore, last year, we had the restructuring charges. And as you know, from this year, we don't have any restructuring charges anymore. Also here, you can see that the currency effect has affected us during the quarter with approximately SEK 400,000,000 negatively compared to 1 year ago.
And as we see the currencies today, and as you know, with the flows that we had last year and when we look upon the transaction exposure, we estimate for the time being that we will have a negative currency effect of somewhere between SEK 2,500,000,000 for the whole year. For the Volvo Group then, what is affecting our results year over year? And we have on the positive side, you should see that the cost programs continue to come through. We have, if we add together the selling and admin expenses, approximately €500,000,000 year over year. And this is exactly in line with the €10,000,000,000 program that we are finalizing during the course of this year.
We can also see that we have a positive effect from the R and D, mainly coming out of the capitalization and amortization. And furthermore, of course, the good markets that we see in Europe with the gross margins that we get there is affecting the results on the positive side as well. When we talk on the negative side, we have the lower volumes as a whole in the group and of course, especially in North America. And unfortunately, we do also have the safety campaigns that Martin mentioned before, and they are affecting the results. It comes through both in the gross income as a negative and also in partly actually in the selling expenses as well when it comes to the commercial goodwill.
Then, of course, due to the fact that we take down America, we lose out the gross margins in North America. But what we have managed to do is that that is to ramp down production in a very efficient way and adjusted our cost base in a good way. And I can say that we are at a decent profitability in North America despite the cuts that we have seen there. The cash flow is actually also affected of the fact that we are breaking down we're standing on the brakes in production. I think we mentioned this in connection with the Q4 report that Q1 is seasonally a weak quarter.
Last year, we had an unusual good quarter in terms of cash flow and working capital, and that was due to the fact that we actually ramped up production in North America. And when you ramp up production in North America, we get a very good situation on the working capital. And as you know, when it comes to the working capital situation there, we have the payment terms to our suppliers. They are what they are. And then we have the receivables.
We get paid the first day when we ship out through the floor planning and so on. So it's the best situation we have in terms of capital, which is good when the market goes up or when we ramp up production, but it hits us at a negative when we ramp down. And that is the reason why I see that the trade payables is unusually weak in this quarter compared to normal Q1. So I think that's otherwise, when it comes to the investments and so on, they are on the level that we want to see them. The truck side, when it comes to sales, we have, as Martin showed, 5% negative on the delivered trucks.
And of course, here you can see the magnitude of the drop off of delivered trucks, the 33% down. That is, as I said before, what affects us on the cash flow so much. Europe is up 16%. Vehicle, in terms of net sales, where we then currency adjust is negative of 5%, and we are stable on service sales for the year. And as a whole, it's 7% down, not currency adjusted and a couple of percent less negative if we currency adjust.
For trucks then, you could say positive, of course, as we said before. Europe on the positive side in terms of volumes and margins. And on negative side, we have the North America and the lower volumes there. We can see here that the lower S and A expenses that you saw on the first page is very much related, of course, to trucks and then the R and D capitalization as well. And the safety campaigns are related to the trucks operations.
And the currency is €340,000,000 I would say that despite the fact that we then have lower sales this quarter, we are improving the margin from 7.3% to 7.8% for the quarter. Construction Equipment, delivered machines up 2%. And here we can see that on the Volvo side, the Volvo branded side, it's a negative of approximately 6%. And then we have the pre buy effect of SDLG in China in connection with the new emission legislations that kicked in on the 1st April. Then we have more or less 0 in terms of sales when it comes to the equipment, and service is flat or slightly negative.
The result is more or less stable quarter over quarter despite the fact that we are losing out on sales. And we have then you can say that the programs that we are running to work with the cost is coming through, actually supporting the result. And then we have on the negative side, it's a combination of the brand and product mix, very much related to the SDLG sales, which, as you know, has a lower margins compared to the Volvo machine. We do also, within the GPE segment, have a shift as well, a little bit from the real big machines quarter over quarter to slightly smaller machines as well. And that is what comes through in the product mix.
And the currency is also here hitting us with approximately SEK 50,000,000. We have a hit in the Q1 of approximately SEK 150,000,000 on the China credit risk as well. We had incidentally the exact same figure in the Q1 last year. It was also $149,000,000 That's why it doesn't show up as a deviation quarter over quarter. Buses, basically good development when it comes to sales, both on the vehicles, on the buses and also on the service side.
We here see that we have an unproportionate big hit from the currency of €140,000,000 and that is a situation that hits, of course, the result very much. Without that one, we would have seen a continued good development in the result. And we are convinced that the trend will continue in a positive way going forward, quarter over the next coming quarter as well. It is this currency hit that affects the result in buses. Penta, not much to say.
Good development in terms of both the equipment sales or engine sales. And also on the service side, a strong development. And the result is actually improving from 13% in EBIT margin up to 15.6%. Customer financing, also stable, good development, continuing to both grow. I think this is the best quarter in terms of new financing ever that 1st quarter that we have ever had.
And then we see the results going up from SEK 4.74 4 to 4.93 million Swedish crowns. Very good development for the time being in terms of the quality in the credit portfolio in North America and Europe. And despite the fact that the you can say the Brazilian portfolio is, of course, we are working with that one all the time, but really no catastrophe and managed in a good way so far. Yes, that was time for you again, Martin. Thank you.
Thank you, Jan. I think we can stand here. And just a summary, we started on the same note, stable operating margin. And I think given the fact continuous uncertainty in many of the emerging markets, we are taking down, so to speak, the forecast for North American markets on high levels, continuous good cost traction, good adjustment and flexibility measures taken in the group. Despite currency headwinds were also actually working in the right way in different markets.
So when it comes to the operating margin and development, we see that the underlying improvement in all business areas continue. Production introduction, as we said, very important for us to continue to build on the core segments. And just a couple of comments on the new organization also. As I said, we have good traction now in the organization. And just to remind ourselves why we are doing it, we have a good base to build on when it comes to our product assets, networks, brands, clearer accountability when it comes to all the different brands and business areas, stand on their own commercial and profitability merits, being able to pursue decentralization, brand ownership, agility and continues to work with improvements in all areas.
And we see lots of potential, of course, when it comes to operational excellence quality, delivery lead times, delivery precisions, but also the service potential, the business potential that we have in the service business. So that is also on track in a good way. So I think that is a summary of the quarter. And by that, also, we open up for Q and A.
Thank you very much, Martin. Then Jan, yes, everyone will start.
Erik Olrang, Nordea. I have a few questions. The first one, since you now separate the aftermarket business, immediately raises the question. Can you say something about the differences in profitability here? And perhaps also to what extent that the aftermarket business shares cost in new equipment so that demand changes on the other could also impact profitability for the other, if that's a factor?
Then the second question on the new structure on the truck side with separate brand responsibilities, Anything about the potential impact on cost or what kind of efficiencies we can get out of that? And then thirdly, given the working capital changes in Q1, any thoughts on the full year impact from working capital, assuming that demand sort of sits where we are today? Thank you.
Yes. I mean, just I think it's very good that you put a question around services. First of all, of course, this is a very important focus area for us. And the most important factor, of course, is that customers more and more require that we're coming with complete solutions and that they are tailor made for different segments. I saw also seeing them both to the capital market and our owners and also to our organization that this is something that we want to follow, focus, talk about.
And the more we talk about it and discuss it also internally in the group and with our customers, we think it's fair also to have that discussion with the capital markets, so to speak. That is then I was not really sure about the follow-up question on how we share costs, etcetera.
To what extent is profitability between the 2, if you could separate it dependent on what happens with the other? Of course, in the end, you need equipment volumes for aftermarket earnings. But in the short term, if you see a big volume drop on equipment, would that impact the aftermarket profit at all? Or
No, no, I mean, the structure is the following, that we have very clear separation of the P and L impact for the two businesses. And that's and the simple reason is that if you look at the value chain of it, you have 2 completely different value chains of it. And then it comes together, of course, in the dealer side. But from a P and L perspective, we can separate that. And then I can just comment on the question on if the margins are higher or lower, they are higher.
And then when it comes to the brand organization, as you said, the cost I mean, here we have been, of course, been very clear. We have created a strong cost I mean, a strong foundation with the efficiency program. This is very important that we are maintaining. And therefore, we have a good together with the brand and business leaders, a good control over that transformation, of course. The whole idea of this is even more focused on the value chain, better connections between the brands all the way through the industrial system, the service opportunity, but also the regional footprint that we can reinforce because we have very strong regional footprints with end to end systems.
So but here we have a transformation that is following plan absolutely, and we will not get lost when it comes to our efficiency program. And then I think it was working capital. I'll leave it to you.
Yes, my favorite topic. The working capital, basically what's happening. You have, first of all, one you can say one effect when you stand on the brakes, so to say, and that's what we're doing now in the Q1. But then, of course, depending on the production level, the higher the production level, the more you have as payables and the lower so that you have to have a view on as well actually. So that is more or less just an automatic or effect that you have or mathematical effect that you get.
Not very much you can do about unless you change the payment terms, so to say. And then when it comes to what we can work with, and now in the Q1, you saw that we had an increase also in receivables and also in inventory. That is a little bit the usual thing you have in the Q1 when you come into the what you call the spring season is usually you ramp up a little bit your inventory for the Q2. So that's a little bit of a seasonal thing, and that will usually come back in the Q2. But generally speaking, also when
it comes to managing, for example, the situation that we have seen in North America, we are pleased to see that we took firm decisions actually both at the end of the year and the beginning of the year to take it down because there is always this discussion, how much should we do, what will happen, will we lose out, etcetera. But I think so far, so good when it comes to managing this.
Hamzah, Handelsbanken. Three questions. Starting off with North America. We note price competition on new trucks is increasing. On top of that, we also noticed a 10% drop in used truck prices.
My question is, have we seen this effect already in your P and L in Q1? Or is this something that we should expect in second and onwards? 2nd question is on the recall cost, if you could quantify that on this 18,500 trucks? Last question is on Europe. Skane gave a very bullish view on the southern parts.
You're talking about more on market share. Could you maybe discuss a little bit if there's a difference in footprint or how we should view that?
First, when it comes to North America, I think it's fair to say exactly as you mentioned, Humber, that we have seen price pressure. And that is pretty natural also when you're coming into a downturn. And in particular, it goes about the delta of inventory you have from coming back to normal stocks. And here, it tends to be that you are a little bit impatient, so to speak. So on that part, of course, we have seen a certain price pressure already now realizing the stock levels and thereby also, I mean, have a discussion together with our dealers how to do that in a way.
And that is also, of course, as you said, related to the, of course, the pressure on the used truck side, 10% to 15%. But so far so good. We are managing the flows in a good way, and that's the reason why we have been also pretty aggressive of really slowing down production. So we are not feeding and overstock with the same discussions that you have already with the stock, so to speak. So I think here, so far so good.
We are continuing to follow this. For the time being, we are not planning any, I mean, structural downturns more. If needed, we will manage that by stop days or stop weeks. The important thing is really to get the balance between stock output and production. We will not comment on the recall cost specifically.
But of course, here it is about safety, containing customers, do what is necessary to do. The organization has done a fantastic job. We have had good communications with customers, dealers and authorities, and that is continuing to be followed. But of course, as we said, it was reasonably a big number of trucks concerned here. And then when it comes to the market share, of course, it's effect of both.
And we see the same pattern when as you described, Southern Europe, it is not strange from low levels. And improvement is percentage wise to start with, big, but also in absolute numbers, we see that. And I just saw the confirmation today also on the ASEA figures coming out that, of course, you see a pronounced effect in Southern Europe and that we see as well. And also in Eastern Europe, as a matter of fact, Poland and some other other markets. And then we have pretty strong levels already in Northern Europe.
So when it comes to our footprint, we are well spread, as you know, and we feel that we have a good momentum, both when it comes to market shares, not at least then for also that we are working actively. We're renewing their core markets. So I think do you want to add something on that?
Can I just do one follow-up, specifically on Germany? Both Skane and Volvo is taking market share massively from Daimler. Could you speak a little bit about how that will play out? Will we see tougher pricing? Or will that keep the price or will it keep the pricing for improving if the demand trend continues in Europe?
I think it's too shortsighted trends to have a specific view on that basically. And in our particular case, it is market share gain, that's for sure, but it's not a big one. So here, I think we should be a little bit, I mean, patient to see what it takes. But for us, of course, price management now in an upturning market is, of course, very important part of the total scope. If something I mean, we need to also work with our price realization when you have an upcoming market here.
Bjorn, I'm Hanske. Two questions. 1 on duty trucks and the previous or ongoing restructuring, if you can shed some light on where you are versus your hope for that brand in terms of earnings development? And secondly, we're already in the process when you're phasing out doing construction equipment, the products. How long should we expect that to continue when you have the mix that you desire?
Yes. Thank you, Bjorn. On the first note, of course, Uli Trucks, we are seeing improvements. We have done a number of measures that in the short run has caused some disturbances, as we have already reported, when it comes to linking a little bit more to the product and production IT systems, the PDM, as we call it, systems for the Volvo Group. The reason for that is really that we are better linked also when it comes to the modular system and using in a smart way group components.
At the same time, we are also separating the operational activities a little bit more for Ulytrax to make sure that it will stand on its own merits when it comes to what can that value chain afford to have given the customer base, given the coverage of markets, etcetera. So we see a positive trend, but we are far from being satisfied where we should be. And that's the reason why we are continuing to do this. We are also happy to see, I mean, Joakim and his team now has full focus on this. And I think it's worthwhile noting also what Joakim Ousenbeg and his team did also on the global truck sales when it comes to the cost base.
The last 15 months has been we see that coming through now. And similar activities is also what we're working with now in UD. Then when it comes to Volvo Construction Equipment, of course, this is one of the key elements for us to continue to see in a transparent way where do we have not only short term opportunistic, but in the long run, what is our sweet spot for construction equipment? We have a number of segments, geographies where we have extremely strong positions and make sure that we, in a good way, are not diluting that with activities that will not, so to speak, develop. For the time being, we are satisfied with what we have done when it comes to product exits.
We are continuing to follow the streamlining all products and make sure, as we do on trucks, that we can follow the product and the market earnings for every single product and market to make sure that we have no unnecessary drags. You can have it for short term, but not in the long run. So that's the same principle.
Anders Schaff, SEB. I have three questions, 2 very simple one word answer only required and a lot more complex maybe. Did you say or when do you think the U. S. Market or the inventories will be stabilized?
Did you say summer
Yes. During summer, you can say that is our I mean, we said I mean, just to be transparent, last reporting, we say, during Q2, we are around maybe a little bit stretched. So during summer is our estimate.
Coming back to cash flow, just to clarify, are you disappointed or not with the cash flow in the quarter? Or is it more like expected?
When you look upon the reason, it's fairly easy to understand why it is so. But I mean, we are not happy with it, of course not. But it's understandable, so to say. Finally, if you could come back to the market share in
the U. S, if I when I look at the trend over the last years even maybe of retail sales market share U. S, you have had a negative trend more or less, and that was made even worse now recently in last quarter, not only. So it's sales to end customer is down quite a lot. And some of your explanations, of course, are valid, but it's a big drop.
Is it the campaign that really matters mostly here? Or are you concerned about this trend basically?
Of course, you're always concerned when you have a drop, and it looks very dramatic, of voluptruck ban, as we said. I think it's possible to see that we have, so to speak, turned the curve for Mack here, mainly then segment mix related. But of course, when we do the scrutiny around Volvo trucks, there are 3 main effects basically, the on road dependence. We had a strong market last year, as you know, and good trend for Volvo trucks. And we feel that also when it comes to the customer feedback, as a matter of fact.
So here, we lost a little bit momentum. But we have the on road, and that is a pretty big part. And we have also deliberately been less aggressive on some of the bigger fleets to have a better mix when it comes to retail and fleet customers and the right proportion, if I may say so. We also had a little bit of a seasonal effect. We shipped in pretty big volumes in quarter 4 last year.
If you really look at the volumes for quarter 4 and specifically then as we see it more that you cannot see it in December as a matter of fact. So that made a slow start. And then we have the quality campaign, and that was a drag in March. And the approval of the Padding, of course, of that will be in Q2 here. But I'm most pleased with that we did it in a very decisive way.
It was no compromise whatsoever on what matters here. That is, I mean, customers, safety and contain the fleet, so to speak. But you should always be worried, but you should do the right actions, so to speak. But that is to be followed. And one quarter we're talking about so far.
Agnieszka Villalak, Carnegie. I have three questions. The first one is on the North America. If you look at your profitability development so far, do you think that Q1 might be the bottom for you, especially when it comes to the underutilization costs? The second question is on the Brazil and the outlook for the trucks there.
I wonder if you don't see whether the heavy trucks segment has begun to stabilize. And what do you think about the easier financing terms in Brazil right now for the trucking industry? And lastly, just on your CapEx requirements for 2016.
Yes. I can start with the first two maybe, and if you comment. When it comes to North America, as Jan commented, there I think we have shown strength also. We have managed the downturn. Of course, we have extra cost related to the downturn.
2 things that has been very important: take it down sufficiently and firmly enough. So in my perspective, at least when it comes to the downturn management, we have, with our current estimates, taking the majority of the heat now. But we will continue to adjust when necessary, and that we will do for the time being with the stop days or stop weeks if necessary. And that's really related to inventory, and we will be firm on that, not hoping before we have seen. That is a strong message.
When it comes to Brazil, yes, I think it's difficult to say that it's not stabilizing when it's like almost approaching 0. I mean, we are at 30,000. And here, you have really, I mean, a necessity of replacements coming in, and it's tough to see it will become much lower. And for us as a brand with 20% market share, of course, that will not affect so much more. We have done a lot of adjustments.
We are continuing to overlook what we can do. But the most important is how do we actually maintain the full value chain in Brazil when it comes to the supply network, when it comes to the dealer network and really to work with that is the main priority now. So when it comes to if we meet 30 or 25 or 33, That's not a big question now. And I think also on the financing side, we have we are working close with our dealers. It's 7% of the
I don't think the financing is an issue. It's really the underlying demand in the market that will
you can see the agriculture is the only sector that is continuing to take a little bit more on not normal, but more close to normal volumes, if
I say so. I wouldn't have any hopes for improved Finam, if that helps or not. It's a much more structured one.
We actually discussed it also what is normal in Brazil. It's an interesting question in itself.
We were about to write going back to normal, and then we said we don't
write that book.
We were so close writing, we are going back to normal. So what is that? If we get that question, what do you mean with normal? We say, okay, we are when it will come back.
I think it's fair to say also that we have to continue to look through our cost base in Brazil as well actually. We are quite pleased with what we have done so far actually, What we managed in taking out the 2nd shift that we did during last year actually came through here in the Q1, but we need to continue to work with that.
And not to destroy long term value. As we said, in the value chain, because this has been built up over a long period of time, given the fact that you have localization demands, etcetera. And if you have a number of bigger hits, for example, among suppliers, that will completely change your ability in an upturn. So this is maybe the most important part.
And then in terms of CapEx, I mean, we have been now on the same level, obviously, 2 years or something like that after the big product introduction that we did in 2013. And we have the plans are to stay on this level as we are today.
Hi, Ula Serra, ABG. Just a couple of questions. First, on the cost development from here, obviously, we restructured for a couple of years and there are still things happening. Could you talk a bit about the sequential cost and efficiency improvement going forward throughout 2016? And also, you've been talking about asset sales.
There are maybe not that much left, but used trucks in the U. S, for example. Is that something we should be seeing sold during this year?
When it comes to the I mean, the €10,000,000,000 program, as I mentioned before, it's there. And as you can see actually in the figure, it is delivering. Apart from that, which we tend to forget from time to time, the €10,000,000,000 program was the structural cost reductions that we are doing. But apart from that, we are also working quite a lot actually with improving our logistic cost, the material cost and so on. And in some of these areas, we actually see quite an improvement as well.
That comes through and supports our gross margin as well. And that is kind of ticking in, you can say, month by month, quarter by quarter. So and I think that is somewhere what's kind of underlying supports the result that we see despite that the volumes are coming down actually. But you will not see any kind of big jumps. This is the nitty gritty work that gradually comes through in the gross margins.
And then when it comes to the yes, we have assets held for sale. And of course, when you have assets held for sale, you have the plan to sell it. And then it's very difficult to speculate when it will happen, if it will be this quarter, next quarter, this year or something like that. Of course, it does not become easier when you have a kind of the correction that you have in North America for the time being and, as was mentioned before, lower used truck prices. So we'll see when the timing is right actually.
But it's difficult to speculate when it will happen.
All right. Thank you very much. Let's move over to those of you participating over the phone. Operator, please go ahead.
Thank you. We've got Klas Bergelind from Citigroup on the line with a question.
It's Klas from Citi. A couple of questions, please. Firstly, on your production levels in North America, it appears as if March was a bigger month for you than I thought when I look at the industry data. Based on what you see at dealers' margin, how do you think production will run-in the quarter? Is the March level a good guide?
Or was that just temporary? Do you need to cut from that level going forward?
No. I should say that the cut set that we have done for the time being now, and that is in the magnitude of approximately 30% or onethree, that is where we are standing right now. We will continue to do, as we already said, adjustments stock levels are developing actually. And here is the main priority really, not to be too positive, but really to manage the stock. So I think what we are starting to see here is might be serving as some sort of guidance.
But if I was you, I should also wait for a number of months to look over that as well because there are always a little bit of different effects when you have just a single month here.
Yes. And then secondly, on people leaving Q2?
Yes. What we have said is that it's more or less done as from with the full effect during March. So as from Q2, it should have been done with a reduction of approximately 1200 people in the U. S.
This is interesting, right? So if we deliver a margin of 7.8% now and you typically have more volume seasonal in the second quarter, the underutilization is going away, then the margin can improve quite a lot here in the second quarter.
Thomas, I mean, I think that's your job basically.
Sorry. Then my next question is on emerging markets. When you look at China Construction, South America Trucks and particularly on South America Trucks. Are we seeing any margin improvement this quarter? Are we still at this depressed level?
We are I mean, if you put it this way, we have a slightly better situation the Q1 this year compared to what we had the Q1 last year. But that is, of course, due to the fact that we took out, you can say, the effect of the as I said before, the 2nd shift that we actually effectively took out January this year, that has improved, you can say, the result in Brazil this year.
Okay. My absolute final question is on market shares and thinking about MACH. Evocational is a strong segment in general. Construction led the headwinds from oil and gas are going away, but this also means more price pressure, at least what we're hearing in the market as everyone is chasing this segment. You're gaining share sort of market share here.
Is this the relaunch of the M. A. C. Brand that you did in 2014? Or is it just coming from that you're a little bit more aggressive on price?
I think on that note, of course, there are the main factories that customers are, to start with, not too opportunistic when it comes to specialized segments, and Mack has a very strong position in those segments. So I mean, that's the main effect. When those segments are moving, we get, so to speak, a positive segment mix effect for Mac. The main effect on pricing what we have seen in North America, as I said, has been how we have realized the excess inventory basically. But otherwise, we feel that we have a strong position.
The products are well perceived in the markets. We are continuing now to launch product news into the Mack brand. The new engines that we are moving in now for the greenhouse gas emissions, the new crawler gears are also coming into the Mack brand. So here is a lot of good news for the construction customers.
Our next question comes from the line of Alastair Leslie from Societe
General. A few questions, please. Firstly, on Renault, it's good to hear, obviously, that you're taking share with the new lineup. But I understand the key focus was to realize better pricing and margins. So you're starting to see that come through as well.
Can you give us a sense of maybe how the margins look now relative to 12 or even 24 months ago? 2nd question is just trying to gauge the scope for pricing to still firm up in Europe. So how do you maybe compare pricing quality today in a market such as the U. K. That's already seen a strong recovery in volumes with those that are still weaker and starting to recover?
And then the final question is really on telematics. I think within your telematics business, you've got that includes wireless car, which serves automotive OEMs. And I believe that's now being carved out of Volo IT which you've obviously sold. Can you give us a sense of how maybe the size of that business in terms of sales, current growth rates and maybe how integrated that is with the truck business? Thanks.
Yes.
If we start with the thank you, Alastair. When we start with the first question then on the Renault trucks, So as you say, we actually have got the trucks into the market for quite a while now and the customer feedback is good. And that is also what we see actually when it comes to the core markets such as Spain and France, for example, but also Poland, we also see progress. It has been and should continue, of course, to be a strong market for Renault. When it comes to price realization in general, I think that we have a job to do also in the organization now, given the upturn, as I said, to manage prices, I mean, for both brands basically.
And what is a key factor for us when it comes to Renault is now when the product has been in the market for a while also to manage the residuals and really get the message through what good uptime and productivity we have with these new products in indoor brand here. So we are working hard on that. And that is also one of the parts with the new brand organization that we have a fully dedicated team under the leadership of Bruno Brandt to handle that. When it comes to telematics, of course, we are actually now working with and overlooking how we will continue with the strength that we have in telematics. As we mentioned, we have 500,000 connected units for the Volvo Group.
But also, as mentioned here, we have a pretty big number for cars in wireless car operation, but that is considerably smaller when it comes to turnover, etcetera. But both operations are important to understand what is the value that you can bring into the different segments and customers, etcetera. So that is where we stand for the time being,
so to speak. I think wireless car is, I think, a fantastic example of how strong we are on telematics actually because here we're actually using our competence and knowledge that we have on the truck side and providing services to premium automotive makers. And that's not only our kind of Swedish premium automotive maker, but it's also German ones and so on. So it really shows us how strong we are in this segment actually.
But I think, as a matter of fact, one of the themes of also having the increased focus on services is by leveraging also the platform that we have on connected vehicles.
That's great. Thanks. Great detail. Just I think the one outstanding question was just whether you see sort of still marked differences in the kind of pricing environment between some of the stronger European markets and some of the weak ones, just how much of a catch up that still might be to come?
Can you take it yes, I didn't follow the sorry, Alastair. Can you just take it a little bit slower or
Yes. Sure. I was just trying to gauge just the scope for pricing to still improve generally across Europe, across the different markets because clearly some of it's been stronger over the past couple of years than others. You're just starting to see a recovery in the European markets. So really it was a question around pricing quality I suppose the potential for pricing to firm up.
And just trying to gauge the difference between, say, a market such as U. K. And, say, France.
Yes. We all not in particular disclosing different price points between different markets, but we can say that the pattern of prices and conditions between different markets has not changed dramatically. So that is pretty stable actually. But the more important thing, of course, with the recovering market is one of the keys for us is to be able to drive and to monitor the price realization, of course.
Our next question comes from the line of Graham Phillips from Jefferies.
Just a couple on service, the 23% sales and the flat development in trucks. Can you talk a little bit about that and why that's not growing? Because I think the previous comments that were made on previous conference calls about that segment was it was benefiting, particularly in the U. S, about increased own engines and own gearboxes.
Yes. And I think it's a fair comment. And of course, I mean, this improvement has gradually been taking place, as you know, in recent years, mainly then on the full transmissions, etcetera. And in U. S, you have a particular situation, of course, that you have a prolonged warranty situation for powertrains.
So this will gradually come into play when it comes to the captive powertrain situation in U. S. But definitely, we will see an effect out of that. But But I think this is, as a matter of fact, also a strong signal that we see that we have a business potential when it comes to parts and services in the group, given the strong platform that we have, and we will drive that focus even harder. I think with the recent developments, the pretty low shipping volumes in Europe, etcetera, it's not strange that we don't see a strong growth, but of course, there are rooms for improvements here.
And do you think I mean, I think Scania gets close to over 30%. Is there any reason why that should be structurally higher than Volvo and Trucks?
Sorry, once more now, I didn't Scania. Scania, I
think, in service and contribution to sales is about 30%. Is there no any reason why that can't be an aim or a direction of where Volvo can go?
I mean, we see that we're starting on 20 if I was you, I should check that figure of 30%, but without saying more comments on that. But 23%, of course, is where we are now. And what we are saying is that we see that there is a business potential for us when it comes to, I mean, the service revenue in relation to full top line. But and that we will continue to drive. And not only for us, but also for our customers, we see when we have contract penetration, financial contracts, we have a high retention also.
So it's bringing value for our customers, and we will continue to drive that.
Okay. And just two quick financial questions. On the R and D capitalization, was there also an increase in amortization? Or was that the net figure when you're talking about that capitalization benefit?
It's the net. Sorry, it is the net? Yes.
Okay. And finally, just on the cash flow. I think you still haven't paid the EU truck fine, the credit provisions being made for China, and I think there's some restructuring expenses. Is that still correct to come out of the cash flow at some point?
When it comes to the European Commission, first of all, we don't know the outcome. We have put a provision in 20 14 of €400,000,000 Obviously, they're not a cash effect. When it comes to the China credit losses, in total, approximately SEK1.7 billion on provisions in the balance sheet. Very little of that is utilized. So from that point of view, also so far, a very limited cash flow effect.
And restructuring is closed as of 2015. We will not have any further restructuring charges going forward.
All right. That's a wrap up. Thank you so much for coming today. We look forward to see you all again in July. Thank you.