Morning, everyone, and welcome to this press conference covering the first quarter of 2016. Today on stage, we will have our President and CEO, Martin Lundstedt, and our Deputy CEO and CFO, Jan Gurander. We will start with presentations, followed by the questions and answers from you in the audience. Since this is a webcasted event, we do appreciate if you use microphones. Enjoy, and Martin, please go ahead.
Thank you. Thank you, Gina. Ladies and gentlemen, good morning also from my side to this reporting and press conference for the quarter one 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 good anticipation. Also that we continue to see both the Volvo Construction Equipment and for Volvo Trucks 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.
Also that we had 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 of important segments, in the off-road segments for the trucks, as one example, new engines, ahead of 2007 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. 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 from 1st of March.
Volume development for trucks, volumes was down approximately 5%. 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 1st from T2 to T3, whereas for Volvo, the volume drop was related to the slow markets. 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. 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 cost 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 a decline 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. 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. We have launched news in the Volvo Trucks 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. 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 325 tons. It's fantastic. 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. 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, the 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 a fuel improvement of 2.5% approximately.
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 I-See, where we are actually all recording different roads for that specific application or truck, and thereby continue to optimize fuels, acceleration, retardation, et cetera, and the interface between driver and the vehicle. 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 platoon is really that you have a Wi-Fi connected road train, you can say, with three trucks. That is giving fuel improvements up to 7%. 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. 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. That is, of course, growing rapidly now.
We will demonstrate also full autonomous driving in the mining sector in May. 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. That is 10,000 less than we forecasted at our quarter four reporting. Main reasons is, as I said before, the on-road segment slowing down as well as the 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, the new forecast for the full year is expected to be 290,000.
We had 280,000 in the quarter four reporting. As a result of, you can say, stability as we feel in the European economy. 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 2008, mainly. We also see that, of course, the low oil price, among other things, in a positive way affecting also the profitability levels, even if a major part of that is transferred to the end customers or the transport buyers. In Latin America, it is Brazil that continues to be on a very low level even declining further. We are taking down forecast now from 35,000 to 30,000. We are continuing to adjust, I'll come back to that.
Maybe one important figure here is that Brazil in quarter one stood actually for 2.4% of the shipped volumes when it comes to trucks. Also putting it into relation where we are standing right now. Here it's really about managing the downturn in a good way when it comes to the industrial system also when it comes to the supplier network and our dealers and customers. Asia. China is expected to flatten out on a level of 750,000 units. We had this downturn, now we feel a stabilization. I think what is important to say about China is that I was actually in China a couple of weeks ago met with the Chinese leadership. You feel a very strong movement in the new five-year plan of 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 pain for long-term gain. 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 Modi 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 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. Most important of all, we didn't have any injuries on our colleagues in Japan. The activity level still to be seen here.
When it comes to market shares, it has been in general good developments. 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 Trucks market share. 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. 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. What is important to say here is not only that we have starting to see positive effect of the market mix growing South 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. 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. 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. 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 order stocks and deliveries.
Organization has done a good job here, production output has been taken down considerably, approximately 30%, and that was the forecast also, as you remember, we said in the quarter four reporting. Orders were down 54% compared to the same quarter last year, deliveries came down to 33% in total. Here again, we are managing this very closely, main priority is that we are actually not being too bold when it comes to the market development. Of course, we are ready if it's necessary to adjust production when stock levels are adjusted. 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 in Southern and Eastern Europe.
Production in Europe has been in several steps now, been adjusted upwards both for Volvo and it will also come for Renault here. 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%, that is a consequence of the political and economic turmoil, 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. As a matter of fact, we are still continuing to have a result that is around zero for Brazil in particular, we are having a positive result for Latin America, 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 in Southeast Asia to some extent, also in Middle East, of course, with the political turmoil here. If we 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. 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 pre-buy of Tier 2, showed a positive trend, 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. At bauma, we introduced the biggest articulated hauler ever, Masterpiece, out from Braås outside Växjö. That is really showing Swedish engineering at 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 a much better traction capacity, of course. 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-tonner 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. Two 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%-10% here. In the previous forecast, it was hovering around 0%, -5% to +5%. In the U.S., the market was pretty stable, but the change in market mix mainly from the heavy machineries into compact equipment, and the forecast for the full year is maintained at -10% to 0%.
Continuous decline in a number of major markets such as Latin America and Middle East. 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. Forecast has moved from up to -15% to -5% instead of -20% to -10%. I think that is what we see, continues to be harsh conditions and market headwinds, so to speak. The net order intake was 11% below for the first quarter with a decline for Volvo, which was partially offset then by the increase of SDLG due to the pre-buy in China.
The year-over-year comparison is influenced by the unusually large order intake for Volvo also the last quarter ahead of the product exits that we did on Volvo-branded backhoe loaders, motor graders, and milling machines. Excluding these product exits, order intake 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. 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. In South America, similar pattern as for trucks, basically. We have a very low economic activity. 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. In Asia, deliveries were 2% above the last year, and as I said before, mainly driven 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 continued to be sluggish. Bus deliveries increased with 28%, mainly driven by North America and Asia this quarter. Orders were up 13% where we saw biggest impact from 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. We received a full order for 11 electric hybrid buses and two electric bus charging stations, much more of a system thinking to Namur in Belgium. This is a very important breakthrough, and the interest around this urban solution is big around and across Europe, mainly for the time being. 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. 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. Net order intake was 11% lower than last year, driven by the lower demand for marine leisure engines in North America. In the quarter, delivery showed a year-over-year increase of 1%. Also, 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, Volvo Penta's electronic vessel control system, to provide a single interface for the driver.
This is, of course, one of the clear strategies. To continue to broaden that offer that we are integrating, propulsion, efficiency, stabilization, maneuvering. We also have bought 80% of Humphree, that are providing them solutions for trim and stabilization systems. That will further enhance the offering in that direction. With that, ladies and gentlemen, I will leave the word to dear friend and CFO and Deputy CEO, Jan Gurander, for the financial update. Thank you.
Thank you, Martin. Good morning, all of you. For the CFO of this company, a fairly undramatic quarter, I would say. Looking into the sales situation, I think the sales figures very much reflect what Martin just described, with the markets coming down in North America and South America compared to one 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.
That comes through as a theme, both in terms of equipment sales and also in terms of service sales as well. 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 small fluctuations compared to one year ago. If we compare it, we were at SEK 4.6 billion last year, and this year, SEK 4.5 billion. Then, of course, we have taken out the effect of the Eicher divestment that we did last year and the effect of the Volvo IT divestment that we did in the first quarter this year. Furthermore, last year we had the restructuring charges, as you know from this year, we don't have any restructuring charges anymore.
Here, you can see that the currency effect has affected us during the quarter with approximately SEK 400 million negatively compared to one year ago. As we see the currencies today, 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 billion and SEK 2.5 billion for the whole year. For the Volvo Group then, what is affecting our results year-over-year, we have on the positive side, you see the cost programs continue to come through. We have, if we add together the SG&A, approximately SEK half a billion year-over-year, and this is exactly in line with the SEK 10 billion program that we are finalizing during the course of this year.
We can also see that we have a positive effect from the R&D, mainly coming out of the capitalization amortization. Furthermore, of course, the good markets that we see in Europe with the growth markets 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. 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. Of course, due to the fact that we take down North America, we lose out the gross margins in North America.
What we have managed to do is to ramp down production in a very efficient way and adjusted our cost base in a good way. 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 unusually 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. When you ramp up production in North America, we get a very good situation on the working capital.
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. Then we have the receivables. We get paid basically the first day when we ship out through the floor planning and so on. 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. That is the reason why I see that the trade payables is unusually weak in this quarter compared to a normal first quarter. 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. Of course, here you can see the magnitude of the drop 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, when we then currency adjust, is a negative of 5%, and we are stable on service sales for the year. 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 can 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 SG&A expenses that you saw on the first page is very much related, of course, to trucks, and then the R&D capitalization as well. The safety campaigns are related to the trucks operations. The currency is SEK 340 million. I would say that despite the fact that we then have lower sales this quarter, we are improving the margin from 7.3%-7.8% for the quarter. Construction equipment, delivered machines up 2%. Here we can see that on the Volvo side, the Volvo brand side, it's a negative of approximately 6%. Then we have the pre-buy effect of SDLG in China in connection with the new emission legislations that kicked in on the 1st of April. Then we have more or less zero 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. 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. 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, little bit from the real big machines quarter-over-quarter to slightly smaller machines as well. That is what comes through in the product mix. The currency is also here hitting us with approximately SEK 50 million.
We have a hit in the first quarter of approximately SEK 150 million on the China credit risk as well. We had, incidentally, the exactly same figure in the first quarter last year. It was also SEK 149. 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 disproportionately big hit from the currency, SEK 140 million. 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. 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. 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. First quarter that we have ever had. We see the results going up from SEK 474 million to SEK 493 million. Very good development for the time being in terms of the quality in the credit portfolio in North America and Europe. 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. Yeah, that was time for you again, Martin.
Thank you.
It was.
Quick, I have to put out the cigarettes now.
Okay. Don't tell my mom.
Thank you, Jan. I think we can stand here. Just a summary, we started on the same note, stable operating margin. I think given the fact continuous uncertainty in many of the emerging markets, we are taking down, so to speak, the full cost for North American markets from high levels, continuous good cost traction, good adjustment and flexibility measures taken in the group. Despite currency headwinds, we're also actually working in the right way in different markets. When it comes to the operating margin and the 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. Just a couple of comments on the new organization also.
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 profitability merits, being able to pursue decentralization, brand ownership, agility, and continues to work with improvements in all areas. 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. That is also on track in a good way. I think that is a summary of the quarter, and by that also we open up for Q&A.
Thank you very much, Martin and Jan. We have several. We'll start.
Thank you. Erik Ekman, Nordea. I have three 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? 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. 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? 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.
Yeah. I think it's a very good question around services. First of all, of course, this is a very important focus areas for us. 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. It's also a signal 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. 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. I was not really sure about the follow-up question on how we share costs, et cetera.
Yeah. To what extent, though, is profitability between the two, if you could separate it dependent on what happens with the other? Of course, in the end, you need equipment volumes for aftermarket earnings. In the short term, if you see a big volume drop on equipment-
-would that impact the aftermarket profit at all or?
No, no. The structure is the following, that we have very clear separation of the P&L impact for the two businesses. The simple reason is that if you look at the value chain of it, you have two completely different value chains of it. Then it comes together, of course, in the dealer side. From a P&L perspective, we can separate that. Then I can just comment on the question on if the margins are higher or lower, they are higher. Then when it comes to the brand organization, as you said, the cost. Here we have, of course, been very clear. We have created a strong cost, I mean, a strong foundation now with the efficiency program. This is very important that we are maintaining.
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 focus 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. Here we have a transformation that is following plan absolutely, and we will not get lost when it comes to our efficiency program. Then I think it was working capital. I'll leave it to you.
Well, yeah, my favorite topic. The working capital, basically what's happened, you have first of all, one, you can say one type, one effect when you stand on the brakes, so to say, and that's what we are doing now in the first quarter. 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. 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 term, so to say. When it comes to what we can work with, and now in the first quarter you saw that we had an increase also in receivables and also in inventory.
That is a little bit a usual thing you have in the first quarter when you come into the, what you call the spring season, is usually you ramp up a little bit your inventory for the second quarter. That's a little bit of a seasonal thing, and that will usually come back in the second quarter. Generally speaking, also when it comes to managing, for example, the situation 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, et cetera? I think so far, so good when it comes to managing this.
Thank you.
Hampus Engellau, Handelsbanken. Three questions. Starting off with North America. We note price competition on new trucks is increasing. On top of that, we also note there's the terms and drop in used truck prices. My question is, have we seen this effect already in your P&L in first quarter, or is this something that we should expect in second and onwards? Second question is on the recall cost, if you could quantify that of this 18,500 trucks. Last question is on Europe. Scania gave a very bullish view on the southern parts. 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? Thanks.
First, when it comes to North America, I think it's fair to say, exactly as you mentioned, Hampus, that we have seen price pressure, that is pretty natural also when you're coming into a downturn. In particular, it goes about the delta of inventory you have from coming back to normal stocks. Here it tends to be that you are a little bit impatient, so to speak. On that part, of course, we have seen a certain price pressure already now realizing the stock levels. Thereby also have a discussion together with our dealers how to do that in a way. That is also, of course, as you said, related to the pressure on the used truck side, 10%-15%. So far, so good.
We are managing the flows in a good way, that's the reason why we have been also pretty aggressive of really slowing down production, so we are not feeding an overstock with the same discussions that you have already with the stock, so to speak. I think here, so far, so good. We are continuing to follow this. For the time being, we are not planning any 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 per specifically. 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, that is continuing to be followed.
Of course, as you said, it was a reasonably big number of trucks concerned here. When it comes to the market share, of course, it's effect of both. We see the same pattern as you described. Southern Europe, it is not strange from low levels. Any improvement is percentage wise to start with, big, but also in absolute numbers, we see that. I just saw the confirmation today also on the ACEA figures coming out, that of course you see a pronounced effect in Southern Europe, that we see as well. Also in Eastern Europe, as a matter of fact, Poland and some other of the markets. Then we have pretty strong levels already in Northern Europe.
When it comes to our footprint, we are well spread, as you know, we feel that we have a good momentum, both when it comes to market shares, not at least, for also that we are working actively with renewing their core markets. I think, do you want to add something on that?
Can I ask one follow-up, specifically on Germany? Both Scania 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 it keep pricing, or will it keep pricing from improving if the demand trend continues in Europe?
I think it's too short-sighted trends to have a specific view on that, basically. In our particular case, it is a market share gain, that's for sure, but it's not a big one. Here I think we should be a little bit patient to see what it takes. For us, of course, price management now in an upturning market is of course a very important part of the total scope. If something, we need to also work with our price realization when you have an upcoming market, yeah.
Björn Enarson, Danske. Two questions, one on UD 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. Secondly, where are you in the process when you're phasing out in construction equipment products? How long should we expect that to continue when you have the mix that you desire?
Yes. Thank you, Björn. On the first note, of course, UD 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 activity a little bit more for UD Trucks 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, et cetera.
We see a positive trend, we are far from being satisfied where we should be. That's the reason why we are continuing to do this. We are also happy to see Joakim and his team now has full focus on this. I think it's worthwhile noting also what Joakim Rosenberg and his team did also on the global truck sales when it comes to the cost base. The last 15 months, we see that coming through now, and similar activities is also what we're working with now in UD. 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, 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 of 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 the short term, but not in the long run. That's the same principle.
Thank you.
Thank you.
Hi, Anders at SEB. I have three questions. Two very simple one-word answer only required, and one more complex maybe. Did you say, or when do you think the U.S. market, all the inventories will be stabilized? Did you say summer time?
Yeah, during summer, you can say. Just to be transparent, last reporting we said during quarter two. We are around maybe a little bit stretched. 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.
We are not happy with it, of course not. It's understandable, so to say.
Finally, if you could come back to the market share in the U.S. 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. That was made even worse now recently in the last quarter not only. 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 course when it comes to the Volvo Truck brand, as we said. I think it's positive to see that we have, so to speak, turned the curve for Mack here mainly down segment mix related. Of course, when we do the scrutiny around Volvo Trucks, there are three 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. Here we lost a little bit of momentum.
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 at 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 four last year. If you really look at the volumes for quarter four and specifically then, as we see it more that you cannot see it in December as a matter of fact. That made a slow start. Then we have the quality campaign, and that was a drag in March. The proof of the pudding, of course, all that will be in quarter two here. 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 customers, safety, and contain the fleet, so to speak. You should always be worried, but you should do the right action, so to speak. That is to be followed, and it's one quarter we are talking about so far.
Agnieszka Vilela, Carnegie. I have three questions. The first one is on 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 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? Lastly, just on your CapEx requirements for 2016.
I can start with the first two maybe, and you have your comment. When it comes to North America, as Jan commented, there I think we have shown a strength also. We have managed the downturn. Of course, we have extra costs related to the downturn. Two things that have been very important, take it down sufficiently and firmly enough. In my perspective, at least when it comes to the downturn management, we have with our current estimates taking the majority of the hit now. 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. 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 almost approaching zero. We are at 30,000, and here you have really a necessity of replacements coming in, and it's tough to see it will become much lower. 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 right now. When it comes to if it will be 30 or 25 or 33, that's not a big question now.
No.
I think also on the finances side, we are working closely with our dealers. I don't think the financing is an issue. It's really the underlying demand in the market. You can see that agriculture is the only sector that is continuing to take a little bit more of, not normal, but more close to normal volumes, if I say so.
I wouldn't have any hopes for an improved economy, if that helps or not. Actually, this is a much more structural problem.
We actually discussed a lot on what is normal in Brazil. It's an interesting question in itself.
We were about to write going back to normal, we said, we don't write that because.
We were so close to writing, we are going back to normal. What is that? If we get that question, what do you mean with normal? When it will come back.
Exactly. 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 second shift that we did during last year actually came through here in the first quarter. We need to continue to work with that.
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, et cetera. If you have a number of bigger hits, for example, among suppliers, that will completely change your ability to in an upturn. This is maybe the most important part.
In terms of CapEx, we have been now on the same level, what is it, two years or something like that after the big product introduction that we did in 2013. The plans are to stay on this level as we are today.
Yeah.
Hi. Olof Cederholm from 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? 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? Thank you.
Yeah. When it comes to the $10 billion Program, as I mentioned before, it's there, 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 billion Program was the structural cost reductions that we are doing. Apart from that, we are also working quite a lot, actually, with improving our logistic cost, the material cost, and so on. In some of these areas, we actually see quite an improvement as well that comes through and supports our gross margin as well. That is kind of ticking in, you can say, month by month, quarter by quarter. I think that is somewhere what kind of underlying supports the result that we see, despite that the volumes are coming down, actually. You will not see any kind of big jumps.
This is the nitty-gritty work that gradually comes through in the gross margins. When it comes to the Yeah, we have assets held for sale, and of course, when you have assets held for sale, you have the plan to sell it. That is 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 the correction that you have in North America for the time being, and as was mentioned before, lower used truck prices. We'll see when the timing is right, actually. 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. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. We've got Klas Bergelind from Citigroup on the line with a question. Please go ahead. Your line is open.
Yes. Hi, Martin. Hi, Jan. 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 industry data. Based on what you see at dealers, Martin, 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 cuts that we have done for the time being now, that is in the magnitude of approximately 30% or one-third, that is where we are standing right now. We will continue to do, as we already said, adjustments according to how the stock levels are developing, actually. Here is the main priority, really, not to be too positive, but really to manage the stock. I think what we are starting to see here might be serving as some sort of guidance. 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.
Yeah. Secondly, on people leaving in North America right now, is the capacity reduction fully done by April, or do you still have some staff that will leave in the second quarter?
What we have said is that it's more or less done with the full effect during March. As from second quarter, it should have been done with a reduction of approximately 1,200 people in the U.S.
This is interesting. If we deliver a margin of 7.8% now, and you typically have more volume seasonally in the second quarter, the underutilization is going away, then the margin can improve quite a lot here in the second quarter.
Klas, I think that's your job, basically.
Sorry. 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, or are we still at this depressed level?
If you put it this way, we have a slightly better situation the first quarter this year compared to what we had the first quarter last year. That is, of course, due to the fact that we took out, you can say, the effect of the, as I said before, the second shift that we actually effectively took out January this year. That has then improved, you can say, the result in Brazil this year.
Okay. My absolute final question is on market shares and thinking about Mack. Vocational is a strong segment in general. Construction led the headwinds from oil and gas are going away, this also means more price pressure, at least what we're hearing in the market, as everyone is chasing this segment. You're gaining market share here. Is this the relaunch of the Mack 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, the main factor is that the customers are, to start with, not too opportunistic when it comes to specialized segments, Mack has a very strong position in those segments. That's the main effect. When those segments are moving, we get, so to speak, a positive segment mix effect for Mack. 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. 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. Here is a lot of good news for the construction customers.
Thank you.
Thank you. Our next question comes from the line of Alistair Leslie from Societe Generale. Please go ahead, sir. Your line is open.
Good morning. 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. 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? Second question is just trying to gauge the scope for pricing to still firm up in Europe. 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? The final question is really on telematics.
I think within your telematics business, you've got, that includes WirelessCar, which serves automotive OEMs, and I believe that's now been carved out of Volvo IT, which you 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.
Yeah. Thank you, Alistair. We start with the first question then on the Renault Trucks, it's true, as you say, we actually have got the trucks into the market for quite a while now, and the customer feedback is good. 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. 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 for both brands, basically.
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 the Renault brand here. We are working all of that. That is also one of the parts with the new brand organization that we have a fully dedicated team under the leadership of Bruno Blin 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.
Also, as mentioned here, we have a pretty big number for cars in WirelessCar operation, that is considerably smaller when it comes to turnover, et cetera. Both operations are important to understand what is the value that you can bring into the different segments and customers, et cetera. That is where we stand for the time being, so to speak.
I think WirelessCar is, I think, a fantastic example how strong we are on telematics, actually, because here we are actually using our competence and knowledge that we have on the truck side and providing services to premium automotive makers. That's not only our kind of Swedish premium automotive maker, but it's also German ones and so on. It really shows us how strong we are in this segment, actually.
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. 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 there still might be to come?
Can you take it? I didn't follow. Sorry there, Alistair. Can you just take it a little bit slower?
Yeah, 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 have been stronger over the past couple of years than others. You're just starting to see recovery in the Southern European markets. Really it was a question around pricing quality, I suppose, and 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.
Yeah. We are 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. That is pretty stable, actually. The more important thing, of course, with the recovering market is that one of the keys for us is to be able to drive and to monitor the price realization, of course.
Great. Thanks so much.
Thank you. Our next question comes from the line of Graham Phillips from Jefferies. Please go ahead. Sir, your line is open.
Hey, good morning. Thanks for taking my question. 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.
Yeah. I think it's a fair comment. Of course, this improvement has gradually been taking place, as you know, in recent years, mainly done on the full transmissions, et cetera. In U.S., you have a particular situation, of course, that you have a prolonged warranty situation for powertrains. 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. 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, et cetera, it's not strange that we don't see a strong growth. Of course, there are rooms for improvements here.
Do you think, I think Scania gets close to or over 30%. Is there any reason why that should be structurally higher than Volvo in trucks?
Sorry, once more now, Scania?
Scania, I think in service and a contribution to sales is about 30%. Is there any reason why that can't be an aim or a direction of where Volvo can go?
We see that we are starting on 20, but if I was you, I should check that figure of 30%, but without saying more comments on that. 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 the service revenue in relation to full top line. That we will continue to drive. Not only for us, but also for our customers. We see when we have contract penetration, financial contracts, we have a high retention also. It's bringing value for our customers, and we will continue to drive that.
Okay, just two quick financial questions. On the R&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?
Yeah.
Okay. Finally, just on the cash flow, I think you still haven't paid the EU truck fine, the credit provisions that have been 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 2014 of EUR 400 million. Obviously, they are not a cash effect. When it comes to the China credit losses, in total approximately EUR 1.7 billion on provisions in the balance sheets. Very little of that is utilized. From that point of view, also so far, a very limited cash flow effect.
The restructuring, any more?
No, restructuring is closed as over 2015. We will not have any further restructuring charges going forward.
Okay, thank you.
All right. That's a wrap up. Thank you so much for coming today, and we look forward to see you all again in July. Thank you.