Good morning, everyone, and welcome to this press conference covering the Q4 of 2015. On stage today, we will have our President and CEO, Martin Lundstedt and our CFO, Jan Grander. And as you all know, this is a webcasted event. So during the Q and A session, please use microphones. Martin, why don't you start?
Thank you, Kino. Thanks, Lutz. So first of all, good morning, ladies and gentlemen, to this presentation was from my side. 4th quarter, as we see, a good quarter with improved underlying margins despite flat volumes for the truck business and, as you know, declining volumes for our construction equipment. Of course, during this press conference also in addition to cover the quarter 4 and 2015 full year, We will also have the opportunity to ask questions, if you like, also regarding changes to the Executive Board of Volvo and the new organization structure that will come into effect as from 1st March this year.
So if we get started then with the Q4 and some of the comments, See if this is working. It's not. There. As I started to say, we had continued improved profitability, all flat volumes in the truck business and all declining volumes done in our Construction Equipment business. Underlying operating margin at 5.7% then if you take away the positive effect in quarter 4 of the arbitration case.
And that is also if you compare without the effect of the arbitration case, 7.9 percent operating margin for the truck business also showing continuous improvement. Operating cash flow of 14 point $7,000,000,000 and thereby also strengthened financial position and a positive net cash position. The board is proposing to the AGM dividend level of SEK3. And also that you will hear more about from Jan, we are now planning to finalize the structural cost reduction program as we go into 2016, but that you will hear more of Jan. Then if we get started with Trucks Europe and what we see.
As you know, we have had a recovery in Europe during 2015, increased freight volumes, improved earnings for our customers and thereby also taking the opportunity to renew the fleet. And we have a continuous replacement need given the good years at the end of, I mean, 2,005, 2,006, 'eight 'seven, 'eight and so on. Market shares for Volvo ended at 15.7 percent and Renault Trucks at 8.1%. What we've seen during the course of the year that we actually started 2015 pretty slow with lower order book, and we have gradually improved during the course of the year for the 2 brands. And what we see now is that also the order book for the beginning of 2016 is better than previous year.
Net order intake improved by 20%, were off 24% for Volvo and 15% for Renault trucks. And as a consequence of the continuous recovery in Europe, our current estimate of the total market for 2016 is a further improvement by 4% up to 280,000. We can also see, by the way, that used trucks volumes are developing positively. As one example, we see plus 12% in Europe North, and that is also an indicator supporting this view. North America, coming into that.
We had, as you know, a very strong last year when it comes to deliveries of 302,000 units. Market share for Volvo, given its main focus on on road segments, continued to develop slightly positive to 12.2%, whereas the Mack brand then, given its strong position in vocational and in oil and gas and pretty weak presence in the mortgage, actually declined to 7 0.4%. Going into 2016, we see actually that the continuous recovery in the construction sector in U. S. Is a positive in relative terms positive for the macro environment.
The net ore intake decreased by 58% in quarter 4. But I think we need to put into the different factors why that was a bigger drop than what we believe when it comes to the total market outlook for North America for 2016. First of all, we had the market correction when it comes to the long haulage segment after a pretty long period of very good volumes. Secondly, the dealer destocking to get balance in the structure that we see industry wide. And our estimate is that this will last during at least quarter 1 and quarter 2 to get the right balance for different segments and regions.
And thirdly, we had an exaggerated, I mean, difference between year on year quarter 4 also. So our current estimate is that the market will drop from $302,000 to approximately $260,000 with, if anything, a little bit of downward pressure actually. We have already decided and we are in underway to take down the production levels. And we are doing that more than I mean, the market forecast in order also to correct the balance between dealer stocks and production output. So we are on the level of approximately 30% adjustment downwards.
Another positive development, of course, as you can see here, is the increased capital components of the powertrain. We are now in very high levels when it comes to engines. You see high penetration for our I Shift, 82%. Highway and drive for Mack also on a very good level. And as I said, as you remember, the On Road segment is relatively small for Mack.
And traditionally, it has been resistance for these type of solutions into vocational. But we see now how the market actually all experience the very good performance of the AMT or semi automatic gearboxes. And with introduction into vocational for MDrives, 6% on deliveries. But when we look into the order book now going forward, we have a penetration rate of 19%, and it's increasing rapidly. So that is showing that the market is very positive in feedback on that as well.
South America. The total market, as you know, continued to decline further by 55% in Brazil. Our market share dropped slightly in Brazil. And the main explanation for that was actually the mix between some of you know these expressions, the semi pesado and pesado, pesado, so to speak, the CME heavy and the heavy segments, where we have a stronger position in the heavy and that decreased more than the semiheavy. When you look into the different segments, we maintained positions in the 2 segments, but that was, so to speak, a product mix effect in the market or a segment effect in the market.
The net order intake for South America continued to decrease by 36%, and our estimate for the time being now is that the market will continue to go down to a level of 35,000 from last year's 42,000. That means that we are continuing to do adjustments in our Latin American structure and in Curitiba. For Asia, the slowing economy in China, a medium and heavy duty market was down in China with 24%. We also saw the surrounding markets, of course, given the freight volumes, trade and different effects also coming into full effect. Our total view now in China is that we'll go sideways basically for 2016, so approximately the same level as we have seen in 2015.
Japan remains, however, on healthy levels, and we expect that also to move sideways on a good level of 90,000 for heavy trucks. We have declined our market share in Japan from 18.8% to 18.3%. And main reason is actually that we have done a changeover in our production system and thereby also decreased or slowing down a little bit deliveries. We are coming through that change now and moving into the market with full focus. On a positive note also in Asia and Oceania, we see that mature markets such as Korea and Australia are showing very good results for for Volvo brand but also for all brands.
Korea, we have a very strong position, has developed really well. And also Australia, we actually had record market shares of I think it was 26.1% for all the 3 brands, showing also that you can have a very successful multi brand strategy where you have clear brand positioning for the 3 brands, Volvo, for the Caballero Union Premium segment, for the Mack Convention segment and also then for UD when it comes to the Japanese region and haulage distribution segment. So I think that has been very successful. India also, our current market forecast is that the recovery also only to the economy will continue. And our view now is the level of 350,000 for 2016 and of course, giving good opportunities for both Volvo and even more for Eicher.
Coming in then to Volvo Construction Equipment. As you will know, continue to meet substantial market headwinds, mainly done in emerging markets such as Brazil, Russia and China, resulting in a decrease of deliveries over 26% in 44%. And just as a small detail, but may might be an important detail, minus 23% without product exits that we have conducted during the year. China continued to face very weak demand with the total market down by 48% up to November. What has been positive as the total demand in Europe, excluding Russia then that is on low level, showed a positive development of 3%.
And the net order intake during quarter 4 was down year on year with 18%. And if you exclude the product exits, it was down with 13%. The current focus, of course, is to improve the market and product mix and thereby earnings and get better resilience into the business less dependence on the brick markets. And I think we've had a good year when it comes to the heavy machinery. We have moved market share from 6.3% to 8.1%, and that's quite a lot, so 1.8 percentage point.
As one example, in Western Europe, Volvo Construction had a strong development on heavy machines that was up 14%.
So I
mean the profitability focus we're working on, on product lines and market earnings gives now a more resilient structure. We are also continuing to do the portfolio pruning and look to where we might we'll continue also to exit some of the products. To further strengthen presence in core segments, we are actually lining up a new set of products at the Bauma Fair in Munich in April, where of one of the big news, of course, will be the new Arctic Holier, A6060 toner that will then take the next step as the biggest today is the A40 toner. And so to the market outlook for next year remain, as you all know, bearish for China. Our current estimate is minus 10% to minus 20%, whereas the rest of Asia, North America are 0% to minus 10% and Europe pretty flat.
Buses had a mixed picture when it comes to market developments. We had good demand in North America. Saw a steady recovery in Europe and a continuous weak demand in Brazil. During quarter 4, sales increased in all regions for us except South America and also what was positive, sales increased in all product ranges. Also service sales increased plus 7%, mainly driven by Europe and North America.
The quarter was very strong for Volvo Buses with deliveries up 9% and net order intake with 24%. And now important to be very close to this and follow that this positive trend will continue. Also
on the
product side, we launched the new 9,800 Coach in Mexico, very good feedback so far. We've also been doing the preparation for introduction of the hybrid buses in India. We have a very big interest from India given their environmental agenda, and we will be shipping the first five hybrids to the city of Mumbai during the Q1. For Volvo Penta, Industrial Engine segment showed mixed picture, declining volumes in larger markets and flat volumes in mature markets, whereas the Marine segment was flat. On a positive note, Penta is strengthening its position in all segments.
For the whole year, Penta increased units sold with 17%. And the net order intake, however, decreased with 8% in Q4. During the full close on the product side, a new D16 marine application was launched to further strengthen a very strong product range on the Marine segment.
So with that,
I'll give actually the word to Johan to go through the numbers and the financial analysis.
So good morning. It's time to summarize
the Q4 for 2015 and also
a few words on the full year for 2015 in financial figures then. And if you look upon the sales figures, we go from SEK 77,500,000,000 in sales, SEK 79,600,000,000 up to SEK 79,600,000,000 krona. Worth to mention here is that the improvement comes basically from a currency effect. It's 3% up in Swedish krona. If we take out the currency effect, it's down by 1%.
And of course, that relates to what Martin has described actually that we do have more or less flat volumes on the truck side. But though and then we have decrease in volumes, down 26% on the CE side. We talk about the different regions, we see that with the strong development that we have seen in Europe, But also, I mean, we see now order intake coming down for North America. We see the kind of slowing momentum in North America. But last year in terms of deliveries and so on helped us a lot actually.
And you can see that we have $3,100,000,000 more in sales in North America in the 4th quarter. South America then more or less exactly compensating. The downturn, they're exactly compensating on the downside, you can say the uptick that we had in North America. And then Asia being fairly stable. And other markets, it's actually so that some markets that actually have a downturn compared to 1 year ago, it's mainly in Africa where some market is actually quite much lower than what we had in 2014 in the Q4.
If we then look into the profitability and earnings, as always, we have onetimers. We have restructuring costs. And we try to do this, communicate it in an as transparent and clear way as possible. This is then as you remember, last year, we had the 2 big onetimers in the Q4. 1 was the provision we put up for the EU litigation or potential litigation.
And then we had the China credit risk of SEK660 1,000,000,000. So the reported was just a negative of almost SEK1.5 billion. But if we exclude this kind of onetimers, it was SEK3 1,000,000,000 in positive. This year, in Q4, we had the arbitration case for the bull gear, which was €800,000,000 If you take away that one, we have €4,000,000,000 and €4,600,000,000 in profit. And you can see here, this is another quarter where you can see more or less all of our business areas are helping with improvements with the exception of Siena.
But I will come back to see a little bit later on. I think given the market circumstances and also if we actually exclude the onetimers and so on, the work that they are doing there and the profitability is on, I think, on a decent level given the circumstances. We go there from a 3.9% EBIT margin, there on the SEK3 billion up to SEK5.7 percent on the SEK4.6 billion. Looking then into the same exercise, but actually, you see where already different kind of, you can say, improvements comes from. When we go from the SEK3 billion to the SEK4.6 billion.
We see that we have then, of course, Europe and North America helping us quite a bit from the market side the increased sales. Also markets now where we have good earnings in our operations as well. Of course, from the market side, on the negative side, goes without saying Brazil is actually hitting us quite a bit compared to what it was in 2014. And of course, all in all, the lower volumes that we see on a group level. As I said before, more or less flat on the truck side, but actually the lower sales and deliveries that we see on the CE side.
Apart from that, we see that we get help from our savings programs. When we measure them in local currency, we have lower selling expenses. R and D is more or less flat if you take away the currency there. We do have savings compared to 1 year ago. And then we have some other.
In the other, which is a little bit unusually high, we have the €158,000,000 from the China credit risk. Also another thing that's there is the lower earnings that we see in the Q4 2015 compared to 2014 from our joint venture in China, DFCV. And of course, DFCV is affected by the downturn of approximately 25% in the market in China. Turning into trucks. Here, we have going from €54,000,000,000 to €55,000,000,000 in sales.
Once again, currency there, it's a +2 in Swedish krona. If you exclude the currency, it's a negative of 2. The operating income goes from 3.2 up to 4.4 billion. And it is on a rolling 12 months basis, SEK16.2 billion. Here, we have once again excluded these onetime mentioned before, the ones that are affecting the Trucks segment then.
And then we have the operating margin on Trucks going up to 6.0 from 6% up to 7.9%. And we were at 7.94% actually. But how we twist it and tweak it, we didn't go to the 8% actually, but very close to 8%. Here then, the going from 6% to 7.9%. Last year, it was a negative of €540,000,000 With the EU provision that we put up, we come to 3 point 2,000,000,000.
And this year, then we have the arbitration crisis of SEK 4,400,000,000 in, so to say, running operations. We have then in the latter part of this year of 2015, we had a higher capitalization than amortization, which helped the result quite a bit in the Q4. Looking into the whole year of 2016, we think that capitalization and amortization for the whole year will be fairly much in balance as it looked right now. But in the beginning of the year, we will capitalize a little bit more than what we amortized, and that will turn for the latter part. Lower selling expenses and of course, Europe, North America on the positive side.
And currency, of course, helping us with almost SEK 700,000,000 We do have a negative product mix, and this is maybe more of a financial thing. It's so that the relative share of our profitability is or the relative sales that we have is actually lower on the Volvo side than on the other brands. So from that point of view, it's a negative product mix. The other brands are selling relatively more in the Q4 2015 than what it was in 2014. And then, of course, Brazil affecting the truck business negatively quite a bit.
On the construction side, here, as I said before, down 26% in terms of deliveries. Sales is only down 10% or 11%. If we take away the currency sales, it's down with 16%. So we can see here that the of course, helped by currency, but also the fact that we move the product mix a lot, going from the smaller machines to the bigger machines, that's why sales is not coming down so much as the unit sales are doing. So once again, the you can strategy or tactics that we are doing right now and see definitely gives an effect on the top line, but also to help to offset the difficult markets that we're into right now.
You can see that last year, minus €815,000,000 this year, minus €191,000,000 In all these figures every quarter now, have the China credit risk provisions included. So they are not excluded anywhere. That's also why that was such a big negative on the Q4 last year with the minus the credit risk provision of $660,000,000 that we put up at that point in time. And then, of course, the operating margin for both quarter is both 'fourteen and 'fifteen is on the negative side. But then looking into a little bit, you can say the underlying performance, if one excludes the China credit risk provisions.
Last year then, we were at a negative of SEK 150,000,000. And this year, we are actually on the minus SEK33 1,000,000. So all in all, given the fact that we lose this 25 ish percent in unit sales, we are more or less on the same level, actually a little bit of an improvement. Also, CE is actually delivering for the whole of last year in an extremely markets are down, still making a €2,000,000,000 profit for the whole year, which I think is I think that's quite a new achievement for the guys working in CE. Apart from that working with the product mix, you know that we are working also with our product portfolio.
We see positive effects coming out of the fact that we are working with that. And as Martin said, the fact is that we are phasing out some or have phased out some products is also positive effect. And we are, of course, working through the whole kind of cost structure in VC as well when it comes to operating expenses and all the other stuff. And that gives a positive or helps CE right now in this difficult environment. Of course, on the negative side, apart from volumes, we, of course, get a very low capacity utilization in some of our factories for the time being, and that's hurting us quite a bit.
And then earnings in China, it's, of course, on a level definitely doesn't help us, if I put it that way. Turning into other areas, buses and Penta. Buses has done actually increasing sales with almost 25%. If we exclude the currencies, it's a positive of 17%. And it is a combination of fairly some markets being fairly good, but also that we gain position here.
So buses are definitely gaining position in many markets for the time being. And we can also see now that we are on the positive trend in terms of earnings as well for Volvo Buses. For the whole year last year, it was almost CHF900 1,000,000 in profit. And it looks as though it is a solid improvement that we see now coming through in this business area, where we have been struggling quite a bit actually. The where we see we see actually good market and product mix in buses for the time being.
We have a strong sales situation in the northern parts of Europe. We see hybrids selling well where we also have a good business. U. K. Is one of the markets where we have a positive coming out of that.
And also then that we see good development on the fully built coaches, which also increases the sales value in North America. So we are at almost, I think, we're at 3.7 percent EBIT margin for the whole year. Penta is basically now a little bit above SEK1 1,000,000,000 in earnings, also had a fairly good quarter or good quarter in terms of sales, up almost 10%, but being above SEK1.1 billion in sales. 11.7% in EBIT margin for the whole year. We checked backwards here in the morning.
And in the quick check backwards, we didn't find any year that was better in terms of EBIT margin for Penta. I might be wrong, but it's at least the last 10, 15 years, we didn't find anything like that. So Penta is really continuing to delivering extremely strong actually. Customer Finance, also an area. We customer finance broke the SEK2 billion threshold.
And if
we look upon purely our customer finance activities, this is always also record. Our customer finance activity has never been above SEK2 1,000,000,000. You will find 1 year that is about SEK2 1,000,000,000 before, but then it was also real estate and pressure involved as well through customer finance. I think it's quite a good achievement for these guys. And we have this where we want to be approximately on our return on equity, 13%, 14% on that one.
So still a very, very good performance there. And of course, the market where we are, Brazil is the market that we have a very, very close eye on. Brazil doesn't add any volumes. We have a portfolio that we're working with in terms of credit risk. We see overdue increasing, of course, compared to 1 year ago.
It goes without saying we have a market where that comes down so much. But it's still under control and managed as well. Then we come to the cash flow. And the cash flow for
the quarter was close to SEK 15,000,000,000.
And the cash flow comes actually through in I would say, in all aspects in this quarter. And I think this trend we have seen now for I think we have to look almost 3 years back actually that cash flow is improving. It comes, of course, from the fact that we are improving our profitability in the company. Secondly, it comes from the fact that we have discipline in terms of our CapEx expenditures. We are now for quite some quarters, actually, we amortize more than what we have in CapEx.
And the company is well invested. There is no need. There's nothing that we, for the time being, is suffering from or anything like that. And of course, thirdly, also, we see that we are improving also on the working capital. And the working capital effect was fairly huge in the Q4, basically with improvements in all areas, accounts receivables, payables and also on the inventory side.
The structural cost program measured in Swedish krona, we are at 4.6%. If we measure it in local currencies, we are at €6,800,000,000 We have 1 year left. If we look upon the last 2 years, 2014 and 2015, we did SEK3.5 billion per year. This means that there will come another SEK3 billion, SEK3.5 billion next year, which means that we will reach the SEK 10,000,000,000. The, what you call it, activities are more or less all of them in place when we come to year end.
We have few things still left. It's causing especially on the sales side, I would say. Some small issues still on the production side. And the main thing that we said that will be finalized and transferred in the Q2 is the outsourcing of IT. And with this one, this is the last time you will see this slide because now going forward, we will continue to focus the company on continuous improvements and also, of course, to implement the new brand organizations that we announced last week.
So a few comments on the full year. And basically here, if we had a few onetimers in the Q4, I can tell you the onetimers in the whole of 2014 and whole of 2015, there are quite a lot of them. And that's you see this small note down here that you can read when you have the time. But basically, to measure the underlying performance, we go from a little bit less than SEK 12,000,000,000 in 2014 up to the SEK 20,000,000,000 in 2015, excluding this one timers. And it takes us from a 4.2% in EBIT margin up to 6 0.5% in EBIT margin.
And of course, there is a quite sizable FX effect from the currencies, a little bit more than SEK 5,000,000,000. And of course, that has helped us last year. But I think the if you look upon the structure last year's structure, we have approximately, you can say, ballpark figures, 1% in internal improvements more or less every quarter if you look upon the whole year. And then we have the other percent basically coming from currencies last year. So there is an underlying improvement within the group, but also some tailwind from currencies.
With that, welcome back, Morgan. Thank you, Jan. I think you can say also, just to summarize what we have said, foundation laid for further going into 2016 and beyond. You have seen net earnings improvements, improved cash flow and thereby also strengthened financial position. And also very important step for us now, the new organization given even more focus on customer segments and driving the service business, increased focus on profit and loss for the different brands, standing on its own commercial and profitability merits and still leverage the best of 2 worlds.
I mean, bring the scale where it matters and where it matters. So I think this is the next step with the foundation that we have laid now and moving to that. So I think with that, Kina, the presentation as such is over, and we start with the question and answers.
Thank you very much, Martin. Who would like to begin?
Thank you, Bjorn Nyman, and Svan Danske. Start with the positives then, North America and Brazil. Can you give some color on the ongoing ramp down in production and how we should look upon that? I mean, it's quite sizable, of course, coming from a very high level. And how difficult or complicated it is to give some help on when looking into 2016 earnings And also the cost reduction or the lower production that we have seen in Brazil and the workforce that has been lower during November, December, are you initiating more measures also in productions in terms of manning, etcetera, in Brazil?
Or what kind of extra measures are you planning there?
If we start with North America then, since we've had high deliveries, more or less the whole 2015, we are now ramping down. And of course, before you're coming down, you take some stop weeks and stop days, etcetera. So that is a fine tuning effect that we have now during the quarter 1. But as we have said, we are more or less taking down the production level on I mean, the pace going forward will be 30%. And as we have said, I mean, the correction over the market, our estimate is 15%.
So we are taking it down more just to be sure that we actually have a good balance between the stock dealer stocks levels and our production rate. And we have a good also flexibility for doing adjustments both upwards and downwards from that level. When it comes to Brazil, as you said, I mean, we already started to take stock in order to really be in balance between output and our production levels. It will be less in quarter 1 due to the fact that now we are taking down manning accordingly. And we are, of course, following this if that is the right level or if we need to do further adjustments.
And that goes, of course, for production,
value chain.
Short follow-up. The ramping down has historically been quite costly for Volvo. Is there anything that you see have changed or anything that is more prepared that you will have more of a smooth ramp down?
As we said, I mean, our estimate now is that we have been pretty clear on that, that we want to be sure that we are taking down production, if I may say so, a little bit more aggressive to be sure that we're coming into balance because we have enough flexibility in the system. So that is where we're standing right now.
Anders Singer, Hansbanken. I'm coming back to North America. Just to clarify, you're cutting production more than suggested by your market outlook. Is there also an element of reducing inventory? And when do you need to switch that if you're correct in your market outlook?
As we have said,
I mean, our current estimate is that we need quarter 1 and quarter 2 when we look at both the Volvo MAC brand in order to correct the inventory. Of course, there's always a mix what you have in inventory, how does it look in different regions, but that is our current estimate. Then of course, if we are correct, we will have an upward pressure. But we, I said here, we have a good flexibility in our 2 production flows in Latin America in North America as well. So that is approximately the timing.
Moving over to Europe. You're growing 20% in orders. If I compare with Scania, Daimler, it's more than twice. How much is this comparison? And how much is there an element of market share gains?
And could you maybe talk a little bit about the Renewal and Volvo?
First of all, of course, if we start with, I mean, average figure of 20%, should remember that I think Volvo Group, both around Volvo and Renault came in a little bit weaker than the other brands into 20 15. And we saw that also in the market share development that really declined during the 1st quarters. And gradually, we have stabilized that and also improved in some market areas in Europe. So I mean, our feeling now is that we're going we are, for both brands, going in with a stronger order book and also that we are going in with a market share that is more solid than it was last year. And what we have seen, of course, also for the Renault brand is that the southern markets are also recovering because that has been one element for the Renault brand that the relative weakness of Southern Europe in relation to Northern Europe.
And so there is an element of that. And in addition, for Renault, it was still at the end of the switching over to the new program during the end of 2014 for some of the specification. So for both brands, it's, I think, those effects.
Okay. One last question for me. The organizational change in trucks, could you maybe add some more comments to the 50 minutes presentation deal over the Internet? No, but
I think as we said, there are a number of, for us, pretty clear targets we want to achieve. Again, during the last 3, 4 years, with good reasons, it has been a consolidation, looking at the cost structure, where do we have the resources, how do we are doing with the brand positioning for different brands in different regions, etcetera. It has been a good and focused product. What we see now in order to drive organic growth, to drive service sales, it starts with the customers. We know that we have discussed that many times before.
And what is it all about? You need to have a brand organization really taking care of that I mean, a tailor made solution in a good way for the different brands. And tailor made could be a more standardized offering depending on what brand it is or it could be a really tailor made solution, including service packages. And the means to drive this is, I mean, being close agility, decision making power out in the different brands and regions, use the fact that many of the regions have a one to one system, as I call it, or end to end. I mean, we have a very good supply chain in all major regions that we should use better to the continuous improvement process to really drive operational excellence in the flow.
So I mean, from an asset, people and business and brand positioning perspective, this is the logic step to take. And then of course, it is important also, I think, to make sure that every brand and every business area is standing on its own commercial and profitability merits going forward. And in addition, it's more fun. And why not? I mean, I think it's a good synergy.
Then of course, as we have said, the backbone is also important to keep in mind. Where does it matter when it comes to scale? As you all know, scale is a very overrated word. But there are scales that you find that we should be very consistent. We have done a good job when it comes to the modular toolkits of standardized interfaces and still having ability for performance steps in between.
We have scale
A question from Hampus here. You mentioned that all brands should stand on their own. If I read between the lines, it seems like at least one isn't doing that today. Or in that case, where do you see the largest potential to improve profitability or improve or drive organic growth going forward for that brands.
You don't even need to read between the lines. As you remember, on the Capital Market Day, we actually disclosed at least the relative position of the different brands and regions. And I think it was pretty clear. And again, I think we have, for example, I assume that you're thinking about UD. I mean, we have a very strong value chain for that brand.
We know that we are actually also looking on a structure where we can have a very good development. So when we're doing that work and we'll, so to speak, empower, as I said, the flow thinking, the business thinking, we have very strong view on our ability to improve position there.
And then moving on to Construction Equipment. If you could talk a bit about the capacitization you see here going forward since the problems we have in the market will probably continue here for the next two quarters. And also, if what your expectations are for the credit provisions you have in China will have had and if they will continue?
When it comes to if you start with the capacity utilization, of course, there is one thing what you have in I mean, the fixed cost of the structure, etcetera. Think we have done some measures on that part. But to some extent, to have what you have, so
to speak, and you need to have
a global presence. What we have done in that area is more, I mean, fine tune with the product exits, what is really, I mean, the core and continue to see what effects that will have. Then, of course, we are doing, I mean, continuous adjustments when it comes to manning in production, but also when it comes to the whole structure, of course. And I think as Jan was into, if you really look into it and also the whole sector, with a decline of 26%, big dependence on some of the markets, We see really now the effects coming through when it comes to the focus on heavy machinery, really scrutinizing the product portfolio make sure where we are concentrating our efforts. And also a number of opportunities when it comes to the operational excellence in itself.
It's not only about the capacity utilization, but how you utilize the capacity you utilize, meaning, I mean, everything about quality lead times, delivery position, etcetera. And I think they are doing a great job now, very focused and consistent work in that matter. So we are not being all over the place, so to speak.
And when it comes to credit risk, I think we would like to know as well how much it will be at the end of the day. And if we knew it, we would put up the provision immediately, say, now it's kind of done. So I think we have in a little bit similar ways, you have the difficulty to predict. I think when we started with the SEK 660,000,000 in Q4 2014, then we maybe hope that the market we had taken the big downturn in the market that it would stabilize and so on. But then you saw last year that the market continued to decline.
And of course, when you have that decline in the market, our end customers, they utilize the equipment much less. By that, they don't have the cash flow. Our dealers, they don't have the cash flow either and so on. So that's why it kind of continued, of course, during 2015. I think one can definitely not rule out that we will have further credit provisions in China going forward.
But the size and magnitude, I don't even want to speculate on it actually. So I think you can pick a number. But from
a more electronic point of view, maybe I cannot should not say it. But we will discuss about the bridge for the total group. And we had $660,000,000 as a one timer, but we didn't have the $158,000,000 as a one timer. And I think that is what we said. I mean, let's stop there.
I mean, these that are actually part of the going business. Okay, we had an overoptimistic view a couple of years ago. And now we have that coming up. And it's better to know that because it's part of the learning process going forward for our business model.
Okay. And then the final question. Just on the balance sheet, now you're no net debt. And the same time, you have said it's Memory is shorter. Memory is shorter, basically.
But I mean, they have also said that the big investments are done. There will be no big banks. And the free cash flow is very strong. Where are you comfortable? What kind of gearing level are you comfortable with?
And how should we look on the kit management going forward?
I think the I mean, 1st of all, I think it has been a necessity actually to strengthen the balance sheet as we have done actually. I mean, we are in a highly cyclical business. I mean, we have seen downturns before. We now have that. I mean, it's the risk.
From that point of view, I think you need to have a solid balance sheet. We should not either forget the fact that we are running our financial services as well, which has assets of what is it, approximately SEK140,000,000,000 as well. So from that point of view, you need to have a strong balance sheet. Our one area that we don't like, but it's the seasonality that we have in our cash flows as well, that we have a little bit of a tendency to basically not generate any cash for the 1st 2 quarters or so last year, but usually it's the 1st 3 quarters and then all the cash flow comes at the end. And from that point of view, we need to manage also the volatility in our and that's the working capital that basically that's fluctuation so much.
So I think from that point of view, that and also then connected back also to, I think, the balanced proposal from the Board as well to have SEK 3 per share as a dividend. I think that's where we are today. But of course, if we continue to see a stability in our earnings, you are all asking for how we manage our can you manage the downturn in North America? You have reported that before. If we can prove that and we can continue to improve our earnings, of course, a day will come that we can take a look and maybe be a little bit clearer also
on the strength of the balance sheet. And it's costly to be short of cash. I don't know. But I think it's I mean, if you really look at shareholder value long term, really to have a healthy balance sheet for that, really driving the business,
if you see, I mean, the
solutions and not at least customer financing, I mean, that is a very important element for driving long
term organic growth, for example.
Hi. Anders Trapp from SEB. I have a couple of questions. But firstly, our first question is really listen to what you're saying about no big banks going forward, evolution rather than revolution, I guess, you're saying also. Is that sort of enough considering that we are probably going to see down volumes also in 2016, looking at the guidance that you have and maybe some further downside risks to that.
So is it and with the capacity adjustments that you are now talking about or having implemented or about to implement, is that enough for to safeguard the profitability in 'sixteen?
Should I talk to No, but I think and when you're talking about continuous improvement, I think that is a mindset when we come to how we are actually improving the business, I mean, step by step. Then of course, when it comes to the current situation in different marketplaces, you need to use the tools that you have. And that is regardless of the structural cost program or if you're working more on a continuous improvement basis by driving efficiency, driving quality development, etcetera. So I mean, we will not take out the tool of doing the necessary adjustments in our value chains, of course. But at the same time, when we look at where do we have opportunities going forward really to drive, I mean, efficiency for real, I mean, all the different elements.
We believe more, I mean, connect the flows, work through the different value chains. And we have, as I said, a number of elements that make that makes the group strong. We have strong regional value chains that we can utilize better, not at least to cope with the different regional volatilities that you're off to. I think we can utilize that even better if we do that.
Exactly. So one other thing, what we have identified is also that currently, when we work along, you can say, the value chain or the process to deliver trucks and service trucks and so on. I think in the organization that we have had, it's a functional organization. And if you have a strong functional organization, and it has had its merits, so I'm not complaining about that. It made my life easy to take out SEK 10,000,000,000, if I put it that way.
But you see that you lose a little bit of efficiency along the value chain. And that's also why we now changed the organization. And when you then look upon certain parameters in along that value chain and KPIs, we see that we are not where we would like to be. And I think we have a fairly good understanding what it means to be world class on these parameters. And now we need to find you and Martin mentioned one example before that.
We have had disturbances in Agio for the last 6 months basically. And we have talked about disturbances before as well. They are partly connected to the changeover programs because they are structured quite big. Now we want to actually take out the benefits, but we have restructured it and then come back and actually make the operational efficiency much better. And that is quite a
big potential that we have. But of course, I mean, Anders, you know, it as well, I mean, if there are real structural things going forward, I mean, you will do it. Yes, sure. And I
was really after if you're sort of happy or content with the sort of basic structure that you have now, which I guess you are and then gradual improvements from that. Also, dollars 5,000,000,000 in help from currency on EBIT last year, much less this year, I guess. But could you give any kind of indication if it's even worth putting into the model?
We will when it comes to currencies, we will 'sixteen compared to 'fifteen, we will not have a help of the currency as it looks right now. It will be on the negative side. It's a little bit difficult to exactly judge that. We have said before, take the flows from last year and apply the rates. Flows will change quite a bit, most probably with the regional shifts that you see as well.
So I think it becomes a little bit of a guessing game for us as well actually. But it will be on the negative side. We also see some of these kind of raw material related currencies from emerging markets become weaker compared to what they were in 2015, that will hurt us a little bit as well. But we have said that we will not say more than it will be as it looks right now on the negative side.
And finally also, with the huge shifts in demand that we have seen last year and also huge currency swings as well, are there any big regions that are actually loss making now?
Speaking of South America, of course.
We don't comment on but I would say that South America is better than what you believe actually because with the production that we have in Brazil and export to other markets in Latin America, having then $1 denominated price on the trucks, we are actually not that bad in Latin America. So Brazil is not very good. But no, I think as a whole, that also we talked about in Ghent. The performance in, you can say, all our brands have improved over the year, maybe with one exception. And that's also why we may maybe take a pan that is driving most actually.
Erik Winter, Citi. On U. S, there are some inconclusive numbers from some of the competitors and some more increasing speculation of softness. Do you see any tendencies in your order books? That's one.
And the other is related to Europe. I think truck deliveries were up 90% last year, and you're forecasting flat 2016. Why is that?
If you look at the order book in the start of the year, I think that is following pretty much what we have said. And of course, there are some markets that are a little bit more uncertain than not at least than North America given, as we said, a number of factors coinciding, so to speak. So I think that is the reason where we have to be closest on the ball, so to speak, and follow where we are. And again, that's the reason why we are correcting also the levers a little bit more to be sure that we are rather on the conservative side. When it comes to Europe, we are not forecasting flat.
For the market, we are forecasting an increase of 4%. And I think also it's fair to say that $270,000,000 $280,000,000 is pretty good level now. I mean, when it was $320,000,000 $340,000,000 all of us know that it was an overswing also and speculation. So I think it's a good market. And as we said, we feel that we are coming in we know that we are coming in from an order book perspective stronger, and we feel that
we have
a good momentum in the market.
All right. Let's move over to those of you participating over the phone. Operator, please go ahead.
Thank you. We have
a question from the line of Klas Bergelind from Citi. Please go ahead. Your line is now open.
It's Klas from Citi. Just coming back to construction, we knew that the Southern Hemisphere couldn't offset the winter season up north, and we knew that transaction flows would fade. But what happened here to the previous market share gains on the larger machines? I get if I look at that sort of typical margin you delivered recent volumes, those market share gains sort of boosted margins by 200 basis points. When we look at the 4th quarter, it looks like even weaker numbers there if you consider that.
I think the we gained market share with something like approximately to a little bit less than 2% in the heavy machines. Then you should remember, market shares are fairly low. It's below 10% that we talk about. So relatively, we gained quite a lot of market share actually. And as I said, we are quite pleased with Ashken and the deliveries.
I think our the profitability and the margin in your spreadsheet your spreadsheet. So I don't think I can help you
there. No, but what I meant, John, was exactly due to what you said here that without those market share gains, I mean, you're delivering a margin that is sort of low mid sort of mid single digit negative. So my question becomes into the Q1. If we don't have any sort of spring season in China, if risk is still a big problem, what kind of sequential uptick should we think about? You typically get a 200 to 400 basis points uptick quarter on quarter here.
Is that possible? Or will the Q1 also be a sort of a tricky quarter?
I don't think usually we don't guide anything on quarters. But the seasonally weakest quarter we have is the 4th quarter. And then you know that usually the stronger in the spring season is the 2nd quarter. Then to speculate whether there will be spring season at all in China this year, it was very low spring season last year. That's another thing.
I think it's very difficult actually to speculate. But 4th quarter is usually the weakest quarter, if I put it that way.
Way. Okay. Yes, then the question on North America and the flexibility. I'm sorry to come back to this. But let's say that you delivered 10% margin in 2015, truck volumes down 16% this year.
The aftermarket is a bigger portion of revenues should still grow. If you listen to PACCAR, 3% to 5%. So what happens to the margin there? Is it dropping to 7%, 5% or do we go below that?
I think you missed one thing there. It's just the effects of the SEK 10,000,000,000 program.
True. Absolutely. But that is obviously in most people's sort of models here. We're trying to understand roughly what can happen to the margin.
I mean, once again, I mean, the only guidance we give on this basically where we see the total markets. And then to speculate whether that market expectations that we have right now, if they are the right ones or not, I and it sounds like you
have the right different parameters into the model, so you can tweak around those.
Thank you, Jan. Yes, my very final question is on the production levels as we go through the first half in North America. I understand that you would probably under produce significantly in the beginning of the year, Jan and Feb. But when you look at the second will that be more in line with demand? Or will you also under produce the Q2?
First of all, you can say, and I think it's a correct assumption. As I said, I mean, the downtick means that we're gradually taking out manning, of course, and that is mainly during quarter 1. So from that perspective, it's correct that we will have a more balanced production in relation to the manning as well in quarter 2. And we been forced there to take more of sort of, say, stop days and stop weeks during quarter 1. So we I mean, our plan is to be correctly manned to the level that we have decided now in quarter 2.
Our
next question comes from the line of Erik Gahlgren, Nordea. I have two questions. The first one on the order intake
on trucks in North America. It seems that your share of orders is on a quite steep decline or has been over the last few quarters. If you can say something about that, the development into 'sixteen? And then the second question for Construction Equipment, a bit more medium- to long term. What kind of planning assumptions do you make for market demand there over the next couple of years?
I guess you want to bring up margins, but what do you assume as sort of an underlying market
Okay. So if we start with the order intake in North America. As we said, I mean, there are all three different factors coming into play here. We have at least our own view that we pretty early came to the conclusion that we have to do something with the stock and inventory on dealer level. And of course, when you start that discussion in the value chain, it also affects, I mean, the net order intake that is coming into, so to speak, our factory level here.
So for that reason, you see a big overshoot. Then if it's, I mean, 58 or 54 or comparison figures, I think the main thing for us is to find the right balance going forward now both. Of course, to safeguard that we all continue on a good note with our market share development, but also that we have a good balance between production, stocks and retail deliveries. So I think that is what we said. We have 3 factors.
We need to make sure that we continue to understand well what is what in those three factors.
Could you say something about your specific cancellation level over the
last 2 or 3 quarters?
No. I cannot say. But we have not that has not been the biggest issue actually for us, the cancellation, because again, when we look at the retail deliveries, as we said, I mean, the fact that we find there is mainly done the correction on the on road. And again, there you also see the difference between and of course, correction, I mean, and also already during 2015, the correction when it comes to energy sector. So I mean, again, that is the difference you need to understand that, I mean, we have an assumption of some maybe 14%, 50% decline here.
If that should be the case, as I mean, our estimate is 260% is the 50% best year ever in U. S. Or in North America. So we have, I mean, some sort of view on the total market as such.
When it comes to the cancellations, it was mainly the first and second quarter, a little bit into the Q3 where we saw the cancellations Because they were the overshoot that we had in Q4 2014 of the order intake. Which is all spot
on the explanation.
Yes. So from that onwards, I think we have seen limited amounts of cancellations and order intake. That's not a big issue today. It was for the first half.
And the funny thing, there you have also what we talked about continuous improvement in the value chain. I mean, typical behavior when you have shortage of deliveries that you start to have a speculation curve and that was part of the game in Q4 2014 when it comes to order intake.
Okay. And on construction equipment demand longer term?
I mean, to say when it will come back, etcetera, is very difficult, of course. And I mean there are some factors that means also that what we have seen in some of the countries like China, of course, we'll not come back to that level. I mean, it has been an investment driven economy and partly on that note also in construction speculation driven economy, as you know. And as China now is moving along into a more consumption based economy slowly, that, of course, will long term affect what is the right level for such a market. And therefore, I think what we are doing now and then, of course, when it comes to other markets, you can say, I mean, the highway build and we have a pretty healthy view on housing in U.
S. And still commodities are down the drain. But at the end of the day, we will have a need of that. I think that the important part of us is to find the right level of resilience both when it comes to market mix, as we have the healthy product mix, where should we be really good, where are we good and how should we continue to drive those segments. And also to have, I mean, a good flexibility among different regions to cope with that.
And again, also what we see is about automation level, the solution level that there is still a big pocket to develop when it comes to share of wallet for different type of equipment. So I think that is a very interesting
Our next question comes from the line of Graham Fox from Jefferies. Two questions, please. One for Jan, one for Martin. First of all, just Jan, on the R and D capitalization, the $704,000,000 and the lower sales and marketing costs, obviously, that benefited the margin in the Q4 for Trucks. I think if you adjust for that, it was probably the lowest margin for the year in Trucks.
So how should we think going forward? I know you've said that R and D capitalization will be moving as well into 2016. But what do we sort of think, again, reflecting back to where you used to talk about the regional profitability and traffic lights? I guess, Europe will be a green. North America perhaps goes to orange or red.
South America is red. Just again trying to get a bit of feel for 2016 truck margins.
I think on the if you look upon the gross margins, of course, they will be affected in the different regions by, of course, the market developments, as you correctly said. And of course, we'll do everything we can to offset, of course, the downturn where in North America that we adjust to and it's the same in Latin America. Then how much you can adjust to the lower volumes or if there will be negative effect, that's very difficult to say. Yes, due to the fact that you lose volume usually means that you lose gross margin, so it will have a negative effect. So there will be certain mix effects, of course, coming there.
Apart from that, you will see that the you can say the underlying improvements that we have done and we are still doing in the efficiency program, that will continue to gradually kick in, in 2016. And that affects all business areas, but obviously, mainly the truck business areas and maybe CE as well within the group. So you will have that as a countering effect to the maybe some regions going down. But on the other hand, Europe is coming up. But you should not forget that there are still efficiencies coming in.
It doesn't stop for that. We have implemented quite a lot during 'fifteen that will have a full year effect in 'sixteen. And there are a few activities still that we are implementing now in the beginning of 'sixteen as well. And then you have the move into what we call the operational continuous improvement or working with the the operational efficiency.
How much of the R and D capitalization benefited the truck division of the SIP-one hundred and
of that one. I don't have the exact figure, but I think it was 80%, 90% of that.
Okay. And just a question from Martin, if I could. If we take your announcement last month about increasing the size of the board and the focus on brands, How should we read I mean, it's quite a large Board now, 13 members. Again, how should we is that EBITDA unwieldy? And how should we read the fact that Construction Equipment is only one member of that board?
They've obviously been diluted as far as presence on the board. There's a lot more focus around trucks at the board level. Should we think of Construction Equipment not be what well, you've had a look at the business now. What is your sort of perception and view of that going forward?
No, I think it was pretty clear when we announced, I mean, the new executive board level structure that Volvo Construction Equipment and Marty Weissberg is taking a seat in the executive board. That is the 2nd largest business if we compare the business areas. And as we have said, the importance of that and the focus we are putting on that is obvious. Then you can always argue about the 12 or 13. I think, I mean, we have senior executives that are driving their businesses.
I mean, all of the talent should actually qualify for stock on large cap just to have a good view on it. And therefore, the important part of this is really to make clear what are the mandates frameworks and where do we have the meeting points where it matters in product board, in service board, in quality board. And then off you go and do your business actually. I mean, don't complicate it more than necessary.
And you mentioned metrics. One of the measures will be new metrics. What new metrics are you introducing to the brand?
Typically, clear responsibility of operating income, cash flow, delivery precision, quality development, organic growth, service, portfolio development, part sales, etcetera, everything that has with customer satisfaction and business to do.
The next question comes from
the line of Faye Tang from Credit Suisse.
Hi, thanks for taking my questions. First one on the product mix in trucks. You said it was weak in Q4. I'm just wondering, was there a particular region driving this? And what can we expect to go into next year given that orders on Volvo looks slightly better than the other brands?
Yes. The product mix is, as I said, it is more of a mathematical effect than anything else due to the fact that the relative shares of Volvo that usually have a stronger or a stronger That's the gross margin. The gross margins are actually lower compared to the other ones. And of course, that comes from, as Martin has said, the fact that Latin America is coming down. So it's a
pure mathematical effect. And since you have more or less a single branded structure in Latin America, that is how it
is. Okay. And second question on R and D, it looks like cash R and D went up quite materially from Q4 versus Q3. Can you give a bit more color on what's driving that? And what can we expect for 2016?
Was it cash flow?
No, no, the cash R and D.
Cash R and D. No, cash R and D, there the cash R and D was actually when it comes to R and D, when we left 2014, you can say the major part of the adjustments were actually done in R and D. So the fact that we year over year now when we come into end of 'fifteen should not become should not be worse actually. I'm a little bit disappointed there. That I can agree with, but should be on the same level actually when we leave the year.
So we have said that on the more or less on the when you talk about cash R and D that we are on the levels that we would like to see going forward right now.
But is quarter on quarter and for the full year? Yes. So I'm
talking about full year then. Yes.
Post quarter on quarter, we'll have also some
It's usually a bit lower when you come to the summertime and so on. And then it's usually a little bit higher at the end of the year and so on. So that's fairly. But if you take the whole year, it should be on a stable level for the
group as a whole now. And if it's at least slightly difficult to run a ship like this on quarterly basis, I can tell that on R and D level, it's even tougher actually. But I think on the I mean, it's more about I mean, what is our target on the cap level for cash R and D going forward on a yearly basis that is important. And I think we are starting to see a level where we can be expected, I mean, around what is it now 5% or something.
Okay. And my final question on the subject of the new corporate structure and the increased accountability that you talked about. Can you just give some details on what basis management compensation will be structured for each of the divisional heads? Will it be determined by divisional targets for the truck overall, for
the group overall? What we have said basically is that we will run that on a pretty, I mean, pragmatic level. We will have business review meetings on quarterly basis with a different and we will roll that so we will not have all the brands at the same time. And then we will actually have a pulse when it comes to the I mean, brands or business area specific areas. And then, of course, it's like running a normal business review on all different factors.
And that is actually the input to the decision for us where it makes sense when it comes to, I mean, different types of commonality or scale, may that be production or network development or competence development or things that but I think what we have said is that we are running the different operations on their own commercial profitability merits. And then we're actually finding where do we need to meet when it comes to product portfolio or production, whatever it is.
All right. We have reached the end. So thank you so much, Jan and Martin, and thank you all for listening in. And welcome back in April.