Ladies and gentlemen, welcome to the Volvo Group report on first six months 2015. Today, I'm pleased to present Jan Gurander, Acting President and CEO. For the first part of this call, participants will be in listen only mode, afterwards there will be a question and answer session. Speaker, please begin.
Thank you very much. Good morning all of you, and welcome to this presentation regarding the second quarter results for the Volvo Group. We turn immediately into the second page where we can see a summary of the second quarter. We do have an improved profitability for the group, with basically if we take all the business areas together, it is on flat volumes. We do have an increased sales of 17%. If we take away the currency effect here, we are approximately an increase of the sales excluding currency with 4%, underlying margin of 7.1%, and a very good quarter for being the second quarter in terms of cash flow, where we managed to generate SEK 8.6 billion. We then turn to slide number three and look into trucks.
We can see here that on a global level, we are fairly stable in terms of order intake and deliveries, but while we see at the same time pretty big regional differences. If we then turn to Trucks Europe, and here we can see that we have a stable and gradually improving market. We are taking up the forecast for the year from 240,000 up to 250,000. The total market up including May, is up with totally 17%, and it is a fairly broad-based improvement that we see in Europe with, I would say, more or less all countries showing improvement year-over-year. Our order intake is up with in total 13%, and we can see that both Volvo and Renault is up. Gladly to see that Renault is actually improving with 17%.
If we take out Russia, which we include in the 13%, the increase is actually for the rest of Europe, excluding Russia, is up with 18%. Deliveries for the second quarter compared to one year ago is up with 14%. We are keeping, you can say, stable market shares for Volvo, 17.1%, and for Renault, 7.5%. If we measure compared to last year, we are in the second quarter more or less at exactly the same level both for Volvo and for Renault in terms of order intake.
Next slide. We are actually wrong in the presentation.
We are at slide number four now, Trucks Europe. We are now moving into the Trucks North America, slide number five. In North America, we can see that we having a slowing momentum from high levels, and we are most probably at the peak in the truck cycle in North America. We don't foresee any kind of dramatic movement down, and we stick to our forecast for the whole year of 310,000 trucks for 2015. The net order intake for the Volvo Group, both brands, Volvo and Mack, was down with 19%, although there are quite big differences between the two brands. We have Volvo more or less stable, down 1%, and I think also the Volvo brand is actually the indication where we see the underlying market where it is.
Mack is down with 50%, and I think here it's important to look upon Mack in a little bit of a longer perspective, going back to the fourth quarter 2014, where we had a very good order intake for Mack. Maybe a little bit of a, you can say, maybe too good order intake in a way. I think some dealers and so on got a little bit nervous when they saw delivery times going up, and they placed then orders, a little bit reservation for slots and so on. When we came into this year, we have been working through our order book, which you always do, actually, and it's very important to do that when you are at the peak of a cycle, so you don't have, what you say, air in the order book.
Through that process, actually, we have seen also some cancellations in the Mack order backlog, and also then a lower order intake. I think that is the reason why we see the low order intake here in the second quarter. When we look into the order backlog for Mack, we can see that the order backlog for Mack is double the size than what we had at the end of the second quarter 2014. We are, I would say, on a very good level in terms of the order backlog for the rest of the year as well. I think that's important to bear in mind when we look upon it. As I said before, it is the Volvo brand is more of, I would say, the indication how we see the market performing this year compared to last year.
We also see that Mack is maybe a little bit more influenced also by some segment movements as well. We have the regional haul, which is coming down, and the regional haul is very much exposed to the oil and gas segment. As you all know, the Mack brand has a high exposure to that segment compared to other brands and compared to Volvo as well. To summarize, this is slowing momentum from high levels, but we don't foresee any kind of dramatic downturn in the North American market. Turning to slide number six, where we looked into Trucks North America, and here we can see that we have a continued weak development, especially in the Brazilian market. The heavy-duty market down a bit more than 50% for the second quarter. We are revising down our forecast for 2015 from 55,000 to 40,000 units.
Consequently, the order intake is also down with more than 50%. We more or less keep our market share. The decline here is very much related to a market mix, where we see that the heavy-duty segment, I mean, the real heavy trucks in Brazil, is actually down with more than 50%, I think it's close to 60%, while the medium heavy-duty, where we have much less of an exposure, is actually down with some 40%. This is more of a market mix phenomenon. We keep our share in what we call the FH segment. We can also see that the acceptance for our new FH, which are now gradually being delivered out to the market, is very good as well. Turning page again to slide number seven and look Trucks Asia-Pacific. We do see a little bit also here, a mixed development in different markets.
We do see a Japanese market that is stable, which we keep to our forecast of 90,000 trucks for Japan. We do see some recovering demand in India, a healthy market. Southeast Asia, you can say, still rather weak, while we see also now that the truck market in China is also starting to be influenced. It is a little bit what is spreading from, you can say, the construction equipment side, where we have seen now for a couple of years a gradual, or actually right now, fairly dramatic downturn on construction equipment. That is now also coming into the truck market, where we see that, as you can say, the construction segments of the truck markets are influenced both on the heavy-duty side and also on the medium-duty side, that's why we take down the forecast for China.
Long haulage is so far on the okay-ish in China, I would say. It's mainly so far in the construction segment. We have a healthy or stable market share on the heavy trucks in Japan, and we did sign in the second quarter an engine agreement with Dongfeng Commercial Vehicles, our joint venture that we have together with Dongfeng. This is about the engine platform license for Dongfeng to be able to develop their future engines to strengthen Dongfeng Commercial Vehicles in China. Also to be able to fulfill the future emission legislations in China for Dongfeng Commercial Vehicles. That will strengthen our joint venture, and from that point of view, it's of course important and a good thing for the Volvo Group as well. Turning to page number eight, we do have Volvo Construction Equipment.
Here we can see that we have a headwind in the market, and that's related mainly to three out of the four BRIC countries. It's China, Russia and Brazil, where we see fairly dramatic downturns in the deliveries and also in the order intake. China is down, actually with close to 50% here in the first five months of this year. We do also see here that we have a fairly big shift in our product mix as well. We do see that, generally speaking, our big machines in terms of wheel loaders, dumpers, and the large excavators, we are having a good development there. We are taking them out to the strong markets in Europe and North America, and we also see here that the market share is improving in that segment.
As we have announced earlier, we are moving two product lines, the backhoe loaders and the motor graders. That is affecting some segments where we then consequently have lower volumes and also lower market shares. As a whole, it is also reflecting then when we come to the result and see this is a fairly, very important, market, but mainly product mix phenomenon that we see, which is definitely influencing in a very positive way our results. We are taking down the forecast for China and also for South America in construction equipment. On slide number nine, we have the buses and Volvo Penta. We have basically a stable situation on the bus side in terms of deliveries.
We have more deliveries of complete buses in the second quarter this year compared to last year, and less of chassis, which means that the sales value is increasing compared to last year. The order intake is down by 37%, and this is the volatility that we can see from quarter to quarter in terms of the bigger bus orders from some bigger operators. It's basically the tender business where we had, I think it was two pretty big orders in the second quarter last year. This year we did not have one of these major big orders. This is, the normal fluctuations we see in this business. It is also here, continued good demand in North America. Europe is recovering and we have the same market issue, of course, when it comes to Brazil.
I think it's also good to see that we have the first fully electric Volvo bus in commercial service now in the Volvo hometown of Gothenburg in Sweden. Volvo Penta is strong. The order intake is good. We have in all the segments in Penta, good momentum. I think this comes out now due to the fact that we have been in a period of over a couple of years where we have invested in the product portfolio in many segments in Penta's activities. I think that is starting to paying off, and that is why we see the increased order intake and sales levels in Penta. We will turn immediately into slide number 11, where we start to talk about the sales for the Volvo Group. We see that the sales are coming from SEK 73 billion up to SEK 85 billion.
We do have, of course, with the currency movements, a big part of that is coming from the FX, the foreign exchange, and that is approximately SEK 9 billion. It, of course, follows the picture we see in the markets there with improved sales in Europe, North America, but also in Asia, mainly related to currency in Asia. We see the downturn in South America. Slide 12, the earnings improvements that we have, we were very glad to see actually that all our business areas and activities are improving the results. We do this quarter have, and we had also last quarter some one-time effects. So the Q2 result in 2014 was SEK 4.3 billion, but at that quarter we had real estate gain and also a release of a provision connected to Volvo Rents as well.
If you take them away, you can say that the underlying result was close to SEK 3.3 billion. This quarter we had a capital gain on the sales of the Eicher shares of SEK 2.1 billion. If you take away that one from the SEK 8.1 billion, we are at close to SEK 6 billion. It's really the improvement that we have is underlying is from SEK 3.3 billion up to SEK 6 billion. Out of that, approximately SEK 1.8 billion is coming from the currencies. As I said before, it's good to see that we have an improvement in all the areas. The biggest improvement comes obviously in trucks, we see developing very well. Turning to Slide 13, where we have done the explanations what is actually creating this improvement in profitability from SEK 3.3 billion up to SEK 6 billion.
It is actually that the improvements that we see on our gross margins in Europe and North America, in terms both of the hardware and the aftermarket and service as well, is giving the improvement in gross income. We do have a lower cash R&D spending. We are negatively affected by the development on the truck side in Brazil and continued, of course, which has now been a trend for quite some quarters also, lower earnings in China related to our construction equipment business. Admin and selling is here coming up. It's worth to mention that we do have in our operating expenses, and that is both for R&D and selling and admin, in total a currency effect of approximately SEK 700 million negative.
If we take away that currency effect, both selling and admin are on a lower level compared to one year ago. I will come back to that a little bit later. We will turn to the trucks profitability on Slide 14. We do see an increased sales level from SEK 57 billion up to SEK 48 billion. Excluding the currency effect, it is a higher sales of 6%. We do have a doubled result from SEK 2.2 billion to SEK 4.4 billion, and the SEK 4.4 billion is excluding the Eicher gain. Approximately half of that improvement comes from the currency. The rest is an underlying improvement in our business. The operating margin comes from 4.5% to 7.7%.
We move to slide 15. The things that are affecting the improvement in results from SEK 2.2 billion to SEK 4.4 billion Swedish krona, its biggest explanation is the currency. We see the good development in profitability and margins in North America and Europe. We do have in the second quarter, which is good to see now, a better off the market compared to what we had in the second quarter last year. What mainly affect us on the negative side here is, of course, the downturn that we see in South America. Volvo CE on page 16. There we have an improved profitability despite the drop in volumes that we have. We do have actually 5% increase from SEK 14.5 billion Swedish krona to SEK 15.5 billion, and that's a 5% increase. If we then exclude the currency, it is a negative development of 10%.
As I said before, here we do have quite some, as you can see, the deliveries are down even more and volumes are down even more. We do have this product mix improvement or change that is actually improving our results quite a bit. Also here we see SEK 400 million in currency effect. The result is going from SEK 750 million up to SEK 1.3 billion Swedish krona. If you look upon the operating margin, it is at 8.8%, which is actually comparable to what we saw in the second quarter 2013, where we had 8.3% in EBIT margin. That is despite the fact that we then had approximately 40% lower volumes in the second quarter this year compared to what we had in the second quarter 2013. Turning to page 17, where we see the explanations for the profit improvement in CE.
It is related to a product mix and also product mix shift that we have. Of course with these products being sold into the good markets in Europe and North America, where we also, of course, have an advantage of the currency effect. Deliveries are down with 24%, obviously affect us in a negative way. We have the lower earnings in China. Also this quarter, we had a negative effect from the credit losses in China of approximately SEK 150 million Swedish krona that is included in this figure. Turning to the next page where we have buses and Penta, page 18. In terms of deliveries on buses, we are on a more or less exactly the same number of units sold. As I said before, we have a product mix change from chassis to more fully built buses.
We are excluding currency up with 11% in sales. We do have a slightly positive result in buses. If you take away the currency effect of SEK 161 million, it is on the negative side. Buses is maybe the area where we actually are maybe not so satisfied with the development. We can see all the other areas are actually improving to a much larger extent than the bus area, and this is definitely something that we need to look in a little bit more deeper. We did have, as I mentioned before, some disturbances related to North America also in the second quarter. If we take that effect including as well, we are in slight positive situation in buses.
Penta is a continued positive story where we increased the sales with close to 20%, excluding the currency effect, and the operating income is SEK 350 million compared to SEK 230 million in the second quarter last year. We turn to page 19. It is continuing to grow the business in customer finance also with a good profit development as well, and the business is for the time being very stable. As we said before in the first quarter, one market that we observe very closely for the time being is the Brazilian market. We see slight increase in the overdue and so on, we don't see yet at least on an alarming level.
When you have these kind of downturns, that's where you become very careful and observe the portfolio very carefully. On the cash flow, as I said before, this is on page 20. It is, I think, very close to be the best cash flow quarter or if it is not the best cash flow second quarter that we have had in the history of the Volvo Group, is at SEK 8.6 billion, and we are also positive in cash flow after the first six months as well, which is, I would say, highly unusual for the Volvo Group. There is good control over the CapEx and investments, and we see a totally positive contribution from the working capital of close to SEK 3 billion, where the main contribution comes from trade payables, inventories, and accounts receivable, unfortunately, on the negative.
The underlying positive cash flow comes very much from the positive development that we have in our results. We turn to page 21 where we see the structural cost reductions. We have, if you look up in the lower right-hand corner, we can see that the total cost reduction is more than SEK half a billion compared to one year ago if we adjust for the currency effects and the currency differences that we have this quarter compared to the same quarter last year. All the activities, and we follow this very carefully on a daily basis, are going according to plan. Where we measure our savings in local currency, they are also going exactly according to plan. We will look upon how we are developing regarding our structural cost reduction programs.
We are now at SEK 3.8 billion, which should be SEK 10 billion when we measured. I think that's important to note. It is the full-year effect 2016 that we're looking on, which means that we have to basically have implemented all the activities around year-end this year to be able to have the full-year savings. If you look upon the currency effect that we have had at the last three quarters, actually, and compare it to where it was when we initiated the program, the SEK 10 billion complete program in the third quarter last year. If we take the current rate at that point in time, we would have a savings around somewhere between SEK 5.5 billion and SEK 6 billion, if we take these current rates that are. We have said that we are committed to SEK 10 billion.
We are trying to offset as much as possible of this. As I said before, the important thing is that we are implementing the activities. They are moving according to plan, and they are according to plan in local currencies. On page 23, we have to summarize it. It is about improved profitability on flat volumes. With flat volumes, I think that shows also how important it is to work with the continued improved efficiency in the group. Because if you don't have the help of improved volumes, you cannot really improve the profitability as you want. I think it shows how important the cost reductions and the efficiency programs are for the Volvo Group. We had, as I said before, a strong cash flow in the quarter.
The focus that we have for the rest of the year is to, you can say, to finalize the activities in the efficiency program. What we are working with is the restructuring of the global truck sales activities. We do have the IT operations that we are working on as well. There are some things in Group Truck Operations that are still being implemented. We had here in the second quarter, actually, two major things that were implemented. One was the even flow in Hagerstown, and the second thing was the cab trim that we moved from Umeå to Tuve. We also have some changes in our logistics system as well in terms of parts logistics in United States. There's a lot of activities going on still in our manufacturing operations.
To implement the activities, continue to implement, because part of it is already implemented, that we announced them at the end of last year regarding our backhoe loaders and motor graders as well. With that, I finish the presentation, and I guess that we open up for questions.
Okay. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. The zero one to ask a question. We have a first question coming in from Mr. Fredric Stahl from UBS. Please go ahead.
Hi, Jan. Hi, Christer, and the rest of the guys. It's Fredric here from UBS. Could I ask you on the U.S. here, should we worry about more cancellations given how strong order bookings were last year across the industry and across the Group, not only for Mack? That's question number one. Question number two, you mentioned that adjusted for the cancellations in the quarter, you think demand is normal at the current level. Should we count on about 12,000 units per quarters going forward? Is that a fair assumption? Thank you very much.
Regarding the cancellations, we take this a little bit, you can say month by month. I don't think that it will get, say, a higher pace or something like that than what we are seeing. I think we are working this one through. As I said, I think it's important to know that, I said it I think a couple of times, I think it's important to look upon the whole order intake in the second quarter. That's probably more of an indication how we see the marketing basically flattening out compared to last year. We then, as I said, see maybe a slower momentum when we go forward. What that will mean exactly month by month or quarter by quarter in terms of order intake or special order intake, I don't want to speculate on that.
Okay, good. Look, I have a few more questions, but I'll let some other people through, and I'll come back. Thank you.
Yep.
Okay, the next question online comes from Mr. Hampus Engellau from Handelsbanken. Please go ahead.
Thank you very much. I have three questions. Starting off with Brazil, would it be possible for you to quantify underabsorption of cost during the quarter, and give some more flavor to the earnings impact from Brazil in second quarter? Given that you're reducing your outlook, even if it was expected, will you need to cut run rate further in third quarter? That's my first question. Second question is on the U.S. Have you seen any type of customer indications on how they're going to be preparing their orders for next year when you come out with the 2016 models? Will you need to change your run rate in U.S. from where we are today in terms of demand? The last question is on construction equipment, very significant earnings improvement, and you highlighted part of that.
Maybe you could put this into perspective also in terms of measures that you've taken into construction equipment in terms of earnings improvements. Thanks.
Okay. We do not quantify the underabsorption in Brazil, but what we have announced that we are doing is that we did already in the first quarter. We are taking out the second quarter in, sorry, the production in Curitiba. That is unfortunately a little bit of a lengthy process to do that. That second shift will leave at the end of the year, which means that the majority or almost all of that cost we will have for the remainder of this year. We will basically be on a one-shift operation. Depending on exactly where the market is going, we of course have to work with stock days and so on, as it looks now for the remainder of the year as well.
Apart from that, of course, we'll see what we can do in terms of taking out costs and so on to adapt to this global level of demands. I think most realistically, this lower level of demand is something that we will see for some time also. We don't expect any kind of quick rebound as it looks right now in Brazil.
That was the first question.
It was actually a three-question bundle.
Yeah
That was a good trick. The U.S. run rate, as I said, we have good order backlogs for both Volvo and Mack in the U.S. We don't foresee any need to adjust the production right now. As you know, we are coming into an interesting fourth quarter in North America as well, where we usually have the big fleet orders coming in, as you know that's a market phenomenon in North America. I think at that point in time, I guess we will get more of an indication for really how this slowing momentum is actually coming in North America. We don't plan for any adjustments in our run rates in U.S. for the time being.
CE, as I said, it is actually a focus on big machines with good gross margins also then, of course, utilizing the weak Swedish krona actually, where we have quite a lot of cost in these machines. We have production here in Sweden for components and so on into the loaders and also the Artics as well. That is one explanation, but maybe what I didn't mention before actually, that is also that of course we see on the cost side, the improvements also in CE. They are also running a cost reduction program as well, and they are working very good in terms of how they work with their operating expenses, R&D, selling, and admin as well. I think it is a package of all this kind of thing. We also see then, of course, a market mix effect as well.
The downturn that we see right now is coming in Asia and the production facilities there, it is actually, in a way, easier to adapt the cost levels in China, among others actually, which is a little bit more difficult in Europe. Now we are filling up the factories in Europe, you actually get from that point of view, a positive effect as well in our production system. From that point of view, a good market mix development as we see. I think that's as much flavor as I can give you on the good development in CE.
Are you now in line with demand in China in terms of staffing and run rating?
I think in terms of run, absolutely. Production, I think there we are working very good. We did not build anything for inventory or something like that. New equipment inventory is very low, we took down production very quickly. Then, of course, we are adjusting our, you can say, our operating expenses and so on in China as well, that's also taking place right now in China. I think it's worth to mention also, what we should remember in terms of also the seasonality that we have in CE for construction equipment. The second quarter, even though we didn't see much of a spring season maybe this year, it is from a seasonality point of view, the best quarter that we have, that's when we come into the third and fourth quarter. They are tougher quarters as well, and we should not forget that.
Thank you very much.
Okay, we have our next question coming in from Mr. Erik Golrang from Nordea. Please go ahead.
Thank you. I have two questions. The first one on credit losses in China, SEK 147 million in the quarter. Where do you see that moving from here? Second question is on profitability and the North American truck market. Obviously, you've become very happy about the performance over there, in the context of you expecting the North American market to be peaking now, how do you think about the resiliency if volumes drop there next year? Do you think that the improvement you've done on the aftermarket side there will be enough to sort of offset a decline on the new equipment side? The last question, coming back to construction equipment, you talk about utilizing the weak Swedish krona there, and the mix improvement. What segments and customers are behind that mix improvement, and how sustainable do you think it is? Thank you.
Okay. Credit losses in China, we are working ourselves through the credit portfolio in China, it is very difficult to actually judge how much it will be going forward, because it is, as you understand, a very difficult situation with both end customers and dealers, we do have workaround programs for the dealers and so on. It's similar the way you work at VFS, we have done many times before in North America and also from time to time in Europe as well. It takes some time before you really know if the situation is stable or not. I don't dare to give you any forecast on that. I think most realistically, you will see some continued development as the one that we have seen in the last two quarters.
If it will be bigger or smaller, I don't dare to guess, but I'm fairly sure that it will be some more going forward. C on the mix. We do have underlying, you can say, fairly good markets in the North America and also in Europe. That is actually where we then actually take the opportunity, of course, to take the big machines a little bit more aggressively into these markets. That's what we have done before. Of course, utilizing the advantages that we see from the currency as well. I don't think it's any particular segments or something like that.
Other than it is the big segments, we are phasing out the backhoe loaders, we are phasing out the motor graders, and on the smaller machines, we see actually, if anything, that we are actually losing a little bit of market share there while we gain quite a bit actually. This is a very deliberate move that we are doing actually to increase the profitability. Focus on the products that also historically have given us the best profitability. The profitability in North America is, I think I said it before, and that is that I think the quality of the business and in terms of not only that is we have good levels of profitability in North America, I think the quality of the business is better than ever.
That is, I think, due to the fact that, as you correctly mentioned, that we have a higher share of captive engines, captive AMT gearbox. We are starting to see an effect of that on the aftermarket side. We do have a good or the best dealer network that we have ever had. From that point of view, I think the quality of the business is better, which means that when we come into downturn, and of course that depends very much on how steep it is and so on, I think our resilience that we have in a downturn today is better than what we have had in the past. Of course, it becomes just a speculation, how deep is it? How quick does it go? How quick can we adapt and so on? We will of course be impacted that there is a sharp downturn.
As I said before, it is a much more stable and high-quality operations that we have in North America. It's the best that we have ever had.
A follow-up there. We know the share of your captive engine and transmission solutions, how that has developed. Could you say anything about how the share of aftermarket sales sit today versus five years ago in North America?
No, I can only say that it is improving. Actually, it's consistently been improving.
You mean the share of the total sales or?
Yes, the aftermarket share of total sales.
That depends. You know that if you have an increased sales volume, then it's difficult to have a high share at the same pace on the aftermarket because, if you sell one more machine, you have to sell a lot more spare parts to keep the, you can say, the relative share. If you look upon it in terms of that over a longer period of time with stable volumes, the aftermarket share in North America is higher today than what it's been before. That trend will, of course, continue going forward as well due to the fact that we have this rolling base of Volvo and Mack trucks with the captive drivelines. Thank you.
The next question on line comes from Mr. Anders Trapp from SEB. Please go ahead.
Yes. Hi there. I have a couple of questions regarding the structural cost program. First, couple of clarifications. Did you say that the run rate, which you say is SEK 3.8 billion in the quarter, if you calculate that in local currencies, we were talking like SEK 5.5 billion-SEK 6 billion. Was that correct?
Yeah. If you look upon it like this, if you take the currency rates that we had in the third quarter last year when we had all the activities in place, and take these currency rates, and if they had been here today, those currency rates, the cost savings would have been somewhere between SEK 5.5 billion and SEK 6 billion.
Okay. That's good. Another clarification on the second quarter, sort of singled out. You say, if I read that correctly, that you had like a SEK 509 million tailwind in local currencies. You also said, I think, that you had a SEK 700 million headwind from currencies, which does that mean that in reported currency, that it was a SEK 200 million increase in the second quarter?
Are you on the cost side now or?
Yes. On page 19, and 21, you said total cost reduction SEK 509 million, excluding currency effects.
Exactly.
Total OpEx.
Yeah.
I think you said.
The total effect on the OpEx is SEK 700 million, so it is actually increasing with SEK 200 million measured in SEK.
Yes, exactly. I want to clarify that. Thirdly, okay, so you have this huge currency headwind, but you're also stating or sticking to your SEK 10 billion target. We have six months to go or five months to go, basically. How do you get that equation?
You have 18 months to go.
Yes. When it comes to measures, implementing measures, you have said that you're going to do the measures by, or implemented the measures by end of this year.
Now I repeat it again. All activities that we implement are going according to plan. What we have for the remainder of this year in terms of the big implementations left is the IT. It is part of the CE program that was launched late last year, and it is the global sales organization on the truck side. That we will have, as it looks right now, will be implemented year-end.
Yes. That will not be enough to get to the SEK 10 billion with the currency headwind that you now have. Yet you are sticking to the SEK 10 billion in.
We are sticking to the SEK 10 billion program. We face currency headwinds for the time being. I don't know what the currency will be at the end of, or next year either. You cannot run a cost reduction program like this on spot rates. I've also said before, that I repeat, we are trying, or we are working to find more measures to be able to offset that as well. They are not of the magnitude that we talk about, and they are not big ones like the ones that we, the three that I mentioned before, but we are working on that as well.
That means that the only logical conclusion is that you have to do more next year, or that you have to change the SEK 10 billion figure.
I'm not changing any figure. I'm just telling you where we are in the cost reduction program right now, what it looks like in terms of currency headwind for the time being, that we have implemented the program, and that we are looking for more offsetting measures.
Yeah. All right. I'm sticking to the logical conclusion of this. Finally, on the changes that you are implementing in second half, what type of challenges in terms of production and supply chain do you see for the second quarter with the implementation of these changes?
No, I think in the second quarter, as I said, we had the move of the cab trim, we had the even flow in Hagerstown on the engine side. We have also some portfolio things. We knew that obviously in connection with the summer shutdowns as well. I don't think there are any major things that I can recall right now that is left for, you can say quarter three and quarter four, if I remember. That kind of magnitude that we're talking about here. The second quarter was not, from that point of view, the most efficient quarter in production either. We did quite big changes that we did, actually.
All right. Very good. Finally, on Latin America, with the changes or cost reductions relating to the business cycle downturn that you are seeing, taking away shift, et cetera, is that, you think, enough to make sure that Latin America is contributing positively to bottom line for the group?
We will do as much as possible to offset the negative downturns. I can also say that we are very much focused on Brazil. There are some other markets in Latin America where we actually see, maybe actually offsetting some of the downturns in Brazil for the time being, where you have actually still fairly stable markets, but we also see that the currency effect that we have with the lower BRL and when you sell it to other markets that are more dollar-denominated in Latin America, actually offset some of the downturns in Brazil, actually. The whole situation in South America is not as bad as it would have been if we only had Brazil.
Yeah. All right. Very good. Thank you.
We have our next question online coming from Mr. Graham Phillips from Jefferies. Please go ahead.
Yes, good morning. My question is about Mack in the U.S. Could you remind us, please, what is the oil and gas exposure or the energy exposure? I had thought that that business was quite exposed to construction and that part of the market, which might have been showing some signs of an improvement in the U.S. Also just remind us what the mix in the business is like in terms of captive engines, captive drivetrains, and perhaps thinking about the traffic light system, where the profitability of that business might exist or sit with regard to the Volvo brand in there. Was the period 12 months ago, I think you might have said, a tough comp for order bookings?
I think the order bookings in the second quarter last year was not a tough comp for Mack if that was related to that. I think that was a normal quarter last year. It's not a tough comp. It is more the fact that we had the If there was an overshoot, it was in the fourth quarter, maybe a bit in the beginning of the first quarter this year. That is why we see now that we do have some, you can say that we are taking out the area in the order book and actually make some dealer cancellations. That's more on a sequential basis than it's a year-over-year tough comparison. When it comes to the exact. I don't know, Christer, do you have any on the Mack exposure to oil and gas and construction?
Yes. When we looked into it's more into the regional haul business where Mack has actually lost some of that business down in markets like Texas, where you have
Regional oil trucks for oil tankers, et cetera. It's that segment where we have seen the impact on Mack in particular, I would say. Construction has been some uncertainty, but it's more of a flattish situation, I would call it.
As the year progresses then, how would you see the Mack brand performing? Again, where are we in its model cycle? As I say, can we think of it as more or less profitable than Volvo brand in the U.S.? I'm trying to think of engines, captive drivetrains and so on.
We don't disclose the difference in profitability on Mack and Volvo. I think it's worth to mention that Mack is keeping its position. When you look upon the market shares, we don't foresee any lost market shares going forward either. If you look into the order backlog, it looks healthy as far as we can judge in terms of market share going forward. Mack will keep its position as well. It is nothing worse than that. In terms of engines and gearbox penetration, it is more or less on the same level. It's actually better on Mack in terms of engines. Then in terms of gearboxes, I think it's more or less on the same level. It's really not that big difference in terms of how good the business is on Mack versus Volvo.
You could say Mack has always had captive engines all along. They have only a few Cummins gas engines. 99% is captive engines, has always been like that. On the Volvo side, we're now up to 90% captive engines and gearboxes. That's the big structural shift, so you can say.
Right. Okay. Sorry, just one clarification on the cost savings. I think there's quite a few comments in, I got a bit confused in the end. You're saying that the SEK 10 billion program for the end of next year would have been SEK 5.5 billion-SEK 6 billion if you adjusted for currency?
The target is SEK 10 billion. We are currently at the SEK 3.8 billion. The SEK 3.8 billion would today have been SEK 5.5 billion-SEK 6 billion if we had had the currency rates that we had in the third quarter last year.
Okay. All right. Thank you.
Okay, we have our next question in line coming from Mr. Alasdair Leslie from Société Générale. Please go ahead.
Yeah. Hi, good morning. Just on trucks, you have talked previously about price realization being a big focus in North America. Just wonder whether you could comment on whether that developed in line with your expectations in the second quarter. Then also, you have just been talking about the quality of the business there being better than ever. Structurally, can we think we are now on a sustainable level margin-wise to the margins we see in Europe? Thanks.
The pricing is developing as I call it the best. What you can see in the second quarter, it has been a stable development in North America.
On the second question about profitability level compared to Europe?
It's fairly close for the time being.
When you say for the time being there, you talked about the resilience, can we assume that on a structural basis going forward, obviously, I think historically they've been lower than Europe, going forward, can we think they're on a par?
On a structurally view, structure-wise, if you have decent, stable markets in Europe and North America at the same time, I think we will see a profitability that is very close to each other, actually. Of course, you don't know if you have a downturn in one of the markets and upturn in the other one, then of course it will differ. Structurally, if you mean that, I think the underlying structural margins and profitability, they are fairly close to each other for the time being.
Okay, thanks. Just one follow-up call. I missed the start of the call. Did you comment on the Renault Trucks market share as well? Have you been winning back share there? I was just wondering how you feel or how we should think about the potential trade-off between volumes from a lower level against pricing on the new truck range. Just your thoughts there, please.
Yeah. I think that's an important thing. The Renault Trucks is a very good truck, well-received, but it's also positioned slightly higher on the price level. That I guess that takes some time before that is accepted in the market. I think that is the acceptance that we gradually see now. We see that the order intake and also, you can say, deliveries to Renault Trucks is getting better. I think also what we see now that we see a stable to slight improving market share also for Renault Trucks as well. I think it goes in the right direction. We are not satisfied yet.
Okay, thanks.
Okay. The next question in line comes from Mr. Colin Gibson from HSBC. Please go ahead.
Morning, everybody. Hi, it's Colin from HSBC. Just a couple of quick questions. Jan, share price has been coming off since you've been talking, and it seems to me it's down to two comments of yours. I'd just like to probe those comments a little bit. Firstly, talking about, which we've already talked a lot about on this call. Apologies. Talking about the effect of FX on your cost savings target, can you just confirm that the net effect of the FX tailwind, i.e. the weak krona on a trade-weighted basis, the net effect is positive, right? It's boosting revenues more than it's boosting costs. Would that be fair to say? It was clearly positive in Q2, for example.
Yeah. The total effect from currencies is SEK 1.8 billion positive. Of course, you can say that the effect on the gross income out of that would have been SEK 2.5 billion, because you have the negative effect of SEK 700 million on the OpEx. Net, it is a huge positive effect we have from currencies.
Great. Thank you very much. The second one I wanted to ask about was your comment earlier in the call that the U.S. market has to be considered at or about peak. Peak was, of course, about 10 years ago, just under, and it was about 350,000 units. Well, that's U.S. plus Canada. Mexico, I don't remember that year. Anyway. The idea that we would still be a fair bit below 350 at, what, 310 this year, given that 350 was nearly a decade ago. Notwithstanding the good improvement we've seen in the U.S. market in 2014 and 2015, do you have any other particular reasons to I think you said you don't see any signs of a downturn for now?
I think the key question is 2016 growth in North America. I know you're not guiding to that at the moment. Everybody has to think about it.
Exactly. No, we are not going to give any forecast for 2016, not now, that we do in the autumn, as you know. I think that the feeling that we have for the time being, that we are around the peak for this cycle and that. We don't foresee any, as I said before as well, any dramatic downturns either. Maybe it's more of an adjustment that we'll see going forward.
All right. Thank you very much.
We have our next question coming in from Mr. Asharinn. Please go ahead.
Question, the first one's on FX. I think your FX tailwind was much higher in the second quarter than it was in the first quarter, despite, I think, the impact on top line's probably bit less in the second quarter. If you can just give a bit of color on the transaction exposure that you had in the second quarter, and I think for the first half, you're now close to SEK 3 billion of FX tailwinds. What your guidance for that for the full year would be? The second question is just on the mechanics of how orders for you work in North America. Are you now taking much orders for 2016, or is there a cap for how many of the orders for 2016 that you're taking? Is that driving some of the weakness?
Okay. In terms of, I think we had SEK 1.2 billion in the first quarter currency tailwind. At that point in time also, we had a one-off negative effects on currency related to the devaluation in Venezuela. If you take that one away, because its underlying currency exposure or currency tailwind was SEK 1.5 billion, which is pretty close to SEK 1.8 billion that we have in the second quarter.
There are some, I think you have a little bit of different structure or seasonal flows in the second quarter due to the spring season and so on. I think if you take that away, you can say that the currency tailwind is more or less the same in the first and the second quarter. What we said in connection with the Q1 report was that the currency tailwind on our transaction exposure, given the flows that we saw last year, will be in the magnitude of somewhere between SEK 3.5 billion-SEK 4 billion, and that we are sticking to for now as well.
On the order intake in North America, as I said, we are not completely, but fairly close to being booked out for the rest of the year in North America, and that goes both for the Volvo brand and also for the Mack brand, which means that we have some orders also already taken in the beginning of next year.
Okay. Can I just have a quick follow-up question on this SEK 10 billion cost saving? Just want to clarify that none of that is based on any volume increases, right? This SEK 10 billion is not predicated on any significant volume increases from you.
It's totally volume independent.
Okay, cool. Thank you.
The next question is coming in from Mr. Fraser Hill from Bank of America. Please go ahead.
Hi. Just wanted to come back to the orders, perhaps globally as well. I think you've made your message sort of fairly clear in North America, but where do you see that global book-to-bill progressing as we move through the rest of the year? You're talking, I guess, fairly positively about production rates in the U.S. and in Europe. When we look at the second quarter itself, obviously your global book-to-bill came back to 89%, and it's retreated from the first quarter. Do you think with what you're seeing on orders into Q3 that's going to remain in a downward trajectory, the direction of your global book-to-bill, or are there going to be some compensating factors that can reinvigorate it? Thank you.
Oh. To have a view on the global book-to-bill when we do have such big regional differences for the time being, so I'm not quite sure if I'd have to give you.
It's a vacation quarter as well.
Yeah.
We shut down the European plant for four weeks.
No, I think we abstain for having any kind of global view on our book-to-bill.
Yeah
I think, for the time being.
Maybe I'll put it another way. I guess you've talked a lot about the U.S., but in Europe, are you really seeing sequential accelerating momentum now? I know that the order book level has moved to a higher level in the first and second quarter, but are there incremental tailwinds to that for the rest of this year in your view?
The underlying order intake, we see that the order intake for Europe was something like in total, a 13% improvement in the second quarter compared to the second quarter last year. If you look upon the first six months, it is 17%. It is actually a fairly, you can say, stable improvement that we see, you can say, sequentially quarter-over-quarter.
Just to follow up on Europe. What are you seeing on pricing? Scania have reported numbers today and earlier in the week they put their own orders out, which were very, very strong. Their orders were up, I think 41% for Q2 in Europe. Why is their order growth so much better? Is that just the regional difference, do you think? Perhaps with more French exposure for yourself, do you feel that there's more competitive pricing in the market from some of your competitors? Just interested as to why we're seeing such a difference on order growth between yourself and one of your large peers. Thank you.
I haven't analyzed any of our peers in terms of order intake. I don't have any view on that one. Pricing is, I say that it's very few times in the truck market that you find pricing easy, actually. That is always a tough thing to work with. I don't know if it's tougher today or easier today than ever. I think it's a fairly normal market that we see out there with a healthy and good competition.
All right. Thank you.
We have our next question online coming from Mr. Fredric Stahl from UBS. Please go ahead.
Yeah. It's me again. Can I ask you on some of my follow-ups here on construction equipment, how much of the volume drop is because you've phased out or de-emphasized the smaller equipment? That's first question. Then I actually wanted to touch on Dongfeng and the JV there. Obviously, it's a big truck market, China. It's falling a lot. It's not very profitable, if at all, and probably needs consolidation. I'm just curious, how should we think about, the potential need to invest money in that business? Again, it's a big business, a lot of things happening in the dynamics of the market. Are you on the hook for potentially significant investments here over the next few years? Thank you.
No. The intention with the JV, the way it's capitalized and the way it's working is that it should be self-finance for going forward in terms of products and so on. There is no way we look upon it and the way it's been structured that the owner should need to put in any money into that company. It is a self-finance, you could say, independent company from that point of view.
Okay.
Then when it comes to the CE side, maybe Christer has some.
Well, if you look at the volume drop, you can say it's primarily linked to China and Lingong, which was down 43%, the SDLG. The Volvo brand is down 12%, and you can say a big portion of that 12% is linked to the fact that we are now phasing out the Volvo branded backhoe loaders and motor graders, combined with the fact that we are deliberately selling less of the small compact machines, since we have some quite unprofitable products still in that segment. I think that's the flavor we can give you.
Okay. That's perfect. Actually, can I shoot in a final question as well? It's regarding the presentation. I think for the last few quarters, for the European truck market, the trend line is downward sloping. Are you saying that you think actually Europe is not going to grow over time or even decline trend-wise?
Fredric, that is probably more of a Bill Gates thing here, where it depends on how many years you include in that trend line. If we were to include another five, 10 years back in time, you would probably see a slightly moderately growing trend line.
Understood. Thank you very much.
I think that was the last question, actually. Thank you very much for this quarter. The IR department is ready to answer any other questions you have on the phone. With that, thank you and talk to you next quarter.