Ladies and gentlemen, welcome to the Volvo Group Report on 1st 6 Months 2015. Today, I'm pleased to present Jan Goodand, our Acting President and CEO. For the first part of this call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. Speaker, please begin.
[SPEAKER KARL HENRIK SUNDSTROM:] Thank you very much. Good morning all of you and welcome to this presentation regarding the Q2 results for the Volvo Group. We turn immediately into the second page where we can see a summary of the Q2. We do have an improved profitability for the group with basically if we take all the business assets together, it is on flat volumes. We do have an increased sales of 70%.
If we take away the currency effect here, we are approximately an increase of the sales excluding currency with 4%. Now thelying margin of 7.1 percent and a very good quarter for being the 2nd quarter in terms of cash flow where we managed the yen rate 8,600,000,000. We then turn to slide number 3 and look into trucks. And we can see here that we on a global level, we are fairly stable in terms of order intake and deliveries, 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 the total 13%, and we can see that both Volvo and Renault is up. Gladly is 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, including Russia, is up with 18%. Deliveries for the Q2 compared to 1 year ago is up with 14%. And we are keeping say stable market shares for Volvo 17.1% and for Renault 7.5%. If we measure the compared to last year, we are in the 2nd quarter more or less at exactly the same level both for Volvo and for Renault in terms of order intake. [SPEAKER STEPHEN ROBERT BINNIE:] Next slide.
We are actually rolling the presentation. [SPEAKER STEPHEN ROBERT BINNIE:] We are at slide number 4 now Trucks Europe. And we are now moving into the Trucks North America, Slide number 5. In North America, we can see that we're 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 90%, although there are quite big differences between the two brands, we have Volvo more or less stable down 1%. And the 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 Mac in a little bit of a longer perspective. Going back to the Q4 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 that they placed then orders a little bit of 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. 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. And through that process, actually, we have seen also some cancellations in the back order backlog and also then the lower order intake.
So 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 Q2 of 2014. And we are, I would say, on a very good level in terms of the order backlog for the rest of the year as well. So I think that is the I think that's important to bear in mind when we look upon it. As I said before, it is the Volvo brand.
It's more of a say the indication how we see the market performing this year compared to last year. We also see that the 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. And as you all know, the Mack brand is has a higher exposure to that segment compared to other brands and compared to Volvo as well. So to summarize, this is a slowing momentum from high levels, but we don't foresee any kind of dramatic downturn in the North American market.
Turning then to slide number 6 where we looked into Truck South America. And here we can see that we have a continued weak development in especially in the Brazilian market, the heavy duty market down bit more than 50% for the Q2. 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 less of an much less of an exposure is actually down with some 40%. So this is more of a market mix phenomenon. We keep our share in the 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. We then turn page again to slide number 7, it looks Trucks Asia Pacific.
We do see a little bit also here a mix development in different markets. We do see a Japanese market that is stable, which we keep stick 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, is still rather weak. While we see also now that the truck market in China is also starting to be influenced, It is a 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. And that's why we take down the forecast for China. Long haulage is so far on the okay ish in China, I would say. So it's mainly so far in the construction segment. We have a healthy or stable market share on unit trucks in Japan.
And we did sign in the Q2 an engine agreement with Dongfeng Commercial Vehicles, our joint venture that we have together with Dongfeng. And this is about their engine platform license for Dongfeng to be able to develop their future venues to strengthen Dongfeng Commercial Vehicles in China also to be able to fulfill the future emission legislations China for the for 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 8, we do have Volvo Construction Equipment.
And here we can see that we have a headwind in the markets and that's related mainly to some of the 3 out of the 4 brick countries. It's China, Russia and Brazil where we see fairly dramatic downsurge in the deliveries and also in the order intake. China is down actually with close to 50% again in the 1st 5 months of this year. We do also see here that we have a fairly big shift in our market in our product mix as well. We do see that you can say generally speaking our big machines in terms of wheel loaders, dampers 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 under that segment. And as we have announced earlier, we are about to we are closing down or moving sorry, we are moving 2 product lines, the backhoe loaders and the motor graders and that is affecting sub segments where we then consequently have lower volumes and also lower market shares. But as a whole and it is also reflecting then when we come to the result of the E. This a fairly very important you can say market, but mainly product mix phenomena that we see which is definitely influencing in a very, very positive way our results.
We are taking down slide number 9 In on slide number 9, we have the buses and Volvo Pentland. We have basically a stable situation on the bus line in terms of deliveries. We are we have more deliveries of complete buses in the Q2 this year compared to last year and less on 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 plus bus orders from some bigger operators.
It's basically the tender business where we had I think it was 2 pretty big orders in the Q2 last year. This year we did not have one of these major big orders. So this is you can say the normal fluctuations we see in this business. So it is here also here continued good demand in North America. Europe is recovering.
We have the same market picture 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.
And I think this comes out now due to the fact that we have been in a period over a couple of years where we have invested in the product portfolio in many segments in Penta's activities. And I think that is starting to pay off and that's paying off. And that is why we see the increased order intake and sales levels in Penta. If we then turn immediately into slide number 11, where we start to talk about the sales for the Volvo Group. We then see that the sales are coming from SEK 73,000,000,000 up to SEK 85,000,000,000 We do have, of course with the currency movement is a big part of that is coming from the FX the foreign exchange and that is approximately €9,000,000,000 And 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 and then we see the downturn in South America.
The slide number 12 with the earnings improvements that we have is actually coming from which is glad we were very glad to see actually that all our business areas and activities are improving the results. We are we did do this quarter have we had also last quarter some one time effects. So the quarter 2 result in 2014 was 4.3%. But in that quarter, we had real estate gain and also a release of a provision connected to Volvo Rents as well. If we take them away, you can say that the underlying result was close to SEK 3,300,000,000.
This quarter, we had the capital gain of the sales of the Ayesha shares of €2,100,000,000 If you take away that one from €8,100,000,000 we are at close to €6,000,000,000 So it's really the improvement that we have is underlying is from 3 300,000,000 up to SEK 6,000,000,000 Out of that, approximately SEK 1,800,000,000 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 in obviously in trucks And then we see the developing very well. Turning then to Slide 13 where we have the explanations what is actually creating this improvement in profitability from €3,300,000,000 up to €6,000,000,000 And it is actually that the good 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 gross income. We do have a lower cash R and D spending.
We are negatively affected by the development of 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 and D and selling and admin. In total the currency effect of approximately €700,000,000 negative. If we take away that currency effect both selling and admin are on a lower level compared to 1 year ago and I will come back to that a little bit later.
If we then turn to the trucks profitability on slide number 14, we do see an increased sales level from SEK 57,000,000 up to Excluding the currency effect, it is a higher sales of 6%. And we do have a doubled result from SEK 2,200,000,000 to SEK 4,400,000,000 and the SEK 4,400,000,000 is excluding the Eicher gain. Approximately half of that improvement comes from the currency, but the rest is an underlying improvement in our business. The operating margin comes from 4.5% to 7.7%. And we move then to slide number 15.
The things that are affecting the improvement and results from SEK 2,200,000,000 to SEK 4,400,000,000 is biggest explanation is the currency We see the good development in profitability and margins in North America and Europe. And then we do have in the second quarter, which is good to see now a better aftermarket compared to what we had in the Q2 last year. And what is mainly affected 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 a 5% increase in from SEK 14,500,000,000 to SEK 15,500,000,000 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. But we do then have this product mix improvement that or change that is actually improving our results quite a bit. Also here we see €400,000,000 in currency effect and the result is going from SEK 750,000,000 up to SEK 1,300,000,000.
If you look upon the operating margin, it is at 8.8%, which is actually comparable to what we saw in the Q2 2013 where we had 8.3% in EBIT margin. And that is despite the fact that we then have approximately 40% lower volumes in the Q2 this year compared to what we had in the Q2 20 13. Turning then to page number 17, where we see the explanations for the profit improvement in CE. It is related to product mix and also product mix shift that we have. And of course then with these products being sold then into the good markets in Europe and North America where we also then of course have an advantage of the currency effect.
Deliveries are down with 24%, obviously affect us in a negative way. And then we have the lower earnings in China. Also this quarter, we had a negative effect from the credit losses in China Turning then to the next page where we have buses and PEMSA, page number 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, let's say, 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. But if you take away the currency effect of $161,000,000 it is on the negative side. And buses is maybe the area where we actually are maybe not so satisfied with the development. We can see all the other areas are improving to a much, much larger extent than the PULSE area.
And this is definitely something that we need to look in a little bit more deeper. We did have as we mentioned before some disturbances of some related to North America also in the second quarter. If we take that effect including as well we are in a slight positive situation in the masters. Penta is a continued positive story where we increased the sales with close to 20% excluding the currency effect and the operating income is €350,000,000 compared to €230,000,000 in the Q2 last year. We then turn to customer finance in Page number 19.
You can say that the it is continuing to grow the business in customer finance and also then with a good profit development as well. And the business is for the time being very, very stable. As we said before in the Q1, of course, one market that we observe very closely for the time being is, of course, the Brazilian market. We do see a slight increase in the overdues and so on, but we don't see yet at least on an alarming level. But when you have these kind of downturns that's of course where you become very careful and observe the portfolio very, very, very carefully.
Then 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 quarter 2nd quarter that we have had in the history of the Volvo Group is an €8,600,000,000 And we are also positive in cash flow after the 1st 6 months as well, which is I would say highly for the Volvo Group. And it's a good control over the CapEx and investments and we see a totally positive contribution from the working capital of close to SEK 3,000,000,000 where the main contribution comes from trade payables, inventories and accounts receivable unfortunately on the negative. But as I said, of course, the underlying positive cash flow comes very much from the positive development that we have in our results. Then turn to page 21 where we see the structural cost reductions.
And we do have if you look upon the in the lower right hand corner, we can see that the total cost reduction is more than €500,000,000 compared to 1 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 they are going according to plan. And where we measure our savings in local currency, they are also going exactly according to plan. We'll then look upon how we are developing regarding our structural cost reduction programs. We are now at the SEK 3,800,000,000 which that should be SEK 10,000,000,000 when we measure that.
And I think that's important to note it is the full year effective 2016 that we're looking on which means that we have to basically have implemented the all the activities around or 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 in the last three quarters actually and compare it to where it was when we initiated the program the SEK 10,000,000,000 complete program in the Q3 last year. If we take the current rate at that point in time, we would have a savings around somewhere between €5,500,000,000 and €6,000,000,000 if we take these current rates at all. We have said that we are committed to the €10,000,000,000 We are trying to offset as much as possible on this. As before, the important thing is that we are implementing the activities.
They are moving according to plan and they are according to plan that in local currencies. Then on Page 23, we have to summarize it is about the improved profitability of flat volumes. And I think that with this with flat volumes, I think that shows also how important it is to work with the continued improved efficiency shows how important the cost reductions and the efficiency programs are for the shows how important the cost reductions and the efficiency progress are for the Volvo Group. We had as I said before strong cash flow in the quarter. And the focus that we have for the rest of the year is to you can say to finalize the activities in the efficiency program.
And 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. And there are some things in group truck operations that are still being implemented. We have here in the Q2 actually 2 major things that were implemented. 1 was the even flow in Hagerstown and the second thing was the cap trim that we moved from Umea to TUV.
And we also have some changes in our logistics system as well in terms of the partial logistics in the United States. So there's a lot of activities going on still in our manufacturing operations. And then to implement the activities continue to implement because part of it is already implemented that we announced then at the end of the ahead of last year regarding our backhaul loaders and motor graders as well. With that, I finish the presentation. And I guess that we leave open up for questions.
Okay. And we have a first question coming in from Mr. Frederic Stahl from UBS. Please go ahead.
Hi Jan, hi Christian and the rest of the guys. It's Frederik 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 Mac?
That's question number 1. And then question number 2, you mentioned that adjusted for the cancellations in the quarter you think demand is normal at the current level. So should we count on about 12,000 units per quarters going forward? Is that a fair assumption? Thank you very much.
I think the I mean it's regarding the cancellations, we take this a little bit you can say month by month. And I don't think that it will get say a higher pace or something like that than what we have seen. I think we are working this one through. I think 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 valve order intake in the Q2.
That's probably more of an indication how we see the marketing basically flattening out compared to last year. And we then, as I said, see maybe a slower momentum when we go forward. And then 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 in 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.
Okay. And the next question online comes from Hampus Engelau 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 like under absorption of costs during the quarter? And give some more flavor to the earnings impact from Brazil in the second quarter? And also given that you're reducing your outlook even if it was expected, will you need to cut run rate further in Q3?
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 I. E.
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. 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. I mean we don't we do not quantify the under absorption in Brazil. But I mean, what we have announced that we are doing is that we that we did already in the Q1. We are taking out the 2nd quarter sorry, the 2nd shift in the production in Curitiba. And 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 with the majority or almost all of that cost we will have for the remainder of this year. So we will basically be on a 1 shift operation. Then depending on exactly where the market is going, we of course have to work with stop days and so on for as it looks now for the remainder of the year as well. Apart from that of course we will see what we can do in terms of taking out costs and so on to adapt to this lower level of demand. And I think it's 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. I think that was
That was the first question.
That was actually 3 question happens. Yes. That was a good trick. The U. S.
Run rate, I mean, we are as I said, we have good order backlogs for both Volvo and Mac in the U. S. So we don't see we don't foresee any need to adjust the production right now. We are as you know, we are coming into an interesting Q4 in North America as well where we usually have the big fleet orders coming in. And that's as you know that's a market phenomenon in North America.
And I think at that point in time, I guess we will get more of an indication for really the how this slowing momentum is actually coming in North America. So we don't plan for any adjustments in our run rates in U. S. For the time being. And see as I said it is I mean it is actually a focus on big machines with good to gross margins also then of course utilizing the weak Swedish kroner, 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 Arctic as well. So that is one explanation. But maybe what I didn't mention before actually is that is also that we of course see on the cost side the improvements also in CE, they are also running a cost restructuring reduction program as well and they are working very good in terms of how they work with their operating expenses R and D, selling and admin as well. So I think it is the package of all this kind of thing. We also see then of course a market mix effect as well.
I mean the downturn that we see right now is coming in Asia and the production facilities there. And 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. And now we are filling up the factories in Europe. So 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.
So I think that's as much flavor as I can give you on the good development in CE.
But are you now in line with demand in China in terms of staffing and run rating? [SPEAKER KARL HENRIK SUNDSTROM:]
Yes. I think in terms of run, build build anything for inventory or something like that. New equipment inventory is very low, so we took down production very, very quickly. And then, of course, we are adjusting our operating expenses and so on in China as well and that's taking place for the that's also taking place right now in China. I think it's worth to mention also, I mean, what we should remember in terms of also the seasonality that we have in the that for Construction Equipment, the Q2.
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. And you know that's when we come into the Q3, they are tougher quarters as well and you should not forget that. Thank you very much.
Okay. And we have a next question coming in from Mr. Eric Golrang from Nordea. Please go ahead.
Thank you. I have a few questions. The first one on credit losses in China, EUR 147,000,000 in the quarter. Where do you see that moving from here? And second question is on profitability and the North American truck market.
Obviously, you've become very happy about the performance over there. And I'm in the context of you expecting the North American market to be peaking now, how should we think about the resilience 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? And then the last question coming back to Construction Equipment. You talked about utilizing the weak 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, I mean, this is I mean, we are working ourselves through the credit portfolio in China and it is very, very difficult to actually judge how much it will be going forward and because it is as you understand a fairly difficult situations with both end customers and dealers. And we do have work around programs for the leaders and so on. And I mean, it's similar the way you work in 2 business. We have done it many times before in North America and also from time to time in Europe as well.
And it takes some time before you really know if the situation is stable or not. So I don't dare to give you any forecast. 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 have to judge, but I'm fairly sure that it will be some more going forward. The let's have a CE on the mix.
I mean, we do have, I mean, underlying, you can say, fairly good markets in the North America and also in Europe. And that is actually where we then that we actually take the opportunity of course then to take the big machines a little bit more aggressively into these markets than what we have done before. And of course, utilizing the advantage that we see from the currency as well. So I don't think it's any particular segments or something like that. 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 big cash on the the 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 our profitability. The profitability in North America is I think I said it before and that is that I think the business is better than ever.
And that is, I think, due to the fact that, as you correctly mentioned, that we have a higher share of captive engines, captive the 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. So 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 the downturn today is better than what we have had in the past. Then of course, if I can't see the speculation how deep is it, how quick does it go, how quick can we adapt and so on.
And of course, we will not be we will of course be interested that there is a sharp downturn. But 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 on 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 5 years ago?
[SPEAKER KARL HENRIK SUNDSTROM:] No. I can only say that it is improving. Actually, it's consistently been improving over. You mean the share of the total sales or?
[SPEAKER KARL HENRIK SUNDSTROM:] Yes, the aftermarket share
of total sales. That depends. You know that if you have an increased sales volume that it's difficult to have a higher share at the same pace on the aftermarket because if you sell one more machine, you have to sell a lot of more spare parts to keep the you can say the relative share. But if you look upon it in terms of that over longer periods, with stable volumes, the aftermarket share in North America is higher today than what it's been before. And that trend will, of course, continue going forward as well due to the fact that we have these rolling days of model and vac trucks with the captive drive outs.
Thank you.
And 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, a couple of clarifications. Did you say that the run rate which you say is €3,800,000,000 in the quarter if you calculate that in local currencies we were talking like €5,500,000,000 €1,000,000,000 to €6,000,000,000 Was that correct?
Yes. Or if you look upon it like this, if you take the currency rates that we had in the Q3 last year when we had all the activities in place and take these currency rates, then it would have and if they were if they had been here today those currency rates, the cost savings would have been somewhere between €5,500,000,000 and €6,000,000,000
Okay. That's good. Also another clarification. On the Q2 sort of singled out, you say, if I read that correctly that you had like a €509,000,000 tailwind in local currencies. But you also said, I think that you had a €700,000,000 headwind from currencies, which does that mean that in reported currency there was
a €200,000,000 increase in the second quarter? Are you on the cost side now or? Yes.
On page 19 as of 21, you said total cost reduction of €509,000,000 excluding currency effects.
On OpEx. Exactly.
And the total effect on the OpEx is €700,000,000 So it is actually increasing with the €200,000,000 measured in Swedish cars.
Yes, exactly. I want to clarify that. Thirdly then, okay, so you have this huge currency headwind, but you're also stating or sticking to your €10,000,000,000 target. We have 6 months to go or 5 months to go basically. How do you get that equation?
You have 18 months to go.
Yes. Yes. Yes. But when it comes to measures, I mean, implementing measures, you have said that you're going to do the measures by we implemented the measures by end of this year.
And that is and now I'll repeat it again. All activities that we implement are going to plan are going according to plan. And 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 aids organization on the truck side. And that we will have as it looks right now will be implemented at year end.
Yes. But that will not be enough to get to the €10,000,000,000 with the currency headwind that you now have. And yet you are sticking to the €10,000,000,000
in so We are
sticking to the €10,000,000,000 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 programs like this on spot rate. I've also said before and 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 3 that I mentioned before, but we are working on that as well.
But that means that the only logical conclusion is that you have to do more next year or that you have to change the €10,000,000,000 figure?
I'm not changing anything. Just telling you where we are in the cost reduction program right now, what it looks like in terms of currently headwind for the time being that we'll implement what the program that we are looking for more offsetting measures.
Yes. 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 sort of challenges in terms of production and supply chain do you see for the Q2 with the implementation of these changes?
[SPEAKER STEPHEN ROBERT BINNIE:] No. I think in terms of yes, I think in the Q2, as I said, we had the move of the Capstream. We had the even flow in Ergertown on the engine side. We have also some partial logistics things. And these are and we knew that obviously in connection with the summer shutdowns as well.
So I don't think there are any major things as I can recall right now that is left for you can say quarter 3 and quarter 4, if I remember. That is that kind of magnitude that we're talking about here. But I mean the Q2 was not from that point of view the most efficient quarter in production either with the 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 etcetera. Is that I think enough to make sure that Latin America is contributing positively to bottom line for the group?
[SPEAKER LARS CHRISTIAN BACHER:] We will always I mean, we will do as much as possible as to Geoff said 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 maybe actually offsetting some of the downturns in Brazil for the time being where you have actually still fairly stable markets where we also see that the currency effect that we have with the lower Brazilian reais. And when you said in terms of markets that are more dominant and denominated in Latin America actually offset some of the downturns in Brazil actually. So the whole situation in South America is not as bad as it would have been if we only had Brazil.
Yes. All
right. Very good. Thank you.
And we have our next question online coming from Mr. Graham Phillips from Jefferies. Please go ahead.
Yes. Good morning. My question is about MAC in the U. S. Can you remind us please what is the oil and gas exposure or the energy exposure?
I mean, I had felt I had thought that
that business was quite exposed to sort of construction and that part of the market, which might have been saw some signs of an improvement in the U. S? And also just remind us what the sort of mix in the business is like in terms of captive engines, captive drivetrains and perhaps thinking about the traffic light system where the sort of profitability of that business might sort of exist also to hit with regard to the Volvo brand in there? And 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 Q2 last year was not a tough comp for Mack if that was related to that I think that was a normal quarter last year. So it's not a tough comp. It is more the fact that we had the there was an overshoot, it was in the Q4, maybe a little bit in the beginning of Q1 this year. And that is why we see now that we have some you can say that we are taking out the area in the order book and actually take some dealer cancellations. But 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, Chris, if you have any on the MAX exposure to oil and gas and construction?
Yes. When we looked into it, 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 haul trucks for oil tankers etcetera. 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.
So as
the year progresses then, how would you see the MAAC brand performing? I mean, again, where are we in its model cycle? As I say, is it can we think of it as more or less profitable than Volvo brand in the U. S? And I'm trying to think of engines, captive, drivetrains and so on.
I mean, we don't disclose the difference in profitability on Mack and Volvo. I think it's worth to mention that, I mean, Mack is keeping its position. When you look upon the market shares and 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 shares going forward. It Mack will keep its position as well.
So 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 Mac on in terms of engines. And then in terms of gearboxes, I think it's more or less on the same level. So it's really not that big difference in terms of how good the business is on Mack versus Volvo?
You can say Mack has always had captive engines all along. They have only a few Cummins gas engines. 99% is the captive engines and has always been like that. On the Volvo side, we're now up to 90% captive engines and gearboxes. And that's the big structural shift so you can say.
Right. Okay. And sorry and just one clarification on the cost savings. I think there's quite a few comments and I got a bit confused in the end. So you're saying that the €10,000,000,000 program for the end of next year would have been EUR 5,500,000,000 to EUR 6,000,000,000 if you adjusted for currency?
[SPEAKER KARL HENRIK SUNDSTROM:] At the EUR 10,000,000,000 program, the target is EUR 10,000,000,000. We are currently at the EUR 3,800,000,000. The EUR 3,800,000,000 would today have been EUR 5,500,000,000 to EUR 6,000,000,000 if we have had the currency rates that we had in the Q3 year.
Okay. All right. Thank you.
Okay. And we have our next line sorry, our next question in line coming from Mr. Alastair Lefki from Societe Generale. Please go ahead.
Yes. Hi, good morning. Just on trucks, you've talked previously about price realization being a big focus in North America. I just wonder whether you could comment on whether that developed in line with your expectations in the Q2. And then also, you've just been talking about the quality of the business there being better than ever.
So structurally, can we think we're now on a sustainable level margin wise to the margins we see in Europe? Thanks.
I mean, the pricing is developing as you can say, call it a plan. And it is what we what you can see in the Q2 has been a stable development in North America.
And on the second question about profitability level compared to Europe.
It's fairly close for the target.
So when you say for the time being there and 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.
But going forward, can we think they're on a path?
On the structurally, we have structure wise, and if you have, I mean decent stable markets in Europe and North America at the same time, I think we will see a profitability that we're very close to each other actually. But then of course, you don't know if you have a downturn in one of the markets and an upturn in the other one, then of course, it would differ. But structurally, if you mean that, I think it's the underlying structural margins and profitability, they are fairly close to each other for the time being. Okay.
Thanks. And just one follow-up call. I missed the start of the call, but did you comment on the Renault 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 sort of volumes from a lower level against pricing on the new truck range?
Just your thoughts there please.
[SPEAKER STEPHEN ROBERT BINNIE:] Yes. I think we and I think that's an important thing. I mean the Renault truck is a very good truck, well received, but it's also then positioned slightly higher on the price level. And that's that, I guess, that takes some time before that is kind of accepted in the market. And I think that is the acceptance that we gradually see now.
And we see that the order intake and also, you can say deliveries truck deliveries to Renault is getting better. And I think also what we see now that see a stable to strike improving market share also for Renault as well. So I think it goes in the right direction. But we are not satisfied yet.
Okay. Thanks.
Okay. And the next question on line comes from Mr. Colin Gibson from HSBC. Please go ahead.
Good morning, everybody. Hi. It's Colin from HSBC. Just a couple of quick questions. Jan,
the share price has
been coming off since you've been talking and it seems to me it's down to 2 comments
of yours. And so 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, so 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? Because it's boosting revenues more than it's boosting costs.
Would that be fair to say? Yeah. I thought it was positive in Q2 for example.
Yeah. I mean the total effect from currencies is €1,800,000,000 positive. And then, of course, you can say that the effect on the gross income out of that would have been €2,500,000,000 if you then because you have the negative effect of €700,000,000 on OpEx. But net net, it is a huge positive effect we have from currencies.
Great. Thank you very much. And 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 or just under and it was about 350,000 units. Well that's U. S. Plus Canada and Mexico. I don't remember that year, but anyway.
So the idea that we would still be a fair bit below 350,000,000 at what 310,000,000 this year and given that 350,000,000 was nearly a decade ago, Notwithstanding the good improvement we've seen in
the U. S. Market in 2014 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. And I know you're not guiding to that at the moment, but everybody has to think about it.
Yes, exactly. No, we are not going to give any forecast for 2016 and not now that we do in the autumn, as you know. But I think the feeling that we have for the time being that we are around the peak for this cycle and that. But 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.
And we have a next question coming in from Mr. Ashkarin. Please go ahead.
Question. The first one is on FX. I think your FX tailwind was much higher in the Q2 than it was in the Q1 despite I think the impact on top line is probably bit less in the Q2. So if you can just give a bit of color on the transaction exposure that you had in the Q2. And I think for the first half, you're now close to $3,000,000,000 of FX tailwinds.
What your guidance for that for the full year would be? And then 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?
[SPEAKER KARL HENRIK SUNDSTROM:] Okay. In terms of I think we had a SEK 1,200,000,000 in the Q1 currency tailwind. At that point in time also we had the one off negative effects on currency related to the devaluation in Venezuela. If you take that one away the underlying currency exposure was actually 1 or currency tailwind was 1.5%, which is pretty close to the 1.8% that we have in the second quarter. So there are some I think you have a little bit of different structure or seasonal flows in the Q2 due to the spring season and so on.
So but I think if you take that away, you can say that the currency tailwind is more or less the same in the first and then 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 €3,500,000,000 4,000,000,000 and that we're sticking to for now as well. And then on the order intake in North America, as I said, we are not completely, but fairly close to being booked out in 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 are I guess 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 $10,000,000,000 cost saving? Just want to clarify that none of that is based on any volume increases, right? So this $10,000,000,000 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 Hell from Bank of America. Please go ahead.
Yes. Hi. Just wanted to come back to the orders perhaps globally as well. I mean, 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?
I mean, you're talking I guess fairly positively about production rates in the U. S. And in Europe. When we look at the Q2 itself, obviously, your global book to bill came back to 89% and it's retreated from the Q1. Do you think with what you're seeing on orders into Q3 that 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, so I have a view on the global book to build when we do have such big regional differences for the time being. So I'm not quite sure if I'd had to give you any And it's
a location quarter as well. We shut down the European plants for 4 weeks.
I think we abstain for having any kind of global view on our profitability for the time being.
I mean maybe I'll put it another way. I mean I guess you've talked a lot about the U. S. But in Europe. Are you really sort of seeing sequentially accelerating momentum now?
I mean, I know that the order book level has moved to a higher level in the 1st and second quarter, but are there incremental tailwinds to that for the rest of this year in your view?
[SPEAKER SEBASTIEN DE MONTESSUS:] I think we have been it's the underlying order intake in for I mean, we see that the order intake for Europe was something like in total 13% improvement in the Q2 compared to the Q2 last year. It was if you then look at 1, the 1st 6 months, it is 17%. It is actually a fairly, you can say, stable improvement that we think you can say sequentially quarter over quarter.
What do you think on just a follow-up on Europe. What do you think on pricing? And 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.
So why is their order growth so much better? Is that just a 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 don't I haven't analyzed any of our peers in terms of order intake. So I don't have that any view on that one. I mean pricing is I'd say that there's very few times in the truck market that you find pricing easy actually. So that is always a tough thing to work with. And I don't know if it's tougher today or easy 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.
And we have a next question online coming from Mr. Fredrik Stahl from UBS. Please go ahead.
Yes. It's me here, me again. Could I ask you on some of my follow ups here? On Construction Equipment, The how much of the volume drop is because you've phased out or deemphasized the smaller equipment? That's the first question.
And 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 your potential need to invest money in that business?
I mean, 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 JV, the intention with the JV debate is capitalized and the way it's working is that it should be self financed for going forward in terms of products and so on. And there is no way we look upon it and the way it's been structured that the owner should need to put any money into that company. It is a self financed, if you say, independent company from that point of view.
Okay.
And then when it comes to the CE side, maybe, Chris, do you have some?
Well, if you look at the volume drop, you can say it's primarily linked to China and the Lingon, which was down 43%, the SDLG. 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. So it's I think that's the flavor we can give you.
Okay. That's perfect. Actually can I shift in a final question as well? It's regarding your the presentation. I think
for the last few quarters
for the European truck market you actually have a the trend line is downward sloping. Are you is that are you saying that you think actually Europe is not going to grow over time or even decline trend wise?
Fredrik, that is probably more of a Bill Gates thing here. It depends on how many years you include in that trend line. If we were to include another 5, 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. So thank you very much for this quarter. The IR department is ready to answer any other questions you have on the phone. And with that, thank you and talk to you next quarter.