Ladies and gentlemen, welcome to the Volvo Group Year End Report 2014. Today, I'm pleased to present Olof Persson, CEO. The first part of this call will be a short introduction from Olof Persson and afterwards, there will be a question and answer session. Speaker, please begin.
[SPEAKER STEPHEN
ROBERT BINNIE:] Thank you very much. Good morning and good afternoon to all of you and welcome to this telephone conference for the Q4 2014. Just let me a few minutes to wrap up my main takes and the summary. And as you know, on the web, you have the full press conference and presentation from this morning. And then we will go over to question and answers rather quickly as we used to do in those telephone conferences.
If I would then go for a quick summary, I would say that we have 2 trends in the Q4. 1 is on the truck side where we see that despite lower volumes, about 9% lower deliveries, we have managed to increase the profitability with around 10%. And on top of that, we have historically a rather good order intake in the quarter as well. And on the other side, we have Volvo CE, the construction equipment business, who has had a really tough quarter when it comes to volumes and declines in many markets around the world. And we're looking at actually a 30% overall lower volumes, which of course have led to lower capacity utilization in the factories that we have in our system.
We can also conclude that the restructuring plan is continuing according to plan. We do have traction in cost savings, and you can see that in the material as well. If we look at the totality and total number of employees and look at the full year numbers, we can conclude that we have during the year reduced our total employees, both blue and white collar, with almost 5,800. And in the Q4 now, about 1100 white collar left the company in conjunction with the efficiency program. We've also seen a good cash flow, a seasonal good cash flow in the operations and we have continued to strengthen the balance sheet.
And as you remember, there were 3 key focus areas for this year. 1 was the cost efficiency relating to the efficiency program. We talked very much in the beginning of the year of the balance sheet strengthening and the balance sheet efficiency. And it's good to see now that if you take the full year number, we actually have reduced our net debt with around SEK 10,000,000,000 leaving us now with a 14% net debt to equity ratio. And with that, I think most of the information is out there.
And instead of me summarizing more, let's open up for question and answers.
And we have a first question coming in from Mr. Klas Bergland from Citi. Please go ahead.
Yes. Hi, guys. It's Klas from Citi. Olof,
I have
some questions on Construction Equipment. Firstly, I know that you don't report under absorption effect anymore, but it would be really helpful if you could give us some sort of indication of the margin impact on the back of the inventory reduction. We could obviously back it out if you could help us with firstly the volume amount of the inventory move and then how much was finished goods versus parts?
Okay. I think actually I hand over that question to you Jan to elaborate a little bit on that.
Yes. I think first of all, I think the CEO organization, I think you can see that on the chart, they have really managed this, I would say, quite I was about to say dramatic downturn. I mean, we actually have a volume decrease of 30% compared to 1 year ago. And you can see that we keep the book to bill ratio at 100. And what we have managed to do is actually to actually stop up the production in a way that we have not built any kind of inventory of new products and also managed to stop the supply chain.
We have actually managed to reduce the inventory quite a bit in the Q4 for the whole group, but that's also including CE as well. So I would say when it comes to CE the way we handle the downturn there now operationally has been so far very good actually.
But so how should
we think about sequential margin progression here? Because if we have the spring season in Europe that's going to be a help, But demand is weaker in North America. And I guess the comp year in China on the back of the spring season likely to be much worse year over year. Thinking about the margin progression, is it likely that the margin will land around 2%, 3% in the quarter?
We never comment on any kind of margins. But I think if you look upon the seasonal pattern that we have usually in in CE is of course that the Q4 is a very weak quarter. And then during the Q1 it gradually comes back as you correctly mentioned due to the what we call the spring season. And then how if there is a spring season, how big it is this year in China? I think that's very, very difficult to judge.
But there is an underlying season pattern.
Okay. And then just on CE and the savings. The incremental savings at the group level last quarter was €3,500,000,000 for the group. The 1,000 people leaving INSE is a fairly small part of that, maybe €500,000,000 So the first question on the savings here is out of the €3,500,000,000 how much is sort of undisclosed savings in terms of real capacity closures on the fixed side?
I'm not quite really sure. You mean the €3,300,000,000 that we show in the €10,000,000,000 or what do you
Yes, the €3,300,000,000 okay. Sorry. Okay.
No. The €3,300,000,000 is as you can see there it's about selling admins R and D. And then we have the first one, which is, you can say, the structural cost reductions in you can say basically within fixed manufacturing to keep it in the gross margin. And that one is has been reduced now since the base year, which is 2012 with EUR 1,000,000,000. There is actually no effect from CE in that.
As you know, the restructuring that we actually announced in connection with the Q3 report is now being put in place you can say gradually over the first half of this year. So we'll not have any structural cost reduction effect in CE included in that EUR 1,000,000,000. So that will come you can say gradually during the course of this year.
Yes. No, no, I am aware of that. I mean, yes, I'm trying to gauge the incremental savings ahead for CE because the if you think about this, if only if you take like half of EUR 3,000,000,000 to come in CE at the current demand level, that would be 300 bps on the margin. That would take the CE margin at current demand levels to 7%. Assuming that China will not come back and I think we all agree with that, that would assume a very, very sharp recovery in developed markets to basically get back to peak margins.
So my question is really, are we accepting that we will not reach a peak margin for CE? Or are there more savings to come basically a new announcement?
You can look upon it in this way. The what you heard, the thing that we announced in the Q3 that was a restructuring basis structure cost reduction that we would have done more or less regardless of what we have seen in the market. We are now short term focusing very much about adapting the our production capacity to the present in demand in the market, which I just mentioned now. And we are at the same time also then putting a lot of emphasis and focus on the on what we can do on the OpEx side and R and D and so on. Then whether we need to do more than what we are already working with, that of course, we will see if that's necessary.
And if we take any kind of decision or whatever we do, we will announce it in that case. Of course, we have to evaluate a little bit how this goes forward now in the next quarter and so on.
Great. Thank you so much.
Okay. And we have a next question coming in from Mr. Martin Viecha from Redburn. Please go ahead.
Hi. This is Martin Viecha from Redburn. Thanks for taking my questions. I have two questions, if I may, regarding the Slide 24 in your presentation. I've noticed that there's one item missing, which used to be in the restructuring presentations before and that's the R and D net capitalization impact.
In other words, once we include that impact of net capitalization of R and D, the €10,000,000,000 figure would drop to say €7,000,000,000 or €8,000,000,000 instead. So ultimately, the savings, which we will see in the P and L, will be in the region of €7,000,000,000 to €8,000,000,000 I just wanted to confirm if this is correct or incorrect. And second question would be, we know that the SG and A and R and D in the restructuring slide includes the currency impact. And I wanted to ask, does the gross income in the first line include currency impact as well? Thank you very much.
Yes. Regarding the cash R and D, we I mean basically to this is really I mean, the cash outlay that you have in a company. I refer to the capitalization, amortization as you can say bookkeeping effect To keep the cash flow and also to balance out the R and D resources going forward, the cash R and D is what we focus on and that is a part of the SEK 10,000,000,000 program. The way we now wanted to describe it as of the Q3 last year. So and then SEK 10,000,000,000 is the cash R and D included in no effect of capitalization or amortization.
We are now coming gradually out of the this effect that we had where we actually we capitalized a lot in connection negative can say the negative effect of less capitalization and also slightly higher amortization. That effect is now gradually coming back. If you look upon the Q4, that is more or less you can say the level of capitalization, amortization we will see going forward in this year. And year over year, you will have almost no effect from as far as we can actually it's a little bit tricky to do that. But as far as we can see, it will be on balance compared to the year before.
Sorry, but compared to year 2012 when I think there was a net capitalization of about €2,300,000,000 compared to 2012, what do you think it's in what sort of region? Are we going to see net amortization or net capitalization in 2016?
Marty, we'll have to come back to that. We don't want to give forecasts that far into the future, but it's not unlikely that you will see capitalization starting to increase again as you have new generations of trucks and other products that will gradually start to come into that will come closer to production decision. So if you take it into 2016, capitalization might start to recover a bit and that of course has an impact on the P and L.
Okay. Thank you.
And then on the currency effect, we do have negative currency effects on the especially on the selling expenses, but also on the R and D expenses since we have that in other currencies than Swedish crowns. It's actually quite a significant effect in the Q4. But that we have said, I mean, we are going to the €10,000,000,000 is still there. So we will not change our target on that one due to the recent currency movements that we have said that we have seen. Then when it comes to the currency effect on the structure cost reduction in gross income, I think, if any, they are very limited, I would say.
Okay. And I mean from now on would the FX impact be included in that line or only some of the FX impact would be included there?
They are included in the line.
Okay. Okay. Thank you very much.
And we have the next incoming question from Ms. Laura Lemke from Morgan Stanley. Please go ahead.
Yes, good afternoon. I got two questions, please. The first one would be on Trucks and I was hoping that you could maybe help us a little bit with regard to incremental margins in 2015 because when I look at the different regions, I mean, you're obviously at different points in the cycle here. So for example, in Europe, we're kind of, let's say, on an upward
trajectory, more early stage, whereas in
North America, we're kind of close to peak and then just wondering if you could help us a little bit to better understand how the incremental margins are changing, So I. E. Are incremental margins, for example, in Europe going to be the same as you had last year? Are they lower or higher? So that would be actually really helpful also for the U.
S. Because as I understand your capacity utilization is quite high now on the 2nd shift. So how much can you really squeeze out on the current shift model? And how much is that how much of that additional revenue is really going to drop down to the bottom line? So that's my first question.
And then on Construction, you said that China was breakeven, if I understood correctly, this morning in Q4. Now if I just look at the adjusted or FX adjusted clean EBIT in Construction Equipment, I mean, you were at minus 1.7% margin. So that to me, suggests that something else must be loss making. So I'm just wondering, can you talk a little bit about that where the additional problem areas are? Thank you.
Okay. Thank you. If you look at the incremental margins going forward and we I gave you some input to it. But if you look into North America and looking at the market that we foresee here, we have said that one part of our activities very much now to balance market share and pricing. And we I was also clear today that our ambition is, of course, to make sure that we have a good pricing structure in North America going forward.
Then when it comes to capacity, we are increasing the capacity step by step in the American system, and we do that in a very controlled way. So that means, for instance, that we do not plan as instance. So we are filling up now within the present structure. So and that we will have to see then going forward what that would mean on the margin side. But that's the activity we do.
In Europe, I would say that as you can see also in the book to bill, we are pretty much balanced in terms of the production and how we have set up the production. And then it remains to be seen how the development goes. But of course, if you if we fill up the factories in the Renault factory, for instance, with extra trucks, that would, of course, have a better coverage when coming out in the profit and loss. And then in Brazil, you have the reverse where we actually need to then both in a very tough pricing environment as it is in Brazil and also we have to reduce the production, as you said, with as we said, with 6 out of 13 weeks now being stop weeks in Brazil. So that would be the major movements in terms of the actions we're doing in order to make sure that as much as we can then secure that we get the incremental development that we would like to see given the market situation.
Okay. And then if you take China, as I said earlier today, I think we are broadly around the breakeven. I think that was more or less what I said. And Luca, I mean, China the China effect it's not only China effect that we see. We also said that we have a lower demand in mining, you can say, generally speaking, especially in Southeast Asia and other parts of Asia and also some other parts of the world as well.
And that is also affecting us. We have actually, as you know, sales going into Russia as well. And we do have you see the picture I think one of the pictures we say that we have which is correct the 21% capacity utilization that is of course extremely low. So due to you can say so that is of course then is not only China. It creates a capacity utilization in our fact that was in our component factories as well.
So that cannot be offset by any other regions where we are in a more what you say positive situation.
Okay. Great. And just on the 21% capacity utilization, that was just the China number, right?
Brick.
Say it again? Brick?
Brick, yes.
Okay. Perfect. Thank you.
And the next question comes from Mr. Alex Potter from Piper Jaffray. Please go ahead.
Yes, thanks. Couple of questions here. I guess, first of all, can you comment on your market share group wide in North America in terms of orders for trucks? There's been some speculation over the last several months that these extremely high order numbers that we're seeing in North America are due to potentially one OEM taking unusually large numbers of orders stretching out several quarters. And I don't know if you guys have seen that or if you think the strength in orders is equally strong across all of the OEMs in North America.
That's the first question. Second question is just if you can comment on kind of what your strategic priorities are for the Dongfeng joint venture, just what the highest priority actions are in the near term? Thanks.
Okay. Christa here. I'll take the first question. And basically, you can say we are getting the share we would like to have in that North American order intake. So we have a fair share of it.
Okay. And when it comes to the strategic, there are a number of strategic plans and activities that we now start to embark onto since a couple of weeks when we have officially now got the joint venture up and running. And there are you can divide them into 2 major areas, I would say. 1 is on the technology side and the other one is on the marketing side. On the technology side, we are looking at technology both when it comes to the transmission, but also when it comes to the engine side.
And that's projects now being started up for that. And when we look at the marketing side, it's still early days and we are sort of developing those strategies together with our partner to then see how we should fulfill the overall objective with the strategic alliance. And that is, of course, to strengthen the Dongfeng and also the Volvo in China by utilizing the common strength both from a technology point of view but also from a presence point of view and also see how we can develop Dongfeng to become an international brand over time. But those are still holidays in those kind of things. But when it comes to the technology side, on specifically on the transmission side, we have moved ahead quite rapidly on that one.
And then the next one is will then be on engine side.
Very good. Thanks.
Okay. And the next question comes from Mr. Tindor from Barclays. Please go ahead.
Yeah. Hi, there. It's Mike Tindor from Barclays. Thanks for taking my questions. 2, if I may.
Just one touching on China and CE. You certainly mentioned that your inventory is in good shape at the moment. But Olaf I think you mentioned on the Q3 call that the industry as a whole had a fairly significant backlog and you thought it would take several quarters to clear that. Has that got worse? Or has that got better over Q4?
And any color you can give on when you think that might actually correct itself? And then the second one just in relation to U. S. Orders again. I don't know if you have a measure of duration, but I mean are we looking at an order book that looks the same as it did 12 months, 13 months, 3 years ago?
Or are truck buyers ordering further in advance than they were previously? Thanks.
[SPEAKER JACQUES VAN DEN BROEK:] Okay. I would say on the China Sea and the inventory and the whole pipeline, which I talked about on Q3, I would say that it is fairly stable. No major movements in any direction in that one. And still, it is definitely an S after the world quarter when it comes to the time it will take to clean out. So we are talking about quarters to do that.
And but as we have pointed out a number of times, we are definitely making sure that from our side that we are pushing everything we can to make sure that we are balancing our own system as quick as possible. And it's a lot of hard and very detailed work going into this to make sure that, that is happening. When it comes to total order book in North America, I would say that when you're looking at and going in a book to bill rate to that we are right now and you have the market strength as we see in North America, keeping a very close eye on the order book to make sure that we don't get any that we have a very good quality in the order book. And there are 2 ways of doing it. Right now, we are in 4 to 5 months delivery time, depending on a little bit, but you can say that as an average.
And if you look at it, we're now then increasing our capacity in our factories step by step to make sure that we can balancing the order back logging in a good way. So but so far so good. We haven't seen any sort of worsening of the quality in the order backlog. And we have processes in place to make sure that we keep a very close eye on that.
Okay. Can I just one quick follow-up? You mentioned increasing production step by step, but not increasing ships. Can you be a bit more specific? Are you just adding more people or adding more over time?
What do you mean when you say step by step?
The very short answer is that yes, It is both. We're adding more people. We are utilizing the more hours so to say, over time and other things in order to increase then the line rate and that is what we're doing. So it's sort of a taxing line rate increase that we're putting there step by step during the spring. And we do it step by step because we want to make sure that we're managing the whole pipeline and managing also suppliers and everything and not to rush into too high of a production rate.
But so we're doing that and we're doing it in a controlled way.
All right. Thank you very much. Cheers.
Cheers.
Okay. For the moment, there are no further questions. Therefore, as a reminder, it is 1 to ask a question.
Well, then I think thank you, operator. I think we can conclude the conference here.
Okay. No problem.
Okay. Thank you so much for joining. And if not before, talk to you again presenting the Q1 in April. Thank you.