Ladies and gentlemen, welcome to the AB Volvo report on the first six months of 2013. Today, I'm pleased to present Olof Persson, President and CEO. During this call, there will be no presentation, we'll go directly to the Q&A session. If you have a question for the speaker, you will have to press zero one on your telephone keypad, and you will enter a queue. After you're announced, please ask your question. I will now hand over to Olof, who will say a few words before we begin with the Q&A session. Olof, please begin.
Thank you very much, most welcome to this telephone call regarding the second quarter of 2013. We have made available the presentation that I made this morning on the net. At our homepage, you can look at that presentation. By that, I would like to open up to question and answers.
I remind you, if you have a question for the speakers, you will have to press zero one on your telephone keypad. That is zero one. Our first question comes from Mr. Mike Tindall from Barclays. Please go ahead, sir. Michael, your line is open. Michael, your line is open. Can you hear us?
Take the next one then.
Our next question comes from Mr. Fredric Ståhl from UBS. Please go ahead, sir.
Hi, Olof. Hi, Christer. I guess you're hiding there as well. It's Fredric here at UBS. I have three questions, please. Maybe, is it possible for you guys to talk a bit about the productivity improvements that comes with all these new products? I'm guessing you revamped the assembly and tried to squeeze out as much as possible from the production side of things as well, not just the features of the trucks. That's the first question. I would like to know, if you look at the FX impact on the truck business, on revenues it was broadly the same as in last quarter, but the hit to EBIT was much bigger. I was wondering if you could give us some color on that, and if we should expect the same sensitivity in the coming quarters. Finally, Volvo Rents.
Are you planning to sell that, sir? Can you comment on that? Thank you.
Okay, thank you very much. You're absolutely right that Christer is hiding here together with Anders Osberg as well, I should of course have mentioned that in the beginning. Thank you for that. If we look at what we have done now in designing the new vehicles, both on the Volvo side, on the Renault side, but of course also now in the coming on the UD Quester. We have, of course, ensure that we have taken into consideration productivity, assembly times, assembly structures, and making sure that we do whatever we can to increase both the efficiency in assembly, but also making sure that we are getting a outstanding quality on the assembly that we're doing.
We have also worked a lot in terms of looked at maintainability, because one thing is of course that we have good assembly procedures and sequences, but it is also very important that when we have services, that we can with our dealers, making sure that we have an efficient and a fast moving and easy accessible maintenance. That is also included very much in the design of the new vehicles. Giving a number on this, how much better it is, that is, I would say, too early because we do see and we do have a theoretical improvement based on calculations. We have our sort of experience from the assembly and production we have done up until now on the new FH. Over time, we will continue to work on this.
It will take some time before we see the full benefit when the whole system is up and running completely, and that will take some time.
Is that part of your margin target or the 300 basis points?
If you look at it, one of the items we have there is the standard cost of sales. In standard cost of sales, you also have, of course, the standard hours and the standard minutes and the standard seconds for assembly of vehicles. The answer to that question is definitely yes.
Yeah.
When it comes to rent, let me just, because that would be a very short answer, and we do not comment, as you know, on those kind of statement or eventually rumors. If we take FX and trucks.
Yeah, what you can say there, Fredric, is that of course it's twofold. That you have the revaluation of the receivables, there's profits and so on, and then you have the effect on the flows. This time, of course, if you look at individual quarters, you could experience certain volatility. Over time, of course, what we have guided before is that we have mainly really a mismatch on the US dollar. Of course, over quarters you can see this volatility, and it's correct that you see this on revaluations over the last two quarters. Of course, on the flows, I think this time you had many currencies in the different currency pairs, also cross currencies that added to this difference.
Is it possible to give us an idea what you expect for the future?
It's basically impossible to do that because, as a global company, we have also a lot of cross-currency pairs that will affect this. It's very hard to see how the individual movements between currencies will be there. It's hard to guide there exactly.
Okay. Thanks, guys.
Fredric, I think I'll just add there, if you look at page 29, you see the currency disclosure for the second quarter. If you look at it, SEK 700 million came from the net flows. That's the transaction exposure that we have. You look at, we have translation effects on operating income from foreign subsidiaries of minus SEK 161. I would say most of those SEK 160 is actually coming in the Trucks result.
If we assume the same profitability in our foreign subsidiaries, and the same FX rates, that amount will be about the same going forward.
Very good.
Depending if, what you compare to, of course.
Yeah. That's the problem.
In Q3, you will have other comparison basis.
Yeah. No, that's clear. Thanks a lot.
Our next question comes from Mr. Alexander Virgo from Berenberg Bank. Please go ahead, sir.
Yeah. Hi, good afternoon. I was just wondering if you could provide a little bit more color on what's going on in India, and then also give us an update on your discussions with the Dongfeng JV in China and perhaps a bit around the developments of the truck market in China. Thank you.
Okay. India in general has had a rather tough development in, I would say, both in the economy and also in the truck market going forward, and hence we have revised our full year forecast down a bit there. In terms of our performance, I would say that the Eicher brand and the Eicher operations has performed pretty well. We have managed to keep our market shares on medium duty. We are, as you know, entering into the heavy duty since, what is now, Chris, a couple of years or one and a half year, and we are slowly gaining traction there as well. What we're now looking forward to in India is, and we haven't mentioned that so much today is that, at the back end of this year, Eicher as well will come out and launch a complete new range of vehicles for the Indian market.
Also products that will be possible to export out of India to other markets as a part of our brand positioning work that we're doing now in different parts of the world. India is, from a market point of view, it is a tough situation and we'll see how it develops going forward. I'm pleased to see how Eicher is taking on the challenges in a good way. When it comes to our discussions with Dongfeng, it goes according to plan. We are providing the data and the approval procedure is going according to plan. We stick to our estimation that we will have this up and running, the new strategic alliance, beginning of next year.
Your last was also about the truck and the truck market in China. What we see so far is that the market is holding in the range that we have discussed. We give you only the medium duty and heavy duty in one number. I can give you a split up there in terms, if you just give me one second. If you look at the 935,000 for the total truck market, we can see that we forecast the heavy duty being 630 and the medium duty the remaining 305,000 units for this year. That is the development we see.
Okay. In just in terms of the sort of development over the first half is that, can you give any color on the profile of the year rather than, presumably it's not flat all the way through?
Chris, why don't you give the data?
I don't have all the data here, unfortunately. We had a fairly weak start. With the forecast we have, we expect a slight improvement here coming into the second half of this year.
Okay, great. Thank you very much.
Our next question goes to Mr. Martin Viecha from Redburn. Please go ahead, sir.
Hi, this is Martin Viecha from Redburn in London. I would like to ask on the services, given that part of the restructuring program is increasing service revenue, especially in North America, I was wondering if there's any chance we would get a bit more detail on service performance on quarterly basis, like we get, for example, with Paccar or Scania. Also on the second question on the truck production, I wanted to ask if the truck production year-on-year has increased or decreased, and if you could give us a hint of how much. Thank you very much.
Okay. If we start with the services and the split out, we do not at this point in time have any plans to give you more disclosure on that. That doesn't mean that we never ever going to do that, but at this point in time, we have no plans of doing it. If that were to happen, we have to be very clear that we have done the right sort of focus and date on that. Let's see. I take it with me as a comment from you, then we discuss it internally. When it comes to truck production, Christer, I think you have all the detailed data there in year-over-year.
We typically don't give the production data, unfortunately.
Sure.
You can look at the deliveries, and they are good, you can say, estimation to what is being produced in our manufacturing system, especially as our inventories are not moving a lot now in this quarter.
Thank you very much. Our next question comes from Mr. Alex White from JP Morgan. Please go ahead, sir.
Yeah, good afternoon, everybody. It's Alex at JP Morgan. I've got two questions. Firstly, I'm just looking for some clarification on the comments you made in the press call this morning on your rolling fleet in Brazil. I think you said that, or in Latin America, I should say. I think you said that this was around 90,000 trucks. On my estimates, you'll deliver around 30,000 trucks this year to Latin America. Does the 90,000 trucks correspond to the total Latin American rolling fleet? Because to me, 30,000 trucks in one year if your fleet's around 90 seems a dangerously high level. The second question I had was, just trying to get a feel for how deliveries in Europe can develop in Q3. Historically, we've seen sequential declines of sort of 20%, 25%, given the seasonality with the vacation period, et cetera.
Should we expect this type of development again this year, despite the strong orders that we've seen? Or did you actually overproduce enough in Q2 so that you enter the quarter with enough momentum to sort of better offset the four-week vacation period? Thanks.
Okay, when I talked about the rolling stock in Latin America, it was for the Volvo brand. Would like to specify that. We do have other brands in Latin America as well, particularly Mack and the others. I hope that clarifies. When it comes to delivery Q3, Christer, why don't for consistency here, making sure that you give the right flavor of that?
I think you should expect you can say we ramped up the Volvo truck production in Europe by 25 trucks a day beginning of June. That pace will of course continue in July. We will have three to four shutdown weeks as we always have, we will do a slight production ramp up end of August. September, you will have a slightly higher pace in production. You should keep in mind that the plants will be shut on the assembly side, usually four weeks in Europe. That type of normal vacation impact you will have.
Okay. That's very clear. Thanks very much.
Our next question comes from Mr. Austin Earl from Marshall Wace. Please go ahead, sir.
Hi, everyone. I've got three questions, if I could perhaps take them one by one. The first was just regarding comments this morning about the pre-buy in Europe. Is there any way of trying to quantify how much of the second quarter orders might have been pre-buy?
I think the short answer to that is not really. What we have to do and what we have done is try to keep an eye and see what kind of order pattern we do have. I think we can conclude that we have seen pre-buy tendencies in U.K. and parts of Eastern Europe, primarily then focusing on the classic FH in that respect. Exactly how much it is and to what extent it is, it's very difficult to give any number of it. I would say that up until today, and what we see in the order book, it is not substantial. We will have to keep an eye on it going forward into the autumn here.
Okay. Second question was just on the pricing in Brazil. Your comment this morning was referring to inflation in Brazil, I just wondered, when you said the pricing was positive, is it positive enough to cover the cost of inflation and also cover the cost of the Euro 5 engine?
The Euro 5 engine, we covered already beginning of this year. That is done. What I am talking about now in the second quarter is exactly what you talk about, is the positive price realization in order to cover the cost increase. The answer to your question there is yes, we have managed to cover up for the cost.
Great. Thanks. Lastly was just your comment on R&D. If I understood correctly, what you're saying is that from a cash flow point of view, that it peaked in H1, is that correct?
What we talk about is the cash R&D, the cash R&D is what we done in our strategic objective is focusing on in order to reduce that with SEK 2 billion up until 2015, giving the starting point last year. We are on good way of doing that. You have, of course, the impact of the amortization depreciation on that. The cash R&D, we are on a good way, and we are continuing to reducing that according to the plan of actually having it reduced by SEK 2 billion by 2015.
Yeah, I think that it was elevated in the second quarter, we have said that it will be about the same level in the third quarter.
Okay. It starts to come down in Q4?
Yeah, exactly, we will have it.
Just regarding that you alluded to the amortization of capitalized R&D, I just wondered, the guidance that you provided of this shifting over so that it'll be a drag rather than a tailwind in terms of EBIT. What's caused the delay to that? Because if I remember correctly, it was originally expected to end Q1, then you postponed it to Q3, and now it's postponed to Q3. Is this just an accounting thing, or what's really causing that?
It is rather complex. We have a huge amount of projects running, according to the accounting, you then, based on certain points and gates, where you pass those gates, that's where you start to do the amortization and the switchover. It's very difficult to judge exactly when all the different projects are hitting those different gates. I think that we can say that as the project goes along, you get better and better certainty of it. Of course, the fact that we now have done all the big launches during this quarter has, of course, put some of those projects then in that category, which will impact this EBIT on a negative side. The clarity is increasing, therefore, we are guiding the way we're guiding for the next quarter.
That's great. Thank you.
Open the launch gate, you can say, and that means that it's more quality and the predictability in the numbers that we are giving for Q3.
Understood. That's great. Thank you very much for your answers.
Our next question comes from Mr. Paul Hartley from Merrill Lynch. Please go ahead, sir.
Good afternoon, everyone. Thanks for taking my questions. I've just got two, if that's okay. The first one is just covering pension provisions. I was just wondering what the cause of the big SEK 3 billion movement has been from Q1 to Q2. If you could just discuss that. The second question is just on some of the expenses that we talked about on the call earlier this morning, allied to the launches that Renault will be pushing through over the coming quarter. In the Q1 call, I believe you said selling expenses are likely to peak in Q2, I just wondered, are we to do that with some of the comments in your opening remarks in the release today, Olof? I think there's some sort of indication that costs might peak in the second half in that comment.
If you could just ally the two, that'd be much appreciated. Thank you.
Okay. Anders, do you want to take the pension?
Yeah. Quickly then on the first one, it's basically the technical effect from long-term rates have gone up, and therefore you have the discount rates and the calculations also affecting, and therefore you get that strong effect that you mentioned.
On the launch cost and the selling cost, we have now said, and I said this morning as well, that if you look at Q2, we were running in the range of SEK 500 million, higher than normal selling cost. We do predict to see in the third quarter that about the same level again coming into the third quarter, given then the launch cost that we have both on the Volvo side, but also on the Renault side.
Okay, thank you.
Our next question comes from Mr. Alasdair Leslie from Societe Generale. Please go ahead, sir.
Yeah, good afternoon. It's Alasdair Leslie at Societe Generale. Question on brand positioning in Europe, I guess in light of the refresh lineup at Renault Trucks and the launch of the new FH truck, the strengthened product portfolio that you talked about. I was just wondering how far down the road that takes you specifically in Europe in terms of brand positioning. Any comments on how differentiated your, I guess, your twin offering is now in Europe compared to, say, a year or two ago? Maybe flesh out the new market opportunities that you see and whether we should be thinking about new price points as well. Thank you.
I think these new launches that we have had gives us an excellent opportunity to actually now getting down to the work with the brand differentiation. The new products are differentiated in a way that makes it possible to do that in a good and profitable way. We have, during this development work, tried to make sure that we, on one hand, take care of the scales that some of the component gives when it comes to Volvo and Renault combined, but on the other hand, making sure that at the end of the day, the product has enough differentiation to actually be able to position different segments.
We are definitely doing that, and I think that when it comes to market opportunities, it is definitely with this new line, so that we will go after and making sure that we are getting the market share that we believe we will have, but also making sure that we cover the biggest segment of the market, both in Europe and as we're going forward. I'm really pleased with this and we are now entering into the phase, of course, when we are starting to come back to the price positioning, where we're now starting to sell those vehicles and making sure that we do that in a good, intelligent way.
It's not very often you have the opportunity to actually start with two brands as we have it, with a completely new lineup, because that gives you also the opportunity to make sure that you address the right customer segment with the right feature, with the right price position. What exactly that is, that is something we keep very close to ourselves, of course, for competitive reasons.
Okay. Thanks. I remind you, if you have a question for the speakers, you'll have to press 01 on your telephone keypad. That is 01. I remind you once again, if you have a question for the speakers, you'll have to press 01 on your telephone keypad. Our next question comes from Mr. Thomas Besson from Cheuvreux. Please go ahead, sir.
Thank you. It's Thomas Besson at Kepler Cheuvreux. One quick question to follow up on the press call this morning. Could you elaborate on the outlook for LatAm in the next 3, 4 quarters? We've seen a nice improvement in the second quarter. The outlook seems to have changed a lot in recent weeks. Can you give us your view on the second half and on the first half of 2014 for the region, please? Thank you. In terms of volumes and pricing. Thanks.
I think if you talk Latin America per se, we talk a lot about Brazil, and that's a big, big chunk of Latin America. There is, of course, and has been different movements in the different regions per se. Very much, if you look into some countries driven by the slowdown in mining, like in Chile, you have other regions who has had a not so strong economic development like Argentina, which has been one, you have other market that has been going really well. If we do focus on the big chunk, which is Brazil, of course, I think that what we see today in the order intake, what we see in terms of the signals we're getting from the market, it gives us enough confidence to keep the market forecast, as we have said today, on the same level.
We also, of course, hear the different discussions going on. I would say that we have to wait and see how things are developing. What we see today, we definitely believe in the forecast that we have put forward. When it comes to 2014, I rather not speculate into that. We have a process when we come back to you at the back end of this year in order to talk about the next year, and we will do that the same thing here. I would like also to stress 2 things.
One is that if you look at Brazil, we have been there since 1972 or 1973, we have been part of the ups and the downs in Brazil for many years, we are well equipped for and well prepared for any sort of ups and downs that we do have, we have done that, I think, in a good way. We also, as I said this morning, investing, which is important, a lot into the service network in order to take care of the rolling populations. Finally, I would like to say also that if you look at Brazil for the group, it is, of course, an important market. If you look at the total revenue of Brazil, it's around 6%, including everything, CE, trucks, Penta of the group sales.
Yeah.
Thanks.
Brazil is 6% of the group revenues, yes.
Yeah. Can I ask another one on another region where you've invested recently, which is Russia? Give us an update on what's going on there. We've seen a deterioration in the economy and some regulation about used trucks that have penalized, obviously, non-local players. Can you update us on your view on the prospects here as well, please?
I think, Christer, you have the latest for Russia.
Yes, I would say that demand for trucks is still good. The difficult thing is basically two things for us. It's that the Russian ruble has weakened, which, of course, puts pressure on margins. The second thing is that they introduced the scrapping fee, which is EUR 5,000-EUR 10,000 per truck, and that we will have to pay up until we have the cab plant up and running in our plant in Kaluga. That's not until the end of next year. I would say demand for trucks is still holding in there, but it's some pressure on margins due to the two factors I mentioned.
Very clear. Thank you very much.
Okay.
Our next question comes from Mr. Fredric Stahl from UBS. Please go ahead, sir.
Hi again. I'm trying to understand what's happening in your P&L because we're talking a lot about extra costs and obviously dramatic changes to your product portfolio and the potential complication that causes for your production system. It sounds like that's weighing down your profitability. When I look at your revenues, they're down in the last three quarters, they're down anywhere between 13%-26%, pretty dramatic drops. If I look at the drop-through margins or the incremental margins on that, they look very normal or I would say for Volvo's standards very, very good actually. You're doing very well despite all these problems. What else is happening in the group? Has there been a step-up change in how you manage your production or you manage your cost base?
These numbers look very good, even ignoring the fact that you might have all of these disturbances within the business right now.
I think, as we talked a little bit this morning as well, with the new organization, the new way of working, with the focus now on the strategic objective that we have in the truck business and the 400 activities, even though it has only been seven months that we have this up and running, of course, we are seeing a lot of things happening, small and big things, which is contributing. We are a big organization, a large organization, that means that all these small activities going on is having a positive effect. Now, have we more to do there? Definitely, I think we are doing, I think we are getting through. Let's put it this way. First, we had a phase of getting the new organization in place. We had a phase of actually defining the new way of working.
The second phase was very much in aligning the whole management team around the strategic objective. The third phase was then to really getting all this activity and scrutinizing the activity, making sure that those activities really were focusing on the profitability and the strategic objectives. Then now the stage of executing, this is what we're now getting into this phase. We're going to continue to do that up until 2015. There has been a number of different phases in this, I feel comfortable that step by step, we're going in the right direction. This is a journey. It's nothing that comes from one quarter to the other, one good activity adding on to another good activity sooner or later also shows results. That is the sort of the top level.
I don't know, Chris, if you have any sort of more detail on the profit and loss, that is what is happening. Again, I also would like to perhaps round up a little bit by saying that we are putting a lot of emphasis on actually delivering on what we are saying that we are going to deliver. We had the Q1 where we then decided ourselves that the Q2 should be a quarter of launches and increased deliveries. We deliver on that. We're now looking forward to the next quarter of concluding the launch side thereby going out 2013 and into 2014 with the new product portfolio we have. In addition to that, we have all the other activities ongoing at the same time. Some momentum is gaining, that is, of course, something you have to have.
29 months is 29 months, we need to make sure we are ready by 31st of December 2015.
Great. Thank you.
Thank you very much.
Our next question comes from Mr. Ashik Kurian from Goldman Sachs. Please go ahead, sir.
Hi, it's Ashik Karim from Goldman Sachs. I've got a couple of questions on the production increase from June onwards. One, is it mostly done through temporary workers, and are you in any way preparing for a potential fall in demand for the first half of 2014, both in Europe and Brazil? The second question is the fact that you've chosen to go along with the normal four-week shutdown in Europe despite the improving orders or the strong orders, does that mean you're expecting limited impact from pre-buy for the rest of the year in Europe, or is this something that you have to do anyway?
I think on the first one, the answer is yes. We are going with temporary workers. I think if you look at the numbers now, we are up on 17% consultants and temporary workers of the whole workforce, and this production ramp-up has been done with temporary workers. This is what we are going to focus on very much going forward in ups and downs. We're going to do that with temporary workers in order to be more agile in adapting to whatever comes ahead of us. When it comes to the four weeks vacation, this is something that we have been doing for many, many years, and it gives you the opportunity to, during a period of time, making sure that you do maintenance on the factories. You have the opportunity to correct things and so on and so forth in the factory.
Just because we don't produce doesn't mean that nobody's in the factories. We're doing a lot of maintenance. If there are any new investments, we use the time and do that in order not to disturb the normal production. There is no sort of special thinking behind that this year. It's a normal procedure. We do it this year as we have done in many, many years in the past.
Can I just ask a quick question following up? Can you give us an update on the reorganization of the Renault and Volvo dealers in Europe? Have you seen any impact on the volumes the initial processes cost, or has it been going on smoothly as planned?
I must say that out on the marketplace, we have seen very good energy and very good ambition levels coming from this. Of course, it's a big change, and it's a lot of details that we have to work through. Given that, I must say that the team has done a remarkable job in speed in order to get this up and running. As you can understand, there is a lot of education and there is a lot of training that has to go on. We're now starting to see the combined dealers getting into place. We see the new management teams. We start to see the action plans from the new organization in order how to improve the situation, reduce costs, increasing market shares. All that is happening as we speak, and we are very much on plan doing this.
I would say that the combination in Europe of this change, plus the new products, of course, gives an enormous boost to the sales organization in order to have something really new to work with, and doing that in a structure which is focusing on optimizing our total footprint on the Volvo and the Renault side. So far so good.
Thank you.
Our next question comes from Mr. Björn Enarson from Danske Bank. Please go ahead, sir.
Yes. Thank you. To follow up, one from this morning on construction equipment in China, could you give some color on where you see that the dealer inventories are for you and also your own inventory? You might have mentioned this this morning, but also a little bit of a bad line. Some more color on construction equipment in China. That's the first question.
To answer that one very quickly is that in balance, we have both on the dealer inventory and on our own inventory, we are now very much in balance. This is a work that has been ongoing from CE for last, I would say, at least the last year. They start already last summer to adapt the inventories and pull back production when they saw the demand going down. Therefore, we have actually never had any big problems with inventory in China. We're definitely now, when the bottoming out is there, having a good balance, and therefore the orders are coming pretty much directly into the production system and helps them the utilization.
Brilliant. For the market, is the stock overhang on the inventory side, is that impacting pricing that you feel something of? Mainly, I guess, for the Volvo brand then.
I think on the pricing, I haven't heard any negative news. It's a very competitive market, let's just put it that way. It's always a fight for the volumes. There is nothing unusual on the pricing side. Not so much either on the financing side, either that has also stabilized, even though it can be a little bit on the, I would say, aggressive side in the market. When it comes to the overhang in the industry, there is probably some overhang still around. Definitely, it's difficult to get a complete picture of that, but our feeling is that there's probably some overhang left in the industry. Of course, if the market starts to pick up, that is a market that consumes quite a few machines, of course.
Perfect. Then on Russia, you mentioned the utilization fee. Are you trying to cover that before your new plant is up and running, and what's the process there?
I think what we do is, of course, we're trying everything we can in terms of pricing and compensating, but it's very difficult to compensate for that kind. It's a balancing act there in order to then sort of work ourselves through 2014, until up when we have the facilities up and running by back end of 2014.
Thank you.
I remind you, if you have a question for the speakers, you'll have to press zero one on your telephone keypad. That is zero one.
Operator, if there is no further questions?
There are no further questions at this time.
Okay. I would like to take the opportunity to thank you all for joining this Q&A session. Our IR department, Christer, is there for answer any questions or further thinking or questions you do have. I'm wishing you a good summer and talk to you again in relation to the release of the third quarter this year.