Ladies and gentlemen, welcome to the AB Volvo Report on the 1st 6 months of 2013. Today, I'm pleased to present Olof Parson, President and CEO. During this call, there will be no presentation, so we'll go directly to the Q and A session. If you have a question for the speaker, you will have to press I will now hand over to Olof, who will say a few words before we begin with the Q and A session. Olof, please begin.
Thank you very much and most welcome to this telephone call regarding the Q2 of 2013. We have made available the presentation therefore, we thought this time that we would go directly in And therefore, we thought this time that we would go directly into the question and answer session. And 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 Our first question comes from Mr. Mikael Tindall from Barclays. Please go ahead, sir. Michael, your line is open. Our next question comes from Mr.
Fredrik Stoll from UBS. Please go ahead sir.
Hi Olof. Hi Christa. I guess you're hiding there as well. It's Frederic 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? Because 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. And then I would like to know if you look at the FX impact on the truck business on revenues it was broadly not the same as in last quarter, but the hit to EBIT was much bigger. So I was wondering if you could give us some color on that and if we should expect the same sensitivity in the coming quarters.
And finally, Volvo Rents, are you planning to sell that? Can you comment on that? Thank you.
Okay. Thank you very much. And you're absolutely right that Christer is hiding here together with Anders as well and I should of course have mentioned that in the beginning. Thank you for that. If we look at the 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 value truck, we have of course ensured 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 an outstanding quality on the assembly that we're doing.
We have also worked a lot in terms of look at maintainability because one thing is, of course, that we have good assembly procedures and sequences. But it's 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. And 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. Then we have our sort of experience from the assembly and production we have done up until now then on the new FH.
But over time, we will continue to work on this. So it will take some time before we see the full benefit when the whole system is up and running completely,
300 basis points?
I mean, if you look at it, one of the sort of items we have there is the standard cost of sales. And in standard cost of sales, you also have, of course, definitely yes. When it comes to rents, let me just because that would be a very short answer, and we do not comment, eventual rumors. If we then take FX and Trucks?
Yes. What you can say there, Fredrik, is that, of course, it's twofold. You have the revaluation of the receivables, the profits and so on, and then you have the effect on the flows. And this time, of course, if you look at individual quarters, you could experience certain volatility. But over time, of course, what we have guided before is that we have mainly really a mismatch on the U.
S. Dollar. So of course, over quarters, you can see this volatility. And it's correct that you see this on revaluations over the last two quarters. But then, of course, on the flows, I think this time you had many currencies in 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 we as a global company, we have also a lot of cross currency pairs that will affect this. So it's very hard to see how the individual movements between currencies will be there. So it's hard to guide there exactly.
Okay. Thanks guys. Frederic, I can just add there. If you look at Page 29, you see the currency disclosure for the Q2. And if you look at it, SEK 700,000,000 came from the net flows.
That's the transaction exposure that we have. Then you look at we have translation effects on operating income from foreign subsidiaries of minus EUR 161 1,000,000 and I would say most of those EUR 160 is actually coming in the Trucks result. And if we assume the same profitability in our foreign subsidiaries and the same FX rates, then that amount will be about the same going forward. Very good. Depending if what you compare to, of course.
In Q3, you will have other comparison basis.
Yes. That's clear. Thanks a lot.
Our next question comes from Mr. Alexander Bergov from Berenberg Bank. Please go ahead sir.
Yes. Hi, good afternoon.
I was just wondering 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 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 down revised our full year forecast down a bit there. In terms of our performance, I would say that the iShares brand and the iShares operations has performed pretty well. We have managed to keep our market shares on on medium duty.
We are, as you know, entering into the heavy duty since what is now a couple of years or 1.5 years, 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, Ayesha as well will come out and launch a complete new range of vehicles for the Indian market, but also products that will be possible to export out of India to other markets in as a part of our brand positioning work that we're doing now in different parts of the world. So in India, it's from a market point of view, it's a tough situation, and we'll see how it develops going forward. But 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. So we will we stick to our estimation that we will have this up and running, the new strategic alliance beginning of next year. And your last was then also about the truck market in China. And what we see so far is that the market is holding in the range that we have discussed. And we give you only the medium duty and heavy duty in one number, and 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 market, we can see that we forecast the heavy duty being 630 and the medium duty then the remaining 305,000 units for this year. And that is the development we see.
Okay. I mean, your interest 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 that is it presumably it's not flat all the way through?
Yes. I'm curious why don't you give the data?
Data? I don't have all the data here, unfortunately. But we had a fairly weak start. So with the forecast we have, we expect a slightly improvement here coming into the second half of this year.
Okay, great. Thank you very much.
Our next question comes from Mr. Martin Vieja from Redburn. Please go ahead, sir.
Hi. This is Martin Vieja 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 Pacar or Scania? And 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 then at this point in time, we have no plans of doing it. And if that were to happen, we have to be very clear that we have the right sort of focus and date on that.
But let's see. I'll take it with me as a comment from you and then we'll discuss it internally. When it comes to truck production, Christi, I think you have all the detailed data there year over year.
We typically don't give the production data, unfortunately, but 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 JPMorgan. Please go ahead, sir.
Good afternoon, everybody. It's Alex at JPMorgan. 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 is 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 1 year if your fleet's around 90,000 seems a dangerously high level. The second question I had was, I was 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, etcetera. 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 4 week vacation period? Thanks.
Okay. When I talked about the rolling stock in Latin America, it was for the Volvo brand. We'd like to specify that. And we do have other brands in Latin America as well, particularly Mack and the others. So 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 a reason. 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. Then we will have 3 to 4 shutdown weeks as we always have. And then we will do a slight production ramp up end of August.
So September, you will have a slightly higher pace in production. But you should keep in mind that the plants will be shut on the assembly side usually 4 weeks in Europe. So 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 Leys. Please go ahead sir.
Hi, everyone. I've got 3 questions, if I could perhaps take them 1 by 1. 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 Q2 orders might have been pre buy?
I think the short answer to that is not really. I mean, 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. And we I think we can conclude that we have seen then free buy tendencies in UK and part of Eastern Europe, primarily then focusing on the classic FH in that respect. But 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 it's up until today and what we see in the order book, it is not substantial.
But 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. And I just wondered, I mean, when you said the pricing was positive, I mean, 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. So that is done. What I'm talking about now in the Q2 is exactly what you're talking about is the positive price realization in order to cover the cost increase. And the answer to your question there is yes, we have managed to cover up for the cost.
Great. And then lastly, which is your comment on R and D. If I understood correctly, what you're saying is that the from a
cash flow point of view that it peaked in H1. Is
D. And the cash cash R and D. And the cash R and D is what we've done in our strategic objective is focusing on in order to reduce that with EUR 2,000,000,000 up until 2015, giving the starting point last year. And we are on good way of doing that. And then you have, of course, the impact of the amortization, depreciation on that.
But the cash R and D, we are on a good way and we are continuing to reducing that according to the plan of actually having it to reduce by SEK 2,000,000,000 by 2015. Yes.
And it was elevated in the Q2, and we have said that it will be about the same level in the Q3.
Okay. And so it starts to come down in Q4?
Yes. And then yes, exactly. And then we will have it.
And just regarding that you alluded to the amortization of capitalized R and D. And I just wondered, I mean, 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 in Q1 and then you postponed it to Q3 too and now it's postponed to Q3. I mean is this just an accounting thing?
Or what's really causing that?
It is a rather complex I mean, we have a huge amount of projects running. And 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 switch over. And it's very difficult to sort of judge exactly when all the different projects are hitting those different gates. Now I think that we say that we as the projects goes along, you get better and better certainty of it. And of course, the fact that we now have done all the big launches during this quarter has, of course, put some of those projects down in that category, which will impact this EBIT on a negative side.
So the clarity is increasing and therefore we are guiding the way we're guiding for the next quarter.
That's great. Thanks.
We have opened the large gates, 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 to see if that's okay. The first one is just covering pension provisions. I was just wondering what the cause of the big sort of SEK 3,000,000,000 movement has been from Q1 to Q2.
So if you could just sort of discuss that. And then the second question is just on some of the expenses that we talked about on the call earlier this morning, sort of 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. So I just wondered, how we do that with some of the comments in your opening remarks in the release today off. I think there's some sort of indication that costs might peak in the second half in that comment.
So if you could just sort of highlight the 2 that would be much appreciated. Thank you.
Okay. Anders, do you want to take the pension?
Yes. 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.
And 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 500,000,000 higher than normal selling costs. And we do predict to see in the Q3 that about the same level, again, coming into the Q3 giving then the launch cost that we have in both on the Volvo side but also on the Renault side.
Okay. Thank you.
Our next question comes from Mr. Alastair Leslie from Societe Generale. Please go ahead, sir.
Yes. Good afternoon. It's Alastair Leslie at Societe Generale. Question on brand positioning in Europe and 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 2 ago and maybe flush out the new market opportunities that you see and whether we should be thinking about new price points as well? Thank you.
I think this new launches that we have had gives us an excellent opportunity to actually now getting down to the work with the brand differentiation. And 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 the 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 segments. And 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 elsewhere going forward. So I'm really pleased with this. And we are now entering into the phase, of course, when we are starting to coming back to the price positioning where we're now starting to selling those vehicles and making sure that we do that in a good intelligent way. And it's not very often you have the opportunity to actually start with the 2 brands as we have it with a completely new lineup because that gives you also the opportunity to making sure that you address the right customer segments with the right feature with the right price position. But what exactly that is, that is something we keep very close to ourselves, of course, for competitive reasons.
Okay. Our next question comes from Mr. Thomas Besson from Chevron. Please go ahead sir.
Thank you. It's Thomas Besson, 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 Q2.
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 twenty fourteen for the region please? In terms of volumes and pricing. Thanks.
Well, I think if you talk about Latin America per se, it is we talk a lot about Brazil and that's a big, big chunk of the Latin America. But there is, of course, and has been different movements in the different regions per se. Very much, if you look into some mining like in Chile. You have other regions who has had a not so strong economic development like Argentina, which has been one but you have other markets that has been going really well. But 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.
Now we also, of course, hear the different discussions going on. But I would say that we are we have to wait and see how things are developing. But what we see today, definitely believe in the forecast that we have put forward. When it comes to 2014, I'd 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.
But I would like also to stress 2 things. One is that if you look at Brazil, we have been there in 1972 or 2073, and we have been part of the ups and the downs in Brazil for many years. And we are well equipped for and well prepared for any sort of ups and downs that we do have. And we have done that, I think, in a good way. We also, as I said this morning, investing, which is important, investing a lot into the service network in order to take care of the rolling populations.
And finally, I would like to say also that if you look at Brazil for the group, it is of course an important market. But if you look at the total revenue of Brazil, it's around 6%, including everything CE, Trucks, Santa of the group sales.
Yes. Brazil is 6% of the group revenues, yes. Yes.
Can I another one on another region where you've invested recently, which is Russia? And give us an update on what's going on there. We've seen a deceleration in the economy and some regulation about used trucks that have penalized obviously non local players? Can you update us on the prospects here as well, please?
I think, Christy, 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 the Russian ruble has weakened, which, of course, puts pressure on margins. And the second thing is that they introduced the scrapping fee, which is €500,000 to €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, but that's not until the end of next year.
So 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. Felix Stoll from UBS. Please go ahead sir.
Yeah. Hi, again. I just wanted to try I'm trying to understand what's happening in your P and 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. And it sounds like that's weighing down your it should be weighing down your profitability. But when I look at your revenues and they're down in the last three quarters, they're down anywhere between 13% to 26%, so pretty dramatic drop ins.
And 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. So you're doing very well despite all these problems. What else is happening in the group? Has there been a step up change in your how you manage your production or you manage your cost base? These numbers look very good ignoring the fact that you might have even ignoring the fact that you might have all of these disturbances within the business right now?
[SPEAKER JEAN FRANCOIS VAN BOXMEER:] I think and as we talked a little bit this morning as well, I mean, 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 even though it has only been 7 months that we have these up and running. Of course, we are seeing a lot of things happening, small and big things, which is contributing. And we are a big organization, a large organization, And that means that all these small activities going on is having a positive effect. Now have we more to do that? Definitely.
And I think we are doing. But I think we are getting through let's put it this way. 1st, 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. And then now the stage of executing. And this is what we're now getting into this phase, and we're going to continue to do that up until 2015. So there has been a number of different phases in this. And I feel comfortable that step by step we're going in the right direction.
But this is a journey. It's nothing that comes from 1 quarter to the other. But 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, Kristi, if you have any sort of more detail on the profit and loss, But that is what is happening.
And 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. And we're now looking forward to the next quarter of concluding the launch side and thereby going out 2013 and into 2014 with the new product portfolio we have. And in addition to that, we have all the other activities ongoing at the same time.
So some momentum is gaining and that is of course something you have to have 29 months is 29 months and we need to make sure we are ready by 31 December 2015.
Great. Thank you.
Thank you very much.
Our next question comes from Mr. Ashik Green from Goldman Sachs. Please go ahead sir.
Hi. It's Ashik Green from Goldman Sachs. I've got a couple of questions on the production increase from June onwards. 1, 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 twenty fourteen both in Europe and Brazil?
And the second question is, the fact that you've chosen to go along with the normal 4 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 it just something that you have to do anyways? [SPEAKER JEAN FRANCOIS VAN
BOXMEER:] I think on the first one, the answer is yes. We are going with what we temporary workers. I think if you look at the numbers now, we're up on 17% consultants and temporary workers of the whole workforce. And this production ramp up has been done with temporary workers. And this is what we're 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 4 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 factories. So just because we don't produce doesn't mean that nobody is in the factories. We're doing a lot of maintenance, putting in if there are any new investments, we use the time and do that in order not to disturb the production, the normal production.
So 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 you 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 from out on the marketplace, we have seen very good energy and a 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. But given that, I must say that the team has done a remarkable job in speed in order to get this up and running. And as you can understand, there's a lot of education and there is a lot of training that has to go on. And we're now starting to see the 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. And again, I would say that the combination in Europe of this change plus the new products, of course, gives an enormous boost to the SAIL organization in order to have something really new to 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. Bjorni Enarson from Danske Bank. Please go ahead sir.
Yes. Thank you. 2 follow-up 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.
So some more color on Construction Equipment in China. That's the first question. [SPEAKER JEAN
FRANCOIS VAN BOXMEER:]
And to answer that one very quickly, in balance, we have both on the dealer inventory and on our own inventory, we are now very much in balance. And 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 adopt the inventories and pull back production when they saw the demand going down. So therefore, we have inventory in China. And we're definitely now in 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. And for the market, is the strike 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 put it that way. So it's always a fight for the volumes. But 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 offering left in the industry. But of course, if the market starts to pick up, that is a market that consumes quite a few machines of course.
Perfect. And then on Russia, you mentioned the utilization fee there. Are you trying to cover that before your new plant is up and running? Or 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. So it's a balancing act there in order to then 2014 until when we have the facilities up and running by back end of 2014. Thank you. Operator, if we if there is no further questions?
There are no further questions at this time.
Okay. And I would like to thank the opportunity to thank you all for joining this Q and A session. And our IR then I'm wishing you a good summer and talk to you again in relation to the release of the Q3 this year.