Ladies and gentlemen, welcome to the AB Volvo report on the first three months 2013. Today I am pleased to present Olof Persson, 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. Olof, please begin.
Thank you very much. Most welcome to this report on the first quarter 2013, a quarter that can be characterized by two sides. One characterized by low volumes and thereby a low result on the one hand, and on the other hand, a strong order intake, in particular in Europe and on the Volvo side. Follow me please to page number two. I will quickly go through the presentation I had this morning, and then we will open up for questions and answers. If you follow me into page number three, which has the Trucks Europe as a heading, just concluding that in the quarter we had an excellent reception of the new products and a good order intake trend, as you can see, coming up to 26,000 units.
We had lower than usual deliveries of 15,000, explained basically by market being down with 17%, but also Renault deliveries being lower than usual, basically based on the push we had in Q4 when it came to getting inventory out, and thereby also impacting the order intake and the deliveries for Renault in the beginning of the first quarter. Order intake sequentially coming up 60%, almost 59 for Volvo, and it is good to see that Renault, even though on year-over-year is down 17%, sequentially since the fourth quarter is 16%. There we also see the orders are coming back, and we are of course building the order backlog on this one. The strong order intake on the Volvo side is basically, we believe, three reasons.
One is a somewhat postponed demand from the second half last year, with a lot of uncertainty in the economy and thereby also customers postponing purchases, which now are coming back with a more stable development in the European economy, even though it is a lot of uncertainty around it. We also have an effect specifically for Volvo. We have seen that the classic FH is selling very well. It is particularly in some markets where we then see these trucks being still very popular when it came to our customer needs and demands. On the other hand, we also see good and strong order intake of the new FH. So much so that we are talking about around 20%-25% of the order intake is for the new FH.
We also see a Euro 5, Euro 6 pre-buy effect in certain markets, in particular in U.K. and in some Eastern European companies. I would also like to add to this that when it comes to the first weeks of the second quarter, we see a continued good demand into the first weeks here. If you follow me to the Trucks North America. The order intake is picking up. We do see that. Also here we had lower than normal deliveries, mainly due to stop weeks that we have had in the North American production system. Reasons being product introduction. Also supply disturbances as you get now and then. Important here is that we are through with all the stops week, planned ones. We are looking forward for the rest of the year with no stop weeks going forward.
When it comes to market share, just to comment quickly on the European side, we're holding both for Renault and Volvo the market share. In North America, we have lost due to the low delivery that we have into the market, somewhat both on the Volvo side and a little bit also on the Mack side. Here, the order intake is very much on a sequential basis, showing good numbers with 37% for the Volvo and 27% for Mack. Should also have mentioned that we are keeping our market outlook in Europe when it comes to the total market. The same comments as we have had before are still valid, that we will see a slower first half and a stronger second half. The same goes for the market outlook in North America, 250,000, again with a slower first half-year and a stronger second half-year.
If we move on to South America, continuously strong performance. We have a market that went down in deliveries with 3%. We increased our deliveries with 28%. As you can see, both on the order side and on the delivery side, we're well-balanced in the production. We are and have increased the production end of March. We're now going into the second quarter with the higher production rates to meet the high demand in Brazil. Order intake sequential up 61% and quarter-over-quarter, 21%. Also here, we're keeping our market estimate of 105,000 up from the 2012 level. Moving into Trucks Asia, we can now see that we have a slow start of the year. Signs of gradual improvement. We are well-balanced in the Asian production system, as you can see, with a book-to-bill rate of 113%.
We also have a now open up for forecast, not only on the Japanese market. We are adding for your convenience also our estimates on India and China because of our increase to be participation in those markets. Of course, thinking it's about our Dongfeng agreement, which then will be, as we plan, coming into force beginning of next year. I just want to make sure that you realize that when we talk about India and China and Japan, we are talking about both heavy duty and medium duty trucks, because that is also very important that we have both there, since we have big participation in those markets with our partner Eicher and to be the Dongfeng. If we move on and look at what all this means for the trucks in Q1, substantially a top-line impact.
We are looking at quarter-over-quarter SEK 12 billion lower sales, driven of course by markets being lower, also in particular the stop weeks in U.S. and the low deliveries that we have seen from Renault. This has driven down the low capacity utilization. If I look at the margins, they are okay on gross margin level. If I look at the cost side, we are still of course running on both R&D and selling on a high level due to our all introductions that we are facing and also the launches that we are performing and will start to perform.
In general, I can say that we are following the plans that we have laid out in our strategy in order to make sure that we are then step by step decreasing our cost level in order to be more flexible and also be able to handle those kind of margins in a better way than we have done this time. However, I should say that if we look at the volumes, SEK 37 billion is almost exactly the volumes we had in terms of invoicing in the first quarter in 2009. With that, we made a SEK 2.4 billion loss compared to the SEK 0.1 billion that we are showing this time. We have become better. Are we good enough? Absolutely not. Do I see a lot of improvement potential? Yes. Will we execute the plans to reach it? Absolutely.
Interesting, I think also to summarize the whole order intake situation where we now have a book-to-bill for the whole truck group of 160%, and for those of you who remember, we are then coming from a Q4 of 89%. If we take a look at the strategic plan that we have, in general, you can say that we are following the plans. We have a follow-up system, and we had a big review now in the first quarter. Majority of the activities that we have phased into the 2015 execution are on track in terms of resources, activity lists, and ideas.
We show you here on the right-hand side of the slide some examples of activities that has been initiated and looked at during the first quarter here, both in terms of continue to now really look into the European truck plant footprint to make sure that we have the most efficient setup. That's a study. The result of this will then be ready by the autumn. There are a number of activities there described in the report, what we are looking at. We continue to keep a very close eye on activity, high activity level in Japan to make sure that we address the profitability issue, that we address the market share issue, that we address the product issue that we have in Japan.
I really see now a lot of activities focusing on making sure that the UD brand comes back in Japan in a place where it should be. All in all, full focus on the strategic plan, we don't let go for a second in our implementation of the ambitions that we have in our strategic plan. If we move on and look at the construction equipment, we can say that we had a tough start of the year with Europe and North America, especially in Europe with a slow start. We can see that also in terms of the sales. That was pretty much in line what we expected, therefore we keep our market outlook and forecast being -15% to -5% in Europe. In North America, we see regional wise improving construction activity.
On the other hand, we also see now that the rental fleets are being filled up. If you remember, we had last year a very high sale into the rental fleet structure, which has now sort of peaked out. In our ambitions to really start to get the USD SEK exposure down, we are now seeing the first result of that in our Shippensburg investment, we are now starting to deliver one model of wheel loader produced in Shippensburg. The next thing is now to continue to start to build up a U.S. dollar based supplier network in order to further take down the USD SEK or the SEK USD exposure that we have in Volvo CE. Generally, we can say that the book-to-bill ratios in both Europe and North America is above one.
In those two regions, Volvo CE has managed to, despite the lower volumes, adjust the capacity accordingly to be well in line with the demand going forward. If we move on and look at the China reservation market for construction equipment, we can see that in March we had, in China, a pickup, particularly from general construction. In March, spring season is coming. We are well-positioned there with a balanced inventory, we also there have a book-to-bill ratio that is above one. It's also important for us that we maintain our number 1 position in China, we do that. It is important, of course, to make sure that we are putting our focus on growing on this very important market for Volvo CE. We keep the forecast for China being basically flat, -5% to +5%.
If we look at Asia, excluding China, you can see that we are calling now that the mining is bottoming out, that is, of course, on a low level. We see activities in Philippines, Malaysia, Thailand, and Korea that are developing in the right way. If we move on to summarizing construction equipment, I would say that in general, good performance on very low volumes. We can see that the volumes are approximately the same, around SEK 12 billion. We should remember that since last time we had SEK 12 billion turnover in construction equipment was actually, apart from Q4 last year, was Q4 2008, that at that time Volvo CE made a substantial loss and also very negative cash flow. This time around, on the SEK 12 billion , we can see that they even improved from the Q4 result and posting now a 4.1% profit.
Of course, down from the levels we saw a year ago, but still a good improvement there. Orders, we can see now the result on our very hard work to manage our inventory throughout the whole system, both in Asia, Europe, and U.S. Despite that the market was going down with 28% in terms of orders, our book-to-bill on the Volvo side is 119%, meaning that the spring season and the orders that comes in now actually goes into the production system, which means that we have a good balance there going forward. Quickly, a few words on, if you follow me to Penta and Buses, I would say the heading says it all for Penta, an okay quarter.
I think they are continuing to do good work in the cost structure and continuously and very consistently on very low volumes, produce margins which are okay. They are not brilliant, but they are okay, and we do see some signs of market improvements, but still it's very low volume, both on the marine side, but also on the industrial side. Buses, the same story as we had over the last quarters. Very demanding picture on the city bus side with the overcapacity and price pressure. The SEK 3.5 billion sales, you have to go back to almost 2005, I think, in order to see those kind of levels. They're posting a loss of SEK 88 million.
Again, I must say that we have a number of programs in place, what is really important to me is see how we are now step-by-step fighting ourselves into new technology areas, I'm talking about the electric mobility, in particular, in terms of hybrid buses, plug-in hybrid, and electric buses where we take orders all over the world. Finally, before concluding, VFS, good performance yet again. We see a stable portfolio development across the world on around SEK 100 billion. Good profitability and well-managed risk.
I think one of the key issues that we have been discussing before is our overdues in China, they have improved substantially in March, we can see that VFS is posting a SEK 381 million profit, up a little bit from last quarter or quarter a year ago, also running now on a SEK 1.5 billion 12 months rolling, and the return on equity on 13%. Summarizing, a transitional quarter, we call it. Sales, as I described, sharply down. Markets are down in the first quarter, also with the American truck manufacturing system having a number of stopped weeks, plus the Renault effect, it has also hit us in terms of deliveries and thereby sales. Orders, we talked about that, up 30%. The low capacity utilization meant SEK 1.9 billion in under absorption for the group. SEK 400 of that is CE and SEK 1.5 is truck.
That is about SEK 500 million more than what we guided for in the Q4 report, the unplanned stops in the U.S. production system. Again, I just want to reiterate that we have no stop weeks planned in the U.S. system for the rest of the year. We should also talk about the truck orders and the capacity. We are now, in order to take care of these orders, particularly on the truck side, building up capacity. We do that in the European system in particular, and on the Volvo system. We do it gradually over the quarter. By the back end of the quarter, we will then have the capacity that we are looking for to supply our markets for the rest of the year.
We should also mention that the orders that we received on the truck side in the first quarter came to a large extent in the second half of the year, therefore also you have the buildup of the capacity coming in the second part, mainly on the capacity side. We are gradually building up this as we speak in the quarter. We are and we will continue to have high investments in R&D, CapEx, and selling for the new future products. We have been investing a huge amount of money in those new products. We have a very successful launch behind us in the new FH. We will have the new range of Renaults coming in the summertime here, we're just going to do that in a very professional, cost-efficient way.
I just want to highlight also that when we talk about selling cost here, it's not about the launch day and the actual launch activities. The major part of these costs are the training of thousands and thousands of technicians, thousands and thousands of salespeople, and of course, getting the customer to know the product. That is the investment that we're going to do. Having said that, we still believe that the peak when it comes to, in particular launch cost in the selling, will be during the second quarter, then will gradually phase off over the year. Then you have the first end of both the new FHs still being there and you're then starting up the new Renault range.
You can see only in the first quarter, we launched 3 new models, the new Volvo FM, the new Volvo FMX, and in the U.S., the new Volvo VNX. That concludes my report on this transitional quarter. Low volumes, low results, but good order intake, giving us more stable ground for the second quarter. With that, I hand it over to Anders, who will talk a little bit about the balance sheet.
Very good. Two additional slides on cash flow and capital efficiency. As you can see there on slide one, we have cash flow this quarter driven primarily by the seasonal buildup of working capital. The left-hand graph there, you see the negative SEK 7.6 billion, of course, a difference primarily due to the fact that operating income is not contributing to this quarter as much as last time around. On the right-hand side, we have a picture of our net financial debt. It is up some SEK 4.7 billion. Of course, again, this is primarily due to the negative cash flow and also some investment in fixed assets. We do have some positive impact also from currency, I should add there. That takes our net debt over equity, excluding pensions here above the hurdle rate slightly of 35% to be at a 38% level.
Next slide, we talk about investments here. You see there on the right-hand side of the slide, of course, that on the subject of investments, we are, as said during the last quarter, trending down there. Olof mentioned this as well, on the investment in leasing assets, and that is very obvious there in the bar as well. We are still on the R&D. We are still capitalizing on a fairly high level. We are now introducing new products, of course, into the market. On the tangible side, we are continuing, of course, investing in factories and tooling in, for instance, Thailand, Brazil, and Russia. As you see, we have a SEK 3.1 billion there on that Q1 2013.
Finally, on the left-hand side of the slide, looking at the capital efficiency numbers, we are now seeing, of course, that we have a slightly elevated level on the CCC days and also on the inventory days. We do not really see this as alarming. The trend is a little bit upward. We will see good improvement possibilities, opportunities as volumes will turn back again. I think that concludes the remarks that I have on the balance sheet.
Thank you very much, Anders. Operator, back to you, and open up for questions, please.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. The first question comes from Mr. Fredrik Stål at UBS. Please go ahead.
Hey, good afternoon, guys. I just wanted to ask you two housekeeping questions, really. One is on the tax rate for the full year and what type of interest cost you expect for the full year, if you can help us with that. Thanks.
That one, I think I give to you, Anders.
Okay. Let me double-check the tax rate that we have here. Yeah. For the full year, it's 30%, and of course, we have a tax rate there that is impacted also by the fact that we have higher taxes in, for instance, Brazil.
Okay.
Okay?
Anything on the interest net financing line?
Can you say that again?
Yeah, sorry. Is there anything you can say about the interest cost for the full year?
Net financing cost.
What we can say there is, as you have seen there on the net financial debt, we see on the trend line there that we see that assets going down and liabilities going up a bit. What we see in front of us is, I would say, lower interest rates, actually affecting the net financial debt in a good way going forward. With loans coming off the balance sheet with higher rates that we actually borrowed during the financial crisis. We see substantial improvements, but these improvements will not appear until 2014 for the most part.
Very good. Thank you.
The next question comes from Mr. Krister Magnergård at DNB. Please go ahead.
Hi, good afternoon. Three questions. Firstly, about your strong order intake in North America. If I look at your percent of ACT Class 8 orders, it seems that you have a quite high market share of about 20%, which is considerably higher than you've had over the last three quarters. It's actually on the same level as you had in Q1 2012, when you had quite extraordinary orders, or orders that came in March that should have come in April, or something like that. Was there anything like that this quarter, or have you just taken market share in North America? That's the first question. Secondly, talk about North America in Construction Equipment. Organic growth was down 36%. Much of that was explained by that you have taken other rental fleets or the rental fleets have stopped to buy as much.
Is this a new level that we're seeing now, or have you lost more market share than just this, or is the drop only affected by the rental fleets? We can start with those two, actually.
Okay. If I start with the CE question, I think that it's difficult. I think that when you look at it in terms of course, we had exceptionally high order intake, and we were up on 111% or something, if I remember correctly, in terms of order intake and growth. I would say that looking now at the North American market, we are, with our localization in Shippensburg, with our full line product, we are addressing both the road segment, the light mining segment, and the construction segment, I think, in a good way. How that will pan out and what level that will be, it depends very much on the market side. I think we are doing a good job in terms of actually focusing on the volumes and capturing new customers in North America.
We're going to continue doing that with our new lineup in Shippensburg over time here. When it comes to the North American, Patrick, I don't know if you have any comments to do there.
No, I wouldn't say that we have any specific one-off items or events that should distort order intake in North America for trucks. Really, no.
Okay. Finally, just more of a question on currencies for Construction Equipment. U.S. dollar exposure is high here for both activation, but still you had a positive impact on the currency for Construction Equipment in Q1. I look at your currency bridge, or where you explain the currency effects in the quarter at the end of the report, I see that you have a quite big negative transaction net flow in currencies, but you have a positive effect from unrealized gains on receivables and liabilities. Did that effect end up at Construction Equipment? If so, what was actually the underlying currency effect for that division?
The currency swings that we see here, that goes into the finance net as we guided last time around. That doesn't affect Construction Equipment like that.
The unrealized gains on receivables and liabilities as well?
I see what you're saying now. Yeah, that has, of course, a positive effect there.
The net flow, was that negative for Construction Equipment? Sorry for being nitpicky here.
That should be a negative effect from net flows, yes, due to the exposure towards the US dollar, yes.
Yes. Okay. Well, thank you very much.
Thank you.
The next question comes from Mr. George Galliers at Credit Suisse. Please go ahead.
Good afternoon, thank you for taking the question. I had one question focusing on the Trucks division, where I was wondering if you could help me understand the low level of profitability. I know you have made comparisons to 2009, but if I compare Q1 with Q1 2010, you have just reported a truck margin of 0.3% compared to 4% in 2010. Yet in the quarter that has just passed, you delivered 4% more trucks globally than in Q1 2010, with more trucks delivered in Europe, more in North America, and more in South America. Western Europe was a higher percentage of deliveries in 2013 than 2010. Was South America. I presume market mix is stronger today. Hence the question is, what do you believe has driven the significant step-down in margins and earnings at Trucks when I compare this quarter to the first quarter in 2010?
Is your trucks business today inherently less profitable than it was three years ago?
I think one answer to that question, if I remember correctly now, is that then you basically were on a substantial upward trend in that quarter, which of course then made that our capacity utilization in the system was much higher, which we are now not seeing because we have, as we have explained a number of times, been going in a downward spiral right now since the Q4 last time with the breaking of and also having the low volume. I think that is probably the largest explanation. You can add to that then that at that time we didn't have the elevated cost on sales and admin in terms of the product launches, which adding to that. I think thirdly also the R&D that we are now putting forward in terms of capitalization versus expenses.
To answer your question, the biggest explanation lies in the underlying activity level in the system, and that we came out from in 2010.
Okay. Thank you.
The next question comes from Mr. Michael Tyndall at Barclays. Please go ahead.
Hi there. It's Michael Tyndall from Barclays. Two questions, if I may. Just the first one is a clarification. If I'm not wrong, you said on the call this morning that under absorption is now pretty much behind us, and that seems consistent given that you were looking for SEK 1 billion for the year. You said it was SEK 500 more than expected, and there was SEK 1.9 in the first quarter. Am I right in thinking that the baseline for Q2, before we consider other factors, is effectively SEK 1 billion, SEK 1.5 billion higher than Q1? That's my first question. The second question, it's less about you and more about the market.
I'm just thinking about what's happened in Brazil in terms of the difficulties in getting price uplift on Euro 5, what's happened in Russia in terms of the tariff agreements, what's probably going to happen in Europe when Euro 6 comes in. It seems like content levels are going up, friction costs are going up, but getting those price lifts is actually getting tougher. In your case, you're stripping costs out to maintain margins or improve them. I wonder if we're facing a period where structurally margins in the industry could in fact be declining. They're my two questions. Thanks.
Let me start on the second one and then come back to the under absorption. It's an interesting question. For me, and the history shows, I think, that there is an acceptance from the customers that new and greener technology also bears a cost to it. You always have a transitional thing and a transitional period when you actually are changing from one technology to the other. We saw that in Brazil, definitely, because we also had, as you remember, Euro 3, do you say hangover, of trucks in that system. Due to our brand position, due to our very strong dealer network, we have to have them gradually over time increase prices and make sure that we over time are getting paid for the new technology, by also making sure that we can sustain the profitability.
Therefore, I said this morning, I repeat it this time as well, that pricing in Brazil for us has developed rather positively. We are also, that we are eminent on, that there is another factor which we always unfortunately have to get price increases for, that is when we see inflationary pressure, we try to stay a little bit ahead of the curve there when we do price increases going forward. That is what we're doing. Long term, I'm sure that we have to work on both sides of the coin when it comes to new technology, new features. One is, that's again a little bit on the long-term level, is that whatever features we put forward, they have to be a value for the customer.
It has to be fuel efficiency, it has to be efficiency for the customers, as long as there is a value for that technology, it's also something that we have to charge and get compensated for when we install that technology. That is the one. In general, you can say that pricing in Brazil is holding up fine for us. We are also seeing that the pricing in Europe is, all markets are competitive, there's nothing unusual in the pricing in the order intake that we see now, the same goes actually for U.S. as well. When it comes to the under absorption, Patrick, first of all, we don't give any forecasts for the quarter to come, therefore.
Sure
we are very sort of not giving too much of a baseline either. Patrick, perhaps you can.
Yeah, of course. Coming back to your first question then. The guidance that we provided in Q4 that related to over SEK 1 billion, that related to the first quarter, not the full year.
Okay.
That was for the truck business as well. We ended up about SEK half a billion above that when we had now report on under absorption being about SEK a billion and a half for the truck business. Yes.
In general, you can say that, we said that this morning as well, with the increases we do, we should definitely get imbalance in our system and looking at an under absorption going forward, what we can see now not being a part of the equation.
If you don't mind, can I just have one quick follow-up? Just coming back to the price realization question. If I think about the new FH and I think about Euro 6, it seems like consensus view is Euro 6 trucks are maybe EUR 10,000 more to make. Presumably, the new FH has more content than the old FH, and is therefore more expensive to produce. You're busily trying to reduce your costs. Should we think about the new FH as being, I know you probably don't want to answer this, a drag on profitability until those cost savings come through? Or is it actually more or less in line with the old FH from day one?
I think that you answered the question a little bit yourself. We will not go into detail. I just want to send a message very clear, is that the new FH is a very important product that we're going to live off for a long time. And I can assure you that when it comes to pricing, profitability, and costs, we are scrutinizing that extremely well and making sure that we do create a platform for the new FH, which will be there to really support us for the long term. That's the overall answer you get on that without getting into much of the details.
All right. Thank you very much. Appreciate it.
The next question comes from Mr. Alexander Virgo at Berenberg. Please go ahead. Alexander, your line is open.
Hi. Good afternoon. Thanks very much. Could I clarify, please, what the R&D guidance is for this year in terms of the bridge impact? I know you've seen a little bit higher capitalization in Q1 than perhaps you guided. I think this morning you said that it was similar to or you maintained the same guidance. I just wanted to clarify exactly what that is in terms of absolute EBIT bridge impact. The second question, just on the stop weeks in the U.S. You mentioned that they occurred as something that you couldn't really legislate for, and that is related to supply chain issues. I'm just wondering what gives you confidence that you have seen the end of that going into the rest of the year. Thank you.
Thank you. I think that what we said this morning was that we are running a slightly higher capitalization than we have. This has to do with, as Anders was explaining, the opening of the gates in a number of them, and it's a big mixture of different projects that we have in the whole group. We believe and what we can see today, we maintain our net effect of the capitalization and the expense side of SEK 2 billion. That is, of course, pending on opening gates and those kinds of things. That we keep that guidance for the full year, the negative impact of SEK 2 billion.
When it comes to the stop weeks in U.S., when it comes to the supply-related issue, we can, of course, not give any guarantees, but we are following all the development in the different suppliers to make sure that we have a good filling rate and make sure that we have a good rate of parts and components coming in. We should also remember that we are not talking about, in the second quarter, any increases of production in the U.S. system. It's basically just by taking out the stop weeks, we will get much more deliveries out. That also eased the issues with the suppliers. That's something that we are having in the U.S. as a good thing. There is nothing on the horizon that we see right now. Of course, no one can give any guarantees that everything will stay that way.
Okay. It's not like a financing issue that they have. It's more a case of their own volume capacity.
I don't want to go into the details. From time to time, you have things happening with the suppliers, therefore you, instead of building a float or an inventory, you just call it that it's better that we have a stop week, get the things in order, get the deliveries in, then we start again fresh. That's the kind of view we're taking now instead of building float and inventories.
Okay. Thank you.
The next question comes from Mr. Peter Riley at Deutsche Bank. Please go ahead.
Hello. Good afternoon. Two questions, please. Firstly, can you give us a bit more color on what's happening with UD in Japan? This is your biggest ever acquisition when you made it back in 2007. We've obviously had no financial information since then, you've been talking about issues with market share, profitability, and product. Maybe you can give us a bit more color on what's been going wrong and how you're addressing it. Then secondly, on buses, which has been a long-term poor financial performer, you were talking positively earlier about mix changing over time with more high-tech products coming through with hybrids and so forth.
Can you give us some idea of the timescale, how long it will be before we start to get a big enough mix shift that it's going to make a material impact to the bottom line, whether it's two, five, 10 years away, just so we can understand what's happening with the dynamics in that business, please.
Thank you, Peter. I thought with the bus and the mix issue, I think that we see now an ever-increasing interest from larger and medium-sized cities to really go for the hybrid and also the electrical type of buses that we do have. I think the best evidence of that is that in our new Euro 6 Bus line freed up the pure diesel on the low floor, the pure diesel variant is not part of our offering. It will be on alternative fuel, and it will be on hybrid together with a diesel then. That shows that we're really focusing on the Volvo Buses side to make sure that we are capturing all these opportunities that are out there. Exactly how that will pan out in the future in terms of mix between the new and old version, that's difficult to say.
Definitely we have a positive momentum going forward here. As you say as well, as we do on trucks with new technology, also on the Volvo Buses side, we make sure that the new technology that we invest is reflected also in the price and in the margin to make sure that we can make money and a living about this future product. When it comes to UD, it's really a lot of different things that we are focusing on. Basically they are in three areas, which that's why we have put it very straightforward in the strategy as well. That is about the sales network and the efficiency in the sales network.
That was partly of the, if you remember, the leave program that we have end of last year, I think it was 950 people that left us in a leave program in Japan, which a big chunk of that was within the sales. In order to get efficiency up in the sales. We continue to do that in different number of programs in order to get a good coverage and making sure that we capture all the business we can. In the industrial system, we are then also now taking to make sure that we're sizing the industrial operations in the right way, but also having a major like we announced in this one, consolidating it into a more efficient setup. As we do and now we're investigating in the European system.
Finally, it's about really making sure that the new products that we launched, the new Condor and Quon, that those products are then, because they're very good products, they are now also then taking the market share that we believe that they will have. It's all a combination of that we're working on.
I'm sure you won't want to give a precise answer, you said in the past that North America is still a material drag on the margin for the trucks business. I know this is a stupid question to answer this quarter when you've had a low margin anyway, I guess Japan is still quite a big drag on profitability for the trucks business.
Well, we don't go into those kind of details. In general, I think what we're talking about here, Peter, is really to position ourselves for the future as well when it comes to the Japanese market. I've said that I'm not happy with the total profitability in Japan. Of course, we are doing those things to address that. That part remains.
Thank you.
The next question comes from Mr. Austin Earl at Marshall Wace . Please go ahead.
Hi, good afternoon. I have a handful of questions, hopefully reasonably quick ones. If I could start maybe just by confirming that I heard correctly on the tax rate of Fredrik question. Did you say 40% for the full year?
Slightly below 30, yes.
30?
Three zero.
Okay.
Slightly below that.
Okay. I'm glad I asked. If I could just, in terms of the new FH, you said it was 20%-25% of all orders. What did you expect it to be at around this stage?
I think, in general, you can say that the acceptance and the order rate is above our expectations. We should remember that we are just now starting to actually get the new FH out to the customers just recently. When I say all orders, it is of course Volvo Europe we're talking about then. It's not the 25% of the total order intake. It is the Volvo Europe where we have launched it. I would say it's actually above our expectations so far.
Okay. Then you alluded for the second quarter to a couple of issues that might hold back profitabilities because of the ramp up of production and the introduction of new models. I just wondered if there's any way of quantifying what sort of impact that could have on your profits.
No, I would say we don't do that. What we do with this information is to try to give you as a complete picture as possible on the opportunities we have for the second quarter, given the ramp up, but also the challenges. You have a good view on the pluses and the minuses. I don't think we should go any further into that in terms of guidance.
Okay, understood. Then, what are the lead times for trucks at the moment? If I ordered a truck today, when would I expect to receive it?
I would say we are in, it depends on model and where you are, but as an average, we talk about three months approximately.
Finally, just on construction equipment in China. I don't know if you're aware, but that there are, let's say various people, consultants, saying that there's a huge amount of inventory and excess capacity in the system. It seems that you've stuck to your market guidance and therefore, am I interpreting this correctly that these sort of worry stories are not correct? Or is this a reflection on Volvo's performance doing much, much better than the market?
I think there are a couple of things that wouldn't change market. One is that we did very early on make sure that we had our inventories in line and cut back production very early on in China, which means that we are pretty much in balance with our inventory, meaning then that when we get orders now that actually flows all the way through the system into our production, thereby our coverage of cost, and that is of course, very important. Secondly, when it comes to the inventory market, it is difficult to say, and there are certain studies around and so on and so forth. Normally what you can say at least is that spring season would have a dampening effect of that, and how much is, of course, dependent on how big the spring season would be.
The spring season, and as I said, is definitely there this year, and we saw that in general construction in March picking up. There are different dimensions to the Chinese market there. Generally, when we look at the market development and with all the data we have as we stand today, our best call is that it will be approximately the same market as last year.
Got you. That's all. Thank you very much.
The next question comes from Mr. Ashik Kurian of Goldman Sachs. Please go ahead.
Hi. Good afternoon. Thanks for taking my question. I got two questions. One is a follow-up from a previous question. I know you highlighted that you had a better operating performance compared to a similar top line in fourth quarter 2009. How much has the underlying margin in your truck business improved since 2011? To phrase it another way, looking at your current order intake in trucks, if you were to achieve similar top line that you had in the first half of 2011 in the second half of this year, do you believe your truck business is capable of doing a similar or a better margin of around 9% as what you had achieved in 2011?
Well, first of all, we don't give that kind of information. Secondly, I would like to also bring back the issue about the strategy and the strategic plan that we're working on. I think that is the basis for all the activities that we're doing right now and focusing on getting the profitability up in the truck business. There, I think also you can see very clearly on the areas we're working on, the targets we have, and also from the September capital markets day, we also specify what kind of impact we believe by 2015 that we will have on that. That's as much as guidance, I think, for the future that we'll give.
Just an update on the launch of Volvo wheel loader in China. Do you have any targets in terms of sales or market share that you want to achieve with this product?
We have internal targets, that for competitive reasons, we keep for ourselves. What I can say is that the launch has gone well. It is well accepted, we are now starting to produce it and also selling it. The acceptance in the market has gone well so far. It's still early days, but it looks like we have a very interesting product there in terms of features, in terms of cost position, then also possibility of price position, which we look forward to. That's the answer I can give you. Thank you.
The next question comes from Mr. Jakob Ternryd at Buoyant Capital. Please go ahead.
Hello. I was wondering if you could comment a little bit on inventory levels. I thought that in Q4 you noted that there was a little bit more destocking to do, I was wondering if there's still any excess inventory in the system that you need to get rid of.
No, we have continued, in total, we have lowered the inventory level, particularly on Renault side, with an additional 900 trucks during the quarter. By that, we feel that we are in good balance in all the regions when it comes to inventories. We did a last bit, as we said, in beginning of this quarter to align the inventory going forward.
Okay, that's it. Thank you.
I remind you that if you want to ask a question, you have to press 01 on your telephone keypad. That is 01.
Okay. If there were no other questions, then I thank you very much for participating in this conference call, and I wish you a good day and talk to you again in the summertime after the Q2 report. Thank you very much. Bye-bye.