Thank you very much, operator, and welcome all to this telephone conference for the Q3. And I will, as usual, not be very long winded. I will just make a few statements in the beginning and then we move directly into questions and answers. And if I should give you the highlights from this quarter, I would say that the improved earnings in a mixed economic environment is a good title on the quarter per se looking at the different economic development we have around the world. If we then look internally, one of the highlights is definitely that among many things that we now see that our structural cost reduction clearly is visible in the results.
And we have then reported on the different progress we have on that. And also, as a sign that we have an ambition and when we find something, when it comes to the way we're working, the way we measure our efficiency or competitiveness, then we will address that. And in this quarter, we then present and report on 3 activities aiming at further reducing the structural for the group. And in summary, you can say that I see this quarter as a small but very solid step in the journey for the Volvo Group to move into a profitability that are in mind the best in our industry and also that the efforts that the whole organization has now put in place here in terms of deliver on the strategic program has started to yield effect. And with that very short introduction, I think time is best used to address the issues that you have and the questions.
Operator, we start the question session immediately.
Our first question comes from Mr. Klas Bergelind from Citi. Please go ahead.
Yes. Hi, guys. It's Klas from Citi. I have three questions, Olof. The first, I just want to come back to Construction Equipment.
Thinking about the SEK 3,500,000,000 here, how much of that is going into CE? Because the reason why I'm asking here is it's highly unlikely that China construction and mining is coming back here. So when I do the numbers, it seems very difficult to reach a double digit margin for this business unless you take up more costs.
Okay. When it comes to the Construction Equipment and the activities that we have in front of us looking at the structural cost level and also the product profitability, We will come back with the details during the Q4. And looking at the calendar, we are already in the Q4. So we will within our too distant future come back then with a specification and more clarity on the activities. And until that, I would refrain from either speculating on what the exact issues are or how much money we're talking about.
Okay. The second question is a little bit on trends in Europe. We're hearing from the market about similar trends as in the U. S. With shortage of truck drivers, which means that there might be replacement cycle when the economy gets going, but the replacement cycle will be very short lived as there is no one to drive the trucks.
Could you share your view here on demand? And because the fear here is obviously that the European truck market is stable, but it will continue to flatline for many years.
I think when it comes to the driver availability in Europe, I think that that is not an issue. I've heard when I talk to my customers and or our customers being raised as an issue. And then how the development we look at going forward in terms of replacement or not, one can conclude that we have now had basically a flat market giving also the 2015 for years and that the market therefore is, of course, looking at the fleetage and other things driving demand going forward. But that's very hard to speculate going into the further distance. But on the first part of your question there in terms of driver and driver shortages, there's nothing I've experienced or heard from our point of view.
Okay. Then the final question on North America. We can't obviously see the margin here, but how much of the sequential improvement was driven by sort of better aftermarket versus improved margins on the actual trucks? I mean, is this the Q1 where North America trucks are getting closer to the peer group or at a more sustainable level?
This is Jan gradual improvement on our profitability in North America. And that I think comes both from a good development on the margins on the trucks, on the vehicles and a gradual improvement on the aftermarket as well. As you know, we have a higher and higher penetration of driveline into our own the capital driveline into our own vehicles. And that, of course, we added yields and effect into that market.
Okay. Thank
you. Our next question comes from Mr. Alexander White from JPMorgan. Please go ahead.
Good afternoon, everybody. It's Alex at JPMorgan. My first question is a little bit of a follow-up to Klas' question. Just looking at it sequentially within the truck division, I wonder if you could just sort of walk us through a bridge in terms of production and like sort of lower production sequentially versus savings, price realization, mix, FX, etcetera, just so that we can, I guess, understand that big dramatic improvement that we've seen sequentially within the truck division?
Sequentially. If you look up on the I mean some obviously are I mean sequentially getting better. Currency is one thing. Secondly, you see also the reductions that we have showed on one of the pages as well is gradually kicking in more and more. I would say when it comes to when you talk about capacity utilization and so on, of course, you have a quarter here where you have the vacation in many of the main markets as well, which means that I would say the capacity utilization is of course, Q3 a little bit not as probably the worst quarter in the year and of course then worse compared to the Q2.
Otherwise, I would say when you talk about this price realization and the development in the U. S. How that affects margin, that's kind of more because they're long term. So there's no big jumps or anything like that between the quarter. It's more kind of moving along gradually over the quarters, I would say.
Yes.
I guess that's what I'm struggling with because I mean my understanding is that Europe was closed for 4 weeks. You had
a couple of weeks shutdown in North America.
You had a
little bit higher daily rate in North America sequentially. You had Brazil that was still sort of operating with a stop wake also in July. I mean sequentially the production looks like it should have been down quite heavily. And certainly if we look at the deliveries, it suggests that the FX obviously are positive sequentially.
Gradually over the years and also over the year. And also, of course, when more and more markets take the new trucks in like the Renault trucks also you get pricing and margin as well. So I think there are some offsetting factors that you will find in there.
Okay. And then the second thing was the Page 27 in the press release. If you can just perhaps walk us through how that table sort of all adds up and I guess where the $10,000,000,000 comes from. The $10,000,000,000 is presumably out of the $50,000,000,000 or so that you've got in sort of cash R and D selling expenses and admin. And also from your production cost base, is that the right way of interpreting it?
Yes. I mean the three line cash R and D selling expenses and admin that you can basically take out quite easily out of our, you can say, annual report. And if you add them together, you get the cost base on these three items. That's quite, what is it, transparent to the way we measure it. Then of course, we do have quite a lot of structural cost reductions that actually comes into our gross income like the restructures we do with our master plan for Japan is one thing and also the restructurings that we do within our production system in Europe and also logistics system both in Europe and then the U.
S. They are in its nature also structured. And of course, we want to show them as well as structural cost reduction. But you cannot put them into relation how big our fixed cost base is in production. But we will show the improvement here because it's an important part of our program and it will also yield quite quite an effect as well.
That's we have taken it here. Although I would say a little bit of course the weak test with that line is that it is not as transparent as the 3 other lines. And then with the base here which is the full year 2012 then going up until the full year 2016, the sum of these improvements that we see on these four lines together will add up to SEK 10,000,000,000. I think it's important to also tell you that what we mean by that is to be able to measure the SEK 10,000,000,000 we need to have a full year of 2016. But all the activities that's within the program both the previous activities the SEK 6,500,000,000 but also the newly added ones that we have talked about earlier today the SEK 3 5,000,000,000 they will be implemented during the course of 2015.
But of course then to be able to measure the cost effect 1 year the whole year, you need the whole of 2016 to see that and come to the SEK 10,000,000,000 over the whole year 2012. That's the intention to show that on this table. And then going forward, we will report on this one. Of course, you can take out most of the figures yourself. But to make it simple, we'll do that and add on then the structural cost reductions that we have with ingress income as well.
Okay. And then if you can just help me understand a little bit the restructuring charges that were booked in this quarter. What were the actual like what were the actions that you put in place this quarter that give rise to the additional charges relative to what you've already booked?
It is actually a combination of we have the white collar reduction programs. There are costs related to that and it is also related to some of the restructuring within GTO as well.
But sorry, I thought that the white collar
vessels in Sweden were there, but it's other it continues. We have France and Japan coming up as well. I think the majority is probably coming from the actually from the Voluntary Leap program in France, if I remember correctly. Then we also have some write downs of assets as well, industrial assets.
Can you help us understand the split between write downs and provisions for that?
No. It's actually in the table.
It's in the table on Page 28. And if you have any further questions like that, you can maybe talk to Ira after that.
I look forward to that. Okay. Well, look, thanks very much for your answers.
Our next question comes from Mr. Michael Tindle from Barclays. Please go ahead.
Yes. Hi, there. It's Mike Tindle from Barclays. Two questions, if I may. The first one, can you just help me out a little bit with the Renault truck that you've just launched?
In fact, if I remember rightly, you launched it in Q4 of last year. You said people were test driving last year. It's just been awarded Truck of the Year as you mentioned. But you also mentioned that the orders are at least at this stage disappointing. Can you just talk me through what's the disconnect because it is going through the Volvo channel as well now.
So I would have thought potentially we would see something like the new FH in terms of a pickup in activity there. Is there a pricing issue? Have you perhaps priced it too high versus customer expectations? So that's I guess question number 1. Question number 2, just around restructuring charges again, sorry to keep on this topic.
But if I think back to December last year, in the slide deck, it looked like you were going to get close to about €5,000,000,000 4,500,000,000 of restructuring charges by the end of 2014. So an incremental, let's call it, €3,500,000,000 in 2014. You've done 1 point 7,000,000,000 if I'm not wrong year to date. Should we be expecting another SEK 1,700,000,000 in the rest of the year? Or has that schedule changed slightly?
Thanks.
Okay. If I start with the Renault track side, there are 3 issues into play here. I think one is the launch and then the way we then actually had the truck being known to our markets. And that was actually something that went on a good part into this year as well. So we had markets that we had those test drive programs and get to know the product programs rolling out.
So that has been something that we have been doing up until just recently. So that's one part of it. The second part, which is about the introduction in the market and comparing it to Volvo, we should remember that this truck, the Renault truck is by far the best truck coming from Renault we have put on the road. And there is, of course, an issue around the feature level and other things that we need to have the customers really appreciating, therefore also the price increases. To answer your question, I don't think we have put the pricing wrong.
I think the pricing is on a good level. We work very much with financing and maintenance as well as part of the total offer going through here. And finally, when it comes to the dealer and the new dealer network, we have to remember that, yes, we have done a big part of the European And we have given you the numbers of the number of workshops that we now have at Jewel Branded. But we are not through there yet. And even if you do that, it's not going to be up and running full speed day 1.
So there is also lagging in time to get everyone acknowledged to the new product and the new brand and then getting to work efficiently. So we have a little bit of delay there as well. So if you look at it in totality, it is a major undertaking that we're doing now. But having said that, I also see that the worst and the biggest work is behind us now. So now it's really a matter of taking advantage of all this preparation work and structure change work that we have done and starting to get the volumes coming in.
Another piece with Renault trucks is very important to remember as well is, of course, the French market. The Renault truck is a big player on the French market and that one that market that market has not developed particularly favorably lately. So that's also something that has a negative impact on the order intake. But all in all, as I said in the press conference, the foundation of having a great truck is there. And if you have that, the rest is just hard work and that is exactly what we are doing right now.
And then perhaps Then when it comes
to the restructuring charges, if you look upon the whole, call it now, the SEK 10,000,000,000 program, which is the old restructuring cost of SEK 6,000,000 sorry, sorry, the structure cost that we will take out of SEK 6,500,000,000 and the new SEK 3,500,000,000 We have estimated that the total of that restructuring cost will be in the range of SEK 6,000,000,000 to SEK 7,000,000,000 going forward. And what we have utilized so far of this SEK 6,000,000,000 to SEK 7,000,000,000 is SEK 3 point 1,000,000,000 if the program started. So we have a remaining somewhere between SEK 3,000,000,000 and SEK 4,000,000,000 that we will consume. And that will come gradually, of course, in the rest of this year and then gradually during 2015.
Can I just two very quick follow ups? Could you just remind me what is the price delta between the Renault T and the new FH? And then secondly on
the restructuring, I wonder if you can give just a bit
more detail in terms of the on the restructuring, I wonder if you can give just a bit
more detail in terms of the sequencing of that just to reassure me that it hasn't moved to the right because it sort of feels
like it may have moved a bit to to the right in terms of timing?
When it comes to the price difference, that's nothing we sort of this player talk to in that one. This is something that we keep to ourselves in that respect.
When it comes to restructuring charges, as we said before, I mean, if you look upon the what we have done in the program up until now all the implementations they have been going according to plan. And that means also that the restructuring follows that as well. And we will not disclose any further exactly when the remainder will go either. It will come gradually as we go along and as the new activities get implemented. And as I said before, the whole implementation of the SEK 10,000,000,000 will actually will have happened before we leave 2015.
Okay. Thanks very much.
Our next question comes from Mr. Austin Auel from Marshall Way.
Wedge. I just have a few more clarification questions. The first is just, if I understood correctly that the difference between the original €9,000,000,000 and then that being changed to €6,500,000,000 is that you're just referring to the items that you view as EUR 2,500,000,000 of savings that you don't view as structural?
Yes. That's great. Out of the you can say the initial launch strategic program, we have identified that 6.5 of that is the structural cost and then we add on the 3.5 up to 10. But it's important to note that the remaining activities that we have discussed before and so on, they are still there. And we work on them in the same manner as before with the same focus, which means that if we take one example, material cost reductions and so on, it's in and so on, it's in high focus still within the organization and we haven't left it.
This is more for disclosure purposes. It's been so complicated to disclose that in a good way when you have at the same time all the changes in market mix and so on and so forth. So to track it in the gross income has become very, very difficult. That's why we have said when we report that or actually disclose this now to the external, we focus on the on this structural cost reductions. But internally, the focus is as high as before on the other things as well.
Sure. Now it makes sense because it will be a lot easier for us to follow. And just of this sort of €3,000,000,000 to €4,000,000,000 or on Page 28, it seems to say €2,900,000,000 to SEK 3,900,000,000 of charges or costs related to the restructuring. Can you give a breakdown of sort of how much of that is truck and how much of that is construction equipment? [SPEAKER
JEAN FRANCOIS PRUNEAU:] No. At this point in time, we will not do that.
Okay. And then I listened to the call earlier today and I didn't quite sort of understand on the I understand on the cash R and D costs coming down. But on this issue of the capitalization of R and D and the fact that, let's say, in this year in 2014, from an accounting perspective, it has been a headwind on your reported EBIT. Did I understand correctly that you're saying that, that as of Q4 becomes no longer as a headwind and then for 2015 is no longer a headwind?
I think I hand over the word to Krista now.
Hi, Austin. I think what you can do here is that you take the level of capitalization and the level of amortization that we have in this quarter and let's say you add about EUR 100,000,000 or so in capitalization going forward because you have always lower capitalization in the vacation quarter when you have lower R and D activity. Then you have basically the levels we will be running at for this year and most of 2015.
I'm so sorry. I'm not sure I followed this. There will still be a little bit of a headwind, but more in the region you're saying. So it's SEK 100,000,000 a quarter or so?
Yes. Okay. If you take
the capitalization we had in this quarter and you add about SEK 100,000,000 or so, then you will be more or less where we will be running at. But these are moving targets as you understand. So it's not a scientific number to this.
Okay. And my last question was just on FX. I know again it has been asked earlier, but just to sort of clarify as to how much in terms of the number that you report on a quarterly basis. Was there anything that was sort of holding it back because of hedges? And so would that become a little bit more visible as of, I don't know Q4 maybe next year?
No. I think when you look upon the FX effect that close to €500,000,000 that is actually without any effect of hedges because the effect of hedges are within our financial net actually. So this is the you can say the effect of the spot rates this quarter compared to last year.
Okay. Understood. That's great. Thank you very much.
Morgan Stanley. Please go ahead.
Sorry, good afternoon. I also have a few follow-up questions. Just maybe on the FX quickly. Could you maybe quantify how the €485,000,000 splits between a pure translation effect and the margin effect for the like the transaction effect? That would be my first question.
And then secondly, on your volumes, I noticed that you had quite a bit of a turnaround compared to the trend that we've seen in July August and then in September. And I was just wondering if you could help us understand that a little bit more, especially in Europe coming from a trend of like minus 18% in the 1st 2 months to a flat month in September. Is this a bit of a delay effect that was caused by the disruptions in the production system and that we should think about this more as an average of let's say minus 11% or what has been driving the strength in volumes in September, especially given the weaker statements that have been made by a lot of companies in the industrial space here? And then just lastly, could you from the production from the disruption of the production system and some of these restructuring measures? That would be great.
Thank you.
I think starting off with the currency effect on operating income. You have a very good breakdown of that on Page 26 actually when it comes to both how it affects the net flow and also unrealized gains on receivables and everything. So there's a very good breakdown on that one there, which explains exactly what you asked about. And with the deliveries in the Q3, I think we have not experienced I think we know where you come from that we were a little bit lower. And of course, in relative terms, we saw actually quite low volumes as you have in the month of July August, a couple of 100 trucks and so one makes quite a big difference.
I think it was maybe more than that, but it makes quite a big difference in terms of percentage wise. But I think the pattern is more or less the same as it was last year with July, August and then picking up in September. And I wouldn't say that we have seen any kind of major effect from the fact that we changed over production during summer and then when we started that one after the holidays.
Sorry, did you say there was no major effect from that?
No major.
Okay. And then the last question on the efficiency losses?
No. I mean, we when it comes to the if you mean what we did during the vacation period now in Europe this summer, I mean, it was actually done during the vacation. And I mean, basically, we stopped production and then we did a changeover during the summer holiday. And the ramp up went, as I said before, quite well. No major disturbances, as I said before.
So there has been, I wouldn't say, any efficiency losses from that point of view.
Okay, great. Thank you.
Our next question comes from Mr. Colin Gibson from HSBC. Please go ahead.
Hi, good afternoon gentlemen. Thanks for doing another call. A couple of add on questions from my side. One of the Swedish papers reported about a month ago, I think that your Dongfeng joint venture was near I'm just looking at the article now, yes, near getting final approval. Do you have any update from your side on Wayfair with that one?
That was the first question. 2nd question, I'm just trying to understand your assumption of a flat European truck market in 2015 year on year versus 2014. It seems to me there are without being too optimistic, there are at least least some reasons to expect slightly better volumes. We have, after all, had some volumes borrowed out of 2014 by the pre buy of 2013. So that was a headwind for 2014 that wouldn't exist for 2015.
We have, if I understand it correctly, higher tolls for old Euro 5 trucks coming in on the German Autobahn from January 2016 onwards, which may encourage some more hauliers to flush the last Euro 5 models out of their fleets during 2015? And even and this is getting quite small, I appreciate, but there should even be a small Turkish pre buy, I think, in 2015 because Euro 6 comes in Turkey in January 2016. So I can think of a few reasons why we might expect volumes all else equal even with no economic improvement in Europe to be a little better in 2015. Do you see some big negatives working in the opposite direction that make you more cautious? Or are you just trying to be cautious because cautious is a good thing to be?
Thanks.
Thank you. On the Dongfeng side, I Betelge is nothing new to report other than that the process is continuing and it is within the Chinese authorities. And again, there are no bad news or negative news coming out of it. So it is a process now and it goes its course and it takes its course and it takes its time and we will see then when it's finalized. So no news on that one.
When it comes to the market situation, when we do those market updates and forecast for the upcoming period, we collect a huge number of data. And you're absolutely right. There are pluses and there are minuses in a different and we do actually then collect it on market by market basis and then we consolidate it and we take a review on it. So it's a huge amount of data that goes into these forecasts. And giving all these pluses and minuses and I think you see all the things that we see which you then accounted for here.
But also we do see this uncertainty in the market as well. So it's not cautious. It's cautious kind of approach. This is really based on a lot of data points. But at the end of the day, it is, of course, a forecast.
I mean, no doubt about it. But that's our best take at it right now when we look at everything ups and downs.
That's great. Thank you.
Our next question comes from David Russell from ISI Group. Please go ahead.
Hi, good afternoon. My question relates to truck. I'm just trying to think about full year 2014 your production versus retail. If you can help me with that geographically, I'm just curious to set up for example in the South America for next year. If the market is down 5 at retail, how your production may deviate from the retail demand?
So for that setup, can you help me with how you view production for Volvo versus retail geographically for truck this year?
Okay. And I think what and on Page number 2, if I start from sort of a historical level, you can see a little bit about the orders and deliveries and how we now in the last year, I would say, really have increased our sort of nimbleness in terms of making sure that we are delivering according to the demand. And that's basically our philosophy is that when we
do see changes in the demand,
supply into the market. And if you take the North American market for instance, we are well in line with and we produce of course with order intake we have there on a very high capacity. In Brazil, if you take that since you brought it up as an example, we have continuously during the Q2 and also the Q3 adjusted the output by having sort of lower production rates. We're also looking to flexibility generally like stop days and other activities in order to make sure that we keep a very close eye on the dealer inventory because we don't want to be sitting with excess inventory we're putting. And I think in generally, if I look around the world, I'm looking here at Jan as well and he's nodding, we are pretty much balanced in throughout the world right now and this is a high focus.
And I even mentioned that also in my CEO letter that this is a major CEO comment in the report, sorry, that this is a high focus for us. And I think we're getting there. It's an important steering mechanism for us.
But to generalize though that answer, do you feel say for South America, Brazil this year in particular that your production is going to be in line with the down 13% forecast you have for the market? I'm just trying to see if there's any production deviation I could see where Brazil you're forecasting it down 6% next year as a market. Should we assume your production is in line with these retail forecasts for the geographies?
Yes. You can definitely assume that. And there was perhaps a long answer to answer that kind of question. You can assume that our ambition is always to make sure that we are in line with demand. So the answer to that question is absolutely yes.
Okay.
Thank you very much.
Our next question comes from Mr. Felix Stol from UBS. Please go ahead.
Sorry, I'm here. Good afternoon, guys. It's Frederic here from UBS. I just wanted to check double check this that the white collar workers that are now disappearing in the Q4, does it mean that the costs associated with these people are gone the minute they walk out
the door, so to speak?
It's actually so that the restructuring cost that we took for that is actually happening in the Q2. Yes, for the people that left in the Q3 then that is the kind of what you call it, severance planning or whatever you call it that goes in the Q2. Then when they leave the company, of course, the salary disappears as well. So it goes in 2 steps.
Yes, exactly. But there's no notice period or anything like that where you continue to pay salaries off?
No, no, no. So that will take it first actually. And then when they leave the company, that's when we stop paying the salaries. So there's nothing coming after that.
Okay. Very good. Thank you.
Our next question
A question on the savings. You say that you take a cost and a book cost for the program up until year end 2015. And as I understand it, savings will be gradual up until Q4 2016. Is that right?
As I said before, the implementation of all the measures will be done before year end 2015. But then to be able to measure the full year effect in our P and L, of course, we'll have to have the full year 2016 to be able to do that. But you can say the pace that we leave 2015, then we have adjusted the 2015. But you will not be able to read the SEK 10,000,000,000 before you're out of the whole year 2016 compared to then compared to the base year 2012. That's the mechanism so to say.
Yes. Okay. Thank you. Then if you can remind me of the dual production and cost associated with that last spring. Dual production and costs associated with that last spring and also the launch costs that were during the spring.
Well, Bjorn, we had never quantified the dual production costs. We have said that we have had SEK 4,000,000,000, five 100,000,000 in launch related costs during 2013. But I need to go back and check more in detail how that played out in the different quarters.
But you will be running more smoothly in the first half year on year, I assume, everything else equal?
Next year? Yes. Yes.
And then on Renault and the issue or the discussions with the clients accepting the new prices. Last time, as you mentioned before, you had a wrong that time? And I understand it that you have now significantly better truck, but it's teaching for the clients. But what happened back then if you can help me with that?
I think there is a number of issues there and I don't really think we should go back there. But it's true to say that one of the key issues that we do have with the new truck is actually to make sure that the truck and the value of the truck being then secondhand or used one is reflecting the true value of such a good track. And this is something that you always have when you come in with such a big step in on a product that we are doing here with the Renault ones to create the confidence by the customer that this truck is then having a completely different resiliency value than the old one. And here, I mean, the trick here is to really show road and thereby they got the confidence that this track is then on a completely different level and therefore also will yield a different recede value. And that's something also that is on the again for us to work on in making sure that we increase now the volumes for rental truck.
Thank
Okay. Thank you very much. And thanks to all of you for joining us this afternoon or morning, wherever you are. And I do wish you welcome back to the Q4 presentation in beginning of next year. So thank you very much and have a nice weekend.