Thank you very much operator, and welcome all to this telephone conference for the third quarter. 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. 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 developments 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.
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 would address that, and in this quarter we then present and report on three activities aiming at further reducing the structural cost for the group. 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 among 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. 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.
I'd like to remind you that if you'd like to ask a question, please press zero one on your telephone keypad. Our first question comes from Klas Bergelind from Citi. Please go ahead.
Yes. Hi guys. It's Klas from Citi. I have three questions, all of. First I just want to come back to construction equipment. Thinking about the SEK 3.5 billion here, how much of that is going into CEE? Because the reason why I'm asking here is that it's highly unlikely that China construction and mining is coming back here. When I do the numbers, it seems very difficult to reach a double-digit margin for this business unless you take out 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 fourth quarter. Looking at the calendar, we are already in the fourth quarter. We will within a two distance future come back then with a specification and more clarity on the activities. 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? Because the fear here is obviously that the European truck market is stable, but it will continue to flat line 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 or our customers being raised as an issue. How the development will look at going forward in terms of replacement or not, one can of course conclude that we have now had basically a flat market giving also the 2015 for three years, that the market therefore is of course looking at the fleet age and other things driving demand going forward. That's very hard to speculate going into the further distance. On the first part of your question there in term of driver and driver shortages, there's nothing I've experienced or heard from our point of view.
Okay. 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 first quarter where North America trucks are getting closer to the peer group or at a more sustainable level?
This is Jan Gurander here. I think what we see is a continuous improvement, gradual improvement on our profitability in North America. I think it comes both from a good development on the margins on the trucks, on the vehicles, and also a gradual improvement on the aftermarket as well. As you know, we have a higher and higher penetration of driveline into our own captive driveline, into our own vehicles, and that of course further yields an effect into that market.
Okay. Thank you.
Our next question comes from Mr. Alexander Whight from JPMorgan. Please go ahead.
Yeah, 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 FX, et cetera, 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 some obviously are sequentially getting better. Currency is one thing. Secondly, you see also the cost reductions that we've showed on one of the pages as well is gradually kicking in more and more. I would say 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 the capacity utilization is of course third quarter a little bit, probably the worst quarter in a year. Of course, then worse compared to the second quarter. Otherwise, I would say when you talk about this price realization and the development in the U.S., how that affects margin, that's more because they're long-term. These are big jumps or anything like that between the quarters.
It's more kind of a moving along gradually over the quarters, I would say.
Yeah. I guess that's what I'm struggling with because my understanding is that Europe was closed for four weeks. You had a couple of weeks shut down 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 week or also in July. Sequentially, the production looks like it should've been down quite heavily, certainly if we look at the deliveries, it suggests that. The FX obviously a positive sequentially. I just struggle to build the bridge.
You see also the improvement on margins gradually over the years and also over the year. 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. I think there are some offsetting factors that you will find in there.
Okay. 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 SEK 10 billion comes from. The SEK 10 billion is presumably out of the SEK 50 billion or so that you've got in sort of cash R&D, selling expenses, and admin, then also from your production cost base. Is that the right way of interpreting it?
Yeah. The three line cash R&D, selling expenses, and admin that you can basically take out quite easily out to our annual report. If you add them together, you get the cost base on these three items. That's quite transparent the way we measure it. Of course, we do have quite a lot of structural cost reductions that actually comes into our gross income, like the restructures we do. Our master plan for Japan is one thing, also the restructures that we do within our production system in Europe. Also logistic system, both in Europe and then the U.S. They are in its nature, also structured. Of course, we want to show them as well as structural cost reduction. You cannot put them into relation how big our fixed cost base is in production.
We will show the improvement here because it is an important part of our program, and it will also yield quite an effect as well that we have taken it here. Although, I would say a little bit, of course, the weakness with that line is that it is not as transparent as the three other lines. 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 billion. I think it's important to also tell you that what we mean by that is to be able to measure the SEK 10 billion, we need to have a full year of 2016.
All the activities that's within the program, both the previous activities, the six and a half billion, but also the newly added ones that we have also talked about earlier today, the three and a half billion, they will be implemented during the course of 2015. Of course, they have to be able to measure the cost effect the whole year. You need the whole of 2016 to see that and come to the SEK 10 billion over the whole year 2012. That's the intention to show that on this table. Then going forward, we'll 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 within gross income as well.
Okay. Then, if you can just help me understand a little bit, the restructuring charges that were booked in this quarter, 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 the white collar reduction programs that are closely related to that, and it is also related to some of the restructuring within GTO as well.
Sorry, I thought that the white collar negotiations had all been completed by the end of last quarter, so the provisions were already taken for that.
The provisions in Sweden were there, it continues. We have France and Japan coming up as well. I think the majority is probably actually from the voluntary 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?
No. It's actually in the table.
It's in the table on page 28, if you have any further questions like that, you can maybe talk to IR after that.
I look forward to that. Okay.
Yeah.
Well, look, thanks very much for your answers.
Our next question comes from Mr. Michael Tyndall from Barclays. Please go ahead.
Hi there. It's Mike Tyndall 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've 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, I would've 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? That's, I guess, question number one. Question number two, just around restructuring charges.
Sorry to keep on this topic, if I think back to December last year, in the slide deck, it looked like you were going to get close to about SEK 5 billion, SEK 4.5 billion of restructuring charges by the end of 2014. An incremental, let's call it SEK 3.5 billion in 2014. You've done SEK 1.7, if I'm not wrong, year-to-date. Should we be expecting another SEK 1.7 in the rest of the year, or has that schedule changed slightly? Thanks.
Okay. If I start with the Renault Trucks side, there are three issues into play here. I think one is the launch then the way we then actually had the truck being known to our customers via test drive program and spreading into the different markets. That was actually something that went on good part into this year as well. We had markets that we had those test drive programs and get to know the product programs rolling out. That has been something that we have been doing up until just recently. That's one part of it. The second part, which is about the introduction in the market and comparing to Volvo, we should remember that this truck, the Renault Trucks, is by far the best truck coming from Renault Trucks we have put on the road.
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. 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 consolidation, and we have given you the numbers of the number of workshops that we now have dual branded, but we are not through there yet. Even if you do that, it's not going to be up and running full speed day one.
There is also lagging in time to get everyone acknowledged to the new product and the new brand, and then getting to work efficiently. We have a little bit of delay there as well. If you look at it in totality, it is a major undertaking that we're doing now. Having said that, I also see that the worst and the biggest work is behind us now. 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 that's very important to remember as well is, of course, the French market. The Renault Trucks is a big player on the French market, and that market has not developed particularly favorably lately.
That's also something that has a negative impact on the order intake. 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.
When it comes to the restructuring charges, if you look upon the whole, call it now the SEK 10 billion program, which is the old restructuring cost of sorry, the restructuring cost that we will take out the SEK 6.5 billion and the new SEK 3.5 billion. We have estimated that the total of that restructuring cost will be in the range of SEK 6 billion-SEK 7 billion going forward. What we have utilized so far of these SEK 6 billion-SEK 7 billion is SEK 3.1 billion since the program started. We have a remaining somewhere between SEK 3 billion and SEK 4 billion that we will consume. That will come gradually, of course, in the rest of this year and then gradually during 2015.
Can I just ask two very quick follow-ups? Could you just remind me, what is the price delta between the Renault T and the new FH? Secondly, 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 the right in terms of timing.
When it comes to the price difference, that's nothing we display or talk to in that one. This is something that we keep to ourself in that respect.
When it comes to restructuring charges, as we said before, if you look upon what we have done in the program up until now, all the implementations we've done, they have been going according to plan. That means also that 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. As I said before, the whole implementation of the SEK 10 billion will have happened before we leave 2015.
Okay. Thanks very much.
Our next question comes from Hampus Engellau from Marshall Wace. Please go ahead.
Hi, good afternoon. I just have a few more clarification questions. The first is just, have I understood correctly that the difference between the original nine and then that being changed to six point five is that you're just referring to the items that you view as structural costs and therefore there was sort of SEK 2.5 billion of savings that you don't view as structural?
Yeah. That's correct. Out of the initial strategic program, we have identified that six and a half of that is structural cost. We add on the three and a half up to 10. 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 we take one example, material cost reductions 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. To track it in the gross income has become very difficult.
That's why we said when we report that or actually disclose this now to the external, we focus on the structural cost reductions. Internally, the focus is as high as before on the other things as well.
Sure. Now it makes sense because it'll be a lot easier for us to follow. Just of this sort of three to four or on page 28, it seems to say SEK 2.9 billion-SEK 3.9 billion of charges or costs that related to the restructuring. Can you give a breakdown of how much of that is truck and how much of that is Volvo Construction Equipment?
No, at this point in time, we will not do that.
Okay. I listened to the call earlier today, and I didn't quite sort of understand. I understand on the cash R&D costs coming down, but on this issue of the capitalization of R&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 as of Q4 becomes no longer is a headwind and then for 2015 is no longer a headwind?
I think I hand over the word to Christer now.
Hi, Hampus. I think what you can do here is that if you take the level of capitalization and the level of amortization that we have in this quarter, and let's say you add about SEK 100 million or so in capitalization going forward, because you have always lower capitalization in a vacation quarter when you have lower R&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. Is that SEK 100 million a quarter or so?
Yes.
Okay. Got you.
If you take the capitalization we had in this quarter and you add about SEK 100 million or so, you will be more or less where we will be running at. These are moving targets, as you understand, so it's not a scientific number to this.
Okay. 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, 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, the close to SEK 500 million, that is actually without any effect of hedges, because the effect of hedges are within our financial net, actually. This is you can say the effect of the spot rate this quarter compared to last year.
Okay. Understood. That's great. Thank you very much.
From 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 SEK 485 million splits between a pure translation effect and the margin effect, so like the transaction effect? That would be my first question. 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 and August than in September. 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 first two 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%?
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. Just lastly, could you maybe help us or remind us again what the efficiency losses were that you've had in the last, let's say one and a half years or so, coming from the disruption of the production system and some of these restructuring matters. 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 liabilities and everything. There's a very good breakdown on that one there, which explains exactly what you asked about. With the deliveries in the third quarter, I think we have not I think we know where you come from, that we were a little bit lower. Of course, in relative terms, we saw actually quite low volumes as you have in the months of July and August, a couple of hundred trucks or so only, makes quite a big difference. I think it was maybe more than that, it makes quite a big difference in terms of percentage-wise.
I think the pattern is more or less the same as it was last year with July, August, and then picking up in September. 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. Then the last question on the efficiency losses.
No, if you mean what we did during the vacation period now in Europe this summer, it was actually done during the vacation. Basically, we stopped production, then we did a changeover during the summer holiday, the ramp-up went, as I said before, quite well. No major disturbances, as I said before. 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 for 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. Yeah, near getting final approval. Do you have any update from your side on where you are with that one? That was the first question. Second question, I'm just trying to understand your assumption of a flat European truck market in 2015 year-over-year versus 2014. It seems to me, without being too optimistic, there are at 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 16 onwards, which may encourage some more hauliers to flush the last Euro 5 models out of their fleets during 2015. 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 in Turkey in January 2016. 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, basically, there's nothing new to report other than that the process is continuing, and it is within the Chinese authorities. Again, there are no bad news or negative news coming out of it. 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. No news on that one. When it comes to the market situation, when we do those market updates and forecasts for the upcoming period, we collect a huge number of data. You're absolutely right, there are pluses and there are minuses in the different. We do actually then collect it on a market-by-market basis, and then we consolidate it, and we take a review on it. It's a huge amount of data that goes into these forecasts.
Giving all these pluses and minuses, and I think you see all the things that we see, which you then accounted for here. Also, we do see this uncertainty in the market as well. It's not cautious, it's cautious kind of approach. This is really based on a lot of data points. At the end of the day, it is, Colin, of course, a forecast, no doubt about it. 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 Mr. David Russell, 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 could help me with that geographically, I'm just curious the set up, for example, into South America for next year. If the market's down five at retail, how your production may deviate from the retail demand. For that set up, can you help me with how you view production for Volvo versus retail geographically for truck this year?
Okay. On page number two, if I start from 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 nimbleness in terms of making sure that we are delivering according to the demand. That's basically our philosophy is that when we do see changes in the demand, we correct the production as fast as we can in order to make sure that we don't oversupply into the market. 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 second quarter and also the third quarter, adjusted the output by having lower production rates. We're also looking into 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 going in. I think in general, if I look around the world, I'm looking here at Jan as well, and he's nodding, we are pretty much balanced throughout the world right now. This is a high focus, 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. I think we're getting there.
It's an important steering mechanism for us.
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 understand if there's any production deviation I could see where if 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 geography?
Yes. You can definitely assume that. That 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. The answer to that question is absolutely yes.
Okay. Thank you very much.
Our next question comes from Mr. Fredrik Sten from UBS. Please go ahead.
Sorry, I'm here. Good afternoon, guys. It's Fredrik here from UBS. I just wanted to double-check this, that the white-collar workers that are now disappearing in the fourth quarter, 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 second quarter. The people that left in the third quarter, that is the kind of, what do you call it, the severance pay or whatever you call it, that goes in the second quarter. When they leave the company, of course, the salary disappears as well. It goes in two steps.
Yeah, exactly. There's no notice period or anything like that where you continue to pay salaries off.
No. That is taken first, actually, and then when they leave the company, that's when we stop paying the salary. There's nothing coming after that.
Okay. Very good. Thank you.
I remind you that if you'd like to ask a question, please press zero on your telephone keypad. Our next question comes from Mr. Björn Andersson from Danske Bank. Please go ahead.
Björn Andersson, Danske Bank. A question on the savings. You say that you take a book cost for the program up until year-end 2015. As I understand, 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. To be able to measure the full year effect in our P&L, of course, we'll have to have the full year 2016 to be able to do that. You can say the pace that we leave 2015, then we have adjusted the cost base end of 2015. You will not be able to read the SEK 10 billion before you're out of the whole year 2016 compared to the base year 2012. That's the mechanism, so to say.
Yeah. Okay. Thank you. If you can remind me of the dual production and cost associated with that last spring, and also the launch costs that were during the spring.
Well, Björn, we had never quantified the dual production cost. We have said that we have had SEK 400 million or SEK 500 million in launch-related costs during 2013. I need to go back and check more in detail how that played out in the different quarters.
You will be running more smoothly in the first half year-on-year, I assume. Everything else equal.
Next year?
Yeah.
Yes.
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 weak used truck prices from the old truck quite soon thereafter. What went wrong that time? I understand it that you have now a significantly better truck, but it's teaching for the clients. What happened back then, if you can help me with that?
I think there is a number of issues there, I don't really think we should go back there. 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 truck. This is something that you always have when you come in with such a big step 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 residual value than the old one.
Here, the trick is here is to really show the customer about the fuel efficiency, about the quality, about the features, getting it onto the road, and thereby they get the confidence that this truck is then on a completely different level, and therefore also will yield a different residual value. That's something also that is on the agenda for us to work on in making sure that we increase now the volumes for Renault Trucks.
Thank you.
I remind you that if you'd like to ask a question, please press 0 on your telephone keypad.
Okay.
There are no further questions registered on the telephone.
Okay. Thank you very much. Thanks to all of you for joining us this afternoon or morning, wherever you are. I do wish you welcome back to the fourth quarter presentation in beginning of next year. Thank you very much, and have a nice weekend.