Good morning, everybody, and welcome to this press conference covering the Q3. On our stage today, we will have our President and CEO, Olof Perschond and our CFO, Jan Goranda. And we will start with presentations, followed by questions from you in the audience and then from you participating over the phone. Why don't you start?
Thank you very much, Kina, and most welcome to all of you. If we should or if I should try to give you the highlights of the Q3. I think the heading and the three bullet points on this slide gives a good sort of inroad to that that we do see improved earnings in a mixed economic economical environment. And we also see then slow growth in many areas around the world and we will come back to that a little bit later. But it's also I think encouraging to see that we now really start to find the all the activities that the organization has worked with for the last couple of years really now starting to show and come into the numbers in terms of cost savings and efficiency improvements.
And that also and it's clear that a program like this when you started you don't have all the answers. And we have of course also discussed that if we find something during the journey that means that we can increase the efficiency, reduce the structure cost base or other things that make us more competitive, we will do that. And we're also launching today 3 new activities in that respect. If we look at it on the totality, we will come back to the numbers on the sales and operating margin coming up with SEK 500,000,000 compared to last year. And also then on the order side, you can see that we continue now basically since a year back having a good control of demand and supply situation.
So we have an order intake book to bill now on 110,000,000 but we are pretty well balanced with our demand and supply structure. If we then move into and look into the different trucks markets and start with Europe. I think the summary of Europe, you can say that we had a positive momentum in Europe during the first half of the year. During the summer and coming in out to the autumn, we have seen that that momentum has leveled off. So we're talking about actually now flattening out of the demand in Europe.
And that is of course happening due to well known reasons both economic development and political and other things that are putting forward an uncertain development. How are we then trailing in an environment like this? And I would say that if we start with the Volvo and the Volvo brand and the Volvo ranges, we are seeing that the new ranges that we are launched is being taken onboard by customers in a very good way. And we see that both in terms of the market shares, the customer acceptance, the feedback we're getting from the customers, but also in terms of the way we then have price and price position the range in the different markets. We can also see it in the way that we now not only in Europe, but also elsewhere in the world launching the new Volvo range that it receive a very good positive reception.
On the Renault side, we are very proud and glad and we knew that we have put the best Renault truck range on the road ever with the new range that we have. And we're very proud that that's also recognized by the international community. And therefore, having this Renault trucks on the T range to be the international truck of the year is, of course, for us very good. However, we are still in a buildup phase on the Renault brand. And the order intake is slowly, slowly ramping up, but we are not there where we want to be it yet.
But I'm absolutely convinced that with that track, that feedback that we have in the Renault side, we will over time make sure that we're getting back get renewal back to the levels where we have been before. If we then look at the total market in Europe, we had a forecast of SEK 2 30 in 2014. We keep that forecast for this year. There are some downward pressure on that. But all in all, when we take all the different activities and the different information we have, that's where we believe the market will end up in.
And then if you look into 2015, we will then see this sideways moving in Europe as we see it today. That means that the market will be approximately the same. And please remember now that here we're talking about heavy duty market only. Moving then on to North America. I talked about this in the Q2 about the good momentum in North America.
It has continued during the Q3 both from a macroeconomic point of view in terms of confidence among our customer freight volumes and also the fact that we continue to see an increasing of the fleets rather than before more of a renewal of the fleets. We have been trailing very good in this market and I've talked to you many times about the profitability in North America and I'm happy to report that in the Q3 now we see a considerable improvement in the profitability in North America. And that's very good to see after all the hard work that has been done both on the pricing products, but also on the deal and equity side that we are now moving in definitely in the right directions in North America. With a book to bill to 127,000,000 and as you can see there 18,000 order intake and 14,000 deliveries, It is, of course, a market that we need to continue to balance between pricing and market shares. And that's something that we have and the North American organization has done in a very good way during the Q3 as well.
And the market shares, again, is moving in the right directions. When it comes to the market and the market forecast, we do increase from 260,000 to 70,000 this year and we see that this positive momentum is actually carrying into also into 2015 where we're then calling it a 280,000 market on the heavy duty side. Moving then on to South America. The story remains. We have seen that for a pretty long time now with weaker economies in the mining.
We also see that in Brazil. We see uncertainty also because of elections coming out. And that has given, as we talked about in the Q2, the situation with the industrial overcapacity and thereby also inventory situation and price pressure. And that continued also into the Q3. However, I think we're trailing rather good in this market.
It's not an easy market to navigate in right now, but I think that the Brazilian team is doing an excellent job in making sure that we balance between the market shares and the pricing and making sure also that we continue to have Brazil as a very important market in terms of size and volumes, but also in terms of profitability. And we can see that we keep the market shares in a good way. We look at the market in totality, we have this 90,000 market and that is, as we have talked about before, not a bad market in terms of size. It has been more of an adaption in the market size coming from the CHF 104 down to CHF90. But we then see with the uncertainty that we now have that we are looking on a little bit of down pressure on that volume and we're now calling next year's market around 85,000 units.
Moving then to Asia and Asia Pacific. There we definitely have a mixed market development. Japan is continuing. The demand in Japan continue to increase and we also upped up the forecast for next year slightly, which is I think a sign of that the economics are moving in the right direction. And the market we have is driven very much from the construction side and we should remember also to some extent still reconstruction side from the tsunami and so on.
Whereas moving outside Japan, you see in Southeast Asia, you definitely have a slow demand. And we see now in India that we see a recovery after the elections coming in, a much more positive sentiment in India. And as you can see also moving from this year's forecast into next year, we do increase the numbers because we see this positive trend going forward. If we then look at the Construction Equipment, I would say that we have continued we talked a lot about China in the last quarter and the China story is still definitely there. And we see that the decline that we saw in the Q2 continue and accelerated also into the Q3 per se, meaning that we also see now that this decline will continue throughout this year.
That means also that we continue to have the issues about inventories, dealers and the whole system in China is still there. And I mean I can only repeat what I said in the Q2. This is not a quick fix. We will have this issue over the quarters to come before the system has come into an equilibrium again or a balance between demand and supply. North America on the other hand is good demand.
It's also driven very much with the same aspect as we have seen on the truck side. And as we see on the truck side, Europe was on a positive move the first half year also for Construction Equipment, but then again is flattening off and getting more leveled level in Europe as well. And within Construction Equipment, we do see now coming into the 4th one of the initiatives that I talked about in the beginning regarding structural cost savings is regarding construction equipment where we now take a look at the structural cost, but also looking into the product profitability in the range that we have in Volvo CE. I will come back to that a little bit later. And you see here the total market forecast where we then see that China again going into 2015.
We forecast now that the drop will continue into 2015 as well. Looking at buses, mixed picture there as well. Again, it's a little bit of repetition. North America and the city buses and also the coaches are looking quite well, whereas you have again the uncertainty coming into Europe, which then put delays on the city tender, in particular the city tender for the city buses, we see a delay on those one. I think it's very interesting to see and good to see that the buses now really take inroads into for quarter by quarter taking inroads on the electrification on the hybrid side, on the plug in hybrid.
And what you see now is the 7900 electric plug in hybrid, which is a vehicle, a bus that actually saves up to 80% of the fuel and run most of the time on electrical. And we are going to have this up and running in commercial operations by next summer in Gothenburg. On the Penta side, maneuvering in a very difficult market situation both on the marine side, but also on the industrial side where the markets are not recovering. They are still weak. But Penta really makes it good in terms of capturing new customer and new customer segments within both the marine side in terms of sizes where they move into the IPS side and with the new engine technology on the industrial side.
So Penta has done a very good job in actually maneuvering in a rather slow and low market situation and also generating, as you have seen and we'll see later on, very good profitability based on that. So if we then summarize this first part about the markets, I would say that in general you can say that the trends that we talked about in the Q2 continues with a few exceptions. One is then that the positive momentum in Europe has leveled off. And on the Construction Equipment side that the China development is moving continue to move in the wrong directions. But if you add all this up in the Q3, you can see that we have a good development in North America and also some in Europe, whereas you can see the South America, Asia and other markets are declining giving us an increase from €65,000,000,000 to €67,000,000,000 in the quarter.
We should also remember that looking at units, it's rather flat. A lot of this is driven by currency changes. So that also reinstates the fact that we are looking at the world economy that is rather flattish in terms of development from quarter over quarter. I will come back a little bit later and talk about some other issues. But right now, I think it's time to look at the numbers, Jan.
So why don't you come up here? I'll take my coffee and I'll move over to that side.
I'll take a coffee break.
I'll take a coffee break, yes.
There you go. So good morning. So starting the results then. And I think it's quite rewarding to see that when it comes to the profit improvement that we have of SEK 2,500,000,000 up to SEK 2,900,000,000 but it actually comes fairly much across all the business areas within the group. You can see here also that we have a negative what we call in corporate and other and that's where we have the court case that we lost in the United States related to the EPA that amounts to something like SEK422 1,000,000.
But apart from that, as you see improvements all over the line. One can also look upon the FX effect is SEK 4.85 positive external factor influence us. And if you then take the litigation, which cost us more or less the same amount, you can see that there is an underlying profit improvement if we take out this if you call it one time or all external factors that we have in the Q3. Then breaking it down to the different kind of effects it has on the P and L. We can see that going from the SEK 2,500,000,000 we had a non recurring item in the Q3 last year was related to sales of a VC dealer.
We had the EPA litigation negatively. We are still kind of struggling in our P and L with the capitalization, amortization. That is not over yet. As we said before, that will gradually go away and it will be more or less over in when we come into 2015. If you look upon the other side, we have the gross income.
Of course, the gross income improvement is to a large extent affected by the currency. That's where you find it to the largest extent. Otherwise, when we come to the different cost items like cash R and D, selling and admin now start to give an effect in our P and L with actually cost reduction on all these items. Maybe a little bit of a reminder when we talk about currencies, here you have a negative currency effect because a lot of the costs especially in selling expenses are actually outside of Sweden. So the underlying improvement is slightly better than what we see here.
But going forward, our task is actually to see too that it comes down regardless of currencies. Looking into what kind of lifts the whole the result is actually the price realization that we have seen on the new ranges, meaning a better gross margin. I think that has been a theme now for both the first, second and we see that continue in the 3rd quarter as well. As I talked about before, the selling expenses coming down. Olof mentioned the North American truck situation with the volumes and also increased margins coming through there.
It helps the results quite a bit for us. We had the also in the Q3 a good aftermarket business as well compared to the Q3 last year. On the negative side, we had the EPLA litigation. But as you have noticed as well, we are actually in unit sales actually lower in the Q3 this year than we were in the last year, which means that the capacity utilization especially within CE and trucks was there. So we have a negative from that point of view.
And we're still as I said before fighting when it comes to the accounting treatments of our R and D capitalization and amortization. Turning into trucks going from SEK43 1,000,000,000 up to SEK45 1,000,000,000 in sales. Here as I said before, we have a negative unit sales of 5% approximately in trucks. It was 46,000 this year. Last year, it was 48.3 1,000 trucks.
So regardless of that, we have an increase in sales. It's not only the currency effect. Here you also see the price realization coming through, especially on the Volvo side in Europe and also on the Renault trucks which has a good price realization as well. So that lifts the sales figures for trucks. When it comes to EBIT, 1.9 to 2.2.
Of course, a big part of the currency effect is within Trucks being the biggest business area. And we then have the operating margin up to 4.9%. SEK 300,000,000 by coincidence exactly SEK 300,000,000 in profit improvement. And you recognize some of the things that they had on the previous slide when it comes to improvements. Of course, Synstruct is such a big part of the group.
But we had the price realization North America aftermarket coming through and reduction in OpEx. And on the negative side, once again, one should not forget, when we measure year over year, although Latin America is a good market still for us profitability wise, it's lower this year compared to last year. It's same as we had in the Q2 and that continues in the Q3 as well. And then we have the capacity utilization as I mentioned before. Turning into CE and here you have exactly the same pattern.
In terms of unit sales, we are down 11%. And despite that you can see that we are flowing from SEK 12,000,000,000 up to SEK 13,000,000,000. A good product mix in the quarter, which affects sales, but also the operating income. And we also have a currency effect coming in here as well. CE has a currency exposure U.
S. Dollar Swedish krona but we also have an exposure when it comes to U. S. Dollar to the Korean won since we have a big production facility in Korea. Profitability wise going from the SEK496 1,000,000 up to SEK648 1,000,000 I think it's worth to mentioning here that we have the seasonality within CE, which means that the Q4 is seasonally the weakest quarter in this.
You can see it clearly on this graph. And then we see that the margin comes from 4% up to 5.1%. What is kind then making this the difference from €500,000,000 up to €648,000,000 in the Q3 for CE? It's the currency effect quite big €125,000,000 And we have the positive product mix especially in Europe coming through as well. On the negative side, we have China.
We should not forget that one. Quarter over quarter it affects quite a bit and the low capacity utilization that we have in CE and that will continue into the Q4 as well. And last year, we had this one time effect of the sales of the dealer in CE. Buses actually coming up in here we have actually higher unit sales compared to what we had in the last year also good product mix and also helped by the currency, which means that we have a sales figure that comes up with actually close to 25%, I think it's 23%. Here we have a good mix in our in what we are selling and also the aftermarket has been quite strong in buses as well.
I think it's quite rewarding to see now that the 12 month rolling now is on a positive for buses. I mean coming with a €200,000,000 profit improvement from last year. And I think we see a solid trend when it comes to the profit improvements in buses. And I think that's quite rewarding for us and also for the bus organization. Then we have I don't know if it's the kind of star that we tend to forget within the Volvo Group Volvo Penta being quite good in sales this year actually an improvement of 12%, but having an EBIT margin in the quarter close to 13%, which is I think is very, very good having then good mix effects and also good aftermarket in Penta, I think this is quite good to see that we have this nice little entity.
Customer Finance, I would say customer finance is now kind of back on track. We have had some disturbances. If we start in the Q3 last year, quite low result that was affected by some non performing loans in Spain. We had some issues regarding accounting treatments in Germany beginning of this year. Now everything of that is good.
So this is you can say a good solid underlying result that we expect to see going forward in customer finance. And we do not see any kind of disturbances or anything like that when it comes to the credit portfolio and the credit quality in the portfolio. Record volumes and I think a solid good return on equity as well. The cash flow, I think this is the 3rd time in 15 years that we a positive cash flow in the Q3. 3rd quarter season wise is always a weak quarter due to the fact that you come into the basically the vacation season in many of the markets in the world.
What is the underlying reasons for the positive cash flow is that we actually of course that the profitability is there underlying, but then we have actually a fairly good situation when it comes to the investments in power plants and equipment. You can see it's down to 1.4% compared to 2.1%. We have been through this you can say fairly heavy investment phase in mainly in products the last couple of years, but also to some extent in investments. And that is now kind of coming down to a more, I would say, normalized level what we see here. And then we managed quite well on the working capital side as well compared to what we've done in previous year.
You can see that accounts receivable contributed quite well. But I think the big surprise really is the trade payables, which usually is much, much more negative in the Q3 than what we have in this quarter. So quite good improvement. Here we need to stick to especially the working capital to continue to work with that one. On the investment side, I'm quite satisfied.
I think we have still room for improvement on the working capital more in the long term that there is actually room for improvement. How do we then work or how does it how do we develop when it comes to our you can say cost reduction programs and reduction programs. White color, the 4,400 program that's running right now is actually going according to plan a little bit better than plan. In the Q3, almost 1,000 people left the organization as planned mainly related to our voluntary leave programs in Sweden. Coming up now towards the year end, we will have the social plan in France being actually then the end of that one.
It goes according to plan. So we see people leaving due to that and also the 2nd career plan that we are running in Japan as well. So as we have said before, the majority of these 4,400 will have left the company when we leave 2014. Looking into the cost reductions that we have done, you can see here selling expenses, admin expenses and also the cash R and D expenses, the trend has been broken. I also think from our point of view since there's a lot of hard work in the organization, a lot of activities taking place, I think it's also from our point of view start to become quite rewarding to see that it gradually comes into our P and L.
And you can see that with the trend that's been increasing during the course of the year coming from the €250,000,000 in the first quarter into the SEK 300,000,000 a little bit more than SEK 300,000,000 in the second quarter sorry SEK 500,000,000 in in the second quarter and close to NOK 800,000,000 in the 3rd quarter. All in all, we talk about close to NOK 1,700,000,000 in this year. Are we happy with that? No, we will continue to work very hard to this one and continue to see that the trend is going in this direction.
With that, I leave the word back to you Olof. We ship prices again. Yes. Thank you very much, John. And I think sometimes it's good also to step back and look at it from what we're doing from a little bit of a higher perspective and long term perspective.
And I would like to remind you that we are in the midst of and by the half year end in June 30th, we were halfway through the strategic program. And now we are on the home stretch sort of say. But this is the year of where we should drive efficiency and cost reduction. Therefore, it is, as Jan said, very rewarding, good to see that we are now seeing those results coming in for the company in total and all the people that worked so hard in order to get it happen. And then of course, we're then moving into the 2015 with the activities that we have then taking the step into increased profitability from 2016 and onwards.
And the basis for these are, of course, the enormous amount of activities and tasks that we're doing. And all the decisions, I've talked to you about that before, has been taking around this And they are now under execution. And we are, as I said, also open to and we look all the time and we learn as we walk this journey where we see and where we find new activities that we can address. And in this particular quarter, we then have said that we are looking into 3 activities. 1 is on as I mentioned before on the construction equipment side to see now both the structural cost level in sea given the situation they are in, but also looking at the product portfolio and the product profitability.
And this is a work that is ongoing and will be presented during the Q4 from CE. We are also announcing today that we are reorganization or reorganize the truck sales organization. Before we had 3 global 3 regions, each with 1 headquarter. We are now merging those 3 into 1 sales organization, 1 global truck sales. And we do that because we have seen that and I mentioned that a number of times, we haven't seen really the traction in the cost savings when it comes to selling.
We have seen it coming off from the launch cost, but the underlying savings we have not seen that really coming through. So that's one reason. But the most important reason is we also see that we with this organization would come closer to the customers. We will take out layers in between the customer and the global organization and we will be faster and more agile into the marketplace giving the tools to the salespeople that are more efficient and better in that. So that is something that we're looking into.
And we will then work much more efficient around the whole sales process by having this as one global organization. That also means that we have a very homogeneous picture in the group tracks organization. We have a global sales, global engineering and a global operation. And also combined with that we are now reducing the group executive management team from 16% to 10% means also that we get more tighter team and a more focused team driving the changes that we need to do now going ahead on this. And then finally, we also said that we are initiating a review on our IT operations and really look into what is it that is core and what is that is non core in those activities.
And we have been doing that in many areas. As you know, we have been quite open to looking into the different aspects of core and non core. And I think it's important driving the focus we have and need to have in the organization that we really push to make sure that we are excellent in our core business and let someone else that is perhaps doing more efficiently do other things. This is a review. There is no conclusions and we will see what comes out of it.
And the review, we believe or not believe, it will be finalized latest in the Q1 next year. Now looking at the profit improvement program and the changes that we're going to do in the reporting and in the follow-up externally. If we take a look at the profit improvement program that we have and that is on the left side of the chart, you can see and you are well aware of all the activities we're doing. And if you look at it, it consists of 2 types. One type is the improvement that is coming based on volume, products mix, market mix and customer mix.
And then you have the other profit improvement types, which are more the structural costs, which are volume independent, market independent. Those are the costs that we basically monitor and manage ourselves in order to improve the profitability. And communicating around a profit improvement program is not so easy because you have those different types. You have the dependencies on volume and market and product mix. And therefore, we have decided to simplify the reporting.
And in the future, we will only looking at the structural cost, the cost that we can monitor, the cost that we can completely influence. And that will be a simplification in the external follow-up of the program. I want to make very clear though that internally the profit improvement program will continue as before because this is a fundamental piece in our transformation journey. So internally, we will follow-up on all these issues as we have done before. But externally, in order to simplify, we will then look at the structural cost per se.
And if we then take a look at the numbers, we can conclude that within the profit improvement program, if you look at all the lines and everywhere, we then have SEK 6,500,000,000 which are ongoing structural costs reduction initiatives, initiatives that are volume independent, initiatives that are ongoing as we speak. The new initiatives that we have I described before plus other activities that we're doing add SEK 3,500,000,000 to that. And those SEK 3,500,000,000 are then again volume independent structural cost savings, leading up to a sorry, leading up to a SEK 10,000,000,000 cost saving target for the group. Now all these activities for the 20 15 activities should be implemented by end of 2015. So all activities around the SEK 10,000,000,000 should be fully implemented by the end of 2015, leading to a full year effect.
The first full year effect will be 2016 for all the activities. It will be then reported quarterly and Jan will come back to the format we're going to report it. All the costs are on the base on a full year 2012 and that's the way we're going to follow it. And again, I would like to stress with these are the fixed numbers. The numbers are not influenced by any volume market or product mix going forward.
So with this, we then simplify the external follow-up of the profit improvement program. And Jan, you might want perhaps to say a few words around
the So I think it will be pretty easy to follow this going forward. You basically as you know a lot of the activities that we are doing that we then define as the structural cost reduction you will find easily within our P and L. And that's the 3 bottom lines here. It's the cash R and D, it is the selling expenses and it is the admin expenses. Easily to pick out of the P and L.
We have then what we call structural reductions also in our gross income. And that is mainly related to of course the industrial reduction structural changes that we are doing like the Japan plan, like the things we are doing in Europe right now when it comes to example taking the medium sized trucks into 1 factory in France for both the Volvo and Renault and so on. These are structural, but they show up in our gross income and they're quite sizable in amounts. But they are as Olav said before, they are volume independent. These ones will, of course, be a little bit tricky to read out of the P and L.
But we think it's important to highlight also these changes. Taking then the starting year 2012, the full year, which you should find in our P and L, we have the outcome in 2013. And as you can see, actually, it's only SEK 100,000,000 that we had in 2013. And there are still some cost items in 20 13 that actually are increasing. So we have a little bit from that point of view not maybe the perfect starting point.
But you can see here if you take the Q3 and make a rolling 4 quarters back, you can see that we are now on the phase of SEK 2,400,000,000 And this will then accumulate upwards. And as Olof said before, when we come to the whole year 2020, which we need the whole year 2016, you will see SEK10 1,000,000,000 in savings from these four lines coming through. As it's important to notice, it's not so that they will be implemented in 2016, They will be implemented in 2015. So it's not that we kind of go into 2016 with activities or anything like that. But to be able to measure it, it is we need
a whole year 2016. Okay. Very good. Then to summarize the 3rd quarter, I think that it's clear to say that even though we see an improvement in the profitability, the profitability level is not where we need it to be in order to reach the targets we want to have. And it's clear that we have a lot of hard work ahead of us still.
It's good to see that the hard work that the organization has put in, in terms of cost rationalization and cost savings start to show result now. And I see this quarter as a small but very solid step in the journey to create a profitability for the Volvo Group that is among the best in the industry. So with that, I think we conclude the presentation and start with questions.
Thank you very much, Olar. Thank you, Jan. You all know this is a webcast event, so please use microphones. And we will start with the gentleman over here.
Anders Engel, Handelsbanken. I have three questions if I may. Coming back to this cost savings program, earlier you have talked about a headwind factor. My question is related to is the headwind factor more on the synergy side on the revenues? Or have you built in a headwind factor also in this SEK 3,500,000,000 cost takeout?
Second question is on Renault. The order intake during the quarter, if you would strip out France from that number, is 11% drop? Or is it more broadly spread the drop in orders? And the last one is on Volvo. If you could maybe talk a little bit about where you're gaining market share in Europe?
Thanks.
I can start with the headwind. There are no headwinds in the SEK 6,500,000,000. It's SEK 6,500,000,000 sharp plus SEK 3,500,000,000 makes sense.
Okay. When it comes to the Renault, I would say that the drop is it depends how you see it. It is a drop, yes. And now it's a phase of building up. And when I look at it, it is in France, of course, due to the market per se, but we also see this generally in Europe that we are in a buildup phase.
And we have certain markets that we focus on particular and we start to build that up and then we take the next one. So we are in that phase right now. But it's not only France. We see it also elsewhere. Well, on the Volvo side, there are and I'm looking at Christi, but that's official data, I guess, or so we can talk about it.
I mean we see the increases in Germany. We have seen increases in Spain. In general, you can say that with different sizes, we are maintaining or gaining the market shares when we come in with a new product in the markets. And so we're very pleased with that.
Thank you.
Hi. Fredrik Stahl from UBS. I'll start with I have 3 questions as well. One question for you Jan on the cash flow. So Q3 was better than normal.
Should we then expect a more even cash flow profile over the coming quarters slightly lower seasonality in the Q4 for example?
No, I think no, no the Q4 is actually always a strong cash flow quarter and that is what we anticipate season wise it will be this year as well.
And then I had a question on China. You have a very lean organization in Construction Equipment in China from what I've seen down there. What's the scope for you to cut costs as the market drops? That's question number 1. And then on the aftermarket mix, I haven't seen this with Volvo or other truck companies, but I've seen it elsewhere in the among the stocks that I cover where you have a good quarter aftermarket wise.
And then a few quarters later it disappears and margins disappoint again. Have you seen is it unusual is good in terms of aftermarket the Q3 here? You mentioned it a few times during the presentation.
I think in terms of the cost structure in Sea and China, I would say that we are looking at finding whatever cost we can in terms of the situation we have. But the really important issue in China is more about production and the inventory situation. That is absolutely the crucial thing in a situation like this. And then we do have a lean organization, but as you know as well, there's always things you can do and those things we're looking at. But the key issue is in China is definitely the balancing between the demand.
And that means also then with very low production volumes, of course, in China with the situation there is now to make sure that we keep a balance. In the aftermarket, that's an interesting question and I haven't thought about it in that way actually. But I would say it was a good aftermarket quarter. We are doing a lot of activities when it comes to the aftermarket and improving the aftermarket not only in terms of spare parts sales, but also looking at it as more of an integrated part in the deal when we do a deal. And that we have done for many, many years.
And there might be a portion of that as well coming more structural. But I think I don't want to speculate in the future how the aftermarket is going to go. I can only conclude that it was a good aftermarket quarter this quarter. Christer Magnegard from DNB. When you presented a SEK 9,000,000,000 profit improvement program in 2012, some got a bit carried away and modeled quite aggressive cost savings in 2013 2014.
To avoid those kind of issues now, what's the distribution roughly on the cost savings here in 2015 2016?
I think I mean, we are standing right now in what was it SEK 2,300,000,000 so far accumulated savings. But you also saw the trend during the course of this year coming gradually building up. So I think we and you see also the reduction that we're doing on the white collar headcount and so on that will come through. I don't want to kind of go into details how much comes this year or each quarter. I think you would rather see quite steady improvement going forward than to see any kind of big shifts quarter over quarter.
That's very good. And then secondly, on the negative side in the quarter, you didn't really mention the production relocation in from Sweden to Belgium and from Belgium to France. Did that have any significant impact at all or?
No. I think the major thing when it comes to what I talked about the utilization of our factories that was related to volumes. I think the changes we did during the summertime and in connection with the vacation went very well actually. So no major disturbances in connection with that.
Hi. Anders Trapp, SEB. I wonder if you could talk a bit about the launch of the new Volvo FM sort of globally. I understand it's in Brazil now. We're starting now, I guess.
What do you expect from that in terms of what the risk is that the customers have it's impacting their ordering pattern, disturbing the normal trends and also basically the same for production challenges going over to new model.
I think when it comes to the we're very much looking forward actually to the introduction of the new FH in Brazil. And there are two reasons for that. One is that we do have an extremely strong position in terms of brands in Brazil. And this new product really is something that the customers are looking for. Then you can and we know it's going to be hard work and it's always hard work.
We need to make sure that we come in, in the right spot. We need to make sure that we have the right price policy and all of that. But we have done so many times now, so we're well aware how to do it. And we also should remember that the other introductions we have done, which has gone very well, has not been in a perfect marketplace, let's put it this way. So it's not that we are has been spoiled with excellent marketplaces when we're launching those and that has gone well anyhow.
So I'm full of confidence. We're reviewing the preparations and I'm confident, but it's going to be a lot of hard work going forward here. When it comes to the production, we do a Monday, Friday here. So we don't have double production in Brazil. And that means also that we're now ramping up and that's of course also a sort of a transition now between the old inventory wise out by the dealers and then building up the new ones.
So it's sort of a sliding in kind of scenario we're looking at here.
So you have been it's been on offer for a while then with customers in Brazil?
I don't know exactly if we have ordered the I don't think we have actually opened the order box. 2 weeks. 2 weeks. 2 weeks, right.
All right.
I'll come back to that question later. I want also a bit an update on the expected currency impacts going forward. It was a big impact this quarter.
Yes. If you I mean the Q4 last year you had I mean the fairly strong Swedish krona and so on. If this continue will this continue or if the levels we see right now continues in the 4th quarter you will of course see positive currency effects also in the Q4 year
over year. I guess accelerating compared to Q3.
That's difficult to say exactly where it ends up.
Okay. On the SEK 10,000,000,000 total structural savings target and the 4 different lines, I would guess the gross income would be the most important one. Is that correct?
We will see as time goes by which one will be the biggest. There might be a little bit of a competition between the lines as well, so see who wins the race.
One final thing on pricing
in sorry in Construction Equipment
in the key regions what is the development?
I think the if you look at it with the different or basically the China is of course a tough one. That goes without saying with the situation we have. In North America, a better pricing, but and in Europe, it was on a positive trend now leveling off also on that. It goes very much hand in hand. But what's important, I think, with CE during this quarter in particular was actually not that.
It was actually the mix, the product mix, where you then come in with larger machines in particular. The larger machines has been also larger margins. So it's in sea, it's a mixed bag really when it comes to that. But generally pricing is not easy.
All right. Anyone else?
Thank you. Yes.
Looking at the Bjorny and Aslan Landscher Bank. Sorry. Looking at the margin in a year on year perspective, we have the savings and FX, but you also have the mix between aftermarket and equipment. Can you give some clarity on the aftermarket part, how much that impacted margins in a year on year perspective? And then second question is on Renault.
Obviously, you have a great track out there. And you are, I guess, as I understand, trying to get it into a new price point, are you meeting new competition? Or are you changing the renewal where it stands in the market?
When it comes to the aftermarket side, I think it's sort of the reason why it's up on the slide is that it's substantial enough to get to the slide because we have hundreds of pluses and minuses and we select the ones. But I don't think we will sort of go into more detail on that when it comes to how much it is. When it comes to the renewal and the price point and Jan mentioned that with the gross margin and the price realization on the Renault truck, we actually and I'm quite satisfied with that. We have managed to get Renault into a price point where we see the improvements in the gross margin. So that one is very important.
Now with the Renault and the new competition, I don't see it being mainly a new competition, triangle when you do a deal. You have the price and the price realization. You have, of course, also the financing part of it that has to be competitive. And you have then the maintenance. And that package is something that we work very much with now in order to make that as attractive as possible going forward and making sure that you're now starting to continue to increase the order intake and on a high level.
So it's about getting the big fleet accepting the package in when it comes to aftermarket? Small fleets, single
owners, but of course that is a part of it. And what we have done very much now is that we have used seed orders. We're selling in smaller parts in the fleets to make sure that we get the truck out that they can really see how good it is. And then from that on, we start to build the order intake going forward. And it's a huge amount of hard work ahead of us definitely, But we have the basis.
We have the track. We have the quality. We have the features. And that's what makes me comfortable that over time we will fix the and the market will come.
Thanks. Anders Henningergaard, follow-up questions. On this incremental cost takeout program of SEK 3,500,000,000 Does this mean that you will have more work on the cost side for next year, I. E. If you would compare 2015 to 2014 before 2014 would be the likely big cost takeout year and 2015 would be cleaner.
But will you see more intense work in 2015 on the back of this?
I think when it comes to I mean the 3 major parts of the new NOK 3,500,000,000 that we mentioned here that is not implemented yet. And that we, of course, will have to do very quickly now going forward. And I think you will see gradually how that start should be kicked in and implemented. And then of course, the sooner we do it, the better to have the effect in 2015. But that's also I would say all activities needs to be implemented end of 2015 to get the full year effect on 2016.
But you will see that gradually coming through I guess in different ways when we actually take the actions.
Just filling on to that on the 6.5, the ones that are ongoing those activities are of course already decided ongoing and their activities are on plan.
Kjell Natoli Onsen at Carnegie. After 2015 when we implemented all this, maybe your profitability is still not top class in the industry. So would you consider continue to cut costs also for in the next phase of the company development?
I think the and it is our responsibility to make sure that whenever now in this journey and this transformation is huge and you don't have all the answers in the beginning and you learn as you go along. And you're going to find things during this journey where we can do better, more efficient. And of course, we will do that. We will implement those kind of things as we go along. So I think this is something that would be on our radar screen continues.
But now we have framed the activities and we are following it up in a very straightforward way. The organization knows exactly what it's about when it comes to this part. And I want to stress again then that when it comes to the gross margin improvement side, all those activities are running with full steam as we have had before internally.
Maybe to add from my side there, I think we need to have because what we have seen is that our cost base is wrong and that's what we are working now with different measures to take down. And as Olof said, I mean, of course, if we find new things to do, we will do that as well. And then when we come into maybe more normal state, we will have to continue to work with efficiency and productivity not only in blue color, but also in white color administration. So it's kind of an ongoing work. That's also a shift that we need to take into the company.
I think the next challenge is maybe some years away. That will be when the market starts to come back and that's to keep the structural cost on this level, because there's always a tendency in an organization to when things go better to start to increase it. And that I think will be our second challenge. But that we'll take where we come there.
Hi. Fredrik from UBS again. Could you maybe comment on the market development in Germany, Holland and the U. K? Cyclo Biena, so specific.
It is specific. Any specific part in Holland or Holland in general?
Around Amsterdam.
I think if we take Germany, I mean, we saw and that's very much in line with the development in Europe. We saw of course Germany as well on a positive trajectory not huge, but still during the first half year and again coming into a more flattening out kind of situation with an increased uncertainty due to the surrounding happening study that are ongoing. When it comes to U. K, I would say that activity level is good, has been. We had the pre buy in U.
K, of course. We had a little bit of buy. The activity level in U. K, I consider to be good. And there we have also 2 very good offerings with the Renault, which is a strong market for Renault and also the Volvo side of that.
In Holland, I must say I don't have the latest update to be and I'm looking at here if you have any specific. I haven't heard any major negative or positive. So I guess we can by that conclude that it's flattish.
Hans Seignil again, Hans Banken. Coming back to your financial targets, and this might be a little bit academic question. But with Skane leaving the peer group and you have headed for being 2nd best in terms of profitability, You're stepping up your program now. Does this mean that you're aiming to be best in this new peer group?
We have a target from our Board to be number 1 or number 2. So it's that is very important, number 1 or number 2. And that target is there in front of our eyes. That is what we are driving for. And that's why we're doing all these things.
And that's something that's still there and there's nothing changed and we are fighting for reaching out. All right.
It's time to move over to you participating over the phone. Operator, please go ahead.
We have a question from Mr. Alexander White from JPMorgan. Please go ahead.
Yeah. Good I'll just take them one at a time, please. The first one was a bit of a clarification or a follow-up from earlier in the call. I think you said that there were no headwinds
in the
€10,000,000,000 number. By that, do you mean that it is a gross number? Or is it a number that is net of wage inflation, etcetera?
It will be €10,000,000,000 end of the day.
Net of wage inflation?
That is what you will read in our P and L. And of course, there is wage inflation and other things coming. We will deliver on the €10,000,000,000 2016 compared to 2015 what you can read in our P and L.
Okay. And then if I just look through the different I think it's a bit it's notable that you haven't really given an indication about where the SEK 10,000,000,000 comes from in terms of the different items. Is this can you help us understand the distribution a little bit there?
No. As I said before, we are not going to break it up into the different lines.
Okay. I mean before, I think the cash R and D number was around SEK 2,000,000,000. So 2 parts of the question. Is this still the case on the cash R and D? And I think before, it was sort of being offset by the lower amortization I'll say the higher amortization, the lower capitalization that we've been seeing.
So net net, it was not going to have an impact on the margin. Should we be expecting from the cash R and D line a neutral impact over the period?
No. We will always balance also cash R and D to the levels that we think we can afford for the company as well. So we will not go into any kind of details exactly where we'll see the different lines. I think there are room for improvement on all these lines from the levels that we are today.
You have higher amortization
and lower capitalization now. So if we look from 2012 through to the end of the program, will we actually see a margin improvement from the cash R and D elements? Or will we not because it's sort of a wash given the other elements?
As I said before, I think I focus very much on the cash R and D. That is what we can influence. The other thing is a bookkeeping effect that we unfortunately have. So what we have already seen we are taking down the cash R and D quite a bit. I don't think we are on a level yet where we think that is a correct level.
I think we will see further improvements on that level going forward. When it comes to the capitalization and amortization where we have had of course a lot of positive things the years 2012 and into to some extent into 2013 then turning into big negative numbers. That is now year over year going away and you can see that that effect is already now 2014 compared to 2013 gradually going down. When we come into 2015 and measure that over 2014, there would be very, very limited effect from that.
Okay. Thanks. That's helpful. The second thing I wanted to ask about was pricing. A couple of your peers have talked about deteriorating pricing in Europe given the subdued sort of market that we've seen later in the summer.
I guess two parts of the question. Is it something that is this something that you see? And will that then impact profitability in Q4? Or would it be more of a Q1 issue if it's starting to come through now?
I think it's very difficult to look at it from a sort of a helicopter view. In general, you can say and that's the guidance we give here is that when I look at the price realization we are getting on the new ranges we have with including the Euro 6 and the new features and the positioning we're doing of the truck, I'm pleased what I see there. And of course then it is a daily struggle. I mean, it's not a walk in the park and it's never been and will never be. So of course there is a lot of hard work that has to be done in order to keep on this level.
But so far so good I would say. And again coming back to also so we don't forget that even though it's not the volumes yet, but also on the Renault side I'm pleased with what I'm seeing so far.
Thanks. And the last thing was just the North American order intake. It looked a lot stronger than the industry. Just wondering if there's anything in there which was particularly one off. Were there any large orders?
Or what do you think was driving that?
I think it's a number of things. We have I mean it goes a little bit between the quarters as well in a market like this. So it's in North America with the products we have and the in North America with the products we have and the introductions we have done and the New Year models that we have come out with. And that drives, of course, the order intake as well. But then again, order intakes are coming a little bit in that one.
But I wouldn't say there are any major one offs in that.
Okay. Thanks very much for your answers.
May we have caller number 2? Do we have an operator who can arrange for caller number 2? Operator, do we have a second caller? We do not. We have technical problems.
True. Please move ahead.
Hello, Ms. Laura Lemke, please go ahead. Your line is open. Yeah. Good morning.
It's Laura from Morgan Stanley. I also have a couple of questions. Maybe we'll also take them one at a time. And the first one is on your cost savings plan. I mean, if I compare this with your initial target of €9,000,000,000 you've basically identified another SEK 1,000,000,000 of additional potential.
However, at the same time, your incremental restructuring charges are to SEK 2,000,000,000. Should we understand from this that your underlying net savings target is actually lower than it was previously? So that's my first question. And then the second one is on your cost savings that you've achieved so far. I mean initially you guided that you would achieve SEK 6,000,000,000 of cumulative savings by the end of 2014.
At the full year results, you said you had achieved SEK 2,000,000,000 and now you're saying you did €1,600,000,000 year to date, so €3,600,000,000 in total. But then on slide 27, you're saying you've achieved €2,400,000,000 out of the 10. So I'm a little bit confused of how we should think about the impact that the restructuring measures that you've taken so far have had on your results? And also how we should think about the timing of the gap between the targeted €10,000,000,000 savings and the SEK 2,400,000,000 that you've done so far? Thank you.
Okay. I think to repeat a little bit what we said before. In the existing program, we have identified out of that total amount that we had there SEK6.5 billion is what we see is structural cost savings. We now add on another SEK3.5 billion to come to structural cost savings of SEK10 1,000,000,000. By doing that, we also see that we need that the restructuring charges will be slightly higher compared to before.
We earlier had said that we had SEK5 1,000,000,000. We are now increasing that to somewhere between SEK6 1,000,000,000 and SEK7 1,000,000,000 and that is then for the whole SEK10 1,000,000,000 in structural restructuring charges. The rest of the program which is then as Olof mentioned before, there we have different kind of margin improvement activities like taking down the material cost, like working with pricing and a lot of other things. They are still there. It's only that it's so difficult to show that in a transparent way.
We will deliver on them as well and work very hard on that one. But it gets mixed up in the external reporting when it comes to market mixes and margin effects on other things. So they are still there. So that's why we now in our external follow-up focus on the external. So it is actually an additional 3.5 compared to where we had before.
And they will come then. As I said, we are picking up steam now when it comes to the cost restructuring. We are at a 2.4%. They will kick in gradually now for the rest of the 2014 and up to 2015. Having been implemented at the end of 2015 with a full year effect 2016.
Okay. And can I maybe follow-up on this? So can you give us a bit of a timeline for the SEK 7,600,000,000? I mean how much of that are we going to see in 2014, 2015 2016? Now I think you did something similar with the old plan where you gave a bit of a cumulative target.
No. We will not do that. As I said now, we are at a 2.4. We are picking up speed and it will come through gradually or it must come through with actually an increased speed into our P and L to be able to reach the SEK10 1,000,000,000. But you need to remember that the 1st year that you will see the full effect of the SEK 10,000,000,000 measurable in our P and L is the full year 2016.
But that will be implemented, so we will be on the level already at the end of 2015.
Okay. Okay. Great. And then maybe just to follow-up on the question from Alex regarding the cost savings in the P and L. I mean, you mentioned that you don't want to break down the individual cost items, but I guess some of that cost reduction will also be in your COGS.
And obviously, the COGS include a lot of other cost items as well. So how as outsiders can we really track how much you're achieving? I appreciate that obviously the other cost items will be visible.
In the cost of sales I. E. Then in the gross margin the first line there we will then break out that and follow that on a separate line in the external follow-up of our program. But then of course the rest of the activities that we are doing like I mentioned before the reductions of the material costs and so on they will then also show up in our gross income. We will just not separate the other things that are there.
We will take out the structure cost as one separate item.
Okay. Okay. And maybe one last unrelated general question. I mean there has been a lot of talk about potential divestments of the bus business and more recently also VCE. So I was just wondering is this something that you could ever envisage doing?
I mean when it comes to the structure of the Volvo Group, I've been very clear saying that what we're looking at now is a a structure of the group, which I think is good. We have divested Volvo Air. We have divested Volvo Rents. We are looking at a group that we're now working very hard to increase the profitability. We are taking extra measures now in VC for instance to address some of the structural issues and also some of the product issue And we're going to continue that.
And we do also a lot of things on the bus side. So the focus from me, from our management team, from the whole organization is to take this work with what we have now and make sure that we are delivering on the plans that we have going forward.
Okay. That's great. Many thanks. Our next question comes from Mr. Colin Gibson from HSBC.
Please go ahead.
Yeah. Thanks very much indeed. Good morning everybody. So I just want to go back on a couple of questions asked so far. So just to be very clear then and this is a question for Jan.
You had previously said, I remember the answer, that you were on track and that you had taken out DKK 2,000,000,000 of cost in 2013. You're now saying on Slide 27, you took out DKK 100,000,000 of cost in 2013. Is the difference between SEK 2,000,000,000 and SEK 100,000,000 just the changed accounting that we're only now looking at structural and not looking at all cost savings. Is that the difference? Or is there some other difference between €2,000,000,000 €100,000,000 for 2013?
That's my first question.
The yes, you have different effects. One is that you follow the I think you referred to the curve actually and that is now what we are walking away from. The SEK100 1,000,000 in 2013 is related to what we now define as structural cost savings. The other things that you saw on the curve that was shown 1 year ago is of course a combination of structural cost saving, but also then different kind of gross profit improvement activities that we had. And they we are now kind of not reporting separately.
Okay. Got it. Thank you. My next question then going back to your slide 27 is you include cash R and D on structural cost reductions. Now if I think about trucks, I'm not sure I see much scope for structural reductions in what is what has been a high R and D burden for many years and looks set to be a high R and D burden going forward.
You have the electrification of the powertrain, which won't be cheap. You have autonomous or at least semi autonomous vehicles, which won't be cheap. So tell me why you think there's going to be a structural reduction in R and D in the years going forward in trucks? Thank you.
There is a if you look at it from a strategic point of view when it comes to how we do R and D and how we are focusing the R and D and also how we allocate R and D into different areas. You will have pockets where you have absolute need to do. You will have pockets which is ambitions to do and you have some pockets that is something that you might want to do. And this is the change now we're looking at again we're talking about focus to group. And within the structural changes in R and D that lies very much also to make sure that we focus the R and D.
And so that really comes into line with the development of the group as well. And there I see the biggest change going forward. But then again, I mean, we're not talking about CR and D. We will invest in new technology. We will invest in doing it.
On top of that, you also have an efficiency part of that. And we have been talking about that a lot over the last years. I truly believe that we still have improvements to be done in how we actually perform our R and D in terms of efficiency. So we get the most R and D out of every krona, dollar or euro that we invest. And there we still have a way to go.
Okay. Thank you. And then one last question please from my side and that is just want to go back on the question that Anders tried to ask you earlier and that is the product changeover in LatAm from Q4 onwards. And obviously, we saw you take a lot of cost in 2013 on product changeover in Europe. Can you give us any guidance on how much the product changeover in South America will hit trucks profitability in Q4 or Q1 or indeed any later than Q1?
I think I don't think we will give you any guidance on that. But in general, you can say that we are a learning organization and this is now the not the first time we do this transfer. But we have, of course, a lot of experience from the changeover in Europe when it comes to tooling. When it comes to spare parts, we have a whole setup of distribution and sub supply structure in place already. So my view on this is that it will go much simpler and much swifter than we have seen before.
And there is a big, big difference and that is that we don't have the dual or double production. And that's also something that helps a lot.
Okay. Thank you.
Our last question comes from Mr. Fraser Hill from Bank of America. Please go ahead.
Hi. Thanks very much for taking my call. Fraser Hill from Bank of America. I just want to really try and pull this together for 2015. If you look at what you're saying and I wouldn't wildly disagree, do you really see any volume growth in your truck or your construction market in 2015 on the main if you pull that together I think looking at your regional mix.
So how much profit improvement do think you can do next year? I mean, you've currently got a level of expectations in the market of €19,000,000,000 So that's probably going to be €6,000,000,000 or so growth in profits. I guess that's all going to have to come from restructuring and that's the majority of the benefits that you have laid out here incrementally from this point. So how do you view that? How do you view that hurdle rate?
And how much profit growth do you think you can bring through?
I think we have given our forecast or estimate where we think the markets will be in 2015. And then of course we will secure that we have the right position when it comes to market shares and so on. We will continue to work with our pricing and we will work on the cost. And then we will see end of the day what it will take where it will take us. I think the important thing going forward is rather now that we focus on or continue to focus on the activities that we can influence ourselves.
And as I said that is of course the structural reduction program that we are running that will continue to kick in, in our P and L. But don't forget the other things that we have in our strategic program. Although that they might drown in other kind of margin situations or market mix situations and so on. But we are working extremely hard on becoming more efficient, having a better product cost and all these kind of items. So net net where that takes us next year, I haven't got a clue.
We will deliver on the things that we can influence. That I think is the most important thing.
Okay. And on the elements that maybe you can't influence, I mean pricing in your markets globally, I mean, I take on board your confidence about your own trucks in Europe. But how do you view pricing globally for trucks, globally for construction equipment in terms of elements that you can't take into control? What have you assumed for example in Chinese construction equipment, Brazilian trucks areas that the market looks tough? Do you think pricing will be a headwind?
Pricing is always tough. That's my experience. I've worked in the truck industry. It's never easy with pricing. And I think it's the same with Construction Equipment.
I think we have to see I mean what we see right now, yes, we have seen tougher pricing in Brazil this year. Yes, we have seen in China, for CE quite a tough environment as well. On the other hand, we have had a very good development of our new products. And I think I mean, it shows the strength of the group that when we come with our new product, they get well received in the market. We have managed to increase the prices, not only prices, actually margins as well.
So once again where that will leave us next year in an always tough environment, it's very difficult to predict actually. But it's never easy out there. It's never been easy. It will never be easy.
Okay. Thank you.
All right. Time is running up. Gentlemen and ladies, this is the end of the press conference. Thank you all for coming and see you again in 3 months' time. Thank you.
And thank you, Janan Olof.