Good morning everybody and welcome to this press conference covering the third quarter. On our stage today, we will have our President and CEO, Olof Persson, and our CFO, Jan Gurander. 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, Tina, and most welcome to all of you. If I should try to give you the highlights of the third quarter, I think the heading and the three bullet points on this slide gives a good inroad to that. We do see improved earnings in a mixed economic environment. We also see slow growth in many areas around the world, and we will come back to that a little bit later. It's also, I think, encouraging to see that we now really start to find 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. It's clear that a program like this, when you start it, you don't have all the answers.
We have, of course, also discussed that if we find something during the journey, that means that we can increase the efficiency, reduce the structural cost base, or other things that make us more competitive, we will do that. We're also launching today three new activities in that respect. If we look at it on a totality, we will come back to the numbers on the sales and operating margin coming up with a half a billion compared to last year. 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 situations. We have an order intake book-to-bill now on 110, but we are pretty well balanced with our demand and supply structure.
If we 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 now to the autumn, we have seen that that momentum has leveled off. We're talking about actually now a flattening out of the demand in Europe. 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? I would say that if we start with the Volvo brand and the Volvo ranges, we are seeing that the new ranges that we have launched is being taken on board by customers in a very good way.
We see that both in terms of the market shares, the customer acceptance, the feedback we're getting from the customer, also in terms of the way we then have priced 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. We're very proud that that's also recognized by the international community, therefore having this Renault Trucks T 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. The order intake is slowly ramping up, but we are not there where we want to be yet. I'm absolutely convinced that with that truck, that feedback that we have in the Renault side, we will over time make sure that we get Renault back to the levels where we have been before. If we then look at the total market in Europe, we had a forecast of 230 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. If you look into 2015, we will then see this sideways moving in Europe as we see today.
That means that the market will be approximately the same. 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 second quarter about the good momentum in North America. It has continued during the third quarter, both from a macroeconomic or economic point of view in terms of confidence among our customer freight volumes, 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, I've talked to you many times about the profitability in North America, I'm happy to report that in the third quarter now, we see a considerable improvement in the profitability in North America.
That's very good to see after all the hard work that has been done, both on the pricing products, also on the dealer network side, that we are now moving definitely in the right directions in North America. With a book-to-bill to 127, as you can see there, 18,000 were intake and 14,000 deliveries. It is, of course, a market that we need to continue to balance between pricing and market shares. That's something that we have and the North American organization has done in a very good way during the third quarter as well. 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 270,000 this year, and we see that this positive momentum is actually carrying also into 2015, where we are calling it a 280,000 market on the heavy-duty side. Moving on to South America. The story remains. We have seen then 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 up. That has given, as we talked about in the second quarter, the situation with the industrial overcapacity and thereby also inventory situation and price pressure, and that continued also into the third quarter. However, I think we are trailing rather good in this market. It is not an easy market to navigate in right now.
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. We can see that we keep the market shares in a good way. When 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 104,000 down to the 90,000. 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 are now calling next year's market around 85,000 units.
Moving to Asia and Asia Pacific. There we definitely have a mixed market development. Japan is continuing. The demand in Japan continued to increase, and we also upped up the forecast for next year slightly, which is, I think a sign that the economics are moving in the right direction. 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. We see now in India that we see a recovery after the elections coming in, a much more positive sentiment in India. 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 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. We see that the decline that we saw in the second quarter continue and accelerated also into the third quarter 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. I can only repeat what I said in the second quarter, 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, has good demand.
It's also driven very much with the same aspect as we have seen on the truck side. As we see on the trucks side, Europe was on a positive move the first half year also for Construction Equipment. Again, is flattening off and getting more level in Europe as well. Within Construction Equipment, we do see now coming into the fourth quarter that we need to take in order to make sure that we don't overproduce further production cuts in Q4. 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.
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 for quarter by quarter, taking inroads on the electrification, on the hybrid side, on the plug-in hybrid.
What you see now is the 7900 Electric Hybrid, which is a vehicle, a bus that actually saves up to 80% of the fuel and run most of the time on electrical. 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. Penta really makes it good in terms of capturing 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.
Penta is doing a very good job in actually maneuvering in a rather slow and low market situation and also generating, as you have seen and will see later on, very good profitability based on that. 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 second quarter continues with a few exceptions. One is that the positive momentum in Europe has leveled off, and on the Construction Equipment side, that the China development continue to move in the wrong directions. If you add all this up in the third quarter, 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 SEK 65 billion-SEK 67 billion in the quarter. We should also remember that looking at units, it's rather flat. A lot of this is driven by currency changes. 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, right now I think it's time to look at the numbers, Jan.
Yes.
Why don't you come up here? I'll take my coffee, and I move over to that side.
Okay. Take a coffee break.
I'll take a coffee break, yeah.
There you go. Good morning. Starting by the results, I think it's quite rewarding to see that when it comes to the profit improvement that we have of SEK two and a half billion up to SEK 2.9 billion, that 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, another, and that's where we have the court case that we lost in the U.S. related to the EPA. That amounts to something like SEK 422 million. Apart from that, as you see, improvements all over the line. One can also look upon the FX effect is SEK 485 million, positive external factor influence us.
If you take the litigation, which cost us more or less the same amount, you can see that there is an underlying profit improvement if you take out these, if you call it, one-timer or external factors that we have in the third quarter. Breaking it down into different kind of effects it has on the P&L. We can see that going from the SEK two and a half billion we had a non-recurring item in the third quarter last year was related to sales of a VCE dealer. We have the EPA litigation negatively. We are still kind of struggling in our P&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 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. When we come to the different cost items like COGS, R&D, selling, and admin, now start to give an effect in our P&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 cost, especially in selling expenses, are actually outside of Sweden. The underlying improvement is slightly better than what we see here. Going forward, our task is actually to see to that it comes down regardless of currencies. Looking into what kind of lifts 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 third quarter as well. 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 have also in the third quarter, a good aftermarket business as well compared to the third quarter last year. On the negative side, we have the EPA litigation. As you have noticed as well, we are actually in unit sales, actually lower in the third quarter this year than we were in the last year, which means that the capacity utilization, especially within CE and trucks, was there. We have a negative from that point of view.
We're still, as I said before, fighting when it comes to the accounting treatments of our R&D capitalization and amortization. Turning into trucks, going from SEK 43 billion up to SEK 45 billion 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 48,300 trucks. 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. That lifts the sales figures for trucks. When it comes to EBIT, SEK 1.9 billion to SEK 2.2 billion, of course, a big part of the currency effect is within trucks being the biggest business area.
We then have the operating margin up to 4.9%. SEK 300 million, by coincidence, exactly SEK 300 million in profit improvement. You recognize some of the things that they had on the previous slide when it comes to improvements, of course, since trucks is such a big part of the group. We had the price realization, North America, after market coming through, and a reduction in OpEx. 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 the same as well in the second quarter, and that continues in the third quarter as well. We have the capacity utilization, as I mentioned before. Turning into CE, here you have exactly the same pattern.
In terms of unit sales, we are down 11%. Despite that, you can see that we are going from SEK 12 billion up to SEK 13 billion. A good product mix in the quarter, which affects sales but also the operating income. We also have a currency effect coming in here as well. CE has a currency exposure, US dollar, SEK, but we also have an exposure when it comes to the US dollar to the Korean won, since we have a big production facility in Korea. Profitability-wise, going from SEK 496 million up to SEK 648 million. I think it's worth mentioning here that we have the seasonality within CE, which means that the fourth quarter is, season-wise, the weakest quarter in this. You can see it clearly on this graph. Then we see that the margin comes from 4% up to 5.1%.
What is making this difference from SEK 500 million up to SEK 648 million in the third quarter for CE, it's the currency effect, a quite big one at SEK 25 million. 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. The low capacity utilization that we have in CE, and that will continue into the fourth quarter as well. Last year, we had this one-time effect of the sales of a 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 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 only positive for buses. Coming with a SEK 200 million 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. We have, I don't know, 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 of close to 13%, which I think is 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, is now back on track. We have had some disturbances. If we start in the third quarter last year, quite low result that was affected by some non-performing loans in Spain. We had some issues regarding accounting treatments in Germany at the beginning of this year. Now everything of that is good. This is, you can say, a good solid underlying result that we expect to see going forward in customer finance. 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 third time in 15 years that we have a positive cash flow in the third quarter. Third quarter, season-wise, is always a weak quarter due to the fact that you come into basically the vacation season in many of the markets in the world. The underlying reasons for the positive cash flow is that we actually, of course, the profitability is there underlying, but then we have actually a fairly good situation when it comes to the investments in power plant and equipment. You can see it's down to SEK 1.4 compared to SEK 2.1. We have been through this, you can say, fairly heavy investment phase mainly in products the last couple of years, but also to some extent in investments. That is now coming down to a more, I would say, normalized level, what we see here.
We managed quite well on the working capital side as well compared to what we had done in previous year. Previous year, you can see that accounts receivable contributed quite well. I think the big surprise really is the trade payables, which usually is much more negative in the third quarter than what we have in this quarter. Quite a 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 do we develop when it comes to our, you can say, cost reduction programs and reduction programs?
White collar, the 4,400 program that is running right now is actually going according to plan, a little bit better than plan. In the third quarter, 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, we see people leaving due to that, and also the second career plan that we are running in Japan as well. 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&D expenses, the trend has been broken.
I also think from our point of view, since there is a lot of hard work in the organization, a lot of activities taking place, I think it also from our point of view, starts to become quite rewarding to see that it gradually comes into our P&L. You can see that it is a trend that has been increasing during the course of the year, coming from the SEK 250 million in the first quarter into the SEK 300 million, it will be more than SEK 300 million in the second quarter. Sorry, SEK 500 million in the second quarter, and close to SEK 800 million in the third quarter. All in all, we talk about close to SEK 1.7 billion 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.
By that, I leave the word back to you, Olof. We shift places again.
Yes. Thank you very much, Jan. I think sometimes it is good also to go step back and look at it from what we are doing from a little bit of a higher perspective and long-term perspective. I would like to remind you that we are in the midst of, by the half year end in June the 30th, we were halfway through the strategic program, and now we are on the home stretch, so to say. This is the year of where we should drive efficiency and cost reduction. Therefore, it is, as Jan said, very rewarding and good to see that we are now seeing those results coming in for the company total and all the people that work so hard in order to get it happen.
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. The basis for this 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. 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. In this particular quarter, we then have said that we are looking into three activities.
One is on, as I mentioned before, on the construction equipment side, to see now both the structural cost level in CE, given the situation they are in, but also looking at the product portfolio and the product profitability. This is a work that is ongoing and will be presented during the fourth quarter from CE. We are also announcing today that we are reorganize the truck sales organization. Before we had three regions, each with one headquarter. We are now merging those three into one sales organization, one global truck sales. 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 underlying savings, we have not seen that really coming through. That's one reason.
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, we would be faster and more agile into the marketplace, giving the tools to the salespeople that are more efficient and better in that. 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 Trucks organization. We have a global sales, global engineering, and a global operation.
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. 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. We have been doing that in many areas. You know, we have been quite open to looking into the different aspects of core and non-core. 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, we will see what comes out of it. The review, we believe, or not believe, it will be finalized latest in the Q1 next year. Looking at the profit improvement program and the changes that we're going to do in the reporting and in the follow-up externally. We take a look at the profit improvement program that we have, that is on the left side of the chart, you can see, you are well aware of all the activities that we're doing. If you look at it consists of two types. One type is the improvement that is coming based on volume, product mix, market mix, and customer mix. 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. 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. Therefore, we have decided to simplify the reporting. In the future, we will only be looking at the structural cost, the cost that we can monitor, the cost that we can completely influence. 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.
Internally, we will follow up on all these issues as we have done before, externally, in order to simplify, we will then look at the structural cost per se. 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 6.5 billion, which are ongoing structural costs reduction initiatives that are volume independent, initiatives that are ongoing as we speak. The new initiatives that I described before, plus other activities that we're doing, adds SEK 3.5 billion to that. Those SEK 3.5 billion are then, again, volume independent structural cost savings, leading up to a SEK 10 billion cost saving targets for the group. All these activities for the 2015 activities should be implemented by end of 2015.
All the activities around the SEK 10 billion 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, 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, that's the way we're going to follow it. Again, I would like to stress, these are the fixed numbers. The numbers are not influenced by any volume, market, or product mix going forward. With this, we then simplify the external follow-up of the profit improvement program. Jan, you might want perhaps to say a few words around the-
Thank you. 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&L. That's the three bottom lines here is the cash R&D, it is the selling expenses, and it is the admin expenses. Easy to pick out of the P&L. We have what we call structural reductions also in our gross income. That is mainly related to, of course, the industrial structural changes that we are doing, like the Japan plan, like the things we are doing in Europe right now when it comes to, for example, taking the medium-sized trucks into one factory in France for both Volvo and Renault and so on.
These are structural, they show up in our gross income and are quite sizable in amounts. They are, as Olof said before, they are volume independent. These ones will, of course, be a little bit tricky to read out of the P&L. I think it's important to highlight also these changes. Taking the starting year, 2012, the full year, which you should find in our P&L. We have the outcome in 2013, as you can see, actually it's only $0.1 billion that we had in 2013. There are still some cost items in 2013 that actually are increasing. We have a little bit from that point of view, not maybe the perfect starting point.
You can see here if you take the third quarter and make a rolling four quarters back, you can see here that we are now on the phase of SEK 2.4 billion, this will then accumulate upwards. As Olof said before, when we come to the whole year, because we need the whole year 2016, you will see SEK 10 billion 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. It's not that we go into 2016 with activities or anything like that. To be able to measure it, we need the whole year 2016.
Okay, very good. To summarize the third 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. 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 terms of cost rationalization and cost savings, start to show result now. 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. With that, I think we conclude the presentation and start with questions.
Questions. Thank you very much, Olof. Thank you, Jan. You all know this is a webcast event, so please use microphones, and we will start with the gentleman over here.
I'm Hampus of 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 3.5 billion cost takeout? Second question is on Renault, the order intake during the quarter. If you would strip out France from that number, is it a positive number, the 11% drop, or is it more broadly spread, the drop in orders? The last one is on Volvo. If you could maybe talk a little about where you're gaining market share in Europe. Thanks.
I can start with the headwind. There are no headwinds in the SEK 6.5 billion. It's SEK 6.5 sharp, plus SEK 3.5, makes 10.
Okay.
When it comes to the Renault, I would say that the drop. It depends how you see it. It is a drop, yes. Now it's a phase of building up. When I look at it is in France, of course, due to the market per se. We also see this generally in Europe, that we are in a build-up phase. We have certain markets that we focus on particular, and we start to build that up, and then we take the next one. We are in that phase right now. It's not only France, we see it also elsewhere. Well, on the Volvo side, there are, and I'm looking at Christer, but that's official data, I guess, or so we can talk about it. 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. We're very pleased with that.
Thank you.
Hi. Fredric Stahl from UBS. I'll start with, I have three questions as well. One question for you, Jan, on the cash flow. Q3 was better than normal. Should we expect a more even cash flow profile over the coming quarters? Slightly lower seasonality in the fourth quarter, for example?
No, the fourth quarter is actually always a strong cash flow quarter, and that is what we anticipate season-wise it will be this year as well.
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 one. On the aftermarket mix, I haven't seen this with Volvo or other truck companies, but I've seen it elsewhere 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. Is it unusually good in terms of aftermarket, the third quarter here? You mentioned it a few times during the presentation.
I think in terms of the cost structure in CE and China, I would say that we are looking at finding whatever cost we can in terms of the situation we have. The really important issue in China is more about the balancing with the production and the inventory situation. That is absolutely the crucial thing in a situation like this. We do have a lean organization, as you know as well, it's always things you can do, and those things we're looking at. The key issue in China is definitely the balancing between the demand. That means also then with the very low production volumes, of course, in China, with the situation it 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.
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. That we have done for many years. There might be a portion of that as well coming in, more structural. 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 Magnergård from DNB. Sorry. When you presented the SEK 9 billion profit improvement program in 2012, some got a bit carried away and modeled quite aggressive cost savings in 2013 and 2014. To avoid those kind of issues now, what's the distribution roughly on the cost savings here in 2015 and 2016?
I think we are standing right now in, what was it? SEK 2.3 billion so far accumulated savings. You also saw the trend during the course of this year coming, gradually building up. I think we. You also see the reduction that we are doing on the white collar headcount and so on. That will come through. I don't want to go into detail how much comes this year or each quarter. I think you would rather see a quite steady improvement going forward than to see any kind of big shifts quarter-over-quarter.
That's very good. Secondly, on the negative side in the quarter, you didn't really mention the production relocation from Sweden to Belgium and from Belgium to France. Didn't 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 volume. I think the changes we did during the summertime and in connection with the vacation went very well, actually. No major disturbances in connection with that.
Thanks
All right.
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, yes? 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 a new model?
I think when it comes to. We're very much looking forward, actually, to the introduction of the new FH in Brazil. There are two reasons for that. One is that we do have an extremely strong position in terms of brands in Brazil. This new product really is something that the customers are looking for. 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. We have done it so many times now, so we are well aware how to do it. 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.
It's not that we has been spoiled with excellent marketplaces when we're launching those, and it has gone well anyhow. 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. 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 one. It's a sort of a sliding in kind of scenario we're looking at here.
It's been on offer for a while then with the customers in Brazil?
I don't know exactly if we have ordered. I don't think we have actually opened the order books.
Two weeks.
Two weeks. Two weeks, sorry.
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.
I mean, the fourth quarter last year, you had the fairly strong Swedish crown and so on. If this continues. If the levels we see right now continue in the fourth quarter, you will of course, see positive currency effects also in the fourth quarter, year-over-year.
I guess accelerating compared to Q3.
That's difficult to say exactly where it ends up.
On the SEK 10 billion total structural savings target and the four 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. It 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 construction equipment, in the key regions, what is the development?
China is of course a tough one, that goes without saying with the situation we have. In North America, a better pricing, and in Europe it was on a positive trend now leveling off also on that. It goes very much hand in hand. What's important, I think we'll see 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, and the larger machines has then also a larger margin. In C, it's a mixed bag really when it comes to that. Generally pricing is not easy.
All right. Anyone else?
Thank you. Yes. Björn Enarsson, Danske 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? 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 Renault 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 you have hundreds of plus and minuses, and we select the ones. I don't think we will go into more detail than that when it comes how much it is. When it comes to the Renault and the price point, Jan mentioned that with the gross margin and the price realization on the Renault track, we actually, I'm quite satisfied with that. We have managed to get the Renault into a price point where we see the improvements in the gross margin. That one is very important.
Now, with the Renault and the new competition, I don't say it's being mainly a new competition, of course we are addressing segments that we've done before because we need to grow. It's important to remember that we have this 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, you have then the maintenance. 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 now starting to continue to increase the order intake and on a high level.
It's about getting the big fleet accepting the package when it comes to aftermarket.
Big fleets, small fleets, single owners, but of course, that is a part of it. 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. Then from that on, we start to build the order intake going forward. It's a huge amount of hard work ahead of us, definitely. We have the basis, we have the truck, we have the quality, we have the features, that's what makes me comfortable that over time we will fix the rest and the market will come.
Thanks.
Hampus Engellau again, follow-up questions. On this incremental cost takeout program of SEK 3.5 billion, does that mean that you will have more work on the cost side for next year? If you would compare 2015 to 2014, before 2014 would be like the big cost takeout year and 2015 would be cleaner. Will you see more intense work in 2015 on the back of this?
I think when it comes to the three major parts of the new SEK 3.5 billion that we mentioned here, that is not implemented yet, that we, of course, will have to do very quickly now going forward. I think you will see gradually how that starts to be kicked in and implemented. Then, of course, the sooner we do it, the better to have the effect in 2015. That's also why we say all activities needs to be implemented end of 2015 to get the full year effect on 2016. You will see that gradually coming through, I guess, in different ways when we actually take the actions.
Just filling onto that, on the SEK 6.5 billion, the ones that are ongoing, those activities are, of course, already decided, ongoing, the activities are on plan.
Can I throw you one, Mats Konni? After 2015, when we implemented all this, maybe your profitability is still not top class in the industry. Would you consider continue to cut costs also for in the next phase of the company development?
I think it is our responsibility to make sure that whenever now in this journey, this transformation is huge, you don't have all the answers in the beginning, you learn as you go along. You're going to find things during this journey where we can do better, more efficient. Of course, we will do that. We will implement those kind of things as we go along. I think this is something that will be on our radar screen continuous. Now we have framed the activities, we are following it up in a very straightforward way. The organization knows exactly what's about when it comes to this part. I want to stress again 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 actually that our cost base is wrong, that's what we are working now with different measures to take down. As Olof said, of course, if we find new things to do, we will do that as well. When we come into maybe more normal state, we will have to continue to work with efficiency and productivity, not only in blue collar, but also in white collar administrations. 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, 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 increases. That I think will be our second challenge. That we'll take when we come there.
Hi, Fredric from UBS again. Could you maybe comment on the market development in Germany, Holland, and the U.K.? Sorry for being so specific.
It is specific. Any specific part in Holland or Holland in general?
Around Amsterdam.
I think if we take Germany, 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, coming into a more flattening out kind of situation with an increased uncertainty due to the surrounding happenings that are ongoing. When it comes to the U.K., I would say that the activity level is good, has been. We had the pre-buy in the U.K., of course, we had a little bit of buy. The activity level in the U.K., I consider to be good. There we have up to two 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 the. I'm looking at Christer here if you have any specific. I haven't heard any major negative or positive, I guess we can by that conclude that it's flattish.
Hampus Engellau again, Handelsbanken. Coming back to your financial targets, this might be a little bit academic question, with Scania leaving the peer group, you have headed for being second 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 one or number two. That is very important, number one or number two. 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. That's still there, and there's nothing changed, and we are fighting for reaching that.
All right. It's time to move over to you participating over the phone. Operator, please go ahead.
Remind you to press zero one to ask a question. We have a question from Ms. Alex White from JP Morgan. Please go ahead.
Yeah. Good morning, everybody. Thanks for taking the questions. 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 SEK 10 billion number. By that, do you mean that it is a gross number, or is it a number that is net of wage inflation, et cetera?
It will be SEK 10 billion end of the day.
Net of wage inflation?
Yeah, that is what you will read in our P&L. Of course, there is wage inflation and other things coming in. We will deliver on the SEK 10 billion 2016 compared to 2015, what you can read in our P&L.
Okay.
12.
If I just look through the different line, I think it is notable that you haven't really given an indication about where the SEK 10 billion comes from in terms of the different items. 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. Before I think the cash R&D number was around SEK 2 billion. Two parts to the question, is this still the case on the cash R&D? I think before it was sort of being offset by the higher amortization and the lower capitalization that we've been seeing, net was not going to have an impact on the margin. Should we be expecting from the cash R&D line a neutral impact over the period?
We will always balance also cash R&D to the levels that we think we can afford for the company as well. We will not go into any kind of details exactly where we 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, if we look from 2012 through to the end of the program, will we actually see a margin improvement from the cash R&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&D. That is what we can influence. The other thing is a bookkeeping effect that we unfortunately have. What we have already seen that we are taking down the cash R&D quite a bit. I don't think we are at 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 to some extent into 2013, then turning into big negative numbers. That is now year-over-year, going away, and you can see 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 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. Two parts to the question, 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?
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, including the Euro 6 and the new features and the positioning we're doing of the truck, I'm pleased what I see there. 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. Of course, there is a lot of hard work that has to be done in order to keep on this level. So far, so good, I would say.
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 what I'm seeing so far.
Thanks. The last thing was just the North American order intake 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. It goes a little bit between the quarters as well in a market like this, so it's going up and down. I think in general, you can say that we are having a good momentum as a company 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. Then again, order intakes are coming a little bit in that one. I wouldn't say there are any major one-offs in that.
Okay. Thanks very much for your answers.
May we have caller number two? Do we have an operator who can arrange for caller number two? Operator, do we have a second caller? We do not. We have technical problems.
That's not true.
Please move ahead.
Hello, Ms. Laura Lemke, please go ahead. Your line is open.
Good morning. It's Laura from Morgan Stanley. I also have a couple of questions. Maybe we'll also take one at a time. The first one is on your cost savings plan. If I compare this with your initial target of SEK 9 billion, you've basically identified another SEK 1 billion of additional potential. However, at the same time, your incremental restructuring charges are going up by SEK 1 billion to SEK 2 billion. Should we understand from this that your underlying net savings target is actually lower than it was previously? That's my first question. The second one is on your cost savings that you've achieved so far. Initially you guided that you would achieve SEK 6 billion of cumulative savings by the end of 2014.
At the full year results, you said you had achieved 2. Now you're saying you did SEK 1.6 billion year to date, SEK 3.6 billion in total. On slide 27, you're saying you've achieved SEK 2.4 billion out of the 10. 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 SEK 10 billion savings and the SEK 2.4 billion 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, SEK 6.5 billion is what we see is structural cost savings. We now add on another SEK 3.5 billion to come to structural cost savings of SEK 10 billion. By doing that, we also see that the restructuring charges will be slightly higher compared to before. We earlier had said that we had SEK 5 billion. We are now increasing that to somewhere between SEK 6 billion and SEK 7 billion. That is then for the whole SEK 10 billion in 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. It gets mixed up in the external reporting when it comes to market mixes and margin effects on other things. They are still there. That's why we now in our external follow-up focus on the external. It is actually an additional 3.5 compared to where we had before. 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. Can I maybe follow up on this? Can you give us a bit of a timeline for the SEK 7.6 billion? How much of that are we going to see in 2014, 2015, and 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, it will come through gradually, or it must come through with actually an increased speed into our P&L to be able to reach the SEK 10 billion. You need to remember that the first year that you will see the full effect of the SEK 10 billion measurable in our P&L is the full year 2016. That will be implemented, so we will be on the level already at the end of 2015.
Okay, great. Then maybe just to follow up on the question from Alex regarding the cost savings in the P&L. You mentioned that you don't want to break down the individual cost items, 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. 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 here break out that and follow that on a separate line in the external follow-up of our program. Of course the rest of the activities that we are doing, like I mentioned before, the reductions of the material cost 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 structural cost as one separate item.
Okay. Maybe one last unrelated general question. There has been a lot of talk about potential divestments of the bus business and more recently, also VCE. I was just wondering, is this something that you could ever envisage doing?
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 structure of the group which I think is good. We have divested Volvo Aero, 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 VCE, for instance, to address some of the structural issues and also some of the product issue, and we're going to continue that. We do also a lot of things on the bus side. The focus from me, from my 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.
This question comes from Mr. Colin Gibson from HSBC. Please go ahead.
Yeah, thanks very much indeed. Morning, everybody. I just want to go back on a couple of questions asked so far. Just to be very clear then, 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 SEK 2 billion of cost in 2013. You're now saying on slide 27, you took out SEK 100 million of cost in 2013. Is the difference between SEK 2 billion and SEK 100 million just the changed accounting that we're only now looking at quote structural and not looking at all cost savings? Is that the difference or is there some other difference between SEK 2 billion and SEK 100 million for 2013? That's my first question.
Yeah, you have different effects. One is that you follow the curve actually, and that is now what we are walking away from. The SEK 100 million 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 one year ago is of course a combination of structural cost saving, but also then different kind of gross profit improvement activities that we had. They, we are now kind of not reporting separately.
Okay. Got it. Thank you. My next question, going back to your slide 27, is that you include cash R&D on structural cost reductions. If I think about trucks, I'm not sure I see much scope for structural reductions in what has been a high R&D burden for many years, and looks set to be a high R&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. Tell me why you think there's going to be a structural reduction in R&D in the years going forward in trucks. Thank you.
If you look at it from a strategic point of view when it comes to how we do R&D and how we are focusing the R&D, also how we allocate R&D into different areas, you will have pockets, where you have absolute need to do, you will have pockets which is ambitions to do, you have some pockets that is something that you might want to do. This is the change now we're looking at. Again, we're talking about focus the group. Within the structural changes in R&D, that lies very much also to make sure that we focus the R&D so that really comes into line with the development of the group as well. There I see the biggest change going forward. Again, we're not talking about a zero R&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. 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&D in terms of efficiency. We get the most R&D out of every SEK, USD, or EUR that we invest. There we still have a way to go.
Okay, thank you. One last question, please, from my side, that is, I just want to go back on the question that Anders tried to ask you earlier, that is the product changeover in LatAm from Q4 onwards. Now, 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 don't think we will give you any guidance on that. In general, you can say that we are a learning organization this is now not the first time we do this transfer. 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-supplier structure in place already. My view on this is that it will go much simpler and much swifter, than we have seen before. There is a big, big difference, that is that we don't have the dual or double production. 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.
Oh, hi. Thanks very much for taking my call. Fraser Hill from Bank of America. I really wanted to try and pull this together for 2015. If you look at what you're saying, and I wouldn't wildly disagree, you don't really see any volume growth in your truck or your construction markets in 2015 on the main, if you pull that together, I think, looking at your original mix. How much profit improvement do you think you can do next year? You've currently got a level of expectations in the market of SEK 19 billion. That's probably going to be SEK 6 billion or so growth in profits. I guess that's all going to have to come from restructuring, and that's the majority of the benefit that you have laid out here incrementally from this point. How do you view that?
How do you view that hurdle rate and how much profit growth do you think you can bring fruit?
I think we have given our forecast or estimate where we think the markets will be in 2015. 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 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. As I said, that is of course the structural reduction program that we are running that will continue to kick in in our P&L.
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. We are working extremely hard on becoming more efficient, having a better product cost, and all these kind of items. 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. On the elements that maybe you can't influence, pricing in your markets globally, I take on board your confidence about your own trucks in Europe. 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 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 what we see right now. Yes, we have seen a tougher pricing in Brazil this year. Yes, we have seen in China, obviously, quite a tough environment as well. On the other hand, we have had a very good development of our new products. I think 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. Once again, where that will leave us next year in an always tough environment, it's very difficult to predict actually. 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 three months time. Thank you. Thank you Jan and Olof.