Ladies and gentlemen, welcome to the Volvo Group Report on 1st 6 Months 2014. Today, I'm pleased to present Olof Persson, CEO. For the first part of this call, all participants will be in a listen only mode and afterwards there will be a question and answer session. Speaker, please begin.
Thank you very much and most welcome to this telephone conference. We will do as we have done previously quarters here now that we will have just a very short introduction and then we will open up directly for questions and answers since the material has been available to you both on the web and also via press conference and discussions. But before starting, I would just like to because there has been some discussions around the profit improvement program, the SEK 9,000,000,000 up until the 2015. And just let me to recap the situation and what we have been saying and trying to say all the time. We have as general target, to over time improve our performance with 3% margin.
That is a nondeending target, meaning that over time, we will then work through so we can, regardless of the different cycles we are in, having a 3 percent higher margin than we previously have had. And that is a target that is a long term target that we then work towards over time. Then we have the €9,000,000,000 program, which is then a strategic program running from 2013 to 2015, where I have, together with the management team, identified, quantified and also set up a number of targets for the organization to be achieved by end of 2015. This is relating to profitability, but it's also we have targets around HR. We have targets around technology, and that has also been communicated and presented to you.
That is the 2020 targets strategic plan that we do have. Those are then those EUR 9,000,000,000 savings and improvements that we want to see is coming from a number of different things. 1 is, of course, cost savings, and there we talk about our efficiency program, for instance. But it's also regarding increasing our gross margin and profit improvement, as we have talked about in the press conference earlier today and the margin improvement that we have seen. That is also part of the program going forward.
€9,000,000,000 will then be materialized over time at a certain pace, And that pace was presented in a curve to the Capital Markets Day in December, where you can see then how much per year. And that adds up to, for instance, during this year, we should see improvements in the range of €4,000,000,000 and then leading up to end of 2015 to the €9,000,000,000 And that is when we refer to the program and we refer to the SEK 9,000,000,000. And if we are ahead or behind that is the reference curve that we do have. That curve as you can see if you have seen it, but if you see it that starts then the 1st January 2013. So that means that the €9,000,000,000 improvement is then based on the 2012.
That's the base and how we measure it. Then we have also a baseline and that is the €300,000,000,000 So basically, we have the €9,000,000,000 and we have the €300,000,000,000 in turnover in improvements And that relates then to an improvement of 3%. So I'm sorry if there has been some misunderstanding about that, but I hope that opening clarify the program and how we're measuring. So with that, I was not planning to have a long opening, as I said other than I think the key issue with the Q2 and the way the second quarter has developed is very much related to construction equipment in China and related to trucks in Brazil. These two items has had a considerable negative effect on the result during the quarter and the improvements we see in other parts of our innovation from the efficiency improvement program and the SEK 9,000,000,000 program has not been enough to offset that.
As I said, I think you have read the materials. So I suggest that we move into questions, so we can have a dialogue on the issues that you find important and the questions you want to have answered. So operator, by that, please open for questions.
And we have a first question from Mr. Alex White from JPMorgan. Please go ahead, sir.
Yes, thanks. I've got a few questions. I'd like to take them one at a time. The first question actually just on your opening comments there, you talked about a 3% sort of improvement over time. If I look at the average group margin since 2000, it's been around 4.4 percent.
Should we take that as meaning that you're seeking a sort of 7% to 7.5% group margin sort of average through the cycle if we take like an extended period of time and then when we have fluctuations and the cycle is high and when the cycle is low?
I think the way we're looking at this and as I said, there is no time or deadline on this one. The way I look at it is that if you go back historically and see in a high cycle, we had a certain percentage. At that point, in the future, we should be 3% higher than that point. You have another margin at the low of the cycle. And if you look at that, we should over time then be able to be 3% higher than that.
So that's the way we're looking at it. So if you have we're basically moving the profitability curve in the highs and the lows in the market upwards on a parallel movement 3% units. But again, this is done over time, and we don't have any deadline on that.
Okay. And then just on the call this morning, I think you talked about a $500,000,000 year on year savings benefit from the program in Q2 at the group level. I guess the question is how much of that was in would have affected the truck division? And then the second part of the question is how much should we expect to see in Q3 and Q4 year on year?
[SPEAKER STEPHEN
ROBERT BINNIE:] The majority of that comes into the Truck division because that's the major part of the program. The part of the efficiency program is valid for a bigger part of the group, but the majority comes to trucks.
And when it comes to
the second half, I mean, we will continue to focus on cost savings. We don't guide exactly how much is quarter over quarter. But it is, of course, a part of this curve that we follow up towards the €9,000,000,000
We could perhaps add to that. If you look at the curve that was presented at the Capital Markets Day, we are we will have we committed to improvements of SEK 4,000,000,000 this year. If we look at the curve after the second quarter, we're slightly ahead of that curve. We do have on the in particular, on the margin improvements on new sales, we then have an improvement, but we're also following in the plans when it comes to cost reduction. So we have yes, okay.
So I mean, I guess, like, since you put up the curve in December, you've obviously had your negotiations taking place in Sweden and in France and in Japan. I imagine you've got a better idea now of how much savings we should be the magnitude of the business at least versus consensus expectations. I guess some guidance would or sort of rough indication would be helpful. But
I think, I mean, if you look upon the I mean, if you see the reduction of white collar people, we have down 1200 people out of the 4,400 the first half of this year. And we then have the Swedish VLP program, 5.30 people will leave mainly during the Q3. There are also other measures in the group that makes people leave in the Q3. Then we have France and Japan Voluntary Lead Programs that comes in, in the Q4 mainly and a little bit of an overhang into 2015. And as I said earlier today, we are 100% committed to deliver on this 4,400,000 and we have done at 12 100,000,000 and it will be done in the 1st part of 2015 with the majority leaving this year.
And how many are the France and Japan then? Is that the balance? Or is it
But if you take we are at 4,400. We are taking 100. We are going to make the majority of 4,000 400 this year with a little bit of an overhang. So I mean what does it mean? We have I mean we have taken out less than half so far, which means that we have to do more in the rest of the year and then with a little bit of overhang into 2015.
Okay. And then the last question I had around the savings target. That's an absolute savings target. Is that the way we should think about it? And then we should have cost inflation to consider as well?
[SPEAKER STEPHEN
ROBERT BINNIE:] Yes. That is in terms of number of employees. And of course, you have a normal salary increase as well underlying that you have in all countries. But the absolute is the number of employees.
But then the EUR 9,000,000,000 is an absolute number as well? Or is that a net of inflation number?
The €9,000,000,000 is a net number. So that is the number that we have committed to be achieved by end 2015. And it is a composition, as you know, of targets we have set and then a so called factor to take care of different aspects of the business that we have going forward. So that's how we come to the SEK 9,000,000,000. Just a final add to that, and Jan explained it very well, but we have are 2 parts.
We have regular employees, which we're talking about the VLP programs and all of that. But then of course, we also have consultants that we're addressing. And in this new structure, we are actually changing the organization as well to get more efficiency. If you look at the staff and support functions, we are now implementing a completely new more efficient structure. And that is also something that you need to in the Swedish legislation, the French legislation and in structures.
And that is exactly what we have been doing now. And that's why we will continue not only with the ELP fixed employees, but we will also reduce the remaining down on the consultant side. So it's a total reduction both fixed and consultant. Okay.
And then just on that, the normal wage inflation is about 3% to 4% for the group as a whole or?
[SPEAKER SEBASTIEN DE MONTESSUS:] 40% on the high side, I would say. I think [SPEAKER
SEBASTIEN DE MONTESSUS:] Yes.
That's on the high side.
So if we have sort of 3 point 5% over 3 years on a €36,000,000,000 base, you're sort of running at nearly €4,000,000,000 of added costs from wage inflation. So we should be thinking about sort of an absolute level of savings that's at least $13,000,000,000 probably a bit more if you've got other cost inflation well. Is that how you think about it?
How did you come to the EUR 30,000,000,000?
So if you have a sort of salaries base of about €36,000,000,000 3.5 percent of that is €1,250,000,000 It's a 3 €1,000,000,000 It's a 3 year cost program. So we had 3 years of cost inflation, which takes us to kind of €3,800,000,000 If we had 3.8 to the SEK 9,000,000,000 then we get to it. So just shy of SEK 13,000,000,000?
Yes. I think, this is a fairly technical calculation you're doing right now. I think as we said before, I think what Oluf mentioned before is this is the EUR 9,000,000,000 and we have included headwind there. It is, I mean, the absolute savings that we're going to do net of inflation going forward.
Okay. Thank you.
Next question comes from Mr. Martin Vyaches from Redburn. Please go ahead, sir. Hi. This is Martin Vika from Redburn.
I have just a bit of clarification on the restructuring program. Does this mean that the 3 100 basis point margin improvement plan is different to the €9,000,000,000 profit improvement plan? And am I understanding this correctly that by 2015, the total profit achieved will be 2012 profit plus €9,000,000,000?
What I have said a number of times is that what we are committing to is based on 2012. We will have a on those areas which we have specified, and you can see that yourself it's in the sales and admin and it's in the gross margin, it's in the R and D, it's in the ISIT cost and so on and so forth. In those items, we will improve based on 2012 with SEK 9,000,000,000 So based on a EUR 300,000,000,000 turnover. So that is and then I've said also because I've got this question and I've been clear on it. We don't know the margin in 2016 because that is we don't know the currencies and other things as well there.
But we are committed to that. By the end of year, on those items, we should see an improvement by SEK 9,000,000,000. So on those items, it would be SEK 9,000,000,000 100
basis point plan and the SEK 9,000,000,000 plan, 100 basis point plan and the €9,000,000,000 plan? Or are we talking about the same thing?
I think that the €9,000,000,000 plan is a very important piece of the puzzle to achieve the over time 3% margin improvement. So it is a very important piece of doing that. And then, of course, we will continue after 2015 to continue to strategic plan is a will come over time. But the EUR 9,000,000,000 the cycle is something that is will come over time. But the €9,000,000,000 plan is a very important piece in achieving that.
Okay. Thank you very much. Next question comes from Mr. Alex Potter from Piper Jaffray. Please go ahead, sir.
Hi, guys. I wanted to switch
over
the next year or so when you see over the next year or so when you see these, I guess, increased competitive problems, inventory, things of that nature, will that drive those companies
out of the market?
Historically, it depends on the market size to start with, and we don't know exactly what the market will pan out being a sustainable market for the Chinese market, and that will depend also how many players. But I mean if we go back in China and look at what has happened over many years and if you look at the wheel loader business, there you can see that there has been a consolidation, a substantial consolidation over the last 10, 15 years. That was a huge number, and I really mean a huge number of small local players doing reloaders in China up until, I would say, 2,000 and then up to 2,005 and so on. And there we have seen a REIT consolidation. Would that happen again?
Might be so. And again, it depends on the market sizes and so on and so forth. But I if it happens, it will take some time. I don't think it will happen overnight and will not happen perfectly now. But we are definitely committed to the Chinese market, and we will make sure that we do what we can in order to stay in our place.
And then it might be that we see a more consolidation in the market going forward. A little bit based on history experience as well.
Okay. Very good. And then I had two questions on North America truck. The first one is on cyclicality. Obviously, we've seen very strong orders here.
Do you think there's any risk that we're pulling demand forward into 2014 and we potentially see the cycle peak out earlier than we originally expected? So that's question number 1. And then question number 2 is earlier on the call, you mentioned that you're working on trying to improve the profitability in the North America truck market. If you could just boil down to maybe the 1, 2, 3 types of things that you're doing in the near term to increase margins in North America? That would be very helpful.
Thanks.
Sure.
Sure. I think one important factor with the North American market right now is that up until now or up until recently, there has been a replacement market. So we haven't seen any growth in the market. And therefore, the but now we do see a sort of expansion also into a new an expansion of fleets and so on and so forth. And that is, of course, much driven by the economy development in the market.
And therefore, it will have a lot to do with the GDP going forward in the North America and in U. S, in particular, how that is developing. And I think that will be a correlation back to as it normal is between GDP freight volumes and then also expansion or contraction in the North American market, and we'll see how that develops. When it comes to the profitability in North America, there are 2 areas where we focus mainly on. And one is to really making sure that we capture off the market business based on our higher penetration on I Shift and engines.
But also and I think it's important to remember is to provide a better service totally. We have moved a lot in the North American market to work with telematics in order to improve service offers to the customers. And the whole area around maintainability, service and business around that is something that we focus a lot around in order to improve and increase the profitability in North America. The second one is, of course, also that we need to work on. If we look at the brand and the brand position that we have both with Volvo and the Mack.
We are addressing the MAKX brand with a relaunch of the brand now and rebranding. That is also important in order to connect that to product features and that is also something we do. So our side, these are the 2 main areas that we're working on. And the second area you could put under the heading of actually having a rightly positioned product in the brand position, but also a very competitive product in order to increase the profitability.
Okay. Thanks very much guys.
We have next question from Mr. Arshak Ryn from Goldman Sachs. Please go ahead sir.
Hi. It's Ashik from Goldman Sachs. Just have a follow-up question on your clarification on the €9,000,000,000 cost savings. Now that you've clarified that you're using 2012 as a base for that, if I recollect correctly, in 2012, you also said that your margins were hampered by around €1,500,000,000 or so of launch cost. Now is this part of the is the reversal of this also part of the €9,000,000,000 cost improvement by 2015?
15? Or should we see a normalization of the launch cost on top of the cost savings coming through?
The launch cost was primarily, I would say, heavy in 2013 where we had the but we also had launch cost in 2012, of course, but mainly in 2013. And when it comes to the selling and that is particularly on the selling side, the targets we have set, as you can see in our target, is actually a percentage of the sales. And that means that we are reducing the wholesale, which is the back office point of view. And therefore, the launch costs are very much also on the retail side. So in general, you can say that we have taken height for that in the SEK 9,000,000,000 in order to accommodate into the SEK 9,000,000,000.
So the answer to your question is that the savings you see is the savings that is part of the SEK 9,000,000,000, which also includes savings coming from the launch cost. Thank you.
Yes. We take our next question from Mr. Andreas Prock from Nordea. Please go ahead sir.
Thank you. So two questions if I may. First of all on China and VC, market was down. You were down more than market. You were down 30.
Market was down in 2019 if I recall correctly. Could you help us understand what happens in such a massive downturn, both in terms of how local customers think about brand, how to think about price, how to think about financing? And what are the main challenges now for your sales in China? 2, also on the gross margin improvement, which is happening in Europe. How is that how is the price increase in price on the Renault side happening?
Is that doing just as well as on the Volvo side?
[SPEAKER STEPHEN ROBERT BINNIE:] If we look at the challenges on the sales side in China, of course, one of the reasons that the market is down less than our deliveries is the fact that we have sort of stopped delivering into our dealers. And that means that like we had in Brazil that the sales that goes on is actually from the dealers out to the market, which means that our sales goes down. And again, this is the right way of addressing it, but it is a correction that is costly and but has to be done. If you then look how the customer react, well, I mean it is, course, a difficult situation for the industry as a total all the way out to the end customers. And the I think what is very important now is to look at that we have a good control of that we measure and see the machine utilizations.
We have a good sort of sight on when an idea when the market is coming back and how it's coming back and where it's coming back and what kind of models are starting to move again. We also have to make sure that we are monitoring the whole flow of system when it comes to the dealer inventory to make sure that that is actually coming down. So it is a market which is, of course, down and by that also affecting the whole of the industry. But the key here, I truly believe, is to have a lot of people on the ground to really feel and be there to react quickly and making sure that we do the right decision when we start to see things moving again when that will come. When it comes to the gross margin improvement and on the Renault side, it's still very early days.
But the pricing on the Renault side has been accepted. We have seen that going forward now. When it comes to our offer to the customers, we are looking, of course, of the price and the margin, but it's also on the service agreements and financing, and then that creates a package. But so far so good when it comes to pricing on the renewal side as well even though it's early days.
Thank you. Just one final follow-up there on WICI in I know that you have some off balance sheet guarantees made to the, I believe, the banks in China that are financing the construction equipment sales. Have any of those off balance sheet items or any of them impaired? Or are the banks forcing you to stop paying them for I. E.
Some dealers etcetera have gone
bankrupt? So far, there's been no call on guarantees on Volvo.
Fair enough. Thank you so much.
Okay. Operator, if there are no more questions.
Then I would like to
There are no further questions at this time. So please go ahead speakers.
Okay. Then I would like to thank you for joining the call. And I hope by the introduction that I clarified some of the issues that was discussed during the day regarding our saving programs. At the end of the day, I just want to reemphasize for us, we are totally committed to making sure that this program is executed. We are on plan.
It is a fundamental part in our commitment to increase the structural profitability of the Volvo Group. This is something that's not done from 1 quarter to the other, but I hope that you can see now that we start to see the positive impact. In this quarter, those positive impacts, which starts to get quite sizable, was not enough to offset the negative that we had in sea in China and the trucks in Brazil. But it shows to me and the rest of organization the importance of this program in order for us in the future to be much better prepared to be able to cope with those kind of swings that we will continue to see in the market going forward. We are in a volatile business.
So with that, I thank you much for calling in. I wish you all a good summer and talk to you again on the 3rd quarter release.