Ladies and gentlemen, welcome to the Volvo Group report of first six months 2014. Today, I am pleased to present Olof Persson, CEO. For the first part of this call, all participants will be in listen only mode, and afterwards there will be a question and answer session. Olof, please begin.
Thank you very much, operator. Most welcome to this telephone conference for the second quarter in 2014 for the Volvo Group. If you follow me to page number two, you see a summary slide. I think the headings there when it comes to markets and market developments explains it quite well. We have seen during the quarter that the mature markets are growing and the growth markets are declining. If we look at the developing countries or economies, in Asia and South America, as we then refer to the BRIC, is actually down 21%. That has been offset by the solid development we have seen in the mature markets, North America, Europe, and Japan, leaving us with unchanged sales compared to Q2 in 2013 on SEK 73 billion. We are reporting a result of SEK 4.3 billion or 6% before restructuring charges.
In that, we do have a number of positive one-timers. We can say that if we should look at what has negatively impacted the result, it is definitely the lower volumes in China for construction equipment and the Brazilian market in terms of the trucks. We will go through that, and I will go through it a little bit more in detail during the presentation. When it comes to truck orders and deliveries, you can see that we are in balance, book to bill 100%, where the orders are down 6% and deliveries are up 2%. Again, big changes or differentiation between the different markets. If you then follow me to page number three. Starting with the Trucks Europe, I would say that the quarter started a little bit slower than we have anticipated.
The hangover effect from the Euro 5, Euro 6 transition did also impact the first part of the quarter. As we have moved along, we have seen a gradual improvement in demand. If we look at the sequential compared to Q1 this year, orders are up with 16%. In general, we can say that we have had a good performance of the Trucks Europe operations in most aspects. We see that the reception of the new products and the new ranges are very well received. We see that in the market shares, particularly for Volvo, now increasing up to almost 18%, historically a very high level. We see it in the price realization, which also reflecting then in the margin development for the Trucks Europe as a whole being positive movements during the quarter.
When it comes to Renault Trucks, we also there see that the order intake is picking up at the latter part of the quarter. We also see that the market shares has gone down a little bit. It is because of the fact that we do now fully introducing the new ranges, and also that the so important French market for Renault Trucks has been on a lower level. However, it's important to notice that the market share for Renault Trucks in France is actually increasing. If I look at the focus going forward for the second half of this year, it is to continue to make sure that we capture the organic growth that we have as a target.
That means that we are focusing on the market shares, both for Volvo but also for Renault, even if that will take a little bit time building that new ranges up. Of course, also to continue with the program we have in reducing the selling cost with the new structure and new organization that we do have put in place for the European sales organizations. All in all, a slower start than anticipated, a gradual pickup during the quarter. The fill rates in the factory was a little bit low in the beginning of the quarter, but has also picked up during the quarter. We leave in the quarter with a good fill rate in the factory coming into the fall. All that leading to a book to bill of 118%. We also keep our market share of 230,000.
As you probably know, many of you, up until May, we had 91,000 registrations in the market, meaning that the second half of the year will be slightly higher in terms of registration according to our forecast than the first half. If we then move to page four, talk about Trucks North America. Again, a market that is generally have a good performance. We see that the freight environment is good and improving. For the first time in a long time, we now start to see that it's not only replacement, it's actually moving into expansions by our customers and the fleets. Also here, we have seen a good performance when it comes to market shares and profitability. It should be noted, though, that we are not where we want to be with the North American profitability, but it's definitely moving in the right directions.
The market shares combined is up to close to 20%, which is a level which we have had in the past as well. That is a result of the fact, you can see that the order intake during Q4 and Q1 was quite high, we have therefore built a pretty long order backlog that we have to deliver, therefore we then also now increase the production rate in Macungie and New River Valley. As always, when it comes to quarterly reports on North America, we report also on our penetration on the engine and I-Shift penetration. We are now in engine for the Volvo side, about 90%, and I-Shift is actually up to about 80% penetration right now, which is very good as we have talked about many times for the spare part, the maintenance, and the service business going forward.
Can also conclude that the dealers in North America are performing well. We do see that they continue to invest in new facilities. They do invest in aftermarket business. We also see that the market share for the dealer side is increasing. We keep our total market forecast of 260,000 for North America. If we then move into page five and coming into a market that has been, and a region that has been tough during the quarter, definitely, and in particular then Brazil. I want to reinstate that we are talking about in this quarter about the planned rebalancing of our Brazilian system. Let me go through this story a little bit here. What happened was that we saw, and we also communicated the lower demand coming into Q1, moving from the 100-plus thousand market that we have seen down to 90.
That meant that we had to rebalance our dealer stock. By doing that, and the way we did it was that we cut production to making sure we didn't overflow the system, and we also lowered our own inventory. That meant, of course, that we had to take a number of stock days in the system. It also meant that our sales went down as dealers then were selling out of their stock. That in combination, both the lower production and the lower sales had a considerable negative effect on the result if you compare to a year before. Good news here then, though, is that we did that decisively. We did it planned, and I definitely think that is absolutely necessary to react quickly.
It has been costly, but we are now almost in balance with the new, and let me remind you, still a historically high level on the market of 90,000. We are now in balance. I think that is very important also to remember that Brazilian market is a big, it's a profitable and very important market for us, and therefore it's also good to see that we are improving our market share with more than 2% compared to a year ago. We have a good movement there, but it has been a tough quarter for the Brazilian organization in order to make sure that we now readjusting the system and rebalancing it into a market of 90,000. If we then move into page number six and looking into Asia and starting with excluding Japan, we can say that there is not much news on the mining side.
It remains slow and has done so for quite some time. What we see now is that we have launched the new Volvo ranges in a number of countries in Asia with a very good receptions. We can only conclude that as soon as we come in with a new range, we immediately see market shares increasing, and we also have a good price realization on the trucks that we are launching throughout Asia. In Japan, we have had a continuous strong demand, and we also see that our market shares are moving on the heavy-duty side, and we are launching also facelift and new products to support the market. The focus going forward there is definitely to improve profitability in our complete Japanese operation. As you know, we have lowered the cost base substantially.
We are working heavily with the dealer development to make sure that we are serving our customer and also capturing the aftermarket in the best possible way, and also, of course, then coming out with new and competitive products. All in all, the Japanese market is, as I said, strong, but we still have some work to do in order to improve profitability. If we then move into page seven and look at the other very problematic area for this quarter, that is the CE business in China. Here again, we are talking about a balancing act in order to make sure that we readjust the system, then I am talking about the complete system to a new and lower level than has been before. As you can see that the total market in China is in steep decline.
Our deliveries is down by 32, and the market is down with 19. Let me also here go through the story a little bit, what has happened during the quarter. As you remember, the January, February market was actually up and combined with 27%. As always, in the beginning of the year and slightly in the back end of last year, the industry is building up inventory ahead of the spring season. March then came in slightly down with a 5%, then we saw The quarter, which meant actually that there was not much of a spring season to talk to, therefore, the whole industry had very high inventory levels. That in turn started, of course, to put high pressure on pricing and also high pressure on the whole system in terms of liquidity and sales. Again, a rebalancing is necessary.
I am absolutely convinced that the best way is to face reality and do it as quick as possible. The team has done that. We have run the production on extremely low level. We are focused on making sure that we are getting the inventory level into a reasonable and acceptable level. We can only conclude that this will take some time with the inventory and the demand situation we have, combined with utilization of the machines that we see out in the market. It is also clear that we believe that for the industry, it will take several quarters. We are committed, and we will do whatever we can to do it as quick as possible. As today, it is very difficult to say when we will be in balance again when it comes to the China construction equipment market.
Again, I think it is worthwhile and very important also to mention that China is and will be for a long time, the world's largest construction equipment market. It is a profitable business for us. We are number one, and it is very important that we continue together with SDLG to keep our position there and work through this tough time as good as possible. If we then move into page number eight, we can see that on the bus side, we start to see a slow market recovery, order intake is up, and also deliveries are up, and the result is also slightly up. I think from a more long-term perspective, what has been interesting during this first half year, not only in the second quarter, is that we see a buildup and a very high interest and demand for hybrid and electric hybrid buses.
We have a very good position there. We are now working with a lot of big cities in order to retransform and to change the bus travel going from normal diesel power into hybrid and electric hybrid buses in a number of projects. That's very encouraging to see. On the Volvo Penta side, we can see that the demand for marine engines in Europe is early signs of recovery, but we should remember it's coming from a very low level. I think what's interesting this quarter definitely is that we have seen now a strong inflow of new customers for industrial engines, and that is based on a very competitive and good new range of Tier 4 Final engines that Penta has put out to our industrial customers.
That is very good for the future to increase the customer base in nowadays, a more and more important segment for Penta on the industrial engine side. Moving into page number nine, just to summarize what I've said before, you can see here that the increases in Europe is SEK 1.3 billion, as we talked about, North America up SEK 1.5. You see South America, in particular, trucks in Brazil, and Asia, in particular, VCE in China has had a negative impact, meaning that we end up very much on the same level as we did last year. With that, I will hand over to Jan, who will go through the financial.
Thank you, Olof. We turn to page number 11. Here we can see the development between the second quarter 2013 up until 2014 goes from SEK 3.3 billion up to SEK 4.3 billion. As we can see here, the corporate and other bar is SEK 1.3. Out of that, SEK 1,040 million are related to one-off items. The big part is SEK 815 million for the gain that we had on the sales of real estate, and SEK 225 is related to an adjustment of the Volvo Rents business, Rents of SEK 225 improvement compared to what we thought. Apart from that, we can see that if we adjust for that the result is more or less on the same level as last year. We can see that the improvement in trucks cannot offset the lower results of SEK 570 million that we have in CE.
Between the two years and in the quarter, we have a slight negative impact of SEK 176 million. We see that the currency is affecting us less in the first quarter. As you remember, we had a negative of SEK 1.1. Looking ahead for the group as a whole, we think it will be fairly neutral, maybe slightly positive for the rest of the year. Next slide. Another way to look upon the result improvement you can find on slide number 12, where we going from the SEK 3.3 billion in 2013. In 2013, we had some non-recurring items. We had put up a warranty reserve in Q2 of SEK 900 million. We also had two positive things in 2013. One was related to SEK 88 million, sorry, SEK 81 million, adding trucks. We had a sale of activities in Japan of close to SEK 100.
Adjusting for that, the result is SEK 720, better in 2013. We can now see that the gross income impact is a negative of SEK 630. That goes back to what Olof mentioned before. With the lower sales in Brazil, with also some pressure on margins, the same for trucks. Same thing in China, lower sales and pressure margins for CE. That cannot be offset by the improvements that we have seen when it comes to our European business and the margin improvements there in our truck business. We still have the effect of R&D capitalization. It is the same amount or size that we had in the first quarter. It is three-quarter of a billion. We can see that the improvements that we have on our operating expenses in the quarter, actually a little bit more than half a billion gradually is starting to kick in.
We have the one effect on real estate of SEK 815 million, and within our others, you find the SEK 225 on rents. We turn to the next page and look closer into our truck business. We can see that we have a slightly higher sales compared to last year, SEK 48 billion compared to SEK 46 billion. When it comes to operating income, up to SEK 2.2 billion compared to SEK 1.5 billion, and operating margin, if we structure insurance, is 4.5%. When it comes to the currency here, we have a negative of SEK 139 in the quarter, and in this area, if the currency rates are as they are today, we think that we will have a slight positive on the truck area for the rest of the year. Turning to the next page 14. As I mentioned, we do have one-off items, things that are affecting the quarters also in trucks.
We have the lower warranty cost this year compared to last year of SEK 900 million. We also have part of the real estate gain is actually affecting this business segment, the SEK 64 million. We have the effect of capitalization, currency, and the one-off effect from the sales in Japan last year. If you look upon these pluses and minuses, it is almost SEK 1 billion plus, and it is almost SEK 1 billion negative. What is remaining is that we have a profit improvement of something like SEK 300 billion between the quarters. There we have on the positive side, the effects of mainly our price realization connected to the new ranges on Volvo and Renault, which has a positive effect. That can actually offset the negative effect we have right now, mainly related to our lower volumes and also margin pressures in Brazil.
We turn to page 15 and look closer into our CE business. Here we have SEK 15 billion in sales in the second quarter, which is down 9%, actually 10% if we exclude the FX effects. We can here see that there has been a gradual decrease in sales year-over-year. It was SEK 20 million in 2012, SEK 16 million last year. We can also see how that the 12 months rolling figure is SEK 53 billion. One should remember that if we walk back to 2012, the sales for the whole year of 2012 was SEK 63 billion. Here we are seeing a decrease of sales taking place over two years of approximately 15%. Operating income is, of course, affected by this drop of sales, coming down from SEK 1.3 billion the year before down to SEK 0.8 billion, and the operating margin is down to 5.1%.
A little bit of a word here about the currency, it is SEK 208 million. This is due to the fact that the KRW is strengthening towards the USD. As you're aware, we do have the excavator factor in Korea, and that is affecting us negatively. This effect, when we look into the currency effect in CE, will, as it looks right now, continue. Here we most probably will have a continued negative currency effect for the rest of the year. Looking a little bit closer into the quarter for CE, I think from an earnings point of view, it is difficult to find any positive things that has happened within CE. As we have said, we have the lower volumes. Actually, unit sales are down with 18%.
We have this steep decline in China, as we all know, it is a bargain with very good margins. We also sell big machines, this affects us quite a bit. Also we see that we have the price pressure coming in China as well. We do also see a product mix change. We are having more selling a higher proportion of compact machines compared to what we did the year before. As a consequence of the lower sales, we get a low capacity utilization. We see as a whole, not only China, but some other emerging markets mainly related to mining that are actually quite a fairly sluggish level, which means that the capacity utilization in our assembly factories are on a too low level. Of course, also when it comes to our component factories, it's not on a satisfactory level.
Before we also have the currency effect of SEK 200 million, it's also worth to mention that we have adjusted our break-even level in our Swedish production system, and actually reduced the blue-collar workforce, and that has a one-off effect in the second quarter of some SEK 50 million. That is not included in the restructuring programs. It is actually outside of that affects also the result in CE. One other focus area that we have in CE, that's also connected back to China, is that we will have to have a close monitoring of our dealer network. With the decreased lower sales that we see, it's extremely important to secure that the dealers continue to be in a healthy situation. If we turn to slide 17, a few words about buses. It was a good quarter in terms of sales.
Sales were up close to 20% compared to the year before, going up to an EBIT margin of 1.5%. Positively affecting the results in the second quarter is of course volumes. We also see a good development when it comes to the aftermarket. I think with the sales level of SEK 4.8 billion, the profitability would have been higher, the reasons why it's not higher is actually due to the fact that we have a weaker product mix compared to one year ago, we do also have had some production disturbances, both in our North American production system and also in Europe. Penta is on a stable, slightly down compared to one year ago in terms of sales, having a close to 12% EBIT margin. Here I will say that most things are, from a result point of view, developing well.
We have a good both market and product mix in the quarter compared to one year ago. One year ago, as I mentioned before, the result was actually influenced by an SEK 18 million in one-off. If we exclude that one, the result in Penta is actually better compared to the year before. Looking into customer finance on page 18, we see that when it comes to new financing volumes, it is very strong year-over-year. We have also then a good development when it comes to the margins in the business. The credit portfolio is developing in a very good way, stable and good way. We only have one item here that is disturbing the picture, and that is that we have a non-recurring audit adjustments in this quarter that relates to previous years.
If we would exclude that one, the profitability in operating income in customer finance would have been improved quite a lot actually compared to one year ago. Looking closer into the balance sheet and cash flow in the group, it is on a SEK 4 million level, which is more or less exactly the same as we had in the second quarter last year. When we look into the investments, we have had now two quarters in a row, a lower level of investments compared to what we had in 2003, which we should have, of course, also, since we are coming out of one or two years with quite heavy investments in the group. It's worth to note here that seasonally-wise in the group, we have a third and fourth quarter where we actually have an increasing trend over the year.
I think it will be difficult to keep the investments on this low level in the third and fourth quarter, but the ambition is definitely to be on a lower level for the whole year compared to last year. That is absolutely achievable, taking into consideration the good trend we have started in here. No big changes when it comes to the working capital and how that affects the cash flow. We can see that the total change is SEK 0.7 billion. Maybe worth to mention the inventories. There we had, I think. We were hoping for a better development in the quarter.
On the other hand, if we look upon the development that we have had in the quarter with the situation in Brazil to take down production and adjust inventories along the whole supply chain, not only in our own activities, but also with the dealers, of course, steep decline that we saw in China, and also then to be able to manage the inventory situation in such a difficult situation. We also see that buses, due to some extent to the production disturbances, also have had a problem with the inventory. We have then, of course, a few positive sides. We have managed inventory very well in our European system and so on. As a whole, although not being satisfied, I think it's fairly well managed, but there are a few pluses and a few minuses. In the bar other, this is unusually high with a plus of SEK 1.3.
What has been offsetting some of the negative developments on working capital or inventory in buses and so on is that we have received quite a portion of advanced payment in the quarter in the range of SEK 6,700 million. That explains why that part of the working capital has developed so well.
If we turn into the efficiency program that we are running in the group for the time being and look closer into the white collar and consultants, we see that if you remember that we had in the first quarter this year a reduction of 900 white collar, that was I think a very good start of the program was due to the fact that the program was kicking in in a good way, but also that you get an initial effect of the fact that we are having a headcount freeze as well, and tight restrictions on when it comes to employment of new white-collar employees. In the second quarter, we reduced it with another 300. That is exactly according to plan so far. We can see also that we have finalized our voluntary leave program in Sweden. This is not affecting so far the headcount figures.
That effect will come in headcount mainly in the third quarter, to some extent in the fourth quarter as well. We see that our voluntary leave programs in France and Japan is progressing according to plan. Here we'll also see the headcount reduction coming in third, but mainly here in the fourth quarter in 2014. As a whole, the reduction program is about 4,400 people, white collar and consultant. It runs over from the second half or late 2013 up until the beginning of 2015, when the majority of that 4,400 will leave during the course of this year. As I said before, it goes according to plan. Looking into the operating expenses on page 21.
We can see here that the trend, maybe not impressive if you look upon the charts, but the trend has been broken when it comes to selling and also our cash R&D expenses. The decrease in the second quarter here is also that according to plan. We do have a very strong focus now to continue with the planned reduction that we have within the group. Turning to page 22, maybe a little bit of a summary regarding our strategic program that is running over 2013 to 2015. We can see there what we have had when it comes to the price realization, which is a part of our strategic program. Price realization, which means improved margins. We can see that we are actually slightly ahead of plan when it comes to that. The second part is that we are on the road of decreasing operating expenses.
If you look upon the figures here and add together the cash R&D, the selling, and the admin expenses, it is actually more than SEK half a billion that we are decreasing that this quarter compared to the second quarter last year. As I said before, here we need to have a continued strong focus to continue this trend with lower operating expenses. One area that will pick up in the second half of this year is the cash R&D reductions. We have, as Olof mentioned before, we are decreasing our activities level, and that will also mean that the decrease will come more in cash R&D going forward. Maybe one remark, maybe a technical remark, you can see here that the IT cost reduction is there as well.
It's important that you don't double count that one because we have that as an indicator also that is coming down. That is actually in the P&L included in all the other lines, so you cannot add up all these three things together. When it comes to the other parts of the program, which is actually related to the production cost and the material cost reduction, they will mainly have an effect when we come into 2015. Steps are, of course, already taken, and we can see one example of that in the second quarter, where we have actually concentrated our production of medium-duty trucks into one assembly plant in Europe. Of course, that will gradually have an effect on these steps. The big steps we have taken and the improvements in our P&L and our cost base will be seen in 2015.
By that, I will hand back the word to Olof.
Okay, thank you very much, Jan. Then I would like to summarize the quarter by highlighting the negative and the positive factors. I think we have alluded on the construction equipment in China and sales decline for trucks in Brazil. I would like to stress the fact that this is now the two most important negative factors that we have in this quarter. One, which we have taken care of, that is the truck situation in Brazil, the rebalancing, as I talked about. One which we will have to work through over the next quarters in order to make sure that we come back in balance in this. This is a reality. This is a market change. It is something that we just simply have to do.
The low capacity utilization in parts of our industrial system, we talked about that as well. It goes for in the beginning of the quarter for the European system, at the back end of the quarter, not so much. We have filled up the factories in a good way. Then, as Jan mentioned, of course, we have in construction equipment also in the factories in the emerging markets, where we have, due to the market situation, low capacity. Then, of course, as we have seen, the height of the cost for R&D through reduced capitalization or due to reduced capitalization, [and it's something that it's no surprise, based on output, it's something that we have to] compensate for on a year-over-year comparison, and we are committed to do that.
I think it's very important also to look at the positive factors when it comes to where we are making headway, because the cost savings through the efficiency program is now, as Jan was showing clear effects. We see that in the cash R&D. We see it in the sales side, we see it in the admin. This program is continuing, and we're pushing a lot, and we will have enormous focus on that during the second half, making sure that we're delivering on the different areas we have. I think it's also important to remember that we have a market situation that we have to take care of. We do that, we have a more long-term transformation of the group, which is going on according to plan as well. It's two sides of that coin.
We have a strong North American market and a strong Japanese market where our focus will be to focus on the profitability in these two markets and making sure that we grow organically. A European market that developing actually according to what we have expected, albeit the pickup came a little bit later than we thought. Now at the back end of the quarter is there. The positive price realization on new ranges we are talking about, it is actually a substantial part in, you all mentioned that the increase in the profitability for trucks, excluding one-timers, is actually done over. The positive factors are actually outweighing the negative factors coming from Brazil. We see the increased market shares in Europe, North America, Brazil, and Japan. Our position in the market is there.
It's been a mixed quarter, two very tough markets, also a lot of positive development in the other markets. Unfortunately, the positive strides could not, in this particular quarter, offset the negatives we had in Brazil and in China. With that, I hand over back for questions.
Ladies and gentlemen, if you have a question for the speaker, please press zero one on your telephone keypad. That's zero one to ask a question. We have the first question from Mr. Alex White from JP Morgan. Please go ahead, sir.
Yeah. Good morning, everybody. I've got a few questions, please. I'll take them one at a time. Firstly, how should we think about the cost within the truck production system in Q3 relative to Q2? I think that the dual production lines in Renault drop away. Do any other costs step up? Do we see much in the way of incremental savings versus Q2?
Okay. I think that we in general can say that, looking at the capacity utilization going into Q3, as we can see it now with the order intake, we can see we are in good balance. That goes for Europe. We're increasing in U.S. We have rebalanced the Brazilian system. The Japanese system is very well utilized due to that. In general, you can say that we have done the homework in terms of rebalancing, and therefore, we are well-balanced going into the third quarter.
You are running dual production lines, I think, in the Renault brand still in Q2. Does that now cease? Are there any other costs that step up that we need to consider?
Okay. If you look at the dual production is ceased. We also have actually completed the medium-duty line in Blainville, where we are now producing both Renault and Volvo as part of the efficiency program. I think in general, we are just going to continue to work on the cost efficiency there. In terms of the production, we have sorted out the dual production in the European system, and that is now gone.
Did the Brazil pricing pressure that you referred to in the press release, did that improve as the inventory was rebalanced, or do you expect that to persist going forward?
I think we rebalanced very quickly. It is very difficult to say to start with. We worked out on a day by day, on a region by region, on a deal by deal basis. I think we worked very swiftly in terms of rebalancing our volumes and production. We will have to wait and see how the market develop now in these regions. I would like to also point out that we are utilizing, of course, the brand position that the Volvo brand has in Brazil in order to make sure that we are keeping the pricing and the price increases. I would like to stress that we are increasing prices as high as possible. It is very difficult to say how the market and how the pricing will develop during the third and the fourth quarter.
Okay. The final question I had was, you said it would take several quarters to get inventory in China construction equipment rebalanced. I think several means more than two or three, but not many. Is the intended communication that it could be four or five quarters before it is brought under control, or do you think it could be sooner than that?
I think that if we would have known or had a clear view on that, we would have communicated. The reason why we don't give an exact quarter is, of course, how the market now going to settle down on a certain level, how the machine utilization will look like, and also how the industry inventory pipeline will look like going forward. Again, I will come back to that. We will definitely work as swiftly as we can in order to balancing our system throughout the dealers. It is a high buildup of inventory that needs to be flushed out before the system goes. I think we stay with that forecast that it will take quarters.
We can't tempt you to help us out with the number of, say, day sales or anything like that relative to Q2?
I don't think we normally disclose that, and we don't do that at this point in time either.
Okay, sure. Thanks very much for your answers.
The next question comes from Mr. Fredrik Stool from UBS. Please go ahead, sir.
Yeah. Hi, good morning, guys. It's Fredrik here at UBS. I was going to ask on U.S. Trucks, I think you mentioned that you're still not happy with the profitability in the U.S. What's missing here? You've had good engine penetration now for quite a while. The aftermarket business has been growing, again, for at least a year, maybe 18 months, very nicely. You have, as far as I understand it, a good and competitive product for the first time in a long while. Overall market volumes are good as well. I don't understand what's missing to get it where you want it. Can you clarify?
I think there are a couple of issues here, the first one is that the effect of the spare part business and the maintenance business, due to the increased penetration both on engines but also on the complete driveline, takes some time before it actually materializes. We see a steady increasing aftermarket portion of the truck, but it is not relative to the trucks that we're producing now, but that is increasing. I think it's also an issue about making sure that we are continue working on the competitiveness of the trucks and also on the brand position when it comes to the product versus the brand position, thereby the pricing as well. That is something, for instance, we do on Mack now. We have just launched a rebranding activity for the Mack brand.
We are working on the Volvo side as well, we work on the other. Don't read me wrong. My comment, which I have made a number of times, is that we are not where we want to be, that means that we are definitely making money in U.S., but we believe we have more potential there when we look at our brand, our position, our dealer network, and so on and so forth. It is a continuous work that we have to continue. To be quite honest, I would never be pleased with the profitability. There are always things to be done.
Very good. I'll leave it at that. Thank you.
Next question comes from Mr. Alexander Berger from Berenberg. Please go ahead, sir.
Good morning. Thanks for taking my questions. Just wondered, on the first instance, whether you would quantify the underabsorption that you've called out a couple of times now, as you've done in the past. Secondly, just on the improvements you've seen on the SG&A side, and that you've quantified and very helpfully in the slide, obviously shows that you're theoretically slightly ahead of the run rate that you've described at the Capital Markets Day. I just wonder whether you could comment on the phasing of that, given the charts you showed there suggested that there's something in the region of SEK 3 billion, I think, expected in the second half in terms of benefits from restructuring. Lastly, I just wondered whether you could update us on the developments with the Dongfeng JV. Thank you.
Okay. On the underabsorption, I think I'm looking at Christer, we don't give that number at this point in time.
No.
I don't know if you want to comment anything on that, Christer.
You can say, if you look at it, we have had very low capacity utilization in our Russian plant. We have had, you can say, low capacity utilization in the Brazilian system. In construction equipment, it's been China and also in the plants around in the BRIC countries like Russia, India, and Brazil. Then some, you can say, overcapacity initially in Europe on the truck side.
Okay.
If we then look at the savings and the curve and where we stand, I think we will come back in the Capital Markets Day to give you a detailed update on where we stand. The intermediate report is that we are on the margin improvement side. We are ahead of plan when it comes to the cost savings that you have seen here and the cost savings that we plan also now to materialize during the second half of the year based on the hockey stick effect, since we do have some time in order to get all the negotiations with unions ready, is also progressing according to plan. I think the numbers, as you pointed out, shows that we're now starting to talk real differentiation now between the quarters, over the quarters in terms of the savings.
We have a good traction on that, and as I also write in my CEO comment, we feel comfortable that we will reach the SEK 9 billion at the back end of 2015, as communicated. On the Dongfeng side, we are still working through and also are involved in the different processes that conclude the deal fully with the Chinese authority. There are a number of process steps that are involved, and we don't have any negative signals. It is just a process that we need to adhere to, and we have full respect for that it takes some time.
Okay. I think you'd originally said or previously said a closure at the end of H1. You're thinking of that as a Q3 number, or is it end of the year?
We're working through the processes now. It's difficult to put a date on it. What's important for me right now is that we are working together with the Chinese authority, with Dongfeng. We are putting it. We don't have any negative news. It is progressing step by step. We just have to see now when it's coming into force, when everything is set and done.
Okay. Thank you very much.
Our next question comes from Mr. Michael Tindall from Barclays. Please go ahead, sir.
Hi there. It's Mike Tindall from Barclays. I've got a few questions, if I may. The first one is just a clarification. Is your entire European range now available in Euro 6? That's, I guess the first question. The second one, I wonder if we could talk about North America and the strong orders in Q4 and Q1. Was there a change in the profile of those orders? I certainly heard some people talking about the fact that historically, orders were more short-term, and that what we saw in Q4 and Q1 was longer term, so 2-year kind of orders coming through. Perhaps I'm wondering if that's the same case for you. We should really not necessarily think about that as being, I guess, a big push in 2014.
The last question just relates to staff numbers, and I always get confused on this. If I look at page four of your report, your total employees appears to have gone up on Q1. I'm just wondering how I should think about the reduction in headcount versus the numbers that I'm seeing, which show that actually the number of full-time employees has gone up. Thanks.
Okay. To start with Euro 6, the answer is very short and sweet. Yes, absolutely. The full ranges are not only available, that's the only thing we're selling now on the European market, the Euro 6. When it comes to order intake in the U.S., I would say we haven't really seen that as a big thing. We have a normal order mix between a little bit shorter, smaller orders, fleet orders, and mid-sized fleets and all of that. We haven't heard or seen any substantial change in that. It's pretty much the same mix going forward, I would say. On the staff numbers, Jan, you might want to clarify that.
I think the white collar headcount figures that as we have shown in this presentation, the reduction of 1,200 people so far, that is a net reduction of white collars. We have excluded the effects of Volvo Rents. This is a net number excluding the effect of Volvo Rents. As a matter of fact, we have a negative of 142 coming in from the acquisition of Terex, which we have not adjusted for. What is compensating when you look upon the total number of employees is that we have an increase more or less on the same amount in the blue collar workforce, and that is basically adjustments that takes place all the time to adjust for production rates and so on. We see an increase in parts of our industrial system for trucks, like in North America as one example.
We also see an increase of blue collar headcounts in buses as another example. That is nothing new. That's the normal way to run an industrial company, to adjust up and down on the blue collar side, and there we have the flexibility. The focus is to structurally take down the white collar headcount, and that's why we focus on that. And that is what you see also then in the slide with the 1,200 reduction in white collar employees and consultants.
That's great. Thank you very much.
Next question comes from Mr. Fraser Hill from Bank of America. Please go ahead, sir.
Yeah. Hi, good morning. It's Fraser Hill from Bank of America. three questions. Just to maybe have a top-down view on this restructuring effort. You talk about making a lot of progress and showing effects. I think maybe you could just break down how much of the SEK 4 billion of restructuring benefits that you had identified for 2014 that you have already seen in the numbers for this year already. I think at your capital markets day last year, you broke the SEK 9 billion down, if I'm correct, into SEK 2 billion for 2013, SEK 4 billion for 2014, and the balance in 2015. How much of that has come into the numbers in 2014 so far? Second question is on truck margins into the second half of the year. Is there any reason why we should be seeing these expand?
I think if you look at your order book, clearly that's down. If you look at your Latin American order book, which is your highest margin region, that's very sharply down. Why are you going to be able to see expanding margins when you're going to be seeing such a negative mix in the second half of the year for trucks? I think finally, just on the guidance, you've talked about the profit savings, the cost savings rather, being dependent upon the business being a SEK 300 billion business. If you look at the business today, first half of the year, you've been at SEK 138 billion. Order books are down, presumably it's going to be tough to double that rate for the second half of the year.
I think that's going to leave you needing, therefore, somewhere north of 10% growth in 2015. How do you get that growth? In that regard, should we look at the cost savings as potentially at risk? Thank you.
Okay. Let me start with the restructuring and the SEK 4 billion. Basically, you can say that if you look at the phasing of that curve during the year, you remember that on the capital markets day, that we had a hockey stick of this SEK 4 billion this year coming basically then from the reduction of staff and support functions and white-collar reduction in general. We are following that plan very well, we do see that we will be able to meet not only the SEK 9 billion for the total year, but we also will be able to meet the SEK 4 billion savings this year. When it comes to the margin, I think the question was the margin development in the trucks in general. You have two things that go against each other here, and we have to remember that.
One is the steady improvement that we see, I would even say that it's a good improvement we see in the European system, particularly then on the new ranges. We also see a steady over time increase in the margins on the North America business, we have some parts in Asia where we also see very good prices. That is one thing. You have the Brazilian situation, where we can definitely then conclude that this has impacted this quarter in this rebalancing, the rebalancing per se has done, of course, both in absolute terms and in margin terms being a hit. Now we are through that, we will have to see now how the margin development in Brazil continues.
Again, I want to stress that it was a conscious rebalancing decision we did during this quarter in Brazil. We are through that. Your last question was about the business volumes and the SEK 300 billion. Looking at it, the markets. I've been very clear on that, the market is what the market is. We want to grow in the market. We are growing the market. We are taking market shares in many of the markets we are active in. We have based our scenario on a SEK 300 billion. We are, of course, looking when we are judging the different activities into the reality. Again, I'm coming back to my comment that you have to react quickly when you see things happen quickly, like in China and in Brazil. We do that.
We also have to look medium-term and see how can we make sure that we are fulfilling the target that we have promised to everyone that is interested in Volvo in one way or another. That is that we want to increase the profitability. That is something we are looking into very carefully all the time based on the reality we live in. Joern was mentioning, for instance, the increased focus we're going to have on the expense side during the second half of this year. That's one example where we now see that we need to really make sure that we have everything in place to meet the targets. See that the trends on all these are happening. There again, this is something we have communicated to you, but we also communicate it internally.
Every one of the 100,000-plus people in the group is very well aware of this and aligning to it. It is something that we are monitoring very closely. We are not working in a theoretical world. We are living in a reality world. We are going to adjust to making sure that we are fulfilling the targets we have set up to 2015.
On that final point, you talked about the reality of the markets. You accepted that that's a market effect, especially in Brazil and China. Are you saying that the reality is that it's going to be difficult to get to that SEK 300 billion? Because I think it probably looks that way. Would you agree with that?
I would not speculate on the volumes in 2015. There are two things I've been very clear on. I do not speculate on volumes in 2015. I don't speculate on absolute margins or profitability in 2015. The only thing I'm saying is that we are looking constantly into the reality, we are continuously making sure that we are fulfilling our targets that we have set up in terms of margin improvement.
Okay.
The next question comes from Laura Lembke from Morgan Stanley. Please go ahead.
Good morning. I also have three questions, please. The first one is, could you quickly give us an update on what kind of restructuring charges we should be expecting in the second half of the year? I think at the capital markets day you said about SEK 4 billion for the full year. I think you're running a little bit less than that, at least in the first half, maybe give us an update on that. Second one is on Western European trucks. Could you maybe give us a bit of color in terms of the recovery, what you're seeing in the different countries and regions, and also in terms of the pricing trends here? The last question, coming back to Fraser's question.
You said that you don't want to speculate on either the margins or the profitability in 2015 and market levels, I think what becomes quite difficult for us is how are we going to actually assess whether Volvo has achieved the SEK 9 billion savings target or not if we don't actually have a base to compare it against? Thank you.
Okay. Let me start with handing over. I will take them in order, Laura. Let's take the restructuring charges first. Joern?
When it comes to restructuring charges, the outlook for the
Program, the SEK 4 billion is still what we are talking about. It can be a little bit difficult to exactly put that in time, so that's why we refrain from actually putting any numbers for quarter by quarter. The total amount is still valid.
Laura, Christer here. May I maybe add a comment? The restructuring charges is SEK 5 billion, and the savings is the SEK 4 billion.
Sure.
What some big programs that remains is, of course, France and Japan. That is more later this year.
Looking at the pricing and the development of the European market in particular, I would say that with our new product ranges, I've said that before, I'm actually glad to see that we have had the positive price realization that we have had. The customers are appreciating very much our new trucks, the feature level, the quality levels, the fuel economy, and so on and so forth, and that is something that is very good. I would characterize what I see right now coming from the second quarter in terms of order intake, as I said, that the European market looks like we are having a development that points at 230,000, which means that we will have a slightly stronger second half of the year in terms of the market.
I think we are well-positioned, both in terms of the price, in terms of the product market shares. We will have to focus very much, as I said, on the selling cost side, on the European selling system. We will have to make sure that we are regaining market shares over time here with Renault. When it comes to the 2012-2015 strategic program, the base is there. The base is the 2012 full year. That is the base we have started off with, and that is the base that we're always measuring against. The SEK 9 billion are measured against the 2012. My comment before was more related to the fact that the question was raised about what if scenarios, what if not and what if that.
My comment to that was only that if that's the case, then we have to look into making sure that we do the adaptations necessary in order to reach the targets that we have set. We are living in a reality, not in a theoretical world in that, and we are committed to do that, and that's what we're going to do. Again, the base is very clear. All the 20 objectives that you have seen are set with the base 2012.
Okay, thank you. Can I just follow up? Sorry, for the market development, I was looking a little bit for color on the different countries, like how, for example, Northern Europe is developing compared to Southern Europe.
Sorry. I forgot that one. Yeah. If we look at it, if we start from the south, we definitely see a positive development in Spain, albeit coming from very low volume. France is still on low levels and a little bit uncertain development in France. Germany is developing fine. If you look at U.K., also Eastern Europe, also the Nordics are developing according to our plans, I would say, and also in accordance with the market development that we anticipated.
Thank you.
Next question comes from Mr. Ashik Kurian from Goldman Sachs. Please go ahead, sir.
Good morning. It's Ashik from Goldman Sachs. I've got a quick follow-up on the price realization in Europe. Are you now able to more than offset the cost increases associated with Euro 6, or has Euro 6 become margin accretive in Europe? Especially in context of comments from some of your competitors on more aggressive pricing by other truck companies in Europe. If you can quickly comment on that, then I'll have a follow-up on Brazil.
Okay. The answer to that question is yes. We managed to more than offset the cost increases for Euro 6.
Okay. On the rebalancing that you mentioned in Brazil and Chinese construction equipment market, could you give us a bit more color on the level of underproduction that would have resulted in the quarter decrease? I'm finding it hard to reconcile it with the inventory numbers or the cash flow from inventory, because there does not seem to be a big underproduction. If the market remains at the current level, then should we see a pickup in margins in both Brazil and China construction equipment because you had underproduced this quarter and that will not recur in the second half of the year?
The question on Brazil again was? I didn't catch that really.
You can say we have had a number of stop dates, especially in June, and we'll have a few also now during the World Cup. We have had also in July, you can say, to rebalance the production. The good news is that we are more or less balanced out now, including the dealer inventory. Coming into August, September, we have reset the production rates to the new levels. We don't need to run-
That, of course, is improved then. When it comes to the fixed cost absorption compared to what we had before, that will of course still be there.
Yes.
Thank you.
Next question comes from Mr. Colin Gibson from HSBC. Please go ahead, sir.
Hi. Lots of questions so far, so just one from me, please, and that is regarding the long-term outlook for the Chinese construction equipment market. Olof, you were saying earlier that it is important to still be in that market, it is a big market, and go through these temporary difficulties. Just to give a longer term perspective, if we take the Chinese excavator market, just as an example, that is still going to be over 100,000 units this year. The EU economy is bigger than the Chinese economy. The U.S. economy is bigger than the Chinese economy. Both those territories have excavator markets of half that size. Are you really convinced there is long-term growth in the Chinese construction equipment market, or is there a risk that the peak of 2011 in that market was dramatically higher than the long-term stasis, if you like? Thank you.
I definitely think there is a big differentiation between the U.S. and the European market, and the economies is that, of course, if you look at the construction need in China over the coming years, is of course much, much higher. The plans to do construction is, of course, on a very high level. Therefore, you definitely see that the long-term trend, we also have to remember that the economy is growing very fast. It is a billion plus people, there are a number of correlations you can do in terms of how many excavators compared to GDP, number of people, and so on and so forth. There you can see that over time, it is still a lot of excavators and construction equipment machines needed in China going forward.
Exactly how that will pan out from a market point of view and from a peak growth point of view, that is very difficult to say. Over time here, definitely we will make sure that we participate in this, as I said, it will be, for a long time, the largest market in the world, we truly believe that we have still potentials and opportunities there. Where it will settle in, I think that is your question, where would be the going rate, sort of say, of the number of machines when the economy and everything has settled in? That is of course difficult to judge at this point in time. That we monitor very carefully and adjust our capacity and presence accordingly.
One quick follow-up, please, that is just on the same theme of construction equipment, a much more specific question. Are you making money in the Korean facility with the KRW at these levels?
We don't comment on specific factories or countries. That we never do.
Thank you.
Next question comes from Mr. Michael Roth from Kepler Cheuvreux. Please go ahead, sir.
Yeah. Morning, gentlemen. This is Michael Roth from Kepler Cheuvreux. One of your major competitors in trucks recently stated that from their standpoint, the pickup of order intake in trucks in Europe was occurring a little bit later than initially anticipated. Am I correct that this is also your perception? If so, what does it do to the dispersion around the mean estimate that you're having for the market in total in Europe in this year, as well as your cost savings? What I'm trying to get at is basically, are you saying, yes, the truck demand or order intake picked up a little bit later than we initially thought, however, more forcefully than we initially thought, so we're not changing our entire estimates for H2, neither as a spot estimate of 230,000, nor in terms of dispersion around that mean estimate?
Are you saying, well, we're keeping the spot estimate, but the dispersion has increased a little bit around that, and so has the dispersion about the SEK 4 billion savings target?
I think the pickup we've seen in the latter part of the quarter indicates then, and when we take that for the full year, indicates then a, as I said, giving the registrations up until May, looking into the full year of 230, a slightly stronger second half of the year in the European market than the first half of the year. That means that we are looking at the unchanged forecast, which we have had for quite some time now, which also means that all savings, all the restructurings, all the activities we have in the market for the European side is progressing exactly according to those plans that we have since the market is developing according to what we set out, I think, already beginning of this year or end of last year.
Okay. Just to make sure I'm getting this right. What you're saying is basically that the risk related to the spot estimates that you're using in your planning assumptions has not increased relative to what it was in your perception as of Q1?
No. I would say no. The market is developing in accordance with our expectations, with a little bit of a change, which we have talked about, is that the hangover Euro 5, Euro 6 went in a little bit into the second quarter, leaving us a little bit of under absorption in the first half of the year. We now see that order intake is picking up in a way that we feel today what we can see comfortable calling the market 213.
All right. Thank you.
The next question comes from Mr. Hampus Engellau from Handelsbanken. Please go ahead, sir.
Thank you very much. I have two questions. The first question is related on the earnings. If I look at the adjusted margin year-on-year, you're almost down one percentage point. If I remember correctly, you should have annual savings running at around SEK 2 billion moving into this year. I know you highlighted Brazilian profitability cracks, construction equipment China, underproduction Europe, and also R&D expenses. I would be interested in if you would maybe pick out one of those where we could find a major impact on earnings. Is it China, or is it trucks in Brazil, or is it the underproduction? That's my first question. Second question is more related to the underlying business on how did you see the service business in truck developing in Europe and North America during the second quarter?
Look at the earnings, if I should try to rate the three aspects you said, I would say that the underabsorption coming from the production is the least impacting. If we start from that end. Both the Brazilian, compared to last year, in particular, if you look at year-over-year comparison, both that one and the CE one is considerable negative impact on that one. I don't know, I'm looking at Jan on here.
No, we don't rank them. In both areas, it's both in absolute number, quite sizable amounts we're talking about, and also in terms of margin, it's noticeable in both areas as well. You have to have both of them as number one, I guess, or number two, depending on how you're looking for it.
When it comes to the spare part business, you can say that if we start in North America to start with times on our own penetration. Margins are also trending in a good way. We have good margins on the spare part business in North America. In Europe, we have also seen that the spare part business is developing according to our expectations. That means rather flattish. It's also a fact of the, as you are aware of, the fact that we have had during the crisis years, when you have less trucks going out to the market, those less trucks are coming into service in the months a couple of years later. That is now coming to an end, that phase, and we see that over the next year, we should have a running population which is then back to more normal level.
Again, flattish in terms of volumes and pricing is keeping up well as well. No worries on that side.
Can you please repeat what you said about North America? Maybe it was my line that were hooked up because I didn't catch you there.
Yeah, your line is breaking up a little bit, basically very quickly, this will be the last, then we have to break. When it comes to spare parts North America, it's developing in a positive direction based on the fact that we do have higher penetration. Margins are good, and we are getting the pricing out of the spare parts we are having. Step by step, we're increasing in North America.
Thank you very much.
Okay. With that, I thank you very much for joining this telephone conference, next time we will see each other face-to-face as normal in Stockholm. With that, I wish you all a very good day and also a nice summer, see to you, and talk to you, if not before, by the third quarter.