Ladies and gentlemen, welcome to the Volvo Group Report of 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 listen only mode and afterwards there will be a question and answer session.
Olof, please begin.
Thank you very much, operator, and most welcome to this telephone conference for the Q2 in 2014 for the Volvo Group. And if you follow me to Page 2, you see a summary slide and 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. And 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 an unchanged sales compared to Q2 in 'thirteen on SEK73 1,000,000,000.
We are reporting a result of SEK4.3 billion or 6% before restructuring charges. In that, we do have a number of positive one timers. And 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. And 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 3 and starting with the the Europe. I would say that the quarter started a little bit slower than we have anticipated. The hangover effect from the Euro5, Euro6 transition did also impact the first part of the quarter. But then as we have moved along, we have seen a gradual improvement in demand.
And 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 range is up. And 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. So 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 and we're leaving 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 and 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 again,
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market that is Again, a market that is generally have a good performance. We see that the freight environment is good and improving. And 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 fleet. 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 and it's increasing as you can see both for Mack and for Volvo. The book to bill is 86% and that a result of the fact that you can see that order intake during Q4 and Q1 was quite high and we have therefore built a pretty long order backlog we have to deliver and therefore we then also now increase the production rate in Mackenzie and New River Valley. As always, when it comes to quarterly reports in North America, we report also on our penetration on the engine and I Shift penetration. And we are now in engines 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. I 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 the aftermarket business. And we also see that the market share for the dealer side is increasing. And we keep our total market forecast of 260,000 for North America. If we then move into Page 5 and coming into a market that has been and a region that has been tough during the quarter definitely rebalancing of our Brazilian system.
Rebalancing of our Brazilian system. And let me go through the story a little bit here. What happened was that we saw and we also communicated That meant that we had to That meant that we had to rebalance our dealer stock. And 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 lower our own and we're selling out of their stock. And that in combination, both the lower production and the lower sales had a considerable negative effect on the result if you compare it to a year before.
Good news here then though is that we did 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 good to see that we are improving our market share with more than 2% compared to a year ago. So we have a good movement there. But there has been a tough quarter for the Brazilian organization in order to make sure that we are now readjusting the system and rebalancing it into a market of 90,000. If we then move in to Page number 6 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.
But what we see now is that we have launched the new Volvo ranges in a number of countries in Asia with very good receptions. And 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 tracks that we are launching throughout Asia. In Japan, we have had a continued strong demand and we also see that our market shares are moving on the heavy duty side and we are launching also facelifts and new products to support the market. And the focus going forward here is definitely to improve profitability in our complete Japanese operation. And 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 and coming out with new and competitive products. So 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 7 and look at the other very problematic area for this quarter and that is the CE business in China. And here again, we're talking about a balancing act in order to make sure that we readjust the system. And then I'm 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. And 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 7%. 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% and then we saw an accelerating decrease in the market during the quarter, which meant actually that there was not much of a spring season to talk to and 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, rebalancing is necessary. I'm absolutely convinced that the best way is to face reality and do it as quick as possible. The CEM 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. But we can only conclude that this will take some time with the inventory and the demand situation we have combined with the utilization of the machines that we see out in the market. So it's 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.
But as today, it's very difficult to say when we will be in balance again when it comes to the China Construction Equipment market. Again, I think it's 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 1 and it is very important that we continue together with SDLG to keep our position move in to page number 8, 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 build up and a very high interest on demand for hybrid and electric hybrid buses. We have a very good position there and 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 marine engines in Europe is early signs of recovery, but we should remember it's coming from very low level. And I think what's interesting this quarter definitely is that we have seen now strong inflow on new customers for industrial engines. And that is based on our very competitive and good new range of T4 final engines that Penta has put out to our industrial customers. And 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 9 then just to summarize what I've said before, you can see here that the increases in Europe of SEK1.3 billion as we talked about, North America up SEK1.5 billion, dollars Then you see South America in particular then trucks in Brazil and then Asia in particular then VCE in China has had a negative impact, meaning that we end up very much on the same level as we did last year. And with that, I will hand over to Jan, who will then go through the financials.
Thank you, Ulf. And we turn to Page number 11. Here, we can see that the development between the Q2 2013 up until 2014 goes from SEK3.3 billion up to SEK4.3 billion. As we can see here, the corporate and other bar is SEK 1,300,000,000 out of that SEK 1048,000,000 are related to the two one off items. The big part is €815,000,000 for the gain that we had on the sales of real estate and 5 is related to an adjustment of the overall rents business, 2.25 sales of Rents of 225 improvement compared to what we thought.
Apart from that, we can see that if we adjust for that, that the result is more or less on the same level as last year. And we can see that the improvement in trucks cannot offset the lower results of $570,000,000 that we have in CE. Between the 2 years and in the quarter, we had a slight negative impact of $176,000,000 We see that the currency is affecting us less in the Q1. As you remember, we had a negative of 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 is the result improvement you can find Slide number 12, where we then going from the SEK 3,300,000,000 in 20.13. In 20.13, we had some nonrecurring items. We had put up a warranty reserve in Q2 of $900,000,000 dollars And we also then had 2 positive things in 2013. 1 was related to Penta, one off of 88 €1,000,000 sorry, €81,000,000 And in trucks, we had a sale of activities in Japan of close to 100 So adjusting for that, the result is the 7.20 better in 2013.
We can now see that the gross income impact is a negative of $630,000,000 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 CEE. That cannot be offset by the improvements that we have seen when it comes to our European business and the margin improvement there in the Laudrac business. We still have the effect of R and D capitalization.
It is the same amount or size that we had in the Q1. It's SEK 3 quarter of SEK 1,000,000,000. And now that then we can see that the improvements that we have on our operating expenses in the quarter actually a little bit more than $0.5 billion gradually is starting to kick in. We have that as the one effect on real estate of SEK 850,000,000 and within the or others, you find the €225,000,000 on rents. If we then turn to the next page and look closer into our truck business, you can see that we have a highest slightly higher sales compared to last year, SEK 48,000,000,000 compared to SEK 40 $6,000,000,000 When it comes to operating income up to $2,200,000,000 compared to 1.9 and operating margin excluding restructuring charges is 4.5%.
When it comes to the currency here, we have a negative of SEK 1 €39,000,000 in the quarter. And in this area, if the currency rates are as they are today, we think that we will have a slight 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 quarter is also in trucks. We had the lower warranty cost this year compared to last year of SEK 900,000,000.
We also have part of the real estate gain is actually affecting this business, like the $64,000,000 We then have the effects of capitalization, currency and the one off effect from the sales in Japan last year. If you look upon these pluses and minuses, it's almost SEK1 1,000,000,000 plus and it's almost SEK1 1,000,000,000 negative. And then what is remaining is that we have a profit improvement of something like SEK 300,000,000,000 between the quarters. And there we have on the positive side the effects of mainly our actually offset the negative effect we have right now, mainly related to our lower volumes and also margin pressures in Brazil. If we then turn to Page 15 and look closer into our CE business, here we have a SEK15 1,000,000,000 in sales in the 2nd quarter, which is down 9%, actually 10% if we exclude the FX effects.
And we can here see that there's been a gradual decrease in sales year over year. It was SEK 20,000,000 in 20 twelve-sixteen last year. We can also see here that the 12 months rolling figure is SEK 53,000,000,000. One should remember that if we walk back to 2012, the sales for the whole year of 2012 was SEK 63,000,000,000. So here, we're seeing a decrease of sales of taking place over 2 years of approximately 15%.
Operating income is then, of course, affected by this drop of sales coming down from 1.3% the year before down to 0.8%. And the EBIT margin, the operating margin is down to 5.1%. A little bit over here about the currency, it is $208,000,000 This is due to the fact that the Korean won is strengthening towards the U. S. Dollar.
And as you are aware of, we do have the ex evasive 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. So here we most probably will have a continued negative currency effect for the rest of the year. Looking a 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. And as we all know, it is a margin with very good margins. We also sell big machines. So this affects us quite a bit.
And also then 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. The as a consequence of the lower states, we get the low capacity utilization. We see as a whole not only China, but some other emerging markets mainly related to mining that are actually on a fairly sluggish level, which means that the capacity utilization in our assembly factories are on a too low level.
And of course, also then when it comes to our component factories, it is not on a satisfactory level. As mentioned before, we also have then the currency effect of SEK 200,000,000 and it's also worth to mention that we have adjusted our breakeven level in our Swedish production system and actually reduced the blue color workforce. And that has a one off effect in the Q2 of some SEK 50,000,000. That is not included in the restructuring programs. It is actually outside of that.
So that affects also the results in. In CE, One other focus area that we have in CE and 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 are continue to be in a healthy situation. If we then 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 and going up to an EBIT margin of 1.5%. Positive effect what's positively affecting the result in the 2nd quarter is, of course, volumes. We also see a good development when it comes to the aftermarket. But I think with the sales level of SEK 4,800,000,000, the profitability would have been higher. And the reasons why it's not higher is actually due to the fact that we have a weaker product mix compared to 1 year ago.
We do also have had some production disturbances, both in our North America production system and also in Europe. Penta is on a stable slightly down compared to 1 year ago in terms of sales, having a close to 12% EBIT margin. And 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 quarter compared to 1 year ago. And 1 year ago, as I mentioned before, the result was actually influenced by SEK 18,000,000 in one off.
So 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 the when it comes to new financing volumes, it's very strong year over year. We have also done 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.
And we only have one item here that is disturbing the picture that is that we have a nonrecurring audit adjustments in this quarter that relates to previous years. And if we would exclude that one, the profitability in operating income in customer finance would have been improved quite a lot actually compared to 1 year ago. Looking closer into the balance sheet and cash flow sorry, the cash flow in the group, it is on the SEK 4,000,000,000 level, which is more or less exactly the same as we had in the Q2 last year. When we look into the investments, we have had now 2 quarters in a row a lower level of investments compared to what we had in 2,003, which we should have, of course, also since we are coming out of 1 or 2 years with quite heavy investments in the group. It's worth to note here that seasonally wise in the group, we have a 3rd and 4th quarter where we actually have an increasing trend over the year.
So I think it will be difficult to keep those investments on this low level in the 3rd Q4, but the ambition is definitely to be at a lower level for the whole year compared to last year. That is absolutely achievable, Take into consideration the good trend we have started this year. No big changes when it comes to the working capital, 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 you look upon the developments that we have had in the quarter with the situation in Brazil to take down production and adjust the inventories throughout 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 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 done, of course, a positive signs. We have managed inventory very well in our European system and so on. So 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 far other, this is unusually high with a plus of 1.3 percent, 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 payments in the quarter in the range of $600,000,000 to $700,000,000 That's explained why that part of the working capital is has developed so well. If we then turn into the efficiency program that we are running in the group for the time being and look closer into the white color and consultants, we see that if you remember that we had in the first quarter this year a reduction of €900,000,000 white color. That was, I think, a very good start of the program. It was due to the fact that the program was kicking in at 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 Q3, we introduced sorry, in the Q2, we reduced it with another 300,000,000 that is exactly according to plan so far.
We can see also that we have finalized our voluntary lead program in Sweden. This is not affecting so far the headcount figures. That effect will come in headcount in the 3rd mainly in the Q3 to some extent in the Q4 as well. And we see that our voluntary programs in Krast and Japan is progressing according to plan. But here, we will also see the headcount reduction coming in 3rd, but mainly here in the Q4 in 2014.
As a whole, the reduction program is about 4,004 100 people, white collar and consultant. It runs over the from the second half or late 2013 up until the beginning of 2015, while the majority of that 4,400 will leave during the course of this year. And 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 chart, but the trend has been broken when it comes to selling admin and also our cash R and D expenses.
The decrease in the Q2 here is also that according to plan. We do have a very, very strong focus now to continue with the reduction with the planned reduction that we have within the group. Turning to page 22, we would then make a little bit of a summary regarding our strategic program that is running over 2013 to 20 15. And 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, well, we talked about is that the second part is that we are on the role of decreasing operating expenses.
And if you look upon the figures here and add together the cash R and D, the selling and the admin expenses, it is actually more than SEK 500,000,000 that we are decreasing that this quarter compared to the Q2 last year. And 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 cash R and D reductions. We have, as Olof mentioned before, we are decreasing our activity level. That will also mean that the decrease will come more in cash R and D going forward.
Maybe one remarket, maybe technical remark, you can see here that the IT cost reduction is there as well. It's important that you double count that one because we have that as an indicator also that, that is coming down. That is actually in the P and L included in all the other lines. So you cannot add up all these three things together. Then when it comes to the other part 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 2,050.
Steps are, of course, already taken and we can see one example of that in the Q2, where we have actually concentrated our production of medium duty trucks into 1 assembly plant in Europe. And of course, that will have an effect this year, but the big steps we can take and the improvements in our P and 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, John. And then I would like to summarize the quarter by highlighting the negative and the positive factors. And I think we have alluded on the construction equipment in China and sales decline for trucks in Brazil. But I would like to stress the fact that these are the 2 and I am now on Page 23, sorry.
And this is now the absolute the 2 most important negative 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 and one which we will have to work through over the next quarters in order to make sure that we come back 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 the beginning of the quarter for European system. At the back end of the quarter, not so much. We have filled up the factories in a good way. But 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. And then of course, as we have seen the high total cost for R and D through reduced capitalization or due to reduced capitalization is something that is no surprise, definitely not, but it is 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 and D, we see it in the sales side, we see it in the admin. And this program is continuing and we're pushing a lot. And we will have an 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 to remember that we have a market situation that we have to take care of.
We do that and then we have more the long term transformation of the group, which is going on according to plan as well. So it's a 2 side of that coin. Then we have a strong North American market and a strong Japanese market where our focus will be to focus on the profitability these two markets and making sure that we grow organically. And then a European market that developing actually according to what we have expected, albeit the pickup came a little bit later than we thought, but now at the back end of the quarter is there. The positive price realization on the uranium as we have talked about, it is actually a substantial part in and Jan mentioned 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.
And then we see the increased market shares in Europe, North America, Brazil and Japan. So our position in the market is there. It's been a mixed quarter, 2 tough, very tough markets, but also a lot of positive development in the other markets. Unfortunately, the positive slides could not in this particular quarter offset the negatives we had in Brazil and in China. And with that, I hand over back for questions.
We have the first question from Mr. Alex White from JPMorgan. Please go ahead sir.
Yes. 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 costs within the truck production system in Q3 relative to Q2?
I think the dual production lines in Reno drop away. Do any other costs step up? And do we see much in the way of incremental savings versus Q2?
Okay. I think that in general, I 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 and that goes for Europe. We're increasing in U. S. We have are increasing in U.
S. We have rebalanced the Brazilian system and the Japanese system is very well utilized due to that. So in general, you can say that we have done the homework in terms of rebalancing and therefore we are well balanced going into the Q3.
But do the you're running dual production lines, I think, in the Reno brand still in Q2. Does that now cease? And are there any other costs that step up that we need to consider?
Okay. The dual production is seized and we also have actually completed the medium duty line in Glendale where we're now producing both renewable and volware part of the efficiency program. So I think in general, we are just going to continue to work on the cost efficiency there. But in terms of the production, dual production in the European system and that is now gone.
Okay. And 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's very difficult to say to start with and we worked out on a day by day on a region by region and deal by deal basis. I think we worked very swiftly in terms of rebalancing our volumes and production. So we will have to wait and see how the market developed now in these regions. But I would like to also point out that we are utilizing, of course, the brand position that Volvo brand has in Brazil in order to make sure that we are keeping the pricing and the price increases.
And I would like to stress that we are increasing prices as high as possible. But it's very difficult to say how the market and how the pricing will develop during the 3rd Q4.
Okay. And then 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 2 or 3, but not many. Is the intended communication that it could be 4 or 5 quarters before it's 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. But again, I will come back to that. We will definitely high buildup of inventory that needs to be flushed out before it sits and goes. So I think we stay with that forecast that it will take quarters.
And we can't tempt you to help us out with the number of, say, days 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.
Okay. Sure. Thanks very much for your answers.
The next question comes from Mr. Fredrik Stolt from UBS. Please go ahead, sir. Yes. 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? I mean you've had good engine penetration now for quite a while. The off the market business has been growing for 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.
And overall market volumes are good as well. So I don't understand what's missing to get it where you want it. Can you clarify?
I think when it comes to there are a couple of issues here. And 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 take some time before it's actually materialized. We see a steady increasing of the market portion of the truck, but it's not where we it is not relative to the trucks that we're producing now, but that is increasing. Then 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. And 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, and we're working on the other. So don't read me wrong. It's my comment, which I have made a number of times, is that we are not where we want to be. And 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. So it's a continuous work that we have to continue. And to be quite honest, I would never be pleased with the profitability. There are always things to be done.
Next question comes from Mr. Alexander Berger from Bergerberg. Please go ahead, sir.
Good morning. Thanks for taking my questions. Just wondered on the first instance whether you would quantify the under absorption that you've called out a couple of times now as you've done in the past? And then secondly, just on the improvements you've seen on the SG and A side and 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. So 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 SEK3 1,000,000,000 I think expected in the second half in terms
of benefits from restructuring?
And then lastly, just wondered whether you could update us on the developments with the Dongfeng JV? Thank you.
Okay. On the under absorption, I think I'm looking at Christoper, but we don't give that number at this point in time. I don't know if you want to comment anything on that, Chris?
Because if you look at it, we have a very low capacity 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 brick countries like Russia, India and Brazil. And 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. But 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 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. And I think the number shows, 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.
So we have a good traction on that. And we as I also write in my CEO comment, we feel comfortable that we will reach the SEK 9,000,000,000 at the back end of 2015 as communicated. On the Donfeng side, we are still working through and also are involved in the different processes that needs to be done in order to be concluded before we can 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's just a process that we need to adhere to. And it's we have full respect for that, that it takes some time.
Okay. I mean, I think you'd originally said or previously said a closure at the end of H1. Is that sort of you're thinking of that as a Q3 number or is it end of the year?
I mean, the we're working through the processes now and it's difficult to put a date on it. So it's what's important for me right now is that we are working together with the Chinese authority with Dongfeng. We are putting it and we don't have any negative news. And it is progressing step by step. And 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 Tindle 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. And then 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
perhaps I'm wondering if that's
the same case for you. So, perhaps I'm wondering if that's the same case for you. So we should really not necessarily think about that as being, I guess, a big push in 2014? And then the last question just relates to staff numbers. And I always get confused on this.
If I look at page 4 of your report, your total employees appears to have gone up on Q1. So 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 full time employees has gone up?
Okay. To start with Eurosek, the answer is very short. Yes, absolutely. I mean, we have the ranges or not only available. That's the only thing we're selling now in the on the European market, the Eurosean.
When it comes to order intake in U. S, no, 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 midsized fleets and all of that. So we haven't heard or seen any substantial change in that. So it's pretty much the same mix going forward, I would say.
And then on the staff numbers, Jan, you might want to clarify that.
I think the I mean the white collar headcount figures that we have shown in this presentation, the reduction of 1200 people so far, that is a net reduction of white collars. We have in from the acquisition of Terex, which we have not adjusted for. The other so 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 is one example.
We also see an increase of blue collar headcounts in buses as another example. So that is not indicative. That's the normal way to run an industrial company to adjust up and down on the blue color side, and there we have the flexibility. The focus is to structurally take down the white color headcount, and that's why we focus on that. And that is what you see also then in the slide with the 1200 reduction in white color referees and consultants.
Next question comes from Mr. Fraser Hill from Bank of America. Please go ahead, sir.
Yes. Hi, good morning. It's Fraser Hill from Bank of Three questions. Just to maybe kind of a top down view on this restructuring assets. You talk about making a lot of progress and showing effect.
I mean, I think maybe you could just break down how much of the €4,000,000,000 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 €9,000,000,000 down, if I'm correct, into €2,000,000,000 for 20 13, €4,000,000,000 for 2014 and the balance in 2015. So how much of that has come into the numbers in 2014
so far?
2nd question is on truck margins into the second half of the year. Is there any reason why we should be seeing these expand? I mean, 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, very sharply down. So 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?
And then 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 SEK300 billion business. If you look at the business today, first half of the year, you've been at SEK138 billion, order books are down. So 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? And in that regard, should we look at the cost savings as potentially at risk?
Okay. Let me start with the restructuring and the SEK 4,000,000,000. Dollars Basically, you can say that if you look at the phasing of that curve during the year and you remember that on the Capital Markets Day is that we had a hockey stick of this SEK 4,000,000,000 this year coming basically then from the reduction of staff and support and white collar reduction in general. We are following that plan very well. And we do see that we will be able to meet not only the SEK9 billion for the total year, but we also will be able to meet the SEK4 billion savings this year.
When it comes to the margin, and I think the question was the margin development in the trucks in general and then basically it. You have two things that goes against each other here and we have to remember that. 1 is the improvement and the steady improvement that we see and I would 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. And also, we have some parts in Asia where we also see very good prices.
So that is one thing. And then you have the Australia, not Australia, Brazilian situation where we can definitely then conclude that this is impacted this quarter in this rebalancing. And the rebalancing per se has done, of course, on both in absolute terms and in margin terms being a hit. Now we are through that and we will have to see now how the margin development in Brazil continues. But again, I want to stress that it was a conscious rebalancing decision we did during this quarter in Brazil and we are through that.
And then your last question was about the business volumes and the SEK 300,000,000,000 Looking at it, the markets and I've been very clear on that. The market is what the market is. We want to grow in the market. We are growing in the market. We are taking market shares in many of the markets we are active in.
And we have based our scenario on the SEK 300,000,000,000. We are, of course, looking when we are judging the different activities into the reality. And 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, and we do that. And then 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 interesting all in one way or another and that is that we want to increase the profitability. And that is something we are looking into very carefully all the time based on the reality we're living.
And Jan was mentioned, 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 and see that the trends on all these are happening. And there again, I mean, this is something we have communicated to you, but we also communicated internally. So everyone of the 100,000 plus people in the group is very well aware of this and aligning to it. So it is something that we are monitoring very closely and we are not working in a theoretical world.
We are living in a reality world and we're going to adjust to making sure that we are fulfilling the targets we have set up to 2015.
So on that final point, you talked about the reality of the markets and I said that that's a market effect especially in Brazil and China. But are you saying that the reality is that
it's going to be difficult to get to
that $300,000,000,000 because I think it probably looks that way. Would you agree with that?
I would not speculate on the volumes in 2015. I do think I've been very clear, Ryan. I do not speculate on volumes in 2015. I don't speculate on absolute margins or profitability 2015. The only thing I'm saying is that we are looking constantly into the reality and therefore 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 Lipica from Morgan Stanley. Please go ahead.
Yes, 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 4,000,000,000 for the full year. I think you're running a little bit less than that at least in the first half.
So maybe give us an update on that. And 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? And then the last question coming back to Fraser's question. I mean, you said that you don't want to speculate on either the margins or the profitability in 2015 and market levels.
But I think what becomes quite difficult for us is how are we going to actually assess whether Volvo has achieved the €9,000,000,000 savings target or not if we don't actually have a base to compare it again?
Okay. Let me start with handing over to I would take them in all of our so let's take the restructuring charges first, Jan. When it comes
to restructuring charges, I mean, the outlook for the whole program, the SEK 4,000,000,000 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. But the total amount is still valid.
Dora, Christoph here. May I maybe add a comment? The restructuring charges is SEK 5,000,000,000 and the savings is the SEK 4,000,000,000. And what some big programs that remains is, of course, France and Japan that is more later this
year. Okay. And then looking at the pricing and the development of the European market in particular, I would say that with our new product ranges, and 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 levels, 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 Q2 in terms of order intake, as I said, a 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 for the year in terms of the market. And I think we are well positioned both in terms of the price, in terms of the product market shares. And we will have to focus very much, as I said, on the selling cost side on the European selling system. And we will have to make sure that we are regaining market shares over time here with Renault. When it comes to the 20 12, 2015, I would 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 9,000,000,000 are measured against the 2012. And my comment before was more related to the fact that the question was raised about what if scenarios, what if not and what if bad.
And then my comment to that was on that if that's the case, then we have to look into and making sure that we do the adaptations necessary in order to reach the targets that we have set. So 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. But again, the basis is very clear. It is the all the 20 objectives that you have seen are set with the base 2020.
Okay. 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, sorry. I forgot that one. Yes, if we look at it, we can 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 that we anticipated.
Thank you.
Next question comes from Mr. Arshik Kurian from Goldman Sachs. Please go ahead, sir.
Good morning. It's Arshiv 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 as 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? So if you can quickly comment on that and 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 of Euro 6. Okay.
And 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? Because I'm finding it to reconcile it with the inventory numbers that you or the cash flow from inventory because there does not seem to be a big underproduction. And if the market remains at the current level, then should we see a pickup in margins in both Brazil and China Construction Acupent 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 during the World Cup. We have had also in July, you can say, to rebalance the production. But the good news is that we are more that balanced out now, including the dealer inventory. So coming into August, September, reset the production rates to the new levels. So then we don't need to run any stop date or anything.
So that should improve, you can study the absorption in Brazil?
When it comes to the variable cost, that, of course, is improved. But when it comes to the fixed cost absorption compared to what we had before, that will, of course, still be there.
Yes.
Next question comes from Mr. Colin Gibson from HSBC. Please go ahead, sir.
Hi. Lots of questions so far. So just one for me, please. And that's regarding the long term outlook for the Chinese construction equipment market. Olof, you were saying earlier that it's important to still be in that market.
It's a big market and go through these temporary difficulties. But just to give a longer term perspective, I mean, if we take the Chinese excavator market and just as an example, that's 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 if you and there is a big differentiation between the U. S. And 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 and the plans to do construction is of course on a very high level and therefore you definitely see that the long term trend. And we also have to remember that the economy is growing very fast. It's 1,000,000,000 plus people.
And there are a number of excavators compared to GDP number of people and so on and so forth. And there can see that over time, it's still a lot of excavators and construction equipment machines needed in China going forward. Then exactly what how that will pan out from a market point of view and from a peak, throat point of view, and that's very difficult to say. But over time here, definitely, we will make sure that we participate in this. And as I said, it will be for a long time the largest market in the world and we truly believe that we have still potentials and opportunities there.
Where it will settle in? And I think that's your question. Where would be the going rate, sort of, say, of the number of machines when the economy and everything is settled in? That's, of course, difficult to judge at this point in time. But that we monitor very carefully and adjust our capacity and presence accordingly.
One quick follow-up please and that is just on the same theme of construction equipment, but a much more specific question. Are you making money in Korean facility with the 1 at these levels?
We don't comment on specific factories or countries. I mean, that we never do.
Thank you.
Next question comes from Mr. Michael Robb from Kepler Cheuvreux. Please go ahead sir.
Yeah. Good morning gentlemen. This is Michael Rupp from Kepler Cheuvreux. 1 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. Is Maria correct that this is also your perception?
And 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? Or 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 4,000,000,000 savings target?
I think the pickup we have seen in the latter part of the quarter indicates then and when we take that for the full year indicates then, as I said, giving the registrations up until May, looking into the full year of 230, slightly stronger second half of the year in the European market than the first half of the year. So that is and that means that we are looking at an 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. So 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 €5, €6,000,000 went in a little bit into the second quarter, leading us to a little of under absorption in the first half of the quarter that has been corrected. And we now see that order intake is picking up in a way that we feel today what we can see comfortable calling the market 230.
All right. Thank you.
The next question comes from Mr. Hampus Singelow from Handelsbanken. Please go ahead, sir.
Thank you very much. I have two questions. The first question is related on earnings. If I look at adjusted EBIT margin year on year, you're almost down 1 percentage point. And if I remember correctly, you should have annual savings running at around SEK 2,000,000,000 moving into this year.
And I know you highlighted Brazilian profitability trucks, construction equipment in China under production in Europe and also R and D expenses. I would be interested if you would maybe pick out one of those as where we could find a major impact on earnings? Is it China or is it trucks in Brazil or is it under production? 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 Q2?
Thanks.
If you look at the earnings and if I should try to rate the three aspects you said, I would say that the under absorption coming from the production is the least impacted. So if we start from that end. Then both the Brazilian compared to last year, in particular, if you look at year over year comparison, both that one and the C1 is considerable negative impact on that one. And I don't know, I'm looking at Johan here, if you want to rank the 2 or No.
We don't rank them. But 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. So you have to have both of them as number 1, I guess, or number 2, depending on how we look upon it.
When it comes to the spare parts business, you can say that in if we start in are also trailing in a good way. So 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 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 coming out to the market, those trucks are then coming those less trucks are coming in to service intervals a couple of years later. But I mean that is now coming to an end that phase And we see that over the next year, we should have a running population, which should come back to more normal level.
But again, flat ish in terms of volumes and pricing is keeping up well as well. So no worries on that side.
Can you please repeat what
you said about North America? Maybe it was my line that were because I didn't catch you there.
Yes. Your line is breaking up a little bit. But basically very quickly, and this will be the last one that 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, North America.
Okay. And with that, I thank you very much for joining this telephone conference. And next time, we will see each other face to face as normal in Stockholm. And with that, I wish you all a very good day and also a nice summer and see to you and talk to you if not
before by the Q3.