Ladies and gentlemen, welcome to the Volvo Q1 Report 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 Persson, please begin.
Thank you very much, operator, and good morning, good afternoon, and good evening to all of you, and welcome to this conference call for the Volvo Group first quarter 2014. Now we do like we have done the last times, where I will just make a very brief couple of minutes introduction. Then we open up directly for question and answers. If we look at the first quarter, I would like to reframe back that to the year of efficiency. If you remember, I've talked a lot about, during the second half of last year and also in the Q4 report, about 2014 being the year of efficiency. In the year of efficiency, we have two focus areas.
One is to continue to capitalize on the positive momentum that we saw at the back end of last year in terms of market share acceptance of our new products in the truck market and also our general market position. Given that target, looking into the first quarter, I can conclude that we are continuing to gaining and capitalize on that positive momentum. We are gaining market shares in many of the trucks markets, in Europe, in North America, in Brazil, and also in Japan. We do that both on the new product launches here in Europe, but also with the existing product launches in North America and in South America, in Brazil in particular. Also important, we can see that we are doing this increase of market shares with a positive price realization across the different markets.
The second part of the year of efficiency focus is, of course, the efficiency. There are three levels of the efficiency. It's the cost, it's the capital, and it's the process efficiency. Here we can see now in the first quarter that the effects from both the strategic program and on the efficiency program are now starting to yield results into the profit and loss as we speak. The structure reduction of white-collar employees and consultants is underway, and we have reduced the number of white-collar employees and consultants with 900 since the program was launched back end of last year. Now when it comes to the capital efficiency, we have then executed on the divestment of Volvo Rents and the commercial real estate has been completed.
That means that this first quarter sales is up from SEK 58 billion-SEK 66 billion, with a substantial increase in operating income coming from a half a billion up to SEK 2.6 billion before the restructuring cost. I would say that for me, this quarter is a stepping stone in the right direction. It is clear that we are moving in the right direction, both when it comes to our market penetration, our products, and our sales. It's also clear that we are moving in the right direction when it comes to the efficiency program. It is clear that we still have a lot of work to be done, and the focus for this year is very much on executing now on the different activities that we do have.
I would like also to emphasize that we do see now in the first quarter that we have moved from the state of analyzing and taking decisions to actually implementing and seeing the result of the different activities that we're doing. With that short introduction, I would like to open up for question and answers, and we can have a discussion on the topics that you have queries about.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad and you'll enter a queue. That is zero one. Please hold until we have the first question. We have a first question coming from Mr. Martin Wilkie from Redburn. Your question please.
Hi, this is Martin Wilkie from Redburn. I have three questions, if I may. Firstly, in your annual report, I wanted to ask about provisions. I've noticed that your net warranty provisions were actually down from about SEK 6.9 billion in 2012 to about SEK 5.7 billion, excluding the one-off charges. I assume that net warranty provisions will increase substantially because there's a new product portfolio, a lot of new launches. I just wanted to ask, what sort of net warranty provision charge should we be expecting for 2014? My second question would be sharing of the order data. I just wanted to know, do you actually share with some of your competitors what the order intake is for Q2, or do you simply find out at the end of the reporting season when everybody reports their data?
Very lastly, there's been a bit of a debate in the market, where a lot of people are saying that your new Volvo truck and your new Renault truck is basically the same vehicle underneath, while you guys have been saying publicly that this is not the case, that these are two very different products. Because this is just such a very important bit of the investment case, I just wanted you to clarify to what extent are these products similar? What is the percentage of common parts and components? A lot of your competitors do disclose this sort of thing, so I was just wondering if you would be able to disclose this as well. Thank you.
Okay, thank you, Martin. I think I hand over the first two questions to Christer Johansson or Jan Gurander, on the warranty side, yeah. When it comes to net warranty provision, it is actually three things that drives the warranty provision. One is, of course, the volume. Volume actually, the more trucks you sell, the more the provision increases, if you assume the same amount provision for each truck. That's one factor. The second factor is what you usually do when you launch new products, you are usually a little bit careful, i.e., a little bit conservative and add on initially a little bit higher provision, which then gradually, when you confirm that the quality is the right thing, are getting lower. These two things.
We have an underlying work when it comes to the quality work in the Volvo Group as well, that has also affected underlying quality of our products. There we have seen also positive trends. You have to add up all these three trends to come to the warranty provision at the end of the year. Therefore, it's very difficult to give you a generic or clear answer on where it will be at the end of the year, because you will have all these three factors coming in. I don't know if you want to add something, Christer Johansson. No. Okay, the order data process, Christer Johansson, that's something We are not sharing order data with our competitors, no. Good.
If you look at the commonality between the new Renault and the new Volvo, we are, and I think we have said that also that, where we do see and we have scale of economics and benefits of that, of course, we're sharing components between the trucks. There are also distinct differences between the two trucks, because in the new positioning that we want to have in the brand, the positioning work that we have done, we have been securing the feature levels, and thereby also components are different in the two trucks. I don't think we ever have disclosed the commonality per se, and I don't think we will do that today either. They are definitely quite-- You have both, as Jan Gurander was talking about trends before, you can talk about the same thing on the components.
You have some similarities, you definitely have a lot of distinguished differences as well, based on the fact that we are trying to make sure that we are segmenting the trucks in a different way.
Okay, thank you.
Okay, we have our next question coming from Mr. Christian Jewell from MainFirst Bank. Your question please.
Hi, good afternoon. Three questions, if I may. First one, just on the restructuring program. Could you give the exact year-on-year saving from the restructuring program in Q1, also, if possible, just a feeling for how this will phase through the year to get to the SEK 4 billion, which you've obviously talked about? Secondly, just on the mix in the trucks business, I was just wondering how we can expect the mix to impact the margin as we go through the year. Obviously, given the trends we're seeing in Europe, North America improving and obviously Brazil weakening. Thirdly, I was just interested if you could give a couple of comments on how you see order trends developing in Spain and Italy on the truck side. Thanks.
Okay. If I start with the restructuring program, there we have been clear that on the progressing of the savings of the SEK 9 billion, let's call it the SEK 9 billion program, which is then the strategic program improvements that we're looking for. We are following that plan. We did that during last year and also in the first quarter, we're following that plan. We also said that we will at the Capital Markets Day come back and report back to the market in more detail around the different movements and the progression that we do have. I can report that after Q1 we are following that curve that we presented at the Capital Markets Day last year.
When it comes to the order in south of Europe and Spain and Italy in particular, I think what you can say is that from now very low levels, we see some positive signs and some increases coming in Spain. I would say in Italy, it's a little bit more uncertain situation, but there are some positive signs coming out of Spain in terms of orders. When it comes to the mix in the truck business, Christer, perhaps you would like to elaborate a little bit on that. Well, you can see that Brazil coming down and U.S. and Japan coming up in the order mix is, from a margin standpoint, you can say slightly negative. Of course, we have raised production now in the U.S. and Japan that helps to offset some when it comes to capacity utilization.
Usually, we have higher margins in Brazil, you can say.
Thank you. Just one quick follow-up. Is there a positive impact of, I guess, weaker developments in the Russian market on the mix side?
I would say that the deliveries to the Russian market has been quite low for a few quarters already because of the price increases we have been forced to implement due to scrapping fees and so on. As you know, Russia was last year only 3% of the group revenues. I wouldn't say it will be any significant impact on the margin because the volumes are so small.
Thank you.
We have a next question from Mr. Fredric Stahl from UBS. Your question please. Mr. Fredric Stahl, your line is open now.
Sorry, I'm here. I was on mute. Hi guys. Good afternoon. Could I ask you, do you agree with the view that the Euro 6 introduction will lead to a greater than usual spread in performance between the different OEMs, i.e., that the fuel efficiency and quality hurdles here are greater than with previous emission changes, therefore, there will be opportunities for successful OEMs to differentiate themselves away from the less successful OEMs in a way that hasn't been possible before. Did you agree with that?
Basically, no. I don't see that, to be quite honest. The technology steps that we have had, so Euro 4, Euro 5, Euro 6, has all been steps that has integrated a certain complexity and new technologies involved. I think that over time everyone has managed to come to grip with it, in terms of the aspects that you were saying. No, I wouldn't say that I would count on that or see that.
Okay. Thank you.
Okay. There are no further questions for the moment. Therefore, I would like to remind you that if you want to ask a question, you will have to press 01 on your telephone keypad. That is 01. Thank you.
Okay.
We have a next question coming in from Mr. David Raso from ISI Group. Your question, please.
Yes. Good afternoon. Good morning. A question on pricing in Europe. How do you feel you're able to pass on the Euro 6 price increases? Can you give some color on how successful you've been so far?
Definitely. Both when it comes to the Euro 6 price increases and also the new ranges feature increases and the uplift of the both Renault and Volvo, I'm very satisfied with the way we have managed to do that. We have covered the extra cost. We have had a positive price realization on both of these products. To answer you very shortly, I'm very satisfied with the way we have managed that.
I know we're at lower volumes right now, how would you characterize the profitability of the new Volvo Trucks Euro 6 versus the prior generation?
As I said, we have managed to cover the cost for the price increases and thereby also making sure that we keep the profitability on the products.
Okay. I appreciate the color. Thank you very much.
Thank you.
The next question comes from Mr. Ashik Kurian from Marshall Wace. Your question, please.
Yes. Hi, good afternoon, everyone. I just wondered in terms of the production rate in North America, how are you going to raise that? Are you going to add an extra shift or just a few more personnel, or how is that going to take place?
In the first instance, that we are now planning is to actually increase the capacity as we have without introducing new shifts. This is something that we're looking at, and it depends also on the order intake going forward, of course. As the first step now we are managing with manning adding, so to say, in terms of doing that.
Great. Thank you very much.
Okay. We have a last question from Mr. Michael Tindall from Barclays. Please go ahead, sir.
Hi there. It's Mike Tindall from Barclays. Just a clarification, if I may. If I'm not wrong, at the end of last year, you mentioned the possibility of doing some actions in CE. Earlier this morning, I got the impression that perhaps you were talking about doing some restructuring at CE, but you also mentioned the improvement was largely driven by volumes. I just wondered if you could give a bit more clarification around what the plan is in CE in terms of restructuring, and whether or not that's ongoing or something that's going to happen a bit further down the track. Thanks.
Okay. What I mentioned this morning was that in CE now, during the quarter, we have taken decision structurally to do a restructuring in the European and particularly the Swedish production network, by reducing the number of blue collar employees by 430. That is not volume related, that's structural. That is a part of, I would say, the lowering the break-even point on the fixed cost structure in CE. Of course, we're doing other things around there as well continuously. What we do in terms of Focusing and refocusing the R&D now after the Tier 4 Final has been launched, is actually to put the R&D money into the product cost reduction, which is then a more sort of a competitiveness action that we're doing in order to make sure that by doing that also, we can increase our margins.
These two actions together then is what we mean about doing the focus on the CE side right now.
When you talk about the product cost reduction, are we talking about further localization or is that a separate piece?
No, I would say it goes into looking through the particular structure of the product. You're looking at the supplier side, you're looking at engineering solutions in the products. You're looking at all these things that you look at in the build-up of a product per se, and see what can we save and what benefits can we get out. Having said that, of course, we're going to utilize our global setup that we do have around the world, both in terms of global suppliers but also in terms of our own global manufacturing footprint to make sure that we achieve that. When it comes to the manufacturing footprint, per se, the locations that we are today in Europe, U.S., and other places around the world, that is not on the table.
Okay. Thank you very much.
There are no further questions. Therefore, as a reminder, if you wish to ask a question, please press 01. We have a follow-up question from Mr. Cedric Dahl from UBS. Your question, please.
Yeah. It's a quick one. What was the China revenues for construction equipment in the quarter?
That one I hand over to you, Christer.
That I don't have on top of my head, to be frank.
Well, if you give me a call afterwards, maybe I can find out to see what the number was. I need to dig it out.
Yeah. No, I'll do that. Thank you.
Okay. Operator, if there's no further questions?
There is another question from Mr. Rob Wertheimer from Vertical Research Partners. Would you like to take it?
Absolutely.
Okay, perfect. This line is open now. Thank you.
Hi. Good afternoon. I'm sorry, I was hitting star one instead of zero one. Just a quick question on North American truck. It seems as though the order surge in fleet business may crest a little bit, but there should be a lot of fundamental demand on the Mack brand. I just wondered about the differing order trend in Volvo and Mack, and whether you'd expect a higher incremental margin given the more depressed nature of the in-town business. I don't know if you're willing to discuss the margin differential between the two brands in North America. Thanks.
No, we don't do that particular. What we see, and I mentioned this morning, and it's worth re-emphasizing, is that what we're doing in terms of brand and brand positioning and the efforts we're now doing with the product line that we have in Mack, is really to make sure that everyone understands that we see the Mack brand as a great asset in the group. We believe that over time, there is definitely an upside on the Mack brand in terms of market share on the different segments that Mack, of course, in the traditional dump truck, construction truck segment, waste management and so on and so forth, but also on the highway. There is something we are investing in this new brand positioning and brand revitalization to take benefits out of that and to invest in that.
We also believe that looking into long term, we believe that there is an upside also, and a potential, I believe, and a good place for the Volvo brand in North America and in the U.S. in particular, than to gain market share over time. That's more long term.
Great. Thank you.
Okay.
There are no further questions.
Okay. If there are no further questions, then I thank you so much for calling in, and thank you for sharing this first quarter review, our first quarter report with us. I wish you all a very nice weekend.