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 Parson, 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, a couple of minutes introduction and then we open up directly for question and answers. And if we look at the Q1, I would like to refrain back that to the year of efficiency. And 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. And in the year of efficiency, we have 2 focus areas.
1 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. And given that target looking into the Q1, 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. And we do that both on the new product ranges here in Europe, but also with the existing product ranges in North America and in South America and Brazil in particular. And 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 euro efficiency focus is, of course, the efficiency. And there are three levels of the efficiency: it's the cost, it's the capital and it's the process efficiency. And here, we can see now in the Q1 that the effects from the both the strategic program and on the efficiency program are now starting to yield result into the profit and loss as we speak. The structural 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. When it comes to the capital efficiency, we have executed on the divestment of Volvo Rents, and the commercial real estate has been completed.
So that means that this first quarter sales is up from SEK 58,000,000,000 to SEK 66,000,000,000 with a substantial increase in operating income coming from SEK 500,000,000 up to the EUR 2,600,000,000 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. But it's also clear that we are moving in the right direction when it comes to the efficiency program. However, 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.
But I would like also to emphasize that we do see now in the Q1 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. So with that, short introduction. I then would like to open up for question and answers, and we can have a discussion on the topics that you have queries about.
And we have a first question coming from Mr. Martin Vieja from Redburn. Your question please.
Hi, this is Martin Micha from Redburn. I have three questions if I may. Firstly, in your annual report, I wanted to ask about provisions. I have noticed that your net warranty provisions were actually down to from about $6,900,000,000 in 2012 to about 5.7 $1,000,000,000 excluding the one off charges. And I assume that net provision net warranty provisions will increase substantially because there's a new product portfolio, a lot of new launches.
And 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? And 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 rental truck is basically the same vehicle underneath.
While you guys have been saying publicly that this is not the case that these are 2 very different products. So and just 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? And 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, Mads. I think I hand over the first two questions to Christa regarding the or Jan,
on the warranty side. Regarding net warranty provision, it's actually three things that drives the warranty provision. And one is, of course, the volume, volume you have actually. The more trucks you sell, the more the provision increases If you're seeing the same amount provision for each truck, that's one factor. The second factor is what you should 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 we confirm that the quality is the right thing are getting lower. So these two things. Then we have an underlying work when it comes to the quality work in the Volvo Group as well that is also affected underlying quality of our products And there we have seen also positive trend. So you have to add up all these three trends to come to the royalty position at the end of the year.
Therefore, it's very difficult to give you a numerical 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, Kristi.
Okay. And then the order data process, Kristi, that's something
It's we are not sharing order data with our competitors, no.
Good. And then 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, I mean, where we do see and we have scale of economics and benefits of that, that, of course, we're sharing components between the trucks. But 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 are different in are different in the 2 tracks. I don't think we ever have disclosed the commonality per se, and I don't think we would do that today either. But they are definitely quite you have both.
As Jan was talking about before, you can talk about the same thing on the components. You have some similarities, but 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. And we have our next question coming from Mr. Chris 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? And then also if possible just a feeling for how this will phase through the year to get to the EUR 4,000,000,000 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? And then 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.
If I spoke with the restructuring program, and we have been clear that on the progressing of the savings of the SEK 9,000,000,000 let's call it the SEK 9,000,000,000 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 Q1, we're following that plan. And we also said that we will let the Capital Markets Day come back and report back to the market in more detail around different movements and the progression that we do have. But 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 particular, I think what you can say is that we 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 the space in terms of orders. When it comes to the mix in the truck business, Christophe, 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. But of course, we have raised production now in the U.
S. And Japan that has to offset some it comes to capacity utilization. But in usually, we have higher margins in Brazil, you can say.
Thank you.
And 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 so on. So and as you know, Russia was last year only 3% of the group revenues. So I wouldn't say it will be any significant impact on the margin because the volumes are so small.
Thank you.
And we have the next question from Mr. Frederic Stahl from UBS. Your question please. Mr. Frederic 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 in previous emission changes. And 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, I no, I don't see that, to be quite honest. The technology steps that we have had since Euro 4, Euro 5, Euro 6 has all been steps that has integrated a certain new technologies involved. And I think that over time, everyone has managed to come to grip with it in terms of the aspects that you were saying. So no, I would have said 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,
Okay.
And we have a next question coming in from David Raso from ISI Group. Your question please.
Yes. Good afternoon. Good morning. Question on pricing in Europe. How do you feel you're able to pass on the Euro 6 price increases?
Can you give us 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. So we have covered the extra cost. We have had a positive price realization on both of these products. So 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, but 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. Austin Pearl from Marshall Weisz. Your question please.
Yes. Hi, good afternoon everyone. I just wondered in terms of the production rates in North America, how are you going to raise that? I mean are you going add an extra shift or just a few more personnel? How is that going to take place?
We are in the first instance that we are now planning is to actually increase the capacity as we have without introducing new ships. But this is something that we're looking at, and it depends also on the order intake going forward, of course. But at the first step now, we are managing with adding manning adding, sort of, say, in terms of doing that.
Great. Thank you very much.
Okay. We have a last question from Mr. Michael Timsler from Barclays. Please go ahead, sir.
Yes. Hi, there. It's Mike Timsler
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. And then 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. When I look what I mentioned this morning was that in SE 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 new collar employees by 430. And that is not volume related, that's structure. So that is a part of, I would say, the lowering the breakeven point on the fixed cost structure in CE.
And of course, we're doing other things around there as well continuously. Then what we do in terms of focusing and refocusing the R and D now after the Tier four final has been launched is actually to put the R and D money into the product cost reduction, which is then an all sort of a competitiveness action that we're doing in order to make sure that we by doing that also can increase our margins. And these two actions together then is what we mean about doing the focus on the CE side right now.
And when you talk about the 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 the 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 buildup 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. But 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. Thanks very much.
There are no further questions. And we have a follow-up question from Mr. Frederic Stahl from UBS. Your question please.
Yes, it's a quick one. What was the China revenues for Construction Equipment in the quarter?
That's why I hand over to you, Christer.
That I don't have on top of my head to be frank. Well, you can if you give me a call afterwards, maybe I can find out to see what the number was. I need to dig it out.
Yes. No, I'll do that. Thank you.
Okay. Operator, if there is no further questions.
There is another question from Mr. Rob Wertheimer from Wertable Partners. Would you like to take it?
Absolutely.
Okay, perfect. Your line is open now. Thank you.
Hi, good afternoon. I'm sorry, I was hitting star 1, it says 1. So 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. So I just wondered about the differing order trend in Volvo and Mack and whether you'd expect 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 2 brands in North America. Thanks.
No, we don't do that in particular. But I mean what we see, and I mentioned this morning and it's worth reemphasizing, 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. And 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. So there is something we're investing in, in this new brand positioning and brand revitalization to take benefits out of that and to invest in that. And we also believe that looking into long term, we believe that there is an upside also and a potential, I believe, and a good price for the Volvo brand in North America and in U.
S. In particular than to gain market share over time. But 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 Q1 review, our Q1 report with us. And I wish you all a very nice weekend.