Ladies and gentlemen, welcome to the Volvo Report on the 1st 6 months 2012. Today, I'm pleased to present Olof Persner, 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 warm welcome, good morning, good afternoon to all of you to this telephone conference for the Q2 for the Volvo Group result. With me here in the room, I have Anders the CFO and Christian Johansen, Head of IR then being able of supporting and answering questions that you might have. We have had the presentation this morning, a press conference and also the presentation has been available together with the report on the net for quite some time. So I was contemplating on actually focus my discussion here on the market situation both for trucks and Volvo CE and then open up for a slightly longer period of time for questions later on. So if you would like to follow me to page number 10, which is called slowing order intake in North America and South Europe, I would like to elaborate a little bit about the order intake and the order intake situation and how we look at it.
In order to explain and also to cast some more light on the situation, we have opened up the disclosure a little bit more than normal also than in Europe and North America, it's split by brand. And if we start with Europe, we can see that the year over year minus 13% and quarter over quarter minus 8%. Looking at the Volvo brand, you can see that we actually have had a good period with an increase 2% year over year and quarter over quarter and that we have a very stable book to bill ratio of 100%. On the Renault side, Renault is of course affected by the slowdown in the southern part of Europe, which is normally a stronghold, but also of course that we now see the uncertainty moving into France as a market as well. However, in the 25%, we should remember that we also have the light commercial vehicles, which are vehicles that we've been buying from Renault S.
A. And Nissan. And if you take those away, the year over year number would be around 20%. As you also know, we have had a production cut in Renault in the beginning of the year. That one was actually a little bit too severe.
So we have during the quarter increased our production rate in Renault. And we are now running at a book to bill rate view of 91% there. In Europe, we are looking at slightly increased production rates in Russia now in Q3. And in our plants, we're also looking at a slight increase in production in the Swedish system during Q4. In North America, you can see that the numbers are minus 47 and minus 41.
We should remember, however, that the comparison numbers year over year minus 47 is very tough comparison numbers. If you remember, we had a period in North America where the order intake rates actually were running, if I remember correctly, above 300,000 on an annualized basis. So the comparison numbers in North America is very tough. That goes both year over year and also if you look quarter over quarter where we had a good order intake in the Q1, particularly on the MAX side based on a dealer restocking program that we had in Q1 and that also drove the orders in Q1 to a larger extent. Now if you look at the we have also added on the information about the year to date, which you can see below the table both for Mack and Volvo, where you can see the for the Volvo side, we have a minus 18% and a book to bill of 98%.
And on the MAX side equivalent numbers of minus 20% and book to bill 64%. Now looking at North America and the activities we are doing is that we are of course making sure that we're balancing the production with the demand. And therefore, we have planned to have a number of stop weeks during the autumn in order to make sure that we align our dealer inventory and our inventory in general and the whole pipeline should be in balance. In South America, you can see that we have year over year minus 7%, but quarter over quarter we actually have an uptick with 10% and a very healthy book to bill on 112%. And we are also there balancing our production with down weeks.
And also we have taken decisions on making sure that we have a production rate in Q3 that is adapted to the demand that we see going forward. And apart from that, in the other markets, you can see that we have some ups or downs also in other markets and in Asia. But in general, we have a, I would say, a situation where we do have in U. S. A very tough comparison from last year.
In Europe, you have a split between volume and renewal and those mix up to the numbers that you see at the bottom end there. But in general, we have had a good balance in our production system throughout Q1 and Q2 And we continue to keep a very close eye on the order intake to make sure that we continue to have the balancing both up and down. If you then follow me to Page 11, this slide is there also to reiterate the fact that we have become much better after the crisis in 2008 to actually managing and adapting our deliveries and production in line with our orders. And you can see 2,009 basically we have followed and had a rather good correlation between orders and deliveries throughout the period here. If we then move into Page number 12, I would like to spend a few minutes on the market and the market estimates that we have published today.
We can see that if we start from the top in North America 250 times. And here it is plus and minuses in the forecast of course. On the plus side, I must say that we do still have a replacement in the U. S. Market where the secondhand value of the old trucks combined with the higher fuel efficiency on the new U.
S. Temp trucks makes it a very good business case to transfer from an old truck to a new one. We also have good profitability with our customers and freight volumes that are keeping up in a good way. We also have a relatively high retail activity. If you would take the 2nd quarter annualized volumes, we are looking at around 270,000 trucks on the retail side.
And if we add on top of that, we also have a good and double digit growth in our spare parts showing that the fleets out there are actually moving. So that's on the positive side. On the minus side, we definitely have the macroeconomics uncertainty and the wait and see attitude that we have seen from our dealers and in the market in general. Of course, the order intake in the Q2 had an annualized pace on SEK 180,000,000 to be compared with the SEK 2 and SEK 70,000,000 we see in the retail. And of course, you understand that the 250,000 forecast that we are keeping unchanged means, of course, that we have to see order intake starting to come during the autumn here.
But if we add all these plus and minuses to what we can see today comfortable with our forecast of 250,000. Europe, we keep unchanged on 230,000. We do have a market that's developing approximately the way we anticipated. And we have said before that we believe that at the back end of this year, we will see some higher activities on the replacement cycle from the customers that now start to think about renewing the fleet and also having that done ahead of the Euro 6 introduction beginning of 2014. In Brazil, we have decided to lower the forecast for the heavy duty truck market 5 to 90 mainly driven by macroeconomics and GDP development in Brazil, which has been lower than anticipated during the first half year here.
Now of course, we have incentives coming into the Brazilian market and we will have to see how that will affect, but we don't believe that it will compensate it from the lower than anticipated volumes that we have seen in the Q1. We also, of course, have had a dampening effect on the fact that we had a renewal of the fleet with high volumes during 2011. In Japan, it might seem like the cautious unchanged $30,000 given the fact that the pace has been higher than that during the first half year. But here we see that some of that has been incentive driven and those incentives are fading out. And therefore, we believe that even though the reconstruction work after the tsunami and the earthquake is ongoing, we don't believe that the pace will be holding up for the full year.
And therefore, we have kept the Japan market unchanged on 30,000 units. If we then move on to Page number 15, if you follow me to Page 15. And then commenting market situation for Construction Equipment. We have kept the China market unchanged. Asia excluding China also unchanged.
And basically the only change we have done since the last quarter is Europe which we had up 10% to 20% before. And given the fact that we see this uncertainty and also not only in the southern part of Europe, but also now spreading into France, we do see also there that the forecast for Europe is being now more or less flat compared to last year. Otherwise, we keep the forecast as they were last year. So in moving on to Page number sorry for that, number 19, which is then the summary. I would like to state that I truly believe that we have delivered a very solid Q2 where we despite the macroeconomics and the market situation that we have seen have had a record size of SEK 84,000,000,000 which is actually the best second quarter ever or in our company's history.
And that is a good receipt, I think, on our globalization and our presence around the world giving us a good balancing power when some markets goes up and other goes down that we then can balance and still be able to grow in a nice way. Also the operating income per se SEK 7,300,000,000 is the 2nd best quarter when you look at the absolute number. And given the fact that I believe that most of the business area has done a very good job in coming in with good margins both Aero, Penta and perhaps in particular CE has shown a strong development in the quarter coming on a 13.3% operating margin. The one and the business area that is a little bit falling behind is buses. I just want to mention that buses do have an very difficult market situation with city buses down in Europe, city buses down in U.
S. And city buses not recovering from the Euro3, Euro5 switchover in Brazil. It's basically the markets in Asia that is still showing some growth and good development. And this in this market condition, it is of course very difficult. But on the other hand, we also have to see to that buses over time comes back to reasonable profitability levels, supporting investments that we need to do in that business area going forward.
So all in all, a quarter that confirms our global position, confirms the profitability. And also I would say that looking at the truck profitability, you can look it from 2 sides. 1 is of course the fact that the numbers that we present are very strong. And given the fact that we have a market shift in the truck business with a reduction in Europe and South America and growth in Japan and in North America. And an 8% margin is actually a very strong performance.
On the other hand, you can twist it around a little bit and also look at it that we are still then suffering from mix changes in our result and the leverage on the extra volume that we are getting in, in those kind of situations are not satisfactory. And this is, of course, exactly what we are addressing in the reorganization, the new way of working, our brand positioning work, our full potential activity list and so on and so forth. And that is being addressed as we speak. And as I said before, we will have the activity list of those actions and activities ready by port by end of Q3. So with that, I would like to conclude the somewhat shorter than normal presentation and giving some time and some more time for questions that I can elaborate on.
So operator, could you please open up for questions?
Our first question comes from Mr. Nico Bil from JPMorgan. Please go ahead sir.
Good afternoon, gentlemen. I'd like to ask 3 follow-up questions from this morning. First of all, on the U. S. Truck market, it seems as if I compare it to other competitors of yours, you had a fantastic Q1 and a development which seems to be a bit worse than the others just sequentially in the U.
S. Truck market. I'm just trying to get a bit of a flavor how the development went through the quarter. So can you tell us whether there was perhaps sort of something that needed to be offset because there was something too high in the Q1? Just like to get a bit of further flavor how you were trending out of the quarter versus the quarter itself.
Secondly, on Europe, seeing a decline in activity here sequentially whilst Scania was actually up, Wondering why there is such a difference. So Scania was up 12% sequentially, I believe, in Europe and Europe down 8%. Just wondering whether you can explain it a bit further and how again you came out of that quarter? On Brazil, actually two quick things. When did you see the actually seen sort of a little bit of an increase in the prices yet on the Euro 5 truck versus the Euro
Okay. Let me take the last question and then I'll leave it. Christi, you might be able to elaborate on the markets there both in Europe and U. S. When it comes to the pricing in Brazil, Brazil, we have had a of course an introduction of the Euro 5 that has been from a pricing point of view as all introductions somewhat tougher than normal.
But we are we do have a plan and we do have an activity list now when the Euro 3 trucks are sold and being out of inventory and then by we can start to really push that forward. So I think we have a good traction on our pricing. We do have a plan and we do follow it. The other part of the your question about Brazil about the subsidies and whether that come in, we don't know that yet really to be quite honest. Of course, we can say that in general, we have seen that the market responds to incentives, but we will have to wait and see how those incentives are panning out in the market.
But what we do say is that it is it will not probably not be enough to compensate and come back to our previous forecast. Therefore, we lowered the forecast somewhat. So Christi, could you elaborate on the U. S. Truck market and the European one?
[SPEAKER CHRISTIAN
CHRISTENSEN:] On the U. S. Order intake, you could say we had a very good March as we were going through with some stocking programs, especially on the MAX side. And of course, that meant that we pulled forward some demand from April into March. And since then, I would say we've been stable through the rest of the quarter.
And it's actually a bit likewise. We made a comparison to Scania. I haven't checked how we compared to Scania in the Q1, but I know we had, especially on the Renault side in Europe, a good order intake during the Q1. So we might have some more tougher comparison basis versus them. But I haven't done the analysis, but that's at least what has happened that we had a good order intake in Renault in the Q1 and then it slowed down in the Q2.
Christian, on Europe itself, are you still on the declining trend? Or are we stabilizing? Or what have you roughly seen there?
[SPEAKER JEAN FRANCOIS VAN BOXMEER:] Well, I would say it seems to be stable roughly. But given the uncertainty you have in the macroeconomic situation, things can fluctuate. And we have now come into the vacation period, which means that it's difficult to read the data and have a lot of confidence in the order intake that we see now coming through.
Thank you.
Our next question comes from Mr. Christian Magnegord from DNB. Please go ahead sir.
Yes, good afternoon. Two questions. First one really is to I guess trying to get a better understanding for the construction equipment development in North America where you cleared out from the market again. I was wondering how much of that is due to that you're investing in your own rental channel? And if not, what else are the drivers behind that?
Secondly, also if you can comment on R and D costs, how you think those will develop going forward? [SPEAKER KARL HENRIK
SUNDSTROM:] If we start with the Construction Equipment, the impact of the our own buildup of the rental fleet is not very much. The big part here is of course that we do see a buildup of the rental fleets by our dealers and customers. We do see also an increased activity level somewhat on the construction side and on the commercial housing side or the commercial side, whereas housing is still on those side. So I think the we have been we're happy with the growth that we have seen and both the 100 I think it was 110% last quarter and 89% this quarter coming in here. So good performance I think from our side here.
Then sorry, now you need to help me on the did you yes, there was the R and D going forward. Well, when it comes to the R and D, there are 2 things. 1 is, of course, that we do invest and we show that on press conference in terms of when Anders talked about the cash flow side. We do invest in our future products and the markets and we're going to continue doing that. And I don't think and I'm looking at Christer here now.
I don't think we give any particular guidance on that. We do have the Euro 6 development. You know that. And apart from that, we do continue to invest in products and markets going forward.
I think it's fair to say that it will continue to run on these levels through the year at least.
Just a follow-up on Construction Equipment. The buildup of the rental channel for your dealers, is that should we see that as a one off? Or do you think they will continue with this pace of investments? And secondly, also you ranked the truck division in terms of profitability by area this morning. Is it possible to do a similar exercise for the Construction Equipment division as well?
[SPEAKER STEPHEN ROBERT BINNIE:] On the profitability side, you mean. Let's start with the market. I think that we have a definitely a catch up effect during the years here when it comes to building up rental fleet and exchange because you know that the U. S. Market was down on time, aging fleet needs to be replaced and that we have done as we speak.
Then you have, of course, the other side of the equation that is the activity level for the eventual growth of the number of total machines. There it's difficult to say right now how much and how long that would be. But I think we sort of stopped by giving the forecast on the total market this year, which is then up the 15% to 25%. And then we will have to see how that is panning out in terms of volume going into next year.
And the profitability by region. I don't I know that you don't give that, but just ballpark which areas are more profitable for
the moment and where do you have an It is a little bit yes. And I would like to point out that, for instance, the U. S. Side of the market is very much dependent on the U. S.
Dollar as you know in terms of exchange rate influences and that's something that is we're also trying to build ourselves away. I have said very clearly that China being such a big portion in the sea construction, of course, with those kind of profitability levels that you see, no doubt that China needs to contribute to that in a very good way. So that's also something we do. And other than, I think that we don't have the same kind of ranking in CECs working on a more, I would say, even level in the different regions than perhaps you would say in the truck business. So it's less of a fluctuation up and down between the regions.
Okay.
Thank you very much.
Our next question comes from Mr. Frederic Stahl from UBS. Please go ahead sir.
Yeah. Hi, guys. It's Frederic here at UBS. Could you maybe educate me a bit about Financial Services and why the customer receivables in Financial Services went up as much as they did in the quarter? I think it's €8,000,000,000 in Q2.
That would be number 1. And then question number 2 is on Brazil and the production cuts there, does that equal output from the current levels? Or the fact that you've stopped yourself too optimistic, I. Demand remains the same, but you expected it to be better in the coming quarters. How should we think about that?
I think when it comes to Brazil, this is of course something that we are taking a look at all the time in order to make sure that we are not overproducing. And our visibility is the 2 to 3 months that's what we see in terms of the orders and the deliveries coming in. So in general, these kind of activities we do should be regarded as sort of panning out and also adjustments in order to continue the good balance in the production systems we have. And we saw that. And another equation to that is of course also whether we stand with the inventories and that's what we focus very much as well on and on plan.
So it's a mix of everything. But in general, you can say that we are continuously doing this based on our horizon of view that we do have, which is 2 to 3 months. When it comes to the Financial Services,
firstly, Ramnish? Yes. I think I would have to come back to you, Frederik, on all the details. It's primarily related to growth of the credit portfolio and to the growth of Volvo rents that we have in the U. S.
Okay. And
we need to keep in mind that we are actually we are running the financing operation with 8% equity. So from a cash point of view, you find that further down in the cash flow statement.
Yes. Maybe we can take and I'm curious maybe we can take that at a later stage. Thanks.
I'll give you a call. Fantastic.
Our next question comes from Mr. Michael Tindle from Barclays. Please go ahead, sir.
Hi, there. It's Michael Tindle from Barclays. Thanks for taking my question. I've got two questions. The first relates to North America.
And I guess what I see is your rather optimistic view for the rest of the year. When I think about the PMI indicators and consumer confidence, I mean, it looks to me as if the key drivers for overall activity are pointing downwards. And when I look at current order intake for Class 8 trucks, it seems to be below the rate that you're suggesting for the rest of the year. So I guess, I wonder if you could share with us what you're seeing that makes you more optimistic on what is going to happen in the rest of the year? And then the second question and I apologize in advance if you seem slightly antagonistic, but the 300 basis point plan, it seems that there are those in the markets who don't believe it and those that do.
I'm one of the ones that does. And I we'd like to
know when you're going to
share with us that plan, but you seem very reticent to actually commit to that. I'm just wondering why that might be.
Thank you.
[SPEAKER STEPHEN ROBERT BINNIE:] Let's start with the North American drug plan. And as said, it is a you have sort of negative facts, As you mentioned yourself, order intake Q2 are annualized on a level of 1.80. But on the other hand, you then have a high retail activity, which is annualized. It's actually pointing at 270. Percent.
And I also think that the financials by our end customers, the fact that the replacement business case is a very attractive one also with the secondhand values that we see in U. S. Right now on the trucks. Together with the fact that our spare parts sales is up double digit meaning that the fleets are running that creates of course an underlying demand and that has to be weighted off visavis the unsecurity or uncertainty you have on the macroeconomics. So it is not an easy call to make this judgment.
But when we do these pluses and minuses and looking at it, we do feel that we feel comfortable with the forecast we do. Then of course, I there is no doubt about it that in order to reach the 250,000 we need to see the orders coming in during the autumn here. When it comes to the 300 basis points, the fact that and you might refer back to the press conference on the questions is just that I want to be very clear. And also I've told you and the market before that when it comes to actually coming up with the activity list and the different action plans that we're going to put in place in order to reach the 300 basis points over time, I want to have a real good commitment embarking into a new way of working with new processes and new completely new setup. This is an organization with 80,000 people that we during 6 months have put forward and are now up and running operation which is a very, very fast time in order to do that.
And I'm not hesitant in that respect, but I want to make sure that we have the full commitment from the organization. Therefore, I've given the organization the time line up until the Q3 in order to come up with all the issues and activities that we see going ahead. Some of these will be short term. Some of these will be more long term. Some of these will be of cost efficiencies.
Some of these will be brand related and so on and so forth. So it's a whole pallet of things. What I've seen so far, the work is progressing very well And there is a lot of engagement and can do attitude when it comes to come up with those issues. And therefore, I'm not sort of committing to a date or a occasion or anything like that when we will come out and present anything. This is over time.
This is some of this will be long term and some of this will be short term. So this is a rather fundamental change that we're doing. But what I've change that we're doing. But what I've seen so far and also in particular the engagement that I see in the organization and among the new managers looks very promising. But I give him the timeline and I give him the time to do the proper job.
So that is I hope I give a little bit shed of light on that one. So it has nothing to do with a date or resistance in that respect.
No, that's great. Thank you very much. Very helpful.
You're welcome.
Our next question comes from Mr. Peter Reilly from Deutsche Bank. Please go ahead sir.
Good afternoon. Two questions please. Firstly, looking at China, you said that Chinese CE volumes, the whole industry were down 38% in Q2, but you've got a forecast for the full year down 15%, 25%. So assuming you're expecting a much better second half for this one that's not as bad as the first half. And I'm wondering whether you have any tangible evidence for that in terms of order intake or anything else or whether it's just a macro call at this stage.
And then secondly, on a related note, Mac, you've kind of given us the book bill for the first half of the year, which is 64%. You've got your U. S. Construction equipment forecast through the market growing by 15% to 25%. And it seems to be a bit of a disconnect.
And Mac historically has been quite big in the construction market. So it seems odd that Mac is having such weak order intake in the first half. If the construction market is growing so strongly, maybe it's because of municipal sales rather than construction sales. But if you could help us to understand the dynamics of Mac versus construction that would be appreciated.
[SPEAKER KARL HENRIK SUNDSTROM:] Okay. Yes, here I will start with the China. And basically, when we do the forecast and particularly now when we come up to the half year, of course, we have 6 months of actuals with us in the luggage. And therefore, we use that as a basis going forward. And it's a combination of what you just said.
It's looking at the macroeconomics, it's looking at the infrastructure projects, it's looking at in the Chinese economy signals that we're getting together with the atmosphere and feeling among our dealers and customers together with the orders coming in there. So it's a combination of all that that sort of leads us to the forecast that we have done. I would like to point out that and I think you know that already, but when we talk about the China and Sea, I'm really pleased to see that our dual brand strategy works well. It does down above or around 30% as a market in total. And C is only losing out 10% volume and actually would maintain profitability due to market mix.
So I think we have shown that we can handle the China ups and downs. Long term China Construction Equipment over time here it's something that we do of course see as something very positive giving the demand over time here for infrastructure and projects coming along. On the other hand, it's also important to keep in mind now the wheel loader and excavator market, which are performing a little bit different in the market. But in general, I'm very pleased with CE's China development here. And Chris there, Mac book to bill and the market situation there?
If you look at it, Peter, you can say on the truck side, we had a big, big pre buyback in 2006 and then the construction works dried up. So a lot of the trucks that we sold back then hasn't collected a lot of hours on them. And therefore, I would say you need to see a higher utilization of that existing fleet that we have sitting out there until the replacement of those trucks start to kick in. We had a strong market of construction equipment 2,005 and 2006 as well, but not at the same level as we saw the truck side. So those machines are a bit ahead of it of the trucks in the replacement cycle is one explanation.
But otherwise, we are actually looking into it as well to see what is the difference. One could be that you see a strong demand within the commodity segment, oil and gas, etcetera, for Construction Equipment where we haven't benefited so much on the MAX side other than shale gas, which has dried up now.
So when you the comments earlier about the economics of a replacement truck being very favorable, will that be geared much towards freight and haulage rather than construction by the sound of it?
That's correct. That's a long haulage truck that is collecting a lot of mileage. Of course, it's a better business case to replace that one than a construction truck. All right. Thank you.
And the last question comes from Mr. Fraser Hill from Bank of America Merrill Lynch. Please go ahead, sir.
Hi, good afternoon. It's Fraser Hill from Bank of America Merrill Lynch. I've got three questions. 2 on pricing, one more short term, one longer term. In terms of the short term, we heard from Scania last week that there had been a reasonable amount of discounting in Europe at the beginning of the year.
They told us that they hadn't participated, but that they have been more so towards the end of the Q2 and that's helped their market share somewhat. Are you noticing that sort of trend yourself? And is that sort of creating any additional pressures as you enter the Q3? Looking a little bit further longer term, we've heard about a lot of restructuring and obviously MAN and Scania are looking to pull a lot of costs out of their business. So how do you see this playing out from your position when you look into the medium term?
Do you think there is a case for structural improvement in profitability across the truck industry and all the truck players? Or how much risk do you think there is that some of these gains are pricing longer term? Just interested in what you assume in your own modeling. The final question is on GKN and the cash. Just wondering if you could give us a bit more color and detail as to what your plans are for the cash as that comes in, maybe areas of potential reinvestment geographically or across your business segments?
Thanks.
Okay. I think on the pricing side in Europe, we have seen a stable pricing we would say. Of course, you have areas where you have stiffer competition and therefore also a harder pricing environment. But in general, flattish pricing or a stable pricing in Europe. That's what we have seen.
I'm looking at Kurdistan is not in the US one.
Could be a few markets like Germany that has seen a bit more pressure lately.
When it comes to the long term and the profitability that is of course a very wide question. And I can only go back to our own 300 basis points activities. And I wouldn't call it a program, but it's the activities that we have. And what we are doing is, of course, looking through everything from A to Z, including the efficiency in our interactions internally, but also looking into of course our efficiency in R and D purchasing and all those areas which now with the new organizational setup we do have, we can look at it from a different point of view, including then, of course, I think the asset that we have on all our brands, which is in my view a huge asset that we do have and that we can and should utilize in a better and more efficient way. And that's one of the areas when you look at the growth side of the house.
So in general, we are attacking all the kinds of our sort of profit and loss side both on the top line and all the way through all the cost issues. Bearing in mind, of course, that we need to do the relevant investments. We need to invest in new technology. We will invest in new products. We will invest in new markets and making sure that we continue to increase our global presence in order to continue be able to offset ups and downs in the different markets around the globe.
And that leads me into the answer of the money that the Vovero is bringing into the company. There is a number of investments that we are looking at in terms of products and product portfolio in markets, making sure that we develop different markets. So there are a number of opportunities for investments going forward there in order to strengthen ourselves in the long run. Okay. Since that was the last question, operator, I do appreciate that you took the time and was with us here on this report.
And I do wish you all nicely back in the Q3 report. And until then, I do wish you a very nice summer and see you then. Thank you very much.