Ladies and gentlemen, welcome to the Volvo report on the first six months 2012. Today, I am pleased to present Olof Persson, CEO. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question-and-answer session. Olof, please begin.
Thank you very much, operator, and a warm welcome. Good morning, good afternoon to all of you to this telephone conference for the second quarter for the Volvo Group result. With me here in the room, I have Anders Osberg, the CFO, and Christer Johansson, Head of IR, them 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. I was contemplating on actually focus my discussion here on the market situation, both for trucks and Volvo CE, open up for a slightly longer period of time for questions later on.
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 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 down in Europe and North America, splitted by brand. If we start with Europe, we can see that the year-over-year, -13% and quarter-over-quarter, -8%. Looking at the Volvo brand, you can see that we actually have had a good period with an increase of 3% and 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 are then buying from Renault SA and Nissan. 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. We have, during the quarter, increased our production rate in Renault, and we are now running at a book-to-bill ratio of 91% there. In Europe, we are looking at slightly increased the production rates in Russia now in Q3.
In our plans, 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 -47 and -41. We should remember, however, that the comparison numbers, year-over-year, -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. 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 first quarter, particularly on the Mack side, based on a dealer restocking program that we had in Q1, and that also drove the orders in Q1 to a large extent.
Now, 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 for the Volvo side, we have a -18% and a book-to-bill of 98%. On the Mack side, equivalent numbers of -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, -7%, but quarter-over-quarter, we actually have an uptick with 10% and a very healthy book-to-bill, 112%.
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. Apart from that, in the other markets, you can see that we have some ups or downs also in other markets and in Asia. 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 Volvo and Renault, and those makes up to the numbers that you see at the bottom down there.
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 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. 2009, basically, we have followed and had a rather good correlation between orders and deliveries throughout the period here. If we 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, the North America 250 change, 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 US10 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 second quarter annualized volumes, we are looking at around 270,000 trucks on the retail side.
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. 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 the 180 to be compared with the 270 we see in the retail. You understand that the 250,000 forecast that we're keeping unchanged means that we have to see order intake starting to come during the autumn here. 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 developing approximately the way we anticipated. 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 their 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 from 105 to 90, mainly driven by macroeconomics and the GDP development in Brazil, which has been lower than anticipated during the first half year here. 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 first quarter.
We also 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. 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. We then move on to page number 15. You follow me to page 15, I'm commenting on the market situation for construction equipment. We have kept the China market unchanged.
Asia, excluding China, also unchanged, basically the only change we have done since the last quarter is Europe, which we had up 10%-20% before. 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. Moving on to page 19, which is then the summary. I would like to state that I truly believe that we have delivered a very solid second quarter, where we, despite the macroeconomics and the market situation that we have seen, have had a record signed of SEK 84 billion, which is actually the best second quarter ever in our company's history.
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 7.3 billion, is the second-best quarter when you look at the absolute number. 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 Volvo Aero, Volvo Penta, and perhaps in particular, Volvo CE has shown a strong development in the quarter, coming in 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 a very difficult market situation with city buses down in Europe, city buses down in U.S., and city buses not recovering from the Euro 3, Euro 5 switchover in Brazil. It is basically the markets in Asia that is still showing some growth and good development. In this market condition, it is of course very difficult. 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. All in all, a quarter that confirms our global position, confirms the profitability. Also, I would say that looking at the truck profitability, you can look it from two sides.
One is, of course, the fact that the numbers that we present are very strong, given the fact that we have a market shift in the truck business with a reduction in Europe and South America, growth in Japan and in North America, 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, the leverage on the extra volume that we are getting in those kind of situations are not satisfactory. 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.
As I said before, we will have the activity list of those actions and activities ready by end of Q3. With that, I would like to conclude the somewhat shorter than normal presentation and giving some more time for questions that I can elaborate on. Operator, could you please open up for questions?
Ladies and gentlemen, if you have a question for the speaker, please press 01 on your telephone keypad and it will enter a queue. That is 01. Our first question comes from Mr. Nico Bahl from J.P. Morgan. Please go ahead, sir.
Good afternoon, gentlemen. I would like to ask three 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 then a development which seems to be a bit worse than the others, just sequentially, in the U.S. truck market. I am just trying to get a bit of a flavor how the development went through the quarter. Can you tell us whether there was perhaps sort of something that needs to be offset because there was something too high in the first quarter? 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.
Scania was up 12% sequentially, I believe, in Europe, and you are 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 subsidy coming through to your orders? And secondly, the pricing. Has the pricing stabilized or have you actually seen sort of a little bit of an increase in the prices yet on the Euro 5 truck versus the Euro-
Let me take the last question and then I leave it. Christer, you might be able to elaborate on the markets there, both in Europe and U.S. When it comes to the pricing in 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. 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. I think we have a good traction on our pricing. We do have a plan and we do follow it. The other part of your question about Brazil, about the subsidies and would that come in? We don't know that yet really, to be quite honest with you.
Of course, we can say that in general we have seen that the market responds to incentives, we will have to wait and see how those incentives are panning out in the market. What we do say is that it will not probably be enough to compensate and come back to our previous forecast, therefore we lower the forecast somewhat. Christer, could you elaborate on the U.S. truck market and the European one?
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 Mack side. Of course, that meant that we pulled forward some demand from April into March. Since then, I would say we've been stable through the rest of the quarter. It's actually a bit likewise, you made a comparison to Scania. I haven't checked how we compare to Scania in the first quarter, but I know we had, especially on the Renault side in Europe, a good order intake during the first quarter or so. We might have some more tougher comparison basis versus them. 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 first quarter and then it slowed down in the second quarter.
Christer, on Europe itself, are you still on the declining trend or are we stabilizing, or what have you roughly seen there?
Well, I would say it seems to be stable, roughly. Given the uncertainty you have in the macroeconomic situation, things can fluctuate. We have now come into the vacation period, which means that it is difficult to read the data and have a lot of confidence in the data, in the order intake that we see now coming through.
Thank you.
Our next question comes from Mr. Krister Magnergård from DNB. Please go ahead, sir.
Yes, good afternoon. Two questions. First one relates to just trying to get a better understanding for the construction equipment development in North America where you cleared up 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&D costs, how you think those will develop going forward?
If you start with the Construction Equipment, the impact of our own build-up of the rental fleet is not very much. The big part here is, of course, that we do see a build-up of the rental fleets by our dealers and customers. We do see also increased activity level somewhat on the construction side and on the commercial housing side or the commercial side, whereas housing is still on low side. I think we are 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. Good performance, I think, from our side here. Sorry, now you need to help me. There was the R&D and going forward. When it comes to the R&D, there are two things.
One is, of course, that we do invest, and we show that on the 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. I'm looking at Christer here now, I don't think we give any specific guidance on that. We do have the Euro 6 development, you know that, 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 to follow up on Construction Equipment. The build-up in the rental channel for your dealers, should we see that as a one-off, or do you think they will continue with this pace of investments? Secondly, also, you ranked the Truck division in terms of profitability by area this morning. It's possible to do a similar exercise for the Construction Equipment division as well.
On the profitability side, you mean? Let's start with the market. I think that we have 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 some time. Aging fleet needs to replace. That we have done as we speak. 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 will be. I think we sort of stopped by giving the forecast on the total market this year, which is then up to 15%-25%. We will have to see how that is panning out in terms of volume going into next year.
The profitability by region. I know that you don't give that, just ballpark which areas are more profitable for the moment and where do you have.
It is a little bit. I would like to point out that, for instance, the U.S. side of the market is very much dependent on the US dollar, as you know. In terms of exchange rate influences, that's something that we're also trying to build ourselves away. I have said very clearly that China being such a big portion in the CE 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. That's also something we do. Other than, I think that we don't have the same kind of ranking in CEs working on a more, I would say, even level in the different regions than perhaps you would say in the truck business. It's less of a fluctuation up and down between the regions.
Okay. Thank you very much.
Our next question comes from Mr. Fredric Stahl from UBS. Please go ahead, sir.
Yeah. Hi, guys. It's Fredric 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 SEK 8 billion in Q2. That would be question number one, and then question number two is on Brazil and the production cuts there. Does that equal outlook from the current levels or the fact that you've staffed yourself too optimistic? 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. Our visibility is the two to three months. That's what we see in terms of the orders and the deliveries coming in. In general, these kind of activities we do should be regarded as a sort of planning out and also adjustments in order to continue the good balance in the production systems we have. We saw that, and another equation to that is of course also where do we stand with the inventories, and that's what we focus very much as well on that and on time.
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 two to three months. When it comes to the financial services, Anders?
Yes, I think I would have to come back to you, Fredric, on all the details. It's primarily related to growth of the credit portfolio and to the growth of the Volvo Rents that we have in the U.S.
Okay, yeah, maybe.
You need to keep in mind that we are running the financing operation with 8% equity. From the cash point of view, you find that further down in the capital statement.
Yeah. 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 Tyndall from Barclays. Please go ahead, sir.
Hi there. It's Michael Tyndall 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, it looks to me as if the key drivers for overall activity are pointing downwards. 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. 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.
The second question, and I apologize in advance if this seems slightly antagonistic, but the 300 basis point plan, it seems that there are those in the market who don't believe it and those that do. I'm one of the ones that does, and 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.
Let's start with the North American trucks. As I said, you have sort of negative facts as you mentioned yourself, order intake, Q2 are annualized on a level of 180. On the other hand, you then have a high retail activity, which is analyzed, it's actually pointing at 270. 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 the 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 vis-à-vis the security or uncertainty you have on the macroeconomics.
It is not an easy call to make this judgment, but when we do these plus and minuses and looking at it, we do feel comfortable with the forecast we do. Of course, there is no doubt about it, 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, you might refer back to the press conference on the questions, it is just that I want to be very clear, 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 really good commitment from the new organization.
We have more than 450 new managers who are managing a new organization. We are embarking into a new way of working with new processes and a completely new setup. This is an organization with 80,000 people that we, during six months, have put forward and are now up and running operationally, which is a very fast time in order to do that. I'm not hesitant in that respect. I want to make sure that we have the full commitment from the organization. Therefore, I've given the organization the timeline up until the third quarter 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-efficiency, some of these will be brand-related, and so on and so forth.
It's a whole palette 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 coming up with those issues. Therefore, I'm not committing to a date or an occasion or anything like that when we will come out and present anything. This is over time. Some of this will be long-term, and some of this will be short-term. This is a rather fundamental change that we're doing. What I've seen so far, and also in particular, the engagement that I see in the organization and among the new managers, it looks very promising. I've given the timeline, and I've given them the time to do the proper job. I hope I give a little bit of shed of light on that one.
It has nothing to do with a date or resistance in that respect.
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, you've got a forecast for the full year down 15%-25%. I'm assuming you're expecting a much better second half, or at least one that's not as bad as the first half. 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. Secondly, on a related note, Mack, you've kind of given us the book-to-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%-25%, it seems to be a bit of a disconnect.
Mack historically has been quite big in the construction market, it seems odd that Mack 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, if you could help us to understand the dynamics of Mack versus construction, that would be appreciated.
Okay. Yes, Peter Reilly, I will start with China. Basically, when we do the forecasts, particularly now when we come up to the half year, of course, we have 6 months of actuals with us in the luggage, therefore we use that as a basis going forward. 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 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. 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, I think you know that already, when we talk about China and CE, I'm really pleased to see that our dual brand strategy works the way it does, down above or around 30% as a market in total, CE is only losing out 10% volume and actually with maintained profitability due to market mix. 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 given 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.
In general, I'm very pleased with the East China development here. Christer, Mack 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 pre-buy back in 2006, then the construction works dried up. A lot of the trucks that we sold back then hasn't collected a lot of hours on them. 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 2005 and 2006 as well, not at the same level as we saw the truck side. Those machines are a bit ahead of the trucks in the replacement cycle is one explanation. Otherwise, we are actually looking into it as well to see what is the difference.
One could be that you see a strong demand still within the commodity segment, oil and gas, et cetera, for construction equipment, where we haven't benefited so much on the Mack side, other than shale gas, which has dried up now.
The comments earlier about the economics for a replacement truck being very favorable, would geared much towards some freight and haulage rather than construction by the sounds of it.
That's correct. That's a long-haulage truck that is collecting a lot of mileage, of course, that's a business case to replace that one than a construction truck.
Right. Thank you.
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. Two on pricing, one a bit 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 second quarter, and that's helped their market share somewhat. Are you noticing that sort of trend yourself? Is that creating any additional pressures as you enter the third quarter? 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.
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 a structural improvement in profitability across the truck industry and all the truck players? 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. In general, flattish pricing or a stable pricing in Europe. That's what we have seen. I'm looking at Christer, he's nodding here as well.
Could be a few markets like Germany that has seen a bit more pressure lately.
Yeah. When it comes to the long term and the profitability, that is, of course, a very wide question, I can only go back to our own 300 basis points activities, I wouldn't call it a program, but it's the activities that we have. 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&D, purchasing, and all those areas, which now with the new organizational set up 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.
That's one of the areas when you look at the growth side of the house. In general, we are attacking all the kinds of our 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 being able to offset ups and downs in the different markets around the globe. That leads me into the answer of the money that Volvo Trucks 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. There are a number of opportunities in 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. I do wish you all nicely back in the third quarter report. Until then, I do wish you a very nice summer, and see you then. Thank you very much.