Thank you very much and good morning to all of you and welcome to this Q1 Volvo Group presentation. And I would like to start with basically recapping a little bit what I ended with in the Q4 with a focus of the year of the efficiency and our 2 key focus areas. 1, as you remember, was about making sure that we continued and kept our positive momentum when it comes the market share, our positions in the markets and also then of course related to our introduction of the new vehicles in Europe in particular both on the Volvo range and the Renault range and the second part which was then the capital cost and process efficiency. And if we look at on a general term and on a highlight and I will come back more in detail, we can see that in general, you can say that we are executing according to that. If you look at the market and our market position, we do continue that also And we do that also with a positive price realization.
And as you all remember, that is a key part in our strategic program going forward to make sure that we are increasing our gross margins going forward. But also we can now see that the structural reductions as a part of the efficiency program that we launched last year is now starting to show result and coming into the numbers that we're presenting. And then if we're then looking at the capital structure, the rents and the real estate commercial real estate divestments has been concluded. Overall, if we look at the truck and order intake, we can see that we do have a healthy 115% book to build despite the fact that we had a drop of the order intake. We're down with 10%.
But the deliveries were up 25%. And if you look at the sequential Q4, Q1, you can see that order intake is up 34%. I will come back a little bit more in detail around the different regions when it comes to the Truck side. Starting then with Trucks Europe, we can see that the big issue coming into Q1, as you all remember, was, of course, how would the transition between the Euro5 and Euro6 go? I stated clearly last time we met that we didn't see any cliff coming when it comes to the pre buy from Euro5 coming into the Euro6.
And it turned out to be pretty much that way. We, of course, had a pre buy effect and we have seen that also in the deliveries as you can see coming down. But all in all, I would say that the transition between Euro5 and Euro6 has been rather smooth. Looking at the market, we have had an increase, as you can see, on the order intake sequential between Q4 and Q1. And our feeling about the market is that we are sticking to to our 230,000 truck volumes and we see a gradual improvement in the market going forward here in Europe when it comes to the business climate.
If you look at the freight volumes, if you look at the freight pricing, it is actually something that is holding up quite well and increasing slightly. When it comes to Euro 6 and our own technology has been received very well, we do get confirmation from our customers and we start to have quite a few of them now running the Euro 6 products that it is a competitive Euro 6 product we have in terms of fuel consumptions, in terms of features and in terms of performance. So that's very good. And we will, of course, continue to monitor that and make sure that we are top of the line when it comes to Euro 6 Technology. One thing that was also internal for us highly in focus was to make sure that we transform and I would say transform is probably a good word.
The coming from the elevated level of production that we had in Q4 smoothly coming into substantially lower or lower volumes in the Q1. And as you can see with a book to bill of EUR 116,000,000 and also looking at the result that we presented, I think we managed that quite well actually in order to making sure that we came in with the right capacity into the Q1, but also making sure that order intake was well taken care of in order to come out of the Q1 into Q2 with a balanced production capacity and we do have that in place. Talked about the market share, I will come back to that on each and every region. Definitely, when it comes to Europe, both for Volvo and Renault, we have had a good development quarter over quarter when it comes to market share. 29% is where we stand today compared to 26% a year ago.
The Volvo brand is definitely taking a lot of market share, but I would like to also stress that the Renault side where we had a lot of question marks because an old product that was coming out, we had to transition into the Euro 6. But all in all, if we look at the order intake during Q1, Renault has hold up quite well. And also if you look at the market shares for Q1, Renault is doing a good job in order to making sure that we keep the market share going forward. Looking, as I said, on the book to bill, which means that we are pretty balanced going into the Q2 in terms of our order book order backlog, sorry. So basically Europe, I would say, very much developed as expected.
We acted accordingly and thereby we now have a good sort of position going into the Q2 when it comes to both production capacity, the order intake and our market position in Europe. If we then look at Trucks North America. So we have seen and I think it has been also quite communicated a growing momentum in the U. S. Truck demand.
And therefore, we do increase our truck market from estimates from €250,000,000 to €260,000,000 And we also as you can see the book to bill is now up to 126,000,000 which means that the order backlog started to get a little bit too long, which means that we will adapt our production capacity upwards during the end of Q2 to make sure that we can facilitate both the market uptick, but also as you can see on the last point here, making sure that we have the good momentum in the market shares that we have had. We have then moved our market shares from 14.8 a quarter 1 last year up to a full 18.5 percent this year, which is, of course, a good news. When it comes to another important happening this quarter that we'll then launch the new M. A. C brand identity.
It is a completely revised Mack identity that we're now going through, everything from brand promises to where we position in the market all the way to actually signage and all the way. And it's a message, I think, to the market and to the markets that we see Mack as a very important part of the Volvo Group. And therefore, we also invest in making sure that the brand and the brand promise is completely up to date and very consistent. If we had an increasing momentum in North America, we do see that we have a slightly slowing momentum in Brazil. And therefore, we do revise downwards from 105,000 to 90,000 the truck market for Brazil.
I think we should remember that 90,000 and looking at this curve, you can see that very clearly still a historically good level. But it is a slowdown in the market, which we also then taken care of by making sure that we are adapting our production in Brazil to not overproduce. And as you can see very clearly also with the 97 percent book to bill, that's a clear sign that we need to make that. Important point is the aftermarket business. We're now starting really to get the fleet, the running fleet in Brazil that starts to drive the aftermarket business and going to be even more important going forward with the volatility in the market.
And therefore, we need to build up even further aftermarket capabilities in new facilities and new in actually building up the aftermarket capabilities in new facilities and new service points. And again, the market share is a very positive development. We are now the market leader in Brazil on the heavy duty above 40 tonne segment with a 21.4 market share coming up from 17.7. So also here we have moved the needle when it comes to market share and when it comes to our market presence in Brazil. When it comes to Japan or Asia, sorry, we do see a stronger than expected demand in Japan.
We had the VAT and the pre buy effects, but we also see now that the Japanese economy by itself is picking up. So we see a more consistent higher volume in Japan. And therefore, we have slightly increased the market from 75,000 to 80,000 and that's good. We are also there gaining market share, particular in the heavy duty segment in Japan. And if you look at it in total, we moved from 18% to 18.4% market shares.
But if you look outside Japan in the rest of the region, I think the overall theme is, of course, and I will come back to that to Construction Equipment as well, is, of course, that mining is still slow, which has an impact on, for instance, the construction trucks that we're selling in the region. However, we with our new effort and our new investments in the UD Quester and also the IH2 Pro series, we are getting a very good customer reception on that. And we are step by step now according to the plan increasing the production output in our Thailand factory. But this is a stepwise and we take it in a reasonable speed to make sure that we can cope with the whole new industrial setup that we have there. The forecast for the markets, I would say that we are apart from the small upward adjustment in Japan, we're sticking to our market forecast for 20 14 with €980,000,000 in China and €184,000,000 in India.
Moving then from the truck side into the Construction Equipment. We can see that on the market side, we have a moderate growth in the mature markets. And I would say also China, I will put in the bracket of moderate growth. Even though we had a very strong growth in January February, we see that March is then slowing down. So the aggregate or the accumulated Q1 at least what we can see in excavators and wheel loaders is coming down to levels that you have growth, but I will call it moderate growth.
We have, of course, our normal seasonal pickup and increase in the volume compared to Q4 and that is, of course, also helping. And we should not forget that it's not only the trucks who is actually doing an emission legislation change. It is very much also within the Construction Equipment, who is now transforming from the Tier 4 interim to the Tier 4 final. And that is an investment that needs to be done, is new products coming out, is new technology. We launched all that basically at the ConExpo in Las Vegas a couple of weeks ago.
We also have the focus in Construction Equipment. As you know, when it comes to the profitability to really look at the cost side. And as many of you have read, I think we have then decided to do structural reductions on the blue collar side in Sweden in particular. And we're then making sure that we are continuous to lowering the breakeven point, but also taking care of the structure changes we see in terms of product mix and regional mix then building up production elsewhere in the world. And of course, if mining was slow for the truck side, it's no surprise that mining is also slow for the construction side.
And that is the market outlooks, I would say they are mainly moving sideways. We have done small adjustment downwards in China. We have done some other small adjustments in the other markets as well. But generally, you can say that on the market outlook side, it's moving sideways. Good book to bill.
That means 108,000,000 very well balanced now production system going into the spring spring season coming now in the Q2. Then on buses and Penta, I would say that the global bus market is still and has been for a long time on low level. We do see some movements here and there around the world in U. S, in Brazil and China. But in general, you can say that there is no real pickup on either the city buses or the coach side buses, So it is on a low levels.
And that also is reflected in the deliveries going down by 3%. And also here, of course, like in the truck side, we are then transforming from the Euro5 to Euro6, also something we don't talk too much about. But here again, it is a major step change also for the bus side with a lot of investments in R and D, new product and new product lines. And we are getting our fair share of our orders, for instance, in Australia and Colombia. On the Penta side, I think we can say that the marine leisure side seems to have bottomed out now, but it is on a very low level.
But at least we don't see the decreases coming forward, which is of course good news by itself. Also on the industrial engine side, we see a continued slow demand both in China, in South America and also in to some extent in southern part of Europe in particular. But having said that, Penta has done a very good job in now actually trying with these new engine lines coming into new customer segments, finding new Industrial segment to in order to grow and to capture new business. That was the overall quick wrap up of the market side. And then I would like to hand over to Jan, who then will talk more about the financial side.
Good morning. We look at the summary of the financials for the Q1 for Volvo, the Volvo Group. The net sales for the group went from €58,000,000,000 the Q1 last year to €66,000,000,000 the Q1 this year, an increase of 13%. If we exclude the currency effect, it's actually a bit better. It's 15% up.
Operating income comes from a low approximately €500,000,000 Q1 last year to €2,600,000,000 in the Q1 this year. And I will come back to the explanations about this improvement in profitability later on. But you can see that we have a headwind still on the currency effect of approximately 1,100,000,000 The operating income margin is 3.9 percent and the cash flow is a seasonally pattern that we see more or less every quarter a weak cash flow situation. But I will come back to explain that a little bit later also. Here you should have seen a nice bridge, but you have it in the handouts.
So now we have to improvise. Coming from the SEK 500,000,000 last year up to the SEK 2.6 percent this year. And then the question is what improves the situation with €2,400,000,000 That's the improvement in the operating margin with approximately SEK 2,400,000,000 Here we can see that approximately 2 thirds of that is related to volume increases and 1 third of that is due to the performance improvements that we do in the group. Polo said before that we have price realization. That's one positive factor.
We also see in some areas that goes into the gross margin also improvements on the cost side as well. So we can see a lot of good things happening in the gross margin going from 21.5% up to the 22.7%. On the next 213, there we see the cash R and D. And you know that we have been in a heavy situation when it comes to development of new products. We now start to see the curve coming down when it comes to the cash paid out gross R and D.
On the negative side there, and that's the minus SEK 724,000,000, we have the effect of the capitalization and amortization. Earlier years, the last couple of years, we have capitalized a lot of R and D into the balance sheet. We are now in a situation where we amortize, start to amortize more and we capitalize considerably less than what we did before. Then we have the selling expenses, that's the SEK 1.43 margin. And as I said, of course, the volume effect comes in as well.
On the negative side, then we have also the currency effect. That's embedded in each and every line that you see here. So it's not an additional or anything like that. Turning into Trucks. And since Trucks is such a big part of the group, of course, the explanations that we had on the earlier slide is the same here.
We can see that we go from SEK 37,000,000,000 in sales up to SEK 44,000,000,000 I think it's important to see also the what Olof mentioned earlier is the sequential effect from the Q4 last year to the Q1 this year. It's a drop of SEK 8,000,000,000 in sales. And we go from SEK 3,000,000,000 in EBIT operating income down to SEK 1.8 percent. I think that shows the ability that we had to adapt from a high production, high sales level that we had in the Q4 due to the pre buy effects down to considerably lower level in the Q1. And we were we had adapted already production when we started in January.
That's what you can see here. That's also why the drop in EBIT from the 4th quarter to the Q1 this year is not as high as it would have been otherwise. I think that's quite an achievement of the people working with that, that we managed to balance the situation so good in the Q1. Operating margin 4.1%. Volvo CE, someone must have had some fun with these slides actually in the Q2 sales quarter.
I don't know if you do this to me since it's my Q1 reporting. It evolves or something like that. I would like to talk to Chris about this later on. Do you have other funny things? It's actually a 10% increase of the sales in between the Q1 last year and the Q1 this year.
And as an effect of the sales increase, we can also see that the profit comes up from SEK 500,000,000 to SEK 647 this year. We have some headwinds on the currency in CE. CE is still in a capitalization mood when it comes to R and D. The focus this is very much volume related. The focus in CE is to work on the cost side, both when it comes to the product cost, but also when it comes to operating expenses.
So you can say it's a similar theme as we see for the trucks. Operating margin going from 4.1% to 4.8% and it continues. So we see that on the buses and on the Penta that actually here, it's also good development when it comes to the gross margin. That's really the thing that triggers the improvement in profitability on both Penta and buses. On buses, we see that with a stable or actually a little bit lower sales level, we go from a negative of close to SEK 90,000,000 last year up to positive SEK 36,000,000 million.
Apart from the operating margin, it's also actually an effect of the restructuring that took place in the bus, European bus production system last year that started giving effect here as well. I think that shows a little bit also that restructuring takes time from time to time to show in P and Ls and so on. I think that could be worth to have in back of your head from time to time. But that's actually one of the facts we see here. Customer Finance is a record volume year for the Q1, dollars 11,000,000,000 we've never been on in the Q1, of course, it reflects the good sales level that we had in the Q4 that then comes into our finance books in the Q1.
We have a stable operating income of €395,000,000 penetration is at 28%. It was been 28%, very stable for quite some time. When it comes to our credit reserve ratio also stable. We don't see any worrying signs in the portfolio for the time being. And the return on equity is around 12% as we have a target for the operation.
A stable good well run part of the Volvo Group. Turning into the efficiency programs that we have. The 4,400 white color employees and consultants that we will reduce the workforce with started the program started as you know in the autumn of last year. So far 900 people have
as a
part of this program left the company up until the end of Q1. We are having activities now in Sweden that we run the voluntary Leap program. Similar actions are taking place in Japan and we are in discussions with the unions in France. So we see development during the course of the rest of the year here up until the 4,400 people. The looking into the operating expenses.
We can see now that the curves when it comes to the selling and admin start to flatten out. But with now the reduced levels that we see when it comes to launch costs during this when it comes to selling expenses, also other activities when it comes to selling expenses, this curve will start to break, grow in 12% and will gradually become lower. The same with admin expenses, the efficiency programs will have an effect on the admin costs as well. So we see a gradual decrease here also on the rolling 12 months. When it comes to the cash or the gross R and D expenses, you can see that that's already started to turn down after the heavy period that we have had now with the development is that we have to remember as well.
But when it comes to cash out there, what we can do now when it comes to bringing down the R and D, we are doing that according to plan. Cash flow, SEK 9,000,000,000. Last year, we had a negative of SEK 7,600,000,000. As I said before, this is the quarter that's almost every Q1 in the year is negative. It's more or less a question about the magnitude of the negative.
We can see that, of course, the operating income is affecting the positive when it comes to the cash flow. When it comes to property, plant and equipment, you can see that we kept it on a very low level in the Q1. Q1 is seasonally a quarter where you should not spend so much on PPE. But the intention is clearly to come out lower than what we had for the whole year last year. And we have a certain now as we say, we have established a certain higher discipline when it comes to the PP in the organization compared to before.
When it comes to the working capital, we see that payables is hitting us in a negative direction. The reason for that is, of course, we had a very high level of production 4th quarter. We have then high accounts payables. When we go into lower production pace, we actually redeem these accounts payables towards our suppliers gradually in the Q1. So it's an automatic effect going from a high production level to a low production level.
The inventory is increasing also, but that's very natural. It's due to the fact that we are preparing for the deliveries that we have in the Q2. We are going to keep more or less the same production pace in the Q2, which means that we have a certain inventory going into that we need to deliver out. The inventory is fit and fresh. We check that every month.
And so it's not old things, it's new things that goes out to customer. And they are, of course, customer orders in the markets where we have customer order production as well. When we look into the cash flow coming back to that, the SEK 9,000,000,000, this is excluding the effect of sales of REN. As you know, we got the consideration for rents in the Q1. That's SEK 7,500,000,000 approximately.
So that's not included here. That means also when you look into the net to equity ratio for the group, it goes from 29% up to 31%. That's a fairly minor effect. So you have to bear that in mind. SEK 9,000,000,000 is without the consideration for all organs.
Then I hand back the word to you again Olof. [SPEAKER LARS CHRISTIAN BACHER:]
Thank you very much.
[SPEAKER LARS CHRISTIAN BACHER:] Your slides are okay. Mine are not okay. So I don't know how to help you
on that. Yes. If we then look at the where we are on the strategic program and see how we're now getting the effects coming in, we can see that the activities, as I said before, are starting to show results. We as Jan explained, we have the cash R and D reduction, we have the selling cost reduction and we also now start to see the ISIT cost coming down. So in total here, you can see quarter over quarter SEK 400,000,000 in improvements.
And we have also always said that this efficiency program is, of course, back end loaded because we have initiated a lot of activities end of last year. We are in the negotiations with unions. We are in the discussions regarding the 4,400 program even though we have then lowered with 900 people in that program since it started. But it's also important to remember that now we have talked a lot about decisions taken. You remember the tick boxes I've showed you many times when this has been decided, this has been decided and so on and so forth.
Now we start to move into the execution of that. One example is, of course, the Legane site, which is now closed according to plan and that impacted 150 people. When you look at the one truck line assembly less in the European system, that's now done. So we will have 100 and 80 less people then from Q3 going forward. So into the factory today, it is actually just one line operating.
So that is according to plan as well. And if you look at the optimization of the service network for trucks in Europe, you can say that now in the Q1 alone, we had added 17 new dual brand workshops in the European footprint, which now brings it up to 320 out of the 500 plus workshops that we want to have. So this is a very quick process ongoing now. And if you look at the cancellation and closure, which you have to do in order to move this, we have 20 closed in the quarter then meaning that we have totally accumulated in Q1 close 90. Percent.
So my point here is very much that the program is executed to plan. And if you look at the SEK 9,000,000,000 curve that I presented to you at the Capital Markets Day, we are following that plan on the look at the whole strategic program. And I will, as promised, come back to you in the Capital Markets Day later this year to give more detail around that. So to summarize the Q1, I would say from a market point of view in trucks in particular, I would say that the markets are developing as expected, both in Europe, North America, a little bit better momentum, a little bit slower momentum in Brazil. But otherwise, markets are developing as expected.
We see a gradual improvement in the sentiment on the European market going forward. We have adapted our capacity accordingly and we start to see the effects from the efficiency program now coming into our result. I just want to end by saying that we I see this Q1 as the 1st stepping stone in the right direction. But don't take me wrong, we have a lot of work still to be done and we're going to keep the focus moving. But this is a good and I think positive stepping stone in the right direction, leading up to our 2015 goals.
So with that, I think we conclude and open up for Q and A.
Hamper Sengelau, Handelsbanken. I have three questions if I may. Firstly starting off with demand situation in Europe. There was a big difference in order intake percentage between Renault and Volvo. It would be interesting to know how you view that and also how that correspond to your view on Q2 in terms of market share.
Is there any prioritization effect between 4th Q1 given that Volvo dropped 36%. Second question is related to the production changes you did during the quarter. If there's any material under absorption cost that you could quantify? And if any please quantify? Last question is more on Russia situation, demand situation in Russia and not what risk do you see to your facilities in Russia and also run rate going forward and embargoes and things like that?
Thanks.
Okay. If we take Europe and Renault truck and Volvo truck development, I mean, we had on the Volvo truck this specific situation with the Classic that actually added on to a pre buy effect for the Volvo Trucks, not only the Euro 5, Euro 6, but also the very popular old class, which we didn't have on the Renault trucks side on that. But if I look at the Q1 order intake, I would say that on the Volvo truck side, good news, market share increases. I mean, if you look at the market shares in January, it was all time record high we ever had in a month and it keeps up on a good pace. But I must say that looking at the market share at the Renault side, looking at order intake, looking at the perception that these new trucks now getting, I'm slightly positive surprised during the Q1 of the Renault performance.
And that is to me a very good sound platform now when we move into the higher volume production of the new of up until the mid year. We have now closed the of Renault up until the mid year. We have now closed the double production for the Volvo. So the Volvo is only producing the new ranges. So that's about that.
In terms of and I will hand back to you on the under absorption then, Jan. But if we talk about Russia, it's clear that we do see some uncertainty now with the Ukraine situation among our customers in Russia. And that has a negative impact on the order intake and we have to monitor that very closely. We keep a close eye on it on a weekly basis and see how we're going to react to it and see where it goes. And then it was the
under absorption. When you look upon the manning in the factories, we were as perfectly manned as we can be. I think it was very well done. But of course, I mean the technical installed capacity is on a higher level than what we see right now. But from a manning perspective, we were there.
We can perhaps add to that that we should remember that we from a productivity point of view, we still were hampered by the double production both in the Volvo system and the Aerobnost system so on. But that was more of a productivity point of view rather than an absorption point
view. Anders Strapf, SVB. I have sort of the same questions, but from the opposite angle. On the production, since you had an increase in inventories, etcetera, there were some who have suggested that you might have boosted your margin a bit in the quarter due to building up the inventories and overproduction compared to sales. Is that the case?
No. No, it's not. Good. Secondly, also on the order intake, clearly positive surprise by the development for Renault especially since you have been fairly clear in indicating that there's a big risk for market share losses, etcetera, and especially in the near term order intake. You don't have the customers don't have the trucks available to test drive, etcetera.
So have they been ordering blindly? Or sort of what is really the strength behind order intake of Renault? Is it what markets, what type of Q2 instead?
It's difficult. But I would say that you have had a transition because part of what we have seen in the order intake is of course a call it a pre buy of also the old Renault products in terms of the hangover into the Euro5 and so on and so forth. And are the markets buildup of the order intake of the new products actually took once we got the test vehicles out, once we started to get the fleet owners and fleet customers acquainted with the products, we started to see very good feedback and thereby also signing up orders. So what we do is to compare now where Volvo were at that point in time with where Renault is at that point in time and see how is the split between the old and the new. And it follows pretty much the same.
And that is very good news for Then exactly how that would pan out in Q2, we have to wait and see. But so far so good.
And I guess the most important question here is, are they prepared to pay the significantly higher price for the new rental compared to the old one?
When we talk about good price realization in Europe, we talk about Volvo trucks and we talk about Renault trucks. And it's I've been very clear on that and I continue to be that. When it comes to those mega investments we have done, we have to make sure that we have done the right investments and the features actually are there in order to give extra value for the customer and thereby also being able to charge out both €5 €6 €1 €6 €1 €6 €1 €6 €1 €6 €1 €6 €1 €6 €1,000,000 but also the new features. And we should remember, of course, it's a big step for the Renault when you look at the product by itself. But so far so good and we have managed to get that in a good way.
So on orders in Renault in Q1, is it how much is euro 6 and euro 5?
Well, I thought I had all numbers in my head, but that one I'm looking at Christi here.
For euro6, it's euro6 market is on euro6.
Yeah. But
the rental figure for Europe in that you gave in Q1 of what it was I don't remember even like 8,000 or so. European number is
€600,000,000 Yes. European number is €600,000,000 for Renault Test.
Okay. One final on FX headwind it was a big one. How long is that going to hurt you? Looking at all other companies I looked at who have said something, they basically all say that if you have a lot of emerging market exposure, you're going to get much less impact already in the second quarter and very little in the second half given the current exchange rate. Is that the same for you as well?
I can repeat exactly the same.
Very good. Thank you.
But one has to be very humble when it comes to predicting these things.
Andreas Prock from Nordea. A question to Mr. Grande. As new CFO, what have been your impressions? Any positive or negative surprise except for the PowerPoint slides on the negative side?
What are your first insights into that?
That's good. I think things are as I expected when I joined Volvo actually. Volvo is a company with a lot of positive things in itself. It's of course, when it comes to heritage, culture, organization and so on. If you look also into what's been done last year when it comes to product introduction, so I'm very impressed by what I see product wise and so on as well.
Then I think we shouldn't take that on the negative side at all actually, but I think we have to recognize what we are into and what's I mean, you are aware of that. I was aware when I joined Volvo as well. We are into big transformation in the group as well. And that's what we are talking about all the difficult things we do from taking decisions to implementation and so on. And that is, of course, a lot of hard work that we need to do.
And if anything, I see I mean, I spend quite a lot of time at work right now to be able to continue to live with this. And that's the pace that we have in the whole organization. So a lot of hard work actually still. And this will take, I would say, the strategic plan is up until 2015. I think it will be a couple of years now to take Volvo back on track where it should be actually.
But the good part, I think, is that that's really the foundation in a company like this is that we have the good products, we have a good production system and so on and that we will be able to leverage on. We need to take down the structured cost in some areas as we have indicated and so on. And there we need to work very hard. So it's more I can say more or less as I expected.
Where do you think you'll be spending most of your time in 2014, if we think 1 or 2 key focus
areas? I think the key focus area is to deliver on this strategic plan, but very much focused, of course, on the if you remember the style on operating expenses and so on. That's really important now to secure that we structurally take down our operating expenses or the fixed costs in the group going forward. So we've put a good and solid platform to have a sustainable profitability on the sales levels that we have right now. And when we do that, which I'm perfectly convinced that we can do, then you will also see that when volumes start come up, when sales start to come up, we will have a very good gearing and very good results coming out of this situation of this company.
But it's really about the cost side. That's the focus number 1. And of course, the second one, I think, is really the cash flow. Part of that will, of course, come as a consequence of improved profitability. But I think also we need to continue to work with, what we say, capital efficiency and so on.
That goes both when it comes to the fixed assets but also on the working capital. There we can definitely improve as well.
And finally, in general, you're pleased with the balance sheet
in If I could wish, I would, of course, have had a little bit stronger balance sheet. But I mean, we are where we are. So it's okay. I mean, it's I think also going forward, I would like to see a stronger balance sheet. But we will do that by generating our own cash flow and then gradually strengthen our balance sheet.
It is a little bit on the weak side. It is okay, but it should be a little bit stronger.
Excellent. Thank you very
much. It's Fredrik here from UBS. Maybe I'll start with a question to you Olof. Brazil, I think your orders were down 30% year over year and still you only cut your market outlook by, I don't know, 13%, 14%, why the optimism? I think the why the optimism?
I think the if you look at and we need to look at from a seasonal point of view, if you remember, if you go back to Q4, we had a Ferrotran fare. We had a lot of order intake coming. We're coming in now with a rather healthy field rather long forward here. So it's a sort of a timing difference between some of these heights and valleys you see in the order intake. And then we do see that the market time stabilizing on that.
Thank you.
And then one for you Jan. Financial service is doing very well right now. And I was just wondering if there is any market or a collection of markets where your metrics are going the wrong way as a customer delinquencies?
No. I think no, it's okay. It's stable.
Okay. Thank you.
Erik Kolrang, year on year pace? And could you update on us how you expect that to progress for the rest of this year?
I think then when it comes to what you saw here year over year, those are the sort of the operational expenses. And then when you come into the total increase and improvements, you have a number of other things as well. We should remember that we have, for instance, the price increases, We have the cost of the products reductions. And that's a little bit what Jan was alluding to. If you look at the gross income improvement of SEK 2,400,000,000 about 2 thirds of that can be related to the volume, but 1 third of that actually then based on the other things than pure operational expense part of it.
We have said that a lot of the and you can see that on the SEK 9,000,000,000 curve as well. If you follow that curve, you can see that the back end of the year of 2014 coming up to the levels where we have committed to, we need, of course, to accelerate coming into the second half of the year. And that is basically the plan now coming with all the activities we're doing on the efficiency program with the 4,400 white collar, etcetera, etcetera, etcetera, those kind of things.
And the one line closure you did now on Volvo, is that included in that?
The what?
The closure of 1 production line here that you did in Q1, is that included in the total savings that you outlined?
Yes. I mean all of these sort of structure things that was on the plan that is the whole European optimization footprint which has been communicated. And the reason why I showed it now is that now it's happening. Before we talked about the decisions, that was tough enough. Now it's actually happening.
Second question is on you touched a bit about the progress of truck demand in Asia. Could you give a bit more few more comments outside of Japan perhaps particularly for and also within markets like China change to how customers are acting in terms of going for premium products versus simpler products?
I think when you look at Questor outside or Questor is outside Japan, We do see in the markets that we have launched the Questor a lot of interest. And up until now, I must say that the big issue has not been to sell the product, it's actually been to have a secured and good ramp up of the product coming from low levels going upwards. Now we're taking step by step and increasing the volume, but it's still not going to be, I mean, huge volume coming out of this year. That's going forward up to the 20,000 volume that we plan coming in the years. Then you have, of course, uncertainty in a number of countries in the Southeast Asia.
And then I mean, you have the elections going in Thailand, you have the elections going in Indonesia. And there are some impacts there on and then you have the mining side as well. In China, I would say that the issue there is we keep the market as planned. And I would say that in the beginning of the year, it has been a rather good start. But it's a little bit of a prolonged free buy effect, you can say.
India, on the other hand, is tough, has been tough for the full last year. And it's hopefully now starting to bottoming out and then hopefully gradually improve again.
And then final question on price realization, if you can give any indication of the level of price increases you've done and maybe if you're planning something particular in any region for the rest of the year?
I think we in terms of price and price management, I mean this is a process that I started very early when I came in to really learn myself and to focus upon and we follow that very closely. And we do huge amount of analysis and making sure that we have a good price realization based on what the market can absorb. But when it comes to the price increases we have done, one thing is very clear. We do have to cover for new technology and new features and new costs, and that we do. We have to and we try to stay ahead of curve if we see inflation.
Not a huge problem right now for sure, but if we see inflation, we try to stay ahead of that curve as And then it's a tactical game every day and how you're going to position yourself and if you have deal orders or if you have others and so on and so forth. But in general, I must say and I think you can look at it on the gross margin as well, the increases we've seen quarter over quarter. And part of that is a good price realization.
Just a short question on Construction Equipment also. I mean, at least from my point of view, it was unexpectedly strong numbers, both sales and especially earnings. Is there anything unusual about the cost situation or mix or anything that makes us we should believe that it's not sustainable recovery in the margin in the quarter in Construction Equipment?
I think you need to look at the market development as we have indicated. The mining is still being slow. But if you look at the result per se, and I think Jan, you can confirm that. If you look at the result, it was basically a volume driven result improvement. And that also shows, you remember, we have discussed many times since I was in the sea that we worked on the breakeven points.
And of course, that has continued to work. And there you can see, once you get this volume, even though it was not enormous volumes coming on, immediately with that breakeven level, you see the volume impacts coming. But having said that, and Jan was pointing out as well and as well as me, the key focus now for CE is actually to continue with that on the breakeven side. But also when we do now investments on R and D, the R and D money goes into much bigger expense into product cost reductions to find also not of a breakeven level on the structure side, but also making sure that we get a better gross margin coming out of the sales that we do have. Mix wise, I don't think that we will see any major change other than normal during spring seasons and those kind of things, yes.
And there's no change in the price pressure that's been around from Japanese and Caterpillars and others?
It has been tough for a while definitely. It is and it is something that you have to work on every day. And if you look in China, if you look in the others, there is definitely a tough price competition out there. But that's why we need to bring down the product cost.
And the first question comes from Mr. Alexander White from JPMorgan. Your question
please. Yes, good morning everybody. I've got a few questions. Firstly, just you're talking about taking market share in Europe with the Volvo brand. I'm just wondering who you believe you're taking market share from because if we look at the sequential increase in orders, they increased 21% in Europe, whilst the other company that we've heard report increased 44% sequentially in Europe.
Just wondering if you can give a little bit of color there on where it is that you think you're taking
share? Yes.
I don't know. I'm looking at Christi here what we normally don't talk about competitors. We just conclude that we are gaining market share. And since the market is always 100% someone else is losing. But I don't want to speculate in that and who is who we're taking from.
The second question, I didn't really get there with the sequential. Could you please help me again there?
No, no. So that was part of the first question. There's the Volvo order the Volvo brand orders are up 21% in Europe, while Scania was up 44%. So that would suggest that share was being taken by Scania. So it was kind of tied into the same first question.
Okay, okay. But there you have to look at if you look at sequential on the Volvo brand, you have to remember also where we came down with the on the level we had coming on the back end of last year, in particular, down with the Classic. And that is for the Volvo brand something you always have to that you are coming from sort of getting a double effect of that. So I would say that's one of the explanations. I don't know if you want to add there, Chris, or something.
He's shaking his head, which you can see, but he's doing that.
The second question I had was just around the inventory build of €4,000,000,000 How should we think about how that was split by each division? And how do you expect that to develop by each division in Q2?
I think it's Jan here. The you get rough figures half of it trucks and the other half of it goes to buses and CE.
And in Q2, how would you expect that to develop in each division?
In Q2 or?
So going forward, should we see any of the divisions seeing particularly different development in inventory?
I think the goal is now and the target is to deliver I mean that we have in inventory should be delivered to the market during the second quarter. And that goes for the whole group.
Okay. Okay. That's helpful. And can you help us out with how much of the €4,000,000,000 was finished goods?
How much of the inventory was finished goods?
Oh, that I don't have on top of my head. I don't know if you have it, Christian.
Most of it.
Most of it.
Okay. Thanks very much.
Okay. And we have the next question from Mr. Alexander Vergo from Berenberg. Your question please.
Thanks. Good morning, gentlemen. Just a quick question really on buses. I mean, if you ex the FX impact and the headwinds from Euro 6, which I think you called out, obviously, a meaningful improvement in terms of the operational performance. And I know you referenced the restructuring measures last year having an impact now.
Is this a sort of a new level that we can think of particularly given your volume outlook is good from the order intake last year?
Can say around buses is that the operational cost reductions and the structural cost reductions that we have done will still be there. That means that the breakeven level has been reduced in buses. We are also continuously looking at the normal cost savings as well. So from that point of view that you can calculate on. Then we will see how the market develops and order intake and the deliveries and so on and so forth.
But there is no sort of major mix changes going forward what we can see now. We are selling more and more of our hybrid buses for instance and that is coming in which is a new technology and giving the same principles as we had with the truck side. If we had new technology then we make sure that we get paid for that new technology when we sell it. So that is the only sort of long term exchanges we I can see.
Okay. Great. Thanks. And then last one just a quick one. Can you give us indication of what we should be expecting in terms of the corporate eliminations number in EBIT for the full year given you did about, what, €590,000,000 or so in Q1?
Is that a number we can annualize?
Exactly. If you read we have one off item related to elimination due to the Volvo Rents effect. And I think if I remember correctly, it's around €130,000,000 €140,000,000 that will not be recurring. So we will go back to a similar leverage as we have had before.
Okay. So €450,000,000 odd is the number to use on a quarterly basis? Great. Thank you.
And the next question comes from Mr. Fraser Hill from Bank of America.
It's Fraser Hill from Bank of America. Just wanted to dig into the Latin American adjustment that you're making. What's your view on the industry inventories overall? How worried are you about the overall inventory situation in the industry? How much visibility have you got on the position of the industry in general?
And this cutback that you're taking, what percentage reduction is that in your rate? And how long do you expect that to last, I guess, particularly in light of maybe what you might tell us about the industry inventory? And
of course,
you talked positively about pricing here on this call, but should we begin to worry about Brazilian or Latin American pricing as we go through the next quarter or 2?
I think that when it comes to the inventory situation, I haven't heard any alarming situation. I'm looking at Cristiano, but it is slightly elevated in the dealer network, you said, on the inventory side. When it comes then to our production, we normally don't give that number. And basically we're going to do enough. And we do have flexibility and we use that flexibility as well to make sure that we adapt all the time.
And that also answers your question when we believe we can go up again. It depends on the market. And when the market comes, then we will increase again. When it comes to pricing, I think that we as being a premium brand and also having a strong market position, we are, of course, very as we are always disciplined in the price realization and we're going to continue to be that. On the other hand, we also make sure that we are competitive both by looking at the cost and the cost side of things and also looking making sure that we are competitive in other areas as well.
But generally, you can say that Brazil is a tough market, has always been. There's nothing new now. And we have been so far very successful and we intend to continue that. And you should also remember what I said in the presentation that we now see the rolling stock population that we have generating then spare part business in an increasing
way. Okay. Thanks.
Okay. And the next question comes from Mr. Michael Tyndall from Barclays. Sir, please go ahead.
Hi, there. It's Mike Tyndall from Barclays. Thanks for taking my questions. 3 if I may. Just the first one, I think you mentioned you've started voluntary redundancies in Sweden.
I wonder if you could just give us a feel for how that's progressing. Certainly not necessarily in trucks, but in autos, we've actually seen greater take up than was expected. So I'm wondering whether or not it's in line with what you're expecting worse or better. That would be interesting. The second one, back to the inventories question.
So a rise in inventories year on year of roughly SEK 4,000,000,000 and yet orders for trucks at least were down circa 6,000 units. What are you seeing in Q2 that gives you confidence about having effectively more inventory on your books at this point in time? And then the last one is a very, very simple question. Just around the parallel production, how long will this persist? I mean is there a point where you switch off Euro 5 production?
Or are we still going to be building those trucks for Eastern Europe and some of the other regional markets basically going forward? Thanks.
Okay. Let me start with the last question first. The ferroelectric production has ceased in the Volvo truck system, gone, will never come back again. And so that's done. When it comes to the Renautrac production, we will stop that mid year.
So it's still the Q2 we will have the parallel production. And therefore, after half year this year into the 3rd Q4, we will only produce the new ranges both on Renault and on Volvo. When it comes to the VLP and the progression, I think that the it's fair to say that the reception of the program as presented has been regarded as fair by the employees and there is a lot of interest and a lot of people are looking into it. And the development is actually according to the plans. So we are seeing the interest.
And I'm very pleased to see that with this momentum we have on the VLP program that we can avoid to do redundancies and actually go on the voluntary lead program here in Sweden, which by the way then if you look at the numbers, it's totally 1300 here in Sweden, of which 800 are consultants and 500 is fixed employees. So that's the part of the 4,400 for Sweden. And in that relation, that's when I say the VLP program is progressing according to plan. And I leave over to you for the inventory discussion and what makes us believe that we have the right inventory for Q2?
Yes. First to the increase in inventory that affects the working capital for the Q1 of SEK 4 point 3,000,000,000 is actually the difference between year and then now. And the increase here of SEK 4,000,000,000 is, as I said before, the buildup of inventory that will be delivered during the Q2. And as I said before, also the clear target is the majority, if not all of that, will be delivered in the
Q2. Okay. Thanks.
So it's not a buildup of inventory for speculation or anything like that. As I said, it's customer order.
Yes. No, I guess the question for me was if I look at it versus last year, you had more orders in Q1 last year and a lower inventory level versus the orders in inventory at the end of Q1 this year?
But then you have to come back to the situation we had in the Q1 last year. It was a very, very low production and sales with extremely high order intake in the Q1 due to the classic Volvo Classic coming at an end that was delivered in the Q2. This year, we come in with a balanced production towards sales and then we see an increase of sales in the 2nd quarter. So you cannot compare really these 2 quarter over quarter. So you have to understand the dynamics when it comes to order intake and sales in respect to orders.
As Olof mentioned before, we are in a slightly odd situation where part of the seasonal effects that makes us not one 100% comparable quarter over quarter.
Seasonal products. Okay. Thank you.
Okay. The question comes from Mr. Alastair Leslie from Societe Generale. Your question please.
Yeah. Hi, good morning. Alastair Leslie at SocGen. A couple of questions please. First one on R and D.
I was wondering if you could give a bit more granularity on quarterly expectations for amortization and capitalization trends.
I mean you did the
same at the beginning of 2013. It looks like capitalized R and D is down quite heavily in absolute terms year on year, but amortization is roughly flat year on year at SEK 600,000,000. Also more color on cash R and D spend, still around SEK 4,000,000,000 on a quarterly basis. How should we think about the pace at which that can come down over the coming quarters? And then the second question on Construction Equipment.
The question is really on the quality of the orders, whether Q1 orders continue to see a shift to higher value segments and whether that's still broad based. I think you said it was at the Q4 release. 1 of your competitors yesterday was saying they expect a move back to smaller machines over the remainder of the yesterday was saying they expect a move back to smaller machines over the remainder of the year. So just interested if you expect to see the same trends?
I think the if I start with that, the definitely we since mining is slow and that reflects also in the order intake. And then you have the general construction, which is per se then smaller vehicles or smaller machines than some of the mining, which means that you do have a shift towards smaller machines. If you look at the market share gains that we have had in Europe, for instance, it's mainly with the smaller machines that we do have. But as I said before, this is nothing new now. I mean, this mix issue we have had for quite some time and this is the mix that we go into this year with the same thing.
And then having that paragraph over, saying that mining is slow, we're having the same mix and we have more or less stable market, that means that we are in a rather uneventful compared to before market situation. When it comes to the cash RNG, the guidance we give there and I think it's the guidance that we stick to and that is the 2015, 0 impact on the strategic program. If you look at the cash R and D reduction and our commitment that, that should offset the amortization negative impact, meaning that we have a 0 impact. And that's basically what we're then making sure that we are aiming at and thereby coming out to 2015 with that zero impact.
And to add a little bit on the net effect of capitalization and amortization, I think we were a little bit somewhere SEK 250,000,000 negative in the quarter, Q1, something like that. You can expect that to go up a little bit somewhere between €300,000,000 going forward for the rest of the year. But already this year, we will see also a reduction of the paid or cash R and D as well.
Okay, great. Thanks.
So thank you very much. Thank you for coming and see you in Q2. And then I invite you all to Gothenburg because that's where we're going to have the press conference in the Q2 report. Thank you very much for coming.