Thank you very much. Good morning to all of you, and welcome to this first quarter Volvo Group presentation. I would like to start with basically recapping a little bit what I ended with in the Q4, with the focus of the year of the efficiency and our two key focus areas. One, as you remember, was about making sure that we continued and kept our positive momentum when it comes to 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 and the Renault. The second part, which was then the capital costs and process efficiency.
If we look at on a general term and on a highlight, 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 the positive momentum that we had in the truck business when it comes to market shares and market position. We do that also with a positive price realization. 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. Also we can now see that the structure reductions as a part of the efficiency program that we launched last year is now starting to show results and coming into the numbers that we're presenting.
If we're then looking at the capital structure, the Rents and the 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 with 10%, but the deliveries were up 25%. 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 Euro 5 and Euro 6 go?
I stated clearly last time we met that we didn't see any cliff coming when it comes to the pre-buy from Euro 5 coming into the Euro 6. It turned out to be pretty much that way. We of course had a pre-buy effect, we have seen that also in the deliveries as you can see, coming down. All in all, I would say that the transition between Euro 5 and Euro 6 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. Our feeling about the market is that we are sticking 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, 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 consumption, in terms of features, and in terms of performance. 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, I would say transform is probably a good word.
Coming from the elevated level of production that we had in Q4, smoothly coming into substantially lower or lower volumes into Q1. As you can see with the book to bill of 116 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 the order intake was well taken care of in order to come out of the Q1 into Q2 with a balanced production capacity. 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, 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. All in all, if we look at the order intake during Q1, Renault has held up quite well. 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 116, which means that we are pretty balanced going into the second quarter in terms of our order backlogs. Basically Europe, I would say, very much developed as expected.
We acted accordingly and thereby we now have a good position going into the second quarter when it comes to both production capacity, the order intake, and our market position in Europe. If we look at trucks North America, we have seen, I think it has been also quite communicated, a growing momentum in the U.S. truck demand. Therefore we do increase our truck market estimates from 250 to 260.
We also, as you can see, the book to bill is now up to 126, 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% quarter one last year up to a full 18.5% this year, which is of course a good news. When it comes to another important happening this quarter is that we then launched a new Mack 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. 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. Therefore we do revise downwards from 105 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, is still a historically good level.
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. As you can see very clearly also with the 97% 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 running fleet in Brazil that starts to drive the aftermarket business, and that's going to be even more important going forward with the volatility in the market. Therefore we need to build up even further the aftermarket business. We do that, and also the dealers, as I have reported to you many times before, is heavily investing in actually building up the aftermarket capabilities in new facilities and new service points. Again, the market share is a very positive development.
We are now the market leader in Brazil on the heavy-duty above 40-ton segment with a 21.4% market share coming up from 17.7%. 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 Asia, 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. We see a more consistent higher volume in Japan. Therefore we have slightly increased the market from 75 to 80,000. That's good. We are also there gaining market share, particular in the heavy-duty segment in Japan. If you look at it in total, we moved from 18% to 18.4% market shares.
If you look outside Japan and 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, with our new effort and our new investments in the UD Quester and also the Isuzu F-Series, we are getting a very good customer reception on that. We are step by step now according to the plan, increasing the production output in our Thailand factory. 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 2014 with 980 in China and 184 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. I would say also China, I would put in the bracket of moderate growth. Even though we had a very strong growth in January and February, we see that March is then slowing down. 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 would call it moderate growth.
We have, of course, our normal seasonal pickup and increase in the volume compared to Q4, that is of course also helping. 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. That is an investment that needs to be done, it's new products coming out, it's 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.
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, we then making sure that we are continuous to lowering the break-even point, 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. Of course, if mining was slow for the truck side, it's no surprise that mining is also slow for the construction side, that is the same story as we have had before. When it comes to 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, very well-balanced now production system going into the second quarter and having been able to produce what we need to produce for the spring season coming now in the second quarter. 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. 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 level. That also is reflected in the deliveries, going down by 3%. Also here, of course, like in the truck side, we are then transforming from the Euro 5 to Euro 6.
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&D, new product, and new product lines. 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. 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 to some extent in southern part of Europe in particular.
Having said that, Penta has done a very good job in now actually trying with this new engine lines coming into new customer segments, finding new ways, particularly on the industrial segment, 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 first quarter for Volvo, the Volvo Group. The net sales for the group went from SEK 58 billion the first quarter last year to SEK 66 billion the first quarter 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 SEK half a billion first quarter last year to SEK 2.6 billion the first quarter this year, and I will come back to the explanations about this improvement in profitability later on. You can see that we have a headwind still on the currency effect of approximately SEK 1.1 billion. The operating income margin is on 3.9%, and the cash flow is a seasonally pattern that we see more or less every quarter, a weak cash flow situation.
I will come back to explain that a little bit later also. Here you should have seen a nice bridge. You have it in the handouts. Now we have to improvise. Coming from the SEK 500 million last year up to the SEK 2.6 billion this year. Then the question is: What improves the situation with SEK 2.4 billion? That's the improvement in the operating margin with approximately SEK 2.4 billion. Here we can see that approximately two-thirds of that is related to volume increases, and one-third of that is due to the performance improvements that we do in the group. Olof 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.
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&D. 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&D. On the negative side there, and that's the -SEK 724 million, we have the effect of the capitalization and amortization. Earlier years, the last couple of years, we have capitalized a lot of R&D into the balance sheet. We are now in a situation where we start to amortize more, and we capitalize considerably less than what we did before. We have the selling expenses, that's the SEK 143 million, and other items explaining the whole thing.
We start to see that operating expenses comes down. We have improvements on the gross margin. 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. 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, it's the same here. We can see that we go from SEK 37 billion in sales up to SEK 44 billion. I think it's important to see also what Olof mentioned earlier, is the sequential effect from the fourth quarter last year to the first quarter this year.
It's a drop of SEK 8 billion in sales, we go from SEK 3 billion in EBIT operating income down to SEK 1.8 billion. I think that shows the ability that we had to adapt from a high production, high sales level that we had in the fourth quarter due to the pre-buy effects down to a considerably lower level in the first quarter. We had adapted already production when we started in January. That's what you can see here. That's also why the drop in the EBIT from the fourth quarter to the first quarter this year is not as high as I think it would have been otherwise. I think that's quite an achievement of the people working with that we managed to balance the situation so good in the first quarter. Operating margin 4.1%. Volvo CE, someone must have some fun with these slides, actually.
In the second quarter sales more. I don't know if you do this to me since it's my first quarter report in heavy Volvo or something like that. I will have to talk to Chris about this later on. Do you have other funny things? It's actually a 10% increase of the sales between the first quarter last year and the first quarter of this year. As an effect of the sales increase, you can also see that the profit comes up from half a billion, SEK 500 million 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&D. 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.
You can say it's a similar theme as we see for the trucks. Operating margin going from 4.1% to 4.8%. It continues. We see that on the buses and on the Penta. 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 million last year up to a positive of SEK 36. Apart from the operating margin, it's also actually an effect of the restructuring that took place in the European bus production system last year that starts to give an effect here as well.
I think that shows a little bit also that restructuring takes time from time to time to show in P&Ls and so on. I think that could be worth to have in back of your head from time to time. That's actually one of the facts we see here. Customer finance is a record volume year for the first quarter, SEK 11 billion. We've never been on in the first quarter. Of course, it reflects the good sales level that we had in the fourth quarter that then comes into our finance books in the first quarter. We have a stable operating income of SEK 395. Penetration is at 28%. It has been 28%, very stable for quite some time. When it comes to our credit reserves ratio, also stable.
We don't see any worrying signs in the portfolio for the time being. The return on equity is around the 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-collar employees and consultants that we will reduce the workforce with. 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 the first quarter. We are having activities now in Sweden, you know that we run the voluntary leave program. Similar actions are taking place in Japan, and we are in discussions with the unions in France. We see development during the course of the rest of the year here up until the 4,400 people.
Looking into the operating expenses, we can see now that the curves when it comes to the selling and admin start to flatten out. With now the reduced levels that we see when it comes to launch costs when it comes to selling expenses, also other activities when it comes to selling expenses, this curve will start to break the rolling 12 and will gradually become lower. The same with admin expenses. The efficiency programs will have an effect on the admin cost as well. We see a gradual decrease here also on the rolling 12 months. When it comes to the cash or gross R&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 of new products. Of course, we have this effect, capitalization, amortization, that goes in the other direction.
That we have to remember as well. When it comes to cash out, what we can do now when it comes to bringing down the R&D, we are doing that according to plan. Cash flow, SEK 9 billion. Last year, we had a negative of SEK 7.6. As I said before, this is the quarter that's almost every first quarter 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 first quarter.
First quarter is seasonally a quarter where we usually don't spend so much on PP&E, but the intention is clearly to come out lower than what we had for the whole year last year. We have established a certain higher discipline when it comes to the PP&E in the organization compared to before. When it comes to the working capital, we see that the payables is hitting us in a negative direction. The reason for that is, of course, that we had a very high level of production fourth 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 first quarter. It's an automatic effect going from a high production level to low production level. The inventories is increasing also, that's very natural.
It's due to the fact that we are preparing for the deliveries that we have in the second quarter. We are going to keep more or less the same production pace in the second quarter, which means that we have a certain inventory going into that we definitely need to deliver out. The inventory is fit and fresh. We check that every month, it's not old things, it's new things that goes out to customer. 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 billion, this is excluding the effect of sales of RENs. As you know, we got the consideration for RENs in the first quarter. That's SEK seven and a half billion approximately. That's not included here.
That means also when you look into the net debt to equity ratio for the group, it goes from 29% up to 31%. That's a fairly minor effect. You have to bear that in mind. SEK 9 billion is without the consideration for Volvo Rents. I hand back the word to you again, Olof.
Thank you very much.
Your slides are okay, mine are not okay, so I don't know how to look upon that.
Yeah. If we then look at 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. As Jan explained, we have the cash R&D reduction, we have the selling cost reduction, and we also now start to see the IS/IT cost coming down. In total here, you can see quarter-over-quarter, SEK 400 million in improvements. 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.
It's also important to remember that now we have talked a lot about decisions taking. 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. We start to move into the actual execution of that. One example is, of course, the Leganés 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. We will have 180 less people than from Q3 going forward. Into the factory today, it is actually just one line operating. That is according to plan as well.
If you look at the optimization of the service network for trucks in Europe, you can say that now in the first quarter alone, we had added 70 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. This is a very quick process ongoing now. 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, meaning that we have totally accumulated in Q1 close to 90. My point here is very much that the program is executed to plan. If you look at the SEK 9 billion curve that I presented to you at the Capital Markets Day, we are following that plan on the look at the whole strategic program.
I will, as promised, come back to you in the Capital Markets Day later this year to give more detail around that. To summarize the first quarter, 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 I see this first quarter as the first stepping stone in the right direction.
Don't take me wrong, we have a lot of work still to be done, and we're going to keep the focus moving. This is a good and I think positive stepping stone in the right direction leading up to our 2015 goals. With that, I think we conclude and open up for Q&A.
Hampus Engellau, Handelsbanken. I have three questions, if I may. First is starting off with the demand situation in Europe. There was a big difference in order intake % between Renault Trucks and Volvo Trucks. It would be interesting to know how you view that and also how that corresponds to your view on 2Q in terms of market share. Is there any participation effect between 4Q and 1Q, 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 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 Trucks and Volvo Trucks development, we had on the Volvo Trucks this specific situation with the Volvo classic that actually added on to a pre-buy effect for the Volvo Trucks, not only the Euro V, Euro VI, but also the very popular Volvo classic, which we didn't have on the Renault Trucks side on that. If I look at the 1Q order intake, I would say that on the Volvo Trucks side, good news, market share increases. If you look at the market shares in January was all-time record high we ever had in a month, and it keeps up on a good pace.
I must say that looking at the market share at the Renault Trucks side, looking at the order intake, looking at the perception that these new trucks now are getting, I'm slightly positive surprised during the 1Q of the Renault Trucks performance. That is, to me, a very good sound platform now when we move into the higher volume production of the new range, which will be then going forward one. As you know, we have double production of Renault Trucks up until the mid-year. We have now closed the double production for the Volvo Trucks, so the Volvo Trucks is only producing the new range. That's about that.
In terms of, and I will hand back to you on the under absorption, 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. It was the under absorption-
When it comes to 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. Of course, the technical installed capacity is on a higher level than what we see right now. From a manning perspective, we were there.
We can perhaps add to that we should remember that from a productivity point of view, we still were hampered by the double production, both in the Volvo system and the Renault system. That was more of a productivity point of view rather than an absorption point of view.
Anders SEB. I have sort of the same questions, from the opposite angle. On the production, since you had an increase in inventories, et cetera, there are 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, I'm clearly positively surprised by the development for Renault, especially since you have been fairly clear in indicating that there's a big risk for market share losses, et cetera, and especially in the near-term order intake. The customers don't have the trucks available to test drive, et cetera. Have they been ordering blindly or what is really the strength behind the order intake of Renault? Is it what markets, what type of customers are we talking about?
Yeah
if it's sustainable or will it happen in the second quarter 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 Euro V and so on and so forth, and other markets outside Europe. We have to remember that, and that also. Gradually and rather quickly, we have seen that the 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.
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 me. Exactly how that would pan out in Q2, we have to wait and see, but so far so good.
I guess the most important question here is, are they prepared to pay the significantly higher price for the new Renault 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. 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 up both the Euro V, Euro VI, but also the new features. We should remember, of course, it's a big step for the Renault Trucks when you look at the product by itself, but so far so good, and we have managed to get that in a good way.
On orders in Renault Trucks in Q1, how much is Euro VI and Euro V?
Well, I thought I had all numbers in my head, but that one, I'm looking at Christer here. It's Euro 6 markets is only Euro 6.
Yeah.
Yeah. The Renault Trucks figure for Europe that you gave in Q1 of the, what it was, I don't remember even, like 8,000 or so.
European number is primarily Euro 6.
Yeah. European number is Euro 6.
Okay
for Renault.
One final on FX headwind, it was a big one. How long is that going to hurt you? Looking at all the 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 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.
One has to be very humble when it comes to predicting these things.
Andreas from Nordea. Question to Mr. Gurander. 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 is, 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. I'm very impressed by what I see product-wise and so on as well. I think, you shouldn't take that on the negative side at all actually, but I think we have to recognize what we are into. You are aware 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.
That is, of course, a lot of hard work that we need to do. If anything, I spend quite a lot of time at work right now to be able to continue to live with this. That's the pace that we have in the whole organization. A lot of hard work actually still. 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. The good part, I think, is that, and 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. It's more, you can say more or less as I expected.
Where do you think you'll be spending most of your time 2014? If you think one or two key focus areas.
I think the key focus area is to deliver on this strategic plan, very much focus, of course, on the, if you remember the slide on operating expenses and so on. That's really important now to secure that we structurally take down our operating expenses or the fixed cost in the group going forward. We've put a good and solid platform to have a sustainable profitability on the sales levels that we have right now. When we do that, which I'm perfectly convinced that we can do, then you will also see that when volumes start to come up, when sales start to come up, we will have a very good gearing and very good results coming out of this situation or this company. It's really about the cost side.
That's the focus number one, 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.
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 we are where we are. It's okay. I think also going forward, I would like to see a stronger balance sheet. 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, Fredrik.
Hi, it's Fredrik here from UBS. Maybe start with a question to you, Olof. Brazil, I think your orders were down 30% year-over-year. Still you only cut your market outlook by, I don't know, 13%, 14%. Why the optimism?
I think now we need to look at from a seasoned point of view. If you remember, if you go back to Q4, we had the Fenatran fair. We had a lot of order intake coming. We're coming in now with a rather healthy backlog, actually. We are, despite the 97% or whatever it was, the book to bill, we do have a production filled rather long forward here. It's a sort of a timing difference between some of these heights and valleys you see in the order intake. Then we do see that the market then stabilizing on that.
Thank you. Then one for you, Jan. Financial services 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, your delinquencies.
No, I think it's okay. It's stable.
Okay. Thank you.
Hi, Erik Golrang, SEB on a call here. Three questions. First on the savings that you outlined there on the last slide. Did I get it correct that it was quarter-on-quarter savings of SEK 400 million? If so, what's the year-on-year pace? Could you update on us how you expect that to progress for the rest of this year?
I think, Jan, when it comes to what you saw here year-over-year, those are the operational expenses. 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, that's a little bit what Jan was alluding to. If you look at the gross income improvement of SEK 2.4 billion, about two-thirds of that can be related to the volume, one-third of that is actually then based on the other things than pure operational expense parts of it. You can see that on the SEK 9 billion 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. That is basically the plan now coming with all the activities we're doing on the Efficiency Program with the 4,400 white collar, et cetera. Those kind of things.
The one line closure you did now on Volvo, is that included in that?
The what?
The closure of one production line here that you did in Q1. Is that included in the total savings that you outline?
Yeah. All of these structure things that was on the plan, that is the whole European optimization footprint which has been communicated. The reason why I showed it now is that now it's happening. Before, we talked about the decisions. That was tough enough. Now, we're actually happening.
Second question is on, you touched a bit upon the progress of Optractimon in Asia. Could you give a few more comments outside of Japan, perhaps particularly for Quester and also within markets like China, change to our customers who are acting in terms of going for premium products versus simpler products?
I think when you look at Quester outside, or Quester is outside Japan. We do see in the markets that we have launched the Quester, a lot of interest. 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 still is not going to be huge volume coming out of this year. That's going forward up to the 20,000 volume that we plan coming in the next years. You have, of course, a uncertainty in a number of countries in Southeast Asia.
You have the elections going in Thailand, you have the elections going in Indonesia, and there are some impacts there, 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. I would say that in the beginning of the year, it has been a rather good start. It's a little bit of a prolonged pre-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.
Final question on price realization, if you could 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 in terms of price and price management, 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 a huge amount of analysis and making sure that we have a good price realization based on what the market can absorb. 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. If we see inflation, we try to stay ahead of that curve as well.
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. 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.
Thank you.
a short question on construction equipment also. 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 believe 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 still being slow. If you look at the result per se, and I think, John, you can confirm that. If you look at the result, it was basically a volume-driven result improvement. That also shows, you remember, we have discussed many times since I was in the CEO that we worked on the break-even points. 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 in, immediately with that break-even level, you see the volume impacts coming. Having said that, and John was pointing out as well as me, the key focus now for CE is actually to continue with that on the break-even side.
also when we do now investments on R&D, the R&D money goes into much bigger expense into product cost reductions to find also not only break-even 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 changes other than normal during spring seasons and those kind of things, yeah.
there's no change in the price pressure that's been around from Japanese and Caterpillar and others?
It has been tough for a while, definitely. It is a something that you have to work on every day. If you look in China, if you look in the others, there is definitely a tough price competition out there. That's why we need to bring down the product cost.
Thank you. We'll move on to questions from our callers, please.
Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad, and you'll enter a queue. That is zero one. Please hold until we have the first question. The first question comes from Mr. Alexander Whyte from J.P. Morgan. Your question, please.
Good morning, everybody. I've got a few questions. Firstly, you were 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 only 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.
I don't know. I'm looking at Christer here. 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. I don't want to speculate in that and who we're taking from. The second question, I didn't really get that with the sequential. Could you please help me again there?
No, that was part of the first question, as the Volvo brand orders are up 21% in Europe, while Scania was up 44%. That would suggest that share was being taken by Scania. It was kind of tied into the same first question.
Okay. There, if you look at sequential on the Volvo brand, you have to remember also where we came down on the level we had coming on the back end of last year, in particular, down with the Volvo classic. That is, for the Volvo brand, something you always have to remember, which is a very unusual situation that you have these two models. At the same time, you have a pre-buy effect, which then means that you are getting a double effect of that. I would say that's one of the explanations. I don't know if you want to add there, Christer, something. He's shaking his head, which you can't see, but he's doing that.
No problem.
Okay.
The second question I had was just around the inventory build of SEK 4 billion. How should we think about how that was split by each division? How do you expect that to develop by each division in Q2?
I think it is Jan here. You get rough figures, half of it trucks and the other half of it goes to buses and CE.
In Q2, how would you expect that to develop in each division?
In Q2, or?
Yeah. Going forward, should we see any of the divisions seeing particularly different development in inventory in Q2?
I think the goal now, and the target, is to deliver, that we have in inventory should be delivered to the market during the second quarter. That goes for the whole group.
Okay. That's helpful. Can you help us out with how much of the SEK 4 billion 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, Christer.
Most of it.
Most of it. Okay, thanks very much.
Okay, we have a next question from Mr. Alexander Virgo from Berenberg. Your question, please.
Thanks. Good morning, gentlemen. Just a quick question, really, on buses. 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've referenced the restructuring measures last year having an impact now. Is this a new level that we can think of, particularly given your volume outlook is good from the order intake last year?
I think what you 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 break-even level has been reduced in buses. We are also continuously looking at the normal cost savings as well. From that point of view, that you can calculate on. We will see how the market develops and the order intake and the deliveries and so on and so forth. There is no 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. I'm giving the same principles as we had with the truck side.
If we have new technology, then we make sure that we get paid for that new technology when we sell it. That is the only long-term mix changes I can see.
Okay, great. Thanks. Last one, just a quick one. Can you give us some 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, SEK 590 or so in Q1? Is that a number we can annualize?
I think SEK 590 and then an additional SEK 150.
Exactly. If you read, we have one off item related to elimination due to the Volvo Rents effect, and if I remember correctly, it's around SEK 130 million, SEK 140 million. That will not be recurring. We will go back to a similar level as we have had before.
Okay. SEK 450 odd is the number to use on a quarterly basis?
Yeah.
Great. Thank you.
The next question comes from Mr. Fraser Hill from Bank of America. Your line is open now. Thank you.
Yeah. Good morning, 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, and how much visibility have you got on the position of the industry in general? This cutback that you're taking, what % 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. Of course, you've 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 two?
I think that when it comes to the inventory situation, I haven't heard any alarming situation. I'm looking at Christer, but it's-
Slightly elevated in the dealer network
It is slightly elevated in the dealer networks, 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. 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 making sure that we are competitive in other areas as well. Generally, you can say that Brazil is a tough market, has always been. It's nothing new now. We have been so far very successful, and we intend to continue that. You should also remember what I said in the presentation, that we now see the rolling stock population that we have generating spare part business in an increasing way.
Okay, thanks.
Okay, 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. Three, if I may. 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. 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. A rise in inventories year-over-year of roughly SEK 4 billion, 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?
The last one is a very simple question, just around the parallel production. How long will this persist? Is there a point where you switch off Euro V 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 parallel production has ceased in the Volvo Trucks system, gone, will never come back again. That is done. When it comes to the Renault Trucks production, we will stop that mid-year. It's still the second quarter we will have the parallel production. Therefore, after half year this year into the third and the fourth quarter, 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 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 plan.
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 leave program here in Sweden. Which, by the way, then if you look at the numbers, it's totally 1,300 here in Sweden, of which 800 are consultants and 500 are fixed employees. That's the part of the 4,400 for Sweden. In that relation, that's when I say the VLP program is progressing according to plan. I leave over to you for the inventory discussion and what makes us believe that we have the right inventory for Q2.
Yeah. First, the increase in inventory that affects the working capital for the first quarter of SEK 4.3 billion is actually the difference between year end and now. The increase here, SEK 4 billion, is, as I said before, the buildup of inventory that will be delivered during the second quarter. As I said before, also the clear target is that the majority, if not all of that, will be delivered in the second quarter.
Okay, thanks.
It's not a buildup of inventory for speculation or anything like that. As I said, it's customer order.
Yeah. 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 and inventory at the end of Q1 this year.
You have to come back to the situation we had in the first quarter last year was a very low production and sales with extremely high order intake in the first quarter due to the Volvo classic coming at an end that was delivered in the second quarter. This year, we come in with a balanced production towards sales, we see an increase of sales in the second quarter. You cannot compare really these two quarter-over-quarter. You have to understand the dynamics when it comes to order intake and sales in the respective orders. As Olof mentioned before, we are in a slightly odd situation with part of the seasonal effects that makes us not 100% comparable quarter-over-quarter.
Okay.
Products.
Thank you.
One final question, please. Okay. The question comes from Mr. Alasdair Leslie from Societe Generale. Your question please.
Hi, good morning, Alasdair Leslie at Société Générale. A couple of questions, please. First one on R&D. I was wondering if you could give a bit more granularity on quarterly expectations for amortization and capitalization trends. I think you did the same at the beginning of 2013. Looks like capitalized R&D is down quite heavily in absolute terms year-on-year, but amortization is roughly flat year-on-year at SEK 600 million. Also, more color on cash R&D spend, still around SEK 4 billion on a quarterly basis. How should we think about the pace at which that can come down over the coming quarters? 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. One of your competitors yesterday was saying they expect a move back to smaller machines over the remainder of the year. Just interested if you expect to see the same trends.
I think if I start with that, definitely since mining is slow. That reflects also in the order intake. You have the general construction, which is per se the 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. As I said before, this is nothing new now. I mean, this mix issue we have had for quite some time. This is the mix that we go into this year with the same thing. Having that paragraph over, saying that mining is low, 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 R&D, the guidance we give there. I think it's the guidance that we stick to. That is the 2015 zero impact on the strategic program. If you look at the cash R&D reduction. Our commitment that should offset the amortization negative impact, meaning that we have a zero impact. That's basically what we are making sure that we are aiming at and thereby coming out of 2015 with that zero impact.
Yeah. To add a little bit on the net effect of capitalization and amortization, I think we were a little bit somewhere SEK 200 million, SEK 250 million negative in the first quarter, something like that. You can expect that to go up a little bit, somewhere between SEK 300 million and SEK 400 million going forward for the rest of the year. Already this year, we will see also a reduction of the paid or cash R&D as well.
Okay, great. Thanks.
Thank you very much. Thank you for coming, and see you in Q2. 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.