Thank you, Your
Honor.
Shareholders, colleagues, Once again, I'd like to take the opportunity of welcoming you all to the Annual General Meeting and AB Volvo. I'm going to stick to my manuscript. It has so full of energy, so how much it's going to go to not so well. There's so many impressions and we can try to be structured. Development in various markets and business areas.
After I took on the role as the CEO, 22nd October, it's been a very intense period. I probably spent the absolute lion's share of my time to this fantastic company. It's been really fun. How do you charge a battery has been lost? I think you do it at work.
It's easier if you do. And I spent a lot of time traveling around, seeing customers and associates to get a picture of what it looks like throughout the whole value chain, product development, procurement, production, our sales organization, our service organization, various brands and various business areas. And you can see a sample here, there's lots of pictures, but it's more fun, right, to get this I'm going to return to this. All these teams and meetings have formed the basis of the prioritization work that we're now carrying out within management. Within group management, it's also laid the foundation for what we feel is a good future through strengthening our values.
I think what is important is the Volvo Group's common values to be successful, naturally strategies, focus areas and also organization with our customer out of focus for all we do. Beginning in February this year, we gathered 300 key managers from all parts of the world to discuss these changes. And feedback has been fantastic and high energy. My opinion is that the group is well equipped to increase both profitability and organic growth, like Chairman said. We've got strong products and in most areas, good service network, well invested globally within production and also regionally and got a portfolio of exciting development projects, both for all product areas but also for important service products and advanced services, something that's going to be more and more topical.
And I'm going to describe this one here. What's inspired me? As I said, all the people that I met in the company who are strongly committed for how our business is conducted and it can be improved. This is a genuine interest and a fantastic ability. I've received a host of suggestions for how things can be improved, encouraging words and simply through host meetings, discussions, mail and text messages.
There is no solutions on optimists. We've got a good base, but we now need to ensure that we have continuous proof that all brands and all product areas and regions can develop and have to develop and will own profitable ability and commercial merits. Essential is a clear focus on the customer throughout with continuous improvements on daily bid activities and focus on organic growth. And there is room for improvement or a considerable improvement in areas of product quality, lead times, reduced bureaucracy, overhead cost, utilizing potential synergies. For instance, thanks to our joint module system where we are well on our way, but we're going to continue to use that force.
All examples of areas that always can be improved upon. And that is management's principal task to give our associates sources the preconditions of being able to carry that out. Workgroup, let's see if this works. Workgroup have got activities in more than 190 countries, as I said, we're going to see bigger and quicker change and in certain parts, more protectionism. Unfortunately, that is part of globalization.
Therefore, more decentralization of responsibility and authority to achieve speed and profitability focus is a central part of going forward. 2015 was an eventful year in the world. Continued major political and financial uncertainty made and still keeps the planning horizon short, and we need to be flexible to adjust. It's important. Europe, a slow but steady increase in demand after a relatively weak start of the owner comes to the order book was relatively weak in the beginning, both for Volvo truck and Renault trucks.
This was caught up during the year. The finalization of the launch of the new truck program for Renault gave stabilized volume level and recovery in a number of key markets, not the least in France. Russia continues low levels because all our sectors, given the geopolitical situation there and the low prices of commodities and oil, former construction equipment strengthened successfully its market positions primarily within the heavy segment. But volume wise, they were weakened in France and Russia. You should also bear in mind that all the construction equipment carried out an exit.
They left a number of product areas that also affected the volumes, but which is going to strengthen the ability in construction equipment within the Volvo Group. Volvo buses also increased volumes in Europe and also made further breakthrough when it comes to future environmental technology with, among others, these fully electric buses we talked about. We're going to return to discussing this in
a minute.
North America had a great year. The truck market on the market reached its historically 3rd best year. And for Volvo Mac, this matter considerably increased profitability. We see that we have continued successful sale of our powertrains. We're now penetration of our engines when it comes to over 90% also with a strong growth very strong growth when it comes to automatic gearbox.
I ship for Volvo where the penetration market share of our own cars is over 80%. We've also got successfully launched the equivalent performance for Mac, M Drive, which is also going to lead to that this penetration and acceptance in the market increases. This was simply got a powertrain in gearboxes, which is best in the world. I know it and the customers know it. And the nice thing about this is that it's also going to strengthen our ongoing business in North America through service and spare parts markets.
You're never going to hear me call it aftermarket because that's the customer's main market, isn't it? In South America, the drop continued from the total volumes due to the economic and political uncertainty, primarily in Brazil. We continued in the beginning of the year as well. We relatively strengthened our market positions though, and they always have a fantastic job by being flexible. And in spite of this situation, managed to have a decent result.
That's a fantastic success. In China, there is a major change in the economy is going on. As you know, a change from mainly manufacturing and investment based economy to a more consumer based economy. I had the opportunity, as I said, to be in China a number of weeks ago in China Development Forum. And you can see 3 main developments that are going to strengthen our possibility of grabbing more market share.
A clear, so say or actually, Chinese management say, and this is important, they have failed or they have succeeded in economic growth and they've done it on the to the detriment of 3 areas that are now correcting, Too big a divide between the countryside and city. They have not managed to bring innovations and product development and brands enough in their economy. And they have made this created this growth on the cost of enormous environmental damage. The positive is that the long term lead to that they address the logistics. We see all of the tendencies, certain segments that leads to that are, so to say, market position.
It's going to be strengthened. It's also going to lead to that our cooperation with Dongfeng is going to have to develop so that we grab a clear position when it comes to the domestic segment and leadership here.
Those who suffer the most from this change has been Volvo Construction here. We retain a strong market position, however, in all segments, both for Volvo Trucks, Dongfeng, of course, and Volvo Construction Equipment. Japan had solid demand and UD trucks carried out a number of additional steps to make the company and the brand more competitive. And some of these industrial restructuring led to some interference with delivery during the second half of the year. And that also led to our partly losing our market position.
And now we're counting on these measures preparing us for the future because we need to focus now to generate a more solid position for the future with a new organization where we have clear unit trucks and Luxembourg's management, and we can create conditions for that. In India, the positive trend continues under new Prime Minister Modi. We see clear signs of reductions in corruption. The less new rules are less complicated. They're opening up the Indian economy to the rest of the world.
We have a very strong position in India in terms of buses. We have a very strong position in the premium segment, which still is fairly small. But we have an excellent market share there for Volvo
trucks.
And we also see a gradual improvement of construction equipment. Our joint venture collaboration with Eicher continues to work well, particularly within light and medium duty, but we need to strengthen our capacity in the heavy duty segment.
And I
would like to take this opportunity to say it. In Australia, you know that if you drill a hole, right, and then you go to the right, right, then you come just to Australia from Sweden. You just drill straight through and turn right. And this is what it's about. Our ability, 26.3% to use our strength, to use the strength of our brands to introduce them to the market in a fantastic way because I was there a couple of ago and I was very impressed and we have excellent profitability there as well and they always go hand in hand really.
I will now move on to
a number of events that took place. As you know, the Volvo Group acquired 45% of the shares in Dongfeng, strengthening our position in China considerably. And we know that this will grow in the future, but there will also be some changes. The number of the volume will shift, but there will also some change in logistics. And this is where partnership will play a role.
How can we make sure that we can use the value of our access to this networks, volumes, at the same time, have an opportunity to contribute with technology in an intelligent way? And with those volumes getting a carryback of technology to certain other parts of the Volvo Group and its products in this modular system. And this is something that we're working on intensely. Of course, it was a tough beginning considering this correction, but the organization has also worked very hard to adapt to the existing demand. Now Karl Henrik touched upon Eicher.
Since July 2008, we've had an excellent partnership in India where we have a relationship where we see the world from 2 different perspectives, which enables us to develop both the domestic market, but we can also use parts of that for our global systems. In addition to the actual holdings in this joint venture company, Volvo Eicher Commercial Vehicles, the Volvo Group also had holdings in the parent company that we sold because we could not see any additional value to retaining those holdings. And it was a good share price as well. It also strengthened the balance sheet of the group, which was important, as you well know. And that sale does not in any way impact the partnership in Volvo Aike Commercial Vehicles.
In October 2015, we announced that parts of our IT operation will be sold. And in February this year, we signed an agreement with HCL Technologies. That agreement means that we will sell the external IT operations, IT operations that does not serve the different companies in the Volvo Group as well as the running of the IT infrastructure, that has been transferred on April 1. And that means that the Volvo Group also because a lot of our IT operations is still retained within the group, but they focus now on our core business. And we can see that HCL's capacity enables us to reduce our costs for IT infrastructure because they're a larger company that focus on this solely and that will lead to a stronger balance sheet.
We have DKK 900,000,000 in profit for the Q1 of 20 16 here. And it's also important for us that our employees who work within these operations, they do a fantastic job, can be transferred with this company because this is an environment where they can work in which their particular skills is the core competency of the business.
I would also like to say
a few words about Volvo 27% of our volume because of macroeconomic conditions, 48% of our volume in China. And China, together with the other BRIC countries, growth countries, possibly with the exception of India, they've seen very strong very comprehensive difficulties in terms of economy. But the positive aspects of this is that we'll continue to strengthen our market positions in heavy equipment or heavy haulers or wheel loaders, excavators and also particularly through streamlining, Volvo Construction Equipment managed to turn this negative earnings trend and actually improve earnings by €900,000,000 Now we need to continue to focus on the right product and market areas. We have carried out a number of exits. We've left a number of product areas.
And that has been very important for us. We need to continue our streamlining process. And implementation of Volvo technology where applicable is an incredibly important factor for us and to continue to share opportunities for certain end segment, for example, gravel. And for example, next week, Volvo Construction Equipment will be launching a number of very strong products at Bauma, Baumachineen, a very large trade fair in Munich, and that will be a success. So we can see that we can see that we've improved in terms of results in this regard.
Another interesting thing, and this is not a major volume aspect, but the brand Renault Trucks were the 1st in the world in launching the buying of trucks online. This is a fairly narrow specified market for the most common transport, regional and long distance transport with very good optimized customer financing offer and maintenance agreements, etcetera, online. But it's important for us to show that this is possible. And we could see more effective sales channels in this regard. And it's an excellent supplement to the market to show that there are these customers who need that fairly narrow spec window of perspective can be offered this opportunity.
This is an interesting opportunity for the future. Volvo Penta, a few years about this jewel in our crown, a very strong year both in terms of sales profitability and market positions. And it's also interesting when you have such a clear P and L as Volvo Penta. It seems to work. A strong focus on innovation.
You all know about the inboard performance system. You may know about it. It's 10th year anniversary this year. And this is about maneuvering and control and our propulsion systems. This is an additional step in integrating both technology, instruments, powertrain and propulsion.
When we look at one of these trade shows, a large trade show like Miami Boat Show, which is about, say more exclusive boats. You can see that and this is one of the largest trade shows in the world. Actually, 68% of all the boats there had Volvo Penta engines. How about that? That's almost worth a warm hand to them.
What do you say, Bjorn? Bjorn is so proud. You can barely speak over there. And 87 boats with IPS, the inboard performance system that shows this is becoming more and more common. We continue to invade that market.
We can see how we can use the synergies that we actually have in the growth, both in terms of engines, motors and then also actual knowledge about application in each business area. The Volvo Ocean Race was an amazing contest that ended with a great crescendo in Gothenburg where we saw a lot of festivities, 2,400,000 visitors worldwide. And of course, the end the final leg of the race, as I've heard, I should say, was a huge success for our customers and meeting our customers. And even the opportunity to showcase the Volvo Group's ability when it comes to the products of this group, both to Swedes and the international audience. The next time it will take off is in 2017, and the final leg will end in Gothenburg that time as well.
Another thing that was very important last year was the climate summit in Paris. I was there myself. And that was really a huge political success because they managed to come up with actual targets, very tangible targets that will affect the transport sector. And as the CEO for Volvo, I am tasked with being 1 of 2 chairmans in the UN High Level Group for Sustainable Transport. And that is in conjunction with a number of both senior representatives of business around the world and different transport industries and politicians.
And we're working on this right now, but we will be presenting a very concrete report about what we can do when it comes to transport systems and how we can achieve the target, the climate targets by 2,030 that are very important. We can see how the market itself is turning now, not least because of the pressure from consumers, and we think that is incredibly positive. Sometimes I say in a joking way that the higher the oil price, the better it is for the Volvo Group. And what I mean by that is really that the greater the pressure we see from that, the more we have to focus on fuel efficiency on life cycle cost, etcetera. And this is an excellent business opportunity.
We have leading technology. We have solutions. We have higher ambitions in the terms of climate, and that will improve our competitiveness if we play our cards right. Some examples of developments we've seen is electromobility. We'll see that for urban transport primarily first and different parts of hybrid technology.
We have some very interesting ISSAP as we and continued focus on combustion technology, but also on the design of the entire vehicle where we have a world leading position. And for that reason, it is essential for us to focus on our R and D with a clear focus on what can add customer value. One example is public transport. And public transport with the urbanization trend we see around the world will become ever more important. And that is about 2 things, of course, making them climate smart, but also making them efficient and attractive.
I know as the mayor of Bogota told me,
I mean, they developed city is not a city where poor people can afford to buy cars. A developed city is a city where the wealthy use public transport. That is good, I think, for us. And it is also true, if you think about it. But then it's about real attractiveness and Volvo Buses in this project together with our technology organization been able to show what can be done and how you think in terms of system.
I thought we'll have a look at a short film to get a feel for what it may look like.
This is Route 55, as you know, between the two various campuses for Chalmers Technical University, Johanenburg and Campus Lindholmen. And the route camp is fantastic. If you look at the CO2 level emissions with renewable energies, same levels as rail traffic, a lot less sound levels, attractiveness, as you see, I mean, connection, USB connections, indoor stops for buses, where you can create another way. And this is a new importance for safety. It's not given that you give your 17 year old daughter a son, standby a post somewhere in a dark corner, a long road.
If we're going to make this for real, we need to look at system thinking. This I mean, investments in this, they are fragments of the lead time investments and the same functionality. And also with half automatic solutions going forward. This can be the future, goes out saying. But we must understand how we think in system thinking.
We can't come to a community space and say, here's a bus, good luck. You need to think about the whole system and create the business opportunity. And for like Saif drift operations, you're going to see it in waste disposal, mining and other areas. Energy sector, we've gone from PowerPoint to reality and shown how it looks like in reality. It's been important to launch this first route.
Connection for the pre conditions is connected vehicles. That is that our vehicles have got communication equipment like you make a mobile phone. I mean, there's a black box, which is not interesting, but can take and process various signals from our vehicles and either use it directly in the vehicle in the interaction between the driver and the vehicle or directly to make things within the vehicle or send these data to various data layers that we then can use to create various types of services and possibilities. We've got a strong position, really strong that we're going to use even more. We've got 500,000 connected vehicles that makes us world leader.
It's the largest population of commercial vehicles. And already today, we may use it for main host of services, driver coaching to optimize fuel consumption and reduce wear of our vehicles and therefore more accessibility for our customers, diagnosing software and potential correction measures if not needed. Overall, I'm trying to contact us, make specifications for the next car or bus or construction vehicles even more optimal. And I would like say, when I traveled around, our American organization has been fantastic in producing service. We also see in other areas, but here we've got enormous possibility of connect even more to our customers.
Also, the thrust into optimized arrangements with electromobility would not have been possible without connected vehicles. And various levels of automation you see in this vehicle column has gone through Europe. Now the future is here and now. This is the first vehicle driving and the others just follow suit. Naturally wouldn't have been possible without connectivity.
We're going to see increased levels of automation. The future is here, and we've got an incredible position here to increase revenue both for our customers and for ourselves. A few words on profitability and development. This is a central part. Very good work has been carried out and continuous improvement is on the horizon.
We could during the year, as you see, improve profitability considerably from 8.4 to 25.7. But if you exclude the major one offs in various directions, the underlying improvement was €12,200,000,000 to €20,300,000,000 which is a result of currency effect and primarily the streamlining program of the group. The operating cash flow was improved from €6,400,000,000 to €18,300,000,000 with an improvement of the balance sheet as a result. And this is incredibly important for the maneuverability of the group and also for future cost when it comes to financing and borrowing costs. On the truck front, let's have a little look.
The result will improve from €5,600,000,000 to €21,500,000,000 but the underlying improvement were equivalent to the same. That is, you exclude one offs from €19,400,000,000 to €16,100,000,000 And the increase came in spite of unchanged volumes. Major differences, as I already touched upon, when it comes to market conditions, weaker in Latin America, strong in North America, weak in Russia, etcetera. And the positive outcome in the same way comes from currency and streamlining programs to continue being good and flexibility when it comes to both swings up and down in Woodford. Volvo Construction Equipment, I talked about, an improvement for a number of different reasons, currency, better product mix and heavier vehicles.
We've got finished a number of product areas that were not profitable and made efficiency measures. And this equivalent of a 4.1% operating margin in a very adverse market. It's also gratifying to see that we've seen improvement in all our business areas, in other words, for the buses, from €98,000,000 to €882,000,000 Also here, currency, better product and market mix and industrial efficiency. Volvo Penta developed well also through volumes, organic growth, profitability of €1,100,000,000 and 11.7 percent of operating margin. You need to bear in mind, you think it's not too big volumes compared to those, but if you take certain segments like 16 liter engines, Volvo Penta is a randomly important bearer of possibility and has got a competitive offer for the heaviest and image wise best segment for our trucks as well.
And for the financial services, which is a very important part, you should remember, not naturally just for the money, but also for the customer loyalty, create contact and make it possible to enter various markets. We also had a very good year with a profit of 2,000,000,000 and return on equity of 13.4%. Structural efficiency program was concluded with the finish of 2015. We reduced cost level 2016 versus 2012 by €10,000,000,000 in local currency. The program has been reducing number of consultants and associates, white collar workers, focused product portfolio optimization on sales channels and the global truck structure, further cost reductions in Volvo Construction Equipment and further during 2015, strong optimization of the signals organization for trucks and sale of the various parts of the IT business, the total structuring charges has been €6,200,000,000 of whereof €2,300,000,000 during 20 15.
It's been a very tough period with difficult but necessary decisions, decisions that have had major impact on various parts of the company, not the least on individual associates, where unfortunately, also a large number of people have been forced to leave the company. I would like to turn my respect for this work to management, managers, trade unions and associates to carry out this necessary work. With this new cost level, the group leaves basically the world operation with bank restructuring products and goes into phase where there's continuous improvements on all areas in the value chain: quality, lead time, delivery precision, simplifies simplification of organization. We've got a strong basis outside of that, but we've also got areas that we need to continue further improvement, strategic direction, where we're heading to, where why do we exist in the form we are today, how can we make sure that we develop things on their own merit, etcetera. And sure, simply that we use the assets that we have.
I'm going to position myself here now. I'm going to finish now using 2 more minutes. This is the way it is. We are well equipped. And the fantastic thing is that we are in the future industry.
I always go out there and talk to people when it comes to schools, customers, various contexts. I usually ask 2 questions. Do we believe that the world needs more or less mobility? Increasing population, increasing high cost standard of living in various parts of the world. Do we that has to be much more sustainable, this mobility?
And I personally think that the answers to Bill's questions are both yes and yes. There's going to be much more mobility of humans and goods. And that connects people, right? And you're also going to need much more sustainable solutions for this. We've got the assets around the world to create this, but we also need to focus our operations and use what we have in a good and clear manner.
That's why we carry out clear, focused efforts that we do. Focus on the customer. Money is not going to fall down from the sky. It starts and ends with the customer. And when the customer is profitable, our customers are going to grow quicker than their relative market and also make us profitable.
That's a partnership. That's why this business is so much fun. It's business to business, humans you're dealing with, where you can success creates a lifelong relationship because it's good for both parties. Focus on the customer. The second issue is how do we make sure that the brands in our business areas can stand on their own commercial and business merits.
Since 1st March, we run an organization with 10 clear business areas. I've got 2 principles. Principle number 1, be responsible for developing your business, your success and your volume. Principle number 2, be responsible for drawing upon those possibilities that there are being part of Volga Group in order to improve Principle 1. And it hasn't had to be more difficult with that.
That's what we're working. We've also worked with continuous improvements. We've built a fantastic base in our industrial structure, in our product development portfolio, our service networks. To work with this continuous improvement close to the business. That's going to lead to clear focus on improvements.
And de decentralization. It's more fun to do than to play business. So we're not going to play business. We're going to make business. And we've got super stock.
We said that if the customer success is one of our most important values, what's them important? Everday Stemming, as a quality professor in the '50s in the U. S, he created a lot of good quality methods, etcetera. But he said one thing, which is for my own leadership, very important. If there's fear, you're never
going to
get the right figures. 1, you're not going to produce them in a company and show them what deviations and possibilities you have. And number 2, you're not going to have the right figures. So with trust, transparency, and if you have that and you feel that you can have that dialogue, you get passion. Simply, you sit and look at TV, sports channel, whatever you're doing, something like, what a great weekend I've had.
But now it's Monday tomorrow. Now let's go. If you have got that, you can also embrace change because you have to change urbanization, new legislation, new taxation. There is flexibility with the market. The customers doesn't want to buy what we thought we need to be flexible.
You know it is. But when you feel that safety and passion you point to and you say that, that change is a possibility as well, then you're going to get the results. I can just say one thing like this. When I meet with our staff, that clarity is sought after and wanted for. We've got fantastic people in our organization.
I'm not going to blame anything else than anyone else in leadership than myself. We've got fantastic staff. I'm not going to blame anyone else. 2 thanks to all the associates in the Volcan Group. 1, fantastically good reception of me and then for fantastic and super good work to make the impression improvements were done.
And thank you to you for investing in our great company. We're going to hit the bricks to make it a success. Thank you very much.