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Executives

Olof Persson - President & CEO

Anders Osberg - EVP, Corporate Finance & Control & CFO

Analysts

Alex White - JP Morgan

Anders Trapp - SEB Enskilda

Martin Viecha - Redburn

Fraser Hill - Bank of America

AB Volvo (OTCPK:VOLVY) Q4 2012 Earnings Call February 6, 2013 8:30 AM ET

Operator

Ladies and gentlemen, welcome to the AB Volvo Report on 2012 Operations Conference. Today, I am pleased to present Olof Persson, President and CEO. For the first part of this call, all participants will be in listen-only mode and afterwards there will be a question-and-answer session.

Olof, please begin.

Olof Persson

Thank you very much operator and good afternoon, good morning to all of you and once again welcome to this presentation of the fourth quarter 2012 for Volvo Group. I would like to just stay a few seconds on the opening picture where you can see a wheel loader and this is now the new BRIC wheel loader that I have been talking about for a couple of years and this is now the first Volvo branded wheel loader that is then really focusing on catching market volumes in the BRIC countries. We've launched it in China. We are starting to ramp-up the production and I am really excited to see how this will then turn out in the marketplace in China and elsewhere in the BRIC countries.

If you then follow me into page number two, Q4 in a snapshot. We have called this quarter a destocking quarter because that really reflects what we have been doing and that is very much in line with what we also discussed with you and said in the third quarter. And as you can see the low order intake in Q3 and heavy destocking in Q4 is one of the main activities that have led to and we will come back to that then with under production as we call it compared to sales with the low capacity utilization, but also then a substantial cut in inventories with SEK 5.4 billion leading to a positive cash flow and also a net debt ratio which has gone down from some 44% down to 29%.

We also have continued our investments in R&D, selling and CapEx for our future products and I will come back to that a little bit later in the presentation. But as you can see we have done about SEK 600 million expense increases in the R&D and selling expenses compared to quarter four in 2011. We also have announced and we have been communicating the efficiency programs in Europe and Japan with a total restructuring charge of SEK 990 million again something that we do for the future, again, we see it as an investment in order to better position us for the future. This has then led to an operating margin of 1.6% and net financial debt reduced by SEK 12 billion. So we have actually been doing exactly what we said in the Q3 that we posted, focus on the cash flow and focus on the balance sheet and I can show that we enter 2013 in a balanced production way.

If you now follow me to page number three and I will come back more in detail on Trucks and CE and I’ll just mention a few words on other business areas. Buses are still struggling in a very difficult market environment. We have had a tough quarter, where the market, both on the city bus and coaches are still on a very low level. On top of that, we have one-time charge here, restructuring charge for capacity adjustments in the European system and as you can see there, but even without that it would have been a negative result.

We are continuing to push forward with programs in buses. We are determined to make sure that we will be able to reduce the breakeven point of buses going forward here. And on the slightly positive news when it comes to buses, we are gaining market shares on the city buses and also our new technology buses when it comes to hybrid, which we believe is very much the future product, we are having great successes with selling our hybrid buses into different cities around the world.

Volvo Penta, a seasonal weak quarter, normally both on the marine side and on the industrial engine side. The fourth quarter is normally a weak quarter; this not being an exception. On top of the market weakness we also have had some investments in R&D positioning Penta for the future when it comes to emission legislation formality Tier 4f emission legislation for the industrial engines.

Another good quarter for Financial Services; SEK 12 billion in new financing and I would like to stress that what we see now is a very solid new financing and I think that the control mechanism and also the new businesses we take on board here is a solid one and that is also reflected in the operating income of SEK 390 and I am really pleased to report that Financial Services now are within the strategic target bracket of 12% to 15% return on equity.

If you now follow me to page number four looking quickly into trends and actions in trucks; when it comes to the demand and order intake I will come back to that on the next slide. We can conclude that our inventory levels as I have said has been substantially reduced and particularly then on the Renault Trucks side where we have had a major focus on actually managing and getting the inventory under right level. We have almost succeeded; we still have a little bit of inventory flush out to be done in the first quarter here, but in all-in-all, I think we have done a good job. This has then resulted in a total inventory reduction of 5,300 trucks where all 3,700 in new truck and the rest to be in used trucks.

When it comes to the implementation of actions, you can see then that we have during quarter four reduced the pace in trucks operations by 20% and if you read it that we then comparing the ingoing pace with the outgoing pace and if you compare these two, we then have an outgoing pace of minus 20%. And as I said, we also have the marketing activities in Europe to reduce the inventories and it was primarily on the Renault Trucks side.

Well, we are now looking into Q1, we will continue to manage and keep focus on under absorption and we will have to also look at the continue low capacity utilization in France and when we look at the quarter, we will see that under absorption will be there in January, you will see that also in February and then we see that we will be more balanced in production coming into March.

If we would then put some sort of a number to under absorption in the first quarter for the trucks, we are looking at around SEK 1 billion and the reason for that is that we had under absorption during the fourth quarter which was a little bit uneven with what you actually had high or rather good production in October and then we did break at the back-end of the fourth quarter and that is then coming also into the first quarter where actually say that the January production level is the low point even comparing with December.

We are ramping with production of the new Volvo FH; we have seen and we are very pleased with order intake and acceptance of the new Volvo FH coming into the market and the order intake is slightly held by our internal plans and targets that we have seen. We have then giving the situation we see, we have reopened the stop-days in the Volvo system here in Europe and we also have decided to increase the production in Brazil as of March and the reason for that we can discuss a little bit more if you follow me to page number five where we take a look at the total order intake if we start at the bottom of this table you can see that we have done order intake of 52,145 trucks minus 10% year-over-year and up 15% quarter-over-quarter and with a book-to-bill ratio of 89%.

The book-to-bill ratio is negatively affected by the 3,700 trucks that we cleaned out from the inventory, meaning that if we would add those back it would be around the 95% book-to-bill ratio.

Quickly looking into the different aspects or the different parts of the order intake, we can note that in Volvo in Europe had a positive development both year-over-year and quarter-over-quarter and we also see that the profiting trend that we have seen in Q4 has continued for Volvo Europe into the first days or weeks here in the first quarter and hence the decision to reopen some of the stock based that were planned.

Renewal year-over-year minus 18, we should though remember that we actually have some stoppage in the order intake due to the fact that we wanted to make sure that we really got the inventory out so we didn't accept orders in certain regions from the renewal and that's one of the reasons there.

The numbers that speaks outs I think North America Mack minus 45 year-over-year, (inaudible) there is very tough compared to numbers from last year where you remember that we had a very high activity level on the Mack. So that's a comparison number otherwise we are on the plus side in North America quarter-over-quarter as well.

And then finally, South America and Brazil good year-over-year numbers 24% and we saw that of course already in the last quarter, we've seen that quarter-over-quarter its another 2% up and also the book-to-bill 115% which then of course is the basis for our decision to increase production in Brazil in March.

Moving then to page number six and Volvo CE I would like to say that (inaudible) is some 23% and the production in Q4 was 28% lower than Q4 and utilization 40%. These are numbers that we haven't seen really since the crisis in 2008. In general, you can say that there is a big difference though that is that this time around Volvo CE is profitable, Volvo CE has a good positive cash flow and Volvo CE also has the inventory line up and also in being in a good level compared to the demand that we have and since May 2012 we actually have reduced the inventory in CE to 30%.

So the destocking has going on for quite some time in CE which we believe is absolute right thing to do even though it is of course a slowdown that we have seen. We also if we look at the different markets there, China has been heavily impacted minus 37% but I'm really happy to report that we are actually getting the market share.

We do have an all time high 50% market share and the price pressure comment that is there on the bullet number three is related to China. There have been price pressures but since we have managed our inventory in a good way, since we have to make sure that we do have a balancing there, I think we have managed that in a good way.

When it comes to action from Q1, prepare for spring season production that is of course the number one priority. How this spring season will go, we don’t really know yet. We'll have to wait and see but we're ready. We have the inventory in line. We have the production lined up. So we will see how that turns (inaudible) when we start to see the order intake coming from that. We also have some other movements and I talked about the [break loaded] in demand in China which is the (inaudible).

I talked about the R&D and the selling expenses being on a high level and really to illustrate this, I would like to you to follow to page number seven and this is I think is a good, this shows description on the enormous amount of things we are actually doing now. It's a little bit of a crescendo when you talk about actually renewing our fleet, position ourselves for the future, making sure that we're a stronger company going to into years to come.

We have of course the new Volvo FH and then a launch process right now and that we're, as I said before, really have to, with their acceptance that a break loaded, just coming out now, starting to ramp up to production. We're in the final phases of getting everything ready for the renewal launch which will come in June with a new lined up for renewal.

At the same time, we then are finalizing the new Tier 4f engines for the construction and the industrial engine side and of course the Euro VI here and Euro IV accounts to emission legislation.

On top of that, we also have done working very diligent with our renewed value truck platform which then is a range of products based on the same platform and that is not only the product by itself. We're also building up an industrial system around that. We did investment for instance in Thailand, Kaluga even though that’s not really for the platform and then in Bangalore, India and now also we are looking into China here.

So I think there is [big] share actually says more than 1,000 word when it comes to describing that we already in a very, very exciting part of our development in the Volvo Group going forward.

Moving into number eight and going back to the standard slide now showing you what is the big issues that has been related to the strategy and we will not and cannot show you all the activities we are doing because we have now defined a 35 roadmaps on 400 main activities, thousands of smaller activities which are allocated, defined and now into operations since January 1. Three years (inaudible) 36 months we have used up [generate] that means that we have 35 months to go in order to succeed achieving the targets that we have set out and you see the different activities everything from reduction of consultants consolidating us through the footprint in Japan, IT projects (inaudible) and of course the Dongfeng and the reorganization in Europe and right sizing in Japan.

So there is a lot of things going on both in terms of position ourselves into future, both in terms of the strategic and structural things we are doing and of course also making sure that we are dealing with the ups and downs in the market that we have seen.

And with that I hand over to Anders Osberg to talk a little bit more about the balance sheet and the financial issues.

Anders Osberg

Very good so we turn over to page number nine and to say a few words about the cash flow and investment side. Here we can see that our cash flow of 4.7 billion for the quarter is of course was driven by the 6.7 billion release of working capital and it’s mainly explained of course by the inventory reduction that’s the main contributor.

Also we can see that on the 12 months rolling, we are still in the negative territory largely explained of course by the fact that we don't get the contribution from the operating income this quarter as before.

Turning over to the investment on the right hand side, we see there that we are in a high pace of the investments we know that, and we can relate back to a previous slide on the massive product renewals of course and that explains the board there that is still on a high level of course in 2013 and then moving towards in 2014 onwards, but we are on the high level, we can see for instance that we are still of course on a very high level on the tangible side with the tooling for instance for India, Russia and Thailand as many reasons.

We can also conclude that on the ramp of fleet side, we are now decreasing on the renewal of that, and also we can conclude that we still have a R&D capitalization on the high level but that is also on a downward trend for the second quarter of this year.

And if we turn to page number 10, look on the capital efficiency measures, we can conclude there that we are still trailing on a fairly good level around 30 days on the CCC days on the capital efficiency side, also on the number of inventory days and that is despite the drop of sales, we have kept the number of inventory days fairly stable.

On the ROC on the same page, we now see that, we are on a 17% of course lower than the 29%, lower to explained by the lower operating income.

Then if you follow me to page number 11, we have concluded before that the net financial debt towards reduced by from $12 billion over the quarter, largely explained them by the positive cash flow to divestment of Volvo Aero and some positive currency impact primarily the Japanese Yen. And now of course that means that we can record a net debt over equity at 29% level excluding pensions for the quarter and that has kept the balance sheet to a stable level as we have said before. On the right hand side, we also would like to display the suggestion from the Board of Directors to the AGM which is a dividend of 3 Swedish kroner as yield just above 3% right now. Then on the last I think page number 12 we have also included some guidance for you on reporting changes for 2013. I will not go through all the details here. You are welcome to ask questions about it in the Q&A. But it’s mainly a guidance on the R&D capitalization and on amortization. It is also some of the accounting changes for the pension and there are also some other changes that we make during the year of 2013. So I think by that I will leave the word back to Olof.

Olof Persson

Thank you very much Anders and by that we conclude the presentation and open up for questions and you will then get answers.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mr. Alex White from JP Morgan.

Alex White - JP Morgan

Two questions please, firstly could you quantify for us the over absorption benefit in Q1 ’12 and Q2 ’12 in both trucks and construction equipment. And secondly on engine construction equipment on the mining side are you beginning to see stabilization there or does demand continue to deteriorate.

Olof Persson

Okay, Chris will take the over capacity issue and I will then comment on the mining. I will say that we see a stabilization, but it is still on of course a very low level or low levels compared to before and is a little bit different in different regions around the world. But at least I will say that we see a stabilization. Where it will go from here though, it’s very difficult to say, because we don't see any sort of clear indication and that's why I was and especially for the spring season which is normally a very strong season as you know for CE. We have prepared ourselves for it, so we will be able to respond to it. But we will have to see how that develops. And Chris have you…

Unidentified Company Representative

Yeah, if we look at the absorption rates in the you can say first quarter of 2012 for trucks you could say it was about minus 100 and in the second quarter it was also about minus 100. For construction equipment likewise about minus 100 both Q1 and Q2.

Alex White - JP Morgan

So 100 under absorption do you mean in those quarters?

Unidentified Company Representative

Correct.

Operator

Our next question comes from Mr. (inaudible) from DMB.

Unidentified Analyst

A follow-up on that, did you have absorption effect for 2011 as well would be much appreciated. Secondly order intake in Latin America in Q4 was strong but it was kind of the quarter-over-quarter growth that we saw for some of the competitors about 50% growth and quarter-to-quarter is that due to your intention of raising prices or is there any other factors? And thirdly on construction equipment, sales were a bit low than I expected. Was that de-stocking problem in the dealerships, the dealers are destocking affecting your sales more than maybe the underlying market or does your Q4 reflect the market demand for the moment and finally on the currency, do you see why that was so positive in the fourth quarter?

Olof Persson

Okay, I look at you Chris on absorption. I have to come back with you to on that one. We don’t have that with us here now, but it was clearly a good utilization of the industrial system that we had good you can say, production levels in relation to staffing levels we had. So, it was over absorption, but I don’t have the number with me now.

Anders Osberg

When it comes to the sales in the Latin American and Brazil in particular, you can say that we have made sure enough that we maintain prices. We also have the pricing increase during the fourth quarter and I am also looking at our overall numbers, where we are in terms of market shares, where we are in terms of position ourselves with the Euro V and the trucks we're selling in Brazil in particular and outside. I am really pleased with the development I see. When it comes to the VC sales, we're looking at both at the, we're looking very much I should say on the pipeline towards that is the total inventory out also on the dealer side and when we talk about the destocking and getting in line, I would say that is reflected all the way in meaning that what you have seen in the sales there is actually the, as far as we can see, the underlying demand that we had during the quarter. And then on the currency issue the positive thing there is I guess its currency movements but I will leave it to you Chris.

Unidentified Company Representative

I have to look up for the detail, but you can say it’s primarily balance sheet items revaluations as well as the derivatives that we are using that is also being realized and you can say changed. We can supply you with a breakdown on that.

Unidentified Analyst

Two more things first on the theoretical, but it seems you had over absorption in 2011 and then you have the long-term mission of raising profitability by 300 basis points from 2011 is that including the over absorption effect or how should we think of that?

Unidentified Company Representative

No, basically you should think about the absorption issue being something that you basically theoretically is of course a serious (inaudible) gain. So when we look at 300 basis points over time that is sort of with an anticipation that we are theoretically perfect in terms of getting our production and everything right, so it’s a (inaudible).

Unidentified Analyst

Okay, and just finally on construction equipment you say that the capacity utilization was 40% in the quarter and that was down 28% from last year and if I remember wrong Q4 2011 was quite okay so that means that you should had [loss] like 55% to 60% capacity utilization despite the strong quarter. Do you have overcapacity in the system do you need more restructuring in construction equipment or is there anything else there that I should remember.

Olof Persson

I think if you look at the system at such, I think we are adding capacity where we believe we are going to grow some and we have invested in productivity in the other ones. What is really important for the sea port is that we are incrementing very good flexibility, that means that the both on the breakeven points so to say, but also making sure that we have a good flexibility and we are taking steps in the right direction definitely but we also have more to do on that side when we are looking at over the next cycle here.

Unidentified Analyst

Okay, thank you very much.

Operator

Our next question comes from (inaudible) please go ahead, sir.

Unidentified Analyst

Just three quick ones; one is just if you could help us to understand on Renault and what you are doing on repositioning the product versus Volvo to try to differentiate and give it some more commercial momentum. And the second is just on China, I understand there not a lot of visibility in the Q2, but I was wondering if you had any comment on softer items such as do you see any change in discounting or do you see utilization changes or spears increases in your business in China to give some sort of sense of movement. And then the last one is, you’ve described the couple of points like under absorption sustained in Q1 and higher launch cost this year depressing margins. Can you give us some feeling for what’s happening in 2013 to boost margin space, thank you?

Olof Persson

Okay, if you look at the Renault and differentiation that is a major part of our brand for system work that we are doing right now and the positioning there will then be sort of manifested also when we get with the new launches that is coming out now. So that will then give us in the markets in Europe and in elsewhere internationally, a good possibility to actually do a differentiation which is then optimum for the other and we have presented and I presented in the Capital Markets Day the work that we are doing there and we are continuing that and it is progressing really well actually. So we are looking forward to that.

As you heard that how I said that repositioning a brand is nothing you do from one quarter to the other. This is of course something you have to work on, but we have that in mind now when we do the reorganization and restructuring in the European sales network that is we have it very much in the front line to see that we have an organization that also supports and make sure that this repositioning is happening.

In China, I would say that we see that the machine utilization basically is minus 10% year-over-year, so I would say that we call it a little bit of bottoming out and where it goes from here, it’s a little bit too early to say and then we would like to see the spring season the data coming in before we can actually call it. We have maintained as you can see in our report the market estimation for China and that is the best we can see now. And the last question, sorry that was?

Unidentified Analyst

It was just that you described a couple of points which the overhead under absorption will sustain in 2013, you have launch cost in 2013 you know depressing margins; I am trying to understand what you would point to as the main items expected to benefit or push markets up in 2013?

Olof Persson

Yeah, and that's a good one; and if you look at the 20 targets, the 25 road maps that we have the 35 months that we have to implement there and of course all of these will not come at the back-end. There will be some that is more back loaded than other, but we would start to see effects of all the activities that we are doing. And one effect is for instance the restructuring in Europe. We have said that the impact there is SEK 600 million something on a yearly basis. The full effect in 2014 but of course we are going to start to see effect of that already in 2013; in the back-end of 2013. So there are a number of things that are in the pipeline based on the strategic objectives that we have that will come through here. But how much of this exactly when it comes and so on and so forth that we will report to you when that happens, so we don't give any guidance on that other than the ones that we have given you, for instance the restructuring.

Operator

Our next question comes from Mr. Anders Trapp from SEB. Please go ahead sir. 00:31:45

Anders Trapp - SEB Enskilda

Yeah hi, just a bit of a follow-up on the Renault repositioning. If you already sort of have launched then you Renault line up and the new Volvo FH; would the, should we expect that sort of difference in positioning between the brands have increased or decreased?

Olof Persson

I would definitely say that the product by itself has the repositioning and the differentiation has increased and the other part of this is, and that’s one thing. The other thing is that we also get a commercial system that optimize the differentiation in absolute best; that is exactly what this reorganization is doing. So if you look into 2014 for instance, what are you looking at them is it’s completely new lineup on the Volvo side and the Renault side with the differentiation you have a reorganized European sales networks that is supporting this and that is of course a lot of hard work, but generally you can say that all the cost and investments that we do during 2013 now turns into income from 2014 and onwards.

Anders Trapp - SEB Enskilda

Okay. Also you have to quotation maybe perhaps on the R&D and market, R&D rather cost in the visible in the P&L in 2013 if that is actually going to be higher in 2012 or higher than the [envelope] rate rather we saw in the fourth quarter?

Olof Persson

I would it should be reasonably stable in the P&L, you will probably see a fairly high first half because then we will continue to envelope to launch all the products and as we thought of see those product launches coming through with the burn rate in R&D gradually sort of come down towards the second half of the year but on the other hand we will start to amortize more than we are capitalizing.

So, some headwind in the first half I would say on the P&L side, and then I would say in the second half fairly neutral.

Anders Trapp - SEB Enskilda

Yeah, compared to the full year of, compared to the Q4 level because you thought it was a bit, quite considerably higher.

Olof Persson

I would the Q4 level is the level we will now in the third call.

Unidentified Company Representative

Okay. Operator, we have no more questions?

Operator

Our next question comes from Mr. Martin Viecha from Redburn. Please go ahead, sir.

Martin Viecha - Redburn

I would have three questions if I may. According to my calculation, destock of 3,700 vehicles equals to roughly four days of sales. Do you have any idea how many more vehicles we will need to be destocked in early 2013? The second question is that I noticed that the truck backlog decreased by about 13,000 trucks in 2012, which I think is quite a bit. When do you see backlog going back up and is it going to involve further production cuts? And thirdly, if you just could give us any color on the situation in Russia regarding this truck recycling tax, how do you see situation developing in further quarters? Thank you.

Olof Persson

Okay, I think that on the first on the destocking activities as I said, I think that if we look at the demand going forward, we have the destocking and the inventory reduction that we have done. We have a few more in on the renewal side, but otherwise I think we are pretty much in balance. And on the order intake I am looking at…

Anders Osberg

Well, I don’t know how you have calculated the backlogs because we don’t give that externally, but you can say nevertheless, we have seen the backlogs or the order book starting to increase now again in both Europe, Brazil and the US. While it’s still bit downward trend in Asia, but the big markets in Europe, North America and Brazil are the backlogs are increasing a bit and that is the reason why we are opening up some more production slots in March both in Brazil and in Europe.

Olof Persson

And the Russia?

Anders Osberg

Sorry, I missed the Russian recycling fee.

Olof Persson

Could I take your question once again please?

Martin Viecha - Redburn

Yeah basically, I just wanted to ask regarding the Russian recycling fee I understand that the European OEMs are not able to get the status of the local producer which means that European truck makers have to pay this tax and from my understanding, it’s very difficult to transfer this cost on to the customer, what is your experience and how do you see this developing in future quarters?

Anders Osberg

You can say, we were actually excluded from the recycling fee initially when it was launched in September because we have committed ourselves to buy a cap [plant] in Russia in Kaluga that will be up and running in the second half for 2014. However, then we got the news in November that we were no longer exempted from this, therefore we have to bit the stock problem and of course we couldn't move those 5,000 euro to the customers because they had already committed price from us.

What we will do now in the beginning of this year is of course trying to push that recycling fee into the customer and start, it will probably take a while because you don't just increase the ticket price by 5,000 euro, it will depend to bit on our competitors are doing also, but we are pushing now in the next few months.

Martin Viecha - Redburn

So just a quick follow-up on that backlog issue, I have noticed that your book-to-bill in Europe has been below [one for three] quarters in the row. So I am struggling to figure out how can the European backlog go up, if book-to-bill is below one for three quarters in the row, thank you?

Anders Osberg

Well, we have a different type of the destockings and other type of you can say movement in that with light duty trucks etcetera. So I would say just as of recent early that you will see the order books starting to move up a bit and its no dramatic increase, if I put it that way.

Operator

Our next question comes from Fraser Hill from Bank of America. Please go ahead.

Fraser Hill - Bank of America

Just on the European market I was interested in your perspective on inventory levels across the market, obviously it seems you’ve got yours into shape heading in to 2013. From your perspective do you think that the industry as a whole has got fairly healthy inventory levels and what are you see on pricing from your competitors at the moment, is that remaining disciplined or is there still some challenges there from the competition. Secondly in Europe as well with regard to the prebuy discussion I know you got a flat forecast for the year but getting towards the end of the year are you expecting an uplift still and if so how are you going to adjust your production footprint for any uplift that might come. And I think finally just on the Chinese construction equipment market, what's your perspective on inventory levels across wheel loaders and hydraulic excavators if you've got any idea as to how many months inventory you think that might be across the industry as a whole.

Olof Persson

I think that when it comes to the pricing issue and I leave the market inventory to you Chris and also on the Chinese side there, these two. I think that in general you can say that we have experienced some spots and some segments with some price pressure in EU in the fourth quarter, but in general there is absolutely no sort of general price pressure all over the map and that is a little bit of a mixed feeling, in general you can say holding are quite reasonable and the same goes for spare parts, even though it’s a little bit lower volumes on the spare part side than we have seen before, but the pricing is holding up. When it comes to the pre-buy I think it’s too early to call and we will have to wait and see if we are going to get any affect of that. When it comes to the productions system we are definitely to do any adaptation that we need and that’s we are so important to me that we came in to this year with an inventory level that gives us that flexibility to grow up and down in the production system when we see the market is moving and that’s why we put such a focus on that in Q4 and when it comes to the inventory levels on market side in EU and Chinese construction.

Anders Osberg

I would say in Europe on trucks feels like inventories are in reasonably good shape. The exception could be Russia where it’s a bit too much inventory, but otherwise no big issue for the industry. When it comes to China construction equipment, I would say there is still too much inventory out in the dealer networks that is putting some pressure on pricing and down payment as some dealers are having financial difficulty in trying to generate cash. We will see if we have a decent spring season that should support and help the industry to clean up some of that coming in to the summer.

Operator

Our next question comes from (inaudible). Please go ahead.

Unidentified Analyst

I just wanted to have an idea of the levels of CapEx spend cash CapEx that you would expect for 2013 versus 2012 please.

Anders Osberg

Our (inaudible) guidance there is that you can expect pretty the same level. So flat levels there going forward.

Unidentified Company Representative

Maybe with leasing portfolio investment will decrease.

Anders Osberg

Yes, there you will see a decrease in trend yes.

Unidentified Analyst

And may be your second question if I may, just a quick highlight on the change in accounting for pension system, can you resummarize quickly what it is about?

Anders Osberg

This is a change in the [IIS19], what we do here is to give you a bit of a guidance here on how the previous corridor method is removed and the use of the discount rate for our planned assets puts a lot of volatility in to the system there. And really what happens there is and this is really why we put down the guidance is that the pension liability is the recognized ones, since we can’t have them off balance any more, they go up with 15 billion and that in effect has also an effect on the equity and this is primarily also why we now prefer to show our net debt over equity, excluding pension because with the discount rate like this going up and down that just creates too much volatility in the system.

Unidentified Analyst

Just for my understanding, the 15 billion increase is purely due to the change in discount rate?

Anders Osberg

Yes, you can say that. Then there is nothing changed. You know, this is an accounting treatment that is changed under the IIS.

Unidentified Analyst

Absolutely. I was just to understand correctly where the increase actually came from.

Olof Persson

Actually, to give you some more commentary, the pension debt has been there but it's been off balance sheet due to the corridor method, it’s been recorded actuarial losses instead.

Operator

(Operator Instructions)

Olof Persson

If there are no further questions, I would like to thank you all for joining and welcome you back then on the Q1 report in 2013. So thank you very much.

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