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Executives

Olof Persson – President and CEO

Anders Osberg – CFO and EVP, Corporate Finance & Control

Analysts

Fredric Stahl – UBS

Christer Magnergård – DNB

George Galliers – Credit Suisse

Michael Tyndall – Barclays

Peter Reilly – Deutsche Bank

Austin Earl – Marshall Wace

Ashik Kurian – Goldman Sachs

Jacob Carroll – Voyant Advisors

AB Volvo (OTCPK:VOLVY) Q1 2013 Earnings Call April 25, 2013 8:00 AM ET

Operator

Ladies and gentlemen, welcome to the AB Volvo Report on the First Three Months 2013. Today I’m 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, and most welcome to this report on the first quarter 2013, a quarter that can be characterized by two sides. One characterized by low volumes and thereby a low result, on the one hand, and on the other hand a strong order intake in particular in Europe and on the Volvo side.

Follow me please to page number two, and I will quickly go through the presentation I have this morning. And then we will open up for questions-and-answers. So, if we’re done, if you follow me into page number three, which has the Trucks Europe as the heading, just concluding that, one in the quarter we had an excellent reception of the new products and a good order intake trend as you can see coming up to 26,000 units.

We had lower than usual deliveries on 15,000, explained basically by market being down with 17%, but also Renault delivery is been lower than usual, basically based on the push we had in Q4, when it came to getting inventory out, and thereby also impacting the order intake and the deliveries for Renault in the beginning of the first quarter.

Order intake sequentially coming up 60%, almost 59% for Volvo and it’s good to see that Renault even though on year-over-year is down 17% sequentially since the fourth quarter is 16%, so there we also see the orders are coming back and we’re of course building the order back on this one.

The strong order intake on the Volvo side is basically we believe three reasons, one is a somewhat postponed demand from second half last year with a lot of uncertainty in the economy and thereby also customers postponing purchases, which now coming back with a more stable development in the European economy, even though with a lot of uncertainty around it. We also have an effect specifically for model. We have seen that the classic FH is selling very well and we also – it’s particularly in some markets where we then see these trucks being still very popular when it comes to our customer needs and demands.

On the other hand, we also see good and strong order intake of the new FH, so much so that we’re talking about around 20% to 25% of the order intake is for the new FH. We also see a Euro 5, Euro 6 pre-buy effect in certain markets particularly in UK and some Eastern European companies. I would also like to add to this that when it comes to the first weeks of the second quarter, we see a continued good demand into the first weeks here.

If you then follow me to the Trucks North America, again the order intake is picking up. We do see that and also here we had lower than normal deliveries mainly due to stop-weeks that we have had in the North American production system, reasons being product introduction but also supply disturbances as you get now and then. Important here is that we are through with all these stop-weeks planned once and we are looking forward for rest of the year with no stop-weeks going forward.

When it comes to market share, just to comment quickly on the European side, we’re holding both for Volvo trucks and Volvo the market share. In North America, we have lost due to the low delivery that we had into the market somewhat both on the Volvo side and a little bit also on the Mack side, but also here the order intake is very much on a sequential basis showing good numbers with 37% for the Volvo and 27% for Mack.

I should also have mentioned that we are keeping our market outlook in Europe when it comes to the total market and the same comments as we have had before is still valid as we would see a slower first half and stronger second half. The same goes for the market outlook in North America, 250,000 again with a slower first half year and a stronger second half year.

If we then move on to South America, continuously strong performance. We have a market that went down in deliveries with 3%. We increased our deliveries with 28% and as you can see both on the order side and on the delivery side, we’re well balanced in the production and we are and have increased the production end of March. We’re now going into the second quarter with the higher production rates to meet the high demand in Brazil. The order intake sequentially up 61% and the quarter-over-quarter 21%. Also here we’re keeping our market estimate of 105,000 up from the 2012 level.

Moving into Trucks Asia, we can now see that we have a slow start of the year, but signs of gradual improvements. We are well balanced in the Asian production system as you can see with a book-to-bill rate of 113%. We also have a now open up forecast not only on the Japanese market but we’re adding for your convenience also our estimates on India and China because of the – our increase and increase to be participation in those markets and then of course thinking about our Dongfeng agreement which then will be as we plan coming into force beginning of next year.

So I just want to make sure that you realize that when we talk about India and China and Japan, we’re talking about both heavy duty and medium duty trucks because that’s also very important to us. We have both ever since we have big participation in those markets with our partner and to be the Dongfeng.

If we then move on and look at what all this means for the trucks in Q1, substantially a top-line impact, I mean, we are looking at quarter-over-quarter SEK 12 billion lower sales, the reason of course by markets being lower but also in particular the tough weeks in US and the low deliveries that we have seen from Renault.

This has driven then the low capacity utilization, but if I look at the margins, they are okay on gross margin level. If I look at the cost side, we are still of course running on both R&D and selling on a high level due to our all introductions that we are facing and also the launches that we are performing and will start to perform.

But, in general I can say that we are following the plans that we are following the plans that we have laid out in our strategy in order to make sure that we are then step-by-step decreasing our cost level in order to be more flexible. And also be able to handle those kinds of margins in a better way than we have done this. However, I should say that if we look at the volumes SEK 37 billion, it’s almost exactly the volumes we had in terms of invoicing in the first quarter in 2009. And with that we made a SEK 2.4 billion loss compared to the SEK 0.1 billion that we show in this.

So we have become better, are we good enough? Absolutely not. Do I see a lot of improvement potential? Yes. And will we execute to plans to reach it? Absolutely.

Interesting I think also then to summarize the whole order intake situation where we now have a book-to-bill for the whole of the 160 and for those of you who remember we are then coming from a Q4 of 89%.

If we then take a look at the strategic plan that we have, in general you can say that we are following the plans. We have a follow-up system and we had a big review now in the first quarter. And majority of the activities that we have faced into the 2015 execution are on track in terms of resources activity list and ideas.

And we show you here on the right hand side of this slide, some examples of activities that has been initiated and looked at during the first quarter here, both in terms of continued to now really look into the European truck plant footprint to make sure that we have the most efficient setup that’s static. The result of this will then be ready by the Automan and there are number of activities there described in the report what we’re looking at.

And we continue to keep a very close eye on activity, high activity level in Japan to make sure that we address the profitability, issue that we address the market share issue, that we address the product issue that we’re having in Japan. And I really see now a lot of activities focusing on making sure that the UD brand comes back in Japan in a place where it should be. So, all in all, full focus on this strategic plan and we don’t let go for a second in our implementation of the ambitions that we have in our strategic plan.

If we then move on and look at the construction equipment, we can say that we had a tough start of the year with Europe and North America, especially in Europe with a slow start. We can see that also in terms of the sales. But that was pretty much in line what we expected, and therefore we keep our market outlook and forecast being minus 15% to minus 5% in Europe.

In North America, we see a – regional wise a improving construction activity. But on the other hand, we also see now that the rental fleets are being filled up. If you remember, we had last year a very high sale into the rental fleet structure, which has now sort of peaked out.

In our ambitions to really start to get the dollar exposure – dollar-SEK exposure down, we are now seeing the first result of that in our shipments per investment. We are now starting to deliver one modular reloader produced in shipments.

And the next step is now to continue to start to build up American-based US dollar based supplier network, we’re at the further take down the dollar SEK or the SEK dollar exposure that we have in VCE. Generally, we can say that the book-to-bill ratios in both Europe and North America is about one. So in those two regions, VCE has managed to despite the lower volumes adjust the capacity accordingly to be well in line with the demand going forward.

If we then move on and look at the China, Rest of Asia market for construction equipment. We can see that in March, we had in China a pickup, in particularly from general construction in March spring season is coming. We are well positioned there with a balanced inventory and we also there have a book-to-bill ratio that is about one. It’s also important for us that we maintain our number one position in China and we do that. It is important of course to make sure that we are putting our focus on growing on this very important market for this fleet.

We keep the – excuse me, we keep the forecast for China being basically flat minus five to plus five and if we then look at Asia excluding China, you can see that we are calling now that the mining is bottoming out, but that is of course on a low level. But we see activities in Philippines, Malaysia, Thailand and Korea that are developing in the right way.

If we then move on to summarizing construction equipment, I would say that in general, good performance on very low volumes. We can see that volumes are approximately the same around the SEK 12 billion and we should remember that since last time we had SEK 12 billion turnover in construction equipment that was actually apart from Q4 last year with Q4 2008, at that time CE made a substantial loss and also very negative cash flow this time around only SEK 12 million. We can see that’s even improved from the Q4 result and posting our 4.1% profit of course down from the levels we saw a year ago, but still a good improvement there.

Again, orders we can see now our – the results on our very hard work to manage our inventory throughout the whole system both in Asia, Europe and US and with despite that the markets are going down with 28% in terms of orders, our book-to-bill on the Volvo side is 119%, meaning that the spring season and the orders that comes in now actually goes into the production system, which means that we have a good balance there going forward.

Quickly a few words on, if you follow me, to Penta and Buses, I would say the heading says it’s all for Penta an okay quarter. I think they’re continuing to do good work in the construction continuously and very consistently on very low volumes, produced margins, which are okay. They’re not brilliant, but they’re okay and we do see some signs of market improvements, but still it’s very low volume both on the marine side but also on the industrial side.

Buses, the same story as we had over the last quarters, a very demanding picture on the city bus side with overcapacity and price pressure and the SEK 3.5 billion sales, you have to go back to almost 2005, I think, in order to see those kind of levels. They’re posting a loss of SEK 88 million.

But again, I must say that we have a number of programs in place and what is really important to me is to see how we are now step by step placing ourselves into new technology areas and I’m talking about the electromobility in particular, in terms of hybrid business, plug-in hybrid and electric buses with Volvo orders all over the world.

Finally, then before concluding VFS, good performance yet again. We see a stable portfolio development in – across the world around SEK 100 billion. Good profitability and well managed risk. I think one of the keys is that we have been discussing before is our overdues in China but they have improved substantially in March and we can see that VFS is posting a SEK 381 million profit, up a little bit from last quarter, or a quarter a year ago and also running now on a SEK 1.5 billion 12 months rolling, and the return on equity on 13%.

Summarizing then, a transitional quarter we call it. Sales as I described shortly down. Markets are down in the first quarter, but also with the American truck manufacturing system having a number of stop-weeks plus the Renault effect, it has also hit us in terms of deliveries and our sales.

Orders, we talked about that up 30%. The low capacity utilization amounting SEK 1.9 billion in under absorption for the group. 400 of that is CE and 1.5 is truck that is about SEK 500 million more than what we guided for in the Q4 report where we said that we would have approximately SEK 1 billion under absorption and the reason for that is the unplanned stops in the American production system. Again, I just want to reiterate that we have no stock to expand in the American system for the rest of the year.

Should also talk about the truck orders and the capacity. We are now in order to take care of this orders, particularly on the truck side, building up capacity. We do that in the European system in particular and on the Volvo system. We do it gradually over the quarter, so by the back-end of the quarter, we will then have the capacity that we’re looking for, to supply our markets, for the rest of the year.

We should also mention that the orders that we received on the truck side, in the first quarter, came in to a largest extent in the second half of the year. And therefore also you have the buildup of the capacity coming in the second part, mainly on the capacity side. But, we’re gradually building up this as we speak in the quarter.

We are and we will continue to have high investments in R&D, CapEx and selling for the new future products. We have been investing a huge amount of money in those new products. We have a very successful launch behind us, in the new FH. We will have the new range of Renaults coming in summer time here, and we just going to do that in a very professional, cost efficient way.

And I just want to highlight also that we’re – when we talk about the selling cost here, it’s not about the launch day and then actually launch activities, the major part of this cost, order training of 1,000s and 1,000s of technicians, 1,000s and 1,000s of salespeople and of course getting the customer to know the product. So, that is the investment that we’re going to do.

Having said that, we still believe that the peak when it comes to in particularly launched first in the selling will be during the second quarter and then would gradually face off over the year, because then you have the percent of both the new efforts still being there and you then starting out the new in our range. And you can see only in the first quarter, we launched three new models, the new Volvo FM, the new Volvo FMX, and in US the new Volvo VNX.

So that concludes my report on this transitional quarter, low volumes, low results, but good order intake giving us more stable ground for the second quarter.

And with that, I hand over to Anders who will talk a little bit about the balance sheet.

Anders Osberg

Very good. A couple of additional slides down on cash flow and capital efficiency. As you can see there on the first slide, we have cash flow this quarter driven primarily by the seasonal buildup of working capital. And on the left hand graph there, you see the negative SEK 7.6 billion, of course a difference than primarily due to the fact that operating income is not contributing to this quarter as much as that time around.

Then on the right hand side, we have a picture on net financial debt, it’s up some SEK 4.7 billion and of course again this is primarily due to the negative cash flow and also some investments in fixed assets. We do have some positive impact also from currency I should add there. So that takes our net debt over equity excluding pensions there above the hurdle rate slightly of 35% to be at 38% level.

Next slide we talk about investments here and you see there on the right hand side of the slide, of course, that on the subject with us as we all have said during the last quarter trending down there and Olof mentioned this as well on the investment in leasing assets, and that’s very obvious there in the bar as well. We are still on the R&D, we’re still capitalizing on a fairly high level but we are now introducing new products of course into the market.

And then on the tangible side, we are continuing of course to invest in, in factories and tooling and for instance Thailand, Brazil and Russia. But as you see we have a SEK 3.1 billion there on that Q1 2013. Finally then on the left hand side of the slide looking at the capital efficiency numbers, we are now seeing of course that, that we have a slightly elevated level on the CCC days and also on the inventory days. But we don’t really see this as alarming, the trend is a little bit upward rather see good improvement possibilities opportunities as volumes will turn back again.

And I think that concludes the remarks that I have on the balance sheet.

Olof Persson

Thank you very much Anders. And operator back to you and open up for questions please.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Mr. Fredric Stahl at UBS. Please go ahead.

Fredric Stahl – UBS

Hi, good afternoon guys. I just wanted to housekeep to ask you two housekeeping questions really. One is on the tax rate for the full year and what type of interest cost do you expect for the full year, if you can help with that? Thanks.

Olof Persson

That one I think I’ll give it to you Anders.

Anders Osberg

Okay. Let me stop and check the tax rate that we have here. Yeah, for the full-year its 30% and 14.5 tax rate there that is impacted also by the fact that we have higher taxes in, for instance, Brazil.

Fredric Stahl – UBS

Okay.

Anders Osberg

Okay.

Fredric Stahl – UBS

Anything on the interest, net financing line?

Olof Persson

Can you say that again?

Fredric Stahl – UBS

Yeah. Sorry. Is there anything you can say about the interest cost for the full-year, net financing costs?

Olof Persson

Yeah, what we can say, there is – of course that as you have seen there on the net financial debt, of course. We see, of course, on the trend line there that we see that assets going down, the liabilities going up a bit. What we see in front of this is, of course, I would say a lower interest rates actually affecting the net financial debt in a good way going forward, of course, with loans coming off the balance sheet, of course, with higher rates that we actually borrowed during the financial crisis. So we see substantial improvements but these improvements will not appear until 2014 for the most part.

Fredric Stahl – UBS

Okay, very good. Thank you.

Operator

The next question comes from Mr. Christer Magnergård at DNB. Please go ahead.

Christer Magnergård – DNB

Yeah, hi, good afternoon. Three questions, firstly about your strong order intake in North America. If I look at your percent of ACT Class 8 orders, it seem as you have a quite high market share of about 10%, which is considerably higher than you had over the last three quarters. It’s actually on the same level as having Q1 2012 when you had quite an extraordinary orders or – that came in March, that should have come in April or something like that.

Was there anything like that this quarter or have you just taken market share in North America? That’s the first question. Secondly, talking about North America, construction equipment, organic growth was down 36% and much of that was explained by, that you have taken other rental fleets or the rental fleet has stopped to buy as much. Is this a new level that we’re seeing now or do you expect – have you lost more market share than just this, or is that the drop only effected by the rental fleets. And I – we can stop with that, those two actually.

Olof Persson

Okay. If I start with the VCE question, I think that it’s difficult. I think that when you look at it in terms of we had exceptionally high order intake and then we were up on 111% or something if I remember correctly in terms of order intake and growth. But I would say that looking now at the North America market, we are of course with our localization in Shippensburg, with our sort of full line product, we are addressing both the Road segment, the Light Mining segment and the Construction segment and I think in a good way.

Then, how that will pan out and what level that will be, it depends very much on the market side. But, I actually rather, I think we are doing a good job in terms of actually focusing on the volumes and capturing new customers in North America and we’re going to continue doing that with our line up in Shippensburg over the time here. When it comes to the North American, Patrick I don’t know if you have any comments to do there?

Anders Osberg

No. I wouldn’t say that we have any specific one-off items or events that should distort order intakes – order in-taking of Mack Trucks really no.

Christer Magnergård – DNB

Okay. Finally, just more of a question on currencies for construction equipments. US dollar exposure is higher for that division, but still you had a positive impact on currency for construction equipment in Q1.

When I look at your currency bridge where you explained the currency effects in the quarter at the end of the report, I see that you have quite big negative transaction – net flow in currencies, but you have a positive effect from unrealized receivables – unrealized gains on receivables and liabilities. Did that affect end up at construction equipment or if so, what was actually the underlying currency effect for that division?

Olof Persson

The currency swings that we see here that goes into the finance as we guided last time around, so that doesn’t affect construction equipment like that.

Christer Magnergård – DNB

They’re unrealized gains on receivables and liabilities as well?

Olof Persson

The full – okay, I see what you’re saying now, okay. Yeah, that has of course a positive effect there.

Christer Magnergård – DNB

So, did the net flow – was that negative for construction equipments, sorry for being precise here, but...?

Olof Persson

That should be a negative effect from net flows, yes, due to the exposure towards the US dollar, yes.

Christer Magnergård – DNB

Okay. Thank you very much.

Operator

The next question comes from Mr. George Galliers at Credit Suisse. Please go ahead.

George Galliers – Credit Suisse

Good afternoon and thank you for taking the question. I have one question focusing on the Trucks division where I was wondering if you could help me understand the low level of profitability. I know you have made comparisons to 2009, but if I compare Q1 with Q1 2010, you have just reported a truck margin of 0.3% compared to 4% in 2010.

Yet in the quarter that has just passed, you delivered 4% more trucks globally than in Q1 2010 with more truck delivered in Europe, more in North America and more in South America. Western Europe was a high percentage of deliveries in 2013 than in 2010, so was South America. The Brazilian market makes it stronger today. Hence the question is, what do you believe has driven the significant step down in margins and earnings at trucks when I compare this quarter to the first quarter in 2010? And is your truck business today inherently less profitable than it was three years ago?

Olof Persson

I think one answer to that question if I remember correctly now is that then you basically were on a upward trajectory or upward trend, a substantially upward trend in that quarter, which of course then made at our capacity utilization in the system was much, much higher, which we are now not seeing because we have, as we have explained a number of times, being going in a downward spiral right now since the Q4 last time with the breaking of the – and also having the low volume.

So, that is not so, I think that is probably the largest explanation. Then you can add to that and at that time we didn’t have the elevated cost on sales and admin in terms of the product launches, which adding to that. And I think thirdly also the R&D that we are now putting forward in terms of capitalization versus expenses.

So, but in general to answer your question the biggest explanation lies in the underlying activity level in this system and that we came out from in 2010.

George Galliers – Credit Suisse

Okay. Thank you.

Operator

The next question comes from Mr. Michael Tyndall at Barclays. Please go ahead.

Michael Tyndall – Barclays

Yeah, hi there, it’s Michael Tyndall from Barclays. Two questions if I may, just the first one is a clarification. If I’m not wrong, you said on the call this morning that under-absorption is now pretty much behind us. And that seems consistent given that you’re looking for SEK 1 billion for the year, you’ve said it was SEK 500 million more than expected and that was SEK 1.9 billion in the first quarter.

So, am I right in thinking that the baseline for Q2, before we consider other factors, is effectively SEK 1 billion, SEK 1.5 billion higher than Q1. That’s my first question. The second question, and it’s less about you and more about the market, I’m just thinking about what happened in Brazil in terms of the difficulties in getting price uplift on Euro 5, what’s happened in Russia in terms of tariff agreements, what’s probably going to happen in Europe when Euro 6 comes in.

It seems like content levels are going up, friction costs are going up, but getting those price lifts is actually getting tougher. Now, in your case you’re stripping costs out to maintain margins or improve them, but I’m wondering if we’re facing a period where structurally margins in the industry could in fact be declining? They’re my two questions. Thanks.

Olof Persson

Yeah. Let me start on the second one and then come back to the under-absorption. I think that – and it’s an interesting question. But for me and the history shows I think that there is an acceptance from the customers that new and greener technology also bears a cost to it. Then you always have a transitional thing and a transitional period when you’re actually changing from one technology to the other. We saw that in Brazil definitely because we also had, as you remember, Euro 3 and do you say hangover of trucks in that system?

But due to our – and I would say that due to our brand positioning, due to our very strong dealer network, we have then gradually over time increased prices and make sure that we over time are getting paid for the new technology and then by also making sure that we can sustain a profitability. And therefore I said this morning and I repeat at this time as well that pricing in Brazil for us has developed rather positively.

And we are also – and that we are eminent that there is another factor which we always unfortunately have to get a – price increases for and that is when we see inflationary pressure, and we try to stay a little bit ahead of the curve there when we do price increases going forward. That is what we’re doing.

Long term, I’m sure that we have to work on both sides of the coin when it comes to new technology, new features. One is and that’s again a little bit on the long-term level is that whatever features we put forward, there has to be a value for a customer. It has to be a fuel efficiency, it has to be efficiency for the customers and as long as there is a value for that technology then it’s also something that we have to charge and get compensated for and we install that technology. So that is – that is the one.

But in general you can say that pricing in industry is holding fine for us. We are also seeing that the pricing in Europe is – I mean all markets are competitive but there’s nothing unusually in the pricing, in the order intake that we see now, and the same goes actually for US as well. When it comes to the under absorption Patrick, perhaps you can, first of all we don’t give any forecasts for the quarter to come and therefore we are...

Michael Tyndall – Barclays

Sure.

Olof Persson

Very sort of not giving too much of a baseline either. But Patrick, perhaps you can?

Anders Osberg

Yeah, of course. Coming back to your first question, the guidance that we provided in Q4 for – that you related to over SEK 1 billion, that related to the first quarter, so not the full year.

Michael Tyndall – Barclays

Okay.

Anders Osberg

And there we ended up – and that was for the truck business as well. So we ended up about SEK 0.5 billion above that and we had now report on under absorption being about SEK 1.5 billion for the Truck business. Yes.

Olof Persson

But in general you can say that – we said that this morning as well. I mean the, we should now with the increases we do, we should definitely get imbalance in our system and looking at under absorption going forward, what we can see now not being a part of the equation.

Michael Tyndall – Barclays

If you don’t mind, can I just have one quick follow-up. Just coming back to the price realization question, if I think about the new FH and I think about Euro 6, it seems like consensus view is Euro 6 trucks had maybe €10,000 to make. Presumably the new FH has more content than the old FH and is therefore more expensive to produce, you’re busily trying to reduce your costs. Should we think about the new FH as being, I know, you probably don’t want to answer this, a drag on profitability until those cost savings come through or is it actually more or less in line with the old FH from day one?

Olof Persson

I think that you answered the question a little bit yourself. We will not go into the detail. I just want to send a message very clear is that the new FH is a very, very important products that we are going to leave off for a long, long time.

And I can assure you that when it comes to pricing, profitability and cost, we are scrutinizing that extremely well and making sure that we do create a platform for the new FH which will be there to really support us for a long, long time. So that’s the overall answer you get on that without getting in too much of a detail.

Michael Tyndall – Barclays

All right. Thank you very much. I appreciate it.

Operator

The next question comes from (inaudible). Please go ahead. Alexander your line is open.

Unidentified Analyst

Hi, good afternoon. Thanks very much. Could I clarify please what the R&D guidance is for this year in terms of the bridge impact. I know you’ve seen a little bit higher capitalization in Q1 and perhaps you guided, and I think this morning you said that it was similar to, or you maintained the same guidance.

But I just wanted to clarify exactly what that is in terms of absolute EBIT bridge impact? And then the second question just on the stop-weeks in the US, you mentioned that it’s sort of some careless, something that you can really legislate for and that is related to supply chain issues. I’m just wondering what gives you confidence that you have seen the end of that going into the rest of the year? Thank you.

Olof Persson

Thank you. I think that what we said this morning was that, that we are running a slightly a high capitalization than we have, and this has to do with, as Anders was explaining, the opening of the gates in a number of and it’s a big mixture of different products that we have in the whole group.

We believe and what we see now – and then what we can see today, we maintain our sort of net effects of the capitalization and the expense side of SEK 2 billion, but that is of course depending on opening the gates and those kind of things. But, what we can see today, we keep that guidance for the full year, the negative impact of SEK 2 billion.

When it comes to the stock weeks in US, I mean, when it comes to the supply-related issue, we can of course not give any guarantees, but we are following all the development in the different – in the different suppliers to make sure that we have a good filling rate and make sure that we have a good, sort of, rate of parts and components coming in. We should also remember that what we – we are not talking about, in the second quarter, on the increases of production in the US system.

So it’s basically just by taking out the stock weeks, we will get much more deliveries out. So that also eases the issues with the suppliers. So, that’s something that we are sort of having in the US as a sales market. But, that is nothing on the horizon that we see right now. But, of course, no one can give any guarantees that everything was paid up right.

Unidentified Analyst

Okay. So, it’s not like a financing issue that they have a small cases that are – in volume capacity?

Olof Persson

That I don’t want to go into the details. But, you know from time-to-time you have things happening with the suppliers, and therefore you instead of building a float or a inventory, you just call if that is better that we have a stock week, get the things in order, get the deliveries in, and then we start again fresh and that’s the kind of – of view we’re taking now instead of building float and inventories.

Unidentified Analyst

Okay. Thank you.

Operator

The next question comes from Mr. Peter Reilly of Deutsche Bank. Please go ahead.

Peter Reilly – Deutsche Bank

Good afternoon. Two questions please. Firstly, can you give us a bit more color on what’s happening with the UD in Japan and this is your biggest ever acquisition when you made it back in 2007. We’ve obviously had no financial information since then, but you’ve been talking about issues with market share, profitability and product.

So, maybe you can give us an all color on what’s been going wrong and how you’re addressing it? And secondly on Buses, which has been a long term poor financial performer, you were talking positively about mix changing over time with more hi-tech products coming through with the hybrids and so forth. Can you give us some idea of the time scale, how long it’ll be before you start to get a big enough mixture to this, kind of to make a material impact to the bottom line, whether it’s say two, five, 10 years away, just so we can understand what’s happening with the dynamics of that business please?

Olof Persson

Thank you, Peter. And I thought with the bus and the mix issue, I think that we see now a ever increasing interest from larger and medium-sized cities to really go for the hybrid and also the electrical type of buses that we do have and I think the best evidence of that is that in our new Euro 6 bus line fleet, the pure diesel on the lower floor, the pure diesel variance is not part of our offering.

It will be on alternative fuel and it will be on hybrid together with the diesel fuel. So that shows that we really focusing on the Volvo bus side to make product we are capturing all this opportunities that is out there and exactly how that will turn out in the future in terms of mix between the new sort of – and old version that’s difficult to say, but definitely we have a positive momentum going forward here.

And as you say as well, as we do on trucks with new technology also on the buses side, we make sure that new technology that we invest is reflected also in the price and in the margins to make sure that we can make money and are leaving about these future products.

When it comes to UD, it’s really a lot of different things that we are focusing on and basically that they are in three areas which that’s why we put it very straightforward in the strategy as well.

And that is about the increase, again and the efficiency in the sales network and that was partly of the, if you remember, the leave program that we have end of last year, when I think it was 950 people that left us in a leave program in Japan, which big shackle that was within the sales, in order to get efficiency up in the sales. And we continue to do that in a different number of programs in order to get a good coverage and making sure that we capture all the business as we can.

Then in the industrial system, we’ve been also now taking – to make sure that we’re sizing the industrial operations in the right way, but also having a major likely announcement in this one, consolidating it into a more efficient setup, as we do and now we’re investigating in the European system. And finally, it’s about really making sure that the new products that we launched new vehicles in Q1 that those products are down, because they’re very good products that but they are now also down, taking the market share that we believe that we’ll have, and it’s all a combination of that as we’re working on.

Peter Reilly – Deutsche Bank

So, and I’m sure you won’t give a precise answer, but you said in the past that North America are still a material drag on the margin for the Trucks business. So, I don’t know this is a stupid question to answer in this quarter when you’ve had a low margin anyway, but I guess Japan is still quite a big drag on profitability for the Trucks business?

Anders Osberg

Well, we don’t go into those kind of details, but in general I think what we’re talking about here, Peter, is it’s really to position ourselves out in for the future as well when it comes to the Japanese market and – but I’ve said that – I’ve said that I’m not happy with the total profitability in Japan, and of course we’re doing those things to address that. So, I mean that part remains.

Peter Reilly – Deutsche Bank

Thank you.

Operator

The next question comes from Austin Earl at Marshall Wace. Please go ahead.

Austin Earl – Marshall Wace

Hi. Good afternoon. I have a handful of questions, hopefully reasonably quick ones. If I could start maybe just by confirming that I had correctly on the tax rate on Fred’s question, did you say 40% for the full year?

Olof Persson

Slightly above 30%. Yes.

Austin Earl – Marshall Wace

So, it’s 30%?

Olof Persson

30%.

Olof Persson

Okay.

Austin Earl – Marshall Wace

Okay. I’m glad I asked. And then if I could just, in terms of the new FH, you said it was 20%, 25% of all orders. What did you expect it be at around this stage?

Olof Persson

I think, in general you can say that the acceptance and order rate is above our expectations. We should remember that we are just now starting to actually get the FH, the new FH out to the customers, just recently. So, having a – and when I say all orders, it is of course Volvo Europe, we’re talking about. It’s not the 25% of the total order intake. It is the Volvo Europe where we have launched it. But I’ll say it’s actually above our expectations so far.

Austin Earl – Marshall Wace

Okay. And then you alluded in the sort of second quarter to a couple of issues that might hold back profitabilities, because the ramp up of production and the introduction of new models, and I just wondered if there is any way of quantifying what’s sort of impact that could have on your profits?

Anders Osberg

I will say, we don’t do that. I mean what we do with this information is, we try to give you as a complete picture as possible on all the opportunities we have for the second quarter, giving the ramp up, but also the challenges. So, you have a good view on the pluses and the minuses. And, I don’t think we should go any further into that in terms of guidance.

Austin Earl – Marshall Wace

Okay. Understood. And then on the – what are the lead times for trucks at the moment, I mean if I ordered a truck today, when would I expect to receive it?

Olof Persson

I’d say we are in – it depends on model and where you’re, but it is less than average on average on average, we’re talking about three months approximately.

Austin Earl – Marshall Wace

Okay. And then finally, just on construction equipment in China, I don’t know if you’re aware, but there are, I think various people consultants, saying that there is a huge, huge amount of inventory and excess capacity in the system, but I mean it seems that you’ve stuck to your market guidance, and therefore I mean am I interpreting this correctly that these sort of worried stories are not correct, or is this a reflection on Volvo’s performance with the Mack transmitted in the market?

Olof Persson

I think what I do, a couple of things that would have changed Mack. One is that we did very early on make sure that we had our inventories in line and cut back production very early on in China, which means that we are pretty much in balance with our inventory meaning then that when you get orders now that actually flows all the way through the system into our production led by our coverage of cost.

And that is of course very important. And secondly when it comes to the inventory market, it’s difficult to say, and there are certain studies around that so on and so forth. I mean normally what you can say at least is that spring season would have a dampening effect of that, and how much is of course done and how big the spring will be, but the spring season.

And as I said, is definitely there this year and we saw that in general construction in March picking up. So, there are different dimensions to the Chinese market there, but generally when we look at the market development and with all the data we have as we stand today, our best call is that it’ll be approximately the same market as last year.

Austin Earl – Marshall Wace

Got you. That’s all. Thank you very much.

Operator

The next question comes from Ashik Kurian at Goldman Sachs. Please go ahead.

Ashik Kurian – Goldman Sachs

Hi. Good afternoon. Thanks for taking my question. I’ve got two questions. One is a follow-up from a previous question. You highlighted that you had a better operating performance compared to a similar top-line in fourth quarter 2009.

Now, how much of the underlying margin in your Truck business improved since 2011? Or to phrase it in other way, looking at your current order intake in Trucks, if you were to achieve similar top end that you had in first half of 2011, in the second half of this year, do you believe your Truck business is capable of doing a similar or a better margin than 2009, and as what you had achieved in 2011?

Olof Persson

Well, I think that it is the – I have to back to – first of all, we don’t give that kind of information. Secondly, I would like to – to also bring back the issue about the strategy and the strategic plan that we’re working on.

I think that is the basis for sort of the – all the activities that we’re doing right now, and focusing on getting the profitability up in the Truck business and there I think also you can see very clearly on the areas we’re working on, the targets we have and also from the September Capital Markets Day, we have also specified what kind of impact we believe by 2015 that we will have on that and that’s as much as guidance I think for the future that we will give.

Ashik Kurian – Goldman Sachs

Just an update on the launch of Volvo brick loaded in China. Do you have any targets in terms of sales and market share that you want to actually when to start out?

Olof Persson

We have internal targets and that’s for a competitive reasons we keep for ourselves. I think that the – what I can say is that the launch has gone well, that is well accepted and we are now starting to produce it and also selling it.

So, the acceptance in the market has gone well so far still early days, but it looks like we have a very interesting product and in terms of features, in terms of cost position and then also possibility of price position, which we look forward to. So, that’s the answer I can give you.

Ashik Kurian – Goldman Sachs

Thank you.

Operator

The next question comes from Mr. Jacob Carroll at Voyant Advisors. Please go ahead.

Jacob Carroll – Voyant Advisors

I was wondering if you could comment a little bit on inventory levels. I thought that in Q4 you noted that there was a little bit more de-stocking to do and I was wondering if there is still any excess inventory in the system that you need to get rid of?

Olof Persson

No, we have continued and in total we have lowered the inventory level particularly on Renault side with an additional 900 trucks during the quarter and by that, we feel that we are in good balance in all the regions when it comes to inventories. We did the last bit as we said in beginning of this quarter to align the inventory going forward.

Jacob Carroll – Voyant Advisors

Okay. Thank you.

Operator

(Operator Instructions).

Olof Persson

Okay, if there were no other questions, then I thank you very much for participating in this conference call and I wish you a good day and talk to you again in the summertime after the Q2 report. Thank you very much. Bye-bye.

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