AB Volvo's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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AB Volvo (OTCPK:VOLVY) Q3 2013 Results Earnings Call October 25, 2013 8:30 AM ET


Olof Persson - President and CEO

Christer Johansson - Investor Relations

Anders Osberg - CFO, EVP Corporate Finance and Control


Hampus Engellau - Handelsbanken

Erik Golrang - ABG Sundal Collier

Andreas Brock - Nordea

Alex White - JP Morgan

Michael Tyndall - Barclays

Christer Magnergard - DNB

Alexander Virgo - Berenberg Bank

Olof Persson

[Started Abruptly]

… and most welcome. And we are now three quarters into the year of product launches for the Volvo Group. As you know, we have plan, we have a three-year plan, where the year of 2012 was the year of definition, the year of developing the strategies and the year of reorganization.

2013 is then the year of product launches. The largest product launch year we ever had in the Volvo Group. And we’re then moving into 2014, which will be the year of leveraging the new product portfolio and drive efficiency.

So we have a plan, we have a strategy, we are following that, we are executing accordingly and we take the decisions necessary in order to meet the targets we have in front of us. We have 26 months to go and we are on track.

Then moving into the third quarter and it was a tough quarter. But one should also recognize that it was a quarter characterized by the enormous switchover in terms of product introductions that we have been doing.

We are actually during this quarter and next quarter starting up the production for not only one brand, not only two brands, but actually three brands all around the world. That means that the European system is now running on a two separate product lines in parallel.

We have introduced more than 10 new models, 100s of different variances. We have installed in the production system more than 10,000 new part numbers and we also then having a production that is running, as I said, not only Europe but also in Asia.

That has of course a negative impact on productivity, on efficiencies and that is showing up also in the result. But having said that, we start to see now, the first positive signs of and positive effects of all the measures that we have done over the last year and I will come back to that little bit later in the organization -- in the presentation.

So then moving into the third quarter a little bit more in detail and starting down with the Trucks and as usually starting with the European market. There are three things I would like to highlight on this slide. One is the order intake.

The order intake in this quarter compared to the quarters before is somewhat lower. But we should remember that during quarter one and quarter two, we had exceptionally good order intake in the European system.

Mainly due to the fact that we launched the new products and also had the classic FH coming in, which means that we are basically sold out in the European system, both on the Volvo side and on the Renault side for this year, when it comes to Euro 5 and that has of course, a dampening effect for the order intake in this particular quarter.

I know there is a great interest about how do we now see the first quarter next year and switch over to Euro 6. What I can say so far is that the order intake on the Volvo side we see is that is coming in as normal I would say when we look at the seasons and seasonability that we normally have in the Q1. Positive on Volvo side is that for the new Volvo FH, 50% of the order backlog is now with Euro 6.

For Renault we have a different situation. The Renault we do see and we are now producing trucks for the new ranges that are going into the dealers and into the customers to start a test drive and that test driving will then result in orders coming into next year.

That process takes a few months which means that we already now can see for the Renault side that will have a tough quarter in terms of order intake. But that’s more due to the fact that we have to switchover to the new ranges than anything else.

I would like to stress that Q1 is still an early call. We know that order intake that we should fill up the Q1 is coming now in October, November and December, and we normally don’t have more visibility then the eight to 12 weeks delivery times that we do have.

The second thing I would like to highlight is the market outlooks for next year. We are for the third year in the row now basically calling this a flat market. We are continuing to look at 230,000 market in Europe and that is something that we see and it’s based on the fact that we do have a rather stable market. We see that we do have a good activity level actually among our customers, when it comes to freight volumes and when it comes to activity level there as well.

And finally, again, I would like then to emphasis the European production system that has been under enormous stress during this quarter will be also during the fourth quarter. And then we have the switchover completed for the Volvo side at the end of the Q1 and we have the switchover completed for the Renault brand at the midyear. So we will still have that kind of effects going forward.

Moving then into North America, again, stable market, if we look at forecast for next year, on the 250,000, we have lowered this year coming from the 250 to 240. But we do see the activity levels in U.S. coming and therefore, we call it a flat market basically 250.

In this rather stable environment that we have in U.S., the focus for the American organization will be very much to continue the good work that they have shown so far in order to increase profitability in this market.

We do see a lot of positive trends when it comes to our products. We have a penetration of the Volvo engines into the Volvo products of 80% and what is even more remarkable, we now see that I-Shift, our gearbox is actually up to a 60% penetration and we should remember, go back five, six, eight years ago, it was basically nothing. This is good news. It’s good news because of our volumes. It’s good news also long-term for our spare part business and that start to show off in the American markets.

So for me, U.S. and North American markets need to continue the good work done, continue to focus on fuel efficiency and therefore we have launch a very important package just recently in order to increase the fuel efficiency and move forward.

Good is also to see that we have a balance in order backlog compared to the deliveries and good news this quarter is actually, Mack. Mack Trucks which is up substantially in order intake. It’s very good to see that Mack now comes back and take the fair share of the market. It is a very strong brand. It’s a very good product. And it also shows that the construction starts to move in U.S. which is then a core customer base for Mack…

Moving down into South America, we have a very strong position and the team in South America and Brazil, in particular, has done a remarkable job. We have seen now that we are hitting all-time high in terms of market shares. And we do that with positive price realization on the new products and the Euro 5 that we go in.

We do believe that the market next year will be on approximately the same level, the 105,000 trucks as we have seen this year and what we see then is that Finame needs to come in on an attractive level. I think that is one prerequisite.

We also see the construction projects that’s ongoing in Brazil to continue and then something, which is also very important for us that is that the growth which we have seen is very strong in ag sector in Brazil continues. And that means also that we do have a lot of customers that is working in the ag sector and we are launching products in order to making sure that we focused at that market and we are already strong in that. So that means all in all that Brazil now goes into a year, we believe of a rather flat 105,000 market.

In Trucks Asia, we have of course the biggest happening this quarter is the introduction of the UD Quester. We did that over a couple of weeks now in the quarter and has been received extremely well. During the first week, we actually took in more than 700 orders during the launch of this truck. And we are now starting the production in Thailand. It’s still modest volumes this year because we’re ramping up.

It's a completely new industrial system that we set up in Asia and in Thailand for this particular product. And then we’re going to ramp up substantially during 2014, taking the leverage now and the good input that we have on this very promising launch that we have with this truck. And again it shows that for the first time, we are developing a truck for Asia, in Asia, produced in Asia and so far so good when it comes to the reception.

When it comes to the market as you can see, not only in Europe, North America, Brazil but also in Asia, we see a flat market development from 2013 to ‘14. So as a combination, you can say that the truck markets on a word -- on a global basis is very much a sideway story coming into next year, which shows to me that we see some stability. We see also that the overall robustness in the market is there and that means also that we are looking at a stable and robust market going forward.

Summing up the trucks Q3 and operating margin of 4.4 and I said I wanted to come back a little bit on the positive signs that we do see which is done little bit not visible in the numbers. We do see now that our targets when it comes to price realization, is starting to gain traction. We see a positive price realization when we look at it in totality.

We do see despite the problematic situation we have in the production system that the variable cost per truck is trailing in the right direction and goes down. We see that the cash R&D, which we’ve said all the time is peaking during this investment we do in this year, now starts to come down, the cash R&D.

And there are other examples where we definitely start to see now the activities that were done over the next year -- over the last year actually are coming into effect and of course, we have a lot of other activities going forward as well.

Well, we then look at the strategic and the strategic objectives. I just want to emphasize one thing here and that is a little bit. We are telling you the markets and the media what we are going to do and we are doing it. We said in Q1 that we are starting to optimize the European footprint.

This quarter we came up and said we're doing it. This is the largest change in the European manufacturering system that we’ve ever done. We told you in Q2 that we are looking at efficiency improvements and we have identified them. We came back in September and said we have overall efficiency program for next year.

And we’re today then announcing that we now have a special program looking at the staff and to support function globally in organization, looking at the 2000 employees over time that we see that we can reduce. And that is a whole thing and the emphasis I would like to put with a strategic plan. We are following it, we are executing it and we are on track when it comes to the truck business.

Moving on to construction equipments, from a market point of view, again and I must say that the whole sort of theme of this market presentation could be sideways. It was even here we see now on the construction side into different markets, that is basically moving to same direction but there is a big difference and that is specifically for construction equipment is the softness in the mining industry.

That’s not so much in the European business but definitely when you look at the Asian business going forward. If you look at Europe, we do have seen a positive trend and I'm really pleased to see that we gain market share in Europe but we are gaining it on the compact side. The compact equipment side is a lower margin business and therefore you have a mix issue by actually gaining those market shares.

In North America, you can see that we had an exceptionally good order intake in sales during last year where we actually took on and replenished our refills, our dealers, rental fleets but also the Volvo rent fleet which then is impacting now as you can see substantially above the market trends in North America last year and that we know have the negative effect of that coming in here.

If we then look at China in particularly, we can say that China goes up 10% which is good. China moving in the right direction is good, but we have also here to remember what sectors, is it that is actually moving and it’s general construction is not mining. The same goes with the rest of Asia as well. And that is something that we have to realize and it has a negative impact on CE, both from a volume point of view, preferably and perhaps mostly so on the mixed issue and that shows also up in the result.

But given that, given that, I must say that the result that Pat and his organization has shown during this quarter is actually a good result, because it shows that we have cost control. It shows that we are addressing the real issues and we are very well positioned when it's time to start to move ahead. And it’s not easy to work against two headwinds, both the volume side but also this enormous mix change, coming from the mining going into the general construction side.

But again, as you can see on the orders and the deliveries, is almost one life. CE, I think has done a tremendous job in adopting its inventory continuously during this period to making sure that it follows the market up and down and thereby, when the mining comes back, we are in a very good position in grabbing that market coming.

If we then take a short look on the buses and Penta, on the bus side it is of course a very bad result. There are explanations to that. I’m sorry, now we go. It’s still a bad result. But there are explanations to that and I think one of the explanations you can see SEK3.7 billion is actually a very, very low volume.

Now, we are suffering as you know from this city market but also the coast market and buses has been under a lot of pressures in the past and now we see that also coming down in very low volumes. I must say that the bus has done a very goods job in order to reduce the breakeven points. They are continuously working on taking out cost, but at the end of the day when you see drops in the sales like this it’s very difficult to mitigate.

The good thing here and a bright light in the report here is the order intake, up 41% and that was of course a real responsibility and challenge for the bus people to make sure that this order intake is transformed into good profitability as well going forward. And Penta, a continuous success story in terms of -- actually, despite lower volumes with good cost control and also very focused activity plan than keeping up with almost 10% operating margin in the report.

Finally then, looking at the financial service. Customer Finance, a good development, we are growing our portfolio on the market that we are in. New financing at 11.1%, exactly the same as the same quarter last year and we're also looking at a return on equity of 12.6% which is pretty good. This quarter was hampered little bit with the provisions that we have to put aside for our activities in Spain.

Finally then, looking at the Volvo Group. I would like to highlight, again, it was a tough quarter, but it was very much characterized by the record high number of startups in production and the parallel production, as I said not only in one brand, not only two brands but actually three brands around the world.

But I also would like to emphasize then the high speed of where we actually take decisions in the line and within the framework on the efficiency program, which is connected to the strategy. It’s not connected to the ups and downs in the market. This is a structural change that the Volvo Group is going through, since it’s a structural change you need to do it very structural and take a step-by-step and that's exactly what we are doing.

And again, focus 2014 is of course not only driving efficiency even if that is very important. It is of course now to make sure that we would go out and would sell the enormously attractive new product lines that we have both on the Volvo side, on the Renault side but also on our UD Quester side.

So with that, I conclude the presentation and I think we have time for questions.

Question-and-Answer Session

Unidentified Participant

Okay. Any questions from the audience?

Hampus Engellau - Handelsbanken

Hampus Engellau, Handelsbanken. Three questions if I may. Firstly, looking at third quarter on the order side, how was the split between Euro 5 and Euro 6? And also if you would compare your orders with some of your Central European competitors, do you feel that you are losing market share short term on the back of these product launches? And then finally also on this theme, coming into next year how do you see your Euro 5 inventory playing out in first quarter and how will this affect your cash flow? Thank you very much.

Olof Persson

The split between -- I don’t know, Christer, if we communicated that or I don’t have that on top of my head. But as I said, on the Volvo side, we don’t have in our order book, backlog now but the new FH is 50% of the orders are Euro 6. And if I look at in tshe split of the total order intake I don’t know if we have that. Perhaps, you can look at that, Christer.

Christer Johansson

It would be 20% to 25% for Europe.

Olof Persson

20% to 25%. Okay. Thank you. If we then look at the loss in market share, I would say that we have to separate the things. If you look at the Volvo and the August number, which are the only number we do have. We are actually keeping up on a very high historically high market share. We had problems in the first quarter with the production issues that we did have, but I must say both in Europe and U.S., we have catch up quite good and we are now back on the level where we used to be.

In Brazil, we are even taking one step further and actually increasing it compared to where we have been before as well. So, what we can see today, the answer is no. On the Renault side, we have definitely lost some market shares and this is of course a consequence of the fact that we said already a year ago or more than a year ago that we would've -- actually it is rather exactly a year ago that we will launch a new truck.

It would come in June. It did come in June. So of course, the customer has been very much aware of not only that we are coming with a new truck in the truck range but also when and that has sort of impacted that one. So the transition for the Renault for going from the old to the new one has been somewhat more complicated and then of course you also now moving that in the Euro 6 sign as well. And then the third question, again was inventory, Euro 5, Christer, do you?

Christer Johansson

If there will be overhang, we will not have any big overhangs into next year. There will probably be some out in independent dealers but looking at how strong demand is for Euro 5 right now, I think there will be absorbs quite quickly.

Erik Golrang - ABG Sundal Collier

Three questions. First one is a follow-up from the last one. On the order trends in Europe, to what extent could it also be a result of your engine portfolio perhaps not being as complete as some of your competitors, is that a factor?

Second question on the R&D side, as you mentioned, cash warranty going down, I think. Europe is accelerating a bit compared to last quarter. Is that -- should we expect that trend to continue until we are pretty stable towards your R&D target, or is there something specific coming up here that might change that trend?

And then the third question on Quester, which -- some more color there, which markets is the truck launched in and what are your plans for the next couple of quarters and the capacity there if you look one or two years out as well? Thank you.

Olof Persson

I think when it comes to Euro 6 and the engine platform, we have a very good offer and I think it’s showing that we now where the market share discussion I just had with the fact that we had 50% of our for a new F with the Euro 6, shows I think that we have a very good offer coming into the market in the Euro 6 range.

So, I definitely think I’m really looking forward to now getting those out in the market and start to show how competitive and good they are. So, I don’t think that’s an issue. When it comes to the R&D trend I think we have sort of hit the highest on that and we are going to continue to work on extra getting the cash R&D out. That’s what we have said all the time.

I mean, we have had enormous investment now in these new products and now we need to show that this was a temporary investment and now it’s the time then to come back to whatever normal levels are. Then exactly, quarter-by-quarter and trends-by-trends that’s going to go, but the general trend is that we are trailing very much against the target which we set up on the 25th of September last year when we showed that to the market. So we definitely expect a continuous cash R&D going down.

And then on the Quester side, we are focusing right now on the Southeast Asia market. Thailand is a big market and Indonesia is another big market and we have some other markets as well and we take them market-by-market and launched and very locally instead of regional. We had the big sort of fanfare occasion in Bangkok, Thailand but now we’re rolling it out over the next year. If you look at a capacity in producing I know it, but I don’t know if we disclose it.

Chris Johansson

We have said 20,000 in the Bangkok.

Olof Persson

Okay. We have said that, thanks. So, that is what we’ve done, ramping up to going forward. But again as I said before, this year is rather modest volumes because it’s a complete industrial system that we need to get going and then we ramp up next year.

Erik Golrang - ABG Sundal Collier

20,000 is in the Thailand factory.

Olof Persson


Erik Golrang - ABG Sundal Collier

And one more question from me. On the cash flow, which was a bit weak in the -- quite weak in the quarter. We know the components but anything particular behind that and is there any reason to expect a quite big improvement, not to expect improvement in Q4?

Anders Osberg

If you look at the cash flow per se, it is SEK2 billion better than last year on lower turnover. It is the component when it comes to the trade payables due to the fact that we are having a shutdown in vacation period which is very normal for us in this time of the year. We don’t give any cash flow forecast and so any other forecast into it, but of course, the trade payable per definition is something that when you get into the production sort of to produce then it comes in as a positive part of the cash flow going forward.

Olof Persson

I think you can expect a normal seasonal trend with a strong fourth quarter cash flow.

Andreas Brock - Nordea

Hi. Andreas Brock from Nordea. I have two questions, please on buses and construction equipment. In both those two divisions, what do you think is the normalized kind of EBIT margin in this more flattish market that you are forecasting?

Olof Persson

I think -- if I start with the construction equipment, what we have done in the CE and what the CE team has done over a number of years now is to really reduce to breakeven leverage -- the breakeven point which means that whatever volume you get in you get a very good leverage. So, now of course, if you look at the SEK12 billion quarter turnover that is historically a very low number. And therefore you can see that despite that historically low number, we are at the 4% volume despite a headwind of SEK229 millions when it comes to currency.

So, I would say that given the fact that we can run the operation on this low level with that margin, we know that we have a good leverage and we have a good leverage potential. Then is of course to question, when is particular mining coming back. And I think it’s almost impossible, what is normalize when you have that kind of high gearing and high leverage in a operation, you get very instant response to what kind of market mix you have but at least you have now established a good baseline saying that we can take care of tough times and we can do it profitably.

And I think that is the important thing. Bus is even more difficult to say. What is a normalized because this is project business as you know in particular for the city buses and there of course it depends very much on the volume where you get into a different thing. Then, I would like to stress though that from a future point of view, and positioning point of view, I truly believe that electric mobility and hybrids that we are now launching, not only the hybrid as it is but the plug-in hybrids and also the full electrical buses that we are looking at.

That concept of actually going into cities with electrification is something that we have seen a huge interest in right now. We are building this, the world’s most modern and updated line in Gothenburg where we are going to mix with full electrical and plug-in hybrids, reducing the fuel consumption with 80% and thereby setting a new standard of bus travel and being there in the forefront I think that we can attract and hopefully rather quick way a lot of cities to rethink the way they look at bus operation there, to be quite honest, deviating somewhat from your original question.

But there I think that you can talk about an LCC over bus, although completely different. That means that you can price the bus completely different because if you can show the customer that you have reduced the fuel consumption with 80% the lifetime -- the lifecycle cost of that bus is something completely different. That was not exactly the answer to your question, but my answer to you, it’s impossible to say what a normalized level is. But it’s higher -- it’s higher than it is today. Let’s conclude that.

Andreas Brock - Nordea

Thank you. Another question. The -- recently you announced truck optimization program. I mean, you spoke about for couple of quarters well in advance and then you announced it. And we got the full fledge details a few weeks ago. Could you help us understand how that is linked, if there is a link with the introduction of the new product ranges and what kind of tangible -- could you give a tangible example of the benefits at this program going forward?

Olof Persson

Of course, I think that the first part of your answer is no. There is no sort of link between the new products. This is a structure change that -- we're doing regardless if we would have had old products or the new products, that is a matter of fact. What it will mean for us, it is that when we now look into managing the whole systems in terms of getting each and every factory optimized for a specific operation. So we’re going from two lines to one line in two, which means that we can specialize the operation in Tuve in Gothenberg into being very good at that kind of vehicles.

We’re then having extended capacity in Ghent because we’re moving the medium duty which means that we can take and work a lot with flexibility and work a lot with the volumes in that factory. And then we’re going to have a center in Europe which will be very good in doing the medium duty trucks that can focus on that and get into volumes for it as well.

And all this change going forward here is of course then leading to that cost per truck. The variable cost per truck will be reduced. And this is more of a optimization and tangible example is I think the thing with specialization with Tuve and Ghent. I think that is something that we haven’t utilized really before. And the other one tangible, I really believe is that we’re now getting one really center of medium duty that can focus on that and get the extremely good in efficiency and driving that.

And the French plant Blainville is actually a very good plant when it comes to efficiency and productivity.

Unidentified Participant

Any more question from the audience. And we can move onto the phone questions please.


(Operator Instructions) Our first question comes from Mr. Alex White from JP Morgan. Please go ahead sir.

Alex White - JP Morgan

Hi. Good morning everybody. It's Alex at JP Morgan. I've got a few questions please. Firstly, some questions around the construction equipment margin of around 3.3% if we adjust for the capital gain. So firstly on the mix, I was under the impression from last quarter's call, the mix would be relatively stable sequentially, but it appears that mining has perhaps fallen away further. Just wondering if you've seen any cancellations or if you can talk a little bit around the sequential development of the mix?

The second question I had was on the pricing environment particularly in Europe. We've heard from some competitors recently that pricing pressure has become an issue. Just wondering if you can talk about what you're seeing there?

And then the third question is really on 2014 truck profitability. It appears as though there'll be a lot of pressures still on margins with R&D, FX and the production in Q1 most likely. You also mentioned that the production changeover issues will still be impacting through the middle of the year. Just wondering if you can help quantify the impact you're anticipating from the changeover and also what savings or efficiency benefits we might begin to see in the first half that might offset some of these pressures?

Olof Persson

Okay. I’m just taking a note here so that I don’t forget any of your questions. If I start with the CE and mix issue, you’re absolutely correct that we’ve seen this mix change coming. And I would say that I mean, there is not -- make enormous differences in the mix changes from Q2 to Q3 sequentially but you have to remember that Q3 is normally also weaker quarter for CE.

So it’s quarter four and quarter two, which are the big quarters for CE. You have that in addition to a not improving, at least mix issue that you have in CE. So there is both mix and seasonality if you do it on a sequential basis. When it comes to pricing, in Europe, both I will say that we have been looking very much at the price realization. We have been focusing onto making sure that both on the classic FH and on the new FH that we are sort of getting what we want to get out of the product that is ending and making sure that we come in on the right level on the new one.

I think we have done a good job there in order to position the products where it should be. On the renewal side, definitely we have seen price pressure coming from the fact that we’re now facing out the older products. So that one is definitely we have seen price pressure there in order to keep up the market share and the volumes.

When it comes to spare parts, even though you didn’t ask it, we also see a stable and -- stable development there as well as for the used pricing -- the used truck pricing -- we also see a stable development there. Having said, that we all know that all markets are very competitive, so of course, there is no walk in the park when it comes to pricing. But I think we’ve done a good job in particular on the Volvo side and that we have to realize fact and act accordingly when we talk about the renewal side.

When it comes to 2014 truck profitability, I will like to talk about in general terms since we don’t do any forecast as you know. But if you look at what we’ve had -- have ahead of us now. We do have a fourth quarter, which is then impacted by this changeover in double. Of course, we’re getting better and better at running also a double line and double products in the lines.

So we are of course gaining the productivity but that doesn’t mean that we gain all productivity that we would have had if we had run only one product. Then we’re going to go in and start to face it out during the first quarter and that we will start to see the improvements coming there.

What exactly that would be a magnitude, I will not sort of guide you through but at least you get the time scale there where we see this coming. And as I said before, we start to see the variable cost per truck coming down despite the fact that we’re running the production system as we do.

When it comes to the saving program for ‘14, the one that we have announced today with the staff and support function that is something we will now comeback in the beginning of the year to identify which countries, what functions and what operations are impacted by this, then we will start to implement that and we will do that as quick as possible. So we will start to see impact of this particular program coming down during ’14 namely at the backend of ’14 we will start to see the big savings coming out of that.

And then you should remember that this is not the only program that we have ongoing. We also have the EMEA, the European sales and marketing organization restructuring, which we have been doing now for little bit more than a year. We start to see the savings coming in that as well.

We are also looking of course in number of different activities which we are not communicating, which is also driving in and under the umbrella of driving efficiency and leverage new product portfolio going into 2014.

Alex White - JP Morgan

And that’s very helpful. Thanks. The question on pricing, sorry I might have mumbled a bit, but it was actually on the construction equipment side, hence what I was talking about. So we have heard some competitors on construction equipment pricing in Europe that it has been under pressure? I am just wondering what you are seeing there?

Olof Persson

Okay. Then, it was the right answer, but to the wrong question. But then you get the truck situation that’s well done, yes. On the construction equipment side in Europe, we have seen definitely a price -- a tough price environment, but we have managed to and as I said before has well done, gain market share particularly in the compact side with a very focused activity there. But it is a market which is a stable but rather low levels and thereby also you have, of course, a rather tough pricing situation.

Alex White - JP Morgan

Okay. Thanks very much.

Olof Persson

You are welcome.


Our next question comes from Mr. Michael Tyndall from Barclays. Please go ahead, sir.

Michael Tyndall - Barclays

Hi. It’s Mike Tyndall from Barclays. Thanks for taking my question. Two if I may, the first one from what I am hearing, you are telling us that the parallel production, the launch cost will continue to be an issue pretty much into the middle of next year. At the same time, you are also telling us that the savings are not really going to come through until the backend of next year?

I wonder if you could help us, I mean, against this backdrop we got consensus looking for almost the double of your -- doubling of your EBIT next year. So it does feel like the market is completely out of step with what you are currently seeing? Can you quantify at least to us what the headwinds are in terms of the parallel production, launch costs and whether or not they are flat to the middle of next year? How do they roll off so that perhaps we can get a better idea of how we should set our expectations for the year ahead?

And then, the second question and I apologize if this sounds slightly antagonistic, but you have got the biggest launch program in the history of your company? You have got an ongoing margin improvement program? You have got the restructuring that you have just announced? It feels like there are lots of plates spinning in the air? I mean, am I right in thinking that the risk of any one of these things not working out perfectly is reasonably high? And how do you manage that, what’s the mood inside Volvo at the moment because it feels like everything is changing at this point in time? Thanks.

Olof Persson

Okay. And if you look at the savings and the -- and I do understand that you have a lot of interest in the facing of this savings coming through. But this is and I hope that you understand that a rather complex picture in terms when the different savings. But let’s take them one by one. I’ll give you a little bit of guidance there.

Cash R&D we have talked about. Cash R&D has peaked and is going down and will continue to go down until we meet the level where we think it’s strategically okay. The sales and marketing costs, the launch cost, you have to separate that in two, one is the selling cost and there we are peaking right now, because now we are doing the selling and the training of all the mechanics and sales people and everything on the new. So that is peaking right now and will gradually start to come down.

Then you have the parallel production which you also can say, it’s a part of the introduction cost. But that one will then be for the Volvo side. We will have that up until Q1 and then you will have only one. So we go actually from Monday to Friday and then you will have Renault coming in the mid of the year when we run -- close out and run only the new one. So that one at the backend of the year.

And then you have and that is what I am saying now, a number of different things, that we already now start to see kicking in and I mentioned it before, it is the variable cost per truck. It is the cash R&D and there are a number of other issues that is coming. And this is when you do such a big change that we are doing coming to your last question, of course there is an accumulation of time you need to do in order to get the savings. And I think and a big structured change and many of you have been around for a long time knows that it is you have to build up that momentum and then you start to get the benefits coming through. So the benefit is not coming from one day to another.

And when it comes to this what can go wrong and not go wrong, of course there are numbers of things that can go wrong, but as also as many things that can go very, very right. Right now the mood when we talk and when I talking around the organization.

The mood is two, one, an extremely proudness of the new product line. And the proudness of both in the Renault and Volvo that the company has invested those enormous amount of money to secure the future of the product, that is an energizer for the whole organization, which is amazing.

Secondly, everyone in the organization understands that we will have to be more profitable than we are today. We need to come there. And if you have that understanding in the -- inside the organization, you also have a much more understanding on the activities that you need to do because it put in a context.

What we are going is that every month go through the strategic objectives. We sit together with the management team. If we see something that is not moving the right direction we take actions and we correct for it. And that is something, that is -- so the strategic plan and the strategic objectives is not something you look at once a year, it’s a part of the operation and management system that we run on the monthly basis and this is the only way of doing it.

And as I said before, we have 26 months to go and we are in track. And we shouldn’t forget I think, that starting this year, one of the largest risk was that, we will not able to actually launch all these products. If you look at what we have done, every product is out in the market, every product start to sale and every product has received a very good acceptance of the market. And that gives me confidence that this organization can manage a lot of change and also can making sure that we put those kind of thing forward. It’s not that easy thing to put forward a largest product launch in the history of the Group. So far so good.

Michael Tyndall - Barclays

Can I just jump in with one follow up, just on that last point, what’s the benefit of doing the biggest launch in the history of the company? I mean does not increase your cyclicality because everything is new at the same time? I mean what’s the other side of the story that I am missing out?

Olof Persson

I think if you look at the, those are of course nothing that, those decision are extremely long decision that is taken and you have to look at each and every one of the product lines, when is the time to change. You look at when is new legislation coming, when is new technology coming, when does it make sense to change.

And then what you have to remember is that with our scale of economics that we do have. We have to look at when can we take the best benefit of actually utilizing our scale and size, and thereby making sure that when we do product launches, we don’t do it just spot it, but we do that actually in a way that we will also can bring with us the size and the scale of our production, platform thinking, engine thinking, technology thinking and those kind of things needs to be harmonized. And therefore it’s end up to this kind of situation.

So it is something that is of course extremely challenging and it’s written by number of different factors but it’s definitely in a big organization like ours and we have showed it that it’s absolutely possible. And I don’t think if we drive cyclicality more because it’s actually meaning that we do have the platform to work on. And then of course, we will continue to invest in these products.

It’s not like we’re going to sort of put the product on the market and wait for 20 years until we do a new investment. We will continue to invest in upgrades, new technology and so and so forth. And that is already plans in our product plans to do that going forward, thereby we will keep the products and also the brand positioning in the right position.

Michael Tyndall - Barclays

Okay. Thanks for your time.


Our next question comes from Mr. Christer Magnergard from DNB. Please go ahead sir.

Christer Magnergard - DNB

Good morning. Firstly, a question on the currency, the FX effect you had in Q3, still a quite big negative effect as you also had in Q2. And I see that you have mainly negative flows on currencies, which I didn't really expect. So can you firstly start to explain what those flows are and if that is related to the ramp-up in production or if that is your normal flows, so to say, that this is an effect that we should expect going forward as well?

Secondly, on construction equipment, did I understand it right that you said that you believe that mining will perform worse than the market? That is that mining probably will decline also in 2014?

And then thirdly and finally on -- you say that you have a high readiness in the organization to adjust the manufacturing footprint, manufacturing output in the beginning of 2014. Historically Volvo has not been well known for being able to adjust for large declines in volumes. What are you doing differently this time? Thanks.

Olof Persson

I gave -- Christer, I’m just trying to think about the currency and get all the numbers right there. And when I comes to CE and mining, I would like to highlight there that we are saying that mining particularly in Asia which is a very important part of, it is bottoming out.

So we are not talking about worsening -- sorry if I gave you that impression during-- impression during 2014. So we’re talking about the bottoming out and then we’ll see how the market is moving.

I think that when I comes to adjusting the production we have to look at two things, one again it’s related back to the manufacturing situation that we do have now with all the start-ups and everything and at the same time managing ups and downs is of course more problematic, requires more planning and requires more flexibility and the thing that we’re doing is the same recipe as we tried before. And that is basically to keep a very high portion of the manufacturing employees on a temporary basis, so we can adjust on a quick basis.

And I think that -- and every time you do this and we have, I think all the perquisites to manage it as good as we can, depending on how the market develops. It’s always easy to look backwards and the benefit of hindsight and so we should have done this and that. But you have to act on the information that you do have and that’s what we try to do.

But I feel comfortable -- very comfortable that we will adjust, when we see what 2014 will bring to us and then we have the seasonality that we always have, then I m comfortable that we will be able to adjust in a good way.

Christer Magnergard - DNB

Yes, a follow-up maybe for the currency question. Are you planning to basically get rid of temporary workers in Q1 and Q2 because of the hangover effect from the pre-buy, but then re-hiring them again in Q3/Q4 because you expect a flat market in Europe, so you probably expect a quite strong Q3 and Q4, or are you planning to keep the temps lasted through the temporary dip as you see it?

Olof Persson

How we tactically going to do this, that’s something that we keep for our self and how we actually do it. I was more talking about the principle that we working for, but how tactically we’re going to do it that is something that we are deciding, as we go along when we see exactly how the actual market is developing and order intake is coming in, so that is something that we are looking into and we will take decisions on going forward.

Christer Magnergard - DNB


Olof Persson


Anders Osberg

Yeah. And I will add one comment to it. The increases we have done and implemented for the second half of this year has been done with temporaries and hired people. Of course, we have the flexibility to bring it down if need to be, beginning of next year.

Christer Magnergard - DNB


Anders Osberg

So we built in flexibility and because they compared to what happened in the first quarter, this year we are a lot more prepared because it’s not really any use to anyone that we might have a software start of 2014 due to emission regulations. You take it from here.

Olof Persson

Yes, Christer, on the FX question, of course as you know we do have the exposure against U.S. dollar, that’s all known to you. But in this particular case or in this particular quarters, we have seen also a number of currencies like the growth regions like Brazilian reais, like the Indian rupee for instance where you’ve an actually weakness of these particularly currencies, not so much the relative strength of the Swedish krona but actually the weakness of the other currencies and added together with all of these currencies, of course, that adds up to a fairly big number and that is exactly what you have seen here. And if you add the complexity of the FX crosses as well than you actually see that this is what’s happening here.

Olof Persson

And I think it’s fair to say looking into, we never know what the currencies will be in the fourth quarter of course. But it’s fair to say that the likelihood that we will still have compared to Q4 2013, we’ll still have headwind on the currencies issues.

Christer Magnergard - DNB


Olof Persson

Yeah. Substantial.

Christer Magnergard - DNB Markets

Great. Then, just a final question on the Renault Trucks, the new product launch. How has the order intake on those trucks? I guess you can't say exactly how many trucks you have received in orders? But how's the perception has been in the market and acceptance of the new trucks?

Olof Persson

The perception has been extremely good and we measure this in order to, I mean, anything else that I would say, anything else would be of course big revolution in. But we measure this objectively. So we measure it in number of articles in terms of the trade press. We measure it also with the way we get the feedback from the customer. And it has been an excellent feedback on the Renault trucking side.

And we just concluded a major event at Lamar, where we have 5,000 Renault Trucks customer coming there and that is sort of events that we now producing the trucks that we are producing right now in order to get up the interest and also getting the customer to get quite a good attraction thereby also putting into orders.

Now, that means that looking particular into the Q1 that order -- the actual order intake and there is always a lag. It was with the new FH as well and it is with FM and it is with others as well. That you get some orders in the beginning quickly but then before the real order -- the major order intake comes, you have a period of time and that period of time then spills into I will say Q1 next year, which means that we don’t have, as I said, a tough situation for Renault when it comes to the first quarter next year.

Christer Magnergard - DNB Markets

Okay. Thank you very much.

Unidentified Participant

More question, please.


Our next question comes from Mr. Alexander Virgo from Berenberg Bank. Please go ahead, sir.

Alexander Virgo - Berenberg Bank

Yes. Good morning all and thanks very much. I have just a couple please. Just wondering quickly on some details what your South American ag exposure is in terms of percent, if you could quantify that that would be helpful?

And the R&D swing in trucks in particular, obviously, in Q3 in terms of the year-on-year EBIT bridge, I'm just wondering whether that will be lower or similar in Q4. You made a comment that the construction equipment ex-mining, sorry, construction equipment breakeven point has obviously been considerably lowered, which is very good to see? But then made a comment that you need to see mining recover, I don't think anyone is expecting that to happen? So just wondering what else is going to move that profitability up.

And then lastly, just on the finance point, the provisions you booked because of the exposure in Spain in Q3? Would you expect that provision level to normalize in Q4 and into next year or is there anything else we need to be aware of in terms of exposure that might weigh as you provide against it? Thank you very much.

Olof Persson

Thank you very much. And if we look at ag in Brazil. Chris, I don’t know what we normally.

Christer Johansson

I don’t have that number here now. It’s an important segment to us…

Olof Persson


Christer Johansson

… especially with the large trucks. But I don’t have the percentage number, I am afraid, no.

Olof Persson

We will come back to on that one and we can, perhaps, take that if we have it on the Analyst call. When it comes to R&D Q3, Q4, the swing, the capitalization and amortization, I think, Chris, we have said that is rather flattish. I’m looking at you now and you are nodding.

Christer Johansson

I would say that we had net amortization of 226 million in the third quarter and you can say that’s the new normal for the next couple of quarters. So, you should expect the similar net amortization coming into the fourth quarter and a few more quarters until we can come into situation where we start capitalizing more again, but that means we will have to have new projects coming into capitalization phase.

Olof Persson

On the VCE, it’s a good clarification probably. I mean, we are having a starting point as we said, but we have to and I think it's good to drill down a little bit. I mean we also have the margin shift between big and small machines, as I said, the compact gain in market share we are done in Europe.

Yes, of course, on -- when you talk about the compact equipment on a lower basis. But you also have larger machines going into other segment that just mining and we are looking not only in mining per se, we also have quarters and other things.

So, there are other segments as well that you can look into and we need to be very focused on actually capturing that. But it's, as I said, I mean, we have the market share, we have the products and we have the presence and as soon as something moving, we going to get on to it in making sure that we take our share of it.

And I would like also to again coming back to the fact that we are still number one in China, which is by far the largest market. So, we have a very good base to work from and thereby also increasing profitability. When it come provision in Spain, I’m looking at Anders here but…

Anders Osberg

Yeah. I mean, this is one the one-off issue consider it as a one-off.

Olof Persson


Alexander Virgo - Berenberg Bank

Okay. Great. Thank you.

Olof Persson

Thank you very much and by that we close this. Thank you very much for coming. I would like to make a cliffhanger then for our Capital Markets Day which is the 4th of December where we will go through and really also present to you where we stand on the strategic objectives and follow-up on issues we have said last year when we have the Capital Markets Day. You are more than welcome to Capital Markets Day in Gothenburg, 4th of December. Thank you very much for coming.

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