AB Volvo Q4 2009 Earnings Call Transcript

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AB Volvo (OTCPK:VOLVY) Q4 2009 Earnings Call Transcript February 5, 2009 9:00 AM ET


Leif Johansson – President and CEO

Mikael Bratt – SVP and CFO

Olof Persson – President of Volvo Construction Equipment

Håkan KarlssonPresident of Volvo Bus Corporation

Göran Gummeson – President of Volvo Penta

Staffan Zackrisson – President of Volvo Aero Corporation

Sal Mauro – President of Volvo Financial Services

Christer Johansson – Head, IR


Nico Dil – J.P. Morgan

Patrick Sjöblom – Cheuvreux

Andrew Casey – Wells Fargo Securities

Yann Benhamou – Exane

Christer Fredriksson – ABG Sundal Collier


Ladies and gentlemen, welcome to Volvo conference call on the fourth quarter report 2009. It would start off with a presentation, and thereafter, there will be a question-and-answer session. Please note that this conference is being recorded. The conference will be chaired by Leif Johansson, CEO of Volvo. Mr. Johansson, please begin.

Leif Johansson

Very good, thank you. Most welcome to the Volvo Group's fourth quarter and full year 2009 conference call. I am here in Gothenburg, and we just had our press conference up in Stockholm. We have our different business area leaders and our CFO in the room, and they will talk about their different business areas of responsibility as we proceed through the conference call. And then we will open up for any questions or comments that you may have.

Let me start by saying that we have handed out a pack of slides. They should be – have been made available to you over the site. And we will talk about the headlines, and also as we go through the numbers on there.

We have had our press conference up in Stockholm and a well-attended one. Let me tell you that one of the things that came out of that press conference is a headline here that is very much misrepresenting what I said when it came to acquisitions. I think we have told all of you before that we are satisfied where we are with acquisitions. We don't see any big acquisitions coming. And that is still our position. We have not changed our position vis-à-vis that.

The reporter who is saying that I think that acquisitions are good is really saying that I think acquisition has been good and that's a natural way to grow in our types of industry. But I've also said that I don't think that's a situation that we are in right now. And we don't see any big acquisitions coming. So we have not changed our stand with that. It's a clear misrepresentation of what I actually said. And by the way, what I said is on tape, so we have – can substantiate that.

Let me go to point – slide two and group highlights on the fourth quarter of 2009. And you see there an operating loss of 2.3 billion Swedish krona, and we have 1.4 billion Swedish krona there of runoffs included in that number. We had a very strong cash flow. And with that, net debt's reduced by 9 billion Swedish krona, driven by very good reduction in inventories, and then also the leverage of payables coming back as we are beginning now in light of the much improved order intake to turn on production slightly more than what we have done in Q2 and Q3.

It is fair to say that we think in Europe that the market is improving. Different business areas, I can say, has cut a picture across Europe. Obviously continentally, we're up, and the northern part of Europe's doing better there, countries like Spain, Portugal, Greece, Italy clearly doing less good. But all in all, as you will see on the order intake rate for trucks, we see a market in Europe improving.

It's fair to say that in Asia and South America, when we say there's strong recovery, we did have a dip in the beginning. But we are at even very high levels from an absolute level in Asia and South America doing very well there.

While in North America we have not seen any improvement, a slight blip in order intake or uptrend in order intake in quarter three in North America, we think, was more of a little of a pre-buy effect, very little. And then we have not seen North America come along. And I assure you, the size of North America now in relation to order intake this year is showing you how low North America or small the North American market has become in view of history and in view of what's happening around the world. Therefore, we do expect North America to come back up. But that's yet to happen.

And on the year of 2009 where we made losses – operating losses and substantial losses here, we – the Board has declared that their recommendation to the general assembly is to have no dividend paid out for 2009 in 2010.

We go to the next slide, you see, which is slide number three, had the headline the "Volvo Group". You see that this quarter was actually the first quarter in quite many now where sales started to turn up. Now that is normally a seasonal effect between Q3 and Q4. But this time around, it is higher than the normal seasonal effect. So we think we are beginning to see, actually, a little of strength there, but it's not to be seen as a major improvement. But still stabilization or a slight improvement here, compared to the gradient that we have watched sales fall before in previous quarters.

And operating income down with 1.4 billion Swedish krona of runoffs you see improving there, where the – it's a terrible quarter fall in vivid memory – quarter two in vivid memory of '09.

Looking at the fourth quarter there, you see sales, you see that North America now has actually come down to 17% of turnover; Western Europe, which is usually way above 40% is down to 38%. And we now have more than 45% of our sales in Asia, in other markets, South America, and Eastern Europe. We think it's a reflection of how the financial crisis has hit the different markets, the greatest hit there in North America and Western Europe, much less over Asia. And it's also a reflection of the very considerable investments we have made geographically over the past many years now, taking very good positions in Eastern Europe, South America, but also in Asia and other markets.

But obviously, the operating income in itself, significantly lower sales volumes then on Q comparison, as you take Q4 '08 as compares to Q4 '09. We have had considerable downsizing costs, including some closures of factories we have given you the details of in Q4. But we're also happy to note that cost reductions and good work with cash flow has worked – have been quite effective over the past many quarters now, even though – and now we see sales coming perhaps slightly in the rebound here.

With that, we have slide five, and we have slide four, which we have somewhere. And I'll hand over that slide – annual cost level. And I'll hand it over to Mikael with that.

Mikael Bratt

Thank you, Leif. The first point that I would like to tackle with you here is to report back on the cost reductions that we have announced during 2009 here, and where we had a very clear ambition to bring down the annual cost level with 21 billion Swedish krona. And I'm very pleased to report to you here now that the implementation of these activities has been fulfilled. We'll see now the – hitting the P&L with full force, so to speak, from the second quarter of 2010. Since we have all the delays there, we have gone through all cost items in the finance segment here. So you will find it both in the operation expenses and up in the gross income line when we move forward here.

With that said, it doesn't mean that our cost focus will stop here. We will certainly continue to reduce costs as we need going forward, depending on the business levels. But what is important here is that is that very important milestone has been passed when it comes to cost reduction.

Let's move on then to page five. And the really good news in this quarter, while we, for the third quarter in a row, have seen a trend improvement when it comes to cash flow, and Q4 shows not only positive cash flow, but also with some historic measurements, a really strong cash flow. I would say considering this environment we are currently in, the 8.6 billion Swedish krona is one of the strongest quarters for a very long time in the book (inaudible).

One very important thought – the important thought in the cash flow here is of course the working capital, which you can see on page six. And the working capital in the quarter here was positive, close to 12 billion Swedish krona. The important ingredient there is of course inventory. That came down with 5.6 billion Swedish krona in the quarter. With that, it also means that we reached the target, which we communicated to you early in 2009, which was we should release 15 billion Swedish krona of inventory throughout 2009. And that has now been achieved.

Also payables had a positive effect in the fourth quarter here. Payables has been the challenge throughout 2009, where we – from feed to crops [ph], so to speak, so impact in the magnitude of 20 billion Swedish krona plus in the negative. And year-to-date now, we have a negative impact of 14 billion Swedish krona, which means that we had good contribution towards the end of the year here, which is expected as production volumes are coming back up. And of course, payables will be important when we gradually improve productions here moving forward. So payables will be an important contributor.

On the inventory side, we could say there that in general, we have reached the level when we talk about new equipment, and that is normalized. We have also reduced inventory, where I think we can find some opportunities going forward here. Q1 is always a seasonal tough quarter from a cash flow perspective as we – been from inventory for the spring season here in some parts of the group here. But so far, I would say we are very pleased with the performance in working capital.

Another area, which is important from a cash flow, is also the CapEx investments, where we had an ambition to bring that down with 10% to 15% in 2009. And I can also there say that we met that requirement.

If we then move on to page seven, our net financial position, which as a consequence of the improved cash flow situation has been strengthened. Equity ratio has come down now to 17.9%. And we saw the stabilization already in Q2, and we have now moved in the right direction in a strong way, I would say.

Liquidity-wise, we are also in a good position there. We have 71 billion Swedish krona available, so to speak. Out of the 71 billion Swedish krona, 31 billion Swedish krona – 38 billion Swedish krona is cash equivalent. And also, when we look forward here into 2010 and 2011, we have very limited maturities in the debt portfolio here. So here we have a good and strong position, and we have maintained a conservative approach here.

And let me also comment here, as you see, the pension have come down from previous year here. We have moved the (inaudible) fund obligation. As you know, we negotiated with ULW [ph] early on in 2009, where we have done a liability into this (inaudible) of fund of $524 million, and about $3.7 billion fetched. That has been reclassified now in the fourth quarter here to become financial debt instead of the pension liability.

So in summary, cost program implemented a strong cash flow in the quarter, coming from positive working capital and a strong and stable financial position. That's all. Thank you, Leif.

Leif Johansson

Very good. And now, we are at slide eight there in the pack, and we are with the headline "Trucks" there. And as you can see here, and I'll show you later on, we had an improving demand. Sales were up by 24% versus Q3, but still down an amazing 30% versus Q4 '08, which really wasn't the best quarter we have had either. So clearly, we are now looking at low markets and performing at low markets, even if the trend is upwards.

We see an operating loss reduced there and lower sales there, you can say it is clearly offset by cost reductions, but not so much so that we were able to yet breakeven there. Inventories on new trucks is interesting because basically we feel that with this quarter, we have cleared inventories of new products all over the globe, but it is still also on trucks. And we are now looking at running at this level of inventory or even in some business areas, like at the building inventories for Q1 for sales in Q2.

We would probably make – and also to say that we still have slightly high inventories on used trucks in particular places in Europe, say for example in Eastern Europe. But all in all, inventory's in very good shape after this quarter. Important, of course, as we go focus here now is when we are all – slowly turning on production, make sure that we can do that with good costs control and with good leverage as we turn up.

In the next couple of quarters there also, importantly, we have this introduction of the US10 engines. And we have also noted today that we have an approved engine for the Japanese market, and that product is meeting the requirement that we put upon ourselves when we bought Nissan Diesel to get group engines into this year and get the synergies with that. And we've ticked off at the press conference the message that we are well in line to meet with our EUR 200 million target five years into the introduction of – or the acquisition of Nissan Diesel. So that's good.

A little more problematic there on the US side because there we are looking at engines that should not have been stockpiled in the first quarter. Our impression is that the – even though we don't know the numbers, but somehow our competitors have more US07 engines lined up for manufacturing in – manufacturing of trucks in Q1 and Q2 than what regulatory authorities allowed and what we felt was allowed from a regulatory point of view. So I think I've used the term before here that we have a couple of messy quarters, quarter one and quarter two, ahead of us here with the introduction of US10.

The good news is that the engines have now been fully certified as the – at the levels where they need to be to be fully US10 certified. And on top of that, we are showing very good fuel efficiency on those engines, so much so that customers count on about 5% improvement, compared to the US07 engine, so good news from a technology and the product point of view, and a little unclear situation on the stockpiling of engines and the impact that it might have short term quarter one and quarter two in the North American market.

If you look at the heavy-duty truck market for Europe, and we said last quarter that we think that that market is going up. I think this quarter confirms that. We are now calling the market to be up by about 10% in 2010. And we think the order intakes support that. As you can see that we are now very far from the historic trend line in Europe. And we think perhaps one way to look at this is that we've been through a financial liquidity crisis worldwide that has dropped markets much, much more than they would normally do in a normal business cycle. And perhaps you can say that we are coming into a more normal business cycle now, but from below wins there. And we will see how that runs out over the next couple of quarters here, but confirming the upward trend that we spoke about in Q3.

You could say that about North America too, but with less strength. If you look at what we are actually now seeing for North America, we think that the market will be up – this is slide 10 now, market will be up by between 20% and 30%. And the sales – if you do the arithmetic, new sales and market will be up by 25% off of the low point of 115 there in '09. And you actually arrive at the second worst or the third worst year ever for the history of 20 years almost. So you can say even though percentage-wise it sounds aggressive, in absolute numbers, it is certainly not that. Unlike in Europe, we are also in North America, as you know, we have an old population running there. And we have that also across construction equipment, for example, but yet to see a real strong order intake trend there.

If you take a look at slide 11, where you see the actual numbers and we thought we would give you the actual numbers rather than trying to discuss this in different terms. You see, Europe actually there, Q4 on Q3, is up 78%. North America is slightly down, and we think that that 5,000 number was more perhaps the only very limited pre-buy that there was in North America. You can say North America's stable there.

South America is up yet again and off, as you can they're on very high levels, Asia also up and on quite high levels. And then we have other markets very stable. So the reflection there, you can say that South America now is bigger in order intakes than North America is. And that's not something that over the long term we would expect to be true. And we think there is probably nothing wrong with South America there. But with any historic measurements, North America is still at very, very low levels there.

If you do the arithmetic between Q4 '08 and Q4 '09, you arrive at a whopping 179%, I think. Perhaps more relevant is the quarter-on-quarter progression there, where you see 13,000 going up to 38,000 over the last five quarters, and you see the downturn really then on the – at the trucks as being in Q4 '08, some of that of course was cancellations.

With that, let me hand over to Olof Persson and construction equipment. Olof?

Olof Persson

Thank you very much, Leif. And that also world market conditions for the construction equipment industry are still weak, with that drop of 12% in the quarter and 39% for the full year. In the quarter, Europe was down 12%. Both North America and international decreased by as much as 14% quarter-to-quarter. Asia, however, we saw a growth of 24%, strongly driven by China that increased by the full 82%.

Our sales declined by 6%, adjusted for (inaudible), and our operating losses came down quarter-over-quarter in 2009. And the loss in Q4 was reduced by 55%, compared to the year ago.

In addition to the actual restructuring charge, we also took a write down of over around 100 million sites [ph] related to obsolete production of (inaudible) in China and Korea.

This quarter was another quarter with substantial inventory reduction and good cash flow, but low production utilization. Our inventories were reduced by another 17% in the quarter and a full 47% for the full year. Thereby, our inventories' been now in good balance with the present adjusted amounts. And we now basically produce our extra customer orders.

Main focus in Volvo C is now to leverage on the cost cutting program we introduced in connection to the reorganization. I expect this will have a positive impact in our results in 2010 – for the full year 2010 with amounts of around 1 billion Swedish krona. Our new strategy for the period of 2010 to 2012 will also help us to improve in the quarter. Key words and the strategy there are in cost reductions work on machine on sites and focus on probable segments.

When it comes to our production network, I think (inaudible) has found a key word in those rather uncertain markets. We have the flexibility with activities we have done during 2009 to both reduce and increase our volumes to meet the market demands.

As you can see in our quarterly report, we expect a modest growth of demand in Europe along with America for 2010. Asia and other markets are expected to grow by 10% to 20%. China is expected to grow with around 20%, and we have presented a range of four new (inaudible) branded, 13 to 29 from (inaudible) that will be introduced to the Chinese markets during 2010, which is of course the biggest in the world when it comes to excavators.

I think that concludes.

Leif Johansson

That takes us from construction equipment into slide 13, buses and Håkan Karlsson.

Håkan Karlsson

Thank you, Leif. The bus markets stabilized on a low level with, we'll say, clear recovery in South America and in Asia. 2009 has been a challenging year for us in the bus industry because the coach market more or less collapsed during this year. That means that the market – coach market in Mexico was down 60%, in US 35%, in South America, 50%, and in Europe, 35%. That has been compensated with a fairly stable city bus market. And for us, that means that we lost approximately 15,000 coaches, which has then been compensated by city buses in China and India. And that (inaudible) has hampered our profitability. We have during the year, strengthened our market shares both in North and South America and international, so we are not so much down as the general market.

We had a strong order intake in the fourth quarter plus 30%, and that is representing orders in all regions. And that has then resulted in an order bank that is much better, compared to last year when we now enter into 2010.

We had an operating loss in the quarter mainly driven by the product and market exchange then, but also that we had some one-time cost items. And that is especially regarding the problems we have had in Nova Bus to deliver our vehicles because we got some key suppliers in Chapter 11 there. And we had a chart deadline to the Vancouver with 300 vehicles. So we were – pushed them to add a lot more capacity, so that has caused a fair amount of money during the fourth quarter. But we managed to deliver the buses and we have now reduced that extra capacity.

We have also reduced the inventories in a good way at almost 1 billion Swedish krona reduction in the fourth quarter. And we had pushed out the old inventories because we are heading towards emission upgrade there. So we are in a good balance regarding the inventories. And also there, our cost programs, shows result in the fourth quarter.

In focus, going forward, we continue to reduce our breakeven levels in all regions to really be profitable on the current volumes and product market mix. In our factories, we are driving a huge program there to reduce the product cost and efficiency. And we are now in the introduction of the Europe 5 new products, which are doing well. And we are preparing for the US10, and we also prepare our introduction of the hybrids in the second quarter. And there, we can see the order intake is picking up now for hybrids in Europe. That’s all.

Leif Johansson

Okay. Then we have slide 14. We have Volvo Penta and Göran Gummeson.

Göran Gummeson

Okay. Thank you, Leif. The total delivery in submarine and industrial end is quite low during the fourth quarter. And demand during the end of the period actually picked up and improved then gradually, both actually in the US and also in Europe. Then by end of December, actually, our order book was 16% higher than the corresponding amount of previous year. And the positive trend has continued, I can tell you, as a result of the international boat shows now in the beginning of January in London and Dusseldorf.

Well, we had a positive operating income during the quarter despite the fact that sales dropped actually 18%, compared to last year. And that’s an effect from all the downsizing activities that we have carried through and also the lower breakeven level that we have, of course, as we’re operating right now.

We have also managed to reduce our global inventories successfully and thereby created a good and strong cash flow throughout the year. In focus for us now, moving forward, we must secure production and deliveries from our global supply chain. We have already increased the production rate in our plants in Volvo Sweden and also in Lexington in the US in order to meet the gradually stronger demand for marine engines.

When it comes to industrial engines, we have some important emission legislations that will come into force during 2011 and 2014. And for us, these are windows of opportunities towards new industrial end in customers actually. And we expect to see a growth in this segment over the coming years as we have a competitive range of emission compliant engines based on the gross diesel program, of course.

And finally, we will and continue to build on the successful IPS system that we launched some years back. Then at the London Boat Show, we actually introduced the third and largest type of drive (inaudible) together with the groups' 30-liter engine. This powerful package can deliver power outputs corresponding into up to more than 1,200 horsepower. And with the total – the range now of IPS systems, we can offer powers for both – all the way up to 100 plus, 100 feet, up to – roughly 120 feet actually. And the IPS is by far the world’s most efficient and environmentally friendly system for these types of boats.

So we received today also orders for various types of commercial vessels actually, such as patrol boats, supply boats, et cetera. So we expect this to move further on with this and grow the IPS business even during the years ahead. So that’s all for Volvo Penta.

Leif Johansson

Okay. That takes us to Volvo Aero, Staffan Zackrisson, and slide 15.

Staffan Zackrisson

Thank you, Leif. Staffan Zackrisson, general comments about market. As (inaudible) gradually recover, and you remember, Leif, the (inaudible) 2009 and that turned positive in November. Also there, common traffic improved sharply during the fall, which is a good indicator of world economy as such. Our customers' airlines are still facing difficulties and have to bad catch for in balance sheet. And but we are expecting them prove during 2010.

Our sales were down 18% during the quarter. And what is especially difficult in it is that they our spares sales have gone down with 26%, which of course there are high margin partial large sales. As of over – relatively, fourth quarter went down sharply and we have in all our activities enough to ahead the impacts of airlines situation, and also on our distribution as such decides we have had extra costs during the fourth quarter.

What was a good sign for the industry is that Boeing 787 had its maiden flight. And we are in both engines that (inaudible) for that aircraft. If we’re looking to the – in focus items, of course, our cost management and the deficiency in the cost package that we are driving with a little heavy its impact during 2010. And also, the after market business is under review to get a better margin on those parts of the business as well.

Boeing 787, for us means that we’re starting to ramp up production during 2010, and it’s of our – most vital importance of the company since we have large investments in costs tied to that program in the GMX [ph] program, but we are executing of course new contracts.

That concludes for Volvo Aero.

Leif Johansson

And if technology works well now, we shall have Sal Mauro with us, from New Jersey. Sal, could we introduce you and do financial services of slide 16?

Sal Mauro

Yes, Leif. Thank you. Looking at the new retails financing, our volume is somewhat flat quarter-over-quarter, slight increase in the fourth quarter and much lower than last year. The credit portfolio has decreased by about 16% over the last 12 months. And this is directly related to the retail volume decrease as we’ve seen at our sister business areas and also a decrease in our penetration levels.

Looking at operating income for the quarter, basically a breakeven, about 15 million Swedish krona in profitability, which is a good sign and a good start. And this level of profitability is basically driven by higher credit provisions than last year.

Looking at the highlights, the economic environment continues to be challenging, especially in Eastern Europe. But it must be noted that many of our markets are profitable, most notably the Americas where we have Brazil and Canada leading the way. However, losses incurred in Spain and Eastern Europe resulted in a consolidated loss for the year.

We see some stabilization of the credit portfolio. This is a good sign. Delinquencies are starting to come down even with a decreasing portfolio. So we’re starting to see our 30-day and 90-day delinquency stabilizing, and in many areas are actually coming down, which is a good first sign. Inventory levels are beginning to stabilize and many markets were selling more than we’re actually repossessing, so obviously inventory levels are coming down. And it’s good to note that used equipment values, while at a relatively low level, are stabilizing. And in some markets, we’re seeing some slight improvements, which is good news.

In focus, we’re continuing to support our customers. As we said many times before, we’re not fair weather friends. While we’ve learned some very valuable lessons from this severe downturn, especially in Eastern Europe, we continue to support our customers and dealers while diligently looking at our credit standards. More specifically, looking at our risk mitigation in Eastern Europe, we've had our challenges and these challenges, I believe, will continue in the near future. But we worked with our customers, and I think a very good way, addressing their needs. And where they weren’t able to meet their commitments, obviously, we've repossess the units and we’re in the process of mitigating those losses as best as we can. We’ve learned many lessons. We’re now applying them and creating what we consider good integrated offers with our sister DAs.

With the decrease in the portfolio and a decrease in our volume, obviously we’re continuing to work on reducing our costs and expenses further. And we’ll be doing that for some time to because as sufficient as possible and continue to decrease our expenses going forward.

With that, that concludes my comments for Volvo Financial Services.

Leif Johansson

Okay, Sal. Let's go to group summary then on slide 17 there. We had a fourth quarter, which was much lower than Q4 ’08 in sales, but actually 23% higher than Q3. An operating loss of 2.3 billion Swedish krona with some runoffs there and an improving curve when it comes to the level of losses that we have sustained over the year, really with the black quarter of Q2 as the turning point.

Operating cash flow, very positive news and really based on the successful reduction of inventories that's been gradually the leverage that we have with – normally have with payables as we increase production rates. With that, we also took the opportunity to decrease our net debt by almost 9 billion Swedish krona. And we are right in this process then of introducing the cleanest ever heavy-duty diesel engines in US and Japan, technology-wise, ready to start that. And then we have the opportunity to also offer our customers a 5% after a few liters as they have in previous generations of engines, on top of – from a group point of view, actually making them group engines. And with that, pick off synergy list that we had, especially when we bought Nissan Diesel in Japan, it seems to be that that is working well.

So as we come into the next couple of quarters then, clearly with demand recovering with inventories in line, we are going to increase production. We are cautious there because we obviously see some risk at least, even though we don't see it. But potentially there’s the risk of plateauing. And with exit strategies in different countries are being executed, so we are doing that with a real view of keeping flexibility high and also to do it with good control, and with that gain productivity. And we also expect, in a normal year – more normal year like 2010 to be able to throw off cash flow again. Even though in the first quarter, as you know, we basically build a little inventory as for – as we get prepared for deliveries in Q2 with the seasonal effect that we normally have.

With that, let me conclude the presentation from our side then. And operator, start any Q&A questions that may be here.

Question-and-Answer Session


(Operator Instructions) The first question comes from the line of Mr. Nico Dil from J.P. Morgan. Please go ahead, sir.

Nico Dil – J.P. Morgan

Thank you. Three questions please, first of all on Latham. We saw a very good order rate here in the quarter. I was wondering, you provide fantastic guidance for the other areas, at Lex and Latham. I was wondering whether you can give a bit of color here, how long do you think it can extend or perhaps bit of quantification like you provide for North America and Europe.

The second question is you said it lagged a little bit in Spain and Italy. Could you quantify what the exposure is for yourself and Trucks to Italy and Spain?

And lastly, a question for Mikael, last year I saw in the balance sheet items, I saw an unrecognized actuarial loss of about 9 billion Swedish krona. And I was wondering whether that has been reduced at all or whether that is still at the same level?

Leif Johansson

Okay. I think on the outlook for the other geographies in North America and Europe, obviously, they are – come together for many different seasons there as you realize when we have, for example, other markets and Asia there. We do see continued strength in India and China. And they are the big markets in Asia. We don't see a very strong upturn in Japan, even though the speculation is that that might come up slightly. But Japan is still at historically very low levels and not coming up very quickly, while India and China are at historically fairly high levels and continuing to grow.

South America and Brazil looks very strong and no reason to really doubt that they've survived the crisis very well as a country and as a continent. If we now have a broader recovery, we think they will continue to do well.

On the whole of the other markets there, we see a slight reduction. Those are very mixed to everything, all the way from Africa to the Middle East, and individual countries there, from our point of view perhaps are more representative of, for example, getting reasonable financing in the Middle East more than economic recovery there. I think I would refrain from giving a forecast. It’s very much tendering or financing business there.

And on the exposure in Italy and Spain, our exposure – my intention was not to say that there was an exposure other than the fact that we have very slow markets there. Constructions, for example in Spain, have not come back yet, and I can say almost at all. Italy is clearly slow in industrial development. And we are concerned both with Portugal, Spain, Italy, and Greece that the exit strategies of different kinds might put a trouble zone on their markets as such. But our intention was not to point to any special exposure that we’re having, aside from the fact that we are – we don’t have a good market there.

And let’s see, on the third question there, Mikael?

Mikael Bratt

On the pension side there, are you trying to say – your question was to unrecognized sectoral loss compared to last year. Last year, it was 9.8 billion Swedish krona. And this year, it’s 9.4 billion Swedish krona, so slightly better or at the same level I would say.

Nico Dil – J.P. Morgan

Thank you.


The next question comes from the line of Mr. Patrick Sjöblom from Cheuvreux. Please go ahead, sir.

Patrick Sjöblom – Cheuvreux

Yes. Good afternoon. Patrick Sjöblom from Cheuvreux. I have two questions, if I may, first of all, when it comes to you mentioning of about 2 billion Swedish krona of under absorption in the quarter. Now when you look at your order books, your production plans, and you’re also saying that inventories seem to have somehow normalized, would you say that you are not going to have or experience this kind of under absorption now in the beginning of the year or how shall we think about this?

Leif Johansson

Mikael, you want to speak to that?

Mikael Bratt

Yes. I don't want to give you a forecast of it, so. But what I could say is that of course we want to go forward here. And if production rates is thought to crank up there as we’re expecting, it will go away. But I think to some extent, you always have at this level some level of under absorption, so you should not take away the full amount.

Patrick Sjöblom – Cheuvreux

Okay. And so first half is still going to feel some pain from this, but come later part of the year, provided that we can keep some kind of this type of level of production, then we should not expect anything more? Is that a reasonable way to interpret this?

Leif Johansson

You could interpret it in that way.

Patrick Sjöblom – Cheuvreux

Okay. Then just a question on financial services. I’m just looking at credit provisions and also the right option. It seems at least on a quarterly basis that credit provision peaked in Q1 last year. And obviously now, we’ve got an – enter the write offs that this seems to have been roughly in the third quarter. Is it fair to say that we now have passed the peak of credit risk and we are heading towards much more stable – or stabled areas? Or is it too early to say?

Sal Mauro

This is Sal. It’s difficult to obviously predict the future. But as I’ve said before in many of our markets, we’ve been quite stable and we’re seeing some good improvements. We believe we have further challenges everyday in Eastern Europe. And while we’re mitigating those challenges as they come up, I would see that as an area that we need to continue to do some very good work on. I also can say that we’re ending the year 2009 with reserved levels actually higher than we had in 2008, while taking a significant amount of write offs during 2009.

So to say the worst is behind us, I don't know if I could make that statement. But what we’re seeing now in the portfolio and we're seeing the reaction to some of the modifications that we’re making with our customers, I’d say that it’s stabilizing and starting to improve.

Patrick Sjöblom – Cheuvreux

Okay. Thank you very much.


The next question comes from the line of Mr. Andy Casey of Wells Fargo Securities. Please go ahead, sir.

Andrew Casey – Wells Fargo Securities

Good afternoon. Thanks for taking my questions. A few questions on regionally used truck pricing trends, and then a clarification on the construction equipment business. On the used truck pricing question, first North America, have you seen any sequential used truck demand and price increase in advance of the US10 transition?

And then second, Eastern Europe related the to the used equipment inventory comment you made, have you seen any used truck price stabilization or is it mainly supply still pressuring price?

And then lastly on the construction side, after the 47% reduction in field inventories that you talked about during 2009, could you please clarify what your production growth would be if retail demand is flat in 2010, excluding any new produce introduction benefit? Thank you.

Leif Johansson

Okay. On the first question here on used truck pricing, we – I think we can say that we have seen the demand increase. I don't think it's fair to say that we’ve seen any price increase. And prices, as we have said before, have come down fairly much there. In Eastern Europe, I think it would be correct to say price stabilization, but certainly not price increases, but probably stabilization is the better word to use there.

Olof, do you want to speak to production rates there?

Olof Persson

Yes. I mean looking at what we have done in 2009, you can say that looking at the sales versus the production, we have a rough – I was looking at the system, I was saying that we have under produced around 25% in 2009.

Patrick Sjöblom – Cheuvreux

Thank you very much.


The next question comes from the line for Mr. Benhamou from Exane. Please go ahead.

Yann Benhamou – Exane

Hello. This is Yann Benhamou from Exane. I have three questions please, sir. Do you have any idea of what will be the evolution of (inaudible) prices for you this year? Second question, you had a big chunk of over-hedging in ’09. What do you think of these impacts from forex in '10? And finally, could you give us the some number for trucks for sale against this provision in 2009? Thank you.

Leif Johansson

What was the first question. Was it–?

Yann Benhamou – Exane

Yes. What do you expect in terms of (inaudible) impact for 2010?

Leif Johansson

Do we have a – I’m looking at my colleagues here whether we have a catch-all number for all the Tier prices. We are working in very different geographies and different types of constituencies. We are debating with ourselves here. We don't see big changes. Slight upward trend, I think is the best way if I look around the most stable area in turn. But don't have a catch-all number for that at the group level.

On the hedging side here, Mikael, you want to speak to that?

Mikael Bratt

Yes. In Q4, as previously announced, we have left the hedging accounting, and we are all – have also changed our hedging policy, which means that we – you will not see us coming into the situation we had in the beginning of this year. So currency impact will have a more direct impact into our result going forward here. And we will not be having the disturbance with hedging contracts and so forth. And from that respect, this quarter was a clean quarter. And we have no historical problems left. And I think you can find in also the quarter report here that reevaluation of the hedge contracts we actually have here was 27 million Swedish krona, so very limited impact.

Leif Johansson

And on the final question there, we have our head of Investor Relations, Christer Johansson, to sort that out for you with the help of what's in the report there.

Christer Johansson

Neutral out of the inventory, and that excludes then the I share [ph].

Yann Benhamou – Exane

I'm sorry, Christer, I didn't hear you.

Christer Johansson

Hopefully, we have delivered then about – other than the 15,000 trucks for the group, excluding I share, and 15,000 of those were coming out of new truck inventory.

Yann Benhamou – Exane

Okay. So at least I understood why you had a (inaudible) sold in trucks for just – and 15,000 coming from inventories.

Christer Johansson

115,000 trucks we sold.

Yann Benhamou – Exane

Okay. And out of that you have 15,000 coming from inventories.

Christer Johansson


Yann Benhamou – Exane

Okay. Thank you.


The next question comes from the line of Mr. Christer Fredriksson from ABG Sundal Collier. Please go ahead with your question, sir.

Christer Fredriksson – ABG Sundal Collier

Hi. Yes, two short questions. Firstly on the inventory levels, you talked about high inventories in the first quarter. Historically, you had roughly 4 billion Swedish krona higher inventories in Q1 versus Q4. Is that something that we should look for Q1 2010 or should it be lower than that given the weak volumes we see? And secondly, on the trucks you sold from the inventories in the fourth quarter, I guess there were quite big discounts on those trucks. How big a negative impact was from these discounts on earnings, compared to, if you will, would have sold the same trucks with – on new price – new truck prices I would say?

Leif Johansson

Okay. I think on the first, I can't confirm the 4 billion Swedish krona number. But at least you would have to scale it down what you would call to be a normal level and compare that to where the order intake is right now. I see no reason why we should be – as a percentage of sales less percentage of orders taken – much different compared to where – what we normally are. But go back a couple of years then because we have some very extraordinary years right close to us now, in a way, in '09. I can't confirm the number, but I think the way you do that is probably about right.

I think on the discounts of earnings, I don't have a catch-all number. I think I can confirm that we certainly made an effort to make sure that we did get inventories down to good levels and that the products that came out were not going to be anymore value the longer we kept them. But I don't have a catch-all number on discount of earnings.

Christer Fredriksson – ABG Sundal Collier

Okay. Thanks.


(Operator Instructions) There appear to be no further questions. Please go ahead, Mr. Johansson.

Leif Johansson

Very good. Then I would like to say thank you. Let me correct one number that I gave. We actually have an updated number in our report on – which was on the Japanese market there. I did say that the market was very low, and it certainly is that. It was only 18,000 units in 2009. But latest data suggests that would actually go up more than what I said. And as even we have suggested here that it might go up by as much as 40%. That's because percentage points, impressive as they may be, we have a very low base there. But that's a number that we are giving you in – on site – of page 11 in the report.

Very well then. Then I would like to thank you for being with us at this conference call, and wish you all a good weekend. And then we have our investor relations people lined up for you to answer whatever questions that you might have on our report. Have a good weekend. Thank you.


Ladies and gentlemen, this concludes the Volvo conference call. Thank you all for attending.

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