AB Volvo's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Volvo AB (VOLVY)

AB Volvo (OTCPK:VOLVY) Q4 2013 Earnings Conference Call February 6, 2014 8:30 AM ET

Executives

Olof Persson - President and CEO

Christer Johansson - Investor Relations

Anders Osberg - CFO, EVP Corporate Finance and Control

Analysts

Fredric Stahl - UBS

Martin Viecha - Redburn

Peter Reilly - Deutsche Bank

Alasdair Leslie - SocGen

Ashik Kurian - Goldman Sachs

Stephanie Renegar - JP Morgan

Andreas Brock - Nordea

Fraser Hill - Bank of America

Operator

Ladies and gentlemen welcome to the Volvo Year-End Report 2013. Today I’m pleased to present Olof Persson, CEO. For the first part of this call all participants will be in listen-only mode and afterwards there will be question-and-answer session. Olof, please begin.

Olof Persson

Thank you very much and good afternoon, good morning to all of you and welcome to this conference call I will just spend as we have done on for a couple of conference calls, spend just a few minutes on introducing and wrapping out the quarter and then we will open up for questions for the remaining period. If we look at the Q4 2013 and separate between the trucks and the CE, I believe we have two different kind of stories here. When it comes to the truck, we have seen good volumes in the quarter, we have seen also encouraging movements in the market shares in many of the markets.

We have seen a very good acceptance of our new products in Europe both for the Volvo and the Renault and leading to, I would say a order intake that can be capitalized as in Europe as a soft landing post, the pre-buy affect end of last year.

When it comes to this financial part, I would say that we are steadily improving, but we do have much more to do when it comes to profitability within trucks. But it’s good to see anyhow. And that we are now talking margin levels, which we have to go back to 2011 in order to find the same as that as well.

On a yearly basis we have booked a 107% book-to-bill ratio and within the Q4 we were at 86% with differentiation between the different regions with the lowest being Europe where we had the book-to-bill to 50% and giving the pre-values effect. When it comes to CE, which is then a different time of story in the quarter, we can conclude that they will have the very tough quarter in terms of market mix pricing and the lack of return of the mining industry.

We have an NC has been working hard on rectifying and compensating for the weaknesses that we have seen in the market. And to summarize, I would say that looking at order intake, looking at activities I think we can conclude that we have in Volvo CE the worst behind us.

Finally just a few words on the balance sheet. I think we posted a good solid cash flow in the quarter of SEK 10.3 billion then pushing us down when accounts to net financial debt to 29% of equity. We as you know have also divested Volvo Rents which was concluded just a few days ago. And if theoretically we would have done the Volvo Rents divestment in 2013, our net debt to equity ratio would have been 19%.

The Board is proposing a dividend of SEK 3 per share which is the same level as last year. And we’re also today announcing then a structure reduction of white-collar employees and consultants by 4,400 to be implemented mainly in 2014 marking really the start of the year of efficiency which is to having all 2014. We are mainly through with the product renewal and the 2013 massive introductions that we have done.

2013 was a busy and costly, but from a market position going to be a successful year. And we still have some work to be done during the first half of this year in terms of switching over the production rollouts, the products to certain market. But all-in-all -- we will do that, but all-in-all the main focus for 2014 is to make sure that we are increasing our efficiency both in terms of cost efficiency and in capital efficiency and finally in process efficiency.

With that short introduction, I would like them to use the rest of the time discussing and answering questions that you will like to have answered and to discuss.

So with that operator, I ask you to open to Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Mr. Fredric Stahl from UBS. Please go ahead, sir.

Fredric Stahl - UBS

Hey, good afternoon. It’s Fredric here. I actually just want to maybe, if you can remind us what the exposure was to mining, the mining segment within construction equipment, let’s say year ago or year and a half ago before it all came falling down, so if you can remind us that would be great, thank you?

Olof Persson

Christer is actually looking at number. And I have a number in my head, but I think it’s there that that we actually let Chris to find the number and then….

Christer Johansson

We can answer that in a couple of minutes.

Olof Persson

We can ask you. Well, that’s the only question you had at this time.

Fredric Stahl - UBS

That’s the only question I have. Thank you very much.

Olof Persson

Thank you.

Operator

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

Martin Viecha - Redburn

Hi, this is Martin Viecha from Redburn. I have only question as well regarding the restructuring gains. I know that during the CMD last time around you mentioned that the gains thus far were about 1.4 billion. Could we get an updated figure for Q4 as well? Thank you very much.

Olof Persson

We agree, did at the CMD, we gave you the rate for the Q3 and then also the forecast for the full year this year and a forecast for next year. And without going into the numbers I can tell you that we are on plan or slightly ahead of plan compared to what we showed you at the CMD. And as you recall we will come back then on a yearly basis at every CMD with a full report on it, but we will also give you a indication, if you are ahead or behind plan during the quarters. And for the full year 2013, I can report that we are slightly ahead of the plan that we presented to you.

Martin Viecha - Redburn

Thank you.

Operator

Our next question comes from Mr. Peter Reilly from Deutsche Bank. Please go ahead sir.

Peter Reilly - Deutsche Bank

Good afternoon. I have two questions please. Looking at the truck business and your deliveries on organic growth were very close to zero on a full year basis, yet you had your profitability fell by roughly half. Can you help us understand the moving cost by giving us a bridge from ‘12 to ‘13? I mean what are your comments on the CMD with external transparency? So maybe you could help us understand what happens to get us some ‘12 to ‘13 in terms of price mix, launch cost and so forth?

And then secondly looking at construction equipment, you made several comments about mixing adverse return, lower delivery (inaudible) heavy in money equivalent. Does that mean that the smaller equipment businesses, has there been a loss for a large part of the year?

Olof Persson

Okay. If we start with second question, I don’t think we give any sort of detail guidance on exactly on where we stand. But there is no secret that the smaller machines and we have to remember that when we say the smaller machines there is a wide range of machines, everything from the 1.5 ton, smaller carry to the medium size wheel orders.

So it is very difficult to give a one catch, but there is no secret that the profitability margin on those machines are lower then I wouldn’t say that we are in a low position but they are definitely lower. When it comes to the bridge there are number of moving parts there. And I am looking a little bit at Christer so we don’t disclose anything that we shouldn’t disclose, but what you say is of course the launch cost versus (inaudible) Christer that you since you are the one with normally giving those kind of numbers that, if you do that in the way you want to have it.

Christer Johansson

So Peter if we look at it, you can say a big portion is related to higher selling and admin cost relating to launch costs, both for the new range. We have the R&D going from a net capitalization to a net amortization. We have, you can say the introduction of the new product into the manufacturing system and the inefficiencies that we have seen there. And then on top of that we have the restructuring charges and the write-down of Volvo Rents.

And then as you have seen in the last three quarters, we have had a billion or so each every quarter of currency impact so to say.

Peter Reilly - Deutsche Bank

Okay. I should understand the reason while asking it, I look at the forecasts across the analyst of 2014, there is an enormously wide range and it’s partly because people don’t know how much, and what happened in 2013 is non-recurring, how much is the shape of the business today. So it’s difficult for analyst to try and forecast their understanding with a bit more accuracy what’s happened in the past.

Olof Persson

I see. We will -- there is always a bridge that we will have in the annual report that is coming out here in a couple of weeks. So I would say maybe we can come back to that one at that time line.

Peter Reilly - Deutsche Bank

Okay. Thank you.

Operator

Our next question comes from Mr. Alasdair Leslie from SocGen. Please go ahead sir.

Alasdair Leslie - SocGen

Yeah. Hi, good afternoon; a couple of questions please. Firstly, a clarification of the 4,400 figure for headcount reduction; I assume that's not an all in number for the entire program to-date i.e. it doesn’t include some of the headcount reductions you’ve made previously in Japan, the bus plant consolidation et cetera, just whether you could confirm that? And then just on the mining, it does seem to have -- within construction equipment, the mining side, it does seem to have had a disproportion of impact on your profitability. So based on your comments, is it really just a mechanical mix effect as volumes come down or are margins in the area also coming in the pressure? And then I guess citing with that, maybe if you could give us a sense of how much mining volumes have (inaudible) it’s a little bit difficult for us to see a clear impact on this? Thanks.

Olof Persson

Okay. Thank you. I can certainly confirm that the 4,400 is new 4,400 then constitute of the approximately half in the staff and support functions and half in the line function. So, on top of what we have said in the European manufacturing system rationalization, Japan and so on and so forth, so that I confirm.

When it comes to the CE, there is of course a number of different areas. And mining is a mixed issue. But as I said also during the press conference and which I said also in the Q3 and in particular, we have three major, I would say areas. One is of course the SEK 13 billion per se, which is for a Q4 historically a low volume. If you go back one more year, you can see that we were up, I think it was SEK 16 billion or something like that.

Secondly, there has been a price pressure in the different markets, in the South American market it has also been a price pressure, Europe and U.S. as well. And then on top of that you can also say that we have had a currency headwind then depending on our production structure where you actually don’t have production for instance of many of the heavy machines in Sweden, you have in Korea and that of course also put pressure on the margins since you have the currency work against you with that production base.

And finally, I would then also say that as you alluded to then the drop of the mining per say; so it is of course not the straight forward. So I answer on the things; it is a mix of everything. But the sum of the mix has turned into this very tough situation for the CE. But as I said, it is a situation that we’re now seeing order book both in terms of the mix of the orders, the quality of the orders and general activities that CE have themselves. We believe that we have the worst behind us. And I think Christer has found some numbers, also going back to the first question here a little bit.

Christer Johansson

So back in, you can say since 2011, the proportion we are selling into mining has been reduced from some about 20% down to 10%, So it’s been half you can say from a proportional point between 2011 and 2013. But then I would say, most of the mining is done, so it will be into Asia Pacific and China.

Alasdair Leslie - SocGen

Great. Can I just -- a quick follow up on the improvement in the quality of the orders. And I guess on the mix is that very broad based or is it particular to some geographies or specific product segments? Thanks.

Olof Persson

I think, we stopped by saying that it is an improvement that we see and that it is a little bit all over. And I think everyone is well aware of that we don’t see a sort of pick up in mining or anything like that. I mean it’s a very, very soft market. But we should remember that general construction also has big machines and we see general construction as well. So it is I would say a non-particular market or non-particular product but it is a general little bit here and a little bit there that drives this.

Alasdair Leslie - SocGen

Great, thanks.

Operator

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

Ashik Kurian - Goldman Sachs

Hey, good afternoon. I just got a question on your order book in Europe now; your orders for fourth quarter especially for the Volvo brand looks quite resilient compared to peers. And also factoring in the fact that you are probably a bit late introducing your Euro VI engines; just trying to get your thoughts on what your views are on your market share expectations in Europe for 2014. Are you seeing any impacts of being probably a bit later into the Euro VI market than some of your peers?

Olof Persson

I would phrase it like this that if you look at our [future] development we had over the year and since we've introduced the new truck, we have then raised it to levels which is we have to go back to, I think end of those 90s to see that. And in the order backlog right now I think and looking at increase, I think we’re talking about 90% Euro VI.

Christer Johansson

Yes, of the orders we took in the fourth quarter.

Olof Persson

Of the orders we took in the fourth quarter is 90% and 10%. So, we are well positioned for that. And when it comes to the market share going forward that is of course very difficult and we don't give any forecast on that. But as I said on my last slide in the presentation before, organic growth capturing and making sure that we get, this will pay back on the huge investment we've done on these new trucks. It's a major target for us. Having said that, we will and we have done so for making sure that we do it with a good pricing and utilizing the premium brand position that we had in Volvo and which is even stronger now with the new product that we have launched. And that is on the Volvo side.

Renault side is as you probably know, a different story with the introduction that we are doing now and it will be a gradual pick up in ordering intake for the new trucks during the spring here.

Ashik Kurian - Goldman Sachs

Okay. Can I follow up with the question on CE; I’m going to try my luck too. I mean I appreciate the fact that the mix has seen a deterioration maybe year-over-year but just on sequential basis I mean your revenues were up compared to the fourth quarter yet your profit and the margins dropped; is that mostly explained by increased pricing pressure or you think there is also a sequential deterioration in mix in the CE business?

Olof Persson

I think you have a number of issues there. You have the FX of course, but you are absolutely right, there is a continuous price pressure as well. And of course we deliver that order backlog which was on an order backlog coming from earlier this year. And so it’s again a combination of both sequentially.

Ashik Kurian - Goldman Sachs

Okay, thank you.

Operator

Our next question comes from Stephanie Renegar from JP Morgan. Please go ahead.

Stephanie Renegar - JP Morgan

Hi. Thank you very much for taking my question. Just looking from a credit analyst perspective here, you are basically BBB flat negative both the agencies. And given your decision to keep the dividend the same and I think S&P specifically mentioned on shareholder distribution, they were 6 billion. So, you are definitely keeping in line with that and you are also getting in the proceeds from the Volvo rental business. Do you feel comfortable with maintaining that flat rating? And what sort of optionality do you have baked into your forecast in terms of additional capital where you are seeing and sort of balance sheet release if the operational side and the cash flow side came in below your expectations for 2014?

And then my next question is simple, just what sort of -- I am sorry if you already answered this. But what sort of cash restructuring are you expected to take in 2014?

Olof Persson

I think that if you look at what we have done is of course as we said now; we are ending the year on 29% net financial debt or lower equity. And we have done on top of that (inaudible). And what we are going to focus on very much this year is the three parts of the efficiency program. One is the cost efficiency, which of course will be helpful in terms of cash flow, but also the capital efficiency.

And one thing we’re going to focus very much on during this year is the working capital and the working capital levels, which have been if you look at it, CCC days for instance has been hurt by the introduction of all the new vehicles. I mean we have run double production, we have introduced a number of things in the production systems, we have had a lot of demos and other things that has been negative to the working capital. That one we’re focusing on very much now to get on.

And finally we are also then really making sure that when we look at the investments we’re going to focus extremely hard on making sure that the investments we’re doing are in line with our strategic objectives going forward.

So, we are looking at all these things in order to make sure that we are strengthening the balance sheet and that is something that is thought of the year or efficiency which we now go into. And I would like to [basically] leave it with that. Then when it comes to -- I’m sorry I think I forgot your second question.

Anders Osberg

The cash -- it’s Anders. It will be about SEK 4 billion in 2014.

Stephanie Renegar - JP Morgan

All right. Thank you very much.

Olof Persson

Thank you.

Operator

(Operator Instructions). We have a question from Mr. Andreas Brock from Nordea. Please go ahead sir.

Andreas Brock - Nordea

Thank you. So, I have a question, it’s [two-sided] question, but a question on the pension liabilities, it’s been coming down pretty rapidly over the quarters. And I was just wondering how come. I know that your pension plans are invested I think are about 50% equity 6% bonds. So is this due to an overall strong equity market, which is bringing the pension liability or what’s happening? And is there a positive (inaudible) I just wanted to understand why?

Olof Persson

Andreas, there is two things. One is that we have had a good return on our assets in the pension foundations as you allude to. And the second one is that the long-term interest rates have gone up, which means that the discount rates that are being used every quarter are higher and therefore when you discount these pension liabilities you get the lower liability.

Andreas Brock - Nordea

So what’s the discount rate you’re using right now?

Olof Persson

I know that first question would come around (inaudible) this year. You can say in general we have increased the discount rate between 25 basis points up to 75 basis points, but it’s the number of the process.

Anders Osberg

Yeah, depending like it’s in UK, U.S. or in Sweden.

Andreas Brock - Nordea

Fair enough. That feels fair what’s [negative] and what’s been happening in the market. Thank you very much [Anders].

Operator

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

Fraser Hill - Bank of America

Hi, good afternoon, Fraser Hill from Bank of America, just a couple of follow-ups. On the cash again and you said focusing on the cash for the year, we’ve obviously seen one sizable disposal in Volvo rents. Should we be expecting more disposals, is that key to the strategy this year? And will that be partly a source of funds in terms of looking at your past experience paying a dividend going forward or is your focus on the cash really just more organic and operational?

Second question is looking at the competitive environment in Europe. The Renault brand as you spelt out quite clearly because I was a little bit to the party. You are picking up some orders now. What are you seeing in terms of the competitive landscape; obviously Scania and Daimler are being quite early along with your Volvo brand. But in terms of other players, are there other players that you have feel are even further behind the Renault brand? And perhaps what are you seeing in pricing from some of those players you might be a little bit behind such as well? Thanks.

Olof Persson

Okay, thank you. The first question first. My message is great here and that is that we have a structure which we have aligned into the new organization, a new way of working. And the focus for this year is definitely as you call it organically grow and generate both results and cash. And then that is absolutely the main focus. Then of course it’s part of my job to always keep an eye open what’s happening in the industry and all of that. But to answer your question, I’m fully focused now making sure that with the structure we do have generates organically both growth in terms of market shares and success is out in the market and internally extremely some focus we're going to have on cost and efficiency during this year.

And when I go to Renault, I always refrain from comment on competitors. I focus very much on our own story here. And when it comes to Renault, we do have a work to be done; I think we are lining all the forces. We should remember for instance that the new set up or the European dealership where Renault use a lot more dual branded Volvo Renault has increase to service points for Renault substantially. That means that we're much more selling points, we do have a much more touch points for the customers. And that means that we can start to really go out and starting to selling.

When it comes to the acceptance, which I think it's extremely important. When it comes to the acceptance of the new truck, it has been very, very good. And that is an encouragement to also believe that now we're going to push very hard in order to increase the sales of the new Renault range. Realistic as I said it will take the first half year to really get back into the race again, but with that product and with that sales force and with that determination that everyone within the Renault brand has to make this a success. I’m confident that we will be successful.

Fraser Hill - Bank of America

Thank you.

Operator

(Operator Instructions).

Olof Persson

Okay. Mr. Operator, if there was no other questions…

Operator

Yeah. No further questions at this time.

Olof Persson

Okay. Then I thank you all very much for dialing in and asking questions and listening. And wish you all the best. And we want to hear you again when we present the quarter one results. Thank you very much. Bye, bye.

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