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Executives

Olof Persson - Chief Executive Officer

Christer Johansson - Investor Relations

Jan Gurander - Chief Financial Officer

Analysts

Martin Viecha - Redburn

Chris Youl - MainFirst Bank

Fredric Stahl - UBS

David Russell - ISI Group

Austin Earl - Marshall Wace

Michael Tyndall - Barclays

Rob Wertheimer - Vertical Partners

AB Volvo (OTCPK:VOLVY) Q1 2014 Earnings Conference Call April 25, 2014 8:30 AM ET

Operator

Ladies and gentlemen, welcome to the Volvo Q1 Report 2014. Today, I am 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 a question-and-answer session. Olof Persson, please begin.

Olof Persson - Chief Executive Officer

Thank you very much, operator and good morning, good afternoon and good evening to all of you and welcome to this conference call for the Volvo Group first quarter 2014. And we do like we have done the last times where I will just make very brief couple of minutes introduction and then we open up directly for question and answers.

And if we look at the first quarter, I would like to frame back that to the year of efficiency. And if you remember, I have talked a lot about during the second half of last year and also in the Q4 report about 2014 being the year of efficiency. And in the year of efficiency, we have two focus areas. One is to continue to capitalize on the positive momentum that we saw at the back end of last year in terms of market share acceptance of our new products in the truck market and also our general market position.

And giving that target looking into the first quarter, I can conclude that we are continuing to gaining and capitalize on that positive momentum. We are gaining market shares in the – in many of the truck markets in Europe, in North America, in Brazil, and also in Japan and we do that both on the new product ranges here in Europe, but also with the existing product ranges in North America and in South America and Brazil, in particular. And also important, we can see that we are doing this increase of market shares with a positive price realization across the different markets.

The second part of the year of efficiency focuses of course the efficiency. And there are three levels of the efficiency, it’s the cost, it’s the capital and it’s the process efficiency. And here we can see now in the first quarter that the effects from the both the strategic program and on the efficiency program are now starting to yield the result into the profit and loss as we speak. The structural reduction of white collar employees and consultants is underway and we have reduced the number of white collar employees and consultants with 900 since the program when launched back end of last year.

When it comes to the capital efficiency, we have done executed on the divestments of Volvo Rents and the commercial real estate has been completed. So that means that this first quarter has sales is up from SEK58 billion to SEK66 billion with an substantial increase in operating income coming from SEK0.5 billion up to the SEK2.6 billion before the restructuring cost.

I would say that for me, this quarter is a stepping stone in the right direction. It is clear that we are moving in the right direction both when it comes to our market penetration, our products, and our sales, but is also clear that we are moving in the right direction when it comes to the efficiency program. However, it is clear that we still have a lot of work to be done and focus for this year is very much on executing now on the different activities that we do have. But I would like also to emphasize that we do see now in the first quarter that we have moved from the state of analyzing and taking decisions to actually implementing and seeing the result of the different activities that we are doing.

So with that short introduction, I then would like to open up for question and answers and we can have a discussion on the topics that you have queries about.

Question-and-Answer Session

Operator

(Operator Instructions) And we have a first question coming from Mr. Martin Viecha from Redburn. Your question please.

Martin Viecha - Redburn

Hi, this is Martin Viecha from Redburn. I have three questions if I may. Firstly, in your annual report I wanted to ask about provisions. I have noticed that your net warranty provisions were actually down to a – from about SEK6.9 billion in 2012 to about SEK5.7 billion excluding the one-off charges. And I assume that net provision – net warranty provisions will increase substantially because there is a new product portfolio, a lot of new launches. And I just wanted to ask what sort of net warranty provision charge should be – should we be expecting for 2014? My second question would be sharing of the order data, I just wanted to know do you actually share with some of your competitors what the order intake is for Q2 or do you simply find out at the end of the reporting season when everybody reports their data. And very lastly there has been a bit of a debate in the market, where a lot of people are saying that your new Volvo truck and your new Renault truck is basically the same vehicle underneath. While you guys have been saying publicly that this is not the case that these are two very different products, so just because this is just such a very important bit of the investment case I just wanted to clarify to what extent are these products similar, what is the percentage of common parts and components. And a lot of your competitors do disclose this sort of thing, so I was just wondering if you would be able to disclose these as well? Thank you.

Olof Persson

Okay. Thank you, Martin. I think I will hand over the first two questions to Christer regarding the – or to Jan on the warranty side.

Jan Gurander

When it comes to net warranty provision it’s actually three things that drives the warranty provision. And one is of course the volume you have actually. The more trucks you sell, the more the provision increases, if you assume the same amount provision for each truck that’s one factor. The second factor is what you usually do when you launch the new product you are usually a little bit careful i.e. little bit conservative and add on initially a little bit higher provision, which then gradually when you confirm that the quality is the right thing, are getting lower. So these two things, then we have an underlying work when it comes to the quality work in the Volvo Group as well that is also factored, the underlying quality of our products and where we have seen almost a positive trend. So you have to add up all these three trends to come to the warranty provision at the end of the year. Therefore it’s difficult to give you a generic or clear answer on where it will be at the end of the year, because you will have all these three factors coming in. I don’t know if you want to add something Christer.

Christer Johansson

No.

Olof Persson

Okay and then the order data process, Christer that’s something.

Christer Johansson

It’s we are not sharing order data with our competitors, no.

Olof Persson

Good and then if you look at the commonality between the new Renault and the new Volvo, we are and I think we have said that also that I mean where we do see and we have scale of economics and benefits of that. Of course, we are sharing components between the trucks. But there are also distinct differences between the two trucks because in the new positioning that we want to have in the brand positioning work that we have done. We have been securing the feature levels and thereby also components are different in the two trucks. I don’t think we ever have this close the commonality per se and I don’t think we will do that today either. But they are definitely quite – you have both I was talking about the trends before you can talk about the same thing on the components. You have some similarities, but you definitely have a lot of distinguished differences as well based on the fact that we are trying to make sure that we are segmenting the trucks in a different way.

Martin Viecha - Redburn

Okay, thank you.

Operator

Okay and we have our next question coming Mr. Chris Youl from MainFirst Bank. Your question please.

Chris Youl - MainFirst Bank

Hi, good afternoon. Three questions if I may. First one just on the restructuring program, could you give the exact year-on-year saving from the restructuring program in Q1 and then also if possible just a feeling for how this will phase through the year to get to the SEK4 billion which you have obviously talked about. Secondly just on the mix in the trucks business I was just wondering how we can expect the mix to impact the margin as we go through the year, obviously given the trends we are seeing in Europe, North America improving and obviously Brazil weakening? And then thirdly, I was just interested if you could give a couple of comments on how you see order trends developing in Spain and Italy on the truck side? Thanks.

Olof Persson

Okay. If I start with the restructuring program and there we have been clear that on the progressing of the savings of the SEK9 billion, let’s call it the SEK9 billion program which has done the strategic program improvements that we are looking for. We are following that plan. We did that during last year and also in the first quarter we are following that plan. And we also said that we will at the Capital Markets Day come back and report back to the market in more detail around the different movements and the progression that we do have. But I can report that after Q1 we are following that curve that we presented at the Capita Markets Day last year. When it comes to the order in the South of Europe and Spain and Italy in particular, I think what you can say is that we from now very low levels. We see some positive signs and some increases coming in Spain. I would say in Italy, it’s a little bit more uncertain situation, but there are some positive signs coming out of Spain in terms of orders. When it comes to the mix in the truck business, Christer, perhaps you would like to elaborate a little bit on that?

Christer Johansson

Well, you can see that Brazil coming down and U.S. and Japan coming up in the order mix is from a margin standpoint you can say slightly negative, but of course we have raised production now in the U.S. and Japan that helps to offset some when it comes to capacity utilization, but in the – usually we have higher margins in Brazil, you can say.

Chris Youl - MainFirst Bank

Thank you. And just one quick follow-up, is there a positive impact of I guess weaker developments in the Russian market on the mix, sorry?

Christer Johansson

I would say that the deliveries to the Russian market has been quite low for a few quarters already, because of the price increases we have been forced to implement due to scrapping fees and so on. So – and as you know, Russia, it was last year only 3% of the group revenues. So I wouldn’t say it will be any significant impact on the margin, because the volumes are so small.

Chris Youl - MainFirst Bank

Thank you.

Operator

And we have the next question from Mr. Fredric Stahl from UBS. Your question please. Mr. Fredric Stahl, your line is open now.

Fredric Stahl - UBS

Sorry, I am here. I was on mute. Hi, guys. Good afternoon. Could I ask you, do you agree with the view that the Euro 6 introduction will lead to a greater than usual spread in performance between the different OEMs, i.e., that the fuel efficiency and quality hurdles here are greater than with previous emission changes and therefore there will be opportunities for successful OEMs to differentiate themselves away from the less successful OEMs in a way that hasn’t been possible before? Did you agree with that?

Olof Persson

Basically, no, I don’t see that to be quite honest the technology steps that we have seen Euro 4, Euro 5, Euro 6 has all bee steps that has integrated a certain complexity and new technologies involved. And I think that over time everyone has managed to come to grip with it in terms of the aspects that you were saying. So no, I wouldn’t say that I would count on that or see that.

Fredric Stahl - UBS

Okay, thank you.

Operator

Okay. There are no further questions for the moment. (Operator Instructions) And we have a next question coming in from Mr. David Russell from ISI Group. Your question please.

David Russell - ISI Group

Yes, good afternoon and good morning. A question on pricing in Europe how do you feel you are able to pass on Euro 6 price increases, can you give us some color on how successful you have been so far?

Olof Persson

Definitely, both when it comes to the Euro 6 price increases and also the new ranges feature increases and the uplift of the both Renault and Volvo and I am very satisfied with the way we have managed to do. So we have covered the extra cost. We have had a positive price realization on both of these products. So to answer you very shortly I am very satisfied with the way we have managed that.

David Russell - ISI Group

I know we are at lower volumes right now, but how would you characterize the profitability of the new Volvo trucks Euro 6 versus the prior generation?

Olof Persson

As I have said we have managed to cover the costs for the price increases and by also making sure that we keep the profitability on the products.

David Russell - ISI Group

Okay, I appreciate the color. Thank you very much.

Olof Persson

Thank you.

Operator

The next question comes from Mr. Austin Earl from Marshall Wace. Your question please.

Austin Earl - Marshall Wace

Yes, hi, good afternoon everyone. I just wondered in terms of the production raise in North America, how are you going to raise that I mean are you going to add an extra shift or just a few more personnel, how is that going to go – take place?

Olof Persson

We are in the first instance that we are now planning is to actually increase the capacity as we have without introducing new shift. But this is something that we are looking at and it depends also on the order intake going forward, of course. But at the first step now we are managing with adding – manning adding so to say in terms doing that.

Austin Earl - Marshall Wace

Great, thank you very much.

Operator

Okay, we have the last question from Mr. Michael Tyndall from Barclays. Please go ahead sir.

Michael Tyndall - Barclays

Yes. Hi, this is Mike Tyndall from Barclays. Just a clarification if I may, if I am not wrong at the end of last year you mentioned the possibility of doing some actions in CE and then earlier this morning I got the impression that perhaps you were talking about doing some restructuring in CE, but you also mentioned the important was largely driven by volumes. I just wondered if you could give a bit more clarification around what the plan is in CE in terms of restructuring and whether or not that’s ongoing or something that’s going to happen a bit further down the track? Thanks.

Olof Persson

Okay, when I – what I mentioned this morning was that in CE now during the quarter we have taken decision structurally to do a restructuring in the European and particularly the Swedish production network where by reducing the number of blue collar employees by 430 and that is not volume related, that’s structural. So that is part of I would say the lowering the breakeven point on the fixed cost structure in CE. And of course we are doing other things around there as well continuously. Then what we do in terms of focusing and refocusing R&D now after the Tier 4 final has been launched is actually to put R&D money into the product cost reduction which is done more sort of a competitiveness action that we are doing in order to make sure that we – by doing that also can increase our margins. And these two actions together done is what we mean about doing the focus on the CE side right now.

Michael Tyndall - Barclays

When you talk about the product cost reduction are we talking about further localization or is that a separate piece?

Olof Persson

I will say it’s – goes into looking through the - particularly the structure of the product you are looking at the supply side, you are looking at engineering solutions in the products. You are looking at all these things that you look at in the build up of a product per se and see what can we save and what benefits can get out. Having said that of course we are going to utilize our global setup that we do have around the world both in terms of global suppliers but also in terms of our own global manufacturing footprint to make sure that we see that. But when it comes to the food – manufacturing footprint per se, the locations that we are today in Europe, U.S. and other places around the world, that is not on the table.

Michael Tyndall - Barclays

Okay, thanks very much.

Operator

There are no further questions. (Operator Instructions) And we have a follow-up question from Mr. Fredric Stahl from UBS. Your question please.

Fredric Stahl - UBS

Yes, it’s quick one. What was the China revenues for construction equipment in the quarter?

Olof Persson

I just want to hand over to you, Christer. That I don’t have on top of my head to be frank. Well, if you give maybe call afterwards, maybe I can find out to see what the number was. It’s I need to dig it out.

Fredric Stahl - UBS

Yes. No, I will do that. Thank you.

Olof Persson

Okay. Operator, if there is no further questions.

Operator

There is another question from Mr. Rob Wertheimer from Vertical Partners. Would you like to take it?

Olof Persson

Absolutely.

Operator

Okay, perfect. This line is open now. Thank you.

Rob Wertheimer - Vertical Partners

Hi, good afternoon. I am sorry I was hitting *1 instead of 01. So, just a quick question on North American truck, it seemed as though the order surge in fleet business may have crashed a little bit, but there should be a lot of fundamental demand on the Mack brand. So, I just wondered about the differing order trend in Volvo on Mack and whether you would expect higher incremental margin given the more depressed nature of the in town business? I don’t know if you are willing to discuss the margin differential between the two brands in North America. Thanks.

Olof Persson

No, we don’t do that particular, but I mean, what we see and I mentioned this morning is worth reemphasizing is that what we are doing in terms of brand and brand positioning and the efforts we are now doing with the product line that we have in Mack is really to make sure that everyone understands that we see the Mack brand as a great asset in the group. And we believe that over time, there is definitely an upside on the Mack brand in terms of the market share on the different segments at Mack of course, in the traditional dump truck, construction truck segment, waste management and so on and so forth, but also on the highway. So there is something we are investing in this new brand positioning and brand revitalization to take benefits out of that and to invest in that. And we also believe that looking into long-term we believe that there is an upside also and a potential, I believe and a good place for the Volvo brand in North America and U.S. in particular done to gain market share over time, but that’s a more long-term issue.

Rob Wertheimer - Vertical Partners

Great, thank you.

Olof Persson

Okay.

Operator

There are no further questions.

Olof Persson - Chief Executive Officer

Okay, if there are no further questions, then I thank you so much for calling in and thank you for sharing this first quarter review, our first quarter report with us. And I wish you all a very nice weekend and talk to you if not sooner after the Q2. Thank you.

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