Volvo's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Volvo AB (VOLVY)

Volvo AB ADR B (OTCPK:VOLVY) Q1 2014 Earnings Conference Call April 25, 2014 3:00 AM ET

Executives

Olof Persson – President and Chief Executive Officer

Jan Gurander – Chief Financial Officer

Christer Johansson – Senior Vice President-Investor Relations

Analysts

Hampus Engellau – Handelsbanken

Anders Trapp – SEB Enskilda

Andreas Brock – Nordea

Fredric Stahl – UBS

Erik Golrang – ABG Sundal Collier

Alexander Whight – JPMorgan

Alexander Virgo – Berenberg Bank

Alexander S. Virgo – Joh. Berenberg, Gossler & Co. KG

Fraser E. Hill – Bank of America Merrill Lynch

Michael J. Tyndall – Barclays Capital Securities Ltd.

Alasdair Leslie – Société Générale SA

Operator

Olof Persson

Thank you very much and good morning to all of you and welcome to this first quarter Volvo Group presentation. And I would like to start with basically recapping a little bit what I ended with in the Q4 with a focus of the year of the efficiency on our two key focus areas.

One, as you remember, was about making sure that we continued and kept our positive momentum when it comes to the market share, our positions in the markets. And also then, of course, related to our introduction of the new vehicles in Europe in particular, both on the Volvo range and the Renault range. And the second part which was then the capital cost and process efficiency.

And if we look at on a general term and on a highlight – and I will come back in more detail we can see that, in general, you can say that we are executing according to that. If you look at the market and our market position, we do continue the positive momentum that we had in the truck business when it comes to market shares and market position, and we do that also with a positive price realization.

And, as you all remember, that is a key part in our strategic program going forward to make sure that we are increasing our gross margins going forward. But also we can now see that the structural reductions as a part of the efficiency program that we launched last year is now starting to show result and coming into the numbers that we’re presenting.

And then, if we then look at the capital structure, the rents and the real estate, commercial real estate divestments has been concluded. Overall, if we look at the truck and order intake, we can see that we do have a healthy 115% book to bill despite the fact that we had a drop of the order intake, we’re down with 10%, but deliveries were up 25%. And if you look at the sequential Q4, Q1 you can see that order intake is up 34%. I will come back a little bit more in detail around the different regions when it comes to the truck side.

Starting then with the trucks Europe, we can see that the big issue coming into Q1, as you all remember was, of course, how would the transition between the Euro V and the Euro VI go? I stated clearly last time we met that we didn’t see any cliff coming when it comes to the pre-buy from Euro V coming into the Euro VI and it turned out to be pretty much that way. We of course had a pre-buy effect and we have seen that also in the deliveries, as you can see, coming down. But all-in-all I would say that transition between Euro V and Euro VI has been rather smooth.

Looking at the market, we have had an increase, as you can see, on the order intake sequential between Q4 and Q1. And our feeling about the market is that, we are sticking to our 230,000 truck volumes and we see a gradual improvement in the market going forward here in Europe when it comes to the business climate. If you look at the freight volumes, if you look at the freight, the pricing, it is actually something that is holding up quite well and increasing slightly.

When it comes to Euro VI and our own technology, it has received very well. We do get confirmation from our customers and we start to have quite a few of them now running the Euro VI products. It is a competitive Euro VI product we have in terms of fuel consumptions, in terms of features and in terms of performance, so that’s very good. And we will, of course, continue to monitor that and make sure that we are top of the line when it comes to Euro VI technology.

One thing that was also, internally for us, highly in focus was to make sure that we transform – I would say transformed is probably a good word – coming from the elevated level of production that we had in Q4 smoothly coming into substantially lower and lower volumes in Q1. And, as you can see, with book to bill of 116% and also looking at the result that we presented, I think we managed that quite well actually in order to making sure that we came in with the right capacity into the Q1, but also making sure that order intake was well taken care of in order to come out of the Q1 into Q2 with a balanced production capacity, and we do have that in place.

Talked about the market share, I will come back to that on each and every region. Definitely, when it comes to Europe, both for Volvo and Renault, we have had a good development quarter-over-quarter when it comes to market share. 29% is where we stand today compared to 26% a year ago.

The Volvo brand is definitely taking a lot of market share, but I would like to also stress that the Renault side, where we had a lot of question marks because an old product that was coming out, we had to transition into the Euro VI, but all-in-all if we look at the order intake during Q1, Renault has hold up quite well. And also if you look at the market shares for Q1, Renault is doing a good job in order to making sure that we keep the market share going forward.

Looking, as I said on the book to bill 116%, which means that we are pretty balanced going into the second quarter in terms of our order backlog. So basically Europe, I would say, very much developed as expected. We acted accordingly and thereby we now have a good position going into the second quarter when it comes to both production capacity, the order intake and our market position in Europe.

If we then look at Trucks North America, so we have seen, and I think it has been also quite communicated, a growing momentum in the U.S. truck demand. And therefore we do increase our truck market from – estimates from 250,000 to 260,000 and we also as you can see the book to bill is now up to 126, which means that the order backlog started to get a little bit too long, which means that we will adapt our production capacity upwards during the end of Q2 to make sure that we can facilitate both the market up tick, but also, as you can see on the last point here, making sure that we have the good momentum in the market shares that we have had. We have then moved our market shares from 14.8% quarter one last year up to a full 18.5% this year which is, of course, good news.

When it comes to another important happening this quarter is that we then launched a new Mack brand identity. It is a completely revised Mack identity that we’re now going through, everything from brand promises, to where we position in the market, all the way to actually signage and all the way. And it’s a message, I think to the market and to the markets that we see Mack as a very important part of the Volvo Group. And therefore we also invest in making sure that the brand and the brand promise is completely up to date and very consistent.

If we had a increasing momentum in North America, we do see that we have a slightly slowing momentum in Brazil and therefore we do revise downwards from 105,000 to 90,000 the truck market for Brazil.

I think we should remember that 90,000 – and looking at this curve, you can see that very clearly – is still a historically good level. But it is a slowdown in the market which we also then taking care of by making sure that we’re adapting our production in Brazil to not overproduce. And, as you can see very clearly also with the 97% book to bill, that’s a clear sign that we need to make that.

Important point is the after-market business. We’re now starting really to get the fleet, running fleet in Brazil that starts to drive the after-market business. And that’s going to be even more important going forward with the volatility in the market. And therefore we need to build up even further the after-market business and we do that. And also the dealers, as I have reported to you, many times before is heavily investing in actually building up the after-market capabilities in new facilities and new service points.

And again the market share is a very positive development. We are now the market leader in Brazil on the heavy duty, above 40 tonne segment with a 21.4% market share coming up from 17.7%. So also here we have moved the needle when it comes to market share and when it comes to our market presence in Brazil.

When it comes to Japan – Asia, sorry, we do see a stronger than expected demand in Japan. We had the VAT and the pre-buy effects, but we also see now that the Japanese economy by itself is picking up, so we see a more consistent higher volume in Japan. And therefore we have slightly increased the market from 75,000 to 80,000 and that’s good.

We are also there gaining market share particular in the heavy duty segment in Japan. And if you look at it in total, we moved from 18% to 18.4% market shares. But if you look outside Japan in the rest of the region, I think the overall theme is, of course – and I will come back to that to construction equipment as well is of course that mining is still slow, which has an impact on for instance, the construction trucks that we’re selling in the region.

However, with our new effort and our new investments in the UD Quester and also the Eicher Pro Series, we are getting a very good customer reception on that. And we are, step-by-step now, according to the plan, increasing the production output in our Thailand factory. But this is a stepwise – and we take it in a reasonable speed to make sure that we can cope with the whole new industrial set up that we have there. The forecasts for the markets, I will say that, apart from the small upward adjustment in Japan, we’re sticking to our market forecast for 2014 with 980,000 in China and 184,000 in India.

Moving then from the truck side into the construction equipment we can see that, we have a moderate growth in the mature markets. And I will say also China I would put in the bracket of moderate growth.

Even though we had a very strong growth in January and February, we see that March is then slowing down. So the aggregate or accumulated Q1, at least what we can see in excavators and wheel loaders, is coming down to levels that you have growth, but I would call it moderate growth.

We have, of course, our normal seasonal pick-up and increase in the volume compared to Q4 and that is, of course, also helping. And we should not forget that it’s not only the trucks who is actually doing an emission legislation change. It is very much also within the construction equipment, who is now transforming from the Tier IV, enter into the Tier IV final and that is an investment that needs to be done. There is new products coming out, there is new technology; we launched all that basically at the CONEXPO in Las Vegas a couple of weeks ago.

We have also have the focus in construction equipment, as you know, when it comes to the profitability to really look at the cost side. And, as many of you have read I think, we have then decided to do structural reductions on the blue-collar side, in Sweden in particular.

And we’re then making sure that we are continuing to lowering the breakeven point, but also taking care of the structural changes we see in terms of product mix and regional mix, then building up production elsewhere in the world. And, of course, if mining was slow for the trucks side, there’s no surprise that mining is also slow for the construction side and that is the same story as we have had before.

When it comes to the market outlooks, I will say they are mainly moving sideways. We have done small adjustment downwards in China. We have done some other small adjustments in the other markets as well. But generally you can say that on the market outlook side, it’s moving sideways. Good book to bill, that means 108%, very well-balanced production system going into the second quarter and having been able to produce what we need to produce for the spring season coming now in the second quarter.

Then on buses and Penta I would say that the global bus market is still, and has been for a long time on low level. We do see some movements here and there around the world in U.S. and Brazil and China. But in general you can say that there is no real pick-up on either the city buses or the [coast-side] buses, so it on a low level. And that also is reflected in the deliveries going down by 3%. And also here of course, like in the truck side, we are then transforming from the Euro V to Euro VI. Also something we don’t talk too much about, but here again it is a major step change also for the bus side with a lot of investments in R&D, new product and new product lines. And we are getting our fair share of our orders, for instance in Australia and Colombia.

On the Penta side, I think we can say that the marine leisure side seems to have bottomed out now, but it is on a very low level. But at least we don’t see the decreases coming forward, which is of course good news by itself. Also on the industrial engine side we see a continuing slow demand both in China, in South America and also, to some extent, in southern part of Europe in particular. But having said that, Penta has done a very good job now actually, trying with these new engine lines, coming into new customer segments finding new ways, particularly on the industrial segment, in order to grow and to capture new business.

That was the overall quick wrap-up of the market side. And then I would like to hand over to Jan who then will talk more about the financial side.

Jan Gurander

Good morning. We look at the summary of the financials for the first quarter for Volvo, the Volvo Group. The net sales for the Group went from SEK58 billion in the first quarter last year to SEK66 billion in the first quarter this year, an increase of 13%. If we exclude the currency effect, it’s actually a little bit better it’s 15% up.

Operating income comes from a low, approximately SEK0.5 billion first quarter last year to SEK2.6 billion in the first quarter this year and I would come back to the explanations about this improvement in profitability later on. But you can see that we have headwind still on the currency effect of approximately SEK1.1 billion. The operating income margin is 3.9% and the cash flow is a seasonally pattern that we see more or less every quarter, a weak cash flow situation. But I’ll come back to explain that a little bit later also.

Here you should have seen a nice rich – but you have it in the handouts. So, now we have to improvise. Coming from the SEK500 million last year up to the SEK2.6 billion this year, and then the question is what improves the situation with SEK2.4 billion? That’s the improvement in the operating margin with approximately SEK2.4 billion. Here we can see that approximately two-thirds of that is related to volume increases and one-third of that is due to the performance improvements that we do in the Group.

Olof said before that we have price realization; that’s one positive factor. We also see in some areas – that goes into the gross margin, also improvements on the cost side as well. So we can see a lot of good things happening in the gross margin, going from 21.5% up to the 22.7%. On the next, SEK213 million, there we see the cash R&D. And you know that we have been in a heavy situation when it comes to development of new products. We now start to see the curve coming down when it comes to the cash paid out, gross R&D. On the negative side there, and that’s the minus SEK724 million, we had the effect of the capitalization and amortization. Earlier years, the last couple of years we have capitalized a lot of R&D into the balance sheet. We are now in a situation where we amortize, so to amortize more and we capitalize considerably less than what we did before.

Then we have the selling expenses, that’s the SEK143 million and other items explaining the whole thing. So we start to see that operating expenses comes down, we have improvements on the gross margin and, as I said, of course the volume effect comes in as well. On the negative side there, we have also the currency effect. That’s embedded in each and every line that you see here so that’s not an additional or anything like that.

Turning into trucks, and since trucks is such a big part of the group, of course the explanations that you had on the earlier slide is the same here. We can see that we go from SEK37 billion in sales up to SEK44 billion. I think it’s important to see also the – what Olof mentioned earlier is the sequential effect from the fourth quarter last year to the first quarter this year; it’s a drop of SEK8 billion in sales.

We go from SEK3 billion in EBIT, operating income down to SEK1.8 billion. I think that shows the ability that we had to adapt from a high production, high sales level that we had in the fourth quarter due to the pre-buy effects, down to considerably lower level in the first quarter.

And we had adapted already production when we started in January; that’s what you can see here. That’s also dropping in EBIT from the fourth quarter to the first quarter this year is not the size that it would have been otherwise. I think that’s quite an achievement of the people working with that that we managed to balance the situation so good in the first quarter. Operating margin, 4.1%.

And Volvo CE, someone must have had some fun with these slides actually. And the second quarter (indiscernible) I don’t know if you do this to me because this is my first quarter reporting, maybe Volvo is something like that. I will have to talk to Christer about this later on. Do you have other funny things?

There is actually 10% increase of the sales between the first quarter last year and the first quarter this year. And as an effect of the sales increase, you can also see that the profit comes up from SEK0.5 billion to [SEK0.6 billion] this year. We had some headwinds on the currency in CE. CE is still in a capitalization mode when it comes to R&D.

The focus – and this is very much volume related – the focus in CE is to work on the cost side, both when it comes to the product cost, but also when it comes to operating expenses. You can say it’s a similar theme as we see for the trucks. Operating margin going from 4.1% to 4.8% and it continues. So we see that on the buses and on the Penta, actually here it’s also good development when it comes to the gross margin. That’s really the thing that triggers the improvement in profitability on both Penta and buses. On buses we see that, with the stable or actually a little bit lower sales level, we go from a negative of close to SEK90 billion last year up to positive of SEK36 billion.

Apart from the operating margin, it’s also actually an effect of the restructuring that took place in the bus, European bus production system last year that starts to give an effect here as well. I think that shows a little bit also that restructuring takes time from time-to-time to show in P&L’s and so on. I think that could be worth to have in the back of your head from time-to-time. But that’s actually one of the facts we see here.

The customer finance is a record volume year for the first quarter SEK11 billion. We’ve never been on in the first quarter. Of course reflects the good sales level that we had in the fourth quarter that then comes into our finance books in the first quarter. We have a stable operating income of SEK395 million. Penetration is at 28%. It was – been 28% very stable for quite some time. When it comes to our credit reserves ratio also stable; we don’t see any worrying signs in the portfolio for the time being and the return on equities around the 12% as we have a target for the operation; a stable, good part whether on part of the Volvo Group.

Turning into the efficiency programs that we have, the 4,400 white collar employees and consultants that we will reduce the work force with started – the program started, as you know, in the autumn of last year. So far 900 people have, as a part of this program, left the Company up until the end of the first quarter. We are having activities now in Sweden; you know that we run the voluntary leave program. Similar actions are taking place in Japan and we are in discussions with the unions in France. So we see development during the course of the rest of the year here up until the 4,400 people.

Looking into the operating expenses, we can see now that the curves when it comes to the selling and admin start to flatten out. But with now the reduced levels that we see when it comes to launch cost during this – when it comes to selling expenses, also other activities when it comes to selling expenses, this curve will start to break rolling 12 and will gradually become lower. The same with admin expenses; the efficiency programs will have an effect on the admin cost as well. So we see a gradual decrease here also on the rolling 12 months.

When it comes to the cash and gross R&D expenses, you can see that that’s already started to turn down after the heavy period that we have had now with the development of new products.

Of course we have this effect capitalization amortization that goes in the other direction that we have to remember as well. But when it comes to cash outlay, what we can do now when it comes to bringing down the R&D, we are doing that according to plan.

Cash flow SEK9 billion, last year we had a negative SEK7.6 billion. As I said before, this is the quarter that’s almost every first quarter in the year is a negative. It’s more or less a question about the magnitude of the negative, and we can see that, of course the operating income is affecting the positive when it comes to the cash flow, when it comes to property, plant and equipment.

You can see that we’ve kept it on a very low level in the first quarter. First quarter is seasonally a quarter where you usually don’t spend so much on PPE, but the intention is clearly to come out lower than what we had for the whole year last year. And we have a certain – we have established a certain higher discipline when it comes to the PPE, and the organization compared to before.

When it comes to the working capital, we see that payables is hitting us in the negative direction. The reason for that is of course that we had a very high level of production fourth quarter. We have then a high accounts payables, we’re going to lower production pace, we actually redeem these accounts payables to our service suppliers we added in the first quarter.

So it’s an automatic effect away from the high production level to low production level. The inventories is increasing also, but that’s very natural. It’s due to the fact that we are preparing for the deliveries that we have in the second quarter. We are going to keep more or less the same production pace in the second quarter, which means that we have certain inventory going into that, that we need to deliver out.

The inventory is fit and fresh; we check that every month, and so it’s not old things, it’s new things that goes off with the customer, and they are of course customer orders in the markets where we have customer order production as well.

When we look into the cash flow, coming back to that, the SEK9 billion, this is excluding the effect of sales or rents. As you know, we got the consideration for rents in the first quarter, that’s SEK7.5 billion approximately. So that’s not included here.

That means also when you look into the net debt to equity ratio for the Group, it goes from 29% up to 31%, that’s a fairly minor effect. So you have bear that in mind, SEK9 billion is without the consideration for Volvo rents.

Then I hand back the word to you again, Olof.

Olof Persson

Thank you very much. Your slides are okay, mine are not okay. So I don’t know (indiscernible). If we then look at the – where we are on the strategic program, and see how we’re now getting the effects coming in. We can see that the activities, as I said before, are starting to show a results.

As Jan explained, we have the cash R&D reduction, we have the selling cost reduction and we also now start to see the ISIT cost coming down. So till here you can see quarter-over-quarter SEK400 million in improvements, and we have also always said that this efficiency program is of course back-end loaded because we initiated a lot of activities end of last year. We are in negotiations with unions; we are in discussions regarding the 4,400 program even though we have them lowered with 900 people in that program since it started.

But it is also important to remember, now we have talked a lot about decisions taking. You remember the tick boxes I showed you many times when this has been decided, this has been and so on and so forth. Now we start to move into the execution of that. One example is, of course, the Leganes site, which is now closed according to plan, and that impacted 150 people.

When you look at the one truck line assembly less in the European situation, that’s now done; so we will have 180 less people down from Q3 going forward. So into the factory today, it is actually just one line operating, so that is according to plan as well.

And if you look at the optimization of the service network for trucks in Europe, you can say that now in the first quarter alone we had added 70 new dual brand workshops in the European footprint, which now brings it up to 320 out of the 500 plus workshops that we want to have.

So this is a very quick process ongoing now. And if you look at the cancellation, and closure which you have to do in order to move this, we had 20 closed in the quarter, meaning that we have totally accumulated in Q1 close 90.

So my point here is very much that the program is executed, it’s executed to plan. And if you look at the SEK9 billion curve that I presented to you at the Capital Markets Day, we are following that plan on the look at the whole strategic program, and I will, as promised come back to you, in the Capital Markets Day later this year to give more detail around that.

So to summarize the first quarter, I would say from a market point of view, in trucks, in particular, I would say that the markets are developing as expected, both in Europe, North America a little bit better momentum, a little bit slower momentum in Brazil, but otherwise markets are developing as expected.

We see a gradual improvement in the sentiment on the European market going forward; we have adapted our capacity accordingly. And we start to see the effects from the efficiency program now coming into our results. I just want to end by saying that, we – I see this first quarter as the first stepping stone in the right direction. But don’t take me wrong, we have a lot of work still to be done, and we’re going to keep the focus moving. But this is a good, and I think positive stepping stone in the right direction leading up to our 2015 goals.

So with that, I think we conclude, and open up for Q&A.

Question-and-Answer Session

Hampus Engellau – Handelsbanken

Hampus Engellau, Handelsbanken and I have three questions if I may. First is, starting off with demand situation in Europe, there was a big difference in order intake percentage between Renault and Volvo. It would be interesting to know how you view that, and also how that corresponds to your second quarter in terms of market share. Is there any prioritization effect between fourth and first quarter given that Volvo dropped 36%?

Second question is related to the production changes you did during the quarter, if there’s any material under-absorption costs that you could quantify? And if any, please quantify.

Last question is more on Russia situation, demand situation in Russia and what risk do you see to your facilities in Russia, and also run rate going forward and embargoes and things like that? Thanks.

Olof Persson

Okay, if we take Europe and Renault truck and Volvo truck development, I mean, we had on the Volvo truck this specific situation with the Classic that actually added on to a pre- buy effect for the Volvo trucks, not only the Euro V, Euro VI, but also the very popular old Classic, which we didn’t have on the Renault trucks’ side on that.

But if I look at the first quarter order intake, I would say that, on the Volvo truck side, good news, market share increases. I mean if you look at the market shares in January, it was all-time record high we ever had in a month. And it keeps up on a good pace. But I must say that, looking at the market share at the Renault side, looking at order intake, looking at the perception that these new trucks are now getting, I’m slightly positive surprised during the first quarter of the Renault performance. And that is to me a very good sound platform now, where we move in to the higher volume production of the new range, which will be then a going forward one.

As you know we have doubled production of Renault up until the mid-year. We have now closed the double production for the Volvo, so the Volvo is only producing the new ranges. So that’s about that. And in terms of – and I will hand back to you on the under-absorption, Jan, but if we talk about Russia it’s clear that we do see some uncertainty now with the Ukraine situation among our customers in Russia. And that has a negative impact on the order intake, and we have to monitor that very closely. We keep a close eye on it on a weekly basis, and see how are we going to react to it, and see where it goes. And then it was the under-absorption.

Jan Gurander

When you look upon the manning in the factories, we were as perfectly manned as we can be. I think it was very well done. But of course, I mean, technically, the installed capacity is on a higher level than what we see right now. But from a manning perspective we were there.

Olof Persson

We can perhaps add to that, that we should remember that, from a productivity point of view, we still were hampered by the double production, both in the Volvo system and the Renault system. But that was more of a productivity point of view rather than an absorption point of view.

Anders Trapp – SEB Enskilda

Anders Trapp, SEB. I have sort of the same questions, but from the opposite angle. On the production, since you had an increase in inventories etcetera, there are some who have suggested that you might have boosted your margin a bit in the quarter due to building up the inventories and overproduction compared to sales. Is that the case?

Jan Gurander

No.

Anders Trapp – SEB Enskilda

No, it’s not. Good. Secondly also on the order intake, I’m clearly positively surprised by the development for Renault, especially since you have been fairly clear in indicating that there’s a big risk for market share losses etcetera. And especially in the near term order intake, you don’t have – the customers don’t have the trucks available to test drive etcetera.

So have they been ordering blindly, or sort of what is really the strength behind the order intake of Renault? Is it what markets, what type of customers are we talking about? I’m really wondering is this sustainable or will it happen in the second quarter instead?

Olof Persson

I’d say that you’ve had a transition, because part of what we have seen in the order intake is of course a – call it a pre-buy of also the old Renault products in terms of the hangover into the Euro V, and so on and so forth, and other markets outside Europe; we have to remember that, and that’s also.

But gradually and rather quickly we have seen that the build-up of the order intake of the new products actually took – once we got the test vehicles out, once we started to get the fleet owners and fleet customers acquainted with the products, we started to see very good feedback, and thereby also signing up orders.

So what we do is to compare now where Volvo were at that point in time with where Renault is at that point in time and see how this is split between the old and the new. And it follows pretty much the same, and that is a very good news for me. Then exactly how that will pan out in Q2, we have to wait and see. But so far so good.

Anders Trapp – SEB Enskilda

And I guess, the most important question there is are they prepared to pay the significantly higher price for the new Renault compared to the old one?

Olof Persson

When we talk about good price realization in Europe, we talk about Volvo trucks, and we talk about Renault trucks. And I’ve been very clear on that, and I continue to be that. When it comes to those mega investments we have done, we have to make sure that we have done the right investments, and the features actually are there in order to give extra value for the customer, and thereby also being able to charge out both Euro V, Euro VI but also the new features. And we should remember of course it’s a big step for Renault when you look at the product by itself, but so far so good, and we have managed to get that in a good way.

Anders Trapp – SEB Enskilda

So on orders in Renault in Q1, is it – how much is Euro VI and Euro V?

Olof Persson

Well, I thought I had all numbers in my head, but that one – I’m looking at Christer here?

Christer Johansson

For Euro VI it’s – Euro VI market is Europe.

Anders Trapp – SEB Enskilda

But the Renault figure for Europe that you gave in Q1 was in the order was so much even like 8,000 or so.

Christer Johansson

The European number is primarily Euro VI.

Olof Persson

The European number is Euro VI for Renault.

Anders Trapp – SEB Enskilda

One final, on FX headwind, it was a big one. How long is that going to hurt you? Looking at all other companies I looked at, that said something, they basically all say that if you have a lot of emerging market exposure, you’re going to get much less impact already in second quarter, and very little in the second half, given the current exchange rate, is that the same for you as well?

Jan Gurander

I can repeat exactly the same.

Anders Trapp – SEB Enskilda

Very good. Thank you.

Jan Gurander

But one has to be very humble when it comes to predicting these things.

Andreas Brock – Nordea

Andreas Brock from Nordea. A question to Mr. Gurander. As new CFO, what have been your impressions? Any positive or negative surprises, except for the PowerPoint slides on the negative side, but what are your first insights into that’s good.

Jan Gurander

I think, things are as I expected when I joined Volvo actually. Volvo is a company with a lot of positive things in itself, of course, when it comes to heritage, culture, organization and so on.

If you look also into what’s been done last year when it comes to product introductions, I’m very impressed by what I see product-wise, and so on as well. Then I think – you shouldn’t take that on the negative side at all actually – but I think we have to recognize what we are into. I mean you are aware of that, I was aware when I joined Volvo as well, we are into big transformation in the Group as well. And then, that’s what we are talking about, all the difficult things we do from taking decisions to implementation and so on. And that is of course a lot of hard work that we need to do.

And if anything I see, I spent quite a lot of time at work right now to be able to continue to deliver this, and that’s the pace that we have in the whole organization. So a lot of hard work actually still, and this will take I would say – the strategic plan is up until 2015. I think it will be a couple of years now to take Volvo back on track where it should be actually.

But the good part I think is that – that’s really the foundation in a company like this – it’s that we have the good products, we have a good production system and so on, and that we will be able to leverage on. We need to take down the structural cost in some areas, as we have indicated and so on. And there we need to work very hard. So it’s more – you can say more or less as I expected.

Andreas Brock – Nordea

Where do you think, you’ll spending most of your time in 2014, area if you think one or two key focus areas?

Jan Gurander

I think the key focus area is to deliver on the strategic plan with very much focus of course on the – if you remember the slide on operating expenses, and so on, that’s really important now to secure that we structurally take down our operating expenses or the fixed costs in the Group going forward.

So we’ve put a good and solid platform to have a sustainable profitability on the sales numbers that we have right now. When we do that, which I’m perfectly convinced that we can do, then you will also see that, when volumes start to come up, when sales start to come up, we will have a very good gearing and very good results coming out of this situation – of this Company.

But it’s really about the cost side. That’s the focus number one, and of course, the second one I think is really the cash flow. A part of that will of course come as a consequence of improved profitability, but I think also we need to continue to work with this capital efficiency and so on. That goes both when it comes to the fixed assets, but also on the working capital, there we can definitely improve as well.

Andreas Brock – Nordea

And finally, in general you’re pleased with the balance sheet?

Jan Gurander

If I could wish, I would of course have had a little bit stronger balance sheet, but we are where we are, so it’s okay. It’s – I think also going forward, I would like to see a stronger balance sheet. But we will do that by generating our own cash flow and then gradually strengthen our balance sheet. It is a little bit on the weak side. It is okay, but it should be a little bit stronger.

Andreas Brock – Nordea

Excellent. Thank you very much.

Fredric Stahl – UBS

Hi, it’s Fredric here from UBS. Maybe I’d start with a question to you, Olof. Brazil, I think your orders were down 30% year-over-year, and still you only cut your market outlook by 13%, 14% why the optimism?

Olof Persson

I think, if you look at and how we need to look at from a seasonal point of view. If you remember, if you go back to Q4, we had the Fenatran Fair; we had a lot of order intake coming. We’re coming in now with a rather healthy backlog actually. So we are – despite the 97% or whatever it was, the book-to-bill, we do have a production failure out of long year, forward. So it’s sort of a timing difference between some of these heights, and valleys you see in the order intake. And then we do see the market then stabilizing on that?

Fredric Stahl – UBS

Thank you. And then one for you, Jan. Financial services doing very well right now, and I was just wondering if there is any markets or collections of markets where your metrics are going the wrong way, say customers delinquencies?

Jan Gurander

No, I think, it’s okay, it’s stable.

Fredric Stahl – UBS

Okay, thank you.

Erik Golrang – ABG Sundal Collier

Hi, Erik Golrang of ABG Sundal Collier. Two questions, first on the savings that you outlined there on the last slide, did I get it correct that it was quarter-on-quarter savings of SEK400 million? And if so, what’s the year-on-year pace, and could you update on how you expect that to progress for the rest of this year?

Olof Persson

I think when it comes to what you saw year-over-year, those are the operational expenses, and then when you come into the total increase, and improvements you have a number of other things as well. We should remember that, for instance the price increases; the cost of product reductions. And that’s a little bit what Jan was alluding to. If you look at the gross income improvement of $2.4 billion about two-thirds of that can be related to the volume, but one-third of that is actually then based on the other things than pure operational expense part of it.

We have said that a lot of the – and you can see that on the $9 billion curve as well – if you follow that curve you can see that the back end of the year of 2014, coming up to the levels where we have committed to, we need of course to accelerate coming into the second half of the year. And that is basically the plan now coming with all the activities we’re doing on the efficiency program with the 4,400 white collar, etcetera, etcetera, etcetera; those kind of things.

Erik Golrang – ABG Sundal Collier

And the one line closure you did now on Volvo, is that included in that?

Olof Persson

What?

Erik Golrang - ABG Sundal Collier

The closure of one production line here that you did in Q1, is that included in the total savings that you outlined?

Olof Persson

Yes. All of these sort of structural things that was on the plan, that is the whole European optimization footprint which has been communicated. And the reason why I showed it now is that now it’s happening. Before we talked about decisions, that was tough enough, now it’s actually happening.

Erik Golrang - ABG Sundal Collier

Second question is on, you touched a bit upon the progress of truck demand in Asia, could you give a bit more, few more comments outside of Japan, perhaps particularly for Quester and also within markets like China change to our customers are acting in terms of going for premium products versus simpler products?

Olof Persson

When you look at Quester outside or Quester is outside Japan, we do see in the markets where we have launched the Quester a lot of interest. And up until now I must say that the big issue has not been to sell the product; it’s actually been to have a secure and good ramp-up of the product coming from low levels going upwards.

Now we are taking step-by-step and increasing the volume, but still it’s not going to be huge volume coming out of this year. That’s going forward up to the 20,000 volume that we plan coming in the next years.

Then you have of course an uncertainty in a number of countries in South East Asia. I mean, you have the elections going in Thailand; you have elections going in Indonesia. And there are some impacts there and then you have the mining side as well.

In China I’d say that the issue there is – and we keep the market as planned. And I would say that in the beginning of the year it has been a rather good start. But it’s a little bit of a prolonged pre-buy effect you can say. India on the other hand is tough, has been tough for the last year. And it’s hopefully now starting to bottoming out and then hopefully gradually improving in.

Erik Golrang – ABG Sundal Collier

Then final question on price realization if you can give any indication of the level of price increases you’ve done and maybe if you’re planning something particular in any region for the rest of the year?

Olof Persson

I think, In terms of price and price management, I mean, this is a process that I started very early when I came in, to really learn myself and to focus upon. And we follow that very closely. And we do huge amount of analysis and making sure that we have a good price realization, based on what the market can absorb. But when it comes to the price increases we have done, one thing is very clear. We do have to cover for new technology and new features and new costs and that we do. We have to and we try to stay ahead of the curve if we see inflation. Not a huge problem right now for sure, but if we see inflation, we try to stay ahead of that curve as well.

And then it’s a tactical game every day and how you’re going to position yourself and if you have dealer orders or if you have others and so on and so forth. But in general I must say – and I think you can look at it on the gross margin as well – the increases we see quarter-over-quarter and part of that is good price realization.

Erik Golrang – ABG Sundal Collier

Just a short question on construction equipment also. I mean, at least from my point of view it was unexpectedly strong numbers, both sales and especially earnings. Is there anything unusual about the cost situation or mix or anything that makes us – that we should believe that it’s not sustainable recovery in the margin in the quarter in construction equipment?

Olof Persson

I think you need to look at the market development as we have indicated. And the mining still being slow, but if you look at the result per se and I think, Jan, you can confirm that if you look at the result, it was basically volume-driven result improvement. And that also shows, you remember, we have discussed many times since I was in the CE that we have worked on the breakeven points. And of course that has continued to work. And there you can see, once you get this volume, even though it was not enormous volumes coming out, immediately, with that breakeven level, you see the volume impact coming.

But having said that, and Jan was pointing out as well as me, the key focus now for CE is actually to continue with that on the breakeven side, but also where we do now investments on R&D, the R&D money goes in to a much bigger extent into product cost reductions to find also not of a breakeven level on construction side, but also making sure that we get the better gross margin coming out of the sense that we do have.

Mix wise I don’t think that we will see any major change other than normal during spring seasons and those kind of things you have.

Erik Golrang – ABG Sundal Collier

And there is no change in the price pressure that’s been around I know from Japanese and Caterpillars and others?

Olof Persson

It has been tough for a while, definitely. It is something that you have to work on every day. And if you look in China, if you look in the others, there is definitely a tough price competition out there. But that’s where we need to bring down the product cost.

Christer Johansson

Thank you. We will move on to questions from our callers please.

Operator

(Operator Instructions) Please hold until we have the first question. And the first question comes from Mr. Alexander White from J.P. Morgan your question please.

Alexander Whight – JPMorgan

Yeah, good morning everybody. I’ve got a few questions. Firstly, just you were talking about taking market share in Europe with the Volvo brand. And I’m just wondering who you believe you’re taking market share from because, if we look at the sequential increase in orders, they increased 21% in Europe whilst the other company we’ve heard report increased 44% sequentially in Europe. So I was just wondering if you can give a little bit of color there on what it is – where it is that you think you’re taking share?

Olof Persson

Yes I don’t know, I’m looking at Christer here. We normally don’t talk about competitors, we just conclude that we are gaining market share and since the market is always 100%, someone else is losing. But I don’t want to speculate in that and who it’s – who we’re taking from. The second question I didn’t really get with this sequential, could you please help me again there?

Alexander Whight – JPMorgan

No, that was part of the first question. The Volvo brand orders are up 21% in Europe while Scania was up 44%, so that would suggest that share was being taken by Scania. So it’s kind of tied into the same first question.

Olof Persson

Okay, okay, but there you have to look at, if you look at sequential on the Volvo brand, you have to remember also where we came down with the on the level we had coming on the backend of last year in particular down with the Classic. And that is, for the Volvo brand, something you always have to remember which is a very unusual situation that you had these two models, at the same time you have a pre-buy effect which then means that you’re coming from – sort of getting a double effect on that. So I would say that’s one of the explanations. I don’t know if you want to add Christer something? He’s shaking his hand which you can’t see, but he is doing that. Okay.

Alexander Whight – JPMorgan

No problem. The second question I had was just around the inventory build of SEK4 billion. How should we think about how that was split by each division? And how do you expect that to develop by each division in Q2?

Jan Gurander

I think – Jan here. You get a rough figures half of it trucks and the other half of it goes to buses and CE.

Alexander Whight – JPMorgan

And in Q2 how would you expect that to develop in each division?

Jan Gurander

In Q2 or I…

Alexander Whight – JPMorgan

So going forward should we see any of the divisions seeing particularly different development in inventory?

Jan Gurander

No I think the goal is now and the target is to deliver, I mean, is that we have in inventory should be delivered to the markets during the second quarter and that goes for the whole group.

Alexander Whight – JPMorgan

Okay, okay that’s helpful. And could you help us out with how much of the SEK4 billion was finished goods?

Olof Persson

How much of the inventory was finished goods?

Jan Gurander

Oh that I don’t have on top of my head. I don’t know if can help me.

Olof Persson

Most of it.

Jan Gurander

Most of it.

Alexander Whight – JPMorgan

Okay thanks very much.

Operator

Okay. And we have our next question from Mr. Alexander Virgo from Berenberg. Your question please.

Alexander Virgo – Berenberg Bank

Thanks. Good morning gentlemen. Just a quick question really on buses. If you ex the FX impact and the headwinds from Euro VI which I think you called out, obviously a meaningful improvement in terms of the operational performance. And I know you referenced the restructuring measures last year having an impact now. Is this a sort of a new level that we can think of, particularly given your volume outlook is good from the order intake last year?

Jan Gurander

I think what you can say around buses is that the operational cost reductions and the structural cost reductions that we have done will still be there. And that means that the breakeven level has been reduced in buses. We are also continuously looking at the normal cost savings, as well.

So, from that point of view that you can calculate on, then we will see how the market develops and order intake and the deliveries and so on and so forth. But there is no sort of major mix changes going forward what we can see now. We are selling more and more of our hybrid buses for instance, and that is coming in, which is a new technology. And, giving the same principles as we had with the truck side, if we add new technology, then we make sure that we get paid for that new technology when we sell it. So that is the only sort of long-term mix changes where I can see.

Alexander S. Virgo – Joh. Berenberg, Gossler & Co. KG

Okay, great. Thanks. And then last one, just a quick one, can we – can you give us some indication of what we should be expecting in terms of the corporate eliminations number in EBIT for the full-year, given you did about SEK590 million or so in Q1? Is that a number we can annualize?

Anders Osberg

Exactly. If you read – we had one one-off item related to elimination due to the Volvo rents effect. I think, if I remember correctly, it’s around SEK131 million and SEK40 million that will not be recurring so we will go back to the similar level as we have had before.

Alexander S. Virgo – Joh. Berenberg, Gossler & Co. KG

Okay. So SEK450 million odd is the number to use on a quarterly basis?

Anders Osberg

Yes.

Alexander S. Virgo – Joh. Berenberg, Gossler & Co. KG

Great. Thank you.

Operator

And the next question comes from Mr. Fraser Hill from Bank of America. Your line is open now. Thank you.

Fraser E. Hill – Bank of America Merrill Lynch

Yeah, Hi, good morning. It’s Fraser Hill from Bank of America. I just wanted to dig into the Latin American adjustment that you’re making. What’s your view on the industry inventories overall? How worried are you about the overall inventory situation in the industry and how much visibility have you got on the position of the industry in general?

And this cutback that you’re taking, what percentage reduction is that in your rates and how long do you expect that to last, I guess, particularly in light of maybe what you might tell us about the industry inventory? And, of course, you talk positively about pricing here on this call, but should we begin to worry about Brazilian or Latin American pricing as we go through the next quarter or two?

Olof Persson

I think that when it comes to the inventory situation I haven’t heard any alarming situations. I’m looking at Christer here. But it’s

Christer Johansson

Lightly elevated…

Olof Persson

It is slightly elevated in the dealer networks, he said, on the inventory side. When it comes then to our production, we normally don’t give that number and basically we’re going to do enough. We do have flexibility and we use that flexibility as well to make sure that we adapt all the time. That also answers your question when we believe we can go up again. It depends on the market and when the market comes, then we will increase again. When it comes to pricing, I think that we has being a premium brand and also having a strong market position, we are of course very, as we are always disciplined in price realization and we’re going to continue to be that.

On the other hand we also make sure that we are competitive, both by looking at the cost and the cost side of things and also looking – making sure that we are competitive in other areas as well. But generally you can say that Brazil is a tough market; as always been has nothing you know. And we have been so far very successful and we intend to continue that. And you should also remember what I said in the presentation, that we now see the rolling stock population that we have generating then spare part business in on an increasing – in an increasing way.

Fraser E. Hill – Bank of America Merrill Lynch

Okay. Thanks.

Operator

Okay. And the next question comes from Mr. Michael Tyndall from Barclays. Sir, please go ahead.

Michael J. Tyndall – Barclays Capital Securities Ltd.

Hi there. It’s Mike Tyndall from Barclays. Thanks for taking my questions. Three if I may. Just the first one, I think you mentioned you’ve started voluntary redundancies in Sweden. I wonder if you could just give us a feel for how that’s progressing? Certainly, not necessarily in trucks, but in autos we’ve actually seen greater take-up than was expected, so I’m wondering whether or not it’s in line with what you were expecting, worse or better? That would be interesting.

The second one, back to the inventories question. So a rise in inventories year-on-year of roughly SEK4 billion and yet orders, for trucks at least, were down circa 6,000 units. What are you seeing in Q2 that gives you confidence about having effectively more inventory on your books at this point in time?

And then the last one, just a very, very simple question, just around the parallel production. How long will this persist? Is there a point where you switch off Euro V production or are we still going to be building those trucks for Eastern Europe and some of the other regional markets basically going forward? Thanks.

Olof Persson

Okay. Let me start with the last question first. The parallel production has ceased in the Volvo truck system gone will never come back again. So that’s done. When it comes to the Renault truck production, we will stop that mid-year. So it’s still the second quarter we will have the parallel production. And therefore after half-year this year into the third and the fourth quarter we will only produce the new ranges, both on Renault and on Volvo.

When it comes to the VLP and the progression, I think it’s fair to say that the reception of program as presented has been regarded as fair by the employees and there is a lot of interest and a lot of people are looking into it. And the development is actually according to the plan. So we are seeing the interest and I’m very pleased to see that, with this momentum we have on the VLP program that we can avoid to do redundancies and actually go on the voluntary leave program here in Sweden.

Which by the way then, if you look at the numbers, it’s totally 1,300 here in Sweden, of which 800 are consultants and 500 is fixed employees. So that’s the part of the 4,400 for Sweden. And in that relation, that’s when I say the VLP program is progressing according to plan. Then I leave over to you for the inventory discussion and what makes us believe that we have the right inventory for Q2.

Jan Gurander

Yeah. First to – the increase in inventory that affects the working capital for the first quarter of SEK4.3 billion is actually the difference between year-end and now. And the increase of SEK4 billion is, as I said before, the build-up of the inventory that will be delivered during the second quarter. And, as I said before, also the clear target is that the majority, if not all of that will be delivered in the second quarter.

Michael J. Tyndall – Barclays Capital Securities Ltd.

Okay. Thanks.

Jan Gurander

So it’s not the build-up of inventory for speculation or anything like that as I said, this is customer order.

Michael J. Tyndall – Barclays Capital Securities Ltd.

Yes. No, I guess the question for me was if I look at it versus last year, you had more orders in Q1 last year and a lower inventory level versus the orders and inventory at the end of Q1 this year.

Jan Gurander

But then you have to come back to the situation we had in the first quarter last year was a very, very low production and sales with extremely high; order intake in the first quarter due to the Classic, Volvo Classic coming then that was delivered in the second quarter. This year we come in with a balanced production towards sales and then we see an increase of sales in the second quarter. So you cannot compare really these two quarter over quarters. You have to understand the dynamics when it comes to order intake and sales in respect towards. As Olof mentioned before, we are in a slightly odd situation where part of the seasonal effects that didn’t makes us not 100% comparable quarter-over-quarter.

Christer Johansson

Seasonable products..

Michael J. Tyndall – Barclays Capital Securities Ltd.

Okay. Understood. Thank you

Christer Johansson

One final question please.

Operator

Okay. The question comes from Mr. Alasdair Leslie from Société Générale. Your question please.

Alasdair Leslie – Société Générale SA

Yes, hi, good morning. Alasdair Leslie at Soc Gen. A couple of questions please, first one on R&D. I was wondering if you could give a bit more granularity on quarterly expectations for amortization and capitalization trends. You did the same at the beginning of 2013. And it looks like capitalized R&D is down quite heavily in absolute terms year on year, but amortization is roughly flat year on year at SEK600 million. Also more color on cash R&D spend, still around SEK4 billion on a quarterly basis. How should we think about the pace at which that can come down over the coming quarters?

And then the second question on construction equipment. The question is really on the quality of the orders, whether Q1 orders continue to see a shift to higher value segments and whether that’s still broad-based. I think you said it was at the Q4 release. One of your competitors yesterday was saying they expect a move back to smaller machines over the remainder of the year, so just interested if you expect to see the same trends.

Olof Persson

I think if I start with that. Definitely we – since mining is slow and that reflects also in order intake. And then you have the January construction which is per se then smaller vehicles, smaller machines then some of the mining which means that you do have a shift towards smaller machines. If you look at the market share gains that we have had in Europe for instance, it’s mainly with the smaller machines that we do have, but as I said before, this is nothing new now. I mean this mix issue we have had for quite some time and this is the mix that we go into, into this year, with the same thing.

And then having that paragraph over saying that mining is slow, we’re having the same mix and we have more or less stable market that means that we are in a rather uneventful compared to before market situation. When it comes to the cash R&D, the guidance we gave there, and I think that it’s the guidance that we stick to, and that is the 2015 zero impact on the strategic program. If you look at the cash R&D reduction and our commitment that should offset the amortization negative impact meaning that we have a zero impact. And that’s basically what we are then making sure that we are aiming at and thereby coming out of 2015 with that zero impact.

Jan Gurander

To add a little bit on the net effect of capitalization and amortization, I think we were a little bit somewhere SEK250 million negative in the quarter, first quarter, something like that. You can expect that to go up a little bit, somewhere between SEK300 million and SEK400 million going forward for the rest of the year. But already this year we will see also a reduction on to paying our cash R&D is one.

Alasdair Leslie – Société Générale SA

Okay, great. Thanks

Olof Persson

So thank you very much. Thank you for coming and see you in Q2, and then I invite you all to Gothenburg because that’s where we’re going to have the press conference in the Q2 report. Thank you very much for coming.

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