Volvo CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb. 4.11 | About: Volvo AB (VOLVY)

Volvo Group (OTCPK:VOLVY) Q4 2010 Earnings Call Transcript February 4, 2011 9:00 AM ET

Executives

Leif Johansson – President and CEO

Mikael Bratt – SVP and CFO

Olof Persson – President of Volvo Construction Equipment

Håkan Karlsson – President of Volvo Bus Corporation

Göran Gummeson – President of Volvo Penta

Staffan Zackrisson – President of Volvo Aero Corporation

Christer Johansson – Head, IR

Martin Weissburg – Head, Financial Services

Dennis Slagle – President of North American Truck

Analysts

Nico Dil – JP Morgan

Fredric Stahl – UBS

Peter Testa – One Investments

Laura Lembke – Morgan Stanley

Peter Reilly – Deutsche Bank

Yann Benhamou – Exane BNP Paribas

Jose Asumendi – RBS

Christer Fredriksson – ABG Sundal Collier

Operator

Welcome to Volvo Group report on 2010 operations conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I’ll now turn the call over to your host, President and CEO, Leif Johansson. You may begin.

Leif Johansson

Thank you. Good morning and good afternoon, good evening perhaps to all of you and welcome to this conference call for the fourth quarter 2010. We have as we have done over the past couple of years, we have our CFO, also in the room, Mikael Bratt; and then we have business area leaders, who would speak to their business areas respectively; and we also have in the room IR people to follow up any questions that you may have.

We will be making a presentation first, and then we will take whatever questions you wish to make. Slides have been made available to you on our Internet site, and let me start on slide two, the one that is headed group highlights.

If you look at the fourth quarter, it turned out to be a very reasonable quarter. We had good operating income at 7.5. We have discussed the details over the day here, how 7.5, it is related to the growth that we had which was more than 25%, and we will be coming to that as we speak about each different business areas. We had very good cash flow at 15.1 for the quarter and 19 for the full year. And the board decided to reinstitute a dividend from zero last year to 2.50 based on earnings per share of about 5 kronas, but also of course, the much better balance sheet that we have. This being compared to last spring and also in this spring a much, much better outlook than what we have had before.

So all in all the dividend then with those things in mind goes to the 2.50.

Business environment was changing and improving all over, perhaps most notably so in Europe and in North America. Europe is still slightly scattered picture, the overall numbers come in to be quite positive, but it is still a slightly scattered picture. North America on the other hand on the on highway business in the trucks, but also in North America, when it comes to construction equipment, we have seen really significant improvement in demand. We have shared with you our order intake numbers there.

Asia continues to be strong both in India and China, and I say that outside of Japan, which is still not heading in the right direction. South America, also continues to be quite strong with double-digit, and then some increases in the demand.

If you go to slide three, which says Volvo Group, and then the different headlines there are net sales and operating income. You saw net sales clocking in at 73 billion for the quarter, 265 for the full year. Operating income at 5.5 for the quarter and 18 for the full year, and as we can see a fair amount of turnaround there in those numbers over the past year.

Fourth quarter, if you look at the pie chart there, you can say that represents how the group geographically is divided. You see North America and Western Europe actually if you would compare that slide to the third quarter having gained and slightly. That is really on the strengths of North America and Western Europe now coming back up, and it is still fair to say off of very low numbers, and still not in trend – into the long-term trend line, but we’re coming into better times both in North America and Western Europe.

At the same time it is rewarding to see than that Eastern Europe, for example, grew by 48%. South America and Asia as we have commented on before did very well too. On the mix side, it is important to recognize as we are now selling many new products, new trucks, new equipment. Of course we have lower margins on those then we had when we sell mainly a mix of spare parts and services. And therefore from a sales point of view, sales goes up, but the margins stay diluted, in fact, I wouldn’t even want to call it a diluted effect, there is an effect there, when we sell new product, they in turn, of course, come out and become vehicles and equipment that will again pull with them spare parts for many years to come.

Operating income there on the base of increased volumes improved capacity utilization, good cost control. If you do the calculation of adding over the year, sales and administrative costs, and research and development you can say they have gone up very, very marginally while we have increased year-on-year sales by 25%, 30%. So all in all good cost control there, and we will speak to the different areas we come in there.

Before that, let us make a couple of different points, Mikael Bratt, our CFO, on the financial side of the business. And slide four.

Mikael Bratt

Thank you, Leif. Continued focus and good control of our operational expenses has resulted in what you see on this slide, sales up 25%, while only the operational expenses have gone up 3%. So good focus on cost control here, and continuous efforts to identify cost reductions to offset volume growth here in the cost side we look forward to continue. And I would say that we have good control process to manage that turnout and reviewing all upcoming programs projects within the administrative area, for an example. So I feel comfortable for the future there.

Let's move on then to page 5, and which has been very much part of the topics for today. We have put together for you here the same kind of disclosure we did in the third quarter. We do not intend to go through all the details here, unless you have questions later on here. But I think the key point here is really that the underlying currency impact is limited, I would say, and the big impact, comes really from the hedges that are re-evaluated on a quarterly basis here.

With the old GAAP of accounting, I would say the result would have been 65 million, the effect on currency, which is 137 less, roughly SEK 72 million out of SEK 269 that is really related to what you see in the top half there. What we will do from September 2011 is to apply that way of thinking to business areas, and that is what you see on the last point on the right-hand side here. So we will allocate the portion of the hedge book that is related to the receivables and payables that are already on the balance sheet there.

So we will have more complete hedge, and currency effect in the business area fully reflect that there. So, that is the change from 1st of January.

Moving on then to page six, here we have also put together for your information then our

net currency flows, which are for the main currencies here for US dollar, pound, Euro and Canadian dollar, but also now Japanese yen, as we have grown significantly there during those couple of years here.

Let me point out that what you seen in the net flows for dollar, the Euro is little bit on the low side compared to the normal years, but pretty much you will get the right picture here when you look at the net effect here. So all in all, currency effect has limited impact on the group on a rolling basis here. And our ambition here is to drive towards natural hedges here and try to get very well-balanced currency flow inside the group here.

This information can also always be found in the annual report for reference back in time. So let us then leave the currency, and move into cash flow on page 7. What you see there is the cash conversion cycle, and I am happy to report here that we have now reached a point, where we have the lowest ever cash conversion cycle, 27 days. And that is the result of first of all good focus on inventory development, and we have managed to keep the number of days and inventory at also historical low I would say, and we also getting back when it comes on trade payables here. Today one of the main contributors here and also here we have the ambition to improve further, and we have talked before about the 20 day target on overall cash conversion cycle here.

Page eight, the next slide is then showing the net effect here of the improved working capital situation, as well as the improved possibility throughout the year here. And we can also here report record strong year actually on the rolling 12 months, 19 billion for the full year, and also very strong quarter with (inaudible).

Finally then page nine, and we are now back on the right side of the 14% net debt to equity ratio, which has been and is our ambition to be on and very strong recovery from peak of more than 80%. So very improved net debt position here, despite I would say the headwind we have actually got here from currencies. As you see for the quarter we have close to a billion back here.

So good cost control and a lot of good work within the working capital area that resulted in the situation here. Looking forward here I would say we will have the traditional seasonal effect when it comes to capital in the first quarter. So I just want to remind you again here that Q1 and Q3 are the weaker cash flow quarters in the year, and we have the quarter one in front of us here.

So I think we will stop there and over to Leif.

Leif Johansson

Good. Thank you, Michael. Let us go to trucks than on page 10. There you can see very good sales development there up by 34% if we adjust for currencies, and operating margin which is 7% better than Q3 and of course on (inaudible) 10% better than Q4 ’09, which certainly was an unpleasant quarter.

Q4 ’10 then, we saw improving demand in market condition, as you say everywhere when it comes to improving demand, except Japan and generally market conditions in the way that we have now come through most of the issues around having inventories in markets or for that matter used, an abundance of used trucks there. So, you can say much more normal market conditions there in most or all of the geographies.

When we look at the order intake, we will go into details of that as we speak, continued increase and that puts us into couple of next quarters here with production ramp up as we did there in the ramp up in quarter four, and of course when you ramp up as quickly as we have we have 34% up year-over-year. Then we bring in new people, we have to train them for a couple of weeks before there are really productive. And on top of that, with the rollercoaster that we have been through so have the whole of the supply system, which means that they too are bringing people in – suppliers too are bringing people in and trying to get up to the speed that we are requesting from them now. And everyone – so they cannot deliver what we need, and we have to go retrofit in some cases, even not be able to build on the normal days, but it will have to come back on weekends and things like that. Those are the types of productivity issues that you encounter in an upturn as steep as the one we are in here. And frankly, which we would probably see also in Q1 and Q2 as we come along here.

Of course, each level gets productive, but then when you come into the next level that in turn creates a little on the leverage side, slightly less leverage than if everyone was productive from day one. We also have, as you remember, we took a decision to continue to invest in R&D to the point of about 13 million on the group level, and we have a number of product introductions ahead of us, and we think that also will represent very interesting and competitive new products as we roll them out over the next couple of years in the marketplace.

If you go to slide 11, which is net order intake then. There you see some very good numbers if you look towards the bottom of that page you see Q4 from Q4 up 63%, and even Q3 on Q4 up 22%, driven by as you can see a strong Europe. If you look at North America, North America is now once again as they should be, bigger than South America, but South America continues to grow there. And then we have Asia also continuing to grow with the exception of Japan and other markets. If you look at that slide you can see the gradient towards the end there is actually picking up and improving rather than leveling off, and that is of course Europe and North America coming also strongly, and then the other markets remain at high growth rates.

If you look at slide 12, they have the heavy duty truck market in Europe, which is Europe [ph], and we earlier said that that above 200,000 units. Now we are another 10% up, and saying 220, and as you can see even with 220, we are well below the historic trend line being represented by the dotted line there in the middle. Of course, what happens here is that when even though we think of this as good growth rates, or even high growth rates, it means that we went down very far, as you can see on that slide. And we are coming into what could be characterized in ’11 and possibly ’12 as more normal market conditions and far off top cycles yet.

If you go to slide 13, there you see the heavy duty truck market in North America and you can see all the way on the rollercoaster there from 325 at emission legislation driven peak, and then all the way down, and in 2010, we ended up at 142 as you say in line with our projection. Now we were saying last time we met that it would be about 200,000, and now even firming that up to 220,000. And then Dennis Slagle, who is our North American Truck President, even made the point that it may come higher than that. We just multiply the last couple of months of order intake any which way we think now we are upping that forecast of North America into 220,000. Good development on the overall truck markets, both in Europe and in North America, and as you say, as Dennis showed at the press conference also indicated North America, and that is also actually true in Europe. We are also gaining share in that increasing market.

With that, let us flip slides to slide 14, and go to construction equipment and Olof Persson, our head of construction equipment. Olof?

Olof Persson

Thank you, Leif. If we then start with the market and enter in Q4, the world market up 31%. Good to see and I have been talking about North America as having lot of positive signs in terms of spare parts and utilization and fleet utilization with rental so on and so forth. And we now start to see that also coming into the order intake and also into sales. It is good to see that we reported 31% upper trend in the North American market.

Also interesting to note on the Q4 market is the uptick on the road machinery, 45% up in the quarter, which is of course good news for us because of our new and very good position in the road machinery segment of the acquisitions that we have made over the last year.

If we then look at the total year, we are talking about 44% up. Financials for Q4, good revenue growth of 51% FX adjusted quarter-over-quarter, and a margin Q4 best ever at 12% operating. Our capacity utilization went up 63% in the quarter compared to 32% last year, and 69% Q3. So, we’re ramping up our production and we are looking at further increasing production output in the quarters to come. If we then sum up 2010 a little bit, it was an all-time high in revenues, earnings and operating margins and we actually sold 66,000 units.

And the pricing environment managed and it has been rather stable there. I talked about that before, we have an average total year price realization [ph] of 2%, if you take an average of all regions, all models. And also that moved quite substantially in productivity, and we are now basically producing seven machines per year, and blue-collar worker in 2010 compared to 2008 where we had in the range of four machines per year and blue-collar worker.

If we look out in 2011 on the market outlook, we are fairly optimistic the market is we believe in a growth mode of the major markets around the world, and we have the numbers in the report with North America up 20 to 30 [ph], Europe up 10% to 20%, and then the rest of the markets somewhere between 5% and 15%. And when I look at the order intake in general this year, we see a supporting trend to those numbers that were just described.

And when it comes to in focus I would say that the (inaudible) it has taken place. It is a substantial launch. We have gone from introduction volumes in 2010, and we will now have ramp up volumes in 2011, and we will have the full volumes coming back in on 2011, and then going into speed in 2012.

Another important focus area is of course the introduction of the Tier 4i IIIB engine that is now more rolling out. All is according to plan. The production was started up in the beginning of January, and we are now starting to deliver the first machines to customers and that would be put to use during end of Q1 coming into Q2. And that, Leif was the report for Q4.

Leif Johansson

Good. That takes us to buses, and Håkan Karlsson, and we have page 15 to support that presentation. Hakan?

Håkan Karlsson

Thank you, Leif. In buses, the market in North America and Europe had a negative development during 2010, and we are traditionally 6 to 8 months behind our truck volumes. So, hopefully for 2011, we will see in the end, in the second half of 2011 an upturn in North America, and maybe not in Europe. There we see still a flat market going forward.

Despite the weak markets in North America and Europe, we delivered a decent quarter with sales of 5.6 billion, which makes total sales of 2010 about 20 billion, and that is a record for Volvo buses, the best level ever so far. During the fourth quarter, we had a good order intake and that has resulted then in an increased order bank plus 26% compared to 2010. So we’re moving into 2011 with a slight higher-order bank than last year.

Despite the flat sales, our profit increased during the fourth quarter, up to an operating margin of 3.9%, and that is also the total operating margin for 2010, which gives us a fairly good leverage compared to 2009 in the range of 50%, 55%. We also had good cash flow during 2010. And the result improvement comes mainly from the better market mix and a successful delivery of our global turnaround program that we have running now during 2008 up to 2010.

In focus going forward, still to secure some tenders and orders in North America and Europe, which are still in tough market conditions. We continue to work hard to improve our profit margins, to improve cost and capital efficiency, and now we have to get another level of that because we had to counteract the negative currency that we are having problem.

We have also included in our programs now a focus on profitable growth to capture our investment that we have done in the past, and also to capture the market potentials going forward. In Europe, we introduced our new intercity [ph] and in combination with that we make some major changes in our Polish factory, and that will gain significant improvement of the production efficiency.

In India, we invest in doubling our capacity to meet the increasing demand for Volvo products in India, and that investment will come in place during the next coming quarters. So all in all we are looking forward for 2011 and hope that we can see some improvement of the market, especially than in North America and Europe.

That was the report from buses Leif.

Leif Johansson

Let us with that go to slide 16, Volvo Penta and the leader of Volvo Penta, Göran Gummeson. Goran?

Göran Gummeson

Thank you, Leif. Now, we have seen the world market for marine engines that continues to be weak during the fourth quarter. This has actually gone on now for quite some time. On the contrary, on the industrial engine side we had strong demand and had seen good growth in all our main markets, global markets. The strong momentum we have on the industrial engine side that also actually follows the balanced strategy we have within Volvo Penta has helped us then to compensate for the weak marine development.

During the fourth quarter, our industrial sales had a share of close to 50% of our total turnover actually. The order book at year end was 70% higher than last year, and lately we have seen the marine engine part of the order book actually growing again. The signals from the first boat shows, Dusseldorfs and so on in Europe and Toronto for instance, in Canada, indicates also so for that there is a positive momentum and interest demand potential for buyers.

The focus to grow our share of the global marine engine business will be intensified. We had a very competitive product range that will give us good opportunity to gain market share and capitalize on increasing demand in the global marine market. We see good growth potential in the Yacht segment, and we will focus our sales efforts around our IPS systems and its advantages.

Moving forward, capital efficiency if high on the agenda in order to maintain a positive cash flow. And then during the fourth quarter, Volvo Penta signed also an agreement with Yamaha Motors in Japan regarding technology cooperation around advanced boat control systems. Yamaha Motors is the world leader in the outboard engine business, and as you know, we are the world leader when it comes to inboard and stern drive power systems, which means that our products are actually complementary.

This agreement forms a strong alliance in the marine sector, and will offer both our companies good opportunities in many areas of cooperation. That is Volvo Penta Leif.

Leif Johansson

Good and that takes us to Staffan Zackrisson, the head of Volvo Aero on slide 17.

Staffan Zackrisson

Thank you, Leif. The demand for air traffic is very strong, it is up 8% and that is on a level that are already on pre-crisis for air transport. If you look on the company’s sales side and if you take away the FX effect and the divestiture of VAS and look on the underlying business growth quarter-on-quarter is 14%. And what is especially positive is demand for spare part sales, which increased, and I will point out that fourth quarter is usually the strongest one for spare parts. This was after eight quarters with a downward trend on spares.

Also this is very good profit margin for Volvo Aero, it is double-digit margin for the second time of a quarter and we had an operating income of 282. In the market, which is very important for us is that Airbus has launched its new aircraft, Airbus 320 new [ph]. This is the best selling aircraft in the industry, and it is going to be offered with two engine options, and we’re intending to participate in the future in this program. And it is going to be entering into service 2016.

What we are focused on is productivity, and we are in the middle of our five-year program for improvement, and keep on working on the cost side and to balance increase of sales to get that to productivity gain in the company. Also, since there are so many programs like the Airbus 320, there is execution a new context that is in focus under product developments, and there are going to be a number of new aircrafts introduced into the market now.

Thank you.

Leif Johansson

That takes us to slide 18; we have Martin Weissburg, our Head of Financial Services. Martin.

Martin Weissburg

Thank you, Leif. Positive trends continued through the fourth quarter in our customer finance business. New financing volume for Volvo Group customers was 10.7 billion in the fourth quarter, and that is an increase of over 50% over the fourth quarter of ’09. Operating income for the quarter was 98 million, still not at satisfactory levels, but improving. The improvement over the prior year quarter driven mainly by lower credit provision expense.

To touch on some highlights, there are many quarters in a row of a reduction or shrinking in our portfolio size. We had the fourth quarter net portfolio growth. And this was net growth in all of our regions around the globe. This is an important trend shift to an increase in our net running assets globally. This comes from continued controlled growth

in Brazil and China, but it is also good to see North America and Greater Europe that they have returned also to portfolio growth.

The strong new business that we booked in the fourth quarter and the resultant return to portfolio growth is driven by, of course, strong new unit sales by the group as a whole, but also strengthening of customer credit profiles and targeted increases in our penetration of financing in markets where we provide financial services.

The fourth quarter also demonstrated continued improvement in customer repayment trends, and this is again the case in all of our regions around the globe. Account delinquency statistics are in the best condition since mid-2008. Solid performance also continued in our BRIC markets, and this is not just the good new volume and portfolio growth as already mentioned, but also stronger portfolio performance in both Brazil and China as these markets continue to grow, and I would add good improvements in Russia. So positive trends in these important emerging markets.

In focus remains operating leverage, and operational leverage, Strong global operating platforms, good cost controls put in place through the downturn, which continue and some efficiency gains should continue to provide us with lift and enhanced operating leverage, as we continue to grow. In terms of competitive landscape, of course as the markets continue to firm, more competitors, especially banks are returning, seeking to provide financing to Volvo Group customers. This is not a surprise of course, given again that customer credit profiles has strengthened, and given that there is ample liquidity in most of the markets where we provide financial services.

On the positive side, however, this aides our ability to syndicate parts of our portfolio to other financial institutions, and this syndication remains an important part of our commercial and risk management strategy. Lastly, business cycle management, of course in financial services we offer customer repayment terms of 3, 4, 5 years. So we are mindful not just of current conditions, but also remaining prepared for eventual market corrections. We are always in a state of preparation and on the watch for this. And again, business cycle management also means upturn management, and we see many good opportunities to provide financing to both existing and new Volvo Group customers as the quarters and the year moves on.

That is a report from financial services.

Leif Johansson

Good. Flick with me please to slide 19, and I will make a short summary there, before we open up the Q&A sessions. You see earnings per share at 5.36, 1.59 in the quarter, and cash flow at 15 for the quarter, and 19 for the full year, 29% up quarter-on-quarter, operating efficiencies in focus as we ramp up. We think we can do that quite well.

Proposed dividend of 2.50, and good R&D investment, and future oriented R&D investment that we kept spending during the crisis, and with that we think that we have a good roll out over the next couple of years of also exciting and competitive products.

An operator with that let me switch over to Q&A mode, and take any questions that you may have.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Nico Dil from JP Morgan.

Nico Dil – JP Morgan

Good afternoon, gentlemen. I'd like to ask three questions, please. Leif, I was hoping you could perhaps provide us with your ideas of where the biggest structural opportunity lies for the new CEO? Two questions for you, Mikael. One, you highlight on your slides that you can still reduce your cash conversion cycle to 20 days from 27 days. Is there any area where you can specifically reduce this going forward? Number two, normally in the annual report, you provide sort of the unrealized pension losses and past service costs. Last year I imagined – I remember this was about SEK 9.5 billion. Where are you now?

Leif Johansson

Okay. All right. Let me start, I think it is too early to give good advice to the new CEO, since we don't even know who he or she might be, but let me tell you what I will be telling them. I will say that I think the group has very good position geographically, but we have good opportunities to continue to grow geographically, especially out in Asia. I think there is good reason to make those investments now, and I think we have good position in many of those countries across the different business areas where we can do that.

Likewise and I would probably argue that we could expand the product range further within the definition of what we have as business areas today. I'm not arguing for any more business areas – I won't be arguing for any more business areas, but I think we can widen the product range a little like with FMX on the Volvo truck side, go after segments of markets where we are relatively underperforming, and even medium duty trucks, medium duty engines, and what have you.

Then on the operational side, I think things never get ready that we have considerable still opportunities on creating a combined strength across the group on different product ranges, and with power train and engines in the middle there, and when I look to the opportunities that we have there, they are still quite big. So I think the new CEO will have his or her hands very full and hopefully they will do a much better job than I have, but it is too early to say now. They will come in somewhere in the second quarter, I don't know. Mikael?

Mikael Bratt

Okay. Let me start on with the cash conversion cycle question there. I mean it's of course so that it is not saying that we’ll take out the remaining days here to reach to 20. So lot of hard work in all areas. I believe certainly that the biggest opportunities lies within inventory management in order to secure the whole supply-chain internally here is managed as efficient as possible. So I think there we have a couple of days to gain. On the payable side, we are not yet back to the days outstanding there which we were having, and which we had before the crisis here. So, also there you have a couple of days to be made.

So I would say it is all over the working capital side what we need to focus on. So there is no single stroke that will solve the gap here, but lots of hard work.

The last question on pension here, we have seen improved situation on the post employment benefits compared to last year. We, I would say, have obligations coming down a little bit to discount rates, and we have also seen good performance that’s maybe flattish or slightly improved on the planned assets that we have. So our recognized gains or losses have come down a little bit here. It was about 2 billion. So the cost for unrecognized gains and losses will be lower than that in the past year. So I think we have disclosed those amounts there. So during 2010 we had 460 million being amortized over the full year. So they'd be flat or lower than that. I think you should expect around 300.

Nico Dil – JP Morgan

Thank you.

Operator

The next question comes from Fredric Stahl from UBS.

Fredric Stahl – UBS

Good afternoon, gentlemen. It's Fredric here at UBS. I think the first one is for you, Leif. I was wondering on Japan, the market is still on a very low level and I was wondering if you guys could – a bit closer to that market can provide us a bit more color on what the situation is in terms of lead dates, what you are seeing, and where are they in the replacement cycle, spare parts, sales, et cetera, to get us a feeling for how long can that market stay low before it's forced up by replacements? And then secondly, I have a question on the tax rate, which is I guess for Mikael, it was low in the quarter at 24%, I think, so has there been a change here?

Leif Johansson

Good Fredric. I'll ask Mikael Bratt to answer your question on Japan too. He just came home from a visit there, and I think he is well updated. Mikael?

Mikael Bratt

Yes, the Japanese market as you said is extremely low here and also with historical measurement. The fleet age is certainly so that is on the high end there, and the replacement cycle should have an impact in that, and our expectations here for next year is to see an increase in demand here. We ended up the year on 39,000. I think we are looking at closer to the 50,000 plus for next year. So it will improve market conditions in Europe.

With regard to aftermarket side, we have a stable and good business in Japan there. We have probably one of the most interesting setups in the world, actually where you have mandatory service checkups twice a year there on the vehicles, which of course is a good aftermarket business for us. So very interesting market from (inaudible). On the tax rate side, I would say the tax rate in this quarter is not what you should expect going forward. We had a few one-time positive effects. No big ones I would say. The different things that have impacted positively with 0.5 percentage points in different locations around the world, and we will guide you towards around 30% tax rate, and we maintain that guidance.

Fredric Stahl – UBS

Very good, thank you very much.

Operator

The next question comes from Peter Testa from One Investments.

Peter Testa – One Investments

Hi, it is Peter Testa. Thank you. A couple of questions, please on productivity. You gave us a very useful statistics in construction equipment on productivity, and I was wondering if you were able to help us get to the bottom of the truck productivity during the ramp-up phase? So maybe if you had a similar number for trucks in Q4 compared to the average for the year or an average over a period you would choose.

Leif Johansson

Leif here, I don't have a similar catch all number. No, I'm trying to say something intelligent here that would catch you can say that mix of medium duty trucks the fact that we are producing sometimes, you can say standardized euro haulers, which will probably be the closest to the standard truck that we are making while at the same time we are making logging trucks for very heavy occasions [ph] in forestry and things like that. So I don't have a catch all number and I'm not so sure that it would be a meaningful statistic actually if you look at it. You would have to make it very even and it would be very sensitive to mix changes, but I can confirm that productivity, you can see that on the operating leverage over all of the year, of course with the volume this is going up.

Peter Testa – One Investments

Yes. And I was – you'd mentioned especially this morning's meeting retrofitting a number of times, which implies supplier challenges have also been a factor. I was wondering if you felt based upon your conversations with suppliers that the supplier disruption effect would be waning now in Q1 and Q2, or that would still be running at a similar high-level as in Q4?

Leif Johansson

I think they will be waning when it comes to the plateau that we have now reached, and you know, they are of course very different. If we lack an important bearing in an engine, then even the engine won't get make and we can't build the product around it and that has dire consequences, and we will have to run large parts of our production shifts on Saturdays and Sundays to compensate for that. If it is outside rear mirrors we can go out on the odds, and retrofit them at very little cost.

So, therefore it is so difficult to give you any numbers on what will be the effect. My impression is that altogether and let me make emphasis on that, we are not critical of our suppliers there. They have gone through the same roller coaster that we have. We don't think that they have industrial capacity restraints that they will need big investments to come out but what they have the same problem that we do they need to bring people in, they need to train them and they need to get products out the door in line for us to put them on to our tractor equipments on the assembly lines here.

So I think you can say we expect this level that we have now reached to be fine, but of course we are increasing our production rates again in quarter one, quarter two and we can't expect that increase you can say, we would have immediate productivity.

Peter Testa – One Investments

I was wondering whether you thought your suppliers were catching up quickly, quick enough to make these issues sort of less of an issue as you go into the first half of the year?

Leif Johansson

Yes, I think they are catching up and I take off my hat for many of them how much they have contributed here, but I can't escape the fact that we have shortages of components on the upturn in quarter four. Frankly if you ask me I would say the risks are high that we will have that also in Q1.

Peter Testa – One Investments

Okay, and Last question was just on construction equipment, where you are seeing signs in North America and maybe even Europe of a pickup and just wondering the extent to which you feel that your supply chain and your own organization is, say, more prepared since you have the business already in a good running, run out rate throughout 2010 to deal with this challenge on a productivity basis in 2011?

Leif Johansson

Well, it is something that we monitor very closely. There is of course a situation we need to manage, but the plans we have and if you look at the order intake and the production plans both internally in our own factories, as you can see we're running on a 63% average capacity utilization, so we have capacity there, but also with the suppliers. Moreover, we can see right now so far so good. We are basically in line with the production ramp up as we plan for the quarters to come and the lineup of the suppliers, but again it needs to be managed and needs to be worked on all the time.

Peter Testa – One Investments

Lastly, just a comment on foreign exchange. If it's possible to present your foreign exchange impact segregating balance sheet, i.e., receivables and payables items versus P&L items in the future just so we have clarity and save lots of questions, that would be great. Thank you very much.

Leif Johansson

Okay. We dramatically increased disclosure between Q3 and Q4, and I hear that you are very satisfied with that, and you are encouraging us to do even more.

Peter Testa – One Investments

Yes, I am encouraging you just if you can make it – summarize it that way because there's lots of individual items, which are very helpful to see, but just to make it easier to account for everybody, because it seems little confusing to some. Thank you very much, though, for the disclosure.

Leif Johansson

Thank you.

Operator

Next question comes from Laura Lembke from Morgan Stanley.

Laura Lembke – Morgan Stanley

Yes, good afternoon. I've got three questions, please. First one is a follow-up on the productivity question asked early on, and you mentioned that obviously your production rates in Q1 and Q2 could – or will likely be impacted still by the ramp up and also some bottlenecks at the suppliers. So my question is do you think you can actually make up for that in the second half of the year or do you think this is a delay in productivity that will actually reach into 2012? Second question is on China construction equipment, and what are your expectations for demand and pricing, especially on the wheel loader side given that you are still in a ramp up phase with your excavator products at Lingong? And then lastly on CapEx, how do you see this position developing going forward? Do you feel that you have enough capacity on the engine side to actually deal with the sharp increase in demand? Thank you.

Leif Johansson

I think on the first question there what we call production disturbances on productivity, I think the same reason that I had on the other past question here is that when you reach a plateau then in general you can expect good productivity from a stable situation, and what we are discussing here you know, you're looking at a group that has increased its output by 30% quarter four on quarter four, and that we are really discussing the leverage on the extra that has come up, and then we say we had some production and productivity impact on that, but of course you can say we have done to 30% ramp up here and we've done that we feel reasonably well.

I think everything that same and everything equal, which as you know Laura usually doesn't happen, but everything is the same if we are stable on production volumes that we don't continue to ramp up, then I think you could assume that we should become into a more stable productivity and setup you can say. If we are still ramping up in quarter three and quarter four then, of course, you will have these issues. People who come in and join a factory on Monday morning aren't productive that first Monday morning. We will need to train them three or four weeks to make them really productive. You can't get away from that. So if we are still ramping up and hiring people and our suppliers are too, then you will see these effects on the ramp up part of what we do, of course not on the plateau that we averaged in quarters earlier or the weeks before.

Laura Lembke – Morgan Stanley

Okay, can I maybe ask a question on that again? How do you then feel you are equipped in terms of staffing right now? Do you think you have now hired enough people to reach a relatively good level of productivity once these people have been trained or do you think we will see a lot more hiring going forward?

Leif Johansson

I think as you can see on the improvement in our order intake which is, if I remember now 22% quarter three on quarter four, it means that we will increase production again in quarter one and most likely in quarter two and for that we will need more people. So we are still in a hiring mode in that sense. So on that extra volume, you can say that that sort of comes up. We will need these training weeks and potentially also we will have disturbances from our suppliers, just as we were saying.

But we are happy that we have reached these levels where we are now and that we have a reasonable productivity on those. On the CapEx side, on the engine side I think it's fair to say that if they continue as they are now, and I think I said this in the quarter three conference call in the best of all worlds, it would be good to see India, China and Brazil not coming down, but lessening their growth rate. It might be good also from an overheat or inflationary point of view, but it would be good from our point of view.

Now that's not happening and that means that most likely somewhere during this year if North America and Western Europe starts, it continues to come up then we will have a look at capacities for engines and possibly gearboxes and possibly axles on the construction equipment side again. For capacities to come in ’12 and ’13 perhaps. That the decisions that will need to be made, if relevant to be made in the latter half of the year.

Laura Lembke – Morgan Stanley

Okay, and regarding China and the market development, I want to say the general consensus looking at the China market is that the excavating market will continue to grow on a steady pace over 2011. The wheel loader market will grow but at a slower pace and that's our base scenario, and also when we look at the volumes into trying to lift going back to issue about the Lingong ramp up and the Lingong wheel loader situation. We should also remember that Lingong and the SAG [ph] brand has over the year in 2010 captured market share in the wheel loader market per se. So you have an effect that is also coming in from 2010?

Laura Lembke – Morgan Stanley

Okay, good. That's very clear, thank you.

Operator

The next question comes from Peter Reilly from Deutsche Bank.

Peter Reilly – Deutsche Bank

Good afternoon. Firstly, thank you for the extra disclosure on FX, and I'm pleased to see you are going to be changing the way you report it in 2011, which strikes me as being a much better solution. I just wonder if you could help us a bit with the impact in Q4 from a divisional basis. Would it be right to assume that most of the items you are referring to are for construction equipment, and therefore on the new 2011 basis, you would have reported a lower margin in construction equipment in Q4? Secondly, I was hoping that with some help to understanding what's happening at Penta. You had some production and technical problems in Q3, which I assume have not recurred. The margin was still I thought quite weak in Q4. I know there's some adverse mix and Q4 is normally a weaker quarter. But could you just help us understand the impact of those issues and whether you have already seen the end of the problems you had in Q3?

Leif Johansson

All right. I think Mikael do you want to speak to the currency side, that's your favorite subject.

Mikael Bratt

Yes. We are not breaking down the currency effect probably this early here, but as I said before of course, it is more sensitive but has a bigger portion of currency exposure than most of our business areas, and it is also of course dependent on the dollar due to the business model, and for the rest I will say, it is fairly evenly distributed here depending on what kind of impact you have on the group.

Peter Reilly – Deutsche Bank

Japanese yen, perhaps this time?

Mikael Bratt

Japanese yen, yes.

Leif Johansson

Of course, as we are growing in the world here and becoming more and more global, I would say more different currency payers is coming up here. So I'm of course quite general in what I'm saying here but on a group level, in absolute amounts it's – has that impact, but of course all the business areas are operating globally, so they have their fair share of the currency impact.

Penta, Goran?

Goran Gummerson

Yes regarding the production disturbances we had during the third quarter they are over with them and down so to say. We had some delays in quarter four, but minor delays due to that, and I think you talked about the volumes also and coming back to that traditionally you know we have weaker margin during quarter four and that we have had for many, many years and that's a seasonal effect we see due to the customer and product mix. So it's a natural situation for us.

Peter Reilly – Deutsche Bank

Because obviously one of the issues that rises for the last couple of quarters is whether the margin you make on the industrial engines is satisfactory and could you comment on that?

Goran Gummerson

Yes, moving forward we think so yes, absolutely. It's a question again about the total customer and product mix for Volvo Penta, not only for marine or industrial, but it's okay for us, yes, moving forward.

Leif Johansson

And I think you have Peter a little of the same discussion that we had before on, when we send out new products, hot products, it takes a while before they become productive and start coming into at aftermarket, and there for service.

Peter Reilly – Deutsche Bank

So better times ahead for Penta when marine recovers and you start to get the spares coming through on the industrial side?

Goran Gummerson

Absolutely, absolutely.

Peter Reilly – Deutsche Bank

Thank you.

Operator

The next question comes from Yann Benhamou from Exane.

Yann Benhamou – Exane BNP Paribas

Good afternoon, Yann Benhamou from Exane. First question to assess what could come from the earnings swing in the US? Could you confirm that you were still losing money in the US in 2010 for trucks? And do we expect the shift towards vertical integration to lead to a similar margin in the US compared to what you had in Europe? This is my first question. Second question relates to the geographic mix for construction equipment. My understanding is that most of your profits comes from Asia today. How can you compare the profitability of Europe and the US versus China today in terms of margins, I would say? My last question relates to CapEx and R&D. Do we have any quantified guidance in terms of percentage of sales for those two items into 2011?

Leif Johansson

All right. I think on your first question on confirming where we are in terms of profitability for individual continents or countries, as you know we don't do that. So we won’t answer – we can't answer that, but we can certainly have Dennis Slagle, who is with us here, the president of NAT talk you through the swings on the vertical integration, et cetera. Dennis.

Dennis Slagle

Good afternoon. I wanted – I'm glad you raised the point on vertical integration because we feel every – all the OEMs in North America are trying to move toward a more vertically integrated product range. Mack Truck has always been vertically integrated, but it can report good progress on the Volvo side, our engine power for example, our penetration there is 75%, which is a record high for Volvo and North America, and we're also seeing good popularity around the I-Shift and the recently introduced mDRIVE, which is the Mack version of that. So not only does that benefit us profitability, of course it drives more business through our dealers, and I'll add that as we face greenhouse gas and future emission hurdles having sort of all the power train integrated gives us advantages.

Yann Benhamou – Exane BNP Paribas

Would you say that you could have – reach the same kind of margins in Europe?

Leif Johansson

We are walking around the subject every time. We are – we see no reason long-term why North America shouldn't have shorter margins than Europe, but North America as you know we have explained that many times, has a different market set up trends than Europe, but over time which is the fact what Dennis was describing is over time beginning to be more and more similar to Europe. Therefore, we're expecting the same type of margins long-term, but albeit as you know the population has to do with the spare parts market, the way customer service there of the trucks, et cetera, and the vertical integration that we have touched on. Olof, do you want to speak about –

Olof Persson

Yes, very much repeating the answer. I mean, we don't comment on the profitability of the regions, but it is clear that going forward we will continue to work on the profitability in all our markets, in all our regions independent on where they are right now and that's something we're going to continue to do, and I just want also to come back to what Leif said about the installed base and the spare parts structure that we also have to look into, and adjust the different regions for each other, but in general we don't split this up. We're working on improving the profitability regardless of market or region or product.

Yann Benhamou – Exane BNP Paribas

Okay, let's put the question in a different way. Given that you forecasted much stronger growth in mature markets such as BRIC markets. Do you see that as a positive for you or rather as a negative?

Olof Persson

Well, you're coming back to it from a different angle all the time. I think if you look at Asia and compare – if you go back five-six years ago China is right now in Asia a very big portion, even with these market numbers that you see which is not our growth numbers, but the market growth numbers, China and Asia will be a big part of our business also in the future and that is shaped from 5, 6, 7, 8 years ago. We are very pleased to see that the North American market is coming back, something we have been longing for. It's a good market for us with a big installed base and the same goes for European region.

Leif Johansson

Then on this question on CapEx and R&D as a percentage of sales, I'd be hesitant to give you anything there, you have to look back over the past two years you can say with the volatility of our sales, and even though we think that the unique situation even with the normal cyclicality you can say those changes would change over the year. The best thing I can do for you is probably to say if you go back and make a ten-year average on R&D, and likewise perhaps on CapEx we could make an argument on R&D and on CapEx that since we are more bigger in volumes, and better in you can say spread across the continent I should have a little of a tendency to go slightly down. On the other hand we have aggressively grown the company with acquisitions, and as you know, so I think the best we can do for you there if you want some kind of average is take a ten-year average and assume that to be about right, and then don't go into trying to divide them quarterly, you know, you won't get any meaningful numbers out of that.

Yann Benhamou – Exane BNP Paribas

Okay, thank you.

Operator

The next question comes from Jose Asumendi from RBS.

Jose Asumendi – RBS

Hi. Jose from RBS, a couple of questions, please. The first one on China, could you please give us an update on your joint venture with Dongfang? How many trucks do you plan to sell in 2011? If you could give us some clarity in terms of your installed current capacity and if you have any investments planned for this JV? And second item would be on Brazil and the Brazilian truck market, are you not worried that three quarters down the road this market could correct severely? How would you react in terms of capacity and what kind of capacity have you got at the moment in Brazil? Thanks.

Leif Johansson

All right. I think the numbers or the number of trucks – have we – those are –

Mikael Bratt

These are 700 to 800 trucks in the Dongfang D&D joint venture, and the sales of about 1000 I think, if I remember correctly. And then that sort of – your question there is good. You know, that is a joint venture that we have operating today between Dongfang and our company used to be (inaudible), therefore Dongfang and D&D, which is now UD Trucks [ph].

There is an interest from us and from the markets to use that joint venture to expand both the volume or the range of products that we have there, and we are interested in doing that but as you know on that part of our truck business in China it very well regulated by Chinese authorities in the automotive policy down to some detail there. So we have that desire. We think our partner has that desire but it is a matter of making sure that we can deliver that and we will invite you and say when we are.

Then on the imported side we are doing very well. I believe we are between Volvo and Renault, we are the biggest Western imported brands of special products, sophisticated products that go into China. The good thing with us that we have been able to build up a very good network of servicing dealers and spare part dealers. That business has actually going quite well, and the reason that it is expanding as much as this is that you see with all of the infrastructural investments going on in China, container harbors, the ability to take heavy containers off of a ship and directly onto a truck, all of those means that they require more qualified sophisticated trucks, more like the ones that we are selling in the rest of the world, and I think the greatest change that's going to happen here in the Chinese market is that customers will actively be looking for more sophisticated qualified trucks. The more sophisticated and qualified they become, the better have we a chance of leveraging our group, and also in the Chinese market, and you can say then regardless of the joint venture, the joint venture in itself we think is a good way to go also.

Jose Asumendi – RBS

How many trucks are you currently exporting or that are being imported into China at the moment?

Leif Johansson

Let me – let us have Chris to give you a call there and we try to give you the details on that.

Jose Asumendi – RBS

Sure, sure.

Leif Johansson

Then your question on the Brazilian truck market, I should say the numbers are in the official statistics in China (inaudible). But Chris you can do something with that. Brazilian truck market, I think it's correct that you say the higher the Brazilian truck market, the – perhaps higher risk or the expectation that it might come down, perhaps can be there. On the other hand Brazil is doing very well, and some of us, which are out there you can say the fact that there is a new found oil there, an economy humming along very nicely, big infrastructure investment that you could make a case that Brazil is actually doing very well under the underlying economy, the truck population and everything else justifies the market at these levels.

If the markets were to come down and I think in the case of Brazil we have a slightly better situation that we have for example with North America, of course, the trucks that we are selling in Brazil are very similar to the ones that we are selling in Europe, and therefore we have a best of ability to use the capacity that we have in Brazil on a more global scale, while that usually can't be done on the truck side, it can be done on the engine side, but usually not on the truck side when it comes to the US.

Jose Asumendi – RBS

Can I – I have just one follow-up. I mean you made some comments this morning which sounded encouraging in terms of the joint venture. Am I reading them wrong if I think that you might be at a turning point where you could start penetrating the Chinese truck market much faster than what you have been doing in the past five, ten years? And obviously, this will be a huge opportunity for you going forward.

Leif Johansson

No, I think you can say had we relive [ph] in a turning point we would have been overwhelmed with joy that we would have told you so. I think it is better to note that my interest right now says it's an interesting market. We are there in a complex automotive policy. We have a desire to be bigger in China and while we have – while we can't announce that we have come to any conclusion on this joint venture we are doing our absolute best in selling products produced elsewhere, and with that we're actually doing well.

Jose Asumendi – RBS

Brilliant, thank you very much.

Operator

The next question comes from Christer Fredriksson from ABG Sundal Collier.

Christer Fredriksson – ABG Sundal Collier

Hi, this is Fredriksson from ABG. Four questions, firstly, on the cost savings you announced two years ago, you said roughly half of that were structured cost savings? I guess now when volumes have recovered, I guess you have a pretty good feeling what the outcome was. So how much has the structure of cost savings been, that was the first one. Secondly, you talked about increasing R&D efficiency by 30% with the capital markets in New York last year. Can you talk about how this progresses and how far you've come? Thirdly, capacity utilization, you said it was 63% for VCE [ph]. How high is capacity utilization for the different divisions in the truck business? And fourthly, raw material costs, is that mainly within VCE that we are going to see higher raw material costs or should that affect other divisions as well?

Leif Johansson

Okay, let me give those and I will talk about (inaudible) that has to be the last question here. I think on the cost-saving structure you can say we can basically say – not basically, we can say we done what we said, and if you just look at how our costs are developing versus a 30% increase, I think it is fair to say, we've done what we said there. The increases in R&D efficiency, we are getting down the road and I think we are in general doing well. We made the point that we that presents us with the strategic toys to reduce R&D for the same business or use the 30% to increase our investment into other segments, where we are not yet et cetera.

And I think that gap is coming there. I think in the next year or two you should not expect any absolute numbers coming down there. The reason is that we have this euro 6 and Tier IV projects ahead of us, and with that comes also the ability, the opportunity to change on products, trucks and construction equipment and introduce more competitive products too. Over the longer term there is a strategic choice to be made if we can deliver on the 30%, and right now I think we are making good progress there. 60% on this, 63% for VCE, I think we can say in Europe and north America on the truck side we are still at low levels of full capacity utilization, while if you do Asia with the exception of Japan we are beginning to come – and Brazil likewise you can say we're coming fairly high up, let's say 80, 80 plus even, or perhaps even more in that for example in Brazil.

But 60 number is probably a good number if you are looking at North America and Western Europe on the truck side, which is why as we said before we don't really see an industrial capacity issue with the ramp-up issue we have discussed at length before. Raw material, the 600 number Q4 ’09 to Q4 ’10 is above across the group, and I think we should recognize that specialty steels et cetera hit VCE proportionately more than the truck side, but all of us – all of our businesses are actually impacted by the type of across-the-board, material increases that you see here. And we have made the point over the day here that our intention is and our experience is that we're reasonably good at getting that across to our customers in general, and that we certainly have the ambition to try to do this also over the next couple of quarters here.

Christer Fredriksson – ABG Sundal Collier

Good. Thanks.

Leif Johansson

Thanks very much. That concludes then the fourth quarter conference call for Volvo on the fourth quarter and the full year of ’10. Have a good weekend. Thanks for being with us, and any questions that you have to our IR people, we are happy to give them a call. Thanks greatly.

Operator

Thank you, ladies and gentlemen. This concludes today’s Volvo Group conference. Thanks for participating. You may now disconnect.

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