Volvo CEO Discusses Q1 2011 Results - Earnings Call Transcript

Apr.27.11 | About: Volvo AB (VOLVY)

Volvo AB (OTCPK:VOLVY) Q1 2011 Earnings Call April 27, 2011 9:00 AM ET


Leif Johansson – Preasident, Chief Executive Officer and Director

Mikael Bratt – Senior Vice President and Chief Financial Officer

Olof Persson – President, Volvo Construction Equipment

Göran Gummeson – President, Volvo Penta

Staffan Zackrisson – President, Volvo Aero

Martin Weissburg – President, Volvo Financial Services


Fredric Stahl – UBS

Nico Dil – JP Morgan

Yann Benhamou – Exane BNP Paribas

Stephanie Renegar – JPMorgan

Jose Asumendi – RBS


Ladies and gentlemen, welcome to Volvo’s First Quarter for 2011. Today I’m pleased to present Mr. Leif Johansson, President and CEO. For the first part of this call, all participants will be in listen-only mode and afterwards there will be a question-and-answer session. Mr. Leif Johansson, please begin.

Leif Johansson

Thank you, and most welcome around the world. Good afternoon and good morning to this Volvo First Quarter 2012 (Sic) conference call. We have in the room as we always do, we have IR people, we have business areas leaders, we have our CFO and we also have our Deputy CEO and CEO-to-be, come first September, Olof Persson. And now he is actually representing Volvo Construction Equipment.

We have a batch of slides that’s been made available to you over the Internet site. And if you stick with me to page 2 in that batch, then you will see a slide that drew highlights. And we had a first quarter operating income of 9.1% margins, 6.5% in operating income. And the really unusual things there was the fact that we had SEK 590 million coming in from Brazil as VAT adjustments against that we put between SEK 250 million and SEK 300 million from the disaster in Japan. Also to note with you the difference in currency impact on operating income Q1-to-Q1 was about SEK 1.3 billion and Q4-to-Q1 or Q1-to-Q4 about minus SEK 700 million. We’re cash flow negative about SEK 4 billion, to say a normal seasonal thing as we build out inventories especially for four to two.

The environment side in general we’re seeing improving market conditions in greater Europe. And obviously and that’s across the Group’s different product ranges than I will speak more specifically about trucks later on. (Inaudible) in Eastern Europe that all fall terribly at low levels. Coming back to normal trend lines in Northern parts of Europe and Germany but well below trend lines in Southern Europe. But all in all, then improving what we would see as improving market conditions.

Asia remains very strong and we have the effect there of India, China, but also many countries around. And let me breaks out and pick Indonesia there as countries that are growing quite rapidly. That is not of course true in Japan. Japan was a slower grower before the disaster of the earthquake and the tsunami in March and of course has impacted us. We call that effect to be about SEK 250 million in Q1 here, really on the fact that we’ve not been able to deliver. We have had in Japan not so much damage to our own facilities. They can actually be used for production, we have resumed production but we have uneven output because of the effects in the supply chain.

South America remains very strong and that’s especially throughout Brazil, which is based on the markets in Brazil being impacted by growth coming out of construction, and also the new oil finds there combined with an overall raw material boom you can say in Brazil. So far that seems to becoming together very nicely even for 2012.

North America, perhaps the best news, there we’re seeing a significant improvement in demand on everything that is related to long haul, which of course is significant because it represents a better consumer and retail market, but it also represents the manufacturing sector that’s beginning to turn on in North America. Some of that of course dependent on the very competitive dollar rate right now. Now, for us to be genuinely happy with North America, we would have liked to see also a recovery in the broader construction sector, home building and even infrastructure construction. And that is yet to come and we haven’t seen that come yet.

If you flip the page to the Volvo Group, page 3, there you’ll see sales coming up at SEK 72 billion for the quarter. And you remember we have a strong crown there, so from a growth point of view Swedish crown that’s 22%. In currency adjusted, it’s a growth of 73%, so very good growth compared to Q1 2010.

If you look at 12 month rolling there, we’re now coming closer to SEK 280 billion than the SEK 270 billion and we have it all-time high at about SEK 300 billion. But if you look to the right there with the first-quarter 2011 there you’ll see distinctly different mix. You’ve got mix compared to when we were close to the SEK 300 billion earlier before the crisis in 2008 and 2009.

And what is happening here is that the half of the Group, which is not North America and Western Europe, continues to grow and of course you can see the impact there on Asia and South America. And Asia now much bigger than North America, but what’s also happened down in the past couple of quarters are notably so in this quarter is that Western Europe and North America grows at the same pace. And all the course comes together at 33 and keeps that pie chart almost stable with 50% of outside the North America and Western Europe.

And that we think of course that’s good news. Now, the left side of that pie, North America and Western Europe, is still far off of any highs, coming close to trend lines but from below. While you can say in South America and Asia there we are at all time highs and looking how that will progress over the next couple of quarters.

Sales obviously then were impacted by the market growth and then of course the increased sales of new products. We have said many times that we kept spending up on R&D. We have a general impression that we have gained market share on the base of new efficient products coming off of that spend over the crisis. Then as we move forward you can say or else we look at operating income and then we move forward you see increased volumes there. We’re upping our production rate again Q2 (Audio Gap) as we come up through the ramping up of our production sched this year.

Let’s go to slide four then, the one that has operating leverage through cost control and Mikael Bratt, our CFO will speak us through a couple of slides here.

Mikael Bratt

Thank you, Leif. As you have heard and seen today, we have presented the strongest Q1 in Volvo history here and I would say that’s despite the currency headwind. And we contributed to that decent force that was cost control that we have seen across the globe, I would say both in the industrial activities, but also from operational expenses perspective as you can see on this slide. Where we have had the growth on the top line, we’re at 24%, and OpEx has stayed on, I would say, moderate 6%, the growth here. And we focus to maintain this kind of leverages of course in high priority and then focus as we go forward.

I will not go through the FX items that we have done in the last quarters here. We haven’t touched them as an appendix back in this pack of slides. But again, I would say that the headwind continues when we have the currency rates, where the currency are, and as you know and just as a reminder here, we keep total hedge books than we’ve had in the past. So new contracts are taking at these levels and I would say it’s more like a stand of course when we have these kinds of level. And, so if you have any questions on that we can take that during the Q&A, otherwise you have the replay at the back.

Let’s move on down to slide number five, and the next financial debt position here. And we have found the seasonal cash flow of negative SEK 4 billion, which were Q1 (inaudible) a weaker quarter, but I would say still that the SEK 4 billion is, even if it’s negative or more on the positive side and one fact that is of course the good work that has been done in the working capital and which I will come through in the next slide. I guess that we’d in all development phase.

And net debt has come back up to (inaudible) but it stays within the range, which we have that said ourselves to be within. And we commented last quarter also that we should see this seasonal effect also when we look at the net debt position.

During the quarter S&P has upgraded us to a BBB+ with a stable outlook and we do not any longer have a speed raising here, we have both S&P and Moody’s at the same level here now. So that is suppose good news that we have stopped moved back up on the pricing level here.

I would say in the short-term, the pricing has not had an effect since we were already priced, I would say as these levels as the market has recognized the improvements already in the group here.

Going forward of course we will have a positive effect here. And we see also funding costs come down as we have progressed in the quarters here. And we have improved about $150 million compared to Q1 last year here.

And focus going forward with this cash flow that we have seen and through (inaudible) focuses on paying down debt in the balance sheet.

Page 6, talking that about the cash conversion cycle and we are looking at the cash conversion cycle here that has reached a level of 23 days. We are close to the 20 days, which is our target, which we have communicated to you, I would say in the midst of the crisis where we were actually moving in the wrong direction at the time. But we are also very, very convinced that we could do better when it comes to work [definitely] go forward. And I would say that mostly three days puts us in very competitive position from the work capital perspective here.

And I have already said that the key for reaching this kind of levels is that we have good control on the inventory side, which we have seen during the last couple of quarters here. And so well managed across-the-board I would say here. And also overdues is at the – in the industrial operation is at the lowest level ever and the word continuous seem to reach to 20 day a time.

Let me comment also very briefly on the TP, TP investments and I would say up to looking on at the first quarter it has been stable. We see an upward trend here and we have guided you towards the $10 billion for the full-year and that should be compared on to the $7.1 billion that we had last year here, but overall, I would say. And stable development so far, but upward trend.

I will stop there and hand back to you Olof.

Olof Persson

Good and come with me then on the slide 7 on the (inaudible) trucks, there you see net sales developing by as much as 35% actually foreign currency adjusted, we see that clearly on an order book, which we have delivered on, as you say with fewer disturbances in this quarter then we had in Q4, but we also see market share gains as we, many of the new products that we have introduced are biting you can say in the market. We are improving our market outlook and I’ll speak specifically that in the next couple of sides.

Operating margin at $9.4, now supply chain in Japan is a worry and specifically in Japan with UD Trucks, we expect to see about the same impact on an

EBIT line as we had in Q1, lets say $250 to $300 million and that's really on our ability to get the manufacturing running smoothly in Japan. Much, much more different sets if we have any effect outside of Japan and if we had – had you asked us a couple of weeks ago we would have said, we were very mightily worried, now we are seeing, we have orders of magnitude less of an issue and we could well be that if we lose some production or two we could actually regain that in Q3.

There is an uncertain, outside of Japan you can say still uncertainty of what the impact will be. And the real issue there is not even Tier 2 suppliers, the real risk there is that we will find Tier 3, Tier 4 or even Tier 5 suppliers that will have an impact on our production in different – in other parts of the world. But generally much less concerned than we were only a few weeks ago here, so problem over time we think is correct.

Then we have a production ramp up in the U.S. based on the very good order intake in the U.S. we are putting at a second shift in Q2 as you were well aware when you put – in [ships] you don't get immediate effects there that’s little of the issue that we had in Q4 and did have in Q1 when we make a ramp up in the U.S. for a much higher than production rate in Q3, then we are putting in a shift there.

Strict cost control also on the trackside and then we have a number of new product introductions in the truck group as we broaden the product range into segments for example like medium-duty construction, medium heavy-duty construction vehicles for Mack in North America. Go to slide eight, and you’ll see the heavy-duty truck market in Europe there we are opting that now into the range of 230 to 240. We're doing that really on a (inaudible) that would take us back to what we would consider to be a normal market as you can see the trend line there depending little on where you started will get up to the 230, 240. So good news there from Europe in general compared to earlier quarters.

And likewise, if you go to slide nine, you see heavy-duty truck market in North America now coming up to 230 and 240 bound to back off the past couple of months with high order in take. The reason that is isn't even higher here of course is that we see a number of big fleets putting orders that have relatively long period for delivery and we think the combination of what the industry can put out and what customers will want to take us to about 230, 240. We are heavy-duty truck markets in North America, we are upping that also compared to where we were the last – late this quarter.

Let's talk construction equipment and Olof Persson to speak through slide 10.

Olof Persson

Thank you very much, [inaudible]. In general, you can say that we have seen the quarter one in the construction equipment industry with a growing market scenario in all our key markets and you have the numbers in the quarterly report and I would like to mention there perhaps that China continues to grow in very good pace and it's good to see and good to report to you that during Q1 when it comes to adding reloaders and excavators together Volvo and SDLG or the (inaudible) brand actually is the number one position in delivered units, which we are very proud of and we think it's a good achievement of the teams in China.

But we have also seen the other markets like North America and Europe coming in with good growth numbers. But starting from much, much lower levels of course. It is a result that we have opted up our market forecast for 2011 in most of the markets and we are now looking at the total market increase for this year around between 20% and 30%.

If we don’t look internal on our quarterly performance I would say that I am very pleased with the growth, if you take out the currency we have a 63% growth year-over-year and it is not very often that we can report Q1 in terms of turnover that is actually higher than Q4 giving our seasonality. I would say that the operating margin is the best ever we have had in the Q1 and the year-over-year leverage of 15%.

On the headwind side, you can say there are two issues there and the biggest of course the currency as Mike had mentioned before there is no [inaudible] see to it that the strong sect is a headwind for VCE. We also had a huge number of start-ups in the production during Q1 related to the heavy machines on the Tier 4 [inaudible] the legislations this has resulted into somewhat lower productivity in the Swedish system that we used to. It’s about getting the supply chain up and running, it’s about balancing the fact on the line and so on and so forth. We are through that and we are delivering [inaudible] machines out to the system as we speak.

Some other key ratios we have the capacity utilization globally of 70% substantially up from last year and of course coming from [inaudible] prices. We have focused on the productivity and the basic volumes are produced by 15%. Fewer employees if you exclude [inaudible] than if we compared to August 2008. And finally, the Japan impacts for Q1 was very close to zero, but we will have a Q2 impact of supplier, lack of supplier over primarily hydraulic components to the Korean excavators manufacturing. It’s very difficult to estimate, but the number that we are looking at right now for Q2 operating result impact is negative 400 million Swedish Krona that is what we can see today. And with that Leif I think we conclude the report from VCE.

We move the conference phone here and take up slide 11 on buses and [indiscernible].

Leif Johansson

Yeah thank you. The first quarter was a very good quarter for buses reflecting our seasonality and the global bus market continue to recover except the CP bus market in North America, which are heavily affected by the discussions going on there. In Europe the city bus market is soft, while the coach market is improving and the rest of the world market is growing. So we see a growing trend in front of us except van or city buses in market. The interest for hybrid and also electro mobility, electrical buses increasing very fast and that is driven by China and also Germany and Canada is putting a lot of money into development of these kind of regions.

Despite the second segment down, we have improved our order intake by 17%. We have received two strategic orders in New York City, Prévost, Nova city buses and (inaudible) commuters and that is accordingly through our strategy to build a volume base in the State of New York. The result was SEK 281 million, 5.8% operating margin, well above last year and, I mean, on the similar sales number we issue, was fairly good leverage.

Going forward we have some headwinds through the currency development, raw material in combination with price pressure in this segment. We have relative focus on profitable growth in all our regions, good leverage on current cost structure and continue to push efficiency in our industrial operations.

During the first quarter we made a strategic investment together with our JV partner SAIC in development center for installing hybrid and electrical drivelines into (inaudible) and Volvo Bus. This is with the ambition to be a market leader in China on new energy buses, which is very clearly adverse from the Chinese government to be in the range of 10,000 to 15,000 units in coming two years. The company will be up and running in the third quarter of this year to meet the demands coming on in the Chinese market. We are also there able to export this kind of vehicles out from China to the rest of the world. So all in all, I think a decent quarter and we’re looking forward to the next quarter.

That takes us to Volvo Penta and Göran Gummeson on slide 12.

Göran Gummeson

Thank you, Leif. The world market for industrial engines continues very strongly in the first quarter of this year and with the positive development in all our markets. The demand for marine engines in Europe was stronger than during the recent quarters and we now see increased interest in pent activity among our end customers. However, in the U.S. the marine engine market remains very weak and we are concerned about the retail by that business going forward.

We have had a positive market share development in diesel-powered gen sets, evolved and thus by far is not by just segments or industrial engines with increased sales of both of the Volvo Groups and certain lead terms (inaudible).

We currently have a very positive order situation. The total volume in our order book last quarter end was 122% higher than corresponding the previous year. And our sales in the quarter rose by 9% to a little bit more than SEK 2 billion and we now also see increased sales on marine and industrial side, mainly driven down by the stronger demand in Europe.

Our operating income improved a little bit to 35%, up actually, and driven by increased marine sales and favorable product mix within the industrial segment. So all in all a positive development both in terms of sales and profitability.

Going forward we focus on securing deliveries within our global manufacturing and logistics systems. Raw material cost development is a concern for us and we are pushing price management actions to compensate for cost increases in the marketplace. As I said, we have a stronger demand in the European marine, industrial business and product wise we are well positioned to capitalize on this development and we have a very competitive product range right now in the marine business.

Our IPS system continue to gain market shares in the yacht segment and we see more and more projects in this segment in Europe and also in the U.S., but we can use the IPS systems then and together with the Groups both 11 and 13-liter engines.

We have recently signed an agreement with Garmin regarding joint development of instrumentation, navigation systems and communication equipments for leisure marine boats. This allows us to move either further into integrate system and complete the driver environment offering the end users (inaudible). It is a very promising and exciting corporation that you will hear more about from us later on.

So, that’s the report from me.

Leif Johansson

All right, Göran. Then we go to Volvo Aero and Staffan Zackrisson slide 13.

Staffan Zackrisson

Thank you, Leif. The market development is positive, in spite of the high oil prices of airline industries, very sensitive to the fuel cost. It was 6% up in February. Well, high fuel cost will effect the profit levels for the airlines, but even given that fact the airlines are quite optimistic for the next 12 months when it comes to passenger traffic and cargo.

The order intake for Boeing and Airbus was up 39% in the Q1 and this has lead to higher plans for production raise, will lead to (inaudible) supply chain in the Aerospace industry. At Volvo Aero we have also seen growth in our commercial component business when we counted in dollar of 10%. But if you look on the sales number for Volvo Aero, they have decreased 14%. That is of course the effect of lower dollar as well as the divestiture of Volvo Aero Services.

Operating margin for Volvo Aero was at the low point, 1.7%, and the two reasons for that lower earning of SEK 28 million only is due to the lower dollar. It has impacted also of course on the top line as well as we bought material for six plus months at a higher rate and are now selling that material. That is the biggest impact on the result. That one is manufacturing disturbances, but we have had internally and also supply (inaudible).

If we have got what we have in focus for next year is the supply management initiative. We are working closely with the suppliers and need to create teams to solve the capabilities of their processes as well as the capacity issues of the suppliers to get a better flow. And also, we are working with our productivity improvement program. We are gaining productivity, but not enough and this is also adjustment for the lower dollar that we foresee in the future and it’s a long-term program for the next three years that we are conducting.

That’s the industry. It’s in the rapid development of introducing new aircrafts and engines. We have a number of used engine programs going on in this current period of Volvo Aero and that’s the execution of (inaudible).

That concludes the report from Volvo Aero presently.

Leif Johansson

Well, that takes us to slide 14, Financial Services. Martin Weissburg?

Martin Weissburg

Thank you, Leif. Positive trends continued in the first quarter in our customer finance business. New financing volume for Volvo Group customers amounted to SEK 9.4 billion in the first quarter and this is a 50% increase over the first quarter of last year as adjusted for currency. We experienced stronger financial volumes overall and this is true for all regions and all products.

Operating income improved with the Q1 result of SEK 179 million, primarily driven by improvements in credit provision expenses compared to those to the first quarter of last year and fourth quarter of 2010. As market conditions improve, customers are strengthening and so do their repayment abilities.

As you see in the highlighted section, the first quarter demonstrated improved portfolio performance for VFS in all regions. In the first quarter we introduced a Volvo Financial Services branded private label alliance in India. Our alliance partner is SREI, which is affiliated with BNP Paribas and is well known and well established in India. That business provided infrastructure and equipment financing for over 20 years. This allowance allows us to enter in a controlled way into the growing and important Indian market and supported group sales.

And focus of course remains profitable growth in all regions and as the economic recovery continues, competition for talented employees increases. So we have strong focus, which continues on after recruitment of talented candidates in all of our growth markets China, Brazil, Russia, et cetera, as well as strong focus on retention in all of our markets.

In Japan, the excellent via best team, continues to work very well with customers to help them through this time of crisis and I would say this is already progressing in a very good way.

Now on to slide number 15. Managed assets for our customer finance business are up slightly over Q4 and prior year Q1 when adjusted for currency. And penetration for the quarter had a result of 23% overall. And this is including some good gains in targeted segments. So this is trending well, despite increased competition from banks, third-party finance companies, who also seek the finance of Volvo Group customers and our products. So, Leif, that’s the Q1 report from Financial Services.

Leif Johansson

All right. That takes us to group summary then and that’s on slide 16. You see earnings per share. That’s about 2 kronor, six months rolling at 650. Remember our dividend is 250. Then we have an operating cash flow at the 12 months rolling there, 19 and 17.7, cash flow we just spoke in about as part of our seasonality.

First quarter then 33% FX adjusted higher sales and cost reductions maintained in focus. As we see it right now, we are managing an upturn, notably so in Western Europe and perhaps even more in North America. And we are seeing those markets come up to historic trend lines there. And at the same time we have a strong order intake coming both from Asia, in general India, China and also countries around that, combined with the strong order intake also in Brazil.

A number of supply-chain issues. We spoke in some detail about that, especially on the Japanese side or the Japanese effect, the possibility in other parts of the group.

Again cost control, high on the agenda. And then we just wanted to make the point here that you have seen us making investments over the crisis. I think we can see that thing off quite nicely both in market shares and margin growth. And of course we are continuing to invest at reasonably high levels for ‘11 and ‘12 as we have spoken about before. We haven’t changed that, just to make the point that of course we are expecting that to provide us with future goals over the years to come.

That concludes the presentation of the Volvo Groups’ first quarter. And we will open up, operator, for any Q&A that maybe.


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

Fredric Stahl – UBS

Good afternoon, gentlemen. It’s Fredrick here from UBS. Could I ask, you mentioned a bit on the improved productivity, but maybe if you could describe a bit more what the situation is in the North American and European truck operations when it comes to your productivity, how far are you from being relaxed and very happy with the situation there? And then secondly, if I can ask you, if you look a bit further out in Japan, imagine that you’re at trend roughly speaking in Europe, North America. How far are we from trend in Japan do you think? Thank you.

Leif Johansson

I think I’m not relaxed and happy with productivity and that’s not what I’m paid for. We have specific (inaudible) talk to you about in quarter four. We had much less of that in Q1, but again really you can say we should be expecting without big investments to have a productivity of 3% to 5% for a year and (inaudible) volume. And we were there in Q4 and we paused (inaudible) of that in Q1 too. And we will continue to drive productivity in the system. And frankly as always, the more productive you become the more productivity measures can you actually identify and see as possible as long as you don’t come close to capacity constrains. And when it comes to North America and Western Europe, on the assembly side we are far from capacity restrains. We over time, and I spoke to that all the long in the press conference, we will (inaudible) and will be becoming close to capacity constraints. And our plan is to address that in the early autumn this year and see where, how we see that the investments for engines roll out to meet the capacity in their timeframe.

But otherwise you can say at least 5% (inaudible) productivity, you can expect for example, when you will be like, we are now in quarter two, putting in a complete shift in the U.S., you can’t expect that to be immediately as productive as when it’s been rolling for a quarter or two. But in general, I’d say, we still have good opportunities on productivity side.

Japan is much more difficult to give a good presentation; I think we are far from what you would call an historic trend line. And if we look at the Japanese economy and the way it is developing, you would have – to say that the markets now are close to where they should be, you would have to make some very, very bad assumptions. One is that the whole of the industrial sector, it’s very low and will continue to be very low. And we actually see – I think we’ve seen some very competitive companies in Japan, who have the opportunity to improve export and manufacturing basis.

Second one is that you would see, forever very neat assumption on the consumer side and I think there is a good reason to think that they are more neat now than they normally are.

And the third one of course is that we would not see a productivity coming in Japan and I think there is reason to expect that the productivity accounting in Japan. So I would say that we are nowhere near what I would call an historic trend line in Japan, so whether that’s up 20%, 25% or 30% from where we are (inaudible). I think we are at the low – at the bottom cycles of Japan.

Fredric Stahl – UBS

Thank you very much.


Our next question comes from Mr. Nico Dil from JP Morgan. Please go ahead.

Nico Dil – JP Morgan

I would like to ask three questions, please. First of all, sort of wondering the pricing on trucks in Europe and in the U.S., you’ve put through some price increases in the market, I wonder whether they are sticking and sort of when you saw them sticking, whether that’s happened in January, March or potentially whether it’s April or whether it’s still supposed to come through.

Secondly, if I compare your margins with local competitors and construction equipment in China, could you give us a little bit of a flavor of how I should compare that? Are you sort of above or lower than the Chinese or presumable lines of this world? And thirdly, looking at your chart on working capital, I see that’s a six months chart. Now, in Q4 we had a phenomenal working capital decline sort of offset by what we saw now. Can we expect a similar decline again in Q2 and hence keeping that 23 days in tact? Thank you.

Leif Johansson

Okay. I think on the pricing of trucks in Europe, we have actually said in Q4 that we had put across increases both in Europe and North America. Towards the end of the year we saw that pricing. So I think best to say is that what you see now is what we did in Q4. Since then we have put across some increases which is a lot more (inaudible) driven but not price increases coming from the overall situation you can see in the marketplace, most of that was done in Q4.

Then I think it’s fair to say that while the U.S. is reasonably, from a (inaudible) where for example we have been able to put cost increases to U.S spend as we said we did in Q4 more scattered place. And obviously, some of that is driven by currency fluctuations but some of that is also driven by very different demand in different parts of Europe. There it’s much to give you an overall, if you say, picture, it is different in different countries than different parts of (inaudible).

Nico Dil – JP Morgan

I think all ops you want to take to local Chinese competitors?

Mikael Bratt

As you know we do not guide on the profitability by region or by product and we stick to that. And what I normally state on those questions is that if you look at the turnover in China, we are in Q1, we had a sales about 40% of our sales was in China. And there is no way of course to have a result as we present here with 11% – almost 11% margin without having China (inaudible) and contributing margin to that margin. And I think I speak to that on…

Unidentified Company Representative

Okay. And then Michael on (inaudible)

Mikael Bratt

Yes. As I said this before, I mean we maintain our time to date target here and we believe we should be able to make it. I have not said before and now we are not saying today when we will get there. As I said we are hope very much on (inaudible) and we don’t give targets. And I’ll remind you, I’ll say that the cash conversion cycle is exposed to seasonality as well, which is not the straight line of course as we move forward.

Nico Dil – JP Morgan

Just one follow-up question here for Olof. I see that Asia is up about 60% year-on-year. You are guiding for up 10% to 20% in Asia. Could you clarify that a little bit, are you gaining market, what’s happening here, is there sort of a strong tail-off by the end of the year, how should I look at that?

Olof Persson

Well, it’s a combination of a couple of things. One is of course that we have this the very strong spring season per se. You’re then also looking into a tough comparison year-over-year when we’re coming back into the backend of the year, this year because last year backend was a pretty good year. And certainly if you look at, of course our ambition is to continue to gain market share in Asia in general and also making sure that our dual brand strategy in China, now with the introduction and ramp up of excavators, what has been (inaudible) branded is taking its portholes on the market shares.

Nico Dil – JP Morgan

Thank you, gentlemen. Thank you.

Leif Johansson

Thank you.


Our next question comes from (inaudible) from Handelsbanken. Please go ahead.

Unidentified Analyst

Thanks very much. I have three questions. My first question is on Japan. Some of the car OEMs indicates a 50% downtime in second quarter on the back of shortages on electronics and also power train components. And I was wondering if you could maybe tell us a little bit how you thought about second quarter regarding yield tracks and also if you have assumed any downtime in your SEK 250 million to SEK 300 million disturbance in cost for second quarter? That’s my first question. Second question is on lead times. Given Board numbers and also book there would be sourced based on traction in North America and Europe, what kind of lead times are we seeing now in North America and Europe?

And then a final question, also coming back on price there. Given that really the price increases we saw in the last year coming effective as of January and also I know this is your initial stand et cetera, but where are we in terms of prices compared to maybe near those seven levels in Europe and as we’re comparing North America we’d have six levels? Thanks.

Leif Johansson

Let me answer. On the Japan side, towards 50% on target would mean a lot. We are calculating with less of that. And you think about it and you can say SEK 250 million to SEK 300 million was the impact as to disaster happen did mortgage and tell you about the same numbers and you are probably talking 25% or 30% rather than the 50%, scale that on 42%. Now I think I’ve said that many times today, but let me say that again that these are to the best of our ability with the information we have today. And all of them, including the ones we gave for VCEM, the effect here are subject to new information that might come along. So there is this considerable uncertainty here. And I think you can say perhaps both on the upside and on the downside, again you’re in an uncertainty here. And we will have to inform you about that as we come through there.

Lead times, I think in general are still quite normal. I don’t have. I am looking (inaudible) if we have any general data, but we don’t have the very extensive order books or problems with lead times either in Europe or North America yet. And of course the reason is that we are off of low capacity there. We are far from capacity levels. We have some I think you can say longer lead times when it comes to China on the fee side. Is that...

Unidentified Analyst

And then, in general we have reasonable lead times and of course and the growth we have had with inventory it’s going down in (inaudible).

Leif Johansson

Difficult crisis, difficult times, so you’re saying are we back to have enough of this and of course we are because in the meanwhile we have put, for example, mission standards or new U.S. term with fairly hefty increases there. So if you look at per truck in dollars, yes. The answer is definitely yes. If you look from a margin point of view some of that has been cost related. I would probably say we have compensated for most of that also. Then of course if you start looking in Swedish kronor as I know some of you divide sales by the number of vehicles, I think that Swedish kronor with the dollar going from a 50.9 down to (inaudible) you get completely different numbers. So I would probably like to not to do that exercise or have. In general I think on the pricing in Europe and North America, as I said before, we are heading in the right direction.

Unidentified Analyst

All right. Thank you.


The next question comes from Yann Benhamou from Exane. Please go ahead.

Yann Benhamou – Exane BNP Paribas

Good afternoon. Yann Benhamou from Exane. My first question relates to China for construction equipment. Could you at this (inaudible) I would go for the market because, do you see a kind of flat with your 30% growth for the year coming from the late Q1 levels or what is your thought there? Second question, related to the U.S. demand you have booked a very strong order book. Do you feel that you would be able to fulfill customer demand by the end of this year or do you feel that part of those orders will be delivered next year? In other words, what is about next two day. Third question related to currency issue; could you help us to understand what is the split of currency headwinds by divisions? Thank you.

Leif Johansson

All right. China (inaudible) Olof.

Olof Persson

I think general, if you look at the Chinese market, strong first quarter. We have seen some truck from the (inaudible) in interest and also lending. I will say that, what we have seen so far is that we’ve managed in a good way with the best other sources like in the quarter we are finding available for our customers, and this will impact going forward is very difficult to say. We’re so far so good, and we don’t see any signs of it. You would remember that however that the Chinese market we believe they will go with a very strong (inaudible) There is a lot of plus and minuses going through here. So this is the best measure to see that producing full year as we comment there with the information.

But in long term booking and (inaudible) in Chinese market, we still believe and that’s why we do all this capacity investment in China and also to a best strategy, is of course that we see overtime continuous increase in either of, that’s a kind of, I think also the growth in China, was that also the same question?

Yann Benhamou – Exane BNP Paribas


Olof Persson

We don’t see and in terms of the U.S., the U.S. order impact, we have such a capacity in our U.S. facility and (inaudible) in the production system. But we should remember that the U.S. is coming back from very low levels even though the growth numbers are all right. So now the major bottlenecks in the U.S. produced vehicles and we also look at making sure that vehicles that comes from outside U.S. are supplied in a reasonable way when it comes…

Mikael Bratt

And that same comment would be valid for the truck side. If you look at the order intake of North America there were some discussion about very large fleets booking in some order that was fail all the way to advantage us, but in general that’s not much of an effect here even though the order intake percentage-wise is up with the booking about 11,700 trucks.

Yann Benhamou – Exane BNP Paribas

Let’s talk currencies Mikael.

Mikael Bratt

Yeah. The question was currency for business segments here. It was down for (inaudible) but what I could say is of course that in absolute amounts Volvo CE stands for a large portion of that. But then of course paramount in the truck segment and to the size of truck but not seen in, I’d say, percentage or the impact per say in the truck segment. If you look at percentage wise I will say Aero and to some extent there was a (inaudible). So hence we look on a certain amount or a percentage impact here but that’s the ability to (inaudible).

Yann Benhamou – Exane BNP Paribas

Okay. May be I’ll ask question on your production outlook for trucks in Q2 versus Q1?

Mikael Bratt

Yeah, I think you can basically say that we are increasing production in Q2 versus Q1. We already commented on the increase there in North America. I am saying that we are putting a new shift in there. Most of the affect of that will come into scheme. Some of the costs in the early parts of that ramp up will be in Q2. And then generally you can say probably another 10% up across the group.

Yann Benhamou – Exane BNP Paribas

Okay, thank you.


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

Stephanie Renegar – J P Morgan

Hi, congratulations on the quarter. I just had a question regarding your balance sheet strength. It looks like right now you are already in the range where you wanted to be when it comes for your net debt to equity. Given your cash position and that it looks production is still building. When it comes to uses of cash, is there any way that you could use some cash to possibly take out some of your high coupon jet that you issued during the crisis?

Mikael Bratt

We are now seeing the cash position improving here. One main part is of course to reduce debt by all different means I would say. Then of course, it’s the question of price, when you want to buyback (inaudible). And I would say as an investor it was interesting rates (inaudible) I will say a breakeven calculation (inaudible) we have to do it through (inaudible) it depends, I would say. But there is certainly no possibility there.

Stephanie Renegar – J P Morgan

Okay. And are you still targeting, are you still pretty comfortable with keeping net debt equity around 40%?

Mikael Bratt

We have said around 40% and we feel comfortable with that. I think over time it will be fluctuating here and it’s not that those below 40% requires immediate action or if it goes above, it requires immediate action. As we said, it’d be around and depending on where were in the cycle also we have to look at.

Stephanie Renegar – J P Morgan


Leif Johansson

I think that perhaps important terms because we did have some problem with the rating agencies for a while that they sort of read that the Board had announced that we would be at 40% almost per quarter and we have certainly not said that. We have said that it’s a long-term guideline and if there are good reasons to be above or below then we will do what we feel is good from a business point of view.

Stephanie Renegar – J P Morgan

Okay. All right. Thank you very much.


Our next question comes from Mr. Jose Asumendi from RBS. Please go ahead.

Jose Asumendi – RBS

Thank you very much. I’m just trying to think a little bit more sort of longer term, putting aside the whole recovery processing on the truck side, which is obviously brilliant. On the C side and like when there’s updates which products of the Volvo C family are you currently not offering in China? And second, is there any major reason why we should now expect you to introduce them in the next, as soon as possible? And then, I guess for Mikael, in terms of the CapEx to sales level you would think about sustaining well the next. I’m not thinking 2011, just thinking the next three years. What kind of levels would you be comfortable to support this growth industrially? Thank you.

Unidentified Company Speaker

(inaudible) all over there.

Leif Johansson

Products in China, yes. I think there are a number of products that we are not offering in China. I would say that the big volumes are definitely on the wheel loader and the excavator side and within that family you have a number of models all the way from compact excavator up to very heavy excavators and the wheel loader side. We are also offering in-road machinery equipment for Volvo branded produceable in China. We say these three categories are the major ones. When it comes to introducing product into China, we are always looking at that and it’s a market decision and it’s a cost calculation we are doing. It’s an initial part marking sure that we not only introduce a number of products but we also make money on them and thus we have the capacity to get it into the dealership having the right service and so on and so forth. So it is rather compensation, but I can assure you that in our long-term product family and we have defined and also laid out the different activities that we want to do in order to make sure that we are a major player in the Chinese market on different products. But what that looks alike and detailed of course that would be announced next financial year.

Unidentified Company Representative

Thank you. On the CapEx side, we don't have a percentage or target to guide you for very long time here. I will also say, we will provide you with the number for the coming year and say that’s as far as we can go in terms of giving you a guidance there. I mean of course we need to evaluate as we move forward the needs to support the growth and also looking at the strength of the balance sheet and the prediction overall in the business environment. So it's an ongoing activity internally I would say but we don't have a target, per se to be below (inaudible) or something like that.

Jose Asumendi – RBS

Okay. And just sort of in terms of acquisitions are you starting to look a little bit more aggressively. It’s then it may just compliment even part of the CE side portfolio. You are shaking the tree about a little bit stronger to see a various new opportunities or not really?

Unidentified Company Representative

I think we can say in a general sense we have said that we want to go over the longer term by 10% the year and we’re obviously doing this exactly. So far that has meant when you look at the longer term that we’ve heard a mix of organic growth, market share gains and acquisitions. And I think given the right set of circumstances and the right set of timing, we might well entertain that really big gap. But let me we just remind you there that we have probably a regulatory limitation in Europe and in North America of some importance. So it would be more towards other continent than Europe and North America, and possibly more focused on construction equipment’s and it would be on track.

Jose Asumendi – RBS

Okay. Brilliant, thank you.

Leif Johansson

Very good, I think we listed these last question and we would like to express from Volvo's point of view here. Thank you for participating in the conference call. Thanks very much for following us. To have our IR people ready to answer whatever remaining questions you may have and we are looking forward to see you again in the summer for the quarter two reports. Thank you.

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