AB Volvo (OTCPK:VOLVY) Q1 2012 Earnings Call April 26, 2012 8:30 AM ET
Olof Persson – President and CEO
Christer Johansson – IR
Laura Lembke – Morgan Stanley
Nico Dil – JP Morgan
Frederic Stahl – UBS
Sébastien Gruter – Société Générale
Benjamin Maslen – Merrill Lynch
Ladies and gentlemen, welcome to the Volvo Report on First Three Months 2012. Today, I’m pleased to present, Olof Persson, CEO. (Operator Instructions) Afterwards there’ll be a question-and-answer session. Olof Persson, please begin.
Thank you very much and good morning and good afternoon to you all and welcome to the first quarter 2012 Volvo Group presentation. Follow me to Page #2 in the presentation and I think we can conclude that the first quarter for the Volvo Group can be summarized with a good momentum on sales side. We have increased our sales year-over-year to SEK 79 billion and that’s a 10% increase and we are posting a 7.9% operating margin.
I will come back to the group to track some CE a little bit more in detail. Just let me have a few minutes on the rest of the operations that we do have. And let me start in the bottom with Financial Services, where we can conclude that in the first quarter, we had a SEK 10.4 billion new financing which is very much in line with the growth of the sales. So we are constantly having around 25% penetration, which I think it’s a good and a balanced way of growing our customer financing.
We also see that the result is improving. The operating income is posted at SEK 333 million, which is then a sign of that we work ourselves through the issues we had particular in Eastern Europe and we also having a good development in the rest of the financing activities that we have seen.
Volvo Aero, it’s very good to see that when the production disturbances and ramp-up issues that we have had in Volvo Aero for the last quarters, has been worked out. We can see that the profitability comes back up and we are posting a 14% operating margin in Volvo Aero, which is a good work done by the team in Aero.
Penta is still struggling with a lower sales, a very tough market on the marine side and also, a tough market on the industrial engine side. And the decrease of profitability in Volvo Penta is mainly due to the lower sales.
When it comes to Buses, 10% increase year-over-year in sales, mainly explained by Brazil and the fact that we did produce our chassis for the Brazilian market back-end of last year. Those chassis went then to partners outside Volvo Group for building on the super structures and then, going out to market and being invoiced. And that means that Volvo Buses did have the industrial coverage and the industrial activities last year, which they don’t have this year, corresponding to that volume. That one explanation to the lower margin, but we also had a very tough situation in Europe on the city bus side, with lower volume and also, under absorption in the industrial system.
Both when it comes to Buses and Volvo Penta, there are activities and the teams are looking on activities to make sure that we come back and restore the profitability going forward.
Follow me to Page #3 and we talk about the group. And as you can see, we’re now trailing at 12 months sales trend of SEK 318 billion and with an operating income of SEK 27 billion. And we’re posting a SEK 6.2 billion profit, operating margin, compared to SEK 6.5 billion last year. We should remember that Q1 last year had a positive impact on a tax return in Brazil and with a net positive impact of SEK 340 million sector.
I will come back to leverage, I’ll come back to the development on the profitability going forward.
On Page #4, I think it’s an interesting picture showing that we now have a global position that makes us in a position where we actually can counteract ups and downs in the different markets and thereby, despite we have lower than usual development for instance in Europe and South America, compensate that with other markets and posting a 10% increase coming from the SEK 70 billion up to the SEK 77 billion.
And that also is reflected on the right-hand side of the picture, where you can see North America, Western Europe and Asia now 24.9% and 25% of the business, which is balancing out throughout the globe. And I think this is a strength in the Volvo Group today, but we do have this geographical region and also, have the geographical distribution.
On Page #5, we then highlight some of the balance sheet items. And we can see then on the operating cash flow, we see we have a normal seasonal minus SEK 4.9 billion in operating cash flow, creating a 12 month rolling of SEK 13.2 billion. And I also would like to highlight in the middle there, the cash conversion cycle, that’s for first time ever in the Volvo Group is below the 20 days, recorded this quarter at 19 days. So there’s a lot of good work that has been done in order to ensure that we can grow our business organically with a very high cash efficiency.
The return on capital moved up from 24% to 28%, a sound and solid development there. And if you look at net debt to equity we recorded 27%, including the pensions liability. And if you take out those, we are on 22%. So good news and I think a strengthening of the balance sheet, giving that we are talking about the first quarter.
If we then move into Trucks and take Page #6. We can see that we have a solid growth from SEK 45 billion to SEK 49 billion and we are now again, above the SEK 203 billion in terms of 12 months rolling. And I would say that the development of the sales in the quarter corresponds very much with the indications that we gave when we gave the full year market outlook in Q4, that the European market is coming down somewhat lower than we perhaps anticipated and I will come back to that. The North American, steady growth, with 42% and then, South America also being impacted by the switch over between the Euro III and the Euro V as we have said.
Other markets that are worth mentioning, up to 35% here we talk about Africa and Australia in particular. So all in all, I would say that our growth in terms of sales has followed very much the market development that we predicted in Q4.
If we then look at Trucks’ profitability, we can definitely conclude that the leverage is not where it should be. We have an operating leverage on – if you exclude the currency effects of minus 20%, there are a number of – and also, I would say, excluding the nonrecurring items and there are a number of explanations to that.
One is of course, the market mix moving out of the Europe – or having Europe and South America on the lower level and then, having the growth in North America, which we don’t have lower margins in. But we also have an effect on the fact that the industrial systems, both in Europe and in South America, due to the slowdown we initiated end of last year and also in the first quarter, has of course less coverage over the fixed cost and then it had the year before.
But whatever and however, this is a situation that we, over time, need to address and that’s one of the key issues I’ve talked to you so many times about, the leverage on both on the top end on the volumes, but also the leverage when it comes to the different market and the market compositions, that we over time need to be more neutral in the way the market’s impacting our leverage and profitability and to do something. As high up on there again and is something we work on but I also, want to stress that this is not a Monday, Friday fix, this is of course, where you have to work through a number of items in order to make that happen.
If we then move to Page 8 and look at our orders, I think that we have been on the sequential side quarter-over-quarter plus 5% and starting with Europe there, I think 23,416 order intake into Q1, on a sequential basis plus 19% and a book-to-bill ratio of 117%. This has meant that we for some models, particular in the Renault System is starting to get a little bit too long delivery times and therefore, we have decided to put up a system and put up the production rate in the Renault Systems, somewhat in order to cope with that increased demand.
In North America, we are basically in line. You can see 107% book-to-bill. I think in that respect, we have now a balanced production system in North America. You might have seen that we do have a couple of stopped weeks in US during the spring. I just want to emphasize that this was planned since long, this is normal maintenance, we need to do certain things also when it comes to improving efficiency and those kind of things. So that those stopped weeks has been in the plan since before. So in North America, a balanced demand and output situation, I would say.
In South America, you have the 109%, which is impacted by the fact that we do have a situation or did have in the Q1, where we did have a one week longer closing time in the beginning of the year and that meant also that the book-to-bill ratio then has moved during the quarter. So we will, in order to make sure that we don’t bill any inventory, have a somewhat reduced production during the spring time here in order to have the inventory level in line with the demand coming forward. And I will come back to the Brazilian market a little bit more in detail later on.
So all in all, with those small adjustments, I would say, in Europe up a little bit on production rates on the Renault side. In North America, we do see that we have a good balance. We are doing slight adjustments during the spring time in Brazil. But with those adjustments, I would say, that we have a good balanced output versus market demand and that’s of course, something we really follow now very carefully and making sure that that is continuing.
Moving down to the market and the market forecast for 2012. As we can see, we are keeping our North American forecast on 250,000 and we do see some hesitation with our customers due to the fact that diesel prices are on the level they are. On the other hand, that makes of course, the business case even more appealing to shift over to our more fuel efficient products with our own engines and our own gearbox. And basically when we put everything together, also the input from how our customers are doing in terms of financial, the freight volumes and so and so forth, we feel the market is then pacing towards this 250,000 for the full year.
In Europe, we have increased the forecast from 220,000 to 230,000 and by doing that, we indicating then the fact that we have and there are mainly three areas. One is of course, our own order intake, which we are looking at. The second is that, we feel that the market did come down as expected, it did stabilize as expected, but it did stabilize on a slightly higher level than we anticipated in – when we did the last forecast.
Then on top of that, we also see and I was feeling that at back end of the year, we probably will see some of our customers then starting to looking for a renew of the fleet and thereby, also driving some sort of a replacement demand coming at the back end of the year. So putting all these facts together, we call the market then at 230, 000 instead of 220,000.
In Brazil, we have as expected, seen a rather messy first quarter with a transition from Euro III to Euro V. We had the overhang of Euro III vehicles coming into the market, we did see the infrastructure build up issues as we talked about, getting urea in place and so on and so forth, then I was pretty much – with pretty much what we expected.
There are – we’re now working through the Euro III vehicles that are coming out in the market. I think that we are looking at this quarter before everything is out in the market. And on the positive side, we see that the spare parts are – the spare part volumes are really high. We do see that incentives that the Brazilian government put in place will drive the market. So even though we had a messy first quarter, we believe that we will then move on and having a stabilizing in the market and therefore, we call it 105,000, which is then unchanged forecast as since before.
I just want to end this relation here – also mention that for us, we don’t have any Euro III in inventory to the outer market. So we are now selling only Euro V into the market.
In Japan, reconstruction after the tsunami and the earthquake, is building up demand and we see that the development is approximately what we are estimated last time. So we keep that one unchanged. So basically, nuances to the different markets, but we keep our forecast, except from Europe where we’ve done – top to off with another 10,000 units to 230,000.
Leaving Trucks and moving into Volvo CE and looking at the sales. I think that we have managed to create a good stage momentum. It’s driven by North America and we also then have maintained our volumes in China. So we are now running on a 12 month, SEK 66 billion turnover for CE and we can see on the right-hand side of the picture that the – we have growth all over and I think in particular, I would like to stress out that we managed to keep the edge of all, the main including China, in positive territory, despite that the China volume has decreased with 25%.
In total, you can say that CE has managed to have a flat development year-over-year, both in terms of volumes in China, but also in terms of profitability. Leaving of course, the fact since the market went down with 25% and made your market share gain in China, which is very, very positive to see and I think the CE team has done a great job there.
Also, I would say that the growth in North America, 111%, which is higher than market in general. Then one explanation to that is of course, that we have been very active and in a good position in North America, but we should also remember that in the fast build up in North America, which was happening last year, when the volumes started to come, we had some issues during end of last year to actually provide the North America with enough of machines. Those machines now are coming floating into North America, which means we have a little bit of a catch-up effect in North America in terms of the volumes. But very nice numbers with 111% growth there, that’s for sure.
In terms of margins for CE and that is Page #11. You can see that we done moving from the SEK 1.8 billion to SEK 2.1 billion and the margin from 11.4% to 11.8%, leaving and excluding currency leverage of 12%. And I must say that I’m – I think that is a good development, it’s due to good price management in China. As I said, we have managed to keep the profitability, despite the market situation. But that’s not – it’s also a positive sign that the CE has managed to shift them, because you could see in the previous numbers of North America, growing as it has and still be able to create those kind of numbers. I think that’s good. So it’s also price management, but it is also good cost control in CE.
Moving into Page #12, we see the market slides and the biggest change here is of course, that we have revised our forecast 2012 for China from plus minus 0% to minus 15% to minus 25%. Two reasons for that. One reason is and I’ve told you all the time, that in order to get to the plus minus 0%, we needed to see a reasonable spring season.
That spring season has come in lower than we expected and it means that the catch up on the autumn season comparable numbers will be very difficult. So therefore, we have stated that that’s one part of it. Another part of it is of course, also that we probably underestimated our ability to take market shares when we were out and asking our dealers and our customers on the market scenario going forward, which basically so far in Q1, they have managed to keep a flat, market situation.
When it comes to Asia, excluding China, we have done a revision downwards as well, 0% to 10% coming from 10% to 20%. And here it’s mainly two markets, it’s India and in South Korea, that is having a little bit of an uphill battle compared to what we expected before. And apart from that, we have unchanged market development in both Europe, North America and South America.
Moving into Page #13 and give you a quick update on the re-organization status after 180 days. Of course the focus has been very much on the processes and structures and as you can see there on the slide, that we have done a lot of things with new senior management teams in place. If you look at all the new managers, we’re up to almost 400, 40 new management – manager appointed. Almost all of them are internal Volvo managers, which I think is a big strength.
And we also looked through the whole governance process and our decision bodies and we have – we are in the process of reducing those substantially. And we’re talking about a reduction of up to 60% of the decision bodies. And all that we do in order to ensure that we get higher efficiency, higher pace in our decision process. We have also put the process ownership and governance is now defined and in operation.
And finally, we also got the new financial steering model implemented, where we now keep management accounted for the same type of targets that we do have on the financial targets externally. Meaning we’re looking at operating margin, meaning that we are looking at competitors and that we focus on the growth in the same way. So we now have a good alignment between the external financial targets into our strategies and then, into our incentive models throughout the company.
On Page #14, we are talking about the customer offering and here, we have this very substantial work and project that we are running, the brand segmentation, which I’ve talked to you a number of times. This is the project where we really go through each and every brand, each and every market, each and every segment, each and every product and see how can be better utilize the brand, looking at it as a total group asset. And it’s well under way, it’s doing great headways and we will be finished with this in Q4 according to the timeline.
We have also moved ahead on the new Asian product that I’ve talked to you about and we have now product plans in place and under implementation for trucks, buses and construction equipment. And this is of course, a (audio gap) comes to utilizing the group’s full potentials. I’ve talked to you before about the detailed mapping.
With the new structure in place and all managers in place, we can now take this to the next level, meaning that the task for this new management in the group is to go through all the opportunities starting from the safe line going through the different lines in profit and loss and see what they can find within their organization, see what we can find in terms of cross-functional work and process efficiency improvements and have all those activity plans ready in Q3.
And thereby, we’re following very much the timeline as you can see in the bottom of slides when we’ve done, looking at the quarter-by-quarter implementation, design and prepare implement and just to follow-up and then, looking at the activity plans and start to implement that from Q3 onward.
So the re-organization, the new way of working, is following the plan, it’s a huge amount of activities but we are now set to read cornerstones and the foundations within the organization. And now, we’re looking for all these activity plans and actions that we need to do in order to utilizing the full potential and address many issues among those for instance, our sensitivity to geographic and market mix going forward.
So with that, I would like to stop there and open up for questions from you, if you have any.
(Operator Instructions) We have a question from Ms. Laura Lembke from Morgan Stanley . Please go ahead, ma’am.
Laura Lembke – Morgan Stanley
Yeah. Good afternoon. I actually just have two follow-up questions from this morning .The first one is regarding the outlook on Brazil, and apologies if I maybe missed part of the presentation here. But you actually kept your absolute volume forecast unchanged versus Q4.
But since then, of course, we have the extension of the (inaudible) program. So I’m just wondering if we should infer from that that the underlying market performance that you’re seeing right now is actually worse than you had expected or is it more that you just – that you do actually see the upside to that number, but it is maybe a little bit too early to say here. And then secondly, I was wondering if you could give us an update on the level of regional capacity utilization both in construction and equipment and for the trucks, please. Thank you.
Well, if I start with the capacity utilization, we don’t normally give that. I mean, what I can say and then what I said in the presentation is that we do feel that we have a good balanced output versus demand in the different regions and that we have a very high focus on that connected to the flexibility that we have in our production systems. When we talk about the capacity per se, it is, of course, very difficult to say because we have assembly capacity of ships and all of that. But I think what we focus on very much right now is that we both want to see and on the truck side is that the output that we do is well-balanced with the demand we see coming forward.
When it comes to Brazil, I mean we are – and we do see that we have the so-called messy quarter and we also see that we do have some Euro III coming into the second quarter, and we think we need to get through the second quarter before all of these are done.
But in general, I’ll say that we will then get this sorted out. And basically if we add everything together that we see right now, both on the GDP growth during the year which has been sequential coming into the year; the customer’s profitability, the spare parts and all the other issues we’re talking about, we come to that we are plus, minus the 200 and as/or if the forecast that we do have.
Laura Lembke – Morgan Stanley
Okay. Can I just ask a quick follow-up on this? Are you worried at all, are you hearing from your customers about a lack of availability of the required fuel quality in Brazil? And maybe also, I think you are one of the first to really introduce or start selling Euro V trucks, and I think you mentioned earlier in the year that actually the prices you were getting on these trucks, the price realization was very good. I’m just wondering how has that developed since all of the OEMs are basically now starting to offer Euro V trucks. How is the pricing here going forward?
Well, if we start with the fuel and the fuel quality and also the urea, we said that we would have the first quarter going through there and there would be. But I must say, and I’m looking to – I haven’t heard anything coming back from the market that that should be a major problem or anything that limiting things and I don’t have an idea of any more updated information, Christer.
We actually expect the build of availability of low-sulfur diesel to increase quite a lot in the next few months as the population of Euro V trucks is building up out in the market. And when it comes to pricing, I would say that it’s roughly stable. It was a bit more pressure in the beginning of this year as the more competitors started selling Euro V, but I would say it’s stabilizing.
Laura Lembke – Morgan Stanley
Okay. Okay. Thank you.
Next question comes from Mr. Nico Dil from JP Morgan. Please go ahead, sir.
Nico Dil – JP Morgan
Good afternoon, gentlemen. I’d like to ask three questions, please. The first question is around the production sequentially both in Brazil as well as in the US whether it’s moving up, sideways or down. The question is a little bit around the outlook statement that you put in the front page of your press release this morning where you highlight a Brazilian production will be adjusted in May and June. Given that January was already so low, wondering whether sequentially the production is moving up on a quarterly basis, sort of, for the US and Brazil or what direction we’re moving there.
Second question is around your ability to cut costs. Effectively, I’d like to know which areas you’re thinking about when you’re thinking about cuttings costs going forward in your reorganization plan as well as the number of decision bodies that you highlight will be reduced by about 60%, wonder where you are in that process. And the last question is around the North American Construction Equipment increase of about 110%. Is the current absolute level sustainable here, or was there something that was, perhaps, slightly abnormal in the quarter?
If we take the production sequentials, you can say that US is moving sideways in terms of the sequentiality. And Brazil, as we said then, is moving down basically and that we have a few stopped in order to making sure that we are not building anything in excess of the market wants to have and that is from March, you can say.
On the cost-cutting side, and I’ve said this before, is that the task that the management have and that the activities that are now ongoing is to leave no stone unturned. And that means that they have to look into all kinds of costs, both short term and long term, both direct cost, indirect cost, but also looking into what activities do we need in order to get a smoother, faster sort of working processes in place.
So that’s a wide scope, and we are looking through each and every cost in the profit and loss and some of these are more obvious, straightforward. If you look at the double work and double functions and so on and so forth, they are more long term which we have to address over time, and I don’t want to speculate on where and how and this will turn out. I have this management principle that the people who will deliver on this also need to have a good chance of actually coming up with the ideas themselves because they have to then deliver on this going forward and that’s the principle I’m going to stick to and that means that all this has to be ready during quarter three.
The decision body, we have identified them. Some of those has been closed out already in the old structure, and we will take the next step now basically starting from beginning of May. So we will very soon be up and running with this 60% lower decision a fewer decision what is done than we have before and that’s going to be a part of the much higher rhythm that we have in the company right now with a weaker rhythm of management teams is now also supported with much fewer decision projects. So that’s an efficiency and improvement in decision making and so on and so forth.
On the VCI, I said in my presentation and that is the fact that we did have issues of actually supporting the fast growth of the US market during the fourth quarter last year, lacking machines, because as you know, we imported a lot of machines coming into US on the compact side and so on and so forth. So now we have corrected that and that means, of course, that our growth is, to a certain extent, a catch-up effect compared to the marketing in general.
Nico Dil – JP Morgan
Next question comes from Frederic Stahl from UBS. Please go ahead, sir.
Frederic Stahl – UBS
Hi, good afternoon. It’s Frederic here again. I just want to come back to you to trucks and I was wondering, I know it’s difficult for you to comment on profitability et cetera. But let’s say I have a list of things that I think can boost group profitability, a meaningful well way over the next few years. Is it still fair to keep duty truck on that list. Is it still a source of potential improvement and profitability there?
And then secondly, if I can ask you, maybe you can give us some color on Volvo Rents. I think it’s both construction equipment and trucks, maybe a bit on how big that business is now and where you want to take that? Thank you.
Okay. I have a, as you understand internally, a list of different issues that we’re going to address and on mileage duty trucks is definitely there.
Frederic Stahl – UBS
When it comes to the Volvo Rents and having that as an outlet and also a good piece to supplement the, particular, the smaller machines in US, we do have it under development. The development of that in the future, we will have to see. I mean, we take it case by case. We need to make sure that we are building a business that is sustainable, a business that we get profitability and a business that makes, really, what we want to do and that is to combine the outlet of the Rents business in US together with the supply of, in particular, the smaller machines.
So I would say that one is developing, and I’m pleased what I see so far. We are strengthening our positioning, and we are adding stores to the market and we are basically now come to a size when we are having 125 stores. And that’s also what I would consider being a critical mass in order to develop this business in a good way. But we are cautious. We take this step by step in making sure that we don’t sort of expand too fast and expanding markets we don’t want to be. So we take it case by case and quarter by quarter to see how we develop that one. Rents in Trucks, I’m not sure what you mean with that.
Frederic Stahl – UBS
Just that you see, at least (inaudible), you see heat of Volvo, or the heat from Volvo, you have a Rental business in Sweden and Europe, I think.
Frederic Stahl – UBS
Maybe that’s all part of the Leasing business, I’m not sure.
No, it’s not and it’s a very small business we have.
Frederic Stahl – UBS
Okay. Thank you.
Next question comes from Mr. Sébastien Gruter from Société Générale. Please go ahead, sir.
Sébastien Gruter – Société Générale
Good afternoon, gentlemen. Two questions, if I may. The first one is on Truck. Maybe you could help us understand the year-on-year margin decline and how much is driven by (inaudible), how much is driven by lower production rates in that time in Europe.
The second question is on construction equipment. First in the US market, I just like to understand a bit more the performance, follow-up to Nico questions. And if we do (inaudible) your US competitors actually shows also a very strong performance in Q1, but also show, the data shows, that a doubling of the inventory of dealers. I would like to know if you should expand on the same trend in the US and in China, more as the same question, were there any significant change in your dealer inventories in Q1 versus Q4? Thank you.
Okay. I don’t think, I’m looking at Christer, but I don’t we do any split-up in terms of the mix issue, how much is done geographical and how much is absorption of fixed cost. I think we conclude that these two factors are playing a major role in explaining the decline and the lack of leverage that we have seen.
When it comes to CE, I haven’t got any reports and I have got a lot of reports but I haven’t got any one where it actually indicates that we would have any dealer thing. Here I think we are in a situation where we still are rebuilding up the rental fleets that you do have in our dealers and that we have seen for a while that those machines have grown in age and that needs to be replaced and that is actually what is happening.
If you look at the larger machines, we then did have a shortage of that and we have been catching up. So inventory, it’s in good levels. We haven’t seen any issues there. The same goes with CE in China. We are very, very absorbed with is, you can understand, in China and dealers side to make sure that would don’t oversupply the machines into the market because that the worst thing you can do in this kind of market. You really have to live on your successes on actually getting the machines out from the dealers to the customers, and that’s what we’re doing. And so far, so good, both in terms of inventory level in US and also in China.
Sébastien Gruter – Société Générale
Thank you. Very clear.
Next question comes from (inaudible) from Exane. Please go ahead, sir.
Yes, hello. Thank you for taking my question. We heard some comments from one of your competitors regarding a tough pricing environment in Q1 in Europe. I was wondering if you give some color in that and if you could also share your view about what the current pricing situation is and how you see it developing in the coming quarters. Thank you.
I think, Chris do you have the latest update on that?
I assume you’re referring to Trucks?
Yeah, well you can say, I would say prices are stable. We saw a positive price realization up through the third quarter of last year and, since then, I would say it’s been stabilized on those levels.
Okay, and in the coming quarters what’s your view on pricing? Do you see it still stable or any room for improvement?
That I think we still – we have to wait and see. But my understanding is that all manufacturers have taken the appropriate actions to balance production with demand. So but we will have to see.
Okay. Thank you.
Next question comes from Mr. Ben Maslen from Merrill Lynch. Please go ahead, sir.
Benjamin Maslen – Merrill Lynch
Yeah. Good afternoon, everybody. Just one question please, on the Chinese construction equipment market. You don’t really infer much pick-up in year-on-year terms in your new guidance. You’ve done a very good job on market share and pricing so far this year. Can you talk a little bit about how you expect the competitive environment to develop if volumes remain fairly depressed? I know there’s new capacity coming into the industry in terms of pricing or use of financing what you would expect going forward. And then secondly, kind of related to that, how do you plan to maintain the level of outperformance that you’ve shown so far? Thank you.
Okay. I mean, first of all, I think you have to split the market into two and that is on the wheel order side and on the excavator side, and then as you know, we are a major player in both of these segments. And on the wheel order side, we have a different market development in total which has hold up better. Last year for instance, it was actually flattish where the big drop was in on the excavator side.
But coming back to your point, it is a – and there’s two things. One, of course, is that the Chinese market has been very competitive also during this extreme build-up phase that we have seen. We shouldn’t forget that if you look at the number of players, the ambitions the players have had over the last couple of years, has, of course, created a very competitive market which, I think, we have handled very well. And I foresee that also in the future it would be very competitive, and I think we have a good model where we then have a dealer network that is dealing with our customers in a good way and making sure that we are progressing in that.
Then you can also say when it comes to extra capacity, this might be a little bit of a cooling-off effect for the plants because what you have talked about and what we have seen, not you, but what the market has talked about and if you look at the announcements we have seen, there’s a lot of plans to put new capacity particularly in the excavator side. This development that we see now make those (audio gap) there might be a cooling off effect for a lot of people to actually answering to that market or do it on a lower level.
And finally, I just want to also stress that the numbers that we see in the different releases, at least what I can read out of them, are the maximum assembly capacity that we do see and that is, of course, to that you need also to connect the components. How and where should we get the components from? And there, we have a good position, of course, with our worldwide global network of component supply, the hydraulics and other.
So it is, and I don’t want to play down, it is something we follow very carefully. I just want to give a little bit of a flavor to it. And when it comes to how we’re going to proceed into the future, I think the first quarter show that we do have a good model. We do have the dual brand strategy. We do have the investments in our dealer network, and I also believe that we do have the right product price and features to the right levels.
So for me, it’s very much to keep on continuing what we’re doing, making sure that the confidence that this first quarter gave us is going on into the next quarters to come as well, but also being humbled that this is a tough market.
But I could also add to that that when it comes to the financing side of the house in China, that is also developing well and is stable when it comes to how we do the financing and how we do set up the down payment and the lines of the financing that we do have. So all in all, I must say that I think that the Chinese team and the CE team has done a great job in balancing this very difficult situation.
Benjamin Maslen – Merrill Lynch
Great. Thank you very much.
Okay, if there were no other questions, operator or...
There are no further questions at this time. Please go ahead.
Okay. Then I would like to thank you very much for participating in this conference call, and we will then be back again presenting the second quarter in a few months’ time. So thank you very much, and have a good day.
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