Olof Persson - President & CEO
Anders Osberg - EVP, Finance & Business Support & CFO
Christer Johansson - Head, IR
Nico Dil - JPMorgan
Christer Magnergård - DNB
Fredric Stahl - UBS
Michael Tyndall - Barclays
Peter Reilly - Deutsche Bank
Fraser Hill - Bank of America Merrill Lynch
AB Volvo (VOLVY.PK) Q2 2012 Earnings Call July 24, 2012 8:30 AM ET
Thank you very much operator and a warm welcome, good morning, good afternoon to all of you to this telephone conference for the second quarter for the Volvo Group result. With me here in the room I have Anders Osberg, the CFO and Christer Johansson, Head of IR, them being able of supporting and answering questions that you might have. We have had the presentation this morning, a press conference and also the presentation has been available together with a report on the net for quite sometime. So I was contemplating on actually focus my discussion here on the market situation both with trucks and Volvo CE and then open up for a slightly longer period of time for questions later on.
So if you would like to follow me to page number 10, which is of course slowing order intake in North America and South Europe, I would like to elaborate a little bit about order intake and the order intake situation and how we look at it.
In order to explain and also to cast some more light on the situation, we have opened out the disclosure a little bit more than normal, also then, in Europe and North America splitted by brand.
And if we start with Europe, we can see that the year-over-year minus 13% and quarter-over-quarter minus 8%. Looking at Volvo brand, you can see that we actually have had a good period with an increase of 3% and 2% year-over-year and quarter-over-quarter and that we have a very stable book-to-bill ratio of 100%. On the Renault side, Renault is of course affected by the slowdown in the southern part of Europe which is normally a stronghold but also of course that we now see the uncertainty moving into France as a market as well. However in the 25% which you remember that we also have the light commercial vehicles which are vehicles that we are then buying from Renault SA and Nissan and if you take those away, the year-over-year number would be around 20%. As you also know we have had a production cut in Renault in the beginning of the year.
That one was actually a little bit too severe, so we have during the quarter increased our production rate in Renault, where we are now running at a book-to-bill ratio of 91% there. In Europe we are looking at slightly increased the production rates in Russia now in Q3 and in our plans we are also looking at a slight increase in production in the Swedish system during Q4.
In North America you can see that the numbers are minus 47 and minus 41. We should remember however that the comparison numbers year-over-year, minus 47 is very tough comparison numbers. If you remember we had a period in North America where the order intake rates actually were running if I remember correctly above $300,000 on an annualized basis. So the comparison numbers in North America is very tough, that goes both year-over-year and also if you look quarter-over-quarter where we had a good order intake in the first quarter particularly on the Mack side based on a delivery stocking program that we had in Q1 and that also drove the good orders in Q1 to a large extent. Now if you look at the, we have also added on the information about a year to date which you can see below the table both from Mack and Volvo, where you can see for the Volvo side we have a minus 18% and a book-to-bill of 98% and on the Mack side equivalent numbers of minus 20% and book-to-bill 64.
Now looking at North America and the activities we are doing is that we are of course making sure that we are balancing the production with the demand and therefore we have planned to have a number of stock weeks during the autumn in order to make sure that we align our dealer inventory and our inventory in general and the whole pipeline should be in balance.
In South America you can see that we have year-over-year minus 7%, but quarter over quarter we actually have an uptick with 10% and a very healthy book-to-bill of 112 and we are also there balancing our production with down weeks and also we've taking decisions of making sure that we have a production rate in Q3 that is adapted to demand that we see going forward and apart from that in the other markets you can see that we have some ups or downs also in other markets and in Asia, but in general we have a I would say a situation where we do have in US a very tough comparison from last year, in Europe you have a split between Volvo and Renault and those makes up to the numbers that you see at the bottom in there. But in general, we have had a good balance in our production system throughout Q1 and Q2 and we continue to keep a very close eye on the order intake to make sure that we will continue to have the balancing both up and down.
If you then follow me to page 11, this slide is there also to reiterate the fact that we have become much better after the crisis in 2008 to actually managing and adapting our deliveries and production in line with our orders and you can see since 2009 basically we have followed and had a rather good correlation between orders and deliveries throughout the period.
If we then move in to page number 12, I would like to spend a few minutes on the market and the market estimates that we have published today. We can see that if we start from the top to North America, 250,000 and we keep that unchanged and here it is plus and minuses in the focus. Of course, on the plus side, I want to say that we do still have a replacement need in the US market, where the second hand value of the old trucks combined with the higher fuel efficiency on the new US contracts makes it a very good business case to transfer from an old truck to a new one.
We also have good profitability with our customers and freight volumes that are keeping up in a good way. We also have a relatively high retail activity. If you would take the second quarter annualized volumes, we’re looking at around 270,000 trucks on the retail side and if we add on top of that, we also have a good and double-digit growth in our spare parts showing that these leads up there are actually moving. So that’s on a positive side. On the minus side, we definitely have the macroeconomic uncertainty and a wait-and-see attitude that we have seen from our dealers and in the market in general. Of course the order intake in Q2 had an annualized pace on the 180 to be compared with the 270 we see in the retail and of course you understand that 250,000 forecast that we’re keeping unchanged means of course that we have to see order intake as starting to come during the autumn here.
But if we add all this plus and minuses together, we then come to the conclusion and feel what we can see today comfortable with our forecast of 250,000. Europe, we keep unchanged on 230,000. We do have a market that's developing approximately the way we anticipated and we have said before that we believe that at the backend of this year, we will see some higher activities on the replacement cycle from the customers that now start to think about renewing the fleet and also having that done ahead of the Euro VI introduction beginning in 2014.
In Brazil, we have decided to lower the forecast for the heavy-duty truck market from 105 to 90 namely driven by macroeconomics and the GDP development in Brazil which has been lower than anticipated during the first half year here. Now of course we have incentives coming into the Brazilian market and we will have to see how that will affect, but we don’t believe that it will compensate it from the lower than anticipated volumes that we have seen in the first quarter. We also of course have had a dampening effect on the fact that we had a renewal of the fleet with high volumes during 2011.
In Japan, it might seem like a cautious unchanged 30,000 given the fact that the pace has been higher than that during the first half year, but here we see that some of that has been incentive driven and those incentives are fading out and therefore we believe that even though the reconstruction work after the tsunami and the earthquake is ongoing, we don’t believe that the pace will be holding up for the full year and therefore we have kept the Japan market unchanged on 30,000 units.
And if we then move on to page number 15, to follow me to page 15 and I am commenting on the market situation for construction equipment. We have kept the China market unchanged and Asia excluding China also unchanged and basically the only change we have done since the last quarter is Europe which we had up 10% to 20% before and given the fact that we see this uncertainty and also not only in the Southern part of Europe, but also now spreading into France. We do see also there that the forecast for Europe is being now more or less flat compared to last year.
Otherwise we keep the forecast as they were last year. So moving on to page number -- sorry for that number 19 which is then the summary. I would like to state that I truly believe that we have delivered a very solid second quarter where we despite the macroeconomics and the market situation that we have seen, have had record signs of SEK 84 billion which is actually the best second quarter ever in our company’s history. And that is a good receipt I think on our globalization and our presence around the world giving us a good balancing power when some markets goes up and other goes down that we then can balance and still be able to grow in a nice way.
Also the operating income per se, SEK 7.3 billion is the second best quarter when you look at the absolute number and given the fact that I believe that most of the business area has done a very good job in coming in with good margins. Both Aero, Penta and for us in particular, CE has shown a strong development in the quarter coming in on a 13.3% operating margin. The one in the business area that is a little bit fallen behind is buses and just want to mention that the buses do have a very difficult market situation. We ship the buses down in Europe, ship the buses down in US and set the buses not recovering from the Euro III Euro V switchover in Brazil, it's basically the markets in Asia that is still showing some growth and good development.
And in this market condition it is of course very difficult, but on the other hand we also have to see to that buses over time can expect to reasonable profitability levels supporting investments that we need to do in that business area going forward.
So all-in-all a quarter that confirms our global position, confirms the profitability and also I would say that looking at the track profitability you can look it from two sides, one is of course the fact that the numbers that we present are very strong and given the fact that we have a market shift in the truck business with a reduction in Europe and South America and growth in Japan and in North America, an [8%] margin is actually a very strong performance.
On the other hand, you can twist it around a little bit and also look at it that we are still suffering from mixed changes in our result and the leverage on the extra volume that we are getting in those kind of situations are not satisfactory. And this is of course exactly what we are addressing in the reorganization and new way of working our brand position work, our full potential activity list and so on and so forth and that is being addressed as we speak.
And as I said before, we will have the activity list of those actions and activities ready by or by end of Q3. So with that I would like to conclude the somewhat shorter than normal presentation and giving some more time for questions as we think and elaborate on them. So operator could you please open up for questions.
(Operator Instructions) Our first question comes from Mr. Nico Dil from JPMorgan.
Nico Dil - JPMorgan
I would like to ask three follow-up questions from this morning. First of all on the US truck market, it seemed as if a compared to other competitors of yours you had a fantastic Q1 and development which seems to be bit worse than the other just sequentially in the US truck market.
I am just trying to get a bit of a flavor how the development went through the quarter. So can you tell us whether there was perhaps sort of something that needs to be upset because there was something too high in the first quarter? Just like to get a bit of further flavor how you were trending out of the quarter versus the quarter itself?
Secondly on Europe, we are seeing a decline in activity here sequentially while Scania was also up wondering why there is such a difference, So Scania was up 12% sequentially I believe in Europe and you are down 8%.
I was wondering whether you can explain a little bit further and how again you came out of that quarter. On Brazil actually two quick things, when did you see the subsidy coming through to your orders? And secondly the pricing, has the pricing stabilized perhaps if you've actually seen sort of a little bit of increase in the prices yet on the Euro V versus the Euro III.
Okay. Let me take the last question and then I leave it with Chris do you might be able to elaborate on the markets there both in Europe and US. When it comes to the pricing in Brazil, we have had of course an introduction on the Euro V that has been from a pricing point of view as all introductions and somewhat tougher than normal, but we do have a plan and we do have an activity list.
Now when the Euro III trucks are sold and being out of inventory and then by we can start to really push that forward. So I think we have a good traction on our pricing. We do have a plan and we do follow it.
The other part of your question about Brazil, about the subsidies and where that coming, we don’t know that yet really to be quite honest. Of course, we can say that in general, we have seen that the market response to incentives but we would have to wait and see how those incentives are panning out in the market. But what we do say is that it is, it will not probably not be enough to compensate and come back to our previous forecast. Therefore, we lowered the forecast somewhat. So Chris, if you could elaborate on the US truck market and the European ones?
On the US order intake, you could say we had a very good March as we were going through with some stocking programs especially on the Mack side and of course that we pulled forward some demand from April into March and since then I would say we’ve been stable through the rest of the quarter.
And In fact, actually a bit likewise you made a comparison, just call me up, I haven’t checked, we compared just going into the first quarter but I know we had, especially on the renewal side in Europe, a good order intake even in the first quarter.
So we might have some tougher comparison basis versus them but I haven’t done the analysis but that’s at least to what has happened that we had a good order intake in the first quarter and then it slowed down in the second quarter.
Nico Dil - JPMorgan
Question on Europe itself, are you still on the declining trend or are we stabilizing or what have you roughly seen there?
Well I would say it seems to be a bit stable roughly, but given the uncertainty you are having in the macroeconomic situation, things can fluctuate and we have now come into the vacation period which means that it’s difficult to read the data and have a lot of confidence in the data in the order intake that we see now coming through.
Our next question comes from Mr. Christer Magnergård from DNB Please go ahead, sir.
Christer Magnergård - DNB
Two questions, first one relates to I am just trying to get a better understanding for the construction equipment development in North America where you clearly outperformed the market again. I was wondering how much of that is due to that you are investing in your own rental channel and if not what else are the drivers behind that?
Secondly, also if you can comment on R&D costs, how you think those will develop going forward?
It is not really construction equipment the impact of our own buildup of the rental fleet is not very much. The big part here is of course that we do see a buildup of the rental fleets by our dealers and customers.
We do see also an increased activity level somewhat on the construction side and on the commercial housing side or the commercial side; various housing is still on low side. So I think we are happy with the growth that we have seen and both the 100 I think it was 110% last quarter and 89% this quarter coming in here. So good performance I think from our side here. And then sorry now you need to help me on the ---
Yeah there was R&D and going forward. Well, when it comes to the R&D there are two things one is of course that we do invest and we show that on the press conference in terms of when Anders talked on the cash flow side. We do invest in our future products and in the markets and we are going to continue that doing that and I don’t think and I am looking and I don’t think we give any particular guidance on that. We do have the Euro 6 development you know that and apart from that you do continue to invest in products and market and so going forward.
I think it's fair to say that it will continue to run on these levels through the year at least.
Christer Magnergård - DNB
And just a follow-up on construction equipment, that the buildup in the rental channel for your dealers, you would see that there is one up or doing you think they will continue with this pace of investments and secondly, also you ranked the truck division in terms of profitability by area this morning, is it possible to do similar exercise for the construction equipment division as well?
On the profitability side you mean, let's start with the market. I think that we have a definitely a catch-up we expect during the year when it comes to building up rental fleet and exchange because you know that the US market goes down for a quite some time and of course the ageing fleet needs to replaced and that we have seen being done and is being done as we speak.
Then you have of course the other side of the equation that is activity level and therefore the eventual growth of the number of total machines. There is it’s difficult to say right now how much and how long that would be, but I think we sort of stopped by giving the forecast on the total market this year which is updated to 15% to 25% and then we will have to see how that is panning out in terms of volume growing into next year.
Christer Magnergård - DNB
And profitability by region; I know that you don't give that, but if ballpark which areas are more profitable for the moment and what do you have….
It is a little bit -- I would like to point out that for instance the US side of the market is very much dependent on the US dollar as you know in terms of exchange rate and prices and that's something that is we are also trying to build ourselves away.
I have said very clearly that China being such a big portion indices, construction of course with those kind of profitability levels that you see that there is no doubt that China needs to contribute to that in a very good way. So that's also something we do. And other than I think that we don't have the same kind of ranking indices working on a more I would say even level in the different regions than perhaps you would say in the truck business. So it’s little less of a fluctuation of the number between the regions.
Our next question comes from Mr. Fredric Stahl from UBS. Please go ahead sir.
Fredric Stahl - UBS
Could you maybe educate me a bit about Financial Services and you know why the customer receivables in Financial Services went up as much as they did in the quarter; I think that’s 8 billion in Q2; that would be question number one.
And then the question number two is on Brazil and the production cuts there, does that actually reflect a weaker outlook from the current levels or the fact that you stopped yourself too optimistic i.e. demand remains the same, but you expected it to be better in the coming quarters. How should we think about that?
I think when it comes to Brazil, this is of course something that we are taking a look at all the time in order to make sure that we’re not over-producing and you know, our visibility is in the two to three months that’s what we see in terms of the orders and the deliveries coming in. So in general this kind of activities we do should be regarded as sort of panning out and also adjustments in order to continue the good balance in the production systems we have.
And another equation to that is of course also where do we stand with the inventories and that’s what we’re focused very much as well on that. So it’s a mix of everything; but in general you can say that we’re continuously doing this based on our horizon or view that we do have, which is two to three months. And when it comes to the Financial Services, to Anders.
Yeah, I think I would have to come back to you Fredric on the details. It’s primarily related to the growth of the credit portfolio and to the growth of the Volvo rents that we have in the US. And if you keep in mind that we’re actually, we are running the financing operation with 8% equity. So from a cash point of view, you’ll find that further down in the cash flow statement.
Fredric Stahl - UBS
Yeah maybe we can take and I am curious, maybe we can take that at a later stage. Thanks.
Our next question comes from Mr. Michael Tyndall from Barclays. Please go ahead sir.
Michael Tyndall - Barclays
I’ve got two questions, the first relates to North America and I guess, what I see is your rather optimistic views for the rest of the year. When I think about the PMI indicators in consumer confidence, I mean, it looks to me if the key drivers for overall activity are pointing downwards. I mean I look at current order intake for cars and trucks it seems to be below the right that you’re suggesting for the rest of the year. So I guess, I wonder if you could share with us what you’re seeing that makes you more optimistic on what is going to happen in the rest of the year?
And then the second question, and I apologize in advance if this seems slightly antagonistic, but the 300 basis points plan, it seems that the reversion in the market you don’t believe it and those that do, I am one of the ones that does and we’d like to know when you are going to share with us that plan, but you seem very reticent to actually commit to that. I am just wondering why that might be? Thank you.
Let’s start with the North American trucks. And as I said, it is -- you have sort of negative facts as you mentioned, you saw order intake in Q2 are annualized on a level of 180, but on the other hand you don’t have a high retail activity which is analyzed is actually pointing at 270.
And I also think that the financial by our end customers, the fact that the replacement business case is a very attractive one also with the second half values that we see in U.S. right now on the trucks together with the fact that our spare parts sales is up double digit meaning that the fleets are running and that creates of course an underlying demand and other has to be waded off vis-à-vis the security or uncertainty you have on the macro economics.
So it is a not an easy call to make this judgment, but while we do this plus and minuses and looking at it, we do feel that we feel comfortable with the forecast we do. Then of course, there is no doubt about it then in order to reach the 250,000 we need to see the orders coming in during the autumn here.
When they comes to this 300 basis points the fact that and you might refer back to the press conference on the questions is just that I want to be clear and also I told you and the market before that when it comes to actually coming up with the activity list and the different action plans that we are going to put in place in order to reach the 300 basis points overtime, I want to have a real good commitment from the new organization; we have more than 450 new managers who are managing a new organization. We are embarking into a new way of working with new processes and completing new set up.
This is an organization with 80,000 people that we during six months have put forward and are up and running operation which is a very, very fast timing in order to do that. And I am not hesitant in that respect, but I want to make sure that we have the full commitments from the organization therefore I give into the organization the timeline up until the third quarter in order to come up with all the issues and activities that we see going here.
Some of these will be short term, some of these will be in more long term, some of these would be of cost efficiency, some of these would be brand related and so on and so forth. So it is a whole pallet of things. What I have seen so far that the work is progressing very well and there is a lot of engagement and can do attitude when it comes to come up with those issues.
And therefore I am not sort of committing to date or occasion or anything like that when we will come out to present and this is overtime this is some of this will be long term and some of this would be short term. So this is a broader fundamental change that we are doing, but what I see so far and also in particular, the engagement that I see in enduring session and among the new managers is it looks very promising.
But I giving the timeline and I giving them the time to do that their proper job, so that is I hope I give a little bit shed of light on that one, so it is nothing to do with a date or resistance in that perspective.
Our next question comes from Mr. Peter Reilly from Deutsche Bank. Please go ahead sir.
Peter Reilly - Deutsche Bank
Two questions please. Firstly looking at China, you said that the Chinese see volumes, the whole industry were down at 38% in Q2 but you got to forecast for the full year, down at 15% to 25%. So assuming you are expecting a much better second half or at least one that is not as bad the first half. I am wondering whether you have any tangible evidence for that in terms of order intake or anything else or whether it's just a macro call at this stage and then secondly on a related note on Mack, you have kind of given us the bill-to-bill for the first half of the year which is 64%. You got your US construction equivalent forecast to the market growing by 15% to 25% and assuming to be a bit of a disconnect and Mack is talked as being quite big in the construction market. So it seems that Mack is having such a weak order intake in the first half, if the construction market is growing so strongly, maybe it is because of municipal sales rather than construction sales, but if you could help us to understand the dynamics of Mack versus construction will be appreciated.
Okay. Yes, Peter I will start talk with China and basically when we do the forecast and particularly now when we come up to the half year, of course we have six months of actuals with us in the luggage and therefore we use that as a basis going forward and it’s a combination of what you just said. It's looking at the macroeconomic, they are looking at the infrastructure projects, it's looking at in, the Chinese economy signals that we are getting together with the atmosphere and feeling among our dealers and customers together with the orders coming in there.
So it’s a combination of all that, that sort of leads us to the forecast that we have done. I would like to point out that and I think you know that already, but when we talked about the China and CE, I'm really pleased to see that our dual brands strategy works well it does down, above or around 30% as a market in total and CE is only losing out 10% volume and actually with maintain profitability with reduced market mix.
So I think we have shown that we can handle the China ups and downs. Long-term China construction equipment over time here its something that we do of course as something very positive giving the demand over time here for infrastructure and projects coming along.
On the other hand, it is also important to keep in mind now we load and excavate the market which are performing a little bit different in the market, but in general I'm very pleased with CE China development here.
Christer, Mack book-to-bill and the market situation there.
If you look at it Peter, we can say on the truck side we had a big, big (inaudible) back in 2006 and then on the construction works dried up so a lot of the trucks that we sold back then hasn't collected a lot of hours and therefore, I would say you need to see a higher utilization of that existing fleet that we have sitting out there uphill the replacement over those truck cost to kick in.
We had a strong market of construction equipment in 2005 and 2006 as well, but not at the same level that we saw in the truck side. So those machines are a bit ahead of it of the trucks in the replacement cycle. It's one explanation but otherwise we are actually looking into it as well to see what is the difference.
One could be that you see a strong demand filled within the commodity segment, oil and gas etcetera for construction equipment where we haven't benefited so much on the Mack side other than [natural] gas, which had dried up now.
Peter Reilly - Deutsche Bank
So, when you commented earlier about the economics right replacement truck being very favorable, we get much towards I may phrase hold it rather than construction or the sound of it?
That’s correct that’s a holdings truck that is collecting a lot of mileage, of course, that’s a business case to reflect that one than the construction truck.
And the last question comes from Mr. Fraser Hill from Bank of America Merrill Lynch. Please go ahead sir.
Fraser Hill - Bank of America Merrill Lynch
I have got three questions. Two on pricing, one in short-term, one in longer-term. In terms of the short-term, we heard from Scania last week, that there had been a reasonable amount of discounts in Europe at the beginning of the year. They told us that they hadn’t participated whether they have been more or so towards the end of the second quarter and that’s helped their market share somewhat.
Are you noticing that sort of trend yourself, I just wondered if you could comment on the market and is that sort of predicting any additional pressures as you enter the third quarter?
Looking a little bit further, longer term, we heard about a lot of restructuring programs from Daimler in their trucks business and also MAN and Scania are looking to pull a lot of cost of their business.
So how do you see this playing out from your position when you look into the medium term? Do you think there is a case for structural improvement profitability across the truck industry and truck players or how much risk do you think there is if somebody’s gain competed away by a pricing longer term, just interested in what you are seeing in your own modeling?
The final question is on [GK] and the cash. Just wondering if you can give us a bit more color and detail as to what your plans are for the cash as that comes in, maybe areas of potential reinvestment geographically or across your business segments? Thanks.
Okay. I think on the pricing side in Europe, we have seen a stable pricing we would say of course we have areas where we have stiff competition and that have also a harder pricing in pricing environment. But in general a flattish pricing or a stable pricing in Europe that’s what we have seen; I am looking at Christer; I think he has one good view.
Could be a few more, like Germany that has seen a bit more pressure lately.
When it comes to the long term and the profitability that is of course a very wise question and I can only go back to our own 300 basis points activities and I wouldn’t call it a program, but it’s the activities that we have and what we are doing is of course looking through everything from A to Z including the efficiency in our interactions internally, but also looking into of course our efficiency in R&D, purchasing and all those areas which now with a new organization and setup we do have, we can look at it from a different point of view; including then of course I think the assets that we have on all our brands which is in my view a huge asset that we do have and that we can and should utilize in a better and more efficient way and that’s one of the areas when we look at the growth side of the house.
So in general, we are attracting all the kinds of our sort of profit and loss side both on the topline and all the way through all the cost issues; bearing in mind of course that we need to do the relevant investments; we need to invest in new technology; we will invest in new products; we will invest in new markets in making sure that we continue to increase our global presence in order to continue, be able to offset ups and downs in the different markets around the globe.
And that leads me into the answer of the money that the (inaudible) is bringing into company and there is a number of investments that we are looking out in terms of products and product portfolio in markets making sure that we develop different markets. So there are a number of opportunities for investments going forward in order to strengthen ourselves in the long run.
Okay and since that was the last question, operator I do appreciate that you took the time and was with us here on this report. And I do wish you all nicely back in the third quarter report and until then I do wish you a very nice summer and see you then. Thank you very much for joining.