During the second quarter, the Volvo Group’s sales continued to grow as an effect of a continued recovery in the Group’s mature markets and continued strong demand in emerging markets. Sales are now at the same level as before the financial crisis that struck the world a few years ago, with a profitability that is now at its highest level so far, both in terms of operating margin and return on shareholders’ equity.
Consolidated sales grew 15% compared with the second quarter of 2010 and amounted to SEK 79 billion. Adjusted for currency, sales growth amounted to 29%. Sales remained strong in Eastern Europe, Asia and South America, in part as an effect of positive market growth but also thanks to our investments in an industrial presence, distribution channels and service networks in these regions. Demand is at a historically good level in Northern and Central Europe and demand for our products rose in North America, mainly driven by a pent-up replacement need.
Operating income amounted to SEK 7.6 billion in the second quarter, with an operating margin of 9.7%. Profitability has improved compared with the year-earlier period, despite significant currency headwinds and the consequences of the tragic earthquake and the ensuing tsunami in Japan earlier this year having a negative impact of SEK 400 M on earnings, which however is lower than previously expected. The improvement in earnings comes from higher sales combined with improved efficiency of the industrial system as well as higher gross margins attributable to competitive products. Moreover, we continue to maintain stringent control of costs.
Operating cash flow in the Industrial Operations amounted to SEK 5.2 billion, which is somewhat lower than in the preceding year due to an increase in working capital. However, the efforts to improve capital efficiency continue to pay off and the cash conversion cycle is down to 22 days compared to 35 days in the preceding year.
Strong profitability in the truck business
During the second quarter, our truck business continued its good development with sales rising 20% to SEK 50 billion and operating income amounting to SEK 5,106 M, which corresponds to an operating margin of 10.2%. Most of our markets are developing well and we continued to have incoming orders in excess of deliveries. We also have well-performing distribution channels and competitive products that are capturing market shares and it is pleasing that the Group has reached a market share in the heavy-duty truck segment of 20% in the U.S. and some 28% in Europe.
In Japan, our employees have worked very hard and manufacturing at UD Trucks has been back at normal levels since June. We have also recently had several important new product launches. UD Trucks has begun selling the entirely new generation of medium-duty Condor trucks with new Group-wide engines. This new generation will significantly improve our competitiveness in this important product segment in Japan.
In Brazil, as the first manufacturer, we have showed trucks with Euro 5 engines ahead of the new emissions regulations beginning next year. These trucks have significantly better environmental performance.
Our focus on environmentally-adapted trucks has taken a major step forward with Volvo FM MethaneDiesel. The truck is driven by up to 75% gas and, with its fuel-efficient technical solution can significantly reduce CO2 emissions from long haul applications. We are also continuing our hybrid efforts. In Europe, Volvo Trucks has begun selling the Volvo FE Hybrid and Renault Truck has delivered the first Renault Premium Distribution Hybrys hybrid truck to customers.
In terms of market conditions, we maintain our previous forecasts that the truck market in both Europe and North America will amount to 230,000-240,000 heavy-duty trucks in 2011.
Good profitability in most business areas
Volvo CE’s sales rose 15% to SEK 17.5 billion following a strong sales trend in most markets. Operating income amounted to SEK 1,893 M, with an operating margin of 10.8%.
In China, the authorities’ efforts to reduce inflation by raising interest rates and tightening liquidity have resulted in a softening in demand for construction equipment. However, the Group has further strengthened its position as a market leader in wheel loaders and excavators in China, with a market share of 11.8% to date this year.
The launch of more than 50 new models of construction equipment that meet the latest emissions standards in Europe and North America has been very successful. This was confirmed at the customer days in Eskilstuna, Sweden, when as many as 10,000 customers from 70 countries had the opportunity to learn more about the new products.
For Volvo Penta, demand for industrial engines continues to develop well while the marine market is more sluggish. However, it is pleasing that Volvo Penta is gaining market shares in both industrial and marine engines. Volvo Penta had an operating margin of 12.2% for the quarter.
Despite continued low demand in the city bus markets in Europe and North America, Volvo Buses achieved an operating margin of 4.9%. Actions taken to reduce costs and increase the efficiency in the industrial structure are the main reasons for the improved profitability.
Volvo Aero’s operating margin was 3.5%. While profit improved somewhat compared with the weak first quarter, it continued to be under pressure from unfavorable exchange rates as well as production and supplier disruptions.
For our customer financing operations in VFS, the credit portfolio grows at a good pace thanks to increased financing volumes. Operating income of SEK 250 M is a strong improvement compared with the year-earlier period, mainly due to sharply reduced credit losses.
Positive view of the Group’s future development
Due to the current macro economic situation, we are in the short-term maintaining a high degree of cost flexibility in order to be able to quickly adapt to any potential changes in market conditions.
Going forward, I am convinced that the Group will continue its positive development. Our intensive efforts to develop and launch a large number of new products that will reach the market in the next few years continue. We have a strong network of dealers who work closely with the customers – a network that we are now investing in to strengthen the customer interface even further. But above all, the Group has a major strength in its employees, who work hard to generate value for customers and shareholders, and with whom it has been a pleasure to work. I would also like to extend my gratitude to our shareholders, who have given me their confidence to be President and CEO of the Volvo Group for the last 14 years.
President and CEO