CEO's Comments

Significant sales drop impacted profitability

The Volvo Group’s first quarter of 2013 was characterized by low sales volumes and low capacity utilization, while we continued to keep a high pace in the work to develop and launch new products.

Net sales for the first quarter declined 25% to SEK 58.3 billion, primarily as a result of the weak order intake in late 2012. The sales volumes were the lowest since the financial crisis and were on the level of the first quarter of 2009. Then, the Volvo Group reported a loss of SEK 4.5 billion, compared with a profit of SEK 0.5 billion for the first quarter this year. Even though this shows that the Volvo Group is better at handling rapid changes in demand, I believe that we still have room for considerable improvement in this respect.

The operating cash flow in the industrial operation tracked the normal, seasonal pattern and was a negative SEK 7.6 billion (negative 4.9).

Weak start to the year, but strong improvement in order intake
With the exception of South America, deliveries of trucks were generally low during the quarter. A total of 38,416 trucks were delivered, which was 23% fewer than in the year-earlier period. Net sales in the Trucks operation declined 23% to SEK 37.0 billion, while operating income fell to SEK 101 M (3,677) as a result of the significant decline in volumes and low capacity utilization in the plants. Under absorption of costs in the industrial system amounted to SEK 1.9 billion, of which SEK 1.5 billion in the truck operations.

However, we see that the order intake for trucks is rising in several of our key markets. In total, the order intake during the first quarter amounted to 61,045 trucks – up 30% from the fourth quarter 2012 and with a book-to-bill ratio of 160%.

In Europe, the order intake has gradually improved since the end of last year. There are indications that customers in some markets are planning to prebuy Euro 5 trucks prior to the transition to the new Euro 6 emission regulations in January 2014. In for instance the UK, trucking companies are taking the opportunity to renew their fleets prior to Euro 6, which carries a significant price increase for trucks. The transition to the new Volvo FH is running smoothly with good demand for both the new and the old ranges.

In North America, deliveries were low during the first quarter due to a number of stop weeks resulting from the weak order intake during the second half of last year. We now note that the order book is expanding and deliveries will therefore increase during the second quarter.

In South America, the trend is strong, with good order intake and higher deliveries, with Brazil as the driving force.

The Japanese market is positively impacted by expectations of higher economic activity following, amongst others, the incentive measures and increased optimism in the export industry as a result of the weak Japanese currency. UD Trucks has had a weak start to the year but order intake is currently improving.

The truck market in India has continued to weaken during the beginning of the year in the wake of the reduced economic growth and higher fuel prices that transporters have not yet been able to offset with increased freight rates.

Intensive product renewal
This year is one of the most intense to date in terms of new product launches. Thus far this year, we have started deliveries of the new Volvo FH truck series and launched the new Volvo FM and Volvo FMX in Europe, as well as the new Volvo VNX, which is aimed at heavy transportation in the oil and gas industry in North America. We also have in the pipeline a completely new series of trucks from Renault Trucks, a new series of trucks aimed at the lower-price segment in emerging markets, new buses, a new medium-duty engine series, as well as the development of engines prior to the new emission legislations Euro 6 for trucks and buses and Tier 4f for Volvo CE and Volvo Penta.

The high level of activity and the many launches in 2013 naturally incur high costs within development and sales. We also have higher costs because of production changeovers and in the aftermarket business, where we are currently training thousands of workshop mechanics on the new products. Thus far, the response from customers on our new products is very positive and from 2014, we will meet the markets with a product range that is the most competitive in the Group’s history.

High activity in restructuring
We are also maintaining a high pace in the work aimed at increasing the Group’s efficiency and profitability. The reorganization of the dealer network in Europe, which started last autumn, is progressing according to plan and is aiming at improving the aftermarket support for primarily Renault Trucks’ customers in Europe, while also reducing costs.

In April, we initiated a study to determine how we shall further strengthen the competitiveness of our industrial system for trucks in Europe, including optimizing the utilization of the plants. The study also covers the possible consolidation of all medium-duty truck production from two plants to one, the relocation of the remaining assembly of cabs from Umeå, Sweden to Tuve, Sweden and a changeover from two assembly lines to one in Tuve. We expect the study to be completed in the autumn.

In Japan, we are reviewing the industrial structure to adapt capacity to the estimated long-term market demand in Japan. In addition, we have reorganized the sales organization by creating customer-facing regions and have put new management in place to drive the improvement work within the owned dealer network. These measures are important in order to reduce costs and increase competitiveness for UD Trucks in Japan going forward.

Weak demand for Volvo CE
Volvo CE was negatively impacted by the weak demand across most of its markets. Machine deliveries declined by 29% to 15,949 units when compared with the first quarter last year. Net sales fell 33% to SEK 12.1 billion and the operating profit amounted to SEK 500 M (2,089). The decline in China is not least an effect of low activity in the mining sector, which is normally a segment with good profitability for Volvo CE. Despite the major drop in sales, Volvo CE succeeded in achieving profitability, with an operating margin of 4.1% (11.6).

Demand continues to be weak, which was reflected in the order intake declining by 28% to 17,670 machines in the first quarter. However, in the first quarter of 2012, the mining industry was booming and dealers were building inventories. With pipeline inventories now in balance with demand and a book-to-bill ratio of 119% for the Volvo brand, Volvo CE has increased production to meet the spring selling season.

During the quarter Volvo CE started production of wheel loaders in the plant in Shippensburg in the US. We have invested in increased local production in order to get closer to our customers with shorter delivery times in the key North American market and also to reduce our currency exposure. In the medium-term, excavators and haulers will also be produced in the facility.

Low volumes also in other business areas
Volvo Buses is also affected by low volumes in most markets and had the lowest sales during a first quarter since 2005. The low capacity utilization in the industry has resulted in considerable pressure on prices, and Volvo Buses reported a loss of SEK 88 M in the first quarter. We are implementing structural measures in for instance Europe to reduce costs and strengthen competitiveness. On a positive note is the fact that we expect to have very good Euro 6 products on the market in 2014.

Volvo Penta reported stable results during the first quarter despite weak markets. Following a long period of weak demand, we note a slight increase in order intake in both industrial and marine engines.

Volvo Financial Services reported return on equity of 13%, with a generally favorable trend in the credit portfolio. However, we see that the weak market for construction equipment in China means that the financial situation for some customers and dealerships there remains strained.

A busy 2013
Despite uncertainty in the global economy, order intake has improved and we have many new, competitive products on their way to the market. That being said, the second quarter of 2013 will pose a challenge for us and our suppliers, with respect to the changeover to new products and the ramp-up of the industrial system to higher volumes. At the same time, we are focusing on our strategy with all the important measures aimed at improving the overall profitability for the Volvo Group.

Olof Persson
President and CEO