CEO's Comments

Sequentially improved sales and profitability

After a weak start to the year, the Group’s sales and profitability recovered during the second quarter of 2013. The renewal of the Group’s truck offering entered an even more intensive phase and during the quarter we presented a completely new product portfolio within Renault Trucks, as well as a number of new trucks for Volvo. Thus far, the trucks have been well received by customers and dealers, which is of utmost importance since these new trucks will be highly significant to the Group’s sales and profitability in the coming years.

Sales for the second quarter of 2013 recovered considerably compared with the first quarter of 2013 and amounted to SEK 72.8 billion, up 25%. Profitability also improved thanks to higher sales volumes and better capacity utilization in our plants. Despite having to increase our warranty reserves by SEK 900 M for legacy truck quality issues, operating income totaled SEK 3.3 billion, corresponding to an operating margin of 4.5% compared with 0.8% in the first quarter.

The operating cash flow in the Industrial Operations amounted to SEK 4.1 billion, primarily as a result of the operating income.

Intensive product renewal in Trucks

In June, Renault Trucks launched a completely new truck program, with four different truck series covering everything from long haulage and construction to distribution. Renault Trucks’ new truck program, with the T-series for long haulage, C for construction, K for heavy construction and D for distribution, is important to the entire Group since it will strengthen the product portfolio and increase the opportunities for the Group to expand in Europe and in many other markets. In addition to the new trucks, we have also made major investments in plants to enhance efficiency in connection with production start for the new trucks.

Volvo Trucks has also launched a number of new trucks during the spring. With production start of the new Volvo FM, Volvo FMX, Volvo FE and Volvo FL trucks in autumn, the Volvo brand now has a completely new product portfolio for the European market. The new trucks will also be gradually introduced in international markets.

In the third quarter, product renewal continues with the launch of a complete series of heavy duty-trucks developed specifically for growth markets and adapted to the price levels in these markets. The markets in South-East Asia will be first to receive the new trucks, which will be manufactured in our plant in Thailand. The plant has an installed technical capacity of 20,000 trucks per year and production will gradually increase later in the autumn. At the end of the year, we also plan to launch a completely new series of Eicher trucks and buses within the framework of our joint-venture company in India.

In the industrial system we are currently working intensively to prepare and change over production to start manufacturing the new truck and engine generations which will peak in the second half of this year. Activities are also high in the sales and aftermarket organizations. In the short-term, this impacts profitability since costs will continue to be high at the same time as we have the usual vacation shutdowns in the third quarter. However, once the new truck generations are out in the markets they will contribute to ensuring the Group’s organic growth and competitiveness going forward.

Demand during the quarter has been relatively stable in most of the Group’s truck markets, with the exception of Brazil, where demand has continued to develop strongly and in India where the market is considerably tougher. Compared with the second quarter of 2012, order intake for all the brands of the truck operation rose 11%. Net sales in the truck operation amounted to SEK 46.2 billion and the operating margin was 4.0%. Profitability improved sharply compared with the first quarter of 2013, thanks to significantly higher sales volumes and better capacity utilization in the industrial system as a result of higher production volumes.

Volvo CE – higher profitability in weak markets

During the second quarter, weak demand in most of the global markets continued to impact Volvo CE’s sales. However, the decline in the key Chinese market slowed and demand stabilized at a lower level. During the first half of last year, the mining industry experienced an upswing and many dealerships built up their stocks. Despite the prevailing market situation, particularly with weak demand for larger equipment in the mining industry, Volvo CE succeeded in achieving an operating margin of 8.3% during the second quarter of 2013, on sales that were 19% lower than in the preceding year.

Volvo CE’s total order intake was nearly at the same level as the year-earlier period, with improving trends in China, Europe and the Middle East and a weaker trend in the rest of Asia and North America where the order intake was at a high level last year when Volvo Rents and dealers renewed their rental fleets. Volvo CE continues to have good control of inventories in both the production and dealer channels. With the launch of two wheel-loader models in the US market, Volvo CE is also taking an important step to develop SDLG into a global brand.

Continued tough market for buses, good performance in Volvo Penta

For Volvo Buses the total market remained weak with significant pressure on prices. Net sales in the second quarter of 2013 decreased by 20% compared with the year-earlier period and the operating income declined to SEK 11 M. On the positive side, the order intake rose 13% thanks to higher demand from North and South America and certain markets in Europe.

In June, Håkan Agnevall assumed the position of new Head of Volvo Buses. Håkan has a long background in the capital goods industry, with several years of Swedish and international experience from numerous companies. During the quarter, Volvo Buses started field tests with plug-in hybrid buses. The plug-in hybrids make a 75-80% reduction in the emissions of carbon dioxide possible, when compared with current diesel buses. Volvo Buses also announced a planned cooperation on fully electric buses in Gothenburg, Sweden.

For Volvo Penta, demand for industrial engines remained weak. The North American market for marine engines has recovered somewhat but demand in southern Europe is still weak. The decline in the boat population and the reduction in the use of boats have a negative impact on spare-parts sales. Despite the overall weak market, Volvo Penta’s sales remained nearly unchanged compared with the year-earlier period, and amounted to SEK 2.2 billion during the second quarter of 2013. Good control of expenses and certain positive non-recurring effects contributed to Volvo Penta reporting a good operating margin of 13.4%.

Volvo Financial Services reported a good return on shareholders’ equity of 13%, which is in line with the financial target of 12-15%. The credit portfolio continued to perform well and the inventory of repossessed products continued to decrease. Delinquencies remained stable. In China, some customers and dealers within the construction industry continue to have a strained financial situation although the situation has improved slightly.

The implementation of the strategy for 2013-2015 runs according to plan

In our strategic targets for 2015 there is a lot of focus on organic growth, not least when it comes to gaining market shares and growing considerably in Asia and Africa. With a strong brand and product portfolio that fulfills customers’ various needs the Group will stand even stronger when the new truck models are out on the markets in 2014. With the new products in place we can put our full focus on the commercial part of our business to reach our growth targets for 2015.

A major focus area in the new strategy for 2013-2015 is to improve the Group’s profitability. The Volvo Group’s new organization has now been in operation for slightly more than a year, and during that time we have established a well-functioning structure with new management teams aligned to meet our strategic objectives. With this in place, we will now take the next step in the development. Within the framework of the Group’s strategy for 2013-2015, we have worked intensively in the past quarters to identify measures to streamline and enhance the efficiency of our operations. In the coming quarters, we will enter a phase when we will begin to execute these measures. The target is clear – to become one of the most profitable companies in our industry. It is a prerequisite that will provide us with the maneuverability to continue to invest in product development and growth in new markets. 

Olof Persson
President and CEO