The Volvo Group’s third quarter was characterized by the ongoing comprehensive product renewal in the Group’s truck program and the fact that we entered a new phase of the Group’s development focused on taking actions to streamline and enhance the efficiency of our operations.
The product renewal is the largest in the history of the Volvo Group, and it means that we are going to enter 2014 with a highly competitive product range. In the short term, profitability is impacted by an elevated cost level related to all the launches, the change-over to new products and the fact that we currently are producing both the old and the new generation of products for both Volvo and Renault Trucks. In a situation like this it is difficult to achieve optimum productivity in the industrial system. During the quarter profitability was also impacted by slightly more than SEK 1 billion in adverse currency effects and higher costs for research and development. Operating income amounted to SEK 2.5 billion and the operating margin to 3.9% excluding restructuring charges. The changeover to the new products will take another couple of quarters, but once we are through it, we will lower the Group’s costs and get the productivity increase that the new products allow for.
High pace in implementation of strategic measures
We also continue to have a high pace in the implementation of the measures connected to the Group’s strategy for 2013–2015. We have decided to combine a number of measures under a Group-wide efficiency program, including cutbacks to the number of white collar employees and consultants and efficiency enhancements in the global industrial system. These measures aim to increase the Group’s efficiency and competitiveness. We estimate that the program will result in restructuring costs totaling approximately SEK 5 billion, most of which are expected to impact operating income in 2014. Annual savings are estimated at SEK 4 billion and will gradually generate results during 2014 and will achieve their full effect as of year-end 2015.
In October, we made a directional decision to implement changes in our European truck manufacturing operations in order to increase efficiency and strengthen our competitiveness. Our intention is to step-wise, over the next two years, relocate the cab trim operations from Umeå to Gothenburg, to concentrate the manufacturing of heavy-duty trucks from two assembly lines to one in Gothenburg and to concentrate the assembly of medium-duty trucks to one single assembly line in Blainville, France. By optimizing our industrial structure in Europe, we will be able to build trucks in a much more efficient way with lower cost per truck.
As part of the Group-wide efficiency program we have also made a directional decision to rationalize the Group’s staff and support functions worldwide. Approximately 2,000 white collar employees and consultants are expected to be affected by this measure, which we intend to implement during 2014.
Within the framework of this program, we have also terminated our agreement regarding local assembly for Renault Trucks in the Turkish market. We have also decided to rationalize our spare parts operations in South Africa and to implement a number of measures to further increase the efficiency in our engine manufacturing in Hagerstown in the US.
All the decided actions are part of the strategic plan we have put in place for 2013–2015 and we are currently taking decisions and implementing actions at a high pace to improve the Group’s competitiveness and profitability.
Massive product renewal in trucks continues
As said, the activity level in our truck operations is very high and during the third quarter the renewal of the Group’s truck program continued with the launch of UD Quester, an all-new series of heavy-duty trucks developed specifically for growth markets in Asia and other areas. UD Quester is now in production at our plant in Bangkok, Thailand and in the future it will also be manufactured at facilities in China and India. While this year’s UD Quester volumes will be modest, we plan to significantly increase our manufacturing rate in 2014.
The launch of UD Quester is part of the extensive product renewal of our truck program, which has been in progress since autumn 2012. We have launched the new Volvo FH, Volvo FM, Volvo FMX, Volvo FL and Volvo FE. In June, Renault Trucks presented a new, comprehensive truck program comprising its T, K, C and D series for long-distance haulage, construction and distribution. We are currently changing over production to the new products at the same time as the European system gradually switches to Euro 6 engines. In India, our joint venture has started manufacturing the new 5 liter and 8 liter engines for UD Quester and our medium-duty truck program in Europe. In Brazil we announced a new Volvo VM. We are working intensely to secure the launches in all parts of the value chain. The new trucks, which shall contribute to the Group’s long-term growth and profitability, have been very well received by both our dealers and our customers. They appreciate that we have invested considerable resources in order to contribute to the strengthening of their competitiveness. I can state that our new and stronger product programs have provided our dealers with stronger faith in the future and motivation for them to continue to invest and contribute to the development of our brands.
We have had a good order intake during the year. During the third quarter it was up by 7% compared to the third quarter last year and we have good order books for the fourth quarter. Order intake was, however, held back somewhat because of available production capacity for 2013 having been more or less sold out primarily in Europe and Brazil. Looking into 2014, we expect many of our markets to be on about the same level as this year. Specific forecasts are provided in the Truck section of this report.
We are closely monitoring how demand in Europe develops and have a high readiness to adjust the manufacturing output in the beginning of 2014.
Deliveries from the Group’s wholly-owned operations rose 4% during the third quarter to slightly more than 48,000 trucks. Net sales in the truck operations amounted to SEK 43.2 billion and the operating margin was 4.4% excluding restructuring charges. Profitability was impacted by adverse currency movements, launch costs, higher costs for research and development and costs in the industrial system attributable to the production ramp-up of new models and parallel production of new and old models.
Lower sales in the mining segment affecting Volvo CE
During the third quarter, Volvo CE’s net sales declined 7% to SEK 12.3 billion. In spite of a difficult market situation with weak demand, especially from the mining industry, and an unfavorable currency development, Volvo CE had an operating margin of 4% thanks to good cost control. Volvo CE also continues to have good control over their inventory levels, which are in balance with demand.
The markets in Asia and other areas continue to be negatively impacted by low demand from the mining industry. This has resulted in weak profitability for certain dealers with large exposure to the mining industry in China. The market in Europe increased slightly, while the market in North America moved sideways and the market in South America declined somewhat. Our base scenario for 2014 is that the markets will remain at largely the same level as in 2013.
A few days ago Pat Olney, President of Volvo CE, notified that he had decided to move on in his career and move back to North America. During his 16 years as CFO, Head of production and subsequently President, Pat has contributed to developing Volvo CE into one of the leading companies in the construction equipment industry.
Continued difficulties for Buses while Volvo Penta shows good profitability
The global bus market remains on a historically low level with continued price pressure, particularly in Europe. Volvo Buses reported a loss of SEK 164 M for the third quarter, compared with a loss of SEK 64 M in the year-earlier period. The decline in earnings was primarily due to an unfavorable product mix and a negative impact of SEK 95 M from weaker currency exchange rates. Through hard work Volvo Buses has been able to lower its structural costs at the same rate as the decline in demand and have a good starting point when demand picks up again. On another positive note, order intake was up 41% compared to the third quarter last year.
For Volvo Penta, global demand for leisure boats remains weak and on historically low levels, which impacts sales of marine engines. The market for industrial engines performs slightly better, with the exception of China. However, Volvo Penta is advancing its position, on the marine side with its IPS system and on the industrial engine side with its offering in off-road applications, and the company’s net sales for the third quarter rose 3% to SEK 1.8 billion. The increased sales and a good cost control contributed to improved profitability, with an operating margin of 9.3%.
Volvo Financial Services continued to perform well in most markets and the company’s gross profit improved as a result of a growing credit portfolio and improved margins. However, operating income declined to SEK 327 M due to increased credit provisions in Spain, where the slow legal system makes it difficult for us to repossess trucks from customers that have been unable to make payments since the 2009–2010 financial crisis. Despite weaker earnings during the quarter, the return on shareholder’s equity was 12.6% on a rolling 12-month basis.
The Volvo Group is in an intense and exciting period. We have a portfolio of strong brands, we have launched new, competitive products and we have an organization with highly skilled employees. Over the coming two years we will furthermore work hard to increase productivity and cost efficiency in line with what we have set out in the strategic plan for 2013-2015. We have full focus on the execution of the actions which are necessary to improve the Volvo Group’s competitiveness and overall profitability.
President and CEO