CEO's comments

Higher volumes and operational improvements

During the first quarter of 2014, demand for our products continued its gradual improvement in the mature economies in North America, Western Europe and Japan, while the emerging economies in South America and Asia saw weaker demand.

Net sales for the Volvo Group rose by 13% to SEK 65.6 billion and operating income amounted to SEK 2.6 billion excluding restructuring costs, corresponding to a margin of 3.9%. The measures we are implementing to increase the Group’s profitability are running according to plan and are starting to have a positive impact on our gross margin and costs, but there is still more work to do in terms of cost reductions and this is the Group’s main focus for 2014.

Competitive new trucks
The operating margin excluding restructuring charges for the truck operations amounted to 4.1%, positively impacted by higher sales, improved gross margins and better capacity utilization, partly offset by negative currency effects.

As expected, the beginning of the year was weaker in Europe than the very strong close of last year, which was driven by prebuying ahead of the change to Euro 6. We expect a gradual improvement over the course of the year and maintain our forecast for the European heavy-duty truck market. In Europe we have adjusted production from the elevated levels of the fourth quarter to a level which is in line with current demand. Volvo Trucks’ new truck generation continues to be successful and has advanced its position in the market and Renault Trucks’ new products are starting to be delivered to an increasing number of customers, although volumes remain limited so far.

In North America, the truck market continues its gradual improvement and, based on this, we raise our forecast for the truck market somewhat. We are also planning for a slight increase in the production level towards summer.

In the Brazilian truck market demand has weakened from its high levels as a result of the sluggish economy and we have therefore reduced the forecast for the heavy-duty truck market to 90,000 trucks which is still a good market from an historical perspective. As a consequence of the lower demand, we will reduce the production level during the second quarter. Volvo has a strong position in Brazil and continues to outperform the market in general.

In Asia, the Japanese market stood out with a good performance during the quarter. The economy is developing in the right direction and customers’ confidence has strengthened. However, the economic trend in India and South-east Asia is weak and customers in several countries are hesitant to invest in new trucks.

Higher volumes in Volvo CE
For Volvo CE, the seasonally strong first quarter had a positive impact on volumes, which contributed to improved profitability compared with the weak close of 2013. Operating margin amounted to 4.8%. To further increase profitability we are currently implementing a number of activities to reduce costs.

We expect a moderate growth in Volvo CE’s mature markets but a relatively weak development in emerging markets. The situation is still challenging for some customers and dealers with large exposure to the mining industry, primarily in China. In Europe and North America Volvo CE is in the process of launching machines which are compliant with the latest emission regulations.

Profit in Buses and good profitability in Volvo Penta
Volvo Buses reversed last year’s losses to an operating income of SEK 36 M. The improvement is primarily attributable to improved gross margins rather than better demand in the markets.

Volvo Penta’s profitability improved compared with last year as a result of a competitive product portfolio in both the marine and industrial segments.

Our customer finance operation had a stable portfolio growth and good profitability with a return on shareholders’ equity of 11.7%.

Efficiency program being implemented
We continue to focus on launch activities, while at the same time implementing the Group-wide efficiency program, which includes a large number of important measures to increase the Group’s profitability.

The optimization of the truck operations in Europe has started and we closed one production line for heavy-duty trucks during the quarter. We have also closed the component plant in Leganes in Spain. At the same time, the major adaptation of our Japanese industrial system continues and we are looking into divesting or closing non-core industrial operations.

We have also initiated the efficiency program to structurally reduce the number of white-collar employees and consultants by 4,400 individuals. In Sweden we have launched a voluntary leave program. Similar measures will be implemented in more countries during the year. Since the announcement of the program in the autumn of last year 900 white-collar employees and consultants have left the Group.

We follow the strategic plan that we have established to increase cost efficiency, capital efficiency and process efficiency. In the coming quarters our focus will be on reducing the activity level in the Group following the extensive product renewal that marked 2013 as well as on the implementation of structural cost reductions and on work to increase productivity and efficiency.

Olof Persson
President and CEO