Volvo Group's Q2 income up 62.5% year-over-year to 5.24B Swedish kronor on higher sales, cost controls, but offset by 400M kroner loss amid Japan disaster; net sales up 15% to 78.96B kronor led by good development in truck business
July 22, 2011
– 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. Consolidated sales grew 15% compared with the second quarter of 2010 and amounted to SEK 79 billion. Operating income amounted to SEK 7.6 billion with an operating margin of 9.7%.
• In the second quarter, net sales increased by 15% to SEK 79 billion compared to SEK 69 billion in the preceding year. Adjusted for currency movements and acquired and divested units, sales increased by 29%.
• The second quarter operating income amounted to SEK 7.6 billion compared to SEK 4.8 billion in the preceding year. Operating margin was 9.7% (6.9). Compared to the second quarter of 2010, changes in exchange rates had a negative impact of approximately SEK 1.7 billion.
• Operating income was negatively impacted by effects from the earthquake and tsunami in Japan in a total of approximately SEK 400 M, of which SEK 100 M in Trucks and SEK 300 M in Construction Equipment.
• Highest operating income and operating margin so far for the Group with the truck operation above 10% operating margin.
• In the second quarter, operating cash flow in the Industrial Operations was positive in an amount of SEK 5.2 billion (8.5).
• In the second quarter, basic and diluted earnings per share amounted to SEK 2.52 (1.55).
• Return on shareholders' equity of 21.3% on a rolling 12 month basis.
”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.” Leif Johansson, President and CEO.
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 Ope- rations 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 mar- gin 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.
The Volvo Group’s net sales increased by 15% to SEK 78,962 M during the second quarter of 2011, compared to SEK 68,765 M in the same quarter a year earlier.
The Volvo Group’s operating income amounted to SEK 7,648 M in the second quarter compared to SEK 4,770 M in the preceding year. The Industrial Operations’ operating income amounted to SEK 7,398 M (4,763). The Volvo Group’s Customer Finance operations reported an operating income of SEK 250 M (7).
Net financial items
Net interest expense in the second quarter was SEK 586 M compared to an expense of SEK 703 M in the previous year. In the first quarter of 2011 net interest expense amounted to SEK 569 M.
During the second quarter, market valuation of derivatives used for hedging interest- rate exposure in the debt portfolio had a positive effect on Other financial income and expenses amounting to SEK 242 M compared to a positive impact of SEK 433 M in the second quarter of 2010.
The tax expense in the second quarter amounted to SEK 2,009 M (1,315), corresponding to a tax rate of 28% (29).
Income for the period and earnings per share
The income for the period amounted to SEK 5,241 M in the second quarter of 2011 compared to SEK 3,226 M in the second quarter of 2010.
Basic and diluted earnings per share in the second quarter amounted to SEK 2.52 (1.55).
In the second quarter, net sales for the Volvo Group’s Industrial Operations increased by 16% to SEK 77,286 M (66,717). Adjusted for changes in exchange rates and acquired and divested units net sales increased by 30%. Compared to the second quarter of 2010, all markets grew with the most significant increases coming from Eastern Europe and North America. Growth in Asia was limited to 2% mainly as a consequence of the impact from the earthquake and tsunami in Japan.
Continued improvement in profitability with an operating margin at 9.6% In the second quarter of 2011, operating income for the Volvo Group’s Industrial Operations amounted to SEK 7,398 M, a significant improvement compared to the operating income of SEK 4,763 M in the second quarter of 2010. The operating margin for the Industrial Operations was 9.6%, compared to 7.1% in the second quarter of 2010.
The earnings recovery compared to the second quarter of 2010 is largely driven by higher sales. Increased production levels improved the capacity utilization in the industrial system which, together with higher productivity, also contributed to the improved earnings.
Continued cost control preserved the lower expense level in the Group that was implemented during 2009. Despite a sales increase of 16% in the second quarter of 2011 compared to the previous year, the increase in research, development, selling and administrative expenses combined was limited to 6%.
The earthquake and tsunami in Japan had a negative impact on operating income of approximately SEK 100 M in the truck segment and SEK 300 M in Construction Equipment.
Compared to the second quarter of 2010, changes in currency exchange rates had a negative impact on operating income amounting to approximately SEK 1.7 billion. Compared to the first quarter of 2011, the impact was negligible.
In the second quarter of 2010 the decision to divest Volvo Aero’s U.S. service business had a negative impact on operating income of SEK 223 M.
Positive operating cash flow
In the second quarter of 2011, operating cash flow from the Industrial Operations amounted to SEK 5.2 billion compared to SEK 8.5 billion in the second quarter of 2010. Operating income was SEK 7.4 billion in the quarter, but cash flow was negatively impacted primarily by a working capital build-up of SEK 1.4 billion, driven by increased inventories.
For the customer finance business, portfolio quality and performance improved in all regions as evidenced by lower delinquencies, write-offs and repossessed units.
New financing volume was strong during the quarter and amounted to SEK 12.0 bil- lion (8.9). Adjusting for movements in exchange rates, new financing volume increased by 49.5% compared to the second quarter of 2010. This increase is due to higher Volvo Group unit deliveries and growing market penetration. In total, 13,564 new Volvo Group units (8,212) were financed during the quarter. In the markets where financing is offered, the average penetration rate in the second quarter was 26% (24%).
In June, VFS syndicated approximately SEK 4 billion of the Brazilian credit portfolio in accordance with risk diversification strate- gies.
At June 30, 2011 total assets amounted to SEK 88 billion (93). On a currency adjusted basis, the credit portfolio increased by 6% when compared to the second quar- ter 2010.
Credit provisions in the quarter amounted to SEK 190 M (414) while write-offs of SEK 247 M (375) were recorded.
This resulted in a decrease in credit reserves from 1.67% to 1.58% of the credit portfolio at March 31, 2011 and June 30, 2011, respectively. The annualized write-off ratio through June 30, 2011 was 0.99% (1.59).
Operating income in the second quarter amounted to SEK 250 M (7). The improvement compared to the previous year is driven mainly by lower credit provisions and higher earning assets. The syndication in Brazil generated a positive impact on operating income of SEK 45 M.
Net financial debt in the Industrial Operations amounted to SEK 28.3 billion at June 30, 2011, an increase of SEK 1.0 billion compared to the first quarter of 2011, and equal to 41.5% of shareholders’ equity. Excluding provision for post-employment benefits, the Industrial Operations net debt amounted to SEK 22.9 billion, which is equal to 33.6% of shareholders’ equity.
The Volvo Group’s liquid funds, i.e. cash and cash equivalents and marketable securities combined, amounted to SEK 26.3 billion at June 30, 2011. In addition to this, granted but unutilized credit facilities amounted to SEK 32.6 billion.
During the second quarter, currency movements increased the Volvo Group’s total assets by SEK 4.9 billion due to revaluation of assets in foreign subsidiaries.
The equity ratio in the Volvo Group amounted to 24.0% on June 30, 2011 com- pared to 23.3% at year-end 2010.
At June 30, 2011 shareholder’s equity in the Volvo Group amounted to SEK 76.9 billion.
Number of employees
On June 30, 2011 the Volvo Group had 94,723 employees and 19,064 temporary employees and consultants, compared with 90,409 employees and 14,851 temporary employees and consultants at year-end 2010. The increase relates largely to higher staffing levels in production.