AB Volvo (publ)

Good morning, everyone, and welcome to this present Analyst Conference covering the Fourth Quarter and the Full Year 2018. In a while, we will have two persons on stage, our CEO, Martin Lundstedt; and as usual, our CFO, called Jan but this time, he's last name will Ytterberg instead of Gurander.

If you are a frequent guest to this conference, you may notice that I am new as well. My name is [indiscernible] I'm heading up the media relations function at the Volvo Group.

We will start with the presentations, then we will have a Q&A session where we will also take questions from telephone callers, so please use the microphone. Martin, take it away.

Thank you, Tom [ph]. Thank you.

And also from my side, obviously, most welcome to this conference on the quarter four, but also on the full year. And actually, I would like to start with the full year and say that we are pretty proud actually of the full year here.

It has been very hectic year. It has been very intense year, obviously, because we are realizing, as you know, good market conditions, and we continue to do so.

And we have also showed, I think, down the line improvement continues in the group. And of course, I'm very proud of that when it comes to our colleagues around - okay, I should do that, yeah - what our colleagues are doing around the globe actually.

Very strong, as I said, SEK391 billion in topline, a growth of SEK60 billion almost over a year, and that I think is worth a reflection in itself. We actually tried to find a similar company that have a SEK60 billion topline in Sweden, we didn't find exactly that, but we came out with SEK1.5 billion, all those, et cetera.

So that achievement in itself, excluding currencies, approximately SEK50 million. And SEK40.6 billion in operating result and 10.4% in margin, showing also that we have a continuous underlying improvement here.

What is also very important for me is that we see that almost all business areas are doing an improvement, and that is important, obviously, that we are seeing improved quality in the business from the different parts of this group. Also, that the service business is continuing to develop in a good way is important obviously also for the resilience of the group.

And as a result of that, to find the right balance, we're still having a very strong financial position, where we can continue to act from a position of strength, but at the same time also show that we are confident in the performance of the company. The Board of Directors proposes therefore an ordinary dividend of SEK5 from SEK4.25 and an extra dividend of SEK 5.

And on the quarter four then on the highlights here. As we've said, net sales up to a record level actually of SEK106 billion, and that was 10% improvement, excluding currencies.

And the adjusted operating margin for the group 10%, and for trucks then, also a strong improvement up to 10.9%. Volvo CE margin came down a little bit during the quarter, but still, and Jan Ytterberg will come back to that underlying improvement is still be very good in Construction Equipment, but we've had some growing pain, you can say.

And also in this quarter, we're actually growing 24% on equipment. And finally, we are seeing some growing pain, I think, holding that back for some quite quarters actually, but very positive.

When it comes to the volume development, pretty straightforward as we said. On Trucks, up 3%.

We have a strong North America, obviously, and it will continue to be so. And we have a relatively flat European deliveries.

And that is also what we are looking for when we are forecasting the European markets, so very expected so. And we have also a little bit lower Middle East situation also due to political turmoil, not at least.

When it comes to Construction Equipment, also strong, as I said, the 24% up, and mainly then related to SDLG, plus 39%, and the majority of that in China still. When it comes then to service sales, again, I should say, a positive quarter for us plus 6%, excluding currency up to SEK20.5 billion.

And it's good to see that all areas are improving here. We had, for some specific reasons, a little bit weaker topline in Construction Equipment but related to specific dealers on China.

High utilization of the rolling fleet continues, and that is of course positive, but we also see that the focus on the organization on the services business is paying off, and it's well received by our customers. And as we have discussed before, this is one of our main priorities to continue to build an even more resilient group when it comes to cyclicality.

What is also important to say here is that when you see the balance and CE, for example, is a good example of that, but also some of the truck brands, is that the priority right now obviously is continue to build a very strong population out there that we can harvest from many years to come now when we have an even better and more broad service range. On the truck side.

We are iterating the fact that we have a continued good demand in our main regions. We will come back to that obviously.

But as you will see, pretty unchanged picture as we already - we're talking about in quarter three reporting. On the order intake, minus 14%.

I can assume that some are getting nervous now when we will have some questions about that. So I will have that as a cliff-hanger for you guys.

But having said that, obviously, and I will have a specific slide on that in North America, that is a very particular situation with the fact that we have a huge order intake in the first three quarters. And also in Europe, we had a particular situation in quarter four 2017.

As you might remember then, we announced price increases from 1st of January 2018, which is creating some internal pre-buy. I think that was good because we are seeing that price realization are coming through.

And in a market like this, I think that is one of our main duties as a company. Deliveries, up 3%.

We have already been into that. And also some news when it comes to product launches during the quarter, important product launch for Dongfeng, both on the medium and heavy-duty with the KL and KR series and also an improved also when it comes to the tractor execution.

That is a growing segment in China. So very important introduction for Dongfeng here.

Also, we are glad that we are continuing now to expand our offering in Japan. As you know, we have - mainly in Japan, I should say.

This is also going for Australia, Singapore, South Australia and mature markets within Japanese preference, so to speak in those segments. As you know, we have been working with quite extensive turnaround in UD, very positive, and this is now the next step to broaden the offer.

We have primarily worked with 11-liter on the Quon, but now we are also introducing the 8-liter, and that is very important part of the Japanese market that will broaden our presence. And as you will see later also, now when we have got the quality back in the business, we're also gradually, actually, taking back some market shares and that is positive.

Another thing maybe you were looking at the movie year before we started the press conference, and that is around our deal and the contract that we have done with Brønnøy in Norway regarding the first commercial execution of a fully autonomous circle of truck or tractor-trailer combinations for this quarry. We have already been testing and piloting, so I think that is a very important message.

We are post-piloting phase here, and we are going into commercial execution. What is important with this is that we have a good, so to speak, risk and reward situation where we are going in with this - with 6 tractors to start with now and really together with the customer loan about the full potential of these autonomous solutions.

So a great achievement by the team, and it was one of our internal targets to actually get the stick on the ground on one of the commercial contracts before the ending on 2018. And it was a runner up to the last days of the year here.

So great achievement. When it comes to market environment, Anders [ph] listen carefully now, it will be unchanged as we see it in most of the regions in relation to what we already said in quarter three.

Europe, we already guided that it will be stabilization there by a small set of, meant down from 320 approximately, we don't have the exact final figures yet, down to around 300,000, which is still a very good and strong market. North America, we are also getting unchanged of 310,000 unit, which is - continues to be extremely strong market.

When it comes to Brazil, we are actually increasing on the heavy-duty here, and we are going for 55,000 to 70,000, and that is obviously a good sign where we have actually gained market share of the year and have a strong position as you know. China is unchanged.

We have guided already that it will go down from very strong levels, but we see that that will remain in the level of approximately 1.15 million medium and heavy-duty trucks. India, we are guiding down a little bit due to a situation regarding liquidity and tighter credit conditions for 430,000 to 400,000, primarily in the heavy-duty segment actually, and Japan, unchanged at 45,000.

So all in all, we are forecasting, still, a rather stable, you can say, but stronger 2019 when it comes to volumes out to in the different markets. When it comes to our then situation regarding order intake and deliveries, yes, as a matter of fact, there is - if you look at the quarter in itself and unbalanced obviously, and it might be mostly pronounced than in and maybe the most interest around it in North America and Europe.

I will actually come back to the situation in North America on a separate slide. I think it's worthwhile to go through what we see there.

But just a couple of words when it comes to Europe. The starting point for us again is the total market of 300,000, good levels, slightly above the trend line and the mid-point of the long-term trend.

And our particular situation, obviously, is that as I said, we had a very, very strong order intake in quarter four 2017. And mainly related, as I said, to the price increase announcement in Europe as the 1st of January but also related to some sort of, you can say, almost seasonality effect, a number of big fleets that we actually booked for Eastern Europe in the quarter four, and they have not been booked in the same quarter here.

I think it's worthwhile also saying regarding Europe that if you look into the quarter four '16 figures, that was on - if I remember correctly, 24,700-800 [ph] we are still well above, and that market then with 309,000. So stabilities there, we need to be granular just to be clear here.

Otherwise, I feel it's pretty un-dramatic, and some of the segments you see an Asia here is mainly related, as I said, to be the Middle East but also a little bit of stabilization in some other markets. Yes, you can also, by the way, say, right, I can take that in a Q&A.

The North America situation as I was saying into, you see it very obviously here, net orders in 2018, 484,000, which in a way is positive, but in a way is also challenging when it comes to really organizing in order books that has the right level of quality. And I think history has told us that being very close to dealers and customers and knowing what is the quality of the order book is key in independently where you are in the cycle.

We know that our production capacity is approximately - we can be 330, 340, and 315, total in the North American sector. It depends a little bit on how the total situation is not only at the OEM side, but also when it comes to the full supply chain.

And last year, we ended up around 310, 315, as you know. So I think the message here, what is very, very important is that the backlog in the industry is still high, we see it in our order books that we are fully booked more or less, my [indiscernible] in 2019 and we have not opened the order books in 2020, because it is not serving us in the way we want to open it now.

So we have actually deliberately been holding back that situation. So I think still it's very stolid situation.

We have been together with dealers and customers cleaning, washing, looking through the things and still extremely solid order book for - an order board for 2019. When it comes to market share situation, starting with North America, despite and I don't want to repeat myself too much about the constraint in supply chains, but I think we have been more open about it.

We see that Volvo actually after now the changeover into the new program that is very well received are actually gaining market share here. And that is positive because our own constraints has been the volume in itself in the value chain.

On the other hand, with Mack, again, the same situation. As you remember in quarter one and partly quarter two last year, we did the changeover into the new models, and in primarily then also on the long haul execution of the Mack Anthem.

We have been more struggling there to get the supply chain right. We have some specific Mack suppliers, where we are together now are working.

We see an improvement in the Volvo system. We see also improvements in the Mack system, but there will still be a journey to be made.

So order board, extremely good, well received, and customers are all satisfied with the product, but we need to continue to work in - primarily in the Mack pipeline. Europe.

You see that we have had a small decrease in the Volvo market share. I should say that this is primarily related - there are some market mix effects if you look into it.

But the primarily reason for us is in the good market, we have made the highest priority on the quality in the business, pricing, price realization, et cetera. And as I said, that has had a positive outcome for Volvo.

And still, I should say that we are all satisfied to be on the 16% level and make priority also on that side. Trucks is a good stabilization important to us, stabilize while maintaining a good quality of the commercial conditions.

So really well done also by the Renault team here. We have a progress at Volvo in Brazil, important now when the market is coming back strongly.

Still from low levels, but if our forecast is great, which we believe because we see good activity level, 70,000 stores should be something in Brazil again and that is good. And as we see, we have regained market share here after some also price realizations that we did primarily in 2017.

Also, strong situations in South Africa and Australia, where we are maintaining our leading position for the group and a very complimentary offering among our different brands here. And in Japan, as we said, a little bit lower than in '19, full focus on the turnaround plan, but we regain market shares.

And I think we were around 16.6% or something of the first three quarters, a very strong fourth quarter for us. Let's see where we are.

Construction Equipment then, good demand continues in key regions. We continue to see a strong North America also for next year, and we are also in Construction Equipment, having a pretty unchanged market forecast guidance.

We feel come on high level, also sideways in Europe and that China now is levelling off more towards the trend line. And if you compare with the last peak, I think that is, for us, in a way, healthy, then we should be humble and say that there is a certain uncertainty about how much it will have offer guiding for the time being it will see to minus 10, so no drama.

And in addition to that, we feel also that with the mix between SDLG and Volvo brands, we also have a strong position in segments where it will continue to be relevant, not this compact for example SDLG. But having said that, being very close to dealers and customers is important in all markets and in particular now in China, so we can now follow that together.

And also Electric Site, we have that up, that is seamlessly grown, we have now been conducting a test together with Skanska for a couple of months or almost a quarter, it was a quarter actually, showing fantastically good result here when it comes to a few two reductions of potential up to - or we showed actually 98% operating cost down with 14%, fuel consumption down et cetera. So the potential is enormous and we are now pushing forward these type of solutions in order to have it so to speak commercial in the relative near future actually.

So really well done by the teams here. Another very important statement and I think also a bold statement is where we said that for applications and segments, where it matters, we will go electric.

And the compact segments for wheel loaders and excavators are typical segments where it matters. Often city operations the noise level is important.

You have availability to a grid, if necessary, but you can also operate with a good degree of freedom without the grid, et cetera. So here, what we say, we de-complex our complex structure by actually taking off the diesel offering as from the next the emission levels and we are doing it quickly, and we are doing it firmly.

And that will, I think, also give a good boost to our segments in compact equipment here. So very exciting about that.

As I said, pretty quick guidance on this, we are continuing to have a good demand, as I said, in key regions keeping Europe unchanged on a stable and good level. We continue to see good demand in Germany, Italy, U.K.

and France. For example, we are also having unchanged forecast for North America from zero to plus 10%.

South America unchanged. If anything there, I feel on there is a possible upside, but let's see it, we are not seeing the signs equally strong as on trucks.

And Asia then unchanged minus 10 to zero, and the same goes with China. And I think I've been through that, that we are following that very closely, but that is the main scenario that we look at for the time being here.

Also on the order intake side here. Maybe just to make a comment, and that we are guiding upwards on North America, and then you have an order intake of minus 24.

And not to make that overly complicated because that has to do with comparison figure that was extremely strong quarter four, and we had also sequential situation where quarter three this year was extremely strong. I think the proof in the pudding is that the order board - the order book this year in comparison to last year is plus 15%.

So we have actually plus 15% more order enhanced now than we have last year and that is the proof in the pudding. So despite - apart from that, you'll see that it's a continuous, so to speak, pressure made in almost in all regions when it comes to deliveries.

And again, I think, that organization is doing a great job actually to take care of these opportunities when it comes to ship it out and get the extensive rolling fleet going forward. Buses.

A couple of comments. As you remember, mainly due to relatively weak order activity late '17 and beginning '18, U.K., Nordics, and also somewhat North America, we had lower deliveries in quarter four.

I think the bus organization worked well given that - and got to topline, that was good, but also the transformation program continues. Strong order intake.

Bogota, a very important order for us, 500 - sorry, 700 buses. And also strong order intake in Chile for Santiago and to Australia also big order plus 100.

So that when it comes to the order intake, it looks really good here. Also Volvo Penta, extraordinary quarter obviously.

You know the reasons. The pre-buy when it comes to the Stage V situation in Europe.

I think it was fantastic achievement to really manage this massive increase in the fourth quarter and the whole organization, including also our industrial backbone, serving Volvo Penta has done a fantastic job here. That order intake decreases by 90% is on the back of the stronger pre-buy, but you should see that the underlying situation in Penta is very strong.

Industrial, all speed segment growing. We are taking more orders.

We are getting that into execution, and we see that also coming through in the service businesses. You have complete different utilization.

So Penta is now standing on two very, very strong pillars here. And when you look at those two pillars of industrial and marine, you can also subdivide that into furthermore strong pillars of industrial all-speed, industrial one speed or power gen, marine - commercial and marine pressures.

So - I think you'll see that on the marine pressure, we continuing to do innovations. Here, you have the twin insulated, 13-liter IPS on a 94-foot, slightly above average, yacht [ph].

And you can see what the IPS is doing with an optimized installation together with the 30-liter, minus 45%. And then I can say that the starting point is not - is quite a lot aeronautical mile.

So I think there is - it will be a continued big interest for this, fantastic achievement. Finally, VFS.

We continued very, very strong and solid performance. What we see is that still the performance of the portfolio, stable, very low levels of non-performing customers.

Being very close to the business, we've had an all-time high on that your retail financing up to almost SEK20 billion. And now with a very, very stable platform we have an performance in the professional organization, we are actually having good discussion about the penetration level.

We are 25% down. Let's see if we can do a little bit more because we also know how will depreciated this is when it comes to retention rates, et cetera, for customers.

We chat - we talked about - I mean, we have a direct offer on that now in relation to the last, so to speak, situation in China. It is VFS really running the business now, and that is also great.

And also, the iLabX situation, I mean, some of you guys are already into FinTech anyhow because are working on that on a daily basis. We actually invited companies to participate in our innovations on the financial services area.

We've got 170 start-up companies applicants. We were actually drafting out from 17 that came, 6 that will work for us for this year and see what we can do innovation.

So also a great initiative I feel we want to have it here. So by that, I think we are going into the financial figures.

Mr. Jan Ytterberg.

Welcome on stage.

Thank you, boss. Well, first, before going into the financials, of course, an honor for me to be here and to be at Volvo and also of course to have good figures to present for you, which is the result of an outstanding performance by our Volvo employees, but we should not forget our Volvo channel partners as well and are thinking a lot about the suppliers.

And this is what we have actually achieved together as financials. So Martin was into it, mainly talked about net sales in the fourth quarter, an increase of SEK14 billion, up to SEK105.8 billion.

Currency adjusted growth of 10% on net sales. In the back of that, we have, of course, the vehicle, and machine engine sales that have increased 11% in local currencies, reflecting then the high demand in general and as Martin was into, the very strong, both from machine sales and vehicle sales in North America.

Service sales in - grow with some 6% currency adjusted, reflecting then the high transport demand and increasing rolling fleet and, of course, also a vehicle utilization. As regard regions, as you can see here, currency adjusted net sales increases were more pronounced in North America reflecting the demand of vehicles and services, whereas Asia, if you take out currencies there, it was actually lower than last year and its related to the truck deliveries to Middle East, partly offset then by increased machine sales in China.

The improve demand in South America impacted positively, and Europe sales adjusted for currencies then were slightly higher than the fourth quarter last year, which was a result of improved machine deliveries and service demand. If we take a look on the operating income per business area, we can first start to conclude that we had fourth quarter that improved to SEK10.6 billion, giving an adjusted operating margin of 10%.

Improvements were noted all across the truck brands and business areas, where the contribution from group trucks, Construction Equipment and Penta were actually the most sizable here. Net cost for group functions and others were lower than last year, and that was mainly related to an underlying improvement over our business area Arquus, and the provision, if you remember, of a lost contract that we've made in the fourth quarter last year of some SEK300 million.

We had also an positive effect related to a divestment real estate here in the fourth quarter, and currency impacted positively with SEK1.2 billion. And that was then mainly related to the weak Swedish kronor compared to the dollar and the euro.

If we look at the operating income and improvements in another dimension, we can say that the main contributors behind this was actually then the 4% higher truck deliveries, 24% increase in machine deliveries and 47% of engine deliveries, quite astonishing figures actually if you just reflect on them. And that, of course, had a huge volume impact on gross income.

And of course, also on top of that on gross income, the higher services across the whole group. Furthermore, as Martin were into, we saw good price realization coming through all through the year and also here in the fourth quarter.

And also, we've got a positive but limited capacity utilization effect despite then having a strained supply chain in general and with the sharp increase in U.S., that was more related to that in this quarter, that impacted negatively. But all in all, the cost per unit decreased slightly in the fourth quarter.

And that, together with the positive FX effect were the main contributors to the improvement of gross income. If we move over to R&D., you can see that activities and expenses have been noted increase - have been noted all through 2018 and continued also to be higher here in the fourth quarter.

The high ambition in areas like electromobility, autonomous driving, connected solution and also in combination and with the challenging emission demands from legislators and also on top of that, our ambitious demand to improve the product offer and our products in general. These together are the main drivers behind this in the quarter and will be so in the coming quarters.

The capitalization R&D cost was on high level in the fourth quarter as projects have been moved into capitalization phase. As regard to selling expenses, half of what you see as a deterioration here is related to FX, and the other half is related to higher ambition level, higher activity level, and of course, the demand situation in itself creates higher costs.

Deterioration of other here is then related to some positive non-recurring items last year and some negative recurring items this year, which - and it's also affected by the high volume. And as I said before, FX had a positive effect on adjusted operating income.

It was not only accounting, it was also cash that was generated during the quarter. Operating cash flow in our industrial operation was SEK15.5 billion, positively affected by, of course, the strong earnings, but also a release of working capital of some SEK6.1 billion related to the increased trade payables which is normal as the payables increases after the vacation period during Q3 in Europe and also, of course, related to the high demand in general.

Inventories decreased slightly during the quarter, reflecting the high deliveries, whereas pay - receivables were stable. Net investments increased compared to the fourth quarter last year to SEK3.7 billion and reflecting then, of course, the high capitalization of R&D, which is the other side of the coin, as well as higher investments in property, plant and equipment, mainly related to replacements investments.

And with the higher ambition activity level we have in the company, the CapEx of tangible assets will gradually increase as we see it coming through here in the coming quarters. The high cash flow generation was reflected in the increase of the net cash position we have in industrial operation with some SEK14 billion during the quarter to SEK43.9 billion at the end of the year.

If we go into a little bit more detail to the segments, trucks. Our truck deliveries increased by 3%.

For heavy-duty, medium-duty trucks and current - currency adjusted net sales by 7% compared to the fourth quarter last year. The strong demand and improved vehicle deliveries in especially in North America, and here we have a 35% increase was the main contributor to the increase of currency adjusted net sales of vehicles of 8%.

And the deliveries in Europe were slightly lower than fourth quarter. As Martin was into, mainly then related to Eastern Europe.

Service demand continue to be higher, reflecting, as I said before, the high demand on transport, then increasing rolling fleet and of course, also high utilization of the vehicles, and that was valid across brands and regions. For trucks then, currency adjusted sales for service up 5%.

If we move over to EBIT and operating income then, adjusted operating income for trucks, it improved to close to SEK7.5 billion giving an adjusted operating margin of 10.9% in the quarter. Behind then the improved adjusting - adjusted operating income was mainly then, of course, since we are a company very much dependent on the volumes, the high deliveries of both trucks and services, a business climate with possibilities of good price realization; and once again, a better capacity utilization and somewhat lower cost per unit then.

The higher activity of R&D which you saw in the group is actually related to trucks, where projects and capitalization phase impacted positively, partly offsetting then the higher cash out of R&D. Selling expenses was higher than last year.

Once again, ambition level, activity level and the volume on top of that impacting negatively. And for the trucks, a positive FX effect of SEK0.8 billion in the fourth quarter.

And this were also the reasons behind a good leverage we can see on the adjusted operating margin that increased 1.7 percentage these units compared to the fourth quarter up to 10.9%. If we move over then to Construction Equipment.

We were into machine deliveries up 24% in the quarter, increases in all regions except Africa and Oceania. The increases were particularly strong in China and for SDLG.

Both North and South America experienced sharp increases in deliveries, and that were related to the compact and the heavy segment in North America and for South America in Brazil then. European deliveries increased to 18% with increases in both Western and Eastern Europe, and that meant also that we had an increase of the currency adjusted net sales for machines of 19%.

Whereas then the currency adjusted service revenues increased more and more directly here for Construction Equipment compared to previous quarters, and that was mainly related to general lower activity level in Turkey and one isolated dealer problem in Southeast Asia. All in all, that meant that net sales for Construction Equipment increased by 16% to SEK20.3 billion.

Result-wise, the year-on-year improvement tractors impressive. We have seen of the operating income continued also here in the fourth quarter for Construction Equipment, but somewhat more moderately than earlier quarters.

And operating income improvement was some SEK335 million to SEK2,157 billion, given an operating margin of 10.6%, slightly lower than last year. The improvement behind the operating income was then higher equipment deliveries, also to some extent the 3% increase of service volume, and that was partly offset then by higher production costs, where part of that higher cost - production costs are related to non-recurring item and part of, as you were into, the very high increase we have seen in production, and thereby also sustained - strain supply chain.

And also on Construction Equipment, we've experienced somewhat higher selling expenses, whereas R&D cost were stable between the quarters. FX had a positive effect of SEK150 million.

The negative effect of the non-recurring item, which were into affecting production cost and the higher vehicles sales in combination with moderate increase of service revenues or service volume. And as you know, we have what we can call over average margin on services.

That mix effect impacted, of course, taking out these FX, especially then the production item effect would have meant that we would have continued our improvement projector on operating margin also here in this fourth quarter. Buses decreased.

Volume is up 350 units compared to the fourth quarter last year. U.K., North America, slightly negative on those markets, partly offset by higher deliveries in Africa and Oceania.

Product mix impacted positively related to some specific customer orders, and that made adjusted vehicles stay on the same level as we saw in the fourth quarter last year. Currency adjusted service revenues were increasing with 5%, which meant that the total net sales for buses were up to close to SEK7.5 billion in the quarter.

SEK266 million of operating income, that is in line with last year where we have all the negative effect, the lower bus deliveries but on a positive effect, we have the product mix and also the somewhat higher 45% higher service volume. FX plus SEK100 million in the quarter, which meant that the operating margin - adjusted operating margin was 3.6%, slightly lower than last year.

And of course, this is not where we want to be with buses and further improvements are needed to actually reach an acceptable profit level. Well, Penta, what a year.

With the pre-buy ahead of euro Stage V coming to an end in this fourth quarter and Unilever's [ph] were extraordinarily high positively affected net sales and of course, operating income. But also regions outside Europe showed a good growth as well.

The increased deliveries was reflected in the increase of currency adjusted sales on engines, 46% service sale continue with a strong growth path of 7% also in this quarter compared to earlier quarters in '18, meant that we had a net sale for Penta up to above SEK3.8 billion in the quarter. Operating income increased quite impressively from around SEK200 million to SEK500 million, i.e., up SEK300 million mainly then on the back of strong engine deliveries but also continued good growth of the services.

FX also here impacted it around SEK100 million and operating margin improvement of around 6 percentage units to close to 13% in the quarter. As regard financial services, strong demand of vehicles and machines, together with a well-performing financing operation were drivers behind yet another good quarter for Volvo Financial Services.

The credit portfolio increased to SEK149 billion at the end of '18. That is currency adjusted and an increase with 10% since last year.

And customer financing markets continue to be highly competitive, putting pressure on both finance penetration and spreads. And the risk appetite in major main markets are competitive and high reflecting then, of course, the good transport demand, the good finance of our customers and also low levels of reducing credit losses.

For financial services, operating income improved to SEK70 million related to the growth and performance of the portfolio on the negative side which is the lowest spreads. FX had a positive effect of around SEK25 million in the fourth quarter.

And as you can see, the contingent improved return on equity since the last year has continued and we actually passed 15% here towards the end of the year. So going into just one slide relating to the full year.

When I started at Volvo, in November, 1st of November, I started to share a dream with my colleagues, and that was 400, 10, 40. Net sales being SEK400 billion, operating - adjusted operating margin being 10% and over SEK40 billion of adjusted operating income.

And we actually reached two most important one, the two most important dream levels related to profit but came short out on net sales. But I've chose that one than the other, so I think that was very, very good and a strong achievement once again of the company.

So for the full year '18, adjusted operating income was SEK40.7 billion, an improvement of SEK11.4 billion and operating margin of 10.5 - 10.4%, and that is an improvement of 1.6 percentage units compared to last year. Improvements, noted all across truck brands, business areas except for buses in the aftermath of lower bus deliveries.

Currency impacted operating income positively by close to SEK1.6 billion in 2018. And we also make a forecast for 2019, which is related to transaction flows.

And there, we see a positive effect of around SEK0.5 billion, so a limited positive effect. We don't make any forecast of translation FX, which will also, in the end, come in here.

Behind this is of course, the higher vehicle machine and the engine deliveries as main contributor to improved gross income but also of course, with a strong service sales, we also see the service impacting positively here. Once again then, without making any drama around it, we have the strength of supply chain.

And if you reflect on the increases I've been discussing or talking about here, you understand it. In the end, we did have a lower cost per unit, so we have a positive effect on gross income due to that.

And then we have the R&D activities and expenses, which we have been noted all through the year, the increased activity and cost. But as projects are coming into capitalization phase, we also see how the net capitalization increased.

And also, that we see for 2019 that we will have a positive effect, net positive effect on capitalization, but limited to around SEK0.5 billion for the full '19. As regards selling expenses once again, of course, impacted by a currency one third is related to the currency of the other two thirds related to the activity level and also to the high volumes we are handling.

Deterioration of other here was then once again related to positive non-recurring items last year and negative non-recurring items this year and also of course, partly affected by the high volume as such. So with the strong financial performance in '18, good cash flow generation and a good net cash position in industrial operation.

We are entering to '19 from a position of financial strength. Martin?

Thank you, Jan.

You're welcome.

I think we have already been saying that, and you summarized it well, Jan, so we can say that this is a summary of the 2018 and the outcome of the decision of the Board of Directors to propose at the AGM then the 5 plus 5 in dividends. So by that, I think we'll perform Q&A, Tom [ph]

That will do. And we have a - yes.

Björn Enarson, Danske Bank. Back to cliff-hanger and talking about North American truck orders, and we have seen, of course, market data or SET [ph] numbers for some months now and some cancellations.

Can you give some color on how that has been pushed out? Is it from your side or from customer side that we have seen cancellations?

And then secondly, quarter on working capital seasonality, what we can take that afterwards?

If we start with down the North America current situation in order board, I should say that primarily it has been a discussion between us as OEM and our dealers on how we should look upon the discipline in the order book, and that has mainly been driven by this. Then, as I've already said, I think we've started to say that in quarter two already at the reporting that obviously, we have seen some small amounts of, if I may say so, double booking among some of the customers.

I think we have spent now the last three, four months to really go through that together with dealers and customers from our side for the two brands. And as I said, generally speaking, high activity level, when we follow the connectivity data, when we see the order book, et cetera, I think we are coming to a situation where we'll we continue to have strong order board.

But at the same time, which is now 484,000 in order intake despite than the weak in quarter four. We will also continue to have comparison figures in order intake.

But again, I think it's more important to see what are we guiding for, what is the activity level and what is the discussion among our dealers. And if you call them, I don't think that they are talking about cancellations, they are talking about deliveries.

So that is the situation. We see that on the used side also by the way.

And just a quick question on working capital seasonality that have for Volvo always been extremely typical, I mean, for every year. How should we look upon payables, for instance, if you need, to some extent - that some period of time, reduce production?

Would we see similar swings that we have seen in the past?

As you're into Björn, the seasonality, as you can see here in operating cash flow and working at [indiscernible] we had a lot of seasonality of course, to sales season. But here we also have a seasonality more related to our production.

As you know, we have vacation period in Q3, especially in Europe, and then we have - or sort of paying payables and then getting back and we ramp up to production, and again, especially in Europe after vacation. So that is a positive payable effect, which is also valid for the first quarter, where we start up the production after sort of shutting down around year-end, and also the normally high deliveries which we have in Q2 and in Q4, which is, of course, even more pronouncing this effect So as you're seeing in the past, we have strong quarters in four and Q2.

And I don't expect that to change with the payment terms and the way our customers behaves, et cetera.

All right, should we let one telephone caller on the line, please?

Yes. Hi, Martin and Jan.

It's Klas from Citi. A couple of questions please.

So first on Construction Equipment. Can you just confirm that the reason for the slower margin expansion there is not price cost like what we saw with Caterpillar?

So it's entirely because of high yield production cost, which is pretty normal at this point in the cycle and because obviously some slower service growth in Turkey. Are you not seeing any negative pricing?

And then sort of related to this, the drop-through in construction is now below 10%. Could the production disturbances abate already this quarter, which will see the drop-through then accelerate again here in the beginning of the year?

If I start on the pricing, there, I think we can confirm, that we still see solid pricing situation for Construction Equipment more or less across the board, so that is clear. And we are, of course, following that.

And we have the positive price realization also by the way. Having said that, I think also, Jan, you have said that its then mainly related to the production cost side.

Well, one part is non-recurring item that we took in the fourth quarter and the other part, as I said is the very stretched situation that we have now. And again, I have to say that given the continuous improvement in deliveries and in production increase, it was a little bit expected at one point in time.

So I think it's underlying still the very solid.

And as regard services, I mentioned Turkey, I mentioned an isolated dealer problem, eliminating that, we would have been at 6%, 7% more or less as we have seen in the earlier quarters. So no change of the demand of services underlying.

Very good. My second one is on truck orders and thinking about Brazil, a very strong market, but weaker orders than I thought.

There seems to be a relating capacity constraints which should also be temporary. You have aftermarket to 70,000 here which I see as solid replacement.

When will the capacity in Brazil come on stream for you which can be re-boost orders there?

What we are doing for the time being is actually that we are increasing our capacity more from then the global, so to speak, situation that we have on some of the main powertrain components, et cetera. So we have a focus on that given the strong situation, as you say, and high activity level and positive is mean in Brazil regarding the transport sector.

So that is what we are doing as we speak gradually.

And we have both lived in Brazil, and we know how it is. It's not a slow increase.

It's normally extreme sharp decreases and increases, and now we are following increased pace.

Absolutely.

My final one is on investments. We appreciate that the total cost of ownership parity versus diesel and full electric heavy-duty is far out.

And therefore, you don't need to ramp investments in heavy-duty EV, but how about autonomous and connectivity? We've seen Daimler announcing pretty big investments recently.

And so maybe you know R&D creep on EV, but should we expect investment ramp on the autonomous. Side R&D is going higher, but it's in line with your previous communication.

But should we expect a further step-up from here?

If I start there, I think already, as we have communicated, we have gradually then moved our, so to speak, focused in R&D portfolio into the new - into Bracus [ph] technologies and electromobility connectivity and autonomous, but also other related, so to speak technologies and also in some research phases. We still believe that I mean, we have today good balance there.

And we see, as Jan was into a lit little bit, in the coming quarters because as we speak now, we are still going forward, quite substantial investments when it comes to the emission and the greenhouse gas regulations, et cetera, in North America, Europe, et cetera. But also, continue to focus in these new technologies that are also related, by the way, because partly, that will be offset by increasing, for example, a electromobility population.

So we will see an increased activity level. But having said that also, with the forecast we are saying now for 2019, we feel that we have a good balance when it comes to R&D in relation to sales.

And this is super good investment for us, including EV, I have to say, because now we are launching - we were launching last year for both Renault and Volvo in Europe, but by also announcing that we will go for a different applications for Mack and UD, as well as - is all related around Construction Equipment. So good balance I think.

Yes. Of course, we are running the machine pretty heavy now, which means that we have some wear and tear and that we are also recovering bottlenecks from time to time which we are removing.

I mentioned that and also pointed that the replacement investment which is the reminder - main driver behind that property, plant and equipment increases. And as I said, we will continue to see that with these volumes we have.

Yeah. I just want to come back to the - obviously fear among some market observers that it could be a big step-up on EV, but it's obviously limited to light and medium-duty rather than heavy, which is the majority of the business.

Just I wonder sort of...

I think it's also important to say what we have said but reiterate that, that we are to a big extent through also the convergence into a global modular product system for our truck brands. That has been pretty big proportion of our R&D investments over many years because it's easy.

When you buy something, to say, okay, now you will have scale, et cetera. But left in the room for 50 years will be the engineers to get their act together, and that has been worked on highly and the Volvo Group for quite some years to get a modular system that we can utilize now that platform, not only for the truck brands, but also for Construction Equipment, buses and Penta, and that is what we see as well.

Thank you.

Any question in the room?

Yeah, hi. Over here.

Mats Liss at Kepler Cheuvreux. Just a question here in Europe.

I mean, you mentioned the tough comparison in Europe. And I guess the question is more like if you could say something about the pricing in the current order backlog if you compare it to last year and how you view sort of going forward…

Yes, absolutely. So Mats, there, as I said, I mean, we have focused on that in the good market conditions that we have seen in '18 and also saw it in '17.

And we have seen a positive effect out of that. So that, of course, is included also in the order backlog that we have.

Looking at Europe, you see some, well, exchanges there going forward, may be in the engine - U.K. for instance, and it's a broader market for you.

Can you say something about the developments there?

Yes. Of course, we have seen some signs of little bit wait and see.

And I think that this is more the naturally if I put it like that, specifically with the type of equipment that we have that you can wait a couple of months and see what will happen. No drama though.

But of course, we are planning together with our dealer groups with our own organizations since we have a pretty big capital organization in U.K. as well, both when it comes to, so to speak, the flow from U.K., but also vice versa, but no drama.

But of course, the longer these drags, the more difficult, so to speak.

And finally, just about, I mean, with the emission related charge you make in the quarter, can you say something if it's sufficient or if you have any sort of...

No. But what I - thank you for that.

I think it's very important to say that when we went out with a press release saying the 16th of October, we were clear about that, I mean, first and foremost, we dictated it. We, so to speak, acted upon it.

We saw this degradation over time. We were clear about that that we have identified the root cause and we were, so to speak, also, very clear about solutions for different segments.

What we have done since then obviously, and our engineering group has done a great job here together with authorities and customers, we have identified what is, so to speak, the risk population and how does it look like. Thanks to different kind of tools and not at least then that we have connectivity, we have been working harder to identify, so to speak, the solutions and also the populations.

So I think we have done a good job to have as good estimate as you can get in that situation.

Okay. Thanks.

All right, let's switch to the telephone.

Yes, good morning. Thanks for taking my questions.

The first one is around Jan's comments with good operating leverage in the truck business. Now to take issue with that because if I strip away the currency and the R&D capitalization, and that there was obviously positive price in that quarter as well, then you would probably had virtually nothing.

I mean, I now I realize that there was European declines in volumes, and the overall volume deliveries were up 3% or 4%. But can we really be confident that there is operating leverage in the business, given that the cost dynamics on selling expenses maybe needs to be explained there?

Well, we were into that. You are mentioning the positive effects.

I was also talking about a limited cost per unit effect and the issues we have had especially in this quarter, which of course limited a normal, what you can call effect of the strong increases we have seen, especially in U.S. As it relates to - so the underlying - and as we have talked about, now we come to a little more stabilized situation but on a high level, but the stabilization in itself is good because the increase is a problem, together with a high level.

So now at least we can work in a more stable platform as you see it, which will be good for efficiency and cost and suppliers as well. Now on selling expenses.

Of course, we are gearing up the machine. Part of that is related to the debond situation in itself.

Part of that is related to higher activity and ambition level. And that is sort of something we see.

And of course, we can address it if we don't have the market, but we have the market. So we will experience that in these circumstances going forward as well.

And well, I think that's the big thing. What we can also say that even though we have raw material and our negotiations with supplier in sync.

So we have limited effect for the full year, a certain quarter could be plus and minuses if you take a look at it. And this quarter, actually has a little more of the net, was a little more negative than if you take a look on the full year where we are in very good balance between commercial negotiations and raw material.

But in general, we feel that we have the operating leverage also on the truck side.

And Graham, just to fill in here. I mean, all days in the week, I go for, I mean, getting the lost volumes now with a reasonable, so to speak, even if its low - little bit lower leverage in the short term to get the rolling fleets out there.

I should not sacrifice that for one minute in the situation given that we will have the best - we see that we have a better service penetration as well.

Thank you. And perhaps related to that, is that I mean, the European volumes were obviously weaker compared to the U.S.

So there is a mix issue. And thinking into 2019, I mean, DAS [ph] last night on their call were saying that a market share ambition from 17% up to 20% trades on their Capital Markets Day yesterday talking about MIN [ph] and gaining share.

What sort of market share do you need in Europe given your volume expectations down Europe, 6% or so in order to generate margin progression in this business? I guess, we are going to be facing a weaker mix from Europe this year?

To start - Martin here. To start with, I feel that I mean, we have been focused and we'll continue to focus on to have, so to speak, the right balance between market share, ambitions and the quality in the business.

That is most important because we are still looking about good levels here. And I think that is the name of the game for us, both in Europe and in North America.

While North America probably - or will stay, because we've also had a changeover as you know, in Mack result, but then we were still partly in the changeover of Volvo last year. Again, we have also worked to do that to continue to improve the situation with the production and supplier and the full value chain, et cetera.

So we'll continue now to optimize in both regions here, but we will not go into raise or the wrong type of market share. But of course, we feel that we have a strong offering, basically, good relations with our customers.

I would just like to comment on the market mix. I didn't mention a market mix in my presentation.

And the reason is, of course, that we are, with more, I would say, in-house powertrain in U.S., gearing up our profitability in U.S. in general, and we also had lower deliveries in Asia.

And I was talking about Middle East, which is, of course, from a mix perspective, sort of leveling out effect, you were looking at.

Okay. Thank you.

To the room.

Hampus Engellau [Handelsbanken Capital Markets] I have two questions, I promise you. So starting off with if I remember correctly on the Investor Day in New York you presented a heat map over the profitability in trucks.

And if I remember correctly, there were some yellows on UD, Renault and also North America. Could you - given close in this year, could you comment a little bit on changes in those colors?

And second question is on the trend line. You're talking about 300 for Europe, which I think will be the fourth year and North America, 310, historic trend lines has been around 250,000.

Do you see change in the trend line given the e-commerce, or how should we think about your view on trend line?

Yes. First of all, I think, there is some - let me start with the last one then.

I think the mid-point that - the trend line then, I think 250 is probably too low even without e-commerce because I mean, you also an underlying long-term growth in, so to speak, the trend line in itself, regardless of economic cycle. So if I should guess on the old sort of world, where we should be given the GDP growth that we've had over the last, like, 7, 8 - even if it is like a model through situation in the Europe anyhow, maybe 270, 275.

And then, if you are conservative, we have said number of times, if we are conservative, maybe the e-commerce, as it stands, to give another dynamic of 10,000. And then I think we're pretty conservative.

It means that the overshoot now is still relatively small in relation to what we saw in 7, 8 where were talking like 80,000, 90,000 overshoot from the trend line. Maybe today, we're talking about 25 to over 40 or something.

So I think that is good to bear in mind then might be so that we are a little bit conservative on the structural effect of e-commerce and those parts. On the heat map, it will be a cliff-hanger to the next Capital Markets Day.

We need to have some things that will attract you guys. But what we can say about that obviously, and Jan said it that all business areas have actually improved except buses, and buses is mainly then related to some of the core margins having a low activity last year.

I think also underlying improvement in buses are - we are seeing that now. But what I think it's very important is not at least then on the truck brand side.

And if you take them, that statement and think about our regional brands, if I may say so, like UD, Mack and Renault and the importance for them or the main regions, I think that is answering that question. Then if that will eventually change the color, that you have to wait and see through the Capital Markets Day.

Fair enough.

So let's take a phone caller.

Hi. Thank you.

I've got three short questions, well, one longer. If just on sort of the efficiency point in the cost per unit point, if you look at how the production and efficiencies are working their way through us, I wondering if you can give us kind of how would you expect the year to develop in that regard on production efficiencies in especially trucks in Europe and trucks in U.S.

and maybe how you think the Construction Equipment part will work its way through? Then the second one is just on Europe.

And yes, you have a high order intake in Q4, you also have a high order intake in Q1 year-over-year in Europe in trucks last year. And I was wondering and you talked about the timing of booking of Eastern European fleet orders.

I was wondering if you can give some sort of color on how you feel about that Q1 base and maybe when those orders are being booked. And then the last one is just on the dividends.

I mean, the decision to put the extra 5 intake and with the recommendation plus the board approval. If you could give some sort of thoughts as to have that number was put together and perhaps how you think about the fact that this is roughly equivalent to the annual cash flow of the company this year on a total group basis, and therefore how we should think about your views and the board views of the dividend power of the company going forward?

Thank you.

Good. I think on the decisions point, Jan, I don't know, if you would like to start or...

No, I can jump in there. I mean, we are talking about the first half of '18.

We had some struggles. And of course, we expect this year to be better on that in that perspective, then I referring to U.S.

mainly. But of course, this is also very much related to the suppliers.

And even though we are very close to the suppliers, we see that it's a strength situation. And of course, there we can have a bumpy road, and we are trying to mitigate.

So I mean, in our plans, and our forward-looking scenarios, we see an improved cost per unit. But that is also up to improve for the coming quarters and year.

And that is related both through trucks and also through Construction Equipment.

And I mean, if you could choose freely and how the outcome should be - obviously we cannot do, stabilization of those level should be healthy for us when it comes to so to speak really driving efficiencies, when it comes to stabilization, when it comes to the logistical flows, and when it comes to, I mean, the sync between ourselves and suppliers, when it comes to working hours, et cetera, et cetera. So this is how it is when you've had a growing market.

But again, I think it has been very important to take high-quality deals, getting the fleet out or I think we have done absolutely right priorities. It should, with this forecast for this year, big opportunities for us.

Then, when it comes to the order intake and so to speak, the expected situation in Europe, I think I would like to come back to what I said from the start here. We are guiding for the market of 300,000.

And as Hampus said, this is still as a good market. I mean, this is about the trend line.

We feel that it's a stabilization on good and high levels. We see that in the activity levels.

And therefore, even without this, so to speak, orders and the price increase, we are going in with an quarter four order intake that is some 5%, 6% higher than it was in the quarter four 2016. That is reasonable when we see also the book-to-bill, for example, that was 1 to 1 and now on high levels in Europe.

And therefore, I think, you should think about our forecast and think about our market share. And then, you have to do something as well.

We have a question here.

So dividend the question.

I don't think the last question was answered…

Yes, the dividend. Sorry for that.

On the last one, the dividend. I think I just said in briefly, I mean, question obviously for the management and ultimately for the Board of Directors and the AGM is to find the right balance.

I mean, for us, in this type step of industry to continue to be in a position of strength, both when it comes to opportunities depending on how different scenarios will play out, but also when it comes to having, I mean, a good relation with, so to speak, the financial community when it comes to our financial services, when it comes to different scenarios, when it comes to that. That is our number one priority.

We should act from a positional strength. That is where we have the starting point.

We feel now also with what we are saying about the current climate and our, so to speak, improved performance over the last years, including not at least 2018, that we also have the room for also a good return to our shareholders. And that balance is the most important, and that's also the basis for the purposes from the Board of Directors.

Going forward, the fact that its roughly similar to the free cash flow…

What kept you from doing a bigger increase in the ordinary rather than doing any OEM, perhaps doing it in two installments?

I mean, again, I'm not going to exact details how the discussion went. I think it's a strength in a company to show that we are believing in an underlying improvement that we have been showing now a couple of years.

And we think it's also important to do that in a good responsible way so that it is understandable for the markets. And also, we think that a good way of actually showing that we have a good balance when it comes to our financial position and acting from a position of strength that an extra dividend is the right way to go so that was the proposal from the Board of Directors.

Then the second question, how should think about your comments here. You're talking about a very, very high activity level which is pushing some cost higher, particularly in sales, you're also seeing your investments coming up out quite a bit towards the end of the last year.

Be that as it may high, activity orders are still down in the quarter and what you're signaling for '19 is more of a flattish market up in some places, down in others. So why are cost in investment creeping up here with what you're signaling is stable demand situation overall rather than an increase in activity?

First of all, I think you need to look upon it from a number of different angles here. What we have said is that obviously, we have opportunities with a stabilization also to gain efficiencies and take out certain ways that we have in the system, recalling very strange situation overall.

Having said that, obviously, we are keeping high level of flexibility for different scenarios if needed. I think one of the things that we have shown also over the last years is our ability to adapt when necessary.

North America, '16 was a case like that. Latin America has been proven to be a good case.

Russia, what have you, the turnaround now with several of the truck division's. So if needed, we will take the necessary decisions to actually have a balance between, so to speak, our ambitions and the current market situations.

On the other side when it comes to investments in the transformation technologies, we will not back off because we know that we are in a very good situation, and we have also made it clear when it comes to our internal planning that, that has the high priority. That has the highest priority for us to maintain also very strong competitive situation for the future.

I think it's a good remark going there, Martin. We are also creating flexibility not only in production but also in administration, where we try to do things more in a module and stepwise projects, et cetera, to be able to...

At a big bang.

Yes. And also to be able to go the other way if we have a market that is coming in that direction, so that we are not sort of having these huge projects that are causing us problems if we have to stop them or if we have to delay them.

And also on the manning as such. So part of this is of course, when I talk about selling expenses is, of course, also related to higher services.

It's not personnel only, if I may put it like that.

All right. No more questions?

Thank you very much.

Thank you very much.