Scania AB (SCV.B)
Q3 2010 Interim Results Earnings Conference Call
October 25, 2010 4:45 AM ET
Erik Ljungberg – SVP, Corporate Relations
Jan Ytterberg – EVP and CFO
Leif Östling – President and CEO
Andrew Strap (ph)
Juan Tukmiya (ph) – Nordea Markets (ph)
Fredric Stahl – UBS
Kenneth Hall (ph)
Niclas Hoglund – Swedbank
Welcome to Scania’s press and web conference for the third interim report of 2010. And at Scania we are proud to present another record quarter. First, we will listen to our CFO, Jan Ytterberg for the financials and then followed by Leif Östling for the market outlook. Jan I hand over the word to you please.
Thank you Erik. The third quarter 2010 marked two new records for Scania as a listed company. Firstly, the operating margin in the quarter was an all-time high 18.3% and thereby passing the 17% we had in the second quarter this year. And secondly, this was also in nominal terms the best third quarter ever for Scania.
The third quarter is normally our weakest quarter during the year as our main market Europe is partly on vacation but the geographical mix of the recession has changed. So now Europe stands for around 40% of the delivery of vehicles, whereas it was pre-crisis around 60% to 70%. Consequently, the seasonal effect was more limited in 2010. With Europe that is sluggishly recovering and with uncertainty around sovereign debts as well as the Brazilian market that actually peaked as regard order bookings in the second quarter.
The need to focus on financial discipline and flexibility is as high as before. The outstanding figures we can show now in the first three quarter as well here in the third quarter were much related to Latin America and more clearly than Brazil. The Brazilian market has been booming resulting in extraordinary high deliveries that together with a strong Real have impacted the result and cash flow positively.
The deliveries of vehicles increased 47% during the first three quarters 2010, with Asia and Latin America more than doubling the volumes compared to last year. With improving demand, the production has been increased gradually and substantially during 2010 leading to significantly improved capacity utilization. At the same time we have been able to maintain high cost consciousness in the whole organization giving them an impressive operational leverage.
With the booming Brazilian market and a strong Real, we have a favorable currency situation despite drop of average rates of the Euro, the Pound Sterling and the Dollar of around 5% to 10%. The negative of this effect was SEK 165 million compared to last year which was more than compensated by positive hedge effects this year of SEK 550 million. The operating income for the Scania Group the first three quarters this year was some SEK 9 billion, that is close to SEK 8 billion better than last year giving then an operating margin for the first three quarters of 16.2%.
The improved earnings impacted the cash flow positively for vehicles and services, and the cash flow was some SEK 8.4 billion for the first three quarters whereof SEK 2.4 billion refers to this third quarter. If we go into deliveries, deliveries a week has increased with 47% during the first three quarters, there is an volume of around 43,000 vehicles in the third quarter, the increase was 70% compared to last year. And as can be seen in this graph into third quarter 2010, we were back at delivery levels experienced pre-crisis, but with a different geographical mix as the European markets are recovering more sluggishly than the rest of the regions.
And we expect now the fourth quarter to be the best quarter of 2010 as regards deliveries provided of course that we do not get disturbances beyond our control and I am referring mainly to supplier related issues. The production level has increased significantly and we are also here back to pre-crisis production volumes. Presently, the production increased 100% here in the third quarter and that’s a figure that is valid also for the first three quarters.
It has been possible to achieve this with dedicated employees as well as dedicated suppliers and with comparably small increases of costs. Our strategy to keep the competence during the recession has been key to this. The situation is though strained and we have had some production disturbances affecting us towards the end of the third quarter related to suppliers and the ability of the suppliers will be crucial to accompany the demand.
We have experienced a continued improvement here on the service side, on service volume during the first three quarters. In the beginning of the year, the service volume on markets outside Europe showed strong increases, whereas service volume continues to be rather sluggish in the beginning of the year in Europe. And as you know it’s there where we have the majority of our workshops and also the majority of our service operation. The service volume improved in the second quarter and even more pronounced here in the third quarter.
We are talking globally of a service volume increase of around 10% for the first three quarters with increases outside Europe that is higher. This as a consequence increase in parts volume was higher than the increase of workshop revenues. The increase in Europe is partly related to higher transport demand, but also due to the need to maintain and repair the high volumes we delivered out in the years 2006, 2007, and 2008 and the average age of these vehicles are simply increasing.