Scania AB (SCV.B)

Q2 2010 Earnings Call

July 23, 2010 10:00 am ET


Jan Ytterberg - EVP and CFO

Leif Östling - President and CEO


Fredric Stahl - UBS



Welcome to Scania’s press and web conference for the presentation of the results for the second quarter of 2010. And we are happy to announce a record quarter with the highest operating margin as a listed company. And the explanations to this you will get from Leif Östling and Jan Ytterberg and as usual, Jan you are first on the stage, please.

Jan Ytterberg

Thank you, Eric. As Eric said, the second quarter 2010 marked a new record for Scania as a listed company as regards to operating margin. The margin was 17% in the quarter slightly over the 16.9%, we showed in the second quarter 2008.

The second quarter 2009 marked an all time low for Scania in modern time with an operating margin of just 0.1%. At that time, I used the metaphor over (inaudible) or in Swedish (inaudible) to describe the situation we were in and we are now on the other side of the ship at the surface, but still in the cold water, as the uncertainty regarding the development of the macro economy still is high especially as regards Europe. The need to focus financial discipline and flexibility is as high as before.

The outstanding figures we can show for the first half here are very much related to Latin America or more clearly Brazil. The Brazilian market is booming, the deliveries are record high as we are taking market share. And the Brazilian Real is strong, which is very positive currency wise for us.

Our biggest region Europe is recovering sluggishly but is still on the lowest point of the century excluded 2009. To underline these trends, we can just take a look at the deliveries of weekend stay increased by 37% during the first half year 2010 whereas Western Europe actually decreased with 3%. At the same time, Latin America increased by close to 70% and represented 33%, one-third of all vehicle deliveries here in the first half year compared to 21% last year.

With improving demand, the production has been increased gradually during 2010 and capacity utilization improved. Towards the end of the second quarter, we were back to pre-crises production levels in the second quarter 2009 if you remember marked the very bottom for us production-wise as we halted the production to clear out the stock of new vehicles.

The operational leverage was impressive as we could combine a sharp increase of the volume with the cost reductions introduced during 2009. With the booming Brazilian market add strong Reals, we have a favorable currency situation despite drop of average rates in euro or and in pound sterling as well as US dollar since those have decreased to 10% whereas the Brazilian Reals has increased by 10%.

And operating income for this Scania Group was $5.632 billion here in the first half year giving an operating margin of 15.2%. The cash flow in vehicles and service segments were strong the first half year and especially here in the second quarter. The cash flow was close to $6 billion whereof $3.6 billion is related to the second quarter.

Deliveries of vehicles increased by 37% in the first half. And we were up to some 28,000 vehicles and the increase was more pronounced here in the second quarter wherein the increase was 75% compared to the very low second quarter 2009.

And we expect the third quarter now where delivery is close to record levels for the third quarter which happened in 2007, in 2008 and that will be also be closed to the deliveries we have had here in the second quarter 2010. And this is of course then provided a continued strong Brazilian market and provided that we do not have any other disturbances beyond our control.

Due to the stronger demand, the four days week was abandoned in the very beginning in the second quarter here in the European production which led to higher capacity utilization and higher production rates. We have prepared ourselves for the coming levels, the coming quarter’s levels by among other things employing some 500 persons in the European production.

Due to the uncertainty around the effects on demand of tightening fiscal balances in the aftermath of the sudden debt problems. These persons have been employed on temporary contracts. The volume of used trucks increased some 40% during the first half year compared to last year.

On services we have experienced a continued improvement of the volume during the first half year but more pronounced here in the second quarter. Already in the beginning of the year, the service volumes on markets outside Europe showed strong increases whereas the service volumes here in Europe were performing more sluggishly. And here in Europe as you know we have the majority of our captive workshops and thereby also a major part of our service operation.

The service volume improved in Europe during the second quarter, the volume increase in total globally was 10% but still with higher increases outside Europe than we saw in Europe, and as a consequence, the increase in parts volume is higher than increase of workshop hours. The increase in Europe is partly related to a higher transport demand but also to a need to maintain and repair the high volumes that we delivered out between the years 2006 and 2008.

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