Volvo AB

STO:VOLV B

Earnings Call Transcript 2020-Q2

[Claes Eliasson]

Ladies and gentlemen, my name is Claes Eliasson, and I wish you all welcome to this conference call covering the second quarter 2020. We will be listening to a presentation by the Volvo Group President and CEO, Martin Lundstedt, followed by a presentation by Chief Financial Officer, Jan Ytterberg. When done, we will open the line for a Q&A session. And with that, Martin, please go ahead.

[Martin Lundstedt]

Thank you, Claes, for that introduction, and also welcome from my side to this 2020 quarter -- or second quarter 2020 report from the Volvo Group. And this is, of course, a very special report after an unprecedented quarter that, to almost the full extent, have been hovering around the COVID-19 pandemic and the different related effects from that pandemic. Our various business areas have been severely affected with initially in this quarter, both disruptions in supply and also gradually then into the quarter, a lower level of demand leading to drop of sales of 38% or almost SEK 50 billion in 1 quarter. In the light of that dramatic decrease in revenues, it was a solid and firm execution by our organization and our colleagues and business partners that led to an adjusted operating margin of 4.5%. In order to reach that level of margin, cost decreased, excluding restructuring charges, with SEK 36 billion. Whereof, short-term layoff programs in various countries where SEK 1.7 billion; and in Sweden, approximately SEK 1.1 billion. We are still in the midst of the COVID-19 pandemic. And even if we see positive signs in utilization of installed fleet and demand of equipment and services, we also must be clear about that numerous uncertainties remain and the risk for further and repetitive lockdowns are still relatively high as we see. And uncertainty about durations and severity unknown that can cause both disruptions in supply moving forward, and we are monitoring and working very closely with our supply chain in that respect and that is working well. But still important to be very, very close there, but also how demand gradually will come back and to what levels, obviously. Also the consequences on the general economy is and I think we all agree on that, still uncertain and thereby how the short-term demand will develop. So therefore, apart from health and safety as priority #1, moving forward, of course, as it has been also in this quarter, main focus is to continue to balance the activity level in the group with actual level of demand of products and services, also moving forward into the fall because that has been a very important, and I should say, successful activity in our industrial system during the second quarter. So that will be moving into the fall, so the group can continue to maneuver from a position of strength into the future since the ongoing transformation of our industry will mean lots of opportunities also, and that is very important to remember in this situation that we are all seeing a transformation with lots of interesting opportunities for the future. So by that, I would like to come back to the slide that we actually showed during the presentation in quarter 1, where we have started to outline our way through this pandemic, even if it was a lot of uncertainty at that time. At that time, we were in the stop phase and had started to plan for a restart of our industrial system in main regions such as Europe and North and South America, and we were up and running, you can say, in Asia. The planning in different phases has served the group well, and the organization has done a very strong and solid job during the first -- during this quarter. We have now passed the restart phase that in most aspects have been working well and have now moved into the gradual return in almost all regions in the world. We noticed good performance in the entire industrial value chain. In the current situation, we have realized a rather steep return since there is a mix between a pent-up demand after the 4 to 6 weeks of stoppage period depending on what plants and operations we are talking about. And also a general demand, of course, among our customer. It is, however, still too early to judge whether the stabilization -- on what level the stabilization will be in the short-term and that we are monitoring closely. Even if we see that in quarter 3, we have a solid filling rate according also to the production level that we have now. So that gives visibility into the third quarter. So again, very much focused on balance, of course, the activity levels in the group with the actual demand level and also balance production and inventories accordingly, but we will come back to that. So during the quarter 2, just to summarize what has been focused activities for us in the group. Number one, of course, we call them the 4 Cs that has been a cornerstone also in our crisis management here. And #1 of the Cs is our colleagues, business partners and customers, the health and safety first for everyone involved in our business. And really great efforts have been made to put in place routines, procedures, physical measures to allow work with a good protection in accordance with authorities requirements, not at least when it comes to the industrial restart. And as I said, still a lot of focus in that area. Second priority is serving our customers, running societal critical activities. It has been functioning really well, I have to say, during the whole quarter, given all the different lockdowns and restrictions in various countries, but we have been able to secure a good uptime support, repair and maintenance, financial services, fleet management, et cetera, to our customers. We have -- on the financial services side, also supporting customers with the lease payment and modifications and thereby also easening the burden temporarily in order to make sure that they can maintain their operation, and we know how important that is also for retention and for future relations. And then #3, of course, during the quarter also, the restart as I saying to the industrial system in different steps. And also in that area, a very, very strong cooperation with all suppliers in the complete value chain here globally. Number 3 (sic) [ 4 ] cash. We will hear more about that from Jan, but also in these areas, as you can see, we have had a number of very important areas that have been working fine also. The going concern of receivables and payables, but also a strong focus on reducing inventory, both on new and used equipment has been executed in with a successful outcome, decreasing, of course, CapEx across the company, partly temporarily with certain measures, but gradually now mitigating those temporary measures into permanent in order to have an aligned activity level with the demand of both products and services. And then also strengthen, of course, liquidity and prolonged credit facilities in order to have the maneuverability when it comes to our financial positions. And finally then, on the cost side, immediate and forceful actions to reduce cost also. Short-term layoffs, consultants, salary cuts, activity level decrease, halt prioritization in different areas and thereby maintaining flexibility. So summarizing the highlights of the second quarter. Net sales decreased, as I said, with 38% in total, 46% for vehicles and equipment and 15% for services. Good volume flexibility in production, resulting in gross margin that not was increasing that dramatically. And holding up rather well in relation to previous quarters despite the significant drop in deliveries and even more, in certain cases, obviously, in production, given also the stock inventory reductions. And we are very pleased to see those achievements by the industrial organizations on a global scale here. Cash R&D selling and administration down with 30%, and the adjusted operating margin, as I said, came out at 4.5%. In addition, the group made a restructuring provision of SEK 3.2 billion, with yearly savings as from first half of 2021 in the same magnitude. And this provision is related to the redundancy notice that was announced in the mid of June and mainly related to a white collar reductions globally of approximately 4,100 positions. And the cash flow came out strong, given the very tough period at minus SEK 5.7 billion. Coming to volume development. Truck deliveries was down with 58%, 5-8 percent, during the quarter. And many of us sitting in this room here, we have been very long in this industry, 30-plus years, and we have never seen something like this, but that was a reality, and Europe, for example, down with 50% -- 53% and North America down with 79%. Construction equipment deliveries increased with 8%. And the positive side was, of course, Asia related to China, Asia, up 38%, whereas Europe and North America showed similar patterns as the truck side. Volvo branded products down with 20% and SDLG up to 31%. Service sales currency adjusted were down with 14%, which is also a big drop that is bigger than we normally see during downturns. And of course, related to the very big hit we had in the beginning of the quarter also related to restrictions in some of the main markets. And that has gradually then improved during the quarter. And you will see later on also how that is with certain time lag also following the utilization of the fleet. Buses, very heavily affected, minus 38% since the coach business and tourist business has been hardly hit and a big part of the fleet has been idling actually during the quarter related to all the travel restrictions that you see across the globe. Then if we go into the truck side and managing the COVID-19 impact, as I said, the forecast visibility is still low, but the utilization, as you can see on the left side, is gradually coming back after the initial period of lockdowns and other restrictions. Utilization is currently now around 5% lower in Europe than pre-corona, you can say, and also confirmed by mouth figures from Germany. Also United States show a similar gap of around minus 5%. Still too early to say what level it will stabilize since there is still a mix of, you can say, societal catch-up of the lockdowns and the current or actual general activity level. But the trend so far, at least, has been clear. And as I said, also service business related to that with certain time lag. The right graph shows the global net order intake and the gradual recovery that has happened after the initial shock in stock faces related to the measures to fight the pandemic. I mean where we -- in April, then we're down with orders of magnitude up to minus 90%. And then you can see has been rather steep increase back is now currently at the level of approximately minus 5%. But also in this regard, I think we need to look at this with a humble -- in a humble way. It is too early to judge at what level we will see a stabilization. It might be also that we will have a certain overswing after, so to speak, the pent-up demand of the stop period. So really being close here on the demand side, short guidelines in production, good balance with inventories is key factors for a continuous successful moving forward in this crisis mode, so to speak. Given the fact that we still are into the COVID-19 crisis with several remaining uncertainties, both as regard continuous measures to fight outbreaks as such, but also risk for new and repetitive outbreaks as well as how the short-term consequences on the economy, in general, will look like the visibility in our view is to -- still too low to provide meaningful forecast figures. So we concentrate instead currently to keep a good balance between order intake, inventory levels, production to keep a good flexibility in the industrial system and also on the service side, obviously. That has been the case during the whole second quarter here. When we look into the book-to-bill situation, orders and deliveries, quarterly orders for trucks were down with 47% and deliveries with 58%, but the most important achievement is the organization work to get a good alignment between orders and deliveries, as you can see here. Worth noticing maybe, in particular, is the very high alignment in Europe during the last 3, 4 quarters, but also other regions are getting to a good alignment, in particular, during the second quarter. High focus has been put on a correction of the inventory, both in the group but also among our dealer partners and the results of those activities have been good. The focus on getting to the right level in the dealer network -- of dealer inventory in our network in North America has been a special attention explaining also the steep decline of deliveries and a better alignment with order intake. And that was also partly already anticipated with an anticipated downturn in North America also for the market that we guided for already at -- during -- at the end of last year. On the market share side, in North America, you can comment that Volvo has a stable development. And we see gains for Mack, partly also related to the mix that the segments where Mack is operating or holding up better, and they are keeping positions there, but good development. In Europe, Volvo positive development up to 16.7%, but also with rather stable prices given the circumstances. Jan will comment a little bit more on that. And Renault stable around, you can say, 8.5%; also knowing that many of the core markets Renault have been severely, of course, affected by restrictions in Southern Europe. Strong progress in Brazil and all-time high for the group in total in Australia, whereas Japan shows a decline primarily related to a weak start in quarter 1, and we did see a stabilization in quarter 2. And the rather weak starting quarter 1 was partly related also to the announcement of the strategic alliance with Isuzu that temporarily created some lost momentum, you can say, but that is better now. On the construction equipment side, quarterly figures show a plus 11% in orders and plus 8% in deliveries with increases almost entirely effected to a strong demand performance in China. For the remained ingredients the figures are showing a similar pattern as for trucks but also in VCE with a good alignment and balance between order intake and deliveries. All exception as you can see North America where the very steep decline in order intake is in addition to the pandemic also result of a very strong order intake in quarter 4 last year and as a result also, I mean, balancing out that now we stop production among dealers and also we see a continuous softening you can say when rental fleets are adjusting their activities in accordance with the market activity levels. But also in the field of construction equipment, we judged it similar to trucks, it's not meaningful now with the low visibility to provide a full cost for the year here. Then moving in Volvo Buses and Volvo Penta. To start with Volvo Buses had -- as I started to say also a very tough quarter with severe declines in both orders of minus 55% and deliveries of minus 68%, the coach and tourist segment came almost into a complete standstill related to travel and tourism restrictions in most part of the world. And even if the organization has been acting firmly and swiftly that's not been able to compensate for this -- and we also did see the various steep decline on the service either. Volvo Penta were a little less affected than trucks and buses and both orders and deliveries came in at only into brackets minus 34%, but of course still very big declines here. Finally, on the business update, financial services, high focus has been, as we said to support customers also with increased modifications of contracts. VFS has performed this in a very professional way and we know that I have said also that this closeness with customers during rainy days is building strong loyalty retention for the future. So an important activity that is ongoing in the financials services area. We see, however, an elevated risk and we have therefore, increased our provisions to be on the conservative side, given the very low visibility of our future activities. Finally, we see a positive development of penetration of new contracts related to all business areas. That is also an important move forward where we can actually increase our presence during difficult times and that we will also gain from when the activity is coming back. So by that, Jan, I leave the word to you, Jan Ytterberg, to continue the financial update.

[Jan Ytterberg]

Thank you, Martin. And I think we should also take a step back and reflect that a year ago, actually, we presented a peak of the cycle quarter. And now 1 year later, we have just passed an unprecedented quarter where truck deliveries decreased some 60% compared to last year's service revenues, some 15% down; and group net sales close to 40% down. And this is to put some reflections into more of modern times, the worst quarter ever if we compare it also with 2009, and actually, in my 30 years in the business unheard in this industry. So we should remember that when we compare figures here now. But despite this, we were able to deliver over SEK 3 billion of adjusted operating income, passing actually all months with black figures, which was very important for us internally as well. And that's due to a strong cost execution, and I will come back to that. Starting then on the top of the income statement with the net sales with the different regions here, you can clearly see how the pandemic and the measures to hinder the outbreak have gradually affected the regions from East to West and both seen then in net sales and earnings. And the 39% for the group is then the combination of decreases in main regions, Europe and Americas, with 40% to 60%, respectively, reflecting then the low deliveries of vehicles and machines. Whereas Asia was flat compared to the second quarter last year. And that is due to an increased machine delivery volume and then compensated for a more limited drop of vehicles and service sales. China was the main contributor behind this, of course, then. Prices, Martin was into that, had actually a limited negative effect on vehicles and machines. We see more of price pressure when we come into inventory reduction vehicles, whereas we go to the factory, we see more of a stable price level. But on this was compensated for the group by a continued good price realization on services. Moving over to the adjusted operating income in the second quarter. That was close to SEK 3.3 billion, and adjusted margin of 4.5%. Of course, now we are comparing, as I started to say, with the Q2 last year. It's difficult to find good references for this quarter actually, but if we make that comparison, it becomes quite obvious how decisive actually volume is in this industry. If we start with the lower new vehicles, engines and service volume that impacted negatively compared to last year then, both related to less gross income of lower sales, but also as a big deterioration of the capacity utilization. And it was, of course, difficult to take out production costs with the same speed and magnitude as the volume decreased. As you heard Martin say, production volume, since we halt the production was actually more down than we can see on the delivery side out to the customers. But the volume flexibility in production was impressive, mitigating a substantial part of the volume effect by reduced fixed and variable costs. Used truck vehicles deliveries actually increased substantially in the quarter, and that is not normal in -- when we are in a crisis mode. But the lack of new vehicles during the stoppage period and the reduction of price levels impacted positively on sales that were higher than last year then, but negatively on the valuation of residual value commitments and used vehicle inventory. In total, those effects, I've just mentioned, represented an impact in the gross income represented more or less the full result we had in Q2 last year, SEK 15 billion. If we move further down in the income statement, we had an effect. Martin was into that as well, where we actually, due to the situation of the COVID-19 and the future forecast of the economy, made us increase our credit provisions by some SEK 850 million. But the main contributor to the positive operating income was, primarily then, of course, the hard work to bring down activity and cost level in the group by eliminating and postponing activities, but also by reaching agreements with employees on voluntary salary reductions, both in countries with state-supported short-term work programs, but especially then in countries without such programs. And also, of course, the state support for such short-term work programs impacted positively. And also we -- by reducing activities, we were able to take out, replace consultants, which also contributed to the strong cost execution here. And it can clearly be seen then in the operating expenses side, R&D, selling and admin. Then we also had a positive impact from JVs in the quarter, and that was related to the strong performance of our Dongfeng joint venture, demonstrating the strength of the Chinese market and the recovery of the Chinese market. FX impacted positively with SEK 300 million, and that was despite stronger Swedish Krona, but we got a positive revaluation effect on our net payable position, which is not normal either. But in this situation, it is in some major currency and that more than compensated for a negative transaction and translation effect. The transaction effect for the remainder of the year, now for the H2, is expected then to be minus SEK 1 billion to SEK 1.5 billion, reflecting the stronger krona, and of course, very much depending on the volume assumption as such. But we do not provide forecast for the full effect as we don't normally do either for 2020. If we move over to the cash flow, and already in the first quarter, we talked about this, that with the structure we have of the working capital, we were going to face a challenge in second quarter with a substantial negative effect coming from the trade payables as we have the supply of material in the first quarter to be paid out to the suppliers in the second quarter. And in the second quarter, we have limited production. And now we see the effect and trade payables have now been paid down to a new lower level. The focused work and the halt in production for some 4 to 6 weeks had a positive effect on cash flow, on inventories, where both new and used inventory decreased. And the receivables contributed slightly positively, but as we gradually moved up deliveries we got less of that effect in this quarter. And CapEx level, as Martin was into as well, was one of our focus areas was kept at the minimum level to safeguard cash. All in all, this meant that we had a cash outflow of SEK 5.7 billion in a normally strong cash flow generation second quarter but that was also then, of course, reflected in our net cash position for industrial operation that actually decreased to SEK 51 billion from the SEK 57 billion we had end of Q1. If we move over to the segments and start with trucks, of course, low truck deliveries of some, all in all, 28,000 units, including then the full range, not only heavy duty and medium duty and a drop of service revenues of some 14% affected both net sales and operating income negatively for the group trucks. Close half of net sales disappeared compared to second quarter last year. And we had a net sale of just about SEK 40 billion and an adjusted operating margin of around 2% and an income of SEK 0.7 billion. Same explanation as for the group. And except then, of course, the credit provisioning, which we will come back to when we talk about the FX. FX had a positive impact of SEK 0.4 billion. You will take a little longer time on construction equipment then. After the first quarter, actually, where we had then the Chinese market being negatively affected by the measures to hinder the COVID-19 outbreak. You saw the Chinese market recovering here substantially and Chinese deliveries actually doubled compared to the second quarter last year. The increase was particularly strong for our SDLG brands and for compact machines. And at the same time, we saw other main markets and regions decrease substantially and service volume dropped some 10%. With less Volvo branded heavier machines and more of compact machines, net sales decreased some 15% despite the higher deliveries, which also impacted gross margin negatively, but we have a light cost structure in China and the substantial volume effect, we got a really good leverage. And we can see that the EBIT margin in our Chinese operation have improved compared to last year. Also, in construction equipment, a good execution on bringing down activity levels and costs, an impressive achievement, making then the adjusted operating income decreased SEK 1.1 billion to some SEK 3.1 billion and a drop of 2 percentage units as regard margin down to an impressive 13.6% in challenging quarter. Buses was our most heavily affected segment by measures to stop the outbreak around the globe. And as personnel mobility was halted, restricted or avoided, a substantial part of the bus fleet stood idle in parts of the quarter and with the halt of production deliveries were also periodically stopped. The decrease of vehicle sales of 2/3 more or less and a drop of service revenue, so close to 40% are very unlike early crisis we have seen where the bus business, in general, have been holding up better than, for example, trucks as regard demand. The lower sales and lower capacity utilization were partly then mitigated by a successful execution also here of decreasing activities and reducing costs. But operating income -- adjusted operating income was negative with over SEK 500 million. And Penta then showed a more similar trend as regard demand as we experienced for trucks. Drop of deliveries and services substantial, of course, but -- which -- and also we have got a somewhat negative mix effect here of less heavier machines that impacted negatively. But also here, this was mitigated by a successful execution on the cost side to reduce activities and costs. So even though we lost adjusted operating income with some SEK 275 million compared to last year, the operating margin showed good resilience and decreased to 13.7%, which is a strong performance, of course, under these circumstances. And coming back to VFS. We have an improved penetration, in general, for VFS, and we are increasing penetrations compared to last year, and that mitigated partly then the substantial drop of deliveries across the group. New retail volumes stayed at SEK 17 billion, similar to what we saw in first quarter 2020, and the portfolio was slightly above second quarter last year if we adjust for currency. Coming back to modifications then. But since we had a high number of requests for modifications in the beginning of the quarter, new requests decreased gradually during the quarter, and we worked through the backlog of modification here in this second quarter. And this, together with then a general deterioration of the business environment and also then an effect of lower prices of used vehicles as they are used as collaterals in this business, we needed to have a change of provisioning parameters and thereby also the increased credit provision for future losses. Write-offs is not increasing. It's still at a pretty low level comparable to what we saw in first quarter. Compared to last year, credit provision expenses were some SEK 650 million higher. We have been last year around SEK 200 million per quarter. So this SEK 850 million, SEK 650 million higher. And of course, the increased credit provisioning was the explanation behind the drop of operating income and also of return on equity compared to last year. By that, Martin, I move over to you.

[Martin Lundstedt]

Thank you, Jan. To summarize the presentation before moving into the Q&A session. Solid execution during an unprecedented quarter, but now it's important to continue to move through this COVID-19 pandemic because as we said, we are still in many cases, in the midst of this pandemic and therefore, continuous focus on a number of activities are the highest priority, obviously. Safety first goes without saying. It has been executed, as we said, in a good way, but we need to continue to focus on that part. Carefully then monitor also the impact on economies, demand and supply to continue to keep the balance of activity levels in the group with the actual demand levels globally, but also more importantly, region-by-region and country-by-country. Balance the restart now of the selected activities with recovery in demand. And that goes across the company in all different parts of the value chain and different type of activities. We are now -- and we have been working with this also, obviously, through the whole quarter, where we have a short-term cost reductions that we are mitigating and converting them into structural cost savings. So we are creating the flexibility, maneuverability and headroom. But also remembering that the prospects of our industry is good. Obviously, there are a lot of megatrends pointing for continuous good development in the marketplace. And therefore, we need to make sure that we also have the flexibility and the strength to accelerate the transformation into the new technologies, electromobility, we are launching, as we speak, now on the truck side more broadly. Automation, new technologies like fuel cells and hydrogen, but also the business model development related to these new technologies. So by that, I think we are ending the presentation part and moving into the Q&A session.

[Claes Eliasson]

Yes. Thank you, gentlemen. Operator, will you please let the first question through.

[Operator]

[Operator Instructions] Our first question comes from the line of [ Tom Marian ] from RBC.

[Unknown Analyst]

[ Tom Marian ], RBC. My first question is, could you provide some color on the Chinese construction equipment market? Maybe what's driving the strength for you guys in Q2? Wondering if this is some pent-up demand from Q1? Or is this strength we can expect to continue into Q3? And then on bus, how much of this business is exposed to the tourism end market? I know you discussed that a little in your prepared comments versus other end markets, public transport, et cetera? And then finally, there's been a bit of chatter recently on new entrants into the fuel cell commercial truck market. Could you comment on how much of a threat that is to the incumbent truck OEMs what advantage is your JV with Daimler may have in this nascent market?

[Martin Lundstedt]

Thank you, Tom, and thank you for the 3 different questions here. We start with the Chinese construction market. Obviously, what we have seen in quarter 2 is partly related to the pent-up demand since China was in heavy restrictions during quarter 1, both, I mean the normal new year stoppage period, but also then, obviously, the prolongation then related to the pandemic. So that is 1 factor, but we still see also that the underlying and also support programs for different sectors in China and not talking about supporting only, but in the construction sector and different type of initiative and probably so driving demand. So -- and we have been successful in actually participating in that volume increase, both when it comes to the SDLG and the Volvo brand, which is, of course, important since we have seen a trend where the Chinese players have been acting strongly, not at least wheel loaders for a long time, but also in excavators. So there, we are very pleased with the development of volumes in our organization. And we see that also on a fairly stable level moving into quarter 3 now at the beginning at least. But for all sectors now, we need to monitor that development closely, obviously. And on the bus side, obviously, it has mainly been related to the coach and tourist segment. Even if, of course, the public transport segment has been affected mainly by them the supply disruptions in the beginning of the quarter where we had delays, et cetera, and we were not able to supply that. You have a little bit long lead times since you also have bought the builds to a big extent, et cetera. So in total, yes, much more heavy weight on the decline on the coach and tourist segment. But also the public transport affected by the -- mainly by the supply disruptions. Then we see now also an increased activity on the public transport side moving forward, not at least into the next mobility areas. So let's see how that development will continue now during the coming quarters here. Then when it comes to fuel cells, we think, in many aspects, it's good that there are a number of players talking about that now because the fuel cell will be one of the cornerstones -- and the hydrogen as a fuel will be one of the cornerstones for sustainable and carbon-free transportation, not at least on the heavy- and long-haul applications. And therefore, it was extremely important for us to find a solid way forward since investments are required, but not only investments into the technology as such of fuel cells and the truck side, where, of course, we will do our part, but also giving a strong sign that other actors around this now should move along when it comes to the build out of network infrastructure and also, so to speak, green generation of hydrogen. Because also in that area, it's important that you have a full value chain that is actually up to speed when it comes to renewable setup. We are very confident in our setup, a strong parameter of the joint venture that is defining where the space of cooperation is and that is a space of cooperation in the fuel cell technology, when we have done our job that we see that there is a strong maturity level on that fuel cell technology, and the setup will allow also volume development with players that have the network and that can deploy that also in volumes needed in order to get TCU and total cost of operations to a level that makes also the volume deployment possible. So we are very confident in our setup, and we are looking forward to that development also into sustainable transport.

[Operator]

The next question comes from the line of Bjørn Andersen from Danske Bank.

[Bjørn Andersen;Danske Bank;Analyst]

I have a question on the balancing of the restart. When do you foresee that production will be more in line with the demand situation? And second question refers to truck pricing of new trucks, can you give some more color on that?

[Martin Lundstedt]

Yes. Thank you, Bjørn. If we start with the restart, as we said, we have had after the almost 6 weeks stop then in our main factories and value chains. We restarted in beginning and in beginning of May, you can say. And then gradually ramping up. But in June and from end of May and in June, we have had a rather steep ramp-up to levels where we are now, where we see also that we have a good balance between demand and supply. So that's the reason also why we gradually have taken out short-term layoff programs in our different plants in order to cope with that because the name of the game now is to continue to keep a short guideline or a short lead time, we call it guideline, but the lead time between orders to deliveries, obviously. So we can serve our customers with the current demand, both the pent-up part and also the growing concern demand and keep the risks on a low level for us also when it comes to executing these orders and turn them into deliveries and receivables and eventually cash collection. So I can say now and also after vacation now, as we said, fielding rates are good to the level we are, and we feel that they are also satisfying the demand level as we speak.

[Bjørn Andersen;Danske Bank;Analyst]

And then what did you say about the inventory situation in North America?

[Martin Lundstedt]

I mean, as we have already said, I mean, after a number of good years, it's always the situation that you -- I mean when you start to see the decline, and that was already pre-corona, you did see that we had an excess stock in the whole industry. We were, in our view, on the lower side, if you compare with other players in the industry. But during also the second quarter, we have continued, you can say, successful execution. What has been positive in both our own management of inventories, both on the new and used side, but also on the dealer network, we see also a good execution. But still focus will continue in this area, obviously.

[Bjørn Andersen;Danske Bank;Analyst]

Truck prices?

[Jan Ytterberg]

Okay. Truck prices. I can take -- since I had it in my presentation, well, we see sort of the normal pattern in this situation, of course, and I commented that with more price pressure when reducing stock. And if you take a look on the globe, market was already into that. That, of course, we see more of this in North America, then we see it in Europe. But the combined effect, if you take a look on truck is rather limited. Actually, we are talking about the small percentage numbers as a total. So rather limited in this situation during this stoppage period of second quarter.

[Operator]

Next question comes from the line of Hampus Engellau from Handelsbanken.

[Hampus Engellau, Automotive Analyst]

Three questions from me. To start up on the order intake. If I remember correctly, January started off better than expected while the interesting comment on the 5% decline year-on-year -- sorry, compared to January. If you could maybe add some more flavor to that? Or what is a catch-up and where you see the underlying here? Second question, the 10,000 headcount reduction, how much of this is pre-COVID given that we were already entering into a slowdown and even if we would look at the recovery next year, we would still be clearly below last couple of years volumes? Last question for me is, if you could maybe add some flavor on the cost savings related to this, say, government's support and also what under absorption of the cost you had during the quarter? I'll stop there.

[Martin Lundstedt]

Yes. Thank you, Hampus. Then when it comes to the order intake, you're right. And when I show that slide also here on the truck section of the presentation, we also, a little bit, intentionally showed also that we had -- maybe the most pronounced, if I say, pronounced, but a slight overswing of the expected level in the beginning of the year, as you said. But we have tried also to illustrate that we are taking away that, so to speak, overswing. So we are talking a little bit about the levels that we were anticipating moving into 2020 and then we are talking about a minus 5%. So that is, so to speak, a little bit how you should see it. But I think the more important part is your second part of your question, how much is pent-up demand and how much is, so to speak, the going concern, the normal level as we speak right now. And that's a little bit the reason also why we say that there is still low visibility, and it's not meaningful to give the forecast, et cetera. Before -- because it is still a little bit difficult to judge what is what here. What I think is important to think about is, we know from historical downturns and also upturns that our general demand and then it could be small changes in that trend line, depending on new things happening like e-commerce, et cetera. But generally speaking, we are following the GDP development pretty close. And therefore, I think in the short-term year, when we will have a hit of GDP and the gradual return, et cetera, we must be prepared for a high level of flexibility and really work with the balance between what is the order intake, keep the guideline short, make sure that the production have the flexibility to deliver and hover around plus/minus levels in order to really make sure that the guidelines are kept short, inventories in good balance. That is the most important now. Then obviously, in the medium to long term, the prospect, as I said, of coming back to a positive trend line with the megatrends of increased population, urbanization, e-commerce, et cetera, they are still there. But we need to be realistic now with the GDP development, and we can still execute in good levels on -- in such an environment. So that's the reason why we are talking about that focusing that way. On the second part, you're absolutely right. Of course, we have already started to reduce position and resources according to the anticipated downturns and of corrections in the market levels. And all the 10,000, you can say, ballpark, that the 50% approximately was related to the already decided measures and the remaining part then coming on top related mainly then to the outbreak of COVID-19. And then how we are, as we have said also then in the process of continuing to reduce on the white-collar side with approximately around 4,000 positions.

[Jan Ytterberg]

And maybe I can comment on the cost savings. And if I understood you correctly, Hampus, it was more on the production side because, I mean, what I talked about reducing activities and being very careful with cost is, of course, valid for the whole organization. But also coming back to following the reduction of headcounts, we were coming into that already in a situation that we had brought down the structure into new lower levels that we expected coming in from 2019 then where we had in Q1 was something more to do in U.S., but in Europe, we were pretty well balanced, actually. So we were already on a decreasing mode, so to say. So when this happened, we were able to adjust costs pretty impressively, I must say. I mean normally in this industry, you talk about the volume flexibility of 50%, i.e., if you can reduce cost with 50% of the volume being then excluding direct material in production, that is a really good achievement at least during a quarter or 2, and we have been better than that actually. And of course, part of this is part of this governmental support programs. But you must remember that this is -- these are programs where both the company is putting in money, the employees putting in money and the state is putting in money. And gradually, as we are now moving up and getting back to a good balance in between demand and supply, of course, we are moving out from these programs as well. And that is gradually happening here and will also happen here in effect Q3. So hope I gave some more flavor to you then Hampus.

[Operator]

The next question comes from the line of Klas Bergelind from Citi.

[Klas Henrik Bergelind, Director]

Yes. Martin and Jan, it's Klas from Citi. So a couple of questions from me. So I want to come back to alternative powertrains and on the JV with Daimler on the fuel cell side and your development of full electric separately. So when we look at this, the green deal is a major thing, the shift to alternative powertrains are really happening, speeding up fast. If you look at Nikolai and their valuation since their IPO, it's obviously -- yes, things are really speeding ahead. So Martin, could you talk a little bit more about the time line of your upcoming vehicle launches, both from the electric heavy-duty side and also on the fuel cell then and also if R&D to sales will start to creep up towards the levels we've seen in autos, i.e., 6% of sales over time?

[Martin Lundstedt]

Thank you, Klas. And first and foremost, I think it's important and good that we're bringing up the 2, so to speak, powertrains in combination because they are really combined because we are talking about battery electric vehicles and fuel cell electric vehicles. And why is that important? Because the modularity of the powertrain is the trick here. Meaning that a lot of the electromobility propulsion components when it comes to e-axles, gearboxes, control systems, management systems around this. And then obviously, the whole modularity around the vehicle as such. Because when we talk about electromobility and fuel cells, you should still have a high-performing truck, which is sometimes forgotten. And thereby, we see that the perimeter of the joint venture providing a modular fuel cell stack will fit into our execution of the electromobility road map, both for battery electric and fuel cell electric and that, I think, is a strength that we are building up now, not only for trucks, but that modularity will provide also opportunities for all our business areas when it comes to buses and construction equipment and Volvo Penta, et cetera. So that is number one. Then obviously, as you say, when it comes to the time line, first out here is battery electric vehicles. We have been out with that for a number of years in different executions on the bus side. We are rolling out that now when it comes to executions up to 26 tonnes, you can say, so medium, medium heavy duty executions for mainly then city and regional applications, both on the renewal and the Volvo side and also now gradually moving into the North American market, both for Volvo and Mack. And then also, we have been showcasing also, meaning that it's not that far away also on the next level when it comes to regional distribution and regional haul where we have been showcasing that also for the Volvo, where the modularity is coming in to play and obviously, other type of energy layers, et cetera, when it comes to the battery. And then when it comes to the fuel cell, maturity level wise, we see that this must have a very important role when we are moving up to the later part of this decade. But that's the reason why we think that the construct of the JV is so important given the sign that some of the major players really want to move this way and a lot of the other actors when it comes to infrastructure and green generation of hydrogen will invest as well because this is really an ecosystem. But from a truck maturity level, we are not that many years away. It will be more about, so to speak, having the system in place, but it looks promising.

[Klas Henrik Bergelind, Director]

No. Very good. No, certainly, it seems like Europe is serious with the near SEK 500 billion investments that you're talking about here. On that note, my second question is around the stimulus we got out from Germany and could be a European program now than when we have Germany from 1st of July, holding the EU presidency. When I listened to you during the AGM on the Q&A with the Chairman, you were -- you seemed, Martin, pretty optimistic on the green deal and what that could do to replacement demand under potential stimulus. Could you comment a little bit about your thinking there?

[Martin Lundstedt]

No. What we have said, I mean, in order to provide a meaningful stimulus into the transport sector, we have said that -- I mean, if we would like to, so to speak, utilize the funds that will be provided for a meaningful transformation, then we have said that, I mean, take out the rolling fleet that are Euro 3, Euro 4, Euro 5, and then you will get leap frogging, so to speak, into the next level of technologies, and thereby making big improvements, while also stimulating, so to speak, mainly then the customer side on taking on this. So we are not asking for any direct stimulus. We don't think that's the right way to go. It's more about stimulating the right technologies on the customer side and thereby taking the right steps when it comes to sustainable transportation.

[Klas Henrik Bergelind, Director]

Okay. A quick final one on cash flow and the moving parts for you, Jan. So obviously, the receivables, I thought that, that would be bigger. But I guess, obviously, that is connected to deliveries ramping through the quarter. If you look at the payables and now when you ramp production, the outflow that we've had in the first half, is it your sort of working assumptions that you can compensate at the current, obviously, demand levels when you ramp production that you can compensate for that outflow completely in the second half?

[Jan Ytterberg]

Well, that will, of course, be sort of a discussion of what volumes do we expect for the coming quarters. But what we can say is, of course, what we did here was to bring down the trade papers to new lower level, i.e., we are in Q3 paying the Q2 suppliers supply. And of course, that was low due to the halt of production. And we believe, we are moving in this way, have some positive effects coming into trade payables. But from a pure cash flow quarter-by-quarter comparison. But receivables is also a mix issue because we have quick turnover time in markets that we're now more affected by the deliveries here, delivery drop, being then America as well as Asia, where we have somewhat longer time is then having a sort of a negative impact in that respect. But in general, we were going down, as I said, but gradually going up here since we gradually move up on delivery. So that's why the effect was maybe a little lower than you expected.

[Klas Henrik Bergelind, Director]

But then the big hit, it was...

[Jan Ytterberg]

Yes. The big hit has happened. So we are moving from a low level of working capital, you can say.

[Operator]

The next question comes from the line of Daniela Costa from Goldman Sachs.

[Daniela C. R. de Carvalho e Costa]

Actually, I'm just left with a few follow-ups to the prior questions. On the cash point, is the first question regarding the second half. What shall we expect in terms of CapEx, would you have to -- how progressively would you have to bring up -- back up CapEx? And then 2 questions on the P&L. One related to R&D, which you've decreased, but how should we look into our R&D going forward? Do you have -- how quickly can you -- would you have to ramp up R&D as well? And then the other question on the P&L relates to -- you talked about the savings, the structural savings from the measures you've recently announced flowing in the first half of 2021. Do we have the furlough programs lasting until the end of 2020? Or do you foresee a little bit of a gap between the temporary measures finish and the structural one start to pay back?

[Martin Lundstedt]

And I think the two first are pretty connected actually because, of course, now we made a real stop. Actually, we stopped activity to a big extent completely during the month of April. And then we are gradually ramping up. But that means that the CapEx was really low in this quarter. And it will, of course, increase as will R&D as we are ramping up activities there as well. But we should remember that this is also connected to what we see on the top line side and on the order side, et cetera, on the demand side because we are talking a lot about affordability. What can we afford within this situation. And that is, of course, having an impact of what we are taking for decisions in this respect. But some of them are more legislative or safety driven. And of course, we cannot stop them. We have to do them. So we will see a ramp-up, but it will also be connected to what we see in -- on our top line and how demand is developing. Then if it's a gap or not, of course, we are trying to avoid the gap here. But -- and the programs you were asking about is a little different depending on where you are. And as I said, also on the question of Hampus when we are moving up in production then on volumes, then we are moving out from these programs, but we are still keeping them on the white-collar side where we can, of course. So we would like to have them in place as long as possible because, at least as a preparation and as a program and then how we use them, it's really depending on the affordability aspect as well. And there are different types, depending on where we are in the world, especially then in Europe. And of course, these are -- you should remember that, gradually also changing because we are part of the economy in total. And of course, society is supporting business here. So let's see where we are. But right now, I mean, for Q3, we have the same programs as we had in Q2. And then we are coming into Q4. Let's see, if we can elaborate a little more about that when we have more of a complete picture of the decisions taken. But of course, try for us trying to avoid the gap.

[Jan Ytterberg]

But I think it's also important to remember that when -- this is also a little bit later between the furlough and the gradual return of activities in line with a good balance with the top line is that the furlough is, in many cases, not just a furlough, but we have the allowance to do the competence development, which is very important for both individuals, for society and, of course, the company to utilize this now to drive competence and thereby increasing the ability to get a good match between individual competence and positions that will also come back now with the gradual return of activities. So that is a very positive thing with this that I think is serving both society, individuals, jobs and companies.

[Operator]

Our next question comes from the line of Kai Mueller from Bank of America Merrill Lynch.

[Kai Alexander Mueller, Associate and Analyst]

Again, a lot of them have already been asked. But if we jump into the truck side, again, not on the original equipment agreed on your service revenues. You show, obviously, that chart on the utilization of your fleet only being down minus 5% as of the last week. How do you see that progressing? Is there a big shift also? Have you seen any significant trends from sort of online deliveries that have been supportive on that side? I remember on your Q1 call you said, obviously, industrial activity is still very low and that has impact on your truck utilization. Now the minus 5% doesn't suggest that. Can you give us a bit of color how you expect the utilization to develop and how that really feeds through then also your services revenue for the second half? And on the second point is, you mentioned, obviously, you work very closely with your customers to help them throughout their difficult time. Can you sort of maybe outline what those conversations are? Is this customers just wanting to extend certain terms? Is that trying to renegotiate a monthly payments? What exactly -- how do we need to think of that, what you are negotiating with them?

[Martin Lundstedt]

Yes. Thank you. On the first question. You can say that if you look at the utilization then. And as we said, there is a rather similar pattern also with other markets depending on restriction lockdowns, et cetera, because when we showed this growth, for example, it was model trucks in Europe, I mean, we said also that you have a similar gap, for example, in North America. What is interesting there is, obviously, when we look at the same data country by country, we see also how much it is related to both when you have the steep decline, the restrictions and lockdowns, so big differences between countries with the more severe, if I put it like that, restrictions, whereas countries with less severe has had less drop in the utilization. So that was the first part of it.Then gradually, when you are moving out, you're getting more mirroring of how is the general economy level because fleets are utilized, I mean, very much according to how the general economy is moving along. So from that reason, we believe that in Europe now, given also what you have seen with GDP and activity levels, it's a pretty reasonable figure with a minus 5%, given that most of the restrictions are lifted at least unrelated to transportation of goods, then it's still a completely different factor when you talk, for example, for coaches, et cetera. And then when it comes to service revenues related to that, as we said, it's following. That is also the normal pattern. It's a certain lag because you start to use it again, and then you're starting to get back to the normal service and repair schedules and these type of contracts. So there is a lag of a couple of weeks or a month or something like that, depending a little bit on market and penetration. Then when it comes to, what was the thing?

[Jan Ytterberg]

Modification.

[Martin Lundstedt]

Yes, modification. Yes. I can start and then you can add, Jan. But I mean the primarily discussion, and it has been a little bit, you can say 50-50, some that really needs it because they are in a financial stressing situation, so to speak, and some of them acting also as us to create the headroom for, so to speak, their liquidity positions, et cetera. So there are of course, different reasons, obviously, in different sectors. It's not so much about, I mean, modifying the terms of the contract, it's more about, so to speak, rescheduling of when payments, et cetera, shall take place.

[Jan Ytterberg]

And then in general, I mean, compared to 2008 or '09, then it was, of course, a liquidity crisis, and we don't see that happening now. So still coming into this with good financials, I mean, good business for the transporters, but of course, as Martin said, there are both -- ways of both segments of customers, I would say. And of course, let's see going forward here, we have some segments that are heavily affected, some regions that are heavily affected as well. And let's see what -- how it's going to play out going forward.

[Claes Eliasson]

So this concludes the call for the second quarter 2020. We are looking forward to meet you in 3 months' time. Bye for now. Over and out.

[Martin Lundstedt]

Thank you very much. Bye-bye.

[Jan Ytterberg]

Thank you. Nice summer.