Ladies and gentlemen, honoured shareholders:
How did 1997 measure up against the expectations we had? Our volume growth during the year was healthy, but our earnings did not meet expectations. I would therefore like to explain why our volume and earnings turned out the way they did.
In Scania's traditional market in western Europe, registrations totalled approximately 170,000 heavy trucks. This was about the same level as in the two preceding years. The year began weakly, which actually suited us rather well, considering our changeover to the new 4-series and the learning process that was still under way in our organisation.
Step by step, demand improved, especially during the second half of 1997. In response, we sharply increased our rate of production in Europe. Despite a strong improvement in demand, price competition in western Europe was tougher than ever. Price pressure normally eases when the market expands. Yet we largely defended our market share, which amounted to just over 15 percent. And our sales of service-related products developed very well, rising more than 20 percent.
In central and eastern Europe, Scania's truck sales continued to rise, almost doubling to nearly 2,000 vehicles.
In Latin America, our second domestic market, volume rose by a substantial 30 percent. In Brazil, our market share was 40 percent, and Scania consolidated its leading position. However, late in 1997 the government introduced an economic austerity package, which pushed down demand and still continues to do so.
In Asia, Scania sold as many trucks as in 1996, thanks to a very good first half. But then came the financial crisis. During the fourth quarter, sales essentially stood still. Our distributors are having a difficult time surviving under these conditions, and we are doing what we can to help them.
Scania's total sales of trucks, buses, industrial and marine engines and service-related products rose by 17 percent to 35.1 billion kronor.
Our sales of Svenska Volkswagen products climbed 23 percent and broke a historic record, just as Volkswagen was preparing to celebrate its 50th anniversary in the Swedish market. Svenska Volkswagen's share of the Swedish passenger car market rose last year to more than 20 percent, thereby breaking its old record from 1955. And during the first quarter of 1998, Svenska Volkswagen has the largest share of any company in the Swedish passenger car market.
Turning back to Scania operations, Scania kept its fourth place in the world market for heavy trucks. The same was true of heavy buses.
But Scania's operating income did not keep pace with the increase in volume. It amounted to three billion kronor, or about the same as in 1996. The operating margin was just below 8 percent, compared to more than 9 percent in 1996. Taking into account nonrecurring effects related to indirect taxes in Latin America, the operating margin was largely unchanged.
So the question is: Why didn't our earnings increase at the same rate as our sales? There are two main reasons.
The first reason is external and is related to the competitive situation in western Europe. German manufacturers in particular adopted a very tough stance in order to recapture the market share they had lost during the 1990s. Capacity utilisation also remained low among most European truck manufacturers, especially early in 1997. This led to extremely strong pressure on prices, especially during the first half.
When we introduced the Scania 4-series, we thought it was possible to raise prices by 4 to 7 percent for the 4-series, compared to an equivalent 3-series truck. This assessment was based on what had previously been possible in our industry. But times have changed.
If we look at Scania's final figures for 1997, our revenue per truck was only marginally higher than in 1996. However, it is clear to me that without our new product range, we could not have defended our price level. But this means that for the same price as before, our customers are getting a new product with higher technical specification that also meets the tighter environmental standards introduced late in 1996.
The second factor that affected our earnings is internal. Since late 1995, Scania has been implementing the biggest product and production changeover in company history. This changeover has strained our organisation and our distributors more than we could foresee when we began this process.
The changeover raised Scania's costs during 1997 in a number of areas.
When a new product is launched, it is necessary to make quite a few subsequent technical adjustments. It also takes time before our sales and service organisation fully masters the new products. For example, a 4-series vehicle cannot be specified in the same way as a 3-series vehicle.
Before everything is operating at full efficiency, a number of problems arise, which cost money. We anticipated that during the first two years, warranty and goodwill expenses in the marketplace would double. And that has proved largely correct. During 1997, warranty and goodwill expenses rose by 400 million kronor.
We have invested several billion kronor in new products and new production equipment. As a result our depreciation, which increased by 200 million kronor during 1996, climbed by another 350 million in 1997 - in other words by 550 million kronor in two years.
Scania's break-even level is now higher, but we have gained new products, the potential for even more efficient production and higher technical capacity to meet future demand.
In Europe we began the changeover to the new generation of buses and coaches during the second half of 1997. We used to have 45 different bus models. The new range is based on seven modules, with a large number of possible combinations. It is also better coordinated with the new truck range, sharing a far larger number of components and sub-systems than before. And we have spent a lot of time building in greater reliability and ease of service.
The changeover in bus and coach production cost 100 million kronor during 1997, and it will be completed by the middle of this year.
In early February this year, production of 4-series trucks began in Latin America. The changeover there affected Scania's earnings to a limited extent during 1997, but will affect earnings during 1998, especially during the first half.
We are now beginning to see the end of this major changeover in our production system. It has absorbed a lot of energy from the organisation and left us with less time for everyday streamlining of operations.
In recent years, we have also invested heavily in our marketing organisation. Our marketing-related investments in Europe rose by 600 million kronor compared to 1996. In Germany and France, we are reconfiguring our organisation in order to respond better to new customer structures and demands. In central and eastern Europe, we are building up a new organisation.
As mentioned in the first quarter 1998 report that we presented today, operating income was largely unchanged compared to the first quarter of 1997. Earnings in European operations improved, while Latin American operations reduced earnings by more than 200 million kronor, which is related to the 4-series changeover.
Order bookings in the western European market remain strong and were 22 percent higher than during the first quarter of 1997. But prices are still depressed. Our western European market share grew during the first three months of 1998, exceeding 16 percent according to preliminary figures.
Both order bookings and deliveries in central and eastern Europe grew. In the Far East, market activity remained slow, partly offset by higher order bookings in Africa and Oceania. In Latin America, our order bookings remained subdued, primarily due to the changeover to the 4-series, but also because of the seasonal downturn during the holiday and carnival period.
As I have indicated, demand is strong in Europe. We are optimistic about market trends.
Western Europe usually lags 12 to 18 months behind the United States in demand cycles when it comes to heavy trucks. The US market rose sharply last year, a trend that has continued this year.
In the US, delivery periods are now about 12 months. The same trend seems to be emerging here in western Europe, in particular because numerous heavy trucks sold in the late 1980s now need to be replaced.
Viewed against such a scenario, today Scania has one of the most modern product ranges and the technical capacity we need in order to handle substantially heavier demand.
During the past three years, Scania has undergone the biggest changes in our company's history.
In May 1995, Scania became an independent company. In the final quarter of the same year, we unveiled the first trucks in the 4-series. In the second quarter of 1996, Scania introduced its shares on the Stockholm and New York Stock Exchanges. And in the space of less than three years, we are implementing a change of generations for all our products: trucks, buses and industrial and marine engines.
Clearly, Scania today is a different company than at the beginning of 1995. During these major changes, all the employees of Scania have been extremely loyal. This period has brought both strains and new challenges. And Scania now has a new platform to build on well into the 21st century, enabling us to strengthen our market position and expand further.
In the stiff competition that we face today, and that we foresee continuing into the next century, we must constantly develop and improve our products, our production and our marketing organisation. We work in an industry characterised by demand cycles of about ten years and product life cycles of around fifteen years. That is why Scania should be judged from a long-term perspective.
We will pursue our modular concept further. For example, we will unveil more engines in our new modular range, where we use a single combustion chamber to build engines of different sizes. After our 11- and 12-litre engines, V8 and 9-litre engines are next in line.
We are also studying the possibility of building a new truck in the weight class immediately below the lightest truck we now manufacture. Discussions are under way in the European Union about introducing restrictions on the use of heavy trucks in urban areas. Since Scania ought to continue having a sizeable share of the market for local goods distribution vehicles, the issue of a medium-weight truck is being explored.
Let me say a few words about the restructuring of the transport business that is underway in Europe. Deregulation is creating the prerequisites for new logistic solutions, which will lead to new transport structures.
Of the greatest strategic bearing for Scania in this new situation is our range of aftersales and other services, and the ability of our service organisation to become an effective business partner to new customers with needs totally different from traditional ones.
We now see how a single European transport market is rapidly emerging. The introduction of a single currency in most EU countries will further accelerate this trend.
The outcome will be stiffer competition in the transport market. During the past ten years, we have seen a number of mergers among transport companies. So far, these companies have mainly merged at the national level, but today we are seeing more and more pan-European transport enterprises being formed.
This development is occurring very rapidly. As a result, transport companies are making new demands on us as suppliers of transport equipment and service, We must stop thinking along old lines - satisfying ourselves with handing over the keys to the world's best trucks and buses. Our service organisation must be located along heavily trafficked routes and must become the world's best suppliers of aftersales and other services. The higher technological content of vehicles also requires that service workshops offer continuously improving standards of technical expertise and equipment.
A growing proportion of transport crosses national boundaries and involves vehicles owned by companies with operations in a number of countries. We must provide the same high level of service everywhere, functioning in every respect as a single, reliable partner to our customers. Given the rapid changes in the market, aftersales and other services will become an increasingly important strategic issue for us.
Our experience from the most highly developed markets - Great Britain and the Netherlands - confirms this. In the early 1990s, we reorganised Scania Great Britain. We dissolved our traditional sales, parts and service departments, and instead we based our work on the needs of different customer segments. We formed customer teams that possess the expertise to view our business from a customer perspective and handle all the issues involved in managing vehicles.
We later refined this concept, and today we call it Scania Vehicle Management. We assume full responsibility for a customer's overall transport equipment needs. We own the vehicle, insure it, supply the maintenance, change the tyres and so forth. For this, the customer pays a fixed per-kilometre price, avoiding other worries.
The response to this concept has been encouraging. In 1990 we had a market share of about 10 percent in Great Britain. Today our market share is more than 20 percent. In the Netherlands, our importer - Beers - has been working in a similar way, and Scania is approaching a 25 percent national market share.
The same type of demand is emerging in other markets, especially Germany and France. And that is why we are investing so intensively in expanding our service organisation in these countries.
In close partnership with transport companies, there is major potential both for new vehicle sales and higher service market volume. This explains our investment in new structures, greater flexibility and improved expertise.
Scania's challenge today is not merely to build the best trucks, buses and engines. In the space of a few years, we have introduced entirely new product generations in all our product areas. We know from market reactions that our products are very competitive.
Our greatest challenge today is to develop our marketing and service organisation to meet new customer demands in western Europe and to strengthen our presence in growth markets.
Our organisation must be just as flexible, highly skilled and service-oriented as our customers demand it to be.
We are building a new Scania to meet the 21st century - a Scania that is a leader in meeting the needs of the most demanding customers when it comes to both vehicles and services.
We must deliver the best money-making machine to our customers. When our customers make money, Scania also makes money.
