Ladies and gentlemen, a warm welcome to this presentation, where we will cover the fourth quarter 2019, also the full year of 2019. We will, in short, be hearing a presentation by our President and Chief Executive Officer, Martin Lundstedt, followed by Jan Ytterberg, our CFO. After that, we will be taking questions, we would appreciate it if you could limit yourself to two questions each. In that way, we will be able to make room for more people putting questions. The telephone conference will also be able to put questions in a while. Now, the limelight is on you, Martin.
Thank you. Thank you, Claes. Also from my side, most welcome to this presentation of the full year 2019 and the fourth quarter. Maybe before coming into the presentation, just a number of reflections. I would like to start by actually thanking the whole organization for 2019. Not only our fantastic colleagues, 105,000 people, but also all our business partners on the supply side, but also on the retail and customer sides. A fantastic year, obviously. Record sales, record profits, but also strong cash generation. Also a year actually containing all the elements of our industry. Coming into this year, there was a very strong tailwind, stretched supply chains, and speedy transports, and then over the course of the year, of course, we saw signals of a softening market environment in our main markets. Still, to have in mind, from very high levels, good activity levels.
Now that we are guided already in Q3 , obviously more normalized replacement levels. Really from an operational standpoint, containing those elements. Also, the service business has continued to actually develop in a positive direction. We see that also here. Of course, as a result, given the strong cash generation in Q4 , there is also a strong financial position of SEK 63 billion. Of course, that is giving a position of strength to maneuver in the future here and act from a position of strength. We have, as a result , on the board, together with management, put forward a proposal of increasing the ordinary dividend from 5 to 5.5, and also propose a special dividend for 2019 for 7.5. In total, 13. Also still keeping a strong financial position moving forward.
When I said that this year has contained everything, that is also the transformation part, obviously. We are continuing to be active when it comes to research and development and investments, and we will continue to reinforce that because there are great business opportunities that I will cover later. This year has also been very much a signal of that when it comes to partnerships: Nvidia, Samsung, the Isuzu Strategic Alliance , and many more also have other types of partnerships in the ecosystem. Also, very tangible outcomes now when we are ramping up, for example, electromobility. We are forming the Volvo Autonomous Solutions business area. We are putting commercial projects in place as we speak. A great year, and moving forward now from a position of strength. Summary of fourth quarter highlights. Obviously, we see the signs of the softening market that we already guided for in Q3 .
No drama there. It's really following what we have been guiding for. Europe is around -15% from very strong levels, and also North America. That is actually seen also in the net sales now, a decrease of 5% if you take away currency. Adjusted operating income of SEK 9.2 billion and a margin of almost 8%. We think that is also a good sign , given that Q4 and the surrounding quarters here will be a little bit of a transitional character when you are actually adjusting the different paces, but we can come back to that. Operating cash flow is very strong, almost SEK 20 billion. One part of that is obviously that we have been successful with inventory reductions in our system. When it comes to the production rate in relation to the delivery rate, it has been a delta of approximately 6% for trucks.
Then, of course, big news also that we announced just before Christmas: the intention to form a Strategic Alliance with Isuzu Motors. Great opportunity moving ahead when it comes to technology partnerships. Very good complementary set when it comes to where the different groups have their strength, both when it comes to product definition and geographical areas and also how we actually can utilize the Strategic Alliance to build further strength in all different segments, all the way from light duty to heavy duty, where we are sitting obviously on strong competencies on the heavy -duty side, and we see Isuzu as a great complement in other segments here. One part of that, as you'll see, is the intention as the first part to transfer the ownership of UD Trucks to Isuzu Motors, and that process is ongoing.
When it comes to truck deliveries, as I was into, there was a drop of 8% for trucks during the quarter. Production levels were down 14%. If you take Volvo Trucks, for example, there you see that the drop has gone primarily in Europe, according to the forecast that we've had, and also in North America. That transition is ongoing as we speak continuously. South America has very strong momentum. When it comes to machine deliveries +4% , the same here is that SDLG has continued to grow. Very strong compact deliveries, for example, 23% up, and the Volvo brand then decreased by 15%. Both are market -related, but also we also in this area have been very successful since we have more of a non-captive retail and dealer system working actively with de-stocking activities.
We are moving into 2020 in a good situation, but I will cover that little more in detail later on here. Services, as I was into +4% excluding FX. I think that is also a strong momentum showing that the activity level out there is still at good levels and that we need now to concentrate on capturing the service potential that we have, given the high deliveries during the last years. Trucks, buses, and Volvo Penta showed increases. Whereas we have seen in some of the major heavy markets, like, for example, Indonesia, for Volvo Construction Equipment , a decrease in the activity level that has impacted the service level. Generally speaking, as you know, we continue to focus on this, and that's the reason why we also have this as a separate slide so you can follow that.
Good development over the course of the year here. Trucks. If we start then with the market environment, there's no drama. We are actually maintaining, in most market areas, the guidance that we had already in the quarter three report. If we start with Europe , then already then we said that we will see a correction down to more or less the midpoint of the trend line, and that is still a good level, obviously. If we look then, and we can take that on the next slide, we have a good balance between book-to-bill, and that is following that forecast. North America. The same thing here. It will be a drop down to the midpoint after a number of really good years. The North American market with the hedging in the independent retail, etc.
Now it's all about really coming down to this replacement level, if I put it like that. Also making sure that the industry and, of course, the Volvo Group are also actively working to continue to de-stock, because we see that there's still an overstock of approximately 25,000, 30,000 units out there. Thereby, we need to also adjust production in balance with inventory and the real demand. We are coming into balance. That has started in quarter four. We are continuing to do that transition in quarter one. As we already talked about 2016, 2017, we will make no compromise whatsoever on that. We will have that balance. That is the most important. Brazil, we are guiding it up a little bit from 75 to 80.
Strong markets, and we have been successful here also, gaining market share and ramping up production and price realization, actually. The South American team has done a great job. Japan, flat. China, also flat. Flat, it is an unchanged forecast. Maybe one detail there is that we see actually that the heavy-duty segment continues to increase and the mix between heavy-duty and medium-duty is changing. That is in the long run good because that is a more mature logistical system, and also more and more are coming into the sweet spot for the Volvo Group. We do a further correction down in India, given the still troublesome, so to speak, economic situation and also the access to financing, etc. We are dropping that.
I have to say that both Eicher and the Volvo brands have been successfully adapting to this in a very difficult market environment as we speak. Sorry. It should be in this direction. If we look to the orders and deliveries, starting with Europe, as you can see, it's approximately -15 when it comes to both deliveries and orders. Following, so to speak, the forecast that we've had and a good balance between book-to-bill. Really , we were taking the measures at the end of quarter two and the beginning of quarter three, which is very important. If anything, we see actually a little bit of pressure upside in Europe, meaning that we are adjusting Tuve in Gothenburg, for example, the final assembly, both related to Europe and also to some other markets that will come upwards a little bit, and we are contemplating if that will be enough.
I think that is a good sign. We did the adjustments. We took those effects gradually during the end of the year, and now we are fine-tuning the balance. We are really doing the same thing as I talked about in North America. Also in North America, as we can start to see, we are now approaching the level where book-to-bill is getting closer to each other. We will still have work to do there. Still, it's a good sign that we have seen this first over -order situation and then, so to speak, over -delivery situation and are coming more back to a situation that is closer. As always, what is the normal situation in North America? Flexibility is the name of the game here. Very strong job also, as you can see, in South America.
We had great increases in production rate over a short period of time, taking advantage of the situation of a strong order intake, market share gains, and price realization at the same time. Also Asia, actually. Some important markets that have been showing strength in the beginning. We are taking a number of key accounts. China's up for us significantly from low levels, but it's still a very good sign for us. Turkey and also GCC countries. It has been good for that sake, and that is also related to European production. Market shares are concluding rather stable now on some comments on this. North America, obviously, as we have said, we have had this situation of a loss of market share at the beginning of the year, primarily where we had the capacity constraints and also a lot of focus on price realization and quality in the business.
Very important for us to continue to build strong resilience in the North American business. We are not happy with a situation with a strong long haul and a very strong product range on north of 9%. That is not acceptable, and we really need to focus on that. Mack, we're regaining market shares during the end of the year, and we are looking forward to 2020, given the fact that we think that the mix will be in favor of Mack here. Europe was good after actually bottoming out on 15.2%. We have been north of 16% during the fourth quarter for Volvo and a stable situation for Renault.
In the other markets, as I've been into strong development of market shares, South America and Brazil are very strong situations, obviously as market leaders, and also we are very proud that we are almost at 30% now in Australia. That is a sign of a global company because when you drill a hole, you're coming to Australia, so that is literally on the other side of the world. Also worthwhile mentioning, not on this slide, is the good development also for Dongfeng on the heavy-duty side. We have had a slippery slope on heavy-duty for Dongfeng, but with new product introductions and a good focus on management there, we were actually north of 15% in quarter four and north of mid -14.5% for the full year. Congratulations on that development as well. Further introductions are going on in our portfolio of electro -mobility.
As we speak now, we are starting to ramp up commercial orders when it comes to urban distribution and waste collection for both Volvo and Renault. Also now during the quarter, we have also launched concept vehicles for the next step of heavy-duty transport, heavy-duty construction, and also regional haul. Those will be the continuous markets where we also need to continue to have discussions on the infrastructure. Well-received, customers are excited, and they are starting to be able to see the business cases, and there is also a quick movement from customers into this, where they are ready to take on investments in order to actually drive their sustainable development. We see that as a very positive sign actually. Also, when it comes to the real heavy guys, that is, of course, the waste collection activities in North America.
We have been showcasing this now in the beginning of the year together with the New York City Department of Sanitation in N.Y. It will be put in place in the real world now, with trials with the New York City Department of Sanitation as of the start of quarter two. That is also a sign that we are moving gradually, and very soon we'll continue also with the full-scale trials in California. By the way, later today, Mack Trucks will also reveal very interesting news. I will not take away the thunder for them because, as you know, we are running a heavily decentralized organization, and Mack Trucks is running on their, so to speak, merits. Stay tuned for that because I think it will be exciting to see that later today.
Obviously, as I said, so I will just touch on it briefly again: great opportunities together with Isuzu. It has been the intention now of pursuing this , moving into the merger clearance activities, but also how we are actually forming now the strategic alliance in a smart and swift and agile way. Very good. also, I feel the value base of the two companies moving forward here. Construction equipment, then. When it comes to the market environment, we have also in this case been stable in relation to quarter three. Unchanged for our big markets in North America and Europe. Even if you say -10%, for example, in Europe, I reiterate what I said in quarter three presentations: still strong activity levels, investments going on, low interest rates, etc. That is still a positive level.
As you will see on the next slide, it has started with order quarter four was like -5% in order intake, but in reality, we were losing out on some of the rental on the compact equipment. If you take the totality, it was actually almost a wash, that is strong for us, actually. Let's see. At a good level. We have increased the forecast in China. We have the midpoint of -15% from strong levels, we are revising that up to only a drop of -5% on the midpoint. Obviously, unfortunately, we need to continue to follow the development of the coronavirus, et cetera, this is before, so to speak, the full effect. That can be evaluated.
When it comes to the orders and deliveries, as I was already into, orders are up for SDLG, with very strong development on compact machines for them but also in other segments. In North America, you see a little bit of a peculiar situation. Orders are now +40 and deliveries are -25%. That is related to what I said. Our organization has, together with dealers, also been successfully de-stocking, so to speak, the pipeline. Thereby, we have had high flexibility on our production rates in order to not have, so to speak, the wrong one. Now we see that we are in balance. We need to prepare for the spring season. Orders are coming in, but that's coming in from the right levels, and thereby, they are ordering this up.
In Europe, as I said, it's a stable situation, if you take away the compact rental orders and deliveries going up a little bit ahead of the spring season, it's because they have also been working with de-stocking. Generally speaking here, I see a situation that is well in balance. Some highlights are also on construction equipment. We are happy and proud to see also the development of market shares in China for the group. On large excavators, we are moving north. That has been one of the prime focuses, where we also have introduced a number of machines and applications where we were weaker, and that is gaining traction. Also, wheel loaders, as you can see, are continuously strengthening our position.
Also in this area, we are now actually delivering the first fully electric wheel loaders to a German customer to start with, and serial production for both the wheel loaders and the small excavators will start. As you might remember, we have communicated that further development beyond the current emission levels will only take place for the compact in fully electric mode. Buses. First and foremost, I can say on buses, we have talked about that, and Jan has also talked about that earlier: we have done substantial, so to speak, activities to be more agile, clear, and distinct in the bus organization. Håkan and the team have done that. We now have clear divisions running the chassis, the full -body operations in Europe. We have a strong North America. We see actually good effects out of that.
Very positive momentum when it comes to the motivation and the ownership. When it comes to orders, there are still strong levels, actually, at -9%. You know orders on buses are a little bit pluses and minuses depending on when tenders are coming in. Last year, we had a very strong order to Bogotá for the TransMilenio system. Still also strong orders in this quarter four for buses, both in North America and with Prevost, the biggest order to New York of almost or actually more than 300 buses or coaches. A very important order also of, at the time, the biggest European order of almost 160 fully electric buses for Gothenburg. That has actually been followed now by a number of non-communicated ones and a number of other interesting deals, and we see that now it's really starting to take off here.
That is also why we feel very encouraged to follow that development during the course of the year. That is also related to why it's the time for us now to lean forward when it comes to our investments in the business models in, so to speak, the technologies to broaden the range to be one of the leaders in all different segments when we talk about the transformation. Volvo Penta has had, as you know, a very particular year, given the huge pre-buys and pre-deliveries. We had 2018 and then came into 2019. Obviously, Jan will come back to that, which has also been a difficult comparison . The only thing I will say here is that we have been feeling that we are on exactly the right track for many years.
The balance between growing sales, entering into new segments, reinvesting in R&D, reinforcing our position, and growing value for our customers and our shareholders will continue. Also positive, finally, is actually that was Penta. Sorry. I came; I cannot do two things at the same time. Financial Services then to end with. Also, I see positive development. We have been talking quite a lot about the further penetration. Should be done with the right risk balance, obviously, but we have seen headroom for that, and that is now ongoing in a good way. Record quarter new business volume, which I think is very positive. Improved penetration in different segments and strong, so to speak, integration.
One example was at Fenatran, the big truck show that is a real sales show in Brazil, where we see how important the commercial crew concept, the integrated concept , actually is. It ended up with 16,000 orders taken, so I think it's pretty good, actually. I leave it by that and ask you, Jan, to continue with the financials. I would do like that.
I will do that. Also from my side, very welcome. We can summarize this fourth quarter as actually being the first quarter where we see correction, and the corrections are putting marks in our earnings. We also have been focusing on inventory reduction, and we saw that coming through here in the quarter with a very good cash flow generation and also a good financial position for industrial operation, ending the year at SEK 63 billion. Currency-adjusted net sales down 4.6%. SEK 4.4 billion is related to currency, that is, euro, and that is mainly the dollar . The decrease of truck deliveries was general across the regions, with the exception then being South America and Brazil, with a remarkable increase there by the organization, and the supply chain, of course, impacting the sales figure positively.
If we take a look at the truck deliveries, we see more profound decreases in North America and Europe, whereas we also saw the Chinese market holding up well for construction equipment, which then offset the drop we had in truck sales for Asia. Service sales improvement is around 4%, mainly related to price, and the effect of the strike in the U.S. did not affect either the deliveries or the sales figures in any material way. Moving over to the earnings and operating income. In the fourth quarter, it deteriorated close to SEK 1.4 billion, down to SEK 9.2 billion, giving an operating margin of 8.8%. Main contributors behind the deterioration are, well, of course, lower truck deliveries and lower engine deliveries, partly offset then by bus and construction equipment deliveries.
Also, we had a product, a market shift in construction equipment, with lower sales of Volvo-branded heavy machines and then also more compact machines and SDLG and Asian sales. All in all, that made a negative impact, and that is also affecting the group. The quarter was also impacted by a strike in North America, where we had both the impact of production standing still, which meant underabsorption of costs, and also the ramp-up phase there and then the agreement as such. The strike effect aside, the cost per unit was actually stable between the fourth quarter last year and this quarter, which is very good if we consider not only the lower deliveries but also the fact that we have been destocking. When we take a look at the production volumes, it's even more than the 10% you see on, for instance, trucks.
It's a good sign going forward as well that we are able to do this. Despite a more challenging demand situation in general for prices of vehicles, they were still on the same level as last year, we see more price realization on the service side, which is impacting the service earnings very positively. Besides FX, these were the effects that impacted the gross income. If we move over to the indirect side and other items, we have the high activity in R&D, both related to what we call well-known technologies and new technologies. The paid expenses increased by some SEK 900 million. A minor part of that is related to FX. We have the capitalization of R&D expenses. That is coming more and more in balance now, i.e., capitalization and amortization being more or less equal.
Last year, we had more capitalization. That's why you get the negative deviation when you compare it with last year. For this year, 2020, we expect amortization and capitalization to be in balance. We also have an increase of sales, but that's actually mainly related to the FX effect, and we have seen more activities and resources going into the selling side, but we are reducing them right now to adjust to a new demand level going forward. We have another SEK 1 billion there. It's mainly related to two things. Actually, the sale of land in Japan gives a capital gain of some SEK 500 million. Coming back to our joint venture and improved performance of Dongfeng, not only market share and deliveries but also results.
Also, we had a positive effect from a non-recurring item relating to how we are matching compensation of costs in the accounting. FX continues to affect positively. We are talking about SEK 0.8 billion in the fourth quarter, mainly on the operating income side in dollars, partly yen, and partly pounds as well. For 2020, we will see a transaction effect that is more or less zero. We do not give guidance for the full FX effect for 2020. Cash flow. In the industrial operation, the fourth quarter is seasonally a good cash flow quarter, where we normally historically have seen higher or high deliveries. Also, we see more of accounts payable coming in the cash flow related to the fact that we have had a vacation period in Europe.
We did not get the support from higher volumes this year, as we have had some years before in the fourth quarter. We're able to decrease inventory levels quite substantially. A lot of focus has been put into this through the whole organization. To get the inventory in better balance for present and future demand. Really good cash flow generation and, of course, giving us a possibility to act from a platform of strength. All in all, SEK 20 billion in cash flow for industrial operations and earnings, of course. We had the release of inventories of SEK 6 billion and more or less the same effect coming from accounts payable. Also, we should remember that we have a quite substantial negative effect in the third quarter during the vacation period in Europe.
Capital expenditure for the fourth quarter was over SEK 4 billion here, affected then by an emphasis on the trend of higher property, plant, and equipment investments that we have seen for a while now when we are comparing year-on-year, and we will actually see that also into 2020. The cash flow generation ended up in an improved financial position, up to SEK 63 billion for industrial operations.
Moving over to the segments. Lower truck deliveries of some 10% are affecting both net sales and operating income negatively, of course. The decrease was limited to 5%, Of course, that is partly also due to the fact that we had the service revenues in Group Trucks up with 5% in local currencies, counterbalancing the lower vehicle sales. We actually had a deterioration of the operating income for Volvo Trucks from SEK 1.2 billion to slightly over SEK 6.2 billion, giving an operating margin of 9.1%.
These are the same effects that we'll talk about with the group just recently, of course, because Group Trucks is so big for us. We have the lower truck volume, we have the R&D cost, and we have the strike effect, impacting negatively for Group Trucks, partly offset then by improved service revenues and price increases there. The capital gain and the JV effect are both related to performance and this non-recurring item. If we take a look on the net at the non-recurring item for Group Trucks and for the group, and then I'm referring mainly then to the capital gain, the JV income, and also the strike effect, it's around zero. It's limited in its effects on our income from the non-recurring items. I've understood that there have been some questions here in the morning related to this.
Of course, also for Group Trucks, a positive impact from FX here is SEK 0.5 billion. Construction Equipment, mixed picture. Machine deliveries are increasing by 4% related to higher volumes of SDLG machines from China, more compact machines, and fewer Volvo-branded heavy machines. That impacted, of course, both sales and operating income. Service revenues down a little. We still see some cautiousness around the distribution network to order parts; also, we see lower utilization in some Asian markets. All in all, currency-adjusted net sales are down 7% and operating income is down SEK 200 million to SEK 1.9 billion. The simple explanation is mix. Product and regional mix. A somewhat positive FX effect. Buses, it's good to see that the financial performance for Buses continued to improve also here in the fourth quarter. Deliveries of new buses are up around 140 units.
Nordic countries are performing better, and also some countries in South America. Net sales, though, decreased 3%, currency adjusted, also despite a service increase here of 9% in local currencies. That was related to the mix of less of city buses this year compared to last year. We have a small improvement of SEK 30 million here, where we see the improvements of volume and services on one side, as well as an improved mix with more coaches and intercity buses. On the negative side, we have the capacity utilization and somewhat higher selling expenses. Also positively impacted our SEK 80 million of FX. Martin was into that. Penta, a very strange year 2018 to compare with. Fourth quarter seasonally is a weak quarter, especially on the marine side then.
Last year was, though, positively affected by the pre-buy effect on the industrial side ahead of Euro Stage V, the introduction of which, together with the general slowdown we see, affects , then, in comparison, deliveries, sales, and operating income. Adjusted operating income then decreased some SEK 220 million to SEK 174 million. That is a more normal level for the fourth quarter than that we saw last year. Besides engine deliveries, we also have a higher level of R&D expenses. Part of that is related to the fact that we now have started to amortize the Euro Stage V applications, but also we have higher activity in electromobility and digitalization in Penta. Also we had a negative effect coming from selling expenses and a slight positive effect from FX. Financial Services, as you saw, we have improved penetration that is supporting general for Financial Services.
We have higher deliveries in Brazil, as well as a financing need that is pretty high in some of the markets, like the U.S. for the time being. That affected the retail financing volume positively. The portfolio continued to perform well, but we have gradually seen the deterioration of payments, more credit expenses, more write-offs, and also more scheduling and returns in the aftermath of weakening transport demand and weakening transport prices. We are presently, from a credit quality perspective, talking about more mid-cycle levels than anything else. Credit portfolio stabilized at SEK 170 billion from the third quarter. That is around 10% up currency -adjusted from last year. If we take a look on the income side, the improvement here of SEK 100 million is mainly then related to the higher and bigger portfolio we have and also, to some extent, the FX.
Making some reflections of the full year and taking a look at the operating income, we can say that 2019 was a typical peak of the cycle year, where we actually peaked in the second quarter as regards deliveries and earnings. When summarizing the year, vehicle volume had actually limited impact on the improvement of some SEK 7 billion compared to 2018 up then to close to SEK 48 billion. Instead, it was price, it was a mix on vehicles, as well as continued improved service earnings. Also, their prices were an important factor behind that improvement on services as well.
Partly offset then by the increased R&D activities and resources and also selling expenses, once again, where FX is the major effect here, but also we have improved and increased from the earlier period more of the resources and cost, and we are working with that right now to bring it to the right balance. Also, of course, impacting positively the FX effect of over SEK 4 billion compared to last year. Then Martin.
Thank you.
You get the pleasure of rounding it off.
I think we have been going through the different details and had a good year, strong financial position as a result. We are continuing to, of course, focus on our performance as we go along but also on the transformation and future investments. This will be really the golden age of logistics, and we should take the lead there. Great times ahead. I think we open up for questions. Claes?
Yeah. Let's do that. Thank you. Let's start here.
Thank you. I'm Erik Golrang, SEB. I have two questions. First one is you talked quite a bit about investment levels trading higher. Could you say something about the size of increased CapEx commitments and R&D for 2020?
I can start with the balance sheet because there everything starts. As I said, we are seeing more of CapEx. We have been running the machine pretty hard the last years, but also with the ramp-up of R&D, we of course get, over time, also an increase of property, plant, and equipment and a need for capital expenditures. I say to my people, Champions are made off-season. Really, we have to both be able to break and accelerate in this situation. We talk a lot about performance and transforming, this is actually what it's all about. Should you say something on R&D then, Martin?
Yeah. As you have seen already during the course of this year, we have increased it. I think , also, you need to take a step back to see at what levels we are talking. We have been hovering around south of 5% R&D expenses. We are not talking about a huge expansion when it comes to the percentage point, but still, both are given, so to speak, a little bit of a softening market as we speak, and also we are actually also in absolute levels, taking some bold steps. We think , given our situation in professional logistics and professional construction activities, the value creation, as I said, is starting to be so obvious. We also need to make sure that we are taking that position when the transformation will come now.
We feel very confident that this is the right balance, and that's the reason also why we have been bold in saying we will distribute to shareholders, but we will also still keep good financial strength so we can be a leader also in the future here. I have to say, I was in Davos, and if I put it like it, all communities have understood now how important the transformation to a sustainable society is. Can you think about something more exciting when it comes to value creation and growth to be in transportation, mobility, and infrastructure?
[inaudible] . We've heard you talk about disappointment on the market share side in North America now for quite a few quarters. You say you want to do something about it. I guess the question is, what can you do outside of pushing harder on the fleet side, which typically comes with quite a negative mix?
No, as you say. I think the first answer to that is obviously that at least we have gradually seen now a stabilization of this. As I said, it's not acceptable to move further south when it comes to market share here because now we are combined for just around 17%, obviously. First and foremost, our retailers are continuing to invest because it's also about presence, obviously. It's about, to your point, having the right mix, and we have seen a little bit , maybe, of under-absorption when it comes to the fleet penetration. We have gradually moved up now to a good resilience level in North America. Now it's time really to be a little bit more balanced in this. Fleet is one thing, but we also see that the mix has been a little bit not in favor, for example, for Mack.
Finally, on Volvo Trucks, the rollout is completed now on the Turbo Compound offering, for example. That is a great product when it comes to fuel efficiency. I think we have removed a lot of excuses for not moving forward.
Okay, the final question on the working capital improvement in the fourth quarter is that a base level from where you can work, or is this really a, at least temporarily or midterm, unsustainably low level, or is it something we can work from?
Your favorite topic.
Working capital is mainly then related to receivables and inventory, and payables can go up and down, depending on the future volume. I make this reflection. Last year, In 2018, we had an increase of inventory of SEK 12.5 billion in the cash flow. This year, we have a release of SEK 5 billion. Am I satisfied? I'm not satisfied. We have more to do there to bring it down to a new lower level.
All right, then.
Good trajectory in Q4.
Yep.
Do we have anyone on the telephone? Please go ahead.
Okay, ladies and gentlemen, if you have a question for the speaker, please press zero one on your telephone keypad. Please hold on till we have the first question. Our first question is from Klas Bergelind from Citi. Please go ahead.
Yes. Hi, Martin and Jan, it's Klas from Citi. First, on the operational gearing in trucks, it's obviously a big destocking quarter for you, and you're relatively naked to the downturn, as we're yet to see the impact from the people leaving in North America. I think you said before that they will not come out until the 1st of February, and we had the impact from the strike. The drop-through, i.e., operational gearing, is around 60% ex-currency and R&D. Without quantifying the strike, Martin, could you perhaps help us with what that 60% drop-through should be when the savings kick in in the first quarter without the strike impact? Are we looking at 40%, 30%? I will start here.
Thank you, Klas. As I always say, I want not to necessarily do all of your work. Having said that, I think Jan was pretty clear about it. When you look at the non-recurring, when you have a transition quarter, and we had a number of those, it's the JV income and the capital gain. On the other side, offset by, among other things, the strike effect, but not fully by that, but also by another. We didn't want to release this, the whole thing, because it should be fair. The net effect of that, as we said, was a wash, more or less. You can take out that and say, okay, what should it be? I think you can take it from this. We are coming now into softer markets, still good levels, but we are decreasing.
We are very firm on that we shall have the right balance . We are decreasing deliveries by 8%.
We are having some technical issues.
We are decreasing deliveries with 8%, but we are decreasing production levels with 14%. There, obviously, you have an effect of the de-stocking.. Very important to do, because then we will continue to actually monitor this very closely, primarily for North America in quarter one and moving forward. Jan.
In addition to that, to your point, you already mentioned that with R&D. I think we are taking the right measures and could be, in some cases , one, two weeks, or one month before we're doing some things. Europe, I think, was really good. We were maybe a little bit too aggressive when we took it down, but it is always good to find the balance.
The only thing I can say is that we will continue if necessary to do so. Also, in the guidance of the total market, you can also see that there will eventually be a further, better balance. This is the nature of the business, and I'm happy to see, in most of the market areas, the activities that have been taken here.
We have some technical issues. I didn't hear everything, Martin. I will follow up with Claes.
Yeah.
My second one is on UD Trucks and Isuzu. Could you say anything at this call about the confidence level around antitrust approvals? It's a non-binding memorandum of understanding. Obviously, over SEK 20 billion potential cash inflow could perhaps add to the now what it seems to be recurring cash returns at Volvo. What I'm interested in is the confidence level, Martin, here in signing this deal.
First and foremost, I think when you are publicly announcing an intention of this magnitude, and I'm not only referring to the transfer but more importantly to the strategic alliance, that is really what we feel is an interesting start of something new with very high complementary opportunities. Of course, we are judging the confidence both when it comes to further, so to speak, in-depth discussions and joint activities with Isuzu and in relation to the merger clearance and other types of activities related to authorities to be high. Otherwise, we should not have pursued it.
My final one is on North America and the 25,000-30,000 excess inventory items in the retail channel. How much did you lower production year-over-year relative to the 16% decline in deliveries? Perhaps 30%, 35%? Just confirm that. With the book-to-bill at one in North America, how do you plan to run production going forward, considering that retail is still sitting on excess stock?
No, I think. Same analysis as we are doing. If we think about the retail volume into the market of 240,000 with an excess stock, we talk about production levels in the North American market of 210,000 maybe. When it comes to our activities and related mix, we will just adjust to that level so we have the right balance, and we will not have any compromise or balance between inventory, production, and demand. We are doing that as we speak. We have seen some good activities happening in that balance already in quarter four. We will continue to drive that in quarter one. Still, as I said, activity levels in North America and , thereby, shipments will be on a replacement level, and that is not a bad thing.
Obviously it will be a little bit of a transition also in the beginning of the year here, but it's completely natural.
Thank you.
Hampus Engellau, Handelsbanken. Two questions from me then.
Yeah, sorry.
Starting off on production and in trucks, the further adjustments you're doing in the first quarter, how would you compare? Is Q1 a bigger production adjustment quarter than the fourth quarter in trucks? Do you expect, from where you see today 's demand, that you will be at the correct run rate when ending Q1? Second question is related to dealer inventory. If you could maybe talk about moving this dealer's inventory. Have there been incentives from you to the dealers? Is that something that has played out in the market share? I'll stop there.
On the first question, obviously, as I said, we feel rather confident that in the European production we have found a balance. If anything, we need to make some adjustments upwards as we speak, but we will do that obviously with temporary contracts and really fine-tune that now. When it comes to North America, we are in the ongoing process here, depending a little bit on the sites. Will that be fully finalized at the end of Q1? That is what we target , I can say. We have to see really how the development is going here.
Again, as I said, no whatsoever compromise between stock, production level, demand, and also market share ambitions, obviously. I think that is the answer. On the second part, yes, of course, when you have the situation, there is certain price pressure. I think we have been stubborn, a little bit, which is reflected in the market share as well. Let's see the balance here. I think also depending on how the whole dynamic in the market goes, we will see what we will do. As I said, to move further south from what we are now is not an option given the fact that we have a resilient business in North America now. Of course, always when you have a slippery slope, you have some pressure, not at least also on the user's side, and that will affect the whole story a little bit, so to speak.
Following closely, but I think the most important is the flexibility now in our industrial system.
Thank you. Could we try a telephone caller?
Okay. Our next question is from Guillermo Peigneux from UBS. Please go ahead.
Good morning. It's Guillermo Peigneux from UBS. Maybe a couple of follow-up questions. One obviously relates to the overall market, the latest event in terms of order intake. You've been doing a bit better than the market, and I was wondering not only about what you commented on in the conference call but also if there are any reasons why we should think that pricing is not a way to actually gain market share in a weak 2020? That would be the first question. The second question relates to maybe, again, trying to assess a little bit how many quarters of inventory reductions are you planning ahead with the current levels of activity? At which point do you expect, really, the balancing between your books and manufacturing to be, again, at higher levels so you can start to raise production? Thank you.
Well, the first question, I think I already heard. The second one, I'm a little more puzzled about. Of course, order intake, and I think that what you were referring to is if we are going into price reductions to be able to get an order and know it. What we are doing, and we have described this before, we are very much consistent with having the quality in our business. What we are doing, and what we did not do when we had the really high volumes, is that we are a little more selective on, a little more aggressive on, some of the fleets coming and getting into those than sort of having more of a general price increase in the market. That is what you see and what you can expect going forward. Of course, we have already been to U.S.
I was more referring to Europe here, but we have already been to the U.S. We will also be more selective there, but of course, we have some quarters now to get out the excess retail inventory, and let's see how that plays out in the coming two quarters.
I'm not sure what's about the last question. I think it was something about our production adjustments in relation to the market situation, et cetera. I think, rightly so, of course, a lot of people are nervous about how we will handle this, et cetera, and they tend to be very shortsighted now. I would take a step back again and say, look at the market forecast for 2020. Do the calculations out from that and say, okay, 275,000 in Europe, 240,000 in North America. We're gaining ground in South America.
We have had strong shipments when it comes to the actually rolling fleet. The whole focus now, again, will not be on the coming one or two quarters. It will be certain adjustments. We are in a cyclical business. We have been talking about this soft market. You can calculate it. I think that is the story that is this, a compelling story when it comes to moving, so to speak, both the sales forward and the services forward. What will happen with the transformation is the bigger piece of this puzzle. Obviously, the transition in quarter four is really natural when it comes to the different factors, as the question has been put here. Continuous adjustments if necessary. Some of them, we know, are necessary in North America already. We will do so.
Then, of course, when we balance this now, demand and production, we can then start again with continuous improvement. Some of them are ongoing. We have the same cost per unit also in quarter four, given the -14% deliveries. I think it is important to think about it like that.
All right.
Thank you. When it comes to the North American market, sorry to squeeze in one more question. I guess, are you concerned that the age of the fleet is now the youngest in over a decade? I would say 15 years, second, the residual values in North America, especially when you look at used truck prices deteriorating, when you mix everything, very young fleets becoming even younger every month, with residual values in North America and actually price for the used trucks actually deteriorating. Is that a positive, in a way, mix of things to think about a recovery in 2020, late term?
I can start with the fleet. Of course, we are following the fleet very closely, the aging, etc. What is very important here to understand is that if we take a look at the average fleet and the age of the fleet, which is very important for service revenues, we have more or less the same level of fleet that is between three-six years. It's where we earn the most money and also support our customers the most with work and repairs and parts. We don't see that shift impacting the service revenues on one side. We were into that, which was the fleet questions.
Used and residual.
Yeah. Then, of course, in this situation, we always have pressure on used trucks and buses. That is pretty normal when we are coming from high levels, and there has been a need for capacity for our transporters that we come into a situation of decrease of used truck prices. It's nothing dramatic. It is what is happening. Of course, that is in its turn also putting pressure on residual values. As I said, no big drama this time in this quarter compared to what we have experienced in the past.
Just to add on that also, I think when we talk about maybe the 25,000 in excess stock, so to speak, that's the reason why it's so important to get that balance back as soon as possible. When we look at our industrial pipeline now, we still have some destocking activities still to be done on the retail side, our dealers'. Again, we will support them by not pushing volumes that they don't need, so we need to keep our production, et cetera. The more we do that, the less they will concentrate on keeping that quality. We have learned that by experience. Make sure that we have the right balance of work with our stock now, and the sooner we get in balance, the less pressure there will be on these questions.
Yes.
Thank you very much. I step back in line.
Thank you.
Thank you.
Bank. Two questions. Again, on the U.S. situation and your share of the excess inventories, is this higher or lower than your market shares? The second question is to other EBIT or government sales, which I assume it is, that is again a really solid number. The question is , therefore, how long or what kind of level should we expect going forward? For how long will you have these defense deliveries that I guess are quite substantial?
If we start with our share, I should say that two elements make us relatively strong on this now. Our judgment is that we have a rather good situation when it comes to our share of the, so to speak, excess stock. We have been working actively, and you need to look both at how you actually have it right now and also at how you have started to adjust your production so you don't have the wrong inflow, if I put it like that. Secondly, also that we are sitting on our Arrow Truck arm for use, giving us a good view also on how the situation looks , both for our own captive brands and also for others. Our judgment of that is that it's a good situation but, at the same time, obviously dependent on the total situation. We are following through that as well.
High focus on that. When it comes to our Arquus, so the defense part of our quarter four, for example, we had big deliveries, and we have a solid order book that we have presented before as well, with good visibility. I think more importantly, what we are seeing is a continuous improvement in the operational flows, also in that part of it. I will not give, because that is also a little bit of this tender-related business. Good improvement, and we are seeing that there are, so to speak, good opportunities to continue on that track.
Okay. Let's check the telephone again.
Our next question is from Olof Cederholm from ABG Sundal Collier. Please go ahead.
Hi, it's Olof from ABG. Just very shortly, we haven't touched much on construction equipment. What is your view there when we're entering 2020 with slightly lower volumes? We have maybe some risks on the horizon, and the currency support will be lower. Are you confident that despite sort of a more difficult outlook, you'll still be able to keep margins high in this business?
First and foremost, thank you, Olof, for that question. First and foremost, I think that what we also showed in the presentation, Volvo Construction Equipment, has done a good job when it's working actively coming into 2020 with the right type of stocks, etc. We did see a little bit, maybe that we were—I should not say too conservative, but normally we are planning for a little bit of ramp -up and stocking up for the spring season. Especially in the U.S., for example, we have been really working actively with making sure that we have the right mix in the inventory. What is good , though, is that construction equipment has shown the response time, both in ramping down and ramping up, in the industrial systems.
I feel confident that we're going into 2020 with the right mix now, both for Europe and for North America. China has still been on the rise, there we are, so to speak, up to speed. We have been working a lot with having the right balance here. Let's see now what the real levels will be for the spring season. Again, it is a substantially better company when it comes to response time and visibility there. It depends a little bit on the volume effect, where we will end up, but you have seen in the guidance that there is no drama really, both in North America and Europe, in our provisions.
What we can say is that we see potential also on the service side for construction equipment.
Absolutely.
There we can really improve from where we are today.
Perfect. Then just a quick follow-up on services and trucks. I apologize if you touched on this already and if I missed it. It was a pretty good quarter. Price realization is positive on services. Will this continue going forward, or was this sort of a one quarter where it all came through, like Q3 was one quarter where services didn't really deliver?
First and foremost, as we said, a little bit quarter by quarter, et cetera. I think the more important thing is that you're seeing a gradual improvement over time. That is partly price. Obviously, it's activity level. It has good markers, but it's also that we have actually increased penetration because we are working very actively with certain of the service verticals, contracts being one of them, but also other types of activities with uptime centers and certified uptime dealers, etc. That will be a continuous focus. There is still a lot of headroom for improvements, both when it comes to the penetration of the first owner and also the second or third. You know that this is more of a step-by-step improvement. The good news about that is it's considerably more resilient also than the equipment sales are. Still high focus. Is 4% representative or not?
It's always difficult to say an exact figure. I think the more important thing is that we see that improvement coming through. Will that continue? It depends a little bit on how we will see the activity level overall, obviously. Having said that, the shipments of new equipment have been positive for quite some years. That is also a caution to that.
Okay. Thank you very much.
Thank you.
Yeah. Hi, morning! Mats Liss, pleasure. Two easy questions to finish. First, regarding the European market, could you say something about the development in sort of the main segments, Germany, France, and Italy, if there are any differences?
Was it on the truck's side or?
Yeah, the truck side, please.
Yeah, there have been a little bit of differences, but it is a little bit too early to say what is what. In France, for example, we have seen a little bit bigger drop initially, et cetera. It is a little bit early to make any big conclusions on that. I think you can still speak more. Eastern Europe has been a little bit more also because you have that mix with the fleets, et cetera, and some of the correlations because you have the bigger type of operators now sitting in Eastern Europe.
We took a big contract now for one of these bigger fleets. It depends a little bit. I think the more important thing is to say that we are feeling that the - 15% and then down to 275,000 are still standing. If anything, that is a little bit on the upside, but early days in 2020.
Okay. Secondly , you distribute a lot of cash to shareholders now, was share buybacks at all an alternative for you to do this distribution?
Of course, in a discussion in a board like Volvo's with such a spread also of shareholders, you are discussing all different types of options. This is the proposal to the AGM that the board has found to be the best option.
Okay, let's take one last telephone caller, and then we will call it a day. No one on the phone?
Yes. Our next question is from Tom Narayan from RBC Capital Markets. Please go ahead.
Hi, Tom Narayan, RBC. Very easy, kind of quick question. I was looking at your income statement, the income and loss from investments from JVs and associated companies for the quarter, SEK 731 million, last year was SEK 144 million. I think you explained it earlier, the phone cut out. Can you just explain what's inside there? Trying to understand the delta there.
Okay. We described it in two parts, being , then, the improved performance of our Dongfeng joint venture. We were into the total market and the market share development and thereby also improved earnings for Dongfeng. We had in one of our joint ventures a non-recurring item related to how we account for and present cost compensations. That is a non-recurring item. When we were talking about the non-recurring item in total, that was included when we said that net, there are very limited effects on Group and Group Trucks.
Okay?
Okay. All right. That's fine. I'll take my follow-up questions later with Jan. Thank you.
Thank you.
Thank you.
Thank you to all present here and on the phone. That concludes this meeting, and we'll meet you again in a quarter. Thank you.
Thank you very much.
Thank you.