Ladies and gentlemen, a warm welcome to this presentation where we will cover the Q4 2019, but also the full year 2019. We will, in short, be hearing a presentation by our President and CEO, Martin Lundstedt followed by Jan Ottobey, our CFO. After that, we will be taking questions and we would appreciate if you could limit yourself to 2 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.
But now, the line item is on you, Martin.
Thank you, Claus. So also from my side, most welcome to this presentation of the full year 2019 and the Q4. And maybe before coming into the presentation, just a number of reflections and would like to start actually by actually thanking the whole organization for 2019, but 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 side. Fantastic year, obviously. Record sales, record profits, but also strong cash generation.
But also a year actually containing all the elements of our industry. Coming into this year, very strong tailwind, stretched supply chain, speed but still to have in mind from very high levels, good activity levels and now that we guided for already in quarter 3, obviously, more normalized replacement levels. So 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.
And of course, as a result, given the strong cash generation in quarter 4, also a strong financial position of SEK 63,000,000,000. And of course, that is giving a position of strength to maneuver in the future here and that's from a position of strength. We have as a result in the board together with management and put forward a proposal of increasing the ordinary dividend from €5,000,000,000 to €5,500,000,000 and also to propose a special dividend for 2019 for SEK 7,500,000,000. So in total then SEK 13,000,000,000. But also still keeping a strong financial position moving forward.
Because 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, investments and we will continue to reinforce that because there are great business opportunities that I will cover later. But this year has also been very much a signal of that when it comes to partnerships, NVIDIA, Samsung, the ISSO strategic alliance and many more also other type of partnerships in the ecosystem, but also very tangible outcomes now when we are ramping up, for example, electromobility. We are forming the Volvo Autonomous solution business area. We are putting commercial projects in place as we speak.
So a great year and moving forward now from a position of strength. Summary, 4th quarter highlights. Obviously, we see the signs of the softening market that we already guided for in quarter 3. No drama there. It's really following what we have been guiding for Europe around minus 15 from very strong levels and also North America.
So that is actually seen also in the net sales now, a decrease of 5% if you take away currency. Adjusted operating income, 9.2% and margin of almost 8%. We think that is also a good sign given that quarter 4 and the surrounding quarters here will be a little bit of transition character when you are actually adjusting the different paces, but we can come back to that. Operating cash flow, very strong, almost SEK 20,000,000,000. And one part of that is obviously that we have been successful with inventory reductions in our system.
So when it comes to the production rate in relation to the delivery rate, it has been a delta of approximately 6% for trucks. And then, of course, a big news also that we announced just before Christmas, the forming 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, but also 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. And one part of that as you've seen, the intention as the first part to transfer down the ownership of UD trucks to Isuzu Motors and that process is ongoing. When it comes to truck deliveries, as I was into, a drop of 8% for trucks. During the quarter.
Production levels were down 14%. And if you take Volvo Trucks, for example, there you see that the drop has come primarily then in Europe according to the forecast that we have had and also North America. And that transition is ongoing as we speak, continuous and South America very, very strong momentum. When it comes to machine deliveries, plus 4 and the same here that SDLG has continued to grow, very strong compact deliveries, for example, 23% up and the Volvo brand then increased with 15%, Both market related, but also that we also in this area have been very successful since we have more of a non captive retail dealer system working actively with destocking activities. So we are moving into 2020 in a good situation, but I will cover that a little bit more in detail later on here.
Services as I was into 4% plus excluding FX. I think that is also a strong momentum showing that the activity level out there is still on 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 full construction equipment and decreasing in the activity level that has impacted the service level. But 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. But good development over the course of the year here.
Trucks, if we start then with the market environment, no drama. We are actually maintaining in most market areas the guiding that we had already at the quarter 3 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, but 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, really good years. I mean, you know the North American market with the hedging in the independent retail, etcetera. So now it's all about really coming down to this replacement level, if I put it like that, and also making sure that the industry and of course, the Volvo Group is also actively working to continue to destock because we see that there's still an overstock of approximately 25,000, 30000 units out there. And thereby, we need to adjust also production in balance with inventory and the real demand. So we're coming into balance.
And that has started in quarter 4. We are continuing to do in that transition in quarter 1. And as we already talked about 2016, 2017, we will make no whatsoever compromise on that we will have that balance that is the most important. Brazil, we are guiding up a little bit from 75% to 80%, but strong markets and we have been successful here also gaining market share, ramping up production and price realization actually. So the South American team has done a great job.
And then Japan, flat China also flat or flat. It is unchanged forecast. But 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 and that is in the long run good because that is signing more mature logistical system and also more and more coming into the sweet spot for the Volvo Group. And then we do a further correction down in India given there's still trouble, some so to speak economic situation and also the excess to financing, etcetera. So we are dropping that.
But 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. Then if we look to the orders and deliveries, starting with Europe, as you can see minus €15,000,000 approximately both when it comes to deliveries and orders, following, so to speak, the forecast that we've had and good balance between book to bill. So really that we were taking the measures in end of quarter 2 and beginning of quarter 3, very, very important. If anything, we see actually little bit pressure upside in Europe, meaning that we are adjusting to Wind Gothenburg, for example, the final assembly, both related to Europe, but also to some other markets that will come upwards a little bit and we are contemplating if that will be enough.
So 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. So 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, but still it's a good sign that we have seen this first over order situation and then, so to speak, over delivery situation and coming more back to a situation that is closer than as you always, I mean, 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 the strong order intake, market share gains and price realization at the same time. And also, Asia actually, some important markets that has been showing strength in the beginning.
We are taking a number of key accounts. China is up for us with, I mean, significantly from low levels, but still, I mean, very good sign for us, Turkey and also GCC countries. So it has been good for that sake, and that is also related to European production. Market shares, 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. Having said that, we are not happy with a situation with a strong long haul and a very, very strong product range on north of 9%. So that is not acceptable and we need really to focus on that. Mack, you will regain 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 for Metc here. Also JOR was good.
After actually bottoming out on 15.2%, we have been north of 16% during the quarter 4 for Volvo and a stable situation for Renault. And in the other markets, as I've been into strong development of market shares, South America and Brazil very, very strong situation obviously as market leader. 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. In we have had the slippery slope on heavy duty for Dongfeng, but we knew product introductions, good focus on management there. We were actually north of 15% in quarter 4 and north of 14% mid-fourteen percent 14.5 percent for the full year. So congratulations to that development as well. Further introductions going on in our portfolio of electromobility.
As we speak now, we are starting to ramp up commercial orders when it comes to regional distribution sorry, urban distribution and waste collection, both of Volvo and Renault. But 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. And those will be the continuous markets where we also need to continue to have discussions on the infrastructure. But well received, customers excited, start to be able to see the business cases and a quick movement also from customers, customers into this where they are ready to take on investments in order to actually drive their sustainable development. So 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 sanitation department, Department of Sanitation in New York. And it will be put in place in real world now trials with Department of Sanitation as from start to quarter 2. So that is also a sign that we are moving rapidly. 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 heavy decentralized organization and Metrux is running on their, so to speak, merits. But they will so stay tuned on that because I think it will be exciting to see that later today. Then obviously, as I said, so I will just touch it briefly again, great opportunities together with Isuzu. It has been the intention now of pursuing this is moving into the merger clearance activities, but also how we actually are forming now the strategic alliance in a smart and swift and agile way.
Very good also I feel the value base of the 2 companies to move forward here. Construction Equipment then. When it comes to the market environment, we have also in this case been stable in relation to quarter 3, unchanged for our big markets in North America and Europe. And even if you say minus 10%, for example, in Europe, and I reiterate what I said in quarter 3 presentations, still strong activity levels, investments going on, low interest etcetera. So that is still a positive level.
And as you will see on the next slide, it just started with quarter 4 was like minus 5% in order intake. But in reality, we were losing out some of the rental on the compact equipment. So if you take the totality, it was actually almost a wash and that is strong for us actually. So let's see, but at a good level. And then we have increased the forecast in China.
We had the midpoint of minus 15% from strong levels, but we are revising that up to only a drop of minus 5% on midpoint. Then obviously and unfortunately, we need to continue to follow the development of the corona virus, etcetera, but this is before, so to speak, the full effect. So that can be evaluated. Then when it comes to the orders and deliveries, as I was already into, orders up for SDLG, 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.
I mean, orders now plus 40% and deliveries minus 25%. And that is related to what I said. Our organization has together with dealers also been successfully destocking, so to speak, the pipeline. And thereby, we have had high flexibility on our production rates in order to not have, so to speak, the wrong. 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 up this. In Europe, as I said, stable situation if you take away then the compact rental orders and deliveries going up a little bit ahead of the spring season, so that because they have also been working with destocking. So generally speaking here, I see a situation that is well in balance. Some highlights also on Construction Equipment.
We are happy and proud to see also the development on market shares in China for the group. On large excavators, we are moving north. That has been one of the prime focus where we also have introduced a number of machines and applications where we were weaker and that is gaining traction. And also wheel orders, as you can see, we are continuously strengthening our position. And also in this area, we are now actually delivering the 1st 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.
And as you might remember, we have communicated that further development beyond the current emission levels will only take place for compact in fully electric mode. Buses. 1st and foremost, I can say on buses. We have talked about that and Jan Gjerandre also talked about that earlier that we have done substantial, so to speak, activities to be more agile, clear, distinct in the bus organization. And Hakan and the team has done that.
We have now clear divisions running the chassis, the full body operations in Europe. We have a strong North American. And 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, still strong levels actually, minus 9%. Orders in buses a little bit plus and minus depending on when tenders are coming in.
Last year, we had a very strong order to Bogota for the TransMilenial System, but still also strong orders in this quarter for buses, both North America then with Prevot, the biggest order to New York of almost or actually more than 300 buses or coaches. And a very important order also, at the time the biggest European order of 100 almost 160 fully electric buses to Gothenburg. That has actually been followed now by a number of noncommunicated yet, but I mean a number of other interesting deals. And we see that now it's really starting to take off here. So that is also we feel very, very encouraging to follow that development during the course of the year.
And that is also related 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 particularly given the huge pre buys and pre deliveries we had 2018 and then coming into 2019. Obviously, and Jan will come back to that, that has been also difficult comparison figures. The only thing I will say here is that we are feeling that we are on exactly the right track since many years. The balance between growing sales, entering into new segments, reinvesting in R and D, reinforcing our position, growing value for our customers and our shareholders and that will continue.
Also positive finally is actually the sorry, that was Panta. I came into I cannot do 2 things at the same time. But Financial Services then to Envil, 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 that I think is very positive, improved penetration in different segments and strong, so to speak, integration.
One example was at Fener Tran, the big truck show that is a real sales show in Brazil, where we see how important the commercial crew concept, the integrated concept is actually. And it ended up with 16,000 orders taken. So I think it's pretty good actually. So I leave it by that and ask Johan to continue with the financials. So I will do like that.
I will do that also from my side. Very welcome. We can summarize this Q4 as actually being the Q1 where we see correction, and the correction are putting marks in our earnings, whereas we also have been focusing in inventory reduction, and we saw that came 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 of SEK 63 1,000,000,000 then. Currency adjusted net sales down 4.6%. SEK 4,400,000,000 is related to currency, that is euro and that is mainly then dollar.
The decrease of truck deliveries were general across the regions, with the exception then being South America and Brazil, with the remarkable increase there by the organization and the supply chain, of course, impacting the sales figure positively. If we take a look on the truck deliveries, we see more of 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 around 4%, mainly related enterprise and the effect of the strike in U. S. Did not affect neither the deliveries and the sales figures in any material effect.
Moving over to the earnings and operating income. In the 4th quarter, deteriorated close to SEK 1,400,000,000, down to SEK 9,200,000,000 giving an operating margin of 8.8%. Main contributors behind the deterioration, well, of course, lower truck deliveries, lower engine deliveries, partly offset by bus and construction equipment deliveries. And also we had a product market shift in construction equipment with lower sales of Volvo branded heavy machines and then also more of 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 under absorption 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 4th quarter last year and this quarter, which is very good if we consider then not only the lower deliveries, but the fact that we have been destocking. So when we take a look on the production volumes, it's even more than 10% you see on, for instance, trucks. It's a good sign going forward as well that we are able to do this. Despite then a more challenging demand situation in general for prices of vehicles, but they were still on the same level as last year, we see more of price realization in the service side and that is impacting very positively on the service earnings.
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 and D, both related to what we call well known technologies and new technologies. The paid out expenses increased by some SEK 900,000,000, a minor part of that is related to FX. Then we have the capitalization of R and D expenses. That is coming more and more in balance now, I.
E, capitalization and amortization being more or less equal. But last year, we had more of capitalization. That's where 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 selling, but that's actually mainly related to FX effect, but we have seen more of activities and resources into the selling side, but we are reducing them right now to adjust to a new demand level going forward.
And then we have other SEK 1,000,000,000 there. It's mainly related to 2 things. Actually, the sale of land in Japan, giving a capital gain of some SEK 500,000,000 and also coming back to our joint venture, an improved performance of Dongfeng, not only market share and deliveries, but also results. And then also we had a positive effect from a nonrecurring item relating to how we are matching compensation of costs in the accounting. FX continue to affect positively.
We are talking about SEK 800,000,000 in the 4th quarter, mainly then on the operating side operating income side dollar, partly yen, partly British pound as well. For 2020, we will see transaction effect that be more or less 0, and we don't give guidance for the full FX effect for 2020. Then cash flow. In the industrial operation, 4th quarter, seasonally a good cash flow quarter where we see normally historically, we have seen higher or high deliveries and also we see more of accounts payable coming in the cash flow related to the fact that we are 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 Q4, but we're able to decrease inventory levels quite substantially.
A lot of focus have been put into this to the whole organization. So to get the inventory in better balance for present demand. So really good cash flow generation and, of course, giving us a possibility to act from a platform of strength.
So all in all, SEK
20,000,000,000 on cash flow for industrial operation, earnings, of course, but then we had the release of inventories of SEK 6,000,000,000 and more or less the same effect coming from accounts payables. Also, we should remember that we have a quite substantial negative effect in the 3rd quarter during the vacation period in Europe. Capital expenditure for the Q4 were over SEK 4,000,000,000 here, affected then by an emphasizing this trend of higher plant and investment 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. So the cash flow generation ended up in an improved financial position up to SEK 63,000,000,000 for industrial operation. Moving over to the segments.
Lower truck deliveries of some 10% then affecting both net sales and operating income negatively, of course. The decrease was limited to 5%, And 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 trucks of SEK 1,200,000,000 to a slightly lower SEK 6,200,000,000 giving operating margin of 9.1%. And these are the same effects that we talked about the group just recently, of course, because group trucks is so big for us. We have the lower truck volume, we have the R and D cost, and we had the strike effect impacting negatively for group trucks, partly offset then by improved service revenues and price increases there.
The capital gain, the JV effect, both related to performance and this nonrecurring item. If we take a look on the net of the nonrecurring 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 0. So it's limited effects on our income from the nonrecurring items. I've understood that there has been some questions here in the morning related to this. But of course, also for group trucks, a positive impact from FX here, SEK 0.5 billion.
Construction Equipment, mixed picture. Machine deliveries increasing by 4% related to higher volumes of SDLG machines, China and also then more of compact machines and less of Volvo branded heavy machines. And 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, but also we see lower utilization in some Asian markets.
So all in all, currency adjusted net sales down 7% and operating income down SEK 200,000,000 to SEK 1,900,000,000 and the simple explanation, mix, product and regional mix. And then a somewhat positive FX effect. Buses, good to see that the financial performance for buses continued to improve also in the Q4. Deliveries new buses up around 140 units, Nordic countries performing better and also some countries in South America. Net sales, though, decreased some 3%, currency adjusted also despite a service increase here of some 9% in local currencies, and that was related to the mix of less of city buses this year compared to last year.
We have a small improvement of SEK 30,000,000 here where we see the improvements of volume and services on one side as well as an improved mix with more of coaches and intercity buses. And then on the negative side, we have the capacity utilization and somewhat higher selling expenses and also positively impacted our SEK 80,000,000 of FX. Martin was into that. Penta, a very strange year 2018 to compare with. 4th 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 5, the introduction there, which together with the general slowdown we see, affects then in comparison deliveries, sales and operating income. So adjusted operating income then decreased some SEK SEK220,000,000 to SEK 174,000,000. That is a more normal level for the Q4 that we saw last year. So beside engine deliveries, we also have a higher level of R and D expenses. Part of that is related to that.
We now have started to amortize the Euro Stage 5 applications, but also we have higher activity in electromobility and digitalization in Penta. And 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 in general for Financial Services. We have higher deliveries in Brazil as well as the financing need that is pretty high in some of the markets like U.
S. For the time being and 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 of write offs and also more of reschedulings and returns in the aftermath of weakening transport demand and weakening transport prices. We are presently from a credit quality perspective talking about more of mid cycle levels than anything else. Trade portfolio stabilized at SEK 170,000,000,000 from the 3rd quarter.
That is around 10% up currency adjusted from last year. And if we take a look on the income side, the improvement here of SEK 100,000,000 is mainly then related to the higher and bigger portfolio we have and also to some extent the FX. So making some reflections of the full year and taking a look on the operating income, we can say that 2019 was a typical peak of the cycle year, where we actually peaked in the Q2 as regards deliveries and earnings. When summarizing the year, vehicle volume had actually limited impact on the improvement of some SEK 7,000,000,000 compared to 2018 up then to close to SEK 48,000,000,000. Instead, it was price.
It was mix on vehicles as well as a continued improved service earnings. Also there, prices was an important factor behind that improvement on services as well, partly offset then by the increased R and 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 earlier period more of 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 4,000,000,000 compared to last year. And then Martin, you get the pleasure of rounding it off.
No, I think we have been going through the different details and 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. So great times ahead. I think we open up for questions.
Claes?
Yes, let's do that. Thank you. Let's start here.
Thank you. Erik Kollrang, SEB. I have a few questions. First one, you talked quite a bit about investment levels trading higher. Could you say something about sort of the size of increased CapEx commitments and R and D for 2020?
I can start with the balance sheet because there's 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 and D, we, of course, get over the time also an increase of property, plant and equipment and the need for capital expenditures. I say to my people, champions are made off season.
So really, we have to both be able to break and accelerate in this situation. We talk a lot about performance transforming. This is actually what it's all about. Should you say something on R and D then, Martin?
Yes. Mean, as you have seen already during the course of this year, we have increased it. But I think also you need to take a step back to see on what levels we are talking. We have been hovering around south of 5% R and D expenses. And I mean, we are not talking about a huge expansion when it comes to, I mean, the percentage point, but still both given, so to speak, a little bit of a softening market as we speak and also that we are actually in also 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. So we need also to make sure that we are taking that position when the transformation will come now. So we feel very confident that this is the right balance. And that's the reason also why we have been born and saying we will distribute to shareholders, but we will also still keep a good financial strength so we can be a leader also in the future here. Great.
I mean, I have to say I was in Davos. And if I put it like this, all communities have understood now, I mean, how important the transformation to a sustainable society is. And can you think about something more exciting when it comes to value creation and growth to be in transportation, mobility and infrastructure?
I want to answer that. The second question on we've heard you talk about disappointment on the market share side in North America for quite a few quarters. You want to do something about it. And I guess the question is, can you what can you do sort of outside of pushing harder on the fleet side, which typically comes with quite negative mix?
No. As you say, and I think the first answer to that is obviously that at least we have gradually seen our stabilization of this. And as I said, I mean, it's not acceptable to move further south when it comes to market share here because now we are on a combined 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, to have 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. And so now it's time really to be a little bit more balanced in this. So fleet is one thing, but we also see that the mix has been a little bit not in favor, for example, for Mack. And finally, on Volvo Trucks, the rollout is complete now on the turbo compound offering, for example, that is a great product when it comes to fuel efficiency.
So I think we have removed a lot of excuses not moving forward.
Okay. And then the final question on the working capital improvement in the Q4. Is that sort of a base level from where you can work? Or is this really a at least temporarily or mid term unsustainably low level? Or is it something we can work from?
Your favorite company. Yes.
Working capital, I mean, it's mainly then related to receivables and inventory and payables can go up and down and that's depending on the future volume. But and I make this reflection. I mean, last year, we had an increase of in 2018, we had an increase of inventory of SEK 12,500,000,000 in the cash flow. This year, we have a release of SEK 5,000,000,000. 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 44.
Yes. Do
we have anyone on the telephone? Please go ahead.
Our first question is from Klas Beglin from Citi. Please go ahead. Yes. 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 February, and we had the impact from the strike. The drop through, I. E. Operational gearing, is around 60% ex currency and R and D.
Without quantifying the strike margin, could you perhaps help us what that 60% drop through should be when the savings kick in, in the Q1 without the strike impact? Are we looking at 40%, 30%? I will start here.
Thank you, Klas. As I always say, I mean, I will not necessarily do all of your work. But having said that, I think Jan was pretty clear about when you look at the nonrecurring, when you have a transition quarter, and we had a number of those, I mean the JV income and also the capital gain, and then on the other side, offset by, among other things, the strike effect, but not fully but also another but we didn't want to release this, the whole thing because it should be fair. But the net effect of that, as we said, was a wash more or less. So then you can take out that and say, okay, what should it be?
But I think you can take it from this we decreased we are coming now into softer markets, still good levels, but we are decreasing. We are very firm on that we should have the right balance. We are decreasing deliveries with 8%. We are decreasing deliveries with 8%, but we are decreasing production levels with 14%. And so there obviously you have an effect of the destocking, very important to do because then you are and we will continue to actually monitor this very closely, primarily for North America in quarter 1 and moving forward.
And then in addition to that, to your point, and you already mentioned that with R and D. But I think we are taking the right measures, and it could be in some cases have been 1 or 2 weeks or 1 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 that is always good to find the balance. So the only thing I can say is that we will continue, if necessary, to do so.
But also given the guidance of the total market, you can also see that, that will eventually be a further better balance. But 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 Christer. And my second one is on Uditrax and Isuzu. Could you say anything at this call about the confidence level around antitrust approvals?
It's a nonbinding memorandum of understanding. Obviously, over SEK 20,000,000,000 potential cash inflow could perhaps add to the now what it seems to be recurring cash returns at Volvo. So what I'm interested in is the confidence level, Martin, here on signing this deal.
1st and foremost, I think, I mean, when you are publicly announcing the intention of this magnitude, And then 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, then of course, we are judging the confidence both when it comes to further, so to speak, in-depth discussions and joint activities with Aisuzu, but also in relation to the merger clearance and other type 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 to 30,000 excess inventory in the retail channel. How much did you lower production year over year relative to the 16% decline in deliveries, perhaps 30,000, 35,000? Percent. So just confirm that. Now with the book to bill at 1% in North America, how do you plan to run production going forward considering that retail is still sitting on excess stock?
No, I think almost answer. I mean same analysis as we are doing. I mean if we think about the retail volume into the market of 240 1,000 around and excess stock, I mean, we talk about production levels in the North American market of 210,000 maybe. We will I mean, 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 do what so have any compromise or balance between inventory, production and demand.
And we are doing that as we speak. We have seen some good activities happening in that balance already in quarter 4. We will continue to drive that in quarter 1. But still, as I said, activity levels in North America and thereby shipments will be on replacement level and that is not a bad thing. Then obviously, it will be a little bit of a transition also in the beginning of the year here, but completely natural.
Hampsen, Johannes Vankeen. Two questions from me then.
Yes, sorry.
Starting off on production in Trucks. The further adjustments you're doing in Q1, how would you compare? Is Q1 a bigger production adjustment quarter than 4th quarter in trucks? And do you expect from where you see today demand that you will be at the correct run rate when ending Q1? Second question is related to deal inventory.
And then if you could maybe talk about moving this delivery inventory. Have there been incentives from you to the dealers? And 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 on the European production that we have found a balance and if anything that we need to do some adjustment upwards as we speak, but that we will do 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 quarter 1? That is what we target for, I can say.
But I mean, then 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. But I think it's 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 reflected in the market share as well.
But let's see, I mean, on the balance here. But I think also depending on how the whole dynamics in the market goes, see what we will do. But as I said, to move further south from what we are now is not an option given the fact that we have the resilient business in North America now. But of course, always when you have the slippery slope, you have some pressure, not at least also on the used side and that will a little bit affect the whole story, so to speak, so following closely. But I think the most important is the flexibility now in our industrial system.
Okay. Our next question is from Gilmore Peknak from UBS. Please go ahead.
Good morning. It's Guillermo Peigne from UBS. Maybe a couple of follow-up questions. One obviously relates to the overall market, your 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 in the conference call, but also is there any reasons why we should think that pricing is not a way to actually gain market share in a weak 2020?
So that will be the first question. The second question relates to maybe, again, trying to assess a little bit, how many quarters of inventory reductions do you are you planning ahead with the same levels of activity? And at which point do you expect, in a way, the balance in between your books and manufacturing to be again at high levels so you can start to raise production? Thank you.
Well, the first question, I think I already heard. The second, I'm a little more puzzled about. But of course, order intake, and I think what you were referring to is if we also say price going into price reductions to be able to get in order and know what we are doing and we have described this before, we are very much consistent with having the quality in our business And what we are doing and what we did not do when we had the really, really high volumes is that we are a little more selective on a little more aggressive on some of the fleets and being coming back and getting into those than sort of having more of a general price increase in the market. So that is what you see and what you can expect going forward. And of course, we have already been into U.
S. I was more referring to Europe here, but we have already been into U. S. Will also be more selective there. But of course, we have some quarters now to get out 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, I mean, our production adjustments in relation to the market situation, etcetera. And I think rightly so, of course, a lot of people are nervous about how will we handle this, etcetera, 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 are guiding up in South America. We have had strong shipments when it comes to the actually rolling fleet. So I mean the whole focus now again will not be on the coming 1 or 2 quarters. Yes, it will be certain adjustments. We are in a cyclical business.
We have been talking about this softer market. You can calculate it. I think that is the story that is this, I mean, a compelling story when it comes to moving, so to speak, both the sales forward, the services, what will happen with the transformation is the bigger piece of this puzzle. Then obviously, transition quarter in quarter 4, really, I mean, natural when it comes to the different factors as the question has been put here, continuous adjustments if necessary. Some of them we know is necessary.
In North America already, we will do so. And then of course, when we will balance this now demand and production, we can then start again with the continuous improvement. Some of them are ongoing. We have the same cost per unit also in quarter 4 given the minus 14% of deliveries. I think that is important to think about it like that.
All right.
Thank you. And then when it comes to the North American market, sorry to squeeze one question more. I guess, are you concerned that the age of fleet is now the youngest in over a decade, I would say, 15 years? 2nd, the residual values in North America, especially when you look at used truck prices deteriorating, when you mix everything, I. E, wage on fleets becoming even younger every month with the usual values in North America and actually price for the juice trucks actually in 2018.
Is that a positive, in a way, mix of things to think about a recovery in 2020, late churn?
I can start with the fleet. Of course, we are following the fleet very closely and the aging, etcetera. And what is very important here to understand is that if we take a look on the average fleet, which 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 3 to 6 years. It's where we earn most money and also support our customers most with work and repairs and parts, etcetera. So we don't see that shift impacting the service revenues on one side.
Then we were into that was the fleet questions. Yes, yes. And 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 have been a need of 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. And of course, that is in its turn also putting a pressure on residual values. But as I said, no big drama this time in this quarter compared to what we have experienced in the past.
And I mean, yes, to add on that also, I think when we talk about maybe the SEK 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 in on the retail side, our dealers. But again, we will support them by not pushing volumes that they don't need. So we need to keep our production, etcetera, because the more we will do that, the less they will concentrate on keeping that quality. And we have learned that by experience, make sure that we have the right balance, work with our stock now and the better or the sooner we get in balance, the less pressure it will be on these questions.
Yes. Thank you very much. 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?
And the second question is to other EBIT or government sales, which I assume it is that is again, it's a really solid number. And the question is there, for how long or what kind of level should we expect going forward? Or for how long will you have these defense deliveries that, I guess, is quite substantial?
If we start I mean, if we start with our share, I should say that 2 elements that makes 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 on how you actually have it right now, but also have you starting to adjust your production so you don't have the wrong inflow, if I put it like that. And secondly also that we are sitting on our aero truck arm for use, giving us a good view also on how the situation looks like, both for our own captive brands, but also for others.
So our judgment on that is that good situation, but at the same time obviously dependent on the total situation. So I mean but we are following through that as well. So high focus on that. Then when it comes to Alkyu, so the defense part of our quarter 4, for example, we had big deliveries. And we have a solid order book that we have presented before as well, I mean, good visibility.
But I think more importantly, what we are seeing is continuous improvement in the operational flows also in that part of it. So I will not give because that is also a little bit of this, I mean, tender related business, But 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 Soderholm from ABG Sundal Collier. Please go ahead.
Hi. It's Olof from ABG. Just very shortly, we haven't touched so much about 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 that you'll still be able to keep margins high in this business?
Yes. 1st and foremost, thank you, Ulf, for that question. Obviously, 1st and foremost, I think that what we also showed in the presentation, I think Volvo Construction Equipment has done a good job and it's working actively with coming into 2020 with the right type of stocks, etcetera. We did see a little bit maybe that we were, I should not say, too conservative, but we normally we are planning for a little bit of ramp up and stocking up for the spring season. Especially in 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 industrial system. So I feel confident that we're going in 2020 with the right mix now both for Europe for North America. China has been still on the rise. So there we are, so to speak, up to speed.
But we have been working a lot with having the right balance here. So let's see now what the real levels will be for the spring season. But again, it is a substantial better company when it comes to response time and visibility there. So then it depends a little bit on the volume effect where will end up. But that you have seen in the guidance that there is no drama really both in North America and Europe in our provisions.
And what we can say that we see potential also on the service side for construction equipment. There, we can really improve from where we are today.
Perfect. And then just a quick follow-up on services and trucks. I apologize if you touched on this already, if I missed it. But it was a pretty good quarter. Price realization is positive on services.
Is there will this continue going forward? Or was this sort of a 1 quarter where it all came through like Q3 was 1 quarter where services didn't really deliver?
I think I mean, 1st and foremost, as we said, I mean, a little bit quarter by quarter, Serta. But I think the more important is that you've seen a gradual improvement over time. That is partly priced. Obviously, it's activity level. It has good markets, 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 type of activities with uptime centers and certified uptime dealers, etcetera.
So that will be a continuous focus. There is still a lot of room headroom for improvements, both when it comes to the penetration of the first owner, but also second or third. You know that this is more over, I mean, step by step improvement. But the good news about that is it's considerably more resilient also than the equipment sales. So still high focus.
Is 4% representative or not? It's always difficult to say an exact figure, but I think the more important 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. But having said that, the shipments of new equipment has been positive for quite some years.
So that is also a cash into that.
Okay. Perfect. Thank you very much.
Thank you.
Yes. Hi, good morning. Mats Liss, Kepler Cheuvreux. Two easy questions to finish. First, regarding the European market, if you could say something about the development in sort of the main segments, I mean Germany, France, Italy, if there are any differences?
Was it on the truck side or?
Yes, the truck side, please.
Yes, it has been a little bit of differences, but you can say for example, but that is a little bit too early to say what is what. I mean, in France, for example, we have seen a little bit of big drop initially, etcetera. But a little bit early to make any big conclusions on that. I think still you can stick more and Eastern Europe has been a little bit more also because you have that mix with the fleets, etcetera, and some of the car related 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, so it depends a little bit.
But I think the more important is to say that we are feeling that the minus 15% and down to 275,000 is still standing. If anything, that is a little bit on the upside, but early days in 2020.
Okay. And secondly about I mean, you distributed a lot of cash to shareholders now, but was share buybacks at all an alternative for you to do this distribution?
Now of course, I mean in a discussion in a board like Volvo with such a spread of also shareholders, you are discussing all different type of options. And this is the proposal to the AGM that the Board has found being the best option.
Okay. Let's take a last telephone caller, and then we will call it today. No one on the phone?
Our next question is from Tom Narian from RBC Capital Markets.
Hi, Tom Narian, RBC. Just very, very easy kind of quick question. If I just looking at the your income statement, the income and loss from investments from JVs and associated companies for the quarter, dollars 731,000,000 and then last year was a $144,000,000 I think you explained it earlier, but the phone cut out. Can you just explain what's inside there? I'm just trying to understand the delta there.
Okay. We described it in 2 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. And then also we had in one of our joint venture a nonrecurring item related to how we account for and present cost compensations. So that is a nonrecurring item.
And when we were talking about the nonrecurring item in total, that was included when we said that net, there is very limited effects on group and group trucks.
Okay.
Okay. Okay.
All right. That's fine.
I'll take my follow-up questions later with Johan. Thank you.
Thank you. And thank you all present here and on the phone. That concludes this meeting, and we'll meet you again in the quarter. Thank you. Thank you very much.