Good morning, welcome to this press and analyst meeting covering the first quarter 2019. We will be listening to presentations from the CEO and President of Volvo Group, Martin Lundstedt, followed by Jan Ytterberg, our CFO. After that, there will be a Q&A session where we will be taking questions both from the room and from the telephone conference. Please use a mic. Martin, take it away.
Thank you. Thank you, Klas. Ladies and gentlemen, also from my side, most welcome to this presentation of the first quarter 2019. Just to start off, let's see if this is working. Yeah, it's working. With a summary of the first quarter, a very strong quarter, as you have seen, for the Volvo Group. Net sales up with 20%, up to a record level of SEK 107 billion, an adjusted operating income of SEK 12.7 billion, corresponding to an operating margin of 11.8%. Also operating cash flow in, Jan will come back to that obviously, in a normally weak first quarter, also rather strong on almost SEK 3 billion. When it comes to the volume development has also been positive as regards deliveries.
The truck deliveries increased with 12%, primarily related to North and South America, where machine deliveries increased with 5%, and the absolute majority of that was related to SDLG. When it comes to the service sales development, we have seen a continuous growth of the service sales for the group, up with 4%, excluding currency effects. That is primarily driven by continuous strong, of course, momentum in the market when it comes to activity levels among our customers, but also to an increased population in the market. That will continue to be strong also moving forward here. Just a couple of words on Bauma. Bauma China, that is the biggest exhibition, as you know, in the world as regards construction and mining activities. That is taking place every third year. I was very proud to see that we were showcasing a very strong presence as a group.
In these industrial verticals, such as construction, waste collection, mining, we have a very strong combined offering, we are more and more working together, going to the customers as the whole group with complete solutions. It was an exhibition of innovation. We launched a number of very unique solutions, and in the middle you see a proud Mats Sköldberg standing just after the reveal of the new fully electric range of compact machines, both for excavators and wheel loaders. Something that was really positively welcomed, obviously, because those are segments where electrification will come the quickest. I will come back to some of the other launches that we made during this very successful exhibition. On the truck side, to start with the market situation, something that I know that you are listening very carefully to what we are saying about that.
We are actually leaving our forecast for 2019 unchanged. Maybe some comments. As you know, deliveries into, or the total market in North America was actually up 22% in quarter one. If anything, we see that we are leaving our forecast unchanged, but if anything, we feel somewhat an upward pressure when it comes to the total market in North America. Also for the other bigger market areas, we are leaving the forecast unchanged, as we reported already in quarter four in January. When it comes to the orders and delivery situation on the truck side, to start with, the total order decline was almost 40%, that sounds obviously rather dramatic. When you look into the, and digesting the figures, the first thing that you see is that you have more or less a 1-to-1 book-to-bill ratio in all market areas except North America.
North America is, when it looks to the figures, rather dramatic because we have a decline of orders over 77%. As you are aware of, we have had, and you can see that on the slide as well, the book-to-bill has been extremely positive for a long period of time. As we have been communicated before, we are continuously now looking over our order book quality in North America to be really sure that we are not sitting with the wrong type of order book and order quality. The message here is that customers are taking their deliveries. It is working according to the provisions. We have order board that is full up to end of 2019 and very restrictive to open up 2020. We are doing that for certain orders in order to capture them.
When it comes to the delivery situation in North America, plus 42% is obviously strong. One shall remember that the quarter started rather weak, primarily for Volvo Trucks in North America, with continuous disturbances in the value chain that has been continuously improved during the quarter. When it comes to Europe, also there we saw a decline of 15%, a little bit of variation between Volvo and Renault. Volvo -10%, if I remember it correctly, and Renault on the heavy side, around 20%. For Renault, a little bit of periodization with some of their traditional bigger accounts. If you see the trend line of our book-to-bill ratio, we are trending towards the revision, or the forecast that we have been stating of around 300,000 total market. Also then in South America, continuous strong situation.
We already had a strong order intake last year, as you see, deliveries are up. Whereas in Asia, it's primarily related to the weakening situation in Middle East. Truck shares, I indicated a little bit in North America. Obviously, we have been very keen on keeping the right quality of the business when it comes to our introductions of the new trucks. That is one of the reasons. The second reason, primarily for Volvo, is, as I said, we had difficulties at the start of this quarter to get trucks out, basically, to the amount that we needed. We have seen improvement at the end of the quarter. Market share is north of 10% for Volvo. Jan will come back to that when it comes to the receivables also, that we have now a strong pipeline of the deliveries that we shall do.
It is important to say that for Volvo Trucks, it has been a favorable market mix. We have a stronger on-road segment in the beginning of the year than the rest of the segments. The interesting part for Mack, though, is that Mack has actually increased their market share in all segments. As you know that they are weaker in on-road and stronger in straight trucks and in waste collection, the market mix, or the segment mix, I should say, has not been favorable for them. Still a strong momentum. We are very confident that the new models are on the right quality when it comes to price realization and also on order board. In Europe, we are losing at the start of the year for Volvo, primarily related to two reasons. Reason number one is a surprisingly strong start of the German market.
I don't know if that has something to do with some one-off effects, a surprisingly strong start of the German market. Since we have a weaker position there, that is actually giving some effects on our market share. The second reason is that we have made priority on quality in the business, i.e., prices and commercial conditions, and also somewhat customer mix in a favorable market where we are running more or less on maximum capacity. Renault stable, I think that is also a good achievement, or a little bit then improvement, given the very strong German market where Renault is very weak, I have to say, with 1.5% market share. In other market areas, as you can see, improvements. I'm satisfied to see that we are coming back in Japan.
There, as you know, we have been doing priority on the quality of the business for a long period of time. The turnaround has been far more important than the market share. Now when we have things in good order, we see also that we are continuously gaining, and the new products are well-received. Brazil working well also after the price realization activities we did last year, coming back on a strong note when it comes to the total market share. South Africa is actually, even if it's not the biggest market areas, but I think it's fantastic to see that we are north of 35% combined market share and almost 30% in Australia. Would like also to take some minutes on one of the launches, very important launches that we have done during the first quarter.
That is the package that we call I-Save for our long-haulage FH execution for Volvo Trucks. It's a combination of many different innovations and improvements, giving up to 7% of fuel improvement, which is, of course, huge and taking us back to a leading position. The anchoring feature in this launch is the new DTC 13-liter engine, 460, 500 horsepower that we have already launched in North America, it's now coming to Europe as well. Combined with improvements in the transmission I-Shift in the gear rating, rear axle gear ratings, also then additional features like I-See when you have digital maps doing even better anticipation of how the topography and other circumstances are looking. Also I-Cruise, how you actually operate over the long haulage distances and idle shut off and a number of other things.
Very strong and it's now available on European markets. On construction equipment side, also here we foresee a continuous stable outlook. We have made two changes. One a little bit bigger change for China, where we were guiding from -10% to 0% last time, now we are guiding it up to 0% to +10%. We had the strong start of the market, +20% when it comes to the market size. It is primarily then excavators and both on the big and compact side that is pulling that. Figure up here. On the other, also South America, we are revising somewhat up also from a flattish market to 0% to +10%. Of course, in comparison, rather low volumes.
For the rest of the market, it has sorted as we have anticipated also +4% in North America, +2%, +3% in Europe, and somewhat below the 0 line for Asia, excluding China. Also here, a little bit the same situation as we have talked about when it comes to trucks. In North America, we have had a long period actually of rather good order intake, meaning that the order board has been good and meaning also that our organization together with dealers and customers have been going through that in a good way. We are still, as I showed on the last slide, guiding for somewhat positive market outlook, 0% to +10%. It's also in this case very important to keep a very tight look on the balance between deliveries, order, and the order book quality.
Europe, no drama, very high comparison figures when it comes to order intake Q1 to Q1. Still we are confident that it will be a flattish market on good levels. Asia, obviously, when it comes to the order situation and deliveries, it's China that is the shining star there and somewhat weaker market in the rest of Asia, no drama at all. Also, construction equipment had a very strong innovation quarter, and of course, took the opportunity in April then to launch a number of the most important innovations. The 20-ton excavator is a more general purpose machine in a very high volume segments where we have not had the most competitive offering, if I put it like that.
We have had a good quality and technical execution, when it comes to features in relation to the cost level in this general purpose segment, we are doing big improvements with this launch now. It has already been then launched in Asia and China and now coming to Europe as well. I was already into the reveal also of the compact excavators and wheel loaders, big success, and we were taking orders on the fair. I think there are a lot of customers that would like to do a statement now when it comes to urban areas, where these type of machines will fit perfectly. Honestly speaking, we have not been relevant in the compact segment, as you know. This is also a good opportunity for Volvo to really take a step forward in the compact part of the construction equipment space.
Also we launched a 35-ton hybrid hydraulic excavator. Never forget that now, Hampus. That was launched. What is that? That is actually that you are using also the movements of the different parts in order to recharge batteries, et cetera. That is also a very interesting launch for general purpose applications. Buses, also a quarter in absolutely the right steps in the right direction, in many different cases. Jan will come back also to the result. Steps in the right direction, definitely a strong order intake, mainly driven then, as you see, by Asia, Oceania. We had a very big order to Australia and Perth and also Mexico, where we have a very strong foothold and successful business. Deliveries also increased, primarily related to our big order to TransMilenio in Bogotá, but also in other areas.
We took then a number of very important deals during the first quarter. Perth, 450 firm orders, but also options for another 450. In addition to that, 300 to Mexico, 70 to Calgary, to mention a few here. A good momentum. Penta, also a quarter that was really strong. The decline of order intake was of course anticipated given the pre-buy of the Stage V in 2018. Deliveries also declined with the same anticipation given the fact that customers have been buffering part of it since you have these transition rules in place. We also launched here a number of activities that will take Penta to the next level, both when it comes to marine and industrial segments, primarily then for electrification.
The ElectriCity project is important to really show in big scale what we can do for an urban activity where we before have been driving the ElectriCity for buses, we have been driving the Electric Site for construction equipment, and now also when it comes to marine transportation. Also that we are now signing up for this cooperation with Rosenbauer on the industrial segment. As many of you might know, Rosenbauer is one of the most well-known and premium fire engine manufacturers for special applications, primarily for airports and other special applications. Here we are using and building on the group's modular platform as we are doing on construction equipment as well. Very good.
It's interesting to see how the success actually for the industrial segment continues from being known more or less primarily as a marine engine supplier into a marine system supplier into actually an industrial system, all speed and power gen supplier. I think that journey is fantastic and more is to come here. Financial services, finally, when it comes to penetration, increased in Asia. Generally speaking, as you can see, a little bit lower penetration in total, primarily then driven by EMEA and North America. One of the factors is increased competition. We see that there are more actors actually competing for the deals.
Our view is to be balanced when it comes to aggressive in penetration, also balanced with a conservative view so we actually can maintain our promises over different cycles and not be opportunistic that we know that some other financial institutions might be, no one mentioned. Market mix is also one of the explaining factors, actually, and that is primarily driven by Europe, where France had a strong position in total market, and we have not the same type of market share. Generally speaking, stable situation, and we have also been rolling out different type of new products, where of one of them is for Europe, the coach assistance insurance for our bus customers. By that, actually, I conclude the market presentation and leave the word to our CFO, Jan Ytterberg, for the financial figures. Please, Jan.
Thank you.
Good luck.
Okay. A solid quarter with improved financial performance across truck divisions and business areas. Starting with net sales for the group in the first quarter increased by 20% compared to last year to SEK 107.2 billion. Currency effect impacted with a little over SEK 7 billion. That was related to the weak Swedish krona in general and a strengthening USD compared to last year. Currency adjusted sales up 12% for the group. Vehicle, machine, and engine sales increased by 15% in local currencies, reflecting a general high demand, as well as a sharp increase of truck deliveries in North America. If you remember, Martin mentioned it, last year, we had a situation of changeover of programs in North America for both Volvo and Mack, which impacted negatively.
Subsequently, the net sales increase was most pronounced here in the quarter related to North America, where also the supply chain still is strained, but have gradually improved. The increased net sales in Europe of 3%, currency adjusted, was mainly related to higher vehicle deliveries in Western European countries, with an increase of deliveries into U.K. to mitigate a potential hard Brexit effect. Net sales in South America increased by close to 50% in local currencies, reflecting the recovery of the Brazilian economy. Whereas net sales in Asia was, if we take away currency flat, where increase of deliveries of machines and trucks into China were offset by lower deliveries to Middle East. Service sales improved by 4%, currency adjusted, reflecting the high transport demand, increasing rolling fleet, and also the high utilization of the vehicles. Moving over to the operating income for the group.
In the first quarter, improved by SEK 4.4 billion, up to SEK 12.7 billion. I am talking about the adjusted operating income. Adjusted operating margin was 11.8%. That is an improvement of 2.5 percentage units compared to first quarter last year. Improvements were noted across all segments, and some of our truck division and business areas were at the record earning levels for a first quarter. As I mentioned, last year, the first quarters were impacted by the changeover of programs in North America. If we take a look on the operating income effect, that was negative due to the lower truck deliveries last year and also the higher per unit costs. Currency impacted operating income positively by SEK 1.2 billion in the first quarter.
As I mentioned on sales, general weak Swedish krona, an appreciation of the USD, but we also got some positive effects from the EUR and from the GBP on operating income. We do not give forecast for the full year on FX in total, but we do it on the transaction effect, and the transaction effect is now expected to, for the full year, be around SEK 1.5 billion. Main contributors to the improved adjusted operating income in the first quarter were the improved volume, 12% of truck deliveries, 18% of bus deliveries, and 5% on increased machine deliveries. On top of that, service volume going up at around 4%, or revenues going up with 4% currency adjusted. Furthermore, we had a good price realization in general across the group, and also a positive mix impact.
On top of that, the capacity utilization and efficiency in production impacted positively with the continuous improvements that were noted sequentially, and volumes stabilized on a high level in the quarter. All in all, SEK 5.3 improved gross income, and part of that is also, of course, related to the positive FX effect. Moving over to the indirect expenses, R&D expenses, the paid-out expenses were higher and it is, of course, a challenge for us to balance the resources and ambitions with emission demands from legislators and also our ambitions to deliver important product improvements. The net capitalization of R&D costs was on a high level in this first quarter as more expenses were then related to project in capitalization phase, and we should remember that last year, the amortizations were actually higher than the capitalizations in the first quarter.
For the full year, the net capitalization is expected to be around SEK 1 billion for 2019. We see an increase here of selling and admin, but if we take away currencies, that increase was very limited. This is mainly currency effect. On the deterioration of other, there is some negative non-recurring items here in this year, as well as some effects related to the high volume in the first quarter. Cash flow for the industrial operation is seasonally a limited quarter. The first quarter, seasonally then, where the working capital is being built up of the year-end before the normally strong second quarter, which is a delivery quarter.
This was also the case this year, when operating cash flow in industrial operation was limited to SEK 2.8 billion, positively then, where we see a strong increase of operating income to SEK 13.6 billion, including then the gain from the sale of WirelessCar. Whereas we have working capital impacting negatively with SEK 8 billion in total, where we have then the increase of inventory of the year end with SEK 6 billion. We have an increase of accounts receivables reflecting the high deliveries towards the end of the quarter this year. That was partly offset by increased trade payables, which is, of course, a reflection of the inventory as such. Capital expenditures were SEK 2.3 billion, and that was, of course, affected by the high capitalization of R&D expenses.
If we take a look on the property plant and equipment side, it was a capital expenditure of SEK 1.2 billion, which was in line with last year, and here we are guiding for 2019 to be somewhat above 2018 as relates to capital expenditures of property, plant, and equipment. You see a pretty big effect on other non-cash item, and that is actually the reversion of the gain from the sales of WirelessCar, since this is considered as a divestment of operation and thereby not included in the operating cash flow for the industrial operations then. Net cash for industrial operation improved some SEK 3.6 billion during the first quarter, reflecting then, of course, the positive operating cash flow and also the effect of WirelessCar of SEK 1.2 billion here. We were some SEK 20 billion higher than we were end of March last year.
Last week, Volvo received an important recognition for all the good work performed the last years to improve the financial situation of the group when S&P raised their rating of the Volvo Group one notch to A- with stable outlook. If we move from the group in industrial operations down into the segments, we can start with trucks. With truck deliveries increasing by 12%, service sales increasing currency adjusted by 4% together with the business climate where price increases are possible to realize, and on top of that, a positive or improved mix, the financials cannot be other than good, and they were. Currency adjusted net sales increased by 14% to over SEK 68 billion, mainly related to the higher deliveries in North America and Brazil compared to last year. The limited increase in Europe was related to Western Europe, offsetting lower deliveries to Eastern Europe and to fleets.
The adjusted operating margin for trucks improved some SEK 3.4 billion to close to SEK 8.3 billion, giving an adjusted operating margin of 12.2%. Improved adjusted operating income was then, besides the higher deliveries, the price realization, and the positive mix also affected by a better capacity utilization and efficiency in production, impacting the per unit cost positively. Whereas last year, I mentioned that several times now, was negatively affected by the changeover of programs in U.S. or in North America. FX effect for trucks, SEK 0.7 billion. Construction equipment, we have an improved currency-adjusted net sales of 8%, reflecting then the increase of machine deliveries of 5%, increases in all major regions for construction equipment.
The increase in deliveries was particularly strong for SDLG and in China, whereas the increase of Volvo branded product was limited, where we have strong increases in Europe and North America that were partly offset then by decreases in Southeast Asia and in Turkey. Product mix and price increases impacting top line positively. Currency-adjusted service revenues, as you saw in one of Martin's slides earlier on, increased moderately 2%, mainly related then to general slowdown in activity in Turkey and also an isolated dealer problem in Southeast Asia that is about to be solved. We hope we have that explanation only for the first quarter this year, so it will be back to normal business in second quarter here. Year-over-year improvement trajectory for operating income continue to improve or continue to deliver here in the first quarter for construction equipment.
It increased from SEK 750 million compared to last year to SEK 3,646 million, giving an adjusted operating margin of 15.1%. That is an improvement of 1.3%. The improvement was mainly then related to the price realization and a somewhat heavier product mix. When we say that, we mean an increase of heavy reloaders and articulated haulers that was more pronounced than the rest. On top of that, of course, the higher sales as such of 5%. FX had a positive effect of SEK 380 million. Buses. Financial performance for buses improved substantially compared to a sluggish first quarter last year. Deliveries of buses increased some 300 units, positively affected by the deliveries to TransMilenio in Bogotá. We saw small increases across the globe except then for Europe.
Vehicle net sales increased by 14% currency adjusted and compared then to a strong first quarter last year, service only increased by 2% in the quarter. As I said, first quarter last year was really strong. Improvement of adjusted operating income of some SEK 300 million to SEK 294 million in the quarter. That was related to the volume directly as more vehicles bring in gross income into the profit and loss statement, and also indirectly as we get a better capacity utilization. FX impacted positively with SEK 125 million. A good start. 2019 was actually well deserved for buses. A lot of hard work there, where tight cost control in combination with now improved deliveries gave momentum. Even though operating margin improved to 4.3% for the quarter, there is more to be done here, and ambitions are higher. Moving over to Penta.
In the aftermath of the pre-buy of Stage V before year-end 2018, we anticipated and expected a decrease of delivery of industrial engines, that happened. Furthermore, the deliveries of smaller marine engines were negatively affected by supply constraints and also to some overstock situations. As a consequence, we got a product mix in the quarter that was more heavy than normal. The decrease of engine deliveries of 9% was then offset or compensated by the heavier mix, giving a small increase of engine net sales currency adjusted, where the service revenues continued to improve. FX adjusted 10% up, reflecting high deliveries the last year and also a focus to deliver uptime to our customers.
All in all, SEK 3.4 billion of net sales and an adjusted operating income that increased SEK 175 million to SEK 684 million for the first quarter, mainly then related to the product mix and also the strong service sales and deliveries. FX contributed with close to SEK 40 million, and operating margin improved to a healthy level of 20%. Financial services. The strong demand of vehicles and machines were, of course, affected here as well, where we see new retail financing that increased some to SEK 15.9 billion in the quarter. Portfolio continued to perform well, reflecting the good business climate for our customers, giving low amounts of overdues and credit losses in most markets. Credit portfolio increased to SEK 157 million at the end of the first quarter. That is an increase with 11% currency adjusted compared to end of March last year.
Customer finance market continues to be highly competitive and putting then pressure on both our finance penetration but also on our spreads. Adjusted operating income was stable at SEK 602 million compared to the first quarter last year, where profitable growth of the service or the portfolio was offset by lower spreads, higher operating expenses reflecting then the higher activities and the volumes, and somewhat increased credit expenses. FX had a positive effect of SEK 30 million, and profitability level measured at return on equity was stable at 14.6%. A solid quarter and also a net margin for the group of double digits. It's not often that that happen any longer in this industry. It was really a solid quarter. By that, Martin, ask you up on stage.
Thank you. Thank you, Jan. Just maybe to make a summary, as we said, it was a strong quarter, both as regards net sales and also the leverage. I would like to take the opportunity also to thank all the colleagues actually in the group for the fantastic work done. With that, we open up for questions.
Yeah, we'll open up for questions. Let's start here.
I'm Hampus, and I have three questions. Starting off with Europe, if I remember correctly, you made some adjustments in the Europe production by the end of last year. I was wondering, given where the orders are trending now, do you feel that your run rate is continuing on this level, or do you make any changes? Second question is on North America. I'm just curious when you will open up the order book for 2020, and if that is related to lead times, of course. Last question is on the EBIT margin during the quarter. If you could maybe just make some comments on where are you happy, where do you see more potential, et cetera. That could be geographies, it could be brands. Thanks.
Okay. Thank you, Hampus. If we start then with the European production. As we said, we have still a rather healthy level when it comes to order intake. One should also recognize, obviously, that European production is to a very large extent also supplying into other market areas, primarily then to Asia, Africa, Middle East, et cetera. We have done a number of smaller adjustments to the European production. We have also been working very hard with balancing, so to speak, our global supply, mainly on powertrain, where we feel that we have a good balance now. I will not exclude that we might be doing some more adjustments during the year, but no drama into that.
That, I think, is more how we would like you to perceive Volvo, that we are continuously working, so to speak, with the different production rates in order to have a better follow-through between order intake, inventories, and deliveries, basically. We are not foreseeing any dramatic changes, if I put it like that. When it comes to North America, what we have said there is still it's rather early, so to speak, during the year. There is no big need to open up to a bigger extent. As I indicated, we have already, for certain deals where it could be fleets or bigger tender activities or other type of orders where it's important for our customers to feel that it is placed according to their wishes. We are not stubborn, so we are stupid.
At the same time, we will have a rather cautious way of opening up, so we have a good, also healthy pressure in the whole downstream value chain when it comes to inventory levels, et cetera, because we feel that we have the right flexibility to supply that also. Then EBIT margin, do you want to start on that, Jan, or shall I do it?
I think we can say more generally that, of course, we can improve continuously all over. 11.8% is good. Of course, there are more to be done. I mean across segments and truck divisions and business areas.
One area, obviously, if we take the different parts of the business, is still that when we look at the service penetration in the rolling fleet and population, there is more to be done. That is a long ride, obviously, to do that. We have had a healthy improvement of our penetration per installed unit, but obviously, there is more to be done there as well. Then when it comes to geographical balances, obviously, we have also things to be done. I think we are standing on more solid pillars across brands and regions than if you look a couple of years back. Continuous improvements will continue, is the plan at least.
What we also can say, Martin, is of course, that we saw in this quarter that we have been moving up production and we get some stability into the system and where, so to say, our suppliers also can work with that stability. We get out some good operational leverage. Of course, we would like to continue with that.
Right. Should we see if we have a caller with us?
Thank you. Ladies and gentlemen, if you do have an audio question for the speakers via the telephone, please press 01 on your telephone keypad now. Once again, if you have an audio question via the telephone, please press 01 on your telephone keypad. Our first question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is now open.
Yes. Hi, Martin and Jan, it's Claus from Citi. A couple of questions from me. Firstly, coming back to the weaker truck orders in North America, you get good price realization out of the backlog, but you're cautious on taking on orders, safeguarding the quality. I obviously understand that this is to secure the delivery patterns, taking out previous double bookings. How about pricing? When you talk about safeguarding, are you also talking about pricing? Is pricing on new orders a bit weaker versus what was realized in the backlog? Just so we understand what you exactly mean by safeguarding the quality.
Yeah. Thank you, Claus. First of all, just a little bit of background, as I said. We feel that given the strong order book that we have, the work that has been done basically during the last three, almost four quarters by, so to speak, cleaning out. Customers are taking deliveries, it's going according to plan, the new orders coming in also, we see a stable situation when it comes to pricing on a good level because we took the opportunity also, obviously, with the launch and introduction of our products to get a better price realization. We see a stability on that is good.
Okay, that's good. My second one is on the European side. MAN, we know, has been pretty aggressive on its market share ambition in Germany last couple of years, and they want to roll out this strategy in other parts of Europe, and they also have a new track range eventually. Scania is still relatively early in the penetration of their NTG. Is this weaker market share only contained to Germany, or are you seeing any shifts elsewhere? It feels like the pricing backdrop in Europe is getting a bit more competitive because, Martin, you're also talking about protecting profitability as a second reason outside of Germany for the slower market shares.
Yeah, I think you should read it. As I said, there are two main reasons. The delta at the start of the year is not fully, so to speak, explained by the market mix and the strong German situation as you mentioned, but also the fact that we have been rather consistent on our price realization in a good market where we are running on high capacity utilization and a strong, so to speak, installed rolling fleet. We are, of course, watching this very closely, but we believe that it's important to be consistent. We have seen improvements when it comes to our offerings. We are bringing better value to our customers in the marketplace, and we want to see that is also coming in as price realization.
The third reason that I briefly mentioned is also a little bit of periodization effect when it comes to some of the bigger fleets, and how they are coming in primarily on the renewal side, and also some deals that we actually have been reluctant to take on some of the really customer competitive segments for Volvo. It's a mix, but we feel that we have a clear strategy, and we want to keep to that strategy.
Good. My final one is on CE and Penta. A weaker SEK should have helped them competitively, and then obviously mix is a solid positive, selling larger machines and engines. Could we talk about the mix here? Was this just, do you feel one quarter positive, or can the product mix be sustained for the year, when you look at market share movements and what sits in the backlog? On Penta specifically, can we now comfortably say that Penta is at a higher margin level as the mix is gradually shifting to the industrial side?
Maybe I can start with Penta. In this quarter, as I mentioned, there was the general effect on the industrial side, related to the Stage V. We had supplier constraints and some order stock problems for some of the distributors on small marine engines, and that was the big part of this product mix effect that we saw in the quarter for Penta. That will, of course, be solved on the marine side. I think we should look on Penta more compared to what they were last year, related to product mix and not take this quarter as a guarantee that we are changing something. We had a question on VCE, on the product mix there. There were no specific things like we had in Penta in VCE. We see more or less the product mix we have here.
We should remember that there was just a small difference between the small or the medium and the big machines. I think the big machines were up 5% and the rest were 4%. That is small differences.
I think generally speaking, to Jan's point, what we have been doing as part of the turnaround and the, so to speak, continuous improvement activities for construction equipment is obviously that really reinforcing our focus on our core segments when it comes to general purpose equipment and heavy equipment, and for both wheel loaders, excavators, and ADTs, obviously. Coming back a little bit to Hampus' questions also, one of the key areas where we see improvement opportunities for VCE is that we are continuously strengthening also our presence in North America. That has been a little bit the same story as for trucks. Meaning that we have had some really good dealers and some less performing. We are working consistently now with bringing up that to a better level. There are a number of activities, and we are keeping focus on it.
I think one very interesting launch, as I mentioned, was the 20-ton excavator also for Europe, where we have had a relatively weak position before, so that we are looking forward to as well.
It looks great.
Agnieszka Vilela, Nordea. I have a question on the North American order intake. It was 5,500 this quarter, which was 18,000 less than last year. Could you tell us how much of that delta was due to the cancellations? Do you expect similar cancellations in Q2? Should we expect this kind of Q1 level to be a bottom for North America?
I think when it comes to the cancellation side, obviously, we've had a number of cancellations, but don't read that as real cancellations. More of a dialogue between us and the fact that we have an independent network. As you know, we are working with dealer groups in North America. Part of, so to speak, the cleaning or the high quality or the board focus, we have, so to speak, regrouped and taken out both when it comes to segments, what is in the pipeline between different dealer groups, et cetera.
One of the things that you don't want to see is that with a very high capacity utilization level, that units are ending up in stock at one yard and other dealer groups are sitting short. The absolute majority of the delta, and I think also when I read a little bit what the financial community has been forecasting, the big delta basically is in the forecasting of North America. The absolute majority of that is the cautiousness of taking in orders for beyond end of 2019.
Okay. One question on Europe. You explained why your orders were somewhat lower this quarter than last year, but if you look at the whole market, do you see more cautiousness or more hesitance from the customers overall in Europe?
When we look at normal indicators as used prices, activity levels from our connected units, et cetera, we still see a strong activity level. That's the reason also why we reiterate our forecast that is somewhat lower than last year, but still on good levels of around 300,000. When we look at our order intake, we are trending around that now. You can say maybe a little bit lower than the 300,000, but that is one quarter, depending a little bit how the order board looks like, et cetera. That's the reason why we keep the estimate, basically.
What you can say, Martin, is of course, I mentioned it, we saw lower or more in deliveries into Western Europe and lower deliveries into Eastern Europe. Eastern European customers tend to be a little more opportunistic in these kind of situations.
Russia being one example.
Russia being one example, for instance. There we see that there are customers a little more cautious.
That is very normal. They are very quick to react also. It is still a cash flow driven economy, and more opportunistic, basically.
All right, so let us take a telephone caller, and then we have up here.
Thank you. Our next question comes from the line of Daniela Costa from Goldman Sachs. Please go ahead. Your line is now open.
Thank you so much for taking my questions. I have three things I wanted to clarify. One, back to the debate about capacity utilization. I guess your comment in the U.S. is pretty clear, but can you help us on understanding capacity utilization on trucks outside of North America and also on construction equipment? That's my first question. Second question is, you've commented on bus margins potential. Can you give us a little bit more of a color on sort of over the long run, how you see that and where is the limit there? The third question, I guess a lot of the upcycle in terms of demand has been met by flexible labor. Have some of the end markets might turn, how quickly can you adjust flexible labor workers? How quickly do they actually get off from when you decide demand might be falling?
How long does it take? A month? Two months? Can you give us just some color on that flexibility of the cost structure on the labor side? Thank you so much.
If you start, when it comes to the capacity utilization outside North America, as we have said, we are still running on good and healthy levels. Even if we have been doing some adjustments, that has been primarily related to the fact that we have been, in a positive way, forced to rebalance between our main regions for certain core components. Still, when it comes to the truck productions, we see good utilization. We also have remaining flexibility to your third point. That is obviously one of the key things that we have been working with, is flexibility when it comes to temporary labor or contracts, but also other type of measures to follow, if needed.
It is very clear, when you're where you are, so to speak, after quite a number of years now with good markets, that there is a high attention for an industry like us to keep a close eye on the flexibility levels, how do you utilize it, building up different scenarios, et cetera. I think the flexibility is there, depending a little bit on markets, but we can do short-term adjustments to that, to rather healthy, but rather big swings if we need to do it. I think we have been proven that also, by the way, I think in North America, we have been talking about Russia, Latin America, et cetera. Construction equipment, similar situation. We still see good levels of deliveries. We are guiding for unchanged forecasts that are on good levels as well.
We'll continue to have a healthy capacity utilization. On the bus margins, Jan indicated that. This is absolutely a step in the right direction. We are running a rather comprehensive activity program in order to make sure that we have a better stability and a better platform when it comes to the EBIT. We have seen when we are up to 3, 4%, that we are getting a good return on capital because that is another type of business. Zero times something is still zero. We need actually to improve the floor of that. We are not guiding for any specific financial target on buses, but improvements are needed and will come.
On the capacity utilization side, we are still working on a very high level, and it is a stretched supply chain in general, but it's more stable than we saw, for instance, in the fourth quarter. Especially in North America, but also Europe, there is a strange situation.
If you ask our suppliers and our purchasing and production teams, I think they can confirm that it's still rather heated out there.
Flexibility-wise, we of course have the time banks, which we will take sort of the first buffer if something happen, and then we have manning and flexibility, et cetera.
The number of performers there.
Yeah.
All right.
Quick follow-up, how many people do you have on the time banks?
No, it's not people, it's hours.
On the time banks. In addition to the time banks, you have flexible contracts. That we are not disclosing. As we said, that has been one of the key strategies for quite some time now, so we are keeping a close eye on that.
All right. Thank you very much.
Thank you.
Hi, Erik Golrang, SEB. I have two questions. The first one on, you had price as a key contributor there to both trucks and construction equipment. If you look on Q1, the balance between price increases and cost, is that extraordinarily high compared to what we expect for the rest of the year, and how the year normally pans out? I mean, is this really a sweet spot for net pricing in Q1? The second question is on the service business, 4% FX-adjusted growth for trucks. Given what you talked about, high investments in that for a long period of time, you have high activity levels, you have the fleet entering a sweet spot, isn't that a rather low number?
The third question, trying to square some of your comments here on the high margin, I didn't really feel that there was a burst of areas that you saw improvement in, then perhaps a bit of declining market share here and there. Are you indicating that you might be a bit more aggressive on price to gain back share, perhaps?
To start with, I think when it comes to the price realization as such, that gives, of course, a platform for maneuverability if needed, because we cannot allow ourselves to fall to whatever level that everyone understands, obviously. Having said that, for the time being, we feel that, as I said, also the strategy that we have been choosing, given the high capacity utilization levels, the balance between the regions, has been the right one. Let's see how that will materialize moving forward. We have said that we should be pretty firm on this going forward. We have some flexibility and maneuverability given the things that we have been doing here. When it comes to price realization, I think what you see is an effect of the activities that we did during last year.
That has been keeping up so far, that is our main plan as we go forward. When it comes to the service, maybe you actually saw the article yesterday about the quarterly economy and the pros and cons of that. I think this is a typical example where you can argue whether you can measure, so to speak, improvement in absolute numbers during one single quarter. I think that the proven record actually has been that we have been improving the service sales during quite a long period of time, and more frequently north of 5% than below 4%. If I have to choose, I agree to you, Erik, that it should be more. I think it's a little bit.
It's a bit low.
It's a bit low, but it's too drastic to say that it's a conclusion that we have another change in trend. We still feel that when it comes to our main activities, it's working fine. About penetration per vehicle, we still think that activity level. The comparison figures are getting higher, obviously. We have said that we want to see a growth north of 5%, and it was not north of 5% this quarter.
All right, should we let the telephone caller come in?
Thank you. Our next telephone question comes from the line of Arnaldo Castro from Société Générale. Please go ahead, your line is now open.
Hi. Thanks for taking my questions. Just a couple of questions from my side. Firstly, just interesting to see the comment about rising truck inventories in the U.S. We obviously talked a lot about the U.S. market. Just wondered what prompted you to kind of flag this in. Also what was the reason why, let's say, the sell-outs at the retail or the dealer level were a bit weaker than the sell-ins in a way, when the underlying market would suggest that there should be a bit more of a strength. Just wonder how we should take these in the context of remarks that you've been making, and how we think about the truck market in the U.S. going over the next couple of quarters or so, just from the inventory perspective. That's question number one.
Question number two was a bit more on the IFRS 16 transition. I saw that the liabilities on the lease side increased by about SEK 6.2 billion. If you could just help us understand, A, what most of these pertains to, is it real estate or is it something else? Also the annual effect of this change in the EBIT line and also on the operating cash flow. Thanks.
Now, on the inventory level in North America, as we were indicating, the quarter actually started rather weak when it comes to deliveries. We had a number of shortages, we had quite some trucks standing with one or two shortages per unit during the beginning of the quarter. It was gradually resolved, actually, primarily for Volvo Trucks from mid-February, you can say, and onwards, meaning that we had very strong deliveries in March. Some of it was materialized as market share for retail sales because we were north of 10% market share, some of it is still, so to speak, in the pipeline, and I think that is the primary reason for it. Should not be read as any, so to speak, increase, but more internally related.
The IFRS 16. Well, starting with the effect on the result. It was less than SEK 50 million in this quarter, meaning that it is less than SEK 200 million if you take a look on the full year 2019. In comparison, not a big effect. Of course, the counter side of this is increased interest expenses, that is also what you see if you take a look on the financial net, that we have some higher interest expenses, and that is related to this IFRS 16 accounting, where you move a part down into financial net of the rents you are paying. SEK 6.2 billion of liabilities and asset increased for the group. That is, of course, as in a traditional industrial company, very much related to real estate, forklifts, trucks, and cars. There you have the three main categories.
I fully agree.
200 million.
Yeah, SEK 200 million.
Less than SEK 200 million on 2019 EBIT effect. Well, difficult to compare because we didn't do it in 2018, but if we would have had IFRS 16 this year, it would have been SEK 200 million or less than SEK 200 million lower EBIT for 2019.
Okay. Okay, great. Thanks.
Thanks so much.
Thank you. We have a question up here. Yeah.
Yeah, hi. Mats Liss, Kepler. Two simple questions to finish with maybe. What about the cost you have had in the U.S. due to the production problems in Volvo? Secondly, could you give some brief comments about your view next year, 2020?
On the cost, Jan was into it a little bit. It is so that we still have stretched supply chains, we have higher than, so to speak, normalized cost. Sequentially, it has been better and better, and thereby also since we had a rather high cost level, and that was also with extraordinary cost for the launch beginning of last year in North America. You can say both quarter-on-quarter and sequentially better, so to speak. Still there are extraordinary cost when it comes to transport over time and all type of extra work, but better and better.
Exactly.
We are not giving any forecast of the market for 2020 now. That will come. That is one of our cliffhangers, Mats. You will come in course.
For the capital markets day, maybe.
Just coming back to the second quarter, still early days, I guess. Orders are coming down, I guess the second quarter is normally very strong and, well, should we expect a seasonal pattern to-.
I think, the expectation is that we say that we are forecasting unchanged forecast as we had already in the quarter four reporting on good levels for the total market. I think that is the answer.
Order books, I think it's important to state that the customers are standing by their orders.
Yes.
Meaning that we have a high order book, we are delivering that out, and customer are taking the vehicles and machines, which is, of course, very important. Same pattern as we saw earlier, yes.
All right then. Thanks for coming. Go out, enjoy the good weather, and see you next time. Thank you.
Thank you.