Good morning, and welcome to the Volvo Group third quarter press conference. Today, we will listen to Martin Lundstedt and the presentation regarding the quarter and follow up with Mats Backman running over the financials. Then we will finish with a Q&A session. With this short introduction, I leave the word to you, Martin.
Thank you for that, Johan, and good morning, everyone, also from my side to this quarter three reporting from the Volvo Group. Great to have you here, both in the room and also, of course, online. First and foremost, all colleagues and business partners delivered solid results in the quarter with an adjusted operating income going up to SEK 14.7 billion in the quarter and the margin expanding to 12.3%, demonstrating continued strong earnings resilience and growth despite several complex external factors, as we all are aware of. The gradual cyclical recovery in the truck and construction equipment markets continued both in Europe and North America, supported by the need to replace aging vehicles and machines.
Not at least North America, we are continuing to strengthen our competitive position, visible in market shares, order intake, order book, and supported by the many launches based on the new platform, both for Mack and for Volvo. As you did see here in the introduction, the recent launch of the all-new VNX for the vocational and heavy haulage segments. Quarterly order intake developed positively with an increase of 26% for Group Trucks as one example. Our core markets are, as I said, in a cyclical recovery with growing demand. Generally, we are well-aligned between market demand and supply from our industrial system, and we will continue to utilize our flexibility toolbox to execute on the solid order books moving forward.
Regarding the trucks order intake in North America, we have been restrictive in our order slotting in quarter three to secure not having an order book that is filled too far into 2027. Just as a reminder, so far, we are up more than 70% year-over-year in order intake in North America, and that is the reason why we opened the order book for 2027 as recent as of September 1st. Something to bear in mind when it comes to the quarterly order intake. Another example of good order intake is the rapidly growing demand for power solutions, not at least linked to data centers and AI infrastructure, resulting that an impressive 32% of Volvo Penta's order book value now is related to data center build-out.
Looking ahead, we continue to focus on what the Group can impact by staying close to our customers, thereby driving growth and resilience while at the same time remaining responsive to the fluid external landscape. Our focus continues, therefore, regarding effective cost control, and we are gradually mitigating cost inflation through pricing. The priority of the service business is giving good results. Services grew 5% organically, showing that our customers have a good utilization of the fleet, and that will also eventually mean that the fleet replacement rate will increase. The Group is well-positioned with our products were recognized by being awarded both the International Truck of the Year 2027 for our heavy-duty electric Volvo range and also rewarded the International Van of the Year 2027 for the Renault Trafic E-Tech electric together with Renault SA.
All in all, our flexible business model create maneuverability to leverage the current environment and continue to create value for customers, employees, and shareholders. When we are moving into the quarterly highlights, as I said, good development and the third quarter net sales amounted to SEK 119.5 billion, with an organic sales growth of 7%. The adjusted operating income amounted to SEK 14.7 billion, with the margin expanding to 12.3%. Operating cash flow amounted to a strong SEK 7.2 billion, mainly driven by higher earnings and lower buildup of working capital. The industrial operation net financial position at the end of quarter three amounted to SEK 43.8 billion. Return on capital employed reached 27.5% for industrial operations, and earnings per share amounted to SEK 5.29. So we can conclude another strong quarter here.
Some Group news. By the end of July, Volvo Group, Daimler Truck, and Toyota Motor Corporation signed binding agreement for Toyota to join cellcentric, where Volvo and Daimler sits on a 50/50 as equal partner and shareholder. We are very delighted to have also Toyota on board both as, of course, an investor, but also as a technology partner since they have a long-ranging and deep experience when it comes to hydrogen fuel cell technology and the full ecosystem. On also the hydrogen note, and at the IAA fair, where we also got awards in September, I was with eight other industry leaders unveiling our plans to accelerate also the rollout of hydrogen-powered vehicles across Europe. We see that the interest is increasing, also giving the energy resilience and competitiveness landscape unfolding.
For the first time in Europe, the German ecosystem has put in place all conditions for a scalable deployment of hydrogen trucks by 2030, driven by the German authorities and the European industrial leaders along the value chain, so very promising. Also, in September, we announced the next step in the Mariestad expansion process with plans for an energy park near the intended battery cell production site. The energy park will be developed along two parallel tracks, a large-scale battery storage facility, and a future test bed for innovative energy solutions, including both electric and hydrogen production and charging, which is an area that we really see good commercial opportunities for the Group moving forward. The battery storage will also support grid stability in the region on normal market conditions.
When it comes to volume development, truck deliveries increased by 11% to 49,600 vehicles, with higher volumes in Europe and North and South America. North America increased by 42%. Still, I will come back to that, should remember that year-to-date deliveries still are actually down 4% in North America. So we are accelerating now as we speak. Volvo Construction Equipment's Volvo-branded volume did grow 8% in the quarter, driven mainly by Europe and North America. Also here, North America deliveries were north of 40%, 41% to be precise. Electrification. Orders of electric vehicles increased 107% to 6,590 units at 12 months rolling. The increase was primarily driven by Renault and Volvo Trucks, with their new models being well-received by customers. Deliveries declined with 7%, but with a good order intake of newly introduced products, deliveries are expected to increase in coming periods.
Vehicle and machine organic sales growth was 8% in the quarter. Trucks growing 8%, currency adjusted, driven by sales in North and South America. Volvo Construction Equipment had sales growth at 13% in the quarter, driven by good sales in Europe and North America. Buses net sales were down 8%, mainly caused by softer sales in Prevost brand and in Mexico as a market. Penta net sales were up 7%, mainly driven by North and South America, while sales to Middle East continued to be soft given the turbulent situation. Services, organic service growth amounted to 5% in the quarter with positive development for trucks +8% and construction equipment 5%. The 12-month rolling service sales increased to SEK 128 billion .
For me, this is two-folded, good customer activity and utilizing the installed base and installed fleet, but also that our efforts of step-by-step working with our contract portfolio is giving good results, and we see that also moving into the future. Of course, this is an important strategy for our total offer, and it is really paying off now. What is really good to see is that when we have that type of penetration, we also get high retention and of course, higher resilience and less volatility. Moving down to the truck side, good momentum with a lot of different things happening. Here we are standing, by the way, very happy just after Roger received the International Truck of the Year award, for amongst others, this beautiful piece here, as you can see, the FH Electric Long Range. Big highlight, obviously.
As I mentioned also, Renault Trucks also did win the International Van of the Year 2027 Award for the new Renault E-Tech Trafic that we are doing together with Renault SA. So congratulations to the Volvo and the Renault teams for these efforts and, of course, to our engineering groups. In October, also Volvo Trucks, as I said, unveiled their all-new VNX vocational truck for North American market. That is engineered from the ground for North America's most demanding work across construction, concrete, logging, agriculture, heavy haul, highway, among others. Of course, we have had an offering in these markets, but with the all-new VNX, we are getting a step up in the ability to penetrate these markets also for the Volvo brand that has historically been highly dependent on over-the-road segments of long and regional haul.
Good market shares opportunities also in close collaboration with VC. Also in October, Volvo Autonomous Solutions announced that they have added Waabi as their second virtual driver, and they are running now operations in Texas for customers. We announced that Warp is the first customer that is now transporting with the combination Volvo Autonomous Solutions and Waabi. We are now preparing for an acceleration in the beginning of next year, as we alluded to during the Capital Markets Day. Exciting times ahead here. Market forecast. That is always a little bit of the highlight in the third-quarter presentations, what is happening. If we start then with Europe, the forecast for 2026 is reiterated at a good level of 315,000 units, and for 2027, a forecasted increase to 320,000 units on the back of continued solid underlying demand.
In North America, we repeat our market outlook for 2026 at 265,000 units in retail sales, and that is also, of course, on the back of a rather weak start of the year. We are accelerating as we speak. We are forecasting down 300,000 units for 2027. As I then mentioned, order levels have been somewhat lower in the recent quarter, especially than in July and August for North America due to the step-by-step opening of order slots into 2027, that we only opened in the beginning of September. The Brazilian market continues to hold up on the back of the Finame financing support package. We repeat our market forecast of 80,000 heavy-duty trucks for 2026 but expect a small decline down to 75,000 units for 2027.
Demand in India has continued to grow, supported by steady freight activity, continued investments in infrastructure, supportive government policies, and healthy replacement demand. We increased our Indian market forecast to 450,000 medium and heavy-duty trucks. That is an increase of over 50,000 for 2026 and forecast 470,000 units for 2027. The total market forecast for China have been lifted to 900,000 plus 20,000 medium and heavy-duty trucks for 2026. Also, that is supported by some packages, and we forecast 850,000 units for 2027. Book-to-bill. Overall, the industrial system is well-balanced between demand and supply, with 92% book-to-bill ratio in the quarter and 109% 12-month rolling. We are sold out in North America for 2026, and we didn't open 2027 until then September.
When it comes to North America, we are at 125% 12-month rolling, so we have, if anything, a good balance and need continue to then execute on the order board here. Europe on good and solid levels, 104% book-to-bill in quarter three and 110% for 12-month rolling. Generally speaking, across regions, we are sold out for 2026, and we are now slotting orders mainly for the first quarter of next year. We will open 2027 gradually to keep also quality in our business and our earnings and to have the right visibility, knowing that we have an underlying cost pressure of input material and freight, not only for our industries, but generally speaking. We need to have that right balance and to be fair to our customers as well.
Truck market share is also positive, I have to say. Europe, Volvo and Renault continued with strong market shares through year-to-date, September, with Volvo at 19.5% and Renault Trucks at 9.1%, giving a total share of almost 29%. On the battery electric side, Volvo and Renault Trucks delivered a combined 23% for the quarter. Our recent launches now of the next-generation long-range and versatile electric will regain momentum now for both Volvo and Renault. Customers have been waiting for that, which is already visible in the order intake. In North America, we have grown share and are at combined share now of 17.4%. Very positive, and that has been step-by-step during the year also, as you can follow from the previous reports. Mack Trucks is at 8.3% and Volvo at 9.1%. Volvo Trucks are back on the right track and are regaining position.
Of course, for Volvo, also in particular, further support expected from that over-the-road segments and not at least on long-haul, which is expected to continue to be strong here. Brazil, Volvo remains at a good level and reached market share of 23%, and also Australia, we see a growing share combined reached 22% for Volvo and Mack. Moving in then to construction equipment. We have significantly expanded production in our Shippensburg, Pennsylvania, facility, and the site has begun production of its first excavators, but also larger wheel loaders, adding 11 new models to local manufacturing and reducing customer lead times by more than six weeks. Now when these introductions are coming into place, of course also that will further increase resilience as we move forward for the North American market.
Market forecast here, rather similar, I have to say, as for trucks. We keep, if I start with North America, +5% as the midpoint for 2026 in relation to 2025, and 2027 estimated to be another +5 percentage points as midpoint versus 2026 as a continuous growth there. Similar in Europe, we raised 2026 midpoint to +10% market development, and that is a 5 percentage points increase, and 2027 estimated to be another increase or +5% in relation to 2026 then. South America, we also raised for 2026 the midpoint with 5 percentage points and the 2027 midpoint is estimated then to go back to -5 percentage points versus 2026. So similar pattern, as I said, with the truck side. In Asia, we raised the midpoint with 5% to a flat market and also 2027 estimated to be flat versus 2026.
China, no change to the Chinese market forecast, which is kept with the +10% for this year and 2027 estimated to be flat in relation to 2026. Book-to-bill, no drama at all here. The industrial system is well-balanced between demand and supply with 97% book-to-bill ratio in the quarter and 104% to 12-month rolling. Also here, we are generally sold out for 2026, and we are now slotting order mainly for the first quarter. We have good order coverage, consequently then, for our main markets. Volvo Buses, very important that we are coming back now in Europe.
You know that we did a major restructuring when we closed our Wrocław operations in Poland a couple of years ago and thereby also needed to restructure, so to speak, the European business, both when it comes to city buses and coaches, absolutely necessary to get a solid financial and growth position for Volvo Buses. Now we are coming back very strongly here. During quarter three, Volvo Buses expanded their offering to support growth again now in European coach segment, relaunched the Volvo 9700 coach, and that will be produced in Mexico where we have a top-of-the-art production facility, and introduced the Volvo B13R coach with Marcopolo body and continued rollout of the Volvo BZR Electric coach. Very strong offering moving forward, and we've had a number of customer activities here.
Hong Kong Volvo Buses launched also the Volvo BZL Electric double-decker to support the city's transition to fully electric. Book-to-bill was 111% in the quarter and 12-month rolling, it reached 96%. Penta, very strong, has expanded its data center business, now representing, as I said, 32% of the total order book value at the end of Q3, a business which is also accretive to their margins. Volvo Penta had a strong book-to-bill with 132% in quarter three and 107% 12-month rolling. Finally, Volvo Financial Services, as you know, a key pillar for our business in all business areas. VFS increased the new business volume, and this was supported by good penetration rates. The 12-month rolling penetration rate was sustained at 30%, and VFS continued to show earnings resilience in a highly competitive environment.
Ladies and gentlemen, friends, that was the business update. By that, I leave the word to Mats Backman for the financials.
Thank you, Martin. Looking into the financials then for the third quarter and starting off with the Group net sales then. Organic net sales increased by 7% in the third quarter comparing to last year. Vehicle sales increased by 8%, driven by Trucks, Construction Equipment, and Volvo Penta. Service sales increased by 5%, driven by Trucks and Construction Equipment. Looking at organic net sales development in the different geographical regions then. In Europe, net sales increased by 1%, driven mainly by Construction Equipment. North America volumes increased, which led to an increased sales of 22%, driven by Group Trucks, Construction Equipment, and Volvo Penta. In South America, net sales increased by 10% versus last year, supported by Group Trucks, Volvo Penta, and Buses.
In Asia, net sales decreased by 7%, and the big decrease you can see on the chart here is absolute numbers, and that is due to the divestment of SDLG in September last year. The overall currency impact was positive at approximately SEK 2 billion, reflecting the general depreciation of the SEK. Adjusted operating income for the Group amounted to SEK 14.7 billion, with an adjusted operating margin of 12.3%. In third quarter, earnings were supported by the positive development of our service business, IEEPA refunds, price realization, and higher volumes. The U.S. net tariff costs were at the expected level, around SEK 1 billion, but fully offset by IEEPA tariff refunds, resulting in a positive year-over-year effect of SEK 700 million in the quarter.
In the third quarter, we saw negative market and customer mix, and we continue to see higher freight cost and material costs related to the inflationary environment and the current geopolitical situation. The net R&D capitalization effect in the quarter was SEK 1 billion, with a negative year-over-year effect of SEK 200 million. The year-over-year increase in selling expenses was partly due to selling expenses from acquired businesses. Currency had a positive impact of SEK 1 billion in the quarter, mainly due to the depreciation of SEK against our main currencies. The third quarter cash flow amounted to SEK 7.2 billion. The positive cash flow contribution in the quarter was mainly driven by higher operating income and lower seasonal buildup of working capital. Return on capital employed improved to 27.5% on a rolling 12-month basis. Net cash industrial operations amounted to SEK 43.8 billion.
Group Trucks organic net sales increased by 8%, and this was mainly driven by positive development of the service business and higher volumes. Adjusted operating income amounted to SEK 9.1 billion, with an operating margin of 11.1%. We saw positive contribution from the service business, higher volumes, and price realization. This was partly offset by market and customer mix, material cost, selling expenses, and freight cost. Currency had a positive impact of SEK 703 million in the quarter.
Construction Equipment organic net sales increased by 12% versus last year, and this was driven by higher volumes and positive development of the service business. Adjusted operating income reached SEK 3.2 billion, with an operating margin of 16.1%. IEEPA refunds, together with market and brand mix and the positive development of the service business, were the main drivers behind the improved performance. Currency had a positive impact of SEK 88 million in the quarter.
Moving over to Buses then. Organic net sales decreased by 6% versus last year. Adjusted operating income amounted to SEK 451 million, with an operating margin of 7.7%. The result was supported by price realization, but largely offset by a property divestment last year, net U.S. tariff cost, and brand and product mix. Currency had a positive impact of SEK 98 million in the quarter. Volvo Penta organic net sales increased by 4% versus last year. Adjusted operating income amounted to SEK 1.1 billion, with an operating margin of 21.1%. Product and market mix had a positive effect, which was partly offset by material cost. The currency had a positive impact of SEK 25 million in the quarter. Looking into Financial Services then. The credit portfolio increased to SEK 284 billion, with a rolling 12-month return on equity of 10%. Portfolio performance remained good, with delinquencies and write-offs under control.
Adjusted operating income amounted to SEK 1.1 billion, supported by solid portfolio growth, partly offset by higher credit provisions and selling costs. Currency had a positive impact of SEK 36 million comparing to the same quarter last year. Lastly, looking into our forward-looking guidances and starting with currency. We expect a positive year-over-year FX impact of approximately SEK 1.3 billion in the fourth quarter. The forecasted net U.S. tariff impact on operating income in fourth quarter of a SEK -700 million is expected to be fully offset by net impact of the Section 232 refunds. The net R&D capitalization effect on operating income is expected to be approximately SEK 4 billion for the full year 2026, which is in line with last year. Finally, the guidance for the tax rate for the full year 2026 on 23%. With that, I am leaving for Martin to summarize then.
Thank you, Mats, for that. I think when it comes to the highlights or the financial figures, it speaks for itself. You can see here. But maybe more importantly than in the market activities and also the guidance for next year, both Europe and North America continuous positive development, 315,000 - 320,000 for Europe and 265,000 - 300,000 for North America when it comes to the truck side. Also we are guiding for a +5 percentage points increase for Europe and for North America when it comes to Construction Equipment. Service development, + 5% organic growth, showing also that our customers, as I said, are utilizing their equipment. Also that we are continuing then to execute on our plans, not at least now in North America.
We have put a lot of pillars into place, both in our industrial system, in our supply system, and of course, when it comes to products and services launches. That is basically the summary of the quarter. By that, Johan, I leave the floor to you for starting the question-and-answer session.
Thank you. We have a number of people on the line, but we start with those coming to the room. We start with Hampus from Handelsbanken.
Thank you very much. Two questions from me. Given that you now are accounting for the Section 232 in Q4, would it be possible for you to just grasp what type of a retroactive payment will you get back as of November 2025? Second question is more related to your outlook for Europe. Could you maybe share also your view on Germany because that is a big contributor for next year? Thank you.
Maybe I should start with the tariff stance. We guide in the fourth quarter for SEK 700 million in terms of run rate and the underlying impact from tariffs then. What we are saying really is the refunds are around SEK 700 million. It is taking out this fully mitigating the effect. That is it when it comes to the retroactive tariff payments. We had IEEPA in the third quarter. Now we have the Section 232 in the fourth quarter. Then on a kind of ongoing basis going forward, this will be positive for trucks as well then. If you see the SEK 700 million as a kind of an underlying run rate to be compared to between SEK 1 billion and SEK 1.2 billion as we have seen before, the difference there is really related to a lower run rate when it comes to the truck tariffs.
We have a cost, but it is very low then going forward after the fourth quarter for trucks. That is where we are.
Great. On Europe then, Hampus, what we see is obviously that we have rather solid, so to speak, demand coming from many countries where Germany, if anything, has been weaker than normal when it comes to the cycle in relation to others. We see that also when it comes to the order activity in our sectors. Looking into next year, we actually expect also other main markets to continue on the levels that we see. If anything, it is still a little bit a question mark on with what pace Germany actually will recover. Of course, we are also waiting for the effects of both the infrastructure package and the allocation of that coming into effect, but also the defense package. To be seen, because that will, of course, affect these type of industries and sectors.
But for us, serving also the different industries with transport and logistics, we see that. If anything, that could actually be adding to the figures, but still included a little bit of a softer situation than it is normal in relation to other countries.
Good. We turn to the telephone line and to Bernstein and Harry Martin. Please go ahead, Harry.
Hi. Good morning, everyone. The first question I had, if you can just help us on the Q3 truck order intake a little bit. If I focus on the North America number, would you be able to disclose how much of that order book related to the 2027 delivery slots versus the final slots in 2026? On next year, how is demand splitting between the EPA NOx-compliant engine and the 2026 engine? As you said, you have been quite limited in opening that order book in early weeks. Will you need to be a little bit mindful on pricing just to fill some of the slots in the first half of the year? A second question that I have, I just want to focus a little bit on the continued high diesel price and the impact on your customers.
I guess on the negative side, are you seeing any hesitancy on new truck orders, deferred maintenance, or any of this type factor? On the other side, the battery-electric order intake was very strong in Q3. I also wondered, have you seen an uptick in diesel trucks sold with fuel economy options like I-Save, I-Shift, et cetera? Is that potentially actually quite margin accretive? Thank you.
Thank you, Harry. A lot to meet in those questions. I will try to respond to that obviously as good as possible here. If we start with North America then, as we said, if we take year-to-date for the full year, and I think this is an important figure to have in mind actually, orders are up 71%, but still deliveries year-over-year is actually down 4%. So of course, we have built up a very strong order book. Now it's important while we are ramping, and you did see that also because deliveries were up 41% during the quarter in relation to last year. So we are really ramping there. It has been very important to us to keep now the order book in balance, not at least in the light of what also you mentioned regarding cost pressure.
We have, so to speak, the right balance in the discussions with our customers. So when we see the +18% order uptick in quarter three, that is then partly artificial on the low side, given that we have been restrictive. We didn't have 2027 order books open in July and August, and opened just September 1st. And I think that is a very important information to have in mind. And then the majority then of what happened in September, and thereby the order intake was related to 2027. And it's still, as everyone knows also, somewhat uncertainty about exact how it will unfold when it comes to the EPA regulations here. The strong thing for us is that we have the offerings in both the categories for 2024 and 2027, and that means that we can provide what the customer want to have.
And the good news about it is also that the EPA 2027 and the new launches has shown a fuel reduction given the high diesel prices of, that makes it even more important, obviously, with 10% fuel reduction on the EPA 2027 that we have also mitigated now in during the summer here, and thanks to hard work by a lot of our engineers also for the EPA 2024. So we feel that we are really well prepared here. And then when it comes to the distribution, we will not disclose that now. And the reason is not because we don't want to disclose this, it's just it's too short. We open up in September 1st, and if we give a number now, it will start to be some sort of truth, and I don't think it's very helpful for anyone.
It's more helpful to say that we can provide what the customer wants to have, depending on what is the preference here, and that we have been able to, so to speak, also get in the type of advantages into also the EPA 2024. Then it was on, what was the last one? Sorry, now. Yeah, it was, yeah, on diesel pricing and different options. Obviously, there are a number of factors coming in here, obviously, that we have a rather broad offering. If I take Europe as an example, we see, for example, LNG sales growing rapidly. Very positive. We have a very strong offering when it comes to the LNG long- haul for Volvo Trucks. So that is coming up. I think also step by step now we see battery electric is coming up.
Still what is hampering that is more, so to speak, the visibility for customer when it comes to the enabling conditions in Europe, and that will continue to take some time. Our offering is very strong, and we feel that now also, coming out from a season here when we have been able to compare that we are moving into this with a high level of confidence that the total offer when it comes to TCO, and if you look at the truck, it's a P&L, basically, that we have a very strong offering here.
Obviously also, and that is part of how we are selling and discussing with our customers, is that we would like to have as much as possible when it comes to this type of fuel-saving options for the customers, including I-Save, of course, the I-Shift fuel economy options that you have, et cetera. But also that we see that our recent launches have, so to speak, a basic execution of this. Of course, these options, since it's value-based selling of a lot of functionalities, for sure accretive.
Good. Thank you for that. We continue to practice the thing about asking one question. We turn to Mattias from DNB.
Thank you very much. Mattias Holmberg from DNB Carnegie. I'm interested to hear about with the 2027 market outlook that you have, if you believe that it will be fairly well-balanced across the year. I think in particular North America, given the slight softness in the order intake, will the Q1 run rate pick up where 2026 left off? In particular, given that you're hiring people, just managing the load in the factories.
No, thank you, Mattias. That is, of course, the big question. That is the reason also why we are pushing as much as we can for having the clarification also when it comes, so to speak, the introduction next year. What has been a good work done still is that we have been able then to make sure that we have both offerings in place. Again, the softer order intake in quarter three should not be seen as a reflection of the ingoing. It is more about our own management of the order book, basically. Then, as always, with North America, it is a little bit difficult to say because you have a little bit of built-in seasonality also in North America. We feel now, as I also said in the presentation, that we have a good balance between order book, order coverage, and our industrial system.
On top of that, of course, we have a number of flexibility tools to create space for short-term fluctuations.
Good. We turn to the telephone line, Goldman Sachs, and Daniela Costa. Please go ahead, Daniela.
Hi. Good morning, all. Thanks so much for taking my question. I just wanted to focus on the truck margin, which I guess when you take off perhaps a little bit better effects and tariff impact than the streets had, basically, was a little bit lower. I wonder to what extent things like you are still ramping up in Mexico, you are having certain costs to, I guess, launch the new EPA engine, you are having the launch of autonomous. How much of those things kind of maybe impaired a little bit your normal operating leverage versus whatever price lag also you might have had with cost inflation? Is there an impact from such things, or should we think about the ex FX, ex tariff underlying operating leverage as kind of your normal leverage from here onwards?
Maybe starting with what. If you recall, I think it was two years ago, but also this year at the Capital Markets Day when we talked specifically about the transformational ventures and the impact on the Group Trucks margin. We had, if I go back to the Capital Markets Day in U.S., two and a half years ago, we talked about 150-200 basis points in terms of effect on the truck margin. But what we said this time in June was that now we have done quite a lot of activities and brought down that impact to between 100 and 150 basis points rather. What you see now in the quarter is within that range. Nothing special coming from the transformational ventures.
If you are then looking at the kind of the underlying business, so to speak, on the truck side and on the gross income, if we are looking at the positive items in the quarter, if you are comparing year-over-year, it's definitely then volumes on new vehicles and service. We have price realization both on vehicles and service, which is positive. We have the tariff impact, and also to some extent, the VC brand mix, so to speak, with less SDLG. On gross income total for the group, then that's the positives. If we are looking at more on the negatives when it comes to gross income, again, year-over-year, for sure we have a market customer mix effect year-over-year. As we are increasing in North America now, we will have relatively higher volumes in North America.
As you recall, we have a lower profitability on the North American volumes then. Again, referring back to the Capital Markets Day, where you could see it. So it's a mix effect. We have, again, the cost inflation that we have been talking about when it comes to raw materials as well as freight. So those are the positives and negatives year-over-year if you are looking at the numbers.
But maybe if we should add also, the tariff effect for trucks specifically is not material. What we have seen in the quarter, the IEEPA is primarily—
The majority. If you are looking at the refunds in terms of IEEPA, that's very much reflecting then the underlying cost when it comes to tariff then. We have been clear that more than 50% has been related to Construction Equipment, meaning that it's less of a part on the trucks when it comes to refunds than on IEEPA.
And on top of that, it is Buses also being rather affected—
Yeah. They approve from Canada to U.S.
No. I think FX is one thing, but underlying, I think still we are following the plans when it comes to, so to speak, leverage.
Absolutely.
Then we are, of course, constantly working now with the price realization related to the underlying cost pressure that exists for everyone. But also just one comment on North America. Obviously, now when we are ramping up, it comes with some, and I think you are right there, Daniela, it comes with some extra cost. But we also know that when we are coming up to a certain level in North America, we are getting a different leverage. North America is very depending on having the right volumes stable. And we are coming to levels that is much more favorable for us also. So that is another type of pattern than you have in Europe, basically. And that is an important information, I think.
Good. Let's continue in the room. Björn at Danske Bank.
Thank you. Coming back to North America, and the order intake, clearly we've had a pre-buy during the year, and looking at freight rates, been quite positive for five, six months. Typically, there is a lag, maybe to orders of 6- 12 months. You are basically saying that you are a little bit conservative, holding back due to the backlog. If you can elaborate a little bit more on the EPA uncertainty, do you feel that among the customers, or is it more that you are holding back a little bit now for lead times, sake of it? Do you expect a little bit of a relief as we get more months with quite good freight rates and, yeah, EPA should be clarified soon, I guess.
No, thank you, Björn. Obviously, it is always like this. It is a mix. We feel when we discuss, and we were over two weeks ago, I think met with the full team there, and we feel clearly that the main reason now is that we are holding back because with the environment that we have discussed here, it is super important for us, obviously, to make sure that we have a good balance and not having order commitments too far out in time. Customers understand that as well. Then obviously, also the EPA type of uncertainty plays a certain role, but I think still that everyone counts now on the fact that you can choose between the two type of regulatory levels and also sort of started counting what can it mean in terms of the, so to speak, the extra cost related to the EPA 2024.
As you said, with the freight rates now and also having a period behind us with rather low volumes, especially over the road, and especially long haul in the over-the-road segments, I feel that the signal that we are sending from 265,000, also knowing that 265,000 is back-loaded because it started weak, not only for us, but the industry. 300,000, I think, is a strong message in that sense.
Good. Thank you for those clarifications. Then we move to the telephone line, Bank of America and Alexander Jones. Please go ahead, Alexander.
Great. Thanks. Good morning. Maybe just on costs, you've spoken about this gradual rollout of 2027 orders. Given the pressures you're seeing, can you help us understand the magnitude of the cost inflation you're seeing at the moment and key items you would flag? How confident are you on the 2027 orders that you are taking, that you'll be able to offset the cost inflation with pricing, or should we expect that to be a bit more gradual through 2027? Thank you.
No, as we say in the report, we have a gradual price realization then. We still see cost inflation. We were looking at the different items then. On the raw material side, we're talking steel-based metals and then metals like platinum as well, and so forth, where we have underlying cost inflation. What we said is that we are gradually now compensating for that with prices down. We are not quite yet there if we're looking at the third quarter, but we will continue to bridge that gap into the fourth quarter. So it goes according to plan, and we are bridging the impact now from cost inflation with the price realization, like Martin talked about on the commercial side. So we are managing that with prices, and we don't see any big changes from what we have communicated previously as well.
We will take one more question in the room. Mattias , DNB, please go ahead.
Thank you. Just a quick follow-up on the tariffs. Have any of your customers asked to take part of the refunds that you received?
To a very low extent. When we are presenting numbers, we are always talking net numbers. When we are talking about refunds in that respect, that is net of any customer claims done.
Clear. We turn to London, JP Morgan, and Jose Asumendi. Please go ahead, Jose.
Very good morning, and thank you. Can you talk, please, a little bit about the ramp-up of the plant in Mexico and how do you see the output in 2026 and in 2027, and whether you think this is an opportunity to take market share in the U.S. next year? Thank you.
Thank you, Jose, for that question. We are producing at low numbers now to trim the lines. Actually, we are going there in a couple of weeks. For 2026, basically, it is not material and we are managing, so to speak, a ramp-up with the existing facilities that we have in Pennsylvania and in Virginia. Of course, also given that we are now looking into, as we can see it at least, for a better market and not at least when it comes to long haul, to have that operation, not at least also to balance between the two brands, will be very important for us, 2027 and beyond. That is going according to plan, but so far, low volumes and we are trimming in. That has been, as we see, done in a very short period of time. We are very pleased with that.
Good. We turn to Citibank and Klas Bergelind. Please go ahead, Klas.
Thank you. Hi, Martin and Mats. Klas at Citi. First on the North America outlook, the 300,000 retail sales, trying to understand how much of that you think will be destocking relative to in-for-out orders. Effectively asking if you think retail sales will grow faster than builds next year within your guide. Then a question on R&D for you, Mats. The R&D is still supporting earnings. Maybe too early, but would be good to hear about how we should think about net Cap R&D into next year. Following the ramp and the launches you do, amortization should eventually start to pick up. Yeah, those two, please. Thank you.
Maybe I can start with the last one then, on the R&D capitalization. If we are looking at the current year, because this is a sequential development that we see right now. We are guiding for an impact of SEK 4 billion for the full year, and that is the same as we had last year. What we have seen so far, if you are looking at the year-to-date and September, we have had a positive impact year-over-year of about SEK 1.2 billion when it comes to the R&D. We are guiding for no effect year-over-year, meaning that we will have a negative, just using the numbers and the guidance, a negative impact on the margin from the capitalized R&D and amortization of about SEK 1 billion in the fourth quarter impact in the margin. Non-cash, obviously.
I think we should think of this like a kind of a run rate going forward, because now we have launched quite a lot of projects and we are taking down the capitalization when it comes to R&D. So it will be a lower level going forward. Then for sure, what we are also doing is to mitigate that effect with continuous savings when it comes to the R&D side as well, and the gross R&D. But that said, in a nutshell, the effects then for the fourth quarter and then the trend going forward.
That is obviously also related to the fact that we have invested heavily in R&D—
Absolutely.
—over quite some years now. The complete new North American platform. We have done a number of very big investments when it comes to battery, electric, and other new propulsion systems. We are pruning the portfolio, as you said, when it comes to the ventures. We are seeing it taking off for the LNG, for example, together with Cespira, et cetera. So, I think that is important to have in mind. Since how it is accounting-wise, with the capitalization and depreciation, but more importantly also, as you say, the cash flow effect.
Yeah.
We have taken quite a number of investments now, so we are well prepared for the future. Then when it comes to the total market, as we say, we are always in the volumes guiding for the retail sales. So, we are saying 265,000, and that will still be, so to speak, a challenge for all of us to get up to the 265,000 total market, as I can see it, since it is back-loaded. Then it's 300,000, so to speak, retail sales into next year that we are guiding for.
Good. We continue on the telephone line with Morgan Stanley and Shaqeal Kirunda. Please go ahead, Shaqeal.
Good morning. Shaqeal from Morgan Stanley. Thanks for taking my question. I also wanted to understand a bit more about the North America orders and the uncertainty in the market versus managing the order book. Could you maybe give a bit more color on what customers are saying, specifically in regards to the new engine versus the old one? The reason on managing the order book, is this due to the rising cost environment? Lastly, are there any customers that are pushing deliveries later in the year than usual? After that, if you can share a bit more about the 300,000 market outlook, just on your main assumptions in terms of non-conformance penalties, freight volumes, and oil prices.
Yeah. First and foremost, when it comes to the order intake, as I said, we are up 70%+ year-to-date when it comes to orders, and deliveries are down 4%. If we just start there and just take a step back. At one point in time, it's important also to make sure that you have quality in the order book. That's the reason why we said now, and of course, in close collaboration with our dealers and with our customers. So, in the event that there is a strong demand for planning reasons to place and to allocate slots into 2027, we are always open for that, of course. But at the majority, we are able to manage that in order to have the visibility for everyone involved, and not at least when it comes to the commercial conditions.
That has been related to both, so to speak, the very strong development in orders, but it has also been related to, as we are asked before here, regarding the unclarity partly then when it comes to the EPA regulatory landscape, starting from January 1st, both with EPA 2027 and EPA 2024, and what that should look like, and of course also how these different technologies are offset. That's the reason also why we waited a little bit, but the primary reason is that we have a very strong order activity where higher freight rates we've had over the road, freight recession, or you can say an aging fleet that needs to be replaced.
When we are weighing all factors together, given also that, again, it will only be 265,000 this year, knowing it is a back-loaded market in retail sales, we are coming with, of course, a number of other factors to the conclusion that the forecast for next year is 300,000.
Good. Any more questions in the room? It is super clear. Good. Then we will let Hemal from UBS wrap up this press conference with one last question. Please go ahead, Hemal.
Good morning, Martin, Mats, and Johan. Hemal Bhundia from UBS. Thanks for taking my questions. I appreciate the last one, so I will try to make them good. I am just curious, on the service business growth that you have seen, just wondering, is this driven by aging fleets or greater service penetration? I am curious if this is driven more by existing customers or new customers. Lastly, could you just touch upon the European order intake that you have seen on your new and more fuel-efficient engine, please? As you mentioned that this engine will be rolled out to other markets, I am just wondering if you have got any clear dates as to when this could happen. Thank you.
Thank you, Hemal, for those questions. On number one, that was, let me see. Now I was thinking about—
Service.
Yeah, services, sorry. Services. Very good question. As you have seen over quite some quarters now, we are continuing to have a good underlying organic growth in the services. Of course, activity levels, as I said, have been high and higher, and that is, of course, having a link to the service development. But I should also argue that the underlying efforts that we've had for a long period of time of more and more contract penetrations, and that is primarily driven for the first owner, but also more and more we see it for the second or third owner, but primarily for the first owner, and that it depends on what type of segments we are talking about, if it's up to four years or six years or seven years. It varies between markets and applications.
But that penetration level is continuing to grow, and since that is like a portfolio case, we can also follow how that is working, because it's about the penetration as such of new vehicles, and then it will have effect step by step when these vehicles are coming into operations, and over these years that the contract length. But it's also about the content of the contracts, where we also are driving, so to speak, the content from more of a maintenance-based type of contracts all the way up to the full, so to speak, service contracts. We also see that, for example, on technologies now that are even more advanced, that customers would like to have it for a longer period of time.
There are a number of factors driving this, but when we see, so to speak, the development of the services and the portfolio, we are anticipating that to continue to be a good development, both when it comes to the underlying activity, but not at least the contract management. Then on the new engines and the development, I think generally speaking, what we've seen, and that's coming back to the R&D question also, we have, with the R&D investments that we have done, have provided a lot of value to the customers. We see that for the new FH, Renault Trucks T model, for example, in Europe, very strong performance lift when it comes to fuel efficiency, and that is, of course, coming in handy, et cetera.
That you rightly say also, now we have the modular platform that we can utilize the same technology around the globe, so we're looking forward to that.
Good. With that powertrain technology question, we will let that wrap up this quarterly presentation. Thank you for coming and to tuning in. See you next time.
Thank you, everyone.
Thank you.