Morning everyone, welcome to this press and analyst conference covering the fourth quarter and the full year 2018. In a while, we will have two persons on stage, our CEO, Martin Lundstedt, and as usual, a CFO called Jan, but this time his last name will be Ytterberg instead of Gurander. If you are a frequent guest to this conference, you may notice that I am new as well. My name is Claes Eliasson. I am heading up the media relations function at the Volvo Group. We will start with the presentations. Then we will have a Q&A session, where we will also take questions from telephone callers. Please use the microphone. Martin, take it away.
Thank you, Claes. Thank you. Also from my side, obviously, most welcome to this conference on the quarter four, but also on the full year. I actually would like to start with the full year and say that we are pretty proud, actually, of the full year here. It has been a very hectic year. It has been a very intense year, obviously, because we are realizing, as you know, good market conditions, and we continue to do so. We have also showed, I think, the underlying improvement continues in the group. Of course, I am very proud of that when it comes to our colleagues around the Okay, I should do that, yeah. What the colleagues are doing around the globe, actually.
Very strong, as I said, SEK 391 billion in top line, a growth of SEK 60 billion almost, over a year. That I think is worth a reflection in itself. We actually tried to find a similar company that have a SEK 60 billion second top line in Sweden. We did not find exactly that, but we came out with 1.5 of those, et cetera. That achievement in itself, excluding currencies, approximately SEK 50 billion. SEK 40.6 billion in operating result and 10.4% in margin, showing also that we have a continuous underlying improvement here. What is also very important for me is that we see that almost all business areas are doing an improvement. That is important, obviously, that we are seeing improved quality in the business from the different parts of this group.
Also that the service business is continuing to develop in a good way is important, obviously also for the resilience of the group. As a result of that, to find the right balance of still having a very strong financial position, where we can continue to act from a position of strength, but at the same time also show that we are confident in the performance of the company. The Board of Directors proposes therefore an ordinary dividend of SEK 5 from SEK 4.25 and an extra dividend of SEK 5. On the quarter four, on the highlights here, as we have said, net sales up to a record level actually of SEK 106 billion. That was 10% improvement, excluding currencies. The adjusted operating margin for the group 10% and for Trucks also a strong improvement up to 10.9%.
Volvo CE margin came down a little bit during the quarter, still, Jan Ytterberg will come back to that, the underlying improvement is still very good in Construction Equipment. We have had some growing pain, you can say, also in this quarter, we are actually growing 24% on equipment. Finally, we are seeing some of growing pain. I think they are holding that back for quite some quarters, actually. Very positive. When it comes to the volume development, pretty straightforward as we said, on Trucks up 3%. We have a strong North America, obviously, and it will continue to be so. We have a relatively flat European deliveries. That is also what we are looking for when we are forecasting the European market, so very expected so.
We have also a little bit of a lower Middle East situation also due to political turmoil, not at least. When it comes to Construction Equipment, also strong as I said, 24% up, mainly then related to SDLG, + 39% and the majority of that in China still. When it comes then to service sales, again, I should say a positive quarter for us, + 6% excluding currency, up to SEK 20.5 billion. It is good to see that all areas are improving here. We had, for some specific reasons, a little bit weaker top line in construction equipment, but related to specific dealers, non-China. High utilization of the rolling fleet continues, that is of course positive, but we also see that the focus in the organization on the service business is paying off, and it is well received by our customers.
As we have discussed before, this is one of our main priorities, to continue to build an even more resilient group when it comes to cyclicality. What is also important to say here is that when you see the balance and CE, for example, it's a good example of that, but also some of the truck brands, is that the priority right now obviously is continue to build a very strong population out there that we can harvest from many years to come now when we have an even better and more broad service range. On the Truck side, we are iterating the fact that we have a continued good demand in our main regions. We will come back to that obviously, but as you will see, a pretty unchanged picture as we already were talking about in quarter three reporting. On the order intake, - 14%.
I can assume that some are getting nervous now, we will have some questions about that. I will have that as a cliffhanger for you guys. Having said that, obviously, I will have a specific slide on that, North America, that is a very particular situation with the fact that we have a huge order intake in the first three quarters. Also in Europe, we had a particular situation in quarter four 2017. As you might remember, then we announced a price increase as from 1st of January 2018, which is creating some internal pre-buy. I think that was good because we are seeing that price realization are coming through. In a market like this, I think that is one of our main duties as a company. Deliveries up 3%, we have already been into that.
Also some news when it comes to product launches during the quarter, important product launch for Dongfeng, both on the medium and the heavy duty with the KL and KR series, and also an improved offer when it comes to the tractor executions. That is a growing segment in China. A very important introduction for Dongfeng here. Also, we are glad that we are continuing now to expand our offering in Japan. Mainly in Japan, I should say, this is going also for Australia, Singapore, South Africa, and mature markets with Japanese preference, so to speak, in those segments. As you know, we have been working with a quite extensive turnaround in UD, very positive, and this is now the next step to broaden the offer.
We have primarily worked with 11 liter on the Quon, but now we are also introducing the 8 liter, that is the very important part of the Japanese market that will broaden our presence. As you will see later also, now when we have got the quality back in the business, we are also gradually actually taking back market shares, that is positive. Another thing, maybe you were looking at the movie here before we started the press conference, that is around our deal and the contract we have done with Brønnøy in Norway regarding the first commercial execution of a fully autonomous circle of truck or tractor trailer combinations for this quarry. We have already been testing and piloting. I think that is a very important message. We are post-piloting phase here. We are going into commercial execution.
What is important with this is that we have a good, so to speak, risk and reward situation where we are going in with this with six trucks to start with now, and really together with the customer, learn about the full potential of these autonomous solutions. A great achievement by the team, and it was one of our internal targets to actually get a stick on the ground on one of the commercial contracts before the ending of 2018. It was a runner-up just to the last days of the year here. Great achievement. When it comes to market environment, Anders, listen carefully now. It will be unchanged as we see it in most of the regions in relation to what we already said in quarter three.
Europe, we already guided that it will be a stabilization and thereby a small settlement down from 320 approximately, we don't have the exact final figures yet, down to around 300,000, which is still a very good and strong market. North America, we are also guiding unchanged of 310,000 unit, which continues to be extremely strong market. When it comes to Brazil, we are actually increasing on the heavy duty here, and we are going from 55,000 to 70,000, and that is obviously a good sign where we have also gained market share over the year and have a strong position, as you know. China is unchanged. We have guided already that it will go down from very strong levels, but we see that will remain on a level of approximately 1.15 million medium and heavy duty trucks.
India, we are guiding down a little bit due to the situation regarding liquidity and tighter credit conditions from 430,000 to 400,000, primarily in the heavy-duty segment, actually. Japan unchanged at 45,000. All in all, we are forecasting still a rather stable, you can say, but strong 2019 when it comes to volumes out in the different markets. When it comes to our then situation regarding order intake and deliveries, yes, as a matter of fact, there is, if you look at the quarter in itself, an unbalance, obviously, and it might be mostly pronounced and maybe the most interest around it in North America and in Europe. I will actually come back to the situation in North America on a separate slide. I think it's worthwhile to go through what we see there. Just a couple then of words when it comes to Europe.
The starting point for us again is a total market of 300,000. Good levels, slightly above the trend line at the midpoint of the long-term trend. Our particular situation, obviously, is that as I said, we had a very strong order intake in Q4 2017, and mainly related, as I said, to the price increase announcement in Europe as from 1st of January but also related to some sort, you can say, almost seasonality effect of a number of big fleets that we actually booked for Eastern Europe in Q4, and they have not been booked in the same quarter here. I think it's worthwhile also saying regarding Europe, that if you look into the Q4 2016 figures, that was on, if I remember it correctly, 24,700, 24,800. We are still well above, That market ended with 309,000. Stability is there.
You need to be granular just to be clear here. Otherwise, I feel it's pretty undramatic and some of the settlements you see in Asia here is mainly related, as I said, to Middle East, but also a little bit of stabilization in some other markets. You can also, by the way, say. I can take that in the Q&A session. The North American situation, as I was into, you see it very obviously here. Net orders in 2018, 484,000, which in a way is positive, but in a way is also challenging when it comes to really organizing an order book that has the right level of quality. I think history has told us that being very close to dealers and customers and knowing what is the quality of the order book is key independently where you are in the cycle.
We know that the production capacity is approximately around, it can be 330,000 or 340,000 and 315,000 total in the North American sector. Depends a little bit on how the total situation is, not only at the OEM side, but also when it comes to the full supply chain. Last year we ended up around 310,000- 315,000 as you know. I think the message here, what is very important is that the backlog in the industry is still high. We see it in our order books that we are fully booked more or less, mais ou menos , in 2019, and we have not opened the order books in 2020 because it is not serving us in the way we want to open it now. We have actually deliberately been holding back that situation. I think still it's a very solid situation.
We have been together with dealers and customers, cleaning, washing, looking through the things, still extremely solid order book for an order board for 2019. When it comes to the market share situation, starting with North America, despite, I don't want to repeat myself too much about the constrained supply chains, I think we have been more open about it. We see that Volvo actually after now the changeover into the new program that is very well received are actually gaining market share here. That is positive because our own constraints has been the volumes in itself in the value chain. On the other hand, with Mack, again, the same situation, as you remember, in quarter one and partly quarter two last year, we did the changeover into the new models, and in primarily then also on the long haul execution of the Mack Anthem.
We have been more struggling there to get the supply chain right. We have some specific Mack suppliers where we are together now working. We see an improvement in the Volvo system. We see also improvements in the Mack system, but there will still be a journey to be made. Order board, extremely good, well received and customers all satisfied with the product, but we need to continue to work primarily in the Mack pipeline. Europe, you see that we have had a small decrease in the Volvo market share. I should say that this is primarily related. There are some market mix effects if you look into it, but the primary reason for us in a good market, we have made the highest priority on the quality in the business, pricing, price realization, et cetera. As I said, that has had a positive outcome for Volvo.
Still, I should say that we are satisfied to be on the 16% level and make priority also on that side. Renault Trucks, the good stabilization important to us. Stabilize while maintaining a good quality of the commercial conditions. Really well done also by the Renault team here. We have a progress at Volvo in Brazil, important now when the market is coming back strongly. Still from low levels, but if our forecast is correct, which we believe because we see good activity level, 70,000 starts to be something in Brazil again, that is good. As we see, we have regained market share here after some also price realizations that we did primarily in 2017. Also strong situations in South Africa and Australia, where we are maintaining our leading position for the group and a very complementary offering among our different brands here.
In Japan, as we said, a little bit lower than in 2019. Full focus on the turnaround plan, but we regained market shares. I think we were around 16.6% or something after the first three quarters, very strong fourth quarter for us. Let's see where we are. Construction Equipment. Good demand continues in key regions. We continue to see a strong North America also for next year, we are also in Volvo Construction Equipment, having a pretty unchanged market forecast guidance. We feel on high level also sideways in Europe. China now is leveling off more towards the trend line. If you compare with the last peak, I think that is for us, in a way, healthier. We should be humble and say that there is a certain uncertainty about how much it will level off.
We are guiding for the time being from 0% to -10%, no drama. In addition to that, we feel also that with a mix between SDLG and Volvo brands, we also have a strong position in segments where it will continue to be relevant, not at least compact, for example, for SDLG. Having said that, being very close to dealers and customers is important in all markets and in particular now in China, we can follow that together. Electric Site, we have that up. That is similar to Brønnøy. We have now been conducting a test together with Skanska for a couple of months or almost a quarter. It was a quarter actually, showing fantastically good result here when it comes to CO2 reductions of potential up to, or we showed actually 98%, operating cost down with 40%, fuel consumption down, et cetera.
The potential is enormous, we are now pushing forward these type of solutions in order to have it, so to speak, commercial ready in the relative near future, actually. Really well done by the teams here. Another very important statement, and I think also bold statement, is where we said that four applications and segments where it matters, we will go electric. The compact segments for wheel loaders and excavators are typical segments where it matters. Often city operations, the noise level is important. You have availability to grid if necessary, you can also operate with a good degree of freedom without the grid, et cetera.
Here, what we say, we de-complex our compact structure by actually taking off the diesel offering as from the next emission levels, we are doing it quickly, we are doing it firmly, that will, I think, also give a good boost to our segments in compact equipment here. Very exciting about that. As I said, pretty quick guidance on this. We are continuing to have a good demand, as I said, in key regions, keeping Europe unchanged on a stable and good level. We continue to see good demand in Germany, Italy, U.K., France, for example. We are also having unchanged forecast for North America from 0% to +10%. South America unchanged. If anything there, I feel there is a possible upside, let's see. We are not seeing the signs equally strong as on trucks.
In Asia, unchanged -10% to 0%, the same goes for China. I think I've been through that we are following that very closely, that is the main scenario that we look at for the time being here. On the order intake side here, maybe just to make a comment then that we are guiding upwards on North America, you have an order intake of -24%. Not to make that overly complicated, because that has to do with the comparison figure that was extremely strong quarter four, we had also sequential situation where quarter three this year was extremely strong. I think the proof in the pudding is that the order book this year in comparison to last year is +15%.
We have actually +15% more order in hands now than we have last year, and that is the proof in the pudding. Apart from that, you see that it's a continuous, so to speak, pressure on mainly almost in all regions when it comes to deliveries. Again, I think that the organization is doing a great job actually to take care of these opportunities when it comes to ship it out and get the extensive rolling fleet going forward. Buses, a couple of comments. As you remember, mainly due to relative weak order activity late 2017 and beginning 2018, U.K., Nordics, and also somewhat North America, we had lower deliveries in quarter four. I think the bus organization worked well given that and got the top line. That was good, but also the transformation program continues. Strong order intake.
Bogotá, very important order for us, 700 buses. Also strong order intake in Chile for Santiago and to Australia, also big order, +100. When it comes to order intake, it looks really good here. Volvo Penta, extraordinary quarter, obviously. You know the reasons, the pre-buy when it comes to the Stage V situation in Europe. I think it was a fantastic achievement to really manage this massive increase in the fourth quarter and the whole organization, including also our industrial backbone. Serving Volvo Penta has done a fantastic job here. That order intake decreases by 19% is on the back of the strong pre-buy. You should see that the underlying situation in Penta is very strong. Industrial all speed segment growing. We are taking more orders.
We are getting that into execution, and we see that also coming through in the service business since you have a completely different utilization. Penta is now standing on two very, very strong pillars here. When you look at those two pillars of industrial and marine, you can also subdivide that into furthermore strong pillars of industrial all speed, industrial one speed or power gen, marine commercial and marine pleasure. You'll see that on the marine pleasure, we're continuing to do innovations. Here you have the twin-installed liter IPS on a 94-foot, slightly above average yacht. You can see what the IPS is doing with an optimized installation together with the 30 liter, -45%. Then I can say that the starting point is quite a lot per nautical mile. I think there will be a continued big interest for this. Fantastic achievement.
Finally, VFS continue a very, very strong and solid performance. What we see is that still the performance in the portfolio, stable, very low levels of non-performing customers, being very close to the business. We had an all-time high on the new retail financing up to almost SEK 20 billion. Now with a very, very stable platform we have, and performance, and professional organizations, we are actually having good discussion about the penetration level. We are 25% down. Let's see if we can do a little bit more, because we also know how well appreciated this is when it comes to retention rates, et cetera, from customers. WeChat, we talked about. We have a direct offer on that now in relation to the lost, so to speak, situation in China. It is VFS really running the business now, that feels also great. Also the iLabX situation.
Some of you guys, you're into fintech anyhow because you're working with that on daily basis. We actually invited companies to participate in our innovations on the financial services area. We got 170 startup companies, applicants. We were actually drafting out from 17 that came, six that now will work for us for this year and see what we can do in innovation. Also a great initiative, I feel, so we wanted to have it here. With that, I think we are all going into the financial figures. Mr. Jan Ytterberg, welcome on stage.
Thank you, boss. Well, first, before going into the financials, of course, an honor for me to be here and to be at Volvo, and also, of course, to have good figures to present for you, which is the result of an outstanding performance by our Volvo employees, but we should not forget our Volvo partners as well, and I'm thinking a lot about the suppliers. This is what we have actually achieved together as financials. Martin was into it when we talked about net sales in the fourth quarter, an increase of SEK 14 billion, up to SEK 105.8 billion, currency adjusted growth of 10% on net sales.
In the back of that, we have, of course, the vehicle, machine, and engine sales that have increased 11% in local currencies, reflecting then the high demand in general and, as Martin was into, the very strong, both on machine sales and vehicle sales in North America. Service sales grew with some 6% currency adjusted, reflecting then the high transport demand, an increasing growing fleet, and of course, also a high vehicle utilization. As regard regions, as you can see here, currency adjusted net sales increases were more pronounced in North America, reflecting the demand of vehicles and services. Whereas Asia, if we take out currencies there, was actually lower than last year, related to the truck deliveries to Middle East, partly offset then by increased machine sales in China.
The improved demand in South America impacted positively, and Europe sales adjusted for currencies then was slightly higher than the fourth quarter last year, which was a result of improved machine deliveries and service demand. If we take a look on the operating income per business area, we can first start to conclude that we had a fourth quarter that improved to SEK 10.6 billion, giving an adjusted operating margin of 10%. Improvements were noted all across the truck brands and business areas, where the contribution from Group Trucks, Construction Equipment, and Penta were actually the most sizable here. Net cost for group functions and others were lower than last year, and that was mainly related to an underlying improvement over our business area, Arquus, and the provision, if you remember, of a lost contract that we made in the fourth quarter last year of some SEK 300 million.
We had also a positive effect related to a divestment of real estate here in the fourth quarter. Currency impacted positively with SEK 1.2 billion, that was then mainly related to the weak Swedish krona compared to the US dollar and the euro. If we look at operating income and improvements in another dimension, we can say that the main contributors behind this was actually then the 4% higher truck deliveries, 24% increase in machine deliveries, and 47% of engine deliveries. Quite astonishing figures, actually, reflect on them. That, of course, had a huge volume impact on gross income. Of course, also on top of that, on gross income, the higher service sales across the whole group. Furthermore, as Martin went into, we saw good price realization coming through all through the year and also here in the fourth quarter.
Also we got a positive but limited capacity utilization effect, despite then having a strained supply chain in general, and with the sharp increase in U.S., that was more related to that in this quarter. That impacted negatively, all in all, the cost per unit decreased slightly in the fourth quarter. That, together with a positive FX effect, were the main contributors to the improvement of gross income. If we move over to R&D, you can see that the activities and expenses have been noted, increases have been noted all through 2018, continued also to be higher here in the fourth quarter. The high ambitions in areas like electric mobility, autonomous driving, connected solution, and also in combination and with the challenging emission demands from legislators, and also on top of that, our wishes and demand to improve the product offer and our products in general.
These together are the main drivers behind this in the quarter and will be so in the coming quarters. The capitalization of R&D costs was on a high level in the fourth quarter as projects have been moved into capitalization phase. As regard selling expenses, half of what you see as a deterioration here is related to FX, the other half is related to higher ambition level, higher activity level, and of course, the demand situation in itself creates higher costs. Deterioration of other here is then related to some positive non-recurring items last year and some negative recurring items this year, it's also affected by the high volume. As I said before, FX had a positive effect on adjusted operating income. It was not only accounting, it was also cash that was generated during the quarter.
Operating cash flow in our industrial operation was SEK 15.5 billion, positively affected by, of course, the strong earnings, but also a release of working capital of some SEK 6.1 billion related to the increased trade payables, which is normal, as the payables increases after the vacation period during Q3 in Europe, and also, of course, related to the high demand in general. Inventories decreased slightly during the quarter, reflecting the high deliveries, whereas pay and receivables were stable. Net investments increased compared to the fourth quarter last year to SEK 3.7 billion reflecting then, of course, the higher capitalization of R&D, which is the other side of the coin, as well as higher investments in property, plant, and equipment, mainly related to replacements investments.
With the higher ambition and activity level we have in the company, the CapEx of tangible assets will gradually increase as we see it coming through here the coming quarters. The high cash flow generation was reflected in the increase of net cash position we have in industrial operation with some SEK 14 billion during the quarter to SEK 43.9 billion at the end of the year. We go in a little more detail to the segments. Trucks. Truck deliveries increased by 3% for heavy-duty and medium-duty trucks and currency adjusted net sales by 7% compared to the fourth quarter last year.
The strong demand and improved vehicle deliveries in especially North America, and here we have a 35% increase, was the main contributor to the increase of currency adjusted net sales of vehicles of 8%, and the deliveries in Europe were slightly lower than fourth quarter, as Martin was into, mainly related to Eastern Europe. Service demand continued to be high, reflecting, as I said before, the high demand on transport, the increasing rolling fleet, and of course, also high utilization of the vehicles, and that was valid across brands and regions. For Trucks then currency adjusted sales for service up 5%. We move over to EBIT and operating income then, adjusted operating income for trucks, it improved to close to SEK 7.5 billion, giving an adjusted operating margin of 10.9% in the quarter.
Behind the improved adjusted operating income was mainly, of course, since we are a company very much dependent on volumes, the high deliveries of both trucks and services, a business climate with possibilities of good price realization, and once again, a better capacity utilization and somewhat lower cost per unit. The higher activity of R&D, which we saw on the group, is actually related to trucks, where projects in capitalization phase impacted positively, partly offsetting the higher cash out of R&D. Selling expenses were higher than last year. Once again, ambition level, activity level, and the volume on top of that impacting negatively. For Trucks, a positive FX effect of SEK 0.8 billion in the fourth quarter. These were also the reasons behind the good leverage we can see on the adjusted operating margin.
That increased 1.7 percentage units compared to the fourth quarter, up to 10.9%. We move over to Construction Equipment, we were into it. Machine deliveries up 24% in the fourth quarter, increases in all regions except Africa and Oceania. The increases were particularly strong in China and for SDLG. Both North and South America experienced sharp increases in deliveries, and that were related to compact in the heavy segment in North America, and for South America in Brazil. European deliveries increased with 18%, with increases in both Western and Eastern Europe. That meant also that we had an increase of the currency-adjusted net sales for machines of 19%. Whereas currency-adjusted service revenues increased more moderately here for Construction Equipment compared to previous quarters. That was mainly related to general lower activity level in Turkey and one isolated dealer problem in Southeast Asia.
All in all, that meant that net sales for Construction Equipment increased by 16% to SEK 20.3 billion. Result-wise, the year-on-year improvement trajectory is impressive. We have seen the operating income continued also here in the fourth quarter for Construction Equipment, but somewhat more moderately than earlier quarters. Operating income improvement was some SEK 335 million to SEK 2,157 million, giving an operating margin of 10.6%, slightly lower than last year. The improvement behind the operating income was higher equipment deliveries. Also, to some extent, the 3% increase of service volume. That was partly offset by higher production cost, where part of that higher production cost were related to non-recurring item, and part of, as we were into, the very high increase we have seen in production and thereby also a strained supply chain.
Also on Construction Equipment, we experienced somewhat higher selling expenses, whereas R&D costs were stable between the quarters. FX had a positive effect of SEK 150 million. The negative effect of the non-recurring item, which are into affecting production costs and the higher vehicle sales in combination with a moderate increase of service revenues or service volume. As you know, we have what we can call over average margin on services. That mix effect impacted, of course. Taking out these effects, especially the production item effect, would have meant that we would have continued our improvement trajectory on operating margin also here in this fourth quarter. Buses decreased volume with some 350 units compared to the fourth quarter last year. U.K., North America, slightly negative on those markets, partly offset by higher deliveries in Africa and Oceania.
Product mix impacted positively related to some specific customer orders. That made the adjusted vehicle stay on the same level as we saw in the fourth quarter last year. Currency-adjusted service revenues were increasing with 5%, which meant that the total net sales for buses were up to close to SEK 7.5 billion in the quarter. SEK 266 million of operating income, that is in line with last year, where we have on the negative effect, the lower bus deliveries, but on the positive effect, we have the product mix and also the somewhat higher or the 5% higher service volume. FX +SEK 100 million in the quarter, which meant that the operating margin, adjusted operating margin, was 3.6%, slightly lower than last year. Of course, this is not where we want to be with buses, and further improvements are needed to actually reach an acceptable profit level.
Well, Penta, what a year. With the pre-buy ahead of Euro Stage V coming to an end in this fourth quarter, engine deliveries were extraordinarily high, positively affecting net sales and of course the operating income. Also regions outside Europe showed a good growth as well. The increased deliveries was reflected in the increase of currency-adjusted sales on engines, 46%, whereas service sales continued with a strong growth path of 7% also in this quarter compared to earlier quarters in 2018. Meant that we had net sales for Penta up to about SEK 3.8 billion in the quarter. Operating income increased quite impressively from around SEK 200 million to SEK 500 million, i.e., up SEK 300 million, mainly on the back of the strong engine deliveries, but also continued good growth of the services.
FX also here impacted with around SEK 100 million and operating margin improvement of around 6 percentage units to close to 13% in the quarter. As regard financial services, strong demand of vehicles and machines together with a well-performing financing operation were drivers behind yet another good quarter for Volvo Financial Services. The credit portfolio increased to SEK 149 billion at the end of 2018. That is currency adjusted, an increase with 10% since last year. Customer financing markets continue to be highly competitive, putting pressure on both finance penetration and spreads. The risk appetite in major main markets are competitive and high, reflecting, of course, the good transport demand, the good finance of our customers, and also low levels of overdue and credit losses. For financial services, operating income improved to SEK 70 million, related to the growth and performance of the portfolio.
On the negative side, we saw the lower spreads. FX had a positive effect of around SEK 25 million in the fourth quarter. As you can see, the continuing improved return on equity since the last years continue, and we actually passed 15% here towards the end of the year. Going into just one slide relating to the full year. When I started at Volvo in the 1st of November, I started to share a dream with my colleagues, and that was 400 10 40. Net sales being SEK 400 billion, adjusted operating margin being 10%, and over SEK 40 billion of adjusted operating income. We actually reached the two most important ones, the two most important dream levels related to profit, but came short out on net sales. I would choose that one than the other.
I think that was very good and a strong achievement, once again, of the company. For the full year 2018, adjusted operating income was SEK 40.7 billion, an improvement of SEK 11.4 billion, and an operating margin of 10.4%, and that is an improvement of 1.6 percentage units compared to last year. Improvements noted all across truck brands, business areas, except for buses in the aftermath of lower bus deliveries. Currency impacted operating income positively by close to SEK 1.6 billion in 2018, and we also make a forecast for 2019, which is related to transaction flows, and there we see a positive effect of around SEK 0.5 billion. A limited positive effect. We don't make any forecast of translation effects, which will also in the end come in here.
Behind this is, of course, the higher vehicle, machine, and engine deliveries as main contributor to improved gross income, but also of course, with the strong service side, we also see the service impacting positively here. Once again, then, without making any drama around it, we have had a strained supply chain, and if you reflect on the increases I've been discussing or talking about here, you understand it. In the end, we did have a lower cost per unit, so we have a positive effect on gross income due to that. Then we have the R&D activities and expenses, which have been noted all through the year, the increased activity and costs. As projects are coming into capitalization phase, we also see how the net capitalization increased.
Also, that we see for 2019 that we will have a net positive effect of capitalization but limited to around SEK 0.5 billion for the full 2019. As regards selling expenses, once again, of course impacted by currency, 1/3 is related to currency. The other 2/3 are related to the activity level and also to the high volumes we are handling. The deterioration of other here was once again related to positive non-recurring items last year and negative non-recurring items this year, and also of course partly affected by the high volume as such. With a strong financial performance in 2018, good cash flow generation, and a good net cash position in industrial operation, we are entering 2019 from a position of financial strength. Martin?
Thank you, Jan.
You're welcome.
I think we have already been saying that, you summarized it well, Jan, we can just say that this is a summary of the 2018 and the outcome of the decision of the Board of Directors to propose to the AGM, the SEK 5.00 + SEK 5.00 in dividends. By that, I think we're open for Q&A, Claes.
That we do, and we have a person here.
Yes. Björn Enarson, Danske Bank. Back to your cliffhanger and talking about the North American truck orders, and we have seen, of course, market data or ACT numbers for some months now and some cancellations. Can you give some color on how that has been pushed out? Is it from your side or from customer side that we have seen cancellations? Secondly, a quarter on working capital seasonality, we can take that afterwards.
If we start with the North American order situation and order book, I should say that primarily it has been a discussion between us as OEM and our dealers on how we should look upon the discipline in the order book, and that has mainly driven this. As we have already said, I think we started to say that in quarter two already at the reporting, that obviously we have seen some small amounts of, if I may say so, double bookings among some of the customers. I think we have spent now in the last three, four months to really go through that together with dealers and customers from our side for the two brands. As I said, generally speaking, high activity level when we follow the connectivity data, when we see the order book, et cetera.
I think we are coming to a situation where we'll continue to have a strong order board. At the same time, which is natural now with 484,000 in order intake, despite then the weak quarter four, we will also continue to have comparison figures in order intake. Again, I think it's more important to see what are we guiding for, what is the activity level, what is the discussion among our dealers, and if you call them, I don't think that they are talking about cancellations, they are talking about deliveries. That is the situation. We see that on the used side also, by the way.
Just a quick question on working capital seasonality that have for Volvo always been extremely typical every year. How do you look upon payables, for instance, if you need, at some extent, some period of time, reduced production? Will we see similar swings that we have seen in the past?
As you're into, Björn, the seasonality, as you can see here in operating cash flow. Working at Husqvarna, we had a lot of seasonality because the sales is seasonal. Here we also have a seasonality more related to our production. As you know, we have vacation period in Q3, especially then in Europe. Then we are sort of paying payables and then get it back when we ramp up the production again, especially in Europe after vacation. That is a positive payable effect, which is also valid for the first quarter, where we start up the production after sort of shutting it down around year-end. Also the normally high deliveries, which we have in Q2 and in Q4, which is, of course, even more pronouncing this effect.
As you've seen in the past, we have strong quarters in Q4 and in Q2, and I don't expect that to change with the payment terms and the way our customers behaves, et cetera.
All right. Should we let one telephone caller on the line, please?
Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press 01 on your telephone keypad. Our first guest question comes to the line of Klas Bergelind from Citigroup. Please go ahead. Your line is now open.
Yes. Hi, Martin and Jan, it's Klas from Citi. A couple of questions, please. First on Construction Equipment, can you just confirm that the reason for the slower margin expansion there is not price cost, like we saw with Caterpillar? It's entirely because of higher production cost, which is pretty normal at this point in the cycle, and because obviously some slower service growth in Turkey, you're not seeing any negative pricing. Sort of related to this, the drop-through in construction is now below 10%. Could the production disturbances abate already this quarter, which will see the drop-through then accelerate again here in the beginning of the year?
If I start on the pricing, then I think we can confirm that we still see a solid pricing situation for construction equipment, more or less across the board. That is clear, and we are of course following that. We've had the positive price realization also, by the way. Having said that, I think also, Jan, you just said that it's mainly related to the production cost side, where one part is a non-recurring item that we took in the fourth quarter, and the other part, as you said, is the very stretched situation that we have now. Again, I have to say that given the continuous improvement in deliveries and in production increase, it was a little bit expected at one point in time. I think it's underlying still very solid.
As regards services, I mentioned Turkey, I mentioned an isolated dealer problem. Eliminating that, we would have been at 6%, 7%, more or less, as we have seen in the earlier quarters. No change of the demand of services underlying.
Very good. My second one is on track orders and thinking about Brazil, a very strong market, but weaker orders than I thought. Seems to be relating to capacity constraints, which should also be temporary. You have upped the market to 70,000 here, which I see as a solid replacement. When will the capacity in Brazil come on stream for you, which can reboost the orders there?
What we're doing for the time being is actually that we are increasing our capacity more from the global, so to speak, situation that we have on some of the mainly powertrain components, et cetera. We have a focus on that given the strong situation, as you say, in high activity level and positivism in Brazil regarding the transport sector. That is what we are doing as we speak, gradually.
We have both lived in Brazil, and we know how it is. It's not a slow increase. It's normally extreme, sharp decreases and increases, and now we are in for increase phase.
Absolutely.
My final one is on investments. We appreciate that the total cost of ownership parity versus diesel on full electric heavy duty is far out, and therefore you don't need to ramp investments in heavy duty EV. How about autonomous and connectivity? We've seen Daimler announcing pretty big investments recently. Maybe no R&D creep on EV, should we expect investment ramp on the autonomous side? R&D is going higher, it's in line with your previous communication. Should we expect a further step up from here?
If I start there, I think already as we have communicated, we have gradually moved our, so to speak, focus in the R&D portfolio into the new technologies of electromobility, connectivity and autonomous, also other related, so to speak, technologies and also in some research phases. We still believe that we have today good balance there. We see as Jan was into a little bit that in the coming quarters, because as we speak now, we are still going for quite substantial investments when it comes to the emission and the greenhouse gas regulations, etc., in North America, Europe, etc. Continue to focus on these new technologies that are also related, by the way, because partly that will be offset by increasing, for example, the electromobility population. We will see an increased activity level.
Having said that, also with the forecast we are saying now for 2019, we feel that we have a good balance when it comes to R&D in relation to sales. This is a super good investment for us, including EV, I have to say, because now we are launching, we were launching last year for both Renault and Volvo in Europe, also announcing that we will go for different applications for Mack and UD, as well as you saw later here on construction equipment. Good balance, I feel.
Of course, we are running the machine pretty heavy now, which means that we have some wear and tear and also that we are discovering bottlenecks from time to time, which we are removing. I mentioned that and also pointed at the replacement investment, which is the main driver behind the property, plant, and equipment increases. As I said, we will continue to see that with these volumes we have.
Yeah, I just want to come back to the, obviously fear among some market observers that there could be a big step up on EV, but it's obviously limited to light and medium duty rather than heavy, which is the majority of your business.
Yeah. Still that, Klas, I think it's also important to say what we have said, but reiterate that we are, to a big extent, through also the convergence into a global modular product system for our truck brands. That has been a pretty big proportion of our R&D investments over many years. It's easy when you buy something to say, okay, now you will have scale, et cetera. Left in the room for 15 years will be the engineers to get the act together. That has been worked on hard in the Volvo Group for quite some years to get the modular system that we can utilize now that platform, not only for the truck brands but also for construction equipment, buses and Penta, and that is what we see as well.
Thank you.
Any questions?
Yeah. Hi. Over here.
Sorry.
Mats Liss. Just a question here on Europe. You mentioned a tough comparison in Europe, and I guess the question is more like if you could say something about the pricing in the current order backlog, if you compare it to last year, and how it feels sort of–
Yeah.
–going forward.
Absolutely. Mats, as I said, we have focused on that in the good market conditions that we have seen in 2018 and also starting in 2017. We have seen a positive effect out of that, and that is, of course, included also in the order backlog that we have.
Looking at Europe, you see some, well, changes there going forward, maybe in U.K., for instance, and it's important market for you. Can you say something about the development there?
Of course, we have seen some signs of a little bit wait and see, and I think that is more than natural, if I put it like that, specifically with the type of equipment that we have, that you can wait a couple of months and see what will happen. No drama, though. Of course, we are planning together with our dealer groups, with our own organizations, since we have a pretty big captive organization in U.K. as well, both when it comes to, so to speak, the flow from U.K., but also vice versa. No drama, but, of course, the longer this drags, the more difficult, so to speak.
Finally, just about the emission-related charge you make in the quarter. Can you say something if it's sufficient or if you have any sort of–
Thank you for that. I think it's very important to say that when we went out with the press release in the 16th of October, we were clear about that. First and foremost, we detected it. We, so to speak, acted upon it. We saw this degradation over time. We were clear about that we have identified the root cause, and we were, so to speak, also very clear about solutions for different segments. What we have done since then, obviously, and our engineering groups have done a great job here together with authorities and customers to identify what is, so to speak, the risk population and how does it look like. Thanks to different kind of tools, not at least that we have connectivity, we have been working hard to identify, so to speak, the solutions and also the population.
I think we have done a good job to have as good estimate as you can get in that situation.
Okay, thanks.
Right. Let's switch to the telephone.
Thank you. Our next question comes to the line of Graham Phillips from Jefferies. Please go ahead. Your line is now open.
Yes, good morning. Thanks for taking my questions. The first one is around Jan's comment that there's good operating leverage in the truck business. I have to take issue with that because if I strip away the currency and the R&D capitalization, and that there was obviously positive price in that quarter as well, then you would probably have virtually nothing. I realize that there was European declines in volumes, and the overall volume deliveries were up 3% or 4%. Can we really be confident that there is operating leverage in the business given that? I know the cost dynamic on selling expenses maybe needs to be explained there.
Well, we were into that. You are mentioning the positive effects. I was also talking about a limited cost per unit effect and the issues we have had in especially this quarter, which of course limited a normal, what you can call effect of the strong increases we have seen especially in U.S. The underlying, and as we have talked about, now we come to a little more stabilized situation but on a high level. The stabilization in itself is good because the increase is a problem together with the high level. Now at least we can work from a more stable platform as we see it, which will be good for efficiency and cost and supplies as well. On selling expenses, of course, we are gearing up the machine. Part of that is related to the demand situation in itself.
Part of that is related to a higher activity and ambition level. That is something we see, and of course we can address it if we don't have the market, but we have the market. We will experience that in these circumstances going forward as well. Well, I think that's the big thing. What we can also say that even though we have raw material and our negotiations with supplier in sync, so we have limited effect for the full year, a certain quarter could be plus and minuses if you take a look at it. This quarter actually had a little more of the net was a little more negative than if you take a look on the full year where we are in very good balance between commercial negotiations and raw material.
In general, we feel that we have the operation being leveraged also on the truck side.
Graham, just to fill in here. All days in the week, I go for getting the lost volumes now with a reasonable, so to speak, even if it's a little bit lower leverage in the short term to get the rolling fleets out there. I should not sacrifice that for one minute in this situation, given that we see that we have a better service penetration as well.
Thank you. Perhaps related to that is that, the European volumes were obviously weaker compared to the U.S. There is a mix issue. Thinking into 2019, DAF last night on their call was saying they got market share ambition from 17 up to 20%. TRATON at their capital markets day yesterday, talking about MAN gaining share. What sort of market share do you need in Europe, given your volume expectations are down Europe 6% or so, in order to generate margin progression in this business? Because I guess we are going to be facing a weaker mix from Europe this year.
Martin here. To start with, I feel that we have been focused and we will continue to focus on to have, so to speak, the right balance between market share, ambitions, and quality in the business. That is most important because we are still talking about good levels here. I think that is the name of the game for us, both in Europe and in North America. While North America probably will strengthen because we also had a changeover, as you know, in Mack, for example, and we were still partly in the changeover of Volvo last year. We have also work to do there to continue to improve the situation with the production and supplier and the full value chain, et cetera.
We will continue now to optimize in both regions here, but we will not go into a race of the wrong type of market share. of course we feel that we have a strong offering, basically, and good relation with our customers.
I would just like to comment on the market mix. I didn't mention market mix in my presentation, and the reason is, of course, that we are with more, so say, in-house powertrain in U.S., gearing up our profitability in U.S. in general. we also had lower deliveries in Asia, and I was talking about Middle East, which is, of course, from a mix perspective, some sort of leveling out effect you were looking at.
Okay. Thank you.
To the room.
Hampus Engellau. I have two questions, promise you. Starting off with, if I remember correctly, on the Investor Day in New York, you presented a heat map of the profitability in trucks. If I remember correctly, there was some yellows on UD, Renault, and also North America. Could you, given closing this year, comment a little bit on changes in that colors? Second question is on the trend line. You're talking about 300,000 for Europe, which I think will be the fourth year, and North America, 310,000. Historic trend lines has been around 250,000. Do you see change in the trend line given e-commerce, or how should we think about your view on trend line?
Yeah. First of all, I think there is some in the—i f I start with the last one. I think the midpoint or the trend line, I think 250,000 is probably too low even without e-commerce, because you have also an underlying long-term growth in, so to speak, the trend line in itself, regardless of economic cycle. If I should guess on the old a sort of world where we should be given the GDP growth that we have had over the last 2007, 2008, even if it's a muddle through situation in Europe anyhow, maybe 270,000- 275,000. If we are conservative, we have said a number of times, if we are conservative, maybe the e-commerce as it stands can give another dynamic of 10,000. I think we are pretty conservative.
Means that the overshoot now is still relatively small in relation to what we saw in 2007, 2008, where we're talking about 80,000- 90,000 overshoot from the trend line. Maybe today we're talking about 25,000 - 40,000 or something. I think that is good to bear in mind and might be so that we are a little bit conservative on the structural effect of e-commerce and those parts. On the heat map, it will be a cliffhanger to the next Capital Markets Day. We need to have some things that will attract you guys. What we can say about that, obviously, and Jan said it, that all business areas have actually improved except buses. Buses mainly than related to some of the core markets having a lower general activity last year. I think also underlying improvement in buses, or we are seeing that now.
What I think is very important is not at least then on the truck brand side. If you take then that statement and think about our regional brands, if I may say so, like UD and Mack and Renault, the importance for them or their main regions, I think that is answering that question. If that will eventually change the color, that you have to wait and see to the Capital Markets Day.
Fair enough.
Let's take a phone caller.
Thank you. Our next question comes to the line of Peter Testa from One Investments. Please go ahead. Your line is now open.
Hi, and thank you. I've got three short questions, well, one longer. Just on the efficiency point and the cost per unit point, if you look at how the production and efficiencies are working their way through, I was wondering if you could give any kind of how you would expect the year to develop in that regard on production efficiencies, in especially trucks in Europe and trucks in U.S., and maybe how you think the construction equipment part will work its way through. The second one is just on Europe. Yes, you had a high order intake in Q4. You also had a high order intake in Q1 year-over-year in European trucks last year. You talked about the timing of booking of Eastern European fleet orders.
I was wondering if you could give some sort of color on how you feel about that Q1 base and maybe when those orders are being booked. The last one is just on the dividend and the decision to put the extra SEK 5 in, taken with the recommendation plus the board approval. If you could give some sort of thoughts as to how that number was put together, and perhaps, how you think about the fact that this is roughly equivalent to the annual cash flow of the company this year on a total Group basis, and therefore how we should think about your views and the board's views on the dividend power of the company going forward. Thank you.
Good. I think on the efficiency point, Jan I don't know if you would like to start, or?
No, I can jump in there. We are talking about the first half of 2018. We had some struggles and of course, we expect this year to be better in that perspective, then I referring to U.S. mainly. Of course, this is also very much related to the suppliers. Even though we are very close to the suppliers, we see that it's a strange situation. Of course, there we can have a bumpy road, and we are trying to mitigate that. In our plans, in our forward-looking scenarios, we see an improved cost per unit, but that is also up to prove for the coming quarters and year. That is related both to trucks and also to construction equipment.
If you could choose freely on how the outcome should be on the market, which obviously you cannot do, a stabilization of these levels should be healthy for us when it comes to, so to speak, really driving efficiencies when it comes to stabilization, when it comes to the logistical flows, when it comes to the sync between ourselves and suppliers, when it comes to working hours, et cetera. This is how it is when you've had a growing market. Again, I think it has been very important to take high quality deals, getting the fleet out, and I think we have done absolutely the right priorities. It should, with these forecasts as we see, be opportunities for us.
When it comes to the order intake and, so to speak, the expected situation in Europe, I think I would like to come back to what I said from the start here. We are guiding for a market of 300,000, and as Jan said, this is still a very good market. This is above the trend line. We feel that it's a stabilization on good and high levels. We see that in the activity levels. Even without these, so to speak, orders and the price increase, we are going in with a Q4 order intake that is some 5%-6% higher than it was in Q4 2016. That is reasonable when we see also the book-to-bill, for example, that was 1-to-1, now on high levels in Europe. I think you should think about our forecast and think about our market share, and then you have to do something as well.
We have a question here
Yeah, sure. I don't think the loss—
Sorry, the dividend.
—was answered.
Sorry. The dividend, sorry for that. On the last one, the dividend, I think I just said it briefly. The question obviously for management and ultimately for the Board of Directors and the AGM is to find the right balance. For us, in this type of industry, to continue to be in a position of strength, both when it comes to opportunities, depending on how different scenarios will play out, but also when it comes to having a good relation with the financial community when it comes to our financial services, when it comes to different scenarios, when it comes to cycle, that is number 1 priority. We should act from a position of strength. That is where we have the starting point.
We feel now also with what we are saying about the current climate and our improved performance over the last years, including not at least 2018, that we also have the room for a good return to our shareholders. That balance is the most important, and that was also the basis for the proposals from the Board of Directors.
Thank you. Erik Golrang, SEB. I do have a follow-up on the last one. What kept you from doing a bigger increase in the ordinary, rather than doing an EO and perhaps doing it in two installments?
Not go into exact details how the discussion went. I think it's a strength in a company to show that we are believing in an underlying improvement that we have been showing now a couple of years. We think it's also important to do that in a good and responsible way so that is understandable for the market. Also, we think that a good way of actually showing that we have a good balance when it comes to our financial position and acting from a position of strength, that an extra dividend is the right way to go. That was the proposal from the Board of Directors.
The second question, more of a, I wish to think about your comments here. You're talking about the very, very high activity level, which is pushing some costs higher, perhaps particularly on sales. We're also seeing your investments coming up quite a bit towards the end of last year. Be that as it may, high activity orders are still down in the quarter, and what you're signaling for 2019 is more of a flattish market, up in some places, down in others. Why are costs and investments creeping up here with what you're signaling is a stable demand situation overall, rather than an increase in activity?
First and foremost, I think you need to look upon it from a number of different angles here. What we have said is that obviously we have an opportunity with the stabilization also to gain efficiencies and take out certain ways that we have in the system regarding a very strange situation overall. Having said that, obviously we are keeping a high level of flexibility for different scenarios if needed. I think one of the things that we have shown also over the last years is our ability to adapt when necessary. North America 2016 was a case like that. Latin America has been proven to be a good case, Russia, what have you, the turnaround now with several of the truck divisions. If needed, we will take the necessary decisions to actually have a balance between, so to speak, our ambitions and the current market situations.
On the other side, when it comes to investments in the transformation technologies, we will not back off because we know that we are in a very good situation, and we have also made it clear when it comes to our internal planning that that has the highest priority for us to maintain also a very strong competitive situation for the future.
I think it's a good remark you're doing there, Martin. We are also creating flexibility not only in production, but also in administration, where we try to do things more in modules and stepwise projects, et cetera, to be able to—
Instead of big bang.
Yeah. Also to be able to go the other way if we have a market that is coming in that direction, so that we are not having these huge projects that are causing us problems if we have to stop them or if we have to delay them. Also, on demanding and such. So part of this is, of course, when I talk about selling expenses, is of course also related to higher services. It's not personnel only, if I may put it like that.
All right. More questions? Thank you very much.
Thank you very much.