Welcome to
the Volvo Group Q3 2018 Results Call.
Cerny Luth from S&P Global.
Before coming in to the results and our views of the market for Q3 and going forward, I also would like to give you my view and the latest update on the press release regarding degradation of the emission control components that we were releasing this Tuesday. As you know, and I will need to be take the background of this also. As you know, to meet emission limits in different forms, we have different systems for that. And in this particular case, we are talking about the engine after treatment system that is physically played off to the engine. And in this engine after treatment system, you also have the selective catalytic reduction system, the SCR unit, that is actually that I'm taking nitrogen oxide into nitrogen and water, respectively, by also adding urea or AdBlue, as it is called in our business.
One of the components in the SCOR catalysts have shown in some cases that the degradation and degradation in this matter is like if it was a mechanical component, a premature wear and tear of the light. And in some applications and segments and possibly geographies, we see that it might occur that the degradation is quicker than anticipated. This component is designed to withstand the whole life cycle of the vehicles and equipment. But in specific cases, we see an increased risk that it will not do so. And therefore, we have taken measures, obviously.
What has happened, it's also important to say that we have detected this in our internal monitoring processes that is ongoing all the time when it comes to the fleet in the field. And when we have, so to speak, come to the conclusion that we will have a risk of certain applications to be needed to have some sort of action. We have obviously also had a proactive contact with authorities and eventually also when we have and we have looked through this matter, disclosure that we did this Tuesday in your press release. I think it's important to say that, again, the reason now when we are doing this very thorough analysis is that it is, as I said, a very bare matter, and we need to understand the pattern. Where is this happening?
Why and how can we actually then make sure that we are doing these preventive actions in a good way together with our customers. We have already identified the problem. We have ringed the problem, and we are now, as we speak, implementing and will continue to implement solutions. It goes without saying, obviously, but I would say it anyhow that this is worked sooner with the highest focus, with the best exposure we have together with the concerned authorities. But it is important now, when we have identified the solution, how do we actually look at the full scope of what is really the affected population in this matter.
And that we are doing, again, as
I said, in close operation with authorities.
All vehicles and equipment are and have been, so to speak, on the right levels at delivery and fulfilling the certificates and then conformity of production. And therefore, production is also stable. And customer performance also when it comes to uptime, availability and performance features, it's also working as planned. And in the case, obviously, that a degradation has occurred in a specific unit, Volvo is together with customers, but Volvo is taking, of course, the full responsibility. I understand that all of you have been questions about this, want to know more about the details, etcetera.
But we have said it's very important now that we take this matter, of course, extremely healthy and that we are working with this with high attention, high focus, but also with quality as we can bring sense and come back to relevant stakeholders with the right type of figures. But again, on our own initiatives, a degrading matter, a problem that we have identified and solutions that are ongoing as we speak. So that is the update on this press release from my side. So by then, actually, we are moving into the next stage, and that is the Corporate 3 reporting for Volvo. And as you've already seen, it has been a strong and solid quarter for the group.
Sales continues to increase, and we are reaching a record level for quarter 3 of SEK 92,000,000,000. That is an increase of approximately 13% when it comes to sales, excluding FX, and an operating margin that we have seen 11 point 1%, both for the group but also for trucks. And trucks is good to see that we are getting the leverage that we have been talking about for a while here and a very good job done by our truck business area. We also see improvements in the other Non Truck business areas, so a strong quarter. Then when it comes to volume development, also in this case, I should say that we are rather satisfied with the volume development, plus 14% for trucks.
It was actually almost 40% for North America. And even if the supply chains all stretched and we are reiterating that, one should understand that while we are now increasing, obviously, new bottlenecks will be detected while we are removing other bottlenecks. That is the nature of the business. And if you think about the global industrial machine increasing 15% and certain regions, 40 percent. I think the organization has done a good job here, and we are concentrating efforts to continue to drive this together with suppliers that also in our internal processes.
Machine delays is also showing a good trend, 17% up, where FTLG is standing for 35% on the FBLG branded machine and 5% up Volvo. The story with development is also positive for us. We have 7% plus excluding currency, and that is a good growth rate, Of course, mainly driven by high activity level in the different regions, but also a strong focus on services in the organization. The contract penetration of repair and maintenance contracts, for example, is continuing to increase, and that is extremely important for us, as you know, also when it comes to our resilience through the cycle. But even more important, that is showing us that we have good and close contact with our customers.
Also, new penetrations when it comes to selected segments are given results here. For example, Volvo Trucks have been putting a lot of focus in Europe on the construction segment. That is also promising when it comes to the contract length of the 1st owner, not the leasing construction. As you can see, all different business areas are showing progress. And in particular, we are pleased to see the progress in Basel as well.
When it comes to trucks, I will keep it short here. The main centers to remember on this slide is the first one, good demand in key regions and the rest that we cover in the coming slides here. When it comes to innovation, a very interesting quarter. Obviously, we were pushing through this world premiere of what we call Viela. So she was shown first time actually in Berlin at our Global Innovation Summit with big interest, and some of you were there actually.
And we were very proud to show that this is a fully autonomous, fully electrical and fully connected unit for certain transport applications, primarily for fixed goods flows of pretty high volume. The starting point here will be that it could be operated fully autonomous but also for certain specific tasks that we control tower application as well. We are now developing the solution as such together with customers and other partners. And some of the features here is and that is interesting, by the way. We are talking about production flows because this is a typical tool for a production flow.
Speed is not the most important when it comes to average speed. We're talking about to 40 kilometers per hour. And that is maybe not impressive, but the impressive thing is that it can control it and even flow as you're talking about, for example, in a production environment. And then you can obviously the limitation is not the 40 kilometers, but we will have an even flow when it comes to that. Up to 42 tons, 200 kilowatt hour batteries range of 100 kilometers to start with and a full infrastructure and systems solutions and things.
So very promising high level of interest. Another thing that has happened this quarter, obviously, is the IAA exhibition in Northern one of the big trucks shows in the world every second year, where we actually also showcased a number of important events for the Volvo Group. We delivered 1 €1,000,000 message, a milestone for us, celebrating 25 years since inception. Big success for Volvo trucks. You can see on the upper left side there.
We introduced Volvo Connect. That is our new platform of connectivity where the customers actually can take their view of connectivity and group their, so to speak, features, applications, the Volvo applications but also applications from other partners. And that has been well received also when it comes to functionality and easy to use and easy to connect. VRI again, you see there, that was one of the highlights, obviously. We were introducing the new coach series for Volvo buses in Europe, the 9,700,900, and EBITDA 9 1,900 got the sustainability award of the year.
In the middle, on the download, full range of battery electric vehicles in distribution and weight collection, both for Renault and for Volvo trucks and also well
conferences about our view team. If I
come in then to our views of them, as you know, we are today revealing our first views of 2019 and forecasts. As always, we say that it's early days, but we are, of course, taking it from the angle we see now and also some of the macroeconomic initiatives we're getting in from around the world here. And we start with Europe. As you can see a little bit of uptick already 2018, meaning that the strong demand continues. And as the forecast for next year, we are guiding around 300,000.
That is minus 5%. If it's so early days to say. But what we forecast is the stable demand on high levels to continue. I've been discussing that before also. It is a good activity level when we read our customers, when we talk to them.
And also, the structural things happening in the market. For example, with e commerce, we also actually support that we will continue to have a good level of yield. North America continue also to be very strong. 310,000 is a continuous uptick then. And if anything, there is a pressure that it will even be stronger, but this is what we see for the time being.
And as you know also, a part of this has been hampered by the supply chain also in North America, which is also given a situation where the used truck situation is good now in the United States because capacity is needed basically. So also there, 310,000. We are guiding out slightly in Brazil. Of course, now we are waiting for the 2nd round in elections in Brazil. But the general, so to speak, sentiment in Brazil is that it will continue.
And as you can see also on this road, there is certain replacement need in Latin America and in particular in Brazil. So we currently think this is also a forecast of them. It has strong support upwards. It depends that in China, we are taking up 2018 with 50,000 units to 1,300,000 and next year, the full quarter, somehow declined approximately 150,000 units. It's a bit related to macro and tariffs and the general economy.
But also in our industry, after a number of very strong years, new legislations, the 3 buys, the transition into tractor segments, construction has been keeping up, etcetera. It is reasonable to think that you will have a stabilization on somewhat a decline here, but still very good and solid levels, obviously. And in India, we are continuing to see an uptick of approximately 25,000 units up to 425 for medium and heavy duty combined. When it comes to orders and deliveries for trucks, you can see a solid quarter, continue to be very strong when it comes to order intake. If I start with 28% up and if I start with Europe, positive to see that even that we have high comparison figures now quarter on quarter, We are moving north, 5% with orders and 4% with deliveries.
And also North America, extremely strong. I could assume, without knowing what questions you have in your back pocket, what is the quality of the order book. So maybe I should just take one minute or that. Sober when you're judging the order book, obviously. So what we are doing is that we take it pretty firm for the coming 2, 2.5 quarters, that we know that we have the right quality.
And the rest of the order book, we are actually revisiting as we are rolling it forward together with the customers and dealers. And that, I think, has been an improvement in our way of working. So we are actually revisiting and see what are the orders that are working and what are placeholders, etcetera. And so I think we'll have a good system on that. And as you can see also, the gap between orders and deliveries are still big here.
40% is still a good figure, I feel, for uptick in deliveries on North America. Also very strong in South America, both for orders and deliveries from low levels. But as I said, we see that the activity level is good here, both when it comes to the general cargo but also in specific sectors such as agriculture. Asia, orders down, and that is almost entirely related to Middle East and the 2 countries there, that is Iran and Turkey, basically, with the turmoil that we have seen. And in Africa, we're seeing that it continues on a good level here.
Market shares. Europe, relatively stable. We are sliding a little bit in Volvo. Depends a little bit on the market mix and where you have the mortgage tariff. We have also been pushing prices a bit.
We have been thinking that it's not been necessary now given the good mortgage situation as the question we've had done. Deliberately said that we need to find the right balance sheet. Still good levels of all, if you think also about the historical perspective. So I think they are managing in a very good way here. Also, the stabilization of some for Renault continues.
As we have said, quality in the business has defined focus and stabilized the market share of the organization has done a very good job here. And this is heavily improving. We see also good progress in medium and light duty for Enorm. North America, good progress for Volvo, keeping up with the pace in the market and even taking market shares. Good reception of the new V and L, strong order books, well received product when it comes to performance.
And 10.5%, obviously, there is more to go there, We are working hard on the supply chain. Mac, losing a little bit, not due to the introduction OEMs and that is super well received. We have all the books that is covering a very big bond next year. But more related to the changeover, obviously, to start with. But after the changeover, we really get the machine and the full supply chain, including our internal processes growing.
The organization is focusing a lot on that, and Marty Beiersberg and the team have all hands on deck to continue because the demand is there, and there is a huge excitement about the Mack Antrim. Good progress in Brazil. Also good in South Africa and Australia, where we are keeping very strong positions now that we have built out the last years. And in Japan, a little bit the same situation for Volvo Trucks in Europe. We are balancing, so to speak, market shares also with the performance in U.
D, where we see good progress actually, and that is the most important focus that we have had there. Construction Equipment, good market momentum, Europe and North America, and we'll come back to that. China is something, the growth rate slowing down. Natural, obviously, and I've already been into the reasons and very similar to trucks. We see more also coming now.
It started in wheel loaders, but we see it also coming in excavators. And all the intake overall good, 22% up and deliveries 17% up. Handwheel also a full electric compact excavator will be used in city centers, urban areas where, of course, both from an emission level standpoint but also noise emission standpoint, it's very interesting. And then on the next slide here, maybe you saw a little bit on that movie here, the electric side concept that we are stopping now to test together with Kamsikan. And we are doing that in Vikdanschos, that is one of the bigger quarry sites in Sweden.
Actually, situated it's well situated, I should say, at JPY 50. So from, so to speak, a technical and system perspective, we can work very closely together. This will be conducted now during a couple of months, really to test the full system, both with loaders. You'll see these fully autonomous load carriers together with hybrid wheel loaders and also with fully electric big excavators. And the aim here is to considerably reduce the CO2 up to 95% if we are successful and total operating cost with a quarter of 20%.
So very exciting probably to look into here and to follow during this form. When it comes to then the market situation, what you can say, Europe very quickly, we are guiding a little bit upwards for 2018. And then as you can see, we are forecasting a little bit forecast for trucks, a stable situation on high levels for 2019. North America, also there, we are gearing up for 2018 5 percentage points, so between 15% 25% growth. And then also, we are forecasting growth for next year.
And if anything, on that growth rate, we foresee actually that the growth will primarily take place on the heavy equipment in North America and maybe it's not so much in compact that we have seen historically or this year, I should say. China, again, upgrading total forecast for this year with 5 percentage points, whereas we, for next year, are talking about, yes, maybe minus 5%, a little bit coming down, but still on good and solid levels. If anything, we think that wheel loaders will be more stable and maybe a little bit bigger drop on excavators, but early days to really see Otherwise, I think Asia, following the same pattern as China, you can say, but also good levels, somewhat of a small, small increase, but still on solid levels. Let's see. There we have it.
Orders, yes, we have been into it, pretty straightforward. Strong order intake, 22%, driven from Europe, 53%. I should say, part of that has been driven by a pre buy in compact equipment upfront legislation. But still, if you take the GPE or the general purpose equipment, the heavy side, even in that sector, we have a growth of 22% in Europe. So Sweden, if you take away, so to speak, the pre buy, strong dividend, strong demand.
In North America, the same, very strong. It has been driven by some compact, but we see also the heavy side coming. And then, generally speaking, it continues on good level with
the rest of the world as well.
And delivery is keeping up. And there, we have had less problems or less challenges than we have had on the truck side. Now the truck side is keeping up here. And buses, good ordering take off, a pretty slow order intake in 2017, but also a slow year when it comes to channeling activities, not the lithium Nordic market, but also in some of the big countries in Asia. Now that is coming back mainly driven by U.
K, the Nordics and as a matter of fact, India. The deliveries decreased, but Jan will come back to that as we see that buses are doing a great job in compensating that through other factors. And I was in tools that we have introduced now 2 important coaches for the European markets, 9,900, 9,700, and we got this award. Penta, also solid, 8% increased order intake. If you evaluate the prebuy, and then you have high comparison figures already from last year, it is only 1%.
So the P by S phase is pretty big here, but still very high level of order intake also given productivity level already last year. Deliveries also continue to increase. And new features for all of us that are interested in having a nice vacation, obviously, with the new positioning systems, the active ride control decreasing, so to speak, the rolling feeling when we're out and also active corrosion protection when you're using tariffs actually take down certain type of corrosions. Financial Services also, finally, continue to be good. The penetration rates are stable around the globe, but financing of new businesses are reaching record levels and also with a very solid performance.
We have also been working actively to show that we are together with the customers when needed. That's also started this press conference. But also here with the hurricane in Florence, we are working together with our customers that are unfortunately affected by that in a good way. And we have also introduced a number of even more integrated offers with our different business areas. So we also hear very, very good progress.
So by that, actually, I will leave the call to Jan Guillaume for the financial figures. So please go.
Thanks a lot.
So when we talk about the financials and the figures are pretty straightforward quarter. I think also, we have to remember the 3rd quarter is usually, season wise, a pretty actually the weakest quarter that we have. And I think pretty proud to hear and say that this is actually the best 3rd quarter that we have ever had in the group. Looking into the sales sales, it's up with 21% for the quarter. If you exclude the currency effect, which is pretty substantial, as you can see, almost SEK 6,000,000,000 We have a growth of underlying growth of 13%.
And as you can see here, it comes really in all regions with the strong developments that we have seen that Martin showed before.
The operating income goes and here
we have adjusted operating income is going from almost SEK 7,000,000,000 the year before. Last year, we had a capital gain of SEK 400,000,000, that was excluded in these figures, up to SEK 10,200,000,000 this year, 11.1 percent operating income margin for the group. And we can see here that it's once again, it's always very fun to stand here and say that it's actually all business areas in the group are contributing to the improvement itself. So where we see that this broad based improvement continuous improvement that we have it in the whole group, I think we can be very satisfied. Obviously, here, I think we have gained quite a lot in the group by the fantastic performance that we've seen in Volvo Construction Equipment.
I think this quarter now, I think we really see here that Trucks is really taken off in this quarter compared maybe a little bit to previous quarter, had a good leverage in the truck operations Q3. One word about currency. That's something that you always want to
know a little bit about when
it comes to the future. When we look into the Q4, when it comes to the transaction exposures, taking away the effects from revaluations of the balance sheet, we foresee a similar size of the positive effect that we have had in this quarter, approximately SEK 500,000,000. And we don't do any forecast for debt when it comes to the currency effects. Do the same thing here
and see what factors that affect
the result. It is obvious about volumes and, of course, a better capacity utilization in our factories. Anyway, I think what is it has been good development over the year. We started to see it in the 1st quarter when it comes to how we work with price and price management. Of course, given the good demand that we have, the bottlenecks that we have in our production, it is, of course, important to work with that side of the commission.
We saw it gradually coming in, in the Q1, more pronounced as so in the Q2, and it continues in the Q3 as well. Good and solid bond from vehicles but also in our service operations. Material cost is, of course, same thing as we have had before. We are struggling with lower fuel prices, also effects from tariffs. We talked about that before, especially regarding North America with the tariffs on steel and aluminum.
But we at the same time, the good work has been done within our purchasing organization. We've managed to offset that more or less 1 to 1. As a matter of fact, we have a small positive effect if we're net the work that we do on the price side with the raw materials. And that we see going forward as well, the ambition has been to offset the raw material with the work we do on
the price side. Then we
see here that service sales is, of course, improving our results quite a bit. It is an important component, both in good times, but of course, especially when you come in down first because that's a very, very good cushion to have for the results. We see that also we are held. We are in a situation right now where we capitalize more than we amortizing in our P and L. And if we here also look for the forecast for the current quarter, it is approximately as an effect of SEK 500,000,000 for Q4 that we foresee, higher capitalization than amortization.
The D and D things that are, especially on the negative side, selling expenses. So we are growing as a company. We have a higher top line. And of course, there are things and factors that increase our selling expenses. We are very careful on whether we add on these costs that we have here, try to keep them as flexible as possible.
So if and when the downturn comes, that we have the flexibility to take care of that. It's really important. Hard working that in the organization for the time being. And then as we have said before, when it comes to the cash underlying R and D expenses, they are gradually coming up here, and this is according to plans that we have made in 12 years. And they will also, in a cautious way, continue to deliver outwards as well.
Cash flow. 3rd quarter is season wise the weakest quarter we have in terms of cash flow. So from that point of view, maybe not so much to say about it's more or less on the same level as we have seen in the last couple of years actually. I think it's anyway worth this is an area that we are not 100% satisfied with. And this is, I would say, especially on the inventory situation.
Now when we come into the Q4, it's a high focus in the organization to basically secure that and get out of the inventory. We have adjusted good market that we have out there, high demand and so on. We need to continue to keep high focus on that. Part of the problem here is, of course, when you have
have the disturbances that we still have, and
I will come back to that on the truck operations, the disturbances we have on the supply chain, it means that we you have a little bit higher inventory. You don't have the perfect efficient organization components. Our standard isn't longer than what it should. You can also, from time to time, miss the delivery slots to customers and so on. So it's not efficient.
But it's definitely more to do there on the inventory side. The payable side is kind of a seasonal effect that we have every time we install a quarter before we start to ramp up the production. Truck sales, delivered trucks, as we said, strong growth, almost 40% in North America Europe, 4%, as a total, 14% and total sales, when it takes away the currency effect, is 15% Services, 8%. And all of this, if you are lower, 5% in Services, if it's not to go up to 10 in this type of business, it's really good low base that you have. And in total, if we take away the currency, 23% up in sales.
The
here, trucks, as I said before,
we are so happy to see now that we 11.5% in the 3rd quarter, good leverage
as well, approximately 22%, which I think it should be actually on pretty normal circumstances. It is good leverage for the truck operations. SEK 4,200,000,000 up SEK 6,800,000,000 on the margin and going from SEK 8,500,000,000 to SEK 11,100,000,000 As you can see here, it's basically the same explanation factors when it comes to the good and positives and the minuses on the other explanation. That is so big, of course, in the group. So that's why it influences the whole group as well.
But it's worth to mention here,
we do still have we
are not perfectly fit on our we still have constraints on the supply side. We are not 100% efficient. The reason why we don't mention it here is that, that was the situation in the Q3 last year as well. So you can say the increased cost level that we have still have in the Q3 this year is more or less on the same level as what we had in Q3 last year. But you can say the elevated cost level that we have is not done yet.
So the machine is not 100% ticking as it should do. And on Contracts Equipment, 17% up in delivered machines, 16% up in currency adjusted in terms of sales. We have here also services 6%, healthy levels. We see also a pretty good market product mix as well. Large and medium machines up 19%, smaller growth rate on Compact.
SD and G is usually actually a negative thing on the product mix because we have pretty healthy profitability right now in China in SDLG. So that would affect us so much on the mix side. Here, going from SEK 2,000,000,000 up to almost SEK 2,600,000,000, an increase on the operating margin almost up to 14%. Same story here as we have seen before, managed to take care of the growth. We see that, of course, sales service sales and the capacity utilization is helping us on profitability.
Leverage of approximately 16%. We maintain also the cost is in the available construction equipment, which I think is very good and it's, of course, obviously important. When we have taken all the measures and rightsizing of what we see to be able to take care of the good increases we see on volumes by repaying in cost is important to us, very well. Then maybe a question on why don't we see the effect of the we sold some property in the Q3 in the Q3. Year over year, it's not the difference because we sold a dealer in the UK last year in the 3rd quarter as well, exactly the same effect.
But we had SEK 200,000,000 in this quarter. But if you compare the result, it's not an explanation factor quarter over quarter. Buncees coming down in delivered volumes, as Martin said before, of course, and also affected our sales with almost 20% on the vehicle side. Very strong service operations. And I think it's due to the fact that we have the service operations that we managed to increase the profitability from in terms of operating margin from 3.3 up to 4.4.
Percent. And I mean, as we said before, high focus now to lift where we said that we want to have Volvo Buses at the start about 5% stable. That is the first thing that's important. And historically, I think buses have been more on level of breakeven, taking it up to 3.5 percent, got a little bit stuck. Now it's time to move on there.
And it's a lot of hard work being done here. I think also we have currency effect is helping us, but I think this is the entity that has managed to have negative currency effect, I think, 4th quarter in a row. So it's a little bit of a positive currency effect. Penta, I mean, yes, fantastic result, 19.6%. I was joking with this Penta organization a little bit.
You currently manage to take it up to 20% if you always miss another SEK 13,000,000?
It would have been nice
to have it, but I think that's maybe the only thing that we can complain about, if anything. But I mean, it's just a great result, obviously, by deliveries of engines, but also very good service development. We have a good product mix,
a lot of heavy engines, big engines, 60 and
Eaters going on to the market. So and of course, as you see here, it's not over €600,000,000 for Panpla. It's not that long ago that, that was actually full year result. Volvo Financial Services. They are also continuing the journey.
We are obviously to the strong markets that we see right now, North America, also the fact that Brazil is cutting back and China as well, the decrease in the portfolio quite a bit. One year ago, it was SEK 125,000,000,000. Now it's a little bit above SEK 140,000,000. And as I said before, we see more or less growth everywhere. Operating income above SEK 600,000,000, strong and healthy portfolio continued to deliver on return on equity.
Once once again, it's all the result from all the financial services. And by that, Martin, we'll come back on stage. Thank you.
It is time to open up for questions. And we're going to take a chance. We're going to start on the floor, and then we'll take your questions from those who are participating over the phone. We would like to begin.
Thank
you. Garry Korda on SMB. I have two questions. The first one, to follow-up more questions on this. But you'll see, you got one from me on the diesel estimating component.
And my question is really, to the extent that this leads to a material charge or a final way, would you expect that if this isn't resolved or if you haven't been able to estimate the
cost of this before you propose a dividend for this year,
will you be citing this as
a key reason for holding back? First of all, I think you should divide those 2 questions. First of all, obviously, I mean, you know the cycle of our discussions regarding dividends. And I mean, normally or not normally, it will happen this time as well. The board and obviously in discussion with management will propose something in relation to all the 4 things.
So I mean, that is where
we are when it comes to
the time line. And then when it comes to, so to speak, the regulation now, I think it's important to understand that we understand the root cause, and we also know what solutions we will we or and we will put in place. This is a degradation over time. This is something that is happening at the Libri or something like that. So what we are working with is to understand what could be the potential population in those effective statements and applications and geographies.
And that we would like to be precise that we should be when we are giving a figure. But we have the odds around this situation. And the details that are out in the market is working accordingly, obviously, to the demand that is in the market. So I will not speak late today about the time line. But of course, we are as eager as anyone else to really clarify furthermore.
But we don't want to do that without quality in our message, so to speak. And that is going to
be necessary today. So we will not wait if it's not necessary.
Then the second question is on Renault in market share in Europe. It's up a bit, but it seems as if the progression there, the recovery of lost market shares from Italy is moving relatively slower than you've been targeting. What's the reason for that? And could you do anything to speed it up? I assume you
do, but what's the whole impact? No, it's Dan.
No. To put back this, yes, I think it's important to say that the first and most important was to really stabilize and stabilize level with good quality in business because we have a great product offering, we have great service offering. And the good news is that in the key markets of renewal, we have done that in a good way. We are actually steadily increasing in those markets. What we need to do now is step by step also come back to certain key markets where we actually did lose
some market shares and that we're working on. But we will not do that to
the expense of the quality of the business we got that has been hurting the Renault organization before. And now when we are standing on 3 solid legs because here, we're talking about the heavy duty of just up to 9%, but we are also making progress in the medium duty. And we
have a very good progress also on
the light duty. So if you really put the activity at the round really well, I think we have good progress according to plan actually and not to the extent of making bad choices when
it comes to the profitability program.
Thank you. Let's take the first caller we have online.
Thank you. Our first question comes from the line of Klas Bergman of Citi. Please go ahead. Your line is open.
Yes, I'm Martin Engevan, it's Klas from Citi. A couple of questions, please. Firstly, the guidance on Europe. So you have another 300,000 a year when we look at 2019. I just want to understand the reasoning.
We're seeing trade volumes peaking, cost inflation building for the carriers, which is diesel up, which is up. And that could put pressure on carrier profitability. And then fleet age is now below 5 years, and replacement cycles continue to be over. And so 300 ks to me can see a bit of a stretch. If you could comment there, Marc, in a bit about how you think about Europe.
Yes. And it is the same message that we have had before. And we I agree that there are also elements in the market that obviously can put pressure on the forward profitability. But having said that, we should also understand that they have historically good profitability level when we talk
to our customers, and that, I think, is also a good starting point also
ATA, if I could turn it back. And now the factor that we have seen is that a big part of the I mean, we have almost anticipated that it could be even higher volumes already this year. But one thing that has hampered that growth rate has been the lack drivers actually and really to find out the type of solutions. So I think there is anyhow a pressure that volumes will continue to because you have some structural measures also, as we have said, for example, with e commerce, etcetera. So if the midpoint in
the historical
trend line should be maybe 170 by 180 or 270, 275. I think we all I think we all rather a capital of percentage points higher given the structural change in Europe also when it comes, for example, to ecommerce. So again, when we look at a given level, when we look at our mileage from different stores, the connected trucks, etcetera, and when we talk to the I mean, customers, not auto customers, customers. Yes, some sort of stabilization that we have guided for, but still we are forecasting virtually solid levels.
Okay. My second one is on the drop through in trucks, the operation of gearing. So yes, well done. Now almost firing on all cylinders. But I'm interested on in what can happen on the way down, obviously.
I guess, particularly on the service side, if we see demand falling, deliveries might be stable next year as you guide, but orders are facing a very tough comp, particularly in North America. Can you remind us all how the service business worked in North America in 2015, 'sixteen when vehicle orders were in free falls? And North America often used for you as an example of how you improved profitability versus the previous cycles. Any word on service development in the downturn now? That would be very helpful.
I think North America, I think we as an effect of our strategy to go more and more for captive drivelines, and obviously, the fleet that is increasing, and there's more and more captive engines and gearboxes as well, we managed very well through the downturn between 'fifteen and 'sixteen actually. If you look at both historically in Europe and other parts of the world as well, as a matter of fact, service is very stable in downturns. Maybe not continuing to grow, but do you please detail at a stable level? So we are convinced that it will be a very, very good support if and or when the market turns down.
And referring to your point, Axel, I mean, 'fifteen, 'sixteen and the downturn, one important part where we why we continue to stay in back in North America was thanks to the increased penetration in services captive. Captive powertrain but also that we have been working a lot with uptime centers, etcetera. So when we I mean, when you look at North America, I mean, we have a market share maybe 20%, 25% due to lack of pay capacity historically. Our dealers are continuing to invest in new workshops, a new base. We are more efficient in turning around, so to speak, the vehicles through this uptime certified uptime day concept where we actually are decreasing turnaround time dramatically.
So I mean there is a
lot of very specific activities ongoing that makes us taking back the market share of our own fleet of Volvo and Mack.
My final one is on the changeover in Mack. You say a very strong order book booked out for entire next year. So obviously, when the transition is over, Nanten starts to deliver the market share, in theory, should jump quite a bit there. When do you think you can see a more normalized situation? Is it on this side of the year?
Or do we have to wait until the Q1 2019?
First of all, maybe you over read before I said, I'd say all the book is next year,
but it's a considerable part of next year, I should say.
And that is good enough, I should say. I should be even more worried if it was the whole year actually given,
I mean, quality in the order book.
But having said that, this is, as I said, for Weisberg and the team over there, the main priority right now. As I said, the reception of the vehicle is great, high margin, not at least on highway execution. So when we previously with Pimnettler, we have had a pretty weak offering actually. So full focus on that. And I mean, we are continuously seeing, I mean, an improvement.
I mean, if you see year over year, we have increased also MAX. I mean, we are improving, but it is a tough situation right now with the competition among everyone to get the attention in
the full supply chain here. So my main problem is that this is full focus. Anton Langer, Handelsbanken. I have two questions. Starting off on the European orders setting quarter.
And there was a big difference between the OEMs in terms of order growth. You have Skane and Volvo reporting negative orders and Baimler and Mann was out quite a lot. And as I understood, there was a couple of large orders in Poland and Germany. So I was wondering if you could shed some light
on the order activity in
the 3rd quarter, given that you reported a 5% growth in Heavy. Then based on coming back to Europe, if you could talk also a little bit about current situation regionally, Central versus Northern and also submenu because there's
a big difference in aging there if
you look at some replacement back in the southern part of Europe. Yes. I just thought with,
I mean, the difference in 2nd Q3. When we look at when we look upon it and here, we have been working, I mean, for a couple of years now to have a good quality in the order book and really see what is happening, etcetera. And as you know, we have a big active port, obviously, on the order book side also. So we have good control of that. And I should say that when we look at the quarter 3, and that can also include the region, we have a relatively good spread both when it comes to segments, customer sizes and also geographies.
So and also, when we look at the FTU situation actually in Europe, stable and solid. So generally speaking, we feel that the good activity level continues and not specifically for certain Videos or customer segments.
All right. Let's move back to our callers.
Our next question comes from the line of Graham Phillips of Jefferies. Please go ahead. Your line is open.
Yes, good morning. A couple of questions, please. First of all, just back on the NOx issue. Can you give us a little bit of GMR, and please, you said you're implementing solutions. Is it via software or hardware fixed?
Has this caused some similarities with what Cummins had to deal with back in August? And when you do have to account for this from a financial perspective, will it be something that will be in terms of higher warranty charge, will be a one off number in a quarter charge against trucks? How should we think about that?
Yes. When it comes to so again, as we said, I mean, this is a component that is originally designed to last over the complete life cycle or life length of any vehicle or machine. In some specific cases, we see that there is a risk of not doing so. And in that case, it's not about software. It is about hardware, and we need to upgrade that and replace that in that case.
There are different types of solutions to do this all depending on the segment. And I think, again, what is important for you to understand, it's an isolated problem that we understand. We have solutions to put in place. And thereby, I think you should more think about that as one off rather than going wholesale. Okay.
And so I mean, again, did you look at
the current situation and where they had to make a similar fix, I think, on their end in the U. S?
We did look at the current situation, obviously. We look at all competitors in all different matters, but I have no specific comments to Canals. We are working on our issues, but we are, so to speak,
proud about is that we have
been very transparent. We've tested it internally. We have disclosed it. We have had the right context.
We are taking actions. So we
are taking our responsibility when it comes to our customers. And
we have a good view on both the problem and the solution. And that is what we are focusing on.
Okay. So my other question was on the top fare margin in trucks. Can you give us an idea of pretty much the R and D capitalization? How much was the R and D capitalization to truck, pretty much all of that. And given that the numbers coming out quite healthily, it looks like about 27%.
And there's more to go for, as you commented a couple of times about the leverage. That means on flat volumes, in fact, we could be looking into next year maybe at a higher drop through margin?
Starting with the capitalization, the majority of the capitalization that comes obviously for trucks actually. So I think it's more or less virtually everything that is related to trucks. I think what I said was that, I mean, we still have disturbances and increased or elevated cost levels due to the fact that the supply chain is and it's both internally and externally. It's not working as it should do in normal circumstances. So maybe there also with a little bit more on a stable situation with these high growth rates, I think there's room for improvement an efficiency point of view if you look ahead.
So I think all other things being equal, that's the healthy for our margins and what you call the drop through.
And could there be more
capitalization in 2019 compared to 2018?
We always we guide for the next year in terms of capitalization when we come to Q4 actually. So I will not go into that today as well as we don't do that for currencies either.
Okay. And just finally, looking at the Volvo book to bill situation in North America, very high, 2.3x. Again, you made the comment about the quality of the order book. I mean, are customers prepared to wait that long for a truck and they're ordering and they can see that it could be maybe into 2020 before they'll get a vehicle? You're not willing to add capacity?
No. But I think, Graham, to your point, and that's the reason why I also said that, but I mean, you have a mix in the order book over, I mean, firm orders and then you have certain place orders. I mean, some of the details, for example, we are working with. They want also to make sure we know that they have a certain need over the year. That can vary a little bit, but I mean the basic need of the baseline is already there.
And then we are working with them on that so we can distribute that over the year. Then what we are doing is that when we are rolling the order book ahead of us, we are also going through that month by month, both of all, well, Mac and not only North America, by the way. This has been one of the prime focuses over the last years to really get the relation between the order book, deliveries, production and the value chain much tighter than we have had historically in the group. And that is given results. But I mean, I think you should think about it as a reflection of confidence also into the market, both from dealer but also primarily from customers that know that they need capacity.
Okay. Thanks so
much, Lars.
Jan, Deutsche Bank for coming back to this. But on the NOx situation, you keep telling us that it's a that you identified a risk that some to some components. So are you telling us that you have not had trucks out on the streets being on the wrong side on what the regulation says? What we're saying is that this is a degradation issue that can happen over time. And in certain issues, we have already changed the books.
And now we are much more in-depth analyzing why did that happen, very small big numbers of that. But why did it happen? Because there can be a number of different courses to that, everything from mechanical failures to this type of degradation. And again, what we are saying is that if that is happening, we are changing, obviously, because we need to comply with the limits that exist on the market. But when
it comes to the disclosure and discussion about
the figures, again, we would like to be certain about the magnitude. So we have serious response to the market instead of guessing, and that is what we're doing right now. And on coming back to a potential slowdown in the market, across the service side, what are the big changes from last time went south? What kind of actions can you implement? Or are you looking at?
I think several a number of things here. Reaction time is the key here. And now I'm talking about general, so don't take this as we are having time. This is going down. We'll also always leave to say.
But I mean, if the sales organization is minus 10, then triple it when you are down to the production. I mean that is how it works. You need to be bold when it starts, and the reaction time is number 1. Number 2 is that you have the flexibility in the system as such and that we have when it comes to terms and fixed contracts and also
the flexibility in our value chain together with our suppliers. How does that differ
from last time on the No, but I should say that not only in figures because that is not different so much, but also the preparation where you have flexibility, we really can take it out. One thing is that you have, I mean, a mix between fixed and temps. But another thing is that the consultants or the variable costing in manning can really be taken out from the system, and that's
where we'll be working with
a lot. And again, I think that both Brazil, the downturn, North America and also the modern construction equipment case has shown that we are capable. And we are humble, and we are looking at this all the time. So we have a good preparation number. I don't know if you want
to add something. As I said before, I mean, we see obviously some cost increases in some areas. And what we try to do all the time now, make sure that what we add on now is really flexible when the downturn comes up. We are also mapping that quite carefully. So coming back to your point, from experience, reaction time It's actually a pretty big thing because if you wait too long, you don't have to write signal, then that is also if you are prepared, know what to do, act in the lifetime.
And also, if you see things starting to happen a little bit bigger, take a pretty abrupt thing because it's usually the best thing because people are always a little bit more optimistic than what you think. And the other thing to the point that
you answered, I think also the potential shift, I mean, the centralization gives also there. I mean, that is automatically also giving closer signs to
the organization that you really take
the decision out in regions or in the brands and really act quicker because I mean the accountability is there to do so. So the only proof in the reporting will be when one day that happens and we can show that we can do it.
We are prepared. We are prepared.
All right, sir. Please go ahead.
Thank you. Our next question comes from Jose Asumendi of JPMorgan. Please go ahead. Your line is open.
Thanks very much, Jose, JPMorgan. Just want to come by the end of the year, if that is all going to happen or not? And then 3, can you just give us a figure on the reduction of fixed costs that you've done in the European business in this cycle versus the previous cycle. The second element would be, please, around your product mix. It looks like on orders, air trucks are definitely suggesting about 3% to 5% improvement in product mix going on to the next quarters.
How sustainable is that share of heavy trucks in your business model? If you could just give some color maybe across regions. Obviously, you haven't seen yet the impact of nothing in the U. S. Long haul.
Thank
you. Okay. On the first, Cecile, I think it's a little bit exaggerated in
the policy
downturn. What we're saying is that we believe now we're guiding up from €310,000,000 to €315,000,000 for this year. And that is really the fine tuning when you're coming at the end of the year to see where it will end. There might be some small correction of that in 2018. And then what we are saying is that next year, like to be on a stable and good level, 300,000.
That is I mean, if you calculate it in an Excel sheet, then minus 5%. But in reality, that is what you're taking with the flexibility you have in your production system as it is with banking hours and also the pay down. And given that type of stabilization to -5 percent and beyond that, obviously, we have the flexibility needed and beyond that as well, absolutely. And then I was not really sure about the second question, Jose, if you can just repeat what you meant there.
When you look at orders and deliveries and you look at the share of heavy trucks within your business, it looks like it is suggesting that the share of heavy duty within your business, both on deliveries and then on invoicing going forward, will take an additional bigger share within the truck division. And this, obviously, I think, is an element that could be a surprise for investors as we continue to deliver record Truck margins over the coming quarters.
I think in the end of
the world, I think there's a broad mix element also coming through for you on the truck front. Is this a level you think is stable? And obviously, we have not seen yet the impact of long haul MAX yet.
Okay. Now I understand. Thank you for that. Yes, if anything, you can say obviously, 2 elements of that. Historically, it has been a drag for us, if I am very clear, to have the mix into North America regardless if it has been a heavy duty.
The good news is that we have constantly been improving that situation for North America. So the first answer to that is that an increased share in North America is not necessarily bad to us. That has been historically but a good situation. The second part is that when North America is increasing, by definition, that is heavy duty because we all only into heavy duty when it comes to North America. So if you look at cost, the share of heavy duty in relation to others will increase.
Thank you.
All right. Let's take one more from the room.
Yes. Hi, Nathalie, Coming back to the emission issue there, could you say something about the geographical mix in those probably? Is this more in U. S. Or is similar to in Europe
as well? We have said that it is a segment in applications both affecting North America and Europe. But again, also that is what we are working on now to really understand the patterns we see. Since, again, this is where and fair over a pretty long time period since we have little reasons also, by the way, those demand that it should withstand through a long period of the life cycle. So that is exactly what we're investing.
And do you use
the same supplier for all your engines? Yes.
I mean for the time being, we are not commenting on, so to speak, how the supply chain looks because what we feel is very important now is that everyone that is part of this really take the full focus of working together to have a good grip on the situation, make sure that we are, so to speak, or solving or understanding better the population. As I said, the root cause and the solutions, we understand again. But now we need to continue to understand the pattern. So we proactively can make sure that the customers can run their operation in good moods, so to speak.
And then a quick one on China. I guess for on track, there are some emission tougher emissions that's coming out in 2020. Do you see any pre buy impact already?
It could be. There are 2 elements, Ahmad. First of all, 20 CN6 or equal to Euro 6 is coming in today in China. But what is interesting is that the biggest issues are not waiting for that because they have so high demands on complying with air quality. So many of the biggest issues actually are demanding that already from mid-twenty 19, which means that we foresee certain type of rebuy already in 2019 for the bigger cities.
Operator, please go ahead.
Thank you. And our last question from the phone comes from Alok Kaffray of Societe Generale. Please go ahead. Your line is open.
Hi, thanks for taking my questions. I just had a couple really. One is on the U. S. Now.
Just wondering if you could elaborate a little bit more in terms of how, let's say, your thinking has developed for 2019. Just looking at how strong the ordering rates are and even if we sort of adjust for some speculative orders and a bit more normalization of the order rates 310 or let's say a bit more than that still seems a bit, let's say, soft than what the orders would suggest. So just wondering what is it that's driving your thinking around the 310 or let's say, you're going to 320 or whatever it is for 2019? That's the first. And then I have a follow-up on the R and D.
Yes. If anything, I mean, as we said, of course, we have a very strong both order book, to your point, and also a continuous order intake. And I agree, even if that could be, I mean, some case orders, as Sven said, I mean, we foresee with activity levels we have now strong 2019. And as I already said also in the presentation, if anything, €310,000,000 could be, so to speak, the so to speak, the supply chain, generally speaking, keep up with this high activity level. So yes, we certainly agree that and get discussed that where should we put the full cost here.
But we want to be guided that it's a continuous good market that will move more and then the fine tune is still to be seen here.
Right. So the supply chain supports then I just wondered again just on supply chain side. I mean, clearly, if the supply chain is geared up for 300, then 310 seems like a small jump or even $325,000,000 seems like a relatively smaller jump. So what's really I mean is it just visibility that you have at the moment? Do you want to be a bit more cautious going in or really
Yes. I think the main message there is really, as we said, a strong solid market right now. We are not seeing any signs that, that should soften off when we talk to customers' activity levels, when we look at the connected activities, when we look at the order book, etcetera, when we look at the changes in the market driven, for example, by e commerce, There is a lot of signs, but so we have guided for €310,000, might that be on a little bit lower side, might be so, but that is the fuel guide for the time being.
Okay. Fair enough. And then just on the R and D side, and I appreciate you wouldn't want to dive in FY 2019 overall. But just wonder, just conceptually, how should we think about the capitalization versus amortization cycle as we look into the next 12, 15 months or thereabouts? Because obviously for this year, it's probably looking more like a $1,500,000,000 tailwind, that's 40 basis points roughly on the margin.
So just wonder how we should think about where we stand in terms of the capitalization versus amortization cycle,
so to speak?
I think after careful consideration, I think I gave the same answers before. We do not yet guide for 2019, so we're not I will not do that today. We always do that when we come to the Q1 actually. Okay.
Fair enough. Thanks.
All right. That's a wrap up. Thank you so much for coming today and see you in from our side.