I would like to wish you welcome to this presentation of Volvo Group's results for the second quarter 2018. We will start with the presentation of the President and CEO, Martin Lundstedt. After that, the Deputy CEO and CFO, Jan Gurander, will be joining on the stage. We start with Martin, and please go ahead, Martin.
Thank you very much. Thank you, Joakim. Good morning, everyone, and most welcome to this second quarter reporting. I'd like to take the opportunity, actually, to say that this was the last time for Joakim Kenndal as press officer for the Volvo Group presenting here. Joakim will move on to be head of communications for Group Trucks Asia and joint ventures as from mid-August, actually. Congratulations to that and good luck. With that, I would also like to say that I'm a proud CEO standing here today, and have to say that all our colleagues in the Volvo Group has been working really hard and I think they've seen that it has been a good result also quarter two here. Really pleased with the hard work of all colleagues in the group here. Go through a little bit of the presentation.
Second quarter, good increase in the net sales. First time ever, we were exceeding actually SEK 100 billion in sales, up SEK 16 billion, 16% if you take away currency effects. Adjusted operating margin, also SEK 11.5 billion, and that is excluding the capital gain on the NHL shares that we were selling during quarter two. Trucks, adjusted operating margin of 11.1% and Volvo Construction Equipment, 15.1%. Really solid development for the two biggest business areas. If we look a little bit into the volume development for the group, for Trucks, +15%, mainly then related to North America, +32%, and also South America, but lower numbers obviously, but they are +43%. In Europe, +3% also reflecting the situation that we are seeing now a stable development in Europe on high levels.
I will come back to that also when we talk about the order intake and how we are looking up on that moving forward here. Also, the machine deliveries, very strong development, +38%, and that is 19% up for Volvo and 66% up for SDLG, then showing also the very strong development in China, but also solid development for construction equipment in all different regions here. Also what is very positive to see is the continuous growth in our service sales. Something that we have been talking about as one of our key focus areas. As you can see now, over the last two years, development from SEK 16.5 billion in quarter two up to almost SEK 20 billion. That is obviously one of the areas where we'll continue to have a strong focus.
Part of it, obviously, thanks to the high market activity and the utilization of the rolling fleet out there, but also a big proportion thanks to also activities within the different business areas to increase the service penetration, service contracts, and also other type of products. I will talk about one specific product when I come to Volvo Financial Services, also driving this type of development. Very positive to see, +8% excluding FX quarter-on-quarter, and that is obviously a very strong development. Having said that, which is interesting, is that even with this strong development, it is lower than the overall +16% excluding FX. If anything, the relative development here has a diluting effect, but still very good development for also giving better resilience for the group moving forward. On trucks, good demand globally.
We see very strong markets. I will come back to that more in detail. We have also seen a stabilization when it comes to the supply chain in Europe gradually. As we have been communicating, when we were standing here one year ago, then it had been more apparent with the different bottlenecks, primarily in the European system. Gradually, we have taken those bottlenecks away, and we have seen a stabilization. Having said that, Europe is still in a stretched situation, obviously. We have high demand, and we have high volumes out from the European production system. We see a clear stabilization there. It continue to be very stretched in North America. Primarily now driven actually by the difficulty to find labor in North America for our suppliers, T1 and T2 suppliers, and we are working with specific programs there.
We can also see that this is something that is not Volvo specific and not even industry specific, but more of a general thing that is happening in North America for the time being. Also very positive, a number of new products launched during the quarter, and also that the FH, the iconic FH for Volvo Trucks celebrating 25 years also. That has been part of the success story for Volvo Trucks over the last two, three decades here. When it comes to the product launches, following then the reveal of Volvo Trucks, both with the FL and FE for distribution and waste collection and other type of urban applications, Renault has also now revealed their outline for zero emission vehicles, starting with the Renault Master in the light commercial vehicle segment, up to 120 kilometers autonomous drive with zero emissions.
That will take place during the fall 2018. Following also with launches in 2019 for the Renault Trucks D series and D Wide for applications up to 26 tons, so medium to medium heavy duty applications and a range up to 300 kilometers autonomous, showing that we are continuing to build on our modular system, starting from our bus operations, moving into Volvo Trucks, Renault. Also during the quarter, we actually were communicated that we will start also test in North America together with one of the biggest customer, New York Sanitation Department, on waste collection for Mack Trucks as well. Another very important event that has taken place is that we have shown in real trials now with one of the key customers and one of the most progressive customers in the industry in North America, FedEx, our platooning operations in North Carolina.
That has taken place with Volvo Trucks with a vehicle-to-vehicle communication based on our own developed system, but also open interfaces in order to host mixed fleets moving forward. Very successful, obviously, both for safety, fuel consumption, and further on then for new type of business models when it comes to automation. Promising start here. Very proud also that we have this specific partnership showing that we are well-placed when it comes to technology. When it comes to the market environment, no drama really. We are actually more or less reiterating our forecast as we did already quarter one and also to the biggest extent, quarter four reporting. North America, 300,000. Europe, 310,000. When we look at Asia, some corrections upwards, +100,000 for China, medium and heavy duty combined, up to 1,250,000.
A correction also upwards for India of approximately 35,000 units for medium and heavy duty combined. Otherwise, stable. Maybe just to comment because I can assume that there will be some questions about how do we look upon primarily Europe given order intake, et cetera. There it is, as we see it now, continuous high activity level. We have had a level of approximately 300,000 units now both for 2016 and 2017, and we anticipate that also as you can see here for 2018. Therefore also, we will see a pretty stable situation both on deliveries and on order intake. When we move into the order intake and deliveries, as you can see globally, +12% for orders and deliveries, +15%.
In North America, it continues to be very strong order intake, +64%, and deliveries up only [than the 32%], and that is then related to, as we said, limitations in the complete production and supply system, obviously, and also that we have done the transition mainly this year then for Mack Trucks. You can say that the order numbers could have been even higher if we should not have also done certain activities in Mack.
As you can see in the figures for Mack, we are reporting +12% in quarter two, and that is also related to a very extensive order book where we have deliberately also working together with our dealers and customers to have as clean order book as possible, because in the long run, you need to have the right balance between order book, and deliveries in order not to have any risks of speculation into the order book. That we have been working hard with primarily then for Mack Trucks this quarter, given the product renewal program. I can only confirm also that the products both for Volvo Trucks and for Mack Trucks in North America have been extremely well-received. When it comes now to the order book for 2018, we are more or less sold out. Europe, as I said, continue on a high activity level.
If we start with the market activities, we see that customers are having a high fleet utilization. We can follow that thanks to the connectivity solutions that we have together with the customers. We see a continuous high activity level, and we see also that the order intake is continuing on a good level. Renault, when it comes to light commercial vehicles, is related to the very high order intake we had last year, and that was a break in offer for a couple of months, and then we started the sales of the new program last quarter. That is more related to that event. When it comes to heavy duty, Renault is continuing a positive development, whereas we saw a small decline for Volvo Trucks, related to a number of events.
We are absolutely echolocating now and seeing where is, so to speak, the market going when it comes to price realization, customer mix, and product mix. We did also an announcement of prices in quarter four last year when we saw a peak also in the order intake. If you take everything into account, we still feel confident about the high activity level, confirming the total market estimate of 310,000. For other regions, again, Asia continued to be strong. A little bit less order intake also related to sanctions in the Middle East, and therefore also taking out some volumes, but otherwise, strong activities in our core markets. When it comes to the market shares, starting with North America, positive development for Volvo Trucks there.
We have been communicating that we were anticipating some improvements after the launch and the introduction of the new product program during 2017 and beginning of 2018 for Volvo Trucks. We are seeing that coming through now in a good way. The loss of Mack Trucks, as we said, we did start then the product renewal process during week six, seven, eight this year, where we were phasing out the current program and introducing then gradually the new program, and also at the same time increasing the basic rate in our Mack facilities in order to cope with the high demand.
Also, as you can say, according to plan when it comes to our output, you can always discuss if the timing was perfect, but those are events and programs that we are planning for years ahead, but good reception, and if anything, lot of positive discussions with our dealers regarding the total volumes of our Mack offering, but very strong and solid demand, and not at least also on highway segment that has been a weak offer for Mack historically with the current program. That with the new Mack Anthem is confirming also our wish of reentering stronger in on highway here. Europe stable, you can say, for the two brands.
In order to be trustworthy, you will always say, okay, we continue to see the positive trend for Renault, I say step by step slowly. In order to be fair, then you should say that you have a negative trend of Volvo Trucks. I would rather say that we are stable on the levels where we want to see them. Obviously, we want to see a little bit higher market share on Renault, even more important is to continue to have quality in the business when it comes to price realization, when it comes to residual values, and when it comes to the right customer mix, and there, I think the Renault organization is doing a great job. Stable also in Japan.
It was a little bit of seasonality in the beginning of the year. When we look upon month by month, we are actually having higher market shares and good registration. Also good traction in Japan. Brazil also, have to say, that is on the heavy-duty side. We are continuing to regain market share and have a good quality in the business. The loss we had in 2017 was mainly related to that we introduced price increases and pretty hefty ones on the CMI heavy segment. Now we are coming back in a positive way. South Africa and Australia, also good development. Construction Equipment, very good demand across both all segments and regions, and primarily then in China. In China, we have seen continuous good demand, both for wheel loaders and excavators and for the two brands.
We have also launched a very important product, that is the 20-ton excavator, a new update and a new product renewal here. Why is that important? Because here we have had an offering that is good but has been a little bit unbalanced when it comes to price, cost, and everything. Now we have a product that is really in the sweet spot. It has the best fuel efficiency, the best swing and productivity. At the same time, also, we have been working with the cost base and we see that we have a competitive offering in order to continue to penetrate also for volumes, because this is by far the highest volume segment. Take that step by step as we have seen in Construction Equipment. Very interesting to look upon. We are also celebrating 60 years for the Volvo Days in Eskilstuna.
I don't know how many times you have been there. If you have not been there, you should go there because that is a fantastic event if you really want to see everything in action when it comes to the full segments. More than 70 machines for all different applications showcased. In particular this year, it drew attention to our new rigids, Volvo branded rigids for the mining and the heavy construction industries, the 70-tonner and the 100-tonner. I saw it was actually Melker driving the biggest one there through a tunnel, everyone was nervous, it went well because we have a very good stability in those machines. Happy ending there. Market environment, also in this case, no drama. We are not changing any full cost actually, we still a continuous good development. North America, 10%-20%.
China, obviously 20%-30%. Might be still on the conservative side if you look at the order intake, but we also normally see that after a very strong spring season, let's see what it will bring. We might be a little bit on the conservative side here. Otherwise, unchanged full cost for construction equipment. When it looks to our order and delivery side, +41%, as I said, in orders. 20% then on Volvo and somewhat 66% on SDLG. Delivery is also positive with 38%, good balance here. If anything, also continues to be strong in Europe, U.K., France, Russia are driving this increase. Also, as I said, Asia extremely strong than with +58%. Maybe, sorry for that also, maybe I didn't mention South America when it comes to the truck side.
Maybe it looked a little bit awkward with the -5% in order intake. That was fully related to Argentina. Extremely strong order intake in Q2 last year. This year due to the currency situation and, I mean, the IMF program, and uncertainty, we had a number of cancellations. The delta there made it seem like you had a decline in South America, which is absolutely not the case for the other markets. I think Brazil, for example, was up with 30% in order intake. That continues in a steady pace. Just to comment that also. Buses, gradual improvement also during the course of the year, not least when it comes to order intake. Strong in North America, Asia, Nordic region, +63% in deliveries. We had a small decline in units of deliveries of 4%.
Very important also for us now is that we have finally, after intensive development program also, launched a new coach, an intercity platform in Europe. It has been actually a pretty long-lasting, I should not say old, but long-lasting platform that we've had in Europe for coaches and intercity. The picture you can see here is the new Volvo 9900 coach in the luxury coach segment, and also the sister coach will be a Volvo 9700 for primarily intercity segments. Very important to us and when we saw also the very good development of the same type of launch that we did in Mexico and in the Americas one and a half year ago, promising, and we will have the sales start here, just after vacation. We have also, during the quarter, demonstrated a fully autonomous city and urban application bus.
Also we are finally after a better tender activity now starting to see more substantial fully electric orders coming in. As you know that we have been working for a long time, we have even been criticized for being pretty early out when it comes to buses and electrification. Now we actually are starting to see after a pretty good tender activity level also, orders are dropping in. This one for Gothenburg was important. We got almost as big for Oslo. We got one for Leiden now, also almost as big in the Netherlands to mention a few examples. It seems finally that the market is ready to take on these solutions. We have also been better in providing the full system, so to speak, together with selected partners. Promising future in this area.
As we have said, this is also the platform when it comes to battery technology, battery management system, modular components for our electrification that we are also using now for Renault and for Volvo and for Volvo Construction Equipment, to mention a number of examples. That we also will use for Volvo Penta, that you will see in a couple of seconds here. Volvo Penta, another strong quarter obviously. The sales growth continues and the very successful work that we have done in industrial off-road applications, in agriculture, construction, and material handling, for example, is continuing to give good results and good order intake. We have a temporary effect also when it comes to the order intake, and that is compounded by the pre-buy effect of the European Union emissions legislation Stage V. Still also underlying, we have a good activity level.
Deliveries increased by 7%. Two other events. During the Volvo Ocean Race, we were demonstrating the fully autonomous self-docking system with Volvo Penta, just continuing to build on the IPS technology, and the joystick, and the easy boating technology that is absolutely world-leading. This is just another step so everyone can feel comfortable to have a 80 feet and go into Sandhamn, Newport, or Marstrand, or wherever you would like to end up with your boat and be, so to speak, in a safe position. A really interesting concept. Also we have also been communicating now that we are aiming for having fully electric and electrical solutions for commercial users from 2021. The reason for communicating that now is that it's very important to get active dialogue also with our different partners, how to use that for what applications, et cetera.
Certainly continue to build on the strong platforms that we have in the group. Finally, financial services. Another very strong development. As you can see, new retail financing is continuing to develop very well, SEK 19.4 billion. Penetration rate is continuing also on a good level given the absolute increase also to 25%. What I have to say is also in addition to the traditional retail financing also, we are very pleased to see the development of Volvo Financial Services to be an integrated part with other sister business areas when it comes, for example, to point number 2 here, parts financing program.
Extremely interesting to see how we are using the infrastructure of Volvo Financial Services to do it much more easy for both dealers and customers to do the transactions, the discounts, the packages, the financing of parts, and by that, also increasing customer loyalty, getting better connection both with dealers and customers. This is only showing that we have an extremely strong platform when it comes to insurance, when it comes to these type of added services out from an existing platform, and one of the most important levers that we have for the continuous service growth as well. Another important area is that we are also participating more actively in some of the specific segments, like Bus Rapid Transit, BRT systems, for example, and we had a successful deal done here in Curitiba.
Also in those segments, it's interesting to participate because we have a long sight, we know, so to speak, the mode of operation, and very attractive way of participating, actually. We are open captive financing in Slovenia and continue to increase our global footprint. I think that was the market and business update, and Jan, you will continue to give us a little bit flavor of the financial numbers.
Absolutely. Thank you. Good morning. The figures, I think we'll keep it rather short. I think a pretty easy quarter to present, and I think the figures talk for themselves. We had, as Martin said, an increase of almost SEK 16 billion in terms of sales, a little bit helped by the currency, approximately SEK 2 billion, going from SEK 88 billion up to almost SEK 104 billion. The adjusted operating income, we had one big one-timer here in the second quarter this year. It was the sale of the Chinese company in Mongolia that generated a profit of approximately SEK 800 million, which is excluded in these figures that we see here. Last year, we did not have any significant one-timers, we go from SEK 8.4 billion up to SEK 11.5 billion, corresponds to an EBIT margin of 11.5%.
I think we're pretty happy to see that almost all business areas are contributing to the improvement. It is buses, but bearing in mind that buses came from the Q1 this year, where it was in a loss situation, now coming back to the levels we saw before, I think that's good to see. I think it shows a little bit also what we have in buses. It's too low underlying profitability level that we need to increase, because if we have a low quarter in terms of volumes or something like that, unfavorable product mix, we don't have the resilience from an earnings perspective. That work continues. Currency was positive this quarter, SEK 672 million. Out of that, approximately SEK 450 million or a little bit more is actually coming from the transaction flows. The rest is SEK 200 million coming from revaluation of receivables and payables.
When we look into the whole year, you know we talk about only the transaction exposure and what that generates in terms of currency, we think we will be for the whole year somewhere between SEK 1.5 billion and SEK 2 billion for the whole year. We will have, as it looks right now with the currency rates, quite significant positive currency effects coming in the second and third quarter as well. When we look into the different lines on what is affecting the profitability here, we can see on the positive side, obviously vehicle volumes. We have also done the service sales coming through, with the high volumes that we have in our factories, the absorption rate and the capacity utilization is good.
As a matter of fact, actually the underlying productivity in the factories is not that bad, despite the fact that we have these supply chain disturbances that also to some extent affects the factories as well. We have a positive effect coming from the R&D capitalization as well. We think when we look into the whole year, that the total effect for the whole year is about half a billion SEK, and Q1 and Q2 is almost balanced. It's a little bit positive, actually. You can say that the whole net effect will come then in Q3 and Q4 this year. On the negative side, selling and admin expenses, cash R&D, and also then the stretched supply chain.
If you look into, as Martin said before, if anything, we can see here first and foremost, if you look into the changeover that we did in the first quarter related to Mack, that one is gone right now. We have still disturbances, especially then in North America, and a better situation. We are all in all, you can say the disturbance costs are lower in Q2 than what they were in Q1, but they are still significant, and that's why we continue to mention them. Cash flow, it's pretty okay. Compared to last year where we had SEK 11.9 billion, it's SEK 8.3 billion here. I think we keep still a good control over the investments in PPE. We come to the effects of the working capital. We are growing right now.
That means that we tie up more in capital in terms of receivables. Nothing strange there. Inventory situation, also an effect of the fact that we are growing, but also an effect of the supply chain disturbances. We have, along the value chain, a little bit more in inventory than we should have. It can be anything from the fact that we build up a little bit of buffers to make sure that we don't have more things coming from disturbances, and also a little bit of semi- and wholly finished vehicles and equipment as well. Trade payables is a little bit also then not so positive, maybe as one should think it should be. Last year, we had a pretty big effect in the second quarter, that was due to the fact that in the first quarter last year, we were having stop weeks in North America.
We ramped up in the second quarter last year. That's when you actually build up the payables position. This year we were, you can say, more stable, that's why we don't have such a big effect on the payable side as we had last year. All in all, nothing strange. You can say it will normalize the cash flow situation going forward. I think we know the reasons why it is as it is. We need to come back here a little bit more on this side. We can see also that the net financial position, we are at approximately SEK 27 billion in cash, as we were in the end of the first quarter, which means that basically the cash flow, SEK 8.3 billion, has actually been used to pay the dividend as well. That's why we are more or less on the same level.
Looking into the different business areas, trucks, deliveries up 15%. Very strong, of course, increase in North America, more than 30%, Europe up a couple of percentage points. When it comes to the sales, up 14% currency adjusted, we can see a 16% on vehicles and currency adjusted 10% on services. I've said it before, when you have a service increase that is above 5%, that's good. That's also what Martin said. There is, of course, an underlying effect from the fact that the fleet is growing. We have more vehicles out there, but there is also a lot of hard work increased on both penetration on the vehicles, but also service contracts and so on. This goes definitely in the right direction.
The results going from SEK 5.3 billion to SEK 7.2 billion, we have the same EBIT margin here on trucks as we have for the group, 11.1%, going from 9.4%. You recognize all the items that we have on the group level. It's the same for Group Trucks, actually, as well, when it comes to what goes positive and what goes negative. It's an exact copy, actually, as it is on the group level. Construction Equipment up 32% in sales. If you currency adjust, it's up 30%, we can see here that delivered machines, 38%, and basically all over the different product groups and so on. It's a healthy growth that we have. We can see here also when it comes to the service sales up 9% when we currency adjust. A strong sales quarter for Construction Equipment.
Looking into the profitability goes from SEK two and a half billion to SEK 3.7 billion, 13.3% last year, 15.1% this year. Here we can see that we get basically the positive effect from the equipment sales capacity utilization. We have also a little bit of currency here, SEK 170 million. I think the good thing here with the Construction Equipment is that they managed to get the sales increase, actually, and maintaining the cost level. We have a more or less exactly flat cost level in VCE. Of course, we get a very good development on the EBIT on the margins that we are-- oh, sorry, on the extra sales that we get here. Really good job done by Construction Equipment. Buses, as I said before, good to be back in profitability again, SEK 260 million.
Fairly, you can say net sales, approximately flat, a little bit down. Down on vehicles 5%. Here we can see also a very strong development on service sales. It's up 12% currency adjusted. A lot of hard work being done there. When we look upon the different positive things that affects operating income, it's service sales, product mix, more complete built buses, less chassis. We also have then on the negative side, obviously, the lower volumes and also the R&D expenses. Adjusted operating margin of 3.8%. The work here continues then to continue to improve the profitability. Everything from working through how we work along the, you can say, along the value chain, a lot of still inefficiencies that we have, but also evaluating also if there is a need for different kind of structural issues.
Nothing that we know about yet, but of course, we look at everything from big to small when it comes to buses. Volvo Penta, fascinating, 19.9%, almost 20% in EBIT margin. I think we are all surprised if we had talked about it one or two years ago internally. Including with our Penta colleagues, no one would have guessed that we would be close to 20% in EBIT margin. It is just a fantastic work that has been done. Good underlying, of course, sales growth and managed to get, you can say, the sales growth down into an improved EBIT as well. Basically nothing on the negative side. High sales product mix That I think Martin mentioned before. Then also, of course, a little bit helped by the R&D capitalization, new emissions steps coming up. Financial Services, 26% increase of the credit portfolio.
I think if you take away the currency effect, I think it's 9% up. Of course, a big effect from the weakening SEK when you translate it into SEK. Almost all the portfolio are in other currencies than SEK. Going then from a profitability last year of SEK 521 up to SEK 582 and a return on equity on 15%. This is, as you know, when we exclude the positive effect from the changed tax rates in the U.S. If we add them back as well, then we are at 23%. This is the underlying return on equity that we have for Financial Services. Also here, good and healthy, stable development as well. With that, Martin, welcome back on stage.
Thank you, Jan. I think we have done the presentation, so the summary speaks for itself. I think, Joakim, we are opening up for questions.
Of course. Thank you very much, Martin and Jan, for a straightforward presentation. Of course, there will be some questions here and also from the telephone conference. We start here. I think that's the easiest thing. It seems to be only one person.
Hampus Engellau, Handelsbanken. I have two questions. Looking at the operating leverage, I think you've been a bit cautious on the operating leverage so far this year. If I look at North America specifically, it seems like we're seeing more regional fleets coming into retail sales second half, and also you indicated earlier this year that prices are better. Maybe could you discuss a little bit how we should think about operating leverage going forward? Second question is more on run rate. If we look at the production, we saw a big jump in North America on the latest ACT numbers. Are you happy where you're running production now, or are there any steps that you need to bump for the rest of the year? Those are my questions. Thanks.
Should we take the first one? Martin.
We can start with the second question, Hampus. First of all, I think you should think about, as we have said also, that we are going through still a little bit of the transition for Mack primarily. Even if we are basically through, so to speak, the changeover, we have been ramping up, and now with the continuous very good demand, we are obviously seeing that we would like to continue to increase that. We do that step by step. It's very important for us to keep stability, both for quality, for price realization, and for keeping also the customer promises. If anything, we will continue to increase in steps for Mack. When it comes for Volvo Trucks, also it is a very strong demand and good order book, and also in that area, we are taking it step by step.
Important for us is also to get the stabilization in the whole value chain, as we have seen in Europe, gradual coming. We will try, but we will do it in a way where we can also manage it both from cost and customer promises and also keeping, so to speak, the right quality in the business.
When it comes to the operating leverage, if we start with the revenue side, obviously volume. It is always good to have volumes. I think also what we have talked about before is maybe work a little bit more with our customer mix as well. We had maybe a little bit of a period where we were a little bit too focused in some areas on bigger fleets. A little bit looking into the quality of the business, going maybe in for more medium-sized fleets, small fleets, and retail customers, and also focusing on prices, price realizations as well. I think that has helped us. When we look upon the price realization, we said in the first quarter that prices were stable or a little bit up.
I think we can confirm that we have managed to get the price realization through here. It is pretty broad-based. It is not only a question for Europe or North America, it is pretty broad-based. I think the organization has worked pretty hard with that, so I think that helps as well. Obviously on the cost side, taking away the, when we went, as I said before, the Mack changeover in Q1, that one is gone. I would say a little bit better, lower cost coming out from the supply chain disturbances. Not over yet in any way, but it is better. That is I think the simple reasons.
I think that is the reason also, as I said during the presentation, why it is important also not to overread now the European figures. I have seen some comments coming out, et cetera. We are on a high level that has been pretty stable, actually, when it comes to the registrations over the last two, three years. When we see the activity level, it continues. For us as Volvo, it has been very important also to work with the quality of that customer mix and how it looks like. I think the organization has been managing that in a way that we wanted to see, basically.
Absolutely.
Thank you. Erik Golrang, SEB. My first question is on Europe, just so I understand you correctly, you basically said that the drop we see on the Volvo side in Europe, the drop in orders in both Q1 and Q2, you would relate to a pre-buy from announced price increases ahead of year-end. Is that.
If you take from a mathematical standpoint, we are keeping our forecast as we have had since we actually revealed that for 2018 of 310,000, approximately, in registrations. We are continuing to see that this is the level that we are seeing, so to speak, in the total market. What we have said that with a stable and good market, we also need to get better quality in the business, i.e., prices and the right customer mix. If that is coming to a little bit short-term expense of the order intake, I think that is still where we want to see it. We can also confirm that activity level by seeing what Renault is doing, for example. I think they are into these phases, but it is nothing that is making us worried. It is according to what we wanted to see.
Second question then turning to Asia, if the market struggles to extrapolate the model that was in the West, I guess there is a bit more room to grow long term in Asia. To the extent it is possible to quickly summarize the different regions there, the various brands across Southeast Asia, China, Japan, India, to some extent as well, decent order growth in the quarter, but what are we seeing there now moving into the second half of the year in 2019?
Generally speaking, the markets that are having a matured, you can always discuss what is a matured logistical system, but markets like South Korea, Taiwan, Singapore, to some extent, certain segments in Malaysia, you have Australia, South Africa, et cetera. There it is confirmed that we are continuing to have a strong growth, both when it comes to the market of, for example, the Volvo Trucks applications, but also market share development. I think that is positive to see. Also markets like China will continue for Volvo Trucks now to grow, given the fact that e-commerce and other type of application that requires much higher mileage and uptime demands are growing steadily. From that perspective, strong and steady growth, so to speak. Part of the little bit lower figure is obviously related to the sanctions in Iran that is taking out certain volumes.
UD continued to develop well, both when it comes to UD Japan. We have done a successful changeover of our Quon product or changeover product renewal, I should say. Good features, well received in the market. Also a very good development when it comes to services and the quality in that type of the business. Also, by the way, Volvo Trucks is almost under the radar, but also having a good development in Japan, actually, even if they are low volumes, but with good profitability.
Also on the value truck segment, as we said, when we really took a step back two years ago and created Group Trucks Asia and joint ventures, I think for all three brands, we see the development that we wanted to see step by step, taking market shares in heavy-duty segment, coming back to profitability both for Dongfeng, Eicher, and also moving in the right direction for our UD value offering.
The final question to you on trying to sort out how clean the trucks margin is again. If we, a year from now, when you present the second quarter 2019 numbers, I guess, and we assume that volumes are flat, but for some reason, the margin is down a bit, and you'll say that, "Oh, in the second quarter last year, we had something that was a bit extraordinary." Anything of that nature?
First of all, it would most probably not be me standing here doing it, but that's it. I understand your question.
My answer is no. I can answer that. It has to be the bridge between the two answers.
Exactly. I think we'll obviously, we don't forget what we guide on. I think we'll give an honest answer and talk about the situation that we had in the second quarter this year, and talk about that, and then, of course, obvious what has happened in the second quarter last year. Nothing to add. I think it's fair to say that there are room for improvement still in the Volvo Group, as we said. The machine is not ticking 100%. We are continuing to work. The strategy is there, it's strong, and we continue to deliver on that one, we still see improvement areas, and that is what we will continue to work with internally as well. As we said before, it is a good result, but we will continue to work internally. We see where the market is, that's another question.
John Anande from Nordea Asset Management. I have three questions. First, if you come back to the U.S. truck situation, I'm just thinking of what can you share in terms of dealer inventory situation? You said that you want to have a clean order book to avoid speculation, et cetera, but I'm thinking about 2016, where we saw some sharp drop in production. What's the status right now, and what's the dialogue with the dealers there? Secondly, on the bus side, the new platform, if you look at the return opportunity that you have in buses, how important is the platform change that you do now? I'm thinking of production setup, modularization, et cetera, to reach the kind of returns that you target. Can you share with some kind of opportunity that you see on buses on the return expectations that you see longer term for that business?
Lastly, on S&P rating, they changed the outlook quite recently. Given the dialogue that you have with S&P, do you think they dare to do something before you see the next trough in Europe? It seems like everybody's waiting for that trough to happen to see if there's something different with the Volvo Group and the returns. Do you think that S&P is waiting for the same kind of trough to see your cash flow and earnings generation in that trough to be able to change your rating? Or what's your best guess? Thank you.
Would you like to start with that, or should you think a little bit?
You're maybe quicker than I am, so you can.
I can start with the North American dealer and the inventory situation.
If you ask our dealers, I guess you do from time to time, by the way, also, I think you will have the answer that the inventory is too low for the time being. They would like to see some more trucks for opportunity sales, if I put it like that, selling from stock. For us, it has been extremely important to have a very tight dialogue on what type of stocks do we have, where do we have it, what is the mix, et cetera. Not at least for Mack, given the fact that they have such a broad application base also, not at least for rigids and straight trucks. Therefore, it's even more important that we are not stuck with trucks, for example, in the order queue for body builders.
That is also a bottleneck now when you have a very steep upturn, because we normally say that a truck can be used as a Kanban card, but it's a very expensive Kanban card. It's better to use other type of planning instruments than to have trucks physically standing in the queue. That is one of the reasons why we have, during this quarter, been working really hard in the Mack system, primarily to, I should not say clean out, but have a tight dialogue about what do we already have in the order book, what do you want to put into the order book, because the orders coming into us is coming from dealers. That is not 100% reflective what is coming from the end customer into them.
The 12% increase you should read as also a very focused activity from Martin Weissburg and his team to really go through where are we now, how does it look like, given also that we have had the buildup of the order book that is reaching now into 2019 for certain application, which is, in a way. No, it's not good. You need to expect that you actually have that tight dialogue. I should say the dealer inventory, no issue when it comes to high levels or not a situation that in 2016, but still working with it to have the right balance.
When it comes to buses, yes, absolutely one of the key elements of this is that we are increasing both customer value, but also working on the cost side, both through modularity, per se, when it comes to components and systems, but also when it comes to the production methods used in order to have a more flexible system on the fully built systems that we have. This is in line with one of the key strategies where we have on buses now that we've had little bit too many platforms globally, then you're eroding, so to speak, the volume base for each platform. That is one of the key elements. To your point, [Jan], you know that we have a good capital turnover on buses, but the base on earnings is too low. If we are dropping down, it doesn't matter.
Zero times good capital turnover is still zero, so to speak. We need to increase that a number of percentage points to have a better base, as Jan said, that is the priority right now as we speak. It's service sales, it's platform modularity, better commonality with trucks, simplification of the number of platforms, and little bit of the pruning that we have been seeing in other business areas.
I think also we have a very positive, the way that the new coach in Mexico really took the market by surprise, good profitability as well. I think we have good hopes also with the new platform here in Europe that we introduced right now, that that can help also on the way. There is hard work still to do internally, I must say.
What I think, just to add on this, we are working with the bus team here, and it is very good spirit, is that it is not only launch of a product and a platform from that perspective. They are launching also a number of services around that. It will be a much more extensive way of doing business that I think will be also key, the Volvo Care system, for example.
On the rating, I think we have said before, we should have a rating somewhere strong BBB to weak single A, and I think we are at that region. I think if you have a solid and good company with high profitability, good cash flow generation, and you lower basically the volatility in earnings and cash flow that we have had, we will get the rating that we deserve. I think we are on that track. How rating agencies, how they evaluate where you are in the cycle and these kind of things, it is very difficult to know, actually. I do not want to speculate on how they look upon it. I think we have been on a good track. If anything, I am a little bit surprised that it went so quickly to increase or improve the ratings, actually.
I thought maybe, out of experience, that it would take a little bit longer time. The important thing, have a good and solid company that produce good earnings, then you will get a good rating.
Okay, we will continue with some questions from the telephone conference. Please go ahead.
Thank you very much. First question is from the line of Klas Bergelind of Citigroup. Please go ahead. Your line is now open.
Yes. Hi, Martin and Jan. It's Klas from Citi. First one on Europe. I appreciate the reasons here for the slow momentum. You're optimizing for a better price mix. Could you remind us of what can happen to the drop-through, and margin in Europe when we will start to see weakness eventually? You are typically pretty flexible on the way down. I think before you said that you will not see any margin weakness up to a 10% volume drop, but for the margin then to drop if we fall more than that. You also have a better momentum in services compared to previous cycle. At the Capital Markets Day, you said that service contracts are up 45% in Europe since 2014, which is a leading indicator for more service growth ahead. If we could start with the resilience in Europe, please.
I think actually, Klas, that we will stick to a little bit what we have said, that I think we have, both when it comes to our industrial system, we have a high level of flexibility. We are working on that. I think also to start with, we are sure that even if we have talked about the stretched supply chain, et cetera, +16% year-over-year in a quarter is pretty much to be in our industry on a global basis, and it has been even more in some of the months for Europe, for example. I think both up and down we have shown. We are working very tight also with our dealers and our market companies to follow inventory situation, how does it look like, et cetera.
We see a stable and good situation both when it comes to used, and when it comes to inventory levels, and when it comes to the turnaround of the trade-ins and the balance between used and new, et cetera. Still keeping good and high flexibility when it comes to the industrial system, working very close together with our dealer groups and market companies. Also, to your point, continue to drive services. I think Europe is-- We are well prepared in Europe. Having said that, it's something that you always need to be very close at, both for upturns and downturns.
My second one is on the bottlenecks and referring to the slide. Last quarter, you said the supply chain, or when you look at the slide, was the highest or biggest drag before selling in R&D for the group and for trucks, obviously. Now it's the other way around. Supply chain is at the bottom of the list. I think the impact from the supply chain last quarter year-over-year was some [SEK 500 million-SEK 600 million]. Are we now [SEK 200 million-SEK 300 million] with selling expenses still SEK 400? Just so we get the magnitude of the improvement, please.
First and foremost, you're very observant, Klas. There is a reason why it's on third place. It is a little bit. First and foremost, the other cost items are actually higher than they were, I think, the other quarter. It's on third place, and we do not comment on how much it is, but I think you can a little bit see the magnitude of it when you compare to the other cost items.
Okay, fair enough. I tried. The third and final is on, just to clarify on price cost. Given the steel cost increases we have now on the back of tariffs in North America, could you talk about price cost on new orders that are yet to be delivered into the second half? Am I right to assume that we could see some margin pressure in North America, but for Europe and international to more than offset that? You're obviously talking about optimizing price mix in Europe. Is that going to be net positive? Is pricing going to improve into the second half when you look at the P&L?
First of all, I think we have gradually seen, as we've said, also price realization coming through, both in North America and in Europe during this quarter as well. When it comes to North America, what we have been working with is obviously, yes, we have a cost increase related to the tariffs per se, but also the increased prices also given the tariffs in also the material that we are taking in North America as such. We have also been working with moving that forward into the downstreams also in the delivery chain here, because this is something that we cannot take, and we have a good market situation. We have been pushing that forward gradually also in the value chain here.
One can also say that, the raw materials, generally speaking, in the world also continue to actually increase in price and cost for us as well. As we did last year, I think we managed actually just to compensate it a little bit more with the commercial negotiations that we have with our suppliers. So far this year, we also managed to offset the balance, and it looks as though we can do it for the whole year. It's a lot of hard work being done, because internally to offset, of course, cost increases from raw material tariffs and so on, but also that we have to work with the price realization as well, because we cannot sit in between and be squeezed between that. We have to work on both sides of the equation, and that's what we do.
Thank you.
We're now over to Graham Phillips at Jefferies. Please go ahead. Your line is now open.
Yes, good morning. My question's as follows. We look at trucks. You talked about being sold out for 2018. How far into 2019, in each market, would a customer have to be waiting if they were to be placing an order today? Also just around Renault, can you talk a little bit about what the issues are in terms of product and volume there? You talked about pricing and having to rebase. Is this affecting the T truck, or is this across some of the other areas for Renault?
Thank you. First of all, when it comes to, as I said, sold out is primarily then related to North America, where we have had a very strong order intake. I think you have seen also that into reports what is what here. More important now is that we see a generally strong momentum in North America, orders exceeding deliveries, et cetera. In a situation like that, it's very important to be very close to dealers, work through the order book, have the right quality in the order book, making sure that we have not orders that will end up as speculation in one state, and then you cannot deliver to another. I think that is the name of the game now, to have the right quality there. You can say, how far is that in 2019?
I think the fact that we have a situation of more or less sold out until 2018 is what we need as information and really work with those orders and those slots together with the customers as such. Therefore, I think from time to time, when you have these type of order figures, you should take that, both when it comes to Europe and North America, moderate that and not take it as only an absolute figure as such. Renault, if anything, I think we continue in a very good way, the strategies that we have said. We want to grow.
We should have a higher market share than 8%-8.5%, but we should not do it too quick, because with the brand and the brand heritage that we've had with Renault, if you do it too quick, you will not get out, so to speak, the value that the Renault vehicle lineup is deserving, because it's a great lineup. Therefore, I'm happy to see that also this quarter we are taking some more orders. We are spreading that not only in Southern Europe, but some other key markets, and it's well-received, both on the heavy duty and medium duty. I think, Jan, we are very pleased with the development there. Again, I said, volume important, but we have the backbone when it comes to scale, given the fact that we are utilizing some of the most critical modular components into the Renault Trucks.
More important, have the right quality and prices, and thereby also residual values going forward.
Exactly. Continue to see that used truck prices are on the right level. Also, it's not only volumes. We see that Renault is also increasing its profitability.
Yes.
It's a stepwise approach on all these parameters right now, we see that we gradually are going in the right direction. One can debate about the speed. I think we all always want to see more speed, this is a solid improvement that we see now in Renault, that's important.
Well done.
Yeah.
Do you have any figures you can share with us on the T truck, how the progression of orders or sales has been going this year?
I think you can see it. Since the majority of still the orders when you see on the heavy and medium duty on Renault is related to the T line, you see that it has been a continuous good and solid development on that as well.
Just on pricing, I'm encouraged by your comments that there was some good realization in the second quarter. Is this relating specifically to the U.S. and to Europe? There was obviously a bit of a scare story as well that used truck prices might drag down new truck prices. Do you see why there could be some disconnect there?
No. If anything, as I said, on the used side, both for North America and Europe, we see rather stable prices actually. Also when it comes to the balance, when it comes to inventory levels, et cetera, it's under control. I think that we have been able then to have a positive price realization, both in North America and Europe in quarter two with, so to speak, stable used prices. Yeah, I think it's good work done there.
Is there any reason why there could be a disconnect between new and used, do you think, in terms of the new trucks being able to deliver much better productivity for customers and perhaps the used ones being under pressure because they're not as fuel efficient?
Yeah, I understand your question. It's always a speculation about that. So far, even we are talking about the positive price realization, it's relative. In relation to the full calculation between new and used trucks, it's relatively low figures when it comes to the life cycle cost of if you go for used or if you go for new. That, I think, is too early to draw any conclusions into that area so far. Let's follow that moving forward, yeah.
Okay, thanks. Just finally on construction equipment, can you talk a little bit specifically about China? Again, there's been mixed signals from some of the construction markets there. What you're seeing about most recent trends and looking into the, say, second half of this year for China construction activity, and also just overall, how much of the construction equipment business, sorry, not China construction, but construction equipment is exposed to mining, per se?
Yeah. If we start with China, as little bit I showed also in the presentation here, very strong development during first half of the year. It has gone both for excavators, both for heavy and compact excavators, as well as for wheel loaders. If anything, we say that it has been such a high activity level. If anything, we expect a little bit more of a softer development during the fall. No drama, but if anything, a little bit softer than we have seen. I think that's okay because we are also in a situation where we are starting to see certain bottlenecks in the construction equipment side as well. No drama at all.
When it comes to the mining, in absolute figures, I don't have it in percentage point, we don't reveal it like that, it's relative low in relation to unit sales, in relation to construction sales, so to speak. Growing, I have to say, because we have a better focus on the mining segment, we have a great offering. Generally speaking, we have not been strong enough on application and industrial segment-based selling. That is not only for construction equipment, but of using the total force of the group into specific segments such as mining. What I'm happy to see is that we have closed a number of deals with mining houses and subcontractors to mining by combining the full strength of the group, trucks, construction equipment, and Penta equipment, as an example, and even some cases, buses.
Here is more to do on a more general note.
Okay. Thanks very much.
Continue with the telephone conference
Another question?
Yeah, please go ahead.
Okay. We are now over to the line of Mats Liss at Kepler Cheuvreux. Please go ahead. Your line is open.
Hi. Thank you. Just a couple of quick ones, I guess. First, regarding Europe again, could you say something about the lead times there of the Volvo order to delivery in Europe, in general terms?
Yeah. What you can say is that it is still a little bit higher than what it should be, the normal lead time. Maybe a couple of months we are talking about. I just looked through the order book. It is approximately on the same level as it was one year ago, a little bit more. We are a little bit on the high side still, but trying to continue to work on that also with the stabilization of the value chain.
You are November approximately, then?
Yeah, October, November, maybe.
Yeah, sure.
It depends a little bit on segments, et cetera. Since you have a much more of a regular, so to speak, market of how you actually are ordering and putting orders into Europe, it's less to keep up with because you have a much more normal flow of underlying orders coming in.
Regarding the holiday season now coming up in Europe, do you plan to make any sort of changes in production, daily production, besides that?
No, I think we are all still sticking to the planned schedules as we have around the globe, actually, when it comes to vacation, because we need that also, both for, as always, maintenance and rebuilding activities, both for product renewals and normal maintenance with high production levels. We also need that to continue to recover in the different parts of the value chains, both internally, so we are running certain production lines and certain areas of our operations, but also for our suppliers because it is very high levels, and they need to breathe also to recover and to build up buffers, et cetera.
Coming back to the U.S. there, could you just remind me on the take rate of the Volvo-based powertrain there, including the gearbox, I-Shift?
Yeah. I don't have exact figures now, but on Volvo, it is in principle north of 90% on the two sides, both for engine and for gearbox. For Mack, obviously, it's also very high level on the engine, north of 90%, and it is 50% now or something 60%, 70% even on the gearbox side, because we are growing that steadily also for Mack, continuous positive development also in that area.
You are able to supply the market, and you are not affected by bottleneck in that area?
No, I have to say that we are proud to say that if you look one year back, then it was really the powertrain area that was the most severe area when it comes to affecting the output and the stretched supply chain. Gradually, we have been working through that. Lately now, even if it's very tight still, it has been stabilizing and improving. For the time being, that is not the most critical area. It is a moving target, obviously, depending on mix and regions, et cetera. Good work done in that area.
Construction Equipment question there. Solid orders there, and I guess could you say something about the mix going forward? Is there anything to
No, I don't think it's some big changes. If anything, we have had a little bit higher order intake when it comes to the heavy equipment than the compact, but not super big mix changes.
Well.
Heavy is little bit more, yeah.
Yeah. Finally, about the cash flow there, could you say something about the development during the second half?
No.
You will.
Usually the fourth quarter tends to be very strong.
Good news then. Okay, great. Thanks.
Thank you, Mats.
Okay, I think we have answered all the questions. Thank you very much, Martin and Jan, and thank you very much for attending this press conference. See you next quarter. Thank you.