I would like to wish you welcome to Volvo Group's presentations for their fourth quarter 2017. My name is Joakim Kenndal. I will moderate the Q&A session after the presentations. We will, as always, start with a presentation from Martin Lundstedt, President and Chief Executive Officer of the Volvo Group. Later on, he will be joined by Jan Gurander, Deputy Chief Executive Officer and Chief Financial Officer for Volvo Group. Please welcome Martin.
Thank you, Joakim. Also from my side, most welcome to this quarter four and full year 2017 presentation for the Volvo Group. Just before starting getting into the presentation, I have to say that it has been a very intensive year when you start to look back a little bit, both that we will discuss about the figures and the economic activity, but also when it comes to a lot of different things that have happened in our business when it comes to product launches, some very major product launches in the truck business, but also in construction equipment, buses, new innovation and business models.
A truly intensive year, I would like to start with actually thank all our colleagues in the Volvo Group, my colleagues in the Volvo Group, and also partners, dealers, suppliers for contributing in a very good way of making this year a very good and interesting year for the Volvo Group. Some of the fourth quarter's highlights to start with. Net sales continued to increase 16% if you exclude currency, which is a strong momentum still, reflecting also the market activities around the globe, and also that we are gaining momentum in many fields and many product areas as a group. We also have seen continued improved profitability for the group. When it comes to trucks, the adjusted margin increased to 9.5% in relation to 8.7% same quarter 2016. Construction equipment also had strong momentum with almost 11% operating margin.
That was also a very strong increase, obviously, from same quarter 2016. As we can see here is also the highest net sales and operating income so far for a quarter four. A very strong result for the group. That goes also for the whole year, as I will come back to a little bit later, that both when it comes to the turnover, the net sales of the group, operating income, and operating margin was the best year so far. That is a very strong achievement, obviously. When it comes to the volume development, that also continues to be strong. We increased deliveries for trucks. When we look at heavy duty and medium duty with 90%, as you can see also, that was in all truck business areas, a strong momentum, and particularly strong then for Volvo and for Mack.
We will also come back to the North American economic situation from that perspective. When it comes to Volvo Construction Equipment, very strong deliveries up with 49%. As you can see, that is also obviously Volvo with strong momentum, but even further pronounced for SDLG than given the strong recovery in the Chinese construction market. I will come back to later on, but I think that figure is important to have in mind. +90% is still a good figure when it comes to increasing deliveries because we've had the discussion regarding the stretched supply chain, but that is showing that we are continuously actually debottlenecking. Given the good situation of order intake also, that will continue to be stressed naturally.
Service days development is also a very positive factor for us, SEK 18.3 billion in quarter four, that is an increase of 8% if you're excluding the currency effects. That is very good growth. What is in particular nice to see here is that obviously the parts sales is increasing, but even further pronounced, actually, the workshop hours and workshop sales, meaning that also the contract penetration, the loyalty, customers are coming into our workshops and different type of solutions, that is part of the strategy. The increase here is related obviously to activity levels in the market, rolling fleet and high utilization, but it's also related to higher contract penetration of our service contracts and obviously also the proprietary strategy of powertrain in North America that will continue to gain momentum.
Overall, when we're looking around the globe now with our modular cost system, and in particular for powertrain, we see very high penetration across the globe. As you can also see here, it is an increase in all different main business areas, trucks, Construction Equipment, buses, and Volvo Penta. Obviously, this is also why it's so important now to take the opportunity with increasing deliveries because this is very important for the future revenues and really coming in on the right level of penetration for the new vehicle sales, including the contract penetrations, both of repair and maintenance contracts. On the truck side, good demand. I will come back to that. 29% up in orders, 90% up in deliveries, still positive book to bill, even though that we are increasing deliveries here.
The whole organization is working hard, obviously, and not only our industrial organization as such, but also, as I said, dealers and suppliers in many tiers also to really try to increase as good as we can here. I think in quarter four, the organization has done a fantastic job on that. The demand continues to increase order intake. Having said that, we managed actually with overtime, with speed transport, we managed actually to fulfill the absolute majority of customer promises when it comes to delivery times, quality, et cetera, which is at the end of the day, the most important. Never promise more than you can keep, I can assure you that is tempting in a situation like this. In order to really build credibility among our customers and their customers, we need to balance this in a good way.
Another important thing that we'll come back to is obviously the launches now that we are doing in North America. In the beginning of the year, as you remember, we did a lot of, or a number of launches in Asia, both in Japan but also in other markets, during the course of the year, starting during the spring, Volvo Trucks in North America, and now lately coming in also Mack Trucks. I will come back to that. Another very interesting step, obviously, is that we will have the sales start of our medium-duty electric trucks in 2019. As a matter of fact, we will already have trucks out this year with selected customers. This is a natural step from our bus business, where we have been a leading actor since many years now. We have almost 4,000 trucks or buses out, hybrids or fully electric.
We are continuing to build of the modular product system that we have in buses also to move into urban applications of trucks. It will be in distribution, waste collection, road sweepers, what have you, in order to utilize also the common infrastructure and get the benefits of electrification where it pays off quickest in terms of sustainability as a whole. Of course, it must be economically viable, but if you count also for noise levels, close by emissions such as particulates, NOx, but also the CO2 impact, given that you have the right energy production, it is very interesting for the cities in order to achieve the targets that we all need to achieve here. That will be interesting times, and we will start both with Volvo and with Renault, actually. The full launch will actually happen during the spring here.
You will obviously be invited to different events to touch and feel what this is all about. As I said, great reception of the new trucks in North America. As a matter of fact, we have been surprised not only by the market as such, the market recovery, but also the strong momentum we have in orders here. For the Volvo VNL, as you can see on the slide here, and also the Volvo VNR, that is the day cab execution or regional haulage, we have so far already got 21,000 orders. Having said that, the VNL was launched, as you know, during the summer. On the Mack side, it's also interesting, a late launch during the fall here, and we are actually conducting the changeover as we speak. We do the clear cut week five, so it's this week in Macungie in Pennsylvania.
Already so far, we have taken 4,500 orders on the highway, the sleeper and the day cab. That is higher figure than we normally do during a whole year for Mack when it comes to highway trucks. That is saying that Mack is back. We are Mack. This is our Anthem, and it's fantastic. I can say that the reception of this has been extraordinary. I was in U.S. week two and met with a number of customers and also conquering accounts that are having other trucks and said, "We are buying now 15 to 20 Mack Anthems because we want to give that to our drivers that really want to have it." As you know, it's a driver shortage. This is a fantastic truck and also with good aerodynamics. It doesn't need to look like a jelly bean in order to be aerodynamic.
I think it's great. It's fantastic truck, we are so happy for that. The organization is motivated. Also, as I said, the Volvo truck here. Strong offering in North America. Quarter one will be now a transition, obviously, a planned transition. We are going for quality. We are going for lead times ramp up. There will be some planned extra costs with that, but that's normal. This is a platform for a bright future and also for regaining the market shares that we obviously should do in a good pace. When it comes to the market forecast, Europe continues to be very strong. In quarter three, we guided for 300,000, now we are guiding up a little bit to 310,000. That is only showing that if anything, there is underlying upward pressure. We are not seeing that as a bubble.
There is good activity levels also still, so to speak, a balance with replacement and the real activity level. 310,000. North America, 280,000, also guiding up with 20,000 units coming from different factors, actually. Low inventory levels both for used and new trucks. It was a strong order intake in quarter four. The economic activity, as we said, there is also hopes for an infrastructural bill coming up here that will also further compound this. 280,000 is our current guidance of that, and that obviously will be one very interesting and positive challenge. Also, given the fact that we have a strong platform here, as I said. Brazil is also up 10,000 from 35 to 45,000. Still low levels. Having said that, obviously agriculture is moving, mining and resources industry is moving.
Also Brazilian economy is in a recovery phase and hopefully in a way also where we will not see subsidies, but real economic environment, and that I think should be very good for the Brazilian truck market going forward. Asia, we are keeping our forecast for China. Still high levels, lower than 2017 given the changes in China of weight legislations in 2017. That was pre-buys, but still high level, obviously, given the economic activity in China. We are guiding up a little bit in India, 20,000 units, 15,000 on the heavy duty and 5,000 on the medium duty. We are keeping our forecast flat in Japan, slightly then downwards in relation to 2017. A little bit bigger part of that decrease or that forecast decrease is related, as we already said in quarter three, to medium duty. Market shares.
If you start with North America, as you have seen during the course of the year, we have been losing market share. As we have already said, we have put priority on really having a solid business when it comes to the relation between volumes and profitability. Volvo is mainly related to the transition during the year and the plan, so to speak phase in, phase outs, that will continue a little bit also in quarter one. Still good reception, good quality levels, according to plan. As I said, it's much more important to have the quality in the business. When it comes to price levels, we feel also that we are on target when it comes to the price realization of our new products here.
Mack is mainly related during the course of the year to the mix effect that long haulage has been coming back strongly during the fall here, where we historically have had a weaker position where Mack is stronger in vocational and urban solutions such as waste collection, for example. Having said that, with the new Mack Anthem, as I said, we are also very hopeful of having the opportunity to have a better share in long haulage. Strong in Europe, historically high levels for Volvo, flat, but I think it's good to consolidate on that level, work also with the quality of the business, so to speak.
Renault Trucks regaining, and has been very important for our Renault organization, done a great job here, and also in a very consistent way, building market shares, not at least in core markets such as France, obviously, but also other very important markets for Renault. Well done here. Brazil a little bit down, mainly related to CMI heavy and medium duty trucks, where we have been over the year pushing for price increases given profitability levels and lost market shares consequently. That has been a very deliberate decision for us. In heavy duty, we are keeping good momentum. As you can see in South Africa, good situation, and also in Australia. As a matter of fact, you have a little bit of mixed effect.
If you look into the three bands, we are keeping a position of 26%-27% for the group, which is historically very strong. We are still happy with that development. Japan, as you can see also, a strong recovery with two percentage points, mainly related to a strong recovery during the fall. I think generally speaking, we are satisfied, and we are aiming now for having a good recovery also in North America, both with the platforms and so to speak, the product levels that we have. When it comes to orders and deliveries, then on the truck side, as I was into, we have a positive book-to-bill still in Europe. As you can see, orders up 22% and deliveries 14%. Continue to be upward pressure here. North America, obviously very strong, 84% in orders and deliveries 28%.
Here we will continue to work with those opportunities and also manage the transition as we have said. South America from low levels, but still very successful FENATRAN exhibition, a good reception of so to speak our solutions in core segments such as agriculture and mining, but also in the long haul segment. That is continuing to look as a good recovery. In Asia, as you can see on the order side, it's mainly related to some of the tender markets, or tender-like markets, where we have more volumes coming in and out, mainly related to Middle East. Generally speaking, our regular markets are moving in a good way. Mix-wise, this is looking obviously positive. Construction equipment, market growth also in all segments. We are revising upward also the forecast as you will see later on here.
Orders up 48 and deliveries up 49, so a wash on the book-to-bill, which I think is very strong and very well done by construction equipment to really manage that. That has been, as you know, the trend during the course of the year. One can also say, obviously, that they start with a lower utilization rate in order also to balance it a little bit with the truck guys, so to speak, on that had a starting point of higher utilization. Having said that, it's very well done in the whole value chain here. Transformation program continues to yield results for us also. We are glad to see that we are continuing also to have good momentum in the heavy equipment across the globe.
One very exciting thing, I was in Motherwell myself actually just before Christmas here, Motherwell outside Glasgow, where we are building our rigids. That is the Terex Trucks facilities. Now we are actually coming with the first Volvo branded rigid hauler that will get hold of the full network of Volvo, obviously, and also combining that with the strong offer we have in articulated haulers, in excavators and both for quarries and mines, et cetera. This will be a very interesting in-break. It's a lot of good innovations here. When it comes to obviously the very famous Volvo intelligent monitoring systems for better productivity that we are using for other applications. Driver comfort, for driver environment, security, safety. Reshaped body, as you can see, new and more robust hydraulics, and it's coming in 45, 60, 72, and 100 tonners.
It's interesting when you're driving such a piece that it feels still very secure. Actually, I had the chance to do it in a controlled environment, so don't worry. I have to say that I will gladly invite you to do that all, obviously also. This will be interesting for the future and a great opportunity for the construction equipment side, yeah. Construction equipment, some guidance upwards, as we said, we were guiding flat in North America and in Europe, and we are increasing that from flat to slightly upwards now. We are also increasing our forecast for China from 5% to 15% as we guided to 10%-20% now, and we still see that it's a strong spring season in China, as you saw also on the order intake here, so if anything, it looks promising there as well, yeah.
When it comes to the orders and deliveries, as I said, strong that we are managing and balancing this in a good way. Maybe what you can comment on this is North America, where actually we had, first of all, a weak order intake, and that is a little bit of how it's coming between the quarters and seasonality drive. We had a weak Q3, and we also see now with the stronger momentum in North America that our dealers are exchanging the rental fleets. They are selling off older equipment that they have been more conservative, and that is also giving opportunities, and a general strong economic situation. That is giving effect here. Also good to see that South America that has been lagging behind a little bit from the truck side is also coming in well, and obviously Asia is very strong.
On the bus side, we can say that the decrease here seems to be dramatic, but I think most of you that have been following us know that the buses is to a very big extent tender-based and a little bit what is happening between quarters. When it comes to the order decrease by 28% here, first of all, you can relate also to the full year where we had an order increase of 2%. This decrease is primarily related to three big orders that we took in Q4 last year in Australia, Egypt, and Nova in North America. If we take Nova as an example, just to have a view into 2018, we actually have an order book that is pretty full for the whole year, actually. That is only showing that you need to look a little bit longer perspective.
What we are very happy to see is the in-break in Singapore of the hybrid buses. It's a full and complete system delivery, not only buses, but also charging stations and infrastructure around that. Here, I think it's very important showcase of how these type of systems are operating in order to also make more in-breaks in Southeast Asia, not at least. In addition to that, we are also starting a partnership with NTU, that is one of the leading universities in Singapore, on autonomous buses in combination with electro-mobility and the full system thinking to reshape also the future of the cities about what I said before, clean air, less congestion, less noise. Looking forward to that.
On the Volvo Penta side, finally, also strong year with sales growth in both industrial and marine segments, but primarily in Q4, we continue to see strong momentum for us when it comes to growth in the industrial low speed segment. Agriculture is one example, but we see that across the board. We have been putting more focus on the industrial low speed segment where we have engines that are suitable for that application, and we see that in the order intake. When it comes to the order increase here, it was primarily actually related to industrial low speed, but still also strong momentum in marine commercial and marine pleasure also when it comes to diesel, little bit less momentum in gas, but that are on the smaller engines.
With that, I will actually leave the floor to our Deputy CEO and CFO, Jan Gurander, to go through the figures. Please, Jan.
Thank you, Martin.
Starting with the sales, it's almost up with SEK 10 billion. As you see here in the third quarter, we have a pretty big negative effect coming in from the currency. It's a minus almost SEK 4 billion. Currency also has an effect on the operating income as well in the quarter, also negative, which you will see later on. As you can see, and as Martin Lundstedt said before, it is a strong growth in all market areas. Europe up with SEK 3 billion, North America with SEK 2 billion, South America and Asia. Basically a global strong development in terms of growth. When we look into the different business areas and how they contribute to the improvement of the profitability, we go from an adjusted operating income of SEK 5.7 billion.
Last year, we had some one-time effects in the result, sale of real estate that was excluded. The underlying result is SEK 5.7 billion. We go up to SEK 7.3 billion, and in the fourth quarter, we didn't have any adjustments. As you can see here, contribution coming positive from all our business areas, Trucks, CE, Buses, Penta, and Financial Services. When it comes to the Group functions and other, here we have the impairment from Volvo Group Governmental Sales on a contract. You can say that the underlying performance of the contract is going more or less according to plan, but it is a hit that we take actually on the currency exposure on this contract. Apart from that, it is a tender business within Governmental Sales, that type of business.
We had a strong fourth quarter in 2016 in terms of deliveries, which added on to the result, and 2017 was a little bit weaker, you can say, from the tender business. That explains the majority of the SEK 765 million. If you look, make the same journey, but a little bit of different line items in the P&L. We see that gross income is helping the result with SEK 1.7 billion. Obviously, it's coming very much from volumes. Apart from that, of course, we see that we have disturbances from the supply chain, extra cost coming mainly from logistics, but also from overtime and so on. That is actually bringing down our gross income in the quarter. We also see mix effects as well.
If you look upon the gross income margin, not the gross income in absolute figures, of course, the new vehicle sales is taking a bigger proportion of sales compared to the service, which then dilutes the gross income margin in %. We also see some, you can say, geographical mix effects also hurting a little bit on the percentage of the gross income, more sales into North America compared to Europe, and also a little bit in Europe, actually shifting from the western parts of Europe, more into Central and Eastern Europe as well. Otherwise, it's good development on the gross income side, coming both, as I talk about the two major business areas from Trucks and Construction Equipment. We see that we are, in terms of cash R&D, a little bit higher. We have kept the R&D on a pretty stable level for some years.
I think now when we see, of course, inflation hits in and so on, and a little bit also new activities in a little bit more focus on new technologies. You will see a little bit gradual uptick in terms of R&D, and that's what you saw here at the end of last year. Not anything dramatic, but a slight drift upwards. Capitalization, amortization, a negative thing. It's a bookkeeping thing, not very much we can do about. When we look into this year, we will be, in terms of capitalization, amortization, flat to maybe that we have a little bit more capitalization than amortization. We were negative, as I saw here in Q4. The start of this year will be on the negative side, and then most probably turn a little bit into the positive side as we go along the year.
Selling and admin, very much related, of course, to the higher activities. That doesn't come through without a little bit of increased efforts in terms of selling and to some extent, admin as well. I think the important thing here is maybe not the fact that it is increasing, because I think pretty natural. The important thing is that we have flexibility in the cost that we add on, and that is the focus now. We don't build up new fixed cost in the company because sooner or later, even though the future look very bright right now, of course, market can normalize again, and then we need to have flexibility in these lifetimes. That's very much a focus in the organization for the time being.
We have another line item called other, here is not the majority, but a big part of that comes from the improvement on the joint ventures. That's what you find there. We have also sold, I think, a dealer in the fourth quarter as well. This other item, it's a little bit of, you can say, I think Tina told me, some years you have a bag of candies, and sometimes there are a lot of red candies, and sometimes a little bit of black candies. We had a lot of red candies, small items in Q4 2016, and we had more of black candies in the fourth quarter 2017. I mean, the big group like that, it can up a little bit like that. The biggest thing you find there is basically the joint ventures.
Cash flow, pretty good quarter, SEK 14.4 billion. Maybe as to mention last year there, we had the effect of what we paid for the fine for the European Commission investigation. That was why it was so low Q4 2016. SEK 14.4 We have a good development in terms, of course, underlying profitability. We see that we had a good development in terms of, actually a little bit of contribution from inventories. We saw also that the payables was on a good level. Nothing to do with payment dates, but it's due to the fact that we ramp up. Here you see a further effect of the ramp up. I think it is worth to mention when we talk about the ramp up and disturbance costs that we have, we are increasing quite a lot, up to 20%, and here you see it also on the payable side.
I think also a stable development, I would say, when it comes to investments as well, not anything dramatic, keeping that on the same level as we have said before. Use the assets as much as possible. Going into trucks, net sales up with 12%. If we do the currency adjustments, you see it is up 16%, vehicles 18%, and 18% corresponds very much in terms of increase of deliveries of 19%. Services, at currency adjusted, is up 9%. Going from SEK 4.8 billion to SEK 5.8 billion, you see here also then a pretty big part of the currency effect comes here, almost SEK 400 million. Maybe I should mention that as well. We also talk a little bit about, now is a little bit nervous. What do you say about the currency for this year?
The currency for the group for this year, once again, transaction exposure, and the same currency flows as last year. We think it will be pretty much, as it looks right now, a flat development on the currency. Nothing from the transaction exposure. Anyway, going from SEK 4.8 billion to SEK 5.8 billion and improving the margin from 8.7%-9.5%. Obviously, it is the higher volumes that we see. On the negative side, it is the increased efforts that we see on the sales side, the higher R&D cost, but also, of course, the stretched supply chain. Of course, being two-thirds of the group, it is very much what we see on a group level. Construction equipment up 28%, deliveries up 49%. Here you can see that you have Volvo up 27% and SDLG up almost 90% in terms of sales.
That is also why you see here when it comes to sales of machinery, it is up 39%. Each SDLG machine has a little bit lower value than a Volvo machine, especially on the GP side. That is why you do not have the same development on sales as you have on deliveries. Otherwise, a very good development and also a good thing when it comes to the mix is, of course, that we sell have a bigger increase on the large machine compared to the compact machines. Also here, a strong development in terms of service up more than 10%. The construction equipment, going from SEK 500 million up to SEK 1.8 billion in the year, SEK 3.8 billion to SEK 10.9 billion in the fourth quarter. Basically, it is about taking care of the volumes, high volumes into an industrial system that has been historically underutilized, gives an enormous effect on the leverage.
At the same time, as you can see here, no cost increase at all in terms of R&D, selling, admin or anything. It is extremely tight cost control you see in this very good market. That is a very good example of how to take care of an upturn in the market. Buses, we have the net sales, when it comes to currency adjustment, is -8%. We were more or less flat in terms of deliveries. Once again, here it is a little bit a question about product mix between fully built buses and chassis. These kind of things can happen between the quarters. Apart from that, a good development on the service sides, which is also then what we can see in terms of the improvement. Sorry, not improvement, but on the operating income, gives a good effect into the P&L for buses.
Apart from that, good improvements in the underlying productivity in buses as well, and SG&A being on the negative side. An improvement on the operating margin from 3.3% to 4.1%. Penta. Penta has the fourth quarter as the seasonally weakest quarter, as you can see from the historical graphs. Coming up now to SEK 2.7 billion in sales in the quarter above 11%, which is historically a very high figure. I think it's the second biggest sales figure in the history of Penta. When it comes to profitability, SEK 1.19 billion, approximately at 7% for the quarter. As I said before, the weakest quarter over the year. High sales and good product mix, generally much on the industrial engine side, and it is also about big engines as well, which is good. A good development.
As a matter of fact, this was in terms of operating income, a record year for Penta as well. Financial services, stable, continued stable development. In the quarter, almost SEK 590 million, 14.3% in return on equity. Here, this is adjusted for tax effect that we have in North America due to the tax reform or the lower corporate taxes in U.S. We have a big positive effect for Volvo Financial Services. The actually reported real return on equity is actually 22% for the year. If you take away that effect, we are on a 14.3%, and 14.3% is a really good result for financial services. New financing obviously will keep or actually improve a little bit on the penetration level, so we get a lot of new financing. Tough environment in terms of pricing, obviously.
Suddenly everybody likes to take these type of assets into the balance sheet, so banks, finance companies, leasing companies, and so on, so it's pretty tough on margins. I think we've kept it fairly good. Extremely good development in terms of credit losses. Historically very low. Europe is performing extremely strong for the time being. Just a few, since it's the Q4, a few words about the full year 2017. We are going then from an adjusted operating income of SEK 21 billion up to almost SEK 30 billion. As you can see, and you have followed it over the year, it is the same, you can say, explanations that we've seen good development on the gross income side. Little bit of increased cost levels when it comes to R&D, selling, and admin.
When we come into the other line, it is actually the joint venture accounts for a very big part of that. Then we have some sales of dealers for CE and also on the truck side as well, but I think that's the majority. If we compare also to 2016, we had some other credit losses still in 2016. That we didn't have in 2017, credit losses for China CE, as you remember. Basically a good year, a record year for the Volvo Group. By that, Martin, coming on as well, and I think we can do a very short summary then. You have heard the most of it. There we have it. As we said, the highest net sales and EBIT for the group, we are obviously very humbly proud of that.
Strong operating cash flow and a strong net cash position, and the proposed dividend taken as the proposal for the AGM by the board, an increase of SEK 1 per share up to SEK 4.25, reflecting the good results, underlying results. In addition to that, a continuing strong financial position that you obviously should have where you are in the cycle right now. Again, very proud of our colleagues in the group and how everyone has been working hard, and now it's full steam ahead for 2018. By that, I think we're open for questions.
Thank you very much, Martin and Jan. We will now start with the Q&A session. We will mix from the auditorium and the telephone conference. Let's start with three questions from the auditorium.
Thank you. Erik Golrang, SEB. Two questions. The first one on pricing in the U.S. You said in Q3 that you were focusing on getting the right prices on the new range, that that might hold back order momentum a bit, but yet you had very strong orders in North America. Should I assume that pricing is not an issue there? The second question on the overall leverage and how we should think of the business in 2018. You're entering this year at a run rate of orders, which is quite a bit higher in trucks than we were last year. There are some supply chain issues and some other factors, but how should we think about the drop through to that on earnings this year? The third question. You talked about some new electrical products. You have some experience now from the bus side.
Could you share any thoughts on how the aftermarket business has looked on hybrids and electric buses so far, and what you expect from that as that also moves to the truck side? Thank you.
Thank you, Erik. First of all, on pricing, generally speaking, we have seen in Q4 actually a slight positive development on pricing in most regions, which is promising, obviously. That is the balance that we need to continue to work on now given the very high activity level, obviously. That goes also for North America. If anything, a positive development that we have been also waiting for to some extent and continue to work with that balance between volume and pricing. When it comes to the leverage, obviously, what I think was positive, or what we think was positive, was that we had the 16% leverage, I mean, on the truck side in Q4. Still, given the fact that we are in a ramp-up mode, both when it comes to the transition in North America, as we were into, and also ramp-up mode in the whole system.
The bottlenecks, if I may put it like that we had in summer is not the same. We are debottlenecking, we are coming up because we have a continuous very strong order momentum. Obviously, this is one of the key areas to focus on in 2018 to have, as you put it, the drop through into the bottom line, so to speak. That is also one of the key parameters of building strength in coming to our long-term financial target as well. When it comes to the aftermarket business in the electrical side, obviously, that is changing a little bit. I don't like aftermarket business as you know that is our customer's main market, but the service business is changing character, obviously, because you get more into a system thinking, and thereby a deeper engagement.
Some of the components have less, so to speak, impact in relation to the traditional execution of a truck.
There are other parameters that are also compensating. It's little bit early days to say, but we see promising signs that we will have an opportunity to, even if it's a different character of the service business, but also have a good and solid service business for electrical solutions.
Hampus Handelsbanken. I also have three questions. Starting off with outlook. If I add Mexico and exports to North America, you are clearly looking at about 300,000 units. My question is, I don't think I have ever seen a combined Europe and North American market well above 600,000 units, and I would like to know what is the main challenge? Is it bottlenecks, or how do you think about that? Second question is capital structure. Following the dividend, you still have net cash SEK 16 billion. It is not unlikely that you generate another SEK 25 billion. How should we think about this maybe ending next year, or this year, on the cash situation and what is your plans for that, given that you are also very fully invested in the group? Last question is on the tax.
With the U.S. tax change, what kind of a tax rate should we look at for the group going forward? Thanks.
Thank you, Hampus. First of all, to your point, I have never seen it either, so to speak, such a coordinated, strong momentum, obviously North American and in Europe, but also in other markets. We see now good signs of Brazil, obviously, that also have, so to speak, the same type of products, but also in Asia, where we also are growing. This is obviously very positive. Having said that, and in addition to that, which is also positive, is that we have, as I said, good penetration on our captive powertrains and continue to actually grow that part, not at least down in North America. Obviously that is the challenge now.
How do we balance that together with our suppliers in several steps to keep, so to speak, the balance between taking part of the increased market because that is a super important investment in the rolling fleet for the future. Also, given the fact that we have better penetration per vehicles on the service business. At the same time, not over appetite, so we are not fulfilling our customer promises, of course, in quality, but also in delivery time. This is the balance. I have to say that the organization and our partners are working hard, and we see that we can continue to grow. In addition to that, also, we have the transition in North America, because now we do the clean capital in Mack and we are still running double programs for Volvo.
Still, I have to say that we are keeping it together. We have some extra costs, it's well contained. We see what it is, I think we are taking, so far, the wise decisions of having that balance. Obviously this will be a positive target, if I put it like that, also during 2018. When it comes to the capital structure, first and foremost, we are increasing the dividend with SEK 1 this year from SEK 3.25 to SEK 4.25. I think that reflects, of course, I think the stable and good development that we have seen in the Volvo Group in 2017. Obviously with the forecast that we see for the markets as well, I think that also shows that we have some trust in at least the near future as well. I think it's a well-balanced dividend if we start in that direction.
What we have said, the new target that we put was actually to be that we should be net cash. As you correctly said, we will be that also after the dividend and maybe also as always, a weak cash flow quarter in quarter one, which we always have for seasonal reasons. I think this is where we stand right now. We will see then what this year ends up with and how much we have managed to get in cash flow in 2018 and where we stand on the balance sheet. I think from our end, that's end of the day a discussion for the board one year from now to take that decision. What we have said also in the long run, first and foremost, we should have a strong balance sheet in the Volvo Group. It is a cyclical business.
It is capital intensive. We also have the financial services arm. We should not be too weak. We can debate how strong should it be then. I've promised many times, I will repeat it again, I will not take away the job from some of you here because we should not be asset managers, the financial asset manager either. Let's come back next year and see where it's at. It's not disturbing yet, I can tell you. I have to say, it looks promising, obviously, with the more momentum in 2018. We also say that we're calling all things that we can discuss the distribution of the cake, let's make the cake first so that we will concentrate on that. When it comes to tax rate, 24%-25% is our best estimate for the time being.
Thank you.
Agnieszka Vilela, Nordea Markets. I have two questions, please. The first one is about your order intake in Europe. We have seen some acceleration recently. Could you just tell us what was your performance against the market in Q4 isolated? The second question is on construction equipment. Can you comment on your market share development there and what's in your outlook?
Yeah. If we start with the order intake, that we don't have clear figures on. That is a drag now related to how the reporting is. Our feeling is that if we look at the pattern that we have, that we continue to have a positive development. What is promising to see is, as we said, is also that Renault has been in a very positive way also gaining momentum without, so to speak, stepping down from their principles of actually building a solid business when it comes to RVs and things like that. We see also it's a pretty strong across-the-board mix actually, between different segments and geographies. If anything, then a little bit maybe more into Central and Eastern, but that is also reflecting how the transportation business is moving.
Having said that, it is reflecting a strong, solid, so to speak, demand in Europe also, I think reflecting the overall economic activity. Our feeling is that we are keeping, and as we have seen also improving somewhat then for the new one. One should remember that always on high levels, and now it is about priorities of the price realization, et cetera, as well, that we are putting focus on. When it comes to market share for construction equipment, generally speaking, we can say that, as you know, we have higher market shares on GP or general purpose equipment, the heavy side. If you see the overall market share globally, that has dropped a little bit, that's mainly related to mix effects where we are strong.
We are not strong because we are relatively a little bit weaker in some markets, and thereby when they are growing a little bit quicker than, for example, Europe, where we are extremely strong, you get that mathematical effect. If you take geography by geography, we are actually still growing on the heavy side. What is extra good to see is that relatively speaking, we are taking more orders in the heavy segment, and that is our home turf where we are strong. That is promising when it comes to the customer feedback as well. Okay, we will now take some questions from the telephone conference. Please go ahead.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad now. The first question is from the line of Graham Phillips from Jefferies. Please go ahead, your line is open.
Yes, good morning. Two questions, please. Firstly, on the truck margin and 2018, can you talk a little bit about the drop-through impact from things like raw materials, how that progressed during last year and into this year? If we do get more OE deliveries than service, and maybe give an outlook for service in 2018, will that be dilutive? The second question is around investment in terms of R&D and CapEx. I think you're guiding to a flat number in terms of percentage of sales, so rising in absolute terms, what you're actually doing in terms of investing in electric vehicles. Is that a headwind, or is it swapping out for what you might have been spending on internal combustion engine?
When it comes to the truck margin, and more specifically on the raw material side, in 2017, we said that we had a quite significant headwind on the raw material side, and we had the ambition to offset that with our commercial negotiations. When we concluded the year 2017, it was actually a flat development, so we compensated everything. The material cost per se was more or less flat, actually. Having said that, we would, of course, obviously would like to have a flat development on the raw materials. Anyway, I think it was good to offset that. For the mining activity. Exactly. It is a little bit more difficult, yeah, of course, 2018. I think we see still some headwind on the raw material side. Maybe not to the same extent as we saw in 2017.
Some headwind on that is, I think, what we say for the time being. Maybe comment a little bit on the service side. If the truck or vehicle sales increase as they have done last year and this year as well, you will have a dilutive effect purely from a mathematical point of view. Having said that, the developments we see on the service side now is going in the right direction in terms of service contracts. We see the activities in our service workshops and so on. We have a very good underlying activity there. No, I think you will comment actually what I want to say also. This is super important. When we have the chance to put units out in the market, that is, a vehicle or a machine is a bracket for future service revenues, very important.
The portfolio now is much more in depth also when it comes to service contract penetration, for example. It's dilutive, but still it's a positive dilution, if I put it like that, mathematical effect. The R&D side, we are in a situation where we have kept, as I said before, very stable R&D, and we are gradually steering more and more of our R&D efforts into the what you call new technology, electromobility, automation, and also connectivity. Of course, also utilizing as much as possible our modular system, the cost system, to become more efficient in our R&D. Having said that, with all these things happening at the same time, we say that we will see a slight drift upwards on the R&D, and as you saw, it start here in Q4 and a little bit upwards also here in 2018.
Nothing dramatic, nothing like what you saw in 2013 or something like that, but a little bit of a gradual uptick on that. Holding R&D stable when you have inflation as well, salary inflation, so on, is pretty difficult in itself. That's also another effect. More specifically on CapEx, there we have kept that stable now for four years, and what we see there is that this will also be pretty stable for 2018 as well. There we don't see the same kind of a little bit uptick as we see on the R&D side. We are well invested in majority of our industrial footprint on that note, so I think that is the case. Coming back to what you said also, the cost system is really paying off for us when it comes to the current well-known technologies.
Having said that, we need to continue to put efforts on the well-known, if I put it like that, internal combustion engine, but axle systems, safety systems, et cetera. What is new and what is, so to speak, well-known is always to be discussed. Having said that, the development, which I think is positive, is that transport will continue to increase in the world, both of goods and people, and it must be considerably more sustainable. That is how it is. That is a super opportunity for us as a group. We have the technologies, and we need to continue to develop that. That's the future. Transport will not go away, but we need to make them more sustainable.
Therefore, electromobility, connectivity to make more efficiency into, so to speak, the transport systems, and automations, both for safety and for efficiency, and to get use of the electromobility in a good way that we are putting a lot of efforts and actually increasing with a lot in percentage but also in absolute terms.
Thanks. Just I'll get back in line. One final follow-up there was on the FX. As I understand, Jan, you said that you think FX will be neutral for the year, and I guess during the year, though, the first quarters could well be negative.
I think we say it will be flat for the year, actually. We don't comment on any specific quarters. Flat for the year.
Okay. Thank you.
Continue with the question from the telephone conference.
The next question is from the line of Klas Bergelind from Citi. Please go ahead. Your line is open.
Yes. Hi, Martin and Jan, it's Klas from Citi. I have three questions, please. I will take them one at a time. First one on services, big increase there in trucks. It's been down to benefiting from more captive components in North America before. Would you say that the workshop and more contract sales now represent a trend shift from this quarter and which is obviously in line with your strategy presented at the Capital Markets Day? We all remember the slide when you were drawing the opportunity there and was very excited. Thanks.
Obviously, always want to think that you're making an impact. I think in all fairness, it's a combination, obviously. It's a combination of high activity levels. Already with the same market share, as we've always said, we should have had an increase. We also see, as a matter of fact, when we look into several of our metrics that we are measuring, as I said, contract penetration, not at all the captive powertrain part, but also how we are utilizing the fact that we have 700,000 connected units in order to be more proactive. We see, for example, I was down in Ghent together with our people, how we are now penetrating the insurance part in a very good way, towing services, and thereby also steering in a positive way into our workshops and have a quick turnaround time.
We see how the Uptime Promise in North America is gaining ground. We are certifying more and more dealers in specific base. It's a lot of practical work behind this, and that is gaining. We are introducing remote downloading as one of the first brands, meaning that we can do software downloading much more quick and thereby minimizing downtime for the customers. Those combined things are making us a stronger partner to each customer. It's a combination, but this will be a long movie also, as we will discuss. This is hard work and continuous improvements.
All right. The second one is coming back to the truck margin. Obviously, solid growth, but we still see the low drop through to EBIT on cost owing to the stretched supply chain and then launches in North America and in Asia. Could you help me understand how these costs will develop here going forward? Am I right to assume that maybe by the second quarter of this year, the drop through can start to improve, i.e. the launches are over and the bottlenecks will start to annualize because it was in the second quarter of last year when the bottlenecks started to emerge? It looks like the first quarter will be the last tough cost quarter, and then we can improve going forward.
I think actually in a way, you give half of the answer yourself actually, because as you correctly said, we are in the changeover in North America, both for Volvo and now Mack here in the first, maybe a little bit, I think we will go into the second quarter as well. When it comes to the bottlenecks, yes, I think it will be pretty strained also for the first and second quarter. As Martin explained before, we are a little bit catching the tail as well because the kind of bottlenecks that we were discussing in the second quarter of 2017, they are probably most of them sold now. Now when we increase the sales figures and increase the production pace, you run into new ones, and you need to increase the capacity, both our own, but also with the suppliers.
We're kind of catching the tail all the time upwards. It is not one line with steps like this, and then you say you take a step increases like 250 different steps that are in parallel, and you need to manage that. A little bit, as I said, all other things being equal, I think we will still have a lot of hard work to do in the first and the second quarter. The third and the fourth one are still a little bit open, depending on what's happening in the market and how well we do the work in the first and second quarter. Obviously, I think anyhow, given also the high deliveries that we had, we were actually somewhat pleased to see that leverage was coming back in quarter four, and we were bending the curve on that part.
This is the focus area for us because when it comes to the Building a true quality company that we are doing the 12th consecutive quarter with improvement to have the leverage in the truck side, it is of course extremely important. That is a focus area. As you said, keeping also cost flexible when it comes to not only the operational part, but also SG&A, as one example.
My final one is coming back to electrification and trucks. There's a lot of noise out there, and I just wanted to confirm that you already have a lot of knowledge within the group, and that we therefore shouldn't expect a spike in R&D or CapEx. You're the pioneer in hybrids, launched in 2009 in buses, and you can draw on that knowledge. We're obviously talking medium duty, of course, but also if you could reflect on long haul. I personally don't believe in high penetration, but I don't believe therefore you would ramp investments. If you could get some more color also from you, Martin, there on both medium and long haul.
First of all, as you said, I think if you take from a pure bus division perspective, I think we can argue that we were too early out. The demand was simply not there. During a period of time, we were criticized, "Why are you spending money on electric mobility?" With good reasons. I have to say for us now when we look in hindsight, that has been extremely important because it is first of all to develop the different modules. It's battery, it's cell composition, software, the opportunities with architecture for different type of applications, both for buses and trucks. Construction equipment, not to forget, because we have showcased a number of things where we are using the same type of modules.
It's also about the utilization as such, because when you are talking about electric mobility, how you actually are cycling the battery, is it going from 10%-90% cycling, or is it from 20%-80% in order to have the combination between range and durability? How should you design a system? Urban transport will be a given that it will take the lead, also some of the confined areas operations such as ports, quarries, et cetera. Why I think that is important to mention is that will give the biggest impact for us as society. It will give the same impact, or in some cases better on CO2, in combination with that, it will also give impact on, as I said, NOx and particulate matters, noise, et cetera, in cities.
Also hopefully also have a debate, how do we build an attractive city when it comes to public transportation? There we have a strong position. We will continue to build on that. Again, what I said is that this is not only about the Volvo Group, but also having a strong ecosystem. To get use on the long haulage to your point, Klas, what we will see there, I think, is some of the main corridors where you will have port electrification to get use of it, and again take the best bets also with, so to speak, constant electrification. You can go, so to speak, the last mile with some sort of electric mobility or smaller combustion with renewable fuels, for example. In some cases also just cross dock lines.
Again, to make use of electric mobility in long haulage, it is not only valid to talk about electric mobility. You must talk about systems, business models, automation, and connectivity, and then you can make some sense out of it. That will start with big flows and not all type of long haul. We are obviously also with our hybrid competence also prepared for that. Not only prepared, we would like to push and take a lead and have a debate, how can we actually make this transition happen?
Thank you.
Okay, one more question from the telephone conference.
The next question comes from the line of Alok Katre from Societe Generale. Please go ahead, your line is open.
Thanks for taking my question. I just have one really. On the North American truck market, clearly, you said it is pretty strong as we can see. You sort of also said, well, the pricing is starting to pick up. Could you just talk about what you're seeing on the used truck side, especially as these come back in 2018? If you could also comment on whether customers were facing any labor or driver shortages, et cetera, and how is that sort of impacting your business-
In your business
higher shares or some of that. Thanks.
Absolutely. Thank you for that question. It's an important one, obviously. As I said, I was in the U.S. for week two and traveled around, meeting a lot of both customers and dealers, et cetera. I was also, almost by coincidence actually, dropping by one of our Arrow Truck Sales, where we are retailing used trucks, not only our own, but all brands. I was very happy to hear that it's a very high turnover rate of the Volvo Trucks. We have low inventory levels, and they are actually moving very quickly. We see also that it has straightened out and see somewhat improvement on that side. Both inventory levels and actually turnaround rates and pricing is somewhat positive. Primarily, I have to say on the Volvo side, I'm not saying that to brag, but it was what we heard, and we have that.
I think that is also related a little bit how big fleet you have there and how you have expanded. That is a good balance for us anyhow. On Mack, it is not that pronounced because we do not have so much of Mack in the market of the used side, given the nature of the business. They are staying much longer with the first owner, given the vocational focus and the waste collection focus, et cetera, that we have had. Also otherwise, if you take the units that we have, we also see a good situation. I think the used side is clearly improved, and that is coming obviously both from the general market activity, but also from that many have been, so to speak, cleaning out here.
I still think, though, that one of the parameters, because you can think about the order intake for North America quarter four, why should not it be even maybe higher than 280,000 Class 8 new market? There are some volumes coming back in, obviously, 2018 also, and pretty big volumes from the good years. I think that is also some balancing effect of the total growth. Driver shortages is an issue, I should say, almost across the globe, but primarily in Europe and in North America, and also one of the reasons why we need to continue to invest in driver environment, driver safety, security, making that profession more attractive, conditions, et cetera. In addition, more long and midterm also, some of the flows being automated also, so you can combine that like you have seen in the industrial evolution over the years, because those are industrial systems.
For many customers and flow, this is an issue, actually, for capacity.
Are there any more questions from the auditorium? We continue with Sorry, what? Okay.
Hi. I have two questions. Just on the electrification. I fully understand that you see this as a system integration within the hauliers and that you should think this in a bigger picture. If you look at the truck industry, it's quite fragmented. It's very many owners of trucks that work for bigger operators. For instance, if I were to be a big grocery store or anyone in the U.S. or in Europe that says, "Our customers want us to deliver on electrical vehicles." To Tesla's points, they already got orders for their semi truck, that nobody really knows how heavy it's going to be and so on and so forth. Having said that, how long time would you have to develop a matching concept on the Class 8, just a pure electric truck? What would be the biggest challenges?
Would it be the charging, the weight, the capacity? Well, if you could elaborate on that, please. We take that first.
Okay. Very quick on that. I think you are absolutely right, Olof, that's the reason why we need to work much more in the triangle than only, so to speak, supplier and the customer, where our customer is the, if I may put it like that, the sub-supplier to a bigger scope than, for example, a retail chain or a grocery store or whatever. To get used of electrification and connectivity, et cetera, you need to think in the system, otherwise you will not get the benefit. First of all, I think it's good that we see actors like Tesla shaking up the system and having that discussion, because that is also giving this type of discussion much more headroom, actually, in the debate, what matters in order to make the transition.
Having said that, 800 km, just to give a comparison of what 800 km that has been announced from Tesla, that is a diesel tank equivalent of 240 L. If I should sell a tractor unit today with 240-liter diesel tank, no one should buy it because they don't have the autonomy. Having said that is not enough to say, "Okay, we'll have 800 km." We need also to rethink the logistical system and say, "If you have 800 km, where are all the hubs that we can use that?" We are making the transition. My point is that it's right to do this, we need also to think through the logistical system, and that we need to do with the logistical buyers. We often have that discussion, why do you go to Carrefour? They are not buying any trucks.
They are designing the logistical system. I think you have a strong point there. We need to work in the triangle. It's fragmented, but we will be part of the same ecosystem in a way. When it comes to long haulage, again, that is a matter of energy storage. It's not a technology difference between if you are doing an urban or, so to speak, a long haul. It's about the architecture of the truck, how do you use it, what range do you want to achieve, and the difference then might be how efficient are your battery packs in relation to competition, and that we need to safeguard that we are keeping the front line. We are prepared, and the abatement will be really between weight.
It will still be around cost, because even if we say, from a society perspective, this is beneficial, how do we get the societal benefits into, so to speak, the person who should take, so to speak, the investment for it? That we need to continue to work on, both with, so to speak, when volumes are coming in, obviously, but also maybe how is the view on the pricing of emissions, et cetera. I don't know. There are different factors that will make that transition anyhow. We are prepared from the cost system perspective, matter of energy usage rather than it's a completely different animal.
Okay. Second question. Rigid hauliers in the VCE business. Can you elaborate a little bit on what your business case is here in this area and how much you are pushing your scope of market? What kind of size could this be? If you move up in the weight, it's a quite consolidated industry. Can you just talk a little bit about this, Lundstedt, and what we can see for the future here?
I know. I think we have built on the strengths that we have. We have platforms from the Terex acquisition. We have modernized that. That was badly needed. Even if it was robust machines, they needed upgrades in safety, driver comfort, as we said, monitoring systems, suspension, and load, et cetera. I think that the rationale, obviously, is that we have a strong position in quarries, site management. We have it in mines. One thing that we see is that there is a trend in the mining sector that when you look into their way you're putting CapEx, it is not only the super big machines anymore. Before, everything was about capacity to the expense of whatever CapEx, because just to get the things out, so to speak.
We see that both the bigger and the smaller mining houses want to have more of a opportunity to stepwise go up and down in capacity. Therefore, our judgment, we see that also on the articulated, but also the rigid. We feel ourself in a pretty good spot, and it is a big market for medium-sized mines, et cetera. Getting hold of the network of Volvo with the Volvo branded situation, and also a lot of customers already using our excavators, wheel loaders, gensets, together with partners and ADTs. We are not giving figures here, but this is one of the main rationales why we actually acquired Terex. It's finally coming through here, and they are doing a great job.
We move over to the telephone conference for more questions.
The next question is from the line of Marcus Mittemeijer from DNB. Please go ahead, your line is open.
Yes. Hi, good morning, everyone. Two questions from my side, please. One, also on electric trucks, and you mentioned it's about sort of business model evolutions here. I'm wondering if you have a view, let's start with medium duty on the total profit pool on a per truck basis. How will that evolve between the equipment and the, you touched on aftermarket service earlier on. If you look at that total profit pool opportunity. That's question number one. Question number two around capacity utilization in various geographies. Where are we currently? I can guess for Europe, or I think we all know it, and what's sort of the planned peak for 2018 on current build rates in the various geographies? Thanks so much.
Thank you. If you start with coming back to the electric truck, I think very interesting question from the fact that historically the profit pool of medium duty has not been at all the same on the service side as it has been for heavy duty. It has been a much lower proportion of services on medium duty given the utilization rates, et cetera. I think this actually is an opportunity for the medium duty to have a much more of a system thinking, given the nature of how you need to set up this, in relation to specialist competence in maintenance, et cetera. If anything, I think there is opportunity for a better distribution of the profit pool between the hardware and the services with electrification in urban solutions.
Primarily on the distribution side, waste collection a little bit different because there we already have the system thinking. When it comes to capacity utilization, you can say like this, that it depends where you look in the value chain. Obviously we have a globally coordinated powertrain system, and that is tensed, if I put it like that. Which is also, again, very positive given the fact, again, that we have very high take rates of our captive components in all parts of the world. Also that we continue to increase performance steps of our I-Shift or similar, the mDRIVE, the Auto Shift. Also with crawler gears, for example, replacing automatic gearboxes, so to speak, the overall demand.
If you think about the primarily, so to speak, continuous challenge we will have on a global scale, that is to continue to work with the powertrain flows. Having said that, again, the other main challenge that will translate into a great opportunity is also the transition of the North American production line.
Okay. I think there are just one final question from the telephone conference, we will have that will be the last one, we finish up here. Thank you very much. The last question.
Okay, the final question comes from the line of Peter Test, One Investments. Please go ahead, your line is open.
Yes, thank you for taking the question. I was wondering if you could give some thoughts and updates on your penetration of common components beyond the powertrain and other initiatives like consolidation of variants, which in a high demand environment might be more straightforward to achieve. On the capacity aspect asked earlier when there's 600,000 combined market and higher penetration of your own powertrain components. When you think about handling that from a system basis and the capacity needs, whether you could give some comment as to how you might be changing the mix between the outsourced capacity versus internal capacity to meet that above peak demand. Last thing is just on capacity utilization. Can you give some comments around how you feel about capacity system utilization now in construction equipment and North America trucks? Thank you.
Sorry for that. Can you just repeat the first question? I didn't quite follow that.
Sure. You've been increasing your investment outside of powertrain common components in helping the overall modular base of the truck, maybe just giving some understanding of how the common component penetration beyond the powertrain is going. Also you had quite a number of variants in different markets, specific trucks made for specific markets, which were complicating the system. Now in a high-demand environment, you might have more success in driving.
Sure. Absolutely. Now it's clear. I think this is also, again, a very important question that we have been reiterating a number of times that when it comes to the core system, historically, we have been talking about powertrain as one of the success factors, engines, and gearboxes, and so forth. What we are working a lot with high discipline is obviously also continue to develop the core system outside that. The frames, for example, today we have three executions with standardized or modularized hole patterns, giving the opportunity to do a lot of exchanges, both on component level, also on R&D, and on parts and services. That is one example, and that goes beyond that. On the new technologies, as I've been into, this is a very important part of our strategy, that we have the modules both on hardware and software for electrification and autonomous applications.
We see that also when it comes to how we work actually with our joint venture partners in some of the components to create a good core system around that. I think we have a good discipline where we are not sacrificing the ability for the brands or for the different applications to be standardized, but still having, so to speak, the benefit of the right type of volumes on component level. That is going accordingly with a high level of discipline in the system, and not only in the truck group, but also together with buses, Penta, and construction equipment. When it comes to powertrain, that is absolutely to your point. We are working with a mix between what is, so to speak, in-house and what is outsourced in order to have the right flexibility in terms of volumes.
Having said that, we feel that we have a footprint that we can continue to build on, so we don't feel that we need to do a lot of new installations around the globe, if I put it like that. We have a lot of buildings already. That we can continue to drive. Again, when it comes to capacity, obviously, given the high capacity utilization, given the high activity level and good order books we are getting into, this will be one of the key areas that we will continue to work with during 2018, together with volume and price, as we learn in school.
Okay. Thank you very much, Martin.
Thank you.
I think that was the last sentence for this press conference. Thank you all for participating.