Good morning, everyone, welcome to the presentation of the third quarter report by the Volvo Group. My name is Henry Stenson, and I will be your moderator today. The program is as usual. We start with the presentation. We go over to a Q&A session. I hope you enjoy this wonderful truck. With that, Martin, please, the floor is yours.
Thank you, Henry. Thank you. Also from my side, good morning, everyone, to this quarter three reporting from the Volvo Group. I have to say it's a great video, actually. It was a great launch, but I will come back to that as well. Third quarter, as we get into it straight forward here, as you have already seen, it was a good and solid quarter. We will say that when we're working together, there are good days and are less good days, but this is actually a good day for us. We are feeling proud of what we have achieved in the third quarter. Growth is coming back. We are getting out volumes and also profitability levels. If you look to the actual profitability levels, both for trucks and construction equipment, actually the best quarter three ever for the group.
That is, of course, a strong achievement. When it comes to truck side, improvement from 8.2% to 8.6%. For construction equipment, up to 13.4% with very good leverage, obviously. Net sales up to SEK 77 billion. As you see also, a net sales increase of 16%, currency adjusted. Overall, down 9.1% in operating margin for the group. It's a good and solid quarter. Volume development, positive. We have discussed that we've had good order intake, as you have seen, in quarter three now we are getting out volumes in a good way on the truck side, plus 15%. As you can see, that goes across the different brands and across the different regions. Very positive to see, for example, in North America, plus 29% for Mack. Generally speaking, good and solid development here.
Machine deliveries also for construction equipment, very strong, up 48%, great work by the organization to really achieve those results. Strong order intake really getting that out to the customer has been a lot of focus, we can see especially for SDLG, very high increases, also for the Volvo brand, across regions also, by the way. Services, very important for us, as you know. We have started to report that in order to focus on it and to give you transparency and the view where we are. Plus 5% currency adjusted. As you know, services is one of the key focus areas for us.
First of all, and the most important thing is that it's the best feedback when it comes to customer retention, customer loyalty, customer satisfaction, but also that this is also one of the key cornerstones for the Group when it comes to be more resilient to the cyclicality of our business. We are pleased with that development. There are more to do, obviously, but Construction Equipment +10% and also positive development in all main business areas here. Utilization rate, obviously one driving factor. Captive powertrains continues to kick in, but also where we see that the number of the focused activities we have around services will gradually come into play even more during the coming quarters here. Trucks. Good demand, as we've said, in all parts of the world. I will come back to the outlook later here.
Mainly, Europe continues to be strong with the north of 10% order intake in relation to quarter 3 last year. That is very positive, and North America coming back. On the stretched supply chain, as you remember, in quarter 2, we were reporting that we have gradually increased the pressure in the supply chain, mainly in the European operations, but also some of the global flows that we have, mainly on powertrain. That should also continue into quarter 3, which is natural given the fact that you need some sort of buffer in order to breathe in the system and to reset also buffer levels, et cetera. That was the vacation, obviously. Vacation period has been working fine.
The organization has been working really hard, and I would like to mention that our own operations and purchasing, together with our suppliers, have been doing a great job here, and we have really decreased the number of flows that are stretched. Still, there is obviously a high level of pressure in the supply chain. If you look through the quarter and after vacation, it has been a continuous improvement, and we continue to see that improvement happening, and it will be a continuous focus on that. Positive development, still work to do. We have the arms around it, so it feels as a good and solid development here. What has also been important in this quarter is that we have presented a number of very important new products and services.
For example, as you can see on this slide, the new 420- and 460-horsepower LNG powered trucks. It could be both LNG that is based on fossil fuel, liquid natural gas, but it can also be 100% liquefied biogas that is actually decreasing CO2 by 100% if you're using that from fully recycled sources. This is a diesel-based engine or a diesel cycle-based engine instead of the normal gas powered that is based on the auto or the petrol cycle, and that gives higher efficiency and higher energy utilization. It will be a very good and solid product into the renewable fuel sale for regional and long haulage. We are also actively working with other stakeholders in order to increase also the infrastructure around those fuels. Here we have a solid alternative for long haulage, so that often is the missing link, so to speak.
Also, as we saw on the video here with Jonathan Randall, we had the launch of the new Mack Anthem and also upgrades of other parts of the Mack range. I was attending the launch, and I can say that the reception was absolutely fantastic. "Mack is back" was the most common comment into long haulage. The brand equity when it comes to Mack is absolutely fantastic. That together now with the continuous improvement of the dealer network, the captive powertrains, the mDRIVE, and now the full range will further actually boost the development of our Mack brand in the U.S., Canada, and also in the export markets. Great start and great launch. Now we concentrate to have a transition as planned. So far, so good, and very hard and dedicated work here.
To recapitalize a little bit, this year is a busy year when it comes to product launches, as you can see here. Even if we are working, as we said, a lot with continuous improvement, driving the culture in the group, we are also continuously upgrading our offering. North America, goes without saying, the biggest reveal in 20 years, started, as you know, with the VNR in the first quarter, the regional haulage for Volvo Trucks North America, continued with the long haulage VNL in North America for Volvo. Also great receptions. Now then, Mack Anthem in North America for Mack Trucks. We are actually strengthening segments where the two brands have been traditionally weaker. Long haulage then for Mack and the regional offering for Volvo Trucks.
Also, as you can see in Asia, we have already talked about the Quon launch for the premium markets in Asia, Japan, but also export markets, as you know, Australia, South Africa, for example. UD Quon, the medium duty, getting started, have a good order intake, have a plan. Also now during this quarter, the UD Croner, that is a light, medium duty truck that we are starting to sell now in Indonesia, but it will continue. Obviously also here, we are concentrating a lot of resources in addition to really continue to work on the product cost with good progress, also working with the service offerings. We are getting a solid and good business in Southeast Asia. I have to say also this area, we already have a plan and building a very good platform for the future.
What is interesting to say here is also that all these platforms are more and more based on our modular system, the cost system, giving good leverage into the different component families and component groups, and also into R&D and the service market. When then it comes to the market environment and the outlook for this and next year, start with North America. Improved freight rates over a couple of quarters now. We have seen stabilized used prices, as we have discussed. We are, I should say, well-positioned. We have been working, as you know, actively with the used side, so we have stock levels that are on very sound positions. We see also that the mix of our used stock levels are good. There are a lot of good signs, both for the market but also for the group as such.
Vocational and construction has been pretty strong for a period of time. We also now see that regional and long haulage coming back and fleet orders coming in here. Already for this year, we are slightly adjusting upwards from 225 to 235, and we foresee a further uptick next year to 260,000. You have seen, maybe there are some of the forecasts a little bit higher than we are. We also see that some of the old fleets coming back from 2015 will actually play a role when it comes to the used truck market. Here it is about managing that in a good way, obviously, and I think we have a solid plan here. Then it goes now in together with an increased market to, in a good way, manage, obviously, the product launches and the transition in our production system.
Here I just want to be clear. With a good market like that, it is not a hunt for market share. It is a hunt of good quality in the price positioning, good product quality, good delivery capacity, and delivery precision, because then you are building a solid platform for the future. To some extent, when you are doing this, the market share should be the variable parameter. I think we are very clear on that. Having said that, obviously, we will not miss any opportunity, but we will not sacrifice our cost plans, our product quality plans, our delivery precision plans for a hunt of a couple or fragments of % market share.
Europe, also a strong outlook. As you saw, order intake will continue to be positive year-over-year, and that is telling us that good activity level. We see that also in the credit portfolio delinquency rates all-time low, solid earnings from our customers in different segments and in different parts of Europe. If anything, it is actually a little bit concerned about the lack of drivers and the difficulty to get drivers in some of the segments that is holding it back a little bit. We foresee a flat market. In some of the early reports here talking about that we were taking it down -2%, I should call it flat, if it is okay. It is a little bit, it is 18, 19 months ahead of plan, so it is difficult to find 2 so to speak. Good levels.
Brazil, I was coming back here 2 days ago from Brazil, short visit at the Fenatran. Actually good spirit now. You know that the surrounding markets have been positive for a couple of quarters. We also see now Brazil is coming back, resources, agriculture, interest rates and inflation coming down to more decent levels. For the first time in many years, it is interest rates and inflation coming back due to real measures and not by subsidies or other, so to speak, political influence measures. It will not be a quick recovery, anyhow, we foresee some +20% on the heavy-duty market, and that in itself, of course, is positive given the fact that everyone has been streamlining their operations, including Volvo. Asia, very strong year. We are adjusting upwards again, China, weight and dimensions, new emission legislations, positive market outlook.
Still we see that this year is an over swing, some 1.35 million trucks obviously is too strong in the long run. Even next year, we see a continuous strong market. It will go down, but it is sound that it's going down. Our current forecast is talking about some 1.15 million trucks, but that is, as you know, still a very strong market. India, also some bumps on the road during quarter 2 this year related to the Euro IV, BS IV, about emission level 4, including also the Goods and Services Tax reform in quarter 2 that put the market somewhat to a halt. That is coming back now. We have a good quarter 3, we see that the market will continue.
As a matter of fact, the GST reform in the long run is positive for logistics, interstate transports, and not at least for driving the market more into from really basic into value and further on in some niche segments into high-end or even premium, like mining, for example, where we have a leading position. Japan, coming down a little bit. What is worthwhile saying here, that is also a little bit affected. Some good years now post new emission legislations, you always have a correction. Mainly, our belief is that that will affect the medium-duty market. When we talk about the heavy duty, that is the most relevant for us. Obviously, we have a medium-duty offering also. Out of the 95,000 this year, approximately 48,000 will be heavy duty, and we foresee the heavy-duty part to go down to 45,000.
That is a less pronounced decrease than for medium duty that our forecast is talking about 47 to 40. Market shares, pretty stable situation since we met last time. North America, we have been losing market share. It was really the start of the year. We were more conservative. We took some stock weeks in order to really get used in balance together with also the new truck inventory levels. Obviously, we have been working, sorting with somewhat a transition. I have to say that we have the situation under good control, and we feel that now the market share position has stabilized. I think that is okay. Mack a good and stable level there. Europe also Volvo historically high, flat level of almost 17%.
What is positive is to see that we are starting now to turn the tide for Renault in a steady way, in a consistent way. One of the key factors here is actually that we have been now more consistently regaining market shares in France. That is telling us that obviously our big dealer network in France, but even more importantly, customers are getting the confidence back about the Renault Trucks organization and the future in that. We are around 30% market share now where we should be. That is really positive. Otherwise, you can say that there is a continuous tough market when it comes to prices in Europe. Even if there is high volume, there is a number of the surrounding markets that normally used to also taking a part of the volume. It has been a tough competition there.
Brazil, the same thing, obviously, tough price conditions in the whole market given the very low volumes. The main reason here for the decrease, as we have already reported, is the really tough conditions in the medium duty where we are making priority for quality in the business. On the heavy duty, we are keeping our positions well north of 25% market share. Japan, also very positive, turning the tide here. In the recent months, we have been close to 20%, in some months above 20%. That is also a positive development for the UD Trucks organization. As you can see, South Africa and Australia, both of them with all our brands, plus 25% market share, I think 27 points, if I remember correctly, in Australia. Very positive. Here, just a reflection, everything plus. Plus, plus. Orders plus 32% and deliveries plus 15%.
As we talked about the supply chain and everything, I think the organization, as I said, have done a great job in focusing, getting their arms around it, well identifying where we have it and how we are working with the different action plans on that. As you can see, North America plus 79, and deliveries plus eight. There it will be now a lot of focus to manage transition and also deliveries and promises that we are putting to the market. Again, Europe, when we are talking about what will happen with the European market, you see here in relation to Q3, already strong last year, plus 14%. Book to bill, actually positive in all markets, even if it's a wash then. Someone will say that to me, also it's a wash in South America, so we are absolutely happy there.
Construction equipment, another very strong quarter, obviously. Market growth across all regions, That has obviously supported a very strong result that Jan will come back to. As you have seen, orders up 45, deliveries, again, up very strongly, They have been managing to get it out to the market. I have to say also that a big part of this very strong development is also the transformation activities that has been ongoing in construction equipment now for a couple of years. Very focused, good motivation in the whole organization. I think Jan will comment on it, but the main part, actually, of the improvement is coming from very strong internal activities. We just have to say this. We invented this product, as you know. This is Volvo, the invention of the articulated dump truck. During the quarter, we celebrated 75,000th ADT.
I stood here when I was doing my toothbrush activities this morning. I said, "75,000 ADT." It's more difficult maybe than combustion engineering from time to time. I have to say this, why are we bringing it up? First and foremost, because we are very proud of it's also a sign of the development that we see in GPE in the heavy equipment. We are continuing to gain market shares in the heavy equipment. On the rolling fleet for ADTs in the world today, we have 50% of the rolling fleet in the world. When we look at pure market share the recent years, we have been around one-third of 33%-35%, recently, we are moving back up to almost 40% market share worldwide here.
Obviously also with the broader range that we introduced, the A60 and the 65-tonner is also making a statement that this is Volvo land, so to speak. Wheel loaders, plus 2 percentage points globally, and actually a flat development on excavators. Here we still have a big untapped potential, since that is the biggest market in terms of volume. I still think when you look at the product mix and the market mix, we have done a good job here. When it comes to the market environment, also here, I should say good development in all markets. We have slightly adjusted, I can start in China because that is always, now when they are coming back, the main focus.
As you can see, we have adjusted this year, it's difficult when you have such a strong bounce back to really get the figures right, we have discussed that internally also. In Q2, we had +35% to +45% for this year, and now we are saying +60% to +70%. One can ask why are we then thinking about a little bit slower increase, if I may put it like that, of 5%-15%? We think actually that now when we are approaching the trend line, that the increase and the growth will follow that a little bit more. The main reason is that we see that the development in China is more sound now. It's based on machine utilization.
We can follow that with our connected vehicles and equipment, we see actually that the machines are used more and more, the machines that we have been sending out are active. We feel that this is based on fundamentals, some point in time, it should start to follow the trend line. If it will be 5%-15% or something around that. It will definitely be a little bit more soft growth, but still good growth in China, also then in total good levels. Europe and North America, we expect for next year continue on good levels and also somewhat growth in the rest of Asia. That is following, for example, the good development in resources, not least for Indonesia and also India coming back here. Orders and deliveries here.
I think maybe the only comment, it's a pretty straightforward graph. Maybe the only comment that could bring some concern is North America and the orders, -17%. I will take away that concern because that is related actually to a product launch or a product opening last year of compact excavators that we had a break of offering during 2 years until Q3 2016, when we opened order books for compact excavators, we had a peak in orders. If you look at the underlying trends, that is following pretty well actually what we have seen in the other markets. Generally speaking, a strong development. Buses, deliveries up 24%. That was obviously strong. Somewhat challenging mix, that Jan will come back to, I think.
What I would like to talk a little bit more, okay, we had a number of important orders, 7900 Nova Bus, that is very important in order to have a balanced situation. The 25 full electric 7900 is still relatively low numbers. That is the biggest full electric order we have taken, but it is still relatively low numbers for every tender. They are now gradually increasing, the tender activity level is also increasing. What we have done during this quarter is that we have increased the battery capacity on the 7900. We have also additional features when it comes to loading. Not only, so to speak, the off-charge loading at end stations, but also overnight loading with high capacity. We are extending the range up to 200 km, and that is giving them a completely new type of autonomy.
Also given the fact that you can use both off-charge and overnight loading using off-peak loading, so to speak, thereby optimize when you are buying, so to speak, the energy for operators. In addition, if you look at the energy consumption, here you have an efficiency that is somewhat 80% lower, actually, due to the much higher efficiency of an electric engine. It is a good system, as you know, we are providing the full infrastructure here together with partners. Important step. What is also worthwhile mentioning here is obviously the modular thinking of our electromobility. All the components, all the parts, software, infrastructure modules will, and can already be used in our other business areas.
We will see that coming obviously for urban solutions for trucks in due time, but also for construction equipment, obviously, where there is a big need for that, not least for noise reasons, actually, where we are doing a number of pilots now with main customers. Volvo Penta also just a good quarter. We made a quality campaign to protect customers. It has been well executed, so no drama about that. It was coming with a positive, Johan will talk about that. When it comes to orders, still good. I think it was +14%, sales or deliveries also positive, 12%. Deliveries increase by 7%. Also I have to say, I am proud that we are launching the first four-digit horsepower engine.
Why that is important is that with its 1,000 horsepower and with IPS 35, we get in actual measures, the feel of that is actually 1,350 horsepower, including the benefits of the IPS system. If you have four of those, you can actually have propulsion ready for yachts up to 120 feet. That is further strengthening our presence in the yacht market, where we already up to 60-70 feet, has a market position of more than 50% market share globally today. Very positive as well. By that, Johan, I think I leave the stage to you to go through the financial figures.
Thank you, Martin. Good morning. From a financial point of view, pretty straightforward quarter, I would say. Looking into sales, basically coming up from SEK 69 billion last year to SEK 77 billion, and currency headwind of something like SEK 2 billion. You can say sales growth in basically all regions, very much reflecting what Martin talked about before. In terms of what we call the adjusted operating income, what we had last year, that was not included in the adjusted, was the final settlement in terms of the E.U. investigation of SEK 190 million, and this year we take away SEK 400 million in capital gain from those. That is excluded in the adjusted operating income. We go from SEK 4.8 billion to SEK 7 billion, 7.1%-9% in EBIT margin. You can see across the line, good development for Trucks. We see quite impressive figures coming back to that later.
Unfortunately, a little bit lower sales both in Buses and Penta. We will come back to that a little bit later as well. Currency headwind of SEK 220 million in the quarter, more or less what we talked about in connection with the second quarter. When we look into the fourth quarter, we foresee a currency headwind of something like SEK 500 million, a little bit worsening compared to what we had when we guided on the second quarter. Looking into what drives the profitability, SEK 2 billion is coming out of gross income. Of course, a big part of that comes from what we see, but also from the volume increase in Trucks. We see that cash R&D and capitalization and amortization is on the negative side.
We talk about capitalization and amortization for the whole year of 2017, we will be somewhere, I would guess, between SEK 800 million and SEK 1 billion in higher amortization than capitalization for the whole year. Maybe a little bit less than what we have guided before. Selling and admin increasing, partly you can say it is due to, actually due to the fact that we are increasing, I mean, the sales are increasing. You have a certain part of the selling cost that is actually variable, and we have to have more feet on the street to actually take care of these markets that we see. This is according to the internal plans that we have as well. It is nothing that comes as a surprise to us. We have also the stretched supply chain that affects us on a negative way.
We look into the cash flow, it is at SEK 0.6 billion a quarter. It comes of cash, we are in a net cash position of close to SEK 11 billion. We see that we have the same development as we have had before in terms of property, plant, and equipment investments, and that same level that we have kept for quite some years. We have a quarter in terms of cash flow, where we can say the accounts payables seasonal-wise, after the summer holidays and so on, where we actually repay the payables to our suppliers. Before we start to build that one up, we have a poor situation on the payables. It is more or less mechanic. This is also more or less in line with what it should be. No surprises from our point of view. Was it you, Henry?
Look a little bit closer into trucks, going from SEK 3.8 billion-SEK 4.3 billion in profitability, 8.2%-8.6% in terms of EBIT margin. Basically, what we have talked about before on the positive side, higher volumes, the income from the joint ventures is actually improving quite a bit. I would say particularly Dongfeng Commercial Vehicles is contributing quite a bit, but also VEC. The size of VEC is a little bit bigger than DFCV . Selling costs, supply chain, then the higher R&D cost is what you have to see here on the negative side. CE, up when it comes to the delivered machines, but also sales. We can see here that I think it's important so we don't get the impression that it is China that drives the development in terms of profitability. It is actually what I showed before.
It is a broad-based improvement that we have in terms of deliveries in all regions. You can see here also in terms of the large and medium machines, 53% up, and this is not only China, even though SDLG sticks out. It is a broad-based improvement in terms of regions and also a good product mix. That's important to have in mind. Generally speaking, a good development, 31% up, and if we actually exclude the currency, which is a headwind, it is 35% up in our sales. Here we see this in terms of the business areas, also the strongest development in terms of service sales as well. Here, absolutely good internal work being done here. Then, of course, selling has by the volumes, high capacity utilization.
This is also a system that is. We have quite a lot of capacity. We talk about that well in this message in the group. Maybe Volvo CE is the part of the group that's been mostly well invested, to put it like that. That also, we can say that here, the capacity, when we put in a lot of volumes in these factories, have been fairly empty for a couple of years. It helps quite a bit. That situation is different compared to trucks. A little bit the same symptom in trucks, but we can say Volvo Penta and so on is not so eminent here as we see in some areas on truck side.
Then, of course, we had in the quarter then this sole dealer, actually the whole dealers for Great Britain , that was capitalized SEK 250 million. If you exclude that, I think it will take away approximately 1.5% of EBIT value. From 5.2%-13.4% in Construction Equipment. Bus is maybe a little bit more difficult story. Increasing sales with almost 25%, that is definitely on the positive side. We are a little bit. We have a few headwinds, and it's on the currency side, as you can see, some SEK 60 million. We are ramping up the Nova as well. That is connected with some cost here in the third quarter. Then we have a negative mix.
One of them is the obvious mix that we go higher vehicle sales. We go for vehicle sales, so bus sales, of course, dilutes the margin because the service become a smaller part of the total sales. It's a mathematical effect that actually affect us quite a bit in the quarter. We also have, as you know, quarter by quarter, depending on what orders we actually deliver, the result can be bumpy, and we have some orders that were pretty low margin in the third quarters as well. Having said that, we are a little bit, as you can see on the curve here, when it comes to 12 months rolling operating income, it's actually a bit plateaued on the bus side, and that's something that we will have to continue to work on. We want to break that trend upwards going forward as well.
There are some explanations to this, speaking of satisfied with the development, we need to turn the trend upwards as we had in the, you can say, 2015, especially. Penta, also a good quarter from many points of view, a little bit, a few headwinds coming in, it is basically coming from increased cost in a little bit in the industrial system during the quarter, a campaign cost that affected us quite a bit as well. Due to the growth also, a little higher, you could say, ambitions when it comes to selling expenses as well. You can say if we didn't have this campaign cost, the quarter would have been yet another good quarter for Penta with improved profitability compared to where we were before.
Here we are not that worried that it will come back, I think already in the fourth quarter. VFS, also pretty simple story, SEK 550 million, which comes in the third quarter. Good volumes coming in, penetration slightly improving, if you compare to where we were in beginning of the year, a little bit better also than compared to where we were last year. Good in terms of delinquencies. The market that we had talked about before very much in VFS is Brazil. Brazil is definitely now under control, actually stabilizing quite a bit. I think we are not worried about that anymore, unless something dramatic happens, but as it is right now, we have come through that one. As you can see, return on equity on a 14.2% level. A very healthy situation in VFS. With that, Martin?
As I said, pretty straightforward quarter, not so much to talk about.
Yep.
We open up for Q&As.
Absolutely.
Thank you. Thank you, Jan.
We start with this end.
I have three questions. Starting off on China. It's quite a significant outlook that you're looking at for VC and trucks. I would be interested if you could talk a little bit about the joint venture you have there with Dongfeng. Second question is on Russia. We heard one of your competitors talking about Russia coming back sharply and not being able to meet demand in Russia and giving a very strong outlook for next year. It would be interesting to hear how Volvo has developed in Russia, if you see the similar situation. Last question is more on sales development. We hear Volvo Cars are releasing a new concept for selling cars with a cold start, ordering it over internet, and also a subscription package with no down payment.
I would be interested to hear if this is something that will work in trucks, if you're looking at it. Thanks.
Should I start with Dongfeng?
Yeah.
Dongfeng. We had a bit of a tough start the first year, I think it was 2015, when the market actually went down, it's not very fun to start your own venture where we're basically going, I would say, into red figures, actually, not a good start for the corporation. I must say, a lot of good work has been done internally in Dongfeng, actually, when it comes to restructuring. Actually, the way that maybe you wouldn't expect from a Chinese state-owned company, when it comes to employment and so on. It's quite a lot of restructuring going on in the industrial system, where we reduced the number of factories quite a bit. We closed some loss-making subsidiaries as well. A lot of hard internal work.
Of course, now when the market comes back, it can be pretty close, actually, that this will be a record year in terms of truck for the total market in China as well. That helps as well. I think that is good. Otherwise, I think we are still learning a little bit in this cooperation. It is a good atmosphere and so on, but you need to get to know each other a little bit. You need to realize the synergy projects that you're working on. We had talked about before, the manual gearbox, now we are into the 11 liter engine that we see they have some license from us and so on. A lot of product renewal comes as well in the coming years as well, both on the heavy-duty side and the medium-duty sides. A lot of things going on, generally speaking.
I think that the cooperation and the joint venture is developing in a good way. Working in China, for those who've done it's not an easy fix if I put it like that. Sometimes it feels like you take two steps forward and one and a half back, and then it can be a couple of months where everything is fine. I think it goes well, actually.
Yeah, maybe also add on what Jan said, we were there last week, actually. It feels like that was three, four weeks ago, but lots of things have happened. We had I think also good discussions about, a little due to your last question also, how will the sales development look in China, for example. We are working a lot together on developing the sales and service structure and the combination of that together with Dongfeng, and it's very high level of curiosity how to drive that. It has been more of an order boom to fill up the factory, and then you are actually delivering home where not a lot of focus on the life cycle management, so to speak. High level of curiosity, and I think these type of programs also building a joint culture in a good way.
To Jan's point, we are investing from both sides a lot of time in to learn to know each other and what are the real benefits. As we have said before, the equity ratio that different partners have has obviously impact. In the long run, the most important is that the partners feel that it's a win-win situation. Also when it comes to the harder activities, we are now also sourcing a number of the components from Dongfeng into the Volvo operations, and that is also working well. The cost system also on the Volvo part is important for us when it comes to the emerging markets. I have to say that we are in a very interesting position there and have got the act together in a quicker way than I anticipated, actually.
Russia, we agree, it has been a sharp uptick in the market. We have been able to get back to where we should be. Well north of 20% market share when it comes to imported brands, and also a good level of production into Kaluga, and that is a benefit right now, obviously. Actually good development also in the service business. I have to say that Russia is good, but that is also part of the global system. We are now into volumes where we are balancing that obviously in a way where we also can meet delivery times, but also delivery promises. It's about how far can you stretch your system when it comes to delivery times and at the same time, not be too positive, so you're promising more than you can deliver, so to speak.
I think for us, it was important to get back to where we should be, and we feel that we have reached that position. Finally, when it comes to sales development, I think it's a lot happening when it comes to how we are selling trucks and even more important solutions. Having said that, there is still a lot of differences between automotive or cars and commercial vehicles. I normally say that, as you know, Hampus, that it's more in common the truck and a stone crusher than a truck and a car, even if they are using the same infrastructure, so to speak. Therefore, I think what we are working with is obviously more and more, so to speak, the uptime or the life cycle promise in different forms, as you know.
There we see a bigger interest also, not only in the traditional part of Europe that has been most mature in some segments like mining and ports where you can calculate life cycles, but also U.S., for example, bigger interest, and also in some of the emerging markets. As I said, I was down during the week now in Brazil. A lot of focus on this because customers feel to take the next step, you must work closely in a partnership with more advanced technology. I think to some extent, we will streamline the sales in itself, given the fact that we have better tools when it comes to configurating and you use connectivity to quickly go into what is the right spec for your application.
At the same time, it is a design process of a solution system that I think can be further developed, actually. I think we have been spending too little time actually on really going to what spec should you really have as a customer, when it comes to the historical data also of your application. Now with connectivity, we can be much more sharp in table making those grids, so to speak.
Okay. Christer Malm from DNB.
There you are. Now we're very.
I had a question on the new financial targets you presented there this quarter. Maybe you can give some argument why now and why you presented them when you did. My impression is also that the 10% margin target maybe was a long-term target, but now you are at 9.3% EBIT margins adjusted this far in 2017, and the outlook to 2028 looks pretty okay. Is that something that we can actually expect over this cycle? That was on that. The second thing was on alternative fuels in the future. You talked about electric mobility, we also have fuel cell alternatives. How do you see this developing over the next years? Because we are seeing quite big moves in the markets. Also if you are adjusting your R&D cost base accordingly to the part of this development.
If I can start a little bit why now. I think you have it in the recent board of Volvo, an annual process where you evaluate your financial targets, how you perform according to them, and then also evaluate if they are still relevant or if they should be changed. That's something you do every year. Obviously, you don't change the targets every year, but you evaluate how they work. I think now it was the first time when the board evaluated the targets actually to change them. It's something that is actually more tangible. It's according to an ordinary board process, not more dramatic than that. The day when you decide upon it, you release and communicate it, then that happened to key in August. It's not more dramatic than that, I don't know what to say more than that.
In a way, the target is clear, it is precise. It's about 10% over the business cycle. Of course you can ask yourself how do you define a business cycle, how long it is, and so on. It's much clearer than what we had before, being number one or number two, because I think it's more difficult to grasp. Having said that, at the same time, if you think about it, if you want to be number one and number two, I think you have to be about 10%, at least historically we show that. I don't know if it was such a dramatic thing anyway, but it's much clearer, much better than the old one, I think. Something to relate to. Both for us actually, but I think also for the capital markets as well.
Obviously, I think coming back to your second part of that question, where are we in the cycle, where should we be, et cetera. I think it's fair to say that we should be, than we are, so to speak, reaching the target of the cycle. We should be north of 9.1% now. We have Europe that is strong and solid right now, and we have, even if that is little bit early days also in the North America recovery, but coming back, et cetera. I think that has to show itself, but there is a gap between the current performance and the financial targets. I think that is obvious. Obviously we have put plans, activities to work on that.
As I've said to you many times, what we are all working with is continuous improvement of the underlying profitability, clear, so to speak, links between activities and what we're doing. Secondly, actively work on better flexibility to decrease, so to speak, the volatility of our earnings. I think we have proven that now from North America. We are continuing to work on different measures, everything from the flexibility in the industrial system in itself, the service sales, closer relations in the value chains around the globe that is increasing speed, so to speak, and then also higher level of flexibility when it comes to the cost base as such.
The third part of it is also to invest in a more prudent form to follow different, not at least when it comes in industrial capacity, that we historically have had a little bit an over-belief in the max volumes instead of taking it step by step. When it comes to R&D and alternative fuels and electromobility, new technologies as such, here I think is one of the big tickets for the future we are working a lot with, where we see now that we have been the last five, 10 years investing heavily in our cost system, in our modular platform, standardized interfaces, different type of modules that we can fit into the different platforms, and not only between trucks but also between the business areas.
Just to take one example that we have already said a couple of times, take the UD Croner, the medium duty. We have, investment-wise, one third of what it should be without the cost system. What does that mean? Yeah, that means that we can redirect funds in our current, so to speak, R&D, not cap because that's the wrong word, but the R&D levels that we are talking about more into new technologies and still have, so to speak, the right speed in electromobility, automation, alternative fuels, connectivity, et cetera. When it comes to alternative fuels here, obviously it's always about how many of the offerings should we have? What is the viable economic life length? What is the viable technical life length?
What we see is that we believe that in some applications, as we have said here now, gas is and will be a viable alternative for some applications, both in trucks but also in other areas. Electrification will come in time. Having said that, with electrification, you need to have certain range extenders, if you put it simply. That could be combustion and diesel or gas. It could be fuel cells. It could be loading along the road, infrastructure development, et cetera. Here it will be more and more of a system development. I think one of the good things for us is that we were a little bit too early out, actually, with buses.
The good news is that we have gained good experience in the utilization of electrification and also how to build a viable modular system because this is a tricky part when it comes to the energy management, the battery modularization, and then also some of the major hardware parts because that will also be combined with automation. Interesting times ahead, but I think now we have got a good view on where we are and how we should continue to work. Having said that, it means quickly, we have rearranged our way of working in R&D, we have much more focused teams so that can iterate quickly, so to speak. We don't foresee any big changes in the overall spending, but how do you use your funds will be different.
Björn Enarson, Danske Bank. Continue on R&D. You have talked a lot about R&D productivity over the years, you are now also talking about redirecting R&D and so on. Is it fair to assume that the overall R&D budget will be pretty unchanged going forward, or do you need to take it up because a lot of course, much, much higher demand on CO2 and et cetera?
I think what we are overlooking right now is that for the coming years, we think and we feel and we have plans for keeping it pretty flat, so to speak. We are having, so to speak, spending approximately SEK 15 billion a year, given the fact that we are getting better and better in the modular system, we can free up capacity in a good way. Having said that, also, R&D will be different in the future because it will be much more of an iteration also with customers. In the long run, what is what here? What is selling? What is R&D? I think if you take what is classified as R&D, we think that we have a good opportunity.
We are sitting in a good position for using these platforms of what we call the cost system or the modular system to redirect also and increase focus where we need to increase it. What we see that is positive is that it's a big interest in the ecosystem also to work with Volvo. We are very proud and humble of that, meaning that we will not succeed alone here. We will only succeed by working with different partners, small and big companies, customers, suppliers, other stakeholders in order to increase. I think we are well aware of creating that ecosystem as well.
Okay, perfect. On the balance sheet, you talked also for quite some time how you want to strengthen the balance sheet and build more cash. I guess that's still valid. Can you give something for how long you are likely to mount up cash?
We'll see. I think we have to come back to that one in connection when we discuss dividends and so on. I don't think it's on an alarming level yet, actually. Not at all.
I think, I mean SEK 11 billion. Having said that we want to be in a net cash position, we are anyway in a volatile business, high capital intensity and so on. I don't think that it is a problem actually so far. Having said that, we really don't intend to be asset managers over time either. I think there are people that are better on that. That should not be the focus for us. At a certain point of time, we need to think about if we have too much cash, what we do about it.
If you were in charge, you would be dividending out more money, but still build cash.
Sorry?
Dividending out more money, but still build cash. That's okay.
I think it's good also if we can increase the dividends to the shareholders, obviously. I think this is a nice problem to have. I mean, we will come back on it.
What I think maybe to add to what Jan's saying, and we have said that several times. We'll continue to invest, approaching that on a one-to-one basis, depreciation. If you look too, it has to be three technologies, et cetera, but we are coming down to more, so to speak, sustainable levels even that. We are not overlooking for the time being any big decision with people, given the fact that we have a strong volume base, we have a strong market position, brands, et cetera. Then we are saying important now is a strong balance sheet, as to Jan's point. To the right extent, we have put that in the financial targets of the new business cycle.
Having said that, what is important, positive now feedback from the rating institutes and building that platform because that will be very important for the value creation. Then obviously, when we are there, we don't want to be asset managers. Then, it's a mathematical game onwards. Under. Thank you.
Let's go over to the guys who are listening in to the webcasts. See if we have any questions over the phone, please.
Thank you. Ladies and gentlemen, we are now ready to take your questions over the phone. If you wish to ask a question, please press zero one on your telephone keypad. That's zero one on your telephone keypad to ask a question. Please stand by while we register the first question. The first question comes from the line of Graham Phillips with Jefferies. Please go ahead. Your line is open.
Yes, good morning. Thanks for taking my questions. Two questions, please. One first to Jan and then to Martin. Just Jan, on the profit increase in truck. Just trying to understand a little bit behind the headwinds, obviously you're focused on FX and R&D. If I look at the increase otherwise, how much of that was really due to associates and joint ventures? Because clearly you're being held back at the organic level due to selling costs and the supply chain issue. I'm trying to think into sort of the final quarter and into next year when we should start to see some sort of kick from the incremental margin from the growth in organic sales. Then just to Martin on the Renault, and the heavy truck.
Can you give us a bit of an idea of the split on how the T heavy truck is going in terms of volume, market share, and how the Renault business itself in terms of its own internal margin target is going, and what actions are in place to see improvements on that business? Thank you.
As you know, we don't disclose the figures for the joint ventures in detail. You can find it in the other segment. You can also find it in the footnotes as well, so you can get a feeling for how much. Yes, it is contributing, but it is not, you can say, taking away actually also the good underlying development we have in terms of our own truck sales as well.
Absolutely.
There, we are increasing sales quite a bit in the quarter. I think we have fairly good underlying gross income margins on our own trucks as well. Of course, we have the headwinds as we have talked about in terms of disturbances and so on. I think I'm okay with the underlying development that we can see in the truck side. We have had to be careful with the disturbance costs. Yes, the joint ventures are contributing positively. A little bit maybe coming back to the levels that we saw when it comes to Dongfeng at the point of acquisitions or kind of returning to these levels. Just to give you some kind of broad indication.
Sorry, what was that? Just from memory, what was Dongfeng earning in those years?
I don't know. I think you can check it yourself somewhere.
In terms of the headwinds on selling costs and supply chain disruptions, when do you actually see them falling away in terms of a year-on-year change?
If you take the ones who are, when it comes to disruptions in the supply chain, that's something that we are working on that. We saw actually during the third quarter trend, where the month by month sequentially, the costs were getting lower. I think we are getting a better grip on the situation. There still will still be disturbance costs in the fourth quarter. As it looks right now and what we know right now in terms of these, they will gradually become lower in the fourth quarter. I think we both hope and believe that when we leave the year, that we have a normalized situation on-
We had a feeling that it was a basketball through the water hose, but now it's more of a tennis ball through the water hose. When it comes to the selling cost, this is actually something that we had planned for, and that goes according to our internal plan. They are not in any way headwinds or something like that. It's the same with R&D as well. Those you should not look upon, because we had to rebuild also on the selling side after, you can say, the global sales organization we had, some of the brands did not have people to be able to manage their own brands. I would say the brand that was most affected by that was Renault, actually. We are adding resources to be able to run the brands.
Of course, that should be also shown that in an improved profitability as well. A very clear link between, as Lyon is saying, sales and services and, so to speak, the resources. It's not about store functions or anything like that. On the Renault, you have to continue that maybe, Graham, on that. As you know now, sales is the T-Range and associated to construction and distribution ranges that we are selling. I think that has been a very important part of, so to speak, turning the tide, giving confidence into the market, but also the focused organization that we have out from Leon is very important in that strengthening of the situation. When we look into the P&L and the development of Renault, that is going according to plan.
What I think is most important to see is actually the customer mix also, that we have a customer mix, not only coming back in volumes of the big fleets, but also the retail customers and different type of customers, that is obviously a sign of strength and sustainability.
Very good. We can take two more questions over the phone, please continue.
Thank you. Moving on to the line of Claus Berling with Citi. Please go ahead. Your line is open.
Yes. Hi, Martin and Jan. It's Claus from Citi. Firstly, on services, we have solid growth in trucks against a tougher comp and a further acceleration in construction equipment. I just want to confirm if this is the self-help now coming through. Before, one could argue in trucks that you had the help from the now captive fleet coming into service in North America, but that we were waiting for the increased penetration of the service contracts in Europe. Is that service growth now a result of your efforts to increase that penetration?
I think still it's a mix of both, actually. We are still enjoying the fact that we have gradually increased the captive penetration of powertrains, both for Volvo, obviously, but also importantly for Mack when it comes to the mDRIVE. That is definitely one part of it. You are also right, Claus, that the higher focus, and that goes actually everything from really the basics of our service business, parts supply, working more with that in all parts of the world, and obviously the contract penetration, to your point. Having said that, there is also a little bit of lag in the service with contract penetration, as you know given the fact that when you are signing that, you also have the warranty period, et cetera.
If you look at the development of that, it looks promising, and that is one of the most important bases. We actually, as I said, from low levels when I was in Latin America during the weekend and beginning of this week, it was the same actually, but we have a good trend here. High focus in the organization, more focused also organizational set up in the different divisions around services. This is very high focus in the organization.
Good. Early days, still more positive to come there. That's good. My second one is coming back to Graham and the truck margin. Obviously fears around cost pressures into the quarter, and they're obviously there, but you have improved JVs even if we strip out the Deutz gain, you have solid service growth, you have strong deliveries as an offset. I want to come back to the cost pressures, because in the past, when we had a lot of launches, we had jagged production effects. I'm talking about FH and the T-Series. Now we have VNR, we have VNL, Mack, Quon, and Croner. Obviously not as global and not as massive as FH. We get questions whether the cost inflation from launches ahead would ramp or can we stay at the current levels?
I think if I can start, Graham, here I think this is obviously always a high focus when you're doing transitions of platforms and new products, et cetera. At the same time, I think we have to move away also from the fact that, okay, what is the extra cost, et cetera? A good world-class company will manage actually launches because we will always have launches. Therefore we have said that when it comes to this now, we want to be measured on the fact that we are a company that will have constant type of introductions of products, et cetera, and that is how we are also communicating that. Having said that, obviously for that business area, it will be a temporary effect. We are a global company.
We must be able to manage that in, so to speak, the normal portfolio gain, if I put it like that, Claus. That is how you should look upon it. As I said also during the presentation as such, we are clear, not at least when it comes to North America and the markets coming back, that you can be tempted to go aggressively on the volumes. That we will do, but not to the expense of product quality, to delivery positions, and also, as you say, the cost management of doing the transition, and the price positioning. I think we have clear marching orders when it comes to how to manage this. I have to say also when it comes to the Quon and Croner, that has been going according to plan and in good order.
One should remember also in all fairness that FH was a tricky game, both the global launch as such, also it was related to initial legislations of Euro 6, it was a very tight schedule both for, so to speak, the chassis and the cab update together with the powertrain update.
Thank you.
Very good. We take the last one over the phone, then we continue in this room.
Thank you. We now take the last question from the line of Markus Mittermaier with UBS. Please go ahead. Your line is open.
Hi. Good morning, everyone. Quick question on the 2018 outlook in North America, please. You mentioned earlier that fleet orders are coming in, I was wondering the 260,000 number that you mentioned, what is the underlying assumption here on large fleets? Do you see that momentum at a higher rate than year-over-year sort of last year? Or is it still driven largely by small fleets and own operators? That's one, maybe you can elaborate a little bit on the used impact from the 2014, 2015 model years. That's on the North American outlook, on electric trucks, two questions here. One, if you had to estimate among all the trucks you're selling globally, what percentage is sort of on a daily utilization under 200 miles, roughly, just ballpark? Technically, you mentioned this on buses.
If I look at the technology you have, the inverters, the battery management system, et cetera, is that a one for one sort of technology that you can transfer over to trucks? Or do I have to think that there is significant incremental work that needs to be done there just from the loads, et cetera? Maybe lastly on pricing, price realization in different geographies, that would be very helpful. Thank you.
Yeah. If I start with the North American market, obviously when it's getting up again, you can always then we see that also little bit in the forecast and the provisions coming in from different, that it's ranging everything from 250 to up to just south of almost 300,000 for next year. What we are saying is that we see that the market is coming back. We see that long haulage and regional haulage is coming back. Already vocational and construction has been on good levels. Therefore also, when we look at the fleet mix, obviously, you have a higher degree of bigger fleets into long haulage and regional. From that particular point of view, I think you should think about a little bit more on bigger fleets in relation to that.
Obviously when long haulage and regional haulage is coming back, you have also mix there. Generally speaking, that is my view on that. When it comes to the big volumes coming back from 2014 and 2015, that is why we are a little bit more on the conservative side of the total market forecast of the range, as I just talked about, because we think that will affect, so to speak, how to manage the used and used will also manage how, so to speak, the new truck market is going. Having said that has been one of our main priorities. We have managed well the used truck situation, both when it comes to stock levels.
We see that also the pricing is flattening out, and we are ahead of plan both for Volvo in the on-road segments where they are primarily present, but also in a good situation for Mack Trucks. That is, so to speak, the basic reasoning behind it, but good transparency about the situation there. When it comes to electric mobility, obviously, when you talk about 200 miles, 200 kilometers, as we talked about, this is always about applications and what infrastructure and what type of time constraints you have, et cetera. As we have already said, this will be more massive into urban areas, confined areas where you have, so to speak, a natural infrastructural development of the electrical infrastructure.
When it comes to the modularity, it's a high degree of modularity between the different business areas and also brands as a matter of fact, going forward, because we can use modules, and the battery as such, as you know, is built up by cells and modules and then finally to batteries. That is also made in a modular way, depending on how you package it into the truck or the bus or the excavator or even the boat eventually. There, I think we have been from the start working with a very clear mission from the electromobility group of R&D, and also then more specifically for buses to make that a modular system from the start.
That goes not only for then the electrical components and the software and hardware management system, it goes also about the hardware components and the mechanical components that are linked to that. For example, the Volvo Dynamic Steering, that will be, not a prerequisite, but it's a good benefit for that as well, and then eventually for automation, for example. What was the last question? Pricing.
Pricing.
Yeah, pricing. Generally speaking, pretty flat-ish situation around the globe with still high competition, actually.
Very good. Thank you very much. Another question is someone more in the room, please.
Agnieszka Wyrowa, Carnegie. I have a question on the governmental sales. You said that you discontinued the selling process. Do you consider the business core today, or would you sell it if you got a higher price tag? Also, a follow-up question really. What do you think about the construction equipment? Do you consider it core? Would you remind us also what are the synergies between construction equipment and the group? Especially in the light that one of the shareholders is quite vocal about the idea of separating the businesses. Thank you.
I think the reasons why we initiated this process actively with government, they are still the same, so to say. Having been running through this process, basically having a pretty big difference or gap between our expectations and the bids we received, it's quite obvious that we stop this process. It's also important that we stop it. We will not actively ourselves go out and start a new process. Not at all, actually. Now we need to continue to develop that business, take care of, and actually deliver on the values that we've seen in that operations. Now we stay where we are actually and continue to develop it. That's the thing. Having said that, we have a very solid order book, order backlog. We have a great company. We have good people working focus even during this process.
This is not at all a drag for us. As we have said that, it's not reflecting the value where it should be. It is as simple as that. When it comes to VC and the synergies, first of all, we have been very clear, I think this year, first in relation to quarter 1 reporting about the way forward during the capital markets day. We have a very clear strategy of increasing the transparency of all business areas in the group, including also the truck areas as we go along. Decentralization, accountability, two principles of everyone responsible for customer satisfaction, volume growth, profitability. Principle number 2, use whatever you like in the Volvo Group to improve number 1. I think Volvo Construction Equipment as such is a brilliant example of that. How they have been using, so to speak, also the group assets.
In terms of, obviously, powertrain technology that will come further now with the five and eight liter, or eight liter primarily. It will come further with electric mobility, automation, connectivity, the distribution system, the logistical system, Volvo Financial Services, et cetera. The most important, as we have said, and that goes for all our business areas, high level of transparency, high level of showing that it should be considerably better to be part of the Volvo Group than not. If that's not the case, obviously, we should look into what is the best for any business area out of the 10 we have or even within a product line that we have shown. That is what we are concentrating around. We are driving that, and I think we are very consistent in showing that it's giving results, so to speak.
We have time for one more question, then we need to break and go over to individual interviews. If there is anyone more who would like to put a question, please come forward. Seems like we have obviously touched upon all the things needed. Thank you so much, and see you again for the fourth quarter report next year.
Have a nice weekend.