Morning, everyone, and welcome to the presentation of the 3rd quarter report by the Volvo Group. My name is Anders Jensen, and I will be your moderator today. The program is as usual. We start with the presentation. We go over to a Q and A session, and I hope you enjoy this wonderful track.
With that, Martin, please, the floor is yours.
Thank you, Henri. Thank you. And also from my side, good morning, everyone, to this quarter three reporting from the Mondele Group. I have to say it's a great video actually. So and it was a great launch, but I will come back to that as well.
So 3rd quarter, as we get into it straightforward here, as you have already seen, it was a good and solid quarter. We always say that when we're working together, there are good days and there are less good days, but this is actually a good day for us. We are feeling proud of what we have achieved in the 3rd quarter. Growth is coming back. We are getting out volumes and also profitability levels.
If you look to the actual profitability levels, both the trucks and construction equipment, actually the best 43% ever for the group and that is, of course, a strong achievement. When it comes to truck side, improvement from 8.2% to 8.6% and for Construction Equipment, up to 13 point 4% with very good leverage obviously. And net sales up to SEK 77,000,000,000 and as you see also then a net sales increase of 16% currency adjusted. And overall, down 9.1% in operating margin for the group. It's a good and solid quarter.
Boarding development, positive. We have discussed that we've had a good order intake that you have seen. And in quarter 3 now, we are getting out volumes in a good way on the truck side, plus 15%. And 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 Mac.
But generally speaking, good and solid development here. Machine deliveries also for Construction Equipment, very strong, up 48%, and great work by the organization to really achieve those results. Strong order intake and then really getting that out to the customer has been a lot of focus. And we can see especially then for SDLG very, very high increases, but also for the Volvo brand, across the mediums 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. And as you know, services is one of the key focus areas for us. First of all, and the most important thing is that is 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. So we are pleased with that development. There are more to do, obviously, about Construction Equipment, plus 10% and also positive development in all business main business areas here.
Utilization rate, obviously, one driving factor. Capital powertrains continues to kick in, but also, 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 then, good demand, as we have said, in all parts of the world. I will come back to the outlook later here. So but mainly, I mean, Europe continues to be strong with the north of 10% order intake in relation to 43 last year, and that is very positive and North America coming back.
On the stretched supply chain, as you remember, in Q2, we were reporting that we had gradually increased the pressure in the supply chain, mainly in the European operations, but also some of the global flows that we have, mainly in powertrain. And 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, etcetera. And 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 at Orsted.
And still, there is obviously a high level of pressure in the supply chain. But if you look through the quarter and after vacation, it has been a continuous improvement, and we continue to see that improvement will happen again. It will be a continuous focus on that. But 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, then as you can see on this slide, the new 420-460 horsepower LNG power trucks. It could be both LNG that is based on then fossil fuel, liquid, natural gas, but it can also be 100 percent liquefied biogas that is actually decreasing CO2 by 100% if you're using that from fully recycling sources. This is a diesel based engine or diesel cycle based engine instead of the normal gas power that is based on the OIBDA or the capital cycle, and that gives higher efficiency and higher energy utilization. So it will be a very good and solid product into the renewable fuel cell for regional and long haulage.
And then we are also actively working with other stakeholders in order to increase also the infrastructure around those fuels. But here, we have a solid alternative for long haulage that often is the missing link, so to speak. Also, we had as you saw also on the video here with Steve Mochler, we had the launch of the new MAC Anthem and also upgrades of other parts of the Mack range. I was attending the launch, and like I say, that the reception was absolutely fantastic. Mack is back was the most common comment into long haulage.
I mean, the brand equity when it comes to Mack is absolutely fantastic. And that together now with the continuous improvement of the dealer network, the captive powertrain, the M drive and now the full range will further actually boost the development of our Mack brand in United States, Canada and also in the export market. So great start and great launch. And now we will concentrate to have a transition as planned. But so far, so good and very hard and dedicated work here.
When it comes to and just to recapitalize a little bit, this year is a tricky year when it comes to product launches, as you can see here. So even if we are working, as we said, look, with continuous improvement, the 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 Q1, the regional haulage for Volvo Trucks North America, continued with the long haulage VNL in North America for Volvo, so great receptions. And now then, receptions and now then a Mack and North America for Mack trucks. So we are actually strengthening segments where the 2 brands have been traditionally weaker, long haulers than for Mack and the regional offering for Volvo Trucks.
Also, as you can see in Asia, and we have already talked about the Q1 launch for the premium markets in Asia, Japan, but also export markets, as you know, Australia, South Africa, for example. JUVIC KRONER, the medium duty, getting started, have a good order intake ahead of plan. And also now during this quarter, the UV crew, so 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 to in addition to really continue to work on the product cost, the good progress, also working with the service offerings. We are getting sold in a good business in Southeast Asia.
But I have to say, also in 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 and D and the service market. And then it comes to the market environment and 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, they're well positioned. We have been working, as you know, actively with the used sites. We have stock levels that are on very sound positions. We see also that the mix of our used stock levels are good. So 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, but we also now see that regional knowledge coming back and fleet orders coming in here. So already for this year, we are slightly adjusting upwards from 225,000 to 235,000,000 and we foresee them further to the next year to 260,000. As you have seen, maybe there are some of the forecasts a little bit higher than we are, but we also see that some of the hopefully coming back from 2015 will actually play a role when it comes to the used truck market. And here, it's about managing that in a good way, obviously, and I think we have a solid plan here. And 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.
And here, I just want to be clear, with a good market, that is not a hunt for market share. It's a hunt for 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. And to some extent, when you're doing this, the market share should be the right and parameter. And I think we are very clear on that. And 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 handful of or fragments of percent market share.
Europe, also a strong outlook. So 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, delinquencies raised all time low, solid offering from our customers in different segments and in different parts of Europe. If anything, it's actually a little bit concerned of the lack of drivers and the difficulty to get drivers in some of the segments that is holding it back a little bit. But we foresee a flat market, as in some of the early reports you're talking about that we were taking it down minus 2%, but I should call it flat, if it's okay, because it's a little bit I mean, it's 18, 19 months ahead of plan as we continue to fine tune that into the last decimate, so to speak, but good levels.
Brazil, I was coming back 2 days ago from Brazil, short visit at the Fenerfran. Actually, goods being written now. You know that the surrounding markets have been positive for a couple of quarters, but we also see now Brazil is coming back, resources, agriculture, interest rates and inflation coming down more decent levels. And for the first time in many, many, many years, it is interest rates and inflation coming back due to real measures and also by subsidies or other, so to speak, political interest measures. So it will not be a quick recovery, but anyhow, we foresee some plus 20% on the heavy duty market.
And that in itself, of course, is positive given the fact that all of everyone has been streamlining their operations in Finland. Asia, very strong year, and we are adjusting across again China, weight and dimensions, new emission legislations, positive market outlook. And but still, we see that this year is an obvious swing. Some 1 0.35000000 trucks, obviously, is too strong in the long run. But even next year, we see a continuous storm market.
It will go down, but it is sound that it's going down. I mean, our current forecast is talking about some 1,500,000 trucks, but that is, as you know, still a very, very strong market. India, also some bumps on the road during Q2 this year related to the U. S. 4, above emission level number 4, including also the goods and service tax reform in Q2 that put the market somewhat to a halt.
But that is coming back now. We have good quarter 3, and we see that the market will continue. And as a matter of fact, the GST return in the long run is positive for logistics, interstate transports and not at least for driving the market more into from really, 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. And then Japan, coming down a little bit, what is worthwhile saying here, that is also a little bit effective. Some good years now, post the new initial legislations, you always have a correction.
Mainly, our belief is that, that will affect the medium duty market. So when we talk about the heavy duty, that is the most relevant for us. Obviously, we have a medium duty offering also. But 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. So that is a less pronounced decrease than for medium duty, but our forecast is talking about 47% to 40%.
Market shares, pretty stable situation as 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 soft weeks in order to really get used in balance together with also the new truck inventory levels.
And then obviously, we have been working starting with somewhat a transition. But I have to say that we are we have the situation under good control, and we feel that now the market share position has stabilized. So I think that is okay. Match due to the stable level there. Europe also, volume historically high, flat level of almost 17%.
And what is positive is to see that we are starting now to turn the tide for renewal in a steady way, in a consistent way. And one of the key factors here is actually that we have been now all consistently regaining market shares in France. And that is telling us that obviously our big deal network in France, but even more importantly customers are getting the confidence back about the Renewal Trucks organization and the future in that. So we are around 30% multi channel where we should be. So that is really, really positive.
Otherwise, you can say that there is a continuous tough market when it comes to prices. And even if there is high volume, since a number of the surrounding markets that were mostly also taking a part of the volume, it has been a tough competition here. Brazil, the same thing. Obviously, tough price conditions in the whole market given the very low volumes. What 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.
But on the heavy duty, we are keeping our positions well north of 25% market share. Japan, also very positive, turning the tide here. And in the recent months, we have been close to 20%, in some months, above 20%. So that is also a positive development for the Unitrucks organization. And as you can see, South Africa and Australia, both of them with all our brands, plus 25% modest share, I think 27 points, which I remember, particularly in Australia, so very positive.
Here, just a reflection, everything plus, plus, plus orders, plus 42% 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 the arms around it and well identified where we have it and how we are working with the protection plans on that. As you can see, North America plus €79,000,000 deliveries plus €18,000,000 So there, it would be now a lot of focus to manage transition and with deliveries and promises that we are putting to the market. But again, Europe, when we are talking about what will happen with the European market, you see here in relation to 43, you were already strong last year, plus 14%. And book to bill actually positively in all markets, even if it's a wash down.
I mean, someone will say that in the NLP, so it's a wash in South America, so we are absolutely at that pace here. Construction Equipment, another very strong quarter, obviously, market growth across all regions, and that has obviously supported very strong results that Jorgen will come back to. And as you have seen, then orders are fortified and deliveries again up very strongly, and they have been managing to get it out to the market. But 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. So I think Johan 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. I mean, we invented this product, as you know. This is, more the invention of the articulated dump truck. During the quarter, we renovated 75 1,000 ADT. I stood differently when I'm doing my toothbrush activities, it was excellent.
75,080. It's not I mean, it's more difficult maybe than combustion engineering from time to time. But I have to say this, why are we bringing it up? 1st and foremost, because we're very proud of it, but it's also a sign on the development that we see in GPE in the heavy equipment. We are continuing to gain market shares in the heavy equipment.
We are I mean, on the rolling fleet on the rolling fleet for ADPs in the world today, we have 50% of the rolling fleet in the world. When we look at pure market share in the recent years, we have been around onethree or 33% to 35%. But recently, we are moving back up to almost 40% margin share worldwide here. And obviously, also with a broader range that we introduced, the A60 and the 65 tonner is also making a statement that this is a global end, so to speak. Also, wheel loaders, plus 2 percentage points globally on hand and actually a flat development on excavators.
So here, we still have a big untapped potential since that is the biggest market in terms of volume. But I still think when you look at the product mix and the market mix we have done, it would be all good. When it comes to the market environment, also here, I should say, good development in all markets. We have slightly adjusted I think I thought in China because that is always I mean, now when they are coming back to the main focus. As you can see, we have adjusted this year.
And it's difficult when you have such a strong bounce back to really get the figures right, and we have discussed that internally also. In 42, we had plus 35% to 45% for this year, and now we are paying plus 70% to plus 60% to 70%. Then one can ask why are we then thinking about the more or a little bit slower increase, if I may put it like that, of 5% to 50%, we think actually that now when we are approaching the trend line, that the increase and then the growth will follow that a little bit more. And the main reason is that we see that the development in China is more sound now is based on machine utilization. We can follow that with our connected vehicles and equipment, and we see actually that the machines are used more and more the machines that we have been sending out directly.
And then we feel that this is based on fundamentals. And some point in time, it should start to follow the trend line. Then it will if it will be 5% to 15% or something around that, but it will definitely be a little bit more soft growth, but still good growth in China and also then in terms of good levels. Also, Europe North America, we expect for next year continue on good levels and also somewhat growth in the rest of Asia. And that is following, for example, the good development in resources, not at least for Indonesia and also India coming back here.
Orders and deliveries here. I think maybe the only comment, I think it's a pretty straightforward go out, maybe the only comment that could bring some concern is North America and the orders minus 'seventeen, but I will take that away, that concern, because that is related actually to a product launch or a product opening last year of compact excavators. And we have had a break of offering during 2 years until 40 three, 2016 when we opened order books for compact excavators, and then we had a peak in orders. So if you look at the underlying trends that is following pretty well actually what you've seen in the other markets. So generally speaking, a strong development here.
Buses, delivery is up 24%. That was obviously strong, somewhat challenging mix, but that Johan will come back to. I think what I would like to talk a little bit more, okay, we had a number of important orders to Toronto, but that is very important in order to have a balanced situation. The 25 full electric to John name is still relatively low numbers. That is the biggest full electric order we have taken.
That is still relatively low numbers for every tender, but they are now gradually increasing and the tender activity level is also increasing. What we have done during this quarter is that we have increased the battery free capacity on the 7,900. We have also additional features when it comes to loading. So 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 2 kilometers, and that is giving them completely new type of autonomy and also given the fact that we can use both off charge and overnight loading using off peak loading, so to speak, and thereby optimize when you are buying, so to speak, the energy at your operators.
And then in addition, I mean, if you look at the energy consumption, here you have an efficiency that is somewhat 80% lower actually due to the much higher efficiency on the electric engine. So it's a good system. And as you know, we are providing the full infrastructure here together with partners. So important step. What is also worthwhile mentioning here is obviously the modular thinking of our electromobility.
So all the components, for the parts, software, infrastructure modules will and can already be used in our other business areas. And 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 at least for noise reasons, actually, where we're doing a number of pilots now with main customers. Volvo Penta, also just a good quarter. We had we made a campaign to clean up some of our air quality campaign, protect customers. It has been well executed.
So no drama, but that was coming with a positive hit, and we only talked about that. But when it comes to orders, still good. I think it was plus 14% and sales, we believe, was positive. Yes, 12% of the mediums of 3.7%. And then also, I have to say, I'm proud of that we are launching the first four digit horsepower engine.
And why that is important is that with this 1,000 horsepower and with the IPF 35, we get in actual measures, if you the feel of that is actually 13 50 horsepower including the benefits of the IPS system. And if you have 4 of those, you can actually have propulsion ready for yawats up to 120 feet. And that is further strengthening our presence in the yacht market where we're already up to 60, 70 feet as market position of a more than 50% market share globally in Europe. So very positive as well. So by that, Jan, I think I leave the stage to you to go through the financial figures.
Thank you, Roger. So from a good morning. So from a let's just say from a financial point of view, pretty straightforward quarter, I would say. Looking into sales, basically coming up from SEK 69,000,000,000 last year to SEK 77,000,000,000 and currency headwind of something like €2,000,000,000 You can say sales growth in basically in the whole region is very much reflective of what Martin talked about before. In terms of what we call adjusted operating income, what we had last year that was not included in the adjusted gross to final settlement in terms of the EU investigation of €190,000,000 and we see a take away €400,000,000 in capital gain from those.
So that's what we have that is excluding the adjusted operating income. But we go from SEK 4,800,000,000 to SEK 7,000,000,000, 7.1% to 9% in EBIT margin. You can see across the line good developments of trucks, seeing quite impressive figures coming back to that later. Unfortunately, a little bit lower as well as both of us and Kansa. We'll come back to that a little bit later as well.
Currency headwind of SEK 220,000,000 in the quarter, more or less what we talked about in connection with the Q2. When we look into the Q4, we foresee a currency headwind of something like SEK 500,000,000, a little bit, let's say, a little bit worsening compared to what we had in the second, say, when we guided on the second quarter. Looking into what drives the profitability. SEK 2,000,000,000 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 and D and capitalization and amortization is on the, let's say, on the negative side. When we talk about capitalization and amortization for the whole year in 2017, we would be somewhere, I would guess, between €800,000,000 and €1,000,000,000 in higher amortization and capitalization for the whole year. So maybe a little bit less than what we have guided before. Otherwise selling and has been increasing partly, you can say, 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 valuable, and we have to have more feet on the street to actually to take care of these markets that we see.
So this is according to the internal plans that we have discussed. So it's nothing that comes as a surprise to us. And then we have also then the strict supply chain that affects us on a longer period. When we look into the cash flow, it's €600,000,000 a quarter. We are in terms of cash.
We are in a net cash position of close to SEK 11,000,000,000. We see that we have the same development as we have had before in terms of property, plant and equipment investments in that same level that we have kept for quite some years. We have a quarter in terms of cash flow where people say the accounts payable season wise after the summer holidays and so on where we actually, let's say, repay the payables to our suppliers. And before we start to build that one up, we have a poor circulation on the payables. It's more or less mechanic.
So this is also more or less in line with what it should be, no surprises from our standpoint. Is it you, Henry? Or No. Look, it comes a little bit closer into trucks going from SEK 3,800,000,000 to SEK 4,300,000,000 in profitability, SEK 8.2 billion to SEK 8.6 billion in terms of EBIT margin. And basically, we have talked about it before on the positive side, higher volumes that you come from the joint ventures is actually improving quite a bit.
I would say particularly that foreign commercial business has contributing quite a bit, but also the ECB. The size of the ECB is a little bit bigger than ECB. Selling cost, supply chain and then the higher R and D cost is what we see here on the negative side. CE, up when it comes to the delivered machines, but also sales. You can see here that I think it's important.
So we don't get that impression that it is China that tries to develop that 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. And you can see here also in terms of the launch of medium machines, 53% up. And this is not only China. Even though SDNG sticks out, but it is a broad based improvement in terms of regions and also a good product mix, that's important to have that in mind.
But generally speaking, we'll develop that 30 1 percent up. And if we actually exclude the currency, which is the headwind, it is 35% up our sales. Here, we see a business in terms of the business areas, also the strongest development in terms of service sales as well. So here, absolutely good internal work being done here. And then of course, then of course, having helped by the volumes, high capacity utilization.
This is also a system that is I mean, we have quite a lot of capacity. We have been I mean, we talk about this very well in this industry, but maybe what we're seeing is that part of the group has been mostly well invested, if I put it like that. So that's also we could 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 in terms of quantity. And here so that situation is different compared to trucks, a little bit the same symptom in trucks, but we can say, Bonso NexSys, so 1 is not so M and M peers as you see in some areas of that side. Then, of course, we had in the quarter then where we sold the dealer actually, the whole dealers for Great Britain and that was capital gain of SEK 2.50 billion.
If you exclude that, I think it can take approximately 1% and 1.5% of diesel value. So from 5.2% to 13.4% in construction equipment. Buses, a little bit of a more it's maybe a little bit more difficult story. I mean increasing sales with almost 25%. So that is definitely on the positive side.
But we are a little bit we have a few headwinds. And on the currency side, that's if you see some SEK 60,000,000. We also have now we are ramping up the Nova as well. That is connected with some cost here in the Q3. And then we have a negative.
Negativeness, one of them is the obvious mix that we go higher vehicle sales compared to. We go for vehicle sales, bus sales, of course, dilutes the margin because service becomes a smaller part of the total sales. So it's not a math that will affect us, that will actually affect us quite a bit in the quarter. But then we also have, as you know, quarter by quarter, depending on what orders we actually deliver, the result can be found here. We have some orders that were on pretty low margin in the 3rd quarters as well.
Having said that, we are a little bit, as you can see on the curve here, when it comes to 12 month rolling operating income, it has a little bit plateaued on the plus side, and that's something that we we will have to continue to work on. We want to build that trend upwards in the full Israel. So there are some explanations to this, but Dennis will be not satisfied with the development. We need to turn the trend upwards as we have in the, we can say, we have 2015 especially. Penta, also a good quarter from many points of view, but also a little bit a few headwinds coming in.
And it is basically coming then from increased cost in a little bit of industrial system during the quarter, then also a campaign cost that affected quite a bit as well. And then also due to the growth also, a little higher, if you say, ambitions when it comes to sales selling expenses as well. But you can say, if we didn't have this campaign cost, the quarter would have been yet another good quarter for Delta with improved profitability compared to year before. So here we are. We are not that worried that this will come back, I think, in the 4th fiscal.
VFS also a pretty simple story, SEK 550,000,000 in the 3rd quarter. Good volumes coming in. Penetration, slightly improving if you compare to where we were in the beginning of the year, little bit better also, I think, compared to where we were last year. Good in terms of delinquencies. The market that we have talked about before very much in UFS is Brazil.
Brazil is definitely now under control. We're actually stabilizing quite a bit. I think we are not worried about that anymore unless I think it's an effort to have those. But basically, we have come through that one. And as you can see, return on equity levels are a significant point to level.
So a very healthy situation in the UFS. By that, Martin, so as I said, a pretty straightforward quarter, not so much to talk about. So we open up for Q and As. Absolutely. Thank you, Thank you, Johan.
I'll be good. We start in the next question. Ambrus Engelhard from Des Plainesen. I have three questions. Starting off on China.
It's quite a significant outlook that you're looking at for this year on trucks. And 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. And it would be interesting to hear how Volvo has developed in Russia if you see a similar situation.
Last question is more on sales development. We hear Volvo Cars are releasing a new concept for selling cars with a Postar, ordering it over Internet and also subscription package with no down payment. And I would be interested to hear if this is something that would work in trucks if you're looking at it. So let's start with Donfang. Yes.
Donfang is yes, it's I mean, we had a bit of a tough start the 1st year, which was 2015 when the market actually went down. And it's not very fun to start the joint venture where we're basically going, I would say, into red figures actually, not a good start for the corporation. But 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, but it's quite a lot of restructuring going on in the industrial system where we reduced the number of taxes quite a bit. We closed some loss making subsidiaries as well.
So a lot of hard internal work. And then, of course, now when the market comes back and it can predict shows actually that this could be a record year in terms of truck for the total market in China as well. That helps as well. So I think that is good. Otherwise, I think we are still learning a little bit in this cooperation.
It is a good atmosphere. So you need to get to know which level a little bit. You need to realize the synergy projects that you're working on. We have talked about before, the manual gearbox. Now we are into the 11 diesel engine that we see the adds on the license from us and so on.
And other product engineering, which comes as well in the coming years as well, both on the heavy duty side and the medium duty side. So a lot of things going on, generally speaking. And so I think that the cooperation and Yuan's venture is developing in a good way. But working in China for the ones who have done it, it's totally easy to fix it. It's not like that sometimes.
It seems that you take 2 steps forward and 1.5 back and then it could be a couple of months where everything is fine. So but it's I think it goes well actually. Yes. Maybe, I'll just add on what you answered. We were there last week actually.
It feels like that was 3, 4 weeks ago, but we have lots of things that happened. We had, I think, also good discussions about little bit to your last question also, how will the sales development look in China, for example. And we are working a lot together on developing the sales structure and the combination of that together with Odfjeng, and it's very high level of curiosity how to drive that. It has been more of an all of the booth. We fill up the factory and then you're actually delivering where not a lot of focus on the life cycle management, so to speak.
But high level of curiosity, and I think these type of projects also building a young in a young culture in a good way. So to Jan's point, we are investing from both sides a lot of time in more to learn to know each other and what are the real benefits. And as we have said before, the equity ratio that different partners have obviously impact. But in the long run, the most important is that the parties feel that it's a win win situation. Then also when it comes to the hardware activities, we are now also sourcing a number of the components from into the value operations, and that is also working well.
So the cost system also on the value part is important for us when it comes to the emerging markets. And 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, I mean, well north of 20% market share when it comes to imported brands and also a good level of production into Colombia, and that is a benefit right now, obviously. And actually, good development also in the service business.
So I have to say that Russia is good, but that is also part of the global system. And 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. So 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 to your promising more than you can deliver, so to speak. But I think for us, it was important to get back to where we should be, and we feel that we have reached that position. And finally, when it comes to sales development, I think it's not 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. And I normally say that, as you know, Hampus said, it's more the truck and a stone crusher than a truck and a car, even if they are using the same infrastructure, so to speak. And 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. And there, we see a big of 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, our FSR was down during the week and now in Brazil and not to focus on this because customers feel to take the next step, you must work closer in a partnership with more advanced technologies.
So I think to some extent, we will streamline the sales in itself, given the fact that you have better tools when it comes to configulating and you use connectivity to create bring to what is the right spec for your application. But 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 should you really have as a customer when it comes to the historical data also of your application? And now with connectivity, we can be much more sharp in table making than for instance.
So 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. And my input shows also that the 10% margin target maybe also long term targets. But now you're at 9.3 percent EBIT margins adjusted this far in 2017, and that also the 2018 looks pretty okay. So is that something that we can actually expect over the next cycle?
So that was on that. And then the second thing was on alternative fuels in the future. And you talked about electromobility. We also have fuels alternatives. How do you see this developing over the next years because we're seeing quite big moves in the markets?
And also if you're adjusting the R and D cost base accordingly to the Apart of this development?
If I can start a little bit why now. I think there is a you have in the recently bought a Volvo an annual process where you evaluate your financial targets of how you perform according to them and then also evaluate if they are relatively 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 actually. And I think now it was the F5, and when the Board evaluated the targets, they actually seems to change and it's something that is actually more tangible.
And so it's according to an ordinary board process, not more dramatic than that. And the day when you decide upon it, you release and communicate it and that happened between August. So it's not more dramatic than that. I don't know what to say more than that. But in a way, the target is it is clear, it is precise, it's about percent of the business cycle.
Then of course, you can also say how you define a business cycle, how long is it and so on. But it's much clearer than what we had before being number 1 or number 2. It's more difficult to grasp. Having said that, at the same time, if you think about it, if you want to be number 1 and number 2, I think you have to be about 10%. At least historically, we show that.
So I don't know if it was such a dramatic thing anyway, but it's much clearer, much better than here in balance sheet, something to relate to, both for us, actually, but I think also for the capital markets as well. And then obviously, I think coming back to your second part of that question, I mean, where are we in the cellular version we'll be, etcetera. And I think it's fair to say that we should be when we are, so to speak, reaching the target of the cycle, we should be lower than 9.1% now because, I mean, we have Europe that is currently insolvent right now and we have even if that is a little bit early days also in the North America but coming back, etcetera. So I think that has to show itself, but there is a gap between the current performance and, so to speak, the financial targets. I think that is obvious.
And obviously, we have planned activities to work on that. And as we have said to you many times, what we are all working with is continuous improvement on 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 for North America. We are continuing to work on different measures, everything from the flexibility in the industrial system in itself, the service sales, close relations in the value chains around the globe that is increasing speed, so to speak, and then also a higher level of flexibility when it comes to the cost base as such.
And then the third part of it is also to invest in a more prudent form to follow different not at least when it comes to industrial capacity that we historically have had a little bit and overbelieving in the MAX volumes instead of taking it step by step. Then when it comes to R and D and alternative fuels and electromobility and 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 5, 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. And just to take one example that we have already said, capital times, take the UV crew on the medium duty, we have investment wise, onethree of what it should be without the core system. What does that mean? Yes, that means that we can redirect funds in our current, so to speak, R and D, not cash because that's the wrong word, but the R and D levels that we're talking about more into new technologies and still have, so to speak, the right speed in electromobility, automation, alternative fuels, connectivity, etcetera.
When it comes to alternative fuels here, obviously, what is the viable economic life length, what is the viable 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 to some applications, both in trucks but also in other areas. But electrification will come being fine. And having said that, with electrification, you need to have certain range extenders, if you put it simple. And that could be combustion and diesel or gas.
It could be fuel cells. It could be loading along the road infrastructure development, etcetera. So 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, but the good news is that we have gained good experience in the utilization of electrification and also how to build the viable modular system because this is a tricky part when it comes to the energy management, the battery mobilization and then also some of the major hardware parts because that will also be combined with automation. So interesting times ahead, but I think now we have yet a good view on where we are and how we should continue to work.
Having said that, it moves quickly. We have reached rearranged our way of working in R and D. We have much more focused teams so that we can iterate quickly, so to speak. So we don't foresee any big changes in the overall spending, but how do you use your funds will be different. Giorgiano Sondonskaya, Numke Bank.
Continue on R and D. You talked a lot about R and the redirecting R and D and so on. Is it fair to assume that the overall R and D budget will be pretty unchanged going forward? Or do you need to take it off because a lot of, of course, much, much higher demand on CO2 and of course, etcetera? So I think I mean, what we're looking right now is that for the coming years, we think and we feel and we have plans plans for keeping it pretty flat, so to speak.
We have I mean, we are having, so to speak, spending on approximately SEK 15,000,000,000 per year. And given the fact that we are getting better and better in the modeling system, we can free up capacity in a good way. And having said that also, R and D will be different in the future because it will be much more of an integration also with customers and customers. So in the long run, what is not clear, what is selling, what is R and D. But if you take what is classified as R and 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 or the modular system to redirect also and increase focus where we need to increase it. Also, what we see here that is positive is that it's a big interest in the ecosystem also to work with Volvo. We're very proud and humble of that. And 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.
But I think we are well aware of creating that ecosystem as well. Okay. Perfect. And on the balance sheet, you talked also for quite some time where you want to strengthen the balance sheet and build more cash, and I guess that's still valued. Can we give some for how long will you are likely to mount up cash?
I think we have to come back to that one in connection when we discuss dividends and so on. But I don't think it's on an alarming level, especially not at all. I think I mean SEK 11,000,000,000 that's I mean, as Harry said that we want to be in a net cash position. We are anyway in the volatile business, high capital intensity and so on. So I don't think that it is a problem actually so far.
Having said that, we don't want to take we really don't intend to be asset managers, or we can't leave. I think there are people that are better, and that's what should not be a focus for us. So at a certain point of time, we need to think about if we have too much cash, what we do about it. But if you were in charge, you would be give us more money but still build cash. Sorry?
Dividending out more money but still build cash. That's okay. Yes. I think it's good also if you can increase the dividends to shareholders, obviously. So I think this is a pretty is this a nice problem to have?
I mean, it is we will come back on it. Yes. And what I think maybe to add to what Johan is saying, and we have said that several times, I mean, we all we'll continue to invest. I mean, unfortunately, that's only one basic depreciation. If you look to, I mean, the capacity is in control, this is that, but we are coming down to a more, so to speak, stable level that we have left.
And we are not only looking, for the time being, at a deep position with people to see that they have a strong volume base. We have a strong market position, brands, etcetera. So I mean and then we are saying important now is the strong balance sheet, to Johan's point, to the right extent, we have put that in the financial targets of Enel and Saichem. And having said that, what is important, positive now, feedback from the rating institutes and building that platform because that will be very, very important for the value creation. And then on Bristol, when we order, we don't want to be asset management.
So then I mean, it's nothing that we can do in Mullet.
And let's go over to the guys who are listening into the webcast, see if we have any questions over the phone, please.
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 focus on FX and R and 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? And then just to Jan on sorry, Vincent, 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 improvement on that business?
As you know, we don't disclose the figures for the joint ventures on in detail. But the part and 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. It is 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.
And there, I mean, we are increasing sales quite a bit in the quarter. Think we have fairly good underlying gross income margins on our own trucks as well. Then of course, we have the headwinds, as we have talked about, in terms of disturbances and so on. So I think, yes, I'm pretty I'm okay with the underlying development, as you can see, in the truck side. We have said to be careful with these disturbance costs.
But 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. It has to be some kind of broad indication.
Sorry. What was that? Just remembering, what was Dongfeng's earning in those years?
I don't know if it's yes, you can I think you can check it yourself somewhere?
Okay. And then a bit 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 you are when it comes to disruptions in the supply chain, that's something that we are working on that. We saw actually during the Q3 trend where the month by month is sequentially, the costs were getting lower. I think we are getting a bit grip on the situation. There still will still be disturbance costs in the 4th quarter. But as it looks right now and what we know right now in terms of this, they will gradually become lower in the Q4.
I think we both hope and believe that when we leave the year that we have a normalized situation on We have a feeling that it was a basketball through the water hose in but now it's more of 15 is where ball is in the water hose. Now when it comes to the selling cost, I mean, this is actually something that we have planned for, and that goes according to our internal plans. So they are not, in any way, headwinds or something like that. And it's the same with R and D as well. So 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. So we are adding resources to be able to run the brands. But of course, that should be also shown that in an improved profitability as well. And a very clear link between, as Johan is saying, sales and services and, so to speak, the resources.
So it's not about store functions or anything like that. On the renewal, yes, to continue, that may be a great that. As you know, now sales is I mean, it is the key range associated for construction and distribution ranges that we are selling. And I think that is that has been a very important part of, so to speak, turning the tide and giving confidence into the market, but also the focused organization that we have out from Lyon is very important in that strengthening of the situation. And when we look into the P and L and the development of Renault, that is going according to plan.
But 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. And that is obviously a a sign of strength and sustainability here.
Very good. We can take 2 more questions over the phone. So please continue.
Thank you. Moving on to the line of Claus Bergelin with Citi. Please go ahead. Your line is open.
Yes. Martin and Jan, it's Klas from Citi. Firstly, on services. We have solid growth in Trucks against the 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 have the help from the now captive fleet coming into service in North America, but we were waiting for the increased penetration of the service contracts in Europe. So is the better 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 Mac when it comes to the AmDrive. So that is definitely one part of it. You are also right, Gauss, that I mean, the higher focus, and that goes actually everything from really, I mean, 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. So and having said that, there is also a little bit of lag in the sort of with contracts penetration, as you know, given the fact that when you are signing that, you also have the warranty period, etcetera.
But 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 being this week, it was the same actually, but we had a good trend here. So high focus in the organization, more focused also organizational setup in the different divisions around services. So this is very, very high focus in the organization.
Good. So early days still more positive to come there. That's good. When it comes to my second one is coming back to Graham and the truck margin. So obviously, fears around cost pressures into the quarter, and they're obviously there, but you have improved JVs.
Even if we strip out the Deutsche gain, you have solid service growth. You have strong deliveries as an offset. But I want to come back to the cost pressures because in the past, when we had a lot of launches, we had dual production effects. I'm talking about FH and the T Series. Now we have Veenar, we have Veenel, MAC, 2 on kroner.
Obviously, not as global and not as massive as SH. But 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, Perron. And here, I think this is obviously always a high focus when you're doing transitions of platforms and new products, etcetera. At the same time, I think we have to move away also from the fact that, okay, what is extra cost, etcetera. I mean, a good world class company will manage actually launches because we will always have launches. And 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, etcetera.
And that is how we are also communicating there. Having said that then, obviously, for that region, that business area, it will be a temporary effect. But 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. So that is how you should look upon it.
And as I said also during the presentation as such, we are clear, not at least when it comes to North America and the market is 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 deliver positions. And also, as you say, the cost management of doing the transition, so and the price positioning. So I think we have clear Marsh orders when it comes to how to manage this. And I mean, I have to say also when it comes to the corner and corner, that has been going according to plan and in good order.
1 should remember also in all fairness that FH was a tricky game, both the global launch and such, but also it was related to initial legislation, so Euro 6, and it was very, very tight schedule, both for, so to speak, the chassis and the cab update together with the powertrain update.
Thank you.
Then we take the last one over the phone, and then we continue in this room.
Thank you. We now take the last question from the line of Markus Mittelmeyer 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 the fleet orders are coming in. So I was wondering the 260,000 number that you mentioned, what is the underlying assumption here on large fleets? And 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 owned operators? That's one. And then maybe you can elaborate a little bit on the used impact from the 'fourteen, 'fifteen model years. That's on the North American outlook. And then on electric trucks, two questions here.
1, 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. And technically then, you mentioned this on buses. Like if I look at the technology you have, the inverters, the battery management system, etcetera, is that a one for 1 sort of like technology that you can transfer over to trucks? Or do I have to think that there is sort of significant incremental work that needs to be done there just from the loads, etcetera? And then maybe lastly on pricing, price realization in different geographies, that would be very helpful.
Yes. If I start with the North American market, obviously, when it's getting up again, you can always then we see that was a little bit in the forecast and then the provisions coming in from different debt. It's ranging everything from €250,000 to up to, yes, out of almost €300,000 for next year. But we are saying is that we see that the market is coming back. We see that the whole is in regional.
Whole is coming back already vocational and construction has been on good levels. And therefore, also, I mean, when we look at the fleet mix, obviously, you have a higher degree of the bigger fleets into low haulage and region. So from that particular point of view, I think you should think about a little bit more on bigger fleets in relation to that. But obviously, when the haul is already in haul is coming back, you have also mix there. So but generally speaking, that is my view on that.
Then when it comes to the big or the big well, yes, big volumes coming back from 'fourteen and 'fifteen, that is why we are a little bit more on the conservative side of the total market forecast of the range that I just talked about because we think that will affect, so to speak, how to manage to use and use and also manage how, so to speak, the new truck market is going. Having said that, that has been one of our main priorities. We have been 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. Then so that is, so to speak, the basic reasoning behind it, but good transparency about the situation there.
When it comes to electromobility, obviously, I mean, when you're talking about 200 miles, 200 kilometers as we talked about, I mean, this is always about applications and what infrastructure and what type of time constraints you have, etcetera. But as we have already said, this will be more massive into urban areas, confined areas where you have, so to speak, a natural infrastructure development of the electrical infrastructure. Then 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. But it's also made in a modular way depending on how you package this into the truck or the bus or the excavator or even the boat eventually.
So there, I think we have been from the start working with a very clear mission from the electromobility group of R and D and also then more specifically for buses to make that modular system from the start. But that was not only for them 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 the prerequisite, but it's a good benefit for that as well and then eventually for automation, for example. What was the last question, Harssen?
Yes, pricing. Yes, pricing. Yes. Yes. Now I mean, generally speaking,
And another question is someone more in the room, please.
Agnieszka Villalba, Kenegi. 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?
And also a follow-up question really, how do you think what do you think about the Construction Equipment? Do you consider it core? Or 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 strategically with government FSA, they are still the so to say. Having been running through this process and then basically having a pretty big difference or gap between our expectations and the bids we received, then it's quite obvious that we stop this process. It's also important then 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.
So now we stay where we are actually and continue to develop it. That's the thing. I mean, having said that, I mean, we have a very solid order book, order backlog. We have a great company. We have good people working focus even during this process.
I mean, this is not at all a drag for us. And so we have said that, I mean, it's not reflecting the value where it should be. It is as simple as that. And then when it comes to this year and the synergies, I mean, 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. I mean, 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 and decentralization, accountability, 2 principles of everyone responsible for customer satisfaction, volume growth, profitability.
And principle number 2, we brilliant example of that, how they have been using some of the is a brilliant example of that, how they have been using, so to speak, also the group assets in terms of, obviously, power train technology that will confer now with the 5 8 liter or 8 liter primarily, it will confer further with electromobility, automation, connectivity, the distribution system, the logistic system, all of our financial services, etcetera. But the most important, as we have said, and that was for all our business areas, high level of transparency, high level of showing that it should be considerably better to be part of the volume group than not. And if that's not the case, then obviously, we should look into what is the best for any business area out of the 10 we have or even reading the product line that we have shown. And 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, and we need to break and then go over to individual interviews. So 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. So thank you so much, and see you again for the Q4 report next year.
And have a nice weekend.