Ladies and gentlemen, welcome to the Volvo Group Q2 2017 Results. Today, I'm pleased to present Martin Lundstedt, CEO. For the first part of this call, all participants will be in a listen only mode and afterwards we'll have a question and answer session. I'm now pleased to hand over to Martin. Please begin.
Thank you very much for that and most welcome to this presentation of the quarter 2 report of the Volcan Group. As the operator stated, my name is Matti Lowstead, President and CEO. I will start the presentations followed by presentation by Jan Gelandrondre, Deputy CEO and CFO, and then followed by a question and answer session as normal. So we can then move to Slide 2. And first comment, obviously, that quarter 2 was another solid quarter for the group and continues to follow at large the same trend that we have delivered over several quarters in a row now.
The group continues to focus on day to day improvements in our core segments and in our core markets. And we see that our new setup with the decentralized organization with clear responsibilities on giving positive effect. The group sales and profitability increased. Net sales increasing 12% and operating margin amounting to 9 point percent, giving an operating income of SEK 8,500,000,000. Group Trucks operating margin amounted to a level of 9.6% in comparison to 10% last year and Volvo Construction Equipment improved margin from 5.9% to 13.3%, thanks to internal transformation activities and also combined with market recoveries in important regions such as China.
Cash flow was strong at SEK 11,900,000,000 putting us in a net cash position. Then we can move to slide 3. And regarding then the deliveries, trucks came in on the same level at the same quarter last year. There were still big changes between different regions with Europe up 7%. And also, South America was up from low levels, 5%, and Asia flat.
And on the other hand, then North America still affected by the weak order intake at the end of last year and also starting this year, was down with 11% in deliveries. MAX down 3% and Volvo down with 70%, showing also the different vessels in different segments. MAX, stronger in vocational, as you know, and Volvo then stronger in on highway that have been weaker than the other segments. Volvo Construction Equipment showed a continuous good uptake in deliveries following the strong order intake in the previous quarters. And we are also pleased to see that the industrial organization within Construction Equipment has been able to transform orders into deliveries in a good way.
Deliveries increased with 49% with strong momentum for the 2 brands, but then in particular for SDLG. If we then move into Slide 4 and service sales. Service sales continued to increase. And in the 2nd quarter, it amounted to the increase amounted to 9%, 3% excluding effects from SEK 1,400,000,000. Up with SEK 1,400,000,000.
Main explanations this quarter came from strong uptick in Volvo Construction Equipment driven by increased utilization of the customer fleet, and we continue our increased focus of the service business also in all different parts of the organization. And that will be continue to be a cornerstone when it comes to a more resilient company going forward. Slide 5, trucks. The summary of trucks. We have actually seen a good demand level in Europe and in China.
And we see now also that orders continue to pick up in North America. Also in Japan, we have a good activity level. On the challenging side, we have had during the quarter gradually increased stress and stretch in both external internal supply chain with processes close to capacity limitations in some cases. And this has caused extra costs, such as speed transport and over time and also some lost volumes. And it has been an escalated trend at the end of the quarter.
And that is pretty normal situation that you have a little bit of a stress situation just up from vacation, but with a pretty strong increase in the European production system, primarily that is supplying both Europe but also some of the Asian markets, for example, it has been more stressed than anticipated and with extra cost effect here. And vacation period will, therefore, be used to refill empty buffers. We are in close dialogue with all different parties here in the different supply chains in order to come back to a normal situation as soon as possible. In addition, the conflict in the port of Gathenburg has also caused reroutings and some extra costs. Then on the positive side, again, we had an important product launch for Volvo Trucks in North America with the introduction of the new VNL long haulage truck that you can see on the next slide, if you move to that.
And that is the new family of long haulage trucks coming in a number of different length and sleeper length and executions. It's an all new update then for this very important segment for Volvo following the introduction of the VNR, the regional haulage truck in Q1 of this year. So launch activities are just getting started. We are coming with new exterior, as you can clearly see on this slide, giving also better aerodynamics and also other features when it comes to safety systems as well as new interior, both for leaving and driving comfort and brings up the level together with new powertrain executions, also turbo compound execution for some of the applications and up to 7%, 7.5% in fuel savings. Market leading also connectivity features with 20 fourseven connection that makes us world leading in North America.
So a very strong offering and just launch as we speak here. Move to next slide. Another very positive news is actually that Volvo Trucks and Renault Trucks came out as number 1 and number 2 among young truck drivers in Germany. This test is actually done by ETM Publishing House, and the test event is a large scale comparison in which 72 future professional drivers are able to take a closer look on all different brands present, and it's a pretty extensive exercise. And what is encouraging, obviously, for us coming out as number 1 and 2 in an important market like Germany makes us also feel that we an up to date range that is appealing also to the next generation of truck drivers, which is very important to attract also drivers into the profession.
Then moving into Slide 8 and the market environment for trucks. Our current estimate of the market environment is mainly in line with the forecast presented in quarter 1. We are increasing somewhat to 225,000 units from 250,000 units for North America. And we are also increasing the total heavy duty medium duty market in China to 1,060,000 trucks. Last Forecast was 1,000,000.
And as you remember, also in quarter 1, we actually increased from quarter 4 2016 from 900,000 to 1,000,000. So this is showing that it has been a very strong first half of the year given also the new legalizations on weight and dimension as well as by effect of CNG5 emission levels. For the other markets, we are staying at the estimates that we were presenting in quarter 1. Just a small change actually in India. As you can see, the forecast there is 295,000, but it's unchanged.
The only thing that we have done there is including also the 5 tonne segment added to the Indian medium duty. So we have a more consistent view of the market also according to the Indian market conditions. Slide 9, market shares. North America developed different Brito II brands in relation to quarter 2 last year. For Volvo, it is obviously under our expected levels in the long run, but the main explanation of the drop from 9.6% to 8.8% is actually related to the relatively weaker on highway segment because Volvo is very heavy on that side, whereas Mack has actually profited from strong vocational segments and moved up to 8.2%.
In Europe, we are maintaining a historically high level for Volvo of almost 17%, whereas we see now that Renewal Trucks is gradually gaining market share step by step in a consistent way. And we have said that it's important to have the right quality in the business and not move too quick here, but a good balance between fleet and retail sales, and that is encouraging to see. Also in Brazil, somewhat a drop from a very low in a very small market, we are making priority on the price quality and the quality of the business. But we also see that in the stronger markets surrounding Brazil, like Peru and Argentina, we are gaining market share. Japan also a good start of the year.
And South Africa and Australia maintaining strong from the strong levels already had last year. Orders and deliveries, next slide. We are continuing to see positive book to bill ratios in all major regions. For the heavy duty, medium duty in total orders were up actually 20%, whereas deliveries were flat. North America, orders are now showing an uptick of 30%, slightly more than for Mac, given the product mix and the application mix.
But delivery still continued to drop down. In Europe, continued also with a good order intake, increased with 11%, and also deliveries were up with 7%. South America, up with 190% from very low levels. But as we said, it has been pretty good uptick in the surrounding markets of Brazil. And Asia was up with 8% in orders and flat on deliveries.
So all in all, a positive development here, and we are now closely adjusting also our build rates to get the right balance between production, deliveries and stock in all regions. But it has also, as we said, caused a stretched supply chain with high cost during the Q2. And now we are intensely working with this to come back to a more normal situation as quick as possible. And it goes both for actually, as I said, I mean, using now the quarter or the vacation period, but also to take out some of the bottlenecks in the short term. So if we then leave trucks and move into Construction Equipment, Construction Equipment is doing a very good quarter and a combination then of good execution in our transformation, plans in our transformation activities across the whole company together with an improved market situation in most of our major markets have given a good leverage.
Both deliveries and orders were up with 54% and 49%, respectively. And it is satisfying to see our strong order intake in recent quarters has been translated, as I said before, into good shipments also in quarter 2. This is a proof of good volume flexibility and that the operation of different parts in the value chain is working well here, including also some of our group functions when it comes to the industrial supply. We have also announced that Melkki Janberg will be the new President of Volvo Construction Equipment as from 1st January next year. If we move down to the next slide, yes, also to show that one of the focus areas we are working within the group is to utilize the leverage of combining the force of the different parts of the Volvo brand as such, but also in some other cases of the Volvo of the Volvo Group, different brands to go to the different industrial verticals stronger than historically.
One good example is the Erniea Wood exhibition, the world's largest forestry trade show, where we had a very good exhibition in June and showing the full scope of deliveries and a much more clear key account view going to markets such as forestry, mining, quarries, etcetera. So good initiatives and good momentum in these activities. Then Slide 13 on the market environment. We are actually maintaining more or less the same forecast that we've had with one exception, and that is for China, where we are further revising upwards. In the last forecast, we were actually forecasting plus 20% to plus 30%.
And the new forecast now for 2017 is plus 35% to plus 45%. Otherwise, the market forecast for the other regions remain unchanged. When it comes to then order and deliveries on Slide 15. Net order intake, as I said, very strong with an increase by 54% in relation to same quarter last year, driven by all regions and deliveries also up then with 49%. Europe was up 3% in orders, and North America up 12%, but the big uptick obviously is in Asia.
In Asia, including China, orders were up with 116%, driven by a strong intake both for Volvo and SDLG in the Chinese excavator market, but also SDLG V loaders in China and also Volvo brand in several other countries such as Korea and Indonesia, for example, then with mining activities. And China alone had a plus 2 21% in net order intake in the quarter. Then moving into buses. The market situation in Europe was slightly weaker, but still on good levels. We see also continues great interest in Electric and Hybrid Solutions, even if it not translated yet into big volumes, more and more activities around these subjects.
South America continue to be on a low level. Asia showed a positive development mainly in for Eastern Pacific and also North America showed good levels. Deliveries down actually with 17%, whereas order intake was up with 7%, driven mainly by North America, but we also received the largest frame agreement ever for North America, 3 60 units for Greyhound. Also important order of fully electric buses to Malmo in Sweden and some big orders also in Asia to Philippines and Indonesia. Finally then, Volvo Penta, continuing its positive momentum with strong sales growth, both in Industrial and Marine segments.
The focus area to continue to drive top line, not at least for the Industrial segment, is paying off. Orders increased by 9% and deliveries with 11%. And during the quarter, Penta has become also the majority owner of outboard motor manufacturer, Southern Marine. And this is an important step to get a good presence in the growing outboard motor market for high horsepower outputs to complement our inboard strong offerings, so to speak. And by that, the market update, I leave the word to Jan Gerander for the financial update.
Thank you very much, Martin. As we turn immediately to Slide 18, where we see the net sales to market, net sales is up with SEK 9,500,000,000 in the quarter. Approximately half of that is coming from currency and the rest is coming from down the line growth. We see that basically all regions contribute to the increase. And you can see that particularly Asia, very much coming from CEE and from China and also Europe that is contributing the most.
Turning now to the operating income on Slide 19. We see that we go from an adjusted operating income of SEK 6,100,000,000. Last year, we had the negative effect of SEK 2,300,000,000 from the EU investigation. But if you adjust for that, we were SEK 6,100,000,000 going up to SEK 8,500,000,000. And once again, I think it's extremely interesting and good to see that all of the business areas are contributing to the improved profitability.
But of course, particularly the increase in Volvo C is very good actually. When it comes to the group functions and other here, we can see that we have a positive effect of almost SEK 500,000,000 and that comes mainly due to the fact that we last year had increased cost in connection with the outsourcing of IT, which was according to plan when we transferred that into the outsourcing partner. And now we are back on the level that we should see going forward. The currency effect was SEK 350,000,000 for the quarter, positive. When we look into the full year, we think that when we talk about the transaction exposure that we will have a flat for the whole year, which basically means that we will have a negative currency effect for the remainder of the year of close to €500,000,000 But all in all, for the whole year, plusminus0.
Turning then to the next slide where we see the contributors to the improved profitability. We see that it comes from the gross income and it's primarily from Volvo CE. We can see here that we are having a higher amortization when it comes to R and D, and this is in line with what we have said before. And spoke to the forecast that we have had for the whole year that or earlier that the capitalization will be approximately SEK 1,000,000,000 to SEK 1,500,000,000 over that amortization for the full year. When it comes to the we see that we have an increase of selling, taking out the currency effect there, with the underlying increase is approximately 0.25000000000 for this period.
The rest is coming from currency. And this is very much according to the plans that we have added. Then looking into the other improvement under the other SEK 600,000,000 that is also then coming from it was IT, as I mentioned before. It is the credit risk in China for CE, which was a negative last year of SEK 176,000,000 and that we don't have this year. And then also an underlying improvement in our JVs.
And as Martin explained before, we see we have had a very strong first half actually including the second half quarter this year with the demand in China and that has improved the profitability for our joint venture in China. So apart from that, we can see on the improvement. I talked about the sales increase. We have, of course, good capacity utilization in CE in our production facilities. We have also an improved gross margin in services compared to last year.
And then we see also better product mix on the actually on the truck side where we sell more heavy duty trucks this quarter this year compared to last year and less of the medium duty and light duty. Then on the negative side, I talked about the selling and admin and R and D capitalization. And we, of course, also see then what Martin also mentioned before, the increased cost levels that we see due to the stress and stretch to supply chain as well. And moving into the cash flow, a strong quarter when it comes to cash flow, close to SEK 12,000,000,000. The 2 contributors there is, of course, the increased earnings that we see, but also the good quarter when it comes to working capital.
The working capital is mainly coming from the trade payables. Here, we have a normal situation this quarter when it comes to payment dates and so on. So this increase in trade payables comes from the fact that we have ramped up during Q2 our production, especially in Europe, and that gives a positive effect on the trade payables. When it comes to the investment in property, parts and equipment, it's still under good control on the levels that we want to see then. We are then into a net cash position of approximately €5,000,000,000 at the end of the quarter.
And we are also happy to see that we have had 1 notch improved rating from Standard and Poor's. So we are now up to a level of BBB plus Moving into trucks. We see an increase of sales of 8%. If we take out the currencies, 2%. Currently adjusted, the sales are up 2% for vehicles and 1% for services.
Turning to Slide 23, the adjusted operating income as we go from SEK 5,200,000,000 to SEK 5.4 1,000,000,000 with a positive currency effect of SEK 276,000,000. The operating margin is 9.6%. And then here you can see the on the positive side, gross margin on services that I mentioned for the group, the product mix when it comes to heavier trucks and then the income from our joint venture is improving. But on the negative side, selling and admin, lower R and D and once again, the stretched supply chain. Moving into Construction Equipment on Slide 24.
See that we have a 36% increase in sales. If we exclude currency, it's 29%. Once again, I think it's rather impressive the way Volusia is actually managing to take the order intake into deliveries and sales in such a short period of time. We can see here that when it comes to the net sales for machines, it's up 33% and on service is 7% when it is currency adjusted. Then on the Slide 25, when it comes to the adjusted operating income going from SEK 810,000,000 up to close to SEK 2,500,000,000, small positive currency effect.
We see that the operating margin is from close to 6% last year to 13.3% this year. It's on the positive side. It's of course, sales capacity utilization, the fact that we don't have the credit losses in China this year and also that we have working with the cost programs and we see that the effects of the R and D is continuing to roll in. And in other areas, we are maintaining our cost level. Buses going from basically having currency adjusted flat sales vehicles minus 1%, services plus 5% and basically having the adjusted operating income stable.
We can see that we it's coming back to the 70% lower volumes and despite that we have more or less a flat on vehicles. It's due to the fact that we have the product mix where we have fully built buses with bodies coming from North America this year. And fully built buses with bodies coming from North America this year. And that's why you see that this not an end of the day net not an effect on the sales level. So product and market mix positive, a lot of efficiency initiatives that kicks in.
But then, of course, negative effect on the lower volumes. Penta, I was about to say not much to say because it's yet a very solid quarter from Penta coming up to 15.5% in adjusted operating margin compared to 14.5% last year. A good growth in the quarter, 10% currency adjusted, coming both from the engine side and also on the service side. Financial Services, I would say also another solid quarter for them as well. What we see is that increasing the operating income from SEK 500,000,000 to SEK 521,000,000, very good return on equity, 14% compared to 13.5% last year.
And I think it's also very good level when it comes to new financing. I think it is actually the highest level we have had in the 2nd quarter. And the reason for that is among others, of course, that we have good underlying markets, but also that we are coming back in penetration to, I would say, more acceptable levels than what we have had in the last quarter and also the Q2 last year. So we are up to 26% there. So by that, I hand over back to Martin for some concluding remarks.
I think we have gone through this in a very clear way where we are having I mean, we have an increased good order intake across the group. That sales done, as I said, increasing. Continued improved profitability for the group. We've had somewhat challenging down quarter for trucks given the fact that we have had this mainly done the stretched supply chain, just upfront vacation period here. Construction equipment, strong improvement and operating cash flow also delivering according to the plans also and a strong giving and cash position.
So I think that is the concluding remarks, and we are opening up for question and answers basically. So back to the operator for Q and A. Thank you.
Thank you. Of Klas Bergelind from Citi. Please go ahead. Your line is now open.
Yes. Hi, Martin and Jan. It's Klas from Citi. Firstly, on the bottlenecks, obviously, linked to the strong demand. But could we please quantify this effect in the quarter?
And when do you expect these bottlenecks to abate? And then on SG and A, obviously, good cost versus bad cost in the past. But how should we think about SG and A to sales for the rest of the year? You have to increase SG and A more in the second half versus the first?
Yes. Okay. Thank you, Claus, for that. When it comes to the pot and mix and, so to speak, the component supply, what you can say is that it has been primarily into the European production system and somewhat also been to the North American system linked then to common components that we have in some of the as you know, in some of the product ranges. What has happened really is that since we have seen a gradual improvement of the demand during the course of the year, gradually, actually, more and more suppliers have been decreasing the safety buffer in order to fulfill the shipments.
And at the end of the quarter, it was falling out not 1, but a number of it causing then, as we said, the speed transport causing over time and causing also some lost volumes when it comes to our shipments. Having said that, obviously, we have shipment days out to our suppliers. So from a out to our customers, from a customer point of view, I think we have managed the situation well, but with higher cost. I think the good news is that it's well identified where we have it. It's well identified where we see, so to speak, the extra cost.
Having said that, we will not quantify exactly how much that is. But obviously, it is pretty substantial since we are already talking about it in the report. And we just wanted to be clear also that when it comes to quality in the business, I mean, market mix, product mix, order intake, that is a good situation. But here is something that we need to address. Some of it will be stabilized during vacation given the fact that we have very dense activities with all our suppliers and also our internal processes in order to refill buffers, etcetera.
But we also have a number of activities that we will more on the midterm debottleneck, to speak, things, but that we will balance also with the order book and production. So generally speaking, I think we have identified it will cause a number of challenges also during quarter 3, but I think we should see it as in common with a good situation in demand and primarily done in the European production system that is not only supplying Europe, but also other markets such as Asia and Africa.
Okay. That's good. My second question is on service growth in trucks. It came in below my expectations. Is this year seasonal because we don't have much history?
I thought the higher utilization and the captive fleet in North America coming through would add more to the growth there. And also if you could tell me why we see a better gross margin in services, the reasons we're seeing a better gross margin there? No. I think the I mean, there are I think maybe it is
a little bit like this that when you go from the first quarter to the Q2, there is a little bit of an effect, of course, if you count the number of working days. Last year, we had, let's say, the Easter holiday in the first quarter. This year, we had it in the Q2. I think there are a few factors like that. And maybe also that when you look upon it maybe once you look on the average between the 1st and second quarter and look upon the first half and then you see that it is a healthy increase over if you compare it to the first half of last year.
So maybe a little bit, I would say, too positive, quite positive in the Q1 and maybe that a little bit back to normal here in the Q2. I think that's more what you look into, I think. And yes, to complement what Jan is saying, what we feel when we look into the customers' activity levels out in the core markets. I mean, as we said, North America now ticking up again when it comes to the activity levels and Europe on a strong activity level. So I mean, with the focus we have, you will see a little bit of, yes, seasonality depending on working days, a little bit where I mean, from quarter on quarter for last year also, then we had a big uptick in relation to quarter 1.
And then you also have some extra inventory to the deal. So I you should not read this at any turn to break. Then coming back on the gross margin again, I think as you said, I mean, it's actually we work quite a lot with the service activities. And it's not only like that when it comes to increase the volumes and so on. Part of the improvement in the gross margin is actually coming from the fact that we work more with pricing on how we price the different kind of services, products and so on, start bundling as well.
So it is a lot of activities going on in this area.
Very good. My final quick one is on construction. Very strong demand, obviously. Do you see any risk of bottlenecks also in construction, which could lower the margin further out? Or is the self help strong enough to offset?
And on the raw materials, steel typically comes through with a lagged effect to the P and L. Do You see any risk of increased price cost pressures in the second half?
If we start then with if we start with the question on the supply chain for Construction Equipment, so far, no signs of that. We have actually been able in a very good way as you have seen also to translate orders into shipments and the situation is stable. So there you have also a number of other supply chains and you have a better spread also geographically in relation to trucks, so a better situation there. Having said that, again, well identified also on the truck side and focus activities. So yes, that is the situation on that.
And so far, I think the raw material situation, of course, it comes in gradually into the P and L, but it's been also in that area being well managed by Volvo CE. Maybe then a few words on the raw material for the group as a whole. We have said before that, yes, of course, we will have during the course of the year a negative effect on the raw materials. And we see that coming in, in the Q2. We have also said that we hope that we will have the ability to offset the raw material negative effect with commercial negotiations with our suppliers to offset that one over the course of this year.
And so far, I think we have managed that quite well. Of course, we would have done the commercial negotiations anyway with our suppliers. So net net, the raw material comes in as actually a pretty sizable negative effect if we didn't have it. But so far we managed to offset it for the group as a whole.
Thank you.
The next question comes from the line of Graham Phillips from Jefferies. Please go ahead. Your line is now open.
Yes, good morning. My question is around your upgrade to the U. S. Heavy truck market. Can you talk about where that is in terms of vocational versus on highway where you see the better numbers?
What that means about you ramping up production in the second half? And the danger is that you are still below falling calling the market down and we've seen 1 or 2 of the independent forecasters looking for more flat market. Is that you continue to be more conservative? This will be permeated through the supply chain and hence probably because of some of these disruptions when actually the market ends up being stronger than expected. Are you not being too bearish here?
Thank you. The first question on U. S, we see it pretty broad based. I mean, so far, it's not as you've seen also, it's not a big uptick that we are anticipating, but it's more a sign of stabilization. We see that also actually on the used side that we have a somewhat better situation on the used truck pricing in U.
S. So I think you should read it pretty broad based for all segments, actually on general activity level and also that the stock correction has now been fulfilled, so to speak, not only for ourselves, but for the industry as a whole in North America. And then when it comes to Europe and the supply chain, I can partly agree to what you're saying. I think that has also to do a little bit with lessons learned from the big hit in 2,008, 2009, I mean, to adjust also, I mean, the supply chain for different type of levels, more granular maybe than historically. And that, you can see is coming through.
Having said that, even if it's a strong market of 300,000 as expected, It is not that we saw pre crisis 2,008, I mean, with an overswing that was a lot of above the economy, if I put it like that, because in this case, we are, I mean, maybe 10%, 15% over, I mean, normal market in if you take the long cycle in Europe. So obviously, we should be able to cope with it. But with the uptick we've had during the and with no, so to speak, relief period in between, the supply chain became too stretched basically, and it gradually increased during the end of the quarter and caused some, as we said, extra costs very clearly identified and that we have activities to correct both during vacation and also some margins going forward and when it comes to capacity debottlenecking, so to speak.
Okay. Thanks. But in terms of the U. S, when will we start to see deliveries up year on year? In the 3rd or Q4, are you going to be ramping up production?
I think we will obviously, I mean, when you have seen the order figures in relation then to shipments, we will guide you to see it. At the same time, we are also making sure that we will not do too quick adjustments. So we are also because we are this time also pleased that we have managed, so to speak, this cycle in a very good way. So we are keeping a high level of flexibility to see that this is a lost in trend, so to speak. But we have a good flexibility level to manage that.
Okay. Thank you. And then in terms of just one final question is around the cash flow, good strong number and net cash on the balance sheet. We've still got the proceeds from the Deutsch sale to come. And have you paid the on the China with a €2,000,000,000 provision roughly, I think it was for credit losses, have you actually been paid out yet?
No, not that much. We actually have write offs in the Q2. So if you look into I think we have provisions today of SEK 1,400,000,000 SEK 1,500,000,000 actually due to write offs. But cash flow wise, it's not that much that we have used.
Okay. So when do you anticipate paying those?
That we don't know. We will this is you know I think we are from a balance sheet point of it as a provisioning, we are at a level where we are quite profitable today actually that, to call it, the worst is over and hopefully, we will not see more. Then it is actually a lot of hard work actually to work and try to get as much money back from another one. So who owe us money? And that work will probably take I would get probably another 2 years or something like that before we really can close the books on it.
So from a P and L perspective, I don't think we will see more if we're a little bit lucky right now.
Okay. Thank you.
The next question comes from the line of Anders Schindelau from Handelsbanken. Please go ahead. Your line is now open.
Thank you very much. I have 3 questions. First question is related to the foundation of bottlenecks. Would it be possible for you to quantify which type of components we're talking about when it comes to bottlenecks in Europe? And related to that question, if you could also discuss run rate.
Does this mean that you are given the order intake with the wine in Europe surprisingly strong if you're increasing run rate and if we should expect any impact from that? Last question is on the Penta and the 7,000,000,000 acquisition. Could you talk a little about the strategy behind this acquisition going into onboard engines on the Infiniti's de risking cannibalization or and also if it's stepping up in more raising and in the I guess. And so I would be interested to hear more about that investment.
Yes. Thank you, Hampus. Then when it comes to the bottleneck situation or to the supply chain in general, what we have seen, it has been quite a number, actually, suppliers. And as I said, it's coming gradually during the course of the year. And some of them have disappeared because they have done activities to debottleneck already during the the nickel already during the swing and some has not been able to do that depending on processes.
But if you take a general standpoint, it has been very stressed, so to speak, in the powertrain part of it. And partly, that is also related to a very positive development for us also that the take rate of our captive components globally has been very strong actually, and we are working hard both in our internal processes, but also in external processes to continue to make sure that we have the right levels here. And then obviously, as you say, when it comes to the order intake, you have 2 parameters to play with. 1 is to increase the run rate and one is to increase the order book. And we prefer the first one, obviously.
So we are working hard on that also to see that we can adjust. And we are not filling up the order book and order backlog too high because yes, we just want to make sure that we are utilizing the strong position. At the same time, balance also in responsible ways. We are keeping the promises when it comes to deliveries to the customers. When it comes to Penta and the acquisition of Southern Marine, the strategic rationale, there are a number of strategic questionals actually.
When we look at the to the marine, pressure marine segments, both actually for petrol and also gas and for diesel engines, we see actually a long term trend that also in the high horsepower output range, more and more also going for output engines for different reasons. And therefore, we have said that at one point in time, we need to look into the opportunity to predict the better, specifically when it comes to then the high horsepower rate. And this was then a good fit, not only because they are primarily 7 marine or the or the inboard, having a horizontally mounted engine, very innovative also with them with the linkage down to the propulsion, meaning that we can use our type of engines in a very good and efficient way into the installations here, both for gas and for diesel. And therefore, you have natural synergies when it comes to product development and
so to speak
to the performance that we have also in our inboard part of it. So it's a strategic fit both when it comes to the market development and to continue to maintain our strong position when it comes to marine pressure and also when it comes to the technical features and the technical development. So those are the main reasons, I suppose.
Thank you. Can I ask just one follow-up on the comments you made on Europe? Would it be possible to quantify lead times in Europe today from orders of delivery to ordering a new truck?
We were discussing a little bit what to say. We should say, I mean, it is normal and maybe a little bit longer in some markets and segments depending on what type of applications. But still, I think we have managed them. And if anything, maybe we have been also stretching our own ambitions when it comes, I mean, the uptick in production and really to follow, I mean, this. And therefore, we have seen this gradually stress situation during the end of the quarter.
But from a delivery and delivery performance perspective, it's not for or formal delivery.
The next question comes from the line of Erik Goring from Nordea. Please go ahead. Your line is now open.
Thank you. I have two questions. Apologies, it's Damien Als. I've had a terrible line on Onuf. Firstly, on the supply chain issues, if you could clarify, do you think that Q3 will suffer more or less than Q2 from it?
And when do
you expect it to be more
or less fully resolved? And then the second question on the balance sheet, given we're acute spend and if you assume that you have normal working capital patterns in the second half and potentially divestment of governmental sales, I guess that would be in some net cash also and including pensions towards the year end. Could you remind us of where you'd like balance sheet to be at this point and what your priorities are beyond that? Thank you.
Thank you, Jirrita. The line was not brilliant. So I think we got most of it. I mean, first question, I thought with I think I would just say, I mean, how will quarter 3 be in relation to quarter 2 when it comes to the supply chain. And obviously, we are working with high priorities in our use the period really to stabilize the situation together with our suppliers.
I mean, as I said, this is a well identified situation where we have the bottlenecks, where we have, so to speak, the different constraints and we have clear activity plans for each and everyone. Having said that, we are using as much as we can for vacation, and we are also doing some other activities in order to debottleneck more long term when it comes to the increased trend in the take rate basically of certain components. So I mean, from that planning, our estimation is obviously that in quarter 3, it should not be worse than quarter 2. And I mean, our estimate is that it should be better. Then I think we are on a high level, and we will continue to have extremely high focus on this and make sure that also with adjustments we need to do given the order intake, that we are also following closely what we need to do and adjusting all parts of the value chain, and we have a good dialogue here.
And on that context, I think also it's very good now that we have also purchasing actually in the executive board as we announced, you remember, last year. So now we have the triadome of purchasing operations and technology sitting in that and that is also giving a good effect when you have a stretched situation as we have right now. And then going to the balance sheet, I think a little bit just to remind us of what we are working with. I mean, the priority number one is, of course, to improve the profitability and the cash flow situation for the group. To decrease the volatility of earnings is the 2nd priority.
But then, of course, also, it is a question about actually having a stronger balance sheet compared to what we had before. I think we are on this journey. I think also then looking into the balance sheet in itself, I personally said it before that we have a 2 week balance sheet. I mean, we are a capital intensive in a capital intensive industry. It will have its ups and downs as well.
And of course, we will do everything we can to offset as much as possible. But I think you need from that point of view, you need to have a slightly stronger balance sheet compared to before what we had before. And then also, I think the when it comes to the financial services arm as well. I think so I think it's good and rewarding to see that in the second quarter that S and P actually raised it, it's rating on the Volvo Group. And then the primary reason for that is, of course, our underlying performance in terms of cash flow and profitability.
So then in the long run, having said that, to have a little bit of a cash position is in itself for the reasons I mentioned before, not a problem. At the same time, I personally have a strong view that too much of cash is probably not something that the management of the company should simply benefit the shareholders. But where exactly that level is, I think we have to come back to that.
Just one quick follow-up. When did you realize these supply chain issues? Has there been any specific supplier that's gone bankrupt throughout the business?
I would say that they do not, yes, they're speaking, go bankrupt. It's more that they have too much work to do actually and have capacity limitations. And it is actually rather fascinating to see how within the Q2, it was not only one supplier, it was actually more it happened more or less at the same time with several of them. So it's pretty broad based. Yes.
So I think it's very important to mention, it's not coming from that they have low activity levels and financial problems. Generally speaking, it's much more about the high activity level and both related to the general markets, but also in some cases related to the product and component mix that we are seeing into our sales. And the original, so to speak, the challenges is positive in the long run for the group.
Thank you.
The next question comes from Markus Mitzemayr from UBS. Please go ahead. Your line is now open.
Yes. Hi, good morning, everyone. Quick question also on the supply chain related issue. What's your technical capacity utilization in North America and Europe on trucks? Can you comment on that a little bit and also on Construction Equipment?
Any capacity issues there given the strong pickup we've had? That was question 1. Question 2, just for your guidance on China Construction Equipment, if I look at that, year to date to May, market's up 65%. You've moved your guidance midpoint up by 15 comment on that. And then last question
on North American market share
that dropped to comment on that. And then last question on North American market share that dropped to 8.8%. Is that because you've seen the growth in Class 8 so far North America largely from the small fleet operators and you're stronger in large fleets? Or is it a mix issue? Or how should we think about that?
Are people maybe waiting after the new truck? That would be very interesting to hear. Thank you.
On the capacity utilization, normally, we are not commenting any exact figures on that. But obviously, it is like that now that North America is not close to, I mean, capacity limitations given the fact that, I mean, we have been up to market. And since we have a very specific supply chain for North America, we still have capacity to go. Having said that, obviously, we have adapted our operational capacity to cope with the current market conditions. And I think we have done or our North American organization has done a good job in actually following the marketing model, etcetera.
But we have capacity technical capacity to go for North America. Then you have a number of components, obviously, that all combined where we are working, not at least on the powertrain, but we are working to balance and to see that we have enough capacity. And that is dual for both general market conditions again and also the fact that we have a good demand on our combined powertrain offerings, the captive powertrain offerings. Then when it comes to Europe, obviously, and specifically then for the Volvo brand, we are much higher in capacity utilization since not only Europe is strong, but also other markets that are taking supply from Europe such as China, Korea, to mention a few markets, Australia, etcetera, is doing well here. So yes, we are higher up, but we also have activities to continue to follow that pattern, so to speak.
And it's not the final assembly issue. It is that we all continue to have the right balance in our component workshops together also with our first and second tier suppliers. Then when it comes to VCE, when you have an uptick like this, and you should remember, it's coming from low levels. And now when we are talking about the total market forecast, it's still which I think is also a healthy sign, by the way, is much lower than it used to be during the previous peak in And that is a healthy sign that you're getting to a more normal market when it comes to demand and supply for the construction sector as a whole. But when you have an uptick like we have now, it's difficult to say what is, so to speak, the first, pickup and where will the market land.
And I think in all fairness, you can say that we have gradually upgraded. I mean, last time, we were at 20% to 30%. Now we say 35% to 45%. Is that where the market will run difficult to judge, but I think it's more of a clear sign that we are more positive about the total market as a whole and that we also are following that very closely with our capacity and flexibility. What has been positive during the last quarter is that in addition to excavators that came earlier, also wheel loaders are picking up for us.
And since we have a strong position with FPLG, that is from a group perspective a positive side. I think what's also important is that as Martin said, I mean, we have been trailing a little bit when it comes to the market forecast. The good news is that we managed to actually capitalize on the market when it's there. And actually, we are not losing out on market share in China or anything like that. So the focus is actually on keeping or actually increasing the market share.
And of course, then take care of it in production as well. And I think we've been pretty successful in doing that. So we'll see what the market will look like at the end of the year. And as we said, regarding North America and the Volvo market share of 8.8%, The main reason for that is actually what you were into, that is the market mix between different segments where Volvo as a brand is much stronger in the On Highway segment, the long haulage, regional haulage and specifically long haulage have been weaker relative to segments. And therefore, we have been losing out.
It has been somewhat also on customer mix, but the main reason is really on highway versus other segments.
Okay. Thank you very much.
The next question comes from the line of Peter Testa from 1 Investments. Please go ahead. Your line is now open.
Hi. Thank you. I'm afraid a bit more on the supply chain. You've made the point that increasingly common sourcing beyond the drivetrain is supposed to drive provide significant savings going forward and yet there's been some challenges with the supply chain. Is any of this also related to the internal efforts in consolidating the supplier base to provide that?
Or is it to some extent more of the fact that European suppliers are reluctant to increase capacity above previous peak? And can you give us some sort of sense as to when you think the overall supply chain impact will swing from being a negative back to a positive in the margins? Is it Q4 or more next year? And then also on supply chain, given you've got a strong order uptake outside of Europe, can you just give a sense as to whether you think there'd be any challenges in managing that ramp up especially with the new truck in North America? And then lastly just on Construction Equipment.
If you look at the performance in H1 versus the market forecast for the year, you're sort of suggesting that H2 will be quite a bit slower. Is that just a sense of come off caution? Or is that basically directional view as you highlighted around your Chinese view? Thank you.
Thank you very much. If we start then again with the supply chain, I should say that the reason behind this it is actually a mix of the reasons that you are suggesting. First of all, I think that everyone has been more cautious about what capacity you should have in order to manage the full cycle. And that goes also for our suppliers, which I think in the long run is healthy actually because you cannot afford in a cycle. Your business will have too much, so to speak, capacity over a large period of time when you're not utilizing it.
So that is one reason. But having said that, it's also even more important to work closely together to anticipate both ups and downs together, so to speak. Then it is also related to the fact that we have been successful with, so to speak, the take rate of some of the modular components in our cost system, as we call it, the common architecture and shared technology system of the Volvo Group. And that is also a positive pullout. And then if you combine that together then with a gradual uptick in the market, not only in Europe, but also, as you said, for European sourced markets outside Europe, We have been using more and more of the safety buffers.
And normally, you try to manage if I put it a little bit to vacation. But this time, we have some negative impact during gradually more during the end of the quarter when it comes to speed transports, when it comes to overtime and when it comes to some lost volumes in production and not into shipments to customers. I think, again, the good news is that it's very visible to us where it is happening, the activities on it. And in the short run now, we are using the occasion for quarter 3 and quarter 4, and we are also taking measures in order to capture the opportunities that we will have, both, I mean, from the European base, but also when we have common components, for example, then for the uptick in North America. So this is a work that we are continuously focusing on a lot, obviously.
Then when it comes to the North American ramp up, it is correct, as you say, we are doing a number of very important product launches now in North America, the B and R and the V and L for Volvo. And we are also given a free sneak that is we will do something also on that here. But that I think we can just relate a little bit what happened during the 4th of the year also in Asia. We have launched a number of new ranges also for Asia. And I think we have a good methodology now with good visibility.
We are making sure that we will have a ramp up of the new product that is in line with quality expectations with, so to speak, the learning curve and everything because quality is the number one priority to our customers. We have a very strong offering here, so that we will cope them. But as always, when you have a changeover, you need to manage that very carefully. But I think we have solid and very concrete activity trends. We will go through that.
And then finally, on the other market forecast, I don't know if you meant the whole world or if it was only China. Well, looking
at the different regions, you could take the deliveries vis a vis the market forecast H1 versus full year and you get a similar impression across the regions. And I was wondering whether that was outside of China. That's how you're reviewing that.
No. I think I mean, I think the most obvious region that we have seen where we have been looking back, of course, being too conservative in our forecast is, of course, China. Maybe a little bit of the same tendency you can see when it comes to Europe as well, but of course, not at all at the same level as before. Having said that, I mean, we don't see from a macroeconomic point of view or anything like that any worrying signs when we talk about Europe or North America, I think it looks actually pretty solid. So maybe there is in hindsight, it always seems to say that it's a little bit heavy, I've been too conservative.
And maybe the focus is too much on actually taking care of the markets, producing the equipment, selling it and We'll conclude this quarterly report call and wish all of you a nice summer, coming back with a full of energy also in a couple of weeks here. So thank you very much for today.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.