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. Afterwards, we'll have a question and answer session. I will now pleased to hand over to Martin. Please begin.
Thank you very much for that, most welcome to this presentation of the Q2 report of the Volvo Group. As the operator stated, my name is Martin Lundstedt, President and CEO. I will start the presentations, followed by a presentation by Jan Gurander, Deputy CEO and CFO, followed by a question and answer session as normal. We can move to slide two. First comment, obviously, that Q2 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. We see that our new setup with the decentralized organization, with clear responsibilities are giving positive effect. The group sales and profitability increased.
Net sales increasing 12% and operating margin amounting to 9.7%, giving an operating income of SEK 8.5 billion. Group trucks operating margin amounted to a level of 9.6% in comparison to 10% last year. 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 is strong at SEK 11.9 billion, putting us in a net cash position. We can move to slide three. Regarding the deliveries, trucks came in on the same level as the same quarter last year. There were still big changes between different regions, with Europe up 7%, also South America was up from low levels, 5%, and Asia flat.
On the other hand, 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. Mack down 3% and Volvo down with 17%, showing also the different processes in different segments. Mack stronger in vocational, as you know, Volvo then stronger on highway that has 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. 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 two brands, but in particular for SDLG. If we move into slide four and service sales.
Service sales continued to increase. In the second quarter, the increase amounted to 9%, 3% excluding effects from currency. In revenue, the increase was up to SEK 18 billion, up with SEK 1.4 billion. Main explanations this quarter came from strong uptick in mobile construction equipment, driven by increased utilization of the customer fleet. We continue our increased focus of the service business also in all different parts of the organization. That will continue to be a cornerstone when it comes to a more resilient company going forward. Slide five. Trucks. The summary of trucks. We have actually seen a good demand level in Europe and in China. 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 and internal supply chain, with processes close to capacity limitations in some cases. This has caused extra costs, such as speed transport and overtime, and also some lost volumes. It has been an escalated trend at the end of the quarter. That is pretty normal situation that you have a little bit of such 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 as an effect here. The 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 Gothenburg has also caused reroutings and some extra costs. 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 next slide if we move to that. That is then the new family of long-haulage trucks coming in a number of different lengths and sleeper lengths and executions. It's an all new update done for this very important segment for Volvo following the introduction of the VNR, the regional haulage truck in first quarter of this year. Launch activities are just getting started.
We are coming with a 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 a new interior, both for living and for driving comfort, and brings up the level together with new powertrain executions, also turbo compound execution for some of the applications, up to 7.7% in fuel savings. Market leading also connectivity features, with a 24/7 connection that makes us leading in North America. A very strong offering, and just launched 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.
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. It's a pretty extensive exercise. 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 have 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. Moving into slide eight and the market environment for trucks. Our current estimate of the market environment is mainly in line with the forecast presented in quarter one. We are increasing somewhat to 225,000 units from 250,000 units for North America. We are also increasing the total heavy-duty, medium-duty market in China to 1,060,000 trucks. Last forecast was 1 million.
As you remember, also in quarter one, we actually increased from quarter four 2016 from 900,000 to 1 million. This is showing that it has been a very strong first half of the year, given also the new legislations on weight and dimension, as well as some pre-buy effect of China 5 emission levels. For the other markets, we are staying at the estimates that we were presenting in quarter one. 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 ton 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 nine, market shares. North America developed differently for the two brands in relation to quarter two 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 Renault Trucks is gradually gaining market share step by step in a consistent way. We have said that it's important to have the right quality in the business and not move too quick here. A good balance between fleet and retail sales, and that is encouraging to see. Also in Brazil, somewhat a drop in a very small market. We are making priority on the price quality and the quality of the business.
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 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 Mack, given the product mix and the application mix. Deliveries still continue 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 129% from very low levels. As we said, it has been pretty good uptick in the surrounding markets of Brazil.
Asia was up with 8% in orders and flat on deliveries. All in all, a positive development here. We are now closely adjusting also our build rates to get the right balance between production, deliveries, and stock in all regions. It has also, as we said, stretched the supply chain with high cost during the second quarter. Now we are intensely working with this to come back to a more normal situation as quickly as possible. It goes both for actually, as I said, using now the quarter or the vacation period, but also to take out some of the bottlenecks in the short term. If we then leave trucks and move into Construction Equipment.
Volvo 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, has given a good leverage. Both deliveries and orders were up with 54% and 49%, respectively. It is satisfying to see that our strong order intake in recent quarters has been translated, as I said before, into good shipments also in quarter two. This is a proof of good volume flexibility and that the cooperation 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 Melker Jernberg will be the new president of Volvo Construction Equipment as from 1st of January next year.
If we move on to the next slide. Yes, also to show that one of the focus areas we are working with in 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 Group, different brands, to go to the different industrial verticals stronger than historically. One good example is the Elmia Wood exhibition, the world's largest forestry trade show, where we had a very good exhibition in June, showing the full scope of deliveries and a much more clear key account view going to markets such as forestry, mining, quarries, et cetera. Good initiatives and good momentum in these activities. Slide 13 on the market environment.
We are actually maintaining more or less the same forecast as 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 +20%-+30%, and the new forecast now for 2017 is +35%-+45%. Otherwise, the market forecast for the other regions remain unchanged. When it comes to the order and deliveries on slide 15. Net order intake, as I said, very strong with an increase by 54% in relation to the same quarter last year, driven by all regions and deliveries also up then with 49%. Europe was up 3% in orders, North America at 12%. The big uptake obviously is in Asia.
In Asia, including China, orders were up with 160%, driven by strong intake both for Volvo and SDLG in the Chinese excavator market, but also SDLG wheel loaders in China. Also Volvo brand in several other countries such as Korea and Indonesia, for example, with mining activities. China alone had a plus 221% in net order intake in the quarter. Moving into buses. The market situation in Europe was slightly weaker but still on good levels. We see also continuous great interest in electric and hybrid solutions, even if it has not translated yet into big volumes, more and more activities around this subject. South America continued to be on a low level. Asia showed a positive development mainly in Far East and 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, where we also received the largest frame agreement ever for North America, 360 units for Greyhound. Also important order of fully electric buses to Malmö in Sweden, and some big orders also in Asia to Philippines and Indonesia. Finally, 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%. During the quarter, Penta has become also the majority owner of outboard motor manufacturer Seven Marine. This is an important step to get good presence in the growing outboard motor market for high horsepower outputs to complement our inboard strong offering, so to speak.
By that, the market update, I leave the word to Jan Gurander for financial update.
Thank you very much, Martin. We turn immediately to slide number 18, where we see the net sales market. Net sales is up with SEK 9.5 billion in the quarter. Approximately half of that is coming from currency and the rest is coming from the underlying growth. We see that Basically all regions contribute to the increase. You can see that particularly Asia, very much coming from CE and from China, 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 6.1 billion. Last year we had the negative effect of SEK 2.3 billion from the EU investigation. If we adjust for that, we were at SEK 6.1 billion, going up to SEK 8.5 billion.
Once again, I think it's extremely interesting and good to see that all of the business areas are contributing to the improved profitability. Of course, particularly the increase in Volvo CE 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 half a billion. 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 million 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 mean that we will have a negative currency effect for the remainder of the year of close to half a billion. All in all, for the whole year, plus minus zero. Turning now to the next slide where we see the contributors to the improved profitability. We see that it comes from the growth income, it's coming primarily from Volvo CE.
We can see here that we are having a higher amortization when it comes to R&D, this is in line with what we have said before, we stick to the forecast that we have had for the whole year that or earlier, that the capitalization will be approximately SEK 1 billion-SEK 1.5 billion and over that amortization for the whole year. We see that we have an increase of selling, taking out the currency effect there with an underlying increase is approximately quarter of a billion for this period. The rest is coming from currency. This is very much according to the plans that we have had. Looking into the improvement under the other SEK 600 million, that is also then coming from IT, as I mentioned before.
It is the credits in China for CE, which was a negative last year of SEK 176, that we don't have this year. Then also an underlying improvement in our JVs. As Martin explained before, we have had a very strong first half, actually, including the second quarter this year with the demand in China, that has improved the profitability for our joint venture in China. Apart from that, we can see on the improvement I talked about, the sales increase, we have, of course, a good capacity utilization in CE in our production facilities. We have also improved gross margin in services compared to last year, then we see also a better product mix actually on the truck side where we sell more heavy-duty trucks this year compared to last year, less of the medium-duty and light-duty.
On the negative side, I talked about the SG&A and R&D capitalization. We of course also see then, what Martin also mentioned before, the increased cost levels that we see due to the stressed and stretched supply chain as well. Moving into the cash flow. A strong quarter when it comes to cash flow, close to SEK 12 billion. The two contributors there is of course the increased earnings that we see, also the good quarter when it comes to working capital. The working capital is mainly coming from the trade payables. We have a normal situation this quarter when it comes to payment dates and so on. This increase in trade payables comes from the fact that we have ramped up during second quarter our production, especially in Europe, and that gives a positive effect on the trade payables.
When it comes to the investment in property, plant, and equipment, it's still under good control on the levels that we want to see them. We are then into a net cash position of approximately SEK 5 billion at the end of the quarter. We are also happy to see that we have had one notch improved rating from Standard & Poor's. We are now up to a level of BBB+. Moving into trucks. We see an increase of sales of 8%. If we take out the currencies, 2%. Currency adjusted, the sales are up 2% for vehicles and 1% for services. Turning to slide 23, the adjusted operating income, we go from SEK 5.2 billion to SEK 5.4 billion with a positive currency effect of SEK 276 million. The operating margin is 9.6%.
Here you can see on the positive side, gross margin on services that I mentioned for the group, the product mix when it comes to heavier trucks, the income from our joint venture is improving. On the negative side, SG&A, lower R&D, and once again, the stretched supply chain. Moving into construction equipment on slide 24, we 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 Volvo CE 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 services 7% when it is currency adjusted.
On slide 25, when it comes to the adjusted operating income going from SEK 810 million up to close to SEK 2.5 billion, small positive currency effect. We see that the operating margin is from close to 6% last year to 13.3% this year. Again, 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, also that we are working with the cost programs, we see that the effects of the R&D is continuing to roll in. In other areas, we are maintaining our cost level. Buses, going from basically having currency adjusted flat sales, vehicles -1%, services +5%, basically having the adjusted operating income stable.
We can see here that it is coming back to the 17% 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 less of chassis sales, mainly than, of course, in South America, and more fully built buses with bodies coming from North America this year. That's why you see that at the end of the day, net not an effect on the sales level. Product and market mix positive, a lot of efficiency initiatives that kicks in. 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 million to SEK 521 million. Very good return on equity, 14% compared to 13.5% last year. I think it's also a very good level when it comes to new financing. I think it is actually the highest level we have had in the second quarter. 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 second quarter last year. We are up to 26% there.
With 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 have an increased good order intake across the group. Net sales down, as I said, increasing. Continually improved profitability for the group. We've had a somewhat challenging quarter for trucks, given the fact that we have had mainly the stretched supply chain just up from the vacation period here. Construction equipment, strong improvement, operating cash flow also delivering according to the plans also, a strong giving net cash position. I think that is the concluding remarks, we are opening up for question and answers, basically. Back to the operator for Q&A. Thank you.
Thank you. Ladies and gentlemen, if you do wish to register for a question, please press 01 on your telephone keypad. If you want to withdraw the question again, you can do so by pressing 02 to cancel. Once again, that's 01 on your telephone keypad to register for a question. I'll have a brief pause while questions are being registered. This first question comes from the line 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, could we please quantify this effect in the quarter, and when do you expect these bottlenecks to abate? Then on SG&A, obviously good cost versus bad cost in the past. How should we think about SG&A to sales for the rest of the year? Do you have to increase SG&A more in the second half versus the first?
Okay. Thank you, Klas, for that. When it comes to the bottlenecks 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 into the North American system, linked down to common components that we have, 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. At the end of the quarter it was falling out not one, but a number of it causing that, as we said, the speed transport causing overtime and causing also some lost volumes when it comes to our shipments.
Having said that, obviously, we have a shipment days out to our suppliers. From out to our customers, from a customer point of view, I think we have managed the situation well, but with higher costs. 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, obviously it is pretty substantial since we are talking about it in the report. We just wanted to be clear also that when it comes to the quality in the business, market mix, product mix, order intake, that is a good situation. Here is something that we need to address.
Some of it will be stabilized during vacation, given the fact that we have a very dense activity list with all our suppliers and also our internal processes in order to refill buffers, et cetera. We also have a number of activities that we will more on the midterm debottleneck, so to speak, things. That we will balance also with the order book and production. Generally speaking, I think we have it identified. It will cause a number of challenges also during Q3, but I think we should see it as something coming with a good situation in demand and primarily then in the European production system that is not only supplying Europe but also other markets such as Asia and Africa.
Okay. No, that's good. My second question is on service growth in trucks. It came in below my expectations. Is this just 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. Also, if you could tell me why we see a better gross margin in services, the reasons for seeing a better gross margin there.
I think maybe it is a little bit like this, that when you go from the first quarter to the second quarter, 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 second quarter. I think there are a few factors like that, and maybe also that when you look upon it, maybe once you look upon the average between the first and second quarter, look upon the first half, and then you see that it is a healthy increase if you compare it to the first half of last year. Maybe I wouldn't say too positive. It's quite positive in the first quarter, maybe then a little bit back to normal here in the second quarter.
I think that's more what you should look into, I think. Just to complement what Jan is saying, what we feel when we look into the customers' activity levels out in the core markets, as we said, North America now ticking up again when it comes to the activity levels, and Europe on a strong activity level. With the focus we have, you will see a little bit of seasonality depending on working days, a little bit where. From quarter on quarter for last year also, then we had a big uptick in relation to Q1, then you also have some extra fillment to the dealer. I think you should not read this as any trend break.
Coming back on the gross margin again, I think, as you said, it's actually we work quite a lot with the service activities, it's not only to put it like that when it comes to increase the volumes and so on. A 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, smart bundling as well. It is a lot of activities going on in this area.
Very good. My final and 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? On the raw materials, steel typically comes through with a lagged effect to the P&L. Do you see any risk of increased price cost pressures in the second half?
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, the situation is stable. There you have also a number of other supply chains, and you have a better spread also geographically in relation to trucks. A better situation there. Having said that, again, well identified also on the truck side and focus activities. That is the situation on that. So far, I think the raw material situation, of course, it comes in gradually into the P&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, we see that coming in the second quarter. 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 the year. So far, I think we have managed that quite well. Of course, we would have done the commercial negotiations anyway with our suppliers. Net, the raw material comes in as actually a pretty sizable negative effect if we didn't have it. 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? The danger is that you are still below calling the market down, and we're seeing one or two of the independent forecasters looking for more flat market. Is it you continue to be more conservative, this will be permeated through the supply chain and hence, probably cause 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. Far, 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. I think we should read it pretty broad-based for all segments actually on a 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. When it comes to Europe and the stretched supply chain, I can partly agree to what you say, and I think that has also to do a little bit with lessons learned from the big hit in 2008, 2009.
To adjust also the supply chain for different type of levels, more granular maybe than historically. 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 as we saw a pre-crisis 2008, with an overswing that was a lot of bubble economy, if I put it like that. In this case, we are maybe 10%, 15% over a normal market if you take the long cycle in Europe. Obviously we should be able to cope with it.
With the uptick we've had during the 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 I said, extra costs very clearly identified and that we have activities to correct both during vacation and also some margins going forward when it comes to capacity debottlenecking, so to speak.
Okay, thank you, sir. In terms of the U.S., when will we start to see deliveries up year-over-year? In the third or the fourth quarter, you're going to be ramping up production?
I think we will. Obviously, when you have seen the order figures in relation then to shipments, we will gradually see it. At the same time, we are also making sure that we will not do a too quick adjustment. We are this time also pleased that we have managed, so to speak, this cycle in a very good way. We are keeping a high level of flexibility to see that this is a lasting trend, so to speak. We have a good flexibility level to manage that.
Okay, thank you. On terms, 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 Deutz sale to come. Have you paid on the China, where the SEK 2 billion provision roughly, I think it was for credit losses. Has that actually been paid out yet?
No, not that much. We actually have done some write-offs in the second quarter. If you look into, I think we have provisions today of around SEK 1.4 billion-SEK 1.5 billion actually due to write-offs. Cash flow wise, it's not that much that we have used.
Okay. When do you anticipate paying those?
That we don't know. I think we are from a balance sheet point of view as a provision, we are at a level where we are quite comfortable today actually that, to call it, the worst is over and hopefully we will not see more. It is actually a lot of hard work actually to work and try to get as much money back from the ones who owe us money, and that work will probably take, I would guess, probably another 2 years or something like that before we really can close the books on it. From a P&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 Hampus Engellau from Handelsbanken. Please go ahead. Your line is now open.
Thank you very much. I have three questions. First question is related to the issue of bottleneck. Would it be possible for you to quantify which type of components we're talking about when it comes to bottlenecks in Europe? Related to that question, if you could also given the order intake we saw 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 Seven Marine acquisition. Could you talk a little bit about the strategy behind this acquisition and going into outboard engines? Are there any synergies, do you see a risk in cannibalization, and also it's stepping up in racing engines, I guess. I would be interested to hear more about that investment.
Yeah. Thank you, Hampus. When it comes to the bottleneck situation or to the stretched supply chain in general, what we are seeing it has been quite a number, actually, of suppliers. As I said, it's coming gradually during the course of the year. Some of them have disappeared because they have done activities to debottleneck already during the spring, and some have not been able to do that, depending on processes. If you take a general standpoint, it has been very stretched, so to speak, in the powertrain part of it. 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. 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.
Obviously, as you say, when it comes to the order intake, you have two parameters to play with. One is to increase the run rate, one is to increase the order book, we prefer the first one, obviously. We are working hard on that also to see that we can adjust, we are not filling up the order book and order backlog too high because 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 Seven Marine, there are a number of strategic rationales, actually.
When we look to the marine, leisure marine segments, both actually for petrol and/or for 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 outboard engines for different reasons. Therefore, we have said that at one point in time, we need to look into the opportunity to participate there strategically when it comes then to the high horsepower rate.
This was then a good fit, not only because they are primarily, Seven Marine, focusing on those segments, but also because they have a concept where you actually are using our type of engines that we are using for the sterndrive or the inboard, having a horizontally mounted engine, very innovative also then 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. Therefore, you have natural synergies when it comes to product development, so to speak, to the performance that we have also in our inboard part of it.
It's a strategic fit both when it comes to the market development, as we continue to maintain our strong position when it comes to marine leisure, also when it comes to the technical features and the technical development also. Those are the main reasons, Hampus.
Thank you. Can I use just one follow-up on the comments you made on Europe? Would it be possible to quantify the lead times in Europe today from orders to delivery to ordering a new truck?
Yeah. We were discussing a little bit what to say. We should say this, it is normal and maybe a little bit longer in some markets and segments, depending on what type of applications. Still, I think we have managed, and if anything, maybe we have been also stretching our own ambitions when it comes, the uptick in production and really to follow this. Therefore, also we have seen this gradually stretched situation during the end of the quarter. From a delivery and delivery promise perspective, it's not far off the normal delivery lead time.
Fair enough. Thank you.
The next question comes from the line of Erik Guldbrandsen from Carnegie . Please go ahead. Your line is now open.
Thank you. I have two questions. Apparently, since they've been asked, I've had a terrible line on and off. Firstly, on the supply chain issues, if you could clarify, do you think that Q3 will suffer more or less than Q2 from it? When do you expect it to be more or less fully resolved? The second question on the balance sheet, given where Q2 ended, and if you assume that you have normal working capital patterns for the second half and potentially divestment of Governmental Sales, I guess that would be doing an instant net cash also when including pensions towards the year-end. Could you remind us of where you'd like the balance sheet to be at this point, and what your priorities are beyond that? Thank you.
Thank you, Erik. The line was not brilliant, so I think we got most of it. First question, I think I heard you say, how would quarter three be in relation to quarter two when it comes to the supply chain? Obviously, we are working with high priority now using vacation period really to stabilize the situation together with our suppliers. 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. We are also doing some other activities in order to debottleneck more long-term when it comes to the increase and in the take rate basically of certain components.
From that planning, our estimation is obviously that in quarter three, it should not be worse than quarter two. Our estimate is that it should be better. I think we are on a high level. We will continue to have extremely high focus on this and make sure that also with adjustments we need to do given the order take, that we are also following closely what we need to do when adjusting all parts of the value chain, and we have a good dialogue here. 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. Now we have the trident of purchasing operations and technology sitting in that, and that is also giving a good effect when you have a fresh situation as we have right now.
Going to the balance sheet, I think a little bit just to remind us of what we're working with. 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 second priority. Of course also it is a question about actually having a, you can say, stronger balance sheet compared to what we had before. I think we are on this journey. I think also looking into the balance sheet in itself, I personally said it before that we had a too weak balance sheet. We are in a capital-intensive industry. It will have its ups and downs as well. Of course, we will do everything we can to offset as much as possible.
I think you need from that point of view, need to have a slightly stronger balance sheet compared to what we had before. Also I think when it comes to the financial services arm as well. I think it's good and rewarding to see then in the second quarter that S&P actually raised its rating on the Volvo Group. The primary reason for that is of course our underlying performance in terms of cash flow and profitability. 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 the strong view that too much cash is probably not something that the management of a company should sit with. It probably is better off with the shareholders.
Where exactly that level is, I think we have to come back to that.
Thank you. 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, generally speaking, go bankrupt. It's more that they have too much work to do actually, and have capacity limitations. It is actually rather fascinating to see how within the second quarter it was not only one supplier, it was actually more. It happened more or less at the same time with several of them. It's pretty broad-based.
Yeah.
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. The original, so to speak, the challenges, is positive in the long run for the group.
Thank you.
Next question comes from Marcus Admi Meyer from UBS. Please go ahead, your line is now open.
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 one. Question two, just for your guidance on China construction equipment. If I look at that year to date to May, markets are up 65%. You've moved your guidance midpoint up by 15%. If I translate that right, I hope for H2, we should see that market growth decelerating to about 15%. I wonder if you can comment on that. Then last question on North American market share that dropped to 8.8%.
Is that because we've seen the growth in Class 8 so far in 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 about 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. Obviously it is like that now that North America is not close to capacity limitations, given the fact that we have been up to market. Since you 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. There, I have done, or our North American organization has done a good job in actually following the market demand, et cetera. We have technical capacity to go for North America. You have a number of components, obviously, that all combine where we are working, not at least on the powertrain, where we are working to balance and to see that we have enough capacity.
That is dual folded, both the general market conditions again, and also the fact that we have a good demand on our combined powertrain offerings, captive powertrain offerings. 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, et cetera, is also doing well here. There we are higher up, but we also have activities to continue to follow that pattern, so to speak. 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.
When it comes to VCE, when you have an uptake like this, and you should remember it's coming from low levels, and now when we are talking about the total market forecast is 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 China. 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. When you have an uptake like we have now, it's difficult to say what is, so to speak, the first pick up, and where will the market land. I think in all fairness, you can say that we have gradually upgraded. Last time we were at 20-30, now we say 35-45.
Is that where the market will land? 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 last quarter is that in addition to excavators that came earlier, also wheel loaders are picking up for us. Since we have a strong position with SDLG, that is from a Group perspective, a positive sign.
I think what's also important is that, as Martin said, 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 markets when it's there, and actually we are not losing out on market share in China or anything like that. The focus is actually on keeping or actually increasing the market share. Of course, then take care of it in production as well. I think we've been pretty successful in doing that. We see what the market will look like at the end of the year.
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, long haulage, regional haulage, and specifically long haulage has been weaker relative to the vocational segments. Therefore, we have been losing out. It has been somewhat also on customer mix, the main reason is really on the on-highway versus other segments.
Okay, thank you very much.
The next question comes from the line of Peter Testa from One 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 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? 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 full margins? Is it Q4 or more next year?
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? 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 caution or is that basically a directional view as you highlighted around the Chinese view? Thank you.
Thank you very much. If we start again with the supply chain, I should say that the reasons behind this 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 a 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 cyclical business to have too much, so to speak, capacity over a long period of time when you're not utilizing it. That is one reason. Having said that, it's also even more important to work closely together to anticipate both ups and downs together, so to speak.
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 CAST system, as we call it, the common architecture and shared technology system of the Volvo Group. That is also a positive for us. 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.
Normally you try to manage, if I put it a little bit to vacation, but this time, we had some negative impact during, and 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. In the short run now we are using vacation for quarter three and quarter four, 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. This is a work that we are continuously focusing on a lot, obviously.
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 VNR, and the VNL for Volvo, and we are also given a pre-sneak that we will do something also on that here. I think we can just relate a little bit what happened during the start 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. That we will cope.
As always, when you have a changeover, you need to manage that very carefully. I think we have solid and very concrete activity plans in order to do that. 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, if you take the deliveries vis-a-vis the market forecast H1 versus full year, you get a similar impression across the regions. I was wondering whether that was outside of China, how you're viewing that.
No, 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, we don't see from the, you can say 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. Maybe there is, in hindsight it always easy to say that a little bit that we've been too conservative. Maybe the focus is too much on actually taking care of the markets, producing the equipment, selling it, and conclude this quarterly report call and wish all of you a nice summer.
Coming back full of energy also in a couple of weeks here. Thank you very much for today.
That concludes our conference call. Thank you all for attending. You may now disconnect your line.