I would like to wish you a very welcome to this press conference where Volvo Group will present the results for the Q4 2016. We will start with the presentation with the President and CEO, Martin Lundstedt and after that, the Deputy CEO and CFO, Jan Grandel, will have a presentation as well. After we have finalized the presentations, we will have a Q and A session where we mix the questions between this auditorium and the persons that are attending on the website. So please very welcome Martin to start the presentation.
Thank you, Joakim. So also from my side, most welcome to this quarter 4 2016 reporting and also some comments obviously of the full year. Quarter 4 was a good and solid quarter for the Volvo Group. Underlying improvement in our operations are continuing in a good way across the board. We see that, of course, coming from the restructuring program and the SEK 10,000,000,000 program that Jan will mention, but also from the continuous improvement and good focus in the organization around customers and different regions.
Trucks delivered better margins despite lower volumes. And as you can see, it's still a big volatility when it comes to shipments between the different regions and that has been one of the main priorities for the group to cope with that those big differences differences that we see across regions. And I think we have managed that in a good way. I will come back to that further on here. Also Volvo Construction Equipment is yielding better results, mainly because of the performance improvement program that is surrounding within Volvo Construction Equipment with a good pace, but also thanks to additional or starting to see some tailwind also in the markets.
And the service business, finally, also good pace, plus 3% adjusted for currency. Better activity utilization among the installed fleets, but also better focus in the organization around the service business. And then, of course, order intake in most of the business areas were positive. When it comes to the volume development for trucks, the volume development was minus 10%, primarily driven by the very weak shipments in North America, minus 47% in relation last quarter or the same quarter last year. And there you can really see the effects now when you still have good volumes coming into the market quarter 4 2015 and then we have gradually taken down, as you know, production and thereby also deliveries during the year of 2016.
So that is explaining, as you can see, the negative figures for Volvo Trucks and even more pronounced than as you see for Mack Trucks in percentage. Europe continued to show strength, 7% up with the Volvo Trucks up 20% and Renault down with 7%, but that was primarily driven by high shipments for light duty trucks last year. When it comes to the heavy duty sector, we see that Renault is stabilizing and we also see some improvements in the order intake. So that is a very important sign after the introduction of the new range here. Also, South America was continued to be weak from already low levels, but there we have adjusted and we have a good balance between output and the order intake.
For VCE, as you can see also strong in terms of shipments both for Volvo and for SDLG. In total volumes, we were up with 19%, and it was Europe and Asia, and in Asia primarily then China, India and Southeast Asia. Volvo brand was up with 16% and SGLG was up with 22%. Service sales, some comments on that also. As you know, we have been starting to disclose that separately and discuss that separately.
Service development, as I said, was positive with 3%, excluding FX. And as you can see also on the arrows here, it was a positive development in all business areas. As I said, we see that is coming from a high utilization in many regions, but also focused activities in the group. One example, as we have been mentioning several times where we continue to see a positive development is regarding proprietary engines in North America, but we see it also across the board when it comes to activities in parts and services and also in relation to connected solutions that I will come back to. This will continue to be one of the core focus area moving forward in order to continue to be even less dependent of the shipments of hardware and thereby also decreased volatility in earnings.
But also because we know this is one of the most important retention activities you can have together with customers. When it comes to the truck side, I would like to start with one good example related to the brand based organization. Now when we have a brand based profit and loss focused organization for the 5 truck business areas, you get the right granularity. And the reason why we were picking Algeria is that Renault Trucks, and you can see the President of Renault Trucks in the middle, Bruno Blanch, together with our partners, BASF, Soakri Industrial Group in Algeria, signing a new contract for the distribution. And why is this important?
This has been a discussion for a couple of quarters now. But now when you feel we have to move on, it's happening much quicker, it's happening much more focused. This is actually the 2nd biggest market for renewal trucks. We have had historically levels over 40%. We are close to 40% now and we have a potential of 2,000 trucks per year.
Another example in quarter 4 was Volvo Trucks signing a very important dealer and distributor contract in Turkey with the Sabanci Group that also will reinforce our position in a very important market between Asia and Europe and the transit country. As I said also talking about services, some comments around that and the development. We have today more than 600,000 connected units in the market around the globe for all business areas. And we continue to rule out features that will improve the communication primarily between us and the customers and all different factors in the value chain. The new MEC Assist mobile app, it's about actually following different type of events when it comes to maintenance services, repairs and all actors can follow that completely transparently in order to improve turnaround times to make sure that everyone, so to speak, is satisfied with what is happening in the value chain.
And that is part of our closed loop communication that goes for all services now. We have the world leading uptime center in Greensboro for the North American market. It has been extremely important for our more solid development in North America and not at least also when it comes to the proprietary strategy. And we are continuing to rule out different type of applications, captive but also together with partners. If you remember also last quarter, I was mentioning or maybe 2 quarters ago, I was mentioning the certified uptime centers that is connected with the uptime center in Greensboro and that is continuing to roll out.
We have now 8 in North America and we are yielding good results when it comes to customer satisfaction and when it comes to actually invoiced hours and better efficiency in our dealer network. I will not be too long on this. This is one of my passions. But what is interesting still is that in North America, we are taking between 15% 20 percent of the opportunity because still there is a lack of capacity in the captive network. We have very good discussions with our dealers and distributors.
And when you have this good momentum, of course, the willingness of continuing to invest and reinforce the network will be there. Some comments about the market environment then. In North America, to start with, we are standing firm, so to speak, with our forecast of continued decline of the total market for 2017 down to 250,000 units. And the reason is, of course, that we are starting to see a market flattening out. But since we are now coming in with very low levels, it's natural before actually we will see an uptick that you are running on a level that actually will support some of these levels.
Then we will see later during the year what will happen with some of the investment programs, etcetera. What is important for us is obviously that we have a well balanced situation now, and I will come back to that, but we stick to that forecast. In Europe, we are increasing a little bit from 280,000 to 300,000 and that is thanks to a good support also in quarter 4 as you saw also in the order intake and still also good activity levels moving into this year when it comes to quotations, activities and discussions with customers. Brazil, a small decrease, not of the biggest importance because we are more or less running now the industrial system on, if I may say so, the minimal mood. And the priority is more about actually safeguarding our T1, T2 supplier base and also our dealers.
So we are coming strong out when the market will return here. And in Asia, as you see, still good forecast for China. Even if it looks like a decrease, it's actually depending on, as you know, the pre buy that we had in or not the pre buy, the correction we had in China, thanks to the change in legislations from a weight perspective that supported a very strong order intake after vacation here. But still 900,000 is very strong. And if you take it more granular, we are increasing 15,000 for medium duty and 15,000 for heavy duty.
And that is obviously important for our joint venture with Dongfeng. Also what is interesting is that we see that some of the premium segments are continuing to be reinforced in China and we have had a good development for Volvo Trucks as well, not at least, for example, for e commerce because then you start to have really just in time flows. India, we are taking down pretty big correction. I mean approximately 100,000 units for medium and heavy duty together. And the reason for that is the demonetization and a little bit, I mean, this break situation that we realized during the last quarter, but still, I mean, levels that we experienced.
So that is what we are doing also in our joint venture in India to adjust for this. On the other hand, we have seen also some better activities in the resources markets in India. Forecast then for Japan, sorry, for medium duty and heavy duty is to continue on a high level, I can say, of 95,000. Market shares. In North America, as you can see, we were losing a little bit more than 2 percentage points for Volvo Trucks.
Weak start of the year, as you remember. And then we have stabilized and gradually improved, but weak start of the year. And then obviously, the product mix in North America, the biggest hit in long haulage on highway and where Volvo Trucks has its sweet spot as well as actually some resistance in our organization, which I think is positive. I mean, you are not buying at Qonsum for market share. So we have also had some resistance when it comes to discount level, which is important in the long run when it comes to credibility vis a vis customers.
Then if you're extremely granular, but I will not be that because, Jan said, don't be that granular because you will be so talking too much. But it's also a little bit of a mix effect when it comes to North America as a market because we're extremely weak in Mexico and that has fallen less than U. S. And Canada. Mack, an uptick then of almost 0.5 percentage point that is mainly related then to vocational segment where we have the strongest position for MAX.
So that is positive. And we have also seen that in the order intake in relation to Volvo, for example. So I think that has been, from that perspective, a good year. We see also some activities starting to come in oil and gas, for example. Europe, very strong year for Volvo, 16.9 percentage points, broad based support markets and segments, very positive.
We were still arguing if that was the highest figure ever. It's not important, but it's a high figure anyhow, and we are pleased with that. And when it comes to Renault, as I said, we have gradually stabilized now the market share, some improvements during the last part of the year or the latter part of the year and more importantly that we are taking care of the balance between price, volume, residual values. So quality in the business given the introduction of the new T range that is very well received and should also be have a well deserved price position in the market. Brazil, as you see, we are losing market shares primarily in the medium duty segment, our VM range.
And the reason is simply that we were increasing prices pretty steeply because we had to do that. And again, someone has to do with we are the premium brand and then we go for it. And partly that has also been the case in the heavy duty segment where we have been losing 1 percentage point. We are still at 28%, keeping up also trying to keep out price levels in high pressure markets, so to speak. Japan was primarily the loss of the beginning of the year.
We had production issues internally when we were switching production system. It's a long story. But now we are back on track. We have a balanced situation and we were also losing some of the bodybuilding slots during that time actually. But that much better situation moving into 'seventeen here.
And yes, I mean, when it comes to South Africa and Australia, obviously, I mean, not the biggest markets, but take Australia anyhow, 27.4% totally for the group, good progress on the other side of the globe. So we take that as a proof that we are pretty global actually. And then also in China, just to comment on that, what we have seen that we have been losing out a little bit market share for Dongfeng. We are between 13% to 14%. We don't have the exact calculation.
And the main reason is the product mix actually that we have had historically stronger position in regions than in tractors, but that is, of course, a focus area. Orders and deliveries then, some comments about that. As you can see, book to bill, generally speaking, positive. We are increasing the order book, totally speaking, with approximately 3,500 units. And as you can see also now that we are getting more in balance.
For example, in North America, orders were still down but much more moderate. And deliveries, as you can see, 47% down in relation to last year. And I think this is one of the key messages that we are pleased to see our improved performance of handling high volatility in the marketplaces. Obviously, I mean, when you look at things in hindsight, you can have you could have been doing even better. But I think the improvement rate has been great, and we are taking now the lessons learned about this and move forward.
Yes, it is a little bit like having a newborn baby and then you should go out when it's minus 10 degrees. And then you're putting on the clothes that you need and then your mother that have more experiences to you that, I mean, just take off 50% and then it will be okay. And that's a little bit the same here. I mean, you're always a little bit too shy to do the correction needed. I think we have been good anyhow, and the organization have been acting fantastically in this work also and with very good mood to do these adjustments.
Europe, plus 12%, as we said, in orders. Still, a main part coming from Volvo, but also in Norway, we are seeing good movements and not at least in retail activities that is very encouraging and not only in fleets. And delivery is up with 7%. So we have, as you see, a positive book to bill ratio here. And meaning also that we are actually gradually adjusting our facilities in Europe, both for Volvo, primarily in Ghent and also we are looking now for adjustments in Bulganbrest for Renault.
That is also, by the way, supported not at least for the Volvo brand, as you can see, positive development in Africa, Oceania and Asia, where we are taking the majority of the volumes out from the European production system. And then in South America, still very low activities, shipments down and orders stable, very low levels. So there is more of balancing the situation also for this year, so to speak, and mainly then in Brazil. Construction Equipment, just a few comments on that to start with. During the quarter, we have had a number of important events related to the ongoing performance plan for Volvo Construction Equipment.
And as you've seen, that is starting to yield really good results, both coming from underlying improvements of the same type and same character as we have done in the truck business, but also with some pretty big decisions. And some of the examples here are, as we said, a major streamlining of our R and D activities within Volvo Construction Equipment, more customer focused, product focused, better balance with the future volumes and the volatility that we expect in these markets. So we also are seeing that product line by product line. And here we are talking about yearly savings of approximately SEK 400,000,000 to SEK 500,000,000. But for 2017, so we are not calculating that directly into the books here, maybe 50% of that, but that will be backloaded obviously since we started with this work during the fall here.
But I think a good strategy and that will still give us the opportunity to have a leading role in innovation in this very important sector, not at least for our main and core segments here. The second part obviously is also that Volvo Construction Equipment is moving headquarters from Brussels to Gothenburg and that is to facilitate even closer cooperation where it matters between Construction Equipment and other business areas on the truck side, on the bus side, but and on the Penta side, but also with technology functions that is of utmost importance. And that means also that we can have the smaller headquarters moving and actually distribute other resources where it belongs, and that is in our commercial areas or in our production and technology areas. So that will happen up to the mid of this year. And then thirdly, to get better use of our group assets also, wheel loaders and excavators fitted today with the Deutsche's 7 and 8 liter engines will be fitted with Volvo Group's 8 liter engines, resulting in approximately 11,000 more engines when transition is completed 2023.
And in relation to that also now when we have an in-depth performance plan, you know the macroeconomics in construction and mining has not been of tail character, if I put it like that. So we have been very granular in our performance plan. Together with the review of the business as such, we have also identified additional potential that we are working with them. And this performance plan is working fine, and we continue with full focus ahead to get to the industry leading position when it comes to both market presence, market share and profitability that our brand deserves here. When it comes to some of the events that will happen in Volvo Construction Equipment, one also very positive development that we see is around, for example, full service contract like our product that is called extended coverage.
We took a big deal in Mexico with CEMEX. You know CEMEX is, I think, number 2 now in after LafargeHolcim in cement. Took a very strategic deal with them for 62 heavy wheel orders. It was a little bit mixed also with other machines, but also in relation to extended coverage and thereby also very good retention of the life cycle. So that is paying off, so to speak, the type of cooperation we have in the group when it comes to these type of service activities.
So very encouraging. Market environment, also we are revising upwards. There is somewhat better feeling in all relation to 2016 and also especially in relation to previous forecasts that we were having at quarter 3 reporting. In North America, we are forecasting a flat total market now. And the last time, we were talking about minus 10% to 0%.
In Europe, as you can see, we are continuing positively. We have seen strong movements in France, in Germany, Italy, Russia also moving. So we are seeing between 0% and plus 10% instead of flat in the previous forecast. And for China, we have also increased forecast. We have seen excavators for a while now, but also seen wheel loaders flattening out.
So we are saying 5% to 15% increase instead of 0% to 10% before. And also Asia, slightly revised OpEx. So there is a positive feeling, but still, I mean, with high level of flexibility in the system, obviously. Also when you see order and deliveries, positive. Net order intake was very strong, increased by 35% in relation to last year's low level, but still.
And that was supported mainly in Europe and China, and deliveries were also positive by 90% in total. Europe up with 46% in orders as you can see in deliveries with 13% North America, up with 35% from very low levels. And that's the reason why I say in terms of units, it's mainly Europe and China. But I mean in percentage, obviously, in North America. And what we can see here, it has been the uptick in the North American, generally speaking, 2016 has been a lot around the compact segment.
The good news for us here is also that the Mexican dealers I talked about is playing an important role. And then you also see Asia, including China, orders were up with 29% and delivery is also strong. For Volvo, this is in China, excavators, but also India, whereas SDLG saw positive development in China and Southeast Asia. Buses, the markets are showing, you can say, mixed situation here. 2 of the big market blocks are still weak.
Latin America, as you know, is a traditional very strong bus market for us and for all players. That is still very weak due to Brazil. And also Asia is pretty low activity in relation what we normally see and that is both geopolitical obviously, but also some of the big players and not taking orders for the time being. But Europe has been strong and we have been moving our market share from 9% to 11%. And also North America is continuing on a good level, not at least in the Coach segment.
What is interesting to see here is obviously that deliveries were down 6%, but sales adjusted for currency were not adjusted for currency, but the sales because that we discussed yesterday, yes. Sales were up 10%, adjusted for currency 8%. But nevertheless, while we have these differences that we are shipping more complete buses this quarter. And when it come obviously to the profitability trends, etcetera, 1 quarter in buses is like comparing 1 days in trucks. You really need to see the trends and the trends still are positive.
We are convinced that we are in the right direction here. We see also when it comes to the orders, 285 Nova buses to Toronto, extremely important for a volatile segment. I mean, the city buses in North America gives a good order coverage and build and order board into that plant. 174 hybrid buses to Ariba in the U. K.
And also that we reached actually milestone during the quarter that accumulated now we have been delivering more than 3,000 hybrid buses and that makes us by far also one of the leaders into this very important movement from gradually moving into electromobility. And finally then, you know what this is guys, that's a tomato harvester. Anders, that is something to long for, for the 2nd career. But that is showing, I mean, how diverse this business is when it comes to Volvo Banda. And also that we are actually more and more successful when it comes to the industrial segment, strong in some of the construction and mining activities, as you know, working with some of the major OEMs, strong in material handling and gradual increasing with a good offering also our presence in agro and agriculture.
And I think this tomato harvester is talking for itself here. Otherwise also, not only for the industrial segment, but still marine diesel is continuing to show very good results. And also in segments with weak market development, total market development, we are gaining market share such as marine gasoline. And what was also, of course, encouraging also this quarter, I have to say, was that we got an innovation award this time at the Ibex trade fair for easy drain solution that you actually have one plug and everyone that has a boat and have had a motor or an engine in it knows the difference if you can do that easily actually. So that is showing a continuous leadership when it comes to easy boating.
Net order intake here increased by 20% and deliveries decreased by 4% mainly related to product mix. In some cases, I've discussed that we've increased many times. I mean, when you talk about units, it's a little bit the same in Volvo Construction. I mean, average is, as you know, the mother of nothing. And therefore, it's when it comes to units and up and down, it depends on if you're talking about small marine gasoline, if you're talking about industrial engines.
But as you can see, I mean, net order intake up was 20% and also net sales adjusted was up actually 3%. Services also continues good development of 2%. So by that, ladies and gentlemen, I will leave the word to my dear colleague, Jan Ger Anders, that will go through the figures. Thank you very
much. Thank you, Martin. I think we are pretty good on holding the time today. So, I think it's from a financial point of view a fairly solid quarter. So I think we can do this fairly quickly.
When it comes to the financials, we increased the sales from SEK 80,000,000,000 approximately up to SEK 82,500,000,000 driven by currency. If we take away the currency, we are negative of 1%. We see the market areas, Europe up, as we saw before in Martin's presentations, North America down. Asia is actually you should be aware of that. Some of Asian currencies like the Japanese yen is strengthening quite a bit.
So it looks quite a big sales increase in terms of numbers, but it's really big currency effect here that we should also watch out for some other currencies in the world that we don't focus so much on. They are actually strengthening quite a bit right now. Turning into the adjusted operating income when we take away the big one timers. Last year, we had basically
we won
an arbitration case, but we also had a restructuring cost basically taken out each other approximately 0. And this year, we had when it comes to operating income, the sale of the real estate in the Q4 given a capital gain of SEK1.4 billion approximately. But you can see here almost all business areas contribute to the increase in profitability from $4,600,000,000 to $5,700,000,000 We see an increase in the operating margin from $5,700,000,000 up to $6,900,000,000 when we have the adjusted operating income. A fairly limited currency effect for the quarter, dollars 336,000,000 coming through. Actually, quite little currency effect on the operating income, much more on the sales figures.
Looking into that, what has contributed to this increase, it is coming from the gross income improvement. We see here that we have a good market mix in trucks from North America into Europe. We have improved profitability in Construction Equipment and we actually see also then that the service business in the 4th quarter has been very good. We see also in the 4th quarter continued positive development in terms of material costs. We have so far not seen any negative effects from the raw material.
Going into this year, we will gradually see that the raw material will affect us negatively. At the same time, we work with measures, of course, to offset that and we see how that develops going forward. On the negative side, we have the of course, the lower volumes especially on the truck side with almost 6,000 trucks lower in production. I think that is definitely affecting us on the negative side. And we have the lower R and D capitalization.
And as always, we will give you a little bit of what we think right now when it comes to capitalization and amortization. This year, we will see a higher amortization than capitalization somewhere in the range of NOK 1,000,000,000 to NOK 1,500,000,000. And then we take the currency at the same time, and you know the same thing. We talk about transaction exposures. We talk about given what we had last year in terms of flows and then we think it will be approximately positive of SEK 500,000,000 Then cash flow is maybe the area where we need to maybe not the best quarter we have seen.
We are if we exclude the one time effects, we paid the fine for the European Union case of almost SEK6,500,000,000 in the 4th quarter. And we also got then the sales proceeds from the real estate in the 4th quarter. So if we take these 2, the minus there and the positive, we had an underlying cash flow of close to $9,000,000,000 in the quarter. But you can see here that this is not in line with what we think it should be. We have some underlying I will take that on the next slide.
On the PP, we see that net investments is virtually 0. If we add back the capital gain from the real estate, we are on the level of 2.5%. So that is in line with what we have. This is for your information. We added the slide because it's a fairly messy cash flow statement that we have this year.
It's a little bit difficult to read what is the underlying and what is due to the effects of these one timers that we have. And they also have the for the ones who are interested in accounting, it moves between the lines within the cash flow statement as well. So this is a simplified version that my colleagues have made so I can understand it as well. So basically take away the one time effects. We go from SEK 14,000,000,000 down to SEK 9,000,000,000.
Dollars The underlying effects that we have on the working capital is that we change a lot of sales from North America going down into Europe. And in North America, when we sell a truck, we get the proceeds more or less day 1, it goes into floor planning and so on. When we have a much more integrated value chain in Europe, and that means that we tie up more capital in Europe. And you can see it here on the receivable sides. When it comes to other working capital, we have of course a lot of restructuring costs that we have had before accounted for and now they go out as cash flow as well.
That's there you have another reason for this. Looking into trucks, basically then lowered the amount of delivered trucks, 10% down. And as you can see a big shift in North America compared to the Q4 last year, almost 50% down. And I think then we see when it comes to vehicles then in sales down 9% and services up with 2%. All in all, dollars 54,500,000,000 The result is going from $4,400,000,000 up to almost $4,800,000,000 giving then an adjusted operating income margin of $8,700,000,000 compared to close to 8% last year.
And you can see the same explanation as for the group in terms of what drives it. I think this I think we are getting more and more agile in the organization. What we do right now when it comes to taking decentralized responsibilities, working more locally or regionally along the value chain has made us more flexible. And I think that is what is shown here when it comes to how we have adjusted the production in North America on the truck side. And we are making money in North America despite this downturn.
And I think also the way we have responded to the upturn in Europe shows that the work we are doing right now with the local focus or regional focus and the work along the value chain, you know the themes about continuous improvement that starts to yield an effect. So then turning into Construction Equipment, 20% increase in sales. It is 15% if we take into consideration the currency. Service is up with 2% more or less the same as on the truck side. Here we go from a negative last year of close to 2 $100,000,000 The last year we had a credit risk provision of $158,000,000 if I remember correctly.
It was a little bit negative still if we take away that one. This year, we are at $500,000,000 We can see that we have a positive thing from obviously sales volumes. We have a good product mix this quarter with a lot of the big heavy machines. And then we also see the effects that we do internally in terms of lowering the operating expenses as well. So going up to an operating margin of close to 4%.
Buses, stable in terms of EBIT margin approximately 3.5%. As Martin said, we are delivering less number of buses this month, but we have an increase of sales and that is due to the fact that we have selling more of fully built buses not only less chassis. And we can see here that this volume lower volumes of course, has an effect in the factories in terms of fixed cost absorption and so on. That's why we see a stable result compared to last year, Very limited, unusually little currency effect for being buses. It's usually one of the most interesting business areas when it comes to currency effects otherwise.
So and the Penta is, you can say, delivering according to plan. We have a good stable quarter, 6.5%, more or less the same as well 1 year ago, virtually you can say volume wise fairly flat. We see some positive things from the currency. We have a slightly higher R and D cost than what we had in the Q4 last year. Financial Services also stable, I mean stable writing some $15,500,000,000 in new business for the quarter, dollars 560,000,000 almost $570,000,000 in operating income and a good return on sales to 13.5%.
Good control over the credit risks in the areas that we have talked about before Brazil managed in a very, very good way. We are making money in financial services in Brazil. We see also that the risk situation is under control in North America despite the fact that we have this downturn. And I think it's also worth to mention when we look upon also the quality of the business we have in North America for the business area in terms of how we manage the used truck and also the residual values, it's actually been very much under good control. And then looking into the full year and I think you've been following this now for 4th quarter.
So it's basically the sum of what we have said and it is very much repeating the same story for the last couple of quarters here. We see that sales are down compared to 1 year ago from $313,000,000,000 to just above $300,000,000,000 And of course, that has an effect on our gross income. You have a negative effect from the volume drop, but you see a lot of internal measures that are actually doing this drop not so visible as it otherwise would have been. We see material cost reductions. We see logistic cost reductions.
So really on the cost side you have quite a lot of things that are offsetting this downturn. And over the year I think we have seen actually not very much help in terms of price and so on. So it's really the internal measures that has kept this effect on the gross income or limited the negative effect on the gross income. We see then also that the effects of the restructuring program that we now finalized when we left 2016. And you can see here that selling expenses, admin, also the cash R and D has gone down and also then the other restructuring costs that we have in our industrial system that is coming in mainly into the gross income has also yielded an effect.
And then the program is finalized and it is eventually it became a SEK10 billion or if one should be very, very thorough, it became SEK9.8 billion, but that is now a closed program as I said before. The margin for the adjusted operating margin is 7%, last year 6.5%. So I think with that, I'll see you, Martin, to come back and then we open the floor for questions.
Absolutely. I don't think we need to repeat. We have been hopefully pretty clear on what we have seen this quarter. Just maybe to add one thing that it has been also a year of a lot of changes in the group given the brand based organization, decentralization, establishment of the business areas again and when we are sitting here also with a lot of people representing also the investors financial community, take the opportunity to thank the whole organization for that work and delivering those results in a highly volatile market. I think that has been a great achievement by our people.
Thank you
very much, Jan Martin. We start with your questions.
Hamp Singhalau, Handelsbanken. I have three questions. Starting off with Europe. In Q3, I think you were planning for some production adjustments for Europe for this year. And I was wondering how far did you come on that?
And how does it look going into this year? And related to that question, Europe seems to go into a 3rd very good year. What's your comment on prices? I know you usually comment on price communicate prices in September for this year. Last question is on North America.
We had your orders being down 3%. Market was down 23%. You lost some share. How should we think of market share in North America for this year given what you see?
Thank you, Hampus. First, when it comes to Europe, what happened actually was that we were a little bit cautious. So we started to gradually take down production in Ghent. But I think we have a good flexibility. So we have still coped with the balance when it comes to the order book, etcetera.
And as I said now, we are adjusting again back, etcetera. So from, so to speak, an order book perspective, I think we have managed as we want to see it and also, so to speak, test our flexibility. So that is going fine, and we still see also that the adjustments we are doing is also getting the right balance in the order book, both for Volvo and Renault. Ore. Then when it comes to the 3rd year and the prices, obviously, one of the aspects this time has been that many of the markets also that are, if I may say so, using the European industrial footprint has been very weak.
And therefore, so to speak, the volumes remaining in Europe has still been very important for all players in the market. And that has been one of the factors where price pressure has been pretty strong. What we see now obviously is that also some other markets areas are improving. And obviously, we are testing our ability if we can do something, but that is too early to say something about. And then thirdly, market share in North America.
Yes, it's true. We are not happy to have a situation where we are not combined market share starting with the 2. And that is, so to say, something that we are working on. But as we have said, during a year of decline, mean, as such a steep decline also, priority must be keeping quality in the business, both when it comes to earnings and credibility in a way. And what we see is that still, I think the new truck inventory is normalized to and a little bit quicker than we expected in quarter 4.
But and as you remember, the previous quarters where it was slower than expected, so it was good news. But still there is an overshoot when it comes to the used truck inventories. I think we are in a pretty good place in that market, both when it comes to our dealer activities and also aero have been playing a very important role there. But for the total market, there is still some jobs to do here. And let's see how we can utilize the fact that we are in my estimate in a pretty good position.
I was in U. S. Last week and we had yes, we had a good feeling about the year, but still balance between orders, production, inventory, both for new and used remains the priority.
Thank you. Erik Kollrang from Nordea. Three questions as well. First one, just a clarification on Jan, on the capitalization and amortization there '17. Was it a SEK 1,000,000,000 to SEK 1,500,000,000 net headwind then relative 2016?
Is that the way you should read it?
This is for this year. We have SEK 1,000,000,000 to SEK 1,500,000,000 more in amortization than capitalization this year, not in relative to 2016.
More of both of them?
No. The net of amortization and capitalization is a negative of SEK 1,000,000,000 to SEK 1,500,000,000 net.
Thank you. And then the second question, you continue to be very sort of optimistic on the aftermarket and service opportunity in North America. So the if you just put that progress in context now, where was the aftermarket growth for trucks in the quarter relative to the total truck business?
And we are not disclosing in detail all these figures. But what we see, and I think that has been very important for us, is obviously that North America is progressing when it comes to services. And one of the major part of that is proprietary, so to speak, penetration. And we will continue with that. Obviously, there are less and less opportunities now.
It's still the M drive for example for Mack. We have insource also the axles as you know for Mack, etcetera. But also the connectivity in the uptime center and I think again now it's more about also the balance that we can get enough into our own network. So it's a capacity in the whole value chain and not at least in the network as I said.
Thank you. And then the last question on Renault. The residual values there trying to sort of get people wanting to start to regain some of the lost share. You made a brief comment on it, but have you gotten more data and intel on the price development of the first trucks that came out of the market on the new range?
Yes. Yes, we have, obviously, because now we are, so to speak, entering also not only 4, but gradually going to 36, and it's going according to plan. And for us that is super priority that we are actually getting the right value because it's a great truck and that is more important than market share gains in the short run, so to speak.
Thank you.
Okay. We now take a couple of questions from the people attending at the webcast. Please go ahead.
Our first question comes from the line of Klas Pedersen from Citi. Please go ahead. Your line is open.
Yes. Hi, Martin and John. It's Klas from Citi. I've got two questions. Firstly, on raw materials, you said that this is positively impacting the numbers.
It should become a headwind eventually. PACCAR yesterday said that the long term contracts could smoothen the impact. Am I right to assume that we shouldn't be too concerned about price cost for the truck business, I. E. That there is more concern Construction Equipment?
And if you could confirm if raw materials is on 15% of total cost, 1.5% and if you could give some detail on the split of the raw material build, please? I'll start there.
Okay. I think you're absolutely right. I mean when you see raw material prices coming up, I mean as I said, we talk about offsetting factors. One is, of course, that you're varying lengths of contracts when you buy steel and so on. So that means it comes gradual.
And of course, we also work very hard on the commercial side in terms of offsetting that as well. But it will have a gradual when we talk about raw materials negative effect over the year. Then we see when we talk about the total material cost, how much the net of that negative effect would be and our ambitions to offset that and that we don't give. Then I think you're right also, you can say that exposure is slightly higher on the construction equipment side than it is on the truck side. That's correct.
In terms of this with the what you said 15% of raw materials, I think there is a lot of raw material in the truck. It's actually what is it 6, 7 tons of majority is steel. So and one way or the other it comes into our products. When we buy raw materials directly ourselves and maybe turn it into cabins, then we have a more direct effect. But of course, through the value chain the effect will come in different ways when we buy material from our suppliers and so on, but that can take a little bit longer time.
And then of course we have the negotiations and so on. So I think end of the day this effect will have a pressure on us all the way through. So I wouldn't just focus on the 15% of raw materials.
It's more and more silicone.
Okay. Just a follow-up on that. I mean, if you look back the last time we had commodity inflation was obviously 2,007, 2,008. And we're also looking at the strong track market right now, not to the same levels. Pricing has been weak on the back of weaker export markets when we look at Russia and Middle East.
Russia is now coming back. Do you think at around $300,000 that the price backdrop can improve a bit in 2017? Or do you think that it will be similar on a gross price level as in 'sixteen?
I think as we also responded to Hampus' question here, again, as we said, I mean, if we are seeing gradual also export markets coming back, we get a better, so to speak, utilization or even higher because we're all pretty high in the European system of utilization. But I mean the higher that gets also the better opportunities comes when it comes. But it's too early to say yet. I mean we are already now for example ramping up our Kaluga facility. We have done that in 3 steps actually.
And we are still, I mean, on relatively low volumes, but we are ramping Kaluga in Russia now to 18 per day actually from the 1st April. And as you remember, just 1 year ago, we were standing still. And those type of activities are obviously showing that utilization is better and that is also the balance you need to have also to see commercial activities.
Then on North America in trucks, you decided to cancel the layoffs of the 500 people there. The destocking of dealers are coming to an end sooner than you expected. Could we talk about how production in North America for you will run year over year in Q1? I think you cut production by 30% in the Q3 last year. So how much will you increase from the current level?
I assume that production will be higher.
Yes. As a matter of fact, we are not giving exactly that figure. But as you say, when it comes to deliveries, obviously, we will still be on the lower side because that was an overshoot from 'fifteen. But I think on the positive note as you're into is that we took the decision to postpone, so to speak, the decrease to 1 shift for Volvo in New River Valley. And but we are, so to speak, very, very firm on keeping the right balance, as I said, between inventory, both in our own books, but also dealers and also when it comes to order intake and production.
So we have the right flexibility. We have the right value chain there. And we will just keep it very, very tight now.
Okay. We will have yes. Sorry, do you have one more question, Orest?
No, that was 2. Okay.
Another one from the telephone conference. Please go ahead.
Thank you. Our next question comes from the line of Jose Asumendi from JPMorgan. Please go ahead. Your line is open.
Thanks so much. A couple of items, please. The first one, if you could provide us some color in terms of the order momentum on a year on year basis growing in Europe, which countries are driving this growth? 2nd, if you could provide some color in terms of the year on year production increase in Q1 on trucks, at least directionally, please, for Europe, Brazil. And we heard some comments on the U.
S, but I'll be mainly interested also in Europe, Brazil. And the final element, cost savings on trucks. What are your expectations for 2017, please? Thank you very much.
If we start then with you, Rupert, and when where the momentum is coming from, I think it's fair to say that it's coming pretty much broad based actually, both from on a geographical perspective, but also from a segment perspective. So pretty broad based. And I think also we have been successful in working with some of the segments where we have been traditionally a little bit weaker. So it's broad based, which is good in itself. And as I said, I mean, production in Europe, our view now is that we are doing gradual adjustments given the stronger order intake, not only for Europe, but also for international Volvo International then primarily.
And when it comes if I heard you correctly there, I'm not really sure you're talking about also South America. Was that correct, Orest?
Margin up in Q1 year on year?
Yes. I think it's fair to say it's at the best on equal level, probably a little bit lower because we are on such a low level now. So we're really just working on what we're getting into there. So that is, if I say, not significant in that perspective.
And when it comes to the cost savings, you know that we change the focus from doing big structural reduction programs like the SEK10 billion program going into what we call the continuous improvement mood. That doesn't mean that we stop doing efficiencies in the group. We focus a lot on productivity. And I would guess if you look upon the number of trucks that we produce per employee, blue collar employee, it's on a totally different level today than what it was 3 years ago. It's about productivity.
We are also collapsing hierarchical structures as well. We have had too many basically layers in the company that goes in line with the decentralization we do. That's also things that are ongoing in the company. I think that we disclose, it can be a few people here, a few people there and so on. So these kind of, you can say, improvements that we do on a continuous basis.
And that is not only for the truck side, It's actually within all the business areas and also in different kind of administrative functions that we have in the group as well.
Fair enough. Thank you.
Okay. We go ahead with another one from the telephone conference.
Thank you. Our next question comes from the line of Graham Phillips from Jefferies. Please go ahead. Your line is open.
Yes, good morning. Thanks for taking my questions. It may have been asked already, but had a lot of troubles with the call this morning on the quality of the line. Just first on the Renault, you talked optimistically about the T truck. Can we just talk a little bit about what's driving when will we see the orders impact on that?
Because I think orders are still flat in the Q4. And what's happening with the dealer redistribution of the network there? And what impact does that have? Are you even seeing into the new part of this year orders increasing year on year for the Renault T truck?
Yes. Thank you, Graham. I think, as I said, we have lately seen and it has been a very good and I think also granular work done by the new Renault management on how to approach the market, and we are seeing that paying off now. What we see is, 1st and foremost, that we have better activity when it comes to the retail sales, and that is super important for our dealer network that you were into. And again, what we said, I mean, if I need to prioritize and if we need to prioritize, we have said that quality of the business goes before, so to speak, volume uptick.
And we have had a good pattern on that. The product is good. It's well received. And therefore, also we are starting now to get the trade ins, as we have said, on also on the new T range. Then when it comes to obviously, are we happy with 8.1%, the answer is no.
But again, it's more about taking that in steps. And also I have to say that we are working also with the retail strategy in some of the markets we were actually too quick to combine. But we have gradually moved into a new business model where we have the right balance between Volvo and Renault, and they will live on their own merit, so to speak. So looking forward to an interest in 2017 there.
Okay. My second question is on North America. With your outlook for still a decline this year in sales, can you talk about what the impact on the margin to that part of the business may well be? Are you still able to you think with the higher mix offset things there? Or will the lower sales outlook still be a bit of a drag on margin?
And also in light of your comment about R and D cost burdening more?
I think when we talk about North America, we talk about the total retail sales in the market is what we expect coming down compared to last year. That doesn't necessarily mean that production volumes will be on a lower level because we took down production quite a bit last year. We produced lower than what is equal to the 240,000 truck market. So maybe the effect from that point of view will not be that bad as it might look if we just look upon the retail sales figures and our expectations for this year.
Okay. Have you looked into the issue of the border tax impacting some of the U. S. Car companies. Is there going to be any issue with components or products or pieces of trucks that are coming from outside of the U.
S. Into that business that might be impacted if there's a border tax?
Obviously, I mean, generally speaking, when it comes to all border taxes, there are issues because we are an international company. When you take our U. S. Footprint on, so to speak, the OEM part of our industrial value chain, I think we are in a good position given the fact that we have all our production for the main components in U. S.
Actually. We don't have the final assembly or other units, as you know, in, for example, Mexico. But at the same time, obviously, we have T1 and T2 in different parts of the world and we need to continue to follow that development obviously.
Thank you. And just finally one for Jan. Just on the cash flow, I know you've now paid the EU fine in the Q4. Is this still a payment to be made to compensate the Chinese banks for all the past provisions on the credit losses that you've put through on that division?
Yes. I mean, we have close to SEK 2,000,000,000 in provisions for that. And from a cash flow effect, it's still fairly limited that we have paid out. So there you will have an effect going forward.
Okay. That's great. Thank you very much.
There were no more questions from the telephone conference. Any more questions from the auditorium? Okay.
Olof Jonas from First JP Fund. I just wonder about this construction equipment deal you have made on engines, the 78 liters engines to replace Deutsch with Volvo engines. You talked about synergies between construction equipment and the truck business for many, many years. I just wonder have the economics changed here? What is the reason behind this?
And then secondly, are the economic benefits of this included in the €400,000,000 per year that you see that you talked about for construction equipment?
No. First of all, when I talked about the NOK 400,000,000 there, it was more related to the R and D streamlining and not related to that. When it comes to the Andean business case, we're obviously not disclosing that for obvious reasons. But this is part also what we are doing in the group as such. You know that we are we have discussed that also, I mean, pursuing a decentralization of the different business areas with 2 principles.
Principle 1, that each business area is responsible for their volume, profitability and customer satisfaction. Principle 2. Group assets are to be used whenever it's feasible to support number 1, because then you get pulled instead of pushed and it's kept for real if I put it like that. And that is exactly the way we have been working now with the engine strategy. We have looked through what that means for the different business areas moving into this.
And there are several aspects of this deal, obviously, when it comes to the volume effect totally. That should be, so to speak, beneficial for the parties involved. And there we are working, I have to say, with an on Slane's principle in order to be professional. Secondly, I think it's important also to say that we've had a pretty wide range of vendor engines into the range. That is in itself creating a lot of complexity when it comes to future developments, not only for combustion engines like the 8 liter, but also the combination with hybridization, with automation, because what we see in the powertrain now is that a big part of automation will come out from how you actually are designing your powertrain.
And therefore, there are stand alone, a good case when it comes to the 11,000 engines. But in addition to that, that is bringing new opportunities of de complexing and also allowing innovation when it comes to 3 or maybe 2, 3 important areas of connectivity, automation and electromobility.
Thank you. There are no further questions from the telephone conference, and I can't see any raised hands here. So by that, I would like to say thank you very much for attending to this press conference.