Welcome to this press conference covering the 2nd quarter of 2016. On stage today, we will have our President and CEO, Martin Lundstedt and our CFO, Jan Gorander. And as all know, this is a webcasted event, so please use
So good morning, everyone. Loyal audience here today, and welcome to also from my side for the quarter 2 reporting. Go straight into the report here. Quarter 2 was another solid quarter for the Volvo Group. We are on track when it comes to our cost savings, when it comes to our internal efficiency programs, but also when it comes to the implementation of the new organization that we will come back to a little bit later on here.
Despite that sales decrease with 7%, 3%, excluding FX and divested units, The underlying performance of the business improved from 7.1% to 7.8%. And in particular then that the truck business, the global truck business reached 10% operating margin, excluding then the provision that we made during June for the European Union investigation. When it comes to volume development in the Q2, truck volumes were down with 5%, where of Volvo down with 9%, in particular then U. S, minus 39% that couldn't fully be offset by Europe that was up 17%. Renault, up 12%, 1, of course, a strong factor during the Q2 for Renault was the pre buy effect of light commercial vehicles, Euro 6 pre buy that's coming into effect now as of Q3.
So light commercial vehicles were up with 18%, and that is also a little bit disturbing the order figures for Renault when it comes to 2nd quarter. Mack down 22%. So that was better than Volvo for different reasons. But the main reason, of course, that the Mack is less affected by the downturn in U. S.
Since the downturn is mainly affecting long haulage and to a lesser extent than Mack core segments of construction and vocational trucks. And UD flat. For machine deliveries in Construction Equipment, down with 16%. Volvo, in total, flat. Europe is actually moving ahead in a good way, plus 22%, whereas North America, South America and Asia for Volvo is declining.
And SDLG then heavily hit by the fact that we had a pre buy effect in quarter 1, Tier 3 legislations coming in, so minus 46% for and then, of course, that is continuing to be a tough situation in China. For service sales development for the group, 3%, excluding FX up. So it's too early to say that we have a positive trend here. But as you know, this is one of the main focus areas for us to really focus on the rolling fleet of different equipment that we have out in the market. If we look into the different business areas, excluding currency trucks, are up 3% in sales.
We have a flat situation on Volvo Construction Equipment, which is also, I think, a good development given the recent years of decline in volumes, plus 2% in buses and actually plus 15% for Volvo Penta. So in total, we are moving in the right direction also for the service sales. And this is one area, of course, that we will continue to deepen in our analysis moving forward. And very important for us also the group's resilience to volatility. Coming into trucks, we see a continuous good demand in Europe, good momentum.
And for Brexit, that is an obvious question. Of course, we have no major visual effects of Brexit so far, good pace in Europe. And we are keeping then our forecast that we will come back to. We see also continuous correction in North America from the very high levels that we have seen in the recent years and specifically then in 2015. And a third bullet that is important for us as from March 1, we have a new organization, brand based truck organization in place.
And gradually during quarter 2, we have got that more and more operational, manning all the different executive teams. We are working with the business plans, and that is moving in a very good pace and with the transparency motivation that we had predicted and hoped for. So that is positive. Before coming into the figures, some minutes on the news in the truck segment. For Volvo, we are presented an upgraded version of our Euro 6 engines together with also upgraded I Shift functionality, meaning that we are getting even more efficiency when it comes to fuel consumptions For the 420 and 460 D13 liter engine, it's about higher compression ratio that is given a more efficient combustion.
And for the high end 13 liter engines, 520 500 and 540 versions, we have new optimized turbochargers in place. Together then with new functionalities on the I ships, we see fuel improvements in typical long haulage applications up to 3%, which is a major step. And also for special applications such as heavy haulage timber even more actually because there we are also adding new functionality, unique functionality with our I Shift, meaning that we can cover even more captive units with our I Shift for crawlers, for example, where Josten is still with very high loads. And also a liftable tandem, meaning also that when you're not fully loaded, you can better use only 2 axles instead of 3 axles, and that is also gaining fuel efficiency. We are also introducing a new aerodynamic kit on the FH executions both when it comes to defectors, bumper shapes, etcetera.
So this is a very strong and good package moving forward. When it comes to the services, as I said, one very important part is in North America where we are driving an efficiency program together with our dealers. As a matter of fact, a little bit interesting maybe for you and many of you already know that the average waiting time in the industry for trucks is 3 to 4 days actually upfront to dealer for an average repair of 3 to 4 hours, which is of course, not a situation that is good for an uptime for the customers. Industry average, we have been working very focused. In October last year, we announced the fact that we are going to work with a new concept with uptime centers, meaning that we have a couple of different flows in the dealers where we have repairs less than 3 hours.
We have specific flows of that in order to have a better throughput time. Very good results so far. As we speak now, we have 32 certified uptime centers for Mack trucks. And in many of those, of course, combined with Volvo trucks, results are astonishingly good actually when it comes to throughput time, efficiency and also thereby the opportunity for us to get more jobs to the workshops. And as a matter of fact, we need that also given the pace of the captive powertrain penetration also.
So connectivity penetration with Mack, GuardDOG, for example, or also for Volvo Dynafleet, this is very important measure. When we come down to the market environment and start with North America, we see that the current pace in registrations is somewhere 240,000 to 250,000 actually. And since we also see that the stock reduction is taking off, but it will take at least the rest of the year, we are keeping a conservative view on the total market. Are lowering the forecast from €250,000 to €240,000 Minor adjustment maybe, but it's a strong signal that we are prioritizing also quality in the business. So that is the new forecast.
For Europe, we have a continuous good momentum and our expectation is that the market will land on somewhere around €290,000 and that is the forecast that we're also keeping from quarter 1 reporting. And as I said, we have no strong signs of Brexit so far. Brazil, the same focus also we are running on a very low level, 30,000 total market. And main priority obviously in Latin America is to keep also T1, T2 and T3 structures for our suppliers because we are running on very, very low levels now and many of our suppliers also have difficulties to maintain with that low pace, not only for us but for the whole industry. At the same time, and we'll come back to that also, we are doing commercial activities in Brazil not to gain volume but to gain momentum and constant pricing.
And for Asia, we are seeing a China that is better. We are even if it is too early to say, I mean, that it's really taking off. But what is interesting to see is that the e commerce, for example, is taking off in a good place, and that is affecting the total market. And we are increasing forecast to 820,000 from previous 750,000. Euros India is on previous forecast levels as well as Japan that is on a high level and forecasted to be also this year 90,000 Market shares, just to start with, we have been very clear also to our organization, main priority now is not really to hunt market shares without maintaining the right quality when it comes to our different deals to our customer base because we have the necessary scale already in the system, but with good quality, we will grow eventually also with our customers.
So and we will grow with quality. So that is, so to speak, the stand point and the general direction that we are heading for here. Even with that actually, we are also moving in a positive direction. When it comes to North America, we had a very slow start as you remember in quarter 1. For Volvo after the Q1, we were in the market share on 8.4% and after quarter 2 now we are up to 9.6%.
So quarter 2 then was significantly better than quarter 1. Obviously, also Volvo is affected more than Mack by the fact that long haulage is taking a bigger hit in North America than vocational segments. And that you can also see in the market share of Mac that has been increasing from 7.2% to 7.8% here. In Europe, we have a flat situation for both brands, you can say. Volvo on historical high level, around 17%.
We see also that we need a little bit more capacity in Europe and we will adjust a little bit upwards here. And also for Renault, we are now bottoming out and keeping a flat level. What is really important for us when it comes to Renault is to keep quality in the business, price realizations and also that we see that residual values, given the very good offering we have now on Renault, is coming in on the right position. And also one very important factor for us with Renewables to keep also the right level when it comes to the industrial systems, so we are having the right absorption. And as a matter of fact, with the levels we have, we can maintain it.
Japan, a little bit same situation as Volvo in North America, slow start in quarter 1. We were at 15.7%. Now we are at 16 point 4%. Several reasons to that. 1, internal, we were changing system, classic, but we are back on track there now on the production systems.
And in addition to that, it has been also shortages, for example, in body build capacity. And when you have production disturbances as we have in Q1, that is also affecting your position in the Q with border builds. But we see a better Q2 and we are also leaving Q2 with a stable situation here. Also South Africa and Australia are developing well here. Orders and deliveries, again, starting with North America for orders, a little bit scattered picture.
Volvo is down with 44% from then dealers into to our system. And one explanation, of course, is that the market is continuing to shrink and we're coming down from high levels, but also that we actually now see an accelerating stock reduction from our dealers, which is good, a stock reduction that we didn't really see during quarter 4 and quarter 1 here. MAC is up 13%, but that was really due to a super weak quarter 2 last year. That in turn was also an offset from a strong quarter 4 the year before that. So that is also showing a little bit of volatility and taking out speculations, etcetera.
Priority in North America now is to find even better balance between production, there by deliveries, order intake and stock. We are taking another decision to decrease now production in mainly Volvo then for starting in September. And main priorities, we said, the right balance and to follow also with a good cost flexibility to the volumes here. Our estimate is that it will take up to year end to clean out the stock and to have the right level here. And my feeling is that we are managing this in a good way and with the right priorities.
Europe orders also a little bit of different pictures. Volvo is up 5%, Renault is down 11%. And you can say 2 different explanations
for that. In heavy duty, we are
down 7%, mainly explained by the fact that we had the sales pretty pushy sales activity during Q2 last year. When we see the levels, we are running on an order intake that is given approximately the same market position as we have. And we are pleased with that and to concentrate on the right quality in the business. And then obviously on light commercial vehicles, we also have a downturn. And again, based on the fact that we had very strong order intake in quarter 1 upfront Euro 6 legislation for emissions.
So production adjustments, in order to cope with this, we are increasing production slightly then for Volvo, mainly in Thue, Gothenburg. We need that balance when it comes to more heavy specifications. And we are slightly adjusting down Renault in order to have the right balance for correct absorption also of the industrial system. In South America, total market, as we said, down and our estimates from 42% to 30%, and thereby also we need to continue to work with the right output, keep stocks in good order. And we are also actually realizing some price increases, pretty aggressive price increases as market and image leader, you need to take that responsibility.
In Asia, mainly then UD unchanged, and we see for Volvo a slowdown mainly in Middle East, Saudi and Turkey. Otherwise, we have pretty good momentum in, for example, markets like Korea and China for Volvo. And then for Africa and Oceania, we have orders coming in positive from Australia, Algeria. And Algeria is also on the negative side of deliveries because there it has been also homologation issues. But now deliveries has started to come back to good levels again.
On Construction Equipment market, we see growth in Europe. We see a slowing in North America, specifically then on general purpose equipment larger machines related to oil and gas and mining and the continuous weak situation in emerging markets. And the big volume drop, as we said, for SDLG related then to the post Q1 volume drop in China after the introduction of Tier 3 emission levels. And also what is positive for us as we see mainly then in Europe, a continued market share gain in for larger machines that has been the focus for us during the last quarters here. Also another introduction that we are conducting that will also change the game in the construction equipment segments that is Volvo Co Pilot where we are investing in even better human machine interface.
We got actually an award for the KAR and KAR, interesting, but they are actually KAR HMI award in Germany in Berlin 2016 for the best human machine interface in the automotive sector. So that shows that we are on the right track. And even more important when it comes to the Volvo CoPilot is the specific applications for different segments order to improve productivity, compliance and not at least safety because you can control much more from the cab or the cabin in itself rather than sort of step in and out as the operator. We have for loaders what we call load assist. We have dig assist for excavators, pave assist, etcetera.
And what it's really about is that you can in a good way control, not overload, not under load the right angles, better productivity, better load time, etcetera. Very interesting concept that will gain ground in the coming years here, big interest on the markets. On the market environment, mainly unchanged forecast as from quarter 1. We see in North America is a flat development so far during the year, but general purpose equipment or larger machines negative related to oil, gas and mining. In Europe, we had the full cost of 0% to +7 10%.
Until May, we are up 7% in total markets, where France, Scandinavia and Germany are moving ahead and Russia and U. K. Weaker. In China, we are also maintaining forecast from -15% to -5%. But we also start to feel that we can be close to the bottom actually finally here.
We see some signs of better utilization of machines. So this, I think, is also something that we need to follow very closely now during the coming months and quarters. And for Asia, excluding China, you can say lower activity in Korea and Japan, but India positive momentum. Coming into orders and deliveries for construction equipment in North America. What we see is orders minus 6 and deliveries minus 11.
And for us, they are mainly related to the larger machines where we have stronger positions. And that is in that perspective related to oil and gas as well as product exits that we did during the course of the between Q2 last year and after Q2 this year. In Europe, what is positive is, as we said, the momentum in the market, but also that we are actually gaining market shares in larger machines. And also positive for Volvo here is France, Scandinavia and Germany, where Russia continue to be very weak and also a slower market in U. K.
Brazil continued to be very low. As we said about trucks, about damage control, not at least for ourselves, but also very important together with our suppliers. And when it comes to Asia, you can say that the slowing situation and pretty big figures here is mainly related to SDLG then after the introduction of Tier 3 in quarter 1. Buses, also a positive trend for us after a weaker quarter 1. As you remember, we are back on track on our trend of improvement for buses.
Order intake improved by 33%, deliveries up with 28% in the quarter driven then by North America and Europe, which positive for us. And just as one example here, we have been taking a number of interesting deals, one that we maybe didn't want to mention in terms of volume, but another order for fully electric buses into Luxembourg where we're not only delivering the buses, but also the complete system and infrastructure. And that is a trend that is very important. Another example is the success for hybrid buses in London. I don't know if you know the exact figures here, but you have around 6,000 double decker buses in London, where of actually 3,000 of them are with Volvo Chassis.
And of these 3,000, almost 1,000 today are hybrid executions. So 30% of the Volvo market share is with hybrids. And that is showing that the hybrid electromobility in different levels are moving in a better pace now. And it's also, I mean, given obviously substantially better performance when it comes to environmental output, but also when it comes to noise that is very important in big cities. So I think that is showing also that we are on the right track here.
Finally, some comments on Volvo Penta. Orders down 2%. And when you're talking about a pretty wide range of engines, that depends on what engines we are talking about. And as you see, the slowdown has been on marine leisure gas engines in North America, smaller engines. And we have had good growth in the off road engines on the versatile side.
So from a product mix perspective, of course, that has been positive even if we have had order and delivery decline here. And we are continuing to launch the easy boating concept where we are taking care more and more of the full, so to speak, care of electronics and propulsion and maneuverability for boating that has been a success and will continue to be a success. One example is the E key remote now where you can control the electrical equipment from the dock and also the new 8 liter engine with IPS drive also that will be a success following also the other IPS executions that we have. So good pace also for Volvo Penta here. So with that, I will leave the floor to our Deputy CEO and CFO, Jan Graanda, for the financial figures.
Thank you, Martin. So good morning. So the Q2, as Martin said, is I think it's fair to say that we don't get very much help of the markets. I mean, sales are declining and maybe stable a little bit down. We see also that pricing is not easy, if I put it that way.
And despite that, we see that we improve our results for the group. And I think that is due to the fact that we now continuously to see that internal measures that we are working with continue to yield an effect. And I think that's really a proof of how important it is to work with efficiency in a group like this when you don't see that you get this external help from the markets. When we look into the net sales, I mean, it fits actually perfectly with what we see in terms of sales figures and where the markets are going. We have then, of course, Europe coming up in terms of sales, while you can see all other market areas are declining.
And of course, the biggest decline we have in this is in North America. We go from SEK85 1,000,000,000 in sales down to SEK79 1,000,000,000 in sales. We have a negative currency effect of almost SEK3 1,000,000,000. And we do also have then an effect, actually a small effect though, but from divested entities. And one of the things is, of course, the external business that we had in IT that we divested in the beginning of the second quarter.
So sales down 7%, excluding currency and divested entities, it's down 3%. Looking into the operating income for the different areas. Improvement in and here, of course, we have this one times effect, I should say, second quarter last year with the capital gain from the sale of ISA shares of a little bit more than SEK2 1,000,000,000. And in this quarter, we had a negative effect of the provision connected to the European Commission's investigation of SEK2.3 billion. If we exclude these factors and look into the underlying performance of the group, we go from SEK6 billion up to SEK6.1 billion, increasing then the EBIT margin from SEK7.1 billion to SEK7.8 billion.
We can see here that all areas, with the exception of Volvo CE, is improving year over year the results. When we look into group functions and other, it sticks out as on the negative side. Here, we have the transition cost for the outsourcing of IT in the Q2. That will continue also a little bit into the Q3 as well. We have done a headwind on the currency of approximately SEK 300,000,000 Looking into then the different lines and the P and L.
And here you can see the volume effect comes in then affecting our gross income with a negative of SEK 900,000,000. Here, though, what we have here, it's actually a positive effect coming in into the gross income and into the gross income margin. That is due to the fact that we see actually that our material cost is coming down. So it's on actually the positive side. We also see that the logistic cost comes through as well.
I think we are focused very much on our structural SEK10 billion program, and that continues to kick in. And you can see that here also on the selling and on the admin side. But we also have other effects that we're working with that are not kind of structural, and these start to yield an effect on the gross margin as well. And you have the proof in that when it comes to material cost and also, as I said before, the logistics cost. On the negative side, obviously, volumes, currency.
When we talk about currency, we said in the Q1 that we had then, as you know, the transaction exposures and the currency effect, even the volumes that were or the flows that we saw last year, then we said it was going to be, at that point in time, what we saw with the currency negative, somewhere between SEK 2,000,000,000 and SEK 2,500,000,000. When we look upon the currency rates that we had at the end of the second quarter, we think they will the negative effect will be slightly lower than SEK 2,000,000,000. But once again, remember the high volatility that we see in the currency market. So this is an estimate that we do based on these assumptions at the end of the second quarter. When it comes to capitalization and amortization, the effect year over year is a positive or a little bit less than SEK 300,000,000.
We have now for the first two quarters, capitalized more than what we have amortized. This will now turn in the other direction in quarter 3 and quarter 4. So if you take the net of capitalization and amortization for the full year, we think it will be virtually 0 or on balance. So turning from positive effect quarter 1, 2, into a negative quarter 3,000,000,000 quarter 4. The cash flow is SEK 6,700,000,000.
You can see here that the we can say the discipline that we have in terms of when it comes to the investment level, as we talked about. We talked about it in London. We are well invested to take in this company, and we don't see a need for that. And we said that the levels that we see on the PPE and so on is the one that we should keep, and that is what you see here as well. In the Q2 is the quarter where you usually have a positive effect from the payable side.
1st quarter is negative. 2nd quarter is positive. On the payables, 3rd quarter usually turns in the other direction again. So as you can say that this is more or less a cash flow that is according to what you can expect from a second quarter. And of course, the underlying profitability helps us quite a bit.
Then looking into trucks. The deliveries of trucks down 5% and the sales when currency adjusted is down with 5%. We see here that vehicles pretty much affected 8% down, currency adjusted. But then we have the positive effect on the service side on trucks, up 3%. All in all, going from a SEK 57 billion to SEK 52 billion in sales.
On the operating income for Trucks, we go from SEK 4,400,000,000, once again taking away these 2 onetime items. And of course, last year, also taking out the effect from the what do you call it, the restructuring charges. So from SEK4.4 billion to SEK5.2 billion and going then from an operating margin in 7 points from 7.7 percent to 10%. And this quarter, we managed to take it to 10% as well. The on the positive side, we have the effects of the restructuring program, S and A, lower material costs and of course, then the effects on capitalization of R and D.
We see also here, which is a little bit of a mathematical effect, but nevertheless, it's a positive market mix that we have, I. E, that North America take a lower share of our sales this year compared to last year, and Europe is bigger. And that gives us a market mix effect. And then on the negative side, volumes and currency. The on the C side, deliveries delivered machines down 16%.
And here you can see that on the Volvo brand in CE, we are pretty stable, more or less flat, while we have this pre buy effect that affected us in the switch from the Q1 to the Q2, and it's a negative 4% to 6% year over year. This, of course, then with the higher value that we have on the Volvo machines, you can see that the sales are actually down with only 7% when we currency adjust it. And so the sales value of 1 STD machine is much lower than the Volvo. That's why it doesn't come through so much on the sales figures. Service is flat 4C.
Sales totally down with almost SEK 2,000,000,000 On the operating income side, you can see here that we go from SEK 1,300,000,000 down to SEK800 1,000,000 margin wise from SEK8.8 billion to SEK5.9 billion. The and obviously, the lower volumes are what is what is affecting us here on the CE side. We do have small positive effects. There were many, many small positive effects, but really no one that was so sizable to mention on the positive side. But the efficiency programs also works through here in CE as well, and there is a lot of hard work ongoing.
But as I said, not one single thing that was kind of qualifying to be on the positive side here. Buses, as was mentioned before, delivered 28% higher unit sales compared to last year, and sales then were up currency adjusted with 17%, positive both vehicles also service positive. And here, I think what is important going forward is now that to capitalize on the growth that we see within the bus area. And of course, higher volumes gives us a positive effect on the P and L. But it's also important now that we maintain our cost base and to be able to fully utilize the leverage that we get from the volumes.
And that is actually what we see here in the Q1. We managed to take care of the 28% growth while maintaining. And actually, the programs that we work with there on the cost side are also kicking in. But I think that is important. It is important now to take the bus operations up to a higher level, but also to keep that higher level stable as well.
We have had a little bit too high volatility on that one. And so we are particularly happy to see now that, first of all, the trend that's got a little bit of a hiccup in the first quarter continues up to close to 5% now, and that journey will continue. Little bit the same as of course, not the same kind of sales growth that we see in Penta as we do for buses. We can see that sales are up with 6%. N S3 service extremely strong here in the 2nd quarter, up 15%.
And it's the same thing here. The story as we have within Bus is that we do grow our improve our profitability with the higher sales and then also here then to maintain and keep the cost base going forward. Once again, a quarter with, I think, a small and decent EBIT margin. Financial Services, not very spectacular in the quarter. This is actually keeping its profitability around the kind of €500,000,000 mark, generating a return on equity of 13.5%.
Actually, continue the downturn in South America in a good way. And then also, I think, as a whole, a good quality in the portfolio, even though the markets out there are pretty tough in terms of pricing and so on with the low interest rate environment. But I think this is a solid operations and a solid result for Volvo Financial Services. So I think we I mean, as I started to say, and I think also as Martin said, to begin with that this actually improved profitability on lower volumes due to the internal measures that we are working with and that yields effect. And basically, that we I think we are on our way.
Okay. Coming up again. Thank you, Johan. Yes, just to summarize very quickly, another solid quarter. Cost efficiency programs, internal focus is moving ahead according to plans.
What is important now, of course, and big focus for us is also to continue to pursue the new brand based organization, full P and L responsibility for those brands and also for Volvo Trucks, obviously, which is considerably bigger that we continue to drive that decentralization also through the regions. And we feel that we have good enthusiasm driving the organization, a big deal of motivation actually coming in here. So what we have said is really to work with 4 teams. Based on this is use what we have. We are well invested.
We can do much more of that. The service focus, big installed fleets around the globe with very good presence in the network. Quality, quality, quality, that is the best business plan we can have. We are in a good way protecting customers, but to in some of the products in some regions too big cost internally. And finally, continuous improvement and use the competence of all great people that we have in Volvo.
So I think that is Jan, the summary of the quarter, and we open up for questions.
Thank you very much, Jan. And Martin?
Thank you, Bjorn, and I'm sure Dan'ske. A question on European demand looking ahead. I mean, you are now taking up production, you have to worry, slightly. But giving order intake and I guess concerns for the business cycle in general, not only trucks, How are you looking at the truck cycle in Europe? Where are we according to you, your expectations?
I mean, we are at a pretty high level, and I guess we are approaching some kind of peak.
First of all, adjustments we are doing, we are doing a slight adjustment, as we said, upwards. We are moving in with a half evening shift, you can say, in Tubbe. A couple of reasons for that, get better balance between the different application and specifications levels we have in Ghent and in TUV. We have seen that for some of the specifications, we have had a little bit too long lead times. And those are also specifications with good profitability so that we cannot have.
Secondly, also that the 2V is actually also supplying a big part of overseas markets. And for example, China and Korea are 100% sourced from TUV and they are doing well coming from relatively small volumes, but starting to get some sort of I mean, Korea, obviously, but also China. So this is not only about Europe when it comes to the production adjustments for Volvo, but in total and keep lead times where it should be. Having said that, we are doing that also with a high level of flexibility, obviously. So we can, I mean, move forward also depending on what market development will look like?
And it is true that there are a lot of different uncertainties, but our feeling is that we have the right flexibility with the brand based organization, the regional organization. We are working very close when it comes to the handshakes between regions and the different plants, not accumulating big figures up with me and Johan, put it like that, but really where it belongs and that will also drive better flexibility. When it comes to Renault, we are actually moving down a little bit, not because if you really see both sequentially and quarter on quarter, not really because we are feeling that we are losing volume, but we have said that for Renault, it's better to be a little bit on the low side for the absorption and to use flexibility upwards. So there we are doing a slight adjustment downwards, not a big one. We are talking less considerably less than 10%, but having the right balance.
So I think we are doing the measures needed there. Good.
Thanks. And one last question on you highlighted as one of your slides, the volume impact on EBIT for the Truck business and also a few other items. But lastly, also on the mix impact. Should we read that slide that volume had the highest impact and mix the lowest impact? Yes.
We used to
put it in order of magnitude.
Makes sense. Thanks.
Thank you, Erik. Golrang, Nordea. I have three questions. The first one on services, 3% I think organic growth on trucks. Some color there on the regions, Europe, North America, South America particularly.
And second question is on the credit losses in for Construction Equipment China. Will we be at this level for the rest of the year into 'seventeen? Any flavor on how long we will see those losses coming through? Then the third question there on the lower material cost. I know you've mentioned a number of initiatives, but could you say anything about sort of specific gains for your 3 year C savings coming through there?
I can start with China. And I wish I could give you an answer because this is an evaluation that we do continuously month by month and look through, of course,
what is happening in the
market, what is happening with our dealers and end customers. So I think it's maybe too early to say that it's over. I wish I could say it was, we're probably not there yet. Then the magnitude in each quarter is difficult to say actually. I think it's actually more of a coincidence that it looks fairly stable than it's more a coincidence than it's actually reality.
We check every month the dealer's health and so on. Then the material cost, I mean, this is, of course, an effect of the program. You remember that we started in 2012, 'thirteen actually. And as I said before, we are focused quite a bit on the structural SEK10 billion, but the underlying other activities that we do actually yields an effect. And this is the hard work that's been done in the production organization and in our purchasing operations, and that's start to come through.
We also, of course, have some help from the fact that raw material prices are supporting as well. So it's a combination of our own abilities and raw materials as well.
On services then, I mean, it is mainly Europe and North America where we are seeing that we have improvements. Too early to say really 3%. I mean, we should be also a little bit humble and say, let's see the trend first. But if you really see the potential differences also between segments and geographies in Europe and also in North America, there is a substantial potential to drive this. And North America is a specific case, as we said, because in theory, we are full.
We have a bottleneck situation with our dealers. And therefore, our market share is pretty low actually. So the uptime center activity that we're doing, for example, is to increase throughput, higher volumes in the installed base that we have. And in addition to that, we are working with our dealers also to enhance capacity basically. We are also using connectivity to a big extent to take out some of the work that should not necessarily be done in workshop, software updates, etcetera.
So there are a number of very good activities. So North America is more. I mean, how do we get more how do we get the asset to sweat even better actually, because there the thing is that customers have to wait too long time basically not only for us but the whole industry and here we have a great opportunity. In Europe, again, what we see is that when we are driving, for example, contract penetrations, both on repair and services, Volvo Gold, Volvo Blue and also for the different levels for Renault, we are also driving penetration and the potential is still good. So those are the 2 markets with the biggest potential and where we also see these improvements to start with.
I think one of the important aspects where we are doing this disclosure more separated is, of course, for you to have better transparency and see what we're doing, but also for all of us to keep this in mind in the organization that here we have a lot of good potential. Yes. And but obviously, the question was if North America is going forward. So again, I think it's not fair to take 1 quarter and draw too much conclusions on it. We see that we have plus 3%.
This is good, but the proof is in the pending number of quarters down the road here.
But of course, I mean, looking on the potential in North America since the rolling fleet of Volvo trucks with captive end drivelines is increasing all the time. So there is mathematically the potential is bigger than what you see in Europe, of course.
But the 4 days of VQ also. I mean, come on.
Hampus Engellau, Hampus Buenkien. I also have three questions. Starting off with the profitability in Trucks, 10% EBIT margin. Have we announced in the full swing of savings? Or are there any additional savings coming in?
And also, could you maybe talk a little bit on the margin, maybe give some indications on where you're regional and also by brand? 2nd question is on market share. What do we need to see to have the Renault market share coming back to 10%, 11% in Europe? Is this a France issue? Or how should we think about that?
Last question is on the run rate. If you could maybe indicate what where run rate is today in North America and how that compared to deliveries?
Starting with the SEK10 1,000,000 goes according to plan. And as you know, Gersa, that is financial wise finalized by the end of this year. So there comes more saving. But I think it's I think that is what we have seen over the last couple of quarters actually is that other underlying things, as we said, we don't focus so much on internal work, efficiency work that we also see coming through in the gross income margin. And I don't see any reason why that should not continue.
And then when we come how we now are shifting from the structural reduction programs into the continuous development way you're working, actually, that should also, of course, continue to yield an effect when we move into 2017 and onwards. So I think you can definitely expect that coming through. When we look into the profitability on brands and regions, Of course, when you improve the profitability from 7.7% to 10%, it is a broad based improvement that we see. Obviously, when you talk about Europe, talk about both brands, I mean, Latin America is a separate chapter. I mean, the downturn that we see in North America, of course, means that the profitability goes down there.
But I think, as you understand, when the underlying profitability, I think we managed that in
a good way. But it was only necessary to use one color.
So as a whole, broad based improvement actually. And where we see the severe downturn,
I think we manage that in a good way. One comment also on just to add on what Jan said about the brand based organization. It's pretty interesting to see now also the 1st business brands coming out also how much more, so to speak, focus on the customer base geographies and, so to speak, the core business of each brand is coming out again. So I think that is also very positive effect of this initial work that has been done during Q2 as well, so to speak. And that in combination what you said and yes, there are a number of other aspects that we can come back to.
On Renault, what we have said there and as I said also is that obviously there are mean, Southern Europe that is the core markets and France, we are on 27% and there is an upside. But at the same time, we have said we should gain that upside with quality now. Quality in the business, we have a very good product. We are working on different aspects in order to drive that. But well received, right price realization, right RV realization is more important because if you think about it, there is often a quick conclusion that we are subscaled the renewal.
But I mean, if you really think about the full product and that we are running one final assembly. We are not at subscale actually when it comes to industrial system or we are not subscale at all basically. Then when it comes to the product, maybe there are some of the components in the new that is a little bit subscaled, but for a big part of the product is also pulled out by the whole system. And then when you look market to market, there are very few markets where we are under 10% today. And when it comes to the distribution and network it's not important it's not important for us to come back to 10%, 11% of scale reason and sacrificing the quality in the business.
I think that is the main message for us. Then obviously, we think that we have such a great offer, so we should be better. But that is, I mean, that is the hard work that we need to show to our customers and the trust. And run rate, North America, 2.50 percent, approximately 2.45 percent, 2.50 percent, a little bit if you calculate the current rate times 12% or 11.8 percent or 11 point 4 and that you
can do a little bit
how you like, but somewhere 245, 250.
All right.
Anders Thap, SEB. I have a couple of questions as well. Coming back to the material costs, it's obvious that we saw a very nice price movement last year on raw materials, but they basically turned up at least steel cost turned up massively since year end. I think U. S.
Up 60%, 65% on relevant steels, Europe a little bit less, plastics, multiples going up, etcetera. So what when you look into next year, when I also believe the action plan initiated will have less effect probably? Do you expect material cost to actually go up then? Is that a fair assumption?
It usually takes as you've seen, I mean, we have seen the material cost and the raw material cost kicking in gradually more and more actually. Now you're seeing the markets going. So usually, you have a lag of a couple of quarters before you start to see the raw material effect due to the flow through and depending on what contracts you have and so on. So it's difficult to say, of course. And now we see one movement in the market on raw materials.
You don't know what it is 1 quarter from now. So but I think you can expect that it takes some time before it comes through as well in increased raw material prices in our P and L. Then I mean, the structural cost reduction program is, of course, ending the final effect of the year. But as I said, I mean, we see this continuing improvement. 1 should not underestimate that effect either actually.
And all the other things that we work with as service, as one example, We are I think the quality you can also see that on the last two bullet points on the final slide, when it comes to this P and L responsibility that we are driving into the organization, which actually was this organization was it's actually starting now with the plans for next year. And also, I think, the enthusiasm and drive that we get in connection with both the P and L responsibility, the proudness of the different brands and this organization. I don't think one should underestimate that. And then also getting out of this actually pretty hard work, boring way of working with Structured Reduction Program into continuous improvement, one should not underestimate of these things that we're doing. So we shift mood in the company during the course
of this year. And yes, to take the example, for example, operations, Global Trucks Operations, where we have had massive restructurings, reshuffling of production lines, movement, opening up closures, new regional warehouses, etcetera, only the fact that we are gradually moving out from these big activities using also engineering resources together with the teams and drive, so to speak, the flow thinking is, of course, a big opportunity, absolutely.
On the IT divestment, you made was it €800,000,000 in capital gain or €900,000,000 But the transition costs that you're going to have, will they eat up all of those that capital gain? No. Half of it?
I did
not comment. Not even the majority of that will lower it. All right.
Can you say anything about pricing development in the U.
S? The market is
so weak and for been so long, so eventually maybe it's really going to be a big problem?
And we have obviously, of course, we have softer pricing in U. S, both on new and unused, little bit more unused. And again, we are doing the same thing in U. S. As we are doing.
And we are not hunting the wrong market share if they put like that even in a downturn now. So we are not destroying that destroying that. But obviously, when you have a whole system geared for it in also in Overstock, you have price pressure, that's for sure.
All right. Let's move over to the 3 participating over the phone. Operator, please go ahead. Thank you. The first question comes from Klas Vollen from Citi.
Martin and John, it's Klas from Citi. I have a couple of questions, please. Firstly, I want to come back to the truck margin. If I take out currency, it's a 40% incremental margin sequentially. I think it's the highest uplift on record.
Could we try and break out what drove the improvement the most, savings appear in line with my forecast? So was it services, the net effect of higher European production versus North America? Or was it just a mix of stronger deliveries in high margin Europe?
Pretty much, yes. So the answer is yes. And then I think it's up to you guys to figure out a little bit what is what there. The reason, Martin, is that
there are obviously a lot of concerns around Europe. And so if this is mainly driven by geographical mix, then the margin is really not sustainable. So I just want to hear your thoughts there.
No, no. But I think, Claus, just coming back to that, as we said, also what is coming through, of course, what the savings that if I may say so that you have calculated that is coming in from the structural cost program is one thing, but also that we are gradually seeing also other dynamic effects when it comes to the cost and efficiency base is obviously very important part of it as well. So I think we have to give credit to the hard work that has been done also internally on efficiency and structure.
So your drop through in a potential downturn in Europe this time compared to previously has improved, a year more resilient today?
I mean, I think we should be humble here and be very close. And as I said, now when we are adjusting production both upwards, a little bit down for Volvo and downwards for Renault, even if there are slight adjustments, this is exactly also to follow the market even closer to see that we have the right balance between variable and fixed cost. And I also think that U. S. So far is serving as a good example that we have improved in our way working with the volatility.
Accelerator or brake in the right timing, that is the trick here.
My second question is also in Europe and back to Renault. Was this only the hangover from the prebuyer? Was there any underlying weakness, customers concerned about residual values around Brexit, etcetera?
I mean, I think if you take I mean, if you take the figures for Novo and you look at both quarter 1, quarter 2 and quarter 2 year over year and so to speak, the absolute position that we have now. And as I said, the feedback from customers when it comes to the product, the performance and the operation is good. And we are not hunting volumes to the expense of quality in the business right now. That is what we see. So we are not in particular worried for Renault from that perspective.
We think that we are on the right track to continue to develop Renault in a positive way here.
Good. My final question is on market shares for Volvo in North America. It seems like the Q2 market share improved versus the Q1 when I break out the year to date. Is that correct? And was it mainly an effect post the recall?
So did you sense any underlying market share improvement towards the end of the period?
Yes. I think it was both actually. Obviously, it was the recall and that caused disturbances for us. But also the fact that we were, I think, putting the foot on the brake a little bit harder than some of our colleagues in the business. We still think that was a wise decision in the short run.
And also that if you look at the mix in quarter 1, it was some big fleets where we didn't have maybe the same hit rate. So there was a number of things. But we are we feel that we're coming back to a level, better level now and that we have the right momentum given the market situation.
Thank you. The next question comes from Guillermo from UBS. Please go ahead. Your line is now open.
Martin, Johan. Guillermo from UBS. A couple of questions from my side actually. One regarding demand in the U. S.
A. Could you describe the progress through the Q2, I. E, was it weaker in June? Was it stronger in June compared to the 2 months? And then I wait for the second question.
No, I think pretty much I mean, June was a rather okay market. And I mean if you really calculate that depending on what again what multiples you use, I mean I think it was a little bit on the high side from the forecast. But again, 1 month is very tricky to take. And we feel that if anything, we are I mean, and that's the reason why we lowered from 2.50 to 2.40. Is fine tuning obviously.
But we feel that, yes, if anything, there is still a little bit of this down pressure and we will have also, I mean, presidential campaign and little bit of uncertainty. But obviously, there are also a number of factors that are positive in the U. S, housing, construction activities, we see indexes that are supporting this. We see that on the inquiry level also in some of the segments for Mac, for example. We see also that the inventory correction is not only related to our industry, but a little bit to the U.
S. Economy in total. So there is a year of a little bit of inventory correction as a whole, even if the underlying macro is okay. So I think that will lower from 250 percent to 240 percent should not be over read, so to speak. But it's a little bit more, okay, we're all we're here.
And if anything, to give a small sign that it could be a little bit low.
And then the second question is regarding the EU introduction of CO2 emissions, which may be a little bit far fetched for the setup today, but the limits for trucks by 2021. And I want to understand what you think about standards and what does it mean for your R and D expenses?
Manny, if we start with CO2 standards, we already have that, as you know, in the United States. And since we're using the same type of technology, obviously, we're well prepared. And we also have the same powertrain and full powertrain, both engines and gearboxes, axles and different type of options. So from that perspective, I think what Europe is heading for now and we are supporting that obviously is that we are in the first run working on a simulation tool that I mean customers and also customers can actually simulate a different type of equipment when it comes to the CO2 efficiency. And again, CO2 is very much driven by the market forces since that is also related to fuel and other costs.
So but when it comes to the preparation for different levels, I think we are in a good position here.
Maybe I can reach a third one on the demand from the U. K. In itself. Have you seen weakness in the construction trucks in the U. K?
No. We have not actually seen any particular change in order pattern from U. K. So far.
The
next
A couple of questions. Just firstly, going back to where you think we are in the European demand cycle for trucks. Could you give us an idea how much of the installed fleet do you think is on pre Euro 6? Some coming across from the angle that Euro 6 engines seem to be more efficient than Euro 5, a lot of people hang off. To understand maybe there's some pent up demand that could be coming from that.
No. I think, obviously we are 2, 3 years down the road with Euro 6. And I mean we have an average fleetage of, I mean, 5 to 6 years depending on application. So I mean that is where we are now when it comes to deliveries. When it comes to efficiency between Euro5, Euro6, obviously, we managed to continue to push fuel consumption a little bit down on Euro 6.
But one should remember that from Euro 5 to Euro 6, it was another very big step on NOx levels and on particulate matters. And those type of emissions are counterproductive in relation to CO2 and fuel. That is like unemployment and inflation in national economy. So I mean, the name of the game is really to drive by engine development down to Urigu. And if you really see the fuel efficiency and CO2 efficiency between Euro5 and Euro6, there are minor effects when it comes to the efficiency, maybe a couple of percentage points better for €6 €6.
And not because it's €6 €6, it's more because of at the same time taking down NOx and PM levels. Our engineers, our very, very skilled engineers have been able also to drive a better technology. As an example that we showed today with compression ratio increases, new turbo technology better matches with the high shift, new functionalities and these type of hard, solid and fruitful engineering work.
Do you
have an idea of how much of the installed base is Euro 6 in Europe?
I don't have the latest. Is it like I will let us come back to it. But I mean, again, I mean, it has been introduced now, I mean, a couple of years here and the average age is so I mean 25% to 25% something.
Okay. And just on the balance sheet. And so we've obviously got the truck fine, the European truck fine still to pay. And I think we're going to get some more update on Wednesday. Maybe you can give some color around what the timetable on that announcement may be.
But also, have you been paying all the China provisions for the credit losses? Or is there any sort of accumulated provision that has yet to be paid? And are there any other things that are yet to be paid, are there restructuring expenses that would give a difference between where the net debt position is today and where it could be if we provided for cash out on everything we have provided for?
I think the when it comes to China credit provisions, they are up in the range of, I think, SEK 1,900,000,000 that we have put to sign out during these, what is it, 2 years. And the majority of that is still provision not by far the majority is not paid out yet. And as you correctly said, depending on the outcome in the European Commission, that is obviously not nothing paid
out. And we don't have any comments or ideas regarding the timetable. As we have said already from the start, we in 2011 on this investigation, we have been fully cooperating with the European Union on this matter and they are deciding the timetable. And until then, we will and cannot comment anything, but more than we are cooperating and that we have disclosed the provisions that we have disclosed so far.
Okay. And just finally, you talked a lot about the benefits in service and the growth that's come from the initiatives in the U. S. And some combined dealerships, Mack, Volvo, the uptime service outlets that you've got. Can you just contrast that to Europe?
And how much more efficient is the U. S. Dealer network to Europe? And is there some upside that could come from Europe?
I think it's a I mean, all questions obviously have been great, but this is an interesting question because when you're a big group with different regional footprints, you can learn a lot from each other. And what we really see we were with the team actually in U. S. 2 weeks ago. And what we see is that in some of the areas, U.
S. Is well ahead of Europe and in some areas, as a matter of fact, the other way around. So again, if you can combine these different aspects, we will have even greater situation. When it comes to contracts, contract penetration, for example, we have a much more solid situation in Europe. When it comes to the connectivity uptime services, how we are actually using the connectivity to drive business and to drive preventive activities U.
S. Is ahead. So I think this is exactly what we want to achieve now working closely in the business also. So interesting potential for the 2 different regions here.
All right. That's a wrap up. Thank you all for coming today, and we wish you all a nice summer and see you next quarter. Thank you.
Have a nice summer. Thank you very much.