Good morning, everyone, and welcome to this press conference covering the fourth quarter of 2015. On stage today, we will have our President and CEO, Martin Lundstedt, and our CFO, Jan Gurander. As you all know, this is a webcasted event, so during the Q&A session, please use microphones. Martin, why don't you start?
Thank you, Kina. Thanks a lot. First of all, good morning, ladies and gentlemen, to these presentations from my side. Fourth quarter, as we see, a good quarter with improved underlying margins despite flat volumes for the truck business and, as you know, declining volumes for our construction equipment. Of course, during this press conference, also in addition to cover the quarter four in 2015 full year, we will also have the opportunity to ask questions, if you like, also regarding the changes to the executive board of Volvo and the new organization structure that will come into effect as from 1st of March this year. If we get started with the fourth quarter and some of the comments. See if this is working. It's not. There.
As I started to say, we have continued improved profitability on flat volumes in the truck business and on declining volumes in our construction equipment business. Underlying operating margin at 5.7% if you take away the positive effect in quarter four of the arbitration case. That is also, if you compare without the effect of the arbitration case, 7.9% operating margin for the truck business, also showing continuous improvement. Operating cash flow of SEK 14.7 billion, thereby also strengthened financial position and a positive net cash position. The board is proposing to the AGM a dividend level of SEK 3, also that you will hear more about from Jan. We are now planning to finalize the structural cost reduction program as we go into 2016, that you will hear more of from Jan. If we get started with Trucks Europe and what we see.
As you know, we have had a recovery in Europe during 2015, increased trade volumes, improved earnings for our customers, thereby also taking the opportunity to renew the fleet. We have a continuous replacement need given the good years at the end of 2005, 2006, 2007 and 2008 and so on. Market shares for Volvo ended at 15.7% and Renault Trucks at 8.1%. What we've seen during the course of the year that we actually started 2015 pretty slow with a lower order book, we have gradually improved during the course of the year for the two brands. What we see now is that also the order book for the beginning of 2016 is better than previous year. Net order intake improved by 20%, whereof 24% for Volvo and 15% for Renault Trucks.
As a consequence of the continuous recovery in Europe, our current estimate of the total market for 2016 is a further improvement by 4% up to 280,000. We can also see, by the way, that used trucks volumes are developing positively. As one example, we see +12% in Europe North, that is also an indicator supporting this view. North America, coming to that. We had, as you know, a very strong last year when it comes to deliveries of 302,000 units. Market share for Volvo, given its main focus on road segments, continued to develop slightly positive to 12.2%, whereas the Mack brand, given its strong position in vocational and in oil and gas and pretty weak presence in long haulage, actually declined to 7.4%.
Going into 2016, we see actually that the continuous recovery in the construction sector in the U.S., in relative terms, positive for the Mack brand. The net order intake decreased by 58% in quarter four. I think we need to go through the different factors why that was a bigger drop than what we believe when it comes to the total market outlook for North America for 2016. First of all, we had the market correction when it comes to the long haulage segment after a pretty long period of very good volumes. Secondly, the dealer destocking to get balance in the structure that we see industry-wide. Our estimate is that this will last during at least quarter one and quarter two to get the right balance for different segments and regions. Thirdly, we had an exaggerated difference between year-over-year, quarter four also.
Our current estimate is that the market will drop from 302,000 to approximately 260,000 with, if anything, a little bit of downward pressure, actually. We have already decided, we are on the way to take down the production levels. We are doing that more than the market forecast in order also to correct the balance between dealer stocks and production output. We are on the level of approximately 30% adjustment downwards. Another positive development, of course, as you can see here, is the increased captive components of the powertrain. We are now on very high levels when it comes to engines. You see high penetration for our I-Shift, 82%. Highway mDRIVE for Mack, also on a very good level.
As I said, as you remember, the on-road segment is relatively small for Mack, and traditionally it has been a resistance for these type of solutions into vocational. We see now how the market actually, or experience the very good performance of the AMT or semi-automatic gearboxes. With introduction into vocational for mDRIVEs, 6% on deliveries, when we look into the order book now, going forward, we have a penetration rate of 19% and it's increasing rapidly. That is showing that the market is very positive in feedback on that as well. South America. The total market, as you know, continued to decline further by 55% in Brazil. Our market share dropped slightly in Brazil, the main explanation for that was actually the mix between, and some of you know these expressions, so to speak, the semi-heavy and the heavy segments.
Where we have a stronger position in the heavier, that decreased more than the semi-heavy. When you look into the different segments, we maintain positions in the two segments, that was, so to speak, a product mix effect in the market or a segment effect in the market. The net order intake for South America continued to decrease by 36%, our estimate for the time being now is that the market will continue to go down to a level of 35,000 from last year's 42,000. That means that we are continuing to do adjustments in our Latin American structure and in Curitiba. For Asia, the slowing economy in China, a medium and heavy-duty market was down in China with 24%. We also saw the surrounding markets, of course, given the freight volumes, trade, and different effects also coming into full effect.
Our total view now in China is that we'll go sideways basically for 2016. Approximately the same level as we have seen in 2015. Japan remains, however, on healthy levels, we expect that also to move sideways on a good level of 90,000 for heavy trucks. We have declined our market share in Japan from 18.8% to 18.3%, main reason is actually that we have done a changeover in our production system and thereby also decreased or slowing down a little bit deliveries. We are coming through that change now and moving into the market with full focus. On a positive note also in Asia and Oceania, we see that mature markets such as Korea and Australia are showing very good results for Volvo brand, also for all brands. Korea, we have a very strong position, has developed really well.
Also Australia, we actually had record market shares of, I think it was 26.1% for all the three brands. Showing also that you can have a very successful multi-brand strategy where you have clear brand positioning for the three brands, Volvo for the cabover union premium segment, for the Mack Convention segment, also then for UD when it comes to the Japanese regional haulage distribution segment. I think that has been very successful. India also, our current market forecast is that the recovery also linked to the economy will continue. Our view now is a level of 350,000 for 2016, of course giving good opportunities for both Volvo and even more for Eicher. Coming in then to Volvo Construction Equipment.
As you will know, continue to meet the substantial market headwinds, mainly done in emerging markets such as Brazil, Russia, and China, resulting in a decrease of deliveries over 26% in Q4. Just as a small detail, might be an important detail, -23% without product exits that we have conducted during the year. China continued to face very weak demand with the total market down by 48% up to November. What has been positive is the total demand in Europe, excluding Russia, that is on low level, showed a positive development of 3%. The net order intake during quarter four was down year-on-year with 18%. If you exclude the product exits, it was down with 13%.
The current focus, of course, is to improve the market and product mix and thereby earnings and get better resilience into the business and less dependence on the big markets. I think we've had a good year when it comes to the heavy machinery. We have moved market share from 6.3% to 8.1%, and that's quite a lot, so 1.8 percentage point. As one example, in Western Europe, Volvo Construction had a strong development on heavy machines that was up 14%. The profitability focus we're working on product lines and market earnings gives now a more resilient structure. We are also continuing to do the portfolio pruning and look to where we'll continue also to exit some of the products.
To further strengthen presence in core segments, we are actually lining up a new set of products at the Bauma fair in Munich in April, where of one of the big news, of course, will be the new articulated hauler, the A60 60-tonner. That will then take the next step, as the biggest today is the A40 40-tonner. The market outlook for next year remain, as you all know, bearish for China. Our current estimate is -10% to -20%, whereas the rest of Asia, North America, 0% to -10%, and Europe pretty flat. Buses had a mixed picture when it comes to market developments. We had good demand in North America, saw a steady recovery in Europe, and the continuous weak demand in Brazil.
During quarter four, sales increased in all regions for us except South America, and also what was positive, sales increased in all product ranges. Also service sales increased +7%, mainly driven by Europe and North America. The quarter was very strong for Volvo Buses, with deliveries up with 9% and net order intake with 24%. Now important to be very close to this and follow that this positive trend will continue. Also on the product side, we launched the new 9800 coach in Mexico. Very good feedback so far. We have also been doing the preparation for introduction of the hybrid buses in India. We have very big interest from India given their environmental agenda, and we will be shipping the first five hybrids to the city of Mumbai during the first quarter.
For Volvo Penta, industrial engine segment showed mixed picture, declining volumes in emerging markets and flat volumes in mature markets, whereas the marine segment was flat. On a positive note, Penta is strengthening its position in all segments for the whole year. Penta increased units sold with 17%, and the net order intake, however, decreased with 8% in quarter four. During the fourth quarter on the product side, a new D16 marine application was launched to further strengthen a very strong product range on the marine segment. With that, I give actually the word to you, Jan, to go through the numbers and the financial analysis.
Good morning. It's time to summarize the fourth quarter for 2015 and also a few words on the full year for 2015 in financial figures. If you look upon the sales figures, we go from SEK 77.5 billion in sales, up to SEK 79.6 billion. Worth to mention here is that the improvement comes basically from a currency effect. It's 3% up in SEK. If we take out the currency effect, it's down with 1%. Of course, that relates to what Martin has described actually, that we do have more or less flat volumes on the truck side, and then we have decreasing volumes down 26% on the CE side. When we talk about the different regions, we see that with the strong development that we have seen in Europe, but also we see now order intake coming down from North America.
We see the kind of slowing momentum in North America. Last year in terms of deliveries and so on helped us a lot, actually, and you can see that we have SEK 3.1 billion more in sales in North America in the fourth quarter. South America, they are more or less exactly compensating the downturn. They're exactly compensating on the downside, you can say, the uptick that we had in North America. Asia being fairly stable and other markets, it's actually so that some markets that actually have a downturn compared to one year ago. It's mainly in Africa where some market is actually quite much lower than what we had in 2014 in the fourth quarter.
If you look into the profitability and earnings, as always, we have one-timers, we have restructuring costs, we try to do this, communicate it in an as transparent and clear way as possible. This is, as you remember, last year, we had the two big one-timers in the fourth quarter. One was the provision we put up for the EU litigation or potential litigation, we had the China credit risk of SEK 660 million. The reported was as a negative of almost SEK 1.5 billion, but if we exclude these kind of one-timers, it was SEK 3 billion in positive. This year in the fourth quarter, we had the arbitration case for Bulgaria, which was SEK 800 million. If you take away that one, we have SEK 4.6 billion in profit.
You can see here, this is another quarter where you can see more or less all of our business areas are helping with improvements, with the exception of CE, I will come back to CE a little bit later on. I think given the market circumstances and also if we actually exclude the one-timers and so on, the work that they are doing there and the profitability is on, I think, on a decent level given the circumstances. We go from a 3.9% EBIT margin, there on the SEK 3 billion, up to 5.7% on the SEK 4.6 billion. Looking into the same exercise, actually you see where the different kind of, you can say, improvements comes from when we go from the SEK 3 billion to the SEK 4.6 billion.
We see that we have then, of course, Europe and North America helping us quite a bit from a market side with the increased sales. Also markets now where we have good earnings in our operations as well. Of course, from the market side, on the negative side, goes without saying, Brazil is actually hitting us quite a bit compared to what it was in 2014. Of course, all in all, the lower volumes that we see on a group level. As I said before, more or less flat on the truck side, but actually the lower sales and deliveries that we see on the CE side. Apart from that, we see that we get help from our savings programs. When we measure them in local currency, we have lower selling expenses. R&D is more or less flat if you take away the currency there.
We do have savings compared to one year ago. Then we have some other. In the other, which is a little bit unusually high, we have the SEK 158 from the China credit risk. Also, another thing that's there is the lower earnings that we see in the fourth quarter 2015 compared to 2014 from our joint venture in China, DFCV. Of course, DFCV is affected by the downturn of approximately 25% in the market in China. Turning into trucks. Here we have going from SEK 54 billion to SEK 55 billion in sales. Once again, currency there, it's a plus SEK 2. If you exclude the currency effect, it's a negative of SEK 2. The operating income goes from SEK 3.2 up to SEK 4.4, and it is on the rolling 12 months basis, SEK 16.2 billion.
Here we have once again excluded these one-timers that I mentioned before, the ones that are affecting the truck segment then. Then we have the operating margin on trucks going from 6% up to 7.9%. We were at 7.94% actually, but how we twist it and tweak it, we didn't go to the 8% actually, but it's very close to 8%. Here then, going from 6% to 7.9%. Last year it was a negative of SEK 540 million with the EU provision that we put up. We come to SEK 3.2 billion. This year then we have the arbitration case, SEK 4.4 billion in, so to say, running operations. We have then in the latter part of this year, of 2015, we had a higher capitalization than amortization, which helped the result quite a bit in the fourth quarter.
Looking into the whole year of 2016, we think that capitalization and amortization for the whole year will be fairly much in balance as it look right now. In the beginning of the year, we will capitalize a little bit more than what we amortize, and that will turn for the latter part. Lower selling expenses, of course, Europe, North America on the positive side. Currency, of course, helping us with almost SEK 700 million. We do have a negative product mix, this is maybe more of a financial thing. It's so that the relative share of our profitability or the relative sales that we have is actually lower on the Volvo side than on the other brands. From that point of view, it's a negative product mix.
The other brands are selling relatively more in the fourth quarter 2015 than what it was in 2014. Of course, Brazil affecting the truck business negatively quite a bit. On the construction side, here, as I said before, down 26% in terms of deliveries. Sales is only down 10% or 11%. If we take away the currency, sales is down with 16%. We can see here that the, of course, helped by currency, but also the fact that we move the product mix a lot, going from the smaller machines to the bigger machines. That's why sales is not coming down so much as the unit sales are doing. Once again, the strategy or tactics that we are doing right now, CE definitely gives an effect on the top line, but also to help to offset the difficult markets that we are into right now.
You can see that last year, minus SEK 815, this year, minus SEK 191. In all these figures every quarter now, we have the China credit risk provisions included, so they are not excluded anywhere. That's also why that was such a big negative on the fourth quarter last year with the minus, the credit risk provision of SEK 660 that we put up at that point in time. Of course, the operating margin for both quarter is both 2014 and 2015 is on the negative side. Looking into a little bit, you can say the underlying performance, if one excludes the China credit risk provisions. Last year then we were at a negative of SEK 150 million, and this year we are actually on the minus SEK 33 million.
All in all, given the fact that we lose this 25-ish% in unit sales, we are more or less on the same level, actually a little bit of an improvement. Also, CE is actually delivering for the whole of last year in an extremely difficult market environment where China, Brazil, Russia, and a lot of other important markets are down, still making a SEK 2 billion profit for the whole year, which I think that's quite an achievement for the guys working in CE. Apart from that, working with the product mix, you know that we are working also with our product portfolio, and we see positive effects coming out of the fact that we are working with that. As Martin said, the fact is that we are phasing out some, or have phased out some products gives also a positive effect.
We are, of course, working through the whole cost structure in VC as well when it comes to operating expenses and all the other stuff. That gives a positive or helps CE right now in this difficult environment. Of course, on the negative side, apart from volumes, we of course get a very low capacity utilization in some of our factories for the time being, and that's hurting us quite a bit. Earnings in China, it's of course on the level, definitely doesn't help us, if I put it that way. Turning into two other areas, Buses and Penta. Buses has done actually increasing sales with almost 25%. If we exclude the currencies, it's a positive of 17%. It is a combination of some markets being fairly good, but also that we gain position here.
Buses are definitely gaining position in many markets for the time being. We can also see now that we are on the positive trend in terms of earnings as well for Volvo Buses. For the whole year last year, it was almost SEK 900 million in profit and it looks as though it is a solid improvement that we see now coming through in this business area where we have been struggling quite a bit, actually. We see actually good market and product mix in Buses for the time being. We have a strong sales situation in the northern parts of Europe. We see hybrids selling well, where we also have a good business. U.K. is one of the markets where we have a positive coming out of that.
Also that we see good development on the fully built coaches, which also increases the sales value in North America. We are at almost, I think we are 3.7% EBIT margin for the whole year. Penta is basically now a little bit above SEK 1 billion in earnings. Had a fairly good quarter in terms of sales, up almost 10%, but being above SEK 1.1 billion or SEK 1 billion in sales. 11.7% in EBIT margin for the whole year. We checked backwards here in the morning and in the quick check backwards, we didn't find any year that was better in terms of EBIT margin for Penta. I might be wrong, but it's at least the last 10-15 years, we didn't find anything like that. Penta is really continuing to delivering extremely strong, actually. Customer finance, also an area.
Customer finance broke the SEK 2 billion threshold. If you look upon purely our customer finance activities, this is also a record. Our customer finance activity has never been above SEK 2 billion. You will find one year that was above SEK 2 billion before, but then it was also real estate and treasury involved as well. Pure customer finance. I think it's quite a good achievement for these guys. We have this where we want to be approximately on our return on equity, 13%-14% on that one. Still a very good performance there. Of course, the market where we are, Brazil, is the market that we have a very close eye on. Brazil doesn't add any volumes. We have a portfolio that we're working with in terms of credit risk. We see overdues increasing, of course, compared to one year ago.
It goes without saying, we have a market that comes down so much. It's still under control and managed as well. We come to the cash flow, and the cash flow for the quarter was close to SEK 15 billion. The cash flow comes actually through in, I would say, in all aspects in this quarter. I think this trend we have seen now for, I think we have to almost three years back, actually, that cash flow is improving. It comes, of course, from the fact that we are improving our profitability in the company. Secondly, it comes from the fact that we have discipline in terms of our cap expenditures. We are now for quite some quarters, actually, we amortize more than what we have in CapEx. The company is well invested. There is no need.
There's nothing that we for the time being is suffering from or anything like that. Of course, thirdly, also, we see that we are improving also on the working capital. The working capital effect was fairly huge in the fourth quarter, basically with improvements in all areas, accounts receivables, payables, and also on the inventory side. The structural cost program measured in SEK, we are at SEK 4.6. If we measure it in local currencies, we are at SEK 6.8. We have one year left. If you look upon the last two years, 2014 and 2015, we did SEK three and a half billion per year. This means that there will come another SEK three billion-SEK three and a half billion next year, which means that we will reach the SEK 10 billion.
The, what do you call it, activities are more or less all of them in place when we come to year-end. We have a few things still left, especially on the sales side, I would say. Some small issues still on the production side. The main thing that we said that will be finalized and transferred in the second quarter is the outsourcing of IT. With this one, this is the last time you will see this slide, because now going forward, we will continue to focus the company on continuous improvements and also, of course, to implement the new brand organizations that we announced last week. A few comments on the full year.
Basically here, if we had a few one-timers in the fourth quarter, I can tell you the one-timers in the whole of 2014 and the whole of 2015, there are quite a lot of them. You see this small note down here that you can read when you have the time. Basically, to measure the underlying performance, we go from a little bit less than SEK 12 billion in 2014 up to the SEK 20 billion in 2015, excluding these one-timers. It takes us from a 4.2% in EBIT margin up to 6.5% in EBIT margin. Of course, there is a quite sizable effect from the currencies, a little bit more than SEK 5 billion. Of course, that has helped us last year.
I think if you look upon last year's structure, we have approximately, you can say more partly is 1% in internal improvements, more or less every quarter if you look upon the whole year, and then we have the other percent basically coming from currencies last year. There is an underlying improvement within the group, but also some tailwind from currencies. With that, welcome back, Martin.
Thank you, Jan. I think you can say also, just to summarize what we have said, foundation laid for further going into 2016 and beyond. You have seen it, earnings improvements, improved cash flow, and thereby also a strengthened financial position. Also a very important step for us now, the new organization giving even more focus on customer segments and driving the service business, increased the focus on profit and loss for the different brands standing on its own commercial and profitability merits, and still leverage the best of two worlds. I mean, bringing the scale where it matters. I think this is the next step with the foundation that we have laid now and moving through that. I think with that, Kina, the presentation as such is over and we start with the question and answers.
Thank you very much, Martin. Who would like to begin?
Thank you, Björn Enarson, Danske Bank. Start with the positives, North America and Brazil. Can you give some color on the ongoing ramp down in production and how we should look upon that? It is quite sizable, of course, coming from a very high level, and how difficult or complicated it is to give some help on when looking into 2016 earnings. Also the cost reduction or the lower production that we have seen in Brazil and the workforce that has been lower during November, December. Are you initiating more measures also in productions in terms of manning, et cetera, in Brazil? What kind of extra measures are you planning there?
We start with North America. Since we have had high deliveries more or less the whole 2015, we are now ramping down, and of course, before you are coming down, you take some stop weeks and stop days, et cetera. That is a fine-tuning effect that we have now during quarter one. As we have said, we are more or less taking down the production level on the pace going forward with 30%. As we have said, the correction on the market, our estimate is 15%. We are taking it down more just to be sure that we actually have a good balance between the dealer stocks levels and our production rate. We have a good also flexibility for doing adjustments both upwards or downwards from that level.
When it comes to Brazil, as you said, we already started to take stop days in order to really be in balance between output and our production levels. It will be less in quarter one due to the fact that now we are taking down manning accordingly. We are, of course, following this, if that is the right level or if we need to do further adjustments. That goes, of course, for production, but it goes for the whole organization also when it comes to other parts of the value chain.
Short follow-up. The ramping down has historically been quite costly for Volvo. Is there anything that you see have changed or anything that is more prepared that we will have more of a smooth ramp down?
As we said, our estimate now is that we have been pretty clear on that we want to be sure that we are taking down production, if I may say so, a little bit more aggressive to be sure that we're coming into balance because we have an upward flexibility in the system. There is where we're standing right now.
Hampus Engellau, Handelsbanken. I'm coming back to North America. Just to clarify, you're cutting production more than suggested by your market outlook. Is there also an element of reducing inventory, and when do you need to switch that if you're correcting your market outlook?
As we have said, our current estimate is that we need quarter one and quarter two when we look at both the Volvo, Mack brand in order to correct the inventory. Of course, there is always a mix. What do you have in inventory? How does it look in different regions? That is our current estimate. Of course, if we are correct, we will have an upward pressure. As I said here, we have a good flexibility in our two production flows in Latin America, in North America also. That is approximately the timing.
Moving over to Europe, you're growing 20% in orders. If I compare with Scania, Daimler, it's more than twice. How much is comparison and how much is there an element of market share gains? Could you maybe talk a little bit about Renault and Volvo?
First of all, if we start with average figure of 20%, should remember that Volvo Group, both around Volvo and Renault, came in a little bit weaker than the other brands into 2015. We saw that also in the market share development that really declined during the first quarters. Gradually we have stabilized that and also improved in some market areas in Europe. Our feeling now is that we are, for both brands, going in with a stronger order book and also that we are going in with a market share that is more solid than it was last year. What we have seen, of course, also for the Renault brand is that the southern markets are also recovering because that has been one element for the Renault brand, that the relative weakness of Southern Europe in relation to Northern Europe.
There is an element of that. In addition, for Renault, it was still at the end of the switching over to the new program during the end of 2014 for some of the specifications. For both brands, it's I think those effects.
Okay, one last question from me. The organizational change in trucks, could you maybe add some more comments to the 50 minutes presentation you did over the internet?
No, I think as we said, there are a number of, for us, pretty clear targets we want to achieve. Again, during the last three, four years, with good reasons, it has been a consolidation, looking at the cost structure, where do we have the resources, how we are doing with the brand positioning for different brands in different regions, et cetera. It has been a good and focused work. What we see now in order to drive organic growth, to drive service sales, it starts with the customers. We know that we have discussed that many times before, and what is it all about? You need to have a brand organization really taking care of that, a tailor-made solution in a good way for the different brands.
Tailor-made could be a more standardized offering depending on what brand it is, or it could be really tailor-made solution including service packages. Elements to drive this is being close, agility, decision-making power out in the different brands and regions, use the fact that many of the regions have a one-to-one system as I call it, or end-to-end. We have a very good supply chain in all major regions that we should use better to the continuous improvement process to really drive operational excellence in the flow. From an asset, people, and business and brand positioning perspective, this is the logic step to take. Then, of course, it is important also, I think, to make sure that every brand and every business area is standing on its own commercial and profitability merits going forward. In addition, it's more fun. Why not?
I think it's a good synergy. Of course, as we have said, the backbone is also important to keep in mind. Where does it matter when it comes to scale? You all know, scale is a very overrated word, but there are scale to find. There we should be very consistent. We have done a good job when it comes to the modular toolkits of standardized interfaces and still having ability for performance steps in between.
Question from Hampus here. You mentioned that all brands should stand on their own.
If I read between the lines, it seems like at least one isn't doing that today, or in that case, where do you see the largest potential to improve profitability or improve or drive organic growth going forward for that brand?
You don't even need to read between the lines. As you remember, on the capital market day, we actually disclosed at least the relative position of the different brands and regions. I think it was pretty clear. Again, I think we have for example, I assume that you're thinking about UD. We have a very strong value chain for that brand. We know that we are actually also looking on a structure where we can have a very good development. When we are doing that work and we so to speak, empower, as I said, the flow thinking, the business thinking, we have very strong view on our ability to improve position there.
Then moving on to construction equipment. If you could talk a bit about the capacity utilization you see here going forward, since the problems we have in the market will probably continue here for the next two quarters, and also what your expectations are for the credit provisions you have in China or have had, and if they will continue.
If we start with the capacity utilization, of course, there is one thing what you have in the fixed cost of the structure, et cetera. I think we have done some measures on that part, but to some extent you have what you have, so to speak, and you need to have a global presence. What we have done on that area is more fine-tune with the product exits, what is really the core, and continue to see what effects that will have. Of course, we are doing continuous adjustments when it comes to manning in production, but also when it comes to the whole structure, of course.
I think as Jan was into, if you really look into it and also the whole sector, with a decline of 26%, big dependence on some of the markets, we see really now the effects coming through when it comes to the focus on heavy machinery, really scrutinizing the product portfolio, making sure where we are concentrating our efforts. Also a number of opportunities when it comes to the operational excellence in itself. It's not only about the capacity utilization, but how you utilize the capacity you utilize. Meaning, everything about quality, lead times, delivery, precision, et cetera. I think we are doing a great job now, very focused and consistent work in that matter. We are not being all over the place, so to speak.
When it comes to credit risk, I think we would like to know as well how much it will be at the end of the day. If we knew it, we would put up the provision immediately, say, now it's kind of done. I think we have in a little bit similar way as you have the difficulties to predict. I think when we started with the SEK 660 million in Q4 2014, we maybe hoped that the market, we had taken the big downturn in the market, that it would stabilize and so on. You saw last year that the market continued to decline, and of course, when you have that decline in the market, our end customers, they utilize the equipment much less. By that, they don't have the cash flow. Our dealers, they don't have the cash flow either and so on.
That's why it kind of continued, of course, during 2015. I think one can definitely not rule out that we will have further credit provisions in China going forward. The size and magnitude of that, I don't even want to speculate on it, actually. I think you can pick a number.
From a more electronic point of view, maybe I should not say it, but we discussed about the bridge for the Volvo Group, and we had SEK 660 as a one-timer, but we didn't have the SEK 158 as a one-timer. I think that is what we said. These are actually part of the growing business. We had an over-optimistic view a couple of years ago, and now we have that coming up, and it's better to know that because it's part of the learning process going forward for our business model.
The final question. Just on the balance sheet. Now you have no net debt, and at the same time, you have said it-
Memory is short, no?
Memory is short, basically. You've also said that the big investments are done. There will be no big banks, and the free cash flow is very strong. Where are you comfortable? What kind of gearing level are you comfortable with, and how should we look on the balance sheet going forward?
First of all, I think it has been a necessity, actually, to strengthen the balance sheet as we have done, actually. We are in a highly cyclical business. We have seen downturns before. We now have that. It's the risk. From that point of view, I think you need to have a solid balance sheet. We should not either forget the fact that we are running our financial services as well, which has assets of, what is it, approximately SEK 140 billion as well. From that point of view, you need to have a strong balance sheet. One area that we don't like, but it's the seasonality that we have in our cash flows as well.
That we have a little bit of a tendency to basically not generate any cash for the first two quarters, so last year, but usually it's the first three quarters, and then all the cash flow comes at the end. From that point of view, we need to manage also the volatility in our working capital that basically that fluctuation so much. I think from that point of view, and also then connected back also to, I think, the balance proposal from the board as well to have SEK 3 per share as a dividend. I think that's where we are today. Of course, if we continue to see a stability in our earnings, you are all asking for how we manage, can you manage the downturn in North America? You've reported that before.
If we can prove that, we can continue to improve our earnings. Of course, the day will come that we can take a look and maybe be a little bit clearer also on the strength of the balance sheet.
You know it's costly to be short on cash.
I think if you really look at shareholder value long term, really to have a healthy balance sheet for that, really driving the business. If you see the solutions, not at least customer financing, that is a very important element for driving long-term organic growth, for example.
Hi. Anders Trapp from SEB. Hi. I have a couple of questions. Our first question is really listening to what you're saying about no big banks going forward, evolution rather than revolution, I guess you're saying also. Is that enough, considering that we are probably going to see down volumes also in 2016, looking at the guidance that you have and maybe some further downside risks to that? With the capacity adjustments that you are now talking about or have implemented or are about to implement, is that enough to safeguard the profitability in 2016?
Should I start off?
I think when you're talking about continuous improvement, I think that is a mindset when we come to how we are actually improving the business step by step. Of course, when it comes to the current situation in different marketplaces, you need to use the tools that you have, and that is regardless of a structural cost program or if you're working more on a continuous improvement basis by driving efficiency, driving quality development, et cetera. We will not take out the tool of doing the necessary adjustments in our value chains, of course. At the same time, when we look at where do we have opportunities going forward really to drive efficiency for real, all the different elements, we believe more in connect the flows, work through the different value chains.
We have, as I said, a number of elements that makes the Group strong. We have strong regional value chains that we can utilize better, not at least to cope with the different regional volatilities that you are after. I think we can utilize that even better if we do that.
Exactly. One other thing, what we have identified is also that currently when we work along, you can say the value chain or the process to deliver trucks and service trucks and so on. I think in the organization that we have had, it's a functional organization. If you have a strong functional organization, and it has had its merits, so I'm not complaining about that. That made my life easier to take out SEK 10 billion, if I put it that way. You see that you lose a little bit of efficiency along the value chain, and that's also why we now changed the organization. When you then look upon certain parameters along that value chain and KPIs, we see that we are not where we would like to be.
I think we have a fairly good understanding what it means to be world-class on these parameters. Now we need to find, and Martin mentioned one example before that we have had disturbances in Ageo for the last six months, basically. We have talked about disturbances before as well. They are partly connected to the change order programs because they are structured quite big. Now we want to actually take out the benefits when we have restructured it and then come back and actually make the operation efficiency much better. That is quite a big potential that we have.
Of course, Anders, you know it as well. If there are real structural things going forward, you will do it.
Yeah, sure. I was really after if you're happy or content with the basic structure that you have now, which I guess you are, then gradual improvements from that. Also, SEK 5 billion in help from currency on EBIT last year. Much less this year, I guess, could you give any kind of indication if it's even worth putting into the model?
When it comes to currencies, 2016 compared to 2015, we will not have a help of the currency as it looks right now. It will be on the negative side. It's a little bit difficult to exactly judge that. We have said before, take the flows from last year and apply the rates. Flows will change quite a bit, most probably with the regional shifts that we see as well. I think it becomes a little bit of a guessing game for us as well, actually. It will be on the negative side. We also see some of these raw material related currencies from emerging markets become weaker compared to what they were in 2015. That will hurt us a little bit as well. We have said that we will not say more than it will be as it looks right now on the negative side.
Final also, with the huge shifts in demand that we have seen last year and also huge currency swings as well, are there any big regions that are actually loss-making now?
We never-
Speaking of South America, of course.
We don't comment on. I would say that South America is better than what you believe, actually, because with the production that we have in Brazil and export to other markets in Latin America, having done a dollar denominated price on the trucks, we are actually not that bad in Latin America. Brazil is not very good. No, I think as a whole, that also we talked about in Ghent, the performance in all our brands have improved over the year, maybe with one exception. That's also why we may take a little bit different measures there, and that's Japan that is struggling most, actually.
Hi. Eric Winter, Citi. On U.S., there are some inconclusive numbers from some of the competitors and some more increasing speculation on softness. Do you see any tendencies in your order books? That's one. The other is related to Europe. I think truck deliveries were up 19% last year, and you're forecasting flat 2016. Why is that?
Can you answer that?
If you look at the order book in the start of the year, I think that is following pretty much what we have said. Of course, there are some markets that are a little bit more uncertain at least than North America, given, as we said, a number of factors coinciding, so to speak. I think that is the reason why we have to be closest on the ball, so to speak, and follow where we are. Again, that's the reason why we are correcting also the levels a little bit more to be sure that we are rather on the conservative side. When it comes to Europe, we are not forecasting flat. For the market, we are forecasting an increase of 4%. I think also it's fair to say that 270, 280 is pretty good level now.
When it was 320, 340, all of us know that it was an overswing also and speculation. I think it's a good market. As we said, we know that we are coming in from an order book perspective stronger, and we feel that we have a good momentum in the market.
All right. Let's move over to those of you participating over the phone. Operator, please go ahead.
Thank you. We have a question from the line of Klas Bergelind from Citi. Please go ahead. Your line is now open.
Yes. Hi, Martin. Hi, Jan. It's Klas from Citi. Just coming back to construction. We knew that the Southern Hemisphere couldn't offset the winter season up north, and we knew that transaction flows would fade. What happened here to the previous market share gains on the larger machines? If I looked at that typical margin you deliver at recent volumes, those market share gains sort of boosted margins by 200 basis points. When we look at the fourth quarter, it looks like even weaker numbers there if you consider that.
I think we gained market share with something like approximately a little bit less than 2% in the heavy machines. You should remember, market shares are fairly low. It's below 10% that we talk about. Relatively, we gained quite a lot of market share, actually. As I said, we are quite pleased with that, actually, and the deliveries. I think the profitability and the margin in construction equipment would have been significantly lower if we didn't have that development. I don't know exactly how we calculate the 200 basis points since I don't have your spreadsheet. I don't think I can help you there.
No, what I meant, Jan, was exactly to what you said here, that without those market share gains, you're delivering a margin that is low mid-single digit negative. My question becomes into the first quarter, if we don't have any spring season in China, if risk is still a big problem, what kind of sequential uptick should we think about? You typically get a 200-400 base points uptick quarter on quarter here. Is that possible, or will the first quarter also be a tricky quarter?
I don't think usually we don't guide anything on quarters, you know that the seasonally weakest quarter we have is the fourth quarter, and then you know that usually the stronger in the spring season is the second quarter. To speculate whether there will be spring season at all in China this year, it was very low spring season last year. That's another thing. I think it's very difficult, actually, to speculate. Fourth quarter is usually the weakest quarter, if I put it that way.
Okay. Just a question on North American, the flexibility. Sorry to come back to this. Let's say that you delivered a 10% margin in 2015, truck volumes down 16% this year. The aftermarket is a bigger portion of revenues, should still grow. If you listen to PACCAR, 3%-5%. What happens to the margin there? Is it dropping to 7%, 5%, or do we go below that?
I think you missed one thing there. It's the effects of the SEK 10 billion program.
True, absolutely. That is obviously in most people's models here.
I'm just trying to understand roughly what can happen to the margin.
Once again, the only guidance we give on this basically where we see the total markets, and then to speculate whether that market expectations that we have right now, if they are the right ones or not. It sounds like you have the right different parameters into the model, you can tweak around those.
Thank you, Jan. Just my very final question is on the production levels as we go through the first half in North America. I understand that you will probably underproduce significantly in the beginning of the year, January and February. When you look at the second quarter, will that be more in line with demand, or will you also underproduce the second quarter?
First of all, you can say, I think it's a correct assumption, as you said. The down peak means that we gradually taking out manning, of course, and that is mainly during quarter one. From that perspective, it's correct that we will have a more balanced production in relation to the manning as well in quarter two, and we have been forced then to take more of, say, stop days and stop weeks during quarter one. Our plan is to be correctly manned to the level that we have decided now in quarter two.
Great. Thank you so much.
Thank you. Our next question comes from the line of Erik Golrang, Nordea. Please go ahead. Your line is now open.
Thank you. I have two questions. The first one on the order intake on trucks in North America. It seems that your share of orders is on a quite steep decline or has been over the last few quarters. If you can say something about that development into 2016. The second question for Construction Equipment, a bit more medium to long term, what kind of planning assumptions do you make for market demand there over the next couple of years? I guess you want to bring up margins, but what do you assume as sort of an underlying market development here? Do you think you will get any support over the next couple of years from high market demand in Construction Equipment? Thank you.
If we start with the order intake in North America, as we said, there are three different factors coming into play here. We have at least our own view that we pretty early came to the conclusion that we have to do something with stock and inventory on dealer level. Of course, when you start that discussion in the value chain, it also affects the net order intake that is coming into, so to speak, our factory level here. For that reason, you see a big overshoot. If it's 58 or 54 all comparison figures. I think the main thing for us is to find the right balance going forward now, both when, of course, to safeguard that we all continue on a good note with our market share development, but also that we have a good balance between production, stocks, and retail deliveries.
I think that is what we said. We have three factors. We need to make sure that we continue to understand well what is working in those three factors.
Could you say something about your specific cancellation level over the last two or three quarters?
No. I cannot say, but that has not been the biggest issue actually for us, the cancellation, because again, when we look at the retail deliveries, as we said, the factor we find there is mainly the correction on the on-road. Again, there you also see the difference and also already during 2015, the correction when it comes to energy sector. Again, that is the difference you need to understand that we have an assumption of some maybe 14%, 15% decline here. If that should be the case, as you know, our estimate is 260 is the 50 best year ever in the U.S. or in North America. We have some sort of view on the total market as such.
When it comes to the cancellations, it was mainly in the first and second quarter, a little bit into the third quarter where we saw the cancellations, because they will overshoot that then in fourth quarter 2014 of the order intake.
Which is also part of the explanation.
Yeah. From that onwards, I think we have seen limited amounts of cancellations on order intake. That's not a big issue today. It was for the first half. The funny thing, there you have also what we talk about continuous improvement in the value chain. Typical behavior when you have a shortage of deliveries, that you start to have a speculation curve, and that was part of the game in quarter four 2014 when it comes to the order intake.
Okay, thank you. On Construction Equipment demand longer term?
To say when it will come back et cetera, is very difficult, of course. There are some factors that means also that what we have seen in some of the countries like China, of course, may not come back to that level. It has been an investment-driven economy, and partly on that note also in construction, a speculation-driven economy, as you know. As China now is moving along into a more consumption-based economy slowly, that of course will long term affect what is the right level for such a market. Therefore, I think what we are doing now. Then of course, when it comes to other markets, you can say, the highway bill, and we have a pretty healthy view on housing in U.S., and still commodities are down the drain, but at the end of the day, we will have a need of that.
I think that the important part of us is to find the right level of resilience, both when it comes to market mix, that we have the healthy product mix, where should we be really good? Where are we good? How should we continue to drive those segments? Also to have a good flexibility among different regions to cope with that. Again, also what we see is about automation level, the solution level, that there is still a big pocket to develop when it comes to share of wallet for different type of equipment. I think that is a very interesting part also.
Thank you.
Thank you. Our next question comes from the line of Graham Phillips from Jefferies. Please go ahead. Your line is now open.
Yes, good morning. Two questions please. One for Jan, one for Martin. First of all, just Jan, on the R&D capitalization, the SEK 704 million in the lower sales and marketing costs, obviously that benefited the margin in the fourth quarter for trucks. I think if you adjust for that, it was probably the lowest margin for the year in trucks. How should we think going forward? I know you've said that R&D capitalization will be moving as well into 2016. What do we think, again, reflecting back to the way you used to talk about the regional profitability and traffic lights? I guess Europe will be a green, North America perhaps goes to orange or red, South America is red. Just, again, trying to get a bit of a feel for 2016 truck margins.
I think if you look upon the gross margins, of course, they will be affected in the different regions by, of course, the market developments, as you correctly said. Of course, we will do everything we can to offset, of course, the downturn in North America that we adjust to, and it's the same in Latin America. How much you can adjust to the lower volumes or if there will be negative effect, that's very difficult to say. Yes, due to the fact that you lose volume usually means that you lose gross margin, so it will have a negative effect. There will be certain mix effects, of course, coming there. Apart from that, you will see that the, you can say the underlying improvements that we have done and we are still doing in the efficiency program, that will continue to gradually kick in in 2016.
That affects all business areas, but I would say mainly the truck business areas and maybe CE as well within the group. You will have that as a countering effect to the maybe some regions going down, but on the other hand, Europe is coming up. You should not forget that there are still efficiencies coming in. It doesn't stop for that. We have implemented quite a lot during 2015 that will have a full year effect in 2016, and there are a few activities still that we are implementing now in the beginning of 2016 as well. Then you have the move into what we call continuous improvement or working with the operational efficiency.
How much of the R&D capitalization benefited the truck division of the 704?
It was the majority of that one. I don't have the exact figure, but I think it was 80%, 90% of that.
Okay, thank you. Just a question for Martin, if I could. If we take your announcement last month about increasing the size of the board and the focus on brands, how should we read them? It's quite a large board now, 13 members. Again, is that going to be unwieldy? How should we read the fact that Construction Equipment is only one member of that board? They've obviously been diluted as far as presence on the board. There's a lot more focus around trucks at the board level. Should we think of Construction Equipment, whether you've had a look at the business now, what is your perception and view of that going forward?
No, I think it was pretty clear when we announced the new executive board-level structure, that Volvo Construction Equipment and Martin Weissburg is taking a seat in the Executive Board. That is the second largest business if we compare the business areas. As we have said, the importance of that and the focus we are putting on that is obvious. You can always argue about 12 or 13, I think. We have senior executives that are driving their businesses. All of the 10 should actually qualify for Stockholm large cap, just to have a good view on it. Therefore, the important part of this is really to make clear what are the mandates, frameworks, and where do we have the meeting points where it matters in Product Board, in Service Board, in Quality Board, and then off you go and do your business, actually.
Don't complicate it more than necessary.
You mentioned metrics. One of the measures will be new metrics. What new metrics are you introducing for the brands?
Typically, clear responsibility of operating income, cash flow, delivery, precision, quality development, organic growth, service, portfolio development, part sales, et cetera. Everything that has with customer satisfaction and business to do.
Okay, thank you.
Thank you. The next question comes from the line of Fei Teng from Credit Suisse. Please go ahead. Your line is now open.
Hi, thanks for taking my questions. First one on the product mix in trucks. You said it was weak in Q4. I'm just wondering, was there a particular region driving this, and what can we expect going into next year, given that orders on Volvo look slightly better than the other brands?
The product mix is, as I said, it is more of a mathematical effect than anything else due to the fact that the relative shares of Volvo that usually have a stronger-
Latin America
gross margins are actually lower compared to the other ones. Of course, that comes from, as Martin has said, the fact that Latin America is coming down. It's a pure mathematical effect.
Since you have more or less the same brand structure in Latin America, that is how it is.
Okay. Second question on R&D. It looks like cash R&D went up quite materially from Q4 versus Q3. Can you give a bit more color on what's driving that and what can we expect for 2016?
Was it cash flow?
No, cash R&D.
Cash R&D. The cash R&D was actually, when it comes to R&D, when we left 2014, you can say the major part of the adjustments were actually done in R&D. The fact that we year-over-year now, when we come into end of 2015 should not be worse, actually. I'm a little bit disappointed there. That I can agree with. Should be on the same level, actually, when we leave the year. We have said that more or less when you talk about cash R&D, that we are on the levels that we would like to see going forward right now.
Of course.
Quarter over full year.
Yeah. I'm talking about full year then.
Yeah, because quarter-on-quarter will have also.
It's usually a bit lower when you come to the summertime and so on, and then it's usually a little bit higher at the end of the year and so on. If you take the whole year, it should be on a stable level for the group as a whole now.
It is slightly difficult to run a ship like this on quarterly basis. I can tell that on R&D level, it's even tougher, actually. I think it's more about what is our target on the CapEx level for cash R&D going forward on a yearly basis that is important. I think we are starting to see a level where we can be expected, around, what is it now, 5% or something.
My final question on the subject of the new corporate structure, and the increased accountability that you talked about. Can you just give some details on what basis management compensation will be structured for each of the divisional heads? Will it be determined by divisional targets for the truck overall, for the group overall?
What we have said basically is that we will run that on a pretty pragmatic level. We will have business review meetings on quarterly basis with a different, and we will roll that, so we will not have all the brands at the same time, then we will actually have a pulse when it comes to the brands or business area, specific areas. Then, of course, it's like running a normal business review on all different factors. That is actually input to the decision for us where it makes sense when it comes to different types of commonality or scale, may that be production or network development or competence development.
I think what we have said is that we are running the different operations on their own commercial profitability merits, then we're actually finding where do we need to meet when it comes to product portfolio or production or whatever it is.
Okay, thank you very much.
All right. We have reached the end. Thank you so much, Jan and Martin, and thank you all for listening in, and welcome back in April.