Welcome everyone to this press conference covering the third quarter of 2015. Today, we're going to run things a little differently. We're going to start with an introduction of our new President and CEO, Martin Lundstedt, followed by our financial presentation by our CFO, Jan Gurander. As you all know, this is a webcasted event, please use the microphones during the Q&A session. We will end this event with media one-on-ones as usually. Let me start by introducing AB Volvo's new President and CEO, Martin Lundstedt.
Thank you. First of all, also from my side, most welcome to this press conference and presentation on the quarter three that, of course, Jan will cover later on. After two days, it will be pretty tough to do that. First of all, I would like to say that it's really fantastic to be back again after six months of reflecting about different things, mainly, of course, the opportunities we have in Volvo, to be back in the industry and to meet a lot of known faces among the crowd here today. Of course, for me, as new President and CEO, it's a big challenge. I'm humble, motivated, and action-oriented for Volvo. I see also and have studied, and as you know, I know parts of Volvo. I've met Volvo in many different regions as a very professional competitor with all different brands.
As a group with a number of important assets going forward. New product line, network that is global coverage, different brands, an organization that is very professional during the whole value chain, actually 100,000 motivated people. That we also see now in the tough and challenging decisions that the Volvo Group has been taking. It's given results, and it's thanks to a motivated, of course, organization that we can continue to build on. For me, of course, now the second day, I will focus on hard work together with management and our people in the organization, also to meet customers in the different business areas. It's important to know, of course, for me, that I know some of the business areas pretty well, some of the geographies and some of the business areas I need really to come in too, together with the rest of the organization.
I look forward to that. That would be the main priority for the coming weeks and months to really see where we are, where we are going, and what we should continue to work on. Just to give a clear message, I think that Volvo has a great opportunity to continue to be even more customer-focused, really, in their different businesses. We can talk about a lot of different opportunities, at the end of the day, it's about serving our customers and their customers in different business areas. That is what building long-lasting value in all companies, that is what we are going to concentrate on. There we have the assets, we can succeed even better. Customer concentration in the value chain, there we have all the different opportunities to continue.
In that respect, again, I would like to take the opportunity to say to Jan, the whole management team, and to the Volvo organization, that it has been a very good momentum continue to build a strong Volvo, and you will see that also now when Jan is presenting the quarter three figures. It's great to be here and looking forward to have a continuous contact with you guys. Thank you very much. We jump immediately into the third quarter results. Let me see if I get this to work as well. Yeah, there we are. It's a little bit almost a copy-paste of what we have seen now for a couple of quarters in terms of how the company is developing.
As you can see here, we do have an improved profitability, and we talk about that we actually see fairly flat volumes, on a global basis when we talk about the trucks. Of course, we have regional differences quite a bit, actually, but we'll come back to that a little bit later. On the CE side, we actually see declining volumes, and despite that, we do improve our profitability also when we exclude effects from currencies. The underlying operating margin is starting to approach the 7%. We see an operating cash flow negative of SEK 3.3. You know that this is a seasonally weak quarter in terms of cash flow, and it's especially on the payable side that we see that.
We do in terms of news that we have had here, actually, just after the Q3 closing, we have then decided to go on with the outsourcing and sale our own infrastructure business and also the sales of our external business. We signed a letter of intent, and it's a very strong letter of intent as well with HCL. Going into the truck markets, starting with Europe, we can see here that we do have a good momentum in the European truck market for the time being. We are taking up our outlook for 2015 from 250,000 up to 265,000 trucks. When we look into next year, we think that Europe will continue to be having a fairly good momentum going forward. We do foresee a better truck market next year with 275,000 trucks.
When we look into our own order intake, Renault up 34% compared to the previous quarter last year. Renault has a fairly, you can say, easy comparison compared to last year. We had a fairly low order intake, that is the main reason. We do also see that the market, as we have said, we are continuing to build the brand with the new product for Renault. It has another position compared to what we had with the old product, and that is starting to yield results. We can also see that the performance for Renault is actually improving quite a bit year-over-year.
On the Volvo side, maybe a little bit surprising, -2%. What we see here is that we have to take into consideration that we do have slightly different patterns in terms of order intake compared to the usual season patterns that we see. We have to go back to 2013 with the introduction of the Euro VI, where we had extremely strong, as you know, order intake in connection with that. Beginning of 2014, low order intake for the first half of the year, coming back then at the latter part of the year. This is not the usual season pattern. That makes the figure for last year comparable, a little bit higher than what it should be, and that's the reason for that.
We do also actually see a little bit, the markets in Europe are, I would say, actually behaving very different from market to market as well. We see quite big moves in terms of market share in Europe. You can see that on a national basis, on a regional basis, a lot of things up and down. We can actually also see that we, in some segments, in some markets, towards some fleet customers and so on, quite a heavy competition, and actually price competition and so on from time to time, despite the fact that we have a strong underlying market. When we look into our own market shares, Volvo at a 16% market share. We were, last year, at 17%. 16% is a good historic level for Volvo. We are coming now up and establishing ourselves on a completely new level.
When we introduce a new truck, this is usually what you see then in the beginning. You get a high interest in the new product, and you get a slightly higher market share than what you have. It starts to normalize, and we are going to continue to build a presence and this new level of market share for Volvo going forward. We see Renault Trucks, as I said before, market share-wise on the same level as what we had last year. We are continuing to build as brand new on a slightly different position than what we had before, and that is working well. The customers are perceiving the truck as very good. It's showing the performance it should have, and it's gradually getting its merits into the market. Trucks North America.
We can say that North America, when we start with the macroeconomic view on North America, I think we see the same thing as many other people see. There's a solid growth also for next year, so we don't see any kind of other things in North America compared to what most, I would say, macroeconomic people see. In terms of this year, we know that it's going to be a good year. We still expect 310,000 trucks. We should remember that this is the second-best truck market in North America. Actually coming back after the tough years that we had in connection with the financial crisis. This also means now that we see that the fleet that was very old has been renewed, and we've come to a more normalized level when we look upon the average age of the truck fleet in North America.
We do see good momentum in the dealerships right now, good traffic in the dealers. What we see right now on the other hand is a slightly too high inventory situation in the dealer network. I think that is what we see reflecting in the order intake figures for both Volvo and Mack. Third quarter last year, when we started to go into the fleet buying season, you can see that on the graph. The comparable figures compared to this year starts to be quite difficult as well. I think you should remember that when you go into Q4 as well, that was an extremely good quarter order intake wise. That will definitely be difficult to beat this year, I can tell you.
We had a very good end of last year, which of course is the reason why we today see a 310,000 market as well. Next year, we anticipate a 280,000 truck market, which once again, that is a good market. It is actually the fourth best market that we have seen in North America. Once again, nothing dramatic, approximately 10% down, but maybe we can call it some kind of normalization for North America. We are keeping our market shares for Volvo, and when it comes to Mack, coming down a bit. This is due to the fact that Mack is focused very much on the oil and gas segments and construction segments, and they are the ones who are coming down right now, while Volvo is in the long haul, and there we are keeping our market share.
I think that's fairly easy to recognize why that is happening. South America, talking then about the region or market rather, I would say, because it's very much related to Brazil. The rest of the region is performing pretty okay, actually, but it's really about the Brazilian market coming down. As you can see here, that it's coming down approximately 50%. We foresee a 40,000 truck market this year, and we also foresee then the same level of market next year. Market share-wise, we are on a little bit lower compared to last year.
This is really about the segment mix where we keep our market shares in the heavy duty segment, we keep our market share in the medium heavy duty segment, the heavy duty is coming down totally and the medium heavy duty is kind of growing compared with that's why you see it's pure mathematical effect, but we keep our positions in the two segments. When it comes to Brazil next year, our best guess is the 40,000, as I said before. I think that also one should recognize that Brazil is most probably not going to come back into some kind of high growth or anything like that for, I would say, don't anticipate that for next coming two years at least, because Brazil has to go through quite a lot of things.
We don't see the boom in terms of raw material prices. Not only price, also the demand is actually coming down. That was very much what fueled the economy in Brazil. We also now know that they have some problems as well with debt, inflation, and all that kind of stuff. It goes a little bit, I wouldn't say go back to normal, but this is a little bit the same tendencies you saw in the late 90s and so on. Then, of course, on top of that, you have also the political difficulties as well. We don't anticipate any kind of quick rebound or anything like that in Brazil. At the same time, the other markets, as I said before, are healthy. We can also utilize the fact now that the Brazilian real is on a very low level.
With the production we have there in Brazil, we can utilize that for the export markets in Latin America, but also potentially for other markets as well. Asia Pacific, we see a stable level in Japan. We foresee the same level of sales this year as we had before and also for 2016. Stable market, no dramatic things there. We have the recovering demand in India. Of course, China, what we see there is that the truck market is coming down quite a bit. We foresee a little bit more than 700,000 trucks for this year, 720,000 trucks. Next year we anticipate the same level. The uncertainties in China is also spreading out into Southeast Asia, where we see that the demand is really not on the level that we saw one year ago.
It's, once again, uncertainties around, you can say the previous market that's helped us for many years is Brazil, Russia, China. That comes back as a theme, we would say, for all our business areas for the time being. While Europe and North America is the ones who are keeping up the demand for us right now and also the ones who are generating the profits for the group. Construction equipment. If you look upon the markets, and here it's a lot of figures, a lot of segments. But if you look upon the underlying markets development, you can say when it comes to North America and Europe, it's stable markets, it's actually slowly growing if you look upon the total markets. When we look into the Brazil, Russia, China, you can see China here is down 50% compared to one year ago.
China, the peak of that market was something like 410,000, 415,000 units in 2010 or 2011, something like that. We talk about approximately 100,000 this year. That's quite different compared to what we had before. When it comes to next year, we foresee, actually, slightly downward for the total year of next year as well, somewhere between down 10%-20% in China. When it comes to Europe and North America, we foresee more or less, you can say, flattish, ±5% for these two regions. Deliveries, down 25%, and that is then driven by these markets. Order intake-wise, we are down by 34%. You can say, "Why is it down so much when we have two big regions that are performing so well?" If you take Europe and take away Russia, we are, as you can see, up with approximately 8%.
North America, our order intake is down 25%. If you take out effect, you remember we have actually left two product lines that affects our order intake. We are also then seeing that we are not focusing so much on the smaller machines, but we are actually focusing on the big machines, where we also make much better margins as well. That's a very deliberate decision that we are taking, actually focusing on these machines. That means also, if we take away these two effects, you can see that, and look upon the large machine, we are more or less flat in terms of order intake compared to one year ago. We'll come back to that, which effect that has also on the income in Volvo CE. Then Asia down with 41%.
You can say the whole strategy that we are running right now with the focus on the heavy machines, you can see that also on the market share. Global-wise, we have taken approximately 2% market share on the heavy machines for Volvo CE. Buses, good delivery situation for the quarter. You can see the same pattern, North America, Europe performing well. Of course, the demand in Brazil hurting our bus business. We are, as we speak now, actually introducing on a more broader scale, the Volvo 7900 Electric. That's a pure electric bus in the bus fare in Belgium. We do also now introduce the Dynamic Steering, the ones that were introduced on the FH two years ago, also into our bus range as well. As a matter of fact, there it will be quite a big help for our customers.
You can imagine these big buses when the wind and so on. That's really a big step forward in terms of maneuverability and stability of the bus. Penta is kind of continuing on its journey, I would say. Of course, what we see there is once again, we had a fairly good market up until quite recently, actually, for Penta in China. Now we see that China is really stopping for CE as well. That's of course connected to gensets and industrial engines. Otherwise, product-wise, we come with new gasoline engines for pleasure boats. Then we have the forward drive as well. That's coming in as well. That's a little bit what's happening in the market and with the underlying business. Next time, Martin, you do that one? Absolutely. Good. Now we turn into the figures for the quarter.
We are then growing our revenues from SEK 67 billion up to SEK 73 billion. You can see here, this is the same picture, of course, Europe, North America, the ones who are adding on to our sales, South America down. The currency effect that we have is approximately SEK 5 billion. As I said before, we are fairly stable in terms of underlying volumes. On the truck side it's up with 3%, the currency effect, of course, explains most of the growth that we see in our sales figures. In terms of profitability then, we go from SEK 2.9 billion up to SEK 5.1 billion. Last year, we had the one-time effect. It was the provision that we put up for the IPA litigation of approximately SEK 420 million. That means that the underlying performance last year was SEK 3.3 billion.
Then you can see here that all business areas, I would say even CE, I will come back to that a little bit. If we add on the provision that we took now in the third quarter, if we add that one back, approximately SEK 300 million, CE's underlying performance is actually also positive here. You can see all business areas are actually giving a contribution to the improvement in profitability. In the quarter, we have approximately SEK 830 million in currency effect. Even if we take that one out, we do see an underlying performance improvement for the group. Looking into what explain the different items that explains the whole improvement, you can see that gross income is the biggest contributor. I will come back to the cost items, but the efficiency program is going according to plan and delivering as it should.
In the other here, we have the SEK 293 million in credit provisions for China. We do of course see with the strong markets that we have and the strong performance that we have in North America and also in Europe that is supporting this development on the gross income side. We do see then that we are a little bit higher now on R&D capitalization. It's the net, but it's mainly capitalization that has increased compared to one year ago. Then we have the currency support from SEK 831 million. We see then, I think we should remember that two big markets and two previously very important market for us, Brazil and China, that are on completely different levels and completely different margins compared to gross margins compared to what we had before. That's, of course, on the negative side.
Then we have the SEK 300 million in credit losses for China. If you look into trucks, we can see that we are up now rolling 12 months into SEK 213 billion in sales. We do have approximately SEK 15 billion in rolling 12 months. This is excluding the restructuring charges, but also excluding some one-off items like the sale of Eicher shares and also the sale of real estate. Then we have the operating margin, a little bit above 7% when we look upon the underlying performance. Here we have a currency effect in the quarter of SEK 381 million. We go from SEK 2.2 billion up until SEK 3.6 billion. That's actually improvement with more than 50%. We do have then, as I said, North America is affecting the truck side positively, both margins and also volumes.
We see the effects of our lowered operating expenses. We also see the volumes. It's mainly volumes in Europe rather than margins that we see the improvement when we measure quarter-over-quarter. We do have a strong aftermarket as well. That's developing very good for trucks if we compare quarter-over-quarter, and then the currency situation. Of course, compared to where we were one year ago in Brazil, the income is definitely negatively affected quarter-over-quarter from that one. CE has been kind of hovering around a little bit more than SEK 50 billion in rolling 12 months. We are SEK 12 billion in the quarter. Currency effect on sales is a little bit more than SEK 1 billion. When we look into the operating income, we are at a little bit less than SEK 600 million for this quarter.
In these graphs now that you can see here, the negative in the fourth quarter last year. It was a negative underlying performance, but here you also have the effect of the first provision that we took for China of SEK 660, and it's also the same on the margin here as well. The rolling 12 months margin, including all the hits that we have taken for China in the quarters are then 2.8%. A good solid 4.8%, including the SEK 300 million in loss that we had. That's compared to, I think it's quite a heavy level. Quite a heavy and healthy level. This is just, you can say, compared to last year, it was 5.1%. This is then despite the fact that the volumes are coming down so far.
I think the Volvo CE organization is doing a fantastic job now to work actually shifting the business model quite a bit. As I said before, taking out unprofitable product lines, adjusting into more profitable lines, focusing the sales on that. Of course, taking advantage of the currency situation as well, but also working quite a bit with, or very good, I would say, with OpEx as well. All these activities together is actually the reason why we see that despite this volume drop, that we keep more or less the same level of profitability that we had one year ago. Also here, absorbing the SEK 300 million in credit loss as well. I think that's a very good achievement that our friends are doing in Volvo CE. Now we are going into, this is the third quarter.
We have had the spring season, third quarter is a little bit of a normal quarter, and we come into the fourth quarter. I guess, for the ones who follow us very, very carefully, you know that the fourth quarter is season-wise the weakest quarter. Now that you have to bear in mind. Buses starting also to show a positive trend, and we are now up to SEK 337 million in profitability. It is very much related to the product mix. It's a lot of good buses, fully built buses with good margins that we have in sales in this quarter. You know that order intake-wise, but that's also, of course, sales-wise, that you have quite big swings in terms of when big customer puts order in place. If they are good margin buses or low margin trucks.
It is a little bit volatile, both in order intake, but can also be in terms of when we come to deliveries as well. This is a good quarter, but I think it's important to notice the trend that buses are in actually, and that I think is good. This is maybe the business area that we've been waiting for a little bit to show trend, and I both hope and think that that's what we start to see now. I would say that Penta is not much to argue about. It's SEK 360 million for this quarter, and they are above SEK 1 billion in terms of rolling 12 months figures. Continue to perform consistently on a very good level.
Customer finance is also continuing its journey with, as you can see here, new financing, a little bit lower compared to what we had in 2013, sorry, 2014, but still on a very good level. We keep our penetration levels as they should be. The operating income is above SEK 500 million, very close to the SEK 2 billion mark. I hope that Scott Rafkin can provide us with the SEK 2 billion for the whole year. That would, I think, be a new record for us, actually. The return on equity is on the levels where we would like them to be, actually. Strong continued performance also here. The only thing that we are checking, of course, it goes about Brazil.
That's where we have all the focus for it, not all the focus, but in terms of credits, of course, a high focus on that one to secure that we are on top of the situation there. We do see an increase in delinquencies, but it's not so that we see any kind of extremely worrying signs so far. Of course, with the market going as it is right now, it is one of the focus areas for customer finance. Cash flow, as I said before, being a negative with SEK 3.3, we were positive last year. The payable effect that we have usually in the third quarter is coming this third quarter as well. If anything, it was in the third quarter last year that it was a little bit lower effect from the payables than what we had this year.
I would say that this is more of a normal Q3, we will come in then, of course, with the normal season variations in Q4 as well, which means that the payable situation will normalize itself. As you know, usually the-- or I think all years, more or less, the Q4 is a very good cash flow quarter for the Volvo Group. We are now in the net debt equity ratio that's below 20% as well, I think also then on a positive note is, I think both the rating agencies now have taken us away from the negative outlook as well. Balance sheet and cash flow is going according to the trends that we would like to see. When it comes to cost reductions, we see then that we are having these currency effects on the cost levels when we compare to last year.
The underlying performance is there. If we take out and we measure quarter-over-quarter, we had another SEK 360 million in reductions compared to one year ago. If you look into the SEK 10 billion program, the efficiency program, we are now up to SEK 6.2 billion. We are then implementing IT, which will actually then, beginning of third quarter, actually go into place. The LOI is set, beginning of the second quarter. We are then also finalizing the restructuring that we do in the sales organization. CE is still doing a few things, we have had during the second quarter, a little bit in the third quarter, also some restructurings in our production organization as well. If you look upon it now, delivering SEK 3 billion-SEK 3.5 billion in 2014, it looks as though it will be on a similar level for this year.
Of course, we have what is going to kick in financial-wise. Things being implemented right now, at year-end or beginning of next year, is also what we need, another SEK 3 billion-SEK 3.5 billion. Talking about the SEK 10 billion, I know that they are there because I follow it every day, but they are definitely, as you can see, within reach if you look upon the financial figures as well. I think that's continued to develop in the way it should do. To summarize the whole thing, and this is more or less the same summary slide as we have had also for the last couple of quarters. We see that the underlying performance of the company is improving. It is still, and we are not through yet. We are still having an extreme focus on delivering on the restructuring things that we are working on.
Sales organization, IT, also the things that we are doing within manufacturing, and then, of course, what the work that we are doing within CE as well. By that, I stop.
Thank you so much, Jan. Let's open up for questions.
Morning, Jan. It's Frederick from UBS. Could I ask you on the U.S. side, how much flexibility do you have in the U.S. cost base? Let's say if the truck demand is down, not 10%, but if it's down 20%, 25%, is that something you can manage without too much disruption to your full-time employees and your fixed cost base? Secondly, I wanted to ask about Brazil and Brazilian trucks. Can you lift profitability there by managing your costs, or are you in the hands of the market there, so to speak? Thank you.
Brazil right now, or if you look upon the Latin American situation as a whole, is actually not that bad. We have, as I said before, utilizing the Brazilian situation on the production side, the product cost becomes fairly low, actually. We have actually very good export sales out of Brazil into the surrounding Latin American markets. That's, of course, tactically something that we're evaluating if we can do for other markets as well, which we have done actually before when the market's been low in Brazil. It depends a little bit what you mean by that. We can utilize the production system, Latin American system, and that actually looks okay or okay-ish, I would say. The Brazilian market, of course, is coming down quite a bit. The production is actually utilized for other markets at the same time.
Financial-wise, I wouldn't say it's good, but it's okay-ish. Cost-wise, as we said before, we have adapted or we are right now actually taking out the second shift. That decision was in, was it April, May this year? It takes six months before it can be effectuated. That comes out now here. Of course, when you have these downturns, you always adjust, you look into the fixed or the overhead cost base and all these kind of things. As it looks right now with the situation with the currency and so on, I think we're doing pretty fine, actually. When it comes to North America to manage a potential downturn, now you're speculating about much bigger figures than I do. We say that if you think it will go down with approximately 10%, that is absolutely possible to do.
I think there are measures also to take if the situation becomes worse as well.
Jan Enarsson, Danske Bank. A follow-up on Brazil. As you mentioned, you have taken out or you are taking out the second shift there. You have those costs basically now in Q3 and also for Q4?
For the major part of Q4. To make it simple, say Q4 also.
Yes, are there further alignments that you can do or do you see that's needed?
What we're working right now is to align especially on the overhead side. That's what we're working on. Of course we work with the ordinary things like stock days and so on. If we need to see that we come on a much lower level, because we are adjusting inventory and so on right now as well. That's also why we're working with stock days. When the inventory situation stabilizes, we'll see what we need to do then, if we need to do something. When you have these downturns and before the whole value chain and pipeline is kind of working through, you have to be a little bit wait and see what you need to do. If necessary, we'll do more.
On North America, are there anything in particular we should think about your development versus the market?
I think what you see here is that, I guess the ultimate outcome in a way or one of the parameters you look upon is the market shares. If you look upon Volvo, we are keeping the market share. I think we are well aligned with the market. When we try to evaluate what we can look forward in terms of our order intake where the market is, I'm pretty convinced that we will keep that one. Mack, you have to just understand that this is a segment shift that we see that affects the negative. I think we keep our positions there in a good way, I think you shouldn't be worried about that.
Good.
Christian Malmgren from DNB. Four questions. Firstly, just to follow up on the U.S. question, cancellations in Q2, did that roll over into Q3? Secondly-
I have to start to write down.
Exactly. Hopefully one of them is good. In China, you had credit provisions in the third quarter that accelerated from Q2, Q1. How should we look upon that going forward? You have still quite a big chunk of contingent liabilities there. Thirdly, cash R&D and net amortization. You have minus SEK 800 million, roughly, net amortization this far in 2015. How should we see that going into 2016? Also cash R&D development for 2016. Finally, after market growth, can you talk about that by region? Thanks.
Okay. Cancellations. I think as I said, when we left the fourth quarter last year and we had this huge order intake, I think already in the first quarter, let's see now that we really challenge our order book because we are seeing what's happening in the past. Especially on the Mack side, that's why you saw, you can say, the disappointment in Q2 on the Mack side. We actually took quite a few cancellations in Q2. That have continued, but at a much lower level for us in Q3, but they are still there. A better situation for us. I think maybe we acted maybe a little bit quicker, from our point of view, we acted when we should act, actually.
The China credit provisions. Maybe in a way, if you look upon what happened during the summertime with all the turbulence in the financial markets, and really not an economy that is growing. We also come now into the, you can say, the weak season for China or CE. China is the same globally. I don't think it's maybe not so much of a surprise that we see a little bit higher levels or, you can say, almost double the levels that we saw in Q1 and Q2. It is extremely difficult to judge quarter by quarter how much. You can say we still provide, and of course we do that on the judgment when we see how the portfolio is developing in terms of delinquencies and how our dealers are performing.
That's why it's difficult to say that it will be so much and so much going forward. I think there will be further provisions going forward, but I don't dare to speculate on what level it will be. I think it's understandable it became a little bit higher now given the kind of macro situation in China, but also how CE or the construction equipment market in China is developing as well. Cash R&D, we have said before when we left 2013, we had a high level of R&D that we are working with to normalize.
We said when we left 2014 that we were on, you can say, on a run rate that we were kind of thought that we could live with, and we thought that was reasonable, not only from a financial point of view, but also to be able, of course, to deliver the coming products that we will have in pipeline. I think when you're going forward, we have the ambition to keep it on the level that we see right now. The effects of amortization and capitalization. Amortization-wise, I think we are gradually coming a little bit lower on amortizations. At the same time now we see, and that's what you see on the capitalization side, that goes up a little bit.
Of course, after the introduction of the FH and the new Renault and a few other products as well, we were kind of done with the capitalization. That was kind of struck back on us from an accounting point of view. That is, of course, now we come because we haven't stopped developing trucks either. There will come new things going forward. Of course, more and more of the products goes into capitalization phase again. I prefer not to. I understand that you need that, but cash R&D, it was counts end of the day what IFRS and all these accountants force us to do. I think that's another thing, but I focus all the time on cash R&D. Then we were on our, sorry, the aftermarkets as well.
I think we, let's see here, on the truck side, I think it is a fairly healthy development, I would say, in most regions, if not all regions, maybe a little bit with the exception of Latin America right now. That's not so difficult to, given the markets that we see for the time being, actually pretty low utilizations, utilization of the fleets as well. That's why we see that coming down. Otherwise, I think that what you see in North America, we talked about that before. Our business in North America is healthier than it's ever been. That's also due to the fact, with the captive engines, captive drivelines, and of course the increased. That effect has only started because the rolling fleet still, we still have, I would say, the major part of the rolling fleet is actually still with non-Volvo engines, as one example.
Of course, the more we sell of that one, the rolling fleet with an installed base of transmissions and drivers, so that's still on an upgoing trend. Europe is, of course, with the good markets, we see that also for transport companies and everything, they consume spare parts definitely. I think it's with the exception of Latin America, I think it's going well. That was the four.
Hampus Engellau, Handelsbanken. I have three questions. Starting off with the first question. I guess now we are in the big fleet season in the U.S., October, November. Could you maybe talk a little bit about the activity and, I know comps are tough compared to last year, but it would be interesting to get a feeling for how high activity is. Second quarter is on buses, a significant improvement in margin during the quarter, and you highlight mix. Could you maybe discuss more detail on the mix, and is that something we should continue to see going forward? The last question is on the remaining cost for the restructuring program. Will that be all ending in fourth quarter or will there be some cost also in first quarter? Thanks.
You're correct, we are in the fleet season. I think the activities that we see in the fleet buying season supports our view on the 280,000 truck market. I think that's the simple explanation. I said before, we do see a good traffic in our dealers and so on. That activity is on a good level. I think it works pretty well. Inventory level is too high, that needs to be, I think that's what you see on the order intake side. As I said, it supports the 280,000 truck market, definitely. The buses, I think that's what I tried to say. The trend for buses is on its right way. You should, I don't think we can rule out that we will see a certain volatility going forward.
Having said that's not due to the fact that the underlying performance is not there. That I think we start to see really that that is coming now trend-wise. As I said before, if you have a quarter when you sell this rich product mix, then you get a very good margin. We can have, and I don't know, we can have the next quarter being with a weak product mix. I think you have to more rely upon that we are on a positive trend. The volatility in the earnings quarter by quarter, that one I don't dare to say that is over yet. We had the What was the fourth one? The third one. The restructure cost. We aim, actually, for being ready with the program, if possible, this year.
In a way, going forward, I personally don't like to work with restructuring programs and have these restructuring costs and these kind of things. The whole idea with the program, that it should be finalized at year-end. That means going forward, we should start to work in a more, you can say, the normal way with not having restructures. That's what we are aiming for, unless something else happens. That's also why the program is implementation-wise ready at the year-end. We'll see where we stand then, we will continue to run it in a more normal basis. It fits very well also in the phase that we want to go into the company right now. With all these transformations, all these changes that you've been following now for three, four years, closing factories, doing this, taking out people here and there and everything.
We want to come into a phase where we work much more with what Michael Bratt described, and I think he did it when we met in Ghent, continuous improvement. It's not only on his side, it is actually all the way through the value chain. We have so many things that we can improve all the way, I think, Martin, you mentioned it before as well, from the sales side, all the way through the value chain into production, logistics, R&D, and purchasing. We're having such a potential in that one, and that is where we should put the focus right now. You will see a continued underlying, continued trend in improved performance. Running that, at the same time, having this kind of big restructuring program is not good. We are gradually entering into a new phase.
That's also why we need to leave this SEK 10 billion when it's done. It's not done yet, but when it's done, we leave that one, and we go into another phase. That's what we are striving for now for the next coming quarters.
Hi, Anders Frick from SEB. I'll take them one by one. You obviously are going through your balance sheet in detail to see what you can sell. Looking at you have sold the Eicher shares, you have sold some real estate, you are selling part of IT, you might be selling Arrow. How far have you come in your scrutiny of the balance sheet? Is it any more assets to be able to sell?
I get a lot of hints also every day in the newspaper as well.
Yeah, exactly.
In case I didn't know my balance sheet myself, I get very good support there. No, as I said, I don't want to speculate in what we do and what we don't do. If anyone else has some suggestions, I'm more than happy to take them. I think I have a pretty good control over the balance sheet, actually. Also, of course, we are evaluating all the time what we think what we should keep and what we should not, what is core and not core. That is ongoing. If we do things, we will disclose them in orderly fashion, as one should do.
All right. You're saying that you think you're keeping your positions in the U.S., I guess that's right, at least within your segments. Looking at orders, I think you must have underperformed quite a lot in this quarter compared to the market. I think you were down 40%. I'm not sure exactly, but I think the market was down like 25-ish or so. You have any comment on that?
I think we are, yes, a little bit lower. When we look into it, then you can look at other statistics, maybe you don't have all of them yourself. When we try to judge also then talking about the market share and where we think we'll be one to three quarters from now, I think we are quite comfortable that we will keep our position, actually.
All right.
Maybe also looking into the cancellations and so on, maybe we started that process a little bit earlier than what we see maybe the rest of the market is doing right now as well. I think, let's wait and see. That's not one of the things that I am sleepless over, if I put it that way.
Finally, also, you mentioned Michael Bratt and the continuous improvement, moving over to that in, well, next year, I guess. I think if I correctly informed, Michael is talking about continuous improvement, giving 5% productivity per year as target, which I think is the same as Scania's had for many years, and more or less achieved as an average over the years. In your experience, is Volvo set up now with the changes that happened in the production footprint and logistical footprint, et cetera? Is the set up good enough to be able to deliver 5% productivity improvement per year?
Absolutely. I think you put it very well. You can say the whole thing that we have done with our industries set up, including logistics and so on, you can say that has created the foundation to be able to deliver on that one. From my point of view, there might be a few things that you still can do when it comes to the real infrastructure, so to say. I think mindset-wise now, we need to change, because from my experience, yes, the footprint in itself means some things. Now I think we need to change mindset and say now we will start to work with, or we have worked with it, but we've put focus on the continuous improvement or lean manufacture. We have a Volvo Production System and so on.
That in itself now, with the structure that we have, can definitely yield quite a lot of effect, actually. That's where it should come from.
Thank you. Erik Holmberg, Nordea. Three questions. The first one on the mix changes in construction equipment. You put much more focus on the market share on large machine now, which is the difference versus history, where it's been a lot about being number one in China, a position you wanted to held overall. Is that a material change in direction there in the strategy?
I would say that China is a little bit what it is as a market, we managed that downturn. We still have a position in China. We have a good position still. That we haven't lost. It's only that the market is kind of 25% of what it was some three, four, five years ago. Maybe the focus on heavy machines, you should put more into relation to how we work with our product portfolio. If we look into our product portfolio, we do definitely have products that are yielding very good margins and results, and that's, of course, traditionally big machines.
As always in a company, maybe especially in a company that's been acquiring a lot of other companies, you have a tail of, you can say, products or businesses that are not providing that kind of support or actually are even losing money. You can say that we are now taking care of that tail, and that's the two examples that you saw on CE side. Now we, of course, you can say on the smaller machines, we don't make that good money either. We have less of a focus on these, and we focus on the big ones. It is really a product mix shift that we are doing, and we do it very deliberately as well. That's what you see coming through in our results as well. It's more that you should focus on that.
What China is, China is a little bit what it is. We will keep our position. When the market comes back, we will be there. We have a strong position there with both the Volvo brand and the SDLG brand. We do the same thing, by the way, also on the truck side, that's maybe not so visible, that we also go out and cut away the small branches that we have on our tree that is actually not profit making. You can talk about everything from components to variants. There's a lot of things that we can do, and that's also going forward. Instead of having these big, kind of 10, 15, five billion programs efficiency that we need to get into more, we are doing it today, we need to put more focus on that one.
That can actually take us to another level of profitability compared to what we are today. We start to see we move into a new period, or a little bit in the company compared to the restructures that we have done the last couple of years.
Thank you. Second question, also on China, but on Dongfeng. There is a SEK 75 million negative contribution from associates, I think, in the P&L. Is that primarily related to the contribution from the Chinese joint venture?
Yeah, we do have, as you know, including these joint ventures, we have Dongfeng, we have our joint venture on the bus side, Sunwin as well, and we do Haisha . That is where you find it. Of course, with the market coming down as it is doing right now in China, we talk about the truck market being down 30%-35%. I can tell you what the management in the DFCV is doing right now. They do the same as what we are doing in Brazil for the time being. That is adjusting DFCV to take care of this basically lower demand that we see. That is ongoing.
Last question on the Volvo truck order intake in Europe. You talked about the comparison base there and a bit different seasonality last few years. You also said that there were pretty fierce price competition in certain regions. Is that partially a reflection of the weakness in Volvo, that perhaps stepping away a bit from some of the tougher orders?
Yeah. Did I say fierce? I said certain segments and so on. We see it's tougher. No, but we can see, and I think it is actually pretty unusual to see that there is quite the volatility in market shares in some markets in Europe. Some are fairly stable. It's actually nothing that you see very often. We can see that, as I said before, in certain segments, maybe in certain markets, maybe in connection with certain fleet, is that's quite aggressive, actually. We have taken a stand. We have a fantastic product program for the time being, and we basically don't want to go into everything of that. Deliberately rather focus on keeping up the good margins, building this presence with a strong new product that we have on this level.
Gradually, of course, we're interested in increasing market share, but building that on a solid foundation instead of going in and making, I was about to say stupid, but less attractive transaction, if I put it that way.
Thank you.
Anyone else? Let's move over to those of you participating over the phone.
Our first question comes from the line of Klas Bergelind from Citigroup. Please go ahead.
Yes. Hi, Martin, Jan, and Christer. It's Klas from Citi. Most of my questions have been asked, maybe a few more. Firstly, starting off with the 2016 guidance. You're guiding for 4% increase in Europe. Obviously, a tough compare of 16% growth expected for this year. I still would like an update here. We still have replacement need of the old peak volumes. Your customers are facing lower fuel costs. I appreciate that this is early when we look at 2016, but it feels a tad conservative. If you could elaborate a little bit on your thinking setting that forecast.
Yeah. I think there are, as you correctly said, there are quite a few factors that are actually there to support a good market next year. It's everything from low interest rates, lower fuel prices. You have actually in some markets in Europe, a pretty old fleet as well that supports it. You have pretty good transport demand and so on. I think I've said for the last I think a year or something like that, underlying fundamental for the truck business is actually pretty good. We have all these kind of uncertainty surrounding us. We have had Greece, we have had the Ukraine situation. We have, of course, the migrants. I think end of the day, when you invest in trucks, you are investing in a couple of goods.
If you are a little bit uncertain, and you don't feel very good, once again, you keep the truck a little bit later. I agree with your picture that, if anything, the underlying pressure is upwards. I think our take for the time being on Europe is. Of course, one can speculate, we haven't seen any effect yet from, you can say, what is happening in China and so on in Europe. That is also, of course, a little bit of a question mark. Will that spread to Europe? I think you have on the one side, fundamentally, definitely pressure upwards. You have, you can say the geopolitical or macroeconomic factors that are kind of maybe a little bit stopping the real positive sentiment to come through.
If we balance all this together, our own view is that, for the time being, that is a 275,000 truck market.
Okay. My second question is on trucks and the mix and the margin here. I would like to understand this a little bit better. We still have solid deliveries in both Europe and North America. These are big regions, high margins. Latin America is already down a lot. It's a small part of trucks. We also have more savings quarter-on-quarter. I get the seasonality, but I still expected a little bit more progression on the margin. How much was the impact from Brazil? Going into the first half next year when we have most of the cost program redundancy plans in place, how much can that drive?
No, I don't think one should in any way underestimate the effect that Brazil has on us in a negative way, actually. Actually, I'm coming from the other side, actually. I'm almost a little bit impressed that we managed to actually offset Brazil with the good margin and volume improvement that we see in North America, but also then the volume improvement that we see in Europe and actually keeping our margin. I maybe come from the other point saying that I think it's pretty okay, actually, to be able to offset Brazil.
It is indeed a good margin. I'm just curious about the impact of Brazil, but maybe that's tricky.
Yeah. Maybe I don't want to talk about it either.
Thank you.
Our next question comes from the line of Alistair Leslie at Societe Generale. Please go ahead.
Yeah. Hi, good morning. Just following on from the last question from Klas on Europe, I was wondering whether you could, which markets you are perhaps most bullish on presently in Europe heading into next year? Maybe also if you could call out what the negative impact from Russia was on European orders in the quarter. Finally, just for Renault, you said you're starting to rebuild the brand there. Where are you getting traction? Is that just in the heartlands of France and Southern Europe? Or are you starting to see a benefit from leveraging that Volvo service and distribution network in Central and Eastern Europe?
Okay. I mean, you can look a little bit yourself on where you see the fluctuations in market shares and so on in Europe. I wouldn't point at any specific, for the time being, market or segment or anything like that. It's a little bit difficult to analyze and see that there is a pattern in this. What we see definitely in some areas is definitely an increased competition. As I said, we rather, and you can see that we keep a focus on our margins on Volvo Trucks and also on Renault Trucks in Europe, and that is the prime focus we have. That might be one of the reasons why we are coming back a little bit in market share. I'm not overly worried about that situation. I did not follow your question.
I didn't hear exactly what you were asking about Renault, actually.
Oh, sorry, just to repeat, on Renault, you obviously highlighted at the beginning of the call that you were rebuilding. You were obviously getting some traction after rebuilding the brand and the new product launches. I was just wondering whether, when you say you're getting traction there, is that just in France and some of the core markets, or actually are you starting to see some benefits from leveraging Volvo's distribution network in Eastern Europe, thanks.
I would say it's mainly coming from the, you can say the bigger markets, you could say the core markets for Renault, France, Southern Europe, and the U.K., because that's the big markets. That's really when we also can clearer get a feedback and so from our customers. That's where we start to see the traction. Of course, some of these markets are also growing a little bit more than the rest of Europe, so that also helps and support the Renault. I think generally speaking, we are getting there with the Renault. As you know, when we launched the Renault, fantastic truck, but at the same time, a completely new structure and the Euro VI as well to compensate for that on pricing and actually put it in a new position. I think that's what we are working on still.
End of the day, it's also so that the customers on Renault, they need to see the proof on the residual values, on the used truck values for Renault as well. The old truck didn't have a very good secondhand value. They want to see that coming through. The only way they can see it coming through is actually when they have owned it for three years. We are waiting for that one. That's also why it's so important now to stick to this brand, this fantastic product, and do not get nervous at what many people might be tempted to do, go out and lower the prices. That would be the absolutely wrong thing to do. You can destroy that once again if you do that.
When we see now this positive trend is building up and the acceptance is there for our customer, we just need to hold on to that one. If the market share is 7.8% or 9%, I do not care so much, to be quite honest. As long as we have right now, with the volumes that we see, we do have a good absorption. We do get a good fixed cost coverage. The factories in France are running on a good level. That's in a way, we just have to continue to build that presence with the new Renault truck. It is proving itself in the market for the time being.
Great. Sorry, just one final clarification. Can you just highlight what the European orders would have been ex-Russia? Was that material?
I think it's not that big, the effect. I think it may be a couple of percent on that. Maybe you can come back to Christian on that one later on.
Sure. Okay. Thanks very much.
As a reminder, ladies and gentlemen, if you do wish to ask an audio question, please press 01 on your telephone keypad. Our next question comes from the line of Graham Phillips at Jefferies. Please go ahead.
Good morning. Am I allowed to ask a question of Martin Lundstedt?
Sure.
Yeah, sorry. I wasn't quite sure on the phone. Okay. You spoke quite eloquently about needing to meet more customers, needing to be more customer-focused on servicing. If you look at Scania, I think about 25% of revenues are coming from service and aftermarket, and I think it's lower at Volvo, about 15%. What are the sort of the main reasons for that difference, and is that something that can be addressed with the Volvo mix that it is?
Therefore, of course, those are one of the main issues for me and together with the team to look into and to have a good idea. I'm sure also when you look into the type of operation that Volvo Group, but also the different brands are standing for, there is and will continue to be a big potential in services since the whole sector of logistics is moving into more life cycle commitment, and thereby also that you need to provide different type of services, everything from uptime or NAM contracts, financing, insurance.
There is a big untapped potential for the whole industry and of course, for the Volvo Group. I'm looking forward to work with the team on that side.
Okay, thanks. Perhaps also related to that and maybe Jan can better answer, in terms of the growth in the aftermarket and service, which you touched on in the profit bridge there for trucks. Clearly, yes, it's helping with what's happening in the U.S. You also touched that it was increasing in Europe. How significantly different is the aftermarket contribution in the European business compared to the U.S., and what is driving the European aftermarket for you to mention it as a growth area?
Europe is driven very much about the high utilization of the older fleets, actually. That's more of a I don't think you see any significant changes in penetration or something like that. It's more driven by the utilization of the fleets. North America is, of course, and that I think a little bit what Martin mentioned before, you do have, to take the average for Volvo and for the Volvo Group and compare that to another competitor more focused into one area makes it difficult because the aftermarket in U.S., given the fact that it's not so much integrated trucks yet. We are now coming into that. That means, of course, that the aftermarket is not as good in North America as it is in Europe.
We are building that one now, and I think that's what we have to bear in mind now with about 90% penetration on our own engines into our trucks in North America and actually above 80% on the driveline. That changes the whole game in North America into a more, you can say, European-like market. That's actually the bet or what we have hoped for in the Volvo Group now since 15 years back, and now eventually it's there actually. The full potential there is not there yet because the rolling fleet still consists of a lot of trucks that do have non-captive engines.
That's going to improve into 2016, really, because those vehicles will be coming back into service in the U.S. more often now.
Absolutely. Of course, with this penetration, all trucks leaving the truck fleet that is not going to be in service anymore with other manufacturer's engines, and we replace them with the new trucks all the time that has Volvo engines and Volvo transmissions. The install base that you service is changing, and that will continue for another, I would guess, at least five years. We are in the middle of this process right now.
Just finally, on the drop in new financing in financial services, is that because of the share between U.S. and Europe, or what's the dynamics going on there? I know you had been targeting to increase your share of vehicle serviced.
You can say it is still, penetration-wise, on the same level. You probably have a few mix effects, but I would guess they are more related to Latin America, where we are, of course, dropping. You do also see very little new financing also in China, I would say. I think it's more that. I would say that we keep our penetration rates both in North America and also in Europe. There are no dramatic moves. I think it's only due to, you can say, market mix or regional shifts that we see in mix.
We will need to move on to our next caller. Thank you so much. Can we have our last caller, please?
The next question comes from Ashik Musaddi from Goldman Sachs. Please go ahead.
Hi. Thanks for taking my question. I'm just trying to get some comfort around the truck margins in 2016, so maybe addressing the three key regions. In North America, with your new guidance, with the market decline, do you think you can still keep the margins at similar levels because of the improvement in aftermarket? In Europe, based on the orders, is there a negative mix impact next year? Because you'll probably have more growth in Renault than Volvo, and historically the Renault brands probably had lower margins than Volvo. Just lastly on Latin, have you been able to pass through some more pricing to offset the currency?
Was the last question related to Latin America or?
Yes, Latin America.
Okay. Yeah. I think when it comes to margins, let me talk about Brazil then, because the margins in the rest of the regions is actually good for the time being. Brazil, of course, we see both volumes coming down, and we do also see actually margins coming together as well. Pricing is tough. When you have a market that's kind of being halved, then the competition is definitely there. It's a tough environment in Brazil, both in terms of volumes and price. I do not know actually if one should expect any kind of mix change in Europe between Volvo and Renault. I don't think I would even like to speculate on that one, actually. What was your first question? Sorry.
In North America, into 2016 with the market decline, would you be able to offset that by the improved aftermarket business?
The aftermarket business will actually continue to support us next year in North America. I'm pretty convinced that with the market that we see coming down with 10%, I think we can manage that in a good way also and continue to have healthy margins in North America as well.
Cool. Thank you.
Thank you.
All right. Thank you, Jan, Martin, and to all of you coming today, and we hope to see you in another three months. Thanks.