Ladies and gentlemen, welcome to the Volvo Report on the 1st 9 months 2012. Today, I'm pleased to present Olof Parson, CEO. For the first part of this call, all participants will be in listen only mode and afterwards, there will be a question and answer session. Olof, please begin.
Thank you very much and welcome all to this Olof Group Third Quarter Conference call. There is a presentation on the web and I will guide you through by telling the page number I'm talking to. So please follow me to page number 2. And I think that the heading of this slide pretty much summarize the three dimensions that we have seen in this quarter: the slowing demand, the one offs and the under absorption. And as we have communicated earlier, we did see a one off coming on the unit trucks and the restructuring of the unit trucks.
And we also have then had a warranty and an increase in the warranty provision that totaled the one off to €1,000,000,000 The slide shows also then that we are now running on a €318,000,000,000 12 months revenue. And if you do exclude the one offs in Q3, we have a €25,000,000,000 12 months rolling operating income. Then please move to slide 3, where we as usual I will come back to Trucks and CE. Just a few words on buses Penta, Air and Financial Services. I think buses is continuing to struggle on a very, very difficult market around the globe.
We do see a continuation of a combination of low demand and high capacity on the European market and particularly the city bus market, a lower than normal activity on the American market and Brazilian and South American market, particularly Brazil, who is still suffering from the switchover between EUR 3 EUR 5 on the bus side. In Asia, we do see a still a good level of buses. And as we have communicated, we have decided to in the European bus market and our production to concentrate that into our facility in Poland. And that is a decision in principle and negotiations with unions are ongoing on that one. When it comes to Penta, I would say that the volumes and the market situation is still very tough.
You do have a marine market that is perhaps at the best bottoming out in the U. S. Is still very tough in Europe. And also on the industrial engine side, we have seen tough market conditions around the globe during the quarter. But still I must say that posting 8.5% profit in a business environment like this is something that shows that Penta is working very hard on its cost control and flexibility.
Last time, we're going to see aero and coming in, in the quarter with a good result of 14.3 percent, SEK 1,600,000,000 and we of course wish Volver all the best in its future now within the GKN family. A few words on the Financial Services. In general, a good quarter, EUR 11,000,000,000 new financing leading up to a 27 percent penetration, which is within the frame. I think it's healthy between the 25% 30%. We do see that the delinquencies and losses are low.
The stability and the quality of our customer financing has proven healthy during the quarter. We are also now having a good profitability with SEK 383,000,000 in the quarter. And of course, then looking at return on equity on a 12 month rolling almost 11% and moving upwards towards VFS long term target of between 12% 15%. Moving into page number 4, just quickly. I think the trends if you look on our regional distribution is basically the same as we have seen in the previous quarters where Western Europe is down with 12%, Eastern Europe basically flat North America up and then you have South America and Asia trailing downwards.
Confirming the picture now, we can see that the upturn in North America is not offsetting the downturns in the other markets, which means that we do have a decline quarter over quarter with 6% in our revenues. Also interesting to note that our split region wise now is 52% in North America and Western Europe. And we do have still of course major operations and activities Asia still around the 22 percent South America 10% and also Eastern Europe around 7%. I will come back with the more detail on Truck N C. But before that, I would like to hand over to Anders, who then would go through the cash flow and the balance sheet a little bit.
Very good. Thank you. Let me start a little bit about the cash flow then on the left hand chart on page number 5. As you can see there, we are recording a negative cash flow for the quarter of a little bit more than SEK 7,000,000,000 And of course, the main reason for this is in the headline. It's the production cutbacks that are affecting our payables negatively.
Even though quarter 3 is not seasonally a very good quarter, course, this is the major impact that we see really from the payables here. Then on the right hand chart, we see on the investment schedule that we have a quite ambitious one. And the split up as we see here is really from the bottom. On the leasing side, primarily then Volvo rents, a very important distribution channel for us where we have invested in new fleets. And this is more or less coming to a peak now in this quarter.
And now we have renewed fleet in this activity and this distribution channel. Then of course on the tangible side, we have invested in primarily in growth markets like in Asia and Russia on our factories and the new tooling side. Whereas on the intangible side, we see an increased capitalization of R and D like on the Euro 6 NG and 10 technique. Flipping then to Page number 6 on the capital efficiency side. You see on the left hand side, our CCC days and the affecting elements there and keeping a very close watch then on the inventory.
Now our inventory is flat in absolute terms, but we are showing then a slight up trend in relation to sales. And of course, this is something that we are addressing and that we really keep a very close eye on. And again on the CCC days uptrend into 28 from an historical point of view is still a very good number. But there again, we have to close keep a very close watch on this. Finally then on the right hand graph, we see on our ROC down from the peaking 28%, but still yielding a very good 23% on our investments.
Okay. Thank you, Anders. And then moving on to page 7 and I would like then to spend a little bit more time in discussing with you the trucks and then also the Volvo CE. On page 7, you can see the trend lines in sales and the bridges. And basically what you can see here is, of course, the same region of distribution as we have had for the group in total with the ups and the downs in the different margins markets, sorry.
And then looking at the operating income then showing a SEK 2,800,000,000 or SEK 6,200,000,000 if you exclude the one off costs basically trailing on a decent level in profitability on in the underlying business. But of course, the quarter 3 and I would like you to follow me in to page number 8 and there looking at the trends in Q3. And we can clearly see that we did have a declining demand in the different markets. And what happened during the quarter was actually that September which is normally a growth month where we start to see the orders coming in, in order down to fill up the production for the autumn didn't come in. I would say that this uncertainty that we have said in Europe spreading from southern part of U.
S. Via France then also went into the rest of Europe. We also saw the uncertainty in North America coming through as well. And I would say that Russia, Eastern Europe and Brazil, you could add those Russia and Eastern Europe to this line as well. We saw a decline in demand and a lot of uncertainty.
But in Brazil and Russia and Eastern Europe, we saw basically good signs. And in the case of Brazil, we have seen, I would say, confirmed good trends coming into the order intake. This has led also that the inventory levels, which Anders also talked about, has been in our inventories to make sure that we don't go into this kind of uncertain situation with a high too high of a production rate. And we took a number of actions as you can see on the right hand side in quarter 3 to proactively and conscious decisions to react quickly and also making sure that we are adopting the production level. And as always, it starts with our component manufacturing engines and transmission and we have taken that down in the quarter with 10% to 20%.
We also then followed up with lower production rates for Volvo in Brazil, staff weeks in U. S. And then we also took the decision in quarter 3 to be implemented during quarter 4 with a further reduction in the Renault trucks production systems by 20%. This kind of braking that we have done means also that we have the under absorption cost, the braking cost in the system and that amounted in the quarter as under absorption cost of €600,000,000 Now looking into Q4, we have of course a number of actions and also focuses that we have. First of all, I would like to stress that we do have a further readiness to adjust production if needed and if the order intake does not support the production levels that we have.
We also said that we will be, I would say, more active in our market activities in order to find and be really of course on a selective basis see if we can get market get businesses into our production system by being slightly more aggressive in certain markets in certain segments around the globe. And focus will very much be for the Q4 to ensure that we are adapting our production capacity together with adjusting our inventory level in order to be really fit for fight going into our assumed market that we are then forecasting for 20 13. So that will be very much in focus going forward. Moving then into page number 9. We are looking at the order intake and the numbers are there for you to review.
You can I think I would like to highlight that we are having the same book to bill as in Q2 90% that you can see also that South America that is particularly Brazil now have a book to bill of 116% and you also see that we do have an increase there of 19%? You could also note for instance that Mack which we discussed in the Q2 had a high negative number because of the high order intake in Q1. Now it's coming back with a sequential better order intake to 4% to 1% and moving then up to the book to bill rate substantially higher than we saw in the Q2. However, of course, the book to bill rate, if you look at the right hand side is something that we follow extremely careful. And I think that the trend you see on the right hand side of the chart shows now how fast we are and how fast we have become in order to really adjust our orders sorry our deliveries with the order intake that we are getting.
One important part in relation to this slide is of course our market share. How are we doing on the market? And if we take on the European market, we are continuing to have a historically high market share level. We have dropped a little bit if you look at the rolling 12. On the other hand in U.
S. On a 12 months moving, we have increased our market share. And the same goes in Brazil where we also have somewhat increased our market share. So we are keeping our market position on the important markets that we're talking about and that also very much important to me. If we then would sort of look at the first small indications of October, I would like to say that if we look at Europe, we see a cautious stabilization in the order intake.
By that it is very early, but it is a cautious stabilization. If we look at U. S, we start to see a small signs of improvements. And I would say in Brazil, we definitely see clear signs of improvements in terms of the order intake. So that is basically the reading we can do from the first call it 3 weeks in October.
If we then move to page number 10 and look at first our 2012 forecast, it's unchanged throughout all the different regions with 230,000, 250,000, 90,030,000 in Europe, North America, Brazil and Japan respectively. And basically, this is where we believe the market giving them the registration pace we see and activity levels that we do see. And then if you look at the 2013 forecast, we basically say that we do see a sideways movement into 2013. And let me go through on the North American both in 2012 and also the forecast. We are continuing to see in the North America a reasonable to good level on the dealer side in terms of activity level.
We do see the freight volumes are keeping up. The spare parts volume are keeping out the profitability of our end customers holding. But there is an uncertainty both in terms of the presidential election coming up, but also the budget discussions that are ongoing in U. S. At this point in time.
In Europe, we do see a sideways movement and this is very much driven by the macroeconomic uncertainties that we definitely do have. Whereas we see in Brazil a slight uptick going from €90,000,000 to €95,000,000 on the back of this Tinam financing and other stimulus activities that we have seen coming here at the back end of this year. And Japan, we then believe moving sideways. If you then follow me into page number 11 talking about CE. And here again, I would like to stress that what we see here is very much a scenario where CE as we also pointed out in the Q2 report where we have a market situation where the markets have slowing down and weakened in a number of areas.
If you look at the sales bridge, you can see that we are following basically the same trend as we have done previously over the years with the exception I would say with Asia minus 25%. We have been able to thanks to our strong position in China holding up and holding against the market drop there throughout the year. Now we have 2 impacts I would say. 1 is of course China continues to be on the low side And then also the drop in mining in Southeast Asia, which is, of course, also an important part or a part of our business which Dan is in that region. Due to the fact that we have brake pull on the brakes very hard in order to make sure we get the pipeline right.
And when I talk inventory, it's the complete pipeline not only our own inventory, inventory in production and on the yard, but also the whole way out to our dealers to make sure that we are having a balanced pipeline going into 2013. And if you go on to page number 12, we expand a little bit more of that when we look at the trends in Q3. And as I said before, we do have a weakening construction market and actually a rapid slowdown in mining. Now if you look at mining and the importance of mining and as you know we are in the so called light mining segment not in the heavy mining. Approximately 14% of what we see is units are in mining.
We believe and we see that the industry as such has quite high inventory levels. That in combination with the lower demand means of course that we do have a price pressure and we have seen that price pressure coming throughout in the different markets. And we do also then see that we have an order book reduction. I think that if you look at the actions implemented in Q3, we can see that we started to break quite early. And if you remember from page number 11, the decline of sales it's 9%.
But if you look at number of produced units quarter over quarter, it's actually 35% lower. And of course, if you break that hard, which I absolutely think is the right thing to do looking at the pipeline and looking at the inventory situation, I think that we also see that now by doing this for 5 consecutive months means also that we do have a positive cash flow for the 1st 9 months in Volusia despite the low end. And again, it's a conscious decision of stepping on the brakes. It is something that we do in order to prepare ourselves for next year and making sure that we come in to 2013 in a good shape. But also here, if you look at actions in Q4 and going forward, we of course are looking very much on having the readiness to adjust production further if needed.
And again also here in Construction Equipment, we will have selected market activities in order to make sure that if we have good opportunities, we think it's strategically right to do so. Then of course, we can also support the production system by going after some business. CE has been looking at this cost structure in what I would call a second wave. We had a first wave in CE when we sort of reshaped operation and started to focus and grow it in China and elsewhere. Now see us in the second 3 year period in terms of strategy and are looking at rightsizing and looking at all kinds of costs in order to become more efficient.
When we look at the markets, also here we have a if you take the midpoints in our study for 20 13, we are basically looking at a flat movement. China, basically minus 5% to plus 5%. Asia excluding China a little bit on the negative side midpoint or minus 5%, I would call that due to the mining. In North America midpoint 0 percent Europe midpoint somewhere south of 10% due to the lowering in the market we have seen this year and South America basically midpoint 0. We did do some updates for the 2012 forecast.
We had before in Europe plus minus 0. Now we say 0 to -10. And in China, the slowing down has continued. And we now look at instead of minus 15% to 25%, we're looking at minus 25% to minus 35% and then it will go into a more of a flat market next year. So if we then look at page number 14, my second to last slide summary.
So truck orders in September, September normally a very important month to build up for the autumn production. It didn't happen. We took the actions. Flat inventories in Q3 in absolute terms. In relation to sales, we saw an upward trend in inventories very much in focus going forward.
We will have an impact production of the September fallback also in Q4. We will have other absorption also in Q4 due to the breaking that we have done. But we truly believe that those are the right decisions to make. We are not gambling on the uncertainty. We are reacting on the signals we are getting.
And we now position ourselves in the for the remaining of the year to have the right pipeline, to have the right production capacity and have the right cost structure in order to attack the market scenarios that we do see coming in 2013. And as I just said, we have the markets basically moving sideways. That is our forecast and our best estimate at this point in time. Finally, I just want to give you an update also on the activities we're doing on the strategy and this will be a recurring slide coming back in each and every quarter as I promised at the Capital Markets Day. We have this time to report on the launch of the new FH which is of course known, but also then the two rightsizing and changes that we're doing in our sales and marketing organization.
The rightsizing of the UD trucks and then a new sales and marketing organization for trucks in Europe, Middle East and Africa. The Unitrux rightsizing activity is completed in so much so that we know that it's now 950 employees including temporary that will leave us by January 1, 2013. And that is actually 10% of the total workforce in Japan that we're now rightsizing. When it comes to the sales and marketing organization for trucks in Europe, Middle East and Africa, We have given you a guidance for a restructuring cost of €900,000,000 that will come starting in Q4. We are in the midst of negotiations and discussions.
So I will not comment more upon it today. But we will of course come back to the market when we have more to tell about this. But we thought it would be good for you to have that as a guidance that we do see restructuring costs coming also on this one. So I would like to just stress that the activities that we are doing in the Q3 and the way we adapt our production capacity in order to position ourselves going into next year has no impact on the speed, agility and the determination the just as a final note, I can also tell you that we are going in now to start our frames discussions when it comes to ISIT costs, when it comes to R and Ds, when it comes to sales and marketing activities for 2013 in order to align ourselves to meet the 2015 targets long term. So that process is set up and will be up and running.
And by that, I would like to conclude my
The first question comes from Mr. Nikumar Gerad from Commerzbank. Please go ahead, sir.
Hi.
Regarding the ice shift to production, you have shifted to Hagerstown, Maryland to United States.
You said
you have reduced the component production for engines and transmissions. Will that affect Maryland production and will be imported from Sweden? Or we'll be keeping the same production level for ice shift in Sweden in Maryland?
We
will our distribution channels the way we support our production system terms of engines and transmission that is set and we will not change that. So the volumes that is coming and going into the American market will be produced in Hagerstown as before. Then of course that volume will be reflecting the volume that we see on the American market. But the way we support and supply our internal system will not change.
Thank you. Our next question comes from Mr. Frederik Stahl from UBS. Please go ahead sir.
Yeah. Hi, good afternoon. It's Fredrik here from UBS. Three questions please. First of all, what do you estimate the payback will be on the SEK900 1,000,000 of restructuring you're taking in Q4?
The second question would be on well, if you could explain it was a while since we had this kind of destocking going through now. So if you could explain the moving parts behind the mechanics behind the relatively small reduction in book value of inventory versus the destocking you've done and the hit the P and L you got. So if you can just give some color on that that would be great. And then finally on the bus business, I guess this is more of a strategic question, but given that you're now going through a relatively large change in across the group, isn't it also time to review buses the future buses within the group? Is this really an asset you want to keep in the long run?
Thanks.
Okay. I take number 1 and number 3. And then I think, Christoph, if you then give a little bit of light of the second question. Fredrik, when it comes to the payback of the SEK900 1,000,000, I would like to come back to that once we have the discussions and negotiations that are ongoing right now finalized and that we can and we will communicate. So I would like to come back to you on that one once we are finished with that and being able to communicate more exactly.
When it comes to the buzzer, I've been very clear that I do see a large synergies in the buses on the engine side, on the chassis side, on the electronic system side and also on the new technology side just to mention hybrids for instance. Now that doesn't mean that we can have a bus business that is running on a sub average profitability. And we need to and we have taken for instance a restructuring step now in a decision in principle regarding city bus production in Europe. And we will continue to try to drive that profitability.
Fredrik, it's Chris here. Can you repeat the second question you had?
Yes. I just wanted to understand your the book value of your inventory has only changed very little between the quarters here. But you have destocked and you've taken a big hit in the P and L as a result of that. I was just wondering what's behind this? How does the mechanics work here behind the numbers?
Well, you can say the inventory when we looked at increasing inventory, we were referring it to it in relation to sales because it can when sales is declining and you're sitting on an inventory, it can very quickly become a problem. So you are right that in absolute terms, the inventory was more or less flat, but measured in relation to sales. It's increasing and that's what's concerning.
I was more interested in how the under absorption, how the mechanics behind that calculation works, but we can take that after the call.
Yes. The under absorption is more related to the production. I mean, when we talk about increasing inventories, we actually look at what you have outstanding in the deal and asset work as well. So you have for instance, when we saw the pipeline inventory increasing in construction equipment, it was not only our inventory, it was the whole dealer network that started to become too much inventory and then that's what we're looking at.
Okay. Well, let's follow-up I'll follow-up afterwards.
Okay.
Thanks. Thank you.
Our next question comes from Mr. Alex White from JPMorgan. Please go ahead sir.
Good afternoon everybody. It's Alex White at JPMorgan. I wonder, could you talk I've got 3 questions, please. Firstly, could you talk a little bit more about Construction Equipment within Asia? Just wondering if you can give us some sort of indication of the Q3 volume development in China relative to the rest of Asia?
Secondly, on buses, can you give us an indication of what it will take to get back to a breakeven level and when you think this might be achievable? And lastly, some idea around what we should expect from a cash flow perspective in Q4? Thanks. [SPEAKER JEAN
FRANCOIS VAN BOXMEER:] Okay. When it comes to Construction Equipment and in China, it is of course a and I think we have there a 25% decrease in Asia and a big part of that is of course in China following the market. And what we have seen before as I said in the quarters up till this one we have been able to hold that up rather well with our market share. I would like to add to that that despite this it is a very important market still even with this drop and it's also good to see that we continue to be number 1 in China with the SLG and the Volvo brand together. So we are holding our fortress.
We're holding our positions in China on that one. When it comes to buses, there are and we are looking at a lot of different activities in order to increase the bus profitability. But I think also that at the end of the day there has to be a jibe between what we are doing in terms of getting profitability and markets as well there. But definitely there are a lot of things that we can do ourselves and that we are addressing and we are in discussions with that. And when it comes to the cash flow Anders perhaps I can leave that question to you.
Yes. On Q4, of course, it's very hard to give an estimate or a forecast here. It's a matter of really the inventory reduction that we're working quite heavily on, of course. And we are expecting and we are forcing ourselves to really reduce the inventory and make an impact on the cash flow for Q4. Also we have other things like payment patterns for company like SDLG that we are quite dependent on of course.
And then the major question of course is the development on payables in a scenario where we have pulled brakes and so on in the production system. And of course that is a major thing that we need to watch very closely. So in essence, it's very hard to give a fair estimate. Seasonally, Q4 is a good the best quarter for us. And so it was the last of the year before that.
And of course, our aim and our focus here will be to produce a very good cash flow for Q4.
Could the dividend be at risk?
The dividend is not for us that is for the board to decide.
Okay. Thank you very much.
Our next question comes from Mr. Laura Lemke from Morgan Stanley. Please go ahead, madam.
Hello?
Yes. Okay.
Hi. Laura from Morgan Stanley, sorry. I actually just have two questions left. The first one is on your production cuts. Just coming back to this.
I mean based on the market outlook that you've given us both for the end of this year and also into 2013, I mean can you confirm or is it the right way to look at it and to say unless you see a further deterioration in end markets, we won't see any further effects from, let's say, cost under absorption post Q4? Is there anything else to come that we will see in Q1, 2013? And then the second question is regarding your outlook. Obviously, I mean you're expecting truck and construction markets to remain largely flat next year. But then on the other hand you've made some kind of positive comments in that for example October was shaping up a little bit better than expected.
So I'm just trying to really reconcile the two statements here. I mean, would it be fair to say that your 2013 guidance mainly reflects the lack of visibility that you have today, but maybe there is some scope that markets could actually develop a little better. Is that the right way to look at it?
Thank you.
Thank you. Well, when it comes to the production cut and the aligning both in terms of production and pipeline inventory, we are of course doing that in order to get into shape based on the forecast and the market estimations that we're doing. So we're trying to keep consistency saying that on one hand now we see a market and we do forecast a market of this size. And therefore, we are shaping ourselves into that market development. And by doing so, we also then of course are looking at in the 2013 where we should be in balance.
Now you can have and we do state in the forecast as well that for instance in U. S. Even though we're talking about the flat market, we say that with the uncertainty that we do have there in terms of presidential election and the budget discussion that we are forecasting a slower Q1. And those kind of effects you can have Laura in this one. But as a whole and as a market of course that is our aim then to make sure that we are in line and that we are balanced if you look at it from a full year.
When it comes to the forecast, we have tried to midpoint ourselves taking all this kind of difference input that we are getting with pluses and minuses, risks and opportunities and try to put ourselves in a situation where we midpoint ourselves into the forecast that we are putting forward here. And that's exactly what we have done. For instance, in Europe, we have the uncertainty not on a macroeconomic level, but we also have the Euro5, Euro6 uncertainty. How would that play out during the year next year? It's very difficult to say.
So of course, it's a combination of the visibility as usual. But on the other hand, we are also then utilizing all that data crunching that we are normally doing in order to put our forecast together. And this is the best estimation that we can do. And then of course, you have opportunities and risk to that. So that's a little bit what we're doing.
I don't know if you want to add anything there Christian. No.
Okay, fine. Thank you very much.
Thank you.
Our next question comes from Mr. Bjorn Iannesond from Danske Bank. Please go ahead sir.
Yes. Thank you. A question on the warranty reserves that you talked about previously and you mentioned in the report. The adjustment that you make, is that reflecting a certain specific issue that you've had? Or are you also hiring the warranty per vehicle going forward?
And the second question is a little bit of the selected market activities that you are mentioning. If you can give some further color on that, it would be appreciated what you really intend to do.
Okay. When it comes to the warranted provision and the increase, we're talking about legacy problem. That is what we are having and what we see. When we take this, I think, Chris, I'm looking at you, but if I remember correctly SEK 8,000,000,000 we went in this year with billion of warranty reserve. And we then look at the activities that we do have on the first half year and the first nine months of activities and we do see then that we in order to fulfill our warranty commitments and other things that we have that we have under provision we can say and therefore we need to add that to it and that is the one off time that we're doing there.
So and then on the But
you're not changing the amount reserve per vehicle going forward or is this adjustment for activities in the past only?
This is more a legacy issue that is related to quality issues that we had some time ago and then that we are adjusting for now. So it should not impact going forward as the quality on the product coming off the lines today are at the right level.
That's very clear. Thank you. And then the second question.
One? Yeah. And when it comes there, there are 2 issues. I mean, when we say the selective marketing activities that is when we see that we have from a strategic point of view or that we have a tactical point of view that we can actually by being more aggressive than we have been before. And I'm not only talking price here.
It's the total offer that is important to remember everything from financing to customer support agreements and what have you then we have said that we would be more open to do that. But I want to stress that we are and I truly believe this is the right strategy very careful about the pricing discipline, because it's easy to get into the trap and do something now that it would be difficult to recoup at the end. But on the other hand, I also think that there is always a way also for us to make sure that we protect market share and by that also getting individual units out, which then have a good basis for our fleets in the different markets. So it's not going to be sort of a general thing. It's going to be surgically and it's going to be tactical.
It's going to be strategically and we're going to work on the whole pallet of offering that we have to the customer. Thank you.
Questions. Deutsche Bank. Please go ahead, sir.
Well, good afternoon. I've got two questions, please. Firstly, the thing that really struck me in your numbers today, Penta sales down 15% and the margin down 2 percentage points. CE sales down 8% and the margin halves. Now I know you've had some issues on under absorption, which is my next question.
But could you talk a bit about the structural differences? I mean is Penta better managed? Does it have an inherently more flexible cost base? Does it have a shorter inventory pipeline? Because it was quite a stark difference between the two businesses.
And my second question is, you explain in more detail what you mean by under absorption? I know you have this big number of SEK 1,000,000,000 in a sec. Is that because you're running production currently below sales? Or you're running production more level is like in the trucks in inventory. Because I'm assuming If you've been running your production more slowly, the trucks you ended up with at the end of the quarter have got high unit cost and therefore you have a headwind in Q4 even if production rates normalize just because you're delivering and invoicing higher cost trucks that you made during the course of Q3.
So if you could help us understand what SEK1 billion actually is that would be very helpful. [SPEAKER SEK1 PIKOLA DE
SIKOLA DE SIKOLA DE SIKOLA DE SIKOLA DE
SIKOLA:] Okay. Let me I mean, when it comes to Penta and comparing that to Sea or the trucks there are of course structural and business differences that are different. I mean, if you look at the process of Marine Business for instance, you have had Marine Business down now for quite some time. We're almost talking a couple of years of rather low. And that means also that we have to have time in Penta to really adjust the cost structure and marine side.
When you look at on the industrial engine side that is basically engines coming out from our engine system. And it is a selling on engines from our engine factors into OEMs and others who are dealing then with versatile products or power generation, which is of course an easier to adapt and terms of cost structure and making sure that you get that out. So they are definitely structured. But I wouldn't take away the fact that they have done a very good job in order to manage the downturn in a good way. But I wouldn't compare them.
It is a if you look at VC, if you look at trucks, it is a much more complex business. And as I said, one of the key things is that they have been on a very sluggish market now for almost 2 years on the Marine side in particular where they have their own manufacturing and they have been able then to adjust to that. When it comes to the €1,000,000,000 then I would like to hand over to Mr. Ed and see if you can do a short explanation around that.
Peter, it comes back to the standard cost system and how that is set up. When you are producing, you have surcharges added to each and every product you produce and then it goes into inventory. Surcharges for fixed costs, whether it's depreciation or other type of fixed costs that you have in manufacturing. And when you produce less, you will add less surcharges and less of the cost in the plant will go into the inventory. And surcharges and the variances will actually be impacting the P and L immediately in the months that you have a difference.
So if you have set the normal standard cost at 100 and you're producing 90, you will get the variance of 10 in the quarter that is incurred.
I understand the theory. I'm interested in the practice. What does the SEK1 billion mean? What are you comparing to? Because it's a very big number and if you're given these numbers, it's quite nice to know what they mean.
Yes. It's you can say the actual cost is of course all the cost for blue colors and white colors etcetera that we have in the manufacturing operation. And then in the standard cost systems, you add a certain portion of those costs to each and every product that is then produced and go into inventory and then later on sold. But in this quarter, we were producing very few units. So the variances became very high.
And that you get immediately into the P and L.
But surely you don't get it until you actually deliver the truck. So and I'm assuming you allocate your direct paybacks every month.
No, you get the gross profit when you sell the truck. But the variance you get in the month you have it so to say.
Okay. So the EUR 1,000,000,000 is compared to a normalized production run rate, not necessarily what you're selling or what you sold last year, but a notional normalized rate?
Yes. For each plant, you have a normalized production. Let's say the TUV plant, we have a normalized production of the 25,000 trucks. And if we were to produce that number of trucks, the variance would be 0. But if we are under producing, we are you can say we get the variance or we have to adjust the standard cost down, let's say to 20,000 and then the unit we will burden each and every unit produced with a higher surcharge.
And can you just my last question on this, can you tell us how production ran versus sales? What's the percent what sort of percentage of sales you're running at in the Q3?
That number I don't have on top of my head right now, Peter, because really what happens is we've started to break the component manufacturing engines and gearboxes quite a lot. And then you have a lead time until you see the assembly operations breaking. And to put those production don't have that here and now, Peter. We would have to look into that.
Okay. Well, it's been helpful. I just wanted to understand more about to help us model going forward where the number comes from so you can understand more of the sensitivity. Thanks for the comprehensive answer.
Think the conclusion is that when you break production, you get a negative variance in the month it is incurred. You could say the alternative would be to continue to produce and put that cost into inventory if you want. But then you have an inventory problem.
Question comes from Mr. Andreas Bok from Nordea. Please go ahead, sir.
Thank you. This is Andreas Bok from Nordea. I have one question. A lot of companies have reported weak September sales, but something big happened for you in September as well. You launched your FH new truck.
When I talk to people in the industry, they are very excited about this new truck. Do you think that has had any impact on your sales perhaps on your orders? Perhaps customers decided to wait a a few months to evaluate the new truck? And secondly, I believe the order book is open for this new truck. How have the orders developed?
Thank you.
I think that in general you can say that I fully agree with you that the excitement in the industry is very high for this new truck. I think also also that the excitement of the classic or let's put it the ICON FH that we're now selling is also very high and we see a lot of interest in that. So I wouldn't say that we see that. And we know how to handle this kind of switchovers between products. We have done it before and we know how to handle it in terms of managing the customers and expectations and the renewal that the customers need.
So I would say that we have seen any of that yet. When it comes to the perception and then also the situation for the new FH. I'm not I don't think we are normally giving that kind of information at this point in time. But I can say that the interest and the perception has been very good in terms of interest risen by the new FH. So conclusion is, I don't think see that the September numbers and what we see going forward here has been impacted by this new truck.
And when it comes to the U. S, it's great interest and a lot of positive comments, but we do not comment upon the order intake on it.
We can say also that it's really in the second half of next year that we will have volumes ramping up. We are starting some more production in March and gradually ramping up, but it's really as we come into the second half of next year. So that's why we would say I would say that orders will start to come in more into next year for the new version.
Okay. Thank you.
Okay.
So operator there was no more questions. And then I would just like to thank you for participating in this conference call. Wish you a good day and we'll be talking to you again at the next quarterly report. So thank you very much for now.