Okay, ladies and gentlemen, welcome to this press conference where the Volvo Group will be presenting the results for the third quarter of 2011. On stage today, we have Olof Persson, our new CEO and President of the Volvo Group. He will be accompanied by Mikael Bratt, our CFO, and Christer Johansson, Head of Investor Relations at the Volvo Group. We will start with taking your questions after the presentation, of course. We will start by taking your questions from here within the room, and please use the microphones that are available. I would like you to please ask the questions in English, as this is a webcasted event. Following that, we will have the phone conference participants asking their questions.
Finally, we will have a chance for those of you who are reporters in this room to have individual interviews with Olof or other colleagues on the stage here today. Once again, thank you and welcome to this press conference. Olof, why don't you start?
Thank you very much, Morten. A warm welcome to this third quarter presentation. I'm, of course, excited to do this as my first quarterly report. Why don't we jump right into it and start to talk about the sales. As you can see on this slide, per region, we have now had a stable growth, I would say, in the third quarter. In total, we had 15% growth. If you then exclude the currencies, we had a 22% growth on the sales side, which I think is a rather strong sales growth. If you look at the regions per se, we have growth in both Western Europe, Eastern Europe, and North America. In particular, I would say that North America, but also the Eastern Europe growth, both in percentage and in money, is coming along well.
What has happened now during the third quarter is that we have moved ourselves a little bit back to historical distribution around the world. If you take North America and Western Europe, it's about 50%. That's where we historically have been. Interesting, I think, is to note here that Asia is still a major part of the turnover. South America, and in particular Brazil, has become a rather big portion of our revenues in the third quarter. If you look at the sales trend on a more moving trend, you can see that we're now pacing at the SEK 297 billion. We have moved ourselves then from Q3 2009 up till today, from the SEK 48 billion up to SEK 73 billion. Looking at the sales breach per business area or company, I will come back to the Trucks and CE a little bit more in detail.
If I just spend a few minutes on the other business area and start with Buses, who has done a 12% growth. If you would exclude the currency, it's around a 20% growth in Buses. In particular, I would say the bus sales growth is coming from South America and Asia. In South America, in particular in Brazil, we have seen good activities both on the city bus but also on the coach buses. The rest of the markets have slowed down for Buses, both in Europe and in the U.S. It's a lower activity than we have seen before in Buses. Despite that, they managed to then move their sales with 12% during the quarter. Penta, 6% reported, 11% if you would add the currency effect.
Here I must say, Penta has done a great job in the transformation coming from the rather slow-moving marine segment into its position on the industrial engine side. Today, actually, Volvo Penta is 50/50 a marine and industrial engine company, which I think is a good move and also countercyclical in aspects. On the Aero side, it shows here - 12% if you would exclude the service businesses that we sold in the U.S. The currency impact, which is hefty when it comes to Aero, would be a + 7% there. Now, the Aero, we see that Aero has a good position in many, if not all, of the coming programs going forward. We see that the Boeing 787 Dreamliner now starts to come into production. That will, in the future, of course, have a positive impact for Volvo Aero as we go along.
If we then take a look at the operating income, we are moving down on a SEK 25.5 billion, 12% moving, and moved from the SEK - 3.3 billion two years ago up to a SEK 5.8 billion this year. We have had a substantial headwind on the currency, as we have reported in the report that you just received. For the first time now, we specify the currency impact per business area in order to see where. As you can see here, we have the FX effect on the trucks and on the CE combined to SEK 900 million . Of course, the percentage impact is higher on the CE than on the truck due to the size. You can also see the substantial headwind on the Aero, which actually has SEK 200 million on the size of the turnover there as a percent very much.
The SEK 0.7 billion here is then the unrealized hedges not allocated to the business areas and the mark-to-market valuation we have. In total, you see that we have a headwind on the currency on SEK - 1.8 billion compared year- over- year. If we look at the financial highlights on the operating capital side, we can see that we have good news on the cash flow. SEK 2.2 billion positive cash flow in Q3 is all-time high. Normally, as you can see, going back, we have a rather weak Q3 due to the operating capital buildup that we normally have during Q3. We have then managed, and there are a number of explanations to that. Here is one. You can see that when it comes to the CCC days, the cash conversion cycle days, we have now come down from 73 days, and we're now down to 22 days, which is historically low.
This is good news because we are then showing that we are having a good cash efficiency. It means also that we have the cash efficiency needed in order to fund the different activities we want to do going forward. Also, if you look at the days of inventory, it's flattening out. The days of inventory have come to a stable level. I would say, and that's something we keep a very, very close eye on, and I will come back a little bit later on our future looking and the markets around the world. I think that we need to have a look on that and making sure that we perhaps get the inventory days on the sloping side instead of the stable side going forward. When it comes to return on capital, we have again moved our way quite healthy up to the 28%.
It's not a record ROC, but at least on a good and OK level. If we then drill down a little bit more specifically into the trucks, you can see that we are trending now on a SEK 191 billion, almost SEK 200 billion, 12 months rolling from SEK 30 billion up to SEK 48 billion. If we take the market by market, we can see that we have had a good growth in Europe, 18%, mainly driven by long-haul segment and construction segment in the northern part of Europe, but still very, very low activities in the southern part of Europe. In North America, we have a replacement cycle, I would say, where the new US10 machines come out, are more fuel efficient, are more economically to own, and thereby there is a proposition for the owners to actually shift from their old machines or trucks into new ones.
It's a replacement demand we see in North America. South America, mainly driven by good activity and high activity level, but also an underlying GDP growth then, in particular in Brazil. All these are also supported, the growth numbers are also supported by market share gains. Both in Europe, North America, and South America, we have seen that we're taking market share, which is, of course, good news. Asia, 0% growth, and we can see the shift now. We had a couple of quarters ago a very high growth on the Asian side. That growth has now sort of also in our numbers then showed, and it's basically flat. It is Japan and to some extent also India that is impacting there. In terms of the operating income, we're rolling on a SEK 17 billion. Again, you can see the same trend coming from SEK 2.3 billion up to SEK 4 billion.
If you then look at the margin side, we're coming up and now reporting an 8.3% margin in Q3, which I think, Mikael, is all-time high as well in terms of margin for the truck business, which is, of course, very good news. It shows then that the activities we did during the crisis, but also our pricing policy, our product cost, our quality cost is going in the right direction. Thereby, we can now start to get the margins we see here today. On the CE side, we have seen a growth. You remember the SEK 400 million headwind on the currency side. Also, if you look on here, we have quite a big difference between the reported number and the currency adjusted. I think it was up to 27% if you would currency adjust the numbers you see here.
If we look at the growth market, we have then Europe. Europe is basically, or only, I would say, Northern Europe, which has shown rather good growth. We should also remember that in the CE, European market has been, since the crisis, substantially below any trend line. We're still on low levels in Europe, but we now see an uptick. You have both activity-driven, but also some replacement-driven activities in Europe. In North America, it's, I would say, a situation where you start to see now that the machines had become very, very old because of the crisis that actually has gone on for almost three years, or perhaps even longer than three years, the downturn, which means that you have a replacement need of machines, but you also have a need to refill the stocks by the rental fleet stocks out in the market.
Again, I would say it's a replacement and buildup. We see some activities on the commercial construction side and also on the energy sector, and then particularly on the gas side that we see some movements on the North American market. In South America, the growth is not so high, but we should remember that over the years, particularly Brazil has moved itself up to a very high level, and it's all-time high in terms of construction equipment in South America, which also means then that the growth potential is not perhaps there. Good news about Asia for our part, 14% up, not currency adjusted. We are taking market shares or keeping market shares in a market in China. We continue to be number one. I think it's all good news when it comes to China.
We'll come back to the China market as such a little bit later when we look at the forecast for this year and next year. On the operating margin side, it's a drop in between, sorry, on the operating income. You have a little bit of an uptick, SEK 100 million compared to the quarter last year, SEK 6.8 billion rolling. A little bit of a drop when it comes to the margin side, 10.5% to 9.4%. You should remember that we have SEK 400 million then on currency headwind that is impacting as well. If you translate all these numbers into this slide, we can then see that we do have a movement in the different areas where you can see the margins are coming up. I would say that on the bus side, it is, of course, a margin that we're not happy with, but it's moving in the right direction.
We also see that buses do have mix issues, which is problematic, but they're working on it. They're also working on efficiency programs, so on and so forth. Other than that, you can say that we have had a rather positive trend in trucks. Penta is coming back nicely after the crisis and back on almost 10% again. Also, Volvo Aero is up on the 7% going forward. If you look at the leverage, you can see the difference between the leverage operating reported and then without the currencies. In particular, then on the CE side, you can see the difference between 3% and 14%. This is, of course, underlying the importance of the localization strategy that we have discussed over the years here now. That means to be local in Russia, be local in India, be local in Brazil, and be local in the U.S.
To try over time now to get away from these major swings that are then caused by the currencies. We should also mention that on the CE side, we have a major investment program, and we have talked about it before, the 55 new products that we are launching, the dual-brand approach, and also all these localization investments. CE is in an organic growth phase right now where they have to invest in order to make sure that we keep the market share and the volumes coming going forward. Of course, we need to look at leverage as well. On the truck side, I must say, despite the fact that we have had a good growth in the U.S., which historically has lower margins, you have a diluting effect with the growth of the U.S. market. Despite that, I think the truck business is now up on 19% leverage.
Coming up on the phase that we have is probably a rather good number in terms of leverage. The whole industrial operations operationally on 18%. There's always more to do on the leverage side, but I think we're moving in the right direction. We will have a special focus to make sure that CE continues to have leverage going forward, even though they have to do the investments that we have planned. To summarize the third quarter in a historical perspective, it is a very strong quarter. It is actually the best quarter in six years, third quarter in six years, if you look at sales, operating income, operating margin, and cash flow. From that perspective, a very good quarter. Leaving the history behind, this is the reported numbers, and move ahead and look a little bit into the future.
We can see that on the order intake and deliveries of trucks, and those numbers are, of course, in the report, + 18%. You can see we have good growth in all the regions, with Europe 15%, North America 27%, South America still very strong on 33%, and so on and so forth. If you look to book-to-bill and orders and delivery, you can see that up to the end of Q3, we took more orders than we delivered. We were building order stock up until the end of Q3. There is a slide that I would like to spend some minutes on, and this is the markets and the market expectation. I know many of you are very interested in the development on it, and I will take it step by step. If we start with Europe, we call that for next year - 10%.
Just let me explain how we came to those 10%. What we did was that we looked at all the facts that we had. The fact was based on the order intake we have, the book-to-bill. We were looking at the customer activities, as we can see it today. We were also looking at market share and other development that we had. You have to add the fact that we do have an uncertainty both on the macroeconomic level and also on the country-by-country level. If we put all this together, what we can see today with a visibility of something between eight to 10 weeks, that's where we are on the order backlog. All the things we're reading about the development in Europe, our best estimate as today, with the input we have today, is a slight dip then in the European market with 10%.
We have done the same when it comes to North America. Looked at all the facts that we have and taking all the other input we have. Here is a slightly different picture because we do see both in terms of order intake pace and the production rate we're doing and the activity levels that the replacement need that we have seen during the second half of the year or perhaps most of the year this year will continue also into next year. Again, driven by the long-haul segment. In those numbers, we don't see much development on the construction side also for next year. There we call it + 20%. We have the next market, which is Japan. Japan has now, for the first time for many, many years, we do see an improving trend in Japan.
In the order intake we see, and of course, it's very much driven by the reconstruction work after the tsunami and the earthquake. Therefore, we call that market for next year with 20%. Finally, Brazil, which we will have a particular in the first quarter next year due to the legislation shift going from Euro 3 to Euro 5. The first quarter, we will have a slowdown in the market. If we look at the underlying GDP forecast and the activity level, we then see that for the total year, we are looking at a - 10% as we call it today with the information we do have today. If we add all this together and take the SEK 211 billion, and I should perhaps mention North America, you see, is now down to SEK 210 billion, which is a slight revision.
That is not so much due to the fact that the market demand has not been as high. It's more about the ramp-up of the industry. We have had also our share of that in the ramp-up in our two plants in the U.S. Now the production is running much, much better, and we are now pacing for the new market scenario that we have put in place. If you take it all in all, you can say that Europe, North America, Brazil, and Japan, the plus and minus, if you look at those markets going from 2011 forecast to 2012 forecast, it's basically a flat number of trucks that we see between the two years. I think I did the math correctly then, but roughly so. When it comes to Europe, the - 10%, we do as we always do.
We make sure that we adapt our production capacity to those kinds of levels. We are doing as well. We're taking some decisions in Sweden. We are doing the investigation and planning and see where we stand on the renewal side. We're going to make sure that we have the right pace of production to meet now that forecast that we have put in place for next year. Moving to CE and doing the same exercise. We then see Europe continue to sort of refleet or restock, not restock, that's the wrong word, but refleet with newer vehicles coming in. We also have the new emission legislation in Europe, which means that there is a need also to get the stage 3B or T4I engines into the market. + 10%- 20%, continuing basically the trend we have seen this year. In North America, again, the same thing there.
We see that the activity level both on the rental fleets and on the stocking, but also on repurchasing of new machines instead of paying high prices for used machines. We do see that continue, which means that we look at the 15%- 25% increase in the North American market next year. South America, as I said, is on an all-time high level, has worked itself up over the years. We do believe that there is room for some improvement, so we have called that 0% to + 10% for next year. Then we have China, which everyone is looking at, where we do see, and we should be very open with that, do see a slowdown on the excavator side in September and in the Q3 in the range of 20% down on the excavator. What surprised me, though, is that the wheel loader side is holding up.
It is only 1% or 2% down on the wheel loader side. Even though we see a dip on the excavator side, we do believe that looking at the macroeconomics data that came out just yesterday, and I saw this morning as well from China, we might see, and we hope that we will see a normalized spring season next year. If we do that, then you can actually have a 0%- 10% growth in China coming from, of course, extremely high level going forward. This is the total market. We, of course, aim for not only following the market, but continue our road here in CE in China to take market shares. Then we have Asia, excluding China, which continue to take on rather well, actually. We do not talk so much about it, but Indonesia is a country that has become more and more important.
We have other countries in Southeast Asia, in particular, that are growing quite nicely, also, of course, including India. These are then the forecasts that we are looking at. We are revising now as we come closer to the year end when we see the data coming in for this year. You can see then that we have actually a scenario next year in CE with growth in all major markets, the mature markets, but also the development. Of course, in slightly lower numbers than what we have seen today. That is our base scenario with information and the facts that we do have today. If I summarize, I think we can summarize the presentation by saying that it was a historically good quarter three, the best in six years in all the different measurements that we have seen.
We have grown, we have grown in a nice way, and we have grown both with the market, but also with market shares. I think that is important to point out. We have done it with profitability. We have had the currency headwind, but if you exclude that, you can see that the leverage is now up on the industrial operation on 17%. We have some areas that we need to work on, but we know that, and it's always areas to work on. I would say that the cash flow is, of course, very strong to be able to show such a good cash flow in a third quarter. The macroeconomic uncertainty, I don't have to tell you that. It is, of course, the visibility that we see going in is what we have in the order books, eight to ten weeks.
The visibility we have is on the cancellation, which is on a very normal level. Of course, the visibility we have is the inventory that we do have. It will be a call, depending on the activity by the customers, and, of course, with all the enormous amount of data and analysis that comes out for the future. I think also we by this can show that our geographical footprint, and if you take the market that we or the markets we're calling for on the truck side, we do have the footprint now to take care of the ups and the downs in a good way. That means also that the production system that is not only local, I'm talking about the powertrain, for instance, the engine side, is then able to support the different areas in a good way. I think that's also important to say.
With that, I conclude the presentation and open up for questions from the audience.
Hampus Engellau, Handelsbanken. I have three questions, if I may. First, a question on Europe. Could you talk a little bit about seeing a 10% drop next year? Have you started making any changes in the run rate towards the end of this year? Second question is on Brazil. How have you managed production, given that there will be an overhang in the first quarter with some overproduction, possibly for the end of the year, as we are looking at the production date of the truck and not the registration date? Finally, a question on production disturbances in North America. Would it be possible to talk a little bit about that, given that you're also adjusting your current outlook for this year? Thanks.
Okay. If I start with Europe and the production rate, the slots that we have for this year are basically sold out. We have a few slots left, but for this year, the production rate is, of course, set. We will, in the Swedish system, and let's put it in the Volvo system, adjust the production rate beginning of next year, then going in line with what we have seen here with a - 10%. We will do that early in the year. When it comes to the, you always have, as you know, seasonality between here. When I talk about this now, I talk about the full year numbers, but you will have ups and downs in the different areas.
We do now the investigation, planning analysis on the renewal side of the production system to make sure that we have the right production volumes going forward there as well. This work is going on right now. In South America and the first quarter production rate, I think we will do the same. We will have to make sure that we are taking out and reducing the production capacity during the first quarter in order to not build unnecessary inventory. There, of course, also is that from mid-next week, we will start to take order on the Euro 5. We have the Euro 5 coming in. We have the big fair in Brazil next week. This fair will be the starting point for then getting orders for our Euro 5 machines. In North America and the production disturbances we have had, it's typically ramp-up issues that we have.
We have added shifts. I think we have taken in more than 1,000 people in the North American system in order to get up the production. We now start to see that that is behind us and the production rates are coming up and we start to see that we will have a production rate in the North American system that is basically sort of pointing at the numbers that I show on the total market.
All right, thanks.
There's been an awful lot of change at Volvo so far this year. An entirely new Group management, including you, a new organization, new financial targets, and there's a Capital Markets Day in Stockholm on the 8th of November where the two of you will present. What should we expect then?
A little bit of a surprise, no. What we will do is I will spend quite some time discussing the financial targets, but I will also spend a lot of time walking through the reorganization and the new organization from a why point of view, how point of view, and then a future point of view. That will be the discussion that we're going to have in two weeks' time. I'm looking forward to seeing many of you there.
Hi, Anders Hjort, SBS Gulda. I wonder if you could discuss a little bit about or describe what's going on in the Chinese CE market in terms of competition, also degree of success for the new excavators, and not least the pricing. There's a lot of fears that prices will be under pressure eventually in China, if you see anything about that.
Are you talking about the excavator or the total?
Both.
Both, okay. Let's start then on the excavator side. I think that if you look and read on all the capacity investments that we can see coming into China on the excavator side, it looks like very big numbers. I would call for that as a theoretical capacity that is assembly capacity. I'm convinced that we will see the correction in due time, getting the right capacity for the market. However, our target is, of course, to make sure that now with our dual-brand approach, really making sure that we capture more of the lower segment of the excavators and growing also the upper segment. So far, so good. On the Volvo side, we are taking market share and we are positioning ourselves very well, in particular also now since we added a new 20-tonner into the market, which has been very successful.
When it comes to the Lingong, this year has been the buildup. The introduction year, first year, and now it's a buildup. What we're focusing very much now is to make sure that we get the dealer competence throughout the system to take care and also be able to sell. I must say, so far, so good. They're learning very quickly. 2012 is going to be the more sort of volume year for the SDLG excavator. Introduction, grow, and then going on full speed. All the investments we're doing are according to plan and we're going to be there going forward. Now it's, of course, a matter of how the market will come and how the spring season will look next year, but that I talked about before.
Okay. So far, no clear price pressure has started yet.
No, we haven't seen that on the excavator side. They're holding up quite well, and we are adjusting the production in Shanghai as we speak in order to make sure that we don't overproduce to the stock. On the wheel loader side, we have seen a little bit of a different picture because it has held up much better than the excavator, which means that there's still quite a big demand there. I must say, Lingong with good products and also good sales networks has continued to take market shares and is now, I think, up on 14.7% or something like that on the market share on the wheel loader side, which is historically very high. They have done a very good job there. No major price pressure.
Okay, very good. Continuing on pricing on trucks, I mean, we seem to be at a sort of inflection point in Europe in terms of demand. I wonder if you have seen any movements on price trends on trucks in Europe?
No, I would say that what we have seen is, of course, a very tough competition, as always, on the truck side. We have managed to get between 1% and 2%. We have been able to get through and it has basically stuck to the pricing as well. That goes for Europe, that goes for North America as well. I think we announced half-year a 3.2% increase in half-year increases in the U.S. We also see good and stable pricing of spare parts, which is very important because that is where you keep it up. All of that is, of course, also driven by stable second-hand prices, used prices. It's stable used prices as well. That, of course, supports the pricing possibilities as well. We keep that and, as we usually say, our price increases should be ahead of the curve when it comes to raw material impact.
I definitely think we have managed to do that during the first three quarters.
One final question on the Chinese truck market. One of your smaller competitors is now looking at China in a more positive way, seeing greater potential there because Chinese truck buyers are becoming more sophisticated. What's your view and strategy on Chinese truck?
I think we have, and that's well known, we have our part of the sort of imported segment, which is basically then what we're talking about. Chinese customers being able to or willing to and need a higher degree of technology and sophistication. That we have already. I mean, we are, if I don't remember wrong, Christer, we are number one in the imported Western European segment, among the highest and among the best. We have the D&D on venture, which we have from which we then have the plans to develop. For our side, it's the position we do have and work on in China. We're already there.
On the Capital Markets Day then?
On the Capital Markets Day, we said it was the organization that's on it. That was more of a comment than a question, I guess. Okay.
Hi, Niclas Höglund, Swedbank. Two questions, if I may. Firstly, on the service and aftermarket. Can you elaborate a little bit on the current trend, and maybe also your expectations for next year, and maybe a split for the magnitude of service and aftermarket now when the market or the deliveries have recovered in both trucks and VC?
I don't think we specify that in such detail. What we can say, and Christer, you correct me if I'm wrong, you correct me before I say the wrong thing. No, I think what we have seen in Europe and also in the U.S., and in particular in the U.S., where we now see more and more penetration of our own engines and both the I-Shift and the M-Drive, which is our proprietary gearboxes, that we now see some effect of that. This penetration rate has moved over the years and is now up on a very high level. That is an important part also when it comes to the spare part and aftermarket business in the U.S. In Europe, we haven't seen any major shifts. It goes very much with the usage of the fleet, with the mileage that is put into the fleets and where we stand.
It is, of course, something that we are working on. On a more strategic level, you can see, but that's something that is more long-term as to how do we capture and how do we make sure that our service business is growing and growing with products, services that we need to do in the future. For now, if I should summarize it, good development in the U.S. due to penetration and stable and also good pricing on the spare parts in Europe.
Should we expect the growth on the service market to exceed GDP next year, driven by the replacement demand and the need for innovation languages, etc.?
I think first we need to know the GDP growth in order to see that. Let's put it this way, I don't think we see any major shifts. I don't know if you want to comment, Christer, on that.
Probably in the U.S., yes.
In the U.S.
They outgrow the GDP.
I can't forget the number on the penetration of your own engine. It was 80%, if I'm not correct.
Yes. I have studied a lot of numbers for this presentation, but help me, Christian, I think it's 80% on the engine side, and also, it's increasing on the I-Shift and on the M-Drive as well.
To say 80% on the Volvo side. If you take the gearboxes, we are running at 40% in Volvo and 25% in Mack on the I-Shift.
The M-Drive.
Is it possible to split the hedging effects separate for within this SEK 1.8 billion or specific SEK 900 million to VCE and trucks?
I mean, what you see there in the specification here was the unrealized hedges that is kept aside. The portion that is allocated to the BA is a part of that sum there. I think we have allocated it to a fairly detailed level there. During the phone conference in the afternoon here, we'll go through that more in detail as well. You have it there.
Thank you.
[Paul] Lindquist with Handelsbanken Asset Management. I had a question on sort of you're now talking about operating leverage in a straightforward way, which is great. If you look at sort of the different, because take trucks, it's a mix of different regions. If you just verbalize and say how happy you are with sort of the development of the operating leverage on sort of the different regions, so we get away from the mixed issue, would you say that, okay, there are big issues or would you overall be saying every region is doing reasonably fine on that one?
I think it's something in between big issues and everything is sort of okay. I think there is someone that we can say that a lot of improvement has been made. If you take North America, for instance, the new organization that was in place two years ago has done great things in working on the leverage side. Do we still have work to be done? Absolutely. I think it's something that I'm going to focus a lot on is to make sure that we are having the additional margin on the last truck we're selling that we should have. What exactly that would be in a different region depends on the starting point, the activity plans, and the implementation plan because it's not so easy.
It's easy to talk about it, but if you look at it, what you have to do, CE, for instance, the real way of getting away from the F production over, but not only the production but also the subsupply system. By doing that, you start to get a more natural hedge and better. To answer your question, I think there are areas that we can address in all the different regions. I don't think I should right now. I need to get into it more deeply before I sort of comment officially on the different regions there. I definitely see that we have improvements to be made as well.
More questions? Okay, we take any calls from the telephone conference.
Ladies and gentlemen, I remind you that if you want to ask a question, you need to press the zero one on your telephone keypad. That is zero one. The first question comes from Mr. Fredric Stahl from UBS. Please go ahead, sir.
Yeah, good morning, gentlemen. I had three questions for you, please. To start with, could you maybe give us an idea on how you see the European market developing next year? I know it's down 10%, but how do you think about Germany and the strong markets in Southern Europe? If you can give us more flavor on that. Secondly, I wanted to ask you if you could quantify the financial impact from the U.S. ramp-up, the impact on the margins. Finally, I've heard that the U.S. market is back exporting trucks into Russia. Is this correct? Is it a meaningful number of trucks being exported from the U.S. into Russia? Thanks.
Okay, Christer, I think you need to help me with the last one. I haven't heard anything about that. I don't know. Did you hear anything about that?
I haven't picked up on it, no.
We'll have to come back to you on that, Fredrik.
Sure.
On Europe, as I said, there are, of course, differences between the different regions. If you look at the GDP growth, for instance, you can definitely see that what we will see, the GDP growth is, of course, of the northern side of the European continent compared to the southern part. I don't think, and I'm looking here at Christer as well, but I don't think we see that being changed for next year. It's going to be the same kind of driver, but on a 10% lower level, if I would summarize it on the European side there. We don't specify the ramp-up cost that we have had and the impacts of it, other than saying that it has had, of course, a negative impact during Q3.
Okay, thank you very much.
The next question comes from Mr. Nick Hoder from JPMorgan. Please go ahead, sir.
Good morning, gentlemen. First of all, congratulations all of you with your new position. I'd like to talk a little bit about the restructuring program that you put forward a couple of weeks ago. What are the savings that you expect from the transformation to a functional organization from a matrix organization in trucks? Second question is the confidence in the construction equipment outlook. Caterpillar highlighted a similar outlook statement as you have yesterday if I take out Bucyrus, but they have more exposure than you have to the best growth markets, which is North America, and they have mining. I'm just sort of wondering what sort of an underlying GDP growth forecast that you have here for globally. I mean, I look at Caterpillar at 3.5%. I'm wondering whether you're above that or whether there's something else that is effectively causing you to be a bit more optimistic here.
Okay, when it comes to, and I would like to highlight, it's a reorganization. It is not a restructuring. As I said before, we will come back on the Capital Markets Day, Nico, in order to then go through this more in detail. I think it sort of takes a little bit more time to go through why, how, and then how does it look into the future. If you bear with me there, in two weeks, I will come back to that in much more detail with ample of time. When it comes to the construction equipment and the outlook for the different markets, we have done the same thing as we have done with all the other market outlooks. We are taking as much fact as we can find. We have then compared that with all the official data that is out there.
We have also, of course, taken our temperature on our customers, on our dealers to make sure that we sort of pitch it in the right way and then make the management. That's how we have come up to all of this. It's two parts of this. It's fact-based, and then it's, of course, the sort of the forward-looking. I think what you're seeing here in terms of the numbers, we're also using now a 10% span, and that's also indicating, of course, that there are uncertainties in the construction equipment market coming, especially when you start from some markets in low levels, then the percentage can be very high, even though the number of units might not be so high.
Okay, thank you.
The next question comes from Mr. Colin Gibson from HSBC. Please go ahead, sir.
Apparently, I've just changed employers. No, it's Colin Gibson from HSBC here. Two questions, please. First of all, going back to the new financial targets that you published a couple of weeks back, could you explain why Volvo Aero is stripped out and treated separately from the other industrial operations in those targets? That's the first question. Second question, and again, just looking at the financial targets that you now have, you want to be in the top two for profitability in the trucks business. That means de facto you're benchmarking yourselves against Paccar and Scania. Two companies less like each other would be hard to find, and neither of them are very much like Volvo. What is it about Scania and Paccar that you think Volvo needs to learn? What are they good at that you need to get better at? Thank you.
Again, coming back to the previous question, there are a lot of things to be discussed around the financial targets. I would like to also, on that, come back in two weeks' time on the Capital Markets Day and have a little bit more of an in-depth presentation and discussion around that. When it comes to Volvo Aero, that's very straightforward, and that is the nature of their business. You know, when I was the Head of Aero, I was at Farnborough and signing two contracts of combined SEK 90 billion, but it was stretched over 30 years- 35 years, 40 years. That's kind of a business where you need to look at the return rather than each and every quarter. Secondly, there is no other Volvo Aero around which you can have a comparison one-to-one. Those are the reasons for that, and particularly the first one.
Let me, and bear with me also on that one, on the financial targets and on the reorganization, we will then have a discussion next in the Capital Markets Day in two weeks.
All right, I look forward to it. Thank you.
Thank you.
The next question comes from José Asumendi from RBS. Please go ahead, sir.
Thanks very much. Good morning. Three questions, please. The first one, could you, just coming back to the truck performance, could you just please remind us how you have become more flexible both in Europe and Latin since the previous crisis? Also, maybe with sales down 15% in Europe and Latin America, would you expect to remain above break even in both regions next year? Third question would be around the balance sheet and maybe an industrial net debt position. How do you see this net debt position evolving over the next three to four years, or what kind of magnitude would you feel comfortable owning in your balance sheet? Thanks.
Okay, thank you. The truck, the flexibility we have, we're talking about total flexibility, and that is then defined as consultants or temporary or manning companies. We are talking about 17% of the total workforce, which is substantially higher than what we had on the peak in 2008. That is the flexibility that we have on that level. Of course, we have the normal flexibility in terms of plus hours and minus hours and working hour banks, and so on and so forth. That's the flexibility. When it comes to the second question, I'm looking at Mikael, but I don't think we discussed that. It sounds very much like a forward-looking statement, which we don't comment upon. The third one, Mikael, I leave over to you on the net debt position.
I mean, as you have seen here, we have confirmed the targets here of 40% net debt/equity, and we are just above that. Our ambition is to continue to work that down. I think where we are right now in the cycle, we have done a lot of work to prove that we should get in line with that. As you saw, the cash conversion cycle is certainly in the best ever shape we have been in in the past, and that will continue also to secure cash flow going forward. We don't give any forecast there either, but we maintain our objective there to get somewhere between 0% and 40% over time in a normal cycle, you could say.
Thank you.
The next question comes from Mr. Peter Riley from Deutsche Bank. Please go ahead, sir.
Good morning. I've got two questions, please. Now that you're in charge, Olof, can you tell us whether you think that Aero is a core business or whether you consider selling it, given the lack of any obvious strategic logic? Secondly, you mentioned several times that profitability in the U.S. is lower, but it's been improving over time. I'm wondering whether you're going to break with the practice of your predecessor and give us any tangible information about the gap and the trend over time.
Okay, let me start with the last question. For the time being, no such plans. If you look at the, if I understood correctly, you wanted to have more split information between the different regions on the truck business profitability-wise. Was that the question, Peter?
Ever since I've been following Volvo, there have been comments saying that the U.S. profitability has been lower and that it's improving. Clearly, it can't be lower and improving forever. That comes a stage when it actually gets up to the average of the division. We've got no idea, based on current disclosure, whether the gap is now small or whether it's still very big, and would it be helpful to know what's going on?
Okay. As per now, to be quite frank, I have no plans of changing my predecessor's disclosures on that one, but I note your question. On the Aero side, nothing has changed on the Aero side, and you're talking to a previous CEO of Volvo Aero. I think what we have done now with Aero is to do a rather strategic repositioning where we have focused Aero into the core businesses where they have a world-leading position in the components that we do have. They are very well positioned in the different segments and the programs going forward, and we have done a lot of investments both on the production side, but also in risk and revenue sharing partner programs going forward.
For me, Volvo Aero is now in a phase where they need to really focus on getting the productivity, making sure that they get the payback on the investments that we have done both in production and on the program side. That's what we're going to focus on going forward here.
Okay, thank you.
Thank you.
I remind you that if you want to ask a question, you need to press zero one on your telephone keypad. That is zero one.
Okay.
There are no further questions at this time. I hand back over to you, Olof.
Thank you very much. I would like to thank you all for sitting through my first quarterly report. Thank you very much.