Volvo AB

STO:VOLV B

Earnings Call Transcript 2017-Q4

[Joakim Kenndal, Communications Director]

Then I would like to wish -- welcome to Volvo Group's presentations for their fourth quarter 2017. My name is Joakim Kenndal, I will moderate the Q&A session of the presentations. But we will, as always, start with a presentation from Martin Lundstedt, President and CEO of the Volvo Group. And then, later on, he will be joined by Jan Gurander, Deputy CEO and CFO for Volvo Group. Please welcome Martin.

[Martin Lundstedt]

Thank you, Joakim. So also from my side, most welcome to this quarter 4 and full year 2017 presentation for the Volvo Group. And just before starting, getting into the presentation, I have to say that it has been a very intensive year when you start to look back a little bit, both that we will discuss about the figures and the economic activity, but also when it comes to a lot of different things that have happened in our business when it comes to product launches, some very major project launches in the Truck business, but also in Construction Equipment, Buses, new innovation and business model. So truly intensive year. And I would like to start with -- actually thank all our colleagues in the Volvo Group, my colleagues in the Volvo Group and also partners, dealers, suppliers for contributing in a very good way of making this year a very good and interesting year for the Volvo Group.Some of the fourth quarter's highlights to start with then. Net sales continue to increase 16% if you exclude currency, which is a strong momentum still, reflecting also the market activities around the globe and also that we are gaining momentum in many fields and many product areas as a group. We also have seen continued improved profitability for the group. When it comes to Trucks, the adjusted margin increased to 9.5% in relation to 8.7% same quarter 2016. And Construction Equipment also had strong momentum with almost 11% operating margin, and that was also a very strong increase obviously from same quarter 2016. As we can see here also, the highest net sales and operating income so far for quarter 4, so a very strong result for the group. And that goes also for the whole year as I will come back to a little bit later, that both when it comes to the turnover, the net sales of the group, operating income and operating margin was the best year so far. So that is a very strong achievement obviously. When it comes to the volume development, that also continues to be strong. We increased deliveries for trucks when we look at heavy-duty and medium-duty with 19%. As you can see also, that was in all Truck business areas, a strong momentum and particularly strong then, for Volvo and for Mack. We would also come back to the North American economic situation from that respect. Also when it comes to Volvo Construction Equipment, very strong, deliveries up with 49%. And I -- and as you can see, that is also obviously Volvo with strong momentum, but even further pronounced for SDLG then, given the strong recovery in the Chinese construction market. As I will come back to later on, but I think that figure is important to have in mind, plus 19% is still a good figure when it comes to increasing deliveries because we have had the discussion regarding the stretched supply chain, but that is showing that we are continuously actually debottlenecking. But given the good situation of order intake also, that will continue to be stressed naturally.The service sales development is also a very positive factor for us, SEK 18.3 billion in quarter 4, and that is an increase of 8% if you are excluding the currency effect. So that is very good growth. And what is, in particular, nice to see here is that obviously, the parts sales is increasing, but even further pronounced actually the workshop hours and workshop sales, meaning that also the contract penetration, the loyalty, customers are coming into our workshops and different type of solutions. So that is part of the strategy. So the increase here is related obviously to activity levels in the market, rolling fleet and high utilization. But it's also related to higher contract penetration of our service contracts and obviously also the proprietary strategy of powertrain in North America that will continue to gain momentum. And overall, when we look in -- around the globe now with our modular cost system, and in particular, for powertrain, we see very high penetration across the globe. And as you can also see here, it is an increase in all different main business areas: Trucks, Construction Equipment, Buses and Volvo Penta. And obviously, this is also why it's so important now to take the opportunity with the increase in deliveries because this is very important for the future revenues and really coming in at the right level of penetration for the new vehicle sales, including the contract penetrations, both of repair and maintenance contracts.On the Trucks side, good demand. I will come back to that. 29% up in orders, 19% up in deliveries, so still positive book-to-bill even though that we are increasing deliveries here. So the whole organization is working hard obviously and not only our industrial organization as such, but also, as I said, dealers and suppliers in many tiers also to really try to increase as good as we can here. And I think in quarter 4, the organization has done a fantastic job on that. The demand continues to increase, order intake. Having said that, we managed actually with overtime, with speed transports, but we managed actually to fulfill the absolute majority of customer promises when it comes to delivery times, quality, et cetera, which is, at the end of the day, the most important. Never promise more than you can keep and I can assure you that is tempting in a situation like this. But in order to really build credibility among our customers and their customers, we need to balance this in a good way. Another important thing that we will come back to is obviously the launches now that we are doing in North America. In the beginning of the year, as you remember, we did a lot of -- we had a number of launches in Asia, both in Japan but also in other markets. And during the course of the year, starting during the spring, Volvo Trucks in North America and now lately coming in also Mack Trucks. I'll come back to that. Another very interesting step obviously is that we will have the sales start of our medium-duty electric trucks in 2019, and as a matter of fact, we will already have trucks out this year with selected customers. This is a natural step from our Bus business where we have been a leading actor since many years now. We have almost 4,000 trucks -- or buses out, hybrids or fully electric, and we are continuing to build off the modular product system that we have in Buses also to move into urban applications of trucks. It will be in distribution, waste collection, road sweepers, what have you, in order to utilize also the common infrastructure and get the benefits of electrification where it pays off quickest in terms of sustainability as a whole. Of course, it must be economically viable. But if you account for noise levels, close-by emissions such as in particulates, NOx, but also the CO2 impact given that you have the right energy production, it is very interested for -- interesting for the cities in order to achieve the targets that we all need to achieve here.So that will be interesting times. And we will start both with Volvo and with Renault actually and the full launch will actually happen during the spring here, so then you will obviously be invited to different events to touch and feel what this is all about. As I said, great reception of the new trucks in North America. As a matter of fact, we have been surprised not only by the market as such, the market recovery, but also the strong momentum we have in orders here for the Volvo VNL, as you can see on the slide here, and also the Volvo VNR, that is the day cab execution or regional haulage. We have so far already got 21,000 orders. And having said that, the VNL was launched, as you know, during the summer. On the Mack side, it's also interesting, the late launch in -- during the fall here and we are actually conducting the changeover as we speak. We do the [ clear ] after week 5, so it's this week in Macungie in Pennsylvania. And already, so far, we have taken 4,500 orders on the highway, the sleeper and the day cab. And that is a higher figure than we normally do during a whole year from Mack when it comes to highway trucks. So that is saying that Mack is back. We are Mack, this is our Anthem. And it's fantastic. I can say that the reception of this has been extraordinary. And we have -- I was in the U.S. week 2 and met with a number of customers. And also concurring accounts that are having out the trucks and say we are buying now 15 to 20 Mack Anthems because we want to give that to our drivers that really want to have it, and as you know, there's a driver shortage. So this is a fantastic truck. And also with good aerodynamics, it doesn't need to look like a jellybean in order to be aerodynamic. So I think it's great. It's a fantastic truck and we are so happy for that. The organization is motivated. And also, as I said, the Volvo Truck here. So strong offering in North America. Quarter 1 will be in our transition obviously, a planned transition. We are going for quality. We are going for lead times ramp-up. There will be some planned extra costs with that, but that's normal. But this is a platform for a bright future and also for regaining market shares that we obviously should do in a good pace.When it comes to the market forecast, Europe continues to be very strong in quarter 3. We guided for 300,000 and now we are guiding up a little bit to 310,000, so that is only showing that, if anything, there is an underlying upward pressure. We are not seeing that as a bubble. There is good activity levels and also still, so to speak, a balance with replacement and real activity level. So 310,000. North America, 280,000, also guiding up with 20,000 units coming from different factors actually: low inventory levels both for used and new trucks, it was a strong order intake in quarter 4, the economic activities, as we said, and there is also hopes for an infrastructural bill coming up here that will also further compound this. So 280,000 is our current guidance of that and that obviously will be one very interesting and positive challenge, also given the fact that we have a strong platform here as I said. Brazil is also up 10,000, from 35,000 to 45,000, still low levels. But having said that, obviously agriculture is moving. Mining and resources industry is moving. So -- and also Brazilian economy is in a recovery phase and hopefully in a way also where we will not see subsidies, but a real economic environment. And that, I think, should be very good for the Brazilian truck market going forward.Asia, we are keeping our forecast for China. Still high levels, lower than 2017 given the changes in China of weight legislations in '17, so there was prebuys, but still a high level obviously given the economic activity in China. We're guiding up a little bit in India. 20,000 units, 15,000 on the heavy-duty and 5,000 on the medium-duty. And we are keeping our forecast flat in Japan slightly downwards in relation to '17. A little bit bigger part of that decrease -- well, that forecast decrease is related, as we already said, in quarter 3 to medium-duty.Market shares. If I start with North America, as you have seen during the course of the year, we have been losing market share. As we have already said, we have put priority on really having a solid business when it comes to the relation between volumes and profitability. Volvo is mainly related to the transition during the year and the plans, so to speak, phase-in, phase-outs, and that will continue a little bit also in quarter 1. But still good reception, good quality levels and according to plan. And as we have said, it's much more important to have the quality in the business. And when it comes to price levels, we feel also that we are on target when it comes to the price realization of new products here.Mack is mainly related, during the course of the year, to the mix effect that long haul, which has been coming back strongly during the fall here where we historically has had -- we have had a weaker position where Mack is stronger in vocational and urban solutions such as waste collection, for example. Having said that, with the new Mack Anthem, as I said, we are also very hopeful of having the opportunity to have a better share in long haulage.Strong in Europe, historically high levels for Volvo. Flat, but I think it's good to consolidate on that level. Work also with the quality of the business, so to speak. And also, Renault Trucks regaining and has been very important for our Renault organization, done a great job here and also in a very consistent way building market shares, not the least in core markets such as France obviously, but also other very important markets for Renault. So well done here. Brazil, a little bit down mainly related to semi-heavy, medium-duty trucks where we have been over the year pushing for price increases, given profitability levels and lost market shares consequently, but that has been a very deliberate decision for us. In heavy-duty, we're keeping good momentum. And as we can see, in South Africa, good situation. And also in Australia, as a matter of fact, you have a little bit of mix effect. If you look into the 3 bands, we are keeping a position of 26%, 27% for the group, which is historically very strong. So we are still happy with that development. And Japan, as you can see also, a strong recovery with 2 percentage points mainly related to a strong recovery during the fall. So I think, generally speaking, we are satisfied and we are aiming now for having a good recovery also in North America, both with the platforms, and so to speak, the product levels that we have. When it comes to orders and deliveries done on the Trucks side. As I was into, we have positive book-to-bill in -- still in Europe. As you can see, orders up 22% and deliveries 14%, so continue to be upward pressure here. North America, obviously very strong. 84% in orders and deliveries 28%. So here, we will continue then to work with those opportunities and also manage the transition as we have said. South America from low levels, but still very successful [indiscernible] exhibition, good reception of, so to speak, our solutions in core segments such as agriculture and mining and so on, but also in the long haulage segment. So that is continuing to look as a good recovery. And then in Asia, as you can see on the order side, it's mainly related to some of the tender markets and primarily related to -- or tender-like markets where we have more volumes coming in and out mainly related to the Middle East. But generally speaking, our regular markets are moving in a good way. But mix-wise, this is looking obviously positive. Construction Equipment. Market growth also in all segments. We are revising upward also the forecast as you will see later on here. Orders up 48% and deliveries up 49%. So it will show on the book-to-bill, which I think is very strong and very well done by Construction Equipment to really manage that and that has been, as you know, the trend over the -- during the course of the year. One can also say obviously that they start with lower utilization rates in order also to balance it a little bit with the truck guys, so to speak, on that, that had a starting point of high utilization. But having said that, it's very well done in the whole value chain here. And transformation program continues to yield results for us also. And what is -- we are glad to see that we are continuing also to have good momentum in the heavy equipment across the globe. One very exciting thing. I was in Motherwell myself actually just before Christmas here, Motherwell outside Glasgow where we are building our rigids, that is the Terex Trucks facilities. And now we are actually coming with the first Volvo-branded rigid hauler that will get hold of the full network of Volvo obviously and also combining that with a strong offer we have in articulated haulers and excavators. And both for quarries and mines, et cetera this will be a very interesting in-break. It's a lot of good innovations here when it comes to, obviously, the very famous Volvo intelligent monitoring systems for better productivity that we are using for other applications, driver comfort, driver environment, security, safety. We shape boldly, as you can see, new and more robust hydraulics. And it's coming in 45, 60, 72 and 100 tonners. And it's interesting when you are driving such a piece that it feels still very secure. Actually, I had the chance to do it within a controlled environment, so don't worry. But I have to say that we'll gladly invite you to do that obviously also. So this will be interesting for the future and a great opportunity for the Construction Equipment side here. Construction Equipment. Some guidance upwards as we said. We were guiding flat in North America and in Europe and we are increasing that from flat to slightly upwards now. We are also increasing our forecast for China from 5% to 15% as we guided to 10% to 20% now and we still see that it's a strong spring season in China as you saw also on the order intake here. So if anything, it looks, yes, it looks promising there as well here.When it comes to the orders and deliveries, as I said strongly, that we are managing and balancing this in a good way. Maybe what you can comment on this is in North America where actually we have, first of all, a weak order intake and that is a little bit of how it's coming between the quarters and seasonality. We had a weak quarter 3, and we also see now with a strong momentum in North America that our dealers are exchanging the rental fleets. They are selling off older equipment, that they have been more conservative and that is also giving opportunities. And yes, the strong economic situation, so that is giving effect here. Also good to see that South America that has been lagging behind a little bit from the Trucks side is also coming in well and obviously share is very strong.On the Bus side, we can say that the decrease here seems to be dramatic. But I think most of you that have been following us know that the Buses is, to a very big extent, tender based and a little bit what is happening between quarters. So when it comes to the order, decrease by 28% here. First of all, you can relate also to the full year where we had an order increase of 2%. And this decrease is primarily related to 3 big orders that we took in quarter 4 last year in Australia, Egypt and Nova in North America. If we take Nova as an example, just to have a view into 2018, we actually have an order book that is pretty full for the whole year actually. So that is only showing that you need to look a little bit long in perspective. What is very -- what we are very happy to see is the in breaking in Singapore of the hybrid buses. It's a full and complete system delivery, and not only buses but also charging stations and infrastructure around that. And here, I think it's a very important showcase of how these types of systems are operating in order to also make more embracing in Southeast Asia, not at least.In addition to that, we are also starting a partnership with NTU, that is one of the leading universities in Singapore, on autonomous buses in combination with electromobility and the full system thinking to reshape also the future of the cities, about what I said before, clean air, less congestion, less noise. So looking forward to that. On the Volvo Penta side, finally also a strong year with sales growth in both industrial and marine segments. But primarily in quarter 4, we continue to see strong momentum for us when it comes to growth in the industrial all-speed segment. Agriculture is one example, but we see that across-the-board. We have been putting more focus on the industrial all-speed segment where we have engines that are suitable for that application and we see that in the order intake. So when it comes to the order increase here, it was primarily actually related to industrial all-speed. But still, also strong momentum in marine commercial and marine pleasure also when it comes to diesel. A little bit less momentum in gas, but -- that are on the smaller areas.So with that, I will actually leave the floor to our Deputy CEO and CFO, Jan Gurander, to go through the figures. So please, Jan.

[Jan Gurander]

Thank you, Martin. So starting with the sales, it's almost up with SEK 10 billion. As you see here in the third quarter, we have a pretty big effect coming in from -- negative effect coming in from the currency, it's a minus almost SEK 4 billion. Currency also has an effect on the operating income as well in the quarter, also negative which you will see later on. But as you can see and as Martin said before, it is a strong growth in all market areas. So Europe up with SEK 3 billion, North America with SEK 2 billion, South America and Asia, so basically a global strong development in terms of growth. When we look into the different business areas and how they contribute to the improvement of the profitability, we go from an adjusted operating income of SEK 5.7 billion. Last year, we had some one-time effects in the result of sale of real estate that was excluded, so the underlying result is SEK 5.7 billion. We then go up to SEK 7.3 billion and in the fourth quarter, we didn't have any adjustments. As you can see here, contribution coming from -- positive from all our business areas: Trucks, CE, Buses, Penta and Financial Services. When it comes to the group functions and other, here, we have the impairment from Volvo Group Governmental Sales on a contract. You can say that the underlying performance of the contract is going more or less according to plan, but it is a hit that we take actually on the currency exposure on this contract. Apart from that also there are some -- it is a tender business within the Governmental Sales, that type of business. And we had a strong fourth quarter in 2016 in terms of deliveries, which are the down to the result and 2017 was a little bit weaker from the, you can say, from the tender business. So that explains the majority of the SEK 765 million. If you look into the -- make the same journey, but a little bit different line items in the P&L, we see that gross income is helping the result with SEK 1.7 billion. Obviously it's coming very much from volumes. Apart from that, of course, we see that we have disturbances from the supply chain, extra costs coming mainly from logistics, but also from overtime and so on. That is actually bringing down our gross income in the quarter. We also see mix effects as well if you look upon the gross income margin, not the gross income in absolute figures. Of course, the new vehicle sales are taking a bigger proportion of sales compared to the service, which then dilutes the gross income margin in percent. We also see some, you can say, geographical mix effect also hurting a little bit on the percentage of the gross income, more sales into North America compared to Europe and also a little bit in Europe actually, shifting from the Western part of Europe more into Central and Eastern Europe as well. Otherwise, I mean, it's a good development on the gross income side, coming both -- talk about the 2 major areas, business areas, from Trucks and Construction Equipment. Then we see that we are, in terms of cash R&D, a little bit higher. I mean, we have kept the R&D on a pretty stable level for some years. I think now when we see, of course, inflation hits in and so on and a little bit also new activities and a little bit more focus on new technologies, you will see a little bit gradual uptick in terms of R& D and that's what you saw here at the end of last year. Not anything dramatic, but a slight drift upwards. Capitalization and amortization, a negative thing. It's a bookkeeping thing, not very much we can do about. And when we look into the -- this year, we will be, in terms of capitalization and amortization, flat to maybe that we have a little bit more capitalization and amortization. We were negative this way in Q4. Of course, the start of this year will be on the negative side and then most probably turn a little bit into the positive side as we go along the year. Selling and admin very much related, of course, to the higher activities. I mean, we are at a record level of sales and that doesn't come through without a little bit of increased efforts in terms of selling and to some extent admin as well. I think the important thing here is maybe not the fact that it is increasing because it's pretty natural. The important thing is that we have flexibility in the costs that we add on and that is the focus now, so we don't build up new fixed costs in the company because sooner or later even though the future looks very bright right now, of course, market can normalize again and then we need to have flexibility in these line items. So that's very much a focus in the organization for the time being. Then we have another line item called Other and here is the majority -- or not the majority, but a big part of that comes from the improvement on the joint ventures. That's what you find there. We also have a little bit of -- we have also sold, I think, a dealer in the fourth quarter as well. And this Other item, it's a little bit of, you can say, I think [ Tina ] told me, some years you have a bag of candies and sometimes there are a lot of red candies and sometimes a little bit of black candies. We had a lot of red candies, small items in Q4 2016, and we had more black candies in the fourth quarter 2017. And in the BRIC group like that, it came up a little bit like that. So -- but the biggest thing you find there is basically the joint ventures.Cash flow, pretty good quarter, SEK 14.4 billion. Maybe as we mentioned last year there, we had the effect of what we paid for the fine for European Commission investigations. So that's also why it was so low Q4 2016. But SEK 14.4 billion, we have a good development in terms, of course, underlying profitability. We see that we had a good development in terms of, I mean, actually a little bit of contribution from inventories. We saw also that the pay was on a good level. Nothing to do with payment days, but just due to the fact that we ramp up. So here is the further effect of the ramp-up. It's actually I think also worth mentioning where we talk about the ramp-up and disturbance costs that we have, we are increasing quite a lot, I mean, up to 20% and here you see it also on the payables side. And I think also, a stable development, I would say, when it comes to investments as well, not anything dramatic, keeping that on the same level as we have said before. Used assets as much as possible. Going into Trucks. Net sales up with 12%. If we do the currency adjustments, we see sub-16%, vehicles 18% -- and I mean 18% corresponds very much to the -- in terms of increase of deliveries of 19%. Services at currency-adjusted is up 9%. Going from SEK 4.8 billion to SEK 5.8 billion, you see here also then a pretty big part of the currency effect comes here almost SEK 400 million. Maybe I should mention that as well, we also talked a little bit about -- now [ Christer] is a little bit nervous what we will say about the currency for this year. And the currency for the group for this year, once again, transaction exposure and the same currency flows as last year. We think it will be pretty much as it looks like now, a flat development on the currencies and nothing from the transaction exposure. But anyway, going from SEK 4.8 billion to SEK 5.8 billion and improving the margin from 8.7% to 9.5% and obviously it's the higher volumes that we see. On the negative side, it is the increased efforts that we see on the sales side, the higher R&D costs but also, of course, the stretched supply chain. So of course, being 2/3 of the group, it's very much what we see on a group level. Construction Equipment, up 28%; deliveries up 49%. Here you can see that you have Volvo up 27% and SDLG up almost 90% in terms of sales. That's also why you see here when it comes to sales of machinery is up 39% and that's each SDLG machine has a little bit lower value than a Volvo machine, especially on the GPE side. That's why you don't have the same development on sales as you have on deliveries. Otherwise, a very good development and also a good thing when it comes to the mix is, of course, that we sell -- have a bigger increase on the large machines compared to the compact machines. Also here, a strong development in terms of service, up more than 10%. The Construction Equipment going from SEK 500 million up to SEK 1.8 billion in a year, 3.8% to 10.9% in the fourth quarter. And basically, it is about taking care of the volumes, high volumes, into an industrial system that has been historically underutilized. It gives an enormous effect on the leverage. But at the same time, as you can see here, no cost increase at all in terms of R&D, selling, admin or anything. So it's extremely tight -- tight cost control you can see in this very good market. So that's very, very good example of how to take care of an upturn in the market. Buses. We have the net sales when it comes to currency adjustments, it's minus 8%. We were more or less flat in terms of deliveries. Once again, here, it's a little bit a question about product mix between fully built buses and chassis. So these kinds of things can happen between the quarters. Then apart from that, a good development on the service side, which is also then what we can see in terms of the improvement -- not the improvement, but on the operating income, it gives a good effect into the P&L for Buses. Apart from that, good improvements in the underlying productivity in Buses as well and S&A being on the negative side. An improvement on the operating margin from 3.3% to 4.1%. Penta. Penta has the fourth quarter as the seasonally weakest quarter, as you can see from the historical graphs, coming up now to SEK 2.7 billion in sales in the quarter, above 11%, which is historically a very high figure. I think it's the second biggest sales figure in the history of Penta. When it comes to profitability, SEK 190 million, approximately 7% for the quarter. As I said before, pretty -- it's the weakest quarter over the year. High sales and good product mix generally much on the industrial engine side and it is also about the big engines as well, which is good. So a good development. As a matter of fact, this was in terms of operating income, a record year for Penta as well. Financial Services, stable, continued stable development in the quarter, almost SEK 590 million, 14.3% in return on equity. Here, we have a -- this is adjusted for tax effect that we have in North America due to the tax reform or the lower corporate taxes in the U.S. We have a big positive effect for Volvo Financial Services. So the -- actually reported real return on equity is actually 22% for the year. But if you take away that effect, we are in 14.3% and 14.3% is a really, really good result for Financial Services. New financing obviously will keep -- or actually improve a little bit on the penetration levels so we get a lot of new financing. Tough environment in terms of pricing obviously. Suddenly everybody likes to take these types of assets into the balance sheet, so banks, finance companies, leasing companies and so on, so it's pretty tough on margins. So I think we've kept it fairly good. Extremely good development in terms of credit losses, historically very, very low. Europe is performing extremely strong for the time being.Just a few -- since it's the Q4, a few words about the full year 2017. We are going then from an adjusted operating income of SEK 21 billion up to almost SEK 30 billion. And as you can see and you have followed it over the year, it is the same, you can say, explanations, that we have seen good development on the gross income side, a little bit of increased cost levels when it comes to R&D, selling and admin. And then when we come into the Other line, it is actually -- the joint venture accounts for a very big part of that. And we have some sales of dealers for CE and also on the Trucks side as well. But I think that's the majority. And if we compare also to 2016, 2016 we had on Other some credit losses still in '16, so that's -- that we didn't have in 2017, credit losses for China, CE as you remember. So basically, a good year. A record year for the Volvo Group. And by that, Martin.

[Martin Lundstedt]

Coming on as well. And I think we can do a very short summary then. You've heard most of it. Yes, there we have it. As we said, the highest net sales and EBIT for the group, so we are obviously very humbly proud of that. Also strong operating cash flow and a strong net cash position also. And the proposed dividend taken by -- as a proposal now for AGM by the board an increase of SEK 1 per share up to SEK 4.25, reflecting also the good results, underlying results, and in addition to that, also continued strong financial position that you obviously should have in a cycle or where you are in the cycle right now, so to speak. So again, very proud of our colleagues in the group and how everyone has been working hard. And now it's full steam ahead for 2018. So by that, I think we open for questions.

[Joakim Kenndal, Communications Director]

Thank you very much, Martin and Jan. We will now start with the Q&A session. We will mix from the auditorium and the telephone conference. So let's start with 3 questions from the auditorium.

[Erik Golrang]

Erik Golrang, SEB. Three questions. The first one on pricing in the U.S. You said in Q3 that you were focusing on getting the right prices on the new range. That might hold back all the momentum a bit. But yet, you had very strong orders in North America. So should I assume that pricing is not an issue there? And then the second question on the overall leverage, and I would just think of this as in 2018, you're entering this year at a run rate of orders, which is quite a bit higher in Trucks than we were last year. There are some supply chain issues and some other factors. But how should we think about the drop-through to that on earnings this year? And then the third question, you talked about the -- some new electrical products. You've had some experience now from the Bus side. Could you share any thoughts on how the aftermarket business has looked on hybrids and electric buses so far? And what you expect from that as that also moves to the Truck side?

[Jan Gurander]

Thank you, Erik. First of all, on pricing, Jan Gurander speaking, we have seen in quarter 4 actually a slightly positive development on pricing in most regions, which is promising obviously. And that is the balance that we need to continue to work on now given the very high activity level obviously and that goes also for North America. So if anything, a positive development that we have been also waiting for, to some extent, and we'll continue to work with that balance between volume and pricing. When it comes to the leverage, obviously what I think was positive -- or what we think was positive was that we had the [ 16% ] leverage, I mean, on the Trucks side in quarter 4. Still, given the fact that we are in a ramp-up mode, both when it comes to the transition in North America as we were into and also ramp-up mode in the whole system, so the bottlenecks if I will put it like that, that we had in summer is not the same. We are debottlenecking and then we are coming up because we have a continuous very strong order momentum. But obviously, this is one of the key areas to focus on in '18 to have the -- as you put it, the drop-through into the bottom line, so to speak. And that is also one of the key parameters of building strength and coming to our long-term financial target as well. When it comes to the aftermarket business in the electrical side, obviously, that is changing a little bit. The character of the -- I don't like of them -- this is as you know, that is our customers' main market. But the service business is changing character obviously because you get more into a system thinking and thereby, deeper engagement. Some of the components have less, so to speak, less impact in relation to the traditional execution of a truck. But there are the parameters that are also compensating. So it is a little bit early days to say, but we are -- we see promising signs that we will have an opportunity to -- even if it's a different character of the service business, but also have a good and solid service business for electrical solutions.

[Hampus Engellau, Automotive Analyst]

Hampus Engellau from Handelsbanken. I also have 3 questions. Starting off with outlook. If I add Mexican exports to North America, you're clearly looking at above 300,000 units. And my question is, I don't think I have ever seen a combined Europe and North American market well above 600,000 units. And I would like to know what is the main challenge? Is it bottlenecks? Or how do you think about that? Second question is capital structure. Following the dividend, you still have like net cash SEK 16 billion. It's not unlikely that you generate another SEK 25 billion. So how should we think about this maybe in the next year or this year on the cash situation and what your plans for that given that you're also very fully invested in the group? Last question is on the tax. With the U.S. tax change, what kind of tax rate should we look at for the group going forward?

[Martin Lundstedt]

Hampus, first of all, to your point, I've never seen it either, so to speak, such a coordinated strong momentum obviously, North America and in Europe, but also in other markets. We see now good signs of Brazil obviously and -- that also have, so to speak, the same type of products, but also in Asia where we're also growing, so this is, obviously, very positive. Having said that, and in addition to that, which is also positive, is that we have, as I said, good penetration on our captive powertrains, and continue to actually grow that part and not -- at least down in North America. So obviously, that is the challenge now. How do we balance that together with our suppliers in several steps to keep, so to speak, the balance between taking part of the increased market because that is a super-important investment in the rolling fleet for the future? Also given the fact that we have better penetration per vehicle for the service business. But at the same time, not over appetite, so we are not fulfilling our customer promises, of course, in quality, but also in delivery time. So this is the balance. But I have to say that the organization and our partners are working hard. And we see that we can continue to grow. And in addition to that also, we have the transition in North America, because now we do the [indiscernible] capital Mack, and we are still running double programs for Volvo. But still, I have to say that we are keeping it together. We have some extra cost, but it's well contained, we see what it is. And I think we are taking, so far, wise decisions so we are having that balance. But obviously, this will be a positive target if I put it like that also due in 2018.

[Jan Gurander]

Now we'll come to the capital structure. I mean, first and foremost, we are increasing the dividend with SEK 1 this year from SEK 3.25 to SEK 4.25. I think that reflects, of course, I think the stable and good development that we have seen in the group in 2017. And obviously, with the forecast that you see for the markets as well, I think that also shows that we have some trust in at least to near future as well. So I think it's a well-balanced dividend if you start in that direction. Then what we have said, I mean, the new target that we put was actually to be that we should be net cash. And as you correctly said, we will be that also after the dividend and maybe also, as always, a weak cash flow quarter in quarter 1, which we always have for seasonal reasons. So I think this is where we stand right now. We will see then what this year ends up with and how much we have managed to get in cash flow in 2018, and where we stand on the balance sheet. I think from our end, that's an end of the day discussion for the board 1 year from now to take that decision. But what we have said also in the long run, first and foremost, we should have a strong balance sheet in the Volvo Group. It is a cyclical business. It is capital intensive. We also have the financial services arm. So we should not be too weak. Then we can debate how strong should it be then. And I promised many times and I will repeat it again, I will not take away the job from some of you here because we should not be asset managers or financial asset manager either. So let's come back next year and see where it's at. It's not disturbing yet, I can tell you.

[Martin Lundstedt]

Yes, that was a -- it looks promising obviously with more momentum in '18. But we also say that we are recording all things that we can discuss the distribution of the cake, but let's make the cake first, so that we will concentrate more.

[Jan Gurander]

And then when it comes to the tax rate, kind of 24%, 25% is our best estimate for the time being.

[Agnieszka Vilela, Research Analyst]

Agnieszka Vilela, Nordea. I have 2 questions, please. The first one is about your order intake in Europe. We have seen some acceleration recently. Could you just tell us what was your performance against the market in Q4 and isolate that? And the second question is on construction equipment. Can you comment on your market share development there, and what's in your outlook?

[Martin Lundstedt]

Yes, it was told with the order intake that we don't have the clear figures on. I mean, that is a drag now related to how the reporting is. But our feeling is that if we look at the pattern that we have, continue to have a positive development and what is promising to see is, as we said, is also that Renault has been in a very positive way also gaining momentum without, so to speak, stepping down from their principles of actually building a solid business when it comes to all these and things like that. We see also -- it's a pretty strong across-the-board mix actually between different segments and geographies. So if anything then, a little bit maybe more into Central and Eastern. But that is also reflecting how the transportation business is moving. But having said that, it is reflecting a strong solid, so to speak, demand in Europe, also I think reflecting the overall economic activity. But our feeling is that we are keeping, and that we have seen also improving somewhat [indiscernible], and one should remember that Volvo is on high levels. And now it is about priorities of the price realization, et cetera, as well, that we are putting focused on. When it comes to market share for construction equipment, generally speaking, we can say that as you know, we have higher market shares on GPE or General Purpose Equipment, the heavy side. And that has -- if you see the overall market share globally, that has dropped a little bit, but that's mainly related to mix effects where we are strong, and we are not strong because we are relatively a little bit weak in some markets. And thereby, one -- they are growing a little bit quicker than, for example, Europe, where we're extremely strong, you get that mathematical effect. But if you take geography by geography, we're actually still growing on the heavy side. And what is extra good to see is that, relatively speaking, we are taking more orders in the heavy segment, and that is our home turf where we are strong. So that is promising when it comes to the customer feedback as well.

[Joakim Kenndal, Communications Director]

Okay, we will then now take some questions from the telephone conference. Please go ahead.

[Operator]

[Operator Instructions] And the first question is from the line of Graham Phillips from Jefferies.

[Graham Phillips]

2 questions, please. So firstly, on the truck margin in 2018. Can you talk a little bit about the drop-through impact from things like raw materials? How that progressed during last year and into this year. And if we do get more OE deliveries than service, maybe give an outlook for service in 2018. Will that be dilutive? And second question is around investments in terms of R&D and CapEx. I think you're guiding to a flat number in terms of percentage of sales, so rising in absolute terms. And what you're actually doing in terms of investing in electric vehicles? Is that a headwind? Or is it swapping out for what you might have been spending on internal combustion engine?

[Jan Gurander]

When it comes to the truck margin, and more specifically on the raw material side, in 2017, we said that we had a quite significant headwind on the raw material side. We had the ambition to offset that with our commercial negotiations and then when we concluded the year 2017, it was actually a flat development, so we compensated everything. So the material cost per se was more or less flat actually. Having said that, we would, of course -- obviously would like to have a flat development on the raw materials. But anyway, I think it was good to offset that. It's a little bit more difficult.

[Martin Lundstedt]

Also for the mining activity.

[Jan Gurander]

Exactly. It is a little bit more difficult throughout, of course, 2018. I think we see still some headwind on the raw material side, maybe not to the same extent as we saw in 2017. So some headwind on that is I think what we say for the time being. Then I'll maybe comment a little bit on the service side. I mean, if the truck or vehicle sales increase as they have done last year, this year as well, you will have a dilutive effect on -- purely from a mathematical point of view. Having said that, I mean, the developments we see on the service side now is going in the right direction in terms of service contracts. We see the activities in our service workshops and so on, so we have a very good underlying activity there.

[Martin Lundstedt]

No, I think you will comment actually what I wanted to say was -- but this is super important. When you have the chance to put units out in the market, that is, I mean, a vehicle or machine is a bracket for future service revenue is very important. And the portfolio now is much more in-depth also when it comes to service contract penetration, for example. So it's dilutive, but still that is -- it's a positive dilution, if I put it like that, mathematical effect.

[Jan Gurander]

Yes. On the R&D side, I think, I mean, we are essentially where we have kept, as I said before, very stable R&D, and we are gradually steering more and more of our R&D efforts into the, what you call new technology, electromobility, automation and also connectivity. Of course, also utilizing as much as possible our modular system, the cost system to become more efficient in our R&D. Having said that, with all these things happening at the same time, we said that we will see a slight drift upwards on the R&D and with -- as you saw historically in Q4 and a little bit upwards also here in 2018. Nothing dramatic, nothing like what you saw in 2013 or something like that, but a little bit of gradual uptick on that. So, I mean, holding R&D stable when you have inflation as well as salary inflation and so on is pretty difficult in itself. So that's also another effect. And then more specifically on CapEx there, we have kept that stable now for 4 years. And what we see there is that this will also be pretty stable for 2018 as well. So there, we don't see the same kind of little bit uptick as we see on the R&D side.

[Martin Lundstedt]

Now, I mean, we are well invested in majority of our industrial footprint on that note. So I think that is the case. And coming back to what you said also, the cost system is really paying off for us when it comes to the current well-known technologies. Having said that, we need to continue to put efforts on the well-known, if I put it like that, internal combustion engine, about axle systems, safety systems, et cetera. So what is new and what is, so to speak, well-known is always to be discussed. Having said that, the development, which I think is positive is that transport will continue to increase in the world, both of goods and people. And it must be considerably more sustainable. That is how it is. And that is a super opportunity for us as a group. We have the technologies, and we need to continue to develop that. That's the future. So transport will not go away, but we need to make them more sustainable. And therefore, electromobility, connectivity to make all efficiencies into, so to speak, the transport systems and automations, both for safety and for efficiency. And to get use of the electromobility in a good way, there we are putting a lot of effort of actually increasing with a lot in percentage but also in absolute terms.

[Graham Phillips]

I'll get back in line, but one final follow-up there was on the FX. Did I understand you when you said that -- do you think FX will be neutral for the year? And, I guess, during the year though, the first quarters could well be negative?

[Jan Gurander]

Yes. I think we -- we say it will be flat for the year actually. We don't comment on any specific quarters. But -- so flat for the year.

[Operator]

And the next question is from the line of Klas Bergelind from Citi.

[Klas Henrik Bergelind, Director]

Yes, it's Klas from Citi. I have 3 questions, please. I will take them one at a time. First one on services, big increase there in trucks. It's been down to benefiting for more captive components in North America before. Would you say that the workshop and more contract sales now represent a trend shift from this quarter, which is obviously in line with your strategy that you presented at the Capital Markets Day? We all remember the slide when you were drawing the opportunity there and was very excited.

[Martin Lundstedt]

Obviously, you always want to think that you're making an impact. I think in all fairness, it's a combination obviously. It's a combination of high activity levels, I mean already with the same market share as we've always had. I mean, we should have had an increase. But we also see, as a matter of fact, when we look into several of our metrics that we are measuring, as I said, contract penetration, not at all the captive powertrain part. But also how we are utilizing the fact that we have 700,000 connected units in order to be more proactive. We see, for example, [indiscernible] to get while people how we are now penetrating the insurance part in a very good way doing sort of this is and thereby also steering in a positive way into our workshops and have a quick turnaround time. We see how the uptime promise in North America is gaining ground. We are certifying more and more dealers in specific base. So it's a lot of practical work behind this, and that is gaining. We are introducing remote downloading as one of the first brands, meaning that we can do software downloading much more quick and thereby, minimizing uptime -- downtime for the customers. And those combined things are making us a stronger partner to each customer. So it's a combination. But this will be a long, long, long move, Klas, that we will discuss. So this is hard work and continuous improvement.

[Klas Henrik Bergelind, Director]

All right. The second one is coming back to the truck margins. So obviously, solid growth, but we still see the low drop-through to EBIT on cost owing to the stretched supply chain and the launches in North America and in Asia. Could you help me understand how these costs will develop here going forward? Am I right to assume that maybe by the second quarter of this year, the drop-through can start to improve? Either launches are over, and the bottlenecks will start to annualize because it was in the second quarter of last year when the bottlenecks started to emerge? It looks like the first quarter will be the last tough cost quarter and then we can improve going forward.

[Jan Gurander]

I think you -- I think actually, in a way, you give half of the answer yourself actually because as you correctly said, I mean, we are in a changeover in North America, both for Volvo and now Mack here in the first maybe -- a little bit I think we will go into the second quarter as well. When it comes to the bottlenecks, yes, I think it will be pretty strained also for the first and second quarter. But as Martin explained before, we are a little bit catching the tail as well because when we, I mean, the kind of bottlenecks that we were discussing in the second quarter of 2017, I mean, they are probably most of them sold now. But now when we increase the sales figures and increase the production pace, we run into new ones, and you need to increase the capacity, both our own but also with the suppliers. So we're kind of catching the tail all the time upwards and...

[Martin Lundstedt]

It is not one line with steps like this when we say we take a step increase, it's like 250 different steps that are in parallel, and you need to manage that but...

[Jan Gurander]

So a little bit, as I said, all other things being equal, I think we will still have a lot of hard work to do in the first and the second quarter. The third and the fourth one are still -- is still a little bit open depending on what's happening in the market and how well we do the work in the first and second quarter.

[Martin Lundstedt]

But obviously, I think anyhow, given also the high deliveries that we had, we were actually somewhat pleased to see that leverage were coming back in quarter 4, and we were [indiscernible] on that part. And this is the focus area for us because when it comes to building a true-quality company that we're doing the 12 consecutive quarters we've seen improvement, to have the leverage in the truck side, is -- it is, of course, extremely important. So that is a focus area. And as you said, keeping also cost flexible when it comes to not only the operational part but also S&A as an example.

[Klas Henrik Bergelind, Director]

My final one is coming back to electrification in trucks. There's a lot of noise out there. And I just wanted to confirm that you already have a lot of knowledge within the group and that we, therefore, shouldn't expect a spike in R&D or CapEx. You're the pioneer in hybrids, launched in 2009 in buses, and you can grow on that knowledge. We're obviously talking medium duty, of course, but also if you could reflect on long haul. I personally don't believe in high penetration, but I don't believe, therefore, you would ramp in that space. But if we could get some more color also from you, Martin, there on both medium and long haul.

[Martin Lundstedt]

No. First of all, as you said, I think if you take from a pure bus division perspective, I think we can argue that we were too early out. The demand was simply not there. So during a period of time, we were criticized on why are you spending money on electromobility and -- with good reasons. I have to say for us now, when we look in hindsight, that has been extremely important because it is, first of all, to develop the different modules. It's battery, it's cell composition, software, the opportunities with architecture for different types of applications, both for buses and trucks and construction equipment, not to forget, because we have showcased a number of things that -- where we're using the same type of modules. But it's also about the utilization as such because when you're talking about electromobility, how you actually are cycling the battery. Is it going from 10% to 90% cycling or is it from 20% to 80% or do you have the combination between range and durability? How should you design a system? Urban transports will be -- given that it will take the lead also some of the confined areas operation such as ports, quarries, et cetera. And why I think that is important to manage is that that will give the biggest impact for us in society. It will give the same impact or in some cases, better on CO2. But in combination with that, it will also give impact on, as I said, NOx and particulate matters, noise, et cetera in cities, also hopefully also have a debate how do we build an attractive city when it comes to public transportation. So there, we have a strong position, we will continue to build on that. And again, what I said is that this is not only about the Volvo Group, but also having a strong ecosystem. And to get use on the long haul is to your point, Klas, what we will see there I think is some of the main corridors where you will have part electrification to get use of it and again take the best bets also with, so to speak, a constant electrification. And then you can go, so to speak, the last mile with some sort of electromobility or a smaller combustion with renewable fuels, for example, or in some cases also, cross stock lines. So again to make use of electromobility long haulage, it's not only valid to talk about electromobility. You must talk about systems, business models, automation and connectivity. And then you can make some sense out of it. But that will start with big flows and not all type of long haulage. So -- but we are, obviously, also with our hybrid competence also prepared for that. And not only prepared, we would like to push and take a lead and have a debate how can we actually make this transition happen.

[Operator]

And the next question comes from the line of Alok Katre from Societe Generale.

[Alok Katre, Equity Analyst]

I just have one really. On the North American truck market, clearly, you said it is pretty strong as we can see. But could you -- some have also said well the pricing is starting to pick up but could you just talk about how -- or what you're seeing on the used truck side especially as these come back in 2018, plus if you could also comment on whether customers are facing any labor or driver shortages, et cetera? And how's that sort of impacting your business, I-Shift or some of that?

[Martin Lundstedt]

Absolutely. I think -- thank you for that question, also it is an important one, obviously. As I said, I was in the U.S. week 2 and traveled around meeting a lot of both customers and dealers, et cetera. I was also by -- almost by coincidence actually dropping by one of our Arrow truck stores where we are selling them -- where we are retailing used trucks, not only our own but all brands. And I was very happy to hear that it's a very high turnover rate of the Volvo Trucks. We have low inventory levels, and they're all actually moving very quickly. And we see also that is a straighten out and see somewhat improvement on that side. Both inventory levels and actually turnaround rates and pricing is somewhat positive, primarily I have to say, on the Volvo side. I'm not saying that to brag, but it was what we heard, and we have that. So I think that is also related a little bit to how big a fleet you have there and how we have expanded. So that is a good balance for us right now. On Mack, it's not that pronounced because we don't have so much of Macks in the market of the used side given the nature of the business. They are staying much longer with the first owner given the vocation focus and the waste collection focus, et cetera, that we've had. But also, otherwise, if you take the units that we have, we also see a good situation. So I think the used side is clearly improved, and that is coming obviously both from the annual market activity, but also from that -- many have been, so to speak, cleaning out here. I still think though that one of the parameters -- because you can think about the order intake for North America in quarter 4, why shouldn't it be even maybe higher than 280,000 Class 8 new market. There is -- there are some volumes coming back in 2000 -- obviously in 2018 also and pretty big volumes from the good year. So I think that is also some balancing effect of the total growth. Driver shortages is an issue, I should say, almost across the globe, but primarily in Europe and in North America and also one of the reasons why we need to continue to invest in driver environment, driver safety, security, making that profession more attractive, conditions, et cetera. And in addition, more long and midterm also are some of the flows being automated also, so you can combine that like you have seen in the industrial evolution over the years because those are industrial systems. But for many customers and flows, this is an issue actually for [indiscernible] capacity.

[Joakim Kenndal, Communications Director]

Are there any more questions from the auditorium? Okay, then we continue with -- sorry, one, okay.

[Olof Cederholm, Lead Analyst]

I have 2 questions. Just on the electrification, I fully understand that you see this as a system integration within the haulers that you should think this kind of a bigger picture. On the other hand, if you look at the truck industry, it's quite fragmented. It's very many owners of trucks that work for bigger operators. So for instance, if I were to be a big grocery store or anyone in the U.S. or in Europe, that says our customers want us to deliver on electrical vehicles. And, I mean, to Tesla's points, they've already got orders for their cement truck that nobody really knows how heavy it's going to be and so on and so forth. But having said that, how long a time would you have to develop a matching concept on the Class 8 just a pure electric truck, and what would be the biggest challenges? Would it be the charging, the weight, the capacity or well, if you could elaborate the matter, please? And then we'll take that first.

[Martin Lundstedt]

Yes, very quick on that. I think you're absolutely right, Olof. And that's the reason why we need to work much more in the triangle than only, so to speak, supplier and the customer where our customer is the, if I may put it like that, the subsupplier would be gear scoped than, for example, a retail chain or a grocery store or whatever. Because it -- to get use of electrification and connectivity, et cetera, you need to think in the system. Otherwise, you will not get the benefit. Normally as a -- first of all, I think it's good that we see actors like Tesla shaking up the system and having that discussion because that is also giving these type of discussion much more headroom actually in the debate, what matters in order to make the transition. Having said that, 800 kilometers, you to give, I mean, a comparison of what -- 800 kilometers that has been announced from Tesla, that is a diesel tank equivalent of 240 liters. And if I should sell a tractor unit today with 240 liter diesel, no one should buy it because they don't have the autonomy. Having said that, that is not enough to say, okay, we'll have 800 kilometers, we need to also rethink the logistical system and say if you have 800 kilometers, where are all the hubs that we can use that? And then we are making the transition. So my point is that it's right to do this, but we need also to think through the logistical system, and that we need to do with logistical buyers. And we have to have a discussion, why do you go to [indiscernible] they are not buying a truck, but they are designing the logistical system. So I think you have a strong point that we need to work in the triangle. It's fragmented, but we will report to the same ecosystem in a way. Then when it comes to a long haulage, again that is a matter of energy storage. So it's not the technology difference between if you're doing an urban or, so to speak, a long haul. So it's about the architecture of the truck. How do you use it? What range do you want to achieve and the difference then might be how efficient are your battery packs in relation to competition, and that we need to save, call it, we are keeping the frontline. And so we are prepared. And the abatement will be really between weight. It will still be around cost because even if we say, I mean, from a society perspective, this is beneficial. How do we get the societal benefits into, so to speak, the person who should take, so to speak, the investment for it, and that we'll need to continue to work on. Both with, so to speak, when volumes are coming in obviously. But also maybe how is the view on the pricing of emissions, et cetera, I don't know. But there are different factors that will make that transition anyhow. So -- but we are prepared from the cost system perspective, a matter of energy usage rather than it's a completely different animal.

[Olof Cederholm, Lead Analyst]

Second question. Rigid haulers in the VCE business. Can you elaborate a little bit on what your business case is here in this area, and how much you are kind of pushing your scope of markets, what kind of size could this be if you move up in the weight or it's a quite consolidated industry. So can you just talk a little bit about this push and what we can kind of see out to the future?

[Martin Lundstedt]

No. I think we have built on the strength that we have, we have trucks also from the Terex acquisition. We have modernized that, that was badly needed. Even it was -- robust machines needed upgrades in safety, driver comfort, as we said monitoring systems, suspension and load, et cetera. I think that we -- the rationale obviously is that we have a strong position in quarries, site management. We have it in mines. And one thing that we see is that there is a trend in the mining sector that when you look into their -- where you're putting CapEx, it is not only the super big machines anymore. Before it was -- everything was about capacity to the expense of whatever CapEx because -- just to get the things out, so to speak. But we see that both the bigger and the smaller mining houses want to have more of an opportunity to stepwise go up and down in capacity. And therefore, we -- our management, we see that also in the articulated, but also the rigid. We see ourselves in a pretty good spot. And this is a big market for medium-sized mines, et cetera. And getting hold of the network of Volvo, with the Volvo-branded situation, and also a lot of customers already using our excavators, wheel loaders, young sets together with partners and ADTs. So we are not giving figures here. But this is one of the main rationales why we are actually quite. So it's finally coming through here, and they are doing a great job.

[Joakim Kenndal, Communications Director]

Okay, then we move over to the telephone conference for more questions.

[Operator]

And the next question is from the line of Markus Mittermaier from UBS.

[Markus Mittermaier, Co]

Two questions from my side, please. One also on electric trucks. You mentioned that it's about the business model evolutions here. I'm wondering if you have a view. Let's start with medium duty on the total profit pool on a per truck basis. How will that evolve between the equipment and the -- you touched on aftermarket service earlier on. If you look at that total profitable opportunity. That's question #1. And question #2 around capacity utilization in various geographies, where we currently, I mean, I can guess for Europe, I think we all know it, and what's sort of the planned peak for '18 on current bid rates in the various geographies.

[Martin Lundstedt]

Thank you. I'll just start with it and then coming back to the electric truck. I think it's a very interesting question from the fact that historically, the profit pool of medium-duty has not been at all the same on the service side as it has been for heavy-duty. It has been a much lower proportion of services on medium duty given the utilization rates, et cetera. I think this is actually an opportunity for the medium duty to have a much more of a system thinking given the nature of how you need to set up this in relation to specialist competence and maintenance, et cetera. So if anything, I think there is opportunity for a better distribution of the profit pool between the hardware and the services with electrification in urban solutions. Primarily on the distribution side, waste collection a little bit different because they already have the system thinking. When it comes to capacity utilization, we can say like this that it depends where you look in the value chain. Because obviously, we have a globally-coordinated powertrain system, and that is tensed, if I put it like that, which is also again very positive given the fact, again, that we have very high take rates of our captive components in all parts of the world. And also that we continue to increase performance steps of our I-Shift or similar mDRIVE or the OptiShift. Also with the crawler gears, for example, replacing automatic gearboxes and then, so to speak, the overall demand. So if you think about primarily, so to speak, continuous challenge we will have on a global scale, that is to continue to work with the powertrain flows. Having said that again, the other main challenge that will translate into a great opportunity is also the transition of the North American product as well.

[Joakim Kenndal, Communications Director]

Okay. I think there are -- just one final question from the telephone conference, and we will have that, and that will be the last one. And then we finish up here. Thank you very much. So the last question.

[Operator]

And the final question comes from the line of Peter Testa from One Investments.

[Peter Testa]

I was wondering if you could give some thoughts and updates on your penetration of common components beyond the powertrain and other initiatives like consolidation of variance, and which in a high-demand environment might be more straightforward to achieve. And then on the capacity aspect asked earlier when the 600,000 combined market and higher penetration of your own powertrain components. When you think about handling that from a system basis and the capacity needs, whether you could give some comment as to how you might be changing the mix between the outsourced capacity versus internal capacity to meet that above-peak demand? And then last thing is just on capacity utilization. Can you give some comments around how you feel about capacity-system utilization now in construction equipment and North America trucks?

[Martin Lundstedt]

Can you just -- sorry for that. Can you just repeat the first question? I didn't quite follow that.

[Peter Testa]

Sure, sure. I mean, you've been increasing the investment outside of powertrain and common components isn't helping the overall modular basis, the truck, so maybe just giving some understanding of how the common component penetration beyond the powertrain is going. And then also you had -- you had high -- you had quite a number of variance in different markets, specific trucks made for specific markets, which were complicating the system. And now in a high-demand environment, you might be -- have more success and driving similar, et cetera.

[Martin Lundstedt]

Absolute -- now it's clear. No, I think this is very -- also again very important question that we have been reiterating a number of times that when it comes to the core system, historically, we have been talking about powertrain as one of the success factor engines and gearboxes and so forth. What we are working a lot with, with high discipline is obviously also continue to develop the core system outside that -- the frames. For example, today, we have 3 executions with standardized or modernized whole patterns giving the opportunity to do a lot of exchanges, both on component level also on R&D and on partner services. So that is one example, and that goes beyond that. On the new technologies, as I've been into, this is a very important part of our strategy that we have the modules, both in hardware and software, for electrification and autonomous applications. We see that also when it comes to how we work actually with our young [indiscernible] partners in some of the components to create a good core system around that. So I think we have a good disciplined way where we are not sacrificing the ability for the brands or for the different applications to be standardized, but still having, so to speak, the benefit of the right type of volumes on a component level. So that is going accordingly with a high level of discipline in the system. And not only in the truck group, but also together with buses, Penta and construction equipment. When it comes to powertrain, that is absolutely to your point, we are working with a mix between what is, so to speak, in-house and what is outsourced in order to have the right flexibility in terms of volumes. Having said that, we feel that we have the footprint that we can continue to build on, so we don't feel that we need to do a lot of new installations around the globe, if I put it like that. We have a lot of buildings already. So that we can continue to drive. And then again, when it comes to capacity obviously, I mean, given the high all capacity utilization, given the high activity level and good order books we're getting into, this will be one of the key areas that we will continue to work with during 2018 together with more human price as we learn in school.

[Joakim Kenndal, Communications Director]

Okay. Thank you very much, all. I think that was the last sentence for this press conference. So thank you all for participating.