Volvo (OTC:VLVLY) reported third-quarter financial results on Friday. The transcript from the company’s third-quarter earnings call has been provided below.
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View the webcast at https://qreport.volvogroup.com/event/RNdmAE6ARX7a9NsWr
Summary
Volvo Group reported strong Q3 financial results with net sales of 119.5 billion SEK and adjusted operating income of 14.7 billion SEK, reflecting a margin of 12.3%.
The company saw 8% organic sales growth in trucks, with significant demand in North America and Europe, while electrification orders increased by 107%.
Strategic partnerships were highlighted, including a collaboration with Daimler Truck and Toyota for hydrogen fuel cell technology, and plans for an energy park in Maristol for electric and hydrogen production.
Volvo’s market share in trucks remained strong, with notable growth in North America and Brazil, and recognition for its electric vehicle offerings.
Management emphasized effective cost control amid inflation, successful service business expansion and a balanced book-to-bill ratio, indicating a well-aligned demand and supply chain.
The company’s future outlook is positive, expecting continued growth in core markets, particularly in North America and Europe, with a focus on leveraging new propulsion technologies.
Full Transcript
Johan (Investor Relations)
Good morning and welcome to the Volvo Group third quarter press conference. Today we will listen to Martin Lundstedt and the presentation regarding the quarter and follow up with Mats Backman running over the financials. Thank you.
Martin Lundstedt (Chief Executive Officer)
So thank you for that, Johan. And good morning everyone. Also from my side to this quarter three reporting from the Volvo Group. Great to have you here both in the room and also of course online. First and foremost, all colleagues and business partners delivered solid results in the quarter with an adjusted operating income in the quarter and. The gradual cyclical recovery in the trucking construction equipment markets continued both in Europe and North America.
Supported by the need to replace aging vehicles and machines and not at least North America. We are continuing to strengthen our competitive position visible in market shares, order intake order book and supported by the many launches based on the new platform both for Mack and for Volvo. And as you did see here in the introduction, VNX for the vocational. 6% for Group Trucks as one example, our core markets are in a, as I said, in a cyclical recovery with growing demand.
Generally we are well aligned between market model supply from our industrial system and we will continue to utilize our flexibility toolbox to execute on the solid order book moving forward. Regarding the trucks order intake in North America, we have been restrictive in our order slotting in quarter three to secure field 2, 4 into. Year over year in order intake in North America. And that’s the reason why we opened the order book for 2027 as recent as of 1st of September.
Something to bear in mind when it comes to the quarterly order int. Another example of good order intake is the rapidly growing demand for power solutions, not at least AI infrastructure. 2% of Volvo Penta’s order book. Looking ahead, we continue to focus on what the group can impact by staying close to our customers thereby driving growth and resilience while at the same time remaining responsive to the fluid external landscape. Our focus continues therefore regarding effective cost control and we are gradually mitigating cost inflation through pricing. The priority of the service business is giving good results. Services grew 5% organically showing that our customers have good utilization of their fleet.
We are well positioned with our products were recognized by being awarded both the International Truck of the Year 2027 for our heavy-duty electric Volvo range and also received the International Van of the Year 2027 for the Renault Trafic E-Tech Electric together with Renault SA. Our flexible business model maneuverability to leverage the current environment and continue to create value for customers, employees and shareholders. When we then moving into the quarterly highlights. As I said, good development in the third quarter. Net sales amounted to 119.5 billion. The adjusted operating income amounted to 14.7 billion with a margin expanding to 12.3%. Operating cash flow amounted to a strong 7.2 billion SEK, mainly driven by higher earnings and lower buildup of working capital in the industrial operation. Net financial position at the end of quarter three amounted to 43.8 billion SEK.
Return on capital employed reached 27.5% for industrial operations and earnings per share amounted to 5.29 SEK. So we can conclude another strong quarter here. Some group news: by the end of July, Volvo Group, Daimler Truck and Toyota Motor Corporation signed a binding agreement for Toyota to join cellcentric, where Volvo went as a technology partner since they have a long-ranging and deep experience when it comes to hydrogen fuel cell technology and the full ecosystem. On also the hydrogen note, at the IAA fair where we also got the awards in September, I was with eight other industry leaders unveiling our plans to accelerate also the rollout of hydrogen-powered vehicles.
See that the interest is increasing. Also given I’m in Europe, the German ecosystem has put in place all conditions for a scalable deployment of hydrogen trucks by 2030 driven by the German authorities and European industrial leaders along the value chain. So very promising. Also in September we announced the next step in the Maristol expansion process with plans for an energy park near the intended battery cell production site. The energy park will be developed along two parallel track.
Including both electric and hydrogen production and charging, which is an area that we really see where we see good commercial opportunities for the group moving forward. The battery storage will also support grid stability in the region on normal market conditions. When it comes to volume development, then trucks deliveries increased by 11% to 49,600 vehicles and North and South America. But still, and I will come back to that, should remember deliveries still are actually down 4% in North America, so we are accelerating now as we speak. Volvo Construction Equipment’s brand volume did grow 8% in the quarter, driven mainly by Europe and North America and also here North America deliveries were north of 40%, 41% to be precise.
Electrification orders of electric vehicles increased 107% to 6,590 units, 12 months rolling. The increase was primarily driven by renewal and. Are expected to increase incoming periods. Vehicle and machine organic sales growth was 8% in the quarter, trucks growing 8% currency adjusted driven by Volvo Construction Equipment and sales growth Europe and North America. Buses net sales were down 8% mainly caused by software sales in Prevost brand and in Mexico as a market and Penta net sales were up 7% mainly driven by North and South America.
While sales to Middle East continued to be soft. Given the turbulent situation services. And the 12-month rolling service sales increased to 128 billion SEK. And for me this is twofold: good customer activity and utilizing the installed base and installed fleet. But also that our efforts of step by step working with our contract portfolio is giving good results. And we see that also moving into the future and of course this. Penetration we also get high retention and of course high resilience and less volatility Moving down to the track sides good momentum with a lot of different things happening here.
We are standing by the way very happy just after Rod you received, you know the. big highlight obviously. And as I mentioned also Renault Trucks also did win the International Van of the Year 27 award for the new Renault Truck E-Tech Trafic that we are doing together then with the Renault SA. So congratulations to the Volvo and the Renault teams for these efforts and of course to our engineering groups. For North American market. And that is engineered from the ground for North America’s most demanding work across construction, concrete, logging, agriculture, heavy haul, highway among others.
Of course we have had an offering in these markets but within all new VNX we are getting a step up in in the ability to penetrate these markets. Also for the Volvo brand that has historically been highly dependent on so good market shares opportunity with VCE. Also in October they have added VABI. Supporting with the combination Volvo Autonomous Solutions and vavi. We are now preparing for an acceleration in the beginning of next year as we alluded to during the Capital Markets Day so exciting times ahead here.
Market forecast that is always a little bit of the highlight in the third quarter presentations. What is happening if we start then with Europe the forecast that a good level of 3 and for 27 a forecasted increase to 320us in North America we repeat our market outlook for 2026 at 265,000 units in retail sales. And that is also of course on the back of a rather weak start of the year. So we are accelerating as we speak and we are. I’ve then mentioned all the levels have been somewhat lower in the recent quarter, especially than in July and August for North America due to the step by step opening of water slots into 2027 that we only opened in the beginning of September.
Cost of 80,000 heavy-duty trucks for 26 but expect a small decline down to 75,000 units. For 2020, demand in India has continued to grow supported by steady freight activity, continued investments in infrastructure, supportive government policies and healthy replacement demand. And we increased our Indian market forecast to 450. That is an increase over 50. Seven. And the total market forecast for China have been lifted to 900,000. Plus 20,000 medium and heavy-duty trucks for 2026 also that’s supported by some packages.
And we forecast 850,000 units for 2027. Book-to-bill: overall the industrial system is well balanced between demand and supply with a 92% book-to-bill ratio in the quarter. 26. And we didn’t open 27 until September, and when it comes to North America we are at 125% 12‑month rolling. So we have, if anything, a good balance and continue to then execute on the order book here. Europe on good and solid levels, 104% book‑to‑bill in quarter three and 110% for 12‑month rolling. And generally speaking across regions we are sold out for 26 and we are now slotting orders mainly for the first quarter of next year for our industries.
But generally speaking we need to have that right balance and to be fair to our customers as well. Truck market shares also positive, I have to say. Europe, Volvo and Renault continued with strong market shares through year‑to‑date September with Volvo at 19.5% 1% giving a total share of almost battery electric side. Volvo Renault Trucks 3% for the quarter. But our recent launches now of the next generation long‑range and versatile electric will regain momentum now for both. Both Volvo and Renault customers have been waiting for that, which is already visible in the order intake.
And in North America we have grown combined share to about 17.6%. Mack Trucks is at 8.3% and Volvo at 9.1. And Volvo Trucks are back on the right track and are regaining positions. And of course for Volvo also in particular further support expected from the over‑the‑road segments and not at least the long haul which is expected to continue to be strong here. Brazil Volvo remains at a good level and reached a market share of 23%. And also Australia we see a growing share, combined reached 22%.
Moving in then to Construction Equipment. Pennsylvania facility and the site has begun production of its first excavators but also larger wheel loaders, adding 11 new models to local manufacturing and reducing customer lead times by more than six weeks. So now when these introductions are coming into place of course also that will further increase resilience as we move forward for the north. As for trucks, we keep, if I start with North America, plus 5% as the midpoint for 26 in relation to 25 and 27 estimated to be another plus 5 percentage points as midpoint versus 26 as a continuous growth there.
And similar in Europe we raise 26 midpoint development and that is a 5% estimate to be another increase of plus 5% in relation to 26. Then South America we also raised for 26 the midpoint with 5 percentage points. And the 27 midpoint is estimated then to go back minus 5 percentage points versus 26. So similar pattern as I said with the truck side. No change to the Chinese market forecast which is kept with plus 10% for this year and 27 estimated to be flat in relation to 26.
Book‑to‑bill: no drama at all here. The industrial system is well balanced between demand and supply with a 97% book‑to‑bill ratio in the quarter and 104% 12 months. Also here we are generally sold out for 26 and we are now slotting orders mainly for the first quarter and we have good order coverage. Consequently then for our main market Volvo Buses. Operations in Poland a couple of years ago and thereby also needed to restructure, so to speak, the European business both when it comes to city buses and coaches.
Absolutely, we are coming back very strongly here. And during quarter three Volvo Buses expanded their offering to support growth again now in the European coach segment, relaunched the Volvo 9700 coach and that will be produced in Mexico where we have top‑of‑the‑art production facility, and introduced the Volvo B13R coach with Marcopolo body and continued rollout of the Volvo B set R electric coach. This transition to fully electric and book‑to‑bill was 111% in the quarter and 12‑month rolling it reached 96%.
Penta very strong, which is also accretive to their margins. And Volvo Penta had a strong book‑to‑bill with 132% in quarter three and 107% 12‑month rolling. Finally Volvo Financial Services, as you know a key pillar for our business in all business areas. And VFS increased the new business volume and this was supported by good penetration rates. The 12‑month rolling penetration rate was sustained at 30% and VFS continued. Business update, and by that I leave the word to Mats Backman for the financials.
Mats Backman (Chief Financial Officer)
Thank you, Martin. So looking into the financials time for the third quarter and starting off with the Group. Net sales, organic net sales increased by 7% in the third quarter compared to last year. Vehicle sales, Construction Equipment and Volvo. By Construction Equipment, North America volumes increased, which led to an increased sales of 22% driven by Group Trucks, Construction Equipment and Volvo Penta in South America. Net sales increased by 10% versus last year.
Divestment of STL in September last year and the overall currency impact was positive at approximately 2 billion reflecting the general depreciation of the SEK. Adjusted operating income for the Group amounted to 14.7 billion with an adjusted operating margin of 12.3% in the third quarter. Earnings were supported by the positive development of tariff refunds resulting in a positive year‑over‑year effect of 700 million in the quarter. In the third quarter we saw negative market and customer mix, and we continue to see higher freight cost and material costs related to the inflationary environment and the current geopolitical situation.
The net R&D capitalization effect in the quarter was 1 billion with a negative year‑over‑year effect of 200 million. The year‑over‑year increase in selling expenses was partly due to selling expenses from acquired businesses and current said a. The third‑quarter cash flow amounted to 7.2 billion. The positive cash flow contribution in the quarter was mainly driven by higher operating income and lower seasonal buildup of working capital. Return on capital employed improved to 27.5% on a rolling 12‑month basis. Net cash industrial operations amounted to 43.8 billion.
Group Trucks organic net sales increased by 8% and this was distribution from the service business, higher volumes and price realization. This was partly offset by market and customer mix, material costs, selling expenses and freight costs, and currency had a positive impact of 703 million in the quarter. Construction Equipment organic net sales increased by 12% versus last year and this was driven by higher volumes and positive development of the service business. Adjusted operating income reached 3.2 billion with an operating margin of 16.1% and a positive development of the service. Improved performance. Currency had a positive impact of 88 million in the quarter.
Moving over to Buses, organic net sales decreased by 6% versus last year. Adjusted operating income amounted to 451 million with an operating margin of 7.7%. The result was supported by price realization but largely offset by property divestment last year, net US tariff cost and brand and product mix. Currency had a positive impact. Volvo Penta: organic net sales increased by 4% versus last year. Adjusted operating income amounted to 1.1 billion with an operating margin of 21 point. Product and market mix had a positive effect which was partly offset by material cost, and the currency had a positive impact of 25 million in the quarter.
The credit portfolio with delinquencies and write‑offs under control. Adjusted operating income amounted to 1.1 billion supported by solid portfolio growth partly offset by higher credit provisions and selling costs. Currency had a positive impact of 36 million compared to the same quarter last year. And then lastly looking into our forward‑looking guidances and starting with currency, we expect a positive year‑over‑year FX impact of approximately 1.3 billion in the fourth quarter. The forecasted net US tariff impact on operating income in fourth quarter of a negative 700. The net R&D capitalization effect on operating income is expected to be approximately 4 billion for the full year 26 which is in line with last year. And finally the guidance for the tax rate for the full year 26 on 23%.
So with that I’m leaving for Martin to summarize now.
Martin Lundstedt (Chief Executive Officer)
Thank you, Mats, for that. No, I think, I mean when it comes to the highlight, both Europe, North America continues positive development. 350 to 15 to 320,000 for Europe and 265 to 300,000 of North America when it comes to the truck side. And also we are guiding for a plus 5% percentage point increase for Europe and for North America when it comes to Construction Equipment. Service development, positive 5% organic. At least now in North America we have put a lot of pillars into place both in our industrial system, in our supply system and of course when it comes to products and services launch.
So that is basically the summary of the quarter and you for starting the.
Hannes Bachelor (Analyst)
Compass from Hannes Bachelor, thank you very much. Two questions for me. Given that you now are accounting for Section 232 in Q4, would it be possible for you to just grasp what type of a retroactive payment will you get back as of November 2025? Second question is more related to Europe. Could you maybe share also your view on Germany because that’s a big contributor for next year.
Mats Backman (Chief Financial Officer)
Start with the tariffs then. So quarter 700 million in total impact from tariffs. Attractive kind of tariff payments. We had IPA in the third quarter. Now we have the Section 232 in the fourth quarter. But then on a kind of ongoing basis going forward this will be positive for Trucks and as well. So if you see the 700 as a kind of an underlying run rate, could be compared to between 1 and 1.2 billion as we have seen before. I mean the difference there is really related to a lower run rate when it comes to the truck tariffs.
Forward after the fourth quarter, Trucks. So that’s where we are, great.
Martin Lundstedt (Chief Executive Officer)
And on Europe then, Hampus, what we see is obviously that we have rather solid, so to speak, demand coming from many countries where Germany, if anything, has been weaker than normal when it comes to the cycle in relation to others. And we see that also. So if anything it’s still a little bit the question mark on what pace Germany actually will recover. Of course we are also waiting for the effects of both the infrastructure package and the allocation of that coming into effect, but also the defence, because that will of course affect sectors about the industries with transport could actually be adding to the figures, but still included a little bit of a softer situation than is normal in relation to other countries.
OPERATOR
We turn to the telephone line and to Bernstein and Harry Martin. Please go ahead, Harry.
Harry Martin (Analyst at Bernstein)
So the first question I had, if you can just help us on the Q3. Of that order book related to the 2027 delivery slots versus the final slots in 26 and then on year how is demand splitting between the EPA NOx‑compliant engine and the 2026 engine? And as you said, you’ve been quite limited in opening that order book for in early weeks. Will you need to full on pricing just to fill some of the customers? I guess on the negative side, are you seeing any hesitancy on new truck orders, deferred maintenance or any of this type of factor?
And then on the other side the battery electric order. But I also wondered if you’ve seen.
Martin Lundstedt (Chief Executive Officer)
Thank you, thank you, Harry. A lot of meat in those questions. I will try to respond to that obviously as good as possible here. If you start with North America, then as we said, if you take year to date for the full year and I think this is an important figure to have in mind, actually orders are up 71% but still deliveries. Strong order book. Now it’s important you did see that also because deliveries were up 41% during the quarter. Very important to us to keep now the order book in balance.
Not at least in the light of what also you mentioned regarding cost pressure. So we have, so to speak, the right balance in the discussions with our customers. So when we see the plus 18% order uptick in quarter three, that is then just 1st of September and I think that is very important information to have in mind and then the majority then of what happened in September and thereby the order intake was related to 27, and it’s still, as everyone knows, also somewhat uncertain in both the categories for 24 and 27.
And that means that we can provide what the customer want to have. And the good news about it is also that the EPA 27 and the new launches has shown a fuel reduction given the high diesel prices, more important obviously with the fuel reduction on the EPA 27 that we have also mitigated now during the summer. Thanks to all. You’re really well prepared here. And then when it comes to the distribution we will not disclose that now. And the reason is not because we don’t want to disclose this. It’s just it’s too short. We opened up on 1st of September. If we give a number now it will start to be some sort of truth and I don’t think it’s very helpful for anyone. It’s more helpful to say that we can provide what the customer wants to have depending on what is the preference here and that we have been able to, so to speak, also get in the type of advantages into the EPA 24.
Then it was on what was the last one. So. And the different options. Sales growing rapidly, very positive. We have a very strong offering when it comes to LNG on hold for Volvo trucks. So that is coming up. To the neighboring conditions in Europe. That will continue to take some time but our offering is very strong and we feel that now also, I mean, coming out from a season here where we have been able to compare that we are moving into this with a high level of confidence that the total offer when it comes to TCU and I mean if you look at the truck it’s a P&L basically that we have a very strong offering here and obviously also options for the customers including I-Save, of course, the I-Shift fuel economy options that you have, etc. But also that we see that our recent launches have, so to speak, a basic execution on this. And of course these options since it’s value-based selling of a lot of functionalities for sure accretive good.
Harry Martin (Analyst at Bernstein)
Thank you for that. We continue to practice the thing about asking one question. I’m interested to hear if you believe that will be fairly well balanced across the year. And I think in particular in North America given sort of the slight softness in the order intake. Will the Q1 run rate sort of pick up where 2026 left off?
Martin Lundstedt (Chief Executive Officer)
In particular given that you’re hiring people just. We are pushing as much as we can for having the clarification, also when it comes, so to speak, to introduction next year. What has been a good done still is that we have been able down to make sure that we have both offerings in place. And again the softer order intake in quarter three should not be seen as a reflection of the ingoing. It’s more about our own management then as always with North America.
Built-in seasonality, order book, order coverage and our industrial system. And on top of that of course we have a number of flexibility tools to create, I mean, space for short-term fluctuations.
OPERATOR
Good. We turn to the telephone line. Goldman Sachs and Daniela Costas, please go ahead Daniela.
Daniela Costas (Analyst at Goldman Sachs)
When you take off perhaps a little bit better FX and tariff impact than the street’s had, basically was a little bit lower, and I wonder to what extent things like you’re still ramping up in Mexico, you’re having some cost to, I guess, launch the new EPA engine, you’re having the launch over time — such things. Or should we think about the ex-FX and tariff underlying operating leverage as kind of your normal leverage from here onwards?
Mats Backman (Chief Financial Officer)
Maybe starting with the… I mean if you recall, I think it was like two years ago but also this year at the Japan markets day when we talked specifically about the transformation and the impact on the group truck margin. So we had, if I go back to the capital markets… Now we have done quite a lot of activities and brought down that impact to between 100 and 150 basis points rather. And what you see now in the quarter is within that range. So I mean nothing special coming from the transformational ventures.
If you are then looking at the kind of underlying business, so to speak, on the truck side and on the gross income, if we’re looking at the kind of the positive items in the quarter, if you’re comparing year over year it’s definitely the kind of volumes on new vehicles and service. We have price realization both on vehicles and service, the tariff impact and also total for the group then — that’s the kind of the positives. If we’re looking at more on the kind of the negatives when it comes to gross income again year over year, we have, I mean for sure, we have market customer mix effect year over year as we are increasing in North America now.
We will have relatively higher volumes in North America and as you recall we have a lower profitability on the North American volumes then, and again referring back to the capital markets where you could see it. So it’s a mix of the kind of the cost inflation that we have been talking. So the kind of positives and negatives year over year if you’re looking at the numbers. But maybe I should add also, I mean on the tariff effect for trucks specifically it’s not material. I mean, so I mean what you have seen in the quarter, the IPA is primarily the majority. So if you are looking at the refunds in terms of IPA, that’s very much reflecting then the underlying kind of cost when it comes to tariff has been related to. That. It’s buses also being rather the approval from Canada to the US.
Martin Lundstedt (Chief Executive Officer)
No, so I think FX is one thing but underlying I think still we are following the plans when it comes to, so to speak, leverage. Absolutely. And then we are of course constantly working now with the price realization related to the underlying cost pressure that exists for everyone. Know that when we are coming up to sort of level in North America we are getting a different leverage. I mean North America is very depending on having the right volumes stable and we are coming to levels that is much more favorable for us also. So that is another type of pattern than you have in Europe basically.
And that is important information, I think. Like this. It’s a mix. We were over two weeks ago, I think, and met with a full team there. And we feel clearly that the main reason now we are holding back is because we had such… I mean with environment that we have discussed here is super important for us obviously to make sure that we have a good balance and not having all the commitments too far out in time, and we have good… I mean customers understand that as well. Then obviously also the EPA type of uncertainty plays certain roles.
Regulatory levels and also sort of starting accounting — what can it mean in terms of, so to speak, the extra cost related to the EPA 24. As you said with the freightways now having a period behind us with a lot of low volumes, especially over the road and especially long haul in the over-the-road signals, I… 300,000. I think it’s a strong message in that sense.
OPERATOR
Good, thank you for those clarifications. Then we move to the telephone line, Bank of America and Alexander Jones, please. Go ahead Alexander.
Alexander Jones (Analyst at Bank of America)
Great, thanks. Good morning. Maybe just on costs, you’ve spoken about this gradual rollout of 2027 orders. Given the pressures of the cost inflation, how confident are you through 2027? Thank you.
Mats Backman (Chief Financial Officer)
No, and I mean as well as we say in the report. I mean we have a gradual kind of price realization then and we still see kind of cost inflation and we were looking at the different items. On the raw material side I would say, I’m talking steel-based metals, lying underlying. What we said is that we are gradually now compensating for that with prices. We are not quite yet there if we’re looking at the third quarter but we will continue to bridge that gap into the fourth quarter.
So it goes according to plan and we are bridging the kind of the impact now from cost inflation with the price realization like Martin talked about on the commercial side. So we are managing that with prices and we don’t see any kind of any changes from what we have communicated previously as well. In the room. Low extent, and when we are presenting kind of numbers, well we’re always talking net number. So when we’re talking about refunds in that respect, that is net of any customer claims. Clear.
OPERATOR
We turn to London, JP Morgan and Jose Asamandi. Please go ahead.
Jose Asamandi (Analyst at JP Morgan)
Good morning and thank you. Can you talk please a little bit about the ramp-up for the plant in Mexico here in the US next year? Thank you.
Martin Lundstedt (Chief Executive Officer)
We’re producing at low numbers now to trim the lines actually. We are going there in a couple of weeks and so for 26 basically it’s not material and we are managing, so to speak, a ramp-up with the existing facilities that we have in Pennsylvania and in Virginia. But of course also given that we are now looking into, as we can see it at least, I mean for a better market and not at least when it comes to long haul, to have that operation not at… very important for us.
As we see it done in a very short period of time. So we are very pleased with that.
OPERATOR
Good. We turn to Citibank and Klaus Berryland, please go ahead Klaus.
Klaus Berryland (Analyst at Citibank)
Thank you. Hi Martin and Mats. So first on the North American outlook, the 300k retail sales. Trying to understand how much of that you think will be destocking relative to in-for-out orders — effectively asking if you think retail sales will grow faster than builds next year within your guide. Into next year, I mean following the ramp and the launches you do, amortization should eventually start to pick up. So yeah, those two please. Thank you.
Mats Backman (Chief Financial Officer)
Maybe I can start with the last one then on the R&D capitalization and I mean as we are… if we’re looking at the current year, because I mean this is a sequential development that we see right now though. So we are guiding for an impact and that’s the same as we had when it comes to the R&D. We are guiding for no effect year over year, meaning that we will have a negative — using the numbers and the guidance — a negative impact on the margin in the fourth quarter.
Impact in the margin, non-cash obviously. And then I think you should think of this like a kind of a run rate then going forward. Because now we have launched quite a lot of projects and we are taking down the capitalization when it comes to R&D. So it will be a lower level going forward. And then for sure then what we are also doing is to kind of mitigate that effect. In a nutshell, the effects then for the fourth quarter and then the time going forward.
Martin Lundstedt (Chief Executive Officer)
And that is obviously also related to the fact that we have invested heavily in R and D over quite some years now. I mean the complete new North American platform. We have done a number of very big investments when it comes to battery, electric and other new propulsion systems. We are pruning the portfolio as you said. When it comes to the ventures we are seeing it taking off. How it is accounting-wise, I mean with the capitalization and depreciation, but more importantly also, as you say, the cash flow effect.
Yeah, and we have taken quite a number of investments now. So we are well prepared for the future. Then when it comes to the total market as we say, I mean it’s—I mean we are always in the volume scaling for the retail sales. Right. So I mean we are saying 265,000, and that will still be, so to speak, a challenge for all of us to get up to the 265,000 total market as I can see it, since it is backloaded, and then it’s 300,000, so to speak, retail we are guiding for.
OPERATOR
Good. And Shaquille Kirunda, please go.
Shaquille Kirunda (Analyst)
Thanks for taking my question. I also wanted to understand a bit more about the North America orders and uncertainty in the market versus managing the order book. Could you maybe give a bit more color on what customers are saying specifically in regards to the new engine versus the old one. And then the reason on managing the order book is due to the rising cost environment. Just on your main assumptions in terms of non-conformance penalties, freight volumes and oil prices?
Martin Lundstedt (Chief Executive Officer)
Yeah. No. First and foremost, when it comes to the order intake, as I said, we are up seven and deliveries are down 4%. Take a step back at one point in time. It’s important also to make sure that you have quality in the order book. And that’s the reason why we said now, and I mean of course in close collaboration with our dealers and with our customers. So I mean in the event that there is a strong demand for planning resource to place, we are able to manage that in order, and not at least when it comes to the commercial conditions.
And that is related and has been related to both, so to speak, the very strong development in orders. But it has also been related to, as we announced before here, regarding the uncertainty partly when it comes to the EPA regulatory landscape starting from 1st of January, both with EPA 20 and EPA 24. And that’s the reason also why we waited a little bit. But the primary reason is that we have a very strong order activity, with high freight rates we’ve had. That needs to be replaced, and when we are weighing all factors together, given also that again it will only be 265,000 this year, knowing it’s a backlog market, retail sales, we are coming with of course a number of other factors to the—
Shaquille Kirunda (Analyst)
Good. It’s super clear. Good.
Yuhan Hemelpini (Analyst at UBS)
Good morning, Martin, Mats, and Yuhan Hemelpini from UBS. Thanks for taking my questions. I appreciate the last one, so I try making them good. Just curious on the service business growth that you’ve seen. Just wondering, is this driven by aging fleets or greater service penetration? I’m curious if this is driven more by existing customers or new customers. And lastly, could you just touch upon the European order intake that you’ve seen on your new and more fuel-efficient engine fees.
And as I mentioned that this engine will be rolled out, you’ve got any clear dates as to when—
Martin Lundstedt (Chief Executive Officer)
Number one—that was, let me see now—I was thinking service. Yeah, services. Sorry, services. Very good question. And as you have seen over quite some quarters now, we continue to have a good underlying organic growth in the services. Of course, I mean activity levels, as I said, have been high and higher, and that is of course having a link to the underlying efforts, the more contract penetrations, first owner but all applications. But that penetration level is continuing to grow, and since that is like a portfolio case we can also follow how that is working.
It’s about the penetration as such, new vehicles, and then it will have effect step by step when these vehicles are coming into operations and over these years about the content of the contract, the content from more of a—also see that, for example, on technologies now that are even more advanced that the customers would like to have it for a long period of time. So there are a number of factors driving this. But when we see, so to speak, the development of the services and the portfolio, we are anticipating both when it comes to the underlying activity, but not at least the contract management.
And then on the new engines and the development, I think generally speaking, what we have seen—and that’s coming back to the R and D question also—we have, with all the investments that we have done, provided a lot of value to the customer. We see that when it comes to fuel efficiency, and that is of course coming in handy, etc. And, as you rightly say, also now we have the modular platform that we can utilize the same around the globe. So we look forward to that.
Johan (Investor Relations)
Good. With that powertrain technology question, we’ll let that wrap up this quarterly presentation. So thank you for coming and to tune in. See you next time. Thank you.
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