During the third quarter of 2011, demand remained favorable in most of the Volvo Group’s markets. Sales rose to SEK 73.3 billion, which adjusted for currency fluctuations, was an increase of 22% year-on-year. Operating income improved to SEK 5.8 billion, compared with SEK 4.9 billion in the year-earlier period, corresponding to an operating margin of 7.9% (7.7). Operating income was negatively impacted by changes in currency exchange rates amounting to SEK 1.8 billion. The operating cash flow in the industrial operations during the seasonally weak third quarter amounted to SEK 2.2 billion, which was considerably better than the year-earlier period.
Continued profitability improvement in Trucks
Currency-adjusted sales in our trucks operations rose 22% to SEK 47.7 billion. Operating income increased to SEK 3,962 M (2,700) and the operating margin improved to 8.3% (6.6). The delivery rate remained high, as did capacity utilization in the industrial system.
The Volvo Group’s truck markets in general had a positive trend during the quarter, and our truck brands captured market shares in Europe, North America and South America. Our competitive total solution offering with trucks and services and our strong dealers contributed to the successes. With an order intake of 60,000 trucks and deliveries of 55,000, we continued to build our order book. On average, our delivery schedules are approximately ten weeks in Europe and longer in North America, which means that we are basically fully booked in Europe for the current year and are now booking orders in North America for the beginning of 2012.
Our assessment is that the total market for Europe 29 will amount to approximately 240,000 heavy duty-trucks this year (previous forecast 230,00-240,000). In Europe, we have noted a slight slowdown recently. Production rates, which were slightly increased in August, are currently somewhat higher than the order-intake rate, which is why we are preparing to reduce manufacturing rates in the European production system in the beginning of next year. Demand continues to be on good levels in Northern Europe and Russia while Southern Europe and parts of Eastern Europe are weaker. The total market for 2012 is difficult to assess due to the uncertain macro-economic situation, but against the backdrop of a continued need to replace trucks, our current assessment is that the total market for heavy-duty trucks in Europe 29 will show a slight decrease in the region of 10% during 2012.
We reduce our total market forecast in North America for this year to about 210,000 heavy-duty trucks (earlier 230,000-240,000); however we anticipate an increase in demand next year. The reduction this year is primarily due to the production ramp-up for the industry as a whole taking longer than we anticipated. Production is now running better at the new, higher rates. Our positive view of demand in 2012 is based primarily on the fact that it is becoming uneconomical to keep parts of the old truck fleet in operation compared with the new trucks we launched in 2010 which have significantly lower fuel consumption. We believe that the total market for heavy-duty trucks in North America will grow in the range of 20% in 2012.
In Japan, signals of higher demand are also becoming increasingly more visible as reconstruction work begins, following the earthquake and the tsunami earlier this year. For the full year the market is expected to amount to about 25,000 heavy-duty trucks. For 2012, the total market for heavy-duty trucks is expected to increase by about 20% after a few very weak years. I am pleased to see that the introduction of UD’s new medium-duty truck Condor has so far been very successful and with the new models we now have a market share of slightly less than 20%, about 10 percentage points more than we had with the old medium-duty models.
In Brazil, we have launched a completely new model program of the Volvo VM, which will contribute to strengthening our position in the important distribution segment. In connection with the transition to new emission regulations on January 1, 2012, we anticipate that the market in Brazil will weaken in early 2012, but that it will subsequently recover assisted by the continued favorable economic trend in the country. We expect a total market of about 120,000 heavy-duty trucks for this year and a slight decline of about 10% for the full year 2012.
The development in the world economy is difficult to assess. In the short term, we carefully monitor the demand trend and the access to liquidity from the financial system. A deterioration may change our expectations for next year. With 17% of our workforce on short-term contracts, we are prepared to quickly implement the measures required to adapt to potential changes in demand.
Successful launch of new construction equipment
Currency adjusted net sales in construction equipment rose 27% to SEK 15 billion. Operating income amounted to SEK 1,403 M, generating an operating margin of 9.4%. Compared with the year-earlier period, changes in currency exchange rates had a negative impact on profitability in an amount of SEK 400 M, primarily as an effect of the depreciation of the US dollar.
The markets for our construction equipment operation continued to expand, with the exception of China, where we noted a slowdown in demand resulting from the austerity measures introduced by authorities to restrain inflation. However, we have maintained our position as market leader in China. Since the financial crisis, recovery in the mature markets has been quite modest and we are still far from what can be viewed as normal levels. Based on this, we anticipate continued growth in demand in most mature markets in 2012, albeit modest.
During the year, Volvo CE has made a very successful introduction of equipment that complies with the most recent emission regulations in Europe and North America. We were first among competitors to launch equipment that complies with the new requirements and have been able to compensate ourselves for the higher costs and have at the same time retained and in some cases captured market shares.
For Buses and Volvo Penta, demand is weak both in Europe and North America, while the pattern is the opposite in the emerging markets. Volvo Penta’s industrial engine business continues to perform well, while customers in the boat-engine market remain cautious. For Buses, the trend is very strong in Brazil, partly as a result of customers purchasing buses prior to the tougher emission requirements to be introduced at the beginning of next year, and partly due to a competitive product portfolio.
New financial targets and new organization
At the end of September, the Board resolved to introduce new financial targets for the Group as of 2012, entailing that we will be clearly benchmarked against our competitors. The Board stated that the Volvo Group currently has the size and geographic scope required to become successful in the long term and the new targets sent clear signals that we must continue to step up our profitability. The profitability target is to have the highest or second highest operating margin compared with competitors.
The Volvo Group has had a very good growth in the past decade and has grown into a world-leading player in heavy trucks, construction equipment and diesel engines. However, companies are never complete and it is now time to take the next step. On January 1, 2012, we will be introducing a new organization, which will better capitalize on the global potential in the products and brands in the truck operations. From a former set-up of four different brand companies, Volvo Trucks, Renault Trucks, Mack Trucks and UD Trucks, we are introducing a new organization with geographic units responsible for sales, marketing and brand directly under my management. In the same manner, all product development and purchasing, as well as production of trucks and engines will be handled in two new central units. At the same time, the supporting business units will be integrated into the new functional organization.
We are doing this to gain a more rapid and efficient organization, with greater focus on our customers and brands. Our products are gaining market share around the world and I view the reorganization as a way to make sure that the Volvo Group continues its positive development while we at the same time become more efficient in everything we do.
President and CEO