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Executives

Olof Persson – Chief Executive Officer, Member of the Group Executive Committee

Mikael Bratt – Head of Group Trucks Operations, Member of the Group Executive Committee

Analysts

Nico Dil – JPMorgan

Fredric Stahl – UBS

Laura Lembke – Morgan Stanley

Yann Benhamou – Exane BNP Paribas

Sebastian Gutale – Société Générale

Declan Carlin – BlueBay Asset Management

AB Volvo (OTCPK:VOLVY) Q3 2011 Earnings Call October 25, 2011 9:00 AM ET

Operator

Ladies and gentlemen, welcome to the Volvo Report on the First Nine Months of 2011. Today, I’m pleased to present Mr. Olof Persson, President and CEO. For the first part of this call, all participants will be in listen-only mode and afterwards we have question-and-answer session. Mr. Olof Persson, please begin.

Olof Persson

Thank you very much, and good morning and good afternoon to all of you, and welcome to the third quarter 2011 report. If you please follow me to page 2, but before I start I would like to introduce my colleagues around the table here is Mikael Bratt, CFO; and Christer Johansson, Investor Relations.

So, if you then follow me to page number 2, looking at the sales by region, we can conclude that we have had a good development during the quarter, 15% growth and 22%, if you exclude the currency impact.

You can also see on the right hand side of the slide, the distribution between the different regions. And interesting to see I think is now, we know back to the total of about 50% in the North America and Western Europe. Asia still a major part, but as you can see, South America has grown and become a more and more important part of our sales.

If we then move to page 3, you can then see the sales trend where we’re now heading at the SEK 297 billion, close to SEK 300 billion on a 12 months rolling coming from the SEK 48 billion, two years ago and now we have the SEK 73 billion in the quarter. And you can also see the sales bridge per business area with the truck and CE, which I will come back to a little bit more in detail later. If we take just a few words from buses, we see they are 12%. On the reported, I think it was around 22% if you were excluding the currencies, mainly increases we see here in South America. We have Brazil where it’s a strong market, but there was a part of Asia.

In terms of Western Europe and in U.S. we see headwinds and a slower market, I would say, both on coaches and city buses. Penta, 6% reported 11% if you do the currency adjustment, Penta has done a great job in actually mitigating the very slow both in Europe and in particular in U.S. on the marine side and compensated that with a good growth on the industrial engine side.

Aero, minus 22% reported. If you take out the service businesses that we sold in U.S. and currency to actually a plus 7%, and again there is very well position in the different programs. And for instance, we have now Boeing 787, the Dreamliner, up flying which is a big part of our programs going forward on the engine side there.

If you now follow me to page 4, looking at the operating income on a 12 month rolling SEK 25.5 billion and SEK 5.8 billion in the quarter. And moving swiftly over to the right-hand side where we can see that we now are giving you the information about the FX effect for our business area and you can see that trucks with SEK 0.5 billion to SEK 700 million you see to the right on other is the forward contracts we do have that is reevaluated market to market and is not allocated back to the business area.

All in all SEK 1.8 billion in currency headwinds this month and that means if you translate that into operating margin, it’s actually at 2% operating margin that represent SEK 1.8 billion on the currency headwind.

Page number 5, looking at the operating capital, I think it’s basically good news we have a reasonable very strong third quarter with a SEK 2.2 billion in positive cash flow and we are now on a SEK 18.5 billion on a 12 months rolling. We also have good news in terms of the cash conversion cycle where we now are down to 22 days, we there by can say that we have compared to Q3, ’09 for instance where we have 73 a much better cash efficiency and you can see on the top line inventories in days are flattening out on a stable level, giving also the fact that we have an increase in sales.

I would say that in terms of inventory days that’s something we keep a very, very close eye on giving the uncertainty in the market. Return on capital, you can see that we’re moving from the minus 15 up to the 28, it’s not record level, but it’s a good return that we present now in Q3.

If we then dig on page six, a little bit closer into the trucks you can see the SEK 191 billion almost SEK 200 billion in 12 months rolling and moving our sale from a SEK 30 billion in Q3, ’09 up to SEK 48 billion. And if you look you look at the region by regions you can see on the right hand side of this slide and that we have 18% in Europe, mainly driven by Northern Europe’s long haul business, but also some construction, but very slow growth in the Southern part of Europe.

In North America we have seen a replacement cycle during the quarter, which we don’t have now fully utilizing the fact that we are introducing the U.S. truck machines, which are both more fuel efficient and more economically and thereby we see the customer has a business case to swift from older vehicles into our new ones.

In South America, the growth is mainly driven by good GDP growth and demand and in particular in Brazil. Asia, that was to drive sort of growth engine if you go back a few quarters or a year back as now flattening out and it’s mainly India and – but also of course Japan and I will go back to the market forecast a little bit later.

With all-in-all going from SEK 41 billion to SEK 48 billion and a 22% growth excluding currency in quarter-over-quarter. On the operating income side SEK 17 billion and a 12 months rolling again an impressive turnaround I think from the minus 2.3 two years ago and now we are talking SEK 4 billion in the quarter, reasonably very strong and operating margin is on all-time high for Q3 with 8.3% and that is of course done despite the headwinds we have on the currency.

On page number 8, again, we can see and let’s begin to the Volvo CE. Coming now on the $63 billion on 12 months rolling, you have a 27% growth, excluding currency, but you can see the difference down to 18% is quite big, so the currency headwind is impacting of course CE.

Again, region-by-region the growth we see in Europe, the 20% on the right-hand side of the chart is mainly driven by an increase of both new and replacement, but we should remember that Europe is still far below the normal trend lines in the market. North America is driven by, primarily I would say replacement; we have had a long period of low activity in the construction segment in U.S. And we see now that is picking up, but basically, it is reflecting of rental fleets and also some – both in terms of operational lease, but also in rents to rent fleets.

Asia, we have managed – this is particular China down, we have managed to grow the business there in CE, we are remaining as the number one player on the Chinese market. We do see that we are taking market shares and of course the market by itself has been hampered particularly during the last month in terms of excavators, due to the tightening of the credits. But I will talk a little bit more in detail about that when we come to the market forecast for next year.

On the operating income, for CE on page number 1, we have seen that we are rolling on a $6.8 billion and we have the margin coming in at 9.4%. If you would exclude that margin from the FX headwind, you would have to add another 1.8% to that, coming up to 11.2% in the quarter.

Now follow me to page number 10, which we now specify the operating leverage on the different business areas, but also on the group industry operations in total. As you can see there, we have a operating leverage excluding FX on the industrial of 18%, which I think is reasonably good. We are in a phase were we have increased the production.

And in trucks for instance, you’re looking at 19% operating leverage and then we should remember that we have seen a [subsequent] growth in the North American market, which then have lower volumes, have some diluting effects to that. So I think that and I think for some leverage operation on this is quite okay.

When it comes to CE, you can see the big difference between 3% and 14%. I would like to comment two things on CE. One is of course that, we are investing in the organic growth as we have reported to you earlier. We have the program of 55 new or updated products that we’re going to launch over the next years to come. We’re also addressing, I don’t think that is important, we’re also addressing this currency sensitivity by now investing in localization. We have it in India, we have it in Brazil, we have it in Russia and we of course have it in U.S. with our big investments we’re doing shipments for in order to make sure that we are less sensible over time here in Volvo CE for currency flow fluctuations.

When it comes to buses, I would say that the direction is definitely the right one. But both on margin side and the leverage side, I think we have more to do there, and we are looking into ways and means to increase both the margins, of course, but also the leverage.

Penta I think has shown a good development over their last quarters, coming back from the crisis and now coming in with margins that are almost back to pre-crisis level and to do that with a completely a different mix. Penta is today 50% marine and 50% industrial engine, and they are managed to do that in a good way.

And then Volvo Aero is now coming on a 7.2% margin. We still have different ways to go in Volvo Aero, but with the specialization that we now have and the fact that we have divested and some years ago we also closed down some of the activities in the service side. I do see now that Volvo Aero is actually very well positioned in the core competencies of components and in their specialization of light weight components and they have a good participation in the different program. So all the prerequisites are there now is a matter of executing and I can show that we offset the dollar impact in particular with good productivity and now showing good return on all the investments that we have done there.

Then since this morning’s presentation there has been a number of questions around the currency impact, and therefore I’ve asked Mikael Bratt to give us on page 11 a little bit more detailed comments around the impact that we have had on currency impact on operating income. So Michael, why don’t you take slide number 11, please?

Mikael Bratt

Thank you, Olof. Most of you have seen this slide before when we have gone through the currency effects in greater detail. We have made some modifications to it however, but I will come to that. The breakdown of the 1.8 billion that we have talked about earlier today is of course coming to logistics on the spot rates on the net flows and behind that, you have the main currency effect coming from the dollar.

Then we have the portion of the realized hedging contract, 75 in change between the Q3 in ‘11 and ’10. The revaluation of receivables and payables, the balance sheet items of course and then, we have the big impact coming from unrealized gains and losses of the hedging contracts, and here we have now breaking out for Q3 ‘11 the portion that is reallocated back to the business area. So, and out of the 378 million that is isolated in Q3, 2011, 166 is unallocated to the business area. So those 166 is a part of the net number you see on the previous slide that Olof went through with you here.

The reason why it’s not anything in the Q3 ’10 figure is of course that, this was something we introduced during 2011 as you see on the note to the right hand side there. And then, of course we have also the regulation of foreign subsidiaries when we translate the result back home to the Swedish currency, which is our base currency. So it means then out of the 1.8 billion, 1.1 billion is in the business area and then the remaining portion is left at group headquarters.

So that is in brief the currency impact in the third quarter here. So I will stop there.

Olof Persson

Thank you very much, Mikael. And I am following on to page 12 and to conclude the quarter by, let me say that in whatever way you look at it sales operating income, operating margin, and cash flow, it has been from a historical point a very strong third quarter over the six years that we show you here is actually quarter number one.

With that, leave the third quarter behind us and the reporting of that and then, looking into the future a little bit I’m starting with the order intake and deliveries for the truck on page number 13. You can then see there we have the plus 18% quarter-over-quarter coming from the 51,000 to almost the 60,000 order intake, and the growth numbers you see there region by region and notably is of course a strong development in North America, but also in South America. And I must say also that Europe is then quarter-over-quarter performing well.

If you look at the right hand side, you see the book-to-bill ratio. We are then having the orders of 60,000 and we have deliveries of 55,000. So basically, we’re then having a book-to-bill one-to-one.

And of course, all the number I’ve said before is year-over-year not quarter-on-quarter as it is there in the table.

Then on page number 14, we are then talking about our forecast for this year in the different markets, but also then our take on the markets for next year. And if, I then start with Europe and let me just spend one minute on how we have sort of come to the conclusion of the Europe and the other markets.

What we have done is really going through all the facts that we have, we have looked at the statistics on the edging, of the fleeting group. We have looked at the order intake ratio. We have of course listened very carefully to our main customer and activity levels and we have also then made sure that we have waited in all the uncertainty on a macroeconomic and country level that we have seen. And really tried to take a [temperature] with the information that is available to us.

Today, when we do all that, we come to the conclusion that we will see a declines or a small declining Europe with 10% next year that means, by saying that we also have to make sure that our production rates are aligned to that and we’re just working through that in the European production system to align our production rate in accordance with the minus 10%.

In North America, you can see that we have taken 20% growth next year coming from the 210,000 that we are forecasting today. Let me start with the 2011 estimate, we have lowered that to 210,000 and that is not so much on the market demand, it’s more of an industrial capacity point of view.

We have definitely seen during the third quarter some disturbance and in ramping up. So we have employed more than thousand people, we have put in extra shifts in our American production system and that has led to some disturbances. But I have, but to report that, it looks like when you threw it up now, the production rates are up and running towards next year’s levels and we see then the continuation of that.

The reason why we call North America a plus trend is basically, we continue to see this replacement cycle on the long-haul side that we have seen before. We do not see in those 20% and a major rebound on the construction side. So it's more of a continuation of a replacement demand as we can see it today.

In Brazil, if we move to the green line, we call it 10% for next year and basically this is the first quarter that we see in front of us that’s going to be slower. It’s partly or mostly due to the fact that you have emission legislation changing over from Euro 3 to Euro 5, and we might have some overhang in Brazil of Euro 3 trucks coming in to next year. Let me also state that we don’t foresee a major pre-buy effect during this year and the reason for that is, the systems and the production systems in the industry is on very, very high utilization levels going forward.

Underlying in Brazil, if you look at the positive side is that we still see that we have an underlying growth in terms of GDP and activity levels going forward. We do have a very important show in Brazil this week or next week, where we actually will then start to take orders on our Euro 5 trucks to be delivered in 2012, and that means that we will get a better visibility on the Brazil side at that point in time.

In Japan, we see now that the reconstruction work after the tsunami and the earthquake is starting to show up in our order intake numbers. We have a good development in the order intake in Japan and we foresee that the market due to this will go up with 20%, but it has to be said, it’s coming from historically very, very low volumes.

So, to summarize the plus and minuses, if we take those markets which you see here and if I’ve done the math correctly I think, number of trucks for next year it’s basically the same number in 2012 as it is in 2011, if you combine all these months together.

If we then shift over to page 15, you can see our takes on the VCE equipment. If I then start from the top with China, we have seen a slowdown in the second half of the year of China, and mainly due to season of course but also to the credit heightening that the Chinese authorities has been doing over the year. We believe however that going into next year, we will have and we see as spring season coming with pretty high activity, and with that into the next autumn, we believe that we could be anything from flat to 12%, 10% in China, then based on very high volumes as you can see, so that means in terms of number of units, quite a few.

Turning now to Europe; we believe that the activity level on construction on Europe will still be there in order to support the 10% to 20% growth. And again, even with this we will still be below this order trend lines in Europe.

North America; we see that the trend of refleeting and also building out the fleets going forward for activities level that we have would support 15% to 25% increase. South America is on all-time high already and we see a small, but still an increase.

So to summarize the VCE market conditions and environment, we are coming out of 2011 with reasons for a good growth in many markets, and we continue to see that growth a little bit more modest growth, but still growth in our markets.

And basically on page 16; we’d like to do a summary before we open up for questions. And as I said before, it’s historically a very good Q3 with growth. We have had the profitability. We have operational leverage excluding FX on 18% on industrial operations and we have historically a very strong cash flow with SEK 2.2 billion in the quarter.

On the macro economic level and as I stated out, we’re now calling the next year’s market. We do that of course with the data, the visibility and the facts that we have today. And of course we are and we will continue to keep our flexibility, we do have around 19,000 people of our workforce as temporary consultants or manning companies. So compared to 2008 we have a much higher flexibility as well.

So we are keeping a very, very close eye on the development going forward here, but again with the data we have today, we are then called the markets as I just presented. And of course our geographical footprint is balancing, the whole thing, you can see that we do put on a little bit of an accelerator in US in order to meet the delivery and the production phases that we see coming there.

We apply a little bit of a break in Europe to adjust our results in the 10% lower market conditions, and we of course will during Q1 in Brazil in particular also making sure that we don’t produce any trucks that the markets doesn’t – or wanted to take.

So with that I would like to stop the presentation and open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The question is from Mr. Nico Dil from JPMorgan. Please go ahead, sir.

Nico Dil – JPMorgan

I would like to ask two questions please. First of all, on the truck orders and Europe in particular; just sort of wondering how that progressed during the quarter; wondering what your exit rate was roughly in September or October.

Secondly; on your construction equipment forecast, just wondering how in North America as well as in Europe, how this compares towards versus the replacement cycle demand level. So just sort wondering how your guidance are in North America sort of up around 25% and in Europe up 10% to 20% in 2012, how that compares to a replacement level of demand? Thank you.

Olof Persson

Yeah, if you look at the order rate coming into and I’m looking at Christer there, since this is my first time, so I am not….

Mikael Bratt

Let me give you some flavor Nico, you can say always in July, August you have vacation period while you have a low order intake activity and then we call pick up in September coming through especially on the Volvo side while we saw a weakness in the Renault side, which has more, you can say, exposure towards the Southern part of Europe. So a normal, I would say, pick up of orders in September for Volvo trucks but then we saw a bit of a weakening again as we got into October.

Olof Persson

And on the VCE side, I would say the following; in North America we have had the downturn for almost I would say three years now while we have seen a decrease in the demand and also that we do see actually a lack of used equipment in the construction equipment and the pricing on the used equipment is holding out very well or even increasing and that is also then trigger some business cases where we can see that the customers then go in and buy new machines.

On top of that, you have put the large machines in your emission legislation, which coming into place as well where we of course are very well positioned with all the new machines out to the market.

In Europe, I will call it a little bit more of a, I will say, not yet come back to historical trend lines. And you can see in the different areas, and this is very much driven by, A part is replacement, but the second one is also activity level in the Northern part of Europe.

Mikael Bratt

Yeah, just a comment there, I mean even if we see growth of 10%, 20%, we will still be on a ten-year low on absolute numbers in Europe and North America.

Nico Dil – JPMorgan

Okay. Thank you.

Operator

Next question comes from Mr. Fredric Stahl of UBS.. Please go ahead sir.

Fredric Stahl – UBS

Yeah. Good afternoon gentlemen, it's Fredric at UBS. I was wondering if you could give us a flavor for how the service and spare parts market is developing in Europe, and maybe if you can tell us what the differences are, if there are any, in terms of demand in Southern Europe versus Northern Europe? And then secondly, given that you're now providing us with a bit more information on the currency, I was hoping maybe you could give us good break with the habits and maybe give us an idea of what the currency impact could be in Q4? Thanks.

Olof Persson

I think on the service side and the spare part, I mean we haven’t seen any deviation as we normally see, that means that is related to the mileage that we have on the fleets and the pickup of the mileage of the fleets that goes both for Northern part of Europe and Southern part, but of course there are different utilization rates. I also said as we’re holding out the pricing of the spare parts quite well. So, giving historically, what I have heard and what I have seen is that we are holding a rather normal pattern on the service and on the spare parts side. When it comes to the currency I’m looking at Mikael and why don’t you take that?

Mikael Bratt

Yeah. As you know, Fredrick it’s very difficult to predict currency impact going forward here. I mean, there is a lot of moving parts involved here. I mean there is forward contracts that we will have in the end of the quarter that will be evaluated and we haven’t done all of them yet, we don’t know their closing rate at the time and so forth. So, I think it would be very difficult to give you any number based on that and if I give you the number I have in mind right now, it will probably not be the right one when we get to the end of the quarter anyway because of the moving parts. So, it’s a very tricky area to forecast for you I understand that, but I don’t think we have the possibilities to get any closer than what we are today, we will be disclosing the real fact and figures at the end of the quarter.

Fredric Stahl – UBS

Yeah, sure. No problem. Thanks a lot.

Operator

Next question comes from Ms. Laura Lembke of Morgan Stanley. Please go ahead.

Laura Lembke – Morgan Stanley

Yeah, good afternoon. I’ve got three questions and the first one is on your North American forecast, which obviously lowered from 230,000 to 210,000 units. Now, are you expecting 20% growth for 2012 and although I know you didn’t have like a full year estimate previously, I’m just wondering if you could maybe give us an idea how this compares to your initial assumptions for the U.S. next year, so what you have internally budgeted, because I mean, if we assume you had that initially up 20% as well then obviously intercity you just lowered your expectations from around 275,000 to 250,000 units. I’m just trying to get a better feel for what has really changed in your view in the U.S. market for 2012.

Second question is on your tax rate. You’re guiding for 30% for the full year, but you are 28% at the nine months stage. So, I’m just wondering is the 30% still valid and we should expect a big increase in the tax rate in Q4?

And then just lastly, in your working capital you have a quite a big item SEK 1.7 billion of other changes; year-to-date that’s at SEK 4.3 billion, so I’m just wondering, what is reflective in this? Thank you very much.

Olof Persson

Okay, thank you. Let me take the first one; and the answer to that question is that we saw and during the third quarter with the ramp up and also the total industry capacity for 2011 that the previous forecast was going to be difficult to meet and that’s why we’re now – and again, I emphasize that this is more of an industrial ramp up, and the acceleration issued on it than a market demand ratio.

The call for next year, we did much later. So, basically we have taken that into consideration. So, we did call for next year, when we had a pretty good picture on what we had already. So there was no one sort of called before that. So, we have not lowered the expectation, that sense we’re just sort of doing the call for next year with actual facts that we have in place.

For the other two questions, I’ll hand over to Mikael. And can you elaborate on those?

Mikael Bratt

Sure. The tax rate remains 30% of the guidance. Then of course when you look at the quarter like this there are some specific country, as this specific country, each may give a little bit different there, but I mean it’s still around 30%, so the continuity is there. On the SEK 1.7 billion under other, is related to number of different items as usual in other, but in this month, in this quarter, particularly there is two items that sticks out and make the number more significant than normal. And one is prepayment for some raw material we wanted to secure in Asia, on the construction equipment side, and then on pension we have also topped up in the extra division like capital into the pension plans as the funding requirements that are needed primarily U.S. or Sweden that makes up the bulk there.

Laura Lembke – Morgan Stanley

Okay. Thank you, very clear.

Mikael Bratt

Thank you.

Operator

Next question comes from Mr. Yann Benhamou from Exane. Please go ahead sir.

Yann Benhamou – Exane BNP Paribas

Hi, good afternoon. Yann Benhamou from Exane. Three questions please. First one, how do you anticipate the evolution of pricing in Brazil, given the fact that it will have capacity addition, plus new entrants in the coming years, and those new players should have local production? Second question is related to your geographic mix in trucks next year. If I understand well, Europe and Latin America should be down, while North America and Japan should be up, so the first two markets are, in my view the most successful deals as our last (inaudible), should we expect any significant impact on margins and maybe a last question, what kind of magnitude do you anticipate in terms of production cuts early 2012 and do you target any additional in terms of inventories. Thank you.

Olof Persson

Okay. When it comes to the pricing and the long term pricing in Brazil and I assume your question is related to the trucks.

Yann Benhamou – Exane BNP Paribas

Yeah heavy trucks.

Olof Persson

I think I mean, we will, if you take it on the short-term it will start to take the orders for our new Euro 5 and if I remember correctly the price increases we are going to have is…

Yann Benhamou – Exane BNP Paribas

10%?

Olof Persson

…10%, yeah, coming into the market and that is going to be a price increase going forward. And then long-term and what kind of effects the new comers will have, I mean that remains to be seen. Our main goal and target is and has been and will be to continue to grow in terms of market share, but do that with a profitable growth. And that’s we’re going to focus on also growing forward.

Now we have to deal with the market situation as they come, it’s very difficult to predict how that will pan out and I think we do see now for the next year and that’s where we are planning for that we will have the price increases coming with the new technology. When it comes to the mix in terms of geographic going up and down it’s also a mix in between regions on one thing, but you also see the difference mixes between the long-haul. In U.S. for instance, we start to see now the penetration rate we have had on our own engines and our own transmissions is also showing, it’s starting to show result in the spare parts, which is of course of great benefit and is important as well.

So, we are going to work very hard on the mix, but what exactly that will pan out that’s forward-looking statements that we don’t do. When it comes to the cut, I mean we are now and we have looked in to the Swedish system and Volvo system in particular and we will cut now the production inline with what we have said in terms of the market. We are looking on to the renewal side and see what implications if any, there are no decision taking there. We are still are in investigation phase. But in general, you can say that [planning on] mix, market mix, product mix, segment mix, there's a lot of details that have to be categorized and we will then align our production to the market demand.

Yann Benhamou – Exane BNP Paribas

Okay. Thank you.

Operator

Next question comes from (inaudible).

Olof Persson

Yeah. Hello.

Unidentified Analyst

Good evening. I have basically three short questions, one is basically what level of reduction you can see in your production, which you can still manage before you start seeing the impact on your bottom line? Second, can you give us the status of your truck JV in China, how that is progressing and what are your plans for China in longer term? And are you seeing any cancellation in your truck orders in Europe predominantly?

Olof Persson

Okay. Let me start to answer the first question about the reduction. I would like to answer it by saying that in total right now, we have a flexibility in our workforce that corresponds to approximately 19,000 people. I think it’s 17% that we do have. So that's a flexibility that we have today that we didn’t have if you go back to 2008. And if you go down exactly where those kind of levels are, it’s difficult to judge, but with the calls that we do for different markets, we will have a mixed picture with a reduction in Europe, a reduction in Brazil, but primarily, then, what we see now, the first quarter. And then you will have an uptick in the high production rates in US as we go along. So it’s a very mixed picture there.

When it comes to truck joint venture in China, we have a very good and a very good cooperation with our partner at the DND. We are putting plans together in order to see how we can develop that joint venture, and that is something that we are working on right now. In parallel to that, we are also looking in terms to see how we can and if possible to increase the sales of both the Volvo and the Renault Truck in the so called Western European segment in China.

And then finally there on the cancellation side, the answer is, no. We haven’t seen any unusual cancellation rates. The cancellation rates are traveling at a very normal speed as we see it today.

Unidentified Analyst

Okay.

Operator

Next question comes from Mr. Sebastian Gutale from Société Générale. Please go ahead sir.

Sebastian Gutale – Société Générale

Hi. Good afternoon, gentlemen. I have three questions. My first question will be on the FX impact on trucks. You said for about SEK 500 million and the FX impact on the operating profit in the division, but the Eaton sales was about SEK 2.5 billion. And I’m just wondering why such high flows on the FX impact. Is there any mark-to-market impact in this number or is it due to a transaction impact? My second question would be on the construction equipment. In China, I think you’ve not mentioned that inventories not in China, but in general, I don’t think you have mentioned that inventories have did in Q3 and came back to the historical level rates and I wonder if you expect on the same trend in general, where to deal our inventories for you CE products today. And my final question would be on Penta, I mean there was a very strong increase in profitability despite the total (inaudible) and you mentioned the mix to explain just wonder is this due to a particular activity or geographical mix. Thank you.

Olof Persson

On the first question, Mike if you might want to elaborate on the FX impact on the truck business?

Mikael Bratt

Sure. The bulk of those SEK 500 million is of course coming from the net flow currency effect. As I told you before here, the portion of the unrealized forward contract that are mark-to-market is only SEK 166 million going up to the BAs. So and of those 166 truck is taking their shares, so that definitely means that the flow is the big impact there.

Olof Persson

On the CE and the inventory side in US, we haven’t got any report from that we are building any substantial inventory or building inventory there, and there is of course, if you look at the rent to rent business there are now both a restocking of new machines for those a little bit of build up in inventory, but there are no big things that has been reported back to us in terms of the inventory.

When it comes to Penta there are two things, one is of course as you hinted to in, a volume and that means also a geographic mix, it’s primarily in Asia where we have seen a good growth on Penta industrial engines within good profitability. But then in general, Penta has done a very good job when it comes to making sure that cost efficiency and making sure that the organization came out of the crisis in a lean and in a good way and that is a little bit also what shows here in the numbers coming.

Sebastian Gutale – Société Générale

Okay. Thank you.

Operator

Next question comes from Declan Carlin from BlueBay. Please go ahead.

Declan Carlin – BlueBay Asset Management

Your estimates for the 2012 European market, volumes appear significantly higher than one of your competitors. Can you tell me why you expect market to be so much better than they do?

Olof Persson

What we have done as I explained and then, that is we are getting more effect that we see in our business, both the statistics for that also making sure that we’re now talking to customers. We have done making sure that we have brought in the uncertainty that we have in the market. So, I think that at the end of the day, this is call. With the information that we see in the fact that we have, we have put it together and this is the core we're doing.

Declan Carlin – BlueBay Asset Management

Okay. Thank you.

Olof Persson

Okay. I think that was the last question. Or are there any other questions operator?

Operator

No, there are no further questions at this time.

Olof Persson

Okay. Then I would like to thank you very much for being with us here this afternoon, presenting this third quarter and I wish you all a good day, good evening and talk to you next time again. Thank you very much.

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