On Friday, Volvo (OTC:VLVLY) discussed second-quarter financial results during its earnings call. The full transcript is provided below.
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The full earnings call is available at https://qreport.volvogroup.com/event/eBRwKKKnTZeC2LE5D
Summary
Volvo Group reported a strong second quarter with an adjusted operating income of 14.8 billion SEK and a margin of 11.7%, reflecting solid earnings resilience despite geopolitical and cost challenges.
The company saw a significant year-over-year increase in order intake, particularly in the truck segment with a 33% rise, and a notable 21% of Volvo Penta's order book is linked to data center infrastructure.
Volvo's future outlook includes a focus on ramping up North American truck production and maintaining cost control amidst inflationary pressures, while also expanding their service business which grew by 7% organically.
Strategic initiatives include launching new business offerings and forming a joint venture with Eicher Motors in India to enhance financial services for commercial vehicles.
Operational highlights include increased electrification efforts, with a 39% rise in electric vehicle orders, and strong market shares in Europe and South America for trucks.
Management remains optimistic about future growth, emphasizing flexibility and adaptability in production and cost management to leverage current market opportunities.
Full Transcript
Eric Ingebretsen (Owner)
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OPERATOR
Good morning and welcome to the Volvo Group second quarter press conference. Today we do as we always do. We listen to our president and CEO, Martin Lunstadt, and then follow up with Mads Pachmann, our CFO, and then finalize with the Q and A. With that, I leave over to you, Martin.
Martin Lunstadt (President and CEO)
Thank you very much for that, Johan, and also welcome from my side, even if it was a short introduction, I have to say it's always a little bit emotional to see our fantastic products in action. So second quarter 2026 and I would like to start by saying that the group and in reality of course all colleagues and business partners delivered very strong and solid results in the quarter with an adjusted operating income of 14.8 billion and a margin that expanded to 11.7%, demonstrating strong earnings resilience and growth.
Despite many moving parameters such as continuous geopolitical turmoil, tariffs as well as higher freight and material costs, performance was good across business areas with high customer confidence in our products and services reflected in a strong order intake and low cancellations throughout the quarter. The group also launched several new business offerings as well as portfolio moves to further improve our competitive set and I will get back to that during the course of this presentation.
Quarterly order intake developed also positively with an increase year over year of 33% for group trucks as one example. And when it comes to the market forecast for the full year we are for trucks continuing to revise slightly upwards Europe while reiterating the forecast for North America given that the first half year was relatively weak when it comes to deliveries into the market in North America and a catch up will be needed there. But order intake has been strong as you have seen.
Another example is the rapidly growing demand for power solutions not at least linked to Data center and AI infrastructure resulting in an impressive 21% of Volvo Penta's order book value now is related to data center build out. Looking ahead, we continue to focus on what we as a group together with our partners can impact by staying close to our customers, thereby driving growth and resilience. And we remain responsive to geopolitical developments, trade policy shifts and the speed of transition into zero emission transport.
Operationally here and now, our flexibility toolbox serves us well to execute on the strong order book but also maintaining balance between demand and supply and keeping inventories at the right level. The ramp up for trucks in North America is currently a key priority. Our focus also remains regarding effective cost control and we actively pursue commercial efforts to mitigate the increases in freight and material cost. The priority of the service business is giving good results and services did grow with 7% organically showing that our customers have a good utilization in their fleets.
All in all, our flexible business model creates maneuverability to leverage the current environment to grab the opportunities and to continue to create value for customers, for employees and for shareholders. And there is a continuous and growing structural demand in the world for efficient and effective transport infrastructure and not at least energy solutions. And the group is well positioned to move ahead and to grab these opportunities. Looking then at the figures, the first quarter net sales amounted to 126 billion with an organic sales growth of 7%.
We continue to focus on earnings quality and the adjusted operating income amounted to 14.8 billion with an expanded margin to 11.7%. In the quarter, operating cash flow amounted to 5.8 billion, mainly driven by higher earnings and the industrial operation. Net financial position at the end of quarter one amounted to 34.7 billion, return on capital employed reached almost 27% and earnings per share amounted to 5.1 krona per share. So we can conclude another strong quarter and I would like to take the opportunity also to thank all colleagues and business partners for great effort during this quarter.
Coming into group news then in the quarter, Volvo Financial Services and Eicher Motors Limited intend to form a joint venture tapping into both Volvo and Eicher branded commercial vehicles and the intended joint venture will provide financing, leasing and other financial services for customers of as I said, Volvo and Eicher branded commercial vehicles in the Indian market. And that is a great opportunity. The closing of this deal is expected during 1H27, pending approvals from authorities, but it is a very important next step in a market that is expanding rapidly and where we have a strong position.
On June 10th we held the Volvo Group's capital market stay in Eskistuna, Sweden. Built for resilience and growth. Well attended day with a lot of good interaction with our investor base, but also other key stakeholders and a lot of good interaction and feedback on that. Also, Volvo Group and Renault Group together with CMA CGM has completed the strategic change for the joint venture Flixys and the transaction, meaning that Flixys is moving into Renault Group, was closed in June and Volvo Group also reached a settlement with the California Air Resources Board during the quarter.
When it comes to volume developments, truck deliveries increased by 6% to 55,700 vehicles, with higher volumes in Europe and South America, but with lower volumes still in North America. From a delivery standpoint and also in Asia, Volvo Construction Equipment's Volvo branded volume did grow 14% in the quarter, driven mainly by North America, but also to some extent by Europe. When it comes to electrification progress, orders of electric vehicles increased 39% to 5,500 units 12 months rolling.
The increase was primarily driven by Renault light commercial vehicles, but also that Volvo trucks took more orders for their heavy duty electric trucks year over year, and that is also coming with the introduction of the new long range and versatile platforms for Volvo. Deliveries were largely flat on a minus 2% level. Sales development vehicle and machine organics sales growth was 6% in the quarter. Trucks did grow also with 6% FX adjusted driven by sales in Europe and South America.
Volvo CE had sales growth at 14% in the quarter driven by good sales across Europe, north and South America and Bus net sales were down 2%, mainly caused by somewhat softer sales in Europe. And Penta net sales were down 4% mainly caused by lower sales to the Middle East where some of the deliveries of power generation equipment has been temporarily paused due to the conflict situation that is happening for the time being in the region unfortunately, but we are expected that to come back, so that is temporarily paused.
Service Sales development Organic service growth amounted to an impressive 7% in the quarter and what was very positive, it was broad based positive development across business areas. The 12 month ruling service sales increased to 126 billion. And this is also showing that what we discussed during the capital markets day that our work with the total offer for every customer is really paying off here. Services is a very important focus area and our efforts are paying off when it comes to not at least our service contract portfolio.
We see that when we have service contracts also it gives higher retention with our customer base, but also higher resilience and less volatility for the group. Moving into trucks Then in May, Volvo trucks showcased their brand new high performing 13 litre combustion engine platform which will be implemented now step by step globally. The platform is also alongside with diesel fuel ready for renewables and alternative fuels such as biodiesel, hvu, biogas and green hydrogen.
And sales will begin during the third quarter 2026. In June, Renault trucks followed. Also Volvo showed their next generation of battery electric heavy duty, the Renault Trucks E Tec T which has an impressive range of up to 660km and with maybe in that sense or leading payload reaching up to 27 tonne. Sales started for Renovo here end of June and Mek trucks and you can see that on the image here, celebrated America's 250th anniversary with a debut of a limited edition America 250 tribute truck, a custom designed Mack Pioneer, as you can see here, honoring the company's deep American roots and its long standing role in helping move the country forward. Then when we move into the market forecast for trucks in North America, we repeat our market outlook at the 265,000 units in retail sales, that is sales out from dealers down to customers orders levels have been elevated in recent months while retail sales pace or the deliveries then is expected to gain momentum in the second half of the year and any EPA 27 pre buy is included in our current view. But it means that we need really now to get deliveries out during the last part of the year.
Marc Dean
Here and for Europe, the forecast for 2016 is increased by 5,000 units to 350,000 on the back of continued strong underlying demand in the market. The Brazilian market continues to hold up on the back of the Phenome financing support package, and we repeat our market forecast of 80,000. Demand in India has continued to grow, supported by steady freight activity, continued investments in infrastructure, supportive government policies, and healthy replacement need.
We repeat our Indian market forecast of 400,000 medium and heavy-duty trucks, and the total market forecast for China has been lifted with 120,000 units up to 880,000 on the back of an extended trade-in program aimed to modernize the fleet. This is really continuing to decouple the transport sector from fossil fuel dependence in China and continues to boost battery electric vehicle sales. Book to Bill, of course, presents a very positive picture here.
Recent order momentum across regions supports a continued positive book to bill. Globally, the book to bill was at 170% in the quarter and 106% 12-month rolling. We have gradually been ramping up and are well-balanced on the industrial side to meet customer demand. But as I said already, focus will be on a continuous ramp-up in North America during the second half of the year here. North America in itself has been strong with 150% in quarter two and 133% 12-month rolling.
Europe is in balance, but it should be remembered that that is on really good and solid levels. South America is strong given final FINAMI programs on the truck market share side in Europe. To start with, Volvo Renault trucks continue to deliver strong market shares through May, Volvo at 19.6% and Renault at 9.3%, giving a total share of almost 29%. On the battery electric side, more OEMs are now delivering battery electric solutions. Volvo and Renault Trucks delivered a 24% combined market share for the quarter, but it should be remembered that our recent launches of the next generation long-range and versatile electric trucks will regain momentum both for Volvo and Renault. We proceed with our three-pronged approach with diesel, electric, and hydrogen to drive both decarbonization and to meet the demands from the customers. In North America, we had a combined share of 17%. Mack trucks are at 8.4% and Volvo at 8.6%. Volvo trucks are back on the right track and are gradually regaining their position, with further support from over-the-road or the sleeper segments expected for Volvo. In Brazil, we remain at a good level and reached a market share of 23.2%.
In Australia, the combined Volvo and Mack market share reached 21.4%. Moving then into construction equipment, Volvo construction equipment had first and foremost The Volvo Days 2026, a big customer event that was held in Eskilstuna. Focus was on, of course, a lot of our new products and services, productivity, sustainability, and long-term customer competitiveness. Over 8,000 guests participated over the course of four weeks, including mainly customers from all over the world, but also retail partners, employees, and representatives from society at large, policymakers, investors, and suppliers.
In mid-June, we also held the groundbreaking ceremony for the new excavator factory in Eskilstuna, together with Sweden's Prime Minister and Deputy Prime Minister. This 700 million investment reinforces Volvo construction equipment competitiveness, industrial footprint, and proximity to customers in the important European market for excavators. The new factory is set for completion in 2028. In the quarter, Volvo CE also delivered the world's first electric articulated hauler, the Volvo A30 electric.
That is, of course, also fit for good operation given the more confined nature, as you can see in the picture here. We see increasing customer interest around this, showcased not least during the Volvo Days here. Market forecast, no drama at all. On the other side, we are lifting, if you start with North America, we are lifting North America with 5 percentage points. We guided flat as midpoint previously, but now we guide plus 5% in relation to the previous year, supported by investments in data centers, energy infrastructure, and manufacturing onshoring.
Europe had already plus 5% as midpoint in relation to last year, and we keep that at the same level as the previous quarterly report, on the back of continued infrastructure development and good machine utilization. South America is also keeping unchanged, but in this case, on a flat development in relation to last year. We are a little bit taking down and decreasing Asia from flat to minus 5% as midpoint, on the back of softer markets in Turkey, the Middle East, and somewhat in India as well.
In China, we are lifting from plus 5% midpoint to plus 10%. Here we see growth supported by government policies to stimulate the real estate market and export industries. When it comes to the book to bill, they reached 92% in the quarter and 102% 12-month rolling. It's important to mention that orders were up 8% and deliveries up 14% for the Volvo brand. So we have good order coverage for both Europe and North America. In Asia, the lower book to bill is driven by somewhat decreasing markets in Turkey, the Middle East, and India.
As I previously mentioned, buses first and foremost, V Flygbossana airport coaches operating between main cities in Sweden and the airports placed an order of new 25 coaches and also completed the gold service contracts to be used, as I said, between the cities and the airports. We also introduced the Volvo bus new electric coach into operations and started on the route between Gothenburg and Landvetter airport. Book to bill was 62%, some seasonality in this from a low order intake in the quarter.
But Volvo buses have a balanced field rate for the year and book to build 12-month rolling at 92%. Volvo Penta continues to introduce new versions of the IPS hybrid platform, expanding its hybrid electric marine offering into the professional vessels segment with strong customer interest. Given the performance of this execution, Volvo Penta also strengthened its position in the growing data center segment and expanded its strategic collaboration with Utility Innovation Group.
Data centers, as I said, now represent 21% of Volvo Penta's total order book value. The image on the screen here is from the switch data center in Las Vegas, produced by Volvo Penta's partner Central Power and powered by Volvo Penta D16 gensets. Volvo Penta's book to bill is at a good balance with 96% in quarter two and 97% 12-month rolling. Moving then into financial services, continued to profitably grow their portfolio on a currency-adjusted basis through solid new retail financing, and the 12-month rolling penetration rate was sustained at 30%.
Portfolio performance continued to be good with maintained earnings resilience. Of course, we are now continuing to focus on the total offer, as again described during the capital markets day where VFS, together with our business areas, are playing a very important role both for customer finance and also in the growing insurance segment. So by that, Johan, I leave the word back to you.
Johan (Operator)
Thank you, Marc Dean, thank you for the business update. Now we're turning to MATS to take us through the financial numbers for the second quarter.
Mats
Thank you, Johan. Dan, looking into the financials, and starting off with the group net sales, organic net sales increased by 7% compared to last year. Vehicle sales increased by 6%, driven by trucks and construction equipment. Service sales increased by 7% with contributions from all business areas. Looking at organic net sales development in the different geographical regions, European volumes increased, which led to an increased sales of 13%, driven mainly by group trucks and construction equipment.
In North America, sales were slightly higher by 4%, driven by construction equipment and buses, but this was partly offset by trucks. In South America, net sales increased by 9% versus last year, supported by all business areas, and in Asia, net sales decreased by 3% in the quarter. Overall, the FX effect was negative with about 1 billion in the quarter. The adjusted operating income for the group was 14.8 billion with an adjusted operating margin of 11.7%.
In Q2, earnings were again supported by the positive development of a service business, a positive brand and market mix, and R&D net. The US tariff net cost was on the expected level of about 1.2 billion, with a negative year-over-year effect of 1 billion. In the second quarter, we continued to see higher freight costs and increased material costs related to inflation and the current geopolitical situation. The year-over-year increase in selling costs is mainly due to selling costs from acquired businesses.
The net R&D capitalization effect in the quarter was positive at 1.3 billion, with a year-over-year effect of 600 million, and FX had a positive impact of 500 million in the quarter. The second quarter cash flow amounted to 5.8 billion. The positive cash flow contribution in the quarter was mainly driven by higher operating income and a lower buildup of working capital. Capital return on capital employed trend improved to 26.8% on a rolling 12-month basis.
Net cash in industrial operations amounted to 35 billion, and the decrease versus the first quarter is mainly related to the $26 billion of paid-out dividends. Group truck's organic net sales increased by 7%, driven by higher volumes and positive development of our service business. Adjusted operating income amounted to 9.7 billion, with an operating margin of 11.2%. Higher volumes in Europe and South America, good development of the service business, and lower R&D net were partly offset by increased freight and material costs.
Currency had a positive impact of 300 million in the quarter. Construction equipment net sales increased by 13% versus last year, driven by higher volumes and positive development of the service business. Adjusted operating income reached 3.1 billion, with an operating margin of 14.4%. Positive development of our service business and brand and market mix were the main drivers behind the improved performance in the quarter. U.S. tariff and material costs had a negative impact on the financial performance, and currency had a positive impact of 180 million in the quarter.
Then looking into buses, organic net sales were stable versus last year. Buses delivered another strong quarter with adjusted operating income of $498 million and 8.2% in operating margin. The result was supported by price realization and positive brand and product mix. In the second quarter, material cost and US tariff costs were building up and had a negative impact. Currency had a positive impact of 18 million in the quarter. Pent organic net sales were on the same level as last year.
Adjusted operating income amounted to 908 million, with an operating margin of 16.7%. Price realization and strong development for the service business were offset by lower volumes, higher R&D, and US tariff costs. Currency had a negative impact of 37 million in the quarter. And then looking into financial services, the credit portfolio increased to $274 billion, with a rolling 12-month return on equity at 10%. Portfolio performance continued to be good with delinquencies and write-offs under control.
The adjusted operating income amounted to 1 billion, supported by good portfolio growth but partly offset by an increase in credit provision. Currency had a positive impact of 26 million compared to the same quarter last year. And then finally looking into the forward-looking guidances and starting off with the... FX, we expect a positive currency impact of approximately 500 million year over year in the third quarter. The underlying net impact from tariffs in the third quarter is estimated to 1.1 billion but expected to be fully offset by IPA refunds giving a total net tariff effect of around zero in the third quarter. We expect an R and D net capitalization effect of $3.5 billion for the full year 26 with a year over year negative effect of about 500 million.
Finally, we reiterate the guidance from last quarter for a tax rate of 24% for the full year 2026. And with that, I'm leaving for Martin to summarize.
Martin Lunstadt (President and CEO)
Thank you very much for that, Mats. That was a really good walkthrough when it comes to the financials. I will do the summary very briefly. Obviously, first and foremost, I would like to thank all colleagues and business partners for a very strong quarter and great work performed here. We see that also when it comes to the top line development, organic development of 7% up to 126 billion. Especially, I would like to mention the service development also organically growing with 7%.
Of course, we continue to support the business here, but also the order intake, not at least when it comes to group trucks. So now moving forward here, it is full focus on executing on the order book that we have and also to make sure that we are having a good level of adaptability when it comes also to the commercial conditions moving forward in order to mitigate the freight and material cost for the company as we have been doing in this quarter.
So that is the summary, I think you won. And let's get started with the Q and A.
OPERATOR
Yeah, thank you, Martin. So we move into the Q and A session and we have a number of banks on the line. We will start with Shaquille from Morgan Stanley. Please go ahead.
Shaquille from Morgan Stanley
Hey, good morning, Shaquille from Morgan Stanley. So, Martin, there still seems to be quite a gap between North America orders and deliveries. Obviously, we started to see freight activity pick up somewhat, but it's not quite booming. The latest EPA proposal seems to indicate that the incremental cost of compliance is also relatively low. So what's your sense of customer sentiment from here? Is there any concern with those later deliveries or are you quite confident in the sustainability of the upturn?
Martin Lunstadt (President and CEO)
Thank you, Shaquille, for that question. I think that is one of the key topics now moving forward for us. I think that there is an underlying support for this figure, knowing that we have been into a freight recession and not at least when it comes to the long haul for quite some time. And that is also reflected in the age of the fleet, etc. We should also remember between the order intake and actual deliveries of what we are calling retail sales out from our dealers, there is, so to speak, a process to get this out.
And since the year started relatively weak, as you remember, we had stop days in quarter one and also we were not fully in balance up to mid-May. The second half of the year now is, of course, a delivery semester for us and for the industry in order also to reach. Because from time to time we get the question, why don't you change the 265,000 guidance? But we should remember that during the first six months it has been considerably lower than 50% of the 265.
So that implies an uptick here. Then, of course, there are still now discussions ongoing. How will exactly the EPA 27, so to speak, transition look like? But again, I think the underlying fundamental is important then it is important then to manage, so to speak, in a good way. Quarter one next year. But at the end of the day, that is normal business for us. What we have in the order book and the order coverage we feel is solid both for Mack and for Volvo.
OPERATOR
Very good. We continue in London with UBS and we turn to Himal. Please go ahead, Himal.
Johan Hemelbund from UBS
Hi, good morning, Martin. Matt and Johan Hemelbund from UBS. Just in terms of the higher cost from freight and raw materials, is this across the group or are there certain regions or divisions where you're seeing these greater cost headwinds? And is pricing the only option you have or can you pull on other levers, such as negotiating with suppliers?
Mats
I would say it's across all the business areas. It's more kind of a general inflation. And as we said in the report, what we're doing is we're kind of gradually increasing prices. We see a gradual price realization coming there, so that we are on top of it, so to speak. But it's definitely cost inflation out there. It is. And it's more general, I would say, than specific. And if you're looking specifically, like Martin said now in the quarter, more kind of pronounced what we saw at Pent with delays on deliveries and thereby lower volume.
So that's a kind of a concrete difference if you're comparing the different business areas, but otherwise more of a kind of a general cost inflation, I would say. And I mean, and I think that's very important to reiterate what Mats is saying. It's not, I mean, reflected to Volvo or not even to our industry. It's more the general, so to speak, pattern, given that you have had disturbances, etc. But having said that, I think you have seen that during a number of years now, different type of events like that.
And we have also been showing that we are really good in working then with the compensation, both when it comes to operational efficiency, when it comes to working with the supply base as, as you alluded to, but also when it comes to the commercial conditions, obviously. So that will continue that work.
OPERATOR
Good. We continue with the Goldman Sachs and Daniela Costas, please go ahead.
Daniela Costas from Goldman Sachs
Daniela, hi, good morning. Thank you for taking a question. I wanted to ask on your EU truck guidance upgrade and to just like, can you elaborate a little bit on what you see underlying? Because we have been seeing the European market okay for a while, while macro headwinds continue and exactly sort of where we are on that replacement cycle. Do you think this can continue into the coming year or is there anything a bit more structural that is driving this?
Martin Lunstadt (President and CEO)
Yeah, thank you. Thank you, Daniela, for that question. And I mean we have continued to see in the different European regions continuous good activity, both when it comes to deliveries, low levels of cancellations and a good order activity, but also when it comes to the utilization of the fleet. And now it's not a dramatic, so to speak, revision, it's plus 5,000, but still it shows that it's holding up well. But I also would like to say that even though we are talking about solid levels, I mean 310, 315 that we are now guiding for, or of course good levels, but they are not extraordinary good levels also because if you look at four or five years back in time also we have been considerably higher. So if you think about replacements, we are not concerned that we are replacing too quick in relation to the rolling fleet. So then when it comes to the structural opportunities that are ahead of us, I think they are a little bit yet to be seen somewhat. We have seen that when it comes to e-commerce, etc. Not only in Europe, but I think when it comes to defense, energy infrastructure and other type of more structural opportunities moving ahead, they are yet to be seen.
But there is an underlying demand that we think is solid here.
OPERATOR
Good. We continue with the Citibank and Klaus Berrilin, please go ahead Klaus.
Klaus Berrilin from Citibank
Thank you Johan. Hi Martin and Matt's class. I just want to ask on tariffs, Matt. So first on section 2 to 2 and the offsets here, obviously EPA will impact positively in the third quarter, but what are you hearing on the section 2 to 2 offsets? I mean on my calculations the MSRP offsets in trucks can almost offset your annual tariff bill in trucks which could come on top of the EPA. Do you think this can come through this side of the year or more next year?
Thank you.
Mats
And without kind of guessing but taking one step back and looking at the total picture because I mean it's a lot of different moving parts right now when it comes to tariffs. So what we said then for the second quarter was we guided for 1.2 and that's what we saw as well then in the quarter and we talked when we reported the first quarter and gave the guidance for the second quarter. We talked a little bit about the extended scope when it comes to the section 232 for construction equipment and including excavators and wheel loaders as well on top of the previous kind of ones including in section 232.
And that have now changed during the quarter then so now they are back on the original scope agenda. So if you're looking at the guidance we are giving for the third quarter we are slightly lower than on the total net impact of 1.1 as an underlying and then on top of that we have the IPA refunds then that will be awash dam for the full net impact for tariffs. So saying zero then for the third quarter including the IPA refunds done. But we have an underlying run rate when it comes to the tariffs done in the third quarter 1.1 and you are right when it comes to the section 232 credits we have nothing included from that in the quarter and we are not kind of guessing either. So if you're looking at the third quarter guidance, it's nothing included, see if it will happen in fourth quarter or not. But what we need is guidance for how to file those kind of claims and so forth. And that's not there yet then. So we are kind of prudent when it comes to making accruals on that side. It's not included anywhere and it's difficult to guess if that will impact the fourth quarter or not. But that's where we are.
Martin Lunstadt (President and CEO)
But I can just add to that also. I mean that Mats and the team, and our entire team in North America, we are working very closely with the related authorities on this. So exactly when it will happen I think is. Let's see. But the process is ongoing in a good way. And we will be there when it happens.
OPERATOR
Thank you. We turn to Bernstein and Harry Martin, please. Go ahead, Harry.
Harry Martin from Bernstein
Hi, good morning everyone. I wanted to ask about the production ramp in North America in the second half of the year. Clearly significant ramp up to close to peak run rates, it looks like on the data we have industry deliveries or production disappointed a little bit in June. Have you seen any supplier delays or any other issues ramping capacity in the nearer term? And then is there, is there any risk to the outlook for the second half of the year?
And then a final sort of related thought or question. Will you use the new plant in Mexico to ease any of these constraints and put some volume into the US market this year as well?
Martin Lunstadt (President and CEO)
Thank you, Harry, for of course, for a very important relevant question. And now, I mean, so far the ramp up is going according to plan. But you are right, it has been a rather long period, not only for us as OEMs, but also for our supply base with rather low figures. And of course now the whole value chain needs to come together in order to really do this ramp up. So far so good. But as we will continue to ramp up because that is what will happen now during the later part of the last semester here.
Of course this will be one of the key focus areas as I alluded to in the presentation. So full focus on that obviously then when it comes to Mexico as such, I think where we are right now, we can cope with it with the two main facilities that we have in Virginia and in Pennsylvania than for Volvo and Mack respectively. But as we go along and the market will continue not only for North America, but also for other markets here, Mexico will continue and we have started, so to speak, the test production there with very good results as well.
And we are then planning to gradually softly ramp up during the later part of this year. But that is going according to plan. That will not be the limiting factor when it comes to final assembly as
Eric Ingebretsen (Owner)
We judge it now for the remainder of this year. Rather to your point that we are keeping the whole system together. So far so good, but there is a lot of work to be done now to make that happen.
OPERATOR
Thank you for that answer. We're turning to Bank of America next and Alexander Jones. Please go ahead, Alexander.
Alexander Jones (Analyst)
Great, thanks. Good morning. Just on EPA 27, the proposed final rules came out last week and included an option of not complying and paying a penalty instead. Does that change your plan at all on how you think about the engines for your US trucks into 2027? Do you expect others to react to it, and have you seen any impact on customer sentiment or order trends as a result?
Eric Ingebretsen (Owner)
Thank you, Alexander. And I think that is obviously a question that is a little bit early out from a customer perspective since it's still in the making. And as you said, the final, so to speak, proposal is out there. But I mean if I start from a Volvo standpoint, we will make sure that we are offering what the customers want to buy. That means that with this opportunity of providing both the current, still really high performing technology, both when it comes to emissions and fuel efficiency, will continue to be there with this proposal as well, of course, as the continuous certification of the next level.
Then it's up to the customers to judge whether you want to have that. You can say offset, you can call it penalty, but I should almost call it a trading parameter since that will be paid to the government as we see in the proposal. I think the most important is that we will keep the optionality for our customers to choose the solution that they prefer with a framework that has been decided by EPA. And there we have, of course, a strong structure with our regional value chain in place primarily in the United States, then for North America.
OPERATOR
Good, thank you. We're continuing with Jose Ysamende from JPMorgan. Please go ahead.
Jose Ysamende (Analyst)
Thank you very much. Good morning, Martin. Just a question on the US new truck market. Do you see there may be any signals so far of a rebuild effect in the US in light of maybe potentially trucks becoming more expensive in the US in the second half of the year comparatively? And then second, Matt, on all the backlog on Penta, can you give us a bit more color on the data center, that proportion, although the backlog is very interesting, it's growing very quickly.
Can you give us a bit more sense of how quickly data center orders are growing within Penta by region, geographically, where are you seeing the biggest orders coming from? And I guess this business, this division within Penta will be margin accretive, right?
Eric Ingebretsen (Owner)
Absolutely. But then if we start with the first question when it comes to the truck market, I should say that I think already when we look at the order book now, when the order coverage is rather full and for us, given that the rather weak sort and to get to the 265,000 total market and our market share ambitions, I think we are where we are basically. So as we said, the EPA 27 possible pre-buy now, as was also discussed in the previous question, there is sort of a new framework that possibly partly can ease also a little bit that type of mitigation activity.
But that is yet to be seen. But underlying, I think it's important also to remember that it has been a rather long period now of freight recession and there is a need of starting to replace. And I think it's a very important step also for the customers to be able to choose also from technologies that are well known for them, even if that will then come with a higher cost as from next year. But again, underlying there is a strong momentum here. Then if I maybe start a little bit with Volvo Penta as well, to your point, very strong growth when it comes to the order board, 21% now for Volvo Penta.
And that is in light of the fact that the other segments in Penta are also strong. But what we see is really that with the rapid build-out and also for both the data center operators, but also the final customers, understanding how they can utilize our type of solutions that we are working with key partners mainly now in the United States gives also for the backup power solutions, a very efficient way of ramping up both when it comes to the capex, but also when it comes to the lead times and capacity, but also when it comes to resilience because you're utilizing our big boards, but that are of course small bores in relation to some other alternatives.
But for backup, that is a perfect solution. And I think we have really understood how to work within these ecosystems with the key partners. Currently, it's mainly related to North America and United States, but this will eventually play out in all regions in the world, given the importance. And there, of course, the Volvo Penta reach and network through the Volvo system will play a very important role. So we remain very bullish about our own role in this growing segment.
OPERATOR
Brilliant. We're turning to Nadia and Agnieszka. Please go ahead.
Agnieszka
Thank you and good morning, Martin Matson. Johan, I have a question on the kind of profitability that you've seen right now improving in the quarter by 70bps year on year and even more so for trucks. So could you please talk about what you see into H2? Can you keep that kind of improvement trajectory running given stronger volumes, benefit from FX and tariffs and so forth, or will the higher input costs kind of offset that benefit?
Martin Matson
Maybe to kind of summarize the information we have in the report and especially coming to the kind of the sequential development looking coming from second quarter into the third quarter and I would on the kind of the positive side from a sequential point of view, I would highlight three areas, Dan. First of all, that we have a balanced production system now and we are ramping as well, Dan, because I mean in the second quarter we still have parts of the quarter with an under absorption done in North America, but now we are kind of balanced into the third quarter.
Secondly, as we clearly stated, the IPA recovery of refunds that is also having an impact on the third quarter and then also that we have a gradual price realization now going forward. So three items on the kind of the positive side when it comes to the sequential development, turning to looking at more of the, if you can call it challenges down into the third quarter. I mean first of all we always have a seasonality into the third quarter. I think that is important to remember because I mean we have lower volumes in Europe due to the vacation or the holiday period in Europe and it is a normal seasonality also this year.
So to be to remember that. Secondly, as we clearly guided if you're looking at the R and D capitalization, we have had the bulk of that in the first half of the year. And if you add first quarter and second quarter together, we have had a year over year positive impact of about 1.4 billion for the first half. We are guiding for a full year negative 500 million when it comes to the R and D capitalization effect. So that will also turn a little bit on as a headwind done in the second half of the year.
And then finally, I mean as you said, we have the cost inflation but we are working actively with pricing and the price realization in order to mitigate that. But you can always see kind of timing effects in that as we have an order book as well. But we are kind of mitigating that effect. So that's in a nutshell, looking at the sequential development into the third quarter and also into the fourth quarter of quarter. And I think on top of it, I mean, must it also that we, we are very, I mean positive and focused also on the service business?
And then always, I mean sequentially. But I, but I still think that, I mean the plus 7% underlying that we have now is of course given. Given good support for us. And, and also if you're looking at the fundamentals, I mean, we have, it's a good utilization both on the truck side and the machine side. So that is continuing to drive the service business. You're right.
OPERATOR
Martin, good. Returning to Danske Bank and Bjorni and Ashan. Please go ahead. Bjorn.
Bjorn
Yeah, thank you. Talking a little bit about the same topic here, but on the production ramp. Can you give us some color on where you are in terms of production planning for upcoming quarters for trucks and perhaps also see.
Eric Ingebretsen (Owner)
Yeah, thank you, Bjorn. As we said, I mean, we have been already on solid and rather high levels in the European production system, obviously, even if we have also been doing certain adjustments there with a continuous underlying strong, so to speak, demand. The other big topic for us somewhat also in South America, given also that we have seen that with the phenomena, financing program, etc. And good balance in these two systems, and they are so to speak, also very solid in doing this type of flexibility moves.
Now the full focus, or not full focus, but a very high focus is of course on the ramp up in North America. And if you do the math and you have also the figures, obviously what is the retail deliveries up to June and if you're thinking about the 265,000 market in total, that requires a rather big effort now of ramping up in United States for us. And that is what we are working on obviously and doing that in a number of steps, both for Mac and for Volvo.
Then when it comes to construction equipment, generally speaking, we had the positive development there. Also on the water intake, we have, so to speak, the right balance and good capacity to cope with that. I think it was plus 8%. When we look at the overall figure, so to speak, and sequentially we have that opportunity. So we are in good balance there.
OPERATOR
Very good, thank you for that with all these good questions. We'll let Hamper Sengela wrap up this second quarter Q&A with his question. So we turn to you, Hamper, thank you very much.
Hamper Sengela
So two questions from me and I guess they're linked but firstly with the EPA 2027 truck and engine out from you guys, can you maybe tell us something more on pricing here versus customer feedback on performance, how they are feedbacking on this? And then, and I'm a bit puzzled on production here. To sell the 2026 truck in next year, it needs to have an engine produced by December 20th. And how are you balancing it? Are you building more engine inventory in the autumn to bridge this given that you have a higher customer demand for 2026 models?
Or are 2027 models from my previous questions sufficient to be competitive at current levels? So if you could maybe talk us through this a bit to understand here. Thank you.
Eric Ingebretsen (Owner)
Now thank you. Thank you, Hamper. And I think also that is of course related down to the recent developments that have been announced by EPA that it looks like now that they will allow, so to speak, this bridge solution for the coming two to three years by utilizing so to speak the existing technology. But that will come with an add-on then a fee and ultimately that will be a customer choice obviously because both the technologies and we sit on both of the technologies are high performing.
Then it comes with the pros and cons depending on what type applications you have. And as we see it as an early judgment now, it's very important that we will continue to have, so to speak, the offerings of the current platform that is really performing for us also with the latest introductions that we have done both on the 13 liter but also on the 11 liter platform. But you are right, at one point in time you need so to speak to absorb the new system.
Mats
Regardless if you are talking about the new technology that was the EPA 27 type of execution or continue with existing technology than with the offset cost that has been announced. And we are of course looking into what exactly that means. But regardless of that, at one point in time you need to mitigate into the new and that will go for the whole industry and for all customers. So it will of course be planning around how to do this now between quarter four and quarter one.
But I think with our regional value chain that we are having in United States for North America, we can be very close in working with this fine tuning. But let's see exactly how it will play out now because it has been a very recent development as you are aware of, but we are onto the subject and more importantly that we have the portfolio both for the current and also for what is about to come. And that is what we will work on moving forward here.
OPERATOR
Thank you for that and thank you for all the good questions. All the materials is posting on our website. So with that, we thank you for today and we see you next time. Have a nice summer.
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