Volvo AB

STO:VOLV B

Earnings Call Transcript 2022-Q1

[Christer Johansson, executive]

Welcome to the Volvo Group press conference on the first quarter. My name is Christer Johansson, heading up Investor Relations. With me, we have, as usual, our CEO, Martin Lundstedt; and for the first time, our new CFO, Tina Hultkvist. We will do, as usual, we'll start off with a presentation followed by a Q&A session.

And with that, over to you, Martin.

[Martin Lundstedt, executive]

Thank you, Christer. And also from my side then, a big welcome to this first quarter business update from our side. And also, as Christer said, I'm really glad to have Tina also with me for the first time as our new Group CFO.

It has been a strong first quarter. But before coming into the business update, let me start with the ongoing war in Ukraine. That is, of course, devastating. And my thoughts go out to everyone who is suffering. We are doing in the group, among colleagues, what we can to support colleagues in the region, families, communities, customers and business partners that are affected by the war.

There are many examples of our colleagues in the group in and around Ukraine going above and beyond expectations to support victims of this humanitarian catastrophe and we really appreciate all the dedicated efforts done.

Since the war started and sanctions were imposed, all production, sales and services in Russia have been suspended. We are continuously now assessing the situation to protect people and assets to the extent possible.

Outside of Ukraine, in the first quarter, the economic activity continued to be good with high transport and construction activities in most markets. Demand continued to be larger than supply. And in such times -- And we have seen that now for a while, in such times, it is important to keep discipline in the order book management. And we will talk more about the balance between order intake, order book and deliveries in this presentation today. But the bottom line is clear. Order books are more than full, they are healthy and activity levels among customers are high.

Again, this quarter also, the whole organization have been doing a great job by working closely both with customers but also with our supply chain partners and thereby riding out many of the challenges we and the whole industry are faced with.

I'm very proud to say that the Group trucks in this quarter delivered record volumes, record sales and record adjusted income for the first quarter despite all challenges and making us, as a group, continue to maneuver our position of strength also into the future.

As regards to quarterly highlights then, top line grew to SEK 105 billion, and adjusted for the UD Trucks divestment and for currency, the net sales growth was 11%.

We delivered an adjusted operating income of SEK 12.7 billion and an adjusted operating margin of 12% despite our conscious decision to run manufacturing with extra flexibility and thereby also extra costs as well as a couple of stop weeks due to disturbances in quarter 1.

Operating cash flow was negative in this normally weak seasonal quarter, but Tina will come back to explain, as normal also, the reason behind that.

Return on capital employed in Industrial Operations increased to 25.3%. And we still see that supply chain constraints remains and visibility going forward is low, but we have also shown that we are working with the right type of methodologies in the organization to continue to mitigate the situation.

So albeit all the challenges, a strong financial performance in the quarter.

As regards to volume development, truck deliveries increased with 15% to 55,600 units and resulting then, as I said, in record truck deliveries for quarter 1 in these challenging times.

For Volvo Construction Equipment, the deliveries decreased with 33%, linked mainly, number one, with very high comparison versus last year when China was on very high levels. But Volvo Construction Equipment also had some impact from strained supply chains in the quarter, mainly then in Europe, outside China.

When it comes to the demand for electric vehicles, you see that we have a good momentum here. And what is interesting to see now also with the strong movement of science-based targets among our customers and our customers' customers, we see a very, very positive dynamic actually. Because when you're pledging that you're also going through your different CO2 sources and you are doing your CO2 abatement curve, and what we see is that many sectors and segments, geographies and, at the end of the day, customers are coming to the conclusion that they need to address transportation and construction activities, which, of course, is very positive. And that is also building up a strong momentum for further acceleration of this trend here.

And I'm proud to see that all the Volvo Group business areas are actually having strong momentum now in their electric business lines. We continue, as you can see here, also to see a positive book-to-bill, both realized orders but also when it comes to letter of intents, et cetera. And that positive book-to-bill and growth rate will continue for many, many years to come here. The volume development is encouraging since we are strongly focused on keeping our leading position in these fields that we are still -- or that we are having as we speak.

Also when it comes to service sales development, that is also linked with the complete offering and not at least for electrification and automation also further on, but you need to have a strong, strong service platform. We see that, that is continuing also in a positive way. Strengthening our service business has been and will continue to be one of the key elements and a key priority for us, and we are continuing then to untap the service potential that we have in our installed fleet, but also with new contracts. Currently, we do that on the back of a very high fleet utilization among our customers, but also structurally, that we are continuing to have a wider adoption of service contracts among our different business areas.

Service sales is on an all-time high level of SEK 25.3 billion. And the growth was, if we exclude then currency, 10%, which is, of course, very strong, where all business areas did show a good development. And this is, as I've said many times before, so important for us for, number one, we know that higher service penetration is actually increasing the customer loyalty and retention; and number two, because that is continuing to build even stronger financial resilience for the group.

When it comes to the truck side, on the news, despite the global turmoil, we continue to present innovative news also during this quarter. In March, Renault Trucks announced the expansion of their all-electric range and start of sales in 2023 for 2 truck models now for up to 44 tons. It is the Renault T E-Tech for regional transport and distribution, and it's the Renault C E-Tech for construction activities.

Also in March, I'm proud to remind all of us that we also got a very important order for Volvo Trucks in North America. They did win an order of 110 Volvo VNR to Maersk for their North American operation. And the deal adds to a previous order of 16 trucks here of the same model and marks actually the sign of the, to date, biggest single then order for fully electric trucks for Volvo Trucks. And this is showing maybe the most important here that the transformation in our customers' operation is now scaling up for real.

As regards truck market forecast, we keep the forecast unchanged for North America and Europe at 300,000 units on the back of the fact that demand continues to be bigger than supply. So of course, we have an upward pressure here, but it will be, as we see it now, supply actually deciding the total market. At the same time, we also have the fact that there is a pent-up demand after more than 2 years of supply shortages from the truck industry.

The Brazilian forecast remains unchanged at a good level. Our forecast for India is slightly increased to 325,000 on the back of a gradual recovery of the Indian truck industry or the truck market. Where we see that in China, the market forecast is trimmed down with 100,000 units. Lower economic activity in general, but also the pre-buy effect before July 2021 has created overcapacity.

Market forecasts for all markets are based on current visibility that continue to be low, and that is, of course, related to the significant uncertainty that we see regarding supply chains, but also the ongoing pandemic and the war in Ukraine.

When it comes to the truck order intake, we have been restrictive with the order slotting during the quarter in order to manage both the order book quality and the cost inflation. Despite this restrictive order intake, we still have an order book that is higher than 1 year ago, even though that quarter 1 2021 had a very high order intake of 80,000 units if you exclude UD Trucks. As a consequence, orders for quarter 1 decreased with 45%. That can look dramatic if you look at the single quarter. But the real reason is that we are restrictive to book firm orders due to the long order board and also to ensure flexibility with pricing in this inflationary situation. The rather big decrease is also to be seen in the light of, as I said, an extraordinarily strong order intake in quarter 1 last year.

However, as I already stated last report, the order intake is currently not a good indicator of the market activity going forward. It is rather the size of the order book, the fleet utilization among our customers, the used trucks business, the service business and the customer finance activities. All these indicators are still on strong and really, really healthy levels and thereby supporting the market forecast moving forward.

Truck deliveries increased with 17% on the back of really, really hard and dedicated work along our supply chains, both internally and externally. We are running our manufacturing system on a high level with extra flexibility, and we see that this is paying off in terms of volumes and also in positive market share developments in many markets. But of course, the main priority is to serve our customers and thereby create a strong rolling fleet for the future.

In Europe, when it comes to market shares, we see that the new Volvo Truck and Renault Truck ranges that were launched last year are both very well received and the combined market shares for Volvo Trucks and Renault Trucks was impressive, almost 28%, which is a very strong performance by our brands.

Also for the electric heavy-duty market share, in Europe, year-to-date, we had a level of 55.1% versus last year's 65%. And even if that is a decrease, now when more competitors also are ramping up, which is a good sign by the way, we still are holding a very, very strong position.

In North America, Volvo had a relatively stable market share. Mack was down some 1.3 percentage points linked with a strong ending of last year and thereby a limited pipeline of trucks in the start of the year, but we have seen a gradual pickup later this quarter.

In Brazil, we did see a strong start with a market share of almost 26%.

And also in South Africa and Australia, we are regaining ground and coming back to really, really good levels.

When we move on to construction equipment, some news here. We are continuing the rollout of the fully electric machines, now also launched in Asia, with South Korea being first out with compact excavators.

We also introduced, which is very important in the decarbonization journeys, as I talked about, a new carbon reduction program and new carbon reduction service, supporting customers towards carbon neutrality. The CO2 reduction program is designed to be easily integrated into customers' plans and operations while maintaining also the same focus, as before, of profitability and productivity and is so far really well received.

When it comes to the market forecast, in general, we do see a continued good demand for construction equipment with the exception then of China. Market forecast are largely unchanged then. For North America and South America, we are not changing the forecast, so we are still reiterating that the market will grow with a midpoint of 10%. And Europe and Asia, we are reiterating that the market will grow with 5% as midpoint. Whereas for China, we are further taking down the market to minus 35%, which is a decrease of 10 percentage points in relation to the last report. And also here, of course, market forecasts are based on the current low visibility.

When it comes to orders and deliveries, very much the same story as I've talked around trucks, restrictive order slotting to manage the order book quality and cost inflation. We have a very good and high order book for markets than outside China. And we have a situation similar to trucks, and we really need to continue to manage this in a good way. So also here, the same story. As a consequence, orders decreased with 42% as we are restricted to book firm orders. And the rather big decrease is also to be seen as for trucks in the light of a very strong quarter 1 last year that we are restrictive in general. But also, of course, here, the rather sharp decrease in China as well as that has a bigger effect here also cancellation of orders into Russia.

But again, when it comes to the market activity signs, very, very similar to trucks when it comes to the utilization of machines among our customers. You did see the strong service business development indicating just that. We see it when it comes to the used development, customer finance activity, et cetera. So all these indicators are still strong and supporting the market forecasts moving forward.

Deliveries decreased with 33%, mainly related to China, but also to support changes -- to supply chain disturbances in some other markets, mainly then related to Europe.

When we come to buses, orders up with 146% from low levels, while deliveries decreased with 2%. What we see now is that with the COVID restrictions that has been gradually lifted, the confidence among our customers are coming back from low levels. We have seen that trend for a while now when it comes to city bus customers and transit bus customers, but we start to see the similar signs then again from low levels also when it comes to our coach customers related also to the opening up of tourism and intercity operations. We see also this improvement in the bus fleet utilization and in the service activities.

In the quarter, Volvo Buses received an important order of 566 BRT units to Santiago in Chile.

Volvo Penta orders decreased with 1%, and deliveries were up with 8%. We have also in this business area a broad-based and good demand across segments and regions. And daily focus here is to continue to increase deliveries to meet the strong order book.

On the transformation agenda, lots of things are happening also in Volvo Penta. And one example is that Volvo Penta is conducting now sea tests with advanced hybrid solution for Hurtigruten Svalbard new sightseeing vessel. And start operation here in the beginning of May.

Volvo Financial Services finally. As you know, VFS has been very, very important and crucial part of our offering and our whole customer relation during the whole pandemic, but also what we start to see now is how important it will be also as an important lever for the transformation into new technologies and business models. We see lots of good progress in this area.

We continue to see a consistent growth in the new retail financing volumes. And again, this is important since we know that the customer relations retentions are improving when we have customer financing together. We also see a step-by-step and continuous improvement in finance penetration across business areas.

And during the quarter, Volvo Financial Services launched also new services, among them Volvo Pay for Volvo Truck customers in select European market, where our customers can easily approve and secure pay for services from anywhere, and that is very, very convenient step for our customers. And the scope of these services and this payment solution will gradually be expanded and the market rollout will continue.

So by that, I end the business update, and I'll leave over the word to you, Christer.

[Christer Johansson, executive]

Thank you, Martin. Thank you. That brings us to the next speaker, our CFO, Tina Hultkvist. She will take us through the financial numbers. So Tina, please, go through the numbers.

[Tina Hultkvist, executive]

Thank you very much, Christer. It's a pleasure to be here, and it's a pleasure to meet all of you for the first time, especially so in a quarter where the group has a very strong performance, especially also considering the challenges that we've had in the quarter.

Let's look a bit into the numbers, and starting with sales. We have sales in the group of SEK 105 billion in Q1. We have higher volumes and sales in almost all markets, with the exception of Asia, where China is coming down from high levels last year. Service sales is also contributing well to basically all the regions where we are selling our products. And it's actually so that service sales is best -- is the best quarter that we have ever had in the Volvo Group in terms of service sales.

Let's look into the operating income, starting with then the adjusted operating income. We have an adjusted operating income in the quarter of SEK 12.7 billion. This excludes then the provision that we have made for Russia of some SEK 4 billion in the quarter.

We have had substantial supply chain disturbances, and we are still impacted by COVID in the quarter. But thanks to a lot of work by many colleagues in the group, we have been able to deliver really high volumes in the quarter.

We have had a strong focus on price realization since somewhere mid last year when the inflation started to increase. This has really paid off, and we have been able to offset all the material cost increases in the quarter.

As we have been talking about in previous quarters, we are investing more money into new technologies and in our transformation journey, both in R&D in the group, but also in our joint venture, cellcentric.

Moving into the capitalization and amortization in the quarter. You can see that we have a somewhat positive impact of this of around SEK 700 million in Q1. This is an area where we usually guide and we -- from what we see right now, we think that the trend that we have in Q1 will continue. And we will have an impact, a positive impact, of somewhere around SEK 2 billion in the quarter.

We also have a positive currency impact in Q1 of around SEK 1.3 billion. This is also an area where we usually guide and we -- when we do the estimation right now, we think that we will have a positive currency transaction impact in the quarter of somewhere -- in the full year of somewhere around SEK 3 billion to SEK 4 billion.

Looking into the cash flow. Cash flow in Q1 is negative by some SEK 5 billion. Q1 is usually a seasonally weak quarter for us. And then on top of that, we have a timing impact on the payments due to 1 extra payment day. Then as a consequence of all the problems that we have had with the supply chain, we are building up inventories of components and on semi-finished trucks and machines in the quarter. Then in addition to that, we are also coming from low levels where we ended last year, building up the commercial inventories and the pipeline to the markets of finished trucks and machines. And then we are also partly suffering from long lead times at our body builders.

Mentioning something also on capital expenditures. Just as I mentioned on the R&D, we are continuing to invest in new technologies. This has an impact on the R&D, as I mentioned before, but also on capital expenditures. Coming from quite low levels in the last years, we are increasing this somewhat going forward, both in Q1 and for the rest of the year.

It's difficult to predict where the supply chain is taking us, but inventory management will continue to be a focused area for us. It has been in Q1, and it will continue also going forward.

We have in Q1 had a solid financial position of some SEK 60 billion. We have thereafter in April paid a dividend of SEK 13 per share, amounting to SEK 26 billion. But we will also, after having paid the dividend, remain with a strong financial position of some SEK 35 billion.

Moving into Trucks. Looking at Trucks. Despite the production problems that we've had and the stop days that we have had in the quarter, still Q1 is a record high quarter in terms of deliveries for Group Trucks. We have sales growth in all regions, supported by higher markets but also by improved market shares. And in addition to that, the underlying service business is growing well in all regions. And we have a growth in the service business of around 10%, excluding currencies.

We have a strong operating performance in Trucks and we have a margin of 12.5%, including currency impacts, but excluding the provision that we've done for Russia in the quarter.

We have proactively worked with price realization in Group Trucks, and we have managed to offset the material cost inflation in the quarter.

Last year, the truck market in China was very high, and we had strong performance from our joint venture, DFCV. This year, the truck market is down by roughly half. And even if we have been working a lot with cost reduction activities, we are negatively impacted in the quarter by -- from our joint venture in China, DFCV.

Looking into construction equipment. Also in construction equipment, we have -- we are impacted by a significant drop in China. The market there is down around 1/3, which impacts our operation in SDLG in the quarter. We are also in VCE impacted by supply chain disturbances, and we have, therefore, an impact on the deliveries also in the Volvo segment in the quarter. On the other hand, service sales is growing strong in VCE in all markets, with the exception of Asia.

The lower volumes and the increased material cost, of course, impacts the performance in the quarter. We will, in construction equipment, just as in the rest of the group, continue focus in price realization as we move forward to offset the inflationary pressure.

Despite the headwinds, Construction Equipment delivers a margin of 12.4% in Q1.

Moving into buses. Buses continues to struggle with low demand, both in the city segment and in the coach segment. North America, with complete buses, is the market which we do see show some signs of picking up, from very low levels though.

We do see some signs of increased traffic, which is supporting our service sales. Service sales is coming out strong in the quarter for buses, mainly driven by North America.

But all in all, the business conditions for buses are difficult. Despite that, we managed to deliver a result which is on breakeven at these low volumes, thanks to a strong work on the cost base within Buses. This, if anything, will give us better possibilities to deliver leverage once the volumes are coming back.

Looking at Penta, we have good volume growth in Penta, both on engines and on services. Also, Penta has had challenges with the supply chain throughout the quarter and with the inflationary pressure. But even with the challenges, Penta manages to deliver a solid performance on par with last year.

And then looking into Financial Services. As you are already aware, we have press released that we made a provision for our Russian credit portfolio of some SEK 2.6 billion in the quarter. We have, excluding Russia, a portfolio that is performing well, with low write-offs and low delinquencies. We see a good truck freight environment, and we also see good construction activities across the board. We can see that our customers are performing well and also our customers' customers are performing well.

In the Financial Services business, we are, just as Martin mentioned, continuing to invest in new service offerings in order to support our customers in the best way, and that is what we see in terms of operating expenses in the quarter.

By that, I hand over to you, Christer.

[Christer Johansson, executive]

Thank you for good numbers, Tina. And Martin, how would you summarize the quarter?

[Martin Lundstedt, executive]

Thank you, Christer. No, I think the summary is about, first and foremost, it has been a dual quarter. Of course, continue to be complex operating conditions. It is emotionally difficult and a lot of hard work, obviously, not at least related to the priority of health and safety for our colleagues and -- in and around Ukraine. So continue to have a focus on that, but also very, very strong financial and operational execution in the quarter from the whole group.

And what is very important here is, of course, that we see a strong and solid activity level among our customers. We see that through the utilization in the fleet. We see that when it comes to our service business that are achieving also record volumes and record sales of more than SEK 25 billion. So continue to work on that and continue to drive the innovation agenda as well.

[Christer Johansson, executive]

Thank you, Martin. And that brings us to the Q&A session. [Operator Instructions] And with that, we are ready, operator, for the first question.

[Operator]

[Operator Instructions] Your first question comes from Tom Narayan from RBC.

[Gautam Narayan, analyst]

Yes, Tom Narayan, RBC. The first one, the Q1 2022 North America and Europe truck registrations were relatively consistent with the year ago quarter, Q1 '21. The guidance is only calling for about 8% to 10% growth for '22. Obviously, you called out pent-up demand and supply issues. Really, the supply issues as the culprit, not demand. So I appreciate that. But if we're trying to quantify the impact of the supply issues, in a perfect world, with all this demand and with no supply constraints, what would your Europe and North America market total be? Presumably, you'd be a lot higher than the 300,000 for each zone. So that's my first one.

And then on these supply issues, just hoping you could give a little color on specifics there. What's the biggest hurdle? Is it just still mostly semis, raw mats, logistics, energy? Just a little more color on the supply issues, if you could.

[Martin Lundstedt, executive]

Thank you very much for those questions. Yes, indeed, I mean as we have stated now for a couple of quarters, when it comes to the total market is actually decided by the supply abilities that we see in the industry and related also to your second question. And then obviously, we can always talk about -- then we can always talk about what should the total market look like if we didn't have that. But if we go back in time and see where market is peaking in the very strong momentum that we see now, it is, of course, considerably north of that. Is that 10% or 20%? We can speculate.

But I think the more important now is to say, okay, it is focus on a very strong order book. That's the reason also why we have been restricted with the order intake in order to moderate this. And the reason again is that this is our best guess given the visibility that we see right now.

What are the different factors for that then? I think you're absolutely right. It is, so to speak, the same type of shortages or constraints that we see. And balance is in the logistics system and not at least also with the lockdowns in China now recently has continued to propel that unbalance in not at least the deep sea logistics transport. We see specific flows of semiconductors and electronics. But we should understand that, I mean, in a normal truck, depending on if it's a fully electric or if it's an ICE truck, you have somewhere between 1,600 up to maybe 3,500, 4,000 semiconductors. So it's really a game where we are working supply chain by supply chain, all the tier systems [ do ], et cetera. And then also in other parts of the world, in North America, for example, we have seen also other type of input materials.

But I think in that context, you need to take a step back and say, in these conditions, Group Trucks delivered 55,600 trucks, which is a record volume for a quarter 1, showing also that we have the methodologies and the organization and the competence to work with it internally but also together with our supply chain partners, and we will continue to drive it like that.

[Gautam Narayan, analyst]

Okay. And is there any visibility on semi's recovery in H2? Or is that still just more of a hope? Or is there actual kind of -- are suppliers telling you that?

[Martin Lundstedt, executive]

No, no. But I think you are right that there is, of course, a gradual build-out of capacities when it comes to semis. You have seen those announcements. And I mean, as time goes by, we will see a gradual so to speak, increase in semis.

What we have to keep in mind is that there is a very thorough job to work through also what nodes are expanded, how do you actually follow with your own product definition, et cetera. That work is going very well, I had to say. We have also reinforced our relation, not only with the Tier 1, but also Tier 2 and Tier 3, that are sitting on a lot of important competence and intelligence and capacities around this.

But also, I have to say that I think we will see somewhat a shift also when it comes to -- because semiconductors, as we all know by this now, are used in all different type of segments and on the consumer side, on the B2B side, et cetera. But I think there are reasons to believe that in some areas, might be a little bit of a lower demand. That will actually be beneficial for us also.

But it will be a lot of hard work also moving forward. That's the reason why we are guiding keeping the ambition on high volumes up, thanks to the strong order book that we have. And thereby, if we don't see disturbances, then we have not pushed the limit enough actually. We are prioritizing customers here. We are keeping a good balance. Delivering 12.5% operating margin on the Truck Group is, I think, a sign of strength.

[Operator]

The next question comes from Klas Bergelind from Citi.

[Klas Bergelind, analyst]

Martin and Tina, so a couple of questions, please. First, on the production levels into the second quarter. You stopped production earlier than other OEMs last year by around 4 weeks. I think you had 2 stop weeks now in the first quarter. I'm trying to think of the net effect year-over-year into the second. I know it's very fluid at the moment, but do you think you need to add even more stock base margin now quarter-on-quarter because of supply chain disturbances coming out of China? Any impact at all from Russia, Ukraine? We'll start there.

[Martin Lundstedt, executive]

Thank you, Klas. I mean we are not guiding specifically for, I mean, what we anticipate in terms of disturbances basically because we don't yet know that. We are running very close to the limits, obviously, as I've said, and keeping a high flexibility. And I think it's important to have in mind that it's both an effect of actually stop days in ordinary planning that we partly are catching up during weekends and others. And that's the reason why we have that extra flexibility, maneuverability, and Tina talked about somewhat extra cost that we have related to that.

So 2 weeks or a couple of weeks, as we said, it has been sort of the level now for a couple of quarters. Will it be exactly like that in quarter 2? We will not guide around that. But what we say is that the ambition is continue to push the boundaries because we have a very strong order book. We have customers that would like to have their equipment.

What we see so far when it comes to the capacity constraints and the supply chain constraints, it's not related to the situation in Russia. It's more related to what we heard -- what I discussed before when it comes to the different categories of supply constraints.

[Klas Bergelind, analyst]

Okay. My second one is on pricing. We met with the Daimler recently in North America who told us the carriers preferred one big price increase start of the year for them to be able to manage their own commitments better. But I sense your pricing, Martin, has been more gradual month by month. I'm trying to understand how much of this price increase, which was really impressive, came through from hikes you did in the second half relative to ongoing price hikes month-by-month on orders you were already working on. That would be very helpful.

[Martin Lundstedt, executive]

Absolutely. Maybe, Tina, I don't know if you would like to start commenting on the pricing.

[Tina Hultkvist, executive]

Yes, we have worked a lot with realizing price since mid last year. We have done several price increases, both on vehicles and parts. We will continue to do so also going forward in order to offset the inflationary pressure. And we will do what we think we need to do in order to offset all the impacts that we see going forward.

[Martin Lundstedt, executive]

And maybe to add to what Tina said here, what I feel is also that we have, I mean, a very good methodology now. That's the reason also why we have been restricted with order slotting actually because, I mean, in this way, you need, to your point also, to be close to the customers to have a transparent dialogue with them. And in our book, it's not a one-size-fits-all that we do at this point in time or at that point in time. We need to have a transparent way of working with the price realization. Even if that is, of course, always followed by discussions, et cetera, with our customers. Everyone understands that with, so to speak, the pressure we have on input material, logistics, et cetera, we need to realize prices and to do that in a way where it's understandable. But we are also following, and in many cases, also that I'm very glad to see in the regions and the business areas being slightly ahead of the curve also. So work well done, but work that needs to be continued.

[Operator]

The next question comes from Hampus Engellau from Handelsbanken.

[Hampus Engellau, analyst]

Two questions from me. Of course, we consider the orders were impacted by your restrictions on taking orders. But my question is, maybe on looking at current lead times and the run rate that you have managed to achieve during the quarter with a record sales, et cetera, at current levels, at what time do you think that you would start to maybe accelerate ordering again? Is it like second half this year? Or is it even further out into 2023? That's my first question.

Second question is relating to pricing, I'm sorry for coming back on this. Would it be possible to maybe quantify price increases even if it has been a gradual process? We've seen prices from some OEMs being up 5%, 8%. And also, if you could quantify that you have actually managed to raise prices on placed orders.

[Martin Lundstedt, executive]

Yes. Thank you, Hampus. Maybe I can start on the orders. And I talked about, so to speak, our strategy around this, but maybe it could be helpful also to take a step back and think about what has happened over the last almost 2 years now.

As all of you remember, I mean, we had the initial shock of the pandemic meant rather extensive stops in quarter 2, partly in quarter 1, but mainly in quarter 2 2020. At the same time, what we did then, if you remember, that was that we also actually really cleaned the order board together with dealers and customers and started from much lower levels again because we wanted to really make sure that we have the right quality when -- if and when at that time the order recovery should start. Then we did see that come rather earlier than later, as you remember, in quarter 3 2020.

And if we take quarter 3 2020 up to quarter 1, 2022, 7 quarters, the matter of the fact is that the net order intake has been 440,000 units for Group Trucks, and deliveries has been 340,000, give and take, and that is a delta of 100,000 that are, since it's net, including cancellations into the order board. And that means that we now are sitting on [ 2.5 ], depending on the markets, at least a quarter because we didn't start from 0, obviously, in quarter 3. And that needs to be managed now, and it should be not smart to continue just to fill it up and thereby not be possible to manage. I mean, as we have talked about, the quality of the order board and the cost inflation.

And you can even take, I mean quarter 1 last year, it was 80,000 in order intake. And I mean if we take now the record volumes in deliveries is at 55,600.

So I think that is -- should be giving everyone comfort that the order intake, as an isolated quarterly figure, is just not a good indicator, it is what you see over the quarters and it is what you see in the market activities. And that will also steer when we will actually, as you say, gradually accelerate again. And I think we have reasons to come back and be transparent with all of you how does that look like. If that is in second half or in the beginning of next year, let's see. The more important is, how does the activity level looks out in the market? And how is the order book quality?

And that brings me to the next question. And that's the reason why we have also been working together with our customers. We have a very, very good view on the order board and, in some cases, also for placed orders. We have had the conversations that we need to do something about it, and it has been working really well. So I should say that also the order book quality in regard of pricing is working well. And the methodology includes, obviously, also the order board. I don't know if you would like to add something to it, Tina.

[Tina Hultkvist, executive]

No, I think it's a quite complete answer. We are of course, observing this a lot. And we have done quite significant price increases, but we will continue to do so as much as we feel that we need to do, yes.

[Martin Lundstedt, executive]

And also, I think even in a market like this, you have, I mean, 2 reasons for the price realization now, of course, with the cost pressure that we see. But we should also be clear about that we are continuously doing a lot of innovation and revealing new models, et cetera. That is the value-based part of it. And then you have, as you said, the 1, 2x per year price realization with customers.

Generally speaking -- maybe -- sorry, maybe just to add one thing on that. If you take -- I mean Tina was into it, I mean average that could be good -- that could be good in the quarterly report. I mean we are on par or slightly ahead of the curve. Then obviously, we are watching this very granular, market by market, region by region, segment by segment.

[Operator]

The next question comes from Nicolai Kempf from Deutsche Bank.

[Nicolai Kempf, analyst]

It's Nicolai Kempf from Deutsche Bank. My question would be a bit on the service business. We appreciate that it's growing, but it's also a reflection that there are older trucks in the market and you're driving the older trucks longer or the customers and it could swing back next year when there are more new trucks in the market?

[Martin Lundstedt, executive]

Thank you, Nicolai. Very good question. And you are right, obviously, there are several factors why the service business are actually on good levels. One factor is, to your point, the high truck utilization. And thereby, I mean, a higher need for support and services, number one.

But what we should say about that, normally when the vehicle fleet is aging, we give some more and more falling off the cliff when it comes to captive services. But we are working, to your point, very actively on that.

Now given the supply chain constraints, there is a pent-up demand on the new truck. And that's the reason why it's so important to continue to focus on getting the volumes up when we have this high market.

But one factor, the vehicle utilization among our customers, good news because they have a lot to do, good news because it's good for our service business.

Other important factor is the structural and very consistent work we have been doing also when it comes to the service contracts in different shapes and forms, everything from maintenance contracts, all the way up to full-fledged repair and maintenance contracts and even uptime contracts. So both when it comes to the penetration as such, but also to the wider adoption of service contracts, meaning more content per contract. So both factors are playing in now.

But having said that also, with continuous good deliveries into the market beyond warranty periods, et cetera, it would be a lot of good opportunities when it comes to the service business moving forward here.

[Nicolai Kempf, analyst]

Understood. And my second question is a bit more long term. So welcome, Tina Hultkvist. Great to have you on board. Given that Volvo is currently the benchmark in the truck sector in terms of profitability, what would you change going forward?

[Tina Hultkvist, executive]

What would I change? Of course, I will try to contribute to everything that is going on. Of course, what is extra exciting for me is to be a part of the transformation journey, maybe a once-in-a-century opportunity to contribute to. And then it is, of course, all the daily topics that we are working with, and we have touched upon it here. It's the price realization. It's managing parts that is going on in the supply chain. And it is also the more long-term topics, of course, to continue building a good financial position that makes us being able to finance everything going on with new technologies and to continue acting from a position of strength in that journey going forward.

[Martin Lundstedt, executive]

And I have to say also -- I have to say also, I mean, it's important to -- and I know that you know it, but also to everyone that is listening, that Tina has been extremely instrumental to our great journey that we have had over the last couple of many years actually with your career in different parts of the organization. So continue to build on that and to utilize that platform will be super important for us. So looking forward to continuous great work together.

[Operator]

The next question comes from Michael Jacks from Bank of America.

[Michael Jacks, analyst]

My first question, Martin, you mentioned that -- you mentioned some truck market health indicators outside of order intake that you used to forecast demand. Freight rates and capacity utilization in North America have started to decline in the spot market since the beginning of April, indicating that perhaps your customers are not doing as well as what they were for the first 3 months of the year. I know this is quite a recent development and I know it's early days in Q2, but in general, does this typically lead to higher cancellations or drop-off in order intake? So maybe just how you think about that.

And then secondly, just with regards to volumes, at the 2021 earnings call, you expected Truck deliveries in 2022 to improve sequentially from quarter to quarter. Is this still the case given the strong Q1 performance?

[Martin Lundstedt, executive]

Yes. First and foremost, thank you, Michael. Yes, we have also followed and seen early signs of these indicators. Early days to say it will be consistent, et cetera. So I think we need to wait a little bit, because also with the geopolitical turmoil, there could be some, I mean, initial effects. But to be followed, to your point.

So far, we have not seen any signs in our order activities or in our prospect or discussions. So -- and I think that is related to the fact also it has been under supply now for quite many years, both in Europe and North America. So in order to -- even if the market -- or the end market, the truck utilization will decrease, it will still be supporting demand for the aging of the vehicle, that is how we see it. But to be followed, as always. And that's the reason also why it is so important to have the leading indicators of truck utilization, of course, on the -- on the used business, the service business, the customer financing activities. But everything of that is still showing strong and healthy signs. And we are, of course, also working very close with our customers.

On the second, I mean, of course, we have seen during the first quarter sequential improvement. Let's see now, I mean, what that will bring when it comes to the total market. We have also been gaining market share, we should remember here, not at least in Europe, actually during Q1. So let's see what that will actually bring when it comes to the total market. I mean, for the time being, we are guiding, as we have said, of an unchanged market. But still early days, of course, in 2022 here. And what we have guided is that demand is still higher, and it is supply that is putting the pace.

[Operator]

Next question comes from Miguel Borrega from BNP Paribas Exane.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

I've got 2 questions. The first one, just a follow-up on Truck pricing. Can you help us understand how you're thinking about the new pricing increase. You mentioned there's 1 or 2 times a year price increases. We've heard OEMs are going back to their order backlogs and renegotiating a surcharge. So can you provide some color on how much of the Q1 invoice deliveries already have a new price increase? And how much more, if any, is there to come in Q2? And is this kind of a one-off surcharge that you're seeing in 2022? Or do you think pricing could be sustainable at these levels going forward?

And then my second question is on working capital. You talked about buildup of inventory. But really, the delta is, from last year, comes from the outflow in trade payables. I think you mentioned an extra payment. Can you help us understand what happened there?

[Martin Lundstedt, executive]

Would you like to start?

[Tina Hultkvist, executive]

Yes, maybe I can start. When it comes to the pricing, I think we have done regularly pricing updates since we started to see the inflationary pressure and we will, of course, continue to do that. We will try to adjust as much as we can as we move forward. It's not regulated in certain specific timings throughout the year, but we are following the trend and trying to offset all the inflationary pressure that is coming. And to the extent it's needed, it will continue -- that focus will continue also going forward in 2022 and beyond.

And then a comment on the working capital. Yes, we do have an impact on the payments from 1 extra payment day in Q1, and that is amounting to somewhere between SEK 6 billion to SEK 7 billion. But Q1 is also a seasonally weak quarter for us when it comes to cash flow. So we have seen this trend also. Irrespective of the payment, we have had this trend also historically, that we come out a little bit weaker in terms of cash flow in Q1.

[Martin Lundstedt, executive]

And maybe just to add on it, also when it comes to the inventory buildup, I think it's important to understand that during a pretty long period of time now, we have had a very, very low downstream pipeline of the finished products that, to some extent, has been, I mean, of course, a hassle also for our dealers, et cetera, that would like to have somewhat more planning horizon. So now when we are gradually building up this step by step, which is a good sign, then of course we are continuing to backfill also the material.

We have -- Tina said it well in the -- I mean, very clearly in the presentation also. I mean, this is a high priority now in order to also execute on the order book, but we have good control over the pipeline.

[Operator]

The next question comes from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

It's actually like 2 quick follow-ups. One was -- one of my questions was on the cash, but more understand the explanations for 1Q. But as we think about the rest of the year, which continues to be a year with strange supply chain situation, and I guess you would want to restock parts, should we think about 2022 has perhaps a lower cash conversion year? Or do you think like that you recover from the 1Q towards the back end of this year? That's question one.

The second follow-up, I wanted to do was understand all your commentary regarding demand still remaining strong and what's happening on the orders. If you -- when you look at sort of the inquiries that you had for orders in 1Q, if you had been unconstrained, can you give us an idea on how much orders would have been maybe up year-on-year? Or -- yes, any color there.

[Tina Hultkvist, executive]

Maybe I should start with the cash flow then. We have a cash flow in the group which is varying in the different quarters. And so it will be the case also this year.

It is very hard to predict where the supply chain challenges are taking us. It's very hard to see where that is going and what that means in terms of inventories. But as I mentioned before, we will continue working a lot with the inventories and with the inventory management. We have done that already in Q1, but that will continue throughout the year. Usually, though, we are having a stronger second half or Q4 of the year. So if that is an indicator, that's the same, I think, also for this year.

What is important to remember also, in addition to the working capital development, is that we are investing a bit more in our transformation activities and in the new technologies. And that will, to some extent, also have an impact in the cash flows for this year.

[Martin Lundstedt, executive]

Yes. And maybe then to comment on the order intake again. First and foremost, I think what is important to mention here, as I said, to see it in an isolated from 1 quarter is not a good indicator now where you don't have the balance in the system. And so that's the reason why I put, so to speak, also a little bit of perspective since quarter 3 2020.

And again, coming back to the figure that we have there, delta, 100,000 on the trucks side to be delivered. And then, of course, if we should have had the full order board open in quarter 1 now, it should have been considerably higher due to the fact also that customers, given this inflationary situation, also would like both to hedge themselves, et cetera. So I don't think it's meaningful to speculate. It's more meaningful to actually see reality how is this now, that the order book is on high levels, but I should say also on healthy levels when it comes to the quality, and how we can manage, to Tina's point, also the cost inflation and thereby also realizing prices. And we see again that all indicators that are important are still also on strong and good levels and we follow that. But what is also important is that we are continuing to untap also the service potential, and that is building strong resilience for the group also moving forward here. So all in all, I think good control over the different aspects here.

Just one add-on to what Tina said about the cash flow. Obviously, now when we had an inventory increase for quite some time, there is, of course, also a limit to that, how much is meaningful to have in the pipeline. And that is, to Tina's point, something that we are working very actively with also if you think about, so to speak, cash flow going forward here.

[Operator]

The next question comes from Bjørn Andersen from Danske Bank.

[Bjørn Andersen, analyst]

If you can talk a little bit about the lead times in the different regions. Are there regions that are standing out in any perspective?

And then also, second, I would like to come back to the noise we've heard from North America on freight availability and perhaps the performance of your customers have weakened a little bit. How sensitive are your data on when you're saying that you see that activities is still very strong also in the U.S. market? It is, I guess, a little bit of a concern or I'm just too worried.

[Martin Lundstedt, executive]

No. I mean -- thank you, Bjorn. No, first and foremost, I think actually when it comes to the lead times, North America, if anything, is sticking out a little bit. And there, we have been working very actively with our dealers and customers. Two reasons. First and foremost, because we have had a very strong order intake previous quarters, as you have seen. We have been forced now to really manage and be restrictive in order slotting for 2 reasons, as I said. We know that North America is always a little bit higher in volatility if you're not managing that order board in a good way. And secondly, because it has just been too long. And again, then to have the right order book quality. So it has been North America, and that's the reason why it is, as we got that question also previously, Bjorn, are very important to follow it. And of course, we have also seen that there are certain early trends about this. We should also know that it has been an under-delivery into North American market when it comes to equipment for quite some time. Then we are not naive. We have been living through this and we have a very high and good flexibility into the system. We had a strong used business with Arrow, so we can also follow how things are developing very quickly on the used side.

So as always, in our type of industry, reason to follow it very closely and come back to it.

But if there should be, so to speak, a situation of a weakening market that will come at any point in time, we are prepared for that. And also that we have a very strong captive service business now that will also support that. So when that will come, we will be well prepared for that as well.

[Bjørn Andersen, analyst]

At least it will resolve the sourcing issues. Okay.

[Martin Lundstedt, executive]

Absolutely. And that could be one part of solving the sourcing issues, by the way.

[Christer Johansson, executive]

Thank you, Bjorn. And that's -- absolutely. That finalizes the Q&A. Then I have only one more important message, and that is that please join us for the Capital Market Day on the 22nd of June, either here in Gothenburg or on the web.

So with that, thank you very much for watching.

[Martin Lundstedt, executive]

Take care.

[Tina Hultkvist, executive]

Bye.