Volvo AB

STO:VOLV B

Earnings Call Analysis

Volvo Group faces market pressures but maintains strong operational resilience.

In Q3, Volvo Group reported a 7% decline in net sales, attributed to reduced demand, particularly in Europe and North America. Despite a 16% drop in truck deliveries and a 12% decrease in construction equipment sales, the adjusted operating income remained robust at SEK 14.1 billion, reflecting a 12% margin. Service sales grew 4%, highlighting resilience. While direct costs and currency fluctuations posed challenges, the return on capital employed improved to 38.3%. The group anticipates stabilization in market conditions moving into 2025, forecasting North American truck deliveries at 290,000, while expecting an increase in global electric vehicle demand despite short-term hesitance.

Market Overview and Key Challenges

In the third quarter of 2024, Volvo Group faced a challenging market environment, characterized by a normalization of demand driven by replacement needs rather than growth. This shift was particularly notable in North America, where supply chain disruptions, notably related to Mack trucks, adversely affected delivery volumes. Although overall truck orders experienced a notable decline, specific segments like construction equipment also saw drops, with total truck deliveries down by 16%. In this backdrop, the company maintained focus on operational flexibility and cost management, crucial for navigating current uncertainties.

Financial Performance Metrics

The financial results for Q3 showed a decline in net sales by 7% year-over-year, adjusted for currency, with revenues totaling SEK 117 billion. The adjusted operating income was SEK 14.1 billion, yielding an operating margin of 12%. Cash flow remained strong at SEK 3.1 billion due to effective working capital management, which saw an inventory reduction of SEK 800 million. Despite the challenges, return on capital employed improved to 38.3% from just below 34% last year, signs of effective management and resilience amid softer demand.

Strategic Responses to Challenges

In response to North America’s truck supply challenges, Volvo took bold steps by acquiring the Mack cab production line from a supplier to regain control over output. This strategic move aims to enhance production resilience, with expectations to gradually improve volume and efficiency. Moreover, the company reported a completed rollout of the new VNL truck model, known for its significant efficiency improvements such as a 10% reduction in fuel consumption, which underscores Volvo's commitment to innovation even amid fluctuating market conditions.

Segment Performance Highlights

Analyzing specific segments reveals contrasting dynamics. The Buses segment shone brightly, achieving a remarkable 21% increase in sales, indicating a strong market presence and demand for new bus offerings. In contrast, the Trucks segment faced headwinds, with net sales down 6% affected by lower volumes and price realizations, yielding a decline in operating margins by approximately 1 percentage point in North America. Construction Equipment also suffered a steep decline of 20%, influenced by poor performance in key regions, although operational cost management mitigated some of the downtrend.

Growth and Investment Outlook

Looking ahead, Volvo guides for a cautious but strategic recovery, projecting a flat market for trucks in 2025 after some downtrends in 2024. Innovations in electric vehicles are positioned as a long-term growth vector, although initial demand remains subdued, primarily driven by early adopters. The company anticipates gradual stabilizations in different markets, backed by a strong order book and active management of inventory levels.

Conclusion and Investor Considerations

Volvo Group’s Q3 performance illustrates a company adept at navigating a challenging market landscape while continuing to invest in future-oriented initiatives. Investors should note the strategic adjustments in response to supply chain issues, ongoing focus on innovation, and capacity management. The positive metrics related to cash flow, return on capital, and growth in the service segments present a nuanced picture. As the company braces for continued industry challenges, the focus remains on strengthening operational capabilities, maintaining price discipline, and fostering innovation, making it a compelling option for investors keeping an eye on both immediate challenges and long-term potential.

Earnings Call Transcript 2024-Q3

[Johan Bartler, executive]

So welcome to the Volvo Group third quarter report. Today, we'll do -- as always, we'll listen to the presentations from our CEO, Martin, and from our CFO, Mats.

So with that, I hand over to you, Martin.

[Martin Lundstedt, executive]

Thank you, Johan. So good morning also from my side, and welcome to this presentation of quarter 3 '24. Interesting quarter, I have to say. So we have some details to share here. But maybe to start with, as we conclude this quarter, again, a lot of uncertainties as you're all aware of. And therefore, I would like to start by thanking colleagues, business partners, customers for continued good cooperation during this quarter as well. I think in our business, in particular, given the nature of it and not at least in uncertain conditions, strong and close relations are more important than ever.

Also, as expected, and following the trends we have seen for a while now, demand continued to normalize into more of replacement-driven markets across most of the group's major segments and regions during quarter 3. Therefore, also, we continue to put priority on high quality in the business by focusing, first and foremost, as always, on our customers and thereby our service operation, volume flexibility in the industrial system, tight cost control, combined with commercial discipline and price management.

In particular, we have managed the volume flexibility well and are in good balance, not at least in the European system that is serving both European and international markets. Also, South America is in good balance, a little bit different part of the cycle where we see a strong development right now.

The only exception is Trucks North America, where we temporarily are having 2 events causing more costs. The first is related to supply issues for Mack cabs that have caused a significant loss of volumes in the quarter. We have now acquired that operation from a supplier, and mitigation is on its way. Order books for Mack are elevated. So a very high priority on this topic to serve our customers, obviously.

The second event in North America is very positive, and that is the production start. And you might -- you did see that also here in the introduction films of the all new VNL, where extra resources and costs are needed to cope with the introduction in parallel with normal production. We are very proud of this game changing -- and I would like to reiterate, a game-changing platform, the all-new VNL, that will drive significant benefits for our customers up to, for example, when it comes to fuel consumption, 10%, and also considerable value for the group moving forward.

But in total, the events in North America affected the global group Trucks margin negatively with approximately 1 percentage point.

But I think it's also important to take a step back. Still with this temporary effect and also with the cycle management that we are into now, I'm impressed by the operational organization across the group that has managed to keep gross margin almost flat, and it shows a good level of flexibility. However, more importantly, the start of production of the all-new VNL in North America is a sign that we, despite softer market conditions, are maneuvering from a position of strength. And we continue to put priority on innovation, research and development investments but also market and commercial investments moving forward. And that is, of course, to remain in the forefront of our industries and maintaining competitiveness.

So if we summarize the quarter, net sales declined to SEK 117 billion on the back of softer markets and thereby lower volumes, obviously, also with a considerable negative currency and the specific deviation of supply for Mack in North America.

Adjusted operating income came in on SEK 14.1 billion, corresponding to a margin of 12%. Operating cash flow, SEK 3.1 billion in a seasonally weaker quarter, as you are aware of, giving a strong financial position of almost SEK 63 billion. Return on capital employed in Industrial Operations increased to 38.3% in relation then to just south of 34% last year. And earnings per share was SEK 4.93.

Looking at volume development, total truck deliveries declined with 16% in the quarter. The light duty business was impacted the most caused by the model changeover for Renault Trucks' light commercial vehicles, which started during the spring, while the heavy-duty volumes declined with 9%. This was with the exception of the North America or Mack-specific issues in line with our current market expectations. For Construction Equipment, deliveries were down 12%, but obviously, with a rather big mix effect here with Volvo coming down 32% and SDLG increasing 26%.

When it comes to electrification, underlying demand is slowing down for the time being, and the switchover to zero-emission transport is still driven by early adopters across different markets and segments. Broad adoption at scale will happen when also enabling conditions are coming in place in a broader sense.

Customers are still a bit hesitant before they know how the TCO, total cost of operation, between zero-emission vehicles and internal combustion vehicles will evolve and how the charging infrastructure rollout will materialize. We also see that the current macroeconomic conditions are creating hesitation and naturally so because then you tend to go back to what you know and to actually handle the current situation.

We regard, however, this more as a blip on the long-term curve, and we are certain about the long-term development, both from market conditions, both for what we have to do, both from competitiveness and also from the regulatory angle. The important thing here is that Volvo has solutions at hand, and you have seen that we have strong market positions, and we are ready to handle different speeds in the transformation. And one example of that is, of course, the slight postponement we are doing now when it comes to the buildup of our cell manufacturing operations in Sweden.

Orders on fully electric vehicles decreased 2% with lower demand for heavy-duty and medium-duty, while light commercial and SDLG machines were positive. Deliveries increased with 29%, there supported by a good order board for medium- and heavy-duty trucks, SDLG machines and buses, while light commercials were lower also partly then affected by the changeover of Renault in Europe here.

So we continue to push in our core markets, and that is also reflected in the high market shares. For example, Europe, 70%, but more importantly, as we did show here before, more now for Volvo Trucks alone, 100 million kilometers, connecting us with customers and customers' customers, collecting enormous amount of data to refine the solutions and thereby the importance of being early out.

On the back of lower volumes, the sales in value then for vehicles and machines declined 11% if we adjust for currency. Trucks sales declined 9% on 16% lower volumes. As I said, the mix effect, you remember there as well. Construction Equipment sales of machines were down 24%, with Volvo down 32% in their deliveries and SDLG increased 26% in their deliveries. So totally in sales, 24% for Construction Equipment, and you will see that later, strong also flexibility here.

We had higher bus deliveries at higher value, driven by North America coach business, resulting in a sales increase of impressive 23%. And for Volvo Penta, despite a drop of 18% in volumes, their sales were only down 3%, and that is, of course, related to the fact that you have a better mix also with more heavy engines.

Service sales, very important, strong focus over many years now, as you know, and we had continuous then growth, a 4% growth year-over-year for the third quarter, adjusted for currency. So the service business continued to show resilience. All business areas growing during the quarter, mainly driven by improved commercial conditions, and efforts to increase service contracts, penetration and other services are also paying off but, of course, more step by step. That is not coming from 1 quarter to another. And specifically, the growth of services for Buses was mainly driven by more coach activities in the market, and Financial Services growth was supported by interest rate and a continued good penetration.

So all in all, I would say a good level of services. We see mainly on the Trucks side that utilization is kept when it comes to the newer part of the fleet, while for somewhat older, it's a little bit lower. That has both a good and a bad relation on the mix. But in total, I think we are coming out well here. And the very important part of the resilience, by the way, moving forward.

Trucks then. IAA, some of you visited that in Hanover in September, the world's biggest truck show. And Volvo Trucks announced amongst a lot of different news. We also had all new VNL there, by the way. The new Volvo FH Electric with 600 kilometers range on one charge. And Volvo Trucks will start to sell the new FH electric model in the second half of next year.

In quarter 3, also Monterrey was selected as location of the truck assembly plant in Mexico. Groundbreaking ceremony has been done. And the new track plant will start serial production in '26, an important piece of the North American push here.

In September, the serial production of the all-new VNL truck model was started as I talked about earlier. And this is the moment we have been really longing for. It's the first bigger platform introduction in North America for Volvo since '96. Of course, we have done a number of upgrades, but this will come with a completely new functionality for customers but also for our industrial and modular capabilities. So it's a true milestone for Volvo in North America to reinforce our position and a game changer for our customers. But of course, and this is important, to manage the introduction as planned, we have temporarily more resources than needed for the current output but in line with our planning for the new project. So all in all, very exciting times ahead here and more to come, of course, also for the Capital Markets Day.

Also in North America, we finalized, at the end of the quarter, our acquisition of Mack cab body in white production from a supplier to strengthen the supply chain and increase volume, resilience and output. Volumes from Mack has been hampered since quite long with an accelerated deterioration. For the quarter, it's resulted in significantly lower volumes than expected. Now this production is brought in-house. I was personally involved together with a fantastic team during the summer to conclude this, and we took it over at the end of this quarter. And by adding resources and leadership, output will gradually improve here.

Market forecast. That is always a little bit interesting, right? If we start then with Europe and the forecast here. For '24, we are increasing with 10,000 up to 300,000 for the full year '24. And that is mainly related to a strong start in '24 and through the summer and also related to the fact that new safety legislations came into play. So you always see a little bit of preregistrations. For next year in Europe, we are saying 290,000. And how you should think about it is that, of course, we are on that rate mainly now moving out from '24 and into '25. So that is also a sign of balance in the industrial system here.

For North America, 290,000 for this year, no change, while we are putting the forecast down for '25 at 300,000 since we expect also a gradual lift then during the course of '25 related also to the somewhat bigger prebuy that we expect in '26, upfront legislations done for -- and that is coming into force, '27.

Brazil, 100,000, no change for this year, and 90,000 next year is really more stabilization, normalization, back to the underlying trend line and no drama for that.

India, we are increasing a little bit for '24 -- decreasing, sorry, for '24, and it is actually more based on how the market regain speed after the election, a little bit also extended monsoon season. And after that, we expect market to lift step-by-step into '25, plus 10,000 units there.

China domestic, flat for -- or unchanged forecast for '24, and 820,000 for '25, but we expect the market to be replacement driven.

Book-to-bill then for quarter 2 was 88% on the heavy duty and 84% 12-month rolling. The European book-to-bill continued to improve, and we had 107% in the quarter on the back of production reductions installed in the beginning of the year and somewhat refined during the course of the summer here.

The North American book-to-bill was negative as Mack is essentially sold out for '24 and well into next year. Order slotting has been very restrictive as you can see also in the order figures for North America, in particular, for Mack but also for Volvo. Volvo actually have not opened '25 during quarter 3, and we opened '25 during the beginning of quarter 4 here. So I think that is something to have in mind also when you look into the order figures. It boils down actually to managing the order book in North America.

Strong deliveries resulted in a 74% book-to-bill in South America, but that is more related to also how you manage the order board, and we see a strong development there. And we also see a positive development in Africa, Oceania while Asia continued to deliver out from the order backlog.

Market shares had a very solid performance, both Volvo and Renault in Europe with a combined share of 26.2%. For electric vehicles, combined also, Volvo and Renault kept the leading position with over 70% market share year-to-date.

North America, year-to-date August, Volvo and Mack, despite delivery problems, kept shares, not at the level that we want but kept shares at 9.1% and 6%, respectively. And in Brazil, Volvo remains strong with over 23% share. Australia also, Volvo and Mack had a combined share of almost 25%. That is also historically very strong.

If we then move into Construction Equipment. This is the biggest launch year ever actually for Construction Equipment. We have talked a little bit about it. And maybe some of you also attended the Volvo Days. That is, I mean, a couple of weeks that we have with a lot of customers. The biggest launch when it comes to electric, fossil-free machines, but also when it comes to the full lineup. And as a continuation of that, of course, now we are rolling out this type of capabilities in Asia and North America as we have done also in Europe.

And also in quarter 3, we continue then to step-by-step install capabilities in our different facilities when it comes to electric machines. And during quarter 3 now, we did that for wheel loader factory in Arvika where we have also, as you know, a little bit more heavy execution of wheel loaders. So we are ready also in that field.

When it comes to market environment, rather much similar pattern as for Trucks. For Europe, we take down the midpoint for this year '24, the midpoint in relation to '23 to minus 20%, which is a minus 5% revision on the back of softer market with dealer inventory reduction. However, we start now to see signs that the downward correction in Europe is stabilizing and guide 2025 to a flat market on the back of positive dialogues and signs from our dealers.

In North America, also there, we are taking down the midpoint with 5 percentage points. So in relation to '23, a midpoint of minus 10%. And for the full year, '25, we forecast a further minus 5% deterioration, a little bit later in the cycle here, but no drama.

South America, flat, both for '24 and '25. Asia, excluding China, the midpoint is lifted to minus 5%. And for the full year, we forecast a flat development. And China, flat both for '24 and '25. So we see a stabilization here.

Book-to-bill for Construction Equipment. Overall, 92% in the quarter and 90% 12-month rolling. European book-to-bill improved to 87% on the back also of production adjustments and reductions. And we start to see early signs, as I see, of a stabilization between demand and supply, and that is also what we're guiding for in the market forecast.

The North American book-to-bill was down to 45% on the back of continued destocking at dealers and timing of orders. This was largely expected and continued adjustments are done to balance order intake stock levels and production. But we have seen that also with deliveries going down rather dramatically for the Volvo brand, we are able to do that in a good way. And South America, Africa and Oceania, Asia were all balanced with positive book-to-bill.

Buses. Generally speaking, a very good story. I think the full improvement program that we are doing in buses is really working well. Mats, you will, of course, come back to that later as well. But if we look then into, first, some product news, and this is impressive what you see here, fully electric bi-articulated, 28 meters, 250 passengers. These are, of course, for the bus rapid transit systems, competing then with tramways and metros, et cetera, with a CapEx that is significantly lower, but with the same type of output, and fossil-free execution, obviously. So we strongly believe into this, not only in South America, where it has been for a long time, but also for others in order to achieve the environmental targets. Book-to-bill also positive for Buses, 100% (sic) [ 105% ] in the quarter and 92% 12-month rolling.

Also Volvo Penta, a lot of great news. The first fully electric hybrid for yachts, interesting segment, as you know. And what is the fully integrated, that is from helmet, from the pilot controls at cockpit all the way to the propeller thrust, utilizing then Volvo Penta's inboard performance system. So we have a fully integrated system here and a great reception, by the way, at some of the different exhibitions here.

And book-to-bill improved -- and also, by the way, I didn't comment on the lower slide here. We see a good momentum continues in industrial, and not at least when it comes to our type of integrated solutions with partners for data centers. We have a very strong position here, and we see that market to continue to be very excited moving forward. Book-to-bill improved to 80% in quarter 3 and to 84%, 12 months rolling.

Finally then, VFS, Volvo Financial Services. Portfolio growth in quarter 3. It continued to grow. The credit portfolio and the penetration remains stable. And it remains stable in, still, a very competitive landscape. So I mean there are financing available. The increase in the net credit portfolio is related to growth, both in our retail and dealer or wholesale portfolio balances.

Penetration levels was good, 28% for 12-month rolling out of September, reaching 29% for the quarter and 31% for the month of September. And portfolio performance continued to be good, with customer delinquencies trending at average business cycle levels.

So by that -- that was the business update, and I'll leave the word to you, Mats, for the financials.

[Mats Backman, executive]

Thank you, Martin. So looking into the financials then. And first, maybe a brief summary before we are getting into the details then.

So overall, we continue to have a good financial performance despite lower volumes. While we continue to invest in transformation activities, it is crucial to maintain a balanced approach. So despite experiencing a quarter with lower volumes, our cost control measures and adjustments within the industrial system have contributed to the good result and the margin we see in the quarter. Price realization carryover is still supporting the results year-over-year, and we are holding on to our current price levels, but the year-over-year carryover effect will be limited going forward.

Service sales continued to expand, approaching SEK 32 billion in the quarter, an increase of 4%, FX adjusted, comparing to last year. Service sales exceeded 27% in the quarter, which also contribute to resilience and stabilize the financial performance. Apart from the specific challenges we have in North America, we have managed the industrial performance well and adjusted capacity to be in balance with the demand we see in Europe and South America.

Working capital remains a key focus, and we have reduced the inventory by SEK 800 million compared to an increase by SEK 1.4 billion during the same period last year. And this was mainly driven by reducing work in progress and material in our production inventory, and that is also adapting to our lower volumes then. So all in all, it was a quarter that showed good resilience in an environment with softening volumes.

Looking into the details and starting off with net sales then. Net sales were down 7%, FX adjusted, compared to the same period last year. Demand remains weaker in Europe, with sales down almost 10%, adjusted for currencies and Arquus divestment. The decrease is driven by lower volumes in Construction Equipment and Trucks.

North America sales reduced by 9%, FX adjusted, on the back of lower market activity for both Trucks and Construction Equipment and the specific supply chain constraints for truck that Martin talked about as well. South America continued to perform well during the third quarter, driven by group trucks sales, while the other regions showed some contractions both in trucks and machines.

The adjusted operating income for the group was SEK 14.1 billion, with an adjusted operating margin of 12%. In Q3, earnings remained on good levels and was supported by some price realizations, both for vehicles and services. The lower trend in raw material cost contributed positively to the performance year-over-year but could not fully offset the impact from reduction in volumes and negative brand mix within Construction Equipment.

The transformation activities require a high level of investments, and R&D spending increased by SEK 0.5 billion in the quarter. The net capitalization effect in the quarter was negative at SEK 85 million, corresponding to a negative delta of approximately SEK 450 million compared to last year. We expect this impact to reverse somewhat during the last quarter of the year towards an overall guidance of plus SEK 1 billion for the full year. The other fixed costs remained in line with last year.

FX had a significant negative impact of SEK 1.6 billion, driven by strengthening of the SEK from last year and especially against the U.S. dollar and Brazilian real. We expect the effect from transaction exposure to be negative at SEK 200 million for the full year '24, and we don't provide any guidance on the full FX effect on earnings though.

We delivered a positive cash flow of SEK 3.1 billion during the third quarter. While inventory went slightly down, the overall seasonality was normal with a substantial reduction of our payables after the summer period. Return on capital employed improved year-over-year to 38.3% on a rolling 12-month basis. The net financial position remained solid at SEK 62.9 billion, supported by the positive operating cash flow generation.

And then looking into the Trucks segment. The decreased FX adjusted net sales for group Trucks of 6% were driven by lower volumes and limited price realizations. The lower adjusted operating income and adjusted operating margin were mainly driven by generally lower volumes, R&D and manufacturing costs impacted by the disturbances we see in North America. Some price realization year-over-year, together with decreased freight and raw material costs, maintained the overall performance on a good level. The temporary events in North America had a combined effect on the operating margin of approximately 1 percentage point in the third quarter. FX was negative SEK 1.2 billion in the quarter.

Looking into Construction Equipment then. FX adjusted net sales decreased by 20% due to the lower volumes and negative brand and market mix. Adjusted operating income decreased by SEK 1.1 billion to SEK 2.6 billion. The negative mix from higher volumes in China and lower volumes in Europe and North America were partly mitigated by lower material cost, price realizations and some reduction in R&D expenses. The adjusted operating income margin reached 13.6%, and there was no significant negative impact on earnings from currencies.

Looking into the big positive in the quarter then: Buses. FX-adjusted net sales increased with 21% mainly driven by strong price realization, market and product mix and high volumes. Adjusted operating income increased by almost SEK 400 million to SEK 731 million. And this is a new record for the business area. The result was supported by higher sales and some reduction in material costs, partly offset by higher manufacturing costs. The adjusted operating income margin increased to 11.8%, and that is also representing a record for Buses. And currency impacted result negatively by SEK 100 million in the quarter.

Looking into Penta. Driven by lower volumes, FX-adjusted net sales decreased 2% to SEK 4.7 billion. Adjusted operating income increased to SEK 831 million due to price realization and a positive product mix with higher sales of more profitable engines and components. This was slightly offset by the impact of reduced volume and higher R&D expenses. The adjusted operating margin came in at 17.7%, and there was a negative SEK 100 million (sic) [ SEK 106 million ] FX impact in the quarter.

And then last but not least, looking into Financial Services. The credit portfolio increased to SEK 262 billion, with a rolling 12-month return on equity at 13.2%. Portfolio performance continues to be good, with customer delinquencies trending at average business cycle levels. In Q3, the adjusted operating income decreased to SEK 992 million from SEK 1.062 billion last year. The solid portfolio performance was offset by higher credit provisions and unfavorable currency movements, which had a negative impact of SEK 55 million comparing to Q3 2023.

So with that, I'm handing back to Martin to summarize then.

[Martin Lundstedt, executive]

Thank you, Mats. We'll try to do that rather shortly here. I think most have been said. But if we zoom out a little bit, just take it from a market perspective, as you've heard, and the tradition is that we are, for the first time, then revealing the market forecast for next year. What we can see basically is that we see now a stabilization of the correction in the market. That is also largely following the expectations that we have.

In relation to that and already during the time of the correction, we have been working very actively with our flexibility to find the right type of balance between demand and supply in different regions. I think we are there at large, and the organization, not at least the -- operational organization has done a good job here.

Specifically, if we zoom in then on North America, 2 events to have in mind temporarily. The Mack supply issue is addressed. We are working on it. It will gradually improve. That is an art that we know how to manage. Good order books. So we are, of course, very eager to get out of that situation. And secondly, the very positive news about finally, after a long period of investments that we are now ramping up step-by-step the Volvo VNL and more to come.

So that is about the volume flexibility, but also that we are maneuvering from a position of strength in this cycle. And we see that now also that the different business areas are doing a very good job in the underlying improvement of the business. And in particular, as Mats said, also, I'm very happy to see also that the hard work that our colleagues in Buses have done is now also, step-by-step paying off, obviously.

So interesting quarter, well executed and looking forward to your questions and happy to respond. Thank you.

[Johan Bartler, executive]

Thank you for that, Martin. So we start with the Q&A. And we'll start with Mattias from DNB. Mattias?

[Mattias Holmberg, analyst]

I'm curious to hear about the North American market environment, in particular when it comes to the differences between vocational and on-highway segment. And also in relation to the issues you're having with Mack right now, are you sort of losing market share? Is it a loss business that you're not able to deliver on the current strong market? Or how do you see that?

[Martin Lundstedt, executive]

Thank you, Mattias. First and foremost, I would like to say that, indeed, and we have said that for a while, that there is a difference between the on-road segments and vocational. And vocation is, of course, a very broad definition of different segments. But if you take these 2 buckets, I mean, the major correction is in on-road. And that we have seen for a while, and that is also following, so to speak, the normal pattern of other activities in the economy. And that's the reason also why we gradually have adjusted, for example, for Volvo that is more heavy into that.

So the reality is that you can say for Volvo, we have done the adjustments, but we have kept the resources on previous or -- I mean, just to make a simple explanation of that in order also to manage now the introduction of the all-new VNL platform.

Vocational is holding up strong, and that is a stronghold not at least for Mack trucks, I mean, application excellence in a vast variety of different type of applications. And I should say loyalty is high because it's a lot about application, special type of applications.

Having said that, there is always a limit, so you cannot take this light, and I expressed that in one of the interviews this morning that I feel frustrated. And I feel frustrated not because of the fact that our organization is -- they are doing a fantastic job here, but of course, because we have a solid and good order book, we have great customers, and we want to deliver as quick as possible. And that's the reason why we took the decision also to take over this operation so we can control it, inject the resources needed to get the job done here.

[Johan Bartler, executive]

Thank you, Mattias. We're turning to the telephone, and we have Klas Bergelind from Citibank.

[Klas Bergelind, analyst]

Klas at Citi. My first one is on the gross income. Even if I adjust for the supply chain disturbance and currency, it's down my numbers, but pricing in the P&L you say is still up a bit. There is, of course, a negative volume effect, but must be a pretty big mix effect as well. Is this more fleet versus retail in Trucks and then the negative mix effect in Construction Equipment? And what do you see on new order pricing in Trucks, Martin, for delivery in next couple of quarters? Are you seeing incremental pressure or still stable pricing?

[Martin Lundstedt, executive]

Would you like to start, yes?

[Mats Backman, executive]

Yes, okay, I can start. So when it comes to the -- if you're looking at the kind of the gross margin or the gross income, and we didn't -- I mean when we're talking about the 1% in terms of effect in North America with the disturbances, I mean, that's it on a total operating income level, and we don't split it between gross income and expenses, so to speak.

In terms of prices and looking at the kind of price effects, I mean, like I said, I mean, we still have a year-over-year carryover effect from last year. That will now decline into the fourth quarter. So the year-over-year effect is almost kind of disappearing. But when it comes to the underlying price environment, we are holding on to the prices we have done. And maybe to add, when we're looking at the VNL, I mean, when we're launching a new model, that's an opportunity also for value-based pricing in that respect.

[Martin Lundstedt, executive]

Absolutely. I mean -- and that, as we said, is also a product that is coming with, I mean, game-changing features for -- and productivity for our customers, obviously.

But coming back maybe, Klas, to your point, regarding the gross income or the gross margin. I think you should think about it, just to add to what Mats said, that we are flat on gross margin. Of course, we are not disclosing separately exactly how that looks like. But the major part of that for group Trucks is, of course, coming on gross income level. But since we have a parallel introduction, to what Mats said, that is also further down the P&L, so to speak.

Normally, we are not disclosing a number like this, but we thought it was useful for you to have an idea about the situation since it was a rather particular quarter basically with this 1 percentage point more margin on group Trucks. But I think taking a step back and seeing that we're holding up with the different mixes that you have always in gross margin, flexibility has been good, both when it comes to the price piece of it -- or I mean, the discipline on pricing, but also when it comes to the cost flexibility, I think that overall is the message.

[Mats Backman, executive]

And maybe to add one thing, when it comes to Construction Equipment, that has done a great job when it comes to kind of mitigating the volumes as well because, I mean, what we need to remember in terms of a mix effect is that in terms of number of units, it's almost 50% SDLG now in that mix then. So a good job from the organization.

[Johan Bartler, executive]

Thank you. We're turning to Hampus from Handelsbanken.

[Hampus Engellau, analyst]

Two questions from me. Martin, could you talk about regional difference in Europe. If I look at your volumes, you're down 12% in heavy and medium. Some of your competitors are down more close to 30%. So it will be interesting to see how the mix is in Europe for you guys.

Second question, we're starting to pick up some interest on the supply side for hybrids on long-haulage trucks as an intermediate way of bridging lower demand on battery electric. Can you talk about your view on hybrids and how we should expect that going forward, especially going into 2025?

[Martin Lundstedt, executive]

Thank you, Hampus. If we start with the mix effect in Europe, you're right, obviously. And I think if you look to Central Europe and, in particular, Germany, it is soft. And I think that is -- I mean, given that we have a much more broad spread of our volumes in terms of -- I mean, volumes as such in absolute numbers but also when it comes to the market share, I think that is why we see what we see.

What has been important for us is -- and we have also traditionally a strong position in East Europe, and we have also been good in executing, so to speak, the balance between order intake deliveries and stock levels in Eastern Europe. And I think we are managing that well. If anything, they were earlier into this since they are, to a large extent also, if I may say so, the flexible parameter in the European transport system with quite many big fleets operating across Europe that are supporting also the big logistics providers. So in that sense also, I think we are seeing that coming through now step-by-step here. But I should say that is the main explanation.

And then when it comes to hybrids, of course, we have a good experience of that, not at least when it comes to buses. For the time being, we don't see that demand coming so strong, so we have any very tangible plans. The technology portfolio for us contains, of course, that capability. And if you think about it, both, as I said, for buses but also when it comes to fuel cell electric or also battery electric by the way, I mean, the electric powertrain as such will remain in such a situation, and you will talk about how -- what type of extra range extension do you have. Is that the battery? Is that the fuel cell? Is that -- in that case, then preferably diesel engine on renewables. But again, it is the constitution of the mix of different models that we have.

[Johan Bartler, executive]

Very good. We turn to the telephone and Goldman Sachs, Daniela Costa.

[Daniela Costa, analyst]

I have some questions about -- one question about the U.S. and then one question about Europe, but I'll ask them one at a time. First, in terms of the U.S., just wanted to clarify, you've mentioned there's some EPA prebuy that you expect next year and then more into '26. If you could give us a little bit more color about how you're planning for that, both in terms of what you see on volume and what you're expecting in pricing impact. And also how the dynamic between that and currently elevated inventories in the industry, how do you think that's going to play out?

[Martin Lundstedt, executive]

Thank you, Daniela. First and foremost, you can say that -- as we said, we are guiding then for a slight uptick in the market for next year, 290,000 this year and 300,000 next year. That is primarily driven as we see it now by -- if I may say so, backloaded at '25. Not heavily backloaded as you can see, 290,000 to 300,000 but still a little bit backloaded. And we see that the bigger fleets normally are anticipating, so to speak, the prebuy patents in order to secure their capacity and their ability to plan.

So I should say, think about it as a market that will be rather flat. I think the good news about that is obviously the vocational market. We are well into '25 already for vocational. And there, we have a good view on price execution, et cetera.

The other part to your point is now for us and for the industry and for the dealers and downstream and used to manage well the on-road segment. So far, so good, I have to say. I think we are -- together, we had a dealer gathering a couple of weeks ago in U.S., good discussions regarding that. But you're absolutely right. That is the name of the game now on on-road to manage that balance. And then with the gradual, so to speak, normalization of interest rates, et cetera, that will also come back when it comes to transport activity.

So we are excited about it because we have a lot in stock for the coming years when it comes to news, not of old trucks, but when it comes to news. So we are super excited about North America, and we will have an opportunity to talk more in detail about that at the Capital Markets Day as well.

[Daniela Costa, analyst]

So if I could quickly follow up on that. When you mentioned on the Volvo, you were lowering production in North America, then you have the new production for the new truck. Net-net, in terms of production for next year, do you expect to be up or down in North America?

[Martin Lundstedt, executive]

I mean, again, Daniela, I think you should think about what we are saying about the total market. During this year, we have, of course, seen a mix shift, if I take the 2 bigger buckets, on-road, both long haul and regional haul, in relation to the other bucket, vocation, and we have seen, of course, a mix change that the vocation has been a bigger proportion.

Having said that, the on-road segment is so dominant anyhow. So it's more about now how we manage that moving forward. And we have ambitions. I mean we have 15-plus percent as we speak now. What we are doing, we are upgrading significantly our platforms. We are upgrading our resilience and production capacity, and we are very excited about North America.

[Daniela Costa, analyst]

Got it. And my final question, just in terms of Europe, with the 2025 regulation coming up next year and then the 2030, you're moving the EVs factory a bit out. How should we think about in terms of like fines and pricing and how you manage the trajectory if the adoption is slower than expected in the industry in BEVs overall?

[Martin Lundstedt, executive]

Great question. Great and big question. '25, we feel good about '25. Both when it comes to our execution on the internal combustion side, we have done significant investment there. So that is supporting our targets for 2025. On top of that, when you look at the volumes that are moved into the market, 70% of those are coming from the Volvo Group. When it comes to battery electric vehicles, that, of course, have a significant impact for us, positive impact for us.

I think also you should remember that doing that and being an early mover, of course, is also an investment. But as we said, more than 100 million kilometers of Volvo, more than 50 million kilometers for Renault, we are gaining data and experience that will serve us well here for the regulations but also for the implementation and the speed of it.

2030, very important to continue to drive that and not at least when it comes to what we talk about enabling conditions, obviously, that you have the full infrastructure in place. From an equipment perspective, we feel very confident that we will be there.

[Johan Bartler, executive]

Thank you for that, Daniela. We move to Erik at SEB.

[Erik Pettersson-Golrang, analyst]

Erik at SEB. Two questions. I got to come back to the North America situation and Mack, just to get some sense of the -- how quickly you can get back up to speed there. So is this a gradual recovery up in delivery capacity into next year? Or could we see more of an immediate pickup in deliveries here in the fourth quarter?

And then the second question on electrification. You're pushing the battery cell plant in Mariestad some time out. Are you doing the same thing on R&D projects? Or is that a more tricky bucket to adjust in the medium term?

[Martin Lundstedt, executive]

Thank you. Then if we start with North America and Mack here. As I said, we have now taken over this operation. And what I feel good about is that now it's in our hands because this has been a tricky situation for quite some time. I should not say any conflictual situation, but a tricky situation in terms of really getting the arms around it. We did, I think, a good job during the summer, very intensive to really do this. We have taken over this operation now at the end of September, and we expect gradual improvements. And that is only an upside because we also know how important the volume leverage is in North America, not at least for Mack with the structure that they have.

When will it happen fully? To stand here now, I mean, I'm an old operational guy, and I realized that I can say both old and operational stand-alone, unfortunately, not only old operationally connected. But having said that, I'm humble of saying that it can, if all the stars are aligned, go rather quick, but I think also we need to be realistic. The most important is that we have a clear view that we will get the job done, and there, I'm 100% confident. And this is super important for Mack, given the fact that we have more customers, we have more volumes out there than we, for quite some time now, have been able to execute from Mack, and that Mack has such a strong position and is deserving more when it comes to the market presence.

Then when it comes to Mariestad, yes, that is correct. I think we have been smart in building up a supply chain that is both internal and external, cell, modules, packs, and it has always been part of the plan, of course, that when you have this type of big investments, how do you build it up in steps. So already with the previous time plan, we had, of course, step-wise, but I think we partly differ from others that think that you have to do everything at once. We think that we can actually take it step-wise also when it comes to our internal capabilities. We have done that both when it comes to packs, modules and now also this. So that was always the plan. On top of that now, it is the exact time phasing. And when we start to see now how things are materializing, we said, okay, 12, 24 months is wise.

R&D activities, obviously, short term now, we are always pruning the R&D portfolio. So that is nothing new. Short term now we say, okay, let's continue to move along because we have such a strong track record when it comes to the operational excellence. But having said that, depending on how it will continue to evolve, we have, of course, modularity blocks also in our R&D pipeline if that is deemed necessary, both from a cycle management but also from a transformation angle. And I think that is also something that we can also continue to deep dive during the Capital Markets Day, how we think about that.

[Johan Bartler, executive]

Thank you for that. We're turning to BNP and Miguel Borrega.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

I'll ask one at a time. So first on orders, can you help us understand the 50% decline in North American orders? Do the Mack cab issues also impacted, in some way, the order intake in the quarter? Because I also see the Volvo brand down 39% in North America. So what drives the decline in orders during the quarter? And how does that come in the context of a positive outlook for 2025?

[Martin Lundstedt, executive]

Thank you, Miguel, and thank you for bringing that up, by the way. I think that is a typical question that is always good to clarify even if we addressed it already in the presentation here. But the thing is that, I think, if I remember it right, it was like 43,500 or something orders on the Trucks side.

And you're absolutely right. I mean where you should zoom in here now and get the balance right is North American order intake. And they are related to the fact that Mack, they are sold out for this year, and they are -- have an order coverage well -- and I say, well into '25. I should not say that we see that the issues are affecting that slotting or that order book and that we will have less quality or that we have lost sales. But of course, it's always urgent to serve our customers well. But the reason for it is that we have done for other regions and for North America quite some time now is that when we have a certain coverage, we are not opening the order books, and we have had a very restrictive slotting for Mack.

The same actually goes with the changeover now for Volvo that we did not open order slotting for '25 until beginning of October. So I think good and reasonable question here why it looks like it looks for North America. And there, I think it's those 2 explanations that you zoom into.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

And then my second question, if you can help us understand the margin situation even without the Mack issues in the quarter, the truck margin would have been 12.7%. So still quite a sequential decline from Q2. How should we think about Q4? You mentioned that the Mack issues will persist, and usually, Q4 is weaker than Q3. I know you don't guide, but can you give us some thoughts directionally how the margins will go?

[Mats Backman, executive]

Yes. I mean looking at gross income level then and more from a kind of sequential point of view then and, I mean, starting again with kind of pricing, I mean we see a kind of a flat development when it comes to prices sequentially. And what has been the big thing is really the kind of the carryover, the year-over-year effect on price realization then. I mean that is getting less than throughout the year then. But from a sequential point of view, it's still flat. I mean you can see the kind of the volume development, looking at order intake and so forth then. So I mean we are kind of adjusting for lower volumes as you have seen in the third quarter.

We talked about raw material being a positive trend here then. And then we have -- and what I think is also important to talk about is the kind of the mix effects we see then. I mean if you're looking -- taking Construction Equipment as an example, I mean, we are now running on 50-50 when it comes to SDLG and the Volvo-branded products. And you can look at order intake on that side as well. I mean that will continue when it comes to the negative mix effect.

And then when it comes to the industrial system -- and I mean, potential underabsorption, I mean we saw underabsorption now in the third quarter in North America, driven by the items that we have been talking about that. And that will also continue into the fourth quarter, even though we are talking about the gradual kind of improvement, but that will continue. And then on top of everything, when you're looking sequentially, you have the seasonality as well built into that.

[Martin Lundstedt, executive]

I think also, I mean -- thank you, Mats. But I think also, if you think about it, I mean, take -- so I have the right word, quarter 3 '22, quarter 3 '23, quarter 3 '24, and of course, I mean, if you take last year, we had a lot of -- I mean, you should say, I mean, also tailwinds and good execution. But I think you should also think about how does it look like also when you go back to '22. Now we have a significant -- I was seeing -- yes, drop in volumes also both for the market and for Mack. And still, we are reinforcing in that situation while we are, at the same time, bringing up R&D, et cetera.

So when -- I think when you look through the different parts of the P&L, starting with gross margin levels and then see, okay, and also understand where is the maneuverability, I think still we are on an underlying improvement track that I feel good about for the future.

[Johan Bartler, executive]

Thank you for that, Miguel. Then we turn to the room here and to EFN.

[Unknown Attendee]

My question was, will you be able to continue to raise prices and defend margins even in unsecured markets? And if so, in which regions can you do better on the pricing side, considering all segments?

[Martin Lundstedt, executive]

No. I mean, I think what -- already what we have been -- I think a good development for us is that we have been able to maintain a good price discipline in a deteriorating market or in a correction in the market, both in North America and in Europe. The opportunities that we have at hand now since we are, more or less, sequentially guiding for flat pricing for the coming quarter here, as Mats said, because, I mean, you don't have the year-over-year effect. I mean what we can have at hand is, of course, that we have now big introductions gradually coming in North America with the value-based pricing, i.e., great products with great performance. And that should, of course, be acknowledged and rewarded for.

What is important for us now is, in a more soft market, to maintain price discipline. If we can do that, that is, I think, a very, very important step for high quality in this industry at large.

[Johan Bartler, executive]

Thank you for that. We'll take one final call from Jefferies and Michael Aspinall.

[Michael Aspinall, analyst]

My question is a bit of a follow-up on the North American market. If we think about your North America industry forecast and the level of inventory we have there at the moment, if we take those 2 together, does that imply that retail sales will be stronger than plus 3% in 2025? Or do you think the industry wants to go into '26 with some inventory on the books?

[Martin Lundstedt, executive]

Okay. No, as I said already, Michael, I think, I mean, obviously, this is an on-road game, if I'm a little bit blunt. I mean how do we manage that now? How does it look like when it comes to activities in the marketplace at the end of the day because that is the only thing counting? And what we start to see is that, I mean, pricing for transporters are starting to normalize. It is starting to come back in better shape. We start -- if we look at our own pipeline, both when it comes to new and used, we feel good about the activities that we are doing. We have been reducing output for on-road products, both regional and long haul in order to manage that situation.

And again, as we said, I think we are now moving in from a level that is around 285,000, 290,000 something to that. And when we are guiding for 300,000 next year, it's also a little bit with the backloaded volumes because, to your point, we need to make sure that this balance is in place. But we foresee also with a decreased interest rate consumption, et cetera, pattern will move up. And also, I mean, uncertainties will be more gone after the election also in November. So that is the best guidance that we can give. But we are well prepared for this situation.

[Mats Backman, executive]

Yes, and I mean, we have the flexibility in the system as well to manage what happens, so to speak. So the flexibility is important to remember as well.

[Martin Lundstedt, executive]

And I have to say from a philosophical point of view -- and not only, also practical point of view, if anything, I feel rather good about that we are where we are in the cycle when we are introducing also the new platform. That should have been a little bit more problematic maybe 1 year ago or something like that. So the more you train, the more luck you have.

[Johan Bartler, executive]

Thank you for that, Michael. So thank you for all good questions. All materials is available on our homepage as always. And with that, we thank you, and see you next time.

[Mats Backman, executive]

Thank you.