Volvo AB

STO:VOLV B

Earnings Call Transcript 2018-Q1

[Joakim Kenndal, Communications Director]

Then I would like to wish you a very welcome to this presentation and press conference of the Volvo Group's results for the first quarter 2018. My name is Joakim Kenndal, I will later on moderate the Q&A session that will take place after the presentations. But we will, as always, start with Martin Lundstedt, our President and CEO. And later on, he will be joined on the stage by Jan Gurander, Deputy CEO and CFO for the Volvo Group.So please go ahead, Martin.

[Martin Lundstedt]

Thank you, Joakim. So also from my side, good morning to everyone to this presentation. Where to start? Maybe to say that it has been a good quarter, but it has also been a pretty challenging quarter for us.If we look into a little bit highlights of the quarter, I think to start on why we feel still it's a very good quarter: it's obviously that we are increasing heavily sales, 19%, excluding FX; that we are also increasing the operating results up to SEK 8.3 billion; and have a strong momentum in Volvo Construction Equipment, as you have seen, of 13.8%.; but also record results, actually, for Volvo Financial Services and for Volvo Penta. On the Trucks side, obviously, more challenging in a way that we, of course, have anticipated, but also that it is a big quarter when it comes to changes, obviously. Still, we are very happy that we actually managed to increase deliveries with 17% already from pretty high levels last year's quarter 1. And also that we finally also got operating result that was better in, in absolute terms, than the last year.But having said that, obviously, we have a little bit of a diluted margin in this quarter. Some of them are more of a temporary character, obviously, that we have the changeovers in North America right now. We do the big changeover for Mack Trucks during the quarter 1 and also continuing to do the changeover for the full range of Volvo Trucks in North America.We, as you will see later also, had, maybe to the surprise of some of you and a little bit to ourselves also, on the FX side, slightly more heavy headwind than expected. But also, obviously, that with sales and deliveries going up with 17% also, that means that the continuation or the pressure of the value chain is still there. I mean, even if we have improved, that will continue to be a little bit the case as we are increasing volumes overall, so to speak. And then we have the mix also, natural mix between services and equipment when you're increasing equipment deliveries to that magnitude. When it comes to volume development, as I said, plus 17% for Trucks and mainly related then to North America. Even if we are doing the changeover, we were increasing for Volvo Trucks in total with almost 6,000 trucks in the quarter, whereof 4,000 in North America and 1,400 in South America and also another 1,000 trucks for Mack in North America.So I have to say, I'm pleased to see that the organization, the complete industrial system and also our commercial system, also the external industrial system, I promised Andrea to say that because they have been working really hard, has managed that changeover and still increasing volume because, as you see, the demand in North America is really high.When it comes to Renault and UD, slight changes. Renault, slight up when it comes to medium- and heavy-duty, and the small decrease for UD, but nothing dramatic there. Machine deliveries also for VCE, very strong, plus 35%; Volvo brand then, 24% up; and SDLG, a little bit more than 50% up. And if you just take China, more than 60% up. So obviously, there is a strong activity in China. But having said that, all regions are moving strongly here. On the service sales side, plus 6% excluding currency. A little bit weaker than in quarter 4, but still a very good and high activity level. You have some impact also on the fact that you have Easter in quarter 1 here. But I think 6% is still good pace, showing the activity level in the installed fleet and also that we have a good focus in the different business areas. So it was particularly strong this quarter for Volvo Construction Equipment. But generally speaking, good development here. Trucks. Just to summarize a little bit, good demand, as you have seen, across the globe. And then resulting, obviously, that the further increase we are doing now in industrial system is resulting in this stretched situation that we have. Again, we are gradually moving away from different bottlenecks, but new ones are rising. That is what you have read when it comes to lean -- the Japanese CE you are seeing, and Europe is coming up here. Still, having said that, I think the organization is working in a good way. What we also see is the balance between the service deliveries [ parched ] into the service market and also into our new equipment. So there is -- if I put it like that, a constant discussion in the organization on how to make the different priorities here. The new trucks in North America, very well received. I'll come back to that in a moment. And also, I think very important that we are now revealing how we are gradually rolling out our electromobility strategy also with Trucks and eventually, also will come for Volvo Construction Equipment here. If we go then into North America, very good reception, as we said, of the new trucks. I got actually -- we had a conversation with one of our dealers in Arkansas and in Tennessee, Jim Maddox, really talking about, for example, the Mack Truck Anthem here. He had a Conquest account on that. And what is really, really encouraging to hear is that those trucks are loved by the drivers. And I think that has been extremely important for us to opt that both for Volvo and for Mack, given the fact that the driver shortages and attractiveness for driver will be an increasingly important decision-making part of different fleets today. So that is very good to hear and some other very good receptions of that. Order intake, 147% plus for Volvo. Mack, a little bit hampered, obviously, that we had already long order books, given the big changeover. But still, we feel that have a good momentum for the 2 brands here. And that will continue, obviously, and we are revising upwards as you have seen. But very positive so far. On also the launch, the world premiere of the new FL Electric for urban applications. What we have said so far is that what we see is the demand coming in urban applications and more, so to speak, restricted areas is where it makes sense to start with. If you do the abatement curve here, obviously, it is in urban transports, it's in refuse collection. It will eventually also move into ports and quarries and mines and what have you, and then into regional haulage and eventually into long haulage. But I mean, if you want to have bang for the buck here, that is how we see this market to evolve. Having said that, we are building on the cost, the common architecture and shared technology and modular system that we have, using the experience of 4,000 electric buses in different levels, everything from hybrid to full electric. And we are using that modular system also now into the truck platforms to start with Volvo and also now eventually for Renault and Mack and UD. As you can see, applications that are opted for urban applications, both when it comes to payload and also when it comes to range. 300 kilometers is well-suited then for the operation. And then you can have a different type of infrastructure for charging, depending on how you're operating around the clock, so to speak. But also, in this area, we have, I mean, good partnerships and good solutions selling. So we are actually taking the full responsibility of it. So we thought this should have been a good interest, but it has been a huge interest. And I think that it has been, yes, very positive for us. When it comes to the market environment, small changes. We are actually maintaining the high levels in the forecast that we've had already in quarter 1. For 2018, the only small changes we are doing is that we are revising somewhat upwards in North America from 280,000 to 300,000. And also, in India, where you can see also it's both medium- and heavy-duty from 340,000 to 370,000. Otherwise, we are maintaining, as we said, I mean, the markets on high level. The small change we have done also is that we are just showing heavy-duty for Japan because if you look into our product mix, it's more relevant to see what that is, so to speak. But otherwise, from a figure point of view, no changes. Trucks order, yes, what can you say? Continues to be very strong, plus 26%; and deliveries, plus 17%. Take Europe as one example where we often get questions also what will happen with the development. As you can see, orders are up 2% and deliveries, plus 9%. But when you look at the figures, obviously, with 2% up for orders, it's up to almost 25,000 and deliveries up 9% to almost 22,000. So [still], you have a positive book-to-bill in the quarter of almost 3,000 units. And we see that there is a strong activity level here.Maybe you can also ask yourself, why did we have a little bit of decrease in Volvo Trucks orders in quarter 1? Mainly related to some price adjustments that we did [ as ] from beginning of first quarter. And that tend to have some effect of the anticipation of some of the orders. So if you take quarter 4 and quarter 1 combined, I think you will see that it's working out pretty well there. Otherwise, again, North America, extremely strong. Orders up 106% and deliveries up 72%. That means that, yes, order intake almost on the level on par with Europe, 23,400, whereas deliveries was only then on a level of 12,000, so a huge delta there. But having said that, one big part is then related to the changeover that we are doing right now. And the biggest changeover again then in this specific quarter has been with Mack, but it's going according to plan. It's going well. And yes, high pressure to continue with the ramp, but maintaining, obviously, quality and delivery precision, not at least so we can keep the promises to customers here. Also, South America and, yes, I think all other markets are continuing on a fairly strong level. Asia is a little bit also there between quarter 4 and quarter 1, we have some pushes of deliveries in quarter 4 last year for Japan and Middle East, but again, nothing dramatic.Market shares. What you can say, Europe to start with, the figures only to February. We are getting in -- we were a little bit to discuss, should we reveal full quarter, but we couldn't do that because we are lacking some countries. Even if it looks like a decrease, and it is a decrease up to February for Volvo Trucks, still a strong start of almost 17%, and we also feel that March was a good delivery month for us. Renault is continuing to do the step-by-step improvement that is important, but not too quick, to preserve the quality in the business here. Good to see also that North America for Volvo Trucks that were -- was more early out with the changeover and has done it more gradual than Mack due to the nature of the business is coming back, even though that we are continuing to do the changeover for Volvo Trucks as well. But that was an important sign. And then, obviously, with Mack, we did a clean cut. And we had a number of weeks with very low production when we did the phaseout and the ramp-up. Japan, flattish also. Australia, after a number of years now with good development, slight decreases. Improvements in South Africa and Brazil, so generally speaking, I think a pretty stable picture here. Construction Equipment then summary. Pretty straightforward. Very high market demand across the globe. Orders up, deliveries up. And back to balance, I mean, as you remember, we have said many times, started with a much lower capacity utilization, obviously, but still have done a great job here. And also, we had the transition and transformation program that the group had been running. And in particular, Volvo Construction Equipment, we see that we have a good leverage now, I mean, really utilizing the volume and maintaining the cost base in a very good manner here. Talking about improved performance in China is obviously the market conditions and also that we are taking market share, but also that our dealers are performing better and better in a more stable situation. And that, I think, is also very important for us.We have talked a little bit of an extra detour into China. We are not often talking about it, but SDLG is a successful joint venture for us and important. I mean, we have a 70% ownership. As you know, we have very good relation with our JV partner and I think also, successfully, money matters. As you can see, we have a targeted -- and this is just a little bit a snapshot of the product portfolio, but some of the main products that we have targeted for emerging markets in a good way. We have a good industrial footprint. We have a good application and development capabilities in SDLG and a close cooperation with Volvo Construction Equipment not only in China but on global scale. So this is a true asset that I think also we can continue to leverage for other parts of the group.Market conditions are strong. But as you can see in the middle, that is also our own performance in China with SDLG as well as with Volvo brand, but this time we are focusing on SDLG. As you can see, we are gaining market shares also in some of the key segments for us and the strong position in wheel loaders domestically and also using as an export base and also good operating margin. The flexibility in this company is something to [ write or talk about ], I can tell you. There, we have something to continue to launch. So it's a two-way dialogue on how we can use not only products together, but also process and ways of working. Market environment, everything up when it comes to guiding here, except Europe that we are maintaining on the level that we guided for already in quarter 4 reporting. So Europe is 0 to 10% up. And when we see Jan, we come to that in the next slide, that is a little bit overshooting right now with orders in the double-digit area for Europe. Otherwise, we are guiding upwards a little bit more than we had in quarter 4, so showing the really strong momentum we have across the globe, not at least in China than in -- and in North and South America.Having said that, orders up 37%; deliveries, 35%. And as we said again, very strong momentum in China, obviously, but also in North America and South America. But also, Europe continued to be strong from high levels. Buses. Quarter 1, always, if you compare with the different quarters, a weak one. This was in particular weak. We had lower volumes, meaning that we had under absorption. Jan will come back to that. But also that 2018 will be, for some of our key markets, a little bit of a struggle, given the replacement cycle in the tender activities in Scandinavia and in U.K. Nevertheless, that is also a little bit more pronounced in quarter 1. And also then, the order intake decreased by 43%. It's a little bit overdramatic here because that was related to a exceptionally strong quarter 1 last year, where we took in some big tender orders for Nova, but also strong order intake for the markets that I said, by nature, then have a little bit lower replacement cycle in 2018, mainly then the Nordics and the U.K.Having said that, that shows also, Jan will come back to it more from a financial perspective later, but it shows that the platform is still too fragile to stand on. And we are falling down if we have a number of parameters against us. And here, we are continuing to work with high focus.Even having said that, we also had a number of very important events. Major and important deal for Brussels, 110 hybrid buses, very important for Central Europe, obviously, with full infrastructure; and also the introduction of the all-electric articulated bus. And why that is important, obviously, is that we are showing and that, with our modular system, we can also move into higher growth vehicle weight combinations that we also can leverage then, obviously, for Trucks and for Construction Equipment and other events. So that will come into place now as from summer in one of the main lines in Gothenburg.Volvo Penta, also very strong quarter. Sales -- order intake up 19% and sales with 17%, deliveries with 13%, particularly strong then in the industrial oil spill segments where we have put particular focus over the last years, but also in other segments, for example, the marine, also very strong. What is encouraging to see for Penta is, obviously, also that we have a very good range that we are taking orders now for Stage V. That is the new emission legislation in Europe coming into force as from 1st of January 2019. And also the Easy Connect application for boat owners, I think that will be popular even for guys like you because that is a B2C, also continuing to build on the easy boating, so to speak, how you can control your boat and how you can follow different things, et cetera. And that will be our future platform for connected solutions within Volvo Penta.Finally, some words also, from a business perspective, of Financial Services. Increasingly important part of our business, as you know, in order to create the full solutions. And the Financial Services, Volvo Financial Services are continuing to perform really, really well. We see a good growth in the retail financing volumes up to SEK 13.2 billion in quarter 1. This year, we also have a good growth in wholesale financing.We've also got external technology award on the process. And it seems okay, obvious, but really to work with the quoting, approval, risk control process and to shorten lead times here. It's actually one of the most important factor of avoiding a lot of frustration to the customers. And here, we see that we have improved that with more than 50%. And for me, that is one of the keys that's why VFS is also not only because this is such an important part of assembling a good solution for our customers, it's also that they are driving a service culture within the company that is extremely important.So by that, I'll leave the word to our Deputy CEO and CFO, Mr. Jan Gurander, for the financial figures.

[Jan Gurander]

Thank you, Mr. Lundstedt. So figures. Net sales, up to SEK 89 billion from SEK 77 billion. We have a negative currency effect of a little bit more than SEK 2 billion. The currency plays a role in this quarter, both in terms of revenues but also in terms of profitability. And I think a little bit, when you look upon it, it is actually, go back 1 year, the U.S. dollar was actually pretty strong. It was around 9 to the Swedish krona. Today, it's down to around 8.40, something like that, and that plays a role. So without that effect, we will have seen a bigger growth in terms of sales for the first quarter this year. It is -- that plays a major role. Otherwise, we see that we have a growth in all our market regions. The adjusted operating income for the group as a whole goes from SEK 6.8 billion up to SEK 8.3 billion, from 8.9% in margin up to 9.3% in margin. We go -- well, you can see that all business areas, with the exception of Buses, is contributing to the result. And of course, as you see here, a very strong performance, especially from Volvo Construction Equipment. The -- look then into the -- what is affecting the result. You can see that we have good development on gross income, and this is valid both for Trucks, also for Volvo CE, so that is the volume coming through. Obviously, then, on the negative side here, we see that the stretched supply chain and the changeover that we do in North America on the Trucks side is actually hampering our gross income a bit in this quarter. Selling expenses and R&D is coming in on the negative side.A few words on the currency, negative SEK 730 million. A little bit more than SEK 200 million out of that comes from what we call the transaction exposure. The rest comes from translation of profits in our subsidiaries and also from when we calculate payables and receivables also to the new currency rates compared to 1 year ago. So basically, the translation exposure is approximately SEK 500 million. Looking then for this year, only talking about the transaction exposure for the full year, approximately SEK 1.5 billion positive for the rest of the year. That time, it's only the transaction exposure and calculated on the flows that we had during the course of last year. When it comes to the capitalization and amortization, we are in a phase right now where we amortize more than what we capitalize. That will gradually change for -- during the course of this year. And for the whole year, we say that the effects will be approximately plus/minus 0, maybe a little bit, that we will capitalize a little bit more than we amortize for the full year. The cash flow for the quarter, this is, as you know, a seasonally weak quarter in terms of cash flow. But this is now the second first quarter in a row that we are on positive, SEK 1.5 billion. Underlying, of course, is -- the underlying profitability is, of course, supporting that we have a positive cash flow in the quarter. We are keeping our CapEx under control, as you can see here. And also then, you can say a pretty normal seasonal pattern when it comes to the working capital, where we usually have a pretty good effect from trade payables, but we are on the negative side from receivables and inventory. But that's what it is every first quarter in the Volvo Group.Trucks, up 17% in terms of deliveries. You can see also then that net sales, when currency adjusted, is also up 17%. We see that the vehicles is up 21%, and services is up 6%. And this, of course, when the mix between vehicles and services changes, that also has a dilution effect on the margins and compared to if we had grown in the same pace with both vehicles and services. Sales goes from SEK 49 billion up to SEK 56 billion. Operating income improving from SEK 4.7 billion up to SEK 4.9 billion, while operating income -- margin goes down from 9.6% to 8.8%. Here, we have, as on the group level, since Trucks account for such a big part of the group, we're having, on the positive side, volumes and, of course, the capacity utilization in the factories. On the negative side, it is the stretched supply chain and the production changeover.When you talk about the stretched supply chain, it is about logistics system is very much in a stretched situation. We do actually have a rush transport or speed transport, too much basically components that are up in the areas instead of on the ground with the trucks or on the sea, and that is costing us too much. And also due to the fact that we get changed -- we get late incoming materials and so on, which means that we have to have extra shifts in the weekend to complete trucks and so on. That is - these are the efforts that we do to actually be able to get the trucks out to the market, increasing sales with 17%, but also getting the trucks out there on time for our customers. When it comes to the changeover effect, Martin had mentioned it before, I mean, we are doing a clean cut in Mack in the quarter, which means basically that we close production on a Friday and you start up from 0 in the -- on a Monday. And then you start to ramp the whole way up. I think the ramp went, I would say, more or less according to plan. But it also means that you get, of course, an under-absorption in that factory when you do it, apart from the fact that you have a lot of resources and so on to do the ramp. Then we have selling expenses and R&D expenses being down on the negative side.Construction Equipment, going from SEK 16.1 billion up to close to SEK 21 billion in sales. Strong delivery quarter, 35% up. When we currency adjust, the sales is up 33%. Here, it's the same thing. Strong deliveries, of course, in machines, 37% currency adjusted. But also a very, very good quarter for service sales, up 12% for service sales for Volvo Construction Equipment.Results from SEK 1.6 billion up to SEK 2.9 billion. 10% in EBIT margin last year, close to 14% this year, 13.8%. And here, we see that higher volumes, capacity utilization goes in on the positive side. And even if we tried very hard, we didn't see anything that took us on the negative side. CE is here extremely cost-conscious as well, so we don't see any drift on the cost side here as well. So that's very good to see.Then we come to Buses. Remember that deliveries was down with 6%, 7%. When it comes to sales, it's up with 6% currency adjusted due to the fact that we have the product mix affecting us positively, more fully built buses with bodies than what we had last year, it was more chassis last year, and that is why we have this swing from a negative on deliveries to a positive on sales. Good development also on the service side, as you see, up 9%. And that also obviously is affecting us on the positive side on the operating income. On the negative side, we are, of course, affected by the fact that we have lower volumes in our industrial system. The 7% in terms of deliveries meant that we built less buses. It actually brought down the production pace in 2 of our factories during the first quarter. And we can see that selling expenses have been on basically a too high level increasing.And here, what Martin talked about before, yes, the first quarter is seasonally the weakest quarter. But we are obviously not satisfied with what we see. We have a lot of activities ongoing on the bus side. And I think we just need to continue to work with these and also see what we can do to strengthen it. It shows you when you are weak. And having weak results, you don't have any room to maneuver. So if you then have a negative effect, as we have here from the currency with SEK 90 million, it brings you actually from a profitability level basically down to a negative. And that you should have more room to maneuver, and we need to structurally continue to lift the profitability on the bus side.We came from a fairly, you can say, over time, flat situation. EBIT was around 0. We managed to lift it up to somewhere between 3% and 4%, but we have plateaued on that level. And we need to continue to lift it further upwards because otherwise, we don't have any room to maneuver.Penta, strong in terms of deliveries and also sales, 17% up. Strong on engines side, 22%; a little bit less good quarter in terms of service sales, you can say, only 3%. But there, whether we see here also, everything is positive. It's the highest sales level. Good favorable product mix in terms of what type of engines we sell as well. And then operating margin, as you see, that's above 16%. This is the first quarter that Penta is doing that is over SEK 500 million, SEK 0.5 billion. And then finally, Financial Services, also a strong quarter, first time above SEK 600 million. Return on equity is close to 15%. We have a solid and good growth, as Martin explained, but we also have a very, very good performance in the portfolio in terms of credit risk. It's very, very low levels that we see right now in terms of write-offs and expenses for credit losses.So by that, Martin, time to come back on stage.

[Martin Lundstedt]

Thank you, Jan. Okay, [ thank you, ladies. ] Yes, I think we have already done the summary pretty extensively. So why don't we open up for question and hopefully answers as well?

[Joakim Kenndal, Communications Director]

Yes, we mix the questions, as always. Should we start in the back? We take 3 questions here, and then we go over through the telephone conference. But please go ahead. I'm pointing at you, yes. Yes?

[Andreas Brock]

Andreas Brock at Coeli. A question on the European market, if you -- how do you see volumes playing out over the next 2 to 3 years? Do you expect the market to plateau? And if it can -- if it does that, will the competitive pressure, especially the pricing pressure, will it increase in the next coming years and does hurt margins? Secondly, onto Mr. Gurander, on the R&D expenses, you expect to do more capitalization going forward, i.e., you have more exciting research projects. Anything you can share? Any details you can share?

[Martin Lundstedt]

First of all, on European market, obviously, we are on a good level, I should say, in Europe. At the same time, I should not say that we are on an exceptionally good level. We talked about a little bit also in quarter 4 reporting that if you see, so to speak, the long-term trend line probably should be a little bit under where we are right now, but nothing super dramatic. Then obviously, there is always a little bit of looking for signs when will it plateau, how it look like. At CE, I came in, for example, with figures now in March that registrations was down 2%. But I think, I mean, if you only just think about what was March when it came to Easter, for example, then you are at the 2% and, I mean, if you look at quarter 1. And if you think that we have guided for more or less flat but still good levels in Europe, I think that is how you should think about for us that we see that it's a good level, but not similar to the overshoot that we saw, for example, before the Great Recession in 2009. Having said that, it is super important that we are keeping the right flexibility. So with the increases we have done in the system, obviously, we have had that also with a right mix between, so to speak, fixed and temporary contracts, et cetera. And also that we are using our European machine for a lot of the global markets as well. So we also have that spread. I think from that reason also, finally, if anything, we are seeing some positive price development also in Europe during the last quarters, and we are continuing to push for that. So let's see what that would bring to the market, but that is important for us now with the tight volumes that we have, that we are also working on the price realization, and we see signs of that.

[Jan Gurander]

In terms of R&D, I mean, we have, of course, always a very interesting portfolio of projects. I mean, we spend every year SEK 15 billion for all our business areas...

[Martin Lundstedt]

We invest.

[Jan Gurander]

Yes. We always have this debate whether it's investment or not. But -- so we have this SEK 15 billion. Of course, we have a lot of projects that come into new phases, [process] gates and so on. And during the course of this year, we will see a little bit more capitalization. I mean, you saw also that we continue to come with new products in a fairly even spread over time as well. You saw the new products when you were in Japan last year. You saw also the new value truck, the kronach last year, and now you see the North America. So I think we intend to, with a steady pace, come with new products in all our business areas, but nothing that we reveal today. By the way, you saw today the new electric trucks as well, medium-duty, so there's always something coming up.

[Erik Golrang, Head of Research for Sweden]

Erik Golrang, SEB. I have 3 questions. The first one is on pricing. A pretty tight market in both North America and Europe, which would, to some extent, should allow for price increases. To what extent have you seen that? And will you be able to offset the cost pressures that you see for this year? And then the second question, obviously, we know the negative impact from selling and R&D and so on, on the results, but -- then we have the product changeover in North America and the supply chain constraints. Could you say which one of those is the biggest drag on Trucks' margins in the first quarter? And if I understand you correctly that the drag from the product changeover should be largely behind us after Q1. And then thirdly, a follow-up on the R&D question. You said you were surprised by the reception and interest of the electric truck, huge interest. Does that mean that you -- doesn't that encourage you to sort of accelerate spending in this field further? And if so, do you still feel you can balance higher R&D spending on electrification and so on with a drawback on the combustion engine-related development expenses?

[Martin Lundstedt]

Thank you, Erik. First of all, I think on prices, as we said, if anything now, during the last 2 quarters, we have seen signs of a positive development both in Europe and North America. And to your point, I think that is, if anything, that won't happen now. And so that, of course, is a high priority for us. In North America also, it's a combination, obviously, that we are working with a new product range that has bigger value for our customers and in addition to that strong market. So if that -- I mean, when it comes to the cost then, Jan, you can also add to this, obviously, as we said, you have a [ number more ]. If I say onetime even if I don't like to talk about that because you need to see that we are developing the business over time, and we will have different, but this is a big changeover. I mean, because we are not at least done for Mack in this quarter, we are introducing also new ranges that we didn't have in that type of volume before. So that is a pretty big one that we have talked about also. I think the most important of that part is that it's following the plans. It's no surprise that we see that we are dragging in a negative way. And I can understand that you want to really have a feel about what is the real magnitude of that. I can say that we guided in a way that we say that the production changeover together with supply chain is, I mean, the most pronounced one, obviously. But I don't think we will go into more details about what is what there. But that, obviously, the major event for Mack now and also when we look at the Volvo changeover in North America, it is -- we are coming through, so to speak, the most important phase of the changeover. So that is correct, Erik. Having said that, obviously, we are finalizing for Volvo some small bits and pieces, and we are continuing to ramp for Mack. But if you look during the course of the year, obviously, that should gradually and pretty quick in some areas fade away. Then I think, you had, as we said, I mean, when you really look at the margins here, you had also the effects, obviously, and the mix between services and hardware. When it comes to selling, I think if you compare that between Construction Equipment and Trucks, obviously, we have a more vertically integrated value chain also down streams for Trucks so you have some of the reliable items when it comes to selling since we have both dealers and market companies to a bigger extent. But then it is also like that, just to be transparent. When you are doing a decentralization, obviously, there are some elements of front-loading enthusiasm into the system. And I think that is not something that you necessarily like, but I think it's good for the culture that you feel a little bit of pain if you front-load that we saw ordered during the course of the quarter activities we're taking on that. So I think that is natural that you -- the most important for us as management has been what is what here, what is selling in terms of volume; what is, so to speak, the introduction costs when it comes to changeover; and what is happy enthusiasm that you are driving your business areas, so to speak. And I think we have seen a good -- we have had good discussions around that, so nothing too special about that. I don't know if there's anything more to add on it, Jan?

[Jan Gurander]

No. I think we -- there are certain elements in selling that is variable. So when you increase your sales, you will say that it follows to some extent. But what Martin said as well, I think we are keeping a closer eye on selling today than maybe what we did 0.5 year ago because maybe the trend is a little bit too strong. And we can call it enthusiasm or whatever, so we try to keep it under control right now.

[Martin Lundstedt]

We don't want to kill enthusiasm now. We need to have balance with that development. On the electric truck then and the product portfolio, correct, in the way that we see a gradual, so to speak, shift when it comes to how we are using our SEK 15 billion, SEK 15.5 billion in terms of R&D. As we have already said, I think with the cost system in place, I mean, it will never be fully in place, but in good shape when it comes to the well-known technologies and the architecture around our trucks. But also for Volvo Construction Equipment and Buses, we can actually redirect the means for not only electromobility, but also connectivity and automation that we need to do. The important thing that we are working on is that we have a smart modular platform also in those areas, so every business area can pull from. [It's] nothing -- the electric truck now, not only for Volvo but also for an UD and Mack, as we go forward, it will be a good example of that where we have gained a lot of experience. So I think we will see a gradual shift here.

[Hampus Engellau, Automotive Analyst]

Hampus Engellau, Handelsbanken. Also 3 questions, if I may. Coming back to Europe, in Q4, I think you talked about an element of pre-buy, maybe fleet orders on the back of price increases. And my question is, where would you see the underlying orders were if you would look at both Q4 and Q1? And when should we see the impact of these price increases? Second quarter -- question is on lead times. Are lead times in Europe becoming a problem for you or are you managing that? And maybe if you could relate that to ramp-up and production. Then the last question is for Renault. Renault is still hampering around 9%, a small improvement from 8.7%. Historically, they have been around 11%, 11.4%. You also have a very new truck in the market where you're aiming for higher prices. Could you maybe talk about a little bit the tradeoff between getting up market share and keeping prices?

[Martin Lundstedt]

Shall I start? If we start then with Europe, as we said, I think we were into a situation, first of all, that -- I mean, we saw that okay. Lead times are increasing, et cetera, so we want to do something. And we announced that from a little bit different in different markets in Europe on price increases in quarter 1. And then, I mean, by the nature of the business, also you have, so to speak, some sort of pre-buy. And I think that is also what you see now that it's balanced between, in particular, now for Volvo Trucks where we have been working more actively on that. I mean, what was the order intake in quarter 4 and what was the order intake in quarter 1? So gradually, we see that -- we will see that coming through then, the price realization during the course of the year. We are starting more or less from now on, so to speak. The lead times, yes, it is longer. It is -- I mean, if we're talking normal, I mean, about 6 to 10 weeks, depending on specification, application. Maybe it is about 1 month more or something like that now, depending a little bit, obviously, about what customers and what specification we are talking about. Still, it's not on a level in Europe where I should be worried, so to speak, that you have too much of air into the order book because with that visibility, you can follow it pretty okay anyhow. And that has been one of our key focus areas also, not at least then for Volvo Trucks, to manage that we are not ending up in a situation where you have, I mean, too much of air. But we don't feel that. And I have to say, we don't feel that in North America either because we have had a quite animated debate about what is happening in North America because there, we have even a little bit longer order book now, not at least for Mack. We had a good reception of the truck and also then the transition. But I think that organization has been working through that in a good way. Finally, on Renault, yes, obviously, we see a potential of improving that market share. But having said that, even more important for us is to do that step-by-step without, so to speak, diluting the price and, in particular, also the residual values. So I mean, we will not do that to the expense of not, so to speak, have the right balance on those items. And here, I think also, the only way you actually continue to work with that quality between price and RV is by getting more trucks out and people feel that, to your point also, Hampus, this is a good product. I mean -- but you can -- this is not a quick fix. And we are more interested on doing gradual improvement than to regain market shares and dilute the RVs.

[Jan Gurander]

And we do that with improved profitability on Renault as well. So it's the whole mix of these factors that goes in the right direction right now, slowly but steadily.

[Joakim Kenndal, Communications Director]

Okay, we will then switch 2 or 3 questions from the telephone conference.

[Operator]

Klas Bergelind of Citi.

[Klas Henrik Bergelind, Director]

It's Klas from Citi. The first one is to continue on the drop-through in Trucks. You managed to get deliveries out quarter-on-quarter in North America and take market share there on the Volvo side as the Volvo roll-up is taking place. Against that, you have more costs to get that done, and you have the changeover in Mack in the quarter. So that seems straightforward, but it should be very good for pricing on the new trucks, I would have assumed. And I'm thinking about the phasing, are we talking 3%, 4% price hikes? And for those to come through, maybe late summer? And then separately, looking at the second quarter where we are right now, we will have the previous bottlenecks annualizing. We have the launch of the Anthem in the quarter, not Volvo. So shouldn't the drop-through improve already quite a lot this quarter as we no longer have the burden of the launches and changeover in Volvo?

[Martin Lundstedt]

Okay. First of all, when it comes to the pricing, obviously, we will not comment exactly on that, Klas, as you can understand. But what we can say is that at least, we have both a good market and we have introduction of products at all, so to speak, well-received. It should -- I mean, we should see that during the course of the year in North America as well. And then when it comes to your analysis about, so to speak, the drop-through and the gradual improvement of the year, I think also, as we were writing in the CEO comments that this is, of course, the highest focus since we have been pretty clear also that the quarter 1, in many cases, was a transitional quarter. We said that already in quarter 4. And then in order to, I mean, to show that this is the case with underlying profitability still maintaining the truck business, we should see, I mean, somewhat [expected] factors fading away already during this quarter absolutely.

[Klas Henrik Bergelind, Director]

Then I had a question on the self-help because these bottlenecks and launch costs have always meant that the focus on the self-help in Volvo has almost been forgotten in the discussions we have with investors. Could you just update us on where we stand on the service penetration on more repair and maintenance in Europe, the turnaround of UD Trucks, the strengthening of Renault and the lean concept? You're very productive in Europe, but you still have to do more sort of elsewhere. If you could update us, Martin, on the underlying margin development in Volvo Trucks in particular?

[Martin Lundstedt]

Yes. I think to your point, Klas, I think it's encouraging to see the business areas on the Trucks side that didn't have the same type of [the exchange of activities], I mean, both UD and UD value. And Renault actually had -- continued to have a positive development, and that is very encouraging, obviously. And also, I have to say, when we look at the underlying improvement in, not at least in the industrial system for Volvo, [we're still average], but with the, so to speak, [ distributors ] as we have. But the reason why I say that, for us, it's very important that we are, and I think we talked about it also in quarter 4, that we are seeing what is what in this market situation with high pressure then on the value chain. But also, changeover, that is a big effort, so to speak. So I think from that standpoint, nothing has changed in our beliefs on what we can see in continuous improvement.

[Klas Henrik Bergelind, Director]

Good. My final one is on services. It's a tougher comp, but Trucks still did 6%, and growth in Construction Equipment was very strong at 12%. Can we talk about which regions that drove this growth? Last quarter, the 9% growth in Trucks was owing to that Europe sort of accelerated on top of North America, increased penetration of service contracts. Did Europe continue to accelerate quarter-on-quarter in the service business there? Is the self-help sort of coming through?

[Martin Lundstedt]

No I think, to your point, sorry for not answering that question. First of all, I think those are, by nature, also the main regions. And when you have the improvements there, you -- they are coming [in through and bigger] figures. But also, to your point, for example, in Japan, we see good development on that piece and where we have also strong assets with very high presence, for example, in the dealer network. And there, I think, you, Joachim and the whole gang has done a great job on really putting focus on the service business and, obviously, also in North America with the high activity level. So that is a little bit across the board. Obviously, activity level has been important to continue to drive this increase in services, but also continuing to drive, for example, service contract penetration step-by-step in all regions. So it's a mix. And you can say, okay, 6%, good. I think everything about 5% is still, I mean, a good pace that we are pacing. And we had 9%, and then it was a little bit on days. But still, 6%, I think, is okay, actually.

[Operator]

We now go to the line of Graham Phillips of Jefferies.

[Graham Phillips]

My questions, the first of all, really on Volvo Europe. And we saw the decline in orders of 7%; the deliveries were up 9%. How should we think about that in terms of the impact on margins? Because going into the delivery of these lower orders, this, no doubt, is your highest margin product of Volvo Europe. And given they're your targets, Martin, of 10% through the cycle, I mean, how quickly do you think we can get to that within Trucks? I mean, obviously, Construction Equipment is shooting well above that, but obviously just focusing on Volvo Europe.

[Martin Lundstedt]

Yes, I think -- and Jan, please add here. But again, as we said, I mean, we came into this year with a very strong order book in particular for Volvo Trucks in Europe. And when we look into, so to speak, the distribution of volumes moving forward here, we still have a good proportion of our volumes in the industrial system and also for shipment and a good -- I mean, good, but I mean, a reasonable mix of that. So you should not think about that, that is diluted due to the order intake in quarter 1 because you need more or less to take the average between quarter 4 and quarter 1, that are given, so to speak, a little bit of what Hampus said about the pre-buy, if I put it like that. So that is on number one. Then when it comes, obviously, to the financial targets over the cycle, I think still, yes, 8.8% somewhat you can [actually] talk about, I mean, a disappointment, what is what in this, et cetera. But when we look to the underlying performance, take away some of the extraordinary items that we have had now and also, I mean, even if -- that is nothing that we should talk about because that will be part of, so to speak, the full cycle in the financial targets. But for a specific quarter, when you have a headwind of SEK 500 million only, that is, so to speak, the whole delta between the previous year's margin and this year's margin. I mean that we should have extraordinary. So I think you should think about what is what here when you are reflecting a little about the quality of the 8.8% and the possible upsides you have from that, so to speak.

[Graham Phillips]

Okay, understood. And I guess, so just playing to my second question is around the supply chain issues. I mean, it's been a couple of quarters now. I mean, what reassurance can you give us that you, as a management team, are tackling the big issues in there? And obviously, the model changeover is different, and I can see that as sort of a more of a very occasional cycle issue. But in terms of what are the main components, I mean, you talk about stuff being up in the air or still sitting on both. But I mean, one must be looking to this running onto 6 to 7 months now that we must be starting to think that there are some serious issues with some particular suppliers. You may not want to point a finger, but it would be nice to know what the main problems are here and what you've done to actually get on top of those issues.

[Martin Lundstedt]

Graham, I think also here, I would like to say that you're absolutely right in the way that this is a continuation of, so to speak, an area where we have been talking about as one of the barriers where we have had the higher cost, et cetera. Having said that, I think it's super important also to understand that a lot of improvements have been done since quarter 2 when we started talking about the last year. Otherwise, it should have been impossible to improve deliveries with 17%, for example, on a global scale, while also doing, so to speak, the changeover at the same time. So I think we need to have, as a starting point, that continuous improvements are happening here. Then obviously, when you are taking away bottlenecks, new ones are coming as, so to speak, that determine -- the factor that will determine what is, so to speak, the possible output. I think the question for us is, how should you think about and plan the balance of the output that today should -- if we could do it in a good way, be even higher, given the demand and on the other side, not to put in volumes that will further, so to speak, accelerate costs or other items, like, for example, delivery promises; or I think even more strategically build in too much of fixed cost into the system, given the fact where we are in the cycle. So here, it is the balance. And then you have the second balance on that also with the service market logistics, where a number of the components are all stretched also are going into that. So having said that, I see improvements. We are working on it. Now it's more or less where should we be when it comes to, so to speak, the increases in the demand in relation to where we are. I mean, we can do it a little bit more simple from our side and say, we take it down with a couple of percentage points. That will improve margins short term. But is that a good way to do when you have the market demand and the penetration? I think that is also something to think about. We are -- I should not say we are happy. We are not happy. We are working hard on this. But I'm not -- I'm happy with the decision on the balance we have taken so far, if I put it like that.

[Graham Phillips]

Okay. And finally, just clarifying one point that Jan made about the foreign currency. Maybe I misunderstood, but there was some comment about a SEK 1.5 billion positive expected for the year. What was that comment when you were talking about the currency impact in the first quarter?

[Jan Gurander]

The first quarter was a negative of SEK 730 million. You have approximately a little bit more than SEK 200 million coming from the transaction exposure, and the remaining SEK 500 million is coming from what we call translation exposure, i.e., when you take profits in foreign subsidiaries into Swedish krona. That's one part of it. That's another SEK 200 million. And SEK 300 million negative comes from when we reevaluate payables and receivables to the currency rates that you have at the end of the quarter, and that's another SEK 300 million. So that is the composition of the different types of exposure in the first quarter. Looking for only the transaction exposure, we say that the transaction exposure, as it looks right now with the present currency rates, will give, for the full year, including the first quarter, SEK 1.5 billion approximately in positive on the transaction side. We don't give any forecast on the translation side because that's so complicated also for us to do actually, especially on the receivables and payables side. So we only give a forecast on the transaction side.

[Graham Phillips]

Okay. SEK 1.5 billion positive, okay.

[Joakim Kenndal, Communications Director]

Okay, one more question from the telephone conference.

[Operator]

Yes, and that is of the line of Erik Paulsson at Pareto Securities.

[Erik Paulsson, Analyst]

This is Erik Paulsson at Pareto. I'm just wondering how much do you see e-commerce volume in the underlying transportation markets and mainly in North America and Europe, affecting [our own] truck order intake? So are those seen now and also going forward? And is it possible to quantify this?

[Martin Lundstedt]

Yes. I think this is one of the elements what we see that is gradually changing also the dynamics and the nature of the logistic business in, yes, in Europe and in North America, but also in Asia, to a bigger and bigger extent. And that is also the reason why I say that, I mean, if you see normally, maybe we should be at the underlying trend midpoint, maybe up to 275,000, 280,000 in Europe. But I think there is actually something more there. And we have done some analysis on that, but a little bit early to reveal that. But I think you have a point here that there is a dynamic that is pushing, so to speak, the whole trend line a little bit upwards, actually. I don't want to stick out the neck and have a figure before feeling a little bit more comfortable, but we are working on that with our connected solutions to see what is what here.

[Joakim Kenndal, Communications Director]

Okay, we continue here. Yes?

[Mats Liss, Equity Research Analyst]

Mats Liss, Kepler Cheuvreux. Just a couple of questions here. First, regarding Construction Equipment, there, you had an excellent operational leverage, I guess. And going forward, do you have some orders to deliver? Should we expect the same leverage? Or do you see bottlenecks or capacity utilization running a bit on the high side now?

[Martin Lundstedt]

I think, if anything, as we said, I mean, Construction Equipment started with a considerably lower capacity utilization in the whole industrial system and including, so to speak, the suppliers. Having said that, because often I think they have done an excellent [journey] of really keeping a good cost control and also working, so to speak, with the means that they've had, what we see now is, if anything, a little bit coming in some of the flows, but nothing similar to the Trucks side, but some of the most popular product ranges that we are getting closer, so to speak, to a very high capacity utilization. But still, I think they are managing it in a good way. And as you can see, we also have a better balance between orders and deliveries, so to speak. So even if it has been a strong uptick, the book-to-bill delta is less and, therefore, we can manage that in a good way.

[Mats Liss, Equity Research Analyst]

And then coming back to the FX impact, the SEK 1.5 billion. Should we expect that to be spread evenly during the remainder of the year, and maybe you can sort of, well, indicate between the business areas there?

[Jan Gurander]

I think it would turn more and more gradually positive during the course of the year. And when it comes to different business areas, I think it's probably pretty same effect, big picture, same effect in all business areas, with the exception of Buses that always sits in a perfect currency storm with interesting currencies like Indian rupees, Polish zlotys and a few other things that we don't have in the other business areas. But apart from the perfect currency storm in Buses, it will be the same trend in all the other business areas.

[Mats Liss, Equity Research Analyst]

And finally there, a question about, I mean, the margin target and the mix you have currently. Is it possible for you to sort of reach the 10% with the current equipment service mix?

[Martin Lundstedt]

Yes.

[Jan Gurander]

Yes.

[Unknown Analyst]

Just a question on the -- on China. On the car side, they just now reviewed their JV structures, just to get in more electrification and access to kind of the global efforts here. Those arguments would, I guess, be relevant for trucks as well. How do you see that coming? And yes, can you update us on your presence there?

[Martin Lundstedt]

Yes. I think, first of all, that came now a couple of weeks ago was the announcement is to say that order from this year, obviously, if you're fully electric that they will release, so to speak, the requirements on the JV structure. And then also, in the same, so to speak, announcement, it was said that commercial vehicles 2020 and the past cars as from 2022. And obviously, this is, I think generally speaking, is good news because we as, I mean, a global company present in 190 countries, we are actively always working for not having this type of threshold when it comes to ownerships. Having said that, we are starting with, I think, a strong footprint already what we have today, both on the Trucks side, given the fact that we have the joint venture with DFCV. I have to say we have a positive development there, a gradual improvement of the quality of the business, maintaining the market share with very high output and also doing some changeovers now when it comes to products. So it's a good starting point. Even if it's early days, I think we are investing a lot of time there to really make sure that we have good position. But also on Volvo Trucks, obviously, we see a positive development on the more advanced segments, not at least, and as we talked about e-commerce here, where we have a strong market share of almost 30% in those small, so to speak, just-in-time flows that are evolving much more quickly than we have seen before in China. And then having said that, and then as we talked about, SDLG and Volvo Construction Equipment, we have a strong presence. So we have a good starting point. But obviously, those announcements are also opening up for further, so to speak, ideas.

[Joakim Kenndal, Communications Director]

Okay, I think we have one more questioner from the telephone conference.

[Operator]

We are over to the line of Markus Mittermaier at UBS.

[Markus Mittermaier, Co]

Just one quick question as a follow-up on the bottlenecks and the basically cyclical demand versus long-term trend that you've alluded to. So what's the level of confidence on the long-term trend issue if you say that this might be moving up, you're still working through the details that you can particularly, in Europe, work through that with your current capacity levels? Because I think you are, correct me if I'm wrong, but I think technical capacity probably 100% in Europe. And associated with that, what's the capacity utilization levels in the U.S. at the moment at the current production level?

[Martin Lundstedt]

Yes, first of all, I think, as we said, and we have also said a number of times that when it comes to the industrial footprint in Europe, obviously, we are on, you can say, 100% utilization level. That, I think, is not to over exaggerate where we are. Having said that, we have also been clear on that, we have the right type of footprint. So now when we are, so to speak, looking into how to expand capacity, and we are doing that step-by-step, we can do that in existing footprint by, so to speak, taking out certain bottlenecks. And that is our strategy also to have a good balance in our, so to speak, PPE flows between CapEx and depreciation. And we find that to be trying to do that and, obviously, then to continue to work with also our resourcing structure. So that will happen step-by-step, but in a way where we are using our industrial footprint. In North America, it's a little bit more difficult to say right now because -- and not difficult, but I mean, for Mack obviously, we are still in the ramp-up. So there is more the ramp rather than the technical capacity that is putting the pace for Mack in particular. And then, obviously, some of the flows that we have are global and that we are also working and that is, in particular, on the powertrain side. But with the same type of strategy, as I said, for Europe that we are using the existing footprint that we have.

[Jan Gurander]

And I think it's fair to say also that the bottlenecks are very much when it comes to our powertrain side, I mean, we have a huge success with our AMT. So when markets go up, we have higher take rates on the automatic gearboxes. We are at record levels today [indiscernible]. We have never been higher, and that means that we have some bottlenecks internally. But when it comes to assembly capacity for Trucks, I mean, there, we don't have any problems at all. So what we are working with now is actually to take away the bottlenecks that we have mainly on components, machining and so on for powertrain mainly on the gearbox, but also some of the engine families are doing fantastically fine, which is a good sign that we have very, very high performing components into our trucks. We also see then that to get -- I mean, there are a lot of industries that are doing fantastically fine and have high demand levels. So to find casted material, to find forged material, to get it into our factories for machining, that's where we see also the bottlenecks. But it's not the whole industrial system on the trucks side.

[Martin Lundstedt]

No, no.

[Joakim Kenndal, Communications Director]

Okay, I think we are ready. Then I just want to thank you for coming to this press conference and presentation. Thank you very much.

[Martin Lundstedt]

Thank you.

[Jan Gurander]

Thank you.

[Operator]

This now concludes today's call. Thank you all very much for attending. You may now disconnect.