Volvo AB

STO:VOLV B

Earnings Call Transcript 2021-Q1

[Claes Eliasson]

Ladies and gentlemen, my name is Claes Eliasson, and I want to wish you welcome to this press conference and analyst meeting covering the first quarter 2021. We will, as usual, be listening to a presentation by the Volvo Group President and CEO, Martin Lundstedt, followed by a presentation by Chief Financial Officer, Jan Ytterberg. When done, we will open the line for a Q&A session, where it would be sweet if you could limit your questions to 2 in order to make more room for as many of you as we can. All right. The ground rules is set. And by that, Martin, I will hand over the presentation to you.

[Martin Lundstedt]

Thank you, Claes for that. And also from my side, welcome then to this call covering the quarter 1 performance of the Volvo Group. And this has been another quarter that has really been characterized by both performance and transformation by the group performance. Of course, what we see, and you have probably seen that in the report also a strong customer demand, both on new and used vehicles as well as services. As we have also communicated, following that very strong demand that we have experienced certain supply constraints and stock base on the truck side, and a little bit more also in quarter 2 that we will cover later. But despite the challenges, we delivered a record margin for the group and also seeing a strong development in all business areas, also including buses, I have to say that is very much related then to the restrictions on travel, et cetera, but when it comes to the cost control. On transformation continue to be forward-leaning, taking a number of very important steps when it comes to partnerships in areas where we are complementing -- we have complementing strength in order to do the transformation into fossil free and more safe and productive transportation systems. So I have to say, and I think I speak for all of us at all in the room here, Jan and myself and Christer and Claes. I mean there is not a dull moment in this industry. There is something happening. But from that perspective, of course, the underlying trends are very positive. So if we go to the summary of the quarter, as I said, high activity levels among our customers and thereby also the strong underlying revenue growth of 13%, if you take away currency effects. Adjusted operating margin increased with 4.8 percentage points to a record level of 12.6%. Just that maybe out of curiosity, it was 12.5% in quarter 2 of 2019. And we also achieved a strong cash flow normally rather weak quarter 1, but a strong here with almost SEK 6 billion positive. And the return on capital employed of 17%, of course, then 12-month rolling, including the very weak quarter 2 last year and a rich balance sheet in 2020 also. But also, as I said, we have continued to pave the way for the transformation of our industry through a number of important steps, strategic partnerships, but also launches of new products. Partnering with out water innovation of hub-to-hub autonomous solutions in U.S., complementing our already strong partnership with NVIDIA partnering with Daimler on fuel cell and the hydrogen economy, also important to complement the battery electric executions. Our joint venture is operational now. And also, of course, the very important strategic alliance with Isuzu also following the transfer of duty trucks into Isuzu where I have to truly thank our, I have to say, previous colleagues about future partners in UD Trucks also for a fantastic job over the last years and quarters, handing over UD Trucks in good shape, strong momentum and thereby also forming a very good platform for the future together with Isuzu. When we look into the deliveries of trucks, it was growing with 16% year-over-year with strong developments in all regions and not at least with the positive momentum in the important regions for the group of Europe and North America. Volvo Construction Equipment also had a very strong quarter, deliveries of 31,000 units. Of course, very much on the back of the spring season in China, but also that we see dealers in Europe and North America are gearing up for their spring season that is now occurring in quarter 2, and deliveries were up with 53% year-over-year. Then we also have some highlights and a historic milestone for our industry. Following our ambitions and announcements on the Capital Markets Day, where we have been talking about, I mean, the importance of transformation that we're getting everyone on board and that we are transparent about how the movement into fully electric vehicles and equipment are going. We are from now on disclosing orders and deliveries on fully electric equipment to bring transparency of the ramp-up and also to bring, if I may say, is a positive pressure to all of us when it comes to this very important transformation. It's about, of course, us together with customers and customers' customers, but it's also about the infrastructure build-out. It's about green generation of energy. It's about the grid capacity and other things. So here, we really wouldn't like to put stick in the ground now and talk about that in full transparency. In addition to these figures, we are also, of course, continuing to sell solutions when it comes to hybrid solutions, primarily on the bus side. And they are not included in these figures that only relates then to fully electric vehicles and equipment. Then I can also mention because I will talk about that later that the Volvo Trucks side have just launched also the sales start of the heavy part of the heavy-duty segment for FH, FM and FMX. And we are already now opening the books even that we will start deliveries on the second half of next year. And that is related to the fact that, that it takes time together with customers to really go through the need of charging an infrastructure, et cetera. Those figures are not included here because they are more seen as letter of intent so far, but we had very good interest and also letter of intent activities in that sector. But here, it is the commercial contracts. It is what we have in the order board. It is what we have in commercial deliveries and not pilot deliveries. So this is the serial production of our different ventures. And as you can see, still relatively small figures, but it will gradually become bigger and bigger for different segments and regions. And again, very important for all of us to be able to follow and to see that we are really doing this transformation and having a leading position. And we can also see that we have a positive development, I mean year-over-year from 9 to 171 units and also book-to-bill where orders are almost 2x higher than delivery. So this will be a very interesting part for all of us. We are super excited about the great interest on customers. And I can say also the quoting activity is very higher. If we move to service sales, also another news we have said also that we will include the financial services in our service sales that is natural. We are gradually moving into business models where more of the sales will be done as equipment as a service in the coming years. And therefore, we are including financial services. Since that is a very important part of the complete deal, not at least linked to the move into electromobility autonomous solutions, where you have the abatement between equipment, energy costs, repair and maintenance and the whole, so to speak, structure when it comes to cost per kilometer or when it comes to monthly installment or what have you. So we think that is also giving even better transparency in our journey towards the service targets that we have with the group. During this quarter, service sales grew with 5% adjusted for currency, which is again reflecting the high activity level among customers. We have had also on this side, of course, strain supply chains, but the organization is continuing to handle that way well together with our customers. Because trucking machine utilization is on par or above pre-COVID-19 levels. And we are also continuing to focus on increasing service contract penetration and duration. The Bus & Coach business continues to be severely hit, as we said, by the pandemic related to the extensive travel restrictions, mainly then for intercity bus travels as well as for tourism segments. But as you can see, VCE and Penta recorded very high increases of 12% and 20%, respectively. Moving to trucks market situation. The forecast here is based, as you can understand, on current visibility on both demand and supply. And the strong order intake will make the supply or make supply the decisive factor for some quarters as we -- when we are now trying to meet the demand step by step. And in this situation, we are keeping the full costs unchanged in relation to what we reported in relation to the quarter 4 last time with the exception of China. Europe and North America, we see a continued strong e-commerce trend, people working and shopping from home. There is a lack of truck transport capacity resulting in strong fleet utilization, low inventories of used vehicles that further drives demand on new vehicles. And it is, of course, still early days in 2021, and it's difficult to assess how the supply ramp-up will be time-based here now. We are currently not planning for any further adaptations of the plant production. As previously announced but visibility is still low, of course. So our market forecast for both the Europe and North America remains unchanged for -- at the 290,000 for both regions. Brazil, we see an export movement due to the devaluation of the Brazilian real, but also, of course, record harvest in 2020 that the prices of raw material, very important for the Brazilian economy and thereby transport needs. Forecasts haven't changed at a good level of 95,000. India, truck market continued to regain momentum on the back of increased freight volumes, infrastructure development and pent-up replacement need, could be disturbed, unfortunately, by the next wave of the pandemic in India, but the forecast remains unchanged also here. And as I said, in China, subsidies for replacement of vehicles with CN3 emission levels or lower them, drove the heavy-duty market or heavy-duty and medium-duty market, I should say, to an incredible 95% growth in quarter 1. And as a consequence, the forecast down is upgraded with 140,000 units well up to -- almost 1.6 million units. Very strong book-to-bill during the quarter and, of course, reflecting again the high activity levels. Orders increased with 126% year-over-year and deliveries with 16%. We see a particularly strong book-to-bill situation in North America and Europe, as you can see on the graphs here, resulting in an order book that is on all-time high level. As we have communicated also this steep increase of demand, this very positive situation have led to planned production increases in several steps that we have done with more and more stream supply chains as a consequence. That is, of course, normal. But we have also seen that the semiconductor shortage has led to planned than 2- to 4-week production stop in beginning of quarter 2, and that is still the plan. We do not currently plan further stop this, but visibility is low. It has improved somewhat, but still low if you compare to normal planning horizons. And the gradual production increases that are needed to meet the very positive demand and to execute the order backlog is, of course, the highest priority and will continue to be a balance between production planning and supply situation to really utilize every single situation at the limit from a positive side. When it comes to market shares in Europe for Volvo and Renault, it was flat versus 2020. Volvo stayed at a good level of -- a little bit more than 17% and Renault and 9%. And in North America, Volvo Trucks has gained share gradually to 10.3%, whereas the Mack is rather stable with 6.6%, a small decrease here in the beginning of the year. Market share in Brazil was almost 21% compared to our normal levels of 22%, 23%, and it's mainly related to low levels of ready trucks in the pipeline here of income inventory into the year. We have also in Brazil, a very good order book and all focus here also is on executing. Australia, coming in also with the same situation, low inventory into our vehicle operations and thereby longer lead time, but strong momentum. And for UD, as I said, we had a very strong finish by the UD team in the Volvo family context with increases across all key markets a lot of this is in Japan with a market share of 17%, so a very strong achievement. And finally, as I said, still relatively small numbers, but the electric heavy-duty down about 16-tonne market share in Europe, so heavy and medium-duty and market share in Europe is 53% combined for Volvo and Renault. We are also proud of several important news during the quarter in the truck segment, broadening the electric offering in Europe into the upper parts of the heavy-duty ranges, both for Volvo and Renault. As I stated, we have now started sales for FH, FM and FMX that is really, so to speak, the core heavy-duty segments with the deliveries to start in second half of 2022. Renault Trucks have also announced their road map for the upper part of the heavy-duty segment with their electric product offering from 2023. And the potential is actually very interesting because when we look at our connected fleets and coverage on daily mileages and ranges, et cetera, we see with the right type of build-out of infrastructure, planning together with customers, we can actually with those news now which cover up to 50% of the transportation need over the next couple of years here. And as I said, there is a broad customer interest for related trucks in Europe, both on transport operators, but also transport buyers. And we are really looking to -- forward to continue to reduce together the CO2 footprint and to take the full benefit of this fantastic offering. Volvo Energy, as we have started to be operational during this quarter will also play a very important goal in transformation. The fuel cell joint venture, hydrogen or fuel cell electric vehicles and the development and production of the fuel cell stack together with Daimler under the joint venture name of Cellcentric, also a great start operationally as from 1st of March. Very important signal, obviously, that it will be a very important complementing factor II battery electric and fuel cell electric vehicles in order to do the transformation. And Volvo Group also broadening their technology reach in autonomous vehicles by cooperation on the hub-to-hub on-highway applications with Aurora innovation, complementing our strong collaboration with NVIDIA also. So we have a very strong setup now when it comes to the autonomous solutions, 4 different type of segments, regions and customer applications. Moving into Construction Equipment. The forecast also here, of course, is based on current visibility on both demand and supply. But having said that, it is a very strong momentum in all regions. We have done changes to the market forecast since last quarter in a number of regions. For example, an increase of 5 percentage points in North America of the total market, 10 percentage points in South America. And 5% in Asia and 10% in China. Maybe I have to comment on China. The Chinese market is currently difficult to assess due to the stimulus impact on the market size. Quarter 1 was very strong again, but we still estimate that the second half of the year similar to the truck side will cool off. And we also judge that to be healthy if that is happening to avoid a bubble, given the very strong development that we have seen over the last quarters here. On orders and deliveries, the same here. We see strong construction and infrastructure activities across regions and markets. VCE had a positive book-to-bill despite a strong increase of deliveries of 53%. Of course, very much related to China, but also in other regions. Also in these segments, there is a good fleet utilization among our customers and not at least in mining. As a result of the positive development, we have low dealer inventories and pipeline. And Volvo CE has not been as affected as trucks with regards to supply shortages, for example, semiconductors. Buses continue to be very difficult, impacted by COVID-19 with the restrictions on travels and tourists, but also in certain cities on the public transport systems. Order decreased with 68% in deliveries with 26%. So the most impacted product segment is cautious with very low fleet utilization and also the timing service businesses we talked about earlier here. But I have to say that Volvo Buses is doing a very good job keeping costs to a minimal, which will serve also as a good platform when we gradually will move out from the pandemic and restrictions will gradually be taken away here. Also an important order with the newest execution of the hybrid buses, the 7900 with S-Charge. It's a very interesting self recuperating technology and also including with a very smart soon management system where you can decide for the CR emission zones and the 0 noise zones, et cetera. So very innovative and promising. And the first larger order here is for 64 buses to Belgium. So again, another important proof point. Penta, the segments of marine, leisure, industrial, off-road in particular, but also to some extent in other segments showed good growth. And in total, the orders, we did see an increase with 27% and deliveries with 7%. We are also in this segment, utilizing the platforms and technologies and innovation of the group and doing specific adaptations to core segments of Penta. Here, you see together with TICO the largest terminal tractor fleet owner and operating in North America, where we are really working in close collaboration to develop the next platform. Emission-free and fully electric executions on terminal tractors. And on the final note, Financial Services, also solid performance, resulted in record new business volumes for the quarter 1. Finance units on a 12-month rolling period exceeded 63,500 units, a great cooperation with all other business areas, as I talked about before, the importance of that. And the penetration for Financial Services, 12-month rolling was 31%, and that is the highest rolling 12-month penetration ever. And we also seen that a good activity level is resulting in improved customer profitability, stable portfolio performance with the lower rates of modifications, credit provisions and write-offs. So with that, Jan Ytterberg, I'll hand over to you for the financial update.

[Jan Ytterberg]

Thank you, Martin. So yet another quarter with impressive leverage as volumes are high and cost controlled good. There were negative effects on deliveries and cost in this first quarter due to shortages in general, COVID outbreaks and restrictions as well as weather-related issues in North America. The first quarter last year was, on the other hand, negatively affected by measures to halt the pandemic outbreak. And the last days of production were on a similar level between the quarters. COVID-19 as such, in combination with supply constraints core for continued cost and cash cautiousness. Moving over to net sales for the group, they increased by 3%, but adjusting them for currency, net sales increased by 13%, the Swedish krone has appreciated against all major currencies compared to last year, but the weaker U.S. dollar and Brazilian real effect more substantially given the combined FX effect on net sales of close to SEK 10 billion. And as a consequence of FX, as you can see, both North and South America had lower net sales despite increases of vehicle deliveries of over 20% and close to 15%, respectively. Region Asia was positively impacted by the increased machine deliveries and partly to an improved truck volume. And China was the main contributor behind this. The first quarter last year, as you remember, was negatively affected by measures to halt the pandemic in China. And if we move over to the group's earnings, high volume of vehicles and services in combination with good cost control, that is a prescription for strong earnings. The adjusted operating income increased from SEK 4.7 billion to SEK 11.8 billion, and we had a margin of 12.6%. And it is comforting to see that the substantial part of the improvement of earnings comes from what we can call own achievements, mainly related to cost, but also to prices and then mainly related to services on that side. And only to a minor extent, actually comes from what we can call market-driven effects like the increased total market demand. And of course, also, we have a negative FX effect. There have been from raw material have so far had limited effect on earnings. Focus for us now going forward is to accelerate ambition and activities in certain areas like R&D, while maintaining the cost discipline. There was a negative effect coming from market and product mix in the quarter, mainly related to Construction Equipment, but also to group trucks and Penta and have been from FX continued and it was some SEK 1.1 billion negative this quarter, reflecting then, once again, the stronger Swedish krone in general and the weakening dollar in Brazilian real. Transaction effect for the full year 2021 is now expected to be close to 0, provided present FX rates, and we do not provide forecast for the full year FX on operating income for 2021. Moving over to the cash generation. Martin was into it. First quarter is a seasonally weak cash flow quarter when working capital is being built up for a stronger second quarter as regard deliveries despite this operating cash flow in industrial operation was SEK 5.7 billion in the first quarter. The quarter was negatively affected by shortages, which impacted inventory negatively. We saw a higher sequential machine deliveries. And of course, that affected receivables negatively, but this was offset by increased payables, reflecting the high production pace. We continue to be on historical low or very low inventory level on used vehicles. And as regard net cash position in industrial operation, it was some SEK 75 billion here in the end of the quarter, i.e., on the same level as the end of 2020 as the positive cash flow effect in the first quarter was offset by the payment for the shares for 50% of the fuel cell joint ventures Cellcentric. Moving a little deeper into the segments then, starting with group trucks. So for them, yet another quarter had some 13% margin for group trucks, where all truck business areas contributed positively. Adjusted operating income, some SEK 7.5 billion, an increase of SEK 3.6 billion compared to the first quarter last year despite the headwind from currency. And the same explanation of improved adjusted operating income as for the group was valid also here for our main segment, the group trucks. But besides improved volumes and good cost execution, we shall mention the improved JV income, mainly related then to Dongfeng, which had a strong delivery quarter, whereas the first quarter last year was heavily affected by restrictions or the pandemic in China. Used truck business have improved substantially across our truck brands and are now at historical good levels. The negative effect was related to a comparably lower share of Volvo-branded trucks related to moderate increases of deliveries in Europe and South America reflecting the halted production due to shortages in Europe and COVID restrictions in Brazil. The increase of heavy-duty vehicle was lower than the increase of medium-duty and light-duty vehicles, and that had an impact on product mix as well. Moving over to Construction Equipment, where we have a sharp increase of deliveries of 53%, mainly then related to SDLG and Chinese market, even if we see increases across the regions and that limited the increase of FX adjusted net sales to 34%. The first quarter last year was negatively affected by the restrictions for the halted pandemic in China. That's why we see these big differences besides a strong market as such in China. Service demand and revenues continue to improve, reflecting the higher machine utilization. Besides the positive effect on earnings from higher volumes, the capacity utilization improved and the cost execution of indirect expenses impacted positively. Whereas the mix impacted negatively with high Chinese deliveries where gross margins are lower than average and where the price competition is fierce. FX impacted negatively by SEK 0.6 billion, and adjusted operating income increased from SEK 1.1 billion to SEK 3.8 billion, giving a margin of historical high 15.4% for being a first quarter. If we move over to buses, what I call the survival of the fittest rate continues for the bus business as demand is -- still is hampered by reduced personnel mobility around the globe and bus fleet standing idle also here in the first quarter. This affects service revenues, and this affects deliveries of new buses where the coach and tourist segments are especially hurt. And as a consequence, capacity utilization was low, but cost execution on selling admin and R&D was strong. So adjusted operating income was just below breakeven for this quarter. For Penta, demand and volumes of both engines and service continue to increase. For engine deliveries, this was related to the industrial segments, particularly in Brazil and China, whereas increase in service volume was most pronounced in marine-leisure segment and in North America due to the early start of the preparation for the boating season. Improved volumes together with good cost execution in R&D selling and not being contributed positively, but partly offset by negative product and market mix with more of lighter engines and more of sales in South America and Asia as well as a negative FX effect of close to SEK 100 million compared to the first quarter last year. All in all, an improvement of adjusted operating income of SEK 135 million to SEK 643 million, giving a historical good margin of 18.9%. And coming into the last segment, Financial Services, adjusting for currency, new retail financing and credit portfolio were higher than last year as deliveries and market penetration on customer finance improved. Customers' payment ability and payment performance improved and write-off levels were low, except for certain bus customers. And as a consequence, credit provision expenses were normalized here in the first quarter this year. Credit reserves for potential future credit losses is kept conservative and stable, in the first quarter last year, the credit provision expenses increased substantially, reflecting at that time, the increased modification request and general uncertainty related to COVID-19. All in all, adjusted operating income improved from SEK 75 million to SEK 682 million besides the lower credit provision expenses, the portfolio growth contributed to the improvement, which was partly offset then by a negative FX effect of some SEK 115 million. By that, Martin, I ask you to sum up.

[Martin Lundstedt]

I think we have gone through all the different things, as we said, both as regards to performance and transformation, a very important and big quarter for us. Very proud to see that the organization is continuing to drive the agenda as we have decided to do together strong decentralization, customer focus, strong execution capabilities together while also having the eyes on the horizon of the transformation and leading that way also to a fossil-free society. I think, just in summary, strong good quarter and very interesting times ahead. If I may say that in a humble way, we're all proud.

[Claes Eliasson]

All right. Thank you, gentlemen. Let's open the line for the Q&A session. And operator, if it will be the time to please let the first question through.

[Operator]

[Operator Instructions] And our first question comes from the line of Hampus Engellau from Handelsbanken.

[Hampus Engellau, Automotive Analyst]

Two questions from me. If we're looking at the second quarter with the planned production stops, could you maybe talk a little bit about how you will handle like will you use time banks? Or will you take temps off or how to manage that? And also related to that question is, what we've seen from some of the car OEMs is that they will continue to take deliveries on sub suppliers given the risk and shortages we see during the beginning of this year and also for the rest of this year. And my thinking is on how will working capital to develop for you guys in the second quarter. Will you continue to take the delivery even if you stop production in terms of spare parts. And then the last question is basically -- is also related to this and it's on the order bookings. When we see this big book-to-bill and lead times, I guess, are creeping up here. Can you maybe talk about how you kind of recast your order backlog and I think about that going forward?

[Martin Lundstedt]

Thank you, Hampus. Yes. And I can say on the first question, when it comes to handling the -- as we have stated then the 2 to 4 weeks depending on region and depending on assembly plant, et cetera, that is handled in different ways, depending on what local contracts we have, exactly to what you said about time banks about other type of flexibilities and very much depending on where we are operating in the world. And I think that has been a good thing for us also when we looked about the situation coming up here that we took a deliberate decision to actually take a step back, get things in order because that is getting better control of how you operate with this Isuzu. And that is also relating to your next question, meaning that of course, we are continuing to make sure that we all, so to speak, filling up. That will have a certain effect, but we asked that to be very much under control and very important for us, of course, because again, as to reiterate the situation. We are in a positive momentum when it comes to orders. We have a strong order board. And of course, we would like to execute together with our customers as quick as possible and to maintain a good flexibility to meet that. But to do that in a controlled way. I think that is also based on quite some years of experience for many of the leaders that is better to do it in a controlled way, don't panic in a very steep upturn. It's a normal situation that you will see supply constraints, but still also refi both for services and for new products. And that is bringing me into the next one. I think 1 very important thing that we did during last year was going through the order book and started almost in quarter 2 and quarter 3 from 0 again. So even if it has been filled up to a very high extent, we have also had the conversations, obviously, with the customers on how they look upon the deliveries and delivery lead times, but, of course, Hampus, and we know that this is a high priority to have a close look to the order book in relation to strong order bookings when it's extended out in time, how certain different things on, but we feel confident about the methodology that we have.

[Jan Ytterberg]

What I can add on the working capital side, as I mentioned, when we talked about the first quarter and production stops, et cetera, we already had an effect related to what you were mentioning Hampus on the buffering of certain parts and components in that quarter.

[Claes Eliasson]

Next question, please.

[Operator]

Our next question comes from the line of Klas Bergelind from Citigroup.

[Klas Henrik Bergelind, Director]

Yes. Martin and Jan, it's Klas from Citi. So 2 questions, please. Sorry, I was a little bit late on the call. There's a lot of things going on this morning, but maybe you touched on this already. Just on the bottlenecks again and the production levels. Am I right to assume that in Europe and Brazil, the visibility on the final demand is better than in North America. And therefore, we shouldn't see any major cancellation risk and given the strong demand that you have out there and that you might be able to catch up during the summer using the normal summer shutdowns on the loss production here in April. But it's with the information you have right now, of course, we can change, but given the supply situation that you have now, Martin?

[Martin Lundstedt]

First and foremost, I should say that when it looks -- when we look to the order books, including North America, as I have said, also Klas, I think we feel rather confident that the order books are call it to join in a way that we had a good starting point of this need ramp up. And when we have field, we have been launched also during the last quarter to have very close discussions with our dealers and customers about the situation. So that I think we feel confident about the order book quality as such. They're not obviously when the order book is increasing with the pace it has been doing now. It is higher sales to execute on that. And therefore, I think it's very important to come back to the fact that we were in a ramp-up mode, obviously. That is normal that we are meeting certain supply constraints. It has been more obvious with this steep increase. And with the coordinated uptick of a lot of sectors, not only in mobility and commercial vehicles and construction equipment, for example, semiconductors. And to that assumption, I would say that we are, of course, not guiding on that more than saying that it felt very good for us to say also now that the decision that we took to halt to get things in order is what we have planned for and we have not planned for anything more than that. And now we are, of course, focusing on executing this as good and as quick as possible in an increasing market situation.

[Klas Henrik Bergelind, Director]

Very clear. Very clear. My second 1 is on dual production. And as you roll out the new battery range, and there is obviously a lot of interest from the customers and from your customers' customers. Will we see any margin impact from dual production. This has been a typical issue with the model changeovers across not only you, but other trucker wins as you shift over. Just trying to think whether it's different in battery electric versus conventional when you do the model changeover.

[Martin Lundstedt]

I mean, during this year, you will not see any marginal effect given that the starting point was lower. I think the more important thing for us is to be very transparent on this ramp-up overall. We have look like what segments or seeing the first transition, but also to speak, the reactions and also to really continue to push the whole society of doing this transformation now because it's going quick. And we have a very good industrial setup as we have discussed many times before, where we actually are adding now these type of products into the ordinary footprint through theme, the most as we have reiterated many times, fishbone structure where the preassembled are coming in. So from that perspective, the industrial footprint is not very dramatic, and we already also to cope with this demand segment by segment, region by region. But we need to be a realistic sales process is a little bit longer at the start, and that is not only related to the fact that you want -- you would like to test and feel the product in itself, but also to plan for depot charging and other types but great interest and a historic day-to-day, that this is now up and running as a transparent part of the transformation.

[Operator]

Our next question comes from the line of Tom Narayan from RBC.

[Gautam Narayan, Assistant Vice President]

Martin, Jan. Yes, Tom Narayan, RBC. So yes, I mean, it appears that the lower selling expense and R&D costs did lead to -- a big part of the EBIT margin beat versus consensus expectations in the quarter. If I apply Q1 '20 selling and R&D expense, I'm getting a margin of something like 10.5%. I know you can't really do that. It's not apples-to-apples, but that would be in line with consensus. Just wondering how sustainable these lower selling and R&D costs are or will be in the rest of the year and beyond. And then next, on hydrogen, we are already hearing about big contract wins from fuel cell suppliers like Plug with Renault and Symbio, the JV between Michelin and Faurecia with Stellantis and Hyundai. It's interesting. Initially, I had thought that OEMs like yourselves would be better advantaged here. But given that these suppliers are clearly making big wins, just wondering why wouldn't you and Daimler just use these suppliers to make fuel cells? Why do a JV just to make them only for yourselves, presumably, the suppliers might have better scale economics since you probably wouldn't make fuel cells and sell it to your competitors?

[Jan Ytterberg]

This is Jan Ytterberg, with sort of the indirect expenses and where we are and where we're heading. Of course, we took this crisis and we were going into a downturn, if we remember the beginning of 2020. So we already had planned to take down costs, and I mean it became even more imminent with the COVID-19 crisis to reset the structure and start from a lower level. I think we have done that. And as I said in my short speech here, the focus for us right now is to be able to add all the ambition and activities in certain areas like R&D. But still maintain the cost discipline in other areas, i.e., the indirect expenses on selling and admin, which -- look was a very important quarter. So that is our task right now, and let's see how successful we will be. But right now, this is where we are with everyone back at work and working with the COVID-19 restrictions we have, of course.

[Martin Lundstedt]

And on the second one, thank you for that very important question. I know that we have 2 questions on for the future here, which makes me extremely proud also. First and foremost, we are strong believers in hydrogen fuel cells as a very important complementary to battery electric vehicles, as I said, also based on the same electric powertrain, but then you have the different energy layers. And then obviously, when it comes to commercial vehicles, you need also to look into what are the requirements of that type of fuel cell that. And when we did go out to the opportunities, we did found technologies that we are now having in the joint venture, the leading 1 when it comes to performance. When it comes to the modularity of the building into commercial and heavy applications that we have in our loop. When it comes to scaling of production for that type of applications that we are sitting on. But also that 2 of the world's biggest competitors are actually partnering on the development and production of the fuel cell stack is a strong signal that this is part of the future that can bring volumes. And we have been very clear about that also that Cellcentric is open for any 1 to actually be buying and sourcing their equipment. So we are anticipating a great opportunity that others will actually also source from Cellcentric. We have already MPU overall goals on 1 of the -- this one, and that one is on. So we believe this is a great setup. It will bring competitiveness. And we think that is also a core component for our system thinking when it comes to fuel cell, electric and the whole service solution. So we are very confident about this setup.

[Operator]

Our next question comes from the line of Olof Cederholm from ABG.

[Olof Cederholm, Research Analyst]

It's Olof from ABG. I wanted to talk a little bit about the order intake. It continues to be at an extremely high level. Europe was amazing. Can you elaborate a little bit more on particular Europe? Could there be any sort of preordering going on ahead of sort of worries about component shortage and increasing lead times? And also on a general basis, are there open production slots for Q3 still? Or are you now taking orders for Q4? Or how does it look in that respect?

[Martin Lundstedt]

Thank you, Olof. No. I mean, as always, obviously, you need to be cautious and work close with both dealers and customers when you have a very steep uptick in the situation we are into now. But in all these type of situations, as you have to be very close also when you see a cooling of situation. As I started to say, we had a good starting point because we had really worked with the order board and we had to work the order board in 2020. And therefore, also now when we have been refilling, we have had conversations because we did see quite early also that, that lead times were pushed out in time, et cetera. So therefore, also planning together with customers, how can we do it in a fair way and meet the different demands depending on what situation you have in regional customer -- specific customer cases et cetera. But you should never exclude that risk, obviously, when you have very strong momentum in the market. So that is something that we'll continue to have an eye on. And then when you talk about quarter 3 and quarter 4, I should say, quarter 3, absolutely, it is full. And obviously, we can do summary education in order to solve specific issues. But in principle, it's full and a large quarter 4, as well. So here is also how we are handling yes, quarter 4 and onwards, obviously, together with dealers and customers. So again, as we said, a very positive momentum and thereby also a high focus of meeting this demand in a good way step-by-step.

[Olof Cederholm, Research Analyst]

Very good. And also on the electrification, there you continue to roll out new products, and we're happy to see that you're also going to disclose it on a quarterly basis. We're still talking about fairly low volumes from your customer conversations, do you sense that the market is sort of rapidly moving towards slightly larger volumes? Or do we need to see the extended product range come out fully for some time before that happens?

[Martin Lundstedt]

I think there are, of course, different dynamics. And I think you all trying to say that it's fairly small volumes. I think it's small volumes still. But having said that, I think you need to see it in these different steps. I mean, what our deliveries. And number one, it is serial deliveries, but I think is a good thing that it's not something that is built in a prototype workshop or something, it is started to be integrated in our normal industrial system. Number two, the order activity, what is really coming in has, so to speak, commercial real orders. And then we have, as I said, number three step is the prebooking, where we have a lot of conversations with the customers. We see that different tractors are also disclosing the prebooks we think it's better to say that we have a higher activity level there. And then, of course, all the conversations and quoting activities we have. And then to your point, how rapidly it will come. I think we can go back to the Capital Markets Day and say that we see the dynamic will happen, so to speak, segment by segment, region by region, depending on the dynamics, and sampling city applications in regions where you have the right dynamics in terms of taxes, infrastructure, customers or consumer pool and demand. When the transition start to happen, it will go rather quick from low levels up to the majority. And then that will gradually then build up the cumulative core step by step. And by the way, that is 1 of the reasons why we are disclosing it, so we can start to discuss around this transformation segment by segment and region by region. So I think we have all reasons to come back to that and discuss how is that dynamic happening. But I think 1 thing is sure is that in the starting point, obviously, this is B2B. You want to feel that you have a strong partner as a customer to work with when you start to do the transformation. And feel sure that you have been thinking right about infrastructure, surveillance, education, repair and maintenance, thinking, financing, et cetera, residual values, battery second life, et cetera. But once you have done a number of deals here, you will feel confident okay now I'm familiar with the structure that we already see because a lot of the medium-duty customers that we are getting into the pipeline also sitting on heavy-duty applications and are then part of the prebooking or the letter of intent type of discussions because you have started in 1 segment, and you see that you can cover new segments in your feet.

[Operator]

Our next question comes from the line of Daniela Costa from Goldman Sachs.

[Daniela C. R. de Carvalho e Costa]

I'll start 1 following up on the electric vehicle side, very helpful disclosure today. I guess sort of round up the EV topic. Can you give us an idea of where ASPs are tracking at the moment versus the ICE and sort of the trajectory you expect sort of when would we reach parity? And then I'll ask the second question afterwards.

[Martin Lundstedt]

Thank you for that question. And also that I think is a very good and relevant question. If you just look at the pure ASP, obviously, it is higher purchase price if you do it alone. And that's the reason why we talk more and more about equipment as a service in this transformation because for the customer, what matters is that in a way, if you put it in the simplified higher price upfront but lower operational costs, and I mean the whole thing about that parity will come of different factors in cities. It will not only play out in the TCU, it would play out also with taxation, incentives, even prohibitions to go into city centers or that you really would like as a transport buyer to get your needle moving on your own sustainability journey. We see a lot of the transport buyers that have done a lot of things in the, so to speak, warehouses or stores or whatever, but logistics will play a very important role. And there is a readiness also to actually pay a little bit more for this to get the CO2 functionality or the non-CO2 emissions to get lower noise and to be, so to speak, driving that agenda. So I think what is interesting is that both with the volume increases, with the battery development, and with a better understanding together, how does it look like when it comes to cost per kilometers segment by segment, region by region, city by city, and that is the modular approach we are taking. So again, with the disclosure, our intention is that we can be very transparent and discuss this transformation together with U.S. investors, so you feel, yes, confident that, first and foremost, that we are driving the agenda and secondly, that you can follow that as well.

[Daniela C. R. de Carvalho e Costa]

And then maybe more of a shorter-term question regarding -- following up on the topics of shortages. I mean there are shortages, but there's still very good demand as you flagged. So what is the opportunity set for pricing into the second half and to maybe sort of plan your deliveries based on best mix customers, best ASP customers?

[Jan Ytterberg]

No, of course. In a market like this, there is a good environment for price increases. And of course, we also have to do that because we have a price -- cost increases coming into the system in several areas. So this is needed, and it's ongoing. So right now, the prices are stable slightly positively. And of course, that is also related to the fact that we have a new -- some new products on the Volvo brand side that we have launched.

[Martin Lundstedt]

And I mean, obviously, as you said, when it comes to the mix, et cetera, we are looking at that. At the same time, I think it's extremely important to understand that we are a B2B company with long-lasting relation with our customers. We are sticking to our customer base, and we are not opportunistic because if you do that to a short-term site, that will -- you have to so to speak -- you risk to eat up that later. So of course, as Jan said, it's more about the price execution as such than to be too selective on the customer fees because we like our customers. We have long-lasting relation and that is the strength of the group and all our brands.

[Operator]

Next question comes from the line of Rob Wertheimer from Melius Research.

[Robert Cameron Wertheimer]

My question is on autonomy. And I wonder if you can give us any update on the strategy and whether the rural relationship is indicative of internal efforts with NVIDIA being not as advanced? Or whether we should expect OEMs to broaden partner with autonomous companies. And finally, in your Investor Day, I think you mentioned the autonomous revenue per life cycle of a vehicle is quite attractive. Does that hold if you do relationships as with Aurora?

[Martin Lundstedt]

Yes, thank you for that question. Very appreciated. First and foremost, yes. I think that you will see, I mean, a complementary landscape a little bit depending on what type of application we are talking about. Obviously, we see it with a very good model knowledge when it comes to the redundant base vehicle or base equipment that is prepared and ready for autonomous capabilities when we come to all the redundant systems, when it comes to acceleration, braking, cooling, what have you. And then when it comes to, so to speak, the virtual driver capabilities depending on what type of segment or what type of region, what type of legislation, we see that it is good with our modular setup to be able to plug in, so to speak, different capabilities as we are doing with NVIDIA, for the CMA confined for port terminals for their basics, so to speak, capabilities when it comes to processing capabilities, as well as we see with order that is highly specialized and very forward leaning, and we have found that also when we have done both the due diligence and the process we get with them very highly complementary with our virtual driving capabilities together with our, so to speak, redundant base vehicle capabilities of that specific application. Having said that, when it comes to the business models, yes, it is very attractive because, obviously, for the applications we are talking about, there is a big gain to be realized, of course, when it comes to the cost of driver, but more -- but even more importantly, we see in many areas also how you can all the time optimized, so to speak, the behavior on the truck when it comes to acceleration, braking, wear and tear, et cetera. And in addition to that, obviously, that you are thinking through the system together with the operator, how do you get the continuous flow in your logistics operation. So very attractive to see that longer contracts, deeper relations. And we're not going to detail obviously because we will keep that for ourselves. But the revenue model is, as we see it, very attractive win-win-win, and I talk about the customer and the parties involved in a smart way where all the games have a good upside for the partners involved. And that, I think, is the dynamic that you should have both when it comes to CO2 execution, cost per kilometer and the safety, not at least also that is super important. So excited about that.

[Claes Eliasson]

All right. Could we please have the last question then?

[Operator]

Our next question comes from the line of Nicolai Kempf from Deutsche Bank.

[Nicolai Kempf, Research Analyst]

It's Nicolai Kempf from Deutsche Bank. My question would be just again, a follow-up on the electric trucks. And as you already touched on the similar shortage and as you're ramping up electric trucks, do you a similar shortage for battery cells? And could be there more room for corporation?

[Martin Lundstedt]

Yes. Thank you for that questions. I mean, what we see, obviously, is that we are working very extensively now, if I may say so, with the new supply chains or necessarily new, but the supply chains that will be ramped up in relation to electromobility and thereby strengthening our partnerships visibility and how we are cooperating. As we have earlier announced, for example, our strategic alliance with Samsung SDI on the battery cells, but also that we have long-lasting partnership with others also in the areas of Patcham and modules, et cetera. So exactly, as you said, I mean, also relating to the electronic units and components, not related on to batteries, but also to the electric pieces of the powertrain as such is of high importance now when we are gradually ramping up and to have that smooth ramp-up also fitting into our industrial system. So high priority on that. But we have a good setup as we deal with it.

[Claes Eliasson]

Hey, excellent. This concludes the call for the first quarter 2021. We are all looking forward to meet you in 3 months time again. So bye for now. Over and out.

[Martin Lundstedt]

Thank you.

[Jan Ytterberg]

Thank you.

[Claes Eliasson]

Thank you.