Volvo AB

STO:VOLV B

Earnings Call Transcript 2023-Q1

[Christer Johansson, executive]

Welcome to the Volvo Group press conference on the first quarter earnings. My name is Christer Johansson, and I'm heading up Investor Relations. And with me, I have our CEO, Martin Lundstedt; and our CFO, Jan Ytterberg. And we will do, as usual, start off with a presentation, followed by a Q&A session.

And with that, Martin, over to you.

[Martin Lundstedt, executive]

Thank you, Christer, for that introduction. And also from my side, most welcome to this quarter 1 2023 press conference. I don't know if you recognized before here, but I think it was a number of great news that was revealed in the small movies, not at least, obviously, also that we are now extending our range when it comes to the heavy-duty electric rigid range of Volvo.

And we are talking about circularity, and it's actually coming good together because it was also shot at one of our main sites here in Gothenburg, where we are now expanding our laboratory and engineering capabilities when it comes to electric and hydrogen, et cetera. So everything is coming together, but that was more of a reflection.

But as regards to quarter 1 then, the group delivered a strong performance improvement, as you have seen. It is important to say that we stick to our priority of delivering as high volumes as possible to our customers since they have a high demand of equipment, but also making sure that our service operations support the customers' installed fleet, that our experience continues high activity levels in most parts of the world.

In addition, the focus is to continue to manage the cost inflation pressure as well as disturbances and disruptions of material supplies and logistics in different parts of the world. For the later part, we have seen some easening during quarter 1, especially in Europe, while we still experienced disturbances in mainly North America. And we have continued to live in highly turbulent times, and the whole Volvo Group organization, together with our business partners and customers, are doing an outstanding job to master these stormy waters.

With a number of business conditions now stabilizing and improving, the quarter delivered a strong financial outcome after a couple of quarters with some margin pressure. But it confirms, and this is important, our fundamental belief in our strategy that serving the customers is always right, even with extra cost and efforts in certain months and quarters, and that is the right priority and is now paying off.

To achieve continued strong and sustainable earnings based on strong customer satisfaction, strong customer relations and retention, it's deeper requisite to fund also the significant investment efforts we are into to continue to reduce climate impact and, in particular, CO2, to the benefit of our customers, society at large, and has a positive consequence and outcome also for the Volvo Group. We, therefore, continued to pave the way for the transformation of our industry with the continuous ramp-up of sales and production of battery-electric machines and battery-electric vehicles as well as introduction of new trucks, machines in several applications.

So for the quarterly highlights, the group continued to deliver strong results. Sales growing to SEK 131 billion, plus 17% if we adjust for currency, and this was an all-time high. Operating -- adjusted operating income grew to SEK 18.4 billion, corresponding to a margin of 14%, also that an all-time high. We also generated, for the normally seasonally weak quarter 1, a strong cash flow of SEK 5 billion. And return on capital employed amounted to 30.3%.

So all in all, strong results, thanks to great work supported by improved or stabilized business conditions in many areas, but despite also continuous supply disturbances and inflation headwinds.

When it comes to volume development in the quarter, we had, as I said, all-time high truck volumes for quarter 1. The supply constraints in Europe were not as extensive in quarter 1 as during primarily the second half of 2022. But however, in North America, our supply chain remained unstable with disturbances, and we expect that this situation will continue also moving forward.

Volvo Construction Equipment deliveries declined with 30%, mainly as a result of low deliveries in China. Volvo brand globally increased or grew with 9%, and SDLG declined with 63%. But all in all, given the circumstances, a great job by all internally and externally involved in the value chain here.

As regards to electrification, demand for our electric vehicles and machines continues to increase rapidly. And since this is still value chains that are maturing, we continue to expand our electric manufacturing capabilities and to mature our own and our partners' both upstream and downstream value chains in terms of volume ramp-up.

We continue to have a positive book-to-bill with 1,200 orders and 1,000 deliveries in the quarter. But a little bit the same situation here that we need to continue to focus on the right side of this slide in order to make sure that we can actually also take in more orders and not having a too long order book out in time, actually. But we have a strong momentum and continue to invest in this area. So this is, of course, just the start here.

A little bit of a new slide, vehicle and machine sales development. Normally, we are also showing service sales development, but we think this is important moving forward. And the sales development of vehicles and machines was, as we have said, very good in all areas on the back of a combination, and you will hear more of that, of course, by Jan later on, of commercial conditions, both pricing and content, but also volumes as well as both product and regional mix effects.

For VCE, as you can see, it was a more stable development of sales or of top line, and that relates mainly negatively to lower volumes in China and positively by positive development of the Volvo brand in other regions and for different elements of this -- of the parameters I've talked about. But all in all, strong FX-adjusted increase of equipment sales of 18% year-over-year to almost SEK 102 billion.

And service sales development, we had continued good demand for services with strong growth, 13% currency-adjusted growth, and that is, of course, strong. This is the result of a continuous high-activity level amongst our customers and that the efforts of our commercial organization to increase contract penetration and other services are successful, both when it comes to the product and services around the products and also financial services.

We did see increases in all segments with the exception of VCE. And for VCE, the flat development mainly was due to Russia and somewhat softer machine utilization in Europe. So as we continue to work closely with our customers to provide them with the best uptime in productivity, service sales 12-months rolling is now about SEK 115 billion, which is, of course, a strong development. And we still have good potential to continue this journey.

On the Trucks side, despite lots of focus on serving the customers with volumes here and now, we continue to launch new and important products and innovation. In March, and you did see Jessica revealing these news in the movie upfront here, Volvo Trucks started production of heavy-duty electric rigid trucks, meaning that we can cover many more applications. And it started here into the Sweden production of that. Volvo Trucks now have a full range of purpose-built heavy-duty and, since a couple of years or quite many years now, medium-duty electric trucks for sales in Europe.

In one key area for the rigid application, Volvo Trucks and mining company -- a leading mining company, Boliden, are now joining forces to implement electric truck transport in underground environment. In mining environments, the electric trucks can deliver, as you can imagine, several big advantages, including no exhaust emissions, safer workplace, quieter working conditions and, on top of that, a very competitive commercial offering based on our modular platform that is produced at scale.

Also in the quarter, and you did see also that in the movies upfront here, Mack Trucks launched an all-electric medium-duty product range for the North American markets. And this is the next step in the very successful reentry in the medium-duty segment that Mack did a couple of years ago. And I'm also proud to see that existing technology and industrial cooperation and alliance with Isuzu Group was extended to also include Isuzu-branded vehicles.

As regard to truck market forecast in both Europe and North America, transport activities remain high. And with constrained supplies over the last year, it is important for many customers to renew their fleet and come back to a normal replacement cycle. We, therefore, increased our forecast of the total market for 2023 up to 320,000 in respective region, and that is for both regions an increase with 20,000 in relation to the last forecast.

The market in Brazil has been softer beginning of 2023, expected, so also following the pre-buy ahead of Euro 6 emission norm. Forecast is kept at 80,000 for the full year. The Indian market forecast is unchanged at 400,000 units on the back of, yes, amongst other, increased domestic consumption. And the Chinese market forecast is restated here to include domestic sales data only since that goes for others, and we think that is relevant, and excludes export data. But the domestic forecast is unchanged at 650,000 units for the full year.

As regards to truck orders and deliveries, we continue to be somewhat restrictive in taking orders. And we do that through a gradual opening of the order book to manage cost inflation pressure with stability, longer lead times, et cetera, as we have discussed before. But having said that, we did see a book-to-bill that was largely in balance during the quarter with approximately 60,000 orders and 61,500 deliveries. And 61,500 deliveries is, of course, a strong figure. So also on the order side, that was a good confirmation when we now gradually open the books here.

But we will continue to make sure that we have the right balance between order intake, production deliveries, so we have an order book with the right quality, both from a customer perspective to manage delivery reliability while at the same time manage inflation, disturbances and other uncertainties.

Truck market shares. We start in Europe, where we continued with a high level for Volvo Renault with close to 27% combined and also 66% on electric-only combined, which is, of course, a strong number. In North America, Volvo was somewhat softer at 8.7% on the back of supply constraints. And Mack, we did see a small improvement to 5.7%. We continued with a good level in Brazil of almost 22% and also a strong recovery in Australia for the Volvo brand and a very good level for Volvo and Mack with close to 26% combined.

Also for Volvo Construction Equipment, VCE, lots of news. First and foremost, in that segment, we have developed a solution to convert the L120 wheel loaders to electric machines, fulfilling market demand for more sustainable solutions in the midsize range. VCE is also investing in battery pack production at the excavator plant in South Korea, in Changwon, enabling customizing of batteries close to final assembly with a similar logic that the group has done also for the Trucks segment.

At the ConExpo exhibition in the United States, it was a major success with lots of news, both for machines as well as services and sustainability solutions. And most other, we delivered the first fossil-free ADT to a North American customer, CRH, with a very, very good customer reception. And VCE also experienced a continued solid momentum of electric machines with orders increasing 84% and deliveries increasing 79%.

As regard to market forecast for VCE, continued very strong market in the North American areas and a flat level in Europe. China has not leveled out yet, and we see somewhat weaker confidence among South American customers. So as a consequence of that, we are doing no changes for North America and Europe in relation to loss guiding. We reiterate that it will be a stable market in relation to last year with -- so no change for North America and Europe, at still good levels. South America, we revised down with 10 percentage points; as we do for Asia, excluding China, revising midpoint down with 5 percentage points. And for China, we reiterate also the minus 10% development as a midpoint, which is no change.

Order intake, it has also been, in particular then for the orders, volatile, and that is again related to the fact that we have been restricted in taking orders through the gradual opening of the order book to manage the cost inflation pressure, long lead times and also the quality of the order book as such. And net orders were down with 35%, and it was heavily impacted by low order intake in China after the pre-buy in quarter 4 for [ Tier 3 ] as well as the cautiousness in Europe among our customers and dealers to place orders with still high order books and somewhat softer market. So that is highly natural.

Order intake in North America increased significantly, driven by the strong activity level. And on the delivery side, it was minus 30%, primarily then due to lower deliveries in China and the slowdown in Brazil. Deliveries in Europe increased when excluding Russia. And the increase in North America was again then supported by favorable market conditions.

For Volvo Buses, in quarter 1, global demand for new buses continued to improve, particularly for coaches. Demand for city buses was more stable with a continued increase in request for electric buses, also an expected continuation. Quarter 1 net orders increased with 4%, driven by coach demand in primarily North America. And deliveries increased with 25%, driven by higher deliveries in South America, the Middle East and Africa.

Volvo Buses has also decided to implement new business models in Europe for their both city buses and coaches, and that will be applied in Europe, similar to other parts of the world where we are operating that model highly successful. So the focus of our internal capabilities, resources, both when it comes to industrial, engineering, et cetera, will be on the chassis side where we have a high commonality with Trucks to ensure that we can drive innovation and investments to make Buses competitive and leading, not at least when it comes to sustainable transport.

We will continue to use external body builders in close partnership and expand that cooperation. And Volvo Bus still will be selling and servicing the complete bus. And in that regard also, as we do today, continue to strengthen and leverage the common network with Volvo Trucks that, of course, is a unique strength. Prevost launched an all-new version of H3-H5 (sic) [ H3-45 ] coach model to secure our leading position in North America.

And the demand for Volvo Penta is somewhat softer on the marine leisure side and, in particular, in the lower end of marine leisure, while marine commercial and industrial business remains strong. Quarter 1 net orders were down with minus 6%, mainly as a result of, also here, restrictive order slotting on the back of high levels in the order book and long lead times. Deliveries increased with 11%.

And an important milestone in the quarter, and you can see that beauty here on the slide, the Volvo Penta expanded its genset range and launched its most powerful engine, the D17. So in relation to the highly successful sibling of D16, it has a minus 5% fuel per kilowatt hour and also a maximum power output of plus 10%. So a very good combination, obviously.

Penta has also acquired a minority stake in leading actor, Utility Innovation Group, in the U.S. to accelerate our entry into the utility sector and, in particular, partnership in the battery energy storage with decentralized and micro-grid systems where UIG is one of the world leaders. I'm very proud of that.

And finally, for Volvo Financial Services, it was a good growth in absolute new business volumes, whereas penetration trending down due to a competitive environment. All in all, the credit portfolio grew, currency-adjusted, by 18% compared to quarter 1 2022. And we continue to see a stable portfolio performance on the back of, as I said before, high customer activity levels and demand for transportation and construction services in most parts of the world.

So that concludes the business update, Christer.

[Christer Johansson, executive]

Thank you very much, Martin. And that brings us to our next speaker, our CFO, Jan Ytterberg. Jan, can you please explain the good numbers?

[Jan Ytterberg, executive]

I will, Christer. First, I have to state that many stores were aligned favorably here in the first quarter when the combination of strong demand in major markets for us and then also our own performance improved operationally, and that gave a good -- very good start of the year.

With that said, the quarter had its challenges. Supply chain issues were mentioned, it's still strained. We see that especially related to North America. And the cost pressure continues, both in the form of inflation, but also as we need more resources for the transformation.

If we move over to the financial as such and start with top line, increase of FX-adjusted net sales of 17% reflected well the higher deliveries of both products and services across our business areas, except for Construction Equipment; the improved mix, especially in Construction Equipment; and then across all business areas, an adjustment and improvement of the commercial conditions to manage the cost pressure.

As regard to regions, the strong demand in Europe and North America, in combination then with the strong U.S. dollar and the euro in comparison to the Swedish krona, contributed substantially, whereas the lower demand in South America and China impacted negatively, but was compensated by FX and improved mix. And as you can see, the FX effect on net sales was substantial.

Moving over then to the earnings, and adjusted operating income for the group improved some SEK 5.7 billion to SEK 18.4 billion and giving them an adjusted operating margin of 14%. In an environment of inflation and transformation, it is important to adjust the commercial conditions continuously to mitigate the combined cost pressure that we are facing. And we were successful with realization of prices, both for vehicles and services here in the first quarter, and that contributed positively, of course, to the improvement.

And we have a good mix as regard to products, brands and markets for our non-Truck business areas, and this was most clearly seen then in Construction Equipment as the mix shifted towards more of heavier Volvo-branded machines in North America and Europe where our commercial conditions are better than -- and from then more of the Chinese deliveries where we see a much tougher price competition. Of course, that affected, to a big extent, our SDLG brand.

The quarter had its challenges besides then the supply chain issues. We talked about the material costs continued to put pressure on the earnings, both as regards compensation to the suppliers, but also with, if we compare it with first quarter last year, higher raw material prices. Sequentially, raw material prices have stabilized lately, whereas the salary inflation will put pressure on both material and on the cost in our own operation.

The ambition to be in the forefront of the transformation with electrified and autonomous vehicles as well as being the forefront on the combustion engine is reflected in more resources, higher activities and thereby higher cost on R&D. We had a positive net capitalization effect on R&D cost of some SEK 0.5 billion in this first quarter. And we expect a similar quarterly positive effect from net capitalization going forward, i.e., some SEK 2 billion of positive effect for 2023.

The higher ambition and activities were also reflected in the selling expenses where we have more of personnel expenses and more of costs related to digital. And that is partly then driven by new business model.

FX had a substantial positive effect on the earnings, close to SEK 1.7 billion in the quarter compared to first quarter last year. Of this SEK 1.7 billion, SEK 400 million was related to the transaction exposure. And we expect now for the coming 3 quarters that we will be neutral on the transaction exposure, i.e., we will have a small positive effect on transaction exposure for 2023. And we do not provide any guidance for the full effect on FX on earnings.

And as already mentioned by Martin, a decision was taken during the quarter to change the business model for Buses in Europe. A provision of SEK 1.3 billion was made in the first quarter, and that is excluded from the adjusted operating income. And if we take a look at the first quarter last year, a provision for assets in Russia of SEK 4.1 billion was made. And at that time, that was also excluded from the adjusted operating income.

If we move over to cash and key ratios for the group, the first quarter is seasonally a weak cash flow quarter when working capital is being built up for the stronger second quarter delivery-wise. Despite the normal negative impact from working capital, the operating cash flow was positive in Industrial Operations, and it was plus SEK 5 billion, where the earnings, of course, contributed positively, but on the other hand, partly offset by high income tax payments for previous year. And we also see the high activity in the group being reflected in more of CapEx.

The increasing net financial position in Industrial Operations up to close to SEK 78 billion, that was related to the cash flow. And we also have a return on capital employed on a rolling 12-months basis that passed, for the first time, 30% here in Industrial Operations.

By that, we move over to the business areas and start with group Trucks. The increase of truck deliveries of some 11% and the strong service demand as well as price realization on both products and services impacted net sales positively. Net sales increased by 21% FX adjusted. And price realization and volume were also the main explanations behind the improvement of adjusted operating income of SEK 4 billion, up to SEK 12.7 billion, giving then a margin -- adjusted operating margin of 14.2%.

And similar to the group, the headwinds came from the material costs where we have higher raw material costs, but also then, compared to last year, but also then continuously then compensating the suppliers for inflation, both by onetime payments, but also by adjusting the piece price; and then also from R&D and selling expenses, which is affected then by high ambition and increased activity level related both to the transformation and to the strong demand that we have presently.

And in this inflationary environment and with the pressure and cost for transformation, that caused, of course, for us to adjust commercial conditions continuously. FX impacted positively with SEK 850 million for group Trucks compared to the first quarter last year.

Compared to the other business areas, Construction Equipment stands out in the first quarter with lower deliveries compared to last year. Despite this, net sales increased by 5% FX adjusted, reflecting then the improved mix of products, brands and markets as the mix shift into more of Volvo-branded heavy machine for North America, Europe with better commercial conditions and less then of Chinese deliveries where we have a very tough price competition. And of course, that, as I said earlier, impacted the SDLG brand negatively.

And in general, for Construction Equipment, irrespectively of where we are, higher prices impacted positively. And price then, together with the positive mix effect, were the main drivers behind the improved adjusted operating income of close to SEK 1.8 billion to SEK 4.6 billion, giving them a margin of 18.3%. And FX impacted positively with SEK 0.6 billion if we compare it with the first quarter last year.

Besides the negative effect on income coming from Volvo, construction was very similar to the rest of the group where the headwinds came from the material cost and R&D expenses, with the same explanations that I gave for the group and for group Trucks.

Buses, here, we see a gradual improvement of post pandemic -- since post-pandemic, and that continued for Buses here. We see higher deliveries, all regions, except in South America. And we also see an accelerated service demand as fleet utilization improves.

Together with improved prices and a favorable market mix, this impacted both net sales positively, that increased with 29% FX adjusted and the earnings. Adjusted operating income improved to SEK 178 million, giving an adjusted margin of 4.2%. And the pressure from higher raw materials -- higher material costs and R&D expenses impacted negatively compared to last year, whereas FX contributed with SEK 112 million if we compare it with first quarter last year.

And also for Penta, the quarter was very strong, both as regards absolute levels and margins. Besides higher engine volumes and continued high service demand, prices and a favorable customer mix with more of heavier engines impacted positively on net sales and on earnings.

Net sales increased by 26% FX adjusted. And adjusted operating income increased by some SEK 500 million to SEK 1.3 billion, giving a margin of 22.7% for the first quarter. And the headwinds for Penta are similar to the rest of the group, i.e., pressure from material costs and more investments into R&D. And also here, we have a positive FX impact compared to first quarter last year, SEK 200 million.

And then ending with the last but not the least important business area, our Financial Services. And just a remark, the numbers on the slide here have been restated to exclude the Russian and Belarus operation in all historical comparisons and quarters.

The high deliveries of trucks, the favorable mix and prices on the group products was also then, of course, affecting the portfolio growth for Financial Services. New business volume increased by 9% FX adjusted in the quarter, giving a credit portfolio of SEK 227 billion when we ended the quarter.

The fierce competition from banks and leasing company is putting pressure on the earnings and affecting also our penetration negatively, that decreased to 27% on a rolling 12-months basis. Write-off levels and credit provision expenses are low as customers continue to have good financial and good payment performance, reflecting then strong transport demand and good prices.

The improvement of adjusted operating income to SEK 872 million was mainly related then to the profitable growth of the portfolio and then also where we had the negative effect coming from the spread compression. FX had a positive effect of SEK 75 million compared to the first quarter last year.

Thank you.

[Christer Johansson, executive]

Thank you very much, Jan. And moving over to you, Martin, how would you summarize the quarter?

[Martin Lundstedt, executive]

I think, at least to start with, of course, a very strong start of 2023. And maybe 2 final messages summarizing what Jan and myself have been presenting here this morning.

Firstly, with a number of business conditions now stabilizing and improving, the quarter delivered, as I said, strong financial outcome after a couple of quarters with some margin pressure. But it confirms again that our strategy has been right to serve the customers and that serving the customers in these times where they have a high demand, even with extra costs and efforts in certain months and quarters, is the right priority and is now paying off.

And having said that, we will continue to keep a high level of flexibility also to maintain the right balance between, on one hand, executing on the current order board with high levels driven by the high activity levels amongst customers and, on the other hand, being prepared for changes in the business environment if we see any signs of that.

But secondly, also, to continue to have strong and sustainable earnings is the important platform to fund the investment efforts we are into now to continue to lead the transformation of transportation and infrastructure to reduce climate impact in primarily CO2 to the benefit of society at large, of course, our customers, suppliers and for the Volvo Group.

So I think, Christer, that is the summary and we go into the Q&A.

[Christer Johansson, executive]

Q&A session, absolutely. [Operator Instructions]

[Christer Johansson, executive]

And with that, we are ready for the first caller. So please go ahead.

[Agnieszka Vilela, analyst]

It's Agnieszka Vilela at Nordea. I have 2 questions. The first one, Martin, you sound quite optimistic about the truck markets. And obviously, we do see improving order trends for you. However, we start to see some signs that lower rates takes toll on the carriers' profitability already. And I wonder if you see any hesitancy from the customers. And also in the case of more, say, recessionary environment, can you tell us what drivers could support demand for trucks?

[Martin Lundstedt, executive]

Thank you, Agnieszka. No, no, but as we have said, obviously, and that we have reiterated for quite some quarters now, and we have had many discussions around that obviously, is that already since, I should say, quarter 2 2020, we have been very, very close to our order board. And that has been a lot of work to be close to that given the many moving parameters. And that's the reason, again, why we said that now that we are gradually opening, that we are reconfirming and looking into it.

And this quarter, with that strategy for Trucks also gave a good level of order intake almost in line then with deliveries. I mean book-to-bill was almost 1:1. So I think that's good. We see that, that is still, of course, driven by the fact that we have had a long period of supply deciding the total market. And the increase we do now of the total market up to 320,000, both in Europe and North America, is also driven by the fact that we see certain easening and thereby that it will be a better situation as regards demand and supply type of balance.

Having said that, we see also on the used side, for example, still low levels, meaning that equipments that are available in the marketplace is used. But on the other hand then, we are following very closely the connected data. A little bit early to say, but if anything, from a high level, flattening out or some softening, that is highly natural when we look at sectors around us.

So as I said, continue to focus that we have done successfully now, I should say, not only quarter 1, but also in quarter 3, quarter 4 and last year, getting volumes out. Then a number of business parameters have improved now, giving better leverage, but combine that with high attention to our flexibility measures. So I think we have a number of parameters to follow that. But it's primarily that the coming back to normal replacement cycles and continue to renew gradually the fleet, and we ask both the dealers and customers to confirm that, that is still the case.

[Agnieszka Vilela, analyst]

Perfect. And then my second question is to Jan. Can you help us understand what you expect for the cost development going forward? You mentioned the labor inflation probably becoming more explicit now. So can you tell us what do you expect for your cost base? And also on that topic, was the operating margin in Q1 as good as it gets?

[Jan Ytterberg, executive]

I hope no from as good as it gets because as we mentioned, there were several headwinds as well related to the inflation you were talking about, but also the supply chain as well as the transformation. And of course, the transformation will continue. I mean we have a high ambition, high activity on that area, but we need to create flexibility also in that area to be resilient in case of. We see also that we, as I said, continuously are then compensating suppliers for their inflation.

Coming back to salaries, we have had salaries increases in part of our operation. And you know we have a pretty big Swedish footprint, and that agreement is sort of on a central level sign, which means that we have a higher cost level there. But we have to meet it with the normal measures: efficiency, productivity and try to be even more than diligent on what we are doing. But the cost pressure will continue. And the most important thing for us, of course, handle it, manage it, but also compensate it towards our customers in the end.

[Martin Lundstedt, executive]

And just to add, I think we also have practiced a lot now on this. I mean since there are also many different moving parameters, we have a very strong and solid methodology also in our sourcing activities or purchasing activities also with the suppliers to really go through what is what in terms of permanent and what is what in terms of more temporary type of fluctuations because this is important also for all of us.

So we are mastering also the inflation in the long run, obviously. So I think there, we have a good methodology regardless of what cost component we are talking about. And maybe as to mention also, of course, we are talking about the leverage, which the relevant leverage is, of course, the quarter 1 2022 and quarter 1 2023. Since we deliberately also said, we take, I mean, what it takes to get volumes out in quarter 3, quarter 4, then we diverted from the trend line basically.

So I mean when we look at our internal productivity, since everything is coming together in our industrial systems, in the final assembly, but also in other areas there, it is [ not any ] productivity gain as such on the volume leverage. So there are things that we need to handle on the cost side, but there are also opportunities. So I think stick with the methodology that we have had and believe that this is the right way of driving quality is the way forward.

[Jan Ytterberg, executive]

And just -- it was a good comment there, Martin. I think...

[Martin Lundstedt, executive]

Thank you.

[Jan Ytterberg, executive]

Yes. I think it's important to say what you state there that we are -- now we have a leverage of 20% more or less compared to the first quarter last year. For me, that is where it should be coming back to is this the best you get. For me, it's more like the Q3 and Q4 is sticking out more than Q1 actually. And of course, if we take a little longer perspective, that is not so strange because we have had the war affecting us already from the end of Q1 last year.

So of course, I would like to see that this was not sort of the end state. It will never be because we are working with continuous improvements. And by that, this should be better all the time.

[Christer Johansson, executive]

Thank you, Jan. And that brings us to the next question, Olof Cederholm at ABG.

[Olof Cederholm, analyst]

Gentlemen, Olof from ABG. My 2 questions, first on pricing, [ maybe perhaps you mentioned on price ], good price stated in the report is probably also an all-time high. As sort of general inflation is maybe softening sequentially at least and we have the weaker economic outlook, are you seeing any reluctance from customers to accept prices here and now?

[Martin Lundstedt, executive]

But first and foremost, as Jan also said in his part of the presentation here, we have been, as a total package, successful in balancing, so to speak, the cost pressure that we have had on the [ back wagon ] into our commercial conditions and, if anything in this quarter, maybe a little bit ahead of the curve. And I think what is important now is continue to work with the same type of methodology, depending on, as you said, business environment, volumes, how is the demand level, et cetera.

And when we look into the order board as such, I think we have a good quality in the different aspects that we have said. But of course, we are always very, very close to our customers to make sure that we can take out the right value in different type of business conditions. But so far, so far, so good when it comes to that methodology, I should say.

[Jan Ytterberg, executive]

And I mean there is always, of course, a discussion and a reluctance of price increases. We have it in our -- so back end. We also have discussions with our customers in the front end. But also they have good businesses and performing well, and they need the vehicles to replace it. And it is a good business case for doing that. And you know that TCO, et cetera, and the truck is rather small part of the TCO. If that provides them better fuel consumption, other operational improvements, of course, you can defend a higher price.

[Martin Lundstedt, executive]

And I -- as a matter of fact also, which is interesting, I've been out during quarter 1 quite a lot in different parts of the world and talking to, of course, the customers, but also other stakeholders. And also in pricing is, of course, a mix of different effects. And the reality is that we have done a lot of things also during the year in terms of content.

When we see take rates of our -- some of our most favorable packages for the customers, I-Save and other type of fuel-performing measures, take rates when it comes to uptime measures, take rates when it comes to driver environment measures, it's also a content into this that is very important. And that is the feedback that we are getting.

And so when you look at the pure price, it's not the commodity, it's a tailor-made, purpose-built production equipment that we are selling. And our organizations and our colleagues around the world are selling that highly successful. So we're really utilizing also the modular platform.

[Olof Cederholm, analyst]

Excellent. And my second one is on CE. Obviously, 18% margin, it's an amazing level, but maybe it's here to stay. Talk a little bit about the mix. I mean it's good partly because China is falling off, but the good performance and mix in Europe, is that a one-off, a one-hit wonder? Or is that mix that you think you can sustain for [ a bit ]?

[Jan Ytterberg, executive]

No, I mean we were talking -- I was talking about sort of the regions, and there is no sort of normal event in the sales in Europe or in North America. This is what it is, so to say. No big change or big things as it relates to mix in those regions, no. So it's more sort of the region in between themselves and, of course comes also the brand perspective since SDLG is very much focused to China.

[Martin Lundstedt, executive]

And I think also, Olof, in that regard that when we look at the long trend line, and I mean Melker and the whole team here has been working very, very focused on building on what is the core strength of VCE, and that is obviously, I mean, on the what we call the GPE side, the general purpose equipment, the heavy-duty side, and also taking a number of important steps when it comes to the upper mid-range, if I put it like that.

So there is also a long-term, very purposeful built mix into this given what -- where are our core strength in the different segments. So I think that is also exactly what you want to say. And therefore, it's not, so to speak, one-off or specific for this quarter.

[Christer Johansson, executive]

And that brings us to the next caller, Daniela Costa at Goldman Sachs.

[Daniela Costa, analyst]

[indiscernible]

[Jan Ytterberg, executive]

We don't hear you, Daniela, unfortunately.

[Martin Lundstedt, executive]

No, we cannot hear her.

[Christer Johansson, executive]

I think we have to move on to the next caller then.

[Martin Lundstedt, executive]

Daniela, I will come back to you.

[Christer Johansson, executive]

Yes. Let's see if we can get the next caller. It's Klas Bergelind at Citigroup.

[Klas Bergelind, analyst]

Martin and Jan, so my first question is on the service side. So last quarter, I think, Martin, you talked about that most of the growth in services was driven by pricing. Now you talk about the positive impact from commercial efforts, higher contract penetration and so forth. So did volumes accelerate in the service business in Trucks quarter-on-quarter, i.e., this was not only because of the price step-up? I'll start there.

[Martin Lundstedt, executive]

Yes, of course, prices continue to be an important element in the mix, so to speak. But underlying long-term trend, we see that in, I mean, the volumes as such, I mean, on parts, et cetera, that is trending very well. And also we see that our contract penetration, both as regards the penetration average, I mean how many contracts do we have in relation to sales, but also the level of contracts that we're moving more north when it comes to full repair and maintenance contracts, for example.

So there is a continuous mix, which I think is very, very positive to see. And obviously, when this is growing, it will also be very supportive for years to come, obviously. So there is a mix between the 2, but pricing is still an important element, obviously.

[Jan Ytterberg, executive]

Yes. And we should also reflect on the fact that when we are comparing these numbers, we also then missing out which we had in Q1 last year, Russia and Belarus. We don't have it this year, of course, for obvious reasons. And then we have, which is more of a bean-counter comment, sorry, Martin, 1 working day more this quarter, which is sort of compensating that.

But we saw, which is very important, coming back to what you -- we saw an improvement of volume compared to where we were in Q4, for instance, where we didn't really find it. We saw it here. I mentioned it around Buses, especially then on coaches, that we see higher utilization and thereby also an accelerated service demand. So there are pockets still growing. And especially also on our workshops, we see a much higher volume.

[Martin Lundstedt, executive]

And the reality is here that also given the very strange supply chains, obviously, also even if we have had high, high focus on serving the customers' rolling fleet, that we have had certain constraints also there when it comes to volumes. That has, in certain pockets, also been decided by supply.

[Jan Ytterberg, executive]

And still have, especially in North America, reflecting what we talked about supply chain in general.

[Klas Bergelind, analyst]

Well, it's interesting because you said before, Martin, that the connected data, so looking at utilization, have seen some softening. So obviously, the self-help by your own effort seems to offset that potential utilization weakness. Is that correct?

[Martin Lundstedt, executive]

Yes. But I mean this has been, as we have said for many years now, one of the key focus areas for us. And if I take Volvo Trucks, as an example, and Roger and team have really been -- I mean, yes, that's one example that goes across the board. But if you take Volvo Trucks as an example, how -- I mean, very successfully, we have been working with this from the angle of the customer.

Because I mean, really to have that close cooperation with the customer when it comes to the contract nature moving from -- in the Volvo Trucks language from Blue to Gold contracts and also Gold Plus is, first and foremost, very important for, I mean, the market share of the contract length, but even more important for the retention and the relation with the customers, not at least now when we are moving into electrification, et cetera, where it will be much more of these type of extensive and much more in-depth contracts. So [ he does it ] here and now. It has, you can say, a cycle and resilience point of view, but it has also a transformation angle that is very important.

[Klas Bergelind, analyst]

Yes. No, the strategy is very well known. I think that some people out there think that your service business can start to decline a lot. So that's great to hear.

When it comes to my second one very quickly is on the timing of the CapEx and OpEx ramp. The investment in cell manufacturing will likely take some time until this is visible. But how should we think about China localization, the assembly of the battery packs, the infra JV? To what extent will we see higher CapEx this year and into 2024 from where we are today? Is it a big step-up or gradual?

[Jan Ytterberg, executive]

Gradual step-up. But I mean, it's -- if you follow this year-on-year, of course, it becomes more of climbing up a hill. But right now, it's more of a gradual step-up. No big hits, so to say.

[Martin Lundstedt, executive]

And I think in that regard also, and referring back to the Capital Markets Day, et cetera, this is, of course, also an opportunity for us when it comes to what we at that time had as a team geared for growth because we gradually see now how content is increasing. So it's moving from a traditional unit count in our business into a content count. And to do this type of investment now in relation to what we see in sales, et cetera, I think we have a very solid and good plan. This will create a lot of value for the group and thereby for the shareholders.

So here, I think to have a strong position of strength, maneuver from that, make the investments in technology, in the right type of industrial and commercial footprint is -- we feel very good about that.

[Jan Ytterberg, executive]

And also, of course, we do this, at the same time, creating some flexibility around it if we have more of services in the business, similar to what we have done in the past.

[Christer Johansson, executive]

Thank you, Klas. And now back to you, Daniela. Hope technology is with us this time.

[Daniela Costa, analyst]

[indiscernible]

[Christer Johansson, executive]

No.

[Jan Ytterberg, executive]

Sorry, Daniela, same issue as last time.

[Christer Johansson, executive]

So we'll have to make a new try later then. Then we move to Erik Golrang at SEB, please. Erik?

[Erik Pettersson-Golrang, analyst]

[indiscernible]

[Christer Johansson, executive]

Let's see. Then I guess we move on. Either we put Daniela back on the line or if we take the next caller?

[Jan Ytterberg, executive]

And now it looks like...

[Christer Johansson, executive]

It must be more on our side if everyone has a problem with their lines. So let's see, José Asumendi at JPMorgan, are you with us?

[Jose Asumendi, analyst]

Martin, Christer, and Jan, welcome back. A couple of questions, please. Just on pricing, if you could comment, please, is there a way to quantify, please, the pricing impact in the first quarter across Trucks and CE, if this was the largest category impacting the earnings in Q1? From another perspective, how do you see this momentum trending towards Q2 to Q4? Obviously, first quarter was incredible, and we're trying to figure out here if the momentum continues in this shape or form.

Second, Jan, as you look back at the sort of 2022 and you look at '23, is there a way to quantify how much did you under-earn in '22 as a result of the disruption in not being able to put the trucks out, the very high-level inflation, the stop on [indiscernible]? If you could [indiscernible].

[Christer Johansson, executive]

Let's start with the first question.

[Martin Lundstedt, executive]

The pricing.

[Christer Johansson, executive]

The pricing.

[Martin Lundstedt, executive]

Yes. So if we start with the first question, obviously, as we said, I think, again, we should look into this in the longer-term line. And obviously, we've had a lot of moving parameters since quarter 1 last year and over the last 3 years also. But if we take quarter 1 last year, where we were starting to see some sort of a little bit more stabilization, now we've seen 20%, as we said, leverage year-over-year. Of course, pricing has played an important role, not at least in order to compensate for the cost increases we have had, inflation, material, raw material, but also when it comes to disturbances.

And more importantly, José, I think here that it shows that our underlying strategy, the methodology of working with, of course, our supply base, but also our customers, commercial conditions is working. And now we have the order book that we have, where we have been working also with the right level of quality, we will continue now to make sure that the business conditions that we have talked about, both on the [ mix ] side and the order book will continue to prevail, then let's see. But we are never guiding exactly how it looks like. But I think more you should think about that methodology as such has been working fine, that we have a trustful and good discussion with our customers, and that will continue to be the focus.

I don't know, Jan, if there is a....

[Jan Ytterberg, executive]

No, no, I...

[Martin Lundstedt, executive]

But as Jan has said it, it has been an important element on the positive side.

[Jan Ytterberg, executive]

Yes. But I mean, when we talk about the cost pressure, it's not only inflation, it's also the transformation. And of course, someone called that reinflation. But of course, it's also part of when we look over our commercial conditions, that's also part of what we have to handle both here and going forward.

Quantifying Q3 and Q4, sorry, José, it was unfortunately continued bad line. So -- but I hear you say that you won't -- wonder if we had quantified sort of what was the -- if we then say that Q1 was sort of back to more of normal level compared to Q1 2022, what happened sort of during the period. But I was reflecting what is normal. I have not actually, since the pandemic, have something that is normal.

And for us, it's -- of course, you do some kind of calculation, but it's not really meaningful. I mean we are trying, as Martin said, to serve our customers, that is sort of priority #1, and get out as many vehicles as possible and, of course, to come extra cost which -- and we don't have sort of, okay, what should another business model look like? We don't even I won't to say reflect on it. Of course, it's part of our discussion, but I mean it's a pretty, for us, obvious choice.

[Martin Lundstedt, executive]

I think just one comment to add to that, Jan. We are always putting the result explanations in the order of magnitude on the slides. So there, you have a part of the answer, I would say, José.

I don't know if we can get your second question now. José, are you still with us?

[Christer Johansson, executive]

If not, then we take up the next caller. Hampus Engellau at Handelsbanken.

[Hampus Engellau, analyst]

Hello? You can hear me, fantastic.

[Christer Johansson, executive]

Yes, we all...

[Martin Lundstedt, executive]

Supply chain services.

[Hampus Engellau, analyst]

Yes, yes. For some reason, the Internet was ahead on the telephone, but that might be the case. Anyway, I'm going to ask this question more straightforward instead of trying to dig into your activity levels of that sense. And when you talk to your sales guys, et cetera, what's their perception of your customers' activity level during first quarter? Has it improved? Has it slowed down? Or it remains on the levels that we saw towards the end of last year? That's my first question.

Second question is on your daily production rate. I'm assuming that you're pretty near full capacity utilization. And should we expect this to continue on the same level going into second quarter? And when do you think U.S. could improve on the supply chain?

[Martin Lundstedt, executive]

Thank you, Hampus. And on the first one, I should -- I mean, of course, they're a little bit different. But if you're just taking that feeling type of answer on that, but it's, I mean, a little bit more than gut, I have to say, then I should say the middle. There's a feeling that is a continuous good activity level out there because I mean, again, when we are talking to our colleagues in the frontline, obviously, and looking into the order board and would like to have reconfirmation, et cetera, that is the message that is coming through because we're not looking, okay, do we want to have it, but also what is the reason that we want to have it, how we talk to our customers, et cetera.

So I should say, when it comes to production, of course, and we have been close to not necessarily always technical capacity, but also the capacity availability at any point in time. I've been saying that in quite many quarters that we have been pushing the boundaries when it comes to all the different parameters that you need to have in order to get things out. But it's true that we are high up on the utilization and the technical utilization now. But still, of course, I mean, with all type of stabilizations, we can hopefully continue to improve somewhat as we go along on that side.

North America, as we said, continues to be higher level of disturbances. As I also said, we see that, that will continue into the next quarter. But having said that, obviously, when complexity of all different type of disturbances that we did see on a global scale, we are putting a lot of efforts from the competence in the group, but also together with our supply chain partners, to exactly say when that is over because you have a little bit more regional pattern in North America with the labor market, et cetera. We see some easening there also, but it always takes a little bit of time to get that through. But again, I should say that the methodology as such is what we are working with in that regard.

[Jan Ytterberg, executive]

One remark maybe there, of course, reflecting then on the orders and deliveries, et cetera. In South America, we are adjusting down our production capacity for -- to meeting then the, hopefully, temporarily lower demand situation that we're facing.

[Martin Lundstedt, executive]

And with the Euro 6...

[Jan Ytterberg, executive]

With the Euro 6, and there is also some turbulence and turmoil related to sort of if the customers would like to take the decision on investments right now because it's a little political turmoil in Brazil, especially.

[Martin Lundstedt, executive]

But given that, obviously, we have also, I mean, the -- we have the flexibility of the [ modular ] platform with the cab-over engine global that, of course, we are redirecting volumes from Latin America.

[Hampus Engellau, analyst]

In the U.S., it's not like a specific situation, it's more on a broad basis when it comes to supply chain.

[Martin Lundstedt, executive]

No, I mean, I cannot talk for the industry. We see what we see. But I mean we have a number of clear issues that we are working with that we can pinpoint for the Volvo industrial system, if I put it like that. But we also see in the broader scale that beneath that, there is still a higher level or higher number of different value chains that are more constrained. Having said that, Europe is not out of the woods. We are talking about an easening, and those are very complex value chains that will continue to take time to gradually heal and reset, so to speak.

[Christer Johansson, executive]

Thank you, Hampus. And with that, we take up the next caller, if we have anyone. It's Nicolai Kempf at Deutsche Bank.

[Nicolai Kempf, analyst]

It's Nicolai here from Deutsche Bank. Hope you can hear me. So my first question, a follow-up on North America. Can you give maybe a bit more color what's causing this shortage of truck drivers? Will it be short of semis?

And my second one would be on input prices, which are still a headwind. Would you expect softening here over the next quarters?

[Christer Johansson, executive]

North America and what's holding back the production and then input prices in the coming quarters.

[Martin Lundstedt, executive]

Okay. No, as I said, in North America, it is, generally speaking, more a turmoil. And then we have a number of specific suppliers that has more clear problems to hold up the volumes. And we are working very close to them on that. So we will get through that, obviously. But for the time being, that is a situation that is more related to particular suppliers rather than electronics or semiconductors. But having said that, we will continue to work with it. And I don't think we should overdo the -- making it more problematic than it is given the overall result of the group in quarter 1.

[Christer Johansson, executive]

And then, Jan, input prices coming quarters.

[Jan Ytterberg, executive]

Yes. And I described also a quarter -- this first quarter with compensation to suppliers and higher costs. And as I said, that raw material prices are more stabilizing than anything else and that is sort of then valid for Q2. And then I also mentioned that we will have -- we have sort of changing elements maybe from energy prices in the discussion with suppliers more into other costs like the [ sales ], et cetera. So we will continue to see what we saw here in the first quarter also into the second quarter as regard input prices. That's my take on it.

[Christer Johansson, executive]

I think, actually, we're starting to come to the close of this press conference. We had a few technical issues, but I think we start to wrap it up.

[Martin Lundstedt, executive]

Yes. And maybe, actually, there's always, obviously, for -- I think it was Erik and Daniela, right, in this case, I mean, but that goes for everyone, in particular, Christer and team, of course, are available for follow-up. And we are also, as you know, highly involved in that. So we are sorry for the technical disruptions, but we are available.

And before closing, I would also like to actually reveal now that maybe the most important news for this quarterly reporting, and that is that our long-serving star in the Investor Relations space, Mr. Christer Johansson, actually will take the next step in his career after having been 17 years the Head of Investor Relations for the Volvo Group and into your 18th year. Christer said always that you have almost seen it all. He had one tick in the boxes that he really wanted to achieve, and that was -- had to do with pre-release. So now you have achieved that as well.

And Christer, you will now take the next step heading, amongst other, business development and M&A activities together with the team on Construction Equipment, going back to where you come from, basically. Actually, you were working also many years in Volvo Construction Equipment, have a big heart for that.

[Christer Johansson, executive]

Absolutely.

[Martin Lundstedt, executive]

And with all the experience, obviously, can contribute a lot. We are very happy. And I think it's reasonable that after almost 18 years heading this in all different aspects that you take the next step. We thought it was good to reveal it for you because we know that Christer has been extremely appreciated. He will be hanging around. I joked with Christer yesterday and said, I mean, change phone number so everyone will not can just call you.

But having said that, all the best, Christer. We have a strong team, as you know, also that Christer has built when it comes to Investor Relations. But all the best for the next step. We will continue to work closely together.

[Christer Johansson, executive]

Absolutely.

[Martin Lundstedt, executive]

Anything to say from your side?

[Christer Johansson, executive]

No. It's been great all these years, really appreciating the job. But now I'm going to come a bit closer to the Construction Equipment business, which is going to be a lot of fun.

[Martin Lundstedt, executive]

So with that, then we are thanking everyone for listening in today, and have a great day. Thanks a lot.

[Christer Johansson, executive]

Thank you.