Volvo AB

STO:VOLV B

Earnings Call Analysis

Volvo's Strong Performance Amid Market Normalization

In Q1 2024, Volvo Group reported stable sales at SEK 131 billion and an operating income of SEK 18.2 billion, yielding a 13.8% margin. Despite a 10% decrease in truck deliveries, solid inventory management contributed to nearly SEK 9 billion in operating cash flow. EPS rose 10% to a record SEK 6.92. The company is adapting to normalized demand, particularly in Europe, where balance is expected in Q2. Volvo continues to invest in R&D and electrification, though electric order intake slightly declined due to market uncertainty. The AGM approved a SEK 18 per share dividend and introduced new products and partnerships.

Strong Financial Performance Amid Global Uncertainty

In the first quarter, the company demonstrated resilience despite global uncertainties. The firm's net sales reached SEK 131 billion, aligning with the previous year, while the operating income was SEK 18.2 billion, yielding an operating margin of 13.8%. Earnings per share saw a significant increase of almost 10%, reaching SEK 6.92. This robust performance was supported by strong service operations, tight cost control, and strategic pricing, ensuring high quality and competitiveness.

Segment Performance and Market Adjustments

Volvo Group’s segments showed varied performance. The Trucks segment saw a slight 1% increase in net sales despite lower volumes, driven by positive pricing effects and lower raw material costs. Construction Equipment experienced an 8% decline in net sales, primarily due to negative market mix and flat volumes. Volvo Buses showed a positive 19% increase in net sales, propelled by strong pricing and lower material costs. Financial services also reported growth, with a 13.7% return on equity over the past 12 months.

Adapting to Market Normalization

The Truck segment is gradually adjusting its capacity to match the normalized market demand, expecting to achieve balance by the second quarter. In North America, despite the strike at Mack Trucks, the strong order coverage and management decisions have restricted new order slots to prevent an overly extended order book. The company remains committed to maintaining commercial and pricing discipline while managing inventories closely to balance demand and supply.

Investing in Future Technologies

The company continues to prioritize investments in R&D for zero-emission and autonomous vehicles, reflecting higher R&D and selling expenses. Notable developments include the launch of the Volvo Construction Equipment's fully electric grid-connected material handler and Volvo Penta's IPS Marine Drive solution. Furthermore, strategic acquisitions like the battery business from Proterra and a partnership with Westport Fuel Systems to develop high-pressure direct injection fuel systems underline Volvo's focus on sustainable innovation.

Robust Cash Flow and Capital Management

Volvo Group delivered an impressive SEK 8.9 billion in operating cash flow, marking the best first quarter ever, partly due to effective inventory management. The return on capital employed improved to 37.7%, and the net cash in industrial operations reached SEK 88.7 billion. This strong cash position provided a solid foundation, even before the dividend distribution of SEK 36.6 billion.

Strategic Outlook and Market Position

Looking ahead, Volvo Group maintains its market forecasts across its segments, anticipating balanced operations by the second quarter. With a clear focus on maintaining pricing discipline and customer relationships, the company is well-positioned to navigate ongoing market adjustments. The establishment of a new truck manufacturing hub in Mexico underscores its commitment to expanding capacity and market reach in North America and beyond.

Earnings Call Transcript 2024-Q1

[Johan Bartler, executive]

Welcome to the Volvo Group First Quarter Report. We will do, as always, we'll listen to the presentation from our CEO and CFO, Martin and Mats. And then we'll follow up with the Q&A session.

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

[Martin Lundstedt, executive]

So thank you, Johan, and also from my side, most welcome. And as we conclude now the first quarter of 2024, I would like to start with thanking our customers, business partners, and colleagues for a good continued cooperation and partnership also during this quarter.

As all of us now know, we are living in a world with lots of uncertainties. And in a world with lots of uncertainties, strong relations are more important than ever. When it comes to the quarter, as expected, demand continued to normalize across many of Volvo Group's major markets during the quarter, and still despite lower volumes and lower deliveries of primarily vehicles, sales were on the same level as in the same quarter of 2023 of SEK 131 billion with an operating income of SEK 18.2 billion and an operating margin of 13.8%.

Earnings per share increased with almost 10% to SEK 6.92 per share. And as a company, we continue now to prioritize high quality in the business by having a strong focus on our service operations serving our customers, volume flexibility in the industrial system, tight cost control combined with commercial and pricing discipline. At the same time, we will continue to drive our R&D investments in the new technologies and services that are transforming our industries and thereby also securing our current and future competitiveness.

If we summarize the quarter, the group continued, as I said, to deliver strong results with the sales in line with last year. Our adjusted operating income came in on SEK 18.2 million, corresponding to a margin down of 13.8%. With the combination of strong earnings and focus on inventory management, we had a level of operating cash flow amounting to almost SEK 9 billion, which elevated our net cash position to almost SEK 89 billion, and that was before then the distribution of shareholders' dividend in April.

Return on capital employed in Industrial Operation increased to 37.7%. And as I said, EPS or earnings per share to SEK 6.92.

So all in all, we summarize another strong results, thanks to great work by colleagues supported by strong commercial and operational execution.

On the back of normalized demands, our truck deliveries softened by 10% to 55,500 vehicles. And we are continuing to adapt our operations to the normalized demands in steps. We started at the end of last year and anticipate now to be fully balanced during quarter 2 with already decided measurements.

The deliveries of the Volvo Construction Equipment were flat. We have increased the deliveries by SDLG in China, while Volvo deliveries in Europe and North America decreased. But given the still complex situation, it was a great job done by everyone.

When it comes to the electrification progress, underlying electric demand is slowing down somewhat. In quarter 1, booked orders were slightly lower compared to last year. But we regard this more as a blip on the curve, mainly related to the uncertainties that we see right now, uncertainties related to interest rates, inflation, incentive systems, but also energy prices and infrastructure availability.

In addition, the lower order intake is partly also related to supply issues that we had during last year in North America that slowed down deliveries and build further the order book and order backlog. So from a customer and a bit long order book and thereby, it's a little bit of hesitations when it comes to the order intake.

But from a customer perspective, it is still the early adopters that drive the current demand and the current order intake. With that said, we are first out in our core markets with the electrification offer and to push the envelope, and we will continue to push. That is also reflected in our high market shares in our main markets that I will come back to.

With that said, group electric orders amounted to 1,000 units in quarter 1 and deliveries to 1,300, and book-to-bill rolling 12 months was more or less in balance.

When it comes down to sales of vehicle and machines, we had sales adjusted for currency decreasing with 2%. Trucks invoicing level was flat versus same quarter last year. Sales of construction equipment were down with 9% due to the product and brand mix, lower volumes in Europe and North America and increased deliveries in China.

Sales of buses increased 24%, linked with higher deliveries at higher value, primarily driven by our coach business. And sales of Penta declined with 9% with lower deliveries in most of the segments.

We had a good continued solid demand for services with also a good growth, plus 6% if we adjust the currency. This is a result of improved commercial conditions together with a continuous good and solid activity level amongst our customers. Efforts to increase contract penetration and other services are also paying off step-by-step.

The group is now pacing at a solid level, 12 months rolling of SEK 129 billion. Group Trucks had sales of 3%, whereas Construction Equipment had a decline of 3%, related to somewhat softer machine utilization and a more cautious deliveries to North American dealers after a very strong delivery quarter -- in quarter 4, 2023.

Volvo Buses continued to show strong service sales development as people travel, fortunately has come -- continue to come back after the big hit that we did see during the pandemic. And for Volvo Penta, marine leisure was softer.

Strong Volvo Financial Services growth, thanks to a growing business portfolio. So all in all, a solid result from services, an impressive achievement by the organization. And still, we have a good potential to continue that journey step-by-step.

The quarter also contained several important group news. The acquisition of the battery business from Proterra in the U.S. is now completed. Following also the Letter of Intent, we have in March, signed an agreement with Westport Fuel Systems of the establishment of a joint venture for high-pressure direct injection fuel systems aimed for biofuels and hydrogen in combustion engines, also a very important piece of the puzzle when it comes to our genre towards fossil-free solutions.

And at the end of March, Volvo hosted our AGM, where our shareholders decided for a total dividend of SEK 18 per share, corresponding to approximately SEK 36.6 billion in total. In addition, Pär Boman was elected Chair of the Board, succeeding Carl-Henric Svanberg, who stepped down after 12 years as Chair. And we would like to take this opportunity to again thank Carl-Henric for his great contribution to the group.

We also have lots of exciting news at the beginning of 2024 in our Truck business areas. Volvo Trucks has unveiled the all-new heavy-duty VNL product family for the North American market. And last week, Volvo Group also announced the establishment of a third hub for truck manufacturing in North America, and it will be located in Mexico. The new plant will be multi-brand and serve both Volvo and Mack will be operational from 2026. This plant will complement our existing facilities in Virginia and Pennsylvania and add further capacity. So it will be a structural uplift.

These news, in addition to previous announcement, will further support our growth plans for North America. In Europe, Volvo also launched all-new Volvo Aero. Truck range and customer receptions are very positive. Also in March, Volvo Group, together with Renault SAS, or Renault Group; and CMA CGM, completed the creation of a joint venture, Flexis SAS, for an all-new generation of electric vans for urban logistics built on a complete new way, including a software-defined vehicle platform.

Renault Trucks and Renault Group have since many years a successful cooperation in the light commercial vehicle market, and this joint venture will further strengthen this cooperation, not at least targeting the growing last-mile deliveries for e-commerce and retailers.

When it comes to the truck market forecast around the globe, it is rather undramatic since we are actually reiterating most of our forecast that we have had from last quarter, and most of them actually already in relation to quarter 3 2023. So for the full year in North America and in Europe, we reiterate what we have already said, 290,000 for North America and 280,000 for Europe. And it is important to remember that those levels are still representing good and solid levels and more underlying trend line.

For Brazil, we increased the forecast with again, I should say, with 5,000 units up to 95,000, reflecting also a good recovery. For India, a little bit of hesitation given also the election here. And we are taking down the forecast with 35,000 units, but we see that this is the plateau and preparing for that.

And for China, we are keeping the forecast in relation to last forecast, unchanged. And maybe to say this with this anticipated normalization, we have gradually and swiftly taken steps to adjust our capacity and cost base accordingly using the flexibility tools we have in the group. We will give the current situation be in balance in our operations during the second quarter. And we are implementing, as we speak, starting at the end of last year.

When it comes to -- let's see here if it works. There. Looking a little bit to the book-to-bill situation for trucks in quarter 1. Group Trucks had approximately 48,700 orders and 55,500 deliveries, leading to a book-to-bill of 88%. This is still in line with our expectation of a normalization of demand in our main markets, and I will come to the specific details here that I think are of importance.

In Europe, the book-to-bill increased to 86% and moves towards balance in the industrial system during quarter 2 with the capacity adjustments that I just talked about that started end of last year.

In North America, we had a book-to-bill of 64% as Mack production slots were moved into 2024 due to the strike during the fall of 2023. This move came on top of an already good order coverage for Mack Trucks. Hence, Mack has been very restrictive in taking new orders during quarter 1, and I think that is important to take into consideration.

In South America, there is a continued good momentum in Brazil with growing order books and book-to-bill of impressive 156% in the quarter. Also, Africa, Oceania and Asia had good order coverage. So we will continue to make sure that we have the right balance between order intake, production, inventory, and deliveries. So we have an order book with the right quality to manage delivery reliabilities on one hand, of course, serving our customers while at the same time, manage inflation and other uncertainties. The main priority remains to maintain our commercial and pricing discipline.

When it comes to market shares, Volvo and Renault in Europe had a combined level of almost 26% when it comes to the total market and at almost 75% of battery electric vehicles. In North America, Mack's share has been affected by the strike last fall. The 2 brands had a combined market share of 14.4% for the first quarter that actually was in line with last year.

But also in North America, we had a leading position when it comes to electric vehicles with a market share close to 50%. Volvo's performance in Brazil remains on a good level, market share above 22%. And Volvo and Mack in Australia had an impressive combined market share of 27%.

For Volvo Construction Equipment, VCE introduced a new fully electric grid connected material handling machine, the EW240. And this is the latest addition to its range of zero exhaust emission machines and an application well suited for grid connection. The machine is now available for select customers initially in Europe, but then we will continue to launch it in other regions as well.

When it comes to market forecast of the construction market, it is following our expected normalizations in all our markets and in our main markets. Therefore, no changes have been made to the market forecast. And as the markets are normalizing also here, we have and are gradually continuing to adjust our capacity and costs.

When it comes to book-to-bill, the overall book-to-bill was 96% in quarter 1 and 82%, 12 months rolling. In Europe, we had a book-to-bill of 88%, and we are gradually adjusting our capacity to come in balance between order intake, order book and deliveries very similar as for trucks. And in North America, book-to-bill was 83% with a somewhat softer market for excavators, but wheel loaders and haulers holding up.

And in South America, we see a continued good momentum in Brazil and a very similar pattern to what we see for trucks. Also in Asia, book-to-bill was on a good level on 97% and Africa, Oceana are reporting good order coverage. Volvo Buses book-to-bill in the quarter was lower at 67%, but with also the order pattern of bus, and more important book-to-bill of 105% for 12 months rolling as Volvo Buses came into 2024 with a high order coverage. The global VSAT air electric chassis for City and Coach was launched in March. This truly flexible chassis platform, enabling both platform synergies moving forward, but at the same time, highly customized bodies for our customers.

Volvo Buses also finalized the production of bodies in Poland, the restructuring activities in March according to plan. Now the implementation of the new business model in Europe continues, and our external body building partners are preparing for production start during the course of the year and customer deliveries in 2025. And this is another important step to structurally improve the performance of Volvo Buses.

Volvo Penta had a book-to-bill of 87% in the quarter and 84% 12 months rolling and is continuing to adapt its capacity gradually as Penta customers are destocking now on the back of the softer demand. During the quarter, Volvo Penta launched a successful IPS Marine Drive solution also for commercial ships and super yachts, the IPS professional platform. The technology builds on Volvo Penta's inboard performance system and electronic vessel control technology with enhancements now to accommodate even larger vessels.

And Volvo Financial Services had good portfolio growth of 16% and growth across most markets, both for retail as well as wholesale. Penetration levels are stable, 12 months rolling, but have increased in relation to quarter 1 last year both in Europe and North America. We did see solid earnings and stable portfolio performance in the VFS portfolio. Delinquencies are somewhat up from last year, but still on reasonable levels.

And that, Johan, concludes the business report, and I hand over back to you.

[Johan Bartler, executive]

Thank you, Martin, for your presentation. And that brings us into the financial update by Mats. So please go ahead.

[Mats Backman, executive]

Thank you, Johan. So looking into the financials now. Overall, we had a strong performance in the quarter. And operating income and operating margin on good levels, and this is despite the lower volumes we see mainly in Europe. Operating cash flow in industrial operations was the best ever for a first quarter.

And one more data point that I think deserves to be mentioned is our strong earnings per share at SEK 6.92 in the quarter, which is a record for the Volvo Group. We had a good balance between our perform agenda to deliver here and now as well as our transformation again that is more forward-looking.

On the performance side, we are driving continuous improvements through price realization to offset the underlying cost inflation. We are driving growth in our service business. And we continue to address production capacity and cost levels to balance the normalizing demand we see in Europe. With implemented activities using our flexibility tools, we anticipate having a truck industrial system in Europe balanced with the current demand during the second quarter.

And we continue to manage our inventories in a good way. First quarter always have a seasonal buildup of inventories. But during this quarter, we had SEK 3 billion less inventory built up comparing to last year, which contributed to a strong cash flow development year-over-year.

In parallel, we continue to invest in our transformation agenda, and Martin talked about the partnership that we created during the quarter. So all in all, a strong quarter with high activity level. Looking into the details then and starting with the net sales. Adjusted for currency movements, net sales were in the same level as first quarter last year, however, with variations between different geographical regions.

We saw weakening demand in Europe for both trucks and machines with a sales decline of about 2% FX adjusted. And the decreasing sales in Europe was mainly driven by lower sales for machines. North America had a positive development in the quarter, 2% year-over-year FX adjusted. And in South America, demand is coming back after the slowdown in the market that we saw last year.

Sales increased with 17% FX-adjusted, and this was mainly driven by good trucks deliveries in the quarter. And then finally, the sales in Asia that declined with 6% FX adjusted.

Moving on to the operating income. The adjusted operating income for the group was SEK 18.2 billion with an adjusted operating margin of 13.8%. And this was a clean quarter with no adjustments. On gross income, we continue to be successful with price realization, both for vehicles and services, which together with lower raw material costs, contributed positively to the improvements year-over-year. This was, however, partly offset by lower volumes affecting the productivity.

The general inflation of salary increases are negatively affecting the operating expenses, and we are also investing in the transformation to zero emission vehicles as well as autonomous vehicles. And this is reflected in higher activities and thereby increasing R&D and selling expenses.

The net capitalization effect in the quarter was negative with some SEK 200 million compared to last year, and we expect about SEK 1.5 billion for the full year '24 and positive earnings effect from capitalization of R&D, with the majority of the effect in the second half of the year. FX had a negative effect on earnings of some SEK 300 million, and we expect the effect from transaction exposure to be neutral for the full year '24, and we don't give any guidance on the full FX effect on earnings.

Looking into the cash flow. First quarter is, from a seasonality point of view, a weak cash flow quarter due to seasonal buildup of inventories. This quarter was, however, the best first quarter ever. With strong earnings in combination with good inventory management, the group delivered SEK 8.9 billion in operating cash flow. And on the back of an effective operational balance sheet and strong earnings, the return on capital employed improved to 37.7% on a rolling 12-month basis.

Net cash in industrial operations reached SEK 88.7 billion. And this is, however, before the dividend distribution of SEK 36.6 billion that we did in the beginning of the month.

Looking into the segments and starting with Trucks. The increased FX adjusted net sales for group Trucks of 1% on lower volumes were driven by positive price effect year-over-year. The record high adjusted operating income and adjusted operating margin for the first quarter was mainly driven by price realization on vehicles as well as service and lower raw material costs. This was despite under-absorption driven by ongoing adjustment in capacity to align with the new demand level in Europe.

We also see increasing investment for the transmission, and that is impacting the level of R&D and selling expenses. FX impacted adjusted operating income negatively by SEK 400 million in the first quarter.

Moving over to Construction Equipment. FX-adjusted net sales decreased 8% on flat volumes due to negative brand and market mix. Adjusted operating income decreased with SEK 900 million to SEK 3.7 billion. Higher prices on both new vehicles and parts together with lower raw material costs were offset by negative mix from more volume in China and less volume in Europe and North America. Adjusted operating income margin reached 16.1%, and we had no impact on earnings from currencies. FX was neutral year-over-year.

Looking into Buses. FX adjusted net sales increased with 19%, mainly driven by strong price realization. Adjusted operating income increased with SEK 81 million to SEK 259 million, mainly driven by price and lower material costs. Adjusted operating income margin increased to 5%, and currency had a positive impact of SEK 48 million in the quarter.

And then looking at Volvo Penta. Driven by lower volume, FX adjusted net sales decreased 7% to SEK 5.2 billion. Adjusted operating income decreased to SEK 988 million, due to lower volumes, higher S&A expenses and production under absorption, and this was partly compensated by price realization. Adjusted operating margin came in at 19.1%, and FX impacted positively by SEK 11 million in the quarter.

And then last but not least, financial services. The credit portfolio increased to SEK 270 billion with a rolling 12-month return on equity at 13.7%. Customer financials and payment continue to be good, reflected in relatively low write-offs and credit provisions. Adjusted operating income increased to SEK 1 billion, and FX had a positive effect of SEK 50 million on the adjusted operating income in the quarter.

So with that, I'm handing back to Johan.

[Johan Bartler, executive]

Thank you for the financial update, Mats. So Martin, how would you like to summarize the first quarter?

[Martin Lundstedt, executive]

Thank you, Johan. I think there are a number of topics that I would like to highlight during this short summary. First and foremost, despite continuous global uncertainty, it's a very strong quarter, executing on our consistent way of doing business. So really a big thank you to all dedicated colleagues, but also we see that activity levels continue on good levels amongst our customers.

Of course, there are some up and downs, but generally good and solid activity level reflected in our service business and we continue to work closely with our customers here. At the same time, with the anticipated normalization of the market, we are also gradually adjusting our capacity to be in balance. And as an example then, as we've said for trucks, we anticipate in Europe mainly then to be in balance during quarter 2 and largely being balanced globally in the world.

And we started early with these adjustments. In that regard, we are focusing on utilizing the toolbox that we are sitting on in the group, maintaining a high focus on our commercial and pricing discipline, tight cost control, utilizing the flexibility we have in our industrial system, but also continue to monitor the balance between orders, deliveries, inventory levels and order backlog. So all in all, we are utilizing a strong toolbox that we are sitting on.

And finally, I would like to say, and you see that also with continuous launches of new products and services. It's important for us to drive the agenda with the high operational performance and profitability we have, resulting also in a strong and solid financial position. We continue to prioritize innovation investments to stay in the forefront of the transformation of our industries and markets. So again, as we have talked about, the importance of performing here and now to transform to perform. That is the message also for this quarter, Johan.

[Johan Bartler, executive]

Thank you, Martin. Thank you. So before we move into the Q&A session, just to remind you about our Capital Markets Day, which we are planning for November 14 in Virginia, North America. We will send out an official invitation via press release later on during the spring. But for those of you who have already sort of made up your mind to come to the U.S., please reach out to us in Investor Relations to myself, Petra or to Anders.

[Johan Bartler, executive]

So with that, we are coming into the Q&A session. There are many people on the line. And in order to facilitate as many as possible, please limit your questions to one, if you can. And prioritize on your most important question. So with that, we're moving over to Stockholm and to Erik Golrang. Please go ahead, Erik.

[Erik Pettersson-Golrang, analyst]

I have 1.5 question, starting with -- sowing out a bit another quarter with really strong profitability. And just taking some perspective on the last few quarters, you went into 2023 and you and the full industry saw a significant improvement in profitability, arguably on very strong pricing. I mean, as you look back now, how sustainable do you think that is? And to the extent you don't, what's the trigger for normalization? That's the first question.

And the half question is the size of the investment in Mexico.

[Martin Lundstedt, executive]

Thank you, Erik. And we actually anticipated exactly this reaction, so maybe we can go down from 2.5 to 2 with them. But having said that, first and foremost, correct. Obviously, it has been a good price realization when it comes to last year. And it was also gradual during the course of the year given the circumstances, both related to the market, but I should also argue related to the fact that we continue to also introduce new products and services, and we'll continue to do so.

Having said that, of course, there is a limit. And with the market that is now stabilizing and following our expectations, our priority is to continue, as we said, to maintain a high commercial and pricing discipline. And we will prioritize that also, so to speak, short term over volume because that is very important. And we think it's also important in relation to our business partners to be consistent over time.

So that is where we are putting focus. Then when it comes to an investment in Mexico, we will not reveal the exact figures. But what we are talking about here, it is a final assembly unit that will serve both brands. And it is also [ bolt-in ] white and painting. So we are talking about, I mean, an investment that is well known in the market and also very well known for us, what is, so to speak, the expected level and thereby also the expected return. The important message for us with this investment, strong rollout on new products. VNL now, for example, for Volvo, we are continuing to invest in North America. We need a structural upgrade of our capacity since in the last periods, our market share have been decided by our value chain capacity, and that cannot be the case. So well contained in our CapEx plans and the right thing to do.

[Johan Bartler, executive]

Very well. We're moving on to the next person on the telephone line, Hampus Engellau from Handelsbanken.

[Hampus Engellau, analyst]

I have a question regarding your service growth during the quarter on 6%. If you could perhaps add some flavor on how much is price rollover and how much is underlying volume growth? And then the second, first question is if you could maybe split that a bit in the geographies like North America, Europe?

[Mats Backman, executive]

Maybe to start with, if you're looking at the growth, we had the 6% in the quarter, and that's obviously a mix between price and volumes. So we had positive volume, positive price, and it's more price, so to speak, then. But both of the components were positive.

And it's also one more thing that I think we need to remember when we're looking at the service growth and especially on the year-over-year numbers, is that we also have an Easter effect coming in this year done with an early history. Meaning that depending on how you calculate globally, but it's probably between 2% and 3% in working day effect as well then in the quarter.

[Martin Lundstedt, executive]

Yes. When it comes to the mix effect, I think, we have continued to see, I mean, good execution in all different parts of the world. What is important, of course, is that we've had a longer tradition of contract management in particular in Europe. But we are already -- gradually also increasing that penetration in other markets as well. And that helps, of course, a further recurring opportunity for us when it comes to the service business.

[Mats Backman, executive]

And maybe adding 1 more data point, just looking at the service overall and especially the importance when it comes to the kind of the resilience in terms of revenues also when we see lower volumes, is that if you're looking at the revenues total share of the or the service total share of revenues, we're on 25% for the quarter. If you adjust compare year-over-year, it's a 200 bps improvement in terms of the percentage in share as well and kind of underlying the importance of service also.

[Johan Bartler, executive]

We're moving over to London, Goldman Sachs and Daniela Costa.

[Daniela Costa, analyst]

I'll stick to one, and it relates to the competitive landscape at the moment in Europe. You clearly have been sort of the first to cut production and quite proactively since December talking about it. And as you just mentioned, you're very focused on pricing and then margin.

But more generally with the others not cutting production, are you seeing any shifts in the competitive landscape at the moment? What could be the implications if the others don't cut for market shares further down the line? Any thoughts in that would be interesting.

[Martin Lundstedt, executive]

No, but, I think -- I mean, obviously, it is a little bit a longer play to discuss. Because if we look at 2023, for example, we had a good market share, continuous good market share situation in Europe. So I should argue that we have been maintaining, so to speak, also performance in the industrial value chain for us now and working very closely with our customers, seeing where things are heading.

We still have an inflationary landscape. We have a number of uncertainties. It's super important to keep balance in the order book. This is following the anticipated total market levels that we are forecasting. And for us, it was important to take measures early, because then we will get the right balance between orders, deliveries, stock or inventory levels and order book. And so far, that is following our plans.

If that short term will result in some changes downwards in market share, we are ready to take that as long as we don't see any structural, so to speak, changes in the relation to our customer base. But so far it's following the plans, and we will execute accordingly.

[Daniela Costa, analyst]

If I can just follow up very quickly. Maybe we don't see the others becoming more aggressive on pricing?

[Martin Lundstedt, executive]

I mean, we cannot comment what others are doing. We are very clear that, we think it's important, both in our relations to customers, but also other stakeholders to be consistent over time. We have anticipated the normalization of the market. We are adjusting accordingly. We see a good activity level when it comes to services and consistency in our commercial execution is very important.

[Johan Bartler, executive]

Thank you for that, Daniela. Next one on the line is Klas Bergelind from Citibank.

[Klas Bergelind, analyst]

So my first one is on the solid pricing here coming out of the backlog in Trucks. And I assume that from the second quarter, you will deliver more orders you took at the end of last year. And what I'm trying to understand is if the price level here on those orders versus those that you got out of the backlog here in the first quarter is very different, obviously, we have a softer market in Europe. Because if that's the case, then the drop-through might suffer here from the second quarter onwards. I'll stop here.

[Mats Backman, executive]

I can start. So I guess the question is related to the price carryover, I guess, then that we see from '23. And I mean you are correct when you are doing the kind of the year-over-year comparison that you will have a kind of a declining effect on the price carryover throughout '24 then. So I mean, being the highest one, obviously, in the first quarter and then declining into the second quarter, and then it will be gradually going down throughout the year then. So that's correct. If we are looking more kind of sequentially and if you are looking, trying to kind of do a sequential forecast, I mean, what we are saying that with the discipline that Martin talked about as well that we kind of considered pricing to be kind of flat sequentially, but positive year-over-year due to the carryover.

[Klas Bergelind, analyst]

Okay, very clear. Very quick final. I also have 1.5, So this will be the half. Just on -- and also on the drop through quarter-on-quarter picking about production. I think Martin, you said you're now moving to a balanced system during the second quarter. So does that mean that flat production is likely quarter-on-quarter, i.e., no more drag from production versus the first quarter? Or will we see any effect there from production sequentially?

[Martin Lundstedt, executive]

No. And I think it's important when we talk about that, and Mats also seen into it also during his presentation, obviously, that I mean we -- when we have, so to speak, a normalization in the market, we will not produce more than what is, so to speak, the right balance between orders and deliveries and order book, as I said. Meaning that when we are taking down, so to speak, the levels in the industrial system, we will also -- we see -- we did see that during quarter 1 an under absorption related to the fact that we were running some of the plans not at full utilization.

What we say now is that with those levels that we will continue to balance towards given also our reiterated market forecast, we will have balance instead of a clear under absorption that we did see. So that is how we look at it. When we have gradually taken it down and we started at the end of the year, we are also utilizing stop deals if needed because we are very strict on having the right inventory levels in order to be in balance, but it's more the structural balance that we are talking about for quarter 2 right there.

[Mats Backman, executive]

Yes. And I mean, obviously, I mean, we had under absorption in the first quarter and the kind of the balance will not kind of hit April 1, and that will be a gradual kind of journey to getting the balance throughout the second quarter and maybe more towards the later part of the quarter, meaning that also some under absorption in the second quarter with the current kind of volumes.

But I also want to highlight, when you're looking at the first quarter, that we managed to reduce inventories less comparing to a normal year, meaning that we didn't take the kind of the easy way out of producing on a high level for inventory. So we had the balance as well, which I think is also important from a cash flow and a balance sheet point of view.

[Johan Bartler, executive]

Thank you, Klas. We move to JPMorgan and José Asumendi.

[Jose Asumendi, analyst]

Congrats on a very strong execution in the first quarter. I would love to get, please, a bit more details on 3 elements. One, how much capacity are you planning to add in Mexico and a little bit more the rationale behind this adding capacity? And are you planning to add capacity in any other regions?

Second, linked to the first one, how do you think about your market share in North America? You've got, obviously, your peers pushing hard in the regions. So what is the plan to improve the market share in North America? And could this be potentially linked to your expansion plans in Mexico?

And then three, would love to get a bit more comments based on CapEx, where are we on CapEx this year and the overall CapEx cycle this year and next year?

[Martin Lundstedt, executive]

Yes. Thank you, José, for those questions. And as we said, I mean, the rationale is completely linked to what you said between question 1 and question 2 or topic 1 and topic 2. We are installing our third hub in North America, primarily then for the North American markets, but also for Mack. Important to see that we have growth opportunities for other markets, Central and South America, also with investments that we are continuing to pursue for Mack. So this will be a multi-brand factory then supporting our 2 main operations that we have in Virginia and in Pennsylvania, respectively.

And we see, as I said also in my presentation, that in order to support our market share ambitions, we are today around 15%. But we see also with the investments that we have done in range, in the product range, both for Mack, Volvo now lately, and we will continue to invest for the 2 brands. There is a good opportunity to grow market shares. And this is linked to that structural uplift of capacity.

We have a solid business with a proprietary product offering today. We have seen dealers investing in the footprint, really reinforcing our presence, and now it's the time to take the next step. So number 1 and number 2 are highly connected with addition that we will utilize this to also strengthen the situation for some other markets. So it's an addition and a complement to the footprint that we have. We want to place it also on the West Coast since we are highly concentrated on the East Coast of North America. Then we come to CapEx. I don't know if you would like to start there, Mats.

[Mats Backman, executive]

Yes. I mean it's no kind of drama looking at the CapEx then. So all the kind of the bigger CapEx that's kind of beyond the '24. So I guess, I mean, what we did in '23 and now we are kind of continuing on that journey, but no dramatic changes when it comes to CapEx.

[Johan Bartler, executive]

Thank you for that. Then we are ready for Deutsche Bank and Nicolai Kempf.

[Nicolai Kempf, analyst]

Nicolai speaking from Deutsche Bank. Congrats to strong start to the year. My question is on the order intake in North America. You flagged some weakness strike linked to Q1. Does this imply that we're going to see a catch-up in Q2, also given that you have all the order books for the new VNL truck?

[Mats Backman, executive]

Thank you, Nicolai, and thank you for the congratulations as well. First and foremost, what we can say is obviously, that order intake as I clearly said also was affected by internal, so to speak, decisions, in particular then for Mack trucks. Already, so to speak, before the strike and the disturbances that we had related to that event during the fall, we had good order coverage for Mack, given also the mix in the market where vocational and typical Mack segments are moving strong.

And then with the necessary move of production starts into 2024, Mack trucks and management of Mack trucks decided then to be restricted in order slotting. So we are not getting an order book that is far too long out in time, as we have seen for other markets and other brands before.

So the order level here is not reflecting, so to speak, the market expectations for us. And in that regard, you can say that you are correct in your assumption. I think it's important to mention that we are reiterating our total market forecast for North America of 290,000. And then let's see beyond that, we also, of course, have event coming up in 2027. And let's see when that will start to take off as well. So full steam ahead.

[Johan Bartler, executive]

Thank you, Nicolai. We're moving to Stockholm, maybe to Olof Cederholm.

[Olof Cederholm, analyst]

I have a question on the Construction Equipment. You continue to deliver very good margins. And how should we think about that business now in the near term? Will we see a normal seasonality in that business from here? Or should we expect sort of different market changes to weigh on that normal seasonality?

[Martin Lundstedt, executive]

I think -- thank you, Olof, for that question. And when you look at the book-to-bill, et cetera, for the main markets and also our market forecast, I think both of them are, so to speak, they are subscribing to the strategy that we see also has had to really be early out adjusting, taking down, et cetera.

So market forecast unchanged in relation to what we said last quarter. And now it's about really to balance that to your point. And that includes, of course, the normal seasonality because the normal seasonality doesn't go away because you have, so to speak, cyclical adjustment. So that is number one.

And then you can say also when it comes to the book-to-bill, I think that is also underlying that they have done a good job to actually work with the balance between orders, deliveries and inventories, et cetera. Then obviously, we see it has a little bit more of a global footprint with more concentrated operations. That will level out over time, but it can play a little bit over quarters.

But I mean, the bigger picture is that they are working very similar to trucks, market forecast unchanged and the book-to-bill that is also balancing. I don't know if there's something to say there, Mats.

[Mats Backman, executive]

Maybe from looking at the financials, one important thing to add, that's the mix, geographical brand mix as well. Because when we see this kind of increasing -- relatively increasing share from China, we will have a negative mix impact on CE, and I think that's important to consider as well.

[Olof Cederholm, analyst]

Yes. And maybe my half question would then be on price, pricing trends for CE as well, if you could throw that in there.

[Martin Lundstedt, executive]

Yes. But I think also, I mean, just to add to 1 month, because when you have that geographical change, you have also a product mix change since your -- I mean -- and I mean, you have by nature more heavy equipment in the portfolio when it comes to Europe and North America, GP-wise.

Otherwise, I mean, price realization, a similar pattern as we have talked about when it comes to trucks and also stating that, that is one of the positives for the quarter. And sequentially, we are working with the same type of strategy when it comes to commercial and pricing discipline and try to maintain our levels.

[Johan Bartler, executive]

Thank you. DNB, Mattias Holmberg.

[Mattias Holmberg, analyst]

Martin, if we recognize a substantial operational improvements that always achieved under your leadership and looking now instead into the quite early stages of the industry transition towards zero-emission trucks. Would be interested to hear your thoughts on how you plan to lead Volvo in this transformative period, in particular given that we see leadership changes in some other companies facing similar transactions like SSAB. How are you thinking it sort of on staying in Volvo during this transformative phase?

And what are your thoughts on the leadership qualities that will be important during the shift towards zero-emission trucks rather than sort of the qualities that have been important during the past years, where I think the structural improvements and operational efficiency and margins and so on has been, what's been the standout qualities in Volvo?

[Martin Lundstedt, executive]

Thank you, Mattias. A pretty big question. And if you bear with me, Mattias, I will leave some of the details to the Capital Markets Day also because I think that is a key topic, obviously, but a very important one.

I think on one hand, just to give some thoughts on it. On one hand, what has served us well so far will continue to serve us well when it comes to the centralization in our brands and in our markets because that creates agility, accountability, ownership that is important regardless. But maybe even more important when you have, so to speak, uncertainties about the speed of the ramp-up, how to adjust, et cetera.

The other piece is, of course, to constantly evolve our business models. This will gradually also be a bigger mix, you can say, between OpEx and CapEx for the customers, and we need to work together with them to find good solutions, but it gives also great opportunities when it comes to the contract lengths, contract penetration, both on customer finance, but even more importantly, on the contract of repair and maintenance.

I think also the industrial preparation has been very important. The flexibility as such when it comes to cyclicality, but also when it comes to mixed model assembly. And then, of course, that we constantly are investing in our modular product and services and digital systems to support this transformation when it comes to new technologies, but also how they fit into to the modular toolkit. And obviously, quite a lot of others. And we have a lot of fun together. So I think that is my comment when it comes to my own situation.

[Mattias Holmberg, analyst]

I'm looking forward to the Capital Markets Day.

[Johan Bartler, executive]

Thank you. We're moving to Nordea, Agnieszka.

[Agnieszka Vilela, analyst]

Yes, perfect. So I also have 1.5 question, maybe starting with the half question. Martin, you talked about your pricing aspirations already. But just to take the discussion further, could you please comment on the impact from the mix change? I think that you mentioned that now the retail customers are in a wait-and-see mode and larger fleets are still placing orders. So the question really is, does this mix affects the type of trucks that you're selling? And also, will it affect the average selling price per truck even if you keep the prices overall stable?

[Martin Lundstedt, executive]

Yes, I can start and Mats, you can add comments to that. But I mean, already, it has partly done so. And then you can always discuss how much is that in relation to other type of mixes when it comes now between Europe and North America, South America, et cetera.

But obviously, when you have a fleet, and that is the normal pattern also with the correction that they are more consistent when it comes to placing their orders over time. I think, though, with a number of signs in the market now and since we are reiterating also our market forecast, that retail and smaller customers will also start to actually contemplate about pacing again. So I think we have partly already seen that, and Mats, so you alluded to that. I don't know if you relate to...

[Mats Backman, executive]

No. I mean, yes, you are correct. Looking at from a kind of a mix point of view and looking at gross income, it's obviously kind of slightly negative when it comes to customer mix than with a bigger share of fleet sales. So that's correct.

[Agnieszka Vilela, analyst]

And then my full question is about the service business. I mean, it's growing by 6% for you as a group. But to my understanding, it was much helped by the financial services and we're seeing a declining service growth in Construction Equipment and then relatively low growth in trucks. So could you just talk about your ambitions? And are you truly satisfied with that performance in Q1?

[Martin Lundstedt, executive]

Of course. I mean, we can always discuss what is satisfaction. I think you are correct in your analysis. We had, for example, on truck side, we had a 3% growth year-over-year FX adjusted. Is that good or bad? I think, the first thing that is positive is that it's also reflecting a continued solid activity level amongst our customers. That is good because, I mean, movements when it comes to our penetration level over time is, of course, more gradual. Mats also already alluded to the fact that we have a couple of days less and maybe 2% to 3%, I mean, so to speak, day correction between this quarter in relation to last quarter with the Easter effect primarily.

And when we look into, so to speak, what we are doing underlying, we feel that we are both, so to speak, execution in relation to the activity level here now, but also that we are gradually improving when it comes to, as I said also in my presentation, when it comes to the service contract management.

So generally speaking, I feel that the team is doing a good job. In Construction Equipment, two folded. We have seen in some markets a somewhat softer machine utilization. And that is, of course, reflected in this drop of 3% FX adjusted. The other part was a little bit also a specific effect in North America after quite a long period, North American actual dealers were catching up when it comes to their deliveries or taking deliveries of parts in quarter 4, and it became a little bit of an overhang that made quarter 1 lower. So I don't think we should see it as a dramatic, so to speak, change.

And then on Penta, it's more related, and that was also anticipated with this type of situation on the marine leisure side and utilization. So again, when it comes to other segments, I think we are following and Bus is positive. So all in all, I think still a solid quarter, and we have now a rolling 12 sales of SEK 129 billion, and that is 25% supporting. Well, Mats, I don't know if you would like to comment something more?

[Mats Backman, executive]

No, I think it was well said. And I think it's pretty important to zoom out a little bit then the about SEK 130 billion in 12 months. And that's -- I'm just taking one data point. I mean that's kind of a double service since 2015 and so on.

[Johan Bartler, executive]

We're moving to UBS and Hemal.

[Hemal Bhundia, analyst]

I just wanted to ask about the cost levers that Volvo has to offset the normalization in Truck market this year. Besides labor, are there any specific efficiencies that you can point to? And secondly, just a follow-up on that. I saw that a number of employees increased quarter-on-quarter. Is that something we should read into?

[Mats Backman, executive]

Thank you. Thank you, Hemal, for that question. First and foremost, obviously, as we also partly said, but maybe not detailed. When it comes to the cost levers, that goes, of course, always across. And now when we have a normalization of the market, we are following that very intensively.

We have said that even if we are also on R&D and our digital development, so to speak, continue to be solid in our belief and continue to invest, also in these areas, of course, we are looking through the different levers that we can find. But on an overarching level, we have said we will continue. We have a strong position. We have strong profitability, strong balance sheet and continue to invest in the future will serve our customers and our shareholders in our call as well.

But for the rest of the company, tight cost control, obviously, of all different type of costs in the Industrial Systems, but also when it comes to activity levels and how we should, so to speak, make priorities. So that is ongoing as it should do.

And again, as I alluded to with Mattias from Danske, that is also the strength of our decentralized model that people feel responsible for their P&L out in the different markets, regions, brands, et cetera. So I think that was number one.

[Martin Lundstedt, executive]

The FTE. And FTE, this is almost a science looking and analyzing the FTEs. So I think it depends a little bit on the kind of perspective on sequential or year-over-year. One item, if you are looking year-over-year, is that we have added Proterra, and that is about 400 people then that is kind of affecting the comparison year-over-year.

And if you are looking at the sequential development and starting with the fourth quarter into the first quarter, we had this special situation in France then when we are taking out about 1,500 consultants before year-end. I mean, during Christmas, that kind of added again in January. And this is a French practice done, and we have done it every year. So it doesn't really -- you don't recognize it year-over-year, but you recognize it sequentially. And that's the same thing that in previous years as well. So maybe to have those items to kind of consider when you're making the analysis on the headcount development.

[Johan Bartler, executive]

Very good. And first time ever we completed the Q1 on the telephone line. So with that, we are finalizing the Q&A session. And all materials that we have presented here today is stored on the homepage of Volvo Group, and we look forward to see you in the next quarter. Thank you, and goodbye.

[Martin Lundstedt, executive]

Thank you.

[Mats Backman, executive]

Take care. Bye-bye.