Volvo AB

STO:VOLV B

Earnings Call Transcript 2021-Q3

[Operator]

Very welcome to the Volvo Group Third Quarter Press Conference. My name is Christer Johansson, heading up Investor Relations. And with me, I have our CEO, Martin Lundstedt; and our CFO, Jan Ytterberg. We will do -- as usual, we'll start off with presentations followed by a Q&A session. And with that, Martin, over to you.

[Martin Lundstedt]

Thank you, Chris, for that. And also from my side, most welcome to this business update related to the third quarter 2021. First and foremost, as a summary of the quarter, we continued to deliver a strong performance despite the ongoing and challenging [indiscernible] supply chain situation. And this is really thanks to all employees and business partners in the entire group doing extraordinary efforts and really focusing on actually delivering both trucks, buses and machines, but also our services. And that is also a true proof of why the centralization, accountability and the ownership mentality is so important for the Volvo Group today. The strong customer demand for our products and services across business areas continues and demand is stronger than supply right now, but we also anticipate that it will be so for the coming quarters here. Our operational focus is there for -- on supply chain, it is on production, it is also in the aftermarket activities to thereby manage our customers' lead times and uptime since they have very high activity levels. The order board is very strong, and it is now a balancing act between the order intake, the quality of the order board, production and deliveries. We have been, and we will continue to be, restrictive in our firm order intake into the manufacturing system related to the full order books. Visibility in the supply chain remains low with a high level of uncertainty, but we have a very good interaction and cooperation with our supply chain partners around the globe, and we will continue to gradually improve our output. So the pandemic and its ripple effects is not over yet. But at the same time, we see that demand for transport and infrastructure continue to be strong here and now, but also supported by several societal trends: e-commerce, for example. And with that comes also higher demands on more sustainable solutions, perform and transform at the same time. On the transformation side, our customers' interest to decarbonize their operation is increasing by the day, and we continue to lead this journey, and we will talk about that just in a second here. Because when we talk about the future, we are committed to be climate-neutral and achieve net-0 greenhouse gas emissions in our value chain by 2040 at the latest on a global scale. So at the same time, as we are decarbonizing the output from our propulsion and from our powertrain systems by electrification, battery and fuel cell electric and also renewable fuels, we now also move ahead to further decarbonize the materials used in our products. And we are very proud that we, a couple of weeks ago now, presented the world's first machine and heavy-duty equipment vehicle produced with fossil-free steel, along with our partner SSAB and the world-leading hybrid initiative. More vehicles will follow now, and we will start small-scale serial production in order also to let our customers be part of this very exciting journey. And [indiscernible], as you see on the screen here, is a real example of a sustainable future. It's electric, it is autonomous and it's also based on fossil-free steel. So coming to the quarter then. As a summary, customer demand, as I said, continued to be very strong in quarter 3 and net sales were growing to SEK 85.3 billion, growth with 20% adjusted for FX. We delivered an adjusted operating income of SEK 9.4 billion and an operating margin of 11%, showing also a strong resilience with a solid result despite the constrained supply chain with unplanned stops also in quarter 3, but also related to the strike in the beginning of this quarter in United States for Volvo Trucks. The industrial cash flow amounted to minus SEK 5.7 billion, where quarter 3 normally is a seasonally weaker quarter, but also this time compounded by the constrained supply chain causing more unfinished vehicles in inventory. And Jan, of course, will come back to that later here. Last year's strong figure was the result of the ramp-up after the long stop at the beginning of the pandemic and was, of course, an exception. On a 12-month rolling basis, the return on capital employed in industrial operation increased to 25.6%. So all in all, a strong and solid quarter. Truck deliveries increased with 33%, thanks to growth in most regions. And deliveries for Construction Equipment decreased with 9%, almost entirely related to China, while other regions were showing solid growth. Electrification and the demand for electric vehicles and machines is growing day by day. And we are in many dialogues with customers in different regions and in different segments, as I said before, reducing CO2 has rapidly become the main priority for many of our customer segments. This is very, very positive, and we will continue to push for more rapid build-out of infrastructure of the energy networks and the green generation of energy together now with the rollout of our equipment, and we are very active in this journey. The result is a positive book-to-bill situation, still from low numbers, but rapidly increasing. So order intake north of 400 units and deliveries almost 200 units. And this is truly the opportunity of the century and be part of leading this very interesting and motivating transformation. Also on the service sales side, strong figures. The freight market and also the infrastructure market is strong, resulting in that customers' activities in most regions are on a high level with good truck and machine utilization. Adjusted for FX, Service grew with an impressive 10% in relation to last quarter. But also, we see that it is now above pre-COVID levels. So we have true sales, both related to the high activity, but also through really focused activities here. Global sales amounted to SEK 22.5 billion. And our Service business is so important for the long-term relation with our customers, obviously, but also when it comes to the resilience for our company. We have very good traction in our Service activities, but there is still so much more to do in order to increase the share of wallet in the rolling fleet together with our customers: repair and maintenance, contract penetration, productivity and services -- productivity services as well as uptime services, but also the electromobility journey, where we see that both in depth and the duration of the contracts are increasing, and that is, of course, also very important now when we are moving forward in the electromobility journey. When we come to Trucks, start with some great news here also. We have lately got to 2 larger and 1, in particular, very large order, showing now that it's not only the pilot units for different customers, but also growing in the real operation of our core customers here. So one example that we -- that came in and signed in beginning of October, so not related to the quarter 3 figures, but so important, so we want to mention DFTS ordered 100 Volvo FM heavy-duty trucks for the airport and logistics operations in Europe. And also performance team in California, which is a Maersk company, ordered 16 VNR heavy duty for their warehouse and distribution operation in North America then. And that is also a result of the Lights project that we are running there where we are cooperating also with the big ports around infrastructure and all the other prerequisites in a very positive way. Volvo Autonomous Solutions, together with Aurora, also revealed the first prototype for the autonomous Volvo VNL heavy-duty Class A truck for hub-to-hub autonomous transportation in U.S. And also Volvo Trucks has agreed now to acquire the JMC Heavy Duty Vehicle Corporation in China. The plan is to produce the full range of Volvo cab-over-engine trucks: the FH, the FM, the FMX as of end of 2022. Market forecast is, of course, shattering itself and it's, of course, high level of interest here. To start with, of course, they are based on the current visibility. And still, the current visibility is very low. And therefore, I mean, flexibility and our ability to adjust is, of course, the key focus. But current visibility, visibility is low. Uncertainty is, of course, also significant, mainly then related to the supply chain situation. So when we are now taking down the market forecast for Europe and North America, 10,000 for Europe and 20,000 for North America for 2021, it's not related to the demand. It is solely related to the supply chain capabilities. So I think that is a very important message to be reminder. And that's also the reason why we are guiding now for an improvement for next year up to 300,000 units, both for Europe and for North America. But where we are also clear that initially at least of the year, that increase will still be decided by our ability to step-by-step improve the supply chain situation and thereby the output. So demand is larger than supply, both in Europe and in North America. Brazilian demand also strong, of course. And we are now saying that the market for 2021 is unchanged that we said before at 95,000 and approximately 100,000 next year, of course, driven by good activities in the commodities and the agriculture sector. Also maybe to mention China, we are keeping guidance unchanged at 1.65 million trucks for this year, where you know that it was an extremely strong market in the spring, both related to the high activity level, but also related to the pre-buy of CN6 emission levels and a weaker second half of this year. And we anticipate that to continue and thereby guiding for the total market in China of 1.1 million units for 2022. When it comes to orders. Orders were down with 6%, while deliveries were up with 33%. And as I've said several times now, demand is stronger than supply. Hence, we have been and we are and we will continue to be restrictive to book firm orders in our manufacturing system. It is more important for us to deliver on the promise that we have already made towards our customers. We have solid and long order books. We are constantly working with the order book quality, and focus now is to deliver and to continue to balance, as I said, the order book, the quality of that, together with supply and demand. Price realization is solid, and we are currently ahead of the raw material cost and cost inflation. When it comes to market shares, Volvo Trucks and Renault Trucks in Europe very well received. So we have the new ranges in the market, the newest ranges in the market. And combined, Volvo and Renault has year-to-date 24.2% market share with actually Volvo Trucks reaching market leadership in September isolated with 18.4%. And we have, during quarter 3, gradually been catching up after a weaker market share development in quarter 2. And as the first -- as we are the first truck OEM also to electrify our ranges in serial production, we have a first-mover advantage, and combined Volvo and Renault reached just north of 60% market share for the electric heavy-duty sector. Of course, volumes are still low, interest is high and now the ball is rolling here, and we will continue to see good development. In North America, we were held back then for Volvo Trucks on deliveries by the strike that ended in July. And we came out at 8.5% for Volvo and 7.4% for MAC and 15.9% combined then. There is clearly room for improvements here given these interruptions and focus now is continue to deliver on the strong order book here. In Brazil, a market share that is stable on a good level of 21.6%. Last year was actually historically exceptionally good, but 21.6% is good. And in South Africa and in Australia, now we are gradually also coming back after the disruptions that we have had in the supply chain. So situations are improving here. And then going into Volvo Construction Equipment, what we see there, a couple of news. First and foremost that we are continuing also to roll out in the Compact segment new machines and solutions. So 3 new machines now, both for -- 3 that are all introduced in the Compact segment in Europe and 2 of them are currently also introduced in North America. Very good step forward. And also during the quarter that we have actually changed and revealed a full program for the CEV4 norm in India also with 16 new products. And also in the Mining and Construction segments, market forecasts are based on current low visibility, and uncertainty is also here significant due to the supply chain and the ongoing pandemic. There is, however, also here a broad-based increase of demand across our key regions and key segments with the exception of China. So changes to the market. We are not changing North America when it comes to this year, but we are expecting a 10% growth as from next year. For Europe, we are increasing this year with 5 percentage points and another 5% as midpoint for growth in relation to 2021 sequentially for 2022. South America, very strong, increasing this year with 10 percentage points up to plus 50%, and we expect another sequential growth of 10% as midpoint for 2022. And then maybe just also -- not maybe, of course, also to mention China, given the very strong start of the year and then a weaker second half now, we are remaining with the current forecast on 2021, and we are guiding for a decrease of minus 20% then sequentially for 2022. When we look at the orders and deliveries for Construction Equipment, orders were down with minus 1%, while deliveries were down with 9%, and the decrease is almost entirely coming from China. There is a continued good demand in our core segments and good machine utilization drives both services and replacements. In addition, we have low dealer inventories and low dealer pipeline. Volvo CE has not so far been as impacted as Trucks with regards to the semiconductor shortages and other shortages. But also, of course, a very tense situation. On Volvo Bus side, demand is gradually gaining momentum and orders increased with 34%, while deliveries increased with 2%. This is, of course, related also to the gradual softening of restrictions where travel and tourism are step-by-step coming back. Volvo Buses also revealed a very, very important part of their product portfolio, and that is a global electric bus chassis platform, the BZL, meaning and allowing also to grow this business now together with some of the very, very strong and professional bodybuilders that we have around the globe in Asia, in Australia, in South America, but also in Europe. And this is based, of course, on the electric platform that we have in the group and not at least on the platform that Volvo Buses are already providing in Europe. So the launch of this is very, very exciting and important for buses now, when the need of electric executions are taking off. Volvo Penta. Also here, we continue to see solid demand across segments with orders up 34%, deliveries up 6%. Also here a struggle, of course, to meet this high demand. Penta is taking also next step when it comes to the electric drivelines and powertrains in serial production, both for on land and off -- or executions. And what you can see here is also the cooperation along with Danfoss developed an electric hybrid propulsion system that has been successfully tested on a crew vessel boat now. And on a final note here for VFS, Volvo Financial Services, we did see, of course, an increased business volume related to the increases in our other business areas with a stable penetration of 30%. And there is a continuous good portfolio performance related, of course, to high activity levels among our customers, and they are making relatively good or even good profits. VFS is also playing a very important role when it comes to the electrification journey. We see that the need of that type of bundled solutions are even bigger and penetration in our electric portfolio for trucks, for example are 43%, so 14 percentage points higher than on the diesel side, and we expect that to grow when we are bundling offers into Equipment-as-a-Service. So very interesting and good and solid quarter. And by that, I will leave the word to you, Christer.

[Christer Johansson, Senior Vice President of Investor Relations]

Thank you, Martin. That brings us to the next speaker, our CFO, Jan Ytterberg, that will now take us through the financials. So Jan, please let's dig into the numbers.

[Jan Ytterberg]

Thank you, Christer. We saw similar trends here in the third quarter as we experienced in the second quarter: shortages on semiconductors, other materials and also transport capacity, putting pressure on the supply chain, leading to disruptions, production slots that were lost and then also higher costs. With now the vehicle deliveries being capped due to the supply chain constraints and also R&D accelerating gradually now participating in to take the lead of the transformation. We, as an organization, we need to focus on boosting the service volume, increasing prices and maintaining the cost discipline that we have had for the last quarters, also the coming quarters. If we move into the numbers and start with the group net sales, FX adjusted, they were up some 20%, reflecting the better truck deliveries and service revenues. We see this as a generic phenomenon across regions, except then for Asia, where the lower demand in China of machines and also trucks is impacting negatively. As regard FX, we had a limited effect on sales. If we move over to the earnings, despite a quarter with considerable supply chain challenges. We were able then to improve our adjusted operating income with SEK 2.2 billion up to SEK 9.4 billion and an operating margin of 11%. In the present inflationary environment that we have, it is important to adjust prices continuously and in advance of the cost pressure we see from raw materials but also from other materials including freight. And we can see that we continue to be successful also here in the third quarter of doing that, especially then related to trucks, but also to services across our business areas. The strong transport demand affecting both services but also the vehicle side is impacting positively. As it relates to services, we are back or actually above pre-COVID levels now. But as it relates to truck deliveries, we see that we are hampered by the supply chain constraints. But anyhow, we had a considerable improvement of the earnings related to the truck deliveries and deliveries in general. The effect on capacity utilization was -- which we expected and which Mike you have expected on the volume was offset by cost increases to handle the disturbances. We also have a positive effect coming from the mix in Construction Equipment, where we have been selling more of heavier Volvo-branded machines into the regions of Europe and North America with better commercial conditions in general. As it relates to negative effects, we can say something about our JV income. It is minus SEK 650 million, more or less compared to the third quarter last year, mainly related to our Dongfeng joint venture, which is, of course, affected by the lower truck demand in China and also partly then to the inclusion of our fuel cell joint venture cell-centric as from the second quarter this year. As it relates to FX, very small effects, in general. And if we talk about Q4 and earnings, we will have a somewhat positive effect coming from the transaction exposure. Martin was into the cash flow. It is a vacation quarter, the third quarter. It is our cash flow-wise weakest quarter seasonally, as deliveries are low, production is low, and we are paying down the payables from the second quarter. This year, the seasonality was even more pronounced due to the production disturbances, but also due to some timing effects on the payable side. Looking at the first 9 months combined, we can see that on the working capital side, it is more the inventory that is impacting negatively. And it is, of course, related to the ramp-up of production, but also to the strategy we have of bringing in materials, critical parts and components to restore or refill buffers and also create and cater for higher volumes going forward. And as Martin mentioned, the inventory of new trucks also was impacted by more of incomplete vehicles. All in all, minus SEK 5.7 billion in the quarter. Net cash position end of September, SEK 42.5 billion. That is a reduction of SEK 25 billion during the quarter, SEK 19 billion is related to the dividend and SEK 6 billion then is related to the negative cash flow. If we then move over to our segments and start with group trucks. We can see that the improved resilience of Volvo Group is clearly seen here in group trucks also in this quarter. When adjusted operating income increased some SEK 1.3 billion to SEK 5.8 billion and a margin of 10.9%. This quarter was another quarter characterized by the supply chain constraint and shortage of materials, mainly then the semiconductors and, as I mentioned, also the transport capacity. Besides causing then unplanned production stops, we are talking roughly over a couple of weeks here in the third quarter for group trucks. It has also a clear inflationary attendance that, together with the pressure from increased raw materials, requires quick and continued adoptions of our prices to customers. And we were, once again, successful in this quarter in group trucks and a little ahead of the curve, so to say, battling then the headwinds from raw materials in a positive way. We also have a positive effect coming from the launch of the new Volvo range, but besides then the more of generic increases that we have on the price side. Costs were incurred and substantial time was also absorbed to complete unfinished trucks coming off the line. The challenge to manage, which is, of course, considerable, and difficult due to the size of the logistic flow we have at the Volvo Group, a balancing act, a fantastic job actually done by our employees and suppliers and other partners. Despite this, truck deliveries and net sales were higher than the third quarter last year, which was, of course, a pandemic-effected quarter, contributed then positively to the earnings. That was partly offset by a negative mix effect on the market side, more vehicles outside Europe and also on the product side with more of medium-duty trucks. The lack of transport capacity is clearly seen also in our used truck business. Profitability is on record high level and inventory on record low levels. And the same trends of improved prices and volumes reflecting the utilization and transport demand is seen in our service earnings. And on top of that, we have continued to see the positive effects of an increased penetration of our contracted services. JV income impacted negatively with the same comments as I made for the group. Moving over to Construction Equipment there -- then, where we see the demand of delivery and deliveries is -- our machines and services continue to be high, except then as was mentioned, in China. This gave a favorable shift for us with more of heavier machines, Volvo-branded machines, into Europe and North America. And implicitly, the weight of China was lower and thereby -- and they have a lighter machine mix, which then is impacting positively. And we should remember that third quarter last year was a very strong quarter for China, in general. This shift was also seen in the net sales. It was up 11%, whereas deliveries were down 9%. Service earnings improved by volume and price across markets, and these positive effects were the main effects behind the improvement of SEK 0.6 billion to SEK 2.6 billion for Construction Equipment here in the third quarter, giving a margin of 13.4%. Besides this, we have some negative effects coming from lower vehicle volume, and of course, also then related to the capacity utilization, but we also have the raw material pressure, mainly from steel, impacting more in Construction Equipment since the machine cost structure is more raw material heavy. In areas outside China, we have been able to compensate that by prices. But if we take a look on the combined markets and combined construction equipment, we have a negative net of price minus raw materials. Moving over to buses and the trend of improved utilization of the bus fleet continues. We saw that on the Service revenues and the Service demand, but you also see more activities on the used side, which is another sign of improved business sentiment, though from very low levels. The lower adjusted operating income of some SEK 200 billion to a black zero, more or less, related to very low capacity utilization, of course, reflecting the last quarter's low demand and low order intake. We also had some production disturbances that added on top of that. And furthermore, we had this negative market mix, but you also had offset that by a positive FX effect. The hard work of bringing down the breakeven level for buses was clearly seen here, where we were able to deliver a black zero despite these headwinds, which is, of course, very promising when we now are seeing that demand is gradually coming back. For Penta, demand and volumes of both engines and services continue to be strong. The supply shortages and capacity constraints have now started to affect more substantially also on the Penta side, both related to cost, deliveries, but of course, it's hampering sort of to meet the demand that we have -- that we are seeing in the market. Despite these engine deliveries were higher than last year, mainly related to the Industrial segment. And on the Service side, we saw high activity on the marine leisure side with a strong and long boating season impacting positively. Despite these positive effects from demand then operating -- adjusted operating income decreased as supply chain constraints and cost impacted negatively, and we also see more of activities on the market side and also that we have high ambitions on both present and future technology impacting on the R&D cost side. The FX had a negative effect of some SEK 40 million. Adjusted operating income just above SEK 500 million, giving a margin of 14.5%, which is a good third quarter if we look in historical perspective, but not as good as the extreme third quarter last year. Last, but not least, Financial Services, with a stable penetration and improved deliveries for the group. We had a positive effect on new retail financing that improved compared to last year, and that also contributed to a bigger credit portfolio ending the quarter. Customers' payment ability and performance continue to be strong in the aftermath of strong demand and a very strong pricing power for the transporters presently. But looking at the portfolio, we have some pockets of concerns still. As a consequence, write-offs and credit expenses were at low levels in the quarter. And if you remember last year, that was a quarter affected by the pandemics, the general business uncertainty and also to the fact that a lot of customers needed to modify their contracts. Subsequently, last year, third quarter, we had high credit expenses. So all in all, some SEK 300 million less of credit expenses, of course, contributing to the SEK 400 million of improvement up to SEK 800 million. Besides that, we see improvement in the -- related to the portfolio as such, increasing then, but also to improved interest margins in the portfolio. With that, Christer and Martin.

[Christer Johansson, Senior Vice President of Investor Relations]

Thank you for good numbers, Jan. And moving over to you, Martin. How would you summarize the quarter?

[Martin Lundstedt]

I think to start with, it has been another very interesting and challenging quarter, obviously, extraordinary work by the whole organization and very close collaboration with customers and supply chain partners, but also actually summarizing what we have talked about regarding the Volvo Group for the future, stronger underlying performance, better resilience in the cycle a very clear and transparent capital allocation in order to lead the transformation, and I think that is actually what we have been seeing in this quarter. So looking forward to the future because there is a lot of interesting things ahead of us now.

[Christer Johansson, Senior Vice President of Investor Relations]

Thank you very much, Martin. Jan, can you join us here because now we are moving over to the Q&A session. And operator, can you please give us the first question?

[Operator]

[Operator Instructions] The first question comes from Hampus Engellau from Handelsbanken.

[Hampus Engellau, Automotive Analyst]

Three questions from me. Starting off on the order side. Is it possible for you to kind of maybe discuss how you secure the quality in the order book and then a little bit more flavor on how that works? And secondly, related to that, if you could maybe quantify the lead times, how long are lead times now? And how do you think that will play out in terms of my third and last question? The production run rate you have indicated that you have an ambition of increasing the run rate during the fourth quarter, but given what we see on the supply restraints that may be shy. So also if you could maybe discuss that? Those are my 3 questions.

[Martin Lundstedt]

Yes. Thank you, Hampus. First and foremost, when it comes to the order board, I think just to come back to quarter 2 last year when we actually flushed the order book it was with, in hindsight, very important, obviously, because then we gradually built it up again. And we have since been very active to be very close to our dealers, but also to our customers on what is actually placed in the order book. And then a little bit depending on what customer type customer segment and also region, we have different means of securing that quality, everything from different levels of down payments and other type of commitments, obviously, but we are also going through the order book and order board with our dealers and customers on a frequent basis. So I should say, from that perspective, it is good. At the same time, obviously, when the order book is rather long out in time, that's the reason also why we are pretty firm and restrictive now on not putting in too many more orders in, in the order board beyond that. Then obviously, we have a number of customers that need to do that for planning reasons, and we have a constant dialogue. So for the lead times, generally speaking, are longer. They are reaching -- and also differs, of course, between segments and regions, but they are reaching now quite a bit into 2022, obviously. And for some of the segments and regions, even into the second half of 2022, and that goes not only for trucks but also for other segments. And when it comes to the production run rate, I think one reflection we should do anyhow between quarter 2 and quarter 3 on the truck side is that we actually had an absolute improvement, small but absolute improvement despite that it was a vacation quarter, showing that we have managed. Then everyone knows, obviously, that it's not 1 or 2 of the supply chains that we are looking at, but quite a few. So visibility is still low, but it shows that our cross-functional work is working fine. We will continue to stretch, thereby also meeting different type of disturbances because the demand is high. Customer really wants to have both, as Jan said, the new and used equipment and also the services. So this will continue to be the name of the game.

[Jan Ytterberg]

What one can add, of course, is that we were mentioning in complete vehicles, and that is, of course, also consuming hours out in the production to take care of this in the flow, so to say, and make it finished delivery. So that is also a part of the production chain right now.

[Martin Lundstedt]

But we are clear on that. And I think that with the strong resilience we see in the group. Also we have the means to be offensive here and to be very close to the industrial system to increase and to fight for every machine and truck, et cetera. Demand is high. Supply needs to continue to improve, and that is what we're working.

[Hampus Engellau, Automotive Analyst]

And from a semi perspective, from what you see today, can you say that this situation has improved? Or is that maybe...

[Martin Lundstedt]

No. But I think -- yes, yes. No, no, but I think as we say visibility is low. But on that note, obviously, now we have another grip on the situation together because when we were running into the situation in, you can say, in end of or mid-quarter 1 and then it continued in quarter 2, then it was a little bit more all over the place, if I would like that. Now we clearly see where do we need to work, et cetera, but visibility is low, but if anything, somewhat improved and semiconductors in that regard is in so many of the different supply chains, so that's the reason why we say that we need to continue to be very close and interact with our suppliers.

[Jan Ytterberg]

We can say that we have been training for 3 quarters now.

[Martin Lundstedt]

Yes. We have been training for 3 quarters.

[Operator]

The next question comes from Klas Bergelind from Citi.

[Klas Henrik Bergelind, Director]

Klas at Citi. So first, on stop weeks. On top of the normal summer shutdowns, how many stop weeks did we see in the quarter? So what I'm trying to get to is the underlying truck margin. Obviously, it was very solid, but ex the stop weeks, I think you said, Jan, that it was a SEK 2 billion hit EBIT from lower production year-over-year in the second quarter in Trucks. So I'm just wondering if you could help us a little bit there in the third quarter as well?

[Jan Ytterberg]

I have to start here, but it goes back to discuss how we should formulate that. But we said around a couple of weeks because -- so I think that is enough precise guiding, but around a couple of weeks in addition to the vacation.

[Martin Lundstedt]

For group trucks.

[Jan Ytterberg]

Yes, for group trucks. Yes, for group trucks.

[Klas Henrik Bergelind, Director]

Okay. Perfect. That's in line with me. Then my second one is looking at construction and the margins across the different regions. I think Martin, you said before that the margin has improved in Europe and North America relative to China since the last downturn in '15. So even if China falls by 20% next year as per your guide, you still might do quite well looking at EBIT, owing to mix. So it would be great to hear a little bit about your thoughts there on profitability improvement since the last downturn across the regions?

[Christer Johansson, Senior Vice President of Investor Relations]

Would you like to start there?

[Jan Ytterberg]

I can start there. Of course, we are starting from a high level, a good level in China, looking at 2020, but we have also talked about the price competition that we see, mainly then on excavators from -- with the domestic players there. But we also have, and we should remember that a good flexible cost structure. So we think that we are able to handle this in a good way, depending, of course, on the magnitude and size of the decrease and the speed of it. So I was not here before, but I think we are as prepared as we could be for this.

[Martin Lundstedt]

But I should say also when it comes to the price realization and how the balance is looking, I think we have a good balance today in the portfolio in Volvo Construction Equipment. If anything, during the last, so to speak, hike in demand in China, 2012 and beyond and then it was a little bit so big that increase in China. So some of the other key regions were almost a little bit forgotten. I think today, we have a good balance. We have good traction. The key segments in not at least North America and Europe, but also Latin America, for example, is performing well. So that is a strength in the portfolio mix, basically.

[Klas Henrik Bergelind, Director]

Exactly, yes, which has changed to the better with developed markets increasing the profitability.

[Martin Lundstedt]

Absolutely. Yes.

[Klas Henrik Bergelind, Director]

Yes. So that's good. My very final one is on battery-electric, and 40% market share in Europe off to a very good start. But I'm interested to hear Martin what you're seeing on the aftermarket side? Can you talk about the recurring opportunities again that you mentioned at the last Capital Markets Day? And I'm interested to hear if customers indeed are keen and outsourcing more handling of the battery pack, the software? And also if these longer service contracts that you talked about on battery-electric, if these are indeed coming through?

[Martin Lundstedt]

Yes. I mean, first and foremost, it's early days, right? But what we see now when the order size of each order is increasing, exactly these type of discussions are coming into play to a completely different extent because when you are starting to order a number of trucks for piloting or to have a number of them in front of your headquarters, then it's not that type of question. But now when bigger orders are coming in with real type of operations, we're talking about the financial contract -- construct, as I mentioned also in the VFS update. We are seeing that when it comes to the repair and maintenance contract penetration, where we are in Volvo Trucks, for example, only selling with what we call the gold contract, meaning both repair and maintenance contracts and also the duration of the contract. But then also in addition to that, other productivity and uptime services, for example, route optimization, battery surveillance, but also, as you say, also included the battery life cycle management because that is one of the key aspects for our customers to feel confident to take the step into electric, how is the durability of the battery? What about, so to speak, the life length when it comes to energy storage? How can we offset that with the second life and then down the road with recycling? So absolutely is what we see and what also our customers want to have. And that is why we say that the electrification is a great opportunity for the service development of the company.

[Operator]

The next question comes from Tom Narayan from RBC.

[Gautam Narayan, Assistant Vice President]

Tom Narayan, RBC. I also have 3, and you kind of answered this, but just curious, maybe from a 2022 outlook perspective for [indiscernible] Europe and North America, what are you hearing specifically from your suppliers on semis? You mentioned lack of visibility, but are they actually telling you something concrete lack of visibility? Next, as you know, peer Daimler Trucks is planning a big turnaround in Europe. In its past, they did have a bigger market share on the continent. Curious as to your thoughts on the competitive landscape in Europe on the HD trucks given their plans? Then lastly, on China CE, I don't know if you can answer this, but when would you expect this government spending to come back? Is this a multiyear issue? Or how should we think about that?

[Martin Lundstedt]

Yes. First and foremost, if we talk about, I mean, the 2022 outlook, of course, again, when you look at the different supply chains for a truck, for a machine or for a bus, whatever, of course, there is a multidimensional type of value chain. So when we look at the bigger and more complex components and systems and the Tier 1s, we are not only working in those systems, but also with the Tier 2 and Tier 3 and even Tier 4. Then obviously, gradually now we are seeing, okay, how can we mitigate this and how can we think about 2022, et cetera. Our current judgment, as I said, is a supply still will be, so to speak, the deciding factor of the total market for the coming quarters at least. And then we will see when it will shift into a more demand-driven total market. But yes, on data, at least, we see and we have very tight plans including the uncertainty, obviously. But then again, there are quite a number of other supply chains where we are gradually now working that through. So step-by-step, we're getting there, again sequentially step-by-step improvements, and we will continue to push, be close. And that's the reason why there are a number of factors that should be taken with a certain consideration. I mean when we talk about the order intake, for example, when we talk about disturbances as such because we will continue even when we can produce more to be very close to that, so we are meeting, so to speak, disturbances, again, given the high demand. So that is number one. Then on the market share, I mean, this is a market that we know well in Europe, obviously, and it has been always a very and highly competitive market. We have strong product ranges now out there, both for Volvo and for Renault that is just released: great performance, great feedback. I think also we have an organization that is really focused on this now that has a strong accountability and the centralization, and also, I mean, the electromobility story. So that is one piece of it. And we have seen also, I mean, gradual improvements now. The second piece, I think, is still also the whole service business where we have good traction now. So it's both, I mean, the market share play, where we will continue to have a strong offering, but it's on the new products, but it's also the Service business. So we're looking forward to that. China. As you say, I mean, it's always a discussion what is -- what will be, so to speak, the different countermeasures, et cetera. I think everyone understands that at one point in time, it was healthy. With this type of correction, it was compounded with a lot of incentives, et cetera, not at least related construction infrastructure. And yes, continue like that should not have been good, it should have only created another bubble. So let's see a little bit. Now I think it's about adoption, flexibility. Again, we have a good mix for construction equipment as an example, also with other regions showing great demand.

[Operator]

The next question comes from Daniela Costa from Goldman Sachs.

[Daniela C. R. de Carvalho e Costa]

I'll ask 2 things, they relate to the U.S., actually. So looking at some of the indicators, for example, on the U.S. used truck side, volumes have started to soften a bit. And then in general, the PPI of heavy-duty trucks in the U.S. has also not improved as much as other product categories out there, and it's actually, I think, slightly down in September. Do you think this is just volatility? How is the competitive landscape on the U.S. at the moment, especially, I guess, after the Navistar deal? If you could talk a little bit through that? And related to that, sorry, a second part to that question. In your market outlook, you still have growth for next year. You mentioned now during the call of the growth for next year, in general, is the supply chain, the deliveries you can't have now or the market can't have now into next year. So can you talk through the breakup of the -- I think it's 11% growth that you have for the U.S. market in the slide. Is that just supply or there's an underlying growth? That was question number one, which I guess ended it being in 2. But one small final question on the U.S. If you could give us a bit of -- you have the electric truck market share in Europe. Can you give some comments on the positioning in the U.S., where things are standing? I guess there's probably not big enough data yet to tell us market share, but it would be interesting to hear on the development of U.S. specific?

[Jan Ytterberg]

Yes, I can start with at least the used side, I mentioned that, and that was a generic comment on profitability being extremely high prices. You shouldn't use the word ridiculously high, but very high on used side has been. And the inventories is extremely low, and that is a problem that is hampering the sales, of course. What we also see in this situation is that our customers are holding on to their leasing contracts, et cetera. So they are not -- of course, because they don't get the new ones handing back their vehicles. And by that, we are also stopping sort of part of the inflow on the used side. So -- maybe it's more of that on the used side that you are seeing. Then there was a question on...

[Martin Lundstedt]

The total market and I mean -- or also activity level in September, et cetera. I think -- I mean to take 1 month, it's very -- I mean, a little bit dangerous to do that. I think it's a little bit flattening and out, but you need to understand a little bit the underlying factors of that as well. I mean with all -- if I put it like that helicopter money coming into U.S. during the pandemic, restrictions on restaurants and travels, et cetera, I think there has also been a boom when it comes to the private consumptions, obviously, and we have seen a lot of that coming through, but also with very, very long lead times, because it has been a lack of drivers, it has been a lack of terminal workers, et cetera. And that is also what we hear from our customers. And one reflection on that is that now when we are taking down U.S. with 20,000 units for 2021, that is related to supply chain. Eventually, that needs to come out to the market. So I mean, the 300,000 level that we are guiding for next year in U.S. is absolutely what the market is demanding. And our prediction is that they are actually demanding more than that. Since, at least in the beginning of the year, supply will continue to dictate, so to speak, the total volumes. So therefore, I mean, 2021 decrease is not related to demand. It is related to the continuous fight on the supply chain. The good news about that is that actually our view is that we will smoothen out a little bit the cyclicality because if everything was perfect and have an overshoot in 2021 should not have been ideal for anyone anyhow. So I think that is good. Then when it comes to electric trucks, you're absolutely correct. We are active in U.S., both with MAC and Volvo, but a little bit too early days for data and for market shares. But that is also why we talked about the orders that we are taking now and not at least in primarily, you can say, in -- on the West Coast than with the big ports, where we are building out also infrastructure together with partners, but also on the East Coast and specific segments related, for example, to waste collection. So it will come there also step by step. And there is a big interest among customers also related to their Scope 3 activities, for example.

[Daniela C. R. de Carvalho e Costa]

And just following up on the competitive landscape on the U.S. post Navistar and the pricing data that doesn't look to improve that much in their...

[Martin Lundstedt]

Yes, yes. No, no. Sorry for that, Daniela. No, no, first and foremost, I think as similar to Europe, it has, for a long time, been a very competitive market with strong players. We feel that we have a strong and competitive offering. Product quality is in great shape, fuel efficiency in great shape. It's really about now continue to have good deliveries, both on the product side and the service side. And then obviously, I mean, with what we are guiding for now 300,000 market and also the possible now cost inflation and pressure, we need to continue to execute on price realization both on products and services.

[Operator]

Your next question comes from José Asumendi from JPMorgan.

[José Maria Asumendi, Head of the European Automotive Team]

José, JPMorgan. I think a couple of questions. The first one on buses. Can you comment a little bit on your electric transline launch there? I'm slightly concerned not just for Volvo, but I think for the traditional truck and bus players that with electrification, we've seen other competitors like BYD entering the market, taking substantial market share. And I'm not sure right now how your product compete against BYD and whether you're going to be able to grow that market share back in the coming years. So I would love to hear more thoughts on this as, obviously, there could be a read across in the trucks going forward. Second question, a little bit more on the positive side. China and China truck heavy-duty opportunity for you. This is going to be probably one of the biggest opportunities growth-wise in the coming 5 to 10 years. Can you give us a bit more details, how do you see this market? What kind of opportunity is it for you? Any details you can give us also on the product side?

[Martin Lundstedt]

Thank you, José. I think both of your questions were positive, by the way. So don't worry. What we see on the electric buses, for example, I mean we are actually together with also BYD and you had only said that we are a market leader in -- during this year in Europe on the electric bus side for city buses. We have -- what we see now is also that when this market is maturing, coming back to the truck side, also more complete solutions when it comes to route optimization, the battery management, circularity as a whole, grid capacity, et cetera, but also a great platform that we are sitting on now when we are ramping up step by step. So for Europe, we are very excited about the development. The good news, to your question, about the chassis is that we can expand that now to markets where there is, so to speak, a bodybuilder tradition, and we have very strong links with that in Australia and Southeast Asia, Latin America, Middle East, in U.K., partly in Spain, et cetera. And therefore, the chassis execution now based on the modular platform of our electric components will give Volvo Buses great opportunities also to, first and foremost, have a competitive offering, but then utilize the full-fledged solutions sitting with BFS, sitting with the Service and retail network in these markets, but also the optimization when it comes to the connected and digital solutions when it comes to, again, battery surveillance, et cetera. So very excited about that development, important launch. China, to your point, the more -- the even more, so to speak, sophisticated segments are growing step by step, not at least driven by e-commerce, but also with the sustainability efforts in China as in other markets. We see also how inbound and outbound from, not at least, the automotive is gradually maturing into these high-mileage, high-uptime type of execution. That's the reason why we are now establishing the footprint in China with the full-fledged solutions for the Volvo FH, FM and FMX that is the full heavy-duty range with all the different executions. So you don't need to have the compromise of guessing -- I mean, we should not say that we guess, but a little bit guessing because you have longer shipment times. And here, then we can optimize for each customer, thanks to the modular system. So absolutely right. We see how that segment is growing. It's still relatively small, but small in China, given the percentage of north of 1 million trucks will be a very interesting market for Volvo Trucks and for the Volvo Group moving forward.

[Christer Johansson, Senior Vice President of Investor Relations]

Thank you, José. And then we have time for one final question.

[Operator]

The next question comes from Olof Cederholm from ABG Sundal Collier.

[Olof Cederholm, Research Analyst]

It's Olof from ABG. Maybe a bit of a reiteration of earlier questions, but just to clarify, the Q4 sort of comments, continued disruptions, you had 2 stop weeks in -- around 2 stop weeks in Q3, but lots of vacation time as well. So when we look into Q4, do you expect to still have -- despite the disruptions, still have the normal seasonal improvement quarter-over-quarter that you usually have in production rates?

[Martin Lundstedt]

Yes. I mean, we have -- I mean, I think it's a great, I mean, comment, obviously. I mean what we have said is that the focus is to continue to increase step-by-step production. Visibility is still low. And so to have an exactly a firm view on that. But absolutely, we are set for continuing to push this. And then we will see -- I mean, how we get -- I mean, I think the message here is that we have shown strong resilience, strong flexibility and thereby, we will be also offensive on that note to see where can we go? What will it give? Of course, the vacation effect should play in. I mean we have been having 3 to 4, I mean, normal weeks in vacation also. So let's see. On the other hand, vacation is also positive for certain supplies for recovery. So let's see. But I think the maneuverability of the group is strong. Demand is there. We will continue to push the limit in order to meet that and execute that strong order book. So that is what we can say at the time being here.

[Jan Ytterberg]

Like I say, it has been a very strange here so far with pretty flat net sales all over the quarters, SEK 85 billion to SEK 95 billion. So let's hope then that we come back to a more normal seasonality here in Q4. But as you said, low visibility still. Thank you very much.

[Christer Johansson, Senior Vice President of Investor Relations]

Thank you, Olof. Thank you very much. And that concludes this press conference, and we're looking forward to see you in the fourth quarter.

[Martin Lundstedt]

Take care, everyone.