Volvo AB

STO:VOLV B

Earnings Call Analysis

Earnings Call Highlights Company's Market Forecast and Strategic Focus

The company provided an optimistic outlook across various markets with the 2023 European forecast rising by 10,000 units to 340,000 and maintaining Brazil's forecast at 80,000. While truck order patterns are changing, there's a management focus on inflation and inventory control. Market shares fluctuated, with Volvo and Mack hitting 15% in North America and 26% in Europe. Construction Equipment's new electric offerings are aimed at strategic markets. The 2024 market guidance anticipates a dip in Europe and North America but a rise in South America. The company plans to balance pricing discipline and cost management in the face of expected market softening. Emphasizing long-term resilience, especially in North America, the leadership remains committed to addressing strategic challenges and opportunities.

Performance in a Seasonally Weak Quarter

In a traditionally challenging third quarter, marked by lower deliveries, Volvo has demonstrated resilience with a commendable adjusted operating income of SEK 19.1 billion and a margin of 14.4%. The company’s success in navigating inflationary pressures, escalating labor costs, and ongoing supply chain disturbances – although less severe than before – underlines the effectiveness of its pricing strategies and operational adjustments. The company achieved a 15% year-over-year increase in net sales, with a caveat that currency fluctuations played a role; excluding FX impacts, the net sales increase stood at 9%, mainly attributed to robust pricing partially negated by lower construction equipment deliveries. The differing regional performance, with strength in Europe and North America, was offset by weaker demand in South America and Asia, mainly due to reduced construction equipment deliveries in the latter.

Resilient Earnings Amid Market Pressure

Despite the volume being slightly lower across various business segments compared to the previous year, Volvo posted a significant financial leverage of over 50%, excluding FX considerations. The effective price management for both vehicles and services helped improve financial performance, while production costs edged higher due to stagnant or falling volumes amid general inflation and salary increments. Nevertheless, some relief came from diminished freight costs, illustrating the adaptability of Volvo’s operations in a challenging environment. Additionally, R&D investments and selling expenses increased in the company's bid to remain at the forefront of developing electric and autonomous vehicles, as well as improving combustion engine technologies, indicating a strategic balance between managing current financials and investing in future capabilities.

Operational Highlights Across Business Areas

Group Trucks and Construction Equipment (CE) saw contrasting fortunes: the former enjoyed a 13% FX-adjusted net sales growth with an impressive margin of 15.6%, while the latter suffered a 4% FX-adjusted net sales decrease due to decreased deliveries, particularly in China. However, Volvo CE's focus on higher-margin products in favorable markets like North America helped mitigate some impacts. Meanwhile, Buses and Penta exhibited improvements, with the Buses segment witnessing a 6% FX-adjusted net sales increase and Penta enjoying a 5% rise, primarily owing to favorable product mixes and price increases. The strategic positioning across business lines showcases the company's agility in optimizing operations amid diverse market conditions.

Financial Services and Cash Flow

Volvo's Financial Services reported growth in portfolio due to higher deliveries and price improvements, albeit amidst intense competition impacting profitability. The credit portfolio touched SEK 255 billion, with low write-offs and credit expenses, underlining healthy financial fundamentals. The quarter also presented challenges in cash flow, typical for the period, with increased investments in the electrical value chain and ongoing inventory management adjustments. Nonetheless, Industrial Operations realized an operating cash flow of SEK 5.6 billion, signposting prudent financial maneuvers to align with anticipated demand shifts.

Looking Ahead: Preparing for Normalized Demand

The company, sustaining a strong focus on operational performance, is gearing up for an expected normalization of demand with comprehensive flexibility measures, including adjustments in staffing and cost management. With a strong financial position, continuing investments in innovation is prioritized, reflecting the company's dual aim of delivering strong current performance while being positioned for future transformations. The mindful navigation of the anticipated volume drop and maintenance of commercial discipline will be critical as competition intensifies, including that from electric vehicle start-ups.

Summary and Forward-Looking Perspective

After a period of robust growth, Volvo is preparing for a cooling market, acknowledging the potential for a 15% volume contraction in 2024 and readying its workforce and cost structure accordingly. The commitment to maintaining a competitive edge is unwavering, as seen in the firm's engagement with electrification and other cutting-edge technologies. In the face of a potential United Auto Workers (UAW) strike impacting Q4 operations, Volvo remains focused on agile management and strategic foresight.

Earnings Call Transcript 2023-Q3

[Johan Bartler, executive]

Welcome to the Volvo Group's third quarter presentation. Today, we will do as always, we will listen to the presentations by Martin and Jan, and we will follow by a Q&A session. And we will have questions both from the line as well as from this room. So with that, I hand over to you, Martin.

[Martin Lundstedt, executive]

Thank you. Thank you, Johan, and welcome to you also as new Head of Investor Relations. And a special welcome to Mats Backman, our new CFO. So it's good to see you here together with Jan and myself presenting today. Most welcome also from my side to this Quarter 3 2023 reporting summary.Group continued to deliver strong performance in the third quarter. I'm proud and humble to present -- strong growth revenues continues, increased the deliveries of trucks in turbulent times, a service business on solid levels and the third quarter record levels for operating income, margin and return on capital employed. On ROCE, as a matter of fact, it was an all-time high ever than ruling to all the [ 12 ], that is the metric.Strong outcome, of course, thanks to great work by all colleagues and business partners across the globe. And also in this quarter, we have put priority work to closely with our customers and to stick to our priority of delivering as high volumes as possible to support their demand -- continuous demand of equipment and vehicles and continuously deliver on the solid order backlog.Our service operations continue, as I said, on solid levels, supporting the uptime and performance of our customers' rolling fleets. And we still see transport and infrastructure activity out in the markets remain on good levels in most of our markets, but we are also gradually now coming down from recent peak levels, as already communicated in [ conjunction ] with quarter 2, [ where ] this is highly anticipated.And it means now that we are entering into a more normalized demand situation for new vehicles and equipment on a platform, as we've said, of record strong profitability and high operational performance. And our first forecast for the 2024 total market is also in line with this normalized demand, and we will come back to that later in this presentation.If we then move into the highlights. Group continued to deliver strong sales growth and strong results. Sales growing to SEK 132 billion in the quarter and that was plus 9% FX adjusted. Adjusted operating income growing to SEK 19.1 billion corresponding to a margin then of 14.4%.Operating cash flow was hampered partly by higher level of working capital, but everyone should remember that the quarter 3 is always a seasonal weak quarter, obviously, coming in on -- down to SEK 5.6 billion, and when we look at year-to-date, down SEK 23.2 billion. Return on capital employed, as I said, record strong of almost 34%, and also earnings per share increased and up to almost [ SEK 7.00 ] [indiscernible] per share.When it comes to volume development, we increased, despite turbulent times, our truck delivers by 4% to 55,300 units. And as I said, I mean, despite continued supply chain constraints, a little bit better than quarter 2. So I've said, quarter 1, a little bit better than quarter 4 last year, then quarter 2, a little bit worse than quarter 1, but now we are seeing better again. So still, I mean, we are maneuvering in the archipelago here.Deliveries on construction equipment declined by 21% to a little bit more than 13,000 units down, mainly driven by low deliveries in China. And for the Volvo brand, we can also see deliveries hampered in Europe by supply chain constraints and also logistics actually, not at least rural capacity that still not is in balance, roll on, roll off capacity for complete equipment. But still, I think given the complex situation, a good job done here.Electrification, orders and deliveries continued to increase year-over-year as an increasing number of our customers are now entering into decarbonization journey to meet their mid and long-term targets, not at least also transport buyers are more and more keen on actually getting hold of transport capacity. It takes time, but we see that this is a strong momentum.And as I said already in conjunction with last quarter, to reach full acceleration and full offtake, the whole electric ecosystem in the society needs to go hand in hand here to move from this brown platform up to the green platform, everything from green capacity charging incentives and having visibility around that as well as OEM deliveries such as ourselves to customers.Supply chains are still to mature. And when you are building up that, obviously, we would -- you will encounter, I mean, troughs in the road, so to speak. But all parts of the value chain must continue to mature, and we are working hard on that.And as one of the first out, I think this is one of the key things that we want to see also that we are together with all partners learning now how to continue to accelerate. But if you look in total, electric orders increased to 1,600 units in the quarter, a yearly [ pace ] close to 6,000 units, while electric deliveries done for the group increased to 1,100 units in the quarter, I should say.When it comes to vehicle and machine sales development in value, strong sales growth for the group, a plus 9%. The currency-adjusted vehicle and machine net sales above SEK 100 billion in the quarter, with strong growth in trucks on the back of a combination of primarily commercial conditions and also partly, as I said already before, volumes. So, very strong development here. And the decline in -- we see them on the [ backlog ] deliveries in primarily China, as we said.And service sales development, very important for us. We had continued good demand for services with a strong growth, plus 10% FX adjusted. This is also the result of a number of factors, but, I mean, primarily then improved commercial conditions. But also you should remember that together with a continuous high activity level amongst our customers. And the efforts that we have done now in quite many quarters as regards contract penetration -- repair and maintenance contract penetration and other services are also, of course, paying off step by step, a very important piece of the puzzle here. And the group is pacing 12 months rolling at the service level then of SEK 125 billion.Volvo Buses continues to show strong service sales development as people travel or gradually coming back. They were more severely hit, as you remember during the pandemic. Strong VFS or Volvo Financial Services growth from a growing business portfolio, supported also of course, by higher interest levels. So all in all, good results of services.[ When ] -- moving to trucks. Truck news, quite manual [ than ] this quarter again. Renault Trucks to start now, is following then the start of the heavy-duty platform for Volvo last year, taking orders for the Renault Trucks E-Tech versions, both in the T version for regional [ whole ] and regional distribution, and the E-Tech C for urban construction. And these figures are up to 44 tons than -- and we'll go into serial production now in November in Bourg-en-Bresse in France.Another milestone, very important, Volvo Autonomous Solutions, still one of the smaller business areas, but with great prospects, has entered a long-term collaboration with Boliden to deploy complete autonomous solutions, you can see that on the slide here, based on the Volvo Group in-house developed virtual driver and Volvo Trucks than premium truck range.In August, for a similar application, we also now removed the safety driver in this type of solution at the Bronnoy limestone quarry in Norway. And that is, of course, a true milestone because now we are [ already ] up to autonomous operations in that quarry.Also Volvo Defense has entered into a 7-year framework agreement for deliveries of our Volvo FMX trucks to Estonia and Latvia Defense Forces, and the agreement also includes comprehensive spare parts and maintenance programs.Another very exciting news is that Volvo Group, Renault Group and CMA CGM Group, the big shipper, will join forces to address the growing needs of decarbonized and efficient logistics for zero emission last-mile deliveries. In general, last-mile delivery solutions is, as you can understand, a fast-growing transport segment, leading to the long-term trend of, amongst others, increased e-commerce across the globe, but it's also currently seeing lots of challenges.In addition to make this transport zero emission, it is also about improving work conditions such as ergonomics, stress levels, but also planning and efficiency as well as support service to guarantee uptime and quality. The base for the corporation is an all new generation of electric and software-defined vans that will be combined with complete end-to-end solutions of digital and physical services, where we can leverage, so to speak, the complementary strengths and not at least then the strong service and support networks across markets since these are truly B2B solutions, obviously.And the new co-builds on the already long and successful partnership between Renault Group and the Volvo Group through our [ arm ], Renault Trucks, in the light commercial vehicle segment, where we have been growing successfully over the last years and see a further good potential, not at least with this new [ co ].When it comes to truck market forecast, that may be the most important slide. So let us -- and I assume we will see a number of questions coming from all around the globe here. Let us start with North America then.For North America, 2023 forecast to start with, unchanged at the 330,000, which, of course, very strong levels. And for 2024, we are forecasting a normalization, I should say, because you can see that also coming down to -- as you can see here, coming down to the trend line of around 290,000 then.For Europe, 2023 forecast is increased by another 10,000 units up to 340,000 units, of course, also related to supply chains gradually getting better. And for 2024, we reiterate our view of a normalization of the market. And also here, we forecast the market over 290,000, and that is also in line and on par with a long-term underlying trend line, as you can see here. So it is important, I think, to remember that the forecast for 2024 still represents good levels.For Brazil, 2023 level is kept at 80,000. We have seen a correction there for different reasons and not at least the change from Euro 5 to Euro 6, and I will come back to that. And we also forecast the market to remain at 80,000 for next year.For India, we reiterate the level for 2023 and the forecast of the total market will increase to 440,000, so increase the 40,000 units for 2024. And for China, the forecast is somewhat increased already for this year and a further small increase then still on rather low levels for next year up to 700,000.When it comes to truck orders and deliveries, we continue, even if -- I mean, it's a little bit changed pattern to be somewhat restricted by gradually opening the order books in different regions. Depends a little bit where we are, but still, I mean, super important to manage the cost inflation pressures and cost balance overall, but also to strictly manage inventory levels in the entire value chain as we continue to see, as I said, the anticipated signs of markets in Europe and also somewhat in North America that are normalizing.All in all, we had a book-to-bill in the quarter that was 0.85% or [ 0.85% ], and so in line with the year. 0.86%, I think it is for the year in total. But also remembering that we have been entering this year with very high order backlog.We will, of course, in that regard, continue now 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, reliability and the need of continuous volumes, while at the same time manage inflation, as I said, and also other uncertainties. We continue to keep a high level of flexibility to manage any midterm changes in demand and have a built-in flexibility.Truck market shares. When it comes to market shares, starting with North America, Volvo and Mack have been affected by specific supply chain constraints over the year and reported that already in quarter 2. And now we have a combined market share of 15% year-to-date.When it comes to market shares in Europe, Volvo and Renault in combination are on a good level of 26%, somewhat decreased. We had a very strong development last year, as you remember, because we have a good ability to deliver. But still 26% is really good for us, and also market share on battery electric up to 68% in Europe.Volvo's performance in Brazil also very strong, almost 24%, historically strong. We had a weaker start this year because we didn't have a lot of Euro 5 Trucks in the pipeline. We deliberately took the decision and therefore, market shares were hampered in the beginning, but now we are catching up. And we see a strong market share position for Euro 6, almost 30% actually.And also Australia, I have to comment, an important market for us. Volvo and Mack in Australia performed well, at 26% combined, that is also historically high.Construction Equipment. We continue to roll out also the electric executions in VCE. Not at least is done in the -- very important, I mean, 20-ton plus segment, the 23-ton electric excavator. We have been rolling that out first in Norway, but now we are continuing in key markets such as U.K., France, Sweden, the Netherlands, to mention a few.And also along with the EC230, VCE is now also offering a more comprehensive solution with the new power unit, as you can see here. And that is a power unit or a power bank with 400 kilowatt hours and brings power to sites with weak or no local grid and can also serve, of course, as a smart grid -- smart local grid, cost arbitrage by charging when commercial conditions are favorable along the weak. And I think all of you are familiar how that works and the opportunities around that.Market forecast for Construction Equipment. When it comes to – there is a continued growth in North America, while European market is expected to be flat in 2023. China continues to contract. So it's very much in line what we have said. And for 2023, we are not changing any of the market forecast in relation to what we already reported in quarter 2.When it comes to 2024, our first guidance then. In Europe, we say minus 10% at midpoint in our guidance range. And in North America, minus 5% at midpoint, so up 5% this year -- down 5%, but still on solid levels and also for Europe obviously. South America, plus 5%. Asia, excluding China, minus 10% and a somewhat further contraction in China as well then, minus 5%.Book-to-bill and orders here, continued good demand, as we said, in North America, supported by infrastructure projects, while demand in Europe softened somewhat then in accordance with our guidance on the back of higher interest rates, weakened macroeconomic outlook, as you know, building segment outlook weaker, et cetera. But an overall order decline of 27%, mainly driven by China as well as cautiousness among customers and dealers in Europe. So it's, of course, I mean, a little bit of an overreaction we see here now in order to balance, so to speak, also the pipeline.Elevated order numbers in North America as the dealers now are allowed to place orders for first semester next year as well as very weak comparison with the last year's similar quarter. And that, again, now is really how we open and manage, so to speak, the order board. So the very strong order intake comparisons, that -- plus 196% is also that should take, I mean, a little bit wider look on that.And I think in this situation, the overall market guidance is maybe more important than the order intake per se quarter-by-quarter both for trucks and Construction Equipment. Deliveries decline with 21%, as I've already said, mainly then related to China and somewhat the supply chain and logistic services for Europe.Buses orders increased by 6%. So it continues, mainly driven by improved multiple coaches and electric city buses and deliveries increased 4%, mainly driven by higher volumes of coaches in North America than both Canada, U.S. and Mexico. Book-to-bill in quarter 3 was [ 1.10% ] to [ 1.12% ].And during the quarter, an agreement was signed with European bodybuilder MCV. We are already having a very successful cooperation with them for the U.K. markets, but now also for the Volvo 7900 normal and Arctic versions as well as electric body also for intercity traffic, supporting the new business model and the turnaround for our European business that we announced in quarter 1. So a very important piece of that puzzle.And Volvo Buses also continues their electric sales momentum in U.K. with electric bus orders in this case from 2 operators. And they are based on the same global BZL electric chassis. So in that sense, I mean, good quality and momentum for buses.Volvo Penta, orders decreased by 28%, similar you can say. Demand coming down across segments. Marine -- pressure of marine leisure segment below 40 feet, primarily. Also industrial segment, similar pattern as we see in Construction Equipment and trucks, but partly offset by continuous strong demand and stronger demand in the Marine Commercial segment, and that is, of course, related also to -- for example, the build-out of wind -- offshore wind farms.Deliveries decreased by 9% in the quarter on the back of continuous supply chain disturbances. We are still struggling here, and we have a high order board that we need to continue to execute upon.Volvo Penta is also currently reinforcing and focusing its sales and service network in the growing industrial segment. We have, as you know, over the last 5, 6, 7 years, been very successful in actually growing the industrial part of Volvo Penta. And now we are focusing also more and more into a specific industrial service network.And as one example, now during the quarter, we have appointed Swecon as the current VCE dealer for Sweden for the services and sales into that segment. So that is also coming along in Italy for our customers to have complete solutions, obviously both here and now, but also for future renewable propulsion systems.Finally, VFS, record business volumes for the third quarter. Volume was SEK 29 billion in comparison to SEK 25 billion last -- same quarter last year. Net -- we see the net credit portfolio growing to SEK 255 billion, and portfolio performance continues to be good since our customers' financial health is overall good and with good payment discipline.So by that, that ends the first business update. So Jan, I'll leave it to you for the financial update.

[Jan Ytterberg, executive]

Thank you, Martin. After the last 2 quarters, I have frequently got the question from you, is this the peak of the cycle? And it is seasonally weak third quarter where we have low deliveries with an adjusted operating income of SEK 19.1 billion and a margin of 14.4%. If that was the peak of the cycle, then I'm fine.Similarities from the last quarters can be seen also here in the third quarter as price [ execution ] continued to be good, mitigating then the cost pressure from salaries, inflation and also from the transformation. And we continue to have supply chain disturbances, but sequentially lower and also compared to the third quarter last year, lower.If we move over then to the income statement and the top line, the increase of net sales was 15%, but of course, positively impacted by FX as the Swedish krona was weak against all important currencies for Volvo. If we take away FX, it's 9% over increase, and that is mainly related to price, partly offset then by the lower deliveries in Construction Equipment.As you can see, the increase was substantial in Europe and North America, whereas the low demand level can be seen in South America then and in Asia, of course, hampered by the low construction deliveries -- Construction Equipment deliveries, but partly mitigated them by other business areas that have more increases of deliveries in Asia.Moving over to the earnings as such then. Despite the volume that was on par, or actually a little lower in the different business areas compared to the third quarter last year, we delivered an impressive financial leverage FX excluded, [ and ] of over 50% in the quarter. So as I said, SEK 19.1 billion of adjusted operating income and 14.4%. And similar to last quarters, we are maneuvering in an environment of inflation and transformation by adjusting our commercial conditions to mitigate these cost pressures then.And we continue to be successful with price execution, both for vehicles and services also here in the third quarter, and that contributed positively to the improvement. And on the negative side, we have the higher per unit cost in our own production as volumes are stable or decreasing. At the same time, we, of course, feel the pressure from the general inflation and the salary increases. On the positive side, we see freight costs coming down slightly, both as an effect of less of [ rush ] transports, but also that the freight tariffs are going down.The general inflation and [ salary ] increases are, of course, impacting all operating expenses. Besides this, the ambition we have to be in the forefront of the transformation with electrified autonomous vehicles, but also on the combustion engine side. That, of course, needs more resources, more activities and thereby higher cost and that is seen in the selling expenses and R&D costs. And we had actually a positive net capitalization effect of SEK 0.4 billion in the third quarter. We expect similar positive net capitalization effect also in the fourth quarter.As you can see on the slide, nothing about sort of material costs which has been sort of something we have talked about a lot in the last quarters. But the fact is that we are on similar level as the third quarter last year where we had positive effects coming from raw material, offsetting the negative effect as we are -- on the material cost as we are compensating our suppliers for their inflation and their salary increases.We got a positive FX effect of SEK 1.2 billion in the quarter then, where a limited part of that was the transaction exposure. And for the fourth quarter, we expect transaction exposure to be neutral, and we do not give any full guidance of FX effect for the fourth quarter.During this quarter, we also then divested our entities in Russia that had been put on hold since the Ukraine war started, and that gave a loss of close to SEK 800 million in the quarter, and that has been classified as a significant item affecting comparability and thereby excluded from the adjusted operating income, and you can find that effect in group trucks and in financial services.As -- now that we're into cash flow, third quarter is a seasonally weak cash flow quarter wherein productions are low, and we are paying down the trade payables. That's in combination with the high volume we have, supply chain disturbances, but also the fact that we are gradually ramping up our better electrical value chain that put mark in our operating cash flow as inventory continued to increase here in the third quarter.All in all, operating cash flow in Industrial Operation SEK 5.6 billion. And of course, as Martin was into -- the focus now is, of course, to take down the inventory, both at our own factories, but also -- and you can say the second production line we have at the Body Builders so that we can adjust the inventory level to the lower future demand.Then the positive operating cash flow was also the reason why we had an increase of the financial position to SEK 65 billion at the end of the quarter, and return on capital employed, as it was mentioned, 34% on a rolling 12-month basis for Industrial Operation, and that is, of course, reflecting the strong earnings the last quarters.Then we move into the different business areas and start with group trucks, where we have an increased FX adjusted net sales for group trucks of 13%, price execution and, of course, also the 4% increase of deliveries are impacting here. And price realization was the main explanation behind the increase of results in group trucks, an improvement of SEK 6.7 billion in the quarter to SEK 14 billion, giving an adjusted operating margin of 15.6%. That must be considered very strong for the third quarter.Similar to the group, the headwinds came from the higher unit costs in production as salary increases and general inflation impacted negatively, partly then, as I said, compensated by lower freight costs. Supply chain disturbances continued, but were at a lower level than the third quarter last year. And the general inflation and salary increases are impacting also, of course, on operating expenses, and that in combination with the high ambitions and activities we have around the transformation impacted negatively on selling and R&D expenses, and we had a positive FX effect of SEK 0.9 billion for group trucks.Moving over to CE. We have talked about it before. Total deliveries continue to decrease in Construction Equipment, mainly related then to China. We have an FX adjusted net sales decrease of some 4%. Of course, the lower deliveries, but then partly compensated by the higher prices in general and also the improved mix we have of brand and markets as we are selling more of Volvo heavier machines in North America and in Europe where the commercial conditions are better and less -- comparably less than Chinese machines where we have a very tough price competitive environment. And of course, that is impacting our SDLG brand quite substantially.The positive price [ and ] mix effect impacted adjusted operating income positively, but not fully compensated for the lower deliveries, then impacting both as less gross income, but also difficulties to handle sort of the absorption of fixed cost out in the production.Also here, general inflation, salary increases are putting marks in our operating expenses with [ them ] on top of that high activities on the sales side in Construction Equipment. We got the negative effect on the selling expenses. More or less flat adjusted operating income, SEK 3.7 billion, giving a margin of 15.4% and a small positive effect on currency in the quarter.For Buses, we continue to see an improved environment -- business environment. The high activity level was seen in our service side, in the service revenues. And this together with the general price increases impacted then positively on FX adjusted net sales up 6% and of course, on the earnings.Despite the supply chain disturbances that we have on buses, production efficiency improved, contributing then positively to the increased adjusted operating income. The increase was [ SEK 200 million ] -- more or less SEK 240 million, up to SEK 340 million and the margin of 6.3% for buses. We have a little more pressure from the material cost, but we also had a positive FX effect of some -- of close to SEK 100 million.And also Penta experienced supply chain disturbances, and that impacted engine volume and impacted the production efficiency negatively. Higher prices and a favorable mix with more of heavier machines, heavier engines, impacted both net sales and the earnings positively, whereas then the cost pressure from material and the high activity on the sales side impacted negatively besides the already mentioned production efficiency.Net sales up 5% for Penta, FX adjusted, and adjusted operating income of SEK 790 million and a net margin -- adjusted margin of 15.9% in the quarter. And also we have a positive effect of FX in this case slightly over SEK 100 million in the quarter.Then we move over to Financial Services. And as I said earlier quarters, the numbers in this slide has been then restated to exclude the Russian and the Belarus operations in all the quarters. Similar to earlier quarters this year, we see then that the high deliveries and improved prices are, of course, impacting positively on the portfolio growth for Financial Services. New business volume increased 13%, FX adjusted, in the quarter. And we -- as Martin said, we ended the quarter with SEK 255 billion of credit portfolio.The fierce competition from banks and leasing companies continues and is putting pressure on the earnings, but also on our penetration that were a little lower on a rolling 12-month basis than last year, 27%.And also, as mentioned, customer financials and payment performance are good, and that's also why we have low write-off levels and low credit expense levels. And the improvement of adjusted operating income of up to SEK 1.62 billion was then mainly related to the portfolio, partly then offset by the spread compression. And we also had a small positive effect from FX in Financial Services.So, before I let Martin summarize the quarter, I would like to do a little summary by myself, actually. I am now handing over the CFO role to Mats, as you heard. And the figure I have in front of me is SEK 280 billion of operating income during 63 quarterly presentations that I've done as a CFO for a listed company, whereof SEK 190 billion have been during my 4 years at Volvo, as they would say in my [ hoods ] respect.And now I would like to thank you, of course, for a very good cooperation and good luck to you with everything going forward here. And now, Martin, it's up to you to summarize the third quarter.

[Martin Lundstedt, executive]

Thank you, Jan. And I did see that you became a little bit emotional. That's good. We need that more in finance as well. No, no, but great Jan, and we will continue to work together, obviously.But if we come back then to this quarter for the Volvo Group, so in summary -- I will be short here, but despite extremely then challenging and complex global conditions, as you're all aware of, I'm proud and humble to present another strong quarter for the group on behalf of all dedicated and passionate colleagues in the Volvo Group.We continue, as I said, in the introduction to work closely with our customers and to stick to the priority of continuing to deliver and to execute on the order backlog, even with extra cost that comes along and that we have seen also in this quarter.At the same time, we are focusing on the right balance between orders, production volumes, inventory levels and deliveries by having a high degree of flexibility. And we see that transport and infrastructure activities continue at good levels in many of our markets, but also that we are now gradually entering into a more normalized demand situation, and that is reflected in our total market forecast for 2024.With high operational performance and profitability resulting in a strong financial position, we also continue to prioritize innovation and investments to stay in the forefront of the transformation of our industries and markets. The importance of performing today to be able to transform for tomorrow has never been more important and will be decisive for the years to come. And this ability to both perform and transform should benefit our customers, colleagues, shareholders and also hopefully society as a whole.So by that, Johan, I leave the word to you to lead the Q&A session.

[Johan Bartler, executive]

Thank you very much, Martin. Thank you. Yes. Thank you for that, Martin. We will start with the Q&A session, and we start here in the room, and then we'll take some on the line. Eirik, please go ahead, and limit yourself to 2 questions, please.

[Eirik Winter, analyst]

The first one on preparing -- let's say that those 2024 end market assumptions are correct and you perform about in line with the market and volumes down then somewhere around 10%, maybe a bit more. How are you preparing for that in terms of staffing and costs and so on? And what kind of profitability contraction alone from that volume drop?And then the second question would have to be on electrification then and the future. As you said, we're getting some of the statistics now from the efficiency and performance of a well-known U.S., I guess, in truck term start-up, and it looks pretty impressive. And it brings to mind whether or not you're about to change the thinking of maybe doing a truck from -- an electric truck from scratch given the aerodynamic benefits that, that could come with?

[Martin Lundstedt, executive]

First and foremost, as you said, I mean if we start with 15%, so to speak, [ correction ] here, obviously, I mean, we have flexibility system to handle that. And we should not forget about the fact also that we have had a situation now where we have really pushed the system really hard with also utilizing the flexibility tools that we have, both as regard bank or time banks that all [ pretty ] -- it [ fills ] up now if I put it like that. And the second piece is obviously also temporary contracts and other flexibility [ masters ]. So there, I think we are well prepared for that.I think more importantly, it's very -- it's to be close now to the balance, as I said, between production, deliveries, inventory, pipeline management, also including body builders. So you not have a double swing, so to speak, and you start to adjust accordingly. And also to, I mean, keep the commercial discipline because we are in front of the important investment that we should continue to pursue. And therefore, also the commercial discipline, I think, is very important.And then you can say that, not only that we have had this extra push, but that has come also with, you can just say a price on the operational efficiency and operational leverage, because as you can see in this quarter, we didn't see anything of that basically. So there is also room for continuous improvement.And at one point in time, you need to reset the system a little bit because even if we have been able to increase volumes, et cetera, it is still coming to, I mean, a lot of [ jem & fix ], so to speak. So I think we are well prepared now.Then of course, when it comes to what is happening now in the transformation, we will see a lot of different type of comparisons. And first and foremost, we can state that it goes always that we have the highest respect, and I mean, it should always be on toes when it comes to competition, both new competition -- new geographical competition, but also existing competition. So that is number one.But also that we have high confidence in our own ability to manage this transformation. We have been early out. We have a lot [ to go ]. And we see also now how different comparisons are coming out that we are following very closely.But of course, also that some of the comparisons are containing, if I may say so, a little bit of apple and pears type of parameters because, if you take the comparison between passenger cars and trucks, obviously, you have specialized vehicles for different applications.So in that regard, it is very important also to see, okay, how is the full constitution of that solution looking when it comes to range, when it comes to gross combination weight, when it comes to efficiency, when it comes to the weight loading factors, et cetera, charging times, uptime in general service network, what have you.Then when it comes to the [ BEV ], a native type of discussion, I think that's relevant. And we are, of course, working in our modular concept of that. And then when it comes to the aerodynamics, it is a little bit what it is when it comes to the North American execution of trucks, given what you have in rules between tractor and trailer and the European. Now Europe is gradually opening up for that with extended front, or -- which I think is good for several reasons because aerodynamics will play a very important role.Having said that, I mean, you will have now, as always, a little bit of -- it's a fast-moving material. And you will have a little bit of -- I mean, [ quicker ] [ iterations ] for, so to speak, [ generation ] [ race ] also when it comes to some of the specific parameters.So the race is on, and we will participate in that race, but full respect for what we see in the market.

[Johan Bartler, executive]

We're moving over to the telephone line. And the next one is from Daniela Costa, Goldman Sachs.

[Unknown Analyst]

[indiscernible] here from Goldman Sachs on behalf of Daniela Costa. I've got 3, if you can take them. So first of all, could you please provide some more color on the expected impact in 4Q from the UAW strike?

[Martin Lundstedt, executive]

Yes. I mean, just to give a very short update on that. We are in a situation where we are renewing, so to speak, the contract for primarily Mack Trucks. That is what we call the overarching contract called Mack master. And we have had a good discussion with the unions over the -- during the course of this year because it's a very comprehensive contract always. And actually, we put forward a proposal that we had a joint agreement around that contract.And then, it works like that, that it's voted amongst members and it was voted down. And after that, so to speak, we had this strike starting since a little bit more than 1 week now. We're working on it. Let's see. So we cannot judge that for the time being.The most important is to find a solution that is acceptable for the [ parties ]. And for us, it is very important that this is a solution that is acceptable knowing the fact that we are the only truck OEM in North America that is producing 100% of our trucks in United States, whereof the competition is producing either a big share or a very big share in Mexico.So of course, for us, it's important that we can continue to have a competitive situation, but at the same time, making sure that our colleagues also have good conditions. So we will follow that, but that is where we are now. So to give any forecast, I cannot do that.

[Johan Bartler, executive]

We're moving on to the next question here in the room from Hampus.

[Hampus Engellau, analyst]

2 questions from me. Firstly from the order -- on the organic growth in service of 10%, could you maybe elaborate a little bit on the pricing there? Is there underlying volume growth? Then a more technical question is, are Volvo looking at running diesel engine on hydrogen? And if so, is that within the Cellcentric collaboration, or is it stand-alone? And will there be a third drive trend going forward for being more CO2 clean, I guess?

[Martin Lundstedt, executive]

Also the sales, I don't know if you would like to elaborate on that.

[Jan Ytterberg, executive]

No, I mean, of course. Price is -- has been a big part of -- behind the increase of FX adjusted sales increase on services. With that said, we are on a high level. We are sort of having more and more of the contracts, which means that we are securing future revenues in -- for the service side. But if you take a look on the total, the price is bigger -- much bigger than volumes. So there are -- we have around 2% to 4% on volume, but it's not much more of that. That is sort of normal situation.

[Martin Lundstedt, executive]

Yes. And I think there is [ all ] about the long-term trend.

[Jan Ytterberg, executive]

Yes.

[Martin Lundstedt, executive]

As you -- I mean, as you say, Jan, I mean, when it comes to the contract penetration, and since that is gradually kicking in, I mean, after warranty periods, et cetera, I think that has been super important. But then quarter-over-quarter, obviously, I mean, kicking in step-by-step. And here we have seen a good price realization. But we are in good levels, and we talked about it also, [ '89 ], the big recession, you remember that.And we have the -- I mean, falling off the cliff when it comes to new equipment that some of us remember. Then we were down, what was it, 7.5%?

[Jan Ytterberg, executive]

7.5%, yes.

[Martin Lundstedt, executive]

Sort [ of ] this is -- And then we had a lower contract, [indiscernible] generally speaking, in the industry. Then when it comes to the renewable power trains, if I put it like that, we have communicated 3 parallel tracks in order to cover the global demand and global application demand and it's better electric then obviously. It is fuel cell electric. So you have the same, basically power train, but we have different energy sources on board, and that is the Cellcentric operation with a fuel cell stack.And then the third is combustion engines with renewable fuels, whereof hydrogen is one of those in the long term, given also different type of applications. That is not part of the parameter of Cellcentric because that is the fuel cell stack development and production and commercialization together with Daimler.But on the hydrogen combustion, our announced acquisition of 45%, or -- I mean it's an MOU for -- of the heavy-duty part of Westport fuel systems, is in line with that since that technology [ corporation ] is based on, you can say, renewable technology ordering today for liquefied biogas, but we have a strong position and further on then for hydrogen.And the construct of that is obviously that we would like to see other players coming in also, so we can get a good standard in the market on that side as well. Because it will not be one silver bullet to be clear here. This is a little bit like the world of silos. So I'm talking about construction industries or cement industries or steel industries or trucking industries or shipping industries and everyone is looking at -- from the center of the world.Reality is that we need to look at the world as such as U.K., how does the energy [ needs ] look like for different sectors, different geographies. And here, I think we have a very, very strong platform of addressing the need based on different technologies.

[Johan Bartler, executive]

We're turning to the telephone line. The next one is coming from Nicolai Kempf, Deutsche Bank.

[Nicolai Kempf, analyst]

And to put [indiscernible] my motion, I think this has been a very strong result, so well done. 2 questions from my side. First one is on lead times. You still mentioned that you're a bit more restrictive on the order intake. Can you update where we are currently on lead times?And my second one is on product cost, because you did mention that product cost has been issue in [ deferred put ] as well. If [ you ] figure about a truck for next year, we see higher costs from labor side, but probably lower input cost from steel. At least [Indiscernible] would expect that product costs for tractor come up next year or down?

[Martin Lundstedt, executive]

Lead times, as we said, little bit depending on regions and how far out we are. If we look, generally speaking, we are fill up for this year. And then we have a good filling rate for quarter 1, and we are continuously gradually filling that in certain cases. We're also, so to speak, fill up for quarter 1. So that differs a little bit.Then depending on the pattern of different regions, that is what we mean with still restrictive, because we don't want to push fixed orders too far out in time still. And what it's about now is to really manage the order board also in a smart way together with both upstream and downstream working capital and inventory levels, et cetera. So, not that -- I mean, a normal balance when it comes to lead times, but getting there also when you see when it comes to book-to-bill, et cetera, and it will gradually continue to adjust as we have guided for when it comes to the total market.Then when it comes to product cost, I don't know if you would like to start, so we mix the voices a little.

[Jan Ytterberg, executive]

Production costs, I mean, we will see the similar things that we saw here in the third quarter also in '24. I mean the salary increases are there. They are pretty -- will be pretty high most likely in a historical perspective. And with -- where we are coming into now to sort of more normalized level means also that we can [ trim ] our production system.We -- from time to time, call our way of running the company has been at least related to production, whatever it takes. Meaning that we have really, really focused on delivery to the customer and the customer promise, meaning that we have absorbed extra cost. And of course, now we are coming in a situation where we can take those costs out gradually, which is, of course, good for the per unit cost.And then -- so let's see how that will play out. As I said, it will be difficult to be in a decreasing volume market to take out sort of the salary increases by efficiency. That will be, to some extent, but fully, it's difficult.On the material cost side and the raw materials, let's see. I mean, it's too early to make any prediction for 2024. But I mean, what you have seen now is, of course, very good on the material side that we are getting positive effects on the raw materials. But our suppliers, they have also to battle with the salary increases, the general inflation, et cetera. And similar to what we saw in this quarter, we will surely have to compensate for that also to our suppliers. Yes.

[Martin Lundstedt, executive]

But yes, to add on that, I think because there is often up also as a discussion point. And obviously, we have a very professional methodology, how do we actually work with that together with our supply chain partners, because in this situation, it's super important that you are looking into the different elements of the commercial -- so to speak, the commercial transaction because it differs a lot when it comes to the raw material content, the regional type of content, and then obviously, the production added -- production value add.And also that we gradually, so to speak, improving our products also that is upgrading value for us and thereby also our suppliers. But there I should say that we have in my book, a very professional way of dealing with that also.

[Jan Ytterberg, executive]

But coming back to -- I mean, what you talked about before, the persistence on price, it will be very important, of course, coming into 2024 that we will be, sort of what we call last-man-standing on the price side.

[Johan Bartler, executive]

Anushka, next question, please.

[Unknown Analyst]

Anushka [indiscernible]. Maybe a follow-up on price realization. I mean you have been very successful with pricing so far. So can you comment on your expectations for 2024 when we will see the market going off? Do you expect pricing discipline in the industry at large as well?

[Martin Lundstedt, executive]

Would you like to talk to…?

[Jan Ytterberg, executive]

No. And we are debating, it's a lot of course. And maybe it's strange, but I'm more maybe on the positive side because I believe, with the situation we are in, we have the inflation, we have the salary increases, we have the transformation. We, as an industry, cannot permit ourselves to decrease prices. This is our funding from the combustion engine side that we need to have. So that's one parameter.And the other parameter is also that there are no more capacity being added into the combustion engine side. On the contrary, every day some capacity is being lost because things are not renewed, not newly invested, more capacity added, et cetera. So I think there will be a resilience on price side may be coming to '24.And we should also remember, it's not sort of falling off the cliff situation. It's a normalization of the market. So I'm pretty optimistic actually that you can be able to manage and handle the price -- make hikes as we have done in '23, that will be difficult in '24. On the other hand, we see lower costs as well in many areas.

[Martin Lundstedt, executive]

But I think also, I mean, for us, at least, it's clear that, I mean, the [ hand ] for the extra volume in relation to the risk for the company in terms of -- I mean, the balance between our commercial downstream conditions and upstream conditions are extremely important because, I mean it has been a long -- I mean, scale is often -- I mean, occurs if you don't manage that in the right way and volumes and the harmful -- the wrong type of volumes.In the market that we have had now, it has been handled the right type of volumes because our customers are -- desperately needed that. Now it's about really maintaining good quality of the business in order to make sure that we can fund the transformation and still be an attractive case for our shareholders. I mean that balance is what is most important for us now. So fully agree to what you said.

[Unknown Analyst]

One more for me on the market share. I mean, they have been coming down in some markets. So obviously, there is some volatility on a quarterly basis and you're against quite tough consumption last year. But don't you think that you being restrictive in taking orders is a reflection of somewhat lower market shares?

[Martin Lundstedt, executive]

The market share for us -- I should not say that because eventually -- I mean, so far, it has been -- maybe it could be one market or two, et cetera, because at the end of the day, when you have a supply restricted market, you're coming almost into -- I mean it sounds not good, what I would say now, but coming into a little bit of an allocation game.And depending on how we are, so to speak, trying to allocate our volumes in relation to competition because it's a true competition out there. And I mean it's a well-functioning market in that sense. Very, very fierce competition, obviously, in certain pockets you can probably see that. But generally speaking, what has -- it is – what -- it is a little bit what I said because we are running the machine as much as we can in terms of output.Then it's clear that we have -- specific related supply chain is used in North America during the year that has been more related to us than to the industry in general, which is a pity because we have a very -- for the time –- not for the time being, I think we have built up a very, very strong position amongst our customers. We have a great product and solution offering.And so, there we are, of course, addressing that now together with our supply chain partners. But that I should [ agree ] is where we have been relatively, so to speak, losing out. Europe, [ 26% ] combined and historically very strong for us. Australia, very strong. Latin America, generally speaking, Peru, that is -- I mean, we cannot talk about all markets here, but take Peru, that is a big market for us in terms of revenues, right? We are at 30%, it will never be that high. And so, yes, supply.

[Johan Bartler, executive]

We're turning to the telephone line. The next one is Klas Bergelind at Citibank.

[Klas Bergelind, analyst]

The first one I have is on the gross margin next year, given how you guide. I think 70% of cost is variable, rest 30% of the -- is basically the fixed cost, and you should be able to take that out for the 3 to 6 months. So it looks like you should be able to handle this volume decline you're talking about quite well.I'm not asking, of course, about a number here, but unless pricing goes below cost, then I think we should have a quite normal drop to it, at around 20%. The comment here on the flexibility would be great now.

[Jan Ytterberg, executive]

No. And as Martin alluded to, we haven't embedded flexibility, of course, in our production system, and we will have to use that. With that said, it has to be similar to what we have done. Now we have to fulfill the customer promise and gradually take out costs and the extra costs we have discussed.And 290,000 in Europe and North America, that is not a bad market at all. We should make good money in that market. So I mean, we are not so -- we -- I mean we will have to handle that, and we are coming from a very high level, you should remember that as well. So it's easy for me to say I'm not so concerned, but…

[Martin Lundstedt, executive]

No, no. But I mean -- and again, what I think is maybe the most important is to be active, I mean, right now also to read the right signals, clause, as you always know, I mean what do we see in terms of it. And as [ Jan ] said also in terms of demand signal, inventory levels downstream, how does it look at the body builders. Reminds me a little bit of my mother always getting [indiscernible] when she was in school with the younger teachers and they also -- I mean, now I have my new baby, how much should I dress that baby when it's wintertime. And then I said, dress it as you think it should be dressed and then you take off 50% of the clothes.And it's a little bit the same here now, that I mean, when you get the signals, be realistic about the demand signals and act accordingly because I think in that mitigation period, it is important to really not end up with unnecessary inventory, for example, because that gives a lot of [ course ] wrong type of focus in an organization, but really to make sure that we have handled that in a smart way and then work with the flexibility that is embedded.

[Jan Ytterberg, executive]

And of course, with the high service business we have, of course, that is a very nice cushion we were into what we have seen in the past.

[Klas Bergelind, analyst]

Yes. Very quick final one on North America. You're obviously catching up here on orders again versus the market. You are underperforming before as we have in [indiscernible] order book. But now we have the strike coming. [ How should ] we think about this not impacting sort of the total Volvo in North America, and you were catching up now in terms of order intake, but thinking about into year-end and the potential impact?

[Martin Lundstedt, executive]

No, I mean, as we said, it depends a little bit on how the situation will develop here. But I think it's extremely important to have a mid and long-term view on this. We have been building up a strong resilience in North America, necessary resilient in North America after, I mean, many, many years and decades of low negative or even mediocre performance. And therefore, to continue to build that strong business at the same time as we have a fair development here is the number one priority as we speak now.But let's see how it will develop. But we are seeing it very positively when it comes to -- I mean, to the future development here. We are investing in North America. But let's see how this specific event will develop.

[Johan Bartler, executive]

And thank you, Martin and Jan. That concludes the Q&A session. All presentation [ material ] today will be found on the Volvo Group homepage. And thank you for coming and thank you for calling in. See you next time.

[Martin Lundstedt, executive]

Thanks.