Volvo AB

STO:VOLV B

Earnings Call Transcript 2022-Q4

[Claes Eliasson, Senior Vice President, Media Relations]

So, ladies and gentlemen, a warm welcome to this conference covering the Q4 and Full Year 2022. My name is Claes Eliasson, and, today we will be listening to a presentation by the Volvo Group President and CEO, Martin Lundstedt; followed by our Chief Financial Officer, Tina Hultkvist. After the presentations, there will be a customary Q&A session, and I will urge you to limit your questions to two in order to make room for as many of you as possible.

With that, Martin, I think it's time to get this show on wheels. It's all yours.

[Martin Lundstedt, Chief Executive Officer]

Thank you, Claes, and good morning, everyone, also from my side to this quarter four and full year 2022 reporting for the Volvo Group.

Maybe to summarize a little bit before coming into the slides here, in the fourth quarter as well for the whole year it is also the full year reporting and really taking that holistic view as well. I think that Volvo Group continued to deliver very strong outcome, both from operational perspective, customer perspective, that is very important now when we have a very strong demand, and business perspective supported by solid financial results.

What is important in this time, in this transformational time is that, we also really did see how we were picking up when it comes to paving the way for the transformation of our industry, not at least when it comes to battery electric vehicles. And I will show that later when it comes to the sales of -- and not at least when it comes to the pickup of deliveries for battery electric machines in quarter four.

But maybe, again, most significant, we are still living in unprecedented times with a lot of moving and uncertain parameters, obviously. And 2022 was absolutely not an exception as you know. Continuous COVID situation, lockdowns, logistical challenges not at least Europe with a lot of operational challenges, both as regards to supply chains, but also as regards to volatility in cost situation and energy being one of those.

And I have to say, to start with, it is a pleasure to work with an organization and with partners that have been able to actually go through 2022 in this way. So coming in then a little bit to summarize this, what does it mean from a yield perspective and take a stance on that. As I said, strong results in 2022. Sales growing with SEK101 billion, of course, FX included, but just taste that a little bit, SEK101 billion in one year, up to SEK473 billion, an all-time high, obviously. But, also our adjusted operating income growing with almost SEK10 billion to SEK50.5 billion, so for the first time north of SEK50 billion, also that's an all-time high.

I'm also very pleased to see the strong cash flow generation, since we are also continuing to invest for the future, both in CapEx, but also when it comes to actually working capital, and Tina will come back to that. And when I say invest in working capital, we have been forced to do that in order to create resilience, obviously. But that has also made us come into a situation where we have a net cash position of SEK74 billion, while we are also continuing to expand, by the way, the customer finance portfolio.

A return on capital employed, the most of all the metrics remained strong and grew during the course of the year to 27.4% and we managed to deliver these strong results, as I said, despite all the turmoil. So a strong overall year.

When we then come into the quarter, it was again a very strong development when it comes to topline, more than SEK30 billion, up to SEK134 billion in topline and that was 17% growth, adjusted for FX. The adjusted operating income amounted to SEK12.2 billion and at a margin of 9.1%. We delivered also in this quarter a strong cash flow of almost SEK19 billion and as we have also communicated, and we had the discussion already in the quarter three reporting and partly in previous quarters. Our strategy to stay close to customers in this time when they really need the equipment, delivering as much as possible from the order backlog remains.

This has resulted in a good EBIT growth and higher market shares. That will serve us well also with installed fleet for future service business and resilience, but it has also meant, and I want to be clear on that, that the marginal last trucks or equipment, because we see the same pattern mostly also in construction equipment. They have been expensive. They have been costly.

But when we see the underlying quality of this business, the price realization, the value that we're providing, this is, as we deem it, the right balance. And, of course, they have been more costly in Europe given, so to speak, the mitigation activities we have been doing together with our supply chain temporarily.

This balance between performing here and now and to invest and lead the transformation, because it's true also we have continued to invest significantly to expand our range of electric products. Those investments in CapEx and OpEx goes both for research and development that we often talk about, but also the ramp up as such, because being early out and I think you know a number of other examples in, for example, the Paccar industry where it takes some time to do it and that we are really now on the ramp up curve, will really benefit the group moving forward, both when it comes to really trim the industrial footprint, but secondly, really to make sure that the business models are as we expected, and thereby it's so important to continue to drive this.

Volume development, very straightforward. I think it's fantastic given all the moving parameters that we have both a production and a delivery record on the truck side. Truck deliveries increased 4% and that was quarter four record. Volvo Construction Equipment also plus 4%, so a great job done by the whole value chain here, of course, across our internal value chains, but also together with our supply chain partners. It is unbelievably well done, I have to say. I have been some years in this industry and when I've seen what has happened, it's just great.

When we look at -- as I was into electrification progress, we can also see that it's starting to take off now. And the good news is that we see some of our major customers are really taking bigger orders. So we are moving from this pilot phase into really electrifying depot by depot and segment by segment that we have been talking about. So 5,000 orders and the deliveries actually close to 2,200 electric vehicles and machines during the course of the year. And as you can see in the graph, also, very steep now increase in the quarter of deliveries. And as we see it, a very, very important part of the value creation moving forward and we are proud of having that leading position.

Also, on the service sales development, a strong -- in quarter three we said that for the first time moving 12, we were at over SEK100 billion. Now we are moving 12 or for the full year above SEK110 billion. As you can see, strong development in all segments with the exception on construction equipment, where you see a flat development, so that is partly and quite a big proportion due to the fact that we had a rather significant service business in Russia. And the other part is that we have a little bit of flattening and softening -- say flattening situation in Europe mainly. But generally speaking, as you can see, activity levels strong on the service side.

Then you can, of course, say that if you look at the relation between vehicles and services, even if we're growing faster, we have not been growing as fast as we have done on the equipment side, as it's natural, because that is a more long-term investment.

Coming into trucks, a lot of things have happened obviously also in quarter four. As I said, a lot of investments, but just to talk a little bit about that and summarizing also some key highlights for 2022. In October, already we passed the milestone of having produced 1,000 battery electric trucks in the medium-duty operations in Blainville, very important for us, obviously, so they are really now coming more into a real type of the serial production mode.

Major customer for mainly Northern XPO, former Norbert Dentressangle for everyone that has been around for a while, ordered also 100 trucks to their fleet. A very important sign, because they are a major player, obviously, not only in France, but in surrounding countries. And most important is that, there have been extensive testing done also in their operations, so that is a really good sign also, that is now scaling here.

And in the quarter, the Volvo Group also signed in addition to what we have done in Europe now with Milence. That is the joint venture together with Traton and Daimler on charging infrastructure in Europe. We signed a partnership that we are very proud of and that is actually to really partner with the Pilot Company and Flying J, so those are the two brands. And for everyone that has been traveling U.S. on highways, you know the importance of that when it comes to resting areas and to services for not at least commercial operations. So having that opportunity will be a great opportunity for really creating the right footprint when it comes to electrification.

The last thing is more interesting from how we leverage also the group assets when it comes to modularity. We have been for a long time been out of the medium-duty offering in North America. It has been a constant dialogue not at least on the Mack side and we decided in 2018 and 2019 to get that going, a very fast project starting then in the mid-2020. And now where we have been ramping up, I'm very proud to say that already for the full year 2022 we have a 5.3% market share, obviously, very important for us, but also for the American footprint for the Mack network with a big success. So that is also a showcase of how we can continue to leverage the global cost system as we call it.

When it comes to forecast, I'm dramatically positive, I should say, in these uncertain times that we are reiterating our forecast in all major markets as we already stated in quarter three and that means, obviously, that we are forecasting strong markets in -- or on good levels and solid levels in North America and Europe. And that can also lead to stabilization for our supply chains moving through the year here, even if short term it will still be a number of challenges to continue to work on, but really, really positive that we see this -- and I note that other -- others have been out also. So, I don't think we need to comment that anymore.

When it looks for truck orders and deliveries, as you remember, in quarter three, by the way, we had a book-to-bill that was 1.2. So then it was -- and now we have a book-to-bill and then that is…

[Operator]

Hello. Sorry. Sir, can you hear me?

[Martin Lundstedt, Chief Executive Officer]

Yeah.

[Operator]

This is the operator. You were disconnected. Your sound did not go through. So, we've spoke in an interruption. I would put you now back into the conference. We did not hear anything from your start.

[Martin Lundstedt, Chief Executive Officer]

Okay. What do we do with this information? Then it will be the short version. We continue? Okay. So, truck orders and deliveries done.

As I said, coming back to quarter three, then we had positive and rather strong book-to-bill and this time a little bit weaker. The reality is, as we have reiterated many times, very, very strong order board, it depends on when we open up the order books for different segments, regions and business areas, and we see it both in trucks, but also in construction equipment.

So, I think, the main message here is that, how do we look at the total market? What are the market forecast knowing that we also have a strong order board that we need to continue to deliver on. And the reality is that, for trucks we didn't open the order book for a big part of quarter three, for example, during quarter four than last year, meaning, that we could not get in more order, but that is to remain with the quality and the inflationary environment and we had a good dialogue with the customers on that. So decrease with 21% should absolutely not be over read. We see now when we gradually are opening that we have a good refilling into the remaining of the year. And deliveries, as we have said, increased with 4%.

And market share is also a strong development during the course of the year. Europe for the total market, very, very strong for Volvo and Renault combined, almost then 28%, 18.4% for Volvo, and 9.4% for Renault was a good development and also continue to see a strong, strong position when it comes to the market share in electric, as I said, above the 50% combined. So that is also a very good -- that we are creating in this market as we speak.

North America, we were growing slightly for Volvo, but Mack dropped a little bit on the back of supply chain constraints for us that were more problematic for Mack than for Volvo during the course of the year. For the remaining regions, strong development. Brazil is extraordinarily strong also for us. So, in total, we have really created a strong footprint for the future, not only the market share, as such, but also translated into the deliveries and thereby the installed fleet and the service business.

And construction equipment in the quarter introduced, continued to also -- we talk a lot, of course, about the propulsion systems and the transformation of our sectors into electromobility, but also very important for our customers, continuous efforts on safety, utilizing the new technologies. So here we see a collision mitigation system for confined areas and also for all areas, by the way, but very appreciated that has been introduced. And, also, electric sales volumes still low, but accelerating and we see the same trend now from our customers here and I will come back to it later. But, as you know, we are electrifying airports, as we speak, and have now solutions up to 23 tons.

VCE market forecast, the same here. All market forecasts for 2023 are unchanged in relation to what we actually talked about last quarter, in quarter three. And so, construction activity has remained on good levels in most regions, so that is the -- yeah, obviously, the reason why we are reiterating what we already did see then. So, of course, there are certain uncertainties, but if anything, we have got more confidence also in those sectors for these forecasts.

Order intake, again, a little bit of the same story. As you can see, net order decline with 23% and I think the most or the best way to look at that is really then North America. And the reason was that we had order intake closed in quarter four more or less during the entire quarter four, very, very long order board, really needed to make sure that we continue and remaining with a high quality in the order board. We have now opened both for Europe and for US in beginning of quarter one here. And we see that it's refilling well.

Deliveries then increased by 4% as we said, and demand in North America, Asia, and the pre-buy effect in China, but, again, mainly due then to the balance between order intake, order board and production output.

Volvo Buses, net order intake increased by 70%, primarily supported by coach sales in North and South America and important -- number of important city bus orders in Europe as well. We still see, of course, with these high figures a recovery phase from the severe effects that, in particular, was hitting buses due to tourism restrictions and public transport restrictions. Deliveries increased by 64% with high deliveries in primarily South America. And in the quarter, also, coming back to safety, recognized by Time Magazine's list of Best Innovations 2022 for what is geofencing solutions using really the connectivity digital solutions of creating safety.

One example, really limiting speed around vulnerable areas, such as schools and other public areas. So, regardless of what the driver is doing, you cannot, for example, go quicker than or faster than 20 kilometers per hour. So these types of systems and connectivity.

Penta, same declined order intake with 18%. The reality is that the order book for 2023 is full. We've been working with our customers here that are both on the industrial and marine side, so largely sold out here. So focus as for the other business areas on deliveries, which increased by 11%.

And, important, also innovation here, Volvo Penta continued to work towards net zero, leveraging the group solution. They're utilizing now what we call the group Cube battery technology that we are mainly utilizing that introduction on the heavy-duty side of trucks, where they then can benefit and leverage both technology, leadership and scale. So, in this case, for Penta and the industrial customers, it gives a 40% increase in energy density compared to previous offers and a very flexible installation. That is the sign of Penta.

Finally, VFS, record quarterly and annual new business volumes. So that is going along actually with our deliveries to customers, continue to see good performance with the low levels of overdue and credit provisions and one very important reason for that is that, customer activity and profitability remain high, and the finance penetration level slightly dropped. I mean, we had a quick growth in equipment, but also partly due to Russia that was high penetration levels.

So that is the business update. And, Tina, I'll leave the word to you for the financial update.

[Tina Hultkvist, Chief Financial Officer]

Thank you, Martin. Good. So let's move into the financial update of Q4 and starting with the revenues. We have revenues of SEK134 billion in the quarter. It's an increase of SEK17 billion if you exclude currency impacts. We have strong revenue growth in all regions and in all business areas where trucks is the main driver of the revenue growth. And I think we have to step back a bit and recognize that the sales in this quarter is the strongest sales quarter for the group ever. Price increases and service sales is also supporting the revenue growth.

If we look at the operating income. We have an operating income of SEK12.2 billion in the quarter and it's supported by currencies of SEK1.8 billion and we have a margin of 9.1% in the quarter. This excludes costs of some SEK600 million connected to claims from the European Commission's Antitrust Settlement decision.

All-time high truck deliveries is supporting the financial performance and the good service growth is also supporting the financial performance in the quarter. We have, due to the energy situation in Europe, continued to support our suppliers financially just as we started to do in Q3 and particularly by the end of Q3 that has continued now also in Q4. At the same time, we see increased costs for freight and material in the system. On the other hand, we see a little bit less headwind on raw material, less than what we saw in Q3, but still more than what we saw by the end of last year.

Price realization has continued in the quarter and we have been able to offset the extra cost for inflation. We are also continuing to invest in new products and new offerings and we are also continuing to invest in the more well-known technologies. On top of that, we have an increase on the operating expenses, partly connected to the higher activity levels, but also connected to currency impacts.

The guidance on net capitalized, amortized R&D for 2023 is that, we think we will have a positive impact of some SEK200 million quarterly for 2023. Guidance on transactional currencies is that, we don't expect any significant impacts on transactional currencies for 2023.

We had a cash flow of close to SEK19 billion in the quarter. This is partly connected to the result and partly connected to seasonable reduction of working capital related to a normal buildup of payables. We have also somewhat released inventories in the quarter, but we do have structurally a little bit too high inventories in the system connected to the supply chain disturbances that we are still seeing and having in the system. We continued to give good return on our assets and we have a return on capital employed of some 27% for the full year with a strong balance sheet and net cash of SEK74 billion.

We're moving into trucks, despite the challenges that we have in the supply -- that we have had in the supply chain, we have record deliveries and we have increased deliveries in trucks of some 2,500 trucks compared to last year. Also, for trucks, it's the best sales quarter ever in the history. On top of the deliveries, also service sales has continued to increase in the quarter and it's mainly connected to the price increases that we've made. We have continued to proactively increase prices and thanks to really strong efforts by the commercial areas we have been able to offset the extra cost for inflation in the quarter.

At the same time, as we are supporting our customers with the deliveries, we also recognize that this comes with a bit of extra cost in the industrial system and it's connected to extra cost for freight on the material side and the support to suppliers, but it's also connected to the fact that we have a bit of extra capacity installed in the industrial system to really secure the deliveries that we are making for the customers. We have a margin in trucks of 9.5% and an operating income of SEK8.3 billion, partly supported by currencies in the quarter.

If we move to construction equipment, the supply chain disturbances has continued also for VCE. We also start to see a bit of need to support our suppliers financially. Just as we saw in trucks in Q3, we have started to see now also in VCE in this quarter. The deliveries are up in the Volvo segment and on SDLG, they are basically on par with where we were last year. This is mainly driven by China and driven by the fact that we have a pre-buy impact due to new emission regulation coming up in China for SDLG.

The increased sales is both connected to increased sales on machines and on services, but it's mainly connected to price increases that we've made and the currency impacts. If we take a little bit step back when it comes to construction equipment, we have to recognize that this is the first time that our construction equipment business is generating revenues of more than SEK100 billion for the full year. We are, in VCE, offsetting the extra cost for inflation in the quarter, but we also have a bit of higher activities on the commercial side, which is impacting the financial performance. Despite the supply chain disturbances, VCE is delivering a stable profitability and a margin on par with last year.

If we look into buses, in the quarter, we had quite large deliveries in buses mainly then in South America. We have also seen a rebound on coaches, particularly in North America, which is connected to the fact that traveling is coming back now after the pandemic. Overall, we see an increased utilization of our bus fleets and our coach fleets, which is really then driving and supporting the service sales and we have a service sales in buses, which is now back at pre-pandemic levels.

Profitability has increased in buses and it's mainly connected to the volumes, to the price increases that we've done and the increase of the service sales. And buses leads the quarter with a margin -- with a good margin in relative terms of some 3.4%.

If we look at Penta, we have good sales growth in Penta in all regions, both on engines and services. This is mainly connected to the price increases that we've done. The quarter has continued to be challenging in terms of supply disturbances in some segments in Penta. We are also in Penta offsetting the extra cost for inflation with the price increases that we've made. The investments in electric products are increasing and we also do have a bit of increase on the operating expenses connected to the higher activity levels and also partly connected to currencies. And Penta is delivering a margin of 9.7% in the quarter.

If we then look into financial services, our customers and our customers' customers business is remaining to be high, both -- that goes for both trucks and for construction equipment, and therefore we have been able to build the volumes in the customer financing operation. We have a portfolio that is performing well with low write-offs and low delinquencies. The financial performance is basically on par with where we were last year and the higher portfolio is offset by somewhat higher operating expenses. But we leave the year with a healthy credit portfolio in the customer financing operation.

And by that, I welcome Martin back on stage.

[Martin Lundstedt, Chief Executive Officer]

Thank you, Tina. Thank you for that presentation. So before then coming into the Q&A to conclude, as we said, I'm really taking a step back to your point, Tina. From a yearly perspective and we start with the perform piece here and now strong performance from the group in a turbulent and challenging year. And I think starting by the return on capital employed of 27.4% and combined with a net cash position of SEK74 billion.

Sales growing over SEK100 billion to SEK473 billion and adjusted operating income exceeding SEK50 billion for the first time. And, as you can see, also two milestones when it comes to topline, about SEK300 billion for trucks and above, then as Tina said before, SEK100 billion for VCE. An important volume increase also and market share gains in key regions and continued growth of services and continued growth of the installed fleet.

On the transform side, a lot of very important milestones, obviously, 5,000 orders and over 2,000 deliveries. We are now starting to see that this is becoming much more material, which is good for the company, for our customers, but also for the society at large. This is one of the key parameters for future success rates. And the great news is that, we have a broad range of electric products in the serial production today and that production is ramping up and we continue then to focus on this.

As a consequence of -- or a positive consequence of this strong year in very turbulent times, the Board of Directors are then proposing to the AGM an ordinary dividend of SEK7 and an extraordinary dividend of equally SEK7, resulting in a dividend yield of approximately 7%. So just happened to be three times seven here. And the proposal is, as also from management and, of course, it is the Board proposing this. As we see, it's a sound balance between giving a good shareholder return and also keeping a strong financial position to allow forward leaning investments and create the leading position in the ongoing transformation of our industries.

So, by that, that concludes the presentation, and we are looking forward to your questions.

[Video Presentation]

We have to be quick here.

[Claes Eliasson, Senior Vice President, Media Relations]

Thank you very much, Martin, Tina. And terribly sorry if there was a disturbance earlier. We didn't really understood what the matter was, but I hope it works now at least. So let's go to the Q&A session. And remember that we will do the Oscar thing here. So more than two questions, and we will put on the music and there will be no more questions. Let's start with the operator, and then we will take the room here.

[Operator]

[Operator Instructions] Our first question is from the line of Nancy Ni from Goldman Sachs. Please go ahead.

[Daniela Costa, Goldman Sachs]

Hi. Good morning. It's actually Daniela over here. Can you hear me?

[Martin Lundstedt, Chief Executive Officer]

Yes.

[Daniela Costa, Goldman Sachs]

Yeah. Perfect. Thank you. I'll stick to two, and I'll ask them one at a time. But first, just actually starting with the dividend and, sort of -- can you elaborate or give us some color on why the Board proposes sort of -- it's been a few years of specials, why specials and not a higher ordinary? You seem to have been able to generate enough cash in every sort of market circumstance, so just interested on why one versus the other in terms of mix of special and ordinary? That's my first question. And the second one is more on operational.

[Martin Lundstedt, Chief Executive Officer]

Thank you for that question. Again, I mean, we are -- first of all, we want to have a consequent view on our ordinary dividend and that is what the Board has discussed. And I think it has been also a consistent way of working. And as I just ended also the presentation to say, in total, it's about also finding the right balance about, of course, being creating good returns for our shareholders in the short-term, but also make sure that you're creating good returns to your shareholders and to the company in the long run.

And in these times, I think, first and foremost, this is the forward leaning with a 7% yield, but also it is a good balance to really make sure that we have the maneuverability to continue in uncertain times operationally, obviously, but also that we have the muscles for the transformation. So then you can always discuss, and I think that is for the Board to answer, I mean, how should the division be. But I think it's wise also to keep that flexibility as long as you are transparent and long-term in way you're working. I don't know, if you would like to add something on that.

[Tina Hultkvist, Chief Financial Officer]

No, I think it was a good answer. Yeah.

[Daniela Costa, Goldman Sachs]

Thank you. And my second question, just wanted to look at -- sort of, the -- looking at the margins and basically your deliveries in truck are exactly -- almost the same number as they were in 2019. Your overall group sales are obviously a little bit higher. I guess, there has been some FX benefits, but you had higher margins in terms of operational -- the industrial operations, like 60 basis points higher margins back then. And I recall in 2019, in calls you've said that 2019 wasn't the optimal peak margin or necessarily that you had more potential beyond that. So as we look and compare the 2019 to the 2022 numbers, is the gap just the disturbances in the supply chain, is it price cost, is it something structural, how should we think about that gap and the potential that you still had in 2019 when you had exactly the deliveries that you have now?

[Martin Lundstedt, Chief Executive Officer]

Thank you. First and foremost, I think, when we talked about it, do not remember that in 2019, we said there are more to be done, it's always more to be done by the way. But I think then we are talking about, okay, how do we continue to actually operationally refine. It was a rather I mean stable situation. And, I mean, if you compare 2019 with 2022 or the years in between, it has been a significant, so to speak, disruption in the way you're thinking, not only related to the latest areas of logistics and supply chains and energy prices short term, et cetera, but really to mitigate the situation. So, I think, from that reason, obviously, it's much more related to the fact of short-term disturbances that are related to this very, I mean, unprecedented situation, different type of turmoils.

Having said that, when it comes to price cost, we feel -- and Tina you were clear about that, we feel good about that situation. We have done a good job when it comes to ASP, both when it comes to products and services. And we see that, I mean, underlying quality of that business is well in balance. And that is, of course, super important.

Then, as Tina said, also, it is about now short term and not the least in Europe with energy prices and mitigating, so to speak, cooperation with our supply chains. It is also overmanning, because we have been firm, and we still think this is the right thing to do short term to support our customers, they need their equipment. And as long as we are not disturbing the underlying quality, it is the right time -- it is the right thing to do.

So the short answer is, it is related to these turbulent factors. Then you can optimize the margin, if you like, a little bit more. As we said in quarter three, we do not think that is the right thing to do now, because at the end of the day to having loyal and satisfied customers getting their equipment will be mid and long-term, much more important than short-term abstain volumes in order to optimize, because the reality is that the last trucks coming out now are expensive, as we said, and in particular, in Europe. And that is how it is. We have a good view on that and that has been the right choice.

Then, on the other side, we should also be clear about that. I mean, of course, you can say that you should have a better leverage on certain factors under the gross margin, such as R&D, for example. But, also, on that side, we have said that we are in a decisive moment of accelerating now. We are still, from a percentage point of view, managing this very well and we are investing for it. So we are not losing out, because the coming decade will be the important decade in this transformation. And so, generally speaking, it is related to what I said. It's not the cost price or any structural deficit in the system. I don't know if you would like to add something to that.

[Tina Hultkvist, Chief Financial Officer]

No, I think it was covering everything.

[Martin Lundstedt, Chief Executive Officer]

Thank you.

[Claes Eliasson, Senior Vice President, Media Relations]

Thank you, guys. And thank you. I think we can take one more caller from the queue here. Is it Olof?

[Operator]

And the next question would be from Jose Asumendi from J.P. Morgan.

[Claes Eliasson, Senior Vice President, Media Relations]

Okay.

[Jose Asumendi, JPMorgan]

Thank you very much. Much appreciated. Just a couple of questions, please. Tina, can you comment a little bit around your thinking for key positives and negatives in terms of the margin development for the truck division in 2023? Just the big buckets. What are the big positives and negatives we need to bear in mind?

And, Martin, can you comment a little bit around the competitive landscape in North America when it comes to trucks? I think, arguably, we are seeing -- not just you, just for the whole industry, right? We've got the Tesla with the semi and we've got Navistar coming back on long haul as well. Can you comment a little bit about how you position yourself product wise in North America? And when it comes to electrification, how are you positioned to win market share? Thank you.

[Tina Hultkvist, Chief Financial Officer]

Yeah. I think, if I start then, I think the main things to look into is, of course, the things that we have also seen during this year or 2022 and how that plays out going forward into 2023. And it is -- of course, the main part is the supply chain, will the supply chain continue as it has been lately or will we see some easening on that with the components coming in and we can be a bit more efficient in the industrial structure in that case. That's one main driver.

The inflationary pressure, of course, will be one main driver also to see where that is going. And that is partly then connected to the supply. The support to suppliers that we have seen during the autumn and how that will play out for next year. That can be both positive and negative, of course, depending a bit upon the inflation and how that plays out, particularly in Europe. So, I think, that's the main three things to look into how they will impact the truck performance going forward.

[Martin Lundstedt, Chief Executive Officer]

I fully agree. I will not add anything to that, but just to maybe underline what Tina said about, I mean, if we can gradually get stability, that will, of course, play a very favorable --

[Tina Hultkvist, Chief Financial Officer]

Yes.

[Martin Lundstedt, Chief Executive Officer]

Because how we are running it now, I think it's extraordinary just to getting out the volumes that we do, but it's coming with a price, obviously. So the market forecast here, I think, is important. If that could be with a certain stability that will be a positive that we are obviously working on. And then keeping, as Tina said, the balance between price and costs that we have done in a good way.

On the competitive landscape in North America, I think the good news for us is that we still have headroom for improvement. We see that we have a strong offering, both on the Volvo side and not at least on the Mack side. We must continue to be more resilient when it comes to our value chains. And that goes both internally and externally. We have done progress here. But we see in relation to other parts that here we can do improvements. And so, when it comes to our commercial offering, we feel that we have a competitive offering well appreciated. We have done a number of upgrades recently and we are continuing to invest here, both for Volvo and Mack in their specific segments.

It's always interesting when you are getting new competitors, so we are following that and we have, of course, noticed that deliveries are starting now. And let's see how that is playing out. But we are feeling good about our commercial offering, how we are interacting with customers. We need to continue to strengthen our value chains in North America in order to gain market share. That is the most critical.

[Claes Eliasson, Senior Vice President, Media Relations]

Okay. Thank you very much. To showcase our Solomonian Justice, we will have two persons from the room now, and we're starting with Hampus.

[Hampus Engellau, Handelsbanken]

Thank you very much. Hampus Engellau, Handelsbanken. And two questions then for me. Starting off on from trucks, could you talk a little bit about lead times where you are Europe and North America? And also put into perspective where you would like to be on lead times as you're running very tight on the production.

Second question is related to your outlook. 300,000 could be debated if it's flattish or if it -- but at least it's a repeat and it's a very solid outlook. At the same time, we have a macro deteriorating and people worried about the economy and you're still running in a situation where supply is determining sales and market. Is the outlook very linked to the reason you're seeing being very restrictive and supply determining how much you will sell, or is there any other thing coming into that market outlook? Thanks.

[Martin Lundstedt, Chief Executive Officer]

Thank you, Hampus. First and foremost, I mean, as I said, we are in -- on the truck side, we are at least in quarter three, both for Europe and North America. And, obviously, I mean, in a normal world, where it's also stability when it comes to, I mean, better type of visibility when it comes to [indiscernible] et cetera, it should be the normal like two months as we are normally working with, but we are far away from that right now.

I think the important thing is not only that it is filled up like that, but also that we are constantly having dialogue both with dealers and customers on what is happening here, how is the quality, how does it look like? What is the mix, et cetera. So I think there is a structural improvement that in order to get hold of is it's still true, how does it look like from what are really, really firm orders. We have a number of ways of doing that, et cetera. So -- but still -- and that's the reason, by the way, that we had in quarter four more restrictive way of looking at the order intake.

We often get the question, are you losing out? I mean, it's an absolute and relative game, right. And, relatively, we have been gaining market shares globally. So, I think, this is a conversation that probably the industry is having overall. But you should also remember the dynamics when you have, for example, most of the customers are not only in one truck per year, so to speak. It's more a conversation also for them to play out a little bit, how should we put firm orders, how should we think about, so to speak, forecast, et cetera. So it is a much more, so to speak, sophisticated way you work and then it might seem as, okay, now we're close and now we are open. It is -- but the firm part in the order board, it's into at least quarter three now. And on -- what was the other?

[Hampus Engellau, Handelsbanken]

Outlook.

[Martin Lundstedt, Chief Executive Officer]

Yeah, yeah, sorry, on the demand supply and outlook. Now, I think, it's fair to say then that it's still about supply to your point, probably. I don't want to speculate. It could be so that during the year, it can be better balance, it depends on. But if you really look into what has happened over the last year, obviously, it has been a constant undersupply into the market, and we see that also -- and we see and we hear it from customers when it comes to average fleet, age and when it comes to bilateral discussions that people want to also to upgrade from repair and maintenance, technologies advancing, et cetera, uptime. So, need to calculate proportion. So, we feel confident about the forecast that we have said. And still early days, obviously, things can happen. So, flexibility is key. I don't know…

[Tina Hultkvist, Chief Financial Officer]

Good.

[Claes Eliasson, Senior Vice President, Media Relations]

All right. Agnieszka, go ahead.

[Agnieszka Vilela, Nordea Markets]

Yes. Perfect. Agnieszka Vilela from Nordea. I just wanted to understand a bit more your operational leverage on volumes. Volumes were strong, but then compared to some of your peers, you have worse margins basically. And I believe that they live in the same kind of world with supply chain issues and so forth. So the question really is, what is specific for you? Do you see that it is you who needs to compensate your suppliers maybe a bit more than your peers? And, also, were you satisfied with your pricing so far? And what do you expect going forward?

[Tina Hultkvist, Chief Financial Officer]

Yeah. I think to start with the prices. I think, we are satisfied with the pricing and what we have done in that area, we feel that we have been able to offset the inflation and we have been working actively with that since quite a while back and we get a good impact out of that, of course, that goes for both vehicles and services. So, I think, that's good then.

When it comes to the margin side and whether we are -- where we are different from the competitors, it's difficult to say a little bit where we are. But, I mean, we have had a clear strategy for quite some time now to really prioritize the customers. We know that that is happening to some extent on the short-term margin at the expense of the short-term margins, but in the long run, we can see -- we see that we will have sort of profitability from that in terms of increased service sales and also keeping the relationship with the customers. So, we strongly believe in that strategy. It has been good so far and we think that in the long run, it will pay off well for us. So that is the most important, I think, for us.

[Martin Lundstedt, Chief Executive Officer]

And I fully agree, maybe also you have to comment on that. I think everyone needs to take a step back and say, okay, how does it look like? I mean, a little bit longer than one quarter. What is the starting point when you start to calculate the leverage? I mean, the baseline is also an important pure mathematically. And, thirdly, the regional mix is fully different, because, I mean, Europe is right now, of course, hit by this given the fact that energy prices. So the short-term mitigation activities together has been very much related to Europe for us, naturally so with this very fluctuating prices.

And then, I think, as a matter of fact, when we look at volume increase for us, it has been very good. So, to Tina's point, the volume investment is obviously very asymptotic when it comes to the margin benefit in a short game. But from a customer satisfaction and customer loyalty and an installed fleet and service business, it's crucial. And we are not playing games with our customers. We are B2B. We are staying behind them, and we are frustrated every day that we couldn't deliver the last 5% or 10% even if that's coming with a short-term margin compression. And, I think, everyone should think through that a little bit.

[Claes Eliasson, Senior Vice President, Media Relations]

Clear. Thank you, Martin and Tina, and Agnieszka.

[Agnieszka Vilela, Nordea Markets]

Question for me. Yeah. Martin, you mentioned the muscle that you will need for transformation. And I just wonder if you can be a bit more transparent about that in terms of what will you need when it comes to R&D costs. You're running at about SEK23 billion in P&L? Also, what will you need in terms of CapEx? Can you share that with us?

[Martin Lundstedt, Chief Executive Officer]

I don't know -- I can share, do you want to start that?

[Tina Hultkvist, Chief Financial Officer]

You start and then I will fill.

[Martin Lundstedt, Chief Executive Officer]

And then Tina will fill in and make it more clear. Now, first and foremost, we have been clear that we are in a situation now when, as I said, also when things are, of course, decisive to really make sure that we are ramping up to -- because it's not only about leading a transformation, but creating also the transformation, right. So we will -- as we have said a number of times, we will continue to focus on this. We think that we have the financial maneuverability is very important, and we have been ramping up. But, at the same time, we should not over read it in relation to, I mean, R&D in terms of -- in relation to topline. And we are making sure that we are, of course, building in the flexibility here also if we have further down the road, bigger troughs in the cyclical business. So that is a setup that we have. But when we have the opportunity to move fast, quick and install this now, we think it's decisive for us, because to have a too long period will be even more challenging. So that is number one.

And also on the CapEx side, we'll be clear that there are a number of years now where, of course, we -- notably completely changed our footprint, because there, I think, we have a benefit, but where we need now to really make sure that we are installing this type of mixed model situation and are converting some parts of the sites will create a higher short-term CapEx situation.

But if you look at -- I mean, the magnitude of that over a number of years, it is not -- I mean it, of course, can be seen in a discrete year rather dramatic, but over a longer period of time, no drama at all. And that is also why, I think, we have a very good balance. Again, what I said with dividends, how we think about our financial position, how we think about our cash flow. Think about it, I mean, we had SEK50 billion in operating income. We generated SEK35 billion in cash flow. I mean -- so some in net income. And then we have already this year expanded, I mean, when it comes to CapEx, and we have invested a number of billions in working capital as well in order to keep the customer satisfied and we are generating SEK35 billion and ending with the SEK74 billion. So I think we have a strong story about managing this. Here, it is important to say, perform here and now, but also transform. I mean, where do we really want to be in 2027, 2030, in order to make sure that this is a strong, resilient company for customers and for shareholders.

[Claes Eliasson, Senior Vice President, Media Relations]

Okay. Thank you very much. Now I believe that we have Olof. Is that right, operator?

[Operator]

Yes. Olof, you're now live.

[Olof Cederholm, ABG]

Thank you. It's Olof from ABG. I'll try to squeeze in two questions. On the supply extra costs in Europe, you're supporting the suppliers. You've mentioned the energy cost being the key driver here. Now it looks like with a fairly warm winter, energy costs are stabilizing a bit, maybe even going down. Is this something sort of that we can expect then to ease for you going forward?

[Martin Lundstedt, Chief Executive Officer]

This one goes to Tina.

[Tina Hultkvist, Chief Financial Officer]

I was just prepared for another question, but it's usually two or three. I think that exactly what you are saying is an important area. We have methods and routines on how to handle this. We do this from time to time, otherwise, also, it's not only now, but it's just that now it has been exaggerated due to the energy situation in Europe. So, we are working. We have very clear methods how we work on this and how we analyze the need to support, et cetera.

So that's why I mentioned this is one -- could be one of the opportunities also going forward if you compare with the run rate where we end the year and going into 2023, of course. I mean, if the energy situation easens up and the inflation goes down, of course, that can be an indicator of us not having to support the suppliers to the same extent as we have done in the autumn.

[Olof Cederholm, ABG]

And, Tina, if I can squeeze in a half a question, there is no chance you can quantify these effects in the second half of the year, right?

[Tina Hultkvist, Chief Financial Officer]

Short question and a short answer, no.

[Olof Cederholm, ABG]

Okay. So I hope it's okay. That was my half question. Outlook on electric truck volumes. We see an acceleration now in orders and deliveries in the second half of the year. Can you share some thoughts on how you believe this will continue going into 2023? Are we sort of accelerating sequentially here, or was Q4 an especially strong quarter?

[Martin Lundstedt, Chief Executive Officer]

I think, yes. In the two last comments that you did, I think we are accelerating. But I also think, I mean, sequentially that quarter four was an exceptionally strong quarter in relation to the others sequentially. And the reason why I say that is that obviously, in -- still in mature type of supply chain you're getting also and then on top of the general type of supply chain situation, you'll get a little back and forth. So I think here it was a strong delivery.

I think the more important is to see how the order intake now is also -- really also taking off, because at the end of the day you need to deliver that. And as we see 5,000 for last year in order intake on all electric machines and trucks is also a steep increase. So, it will continue. And it will continue segment by segment and market by market that we have talked about. We see that for the urban applications. We see that for specific regions that have been ahead of the curve when it's about thinking not only about the equipment and different type of programs to roll it out, but also where they have been ahead of the curve with infrastructure and certainty about the energy supply and green energy, et cetera.

And, obviously, we will see also continuous effects of programs like the Inflation Reduction Act in US. We had very strong situation in the US also here. We were not allowed actually to -- it was not quality assured enough to actually disclose the market share figures, but they were promising also there, if I put it like that. So, I think, it will continue.

And just maybe, Olof, on your half question there, and I will not quantify it to Tina. But, as Tina said, what I think is important to understand is that in a supply chain situation, where you're working with a lot of supply chain partners, obviously, you need to have a very diligent and transparent methodology, about -- I mean, we have base contracts, obviously. Some of them have been moving parameters, but some of them are extraordinary fix. And you need to -- but the important thing is that it's not okay, we take something and to compensate cost inflation on input material or cost inflation on energy or volatility. It is -- and Tina said it clearly, but I just want to be super clear to everyone. This is a very in-depth methodology and transparency to make sure that it is the moving parameters, specifically in extraordinary times as we have seen in Europe.

[Claes Eliasson, Senior Vice President, Media Relations]

Good. Thank you very much. So I believe we have Klas on the line. Could that be so?

[Operator]

Yes, that's right.

[Klas Bergelind, Citi]

Thank you. Hi, Martin and Tina. A couple from me. I'll take them one at a time. So, first, on the service growth of 9%. It looks like this is now only pricing. So service volumes are now flat year-over-year in trucks. And, I guess, down in volume terms in construction equipment, if we strip out pricing. And I hear you on the Russia impact. But are we seeing any softness on the utilization side of the fleet, or are we just comparing against the tough compare of starter?

[Martin Lundstedt, Chief Executive Officer]

I mean, I think it's fair to say that, generally speaking, you are right on that assumption. But I think the main thing is actually a tough compare partly Russia, as we said, on both sides. But, at the same time, on utilization of the fleet, we see a flattening out, but on high levels. So, again, I think it's also an opportunity for us if it's setting it out, because we have had not only supply chain issues on the equipment side, but also on the parts and service side, actually. So, there is an opportunity anyhow. But you are right in that assumption, I think that's fair to say.

[Tina Hultkvist, Chief Financial Officer]

Yeah. I fully agree, yes.

[Klas Bergelind, Citi]

Okay. Thank you. My second one is on the underlying cost situation ignoring the energy side for a bit. And we've heard from others that the situation is improving on the semi side. We have less trucks being parked up waiting for the ECUs. Are these costs now starting to drop out for you, because if that's the case and when energy inflation abates, then the truck margin should take a pretty big jump up eventually, if we can talk about cost side, outside of energy and through the quarter, please? Thank you.

[Tina Hultkvist, Chief Financial Officer]

Yes. I think your assumption is correct, and it's coming back to what we said before also that it is very much connected to -- the cost levels that we are having in the industrial system is very much connected to the supply chains, the inflation and the fact that we have a bit higher capacity installed to really secure that the last trucks and vehicles are getting out. If the supply chain is a little bit going down, then we can make the industrial system a bit more efficient and the cost levels will go down. We have talked a lot about costs when it comes to supply chain, but I would like to stress also that it also has a cash impact. And I mentioned that briefly in my presentation that we also do have a bit higher inventories connected to the supply disturbances. And if that comes down a bit, we should be able to address the little bit structurally higher inventories that we are having right now. So --

[Martin Lundstedt, Chief Executive Officer]

And it's interesting, as Tina said, because you have, so to speak, the pure cost. And what are the moving parameters there, so to speak, temporary or not temporary. But then you have the stability as such and the dynamics effects around that, that are often difficult to calculate, but to having a smooth machine that is running is, of course, we are talking about it as, I mean, on planned overmanning, et cetera, but the dynamic effect of having much more of a harmonized system is very important.

[Klas Bergelind, Citi]

Just to squeeze in a half a question like Olof did. Just very, very quickly.

[Martin Lundstedt, Chief Executive Officer]

Now, you're cheating, Klas.

[Klas Bergelind, Citi]

I'm cheating a little bit, but it will be very, very quick. I think you've said before that given if supply chain is easing, then effectively the first 5% to 10% down on truck volumes could effectively mean that you can keep the margin relatively stable, right, in the sense that you have those extra costs you carry that will eventually drop out. Is that still the case, Martin?

[Martin Lundstedt, Chief Executive Officer]

No. But I think it was also related to questions here from, I don't recall who it was now, but I mean about comparison 2019 and 2022. And I think we should think about it like that, obviously, that, as I said, with all the moving parameters that we've had now and thereby creating a system in harmony that is, of course, affecting that. So, I think, it's very much related to the answer that we had on that question. So, meaning it's yes, basically.

[Klas Bergelind, Citi]

Thank you.

[Claes Eliasson, Senior Vice President, Media Relations]

Thank you. I am glancing the room here to see if we have anyone, any hands? Anyone, anyone, Buhler? No. Okay. So, let's move over to the list on the phone then. So, let's take the next one, operator.

[Operator]

The next question is from the line of Nicolai Kempf from Deutsche Bank. Please go ahead.

[Nicolai Kempf, Deutsche Bank]

Yeah. Thank you. It's Nicolai Kempf speaking from Deutsche Bank. Thanks for taking my question. And I have two questions on the construction equipment. And if you look at China, the market has been very weak last year and you guide for another 10% decline midpoint for this year. However, given the lifting of the COVID restrictions, do you see upside for this? And I do understand that January might be a bit weaker, because of cost of manufacturing, but could there be upside? And my second question would be on the pre-buy effect in China you mentioned, could you roughly quantify how much this business was in terms of units?

[Martin Lundstedt, Chief Executive Officer]

Yeah. First and foremost, I think you're absolutely right. We actually discussed that also in our preparations here that we see -- it is a difficult situation to really forecast now the Chinese market given all the, again, the moving parameters and not the least, so to speak, the lifting of the restrictions and what effect that will have then coming in after the Chinese New Year. So that we have to follow.

I think the good news for us is that we have a very flexible type of setup in China. We have shown that also through this trough now. So by that also, both for the SDLG that is volume wise, the most important for us. But also on the Volvo brand, we have shown a good level of flexibility. But, if anything, I think it's not fully factored in in these forecasts. It's more about, I mean, the growing concern.

Then when it comes to prebuy effect, I mean, I cannot quantify that directly. I think it's more important to say that we know that when you have these type of events, there is a dynamic that we want to be clear about, so you can understand what is what when it comes to ups and downs, so to speak.

But, I don't know, Tina, if you can quantify that exactly.

[Tina Hultkvist, Chief Financial Officer]

No. It's difficult to quantify. But I think that when we saw in Q4, now they were -- SDLG are basically on par. If you go back a few quarters, you can see that we were quite substantially lower. If that gives kind of indication of the underlying market and --

[Martin Lundstedt, Chief Executive Officer]

Or to normalizing a little bit.

[Tina Hultkvist, Chief Financial Officer]

And the prebuy effect also, yeah.

[Martin Lundstedt, Chief Executive Officer]

Thank you, Tina.

[Nicolai Kempf, Deutsche Bank]

Understood. Thank you.

[Martin Lundstedt, Chief Executive Officer]

Thank you.

[Claes Eliasson, Senior Vice President, Media Relations]

Okay. I think this concludes this meeting. So, thanks for watching us today and see you next quarter. Maybe here, maybe in Gothenburg. We'll see. So --

[Martin Lundstedt, Chief Executive Officer]

So that is a cliffhanger.

[Claes Eliasson, Senior Vice President, Media Relations]

Yeah, it's a cliffhanger. Over and out for now, and glad to see you next time.

[Martin Lundstedt, Chief Executive Officer]

Thank you.

[Claes Eliasson, Senior Vice President, Media Relations]

Thank you.

[Tina Hultkvist, Chief Financial Officer]

Thank you.