AB Volvo

My name is Klaus Lillasson, and I wish to welcome you all to this conference call covering the second quarter of 2021. We will be listening to a presentation by the Volvo Group President and CEO, Martin Lundstedt, followed by a presentation by Chief Financial Officer, Egon Lundstedt. When done with the presentations, we will open the line for a Q&A session. It would be great if you could limit yourself to one or two minutes. Two questions in order to make room for more callers. And with that, Martin, please go ahead.

Thank you, Klaus, for that. And also welcome to the second quarter business update from my side. We discussed this morning how to make the summary of it. And maybe to take a step back, we can start by saying that, yes, four out of 12 weeks we were Unfortunately, standing still due to the input material, but despite that, delivering 10.7% for the group and 10.3% for the truck segment is, of course, a solid result while we have managed the supply chain challenges. To elaborate a little bit more on it, you can say that the second quarter has been characterized by, on one hand, the short-term operational focus, of course. We continue to see a high and positive activity level among our customers in their business around the globe, I have to say, and thereby also a continuous high demand of our products and services. The short-term priorities in all parts of the organization has been done and will continue to meet this positive demand also as quick and precise as possible as order books are full. This is a big challenge due to the instability and the low visibility in the global supply chain. But the cross-functional work is working very effectively in the group and together with our business partners. But it's also worthwhile mentioning that, on the other hand, it has been a quarter also characterized by continuous push for the transformation of our industry. We have now, in quite some quarters, announced different decisive steps in moving into fossil-free and sustainable transportations, and showing also by concrete examples how we are leading the transformation of our industry. Among other things, I can highlight the agreement during this quarter between ourselves, Dynatrack, and Trayton Group to establish the pan-European charging network for high-performance charging for fully electric vehicles, then heavy trucks and buses to accelerate the truck electrification in Europe. And also that we have continued to push out new products and services in the sustainability area. And we see that also when it comes to the sales activities, the commercial activities, tender activities in this sector as well. So in summary, during quarter two, all colleagues and supply chain partners, both upstream and downstream, have done a great job, a very passionate job during difficult circumstances, delivering a solid result here and serving our customers. That is, at the end of the day, the most important. The highlights of the quarter, then, as we said, demand... continue to be good. We will comment later on order intake and deliveries. Net sales amounted to 19.6 billion, and we delivered an adjusted operating income of 9.7 billion at the margin of 10.7%. Despite that, we had stop days close to the upper range of our previous guidance, i.e. close to four weeks in the bigger truck plans globally. Cash flow was 5.9 billion, and the return on capital employed increased to 23.4% on a 12-month rolling basis. So, again, showing that we have a continuous good operation and resilience that is, of course, a strength during times where uncertainty prevails. Demand is good, but uncertainty prevails, and then it is important to have that operational resilience. When it comes to deliveries, increases in deliveries, of course, across key regions, and it's, I mean, given also the very special circumstances quarter two last year, In many ways, it's not meaningful, of course, but the truck's delivery has increased with 85%, and Volvo construction equipment delivery has increased with 5%, also given that the recovery had started for Volvo construction equipment already last year's quarter with China coming back. When it comes to the ramp-up of sales and deliveries for battery electric vehicles and battery electric equipment, it continued also in quarter two. We took 351 orders for full electric vehicles and equipment in the quarter. On top of these numbers also, we are also now starting to take three orders of the heavy-duty battery electric range of Volvo trucks, the FH and FM, that will start production in 2022, so next year. Those are not yet included in those firm orders, but there is also high interest in addition to what you see here. And we delivered 357 fully electric vehicles compared to 26 last year. And maybe more as a take when we look at, as I said, tender activities, interest on customers across different markets, high interest, lots of discussions ongoing, and we continue to drive this change together with our customers in Europe, but also in North America and other markets, first delivery, for example, to Australia also during the last weeks here. Service development. I referred in the start to the high activity level among our customers and that is of course also reflected in the service business development. We see that the machine and truck utilization being above pre-COVID-19 levels in many regions and continues to grow. We have seen that also in this area, it has been bottlenecks also of components, obviously. But despite that, we have good development. So adjusted for currency, the service business grew with an impressive 23%. And actually, if you compare With quarter two 2019, that was also a high-activity quarter. And just for currency, we were actually growing with plus 5%. So that is also encouraging. And there are still a lot of business opportunities in this area, as you know, and we are working very systematic with those opportunities. One example now is that we are introducing the The service contract, the blue service contract that has been very successful for Bottle Trucks in Europe and other markets, also into the North American market, that will also drive penetration and loyalty, for example, and will drive increased peace of mind and better uptime for our customers, but also good opportunities for the group here. And you can also see that it has been an impressive development in the different segments also since last year. Another very important milestone also connected to the transformation is that we got our greenhouse gas targets validated by science-based target initiative. We have set the most ambitious targets in our industry, but necessary targets in order to drive our ambitions up to 2030, 2040 and ultimately to 2050. Our targets are in line with what the latest climate science deems necessary to keep global warming at the maximum of 1.5 degrees Celsius. And we are targeting the net zero value chain emissions by 2040. And already, as you can see also in the slide here, the greenhouse gas reduction interim goals by 2030 on a global basis with 2019 as a baseline. are also very stringent in our journey up to 2014 and set for the different segments with the relevance for the respective segments depending on how the equipment or beacons are utilized. tangible and clear targets, and how we can focus to get this work done and decarbonize ours and our customers' business, because this is also, of course, the big opportunity and challenge to decarbonize the scope-free downstream emissions of greenhouse gases. When we move into trucks, I can say, first and foremost, continue to launch Very competitive products. The Renault trucks now, the T, T-High, C, and K model, is following the recent launch and ramp-up of Volvo trucks of their new F, H, and FM, meaning that both Volvo and Renault have really competitive and high-performing heavy-duty ranges in Europe and international cab-over-engine markets. The new Renault range brings major improvements in terms of driving comfort, onboard comfort, safety and productivity. And it is the most important evolution of the Renault range since the total renewal in 2013. Great feedback and comments from customers and business partners during the recent launch here. So I'm very excited about that opportunity. And also, as I said in the introduction that we have together with Dynatrack and the trading group and signed a non-binding agreement to install and operate high performing public battery electric charging infrastructure for the trucks and coaches across Europe. And of course, this is really to show the way forward to make the journey with our customers. to install up to 2025 1,700 charging points at least. We are also expecting that interest will grow when we are now showing the way, and also customers will have a bigger confidence in making this journey together with us. So very exciting about that, and also good business opportunity, obviously, given the need of having recurrent charging across Europe for these type of production equipments. That is a big difference to cars, for example. And we are also open, of course, for additional partners and public funding in order to make this happen and accelerate that, not at least in the light of the recent development and announcement from European Union with a fit for a 55 announcement. When it comes to... Market forecast is, as we said already last quarter, based on current visibility on both demand but mainly supply. It will continue to be the supply side that is dictating how we can continue to ramp up production to meet the high order backlog and demand that we see across markets. Europe and North America. Demand remains strong, and because there is a general lack of transport capacity and fleet utilization is high, inventories are low out in the markets. But it is difficult to assess how the current supply situation will develop and how it will affect the truck industry volumes we see. keep then the market forecast unchanged for North America and Europe to 290,000 units. Also in Brazil, driven by commodities and agriculture, a strong development. We are keeping that also unchanged on a high level of 95,000. India, of course, the COVID-19 has caused extra lockdowns, unfortunately, and thereby also affecting the market, and we are decreasing somewhat our market forecast with 50,000 units. And in China, subsidies for the replacement of vehicles with less than China 3 or CN3 emissions supported the market stronger during the first half of the year than we initially anticipated. We are therefore increasing our total market forecast of China with 90,000 units. However, what we see now is the correction and decline of the market as from May, and we expect that to continue also in the second half of the year after very, very strong developments over the last quarters and years. And at the end of the day, that is a good thing because we don't want to continue to create, so to speak, a situation where we are delivering in units that eventually will cause the bubbles. So we'll come back to that also when it comes to construction equipment. Orders and deliveries, of course, when it comes to the order side, we see strong orders across most regions. But as you can also see here on the graph, given the extremely strong order intake development that we've had over the last quarters, we have also seen meant that we are sold out for 2021, basically across the globe, and we have been cautious now to take orders for 2022. It is not meaningful to place too many orders, given also that the commercial agreements must be fine-tuned, given also upstream development of input material, for example. So, therefore, it is also in the light of the discrete order intake figure for 2022, is not really worthwhile to judge as a standalone figure. Deliveries, we communicated already in the beginning of this quarter at the Q1 press conference that we expected two to four weeks of stoppages due to supply constraints. We have now been clear saying that it was in the upper range, so four weeks in the global system on trucks. Of course, now main priorities continue to work with shortening our lead times to customers, and we plan then to gradually increase our outputs during the second half of the year. It's not our industrial system that will dictate the capacity, obviously. It is how the stability will look like when it comes to different types of input materials here. And we will stretch also the production, continue to do so. Every unit counts for us. It is an important source of resilience for the future. Customers really want to have it. And therefore, also, we are stretching the system. And that's the reason also why we say that we will see disturbances. And everything else should have been, so to speak, a mistake not doing like that. In addition, of course, we see, as you see, the pandemic making – Still, the situation is vulnerable. We have now, for example, temporary lockdowns in important supply markets like Malaysia and Taiwan. How long will that last? How will it affect, et cetera? But that goes for everyone, not only in our sector, but all over the place, so to speak. Continue to manage that with good volume flexibility. Market shares, Renault trucks in Europe, if we start there, was relatively flat. Year-to-date, Volvo trucks had somewhat decrease, which was in addition to what was said about the supply chain issues also related to the gradual ramp-up now of the new range and affected also the group's ability to produce and deliver Volvo trucks in line with the market during the quarter. Somewhat expected also, obviously, when you're ramping up, but... The good news here is that the new Volvo truck range for Europe is extremely well received. Full focus now is to continue to ramp up production and to meet the high customer demand and order book here. Our work also, as you can see on the right side in Europe, electrify our customers. Fleet continues with market shares for Volvo trucks and Renault trucks combined. Year-to-date May, I should say, reaching almost 65%. Some somewhat positive developments then for Volvo Trucks in North America, also with some selected fleets. Flat situation for Mack. Market share in Brazil. A little bit lower. And I mean, last year we had an extremely good situation. So we should see in the light of that also. But also that we were coming in this year with very low inventory in Brazil. So also the same type of focus. I don't comment Australia specifically, but you can see that we have lost here, and the main reason, I should say, is that we have had internal logistic issues in Singapore and also incoming into Australia, since we have full operation in Australia. So, this has been caused by internal issues. We are now back on track, and we count on a gradual recovery of the market share during the rest of the year, or the board and order books are full. Moving into CE, also here you can see a number of interesting news. The 50-ton excavator machine, class aimed at heavy-duty digging and large site preparation, impressive results when it comes to the electrohydraulic New systems also giving a fuel benefit of up to 25%, and that is, of course, causing fantastic numbers when it comes to productivity, but also first dedicated fuel cell test lab in Volvo Group opening in Eskilstuna. So we are not pushing fuel cells only for the vehicles, but also for the construction equipment. On market environment, the same year, based on current visibility on both demand and mainly supply, Except for China, there is a broad-based increase of demand across our key regions, and the changes we are doing to the market forecast are we are increasing North America with 5 percentage points, European Union with 10 percentage points, South America 15, Asia, except China, then, plus 5, and China flat. The Chinese market is difficult to assess, but so far our assessment from quarter one holds, and we have noticed in quarter two that the market has started to decline as from May. And again, I just would like to reiterate that we have expected that, and we think that it's also a sound development, given the extremely strong development over the last years. Book-to-bill. Very strong, with the exception of then China, but also in the light of what I just said, with its expected decline. Very positive with America and Europe, strong developments. Our two other strong legs are also now developing well, and thereby also good opportunities to continue to offset the expected cooling off and decline in China. Also, we see that with our core segments growing. There is a good level of machine utilization, very similar to the truck side. Another positive factor also for us, and you can see that in the orders intake, not at least in North America, low dealer inventories and pipelines. And Volvo C has not been as affected as trucks with regards to semiconductor shortages and continue also to, of course, focus on the total picture because it's not only about semiconductors but also other input materials and stretched supply chains of logistics, et cetera. Buses. I mean, among the group's different segments, the segment that has been most severely affected, as you know, restrictions in tourism and travel, public transport, et cetera. But Volvo Buses has not spared any efforts of really, so to speak, working with the cost side, volume flexibility, and take down the general cost levels and manage to reach break-even in quarter two on very low volumes. That is, of course, a strong achievement and a good platform moving forward with gradually better activity levels to be expected when societies are opening up here. But still, order intake increased with 5% and deliveries increased with 45% from very low levels. So still a way to go here, of course. Volvo Penta, all segments in focus of Penta, strong activity level, net pour intake in the quarter increased by 102% of deliveries with 68%. And also another smaller but important example also of how we are taking different steps in the sustainability journey with acquisition also of the Norwegian driveline solution supplier SEM for marine electrical drivelines. And on a final note, BFFs, financial services, continue to show a solid performance in quarter two, reached a new quarter two business volume record on the back of increased penetration across the business areas, so very positive development. Credit portfolio in good balance with the increases at historically low levels. And also very important, how VFS is continuing to develop a number of very important solutions and business models also for the transformation together with our business areas. New package solutions for financing of electric vehicles and charging over the life cycle, implementing digital payment solutions for different services, accelerating the development of equipment as a service programs and rolling out, for example, new connected insurance programs in addition to the service is already existing. So by that, I need to yawn for the financial update. Thank you.

Thank you, Martin. Well, there seems to be something special in second quarters and supply disruptions. at least the last two years. Last year, second quarter, 46 weeks of complete production stopped across the group and the society that was under partial or full shutdown to halt the pandemic. And this year, then, four weeks of halting the truck production due to shortages of supply, whereas the underlying demand was strong and restrictions in general lifted. Some similarities, but the severity of the problem was, of course, much less this quarter, but challenging enough. And with low visibility and top line then partly being caps due to lack of capacity at suppliers, we need to have continued focus on cost discipline and cash cautiousness going forward. Moving over then to the P&L and starting at the top on the not-net sales, deliveries are weak as this second quarter were sequentially actually lower than the first quarter. And that is not the normal seasonal pattern for Volvo, since the second quarter is our strongest delivery quarter. Despite the halt of the production, truck production then during a month, net sales of the group was over 90 billion in the quarter. We have continued headwind from FX related to an appreciated Swedish krona against all our important currencies, but especially then related to the dollar, but also the Brazilian real during the Chinese one. In total, we have an FX effect on net sales of close to 7 billion. And after guard regions, they increased here across on vehicle and service volumes, and that impacted positively, except then for Asia, where deliveries were stable compared, if you remember, an elevated second quarter last year in China. And going on with the earnings as such then, and comparing then the second quarter this year with the second quarter last year, it's a difficult comparison, but here we can see, of course, that the higher vehicle volume, both related to the gross profits as such per delivered unit and the more delivered units, and then, of course, improved capacity utilization in the industrial side. These were the main explanations behind the improvement of adjusted operating income of close to 6.5 billion to 9.7, and giving them an adjusted operating margin of 10.7%. Furthermore, we have done a positive price effect on trucks, whereas the positive mix effect was related to construction equipment, where we have increased sales of heavier machines, and also especially in Europe and North America, that impacted positively. These items are in the gross income, and that impacted, of course, the gross income favorably. But looking at the pressure on operating income, they came mainly then from increased ambition and activity levels in R&D and also lower joint venture income negatively impacted by a prioritization effect, a tougher market condition in Asia, and partly also to the fact that we have our fuel cell joint venture cell-centric here included fully as from the second quarter this year. Headwind from FX continued here in the second quarter, minus 1.5 billion, once again reflecting the strongest Swedish corona and specifically then the weakening dollar compared to the second quarter last year. Looking at the FX transaction effect, as such then we expect now for the second half of the year a slight positive impact for the H2 then. And we do not provide forecasts for the full year as well as FX and operating income. If we make a comparison more with what has happened this year and with the first quarter this year, here in the second quarter, we can see that the negative effects on adjusted operating income of some 2 billion, 2.1 billion, were mainly then related to lower production output. And that was, of course, only partly seen in deliveries. That is due to the supply shortages and also, to some extent, higher R&D costs as well as lower joint venture income. If we move over to the cash generation, the supply shortages impacted also here, as production material was brought in for critical parts and components to create and restore necessary buffers to limit the risk when bottlenecks can be removed. And as Martin said, we should not be, so to say, the bottleneck in this situation. The inventory of new and used trucks were at the low level, and in the case of used vehicles, actually at record low levels, and that is, of course, a reflection of the lack of supply of new trucks. We have somewhat high non-cash items in the cash flow statement, and that was related to the reversal of the capital gain on the divestment of UD trucks and had a positive impact on the cash flow related to dividends from our joint ventures. 50 million in the quarter, all in all an operating cash flow in industrial operation of 5.9 billion for the quarter. Moving over to the financial position then, it was 67 billion at the end of June, negatively affected then in the quarter by the payout of dividend of over 30 billion in the beginning of the quarter. partly offset then by receiving the proceeds for UD truck sales divestments of close to 19 billion, and of course also the cash flow as such. In the beginning of this third quarter, some 19 billion, once again the proceeds from the UD truck sales, was distributed to the shareholders as an extra dividend. meaning that we had after that close to 50 billion as net cash. And by that, we continue to have a strong financial position also going forward. Going into the segments and starting with the trucks then, and I think we can see here that the improved resilience of the volume group was clearly seen in group trucks here in the second quarter. With the production being halted, a total of four weeks out of the 12 group trucks still was able to deliver an adjusted operating income of 5.4 billion and a margin of 10.3%. For resilience, so important service revenues were at the high level and the cost discipline continued to be good. These were the two main reasons behind this achievement. When comparing with the second quarter last year, we have the same explanation as we had for the Volvo Group as such. Improved vehicle volumes impacting positively, but also, of course, impacting positively on capacity utilization. And as I mentioned in the beginning, price impacted positively, not at least related to FH, FM range, the new one for Volvo trucks. And as regards general price increases, they have compensated for the raw material cost increases that we have seen. The lack of new trucks has positively impacted the used truck business, where both prices and sales channel mix impacted positively compared to the second quarter last year. But we should remember that last year we had provisions for used trucks, and we also had some residual values impairments. R&D and joint venture income impacted negatively, as did the headwind from FX of $0.7 billion. If we move over to construction equipment, we continue to see high level of deliveries of vehicles and services. We experienced a favorable shift in regional and product mix towards proportionally more deliveries of heavy machines and more deliveries into Europe and North America where prices are higher. Implicitly, the weight of China with the lighter machine mix decreased compared to a strange and extraordinarily strong second quarter last year for China when business was recovering after the pandemic outbreak during the first quarter in China. The shift that was also clearly seen in net sales, where FX suggested net sales was up 21%, whereas machine delivery increase was limited to 5%. These positive effects were the main explanation behind an improved adjusted operating income of some $265 million to close to $3.4 billion and an adjusted operating margin of 13.1%. But on the negative side, we had the raw material price pressure, mainly from steel then, impacting more in construction equipment, reflecting the machine cost structure we have with more raw material included. In areas outside China, we have, to mitigate that, introduced price increases to compensate for the raw material, but when we take a look on construction equipment as a total, the price pressure in China did offset this and gave actually a net negative impact of price for the business area. The ramp-up of ambition and activities in R&D area impacted negatively, as did the helping from FX, and that was mainly related to the weaker dollar for construction equipment. On buses, as Martin was into, we continue to see a demand that is hampered by reduced or hesitant personal mobility around the globe and bus resources standing idle. We see though that the utilization is improving and that was seen in our service and the demand of service and our service revenues. And also we see a somewhat better general sentiment in the market. Meanwhile, buses have done an impressive work to lower the break-even point to last year, and especially since the pandemic outbreak. So when volumes come, the leverage becomes good, and that was exactly what happened here in the second quarter when we have higher weekly deliveries and service sales that impacted positively. So an adjusted operating income going from minus 500 to a red zero due to good work on the cost side, among other things. For Penta, demand and volumes of both engines and service continue to be strong. Supply shortages had limited impact on production as such in the quarter, but this is a considerable bottleneck to meet demand going forward. The increases in deliveries were particularly strong on the marine leisure side due to strong boating seasons where both old and new boaters are contributing to both engine sales and a strong demand of services. And second-hand market is booming. and what they call in the boat business sleeping beauties are being used again, contributing to the service space. The increase of engine deliveries in the industrial segment was high, but last year then we had Chinese deliveries that already had started to recover. With higher activities in the market and also ambitions on present and future technologies, the indirect costs increase in the quarter, which together with the negative FX effect of some $170 million, limited increase of adjusted operating income to 270 million, slightly over 0.6 billion operating income, or adjusted operating income giving a margin of 15.6%. And we end, finally, but not at least, with financial services then. And looking at the portfolio, we can see that adjusted for currency, the new retail financing was substantially higher than the press second quarter last year, reflecting, of course, the higher deliveries in the group. But the credit portfolio as such continued to increase, FX adjusted. We continue to see a good payment ability and performance among our customers. And write-off levels were low, except for some certain bus customers. When we make this comparison, we must remember that the second quarter last year was heavily affected by the general business uncertainty for our customers in the midst of the measure to halt the pandemic and an imminent need also for many customers to modify their payment schemes to handle the situation. So subsequently, we made substantial credit provisions during the second quarter last year. Credit expenses this year, second quarter, were positive as we have a change of how to calculate credit provision for vehicles in operating leases. And that impacted positively with 190 million. So all in all, when we take a look at the credit expenses, they are 900 million better this quarter. And on the negative side, we have also here the headwind from FX of some 85 million. meaning that we saw an improvement of adjusted operating income of some 850 million to over 900 million, and we were back at return on equity levels inside the range of our financial targets here in the second quarter.