AB Volvo (publ)

Very welcome to the Volvo Group third quarter press conference. My name is Kristi Johansson, heading up Investor Relations. And with me, I have our CEO, Martin Lundstedt, and our CFO, Jan Ytterberg. We will do as usual. We'll start off with presentations, followed by a Q&A session. And with that, Martin, over to you.

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

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

Thank you, Krister. We saw similar trends in the third quarter as we experienced in the second quarter. shortages on semiconductors, other materials and also transport capacity, putting pressure on the supply chain, leading to disruptions, production slots that were lost and then also higher costs with now the vehicle deliveries being capped due to the supply chain constraints. and also R&D accelerating gradually now, participating in to take the lead of the transformation. We as an organization, we need to focus on boosting the service volume, increasing prices and maintaining the cost discipline that we have had for the last quarters, also the coming quarters. If we move into the numbers and start with the group net sales, FX suggested they were up some 20%, reflecting then better truck deliveries and service revenues. We see this as a generic phenomenon across regions, except then for Asia, where the lower demand in China of machines and also trucks is impacting negatively. As regard FX, we had a limited effect on sales. If we move over to the earnings, despite a quarter with considerable supply chain challenges, we were able then to improve our adjusted operating income with 2.2 billion up to 9.4 billion and an operating margin of 11%. In the present inflationary environment that we have, it is important to adjust prices continuously and in the advance of the cost pressure we see from raw materials, but also from other materials, including freight. And we can see that we continue to be successful also here in the third quarter of doing that, especially then related to trucks, but also to services across our business areas. The strong transport demand affecting both services but also the vehicle side is impacting positively. As relates to services, we are back or actually above pre-COVID levels now. But as relates to truck deliveries, we see that we are hampered by the supply chain constraints. But anyhow, we had a considerable improvement of the earnings related to the truck deliveries and deliveries in general. The effect on capacity utilization was which we expected and which might you have expected on the volume was offset by cost increases to handle the disturbances. We also have a positive effect coming from the mix in construction equipment where we have been selling more of heavier Volvo branded machines into the regions of Europe and North America with better commercial conditions in general. As relates negative effects, we can say something about our JV income. It is minus 650 million, more or less compared to the third quarter last year, mainly related to our Dongfeng joint venture, which is, of course, affected by the lower truck demand in China and also partly then to the inclusion of our fuel cell joint venture cell centric as from the second quarter this year. As relates to FX, very small effects in general. And if we talk about Q4 and earnings, we will have a somewhat positive effect coming from the transaction exposure. Martin was into the cash flow. It is a vacation quarter, the third quarter. It is our cash flow-wise weakest quarter seasonally. As deliveries are low, production is low, and we are paying down the payables from the second quarter. This year, the seasonality was even more pronounced due to the production disturbances, but also due to some timing effects on the payable side. Looking at the first nine months combined, we can see that on the working capital side, it is more the inventory that is impacting negatively. And it is, of course, related to the ramp up of production, but also to the strategy we have of bringing in materials, critical parts and components to restore or refill buffers and also create and cater for higher volumes going forward. And as Martin mentioned, the inventory of new trucks also was impacted by more of incomplete vehicles. All in all, minus 5.7 billion in the quarter. Net cash position end of September 42.5 billion. That is a reduction of 25 billion during the quarter. 19 billion is related to the dividend and 16 is related to the negative cash flow. If we then move over to our segments and start with group trucks, we can see that the improved resilience of Volvo Group is clearly seen here in group trucks also in this quarter. When adjusted operating income increased some 1.3 billion to 5.8 billion and the margin of 10.9%. This quarter was another quarter characterized by the supply chain constraint and shortage of materials mainly than the semiconductors and as I mentioned also the transport capacity. Besides causing then unplanned production stops, we are talking roughly over a couple of weeks here in the third quarter for group trucks. It has also a clear inflationary attendance that together with the pressure from increased raw materials requires quick and continued adaptions of our prices to customers. And we were once again successful in this quarter in group trucks and a little ahead of the curve, so to say. battling then the headwinds from raw materials in a positive way. We also have a positive effect coming from the launch of the new Volvo range, but besides then the more of generic increases that we have on the price side. Costs were incurred and substantial time was also absorbed to complete unfinished trucks coming off the line. A challenge to manage, which is of course considerable and difficult due to the size of the logistic flow. We have at the Volvo Group a balancing act, a fantastic job actually done by our employees and suppliers and other partners. Despite this, truck deliveries and net sales were higher than the third quarter last year, which was, of course, a pandemic-affected quarter, contributed positively to the earnings. That was partly offset by a negative mix effect on the market side, more vehicles outside Europe and also on the product side with more of medium duty trucks. The lack of transport capacity is clearly seen also in our used truck business. Profitability is on record high level and inventory on record low levels. And the same trends of improved prices and volumes reflected the utilization and transport demand is seen in our service earnings. And on top of that, we have continued to see the positive effects of an increased penetration of our contracted services. JV income impacted negatively with the same comments as I made for the group. Moving over to construction equipment there, then where we see the demand of delivery and deliveries of machines and services continue to be high, except then as was mentioned in China, This gave a favorable shift for us with more of heavier machines, Volvo branding machines, into Europe and North America. And implicitly, the weight of China was lower, and they have a lighter machine mix, which then is impacting positively. And we should remember that third quarter last year was a very strong quarter for China in general. This shift was also seen in the net sales. It was up. 11%, whereas deliveries were down 9%. Service earnings improved by volume and price across markets. And these positive effects were the main effects behind the improvement of 0.6 billion to 2.6 billion for construction equipment here in the third quarter, giving a margin of 13.4%. Besides this, we have some negative effects coming from lower vehicle volume and, of course, also then related to the capacity utilization. But we also have the raw material pressure, mainly from steel, impacting more in construction equipment since the machine cost structure is more raw material heavy. In areas outside China, we have been able to compensate that by prices. But if you take a look on the combined markets and combined construction equipment, we have a negative net of price minus raw materials. Moving over to buses. And the trend of improved utilization of the bus fleet continues. We saw that on the service revenues and the service demand. But you also see more activities on the use side, which is another sign of improved business sentiment, though from very low levels. The lower adjusted operating income of some 200 billion to a black zero, more or less, related to very low capacity utilization, of course, reflecting the last quarter's low demand and low order intake. We also had some production disturbances that added on top of that. And furthermore, we had this negative market mix, but we also had offset that by a positive FX effect. The hard work of bringing down the break-even level for buses was clearly seen here where we were able to deliver a black zero despite these headwinds, which is, of course, very promising when we now are seeing that demand is gradually coming back. For Penta, demand and volumes of both engines and services continue to be strong. The supply shortages and capacity constraints have now started to affect more substantially also on the Penta side, both related to cost, deliveries, But of course, it's hampering sort of to meet the demand that we have that we are seeing in the market. Despite this, engine deliveries were higher than last year, mainly related to the industrial segment. And on the service side, we saw high activity on the marine leisure side with a strong and long boating season impacting positively. Despite these positive effects, From demand then, adjusted operating income decreased as supply chains constraints and cost impacted negatively. And we also see more of activities on the market side. And also that we have high ambitions on both present and future technology impacting on the R&D cost side. FX had a negative effect of some 40 million. Adjusted operating income just above 500 million, giving a margin of 14.5%. which is a good third quarter if we look in historical perspective, but not as good as the extreme third quarter last year. Last but not least, financial services with the stable penetration and improved deliveries for the group. We had a positive effect on new retail financing that improved compared to last year, and that also contributed to a bigger credit portfolio ending the quarter. Customers' payment ability and performance continue to be strong in the aftermath of strong demand and a very strong pricing power for the transporters presently. But looking at the portfolio, we have some pockets of concerns still. As a consequence, write-offs and credit expenses were at low levels in the quarter. And if we remember last year, that was a quarter affected by the pandemics, the general business uncertainty, and also to the fact that a lot of customers needed to modify their contracts. Subsequently, last year, third quarter, we had high credit expenses. So all in all, some 300 million less of credit expenses, of course, contributing to the 400 million of improvement, up to 800 million. Besides that, we see improvement related to the portfolio as such, increasing them, but also to improved interest margins in the portfolio. With that... Krister and Martin.

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

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

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

Thank you very much. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. The first question comes from Hampus Engelo from Handelsbanken. Please go ahead.

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

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

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

we are clear on that and i think that with the stronger resilience we see in the group also we have the means to to be offensive here and to be very close to uh to to uh to the industrial system to increase and and to fight for every machine and track etc demand is high supply needs to continue to to improve and that is what we're working And from a semi-perspective, from what you see today, can you say that the situation has improved or is that maybe... No, but I think, as we say, visibility is low, but on that note, obviously, now we have another grip on the situation together, because when we were running into this situation in you can say in end of or mid quarter one and then it continued in quarter two. Then it was a little bit more all over the place if I put it like that. Now we clearly see where do we need to work, et cetera, but visibility is low, but if anything somewhat improved and semi-conductors in that regard is in so many of the different supply chains. So that's the reason why we say that we need to continue to be very close and interact with our suppliers.

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

Yeah, we have been training for three quarters.

Thank you very much. Thank you. Thank you, Hampus. Then we take the next question.

Thank you. The next question comes from Claes Bergenlind from Citi. Please go ahead.

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

I have to start here because we actually discussed how we should formulate that. But we said around a couple of weeks. So I think that is enough precise guiding, but around a couple of weeks in addition to the vacation. For group trucks? Yeah, for group trucks.

Okay, perfect. That's in line with me. Then my second one is looking at construction and the margins across the different regions. Martin, you've said before that the margin has improved in Europe and North America relative to China since the last downturn in 2015. So even if China falls by 20% next year, as per your guide, you still might do quite well looking at EBIT owing to mix. So it would be great to hear a little bit about your thoughts there on profitability improvement since the last downturn across the region.

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

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

Exactly. Yeah, which has changed to the better with developed markets increasing the profitability. Yeah, so it's good. My very final one is on battery electric and 40 percent market share in europe off to a very good start but i'm interested to hear martin what you're seeing on the aftermarket side can you talk about the recurring opportunities again that you mentioned at the last capital markets day and i'm interested to hear if customers indeed are keen out keen on outsourcing more handling of the battery pack the software and also if these longer service contracts that you talked about on battery electric if these are indeed coming through

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

Thank you. Thank you, Claes. Then we're ready to move to the next question.

Thank you. The next question comes from Tom Narayan from RBC. Please go ahead.

Yeah, hi, Tom Narayan, RBC. Good morning, Martin and Jan. Thanks for taking the questions. I also have three. You kind of answered this, but I'm just curious, maybe from a 2022 outlook perspective for Europe and North America, what are you hearing specifically from your suppliers on semis? You mentioned lack of visibility, but are they actually telling you something concrete? Lack of visibility. Next, as you know, Pierre Daimler Trucks is planning a big turnaround in Europe. In its past, they did have a bigger market share on the continent. Curious as to your thoughts on the competitive landscape in Europe, the HD trucks given their plan. Then lastly, on China CE, I don't know if you can answer this, but when would you expect this government spending to come back? Is this a multi-year issue, or how should we think about that? Thanks. Thanks.

First and foremost, if we talk about the 2022 outlook, of course, again, when you look at the different supply chains for a truck, for a machine, for a bus, whatever, of course, there is a multi-dimensional type of value chain. So when we look at the bigger and more complex components and the and systems, and the T1s, we are not only working in those systems, but also with the T2 and T3 and even T4, then obviously gradually now we are seeing, okay, how can we mitigate this and how can we think about 2022, et cetera. Our current judgment, as I said, is that supply still will be, so to speak, the the deciding factor of the total market for the coming quarters at least. And then we will see when it will shift into a more demand driven total market. But yes, on that, at least we see and we have very tight plans, including the uncertainty, obviously. But then again, there are quite a number of other supply chains where we are gradually now working that through. So step by step, we're getting there again sequentially. step-by-step improvements, and we will continue to push, be close. And that's the reason why there are a number of factors that should be taken with a certain consideration. I mean, when we talk about the order intake, for example, when we talk about disturbances as such, because we will continue, even when we can produce more, to be very close to that. So we are meeting, so to speak, disturbances again, given the high demand. So that is number one. Then on the market share, I mean, this is a market that we know well in Europe, obviously, and it has been always a very highly competitive market. We have strong product ranges now out there, both for Volvo and for Renault that is just released. Great performance, great feedback. I think also we have an organization that is really focused on this now that has a strong accountability in decentralization. and also, I mean, the electromobility story. So that is one piece of it. And we have seen also, I mean, gradual improvements now. The second piece, I think, is still also the whole service business where we have good traction now. So it's both, I mean, the market share play where we will continue to have a strong offering on the new products, but it's also the service business. So we're looking forward to that. China, as you say, I mean, it's always a discussion what will be, so to speak, the different countermeasures, etc. I think everyone understands that at one point in time it was healthy with this type of correction. It was compounded with a lot of incentives, etc., not at least related construction infrastructure. And just continue like that should not have been good. It should have only created another bubble. So let's see a little bit. Now I think it's about adaption, flexibility. Again, we have a good mix for construction equipment, as an example, also with other regions showing greater monitoring.

Okay, thank you. Thank you. We'll move to the next question.

Thank you. The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.

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

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

Then there was a question on the total market and, I mean, or also activity level in September, et cetera. I think, I mean, to take one month is very, I mean, a little bit dangerous to do that. I think it's a little bit flattening out. But you need to understand a little bit the underlying factors of that as well. I mean, we'll all, if I put it like that, helicopter money coming into U.S. during the, During the pandemic restrictions on restaurants and travels, etc. I think there has also been a boom when it comes to the private consumptions, obviously, and we have seen a lot of that coming through, but also with very, very long lead times because it has been a lack of drivers. It has been a lack of terminal workers, etc. That is also what we hear from our customers. And one reflection on that is that now when we are taking down U.S. with 20,000 units for 2021, that is related to supply chain. Eventually that needs to come out to the market. So, I mean, the 300,000 level that we are guiding for next year in U.S. is absolutely what the market is demanding. Our prediction is that they are actually demanding more than that, since at least in the beginning of the year, supply will continue to dictate, so to speak, the total volumes. So therefore, I mean, 2021 decrease is not related to demand. It is related to the continuous fight on the supply chain. The good news about that is that actually our view is that we will smoothen out a little bit the cyclicality because if everything was perfect and having an overshoot in 2021 should not have been ideal for anyone anyhow. So I think that is good. Then when it comes to electric trucks, you are absolutely correct. We are active in the U.S., both with Mac and Volvo, but a little bit too early days for data and for market shares. But that is also why we talked about the orders that we are taking now, not at least in primarily, you can say, in on the west coast than with the big ports where we are building out also infrastructure together with partners but also on the east coast and specific segments related for example to waste collection so it will come there also step by step and there is a big interest among customers also related to their scope three activities for example thank you and just following up on the competitive landscape on the us post post navistar and the pricing data that doesn't look to improve that much in their Sorry for that, Daniela. No, no, first and foremost, I think as similar to Europe, it has for a long time been a very competitive market with strong players. We feel that we have a strong and competitive offering. Product quality is in great shape. Fuel efficiency in great shape. It's really about now continue to have good deliveries both on the product side and the service side. And then obviously, I mean, with what we are guiding for now, 300,000 market, and also the possible now cost inflation and pressure, we need to continue to execute on price realization, both on products and services.

Thank you.

Thank you. We'll move to the next question then.

Thank you. The next question comes from Jose Azumendi from JP Morgan. Please go ahead.

Hey, thanks very much, Jose, JP Morgan. Martin, a couple of questions. The first one on buses. Can you comment a little bit on your electric driveline launch there? I'm slightly concerned, not just for Volvo, but I think for the traditional truck and bus players that, you know, with electrification, we've seen other competitors like BYD entering the market, taking substantial market share. And I'm not sure right now how your product competes against that. know, BYD and whether you're going to be able to close that market share back in the coming years. So, we'd love to hear more thoughts on this, as obviously there could be a real crossing to trucks going forward. Second question, a little bit more on the positive side. China and, you know, China truck heavy duty opportunity for you. This is going to be probably one of the biggest opportunities growth-wise in the coming five to 10 years. Can you give us a bit more details? How do you see this market? What kind of opportunities for you? You know, any details you can give us also on the product side? Thank you.

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

Thank you very much.

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

Thank you. The next question comes from Olof Söderholm from ABG Sando Corridor. Please go ahead.

Hi, it's Olaf from ABG. Thanks for squeezing me in at the end. Maybe a bit of a reiteration of earlier questions, but just to clarify the Q4 sort of comments, continued disruptions. You had two stop weeks in around two stop weeks in Q3, but lots of vacation time as well. So when we look into Q4, do you expect to still have, despite the disruptions, still have the normal seasonal improvement quarter over quarter that you usually have in production rates?

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

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

Thank you very much.

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

Take care, everyone.