AB Volvo (publ)

Welcome to the Volvo Group press conference for the fourth quarter. My name is Christer Johansson, heading up investor relations. And with me, I have our CEO, Martin Lundstedt, and our CFO, Jan Ytterberg. We'll do as usual, start off with a presentation and then follow by a Q&A session. And with that, over to you, Martin.

Thank you, Christer. I have to say that normally I speak with a high speed, but I think Christy, you did it also very well. But also from my side, welcome to the fourth quarter 2021, but also the full year 2021 business update. And it, of course, had been a very turbulent year for many different aspects. So I have to start by saying how proud I am that the group delivered a strong performance in quarter four, but also for the full year 2021, thanks to outstanding work and dedication and cooperation by colleagues and business partners, supply partners, and of course, in close cooperation with customers. And I know that many of you are listening in. And I will therefore start to really express my gratitude from myself, but the whole executive management team and all colleagues also for, I mean, relentless efforts. relentless efforts and continuous disturbances, disruptions, but always having the customer focus in mind. And that's also the reason why we have been able to continue now to increase deliveries and to serve our customers well here, despite the supply constraints, but also while securing a safe operation that is of course the main priority. At the same time, the pandemic and its ripple effects on different industries and our industry is yet not over. The supply chain visibility and predictability continues to be low. Therefore, we continue to focus on securing supply on a weekly, but in many cases daily basis. and to manage our operation with high levels of flexibility and maneuverability, and thereby serve the very high demand of our customers and their need for extended capacity, but also more and more urgent replacements, and to execute on our side also on a very strong order boot. The demand will continue to be higher than the supply in the coming quarters. So in this regard, every truck or machine or bus or engine count. Also in the longer term, the megatrends are supporting an increased need of transport and infrastructure solutions that also must be considerably more sustainable. So in 2021, In parallel with managing the here and now situation, we have also taken a number of very important steps. We have confirmed our support to the latest science, what is deemed necessary to keep global warming at the maximum of 1.5 degrees Celsius. Our pathway to reach the goals of the Paris Climate Agreement was validated by the Science-Based Target Initiative, a very important step to continue to increase transparency, both about the target setting, but also about the pathways and the progress. And the good news is that our customers and their customers in turn also are increasingly committed to reduce their carbon footprints And we rely on each other here to support each other to decarbonize the entire value chains in different industries and segments. And what is our scope three downstream, that is the biggest part of our emissions, is someone else's scope one, scope two, scope three. And that's the reason why we're so often talking about the partnership and the ecosystem creation. And we have seen how that has been further taking off during this year. We have been early out taking the leadership in the electrification and we are now accelerating our R&D initiatives dedicated to the transition to a sustainable transportation and infrastructure solution system. We are broadening the product and service offerings but also extending solutions to areas of importance such as charging, energy and battery management, just to mention a few examples. Then when coming into the quarter highlights, the demand continued to grow in quarter four and net sales increased with 12% to 102.4 billion Swedish crowns than adjusted for unit trucks and currency. We delivered an adjusted operating income of just above 10 billion at an adjusted margin of around or just slightly above a double digit 10%. And this was a strong achievement, strong development on the back of strong demand and deliveries and also price realization. But that was also offset by extra supply chain costs and high costs on raw material and freight. But one thing is clear, with the current high demand, Both for us and our customers, our main priority has been and will continue to be to maximize deliveries and thereby serving the customers for their urgent need, as we said, of capacity increase and replacements. And to execute also on our side on the strong order book. Since the summer, we have taken an even more conscious choice to run our productions on high levels and with extra flexibility. This is, of course, not optimal in the short term when it comes to efficiency, but it gave us extra flexibility and maneuverability in a bumpy second half here. And deliveries and market shares increased. Industrial cash flow strong, almost 24 billion in the fourth quarter, and the return on capital employed increased to 25.3%. So in short... we did manage the right balance during this quarter. Higher volumes for our customers, both for products and services, and strong market share development. And despite the pain in the supply chain and the cost headwinds, we achieved sales of 100 billion, income of 10 billion, and a margin of 10%. As regards deliveries, truck deliveries increased with 20%. Again, 56,000 heavy-duty and medium-duty trucks is a very good achievement considering the constrained supply chain. Volvo construction equipment deliveries decreased with 18% and the decline was only related to China. In all other regions, we were growing between 20 and 40% with continuous strong momentum. Also when it comes to electrification, the most important part of the sustainability journey is an accelerated deployment of zero-emission vehicles. And the interest and demand for battery electric, but also later on fuel cell electric vehicles, and solutions is accelerating as our customers are executing also their plans to reduce their CO2 footprint. And we are, thanks to our modular product system, CAST, Common Architecture and Share Technology, continuously broadening the range of trucks, machines and related solutions. We have a positive book to build also in this quarter. for our electrified solutions and then good momentum continues. On the right side of the slide here, the sequential improvement is obvious and is expected to continue also in the coming quarters and years. As regards service, we had a good development of services during the quarter on the back of course of high freight volumes and construction activities. but also with the focus that we've had on continuous increase of penetration of service contracts. Service sales increased with 9% to almost 24 billion in the quarter, adjusted again for UD and currency, which was above the peak in 2019. And as stated many times before, service growth continues to be one of the key priorities. First and foremost, of course, because we know how important that is for the customer relations and the customer retention, but also to build strong resilience moving forward. There is still a great potential to continue to improve from a strong level here. Of course, continue the adoption of service contracts into new regions. for example, into North America now for different performance steps of service contracts, but also to continue to increase penetration. We see also when it comes to connectivity and financial services penetration, as well as the electromobility solutions. But overall, a good and promising development also for the future with recurring revenues. On the truck side, start with truck news. And that is, again, a proof point that we are serious about our focus of the transformation here. We are continuing to introduce a number of new products and solutions. First and foremost, then, that the Daimler truck, Traton, together with us at Volvo Group, then signed a joint venture agreement for a European high-performance charging network. And that is, of course, important then to continue to show the sign that we want to see more partners and to deploy a strong network and thereby also facilitating the transition even faster. There is a big interest in this joint venture, both as regard partnership, but also from the customer side. In North America, another very important part, we have introduced the VNR electric for regional hall and for other applications. We are broadening that scope now. And we are also launching a number of new features, extended increased range up to 440 kilometers, or maybe more accurate to say in North America, 275 miles. faster charging and the more available vehicle configurations. That is, of course, important then to reach out to more customers. So great interest. And at the end of the year, we concluded a number of important deals and momentum continues. And then the Volvo FH, heavy-duty electric truck that is coming into serial production this year, was put through an independent test. energy efficiency test in Germany and the truck exceeded expectations range used 50% less energy than the diesel counterpart so let's have a look on on that a short movie our electric truck ready for heavy loads yes and we can prove it

In a first independent road test, the Volvo FH Electric maintained an average speed of 80 km per hour at 40 tonnes total weight with zero tailpipe emissions. The test was performed on the renowned green truck route in Germany. Energy consumption was 1.1 kilowatt hours per kilometer, which gave the truck a total range of 345 kilometers. In addition, the Volvo FH electric consumed 50% less energy than a corresponding Volvo FH diesel truck, making it a very powerful tool for reducing CO2 emissions.

So I think it's pretty exciting to see this very promising course. We are starting to first of all must get the real input from customers. That is the most important. But also to compare this also with the well-known routes as you see. So very excited about the introductions and the ramp up during the course of this year. But okay, then coming back to the truck market and how does it look globally? As we have said, both demand for freight and freight rates remain high, which supports our customers' profitability and in turn then drives demand both for new and used vehicles or trucks. And however, also as have been stated before, due to the constrained supply situation, the market development is capped for the time being what the industry can produce. And all forecasts that you did see in quarter three are largely unchanged. Just maybe to give some flavor of it, very similar pattern what we see now in Europe and North America, Brazil, strong freight volumes, pent up replacement demands, And also that customers are extending their vehicle contracts due to the long lead times and they need the capacity basically. China, a different picture. We have had a number of very strong years, had a strong first semester of 2021. And after the introduction then of the new emission legislations of CN6 and also a generally slower market, We have seen sharp declines in the Chinese market. Deliveries were down with 63% in quarter four, heavily affecting then our joint venture result in the quarter. Platinum supporters began to reiterate what we have said before, that market forecasts are based on current visibility that continues to be low. We are managing this by working very closely together, but uncertainty continues to be significant due to the supply chain situation. And also the effects of COVID-19, not at least now, on the back of the Omicron spread that has caused very high levels of absenteeism in both our internal but also external industrial systems. Nevertheless, orders strong and also deliveries. We continue despite that to be restricted to take orders too far out in time. We need to have the balance and also to manage the cost inflation. But we have a good quality and a good grip over the order book. Orders were down 18% in comparison with an extremely strong quarter four 2020. But still 68,300 orders for Q4 2021 is of course a very strong figure. Deliveries increased with 20% and we will continue to push our production as much as we can to serve our customers as well said. And to execute on the solid order board. We will therefore experience disruptions and stoppages moving forward because we are really pushing the limit. And as I said, every truck in this case counts. Market share, also positive development here. As you did see also on the short movie here, but Volvo trucks and Renault trucks, new ranges are well received, not only the electric, but also the full range. And we have the most modern heavy duty range now in Europe. Combined Volvo and Renault trucks for the full year reached a market share of 25.3%. Volvo growing back to 16.5%. Strong finish of the year. Isolated in quarter four. Volvo trucks had almost 19%. Renault almost 10%. And combined 28.6% for the quarter isolated. Also, as you can see on the right graph, a continuous strong market share on electric, both for Volvo and Renault. Still small volumes, but as I said, momentum continues, and it's good to see that we are having a strong position here. North America also strong finish after a weaker start of the year, but we have been coming back in a good way. Isolated in quarter four, Volvo was up to 12.9%, Mac up to 8.7%, and combined then almost 22%. And also a strong level in Latin America or in Brazil, a historically strong level also, 22%. Stable but strong. So good development here. When it comes to construction equipment, also starting with some of the key news in the quarter. First shipment of 20 ton this time, electric excavator from our operations in South Korea. This is the latest move to accelerate also in BCE, the electric journey. And the shipment is going to customers in Norway now for testing and real operations in preparing for small volume serial production. In addition, also VCE revealed its concept machine LX03. which is a fully autonomous, connected and electric solution that is then complementing for confined operations together, for example, with the TARA, the autonomous applications that we are actively working with right now, also with customers. On the market forecast, good demand in general on the back of high mining activity, but also investments in building and construction. But it is China excluded where demand is declining after years of high growth. And as we have said before, and we did said that already in quarter three, it has been anticipated and even actually as good as we see. So we are not creating a bubble here. When it comes to the market forecast and changes since last quarter, very similar to trucks, we are reiterating our forecast for all regions with the exception of China. In China, we are decreasing the midpoint from a decrease in relation to previous year from minus 20 to minus 25 as midpoint. But also for this year, obviously, market forecasts are based on current visibility, which is low. And that is, of course, due to similar reasons as we have talked about as regards trucks. When it comes to orders and deliveries, orders were down with 24% due to China. In all other markets, we have good demand and very long order books. And also here, we are restrictive in some markets due to the very long order book. Deliveries were down with 18% due to China. And as I said before, all other regions up between 20 and 40%. And we also see here in this area a strained supply chain, of course. We had still a positive or we had a positive book to build and good machine utilization among our customers. So high and good activity level. When it comes to buses, orders increased with 43%, while deliveries decreased with 37%, mainly then, of course, linked to the very weak development in the aftermath, but also during the pandemic. Demand for new buses remains low following COVID-19 and the restrictions linked to that, and especially then for the coach business, tourism, intercity, etc., In the quarter, the Nova bus business in North America was moved into a separate business entity, and Jan will come back to that. But that is with a dedicated management and really continue to focus on the city bus market in North America. Volvo buses managed to achieve a small positive operating income for 2021, despite volumes were down with 50% in relation to 2019. And focus here moving forward is to leverage the improved break-even level when volumes are coming back. Positive is also that we took the biggest-to-date order for Finland of around 60 battery-electric buses to Helsinki, a very important deal also, and seeing that we have good momentum in this area for city buses and for sustainable solutions. Volvo Penta orders up 1%, deliveries up with 8%, broad-based and good demand across segments here. So it's also the same type of focus now to really serve our customers in the best possible way. Also, Volvo Penta is revealing new solutions. A pilot project to develop an advanced hybrid solution, in this case for Hurtigrotten. A new sightseeing vessel, but of course to be used in other applications as well. And during 44 also the first terminal tractor powered by Volvo Penta's electric driveline was delivered to Tickwin, an important customer in North America. And finally on the business update then, Volvo Financial Services. There is a strong demand, of course, for transportation and construction services and that drives good portfolio performance. Our customers are solid and Jan will go into details here. Record new business volumes in the quarter and year on the back of the high deliveries of machines and trucks and vehicles. but also that we continue to have a good penetration rate. And we are continuing to expand also our service offerings to new regions, for example, then the global parts and service financing platform now to Brazil and Latin America. So by that, Trister, I end the business update and leave the word to you.

Thank you, Martin. And that actually brings us to the next speaker, our CFO, Jan Ytterberg, who will go through the financials. So, Jan, can you please take us through the numbers?

I will, Christer. The equilibristic work continued also here in the fourth quarter. We had a good balance between perform and transform as we were generating the necessary earnings to be able to continue to accelerate on the transformation of our industry by adding more resources and capabilities into the R&D area. We also had a good balance as relates to delivering the high number of vehicles to customers and then at the same time absorbing the extra costs while doing this. And we also had a good balance as relates to price realizations, mitigating then the cost inflation that we see on material and freight. A dedicated act done in a very challenging environment. If we then start with the income statement on top of that and look at the net sales, the increase then of FX adjusted net sales of some 12% reflects well the high demand of vehicles and services globally, except then for the region Asia, where, of course, the market decline of China, both related to trucks, but mainly for us and related to construction equipment, impacted negatively from high levels last year. As for FX, there were little effect on net sales. Moving into the earnings, and despite the high net sales, the adjusted operating income decreased some 800 million down to 10.1 billion, and an adjusted operating margin of 9.8%. In the present inflationary environment, it's important to adjust prices continuously to mitigate the cost inflation we see both on raw material, other materials, but also freight. In recent quarters, the combined effect of all this has been adding positively to results. In this fourth quarter, it was a wash between price realisation and costs. The price realisation is quicker on services, whereas on the vehicle side, we see that the long lead times are making it take a longer time actually for the price to be realised on the vehicle side. Looking at the full group then, the price pressure in China on excavators is impacting negatively. The strong demand is, of course, impacting the deliveries of vehicles and service volumes. And as regards services, we are at all-time high levels, whereas then on the vehicle side, we continue to be hampered by the supply challenges. Despite this, trucks did deliver their second best quarter ever of trucks into the market. which was then partly also offset by the lower machine deliveries in construction equipment to China. In this period of shortages, this truck volume comes with an extra cost and impacting negatively on the industrial efficiency. The limited supply of new trucks is of course also then affecting on the used truck side, where we see demand being high and prices are being high. then contributing positively to the group results. But volume is being hampered by that the used truck inventories are at all-time low levels and customers are keeping their vehicles. The ambition to be in the forefront of the transformation with electrified and autonomous vehicles is then reflected in the increased R&D spend. And we will continue to invest in R&D and plan to step up our efforts in this area even further into 2022. There was a positive effect on the net capitalization in this fourth quarter. And if we look at the full year 2022, that will prevail, even though not as pronounced as we saw here in the fourth quarter. But we expect a net capitalization of around a billion on the R&D costs for 2022. The negative impact from JV earnings was substantial at the profit of some 600 million in the fourth quarter last year was converted into a loss of 700 million in this fourth quarter, mainly then related to the lower demand in China affecting our Dongfeng joint venture, but partly also related to the inclusion of our fuel cell joint venture, Cellcentric, as from the second quarter 2021. All in all, the JV effect is around 1% on group margins. negatively then. FX had limited effects on the earnings, and with the weakening Swedish Corona, we expect a positive effect coming from the transaction exposure of around one and a half to two billion in 2022, evenly spread over the quarters, and we do not provide any guidance on the full FX effect on earnings for 2022. If we take a look on a group's balance sheet and cash flow, fourth quarter is normally our strongest cash flow quarter with high deliveries and also with trade payables increasing after vacation period, the third quarter. This was the case also this year. On top of that, we had a negative timing effect on payables in the third quarter. I mentioned that at that time, and that turned into a positive effect here in the fourth quarter. If we take a look on the working capital for the full year, it had limited effect on cash flow, and it was pretty balanced. The higher capex in the fourth quarter was then reflecting an increased replacement need, investments in new products and in the transformation, and that will continue to be so into 2022 as well. So operating cash flow for industrial operation was 23.6 billion. in the quarter impacted positively on the net cash position that increased to over 66 billion at the end of December. Moving into the segments then, and starting with group trucks, the fourth quarter was yet another quarter characterized by the shortages of material, mainly then related to semiconductors, and also then the lack of capacity, including freight. Despite the high volumes of vehicles and services contributing positively, the adjusted operating income decreased from 1.1 billion down to 6.9 billion. A substantial part of the drop, actually 2% more or less, was related to the already mentioned negative year-over-year effect on the JV earnings, minus 1.3 billion, with the same comments as I mentioned just recently. Besides causing unplanned production stops, in this fourth quarter, a couple of weeks. The supply chain disturbances is also then affecting the industrial productivity with adding then extra costs for shifts, for express freight, for manning, et cetera, to deliver on the most important thing for us, our customer promises. The material cost pressure continued for group trucks also here in the fourth quarter, and that requires quick and continuous adaptations of the customer prices. The tailwind from increased prices continued for group trucks to be stronger than the material cost inflation, where the product launches of the new FH-FM FMX, as well as the Renault Heavy Duty range, are contributing positively to this. Used trucks, as mentioned, are on extremely high levels and are impacting positively. And with higher deliveries in regions outside Europe, where we have less of forward integration, we got a negative market mix effect. And we also have a slightly negative product mix effect as we were delivering out more of medium duty trucks here in the fourth quarter compared to last year. R&D expenses. are higher than last year despite all these challenges group trucks continue to deliver a double digit margin in this case of 10.3 percent the demand and delivers of machines and services continue to be on high levels for construction equipment except them for china this gave a favorable shift both on regional and product mix, where we were moving into proportionally more deliveries of heavier machines and also into markets where prices are higher as they are in Europe and North America. Implicitly, the weight of China with the lighter machine mix decreased compared to a very strong fourth quarter last year for China. And this shift was also clearly seen on net safes, FX adjusted net sales up 5%, whereas deliveries are down 18%. And service earnings improved, both as relates to volume and prices across markets. In areas outside China, we have been able to compensate for the material cost inflation in construction equipment. But when we look at the construction equipment as a whole, including the price pressure we have in China, there is a negative impact net of this, i.e. price minus material costs. Besides the negative effect coming down from the lower machine volumes and thereby also the capacity utilization, we also here have more of increased ambitions and activities in the R&D area coming from low levels and thereby impacting negatively. All of this gave a small increase of adjusted operating income up to 2.4 billion and an adjusted operating margin of 11%. Buses, as Martin mentioned, we have changed the segment buses in this fourth quarter to give NovaBus the right prerequisite to succeed in the North American city bus market. We have decided to make them a separate unit, move them from buses, and they are now in the segment group functions and others. And the figures have been restated for this. The trend of improved utilization of the bus fleet continues to be seen in the service demand and the revenues. The higher sales of used buses are adding to this general feeling. But then, of course, we have the recent COVID development making then our coach customers to hesitate to invest. We have a positive customer mix with less of city buses and fleet deals in northern Europe and more of coach customers and deliveries into North America, and that impacted positively. And this was offset then by also here lower vehicle volume and material inflation, giving them a red zero of adjusted operating margin for buses. For Penta, demand and volumes of both engines and services continued to be strong and impacted positively. The increase was mainly related to the industrial side, and we also had more of heavier machines that impacted positively together with more of IPS propulsion packages on the marine side. All of this, of course, adding to the result, the supply shortages and capacity constraints, on the other hand, affected negatively on industrial productivity costs and also deliveries. The positive impact from price increases mitigated the material cost inflation and the higher ambitions on present and future technologies impacted on R&D costs. All in all, an adjusted operating income of 330 million, 9.1% of adjusted operating margin. Last year, we should remember, was affected by costs for discontinuing the outboard business of 177 million. And then the last segment, but very important for us, VFS. We have a stable penetration and improved deliveries for the group, which made the new retail financing increased. compared to last year, and then contributing positively to the increased credit portfolio. Write-offs levels are low, as customers' payment performance is strong, reflecting then the good demand for transport, but also a strong pricing position for our customers. And as a consequence, credit expenses were low here in the quarter, The fourth quarter last year, on the other hand, was affected by the general business uncertainty after the first wave of the pandemic. And also we had a lot of customers that had modified their payment schedule to manage that situation. At that time, fourth quarter last year, we had relatively high credit expenses. So all in all, this means that the year-on-year effect is plus $265 million and adding, of course, to the improvement of $335 million we see on adjusted operating income. four financial services, so 858 million. The improvement on earnings is also related to the higher credit portfolio.

So, thank you very much, Jan. And Martin, time to summarize the year. Thank you, Krister.

Yes, and as we started to say, it has been a very hectic and challenging, but also exciting year. Strong Performance, despite all these challenges, EBIT margin of 11%, adjusted EBIT margin of 11%, and just slightly, slightly above, actually, the all-time high margin that we achieved in 2019, with an operating leverage also for the food year of 2021 of 37%. So we stand strong with net cash at the end of the year of 66 billion SEK. And the board is therefore proposing to dividend out around 26 billion SEK consisting of one part and an increased ordinary dividend to 6.5 SEK and an extraordinary dividend of 6.5 SEK as well. And it's a good balance as the board and management sees it. With the current share price, it represents an attractive yield but also why we are continuing to address the future from a position of strength. Because we are leading the transformation towards fossil-free solutions in our different business areas, which will be the key lever also to create long-term and lasting value creation. We are accelerating orders and deliveries, as you have seen, of electric trucks and machines here and now. But we are also investing continuously for the future. We are broadening 2021 and will continue to do so. Our electric offers across business areas, thanks to a group-wide modular system, but also through strong partnerships. We're operational with our fuel cell joint venture with Daimler for the hydrogen-based fuel cell electric vehicles, but also other applications. We're establishing the pan-European charging network, and we have accelerated also the introductions of autonomous solutions and have concluded also in this area important partnerships, such as with Aurora. So in summary, we have a good balance between perform and transform. And one important proof point of that balance is also that we increased our returning capital employed to 25% in the industrial operation in this year of turmoil. And for sure, 2022 will be another both challenging, but more importantly, exciting year, Kirsten.

Thank you, Martin. And that brings us to the Q&A session. Thank you. So we would appreciate if you can limit your questions to two. And with that, operator, we are ready for the first question.

Our first question comes from the line of Hans Engelau of Handelsbanken. Please go ahead.

Thank you very much. Two questions for me. First question is relating to the ramp-up and Q4. I know that you added labor after the summer to manage the longer lead times. And I guess my question is, from our understanding, is that you had more labor and less ramp up. And my thinking is here, how should we look at this going into Q1? It seems that you're taking slightly more orders also. Do you think that you would manage to increase the run rate into first quarter? That's my first question. The second question is kind of related to that, and that's how we should look at lead times now and how this is affecting your orders. To me, Q4 were better on orders. I would expect you to maybe hold back a bit from the comments you made in Q3. Those are my two questions. Thank you.

Yeah, if I may start, and thank you, Ambrose. On the first question, yes, you're right. We actually stepped up further after vacation when it comes to manning and thereby possible production levels. but also to host flexibility because we did see a continuous, so to speak, low visibility, and we knew already at that time that we will encounter stoppages in the short run and with very short notice, and thereby both in order to host a higher need because we have a strong order board, but also to host a higher flexibility to catch up and to really drive it when we have components available. And I think that has been a wise strategy. We have been able to ramp up during quarter four. 56,000 heavy and medium duty in deliveries is, of course, a very strong figure despite the disturbances. As you all said, we are talking about a couple of weeks stoppages, right? But at the same time also, we have been working overtime, et cetera. So this is... A short-term pain, you can say, for a long or medium-term gain. And absolutely the right balance in this situation. Because as you can contain, I mean, the costs related to this, then, of course, you should go for it. Customers first, priority, building strong relations and retention. They need that capacity. So then, as we've said, also moving into the year here, visibility continues to be low. We keep the same strategy because, again, as long as we feel that the cost inflation And it's also a balance with what we are doing or balance or that we are ahead of the curve when it comes to price or commercial realization with the methodology that we've seen in 2021. And we need to continue with the same methodology. But then when you can contain a number of investments, I should say, in our customer relations capacity, that's the right thing to do. And that is what we have done.

I can add as well, I mean, without this manning strategy, we would never have been able to get out as many vehicles because we are also handling the unfinished goods, the unfinished trucks. And these were actually decreasing towards the end of the quarter. Yes, exactly. And that was also seen in the cash flow, that we had a balanced situation. Inventories were going down despite trade payables going up.

And on the lead times, what?

Sorry, I'm both. Now, on lead times, I mean, of course, the sign, as you say, that we are also, I mean, seeing a positive book to build again. I mean, we had that discussion during quarter three. It's, of course, also that we are, as we said, restricted with order intake to balance that with the lead times. And that is still varying between regions. But we are well into... well into this year but again then working with the salt sources so we can manage to balance with the with the cost pressure and cost inflation also with the quality in the order board and also the quality of the order book overall so we have a good view on that what we are putting in is actually orders that the customers need so we can get to that increased capacity for our customers that they in many cases urgently need as well so it is And we will continue to work like this now to have the right balance. But I think the important thing here, as I said, is also the deliveries that we are seeing that coming up here. And that is, of course, the main priority.

Fair enough. Thank you.

Thank you. Then we take the next question, operator.

Our next question comes on the line of Tom Leran of RBC. Please go ahead.

Yes, I'm Ryan RBC. Thanks for taking the questions. The first one on, could you give us some more color on the truck pricing environment? You know, in autos, premium car makers have been able to prioritize higher margin vehicles with the limited supply of chips they have. So pricing has been very strong. They've also been useful in offsetting raw material cost price inflation. Presumably, you don't have the same luxury there given your customer profile, but just love to hear your thoughts there. And then, Secondly, if you would indulge me in a very long-term question, at CES this year, the hot topic was autonomous, and specifically Level 4. Your customers are dealing with labor shortages, giving this issue more importance near term. The main takeaway from CES was that technology is already there for Level 4, but policy and regulatory is the main roadblock, particularly in Europe, and Can you just remind us maybe where you are on the development? I know you mentioned the partnership with Aurora, but maybe just give us a sense of your timeline.

Thanks. Absolutely.

I can talk with the truck pricing. Of course, we are increasing prices to mitigate the cost, but also to try to improve our margins. But if you take a look some years back in time, we have been used to one, maybe two percent. But this is, of course, substantially more in this year than we have experienced earlier years without to go into any specific numbers here. And it is, as I mentioned, it is more the lead times that is sort of a problem here for us to bring out these increased prices than anything else. And as you reflected on Martin, we have extremely strong order intake in Q4 and 2020 and Q1 this year. With the stoppages and postponements of deliveries, it takes a little longer time to realize these prices. Then we have the launches of FHFM, FMX, and then Renault Heavy Range lately. And those come in very handy because that's the natural situation when you can increase prices.

But maybe I said from my side also on that note, I think when we look overall, I mean, given the situation, I mean, we are a business to business also. So, I mean, we have and that is a big difference, of course, with the car that you can say, OK, make a priority on that model now. But we have long lasting relations. given that situation I think it has been a very strong work done by the organization to be ahead of the curve if I look at the truck side in many parts of the construction equipment given the long order board anyhow and of course that works needs and that methodology need to continue because we have to protect our margins but to do that also in a balanced way also so we're keeping relations strong and then of course also on the service side so Continue to work on that. And then, as I said, you have to think about also the cost side. There are a number of extraordinary costs right now, given the fact that if you want to prioritize deliveries, you're out, for example, on the spot market. But you need to understand the buckets here, so you're also comfortable about the way going forward. Then when it comes to autonomous, very exciting about that. Two years ago, we created also Volvo Autonomous Solutions since we have a very strong backbone of different machines and solutions that are put together because with autonomous solutions, obviously, it's very much solutions based on different type of end applications. What do I mean by that? For a port, for a quarry, for a mine or whatever. and this type of to start with confined areas will of course come much quicker both from technology standpoint but also from a regulatory and other type of environments so we have now started operations with customers for a number of these operations in confined areas it will have great benefits of actually realizing this. Of course, when it comes to labor, labor shortages and competence, but also when it comes to safety, when it comes to opportunities to operate, but also to electrify, because you are thinking about the complete system. So, paving ahead in a number of areas here, confined, but also then coming back to Aurora, and that is the hub-to-hub type of applications that are not confined, but more semi-confined, since it's more of an entry-exit point to the highway. So, exciting times ahead, and not at least when it comes to the combination with autonomous connectivity and electrification.

Okay, thank you. I'll turn it over.

Thank you. Then we're ready for the next question.

Our next question comes from the line of Klaus Bergerlinds of Citigroup.

Please go ahead. Thank you. Hi, Martin and John. So first, a follow-up to Humper's question. So it's great to see that you're opening up the order book gradually. You saw the shortages much earlier than many other OEMs. But I'm just trying to understand the dynamics. You said that you're covered well into 2022, looking at the backlog, Martin. But I'm just trying to understand if orders then can roll over again in the first quarter, or do you think that this is a reasonable new good level? Thank you.

Thank you, Claes. I mean, as we stated in the report, obviously, disability continues to be low, and not at least also on top of what we have seen before, where I think we have a very strong organization working with it now, with the task forces and the mitigation plans that we also did see as an outcome of Q4. Of course, on top of that, what we have seen now is the Omicron spread. that is very similar to what we hear for society at large. Both, I mean, when it comes to the spread as such, but also quarantines, etc. Which means that we see a higher level of absenteeism, not least in the supply chain. So it will continue to be disturbances. So what level it will be. We talked about the capital weeks in quarter four. Let's see what it will be in quarter one. But I think what is more important about it is that we have found the methodology to work with it, to contain the different type of, I mean, costs and actions and time-derived balance. And also working very closely with our customers so they feel informed and included in what is happening. So let's see, but we have been clear, the strategy that we have put in place is the right one, have maneuverability, flexibility, take that extra investment in the short run to serve our customers, and as situation will improve, of course, then we will continue to optimize more to the normal type of industrial system. I don't know if you would like to add something.

Okay. My second one and final one is on the dividend. And it's great that you're paying out an extra dividend again, but the total is lower than last year despite ending the year with very strong cash flow. And you didn't normalize the balance sheet such as, you know, introducing payout ratios, starting a buyback program. Is this a signal from Volvo that Volvo is going to ramp investment even more than what you said previously at the CMB, a gradual increase? not a step change in investments. Thank you.

I mean, first and foremost, I think it's important to take a step back here and look at what the group has been doing over a number of years now. And we have been very clear, of course, that Volvo shall be an attractive investment in the short run with a dividend yield that is attractive. The board has proposed a good balance here. But we have also, and the board has been clear, that we need to continue to act from a position of strength. And that position of strength is, of course, to provide continuous transparency about, I mean, how do we continue to lead the transformation, both when it comes to the strategy and execution of that transformation, because that is super important to create mid- and long-term value, containing great opportunities, And of course, when we look at how we have been working with our capital allocation and communicated around it, to my extent, it brings a lot of credibility. I mean, with underlying improvement in performance, we have been also following with continuous improvement in the ordinary dividend. We have been clear that we should have a good balance between the short term and the long term. We have been, for a number of years, been also handing out an extraordinary dividend, giving a good yield. But we are still continuing to act from a position of strength. And that is, of course, important in a landscape where we are moving into solutions, where we are moving into new business models. But of course not without being clear about how we are acting when it comes to capex or investments, etc. But to act from a position of strength is not always signaling that we need to use it, but that we have the maneuverability that we will lead this transformation. You don't want to have short-term gain for long-term pain. You don't want to have long-term gain for short-term pain. You want to have short-term gain and long-term gain and a good balance. And the board has proposed a good balance in that regard.

Thank you, Martin. Thank you. Then we take the next question.

Our next question comes from the line of Jose Asamundi of JP Morgan. Please go ahead.

Good morning. A couple of questions, please. The first one, in the light of your very strong order backlog on trucks, if your level of activity going into Q1 is going to be higher than last year, are you seeing the situation improving gradually towards maybe the situation we had in Q4 last year? And also, how much visibility do you have right now on your production lead times as we speak? The second question refers to the your efforts and collaboration for the high-performance charging network in Europe. Can you talk a little bit about what this means for you and in terms of investments, how much do you plan to invest into this high-performance charging network? Thank you.

Yeah, I mean, thank you for saying that. I mean, just to reiterate what you said, when it comes to quarter one, Obviously, we are continuing with the same strategy that we have seen in Q4. I mean to remain on high opportunity levels in production, high flexibility and maneuverability, knowing that we will encounter disturbances and stoppages given the low visibility. But again, that is the right strategy. We did see that in Q4 that we got out volumes. Of course, most importantly to serve our customers, but also I mean to create strong resilience for the future. I mean all these trucks and construction equipment are serving as well also when it comes to the service market from a group perspective. And we will continue with that. Visibility remains low, both related to the same type of issues, even if in certain value chains it has improved. We have got better visibility. New issues have arised, but we have a good way of working with our task forces here. And then on top of that, Omicron creating low visibility. But we need also to see that this is a contained situation right now. There are also signs then of gradual, of course, improvement of the pandemic that at one point in time also will normalize the effects. And then, of course, incoming investments for different supply chains. And maybe change patterns also related to the ending of the pandemic when it comes to parts and components that we are sharing with other industries. But again I think we have found the right balance and we will continue to work very closely with that to continue to have a strong performance of course from a financial standpoint. But stand by our customers by having this flexibility and maneuverability. Then when it comes to the order board as such, Again, as we said, it differs a little bit between regions to regions. I think the sign that we are now opening up the order book is also that we have a good view on it, that we have been restrictive in previous quarters. So that is the situation right now.

I can add also, because this has been ongoing for quite a while now, but maybe it's obvious for some of you, but it's very important to remind ourselves that the buffers in the system, and then I'm only talking about the Volvo buffers, but buffers at suppliers or sub-suppliers, etc., they are gone in many cases, which means that a flat tire in Helsingborg will be a problem. That was not the problem before. So we are very sort of vulnerable to disturbances, whether or whatever. And then to come back to the right situation, we don't only need the capacity to fulfill the demand. We have to have overcapacity up in the supply chain because we have to fill up the buffers as well.

Absolutely. And Martin, the investments in the charging network?

Yeah, what we have said there is that we are together investing 1.5 billion But I mean what I think is most exciting about that is also that given the sign of this pan-european charging infrastructure have gathered a lot of adjacent interest because the whole idea is to say we believe in it we want to go for it we want more partners to embark till we really get the coverage and we see that there is of course a big interest of the charging infrastructure network for commercial vehicles because from utilization rate of this network will be very interesting given that there are professional equipment moving around So, big interest, and that is what we hope for also, to have more partners joining, so coverage is coming, and thereby even quicker deployment of theory mission vehicles.

Thank you. Then we take the next question.

Our next question comes from the line of Agnieszka Biela of Nordea. Please go ahead.

Thank you. So, my first question is on the input cost and price dynamics. I just wonder if the orders you're taking, do you have any flexibility when it comes to the pricing or are you locked in the prices for the order tracks? And if so, do you feel that you will be covered given the fact that you're buying more probably now on the spot market? Thanks.

Thank you, Agnes. Would you like to start, Johanna?

No, and that's also what I tried to explain, that we are coming from a very positive situation where we were a little ahead of the curve as related to price and material freight, and now we are more of a balance, so you can see the underlying pressure, and of course, as I said, On services, we are quick to increase prices and adjust to the cost inflation. It takes longer time as you're into Agnieszka. And of course, for us, this means also that to some extent, it is sort of what can the market take? What will the cost pressure be when we are then going to produce a vehicle towards the end of June or whatever it is? We are doing what we can, of course, and we have to come back because in many cases, as Martin went into, we don't really exactly know in case of broker parts, how much we will buy, one-time payments to suppliers, etc. It's very difficult to assess and it is changing quarter by quarter. Let's come back on that, but we have been successful and we are right now in a balance. And as I said, trucks positive, construction equipment negative, but that's mainly related to China price on excavators.

But I think, just to add to what you say, I mean, a very small addition. I feel confident about how we are working with it. I mean, when it comes to the, I mean, so to speak, inflation pressure and how we're working with our price realization in steps. Then we have very very short-term effects that you were into with with the spot market purchases But the important here is that we are ahead of the curve when it comes to You know the price realization in relation to the cost inflation, but good work done and a methodology in place that is working Great thank you.

And then my last question is Regarding these extra costs that you have for running the production high right now. Is it fair to say that this extra cost really stems from a very volatile supply chain and should supply issues ease that it will be better and also maybe if you could comment on the after assembly of the trucks, how many of these 60,000 trucks you've delivered into four were the red tech trucks and also do you have many of such trucks on your lots today? Thanks.

That extra cost, because of course what we are doing right now is of course to some extent take the positive volume effect out in the production and say okay, we take the extra cost instead and we use that positive volume effect to compensate for that. And that will not of course going forward, then we will have the normal leverage in our truck, especially in operation, but also construction equipment. So this is sort of the extra we are having. And there you get a little volume effect of the additional production we are doing and then vehicles we are selling. The next one. Yeah, the after assembly of trucks. And we did sort of, and that's due to customer promises, but also due to certain legislations, especially in North America. You want to clean out your unfinished stock. We did that, but we are not talking major numbers. It's not affecting sort of the quarter substantially and will not affect first quarter either. But we did a clean out to some extent here. Sorry, what is happening at that time is, of course, you don't get, now I'm being counter again, you don't get the absorption on the cost because that you already have when you put the vehicle on the assembly line. Then you only have the cost for finalizing the vehicle.

In some of the plants, actually, we were taking down the run rate in production to clean the yard. Because, I mean, at one point in time, it's no meaning to just continue to produce unfinished, put them on the yard, what we call float. But then to get back to that balance, because I mean, when we have the parts in order, we have short, I mean, throughput time. So I think that was also a wise decision. But then you have this, as you said, bean counter effect. But that's, again, the right effect. But think about it like Johan said, this normal volume leverage is eaten up by the short-term effects. That is a conscious decision. That is good to do now. More important is the price realization with being ahead of the cost inflation, basically.

Thank you.

Thank you. Then we have time for a final question.

Our last question comes from the line of Daniela Costa of Goldman Sachs.

Please go ahead. Thank you very much for taking this last question. I have two things, but I'll keep them short. One was a follow-up on dividend. And I think you explained well that you wanted to keep some room for the future. But just in terms of ordinary versus special and the proposal there, you have had, like, 2020, probably the toughest downturn. 2021, a huge amount of disruptions still generated a lot of cash. Why not just go for a structurally higher dividend proposal and carrying on doing the specials? That's one. And second was regarding your EV aftermarket. I guess it's still early days, but you've now been having the trucks in Europe for a while. And if you can draw any comments how the penetration of services and the type of aftermarket compares here for these trucks so far. versus what an ICE of the same age would be. Thank you.

Thank you, Daniela. And first, I mean, obviously, for the board, it's always a discussion about the balance, I mean, on the size of the dividend overall. And then, I mean, if there is room also for an extra dividend, I think in this area also, I mean, for the board, it's just really important to continue to reaffirm, so to speak, the belief in the underlying improvements by increasing the ordinary dividend. that has been done from 6 to 6.5 and then also then doing a judgment on the extraordinary with the considerations that we discussed I think it's also important to remember when we discussed also this year last year and also actually the UD transaction that again I think the group is in a good way showing so to speak, the attractiveness in the short run, but also leading, having the maneuverability and act from a position of strength that will serve our customers, our colleagues, but of course our shareholders in a very good way.

I can also add from a more pure financial perspective that the ordinary dividends have been up for the last year around 40% of the net income. It's not the policy, it's the behavior. And we have the last year has been dividend out the full cash flow in industrial operation. And that is the case also this year. And then, of course, we have sort of the cash left, which we were into what we need that for.

And then, Daniel Olsson, EV, thank you for that question. As you said, it's early days, but what we see is, of course, that we are. more going into solution type of sales. So all of our vehicles are sold with what we call the gold contract that is the full containment of repair and maintenance parameters, financing, but also additional parameters then of course that are included so to speak in services of charging and battery and energy management. So far we feel really that our anticipation that this will be a step change in the service piece because it will be more of solution sales or following the plans that we have. So we are looking forward with excitement to that. And that is coming also with the customers really wanting to do the journey together. And many of them want to have that comfort, that peace of mind, more of a cost per kilometer or cost per ton, et cetera, and that type of solutions so they can feel good about it. And, of course, also the importance of the, upcoming carbon pricing more and more that not only on an external, you know, emission trading system type of view, but that we see, as I refer to, that a lot of customers also putting internal carbon prices. So very exciting. So this is a development that will continue, as you said, and promising also when it comes to the auto market.

So thank you. That concludes the press conference for this quarter. And with that, we hope to see you next time.