AB Volvo (publ)

Welcome to the Volvo Group press conference on the first quarter. My name is Kristi Johansson, heading up investor relations. With me, we have as usual, our CEO, Martin Lundstedt, and for the first time, our new CFO, Tina Hultqvist. We will do as usual. We'll start off with a presentation followed by a Q&A session. And with that, over to you, Martin.

Thank you, Krister. And also from my side, Dan, a big welcome to this first quarter business update from our side. And also, as Krister said, I'm really glad to have Tina also with me for the first time as our new group CFO. It has been a strong first quarter, but before coming into the business update, let me start with the ongoing war in Ukraine. That is, of course, devastating, and my thoughts go out to everyone who is suffering. We are doing in the group, among colleagues, what we can to support colleagues in the region, families, communities, customers and business partners that are affected by the war. There are many examples of our colleagues in the group in and around Ukraine going above and beyond expectations to support victims of this humanitarian catastrophe. And we really appreciate all the dedicated efforts done. Since the war started and sanctions were imposed, all production, sales and services in Russia have been suspended. We are continuously now assessing the situation to protect people and assets to the extent possible. Outside of Ukraine in the first quarter the economic activity continued to be good with high transport and construction activities in most markets. Demand continued to be larger than supply and in such times And we have seen that now for a while. So in such times, it is important to keep discipline in the order book management. And we will talk more about the balance between order intake, order book and deliveries in this presentation today. But the bottom line is clear. Order books are more than full. They are healthy and activity levels among customers are high. Gandhi's Quarter also, the whole organization, have been doing a great job by working closely both with customers, but also with our supply chain partners, and thereby riding out many of the challenges we and the whole industry are faced with. I'm very proud to say that the group trucks in this quarter delivered record volumes, record sales, and record adjusted income for the first quarter, despite all challenges, and making us as a group continue to maneuver of a position of strength also into the future. As regards the quarterly highlights then, top line grew to 105 billion Swedish crowns and adjusted for the unit trucks divestment and for currency, the net sales growth was 11%. We delivered an adjusted operating income of 12.7 billion and an adjusted operating margin of 12%, despite our conscious decision to run manufacturing with extra flexibility and thereby also extra costs, as well as a couple of stop weeks due to disturbances in Q1. Operating cash flow was negative in this normally weak seasonal quarter. But Tina will come back to explain as normal also the reason behind that. Return on capital employed in industrial operations increased to 25.3%. And we still see that supply chain constraints remains and visibility going forward is low. But we have also shown that we are working with the right type of methodologies in the organization to continue to mitigate the situation. So albeit all the challenges, a strong financial performance in the quarter. As regards volume development, truck deliveries increased with 15% to 55,600 units and resulting then, as I said, in record truck deliveries for a quarter one in these challenging times. For Volvo Construction Equipment, the deliveries decreased with 33%, linked mainly, number one, with very high comparison versus last year when China was on very high levels. But Volvo Construction Equipment also had some impact from strained supply chains in the quarter, mainly then in Europe outside China. When it comes to The demand for electric vehicles, you see that we have good momentum here. And what is interesting to see now also with the strong movement of science-based targets among our customers and our customers' customers, we see a very, very positive dynamic actually. Because when you're pledging that, you're also going through your different CO2 targets. sources, and you are doing your CO2 abatement curve. And what we see is that many sectors and segments, geographies, and at the end of the day, customers are coming to the conclusion that they need to address transportation and construction activities, which of course is very positive. And that is also building up a strong momentum for further acceleration of this trend here. And I'm proud to see that all the Volvo Group business areas are actually having strong momentum now in their electric business lines. We continue, as you can see here also, to see a positive book to build, both really realized orders, but also when it comes to letter of intents, etc. And that positive book to build and growth rate will continue for many, many years to come here. The volume development is encouraging since we are strongly focused on keeping our leading position in these fields that we are still or that we are having as we speak. Also, when it comes to service sales development, that is also linked with the complete offering, not at least for electrification automation also further on, but you need to have a strong, strong service platform. We see that that is continuing also in a positive way. Strengthening our service business has been and will continue to be one of the key elements and a key priority for us. And we are continuing then to untap the service potential that we have in our installed fleet, but also with new contracts. Currently, we do that on the back of a very high fleet utilization among our customers, but also structurally that we are continuing to have a wider adoption of service contracts among our different business areas. Service sales is on an all-time high level of 25.3 billion. And the growth was, if we exclude them, currency 10%, which is, of course, very strong, where all business areas did show good development. And this is, as I've said many times before, so important for us for number one, we know that the higher service penetration is actually increasing the customer loyalty and retention. And number two, because that is continuing to build an even stronger financial resilience for the group. When it comes to the truck side on the news, despite the global turmoil, we continue to present innovative news also during this quarter. In March, Renault Trucks announced the expansion of their all-electric range and start of sales in 2023 for two truck models now for up to 44 tons. It is the Renault T E-Tech for regional transport and distribution. And it's the Renault C E-Tech for construction activities. Also in March, I'm proud to remind all of us that we also got a very important order for Volvo Trucks North America. They did win an order of 110 cars. Volvo VNR to Maersk for their North American operation. And the deal adds to a previous order of 16 trucks here of the same model and marks actually the sign of the to date biggest single then order for fully electric trucks for Volvo trucks. And this is showing maybe the most important here that the transformation in our customer's operation is now scaling up for real. As regards track market forecast, we keep the forecast unchanged for North America and Europe at 300,000 units on the back of the fact that demand continues to be bigger than supply. So, of course, we have an upward pressure here, but it will be, as we see it now, supply actually deciding the total market. At the same time, we also have the fact that there is a pent-up demand of the more than two years of supply shortages from the truck industry. The Brazilian forecast remains unchanged at the good level. Our forecast for India is slightly increased to 325,000 on the back of a gradual recovery of the Indian truck industry or the truck market. Where we see that in China, the market forecast is trimmed down with 100,000 units, a lower economic activity in general, but also the pre-buy effect before July 2021 has created overcapacity. Market forecasts for all markets are based on current visibility that continue to be low. And that is, of course, related to the significant uncertainty that we see regarding supply chains, but also the ongoing pandemic and the war in Ukraine. When it comes to the truck order intake, we have been restricted with the order slotting during the quarter in order to manage both the order book quality and the cost inflation. Despite this restrictive order intake, we still have an order book that is higher than one year ago, even though that quarter one 2021 had a very high order intake of 80,000 units if you exclude UD trucks. As a consequence, orders for quarter one decreased with 45%. That can look dramatic if you look at the single quarter. But the real reason is that we are restricted to book firm orders due to the long order board and also to ensure flexibility with pricing in this inflationary situation. The rather big decrease is also to be seen in the light of, as I said, an extraordinarily strong order intake in Q1 last year. However, as I already stated last report, the order intake is currently not a good indicator of the market activity going forward. It is rather the size of the order book, the fleet utilization among our customers, the used trucks business, the service business, and the customer finance activities. All these indicators are still on strong and really really healthy levels and thereby supporting the market forecast moving forward. Truck deliveries increased with 17% on the back of really really hard and dedicated work along our supply chains both internally and externally. We are running our manufacturing system on a high level with extra flexibility and we see that this is paying off in terms of volumes and also in positive market share developments in many markets. But of course, the main priority is to serve our customers and thereby create a strong rolling fleet for the future. In Europe, when it comes to market shares, we see that the new Volvo truck and Renault truck ranges that were launched last year are both very well received, and the combined market shares for Volvo Trucks and Renault Trucks was impressive, almost 28%, which is a very strong performance by our brands. Also for the electric heavy-duty market share in Europe year-to-date, we had a level of 55.1% versus last year's 65%. And even if that is a decrease, now when more competitors also are ramping up, which is a good sign, by the way, we still are holding a very, very strong position. In North America, Volvo had a relatively stable market share. Mac was down some 1.3 percentage points linked with a strong ending of last year and thereby a limited pipeline of trucks in the start of the year. But we have seen a gradual pickup later this quarter. In Brazil, we did see a strong start with a market share of almost 26%. And also in South Africa and Australia, we are regaining ground and coming back to really, really good levels. When we moved on to construction equipment, some news here. We are continuing the rollout of the fully electric machines, now also launched in Asia, with South Korea being first out with the compact excavators. We also introduced, which is very important in the decarbonization journeys, as I talked about, a new carbon reduction program, a new carbon reduction service, supporting customers towards carbon neutrality. The CO2 reduction program is designed to be easily integrated into customers' plans and operations, while maintaining also the same focus as before on profitability and productivity, and is so far really well received. When it comes to the market forecast in general, we do see a continued good demand for construction equipment, with the exception then of China. Market forecasts are largely unchanged then. For North America and South America, we are not changing the forecast. We are still reiterating that the market will grow with a midpoint of 10%. And Europe and Asia, we are reiterating that the market will grow with 5% as midpoint. Whereas for China, we are further taking down the market to minus 35%, which is a decrease of 10 percentage points in relation to the last report. And also here, of course, market forecasts are based on the current low visibility. When it comes to orders and deliveries, very much the same story as I've talked around trucks, restrictive order slotting to manage the order book, quality and cost inflation. We have a very good and high order book for markets than outside China. And we have a situation similar to trucks, and we really need to continue to manage this in a good way. So also here, the same story. As a consequence, orders decreased with 42%. as we are restricted to book firm orders. And the rather big decrease is also to be seen as for trucks in the light of a very strong quarter one last year that we are restricted in general. But also, of course, here the rather sharp decrease in China, as well as that has a bigger effect here, also cancellation of orders into Russia. But again, when it comes to the market activity signs, very, very similar to trucks. When it comes to the utilization of machines among our customers, you did see the strong service business development indicating just that. We see it when it comes to the use development, customer finance activities, etc. So all these indicators are still strong and supporting the market forecasts moving forward. Deliveries decreased with 33% mainly related to China but also to supply chain disturbances in some other markets mainly than related to Europe. When we come to buses, orders up with 146% from low levels while deliveries decreased with 2%. What we see now is that with the COVID restrictions that has been gradually lifted, the confidence among our customers are coming back from low levels. And we have seen that trend for a while now when it comes to city bus customers and transit bus customers. But we start to see the similar signs then again from low levels also when it comes to our coach customers related also to the opening up of tourism and intercity operations. We see also this improvement in the bus fleet utilization and in the service activities. In the quarter, Volvo buses received an important order of 566 BRT units to Santiago in Chile. Portfolio Penta orders decreased with 1% and deliveries were up with 8%. We have also in this business area a broad base and good demand across segments and regions. And daily focus here is to continue to increase deliveries to meet the strong order book. On the transformation agenda, lots of things are happening also in Volvo Penta. And one example is that Volvo Penta is conducting now seed tests with advanced hybrid solution for Hurtigruten and their Svalbard new sightseeing vessel. And start operation here in the beginning of May. Volvo Financial Services finally, as you know, VFS has been very, very important, a crucial part of our offering and our whole customer relation during the whole pandemic. But also what we start to see now is how important it will be also as an important lever for the transformation into new technologies and business models. We see lots of good progress in this area. We continue to see a consistent growth in the new retail financing volumes. And again, this is important since we know that the customer relations and retentions are improving when we have customer financing together. We also see a step by step and continuous improvement in finance penetration across business areas. And during the quarter, Volvo Financial Services launched also new services, among them Volvo Pay for Volvo Truck customers in select European market, where customers can easily approve and secure pay for services from anywhere. And that is a very, very convenient step for our customers. And the scope of these services and this payment solution will gradually be expanded and the market roll out will continue. So by that, I end the business update and I leave over the world to you, Krister.

Thank you, Martin. Thank you. That brings us to the next speaker, our CFO, Tina Hultqvist. She will take us through the financial numbers. So, Tina, please go through the numbers.

Thank you very much, Krister. It's a pleasure to be here and it's a pleasure to meet all of you for the first time, especially so in a quarter where the group has a very strong performance, especially also considering the challenges that we've had in the quarter. Let's look a bit into the numbers and starting with sales. We have a sales in the group of 105 billion in Q1. We have higher volumes and sales in almost all markets, with the exception of Asia, where China is coming down from high levels last year. Service sales is also contributing well to basically all the regions where we are selling our products. And it's actually so that service sales is the best quarter that we have ever had in the Volvo Group in terms of service sales. Let's look into the operating income, starting with the adjusted operating income. We have an adjusted operating income in the quarter of 12.7 billion. This excludes then the provision that we have made for Russia of some 4 billion in the quarter. We have had substantial supply chain disturbances, and we are still impacted by COVID in the quarter. But thanks to a lot of work by many colleagues in the group, we have been able to deliver really high volumes in the quarter. We have had a strong focus on price realisation since somewhere mid last year when the inflation started to increase. This has really paid off and we have been able to offset all the material cost increases in the quarter. As we have been talking about in previous quarters, we are investing more money into new technologies and in our transformation journey, both in R&D in the group, but also in our joint venture, Cellcentric. Moving into the capitalization and amortization in the quarter, you can see that we have a somewhat positive impact of this of around 700 million in Q1. This is an area where we usually guide and from what we see right now, we think that the trend that we have in Q1 will continue and we will have an impact, a positive impact of somewhere around 2 billion in the quarter. We also have a positive currency impact in Q1 of around 1.3 billion. This is also an area where we usually guide and when we do the estimation right now, we think that we will have a positive currency transaction impact in the quarter of somewhere in the full year of somewhere around three to four billion. Looking into the cash flow, cash flow in Q1 is negative by some five billion. Q1 is usually a seasonally weak quarter for us. And then on top of that, we have a timing impact on the payments due to one extra payment day. Then, as a consequence of all the problems that we have had with the supply chain, we are building up inventories of components and on semi-finished trucks and machines in the quarter. Then, in addition to that, we are also coming from low levels where we ended last year, building up the commercial inventories and the pipeline to the markets of finished trucks and machines. And then we are also partly suffering from long lead times at our bodybuilders. Mentioning something also on capital expenditures, just as I mentioned on the R&D, we are continuing to invest in new technologies. This has an impact on the R&D, as I mentioned before, but also on capital expenditures. Coming from quite low levels in the last years, we are increasing this somewhat going forward, both in Q1 and for the rest of the year. It's difficult to predict where the supply chain is taking us, but inventory management will continue to be a focused area for us. It has been in Q1 and it will continue also going forward. We have in Q1 had a solid financial position of some 60 billion. We have thereafter in April paid a dividend of 13 SEK per share amounting to 26 billion. But we will also, after having paid the dividend, remain with a strong financial position of some 35 billion. Moving into trucks, looking at trucks, despite the production problems that we've had and the stop days that we have had in the quarter, still Q1 is a record high quarter in terms of deliveries for group trucks. We have sales growth in all regions, supported by higher markets, but also by improved market shares. And in addition to that, the underlying service business is growing well in all regions, and we have a growth in the service business of around 10% excluding currencies. We have a strong operating performance in trucks, and we have a margin of 12.5%, including currency impacts, but excluding the provision that we've done for Russia in the quarter. We have proactively worked with price realization in group trucks, and we have managed to offset the material cost inflation in the quarter. Last year, the truck market in China was very high, and we had strong performance from our joint venture, DFCV. This year, the truck market is down by roughly half, and even if we have been working a lot with cost reduction activities, we are negatively impacted in the quarter from our joint venture in China, DFCV. Looking into construction equipment, also in construction equipment, we are impacted by a significant drop in China. The market there is down around one third, which impacts our operation in SDLG in the quarter. We are also in CE impacted by supply chain disturbances, and we have therefore an impact on the deliveries also in the Volvo segment in the quarter. On the other hand, service sales is growing strong in VC in all markets with the exception of Asia. The lower volumes and the increased material cost of course impacts the performance in the quarter. We will in construction equipment, just as in the rest of the group, continue focusing price realization as we move forward to offset the inflationary pressure. Despite the headwinds, construction equipment delivers a margin of 12.4% in Q1. Moving into buses, buses continues to struggle with low demand, both in the city segment and in the coach segment. North America with complete buses is the market which we do see show some signs of picking up from very low levels though. We do see some signs of increased traffic, which is supporting our service sales. Service sales is coming out strong in the quarter for buses, mainly driven by North America. But all in all, the business conditions for buses are difficult. Despite that, we managed to deliver a result which is on break-even at these low volumes, thanks to a strong work on the cost base within buses. This, if anything, will give us better possibilities to deliver leverage once the volumes are coming back. Looking at Penta, we have good volume growth in Penta, both on engines and on services. Also, Penta has had challenges with the supply chain throughout the quarter and with the inflationary pressure. But even with the challenges, Penta manages to deliver a solid performance on par with last year. And then looking into financial services, as you are already aware, we have press released that we made a provision for our Russian credit portfolio of some 2.6 billion in the quarter. We have excluding Russia, a portfolio that is performing well with low write-offs and low delinquencies. We see a good truck freight environment and we also see good construction activities across the board. We can see that our customers are performing well and also our customers' customers are performing well. In the financial services business, we are, just as Martin mentioned, continuing to invest in new service offerings in order to support our customers in the best way. And that is what we see in terms of operating expenses in the quarter. By that, I hand over to you, Christer.

Thank you for good numbers, Tina. And Martin, how would you summarize the quarter?

Thank you, Krister. No, I think the summary is about first and foremost, it has been a dual quarter, of course, continue to be complex operating conditions. It is emotionally difficult and a lot of hard work, obviously, not at least related to the priority of health and safety for Our colleagues in and around Ukraine continue to have a focus on that, but also very, very strong financial and operational execution in the quarter from the whole group. And what is very important here is, of course, that we see a strong and solid activity level among our customers. We see that through the utilization in the fleet we see that when it comes to our service business that are achieving also record volumes and record sales of more than 25 billion so continue to work on that and then continue to to drive the innovation agenda as well thank you martin and that brings us to the q a session

So we would appreciate if you can limit your questions to two. And with that, we are ready, operator, for the first question.

Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. The first question comes from Tom Narayan from RBC. Please go ahead.

Hi, yes, Tom Narayan, RBC. Thanks for taking the questions. The first one, the Q1 2022 North America and Europe truck registrations were relatively consistent with the year-ago quarter, Q1 2021. Their guidance is only calling for about 8% to 10% growth for 2022. Obviously, you call that pent-up demand and supply issues. really the supply issue is the culprit, not demand. So appreciate that. But if we're trying to quantify the impact of these supply issues in a perfect world with all this demand and with no supply constraints, what would your Europe and North America market total be? Presumably it'd be a lot higher than the $300,000 for each. So that's my first one. And then On these supply issues, just hoping you could give a little color on specifics there. What's the biggest hurdle? Is it just still mostly semis, raw mats, logistics, energy? Just a little more color on the supply issues, if you could. Thank you.

Thank you very much for those questions. Yes, indeed. I mean, as we have stated now for a couple of quarters, when it comes to the total market, it's actually decided by the supply abilities that we see in the industry and related also to your second question. Then obviously we can always talk about what should... The total market look like if we didn't have that. But if we go back in time and see where market's peaking in a very strong momentum that we see now, it is of course considerably north of that. Is that 10 or 20 percent? We can speculate. But I think the more important now is to say, OK, it is. Focus on a very strong order book. That's the reason also why we have been restricted with order intake in order to moderate this. And the reason, again, is that this is our best guess given the visibility that we see right now. What are the different factors for that then? I think you are absolutely right. It is, so to speak, the same type of order. of shortages or constraints that we see. Unbalances in the logistics system, not at least also with the lockdowns in China now recently has continued to propel that unbalance in not at least the deep sea logistics transport. We see specific flows of semiconductors and electronics, but we should understand that in a normal truck, depending on if it's a fully electric or if it's an ICE truck, you have somewhere between 1,600 up to maybe 3,500, 4,000 semiconductors. So it's really a game where we are working supply chain by supply chain, all the tier systems through, etc., And then also in other parts of the world, North America, for example, we have seen also other type of input materials. But I think in that context, you need to take a step back and say, in these conditions, group trucks delivered 55,600 trucks, which is a record volume for a quarter one, showing also that we have the methodologies and the organization and the competence to work with it. internally, but also together with our supply chain partners, and we will continue to drive it like that.

Okay. And is there any visibility on Semi's recovery in H2, or is that still just more of a hope, or is there actual kind of suppliers telling you that?

No, no, but I think you're right that there is, of course, a gradual build-out of capacities when it comes to semis. You have seen those announcements, and I mean, as time goes by, we will see a gradual, so to speak, increase in semis. What we have to keep in mind is that there is a very thorough job to work through also what nodes are expanded, how do you actually follow with your own product definition, etc. That work is going very well, I have to say. We have also reinforced our relation not only with the tier one, but also tier two and tier three that are sitting on a lot of important competence and intelligence and capacities around this. But also, I have to say that I think we will see somewhat a shift also when it comes to, because semiconductors, as we all know by this now, are used in all different type of segments and on the consumer side, on the B2B side, etc., But I think there are reasons to believe that in some areas might be a little bit of a lower demand that will actually be beneficial for us also. But it will be a lot of hard work also moving forward. That's the reason why we are guiding keeping the ambition on high volumes up thanks to the strong order book that we have. And thereby, if we don't see disturbances, then we have not pushed the limit enough actually. We are prioritizing customers here. We are keeping a good balance. Delivering 12.5% operating margin on the truck group is, I think, a sign of strength.

Thank you. Great quarter.

Thank you. Then we take the next question.

Thank you. The next question comes from Klaas Bergwijn from Citi. Please go ahead.

Thank you. Hi, Martin and Tina. A couple of questions, please. First, on the production levels into the second quarter, you stopped production earlier than other OEMs last year by around four weeks. I think you had two stop weeks now in the first quarter. I'm trying to think of the net effect year over year into the second. I know it's very fluid. at the moment, but do you think you need to add even more stop days, Martin, now quarter on quarter because of supply chain disturbances coming out of China, any impact at all from Russia, Ukraine? Let's start here.

Thank you, Klaus. I mean, we are not guiding specifically for what we anticipate in terms of disturbances, basically because we don't yet know that. We are running very close to the limits, obviously, as I said, and keeping a high flexibility. And I think it's important to have in mind that it's both an effect of actually stop days in ordinary planning that we partly are catching up during planning. weekends and others and that's the reason why we have that extra flexibility maneuverability and Tina talked about the somewhat extra cost that we have related to that so two weeks or a couple of weeks as we said it has been sort of the level now for a couple of quarters will it be exactly like that in quarter two I will not guide around that but what we say is that the ambition is continue to to push the boundaries because we have a very strong order book. We have customers that would like to have their equipment. What we see so far when it comes to the capacity constraints and the supply chain constraints is not related to the situation in Russia. It's more related to what we heard or what I discussed before when it comes to the different categories of supply constraints.

Okay. Thank you. My second one is on pricing. We met with Dyna recently in North America, who told us the carriers preferred one big price increase start of the year for them to be able to manage their own commitments better. But I sense your pricing, Martin, has been more gradual month by month. I'm trying to understand how much of this price increase, which was really impressive came through from hikes you did in the second half relative to ongoing price hikes month by month on orders you were already working on that would be very helpful absolutely maybe tina i don't know if you would like to start commenting on the pricing

Yes, we have worked a lot with the realizing price since mid last year. We have done several price increases, both on vehicles and parts. We will continue to do so also going forward in order to offset the inflationary pressure. And we will do what we think we need to do in order to offset all the impacts that we see going forward.

And maybe to add to what Tina said here, what I feel is also that we have, I mean, a very good methodology now. That's the reason also why we have been restricted with all the slotting, actually, because, I mean, in this way, you need to your point clause or to be close to the customers to have a transparent dialogue with them. And in our book, it's not one size fits all that we do at this point in time or at that point in time. We need to have a transparent dialogue. way of working with the price realization even if that is of course always followed by discussions etc with our customers everyone understands that with so to speak the the pressure we have on input material logistics etc we need to realize prices are and to do that in in a in a way where it's understandable, but we are also following and in many cases also that I'm very glad to see in the regions and the business areas being slightly ahead of the curve also. So work well done, but the work that needs to be continued.

Very helpful. Thank you.

Thank you, Claes. And that brings us to the next question.

Thank you. The next question comes from Hampus Engelow from Handelsbanken. Please go ahead.

Thank you very much. Two questions from me. Of course, we can see that the orders were impacted by your restrictions on taking orders. But my question is maybe on looking at current lead times and the run rate that you have managed to achieve during the quarter with the record sales, etc. At current levels, at what time do you think that you would start to maybe accelerate ordering again? Is it like second half this year, or is it even further out into 2023? That's my first question. Second question is relating to pricing. I'm sorry for coming back on this. Would it be possible to maybe quantify pricing cases, even if it has been a gradual process? We've seen prices from some OEMs being up 5%, 8%. And also, if you could quantify that you have actually managed to raise prices on placed orders. Thanks.

Yeah, thank you, Hampus. Maybe I can start then on the orders. And I talked about, so to speak, our strategy around this, but maybe it could be helpful also to take a step back and think about what has happened over the last almost two years now. As all of you remember, I mean, we had... The initial shock of the pandemic meant rather extensive stops in Q2, partly in Q1, but mainly in Q2 2020. At the same time, what we did then, if you remember that, was that we also actually really cleaned the order board. together with dealers and customers and started from much lower levels again because we wanted to really make sure that we had the right quality if and when at that time the order recovery should start. Then we did see that come rather earlier than later, as you remember, in Q3 2020. And if we take Q3 2020 up to Q1 2022, seven quarters, the matter of the fact is that the net order intake has been 440,000. units for group trucks and deliveries has been 340 000 give and take and that is a delta of 100 000 that are since it's net including cancellations into the order board And that means that we now are sitting on two and a half, depending on the markets, at least quarters, because we didn't start from zero, obviously, in quarter three. And that needs to be managed now. And it should be not smart to continue just to fill it up and thereby not be possible to manage, I mean, as we have talked about, the quality of the border board and the cost inflation. And you can even take, I mean, quarter one last year was 80,000 in order intake. And I mean, if we take now the record volumes in deliveries, it's 55,600. So I think that should be giving everyone comfort that the order intake as an isolated quarterly figure is just not a good indicator. It is what you see over the quarters, and it is what you see in the market activities. And that will also steer when we will actually, as you say, gradually accelerate again. And I think we have reasons to come back and be transparent with all of you. How does that look like? If that is in second half or in beginning of next year, let's see. the more important is how does the activity level looks out in the market and how is the order book quality and that brings me to the next question and that's the reason why we have also been working together with our customers we have a very very good view on the order board and in some cases also for placed orders we have had the conversations that we need to do something about it and it has been working really well so I should say that also the order book quality in regard of pricing is working well and the methodology includes obviously also the order board. I don't know if you would like to add something to it, Tina.

No, I think it's a quite complete answer. We are, of course, observing this a lot and we have done quite significant price increases, but we will continue to do so as much as we feel that we need to do.

And also, I think even in a market like this, you have, I mean, two reasons for the price realization. Now, of course, with the cost pressure that we see, but we should also be clear about that we are continuously doing a lot of innovation and revealing new models, et cetera. That is the value-based part of it. And then you have, as you said, the one or two times per year price realization with customers. Generally speaking, maybe just to add one thing on that, if you take, I mean, Tina was into it, I mean, average, that could be good in a quarterly report. I mean, we are on par or slightly ahead of the curve. Then obviously we are watching this very granular market by market, region by region, segment by segment.

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

Thank you. The next question comes from Nikolai Kemp from Deutsche Bank. Please go ahead.

Yeah, good morning. It's Nikolai Kemp speaking from Deutsche Bank. My question would be a bit on the service business. We appreciate that it's growing, but it's also a reflection that there are older trucks in the market and you are driving the older trucks longer, or the customers, and could this swing back next year when there are more new trucks in the market?

Thank you Nikolaj, very good question and you are right obviously there are several factors why the service business are actually on good levels. One factor is to your point the high track utilization and thereby I mean high need for support and services. Number one. But what we should say about that, normally when the vehicle fleet is aging, vehicles are more and more falling off the cliff when it comes to captive services. But we are working, to your point, very actively on that. Now, given the supply chain constraints, there is a pent-up demand on the new truck, and that's the reason why it's so important to continue to focus on getting the volumes up when we have this high market. But one factor, the vehicle utilization among our customers, good news because they have a lot to do, good news because it's good for our service business. other important factor is the structural and very consistent work we have been doing also when it comes to the service contracts in different shapes and forms everything from maintenance contracts all the way up to full-fledged repair and maintenance contracts and even uptime contracts so both when it comes to the penetration as such but also to the wider adoption of service contracts meaning more content per contract so And both factors are playing in now. But having said that, also with continuous good deliveries into the market beyond warranty periods, et cetera, it would be a lot of good opportunities when it comes to the service business moving forward here.

Understood. Thanks. And my second question is a bit more long term. So welcome, Tina. Great to have you on board. Given that Volvo is currently the benchmark in the truck sector in terms of profitability, what would you change going forward?

What would I change? Of course, I will try to contribute to everything that is going on. Of course, what is extra exciting for me is to be a part of the transformation journey, maybe a once in a century opportunity to contribute to. And then it is, of course, all the daily topics that we are working with, and we have touched upon it here. It's the price realization. It's managing parts that is going on in the supply chain. And it is also the more long-term topics, of course, to continue building a good financial position that makes us being able to finance everything going on with new technologies and to continue acting from a position of strength in that journey going forward.

And I have to say also, I mean, it's important to, and I know that you know it, but also to everyone that is listening in, that Tina has been extremely instrumental to our great journey that we have had over the last couple of many years, actually, with your career in different parts of the organization. So continue to build on that and to utilize all that platform will be super important for us. So looking forward to continuous great work together.

Thank you, Nikolai. And then we are ready for the next question.

Thank you. The next question comes from Michael Jacks from Bank of America. Please go ahead.

Hi, good morning. Thank you for taking my questions. My first question, Martin, you mentioned some truck market health indicators outside of order intake that you use to forecast demand. Freight rates and capacity utilization in North America have started to decline in the spot market since the beginning of April, indicating that perhaps your customers are not doing as well as what they were for the first three months of the year. I know this is quite a recent development, and I know it's early days in Q2. But in general, does this typically lead to higher cancellations or drop-off in order intake? So maybe this is how you think about that. And then secondly, just with regards to volumes, at the 2021 earnings call, you expected truck deliveries in 2022 to improve sequentially from quarter to quarter. Is this still the case, given the strong Q1 performance? Thank you.

Yeah, first and foremost, thank you, Michael. Yes, we have also followed and seen early signs of these indicators, early days to say if it will be consistent, et cetera. So I think we need to wait a little bit because also with the geopolitical turmoil, it could be. some, I mean, initial effects, but to be followed to your point. So far, we have not seen any signs in our order activities or in our prospect or discussions. And I think that is related to the fact also it has been an undersupply now for quite many years, both in Europe and North America. So in order to, even if the market or the end market, the truck utilization will decrease, it will still be a supporting demand for the aging of the vehicle. That is how we see it. But to be followed, as always. And that's the reason also why it is so important to have the leading indicators of truck utilization. of course, on the use business, the service business, the customer financing activities. But everything of that is still showing strong and healthy signs. And we are, of course, also working very close with our customers. On the second, I mean, of course, we have seen during the first quarter sequential improvement. So let's see now what that will bring when it comes to the total market. We have also been gaining market share, we should remember here. Not at least in Europe, actually, during quarter one. So let's see what that will actually bring when it comes to the... total market. I mean, for the time being, we are guiding, as we have said, of an unchanged market, but still early days, of course, in 2022 here. And what we have guided is that demand is still higher and it is supply that is putting the pace. Thank you.

Thank you. Then we take the next question.

Here, the next question comes from Miguel Borrega from BNP Paribas, Pakistan. Please go ahead.

Hi, good morning, everyone. I've got two questions. The first one, just a follow-up on truck pricing. Can you help us understand how you're thinking about the new pricing increase? You mentioned there's one or two times a year price increases. We've heard OEMs are going back to their order backlogs and renegotiating a surcharge. So can you provide some color on how much of the Q1 invoice deliveries already have a new price increase and how much more, if any, is there to come in Q2? And is this kind of a one-off surcharge that you're seeing in 2022, or do you think pricing could be sustainable at these levels going forward? And then my second question is on working capital. You talked about a buildup of inventory, but really the delta is from last year comes from the outflow in trade payables. I think you mentioned an extra payment. Can you help us understand what happened there? Thank you.

Yes, maybe I can start. When it comes to the pricing, I think we have done regularly pricing updates since we started to see the inflationary pressure. And we will, of course, continue to do that. We will try to adjust as much as we can as we move forward. It's not regulated in certain countries. specific timings throughout the year, but we are following the trend and trying to offset all the inflationary pressure that is coming. And to the extent it's needed, that focus will continue also going forward in 2022 and beyond. And then a comment on the working capital. Yes, we do have an impact on the payments from one extra payment day in Q1. And that is amounting to somewhere between six to seven billion. But Q1 is also a seasonally weak quarter for us when it comes to cash flows. So we have seen this trend also irrespective of the payment day. We have had this trend also historically that we come out a little bit weaker in terms of cash flow in Q1.

And maybe just to add on it also when it comes to the inventory buildup, I think it's important to understand that during a pretty long period of time now, we've had a very, very low downstream pipeline of finished products that to some extent has been, I mean, Of course, a hassle also for our dealers, et cetera, that would like to have somewhat more planning horizon. So now when we are gradually building up this step-by-step, which is a good sign, then, of course, we are continuing to backfill also the material. Tina said it very clearly in the presentation also. I mean, this is a high priority now in order to also execute on the order book. But we have good control over the pipeline.

Thank you. And then we have time for another question.

Thank you. The next question comes from Daniel Acosta from Goldman Sachs. Please go ahead.

Hi. Good morning. Thanks for taking me. It's actually like two quick follow-ups. One of my questions was on the cash, but more understand the explanations for 1Q. But as we think about the rest of the year, which continues to be a year with the strange supply chain situation, and I guess you would want to restock parts. Should we think about 2022 as perhaps a lower cash conversion year, or do you think that you recover from the 1Q towards the back end of this year? That's question one. The second follow-up I wanted to do was understand all your commentary regarding demand still remaining strong and what's happening on the orders. If you when you look at sort of the inquiries that you had for orders in one queue, if you had been unconstrained, can you give us an idea on how much orders would have been maybe up year on year or any color there? Thank you.

Maybe I should start with the cash flow then. We have a cash flow in the group which is varying in the different quarters and so will be the case also this year. It is very hard to predict where the supply chain challenges are taking us. It's very hard to see where that is going and what that means in terms of inventories. But as I mentioned before, we will continue working a lot with the inventories and with the inventory management. We have done that already in Q1, but that will continue throughout the year. Usually, though, we are having a stronger second half for Q4 of the year. So if that is an indicator, that's the same, I think, also for this year. What is important to remember also in addition to the working capital development is that we are investing a bit more in our transformation activities and in the new technologies and that will to some extent also have an impact in the cash flows for this year.

Yeah, and maybe then to comment on the order intake again. First and foremost, I think what is important to mention here, as I said, to see it in an isolated form, one quarter is not a good indicator now where you don't have the balance in the system. So that's the reason why I put, so to speak, also a little bit of perspective since quarter three 2020. And again, coming back to the figure that we have there, a delta of 100,000 on the truck side to be delivered. And then, of course, if we should have had the full order board open in a quarter one now, it should have been considerably higher due to the fact also that customers, given this inflationary situation, also would like both to hedge themselves, et cetera. So I don't think it's meaningful to speculate. It's more... meaningful to actually see reality how it is now that the order book is on high levels but I should say also on healthy levels when it comes to the quality and how we can manage to Tina's point also the cost inflation and thereby also realizing prices. And we see again that all indicators that are important are still also on strong and good levels. And we follow that. But what is also important is that we are continuing to untap also the service potential. And that is building strong resilience for the group also moving forward here. All in all, I think good control over the different aspects here. Just one add-on to what Tina said about the cash flow. Obviously, now when we have had an inventory increase for quite some time, there is, of course, also a limit to that. How much is meaningful to have in the pipeline? And that is, to Tina's point, something that we are working very actively with also. If you think about, so to speak, cash flow going forward here.

Thank you.

Thank you, Daniela. And then we have time for the final question.

Thank you. The next question comes from Bjorn Andersson from Danske Bank. Please go ahead.

Yes, thank you. If you can talk a little bit about the lead times in the different regions, all the regions that are standing out in any perspective. And then also second, I would like to come back to the noise we have heard from North America on freight availability and perhaps the performance of your customers have weakened a little bit. How sensitive are you, your data on when you are saying that you see that activity is still very strong in also in the U.S. market? It is, I guess, a little bit of a concern or I'm just too worried. Thank you.

No, I mean, thank you, Bjorn. First and foremost, I think when it comes to the lead times, North America, if anything, is sticking out a little bit. And we have been working very actively with our dealers and customers for two reasons. First and foremost, because we have had very... strong order intake previous quarters, as you have seen. We have been forced now to really manage and be restrictive in the order slotting for two reasons, as I said. We know that North America is always a little bit higher in volatility if you're not managing that order board in a good way. And secondly, because it has just been too long, and again, then to have the right order book quality. So it has been North America, and that's the reason why it is, as we got that question also previously, very important to follow it. And of course, we have also seen that there are certain early trends about this. We should also know that it has been an under-delivery into North American market when it comes to equipment for quite some time. Then we are not naive. We have been living through this, and we have a very high and good flexibility into the system. We had a strong used business with Arrow, so we can also follow how things are developing very quickly on the used side. So as always in our type of industry, reason to follow it very closely and come back to it. But if there should be, so to speak, a situation of a weakening market that will come any point in time. We are prepared for that. And also that we have a very strong captive service business now that will also support that. So when that will come, we will be well prepared for that as well.

At least it will solve the sourcing issues. Okay. Thank you.

Absolutely. And that could be one part of solving the sourcing issues, by the way.

Thank you, Bjorn. Absolutely. That finalizes the Q&A. Then I have only one more important message, and that is that please join us for the Capital Market Day on the 22nd of June, either here in Gothenburg or on the web. So with that, thank you very much for watching.