AB Volvo (publ)

Welcome to the Volvo Group third quarter presentation. Today, we will do as always, we will listen to the presentations by Martin and Jan, and we will follow by a Q&A session. And we will have questions both from the line as well as from this room. So with that, I hand over to you, Martin.

Thank you. Thank you, Johan. And welcome to you also as new head of investor relations. And a special welcome to Mats Backman, our new CFO also. So it's good to see you here together with Jan and myself presenting today. Most welcome, also from my side, to this Q3 2023 reporting. Summary, Group continued to deliver strong performance in the third quarter. I'm proud and humbled to present strong growth revenues, continuous. increased the deliveries of trucks in turbulent times, a service business on solid levels, and third quarter record levels for operating income margin and return on capital employed. On ROSE, as a matter of fact, it was an all-time high ever done, rolling 12, that is the metric. Strong outcome, of course, thanks to great work by all colleagues and business partners across the globe. And also in this quarter we have put priority work closely with our customers and to stick to our priority of delivering as high volumes as possible to support their demand, continuous demand of equipment and vehicles and continuously deliver on the solid order backlog. Our service operations continue, as I said, on solid levels, supporting the uptime and performance of our customers' rolling fleets. And we still see transport and infrastructure activity out in the markets remain on good levels in most of our markets, but we are also gradually now coming down from recent peak levels. As already communicated in conjunction with quarter two, this is highly anticipated and it means now that we are entering into a more normalized demand situation for new vehicles and equipment on a platform, as we've said, of record strong profitability and high operational performance. And our first forecast for the 2024 total market is also in line with this normalized demand, and we will come back to that later in this presentation. If we then move into the highlights, Group continued to deliver strong sales growth and strong results. Sales growing to 132 billion in the quarter, that was plus 9% FX adjusted. Adjusted operating income growing to 19.1 billion, corresponding to a margin then of 14.4%. Operating cash flow was hampered partly by higher level of working capital, but everyone should remember that quarter three is always a seasonal weak quarter, obviously, coming in on then 5.6 billions. And when we look at the year to date then 23.2 billion. Return on capital employed as I said record strong of almost 34% and also earnings per share increased and up to almost 7 kronor per share. When it comes to volume development, we increased despite turbulent times. Our truck delivers by 4% to 55,300 units. And as I said, I mean, despite continued supply chain constraints, a little bit better than quarter two. So I've said quarter one a little bit better than quarter four last year, then quarter two a little bit worse than quarter one, but now we are seeing better again. So still, I mean, we are maneuvering in the archipelago here. Deliveries of construction equipment declined by 21% to a little bit more than 13,000 units done, mainly driven by low deliveries in China. and for the volvo brand we can also see deliveries hampered in europe by supply chain constraints and also logistics actually not at least the rural capacity that still notice in balance roll on roll off capacity for complete equipment but still i think given the complex situation good job down here Electrification orders and deliveries continued to increase year over year as an increasing number of our customers are now entering into decarbonization journey to meet their mid and long term targets. Not at least also transport buyers are more and more keen on actually getting hold of transport capacity. It takes time but we see that this is a strong momentum. And as I said already in conjunction with last quarter, to reach full acceleration and full offtake, the whole electric ecosystem in the society needs to go hand in hand here, to move from this brown platform up to the green platform. Everything from grid capacity, charging, uh incentives and having visibility around that as well as we we am deliveries such as ourselves to customers supply chains are still too mature and when you are building up that obviously you will encounter i mean traps in in in the road so to speak but but all parts of the value chain must here continue to mature and we are working hard on that And as one of the first out, I think this is one of the key things that we want to see also, that we are together with all partners learning now how to continue to accelerate. But if you look in total, electric orders increased to 1,600 units in the quarter. A yearly pace close to 6,000 units while electric deliveries then for the group increased to 1,100 units in the quarter, I should say. When it comes to vehicle and machine sales development in value, strong sales growth for the group, plus 9%. Currency adjusted vehicle and machine net sales above 100 billion in the quarter, with strong growth in trucks on the back of a combination of primarily commercial conditions. And also partly, as I said, already before volumes. So very strong development here. And the decline in VC then on the back of load deliveries in primarily China, as we said. Service sales development, very important for us. We had continued good demand for services with strong growth, plus 10% FX adjusted. This is also the result of a number of factors, but I mean primarily the improved commercial conditions. But also, we should remember that together with the continuous high activity level amongst our customers. And the efforts that we have done now in quite many quarters as regards contract penetration, repair and maintenance contract penetration and other services are also of course paying off step by step. Very important piece of the puzzle here. And the group is pacing 12 months rolling at a service level of 125 billion. Volvo buses continues to show strong service sales development as people travel or gradually coming back. They were more severely hit as you remember during the pandemic. Strong VFS or Volvo Financial Services growth from a growing business portfolio supported also of course by higher interest levels. So all in all, good result for services. When we move into trucks, truck news, quite many of them this quarter again. Renault trucks to start now is following the start of the heavy duty platform for Volvo last year. taking orders for their Renault trucks, E-Tech versions both in the T-version for regional haul and regional distribution and the E-Tech C for urban construction. And these vehicles are up to 44 tons then and will go into serial production now in November in Bourg-en-Bresse in France. Another milestone, a very important, Volvo Autonomous Solutions, still one of the smaller business areas but with great prospects, has entered a long-term collaboration with Boliden to deploy complete autonomous solutions, you can see that on the slide here, based on the Volvo Group in-house developed virtual driver and Volvo Trucks then premium truck range. In August, for a similar application, we also now removed the safety driver in this type of solution at the Brunnøy limestone quarry in Norway. And that is of course a true milestone, because now we are up to autonomous operations in that quarry. Also, Volvo Defence has entered into a seven-year framework agreement for deliveries of our Volvo FMX trucks to Estonia and Latvia Defence Forces. And the agreement also includes comprehensive spare parts and maintenance programs. Another very exciting news is that Volvo Group, Renault Group and CMA CGM Group, the big shipper, will join forces to address the growing needs of decarbonized and efficient logistics for zero emission last mile deliveries. In general, last mile delivery solutions is, as you can understand, a fast-growing transport segment linked to the long-term trend of, amongst others, increased e-commerce across the globe. But it's also currently seeing lots of challenges. In addition to make this transport zero emission, It is also about improving work conditions such as ergonomics, stress levels, but also planning and efficiency as well as support service to guarantee uptime and quality. The base for the cooperation is an all-new generation of electric software-defined vans. that will be combined with complete end-to-end solutions of digital and physical services, where we can leverage, so to speak, the complementary strength and not at least the strong service and support networks across markets, since these are truly B2B solutions, obviously. and the new co builds on the already long and successful partnership between renault group and the volvo group through our arm renault trucks in the light commercial vehicle segment where we have been growing successfully over the last years and see a further good potential not at least with this new co When it comes to track market forecast, maybe the most important slide. I assume we will see a number of questions coming from all around the globe here. Let us start with North America then. For North America, 2023 forecast to start with, unchanged at 330,000, which of course is very strong levels. And for 2024, we are forecasting a normalization, I should say, because you can see that also coming down to, as you can see here, coming down to the trend line of around 290,000. For Europe, 2023 forecast is increased by another 10,000 units up to 340,000 units. Of course, also related to supply chains gradually getting better. And for 2024, we reiterate our view of normalization of the market. And also here we forecast a market over 290,000. That is also in line or on par with the long-term underlying trend line, as you can see here. So... It is important, I think, to remember that the forecast for 2024 still represents good levels. For Brazil, 2023 level is kept at 80,000. We have seen a correction there for different reasons and not at least the change from Euro 5 to to Euro 6, and I will come back to that. And we also forecast the market to remain at 80,000 for next year. For India, we reiterate the level for 2023, and forecast that the total market will increase to 440,000, so an increase of 40,000 units for 2024. And for China, the forecast is somewhat increased already for this year and a further small increase still on rather low levels for next year up to 700,000. When it comes to truck orders and deliveries, we continue, even if I mean it's a little bit change pattern, to be somewhat restricted by gradually opening the order books in different regions. Depends a little bit where we are, but still I mean super important to manage the cost inflation pressures and cost balance overall, but also to strictly manage inventory levels in the entire value chain. As we continue to see, as I said, the anticipated signs of markets in Europe and also somewhat in North America that are normalizing. All in all, we had a book to build in the quarter that was 0.85 or 85% and also in line with the year 0.86, I think it is for the year in total. But also remembering that we have been entering this year with very high order backlog. We will, of course, in that regard, continue now to make sure that we have the right balance between order intake, production, inventory and deliveries, so we have an order book with the right quality to manage delivery reliability and the need of continuous volumes while at the same time managing inflation, as I said, and also other uncertainties. We continue to keep a high level of flexibility to manage any mid-term changes in demand and have a built-in flexibility. Truck market shares, when it comes to market shares, starting with North America, Volvo and Mack have been affected by specific supply chain constraints over the year. And reported that already in quarter two. And now we have a combined market share of 15% year to date. When it comes to market shares in Europe, Volvo and Renault in combination are on a good level of 26%. A somewhat decrease. We had a very strong development last year, as you remember, because we had a good ability to deliver. But still 26% is really good for us. And also market share on battery electric up to 68% than in Europe. Volvo's performance in Brazil also very strong, almost 24% historically strong. We had a weaker start this year because we didn't have a lot of Euro 5 trucks in the pipeline. We deliberately took that decision and therefore market shares were hampered in the beginning, but now we are catching up and we see a strong market share position for Euro 6, almost 30% actually. And also Australia, I have to comment, an important market for us. Volvo and Mack in Australia performed well, and 26% combined, that is also historically high. Construction equipment. We continue to roll out also the electric executions in VCE. Not at least in the very important, I mean, 20 ton plus segments, the 23 ton electric excavator. We have been rolling that out first in Norway, but now we are continuing in key markets such as UK, France, Sweden, the Netherlands, to mention a few. And also along with EC230, VC is now also offering a more comprehensive solution with a new power unit, as you can see here. And that is a power unit or a power bank with 400 kilowatt hours and brings power to sites with weak or no local grid. And can also serve, of course, as a smart local grid cost arbitrage by charging when commercial conditions are favorable along the week. And I think all of you are familiar how that works and the opportunities around that. Market forecast for construction equipment. There is a continued growth in North America, while the European market is expected to be flat in 2023. China continues to contract, so very much in line with what we have said. And for 2023, we are not changing any of the market forecasts in relation to what we already reported in Q2. When it comes to 2024... Our first guidance then. In Europe, we say minus 10% as midpoint in our guidance range. And in North America, minus 5% as midpoint. So up 5% this year, down 5%, but still on solid levels, and also for Europe, obviously. South America plus 5%, Asia excluding China minus 10% and a somewhat further contraction in China as well than minus 5%. Book to build and orders here continue good demand as we said in North America supported by infrastructure projects while demand in Europe softened somewhat then and in accordance with our guidance on the back of higher interest rates, weaker macroeconomic outlook, as you know, building segment outlook weaker etc. But an overall order decline of 27% mainly driven by China as well as cautiousness among customers and dealers in Europe. So it's of course I mean a little bit of an overreaction we see here now in order to balance so to speak also the pipelines. Elevated order numbers in North America as the dealers now are allowed to place orders for first semester next year as well as very weak comparison with the last year's similar quarter and that again now is really how we open and manage, so to speak, the order board. So the very strong order intake comparison there plus 196% is also that should take, I mean, a little bit wider look on that. And I think in this situation, the overall market guidance is maybe more important than the ordering per se, quarter by quarter, both for trucks and construction equipment. Deliveries declined with 21%, as I've already said, mainly then related to China and somewhat the supply chain and logistic disturbances for Europe. Buses orders increased by 6%, so it continues mainly driven by improved demand for coaches and electric city buses. And deliveries increased 4%, mainly driven by higher volumes of coaches in North America than both Canada, US and Mexico. Book-to-bill in quarter three was 112% to 1.12. And during the quarter, an agreement was signed with the Egyptian bodybuilder MCV. We are already having a very successful cooperation with them for the UK markets, but now also for the Volvo 7900, normal and Arctic versions, as well as an electric body also for intercity traffic, supporting the new business model and the turnaround for our European business that we announced in quarter one. So very important piece of that puzzle. And Volvo buses also continues their electric sales momentum in UK with electric bus orders, in this case from two operators. And they are based on the same global BZL electric chassis. So in that sense, I mean good quality and momentum for buses. Volvo Penta, orders decreased by 28%. Similar, you can see demand coming down across segments. Marine pleasure and marine leisure segment below 40 feet primarily. Also industrial segment, similar pattern as we see in construction equipment and trucks. but partly offset by continuous strong demand and strong demand in the marine commercial segment and that is of course related also to for example the built out of offshore wind farms. Deliveries decreased by nine percent in the quarter on the back of continuous supply chain disturbances. We are still struggling here and we have a high order board that we need to continue to execute upon. Volvo Penta is also currently reinforcing and focusing its sales and service network in the growing industrial segment. We have, as you know, over the last five, six, seven years been very successful in actually growing the industrial part of Volvo Penta. And now we are focusing also more and more into a specific industrial service network. And as one example now, during the quarter, we have appointed Swecon, the current VCE dealer for Sweden. For the services and sales into that segment. So that is also coming along neatly for our customers to have complete solutions obviously. Both here and now but also for future renewable propulsion systems. Finally, VFS, record business volumes for the third quarter. Volume was 29 billion in comparison to 25 billion in the same quarter last year. We see the net credit portfolio growing to 255 billion. And portfolio performance continues to be good since our customers' financial health is overall good and with good payment discipline. So by that, that ends the first business update. So Jan, I leave it to you for the financial update.

Thank you, Martin. After the last two quarters, I have frequently got the question from you, is this the peak of the cycle? And if this is the third quarter where we have low deliveries with an adjusted operating income of 19.1 billion and a margin of 14.4%, if that was the peak of the cycle, then I'm fine. Similarities from the last quarters can be seen also here in the third quarter, as price realisation continue to be good, mitigating then the cost pressure from salaries, inflation and also from the transformation. And we continue to have supply chain disturbances, but sequentially lower and also compared to the third quarter last year, lower. If we move over then to the income statement and the top line, the increase of net sales was 15%, but of course positively impacted by FX, as the Swedish krona was weak against all important currencies for Volvo. If we take away FX, it's 9% of an increase, and that is mainly related to price, partly offset then by the lower deliveries in construction equipment. As you can see, the increase was substantial in Europe and North America, whereas the low demand level can be seen in South America then and in Asia, of course hampered by the low construction equipment deliveries, but partly mitigated then by other business areas that had more increases of deliveries in Asia. Moving over to the earnings as such then, despite the volume that was on par or actually a little lower in the different business areas compared to the third quarter last year, we delivered an impressive financial leverage, FX excluded then, of over 50% in the quarter. So as I said, 19.1 billion of adjusted operating income and 14.4%. And similar to last quarters, we are maneuvering in an environment of inflation and transformation by adjusting our commercial conditions to mitigate these cost pressures then. And we continue to be successful with price execution, both for vehicles and services, also here in the third quarter. And that contributed positively to the improvement. And on the negative side, we have the higher per unit cost in our own production as volumes are stable or decreasing. At the same time, we of course feel the pressure from the general inflation and the salary increases. On the positive side, we see freight costs coming down slightly, both as an effect of less of rush transports, but also that the freight tariffs are going down. The general inflation salary increases are of course impacting all operating expenses. Besides this, the ambition we have to be in the forefront of the transformation with electrified autonomous vehicles, but also on the combustion engine side, that of course needs more resources, more activities, and thereby higher costs, and that is seen in the selling expenses and R&D costs. And we had actually a positive net capitalization effect of 0.4 billion in the Third quarter we expect similar positive net capitalization effect also in the fourth quarter as you can see on the slide Nothing about sort of material costs, which has been sort of something we have talked about a lot the last quarters, but the fact is that we are on a similar level as the third quarter last year, where we have positive effects coming from raw material, offsetting the negative effects on the material costs as we are compensating our suppliers for their inflation and their salary increases. We got a positive FX effect. of 1.2 billion in the quarter then, where a limited part of that was the transaction exposure, and for the fourth quarter we expect transaction exposure to be neutral, and we do not give any full guidance of FX effect for the fourth quarter. During this quarter, we also then divested our entities in Russia that had been put on hold since the Ukraine war started. And that gave a loss of close to 800 million in the quarter. And that has been classified as a significant item affecting comparability and thereby excluded from the adjusted operating income. And you can find that effect in group trucks and in financial services. As Martin were into cash flow, third quarter is a seasonally weak cash flow quarter. When productions are low and we are paying down the trade payables. That in combination with the high volume we have, supply chain disturbances, but also the fact that we are gradually ramping up our battery electrical value chain, that put mark in our operating cash flow as inventory continue to increase here in the third quarter. All-in-all operating cash flow in industrial operation, 5.6 billion. And of course, as Martin was into, the focus now is, of course, to take down the inventory, both at our own factories, but also, you can say, the second production line we have at the bodybuilders, so that we can adjust the inventory level to the lower future demand. Then the positive operating cash flow was also the reason why we had an increase of the financial positions to 65 billion at the end of the quarter, and return on capital employed, as was mentioned, 34% on a rolling 12-month basis for industrial operation, and that is, of course, reflecting the strong earnings the last quarters. Then we move into the different business areas then, and start with group trucks, where we have an increased efficacy adjusted net sales for group trucks of 13%, price execution, and of course also the 4% increase of deliveries are impacting here. And price realisation was the main explanation behind the increase of results in group trucks, an improvement of 6.7 billion in the quarter to 14 billion, giving an adjusted operating margin of 15.6%. That must be considered very strong for the third quarter. Similar to the group, the headwinds came from the higher unit cost in production, as salary increases and general inflation impacted negatively, partly then, as I said, compensated by lower freight costs. Supply chain disturbances continued, but were at a lower level than the third quarter last year, and the general inflation and salary increases are impacting also, of course, on operating expenses and that in combination with the high ambitions and activities we have around the transformation impacted negatively on selling and R&D expenses. And we had a positive FX effect of 0.9 billion for group trucks. Moving over to CE, we have talked about it before, total deliveries continue to decrease in construction equipment, mainly related to China. We have an FX adjusted net sale decrease of some 4%. Of course, the lower deliveries, but then partly compensated by the higher prices in general, and also the improved mix we have of brand and markets as we are selling more of Volvo heavier machines in North America and in Europe, where the commercial conditions are better and comparably less than Chinese machines, where we have a very tough price competitive environment. And of course, that is impacting our STLG brand quite substantially. The positive price and the mixed effect impacted adjusted operating income positively, but not fully compensated for the lower deliveries, then impacting both as less gross income, but also difficulties to handle the absorption of fixed costs out in the production. Also here, the general inflation salary increases are putting marks in our operating expenses with then on top of that high activities on the sales side in construction equipment, we got the negative effect on the selling expenses. More or less flat adjusted operating income, 3.7 billion, giving a margin of 15.4% and a small positive effect on currency in the quarter. For buses, we continue to see an improved business environment. The high activity level was seen in our service side, in the service revenues, and this together with the general price increases impacted them positively on FX adjusted net sales up 6% and of course on the earnings. Despite the supply chain disturbances that we had on buses, production efficiency improved, contributing then positively to the increased adjusted operating income. The increase was more or less 240 million, up to 340 million, and the margin of 6.3% for buses. We have a little more pressure from the material cost, but we also had a positive FX effect of close to 100 million. And also Penta experienced supply chain disturbances, and that impacted engine volume and impacted the production efficiency negatively. Higher prices and a favorable mix with more of heavier machines, heavier engines impacted both net sales and the earnings positively, whereas then the cost pressure from material and the high activity on the sales side impacted negatively, besides the already mentioned production efficiency. Net sales up 5% for Penta, FX adjusted, and an adjusted operating income of 790 million, and an adjusted margin of 15.9% in the quarter. And also here we have a positive effect of FX of, in this case, likely over 100 million in the quarter. Then we move over to financial services and as I said earlier quarters, the numbers in this slide has been then restated to exclude the Russian and the Belarus operations in all the quarters. And similar to earlier quarter this year, we see then that the high deliveries and improved prices are of course impacting positively on the portfolio growth for financial services. New business volume increased 13% FX adjusted. in the quarter and we, as Martin said, ended the quarter with 255 billion of credit portfolio. The fierce competition from banks and leasing companies continues and is putting pressure on the earnings but also on our penetration that were a little lower on the rolling 12 months basis than last year, 27%. And also, as mentioned, customers' financials and payment performance are good, and that's also why we have low write-off levels and low credit expense levels. And the improvement of adjusted operating income of up to 1 billion 62 million was then mainly related to the portfolio, partly then offset by the spread compression, and we also had small positive effects from FX in financial services. So, before I let Martin summarize the quarter, I would like to do a little summary by myself, actually. I have no handing over the CFO role to Mats, as you heard. And the figure I have in front of me is 280 billion SEK. of operating income during 63 quarterly presentations that I've done as a CFO for a listed company, where of 190 billion have been during my four years at Volvo. As they will say in my hood's respect, And now I would like to thank you, of course, for a very good cooperation and good luck to you with everything going forward here. And now, Martin, it's up to you to summarize the third quarter.

Thank you, Johan. I did see that you became a little bit emotional there. That's good. We need that more in finance as well. No, no, but great, Jan, and we will continue to work together, obviously. But if we come back then to this quarter for the Volvo Group, so in summary, I'll be short here, but despite... Extremely challenging and complex global conditions as you all are aware of. Proud and humble to present another strong quarter for the group on behalf of all dedicated and passionate colleagues in the Volvo Group. We continue, as I said in the introduction, to work closely with our customers and to stick to the priority of continuing to deliver and to execute on the order backlog, even with the extra cost that comes along and that we have seen also in this quarter. At the same time, we are focusing on the right balance between orders, production volumes, inventory levels and deliveries by having a high degree of flexibility. And we see that transport and infrastructure activities continue at good levels in many of our markets, but also that we are now gradually entering into a more normalized demand situation, and that is reflected in our total market forecast for 2024. With high operational performance and profitability resulting in a strong financial position, we also continue to prioritize innovation and investments to stay in the forefront of the transformation of our industries and markets. The importance of performing today to be able to transform for tomorrow has never been more important and will be decisive for the years to come. And this ability to both perform and transform should benefit our customers, colleagues, shareholders and also hopefully society as a whole. So by that, Johan, I leave the word to you to lead the Q&A session.

Thank you very much, Martin. Very good. Thank you. Yeah, thank you for that, Martin. We will start with the Q&A session, and we'll start here in the room, and then we'll take some on the line. Erik, please go ahead and limit yourself to two questions, please.

Two questions. Okay, thank you. The first one on preparing. Let's say that those 2024 end market assumptions are correct and you perform about in line with the market and volumes down then somewhere around 10% or maybe a bit more. How are you preparing for that in terms of staffing and costs and so on? And what kind of profitability contraction alone from that volume drop? And then the second question would have to be on electrification then. And the future, as you said, we're getting some of the statistics now from the efficiency and performance of a well-known US, I guess in truck terms, startup. And it looks pretty impressive. And it brings to mind whether or not you're about to change the thinking of maybe doing an electric truck from scratch, given the aerodynamic benefits that that could come with.

Thank you, Erik, for those questions. First and foremost, as you said, I mean, if we start with 15%, so to speak, correction here, obviously, I mean, we have the flexibility system to handle that. And we should not forget about the fact also that we have had a situation now where we have really pushed the system really hard with also utilizing the flexibility tools that we have, both as regard bank or time banks, that are pretty filled up now, if I put it like that. And the second piece is obviously also temporary contracts and other flexibility measures. So there I think we are well prepared for that. I think more importantly, it's to be close now to the balance, as I said, between production, deliveries, inventory, pipeline management, also including bodybuilders. So see you not have a double swing, so to speak, and you start to adjust accordingly. And also to, I mean, keep the commercial discipline because we are in front of important investment that we should continue to pursue and therefore also the commercial discipline I think is very important. and then and then you can say that not only that we have had this extra push but that has come also with you can you can say a price on on the operational efficiency and the operational leverage because as you can see in this quarter we didn't see anything of that basically so so there is also room for continuous improvement and at one point in time you need to reset the system a little bit, because even if we have been able to increase volumes, etc., it is still coming to a mean lot of, you know, jam and fix, so to speak. So I think we are well prepared there. Then, of course, when it comes to What is happening now in the transformation, we will see a lot of different type of comparisons. And first and foremost, I'm going to state that it goes always that we have the highest respect. And you should always be on your toes when it comes to competition, both new competition, new geographical competition, but also existing competition. So that is number one, but also that we have high confidence in our own ability to manage this transformation. We have been early out, we have learned a lot. And we see also now how different comparisons are coming out and that we are following very closely. But of course also that some of the comparisons are containing, if I may say so, a little bit of Eppel and Peer's type of parameters because If you take the comparison between passenger cars and trucks, obviously, you have specialized vehicles for different applications. So in that regard, it is very important also to see, okay, how is the full constitution of that solution looking when it comes to range, when it comes to gross combination weight, when it comes to efficiency, when it comes to the weight load, loading factors, etc.? ? charging times, uptime in general, service network, what have you. Then when it comes to the BEV native type of discussion, I think that's relevant. And we are, of course, working in our modular concept of that. And then when it comes to the aerodynamics, it is a little bit what it is when it comes to the North American execution of trucks, given what you have in rules between tractor and trailer. and the European. Now Europe is gradually opening up for that with extended front door, which I think is good for several reasons, because aerodynamics will play a very important role. Having said that, I mean, you will have now, as always, a little bit of fast-moving materia, and you will have a little bit of, I mean, quicker iterations, fast so to speak, generation raise also when it comes to some of the specific parameters. So the race is on, and we will participate in that race. But full respect for what we see in the marketplace.

Very good. Thank you for that, Erik. We're moving over to the telephone line, and the next one is from Daniel Kossas at Goldman Sachs. Please go ahead, Daniela.

Thank you for taking my question. I've got three, and we can take them in turn. So first of all, could you please provide some more color on the expected impact in 4Q from the UAW strike?

Yeah, I mean... Just to give a very short update on that. We are in a situation where we are renewing, so to speak, the contract for primarily Mack Trucks then. That is what we call the overarching contract called McMaster. We've had a good discussion with the unions over the course of this year because it's a very comprehensive contract always. And actually we put forward a proposal that we had a joint agreement around that contract. And then it works like that, that it's voted amongst members and it was voted down. And after that, so to speak, we had this strike starting since a little bit more than one week now. We are working on it. Let's see. So we cannot judge that for the time being. The most important is to find a solution that is acceptable for the parties. And for us, it is very important that this solution that is acceptable, knowing the fact that we are the only truck OEM in North America that is producing 100% of our trucks in United States. Where of competition is producing either a big share or a very big share in Mexico. So of course, for us it's important that we can continue to have a competitive situation, but at the same time, making sure that our colleagues also have good conditions. So we will... We will follow that, but that is where we are now. So to give any forecast, I cannot do that.

No. Very well. Thank you for that. We're moving on to the next question here in the room from Hampus. Please go ahead.

Two questions for Milan. Firstly, on the organic growth in service of 10%, could you maybe elaborate a bit on the pricing there? Is there some underlying volume growth? Then a more technical question is, are Volvo looking at running diesel engine on hydrogen? And if so, is that within the cell-centric collaboration, or is it standalone? And will there be a third drivetrain going forward for being more CO2 clean, I guess? Thanks. Thank you, Hampus.

On services, I don't know if you would like to elaborate on that.

Of course, prices has been a big part of behind the increase of FX-adjusted sales increases on services. With that said, we are on a high level. We are sort of having more and more of contracts, which means that we are securing future revenues for the service side. But if you take a look on the total, the price is much bigger than volume. So we have around 2-4% on volume, but it's not much more of that. That is sort of normal situation.

Yeah, and I think there is more about the long-term trend. As you say, Jan, when it comes to the contract penetration, and since that is gradually kicking in, I mean, after warranty periods, etc., I think that has been super important. But then quarter over quarter, obviously, I mean, it's kicking in step by step. And here we have seen a good price realization. But we are on good levels, and we talked about it also, 8-9. The big recession, you remember that. Then we had, I mean, falling off the cliff when it comes to new equipment, as some of us remember. Then we were down, what was it, 7.5% services. And then we had a lower contract, generally speaking, in the industry. Then when it comes to the renewable powertrains, if I put it like that, we have communicated three parallel tracks in order to cover the global demand and global application demand, and it's better electric than obviously. It is fuel cell electric, so you have the same basically powertrain, but you have different energy sources on board, and that is the cell-centric operation with the fuel cell stack. And then the third is combustion engines with renewable fuels, whereof hydrogen is one of those in the long term, given also different type of applications. That is not part of the perimeter of Cellcentric, because that is the fuel cell stack development and production and commercialization together with Daimler. But on the hydrogen combustion, our announced acquisition of 45%, I mean it's an MOU so far, of the heavy duty port of Westport. fuel systems is in line with that since that technology cooperation is based on you can say renewable technology already today for liquefied biogas where we have a strong position and further on than for hydrogen. And the construct of that is obviously that we would like to see other place coming in also so we can get a good standard in the market on that side as well. because it will not be one silver bullet to be clear here. This is a little bit like, you know, the world of silos so I'm talking about construction industries or cement industries or steel industries or trucking industries or shipping industries and everyone is looking at you know from from the center of the world reality is that we need to look at the world as such and see okay how does the energy mix look like for different sectors different geographies and here I think we have a very very strong platform of addressing the need based on different technologies

Very well, thank you for that. We're turning to the telephone line. The next one is coming from Nikolaj Kempf at Deutsche Bank. Please go ahead.

Yeah, thank you, Johan. Good morning. Nikolaj speaking from Deutsche Bank. And to put my emotions, I think this has been a very strong result, so well done. Two questions from my side. First one is on lead times. You still mentioned that you're a bit more restrictive on the odd intake. Can you update where you are currently on lead times? And my second one is on product cost, because you did mention that product cost has been an issue in the third quarter as well. If you think about a truck for next year, we see higher costs from the labor side, but probably lower input costs from steel. If we sum them all up, would you expect that product costs for a truck will come up next year or down?

Yeah, thank you. Thank you, Nikolaj, for that. Lead times, as we said, a little bit depending on regions and how far out we are. If we look, generally speaking, we are filled up for this year. And then we have a good filling rate for quarter one, and we are continuously gradually filling. that in in certain cases were also so to speak fill up for quarter one so that differs a little bit then depending on the pattern of different regions that is what we mean with still restrictive because we don't want to push fixed orders too far out in time still and what is about now is to to really manage the order board also in a smart way together with both upstream and downstream working capital and inventory levels etc so Not that, I mean, a normal balance when it comes to lead times, but getting there also when you see when it comes to book-to-bill, etc., and it will gradually continue to adjust as we have guided for when it comes to the total market. Then when it comes to product cost, I don't know if you would like to start as we mix the voices a little bit.

Production cost, I mean, we will see the similar things that we saw here in the third quarter, also in 24. I mean, the salary increases are there. They will be pretty high, most likely. in historical perspective. And where we are coming into now to sort of more normalized level means also that we can trim our production system. We from time to time call our way of running the company has been at least related to production, whatever it takes. meaning that we have really really focused on delivery to the customer and on the customer promise, meaning that we have absorbed extra cost and of course now we are coming in a situation where we can take those costs out gradually, which is of course good for the per unit cost. So let's see how that will play out. As I said, it will be difficult to be in a decreasing volume market to take out sort of the salary increases by efficiency. That will be to some extent, but fully it's difficult. On the material cost side and the raw materials, let's see. I mean, it's too early to make any prediction for 2024. But what we have seen now is, of course, very good on the material side, that we are getting a positive effect from the raw materials. uh our so our suppliers they have also to battle with the salary increases the general inflation etc and similar to what we saw in this quarter we will surely have to compensate for for that also to our suppliers uh yeah but yes to add on that i i think because that is often up also as a discussion point and and obviously we have a very professional methodology how do we actually work with that together with our supply chain partners

Because in this situation, it's super important that you're looking into the different elements of the commercial, so to speak, the commercial transaction, because it differs a lot when it comes to the raw material content, the regional type of content, and then obviously the production value add. And also that we're gradually, so to speak, improving our products also, that is upgrading value for us and thereby also our suppliers. But there I should say that we have, in my book, a very professional way of dealing with that also.

But coming back to, I mean, what you talked about before, the persistence on price, it will be very important, of course, coming into 2024, that we will be sort of what we call last man standing on the price side.

Very well, thank you for that. Good value for money, I suppose. Thank you, guys. Agnieszka, next question, please.

Agnieszka Vilela-Nordea, maybe follow up on price realization. I mean, you have been very successful with pricing so far. So can you comment on your expectations for 2024 when we will see the markets cooling off? Do you expect pricing discipline in the industry at large as well?

Would you like to start? No, and we are debating this a lot, of course. Maybe it's strange, but I'm more maybe on the positive side, because I believe with the situation we are in, we have the inflation, we have the salary increases, we have the transformation. We as an industry cannot permit ourselves to decrease prices. This is our funding from the combustion engine side that we need to have. So that's one parameter. And the other parameter is also that there are no more capacity being added into the combustion engine side. On the contrary, every day some capacity is being lost because things are not renewed, not newly invested, more capacity added, etc. So I think there will be resilience. on price side when we come into 2024. And we should also remember it's not sort of falling off the cliff situation, it's a normalization of the market. So I'm pretty optimistic actually that we can be able to manage and handle the price. Make hikes as we have done in 2023, that will be difficult in 2024. On the other side, we see lower costs as well in many areas.

But I think also, I mean, for us at least, it's clear that, I mean, the hunt for the extra volume in relation to the risk for the company in terms of, I mean, the balance between our commercial downstream conditions and upstream conditions are extremely important because, I mean, it has been a long... I mean, scale is often, I mean, a curse if you don't manage that in the right way and volumes and the wrong type of volumes. In the market that we've had now, it has been a hunt of the right type of volumes because our customers have desperately needed that. Now it's about really maintaining good quality of the business in order to make sure that we can fund the transformation and still be an attractive case for our shareholders. I mean, that balance is what is most important for us now. So I fully agree to what you said.

One more from me. On the market shares, I mean, they have been coming down in some markets, and obviously there is some volatility on a quarterly basis, and you're against a quite tough come from last year, but don't you think that you being restrictive in taking orders is a reflection of somewhat lower market shares?

The market shares for us... I should not say that because eventually, I mean, so far it has been, maybe could be one market or two, et cetera, because at the end of the day, when you have a supply restricted market, you're coming almost into, I mean, it sounds not good what I was saying, but you're coming into a little bit of an allocation game. And depending on how we are, so to speak, trying to allocate our volumes in relation to competition, because it's a true competition out there. And I mean, it's a well-functioning market in that sense. Very, very fierce competition. Obviously, in certain pockets, you can probably see that. But generally speaking, it is a little bit what I said, because we are running the machine as much as we can in terms of output. Then it's clear that we have had specific related supply chain issues in North America during the year that has been more related to us than to the industry in general. Which is a pity because we have a very, for the time, not for the time being, I think we have built up a very, very strong position amongst our customers. We have a great product and solution offering. So there we are, of course, addressing that now together with our supply chain partners. But that, I should argue, is where we have been relatively, so to speak, losing out. Europe, 26 combined, historically very strong for us. Australia, very strong. Latin America, generally speaking. Peru, that is, I mean, we can not talk about all markets here, but take Peru, that is a big market for us in terms of revenues, right? We are at 30%, we've never been that high. Yes, supply, supply.

Very well, thank you for that. We're turning to the telephone line, and next one is Claes Berglind at Citibank. Please go ahead, Claes.

Thank you. Hi, Martin and Jan. The first one I have is on the trust model next year, given how you guide. 70% of cost is variable, rest 30% is basically the fixed cost, and you should be able to take that out within three to six months. So it looks like you should be able to handle this volume decline you're talking about quite well. I'm not asking, of course, about a number here, but unless pricing goes below cost, then I think we should have a quite normal drop through at around 20%. A comment here on the flexibility would be great, thanks.

Yeah. No, and as Martin was into, we have an embedded flexibility, of course, in our production system, and we will have to use that. With that said, it has to be similar to what we have done. Now we have to fulfill the customer promise and gradually take out costs and the extra costs we have discussed. And 290,000 in Europe and North America, that is not a bad market at all. We should make good money in that market. So, I mean, we are not so, I mean, we will have to handle that. And we are coming from a very high level. We should remember that as well. So, it's easy for me to say I'm not so concerned. Thank you.

No, no, but I mean, and again, what I think is maybe the most important is to be active, I mean, right now also to read the right signals. Claes, as you always know, I mean, what do we see in terms of, Agnieszka said, also in terms of demand signals, inventory levels downstream, how does it look at the bodybuilders? reminds me a little bit of my mother always getting asked when she was in school with the younger teachers, and they asked, I mean, now I have my new baby, how much should I dress that baby when it's wintertime? And then he said, dress it as you think it should be dressed, and then you take off 50% of the clothes. And it's a little bit the same here now, that I mean, when you get in Segnals, be realistic about the demand Segnals, and act accordingly, because I think in that mitigation, period it is important to really not end up with unnecessary inventory for example because that gives a lot of wrong type of focus in an organization but really to make sure that you have handled that in a smart way and then work with the flexibility that is embedded and of course with the high service business we have of course that is a very nice question we were into what we have seen in the past

Yeah, very quick final one on North America. You're obviously catching up here on orders again versus the market. You were underperforming before as you hadn't opened the order boat. But now we have the strike coming. I'm sure we think about this, Martin, impacting sort of the total Volvo system in North America. And you're catching up now in terms of order intake, but thinking about into year end and the potential impacts.

No, I mean, as we said, it depends a little bit on how the situation will develop here. But I think it's extremely important to have a mid- and long-term view on this. We have been building up strong resilience in North America, necessary resilience in North America after, I mean, many many years and decades of low negative or even mediocre performance and therefore to continue to build that strong business at the same time as we have a fair development here is the number one priority as we speak now but let's see how it will develop but we are we are seeing it very positively when it comes to I mean, to the future development here. We are investing in North America, but let's see how this specific event will develop.

Thank you. Thank you, Martin and Jan. That concludes the Q&A session. All presentation material today will be found on the Volvo Group homepage. Thank you for coming and thank you for calling in. See you next time.