AB Volvo (publ) (VOLVB) Earnings Call Transcript & Summary

I think we have seen so many fantastic results with this so far, not at least on the CO2 side. I think it's fantastic. But we're also talking about new business models. So what kind of business models are we going to use in this?

Yes. Yes. I think, Melker, this is a very relevant question because this beautiful machine, which you see here, is actually not for sale. We're a solution provider, and our product is transport-as-a-service. So we are generating long-term contracts with our customers where the machine, together with the autonomous driving system and the site control system, they form a total offer, which is then supported by Volvo uptime services by site-specific infrastructure and by a state-of-the-art payment solution coming from Volvo Financial Services. And then depending on the customers' choice, the customer can decide to operate the solution on their own or Volvo Autonomous Solutions comes into play, and we operate on behalf of the customer. Now in this constellation, we actually go deeper into the value chain for the Volvo Group, and we are unlocking further value from the site. Now the approach you see here, transport-as-a-service, is common for all the segments we target at Volvo Autonomous Solutions. And let's have a look at the next slide where I illustrate a little bit the markets or the segments we're focusing on. Now to begin with, the market availability of autonomous solutions is different segment by segment. This is driven by the complexity of the technology, but this is also driven by regulations, but also by society buy-in. Now we have chosen to start in the confined segment. Because here, we can demonstrate a very strong safety concept, and we can introduce customers, but also society itself to this new technology, and we do this in a very pragmatic but in a safe way. In this segment, the first one here, quarry and aggregates, this is where we come with our TARA solution. And again, we are making the market here. We are in this market, and we have started to scale here. We have, on hand, a very sizable business pipeline, as we speak, with SEK 1.5 billion. And of course, we know the addressable market is a multiple of that. But also, in this segment, the partnership between Melker and myself comes visible because, Melker, you're actually the one who provides me with the machine.

First of all, Nils, I think it's absolutely the right segment to start with. I think the potential is big here from the beginning. And also happy to see the -- all the cooperation that we have in the group to be able to supply this kind of systems, it's great to see. Coming back to what Martin mentioned earlier about the group's commitment that we have to our stakeholders, about 100% safe, 100% fossil free and 100% more productive. I think TARA is a great example because TARA is not a product. TARA is a great example of the platform and the system that helps us to achieve all of this.

Now I fully agree with your view here, but also with Martin's comments, absolutely. But I also think it's actually good to see the way we're working together here as One Volvo because that also helps us to perform on another level. But let's not forget -- focus here on that slide. I want also to talk about the other 2 segments. And the second segment I want to talk about here, we target the First Mile. This is about autonomous solution for ports and logistics centers. And also here, we are active. We're implementing first pilot applications with our customers. This is the segment -- Volvo's also the third one where we received strong interest from customers all over the world ready to partner up with Volvo. The third segment here, it's on-highway trucking in the U.S. It's also called hub to hub. High potential, large opportunity, a bit further out from a time line point of view and with certain dependencies, but strong focus from Volvo Autonomous Solutions also on that segment that we're able to leverage that segment when the time is there. But in summary, Melker's approach, my approach is the same, and it is clear. We have a strong basis. We are in business today when it comes to utilizing new technologies. We are creating new value for our customers, but also for the Volvo Group. Kina?

Thank you so much, guys. Crystal clear. I really enjoy your collaboration. I must say that. So we have looked at 3 segments: on-road, waste management and building and construction. And one of the questions you might have is, okay, how and when will all this happen? Stay tuned. [Presentation]

So 3 segment deep dives, Martin, your reflection.

First foremost, I mean, I have to admit, of course, that we have rehosted before. But every time I listen to my business leaders or our business leaders, I become really excited about how motivated we are to make this happen. But how will we make it happen? I think that is the most important key. And if you look at this slide, that is demonstrating our way up to -- first and foremost, to the more than 35% by 2030 and beyond. This is, of course, a continuous journey when it comes to the total market that you see here on the black line. But what is more important, obviously, is that the transformation and shift will happen segment-by-segment, market-by-market and region-by-region. And why is it so? Yes, because different segments and markets are better fitted to do the transformation. So you will see here, of course, this is illustrative slide, but you will see, for example, distribution coming in, waste and recycling that we heard, certain areas of construction. But another very important point here, Kina, is when it will happen. When it's a good fit in the market and in a segment, the shift will happen rather quick. And that is how the black line gradually and eventually will be built up here. So what we have heard here now is how our business areas are prepared. They have the rollout of different products. They are ready. They will sell solutions. But one question is, of course, are our technology leaders and our industrial leaders ready to take on the challenge?

Let's bring in those guys, Martin. They are coming here. [Presentation]

There we are. So what we have learned is that once it has started, it will, in fact, happen very fast. And one successful -- success factor that will be to have a robust transformation plan in place that build some strong products and solutions, an industrial backbone and, of course, superb technology. Now Lars, our CTO, would you mind, shed some light on where we stand from a technology perspective when it comes to our transformation?

Absolutely. You have heard today, our commitment to the Paris agreement. You have heard it, our commitment to decarbonize transport 2050. That means 2050, we must have a rolling fleet that is completely fossil-free, 2050. Our products have a life length of approximately 10 years. And that means that everything that we are delivering after 2040 will be part of that rolling fleet 2050. So for us, it means 100% fossil-free from 2040. This is a journey. And the starting point of the journey was, of course, combustion engines. Combustion engines running on fossil diesel with a touch of biofuel. So biofuel stands. What about biofuels going towards 2040, 2050? What role can biofuels play when decarbonizing transport? Can we rely on biofuels? The answer must be no, unfortunately. There will be biofuels, definitely, but we are convinced that the biofuels will be directed towards other industries, other sectors with greater need than ours. Talk about aviation, talking about maritime applications. So there will simply not be enough biofuel available to decarbonize road transport and construction equipment. So the absolute majority of the vehicles around 2040 will be electric. We are convinced that we talk about fuel cell electric vehicles, and we talk about battery electric vehicles. We don't know exactly the mix, the share in between these 2 technologies, but we are convinced that both technologies will play a major and important role. There will be high volumes coming from both technologies. A very high share of electric vehicles here, 2040. That means all of a sudden that target that you heard Martin talking about earlier, 35% electric vehicles around 2030 is, all of a sudden, turning into something completely different than just an ambitious target. It is a bonus where we need to be 2030 on this journey. It is, of course, important to underline that all these electric vehicles, if they are truly to be fossil-free and to decarbonize transport, they must run on green electricity, and they need to run on hydrogen that is produced in a sustainable way. In this area, there is still a lot to do when it comes to investments in production and infrastructure, still more to do from a societal perspective, but we are convinced this will happen. With the majority of the vehicles, 2040, being electric, we anyhow foresee that there will be applications where we will need combustion engines for a long, long, long period of time. And those combustion engines, they will, of course, run on biofuel. That small amount of biofuel that will be dedicated to our industry. We are talking about, for example, HVO, talking about biogas, and we are also talking about hydrogen. But in that context, hydrogen in combustion engines, an area that we are seriously looking into right now with a lot of potential. The combustion engine as such still has a lot of potential. And the combustion engine will be very important for us for a long period of time. With 35% electric vehicles 2030, well, then bonus, simple mathematics tells us that 2/3 of the vehicles by then will be driven by combustion engines. Combustion engine and those vehicles will remain a cash cow for the Volvo Group, enabling the necessary R&D investments and safeguarding a strong financial performance. We know from press tests, we know from customer testimonials that this machine, our turbo compound engine, is leading when it comes to fuel economy, meaning leading already today when it comes to CO2 emissions. On the way towards decarbonized transport, there will be legislative milestones when it comes to CO2 across the globe, in Europe 2025 and 2030, for example. We will continue to invest in combustion engines and into after treatment systems in order to meet those legislative milestones and to stay competitive. There is a lot of potential still when it comes to raising efficiency out of these machines. But the big, really big transformational shift is definitely electrification. This is our modular electric driveline: electric motor, gearbox, prop shaft connected to an axle. We use this very driveline for trucks, for buses, for construction equipment and for Penta applications. It is a very good example of our modular product thinking. We call it common architecture, shared technology. In short, cost. Same interfaces, same components for buses, trucks, construction equipment. This is how we create synergies in R&D, in production and in our service business. But the modular thinking doesn't stop there. For the lightest applications, we use 1 electrical motor; for the somewhat heavier applications, 2 of the electrical motors; and for the heaviest ones, we're going to use 3 of the identical electrical motors. That gives us the possibility to create volumes already now in the early phases of electrification. Today, we use this driveline in our battery electric vehicles, but this driveline will also form the base for our fuel cell electric vehicles. In our industry, the possibility to offer a wide combination of variants is key in order to deliver tailor-made solutions to our customers. This is important independently on what kind of driveline the customer wants. Take axles, applications that demands 2 axles, or 3 axles, 4 axles or even 5 axles. Take cabs, for example, a car transporter, they just need a low roof, so that they can get a car on top of the roof of that cab. A construction vehicle needs a short day cab and a long-haul vehicle needs a big spacious cab with a high roof. The list of available options in combination with each other is in principle unlimited. Now this well-proven variety of options can easily be made available also with electrified drivelines. I dare to say that this broad, well-proven product offering is one of our main advantages if you compare us with some of the new players that try to enter into our industry. The development of batteries is definitely key. This is our cost battery. We use exactly this battery in buses, in trucks, in construction equipment. We use it in Europe. We us it in North America. Battery development is super fascinating. We have just started production of vehicles with the second generation of this battery. It is exactly the same pack, the same box, identical interfaces, identical dimensions. But inside, second generation compared to first generation, plus 35% energy at a lower cost per kilowatt hour. And my engineers, they are now in final development stages for the third-generation, keeping the box, identical interfaces, third generation compared to the second one, another plus-40% energy at even lower cost per kilowatt hour. The pace in battery development is not slowing down. The performance raise is not slowing down. So in such a vibrant, fast-moving area, you should team up with the best ones, and we are extremely happy with our partnership with Samsung in the area of batteries. Battery electric vehicles is one pathway towards electrification. One, for long-haul vehicles and for heavy on- and off-road applications, we are firm believers of that fuel cells will build the technology to use. That will be the solution. Since fuel cell technology is rather new, I would like to share with you an animation showing how it works. [Presentation]

I know that I'm somewhat biased, but that's cool for real. I'm really excited when it comes to our joint venture together with Daimler when it comes to fuel cells. The intention with this joint venture is to develop, produce and commercialize fuel cell systems for heavy-duty applications. By doing this, we will share the cost for the development. And together, we will also create the necessary volumes in order to be able to produce fuel cells because production of fuel cells is definitely a game where scale matters in order to reach the right product cost level. It is right now somewhat of a hype around fuel cells and the hydrogen economy. And it's very important for you to understand that our tough applications means that there is today no off-the-shelf ready fuel cell product. Our tough demands when it comes to continuous power, when it comes to life length is something completely different compared to past course. In this joint venture together, with Daimler now, we're going to use the combined experience from Daimler and the Volvo Group in order to develop fuel cell systems, meeting the tough requirements from our applications. But the joint venture is more than just combining experiences. I see the joint venture also as a statement to society. Think about it, 2 of the biggest players now both committing to fuel cells, committing to hydrogen. It's a signal. It's a direction, meaning that others now dare to step in and invest into production of hydrogen and infrastructure. This joint venture will operate on its own, having agility and speed. We plan to have commercial solutions on the road somewhere between 2025 and 2030. But watch out, we will be out there on the roads long before that with different kinds of trials and pilots. But the fuel cell systems that we develop in this joint venture will just be one part of a fuel cell vehicle. There is much more technology to be developed -- that will be developed in the Volvo Group. Meaning that on a vehicle level, we will -- and we will stay fierce competitors with Daimler and the other guys. And I can assure you that the ambition towards my engineers is clear. We're going to be winners also when it comes to fuel cell electric vehicles. So electrification is happening here and now, today and onwards. We are in serial production in Europe. We will be in serial production in U.S. next year and in the years to come. We have a massive rollout plan. For me as CTO of the Volvo Group, it's extremely satisfying to see how much synergies we are creating across the group, across the different products when it comes to better electric vehicles and when it comes to fuel cell electric vehicles. So Kina, you asked if we are prepared for this transformation? And well, I think the answer is a massive rollout of products in the years to come.

Yes. So the answer is, YES!, with capital letters and exclamation marks, if you. Lars, since I got to know you, and that's quite a few years ago now, I've heard you say many times now is the time to be an engineer. But now I feel that it's really the time to be an engineer.

Yes, I think that you are right. I mean it's obvious for everyone that a lot of the solutions that we will need now will be technology and engineering driven. So yes, this is the era of engineering.

Thank you so much. Thank you, Lars. So as we said, to be able to win this game, we also need a strong industrial backbone and you need to be able to scale. Now I am joined by Jens Holtinger, a new face to some, perhaps. You are the new head of our global truck manufacturing organization, and you will speak about the industrial system as a true asset. But before I sort of kick you off, a common question that we normally get, Jens, is to what extent do we need to invest in new production facilities and new lines to meet this transformation?

To be honest, I think that is a bit of a misconception. And I'm an industrial guy, so I'll give you a straightforward answer. No, we'll not build a plant. It's a big no. Exactly.

Okay, kick it off.

Thank you. Let me talk a little bit how we will do this. And before I start explaining, I think I will talk -- what are the drivers for flexibility in the industrial system. You saw Martin's slide earlier where we talked about segment, starting out segment by segment. Next step will be an S-curve by segment. And on top of that, we will have the region-by-region and the geographical spread. So of course, that will demand extreme flexibility from an industrial system. So how to solve that? Of course, we need to leverage on what we have. So looking at this, you see a fishbone. It's classical. We've worked with it for years. So that's not new as a concept. But what is new is that when we work together and we create this modular electrical product, we can utilize this by also creating a modular industrial setup. So you see these sub-flows where we actually prepare our different electrical components. And then we'll simply mix an electrical truck next to an electrical truck, and we will have them. And what we call this system is mixed model assembly. And then you will actually create a seamless possibility to just ramp up and mix the different modules. So this is a PowerPoint. This is a strategy. But it's happening right now as we speak. We already started this spring. This spring, we started, and we are doing this, exactly what we do. So looking at Blainville, our factory in France, where we have already started to produce our medium trucks. And you see here, we follow a truck going through the factory. And we are preparing them component by component, exchanging that for where we use a diesel component and actually putting in an electrical component. And by that, we are fulfilling and setting up our mixed model assembly. So we are doing it as we speak. I sometimes also get the question, how much do we need to invest? Is it expensive to transform this? And just to give you a little bit of idea on that. If we have -- let's say, we have a final assembly plant. It is capital level -- let's say, we have 100 of index to what its value is. When we add, you say, some of these sub-flows, we add some safety features. We are working with high voltage, very important. We are talking about maybe adding 5% to 10% on investments. But that is the capital value. I think also important to talk about the human capital that we have. So going into our plant that we have here in Gothenburg, our pilot plant, where we are now preparing -- we are, as we speak, again, talking about preparing our heavy-duty range. The FH and FM. We are preparing it for high-volume and with step-by-step preparing it for mixed model assembly. And here, we see, we have our product development together with purchasing, together with our industrial engineering. They step-by-step, module by module, they're preparing this for a very good setup. But I think also going further into this with competence. It's not only about setting up mixed model assembly. I think in very many of our final assembly plant, I would say 95% of the competence that we have today, we will reuse going into the electrical era. The challenges are very much the same, so we will reuse the competence. And I would like also to mention our powertrain system. We are today producing engines, gearboxes, but then take an example of stripping or have the big factories here in Sweden. What is their real competence? Yes, they are good at costing. They're good at heat treatment, machining, high-precision automated assembly, true assets going forward when we go into the new era, and we can look at other components. So we have talked about the segment. Taking off the S-curve, now talk about geography. What we see here is a global map. Starting in Europe, 2020, we are preparing very quickly, we will move out by 2022. We see that we are expanding even further. And by 2025, we will and we have the capability to have a global reach and the possibility to produce electrical vehicles in a global footprint. So to conclude, we will reuse. We will not write-off. And Kina, we will use the same platform and the same plants.

Jens, so what you're basically saying is that from an industrial perspective, your perspective, entering into electrification, it sounds as if it's not harder than a common product launch?

We have a solid organization. We have fantastic people. We will do that.

Very comforting. Thank you so much. It's time to move on again. [Presentation]

So as we have been talking about applications, new technology, new business models, solutions selling all pieces in a puzzle. Now we would like to show you how these pieces fit together and creates that puzzle that will make us, the Volvo Group, our customers and the society as a whole winners in this transformation because it is when all elements come together, that is when we create a true win for all. Martin?

Thank you, Kina. And obviously, this journey will be about following this opportunity and not only following when it comes to the shift from a customer point of view, but be part of their journey and take the lead. And in order to take the lead, it's not about following the black line here. It is really to lead the acceleration that will happen segment-by-segment, market-by-market and region-by-region. And in order to do so, I will take you on a small journey of how we think this will work. The next step is to really look into what we have been talking about, application, excellence and different industry verticals. And if we look at that development, how it looks like, here, you have an example of a number of industry verticals. We are talking about distribution. We are talking about mining in long-haul and construction. And as you can see, we are not only talking about the application and the industry vertical, but we're also talking about different type of geographies and countries. And why is that important? First and foremost, because when you talk about, for example, distribution, you have a certain cost pie consisting of the cost of drivers, the cost of fuel, for the vehicle depreciation, for financing, for insurance and for repair and maintenance. And then you have a different constitution when it comes to mining in Indonesia or when it comes to long-haul in Europe. And why is it so? Yes, first and foremost, because the application in itself drives a different behavior when it comes to uptime, when it comes to uses of mileage and other factors. But also, of course, the different geographies gives also specifics, like salary levels, energy prices, specific legislations and other specific factors. So here, it is a game about really making the tailor-made specification for every customer for their application. So if we take it one step further and talk a little bit about one segment that will really accelerate here and now, and that is grocery retail or food retail in Europe and in the Nordics. First and foremost, because those companies have a very powerful sustainability agenda themselves, they want really to show how they can drive this sustainability to the next level. But they also have a very close interaction with us as consumers and customers. When we are coming to the retail shop, we are already today able to make a number of deliberate choices. And we see how that is accelerating. We are picking the ecological milk. We are looking for packaging that is more sustainable, moving away from plastics. We are interacting with the grocery retail companies about how to minimize the waste of food to do that in a smart way. But there are even more to be done here. And therefore, when you look at this opportunity, here, you see the typical cost shot of a retail company in the Nordics, in this case. Here you see the total cost of this company. And the small piece you see here, approximately 6%, is the transport cost, okay? On this side, you see the total CO2 emitted from this company. And as you can see here, approximately 30% of the CO2 is emitted from transport. So it's a really interesting equation here. 6% of the cost, 30% of the CO2. So if you take that one step further, knowing that here and now with our solutions, talking about the total cost of operation for a battery electric distribution solution, it is today approximately 10% to 15% higher in -- over the life cycle. But what does that mean in reality? It means that 6% transport cost, 30% CO2. And if you take them, the ability to go for 50% higher TCO, what you will get is a total cost increase of 6% in transport cost, multiply by the 15% cost increase, so 0.15%, giving 1%. And so bottom line here, we are talking about a cost increase in total of 1% and reducing at the same time, the CO2 with 100% for transport and for 30% for the global scope of this company. It is just a fantastic equation. And to make it even more tangible, think about us as consumers then coming back to the situation and say, okay, I'm standing in front of this milk shelf. And can make a decision. Should I go for a milk transported in the normal way, costing EUR 1 per liter or should I go for a milk transported in a 100% fossil-free way, paying EUR 1.01. And I think it is a rather simple choice. And that is the logic why this shift will happen here and now, and it will go fast. So if we take this to the next step and expanding transport cost, what are the dynamics moving from diesel to electric. Yes, we need to come back to the total cost of the food retailer. We see here the small piece of transport costs, 6%. And what we do now is to expand that. We expand that, how the constitution looks for diesel, and we expand that how the constitution looks for battery electric to have a view on the dynamics that is happening here. And the dynamics is the following: diesel is constituting of one piece here that is similar regardless if it's diesel-powered or a battery electric. That is related to driver, administration and others. But the right side is where the dynamics is coming in. Here, you have, today, 4 distinctive parts. You have the vehicle depreciation, including the body build. You have repair and maintenance over the life cycle and you have finance and insurance. And finally, energy cost. And for your diesel power truck, it is diesel. Everything here is cost per kilometer and, of course, ballpark figures since everything is very specific for each customer. When you are then moving into battery electric, one very important thing is happening. You are pushing in a new piece here, and that is what Lars talked about, the battery system. That is the energy system containing then the batteries and the surrounding control systems and cooling. A rather big piece of the cost chart here, but the very positive abatement, obviously, is that you're pushing down the need or the cost of energy per kilometer. And the reason for that decrease is twofolded: number one, that the efficiency out from an electric motor is considerably higher, well above 90%, whereas for a combustion engine, even the best one the [ velage ] is doing is around 50%. And number two, because you have also a positive arbitrage when it comes to the energy prices as such between electricity and diesel. And in this case, in the Nordic countries, but that will happen more and more when we are moving into massive renewable investments across the globe. So this is really the dynamics that is happening. If we then take it to the next [ level of ] talk, why could that be a competitive solution? And how will that play out? Yes, then we are coming to these 4 pieces here and talk about them. And the outcome is the most important, of course, providing this as an equipment-as-a-service over the life cycle. And what are the outcomes that a customer expects in order to move from diesel into battery electric? It's a big and bold move. Of course, they expect, and rightly so, visibility on cost per kilometer, to have the same safety standard to have application excellence for productivity, to have the fossil-free execution, to have uptime because here, we are talking about solutions that requires an uptime of 98%. And of course, they require that also moving forward. And in totality, they would like to have peace of mind. And that comes together when these 4 areas are actually combined. It is about vehicle, it is about repair and maintenance, financing, insurance and battery systems. And in order to explain that, I have to go one step deeper. Look at this. I start with the vehicle. What is happening here? Yes. Number one, what are the prerequisites for excelling as a customer. That is to have a tailor-made specification for that specific use, wherever you are in the world. And to get there, you need to have application knowledge and customer context and relations. That is a starting point. And in addition, you need to pull from a modular product system to combine the different elements from the application knowledge to make that tailor-made solution. Lars talked about it. But as Jan said, that is not enough. You need also to be able to scale because when the shift is happening, it will go quick. And not only it will go quick, but you can also combine the force of the scale volumes and thereby cost execution that we are sitting on. This is what we do. The second piece is about repair and maintenance. Even a distribution truck will stand 1 day or 2 in [ modern ] situations in North of Sweden or in Midwestern U.S. or early morning and hot morning in Southern France with fresh food, and something has happened. Then they rely on the uptime services, that you have a dense network of trained, motivated technicians and power people, uptime services through connected solutions, and not a daytime operation, but 24/7, including Christmas Eve. This is what we do. And then financing insurance. It is even more important now when we talk about equipment as a service. We have the infrastructure, customer knowledge, relation and trust, but also the different structures, how to finance this as a solution and to work really close with the customer here. Very, very competent teams on a global scale. This is what we do. And finally, the battery system, 10-plus years of experience when it comes to how to define the battery for each application in terms of durability, in terms of range, in terms of weight, in terms of route optimization, but even more to have an established partnership that we can build a modular platform [ bond ] like with Samsung SDI. And in addition to that, of course, also the circular flow of the battery in order to cost optimize per kilometer and what is required then, obviously, after the first life that we can utilize the battery packs for a second life of, for example, stationary power and recycling, thereby optimizing the full flow and taking down the cost per kilometer for the customers. So if you go back one, I just would like to conclude here. And that is also what we do. So in combination here, we have 4 very important parts. But I will come back where I started. The customer expects equipment as a services with 6 very important outcomes. And it is not about delivering on 75% of all these promises. In order to get to these 6 promises, you need to excel and to deliver of all of them. That is how you create a partnership, a competitive solution and how you make the shift from diesel into battery electric. The good news is that this is also a win situation for Volvo by expanding this into these different services. We will see on the next slide how that is playing out also for Volvo when it comes to revenues and top line. What is happening is that our top line over the life cycle per installed unit is increasing, and it is increasing considerably because the equipment as a service is what the customers are expecting and requiring. And the revenue increase is in the magnitude of at least 50%. This is a true step change. So to summarize, this is a journey that is super exciting, and we are talking about the opportunity of the century. It is a story about growth and it's a story about resilience. Growth because we will do a step change when it comes to market share. We are ready. We are ready to scale, and we are ready to meet the S-curves. It is a step change because the revenues per vehicle during the life cycle will increase with 50% for electric vehicles and with more than 5x when it comes to autonomous solutions. It is a story of growth because at least -- and I say at least -- 35% of our vehicles will be electric by 2030. And it is a story of growth because the underlying need of transportation will continue to increase, but it must be done so in a considerably more sustainable way. But it's also a story about resilience. Equipment as a service and transport as a service will create our journey up to more than 50% of the revenues coming out on services by 2030. And also what is important that it gives an even closer relation with the customers when it comes to penetration, duration, partnership of how to continue to develop this. But of course, the most important about the story is the journey towards a fossil-free society. And for Volvo, shaping the future of transportation and shaping the world that we want to live in. Kina.

Thank you, Martin. This is such an eye opener. I get emotional as well as...

No, but it's so exciting.

Yes, it is.

And I feel that also that energy from the whole organization basically. So this is a story that we really want to share with everyone.

Can you give me your one line summary on all this? Because it's a massive piece to sort of take in.

No, I think the one line summary really is shaping the future of transportation and also the opportunity of a century for all of us, for planet, for people and for also opportunities for driving prosperity. That is what I see. So it's super exciting times.

Yes. I can really see that you are enjoying this transformation. It's an opportunity. It's not a threat. Stay put, we will soon change gear. But first, we have presented you with a lot of information today. A lot of slides, a lot of facts. And everything is available on volvogroup.com, if you would like to sort of dig a little bit deeper. Now it is time to make room for all of you watching. We are going to end this Capital Markets Day with the opportunity to ask questions to our presenters. Let's move on. So we are going to do this the following way. We have several listeners already -- there we are. Let's take it from the beginning. So we are going to do this the following way. We have several listeners that have already queued up, ready with their questions on our business. And we're going to take them one by one.

And the first one is actually Hampus Engellau from Handelsbanken.

2 questions from me. When we have this type of a paradigm shift in the industry where you're changing towards more electrification, et cetera. We have also new entrants coming into the market, and we have seen initiatives both on fuel cells as well as in battery electric, talking of Tesla and Nicola. These guys have started by taking a battery and designing the product around that. How much do you feel that, that could be a competitive advantage towards your guys taking an existing product and putting a battery in that? That's my first question.

Would you like to start, Lars, or...

Absolutely. I was [ interviewed in ] my presentation as well. Regarding the batteries, we have decided to team up with Samsung SDI as our partners. They are, according to us, absolutely world player, one of the best, absolutely best players when it comes to batteries in the world. That means that we get access to the latest and the greatest technologies. And our strong asset that we bring to this is, of course, that we have our well-proven product offering that we then now start to electrify. And that means that compared to some of the new entrants that start with a rather small and narrow specification, we can easily go and electrify a very wide product offering in a very short period of time.

Thank you, Lars. Hampus, please move on.

Yes. And then moving on to the next question. At least in my world, if you go fully battery electric, you remove 30%, 40% of the moving parts in the vehicle. And maybe learning something from the car industry, that typically has resulted in a less service and spare parts business. And -- but you're ambitious here to target to increase revenues by 50%. Can you maybe talk a little bit about other solution services that you may be including in that? Or are you seeing -- are you looking at this in a different way than I am?

No, first and foremost, Hampus, not to being too technical, it depends really how you count them in the moving parts here because, of course, in a combustion engine, you have a lot of moving parts. But when we look at the different type of services, repairs, constituting of a repair and maintenance contract over the life cycle, as we talked about just recently, then it is less than 50% that is related to the engine in itself, because there are so many other elements also part of the repair and maintenance. So that is the first point, obviously. Then when I said the increase up to 50%, that is, of course, because it's equipment as a service. So it's about duration, the depth of engagement. And as you know, for example, that our today contract penetration is not at 100%, but here, we clearly see that the customers would like to take that step, maybe not to 100%, but considerably higher. So it will be a penetration game. It will be a depth of engagement. It will be duration. And it's not just to say 40% less because of moving parts. It's not that simple because this is production equipment with a duration over 7, 8 years and with an uptime requirement of 98%, and that requires a lot of other elements. So we are confident in those figures, and we have also experienced those in our own executions and the customers would like to have it. So this is our story.

Thank you so much, Hampus. Let's move on to our next caller, which is Klas Bergelind, Citi, of course. Klas, please go ahead. Do we have Klas on the line? Please go ahead.

It's Klas at Citi. So thanks for a very informative session. So first, on R&D, electric and fuel cell, 35% of new sales by 2013, then a big ramp to '24 to be able to have a fossil-free fleet by 2050. How should we think about R&D here, Martin? The split here between the [ eyes ] conventional portfolio and new powertrain peers, do you have -- have signaled that total R&D can stay flat until 2025, but with the mix shifting to new powertrain and then we see a fall in [ eyes ]. So if you could comment a little bit on the trajectory there.

Yes. Thank you, Klas. First and foremost, what we can say, obviously, is that, as you said, we will have a shift in the portfolio of R&D because, as Lars said, of course, we will continue to invest in certain of the platforms when it comes to combustion. But at the same time there, we are also pruning and streamlining and getting even better in our cost methodology. We have done a good journey when it comes to really combining forces among all our business areas and have a built up now when it comes to the cost that we can also release funds. And then obviously, we're shifting into the new technologies of electrification, both battery electric and fuel cell electric. But to Lars' point also, the powertrain as such for electric will be similar both for fuel cell and battery. And thereby, we can reuse that for different type of applications. So I think you should think about it that we are well prepared. And on top of that, of course, the fuel cell development as such, it is an advantage for the stack development that we are sharing that with Daimler, both for the development of the stack, but also for scaling and thereby getting that into the market rather quickly because the S-curve here is really about getting the volumes going step-by-step, and that is also good for R&D. And then we can combine. And I think we have showed that we are following pretty well the R&D. And you will not see the similar pattern as you have seen on the pass car side because our R&D portfolio is constituted. But when we feel that we will be a little bit more forward leaning, and we can still fulfill our ambitions and promises that we have done on the financial targets, we will also do that. So we are flexible in our P&L, following the financial targets and also accelerating in innovation.

So that's good to hear. My second one is on equipment as a service, 50% of the sales by 2013 coming back to Hampus' question. What is the likely margin impact? Because obviously, traditional service, spare parts and so forth, you could see a hit as you're moving away. But your vehicle margin can obviously increase to compensate for that. And I don't think the truck industry in general has been that good at pricing the vehicles before. So are we talking about that offsetting the service margin?

What you can say, first and foremost, what we see on our service margin execution, generally speaking, it's a little bit higher than the vehicles. But more importantly, of course, that is bringing 2 very important elements for us that we can optimize. That is the duration stability of services, resilience for the company as such when it comes to absorption, then you should obviously think about equipment as a service and transport as a service as 2 parts of the journey up to 50%, because we still have -- we have a considerable service business already. And some of that will also, of course, remain and continue to be developed as we have done the last couple of years. So it will continue to be a mix. But generally speaking, service business, higher margins, better resilience and better customer context over time and thereby also a better retention. So exciting journey.

We are moving on to our third caller, and that is Daniela e Costa from Goldman Sachs. Do we have Daniela on the line?

Sorry, having some issues here with the connection, I still have a little bit of a lag. And apologies if my question has been answered. I think it actually relates somewhat to the prior question. But first, I think you mentioned before and also in the interviews in the morning, vehicle life cycle will increase by 40% to 50% in terms of like the revenue opportunity. Can you sort of like you elaborate a little bit about the financial impacts that this will have? And how quickly will those show through? And I think my second question was somewhat related to the prior one, but I didn't listen to everything because of the gap, I think, which is over 50% of service by 2030. That should be very ROIC or ROCE accretive. Can you -- you said you want to do more from here? Do you have a ROCE ambition long-term target that you can give us some color of?

No, first and foremost, obviously, what we have said that during this growth opportunity, we will continue to deliver on our financial targets. I mean, this is not a compromise. I mean performance and transform comes together. So that is the first part. Then when it comes to services as such, as I just said, it would be a constitution. We have already today a rather big and growing service business when it comes to service contracts, when it comes to connected solutions, of course, our financial services. But we will add on then equipment as a service as a very important piece of puzzle. And the reason for that is also that this is what a majority of our customers would like to see in order to make the step change from combustion technology into electrification, both battery and fuel cell electric. And one very important factor of that is also our customers ambition to gradually moving on from having in-house services. That was much more common 20, 30 years ago and then it is gradually going down. And now when you are taking this step into high-voltage competence, a lot of certificates and other type of requirements, you will further expand that peace of mind sort of story. So obviously, then, with our strong Volvo Financial Services backbone. We will have all the abilities to fund that, both through our own portfolio, but also in syndication, the green funding and other things that we have talked about. And I know that a lot of investors are super interested in that, not least when the contract length is expanded, so you have a good visibility over time here.

And I think, Martin, it's important also what you were into the contract length, because where we are good is normally the first owner as...

Which is 3 to 4 years.

Yes. The service contracts. And now we will get longer relationship in the service side with our customers as we see it.

Good. Daniela, any other questions? Or should we move on?

No, thank you very much.

And our next caller is Erik Golrang from SEB.

I have 3 questions. The first one is on the equation of getting a decent margin also when you include batteries on trucks. Is the whole approach towards sort of end-to-end solutions and trucking as a service really key in sort of perhaps hiding the battery cost a bit in there to get a margin on there as well? And then the second question is you said that e-commerce is breaking the demand curve here for truck demand relative underlying GDP. Do you have any sort of numbers to put on that? And then the third question, and I think you partially talked about this previously, but is there no sort of reason or incentive at all to perhaps invest in a proprietary charging network to sort of further accelerate what you say is the market-leading position there?

Shall I take it or...

I can take the third one for...

I can start with the first one on the batteries here. I think the good news in our business, Erik, is that it's not necessarily positive to hide anything, because we have professional customers. So that's the reason why I had also the session about how this will play out for the customers at the end of the day. And they are already today counting in their books, either the customer or the customer's customers, how this is playing out as cost per kilometers. And therefore, we are very clear that if you should move into electric, there are certain consequences of that. You are shifting one of your cost pies and decreasing that, that is, energy cost, towards the battery. But the game for us is obviously to provide those 4 elements as a competitive offering for the customer. As regards cost per kilometers uptime as regards to safety, productivity, fossil free, obviously, and this peace of mind. And then Daimler would say this is the cost per kilometer that will be higher, but you will have a good abatement when it comes to the energy prices. And then the shift will happen. And of course, CO2. CO2-free operations will all come for free, that we did show here. And the interest of that is super high. Super high.

Anyone who would like to fill in?

No, I can take the question about charging infrastructure. I think when we talk about everything that is around electromobility, new kind of consulting services, how we optimize the whole vehicle in -- when it is out there running, there is a lot of things that will happen, including, of course, the charging infrastructure and all that kind of stuff. I think we'll probably gradually look into what we need to do, what we want to do. But also, of course, what is giving us good returns on the money that we do. I think it's a little bit too early days to say exactly what it will be. We are tracking some of these areas already today when it comes to our venture capital arm as well. So I wouldn't say yes to your question, I wouldn't say no either. I think it depends a little bit on it. And as I said, if we can do a good business out of that, we will absolutely do that.

But I think to Jan's point, what is important to understand is that, of course, we have an extensive ecosystem of that already today since we have been operating for the bus side, but also now on the medium-duty side. So partnerships. Partnership is the new leadership. And it's not only about the charging infrastructure as such. It's also about pyramids. It's about the grid capacity, and we have learned a lot here over the last year. So either in-house, but also with partners, the more important is that the solution comes together totally. And when it comes to e-commerce, yes, and no, Erik. I don't feel ready to give a more exact figure on that. But what we have seen and not at least now also partially explained that we have had, as we said also at the trading update in relation to quarter 3, a rather good demand, of course, the catch-up, the underlying demand, but also e-commerce that, of course, have accelerated during this unfortunate situation with the pandemic, but we already did see that before. We are doing some research. I will not say that I'm ready to just pick a number and say the normal underlying growth of 3, 4% often related to GDP has now gone up to something else. But we see indications of how that is happening, but -- and we are convinced that it is happening. But I will not just pick a number because that is not fair.

We can leave that as a cliff hanger for later.

Our next caller is Tom Narayan from RBC. Please go ahead and share your questions with us, Tom.

Tom Narayan, RBC. I really have 2 questions on fuel cells. The first one is we hear an issue that is a bottleneck for making fuel cells, that it will likely require costly platinum. As we understand it, platinum can be recouped from recycling scrapped catalytic converters and I see cars as one possible solution. What are your thoughts on this apparent key issue facing widespread commercialization of fuel cell vehicles? And the second one is you sell fuel cells produced with your JV with Daimler to -- will you sell them to other OEMS? Or is it only just for the 2 of you? Just curious, because we know suppliers who are planning on making fuel cells as well, and typically, suppliers are better positioned and they can achieve better scale economics. But trucks obviously is a very consolidated market, so perhaps this isn't as big of a problem for you.

Thank you, Tom. Maybe Lars, you would like to start?

I can start. We can say then that as late as this week, Monday, we signed the binding contract together with Daimler [ then ], and we are then still formally waiting then the formal clearance from competition authorities before we really get started. So before we dive too deep into the technologies, we need to get started. But definitely, then we have done a very thorough due diligence, together with Daimler regarding the technologies that they have been working on so far and the intention going forward, our shared intention going forward. And that includes, of course, all kind of catalytic materials that we will use. So yes, we have done a thorough due diligence. We have a good plan, including what kind of catalytic materials we're going to use. I think I'll leave it like that for today.

Martin, would you like to fill in?

Maybe just to add that, I mean, of course, when we talked about the fossil-free road map, Lars, up to 2050, then today, we talked about the tail pipe emissions. But in order to be truly fossil-free there, and that is also included in our journey. We are talking about also what we are bringing on board and how we are producing that. So obviously, that is a very good valid and relevant question that we will together address. On the second note, the whole setup is based on that we will have a joint venture, 50-50 that is delivering fuel cell stacks out of that providing Daimler and Volvo. But we have already signed an agreement with Rolls-Royce and our power generation unit will also provide link stacks to them. So the answer to that is, of course, yes, we believe firmly with our volume capabilities that we can create the necessary scale technology and thereby making it competitive also for other takers of these stacks because it will be a vast range of utilization, not at least when it comes now with the renewable generation of energy, wind, solar, where there are, as you know, certain hours during the night, for example, when energy prices are low and you need to store that energy where hydrogen will play a very important role, so super exciting about that.

Our next caller is Bjorn Enarson, and he's calling from Danske Bank. Bjorn, please go ahead.

Yes. I have one question on another megatrend. I mean we are talking, of course, a lot about moving into more sustainable technologies. But I mean, looking in the car industry, I would assume that the change into smarter vehicles is an even bigger and perhaps even more complex transition. I would like you to comment on that. And as the vehicles are becoming smarter and fully connected, do you have the ambition to run this, I mean, a global network for vehicles and to maintain and develop that? Is that a core basically to have an own operating system, et cetera. Is this a big focus area for you?

Yes. Maybe to start with, I mean, we can add on here. But when it comes to the whole story of connected solutions, of course, that is a key cornerstone because the whole abilities that digitalization will bring is already serving us very much today in our relations with the customers, but also in our own operation. We have more than 1.3 million connected units today, where we are optimizing a lot of things and gradually moving, as you call it, to more and more smart and intelligent solutions, optimizing that through AI and others. For example, truck monitoring, where we can really predict how the durability look like, the uptime, et cetera. Then step-by-step, of course, we will move into the real smart solutions when we have autonomous solutions, that was touched upon. And that will also be done in steps because in many cases, for example, in our applications like in mining ports, you want -- at the first step, just to remove humans out from the operation spot. And then you can use that connectivity platform for operating remotely. And then as [ Neil said also ] now we are commercializing fully autonomous solutions. So here we have a global platform and we have a business unit, Volvo Group Connected Solutions, that is rounding that backbone for all the different business areas very successfully. So building on that will be the key for the future.

Our next caller is Nicolai Kempf, and he's calling from Deutsche Bank. Nicolai, please go ahead.

Yes, thank you. Yes, this is Nicolai speaking from Deutsche Bank. So my first one would be on cost parity. When do you expect the cost parity between the electric versus the diesel truck, give that the diesel truck will likely become more expensive while the electric truck will become cheaper? And the second question would be battery reserves. You have a [ couple of arrangements ] with Samsung battery reserves. Given the importance of the battery reserve, what's your strategy to secure enough batteries at also a competitive price.

Yes. If I start with the TCO parity, Nicolai, I think what is important to understand here is, of course, that the TCO or enough close TCO parity since, I mean, the whole story also for the customers and customers' customers, in many cases, as I showed here on the distribution case, will actually be to get the CO2 also because today, many customers, all customers' customers are paying also to abate the CO2, offsetting CO2 that they have. And of course, it will feel much better to do it yourself. And so that has also, so to speak, a revenue impact. So already here and now, you have close enough TCO parity in quite many segments that will shift. And that's the reason why we talk about these S curves, that when that is happening, the transformation and the shift will go rather quick for that segment and that geography. And it will not be one size fits all over time, and the winners clearly here -- that is often missed -- is that can deliver for each specification and geography when that TCO parity is clear enough or close enough, and then transform quickly and get the volumes. And we are excited about that type of transformation because we think that is fitting us rather well. Then when it comes to the parameters of batteries.

Well, regarding an availability and capacity of batteries. I think this is exactly the reason why we are talking about a partnership where you have 2 partners working extremely close together, and we are then sitting planning the future together regarding the needed capacity, the availability of batteries [ done ]. And regarding attractive prices to bonus, and it's the same thing there. A partnership is constituted by 2 partners that need to stay attractive. That's how we keep the partnership alive.

Let's move on to our next caller, and that is Himanshu Agarwal calling in from Jefferies, please go ahead.

Himanshu Agarwal from Jefferies. I have 2. I just wanted to understand, for every fossil-free vehicle that you sell, you don't sell an [ ice ] vehicle. So with an accelerated adoption of fossil-free vehicles, how should we think about the depreciation on [ ice ] assets? And is there a risk of write-downs there? And secondly, I just wanted to hear your thoughts on a long-haul [ bev ] truck. I presume from the slide, I didn't see one. What do you think of a long-haul [ bev ] truck with a range of around 500 kilometers given the tachograph regulation, I think it could cater to a wide range of application and possibly reduce your time to market as well.

Very quick on the last one. I'm not sure that... No. Did we get the first question? Can we repeat the first question?

Yes. So first question was around the accelerated adoption of fossil-free vehicles could lead to higher depreciation on your ice assets and possibly some write-downs because of low volume?

Okay. No, I -- if we start with that one, as Jan's explained also, I think we are well placed when it comes to our assets today, both when it comes to, so to speak, what is the book value of it, but more importantly, what is the value moving forward. And that's the reason why we are confident that by using the fishbone principle, step-by-step, implementing and co hosting both battery electric and other type of vehicles into the same lines, we'll solve that largely. If there are some write downs, it could be related a little bit further down the road, but it's not material at all when it comes to the component manufacturing. Because as we said that we have the components needed also for other types. So it's not a material write-down needed as we see it. And the good news is that we will not have to create new factories or platforms, so that will take a long time to actually ramp up volumes. That is also a big difference from pass cars, obviously. So here, we are agile enough to shift when that is happening. And just to be very clear on your last question, yes, we agree. When it comes to what we call regional haul or long haulage coming back during the night, for example, the 500 kilometers or something, that it will be well fitted for battery electric. And for even longer, it will be fuel cell electric. So that is the reason actually why we are introducing now already next year, the heavy-duty applications. That was not shown here, but the vehicle standing in the room here is a such vehicle that you are after that we will introduce next year. For sales.

What you could add, of course, Martin, related to the question around impairment. Of course, if -- with these plans we have shown today, there is no risk of impairment. Otherwise, we would have done it already since we have the plans. But it's also, I think, more important for us is also to be very diligent in the investments going forward because, as Lars said, I mean, 10 years from now, still a big part of what we are doing will still be related to diesel. So there, we have to be careful when we are sort of allocating capital going forward.

Our next caller is Joe O'Dea of Vertical Research Group. Please go ahead, Joe.

A few questions. First, I was just hoping for a breakdown of when you talk about 35% penetration of EV. Just to clarify that, that's both a combination of the commercial vehicle and the construction side of things. And can you give a sense of how you think that looks in Europe versus North America versus Asia Pac? And then second question is, when you talk about over 50% of revenues from services and solutions in 2030, and that's in a world with 35% going to EV. When you think about 100% EV, what do you think about the mix of services and solutions revenues being? And then third question is just what you think of the subsidy environment today? Do you see enough out there to support the kind of adoption that you're looking at over the next 10 years?

Who would like to begin?

Shall I take it all? If we start with, I mean, how it will play out, obviously, as we said, it's both from a regional perspective. And there, you correctly mentioned, the regions that we think are very early out when it comes to this adoption. Europe, North America or at least part of North America, like California, for example, we see China, Japan, parts of Southeast Asia, like Singapore, urban areas also in other parts of the world. But the most important, as we said, is also the shift from segment to segment because the TCO parity, and TCO parity including, so to speak, the CO2 abatement will also play out here. So that is how we see it. And that's the reason why Jan's also show the importance of having the industrial footprint ready because very rarely, people are asking themselves who can scale this. I mean, not only, so to speak, the vehicle, but the whole system and also the services. And then what was it...

what will happen when the penetration goes above 35% of Africa, what will happen with the service part?

Yes. I mean, this is, of course, when we have looked upon this, this is included the electric vehicle penetration, but it's also constantly, including the continuous penetration increase that we've had also in our ordinary service business. And also too, I think it was -- was it Erik's questions about connected solutions that we're also now penetrating more and more. So this is a continuous game. But when we are going upwards from the 35%, that share will increase because equipment as a service is, I mean, equipment as a service. And then also we have the acceleration of autonomous towards the later part of the decade.

And finally, the subsidy environment?

Yes. I think the subsidy environment partly is -- I mean, supporting, we have seen a number of cases like that. I think the more important is the consistency over time, and not least also, you will see that also in urban areas, for example, that it will be restrictions on what you can actually drive into different cities, that will also play out. But as we go along now, the TCO parity, including CO2 will be the main driver to gain volumes. And as we see it, also electricity will be cheaper and cheaper, given the big build-out of renewables and also the hydrogen economy.

Very good. Thank you, Joe, for being with us today. That was, in fact, our last caller. So guys, it's time to wrap this up. First and foremost, thank you, everyone, for watching the 2020 Capital Markets Day. Again, all the material is available, and the entire broadcast, on volvogroup.com. Please stay safe and join us next time we have the opportunity. And finally, Martin, would you like to do a short conclusion.

Well, I think everyone would like that to be a short conclusion. First and foremost, also from my side and management, a big thank you for being with us today. And hope also that you have found our messages about performing from a position of strength and also transforming into this new exciting world of transportation. And hope also, of course, that you will be part of our journey for the future. So looking forward to that with all the Volvo Group.