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

Welcome to the Volvo Group press conference for the second quarter. We will -- as usual, we'll start off with presentations by our CEO, Martin Lundstedt; and our CFO, Tina Hultkvist. And then we will follow up with a Q&A session. And with that, Martin, I leave the word to you.

Thank you, Christer. And also from my side, welcome to the second quarter business update from The Volvo Group. We continue to experience a challenging business context with complexity and uncertainty that I have never experienced before. And in August, it will actually be 30 years since I entered into this industry, so it is really challenging times. Devastating more in Europe, continuous pandemic with further lockdowns in different regions, supply chain and logistical constraints and increasing inflationary pressure, among other things. And with all these factors in mind, I'm so proud to report that we delivered a very strong result in the second quarter, both in terms of volumes, profitability and return on capital employed. Net sales were up with 31% or almost SEK 30 billion in the quarter to SEK 119 billion with major contributions coming from increased vehicle and service volumes from positive price realization and from favorable currency effects but also excluding currency on the top line, sales still grew with an impressive level of 20%. We also continue to serve our customers in a good way. We improved our market shares in almost all regions and brands. And we continue to grow our services. The whole organization has been doing a fantastic job by working closely both with our customers and supply chain and other business partners and thereby riding out many of the challenges we and the industry are faced with and making also the group continuing to maneuver from a position of strength. Among our customers, there is still a high activity level, both in the transport and construction segments, despite the global turmoil. Demand continues to be larger than supply and order books are more or less full for 2022. But with a high level of uncertainty in the general economy, it is important to maintain discipline in order book management. In addition, we continue to have a high level of flexibility in all parts of the organization to be able to swiftly adapt to changes in market conditions. So to summarize the quarter highlights, we have had, as I already said, a strong top line development, with an all-time high quarter in group trucks and in Volvo Penta. The adjusted operating margin amounted to SEK 13.7 billion at a margin of 11.6% despite our conscious decision to run manufacturing with extra flexibility to serve our customers in the best possible way. But that is, of course, coming with an extra cost. But we have seen this strategy paying off in the positive market share development. The group continued to deliver a good return on capital employed in Industrial Operations at a level of almost 27%. And despite the strong performance, the constrained supply chain situation continues and visibility remains low also moving forward and we need to continue to adapt on a day-to-day basis. But albeit the challenges, we delivered strong financial performance in the second quarter. The total truck deliveries increased with an impressive 33% to almost 61,000 units. This was a great achievement, thanks to our colleagues in all markets, together with a complete supply chain, both internally, purchasing production, but also with all our supply chain partners. And the result was an all-time high production in global trucks operation for a single quarter. Mobile construction equipment deliveries decreased with 27%, mainly on the back of lower volumes in China and construction equipment or VCE also had some impact from strained supply chains in the quarter. Demand for electric vehicles continues to accelerate as the number of companies with pledged science-based targets are addressing their different CO2 footprints, where the decarbonization of logistics and construction activities are main focus areas on that journey. All Volvo Group business areas continue to drive their sales of electric solutions, and we continue to see a positive book to bill with a steady growth rate that shall remain for many years to come. The volume development is encouraging since we are strongly focused on keeping our leading position in this field. In quarter 2, we opened the order book for the heavy-duty Volvo electric truck in Europe, and we are starting production and ramp-up of these trucks in the third quarter this year. Orders across all business areas amounted to almost 1,500 units while we delivered 434, a strong momentum and a strong book-to-bill ratio. To strengthen our service business has been and will continue to be a key priority as we continue to untap the service potential on the back of high vehicle utilization amongst our customers and broader and wider adoption of service contracts. Service growth adjusted for FX was 11% with good momentum in all business areas, which serves as a good indicator that our customers' activities are high and that our focused efforts in the service field is paying off. Service sales 12-month rolling is now close to SEK 100 billion. And when it comes to trucks and the trucks news, despite the global turmoil, we continue to present innovative news. Some important examples during the quarter. Volvo Trucks showcased its first fuel-cell electric truck, as you might have been seeing on the introduction video. The truck has a range of the 1,000 kilometers produced through the fuel cells, its own electricity on board and it only emits water. Volvo Trucks also will introduce frame-rails or side members made of fossil-free steel in its battery electric heavy-duty trucks. This is another important step on our journey towards our net zero commitment and to maintain also our leading position of applying fossil-free steel in series production. In the quarter, we also opened our first assembly plant for battery packs in Ghent, Belgium. In the new battery, plant cells and modules from Samsung SDI will be assembled into battery packs that are tailor-made for our heavy-duty electric ranges and production now will coincide then with the launch and the ramp-up in production of our heavy-duty Volvo trucks. On the back of high transport activities and pent-up replacement need, demand for trucks is continuing to be strong, stronger than the industry currently can deliver. We keep our market forecast unchanged for European Union and North America at 300,000, but the total market outcome for 2022 will ultimately depend on how much the industry can deliver. Also in Brazil, continued good momentum in the commodity and agriculture business, even if we see some weakening signs in the general economy, but we are keeping and maintaining our forecast also in this market. The forecast for China is further reduced to 800,000. We had reduced it to 1 million trucks for medium- and heavy-duty in last quarter, but we are further reducing to 800,000 on the back of lower economic activity and recent lockdown effects in several provinces in China. It is important to state that we have done now a number of quarters in a row that market forecasts are based on current visibility, which continues to be low. Uncertainty is significantly due to inability to predict supply chain capacity and the ongoing COVID-19 pandemic and also the war in Ukraine. We continue to be restricted in order slotting to manage order book quality and cost inflation. It is, therefore, increasingly important to keep even higher quality and transparency in the order book in case the economy is slowing down and when the economy will correct here. Orders in quarter 2 decreased with 8% and deliveries increased with 33%. And when we look to the order decrease of 8%, we have a higher bar to book firm orders due to long order book, but also to ensure pricing flexibility given the inflationary environment. However, as I have stated already in last report and the report before that, the order intake is currently not the best indicator of the market activity going forward. It is rather the size of the order book, the fleet utilization, the used trucks business and customer finance, and all these indicators are still healthy. Truck deliveries increased with an impressive 33% on the back of really hard work in the whole supply chain. And we are running our manufacturing system on a high level with extra flexibility, and we see that this is paying off in terms of volumes. It is also important for me to note that when we look at the balance, the book-to-bill and the sequential, book-to-bill was 88%, meaning that the order book decreased with 7,500 units or 1.5 to 2 weeks. And knowing that the order book almost filled enough for 2022, this is a moderate decrease but we need to continue to work with that so we have the right type of lead time. We had about a month of stock days in quarter 2 -- in quarter 2 '21. And for the same quarter this year, it was more or less a week instead, so a considerable improvement here. Apart from specific supply chain challenges for Mack in North America with some lost market shares, we have made good progress in all major regions during the quarter and first semester as we lost market shares. Our commercial organization has done a great job to combine and increase market share together with an improved price position to offset the cost inflation. It also shows fantastic efforts by our colleagues in the industrial system together with all our supply chain partners. In Europe, a strong total market shares by Volvo and Renault, growing to 19.3% and 9.6%, respectively, and combined 28.9%. That is an all-time high for us. Electric market shares was even better, 30 -- almost 37% for Volvo and almost 19% for Renault, so significantly higher than our strong diesel market share. In North America, I have already commented Mack, but Volvo is growing up to 10.5%. In Brazil, strong performance, growing the market shares to almost 26%. And for South Africa and Australia, also the Volvo Group has a market share above 20%, also very strong development. For Volvo Construction Equipment, in early June, VCE became the first manufacturer to deliver a construction machine built using fossil-free steel to a customer for use in commercial operations. The handover took place at the United Nation's Stockholm+50 event. Volvo Construction Equipment also announced a majority investment into Dutch firm, Limach. This investment complements Volvo CE's capabilities and product ranges when it comes to electrified products. In general, we do see a continued good demand with the exception of China. Construction activity in both Europe and North America remained high in quarter 2. However, the total market deliveries were impacted by limited machine availability because of supply chain constraints. In general, the construction equipment supply chain challenges came later than in the truck industry and hit mostly into 2022 here. Market forecast remains unchanged since last quarter for all regions. But also here, as I said, on the truck side, market forecasts are based on current visibility, which is low. Also when it comes to orders and deliveries, VCE has had a restrictive order slotting to manage order book quality and cost inflation, very similar to trucks. In addition, we need to continue to deliver on the overshoots in order intake in 2020 and 2021. And it is very important to do that now step by step. VCE has well-filled order books and long lead times following the strong order intake in previous quarters, as I said, not at least in North America, as you can see in the graph here. Now book-to-bill is normalizing with a ratio of 0.95% or 95% in the quarter, but we still have high order backlog to deliver on. As a consequence, the restricted slotting made orders in quarter 2 to decrease with 42% to ensure flexibility with pricing. However, as I stated already the last report, order intake is currently not good or the best indicator of the market activity. It is still the size of the order book, fleet utilization and customer finance and all these indicators are, as for trucks, showing healthy levels. Deliveries decreased with 27%, mainly related to China, but also partly due to supply chain disturbances in other parts of the world, for example, in Europe. In the bus segment, confidence among our customers has started to pick up, particularly in North America, where utilization of the bus fleet continues to increase. Orders were up with 44% and deliveries up with 22%, but still from very low levels. In the quarter, Volvo Buses launched a powerful and fuel-efficient performance step for the Coach driveline, with the power ratings up to 500 horsepower and fuel savings of up to 9%, it will be a true cost saver for [indiscernible] shorter and line haul operators. For Volvo Penta, the market remains strong in all segments, but it's, however, fighting with long delivery times due to challenges in the global supply chain that is hampering also order intake and deliveries. As a consequence, orders were down with 25% and deliveries with 1%. But it is important to say that we still have a broad-based and good demand across segments and regions and daily focus now is to continue to increase deliveries to meet the strong order book. On the business development side, yet another segment is going electric, as Volvo Penta's electric driveline now is also powering city firetrucks in North America, as you can see on the slide here. On Financial Services, we had the record retail financing business volume during the quarter together with a stable penetration of around 30%. VFS continues to have a strong portfolio performance with low delinquencies, indicating continued good customer activity and profitability. Volvo Financial Services is a very important lever for the transformation into new technologies and business models, and we continue to see lots of good progress. On the business development side, VFS recently began offering customer financing in Portugal, also providing that opportunity for all segments in Portugal. So by that, Christer, that was the business update, so I leave over to you.

Thank you, Martin. And that brings us to our next speaker, our CFO, Tina Hultkvist. Tina, can you please give us the financial numbers?

Thank you, Christer. Let's go a bit more into the financials. Group sales is SEK 119 billion in the quarter, an increase of SEK 18 billion, excluding the currency impacts. We have growth in most parts of the world with the exception of Asia driven by China. And just as Martin said, price increases and the service sales is contributing well to the growth in the quarter. If we look into the financial performance, we have an operating income of SEK 13.7 billion in the quarter, supported by currencies of SEK 2.8 billion. The performance is mainly driven by increased deliveries in trucks despite the supply chain disturbances, but also the service sales is contributing well to the improved performance. We have seen a continuous pressure in the supply chain, not only in the supply chain, but also in raw material costs and inflation in general, but thanks to a good work in the commercial area, we have been able to offset this in the market in the quarter. We are continuing to invest in new products, both in the current platform and in the coming platforms. We also have a net positive impact in the quarter from net capitalized and amortized R&D. This is an area where we are guiding. And the guidance here is that there is a wash between capitalized and amortized R&D for the second half of the year. As the business is growing, so it's also selling expenses and there is a bit of currency effects in this also. The challenges in our Chinese operation is impacting our Chinese joint venture negatively of some SEK 600 million, and that's what you see in the bridge here in other. There is also another impact there coming from an accounting effect we had last year in VFS, which was by then positive of some SEK 200 million. Coming back to the currency impacts, we guide a bit on the transactional currencies. And the expectation right now is that this will be somewhere positive of SEK 4 billion on a full year level. Moving into the capital. We had a positive cash flow in the quarter of SEK 7.2 billion. This is mainly driven by the increased business activities and the result. We are continuing to build inventories, mainly connected to the supply chain disturbances, meaning that we don't have a fully efficient incoming material flow to our industrial system. But inventories continues to be a main focus for us, especially then thinking about the uncertainty and the economic outlook. We have paid dividend of some SEK 26 billion in the quarter, but we still believe the quarter financially strong with SEK 44 billion in net cash. Moving into trucks. We have a sales increase of almost 40% in the quarter in trucks, excluding currencies, following the higher deliveries of some 15,000 more trucks. The demand is higher and we have improved the market shares in most markets, but the main reason for the increased deliveries is really that we have managed the supply chain better than the previous -- than the Q2 last year when we had almost 4 stop weeks, 4 production stop weeks, while this year, we have had around 1 stop week in the production in the quarter. We have strong performance in trucks, 12.2% in margin and an operating income of SEK 9.6 billion, partly supported by currencies, but there is also an underlying reasonable leverage in trucks in the quarter. Last year, we had a strong market in China and we had a good performance in our joint venture. This year, the market has dropped by almost 2/3, which means that we have some impact on the performance in our Chinese joint venture. Moving into Construction Equipment. CE is also impacted by the market drop in China, impacting there then our operation in SDLG, where the deliveries are basically half of what they were last year. In the Volvo segment, the volumes are holding up though and they are basically in line with where they were last year. Also, VCE has had supply chain problems in the quarter and that has somewhat limited the deliveries. But on the other hand, service sales is contributing well to VCE and we had a growth of around 5% excluding currencies. Despite the supply chain disturbances and the market drop in Asia, VCE delivers a margin of 13.8% supported by currencies. Looking into buses. Buses is still struggling with a low demand, both in the coach and in the city segment. Deliveries are higher, but it's less electric buses and hybrid buses which hampers the sales and the operating income. The good service development that we saw in Q1 is continuing also in the second quarter, mainly driven by higher utilization of the fleet in North America. Buses is continuing to have difficult business conditions and lands the quarter on a breakeven. Moving into Volvo Penta. Also in Volvo Penta, we have a sales increase, both on engines and services, but also Penta is impacted by the supply chain disturbances. This, together with an increased inflationary pressure and somewhat increased operating expenses, had impacts on the financial performance. Still though, Penta is delivering a solid margin, in line with last year, supported by currencies. Moving into Financial Services. Our customers' business activity continues on high levels, both in the freight activities and in the construction market. And we have built volumes -- we have increased the business volumes in our customer financing operation. The portfolio performs well and we have low write-offs and low delinquencies in the quarter. The financial performance is somewhat impacted and somewhat lower, but it's mainly connected to the onetime accounting impact of some SEK 200 million that we had in Q2 last year. By that, I will end the financial reporting and hand over to you, Christer.

Thank you, Tina. I like the numbers. Martin, how would you summarize the quarter?

Now first of foremost, as we started, [indiscernible] to say, I mean, it has been an extremely complex situation with a high level of uncertainty and it's almost easy to forget a day like this when we are going toward the figures. But this, today, I was traveling to Sweden and actually by coincident passing by 2 of our sites, Skövde, early Saturday morning, seeing foundry, machining, assembly going on, a lot of commitment from our people. Passing by [indiscernible] you can see here on the screen, I mean up to [indiscernible] so activity ongoing 24/7 with an enormous commitment of all colleagues in the organization. And I have to say that with that as a backdrop, I mean, really understanding the complexity and the complex sense that we are living, to increase top line with SEK 30 billion in quarter, yes, 1/3 of that might be currency, but then regardless of currency, I mean, price realization, volume increases in products and services, an operating margin of 11.6%, operating results of SEK 13.7 billion and the return on capital employed that is 27% is a fantastic achievement. But also what we hear from customers and penetration in VFS service development, et cetera, a very strong quarter by all colleagues and all partners and very close cooperation with customers. We are proud today.

Thank you, Martin. Thank you. That means that we are ready to move to the Q&A. [Operator Instructions] Yes, exactly. So with that, operator, we are ready for the first question.

The first question comes from the line of Hampus Engellau from Handelsbanken.

I'll try to make 1.5 questions then. It would be interesting to maybe hear -- if you could comment on -- I know that you're monitoring your service network and fleet activity on the [indiscernible] market. Could you maybe discuss a little bit if you've seen any -- noticed any difference in that activity and what your customers are giving in terms of feedback, if they're starting to worry a bit from the macro side or -- and are hesitating a bit on placed orders? And if you've seen any changes in translations during the quarter. I hope that is 1.5.

Absolutely, Hampus. That was exactly 1.5. Now of course, we are following this very closely, I mean, region by region, but also different segments and down to country level. And the general question is that we still see a very good high activity level amongst our customers. I mean, it has been flat, so it's not maybe continuing to improve that we did see after COVID, but still on a high and good level. So that is comforting. Then obviously, in our conversations with customers, we see and understand that everyone is also expecting that it will be some sort of correction moving forward. Exactly when will that happen, let's see, but it's natural. I mean increased rates, increased inflation will, at one point in time, more lead to corrections in the general economy and eventually then also in the need of Volvo transports. But we don't see that now. What you can say is also that there are a number of factors that is also playing in the other direction, of course, with the replacement needs, the age of the fleet, et cetera, given the delivery. So pros and cons, but we have already a high level of flexibility on that side. But also when it comes to the placed orders, since the start of the pandemic when we really also cleaned out the order board, we have been very disciplined in maintaining our important of the order book and we continue to do so. So no significant or material signs at all also on that side.

The next question comes from the line of Tom Narayan from RBC.

Tom Narayan, RBC. It's on gas rationing in Germany, and now we're hearing potentially Europe. Could you just remind us of how this would impact your specific production in the supply chain? And then should there be plant shutdowns, how does that work? Could it be a day? A week? Or does it have to be kind of continuous periods of shutdown?

Thank you, Tom. Of course, a very wide and complex question. To start with, it will be some sort of limitations when it comes to supply and how that will play out, that is too early to say. When it looks -- when it comes to our direct effect in the group, I mean, we have 2 factories and 2 plants in Germany for Volvo Construction Equipment. When it comes to the overall, so to speak, picture, not super big effects. But the more important is what will happen in the -- in the first tier, second tier, third tier system where Germany, of course, plays a very important role for all industries and not at least for automotive and industrial equipment and industrial goods. And if there will be certain limitations, that will have an impact across the board, including The Volvo Group, obviously. And I can say on the positive note that we are, at this moment, of course, well trained when it comes to adapting our situations, both when it comes to immediate effect of COVID and the pandemic, but also the whipping effect out of that when it comes to supply chain constraints, logistics, et cetera. So we have that different tools and methodologies to handle that from a group perspective. But if there would be limitations, that will have an effect as we can see it on most industries in Europe.

Next question comes from Klas Bergelind from Citi.

Martin and Tina, so my question is on price versus cost. Very good performance still. But we can split this into 2 phases. One, which is the cost inflation prior to the Russia-Ukraine war and then the next step-up in cost inflation happen after. Now given your price actions, Martin, do you feel that you can continue to compensate into the second half for the new cost inflation, if you like? Or can we see some incremental pressure to the margin? I'll start there.

Thank you, Klas. I think I'll let Tina answer that question so we get some variation also in the voices here and I will [indiscernible].

Yes. Thank you. Yes, we have some experience in handling price management and offset the inflationary pressure in the market. We will, of course, continue with price management also in the second half and going forward. So we will continue working with that, of course, as we have done the last quarters really.

And I mean, as Tina is saying, what we feel like, Klas, it's also that we have had a good balance through the different quarters here now in the different phases you're referring to. So that is showing that, so to speak, the link in the whole value chain, all the way from customers and upstreams, has been functioning well when it comes to the methodology of how to working with it, and we will continue with the same type of methodology here to be because it's also balanced. I mean that you are not too far ahead of the curve, it's not good visit the customers also. But we have had a good balance and we are proud of that balance.

Can I squeeze in my half question. Martin, so Construction Equipment, so 5% growth in services, that's still very good, but a bit lower than I thought. Have you seen any weakness in construction outside of China towards the quarter end? I'm wondering if utilization is leveling off a bit. I get that the truck demand is still solid, but we're hearing of some construction weakness in Europe and I was just wondering if you see anything at all. I totally get the trucks demand still being solid, but on the construction side, please.

No. I mean when we look at the general picture, we can maybe see something in small pockets, but on the general picture, still a good activity level, as I said in the -- in my presentation in Europe and North America in construction activities. When we see the deliveries going down also in Europe, it was mainly then related to the supply chain constraints. But when we look at the connected fleet, it is still on good levels in most part of Europe as well.

The next question comes from Michael Jacks from BofA.

The first one and the main one. Maybe just looking at the prices of some of your key raw material inputs which are now declining, it's amazing how things change quarter-on-quarter, for example, in steel, in copper, et cetera. How long do these need to remain at current levels before you would need to consider price reductions? I would imagine it's more than 6 months away, but some sort of feel for that. And then my half question is just on energy cost inflation. Can you just give us a sense for the level of current cost inflation that you're experiencing? And if you have an offset in the system that could potentially limit the impact in the coming quarters?

Tina.

Yes. Yes. I think both when it comes to the raw material impact and on the energies, we are working a lot with being able to offset this. I think it's too early to say what impact it will be from the raw materials that has reduced prices and the ones that continue with the increasing prices. So I think that's just too early to say. Even though we've seen some of that in the second quarter, we still continue managing the full inflation situation going forward, together with the energy prices that you were mentioning.

And I think the main message here, just as Tina said, is that we have a good methodology of balancing this between the different type of cost pressures and to realize that also into our pricing. So we continue with the same methodology regardless of what of the impact -- input factors we are talking about. But more importantly, we will also continue to be to stabilize the supply chain since we are also running our production system with extra flexibility and thereby linked the cost that is also important that -- it has been the right choice, by the way, we see that in the market share development, we see that also in the volumes and the top line growth. But that is another factor. So there are a number of factors that we are constantly working with in order to have the right balance. And so far, so good and continue to do the same.

The next question comes from Daniela from GS.

I'll stick relates to cash flow. Your net industrial cash is SEK 44 billion. Normally, the second half is quite a high free cash flow generation for you anyway, especially Q4. So you're likely going to end with more than that. Historically, you had said SEK 30 billion of operating cash that you normally want to keep within the business and then you've reallocated the rest to things like shareholders. I was wondering if like the current environment changing any sense the dynamics of what you think is the required operating operational cash you need on the business and how you think about allocation beyond that operating need?

Yes. I think to start with, I think we have to say that we don't have a specific dividend policy. I mean we want to have a financial strong position in order to be ready for the transformation, but also to handle situations that we are in right now with some kind of cyclicality. So I think we should not give any kind of guidance on what the balance sheet or the net cash will be when we finalize the year or when we end the year. When it comes to cash flow, so I think that the pattern that you are mentioning has been there for quite some time and I think there is no reason to expect any differences to that. But in terms of dividend or what will happen to our net cash position, I think we should just stay with the thinking that we have to have a strong financial position in the situation that we have and the transformation that we have in front of us.

And in addition to that, I mean -- and you remember it also, Daniela, we talked about that during the Capital Markets Day. I mean if we repeat a little bit what has happened over the last 5 years, we have been a very attractive case when it comes to yield. So of course, to keep that balance, I mean an attractive case for our shareholders, that has been showcased year-over-year here, also despite the turmoil situation that we have experienced over the last 2.5 years and still keeping a strong and solid financial position so we can continue to maneuver in a position of strength, both in the current environment but also moving forward into the transformation. I think that is a very attractive case also for investors at all, looking for solid value creation.

The next question comes from [ Miguel Boege ] from BNP Paribas.

Just a couple of questions. You're now starting to open the books for 2023. So looking into next year, if supply chains continue to ease, do you believe you'll see an increase in truck deliveries relative to 2022? Just trying to understand how the output will behave next year, considering the balance between your backlog and the orders remain restrictive and below 2021 levels. And then on pricing and mix, is there any change in the mix here that you would say is not sustainable? Perhaps given the supply chain constraints, you're prioritizing more highly valued trucks and this will reverse at some point? Or do you think the implied average selling price of these trucks is sustainable at these levels? Obviously, if costs come down, pricing would also be adjusted. But just trying to understand if there's anything exceptional in the mix that you don't see as recurring.

Thanks. First and foremost, obviously, I mean, we are not giving any guidance for 2023 at this point in time. It will happen next quarter, as we normally do then, our first guidance for 2023. Having said that, we have also been clear in the report that we still see a situation where supply is actually dictating, so to speak, the size of the market gradually due to different factors, both at one point in time, the easening of the supply chain, to your point, but also the general economic activity that will, at one point in time, shift from a supply to a demand-decided market. When that will happen, let's see, and what effect that will have also when it comes to -- because if that could have been possible today, it should have been, as we see it a bigger market than we have today because it's dictated by supply. So we continue to follow that. We have the right type of flexibility, both for upward pressure as well as downward pressure. But having said that, on pricing and mix, this is very important to state that we have not taken any decisive measures to prioritize from the Volvo Group standpoint, products or customers over others, and the reason is that we are in B2B, we have long-term relations with our customers and we cannot suddenly say that you are actually buying a solution that is from the Volvo Group less worth short term. So we don't have that type of pricing and mix effects, as you might possibly have heard about in B2C sectors such as automotive.

The next question comes from Ali Golden from CE.

I have one question on the order book and the discipline you talk about. I guess, the magnitude for deliveries could go down if we do get a proper recession here is determined by that -- the quality of that order book and you talked a lot about the discipline. Could you say something, what specifically are you doing differently compared to prior cycles in terms of managing the quality of that order book? Why would it be different this time around?

Yes. Obviously, I mean we are not -- we have been seeing a number of cycles and we have also every cycle got a lot of learnings. First and foremost, that we actually have the connectivity. So we can see the movements and how it looks like also, not only that they are with certain dealers, but where there are always certain dealers, including body builders. We have also the advantage of cleaning out, as I said, in second quarter of 2020 the order board also and built that up a little bit from almost 0, not really 0, but almost 0. So -- and then we have continued to build on that. And then obviously, when we look into also downstream factors like finished inventory, inventory of new trucks, but also used, is still on a healthy level. So all the early indicators are still here. But having said that, Erik, we all know that if the market turns, it can turn quickly, and we need to have a high level of flexibility and maintain discipline also. In that case also go through again the order board, as we did in April/May 2020. So I think we have since been working with all the different parameters. And also, I have to say, for the different drops we have seen in regions over the last 5, 6 years, we have actually showed also that we have been rather quick in adapting to the current situation. So it will be partly different prior to -- in relation to prior cycle jobs, but also rather confident what we have done in North America and Latin America and in other parts of the world where we have seen these drops on a regional basis.

Okay. And then my half question would be for Tina. You said a wash between capitalization and amortization of R&D in the second half. That's a quite big delta compared to H1. Were there specific project explaining that? Or what's the -- why the change?

Yes. I mean we are launching our new electric vehicles in the autumn here. So that's really project that has been in the face of capitalization up until now basically and then they are moving into more an amortization phase for the second half year with the new electric Volvo trucks vehicles.

On the heavy-duty range.

On the heavy-duty range, yes.

The next question comes from Olof Cederholm from ABG Sundal Collier.

Olof from ABG. Just my 1.5. Of course, my first one is on cash flow then. Just you have excess inventory now. We know second half is stronger in terms of working capital relief, just as you indicated, it's a normal seasonal development. But what's your plan to get rid of excess inventories going forward? Is that something you can control? Or are you still sort of in the hands of the market?

Maybe I should comment on that. Well, of course, it depends on the volumes that we are having, but we also have to remember that the main part of the inventories that we have built up is coming from the supply chain disturbances. So it's incoming material and the inventories that we have in the plant. As Martin was mentioning, the finished unit inventory is usually still on a low level. So it depends very much on where we will be in the supply chain in the second half of the year.

And I think this is very important, what Tina is saying here, that we have this very deliberate actions taken in order to pull more raw material. And again, that has been showing positive when it comes to the market share development. Now, I mean, if we will see a gradual easing on the supply chain constraints, obviously, we will also work with this to trim it to normal levels. But in the balance of everything, that has been the right choice given that we have it where we have it and not in finished products, if I put it like that.

Yes. Excellent. And my half question is on the market share development. It's been pretty impressive. Clearly, you are able to produce more trucks than your competitors. But do you think there is something going on in the market share department that is sustainable, that you have taken a step-up in Europe, for example, and that you can think you can hold on to this going forward?

I think we -- of course, we should be humble in a situation like this and say that in the market dictated by supply, it is also, of course, an advantage if you have had the right type of supply chain collaboration that we have seen. We are proud of that and that has brought us to very good and strong levels, almost since, you can say, quarter -- late quarter 2 last year and then continuous good progress. But of course, I mean, having said that, we also feel that for all the deliveries that we have done, we have a good feedback when it comes to customers of quality or performance. And essentially, it is also an opportunity for us to reach more customers, and we will continue to work on that. So -- but early to say, I mean, what will be the long-term effects of that. But we will continue to utilize the methodology that we have had, that have served us and, most importantly, our customers well.

The next question comes from Mats Liss from Kepler Cheuvreux.

Just trying your outlook there a bit. And for the North American market, I mean we will see some emission regulation, well, increasing in 2024. And I was just wondering if you expect to see some pre-buy impact next year due to this? Or is it sort of too limited emission regulations to have any such impact?

Yes. I mean, of course, it is a legislation with -- that is, I should not say a small legislation. It is an important one when it comes to CO2 and greenhouse gases. It might have a certain effect that is actually holding up the market in 2023. Difficult to judge exactly how much that will pay in and it depends on the overall situation also since we -- since long now we have had also an under supply into the North American market as well. So again, a little bit what will be what [indiscernible]. But as always, when you have rather big regulatory steps, it is always having some sort of prebuy at least, but a little bit early to judge, given also all the other factors.

And my half one is sort of looking at freight rates. And so I mean spot rates, if you adjust for fuel prices and so on, are down. So I would -- do you see that as a sort of indication that the market is in balance currently or what's the reason?

No. But I think it is right. Of course, there have been a number of uncertainties, inflation building up, interest rates, et cetera. At one point in time, of course, that will have certain effects also on the total general economy. And how that, of course, also will affect the demand of transport, et cetera. Normally, that is an indicator. Again, what we see is a high demand, high utilization of the fleet, as we can read it in our connected data. But again, we need to be very close here to make sure that we are following what the market conditions will -- how the market conditions will continue to develop. So this is a very important sign to keep a close eye on.

The final question comes from Anthony Dick from ODDO BHF.

My question was regarding the order intake. So it's down year-on-year, but quite most improvement sequentially quarter-on-quarter. So that would suggest an improvement in the supply chain conditions. So maybe if you could just confirm that and also address what your expectations are for H2, do you expect an improvement and what kind of visibility do you have on that? And then also just trying to get a sense of how the supply chain disruptions are still impacting your ability to take on additional orders. Are they still really limiting your order intake? Could you maybe mention your waiting list to when they extend to and has that evolved in the last couple of months?

Yes. First and foremost, if we start with the order intake, it is true that we gradually have opened up and being less, so to speak, firm in our discipline. We are still firm in our discipline, but we have been able to open up a little bit more. As I commented, book-to-bill, both in trucks and construction equipment are getting closer to balance now, which is good. For trucks, we took down the order book with approximately 7,000, 8,000 units. That is representing then 1.5, 2 weeks of production. But knowing that we've had quarters of order book and, as I said, 2022 almost fill, we need to continue to do so in order to have the right type of lead time, balance, pricing inflation, deliveries, et cetera. So I think the order intake as such is not the main sign of the supply chain easening or not. It is more the output that we have seen. And I think that is very impressive. I mean 61,000 trucks quarter 2, all-time high production for our global trucks operations in the quarter with the supply chain content is, of course, a sign that we have been able to continuously improve our work with our supply chain partners, Tier 1, but also Tier 2, Tier 3, Tier 4. Having said that, we are also clear that this is not over until it's over. We still have a lot of uncertainty in the supply chains, short type of commitments depending on continuous struggle when it comes to electronics and semiconductors, for example, but also a lot of other input materials, logistics. So we continue to utilize the methodology that we have had. And I think it's more about seeing that with the order and deliveries in a reasonable balance, it's a good sign also that we are starting to see, okay, we can work with the order book that we have. So I think -- I think that is how we look upon it.

Thank you, Martin. And that finalizes the Q&A. And then if anyone missed our Capital Market Day, I would recommend a replay that is available on our home page and on YouTube. Perfect summer activity. With that, I think, we see you next time.

Yes. We wish everyone a nice summer. Take care.

Take care.