AB Volvo (publ) (VOLVB) Earnings Call Transcript

Good morning, and welcome to the Volvo Group Second Quarter Press Conference. Today, we'll do as we always do. We listen to our President and CEO, Martin Lundstedt; and then follow up with Mats Backman, our CFO. And then, finalize with the Q&A. With that, I leave over to you, Martin.

Thank you very much for that, Johan. And also, welcome from my side. Even if it was a short introduction, I have to say, it's always a little bit emotional to see our fantastic products in action. So second quarter 2026, and as I would like to start by saying that the group and in reality, of course, all colleagues and business partners delivered very strong and solid results in the quarter with adjusted operating income of SEK 14.8 billion and the margin that expanded to 11.7%, demonstrating strong earnings resilience and growth despite many moving parameters, such as continuous geopolitical turmoil, tariffs, as well as higher freight and material costs. Performance was good across business areas with high customer confidence in our products and services, reflected in a strong order intake and low cancellations throughout the quarter. The group also launched several new business offerings as well as portfolio moves to further improve our competitive set. And I will get back to that during the course of this presentation. Quarterly order intake developed also positively with an increase year-over-year of 33% for group trucks, as one example. And when it comes to the market forecast for the full year, we are for trucks continuing to revise slightly upwards Europe, while reiterating the forecast for North America, given that the first half year was relatively weak when it comes to deliveries into the market in North America and a catch-up will be needed there. But order intake has been strong as you have seen. Another example is the rapidly growing demand for power solutions, not at least linked to data center and AI infrastructure, resulting in an impressive 25% -- sorry, 21% of Volvo Penta's order book value now is related to data center build-out. Looking ahead, we continue to focus on what we, as a group, together with our partners, can impact by staying close to our customers, thereby driving growth and resilience. And we remain responsive to geopolitical developments, trade policy shifts and the speed of transition into zero-emission transport. Operationally, here and now, our flexibility toolbox serves us well to execute on the strong order book, but also maintain balance between demand and supply and keeping inventories at the right level. The ramp-up for trucks in North America is currently a key priority. Our focus also remains regarding effective cost control, and we actively pursue commercial efforts to mitigate the increases in freight and material costs. The priority of the service business is giving good results, and services did grow with 7% organically, showing that our customers have a good utilization in their fleet. All-in-all, our flexible business model creates maneuverability to leverage the current environment to grab the opportunities and to continue to create value for customers, for employees, and for shareholders. And there is a continuous and growing structural demand in the world for efficient and effective transport infrastructure and not at least, energy solutions, and the group is well positioned to move ahead and to grab these opportunities. Looking then at the figures. The first quarter net sales amounted to SEK 126 billion with an organic sales growth of 7%. We continue to focus on earnings quality and the adjusted operating income amounted to SEK 14.8 billion, with an expanded margin to 11.7% in the quarter. Operating cash flow amounted to SEK 5.8 billion, mainly driven by higher earnings, and the Industrial Operations' net financial position at the end of quarter 1 amounted to SEK 34.7 billion. Return on capital employed reached almost 27%, and earnings per share amounted to SEK 5.1 per share. So we can conclude another strong quarter, and I would like to take the opportunity also to thank all colleagues and business partners for great effort during this quarter. Coming into group news then. In the quarter, Volvo Financial Services and Eicher Motors Limited intend to form a joint venture, tapping into both Volvo and Eicher branded commercial vehicles. And the intended joint venture will provide financing, leasing, and other financial services for customers of, as I said, Volvo and Eicher branded commercial vehicles in the Indian market, and that is a great opportunity. The closing of this deal is expected during the first half of '27, pending approvals from authorities. But it is a very important next step in a market that is expanding rapidly and where we have a strong position. On June 10, we have the Volvo Group's Capital Markets Day in Eskilstuna, Sweden, built for resilience and growth. Well attended day with a lot of good interaction with our investor base, but also other key stakeholders, and a lot of good interaction and feedback on that. Also, Volvo Group and Renault Group, together with CMA-CGM has completed the strategic change for the joint venture, Flexis. And the transaction, meaning that Flexis is moving into Renault Group was closed in June. And Volvo Group also reached a settlement with the California Air Resources Board during the quarter. When it comes to volume development, truck deliveries increased by 6% to 55,700 vehicles with higher volumes in Europe and South America, but with lower volumes still in North America from a delivery standpoint and also in Asia. Volvo Construction Equipment's Volvo branded volume did grow 14% in the quarter, driven mainly by North America, but also to some extent by Europe. When it comes to electrification progress, orders of electrical vehicles increased 39% to 5,500 units, 12 months rolling. The increase was primarily driven by Renault light commercial vehicles, but all that Volvo Trucks took more orders for their heavy-duty electric trucks year-over-year and that is also coming with the introduction of the new long-range and versatile platforms for Volvo. Deliveries were largely flat, minus 2% level. [ 6 ] Development. Vehicle and machine organic sales growth was 6% in the quarter. Trucks did grow also with 6%. FX adjusted, driven by sales in Europe and South America. Volvo CE had sales growth at 14% in the quarter, driven by good sales across Europe, North and South America. And bus net sales were down 2%, mainly caused by somewhat softer sales in Europe. And Penta net sales were down 4%, mainly caused by lower sales to the Middle East, where some of the deliveries of power generation equipment has been temporarily paused, due to the conflict situation that is happening for the time being in the region, unfortunately. But we are expecting that to come back, so that is temporarily paused. Service sales development, organic service growth amounted to an impressive 7% in the quarter. And what was very positive, it was broad-based positive development across business areas. The 12-month rolling service sales increased to SEK 126 billion, and this is also showing that what we discussed during the Capital Markets Day that our work with the total offer for every customer is really paying off here. Services is a very important focus area and our efforts are paying off when it comes to not at least our service contract portfolio. We see that when we have the service contracts, also it gives high retention with our customer base, but also higher resilience and less volatility for the group. Moving into Trucks then. In May, Volvo Trucks showcased their brand-new, high-performing 13-liter combustion engine platform, which will be implemented now step-by-step globally. The platform is also alongside with diesel fuel ready for renewables and alternative fuels such as biodiesel, HVO, biogas, and green hydrogen. And sales will begin during the third quarter 2026. In June, Renault Trucks followed also Volvo showed next generation of battery-electric heavy-duty the Renault Trucks E-Tech T, which has an impressive range of up to 660 kilometers and with maybe in that sense, our leading payload reaching up to 27 tonnes. Sales started for Renault here end of June. And Mack Trucks, and you can see that on the image here, celebrated the Americas 250th anniversary with a debut of a limited-edition America 250 tribute truck, a custom-designed Mack Pioneer, as you can see here, honoring the company's deep American routes and its long-standing role in helping move the country forward. Then when we move into the market forecast for trucks, in North America we repeat our market outlook at the 265,000 units in retail sales. That is the sales out from dealers and to customers. Orders levels have been elevated in recent months, while retail sales pace or the deliveries done, is expected to gain momentum in the second half of the year. And an EPA27 prebuy is included in our current view, but it means that we need really now to get deliveries out during the last part of the year here. And for Europe, the forecast for '26 is increased by 5,000 units to 350,000 on the back of continued strong underlying demand in the market. Brazilian market continues to hold up on the back of the FINAME, financing support package, and we repeat our market forecast of 80,000. Demand in India has continued to grow, supported by steady freight activity, continued investments in infrastructure and supportive government policies and healthy replacement need. Repeat, our Indian market forecast of 400,000 medium and heavy-duty trucks. And the total market forecast for China have been lifted with 120,000 units up to 880,000 on the back of extended trade-in program aimed to modernize the fleet. And that is really continue to decouple the transport sector from fossil fuel dependence in China, continue to boost battery-electric vehicle sales. Book-to-bill. Of course, a very positive picture here. Recent order momentum across regions supports the continued positive book-to-bill. And for globally, the book-to-bill was at 117% in the quarter and 106% 12-month rolling. And we have gradually been ramping up and are well balanced on the industrial side to meet the customer demand. But as I said already, focus would be on a continuous ramp-up in North America during the second half of the year here. North America and South and has been strong with 150% in quarter 2 and 133% 12-month rolling. Europe in balance, but should be -- remember that, that is on really good and solid levels. And South America, strong given FINAME programs. On the truck market side, in Europe, to start with Volvo and Renault Trucks continue to deliver strong market shares through May. Volvo at 19.6%, Renault at 9.3%, giving a total share of almost 29%. And on the battery-electric side, more OEMs are now delivering. Battery-electric solutions, Volvo and Renault trucks delivered a 24% combined market share for the quarter. But to be remembered is that our recent launches of the next-generation long-range and versatile electric trucks will regain momentum both for Volvo and Renault. And we proceed with our three-pronged approach with diesel, electric and hydrogen to drive both decarbonization and to meet the demands from the customers. In North America, we had a combined share of 17%. Mack Trucks is at 8.4% and Volvo at 8.6%. Volvo Trucks are back on the right track and regain gradually their position and further report from over the road or the sleeper segment is expected for Volvo. In Brazil, remains at good level and reached a market share of 23.2%. And in Australia, the combined Volvo and Mack market share reached 21.4%. Moving then into Construction Equipment. Volvo Construction Equipment had, first and foremost, the Volvo Days 2026, a big customer event that was held in Eskilstuna. Focus was on, of course, a lot of our new products and services, productivity, sustainability, and long-term customer competitiveness. Over 8,000 guests participated over the course of 4 weeks, of course, including mainly customers from all over the world, but also retail partners and employees, but also representative from society at large policymakers, investors, and suppliers. And in mid-June, we held also the groundbreaking ceremony for the new excavator factory in Eskilstuna, together with Sweden's Prime Minister and Deputy Prime Minister. And this SEK 700 million investment reinforces Volvo Construction Equipment, competitiveness, industrial footprint, and proximity to customers in the important European market for excavators. And the new factory is set for completion in 2028. And in the quarter, Volvo CE also delivered the world's first electric articulated hauler, the Volvo A30 Electric. And that is, of course, also fit-for-good operation given the more confined nature, as you can see on the picture here. And we see an increasing customer interest around this and showcased not at least during the Volvo Days here. Market forecast, no drama at all. On the other side, we are lifting. If we start with North America, we are lifting North America with 5 percentage points. We guided flat as midpoint previously, but now we guide plus 5% in relation to previous year, supported by investments in data centers, energy infrastructure, and manufacturing onshoring. Europe, we had already plus 5% as midpoint in relation to last year, and we keep that at the same level as previous quarterly report on the back of continued infrastructure development, good machine utilization. South America also keeping unchanged, but in this case, on a flat development in relation to last year. We are little bit taking down and decreasing Asia from flat to minus 5% as midpoint on the back of the softer markets in Turkey and Middle East and somewhat in India as well. And China, we are lifting from plus 5% midpoint to plus 10%. And here, we see growth is supported by government policies to stimulate real estate market and export industries. When it comes to the book-to-bill, reached 92% in the quarter and 102% 12-month rolling. And here, it's important to mention that orders were up 8% and deliveries up 14% for the Volvo brand. So we have a good order coverage for both Europe and North America. In Asia, the lower book-to-bill is driven by some of the decreasing markets in Turkey, Middle East and India, as I previously mentioned. Buses. First and foremost, Vy Flygbussarna airport coaches operating between main cities in Sweden and the airports placed an order of new 25 coaches and also complete gold service contracts to be used for, as I said, then for -- between the cities and the airports. We also introduced the Volvo Buses' new electric coach into operations and start on the route between Gothenburg and Landvetter Airport. Book-to-bill was 62%, some seasonality in this from a low order intake in the quarter. But Volvo Buses have a balanced field rate for the year and book-to-bill 12-month rolling at 92%. For Volvo Penta, continued to introduce new versions of the IPS Hybrid platform, expanding its hybrid-electric marine offering into the professional vessels segment with strong customer interest given the performance of this execution. Volvo Penta also strengthened its position in the growing data center segment and expanded its strategic collaboration with Utility Innovation Group. Data centers, as I said, now represent 21% of Volvo Penta's total order book value. And the image on the screen here is from the switch data center in Las Vegas, produced by Volvo Penta's partner Central Power and powered by Volvo Penta D16 gensets. Volvo Penta's book-to-bill at good balance with 96% in quarter 2 and 97% 12-month rolling. Moving then into financial services, continued to profitably grow the portfolio on a currency-adjusted basis through solid new retail financing. And the 12-month rolling penetration rate was sustained at 30%. Portfolio performance continued to be good with maintained earnings resilience. And of course, we are now continuing to focus on the total offer as again described during the Capital Markets Day where VFS together with our business areas are playing a very important role, both for customer finance but also in the growing insuring segment. So by that, Johan, I leave the word back to you.

Thank you, Martin. Thank you for the business update. Now I'm returning to Mats to take us through the financial numbers for the second quarter.

Thank you, Johan. Then looking into the financials and starting off with the group net sales. Organic net sales increased by 7% comparing to last year. Vehicle sales increased by 6%, driven by Trucks and Construction Equipment. Service sales increased by 7% with contribution from all business areas. Looking at organic net sales development in the different geographical regions. European volumes increased, which led to an increased sales of 13%, driven mainly by group Trucks and Construction Equipment. In North America, sales were slightly higher by 4%, driven by Construction Equipment and Buses, but this was partly offset by Trucks. In South America, net sales increased by 9% versus last year, supported by all business areas. And in Asia, net sales decreased by 3% in the quarter. Overall FX effect was negative with about SEK 1 billion in the quarter. The adjusted operating income for the group was SEK 14.8 billion, with an adjusted operating margin of 11.7%. In Q2, earnings were again supported by the positive development of our service business, a positive brand and market mix and R&D net. The U.S. tariff net cost was on the expected level of about SEK 1.2 billion with a negative year-over-year effect of SEK 1 billion. In the second quarter, we continue to see higher freight costs and increased material costs related to inflation and the current geopolitical situation. The year-over-year increase in selling cost is mainly due to selling costs from acquired businesses. The net R&D capitalization effect in the quarter was positive at SEK 1.3 billion with a year-over-year effect of SEK 600 million, and FX had a positive impact of SEK 500 million in the quarter. The second quarter cash flow amounted to SEK 5.8 billion. The positive cash flow contribution in the quarter was mainly driven by higher operating income and a lower buildup of working capital. Return on capital employed trend improved to 26.8% on a rolling 12-month basis. Net cash in industrial operations amounted to SEK 35 billion, and the decrease versus first quarter is mainly related to the SEK 26 billion of paid out dividends. Group Trucks organic net sales increased by 7%, and this was driven by higher volumes and positive development of our service business. Adjusted operating income amounted to SEK 9.7 billion with an operating margin of 11.2%. Higher volumes in Europe and South America, good development of the service business, and lower R&D net were partly offset by increased freight and material costs. Trucks had a positive impact of SEK 300 million in the quarter. Construction Equipment net sales increased by 13% versus last year, and this was driven by higher volumes and positive development of the service business. Adjusted operating income reached SEK 3.1 billion with an operating margin of 14.4%. Positive development of our service business and brand and market mix were the main drivers behind the improved performance. In the quarter, U.S. tariff and material costs had a negative impact on the financial performance. And currency had a positive impact of SEK 180 million in the quarter. Then looking into Buses. Organic net sales were stable versus last year. Buses delivered another strong quarter with adjusted operating income of SEK 498 million, an 8.2% in operating margin. The result was supported by price realization and positive brand and product mix. In the second quarter, material cost and U.S. tariff costs were building up and had a negative impact. Currency had a positive impact of SEK 18 million in the quarter. Penta organic net sales were on the same level as last year. Adjusted operating income amounted to SEK 908 million with an operating margin of 16.7%. Price realization and strong development for the service business were offset by lower volumes, higher R&D and U.S. tariff costs. Currency had a negative impact of SEK 37 million in the quarter. And then looking into financial services. The credit portfolio increased to SEK 274 billion with a rolling 12-month return on equity at 10%. Portfolio performance continue to be good with delinquencies and write-offs under control. The adjusted operating income amounted to SEK 1 billion, supported by good portfolio growth, but partly offset by an increase in credit provisions. Currency had a positive impact of SEK 26 million compared to the same quarter last year. And then finally, looking into the forward-looking guidances and starting off with the FX. We expect a positive currency impact of approximately SEK 500 million year-over-year in the third quarter. The underlying net impact on tariffs in the third quarter is estimated to SEK 1.1 billion, but expected to be fully offset by IEEPA refunds giving a total net tariff effect of around 0 in the third quarter. We expect an R&D net capitalization effect of SEK 3.5 billion for the full year '26, with a year-over-year negative effect of about SEK 500 million. Finally, we reiterate the guidance from last quarter for a tax rate of 24% for the full year 2026. And with that, I'm leaving for Martin to summarize.

Thank you very much for that, Mats, that really good walk through when it comes to the financials. I will do the summary very brief. Obviously, first and foremost, again, we'd like to thank all colleagues and business partners for a very strong quarter and great work performed here. We see that also when it comes to the top line development, organic development of 7% up to SEK 126 billion, especially I would like to mention the service development also organically growing with 7%. Of course, we continue to support the business here. But also the order intake, not at least when it comes to group trucks. So now moving forward here, it is a full focus of executing on the order book that we have and also to make sure that we all are having a good level of adaptability when it comes also to the commercial conditions moving forward in order to mitigate the freight and material costs for the company, as we have been doing in this quarter. So that is the summary, I think, Johan. And let's get started with the Q&A.

Yes. Thank you, Mats and Martin. So we move into the Q&A session, and we have a number of banks on the line. We will start with Shaqeal from Morgan Stanley.

Shaqeal from Morgan Stanley. So Martin, there still seems to be quite a gap between North America orders and deliveries. Obviously, we started to see freight activity pick up somewhat, but it's not quite booming. The latest EPA proposal seems to indicate that the incremental cost of compliance is also relatively low. So what's your sense of customer sentiment from there? Is there any concern with those late deliveries? Or are you quite confident in the sustainability of the upturn?

Thank you, Shaqeal, for that question. I think that is one of the, of course, the key topics now moving forward for us. I think that there is an underlying support for this figure, knowing that we have been into a freight recession not at least when it comes to the long haul for quite some time. And that is also reflected in the age of the fleet, et cetera. We should also remember between the order intake and actually deliveries of what we are calling retail sales out from our dealers, there is, so to speak, a process to get this out. And since the year started relatively weak. As you remember, we have stop days in quarter 1. And also, we were not fully in balance up to mid-May. The second half of the year now is, of course, a delivery semester for us and for the industry in order also to reach, because from time to time, we get the question, why don't you change the 265,000 guidance, but we should remember that, during the first 6 months, it has been considerably lower than 50% of the 265,000. So that implies an uptick here. Then of course, there is still now discussions ongoing, how will exactly the EPA27, so to speak, transition look like. But again, I think the underlying fundamental is important than it is important then to manage, so to speak, in a good way quarter 1 next year. But at the end of the day, that is normal business for us. What we have in the order book and the order coverage, we feel is solid, both for Mack and for Volvo.

Very good. We continue in London with UBS, and we turn to Hemal. Please go ahead, Hemal.

Hemal Bhundia from UBS. Just in terms of the higher costs from freight and raw materials, is this across the group or is there certain regions or divisions where you're seeing these great cost headwinds? And is pricing the only option you have? Or can you pull on other levers such as negotiating with suppliers?

I would say it's across all the business areas. It's more kind of a general inflation. And as we said in the report, I mean, what we're doing is we're kind of gradually increasing prices. We see a gradual price realization coming there. So that's -- we are on top of it, so to speak, but it's definitely cost inflation out there, it is. And it's more general, I would say, than specific. And if you're looking specifically, like Martin said, now in the quarter, more kind of pronounced what we saw at Penta with delays on deliveries and thereby lower volume. So that's kind of a concrete difference if you're comparing to different business areas. But otherwise, more of a kind of a general cost inflation, I would say.

And I mean -- and I think, that's very important to reiterate what Mats is saying. It's not, I mean, reflected to Volvo or not even to our industry, it's more the general, so to speak, pattern given that you have had disturbances, et cetera. But having said that, I think you have seen that during a number of years now, different type of events like that. And we have also been showing that we are really good in working then with the compensation, both when it comes to operational efficiency, when it comes to working with the supply base, as you alluded to, but also when it comes to the commercial conditions, obviously. So that will continue that work.

Yes. Good. We continue with Goldman Sachs and Daniela Costa. Please go ahead, Daniela.

I wanted to ask on your EU truck guidance upgrade. And just can you elaborate a little bit on what you see underlying because we have been seeing the European market okay for a while, while macro headwinds continue and exactly sort of where we are on that replacement cycle? Do you think this can continue into the coming year? Or is there anything a bit more structural that is driving this?

Yes. Thank you, Daniela, for that question. And I mean, we have continued to see in the different European regions, continuous good activity, both when it comes to deliveries, low levels of cancellations, and a good order activity. And -- but also when it comes to the utilization of the fleet. And now it's not a dramatic, so to speak, revision, it's plus 5,000. But still, it shows that it's holding up well. But I also would like to say that even though we are talking about solid levels, I mean, 310,000, 315,000 that we are now guiding for are, of course, good levels, but they are not extraordinary good levels also, because if you look at 4, 5 years back in time also, we have been considerably higher. So if you think about replacements, we are not concerned that we are placing too quick in relation to the rolling fleet. So then when it comes to the structural opportunities that are ahead of us. I think they are a little bit yet to be seen. Somewhat, we have seen that when it comes to e-commerce, et cetera, not only in Europe. But I think when it comes to defense, energy infrastructure, and other type of more structural opportunities moving ahead. They are yet to be seen. But there is an underlying demand that we think is a solid year.

Good. We continue with the Citibank and Klas Bergelind. Please go ahead, Klas.

It's Klas. So I just want to ask on tariffs, Mats. So first on Section 232 and the offsets here. Obviously, EPA will impact positively in the third quarter. But what are you hearing on the Section 232 offsets? I mean, on my calculations, the MSRP offsets in trucks can almost offset your annual tariff bill in trucks, which could come on top of the EPA. Do you think this can come through this side of the year or more next year?

And without kind of guessing, but taking one step back and looking at the total picture, because I mean, there's a lot of different moving parts right now when it comes to tariffs then. So what we said for the second quarter was that, we guided for SEK 1.2 billion, and that's what we saw as well then in the quarter. And we talked when we reported the first quarter and gave the guidance for the second quarter, we talked a little bit about the extended scope when it comes to the Section 232 for Construction Equipment and including excavators and wheel loaders as well on top of the previous kind of ones including in Section 232. And that has now changed during the quarter then. So now they are back on the original scope again them. So if you're looking at the guidance we are giving for the third quarter, we are slightly lower than on the total net impact of SEK 1.1 billion as the underlying. And then on top of that, we have the IEEPA refunds then that will be wash then for the full net impact for tariffs. So saying 0 then for the third quarter, including the IEEPA refunds then. But we have an underlying run rate when it comes to the tariffs than in the third quarter, SEK 1.1 billion. And you are right, when it comes to the Section 232 credits, we have nothing included from that in the quarter. And we are not kind of guessing either then. So if you're looking at the third quarter guidance, it's nothing included. And let's see if it will happen in fourth quarter or not. But what we need is guidance for how to file those kind of claims and so forth. And that's not there yet. So we are kind of prudent when it comes to making accruals on that side. It's not included anywhere. And it's difficult to guess if that will impact the fourth quarter or not, but that's where we are.

But I can just add to that also, I mean, that Mats and the team and our entire team in North, we are working very closely with the related authorities on this. So exactly when it will happen, I think -- let's see, but the process is ongoing in anyway.

And we will be there when it happens.

Yes, we will be there when it happens.

We turn to Bernstein and Harry Martin. Please go ahead, Harry.

I wanted to ask about the production ramp in North America in the second half of the year. Clearly, a significant ramp-up of close to peak run rate. It looks like on the data we have industry deliveries or production disappointed a little bit in June. Have you seen any supplier delays or any other issues ramping capacity in the near term? And then, is there any risk to the outlook for the second half of the year? And then a final sort of related thought or question. Will you use the new plant in Mexico to ease any of these constraints and put some room into the U.S. market this year as well?