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Edited Transcript of VOLV B.ST earnings conference call or presentation 23-Apr-20 7:00am GMT

Q1 2020 Volvo AB Earnings Call

Goteborg Apr 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Volvo AB earnings conference call or presentation Thursday, April 23, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Claes Eliasson

AB Volvo (publ) - SVP of Media Relations & Group Communication

* Jan Ytterberg

AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board

* Martin Lundstedt

AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director

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Conference Call Participants

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* Agnieszka Vilela

Nordea Markets, Research Division - Research Analyst

* Daniela C. R. de Carvalho e Costa

Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team

* Erik Pettersson-Golrang

SEB, Research Division - Head of Research for Sweden

* Erik Paulsson

Pareto Securities, Research Division - Analyst

* Gautam Narayan

RBC Capital Markets, Research Division - Assistant VP

* Hampus Engellau

Handelsbanken Capital Markets AB, Research Division - Automotive Analyst

* Klas Henrik Bergelind

Citigroup Inc, Research Division - Director

* Olof Cederholm

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

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Presentation

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations & Group Communication [1]

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Ladies and gentlemen, my name is Claes Eliasson, and I wish to welcome you all to this somewhat unusual way for Volvo to present the quarterly report. Normally, we get to meet some of you live, but this time, we will do it purely digital. Some things remain the same, though. We will be listening to a presentation by our President and CEO, Martin Lundstedt, followed by a presentation by our CFO, Jan Ytterberg. When done, we will open up the line for a Q&A session.

So without further ado, Martin, please go ahead.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [2]

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Thank you, Claes, for that. And also from my side, most welcome to the presentation of the first quarter 2020 for the Volvo Group. And as you all can understand, obviously, this presentation will not be like our normal way of doing it. We will start with some of the highlights from quarter 1, but both when it comes to business and financials, and then move into current situation of how the group is handling the COVID-19 pandemic crisis in the current situation and also the actions going forward. And it will be lots of focus around our 4 Cs, as we call it: colleagues, customers, cash, and cost development and mitigation activities.

If we then move into quarter 1, quarter 1 did, with the exception of China, follow our estimates and plans for the different markets, mainly up to mid-March. The forecasted downturn in North America materialized according to expectations, and we did adjustments according to that as well. And Europe also developed mainly according to plan, maybe somewhat more positive actually. Also, the development of market shares was generally positive. But as of mid-March, everything has changed dramatically.

But if we go to the summary of the quarter, net sales decreased with SEK 16 billion or 15%; adjusted operating income was SEK 7.8 billion (sic) [SEK 7.1 billion] or 7.8%, with effects related to the COVID-19 outbreak in addition to further adjustments of production and activities -- sorry, operating income was SEK 7.1 billion; and operating cash flow was minus SEK 4.1 billion.

The net financial position remains strong at almost SEK 58 billion, and I will come back later on also to some important news that has been announced regarding green transformation and product renewals lately.

The significant impact of COVID-19 started at mid-March with a very quick shutdown of our industrial activities in Europe, followed by North and South America and many other smaller regions. Since then, the majority of our industrial system has been stopped or is still in a stop phase.

Regarding the truck deliveries, we have had an impact from COVID-19 outbreak, primarily from mid-March. Supplies were actually secured from China through the quarter despite society shutdown, but supply chains were disrupted when Europe, and later on, U.S. entered into more lockdowns. The volume deliveries for trucks decreased to 23% and the decline accelerated at the end of the quarter and has continued into April. The expected downturn in North America has also affected the deliveries in the quarter, but that was already planned, both for Volvo Trucks and Mack, and adjustments for that were already done to a big extent.

Volumes of construction equipment decreased with 13%, where with Volvo 14% and SDLG with 11%. The same trend as we see for trucks in Europe and America is also valid for construction equipment with a certain time lag, whereas China and Korea have picked up to levels comparable with pre-corona outbreak.

Given the extremely uncertain situation regarding both short-term supply restrictions in many parts of the world currently and also the uncertainty about the demand situation when the gradual return will start, it is not as we see it meaningful to leave any market forecast for 2020 for any region.

In addition to previous guidance of declining markets in Europe and North America pre-corona, this situation has been further accelerated due to the high degree of uncertainty as we are into now. We do see that activity has returned to levels, as I said, before pre-corona in China and also Korea and also relatively good activity levels and operations in Japan. But for other markets visibility is still very low, and the impact on demand not possible to assess. We have done this judgment, both for trucks and construction equipment, and therefore, we are not leaving any forecast for the total market. Focus will instead be to align our activity levels across the whole company to the gradual return of demand. And we will do that in a step-by-step approach, both when it comes to direct and indirect cost and activities.

This slide is more in detail explaining our -- the reason for our current judgment and why leaving a forecast is not meaningful for the time being. Fleet utilization has dropped dramatically during the last weeks and is continuing on that level also. You can see one example here from Volvo Trucks European fleet utilization. The main factor for this decrease is related to national restrictions in general, but also in industrial activities as well as transportation, meaning that there is no need or even possibility to run transports on previous levels. The development of the fleet utilization for the coming months and quarters will depend on national plans for opening up different sectors and how gradual and step-by-step this will be. And we see that effect also because we have a steeper and more pronounced decrease in countries with more severe shutdowns, such as Southern Europe, for example, in relation to Northern Europe.

In addition, as we see it, it will also depend on what activity and demand levels the opening up will give when it comes to different sectors. Our current estimate is that the gradual return will be rather slow and activities in the group -- in the Volvo Group needs to be structurally adjusted. Also, the effect on the order intake on the right side here, as you can see, has been dramatic and fast. After a somewhat better-than-expected start in January and February, primarily in Europe and international markets, the order intake took a big hit related to the outbreak as from mid-March. And the reasons are, you can say, threefold.

Number one is that new orders have more or less disappeared since customers are waiting for better visibility and understanding of midterm demand on their activities, on their transports basically. They are thereby postponing both the replacement and extensions, which is understandable.

And secondly, also, not only that new orders and the new order inflow but the cancellation of firm orders for the same reasons from customers.

And thirdly, cancellations of certain stock orders from dealers in markets with standard specifications or longer lead times basically.

So this pattern has continued also in April. And the highest priority is to get an order book with high quality for us, really containing products that customers still want to get delivered. This work is still ongoing. And the refilling of the order book and to what level and speed is currently not able to judge. And together with the uncertainty in the fleet utilization, going forward means that the Volvo Group -- that we have decided to take out forecast for 2020.

As a consequence of the decline in fleet utilization and also vehicles standing completely still, for example, serving automotive industry in Europe or other examples, due to the lower business activity, they are standing still. We do expect service and part sales to be more impacted in the near term.

In quarter 1, service sales was still at a reasonable level. The most visible negative impact related to COVID-19 was coming from Volvo Construction Equipment and the extensive lockdown in China during big parts of quarter 1. For the rest, we did see service activities that held up fairly well with more visible negative impact as from mid-March. And that goes hand-in-hand with fleet utilization as well. We continue to see the effects of this decreased utilization also in April as the general activity and transport levels have been severely disrupted. How it will develop in the coming months is as a part I have already said also, depending on the gradual opening up of different countries and sectors and, going forward, depending on the demand level of transportation after the acute outbreak phase.

Even if we expect a certain uptick for services after the lockdown periods and when important sectors, as automotive, gradually opening up, sales will be lower in the foreseeable future and highly linked to the general development of the economic activity in major markets. Further adjustments to the new normal will, therefore, most likely be necessary, and we are following that very closely.

2 days ago, we announced the intention to form a joint venture with Daimler Truck for development and deployment of fuel cells in long-haul transports and other heavy industrial applications. The setup allows Volvo to lead the transformation of our industry into the carbon-dioxide-neutral society and to accomplish the Green Deal and complement the current strategies with battery-electric vehicles and other renewable fuels.

We are building on a world-leading fuel cell technology for heavy-duty as regards power output and durability, what we call 2 of the main factors, in a 50-50 percent joint venture that will enable then the shift by a quicker time to market, larger combined volumes and a competitive cost, which is super important to compete with current powertrain solutions, mainly diesel, for example, and internal combustion engines. And it is also, as we have communicated, a clear signal to other players in society to start investing in other parts of the system, such as infrastructure and supply. And the interest after the announcement has been huge and positive, so a very important milestone and landmark moving forward here.

Also during this period, Volvo Trucks introduced a new range of competitive cab-over-engine trucks, covering all segments and all markets except North America. Also in this area, reception has been very positive and will serve as an important lever when the markets are coming back. So that is also a very important investment for the future.

So by that, I leave the first part of quarter 1 reporting and leave it to Jan Ytterberg for the financial metrics.

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [3]

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Thank you, Martin. Some facts around the first quarter. This was supposed to be a quarter where we could show how a downturn management looks like at Volvo. We were heading towards an operating margin of close to 10% in a quarter where Europe was in good balance between supply and demand, whereas we cut production and reduced manning in North America in the beginning of the quarter to adjust to low level of demand for 2020.

The measures to stop COVID-19 started to affect our Chinese operations in the beginning of the quarter. That had effect, but limited effects on the group. But as from mid-March, all of our main regions and business were affected substantially, both operationally and financially. So entering a tough time, it's comforting to know that the company was in good shape for a normal downturn and that we have the toolbox in place for future challenges.

The adjusted operating income in the first quarter deteriorated by close to SEK 5.6 billion to SEK 7.1 billion, giving an adjusted operating margin of 7.8%. And the main contributors to the SEK 5.6 billion reduction were the lowered amount of vehicles and services more or less across markets and business areas affecting both the loss of top line and lower capacity utilization in production. These were effects we had as part of a normal downturn, but they turned even more negative as from mid-March.

Despite SDLG being more severely hit by COVID-19 effects in the quarter, sales of SDLG machines decreased less than Volvo-branded products, which led to a negative market and product mix effect with more of compact machines in construction equipment. And on the positive side, we had some positive effects coming from raw material. These items were the main explanation behind the lower gross income of SEK 5.3 billion.

If we're moving further down into the profit and loss to the indirect cost side, we continue to have high activity level in R&D, which increased and paid out expenses by close to SEK 700 million, and capitalization R&D expenses continued to be higher than the amortizations also here in the first quarter, but less positive than we saw in the first quarter last year. And on R&D, FX had a limited effect.

Joint venture income was substantially lower than last year, mainly related to lower income from Dongfeng, reflecting the measures of stopping COVID-19 in China, which impacted less towards the end of the quarter, but also related to our Indian joint venture with Eicher, reflecting weak demand in general in India. And on the positive side, on the indirect cost side, we had lower selling and administrative expenses of close to 10% if we adjusted for currencies. All in all, currency had a negative impact of some SEK 300 million related and to a revaluation of net payables as the Swedish krona weakened towards the end of the quarter.

If we move over to cash and net financial position, first quarter is seasonally weak cash flow quarter where working capital is being built up off the year-end before the strong second quarter from a delivery perspective. The same trend we're seeing here in 2020 during the first 2 months, but the strong delivery month of March in the first quarter was a disappointment as business activities came to a halt in major markets, and then especially Europe. And as a consequence, working capital impacted negatively with close to SEK 10 billion in the quarter.

Besides working capital where trade payables and inventory impacted negatively by some SEK 3.5 billion each, the cash flow in industrial operation was negatively affected by high tax payments of some SEK 3 billion, mainly related to the strong results in 2019, where payments in Sweden represented the majority of this; and the capital expenditure of some SEK 2.5 billion, partly being offset by disposal of assets to financial services. All in all, we had a cash outflow in industrial operation of SEK 4.1 billion in the quarter. And the negative cash flow then was reflected in a decrease of our net cash position for industrial operation by some SEK 5 billion from end '19 to end of this quarter, down to SEK 58 billion.

The financial target for industrial operation is to have a net cash position under normal conditions, meaning with normalized working capital. When volume is decreasing, we are paying our suppliers for previous periods of production, but having a reduced cash flow -- cash inflow from customers of present volumes like we have had here in the first quarter.

In a situation like the one we have experienced so far in the second quarter when the production have been halted in all regions except Asia, and sales have been low, the negative cash flow effect from such event will be more substantial than what we experienced here in the first quarter. Our present financial position will act as a shock absorber, giving us the necessary maneuverability and also comfort in how the financial target has been applied and respected. We have been active in the credit market as from mid-March, and that has been to improve our refinancing risks and liquidity for coming quarters.

By that, Martin, I'll leave it back to you.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [4]

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Thank you, Jan, and then we will move into the COVID-19 situation and how the company is currently handling that and the actions moving forward. And thereby, in our continuous planning for the group, we are now region-by-region working with a road map in 5 phases with linked milestones and activities and responsibilities, as you can see here on the screen. And the main priority is to work with the health and safety situation in all different phases together with our leaders, colleagues and experts to secure, of course, a reinforced situation aligned with regulations and recommendations. And that goes across the company in all different regions and countries, depending on the situation of the outbreak. And this will continue to be the main priority and an absolute prerequisite for the execution of other activities in our way through and to exit the COVID-19 crisis.

When it comes to the business activities, we have paused the initial shock with immediate winding down of industrial activities in all regions now, and that has been done in a good order, given the very, very short notice time that we had. The organization has been doing in that regard a fantastic job since it's not only the group and our internal activities that are affected but also a lot of links to suppliers and the dealers and other business partners and customers.

We are currently now in the stop phase, as we have said, and we have approximately 50% of our employees in some form of temporary layoff programs around the globe. And we are now gradually moving into the restart phase in some major regions. In parallel, the work is ongoing to plan for the gradual return and different scenarios for the new normal situation. This goes, of course, for directly related volume activities in operations, in sales and services but also into the indirect areas, such as technology, IT, administration to cope with a good balance and to protect cash flow financial flexibility.

We are very proud to inform that our customer frontline colleagues in repair and maintenance, uptime services, call centers, Volvo financial services, parts supply, fleet management and other customer-critical activities have functioned with small or no disruptions. This is, of course, very important to serve customers since they are serving society with really society-critical activities of transporting necessary goods during this very difficult period.

A final comment on this slide, as it illustrates, the current restart phase is still to test that our supply chains can function in a good manner, but as we move further down the road here and moving to the right, it will be more and more a question and a judgment of the demand levels linked to the general economic activity. The scenario planning includes, therefore, both short-term mitigation activities as well as structural measures to cope with the new normal situation and to find the right balance between revenues and costs and also investments.

So if we summarize what we have been concentrating on in March and April to mitigate the severe impact of COVID-19, we have gone through most of it. Of course, health and safety remains and will continue to remain the main priority. We have done immediate reduction of activities of spending to go down to only business-critical activities. We are continuing to have a strong focus on customer uptime, supporting society-critical transport and the infrastructure development. We are now continuously adjusting activity levels to the gradual ramp-up and the new normal that will be considerably lower as we judge it now, and structural adjustments will be necessary. And the gradual restart of production is coming from end of April, as we can see here on the next slide.

And on the right side of this slide, you can see that production is already up and running in China, Korea and Japan, so the main part of our Asian footprint. And when it comes to the gradual restart with low pace, now the main focus is on Europe and the Americas as from week 17, and just to clarify, week 17 is the week we are into now because I know that in some countries we are not talking about weeks. But just to be clear, week 17 is this week and the coming weeks after that, so we are talking about the end of April and beginning of May here.

First out is powertrain and engines, gearboxes, axles. And since we have, first and foremost and most important, a small demand of firm customer orders primarily related to Penta, buses and construction equipment, for example, in Asia, and to assure deliveries to customers in those areas, but also then gradually for trucks. So we will gradually start our final assembly units for trucks in the coming weeks also to test supply chains and then step-by-step adjust to actual demand levels.

So to summarize, our focus is, as I started this presentation on the 4 Cs: It is about colleagues; customers and business partners; it is about cash; and cost.

For colleagues, we are making sure that the restart and gradual return is done with reinforced safety measures and procedures to enable this slow ramp-up.

For customers, we are focusing on maintaining good frontline service, and in addition to that, to support financial mitigation since we are seeing increased requests for, for example, lease payment modifications in our financial services operation.

For the cash part, we are working with a lot of different activities and Jan has been into that, of course, inventories, both on new and used receivables and collection of that, but also to execute on our payables to pay customers in good order and quickly adjust CapEx short and mid-term. We have a good liquidity, and we have committed credit facilities also that have been worked on from treasury with very good progress.

For cost, it is, of course, a mix of short-term mitigations such as layoff programs and reduction of consultants and salaries as well as reducing OpEx to business-critical activities and also all other type of activities reduced to a minimum. Long term, we will -- and that goes both for the direct and indirect part of the company. And long term, we will structurally adjust to the new normal across the group, including research and development, IT and other development activities. And we will be firm continuing to protect the core R&D in areas where it is important for us to continue to drive the transformation of our industry, particularly into a sustainable transportation system.

Finally, I would like to say that Volvo, we are a strong company with very committed colleagues and business partners. And I would like to thank also everyone in the company and also other partners for the great and committed work and loyalty during this unprecedented period. We build on a strong foundation entering into this tough period, not at least when it comes to our product and service portfolio and outstanding relations with customers across the globe. When we eventually get through this crisis, we take confidence in the fact that our customers are active in businesses around the globe that are important to keep society functioning, and those businesses will continue to grow, not at least both when it comes to transportation and infrastructure, and that Volvo, now our products and services are vital in building sustainable and competitive transport systems and infrastructure for the future. So we have an important role to play today and tomorrow.

And in the coming quarters and especially in quarter 2 and in quarter 3, it will be extremely challenging to reduce cost with the same speed and magnitude as revenues are decreasing, and it will also, as Jan said, have a big negative impact on cash flow, depending on the balance between the inflow and outflow and how production has started in mainly quarter 2 here. But we would, therefore, have full focus on our contingency activities and continuous execution during this challenging period.

And by that, actually, we close the presentation, Claes, and we open up for question and answers.

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations & Group Communication [5]

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Let's do that. Thank you very much. So operator, if you would please let the first caller come forward, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Hampus Engellau from Handelsbanken.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [2]

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Three questions from me. Starting off with this gradual ramp-up, I think that if we look at China, there were also similar gradual ramp-ups. This was, of course, much different, tougher. I understand that. But given from what you're planning now, would it be possible to kind of quantify, in an initial phase, what type of a capacity utilization we could be looking at moving into May and second quarter?

Second question is on order intake. Of course, remembering the minus 1,500 order intake that you had in Europe in Q4 2008, that says that lead times are very long. Could you talk a little bit about how lead times are now following the cancellations and trying to -- for us to grasp how to think about further cancellations given lead times?

And last question for me is more on this announcement with Daimler on fuel cells. [Unique to this] PowerCell, what is the main difference between what you're doing with Daimler in terms of what you had with PowerCell? Is it just a volume game or is there a difference in technology?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [3]

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Thank you, Hampus, for those questions. And to start with, China, of course, is a particular case as you said. As always, when you've had such a big stop, it was also in China, a gradual ramp-up. But China has come back both when it comes to construction equipment and trucks to, as I said, pre-corona levels. For different reasons, we don't expect the same type of rebounds when it comes to Europe and U.S. So when it comes to the first question regarding capacity utilization, it is to be completely transparent, too early to really deem how that will look like. But I think you should think about it that when we do the restart now, we primarily restart from low levels to test the supply chain, and then when we feel that that is working in the different value chains for different business areas and component flows, we will gradually move into adjusting according to the demand levels.

Given the short-time layoff programs that we have, we will be very clear on just producing what are firm orders. And that will, as we see it now, have quite a big variation from day to day, but we will install that flexibility given that we have a frozen lead time of a couple of -- 3 to 4 to -- a little bit depending on the region 3, 4, 5 weeks and adjust that accordingly. But it will be a gradual ramp-up step by step. And we will be very firm on not producing anything that is not firmly ordered because it is not in the interest of the customers, it's not in the interest of the dealers and ourselves. So we have to take it there step by step. But we will cope with the situation, and we will cope both from, so to speak, a flexibility point of view and from a capacity point of view, thanks to the system that we are installing now.

When it comes to the order intake, the same situation that we've had such a dramatic drop, as you did see, of 75% between February and March is, of course, related to the fact that when you're coming to a stop of this magnitude, both new orders are more or less coming to a complete stop because customers are waiting and see to get visibility and what will their demand be after this. And in addition to that, as I said, cancellations of already placed orders and cancellation of some of the stock orders and cleaning out of the order book. So that is continuing. That is the right thing to do. And linked to the first question, then we will gradually now and some orders are coming in, obviously, we will pace them when customers would like to have them produced and take it from there. So this is much more of a short-term game of really finding the balance in this gradual return and gradual ramp-up.

On the final question, I should say that it is important to understand that fuel cells are not commodity. Fuel cells have all different technologies, a lot of different characteristics. And when we have now been evaluating a number of alternatives moving forward into the hydrogen society -- because we see that after one very viable part of the CO2-neutral society moving forward for long distance and for heavy applications, we have evaluated a number of different alternatives when it comes to technology maturity but also technology characteristics for heavy-duty applications, both when it comes to power outputs and when it comes to durability for our type of applications.

In addition to that, the opportunity to make an industrialization that makes sense when it comes to shifting this with volumes, that makes sense in order to get the cost level to a level that it can compete with other technologies, and also to have a structure that allows others to foresee this shift when investing into infrastructure and hydrogen supply. And when we are -- and then also the opportunity to get to the structure of a 50-50 joint venture producing the fuel cell stack, and thereby giving a natural way of both sharing development and the whole journey of industrialization, but gaining the opportunity to continue to compete in the market and to continue to have, so to speak, a modular system where the different partners that have the right application and engineering will actually win and be more successful. So that is the very good balance and giving us also the natural influence in this joint venture.

So coming to the end of your question, for that reason, when we did evaluate different alternatives, this alternative was the outstanding alternative for us, and without any competition, the most viable alternative for Volvo Group moving forward.

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Operator [4]

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Our next question comes from the line of Erik Paulsson from Pareto Securities.

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Erik Paulsson, Pareto Securities, Research Division - Analyst [5]

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It's Erik from Pareto. Two questions from my side. First one is on order development here from late March, and you said a negative order intake here. Is it possible to breakdown that into geographic regions from now?

And also on the second question is regarding this fuel cell JV with Daimler. How much will you invest per year from your side, given that this is approved by the competition authorities?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [6]

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Thank you, Erik. First and foremost, you can say that the immediate effect that we have seen on the order intake is very similar in all regions where you have the restrictions and the lockdown because you have the same type of reaction from customers and dealers, meaning that there is a restriction, there is a lockdown. We [start] to order and we canceled because we need to create maneuverability, and we need to create visibility of customers. So from that perspective, it is more linked to the acute outbreak and the stop phase than 2 different patterns in different geographies. And that we see clearly also obviously that markets that have opened up is gradually also coming back.

I mean when we look at China for the different business areas, Japan that has been less in a lockdown, Korea that has also been opening up. So it's, in the current phase, more related to the lockdown. And therefore, as we say, when we are now restarting, we test with the supply first and then gradually moving in to understand what is the right level to follow in the ramp-up when it comes to demand.

And then when it comes to Daimler and, yes, investments, we have not been precise in that. During the call 2 days ago, it was said that the 2 companies will invest a 9-digit amount of euros into this over the coming period, and we have also said that this is a journey that will be done now during the coming decade here because it will be a very important cornerstone in our strategy up to 2030 and to move into a leading position when it comes to carbon dioxide transportation systems.

And again, that's the reason why we still -- or not still -- why we find it so attractive to have this joint venture of a modular setup of the fuel cell stack that can be then installed in different type of equipment for heavy-duty applications, because you can then share the development costs, keep the consistency, allow other partners to also actually order and to take volumes out of this JV, but more importantly, also other actors to invest in other parts of the system such as infrastructure and hydrogen production. So again, when we are looking into this, and we have already before judged that hydrogen must be a part of our product portfolio, and when we have balanced that in our R&D road map moving forward, this has been the most efficient alternative for us to move forward, both when it comes to a competitive solution in the marketplace but also when it comes to our investments into this technology.

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Erik Paulsson, Pareto Securities, Research Division - Analyst [7]

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Okay. Just this 9-digit amount then, I guess, it's been over 10 to 20 years or so?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [8]

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Yes. I mean, I think the most important is that you should see -- I mean, thanks to setting up a structure like this, it will -- I mean you should think about it also that this is a part of our R&D investments. It's not separate. I mean, it is the same as we have announced partnerships with Samsung, with NVIDIA, with Isuzu, and it has been growing in different directions because we have a very comprehensive road map in this transformation and to find smart setups depending on what technology and what geography and what type of applications we are talking about is the trick of the tail here. And again, think about it as a part of our R&D investments and an efficient part of our R&D investment, both when it comes to get hold of a mature technology that has been tested in a million kilometers for heavy-duty applications with a good IP position and also when it comes to the commercialization and the volume shift because that is also so important when you're talking about technology shifts.

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Operator [9]

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

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Gautam Narayan, RBC Capital Markets, Research Division - Assistant VP [10]

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Tom Narayan, RBC. My questions -- I have a couple. One is on the construction equipment business, where sales were down 17% but margins were still, I think, 13%. I think it was above where consensus expectations were by quite a bit. Could you perhaps comment on what the breakeven level of demand is of that business? Asked another way, what level of volume declines in the CE business would be breakeven on an operating income basis?

And also on the Daimler JV, obviously, it's 2 truck makers working together as opposed to you guys working with a supplier. Could this perhaps indicate you guys foregoing the supplier route and maybe doing fuel cells kind of by yourselves going in-house? Or just purely just an R&D thing the way that you guys would do on a normal basis?

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [11]

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We see a breakeven point. We don't give any guidance on a breakeven point. We can describe the quarter a little. And I think also we should go back to where we were in 2019 because we see it was doing a very good job of taking out costs and not produce too much in -- for the season in Q1, Q2. So they came in, in a pretty well balanced way into this and also starting up very well in Europe and U.S. And we have then the problems from SDLG already in the beginning of the quarter and then coming back to strong volumes for SDLG towards the end of it, whereas the Volvo-branded products, as you have seen them, decreased even more than the SDLG under the circumstances. So I will abstain from giving any guidance on breakeven points, but a strong quarter for VCE, and also it was catered for in a good way in the end of 2019.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [12]

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And when it comes to the cooperation and the joint venture setup regarding the fuel cell, the joint venture is, so to speak, set up in a way where it is both about the continuous development of the fuel cell stack for heavy-duty applications in different forms where we have, so to speak, the ability to use this across the group for different business areas; but it's also set up. So it will be the deployment, industrialization and production of the fuel cell stack. And the fuel cell stack is the component, being the energy layer producing electricity on board for a long distance over heavy-duty applications than applied to a product. For example, a Volvo Truck with Volvo's electric powertrain, with Volvo's cooling systems, with Volvo chassis and execution.

And that is, so to speak, the good balance in this, that sharing the development burden on such an important technology and being able to drive the industrialization and the shift and get to volumes quicker where it makes sense, and cost levels can actually compete with other type of -- total cost of operation, other type of drivelines. So the JV will be responsible both for development and for production of the fuel cell stack. And we have also been clear that this is a setup that allows also the joint venture to sell to other parties that could be interesting in this technology.

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Operator [13]

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Our next question comes from the line of Erik Golrang from SEB.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [14]

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I have 3 questions. First one is if you could put a number on -- you said that around 50% of your employees were in some kind of temporary layoff programs currently. Could you put a number on what that means in terms of savings or avoided costs?

And then the second quarter ties into headcount as well. You saw a drop of total headcount by 7% in Q1. Given what you're planning now, where would you expect that number to be for the second quarter?

And then finally, on the UD Trucks deal, if you can get a status update there. Should we simply assume that it's still on, but that the price will be lower?

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [15]

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Okay. Maybe I can start on the first one, the 50,000 employees on short term. First of all, that has to a very, very limited effect impacted Q1 since it happened towards the very end of the quarter. And we don't give any guidance on savings. I mean, Sweden is a big part of that. We have 20,000 employees in Sweden, and you know the -- how this system works. If you at least are in Sweden, you can get some number on it. But it also will, of course, depend on how long we will have this and how long we will fully utilize it not only in Sweden but in other parts of the world as well. So also here, I abstain to giving any numbers.

Related to the headcount reduction, part of that is, of course, the fact that we had a very quick end of the quarter as it relates to consultants where we were reducing consultants. One can put it like drastically, but quickly at least with a certain magnitude. And of course, those are in those numbers. And it will also be very much depending, as Martin was into, how the restart will look like and when we can actually put on new further activities than we have today where we have a very, very low activity level as we go on and as we see how the demand is coming back and in what kind of way it does. So also, I will not give any guidance of how this will look going forward. But where we are today, of course, this is a situation where we are decreasing employees and consultants, not increasing, trying to postpone recruitments, et cetera, where we can and also, of course, use a normal turnover to find solutions that we are taking down costs in general in the company.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [16]

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And yes, maybe from my side, really to complement what Jan said, I mean, I think you should think about it also as different measures in the same toolbox because short-time work and layoff programs is one part of mitigations in short and midterm and then reduction of resources then, first and foremost, with priority temporary resources and consultants. But as we've also stated -- but that starts from going through the activity level in the company. We will adjust activities, both on the direct and indirect side in relation to what we will have as a demand level, and then we will utilize the different tools here, both when it comes to reductions but also the short-time work depending on how long we deem this will be. And that visibility will gradually increase during the coming months here.

On UD Trucks and the strategic alliance with Isuzu, that is still on.

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Operator [17]

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Our next question comes from the line of Olof Cederholm from ABG Sundal Collier.

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Olof Cederholm, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [18]

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It's Olof with ABG. I have a question about maybe not the near, near term, but what you call the new normal. I was just wondering how you -- if there is a way of putting the reasons why you don't think Europe and the U.S. will recover as strongly as China has into words, why will that take a lot longer? And also on the -- on your time line, there is no back to the old normal. So what are your thoughts regarding that? Will the truck market simply be a smaller market for the very long term due to this? And why in that case?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [19]

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Thank you, Olof. First and foremost, I think that's the reason why we are not leaving any forecast for the market that we are still as you are. And I think everyone is struggling with what -- how will the gradual ramp-up and the new normal look like.

First and foremost, of course, they are all different economic systems in different parts of the world. And I think one of the key factors for Europe and North America is that we need to start to see more visibility about the coming phases here, not at least when it comes to people's confidence in the future because a lot of the economic activities, and thereby the need of upstreams, the need of transportation and maybe a little bit less affected infrastructure, but at least transportation is depending on the visibility for normal people and also for companies to start to take normal decisions again regarding consumptions and travels and different type of activities. And therefore, I mean, that link is even more pronounced as we see it in Europe and in Americas.

So our link to the normal economic activities in different phases here will determine, to a big extent, what will the demand level be, also when it comes to new trucks. And we have had a couple of very good years, obviously, and that's the reason why we already said that it was expected with a normal correction, both in Europe and in North America. And thereby also, we will see that there is a rather big fleet that can be utilized. So I think we should think about this as a gradual return that probably will take some time, and therefore, we need to do the adjustments accordingly to have the right balance in the company and to protect the right type of investments to come out strong and have the ability to continue the transformation of sustainable transportation.

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Olof Cederholm, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [20]

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All right. And you also talked about structural cost savings. Is there -- do you know when you're able to tell us more about this? Will that be in the coming quarter? Or how do you see that?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [21]

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No. Obviously, we are continuously working with both the short-term mitigation activities and the structural type of activity reductions, but it starts really, I mean, to look into what do we believe in from a demand level, and thereby, also adjusting, for example, R&D portfolios, IT development, capital expenditures and things like that. So to make sure that we at any point in this gradual ramp-up and the new normal have the -- will have the right balance.

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [22]

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One can add that also that what you see on certain items in the P&L like selling and admin, we were already working with downturn management and taking down costs. And of course, this has done -- been accelerated, but still more on operational activities and using the normal tools in the toolbox so far.

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Olof Cederholm, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [23]

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Okay. But the -- these measures, would they also include shutting down production facilities for good and changing around in your production setup, et cetera?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [24]

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I think, Olof, we are early into this, obviously now, and we are not excluding any alternative, depending on how this will continue to develop. And that should not be wise to do so in this very particular and extensive crisis situation we are. But it's also a unique crisis. So as we go along here, we need to understand in a step-by-step approach, how this will develop. And that's the reason why we are developing different scenarios, both when it comes to the short-term activities and the long-term more structural measures.

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations & Group Communication [25]

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Do we have any more questions, operator?

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Operator [26]

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Yes. Our next question comes from the line of Klas Bergelind from Citi.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [27]

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Martin and Jan, it's Klas from Citi. I hope you are both keeping well. First, on the service revenues down 2% in trucks and 1% down at group level. What was the end of the quarter rate -- exit rate? Shall we see total services down 20%, similar to the utilization there on Slide 5? And if you could also talk about service volumes end of the quarter by region? I will start there.

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [28]

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Of course -- I mean, when we take a look on demand here, they were holding up pretty well, all of them. So there was no big drop. So we didn't see the truck utilization that happened towards the very end of the quarter still being reflected in service revenues. Going forward, of course, this slide will start to affect us. And since it's pretty generic, it will, of course, affect the whole group except for what we have been to before China and parts of Asia where we see less of it. And it's pretty generic, one must say, where we are today. Then coming back to restart society, coming back, et cetera, et cetera, let's see, but where we are today, pretty generic.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [29]

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And that's the reason also -- I mean, maybe just to add on that, that's the reason why I said that briefly also in my comments during the presentation that when we look at countries with more extensive lockdowns, we see also fleet utilization being more severely hit. I mean, if you have had sectors that are very important for certain countries, such as automotive, for example, completely locked down, you have in that regard, an overshoot of the drop in fleet utilization. And just to give a magnitude, maybe in the more open countries in Europe, we have seen a drop of some 10% in fleet utilization, whereas in countries with more extensive lockdown and longer lockdown also, and currently, you have seen fleet utilization drops of 30%, 35%. So again, in order to judge that level moving forward, we need to see how the opening up plans offer different countries as well.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [30]

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Got it. My second one is on -- is also on margin on Slide 5 and thinking about orders, coming back to the question asked by Hampus. Considering that Asia probably looks better and you also talked about cancellation, that would suggest that orders could be negative now in Europe. I mean, we don't have a financial crisis as of yet, and I think others in the industry have said that orders haven't turned negative yet. But I was just wondering, Martin, if you could say anything, if we are in a situation where we have no demand and then cancellations on top?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [31]

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I should say, I mean, we have a small demand coming in from, but very tiny. But when you take the net effect of this, which is natural, and I think that is in a way good that we have those relations with both customers and dealers that we can have a conversation about what is the right type of products to still have in the order board. We have seen in days and weeks that the orders are around 0, and that is the net effect, obviously. But again, in a stop phase like this, you should see that also as, I think, a right methodology to do to really make sure that we have the close conversation because we don't have any interest to push forward a firm order book that dealers or customers have to take and then ending up with a problem down the road of a built-up unit, so to speak. So now when we are in the stop phase, it's still getting a little bit theoretical about that. I think more you should see it about really getting visibility of the firm orders remaining in the order board.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [32]

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Makes sense. My final and -- the third and final is on deliveries and thinking about it sort of in the same way. I mean, you didn't put it on Slide 5, and that's fine. But one effect compared to the financial crisis is obviously that deliveries could fall more than what the backlog suggests because most economies are close to business, something we heard from Epiroc and other industrial overnight. Can we get any indication how much deliveries in trucks were down there in March and April perhaps because those falls might have been quite big as well?

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [33]

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Well, since -- I mean, this is not to a big extent related to production since the things that we were selling in April -- or March and also beginning of April is already produced and standing out at dealers and so forth. But -- so it's more of how the customers can get the vehicles because from time-to-time they are not able to it because there is a closed society, and it's not possible to move. Some cases, of course, the dealers doesn't have sort of the need for it right now, so would like to defer to take out the vehicles a little as well, but that's not affecting so much on deliveries. We will see more of that when we come into the period we are right now, and I think, also, depending on what will happen in the demand in general, as Martin went into, also in May. Let's see. But of course, we have not seen the full effect of this yet, as I see it.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [34]

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And it has even been difficult to do registrations, et cetera, because authorities have been closed also. So there has been so many parts of these lockdowns and restrictions affecting quite a number of steps in this delivery chain. And again, now we need to assess what is what in this, basically.

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Operator [35]

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Our next question comes from the line of Agnieszka Vilela from Nordea.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [36]

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Two questions from me. The first one is, if you could quantify your exposure to the energy sector and when it comes to trucks and construction equipment? That would be helpful.

And then the second one, if you could elaborate about your planning for the construction equipment market. How do you think about how the demand will shape up now, given where we are in the cycle and inventory levels, usage of the machine and stimulus packages coming in? And if you could give the color for the different regions?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [37]

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First and foremost, if you start with the energy sector, and a question we get there, obviously, of the news around market that have a lot of vocational type of applications, and they are in relative terms, so to speak, into the energy sector, for example, in North America. But still it represents 4%, 5% of their revenues. So that is one example of that. And for other truck brands, it is smaller. It's not even visible to that extent.

Construction equipment. Yes, we have some exposure, but also rather limited in relation to other industrial verticals. Then when it comes to construction equipment, in general, obviously, what we have seen now is, as I said, also that in Asia, Korea and China, it has picked up well. We will see how continuous, so to speak, stimulus when it comes to infrastructure and other type of activities will continue to pull that demand forward in those regions. And as I said, also we have seen for other major regions that construction equipment is following trucks but with a lag. And then obviously, it depends, to your point, on how different countries and regions will act when it comes to stimulus packages. It's too early to say. But as Jan was into, I think, and we have shown also with the leverage here for construction equipment, we have a good flexibility into that system, and we are keeping good balance also when it comes to the stock levels. And that was the reason also why we did less of preproduction, for example, for this spring season for construction equipment.

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations & Group Communication [38]

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Thank you. Do we have one more? And then we will, perhaps, call it today.

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Operator [39]

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Our final question is from Daniela Costa from Goldman Sachs.

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [40]

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Can you hear me?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [41]

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Yes.

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations & Group Communication [42]

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Yes.

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [43]

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Yes.

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [44]

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Three quick questions. First one, and apologies if you've answered earlier, I didn't hear it, but the line was sometimes patchy. Level of inventories across the various regions, particularly in the U.S. for the market, can you comment on where that stands now? I think in the past, you've given for the U.S. helpful figures there.

Number two, on the buses side, can you comment on there, as why -- any quick fixes that you could do on the margins there? I guess, looking at what you did in trucks, the margins are still pretty resilient, but could you turn around buses, anything there?

And number three, I just wanted to clarify on the investment on the fuel cells along with Daimler on those 9-figure -- 9-digit figure that you've mentioned. Is that over and above your prior commentary on the outlook for CapEx or was -- or is there stuff that you were doing internally and sort of is just reallocated towards the JV? How shall we think about CapEx over the medium term?

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [45]

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Well, starting with the inventories -- and I mean, we were in a downturn phase, and we were addressing this also, and we had a Q4 presentation, and I stated there that we have more to do there. And of course, in this situation, we have more to do definitely on our inventories. And of course, that is -- goes very much to our retail system in U.S. They also had too much on their hands coming into this quarter, and now in this situation, there is still a need to take that down, of course.

Moving over to buses, it's not a quick fix. If it would have been a quick fix, I think it would have happened. But yes, we will -- I won't say turnaround because they are on a positive track there, so -- but continue that journey with measures that we have already installed to many -- to a big extent and do the continuous improvement work, actually. And then we had investments of fuel cells, which I think we have been in for -- to before, but...

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [46]

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Yes. And again, as we said, I think you should think about this as a setup and structure that allows us to contain this in the R&D portfolio in a smart way when it comes both to CapEx and when it comes to development -- investments or development spendings to get hold of this very important part of our future portfolio. So from that reason, think about it as part of the R&D road map moving forward, and obviously, we're looking through that now what is the right level for R&D investments. But as I clearly stated, when coming to protect our core R&D and the transformation activities to make sure that Volvo is competitive also for the coming decade where a lot of transformation will happen, this will continuously be a priority. But if anything, this setup is allowing us to move faster with less investments and spendings that we should have been doing if we should have been doing it alone.

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [47]

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I want to remark on buses which I think we should remember, coaches represent a big share of their size, and of course, coaches with reduced tourists, and then so forth, going forward, it has been affected already in the beginning of this quarter. So buses have been more affected than maybe others in that respect.

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations & Group Communication [48]

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Thank you, all of you on the line and also to you gentlemen here in the room. This concludes the presentation for the first quarter 2020. Looking forward to be meeting you again in a quarter. Thank you.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [49]

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Thank you, very much.