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Edited Transcript of VOLV B.ST earnings conference call or presentation 18-Jul-19 7:00am GMT

Q2 2019 Volvo AB Earnings Press and Analyst Call

Goteborg Jul 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Volvo AB earnings conference call or presentation Thursday, July 18, 2019 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 and 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

* Björn Enarson

Danske Bank Markets Equity Research - Head of Equity Research of Sweden

* Erik Pettersson-Golrang

SEB, Research Division - Head of Research for Sweden

* Gautam Narayan

RBC Capital Markets, LLC, Research Division - Associate VP

* Graham Phillips

Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research

* Olof Cederholm

ABG Sundal Collier Holding ASA, Research Division - Analyst

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Presentation

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

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Good morning, everyone, and welcome to this press and analyst conference covering the second quarter 2019.

We will, as always, have 2 persons on stage today, our President and CEO, Martin Lundstedt; and our CFO, Jan Ytterberg. And we will start with presentations, and then we will have the floor opened for questions both from the room and over the phone. Since this is a webcasted event, kindly ask you to use the microphones.

Martin, take it away.

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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. So ladies and gentlemen, both here in Stockholm and also on the web, most welcome also from my side to the quarter 2 reporting of the Volvo Group.

And indeed I have to proudly report that it was actually a record quarter for the group, with sales exceeding actually for the first time SEK 120 billion in 1 quarter, resulting in an operating margin of 12.5% and operating income of just above SEK 15 billion; good outcome also when it comes to the cash flow almost coming up to SEK 14 billion. But maybe most proud of seeing the underlying activities resulting in these strong results: the focus of growth but profitable growth, high quality in the business; high focus on a good price realization given the market conditions and how that is coming through; but also the focus on continuous flexibility in our different systems. So we are creating the necessary balance between deliveries, inventories, order intake; and thereby also creating the maneuverability for the future.

Talking about maneuverability. Another very important part of the second quarter has been what we call the events supporting our transformation and being a leader of transformation, transforming this industry, the transport industries. We have announced a number of very important partnerships because the future will be about partnerships to really conclude solutions that will take the full advantage of the future technologies. NVIDIA is one of those. Samsung is another. And also announced the first commercial agreement also how to put level 4 or level 5 automation into place with Vera, as you have seen before. So we are looking for her entrance in the real world.

So very strong and solid quarter, and we are very proud. I would like to say that the colleagues around the globe have done a great job here.

When it comes to the volume development, given the strong order books that we have, we continued to see growth in volumes, as you can see here, 9% on the trucks side, mainly then driven by continuous improvements and increases in deliveries and shipments in North America; strong development in South America also -- in North America for the 2 brands and in South America then for Volvo; and rather flat development in Europe and also according to the forecast that we have had. Machine deliveries up 12% and solid rebound in this case by SDLG; Volvo a little bit down actually, minus 3%; but SDLG then -- mainly then in China up almost 30%.

Service sales development continues. Of course, we have now higher and higher comparison figures with high activity levels already in place 2018, but despite that, we see continuous development in this quarter and the start of the year, if you exclude FX, 3%. And we just discussed that yesterday, so I can tell you also I think it's good to see that we have increased with almost 20% now accumulated over the last 2 years. So the strategy is working, partly driven by activity levels but is also driven by better penetration in different segments. And as we can see, all segments are making a contribution here.

When it comes to the trucks side market environment, we are doing a number of adjustments. And if we start with Europe: We are adjusting that upwards for the year, up to 320,000, meaning that more or less a flat level in comparison to 2018. Main explanation for this is that we have had a strong year -- start of the year. And when we are calculating the end of the year, we see that, with the order bank we have, we will not come down to the levels that we have predicted before. And one explanation of the very strong start, we're up 8% in Europe, is actually the introduction of the tachograph in 1st of July that has caused a number of preregistration a little bit higher than expected, but still order backlog is also indicating this level.

Same for North America, strong start. Shipments are getting out to the market, and when we look to the complete year, we are also increasing there somewhat from 310,000 to 325,000, a minor adjustment but still showing that activity levels are high. When it comes to Asia, a small decrease in India from 390,000 to 360,000, and that is primarily related to the tightening financial system and credit systems in India. And for the rest, we are keeping the market forecast unchanged.

When it comes to order and deliveries. Here what we have started to talk about is Europe again following the pattern that we have seen. We have -- on deliveries we are flat. So as we already reported, when it happened also was actually, given our constrained supply situation, that we were losing somewhat market share in beginning of the year for Volvo, but when we now look at the order intake, it's following also the pattern that we are expecting for the remaining part of the year. And we are doing the adjustments accordingly when it comes to production, no drama and in line with our forecast.

North America, same situation even if we see less now drop in order intake. We had more than 70%, as you remember, in quarter 1. Still a big drop, and that is still related mainly then to the big order book and the balance there. We have gradually now started to open a little bit more for fleets and selected customers into 2020. And we are also happy to see that, during the course of the year also, the supply chain restrictions that we have had, not at least in the beginning of the year, for Volvo is gradually fading away here. South America, positive following the trend up to the forecast of 70,000 units total market and that we can see both in order and deliveries. And when it comes to Asia, it's mainly related to Middle East, countries under sanctions. We have Turkey with an economic turmoil. We have also some commodity-related markets that are showing weaker signs there like Indonesia and the coal prices, as one example.

When it comes to market share, we have seen a stabilization now in North America and somewhat improvement from first quarter for Volvo; I think, again high priority on the quality of the business now with these high market conditions and capacity constraints, good balance for us. Same goes for Europe and the same story there for Volvo.

When it comes to Mack, a little bit specific situation because in their core segments they are still gaining market share, but since it's an overweight for long haulage, you'll see a little bit of erosion year-over-year. But when we look sequentially, it's also a solid and expected development. Renault is also worthwhile commenting. I think that the Renault team is continuing to do the job that we have expected: steady, slow market share increases; high focus on the quality; of the pricing, price realization; and not the least also that we have the right balance with residuals, et cetera.

For other regions such as Japan, strong development now. We see that our turnaround program and our improvement program for UD Trucks is really working fine. And we see that both when it comes to our underlying improvements in the operation but also when it comes to customer satisfaction and the [receival] of our new products there or rather new products like the Croner, but we have extended the range there. Brazil, good development; as well as South Africa and Australia. We are actually approaching 30% market share totally for Australia. That is knowing that all brands almost are present there from Japan and North America and Europe, I think that is a great achievement.

When it comes to the transform part. Some of you attended the Capital Markets Day a couple of weeks ago. And we talked about, I mean, the importance of balance between perform and transform. And when it comes to the transform part, we are continuing now to strengthen our ecosystem and not only talking about the ecosystem. That was some abstract thing that is hovering around the universe, but that is the real stuff. And in our joint ecosystem we are now strengthening that with a number of world-class partners. And today, we announced then the strategic alliance with Samsung SDI when it comes to battery technology, development of that and supply for the future. Very important obviously now when we are gradually rolling out electromobility solutions in trucks, in construction equipment, in buses and in the Penta business areas as well. The good news here is that it's standing on 2 strong legs. It is, so to speak, the intention of securing now the battery capacity, primarily done on the battery cell level, but also the ability for us to utilize the industrial system both when it comes to modules -- battery modules, and the last-level battery pack of Samsung industrial system but then gradually be able to move that into a different part of the Volvo industrial system as volumes grow so we can utilize also the competence and footprints that we are sitting on in a smart way but take that continuously. The other very important part is that it's a long-lasting partnership also when it comes to develop cell technology for utilizing -- utilization into commercial vehicles and into industrial applications. So we are really optimizing for range, energy, density and durability and other very important performance indicators for other type of applications. So it's a great announcement, and we have seen it has also gathered a strong interest in Korea that is fine for us. And as you know, Samsung SDI is one of the world-leading partners in this space.

Very short on this. We announced that in conjunction with the Capital Markets Day, but it's an important event also during this quarter, the partnership with NVIDIA regarding the development of the vital parts of the autonomous stack into our L4 and L5 applications both when it comes to hardware and software, where we will have, so to speak, co-creation teams both in California as well as in Gothenburg in order to create these solutions now for the near future. And in conjunction with that also, we announced also the first commercial now application for the Vera tractor L4 applications together with DFDS. That will be in CMI confined areas, partly on public roads, transporting from cross docks into the rural terminal of Gothenburg, to start with. So that is another announcement just confirming also that we are taking now commercial steps into this space. Brønnøy will get into operations for the quarry mining operations at the end of this year. We have the Electric Site project and now also this project that they are commercial viable.

Also in the electric space we are continuing to move, which is very positive. Now during this quarter we were revealing also the refuse application based on the model platform of the Volvo Group for Renault. This is a 26-ton D Wide zero-emission application that is now rolling out. And we will start, so to speak, ramping up at the end of 2019 and beginning of 2020.

On construction equipment, also in this area we see development that we, to the majority, have predicted. We are not changing the market forecast for this year in any of the regions. And when you see actually the year-to-date figures for the different regions, it's following also the pattern as expected. Maybe a few comments on it: In China we're up 8% year-to-date, primarily driven by compact excavators. And in North America, for example, it's up 7% market registrations, but in that case it's mainly driven by more heavy equipment -- heavy excavators and articulated dump trucks. So also a fairly expected pattern as we see it.

When it comes to order intake, we are -- when you look into the different parts of the world, and you can also see between the brands obviously, but if I start a little bit with North America: Orders down 5%, and we are guiding for the market up. And the main reason for this is that we have, and that was also valid during last quarter, been working also with destocking activity together with our dealers, but when we look at the market share development, that is positive. So I think that the medicine, so to speak, is functioning as expected. And deliveries is also working fine here. Also in Europe, as a matter of fact, where we are guiding for a flat development now during this year, is the same situation. We had high order backlog thanks to big orders in quarter 4 and quarter 1 -- quarter 4 last year and quarter 1 this year; and therefore also, so to speak, a small correction. But when we look at the activity level that is following the pattern that we see.

And in Asia, a scattered picture. As I said, China still a strong development when it comes to order intake, plus 20%, mainly then related to -- solely related to SDLG, whereas India and Turkey, given the turmoil, have shown weaker performance there. So let's see where India is heading now when the presidential elections are over and we are starting to set the next phase of -- the second term of Modi.

When it comes to construction equipment events. One very important event is the upcoming China IV, emission legislations coming into China. And what that will mean is that the technology will continuously now converge, not at least -- obviously when it comes to the driveline and the different components around that. And thanks to that opportunity actually, we have taken the next step of the successful cooperation and joint venture there, where we are sitting on the majority, as you know, with SDLG, to actually join forces when it comes to above-15-ton excavators, providing the latest Volvo technology and utilize that for solely Volvo branded actually. So we are joining forces because, when it comes to these more heavy advanced equipment, it doesn't make sense actually to utilize 2 brands because technology will be the most advanced in order to comply. Very good spirit of that cooperation and well received in the marketplace.

On the full electric rollout, primarily now on the compact machinery, it's also going according to plan. The first delivery is now out to the first customers testing this in real environment; and one of our most respected global customers taking on those first deliveries, Colas of France. And sales start will be 2020 in more broader terms.

On the bus side, it can look dramatic, but everyone that has been following our business for a while know that, when it comes to order intake, it's hovering up and back, depending on tenders primarily. When we look at the normal, more retail-based business, it's actually developing well. Last year, we had a number of big tenders. When we look at the order bank, we are actually 4%, 5% above last year, so here you need to look in a little bit longer perspective. Good deliveries mainly into Americas and also Latin America here. And important breakthrough is also in Middle East for the more advanced also urban transportation systems now coming in Middle East, both in Abu Dhabi and Dubai. So we are very proud of that. And that will give a good push for the bus business in the coming years here.

On the Penta side. As expected, we have been talking about it, the prebuy effect related to the Stage V engine introduction in -- that happened in the beginning of this year. So deliveries decreased 12%, and order intake decreased with 45%. Still, as you can see, and Jan will come back to that, sales were holding up because we have very good mix here. But this was an expected situation and that will stabilize during the course of the year here. Also a lot of news: Innovations, that is the signage of Penta in its space, the new launch of the D4/D6 propulsion packages launched, very popular obviously, as we discussed, and did see here before in the introduction. New D8, also marine and industrial application showcased. And then we are also now starting the electrification journey here both in the industrial segments and in marine segments with Älvsnabben, for example, in Gothenburg also, where we will test now the first type of ferries with full-electric propulsion system.

Financial services. Interesting to see actually, and of course, Jan will come back to the climate around this, but still very high level of competition. So we see that there are still big appetite to be part of our industry not only from our captive financing but also from other players. And we are -- given also that there are opportunities to find, we will still maintain our discipline on price and credit. It's important, obviously, to continue to be the strong platform here. Also from when you see the penetration level, it's going down a little bit and mainly related to Europe where we have a market mix effect where we have a weaker position in important markets such as France that is still holding up very well when it comes to the vehicle deliveries. And we also got a license awarded now for a finance company in Korea. That is important to support our big business in Korea as well.

So by that actually, I will conclude the market part of the presentation and leave the word to Jan to continue the financial presentation.

So please, Jan.

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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. And also from my side, very welcome to the presentation.

And of course, we are very happy with the financials. So we can conclude that the second quarter was yet another strong quarter with similar trends, as we saw in the first quarter this year, of increased deliveries, improved capacity utilization in our truck supply chain, we have a better price realization and also an improved mix. And on the other side, we have more activities on the R&D side that is impacting costs negatively.

So if we start with the top line net sales and look at those per market. In the second quarter, they increased by 17% up to SEK 121 billion. Currency effect affected net sales by some SEK 5.7 billion; and that was mainly related to the dollar that has, compared to last year, appreciated. And if we take out that effect, we are up 11%, where we see increases, currency adjusted, across main truck divisions and business areas.

If we look at the weaker machine and engine deliveries. They were up 13% in local currencies; and reflecting then what Martin was into, the sharp increase, as we see, in truck deliveries in North America and in Brazil, whereas net sales increased in Europe. If we take out currencies, it was rather flat actually. And in Asia they were, currency adjusted, going down, where we had the decreases in trucks related to Middle East and Southeast Asia impacting negatively. And that was partly offset by the increased deliveries in China than mainly by SDLG then. Despite a continued strained supply chain situation, deliveries were not affected by any supply chain issues. It was sort of a normal situation after some tough quarters end of '18, beginning of this year as well.

Service sales continued to be at a very high level. You must remember that. We saw an improved service sales by 3%, currency adjusted; higher transport demand; and increased fleet. And of course also a high demand on Uptime impacted and supported this high level of service revenues.

If we move over to the results and operating income. Adjusted operating income in the quarter -- in the second quarter improved some SEK 3.6 billion, up then to SEK 15.1 billion, giving an operating margin of 12.5%. Except for Penta, improvements were noted across all segments. And also in this second quarter, we have several of the truck divisions and business areas at record levels. Main contributors, of course, behind this improved result is the deliveries, 10% on trucks, 20% on buses and then 12% on machine deliveries. And on top of that, we have positive impacts from, as I mentioned, capacity utilization in our truck factories impacted positively by then continuous improvement sequentially; and also the fact that we have been stabilizing now for a while on high level of production volume, which is also important to drive out costs.

Gross improved -- gross income improved also due to a good price realization in general and as I mentioned, a positive mix, being then customer and product mix. This, together with the positive FX effect, contributed then to the SEK 4.1 billion increase of gross income. And if we move over to the indirect costs: We have the high activity in the R&D area. And of course, we have to balance resources and ambitions with the legislative demands. So the paid-out expenses increased close to SEK 700 million compared to last year. Part of that is related to currencies. We also have, on top of that, net capitalization. That is now becoming more in balance with the amortization in this quarter, but that affected positively when we take a look at the R&D costs as such. So all in all, R&D up some SEK 600 million. And then looking at the net capitalization and saying something for '19, we maintain our guidance there that it will be some SEK 1 billion of positive impact from the net capitalization. And if we look into the report, we can see that a big part of that has already happened here in the first 2 quarters.

Excluding FX effect, we can see a minor increase of selling. So there's a lot of FX into the selling increase in nominal terms. And that increase was related to high volume, if we take out currencies, whereas the improvement on the administrative side is more related to costs we had last year, which we have in nonrecurring item in the second quarter. Another improved 400 -- over SEK 400 million, that was an effect of a divestment made by Volvo Venture Capital that had a gain of some SEK 200 million in the second quarter, and also the fact that we had some positive nonrecurring items this year and we had some negative nonrecurring items last year. So that's a -- makes the difference a little bigger, but the big thing here is the SEK 200 million of divestment.

Currency, all in all, impacted operating income with SEK 1 billion in the quarter on operating income. And that was mainly related to the dollar once again, partly also to a general weak Swedish krona. And the transaction effect for the full year is now expected to be some SEK 2 billion, but we don't give any forecast on the full FX effect on operating income for 2019.

If we move over to the cash flow for the industrial operation, there is a seasonal pattern. I think you know that, that we have -- first quarter, that is a little tougher, when we are building up inventory. And in the second quarter, we come into more stable situation as relates working capital. And also normally we have strong earnings impacting the cash flow positively in the second quarter, and that was also the effect we saw this year. Cash flow in industrial operation was SEK 13.9 billion. Of course, the strong operating income is one impact, and also the fact that we had a rather stable working capital actually impacted slightly positively, where we have SEK 2.6 billion of inventory decrease, and that is to a big extent related to Volvo Construction Equipment. On the other hand, with high volumes, we have higher receivables, minus SEK 2.8 billion; and then a somewhat plus on trade payables.

Capital expenditures in the second quarter were some SEK 2.6 billion, where we have then somewhat higher capital expenditure for property, plant and equipment; and of course, the capitalization of R&D expenses. As regard capital expenditure for property, plant and equipment, they were somewhat higher than last year. And we expect that trend to continue year-on-year going forward.

And that means that we also got an effect on net cash which was positive but of course, the big thing here is the dividend paid out in the second quarter, beginning of April, ordinary and extra dividend of in total SEK 20.3 billion and of course, partly offset then by the SEK 13.9 billion of cash flow in industrial operation.

If we move over to the business areas and segments, start with trucks. The positive momentum from earlier quarters for trucks continued also again in the second quarter: currency-adjusted net sales up 11% to some SEK 76 billion, mainly related then, of course, to the truck deliveries up 10% and also, of course, the service increase of 3% currency adjusted; higher truck deliveries North America, Brazil, whereas we saw a limited increase in Europe as relates to trucks. That is related to Western Europe where we have then offsetting decrease in Eastern Europe and in Eastern Europe to fleets. Asia was negatively impacted by lower deliveries to Middle East, Turkey and some countries in Southeast Asia then.

That meant that the operating income increased by SEK 2.3 billion to SEK 9.5 billion, giving an adjusted operating margin of 12.6% for trucks. And main effect here, of course, being then volume contributing very positively to the operating income. And on top of that, we had the capital -- capacity utilization and efficiency in production mainly related then to the American system, good price realization, and also here somewhat positive customer and product mix effect, partly offset by higher R&D and selling. And FX had a positive impact of SEK 0.4 billion.

Construction equipment. Here we can see that the improved currency-adjusted net sales of 6% reflected the 12% increase of deliveries, Martin was into that, mainly related to SDLG China and compact machines, whereas the Volvo-branded products actually decreased deliveries with some 3%, where we had increases in Europe and North America not fully offsetting the decreases we had in Southeast Asia and Turkey. Currency-adjusted service revenues were more or less flat, a little up 1%. That is an effect of a slowdown in certain Asian countries.

And year-on-year improvement then for construction equipment is then SEK 475 million, continued the positive trajectory of improved margins, to SEK 4.153 billion of total adjusted operating income and a margin of 15.5%. The improvement was mainly then related to the 12% increase of deliveries, which offset the deterioration of capacity utilization in the industrial system, and that was then, of course, mainly related to the Volvo-branded products, to reduce stocks and also to prepare ourselves for lower -- the lower order intake we have seen. FX impacting positively with SEK 340 million.

And moving over to buses. We continued to see an improvement there also here in the second quarter. The deliveries of new buses increased some 450 units, positively affected by the TransMilenio order in Bogotá; and also to some deliveries into the Santiago system in Chile; as well as higher deliveries in North America. That meant that the vehicle net sales up 25%. Services were in local currencies up 5%. And the improvement of adjusted operating income also, SEK 145 million to SEK 403 million, was related to the deliveries, and -- where we, though, had a negative market mix effect and also as well as some deterioration in our industrial efficiency. Positive impact from FX being then SEK 125 million in the quarter.

Penta, in a spot we are not used them to see. And the second quarter 2019 continued then to be negatively affected by the high prebuy deliveries we experienced end of '18 ahead of the Euro Stage V introduction. The general decrease in industrial engines was partly offset by growth in heavier -- of heavier engines into the segment at 8% backup supply.

Deliveries of marine engines, diesel ones, being in line with last year; gas engines going down. And that is due to certain distributors destocking. Total engine deliveries down then 12%, but the heavier mix more or less compensated that drop, being then net sales more or less flat of engines, currency adjusted. And service revenues were also more or less flat, where we see activities among customers to adjust their inventory levels and that affected the second quarter.

So compared to a very strong quarter last year, adjusted operating income decreased some SEK 90 million to SEK 618 million, mainly then related to the lower deliveries and higher level of R&D expenses reflecting then the amortization of Euro Stage V applications and also high activities in the area of electromobility and digitalization. This was partly then compensated by the higher -- or the improved product mix, the heavier product mix. And FX had a positive contribution here as well by some SEK 70 million. Operating margin deteriorated to 16.9%, still a very good margin.

Financial services. Here we can see that the strong demand of vehicles and machines continued to affect the new retail financing volumes positively. They increased slightly up to SEK 20.9 billion in the second quarter. And the portfolio continued performing very well, reflecting then the general good business climate among our customers resulting then in low amounts of overdues and credit losses. The credit portfolio increased to SEK 165 billion towards the end of this quarter, and currency adjusted, that means an increase of 13% compared to June last year. And as Martin was into, we see a tough situation on the customer financing market putting pressure on both spreads and our penetration.

And adjusted operating income then improved some SEK 100 million to SEK 680 million, where the portfolio increase was then partly offset by the lower spreads and also somewhat increased credit expenses negatively affected by the requirement to make upfront provisioning according to IFRS 9. FX had a positive effect of SEK 30 million. And profitability level stayed on -- as relates to then return on equity, stayed on a high level of 14.7%.

Then Martin.

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

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Yes, Jan.

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [5]

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Yes.

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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.

Maybe just to conclude, I think, to give a perspective of this quarter, again strong and solid quarter, record sales, record result, operating cash flow really translating into good numbers, but most important, good activities around that. We know why -- and we know why that will continue to actually proceed with the group: good underlying profitability development; good price discipline; and good balance now between orders, deliveries; and continuous focus on the inventory levels, but also creating the continuous flexibility to have the maneuverability for the future. And finally, transformation continues, and a strong announcement of partnerships and commercial agreements in the areas of automation and electromobility.

So very well done by all colleagues in the group. We are proud of that. Thank you.

And then I promised also at least to show this very important slide, that we have the Volvo Group investor meeting at the North American Commercial Vehicle Show also coming up in October.

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations and Group Communication [7]

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Thanks for that commercial. And we will open up for some questions, and I can see that we have one up here.

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Questions and Answers

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [1]

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Agnieszka Vilela, Nordea. I have 2 questions, please. The first one is that, given the order intake trend right now, it seems like you are bracing for a bit weaker H2 already. Can you help us and tell us how much your production rates for trucks will come down in, say, Q3, Q4? And also how flexible are you when it comes to the costs side? Do you plan for any larger cost savings projects already?

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

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When it comes to the market outlook, I mean, it might be so that it's taking a little bit time to explain that. I think that is an important part. I mean, when you look at -- if you start with Europe then, when you look at the development, I mean, up to May, we're up 8% in the market. We are flat. And that is basically related, as I said, to our initial loss in market share and the priority of the quality in the business given the high situation. Now when we are comparing '18 and '19, we are guiding for a flat market, more or less, and that means mathematically approximately 8% lower market in the second part of the year. And that is also following very much what we see in our order trend for the European market. So I mean in that magnitude, I think you can little bit look into what we are after. That is not -- I mean we are coming from high levels. We have been working really on the stretch of the system here. So we are continuously now adjusting also given the fact that the European system is also supporting some of the international markets that also have shown a little bit weaker demand, but it's still on levels where we can support a good, so to speak, flexibility and a good level of productivity. So that is what we can say about Europe, but we are well prepared. We have been working on it. We have said that, as we also discussed in '16, for example, and -- '15 and beginning of '16, that -- priorities for the group to show that -- show to ourselves and to everyone that are interested that we can actually handle. I mean we are in a cyclical business, so that is a normal type of activity. When it comes to North America, it is still a little bit too early to say. I mean we are still into this correction between order book, inventories, order intake and deliveries. I mean still very strong support of the deliveries. We see that the order book, as we have worked with it, and -- has a good level of quality into that, no big changes, but I think we also should recognize the fact that there are coming in some data among transporters, for example, that they are seeing a little bit of a weakening demand and -- which is also expected. So at the end of the year, there is probabilities also for adjustment accordingly, but I think we show that very well that we have the flexibility measures in place for that.

And on a second note, I can say that I'm a little bit surprised almost about the fact that people are seeing that, I mean, the economic cycles are going up and down as something that is new. I think that we will have to live with that also in the future. We'll go up and we will go down, et cetera. I think the good news is that we have a long-lasting good development when it comes to transport demand in the world, and that will continue to increase.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [3]

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Okay. Perfect. So basically you don't plan for any kind of big-bang cost savings as of yet, but you're more flexible...

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

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Yes. And I think that is a part of the game also. I mean, if we are sincere about the fact that we are believing in the centralized system with strong P&Ls both in regions and brands -- I think we should talk with a double tongue if we, at the first sign of a downturn in some markets, should start with a big program because one size will not fit all here. We are seeing markets that are going up and that have a very strong development that they need to live on their merits, Latin America, for example. We still see a number of European markets with strong development. And my firm conviction is that this type of big programs and -- is the story of yesterday.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [5]

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And then my last question is on the service business. You had organic growth of 3% in the quarter. So the growth rate has been coming down from the previous quarters. And can you just explain what's happening when it comes to utilization of the machines and trucks? And then also, what could we expect from that service business when it comes to the growth over the next couple of quarters?

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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. First and foremost, as you say, I mean, to just take 1 quarter can be a little bit premature to do when we -- more wide conclusions about it. Having said that, I think a little bit the sentiment of the market moving sideways is also, given our parts of the retail and distribution system also, time to consider, okay, [review] our stock levels. I mean, when you are in a very high activity level, you're obviously more thinking about having the right availability. It will be consumed. So that might be one explanation, premature to say. The comparison figures, as I said, I mean, we have been growing pretty well over the last couple of quarters and years. And I mean, the comparison figures here. And then I think there are a number of markets where it's a little bit of, I mean, hesitation also in utilization. So probably a mix but no drama. I think the good news, to your point, is that there are still good rooms for continuous also penetration improvements into this business. We see that -- when it comes to contract penetration, that we have still big differences and swings between both markets and regions and applications, so here I think we should continue to expect that we focus on the potential that exists already even in a flat or in a possible declining market.

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations and Group Communication [7]

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Martin, we have a question here as well.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [8]

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Yes, a couple. Erik Golrang, SEB. 3 questions. The first one on pricing. I mean you had been good at price realization at the start of this year, I guess, partly for market reasons, but also for company-specific reasons with a tight system. You lost a bit of share on that. Is it reasonable to assume, now that with demand on a lower level, that the sort of prices on new orders is perhaps not as strong as they were in Q4 and Q1?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [9]

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Yes, first and foremost, thank you for that question. I think that is important. I mean, as we said, when you're in a situation with a very high capacity utilization, as we said, we took a step back and said really, how shall we prioritize now? It's always tempting to go for the last unit, but that can be gold plated, so to speak. So I think that balance functioned well, even if it partly was a little bit frustrating with the supply chain issues we had primarily in the beginning of the year and end of last year as well. Having said that, I think that would be a continuous priority for us. I mean we see ourselves one of the premium players. And we have a strong responsibility, we feel, for also being consistent with our pricing. So that is our intention on that side. I don't know if you would like to add...

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [10]

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Nothing to add.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [11]

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Then the second question on what you talked about -- on some of the machine ranges on SDLG transitioning to Volvo brand only. I mean, given the market development with quite big market share gains for the local brands over a longer period of time and I think also with the Volvo brand struggling to keep its share and some of the bigger players really struggling, does it make sense then to move this -- to also transition to Volvo only?

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

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Yes. I think it's very important. I mean, first and foremost, we are talking about, I mean, the bigger segments above 15 tons where still we have a very strong presence, and where we feel also with the convergence of technology that we would like to make the statement also that we have 2 strong brands, where SDLG with their very strong presence in wheel loaders, but also when it comes to compact machinery and so to speak, the more -- I mean, more general purpose type of excavators should continue to drive that. But we also see the opportunity, by doing this, that also joining forces and combining our commercial networks in small places. So we actually are utilizing the fact that we have a strong -- 2 strong legs with special, so to speak, offerings. So this has been a careful consideration, but given also our strong local management, not at least coming from SDLG but also from the Chinese part of the Volvo organization, this is a decision that we all believe in given the technology needed to really put in the latest one and drive that at the same time as keeping the spirit of the 2 brands, so to speak. So that is the logic behind that.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [13]

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And then the third question, on the balance sheet. And I guess the cash position is tracking ahead of where it was this time last year. Of course, anything could happen to the economy, but if you look at your own priorities and investment needs and so on, is there any need for where you should need sort of a stronger balance sheet leaving this year than you did last year?

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [14]

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Well, it's not a question for us actually. It's something for the AGM, but of course, we need to be prepared. And as we have stated before, we would like to act from a platform of strength. Whether that is X on net financial cash position or not, that is nothing actually that we discuss. Or really it's also depending on the situation, of course.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [15]

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And the timing is a little bit at the end of the year, but I mean just to add to what Jan said. I mean, we have also several times stated that we have no intentions to being a bank. We think you are doing that better than us, so -- except for the financial services where we are selling, I hope, and (inaudible), we can agree on that.

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations and Group Communication [16]

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Thank you. Anyone else here, or should we see if -- we have one here, yes.

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Björn Enarson, Danske Bank Markets Equity Research - Head of Equity Research of Sweden [17]

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Björn, Danske Bank. A question on production in North America again. You stressed that you may be revising production, of course, by the end of the year. Giving that we are at very high levels right now and also we see decreasing freight rates and lower pricing on load, et cetera, are you concerned about that we could see pretty sharp production cuts? Or how do you look on that?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [18]

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Let's put it like this. I think this is also, of course, a valid question given the history of the North American, so to speak, volatility. And I think the short answer to that is that, in order to have a good and steady performance in North America, I think we have learned that over many years now the whole way, that being very well prepared for different levels of flexibility. And I think we were taken down -- what was it? Was it 39% or -- in '16? And that functioned according to the plan and also with, so to speak, a good support when it comes to margin both from the service side but also the flexibility in the industrial system. So without answering, I mean, yes, we are prepared. And then let's see there because there you can see, you can speculate. I think the most important is to have a firm conviction that when you are adjusting, do it because when you all sorted to adjust -- as I normally say, I've never been in a situation in my 30 years in this industry where we have been running dry of inventory in a downturn. So it's always an opportunity to increase if necessary. I think it's more the timing and that you are doing that with the right timing and formula, so to speak. So let's see, but we are well prepared, have a good flexibility of that. And I think again '16 showed that very well.

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Björn Enarson, Danske Bank Markets Equity Research - Head of Equity Research of Sweden [19]

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And a question on services. Can you say something about earnings resilience or drop-through on the service business?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [20]

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We -- I mean you know my answer to that. What we always say is it's better than equipment, but the resilience, I mean, I think if you go backwards or historically -- and we -- I mean Jan showed that also at the Capital Markets Day, that we have a considerably lower, so to speak, volatility on services. And we expect that pattern to continue, not at least also giving the better penetration of captive components in North America, as one example.

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations and Group Communication [21]

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All right then. Should we see if we have anyone on the telephone as well? Go ahead.

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Operator [22]

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(Operator Instructions) And the first question comes from Graham Phillips from Jefferies.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [23]

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My questions are around European productions, also the -- more about the battery announcement. Just on the European production reduction. So you're guiding it'd sort of be down 8%. Is this different to what was announced with the Tuve plant from a shift reduction back at the beginning of June? Or is this sort of a new announcement looking into the second half?

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

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No. I think -- thank you, Graham. That is obviously related to that. I mean we started earlier, as I said, because when you have this type of development, you want to be early out. You have always a possibility for an upside. So that was related to that.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [25]

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Okay. And just on the new battery announcement with Samsung, can you just explain a little bit more about this? How does it differ from what you've been using already with your extensive electric bus network? What sort of capacity, vehicle range expectations you'll be able to get from the packs you'll be getting from Samsung, which segments they're going in? And why did you choose Samsung? Because obviously there are some other larger established players like LG Chem, CATL and Panasonic. So perhaps if you can talk a little bit more about that.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [26]

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First of all, to start maybe with the end. I mean we have done a thorough evaluation for our needs, obviously, and our specific needs of having the full resources focused for commercial vehicle and industrial equipment applications. And in that evaluation, given all the different aspects, we found, I mean, there are a number of very good and strong players, as you say, but Samsung to be a very good fit for us in this. And as I told you then, it's standing on 2 very important legs. I mean it's the capacity, so to speak, supply capacity, for the future that we are foreseeing, also giving the ramp-ups in different types of segments, but it's also the very tight development of application-based, so to speak, development of cells for our type of applications. So as you know, in this space the development is moving very quickly. We will see a number of generations coming out both as it comes to energy density but also when it comes to price levels; and when it comes to how we're actually utilizing, so to speak, the cycling of it because it's not about only the full energy content, it is also about how much of the energy content you can use in different cycles in order to also have the right type of durability of the battery. So I think what is new about it is a more thorough type of cooperation where we are actually modularizing from the cell design into the modules and eventually the packs and eventually into the vehicles or to the different type of construction equipment. And that is, so to speak, a full modular platform. Another part that is important to us is that we have the ability to, together with Samsung, decide also the depth of engagement when it comes to the industrial value chain because -- both when it comes to competence; already existing investments phasing in, phasing out; and location close to production of the final units; all factors that we are considering. And there we have a good flexibility together with Samsung. So a lot of good factors coming together.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [27]

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So is it actually envisaged for heavy trucks and again, is this you've been using for buses?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [28]

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Yes. And this will be a part of a modular platform because one of the strengths of the group is obviously that we are both on the hardware side, starting from the batteries, so from the cells, the packs and the modules -- or the modules and the packs, but also the electric components, the software systems, building a modular platform where we then can pull for the different applications, whether we're talking about buses; excavators; wheel loaders; light, medium, heavy trucks; marine; and industrial applications. And so far, we have not found a utilizing factor for that into the financial services business area, but for the rest they are actually very interesting.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [29]

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And when do you expect the first supply of these to come?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [30]

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Yes. That we have not announced yet, but I mean given the fact that we have, so to speak, also good cooperations also in other areas, we will complement the current offering with also these partnerships. And so I will also say that we are continuing to work on that.

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Operator [31]

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So our next question comes from the line of Klas Bergelind from Citi.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [32]

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We'll be disappointed now, Klas, if we don't get the 3 questions.

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Operator [33]

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As there are no response from Klas, we move on to the next question, which is from Tom Narayan from RBC Capital Markets.

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Gautam Narayan, RBC Capital Markets, LLC, Research Division - Associate VP [34]

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So I know a lot of questions have been asked about the North American truck guidance. It obviously appears, was it 5%, despite the fact the market is up 20%. And I understand the order intake is quite -- the decline is quite sharp. I guess, the question is, when you look at the order intake decline, how much of that is being done by yourselves versus the market demand dynamic? So it's sounding more and more now that the order intake decline is really market determined, whereas in the past I thought that maybe some of that was determined by yourselves perhaps pruning to get more high-quality customers.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [35]

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Yes. Thank you for that question, Tom. I think, to your point, I mean, up to now, I should say that we have deliberately been holding down a big part of the order intake in order to really make sure that we have the right visibility. We have gradually, as I said also in my presentation, started to open up for 2020, but up to mid this quarter, we had been very prudent of doing so because we have said that -- also given the market dynamics, that there is no need actually to continue to have volumes for our dealers and eventually customers. So up to now and when we see the order board, et cetera, for this year, it's still solid and also with quality. And we see few movements there. Having said that, and that has also been mentioned, I mean, there are a number of indicators also coming in now when it comes to the freight indexes and a little bit also from the reportings on transport and obviously all the context we have of a more softer, so to speak, side of the market. And so I think we should be prepared for a good flexibility there, but still we are in July. And there, I mean, we should not, so to speak, see that we have not opened fully yet that we cannot adjust if needed. So gradually now we will more test the real demand of it, but I think we can expect also that there is a probability of some adjustments when we are coming to the end of the year. But again we have a good flexibility for it.

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Gautam Narayan, RBC Capital Markets, LLC, Research Division - Associate VP [36]

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Okay. And my second question, if I may. On the Capital Markets Day, you called for a 10% margin through the cycle. Just seeing like the cyclicality of this business and obviously seeing it in the order books as well as how you're being conservative on -- or maybe not conservative but just how the guidance is looking in North America truck, for example. How confident are you in that 10% through-the-cycle margin? Is that more of a target, or is that really something you believe you'll be able to achieve? I understand some of that has to do with increasing service revenues but just trying to understand that better given obviously it is such a cyclical industry. Just would love some color there.

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

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Do you...

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [38]

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Well, it's a financial target. So of course, it's a target for us to see to it that we are over 10% over a cycle, but I mean we are just -- we -- these were launched 2 years ago, more or less. So it's a little early to say we will make it or not, but of course we are gradually moving up our level, and that's very important. And service is one important part of that both in up -- in strong markets and in weak markets. So I don't know if we -- you would like to add something, Martin.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [39]

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No, no. I think we have been saying that also. And remember we -- last time, we reiterated that statement also actually. I don't remember if it was Q1 or the Capital Markets Day, but we said that the Q1 result was good. But still, I mean, if we should be in the good part of the cycle really follow through here, we still have improvements to be done. And we have been doing this, this quarter as well. And I think we should say also, I mean, okay sales were up with, what was it, with...

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [40]

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11%...

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

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Yes, ex FX, but also when you see, I mean, the underlying improvement in this is -- market is good, but still also we have a lot of activities that is improving the underlying business, and that will continue the demand. So this is absolutely a target that we should achieve. And that is also necessary for us given also the future and to be leading when it comes to the transformational part here.

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [42]

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And I also made a statement at the Capital Markets Day that half of the improvement that we have seen between '16 to '18 was own achievements. And the other was more related to external FX like markets you're into.

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Operator [43]

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The 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 - Analyst [44]

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It's Olof for ABG. I just wanted to ask a question about Latin America actually, if I could. That market is recovering. And it's of course smaller than the others, but what's the -- what do you think about that market going forward? Does it have sort of the underlying drivers to stay strong or stronger for a couple of years? Or is this just a 1-year event with a small recovery?

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [45]

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As you know, Olof, I mean, to predict (inaudible) in Latin America, that, I mean, if you can do that with good precision, then you should do something else, not being President of Volvo, but having said that, I think, when we look at the fleet age when we talk to our customers, there is a fleet renewal need. There are a number of very solid businesses. And now when we are coming to that type of the cycle of the fleet age in Latin America, not at least in Brazil, I think we can actually -- I mean we see the momentum continuing. You saw a strong order intake now. We are predicting a 70,000 market. I think that is supporting a sort of stability for a period of time without guiding too much into 2020.

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [46]

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What...

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [47]

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But it's an important market for us, I mean. And also when you look at the mix and the segments, I mean, we are about 21% now including CMI heavy. So in the heavy duty segment, we have a very strong position, so even if you say it's a smaller market, but I think it's worthwhile mentioning that it's a good support also for the total machinery.

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [48]

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I was just adding that, taking a look in the course we have here into the past, we can see that there are high deliveries in '11 to '14, now celebrating 8 to 10 years soon. So of course, that will in itself create, in Brazil at least, then...

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

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It will pay off in good demand...

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [50]

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Yes, it will pay off in a replacement demand.

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations and Group Communication [51]

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All right then. Thank you for showing up, and see you next time in 3 months' time. Thanks.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [52]

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And have a nice summer.

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Jan Ytterberg, AB Volvo (publ) - Executive VP of Group Finance, CFO & Member of the Group Executive Board [53]

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Yes, nice summer.

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Claes Eliasson, AB Volvo (publ) - SVP of Media Relations and Group Communication [54]

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Yes.

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Martin Lundstedt, AB Volvo (publ) - CEO, President, Member of the Group Executive Board & Director [55]

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We all need that...