Volvo AB

STO:VOLV B

Q1-2025 Earnings Call

[Johan Bartler, executive]

Good morning, and welcome to the Volvo Group First Quarter Press Conference. Today, we do, as always, we listen to the presentations by Martin and Mats, and then we follow up with a Q&A session. So with that, I hand over to you, Martin.

[Martin Lundstedt, executive]

Thank you, Johan. Thank you for that. And also from my side, welcome, everyone, to this quarter 1 2025 presentation. And I would like to start with saying that it has been a rather eventful time here. That is not, so to speak, exaggeration. But as we conclude the first quarter also, I would like to take the opportunity to thank everyone that has been involved, customers, business partners and colleagues. It's more important than ever to work closely together, and that is a strong asset that we have, that we have very close relations.

And overall, the underlying activities in many markets during the quarter have been, as a matter of fact, rather stable. But there is, of course, an elevated level of uncertainty around increased trade barriers and their effect on both local and global economies. For North America, in particular, the increased uncertainty means that we are now taking down our forecast for the markets for the full year, both for Group Trucks and VCE. But however, globally, the order intake for the quarter was positive in relation to quarter 1 last year for all business areas, and that goes also in the different truck business areas.

Europe specifically did show a rather positive trend. And we are also proud that Volvo Trucks maintained market leadership in Europe with a market share for the first time actually exceeding 20% -- 20.1% and combined with Renault, the group reached over 30%. And across the group, we have continued to prioritize a high quality in the business by focusing on our customers and service operation, I will come back to that; volume flexibility in the industrial system; tight cost control combined with, given the current situation, commercial discipline and price management.

Specifically for volume flexibility, we are in a good balance for almost all markets and regions. The only exception is still, I should say, Group Trucks North America, where we continue to have more costs related to specific situations. Firstly, the continuous ramp-up of the all-new Volvo VNL and that is also now adding with the all-new VNR, the regional model, where extra resources and costs still have been needed. This situation has gradually been improving during the course of the quarter.

And secondly, the increased hesitation among customers in North America to place orders given uncertainty in general. We are, therefore, as we speak, adjusting production levels for Group Trucks North America to minimize the under-absorption in production going forward, but it's clear that we have had an under-absorption during the quarter. On the positive side, in North America, the impact by low levels of cab supply that we have hampered Mack is now overcome after our takeover of the production plant during the fall. So that has been a great work done here.

So in total, the specific events for Group Trucks in North America affected the global truck margin negatively yet for another quarter here. But I have to say also more importantly, we are firm on building a strong American platform with the introduction of the new platforms. That is, of course, I mean, if I may put so a little bit of short-term pain for long-term gain. And a good proof point was the launch of Mack's new Pioneer long-haul model that you did see here in the introduction of this press conference.

So moving forward in these turbulent times for global trade, it is important to focus on activities that we, as a company, can affect. Here and now, we will continue to build on our strong regional value chains combined with global capabilities. We work actively to adapt flows, production capacity if needed and commercial terms to mitigate the effect from tariffs in addition to the normalized markets that we have seen and the subsequent impact on demand. And in times of uncertainty, it's also essential to, from time to time, take a step back.

It is motivating to know that transport, logistics and infrastructure will remain exciting growth opportunities for many years to come. In that regard, we continue to maneuver from a position of strength. We have high customer satisfaction and strong relations. We have a solid foundation with the right people, well-invested industrial and commercial backbones, cutting-edge technology and a strong financial position. So if we summarize the quarter, net sales declined to SEK 122 billion on the back of lower volumes. It was a year-over-year drop of 7% with or without currency.

Our adjusted operating income came in on a level of SEK 13.3 billion, corresponding to a margin of 10.9%. Quarter 1 is normally a somewhat weak quarter in terms of cash flow. And in quarter 1 '25, we generated SEK 1.3 billion in free cash flow. The year-over-year change is mainly an effect of the lower operating income, but also slightly higher investment and mainly related to the assembly plant we are building in Mexico. At the end of the quarter, we had a net cash position of SEK 77.9 billion. Return on capital employed, industrial operations was at 31.8% and earnings per share at SEK 4.86.

So all in all, we summarize another solid quarter and resilient quarter in times of correcting markets. If we then move to the volume developments, total truck deliveries declined 12% in quarter 1 with heavy-duty deliveries holding up relatively better at minus 7%. For Construction Equipment, deliveries decreased by 7% with Volvo coming down 12% and SDLG increasing by 30%. Maybe it's worthwhile noting also when it comes to the truck deliveries, I didn't have that here, but that it was also a rather big change in the mix here related also to the order intake during the last part of '24 here.

So Volvo actually had a bigger decline in relation to then Renault and Mack actually increasing, as you have seen here. When it comes to electrification, with the different uncertainties, obviously, now also linked to the general economy, there is a hesitation of actually placing orders. I mean, it's a hesitation overall to place orders in some of the markets. And then, of course, to add moving into a new type of business model is, of course, not the right timing here. So the underlying demand has been slowing down and the switchover is still driven by early adopters that has started, so to speak, that journey.

But still orders for fully electric vehicles increased with 138%, and it was mainly driven by Renault Trucks, light commercial vehicles and SDLG machines in China. And that was the same trend that we did see in quarter 4, '24. Deliveries increased with 58%, also supported mainly by the same 2 main reasons on SDLG in China and Renault light commercial vehicles in Europe. But in summary, and this is important, despite the slowdown here and now, we continue to push in this field, which is, for example, reflected in our high market shares for medium and heavy-duty trucks in Europe around 60%.

But also as we see that the early segments out is continuing to grow, for example, city buses. Vehicle and machine sales. So if we take those segments on the back of lower volumes, vehicle and machine sales declined 9% adjusted for currency. Truck sales declined 10% on 12% lower volumes. Construction Equipment sales of machines were down 10%, driven by lower volumes in Europe and North America. And bus sales increased by 5% despite 5% lower volumes than same period last year. And one of the effects here is actually electrification, but we'll come back to that.

And for Volvo Penta, sales were down by 5% despite volumes down by 70%. So that was also holding up well here. When it comes to services, the service business was slightly down compared with the prior year and amounted to SEK 129 billion, 12-month rolling that is impacted by also the Arquus divestment last year. If we take that effect away, the underlying service sales did grow by 2% year-over-year adjusted for currency. So services continue to show resilience.

And our efforts then to increase service contract penetration and other services will continue to pay off here step by step. So all in all, I should say, a solid result for services, also showing that activity levels are continuing on rather good levels in the installed population here. Group news. We held a well-attended AGM actually in beautiful spring weather, April 2 in April. The meeting, then shareholders resolved that an ordinary dividend of SEK 8 per share and an extra dividend of SEK 10.5 per share should be paid to the shareholders for fiscal year '24. In total, then we distributed SEK 37.6 billion to our shareholders, the largest dividend so far from a Swedish company. But that said, and that is important, we continue to maintain a strong financial position moving forward.

And we also have obviously, as all of us now had a high focus on mitigating the effects of different trade barriers and tariffs. A couple of words around that, trucks, for example, Volvo Group, when it comes to North America, has all its assembly for the North American market in the United States. Also key truck components are assembled in the United States. But of course, we will have certain flows coming in from, so to speak, noncompliant USMCA regions in the world, not at least then from Europe, and that then will have a tariff effect as already have been then announced by the U.S. administration.

For Construction Equipment, there, it's a little bit of a different picture, majority of volumes imported and mainly then from Sweden, South Korea and Brazil, and we are working now with the mitigations here. Having said that, I think, it's important also to take a step back and see how we are operating. If I take trucks here as an example, we are operating with regional clusters, where, so to speak, a main part of our activities are taking place. The main reason for this is, of course, that we have products that are tailor-made for our customers and thereby, we want really to make sure that we have short lead times with the right type of specification.

But that platform moving forward -- that industrial footprint and platform moving forward will serve us well. Obviously, in between here, we have flows, as I said, about parts and components that we need now to work through and see how the different effects will play out as we move forward. So it will be adjustment of flows, adjustment of volumes in different parts of the world. We will work with the commercial effects, obviously, and pass through that as we have seen, for example, on the steel and aluminum tariffs where we are working with pass-through measures.

That is, I think, very important to have in mind as we move forward, giving us a good opportunity to continue to maneuver. When it comes to the truck side then, we continue to drive innovation to strengthen our customer value propositions globally. And quarter 1, despite then, as we said, many moving parameters was no exception to that rule. In the U.S., our iconic Mack brand and the day -- for the day here, both Mats and myself, we brought actually the Bulldog with also a small sign saying 125 because Mack celebrated its 125th anniversary on April 8 in Brooklyn, New York, where the company actually was founded by the Mack Brothers.

The day was also celebrated with the launch of Mack's all-new Mack Pioneer, as you can see here, which is designed for long-haul trucking. And it sets a new standard in terms of driver comfort, advanced aerodynamics and game-changing fuel efficiency. And this is really a game changer for Mack when it coming to really regain their position in long haul. Also, Volvo's most fuel-efficient truck to date, the Volvo FH Aero won the Green Truck Award. We do know that this truck with its aerodynamics and efficient powertrain is at the top. And this independent test carried out in Germany confirmed its leading savings in fuel and CO2.

And continuing on with the changeover to the new Volvo platform in North America, we launched also the all-new Volvo VNR, complementing then the VNL and this VNR is for regional haul. And when it comes to market environment, let me begin my comments here to the slide with stating what is maybe obvious for everyone. At this point in time, uncertainty is rather elevated. So it comes with a significant uncertainty given the market conditions. So everything that is going on here, both in the short term, but this is what we see right now then.

In Europe, to start with, our forecast for 2025 is unchanged at 290,000 units. But having said that, utilization of trucks is on good levels, and the market is still replacement driven with an increasing share of fleets. Just looking at the current underlying fundamentals, one could argue that there is upside to the forecast. But with everything that is going on, this is, for the time being, our best estimate. In North America, we take down the forecast from 300,000 to 275,000 units. That goes then for U.S., Canada and Mexico combined. And obviously, there is uncertainty about the tariffs and trade barriers and also about EPA 2027.

In this forecast, it means that we do not expect any prebuy related then to EPA 2027 for 2025. We had that previously that we thought maybe that should start in the later part of '25. But of course, the development here is still uncertain. And in Brazil, we take down the forecast slightly from 90,000 to 85,000 trucks on the heavy-duty side. And agriculture and mining segments are still holding up, export oriented, as you know, where the domestic economy is impacted by higher inflation and increased interest rates.

India, somewhat correction upwards. We are correcting heavy and medium-duty up to 380,000, that is plus 10,000 in relation to last forecast, and we maintain our forecast for China market of 710,000. Book-to-bill, we did see a good order activity with a positive book-to-bill in quarter 1, specifically for medium and heavy-duty trucks, book-to-bill in quarter 1 was 114% and for 12-month rolling then 99%.

Year-over-year, orders did grow 13% to over 55,000 trucks and with 19% to almost 48,000 units for heavy-duty segments. The European book-to-bill in quarter 1 was strong at 137% with both Volvo and Renault growing. And the uncertainty then in North America is evident in the book-to-bill with a mixed picture between Volvo and Mack. Orders for Mack were increasing, while Volvo being hampered by the changeover to the new trucks as well as weakened demand in the long and regional haul segments.

But in total, orders were up 6% in North America in relation to last year. South America, Africa, Oceania, Asia also had strong developments of book-to-bill in the quarter. Truck market shares. I've been a little bit into it. Volvo Trucks recorded an all-time high market share of 20.1% in Europe. In heavy-duty, Renault Trucks had its high market share since the fourth quarter of 2012, actually with 10.5%. So in total, the group had 30.6% market share in Europe.

In terms of battery electric trucks, we still have more than half of the market with a combined share of 60%. And in North America, Mack Trucks has regained market share with an improved supply chain situation, as I alluded to, while Volvo Trucks has been hampered by the changeover to the new platform and also an unfavorable mix. All in all, a rather stable share of 14.1%, but the new products on both Volvo and Mack side will provide us with opportunities and really good opportunities to grow market share as we move forward.

In Brazil, Volvo remains the market leader with close to 24%. And in Australia, both Volvo Trucks and Mack Trucks were somewhat lower in quarter 1 with a combined share at almost 22%. Moving then over to VCE and Construction Equipment. Also on this side, we continue to push innovation and to roll out important new products. At the construction trade show, Bauma in Munich in April, Melker and team unveiled the first electric haulers in the A30 and A40 size classes. And Volvo CE also showcased the groundbreaking all-electric lineup of excavators, wheel loaders, articulated haulers and compact machines.

Then, of course, it's important to add that, I mean, the customer can get what the customer wants. So we have, of course, this lineup also for combustion execution and also for different type of fuels in that sector. And in the quarter, Volvo CE also launched a new A50 that is actually fitting between the A40 and A60 size classes, articulated hauler model in the very important North American market.

Market environment, also here, uncertainty also apply, of course, for construction equipment as it is for trucks. And in Europe, if we start, we guide for a flat development for 2025 in relation to '24, and that is unchanged in relation to previous forecast. In North America and on the back of increased uncertainty, we guide for a continued decline. And our guidance is now minus 10% as midpoint in relation to '24, and that is a slight change than we had minus 5% as midpoint in the previous forecast.

And in South America and Asia, we stick to a flat development for '25. That is also unchanged. And in China, we reiterate a slight improving market, plus 5% as midpoint, also unchanged, by the way, in relation to previous forecast. Book-to-bill situation. Also here, VCE showed growth with a book-to-bill at 111% in quarter 1 and 99% 12-month rolling. European book-to-bill continued to be good at 131%, so a similar pattern as for trucks. And the North American book-to-bill improved to 114%. But as you can see then, 12-month rolling still a bit low 180%, but at least an improvement here.

And South America had a positive book-to-bill at 125%. The same goes for Africa, Oceania and Asia were also positive in terms of book-to-bill. Volvo Buses then launched during this quarter, the new Volvo 7800 electric in Mexico, and that is the first electric bus model to be manufactured in the country. The new articulated and bi-articulated electric bus is built on Volvo Buses' global electromobility platform, BZR. We also received the first order for the new intercity bus Volvo 8900 Electric when Svealandstrafiken that is one of the Swedish PTAs or public transport authorities ordered a total of 106 electric buses to operate in Sweden, whereof 80 -- or sorry, 60 Volvo 8900 electric.

So Volvo Buses continue its top line growth on the back of a strong position in electrification. And book-to-bill in the quarter was very strong at 158%. Overall demand for coaches continue to be good and order intake year-over-year was up 123%. Penta then, Volvo Penta in the quarter started serial production of its IPS Professional Platform, the biggest IPS system so far. And it was also introduced to the North American yacht market. This is a great addition to the already very strong lineup of marine -- in the marine product portfolio.

And book-to-bill continued to improve to 141% in quarter 1 and to 109% 12 months rolling, and order intake year-over-year was up with 35%. Volvo Financial Services, the portfolio performance continued to be good with customer delinquencies stabilizing at average business cycle levels. VFS continued to deliver good and stable earnings. And in quarter 1, the new business volumes reached SEK 24.9 billion. The 12-month rolling penetration also was good, reached 29% and up by 2 percentage points compared to last year. So by that, I conclude the business report and leave to you, Mats, for the financials.

[Mats Backman, executive]

Thank you, Martin. So looking into the financials then and starting off with the group net sales. So net sales decreased by 7% on a currency-adjusted basis compared to last year. Vehicle sales dropped by 8%, mainly due to lower volumes. Service sales increased by 2% adjusted for currency and the Arquus divestment. European volumes declined with sales coming down 12% adjusted for currency and the decline is mainly due to lower volumes in trucks and Construction Equipment.

In North America, sales experienced a slight decrease of 2% FX adjusted, mainly due to lower market activity for construction equipment. South America continued to have positive performance during the quarter. Net sales increased 3% FX adjusted compared to last year, and this was mainly driven by trucks and construction equipment sales. In Asia, the net sales increased by 1% adjusted for currency, mainly driven by our SDLG business in Construction Equipment.

And the other regions experienced declining sales in both trucks and machines. Overall, FX effect was negative with about SEK 700 million, driven by the Brazilian currency depreciating 13% versus SEK with a negative FX effect of about SEK 1 billion. The adjusted operating income for the group was SEK 13.3 billion with an adjusted operating margin of 10.9%. In Q1, earnings were supported by positive development of our service business and lower operational expenses for R&D as well as S&A.

While the lower trend in freight costs had a positive year-over-year impact, it did not compensate for the effects from reduced volumes, negative product and brand mix within Construction Equipment, and the negative financial impact from the truck model changeover and under absorption in the U.S. manufacturing system. The net capitalization effect in the quarter was positive at SEK 600 million with a year-over-year effect of SEK 200 million. Guidance on net capitalization for the full year 2025 is positive at approximately SEK 3 billion with a year-over-year effect of about SEK 2 billion.

FX had a negative impact of SEK 200 million in the quarter, mainly driven by the strengthening of the SEK. And given the current trend of strengthening SEK, we expect the effect of transaction exposure to be negative at SEK 4 billion for the full year 2025, and we don't provide any guidance on the full FX effect on earnings. First quarter is, from a seasonality point of view, a weak cash flow quarter due to the seasonal buildup of inventories. This quarter, we have ever generated a positive operating cash flow of SEK 1.3 billion despite continuing to make significant investments in the transformation.

While the inventory went slightly up, the solid earnings were the main contributor to the positive operating cash flow. Return on capital employed trend declined to 31.8% on a rolling 12-month basis. The net financial position remained solid at SEK 77.9 billion, supported by the positive operating cash flow generation. And then looking into the Truck segment. The decreased FX adjusted net sales for Group Trucks of 8% was driven by lower volumes and slightly negative price effect on vehicles.

The lower adjusted operating income and adjusted operating margin were mainly driven by generally lower volumes and the impact from the model changeover and under-absorption in the U.S. manufacturing system. Good performance was maintained through effective price realization on parts, reduced freight costs and generally good cost control. FX was slightly negative with SEK 58 million in the quarter. Looking at Construction Equipment then. FX adjusted net sales decreased by 8% due to the negative brand and product mix.

Adjusted operating income decreased by SEK 1.1 billion to SEK 2.5 billion. The negative mix from higher volumes in China and lower volumes in Europe and North America were partly mitigated by lower material costs and increased service business. The adjusted operating income margin reached 12%, and FX effect was minor at SEK 12 million. Looking at buses then, FX adjusted net sales increased by 7%, driven by product mix and service sales. Adjusted operating income increased to SEK 360 million, and this was actually the best first quarter ever for buses.

The result was supported by price realization on both vehicles and parts and continuous improvements on manufacturing costs, offsetting the impact from higher material costs. The adjusted operating income margin increased to 6.6%, and the currency impact was slightly negative at SEK 30 million. Moving over to Penta then. Driven by lower volumes, FX adjusted net sales decreased by 3% to SEK 5 billion. Adjusted operating income was slightly lower at SEK 950 million, and this was mainly driven by lower volumes. The solid performance in the quarter was due to positive product and market mix, driven by heavy-duty engines in the U.S. market and price realization on both engines and parts.

The adjusted operating margin reached 18.3%, and there was a small negative FX impact in the quarter at SEK 37 million. And then finally, Financial Services. Adjusted for currency, the credit portfolio increased to SEK 264 billion with a rolling 12-month return on equity at 12.7%. The currency effect on the credit portfolio was minus SEK 22 billion compared to first quarter '24. Portfolio performance continued to be good with customer delinquencies stabilizing at average business cycle levels.

In Q1, the adjusted operating income was stable at SEK 1 billion, and the solid portfolio performance was partly offset by increased credit provisions and unfavorable currency movements, which had a negative impact of SEK 48 million compared to first quarter 2024. So with that, I'm leaving for Martin to summarize.

[Martin Lundstedt, executive]

Thank you, Mats. Thank you for that walk-through. Yes, to conclude, I'll be rather brief here before opening up to -- for questions and Q&A here. Yes, as you have heard, it has been a quarter with solid earnings and returns despite continued decline of deliveries, but also extra costs mainly for Volvo Trucks and North America related to the changeover to the new truck platform as well as under-absorption in production. We are addressing those areas as we speak, and we do see improvements.

It is also very positive to see the order intake that improved for all business areas year-over-year during the quarter. But also in these turbulent times for global trade, it is vital to focus on activities that we, as a company, can influence. Here and now, we will continue to build on our strong regional value chains combined with global capabilities to mitigate the changes in global trade patterns. We have a good traction to adopt costs, selling admin industrial, while we, at the same time, are maintaining a high priority on innovation and technology moving forward. But as I said earlier, in times of uncertainty, it is essential to take a step back. It is motivating to know that transport, logistics and infrastructure will remain exciting growth opportunities for many years to come. And in that regard, we continue to maneuver from a position of strength.

So by that, Johan, I think we are ready for Q&A, right?

[Johan Bartler, executive]

Thank you, Martin. So we continue to the Q&A. And we do as always, we try to limit ourselves to one and most important questions, so we leave the floor for everyone. We start in the room. We start with Erik.

[Erik Pettersson-Golrang, analyst]

It means we have to consider which one you'll actually answer. And I'll try with this one. On the investment side, as you mentioned, quite a big step-up compared to last year. You said Mexico was a part of it. So for the full year then, will we see a similar rate of increase Q2 to Q4 as we saw in Q1?

[Mats Backman, executive]

Yes, you will see a somewhat higher level than driven by Mexico because if you're looking at the delta in the first quarter year-over-year, it's all Mexico actually when it comes to the assembly plant. So you can expect that we have that kind of delta for the full year and maybe not the full delta, but we will see some impact from Mexico on the full year.

[Johan Bartler, executive]

Good. Thank you, Erik. We move to the telephone line. Jefferies, Michael Aspinall.

[Michael Aspinall, analyst]

Just one on Europe. You saw very strong orders in Europe again. Have you seen that continue into the second quarter? Or have you seen an impact on activity levels in Europe from what's happening in the U.S.?

[Martin Lundstedt, executive]

Thank you for the question. Yes, of course, it's quite early in the second quarter. But so far, it has largely followed the same pattern as we have seen in quarter 1. So when it comes to absolute levels in Europe, it has been continuing on a level that we have seen in quarter 1.

[Johan Bartler, executive]

Good. Thank you for that, Michael. We move to Hampus at Handelsbanken.

[Hampus Engellau, analyst]

Yes. One question from me. Can we go back to North American trucks? You've been running due production with the new B&L. And I guess my question, you were all stepping up and reducing run rate. But what further measures have you been taking given the market sentiment? And when would do you think you will be in balance with that demand?

[Martin Lundstedt, executive]

Thank you, Hampus. And I think this is a very important one, obviously, because when you have so many moving parameters, if you start globally to start with, you need really to go down to the different regions and see how does it look when it comes to the balance. And I should argue that for all business areas, we are in a good balance. Of course, there are adjustments to be done everywhere when you have so many different changes. As we speak, for example, we are actually adjusting somewhat upward in Europe then for both Volvo and Renault as one example, and that goes for all the 4 main plants there.

But at the same time, in North America, it has been quite a number of different events over the last 3, 4 quarters, as we have also discussed here. But I think if you start on the positive and just to give that a little bit flavor, Mack, we feel now is through with their, so to speak, supply chain issues. I think that is an important data point to have. Then -- I mean given their current customer base, now we are introducing more also diligently for long haulage, but I mean, they are regional haul and vocational. It has been holding up.

If that situation now uncertainty will continue, our judgment is that it will have a spillover also to these segments. And we are, therefore, preparing for adjustments also for Mack. So that is, so to speak, the Mack situation but well ahead of plan there.

Volvo, in particular, obviously, we started the ramp-up at the end of quarter 3, beginning of quarter 4 last year. And what is happening then is obviously that you are during a period of time running in parallel, so to speak, the -- I don't like to call it the old, but I mean the previous program and the new program. And since this is a rather big platform change, you need to have extra resources to do like that.

Then you can also see in the deliveries that during that ramp-up, we were losing volumes. So the loss in North America Volvo Trucks was one of the bigger than also for this quarter because what we are producing is also coming with a certain lag. But that has been, so to speak, following the plans, you can say largely when it comes to our estimate of the costs related to that type of double program, maybe with a couple of weeks or up to a month of delay because there are events happening. So that is how it is. But of course, also, when you have these type of programs, you are ramping up during quarter 4, we have also been working with these volumes. It has not been fully completed, et cetera. So those extra costs have been there.

On top of it, we did see, of course, a correction in the market. We started to see, okay, how should we adjust the extra resources related to the ramp-up also with de facto lower, so to speak, demand in the North American market. We have started to do these adjustments during the course of quarter 1, and we have also recently then decided to make a further step also for Volvo Trucks. And that is now related to -- more to the actual demand in the market that we see that uncertainty is still there. There is a hesitation amongst customers. You see that in our market forecast. And as we speak now, we are taking down the production also for group trucks in North America, Volvo and for Mack.

[Johan Bartler, executive]

Good. Thank you for that. We move to the telephone line, Citigroup and Klas Bergelind.

[Klas Bergelind, analyst]

Klas at Citi. So my question is on the gross income, and I'm focusing on the impact in the truck business. You didn't call out the mix on the slides for trucks that was in Construction Equipment. But I think you said, Martin, that the mix took a hit as Volvo brand declined more than Renault. So that's one drag. But across the under-absorption, the B&L change and the pricing, I'm trying to understand this better.

First, on the under-absorption, obviously, inventories are seasonally higher, which is normal. So the destocking was more last quarter in the fourth. But despite that, you're reporting a bit weaker margin. So is pricing getting worse out of the backlog? Or is the brand mix the key here? Or was the changeover in B&L, a bigger drag this quarter? So I'm just trying to understand the moving parts. So there was a lot of questions in one.

[Martin Lundstedt, executive]

Well done. Well, no, I should say that, I mean, you're on to -- and Mats, you, complement here because there were quite -- as you said, also quite a number of parameters. I would like to start by saying that we feel again rather good about having control of the different parameters. So there is no, so to speak, underlying surprise to us. Volume is, of course, one effect, just to start there. The general volume, so to speak, decline. That is of 12%. That is one effect. Then you have the mix effect also on the truck side, obviously, because, as I said also Volvo has had higher, so to speak, decrease than the other brands.

On top of that, to your point, we have a rather still material effect then on, so to speak, the 2 specific events remaining for Volvo Trucks in North America changeover as well as, so to speak, under-absorption. We are addressing that as we speak, and we feel good about the activities that is happening there.

And then largely on pricing, I should argue that, yes, partly, you had mainly then in Europe, actually in quarter 4 order intake, a slight pressure. That was related also to mix bigger fleets and I mean market was going down. And that is then materializing in quarter 1 when it comes to invoicing, but that we have seen stabilizing now and rather seen an improvement. As we speak now, it's a lot of focus, obviously, on North America when it is high uncertainty that there is a pressure. But we have said that we want to hold on. We have strong products here, and we are therefore also adjusting production rather than to -- so I should argue that you mentioned it's slight price effect, and that is, I think, the right wording.

But we don't feel overconcerned about that reason. There is more, so to speak, about the other moving parts here again, volume and then I should argue a rather big effect then of the North American events, Volvo Trucks, specifically.

[Mats Backman, executive]

Maybe just to add, I mean, as I guided as well, if you have a little bit more kind of forward-looking, I mean, the currency will be a headwind going forward as well. I think that's also important to remember when you look at the gross income.

[Johan Bartler, executive]

Good. We turn to Agnieszka, Nordea.

[Agnieszka Vilela, analyst]

On Construction Equipment, your margin was somewhat pressured in the quarter. Can you explain what was behind? And also given the fact that your orders now in construction equipment are quite strong in Europe and even in North America, should we expect somewhat better mix? And then maybe, Martin, also, if you can comment on the interest at Bauma for your new products?

[Martin Lundstedt, executive]

Absolutely.

[Mats Backman, executive]

Starting with CE then I mean, it's basically all about mix then. Because, I mean, looking at the SDLG, I mean, we had in the first quarter, about 55% SDLG in deliveries, and that is a really, really high number. So that is impacting quite a lot. And if you're looking at the kind of the current order intake is quite good on the Volvo product side, meaning that -- I mean, maybe we'll see some improvements then going forward. But for the quarter, it's definitely the SDLG being a big part.

And then also, I mean, below that, so to speak, also the kind of the geographical mix on the Volvo brand when we had less in North America where we traditionally have very good profitability. So I would say looking at CE, it's very much related to the mix effects in the quarter.

[Martin Lundstedt, executive]

But it's positive to see also. I mean, to your point also, we have a good order intake when it comes to Europe, and that was the second consecutive quarter for VC as well, and I think that is promising. And then CE also that we don't see in the books yet. But obviously, the announcements also in Europe of rather big packages when it comes to infrastructure and defense, et cetera, we'll also have an effect here going forward, obviously. I mean, generally speaking, that's good for Europe that start to think about the balance sheet, and we will gladly be supportive in that effort.

Bauma, great interest. I think the strength is that we are also in those segments showcasing that we have the different propulsion systems now ready, not at least actually for city-type of construction sites where we see more and more of the tenders are coming with demands on electrification, both for emission and pollutions and close by, so to speak, emissions like NOx and particulates. But maybe even more for noise, vibration and these type of factors.

So really to have the full lineup plays an important role. Then, of course, big interest around the new reveal of articulated haulers also. I mean that we are now filling in with the A50s making our lineup to a true winner, if I put that in that very, very important segment and that we are ramping up now as we speak because there is also work to -- has been done during the quartering draws. So that is also a step-by-step coming through.

[Johan Bartler, executive]

Good. We turn to the telephone line, Goldman Sachs, Daniela Costa.

[Daniela Costa, analyst]

I wanted to ask on free cash flow. You've already addressed the CapEx point, but I know normally seasonally weaker in 1Q, but you have a pretty big drag this quarter on working capital, which is between inventories and the other change in working capital. Wondering if you could maybe clarify what that other changes in working capital was and give us a bit of how should we think about it this year, given you're probably ramping up for EU orders getting better, potential supply chain disruptions in the U.S. with tariffs, but also cutting production, sort of how should we think about the cadence from here and on this working capital line item?

[Mats Backman, executive]

Looking at, I mean, working capital and the different components, I mean, to start with, we have an inventory buildup in the first quarter, but what I would like to stress is that the buildup is less than we normally see. Even if you're looking year-over-year, we have much less in terms of inventory built up this quarter than comparing to last year and the quarters before that as well. So -- I mean very, very well managed by the organization when it comes to inventories.

When it comes to other working capital items, where we have quite a lot of volatilities related to the payable side. And that is actually more of a calendar effect than depending on how many -- I mean we are making payments a certain weekday. And if you have 4 or 5 of that kind -- of that weekday, then you will have a positive or a negative impact then. So that is more kind of a calendar effect on the payable side.

Then overall, on the cash flow and comparing to last year, when you see the numbers then, what you also should remember, looking at the cash flow comparing to last year is that we had an all-time high when it comes to the cash flow last year in the first quarter, a great cash flow quarter that we're comparing ourselves with now then. And if you're looking at the kind of the differences year-over-year, it's very much related to the operating income then. That's the big kind of difference then, and then to some extent, related to CapEx then when we have somewhat evaluated CapEx done with Mexico and the assembly plant. So that is, in a nutshell, the cash flow explanation.

[Martin Lundstedt, executive]

But I think it's very important just to reiterate what you said was about inventory situation in general. I think that is well managed, we have said, with our different business areas and super important in a situation where you have a lot of uncertainty. You don't want to sit with so to speak, inventory in different parts of the world, and so well done there.

[Johan Bartler, executive]

Good. We turn to Mattias at DNB.

[Mattias Holmberg, analyst]

Could you talk a little bit about the Mack Pioneer? I would be particularly interested to hear how we should think of it in relation to the 25% market share target in North America. And then also what learnings you've made since the -- I think, a couple of years back, you made a similar launch for a Mack highway truck.

And then also, finally, perhaps you showed at the Capital Markets Day last year that Mack was below the rest of trucks in terms of margin. How should we think about the margin profile on this? Can this help bring that up? Or is it other moving parts you need to move?

[Martin Lundstedt, executive]

Thank you for that question. And it comes in handy. As we said, I mean, we launched that now, and that is then the continuation of the changeover we are doing in North America, and it's a big investment as we have been talking about before here, both when it comes to the product, but also industrial. And what is important to understand that this is a real, so to speak, platform change for Mack. The Mack Anthem that we did was that in '17, '18, if I remember it correctly, somewhere there, right, was more, so to speak, of an upgrade of the already existing platform built on the old, if I may say, so the current then -- back then Mack legacy platform. And that was, so to speak, an attempt to reenter. We did see that the competition here is too high in order to be a real contender for that. So it was the hard core, so to speak, Mack [indiscernible]. It's a good track. But in reality, the industrial system is not geared for that type of products also.

What we are doing now is that we are, as we have done in Europe, building a modular platform for the 2 brands for the different type of categories. Very strong as you can see, still brand distinction. So you have, so to speak, the Mack feel when it comes to that type of customer categories when it comes to the driver experience, when it comes to the driver interface, living spaces, et cetera. But when it comes to aerodynamics, when it comes to weight, when it comes to fuel efficiency, when it comes to technology, it is really up to the top type of long-haul product, but also supported by an industrial system that will give us, so to speak, scale where it matters at the same time, brand distinction where it matters.

Today, just to give a ballpark, I mean, Mack is sitting on 1.2, 1.6 depending a little bit of the markets on the long-haul segment. So in reality, almost absent type of segment for Mack. We have high in relation to that ambition, but still realistic ambitions. But thinking about that long haul in certain market conditions are up to almost 50% of the total market, that will be a very, very important part of Mack's journey.

So even if we talk about like 5%, 6%, that is more than realistic given the performance of this. We can do that without being too aggressive when it comes to our commercial conditions and at the same time, utilize, I mean, the strength of the network that we are already sitting on. So we're very excited about it.

I was over together with colleagues and of course, all the colleagues in North America, meeting customers and dealers and people are super excited about this. I mean, Mack is back when it comes to long haulage. That was the statement. And I mean, now we will start to ramp up this in the later part of quarter 2. And by the way, also a lot of good then learnings from the VNL ramp up. So what we have done now in New River Valley for Volvo, we have also good, so to speak, learning for Mack here.

[Mats Backman, executive]

On margin then I guess that was also a question. And so looking at the kind of the performance for Mack, I think the first step when it comes to margin improvements is all about volumes. So we have been kind of supply constrained and given the challenges we have had on the supplier side. So good leverage on additional volumes. And even though we are not disclosing the different brands, I mean, Mack had a good kind of performance now when we see the...

[Martin Lundstedt, executive]

Which confirmed also our, I mean, clear believe that volume will give that so...

[Mats Backman, executive]

So to sort out the kind of the supply issues and getting volumes through the system is by far the most important thing to start with and will bring up the kind of the margin for Mack. And then on top of that, the new launches as well. But the first step is really getting the volumes.

[Martin Lundstedt, executive]

And on top of that, I mean, the industrial system for Mack will be completely different and much more aligned to where -- I mean, professional, if I may say, so industrial system that we see for Volvo Trucks in North America, but also for Volvo Renault in the rest of the world, so it feels really exciting.

[Johan Bartler, executive]

Good. We turn to the telephone line, Morgan Stanley and Shaqeal Kirunda.

[Shaqeal Kirunda, analyst]

Shaqeal from Morgan Stanley. So clearly, sentiment has changed significantly since last quarter, especially in North America, of course, impacted by tariffs and EPA. If we look at the new market outlook, what's baked into your expectations for 275,000? We know you no longer expect to prebuy, but to what extent do you still rely on a second half improvement? And what drives that?

[Martin Lundstedt, executive]

No, but I should say that, I mean, first and foremost, I think that if you look at the deliveries in the market, et cetera, 275,000 is rather, so to speak, sizable adjustment already now. And we should say that the prebuy effect that we expected for '25 was rather related to the later part of the year and depending also the general sentiment. So I should not say that the full, so to speak, decline here is related to EPA, is also related to the general uncertainty. So I think still, I mean, this is the most realistic scenario when we see different order activities. I mean it has been a bigger hit when it comes to the over-the-road segment, mainly long haul but also regional.

We start to see certain effects now more related to the uncertainty, wait and see for vocational like construction and other oil and gas, et cetera, than the actual, so to speak, absence of need for it. So if clarity will come back, I think that will also support. So 275,000 is the best in scenario we have now. Having said that, with adjustments, we do -- of course, we are prepared to continue to adapt if that is necessary, but now I think we are on to it, and we are rather early out to do the adaptions also.

[Johan Bartler, executive]

Right. So we move to Bjorn at Danske Bank.

[Björn Enarson, analyst]

Yes, trucks in Europe. We've seen deliveries quite low a few quarters but also orders quite strong 2 quarters and you are ramping up, as I assume we see better deliveries looking ahead. But what will take you to hike your forecast or the outlook for the European demand?

[Martin Lundstedt, executive]

No, but I think that is a very good question, obviously. And I mean I should -- I think I could be transparent in saying that we have discussed that also already. I mean, where we really know? I mean when we said 219 -- as already said in my presentation here, if anything, we see, so to speak, an opportunity on the upside here. But given so to speak so many uncertainties, et cetera, to already now do it. We have had 2 consecutive quarters with good order intake and positive book-to-bill. And I said that it has started good also now in April here. Let's see.

What I mean about that is also, I mean, typically, weaker order intake quarter 3, quarter 4. And then we see that coming through in deliveries now, not only for us, but for the market in general. We have gained market share even if we have lower deliveries year-over-year. So again, depending on how different parts of the whole system will adjust now, but we are planning to adjust upwards as we speak for Volvo, both in Ghent and Tuve and also for Renault in Bourg and for Volvo and Renault in Blainville for the medium duty basically.

[Johan Bartler, executive]

Thank you. We turn to JPMorgan [indiscernible].

[Unknown Analyst]

Just one question, please. Can you help us a bit on North American production sequentially Q2 versus Q1? How do you see that in the light of the -- on the order intake? What's the share of temporary workers you have in the region? And excluding Mexico, are you looking at some CapEx contention measures -- or cash contention measures, CapEx reduction measures in Q2 versus Q1 to protect cash into the first half?

[Martin Lundstedt, executive]

Thank you. I mean, first and foremost, I think, of course, we're always cautious about, I mean, different activities when you have a high level of uncertainty. That goes on the cost side, it goes on the PPE or the CapEx side, obviously. Having said that, I think it's also very important to have a little bit longer view than a quarter when you are planning for CapEx. And that's also a very important reason why we have said that it's important to maintain a strong financial position, maneuverability in order not to be too much stop and go when it comes to your CapEx because that will eventually be much more expensive and disturbing than actually go along. Then if you see more systematic or structural changes, then, of course, we are adapting.

And given, I mean, if there is really weak outlook, we need, of course, also to adjust in order to maintain the right type of balance. But what I feel is that we have been showing over quite many years now that we are responsible when it comes to our CapEx in relation to what we can, so to speak, afford, and we will continue to work in that direction.

Then when it comes to -- and that goes obviously for, I mean, North America as a case. We have seen that constantly when markets have been coming back and peaking, we have been losing our share already, so to speak, with our current and previous programs. We don't want to have that situation again. So Mexico is an add-on. Of course, this market will come back. I mean the need of transport logistics in infrastructure will continue to be there. And this is an add-on well placed for us on the Western part of that continent, complementing then our main facilities in LVU and in NRV.

Then when it comes to the flexibility, we have the right type of flexibility, and that's the reason why we are now actually adjusting. We are adjusting during the first half of the year with approximately 1,000 positions here, if we take Mack and Volvo Trucks North America combined.

[Johan Bartler, executive]

Good. That brings us to the full hour. So thank you for listening in on over the streaming and also in the room. So with that, thank you for today.

[Martin Lundstedt, executive]

Thank you very much.

[Mats Backman, executive]

Thank you.