Volvo Car AB (publ.) (VOLCARB) Earnings Call Transcript & Summary

Thank you, and hello, everyone. My name is an Anna Oxenstierna, Head of IR, and I would like to welcome you all to this debt analyst conference call covering the 2021 first half year results of Volvo Cars. With me in the room, I have Volvo Car Chief Financial Officer; Björn Annwall; and Group Controller, Per Ansgar. We'll start with a short presentation by Björn, and then we'll open up for questions. By that, Björn, I'll hand over to you.

Perfect and thank you and welcome, everyone. I think, Per will help me as well through this presentation before we go to the Q&A. And I'll give a brief update then on the H1 result and put that a little bit in the context of the change journey and transformation we are going through. In short, the key highlights of this H1 is basically a message of continued strong growth or back to strong growth. It is also an H1 with record profit and premium profitability, come back to cover that. And as you will hear, we are truly accelerating our transformation into the future. So I will spend a few minutes going through that. So in short, the sales came out at 381,000 cars for H1, which is a strong growth of more than 40% compared with last year. Of course, last half year was heavily affected by the COVID situation with lockdowns in major parts of the world. So a more true comparison would be to compare with 2019, and then the growth is around 12%. Still strong growth. If you then look at the EBIT, it came out at SEK 13 billion or 9.4%, which is truly a strong and a record for Volvo Cars. If you zoom out a bit and add to the H1, also the last 6 months of last year, so look at the last 12 months, this means that our retail sales pace now are -- is at 773,000 cars, which is very close to the 800,000 target we set for ourselves for 2020 back in 2011, which I think is quite remarkable. Yes, it's a bit delayed due to the pandemic and it's slightly below 800,000. But given the semiconductor situation, I do feel that those 773,000 cars are principally where we should be on the 800,000. Same goes with our profit margin. If you look at the last 12 months, the total EBIT is SEK 22.7 billion or close to 8% EBIT margin, which was the target we set for ourselves by 2020 in 2011. So principally, we feel very good about ticking off that landmark -- land post that we have and now moving forward with our transformation. And as we move forward with our transformation, we have very clear mid-decade business ambitions. We're saying that we're going to continue to grow at approximately the pace we've been growing lately, so to 1.2 million car by mid-decade. We're also saying that half of the sales should be from fully electric cars on route to become a fully electric company by the end of this decade. We're also saying 50% of the sales should be online. And importantly, we will have a sustainable margin at 8% to 10% EBIT margin. We will reduce the CO2 footprint of a new car in mid-decade with 40% comparing to the baseline we had actually in 2018. And we will -- and that those of you who looked at our tech moment and looked at our plans with central compute, you also understand why it's important that we take control over the software in the car. And we planned that by mid-decade, at least 50% of the software in the car is in-house controlled developed. So those are pretty clear and aspirational mid-decade ambitions that we are steering the company against. And during this H1, we made clear progress on the journey towards reaching those ambitions. We -- When it comes to our Recharge cars -- chargeable car, plug-in hybrids and full electric. It is now 25% of our sales. It's globally. It's 40% in Europe. Last 3 months, it's been 50% in California. So it's really a significant part of our business, and it's the highest share of any traditional car manufacturers in the world. We also launched the C40 Recharge, our second fully electric car, and we have opened for orders, and it will start delivered in the fall. Another very important announcement we made was the creation of Aurobay, which is an operational unit that will manage the ICE powertrain assets of Volvo Cars and Geely Holding and coordinate those also with the ICE powertrain assets of [ Geely Holding ], which means that we, as Volvo, are deconsolidating all the ICE powertrain units and managerially and also kind of financially. We have a 33% ownership in this in this company. But as a management team, we will not focus on that. We get great supply of high-quality and energy-efficient engines. But the management of Volvo Cars is fully dedicated to deliver on the ambitions I just showed you. Another important announcement we made during the last time is the partnership with Northvolt, just as ICE engines, we're a vital part of Volvo in the past, it's such a fundamental part of the material cost, is such a fundamental part of the performance of vehicle. Same goes now for battery cells and the electric motors in the future. It's such a big part of the material cost, and it fundamentally sets the characteristics of the vehicle and the performance of the vehicle. Therefore, we, as Volvo, need to be firstly involved in that. And that's the context for the setting up a new research unit where Aurobay's -- sorry, where Northvolt's battery cell competence and Volvo's vehicle integration competence is kind of together developing the next level of battery cell chemistry, and we're also building a battery cell factory. We are continuing the competence shift. I mean, Aurobay is one example where, yes, our powertrain assets, the production asset, but also the engineering unit working with ICE engines is being spun off from Volvo. And then we're continuously investing into competence when it comes to battery, when it comes to software, when it comes to building a digital solution for direct commerce. So that will continue. And as announced, Volvo is evaluating a potential listing later this year at Stockholm Nasdaq. Nothing new to report on that front. Evaluation is ongoing, and we will inform in due course what the result of such an evaluation will become. So accelerating transformation. Then looking deeper into the results. Retail sales, as I said, 381,000 cars, revenue, SEK 141 billion. If you look then at the percentage growth on unit and revenue, you are used to see a higher revenue growth than retail sales growth because Volvo Cars have become more premium, they cost more and we have mixed up. Now you see the opposite. And that is not due to the fact that we have sold our cars less price or that we have mixed down, this is an effect that the retail sales measures to deliver from our retailers where, of course, revenues is in a wholesale model, it measures our sales to retailers. And during this period, the inventory at dealers have been drastically reduced as a consequence of the semiconductor supply shortages and therefore, the supply shortages in the industry. The EBIT margin, we've already talked about. Cash flow, I will come back to it in more detail, but it's minus SEK 7 billion. You know that we have the seasonality in our business, where the cash flow is typically negative first half year, positive in the second half year. On top of that, there were a number of time phasing elements affecting this period that we come back to, but the underlying cash flow is strong. That's the key message here. Double-clicking on the growth, it's very reassuring to see that this growth is consistent across our regions. So if you compare with 2020, very strong growth in all regions. Compared with '19, very strong growth in China, 40%; U.S., almost 30%. Europe is slightly declined, is minus 4%, but that is in a market that has declined with 23%. So we are minus 4% in the market that's going down with 23%, that means we are gaining massively on market share, which is true in all regions. So very reassuring to see such strong market share growth. This is, of course, coming from a good product lineup and the sales on SUVs. XC40, XC90 and XC60 were record high, that's 75% of our total sales. So the product offer is strong. We also see if we take a bit longer time horizon, the strength of Volvo's brand is helping us to drive market shares. We have the brand values that are totally in line with where the society is moving. Our human centricity, understated warm care aspect of the brand combined with the kind of safety, responsibility, sustainability, focus, that is truly what modern premium consumers aspire to. So much more consumer groups are coming to the values that are traditional [indiscernible] that helps drive growth. We're also driving growth based on leveraging macro trends in the industry. Of course, electrification is the fastest growing part of the automotive market. Those 25% Recharge sales that I already talked about, in that, I would say, to around 2 percentage points that fully electric cars. The XC40s [ in '23 ], then is plug-in hybrids. The fully electric cars, that we're basically selling the capacity we have, and we're following a ramp-up of capacity for XC40s. Then in the fall, the capacity is increasing. And we also have the C40. And then next year is another capacity step. So those cars will grow quickly as we speak. But why is then the plug-in hybrid, so important? Why we keep on talking about that. It is not the end state. It is a step towards a fully electric future, but it's extremely important that the consumers that buy plug-in hybrid cars today are the consumers that will buy fully electric cars next time they buy a car. And our market share in chargeable car is much higher than in non-chargeable car, we're taking market share in the growing part of the market. If you compare quickly, Volvo with the 3 German premium competitors, they are 3x our size globally. But if you look at cars that can be charged, we are at the same size. So our market share is very different in this important, growing part of the market. That's also the future for Volvo. Online, we also continue to grow, and you might say 10,000 active contracts there in the big scheme of things when we have sold 773,000 cars last 12 months. Why do you mention that? And I do mention that because this is a start of a fundamental transformation journey that is very important. Consumers want transparency. Consumers want convenience and efficiency. And our way of meeting that is to offer cars in a slightly more simplified way. You have a few cars with free set specifications to choose from. You get the set price, you get everything around the car included also transparently in the price, service, wear and tear, financing, insurance. That is the way Volvo consumers want to give access to mobility. In order to do that, we clearly need great global, scalable digital systems. We need a direct consumer e-commerce competence, and we need the support and collaboration with our retail partners in providing this because we want our consumers to be able to get access to Volvo with a very few click online and as much human interaction as they want. It could be nothing. It could be a lot. And the retail partners are there to support that. This is now in place in 5 spearheading markets in Europe. Germany, Netherlands, U.K., Sweden and Norway and the U.S. In those markets, you see the ramp-up here, it is very quick. So far, the detailed solution is focused on the B2C segment. And as you know, the B2B segment, fleet segment is the biggest segment, especially in Europe. And as we develop now the digital capabilities in the near future, add that functionality and add more countries to this, of course, the scale of this business will quickly grow and this is really part of our future. Zooming out a bit then looking at the long-term trends prior to COVID, from last 5 years, '14 to '19, we grew with about 10% per year. And now comparing last 12 months with '19, it's about the same pace, 10%. Yes, this is 1.5 years rather than 1 year, but we have a pandemic in between, I think it's roughly a fair comparison to look at the growth pace. If we're in that now zoom in again on H1 and look at the revenue walk, how that has increased. Nothing major here to comment on. I think volume is clearly the biggest contributor. On top of that, we had a very good mix of product and sales channels and kind of good price realization, that, of course some FX was going in the wrong direction. And that's the main things on revenue. And as I already said, the key point there is revenue growth was lower than retail delivery growth, but that's because we have a wholesale model and basically we have been to drive constraint in this period and used the dealer inventory. It is satisfying the consumers as we can. Changing then instead of the EBIT bridge and then I'll focus in the short message is very strong on most dimensions. There are 2 dimensions that have gone against us in this period. One is FX, as you can see here. The other one are the increased raw material prices. The good news is that we more than compensated for that with material cost efficiencies. That's part of the efficiencies in other buckets. But the major explanation for the strong increase in EBIT is, of course, the strong volume and the very strong mix and price realization. Then in this, we also have a number of nonrecurring items, if you compare with last year. I mean, we had some restructuring costs negative in H1 last year. And then we have 2 positive nonrecurring or at least not occurring every half year type of items. One is a valuation effect from Polestar, as Polestar did a private placement and the value appreciation of Polestar effect result. And of course, that's part of the plan that Polestar's value should appreciate. That's one of the reasons we have them. And the other one is a dividend from Zenuity, which is kind of last thing you're going to hear about Zenuity. I mean we separated that from Veoneer and then the last kind of dividend that was paid out around SEK 1 billion has affected the result this half year. On the EBIT, taking that in the big picture, reassuring to see that the last 12 months, then almost SEK 23 billion, which is much stronger than we have had before, our record full year result was to SEK 14.3 billion in '19. So of course, we are happy to have pushed the EBIT level of this company to levels we have not seen before. So that's very, very reassuring. If you -- before I move on, I think this is an important slide I would spend a few minutes on. Going forward, given our focus on fully electric cars, it will be a bit difficult to shift for what's going on in Volvo because it's going to be 2 different segments. It's going to be ICE, which is going to go down in volume, go down in profitability and go down in investments. And you're going to have BEVs, which is going to go up in volumes, go up in profitability and go up in investments. And in order for any analysts to get a better sense of what's really going on and be transparent around it, we have also said that, if Volvo comes into a listed environment, if the decision would be to this Volvo, then we would, starting from next year, provide transparency on BEV versus non-BEV separately. Basically showing the volume, the revenues, the gross profit for new cars there, obviously, on the gross margin for new cars and the share of CapEx, the share of capital as R&D and the policy, the physical investments in production. So that's something we will do for the future. Last slide for me before I hand over to Per. Also how have we focused our investments in the recent time. And those of you who saw the tech moment, you know that what we are focusing on now is a fully core compute architecture, that's the future architecture for our vehicles. So that's the big focus. And we're focusing on developing the next level of safety through LiDARs and ADAS technology, and we're focusing on connectivity and digital development. That's really where the R&D focus is and -- but by being very purposeful on where we focus and where we're not focused, we've been able to hold the R&D flat as a percent of revenue. But given that we're growing, it has grown in absolute levels. When it comes to capital expenditure, the capitalized R&D then has been pretty flat, given that as a percent of sales, then the more physical investment has actually declined a bit. And that is a bit, I would say, cyclical. I mean we spent a lot when we invested into SPA into CMA and building up our global industrial footprint. Now there've been a few years with less physical investment and we might -- we will get into a new cycle soon with a lot of new cars and investments in electrification. But right now, it's a relatively low level. With that, I hand over to you, Per, to give a bit sense on how the cash is flowing in.

Thank you very much, Björn. I will talk about on this slide, both our liquidity and also our cash flow. And as you see here, our liquidity has moved from SEK 94 billion to SEK 67 billion and they are basically 3 areas that has moved here. First of all is that you see that we have undrawn credit facilities has reduced from SEK 25 billion to SEK 13 billion. During last year, during the corona crisis, we actually increased our undrawn credit facilities as an extra insurance. But obviously, we did not use that extra insurance. We did not use the kind of like normal credit facility during this first 6 months, now went back to the normal range, which is around EUR 13 billion, which we think is a prudent number of undrawn credit facilities. Then we have cash has also then gone out of the company, around SEK 7 billion from operating and investing cash flow and around SEK 7 billion -- SEK 6 billion from financing. If I start with the financing, there are basically 3 areas into that one. First of all, we have repaid a bond of around SEK 5 billion. We have paid dividends, SEK 4.8 billion. And then we have also sold marketable securities for around SEK 3 billion, and that adds up to the negative SEK 6 billion. On the operating and investing cash flow, around negative SEK 7 billion, more or less in line with normal seasonality. Obviously, this year, we had a very good EBITDA. Net working capital around SEK 12 billion negative, following season pattern. A little bit different, maybe the constitution of that one. This year, we have built our inventory to a very small degree. And basically, the inventory that we have been built is mainly related to slightly more expensive cost, which is basically an impact of selling more BEVs and more PHEVs, but also more production inventory. At the same time, we have less payables than we normally have. And you see that both the payables and the production inventories partly fall out of the unstable situation of semiconductors. So we have had less production normally than we normally have in May, June here, and we have also then built a little bit of production inventory to be able to have the right components when we get supply of semiconductors again here. Other working capital, SEK 8 billion negative that is also slightly more than normal. In that we have around SEK 4 billion of deferred VAT and tax during 2020. The Swedish government and also some European governments allowed companies to defer their payments of tax and VAT. We took that opportunity last year, and we repaid that now earlier this year, that's around SEK 4 billion. Then we have also a couple of billion in other working capital, which is related to the post revaluation and the annuity that we have talked about, those improvements in EBITDA doesn't really have a cash impact, they get back in other working capital. Investments are slightly lower compared to what you see on the page before, but reality is that around SEK 10 billion, SEK 11 billion of real investments, then we have had some good news related to again Polestar where we did the restructuring or the whole Polestar legal set up where the main company of Polestar was moved from China to Hong Kong in 2020 and we get the cash back this year. So that's a little bit more of a technicality. The underlying investments are around SEK 11 billion, which is quite normal here. So that explains our journey on the cash and our liquidity. We think that we are still in a very good position on liquidity. And you can also look into our change in net working capital. And you see here that over the last couple of years, we have been improving that one steadily. And the last 12 months here is around same level as 2020, just about SEK 2 billion here. And obviously, then you see that we have had a negative almost SEK 12 billion net working capital this year. But on the other hand, we had a positive SEK 14 billion in the second half last year. So that explains that one. So I think very predictable and not any surprises in our cash flow. And as you know, just making the point again, that seasonality very much is that in the first half of the year, slightly negative on cash flow, and we make significantly more cash flow positive in the second half of the year. So if you -- on the net cash position, then basically this is a little bit repeat, you see the SEK 66 billion -- SEK 67 billion of liquidity we have. And really the point here is that we see that we have a very stable repayment maturity profile of our loan and bonds. And you see also here that we have still some loans to be repaid in '22, which time frame, but then from '23 and beyond, it's more or less financed by bonds, and you have the maturities quite well spread. And also what is very encouraging for us is that the last bond we raised here, the SEK 5.1 billion, is a green one, and we're very proud of having that done as well.

Good. Thank you, Per. And then to wrap up then with going forward and summary, we probably take the questions. Of course, the semiconductor supply situation makes it very hard to forecast the future right now. So on balance, we're saying that we're not updating the full year outlook. It remains that we believe for the full year that we're going to have growth and that we're going to have improved profitability to pre-corona levels. And I guess pre-corona levels is a wide range. What we are seeing, however, is that during H1, yes, we have had some disturbances and had to close down production, some days here and there. We believe the situation to remain in H2. And in H1, we were able to kind of sell down our inventory and retailers inventory to meet consumer demand. You can only do that once. So for H2, we see basically flat volumes and revenue for H2, which will then give growth for the full year, but you can't extrapolate the growth in H1 into H2 because the inventory trick we can only do once. That's the clarification we are making to the outlook. So to sum up, as I hope you can hear, we are proud about this result. Very strong growth. I would also underline that in H2, the flat growth of the revenue, it's purely due to supply. I mean the consumer demand is there for Volvo and for our products. So we're building order books and the strong demand. So it's basically the supply situation that will determine the growth phase in the short run. And we are not giving any real outlook to when this situation will clear. We -- it will likely remain for the remainder of this year. That's our assessment, but it's very hard to assess. But strong growth that we're happy about, we're gaining market share across all regions. We are growing in the right areas. We're growing with rechargeable cars, profitability at premium levels and we are accelerating the transformation into the future that we see for Volvo as a fully electric company, as a company that sells more online and direct and as a company that has control over its own software and drive a more sustainable future. So that's in a nutshell our H1. And then I hand back to Anna, for questions.

Thank you, Björn, and thank you, Per. Now it's time for the operator to please open up for questions.

[Operator Instructions] And your first question comes from the line of Agnieszka Vilela at Nordea.

I have a couple of questions, if I may. Starting with the semicon situation. Can you just elaborate whether you had troubles to produce in H1 that you run -- where you -- did you need to close your factories at some point? And also, how is the supply of semicons and other components looking into H2. Is it getting better or worse? Can you just elaborate on that?

I can answer. So during H1, we did have production disturbances and some factors had periods where they couldn't produce. I mean, that's normal that you have sometimes, component supply issues, you need to kind of play it very, very agile, but it's been much more disturbance than what is normal. So that problems we have had during H1, we would have liked to produce more than we have. And had we produced more, we would also have sold more. That's crystal clear. When it comes to H2, we are not seeing that the situation would be worsened, but we're not seeing either that the situation would get better. So we are assuming a similar degree of disturbances as in H1, but that similar degree of production disturbances will translate into lower sales because we cannot sell off inventory once more, which we did in H1, but that's not the trick we can repeat in H2 because they've already gone.

Okay. Great. And then maybe last question for me is on the cost inflation side. If you're seeing more inflation when it comes to raw materials and also, how do you think about adjusting your own prices for your vehicles?

We see increasing raw material prices. So that is clearly an effect, and we see that as an effect for H2. And then we need to, of course, take measures to manage our profitability and ongoing cost improvements is what we always do. Historically, I don't think this industry has been very good to price for raw material. I do believe we have a better opportunity now than historically, given that the supply constraint that exists in the market to work on pricing to compensate, but that is still unproven. But we are working hard, given raw material, but also the kind of the supply constraint to make sure we get great price realizations on the products we have, selling the right cars in the right channels to kind of compensate for those raw material cost increases.

[Operator Instructions] Your next question comes from the line of [ Christoph Pulage ] at Barclays.

Can you hear me?

Yes.

I will have a few questions. First on the semiconductor shortage. Can you help us understand what is the current level of dealer inventories at the end of June? And also what will be a fair level of dealer inventories going forward if there will not be any semiconductor shortage so that we can understand what will have to be the inventory rebuild once the chip shortage is disappearing? That's the first question. And I have 2 more questions.

Sorry, repeat the second question once more. Sorry.

Well, I mean -- so what's the current level of dealer inventories? And what is a fair level of dealer inventories in your eyes, given where we are in the cycle?

Let me put it this way. So the current level of dealer inventory is low, very low. I will not give a more precise number than that. Then what is the fair level of inventory? I think that's a very important question. And if you compare to historic ratios, I mean, maybe you should have another 30,000 cars in the dealer inventory. But I also think we should leverage this opportunity to learn how to run our business on a lower inventory level in the total system, which is a core part of our commercial transformation as we move from a wholesale model into a more direct model rather than having 2,500 retailers who optimize their inventories, we have one inventory system and with more simplified offers in the -- by Volvo and a direct offering, we can have a consignment stock of a number of prespecified cars that is optimized by us. So the whole idea is to take down the total inventory in the system. Yes, today, a big part of that inventory is with the dealers and not with us. Tomorrow, everything will be with us. So on Volvo's balance sheet, it will be slightly more, but in the total system, it will be massively reduced. So I'm not sure the inventory and the pipe should be refilled again. I think we should actually [ re-slot ] it rather than refill it.

Okay. But I guess, at this stage, we are not yet at this point, right? So at this stage, what would be [ your level ] of inventories? Is it like 60 days, 50 days? What's your thinking?

Our thinking is unless the supply constraints eases, we cannot build up inventory. We need to live with the low inventories we have today. Then when we don't supply constraints, then we can have that optimization question, but that's not the question for H2. That's going to be a question for next year. And when we're there, I think we should think hard about how inventory should be built up for Volvo cars. I think -- I don't think we should go back to historic rules of thumb. We should rethink the complexity of our offering and kind of the total stock system. And that's something we're working very hard on.

Okay. That's very clear. So then I guess, maybe my next question is indeed on the ongoing second half of the year. So how do you see so far the production scheduled developing compared to last year. What is the decline in production, let's say, in the last few weeks compared to last year?

We're not giving weekly updates on this big picture. We see a similar degree of disturbances this half year as we did last half year.

Okay. [ Daimler ] mentioned some level of retail sales saying that it will be flat compared to last year, which implies a 12% decline in the second half of the year. So do you see like a low double-digit percentage decline compared to last year? Or is it like less than that or more than that?

No, we're saying flat.

Flattish, okay.

Flat for H2 versus last year H2. That's what we're saying at the clarification with the caveat that there is a normal large degree of uncertainty in that statement.

Okay. And then the last 2 questions. Do you see any specific regions where the supply chain is better with regard to the sourcing of semiconductors, like China, for instance? And then the last question is how do you see full year free cash flow developing?

I'll take the first one and Per will take the second. But the short answer to your first question is that we truly have a global supply chain. So we are optimizing the supply globally. So -- and, of course, the sourcing of semiconductor is -- it's not global, but it's sourced for a global production. So there is no real region specific from a production perspective. And on the cash flow?

Sorry, what was the exact question on the cash flow?

How do you see full year free cash flow developing?

Yes, we are saying it should be kind of like in line with what we've seen historically here from a full year perspective.

There are no further questions at this time. Therefore, I would like to hand back to the speakers for closing remarks.

Thank you, everybody, and I think that concludes this call. And thank you for participating.

Thank you very much.

Thank you.