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

Hi, and welcome to Volvo Cars and our presentation of the Third Quarter Financial Results. My name is Anna Oxenstierna, and I'm Head of IR. And with me in the room, I have CEO, Hakan Samuelsson; and Bjorn Annwall, CFO; Deputy, Per Ansgar. We will start with a short presentation, and after that, we will take -- go on with the Q&A session. And by that, I would like to leave over the room to you, Hakan.

Thank you, Anna, and welcome all of you to our first really quarterly report as a listed company. So if we start then, really, what has happened in the quarter 3. And then, of course, IPO was, of course, a major event for us. And we had also a development of the price, I think after the IPO till today, which also has been very favorable for the new shareholders which we got on board. We have around 200,000 more owners, and I think you could call that a successful IPO and it's a very important milestone for the company. If we look now into the third quarter operationally, it was a challenging quarter due to supply constraints of CMA conductors. So we had a volume which was around 17% lower than last year, although we have a much better bottom line result in the quarter. It was around 5.5% profit margin. And if you look into the full-year year-to-date, we have a growth compared with the previous year and a strong profitability of the 8.2%, which is a really strong result. When we look into the full year, we can really confirm the outlook. We stated already from beginning of the year, 2021 will be a year of growth compared with the previous year and both in volume, retail sales as well as revenue. And the profitability for the full year, we will be back on the levels we were on before the pandemic. Looking into our mid-term development, the transformation, we should be the fastest transformer into an all-electric future. We are on track, and now the ambition is to increase capacity of our BEVs. I will come back to that. But before, let me remind you of our ambitions mid-term. We will continue our growth, 1.2 million cars is where we're going to be mid-decade. Half of those will be all-electric cars and half will also be available online to transparent prices. That's really the definition of direct sales. Profit-wise, we should be as good as anybody else in the business, 8% to 10% is what we have defined for mid-decade. And last but not least, we will work with sustainability with very clear targets, in the same way, integrated in our operations. And the car that we will build in 2025 should have a carbon footprint 40% smaller than the car we built past year. So those are our ambitions. And if we look into transformation on track, what does that mean? We have launched our second fully electric car, the C40 Recharge. Fully electric cars is now around 4% of the volume in quarter 3, and that volume is defined by our ramp-up capacity where we are following our plan. But after summer next year, we will have an increase so that we can build 150,000. That is, say, around 20% of our total capacity. Can be built C40 or XC40s in Ghent or in Luqiao, and that should really give us possibility for a rapid uptake of the BEV volumes. Waiting for that also, our very good solution is the plug-in hybrid, which is really the way for us to bring our present customer into an electric future. And we know that customers who have chosen the plug-in hybrid are more likely to go full electric in their next swap of car. And this car is very successful, 22% globally sold. In Europe, it's close to 40%. The car will now come with an increased range, say, making it more electric and making it possible to use more charged electricity for propulsion instead of tanked fuel. We have also to really drive the transformation, introduce an internal CO2 price of SEK 1,000 per ton. And this is a help parameter for our R&D people to choose the right solution because even if we invest in material cost to have a lower CO2, the total cost for the company will be lower, including all type of tax and incentives, advantages we will get with the reduction. Another very important development are the direct sales, where we with our subscription offer a new way of reaching customers with a very hassle-free and convenient concept called Care by Volvo. Everything included transparent full price per month, making it easier for customers. And this have also attracted a lot of new customers, a lot of younger customers. So I think Bjorn will tell you a bit more about the volumes of this new interesting concept. With this summary of our transformation, let's go into the financial update, and then we can return to you for questions around the transformation. So Bjorn, please take over and talk a bit about the financial results.

Thank you, Hakan, and hi, everyone. Those of you who expect a truly exciting financial update will be disappointed because what we will share today is actually what we shared in the trading update in the prospectus. The quarter 3 came out exactly as we said, no more, no less. And what we said then was basically that over the last 12 months, Volvo has grown both in retail deliveries and in terms of revenue, but the growth has been hampered by the supply chain capacity constraints, primarily semiconductors. As we have not grown in the last year or two at the pace we grew before '19, where we grew roughly double digits, and the pace we plan to grow to get to the 1.2 million cars, which is roughly the historic pace as we have been supply constrained in our growth. The EBIT margin in the last 12 months is at 7.5% or SEK 22 billion in absolute, and the cash flow in the last 12 months is pretty flat, which of course is weaker than we've had in the previous years, and this is really driven by the slowdown of production. And then you get the working capital effect that takes down the working capital, and as the sales goes up again, you get the opposite effect. So nothing dramatic in that. It's just the kind of operational time-phasing effect. We need to transform, and that transformation is not just saying where we're going to be in the long term. We need to deliver on that every quarter, and that's what we're going to report to you how we are progressing every quarter. So electrification is key, and as Hakan said, around 1/4 of our sales is plug-in hybrids, and that has really been our strategy to grow in plug-in hybrids over the last 2, 3 years. Now, in the coming 2, 3 years, the focus shifts over into growing in the fully-electric segment, which is the part of the market that will grow the fastest. And if you want to be successful, focus on growing in the growing part of the market. And in order to do that, you need great cars. We have the XC40 and the C40, and now we are rapidly increasing the capacity from annual capacity of 15,000 cars today to 150,000 cars per annum after summer, and that goes in a number of steps up until after next summer. That, of course, enable us to grow in the fully-electric segment. Also important, the plug-in hybrids is a core part of the Volvo offering, and we're now even improving that with an upgrade of the propulsion system with stronger batteries, better electric motor, more efficient electric motor that gives a longer driving range. Almost double real-life driving range in terms of Pure mode, which is important because we know that the Volvo consumers are using the plug-in hybrid as intended. 40% of the energy consumption in the Volvo plug-ins is coming from charge electricity, and with a longer range, that can even increase. And that's another important effect. We are also taking down the cost of the plug-in hybrid technology. So it becomes also more cost effective, which is important given that it's almost 1/4 of our volume. So the electrification journey continues, but it shifts a bit focus from plug-in hybrid over the last 2, 3 years into fully-electric cars in the coming 2 to 3 years. Also important, we are showing the progression on the CO2 footprint where we need to be down with 40% by 2025 and be climate neutral in 2040. It's easy to make promises for the future. We need to deliver here now, and we will show you every quarter where we are in the CO2 footprint in terms of the total effect over the full life cycle for a car. Right now, it is 8% down versus the starting point. And you will see that every quarter, how this goes down according to plan.

Technology [indiscernible]

So that's CO2, now we move over to growth of online sales. And as Hakan said, online sales, that means direct sales where Volvo is the transacting party, but with strong collaboration and involvement of our retail partners. Consumers should be able to buy Volvo with transparent price, transparent services with a few clicks and as much human interaction as the consumer wants, from a lot to less. But our retail partners are always there to support in the same integrated system. And the Care by Volvo subscription is continuing to grow month over month, and our digital sales in the first 5 markets in Europe that we're focusing mostly on right now, it's now almost 10% of our total sales. And you should remember that the digital solution we have developed is a B2C solution. We don't have the fleet solution yet. That is being launched in the coming months, so this will only increase. And so far, this has been very successful in attracting growth and a more efficient model. If we then go into the quarter 3, and Hakan said it was a challenging quarter, and it was really a quarter of extremes. On the one hand, extremely strong consumer demand. Our order book is record big, and the order intake is really, really strong. On the other hand, low production. We produced 50,000 fewer cars this quarter compared with quarter 3 last year, and then the retail sales was done with some 20,000 cars. So we enable to offset a bit of the production loss with inventory, but I think it was the last time we could do that trick because now the inventory is really, really at the minimum. Revenue was decreasing slightly less partly due to a really strong mix and strong part realization -- price realization. EBIT margin was 5.5%, and cash flow, as I talked about, had this working capital effect. When the production and the sales is breaking, then you get a negative working capital effect, and when it's accelerating again, you get the reverse. If we then look at the revenue walk, it's pretty simple. Volume down, sales and mix positive. A bit of foreign exchange and a bit of other, but it's basically volume down, but a better mix, recharge cars and good pricing compensated somewhat. And if you go to the EBIT walk, basically a similar story. Volume down, but more than compensated for by good mix and price realization. We had a bit of positive effect from FX. There is one non-recurring thing in there in a few, but the main one is that in quarter 3 last year, we got a bit of dividend from the divorce in Zenuity, which, of course, we did get this year. And then in others, you have many different things, but one key thing is the raw material prices, which increased. It actually increased slightly more than the positive you have on FX here. So that's, in essence, the big ups and down quarter-to-quarter. And then on liquidity. Clearly, this working capital effect, you can see it very clearly if you look on the right side of this picture where you can see that, typically, quarter 3 is a relatively neutral or weak quarter seasonal-wise. Last quarter, we had an extremely strong from a working capital perspective because in quarter 3, we were accelerating production and sales again. And now, we actually have the complete opposite effect, so the kind of year-over-year effect becomes quite significant, but it is the operational time-phasing effect. There's nothing else here really playing in, a bit of -- not in working capital, but in total liquidity we had a bit of investments and so forth, but nothing extraordinary. So the liquidity is still good, and you should remember all of those numbers are pre-IPO, so pre the primary that we attracted in the IPO. And then we are now on November 30, and the key thing going forward is going to be production, of course, and we're going to reveal the sales on -- for November 2 days from now. So we felt we can anyway give you an update on how that is going. And basically, in quarter 4, we have continue to see what we saw in quarter 3. Extremely strong demand from the consumers, strong mix development, strong price realization. That's continuing. The production problems are remaining, but then easing up. You should remember in quarter 3, you have the underlying semiconductor shortage, and on top of that, the COVID-related lockdowns in Southeast Asia. Now, the COVID-related lockdowns is gone, and that's not the problem, so now we're back to only "the normal semiconductor shortage." So we have increased production or at least reduced the losses of production month by month, and we see that continuing, but we don't have any inventory to compensate for, so you can't really deliver more than you can produce. That's really our bottleneck as we speak. And when it comes to the outlook for the semiconductor shortage, we are quite boring and honest. We see this continue for a big part of next year, but we don't have any visibility to when it's going to end. You'd like to see some improvements. You maybe see some, but it's really very uncertain to see how this is developing, and we need to play it week by week. Thus, we have been done quite well over the last -- almost a year now. So that's the current trading, and then you have to reiterate what Hakan said. We're not giving you a more detailed outlook for the full '21. We're staying with what we stated in the beginning of the year. We're going to create growth for the year and go back to pre-pandemic -- corona pre-pandemic profitability levels. And when it comes to the outlook for 2022, we're going to come back to that as we close this year, so let's close this year first and then we can have that discussion. That's, in essence, what we plan to cover in the presentation, and let's go into Q&A. And I guess, Anna, you will facilitate.

Yes. And we should have the operating -- operator opening up for Q&A now and give the instructions, and so we can start with the people calling in for questions.

[Operator Instructions] I will now hand the conference to Henning Cosman from HSBC.

It's Henning from HSBC. It's nice to see you again, and congratulations on your first set of quarterly results as a listed company. I have 2 questions, if I may. The first one is on your capacity expansion for electric vehicles. I just wanted to reconfirm the numbers that you currently stand at 15, one, five thousand in Ghent in Belgium, and you're looking to expand that to 150,000 after the summer next year. So how does that fit in with your production capacity globally for electric vehicles? And can we assume that you're looking to sell 150,000 as an annual run rate and once the production capacity is up and running? If you could just talk us through basically your expected ramp-up in terms of EV volumes as a function of that capacity expansion that you've been discussing? That's the first question, please. And then the second one for Bjorn, probably. When you talked about the EBIT bridge in the Others bucket, you talked about raw materials as a major driver. But if I look at your JV earnings in the third quarter, particularly, there is a SEK 1.5 billion swing as compared to the third quarter last year, if I read that correctly in the report. Could you just talk about the JV earnings level going forward? I suppose, mainly post-JV earnings contributions and how you see that developing into Q4 and into 2022? I'll get back in line for more questions.

Electricity then, 15,000 is the output more or less for this year, so it's not the capacity as we introduce the car mid-year sometimes. So I think the capacity right now is more around 50,000 and that will go up to 150,000 in Ghent and Luqiao, the major capacity we have in Ghent. Maybe flexibility between XC and C, I think right now, we are seeing maybe 1/3 C40 and 2/3 XC40. And this capacity, we will have after summer. What sales volume we will have depends, of course, from the demand from our customers. I think we just have to see as that enrolls. But the important thing is we will really have capacity for big increase in output of electric cars. And then the next step will be the bigger XC90 successor, which will be then born electric, planned to be presented by the end of next year and going into production then after that. I think that was...

Maybe just one clarification. So the -- I don't know if it's today or it's a week ago or 2 weeks, but the capacity was 15,000 cars. That's kind of what we have had, and that will increase to 150,000 after summer, as Hakan said, in a number of steps between now, and -- and one of the steps is when the C40 was here started to be produced, so far and so, a number of steps from -- we had one practically up until now 15,000 and we will have 150,000 after summer across the 2 plants. Luqiao, which we will call Taizhou going forward, and Ghent. That's that, I think. Did that answer your question on the first one?

Yes, Bjorn. And just on the JV earnings?

Yes. First, I have to be boring. And of course, the outlook on Polestar's earnings is nothing I should comment on. So that one, I have to not comment on. And Per has the exact numbers, you can go ahead and to join.

Yes, for clarification that you talked about around SEK 1.5 billion year-over-year deterioration, which is correct. And if we are connected to the EBIT bridge, we have around half of that one in the non-recurring, and half of it, which is Polestar, Lynk & Co and some others, they are hidden in others.

So another way of saying it. Last quarter, we have the positive from this annuity that we don't have now, and then the combine of Polestar and Lynk & Co is worse now than same quarter last year.

Sure. So I don't know if you can say that but, I mean, if you have put half of that into the non-recurring and half is in the other bucket, would you say it's fair for us to extrapolate the half that sits in the other bucket going forward? And then, of course, towards an improvement that is represented by Polestar's financial plan, is that okay for us to be modeling like that?

I think it's fair to say that the major driver of the development there is clearly going to be Polestar's profit development, then there are other things in this as well. There is Zenseact, then Lynk & Co and so forth. But -- and when it comes to Polestar's development, I really have to refer to their capital market dialogues.

The next question is from Jose Asumendi from JPMorgan.

[Foreign Language] Hakan and Bjorn. A couple of questions, please. Can you talk a little bit about your CapEx for next year? How come -- what kind of step-up are you seeing in CapEx next year? And Hakan, can you talk a little bit about the medium-term product launches? I mean, one way, it's clearly a growth equity story, so can you talk a little bit about the bigger launches? And then second question...

The bigger launches. Are you talking about the car launches? Is that the question?

Yes. Product/car launches in the medium term, not short term, a bit more medium term to support the growth story and then CapEx number for next year, if you have it? And the second question was simply fourth quarter production in 2021. How do you see that sequentially versus Q3? Is it up somewhere, I don't know, 5% to 10%? Is that how we should be thinking about it?

So let me take the one with the products. Right now, we have 2 all-electric cars out in the market. And looking forward, we will roll out then 3 more cars, which will then be born electric. One is a big SUV type, which will then be sold in parallel to the conventional XC90, which will continue in production for -- as a plug-in hybrid. But there will be an all-electric car launch presented end of next year and going in production thereafter. That is one important explanation for how we are going to reach 50% all electric. And then after that will come a smaller SUV type of vehicle under the 40 size, so let's say, for your understanding, something like XC20 or 30, and that will also be an all electric car. And then the third all-electric car will be mid-decade before '25, our volume product XC60 will also have an all-electric version launched then using our new architecture. And there also, the XC60 conventional will continue to have a soft bridge here into all-electric, but all major investments, all new cars will be fully electric. Others will have -- will continue based on this [indiscernible] one platform. So I think that is what models, so what will that cost?

Yes. In terms of CapEx, clearly, CapEx is a bit cyclical to the intensity of your launches, and what Hakan is going through here is going to be a more intensive phase of launches, so the CapEx will go up slightly in absolute and also in relative compared to the last 2 years. But in relative, it will be lower than where it peaked, some 4, 5 years ago when we had the most intensive SPAR launch phase. And that's basically what we guided ahead of the IPO, and that guidance stays exactly the same.

Do you have a figure for production sequentially in Q4 versus Q3? Roughly [indiscernible].

No, we gave you here if you -- basically that in November, which is clear in outlook, but we are on November 30, so it's not a very daring outlook. Basically, production for November will be around 63,000 cars, which is 7,000 fewer than November last year. And the retail deliveries, we will be able to get out, as a consequences will be some 40 -- 52,000 cars, which is down than some 14,000. And this is also -- I think we said 3 times that we have managed to reduce the reduction in retail deliveries by selling -- taking down inventory, but it was the last time we did it. Now, I think, last time we said it was actually correct, now there is no more inventory to take from. So as production now goes up, you get a bit more of this just inventory in transit cars or on boats basically to get delivered...

But if you ask about production, third quarter, we lost -- or lost were 50,000 lower than third quarter last year. And fourth quarter, if you look at the trend there, I think we see now it will be a bit more than half lower, so 20...

[indiscernible]

[indiscernible] of what we lost in quarter 3, say, between 25,000 and 30,000 lower. With a very positive trend, you see 16,000 and 7,000, and that will give you then the production volume, which is also closer to the wholesale volumes, giving us revenue. [indiscernible] market share retail number.

We have the next question from Dorothee Cresswell from Exane.

It's Dorothee Cresswell from Exane. It's a slightly longer-term one, and I wanted to ask you around the raw material supply for your battery electric vehicles. I wondered how concerned you are that shortages of cobalt and lithium might hamper your transition to pure electric in the coming years? Obviously, everyone at the moment is, how can there be easy next target. And then following on from that, could you talk a bit about the potential you see for LFP battery technology? Which, more and more of EV manufacturers are talking about as well.

We see it develop. I cannot go into the detail about the LFP, but there will be development of the chemistry giving us a longer range, and that's really what the new R&D joint venture will focus on, so we're really developing the battery for around 26 -- for the new generation XC60, really, which we will produce in the joint venture some years thereafter. So that's on. And as we are, of course, engaging more into our own production, requires also that you secure the supply chain for those batteries. So I think we cannot expect to buy batteries on the spot market. We need a really controlled supply chain exactly because, what you really indicate with your question, that is needed. There is a lot of people out there fighting for cobalt and nickel and the other materials. You really need to have a control of that. Looking a bit long term, I think also there is a very interesting development, and that is recycled raw material will be lower in cost compared with virgin material. So that means we'll be very profitable to get batteries back and recycle them into a new battery. So after some time when you have a population out there and the cars being scrapped, you really have 2 mines. You have one normal mine, but then you also have a mine in form of a rolling population of cars which will give battery raw material to a lower cost. I think that's really promising for a circular economy, also with a lower cost. So we together, then, don't see any major concern on the raw material side, but it requires special action. You could not just buy it in a conventional purchasing system.

I would add 2 comments to that. So I think now, we talk a lot about residual values of cars. I think that recycle value will be something we talk much more about, and that kind of comes down to how you make the battery recyclable in a good way and other parts of the car for that matter as well, so that's a slightly more long-term version of the answer. But to your more short-term concern, I think what you're asking here is really one of the rationale behind our strategy that we are not saying that we're going to electrify if and when the market is ready. We basically say we go fully electric by 2030 or we are going to have at least half of our sales fully electric by 2025. That means that this is your #1 priority to fix this for the capacity you need because if you -- it's going to take you 2, 3 years after you realize full capacity, you need to fix this problem if you're not determined. So that's another key reason why we have the strategy we have and not focusing on trimming [indiscernible] in the meantime.

And next question from Agnieszka Vilela from Nordea.

So I have 2 questions next for you, both of them on cash flows. Firstly, obviously, you understand that you will get the proceeds -- or you got the proceeds from the IPO of SEK 20 billion in Q4. What other kind of building blocks for cash flows do you expect for Q4? And here, I'm thinking about the strategics transactions. What outflows are left for Q4?

I'll ask Per to go into that in more detail. I think one thing I also want to say as well is that this working capital effect, clearly, now it is driven by production, our production is slowing down, then you get the outflow. And when it comes up, it goes the other way. And clearly, you can see during quarter 4, that is starting to go the other way. So on the working capital, that's going in the right direction. And then on the pre-IPO transaction, Per.

Yes. As Bjorn said, we will have a very strong underlying improvement there. On the pre-IPO transactions, we have -- as you know, we have, in the prospectus, talked about that we will acquire the Luqiao plant, which we now call Taizhou plant, and that will happen here during December. And there we will have quite some outflow on the cash. So I would say that, including everything we have guided on a slightly negative cash flow for the full year here. But the underlying is very strong, and that is in line with what we said in the prospectus here.

Great. Then my second question, we can maybe touch upon the R&D cost in the quarter. I noticed that they are now running at SEK 2.7 billion for the quarter and that we were like at SEK 3.6 billion in Q1 and Q2, if we average that. So what's the kind of run rate that you expect for the R&D cost in P&L for the coming quarters?

This quarter was, I would say, a bit artificially low due to that the capitalization rate went up with some time phasing when we took some decisions, so forth. That happens every now and then, so you shouldn't see this as normal. It's slightly abnormally low due to an increased capitalization rate. But the underlying operational rate is pretty much the same as it's been in the other quarters.

The next question from Mattias Holmberg from DNB.

On your production capacity outlook. If I understand correctly, you will quite comfortably have the capacity to meet the mid-digit target of 1.2 million sold cars. But I also understand that you share production facilities with Polestar, and they intend to sell almost 300,000 cars by the same year. So can you just help me understand how all these numbers add up, or if I'm misunderstanding something?

That was very good. It's good catch. So we should be at 1.2 million cars. We can increase with line speed and some minor investments to get to that capacity. Then, as you said, we are producing for Polestar the PS2 in Ghent and Luqiao, and then we're also going to produce the PS3. So that, of course, eat some of that capacity. But on the other hand, the so-called XC30 or 20, the small fully electric SUVs is being produced by Geely for us. So by mid-decade, we will have a quite even trade balance, what we do for Polestar and what Geely does for us. So we come back to those 1.2 million of capacity for Volvo cars.

That's clear. Another question. In your ambition to shift the model towards direct online sales, I'm curious to hear how you intend to keep the retail change that you are dependent on today in the vast majority of your sales, to keep pushing and promoting Volvo cars if they ultimately basically will get this business taken away from them.

That's, of course, not what's going to happen. So I think we should be clear on not trying to indicate that online sales is some kind of Amazon online sales. The important thing with online sales that you have natural transparent prices, you have a much more simple, easy-to-understand product offer and then the faster delivery time. So we should really say here is a new, for example, C40 available on Volvo cars.com or your nearest Volvo retailer because in practice, some customers can order this self, select where they want to pick it up, which partner should be the delivering partner. Or they just walk in into any building where there is Volvo on the roof and then talk with the salesman, and then that customer will be helped entering the order on volvocars.com. So it's really a new, transparent ordering platform available for everybody, including the sales personnel. So we think probably majority will still be -- so agent-supported sales in the retailership, so they have a clear role. They will, of course, be compensated for delivering the car. In standard margin it will be called then a commission. And then they, of course, have the full value of the service market, which will probably increase with more subscription cars. So this should be really good business for our partners and really a way for us to help them staying profitable, also going into an electric future.

I'll just add to that, that we typically say that the act of selling, that's the act of convincing another person that this is the right product for me. That act, our retail partner is going to continue to execute. Then legally, who is actually owning the car when it's being sold and so forth, that's a different matter for the consumer.

And they're probably totally irrelevant for the consumer. So I mean, the consumer will experience -- she walks in into a Volvo showroom and buys a car from a salesperson, and -- but in -- formally, it's going to be invoiced directly from Volvo.

What's going to be different for consumers that 2, 3 different things are actually quite important. One is that there's one digital system that really works in a smooth way together with the retailers that, that comes in place, which is Volvo's responsibility. That will be much better. The other one is that the customer can't negotiate about the price. It's very transparent and fixed, so you get a fair price for Volvo, and your neighbor is not going to get the better or worse price. You get the price to simplify the buying experience. And thirdly, and we're going to redo our offering structure. So compared with today when you have 53 choices, when we see our consumers having more angst for making the wrong choice than pleasure from making the right choice, we drastically reduce that. So we basically have 7 variants per car model, which then in small choices, a few choices you can do. That enables a much more efficient distribution system where we can have a few compounds throughout Europe and enable delivery times of a week or something rather than having every stocking point in Europe to be -- every retail to be a stocking point, which gives a very inefficient inventory system and the likelihood to have the wrong car in the wrong place at the wrong time is very high, which means worse margins for everyone. So that's the idea.

The next question is from [indiscernible] for [indiscernible] Bank.

I have a question on pricing. If I look at the one thing on this supply chain shortages that we see has driven up, used car prices by 20-plus percent. We've seen very good new pricing generally in the car industry and this has, of course, driven your earnings. And my question is, going forward, when we have this problem easing out and kind of return to the normal situation of price competition a bit, and also what will happen with used car prices when [indiscernible] is coming back and more EVs going out. How should we think about operating leverage for you guys going forward compared to what we've seen in this time?

I think -- first of all, I do believe that this supply constraint will remain for a big part of next year. We don't know how far. But eventually, you're going to get a slightly more balanced in the supply. And I don't think we should be naive. Of course, you're going to get into a situation with more rebates, other channels being in play and so forth. But I do believe that the industry as a whole has learned a bit of a lesson on what the margin versus volume equation can look like, so -- and we have rebased a bit the level for which to do the rebates, so I do believe you're going to have a positive effect for some time, but I don't think we should be naive and think that the industry has changed forever. I don't think it has, unless we also change the distribution of them, which we aim to do.

All right. And different things here from different OEMs, but what's the -- what's your working hypothesis here on the supply chain issues on semis, is it second quarter or do you dare to comment on that?

We have a very simple one. We don't know when it's going to happen. So we, of course, try to drive the production for what we need, and then we gear this -- the commercial system for accepting, being able to play with a lower volume in the short term, and then we monitor it month by month or week by week.

But you look at the -- compared with last year, October was 16,000 down, November was 7,000 down, and then we said for the fourth quarter, about 25,000, 30,000 total. That means even lower number is what we are planning right now, we're seeing right now. But of course, there are so many uncertainties. But we have a trend in the right direction. I think we gave you also an indication for next year.

But we still have -- the order book is continuing to grow, so production pace improvement is not where the demand pace [indiscernible].

No, no. But it will be -- the output will be really guided by production, and that's getting better. Then, of course, you have all type of difficulties with new variants of the virus and so on, could cause shutdowns, but it's impossible to forecast when that happens. We just have to act.

And we take some trust in the fact that we've been quite good at acting in this circumstance over the last 18 months, so.

But I think the conclusion is, still, you should be clear on that, it's really getting better. And then it's a question of how fast will it -- how long will it take till we are absolutely back to normal and be able to grow. Of course, we don't just want to reach last year's level, we want to grow.

I have a question from [ Henrik Christensen, Carnegie ] regarding the expansion in Europe where he actually said, if we can provide more details around the expansion in terms on timing, main driver of the expansion and CapEx related to adding another manufacturing facility?

I can give you the -- comment the volume. But I mean, if we talk about 1.2 million, I think important to say that capacity, we really have. We need no new plants for that. But of course, we want to continue growing and then also maybe build more cars locally in Europe, so that requires really the third factory, which we need after mid-decade. But of course, we need to start working with that. The money will start being needed before that. So I think, in some way, it's included in our plan, if you look into 2025.

And that is the follow-up question, if -- is the expansion CapEx in addition to what we have forecasted?

No, we were clear in the IPO dialogue we have that that's part of the use of proceeds to kind of support growth. And in order to sustain growth after '25, we will need another factory, so that will start to kind of be CapEx. But not now, but going up to '25.

[indiscernible] this question all to me, but some of it is included already in our plan going [indiscernible].

[indiscernible]

But then, of course, big money will maybe come '26. I don't know. It's already probably -- it should be operational on '26, '27. So okay, short answer, it's included in the plan.

Okay. I hope Henrik is satisfied. Okay.

And then just to be clear, we haven't made any formal decision yet on the investment decision. This is an intention. And of course, when we make a formal decision, then we will reveal that. And we have also not decided on location yet and so forth. So it's not now, now, but it's clearly in our plans.

And do we have any more questions online, or no? Okay. So thank you very much for joining us on this financial presentation, and I hope to see you next time, if not before. Thank you.

Thank you all.

Take care.