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

Hello, and welcome to this analyst presentation of Volvo Cars financial results for the first quarter. My name is Christina Zander, and with me here today to present the numbers are Jim Rowan, our Chief Executive; Bjorn Annwall, our CFO; and Per Ansgar, our Deputy CFO. Following the presentation, there will be an opportunity to ask questions. [Operator Instructions] So with that, I will hand over to Jim.

Thank you. Thank you, and welcome. Thanks for joining us today on this -- the Q1 results for 2022. So, the backdrop is it's a stable EBIT margin in an unstable environment. EBIT margin at 8.1% with a strong order intake despite supply constraints. Limited direct effect from the Ukraine war on supply, but raw material pricing is increasing and continues to increase. The COVID shutdowns in China, of course, add further high uncertainty to the supply chain as we look forward. If we move to our mid-decade business ambitions, then they stay committed to 1.2 million units sold. And of course, because of the supply constraints that we saw this year and the lower volumes this year, that then means that in the coming years, we are now busy chartering a path towards higher growth in order to meet those 1.2 million ambition on 2025. Online sales are 50% and EBIT margin of between 8% and 10% and, of course, our reduced CO2 emissions of 40%. Perhaps more importantly, by 2025, our ambition of having 50% BEV sales remains very much in focus and very much on point. And with that, we can see the fully electric share increasing from only 2 quarters ago at 4% to this quarter at 8%. And again, please remember that is within a supply-constrained environment. We would have expected that to be higher had we had full supply. As we go forward, we'll see that share of BEV by the end of this year being solid double-digit numbers. And interestingly as well, we're starting to see some markets change completely to 100% rechargeable models. Perhaps unsurprisingly, Norway, but surprisingly, countries like Thailand and Brazil are now 100% electric charge model for Volvo cars. And that's a really encouraging sign and a proof point for us that our strategy towards a fully electric vehicle company by 2030 remains the right North Star for us as a company. So to the transformation. We're seeing a surging demand for BEV is very strong and a strong order intake, which is ramping up in line with our capacity. Recharge sales at 34% with a fully electric share of 8%. The CO2 reduction is charting now at 13.4% against a target of 40%. And again, that remains very much on track for our ambitions at the half decade of 2025. And then, of course, the strong demand on online sales are another one of our ambitions. Now we're in 6 markets at the moment and online sales, and in those 6 markets were at 13% of total sales. However, that's really only on the B2C channel at this point in time, whereas markets like the U.K., for example, who are very strong in fleet sales, will require us to build a strong B2B channel on the digital side in order to accelerate that further. And of course, we're busy doing that as we speak. Continued progress on our transformation investments in terms of battery. Investment in BEV, investments in megacasting and so on. And also global software talent ramping up in the Stockholm facility from 300 people at the moment to 700. Now those people are mainly engaged in building our digital backbone and our e-commerce engine for our B2B channels around the world. In addition to that, of course, we're looking to develop our software capabilities and our embedded software for the cars and all the technology that we're putting into our new models. And with that, I shall hand over to Bjorn.

Thank you, Jim, and good morning, everyone. Let me take you through some of the key numbers. I think you've seen by now in the quarterly report, and then we come into questions at the end. So a number of things pointing out. The revenue actually increased with 8% in the quarter despite the volumes -- production volumes and also retail deliveries and wholesale being down. I'll come back to that in a little bit. Also worth mentioning, you get a lot of questions around the direct impact of the Ukrainian war, and I think worth saying we don't have any production in either Russian or Ukraine. We don't have any major suppliers in any of these countries either. We do have a sales company in Russia. We have completely suspended operations, not shipping or selling any cars or parts. And we have also taken down the staff in Russia, down to more of an administrative kind of hibernation level before we take further decisions. No material financial impact at all directly from this. Clearly, a big humanitarian tragedy, but the short-term financial impact of this for Volvo Cars is limited. The total sales we had last year to Russia and Ukraine together was 1.5% and very long order book. Clearly, that sales has been diverted to other markets. The real impact comes from raw material prices, and we'll come back to that. Production volume has continued to be restrained. We stand by what we have said that the underlying semiconductor shortage, it is gradually improving. And we have seen since basically August month by month, it has becoming gradually better. And during quarter 1, we were then hitting a situation where we actually had year-over-year production in February, and we were heading towards that in March. Then we were hit by a specific shortage related to one specific semiconductor, related to one specific supplier which didn't have the full visibility back in their value chain. That hit us towards the end of March and will affect us now during quarter 2 from a production perspective. But we have -- that issue is solved, so we got back on track for that during the quarter. And we see the underlying semiconductor-related supply constraint being much better after summer in H2. The EBIT margin, as Jim said, 8.1%. I come back to the ups and downs. But I think what is worth mentioning is that it's a very stabilizing underlying operational results, has been very, very stable now for a number of quarters. And the cash flow was negative, and that cash flow is, you should say, there was nothing unexpected in it. I'll come back to that as well. But there was negative cash flow. And the BEV margins, we come back to that. Now for the first time, we in a transparent way show the BEV margins and the share of investments we're doing in BEV versus non-BEV. I'm pretty sure other automotive, traditional automotive players will have to show that over time. We're glad to be the first. So retail sales down 20%. In retail deliveries, revenue up 8%. Key drivers, why that was higher than the retail sales clearly is higher prices, somewhat stronger mix but more higher prices. And we also have the contract manufacturing to Polestar in there. And clearly, they are also ramping up their production and sales. EBIT margin, around 8%; cash flow, negative SEK 12 billion. The operational cash flow was very much the same in quarter 1 this year compared with last year, so the whole delta is in investing cash flow. And there nothing unexpected in it. One is that last year Q1, we had one, call it, a positive one-timer that has to do with the corporate restructuring of Polestar in preparing for the [indiscernible] had a time phasing effect. So there were some billions worth of one-timer there. And then this year, we're having a slight one effect due to the [indiscernible] transaction, which is according to plan. And we have some SEK 2 billion worth of Care by Volvo cars on the balance sheet as well. That has affected the cash flow. So nothing unexpected but a negative cash flow. And as you all know, quarter 1 is seasonally a weaker quarter from a cash flow perspective. So the revenue bridge. Basically, volumes down, compensated by price and mix, primarily price now given that the mix was already quite strong in quarter 1 last year. Some helpful exchange from a revenue point of view and then the contract manufacturing to Polestar that is now ramping up. So that's the driver behind the 8% growth of revenue. Then going into the EBIT bridge. Here to start off with, we had a very strong quarter last year to compare with, where we made SEK 8.4 billion or 12.3% EBIT margin. You had 2 specific one-timers. One was the last transaction related to the divorce from Veoneer in Zenuity and another one was the bookkeeping effects of the private placement in Polestar, roughly SEK 3 billion worth of that. So if you take away those, which are both related to JVs & Associate and the other results in JVs & Associate, the EBIT in quarter 1 excluding JVs & Associate was SEK 5.5 billion. And basically, you can see that, that's a very similar result to that we have operational this quarter. Volume down, more than compensated for on pricing and mix. And then what you don't have on this curve -- bridge that you typically have as a positive are the kind of cost improvements and the material cost improvement that you do year-over-year. Clearly, with the negative raw material prices and also a tougher situation for the whole supply chain and for suppliers, that positive contribution has been less than it normally is in the quarter. So that gives us a SEK 5.9 billion for EBIT excluding JVs & Associate and not a big effect from JVs & Associate this quarter. And here, you remember that you have positive effect typically from Volvofinans Bank and Lincoln Co. [indiscernible] growth and then a negative effect from Polestar normally as they are in their ramp-up phase. This quarter is less affected negatively from Polestar, and that's basically a bookkeeping methodology thing in that if we have negative results from Polestar, that can get offsetted by to the book value of Polestar. And during this quarter or quite early in January, we came to a situation where the book value of Polestar is 0, and then you stop actually taking the negative impact into your P&L according to IFRS. But when Polestar gets [ de-stacked ] and the plan is still that, that's going to happen during H1, then clearly, our book value will go up again. And then what you didn't take as a negative effect in this quarter will be taken as a negative effect in next quarter. So it's purely a time-phasing thing, but it's worth understanding how that works. And that's the reason that the EBIT excluding and including JVs & Associate is much more similar this year or this quarter. I think this is worth having a quick look at. If you look at the bottom here, you see the EBIT margin quarter-over-quarter. So clearly, the dark green line is the EBIT margin, the bottom line. And the light green line is the one excluding JVs & Associate. I think this is quite remarkably stable performance in an environment that you know over the last 5 quarters has been very, very far from stable. So very stable, continued deliver, excluding JVs & Associate, between 7% and 8% during this whole period, and this quarter was no exception. Then comes to the profitability, BEVs versus non-BEV. So what we have done here is basically grouped all the BEVs costs we have, and as you know there are 2, C40 and XC40 BEV. We have that in one bucket. And then we have all the cars that are not fully electric but a mix of plug-in hybrids and [ mild ] hybrid cars as one group. And then we divide the profitability. And if I then go through the profitability in quarter 2, we also added in the full year breakdown for '21 as well so that you have that as a baseline. For us, this is the starting point for our fully electric journey. And clearly, the current generation, of course, is based on first generation battery technology, electric growth or battery management system and the architect into a car architecture that is made to be both ICE and BEVs. So clearly, there are lots of rules for cost improvements over time. And as you know, that's what we have in our plans. But this is the starting point. And given that we will become a fully electric company, I think it's important for you to understand what the profitability is of that starting point. And as you can see there, the revenue per car was around SEK 435,000 for the BEVs compared with the SEK 385,000 for the non-BEVs. And the gross income per car, SEK 59,000 per car for the BEVs, SEK 82,000 for the non-BEV. Then you should remember that here we are not comparing to 40 Series cars with a mix of 90, 60 and 40 Series cars. And clearly, the margins we have on 90 Series cars are higher than the 40 Series cars. So if you were to just make a more like-for-like comparison, take the XC40 and C40 compared with the XC40 plug-in hybrid and ICE or mild hybrids, you would actually have a stronger absolute gross income per car on the BEVs versus the non-BEVs. But on the percentage of sales, it's slightly lower in that comparison, and you have an even bigger discrepancy when you take the full group of non-BEVs. So 14% gross margin on BEVs and 21% on non-BEVs. And if you look at what it looked like for the full year of last year, you see quite similar numbers. So this is the starting point from where we continue to develop. And we are also very clear in the IPO that we are becoming a fully electric company. The investments we're going, going forward we do into our full electric future. And here are some numbers to back up that statement. Basically clarifying that in the quarter, 57% of our investments, now [ I am ] taking the capitalized R&D and the CapEx, 57% went into fully electric cars, 9% went into not fully electric cars, and 34% were common. I mean when we do a tooling or investment in machinery for a paint shop, you cannot really divide that was it in the BEV or a non-BEV. So that -- those things we classified as common infotainment systems as well classified as common. So you have 34% being common. So that is the kind of transparency that we would promise to give you and what we continue to work on. Last slide from my side, the liquidity situation of the company and the balance sheet is still strong. We have now SEK 72 billion worth of liquidity, of which SEK 13 billion is in the revolving credit facility. The negative compared with the start of the year is due to this negative cash flow that I talked about. So nothing unexpected here either. So with that, Jim, I think I hand it back to you, and we talk a little bit about current trading and how we see the year playing out.

Okay. So maybe just then to summarize and conclude. So continued strong demand for across the range, also specifically on our BEV and plug-in hybrids and also strong demand across most of our regions, in fact, all of the regions. Overall, the semiconductor situation is improving, and that's in line with the communications that we gave back in March. However, the increased COVID pandemic and the shutdowns in China continue to impact and add uncertainty and more turbulence to the supply chain as we look towards 2Q and perhaps even beyond, depending on how long that situation takes effect. The indirect effect of raw materials has -- continues to put up prices. However, we've largely offset that by the price increases that we've given to the markets. Again, just to reiterate on that, the price increases that we've given to the market has saw no reduction in demand for Volvo Car products, and we see that as a very positive sign that we don't see consumer sentiment changing in any way. Price actions taken to largely offset these raw materials will continue into the future if we indeed see increased further inflation or indeed an increased material costs that will affect the billing materials. And I guess the final comment is you would imagine would be does high uncertainty given mainly to the plethora of different effects coming in at the same time. And we'll probably talk more about that during the course of today's call. With that, I shall hand over..

Thank you, Jim. And with that, it is now time for questions. [Operator Instructions] I would like to start with the question from you, Jim. You've been here at Volvo Cars now for a little over a month. Would you like to share your impressions so far?

Yes, we've got to be pleased. But I mean I think the team here, what we've built over decades here has really come to the fore because we're dealing with really an unprecedented state of turbulence. You've got the Ukraine situation, of course, which is driving up prices. You've got underlying inflation, which is, again, driving up price. We've got the pandemic in China, we've seen lack of semiconductors coming through, and the team here at Volvo has managed to navigate through those choppy waters, if you will, and deliver, I think, which is a very strong quarter on the basis of very uncertain supply chain and turbulence. So -- and then, of course, if I pivot on that even a little bit more, have the chance now to look at the underlying technology stack is really solid. I guess we'll come on to more about that, the range of new cars, especially BEV cars, I think is stunning. And that, we're in really good shape for that. And of course, we're looking for the rollout for that to be around our mid-decade and long-term demands or ambitions. And then just the energy that we have within the company has been really inspiring. So very good first 4 or 5 weeks. Turbulent but that's what it [ pays ] for.

Interesting. So thank you for that. We have a couple of callers now over the phone. Let's start with the JPMorgan. Please go ahead.

It's José from JPMorgan. Just Jim, can you maybe at your previous [indiscernible] as you came into Volvo, are there any [indiscernible] best practices or maybe [indiscernible] or experiences you bring from your previous companies, I mean, you came in to Volvo, you realized, yes, definitely we can implement these and boost the strategy or the momentum of the company? I'd love to hear about that.

Yes, thanks for the question. So I think, obviously, coming from the consumer electronic world, the volumes are higher. The cadence and the pace of that industry works at a higher cadence and pace. But maybe perhaps more importantly, a lot of the transition, the digital transition, selling so into the D2C and B2B channels, using a digital backbone by and large started in that -- in those industries. And so that's definitely something which I think we can help accelerate our journey towards digitization on the consumer side. The other transition, obviously, that's happened is the technological transformation. And that really starts with core compute and how we architect the next-generation vehicles using that core compute power, understanding silicon at much deeper level. And other 2, the industry -- the automotive industry has outsourced much of that to subcontractors or sub-suppliers. Now we're bringing that understanding of actual silicon, choosing those silicon chip manufacturers, understanding the software stack that connects the silicon to the actual application whatever that is be the safety layer or be the lights or infotainment or whatever. And that's going to -- that again is [ born ] and very much more mature in the high-tech consumer electronic world. So hopefully, those are some of the things which will help from our previous experience that we can bring in to Volvo and help accelerate our journey towards digitization of the consumer channel and also the technology moves that we need to make in the coming years.

Maybe just a quick follow-up. You comment please on the margin seasonality. Is the first quarter marking the peak of the year when we think about first half versus second half margins. So if you could comment on how you plan to basically improve the gross margin of those BEV vehicles are the biggest leaders within BEV to improve the profitability.

I think -- what was the question in seasonality of the EBIT margin over the quarter, sir?

Yes, please.

I think it's a pretty average quarter. I think the quarter that is seasonally weak is really quarter 3 when you have a summer shutdown on our European factories. Other than that and from a margin perspective, it's quite even seasonality. It's more on the cash flow side where quarter 1 is a quarter that's seasonally worse. So from an EBIT perspective, it wouldn't make a big drama to seasonality on margins. And then how do we improve margins for BEVs going forward is a critical question. And our ambition is to start with that is to make sure that we have full cost parity on fully electric vehicles and with ICE cars by mid-decade. And in order to do that, I mean, there's no rocket science, you need to get down the cost of the battery cells, which we do with better chemistry, better production approaches, scaling up that in a good way. You need to work on the fully electric propulsion system efficiencies, is also working with electric motors, where we now are designing and producing them in-house and the battery management system linked to it. And also fundamentally, how you architect the electric propulsion system in the batteries into the vehicle architecture of the car, that's also where we now come with this core compute fully electric-based, electric architecture that will allow the [indiscernible] replacement to the XC90 and coming cars. So it's a lot of technology development that needs to happen to reach that. We believe until that mid-decade, you are somewhat supported by; a, consumers are willing to pay certain price premium from BEVs versus ICE and you clearly have an incentive schemes from governments that favors BEVs versus ICE, that still is there for a number of years. But over time, as the fully market goes electric clearly you can't expect consumers to pay more cars or us, to governments to kind of subsidizing the perpetuity. So that's where we need to get to that cost parity.

Thank you very much. Our next caller is George from Goldman Sachs.

It's George Galliers from Goldman Sachs. Jim, maybe just following on a little bit from Jose's question. Obviously, you have a wealth of interesting experiences including your time at Dyson, who it's been well publicized to more than a look at the automotive industry. What was your view of the greatest weakness and risks faced by the incumbents as it undergoes this transition to electric and digitalized cars? And what also was your view of the greatest strength and opportunity for the incumbents? And then, Bjorn, just 2 questions, one near term, one more longer term. Can you give us some indication of how 2Q wholesales are likely to compare to the first quarter wholesales? And then on the battery inputs, obviously, we've seen huge inflation on the raw material side. I think just under 30% for an NMC cell relative to the end of 2020. In a worst-case scenario, where raw material prices remain at today's level, what actions or plans are you starting to think about in order to mitigate this as you complete your transition to a higher BEV penetration rate?

George, I'll take the first question, first I guess. So the incumbents -- first of all, it's that what the mindset. You've got to have a mindset that we are going to move the company to fully electric, and you've got to put a line in the sand, and you've really got to staple your colors to the mast and say we're going to do this by this date. And that starts to mobilize the company at a certain direction. We've done that at Volvo. We've already made that, and we made that public, and we've made that part of our IPO. So that pushes us very quickly into the direction that we are now hell-bent on making sure that we deliver that. I think the incumbents who haven't quite done that yet are neither here nor there and they're still trying to kind of run both systems. And that becomes very difficult over time. The choices that you make in technology, the investments that you make going forward, the talent that you hire in, all that becomes sub-optimized if you don't have a single focus on where you're taking the company. So that's may be answer to the first question. We're past that. Now we know we are running headlong and to making sure that we have those mid-decade ambitions and those full decade ambitions. What you get when you start the start up coming into the EV industry is that you start with a clean sheet of paper. That means that you have nothing that holds you back in one sense, but it's also very, very difficult without the full infrastructure of everything that we have here at the [indiscernible] of Volvo cars, the manufacturing infrastructure, the engineering, the production, the facilities, the supply chain and then all the support infrastructure that you need that we've built up over decades. It's much, much easier. In my opinion, it's much easier for a company who is an incumbent car company, who says right mindset -- [ mindset ] change, this is the way we're getting head and then really move the whole company in that direction than it is for a young start-up company that doesn't have the resources or the production facilities or the background.

And on the questions you asked me there on the wholesale, what we have announced is basically during quarter 2, we experienced this production progress related to one specific semiconductor that will make us produce less than we had hoped for during quarter 2. So -- and we knew already in April that has affected us quite a lot. So the likely wholesale is more negative in quarter 2, but we see very strong -- see strength in H2 both in that we do see this semiconductor underlying shortage is really easing. And then also you're comparing with a much, much easier certain quarters when you go into H2. So that's on the wholesale side. What one should say in all of that, I think, as well is the fully electric part of that is clearly ramping up, and we still stand by this that we have capacity for BEVs of 150,000 cars annual capacity after summers in H2 and we're going to be in solid double-digit numbers in terms of share of BEVs. In terms of the raw material effect of BEVs, so clearly, you're right, I mean, you guys might want to calculate. And if you look at the raw material effect, if you look at the battery materials kind of after Ukrainian wars compared with before, so the last 2 months development, the raw material effect on the BEV is right around [ SEK 40,000 ] per car. For a PHEV, it might be around SEK 15,000. And for an ICE, it's more SEK 5,000, SEK 10,000 if the raw material prices stay as exactly where they are today. So clearly, and the general answer to that is we need to continue to work on price. And that is what we are doing and what we will continue to do, positive note, we see this order intake being very strong. We haven't seen an effect on the price increases so far, which is positive. Then there is -- I mean the big question is for how long that will be the case, how much of this inflationary pressure is that end consumers can take. But for premium cars from Volvo, right now, consumers are being able to take them. I don't know if you want to add anything?

No, I think you covered it very well Bjorn.

Then our next caller is Daniel from Bernstein Research.

James, welcome. Could I ask you to talk a little bit about your initial thoughts around the tech stack? You already mentioned you're looking at the full stack from silicon down to applications and bringing more of the know-how back into Volvo. But what are the areas where you think you will be successfully able to differentiate on product or cost? And what do you need to do to achieve that, right? Is that organic, inorganic partnerships? How do you basically navigate that those choices, right, as you decide where you have some differentiation potential? And then secondly, peers have started about adding revenue pools from software and digital services and [ new ] business mobility opportunities. And this is clearly something Volvo is pursuing with your D2C approach or the Care by Volvo Sverige, I'm not aware of any specific midterm targets or outlook on the subject. Could you very broadly just outline how you're thinking about the revenue composition of Volvo in, let's say, 5 years and how the business will develop between selling cars and other forms of revenue and how that basically changes your revenue setup.

I'll take the first part of that question, and then may be let Bjorn answer the part on the Care by Volvo and the subscription and [indiscernible] ownership model. The technology stack, unless this is -- for me, this is the really interesting part of where the industry is at the moment. The technology stack that we can build up and become very, very relevant within the industry as incumbent about us making the right choices between, as you alluded to, where we make and where we buy. And on the things that we buy, how we actually then integrate those products or services or subcomponents. So that whole architecture, which in the past have been outsourced to large subcontract manufacturers across the electronics industry, which we then bought in modules and stretched together. But we had no real control over those different electronic modules. And that's really the core fundamental change that we have. And so that core compute architecture, and that will accelerate the actual compute power. Now that we have big companies like NVIDIA and Qualcomm, some others that are very interested in that core compute technology, we'll start to see the investments being made in that. You'll start to see those SOCs that they can produce because they have the knowledge and the investment in the fabs and so on, so we'll start to see that really accelerate. And our job then is to make sure that we can harness all that additional compute power and put that to the best use within the vehicle. And of course, if I just pick one strand of that as an example, of course, Volvo, the very core of our company is about safety. So if you understand, if you've got high compute power within the silicon and you understand the software and can write that software [ stack ] between the compute power and the actual application, let's say, the camera array, the sensor array and also the LiDAR, and you can do that in a differentiated way so that you can make your assisted driving or ADAS or AD even much more robust and much more powerful than the competitors, that's what will drive differentiation. And that's one example. The same with batteries, maybe just as I said to you that. So we've invested with Northvolt, Northvolt will allow us to understand battery chemistry. Battery chemistry will continue to increase, but we really need to understand, first of all, the cost base within batteries. We need to obviously look at things like solid state battery manufactured for the future as well, and we need to start looking at different anodes and cathodes and also manufacturing methods and the types of materials. Because of the investment that we're making in batteries, we will understand that [indiscernible] at the subatomic level almost, at the nano level, and that will allow us then to invent different battery chemistries in different ways of proportion. So those are some -- just very quickly, those are some of the things that we're -- obviously we've already started looking at but we will delve in much deeper, too.

And then on the other revenue parts, I would say, clearly, there is huge potential from direct software sales, no question about it. And we have the fundamentals starting to get in place with our direct-to-consumer relation and the [ e-commerce engine ] and a core compute car and also with the older capabilities which, by the way, we now have in all our vehicles. So that creates the potential. The way we think about it, where we are right now, and a lot of those who were there downloads, they are much more there to fix quality problems and they can have small delights, I mean, but I don't think you should charge SEK 5 for a slightly nicer looking OHI or something. It's -- I mean, we shouldn't do that. Right now, that is to improve the experience of the car. In order to start to do things, they have to get an S-curve or better functionality for the consumer. And the one that is most likely to happen in short term is this self-driving functionality, which we are then going to sell as a software upgrade over there. So that's a real piece or thing that where we believe there's real revenue behind it. Then there are many more other potential software features that we could sell, but we've been very clear that I don't think we should count ourselves rich on it up until mid-decade, then it's going to be more delighting. And then if you talk about the business model post mid-decade. I think this will play a bigger role. But we're not counting ourselves rich on it now. And I think a lot of competitors, yes, they might claim some numbers. And when you scratch the surface, what are you actually selling and why would consumers pay for it, it gets slightly more iffy. So I'd rather have more solid case there before I give you any numbers. The one other thing I would say in terms of other revenues, clearly, as part of the Care by Volvo and subscription and what we do in the direct transformation, we are taking better control of a lot of things around the car, be it the financing, the insurance, service contracts and so forth. So you can see us taking a larger part of that pie, which helps from a revenue perspective, I think, even more from a profitability perspective. That was a long-winded answer, but great potential, but let's not count ourselves rich in the short term but great potential for the long term.

I'm looking forward to the Capital Markets Day in 2025. Jim, if I could follow on one question, two great examples on safety and battery. Maybe I'll turn it around. Are there any area -- functional areas where you for Volvo or Volvo decided this is not something where we're going to be kind of that down in the weeds, in the microcosm of what's happening in your car? Any kind of -- sometimes it's harder to decide what not to do. Anything that springs to mind where you've decided this is not something we're going to worry too much about in the next couple of years?

So in some of the software stack, we've already chosen some partners on our infotainment system in terms of that software stack. And then the silicon as well, so we've chosen that we won't build our own silicon. We won't make our own SOCs. We won't design our SOCs because I think that area will become very competitive, and we will actually be in a much stronger position as that competitive landscape increases across those chipsets and those SoCs. That allow us then to choose. Now our job at that point in time is to make sure that our designs are done in such a way that we can choose and that we're not [indiscernible] into any one specific supplier so that we can leverage those benefits that we start to see coming in the supply chain in 2 or 3 years' time from now. So yes, that -- the core operational software that we need, that's the thing that we want to be in charge of. Some of the other elements, we think actually, the market will move faster than we could move and provide greater benefit to us in the long run.

Thank you. Our next caller is Dorothee from Exane.

It's Dorothee Cresswell from Exane. My first one is around the supply chain. So we've obviously seen a little bit of disruption there through the last year or 2. Can you give us a bit more detail around any strategic changes that you might make to reduce your vulnerability to such issues going forward? And then coming back to the digital revenue stream, how quickly do you think you can get regulatory sign-off for Level 3 autonomy? And when you do start to roll out that technology, how are you going to charge for it? Is it that [indiscernible] consumers maybe initially pay for upfront? Or will it immediately be something that you're going to offer to consumers through recurring fee? And then one last one. I think your tech fund has just taken a stake in carve-out. How does that fit with your strategy of improving pricing by reducing intra-dealer competition? I guess we'll see through the direct sales model.

Thanks, Dorothee. So what was the first question?

Supply chain resilience.

So supply chain resilience, yes, I mean, it's a great question because what we're seeing now as the changes that we've made, and actually, we started this quite a few years ago, Dorothee, where we started the structure of build where you sell, source where you build. So that was one of the reasons why we decided to put an operation -- a manufacturing operation in Charleston in the U.S.A., for example, and why we still have 2 large facilities in Europe. Now the underlying sub-tier supply chain that service those factories that are around the world are somewhat independent, but we are still dependent on supply from China, hence, the pandemic in China and the effects of that to our supply chain. There's a very careful choice that we need to make in terms of what we source locally for the local manufacturer and what we think is in abundance that we can find elsewhere. It doesn't need to all be in China, so there's a strategy that we've already started to employ, so what should be dual sourced and what should be multi-sourced. And when we multi-source those key components, which regions do we want to have them from. And of course, that in itself is a very complex landscape because you're trying to guess into the future where will you have tax tariffs between certain countries, where will you have tsunamis and earthquakes and [indiscernible]. So there's lots of change in that. But we've made, I think, a very good initial plan of how we can build resilience, let's call it, and to our supply chain as we go forward. Great thing about that is, as we go through this transition and to BEV, our [ build-up ] material changes quite significantly. So that gives us the opportunity in order to build this from hence forward rather than try and having to rewire everything in the past. And that's another decision, of course, that we need to make, what do we leave in terms of the ICE stuff, where that is right now, and what do we really focus in on the BEV stuff and the PHEV stuff that we want to build and that, make where you sell and source where you make, strategy.

If I take the digital revenue stream and the AD then, I will not give you the full answer that you want in terms of exactly when will it be available, where and exactly how much will it cost and how will we charge. We'll come back with those details later on. But I think one thing that is important to remember, I mean, the investments we're making into this self-driving stack with LiDAR and the core computing power that you need to add into the car to be able to do this, it will -- and I think consumer will really pay for the fully self-driving functionality. But it will also make the car a step change more safe even when you are driving. So I think part of the payback you get from a truly safe Volvo, that's always going to be there. But as we reveal the kind of replacement to the XC90, the fully electric one, clearly, we will answer more questions on likely when, where and then how much it costs and so forth, but not at this point.

So carwow is an investment we made through the tech fund. Our tech fund is designed as a strategic investment than as a financial investment vehicle. And the reason for carwow was basically because we can learn, as a learning environment for us. If you look at carwow in the U.K., they have about 13% of total new cars sold, about 28% of used cars sold. And they have a YouTube channel that drives a huge amount of traffic. That is all in the digital spectrum. That is partly where our learning needs to be in the future. And that was a big reason for our investment, to really understand that digital sales channel where you find those customers, how you convert those customers and what those customers want to talk about across those YouTube and streaming channels. And we'll gain a huge amount of information from that investment.

And I think it's very important to stress that in our digital future, online direct future, we're not seeing ourselves isolating ourselves from the world, neither our physical retail partners, which needs to be part of the system, nor digital partners or different form or fashion where carwow is one that needs to fit into this ecosystem.

The next caller is Mattias from DNB.

A couple of questions from me. You pride us with very helpful details on the BEV versus non-BEV, so thankful for that. And I may be pushing it a bit with this question, but we know that there's quite significant difference in service mix with 40 Series in BEV only and 40, 60 and 90 in the non-BEV. So if we were to compare the -- based on a like-for-like basis for the 40 Series BEV versus 40 Series non-BEV, how would it look then in terms of revenue per car and gross margin, please?

Yes. I will not give you the exact numbers. And that's -- we don't want to single out specific cars, and you understand why. But if you do a big picture, if you were to compare those BEVs with the 40 Series PHEVs and ICE, the gross income per car in absolute terms would be lower for the non-BEV versus the BEVs. But in percentage of sales, they will be lower for the BEVs than the non-BEVs. I can tell you that much.

Great. And you also seem quite happy with the price realization and the margin here sort of underlines that in the quarter. But I'm just curious how now when you have lead times stretching 9, 12 months into the future, how are you ensuring that you are not locking in prices in your backlog that potentially would sort of be at a too low level as I assume that you don't have locked in your costs fully as far as 9 to 12 months into the future already?

Right. That is a very important question. And I think the whole question here, are you 3 months ahead of inflation or 3 months behind inflation, that's going to be a big difference in how you feel like a company, and that's a topic that we've put a lot of focus on. And the way it works, roughly speaking, in terms of how the raw material prices translate into our prices. Typically, for most raw materials and most components, you have an index raw material pricing typically kind of a 3 to 6 months' time lag, which means that the spike you've seen following the Ukrainian more, that hasn't affected us yet in Q1. It will have a marginal effect in Q2. The real effect happens in H2 from that. And then as you said, we have a mix then of U.S. and China, where you have more sales from stock where the price effects take immediate effect. And in Europe, where a large part of it is customer orders where you then can have 9-month and 12-month time lags. So the answer is basically doing very quick price increases, and we have done one, another set of price increases throughout Europe after the Ukraine war situation in order to make sure we don't end up in a situation where we sell cars at one cost situation and deliver them in another.

A final one also. You've indicated your marginal growth only in retail sales this year, so I'm just curious how would you think of this in relation to the 2025 ambition of 1.2 million cars sold, it basically implies a much higher growth rate for the remaining years. Any comments there would be helpful?

Yes, it's a good question because this is a flat year effectively. Yet we're holding our ambitions of 1.2 million. So that's the underlying challenge that we have. The good thing for us in that is demand is very strong, and we don't see consumer sentiment changing. In addition to the demand being strong, we've got some new, I think, very exciting vehicles coming out in that time range as well, which is underpinned by differentiated technology. And when you add -- and we have the processing power, let's say, within the factories in order to actually manufacture and supply those products. So we have 3; the big building blocks towards increasing our rate of growth effectively, new cars, new technology and enough production capacity in order to get those to the hands of the customers. Provided supply chain can provide the raw materials, I feel a lot more confident that we can build the growth curve higher, if you will, because of those -- that technology, because of the strong demand that we see right now and because of the cars that we already have in the final stages of development.

And you might have a question behind the question. Some are even more blunt when they ask the question and say, okay, now you have this high volume target or are you in the new Volkswagen that just want to push volumes and you don't care about margins. And I want to make it clear. No, I mean, clearly, whatever growth pace we can deliver, we want to do that in a way that we drive decent margins on the way to do this in a sustainable way. So it's not volumes at all cost. We're what -- all we're saying is that based on the factors that Jim says, we have still the opportunity to get to those 1.2 million cars. Clearly, year-by-year, we're going to pace us so that we can do a balanced sustainable growth.

Our next caller is Eric from SEB.

Most questions have been asked already. I have one left to just see if you can give a bit more color about the production situation for the second quarter. You still have those issues with that -- those 1 or 2 components, but then you said you expected it to be resolved. Would you say production overall in the second quarter will be on par or below or above Q1?

Yes. So would be above Q1 for sure provided that we can get the supply of materials given the pandemic situation in China. That's the single biggest uncertainty that we have right now is how long will the lockdown in China last and how much disruption will that cause in the supply chain. By and large, the semiconductor piece, we know where the material is. We already have secured that material. Now we need to be able to get the other subcomponents, get those into the factories and process them through the factories.

That's very clear. And just to follow up on that. Do you see -- I mean, do you have visibility already now that you have suppliers that are not currently delivering to you in China, so you have inventories that are running out to the extent they don't come back on, you will end up in a situation where you need to cut again? Or is it sort of just you highlighting that this could potentially happen?

It is happening on the margin already. They have some specific components. We have had to do some marginal adjustments in Europe all ready, and our production in China is standing still based on it. So it is marginally affecting us now. If it comes back up in a week or 2, we still have a way -- I mean, it's manageable. But post that, you start to see more severe effects.

We have another caller, and it is [indiscernible] from Handelsbanken.

Two questions from me. Maybe coming back to the lead times, maybe could you discuss how you look at the lead times, how long lead times can you [ live ] in with your new business? And to what extent are the lead times affecting your day-to-day sales and customers going to other suppliers? That's the first question. Second question is very [indiscernible], it's on the back of your outlook, margin growth. What kind of [ LVP ] is that based on? We've seen IHS coming down from 9% to 4.5% currently. And my sense is that, that is too high, so I will be interested to pick your brain on that. Those are my 2 questions.

I think on the first question, if you had asked me 12 months ago, is it sustainable to work with 9 to 12 and even beyond that later, I will say hell no. We are in a situation now where, I mean, consumers have gotten used to it, to have supply constraints in a lot of consumer categories. And all competitors are in a similar situation. So I think it's about your relative position there. And I think there's one person is sticking out, it's Tesla, they have slightly shorter lead time. And of course, based on their battery supply, they can do good single pricing and good to go thing on growth. But everybody else is in similar boats, so there's not too much choice for consumers. So I think it's -- the real question is not what absolute level we can live with, it is what relative situation we can live with. I think that's the short answer.

Just to add to that as well, on the secondhand car market, you're seeing that the prices have obviously increased in the secondhand market. And of course, the availability in secondhand market is almost exhausted in certain places at this point in time. So it's not like you have the choice, I would rather buy a new car or I would buy a secondhand car. And in many cases, people say I'm prepared to wait for those longer lead times to get the particular car that I want to get because they don't have the same choices in the secondhand car market as they used to have.

Again, remind me what was the second question.

Yes, it was on your outlook for margin and increase in sales and...

Yes, okay. Of course, we look at how people estimate the total market to develop during the year. But to be honest, that isn't complete. That's a production outlook that people are doing because the full industry will be driven by supply and not demand for this full year. So it's much more interesting for us to look at what our supply situation looks like. Of course, we have the order book to kind of basically deliver any number you want if we have the supply. So it's really supply. So it's based on our visibility into how we believe we're going to get supply for Volvo components during this year.

Thank you. We have no further callers on the phone, but we have one last question for Jim in the chat, and it's from [ Harald Hendriksen ] at Morgan Stanley. And he is asking, as per your latest comment, why do you think consumers are not reacting to now very high car prices? And do you think there might be limits to that pricing as consumer come more under pressure from cost inflation, higher rates and other pressures? Won't demand suffer eventually?

Well, underlying inflation, if underlying inflation continues to increase in costs, and that drives cost of energy and food and transportation and utility costs, there will come a point in time where underlying consumer sentiment and their affordability to buy a new car, for example, or other objects will come under pressure. At this point in time, we don't see underlying consumer sentiment towards Volvo Car products. But that's not to say if we continue to see price increases that, that will change. At the moment, no, but I think it's a very fair question that how long can the consumer can sustain these price increases across the total basket of goods that they buy on a weekly, daily, monthly basis.

I think this will also be a bit -- clearly it will affect volume car brands before the premium car brands. As I said, we don't -- your analytics is sound and at some point, something will happen, but we're not seeing it here now. On the contrary, we see we're taking those price increases, and we don't see [indiscernible] or the pace based on it.

Great. Thank you so much. We have no further questions over the phone or in the chat. So thank you, everyone, for joining me, and thanks for taking the time to call in. Thank you.

Thanks.