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

Good morning, and welcome to the presentation of the second quarter financial earnings coming to you from our headquarters in Gothenburg. Those were, of course, some of the highlights from the big reveal we did last month of the small fully electric SUV, the Volvo EX31, the key highlights for this quarter. We'll talk more about that in the course of this earnings call. My name is Ron Banerjee. I'm in Communications. And as always, I'm joined this morning by our President and Chief Executive, Jim Rowan; and our Chief Financial Officer, Johan Ekdahl. It should be familiar to you by now, but we will start this earnings call with Jim and Johan walking us through our performance during the second quarter, after which we'll throw it open for a live question and answer round. So if you have any questions, please send it to us. You can either use the chat window that you see at the bottom of your screen or else just use the phone lines, and then we can hear you. But I'll come back with more details before that. But for now, Jim, over to you.

Thanks, Ron. Welcome, everyone, to our second quarter results. Let's categorize as Q2 full speed ahead in transformation with solid underlying business performance. The share of fully electric cars at 16% versus 7% in Q2 2022 with sales up 178%. Retail sales up 25% versus Q2 last year. Production volumes up 30% versus Q2 last year, a stable order book and we've maintained our premium pricing. Underlying EBIT has been improving, weighed down only by nonrecurring restructuring costs, which Johan will talk to in some detail in a moment. The U.K. transformation into fully direct sales has now happened, and we're starting to see the benefits of that come through. Strategic collaboration and agreements with leading semiconductors has helped to stabilize our manufacturing and our supply chain, and we have launched the EX30 with strong customer response. If I look to the financials, retail sales up 25%. Revenue up 43%. And our EBIT margin when compared to Q2 last year has gone from SEK 4.6 billion to SEK 7.3 billion. Again, Johan will pull out the details on all of this in just a few moments. Despite multiple headwinds, we are tracking towards our mid-decade ambitions. And let me just frame what we mean by mid-decade ambitions. That is from the start of 2025 until the end of 2026. During that timeframe, we expect that we will reach 1.2 million unit run rate per month that we will be 30% fully electric in our car sales, that we will be 50% online in our sales, that we will achieve between 8% and 10% EBIT margin and our CO2 reduction will be at 40% when compared to a baseline of 2018. And we're starting to see the share of fully electric and plug-in hybrid cars now really start to explore through the world. It's a global phenomenon that is gathering pace. We're seeing countries like France, Belgium, the Netherlands, Ireland, all moving towards either fully electric or plug-in hybrids. This means we have 15 countries which now show more than 74% of either plug-in hybrid or full BEV sales. When you look at BEVs in isolation, again, the story is the same. We see countries like Denmark now at 41%, the Netherlands at 50%, and of course, Norway over 80%. This is a phenomenon that we think will gather pace over the next few years and positions us well to meet our end decade ambitions of being a fully electric car company. And on that, this will be boosted by the launch of our EX30. The EX30 we launched just recently, and it is our smallest SUV to date. You saw some of the highlights already at the start of this presentation. So while the EX30 may be small, we think that it represents a huge opportunity for our company. With this car, we will enter an important new segment and a new demographic for the company, one that will help us grow rapidly in the coming years. The EX30 will also boost our growth and our profitability in the future of electric cars with gross margins for this car expected to be in the range of 15% to 20%. We're also delighted to share today that the response to this car has been overwhelmingly positive and that the order intake for the EX30 has exceeded even our ambitious projections, and we're grateful for the warm welcome this car has received. This car will start its production life in Q3, and the customers will sit behind the wheel of this car before the end of this year, again, something that's very exciting for us here at Volvo Cars. And with that, I will hand you to Johan, who will take us through the financial update in some details. Johan?

Thank you, Jim, and good morning. On the financials, really a solid quarter with improving underlying operations. Retail sales up 25%, really showing the continuous improvement in our production and supply chain. And revenue up even more, 43%, also showing that we are still able to maintain a premium pricing level with revenue growing more than the sales volumes. On EBIT, if we concentrate first on the Volvo core underlying operations, excluding JVs and associates, we increased the profit from SEK 4.6 billion last year in Q2 to SEK 7.3 billion this year from 6.5% to 7.2% EBIT margin. The margin has then been affected by a onetime nonrecurring item related to our cost efficiency program of slightly less than SEK 1 billion, taking us down to SEK 6.4 billion, including nonrecurring items, or 6.3%. On the full group, including JVs and associates, 2022 Q2 was heavily positively affected by the accounting valuation effect related to the listing of Polestar of around SEK 6 billion, which is then included in the SEK 10.8 billion last year. So that's really important to bear in mind when comparing Q2 '22 to '23. And on cash flow, a positive cash flow for the period. SEK 1 billion free cash flow, also then, to some extent, affected by structural investments during the second quarter of this year. So still a positive cash flow despite that. So all in all, a solid quarter. And if we look on revenue, we see a big effect, of course, from the increased volumes. We are more or less flat when it comes to mix and pricing in the quarter. We have a still quite nice tailwind from FX and also some contribution from the JV contract manufacturing on Polestar. And on other positive effects, mainly also good deliveries of sales of parts and accessories taking us then in total to the revenue of SEK 102 billion for the quarter or an increase of 43% compared to the same period last year. On EBIT, concentrating again on excluding JVs and associates, SEK 4.6 billion last year. Then we see a big effect, of course, from the increased volumes on the back of the improved production and still healthy demand, SEK 6 billion in effect. Sales mix and pricing, slightly negative, really due to several factors. One, being that on the back of the improved production, we see a normalized mix, if you will, which have some effect and also the increased share of BEV cars compared to last year has a slightly negative effect, we'll come back more to the BEV margins shortly. And then slightly net positive on FX. And on other, SEK 2.3 billion negative year-over-year still consists of the largest part of elevated raw material prices. However, we expect now raw material prices to start materializing on a lower level into the second half of the year. That has then taken us to SEK 7.3 billion or 7.2%. And then on top of that, we have the restructuring cost, onetime cost in Q2 of SEK 0.9 billion related to the redundancy program as a part of our cost efficiency measures that we are taking in order to be more competitive going into the future from a cost structure perspective. Then on -- including JVs and associates, last year, again, heavily affected in '22 Q2 by the SEK 6 billion positive effect from the listing of Polestar. So that is really affecting the comparative number. On BEV margins then, 3% into the quarter. And as expected, really, our BEV margins in the second quarter were affected by a number of factors. One, the lithium and other raw materials used in these cars were sourced at peak levels in 2022. And also secondly, the effects of increased pricing on fully electric cars that haven't really yet taken full effect. So going forward, for our existing models, we are introducing a considerably better range, thanks to increased energy density and more efficient built in-house e-motors. And together, this will really help to secure our premium position in the market. And as such, we expect their margins to improve considerably in the second half of the year. And this trend is expected to continue into 2024, also especially when EX30 start to hit markets with even better margins as we have seen previously. So the low level that we are at now is really a Q2 phenomenon, which we then expect to improve during the rest of the year. On liquidity, as I said, positive free cash flow in the quarter, which makes us still being at a very healthy liquidity level going out of Q2 also considering that we do have a period of high investments, but also contributions from a positive EBITDA and working capital, which then is keeping us at a very healthy and solid liquidity level. So with that, I will leave back to Jim to summarize the quarter.

Thanks, Johan. Okay. So end summary. Our order book remains robust, including the EX30 and the EX90 preorders, which will sit as well certainly for 2024 and beyond. Production output continues to improve. Effects of lower raw material prices to accelerate in the second half of the year, as Johan just alluded to. Our global cost efficiency measures is developing as planned and already we're starting to see the benefits of that. Retail deliveries are on track and solid double-digit growth is expected for 2023. Execution remains our focus. So far this year, we have launched the EX30. We have improved fast-charging infrastructure across North America for our customers. We have transformed the U.K. to a direct sales market. We've strengthened the vertical integration of our company by the introduction of e-motors and higher energy density battery, and we have secured our BEV margins for improvement going forward. With that, I'll hand back to Ron and we'll take some questions. Thank you.

Well, thank you very much for that, Jim. So we're all set now to start this Q&A round. We can already see a lot of questions coming in. For those of you who still want to participate, please use the chat window that you should see at the bottom of your screen, in which case, I will then read out the questions on your behalf or if you want to use the phone lines, then just simply use the QR code. But before we get started, let me also invite our Head of Investor Relations. John. Good morning, John.

Good morning.

All right. So let's get started. Let me take the first question. Maybe I can read this out. It does not have a name. So please identify yourself so we know who you are. So Jim, how would you summarize the second quarter? What number really sticks out for you?

I think when you're looking at the business, there's a lot to unpack, obviously, in the results. But if you look at the underlying operational performance of the business, that's really what I think sticks out for me. And if you look at that year-over-year, we've gone from SEK 4.6 billion to SEK 6.4 billion, and that includes the onetime charge of SEK 900 million. If you include that onetime -- if you exclude that onetime charge, then really, our performance has gone -- our underlying EBIT performance has gone from SEK 4.6 billion to SEK 7.3 billion. And I think that underlying performance is something which encourages us because we're still going to see an improvement in lithium prices as we go through the back end of this year and into next year. Next year, we also have the benefit where we'll see the EX30 become a much bigger part of our electrification journey. The EX90 will also come in. And the EX30, we have already said, should be at gross margins around 15% to 20%. So those are solid foundations, I think, upon which we will build our fully journey, 50% by '25 and 100% by 2030. So that's really the number that sticks out for me.

All right. Thank you. Let's take a caller then. We have Jose Asumendi from JPMorgan.

A couple of questions, please. Jose from JPMorgan. Can you comment, please, on the launch of the EX30, how is that progressing and how do you expect that to impact the second half of the year? Also, can you comment on restructuring charges that you took in the second quarter? Do you foresee additional restructuring charges into the second half of the year or maybe next year as you continue to progress and improve the efficiency of the overall company? And then the final one, if you can comment, please, on CapEx and R&D for the full year 2023.

Jose, thanks for the questions. Let me take the first one on the EX90. So as you know, we pushed the start date -- the production start date of the EX90 out simply driven by the complexity of the software code in that car. This is a brand-new platform for us. It's a flagship product for us. It's the first time that LiDAR will be a standard, if you will, and arranging fact this is first time that LiDAR will be introduced as a new technology. We're writing the perception stack software and the sensor fusion software for that safety layer. We wanted to make sure we get that bang on. We need to get that right. So we pushed out the development of that to give the engineering teams a little bit more time to make sure that when we launch that car, then the customers get the best experience possible. And we're on track. As we had previously said, we've pushed out 5 or 6 months. We're on track to launch that car as we had said a few months ago.

And the restructuring costs, any spillover into H2 or 2024?

Yes, restructuring costs, the absolute main part is taken now in Q2 for that redundancy program. So we don't foresee any material nonrecurring charges on restructuring in the second half of the year. And on -- yes.

CapEx and R&D.

Yes, on CapEx...

Any comments you could say.

Yes. On CapEx, we are in a period where we do quite a lot of investments, which we will continuously do in the next coming years, new cars, new architectures, production footprint, et cetera. However, when we go into next year, when the EX30 and then subsequently the EX90 is into production, we will see a slightly normalized capitalization rate, if you will, which will go down to a more, overtime, normalized level, and we will also, of course, then see some increases in amortization when these cars go into production so that -- and that will happen during the course of 2024 after both cars are starting to be sold.

Maybe just let me add another point. You asked about the delay in EX90. Again, just to clarify, the EX30, which we announced just a couple of months ago, production for that car is scheduled to start in Q3, and we should have customers behind the wheel of that car in Q4. So -- and that's in a different platform. That's a much more robust platform. It's a platform that's already known to us. And so that, I think, helps just maybe clarify the difference between the 30 and the 90.

All right. Thank you. Yes. I hope that answers your question, Jose. Let's take another caller then. We have Daniel Roeska from Bernstein.

It's Daniel from Bernstein. Just two from me then. Number one, on pricing. The BEV pricing seems to have taken a turn for the worse this quarter. Could you just help us by sharing some of the moving parts within that bucket to then understand kind of your level of comfort for the second half kind of across the region, maybe mix, maybe model. So why was BEV pricing so much lower and declined faster than the combustion engine car pricing? And secondly, maybe more on a strategic level. Just wondering about BEV penetration globally, right, in the next 12 months. But maybe, Jim, are you prepared to invest downstream in solutions like charging or other ideas to help consumers adopt to technology? And maybe the other way around towards the upstream, right? Have you uncovered any potential investment requirements you have? You've had other OEMs going to the finding or actually buy mine. So any additional investment requirements you've uncovered kind of in the upstream from the OEM.

Yes, maybe I can comment on the BEV cars first. We see -- as we said in Q2, we have a number of effects. One is that the cost for the cars are elevated due to that the cars were manufactured at the time where we had raw materials more or less at the peak level. We have also deliberately sold some inventory of model year '23 cars with -- partly on campaigns due to the fact that now Model year '24 is coming in, as we said, with a significantly improved range, which will also cater for improved pricing. So -- and on the back of that, also lithium prices will flow through at a lower level in the second half. We will see considerably improved BEV margins into the second half of the year. But also due to a little bit of a delay in production of certain BEV cars due to the closures of the Ghent factory, et cetera, we had some inventory that has been at slightly low level sold out during the quarter also, which is a deliberate decision in order for now the better price than range cars coming into the third quarter.

On the charging stations, I guess, and the general supply chain. So we make a lot of these decisions in terms of what do we build versus what do we buy. And that's definitely in different parts of the world. In Brazil, for example, we do invest in charge infrastructure. We already do that for the benefit of our customers, and we do that directly. In places like North America, you probably saw we just signed an agreement with Tesla, which allows all of our customers to use that fast charge infrastructure that's already been built out by Tesla. And there's an immediate benefit then to our customers. In the likes of Europe, we use companies like DCS and Polestar, which allows them to use that aggregated charge infrastructure and gives access to our customers across the various different manufacturers and suppliers across Europe. Then when you dial that back into, okay, where else do we want to vertically integrate? We've decided that we think that Silicon is something which we can partner with. So we've decided to choose partners with a Silicon like NVIDIA and Qualcomm that give us access to high computational silicon without the need for that deep investment that you need to make in semiconductors. Batteries we'll decide to build in-house as well as source. So that will be a mix model. We want to really understand battery, battery chemistry and next-generation manufacturing on sales as well as sell to pack. We'll learn all of that through the joint venture that we have with Northvolt. That's already started. We've cut the ground in that already here in Sweden. And that operation will be up and running in 2026. And then on e-motors, we brought those in-house. We used to buy our e-motors externally. We brought those in-house. And in fact, that's one of the reasons that we can offer extended range in the new XC40 and C40 because of the efficiency that we've managed to drive out of that new motor design and the silicon carbide inverter modules that we're designing. So we look at this pretty forensically, if you will, in terms of what do we build, what do we buy, where is our money best spent in terms of investments? And how do we gather the most benefit for our customers and the highest potential growth with the best margin structure? So that is something that we pay a lot of attention to.

Maybe just as a follow-up, Jim, is there anything in the past kind of 6 months where you've kind of changed directions or said, well, maybe we do need to build or kind of in-source parts of the chain where you previously thought that wasn't the case?

Yes, not so much in build in terms of intelligence and analytics. So we're adding an analytics layer on top of our supply chain architecture that allows us to much more deeply understand on a more real-time basis exactly what's happening across the supply chain. So that is being implemented as we speak. We've also started direct relationships with the semiconductor companies that used to be that we relied on the Tier 1 suppliers to have those direct relationship with the semiconductor people. We are now as part of that conversation and have direct relationship with many of those semiconductor companies that allows us, one, the intelligence and two, the direct access. And where it makes sense for us, we will buy those semiconductors to make sure that we get them and then we can supply those to the Tier 1 for the inclusion in the final subassembly that they then supply to us. So that's basically the direction of travel that may have changed, if you will, over the last 6 months.

Thank you, Daniel, for the questions. Let's take one online then that's come in. This is from Constantine [indiscernible]. Sales of BEVs increased by 178% during Q2, but the pace of public charging installations in Europe is much slower. Does this worry you? What needs to happen?

I can take that. Yes, I think what you're finding now is that you're starting to see some external investments now going on. You're starting to see some of the big private equity companies getting involved and investing in the long-term infrastructure for electrification. That will continue. And it's not about the number of charges per se. It's about the number of fast chargers. And I think that's really the shift that you're starting to see now. It's fine if you have a big installation of AC chargers, but it takes -- in many cases, that takes too long to actually charge for the consumer. So you need to now build an infrastructure of DC chargers, 50-kilowatt to 150-kilowatt preferably. And that's what we're starting to see happen now. I think that will continue. And our intelligence tells us that we're starting to see a lot more interest and investments being made in that. I'm speaking specifically in Europe for that. When you look at the Inflation Reduction Act in the U.S.A., that is going to drive a tremendous amount of investment and to charge infrastructure across the U.S.A. And I think that will only be a good thing for the entire EV industry.

All right. Thank you. Now we have another caller on the line, and that is George Galliers from Goldman Sachs.

Jim, in your comments in the press release, you did mention that demand continues to normalize, which brings some additional pricing pressure. Were there any specific markets or segments where you're seeing pricing pressure? And how do you think Volvo is positioned in terms of weathering the pricing pressure? Obviously, you have several new and exciting battery electric vehicles, but that is a market where we're seeing a lot of pressure in China and also certain competitors cutting prices in other markets. Meanwhile, obviously, because of your focused and rapid transition to electrification, some of your internal combustion engine vehicles are perhaps older than some of the products being introduced by the Germans at this point in time. And then the second question I had was just on the cash flows. Would it be possible to just give us some insights into the [indiscernible] cash outs that you're expecting in the second half around restructuring costs payments to China JVs? And then also any potential cash-ins that you're aware of that will take place in Q3 and Q4? And could you remind us how much of the loan to Polestar has not been drawn at this point?

So let me take the price point. I'm sure you want to elaborate on that as well. So -- and I'm glad you asked the question, George, so we can just clarify that. Right now, we are seeing a strong and robust demand for our products pretty much globally. There are certain parts of the world which are stronger, other parts of the world, which are a little bit softer. But for the best part across our product portfolio and across our geographies, we are seeing strong demand. And that gives us that gives us the position that we don't feel that we need to be involved in any price reductions. So we still feel we have pricing power in the market. Within the premium sector. I think that has become a lot more pronounced in terms of price pressure in the mass market sector, we don't see it as much in the premium market sector other than a few places around the world. So that's -- so pricing for us is not something that we intend to get involved in any price cutting and any specific. Now as Johan said earlier, when we had the model year change from 2022 to '24, specifically on the C40 product, then we -- and we were offering a brand-new product, which had 70 to 80 kilometers additional range, then of course, you want to get those products in the market before you bring in your model year '24. That's really -- that was a very tactical decision that we made at that point in time pretty much focused on the U.S. market at that point. But other than that, we actually don't see a huge amount of price pressure in the market for our products at least.

Anything on the cash flow, Johan?

Yes, on cash flow. So if we start with the restructuring cost and other, let's call it, nonoperational parts. The provision that we made now of slightly less than SEK 1 billion will, of course, come in as cash flow in the second half. With -- in addition to that, we don't foresee -- on a net basis, I think the so-called structural investments that we call them will be virtually 0 on a net basis into the second half of the year. So the main part of that has been taken in the first half. So it will not have any significant effect in the second half of the year. And with that said, then the loan to Polestar has to the absolute majority already been drawn in the first half.

Good. Maybe one -- and then I was thinking about the comment on pricing. I mean, as you know, I mean, in the last 3 years, the industry hasn't been able to sort of meet demand with the supply. And now we're getting into a point where we are increasing production. And we also said in previous calls that the pricing environment that we saw in '22, that level will not persist into the future. But it's also important to bear in mind if you look at the net pricing and the discount levels, they are far from what is called pre-pandemic levels. So I think it varies in between markets, but it's not so that we experience a significant price pressure on our products, and we are still having a significant order book, as you know, in Europe, that we're building on and we would be very active in price actions in Europe. We will only build on top of that order book, which is already quite long. So of course, we're monitoring this, but there's no drama as we see it in our numbers.

Yes. And that's a good point. Just to pivot on that. The EX30 will be released to the market at a starting price of USD 35,000. Gross margin for us is between 15% and 20%. By and large, the feedback from the market was that's a very competitively priced product, 480-kilometer range, full of new technology. And of course, it's a small SUV and a fantastic city car. So -- and still being able to get 15% to 20% margin. That, I think, probably is the best signal that we can give that we feel pretty comfortable that we can price well in the market, but still make those margins especially embed 15% to 20% on BEV products I think puts you in the upper tier of the marketplace in terms of what people are managing to extract from BEV cars at this point. .

George, hope that answers all your questions. Let's take another caller then. Let's take Erik Golrang from SEB.

A couple of questions. First one on your comment about the order book being strong, including demand for the EX90 and EX30. Just trying to sort out sort of maybe if there's a change in the duration of the order book. We know the EX90 is wrapping up until some point sort of into mid next year, EX30 coming on now. But is there a -- your overall book might be strong. I guess my question is, has the duration of it sort of extended i.e., a bit of gaps in there? And then a follow -- a bit of a follow-up to that on your ICE offering. Are you concerned that from as far as we know that you don't really have any sort of new ICE models coming. For how long do you think your current hybrid and ICE offering is competitive without that?

Maybe I can start on the order book. Then the answer is that we have an almost record-high order book, and there's no gaps, as you refer to it. We still have an order intake in general and on a global level, healthy demand, which means that the order book is kept stable. So the answer to whether there are any gaps in time, if you will, the answer is no. And even if you exclude the orders for EX30 and EX90, it's still at 2x normal level. And then the ICE offering?

Yes, I'll come back on the ICE. On the EX30 as well, we have -- I don't think we've explicitly said this is going to be a volume car for us. This is going to be one of the highest volume cars that we sell. And that as we get into full volume of that next year, which we just pointed over this part as well that we've put in the production capacity to have a very steep ramp on that car because we're hopeful that the volumes will materialize very quickly. And of course, the preorders would -- we think that we may have got that right. In terms of the ICE and the existing products, yes, we are making and we'll continue to make upgrades to our ICE products to make them fit for the future. That's not bringing out new ICE models per se, obviously, the XC60, the XC90 and so on. But we will be making constant improvements to those cars in order to make sure that they are fit for the future and that they can compete with the latest products that are available in the marketplace. So -- and those investments are already baked into our business plan.

Okay. Let's take a question online then. This comes from Dorothy Creswell. Can you once again please remind us of the BEV launch schedule for the EX30 and the EX90?

So 30 starts production in Q3, and the first customers will receive those cars towards the end of Q4. So small volumes in 2023, and then we will be in full production at the start of '24, and we'll start to see that ramp up very quickly through the course of 2024. And we expect to be building the EX90 around the mid-year, and the deliveries will happen shortly thereafter. That will start its production -- the EX90 will start its production life in our Charleston facility in the U.S. and the first customers to receive those will be in the U.S. as well. So basically, it will roll out the factory and hopefully into the hands of the first customer in the U.S.A. in the mid-part of next year.

Let's take one more question from Dorothy. She asked, when will we see the cash-out associated with your Chinese JV stake going from 50% to 80%? And then when do you expect to end up at 100%?

We will -- we expect the first transaction happen into the second half of 2023 and the next phase then potentially -- or probably into 2024.