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

Good morning, and a warm welcome to the presentation of Volvo Cars' third quarter financial results. We are coming to you from downtown Stockholm today. We are currently in the Volvo Cars Studio, and our tech hub in Stockholm is just a few blocks away. My name is Ron, and I'm joined this morning by our Chief Executive, James Rowan; and our Chief Financial Officer, Johan Ekdahl. At the top of this earnings call, Jim and Johan will walk us through our performance during the third quarter, and thereafter we'll throw it open for a Q&A via the chat and the phone lines. I'll come back with more information right ahead of the Q&A, but without further ado, let me hand over to Jim. Jim, over to you.

Thanks, Ron. And as Ron said, it is fantastic to be here right in the very heart of Stockholm and our Volvo Studio, surrounded by our latest technology. With that, let's talk about Q3. Our momentum continues, we're performing and transforming. Share of our fully electric cars at 13% versus 7% in Q3 '22, which means that their sales are up by 111%. We've improved our margin on fully electric cars, 9% versus 3% only last quarter, and this is very much in line with our plans and our expectations, again, as we had previously indicated. Retail sales are up 22%. Production volumes are up 16%, again compared to the same period last quarter. Continued solid underlying EBIT growth with lower variable costs, including our raw materials, again, as we had indicated. Stable order book, and we have maintained our premium price discipline. We also declared the end of diesel. Our last diesel car will be produced early 2024. That marks an end of an era and the start of another era. Construction of our novel battery plant started in Sweden, and we will accelerate the production of that in line with our plans. Volvo Cars first fully electric MPV, the EM90 will be launched in November 12 in China, and we have stated production of the EX30. During the second quarter, we revealed our first-ever fully electric small SUV, the EX30. This competitively priced car will serve to strengthen our position and help us reach our global ambitions to become a fully electric car company by 2030. Not only has the demand for this car been higher than our expectation, but has now also received several industry awards, and we expect that to continue in the coming weeks and months ahead. In the third quarter, we also started production of the EX30, and that sets us up for the first deliveries of this car in the fourth quarter with a ramp-up through the first quarter next year. The expectations for this car is that the gross margins for this fully electric SUV will be in the range of 15% to 20% as previously indicated. In addition, we're also planning to produce this car, the EX30 in our Gent plant in Europe. This decision reflects the strong demand for the car and supports our global strategy to produce where we sell. It also builds a production capacity for this car in Europe as well as for global exportation. Let's move to the financials. Johan will take you through the financials in much more detail in just a second. But in summary, retail sales are up by 22%. Revenue is up by 16%. And our EBIT margin has grown compared to the same quarter last year from SEK 3.5 billion to SEK 6.1 billion, and that reflects the growth that we expect in the company and the growth that we expect in our performance. As I said, Johan will take us through that in much more detail in just a second. This positions us well for our mid-decade ambitions in terms of volumes, fully electric car sales, fully online sales and also our EBIT margins and a reduction on Tier 2 emissions. Moving to CO2 emissions, you can see here both our BEV and our recharge cars in total. And whilst we see that go down slightly in the third quarter, this is very much in line with our plans and with our expectations as we move to a new model here. As we progress to Q4, we expect our BEV sales to be more online with the first half of 2023. And again, this positions us well for our global ambitions of CO2 reductions of 40% from the mid-decade when you compare that to our baseline of 2018. Again, very much on track to what we have signaled before. With that, we'll look at global sales of what we call recharge cars, which includes our hybrids as well as our BEV cars. Again, we see this accelerating. And if we move to full BEV, then we see the same phenomenon. Fully electric cars are now becoming a global phenomenon. We're starting to see that in many markets around the world. [ Our broad ] ambitions to be early movers and move towards electrification is now done to really pay dividends for us, and we expect this to be something which accelerates in the coming months and years ahead. With that, I'm going to move to the financials, and I'll hand over to Johan.

Thank you, Jim, and good morning. On the financials, retail sales, up 22% in the quarter, revenue up 16%, but also worth mentioning is that wholesale is up 14%, slightly lower than retail sales, which is normal seasonality of the summer, which also shows that we are increasing revenue more than we increase in wholesale, which also is a proof point for our ability to maintain good price discipline. On EBIT, SEK 6.1 billion compared to SEK 3.5 billion same quarter last year, 6.7% versus 4.4%, showing that we are continuously on a positive trajectory when it comes to the profitability for the underlying Volvo Car operations, including JVs and associates at SEK 4.5 billion or 4.8% in the quarter. And on free cash flow, we are positive SEK 2 billion in the quarter, more or less in line with last year. On revenue, the biggest driver for the increased revenue is really volume showing our normalized production situation where we see improved production month-over-month now since quite some time. Sales mix and pricing more or less flat, showing that we are maintaining solid price discipline. FX still a tailwind on revenue side, contract manufacturing, more or less flat compared to last year. And also, we have some further positive effects, especially from sales of parts and accessories taking us then with the 16% growth and SEK 92 billion in revenue for the quarter. On EBIT, again, volume being a strong driver for the increased profitability. We also do see compared to last year, as we have said, we see lower raw materials flowing through. We see lower cost for semiconductor purchases. We see lower logistics costs, et cetera, which is then also driving the underlying increased profitability. Sales mix and pricing, slightly negative, although we see a higher BEV share, which still have slightly less margins than the other car lines. We see a normalization of mix compared to last year on the back of the improved production situation, but we also are maintaining good price discipline taking us to 0.5% negative, but in all in all, limited effects on that side. On FX, more or less flat, slightly positive on EBIT due to the fact that other currencies such as Euro are on the cost side, are offsetting the positive effects on the revenue side. So that takes us down to the 6.7% EBIT margin, which is then quite a big improvement compared to the 4.4% for the Volvo core operations compared to last year. JVs and associates, minus SEK 1.7 billion, taking us then to the SEK 4.5 billion or 4.8% EBIT for the quarter. BEV margins. As we already said in the second quarter, that was the low point at 3%. Now we are -- heavily increased that to 9%, which is driven by a number of different things. We see lower raw materials materializing in the second half of the year, especially lithium, which will continue then into the fourth quarter. We also see improved pricing due to the new model year and improved range, et cetera. And we also see cost efficiencies coming from, among other things, the in-house produced e-motors, taking us then to the 9% BEV profitability in the quarter compared to 3% in the second quarter. So also there a positive underlying trajectory. On liquidity, we are at a very solid liquidity level at the end of Q3, SEK 70 billion, including undrawn credit facilities. We have a positive free cash flow in the third quarter. We will continue to have so in the fourth quarter, and this really caters for us being able to continue to deliver on our transformation and our upcoming investments. So with that, I'll leave back to you, Jim, for the summary.

So in summary, the order book remains stable. Retail deliveries are on track with solid double-digit growth expected for this year, as we had indicated previously. Our fully electric car sales will increase year-over-year, the EX30 first deliveries for Q4 with retail sales and production ramping in the first quarter of next year. EX30 has already won 2 major industry awards, and we expect to see that increase over the coming weeks and months ahead. And we will stay continually focused on cost consciousness throughout the entire organization. We will remain laser focused on our execution. We've announced the end of diesel production in early '24. We've secured significant BEV margin improvements. We have stabilized our supply chain, and we have strengthened our in-house software capabilities through our global tech hubs and further investments in software in Sweden. And we started the EX30 production. And we will add further production in Europe in the coming years ahead. From the smallest SUV to one of the largest cars that we've ever produced, the Volvo EM90. In a few weeks, we will globally reveal our first ever fully electric MPV, the EM90. We will do this in Shanghai. This will be an important proof point for our strategy as well as our brand strength in China, and we hope that you will join us for that reveal. With that, I'll hand over to Ron.

Well, thank you very much for that, Jim. So we are all set now to start the Q&A round. [Operator Instructions].

Well, with that, let's get started. But for the Q&A round, let me also invite our Head of Investor Relations, John.

Good morning, Ron.

All right. So let's get the Q&A round kick started then. And maybe I'll take the first question on line, since a lot of questions online as well coming in. All right. So we've seen other competitors come out with their quarterly results, and many seem to be very bearish on their BEV outlook. So the question is, how is the BEV demand for Volvo cars in the Q3? And how do you see demand for BEVs going forward?

Well, I can only go by our own order book. What we see is a strong BEV demand. We see a strong demand actually for our products across all of our portfolio, and we see that pretty much in every region in the world. And that's allowed us to maintain our price discipline. But as we get back to specifically the question on BEV, then we see a strong BEV demand not just for the C40 -- the XC40 that we've got in play right now. We've just refreshed that car on the model year '24, which gave us additional range within that car. I think that's obviously helped, but also for the EX30. The EX30 where -- when we announced that car, we opened the preorders, we set ourselves some internal targets on those preorders and what that should look like, and we surpassed those internal targets pretty quickly. And so -- but I think we are slightly different in so much as we've been very, very choiceful of how we move into the electrification sphere. We started with the C40 and the XC40, which, of course, started its life as a [ mere ] hybrid car and -- in terms of the C40. So we understood the dynamics of that specific segment. And then we proliferated that out to supply that car globally. We've done the same thing with EX30 but in a different segment. So we're not overloading one segment with more and more cars that compete against each here. The EX30 takes us into a really new segment, the small SUVs, the smallest SUV have done. It takes us to a new demographic. It takes us to a new price point, $35,000 starting price for a 480 kilometer range car. That was very competitively priced. The EM90, which we'll announce in a few weeks' time, takes a into a very different segment, again, still within the electric sphere but within a different segment, so we don't overload and of course, we're positioning that really in China to see that car. So not only are we positioning our electric vehicles into different segments around the world, we're actually positioning into different markets around the world where we think we can be really successful. And then, of course, the EX90 the same thing. That's the flagship SUV. And we think that the XC90 and the EX90 will live in harmony for quite some time. When I look at the U.S., the electrification of East and West Coast is driving electrification. The interior has taken longer. So if I look at the 90% range, I expect that we will sell the EX90 more in the coastal regions of Southern California and so on. But the XC90 will still sell in the PHEV range and the interior, and we see the same dynamics in China. So I think we're really well positioned, and we've been very thoughtful and sure-footed about how we have our existing portfolio and how we then augment that with electrification in different markets and in different sectors. So I remain bullish on our journey, I mean bullish on our strategy. And as well, we're in the premium sector, where we see an awful lot of the turbulence and where we see a lot of oversupply and a lot of excess inventory is in that low-end mass market arena, and we don't operate within that arena. So to some extent, it's measuring apples and oranges in my opinion.

Good. Thanks for that. So let's get maybe the first caller on the line this morning, and that's Hampus Engellau from Handelsbanken.

2 questions for me. From a -- speaking about the EX30, do you -- I guess you're starting to have some visibility on production in Q1. And would it be possible to maybe indicate somewhat volumes we should expect here, just given that it's a new model that is broadening your product offer? Second question is one to give the question. And that's on the price sales mix during the quarter, minus SEK 400 million. One of your -- the main competitors [ on Bell ] here has lowered prices back to 2020 levels. How much of this is a surprise element and how much is a sales mix element in it?

On EX30, so we started production of the EX30 a couple of weeks ago. We'll see as the first customers behind the wheel of that car before the end of this quarter, which is immediate pretty much in auto terms. And then we'll ramp that up through production in the first and second quarter of next year. We also announced yesterday or earlier this morning, actually. We announced that we would manufacture that car in Europe as well. So that's going to give us enough capacity to build out the global supply for that car. It also allows us to make sure that we are -- we can circumnavigate any of the trade tariffs and so on that might come in the future. So I think that's -- that from a strategic point of view, we're very well positioned for the supply of the EX30. In terms of the volumes, yes, of course, this is going to be a volume car for us. It's in exactly the right price point as we seek to democratize the electrification and bring that price to a $35,000 range with a 480 kilometer -- sorry, $35,000 price with a 480 kilometer range, we think we get into that sweet spot of being able to attract more customers, younger customers, younger demographics. And of course, if we offer that car on subscription-based ownership as well, that allows us to even attack more of that market. So it will be mass -- it will be a volume car for us. We haven't put exact volumes on what that looks like right now. We may do that in the future. But suffice to say, we think this would be one of our highest selling models in terms of volumes. On the price piece, again, back to the EX30. We signaled last quarter, we expect the EX30 to come in with gross margins of between 15% and 20%. And that is much, much higher than anything we [ said ] -- in fact, I think we're still the only automotive company that splits out BEV margins versus the total blended margins. So we saw that increase from 3% last quarter to 9% this quarter. It's a threefold increase in the space of a quarter. I expect that we'll see further benefits even on the XC40 and the C40 gross margins as we accelerate through the rest of this year because we expect material -- raw material prices to come down. So we have further tailwinds even on that. And then, of course, we add the EX30, which we say 15% to 20%. I don't think there's many other car companies that have got both internal combustion engines as well as BEVs that are making 15% to 20% gross margins on the BEVs on an isolated measurements. And so I think we are much better positioned in that market than maybe some others.

And on your question on the price sales mix in the quarter. I would say that the main effects are from: one, we are increasing year-over-year with BEV share, which is, of course, slightly diluting other margins. We are also seeing a normalized mix that is reducing that somewhat because, I mean -- which is, in essence, a positive thing since we have a much better production situation. So we are far from back to pre-COVID pricing, I would say. We don't show the exact allocation, but we are keeping our prices for sure, better than we were pre-COVID if that was the question.

All right. Thanks for that, Hampus. Let's take another caller then, and this is coming in from Goldman Sachs this morning, and that's George Galliers.

The first question I had was more of a sort of conceptual one just around that market evolution for BEVs. Do you believe it will be possible going forward to price a comparably-sized BEV at a premium to the ICE equivalent in Europe and North America as we've seen manufacturers do yet -- do so far? Or do you think customers will increasingly demand price equivalency at point of purchase? And the second question I had was on the EX30. I mean, I completely agree with your comments that the targeted gross margin of 15% to 20% is very impressive and materially above that of what we've seen from a lot of BEV pure plays and your competitors. But if we look at your reported gross margins today at a group level, it's already within that range. So is the aim at least in the near term with the BEVs to be able to transition to the BEVs with no incremental margin dilution, i.e. keep margin equivalency to what you've had in recent years? Is that the first objective? And I don't want that to sound like it's not an admirable objective because I think others will struggle to even achieve that.

Yes, let me take the first one. So in terms of -- so when we look at EX30 as you mentioned, I think for the first time, we can say we're pretty close to price parity between ICE and BEV, a 15% to 20% gross margin. If we can push that higher to the 20% than the 15% as we get more and more volume and continue to take cost out of that platform, then, of course, that would be our ambition, that we start to see EX30 move towards the upper end of that scale that we've given. And then you're definitely on BEV/ICE comparability at that point. The question then across the -- moving to the question across the range. As the evolution of BEV, we're starting to see now we stop diesel. So we made that as a conscious choice. We're starting to see some cities around the world now ban diesel from the inner cities. And I think that's going to be something that progresses over time, one of the reasons why we've taking that decision. But if you then look at -- as we go 3, 4, 5, 6 years into the future, and the world is much more towards a BEV landscape where you start to see much more energy density in batteries, you see the cost of batteries coming down and you start to see that more price comparativeness. The other thing which is coming on is that then the residual values of BEV cars are going to be higher than the residual values of ICE cars. And that is going to change, that's going to be a change in dynamic that we haven't saw play out yet within the market. That's going to take a number of years. And that's what's going to allow us to drive the higher gross margins across the range in EV because people will trust that if they buy an EV, the car is going to be a higher residual value in 3, 4 years' time after purchase than an ICE car would be. And those dynamics are not being talked about enough in the transition to BEV and how people -- how customers will see that value proposition 3, 4, 5 years from now.

Maybe the second question then, Johan, if you want to add something on that here on the BEV gross margin piece. It's pretty much in the range of where we are today, our gross margins. So will that be an addition to our gross margins going forward? Can you just add some color to that question?

Yes. I mean we -- as we have said, we will be on the cost parity from a cost perspective on comparable cars mid-decade between BEV and ICE. And I think EX30 will be the first proof point that, that is possible in order -- because that will as you say, be almost on par with company gross margin. And again, we also see even in this quarter, the proof point now when raw material prices are coming down, we have been able also to price for the improved technology, with the improved range, et cetera, on the current BEV lineup, although they are not still on par with the ICE cars. I think, again, mid-decade, we will be on parity. And of course, we also have the ambition in order to reach our mid-decade profitability ambitions, to also over time improve our gross margin over the whole lineup by being more cost efficient from a technology perspective, but also being more cost efficient as a company, setting the right cost structure and indirect costs, et cetera, which we are continuously working with.

And there are some benefits, again, which are not obviously -- immediately obvious. As you transition more and more of your portfolio to BEV production, there's a lot more similarities in that underlying component set. So as we -- and one of the reasons why we're building our own battery factory is so that we really understand the cost of batteries, which is a real big component of the cost of BEV cars. We have 2 joint ventures with Northvolt. One is to understand the underlying technology, which is an [ RNG ] joint venture, the other is a manufacturing joint venture. When you look at internal combustion, the engines are always different. There's always different components. There's hundreds, if not thousands of parts in each one of those internal combustion engines. When you move to a BEV car, you can standardize on motors, on inverters, on battery, on the battery management software, and you can reuse that technology in different platforms and in different-sized modules. And you really get the economies of scale and the economies of benefit on that, and the economies of scope that you just don't get on ICE cars. And that's where you can drive that. Even if your gross margin stays the same at 20% or so, you can drive a higher EBIT margin because you have more efficiency in the underlying bill of material, which is still the single biggest part of the cost of the car. And that again, that's a conversation that's not fully developed right now in the markets, but that's going to be something that if you can really understand the underlying benefits of the key technology that's in the car, batteries, motors, inverters, the software that drives that electrical propulsion system, all of which we brought in-house. We do it on motors, we do our own inverters and we're starting to build our own batteries. That's really where the synergies start to kick in 3, 4, 5 years from now as you develop much more towards a bigger portfolio of [ BIM ] BEV, if you will.

Good. Hope that answers your questions, George?

Yes. Very insightful.

All right. Let's take another question online, then maybe this comes in from Mattias Holmberg, Analyst at DNB. Is there any reason we should not see a normal seasonal increase in wholesale volumes in Q4 compared to Q3?

I mean what we have said is that we will have a solid double-digit growth in sales volumes for the full year 2023 that we are absolutely still standing behind. And I think both the Q3 volumes also on the back of the now much improved or normalized production situation and also where we are year-to-date. We don't guide on specific volumes in Q4, but I mean, Q3 is a good proof point.

All right. Great. Maybe let's take another caller then. This comes in from Stephanie Vincent in Bank of America Stephanie, what questions do you have for us?

I guess my first question is just on your order books. Some guys have been giving monthly sort of months outlook for orders. I was wondering if Volvo Car would potentially do the same. It seems like some of your competitors are talking about a 2- to 3-month range. It would be nice just to get some visibility on that number? My second question is just on your inventories, if you would be willing to disclose potentially days inventories at your dealers or at the group 2, I think that would be helpful. And then finally, supply chain issues are still obviously a big deal in the space. Just wondering if you would be willing to disclose any supply chain issues that you see upcoming over the next 6 to 12 months? There's been some issues in the space about graphite. Can you talk a little bit about semiconductors still and any other items that we need to be aware of? I think 48-volt batteries were also brought up today by a competitor. And that's it for me.

I'll do the supply chain piece, then maybe you can talk a little about the order piece and so on.