Volvo Car AB (publ.)

Good morning and a warm welcome to the presentation of Volvo Cars' second quarter financial results coming to you live from the Volvo Cars headquarters in Gothenburg. I am Ron, and joining me this morning is our President and Chief Executive, Jim Rowan, and our Acting Chief Financial Officer, Johan Egdahl. At the start, Jim and Yuan will walk us through our performance during the second quarter. After that, we will throw it open for questions. If you want to participate in the Q&A round, you can do so in two ways. Either you can send in your questions via chat, and you should be able to see it at the bottom of your screen, or else you can simply call us in. You would have different numbers displaying on your screen depending on which part of the world you are in. If you want to ask a question, please remember to press star and one and the operator will guide you right in to this live stream and you can ask your question directly to Jim and Yuan. With that, I'll leave the floor to you, Jim. Okay, thank you.

Good morning and welcome to Volvo's second quarter annual results. So let's start with a summary. over-action EBIT at 15% with an underlying EBIT of 6.5% and that excludes GVs and Associates. All in all I think we can say that it's been a stable result in a very turbulent second quarter environment. Revenue is down 2%, mainly supply constrained coming really from the pandemic lockdowns in China and that policy that was driving some shortages, not just into the factories within China, but also within some of our other factories around the world and in particular affected some of our BEV production. Demand continues to be very strong, especially in the US. We're starting to see that bounce back also now in China as it opens up post-pandemic. And of course, Europe has remained very stable throughout, which is another great proof point for us as it's our biggest market. Raw material prices of course have started to impact earnings and we saw that Polestar this quarter became a listed company in the New York Exchange. I think a fantastic achievement given all of the turbulence that surrounds the financial markets at this particular point in time. I know I'll speak more to the Polestar D-SPAC in a few minutes. Moving on to the key financials. Although demand remains strong, it was really supply constrained by those lockdowns in China. And if you remember when we spoke to you the last time, those lockdowns in China had only just started and little were we to know that that was going to manifest itself into more than two months of lockdowns in the Shanghai area. Revenue has been helped by strong price increases. So the brand strength of Strong's allowed us to push price increases through to offset those increases in raw materials, by and large, as well as mix and some FX headwinds have also helped us to drive revenue to only 2% despite the 27% retail reduction. EBIT margin, as we said earlier, underlying at 6.5% when you discount the JV and Associates. Now 6.5% is not where we want to be long term, of course, but I think it's a great signal for us to look at upon the foundations that we can build as we port forwards and we have full supply back into the supply chain. We remain dedicated to a long-term strategy of 50% BEV sales by the half decade, 50% online sales, between 8% and 10% margin, and a 40% reduction in CO2 emissions when we take that baseline of 2018. and of course 1.2 million cars sold. Now despite a flat year this year for volumes, we are confident that we can still reach that 1.2 million units sold. The reason for that is because by then, by the half year, we will have more new products, BEV products in play, And also we're starting to see much more consumer sentiment move towards BEV purchasing. That combination of factor gives us confidence. But it's really more about driving BEV and revenue than it is about driving absolute numbers of volume. But we're positioned well for those mid-decade ambitions. If we move then to the recharge sales, strong demand for recharge, especially in BEV. Again, this is a great signal for us and our company that we're taking the company in the right direction, which is towards BEV and recharge technology. And of course, that would be higher than the seven points you see here in BEV. But for those supply constraints that we saw, coming from the pandemics in China. And as well, just to point out that the BEV supply was disproportionately affected by those lockdowns in China. Otherwise, we'd have seen that to be considerably higher. And in fact, we're on target to see double digit BEV percentages of sales as a whole year in 2022. So we'll see that acceleration through the last half of the year on BEV sales. And then moving to Polestar. Tremendous achievement by Polestar and the Polestar team to get out in the capital markets and enlisting in the current environment with such a low redemption rate and high valuation, I think bodes well for two things. One, the strength of the Polestar brand. But two, and perhaps more importantly for Volvo Cars, this is a validation that BEV and BEV technology is a future choice for car purchasers going forward. And so the combination of that strong brand with Polestar, but also a nod towards the demand for electric vehicles, I think bodes well for us and Volvo Cars as well. Some big numbers here, of course, we're going to see them in 30 markets by next year. We're going to see three new premium launches by 2024, and then they hope to 10x their 2021 volumes by the end of 2025. So that will be a 10x increase in volumes in only a four-year period, which again points to how strong the BEV sector is starting to become globally. So maybe a wrap up as we look towards our transformation journey, if you will, surge in demand for recharge, 31% in total, 7% of that obviously coming from BEV, CO2 reduction of 10%. Again, we're on track to meet those mid-decade ambitions of 40% by 2025. The strategic choices that the customers are making in favor of BEV cars now is accelerating all of that. And of course, we're starting to see now some online sales that we have pushed deliberately towards retail because of the lack of supply. Despite that, at 9.5%, it's still double where we were last year on those online sales. We've had the green bond which has gone out 500 million euros and of course again another great validation of Volvo cars as an ESG investment over three times subscribed in that green bond and then of course the Polestar D-SPAC which Johan will talk to in more detail. So that's basically the summary of where we are and to summarise just once more I think stable results in a very turbulent and unstable world at this particular point in time and it bodes well for our acceleration into the second half of 2022 and beyond. With that I shall hand over to Yon.

Thank you Jim and good morning. And let's look into the financials then a little bit more in detail. As Jim said, we have a decrease of 27% on retail sales, which is then, of course, on the back of the supply and production constraints. But what's good is that we have maintained revenue almost on par with last year. 2% down due to price increases, good mixes and also some FX tailwind. We will come back more to that a little bit later. EBIT margin high at 15%, 10.8 billion SEC, of course, then heavily positively affected by the Polestar listing effect, but excluding Javis & Associates, 4.6 billion at 6.5%, which considering the turbulent environment and the supply and production constraints, we still believe that is a quite good number. Cash flow operating and investing in the period 6 billion negative. which is also considering the production situation quite good. We have some effects, of course, on payables due to the production. We have a slight buildup of inventory in June due to the turning point in the production. And further, we have also invested 6 billion in preference shares in Polestar affecting this number. So all in all, quite a decent cash flow. And in June, we also saw a turning point with a positive cash flow for the June isolated. If you look a little bit further into revenue, we see of course a negative volume effect, but we have been able to mitigate that through pricing actions, through a good sales mix and also with the tailwind on foreign exchange rate and on top of that some effect of course then on the contract manufacturing for Polestar, meaning that in total we get more or less the same revenue out as we did last year despite the lower volumes, only 2% down. If we then look more into the EBIT, if we concentrate to start with on the Volvo core excluding Javis and Associates, we see a negative volume effect of course due to the production constraints, which has then been more than mitigated actually by pricing actions and a good sales mix. On top of that, on a net basis in EBIT we also have a positive foreign exchange rate effect of 1.8 billion. We have no items affecting comparability in the period. Well, despite the Javis & Associates listing effect in Polestar, but for the Volvo core part, And then we have some other effects, negative, which is a combination you could say of raw materials started flowing through in the second quarter. We also have some increased costs for especially R&D on future car models and development that has not yet reached the capitalization phase. and also some extent the effects of the contract manufacturing with slightly lower margins than let's say normal wholesaling. So all in all, 4.6 billion, 6.5% EBIT for Volvo Corp. in this environment and under these volumes, I think that's a very decent number. On top of that, of course, we have the high amount from Javis and Associates, more than 6 billion, of which the largest part is the listing effect from PoolStar, which we will go through now a little bit more in detail. As you know, Polestar started trading at the end of June 24th, raising around 890 million US dollars in gross proceeds. We invested a small part of that. And following the listing, we also invested 600 million US dollars in convertible preference shares that has also now been converted to common shares, which means that after these transactions, we've seen a dilution of our ownership, just a small dilution from 49.5% to just about 48%. And the Q2 effects in Volvo Cars, you could summarize, it's three effects mainly. One is the so-called dilution effects, which is based on our own share of the external proceeds coming in the listing. And the other two is then the net effect, the other two is the allocated earn-out rights that we have received, that all previous owners of Polestar received. that can be converted to common shares in the future in different thresholds based on the share price. In addition to that, we have a negative catch-up effect of previously non-recognized operational losses from Polestar since we have had a zero book value since Q1. The net of all these transactions are at SEK 5.9 billion and all effects from the listing has been accounted for in Q2. And what's also important I think to bear in mind is that Polestar will remain an associated company accounted for according to the equity method. So we will not have any volatility due to the Polestar share price. It's still accounted for at investment cost. These effects only sort of have a one-time effect on the book value of this investment. And you could also say the current book value is at approximately 6 billion SEC. But the market cap for our 48.3%, I think, looking at the current market price for Polestar, is between 90 and 100 billion SEC, you could say. So we have, considering that the listing, after the listing, Polestar share price had stood up very well. $10 per share that was the listing price. So all in all these effects based on the very successful Polestar listing and as a one-time then in Q2 and there is a lot more information in the interim report if you want to go through that more step-by-step from a more technical point of view. Looking at the EBIT development over time we see that excluding Javis & Associates we are quite stable over time. somewhat lower in Q2 based on then the low production due to the supply constraints and if we look at including Javis & Associates historically typically been lower due to operational losses coming from Polestar but now of course peaking in Q2 due to this one-time effect of the listing transaction as such. On the BEV we see a continuous high demand for our BEV products, which is very positive of course. And we also see an increase in the margins, both for BEV and non-BEV cars in the quarter, both compared to Q1 and 2021. that development you could say is two. One, we have an increase in raw material cost which we have been able to mitigate and more than mitigate then with especially price increases and lower discounts and to some extent also due to FX, especially US dollar and a small part due to subsidies in certain jurisdictions. but all in all healthy BEV margins on the back of the good demand. Liquidity, we are also, I would say, considering the turbulence in the market on a very healthy liquidity level at 71 billion SEC, including 14 billion of undrawn credit facilities. At the end of the quarter and if we look a little bit further into the cash flow we see the positive EBITDA of 15 billion including then of course the non-cash effecting Polestar's back effect. We have a positive net working capital mainly driven by receivables and especially that we have received quite substantial payments on Polestar receivables during this quarter. Partly offset by payables on back of the lower production and also somewhat increased inventory towards the end of the quarter due to the turning point in the production where we have increased during June. Other working capital, mix of things, time facing of different payables, some tax payments etc. Nothing out of the ordinary. And if you look at the investment amount, 13 billion SEK in the quarter, it's a little bit higher than the previous quarters, but that then includes the Polestar preference share investment of around 6 billion SEK, which means that the underlying sort of investments in intangible and tangible assets are roughly in line with previous quarters. And then financing, finally, it's of course the effect of the green bond issuance of around 5 billion SEC, offset by just normal scheduled repayments of financial debt. So all in all, a healthy liquidity situation. If we then look at the current trading, the order book remains robust. We see good demand. The overall semiconductor situation is improving, but we, as you know, had these specific shortages as well as the COVID-19 related shutdowns, which impacted both the first and especially the second quarter of the year, down 38,000 in production year over year. However, we saw a turning point in June, 60,000 in production, which is the best month for the year so far, and also actually an increase year over year, which is very positive. We also see that raw material have had and starting to have an impact in the earnings in Q2. Some raw material prices have come down from their peak but there is a certain time lag on that. So we will see a flow through of increased raw material in the second half of the year and especially also on the batteries, the electrified cars since battery raw materials such as lithium are still at the high price point. We do take pricing actions and have done so in order to largely offset the raw material increases and we expect to be able to continue to do so on the back of the good demand. The deliveries of electrified cars, we were at 7.3% in the quarter. We will be at double digit, is definitely still our goal for the full year. However, since we have had these supply constraints in Q2, we will see a decline in volumes of BEVs in the third quarter, which is you could say almost mechanics due to the things that already happened in Q2, but then we will see a strong growth in Q4 also on the back of the now installed increased production capacity and then we will be on double digit for the full year, but it will be first a decline in the third quarter and then a vast increase in the fourth quarter. And all in all we see that we will have a strong growth of both production, wholesale and retail in H2 which means that the lost volumes in the first half will be to the largest extent catched up in Q4. On retail sales we see a flat or slightly lower volumes for the full year. We will have a good increase in wholesale for the full year but since there is The lockdowns, especially in China, were persisting for somewhat longer and then there is just a normal lead time between production until retail sales, which means that there will be an increase in wholesale and flat or slightly decrease in retail sales for the full year. But of course, there are still uncertainties in the both macroeconomic environment, of course, the COVID situation in China, etc. But for the time being, at this point in time, we see a continuous high demand and a strongly improved production situation. So with that, in summary, that was what I had to share. And then Ron, please, and if you will come up again and facilitate the Q&A session.

Well, thanks very much, Johan. So because you take your seat and for the Q&A session, maybe we can also invite Bjorn Anval, our Deputy CEO and Chief Commercial Officer. Thank you. So again, I think good reminder for everyone, you can send in your questions either using the chat window at the bottom of your screen or you should also be able to see the call-in details. Use those lines and the operator will guide you straight into where we are and you can ask your questions directly. So maybe we can start with some questions that have already come in via chat and we have quite a few callers waiting in line. But this comes in from Steve Fowler from the Auto Express UK. Did you expect the issues with component shortages to have eased by Q2? And when do you expect a level of normality now?

Yeah, we signaled that, actually we signaled it in Q1 and we signaled it just at the start of Q2, that we had a specific semiconductor issue or one component that we knew would hamper us through the back end of Q1 and for most of Q2. And our analysis was that we would be through the back end of that by the end of Q2. By and large, that's exactly where we are. So we now have... semiconductor supply as we would expect to accelerate us through the back end of 2022. The supply constraints really are in relation to the pandemic lockdowns in China. Remember, Shanghai was locked down for over two months, and that had an effect on some of the suppliers who are located in those regions that supply components for us across the world, not just in our China factories, but they actually supply components to our other factories around the world. Specifically and disproportionately, that affected our BEV and PHEV production. And so, but now with the lockdowns completed in China, hopefully, all of those factories are back to full scale production and we're starting to see that flow through into the factories. And a great signal to that is the June volumes were incredibly satisfying because we saw those to be the highest of this year and in actual fact, even higher than compared to the same time last year. So by and large, provided that we don't head back into a lockdown situation in China, we're well set up for a strong end to the 22 year.

Okay. All right. So let's take our first caller then. This is George Galliers from Goldman Sachs. George, good morning.

Good morning. And thank you for taking my questions. Jim, I wanted to ask you about Polestar because obviously the investment in Polestar is something that you came into as CEO. And I think 20 days before you joined, Volvo did announce its intent to support Polestar with its funding needs. How do you as CEO think about the future of your investment in Polestar and what parameters or metrics would you want to see from Polestar in order for Volvo to potentially contribute incremental equity or funds to Polestar over the course of coming years? The second question I had, which also relates to Polestar, is do you see Polestar as a competitor? Certainly, if I look at the Volvo C40 and the Polestar 3, sorry, Polestar 2 in key markets such as Germany and the UK, These products seem to be offered at very similar price points and have a very similar proposition for the customer. So aren't they ultimately competing against one another? And what are your thoughts around that? Thank you.

Sure. Let me take the first part. So I think Polestar was incredibly successful in the D-SPAC. When you look at the 20% redemption rate and the current economic climate and the valuation that Polestar achieved in the capital markets, bodes well, as I said at the opening, bodes well for both electrification as a technology choice for consumers, but also bodes well for them as a company and as a brand. We have said that if Polestar, in terms of the funding, if Polestar want to go back into the capital markets to raise that, then we would, in order to avoid dilution on the Volvo cars front, that we would lean in on that as well. And Johan can speak more to the details on that in a second. So that's really the Polestar piece. In terms of the competition, I think it's different audiences and it's different demographics that the Polestar, let's say, target audience or target customer is aiming for. And so I think we can, yes, there'll be a level where there's probably an overlap of some competitive. That's not necessarily a bad thing because I think competition keeps everybody sharp and honest. But I think there's enough competition bandwidth and enough room within the swim lanes that allows us to target our target audience and allows Polestar to target theirs as well. So I don't see that as a major concern for us at this particular point in time. I don't know if you want to add some more on the Polestar.

I think you're right. SPAC was quite successful with very low redemption compared to others this year, which means that they received quite a large amount of proceeds and And we cannot comment specifically on Polestar's funding plans per se. They are a standalone company, but as Jim said, what we have said is that if that would include an additional capital raise, we will, as we have communicated, be willing to join that on a pro-rata basis to protect our shareholding and limited dilution. But there is no such... decisions or firm plans in the near future. It's more a soft commitment that we have already communicated.

Good. This question comes in from William Boston at Wall Street Journal. Could you give us more granular details on the raw material inflation, your efforts to mitigate it, and the overall impact, including on pricing?

This is really a question on timing on many things here. So clearly after the invasion of Ukraine, you saw a quite steep raw material inflation across most of the relevant raw materials for Volvo cars. The way that plays out and affect our financials is typically with a time lag between three and six months before you start to see it. And as Johan said, you saw a bit of that now in quarter two, you're going to see even more in quarter three. What we have to do to mitigate that is, of course, continue to work with our product mix, continue to work with pricing actions, which we have done, but also there you have a time lag, and right now that time lag is longer than normal, especially in Europe, where you have long waiting times to get your car. It could be nine months, could be 12 months, could be even longer. So it takes some time before that plays in. So playing that balance of the time lag on where the raw material prices hit you and the pricing actions you take is something we're monitoring very, very closely. Then now, over the last two months, you have seen raw material prices starting to normalize. On the more base materials, kind of aluminum, steel, and so forth, you kind of have much more normalization, whereas the battery raw materials, lithium and cobalt and so forth, are still quite high, especially lithium. But you start to see it trending downwards as well. So we continue to work with price and mix. It's important to find the balance of the time lag between those effects and that's something that we continue to work on.

I think the encouraging thing, Bill, is that we have the brand strength within the product lineup that we can, by and large, offset those raw material prices with the prices of the final product. And that's an encouraging sign for us as well. And that's across the range and pretty much across each geography.

I think we should also add that... We haven't seen a tampering or hampering of our order pace due to those pricing actions that we have taken. We still have a steady order inflow as of today. It's true across the world. So as of now, we get that question a lot. Aren't you seeing consumer demand weakening and so forth? As of now, we're not seeing it. On the contrary, the demand for especially electrified vehicles, the electric and the PF is very strong.

Good. We can go to our next caller then. And this is Daniel Rosek from Bernstein.

Hi, good morning. This is Daniel from Bernstein. Two questions, if I may. Number one, could you comment a little bit on the performance in the used car market? It seems to have weighed a little bit on your results in Q2. revenues seem to be down 31%, quite a stark contrast sequentially in year-on-year. So any insights what happened in the used car markets? And I guess also the subscription declined sequentially. It's probably more due to the availability. And then longer term, could you give us an outlook on kind of the platform benefits that are coming up? Maybe also the example of the XC90 coming in later this year. We're kind of wondering, right, between where we are today and your 10% EBIT margin, How much of that is op leverage of you being a bigger company and spreading the overhead and R&D a little bit more? And how much of that is actually GP improvement? I have to assume that the new platform gives you some advantages on cogs in the cars. And so any way to think about that improvement in the platform costs will be helpful.

So Daniel, let me take the first one. In terms of the used car market, yeah, we're seeing in the used, obviously the used car globally, and I'll just take a broader view on that, is being depleted. And of course, the prices are higher than we've seen in the past. And that, you know, we've benefited from that, I think, to some extent, because rather than pay excessive prices in the used car market, people are prepared to wait or seem to be prepared to wait for the car of their choice and buy a new car. The other thing on that is we're seeing a huge amount of growth within the BEV and PHEV range. So when people are waiting and buying those new cars, they tend to be buying a recharged or an electric car of some description. And I think we benefit on both those sides. So that dynamic I think will be around for a while just because of the shortage of supply across the automotive industry. Then if we move to the platform question, the platform question I think is really interesting because the benefits that we get when we move to our next generation born electric and designed electric cars are huge in terms of the cost basis. These are cars which are built specifically for BEV. It's not an old ICE design that you've repurposed to be able to also include BEV technology. So we get everything in there, not just from the cost benefits, but also from the performance benefits as well. And so you'll see that new platform where we've got core compute technology, where we've got full connectivity, where of course we've got our own motors, our inverters, our own battery packs, the BMS that runs all of that. And we pour all of that in together, we control much, much bigger parts of that supply chain than in the past. And therefore we take out costs, but we also add benefit and take more control of the design of the product. And that's really what you're going to see when we start to release and launch some of those new BEVs, starting, of course, with the electric replacement for the XC90, which will launch Q4 this year.

And maybe just on your first question, the reason financially lower used car is purely a volume thing. We don't have used cars to sell. So it has a volume effect.

Yeah, that's helpful. Maybe, Jim, if I could follow up on the cost benefit and performance benefit. Are you able to put some kind of range around that? Are the cost benefits of a new platform on a like-for-like basis? Is that 5%, 15%, 50% better on a like-for-like car? And in performance, how far do you get on electric performance? What's your kilowatt hour per 100 kilometers you're targeting with these new cars?

Yeah, so in terms of the performance benefits, The design that we've put in place allows us to, and we've said this pretty openly before, allows us to get to cost parity between ICE and BEV. And we feel we need to be there by the half decade because at some point in time the subsidies will run out and you don't want to be relying on subsidies. So we need to get to price parity between ICE and BEV as quickly as possible. And there's a few things which help. us get there one is the design of the vehicles themselves two a large proportion of that are the the big units that drive the bomb costs so the motors the inverters and of course the batteries we used to buy in the motors we're now making them ourselves the same with the inverters and of course we've done this jv with Northvolt that allows us to really understand battery technology and battery production and that's going to help us take out cost and drive some efficiencies as well as logistics and CO2 efficiencies rather than bringing in batteries from the far east we're bringing them in from next door when we build that factory here in Europe and so when you combine all of those factors together then you start to get price parity with ICE and that's where we need to be. So there's basically three other things which are maybe worth mentioning at the same time. So if you look at the technology around batteries and charging technology, then of course we're moving to an 800 volt system that's going to allow us to charge much quicker. We're moving to our own battery technology as well. Charge infrastructure is becoming more prevalent in most parts of the world as well and all of this is pushing towards BEV adoption and therefore as you get more BEVs you get more leverage and of course that helps us reduce cost as well. So that's really the dynamics that we see from our side, Daniel.

Okay, thanks for those questions, Daniel. Next one comes in from Autocar in the UK. What will Slovakia's contribution be to overall volumes? From a manufacturing perspective, we announced the Slovakia plant, so how much will that plant contribute to Volvo Car's overall volumes going forward?

So maybe let's just start with the purpose of the Slovakia plant. It will be 100% EV. So that factory has been designed and purposed for 100% EV. That means you can design it very differently from car factories which are repurposed to do EV. So again, we're going to wring out the efficiencies on that. Not only will it be purpose-built for EB, it will also incorporate all of the latest Industry 4.0 technologies, which allow it to be extremely efficient, and it will be carbon neutral from the get-go. So those are three key elements to that investment in itself. We also have enough land there that should we choose to do so we can actually put a battery factory on the same piece of land so that again that can drive efficiency. We haven't made the decision to do that yet but we are future proofed let's say should we decide to go in that direction. The scale of the factory will be able to produce 250,000 cars in its initial footprint and we have the option with a parcel of land that we have to double that production should we choose to do so as well. So that's a big investment for us in the future. I think it bodes well for the confidence that we have both in terms of our growth potential but also BEV and the potential of BEV not just in Europe but globally.

Thanks. Next question comes in from Barclays. Given the increased threats of gas supply disruption in Europe and primarily in Germany where some of your large suppliers are located, what contingency plan does Volvo Cars have? Have you been looking to increase inventories of parts?

So there's two questions actually within that question. So first of all, the gas supply. Our factories are biogas, so we're not dependent on Russian gas supply. But having said that, we do have a lot of suppliers who are not in that position. So we have one eye on that, and that could potentially cause disruption within our supply chain. But if you look at the bigger supply chain architecture, we have said for a number of years now that we are becoming more distributed in terms of our supply chain architecture, which means that we say, make what you sell, source what you make. And so we've been continually bringing in more and more sub-assemblies closer to the manufacturing facilities where that makes sense. It doesn't make sense for every single component, but where that makes sense, we've had that strategy of make what you sell and source what you make, and we'll continue to accelerate that. A good example, of course, is the Northvolt investment and bringing batteries right on the doorstep of the factory itself. But supply chain architecture in general is changing. This just-in-time process that we've enjoyed for decades now, when there was frictionless trade across the world, that time has gone and people are now re-architecturing their supply chains to make it more resilient. We're doing that. It won't happen overnight, it will be a journey, but we've already started that. And again, the Slovakian piece is a good point to that, as well as the battery factory that we've already announced.

All right, so we have another caller then. Let's take Agnieszka Vilela from Nordea. Go ahead with your question, please.

Thank you. And thank you for providing the detailed EBIT bridge for Q2. I just wonder what you think about the profitability drivers for H2. and I wonder in what direction will your margin move from the current 6.5%. So if you could comment on your expectations for the kind of volumes impact, mixed impact, also impacts from FX on the current spot rates and then the net impacts from the raw material prices and your pricing.

Yes, thank you. As we said, we expect volumes in terms of both production and wholesale and retail sales to have a strong growth during the second half. We will see also a continuous effect of the increased raw material prices that we have seen starting coming through in Q2. Now we'll continue into Q3 and Q4. And we will also continue work with pricing actions. As we said, we do not specifically guide on profitability for the second half of the year. So that's my maybe short answer.

Maybe just on the FX, assuming current spot rates, if you could guide us for any hedge impact or the contribution to EBIT coming from the spot rates.

The FX effect that we showed in the numbers are including hedges, but without quantifying, of course, with the current US dollar rate, for instance, the FX is a positive thing for us, but we do not guide on quantifications.

Thanks. We have another caller, Jose Asumendi from JP Morgan. Good morning, Jesse.

Good morning, everyone. Morning, Jim. Just a couple of questions. Can you just remind us again, please, of the overall investment for the Slovakia plant and the figures that you disclosed. Does this include also the battery investments? That'll be the first one. Second, can you comment, please, on direct sales to customers? Where do we stand there? So first half, truly true, and how is that progressing? I remember this was one of your, I think, you know, abilities to transform the business quicker. So we'd love to hear that on direct sales. Three, please, in time to CapEx, how do we think about this metric? There was a, you know, we were starting to see it rising on a quarterly basis. Is the Q2 figure maybe a good number to think about the quarterly progression to Q3, Q4? Oh, great. Thank you.

Okay, let me just clarify on the Slovakia, then I'll hand over to Bjorn on the direct sales. So Slovakia factory, I think I've understood the question correct, Jose. It was around, does the 1.2 billion investment that we've communicated include a battery factory? The answer to that is no. We haven't made the decision on whether we will put a battery factory in that facility or not. We'll make that decision probably sometime early in the year. or sometime in 2023, we don't need to do that right now. But the 1.2 billion investment that we've signalled so far is only for the car production.

And on direct sales? And on direct sales, yes, right. That is an important part of our strategy going forward. And I think to put a bit of context around it, what we're really after here is to deliver a much better consumer experience per cost it takes us to deliver it for us and our retail partners. And when we talk about online, we should also be very, very clear. What we're after is an omni-channel experience that's being delivered by us and our retail partners together. That's really what we talk about. In order to do that in a great way, we need to invest in the right digital systems, and we also need to work with a retail partner to make sure we work in slightly different roles, but together to deliver that consumer experience. And that's progressing quite well. We have now implemented, as you know, the Care by Volvo solution, which is more targeted as a kind of B2C offering. And we started now in the UK and Sweden and Germany and so forth to sell also not not just the subscription, but cash and other offers direct to consumers in those countries. What we have implemented during the last quarter now is also a solution to handle the B2B, the fleet sales, which is a big and important sector in Europe. We handle the small medium enterprises now with a solution that's implemented in Sweden and in the UK. And we're building out now the solutions to also handle larger fleet customers as we speak. I spent last week in the UK with some of our retail partners there and for UK we're planning to make this full transformation into a quite different setup during next year when we then have the right digital solution in place and we're agreeing with our retail partners how we're going to play this well together. So it's progressing well according to plan.

And on your questions on investments, as you saw in Q2 we had the additional investment in Polestar, in preference shares in the second half of the year, we will have some effect of the previously communicated so-called pre-IPO transactions that will require some investments during the second half of the year, which then will increase that amount somewhat. But other than that, we do not guide specifically on it, but there will be slight increase, I would say, due to the fact that we have some of the investments, so-called pre-IPO transactions previously communicated during the second half of 2022.

Thanks. Another question from Steve Fowler once again, that Volvo has an impressive share of the subscription market, but is the overall subscription market growing at a level you expected? Our readers tell us that it looks like an expensive way to own a car. So...

Our consumers say it's a very convenient way to access mobility. And we see it has a very strong demand. We also see that it, to some degree, attracts a different demographic. The average age of our subscription customers is 10 years younger than our other customers. So clearly it's a signal that the way consumers want to access mobility is changing. We see it as a core part of our offering going forward, but clearly when someone wants subscription, wants someone to buy the car outright, someone wants loan structures to finance the car and leasing structures, and we'll be able to provide all of those different structures. But the flexibility is something we see a need for and continue to focus on.

Good. Let's take another caller then. This is Daniel Schwartz from Stiefel. Daniel, go ahead.

Thank you for taking my question. First one is on R&D capitalization. It seems high compared to previous quarters and compared to peers. Could you say how this will develop in coming quarters? What are the peak in Q2 and what would you consider a normal rate over the development or production cycle? Second question would be on Polestar. Just for my understanding, you explained the one-off effects from the D-Spec transaction. Was there also a positive or negative contribution from Polestar's operating business in your Q2 results? And my third question would be, you mentioned that third-party manufacturing had a negative impact on the gross margin. Could you quantify that and how will this develop over time? Will there be more dilution due to higher volumes produced or less due to scale effects that you generate?

I can start. On the capitalization rate, we have seen that it does vary over time. It's hard to say that it's something that is at an exact point that is normal because there are projects in different phases and there are also spend on different projects vary a little bit between the quarters. So if there is a higher rate or a lower rate, it's hard to say that. You should probably see that a little bit more over time rather than at an individual quarter to say what is a normalized level because it can vary quite a lot between quarters. So that's sort of my answer on that one. On the Polestar operational result, It's actually the case that we have not shown that explicitly in this one-time effect. We show it on a net basis, which is simply that Polestar is a listed entity and they have not yet released their half-year numbers, which they will do later. So we cannot say that due to the Polestar being listed and not have released the numbers themselves yet. So that we will have to wait for until they do in August, I think. And on the third-party manufacturing, the volumes are not that big, it's not a very big deterioration of the margins, but of course there is a contract manufacturing agreement between us and Polestar with a certain margin. We do not comment on that margin specifically, but there is a deterioration, Higher volumes, it might increase a little bit. On the other hand, you get synergies from higher volumes as well.

What one can say then, though, is the full-space related part is of course this is a contract at arm's length at market terms. So it's, I would say, quite normal terms for contract manufacturing within the industry. That's the guidance. Absolutely.

But in the current high price environment, it's still somewhat lower than, let's say, normal wholesale. But of course it's on arm's length and so on.

Good. Thanks for this question, Daniel. Next is from Michael Knorr, a reporter at Automobil WK in Germany. Seeing the strong efforts of the EU to establish a fuel cell economy, will Volvo Cars reconsider its strategy and eventually offer a fuel cell-based electric car?

Yeah, for us to comment on that at this stage would be too early. We're constantly looking at new technologies. Some of that new technology is very far into the future, some of it is much more immediate. We tend to get very focused on certain technologies that will deliver, we think, differentiated benefits to Volvo cars. But at this particular point in time, we don't have any comment on that specific type of technology.

Good. Next question from Rob Merton from Long Term Capital Management. To what extent do you expect increases in labor costs following high levels of inflation to weigh in on your results? And when will you see the first impact? Johan, you want to start?

Well, to start, we have a very large part of our total employees in Sweden where the salaries are set based on central negotiations. compared to other jurisdictions where there have been demands for, I don't know, eight, 10% salary increases. That's not what we foresee in Sweden. Further, even if it would be an increase, I'd say compared to, raw material or some other parts, I think it's still less of a problem for us than heavy increased raw material, just as a hypothetical example, I would say. Of course, we will follow this, but we are not particularly worried about salary cost per se.

And I think just to pivot on that, if you look at the raw material prices that we came on, which were much more considerable, I guess, than the salary increases, by and large, if it's driven by underlying inflation, the costs are driven by underlying inflation, by and large, we've managed to offset those additional costs by pricing the final product.

Felix Page from Autocar. When will output be back to pre-COVID levels? And how are you mitigating the impact of the war in Ukraine?

I can take that. we believe peak pain in the supply chain. We were beyond that in beginning June. So I think we are back to pre-pandemic production levels. So we were back in June, we are now in July, and we see that as the base case for the remainder of this year. The underlying semiconductor problems has been eased to a high degree. The lockdowns in China has been eased. Clearly, there's lots of bottlenecks and constraints still there, but we are back to pre-pandemic production.

And if you're looking for a proof point on that, if you look at the June production output, June production output was the highest this year and actually higher than last year when you compare it to year over year. So that, I think, indicates that we've hit that inflection point and that we're now back into... pre-COVID, whenever you started to measure COVID from, I guess, from pre-COVID levels.

I think it's an important point because Volvo is about growth. I mean, we were growing double-digit for five years consecutively up until the pandemic. Now we have been flat since the pandemic. And that's not what our ambition is. Our ambition is to come back to growth quickly. So this is an important point for us.

Maybe to add then that we saw, as you say, the turning point in production was really in June, and then the real turning point in retail volumes will be, let's say, in August then and forward, because there is a certain time facing between production and retail sales. But from a production perspective, June was the turning point.

And perhaps the second part of the question, maybe we've touched upon it already, but how are you mitigating the impact of the war in Ukraine?

I would imagine this is more on the... We talked about that at humanitarian total tragedy what's happening in ukraine from a business perspective volvo isn't directly affected to such a big degree we are affected by that it accelerated raw material prices that we already talked about but our business in russia and ukraine is is very limited we froze the business to china to russia immediately as the war broke out that has had a very limited effect on our business.

I think we had just over 1% of our sales in Russia and Ukraine last year, and we have not had any material financial effects from those markets so far.

Another caller, Dorothy Creswell from BNP XM. Dorothy, go ahead with your question.

Yeah, hi there, and thanks for taking my question. I wondered whether you had any further details around how you're going to monetize the SPA2 platform's Level 3 autonomous capability. Is that going to be via a subscription model, or is the case that Mercedes with an upfront charge? And is there any update you can share in terms of regulatory sign-off for Level 3 for Volvo?

Thank you. I think the short answer is stay tuned. Of course, as we unveil the cars and launch the cars, we will give you a lot of answers to those interesting questions, but let's stay tuned and we will reveal that as part of the car reveal.

This question comes in from Eric Lowe. Do you have any plans to take actions in China regarding lockdowns to decrease the problems there? I guess perhaps question more about de-risking our business in China and supply. I guess that's what Eric means.

Yeah, and as we touched on slightly earlier, so we'd already started the strategy of Make what you sell, source what you make. And that's, you know, we're two years into that already. So we've already looked at supply chain resilience in a pretty deep and meaningful way. And what makes sense to have closer to the factories in the regionalised basis and what makes sense to have more of a global supply chain feeding all of the factories. That work will continue, obviously, as we bring out new models, as we bring out new technologies, as we bring on new suppliers. You need to constantly look at that supply chain architecture and how those new suppliers fit in to that satellite network and and it's something which is very much top of mind. I think we've done a pretty decent job as we said from a semiconductor point of view we were we were caught by one semiconductor and which was which actually wasn't so wasn't so much supply related it was it was more in terms of the management of that particular supplier by one of our sub suppliers. So I think we're in reasonably good shape I'd love to be more progressive in that and we're working with the teams to see how we can accelerate that further but it's about supply chain architecture.

All right so maybe we have a few minutes maybe a couple of one or two last questions then this comes in from Alan maybe we've addressed parts of it but let's maybe re-clarify given the importance of the Slovakia plant in your EV strategy can you provide some sense for the capex plan and funding strategy for the manufacturing plant?

I'll start with the factory, then maybe I'll hand it off to Joanne. So, again, just to reiterate, this factory, in fact, we've already increased our BEV production, which is coming online right now as we speak. We had signalled early in the second quarter that we would bring on 150,000 units of BEV production at an annualised run rate from around now. And I'm pleased to report that that investment and those... and that capacity is now online so we've increased our BEV supply as it stands today that's which is great news because we're seeing a huge demand in that side of the business and then from a Slovakia point of view of course that gives us a another booster on BEV production that'll take a couple of years before it comes online but you want to talk a little bit more about the CAPEX investment?

Yeah, I think the total investment is around 12 billion SAC, of which I think 3 billion is funded or in different... grants and subsidies. And then, of course, this is a part of our long-term funding plan, including, for instance, issuance of green bonds, et cetera, for these investments in electrification and this new plant as well.

Good. And perhaps we can end with this final question then from Felix Page. Will the entry point to Volvo's range ever come back below £30,000?

Well, we've signaled already, so we have the new electric version of our current XC90 product, which will launch in the fourth quarter this year. We've also signaled that we will be launching a smaller SUV next year, so in 2023. And that's a really important part of our product lineup, because that gives us then the smaller SUV, the 40, the C40, the then obviously the 90 and then of course eventually the fully electric replacement for the 60 as well. So that's a really nice lineup for us and back to one of the points which Bjorn made earlier which I think is a key part of our overall strategy. When you offer subscription-based ownership on a lower priced but still premium product. And you can reach a much younger demographic. And remember, Gen Z is coming in now to own the buy box. So they're coming into first time buyers. We think with that combination of a lower priced premium product, which we'll release next year, as well as consumer base, but we know that we lower that age, then we'll bring in that new demographic, maybe for the first time in a long time to Volvo as a customer. And then hopefully, if we treat those customers right, we can satisfy those customers for life. as they trade up as they need a second car and so on so that entry point car on subscription based ownership probably bought online because think about it if you're buying a car on subscription let's say three six months subscription and you're buying a a more affordable price then and we have a strong brand so we're known in the marketplace there's much more confidence in the market then for people to say I'll buy online because I'm signing up to a much lesser commitment in a lower priced vehicle.

And I think that's a big pivot point which we are well positioned, I think, I don't know if you want to... I think we can have the dynamics of selling smaller cars at the lower price point in premium automotive. I think that's changing a lot. It used to be pumping out a lot of volumes on these lower cars with the belief that by getting young customers to buy this car, I get them into the brand forever. And also, by the way, by selling all these small cars, I get the lower CO2 fleet average so I can sell the big cars and make some money on them. We're not in it for that logic. It's a totally different logic. Our CO2 fleet average with our full electric car is going to be fine, so that's not any reason why we do this. We're still going to sell a premium offer, and we want to take care of these customers, not just by selling the car, but having a much deeper relationship with them. So it's a very different, I'll call it smaller car, lower price point, premium play that we intend to play than how Premium Automotive has played it in the past.

Good. Hope, Felix, that answers your question. And with that, we need to wrap this. Jim, Johan, Bjorn, thanks for your time. And thanks, everyone, for tuning in. Have a great day ahead. Goodbye.