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.