Volvo Car AB (publ.)

flagship fully electric SUV, the Volvo EX90, on November 9. And that is another milestone for the company as we approach the back end of this year. We look to share of recharged cars. That has been affected by the supply constraint. So we saw that reduce from 31% to 25%. However, when you look at as those supply constraints start to free up within the third quarter and we look at September in isolation, then we actually see that bed sales accounted for 13%, which is the highest in the history of the company. And our overall recharge is tracking to 31% when you look at September as an isolated month within Q3. And of course, that bodes well for ambitions for Q4 and beyond. And with that, let me hand over to Johan Ekedal, who will take us through the financials and a bit more detail. Johan.

Thank you, Jim, and good morning. Okay, let's then go through the financials a little bit more in detail. Retail sales volume's down 8%, which is then driven by the production constraints, especially earlier in the quarter, based on the lockdowns for COVID in China, the power cuts in China on the heat waves, and also continued supply constraints in certain components. However, we did see actually a turning point where we had the year-over-year increase in retail sales in September. So this has been gradually improving also during this quarter. Revenue, very strong, 30% up. strong pricing on the back of the good demand, strong mixes of cars. We also have seen a tailwind on FX, especially on the US dollar, and also that we have an effect from the contract manufacturing of cars than for Polestar. EBIT at 3.5 billion or 4.4% in the quarter, a decrease from last year, which is then driven by higher cost for raw material especially on electrified cars and on the lithium prices but also on high cost for spot purchases of semiconductors and also a higher euro effects. We'll come back more on EBIT just shortly in detail. Cash flow Positive operating and investing cash flow in the quarter, 3 billion, which is also somewhat of a turning point here compared to the previous quarters this year. So revenue, again, very strong, up 30%. We have an effect from increased wholesale volumes during the quarter. We do see continued good pricing on the back of the high demand. We do see a positive sales mix effect. And also a very strong FX, especially on the U.S. dollar, which is then contributing with almost 6 billion. On top of that, we have contract manufacturing for both are contributing 6.5 billion in the quarter. So all in all, strong revenue. EBIT then, we also here see a positive effect from volume and sales. mixes and also on pricing. FX virtually flat. We have a positive effect on US dollar, but we also have a strong Euro rate, which then makes this offset, you could say, to more or less flat. In addition to that, in this quarter, we have seen increased costs for raw material and freight. an effect from the flow-through of the high spot prices during the second quarter, where we do see a certain lag in time, and also continued high prices on battery materials, especially on lithium. In addition to that, we have seen high costs for spot purchases of semiconductors during the period, and we also have some more temporary effects on the geographical mix, which is then especially a lower U.S. mix unusual due to certain logistics issues towards the end of the quarter. That is something that we now normalize during the fourth quarter. And including Davidson Associates, EBIT at 2.1 billion, which is then affected 1.5 billion of results from Davidson Associates in the period. Epic development over time. As we see, we have been quite stable over time. Then we have this big uptake in Q2, including Davis & Associates, which is then, of course, driven then by the effects from the listing of Polestar. And then, as I just showed, we see a decline in the third quarter for the reasons just mentioned. Then margins, a deterioration during the quarter. which is driven by several things, one being then the increased cost for the raw material, especially batteries, and driven by the lithium prices. But we also, and that stands for say around half of this effect, but then we also see some other more temporary effects, especially on FX, also driven by the low US mix that I just mentioned, and also the U.S. dollar effects, which further affects the prices for batteries. And when we now go forward into the fourth quarter, we will see a more normalized geographical mix, and we will also see price increases further flowing through into the fourth quarter and also even further into 2023. On liquidity, we are at a solid liquidity level. We have a positive free cash flow of $3 billion in the third quarter, mainly driven by a positive working capital development now in doing this ramp up phase of the gradually improved production situation. We see also included in investments is $3 billion of what we have called pre-IPO transactions, which in this case is a shareholder loan to our JD with Geely or Bay in China. So the underlying operating free cash flow is actually even better. So with that short financial summary, I will be back to Jim to take us through the summary of the quarter.

Thanks, John. Okay, so end summary. The road to good remains robust and stable across the globe. Overall semiconductor situation is better, but the continued lockdowns in China caused by COVID and some of the heat waves have impacted our production. If we look at production for the year, especially if we're focusing on Q3, then production at 145,000 units is up 54,000 units year over year, with September dead production being the highest in the history. Recharge production in Q3 was 37%, 14% of that was fully electric. The effects of the lithium prices will continue to affect or put pressure on our raw material and overall prices as well as gross margins as we go into the fourth quarter. As we continue to put in cost measures to focus on productivity and efficiency to offset some of those additional costs. The additional pricing actions that we'll put in place are further to materialize in Q4 and beyond. And again, that will have a positive effect. Now, assuming that there is no further major supply chain disruption, production wholesale and retail are expected to grow in the second half of this year. However, we do expect a slightly lower wholesale volume by 2021. And this means that we'll be tracking towards double-digit dev sales for the full year as a regular client. despite all the uncertainties and they remain high we are fully focused on and remain fully committed to our long-term strategic objectives as outlined earlier in the call so one last point and that is the ex90 reveal in november 9th this is the reveal of our first spa 2 product which will be a flagship ex90 that we are excited to bring to the public and announce that on November 9th. With that, I will hand over to Ron, who will now take us through the question and answer session.

All right, thank you for that, Jim. So we are all settled in now to kickstart the Q&A session. For that, let me invite to join Jim and Yuan. John Hernandez, our head of industrial relations. Good morning, John.

Good morning.

So let's just do again to quickly go through how you can participate in the Q&A session. You can do so in two ways. You can send in your questions via chat using the chat window that you should be able to see at the bottom of your screen. Or you can also see the QR code. That's what you should use if you want to call in. To ask a question, remember to press star 1 1. So with that, I think we have a lot of callers and a lot of questions already. So let's get this started. So the first, let's take a caller. This is George Galerias from Goldman Sachs. Good morning, John. What question do you have for us?

And thank you for taking my question. So the first question I had was just on semiconductors. You mentioned that the constraints are continuing to improve gradually. Could you talk a bit about what, how much constraint you see in the fourth quarter and also the first half of next year, and also what you're seeing in terms of semiconductor pricing. And then with respect to semiconductors, could you just remind us how you purchase them? Do you purchase them directly from a tier one supplier or indeed a semi-manufacturer, or are you buying them from within the broader Geely group? And then the second question was just with regards to the loans at Orobee. Could you just confirm, was that planned and as described during the IPO process, or is that an incremental loan above and beyond what was previously communicated? Thank you.

Hi, Josh. Maybe I'll start off and... I'll answer the first two parts of your question and then I'll hand over to Yolanda who can take you through the conversation about oral beds. So semiconductors, what we've found increasingly through the course of this year is that semiconductor availability has become better. But however, as we approach the back end of the year, we still see sporadic supply constraints. And where that happens, then we need to play in the spot market in order to secure those parts. the trend line is good and so much we are we are having to play less and less in the stock market and purchases but that is still um prevalent right now in q3 i expect that to be the same in q4 and then hopefully as we go into 2023 we see that trend line continue and we need to spend less and less money on spot market purchases for semiconductors an answer to your question in terms of how we buy those it's a mix On some semiconductors, we buy directly from the manufacturer. On some of those, we buy those semiconductors through a sub-assembly. So we have sub-assembly components that use those semiconductors. And in that case, we rely on those manufacturers who are doing the sub-assembly to buy those semiconductors and then install them in the sub-assemblies before shipping them to Volvo. We're also leaning in on that as much as we possibly can. and helping those sub-assemblies companies to actually procure the silicon and the semiconductor where we think we can help. And in some cases, that's where we make the spot purchase buys. We secure those semiconductors and then we ship them to the sub-assemblers and they produce the final product or the final sub-assembly and get it to us. This isn't related to Geely. We do all of this on our own through Volvo procurement. Should probably just add to that in that in order to build the robustness of the supply chain architecture and infrastructure, we are adding more and more analytical tools to our supply chain capabilities so that we get more visibility and a bit more granularity quicker in the process to try and alleviate some of the because obviously the sooner you see these issues the sooner you can react and either you're in the spot market quicker and therefore paying less money or indeed you can you can actually navigate past that without having to go into the spot market the flash place. Hopefully that answers the question and I'll hand over to Johan so he can talk about Oro Bay.

Yeah and regarding the question on Oro Bay, the short answer is this was fully in accordance with the plan on the financing of Oro Bay so it's nothing incremental on that so that's the short answer.

Great, thank you very much for very clear answers.

Thanks for those questions, George. Let's take another one that comes in through chat. This is by Voldemar Lenrock. And Voldemar is asking, how does the stop in production in Tushland and next week affect the production as a whole? Does it lower the target for the full year?

Yeah, so the stopping production in Tushland, obviously we've known that was coming, so that's already baked into the full year numbers at this particular point in time. And of course, if you're familiar with the manufacturing process, it's sometimes easier, rather than to run the facility on a half day basis or a sporadic basis, it's sometimes much more effective and efficient to close the factory for a couple of days until you have sufficient supply of components and then run that at full speed which is generally when you can you can run the factory in the most efficient manner so that's the that's really the reason behind the reason for the closure and also uh just to give you clarity that's already baked into the year in numbers we don't expect to see any more closures and unless there's some news of the sovereignty that we don't see right now and between now and the end of the fourth quarter

Thank you. Let's take the next caller. This is Matthias Holmberg from D&D. Good morning, Matthias. Go ahead with your question.

Thank you. First, I would be interested to dig a bit deeper into the quite high volatility in revenue for Bevacor, that you showed on slide 12, and also the quite significant drop in gross income, which I think began from 71 in Q2 down to 21 now in Q3. A big surprise to see prices come down sequentially when you talk about price increases, so perhaps there's something I'm misunderstanding here, and also perhaps a comment on how quickly you expect to be able to reestablish the gross profit or gross margin for the dev segment with your current visibility on selling prices and costs. Thanks.

If we start with the Q3 then on dev, it's several different reasons. One being, of course, higher cost for raw material, especially lithium, that is currently on a very high level. So that has an effect, I would say, pretty much half of the effect that we see between Q2 and Q3. Then in Q3 isolated, we have had some, let's say, more temporary effects, which is a mix of effects and geographical mix of sales, which means that we do buy batteries in U.S. dollar, but have had an unusual low U.S. mix on the BEV sales during the quarter, which means that you have an accelerated FX effect due to that fact. So the drop that you see in revenue is not by any means that we have lowered prices in absolutes for the BEVs, it's rather an FX effect as well. So I think looking forward, We will see a more normalized geographical mix into Q4, which will offset this effectively in Q3 somewhat. We do see, however, still, of course, high raw material prices short-term based on the lithium prices, et cetera. But we do believe that, and so does the market and the intelligence that we have, that the lithium prices gradually will come down. They are at the peak right now. So I think that We will short term still see probably high raw material prices, even though we have some other effects that will be not as severe in Q4 and forward as we saw in Q3. We will also see some additional pricing increases from flowing through into Q4 and even more into 23, especially in Europe where we have made price increases. earlier during the year, but due to the long order book and the lag in time, if you will, we will see a gradual flow through of that into Q4 and then even more so beyond that. Thank you.

If I may, just a quick follow-up or actually a second question. I'm a bit interested to hear more in how you're thinking about still maintaining the mid-decade addition of 1.2 million cars sold and more precisely what you mean when you say that you're tracking towards them. I mean, when I look at IHS and we cut 2025 global forecast by almost 10% just this year, I'm a bit curious here what market assumptions you use in order to reach the 1.2 million or if you seem to assume that you will be able to compensate for the weaker market with even more market share gains. Thank you. Yeah, great question. So two parts of that. First of all, we need to look at demand. The demand for our products right now are incredibly strong. Perhaps more importantly, the demand for our bed and recharge products, but especially the bed products are strong. And actually we see that as a global phenomenon. If you look at the whole industry as a whole, from January to August, ice demand has been down by 19%, whereas bed demand has been up by 74%. That's just an industry-wide number. And that's important for us because, of course, our strategy relates to taking more market share out of ice as we build up our ice portfolio. So far, we've really only had the XC40 and the C40 product in our bed range. we'll announce the ex90 in a few weeks time and then of course we're committed to releasing a brand new dev product every year until the mid-decade for the next four or five years so that and its own as well and then next year we'll be related to that we will release a new a smaller suv which we expect to be a good volume product for us as well when you add all of that together then you get a whole range of products from the smaller SUV all the way up to the flagship EX90 SUV. You get them in the best format and you get them released before those mid-decade ambitions of 1.2 million cars. In addition to that, you get an explosion of demand into the ice, sorry, into the bed product category. And those combined, I think, with the technology that we're bringing to the market gives us a pretty good shot at helping with Mid-Deckie's ambitions.

Maybe to add to that as well, I mean, we don't think that we earned the potential recession I mean, we've seen the supply being restrained over the last couple of years. So I think that we've not only included market appreciation in our ambition to grow, but one should bear in mind that's on the absolute level where we start at the moment, I think.

Yeah. And I think just to put it on that, there's been, because there's been a lack of supply into the market, the people that are coming into the market now are probably going to come in on the bad side. because that's the new technology, that's the technology that they're going to invest in for the future. And that's where we'll have the most confidence, they'll have less residual value risk. So all of that, us having products placed at the smaller SUVs all the way up to the flagship SUVs and having a good range of products in a market which is expanding in dev, I think positions us pretty well to meet those mid-decade ambitions. Great, thanks for that comprehensive answer.

So let's take another question via the chat. This comes in from in the target industry. Why has online sales decreased from 8% to 6%? And here's another question. How will the rising energy prices affect all the cars?

If we start with the online sales, we have, as you say, 6% in the markets where we have launched that. I think that is to a large extent an effect of the the production and supply situation for several reasons. One is that we have had lower inventory during this period, which means that it's not really supporting in that way the online business model. The second is actually the prioritization of cars. When we have a limited supply, we have actually prioritized other channels to some extent. where we have revenue recognition and cash flow due to the limited supply. So it's to some extent deliberate. So we are still comfortable that we will see a good growth in that channel going forward when we have a more normalized supply.

Just to be really clear on that, Karin, so we have we could have higher sales than 6% quite easily. We chose to push those vehicles to different channels for financial purposes to become what we think is the right thing to do. But there is demand that is coming in on online sales, which is much higher than the 6%, even in the limited markets that we are launched in online sales capability.

And there was another question on the rising energy prices and how that could affect all the cars.

I think that there are two things. For our own operations, of course, we will see an increased cost for energy, but that is not by any means the biggest cost we have. So I think that that effect is somewhat limited, even if the prices are high. But of course, we do see indirect effects rather on effect on raw material prices, et cetera, which is, of course, to a large extent also driven by higher energy prices. And then we have seen in the quarter that we have had higher prices for raw material. But in our own operations, the exposure to energy prices is not that significant.

Let's take the next caller. This is Jos Asimundi from J.T. Morgan. Good morning, Jos. Go ahead with your question.

Thank you, Jose, J.T. Morgan. Thanks very much. A couple of questions, please. Can you talk a little bit your older book, whether you're starting to see maybe the economic uncertainty that we are facing.

Is it denting the other backlog or you see some uncertainty? And can you also please comment on the level of inventories that you have across different regions? The first one. Second question, please. On the profit bridge, the other bucket is quite substantial.

Can you provide more color on the other category and how should we think about this category

into the fourth quarter, please. And then, James, can you please comment, like, overall, how do you think about managing pricing power into next year and maintaining, you know, the strong level of pricing power and low level of discounts structurally strong for the next decade? Thank you. Hi, Jose. Let me take this off. I'll put the first part and the last part of that question and then maybe Johan can speak about the inventory levels around the globe. So it's a great question because we look at that ourselves. So when does demand with rising energy prices, rising inflation, when do you start to see consumer sentiment dropping off and when do you start to see large order cancellations or the new orders start to slow down? we're looking at that we're looking at that in a regular basis at this particular point in time here we don't we don't see any reduction in the demand and in fact what's really encouraging for us is that the demand for our bed and and our recharge products is incredibly high uh which is great because that's the future that's the strategy of our company is that we're adding capacity of course for for our electric products We keep a very beady eye on that reducing consumer sentiment, and at this particular point in time, globally, we don't see any softening of demand, and we don't see any large-scale cancellations of existing orders. So I guess that's the good news. In terms of the pricing, we think we do have scope for additional pricing power. We think the brand is strong and the brand attributes are working well in the markets that we're in. have raised prices already as you know and in fact as Johan alluded to not all of those price increases have yet came through the cost increases came through quicker than some of the price increases the reason for that of course is because we have a large back order book and so it's only on the new orders that we could leverage that new pricing so that will start to flow through in the fourth quarter and then of course into the first quarter as well next year so you'll start to see and and those higher prices kick in and some of the markets that that we put prices in later than the other market europe reacted quick and some of the markets were a bit more so that's that's where i see the pricing power and um and the demand profile you want to talk about the inventory levels across the globe yeah and and we we have i mean due to the the uh

production concerns we have had. We have been at very low inventory levels for some time. We have seen an increase in inventory slightly during Q4, which is mainly driven by production inventory, which is due to the fact that we are seeing a gradual improvement of production during the quarter. So that has increased inventory. When we see a gradual improvement both in production and sales going forward, I think we will see a gradual increase in inventory levels not for any other reason that they are at an extremely low level currently. So when things gradually normalize, we will see a slight increase in inventory. And in this quarter, we have seen mainly in production inventory, not in inventory of new cars mainly.

And there was another question on the profit bridge that if we could explain that a bit more. that led to the decline in the profits in this quarter?

Yeah, if we look at the profit this quarter, I think that we have a few main items. As we have said, we have had an increased cost for raw material, which is partly a flow through from the high spot prices in Q2, where we have seen the peaks in many raw materials. We've also seen a continuous high level on raw material for electrified cars mainly driven by lithium prices and batteries. We also have seen, as we've talked about, the high increased cost for spot purchases of the semiconductors due to the continued, although improving, supply constraints and also increased costs for logistics On top of that, we've also seen on FX that on revenue, we have a good tailwind on the US dollar, which is contributing quite a lot to our revenue growth. However, we also see an increased Euro rate, which has more or less offset that effect if you take it from a profit perspective. So on EBIT level, FX effects are more or less flat. Okay, those are the main effects. And in addition to that, if we look at from an FX perspective, in the quarter isolated, we also have, as I said, the lower than usual US dollar sales mix, which also affects this from an FX perspective due to the benefit we would have had on the high US dollar if that mix, and that will normalize during Q4.

All right.

Thank you.

We have another caller on the line. Let's bring in Agnieszka Vilela from Nordea. Go ahead.

Hi. Can you hear me?

Loud and clear. Go ahead with your question, please.

Perfect. Thank you. So I just wonder when it comes to your order books, how long are they today? So when can you deliver your cars, basically? And has the time to delivery expanded given your problems with the production to start with that?

I'll start with that and then I can add some details. So we don't actually release the amount of orders that we've got, and it's different in different regions, of course, and it's different across different product models. Again, I'm going to come back to the demand cycle piece. So even though we have increased our lead time, as we would call it, between order and delivery of the product itself, again, we've not seen any demand shortened or reduced as an extension of those lead time deliveries. And by and large, I think the industry has seen extended lead times as well. So maybe that's part of the reason for that. And whilst that's increased over the course of the last couple of months, now we're starting to get into a situation where we're starting to see maybe for the first time that some of those lead times will come down for certain models. And it is model by model and country by country. Of course, if you're manufacturing a product in one part of the world and you're shipping it logistically to another part of the world, then you need to bake that into the lead time. Whereas if you're manufacturing and supplying in the same geography, then of course that lead time becomes considerably shorter. So you need to look at a lead time by lead time and product by product basis.

Perfect, very clear. And then another question is on your new product, EX90. I don't know if you've been talking about the selling price already. I just wonder what kind of premium do you need to have towards EX90 given the fact that you have so much technology in the new product and in order to make this product profitable for you?

Yeah, no, we haven't released pricing on that yet. Suffice to say that we think that that product for the technology, the market is competitively priced. It's a super feat of engineering and innovation and we're excited to release that in a couple of weeks' time and we think we're very optimistic that will place that product to be very competitive in the marketplace.

Perfect. Thank you. And then the last one from me. I can see that the contract manufacturing the quarter revenues reached 7 billion. And when I look at the poster deliveries of 9.3 thousand cars, that would mean that the kind of contribution by car you get in the quarter was at about 700 thousand SEK compared to below 300 thousand before. Can you explain what is happening and what kind of assumptions should we make going forward? Thanks.

What I will say on that is that we don't comment on the specific margins on that. We have a contract with Polestar where we have selling the cars on arm's length. The margin in average on the contract manufacturing cars is slightly lower than on our normal wholesale, we also say that this kind of sort of mathematics is not necessarily showing the exact margin of the cost because there is a certain lead time between our production, our sales to Polestar and Polestar which then delivers to the market. So I would say it's more complex than just doing that mathematics. And I will not comment on that specifically. So I think the margins on the cars from us to pool star is it has been the same more or less over time during 2022 it's not that it has been any difference in in the um in the q3 and you don't have any kind of license revenues um special license revenues that that you uh booking this quarter or no nothing nothing material at all on license revenues this quarter no thank you

Just a reminder to all our callers to please speak to two questions so that we have others on the line who also get an opportunity to participate. So thank you for that. So let's take a question then that's coming from via the chat. With the high lithium prices, are we sure that electrification is the right technology for the future?

Let me start, John, and I'll come handle it. So at the end of the day, my opinion is that that technology wins at the end of the day. It usually does. In fact, I think you could say it always does. And when you look at the, we see that proof point now in the marketplace where we see ice reducing by 19%, we see beds increasing by 74%. That is a massive switch and even a year ago. And so when you have a technology which is quieter, which is no vibration, where there's less servicing for the customer, where there's less servicing cost for the customer, and where there's zero tailpipe emissions and it's much better for the planet, then that combination is a very very powerful combination that says that this is the technology of the future and these are the technologies that you need to invest in as a next generation mobility company So I'm increasingly confident that we have the right strategy. Yes, there's some lumps and bumps right now. There's a lot of turbulence. I think we could safely say that every industry in the world right now is suffering some kind of form of turbulence, given all between this dreadful war in Ukraine to increase energy prices, raw materials, inflation, COVID lockdowns in China, sending doctor issues. When you put all that together, that's quite a turbulent environment. And, of course, we'll have to navigate through that. But as you come out the end of this, and we will come out the end of this in a relatively short period of time, hopefully, as lithium crises start to stabilise as well, then those who have positioned themselves well and kept investing in new technologies for the future, I think, will be the stronger players in next-generation mobility. And that's exactly what we expect to be. And that's why I'm confident that this is the right strategy.

John? I think you're perfectly right that we don't think that the current high lithium prices are sustained in the long term. And with the launch of one-year electricity in the next five years, we are firmly on our way for the mid-decade ambitions. And we're also confirming our strategy of the fully electric car brand by the end of the decade. And I would also like to highlight that on the 10th of November, we have a capital market that we will address a lot of these topics in more detail. So I look forward to seeing you there as well.

Good. Thank you, John and Jim. We have another caller. This is Eric Goldrang from SEB. Good morning, Eric.

Thank you. Two questions. The first one is on the raw material comment to Q4, just to make sure we get it straight. You talk about partial improvement on raw material costs, lithium still high.

The total raw material cost per car, will that be up or down in the fourth quarter? And then the second question, and perhaps a topic that you'd return to on the CMV, but still, in terms of securing, you talk about more focus on securing raw materials further up in the curve.

Towards that 1.2 billion target you still have, how far up on that slope have you secured supply of key materials?

If we start with the question on raw material into Q4, I think that We will see, over time, a gradual decline in raw material prices. Still, lithium is at a very high level, which will affect the raw material costs for electrified cars. As John said, we do believe that this will gradually come down. It's not sustainable, but short term, it will still be high. We will also see, over time, into 2023, a gradual decline in other raw materials because they have peaked on spot levels. There is also a certain time lag, both due to different contracts. There are, in some cases, depending on when the previously high prices hit our P&L, so to speak, and also that we have components in stock for cars that we will produce during Q4. So I would say that the raw material levels will still be at the quite high level in Q4, but are expected to gradually come down, especially into 2023.

And at the same time, the dynamic on that is even if the raw materials stay even at the same levels of Q3, we'll start to see some of that pricing that we put into the market come through in Q4, which we're not quite seeing come through yet as well. So some of that will be offset. And in addition to that, of course, we continue to drive efficiency and productivity within our own facilities. And so all of these are targeted to offset those high raw material prices, which is, as Johanna alluded to, will probably last to the end of the fourth quarter. On your second question around strategic securing of key components, Again, obviously, that topic is something that takes a lot of our attention. One of the reasons we did the North Pole joint venture six or nine months ago was specifically because we think battery and battery supply will become a constrained commodity for the future, a constrained component for the future. And therefore, that had two purposes. One, it allowed us to really understand the full supply chain. When you make your own batteries, you really start to understand the full supply chain of that product. Secondarily, aligning ourselves with Northvolt, who are heavily invested in this space and have great contacts with many of the raw material suppliers for the batteries as well. And then the second agreement that we have with Northvolt is a joint venture in terms of technology. And that technology allows us then to understand next generation battery chemistry. And that's important because in order for us to understand what components and what materials and what minerals that we need for the future, we need to first of all understand where the direction of travel is in terms of next generation chemistry and battery technology around anodes and cathodes and all of those things. At the same time, we've already started negotiations and in some cases they're fairly well developed with the raw material suppliers themselves. So and in some cases that will go right back to the mines where we will be putting in direct agreements and direct supply agreements over long periods of time with some of the mining companies which are responsible for some of these key materials and minerals. And we'll probably release more than that in the fourth quarter, maybe the first quarter next year. In addition to all of that, we have laid over the top of our current supply chain an analytics engine. We're in the process of laying an analytics engine that sits on top of our supply chain, which is solely designed to extract where we think those, let's say, supply chain gaps may appear by using computational analytics across our entire supply chain network. And that kind of combination of Northvolt for batteries, understanding chemistry, understanding next generation, and battery chemistry and technology and minerals, as well as the strategic alignment with some of the mines around the world, and then an analytics engine that sits on top of that is something we're paying a lot of attention to. Hopefully that helps answer the question, Eric.

Thank you. Thank you. Let's take another question via the chat then. How will you increase the overall market share?

Well, I think you alluded to that earlier. I mean, the overall market, first of all, BEV is growing, so we've got to talk about two things. One, the premium market that we play in, and two, the BEV market that we're really interested in taking the market share. And that BEV market is exploding, which is great to see. We're well positioned for that. And the way in which we take that market share will be, of course, to bring out more and more products that our customers want. And that starts with the new EX90 as well, the XC40, the EX90, the smaller SUV, which will come next year as well. And then beyond that, a car, a brand new BV car every year for the next four or five years. That's really, and I'm not sure that's really the game plan.

Another question, this is from Henning Kosman at Barclays. Drop through on price mix seems low, suggesting mix is the majority. why weren't you able to raise prices or cut discounts more in line with the EU premium peers?

I think we have quite a good drop through in both mix and pricing. So I think that I would say we have quite good effect on both mix and pricing.

And I think maybe you don't see some of those placements. We alluded to earlier, some of those placements that we did put in place haven't quite come through. We're a long back order book. You obviously can't go back to the customer and say, hey, you placed an order in good faith and all the prices have been up, so we want to increase your price. So you need to wait until those orders flow through and you put the new prices on the new orders. And there's obviously a timeline between that, whereas the raw material prices came in really quickly.

And we also in the third quarter have an effect of, as I said, the unusual low US mix, which has to some extent declined the effect of the the pricing because we have had very high pricing in the U.S. on the back of the high demand and also helped by the effects. So that to some extent decreases the pricing effect in Q3 isolated. But that's, as I said, more temporary effect. We will see a more normalized geographical mix into Q4 again, and then we'll see this coming through even more from the U.S. as well.

There's some port issues in the U.S. in terms of logistics and input into the U.S. in the third quarter. And of course, in the U.S. as well, we sell a higher percentage of a high-end and more expensive product, like the XC90 and so on. And there's a delay in getting those products into the actual markets and through the ports.

Good. We have another caller then on the line. Let's go straight in. This is Dorothy Cresswell from BNP. Good morning, Dorothy.

Hi there, and thank you for taking my question. My first one is around IRA in the US, and I just wondered how you're thinking about achieving IRA eligibility for your USBV production. And then my second point is just a housekeeping one. So you've given us those structural cash transactions for 2022 in the back of the presentation, which is really helpful. But can you comment on what's still to come in 2023? Because I think there is still some cash out from the increase in the Chinese joint venture stake. And I seem to remember there being some cash out to come to the purchase of land and buildings at the Taiju facility. So any comments around those coming cash outs, their magnitude and their timing would be great. Thank you.

Yeah, we, as you say, we have a few of those transactions left. It's the, the, acquisitions of the Chinese JVs and also the additional acquisition in the Taisho plant in the land, and that is expected to come mainly in 2023.

In terms of the IRA, which I think is now called the IRL, since it's been into law now, You know, it's so new and it's pretty nascent, so I guess that it's definitely worth making a sensible comment on that at this particular point in time. It's flown through, we obviously have our eyes on how that will affect fails in bed in the US, but at this point in time, I think it's a little bit too early for us to make a judgment on that. The only thing I would say is a lot of our customers are already excluded from that because the household, the combined household income takes them above that threshold. So we don't see this as a major event for Volvo cars. But again, a little bit too early to comment.

This question comes in from Daniel Schwartz, analyst at SkySales. Given the negative free cash flow year to date, are you fully committed to investing investing more into Polestar in case Polestar raises capital? Will you keep your stake unchanged?

What we have said is that previously communicated intention to that if needed, we could be prepared to invest on a pro-rata basis in a potential capital raise by Polestar. Other than that, I don't think I would comment on Polestar's funding as such. They are a standalone listed company.

Right. Yeah. Let's take in another question. I think partly this was answered, but I think this is coming up again, so let's address this once more. What about the quality of your audiobook? Are you seeing high cancellations? John, do you want to?

No, again, we're looking at this. Of course, they can see the audiobook. It is, as Jim mentioned before, around two times the size of the normal workbook. But looking at the cancellation levels that we are seeing right now, it's nothing than normal as a percentage of the audiobook.

All right. We have another caller then. This is Hampus Engnallu from Handelsbanken. Hampus, go ahead with your question, please.

Thank you very much. Two questions for me. I'm sorry to come back on the EBITB page and page 10 in the report. The minus 3.7 billion SEC there. You mentioned used cars. Is used cars a negative here, and this is a major one? And maybe could you add some more flavor on how used car prices have developed, you guys, in the quarter? That's the first question. Second question is, and maybe I need to get to here, but given the better component availability, I assume you will have higher run rates coming into Q4. Would it maybe possible for you guys to comment on daily rate, how much higher should we expect it to be, quarter over quarter, and just the basis, Q4 over Q3? Thanks. Okay.

If we start with the EBIT bridge, I will say that used cars is still on a high, good used car prices. We have some effects on lower volumes, and that is simply due to lower stock of cars. And it's insignificant effect compared to, for instance, what we have said about raw material, et cetera. But it's not that we see a negative trend on used car prices, but there has been a high demand also for used cars. So it's more volume effect and it's driven mainly by availability to cars to some extent, honestly, because it's lower volumes over a long period of time on new cars also, of course, decreases the availability of used cars. So it's about the prices of thin loops.

There was another question on raw materials prices going forward.

Yeah, as we said, I think that in Q4, we will still see quite high raw material prices due to both time lag in the effects of different contracts, et cetera, on raw materials that have peaked somewhat earlier during the year. And we also see currently a continuous high price for dead cars, especially lithium and batteries. It is expected to gradually come down. So I think into 2023, we will see gradually lower raw material prices. But I think in all in all in Q4, we'll still see quite high levels of raw material.

And one can possibly add to that as well. Since our order book has a higher bed share than what we currently are delivering as well, the delivery of bed share cars into the fourth quarter will be higher, which will also, of course, have an influence on the total raw materials, coming back to the last point about high lithium prices.

Could you also comment on the production rate Q4 over Q3?

We are at, I mean, we have seen a gradual improvement of production and we will see in the second half of the year in total, we will see a growth both in production and wholesale and retail. And we have seen a gradual improvement. So we will have an improved production in Q4. There is still volatility. There is still uncertainties due to supply, et cetera, but there will be a gradual improved production into Q4 and into 2023. Fair enough. Thank you.

Thank you for the questions. Let's take a question online then. This is from Harold Hendricks, analyst at Morgan Stanley. Good morning. Can you please talk about monthly lease and loan prices? What is happening to monthly payments, and have you seen any reaction from consumers?

It's more or less the same as we have said in general, that we still see a high demand on the channels where we sell the cars. And this is, of course, driven by that there has been over a long period of time a lack of supply of cars. And so over the whole line of products, you could say that we still see a good and healthy demand.

And as a follow-up, at the IPO, you talked about a short-term reduction in gross margins as BEV mix rises in 2022-2023. Is this still the case, or is it better or worse? Has the pricing power helped the relative profitability case for BEVs?

Pricing power, of course, helps the general profitability both on BEV and on other cars. But as you say in the question, we do see that we have currently lower margins on BEV cars than we have on combustion engine cars, which is perfectly in line with our plans. We will gradually see that gap close over time when we have new technology. Now, first, we will launch the EX90 on the new platform, and so the ambition to have parity between BEV and ICE cars mid-decade still firmly stands, but that will happen around mid-decade on the next generation of platforms. But up until then, we will see a gradual closure of the gap. Currently, on these very high lithium prices, of course, the gap short-term might have increased somewhat. But as we have said, I think that the general view is that the lithium prices over time are not sustainable, so they will come down. And I think from a strategy perspective, we are very firm on our electrification ambitions. And over time, the gap was closed.

And maybe I'll just put it in on that. So the way I see it is there's four or five different bridges that build towards that price pattern. We need to get to price pattern around the mid-decade between bear and ice. And there are three or four things that take us in that direction. One is the price of lithium we think will definitely come down, so that's definitely going to help. Our SPA2 platform, the architecture of the SPA2 platform takes out cost in terms of beds because it's fully designed for a bed manufacturing process, which gives good economies of scale from a manufacturing perspective and some cost savings along that. So that next to SPA2 platform, that's the EX 90 is going to be built on, will help us. The next generation platform, fully cost improved, takes you even closer to that and takes out more cost in terms of a fully bed design product. The new technology that we see come into battery and battery technology is bringing down the price per kilowatt hour. So you'll get the same range for less cost as we go forward. And then, of course, you get volume and volume leverage. The more and more batteries that you buy or you make yourself and you start to make them with Northvolt and that joint venture, that leverage starts to play in. So lithium coming down, the next generation platform, the 401 generation platform, new technologies taking out more expensive materials, bringing down the cost of kilowatt hour per battery, and eventually leverage across the entire volume. That combination takes us to price parity on BEV at the mid-decade ambition.

I think time's running out, so maybe we can take one or two last questions then. This comes in from an analyst at HMBC, Pushkar Tendulkar. Does your relatively small size put you at a disadvantage when sourcing raw materials compared to the peers? And he had a follow-up. What explains the widening margin gaps of German peers, which also experience similar cost pressures? So on the raw material front.

In terms of the size piece, on the leverage piece for sure, but I mean, I think it's much more than just leverage, it's about the other things that I mentioned that we are looking to get direct relationships now with the mines. We're looking to make sure that we truly understand the supply chain and the architecture and how we architecture a supply chain in region for region. So we take out CO2 emissions as well as taking out cost of logistics. Again, that's something we spend a lot of time on. you can take out some cost of that as well. So we need to be, whilst it's true we will lose out in terms of price levies because of the volume against some of the bigger players, I think we can make that up through the nimbleness and through the agility that we need to have as a company that's moving quicker to full bed adoption than maybe some of our competitors in that space as well. So the nimbleness and the sure-footedness of moving toward their strategy of a fully electric car company by 2030 halfway there by 2025 hopefully we can make up and we can make up the scale if you will by sure-fittedness of execution and the nimbleness of the company and on the question the second question I will not comment on the margins of our competitors but I will just be confident that

over time as we now, the production is increasing. We will see improvement over time on the supply chain and we will launch these new products and we see a high demand for our products and we will, and especially our new electric cars. So I think over time we are confident that they will grow and our margins will improve.

Okay, maybe we have time for one final question and this comes from Danske Bank. Hi. Price and mix among most OEMs have benefited from price and mix during the pandemic, but going into a likely recession and an inflationary environment, do you see a risk for normalization of prices and mix at a lower level?

I think that currently, as we've said, we still see a high demand for the products, and that's, of course, driven also by that has been a lack of supply over quite a long period of time, which means I think there is quite a big backlog on cars in the market, which means that I think the demand will persist and we don't see any signs of weakening demand for our products. Of course, we are following the macroeconomic environment closely. And of course, it would be impossible to say that that will have no effect on us or as for everyone else in this and other industries, there would be a recession. We're following the development closely and are prepared for different scenarios, but currently we see a good demand and good pricing.

And we don't, you know, we don't intend to play in the mass market. So we play in the premium market space. And I think, you know, that in itself is, for us, I think the company is a good place for it to be, especially given the current uncertainty in the environment. So, but again, back to the demand piece, we're watching it very closely. We're watching it globally. We're looking at it from different angles, looking from the order book intake, from cancellations, you know, and we don't see

this point any reduction demand so that that seems to bode well for the future all right i guess we've completed a lot of time uh jim you and john thanks for your time and thank you everyone who tuned in live and for all your questions that's all we have time for today goodbye see you another day