Volvo Car AB (publ.)

Good morning and welcome to the presentation of VolvoCast full year 2022 and fourth quarter 2022 financial results coming to you from our headquarters in Gothenburg. My name is Ron and I'm joined this morning by our President and Chief Executive Jim Rowan and our Chief Financial Officer Johan Ekdal. At the start, Jim and Yuan will walk us through our performance, and thereafter we'll throw it open for a live Q&A. You can participate in two ways. Either you can send in your questions via the chat window that you should be able to see at the bottom of your screen, in which case I will then read out the questions, your questions to Jim and Yuan, or you can also participate by using the phone lines. So please follow the link at the bottom of your screen or simply just use the QR code. But I'll come back with more information on how you can participate at the start of the Q&A. But for now, the floor, Jim, is all yours.

Thanks, Ron. And welcome, everyone, to the fourth quarter and full year review 2022 for Volvo Cars. 2022 was an acceleration of our strategy and navigating some challenges. And we made some good headway. 2022 fully electric share of sales rose to 11% versus 4% in last year. If we isolate the fourth quarter, that rose to 18% versus 6% in Q4 2021. And of course, we had the global reveal of the Volvo EX90, our first fully designed electric platform car. We divested the rest of our assets in Oro Bay to allow us to fully focus on our electrification journey. And the battery plant and engineering joint venture with Novo Northvolt was announced for here in Gothenburg. Our new fully electric assembly plant in Slovakia was also announced. And of course, Polestar, our affiliate, was listed on the NASDAQ exchange in New York. But it was also a year filled with challenges. Energy crisis and rising inflation, higher cost for raw materials, semiconductor shortages forcing spot buys, and logistic disturbances. The year started with this terrible war in the Ukraine, which of course is still with us today and likely to cause disruption going forward. The continued COVID related lockdowns primarily in China in 2022 forced plant closures and shortages of some key components. And those were really the key challenges that we faced through that year. If we take a quick look at our full financial, full year financial results, and Jorn will take us through this in a lot more detail just shortly. But if we start with retail sales, they were down by 12%. Yet, because of our high pricing and also the car mix, our revenue was up by 17%. EBIT margins compared to 2021 were up at 22.3 billion versus 20.3 billion in 2021. And of course, we remain fully focused on our mid-decade ambitions. We aim to be at 1.2 million cars sold run rate. as well as 50% electric sales, 50% online sales, 8 to 10% EBIT margins, and a 40% CO2 reduction when compared with our baseline in 2018. We remain fully dedicated and focused on those mid-decade ambitions. Perhaps one of the most important things that we saw in 2022 was the validation of our electrification strategy. and that sharp rise in recharge and BEV sales. If we isolate this to Q4, we can see that BEV sales at 18% are the highest ever and total recharge sales at 41%, again, the highest ever in the history of the company. And in fact, if we isolate just December as a month, we can see that BEV sales actually increased to 20% over total sales. And this bodes well for the future because we start to see that now emanate out towards some markets across the world, from Latin America to Southeast Asia and to here in Europe. We've listed here the top 10 markets across the world where we see a high adoption of recharge, and that includes BEV as well as obviously our plug-in hybrids. And I think that bodes well for us as well in terms of the future and the investment strategies that we've made as we start to see more and more of those countries move higher into that electrification journey. With that, I will hand over to Johan who will take us through the financials and some more details.

Thank you, Jim, and good morning. Some more details then on the financials. In the fourth quarter, we saw an increase in retail sales volumes of 11%, which is then on the back of the improved production situation towards the end of the year where December actually was our best production month ever with more than 72,000 cars in production. Revenue with a solid growth of 31%, taking us to 105 billion in the quarter, also proving that we still see a good demand and have been able then to have a good mix of cars and healthy pricing. And on top of that, we've seen a tailwind on FX on revenue and also some contract manufacturing contributing to that growth of 31%. On the EBIT side, Volvo Core without Javis and Associates, we are at 3.9 billion or 3.7% for the quarter, which is not where we want to be, but we have had, which we will go into more detail later, still very elevated cost for raw material. We have been buying semiconductors still on the spot market, etc. So we are at a deteriorating margin compared to last year. Cash flow, 9 billion of free cash flow for the quarter, which is then on a very healthy level and almost on par with 2021. On revenue, a little bit more in detail, we see, of course, a positive effect from the increased volumes in the quarter. We do see still positive effects from mix and pricing. We have a very good tailwind on FX, which is then on revenue, especially on the US dollar. And we also have effects from our contract manufacturing of cars to Polestar, taking us then again 31% growth and 105 billion in revenue in the fourth quarter. On EBIT, we do see positive effects. We have increased volumes, we have good sales mix and pricing on the back of the continued healthy demand. On FX, it's actually slightly negative on EBIT due to the fact that we have Euro and other currencies on the cost side offsetting the effects on revenue from especially US dollar. And then we have the negative effects from the increased raw material Prices especially high on lithium still on our BEV cars, but also raw materials in general still at elevated levels. We see increased costs for freight. We're buying semiconductors to some extent still in the spot market, which then takes us to 3.9 billion or 3.7% in the quarter, including Javis & Associates, 3.4 billion or 3.3%. Our BEV margins still at lower levels at 6% compared to 5% the previous quarter. We have had some positive effects from sales of CO2 credits. We also see that we have a good development of the revenue per car in absolutes, an increase both in revenue and gross income per car compared to the third quarter, although still offset by then the elevated prices for lithium and raw material and also some effects from the high US dollar rates in the prices for the batteries. We are coming out into 2023 with a very solid liquidity level. We are at 84 billion, including undrawn facilities, on the back of the 9 billion positive free cash flow in the fourth quarter. We have been slightly positively impacted in the fourth quarter due to the fact that some of the so-called structural investments already announced in connection with the IPO, some investments, especially in China, have been pushed forward into 2023, awaiting regulatory approvals, etc. So there is a time-facing that has had a positive effect in the fourth quarter as well, although also the underlying operational cash flow is at a good level towards the end of the year, taking us to... very solid liquidity level. If we look at the full year, it's to a large extent the same story as in the fourth quarter. Volumes for the full year then down 12% as we saw previously, but Despite that, we've been able to increase revenue 17% to 330 billion, taking us for the first time in the history of the company above 300 billion in revenue, affected by then still good mixes, good pricing, FX and contract manufacturing, and we'll come back to some more details shortly. EBIT, Volvo Corp excluding JV and Associates, 17.9 billion for the full year, or 5.4%, including JV and Associates, 22.3 billion, but then also a large effect from the Polestar listing in the second quarter. Cash flow, minus 6 billion for the full year, almost on par with last year, and then again taking us to that we do have a healthy liquidity level at the end of the year. So, as Jim showed previously, we are really seeing a good increase in our share of electrified cars, 18% of full electric in the fourth quarter, 41% recharged cars, and then it's an important proof point towards our mid-decade ambition of a CO2 reduction of 40% per car a mid-decade whereby the increased BEV share will be the most important contributing factor due to the fact that the tailpipe emissions then will be reduced. So we are fully on track towards that ambition. Again, revenue for the full year, 330 billion, 17% increase despite lower volumes compared to the year before. Sales mix, pricing, again proving that we have seen a good demand during the year and been able to price our cars better. We have a positive FX effect, especially from the US dollar in revenue and then contract manufacturing on top of that, taking us then to the 330 billion. On EBIT we see also there positive effects from our mix of cars and our pricing, FX slightly positive, but again Euro and other currencies on the cost side offsetting to a large extent the positive revenue effects from the US dollar and then again the negative effects from the increased raw material prices, lithium especially, but also on a lot of other raw materials, spot purchases of semiconductors in order to save cars in production and increase freight costs. So even though we have been quite successful in our mix and pricing effects, not fully but to a large extent offsetting the increased cost but not to the full extent, taking us then to the 17.9 billion or 5.1% for the full year, 22.3% or 6.6% including Javis & Associates and the positive Polestar listing effects. So with that, I will leave back to Jim to take us through the final summary. Thanks, John.

So in summary, 2022, overall semiconductor situation freight cost is better and the easing of the COVID restrictions and lockdowns, we should see a positive impact as we roll forward into 2023. In 2022, the second half production improved by 15% compared to the first half production. And again, that bodes well for us as we pour into 2023. And as Johan said, December was our highest production month today. We've refocused on cost and efficiency, and this is to help not just drive the 2023, but also our mid-decade ambitions as that relates to EBIT. And in 2022, the European price actions will further materialize in Q2, in Q1 rather, 2023, due in part to that sizeable order book that we accumulated throughout the course of last year. If we roll forward to 2023, despite the macroeconomic situation, our execution engine continues to improve. Our order book remains robust and healthy demand globally. We expect solid double-digit growth in retail sales compared 2022 to 2023, and we intend to also increase our BEV volumes, resulting in that percentage growth of BEV. The global unveil and supply of our new fully electric small SUV is a highlight for us this year and we look forward to announcing that to the world later this year. But at the same time, we will also transform the UK to become our first fully direct consumer facing market. And that's something that we're looking forward to, as it has so many proof points for us as a business. And of course, we will start the construction of a new North Pole facility, one of Europe's largest high tech battery manufacturing plants. And with that, I will hand over to Ron, who will take us through the Q&A session.

Ron? Well, thank you very much for that, Jim. So we're all set now to roll the Q&A session. As I said, you can participate in the Q&A session in two ways. Either you can send in your questions using the chat window that you should see at the bottom of your screen, in which case I will then take the questions to Jim and Yuan. Or if you want, you can also participate via using our phone lines. Please use the QR code that you see on the screen. Once you're on the call, press star 11 to be able to ask the question, and then you'll come directly to this live conference. But to get the Q&A session, let me also invite up here our Head of Investor Relations, John Hernander. Good morning, John. Good morning. All right, so let's take the first question then. And this comes in from Henry Christiansen from Carnegie. There have been a number of price cuts on BEVs from other OEMs in recent weeks. How do you see that development and how does that impact your ability to get the necessary price realisation through?

Yeah, so despite the high inflation and the high energy costs, we see demand for our products on a global basis incredibly high still, especially on our BEV products. And that bodes well obviously not just for our strategy to become fully electric and to increase our electric sales, but it bodes well as well for the strength of the brand and our pricing within the market. So we don't have any pressure points that we see that would require us to reduce our pricing anywhere in the short term.

We can take one more question from Hendrik. Could you explain the change in the accounting policy for the Polestar holding impacting JV & Associates income? What is the forecast profit loss based on and how will you treat actual versus forecast outcome in the P&L in future quarters? Maybe you, An?

Yes, and since Polestar now being a listed company, we need also to adhere to certain insider regulations. we are reporting as of now earlier our quarterly results compared to Polestar. So it's not really, it will not be any material effect in our figures at all, but rather than taking in the actuals using the equity method, we will take in, let's call it a well-informed forecast rather. So there might be small adjustments in the quarter afterwards if you're referring to the difference between actuals and and forecast. But I think we will have the ability to do that in a way that I foresee very, very insignificant effects in our P&L from this change.

All right, thanks for that. Let's take in a caller then. The first caller is George from Goldman Sachs. Good morning, George. Please go ahead with your question.

water at more than 200,000 units and a very strong finish to the year it sounds like. When we think about 2023, is there any reason why you won't be able to achieve this level of production on a quarterly basis through the year? And then a second question just on the financials for Johan. Obviously, it was a strong quarter in terms of volume and top line. But when we look at the profitability extra JVs, and we also strip out the benefit that you get from capitalizing a high level of R&D net of amortization, it looks like the earnings were only around 500 million kroner or around a 50 basis points margin. Obviously, this is in a very strong end market environment in terms of pricing and mix. So can you give us some insight into what is holding back the profitability at Volvo Cars today? Is it just the raw material and high semi-costs or are there other important items and how do you see these easing over the coming 12 to 24 months? Thank you.

Hey, George, I'll take the first part, which is on the production side. And the real positive that we see in the tailwind that we're already starting to see through the fourth quarter is, of course, the COVID lockdowns in China were a big part of the disruption factors for 2022. In fact, that's where most of the supply disruptions and plant closures came from. Because we have a large supply base in China, it affected not just the manufacturing plants in China, but affected our manufacturing plants on a global basis. And with the easing of those lockdowns in China now, by and large, it looks like those won't reoccur in 2023. So that's the biggest single hurdle and the best tailwind that we can find. In addition to that, the semiconductor situation continues to ease. That doesn't mean to say it's gone away. We'll still see small disturbances and we will need to play in the spot market in order to get some of those semiconductors, I would imagine, all the way up through the first half of the year. And then hopefully we'll see that slide away as well in the second half of the year. But those are the two main things which give us the confidence that we can grow the production in line with our forecasts. And we saw that actually manifest itself to some extent in Q4 with the highest ever production month of around 72,000 units.

Yes, and on the question on the profitability, I would say that the absolute main part of the deterioration in margins is due to, as you say, the elevated prices for raw material and also other costs for semiconductors, spot buys, which has, on the other hand, saved quite a lot of production, but also comes with a cost, and then also increased freight costs, etc. On top of that, I would say that there is also actually a volume effect, which means that we have had this supply and production disturbances during the year. And even though that the volume, there is also an effect that if we would have had higher volumes, the profitability would be slightly higher because If you put it simply, not all cost in gross margin is variable either. So I would say on top of the elevated raw materials, etc., there is also volume effect. But in summary, raw material being by far the biggest effect.

And I guess we can also add to that what we said during the IPO, that when we sell more BEV cars under the current generation of platforms, it will be sort of a dilutive effect on margins. But when we introduce the new platforms in the years to come, we will get closer to the BEV and ICE parity. But that has an effect on the profitability in the fourth quarter as well.

All right. Let's take a question that's coming in from, a few questions from the media then. Let's take a few of them. How has the launch of the Volvo EX90 been received by the market? How much do you see that car model take part of the 2023 financial results? So maybe on just the feedback from the market.

The feedback's been really good. In fact, we opened that up for pre-orders and we set ourselves some internal targets that we were hoping to achieve and we blew through those targets pretty well. So the demand for that product is high and which we had expected but even beyond our expectations, so that's great. And then of course the production of that car as we announced earlier, that won't happen until well into the fourth quarter, so supply this year will be limited and therefore the effects on our 2023 results on the EX90 will be limited. However, let me take the opportunity as well just to bring on place the new small SUV that we haven't announced yet officially, but we'll announce that later on this year, probably around about the mid part of this year. And as we announce that, that car actually will be in production as well. by the end of this year so both of them the combined effect will still be quite small in 2023 but as we port into 2024 then we'll have two brand new cars and the nice thing really for that is we top and tail the range so we've got the EX90 at the top of the range full electric and in full production by by 2024 and of course this brand new SUV which is going to take up a new position in the market for us, I think will bring in different demographics for us as a brand and that again will be in full production by the end of this year as well. So we start off then with rather than just two cars which we have this, we're doubling up to four cars by the end of the year.

All right. I'll take two quick questions then from Gothenburg Post then as well. One is, this is from Valdemar. Is it realistic to stick to the goal of 1.2 million cars sold mid-decade, considering you sold a bit over 600,000 last year?

Yeah, let me take that. So first of all, the clarification point on that is that we had said that by the mid-decade, we expect it will be at 1.2 million cars. That's a 1.2 million run rate by the mid-decade. Okay, so what drives that? I think some of the, maybe the narrative has not quite picked up that this new smaller SUV which will be at a lower price point than our current BEV sales, our BEV cars, will allow us to pick up that new demographic. It won't be in a major way cannibalistic to our existing sales, so that goes on top. We'll have obviously the C40, the XC40, which is in play right now. We'll have the EX90 in play, and we've already said that we'll have one brand new production fully electric car in play or will release that every year for the next three or four years. When we get to that mid-decade, we have five or six fully electric cars, fully built on our new electric platforms, all in play at the same time, especially the new smaller SUV, which plays to a different demographic, and we think that will be a nice volume car for us. When you add that together, then I think you have a very credible story towards getting to that. 1.2 million run rate by the mid-decade. And that's how those numbers add up.

Right. And one more question from him then. How will the Swedish organization and the employees in Gothenburg be affected by the cost and efficiency optimization plan? Maybe I'll turn to you again, Jim, for that one.

Yeah, that's a good question. So, I mean, I think it behooves every business right now to be seeing how do they make sure that they're driving efficiency through their entire organisation. We obviously do that on a day-to-day basis. We've amped that up to make sure that we're fully fit for the future. And a good example of that is we have divested all of our Oro Bay assets, for example, so that we can fully focus our investments in the future, which we, of course, see as full electrification, the electrical propulsion systems and all the new technologies that we need. to remain relevant in this new emerging EV world. And that's a good example where we're really looking at our cost base in every part of the business and saying, okay, this is something where we think we can take out cost in order to fully invest in the future. So it's a sharpening up, it's not a big separate program, it is a sharpening up of our efficiency and where we spend our cost.

Good. All right. Let's take a caller now. Let's take Matthias Hornberg from DNB. Good morning, Matthias.

Thank you for the time. Can you hear me?

It's loud and clear.

Perfect. When I spoke to your IR team earlier, I understood that you had a quite material balance sheet revaluation effect that impacted the foreign exchange line in the EBIT bridge in the quarter. but I noticed that you didn't mention this during the presentation. So I would want to first of all confirm if this was the case and perhaps clarify if there were any issues here.

Yeah, on FX, if we look at the full year or quarter as well. On EBIT we have quite limited net effects on FX, although we have a big positive effect in revenue. And that's of course different parameters. You have the US dollar mainly affecting the revenue. We have the mainly Euro and other currencies affecting the cost side. We have effects of hedges included in that number and we also have balance sheet revaluations, but I would say over the full year on the net side, I would say the biggest effects are the change in US dollar on the revenue side and the cost effects of the euro on the cost side. Then there are other corresponding effects and they can of course vary somewhat month over month, quarter over quarter, but I would say for the full year those are the main effects.

And would you say it was a material headwind or tailwind in the fourth quarter particularly from revaluations?

I would say it's not that significant in the fourth quarter. I would say that the main effects in the fourth quarter as well is the positive US dollar year-over-year on the revenue side. and partly hedges on the cost side which then takes us to slightly negative but almost a wash in total in the quarter from currency.

That's clear. A second one if I may. Can you tell us roughly where the BEV gross margins would have been without the currently elevated lithium prices or rather perhaps how much of the COGS for the big segment that relate specifically to the batteries at this point? And also if there were any positives impact in particular to the BEV gross margin from the credit sales in the quarter or did that sort of impact the EI segment or the common side on gross profit?

Yes, on the second question, the credits sold, it has a slightly positive effect in the quarter, but it's not that huge. It's mainly one percentage point or something like that from the credit sales. On the lithium prices, I would say that if we compare 2021 with 2022 Q4, the main part of that deterioration for sure is lithium prices.

That's clear. And just to clarify, the impact from the credit sales, did that impact the BEV gross margin or the ICE gross margin or the common?

The main part affecting the BEV gross margin, but since we also have credits for certain PHEVs, there is also a slight effect on the non-BEV cars, if you will, but the larger part is in the BEV. It was not that huge amount, but it's...

Thanks. Thanks for the questions. We can take another question from the media then. This is from Eric. Will there be a bonus payout to employees this year?

Yes, there will be a bonus payout for employees this year.

Good. We have a question from Automotive News. Do you plan any job cuts as part of the cost optimization plan in 2023? If so, where globally will these cuts come from? Vijay?

Yeah, no, we don't plan any job cuts. In fact, if you look at our electrification journey and our growth ambitions and also this transition to new technologies, we're going to be pretty confident we're going to keep all our people pretty busy for the next few years as we get the new cars ready for production and ready for prime time, the new SUV, the small SUV, the EX90, and of course one new car every year for the next two or three years I think is going to keep our people pretty engaged and pretty busy.

This is from Charlie Martin in Autocar. You noted in the full year report that the active subscriptions increased 49% compared with last year. What has driven this growth and how do you see it developing through 2023, the subscription business?

I think really what's driving the growth in subscription is that we're in a new phase where people are looking for different ownership models or different user models for, you know, for, for cars and next generation mobility and I think it's great that we're an early adopter and that all the way from Volvo on demand which allows you to to enjoy the benefits of having a car for a very short period of time or subscription base for for months or you know or a short time basis it's going to be a new thing that has is here to stay in my opinion I think it will excel and I think about if I go back to the small SUV When we release the small SUV and we put that on a subscription-based ownership model, that's going to allow us really to talk to brand new customers who have never spoken to them for the first time. In many cases, Gen Z who are coming into the car market for the very first time because it makes it affordable. The price of that car is going to be lower, of course. And then when you add subscription-based ownership, you're only signing up for, you know, for say a minimum of three months. So I think it's just a new addition to how this next model generation of car owners want to enjoy that product.

Good. Let's take a caller then. This is Jose Acemundi from JP Morgan. Jose, go ahead with your question, please.

A few questions, please. Thank you for the disclosure on the gross margin between ICE and Beth. Definitely, you know, I think you're leading the discussion here amongst the OEMs. Can you provide some clarity, how do you expect to move those gross margins on Beth higher in the coming years? What are the biggest levers you're thinking to move to improve the profitability there? Second, for Johan, can you explain a little bit more the 13 billion headwind bucket you have for the full year? Can you just give us some breakdown of the biggest pockets behind this helping billion and whether you were expecting at the beginning of the year maybe to offset this category with price mix? And then final one, CapEx R&D. Can you give us some sphere for 2023? How should we think about CapEx R&D? How much higher is it going to go versus 2022? Thank you.

Hi, Jose. Thanks for the question. So yeah, right now what we're seeing in the market is very encouraging for us. We've managed to move our BEV sales from basically 4% to 11% year over year. And if you isolate the fourth quarter, that goes from 6% to 18%, which is a threefold increase in the space of a year, despite supply chain disruptions, which hit BEV sales or BEV supply more than other supply. Actually, when we isolate CUF December within the fourth quarter, we see that that actually increased to 20% in BEV sales. And that's, you know, so that direction and the adoption of electrification in our customer base is great. The one headwind that we have, of course, is this high price of lithium. So how do we get that? Now, all of our intelligence tells us that we'll start to see more supply come in on lithium, not just the lithium mining, but also lithium processing. And that's part of the thing that's driving the price up as well, that lack of supply. We're already in discussions with mines and with processing factories in order to get direct access to that at more predictable costs. But there's another part to this to play out as well. and that is battery chemistry and battery technology continues to increase or the adoption of new technologies like LFP technology that is going to take out cost anyway and it's going to extend range which means then you put in less cells so reduces cost in that effect and all of these technical benefits that we'll start to see over the next few years in battery chemistry and battery technology is going to add to reducing the cost. As we remove other metals, as you move towards the LFP technology in certain instances and you move away from MMX or MNC technology, then of course that further reduces cost as well. And maybe the biggest thing for us is this joint venture that we have with Northvolt is double-headed. One is in production. So again, we're going to take out production costs of batteries because we're going to understand that we'll cut out that middleman, if you will, The other thing is the JV with Northvolt is on technology and that's really going to allow us to understand all of that spectrum of battery technology from prismatic to pouch to cylindrical, different anode and cathode materials, different, you know, different electrolytic chemicals and so on. And when you add all that together, I think you're going to start to see then meaningful cost reductions across the BEV to ICE comparison. I still expect to get there by 2025. BEV to ICE parity, I'm confident or more so that we'll get there in the 25 timeframe. Hopefully that helps answer the question.

On the 13 billion you're referring to for the full year, I would say if you simplify it, it's to a very large extent a couple of things. The main part is raw material increases, raw material prices. That's the by far biggest part. On top of that, we also have increased cost or payments to certain suppliers which to a large extent also are raw material cost driven if you will. Then we have had these supply constraints especially on semiconductors where we have been buying semiconductors in the spot market which also is a part of that. That has of course been a good business case if you will because it has saved quite a substantial amount of cars in production but it has also of course come with the cost. Then we also have increased cost for logistics and also you could say disturbances in the production due to the constraints we've had which also of course comes with the cost where it's more difficult to plan. So those I would say on a net basis sums up to these 13 billion of which the by far largest part is driven by raw material prices. Thank you. And on CapEx, please. On CapEx, we will increase our CapEx in the coming years. We will have large investments, both in the development of new architectures, new car models coming up, one each year, at least going into the mid-decade, and also on our production footprint, the Kosice plant in Slovakia, the joint venture with Northvolt in Gothenburg. So I expect CapEx to increase, although we will see that on the back of a growth, which means that the relative share of CapEx as a share of revenue, if you will, I will not expect go up that much.

All right, Jose, thanks. Thank you so much. Yeah, thank you. This question comes in from Agnieszka. How long and how large is your order book? That is how much of your projected production for 2023 is covered by it?

Well, we don't disclose the size of the order book, but I can say it's still very high on almost record high levels. So, of course, it do cover a part of the sales into 2023. When we now see the improvements in the production system the order book will come down because I mean it's positive that we have a large order book from a demand perspective but we also have long delivery times to our customers which we of course aim to reduce when normalizing production so the order book in totals will decrease during the year but and we will not comment on the exact size of it.

Anything John you would like to add on this?

No, I think that the order book remains of good quality. We don't see a big change in cancellation rates either. They're on normal levels relative sort of the order book size.

This question comes in from Efiwe Lungelo. Does Volvo still feel that they will be fully electric by the set year after there have been hikes in lithium prices and coal shortages globally? Maybe Jim.

Yeah, I mean, you know, the industry is in transition. And the problem is when an industry is in transition, especially when it's a technology transition as well as some of the other things that are happening at the same time, it looks like the industry is going to transform at a linear pace. That's what it looks like. But then when that technology becomes more mature, when cost comes out of the equation, when the friction factors of things like charge infrastructure and range start to be eliminated, then you hit that inflection point. And when you hit that inflection point, the gradient of the curve goes up very, very quickly. The big problem with industry transitions is if you don't invest ahead of the curve, then you miss that inflection point and you're not ready for when the market changes. We're investing ahead of the curve. Yes, right now, the only real headwind that we've got is the price of lithium. But we see globally, last year, we saw that new BEV sales increased by 61%. ICE sales fell by 15%. I mean, that's a big data point. That's telling you that the market is moving towards electrification and you best get ready. And you're going to have to cope with some of those increased prices right now with lithium, which we think will die away. We think that new battery technologies will help reduce the cost of batteries and we think we'll get to price parity by 2025. which really is when I think that inflection point kicks in and the market really goes, not quite exponential, but the market goes towards a much higher gradient towards full bell adoption. We've seen it. I mean, we've seen it happen in places like Norway where 80, 85% of every new car sold is now electric. And we've actually seen it in some of our markets as well. We showed in the slides earlier our top 10 markets that are now above 80% either recharge or full BEV. And that's just going to continue. So do I think we've got the right strategy? That was a long answer to a short question, I guess. But yes, I absolutely do think we've got the right strategy. And I think we've been bold enough for us to invest ahead of that inflection point, which we know is going to come. And I think if you're waiting to say, well, I'll try and hedge both bets, I'll keep investing in ICE and I'll keep investing in BEV, then that's a difficult, I think that's, and I think you then risk missing the market. And we don't want to risk missing the market.

Thanks, Jim. Let's take another caller then. We have Daniel from Bernstein on the phone line. Good morning, Daniel.

Jim, thanks for taking my question. Jim, You maintained your mid-decade guidance, and I know you've said before that mid-decade may not mean 2025. Could you elaborate right now what is keeping you from providing interim steps between where you are today, kind of with quite a gap in volumes and margins, to that mid-decade ambition? So what are the interim steps? How are you thinking about the shape of volumes and margins as we head towards, I'm going to say, 2027? And then for Johan, can you Can you give us some color how you would dissect the moving parts in 2023? You've already commented on the cost per car or the evolution you think on the cog side, but in your mind, what's the upside on your exit rate from December, which I guess was pretty low? What are the moving parts you'd point us forward in this year? Can you give us a sense of where you'd hope to end up by the end of the year?

Just to come back to your first point. So we've already said, and we said earlier today, that we expect to see strong double-digit growth. I think that's your first proof point. As we go through the course of this year and we release our volume numbers on a quarterly basis, then you're going to start to see that come through. So we know demand is strong. We know we have a strong order, but where we were constrained on growth last year was basically on the supply issues around COVID, around some of the disruptions on semiconductors and so on. But we have that pent up demand and we don't see, as John alluded to earlier, we don't see any significant order cancellations. So we extrapolate the demand with our supply engine and we can see we can get to that strong double-digit growth. That's going to be your first proof point at the end of 2023 in our move towards those mid-decade ambitions of a run rate of 1.2 million cars, which is obviously 100,000 cars per month. And can we reach that? Now, the fact that we made 72,000 cars in the month of December allows us the confidence that we can get there. Remember as well, the market is moving towards electrification. That's where the growth is happening. 61% up versus 15% down on ice. And we will have the C40, the small SUVs, We'll have the big EX90 at the top of the range, and then we'll release a brand new car every year for the next three or four years. So by the time we get to that mid-decade, we're going to have four, five, six probably cars, and brand new, fully electric in a market which is now much more adopted to electric with full-core compute technology. And that, I think, is the roadmap towards that ambition.

And on your question on the moving parts, so to speak, or in 2023 and on the margins, we don't specifically guide on profit margins, so this will be more of a generic answer, but I think 2023 will play out sort of a gradual change. We are going into 2023 still on elevated price levels for raw materials. especially lithium, but also in other cases. And we also still see, even though it has improved significantly, disturbances in the supply chains. We are still buying semiconductors in the spot markets, etc. I think what we believe is that gradually during 2023, raw material prices will come down, especially with the exception of lithium, which is where the timing might be somewhat more uncertain, but also there we believe that the intelligence that we have, the reports that we get, etc., indicates that lithium prices will start to come down already. during the second half of 2023, although that timing might be somewhat uncertain. In other raw materials, we will see a decline during the year due to contractual indexation, etc. So that's one part, and also I think that the supply chain when it comes to semiconductors is already improving. We see that in the increased production volumes, but we believe that will also gradually improve over the course of 2023, especially in the second half. So I think, and also then, as I said before, there is also volume effects. So in the increased volume, the double-digit growth that we will have during the year will also have an effect on this. So with that said, I think there will be a gradual improvement during 2023 without saying any specific number.

Maybe in addition to the comments on the 1.2 million, I mean that's capacity that we have today. So what you want to talk about CAPEX is to secure the growth beyond the mid decade. We have the capacity in place to reach 1.2 million in the current facilities.

I think maybe what I'm wondering if I could put those two answers together, Jim and Johan, is you have a you have a plan you're executing on it i think it's well understood you have a good grasp of the business so what's been the discussion in the board what's keeping you from providing some more guidance figures to the market be it for 23 24 kind of interim steps that may help investors kind of range the range the shape if you will between now and then i think that's what i'm asking right what's what's the decision what are the reasons for the decision that you know, you don't feel comfortable at this point kind of sharing a few more guidance items.

Well, partly it's just a policy we've decided to adopt, but really as well, if you look at, as we sit here today, and we wind back the clock a year from now, the Ukrainian war hadn't started. And that in itself is a massive data point. There's a lot of disruption still going on. We still have inflation costs. We don't really know what's going to happen with the Fed. We've got this rumbling war in the Ukraine. We don't know what turn that's going to take. That could get a lot worse before it gets better. We've got global economic uncertainties in terms of energy prices and energy security. And we've got global uncertainties in terms of world trade and whether tariffs start to go up. So now you have a tax tariff that if you if you manufacture a car in China and you sell it to the US, you have a 27.5% tariff cost. You never had that a couple of years ago. So I think it behooves us as a public company to say we're not in control of all of the could be eventualities. So to give far out guidance would seem at this particular point in time, given the disruptions that we've already seen in the last couple of years and what's likely to continue for the next a year or so, I think it behooves us to be conservative in that approach.

But we also get a lot of questions, especially on the EBIT margin target. So sort of as a sneak preview, we will have an update throughout the year, capital markets update, where we address some of these topics and hopefully clarify it a little bit more in the building blocks.

Maybe just to pivot on that point. So the industry is in transition. Okay, we're an early mover and we hope to get that early mover advantage. We're already seeing some of the benefits of that early mover advantage where we grew our BEV sales by three times within a year in a very turbulent market. We're making the investments to put in new BEV cars. We're not trying to say, well, let's release two ICE cars and a BEV car. we're like we're all in on Bev because we think the technology is better, it's much more efficient, an internal combustion engine is only 30-35% efficient, an electric propulsion system is over 90% efficient, there's no tailpipe emissions of course which is a massive benefit and our customers really care about that, there's no noise, there's no vibration, there's less servicing costs for our customers, Yes, we've got some headwinds right now in terms of lithium, but that's pretty much the only thing that stands in the way of full-scale adoption. The other thing is you need to look at the other side of the table, which is ice. Internal combustion engines will probably become more expensive because there'll be less demand for them, and therefore they won't have the leverage of volume over time. Not only that, When they need to hit Euro 7 or China 7 or some of these other new regulations, they're going to have to make big investments in ICE at the same time as making big investments in BEV, and that becomes a bit of a drag as well. And as ICE is seen as old technology, then the residual values of ICE cars is probably going to reduce, which makes it higher for them to offer that in subscription-based ownership, whereas BEV cars are probably going to hold the residual value higher because it's a new technology. and therefore subscription-based ownership becomes a lot cheaper on that. You add all that together and you say, wow, we're really in the middle of transition here. Who's brave enough and bold enough to make the decisions for the future? Despite the high lithium costs that we're facing right now, we just think we have a good strategy for the future. But to your earlier point, we're not quite ready to lay that out on a month-by-month basis towards that mid-decade ambition.

Thank you very much. We have about less than 10 minutes now, so we'll take a few more questions. This one comes in from Tobias Beeth, analyst at Redburn. You mentioned raw materials still being a headwind in 2023. Can you remind analysts what the typical time lag is on your contracts for both non-battery cell materials like steel and cathode and precursors like lithium?

I would say it's hard to say in very generic because it varies between different raw materials and different contracts. There are both indexation that is more based on the spot prices on a quarterly basis or on a yearly basis. So that's why in total there is a certain lag and there are some raw materials that are actually indexed annually, which means that we are still in some cases suffering from prices in the first half of 2022, whereby we have seen the benefits of other raw materials already in the second half of 2022. So it's very difficult to say a very generic answer.

Thanks, Johan. Let's take another caller, Hampus from Handelsbanken. Good morning, Hampus. And if you could please restrict your questions to just two, so that we can get one or two more after that.

Hello, can you hear me?

Yes, loud and clear.

Two questions from me. Just a clarification on your outlook, Jim. Do you think that supply will determine your sales this year, or will it be the demand? You've been supply-restrained for all last year, so it would be interesting to pick your brain on that. And the second question is on the lead times. What lead times are we looking at here today between order and delivery, and how will that change if you look back one year? Those are my questions. Thanks.

Yeah, so supply, I think we'll still see some supply chain disruptions this year. I think we'll still end the year with almost the same backlog as we've started the year. So I don't think we'll make headway into that in 2023. And then hopefully, I would like to reduce that order book, because when we reduce the order book, it suggests then we have a smaller lead time to our customers. But this year, I think we're going to still be somewhat supply constrained. So demand is incredibly high. The order book is incredibly high, especially for BEV. And some of those raw materials, especially the likes of semiconductors, are much more geared towards BEV production than other productions. So that's really, I think, going to be the choke point for us towards... Now, having said that, we still see tremendous growth this year, year over year, because a lot of that is freeing up, but it won't free up fully.

You had another question on lead times?

Yeah, on the lead times, it, of course, varies between models and markets, but I would say it's still long. So I would say six to nine months, or at least, I think, a little bit depending on which car, of course, which market.

All right. Thank you. Thanks, Hampus. This question comes in from Marcus Winkler. How will you be able to approach and manage the complexity of software-defined vehicles? And what effect will it have on your organization, partnerships, and even on margins? Yeah. So, Jim, maybe I turn to you.

Yeah, one of the things that we spend a lot of time and attention on is where do we build versus where do we buy? And I think that's... That's one of the critical parts. When you're in this transition and you're trying to figure out exactly where you should be spending your engineering dollars, then what's essential for us to drive differentiation into the product and what do we need to own? So software is part of that. Of course, it's a lot wider than software. So we've decided that the electrical propulsion system for us is important. So we make our own e-motors, we make our own inverters. We're now very shortly be making our own batteries, our own battery management system, which is the software layer that sits on top of that to get all of the best performance from that propulsion system. So we invest heavily in that software. We're also investing in the software that drives the silicon to the application layer. So we buy in the silicon from Nvidia, as you know, we buy in the silicon from Colcom on the infotainment stack, but we build the software, for example, for all of our safety systems. So Zanziak, a wholly owned subsidiary of us, we have over 700, 800 people working just in that software alone. And we think that drives differentiation in the product, and that allows us the freedom to make the changes that we think we need to make without being reliant on sub-tier supplies. But we also buy in some software. We buy in software from the likes of Google and Apple in terms of Android Auto and Apple CarPlay, because we think that gives our customers one of the things that they want, which is to be able to connect their cell phone the smartphone with our cars. Of course we also have the Volvo OS, the operating system for Volvo should they want to just use the Volvo system but we're giving them those choices and we're constantly making these make versus buy decisions. So far I think by and large we've got that pretty much right but that's going to be a continued journey. And that's how really understanding the software, the silicon layer, is where we're investing a lot of our time, especially as we take the range towards a further core computer architecture.

Good. And another follow-up from him was how would it impact our margins and our balance sheet when we make these sort of investments?

Yeah, well, if we have meaningful technology within the car, hardware and software, oh, and incidentally, I should also mention that software is not just inside the car. The software is also the connectivity into the cloud. as well as into the application layer on your iPhone so that you have a Volvo app which is meaningful and helpful and you can use it as a digital key and that we can connect with our customers directly through the Volvo app in a meaningful way. So we take it all the way from the customer engagement all the way through from the silicon layer and then of course into the application layer and some of the embedded software and Alexa batteries and so on. If you can create that meaningful connection differentiation in your product, then of course you can provide a premium product which people are prepared to pay more for and therefore it helps your gross margin structure. And that's basically the strategy.

Good. Maybe we take our final caller then. This is Tim Rose from Bower Media. Tim, maybe if you could restrict to just one question, please. Good morning.

Good morning. Question for Jim. On the UK direct-to-consumer or agency rollout, how will you measure it? success how will you deem it a success and when do you kind of expect that to be and secondly will you be doing similar in other markets?

Yeah so to take the first question first in terms of the UK so that will happen we'll get to that full let's call it UK direct model by the end of this year How we measure that will really be our engagement with our customers. So this is really the point that we're trying to change. It seems strange for me coming from the consumer electronics and technology industry that you can sell a product which is $40,000, $50,000, $60,000 of value to a customer that you never speak to. You never speak to pre-sales and you never speak to post-sales. For me, that's a flawed business model, especially in today's world when we've got so much connectivity at our fingertips. And so we need to be part of that conversation. Now, whether that customer researches online and buys online, or whether that customer researches online and buys at a dealership, or whether they just go straight to the dealership because they want to try a test drive actually i don't i don't really care what i care about is that every single touch point within that that we're connected with that customer and so if you go to a dealership you're still buying from volvo.com and we're still part of that conversation and then that gives us access to that to that customer that customer data and then and of course it gives us a much a much better chance of continually engaging with that customer to find out what they like about the product what they don't like about the product and hopefully keeping them as a lifelong customer and as they trade up maybe they come in at the small suv as their life changes and they have kids or they move to the country they need a second car we're constantly going to be part of that conversation and that's really the big measure of success And second part, sorry, was what?

Second part was other markets that will follow after UK.

Yeah, so so far we have the UK as the front runner and then we're going to take it, we're going to learn so much from that UK flip and I think it benefits us to say, okay, let's see what we learned here, let's take a beat, what worked, what didn't work and how we change that for the next market. So UK is definitely a leaked market.

All right. Hopefully that answers your question, Tim. Thank you very much. We really need to wrap up this live stream, but our media lines are open. So please reach us if you have follow-up questions. You can reach the investor relations team as well. But we need to wrap up for the day. Thank you for all your questions and engagement, Jim, you and John. Pleasure.

Thank you.

That's all from us. Have a great day. Bye.