Volvo Car AB (publ.)

Good morning and welcome to the presentation of the second quarter of financial earnings coming to you from our headquarters in Gothenburg. Those were, of course, some of the highlights from the big reveal we did last month of the small fully electric SUV, the Volvo EX30, one of the key highlights for this quarter. We'll talk more about that in the course of this earnings call. My name is Ron Banerjee. I'm in communications. And as always, I'm joined this morning by our president and chief executive, Jim Rowan, and our chief financial officer, Yuan Ekdal. It should be familiar to you by now, but we will start this earnings call with Jim and Yuan walking us through our performance during the second quarter, after which we'll throw it open for a live question and answer round. So if you have any questions, please send it to us. You can either use the chat window that you see at the bottom of your screen or else just use the phone lines and then we can hear you. But I'll come back with more details before that. But for now, Jim, over to you.

Thanks, Yuan. Hey, welcome everyone to our second quarter results. Let's categorise as Q2 full speed ahead in transformation with solid underlying business performance. The share of fully electric cars at 16% versus 7% in Q2 2022 with sales up 178%. Retail sales up 25% versus Q2 last year. Production volumes up 50% versus Q2 last year. A stable order book and we've maintained our premium pricing. Underlying EBIT has been improving, weighed down only by non-recurring restructuring costs, which Yuan will talk to in some detail in a moment. The UK transformation into fully direct sales has now happened, and we're starting to see the benefits of that come through. Strategic collaboration and agreements with leading semiconductors has helped to stabilize our manufacturing and our supply chain. And we have launched the EX30 with strong customer response. If we look to the financials, retail sales up 25%, revenue up 43%, and our EBIT margin, when compared to Q2 last year, has gone from 4.6 billion SEC to 7.3 billion SEC. Again, Johan will pull out the details on all of this in just a few moments. Despite multiple headwinds, we are tracking towards our mid-decade ambitions. And let me just frame what we mean by mid-decade ambitions. That is from the start of 2025 until the end of 2026. During that timeframe, we expect that we will reach 1.2 million unit run rate per month. that we will be 50% fully electric in our car sales, that we will be 50% online in our sales, that we will achieve between 8% and 10% EBIT margins, and our CO2 reduction will be at 40% when compared to our baseline of 2018. And we're starting to see the share of fully electric and plug-in hybrid cars now really start to explode through the world. It's a global phenomenon that is gathering pace. We're seeing companies like France, Belgium, the Netherlands, Ireland, all moving towards either full electric or plug-in hybrids. This means we have 15 countries which now show more than 74% of either plug-in hybrids or full BEV sales. When you look at BEVs in isolation, again, the story is the same. We see countries like Denmark now at 41%, the Netherlands at 50%, and of course, Norway over 80%. This is a phenomenon we think will gather pace over the next few years and positions as well to meet our end decade ambitions of being a fully electric car company. And on that, this will be boosted by the launch of our EX30. The EX30 we launched just recently and it is our smallest SUV to date. You saw some of the highlights already at the start of this presentation. So while the EX30 may be small, we think that it represents a huge opportunity for our company. With this car, we will enter an important new segment and a new demographic for the company, one that will help us grow rapidly in the coming years. The EX30 will also boost our growth and our profitability in the future of electric cars, with gross margins for this car expected to be in the range of 15% to 20%. We're also delighted to share today that the response to this car has been overwhelmingly positive and that the order intake for the EX30 has exceeded even our ambitious projections. And we're grateful for the warm welcome this car's received. This car will start its production life in Q3 and the customers will sit behind the wheel of this car before the end of this year. Again, something that's very exciting for us here at Volvo Cars. And with that, I will hand you to Johan who will take us through the financial update in some details. Johan.

Thank you Jim and good morning. On the financials, really a solid quarter with improving underlying operations. Retail sales up 25%, really showing the continuous improvement in our production and supply chain. and revenue up even more, 43%, also showing that we are still able to maintain a premium pricing level with revenue growing more than the sales volumes. On EBIT, if we concentrate first on the Volvo core underlying operations, excluding Javis & Associates, we increased the profit from 4.6 billion last year in Q2 to 7.3 billion this year, from 6.5% to 7.2% EBIT margin. The margin has then been affected by a one-timer non-recurring item related to our cost efficiency program of slightly less than 1 billion SEC, taking us then to 6.4 billion including non-recurring items, or 6.3%. On the full group, including Javis & Associates, 2022 Q2 was heavily positively affected by the accounting valuation effect related to the listing of Polestar of around 6 billion, which is then included in the 10.8 billion last year. So that's really important to bear in mind when comparing Q2 2022 to 2023. And on cash flow, a positive cash flow for the period, 1 billion SEK free cash flow, also then to some extent affected by structural investments during the second quarter of this year. So still a positive cash flow despite that. So all in all, a solid quarter. And if we look on revenue, we see a big effect of course from the increased volumes. We are more or less flat when it comes to mix and pricing in the quarter. We have a still quite nice tailwind from FX and also some contribution from the JV contract manufacturing on Polestar. and on other positive effects mainly also good deliveries of sales of parts and accessories taking us then in total to the revenue of 102 billion for the quarter or an increase of 43% compared to the same period last year. On EBIT, concentrating again on excluding Javis & Associates, 4.6 billion last year, then we see a big effect of course from the increased volumes on the back of the improved production and still healthy demand, 6 billion in effect. Sales mix and pricing slightly negative, really due to several factors, one being that on the Back of the improved production, we see a normalized mix, if you will, which have some effect and also the increased share of BEV cars compared to last year has a slightly negative effect. We'll come back more to the BEV margins shortly. And then slightly net positive on FX. And on other, the 2.3 negative year over year still consists to the largest part of elevated raw material prices. However, we expect now raw material prices to start materializing on a lower level into the second half of the year. That is then taking us to 7.3 billion or 7.2%. And then on top of that, we have the restructuring cost, a one-time cost in Q2 of 0.9 billion related to the redundancy program as a part of our cost efficiency measures that we are taking in order to be more competitive going into the future from a cost structure perspective. Then, including Javis & Associates, last year again heavily affected in 2022 Q2 by the 6 billion positive effect from the listing of Polestar, so that is really affecting the comparative number. On BEV margins then, 3% into the quarter and as expected really, our BEV margins in the second quarter were affected by a number of factors. One, the lithium and other raw materials used in these cars were sourced at peak levels in 2022. And also secondly, the effects of increased pricing on full electric cars that haven't really yet taken full effect. So, going forward, for our existing models we are introducing a considerably better range thanks to increased energy density and more efficient built in-house e-motors. And together this will really help to secure our premium position in the market. And as such, we expect BEV margins to improve considerably in the second half of the year. And this trend is expected to continue into 2024, also especially when EX30 start to hit markets with even better margins as we have seen previously. So the low level that we are at now is really a Q2 phenomenon, which we then expect to improve during the rest of the year. On liquidity, as I said, positive free cash flow in the quarter, which makes us still being at a very healthy liquidity level going out of Q2. Also considering that we do have a period of high investments, but also contributions from a positive EBITDA and working capital, which then is keeping us at a very healthy and solid liquidity level. So with that, I will leave back to Jim to summarize the quarter.

Thanks, Johan. Okay, so in summary, our order book remains robust, including the EX30 and the EX90 pre-orders, which we'll set as well, certainly for 2024 and beyond. Production output continues to improve. Effects of lower raw material prices to accelerate in the second half of the year, as Johan just alluded to. Our global cost efficiency measures is developing as planned and already we're starting to see the benefits of that. Retail deliveries are on track and solid double digit growth is expected for 2023. Execution remains our focus. So far this year, we've launched the EX30. We have improved fast charging infrastructure across North America for our customers. We have transformed the UK to a direct sales market. We've strengthened the vertical integration of our company by the introduction of e-motors and higher energy density battery. And we have secured our BEV margins for improvement going forward. With that, I'll hand back to Ron and we'll take some questions. Thank you.

Well, thank you very much for that, Jim. So we're all set now to start this Q&A round. We can already see a lot of questions coming in. For those of you who still want to participate, please use the chat window that you should see at the bottom of your screen, in which case I will then read out the questions on your behalf. Or if you want to use the phone lines, then just simply use the QR code. But before we get started, let me also invite our head of investor relations, John. Good morning, John. All right, so let's get started. Let me take the first question. Maybe I can read this out. It does not have a name, so please identify yourselves so we know who you are. So Jim, how would you summarize the second quarter? What number really sticks out for you?

I think when you're looking at the businesses, there's a lot to unpack, obviously, in the results. But if you look at the underlying operational performance of the business, that's really what I think sticks out for me. And if you look at that year over year, we've gone from 4.6 billion to 6.4 billion, and that includes the one-time charge of 900 million. If you exclude that one-time charge, then really our performance has gone, our underlying EBIT performance has gone from 4.6 to 7.3 billion. And I think that underlying performance is something which encourages us because we're still going to see an improvement in lithium prices as we go through the back end of this year. and into next year. Next year, we also have the benefit, we will see the EX30 become a much bigger part of our electrification journey. The EX90 will also come in. And the EX30, we've already said, should be at gross margins around 15% to 20%. So those are solid foundations, I think, upon which we will build our full electrification journey, 50% by 2025 and 100% by 2030. So that's really the number that sticks out for me.

All right, thank you. Let's take a caller then. We have Jose Asamundi from JP Morgan. Good morning. And please go ahead with your question, Jose.

Hey, thanks very much. A couple of questions, please. Jose from JP Morgan. Can you comment, please, on the launch of the EX90? How is that progressing? And how do you expect that to impact the second half of the year? Also, can you comment on restructuring charges that you took on the second quarter? Do you foresee additional restructuring charges into the second half of the year or maybe next year as you continue to progress and improve the efficiency of the overall company? And then the final one, if you can comment, please, on CAPEX and R&D for the full year 2023. Thank you.

Hi, Jose. Thanks for the questions. Let me take the first one on the EX90. So as you know, we pushed the production start date of the EX90 out simply driven by the complexity of the software code in that car. This is a brand new platform for us. It's the flagship product for us. It's the first time that LiDAR will be standard, if you will, in the range. In fact, it's the first time that LiDAR will be introduced as a new technology. We're writing the perception stack software and the sensor fusion software for that safety layer. We wanted to make sure we get that bang on. We need to get that right, so we pushed out the development of that to give the engineering teams a little bit more time to make sure that when we launch that car, then the customers get the best experience possible. And we're on track, as we had previously said, we've pushed it out five or six months. We're on track to launch that car, as we had said a few months ago.

Maybe the restructuring cost, any spillover into H2 or 2024? Yeah, the restructuring cost, the absolute main part is taken now in Q2 for that redundancy program, so we don't foresee any material non-recurring charges on restructuring in the second half of the year. And on, yeah? CapEx R&D. Yeah, on CapEx. Any comments you could make? Yeah, and on CapEx, we are in a period where we do quite a lot of investments, which we will continuously do in the next coming years. New cars, new architectures, production footprint, etc. However, when we go into next year, when the EX30 and then subsequently the EX90 is into production, we will see... a slightly normalized capitalization rate, if you will, which will go down to a more, over time, normalized level. And we will also, of course, then see some increases in amortization when these cars go into production. And that will happen during the course of 2024 then, after both cars are starting to be sold.

Maybe just let me add another point. You asked about the delay in the EX90. Again, just to clarify, the EX30, which we announced just a couple of months ago, production for that car is scheduled to start in Q3, and we should have customers behind the wheel of that car in Q4. So that's in a different platform. That's a much more robust platform. It's a platform that's already known to us. And so that, I think, helps just maybe clarify the difference between the 30 and the 90.

All right. Thank you. Hope that answers your question, Jose. Let's take another caller then. We have Daniel Roska from Bernstein. Good morning, Daniel. And please go ahead with your question.

Good morning, everybody. Daniel from Bernstein. Two for me then. Number one on pricing, the BEV pricing seems to have taken a turn for the worse this quarter. Could you just help us by sharing some of the moving parts within that bucket and understand kind of your level of comfort for the second half kind of across the region, maybe mix, maybe model. So, you know, why was PV pricing so much lower and declined faster than the combustion engine car pricing? And secondly, maybe more on a strategic level, just wondering about PV penetration globally, right, in the next 12 months, but Maybe, Jim, are you prepared to invest downstream in solutions like charging or other ideas to help consumers adopt Zootology? And maybe the other way around towards the upstream, right, have you uncovered any potential investment requirements you have? We've had other OEMs go into refining or actually buy mines. So any additional investment requirements you've uncovered kind of in the upstream from the OEMs?

Maybe I can comment on the BEV cars first. We see, as we said in Q2, we have a number of effects. One is that the cost for the cars are elevated due to that the cars were manufactured at the time where we had raw materials more or less at the peak level. We have also deliberately sold some inventory of model year 23 cars with partly on campaigns due to the fact that now model year 24 is coming in, as we said, with a significantly improved range, which will also cater for improved pricing. And on the back of that, also lithium prices will flow through at a lower level in the second half. We will see considerably improved BEV margins into the second half of the year. But also due to a little bit of a delay in production of certain BEV cars due to closures of the Ghent factory, et cetera. We had some inventory that has been at slightly low levels sold out during the quarter also, which is a deliberate decision in order for now the better priced and range cars coming into the third quarter.

On the charging stuff and I guess the general supply chain. So we make a lot of these decisions in terms of what do we build versus what do we buy? And that's different in different parts of the world. In Brazil, for example, we do invest in charge infrastructure. We already do that for the benefit of our customers. We do that directly. In places like North America, you probably saw we just signed an agreement with Tesla, which allows all of our customers to use that fast charge infrastructure that's already been built out by Tesla. And there's an immediate benefit then to our customers. In the likes of Europe, we use companies like DCS and PlugServe, which allows us then to use that aggregated infrastructure charge infrastructure and gives access to our customers across the various different manufacturers and suppliers across Europe. Then when you dial that back into, okay, where else do we want to vertical integrate? We've decided that we think that silicon is something which we can partner with, so we've decided to choose partners with a silicon like NVIDIA and Qualcomm that give us access to high computational silicon without the need for that deep investment that you need to make in semiconductors. Batteries we've decided to build in-house as well as source, so that will be a mixed model. We want to really understand battery, battery chemistry, and next generation manufacturing on sales, as well as sell to pack. We'll learn all of that through the joint venture that we have with Northvolt. That's already started. We've cut the ground on that already here in Sweden. And that operation will be up and running in 2026. And then on e-motors, we've brought those in-house. We used to buy our e-motors externally. We've brought those in-house. And in fact, that's one of the reasons that we can offer extended range in the new XC40 and C40 because of the efficiency that we've managed to drive out of that new e-motor design and the silicon carbide inverter modules that we're designing. So we look at this. pretty forensically, if you will, in terms of what do we build, what do we buy, where is our money best spent in terms of investments, and how do we gather the most benefit for our customers and the highest potential growth with the best margin structure. So that is something that we pay a lot of attention to.

Maybe just as a follow-up, Jim, is there anything in the past kind of six months where you've kind of changed directions or said, well, maybe we do need to, we do need to build or kind of insert parts of the chain where we previously thought that wasn't the case?

Yeah, not so much in terms of intelligence and analytics. So we're adding an analytics layer on top of our supply chain architecture that allows us to much more deeply understand on a more real-time basis exactly what's happening across the supply chain. So that has been implemented as we speak. We've also started direct relationships with the semiconductor companies. It used to be that we relied on the tier one suppliers to have those direct relationship with the semiconductor people. We are now as part of that conversation and have direct relationship with many of those semiconductor companies that allows us one, the intelligence and two, the direct access. And where it makes sense for us, we will buy those semiconductors to make sure that we get them and then we can supply those to the tier one for the inclusion and the final sub-assembly that they then supply to us. So that's the, you know, that's basically the direction of travel that may have changed, if you will, over the last six months.

Thank you, Daniel, for the questions. Let's take one online then that's come in. This is from Constantin Bitiskokos. Sales of BEVs increased by 178% during Q2, but the pace of public charging installations in Europe is much slower. Does this worry you? What needs to happen?

I can take that. Yeah, I think what you're finding now is that you're starting to see some external investments now going in. You're starting to see some of the big private equity companies getting involved and investing in the long-term infrastructure for electrification. That will continue. And it's not about the number of chargers per se. it's about the number of fast chargers. And I think that's really the shift that you're starting to see now. It's fine if you have a big installation of AC chargers, but it takes, in many cases, that takes too long to actually charge for the consumer. So you need to now build an infrastructure of DC chargers, 50 kilowatt to 150 kilowatt, preferably. And that's what we're starting to see happen now. I think that will continue, and our intelligence tells us that we're starting to see a lot more interest and investments being made in that. I'm speaking specifically in Europe for that. When you look at the Inflation Reduction Act in the USA, that is going to drive a tremendous amount of investment into charge infrastructure across the USA, and I think that will only be a good thing for the entire EV industry.

All right. Thank you. Now we have another caller on the line, and that is George Galerius from Goldman Sachs. Good morning, George.

Good morning. Jim, in your comments in the press release, you did mention that demand continues to normalize, which brings some additional pricing pressure. Were there any specific markets or segments where you're seeing pricing pressure? And how do you think Volvo is positioned in terms of weathering the pricing pressure? Obviously, you have several new and exciting battery electric vehicles, but that is a market where we're seeing a lot of pressure in China and also certain competitors cutting prices in other markets. Meanwhile, obviously, because of your focus and rapid transition to electrification, some of your internal combustion engine vehicles are perhaps older than some of the products being introduced by the Germans at this point in time. And then the second question I had was just on the cash flows. Would it be possible to just give us some insights into the known cash outs that you're expecting in the second half around restructuring costs, payments to China JVs, and then also any potential cash ins that you're aware of that will take place in Q3 and Q4? And could you remind us how much of the loan to Polestar has not been drawn at this point? Thank you.

So let me take the price point, and I'm sure you want to elaborate on that as well. And I'm glad you asked the question, George, so we can just clarify that. Right now, we are seeing a strong and robust demand for our product pretty much globally. There are certain parts of the world which are stronger, other parts of the world which are a little bit softer. But for the best part, across our product portfolio and across our geographies, we are seeing strong demand. And that gives us... that gives us the position that we don't feel that we need to be involved in any price reduction. So we still feel we have pricing power in the market. We're in the premium sector. I think that has become a lot more pronounced in terms of price pressure in the mass market sector. We don't see as much in the premium market sector other than a few places around the world. So pricing for us is not something that we intend to get involved in any price cutting in any specific... Now, as Johan said earlier, when we had the model year change from 2023 to 2024, specifically on the C40 product, then we, and you were offering a brand new product which had 70 to 80 kilometres additional range, then of course you want to get those products in the market before you bring in your model year 2024. That's really, that was a very tactical decision that we made at that point in time, pretty much focused on the US market at that point. But other than that, we actually don't see a huge amount of price pressure in the market, for our products at least.

Anything on the cash flow front?

On cash flow, if we start with restructuring cost and other, let's call it non-operational parts, The provision that we've made now of slightly less than a billion will, of course, come in as cash flow in the second half. In addition to that, we don't foresee on a net basis, I think, the so-called structural investments that we call them will be virtually zero on a net basis into the second half of the year. So the main part of that has been taken in the first half. So it will not have any significant effect in the second half of the year. And with that said then, the loan to Polestar has to the absolute majority already been drawn in the first half.

I was just thinking about the comment on pricing. As you know, in the last three years, the industry hasn't been able to meet demand with the supply. And now we're getting into a point where we are increasing production. And we also said in previous calls that the pricing environment that we saw in 2022, that level will not persist into the future. But it's also important to bear in mind, if you look at the net pricing, And the discount levels, they are far from sort of pre-pandemic levels. So I think it varies in between markets, but it's not so that we experience a significant price pressure on our products. And we are still having a significant order book, as you know, in Europe that we're building on. And we will be very active in price actions in Europe. We will only build on top of that order book, which is already quite long. So, of course, we're monitoring this, but there's no drama as we see it in our numbers.

Yeah, and that's a good point. Just to pivot on that, the EX30 would release to the market at a starting price of $35,000, US dollars, a gross margin for us between 15% and 20%. By and large, the feedback from the market was that's a very competitively priced product, 480-kilometer range. full of new technology, and of course, it's a small SUV and a fantastic city car. And still being able to get 15% to 20% margin. That, I think, probably is the best signal that we can give that we feel pretty comfortable that we can price well on the market, but still make those margins, especially in BEV. 15% to 20% on BEV products, I think, puts you in the upper tier of the marketplace in terms of what people are managing to extract from BEV cars at this point.

Thank you, George. I hope that answers all your questions. Let's take another caller then. And let's take Eric Goldrang from SEB. Good morning, Eric.

Thank you. A couple of questions. First one, on your comment about the order book being strong, including the one for the EX90 and the EX30, just trying to sort out sort of maybe if there's a change in the duration of the order book. We know the EX90 is dropping until some point of into mid next year exerted coming on now but is there a your overall book might be strong but i guess my question is has the duration of it sort of extended ie or a bit of gaps in there and then a full bit to a follow-up to that on your ice offering are you concerned that for us for us we know that you don't really have any sort of new ice bottles coming for how long do you think your current hybrid and a nice offering is competitive without that. Thank you.

I can start on the order book. The answer is that we have an almost record high order book, and there's no gaps, as you refer to it. We still have an order intake in general, and on a global level, healthy demand, which means that the order book is kept stable. So the answer to whether there are any gaps in time, if you will, the answer is no.

And even if you exclude the orders for year 30 and year 90, it's still at two times normal level.

Yeah, I'll come back on that. And the EX30 as well, I don't think we've explicitly said, this is going to be a volume car for us. This is going to be one of the highest volume cars that we sell. And that, as we get into full volume of that next year, we should just point out at this point, this part as well, that we've put in the production capacity to have a very steep ramp on that car because we're hopeful that the volumes will materialise very quickly and of course the pre-orders would think that we may have got that right. In terms of the ICE and the existing products, yeah, we are making and we will continue to make upgrades to our ICE products to make them fit for the future. That's not bringing out new ICE models per se, obviously, the XC60, the XC90 and so on, but we will be making constant improvements to those cars in order to make sure that they are fit for the future and that they can compete with the latest products that are available in the marketplace. And those investments are already baked into our business plan.

Okay, thank you. Let's take a question online then. This comes from Dorothy Cresswell. Can you once again please remind us of the BEV launch schedule for the EX30 and the EX90?

So 30 starts production in Q3 and the first customers will receive those cars towards the end of Q4. So small volumes and in 2023 and then we will be in full production at the start of 24 and we'll start to see that ramp up very quickly through the course of 2024. We expect to be building the EX90 around the mid-year, and the deliveries will happen shortly thereafter. That will start its production life. The EX90 will start its production life in our Charleston facility in the U.S., and the first customers to receive those will be in the U.S. as well. So basically it will roll out the factory and hopefully into the hands of the first customer in the U.S.A. in the mid part of next year.

Let's take one more question from Dorothy. She asks, when will we see the cash out associated with your Chinese JV stake going from 50 to 80%? And then when do you expect to end up at 100%?

We expect the first transaction to happen into the second half of 2023 and the next phase then potentially or probably into 2024.

Another caller then. We have Daniel Schwartz from Stifel. Good morning, Daniel. Please go ahead with your question.

Thank you. Now, I have a follow-up question on the BEF profitability. As you just said, for many BEFs, you have a very long lead time. The BEFs that had a 3% cross margin in the second quarter, could you say when you did sell these cars? Is it a couple of quarters ago? And would you say that due to the time gap between orders and delivery and the start of delivery of the more profitable EX30 in Q4 and then in 24, should pricing for BEFs not first deteriorate in Q3 before it starts getting better in Q4 and beyond? And my second question would just be for clarification on the working capital. The 9 billion SEC in other working capital that is not related to our Bay. Could you say what were the main drivers here? And then similar, the 3.8 billion outflow from change in provision, what was driving that and is that offsetting a positive earnings impact in the second quarter? Thank you.

Hey Daniel, so on the BEV side, so we're pretty confident that that 3% gross margin that we showed for this quarter, for Q2 rather, was the low point of our BEV margin. Lithium prices are coming down, the new prices that we've put into the market are taking effect. The model year 24 gives us some pricing power because that has a much higher range due to the efficiency of the batteries and the e-motor and inverter modules. So all of that alludes to us assuming or calculating that our bed margins are going to improve in Q3 and in Q4. Then, of course, as we get into 24, with volume of the EX30 at 15% to 20% gross margin, we'll see it improve again further. And maybe just... A last comment on that, the XC40 and the C40 were built on a hybrid platform. They weren't designed and built for BEV efficiency. The XC90 and the EX, sorry, the EX90 and the EX30 are built on specific platforms to drive higher gross margins in BEV. So whilst we'll see the improvements in the C40 and the XC40 as lithium comes down and pricing comes in, then it's unlikely to match the same gross margins as the EX30.

Yeah, and on the cash flow, the main change the working capital in general, if you will, is on the back of the increased production and increased sales, which is then due to different kind of sales-related accruals, dealer incentives, et cetera, that is, of course, increasing on the back of of the increased volumes, if you will, and the change in provisions. I can come back maybe of this with some further details, but one thing is that we have done provisions increased, putting money into our pension trusts, which then, of course, is more or less a movement between assets because it reduces the pension liability. So that is one part of that claim.

And there was one more question on the outflow in provision of 3.8 billion.

Yeah, that was the pension.

Which was the effect of that.

Yeah, exactly. But if you want more details, we can come back offline with further details on that, more in detail.

Great, thank you.

Another caller then, and that is Pushkal Tendulkar from HSBC. Good morning, Pushkar, and please go ahead.

Hey, hi. Good morning, and thanks for taking my question. I have only one left, and that's on the pricing. In your EBIT bridge, the 1.8 billion that you, the 1.8 billion that you show in the EBIT bridge Can you break that up into mix and pricing? And then just to follow up on that, whether all the negative pricing in that is coming from the BEV side, or do you also see softening on the non-BEV side as well?

Yeah, I can answer that. To the largest part, it's not pricing, if you will. You can say it's a normalization of mix. I mean, we have a... very much improved production situation and we have a long order book which means in the supply constraints we have had historically last year on lower volumes we have of course prioritized you could say certain cars which means that we see a normalization of the mix which has an effect We also see, of course, an increased BEV share. And in the quarter, as we have discussed, the BEV profitability is lower. So I would say from a pricing or negative mix effect, that also have an effect. It should not be read as if we have any general pricing pressure. It's more BEV and variant and car line mix effects.

All right. Let's take a question online then. And this comes from Gemma Permelo. Some of your peers have raised renewed concerns around the risk of chip shortage. Are you concerned now, especially given China's restriction on gallium and the impact on the chip's supply?

As I said, we don't see that on the horizon right now, so I read the reports the same as everyone else and we keep pretty close to that. The relationship that we're building up with the semiconductor companies directly is helping us understand that and it's helping us with information, it's also helping us with supply. So at this point in time, we don't see the need to signal specific shortages on semiconductors. There'll still be areas here and there where we need to get into the spot market and buy those. That's going to be on an exception basis. When we compare it to last year, it's probably somewhere in the magnitude of 10% of the issues that we see this year compared to last year, just to frame that up. Maybe that helps. Yeah.

Let's take another follow-up from Gemma, and maybe you can take this, Yuan. You have €600 million in early 2024 maturities. thoughts on refinancing, please? Do you plan on using cash on balance sheet or refinance with the bond market?

Yeah, as I said, we have maturities coming up in 2024 and also so in 2025. We are continuously evaluating funding options, so I will not exclude that we will do external funding when we approach these maturities, but there are no specific decisions made at this point.

Another caller then, and this is Hampus from Handelsbanken. Good morning, Hampus, and please go ahead. Can you hear me? Yes, loud and clear.

Thank you very much. I was a bit late on the call, so I apologize if I'm asking questions that have already been asked. But my first question is on the shortages and the agreement you signed on the simicide. Where do you think you are in terms of... production compared to demand? Is there a big gap here in terms of what you could potentially deliver and what you are delivering? That's my first question. Second is on the back of the software issues on the EX90. Is that solved now? And then maybe last, I would like to get some more flavor on the rollout on the UK market, what lessons you've learned and how that is proceeding. Thanks.

Deliveries. So our output is up 50% year over year when you compare Q2 this year to Q2 last year. So that's in line with where we wanted to be. And again, that's driven by, obviously, the lack of turbulence that we see in the market compared to last year. We don't have to deal with the COVID situation, which was a big problem for us last year. We don't need to really deal with the supply chain issues around semiconductors, buying large. That's a fragment of where it was last year as well. And then there was a few other things that hit us last year as well. Most of those problems have been solved and we look like we have a pretty good run to the back end of this year in terms of supply versus demand. So again, we signaled earlier in the year, we expect to see strong double-digit growth, 2023 versus 22, and we stand by that. We think we have a pretty clear view to achieve that strong double-digit growth. So hopefully that answers the question on deliveries. EX90 software, yeah, we pushed that out. I mentioned just earlier on the call, we pushed that out because we're writing a lot of that software ourselves, specifically around LiDAR and the safety stack. with the company that we own 100% called Zanzac. And we wanted to make sure that the first time we put LiDAR into our safety stack, we wanted to make sure that it was operating the way it should. And we wanted to give the engineers a little bit more time to get that done. But that is on schedule for when we signaled that we'd start production mid next year. And we're still on for that.

And then the last question was... Lessons learned from the UK transformation. The UK flip and the UK transformation. And general answer is it has gone very well. It's well received by the customers and of course it's quite early, but we will say that both from a commercial perspective and let's call it from a technical or digital perspective, it has gone very well and more or less in accordance with plan without any disturbances of any significance.

Let me just add a little bit more colour to that. So what I think we did well, because some other people obviously had tried to take their business digital, we took a slightly different approach in that we felt we had to get all of the stakeholders involved in the same conversation and everybody connected digitally. So, of course, there's ourselves, there's our customers, there's our dealership, but we also included the aggregators in the UK. So people like CarWow and Autotrader and so on. And I think really that's, to my knowledge, that's the first time that's really been done. And if you look at, say, CarWow, CarWow in the UK, 28%, 29% of every secondhand car sold in the UK goes through the CarWow channel, about 13% or 14% of new cars. cars. If you don't include the aggregators in that conversation, it doesn't work as effectively as it should work. And what we're finding is by bringing those four parties together, the customer, the dealers, the OEM, Volvo in this case, and the aggregators, everybody gets part of the same conversation and you get a much nicer experience for the customer on an omni-channel environment.

Okay, thank you. Hope that answers all the questions. We're still getting a lot of questions, so let's keep this going. This comes in from Odil Nurmurtov. Will the Kosice construction timing be kept or will it be delayed?

As we have said, the ambition is that we should start production in 2026. That still stands.

Yeah, there's nothing that we see right now that would potentially delay that. And again, just to reiterate, that will be only electric car. The whole site will be carbon neutral from the get-go. It will be only electric cars that we build there. And the initial piece, the initial build will allow us to do 250,000 fully electric cars. But we have enough land there that we could increase the output of that facility should we choose to do so. But so far, everything's on track.

Yeah, I mean, I think you've already answered the next question, but still let's take it because it's coming up a few more times. Again, from Odil, how positive are you with regards to the easing on the supply shortage, semiconductor shortage, and production increase going into the second half?

So listen, supply chains are complex. They come from various parts of the world. You are always going to have, I did a lot of work early in my career on supply chain. You are always going to have some bushfires that you need to deal with in supply chain. You deal with them through maybe going out to the spot market, dealing with the distributors, making sure that you've got the right relationships with the semiconductor people in this case. And also putting on top of that an analytical layer that allows you to do what-if scenario planning and real detailed analytics around your entire supply chain. So we're doing all of that. Is that to say that there won't be issues? Of course there'll be issues. Do I think that the issues that we see right now are going to meaningfully cause us to miss our production targets? We don't see that at this particular point in time.

One more caller then, and that's Stephanie Vincent from Bank of America. Hi, Stephanie, please go ahead.

Hi, thank you so much for taking my question. Just on the EX30 that you speak about, just wondering what sort of run rate you'd like to get to to get to those targeted margins and how much is improved mix and trim part of that would be helpful to know. And then my second question is just on your group inventories and independent dealer inventories, where do they stand versus Q1? That would be helpful.

So, EX30, really excited about this car. I think this takes us to a new demographic. So I think we open up our supply, our customer base with this car. We'll offer this car as well in subscription in certain markets, which I think will further deepen our engagement with some new customers, specifically around that younger demographic. We're going to offer this car basically with two different battery types. So you'll be able to get this on a high-performance MNC battery as well as an LFP battery, which allows us to bring down the cost of that. We'll offer this in different sizes so that you get different range. And again, that helps with the cost base. So it really allows the customer to choose. And we'll offer it in a twin and a single motor version. We'll offer it in five different colors, and we'll offer it in four different interiors. And we think that the difference between the LFP, the MNC, the twin, the single, the colors, the choices, that everything that's coming back at us right now suggests we've got this a bit right. And we think this will be a high-volume car for Volvo in 2024 and beyond.

Yeah, and on inventory levels. I mean, we are increasing inventory in Q2, I mean, for several reasons. One is, I mean, we are coming from an environment for quite some time with very low inventory levels, too low inventory levels, both in our own books and at the dealers. Secondly, we are in a process of really increasing production and growing volumes, which by definition increases inventory slightly. There are also cars in transit, et cetera, et cetera. And then of course wholesale come before retail sales, which means that you also see an increase of dealer inventory to some extent. And further, it's a normal seasonality into this as well. We typically build up some inventory in the second quarter before the closures of the European plants over vacation time, et cetera. The answer is we are building up some inventory in the second quarter, fully accordance with plan, and we are on healthy levels.

All right. Let's take two questions online, both from Tom Swift, and I'll read them out one by one quickly. So, despite the higher CapEx period, is getting to investment grid ratings a priority over the near term? Maybe take that and I'll go.

Yeah, I think, I mean, we are... aiming to deliver on our ambitions, both when it comes to growth and profitability. And I think if we do so, that will of course have a positive effect also from other perspectives, potentially from a rating perspective, et cetera. But I mean, the main focus is to really deliver on our ambitions as a company.

And a follow-up, can you comment on your minimum liquidity requirement from a day-to-day operations?

We don't guide on specific levels on minimum liquidity. We think we are at the healthy liquidity level.

This one comes in from Juicy Pananin. When can you make fully electric cars as profitably as fossil fuel cars, if ever?

Yeah, so if you go back to, if you take that top end of the range that we gave on the EX30, 15% to 20%, if you take the top end of that range, then you're already there. So I think that kind of answers that question. Is it achievable? Absolutely. When you can offer the technologies that we can offer already, which is LFP batteries, when we improve energy density within the battery, when we improve, as we've done with the e-motors, and you can get more range, that allows you then to take batteries out for the same range, which means you can take cost out, which means you can improve margin. And as you get more and more leverage on the fully electric supply chain, again, you get a reduction in your BOM costs, and that drives up margin as well. So I think we are already there. And the EX30 will be a great proof point to that.

All right, I think on that note, I think we're getting some questions, but I think we've already answered most of them. So I think with that, we should wrap this analyst and media live stream. So Jim, Yuan, John, thank you for your time. And thank you everyone for your questions. If you think of more, our phone lines are open. So reach the investor relations team or the media relations team, and we'll be back with you with answers shortly on that. But from all of us here, thank you and have a great day ahead. Goodbye. Thank you. Thank you.