Volvo Car AB (publ.)

Good morning and a warm welcome to the presentation of VolvoCast's third quarter financial results. We are coming to you from downtown Stockholm today. We are currently in the VolvoCast studio and our tech hub in Stockholm is just a few blocks away. My name is Ron and I'm joined this morning by our Chief Executive Jim Rowan and our Chief Financial Officer Johan Egdahl. At the top of this earnings call, Jim and Yuan will walk us through our performance during the third quarter. And thereafter, we'll throw it open for a Q&A via the chat and the phone lines. I'll come back with more information right ahead of the Q&A. But without further ado, let me hand over to Jim. Jim, over to you.

Thanks, Ryan. And as Ron said, it is fantastic to be here, right in the very heart of Stockholm, in our Volvo studio, surrounded by our latest technology. With that, let's talk about Q3. Our momentum continues while performing and transforming. Share of our fully electric cars at 13% versus 7% in Q3 2022, which means our BEV sales are up by 111%. We've improved our margin on fully electric cars 9% versus 3% only last quarter, and this is very much in line with our plans and our expectations, again, as we had previously indicated. Retail sales are up 22%, production volumes are up 16%, again, compared to the same period last quarter. Continued solid underlying EBIT growth with lower variable costs, including our raw materials, again, as we had indicated. Stable order book, and we have maintained our premium price discipline. We also declared the end of diesel. Our last diesel car will be produced early 2024. That marks an end of an era and the start of another era. Construction of a Novo battery plant started in Sweden and we will accelerate the production of that in line with our plans. Volvo Cars' first fully electric MPV, the EM90, will be launched in November 12th in China. And we have started production of the EX30. During the second quarter, we revealed our first ever fully electric small SUV, the EX30. This competitively priced car will serve to strengthen our position and help us reach our global ambitions to become a fully electric car company by 2030. Not only has the demand for this car been higher than our expectations, but it has now also received several industry awards and we expect that to continue in the coming weeks and months ahead. In the third quarter, we also started production of the EX30, and that sets us up for the first deliveries of this car in the fourth quarter, with ramp up through the first quarter next year. The expectations for this car is that the gross margins for this fully electric SUV will be in the range of 15 to 20%, as previously indicated. In addition, we're also planning to produce this car, the EX30, in our Ghent plant in Europe. This decision reflects the strong demand for the car and supports our global strategy to produce where we sell. It also boosts our production capacity for this car in Europe as well as for global exportation. Let's move to the financials. Johan will take us through the financials in much more detail in just a second. But in summary, retail sales are up by 22%. Revenue is up by 16%. And our EBIT margin has grown compared to the same quarter last year from 3.5 billion sec to 6.1 billion sec. And that reflects the growth that we expect in our company and the growth that we expect in our performance. As I say, Johan will take us through that in much more detail in just a second. This positions as well for our mid-decade ambitions in terms of volumes, fully electric car sales, fully online sales, and also our EBIT margins and our reduction on CO2 emissions. Moving to CO2 emissions, you can see here both our BEV and our recharged cars in total. And whilst we see that go down slightly in the third quarter, this is very much in line with our plans and with our expectations as we move to a new model here. As we progress to Q4, we expect our BEV sales to be more online with the first half of 2023. And again, this positions as well for our global ambitions of CO2 reductions of 40%. from the mid-decade when you compare that to our baseline of 2018. Again, very much on track to what we had signalled before. With that, we look at global sales of what we call recharge cars, which includes our hybrids as well as our BEV cars. Again, we see this accelerating. And if we move to full BEV, then we see the same phenomenon. Fully electric cars are now becoming a global phenomenon. We're starting to see that in many markets around the world. Our bold ambitions to be early movers in the move towards electrification is now starting to really pay dividends for us. And we expect this to be something which accelerates in the coming months and years ahead. With that, I'm going to move to the financials and I'll hand over to Johan.

Thank you, Jim, and good morning. On the financials, retail sales up 22% in the quarter, revenue up 16%, but also worth mentioning is that wholesale is up 14%, slightly lower than retail sales, which is normal seasonality over the summer, which also shows that we are increasing revenue more than we're increasing wholesale, which also is a proof point for our ability to maintain good price discipline. On EBIT, 6.1 billion compared to 3.5 billion same quarter last year, 6.7% versus 4.4%, showing that we are continuously on a positive trajectory when it comes to the profitability for the underlying Volvo car operations, including Javis & Associates at 4.5 billion or 4.8% in the quarter. And on free cash flow, we are positive 2 billion SEC in the quarter, more or less in line with last year. On revenue, the biggest driver for the increased revenue is really volume, showing our normalized production situation where we see improved production month over month now since quite some time. Sales mix and pricing more or less flat, showing that we are maintaining solid price discipline. fx still a tailwind on revenue side contract manufacturing more or less flat compared to last year and also we have some further positive effects especially from sales of parts and accessories taking us then to the 16 growth and 92 billion in revenue for the quarter on ebit again volume being a strong driver for the increased profitability We also do see, compared to last year, as we have said, we see lower raw materials flowing through, we see lower cost for semiconductor purchases, we see lower logistics cost, et cetera, which is then also driving the underlying increased profitability. Sales, mix and pricing, slightly negative, although we see a higher BEV share, which still have slightly less margins than the other car lines. We see a normalization of mix compared to last year on the back of the improved production situation, but we also are maintaining good price discipline, taking us to 0.5 negative, but in all in all, limited effects on that side. On FX, more or less flat, slightly positive on EBIT due to the fact that other currencies such as Euro on the cost side are offsetting the positive effects on the revenue side. So that takes us then to the 6.7% EBIT margin, which is then Quite a big improvement compared to the 4.4% for the Volvo corporations compared to last year. J Business Associates, minus 1.7 billion, taking us then to the 4.5 billion or 4.8% EBIT for the quarter. BEV margins. As we already said in the second quarter, that was the low point at 3%. Now we are heavily increased that to 9%, which is driven by a number of different things. We see lower raw materials materializing in the second half of the year, especially lithium, which will continue then into the fourth quarter. We also see improved pricing due to the new model year and improved range, etc. And we also see cost efficiencies coming from, among other things, the in-house produced e-motors, taking us then to the 9% BEV profitability in the quarter compared to 3% in the second quarter. So also there a positive underlying trajectory. On liquidity, we are at a very solid liquidity level at the end of Q3, 70 billion, including undrawn credit facilities. We have a positive free cash flow in the third quarter. We will continue to have so in the fourth quarter, and this really caters for us being able to continue to deliver on our transformation and our upcoming investments. So with that, I'll leave back to you, Jim, for the summary.

So in summary, The order book remains stable. Retail deliveries are on track with solid double digit growth expected for this year, as we had indicated previously. Our full electric car sales will increase year over year. The EX30 first deliveries for Q4 with retail sales and production ramping in the first quarter of next year. The X30 has already won two major industry awards and we expect to see that increase over the coming weeks and months ahead. And we will stay continually focused on cost consciousness throughout the entire organisation. We will remain laser focused on our execution. We've announced the end of diesel production in early 2024. We've secured significant BEV margins improvements. We've stabilised our supply chain and we've strengthened our in-house software capabilities through our global tech hubs and further investments in software in Sweden. And we started the EX30 production. And we will add further production in Europe in the coming years ahead. from the smallest SUV to one of our largest cars that we've ever produced, the Volvo EM90. In a few weeks, we will globally reveal our first ever fully electric MPV, the EM90. We will do this in Shanghai. This will be an important proof point for our strategy, as well as our brand strength in China. And we hope that you will join us for that reveal. With that, I'll hand over to Ron.

Well, thank you very much for that, Jim. So we are all set now to start the Q&A round. As I said at the start, you can participate in the Q&A round either by using the chat function. You should be able to see the chat window at the bottom of your screen or else use the QR code to use the phone lines. But to be able to ask a question, please press star 1 1. Then we can hear you inside the studio. Well, with that, let's get started. But for the Q&A round, let me also invite our head of investor relations, John. Good morning, John. Good morning, Ron. All right. So let's get the Q&A round kick started then. And maybe I'll take the first question online since a lot of questions online as well coming in. Alright, so we've seen other competitors come out with their quarterly results and many seem to be very bearish on their BEV outlook. So the question is, how is the BEV demand for Volvo cars in the Q3 and how do you see demand for BEVs going forward?

Well, I can only go by our own order book. And what we see is a strong BEV demand. We see a strong demand actually for our products across all of our portfolio. And we see that pretty much in every region in the world. And that's allowed us to maintain our price discipline. But as we get back to specifically the question on BEV, Well, then we see a strong bed demand, not just for the C40 and the XC40 that we've got in play right now. We've just refreshed that car on the model year 24, which gave us additional range within that car. I think that's obviously helped. But also for the EX30. The EX30, when we announced that car, we opened the pre-orders. We set ourselves some internal targets on those pre-orders and what that should look like. And we surpassed those internal targets pretty quickly. And so... But I think we're slightly different in so much as we've been very, very choiceful of how we move into the electrification sphere. We started with the C40 and the XC40, which of course started its life as a mild hybrid car in terms of the C40. So we understood the dynamics of that specific segment. And then we proliferated that out to supply that car globally. We've done the same thing with the EX30. We're in a different segment. So we're not overloading one segment with more and more cars that compete against each other. The EX30 takes us into a really new segment, the smallest SUV we've done. uh it takes us to a new demographic it takes us to a new price point 35 000 starting price for a 480 kilometer range car that's very competitively priced the em90 which we'll announce in a few weeks time takes us into a very different segment again still within the electric sphere but within a different segment so we don't overload and of course we're positioning that car really in china to see that car so not only are we positioning our electric vehicles into different segments around the world We're actually positioning them into different markets around the world where we think they can be really successful. And then, of course, the EX90, the same thing. That's the flagship SUV. And we think that the XC90 and the EX90 will live in harmony for quite some time. When I look at the US, The electrification of East and West Coast is driving electrification. The interior is taking longer. So if I look at the 90 range, I expect that we will sell the EX90 more in the coastal regions of, say, California and so on. But the XC90 will still sell in the PHEV range and the interior. And we see the same dynamics in China. So I think we're really well positioned and we've been very thoughtful and sure-footed about how we have our existing portfolio and how we then augment that with electrification in different markets and in different sectors. So I remain bullish on our journey. I remain bullish on our strategy. And as well, we're in the premium sector where we see an awful lot of the turbulence and where we see a lot of oversupply and a lot of excess inventory is in that low-end mass market arena. And we don't operate within that arena. So to some extent, it's measuring apples and oranges, in my opinion. Alright.

good thanks for that so uh let's uh get maybe the first caller on the line this morning and that's uh hampus single you from handelsbanken good morning hampus and please go ahead thank you very much two questions for me for me um speaking about the ex30 gym and you i guess you're starting to have some visibility on production and q1 and Would it be possible to maybe indicate some of what volumes we should expect here, given that it's a new model that is broadening your product offer? Second question is more an nitty-gritty question, and that's on the price-sales mix during the quarter, minus 400 million. One of the main competitors on BEV here has lowered prices back to 2020 levels. how much of this is a price element and how much is a sales mix element in it.

Thanks. Great. On the EX30, so we started production of the EX30 a couple of weeks ago. We'll see the first customers behind the wheel of that car before the end of this quarter, which is immediate, pretty much in auto terms. And then we'll ramp that up through production in the first and second quarter of next year. We also announced Yesterday or earlier this morning, actually, we announced that we would manufacture that car in Europe as well. So that's going to give us enough capacity to build the global supply for that car. It also allows us to make sure that we can circumnavigate any of the trade tariffs and so on that might come in the future. So I think that from a strategic point of view, We're very well positioned for the supply of the EX30. In terms of the volumes, yeah, of course, this is going to be a volume car for us. It's in exactly the right price point as we seek to democratize electrification and bring that price to a $35,000 range. We have 480 kilometer range. sorry, the $35,000 price with 480 kilometer range, we think we get into that sweet spot of being able to attract more customers, younger customers, younger demographics. And of course, if we offer that car on subscription-based ownership as well, it allows us to even attack more of that market. So it will be a volume car for us. We haven't put exact volumes on what that looks like right now. We may do that in the future, but suffice to say, we think this will be one of our highest selling models in terms of volumes. On the price piece, again, back to the EX30. We signaled out last quarter, we expect the EX30 to come in with gross margins of between 15 and 20%. And that is much, much higher than anything we've seen. In fact, I think we're still the only automotive company that splits out BEV margins versus the total blended margins. So we've saw that increase from 3% last quarter to 9% this quarter. It's a three-fold increase in the space of a quarter. I expect that we'll see further benefits even on the XC40 and the C40 gross margins as we accelerate through the rest of this year because we expect raw material prices to come down. So we have further tailwinds even on that. And then, of course, we add the EX30, which we say 15% to 20%. I don't think there's many other... car companies that have got both internal combustion engines as well as BEVs that are making 15 to 20 percent gross margins on their BEVs on an isolated measurement and so I think we're much better positioned in that market than maybe some others.

And on your question on the price sales mix in the quarter, I would say that the main effects are from one, we are increasing year over year the BEV share, which is of course slightly diluting of the margins. We are also seeing a normalized mix that is Reducing that somewhat because, I mean, which is in essence a positive thing since we have a much better production situation. So we are far from back to pre-COVID pricing. I would say we don't show the exact allocation, but we are keeping up prices for sure better than we were pre-COVID if that was the question.

Fair enough.

Thank you.

All right. Thanks for that, Hampus. Let's take another caller then. And this is coming in from Goldman Sachs this morning. And that's George Galerius. Good morning, George. Please go ahead.

Thank you. Good morning, everyone. The first question I had was more of a conceptual one just around the market evolution for BEVs. Do you believe it will be possible going forward to price a comparably sized Bev at a premium to the ice equivalent in Europe and North America as we've seen manufacturers do so far? Or do you think customers will increasingly demand price equivalency at point of purchase? And the second question I had was on the EX30. I mean, I completely agree with your comments. The targeted gross margin of 15 to 20% is very impressive and materially above that of what we've seen from a lot of pure plays and your competitors. But if we look at your reported gross margins today at a group level, it's already within that range. So is the aim, at least in the near term with the BEVs, to be able to transition to the BEVs with no incremental margin dilution, i.e. keep margin equivalency to what you've had in recent years? Is that the first objective? And I don't want that to sound like it's not an admirable objective because I think others will struggle to even achieve that. Thank you.

Yeah, let me take the first one. So in terms of, so when we look at the EX30, as you mentioned, I think for the first time, we can see we're pretty close to price parity between ICE and BEV, 15 to 20% gross margin. If we can push that, you know, higher to the 20% than the 15%, as we get more and more volume and continue to take cost out of that platform, then of course that would be your ambition that we would start to see the EX30 move towards the upper end of that scale that we were given. And then you're definitely on Bev Ice comparability at that point. The question then, moving to the question across the range, as the evolution of Bev, we're starting to see now we stopped diesel. So we made that as a conscious choice. We're starting to see some cities around the world now ban diesel from the inner cities. I think that's going to be something that progresses over time. One of the reasons why we've taken that decision. But if you then look as we go three, four, five, six years into the future, And the world is much more towards a BEV landscape where you start to see much more energy density in batteries. You see the cost of batteries coming down and you start to see that more price comparativeness. The other thing which is coming on is that then the residual values of BEV cars are going to be higher than the residual values of ICE cars. and that is going to change that's going to be a changing dynamic that we haven't saw play out yet within the market that's going to take a number of years and that's what's going to allow us to drive then the the higher gross margins across the range and ev because people will trust that if they buy an ev the car is going to be a higher residual value in three four years time after purchase than a nice car would be and those dynamics are not being talked about enough in the transition to BEV and how customers will see that value proposition three, four, five years from now.

With the second question then, Johan, if you want to add something on that, on the BEV cross margin piece, it's pretty much in the range of where we are today, our gross margin. So will that be an addition to our gross margins going forward? If you just add some color to that question.

Yeah, I mean, as we have said, we will be on cost parity from a cost perspective on comparable cars, mid decade between BEV and ICE. And I think the EX30 will be the first proof point that that is possible. in order because that will as you say be almost on par with with company gross margin and and and again we also see i mean in in even in this quarter the proof point now and when raw material prices are coming down we have been able also to price uh for the improved technology with the improved range etc on the current bev lineup although they are not still on par with with with the the ice cars I think, again, mid-decade, we will be on parity. And of course, we also have the ambition in order to reach our mid-decade profitability ambitions to also, over time, improve our gross margin over the whole lineup by being more cost-efficient from a technology perspective, but also being more cost-efficient as a company, setting the right cost structure and indirect cost, et cetera, which we are continuously working with. So I guess, yeah.

Right. Good. And there are some benefits, again, which are not obviously immediately obvious. As you transition more and more of your portfolio to BEV production, there's a lot more similarities in that underlying component set. And one of the reasons why we're building our own battery factory is so that we really understand the cost of batteries, which is a real big component of the cost of BEV cars. We have two joint ventures with Northvolt. One is to understand the underlying technology, which is an R&D joint venture. The other is a manufacturing joint venture. Thank you. When you look at internal combustion, the engines are always different. There's always different components. There's hundreds, if not thousands of parts in each one of those internal combustion engines. When you move to a BEV car, you can standardize on motors, on inverters, on battery, on the battery management software, and you can reuse that technology in different platforms and in different size modules. And you really get the economies of scale and the economies of benefit on that and the economies of scope that you just don't get on ICE cars. and that's where you can drive that even if your gross margin stays the same at 20 or so you can drive a higher ebit margin because you have more efficiency and the underlying bill of material which is still the single biggest part of the cost of the car and that again that's a conversation that's not fully developed right now in the markets but that's that's going to be something that if you can really understand the underlying benefits of the of the key technology that's in the car, batteries, motors, inverters, the software that drives that electrical propulsion system, all of which we've brought in-house. We do our own motors, we do our own inverters, and we're starting to build our own batteries. That's really where the synergies start to kick in three, four, five years from now as you develop much more towards a bigger portfolio being Bev, if you will.

Hope that answers your questions, Judge.

Yeah, very insightful. Thank you.

All right, thanks for that. Let's take another question online. Then maybe this comes in from Matthias Holmberg, analyst at DNB. Is there any reason we should not see a normal seasonal increase in wholesale volumes in Q4 compared to Q3?

I mean, what we have said is that we will have a solid double digit growth in sales volumes for the full year 2023 that we are absolutely still standing behind and I think both the Q3 volumes also on the back of the now much improved or normalized production situation and also where we are year to date. We don't guide on specific volumes in Q4 but I mean Q3 is a good proof point.

all right great maybe let's take another caller then this comes in from Stephanie Vincent in Bank of America good morning Stephanie what questions do you have for us hi I guess my first question is just on your order books some guys have been giving

you know, monthly sort of months outlook for orders. I was wondering if Volvo car would potentially do the same. It seems like some of your competitors are talking about a two to three month range. It would be nice just to get some visibility on that number. My second question is on your inventories, if you would be willing to disclose potentially days inventories at your dealers or at the group too. I think that would be helpful. And then finally, supply chain issues are still obviously a big deal in the space. Just wondering if you would be willing to disclose, you know, any supply chain issues that you see upcoming over the next six to 12 months. There's been some issues in the space about graphite. Can you talk a little bit about semiconductors still? and any other items that we need to be aware of. I think 48 volt batteries were also brought up today by a competitor. And that's it for me. Thank you.

On the supply chain thing, actually buying large we feel we're kind of through most of that turbulence that we saw in the last couple of years. We don't see anywhere near the amount of issues with semiconductors for example. We still need to play in the spot market a little bit here and there but it's not something which is significant. for us compared to certainly a couple of years ago. There is a couple of little things that pop up from time to time, as you mentioned. Graphite, we won't be affected by. Gallium, we won't be affected by. So some of those recent announcements in China around graphite and so on. So we've double checked on our supply base on that. That's fine for us. Things like silicon carbide, I think is going to continue to be probably a problem on the inverter module side for a while. Everybody's looking for those same components. But by and large, we don't see the turbulence that we saw to anywhere near. And it's certainly for us, it's things that we can cope with. There's always turbulence in the supply chain to one extent or the other. For me, we're back into normal levels of turbulence within the supply chain. And we have much more visibility on what we call clear to build or clean to build, which gives us visibility for the build into the future. That's much more progressed and we have a much longer view on what that looks like on CTB than we've had in the past. So that's on the supply chain side. I'll let Johan talk on the inventories.

Yeah, if we start with the question on the order book, we don't disclose the exact size of order book, etc. But I can say so much that we are still virtually on the twice the size of a normalized order book from pre-COVID. Despite the fact that we now are improving production, we are still seeing the order book maintained on a high level simply due to that we still see a healthy order intake. So that I think is a proof point. It's not only that we're living off an historical order book, it's still also being refilled, if you will. It will, due to improved production, probably slightly decline over time since we have had long lead times, etc. But it's still maintained and the order intake is healthy. On inventory, we don't disclose exact number of days in the inventory. Inventory increases in Q3, it has, and it's typically normal seasonality. It typically then goes down in Q3. Q4, which we expect also this year, with the exception, which is also maybe important to mention, that the EX30 will, of course, then also have an offsetting effect due to the fact it's produced in China and there will be more cars in transit. But otherwise, I think we're following a normal seasonality and we have healthy inventory levels, less than pre-COVID, but higher, of course, than during the supply chain issues last year. But I think we are balancing at the healthy inventory level.

If we check with the dealer network, we are not seeing very large inventories at this point. We have seen increased production, but we've also got the feedback that we have had two low inventories in the dealer network in the US, for example. that we don't see as a major issue and then also to clarify on the order book even if you exclude the new cars and look at the life cycle cars it's still also there twice the size but you know from a customer experience perspective we still have a bit of a too long waiting time so reducing the order book is also positive from that perspective which Gradually happens, right?

Great. Hope that answers your questions, Stephanie. Let's take one online then by a chat that comes in from analysts at Redburn. Two questions. His name is Tobias. So Tobias asks, why did bear volume fall quarter on quarter? So versus Q2.

and latest update on ex90 can you comment on software platform integration process sure and so it was natural we expected the bed volumes to fall on q3 we i think we'd already signaled that and that's the derivative of us basically changing model gear so model year 23 was going out that but that pushed into the market and queue at the end of q2 And then that new model year was ramping up through the factories, the transportation time to get that into the dealerships and into the hands of the customer. There was going to be a natural fall. We'll see those BEV percentages increase again in the fourth quarter to, I would imagine, the first half levels of 2023, maybe a little bit beyond that. So we'll see that pop back up. And then, of course, if we continue into 2024, the EX30 will be online Q1 in pretty decent volumes. EM90 will have launched by then. Halfway through the year, we'll launch the EX90, which is the next part of the question. So you're going to have the model year 2024 for XC40, C40, EX30, EX90, EM90. All of those will be in play next year. So that's when we'll start to see, again, further increase in our BEV percentage of total sales. And again, back to the earlier comment that we started with, in very different segments and very different parts of the world. So we don't overload any specific segment or any specific geography with too much BEV cars at the same time. Right. All in the plan, all strategically thought out, and now we just need to execute. So that's the execution. That brings me on to the next point, which is basically the EX90. We made a conscious choice. This is a fantastic car. I've been driving this car around Gothenburg now because we have road release on that so we can drive it on the open roads, the test cars that are. And that's really when you start to get a real sense that this car is now ready for prime time. We deliberately made the choice that there was a lot of software in this car. There's a lot of hardware. It's new technology. We wanted it to be, you know, as best as it possibly could be before we launched that flagship electric SUV. And so we decided that it needed a little bit more time in the oven, let's say, and to sort out mainly on the software side. And now I'm very confident that we'll be launching that car in line with the latest expectations that we set to the market a couple of months ago.

All right, good. Thank you for that. Another caller then. And this is Pushkar Tendulkar from HSBC. Hi, Pushkar. What's your question?

Hi, this is Pushkar from HSBC. I have three questions. The first one, a very short one about the bets. So you said the EX30 would also be produced in Europe. If you could confirm the gross margins for this, that the car produced in Europe, that would be still within the 15 to 20% range. Then the second one on your sequential margin development in the third quarter versus the second quarter. If I strip out all the JV associates effect and a restructuring effect. I think the margin more or less has been in Q3 was at the same level as Q2. I would have expected it to be better just because your BEV profitability has improved and you also had a lesser BEV exposure in the third quarter. So if you can just explain the puts and takes of the sequential margin development. And then just the last one on Polestar, So I just wanted to check if Volvo would participate in a Polestar capital raise, considering that it has the option to convert its loans to equity. And also on a broader level, what is Volvo's view about the significant cash injections that are required in Polestar, considering that Volvo itself is going through peak CAPEX cycle along with the so-called strategic investments?

Thank you. We can confirm on the margins, I think in Ghent, maybe you've got the details, but we can confirm the margins in Ghent will be within the same 15 to 20% that we would expect to come from China. The offset of the 10% that you need to pay import duties from China to Europe, if you manufacture in China versus manufacturing in Europe, the cost base in terms of components and so on. So we are very comfortable that we can maintain that 15 to 20% gross margin, whether that's built in China or whether that's built in Europe. So hopefully that answers the first question. I'll let you come back to the margin development, but let me just, and also you can maybe mention Polestar, but let me just say a few words on Polestar. So we've been an investor in Polestar for a number of years. It started off, of course, with the Polestar 1, which was a low volume car and really the dynamics of building that brand in the market. And then, of course, Polestar 2, which has been in play now for three years. They sold 50,000 Polestar 2s last year. That's for a startup EV brand. That's considerably decent volumes. And we've been funding Polestar to the next phase of their growth journey. The next phase of their growth journey is happening now. And so those investments, as you know, in the auto industry, you put in the investments up front, the cars become available to obviously design and develop and manufacture those cars. And when that investment is made and those cars are in the market, that's when you get that revenue stream that comes back in from those investments. We're in that cycle phase right now with Polestar. They are going to release the Polestar 3 and the Polestar 4. Both of those cars will release to the markets within the next six months. And that takes them to their normal growth cycle then in terms of the Polestar 2, the Polestar 3 and the Polestar 4. all in play by the first half of next year. And so that's just the dynamics of the funding that we've put into the company in order to get them to the next phase of the growth journey in that sense. Just as some background as to the dynamics as it stands today.

Yeah, a question on the margin development from Q2 to Q3. I agree the margins are reasonably similar. I think it's a variety of effects. As I say, we have an increased BEV margins, still BEV share reasonably low. In the third quarter, we also have cost deficiencies from raw materials, etc. flowing in. But we also have, let's say, a normalization of the mix in the sales, which also affects margins quarter over quarter. So I would say that we are reasonably similar to Q3. I would say that we are at a positive trajectory from the underlying margin development, but not with any major effects between Q2 to Q3. That's how I would describe it. then maybe more on the Polestar and potential equity raise. What we have said previously and what we still stand by is that we could consider participating in a Polestar equity raise. We can also do that potentially by converting the loan that we have granted them and we will do that not more, we will not increase our ownership share. That's an important point as well.

Alright, thanks guys. Hope that answers your questions Pushkar. This is a question coming in from Automotive Journalist. When do you expect to see significant output from your joint venture plant with Northvolt? How significant cost reductions do you expect and which cell types will you be producing there? Maybe more like an update on a plant with Northvolt, Novo.

yeah 2000 2026 uh will be when we start to see production uh from from the facility uh itself and we haven't released the chemistry we haven't released the cell types uh we'll do that at a later stage um you know as and when we think that the timing is right for that as well as obviously the cost benefits that they think that we think we'll get from manufacturing internally versus manufacturing with partners it is important to say that the north volt facility won't be It won't supply 100% of the batteries that we need. We will still maintain that relationship with our existing suppliers. And remember, we're growing our company. So there's enough growth scope to fully satisfy the needs that we get or the production that will come from Northvolt, as well as even growth from our existing suppliers. So I think that's an update that we'll probably give in a more meaningful way to the markets in maybe early next year or so on.

Alright, good. Let's take another question. This is coming in from Netherlands, mobility editor. Will you produce the EX30 also in the new Volvo Cars plant in Kosice and will production of the EX30 transfer from Ghem to Kosice when the Kosice plant is operational?

So we've signalled that we're going to manufacture the facility in Ghent. So that gives us European production. So we have production in Asia, we'll have production in Europe. We think that's going to satisfy the production facilities. It's expensive when you fit out a factory for production. So the Kosice factory is not targeted to do the EX30 at this point in time. That will be a different model. We don't think it makes financial sense to split that volume over two sites and do two installations of the same platform. It just doesn't make cost-effective sense.

Let's take another caller then. Perhaps we're running out of time, so maybe we can have one or two last questions. But let's take caller Agnieszka Wiella from Nordea. Good morning, Agnieszka. Please go ahead with your question.

Yes, good morning. I have two questions, maybe starting with a question to Johan. Can you give us an update on your cash flow expectations or maybe cash outflow expectations for 2024 on the kind of initiatives that you already know about? And here I refer to maybe your CapEx investments in factories, the investment in Novo and the strategic transactions, any outstanding ones, if you could comment on that. Thanks.

Yeah. Yes, in terms of the exact outflow for different investments, we maybe don't guide on that. What we have said is that the the strategic investment in the joint ventures in China that we have showed previously might be delayed into 2024. We're awaiting final regulatory approval, so that is a little bit uncertain exactly when in time that comes. That's around 3 billion sec. In addition to that, I think that we will have, of course, significant investments going forward in terms of both our production footprint and and new cars and and the novo factory however we we have a plan that we will be self-funded on these investments so we used to we should have a have a solid cash level going forward despite these these high investment levels that we do have in 23 24 25.

Thank you, Angieska, for that question. Maybe we can take two quickly. This comes in from Danske Bank. As normalization of mix was a headwind on margins in the quarter, where are you in the post-sourcing crisis era? When will the mix be fully normalized?

I would say that the mix is reasonably normalized now. So I think I mean compared to 2022 because the analysis and the walk is year over year and then in a situation with supply chain constraints we were focusing of course on producing let's say the most profitable cars in the situation where we had those constraints. Now we have a much more improved production situation and we are really working with the full order book, which means that I would say that we are to a large extent normalized as we are right now.

Cool. Maybe I'll take one question at the end then. So you have reinforced your guidance for 2023 with solid double digit growth in retail volumes, but can you give us a color? How do you see the year 2024 panning out for Volvo cars? Jim, if you just want to leave that to Johan.

Yeah, I mean, we will come in with two new cars in 2024, the EX30, which will have started production already, but from a volume perspective will come into play in 2024. We will also have the EX90 coming in the first half of 2024, which in both cases, of course, will cater for a growth in 2024. When it comes to more detailed guidance on volume growth in 2024, we will come back at the later stage.

And then just to augment on that, so next year, when we go in, as we start next year, the EX30 brand new segment, so we don't operate in that segment. I don't fear that we'll cannibalize the C40 or the XC40 for that. I think it's a different demographic that we operate within. This is a $35,000 car. It's going to bring in new customers. When you offer that in subscription, it's going to bring in... allow us access to new customers at the same time. The EX90, as I said previously, I think the EX90 and the XC90 will operate in harmony in most parts around the world. We see Northern Europe electrifying much quicker than Southern Europe. So in which case that's an XC90 versus same with the Same with the US, the interior and the exterior. So what we're going to have is an augmentation of our existing portfolio of products augmented by the new electric products. And that's for people who want to be electric but also want the safety and security of being in a Volvo that care about our brand and the sustainability that we put into that and the fact that you get that range and to some extent on the EX-8 you get that price point. So and then, of course, the EM90 is the same play inside China. So, you know, I'm bullish about the future in terms of the existing portfolio of products I think could still grow as well as our new electric range as well, which should be additive to that.

All right. So with that, Jim, you and John, thank you for your time this morning. And thank you, everyone, for joining and for participating in this live conference call. Hope we've answered all your questions. The phone lines, you can reach the investor relations team or the media relations team for any more questions that you might have. But from all of us here, goodbye and have a great day.

Bye bye.

Thank you.