Volvo Car AB (publ.)

Good morning and a warm welcome to the presentation of Volvo Car's second quarter financial results coming to you from our headquarters in Gothenburg. My name is Ron. As always, I'm joined this morning by our President and Chief Executive Jim Rowan and our Chief Financial Officer Yoan Iqdal. At the top of this earnings call, Jim and Yuan will walk through our performance during the second quarter. And thereafter, we'll throw it open for a question and answer round. I'll come back with more information on how you can participate in the Q&A round. But for now, I'll leave the floor to Jim.

Jim. Thanks, Yuan. Good morning, everyone, and welcome. And thanks for joining us for our second quarter earnings call. The second quarter for 2024 has been strong with record core profitability. But before we delve into the numbers, here's what we achieved inside the quarter. We delivered very strong double digit retail sales growth within this quarter. We increased market share and the EX30 is now amongst the top three best selling EVs in Europe. Gross margins were at the highest level in seven years and gross margins for EVs were at the highest level ever. Our core EBIT and our core EBIT margins were also at the highest levels ever. and our cash flow improved by 12 billion sec quarter over quarter. We also achieved record electrified sales and EV sales within this quarter. Now in terms of the numbers, let's look at our performance in some more detail. Our retail sales for the quarter were up by 15%, much stronger than many of our competitors. Our gross margins for the quarter reached 22.8%, up from 19% last quarter. Gross margins for our BEVs touched a new high of 20% versus only 3% last year. And our core EBIT margins for the quarter increased to 8.1%, which is the highest ever, up from 6.3% reported last year. Our absolute core EBIT for the quarter increased by 28% to a record 8.2 billion SEC and share of electrified cars reached a new high of 48% in Q2 with the share of BEVs now at 26%. And let's look at our performance for electrified cars a little bit more closely. As mentioned, the share of our electrified cars rose to 48% in Q2 from 39% in the same period last year, with EVs accounting for 26% of those sales, the highest ever share of electrified products that we've ever reported. PHEV sales were led by the XC60, which has been the best-selling plug-in electric hybrid car in Europe for the past two quarters. Our EV growth has been led by the EX30, which continues to be among the top three best-selling EVs in Europe across all brands and segments. As mentioned earlier, the gross margins for BEV reached 20%, up from only 3% the same quarter last year. And as you know, we have been reporting our gross margins on BEVs since 2022. No other heritage car company has done that. Our purpose was to create an understanding of our wider investment community and the economics of fuel electrification and to demonstrate that we are making the transition towards electrification profitably. But as we introduce new BEVs into the market, this information becomes more and more sensitive. So from next quarter onwards, we will not disclose the margins of our individual drivetrains, including EVs, but we will continue to report on EV volumes. One of the reasons of our strong growth has been the balanced product portfolio. We have cars in many sizes and segments, the 30, 40, 60 and 90 size range, SUVs, sedans, wagons and MPVs. We have mild hybrids, plug-in electric hybrids and of course fully electric cars. Our plug-in hybrids and mild hybrids remain very strong and popular with our customers, and we will continue to invest in this lineup. And these cars form a solid bridge for our customers that are not yet ready to move to full electrification. On EVs, we have five fully electric cars in production, and during the third quarter, we'll have the first customers behind the wheels of our brand new EX90. Now the EX90 is not just an all electric SUV, it will be one of the very few cars in the industry to be packed full of technology and core compute. And this represents a major paradigm shift in the technology and throws us into a new area of great possibility. So let me delve a little bit more into the tech which is embedded within the new Volvo EX90. This is an image of our EX90 and it includes 10 key areas that represent our future technology stack. These include cloud, design, the application layer, e-motors and inverters, batteries, bi-directional charging, silicon, sensor, connectivity and of course software. All of this is happening at the same time and we are forced to understand and to harness all of these key technologies for the future. These key areas then become the enablers for us to offer unique Volvo benefits to our customers. Zero emissions, world-class infotainment, car sharing, service and servicing, advanced over-the-air updates, increased active safety performance, speed and handling, stability and comfort, safety and security, and home energy management. The EX90 is truly a software-defined vehicle that will just become better and better over time due to its OTA or over-the-air capabilities. Meanwhile, to make sure that we constantly improve what we do and how we do it, data capture and data analytics are the golden threads that run through almost everything. As I've said, electrification is the tip of the iceberg. The more profound change that's taking place in the industry are in these areas and this can be summarized as software, silicon, connectivity and data. Our industry is developing rapidly and to be successful, you will need to fully understand all of these technologies and how they work together. At Volvo Cars, we have invested heavily to make sure that we can do just that. And with that, I'll hand over to Johan.

Thank you Jim. Good morning everyone. A little bit more details then into the financials. Strong quarter, solid retail sales growth of 15%. Revenue just about flat but with some dynamics from contract manufacturing and other factors. We'll come back to that more in detail. Very strong EBIT, 8.2 billion or 8.1%, highest ever, as Jim alluded to, for the core operations, excluding JVs and associates. But also including JVs and associates, we're at 7.9% or 8 billion in the quarter, which is a significant improvement from last year, but there are a few different things, needs further explanation. I'll come back to that shortly. And on cash flow, we're about neutral for the quarter, and that is also on track to be neutral for the full year as previously guided. So a strong quarter from a financial perspective. And if we look more details into revenue, and if we exclude contract manufacturing, we have a 3% revenue growth, mainly driven of course by the increased volumes. We have a slightly negative sales mix in pricing, but that is mainly driven by product mix. You could say the main driver for the growth is the EX30, very solid margins, but the lower priced car, of course, have an effect on top-line growth. And then we have quite a big year-over-year effect when it comes to deferred revenue, and that's related to mainly sale of cars to rental companies and company cars with the repurchase agreement, which makes us be able to, from an accounting perspective, defer revenue and take it over time. That will even out during the course of the year, but it does have a year-over-year effect affecting revenue growth. FX on revenue virtually flat and then some other positive effects also driven by used car sales, parts and accessories and other, taking us to the 3% growth excluding contract manufacturing and that's of course to Polestar and lower volumes this year in contract manufacturing compared to 2023. If we look at it a bit more into EBIT then and look at the core EBIT excluding J-Business Associates, we have a positive effect from the volume growth. We have a positive effect from mix and pricing, which I think is also a good proof point on our ability to maintain price discipline. Slightly negative on FX in the quarter driven by the strengthening of the Swedish SEC. And then in other, we have parts and accessory sales, used car sales, but also effects from a lower then to the 8.2 billion or 8.1% in core EBIT, a very strong quarter on the back of the strong gross margin of 22.8% but also actually on fixed cost efficiencies flowing through due to the actions we are continuously taking and then taking us to the record 8.1% core EBIT. including Javis & Associates 7.9% or 8 billion and Javis & Associates combined all Javis & Associates is minus 0.2, which is significantly improving from last year. There are a few more one-off items I would like to explain related to Polestar. As you know, they some weeks ago released their preliminary year end 2023 numbers, which was including related to assets and that we have a catch-up effect in the second quarter since those effects was not known at the time when we released year-end 23 numbers. That has a negative effect although more or less entirely offset by accounting effects you could say based on the fact that due to the distribution of shares and lowered interest in Polestar we have a release of previously eliminated internal profit eliminations that flows through into the P&L in this quarter, offsetting the negative effects. And a third effect also being that during this quarter, the book value from an accounting perspective in Polestar has reached zero due to previously recognized operational losses. And as such, we do not recognize operational losses to Polestar as long as book value remains at zero. We of course have a significant value still from our holdings in Polestar, although from an accounting perspective, it's now down to zero. And that also affects these numbers in the quarter. On EV margins, 20% highest ever, we have an effect from CO2 credits but even despite that we are at 19% which is by quite a margin the highest ever, driven by both cost reductions and maintained price discipline taking us down to the 20% for the quarter. As Jim alluded to, we will going forward not show EV margins explicitly due to competitive sensitive information based on new products rolling in. We will of course continue to show the EV volumes but we're having a really strong quarter from an EV margin perspective in the second quarter of 24. liquidity neutral free cash flow for the quarter we maintain a very solid balance sheet and a solid liquidity level And we are still a guide on neutral free cash flow for the full year and that mainly driven by lowering inventory during the second half of the year when production and sales volumes should balance out. Still at high inventory level in the second quarter due to ramping up EX30 in more markets, etc. But we are tracking according to our plan for a neutral free cash flow for the full year 24. And if you look a little bit ahead on capital allocation and investments, we are in 2024 and 2025, as was previously also communicated at very high levels on investments. We are investing in new technology, in the manufacturing footprint, new platforms, new cars. But that will also then, when we come into 2026 and onwards, we will be able to harvest from those investments, taking down investment levels in absolutes, even more so relative to revenue, and then we should have a strong free cash flow generation from 26 and onwards. So, if we summarize the financials in the second quarter, highest ever core EBIT, 8.2 billion and 8.1% EBIT margin, strong gross margins of 22.8%, driven by cost reductions, and maintain price discipline. Gross margins on full electric cars on a record 20%. Neutral free cash flow for the quarter tracking towards neutral free cash flow for the full year. We have a strong balance sheet and strong liquidity levels And during the quarter in May, the lower shareholding in Polestar reflected in Group EBIT with 18% ownership remaining. And also going forward now, since from an accounting perspective, book value is down to zero, we will no longer recognize operational losses from Polestar going forward. And if we look a little bit further ahead then, We're coming out for a very strong quarter. We have a very good starting point going into the second half of the year. However, there are uncertainties. There are macroeconomic remaining challenges and tariffs imposed both by the EU and the US that will have an impact in the coming quarters. Although we have a strong balanced lineup of premium cars, we have EVs, PHEVs and MHEVs that will make us be able to navigate the different pace of electrification and the differences in customer demands in different parts of the world. The first customer deliveries of the EX90 will happen now during the third quarter. Next year, as previously communicated, we will localize production of the EX30 into Ghent in Europe And we will, of course, remain focused on cost and capital allocation and continue to prioritize value over volume in order to navigate the challenges ahead. For the full year sales volumes, our ambition is still to reach the 15% previously guided, although considering the challenges we have and the clear prioritization of value over volume, our guidance is now for the full year retail sales growth of between 12% to 15%. And we will have a neutral free cash flow in 24 and 25 and 24 now we will generate stronger positive cash flows in the second half of the year balancing production and sales volumes in order to take us to the neutral free cash flow also for the second half of this year. And then in September, the 5th of September in Gothenburg, we will host the Capital Markets Day, where we will have focus and be more grander presentations of our future products, technology, global footprint, commercial and brand strategy, and of course also how that links to the financials. And you can sign up at our investor relations page on the web. So with that, we go into the Q&A. So thank you.

Well, thank you very much for that, Yuan. So we are all set now to start the Q&A session. You can participate in the Q&A round in two ways. Either you can send in your questions via the chat. You can see the window at the bottom of your screen, in which case I will read out the questions for Jim and Yuan. Or you can simply use the phone lines. But remember, to be able to ask a question, press star 1 1. With that, let's get this started. But let me take the first question, guys. I mean, clearly looks like a really good set of numbers we have reported today. But Jim, if you were to sort of, you know, pick the three main highlights, the three main takeaways from your perspective that these numbers demonstrate.

I think we've got to start with the core fundamentals of the business so we're pretty happy that we in a pretty turbulent environment could grow the business by 15% and so that's a good starting point for us but the fact that we can do that with gross margins at 22.8% which allowed us obviously to deliver record EBIT of 8.1% and then also free up you know or improve our cash flow position by 12 billion set quarter over quarter when you look at those core fundamentals of the business That's a positive, obviously. And it is turbulent out there. You've got to make sure that we're positioning the right products in the right market at the right prices at the right time, and that we remain relevant and can take market share. And that's probably the last part. The fact that we're taking market share from our competitors is something which we're obviously happy about as well. That leads me on to the second part, which is we now have a SPA2, our latest platform, jammed full of new technologies, as well as obviously that core compute architecture that we've been working on for a while. Now, really, we are one of the very few people in the market that has crossed that bridge and crossed that Rubicon to real core compute software-defined vehicle. And that's an important stepping stone for us. So the first customers will be behind the wheel of the EX90 in the next couple of weeks. And that takes us then to a new trajectory, which is SPA2, SPA3 and beyond. And we can really build on that new platform architecture, both in terms of technology and also cost efficiencies. But the headwind obviously is around the tariffs. So, you know, it's a short term issue for us, but it is an issue in the short term. And so we're going to start to see the impact of that in the second half of this year until we can get the EX30 up and running and into full production in our facility in Belgium in the early part of next year. So that's the takeaway. Really good core fundamentals. Great to have a new platform in the market. And now we're dealing with the trade tariffs that are going to be a short term issue for us in the second half of this year.

Right. Another question that comes in is that maybe I'll take this that's coming online. How would you summarize the second half of 2024 from a financial perspective of Volvo? Maybe, Johan, if you want to take that.

Yeah, I think as Jim alluded to, we are coming out of a very strong quarter in the second quarter. We are at a very good position on the core fundamentals of the business. The underlying operational profitability has been very good. But there are, of course, challenges ahead, tariffs being one, EX30 coming from China into Europe and into US. There are still an uncertain macroeconomic environment. If you put it like that, that is, of course, creating continuous uncertainty, although we have a 15% growth in the first half. So we are at a good point. We see healthy demand and we are still a strong order book. But, of course, that is also a layer of uncertainty. We also have, as we have previously discussed, we have some factors affecting us more sequentially, like amortization of new cars coming into production, etc. So it will not be a linear journey onwards, but I think that there are some challenges in the second half of the year, maybe the tariffs being the biggest one, but coming from a strong starting point.

And I think that was why as well that we wanted to guide, so we guided that we expected to grow the business 15% in terms of units of growth or retail sales as we had done last year. And then we wanted just to have some more clarity on that with the new tariffs and some of the headwinds that we see in the second half of this year, we've now given a range between 12 and 15%. We wanted to put a floor on that for the investment community so they could understand how confident we are, obviously still to grow our business, because we see a lot of our competitors really struggling with any growth at all. So we still feel confident we can grow the business at a minimum of 12%. but we're still chasing obviously the upside of that, which is 15%. So that gives us a range and hopefully helps with the investment community just to give a floor on that growth.

Good. Let's take the first caller then this morning. And the caller is Harry Martin from Bernstein. Good morning, Harry, if you can hear us.

Yeah, good morning everyone. Thanks for taking the questions. I'll ask three if I may. So the first one, just on the 12 to 15% retail sales guidance for the full year, In the first half of the year, we've had wholesale revenues lagging the growth in the retail revenues, and then we've had revenue growth below that on the impact of the rental car mix and the deferred revenue contribution. So do you expect the growth rates between that 12% to 15% retail guidance and the actual automotive revenue in the business to get a lot closer in the second half of the year? That's the first question. The second one, just on raw materials, any comments that you have on the visibility you have on costs in the second half, how much of the raw material cost base is already purchased or agreed? It'd be good to get an understanding there. And then the final one, Jeremy, you kind of outline the importance of software and the investments that you've made. We've seen a number of headlines in the last few weeks about some software issues on the EX30 and also I believe the EX90 is being launched without some of the features that it was expected to be launched with in the US. How do you feel about the position on that journey and whether there is still further to go on investments in software? Thank you.

Thank you. I can start with the first two maybe and if we start on the volumes and revenue side I mean as you know we have been firmly guiding on the neutral free cash flow for the full year which means that if you like production and retail deliveries and wholesale will sort of balance out during the course of the second half of the year and partially the deferred revenue that is affecting the second quarter will even out Also during the year, in many cases, it's more seasonal sales and shorter-term contracts. There will be an effect, maybe affecting the full year slightly, and also the fact that a lot of the growth is driven by the EX30, which is very healthy margins, as we have seen, but it's a lower-priced car, which means that it affects the year-over-year, let's say, one-to-one, relation between volume growth and revenue as well. So my answer is like this, that we will see more balancing of the relation between growth and revenue for the full year, but maybe not one-to-one, And then on the raw material cost question, I'd say that the material cost positive impact in the second quarter is by far not only raw materials. We actually see effects also of our continuous work on the material cost in general. And we are now at quite low levels on raw materials. We're also working with hedging, so we're far more resilient than we were let's say before the spike of the raw material cost a couple of years ago. So I would say that the material cost upside we have in the second quarter will continue into the second half of the year, although maybe that there is not that much further upside, but we will still remain on very healthy material cost levels.

Yeah, let me just talk on the software side. So if I take the EX30, so we had some teething issues with the EX30 very early on in the launch of that product. Those issues were sorted very quickly. Maybe some of that news is just trickling out, but that seems to be aged news now and those problems have been solved. And that really talks to the strength of that car. So after about three or four months in the market, that's now the third best-selling EV car in the whole of Europe. So it seems to be that that's landed well with the customer base. On the EX90, the whole point of a software-defined vehicle that has over-the-air... capabilities to continually upgrade that software is the fact that we can do that. So we'll release the EX90, it'll have a fantastic set of features from the start, but obviously we can add more features, unlock more benefits, unlock more features as we give over the air updates as our software teams develop new and different features for the car. So I think that customers who invest in advanced technology products like the EX90 understand this fully and they reap the benefits over time. So we don't think this is going to be an impediment to sales growth in the EX90. And we don't see any major loss of, let's say, pre-bookings or pre-orders as a result of updating the car, if you like, with software as it gets further into its journey.

Thank you. Hopefully answers all your questions, Harry. Let's take another caller now. This comes in from George Galerius from Goldman Sachs. Good morning, George. And please go ahead with your questions.

Good morning and thank you for taking my questions. The first question I had was just with respect to the EX90 launch timing. Could you give us some insights into the rollout by market and when you expect this vehicle to be full production volume and readily available in both Europe and North America? And related to the EX90, could you just confirm what is the capacity capability of the plant in North America? And to the extent the demand exceeds the supply, how do you prioritize EX90 versus Pulsar? The second question I had pertains to the gross margins on the battery electric vehicles. a big step up in Q2 and a very impressive gross margin for BEVs if we compare it to many of your peers. Could you just explain the drivers of that step up in the gross margin for the BEVs and is this a run rate if we were to ignore the tariffs that we could expect to continue over coming quarters?

Yeah let me start with EX90. So EX90 starts its production life in Charleston and our a US facility, that production's already started. The cars have already been manufactured and they're in the process of finding their way to customers right now. So the first customers will be behind the wheel of those cars, certainly within this quarter. Then we ramp up production to, to full production the back end of this year and early into next year. So that hopefully answers the question on the production ramp. And then, of course, we can supply products to the USA and to Europe. We'll also start production of that same vehicle towards the back end of this year, early next year in our China facility as well. So that can serve China and Southeast Asia. So that covers us on the EX90 production demands. We feel we have enough capacity that will satisfy the demand that we expect to see for that vehicle globally. So we don't think supply constraints will be an issue for that specific vehicle. um and then on the sorry what was the second what was the second part of that question well there was one question on how do you prioritize volume between pole star and you know and the ex90 yeah and again i don't think that's going to be an issue for us because we'll put in sufficient capacity uh for that i don't think we don't see that as an issue we're you know we're incredibly excited about this car not just because of the core compute technology but because of the benefits that the car brings in itself in terms of the size, it's going to be one of the very few proper seven-seater electric vehicles with core compute technology and a huge range in terms of its electric range. So, bullish about this car and I think we have enough capacity.

Question on BEV gross margins then, Johan.

Yeah, and the BEV gross margins, as you say, very good margins in the second quarter, which we're very glad about. And there are a number of drivers. I think it's a combination as well as the general gross margin. It's on the cost side, raw materials even further flowing through, but also in general terms, we're working with cost reductions of the car, especially on the... let's call it previous EV lineup with the 40s, where we've done actions in order to take down the cost of the car. And that's more from a technical perspective as well and working with suppliers, etc. And then we have also been able to maintain a good pricing. And I think already previous in the new model year of the EX40 and EC40, with the improvements we've done on batteries and e-motors, etc. Improving efficiency and improving range, which has also made us able to price for that. So I think and being in a situation now with lower material cost and more resilient on material cost fluctuations due to more hedging etc. If we, as you say, exclude the effects of the tariffs, which will of course have an effect, I will see that we should continue on a healthy margin level going forward excluding that effect.

And maybe just to add to that, so on the EX30 as well, so this is a car after three or four months in the market is now the third best selling EV in Europe. So that's great. That's shown that we have really strong demand for that car. We also get it that would be between 15 and 20% gross margin on that specific car. Obviously, we're at the upper end of that right now. And part of the driver is we're getting a nice car mix order coming through on that. So we sell that in the core plus an ultra. And obviously, if you have a nice car mix in terms of profitability, that very much helps. So people like this car. They also like the, let's say, the upper spec of this car. And all of those are working together to drive those margins.

All right.

Thank you.

I'll take a few written questions now and this and a few comes in from Daniel Schwartz from Stifel and maybe I'll just take one at a time. Maybe the first one to you, Yuan, then. Could you provide details on the 2 billion sec positive effect from the other line that you showed in the EBIT bridge and whether that level is sustainable in the coming quarters?

Yeah, this is a year-over-year effect, of course, and it's driven to a large extent by improved material cost. And so I think there is still an upside year-over-year, but of course, during the course of 2023, I mean, we had... elevated raw material prices were maybe having a bigger effect in the first half of 2023 than in the second half of 2023. So my answer is that I foresee that we will still be on healthy material cost levels, but the year-over-year effects will sort of decrease over time due to the fact that we had more elevated cost levels in the first half of 2023.

And could you quantify the expected impact from the tariffs in the second half of 2024?

We've touched upon that, but a bit more on... Yeah, I will not quantify the exact effect. As you know, we don't guide on specific profitability in general. So, hence, I will not guide on the exact effect of the tariffs. What I will say is that, of course, it's a balancing. Temporarily, we will localize EX30 also into Belgium, in Ghent, as you know. But during that period, we will have an effect. We will, of course, be impacted. There is always a balancing with pricing and volumes, etc. But with that said, we will not be... Sorry for that. Fully mitigate the effect. So I think that there will be an effect. But on the other hand, it's also, we have a global sales of a number of different cars. This affects the EX30 from China into Europe. But with that said, we will be affected, but I will not quantify exactly.

All right. I think we can take the next caller on the line. This is Hampus from Handelsbanken who's calling in. Good morning, Hampus, and please go ahead with your questions.

Thank you very much. Three questions from me. Firstly, on the tariffs, do you know already now if it will be retroactively from the that you have already sold and delivered to clients so far this year, or if it only will be as of a specific date going forward? And second question is on the EX90. There's been some talks in the market that clients who receive the EX90 now will need to come back to you and have a change in the central compute GPU. That's something that you could either talk about or is it simply just a rumor? Last question is if you know how much you will be able to push forward in terms of bumping the price on the EX30 given the tariffs. Thank you.

Maybe I can start on the tariffs, it's important. The answer to the question is no, and then to be more clear, we don't know the exact outcome of the tariffs at all because it's an ongoing dialogue also with with the EU Commission, etc., which means that the vote among the member states will be in November. So the tariff levels are actually preliminary, and that is an ongoing dialogue with the concerned parties. So the answer is no, we don't know the final outcome, which is important to emphasize also in general terms, not only on the retroactivity.

Yeah, and then on the EX90, yeah, so we're going to be upgrading the EX90 obviously all the way through the course of its journey. If that's something which we feel adds benefit to the customer, then we will take obviously the responsibility to do that. Some of that will be software, some of that will be hardware. In the immediate launch of that car, which we'll see in the next couple of weeks, We're going to be collecting data. We're going to be looking at the best ways in which to give the software updates over the air, or in some cases, it may be best if we take that back in and do an update at the garage, in which case then obviously those costs would be covered by Volvo cars.

And question on pricing on the EX30 as a result of the tariffs?

Well, we have a strong position. I mean, that's what we saw after about three or four months in the market. We're seeing really good gross margins on that product, but we're also seeing fantastic demand. So, you know, we're looking at all of the options available to us to run our business in the most prudent way. Obviously, as you increase prices, you tend to reduce demand. So that's always an equation that we're looking towards. And then of course, between the core plus and ultra range of that product, where is the best mix for us? And if we are going to make pricing changes or pricing alterations, where should we make those alterations in order to benefit the customer and in order to drive value for our shareholders? That's a dynamic equation that we do, not just on the EX30, but we do that in every single car range that we have. And we do that in every single market. So that's why we have teams of commercial people around the world that look to the individual dynamics of the market, the competition in that market, and then we make those decisions. That's resulting right now in us taking market share. So we've grown our business 15%. A lot of our competitors are struggling to get that growth. So I think we're just about getting that equation right. And by growing 15% and also delivering eight points of margin, I think that talks to the point of the strength of the brand, the strength of the products, as well as how well we're kind of navigating through some of the turbulence that we're seeing right now in the industry.

Great. Hope that answers your question. Let's take a few more callers before I go to the written questions again. And this is from HSBC. This is Pushkar Tendulkar calling in. Good morning, Pushkar. Please go ahead with your question. Maybe let's try to connect with Pushkar. I'll take a written question in the meanwhile. And this is from Gemma Permalu from JP Morgan. Away from the tariffs, are you seeing any impact from the Red Sea crisis so far? And do you see any of that extending into the third quarter?

The Red Sea, no. Virtually none. And that was an issue of a few months ago. We came through that pretty quickly where we had to reroute some vessels around the Horn, but that's something that's, I'm glad to say, in the rear view mirror, let's say.

Another question comes in that apart from the geopolitical tension regarding tariffs, what are the other geopolitical or the macroeconomic challenges that are concerning Volvo cars at the moment? Maybe it's for you, Jim.

But not necessarily concerning Volvo cars. I think we are in a pretty good position. Obviously we've got the turbulence of the US elections going on, so that is a narrative that's playing through. The UK is still to decide on where it takes its decisions in reference to the EU and import duties as regards to EVs coming in from China. We don't know that. We also saw battery prices increase or tariffs increase in batteries that went from 7% to 25% in the US to import Chinese battery in the US. So all of that turbulence is not unique to, of course, Volvo car. That's an industry turbulence. And it expands even beyond the auto industry. I think the really important thing is that when we're designing our business, when we're architecting our strategies, we're making sure that we have got the most resilient supply chain, that we're manufacturing in region for region. We started that a long time ago with a build where you sell, source where you build strategy. So now we have factories In Asia, we have factories in Europe. We're investing in another factory in Europe, in Slovakia, that comes online in 26. We invested heavily in the US, $1.2 billion in the US to bring up the EX90 and expand the capacity there. But these are investments we made long before a lot of this turbulence. We're now reaping some of the benefits of that. And so, yeah, that's really the geopolitics that we think will play out in the next couple of years. It's very, very difficult to guess where that's going to be. So rather than trying to guess and react to that, we're designing a supply chain and we're designing a manufacturing strategy that's got much, much more resilience than it ever had in the past. And that's really the secret.

Another question from JP Morgan. Maybe I'll go turn to you for that, Johan. Any update on refinancing, please? You have €500 million worth of refinancing coming up in 2025.

Yeah, and I would say in general terms, Dan, is that we have a strong balance sheet and a healthy liquidity position. And so I don't foresee that We are in a period of high investments, but we will be self-funded in that respect. We will not have any need for increasing our gross debt, but we will likely also refinance future maturities, but not taking on additional debt in addition to that, that's in general terms.

All right, let's take a few more callers. This is Jose Acemundi from JP Morgan. Good morning, Jose, if you can hear us.

Thank you very much. Alan Clear, thank you so much, and congrats on a strong quarter. Johan, can you do a bit of a summary, please, second half versus first half on margins? What are the key pockets, positives and negatives, so we can understand it better, so the margin seasonality between the second half and the first half? Second question, can you also speak a bit about what are the key moving parts to hit your free cash flow guidance for the year? And then Jim, can you talk a little bit around powertrain product strategy or product portfolio? I mean, we're seeing some of your competitors are taking quite, I think, strong actions to discontinue some of the powertrains. How do you think about meeting different needs in different countries on a global basis and having the right power drain portfolio and how does this basically bake into your volume assumptions or growth assumptions for the next years. But effectively trying to understand a bit better your power drain strategy on a global basis. Thank you.

Thank you. I'll start then on the margins in H1 and H2 of the year. And as I said before, we had a very strong second quarter driven by Both ability to maintain pricing in combination with lower cost, material cost being the biggest driver, but also a general positive development on the run rate of fixed cost, partly offset by higher amortization kicking in sequentially for new cars and products coming into production. And in the second half, I would say, of course, we have the tariffs. We will not be unaffected by that. So that is one thing. We are still in an uncertain macroeconomic environment, although showing the growth in the first half that we are at a very good starting point from that perspective. But in addition to that, we also have some seasonal variations if we go into the next quarter, which is Q3, typically from a volume and production perspective, vacation periods, etc. It's not a linear journey for the full year. And with also further amortization, kicking in tariffs coming in. So I would say that Q2 is very, very good. We're showing an underlying strong operational profitability, although it will not be maybe the run rate for the full year, because there are challenges, tariffs being maybe the biggest one, short term kicking in in the second half of the year. We don't guide on specific margins, but that's sort of to set a little bit the scene of the dynamics going forward. And on the free cash flow, we are still firmly guiding on a neutral free cash flow for the full year. The biggest effect in the second half compared to the first half is inventory, and that we have been ramping up EX30 into new markets, et cetera, and building up inventory. In the second quarter, we also build up some inventory, which we always do from a seasonal perspective, ahead of the planned closures for vacation. But the production and sales will balance out over the course of the year, which then should be the biggest lever for us being confident, taking us to the neutral free cash flow for the full year.

Just on the powertrain, it's actually much wider than the powertrain, but let me start with the powertrain. What we're finding is that it relates to powertrain as well as size and features and functions and where people are in their life journey for the size of car that they need. So if I start with the EX30, EX30 obviously on a BEV powertrain, very successful car, third best selling car in Europe. But we're also seeing tremendous demand for our XC40 M-HEV cars. So that takes us into that M-HEV powertrain, really popular car, very, very cost effective and very well positioned in the market. And then if you look at our P-HEV, the XC60 has been the best selling P-HEV in Europe for the last two quarters. So that's an example of how we're playing across all of our different powertrain capabilities to drive value and obviously increase sales and take market share. But it's much wider than that because being in the 30 size, the 40 size, the 60 size and the 90 size, that gives us a range to cope with people's different lifestyles and choices. But we also have MHEV, PHEV and obviously PureBev. And we have the different factors as well, SUVs, sedans, wagons, MPVs. And then we offer that in core plus and ultra. So that's all the product piece. And then when you look to the markets, we have 2,500 dealerships around the world. That gives us access to over 50,000 product specialists, be that technicians that repair the car and service the car or sales professionals that help sell the car. And that gives us access to 10,000 service bays You wrap all of that together around the 80 countries, the 80 or 90 countries that we sell in, and that's kind of how we look at it. Where do we need to continually add value so that we can have the right size cars, the right price cars, the core plus and ultra offerings for the right car mix? How can we get those cars serviced? How can we improve the service levels for the customers? And how many countries are we in and are we driving value from every single country that we operate within? So it's a much, much more holistic, view, if you like, or strategy than the powertrain. But certainly the powertrain plays a big part of that.

Thank you so much.

Okay, let's take maybe a few more callers before we wrap this call up. Next one is from Jefferies. And this is Philippa Hughes calling in. Good morning, Philippa. Please go ahead with your question. Philippa, do you hear us? All right, let me take.

Is this Philippa or is it Philippe? Philippe, sorry. Philippe Uchoa, can you take my question?

Apologies, yeah. Please, Philippe, go ahead with your question.

Yeah, that's fine. Okay, all right. Just didn't want to take someone else's thought. Yeah, my question was on this deferred revenue, the $4.9 billion in the second quarter. Is that going to be a permanent fixture of your business model, having relatively large exposure to rentals and fleets? And then the follow-up to that is, how do we connect that negative number and the revenue to the EBIT bridge?

Yeah. It's not that we're increasing, as you put it, the exposure to those kind of sales. It's more that we see a dynamic that is bigger than usual in 2024. In the first half, I mean, we always have a part of our sales with your rentals and other cars with repurchase agreements where we have deferred revenue. In 2023, when we still were in a situation in the first half with more remaining supply constraints, you could say that those channels were underutilized and hence you get a bigger year-over-year effect than usual if it sort of normalized year over year, then you don't get that dynamic fully in the year over year bridge. That's why we're emphasizing this more in this. So over time, I would say it will even out and the year over year effects will be much smaller and also, and of course it has a partial effect on EBIT as well due to you get revenue over time, but that will also sort of even out over time when we have a more, even spread of these kind of sales year over year. So the effect is bigger first half 23 towards first half 24 than it will be over time.

And is that more linked to the EX30 launch being new, you placed it in rentals to increase visibility or is it just on other models?

Not really, I would say it's a part of our business in general terms and it's a mix of cars and geography, so it's not specifically linked to the EX30, no. Okay. Thank you very much.

All right, Philip. And thank you. And sorry for messing up the name at the start. No worries. Yeah. So the next caller is from HSBC. Pushkar, hope you can hear us now. Go ahead with your questions.

Can you hear me?

Yes. Loud and clear, Pushkar. Go ahead.

Yeah. Good, good. Sorry for the confusion earlier. I have two or three questions. So first one, I'm sorry to come back on the topic of tariffs, but that's important. So just if you could talk about the ramp up of EX30 production at Ghent, how would that go through 2025 through the year? Then just a very technical part, are the tariffs tax deductible? And then again on tariffs itself, but on the US side, if there are potential tariffs on imports into the US from Europe, do you have the flexibility to localize some production in the US as well? That's on tariffs and I have one more on the EM90. The retail sales in May and June, they've actually gone down month over month versus April. Any particular reason for that? Is it like a supply side issue? And if yes, when would we see kind of a ramp up in those volumes?

Let me start with the Ghent piece then. So thanks for the question, Pruskar. So in Ghent, we'll start the production of the EX30 in Ghent in the first half of next year. But the main volume will come in the second half of next year. So we'll ramp up at that point in time. We'll need to make the choice as to where we send those cars, where we sell those cars. So we're in the process of doing the planning work around that right now. And then we're in full production in the second half. So by the time we get to the second half of 2025, the Ghent facility will be up and running for the volumes that we need in Europe and in the USA. So hopefully that answers that question. On the EM90, you know, it's cyclical. That's a premium car. So the volume for that car wasn't expected to be specifically high. It's very much a brand statement from Volvo in China. Whereas the mass market in China and EV is all about price. We didn't want to enter that price market, that price position. So we wanted to go up. into the more premium space and that was the whole purpose of the EM90. So part of that, of course, is that we want to sell as many of those EM90s as we possibly can. Part of that is to position the brand in China as a premium EV player to stay away from the mass market. So I'm less concerned about the volumes there, I'm more concerned about the perception of Volvo and its brand position and its brand strength in China.

And on the specific question on tariffs and tax deductibility, my answer is yes with the disclaimer that, of course, this is a legislation that is still under construction, if you will. It will not be finalized until later this fall. And there might, of course, always be interpretations and changes in those kind of situations. But my answer as of now is yes. Good.

Can I just ask one more, maybe, if possible? Yes, go ahead. Yeah, I just wanted to understand the improvement in EBIT, the core EBIT margin, second quarter versus first quarter. Is that, so one part of it is the higher retail wholesale production. Is there anything other than that that drives that 80, 90 bps improvement? And especially if there is any one-off within that?

A big part of that is price discipline. I mean, you need to be disciplined in the marketplace. And that, you know, that attribute is important because when you're trying to also take market share and grow the business, you can only really have price discipline if you have a strong enough brand and a strong enough product in the market to drive that. So that's what we're particularly pleased about, that we have the brand strength and we have the right products and the right segments at the right price. So that allowed us to grow the business, but it also allowed us to grow the business with the right margin structure that we're looking for in the company. And of course, cost controls, as you probably know, we took out considerable costs in the business over the last 12 to 14 months, both in terms of raw material and also overhead and operating costs. Both of those pay forward as well, if you will.

Yeah, and on the specific note, there are no... material one-timers at all affecting the profitability in the second quarter. So it's a strong underlying operational result, price discipline and cost structure.

Thanks, Pushkar, for all your questions. We're getting a lot of questions and we'll try to take as many as we can. We're seeing a lot of companies now indicating that the overall EV demand is coming down. One of your competitors recently shut down a factory in Belgium. What are you seeing the others are not?

So the overall industry has got less new sale cars than in the past. That's just a statement of fact. The only way you can grow your business is to take market share. In my opinion, the only way you can take market share is to offer competitive products at competitive pricing within the market. We've increased our technology stack. We've done that significantly now with the EX90, but we'll continually increase the technology stack. When you have the right technology vehicles at the right price, and you also have the brand attributes that people care about, which is safety, sustainability, human-centric technology, fantastic Scandinavian design, And then you can release products like the EX30, which brings in a younger, new demographic to the brand as well. Then all of those things kind of come together. And of course, we've got the different powertrains. As one of the questions earlier, we have MHEV, we have PHEV. and of course we have fuel bev, so we can play across that entire spectrum. I'm a huge believer in electrical propulsion. I think it's a better technology than internal combustion. Just as an engineer, I look at the facts, I look at the science, I look at the physics, I look at the details on that. That's a better propulsion system. No loss of energy to noise, vibration, or heat, and zero tailpipe emissions. However, it's going to take time to bridge different parts of the world towards fuel electrification. we have a really strong bridge in terms of MHEV and PHEVs to get us on that journey. And so I think all of those things come together, you know, to degrade those benefits. So we don't see, in fact, again, you mentioned Belgium and competitive clothing factory in Belgium. We're actually putting in the EX30 into Belgium because we have such strong demand in Europe and in North America for the EX30. But again, I think that's because we have the right product at the right price point for the right size region at the right price to those customers.

All right, we probably have time for one last caller then. And this is Stephanie Vincent from Bank of America. Good morning, Stephanie.

Hi, good morning. Thank you very much. I have two questions, please. One is your strategy in China you did mention, but I'm just wondering if you have a target for where BEV penetration could trend to in 2024 and 2025. And then my next question is, can you please affirm the gross margin targets for the EX30? So I believe you spoke about 15% to 20% once that move to Ghent happens next year.

Yeah, on China. So in China, again, that's the great, it's a follow-on question really from the last question, which is how do you play in a market which is very turbulent and unchanged with a lot more competitors than there's ever been in the past? So we're very strong across the range in terms of MHEV, PHEV, and even in the BEV segment. But in the BEV segment in China, we're playing at the high end. We're not in the mass market on BEV. and that's where we'll stay, at least for the time being. And that will allow us to drive our electrical powertrains and those vehicles as well as our MHEV and PHEV vehicles in China until the turbulence starts to subside, which is probably going to be 18 months from two years to now. That's fine because, again, we have the breadth and width of products in terms of powertrains as well as different sizes and segments in China. We don't give specific guidance on how much EVs will sell in each particular region of the world because that's very dynamic. The whole purpose is that you've got to position your company to be able to react to those market dynamics as those market dynamics change. As more and more competitors come in in the EV space, of course, us being able to pivot quickly, not to get involved in the price wars there and sell more MHEV and PHEV products makes perfect sense. So that's maybe the answer to the China question.

And on the gross margin target, we are guiding on 15% to 20% on the EX30. Of course, temporarily with tariffs, but excluding that, also when we localize the car in Ghent, you have some ups, some downs. I mean, there's a slightly higher production cost in Europe compared to China. On the other hand, you win on tariffs. There are already tariffs, remember, and logistic costs, etc. And we have also other benefits in terms of lower... shorter delivery times to customers etc being an important car in europe lower co2 emissions etc but from a pure financial perspective we guide within the same range for the european produced cars

All right. Hopefully that answers all your questions, Stephanie. We really need to bring this to a close, but maybe Jim, I'll probably ask you to sort of conclude with your final thoughts. We've spoken a lot about the industry transformation and what the EX90 represents for Volvo in the future. Where do you see the industry transformation going from where we are sitting here today?

Well, if I look at Volvo where we are right now, so we're pleased with the core fundamentals. We wanted to position the company so that we can prove that we have the cost structure, we have the product lineup, that we can deliver 8% of EBIT at the core fundamental level of the business. And we achieved that this quarter. So that's a good proof point. Of course, we have tariffs and we will have an impact going into the second half of this year and until we get localized in Ghent with the EX30. But the core fundamentals of being able to drive cash, so a 12 billion improvement on free cash flow in the quarter, 8.1% on EBIT, 8.2 billion in SEC, as well as gross margins approaching 23%. All of that is really positive. And I think positions as well. And then we've got some new cars coming out into the market as well. So we'll have further strength from the EX90 as it hits the market. I'm driving that car right now. It's a fabulous car. Of course, I'm biased. So we'll wait to see what the reviews say on that car in a couple of months' time. But it does take us to the next level of technology. And really, that's the fundamental point here. We'll continue to invest in talent, technology and the transitions that we need to make in order to continue to push yourself forward and be positioned to be one of the winners in next generation mobility as this whole industry continues to unfold over the next two or three years. So that's basically the takeaway. Maybe finally, again, just as a reiteration, When you're part of that position is that we have cars in the 30 size, 40 size, 60 size, 90 size. We have cars in M-Hev, P-Hev and Bev. We have sedans, we have wagons, we have SUVs, we now have an MPV as well, of course. And we sell in 90 countries. We have two and a half thousand dealers across the world. That's 50,000 brand specialists or product specialists, 10,000 service space. So it's the whole package of Volvo cars and where it's positioned in the world versus a startup. It's a very, very different comparison in how you can bridge towards the future of technologies, how you can continue to invest in those technologies to remain relevant and even dominant in certain markets in the future. So that's the position that we're in. And yes, we've got headwinds in terms of tariffs and some other things that come in, geopolitics and so on. Our job as the executive team of Volvo is to manage through those faster than the competition.

And we'll speak a lot more about our transformation during the Capital Markets Day as well.

Indeed, yeah. And that's a great point. So hopefully those on the call here today can join us for our Capital Markets Day where we can unpack much more about our technology strategy, about our product strategy, about our commercial strategy, as well as obviously some of the financials. So please join us on the 5th of September in the fabulous new world of Volvo right here in Gothenburg.

Great. And with that, that's all the time we have. Friends, thank you very much for joining us this morning. For those questions we couldn't take, of course, the media lines and the IR phone lines are open, so we are available for you at all times of the day. But for now, from all of us here, have a great Thursday. See you. Thank you.