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.