Volvo Car AB (publ.)

Good morning and a warm welcome to the presentation of our third quarter financial results. We're coming to you from our headquarters in Gothenburg. My name is Ron. I work in communications. And as always, I'm joined this morning by our Chief Executive, Jim Rowan, and our Chief Financial Officer, Yuval Ekdal. Like we do on these calls, at the top, Jim and Yuval will walk us through our performance during the last three months, after which we'll throw it open for a Q&A. You can participate in the Q&A round either by using the chat function at the bottom of your screen or simply use the phone lines. But I'll come back with more information closer to the call. But for now, I hand the floor to you, Jim.

Thanks, Ron. Good morning and welcome to the third quarter financial results. During the last three months, we maintained our operational momentum and demonstrated resilience, even though we are now confronted with a much more turbulent external environment. Let me walk you through the highlights from the quarter. Our retail deliveries increased by 3% during the third quarter, and we grew faster than our premium peers. We took market share in Europe, and in an increasingly competitive environment, drove our market share from 1.7% in Q3 last year to 2.4% now. This was made possible by the performance of our balanced portfolio of cars. The EX30 continues to be among the top three selling EVs in Europe, while the XC60 remains the best-selling P-HEV in the region and has been for several months. Our electrified cars now represents 48% of our total volumes, with Bev's share at 25%. Now onto the financials. Our gross margins increased to 20.5% versus the same period last year of 19.6%. This improvement came in the back of lower material costs and improved operational efficiency. Our core EBIT margins for the quarter came in at 6.2%. Johan will walk through the full financial details very shortly. In terms of free cash flow, we were almost flat during the quarter. And again, this was in line with our plans. As regard to product development, we remain committed to electrification and it's encouraging to see our continued leadership in this area. Almost half of our total sales in the quarter came from electrified cars, consisting of fully electric cars and our plug-in electric hybrids, so all cars with a cord. This performance puts us in a strong position to meet our 2025 60% of our sales coming from electrified cars. Our performance in Europe was particularly strong during this period, where the share of electrified cars reached 68%. This also puts us well on track to exceed the 2025 CO2 targets as set by the EU. But while we remain resolute on the journey, the market turbulence is intensifying. Since our Capital Markets Day in September, the external environment has become even more challenging. A fact also echoed by revised inventory forecast and third parties analysts such as S&P Global. We are seeing a general weakening in demand for premium cars in the key regions of China and the USA. And even in Europe, we are seeing signs of a slowing and softer demand. This is mainly due to the microeconomic factors such as higher interest rates and changing consumer sentiment. softer demand for EVs due to a slower pace of development and charging infrastructure, reduced government incentives and uncertainty created by tariffs. Considering all of the new market realities, our strategy to focus on value rather than volumes alone, we now expect minimum growth during the fourth quarter. This will affect full year sales growth, which is now expected to be between 7% and 8% instead of the previously guided 12% to 15%. However, we will still outgrow the premium market. However, the lower Q4 volumes are expected to have an effect on our free cash flow for the full year. We anticipate our full year free cash flow to be single digit negative billions of sec for 2024 versus our earlier guidance of neutral. And to that end, we are taking a proactive approach to our cash generation through continued work on inventory management and other actions to reduce our tied up capital. These steps will help us reach neutral free cash flow as previously guided for 2025. And we maintain our guidance for strong free cash flows from 2026 onwards. While the turbulence around the world is increasing, we remain confident that we have a balanced lineup of cars that will help us navigate this period effectively. We have cars in all segments, 30s, 40s, 60s, and 90s. We have SUVs, sedans, and wagons. We have a strong lineup of hybrids and fully electric cars that we continue to invest in. This is exemplified by the updated ready for a new era version of the iconic XC90. This plug-in electric hybrid, which is already on sale. On top of our hybrids, we have five fully electric cars on the road and five more in development. In short, we have a strong and balanced product portfolio for the current marketplace. And we are confident that all of this will allow us to continue to grow and outpace the premium market on a CAGR basis from 2023 to 2026. Speaking of our product lineup during the third quarter, we took a decisive step into the future of automotive technology with the first customer deliveries of the EX90. We are the only European car company to have successfully harnessed core compute technology, and in so doing, we have now crossed the Rubicon to the next phase. We are gradually ramping up production of this car in our Charleston facility in the United States. I am confident that EX90 will redefine the premium electric SUV just as the generation before the XC90 redefined the large SUV almost 20 years ago. As we mentioned during our Capital Markets Day, starting with the EX90, all of our new electric cars will be based on the same fundamental core architecture and modules, scalable in terms of performance, size and cost. This is the Volvo Cars Superset tech stack. This introduces a set of hardware and software modules, which will be used in particular combinations when developing new cars. With the Superset tech stack and Spathi architecture, the EX60 being the first car on that platform, all of the engineering efforts for future products will be guided in one direction, leading to more efficient R&D on all of our future products. And it will enable us to improve safety for people in and around the car, even more so than today. It will also allow us to create a stunning customer experience that improves over time. All of this while taking down investment levels, which can be an important lever for increased cash generation. As a company, we are making solid progress towards this, and we remain focused on execution. But for now, let me hand over to Johan, who will walk through the financial performance in the third quarter in a bit more detail. Johan.

Thank you, Jim, and good morning. Now let's have a look at some of the key financials from the third quarter. As Jim said, retail sales have grown 3% during the quarter. We do see a challenging environment, but despite that, we are growing in the third quarter. And year-to-date, we have grown 10%, and that means we have clearly outgrown the premium car market. On revenues, excluding the compact manufacturing to a pole star, our revenue has grown more or less in line with our volume growth. Core EBIT for the quarter came in at 6.2% or 5.7 billion. I will come back with more details on this in the following slides. And our EBIT, including Javis & Associates, came in much higher than last year. And as you know, we no longer recognize the operational losses from Polestar from an accounting perspective. Cash flow for the quarter was more or less flat and I will come back also with more details on that in the following slides. So looking at our revenues, if we exclude contract manufacturing, which decreased a bit during this quarter, we do see a positive effect coming from the volume growth. We have also seen a slight decrease due to sales mix and pricing. We have the EX30 coming in in large volumes, and that is a smaller car at the lower price point, which of course affects the absolute revenue. But we have also seen some effects of the challenging market conditions and normalization of prices in the market. We also had some effects also this quarter of deferred revenue, which typically comes from rental cars where we have repurchase agreements and that essentially means we recognize the revenue over a period of time. It evens out over time, but since it was an underutilized channel during 2023, we are still seeing some year-over-year effects impacting the revenue for the third quarter. We do see an increased headwind from strengthening of the SEC, especially against US dollar and other inflow currencies, and that trend continued in the third quarter. We also saw positive contributions from aftermarket sales, such as parts and accessories, as well as from used cars, taking us then to the 87 billion SEC for the quarter excluding contract manufacturing and 93 billion SEC overall for the group for the third quarter. If we look at our EBIT for the quarter excluding Javis & Associates and last year we had a negative impact from Javis & Associates and this year as previously described the effects are very limited. And volume effects on EBIT for the quarter is more or less flat. And on sales mix and pricing, we see an impact both from a car line mix perspective, mainly sales of the EX30s with lower absolute profit since it's a lower priced car, although the car has healthy margins. But we also did have an impact of variant mix and pricing on a year-over-year basis. And in 2023, prices were still higher following COVID-related supply constraints. And now when we see the macroeconomic pressures intensifying, that is getting normalized. EBIT for the quarter was also affected by around 1.3 billion SEC from the FX headwind as a result of strengthening of the SEC, mainly against the dollar and other inflow currencies. On other effects, we also continuously see positive effects from aftermarket and sales of parts and accessories as well as the used car operations. We have also seen impact from a number of one-off effects in different directions during the quarter. We had a positive effect from depreciation and amortization, where we have done some adjustments based on the amortization period for certain assets, and that contributed positively. But at the same time, we had other negative one-off adjustments which affected us during the quarter. For example, one-off costs related to the change in the commercial approach So overall, the total effects in the quarter from different one-off items do more or less offset each other. Slightly positive, but the underlying core EBIT margin was around 6% without those effects. Including Javis & Associates, our EBIT is more or less at the same level as for the Volvo core operations. On liquidity and cash flow, we are still at a solid liquidity level. Our free cash flow for the third quarter was essentially flat. However, we do see macroeconomic challenges ahead and headwinds around us. And as Jim alluded to, we are expecting around 7-8% volume growth for the year as opposed to the 12-15% as previously guided. And this will of course have a short-term effect on cash flow, which means for the full year our cash flow will be slightly negative in single-digit billion sec. But I would also like to emphasize that we are expecting a positive free cash flow in the fourth quarter and will end 2024 on a solid liquidity level. And we are still firm on our ambitions going forward to have a neutral free cash flow in 2025 and strong cash flow generation from 2026 and onwards. And on the investment cycle, this is a slide that we have also shown previously. We are currently at the peak of our current investment cycle with high investments in both new technology, manufacturing footprint, as well as in new cars and platforms. This will remain at high levels in 2024 and 2025 and will come down significantly from 26 and onwards, both in absolute investments in both CapEx and engineering, and even more so relative to revenue as we grow as a company. And as we explained during our capital markets day, this is the driving force behind our strong free cash flow generation from 2026 and onwards. So to summarize our financial numbers, core EBIT in the third quarter came in at 5.7 billion or 6.2%. And considering the turbulent external environment, this is a solid EBIT and shows that we do have a healthy underlying operation. We have a stable gross margin at 20.5% increased year-over-year, mainly driven by low material costs year-over-year, both related to raw materials but also a result of our continuous work in getting the variable cost levels down. We have a neutral free cash flow for the quarter and we are going out of the quarter with a strong balance sheet and a strong liquidity level. And just to repeat again, the earnings from Polestar is no longer reflected due to the fact that from an accounting perspective, the book value is zero. So with this, I will leave back to Jim to conclude this presentation. Thank you.