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.

Thank you, Johan. So looking forward, the headwinds we spoke about today are only intensifying. We expect the industry to remain under pressure for a period to come. we will remain resolute on safeguarding our cash while future-proofing our business through our strategic investments. But as I said earlier, given the accelerated weakness in key markets, our immediate focus is on protecting value. As a result, we now expect minimum volume growth during the fourth quarter. For the full year, we now anticipate sales growth of between 7% and 8% instead of the 12% to 15% previously guided. This growth rate continues to outpace the premium car industry. Our revised sales guidance will also affect our free cash flow expectations for the year. Now we anticipate our full year free cash flow to be in the single digit negative of billions of sec for 2024 rather than neutral. We will continue to take proactive steps to preserve cash and we will retain our aim to have neutral free cash flows from 2025 and strong free cash flow from 2026 onwards. We have a balanced and strong lineup of cars that will help us manage the turbulence and outgrow the premium market. Our cars will be underpinned by advanced technology designed to give us a competitive edge within the market. So to conclude, external headwinds are clearly intensifying and these are the inescapable business realities of today. but we have a solid strategy and a clear pathway to take us to the future. We have invested in new technologies that will position us and our company strongly to protect those future free cash flows. We have a strong and balanced lineup of cars consisting of M-HEVs, P-HEVs, BEVs, SUVs, wagons, and sedans across all sizes. The EX90, the first car on our superset tech stack, truly represents a paradigm shift in our technology. and it's now on the road and we're ramping up production. And we're making rapid progress on the introduction of our next generation architecture, SPA3, with the new up and coming EX60. This SPA3 platform is designed to improve gross margins and drive revenue growth. We remain resolute in delivering our business ambitions as set out last month. We will outgrow the premium car market until 2026, reaching a core EBIT margin of between 7% and 8% by then, and generate strong free cash flows from 2026 onwards. And with that, let's start the Q&A. Thank you.

Well, thank you very much, Jim. So now we're all set to start the Q&A session. As I said at the start of the call, you can participate in two ways. You can either simply chat, use the chat window at the bottom of your screen to type in your questions, in which case I will read it out for Jim and Yuan, or you can use the phone lines. To do that, please use the QR code that you should be able to see at the bottom of your screen. And to be able to ask a question, press star one one. So with that, maybe while we get the questions rolling in, maybe I'll start with you, Jim. You know, third quarter, any two or three numbers that really kind of pop out for you?

Yeah, I think it's obvious that the market's starting to soften, which to some extent was expected. So we're starting to see a softer fourth quarter than we had envisaged. So we're giving signal on that. But listen, we're pretty pleased that we've outgrown the premium market pretty significantly all the way through the first nine months of the year. And even if we project that forward into the new guidance of between 7% and 8% growth, that's still significantly higher than the premium market growth that we're seeing in the industry. So I'm pleased with that. And of course, when you're in a flat market, and industries go through cycles, this is what we've got to remember, industries are going to go through cycles. And when you're in a down cycle, the only way to grow, if you're in a down cycle or a flat market, is to take market share. And we're taking market share. We've grown our market share pretty significantly, especially in Europe year over year. but you need to make sure as well that you also do that without the expense of eroding value. One of the reasons we've given the guidance in the fourth quarter between 7% and 8% is because we will remain price disciplined and we'll protect that value. We won't ship volume at the expense of value. So those are the, you know, those are the key guardrails, if you will, in terms of how we're running our business. I'm also pleased with, you know, if you look at the growth that we're seeing in our electrification lineup. So now we're almost 50% already of our electrification between plug and electric hybrids, and of course, our full EVs. Let's not forget the EX30 is a brand new car to the market. It's only been in the market four or five months. It's already the third best-selling car in Europe behind the Tesla Y and the Tesla 3. That's a really good signal that there is a demand, an undergrown demand for good electric vehicles in the premium space. And then, of course, the XC60 is the best-selling plug-in electric hybrid in Europe, has been for the last 10 months. So the underlying fundamentals of electrification moving forward is good. sentiment right now has been driven by high inflation or high interest rates, lack of charge infrastructure and of course some of the government subsidies for EV adoption have been taken away in the last few months and all of that has dampened consumer demand. But we're in a down cycle and you've got to get through that making sure that you still make the investments for the future. So business is not a game of perfection, it's a game of progress and I think we continue to make progress even in a tougher market environment.

And Johan, let me quickly come to you in that regarding the underlying performance that still remains stable. Core EBIT, you mentioned on the earnings call as well, there were a few one-off effects. Can you again once and for all sort of clarify that? What is the underlying EBIT then if you were to remove those one-off effects?

Yes, absolutely, Ron. And as we said in the call here as well in the presentation, we have some positive effects on depreciation and amortization, which essentially is isolated to this quarter. It's a re-assessment of the amortization period for certain assets which we of course continuously evaluate amortization period for our assets and that contributes positively but we also have on the downside other costs and provisions of which I would like to say one the bigger part is actually related to our change in commercial approach and the new and the change to new financing partners in different markets to get cars off balance now during the remainder of the year etc which which also comes with some cost and then also some other let's say smaller provisions in in different areas which means that all those things aside i would say that it's the net effect is slightly positive but we would be around six percent uh ebit margin uh one offs aside so uh instead of the 6.2 that we have now in the EBIT. So it is slightly positive, but more or less representing the underlying operational profitability. And maybe as a clarification on the other bucket, if you will, in the slide, also includes some gross margin items such as the improvement in material cost, etc., which build up that other bucket in addition to those different one-offs in different directions.

All right. Very clear, Yuan. Thanks for that. So let's get into the callers. We have quite a few waiting in the wings. Let's start with HSBC then. Good morning, Pushkar Tendulkar. Please go ahead with your question. Good morning, Pushkar.

Can you hear us? You said it's isolated to Q3, so it should we assume that it goes back to the two or two and a half billion SEC level from the fourth quarter onwards? That's my first one. The second one is on the three to four billion SEC others bucket. Just you mentioned material costs within that. I don't think it includes amortization because it's a year on year comparison, that three to four billion. So if you can still break it up further, maybe that would help material and what else is included in that. And then on the volumes side, you have a $5 billion positive effect from volumes in the revenue bridge, but just nothing in the EBIT bridge. What exactly is driving that effect? Thank you.

Thank you, and I'll start with the DNA question. Yes, I would say that the positive effect, if you will, from this reassessment is in the third quarter. Year-to-date, we are having total year-over-year increased amortization due to the new cars coming into production and that will also continue back to, as you say, more of a normalized run rate from a 2024 perspective into the fourth quarter. So this change in amortization period is essentially hitting Q3 positively isolated. If we look at the other bucket, there are a couple of main items that build up. I mean, that consists of a lot of things, of course, but without going into too much detail, one aspect is the positive effects from lower material cost, both in general and on raw materials, which, of course, is also one of the drivers behind the, I think, strong gross margin of 20.5% in the quarter. And we also still see positive contributions from aftermarket sales from parts and accessories. We see a positive development still on the used car sales. And I would say those three are the main drivers in the quarter of the other bucket. Then it's a huge number of smaller things. And if we look at the Volume effect, of course, we sell more cars and we get a contribution from volumes on revenue. When we look at EBIT year over year, it's really, I mean, one thing is that we also have quite a big part of our sales now being EX30s, which is It's a lower-priced car. The car is such as healthy margins, but it sort of gets mathematically, which decreases the EBIT effect year over year, compared volume versus EBIT. I would say it's the main explanation.

All right. Thanks. And hopefully that answers your questions, Pushkar. Let's get one question. This comes in from James Atwood in the UK. Given the success of the EX30 in a new segment, will any of the five new models sit in new segments for Volvo? Will you be entering new segments with the five that we have announced? And can you give us any indication of a timeline for those five models as to when they will be launched?

Well, we're actually in two new segments. So the EX30 took us to the small SUV, but the EM90 that we announced and we released a few months ago or earlier this year, I guess, took us into the MPV segment. So that's in two parts. And that was a very conscious choice. We felt that in China, we wanted to be in the premium segment. And of course, that format of an MPV in China is a common format on the executive and executive sales level. The new models that we've so far guided on, so we have the EX, we've got five in the market, we've got the EX30, the 40, we have the EM90, the EX90, and we've just released the ES90, so I think the ES90 is obviously in the sedan range, so that wouldn't be a new segment, but in a very strong segment, especially in China. And then we've also announced that we'll go on to the new SPA3 platform and the EX60 will be the first car on that brand new platform. That platform designed to massively take out cost and allow us to increase gross margins while at the same time remaining very competitive in the market. So it's a mix. Some of them will be obviously an electrification of our current models, if you will, or formats, and some of those will take us into new segments. But we'll release that as and when we think is the right time into the market. Cool.

Let's take another caller, comes in from Goldman Sachs. Good morning, George. Go ahead with your question.

Good morning, and thank you for taking my questions. I want to start off actually with three questions just on the new electric vehicles, because obviously the products have a lot of technology on them and are getting very good reviews. But if we just look at the sales data, I wanted to get your thoughts on it. So if we start with the EX30, if we look at the sales development sequentially in Q3, it looks like volumes were down relative to Q2. Now, I appreciate that there was some seasonality in that, but it also accounted for a lower proportion of your total sales in Q3 than it did in Q2. Is there any fundamental reason behind that? And is it or is there a risk that actually the Q2 volumes for that product represent something of a near-term peak? Moving on to the EM90, the average units per month over the last four months has only been about 100 units. Again, I appreciate that you probably leveraged a lot of technology from Geely in this car, but does any vehicle program make economic sense at such low volumes? And then finally with the EX90, clearly very exciting products and great to see this in the marketplace. But the addressable market for an EV at that price point globally today is less than 300,000 units. So can you give us any indication of what kind of volume you think is realistic for this product, just given the total addressable market is so small? I just had a follow-up on the financials. Obviously, you mentioned the incremental provisioning with respect to the change in commercial approach. Can we just confirm, is that the transition away from direct sales back towards a more traditional sales approach, or does that relate to something separate? And if it is related to the move away from direct sales, has that also played some kind of role in the 3 billion reduction in inventory on your balance sheet observed during the quarter? Thank you.

A lot of questions for us to unpack over there, George, but maybe, Jim, if you want to take the... Yeah, let me take them one at a time.

So EX30, yeah, so remember, you've got to remember the EX30, when you're going into an open market in the Q2, you're pipe filling. So we're pipe filling into a brand new market, so you get high... sales going into that market. But we're only in a fraction of markets that we'll end up being in. So we've got to go through that growth rate and that pipe fill as well as we open up the EX30 into brand new markets. In fact, we're not even in the USA right now in the EX30. So I expect to see further growth in the EX30 as we open that up. You're right, seasonality in the third quarter is a big part of that because a lot of the the factories and dealerships closed during the summer, especially in Europe. So we'll see that EX30 roll out progressively and we'll see additional markets bring on higher volumes. Then we have Ghent, so we start the manufacturing at Ghent, so obviously we're pacing some of that supply as it comes out of the Ghent facility, that's going to make a lot more sense for us from a financial point of view to feed the likes of North America from the Ghent facility, given the tariffs, of course, from China. So there's a pacing to that. But let's not forget that car only started sales, I think, four or five months ago as the third best selling EV in the whole Europe behind the Tesla Y and the Tesla 3. And there's some pretty strong competitors in Europe as well. So I'm very positive about the EX30. Brand new market segment for us, the small SUV, and it's proved that there's the demand for that. So EX30, I'll put that to one side and say, I'm going to chalk that up to positivity and their success. When we look at the EM90, yep, we entered the EM90 into the China market. It's a very, very busy market at this particular point in time. There's lots of new entrants, there's lots of incumbents in there as well. And it's going to take a time for the premium EV market in China to develop. Right now, what's happened in China is the EV market has developed, but at the mass end of the market. The China EV premium market is still in development at this particular point in time. I'm still reasonably confident that we can carve out a premium space in the EV market in China. That's why the ES90 I think will be a strong product for us there. But the EM90 was never really going to be a volume product for us. It was a brand statement as much as it was, you know, to take market share. So that's still developing and we need to keep an eye and see where that goes. As regards the EX90, listen, this is a fantastic car. It's got a huge amount of technology. It's the safest car we've ever built. It's got 600 kilometres of range. It's got bidirectional charging. It's got LiDAR technology for the first time. You mentioned the price point. However, When you get that amount of technology wrapped up into your car, for the premium sector, for those who can afford it, we actually think that there is a substantial market for people who want to upgrade for all the benefits that you get from a fully seven-seat electric car that can go 600 kilometres in range with all of the technology that people would expect for something in that price point. And again, the EV segment at that is still developing. So I think we are one of the pioneers in that and we'll push the boundaries on that. But, you know, it's a tough market and we've got to be competitive.

On the provisioning, yes, you can say the short answer is yes, that is related to the change in commercial approach and changing of financing partners, etc., related to that. On your question on inventory, the answer is not really in the third quarter. It's more that we will see that affect cars soon. under subscription, et cetera, on our balance sheet that will come off balance more into the fourth quarter. So the decrease in inventory in third quarter is more balancing production and sales, which we will increasingly do during the fourth quarter, which is one of the driving forces inventory in general in the fourth quarter that would take us to the positive free cash flow in the fourth quarter isolated. But that specific effect is not that huge from an inventory perspective in Q3. Okay.

Thank you. Great. Thank you. Thanks, George, for your questions. Let's take one that's coming in through the chat now. This comes in from Henrik Christiansen. This again goes back to the R&D amortization we spoke about. He asks the R&D amortization reassessment, which was 1 billion sec positive in the quarter. Could you explain a bit more on that? And is that a pure one-time effect or will it also impact amortization pace going forward as well?

No, it's a one-time effect. I mean, we're continuously evaluating amortization period for our assets. And this is, as we, I think, states also in the Q3 report, it's related to spot to assets and based on the timing of production for customer deliveries. So, but it's a one-time effect. And yes. All right.

Clear. Next caller then. And this is Hampus Engelhue from Handelsbanken. Good morning, Hampus. And go ahead with your question.

Thank you very much. Two questions from me. Maybe first, starting off on them, if you could maybe talk about, or rather remind us from this change in commercial approach, financial partners, what exactly are you doing? I know you commented on it before, but also in what type of cost that you had from that during the quarter. Second, if you could talk a bit about the rollout of the EX90 now, in what speed you're rolling this out coming to Q4 and Q1 next year? And also, where you are on the software, how much software are you releasing on that product? Will those cars being delivered as of now be using the leader, and how should you think about that going forward? Thanks.

Yeah, let me start, and then I'll hand over to Johan on the engagement with our customers on the commercial rollout. So one thing that's become clear is that this has now become a three-way conversation between the dealerships, ourselves and our end customers. That interplay between those three extremely important trifecta It means that we want to make sure that we get access to those customers, that we can talk directly to those customers, but we can also leave the dealerships to do the transactional work, the servicing, the connection with the customers. Everything is now connected through the Volvo app, so we have direct access to the customers, but we don't need to do every single transaction. And what this basically means is, It allows us to play to the strengths of having a dealership network across the world. We've got 2,200 dealers across the world. Within those dealerships, there's something like 60,000 brand evangelists, let's call them. Within that, they have something like 10,000 technicians, 12,000 service base. That's a very, very strong part of the value proposition for our customers. And we want to make sure that we extract the maximum value from that without us duplicating some of the work that they can do more effectively than we can. And so that's really the, let's say, the strategic intent of our engagement with our dealership networks across the world. As regards then the financial aspects of that and what we had communicated before, I'll hand over to Johan who can take us through some of the details on that.

Yeah, and on the question on what are those costs, I mean, as Jim said, when going away from this more pure direct model and the more tailor-made financing solutions for cars off balance, etc., that we had starting to implement, going to more, let's say, other financing partners also to have and other channels off balance. That change of financing partners, of course, is also related to a different kind of cost. I will not go into that in much more detail than that, but I would also say that I see this more as a one-off cost in the third quarter than it's going to be recurring, to be clear.

Something on the EX90 sort of rollout and the production ramp up that we're doing?

Yeah, so the EX90, so we have, you know, that's ramping up through the production volumes right now in our Charleston facility. It's in the hands of our customers. I think there was a question on LiDAR technology. So we're capturing data right now. We've told our customers for the first few months of that car, we need to capture the data so that we can then run that through our analytics and our data center here so that we can really interrogate what the car is seeing. From that then we push code back into the car so that we can actually make the car safer. The first rollout on that will be making the car safer in darker conditions, darker driving conditions, and we'll see that rollout pretty soon after the early part of the year. That's when we'll start to get that data coming in. And so it's going to be an evolution as you use new technology to make cars safer. The first and most important thing is that we need to make sure it's robust. And in order to do that, we need to bring the data in, we need to interrogate that data, we need to run it through all of our algorithmics and check and test that data, and then we'll deem that fit for purpose, and then we'll push it into the cars through an OTA, and it will be seamless to the customer that they'll get that over-the-air update when we believe the code to be robust enough.

Good. Thank you. The next caller then from JP Morgan, and that's Jose Asimundi. Good morning, Jose, and please go ahead with your question.

Thank you very much, and good morning. A couple of questions, please. You pointed out to some slowdown in, I believe, in deliveries, in sales in the fourth quarter. Are you detecting any slowdown in premium card demand across Europe, US, China, and any region that you think is you know, maybe worth pointing out. Second, can you comment, please, on your ability to accelerate cost savings next year or potentially slow down some of the capex into 2025 if premium car demand will slow down? And then three, Jim, can you comment a little bit on your powertrain strategy? After we think about 2025 and 2026, the shape of electrification might be a bit more behalf versus death, and depending on the region, you have to be very flexible. So how is Volvo ready in terms of these different powertrains to capitalize on growth across the different regions, depending on that powertrain mix? Thank you.

So maybe I take the, so the slow, the demand, yes, certainly we're seeing the demand is slowing down. I think there's three areas that's driving that. So some of that specific to EV, if you look at EV, then of course, The tariffs play a part of that. The lack of infrastructure in certain parts of the world, especially fast charge infrastructure, play a part of that. The removal of subsidies that we saw happen this year is obviously a part of that as well. And that's really the drivers on the EV side. And then overall, if you look at the industry, and the industry is in a flat cycle right now, there's no growth in the industry, as we all know. And that's really driven by inflation to some extent, and I guess the high interest rates. A lot of people are taking cars on loans, and that has an effect on their affordability. And that's starting to dampen consumer sentiment. As you go into the fourth quarter, and people are looking to where they spend their money as they come up to the Christmas period and so on, then you start to see a little bit of dampening in that as well. What we've found is we had a very, very high order book. And now the order book is starting to normalize. It's still strong, but it's normalizing back to the pre-COVID levels, let's say. And one thing we want to protect, of course, is the cash within the company. So rather than us driving volume into a market that is turbulent, we would far rather drive value. So, and that means you're absolutely spot on. That means we're looking very, very carefully at the volumes and remaining in a price, so the value that we can drive, maintaining price discipline through the range, and then looking very systemically and using analytics to predict how much of those powertrains we will need in different parts of the world. And again, you're right in the assumption that that is going to be different in different parts of the world. West coast of the USA is moving still very quickly to electrification. Middle of the USA much slower for a whole bunch of different reasons. And then the East Coast is more balanced, let's say. Northern Europe moving very quickly to electrification. Southern Europe is taking longer. The provinces in China moving slowly to electrification. The cities in China moving much quicker. And so that's now helping us. Those analytics and that data that we have helps us to navigate how many P-HEV, M-HEV and BEV engines that we need or parts that we need or cars that we need. And so that integrated business planning, I think that's the thing that we've really upped our game on away from just SNOP or sales and operational planning. Now, we have a much more robust IBP or integrated business planning that takes that analytics from the market and feeds that almost real time back into our supply engine. And so that we can have minimum amount of inventory and that inventory positioned in the right parts of the world. with the right drive trains and the right models that we need in order to drive the effect of growth in a flat market. Sorry, that was a long answer, but it's a great question because I don't think that question gets asked enough. So I'm pleased to be able to talk through that in a little bit more detail. Thank you.

Maybe on the cost savings part.

Yeah, absolutely. And I think it's cost savings and cash flow protection in some sort of combination here. But I mean, there are three buckets very simplified next year that we are focusing on. from that perspective in this challenging environment. One is, of course, investments. As you say, it's time-facing of investments, it's prioritization and ensuring we allocate capital to the right things, still protecting the big investments, the new architecture, the new cars, ensuring that we protect the transformation we're in and the new products to come. There are always things you can time-face and prioritize. The second bucket is to continue to work relentlessly on setting cost efficient fixed cost base in order to protect profitability and not grow fixed cost in line as we grow as a company, but rather the other way around. And the third is to continue to work with the working capital, especially inventory management and ensure that we have a balance between production and sales. So I think those are the three main buckets I would say simplified. All right.

Question on chat then from Philippe. Can you estimate the FY24 impact from import duties related to cars imported from China and remind us when it impacts the accounts?

Well, we're going to see those tires from China, they're going to make a final decision, the European Union will make a final decision on the 30th of October. So we don't know the exact, but we can estimate that. But listen, we're only affected by one car, it's the EX30. We already started the localization of that car back in the summer. So that car will be, that's the only car that we import right now from China. And so we'll start to see that start production in our Ghent facility in Belgium, in the first half of next year and then we'll ramp up through the gears and that. In the meantime, of course, we can supply that car to many other regions which are not yet affected by or not affected by those regions. Lots of countries in Southeast Asia, the UK is an example to that. So we still have a big outlet for the EX30 and non-tariff affected countries at this point. And then, of course, it makes sense for us to really ramp up production or supply into North America for the EX30 once we have that Ghent facility up and running. But for us, it's a short-term problem, but it is a problem in the short term.

We have time for a few last questions then. Let's go to another caller then from Nordea. This is Agnieszka Wiela. Good morning, Agnieszka, and please go ahead with your question.

Yes, perfect. Thank you. So I have two questions. Starting with your EV penetration, it's quite high. So do you expect any benefit from selling the CO2 credits in Q4 or in 2025? And do you think it will be substantial? That's my first question. And then maybe just moving the production of EX30 to Ghent. How is the move going? Have you secured the supply base already? And also, if you can comment on the kind of total cost for this car being produced in Europe, if you take into consideration the absence of shipping costs, will it be more expensive than the cost that you have in China right now, or will it be similar? Thanks.

I can start on CO2 credits. And as you say, we are one of the reasonably few that is really in a good spot when it comes to our EV penetration as such. credit surplus or potential credit surplus. So that, of course, is a potential quite significant upside. We don't guide on specific amounts because, I mean, it requires negotiations with counterparts, et cetera. In Europe, we have the pooling system, which is per calendar year, et cetera, et cetera. And it's not something that we, you could say, we rely upon to reach financial ambitions. But I think, yes, there is a potential, reasonably substantial upside into that. I would expect, from a materiality perspective, potentially more in 2025 than in Q4 in 2024, even though there are, of course, some potential also there. But I will not go into specific amounts.

and anything on the EX-30 and how that production is going in Ghent?

Yeah, the production in Ghent is, as I said, we started that early in the summer. You know, we visited that factory pretty recently. I visited that factory pretty recently to get a beat on how that is ramping up. It's absolutely on track. We've got a great team on that. Localization and supply base is going extremely well. And to the question of we expect to get that when you take the tariffs, not even the increased tariffs, but you take the current 10% tariff as it is at the moment, and the shipping costs and the logistics costs, and you offset that against the higher labor cost, if you will, in Europe, then you get to, not quite, but very close to price parity between manufacturing that product in China and manufacturing that product in Belgium. Of course, the big benefit is that if the tariffs go up by 18, 19%, then of course you benefit greatly from that. So, yeah. Cleo?

A question on chat then from Eric Goldrang. The third quarter had benefits from lower material costs. How do you see these developing into the fourth quarter and early 2025? That's one. And then there are questions, anything more that you can say on your Northvolt investment? But I'll come back to that. Maybe more on the material cost front.

Yeah, on raw materials. I mean, we still see a tailwind on raw materials year over year. I guess the biggest effects, if we look at the full year 24, was actually during the first half. If we look at the year over year comparison, because first half of 23 was still at quite elevated levels. So we foresee that we will still have very healthy raw material prices going forward. But if you put the year-over-year effect going into 2025, I guess we'll decrease quite a bit because we have had quite favorable prices during 2024. So depending on the angle, but I foresee that we will still be at good levels going into 2025.

Maybe just to pivot on that, so really, Really, if you look at this in the longer term, the longer term benefit on that is Spa 3. When we get to the Spa 3 architecture and that Spa 3 platform, it significantly takes out cost at the design level. So you're now designed in for a much lower cost platform, and that's going to allow us the first car, of course, that we wanted to put on that platform is the volume car of the 60 range and the SUV. So the EX60 will be the first car on the Spa 3 platform, and that significantly takes systemically using technology and design reduces the cost of the vehicle and then of course if raw materials add on top of that then you'll get the added benefit on that but you can't just rely on raw materials alone you've got to systemically reduce the cost of the next generation EV cars so that we can be more competitive and continue to take market share in that space.

And he also wanted to get an update from you on where we are with Novo. Anything on that we can say.

Not really. I mean, obviously, there's, you know, the Northvolt situation is making a lot of headlines right now. We'd like to see, obviously, more supply in Europe for Europe on batteries. So it would be great to see that, you know, that venture be successful. But listen, we are, and our strategy has always been not necessarily really specific to Novo or even batteries for that matter. But we have a strategy where we are diverse in our suppliers so that we don't have a single point of fracture. And so we'll be unaffected regardless of the outcome of that, although we're rooting for the Northvolt guys and to bring battery production into Europe in a much more meaningful way. But it won't really affect our supply chains because we've built it with the resilience that we need, not just in batteries, but across the whole component range.

Maybe we have time for one last question. Let's go for this one then. And this comes in from Stephanie Vincent. She asked, with the change in the free cash flow expectations, is Volvo changing its intentions for new debt to only cover upcoming maturities?

No, we don't. We say now we will most likely end up in single-digit negative free cash flow for the full year 2024, which is on the base of the lower volumes during the remainder part of the year compared to previous guidance. We are still firm on the at least neutral free cash flow for 2025 and strong free cash flow for 2026. We are taking the necessary actions proactively in order to ensure that happens in next year. And we have a strong and healthy liquidity situation right now, so I don't foresee that we will have to increase gross debt. We will still consider refinancing maturities, but not additional debt as far as I can see.

Yeah. One more question on the product side then. We're seeing a great success with the EX30. Does Volvo Car see a market moving towards producing more of this type of car, compact, affordable cars that can compete with Tesla?

Jim? Yeah, I think we're already competing well if you look at Europe as where we've really launched that car more than any other region, of course. So you go from a standing start with that vehicle, it's won 23 awards, I think, and still counting. It's a very, very popular car. We offer that, of course, in a different range. So we offer that in two battery sizes, we offer it in five different colours, we offer it in four different interiors. Our customers like that. We offer twin or single motor versions, and I think that's been driving it towards the success levels that we're seeing. best-selling car in Europe behind the Tesla Y and the Tesla 3. So de facto, I would say it's already competing. But we look at the different market sectors and how we can navigate through that to drive value into the company. That's something that's a constant conversation inside our company, as you can imagine. And if and when we're ready to release new model information, you'll be the first to know.

All right, we are almost about to wrap up, but maybe, Jim, I'll give you the last words to bring this Q3 earnings call to a close.

Yeah, I mean, I think we're in, you know, we're in good, the market is down, that's fine. Markets go through different cycles. And that's, you know, that is a part of business. This is when you really want to make sure that you have a strategy that is longer term looking, but also with short term bridge to take you through those difficult and more turbulent times. And we have a, you know, we have fantastic technology, we're very low cost customer base, we have products in the 30, 40, 60, 90 range. We have MHEVs and PHEVs and BEVs, so we cover all the technology spectrums. We're in 80 countries. We have a really good supplier network. We're in region for region, so we're navigating those trade tariffs to a great extent. Where we don't, we've already made moves to move the EX30 to Ghent to further strengthen that part of the business. We have a great dealership network of over 2,200 dealers across the globe and all of the service and the service base that we need to satisfy those customers. We're investing in the long term for electrification because that is exactly where the industry is going. You just need to look at China. and see how quickly they have moved to electrification. And if you don't keep investing in electrification, you're going to be left behind. That's the problem. The easy answer is stop the investments right now on electrification and wait until the market picks up. You do that, you miss the market. It takes two or three years to try and pick that pace up. By then, those who are brave enough to invest, those who are bold enough to invest, those who have the vision to invest in the future will be way ahead. And that's what we intend to be. But in the meantime, of course, we're in a high investment cycle right now because we've got to refresh the M-HEVs and the P-HEVs to provide that bridge to fuel electrification, which is taking a little bit longer than we would like. And that's it. Solid strategy, good line of products, you know, really strong... engaged leadership team and an employee base and a loyal customer base. So, you know, I've said it before, I'll say it again, business is not a game of perfection, it's a game of progress. And as long as you're making progress, you're in the game. And I think we're in the game.

Jim, Yuan, thank you very much. And thank you to all of you for tuning in for this Q&A session. If we couldn't take your questions because I realized there were a few more left, of course, the media lines are open. So you can reach the media relations team or you can reach the investor relations team and we are available for you all throughout. But from all of us here, goodbye and have a great day.