Volvo Car AB (publ.)

Good morning and welcome to Volvo Cars and our headquarters here in Gothenburg. My name is Erik Kronqvist and I'm the Head of Investor Relations here at Volvo Cars. We're here today to present the third quarter results that was released just earlier this morning. And with me, I have Håkan Samuelsson, our President and CEO, and Fredrik Hansson, our CFO. As per usual, we will start with a presentation and then we'll move into a Q&A session. If you would like to ask a question during the Q&A session, you can do so either by using the chat function or you can dial in. If you want to dial in, please scan the QR code, register and when on the call, press star one one. With that, I would like you to hand over to Håkan.

Thank you, Erik, and good morning to all of you. If we look into the quarter and summarize it, I think it was a good quarter, solid performance on a very tough market. I mean, tough market, you saw that on the volume side, we were down 7%. The total market, I think the premium market down around 5%. So we definitely did not have any tailwind from the market, although it turned into positive in September. Pricing is also remained very tough, of course, on a shrinking market, but we managed to offset that in one area at least, and that with our best seller XC60 has been upgraded and that helped us a bit. Tariffs have been very turbulent. Right now it has clarified a bit. We know now that it will be 15% into the US and we know also it will be zero into Europe, which is 10% lower than before, which is an advantage for, for example, us selling EX90s to Europe. Altogether, we have then an EBIT margin of 7.4%, which I think is really good. What is also good is that we have achieved this with our own measures. It's not coming from outside. There were some, one of Fredrik will talk about that later, but mainly this was a result of a very good work in our organization on the cost side, both material cost and indirect cost. So if we look into our turnaround program, which we started in April, it was focused on three areas. Electrification, we believe this company will come out as a stronger company, electrified. We believe we need to come closer to customers. We need to be more regionalized with empowered regions and with more accountability. The reason for that is we believe with that we will have a better growth. That's the reason for our regionalization. And then of course profitability must be now the main focus and we are executing on our 18 billion cost program and already in this quarter really effects from that came in faster than we planned and anticipated. So look into then the electrification, which is very important. We see we need to have on the market fully electric cars. We need to be ready to be fully electric 2030. But we cannot force our customers to be that. So we have decided also that we need bridge solutions. the so-called PHEVs. But if you look onto the market fully electric car, that is in Europe up 26% in the first eight months. So I mean, very difficult to complain about that there is no growth of EV cars. And the total share is now in Europe also very high. So what we are doing is EX90, our flagship, we are now ramping up. The car is now finally ready for demanding customers. We have done major software upgrades. The EX30 we have successfully ramped up in Ghent. So now we are producing in volumes which our sales organization is requiring. We have a brand new sedan, the ES90, started production as planned in August. And then looking ahead, we have next year a very exciting new product, really in the bread and butter segment, the D SUV segment, which is really the biggest on the market. We will have a very strong car. I will come back a bit to that. We also have launched our very first next generation plug-in hybrid. And when I say next generation, I mean then it's a plug-in that is basically an electric car, but has a combustion engine as a backup. The first generation were really combustion cars with electric motors. And we have also upgraded our XC60, our absolute best selling car so far. And that upgrade has been very well received on the market and also has helped us to improve our margins. If I look into the second area in our turnaround program, the regional approach, it is delivering. The reason for the regionalization is, as I said, to enable profitable growth by empowering the regions to take more local actions. And what we have seen in China is a new governance structure. We are running the China operation basically through a board. I'm the chairman of that board and some other people, but much more empowerment locally. We also have seen a very good development so far, relatively seen. I mean, all Westerners have huge problems in China with declining volumes. Our business in China is more or less flat, and that is compared with others not that bad. Looking ahead also, we are now ramping up the XC70 production, and that is going to deliver a very healthy growth in China now in the last quarter. and the car has been received very well on the market. In Europe, we see BEV orders now picking up as we now also we are ready with a small car, the XC30, EX30 and the EX90 finally ready after all the delays we have seen. So that's positive. And we have also seen strong performance of some very important market especially the UK had a very good quarter and a very solid market share in the UK. In America, we also have strengthened our presence industrially. We have announced two new products that we will build in Charleston and we have a new team leading Americas. I think we also have new approaches to marketing, which I think is very promising. for the growth in that region. Then going over to the third box, the very important one, profitability and cost control. I leave it over to you, Fredrik, to talk about that.

Thank you, Håkan. Oh, sorry. Let me start with some of the main messages financially. So we had a strong performance in seasonally weak water. And as Håkan mentioned, this is in part boosted by all time high performances in UK, Brazil and other markets in September. We see that our 18 billion cost and cash action plan is materializing faster than planned and is contributing to the results. We also see cash flows negative and impacted by seasonality from vacation shutdowns and also continued high investments. If we look at the key financials, from a sales perspective, it was a challenging quarter for the premium market. It was down 3%. For us, we're down as much as 7%. And a big reason for this drop in sales volumes is lower EX30 deliveries compared to last year, as we've awaited the full ramp-up of the local European production at lower tariffs. And that ramp-up has now happened during the third quarter. These retail sales then translate to lower wholesales and to lower revenues. And despite lower revenues, we report a strong EBIT of 6.4 billion or 7.4%. One adjustment has been done for the restructuring costs. So if you exclude that, we're at 5.9 billion and 6.9% EBIT. Cash flow, seasonal low at 4 billion, driven by a quite normal year with the summer shutdowns, I should say. But let me double click a bit on each of these. So starting with revenue and focusing in on the core revenue, excluding contract manufacturing, that was last year, 88 billions. We see volumes going down, taking revenues down another 5 billion. Sales mix and pricing actually helping us and positive on revenues. And that's very much linked to the good reception of the XC60, which had a full interior facelift that came fully live into the market during Q3. We have quite sizable revenues from licenses in this quarter, which is more of a one-off, both from new sales in the quarter, but also deferred revenues from previous sales that has now been realized. FX on revenue is quite strongly negative due to a very strong ZIC. And then we had quite a chunk of revenue coming in other, which is in part used cars and a good contribution from CO2 credits. All in all, we're at minus 5% revenue in the core business. Looking at EBIT then, so last year we were at 5.8 billion or 6.2%. This year, that's taken down 1.1 billion by lower volumes. We see sales mix and pricing also pushing down in part due to pricing, but also due to the higher US tariffs that we didn't have last year. Depreciation and amortization is higher and worth noting here is that last quarter or last year Q3, we had a positive one-off adjustment in depreciation and amortization of 1 billion. So if we normalize the Q3 last year, the result was more 4.8 billion rather than 5.8 billion. And you see that year-on-year effect here. Licenses, that sale is flowing through to profit. And then FX on a profit level is actually positive, largely due to 300 million of realized profits on hedges. But I think the good thing here is that we are quite balanced on the underlying flows. So we have the weaker dollar and pound revenues coming in, but that is offset by lower costs in CNY. The other category here is quite sizable, and this is largely from lower variable and fixed cost, also showing earlier than planned results from a cost and cash action plan. And in this, we also have 800 million or so from CO2 credit sales, similar to last quarter. All in all, EBIT excluding restructuring was 6.4 billion, 7.4%. And that And there I have a restructuring provision I forgot to mention, but we took a provision linked to the reduction of 3000 people that we announced in Q1. We had a provision of 1.5 billion. What we see now that we are where we have executed most of the program is that we're not spending as much money as we set aside. So we're releasing 500 million from that. So. If you sort of exclude some of these one-offs, like restructuring and sale of licenses, which is more of a one-off character, the underlying operational result was more around 5 billion. And if you want to sort of simplify, which I sometimes do, you could say that a bit less than a third was one of items of the result. One third came from Cost reductions in general, emphasized by the cost and cash action program. And one third is sort of flowing through from the business. If we look at the quarterly development, then we see a quite clear positive trend. And in this, we will continue to see effects of our cost and cash program. But that said, the short term market is expected to be increasingly challenging. So perhaps it's unwise to extrapolate too much from the sort of near term, very drastic trend here. Cash then, in Q3, it was impacted by seasonality. Our European plants are closed during summer. But that said, we exit with a strong liquidity of 51 billion in cash. If we look at the details, we have 13 billion in EBITDA from the underlying business. Networking capital is flat. We have a quite significant negative in other working capital. Part of this is cash, primarily payments linked to tax and VAT. But in this, we also have quite large non-cash items linked to FX balance sheet revaluations, reversals of accruals linked to discounts and warranty, and also the reversed redundancy provision I just mentioned. Investments at minus 7 billion, but it's important to note here that this also includes transactions linked to selling the last big chunk we have of on-balance cars that we had in Germany. And that was sold to the tune of 1.7 billion. So if you look at the underlying investments, the number is more closer to nine. Financing slightly down from FX and lower leases, and then, as stated, 51 billion in ending cash balance. So those were the hard financials. If we zoom out a bit and look at the cost and cash action plan, as you remember, this covers variable cost, indirect spend, capex and working capital. And I feel we're making great progress on all these dimensions. In Q2, we shared some updates that you see here. But looking at Q3 and Q4, we see that we are now taking further steps. So on variable cost, we are formalizing more special task force to make sure that we get synergies primarily on hardware components together with Geely. We've also done a lot of work on logistics setups. One very tangible action is that we're taking out one of the ports we use for finished vehicle flows into the US, which is then reducing our logistics cost in total. On indirect spend, as I said, we are reducing indirect costs faster than we expected, and we are well on the way to execute the redundancy program, removing 3,000 positions from the company. On CapEx and working capital, we are reducing our planned investments and we're maintaining a very strict working capital discipline. And I want to, as a last point, double click a bit on these two last points. So firstly, on reducing the planned investments, the peak is behind us, as we've said before. And I think you've seen this page before. But it's worth to remind ourselves that we are now finalizing the major investments in our new product architecture. Year to date, we have reduced investments with 25% and we're looking into further reducing investments to set a new sort of affordable level of investments. And we have a strategy day on November 6th where we will also talk a bit more about the details of this and how it looks ahead. Lastly, I wanted to highlight our working capital discipline. And this page shows total inventory over time. And as you can see here, we did a real step change in inventory in Q4 already last year with a 17 billion reduction. within quarter four of last year. And since then, we've been able to maintain a significantly lower level. But that said, that also means that it's hard to repeat the reduction we did Q3 to Q4 last year. But we are grinding and we're not done with this. But the real low hanging fruits have happened. So that was a bit of financials. Maybe, Håkan, if you want to summarize.