Volvo Car : Quarterly Earnings (Swedish)

Volvo Cars Q1 2024

Financial Results

Conference Call

Wednesday, 24th April 2024

Volvo Cars Q1 2024 Financial Results Conference Call

Wednesday, 24th April 2024

Agenda

Ron Banerjee

Head of Corporate Communications, Volvo Cars

Well, that's right. Multiple awards rolling in, and we are ramping up the EX30 around the world. We're going to speak a lot more about the car during this earnings call. Good morning, and a warm welcome to the presentation of Volvo Cars First Quarter Financial results. My name is Ron and joining me this morning is our President and Chief Executive, Jim Rowan, who joins us from our design studio in Shanghai. In fact, Jim is in China this week for the launch of the EX30 during the Beijing Auto Show. In the room with me is our Chief Financial Officer, Johan Ekdahl, and our Chief Commercial Officer, Björn Annwall.

At the top, Jim, Johan and Björn will walk us through our performance during the first quarter, and thereafter, we'll throw it open for a question and answer round. You can either participate using the chat window that you should be able to see at the bottom of your screen, or you can simply use the phone lines. I'll come back with more information on how you can participate closer to the Q&A session.

But for now, I'll leave the word to you, Jim.

Performance Update

Jim Rowan

President and Chief Executive, Volvo Cars

Q1 - strong business performance with continued momentum

Hey, thanks, Ron. Delighted to be with everyone today and good morning. We started the year strong. Strong business performance with continued momentum to lay solid foundations. Double-digit retail sales growth during the quarter with the bulk of that growth coming in the back end of Q1, with March setting new monthly sales records of over 25% year-on-year growth. Solid core EBIT margins is 7.2% versus 6.6% in Q1 last year. We improved the gross margins on fully electric cars, which came in at 16% versus 7% in Q1 2023, and the share of EVs and PHEVs came in at 41% with EVs accounting for 21% of that. And the XC60 plug-in hybrid continues to be the most-sold PHEV in Europe.

We were the third-largest EV brand in Europe. This is mainly on the back of the EX40 and the EC40 and, of course, the new EX30. And in fact, the EX30 was the third highest-selling EV in Marc, having only started its retail journey. We started production and customer deliveries of the fully electric MPV, our new EM90 in China.

Free cash flow stood at minus SEK 12 billion, which is in line with our internal plans. This is affected by the EX30 inventories as we build up production for that car and inventory for our customers ahead. We secured shareholding support to distribute our 62.7% of our ownership in Polestar, and we continued to remain focused on cost and ensure robust capital allocation.

Q1 Key Financials

If we look towards the financials, we reported solid financials for the quarter. Retail sales are up 12%, with most of that growth coming towards the end of the first quarter as we set new

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records in March and we ramp up the EX30. Revenues slightly lower versus last year as a direct result of lower contract manufacturing, and we maintained price discipline overall in the market, but Johan will speak to that in a little bit more detail very, very shortly.

Our core EBIT margin improved to 7.2% from 6.6% year-over-year. This was due in part to improved gross margins, especially on BEVs, and the result of our internal efficiency actions, especially on indirect costs.

Cash flow for the quarter is down, but this is in accordance to our plan. We increased production and the build-up of the EX30 and inventory to meet the demand for that car. And Q1 is usually the low point for cash flows in our cycle, and it will improve in the coming quarters to remain on track for neutral cash flow in 2024.

EX30 Awards

As we said previously, the EX30 is the smallest fully electric premium SUV, but with big potential. The Q1 performance showed the early prospects of this car even though deliveries are still in the ramp-up phase. The car is a profitable growth driver for us as a business with deliveries in Q1 already reaching 14,500 cars, and gross margins are planned between 15% and 20%. Thousands of customers across Europe are already behind the wheel of this car with many more in line as it starts its ramp-up. And this will include customers in the US, China, South Korea and Canada, and in the coming weeks and months, but by the year ahead, we will have this car available in more than 90 countries across the world. I'm so pleased to share that the EX30 continues to win awards. This time, it's the 2024 Urban Car of the Year and the Red Dot 'Best of the Best,' two additional prestige awards that we've won. So in total, the EX30, since it was introduced, has received more than 20 awards, and we're still counting.

Balanced portfolio towards electrification

Our balanced approach to hybrid and BEV has strengthened our portfolio. We continue to have high share of fully electric and plug-in hybrid sales, and this total reached 41%, with EV accounting for 21% of that. This performance on EV demonstrated that we are fully on track to reach our guidance of considerably higher EV share in 2024 versus 2023. Q1 was also an important quarter in terms of gross margins with our fully electric car reaching 16%, up from 7% in Q1 last year and from 13% in Q4 2023. This increase was led by the EX30, with gross margins of between 15% and 20%, but also we improved our margins on the EX40 and the EC40 due to lower material costs.

Now, we're taking a balanced approach in our products and the propulsion offerings. We have small SUVs, we have large SUVs, sedans, wagons and MPVs, and that sets up nicely for growth in the premium end of the sector in over 90 countries. We have a balanced approach to propulsion, offering customers plug-in electric hybrids, mild hybrids as well as fully electric cars, and we are focused on the premium segment.

EM90

Apart from the EX30, the EM90 has already started production, and we've seen the first customers get behind the wheel of that car in China. The EX90 will start production in Charleston in the USA in the first half of this year, and each of these cars will be launched with new segments, which will strengthen our position in the premium electric segment around the world.

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And with that, I will hand over to Björn, who will speak more about this balanced approach and our commercial operations.

Commercial Operations Update

Björn Annwall

Chief Commercial Officer & Deputy CEO, Volvo Cars

Balanced global commercial footprint

Thank you, Jim, and clearly, with a balanced car portfolio, we also have a balanced commercial approach. If you look at our geographical footprint to start with, it's a truly global and balanced situation where almost half our sales is in Europe with another 20% each coming from China and from US and Canada. And the remainder, the 15%, comes across Latin America, Asia- Pacific, Middle East, Africa. So all in all, we're active across 90 countries. We also have a balanced setup in a backbone of physical retail partners that serve our customers across 2,200 retail locations for selling cars and 2,500 service locations for servicing cars. This physical backbone is then empowered through digitisation to drive a great omnichannel experience, giving a good customer experience and taking cost out of the system for efficiency.

Importantly, there are 10 million Volvos out there in the world today. That car park creates a good foundation for our continued growth. It has an immediate positive impact in that we, of course, sell parts and accessories and service to those Volvo lovers, but it also creates a good foundation for further growth. We will grow both by conquesting new customers, but also reminding the Volvo lovers out there that we need to retain them. This is a balanced approach. Out of the 10 million cars out there, we actually hit the landmark situation in March where we delivered now 1 million electrified cars, be it plug-in hybrid or BEV. So we have delivered 1 million electrified cars by March this year, which is also a good foundation for the future.

Fully electric and plug-in hybrid share Q1 2024

Speaking about those electrified cars, you can see that across many markets, in Latin America and Asia-Pacific in particular, we are focusing almost fully on those cars. That might be a bit counterintuitive given that some of those markets are not very mature from electrification standpoint for the total car market, but they were clearly ripe for premium electrification made by Volvo. This focus has propelled Volvo's brand. We have increased market shares and earnings in those countries. We do that by being more distinct. It's right for sustainability, but it also gives a lot of simplification, both commercially and from an industrial point of view. This is a good way forward, and I think it's a testament to the fact that it's a big difference between electrifying the full car market and electrifying a part of the premium car market, which is Volvo's strategy. If you're a 1% premium brand with focus on electrification, electrification is an upside, not a risk.

Fully electric share Q1 2024

If we turn over to the full electric cars, here, we continue to grow. We grow with 27% year- over-year in quarter one, and now, as Jim said, 21% of all our deliveries are fully electric cars. And importantly, we're doing this with a value-over-volumemind-set, and we have continued to deliver increasing margins on those cars and met the guidance we provided in terms of EX30 cars between 15% and 20% gross margin.

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Geared for premium growth with balanced portfolio

So our balanced car portfolio. On the plug-in hybrid and mild-hybrid side, we continue to see solid demand, and with the love and tenderness we will give to those cars, we see this as a strong foundation and bridge towards the future where Volvo will be a fully electric company after 2030.

On the full electric side, as Jim already mentioned, EM90 is now starting to ship in China. EX90 will be produced in H1 and shipped in H2, and EX30 has really started off well. It hit a, I would say, inflection point in Europe where we started really to ship to customers in March, and we shipped almost 8,000 cars in Europe in March. In Asia Pacific and LATAM, that inflection point where we really ramp up deliveries will happen before summer in May, June. In Europe and Canada, it will happen after summer in September, October. And in China, after launching it in Beijing Auto Show this week, it will start to ship during the summer.

Conclusion

So to sum up, we have a balanced car portfolio, we have a balanced commercial approach with a very clear future, premium electrification, but we have a very balanced approach of getting there.

So with that, over to Johan Ekdahl for a balanced review on our financial numbers. Johan?

Q1 2024 Financial Update

Johan Ekdahl

Chief Financial Officer, Volvo Cars

Q1 - Key Financials

Thank you, Björn, and good morning and some more deep dive into the financials then. Retail sales, 12% increase in the quarter on the back of a still healthy demand and also, of course, the ramp-up of the EX30, taking us to being well on track towards our guidance of at least 15% volume growth in the full year 2024.

Revenues, slightly down 2%, but that is driven mainly by the fact that we have less contract manufacturing to Polestar during the quarter and also some FX headwind on revenue. We will come back with more details shortly, but the underlying operating revenue is increasing.

EBIT increased from SEK 6.3 billion to SEK 6.8 billion, or from 6.6% to 7.2%, during the quarter, which is then driven both of course by the increase in volume, but also the fact that we have a lower cost situation in the quarter, both on raw materials, lithium, etc., but also on the fixed cost side, having effects from the cost actions we took last year going into 2024 with an improved run rate. EBIT, including JVs & associates, at SEK 4.7 billion or 5%. We'll come back to more details on EBIT here shortly.

Cash flow, minus SEK 12 billion for the quarter, an improvement from the same period last year and also very much due to the ramp-up of inventory of EX30 and also normal seasonality affecting working capital and inventory. And that should gradually improve during the remainder of the year to take us to the neutral free cash flow for the full year 2024.

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Q1 - Revenues weighed down by contract manufacturing

On revenue, we see a positive impact, of course, from the volume growth. On the sales mix and pricing side, a couple of things, both that we see a little bit of a change in mix, of course; higher BEV share, a ramp-up of EX30, a lower priced smaller car having an effect on revenue. And also remember from the pricing side, last year in the first quarter year-over-year, we were still in a supply constraint situation with an undersupply of cars. There has been a normalisation of pricing since then, but if we look back into the fourth quarter of 2023, into the first quarter, we're maintaining very healthy price discipline and don't see any negative pricing effects going into 2024.

FX headwind on revenue, minus SEK 2 billion, mainly driven by the strengthening of the Swedish SEK. And then the biggest negative impact is the reduce in contract manufacturing in the quarter, minus SEK 4.3 billion to contract manufacturing to Polestar, and then also some other upsetting positive effects, mainly driven by parts and accessories business as well as used car sales, taking us down to the SEK 93.9 billion in revenue for the quarter.

Q1 - Solid underlying EBIT

On EBIT, volume contributing, of course, positively to the EBIT growth. Sales mix and pricing, a lot of the same situation as in revenue. We see year-over-year normalised pricing from Q1 last year, still maintaining good price discipline compared to Q4 last year, and also mix shifting towards higher BEV share, EX30 ramping up, still on increasing BEV margins, but slightly dilutive compared to company margins.

FX in EBIT, slightly positive. Other currencies mitigating the negative effects on revenue. And also then positive, the SEK 1 billion in Other mainly consists of two things: lower cost raw materials and also fixed costs and also contributions from the sales of parts and accessories and used cars going into them. The SEK 6.8 billion in EBIT or 7.2%, an increase from 6.6% excluding JVs & associates last year. Including JVs & associates, taking the net of all where JVs

• associates whereby Polestar is the biggest part, but also all other smaller JVs and associates coming in net at minus SEK 2.1 billion, then taking us to SEK 4.7 billion or 5% for the full group. And as a reminder, we are still consolidating 48% of Polestar into our EBIT, and the effect of the distribution of shares down to 18%, that will happen during the first half of May this year.

Q1 - BEV margins

BEV margins at 16%: 13% in Q4, 9% for the full year 2023, 7% the same period last year, so we are on a positive track. And that's really driven by the EX30 ramp-up coming in, as we have said, of 15% to 20% gross margin, but also improvements in the previous cars - EC40, EX40

• coming in, driven by lower lithium prices still flowing through somewhat into 2024 and also clear focus on the value-over-volume strategy for those cars, taking us down to the 16%.

And just as a short comment on the gross margin for the full group, slightly lower than in Q4, mainly then driven by the mix of cars, but also I would like to emphasise the fact that despite that, we are increasing our EBIT margin to 7.2% on the back of the lower cost.

Q1 - Solid liquidity level

Liquidity, we are going out of the quarter with a solid liquidity level and a strong balance sheet, minus SEK 12 billion in free cash flow for the quarter, which is according to plan. We will gradually improve during the year and have a neutral free cash flow, as we have said for the

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full year, then where Q1 should be the low point on the ramp-up of inventory, mainly driven by the EX30 ramp-up then.

Positioned capital allocation for future success

And if we look a little bit how that plays out over time, where we are now in 2024 and 2025 on the peak levels of investments where we do a lot of investments into new technology, manufacturing footprint, new architecture for upcoming cars, etc., that we should really be able to harvest on them, especially from 2026 and forward, where we should see the absolute levels on investments coming down, even more so relative to revenue on the back of the growth that we will have. And that should cater for us being able to deliver a strong free cash flow from 2026 and forward and navigating this to maintaining a neutral free cash flow for the years 2024 and 2025, despite the high investments we really do in our future and our transformation.

Financial summary of Q1

So to summarise the financials, solid core EBIT margin of 7.2% in the quarter, improving BEV margins to 16%, free cash flow according to plan and on track towards neutral in 2024, and a strong balance sheet and liquidity levels into the second quarter.

Financial profile for 2024

And a little bit more also on how this will play out during 2024. We do see, already in the first quarter, as we previously have said, increasing R&D amortisations and lower R&D capitalisation affecting our EBIT, and that will also sequentially do so during 2024. We are at high investment levels into new platforms, technology and a manufacturing capacity, and the free cash flow should be neutral in 2024 and 2025. It will improve during the coming quarters. And then we should, as I said, be able to generate a strong positive free cash flow from 2026 and onwards.

And on volumes, the full-year guidance remain of retail sales growth of at least 15%. BEV share will increase considerably versus 2023, driven mainly by the EX30 ramp-up, and we're at 21% now in the first quarter. And again, then from early May, our lower shareholding in Polestar will be reflected into our Group EBIT, going from 48% to 18% ownership.

So with that, I leave it back to you, Jim.

Looking Ahead

Jim Rowan

President and Chief Executive, Volvo Cars

Thanks, Johan. So looking ahead, strong balanced line-up of premium cars and the fully electric range, a plug-in electric hybrid and our mild-hybrid range. We'll be ramping up deliveries of the EX30 and the EM90. We're set to introduce a paradigm shift in our technology with the start of production of the EX90 in the first half of this year, and we will remain focused on streamlining our cost base and our capital allocation. We will also continue to prioritise value over volume with a balanced portfolio to meet our business ambitions.

To sum up, we have a balanced approach to our strategy that positions us to deliver on our transformational journey. This allows us to react to the changing market demands quicker than many of our competitors, and that balanced portfolio is focused in five areas.

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• Product, we have cars in many sizes and segments, the 30, 40, 60 and 90 range SUVs, sedans, wagons, and MPVs, and we have these to meet the needs of our various customers around the world.
• Propulsion, we have mild hybrids, plug-in electric hybrids and fully electric cars.
• In production, we have manufacturing facilities in every region Asia, Europe and in the USA, and this aspect has become more important as trade and import tariffs continue to change across the world.
• And pricing, we have maintained a balanced price discipline across all of our various models, and we have our core, ultra and plus variants.
• Partnerships, we have carefully balanced our investment choices between internal development and building key partnerships with leading technology companies around the world, such as Nvidia, Qualcomm, Google and Apple. We've also developed a strong retail and service dealership structure in every region with over 2,200 retail partners across the globe.

And this balanced approach is a key aspect towards our continued growth. We are laying strong foundations for the future, and it positions us to achieve our ambitions of between SEK 550 billion and SEK 600 billion and an EBIT margin of above 8% in 2026.

Looking forward, on the 5th September, we'll also host our annual Capital Markets Day in Gothenburg with a focus to outline our strategic transformation as well as the journey towards our financial ambitions. We'll share in more detail what that consists of in the coming days.

And with that, I'll hand back to Ron. Ron?

Q&A

Ron Banerjee: Well, thank you very much for that, Jim. We are all now set to start the Q&A session, but before I do that, I can see from some of the chats that we're getting from livestream that there might have been some interruption in the live transmission. Apologies for that. Hopefully, you were able to catch up with the rest of the presentation, but of course, the presentation is available on our website as well if you were to look at this afterwards.

But let's start the Q&A session. You can participate in two ways. Either you can use the chat windows that you see at the bottom of your screen, in which case, I will then read out the question on your behalf. Otherwise, simply use the phone lines. But remember, to be able to ask a question on the phone lines, press star one, one, and I request all our callers to please take one question at a time.

So with that, let's take the first question and let me take the first question that's come in online already. Maybe I'll pass this to you, Jim. The question is that - it comes in from Andy Raul[?]. He asks that, 'We've seen your share price in recent days rally up almost 50% since you announced your fourth quarter results. What is causing that, according to you? Is there more headroom for the stock to grow?'

Jim Rowan: Hi, Ron. Thanks for the question. Let's be honest, the stock price is basically an outflow of performance of the core business, so I actually don't focus on the stock price. I focus on, are we doing the right thing? Do we have - first of all, do we have the right strategy for

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the business that takes us forward? Are we producing the right cars at the right price? Do we have the right talent in the business? Are we building the right technologies that will deliver on that strategy, and ultimately, is this driving performance? And that's really been the focal point for the whole executive management team. If we get that right, if we start to see that performance improve and we're predictable, then I think the stock takes care of itself. But the stock in itself, I really don't pay that attention to that. I pay attention to the overall core fundamentals of the business.

Ron Banerjee: Right. Jim, thank you for that. Let's take then our first caller.

Jim Rowan: Sorry, Ron. I think as well, maybe just to follow up on that, I think one of the things which became more and more apparent is that we have a very balanced portfolio - we'll probably come onto some of those questions as we get deeper into the call. But this balanced portfolio where we have really good mild hybrid, plug-in electric hybrid and EV technology in various class sizes of 30, 40, 60, 90 SUVs, sedans, MPVs, I think that narrative has become much more important to the investment community in terms of the depths of our technology, the breadth of our network that we're in 90 countries, that we have a great dealership network and so on. I think all of that has become much more developed, if you like, as a narrative across the investment base.

Ron Banerjee: Okay, thank you for that. Let's take the first caller then this morning, and that is Harry Martin from Bernstein. Good morning, Harry, and I hope you hear us. So as I said, please request you to take one question at a time for the benefit of all of us here. Go ahead, Harry.

Harry Martin (Bernstein): Yeah, good morning, everyone. Thanks for the presentation. The first question I have is just a little bit of colour on the price and the mix. I understand the commentary on price normalisation and mix. So can you just confirm you haven't seen any negative pricing impact or rising competition in the context of EVs or inventory builds elsewhere? And then relatedly, on value and volume in the US, you talked about gaining share of volumes in the US, but if I calculate revenue per car, it's down more than 30% in Q1. So I think it's a related question, but any commentary you have on, sort of, the mix and the pricing normalisation from a US standpoint as well.

Björn Annwall: Maybe I can take that and start from, kind of, the overall picture. I think you're right that the biggest difference driver of that is the mix. In terms of the pure pricing, we are maintaining a very strict, kind of, value-over-volume approach, and we haven't seen any drama in changes over the last - over the quarter-over-quarter.

When it comes to the US, and this becomes a bit technical, but clearly, within a certain quarter, retail deliveries doesn't translate directly into revenue recognition. You have different channels, right, where you have rental channels and some of the leasing channels where the revenue recognition, rather than coming at the point of where we deliver the car, it comes over the duration of that contract or when we sell the used car. And quarter to quarter, the channels can fluctuate a bit, so I wouldn't read in too much in that, and we haven't made any strategic big shifts in how we see the channels if you look at the full year. So I wouldn't read too much into that specific quarter in the US.

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Ron Banerjee: And Harry had another follow-up question, it was on the value-over-volume revenue per car down, maybe you touched upon it slightly, but if there's more colour, Johan, if you want to put on that?

Johan Ekdahl: No, no, but I think as Björn says, it's a mix of things, and it's - to some extent, it can be variations between quarters, exactly as Björn said, different sales channels that has a little bit different time facing when it comes to revenue recognition, etc. What we can say is that we can firmly say that we don't see any price deterioration. If you look at the end of 2023 into 2024, the walk in the presentation is more year-over-year Q1 over Q1, where we still had an imbalance in supply and demand in Q1 2023. So I'll just, sort of, reemphasise what Björn is saying.

Ron Banerjee: Okay. Thank you. Harry, do you have any follow-up for us?

Harry Martin: If I could just have a quick follow-up on the margins as well. You gave good colour on the 16% EV gross margin, but the 25% gross margin in the ICE and the hybrid business is also very strong. So I wondered if you could just touch on the outlook for the margin on that side of the portfolio in the midterm and put that into context of how you think about margin parity over the longer term as well.

Björn Annwall: Yeah, I can start. If you look at it a little bit more short term first, again, we have increased our BEV margins to 16%, both driven by lower raw materials and also EX30 of course ramping up. If we look a little bit ahead into 2024 on the BEV margins, of course, we will ramp up the car EX30 with higher volumes, and which will also lead to, let's say, a little bit more of a mixed spec level. So I don't foresee any huge increases in the BEV margins in short term, but we should definitely maintain on the good levels where we are right now. And as you say on the non-BEV cars, we do see still a healthy demand and good margins. Mix shift might vary quarter-over-quarter to some extent, but we don't see any major margin deterioration short term.

Ron Banerjee: Okay. Thanks for that. Hope that answers your questions, Harry. Let's take the next question that comes in online, and there are two questions comes in, this from Felix Page, Autocar. And probably I'll turn to you Jim, for both of these questions. Firstly, Felix asks, 'Are you still confident you can achieve 50% EV sales by end of next year and go all electric by 2030?'

Jim Rowan: Yeah, let me take the EX30. So we started the EX30 sales just really - it came into full production in the back end of the first quarter, and we saw immediately the sales of that car be propelled to be the third best-selling EV in Europe behind the Tesla Y and the Tesla

• 3. So that's a great start for that car, and demand is strong, as Björn has alluded to. So that's

• and we will see then, in the coming years - for the rest of this year, of course, the whole of 2025, we'll see full production of the EX30.

We also have the EX90, which will come into production this year, and we'll have the EM90, so three brand new cars all in full production this year and all through 2025, in addition to the refreshed EX40 and EC40. And we'll announce more EV cars at the back end of this year, which will start production and sales in 2025 as well.

I'm confident that there's enough - and the premium sector as well, remember, is very different from mass market. Then the premium sector, you need to remember that you're selling to a

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