Volvo Car : Quarterly Earnings (Swedish)

Volvo Cars Q4 2023

Results

Thursday, 1st February 2024

Volvo Cars Q4 2023 Results

Thursday, 1st February 2024

Introduction

Ronojoy Banerjee

Head of Corporate Communications, Volvo Cars

Welcome

Good morning, and welcome to Volvo Cars earnings call coming to you from Stockholm. My name is Ron, and I'm joined this morning by our President and Chief Executive, Jim Rowan; our Chief Financial Officer, Johan Ekdahl; and our Chief Commercial Officer and Deputy CEO, Björn Annwall.

Agenda

At the top, Jim, Björn, and Johan will walk us through our performance, and thereafter, we'll throw it open for a question and answer on. And Before I invite Jim to come up here, take a look at this short video that summarises the year 2023. Jim will join on the other side.

[Video]

Opening Remarks

Jim Rowan

President & CEO, Volvo Cars

Best core operating performance in our 97-year history

Hello, and welcome to Volvo Cars fourth quarter full-year financial results for 2023. As you can see, it was a record year. We delivered some key milestones to our transformation journey in Volvo Cars during the last 12 months with record breaking years on many levels.

We reported the highest retail sales, revenues and profits in the 97-year history of our company.

2023: strong operational performance

2023 was a strong operational performance year for us. As we said, records here in terms of sales revenue, EBIT, but also in fully electric BEV share. 16 months of consecutive growth in retail sales with a balanced portfolio of BEV, PHEV and MHEV products.

Fully electric car sales increased by 70% with increased margins. Increased production output by 18%, reflecting a strong supply chain resilience. We delivered meaningful fixed cost efficiencies. We entered the premium EV sector in China with the launch of a new EM90.

We commercially launched the multiple award-winning EX30 with strong pre-orders, and the delivery of those cars to customers happened in the fourth quarter.

We substantially strengthened our next generation technology, including further investments in AI. And in so doing, we laid solid foundations for our continued growth in 2024.

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Solid gross margins of EVs of 13%

We are the only heritage car company that split out our BEV margins. We saw that rise to 13% on our CMA XC40/C40 platform. And that will increase further as we develop the EX30 into more and more geographies and sell more of those cars around the world.

We are the highest premium BEV share company. And we are the highest published BEV margins in the EV sector other than Tesla. We're proud of all of those achievements.

Gearing up for electrified 2024

But perhaps we're most proud on the three new cars in our full production line-up this year, all with a very specific focus. The EM90 is tailored at the premium sector of the MPVs in China. The EX90, a global seven-seater, full electric car with strong customer demand, targeted towards Europe or North America and our Chinese markets. The EX30, a new small SUV, targeted very specifically towards bringing in new customers and city drivers.

This combination of those three strong cars in addition to our existing line up we think positions us well for continued growth in 2024.

EX30: small SUV with big opportunities

But let's look at each of those cars individually.

The EX30, we already have 40,000 cars that have left the factory. The car has been released for sale. We have strong demand. We have strong supply. Five colours, four interiors, two drive trains, two battery types, including LFP, 450 kilometre range and the lowest CO2 footprint of any car we've ever produced. It also goes from three - from zero to 100 kilometres an hour in 3.6 seconds. It's safe, sustainable, a city car that will attract new customers to Volvo.

EM90: Strong ambitions for China premium EV market

The EM90, a premium car specifically targeted towards the China MPV market. This will help strengthen our brand, attract new customers and improve our gross margins and our profitability in China. Production on that car has already started.

EX90: Not just a car, a paradigm shift

The EX90, our flagship SUV, seven-seater, fully electric, almost 600 kilometres of range, based on our new SPA2 core compute architecture, with new active safety systems including LIDAR standard. This positions Volvo technology ahead of many of our premium competitors globally.

It's our safest and most intelligent Volvo that we have ever produced. And that car will start production in the second quarter in our Charleston facility in the USA.

So with the EX30, the EM90 and the EX90, we are significantly strengthening our position in the market, especially in the premium electric segment, which is where we are focused for the future.

We're not just building electric cars, but we are bringing new technologies that represent a paradigm shift for us and for our entire industry.

Starting with the EX90, all of our cars built on our next-generation fully electric platforms will be powered by AI-enabled core compute. This will provide tremendous opportunities to

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harness the benefits of AI and of data capture. This further differentiates us from other mass EV cars that are simply electric cars with electrical propulsion. But they don't have the core compute architecture that provides the tremendous benefits that our next-generation cars will have.

With that, I will hand over to Björn, who will take us through the exciting journey that lies ahead in our full range. Björn?

Operational Overview

Björn Annwall

Chief Commercial Officer & Deputy CEO, Volvo Cars

Geared for premium growth with balanced portfolio

Thank you, Jim. So clearly the three new fully electric cars that Jim talked about will make our showroom even more attractive for consumers. So our growth journey on fully electrification will continue. We will come to 50% fully electric car by 2025 and become fully electric by 2030.

But it's important to point out that the transition to fully electrification happens at different timescales throughout the world. And therefore, our plug-in hybrids and mild-hybrids continue to play a very important role.

They will get further love and care with smart investments. We will see exterior upgrades, interior upgrades, and infotainment upgrades to these cars. The exact timings we will come back to. With this broad portfolio, we have the right portfolio to play throughout the world.

Strong Fully Electric (BEV) and Plug-in Hybrid sales

On the electrification side, it's important for our sustainable future that we get fully electric, but it has to be done with sustainable margins. Therefore, it's really reassuring to see amidst all talk about weakening or softening BEV demands and lousy BEV margins from many players, but we, during last year, grow our BEV sales with 70% and we increased the gross margin up to now 13% in quarter four. That's something that's been done with real hard work and focus over a long period of time.

We have invested into making the cars better, interiorly designed fully electric motors is one example that has extended the range and made the car better. And we have also invested a lot to build up the know-how and belief in electrification in our sales companies and with our retail partners in order to be able to serve our customers in a good way. This strong growth will continue and the path towards an even more profitable BEV sector will also continue.

The EX30 will come in with a contribution margin or gross margin, I should say, between 15% and 20%.

Fully Electric share 2023

It's also important to say that, as I said, the transition happens at different pace at different parts of the world. But this is not a Northern European phenomena. This is something we see throughout the world. It's happened faster in Northern Europe than Eastern or Southern Europe. It also happened faster on the West Coast than the US than interior, but we see

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strong electrification throughout the world. And we're already above 50% fully electric shares in six markets throughout the world.

Fully electric and plug-in hybrid share 2023

If you then also add in our plug-in hybrids, so basically looking at what share of our cars are sold with a cord, either plug-in hybrids or full electric cars. You see that there are many markets where the vast majority of our cars have those cords.

It's also important to mention that the plug-in hybrids continue to constitute an important bridge into the fully electric future. We see many consumers who take a plug-in hybrid as the first step into full electrification, and the next car they buy is the fully electric cars.

It's also reassuring to see if we look at the usage of the plug-in hybrid, they're used as intended. More than 50% of the energy consumed in the cars comes from charged electricity, i.e. it's more of a fully electric car in the usage of the consumer than it is an ICE car. And it bodes well for the future.

Also interesting to see in the US, we brought with you the kind of top three US states there. Some of the states there come quite far when it comes to electrification, at least for Volvo Cars. So again, this happens throughout the world.

Strong sales and earnings in 2023

I also want to mention the fact that the '23 was a record year at the global level, and at the local level we had a lot of sales companies and retail partners who did a fantastic job. Ten sales companies had an all-time-high unit sales, but more importantly, 24 sales companies had an all-time-high earnings. And that comes based on a lot of work to deliver a premium consumer experience and to get the right price realisation and mix in the market in a tough year. So we feel very proud about that achievement, which bodes well for great numbers.

Johan, let's have a look at those numbers.

Q4 2023 Financial Review

Johan Ekdahl

CFO, Volvo Cars

Q4 - Key financials

Thank you, Björn, and good morning. Some more flavour to the financials then. Again, 16 consecutive months of growth taking us to the 200,000 cars in the fourth quarter of 2023 and SEK109 billion in revenue.

On EBIT, we are at SEK6.7 billion compared to SEK3.9 billion last year for the Volvo core operations excluding JVs & Associates, so a significant improvement. And on cash flow, a strong free cash flow of SEK6 billion in the fourth quarter of 2023.

If we look a little bit more into the details on revenue, of course, driven by higher volumes, but also that we are actually maintaining a good sales mix and pricing, showing our ability to maintain price discipline in this quite turbulent environment.

Foreign exchange rates still a tailwind on the revenue side, mainly the US dollar. Contract manufacturing, a slight decrease compared to the same period last year, and then we also

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have other positive effects, mainly from after-sales and parts and accessories taking us down then to the SEK109 billion in revenue for the quarter.

Q4 - Solid underlying EBIT

Looking at EBIT, SEK3.9 billion again in fourth quarter last year, an increase in volumes, still maintaining price discipline and a favourable mix. Some decrease due to FX in the fourth quarter, mainly the strengthening of the Swedish SEK against other main currencies, and then other positive effects also mainly driven by parts and accessories, taking us then to a solid underlying profitability of SEK6.7 billion or 6.1% for the quarter. And then including JVs & Associates, we're at SEK5.4 billion or around 5%.

Q4 - BEV margins

And then, as Björn alluded to it before, solid BEV margins of 13%. As we have said previously during the year, we see an increase of the BEV margins from 9% in the third quarter to 13%, both due to lower lithium prices, but also the product development, in-house,e-motors, et cetera. And also the ability driven by increased range, et cetera, to further improve pricing of the cars, taking us to 13%.

On the investment side, again, the main part of our investment is going into the electric future, but we also see investments still in our balanced portfolio of other cars, PHEVs and MHEVs taking us to the journey towards the fully electric future beyond 2030.

FY - Key financials

So for the full year, again, we are seeing a solid double-digit growth in retail sales of 15%, taking us to the record 709,000 cars. Revenue, 21% growth; SEK399 billion in revenue, showing also there a strong pricing effect due to the fact that we are increasing revenue more than sales volumes.

EBIT for the company, record SEK25.6 billion in EBIT, 6.4%, a significant improvement compared to last year where we had around SEK18 billion or 5.4%, including JVs & Associates, SEK20 billion or 5% EBIT margin.

And if we look at cash flow, minus SEK9 billion for the full year in free cash flow, but taking that into consideration that we have granted this shareholder loan to Polestar of around SEK11 billion, we are operationally at a positive free cash flow for the full year.

FY - Record revenue in 2023

And revenue then in some more detail, the biggest driver of course being volume, but again we are able to have a positive effect from sales mix and pricing also for the full year, FX tailwind, some contract manufacturing contribution and then other effects, parts and accessories, used cars, et cetera, taking us then to the almost SEK400 billion revenue, which is a record for the company in its history.

FY - Strong underlying EBIT

On EBIT, we start around SEK18 billion last year, big effects again from volume. Sales mix and pricing, almost flat, but that is also then considering that we have a significant increase in our BEV share from 11% to 16%, still maintaining pricing and sales mix, taking us to a flat level on that respect. And then some tailwind also on EBIT for the full year on FX. Some other effects considering the first part of the year where we still had some supply constraints,

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semiconductor shortages, et cetera, increasing cost, also elevated raw material prices. But that, as you saw in Q4, is a complete different picture now going out of 2023 and into 2024.

Then taking us to the SEK25.6 billion record level EBIT, 6.4% for the full year. And again, SEK19.9 billion or 5% including the JVs & Associates.

2023 - Solid liquidity level despite high investments

On liquidity, we're going out of the year with a strong balance sheet, a solid liquidity level of SEK75 billion, including undrawn facilities. We are in a period of high investments, but we are doing this in a balanced way. And we also foresee now for the years to come, '24 and '25, an approximately neutral free cash flow taking us then investing into 2026, where we should see a strong cash flow generation for the years to come.

And with that, I leave back to Jim for the clarified ambitions.

Clarified Ambitions

Jim Rowan

President & CEO, Volvo Cars

Ambitions

Thanks, Johan. Yeah, so let me just take a few moments to clarify a few of our strategic ambitions and the timeline that goes with that.

We're on track to reach our 50% EV sales by 2025. Of course, that's supported greatly by the add of the new EX30, which we think will be a high-volume car for us in the years to come. We're also on track to reach our 40% CO2 emission reduction when we use that against our baseline of 2018. Again, that will be strongly supported by the advent of the EX30 sales in the months and years ahead.

We're also moving our focus from volume to value. We think that's a much more important measure as we go forward. Therefore, going forward, we will report on revenue and not on units. And we have set ambitions to be between SEK550 and SEK600 billion by 2026. And we remain resolute on achieving our 8% plus EBIT by 2026.

We've been asked to clarify some of those strategic ambitions and also asked to clarify the timelines where those ambitions would be realised. So hopefully that paints that picture more crisply for everyone today.

Strong growth trajectory

All of this translates to ambitious revenue growth of between 11% and 15% CAGR between 2023 and 2026, which we believe is one of the most ambitious growth rates in the premium automotive sector as it stands today.

Positioned capital allocation for future success

Now the auto industry has cyclical investment. We saw this in 2015 when we invested heavily in our SPA1 platform. That delivered great benefits to us and allowed us to reap the benefits of those investments over several years. We are now in a similar investment cycle for SPA2 and beyond.

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This investment involves much more complicated technologies than ever before, and they all must come together simultaneously: cell-to-body, batteries, mega casting, e-motors and inverters, AI, safety, embedded safety, and also some of the other tech investments around software, and of course partner up with our silicon providers like Nvidia, Qualcomm and many more.

All of these need to come together in order to deliver the benefits, and we are very well positioned within our industry to deliver the first part of those investments in the SPA2 architecture. This will allow us to reap the benefits of this for the years to come.

Volvo Cars and Polestar

Let me also clarify or take the opportunity to clarify our position on Polestar. Polestar is entering an exciting new phase with a strengthened business plan and they're positioned for future growth.

Volvo Cars is developing and concentrating on its resources now on its own ambitious journey. In that case, Volvo Cars is evaluating reduction of our shareholding in Polestar, including a distribution of shares to Volvo Cars' shareholders, with Geely Holdings being the primary recipient.

Volvo Cars will no longer take the role of providing further cash into Polestar. We will however extend the repayment periods for our existing loans from 2027 to 2028. Volvo Cars and Polestar's existing operational collaboration across R&D, manufacturing, after-sales services and some commercial opportunities will continue to the benefit of both companies.

So hopefully this clears up some key points around ambitions, our investment cycle and our continued engagement with Polestar.

2024: growing faster than the market

Let me move now to 2024. We have a strong balanced line-up of premium cars, BEV, PHEV and MHEV. We have higher volume growth rates in 2023. We have a fully electric car share that will be considerably higher than 2023. We will have higher BEV margins than in 2023.

The ramp-up of the EX30 is in production and we have 40,000 cars already in transit. The EM90 has already started production, and we'll have the first customers behind the wheel of that car in Q1. And the EX90 will start production in the first half of 2024.

This positions us strongly to deliver on our clarified ambitions as well as a strong growth and revenue for 2024.

Summary

So, in summary, a record year in 2023. The foundations and the hard work of '23 positions us really well for another record revenue year in 2024. We will have 11% to 15% CAGR growth rate between '23 and '26. We have three new models in production in different market segments, in different countries, in different geographies, with different customers, all in the first half of 2024.

Capital allocation will be fully focused on Volvo Cars operations. And that will deliver differentiating technology for Volvo customers in the years and months ahead. And we have added to our organisational strength and developed a winning can-do culture.

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And let me just stop on that for a second. One of the things I think that differentiates Volvo Cars from our competitors is that we've managed to harness our global operation towards the single focus of becoming a fully electric car company by 2030, and by harnessing all of the technology that we need to develop in order to achieve that goal.

We have manufacturing facilities in Asia, in Europe, and in North America. We have engineering teams in Asia, Europe, and North America, yet we bring all of that together into a single focus point that allows us to develop technology and bring out winning cars faster than our competitors, with differentiated technology that's important for Volvo customers.

So let me then just say thank you to all the people who work for Volvo cars to deliver what was a record year for our company, and in so doing, positions us for a great 2024. Thanks.

Q&A

Ronojoy Banerjee: Well, thanks very much, Jim. So while Jim settles in, let's tell you how you can participate in this Q&A round. You can do so in two ways. You can either send in your questions. You can see the chat window at the bottom of your screen, in which case I will read out the questions, or else if you want to join in on the phone lines, just use the QR code that you should also see at the bottom of the screen. If you want to be able to ask a question, please press star one-one. With that, guys, let's get this Q&A started.

So the first question that comes in. Jim, we're seeing many companies becoming more cautious about their BEVs, battery electric cars. Will you be lowering your BEV ambitions as a result of the weak sentiments around battery cars?

Jim Rowan: No, far from it. In fact, when we look at 2023, we grew by 70% in our BEV segment. And that was really just with two cars, the XC40 and the C40, both of which are of course on the same size. So effectively on one platform and two cars we saw that growth. And we're outgrowing our competitors where we have the highest share in EV sales amongst our premium competitors.

This year, of course, we'll see the EX30, we'll see the EX90, and we'll see the EM90 all in full production by the half year. So we expect to grow considerably in the EV segment this year as well, and to take further market share.

But let me pull that apart a little bit more. The reason I think there's so much narrative around the slowing EV is that there's two different segments. There's the premium segment and there's the mass market. I think in the mass market segment, maybe that has been affected by some companies not getting to price parity with ICE. In the premium segment, we don't see that. We see the premium segment growing and we're taking market share in that.

But as well remember, we have a fantastic line-up of mild-hybrids as well as plug-in electric hybrids. And that helps bridge many of our customers from mild-hybrids to plug-in electric hybrids to full BEV. And the loyalty of our customers and the data that we have shows that that's a natural transition for many of our customers. So we're still bullish about the EV market going forward - the premium electric market going forward, I should be more precise.

Ronojoy Banerjee: All right, let's take another question then. This comes from Hampus Engelau from Handelsbanken. Can you give us an update on the software situation with the EX90?

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Ronojoy Banerjee: Yeah. So, on the software side, as you know, we delayed that car. Again, this is the most technically advanced car that we've ever produced. And in fact, I think it's one of the most technically advanced cars that has ever been produced, quite frankly. And so we wanted to make sure that the software within that vehicle was as good as it possibly could be. Even though we can do software updates over the air now with that technology, we still wanted to make sure that everything was as good as it could be.

And we took the time. It was the decision that we made I think for the long-term benefit of our company and the long-term benefit of our customers to just take a pause and make sure we get that right. But now I'm glad to say the teams have worked through that and we're on schedule to start manufacturing that car now in the second quarter of this year, which we had alluded to, I think, about a year ago or so when we made the announcement that we would delay.

So still on track. It will start in our Charleston facility in the USA. That's where that car will begin its production life. And the first car - the first customers will be behind that car. And shortly after we ship that in the second quarter.

Ronojoy Banerjee: All right. This question is from Daniel Schwartz at DNB. Good morning. Your EBIT margin target for 2026 includes revenues and EBIT from cars that you produce for Polestar. Could you give us an indication how substantial that contribution is?

Johan Ekdahl: Yeah. And of course, there is a contribution in absolute. I will start by saying the contract manufacturing contracts that we do have, we are not in any means depending on that in order to reach our EBIT margin target of above 8%. So that is - of course, it's a contribution in absolutes. We don't guide on these specific numbers, but it's - we will - it's not the requirement to reach the 8%. No.

Ronojoy Banerjee: Okay. Another question from Daniel then. The contribution from JVs & Associates includes an estimate for Polestar's Q4. Does that already reflect the recent profit warning by Polestar?

Johan Ekdahl: I mean, since Polestar has not yet disclosed their Q4 earnings, we cannot comment on the specifics on Polestar numbers. But of course, the Polestar numbers are included in our net of JVs & Associates. They will release that at a later stage.

Ronojoy Banerjee: Okay. So let's take a question then from the UK, James Attwood from Autocar. He asks, the XC60 remains your best-selling model, how long until you have an EV offering in that crucial market segment?

Ronojoy Banerjee: Stay tuned. Yeah, it's obviously a natural progression. The 60 size and the 60-size class for us has been an important part of the product portfolio. So it would be natural that we would, at some point in time, announce when we're ready to do that. So yeah. It's a good question. It's a natural progression for us. We're just not quite ready to announce when we'll hit the market with the new 60 class in electric.

Ronojoy Banerjee: All right. Let's take the first caller then this morning. It comes in from Daniel Roeska from Bernstein. Good morning, Daniel. How are you? And please go ahead with your question.

Daniel Roeska (Bernstein): Good morning, gentlemen. Thanks for taking my question. Two for Johan, and one for Jim, please. Johan, first, on gross margins for ICE and BEV, what drove

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