Volvo Car AB (publ.) (VLVOF) Q2 2024 Earnings Call Transcript

Volvo Car AB (publ.) (OTCPK:VLVOF) Q2 2024 Earnings Conference Call July 18, 2024 2:00 AM ET

Company Participants

Ron Banerjee – Head of Corporate Communications
James Rowan – President and Chief Executive
Johan Ekdahl – Chief Financial Officer

Conference Call Participants

Harry Martin – Bernstein
George Galliers – Goldman Sachs
Hampus Engellau – Handelsbanken
Jose Amundi – JPMorgan
Philippe Houchois – Jefferies
Pushkar Tendolkar – HSBC
Stephanie Vincent – Bank of America

Ron Banerjee

Good morning, and a warm welcome to the presentation of Volvo Car’s Second Quarter Financial Results coming to you from our headquarters in Gothenburg. My name is Ron. As always, I’m joined this morning by our President and Chief Executive, Jim Rowan; and our Chief Financial Officer, Johan Ekdahl.

At the top of this earnings call, Jim and Johan will walk through our performance during the second quarter and thereafter, we’ll throw it open for a question and answer round. I’ll come back with more information on how you can participate in the Q&A round.

But for now, I’ll leave the floor to Jim. Jim?

James Rowan

Thanks, Ron. Good morning, everyone, and welcome, and thanks for joining us for our second quarter earnings call. The second quarter for 2024 has been strong with record core profitability. But before we delve into the numbers, here’s what we achieved inside the quarter. We delivered very strong double-digit retail sales course within this quarter. We increased market share and the EX30 is now amongst the top three best-selling EV’s in Europe.

Gross margins were at the highest level in seven years, and gross margins for EVs were at the highest level ever. Our core EBIT and our core EBIT margins, were also at the highest levels ever. And our cash flow improved by SEK 12 billion quarter-over-quarter. We also achieved record electrified sales and EV sales within this quarter. And in terms of the numbers, let’s look at performance in some more detail.

Our retail sales for the quarter were up by 15%, much stronger than many of our competitors. Our gross margins for the quarter reached 22.8%, up from 19% last quarter. Gross margins for our BEV touched a new high of 20% versus only 3% last year and our core EBIT margins for the quarter increased to 8.1%, which is the highest ever, up from 6.3% reported last year, our absolute core EBIT for the quarter increased by 28% to a record SEK 8.2 billion.

And share of electrified cars reached a new high of 48% in Q2, with a share of BEV’s now at 26%. And let’s look at our performance for electrified cars a little bit more closely. As mentioned, the share of our electrified cars rose to 48% in Q2 from 39% in the same period last year, with EVs accounting for 26% of those sales, the highest ever share of electrified products that we’ve ever reported.

PHEVs sales were led by the XC60, which has been the best-selling organ electric hybrid car in Europe for the past two quarters. Our EV growth has been led by the EX30, which continues to be among the top three best-selling EVs in Europe across all brands and segments.

As mentioned earlier, the gross margins per BEV reached 20%, up from only 3% the same quarter last year. And as you know, we have been reporting our gross margins on BEV since 2022. No other heritage car company has done that. Our purpose was to create an understanding of our wider investment community and the economics of full electrification and to demonstrate that we are making the transition towards electrification profitably.

But as we introduce new BEVs into the market, this information becomes more and more sensitive. So, from next quarter onwards, we will not disclose the margins of our individual drive chain, including EVs but we will continue to report on EV volumes.

One of the reasons of our strong growth has been the balanced product portfolio. We have cars and many sizes and segments, the 30, 40, 60 and 90 size range, SUVs, sedans, wagons and MPVs. We have mild hybrids, plug-in electric hybrids and of course, fully electric cars.

Our plug-in hybrids and mild hybrids remain very strong and popular with our customers, and we will continue to invest in this lineup. And these cars form a solid bridge for our customers that are not yet ready to move to full electrification.

On EVs, we have five fully electric cars in production. And during the third quarter, we will be the first customers behind the wheels of our brand-new EX90. Now the EX90 is not just an all-electric SUV. It will be one of the very few cars in the industry to be packed full of technology and core compute. And this represents a major paradigm shift in the technology and throws us into a new area of great possibility.

So let me delve a little bit more into the tech, which is embedded within the new Volvo EX90. This is an image of our EX90, and it includes 10 key areas that represent our future technology state. These include, cloud design, the application there, e-motors and inverters, batteries, bidirectional charging, silicon, sensor, connectivity and, of course, software.

All of this is happening at the same time, and we are forced to understand and to harness all of these key technologies for the future. These key areas then become the enabler for us to offer unique Volvo benefits to our customers. Zero emissions, world-class infotainment, car sharing, service and servicing, advanced over-the-air updates, increased active safety performance, speed and handling, stability and comfort, safety and security and home energy management. The EX90 is truly a software-defined vehicle that would just become better and better over time due to its OTA or over-the-air capability.

Meanwhile, to make sure that we constantly improve what we do and how we do it, data capture and data analytics are the golden phrase that run through almost everything. As I said, electrification is the tip of the iceberg. The more profound change that’s taken place in the industry in these areas.

And this can be summarized as software, silicon, connectivity and data. Our industry is developing rapidly. And to be successful, you will need to fully understand all of these technologies and how they work together. At Volvo Cars, we have invested heavily to make sure that we can do just that.

And with that, I’ll hand over to Johan.

Johan Ekdahl

Thank you, Jim. Good morning, everyone. A little bit more details then into the financials. Strong quarter, solid retail sales growth of 15%. Revenue just about flat but with some dynamics from contract manufacturing and other factors. We’ll come back to that more in detail.

Very strong EBIT, SEK 8.2 billion or 8.1% highest ever, as Jim alluded to, for the core operations, excluding JVs and associates, but also including JVs and associates, were at 7.9% or SEK 8 billion in the quarter, which is a significant improvement from last year, but there are a few different things is further explanation. I’ll come back to that shortly.

And on cash flow, we’re about neutral for the quarter, and that is also on track to be neutral for the full year as previously guided. So a strong quarter from a financial perspective and if we look more details into revenue and if you exclude contract manufacturing, we have a 3% revenue growth, mainly driven, of course, by the increased volumes.

We have a slightly negative sales mix and pricing, but that is mainly driven by product mix. You could say, the main driver for the growth is the EX30, very solid margins, but the lower-priced car, of course, has an effect on top-line growth.

And then we had quite a big year-over-year effect when it comes to deferred revenue, and that’s related to mainly the sale of other cars to rental companies and company cars with the repurchase agreement, which makes up we have to, from an accounting perspective, defer revenue and take it over time.

That will even out during the course of the year, but it does have a year-over-year effect affecting our revenue growth. FX on revenue are virtually flat, and then some other positive effects also driven by used car sales, parts and accessories and others, taking us to the 3% growth, excluding contract manufacturing.

And that’s, of course, to bolster and lower volumes this year in contract manufacturing compared to 2023. If we look at it a bit more into EBITDA and look at the core EBIT, excluding JVs and associates, we have a positive effect from the volume growth.

We have a positive effect from mix and pricing, which I think is also a good proof point on our ability to maintain price discipline, slightly negative on FX in the quarter, driven by the strengthening of the Swedish SEK. And then in other, we have parts and accessories sales, used car sales, but also effects from lower costs, which takes us then to the SEK 8.2 billion or 8.1% in core EBIT.

A very strong quarter on the back of the strong gross margin of 22.8%, but also actually on fixed cost efficiencies flowing through due to the actions we are continuously taking and then taking up the record 8.5% for EBIT. Including JVs and associates, 7.9% or SEK 8 billion and JVs and associates combined, all JVs and associates is minus 0.2%, which is significantly improving from last year. There are a few more one-off items I would like to explain related to Polestar.

As you know, they — some weeks ago, released their preliminary year-end 2023 numbers, which was including certain impairment charges related to assets and that we have a catch-up effect in the second quarter since those effects was not known at the time when we released year-end ’23 numbers.

That has a negative effect, although more or less entirely offset by accounting effects, you could say, based on the fact that due to the distribution of shares and lowered interest in Polestar, we have a release of previously eliminated internal profit elimination that flows through into the P&L in this quarter, offsetting negative effects.

And a third effect also being that during this quarter, the book value from an accounting perspective in Polestar has reached zero due to previously recognized operational losses and as such, we do not recognize operational losses to Polestar as long as book value remains at zero.

We, of course, have a significant value still from our holdings in Polestar, although from an accounting perspective, it’s now down to zero, and that also affects these numbers in the quarter. On EV margins, 20% highest ever, we have an effect from CO2 credits, but even despite that, we are at 19%, which is by quite a margin, the highest ever, driven by both cost reductions and maintained price discipline taking us down to the 20% for the quarter.

As Jim alluded to, we will, going forward, not show EV margins explicitly due to competitive sensitive information based on new products rolling in. We will, of course, continue to show the EV volumes but we’re having a really strong quarter from an EV margin perspective in the second quarter of ’24.

On liquidity, neutral free cash flow for the quarter, we maintained a very solid balance sheet and a solid liquidity level and we are — we still guide on neutral free cash flow for the full year, and that’s mainly driven by lowering inventory during the second half of the year when production and sales volumes should balance out. Still at a high inventory level in the second quarter due to ramping up EX30 in more markets, et cetera, but we are tracking according to our plan for a free — for a neutral free cash flow for the full year ’24.

And if you look a little bit ahead on capital allocation and investments, we are in ’24 and ’25 as we’ve previously also communicated at very high levels on investments. We are investing in new technology, in the manufacturing footprint, new platforms, new cars, but that will also then, when we come into ’26 and onwards, we will be able to harvest from those investments, taking down investment levels, be absolute even more so relative to revenue, and then we should have a strong free cash flow generation from ’26 and onwards.

So if we summarize the financials in the second quarter, highest ever core EBIT, SEK 8.2 billion and 8.1% EBIT margin, strong gross margins of 22.8% driven by cost reductions and maintained price discipline; Gross margins on fully electric cars on a record 20%. Neutral free cash flow for the quarter, tracking towards neutral free cash flow for the full year.

We have a strong balance sheet and strong liquidity levels. And during the quarter, in May, the lowered shareholding in Polestar reflected in group EBIT with 18% ownership remaining. And also going forward now since from an accounting perspective, book value is down to zero, but we no longer recognize operational losses from Polestar going forward.

And if we look a little bit further ahead then, we’re coming out for a very strong quarter. We have a very good starting point going into the second half of the year. However, there are uncertainties. There are challenges, macroeconomic remaining challenges and tariffs imposed both by EU and the US. that will have an impact in the coming quarters.

Although we have a strong balanced lineup of premium cars, we have EVs, PHEVs and MHEV that will make us be able to navigate the different pace of electrification and the differences in customer demands in different parts of the world.

The first customer deliveries of the EX90 will happen now during the third quarter. Next year, as previously communicated, we will localize production of the EX30 into Ghent in Europe. And we will, of course, remain focused on cost and capital allocation and continue to prioritize value over volume in order to navigate the challenges ahead.

For the full year sales volumes, our ambition is still to reach the 15% previously guided, although considering the challenges we have and the clear prioritization of value over volume. Our guidance is now for the full year retail sales growth of between 12% to 15%. And we will have a neutral free cash flow in ’24 and ’25. And ’24 now, we will generate stronger positive cash flows in the second half of the year, balancing production and sales volumes in order to take us to the neutral free cash flow also for the second half of this year.

And then in September, in the fifth of September in Gothenburg, we will host the Capital Markets Day, but we will have focus and be more granular presentations of our future products, technology, global footprint, commercial and brand strategy and of course, also how that links to the financials. And you can find us at our Investor Relations page on the web.

So with that, I’ll — we’ll go into the Q&A. So thank you.

Question-and-Answer Session

A – Ron Banerjee

Well, thank you very much for that one. We are all set now to start the Q&A session. [Operator Instructions]. So with that, let’s get this started. But let me take the first question, guys. I mean, it clearly looks like a really good set of numbers we have reported today. But Jim, if you were to sort of pick the three main highlights, the three main takeaways from your perspective that these numbers demonstrate?

James Rowan

I think we’ve got to start with the core fundamentals of the business. So we’re pretty happy that we — in a pretty turbulent environment, to grow the business by 15% and so that’s a good starting point for us. But the fact that we can do that with gross margins at 22.8%, which allows obviously, to deliver a record EBIT of 8.1%. And then also free up — and improve our cash flow position by $12 billion, say, quarter-over-quarter. When you look at those core fundamentals of the business, that’s a positive, obviously.

And I too out there, you’ve got to make you we’re positioning the right products in the right market at the right price at the right time. And we remain relevant and can take market share. And that’s probably the last part. The fact that we’re taking market share from our competitors is something which we’re obviously happy about as well. That leads me on to the second part, which is we know the SPA2, our latest platform, jam-through of new technologies as well as obviously that coconut architecture that we’ve been working on for a while.

Now really, we are one of the very few people in the market that is across that bridge and across that Rubicon to real co-compute software-defined vehicle. And that’s an important step in one for us. So the first customers will be behind the wheel at EX90 in the next couple of weeks, and that takes us into a new trajectory, which is SPA2, SPA3 and beyond. And we can really build on that new platform architecture, both in terms of technology and also cost efficiencies.

But the headwind, obviously, is around the tariffs. So there will be — it’s a short-term issue for us, but it is an issue in the short term. And so we’re going to start to see the impact of that in the second half of this year until we can get the EX30 up and running and into full production in our facility in Belgium in the early part of next year.

So that’s the takeaway. Really good core fundamentals, great to have a new platform in the market. And then we’re dealing with the trade tariffs that we’re going to get a short-term issue for us in the second half of this year.

Ron Banerjee

Right. Another question that comes in is that — maybe I’ll take this that’s come in online. How would you summarize the second half of 2024 from a financial perspective? Maybe Johan, if you want to take that?

Johan Ekdahl

Yes. I think as Jim alluded to, we’re coming out of a very strong quarter in the second quarter. We are at a very good position on the core fundamentals of the business. The underlying operational profitability has been very good. But there are, of course, challenges ahead. Tariffs being one, the EX30 coming from China into Europe and in the US. There are still an uncertain macroeconomic environment.

If you put like that, that is, of course, creating continuous uncertainty, although we have a 15% growth in the first half. So we are at a good point to see healthy demand, and we are still a strong order book. But of course, that is also a layer of uncertainty.

We also have, as we have previously discussed, we have some factors affecting us more sequentially like amortization of the new cars coming into production, et cetera. So it will not be a linear journey onwards. But — so I think there are some challenges in the second half of the year, maybe the tariffs being the biggest one, but coming from a strong starting point.

James Rowan

And I think that was why that we wanted to guide, so we’ve guided that we expected to grow the business 15% in terms of units of growth of retail sales as we had done last year. And then we wanted just to have some more clarity on that with the new tariffs and some of the headwinds that we see in the second half of this year, we’ve now given a range of between 12% and 15%.

We wanted to put a floor on that for the investment community so they could understand how constant we are. Obviously still to grow our business because we see a lot of our competitors really struggling with any growth at all. So we still feel confident we can grow the business at a minimum of 12% but we’re still chasing obviously the upgrade of that, which is 15%. So that gives us a range and hopefully it helps with the investment community just to give a floor on that growth.

Ron Banerjee

Good. Let’s take the first call of them this morning. And the caller is Harry Martin from Bernstein. Harry, if you can hear us?

Harry Martin

Yes. I’ll ask three, if I may. So the first one, just on the 12% to 15% retail sales guidance for the full year. In the first half of the year, we’ve had wholesale revenues lagging the growth in the retail revenues and then we’ve had revenue growth below that, the impact of the rental car mix and the deferred revenue contribution. So do you expect the growth rates between that 12% to 15% retail guidance and the sort of the actual automotive revenue in the business to get a lot closer in the second half of the year? That’s the first question.

The second one, just on raw materials. Any comments that you have on the visibility you have on costs in the second half? How much would be the sort of the raw material cost base is already purchased or agreed? It’d be good to get an understanding there.

And then the final one, you kind of outline the importance of software and the investments that you’ve made. I mean we’ve seen a number of headlines in the last few weeks about some software issues on the EX30. And also, I believe the EX90 has been launched with — without some of the features that it was expected to be launched within the U.S. So how do you feel about the kind of the position on that journey and whether there is still a — still further to go on investments in software?

Johan Ekdahl

I can start with the first two maybe. And if we start on the volumes and revenue side, I mean, as you know, we are — we have been firmly guiding on the neutral free cash flow for the full year, which means that if you — production and retail deliveries and wholesale will sort of balance out during the course of the second half of the year.

And partially the deferred revenue that is affecting the second quarter will even out also during the year some — in many cases, it’s more seasonal sales in shorter-term contracts. There will be an effect maybe affecting the full year slightly and also the fact that we — I mean a lot of the growth is driven by the EX30, which is very healthy margins that you have seen, but it’s a lower-priced car, which means that it affects the year-over-year, let’s say, one-to-one relation between volume growth and revenue as well.

So my answer is like this, that we will see a more balancing of the relation between growth and revenue for the full year, but maybe not 1:1. And then on the raw material cost question, I’d say that we — I mean, the material cost positive impact in the second quarter is by far not only raw materials. We actually see effects also, our continuous work on the material costs in general. And we are now at quite low levels on raw materials.

We’re also working with hedging. So we are far more resilient than we were, let’s say, before the spike of the raw material cost a couple of years ago. So I would say that the material cost upside we have in the second quarter will continue into the second half of the year, although maybe that there is not that much further upside, but we will still remain on very healthy material cost levels.

James Rowan

Yes. In talking on the software side. So if we take the EX30. So we have — we had some tentative the EX30 very early on in the launch of that product. Those issues were sorted very quickly. Maybe some of that news is just trickling out, but that seems to be aged news now and those problems are being solved. And that really talks to the strength of that cash. So after about three or four months in the market, that’s now the solid base sale on EV car in the whole Europe. So it seems to be that that’s landed well with the customer base.

On the EX90, the whole point of a software-defined vehicle that has over-the-air capabilities to continually upgrade that software is the fact that we can do that. So we’ll release the EX90. It will have a fantastic set of features from the start. But obviously, we can add more features, unlock more benefits, unlock more features as we give over the update and as their software teams develop new and different features for the car.

So I think that customers who invest in advanced technology products like EX90 understand this fully, and we reap the benefits over time. So we don’t think this is EV going to be an impediment to sales growth in the EX90, and we don’t see any major loss of, let’s say, pre-bookings or pre-orders as the result of updating the car, if you like, with software as it gets for tarts.

Ron Banerjee

Thank you. Hopefully that s all your questions, Harry. Let’s take another caller now. This comes in from George Galliers from Goldman Sachs.

George Galliers

The first question I had was just with respect to the EX90 launch timing. Could you give us some insight into roll out by market? And when do you expect this vehicle to be sort of full production volume and readily available in both Europe and North America.

And related to the EX90, could you just confirm what is the capacity capability of the plant in North America? And to the extent the demand exceeds the supply, how do you prioritize EX90 versus Polestar?

The second question I had pertains to the gross margins on the battery electric vehicles. Obviously, big step-up in Q2 and a very impressive gross margin for BEVs if we compare it to many of your peers. Could you just explain the drivers of that step-up in the gross margin for the BEV? And is this a run rate if we were to ignore the tariffs that we could expect to continue over coming quarters?

James Rowan

Yes, let me start with EX90. So EX90 starts its production life in Charleston and the U.S. facility. That production has already started. The cars are already been manufactured and then the process of finding the way to customers right now. So the first customers will be behind the wheel of those cars certainly within this quarter.

And then we ramp up production to full production at the back end of this year and early into next year. So that hopefully answers the question on the production channel — the production ramp. And then, of course, we can supply products to the U.S.A. and to Europe.

We’ll also start production of that same vehicle towards the back end of this year, early next year, in our China facility as well. So that can serve China and Southeast Asia. So that covers us on the EX90 production demand. We feel we have enough capacity that will satisfy the demand that we expect to see for that vehicle globally. So we don’t think supply constraints will be an issue for that specific vehicle. And then on the, sorry, what was the second part of the question?

Johan Ekdahl

Well, there was one question on how do you prioritize volume between Polestar and EX90?

James Rowan

Yes. And again, I don’t think that’s going to be an issue for us because we’re put in sufficient capacity for that. I don’t think — we don’t see that as I mentioned. We’re incredibly excited about this car, not just because of the coal compute technology, but because of the benefits that the car brings in itself in terms of the size.

It’s going to be one of the very few proper 7-seater electric vehicles with co-compute technology and a huge range in terms of its electric range. So bullish about this car and I think we have enough capacity.

Ron Banerjee

A question on BEV gross margins than, Johan?

Johan Ekdahl

Yes. On the BEV gross margins, as you say, very good margins in the second quarter, which we’re very glad about. And there are a number of drivers. So I think it’s a combination as well as the general gross margin, it’s on the cost side, raw materials even further flowing through, but also in general terms, we’re working with cost reductions of the car, especially on the, let’s call it, previous EV lineup with the Fortis but where we have done actions in order to take down the cost of the car.

That’s more from a technical perspective as well and working with suppliers, et cetera. And then we’ve also been able to maintain a good pricing. And I think already previously in the new model year of the EX40 and C40, the improvements we’ve done on batteries and e-mails, et cetera, improving efficiency and improving range, which has been also made us able to price for that.

So I think — and being in a situation now with lower material costs and more resilient from material cost fluctuations due to more hedging, et cetera. If we — as you say, exclude the effects of the tariffs, which will, of course, have an effect. I will see that we should continue on a healthy margin level going forward, excluding that effect.

James Rowan

And let me just add to that. So on the EX30 as well, so this is a car after three or four months in the market is now the third best sale in EV in Europe. So that’s great. That’s shown that we have really strong demand for that car. We also guided that we’ll be between 15% and 20% gross margin on that specific car.

Obviously, we’re at the upper end of that right now. And part of the driver on that is we’re getting a nice CarMax order coming through on that. So we sell that in the Polestar and Ultra. And obviously, if you have a nice car met in terms of profitability, that very much helps.

So people like this car. They also like the — let’s say, the upper spec of this car and all of those are working together to drive those margins.

Ron Banerjee

Thank you. I take a few questions now. And this — and a few comes in from Daniel Schwarz from Stifel. And maybe I’ll just take one at a time. Maybe the first one to you, Johan, then. Could you provide details on the SEK 2 billion positive effect from the other line that you showed in the EBIT bridge and whether that level is sustainable in the coming quarters?

Johan Ekdahl

Yes. This is a year-over-year effect, of course, and it’s driven to a large extent by improved material costs. And — so I think there is still an upside year-over-year. But of course, during the course of 2023, I mean, we had elevated raw material prices were maybe having a bigger effect in the first half of ’23 than in the second half of ’23.

So my answer is that I foresee that we will still be on healthy material cost levels, but the year-over-year effects will sort of decrease over time due to the fact that we have more elevated cost levels in the first half of ’23.

Ron Banerjee

Yes. And could you quantify the expected impact from the tariffs in the second half of ’24? We’ve touched upon that, but a bit more on.

Johan Ekdahl

Yes, I will not quantify the EX30 effect. As you know, we don’t guide on specific profitability in general. So hence, I will not guide on the exact effect of the tariffs. What I will say is that, of course, it’s a balancing temporarily, we will localize the EX30 also into Belgium in gains, as you know. But during that period, we will have an effect, we will, of course, be impacted always a balancing with pricing and volumes, et cetera.

But with that said, we will not be fully mitigate the effects. So I think that there will be an effect. But on the other hand, it’s also — we have a global sales of a number of different cars. This affects the EX30 from China into Europe. So — but with that said, we will be effective, but will not quantify exactly.

Ron Banerjee

All right. I think we can take the next caller on the line. This is Hampus from Handelsbanken, who’s calling in. Good morning, Hampersen. Please go ahead with your questions.

Hampus Engellau

Thank you very much. Three questions from me. Firstly, on the tariffs, do you know already now if it will be retroactively from the expertise that you have already sold and delivered to clients so far this year? Or if it only will be a — you have some specific dates going forward.

And second question is on the EX90. There’s still some talks in the market that you — that clients who receive EX90 now will need to come back to you and have a change in the central compute GPU. Is that something that you could talk about or is it simply just a rumor?

Last question is if you know how much you will be able to push forward in terms of bouncing the price on the EX30 given the tariffs?

Johan Ekdahl

I can start on the tariffs. It’s important. We — the answer to the question is no. And then to be more clear, we don’t know the exact outcome of the tariff at all because it’s an ongoing dialogue also with the EU Commission, et cetera, which means that the vote among the member states will be in November.

So the tariff levels are actually preliminary. So that — and that is an ongoing dialogue with the concerned parties. So the answer is no. We don’t know the final outcome, which is important to emphasize also in general terms, not only on the retro activity.

James Rowan

Yes. And then on the EX90, yes, so we’re going to be upgrading the EX90 obviously, all the way through the course of this journey. If that’s something which we feel and add benefit to the customer, then we take will take obviously the responsibility to do that.

Some of that will be software. Some of that will be hardware. And the immediate launch of that car, which we’ll see in the next couple of weeks, we’re going to be collecting data. We’re going to be collecting data. We’re going to be looking at the best ways in which to give the software updates over the air or in some cases, it may be better if we take that back and do an update at the garage in which case, then obviously, those costs will be covered by Volvo Cars.

Ron Banerjee

And a question on pricing on the expect as a result of the tariffs?

James Rowan

Well, we have a strong position. I mean that’s what we saw after about three or four months in the market, we’re seeing really good gross margins on that product, but we’re also seeing fantastic demand. So — we’re looking at all of the options available to us to run our business in the most prudent way. Obviously, as you increase the prices, you tend to reduce demand. So that’s always an equation that we’re looking towards.

And then, of course, between the core plus and Ultra range of that product, where is the best mix for us. And if we are going to make pricing changes or pricing alterations, where should we make those alterations in order to benefit the customer and in order to drive value for our shareholders.

That’s a dynamic equation that we do. Not just on the EX30, but we do that in every single car range that we have. And we do that in every single market. So that’s why we have teams, the commercial people around the world that look to the individual dynamics of the market, the competition in that market, and then we make those decisions.

That’s resulting right now in taking market share. So we’ve grown our business 15%. A lot of our competitors are struggling to get that growth. So I think we’re just about to get that equation right. And by growing 15% and also delivering eight points of margin, I think that talks to the point of the strength of the brand, the strength of the products, as well as how well we’re going to, kind of navigate through some of the turbulence that we’re seeing right now in the industry.

Ron Banerjee

Great. I hope that s your question. Let’s take a few more callers before I go to the written questions again. And this is from HSBC. This is Pushkar Tendolkar calling in. Pushkar? Maybe let’s try to connect with Pushkar.

I’ll take a written question in the meanwhile. And this is from Jemma Permal from JPMorgan. Away from the tariffs, are you seeing any impact from the Red Sea crisis so far? And do you see any of that extending into the third quarter?

James Rowan

These — virtually no. And that was an issue of a few months ago. We came through that pretty quickly where we had some vessels around the home, but that’s something that’s — I’m glad to see in the rearview mirror, I like to say.

Ron Banerjee

Another question comes in that apart from the geopolitical tensions regarding tariffs, what are the other geopolitical are the macroeconomic challenges that are concerning Volvo Cars at the moment?

James Rowan

But not necessarily a concern in Volvo Cars. I think we are in a pretty good position. Obviously, we’ll get the turbulence of the U.S elections going on, so. So that is a narrative, that’s playing through. And the U.K. is still to decide on where it takes its decisions in reference to the EU and import duties. As regards to EVs coming from China, we don’t know that.

We also saw battery prices increased or tariffs increase in batteries went from 7% to 25% in the U.S. to import of Chinese battery. So all of those, all that turbulence is not unique to of course Volvo Car, that’s an industry turbulence and expanding beyond the auto industry.

I think the really important thing is that when we’re designing our business, when we’re architecting our strategies, we’re making sure that we have got the most resilient supply chain, that we’re manufacturing and region four, region. We started that a long time ago with the build where you sell source for your build strategy.

So now we have factories in Asia, we have factories in Europe are investing in another factory in Europe, in Slovakia that comes online in ’26. We invested heavily in the U.S, $1.2 billion in the U.S. to bring up the EX90 and expand the capacity there. So — but these are investments we made long before a lot of this turbulence. We’re now reaping some of the benefits of that. And so yes that’s really the geopolitics that we think will play out in the next couple of years.

It’s very, very difficult to guess where that’s going to be. So rather than trying to guess and react to that, we are designing the supply chain and we’re designing a manufacturing strategy that’s got much, much more resilience than it ever had in the past. And that’s really the secret.

Ron Banerjee

Another question on JPMorgan. Maybe I could turn to you for that, Johan. Any update on refinancing, please, your EUR 500 million worth of refinancing coming up in 2025.

Johan Ekdahl

Yes. And I would say in general terms, then is that we have a strong balance sheet and a healthy liquidity position. But — and so I don’t foresee that. We are in a period of high investment, but we will be self-funded in that respect. We will not have any need for increasing our gross debt, but we will likely also refinance future maturities, but not taking on additional debt in addition to that, that’s in general terms.

Ron Banerjee

All right. Let’s take a few more callers. This is Jose Amundi from JPMorgan. Good morning, Jose, if you can hear?

Jose Asumendi

Yes, thank you very much. I’m clear. Thank you so much. Congrats on a strong quarter. Johan, can you do a bit of a summary, please, second half versus first half on margins? What are the key buckets, positives and negatives, so we can understand the better of the margin seasonality between the second half and the first half?

Second question, can you also speak a bit about what are the key moving parts to hit your free cash flow guidance for the year? And then Jim, can you talk a little bit around powertrain product strategy or product portfolio. I mean we’re seeing some of your competitors have taken quite, I think, a strong actions to discontinue some of the powertrains. How do you think about meeting different needs in different countries on a global basis and having the right powertrain portfolio? And how does this basically take into your volume assumptions or growth assumptions for the next year? But effectively trying to understand your powertrain strategy or growth basis.

Johan Ekdahl

Thank you. I’ll start then on the margins in H1 and H2 of the year. And as I said before, we had a very strong second quarter, driven by both ability to maintain pricing in combination with lower cost. Material costs being the biggest driver, but also a general positive development on the run rate of fixed costs, partly offset by higher amortization kicking in sequentially for new cars and products coming into production.

And in the second half, I would say, of course, we have the tariffs. That will — we will not be unaffected by that. So that is one thing. We are still in an uncertain macroeconomic environment, although showing the growth in first half that was at a very good starting point from that perspective.

But in addition to that, we also have some seasonal variations if we go into the next quarter, which is Q3 typically from a volume and production perspective, vacation periods, et cetera. So it’s not the linear journey for the full year. And with also further amortization kicking in tariffs coming in.

So I would say that Q2 is very, very good. We’re showing an underlying strong operational profitability, although it will not be maybe the run rate for the full year because there are challenges, tariffs being maybe the biggest one, short term kicking in, in the second half of the year.

We don’t guide on specific margins, but that sort of to set a little bit to see of the dynamics going forward. And on the free cash flow, we are still firmly guiding on a neutral free cash flow for the full year. The biggest in half compared to the first half is inventory and that we have been ramping up the EX30 into new markets, et cetera, and building up inventory in the second quarter.

We also build up some inventory, which we always do from a seasonal perspective ahead of the planned closures for vacation. But the production and sales will balance out over the course of the year, which then should be the biggest lever for us being confident taking us to the neutral free cash flow for the full year.

James Rowan

On the powertrains, actually much wider than the powertrain, but let me start with the powertrain. What we’re finding is that it relates to pertain as well as size and features and functions and where people are in the life come of the sidecar that we need.

The — so if I start with the EX30 obviously, on a bed powertrain, very successful car been car in Europe. But we’ve also seen tremendous demand for our XC40 and head cars. So that takes us into that MHEV powertrain, really popular car, very, very cost effective and very well positioned in the market. And then if you look at the PHEV, the XC60 has been the best in her in Europe for the last two quarters.

So that’s an example of how we plan across all the different training capabilities to drive value and obviously increase sales and take market share. And — but it’s much wider than that because being in the 30 size, the 45, the 60 sites and the 90 side, that gives us a range to quote people with different lifestyles and choices, but we also have MHEV, PHEV and obviously a pure BEV base and we have the different factors as well, SUVs, sedans, wagons, MPVs. And then we offer that in Core Plus and Ultra.

So that’s all the product piece. And then when you look to the markets, we have 2,500 dealerships around the world. That gives us access to over 50,000 products specialists be that technicians that repair the car and service the car or sales professionals that help sell the car, and that gives us access to 10,000 service bays.

You wrap all of that together around the 80 countries, 80 or 90 countries that we sell in, and that’s kind of how we look at it. Where do we need to continually add value so that we can have the right-sized car, the right-priced cars, the core plus and ultra offering for the right CarMax, how can you get those car service? How can we improve the service levels for the customers and how many countries are we in and are we driving value from every single country that we operate within?

So it’s a much, much more holistic view, if you like, our strategy than the powertrain. But certainly, the powertrain plays a big part of that.

Ron Banerjee

Okay. Let’s take maybe a few more callers before we wrap this call up. Next one is from Jefferies, and this is Philippe Houchois calling in. Good morning, Philippe. Please go ahead with your question. Philippe, do you hear us? All right, let me take. Is this a Philippe or is it a Philippe? Philippe Houchois, can you take my question?

Philippe Houchois

Apologies. Yeah, please. Okay. All right. Just didn’t want to take someone else’s thought. Yes. My question was on this deferred revenue of $4.9 billion in the second quarter. Is that going to be a permanent fixture of your business model having relatively large exposure to rentals and fleets? And then a follow-up to that is how do we connect that negative number on the revenue to the EBIT bridge?

Johan Ekdahl

Yes, it’s not that we’re increasing as we put it, the exposure to those kind of cars. It’s more that we see a dynamic that is bigger than usual in 2024. Do you think in the first half — I mean, we always have a part of our sales with our rentals and other cars with repurchase agreements where we have deferred revenue.

In ’23, when we still were in a situation in the first half with more supply — remaining supply constraints, you could say that, that channel — those channels were underutilized. And hence, you get the bigger year-over-year effect than usual. If it sort of normalized year-over-year, then you don’t get that dynamic fully in the year-over-year bridge. So that’s why we are emphasizing this more in this.

So over time, I would say it will even out and the year-over-year effects will be much smaller and also — and of course, it has a partial effect on EBIT as well due to get revenue over time, but that will also sort of even out over time when we have a more even spread of these kind of sales year-over-year. So the effect is bigger first half ’23, towards first half ’24 than it will be over time.

Philippe Houchois

Right. And is that more linked to the external launch the new replacement in rentals to increase visibility? Or is it just other levels?

Johan Ekdahl

Not really. I would say it’s a part of our business. in general terms, and it’s a mix of cars and geographies. So it’s not specifically linked to EX30. No.

Ron Banerjee

All right, Philippe. Sorry for messing up the name of the staff. So the next caller is from HSBC. Pushkar. Hope you can hear us now. Go ahead with your question.

Pushkar Tendolkar

Can you hear me? Good. Sorry for the confusion earlier. I have two or three questions. The first one, I’m sorry to come back on the topic of tariffs, but that’s important. So just if you could talk about the ramp-up of EX30 production at Ghent, how would that go through 2025 through the year?

Then just a very technical part, are the tariffs tax deductible? And then again, on tariffs itself. But on the U.S. side, if there are potential tariffs on imports into the U.S. from Europe, do you have the flexibility to localize some production in the U.S. as well? That’s on tariffs.

And I have one more on the EX90, the retail sales in May and June have actually gone down month-over-month versus April. Any particular reason for that? Is it like a supply side issue? And if yes, when would we see kind of a ramp-up in those volumes?

James Rowan

To start with the Ghent piece then. So thanks for the question, Pushkar. So again, we’ll start the production of the EX30 in the first half of next year. But the main volume will come in the second half of next year. So we’ll ramp up. At that point in time, we need to make the choice as to where we will send those cars, where we sell those cars. So we’re in the process of doing the planning work around that right now, and then we’re in full production in the second half.

So by the time we get to the second half of 2025, the Ghent facility will be up and running for the volumes that we need in Europe and in the U.S.A. So hopefully that s that question.

On the EX90, it’s cyclical. It’s a premium car. So the volume for that car wasn’t expected to be specifically high. It’s very much a brand statement from Volvo in China. And whereas the mass market in China and EV is all about price, we didn’t want to enter that price market, that price position. So we wanted to go up into the more premium space and that was the whole purpose is at EX90.

So partly that, of course, is that we want to sell as many of those EM90 as we possibly can. Part of that is to position the brand in China as a premium EV player to stay away from the mass market. So I’m less concerned about the volumes there. I’m more concerned about the perception of Volvo and its brand position and its brand strength in China.

Johan Ekdahl

And on the specific question on tariffs and deductibility, my answer is yes, with the disclaimer that, of course, this is a legislation that is still under construction, if you will. It will not be finalized until later this fall. So — and there might, of course, always the interpretations and changes in those kind of situations. But my answer as of now is yes.

Pushkar Tendolkar

Good. Okay. Can I just ask one more, maybe if possible. Just wanted to understand the improvement in EBIT — the core EBIT margin, second quarter versus first quarter. That — so one part of it is the higher retail wholesale production. Is there anything other than that, that drives that 80, 90 bps improvement? And especially if there is any one-off within that?

James Rowan

Well, big part is price disciplined. I mean, you need to be disciplined in the marketplace. And that attribute is important because when you’re trying to also take market share and grow the business, you can only really have price discipline if you have a strong enough brand and strong enough product in the market to drive that. So that’s what we’re particularly pleased about that we have the brand strength and we have the right products and the right segments at the right price.

So that allows us to grow the business, but also to grow the business with the right margin structure that we’re looking for in the company. So that — and of course, cost control, as you probably know, we took out considerable costs in the business over the last 12 to 14 months, both in terms of raw material and also overhead and operating costs. Both of those pay forward as well, if you will.

Johan Ekdahl

Yes. And on the specifics, no, there are no material one-timers at all affecting the profitability in the second quarter. So it’s a strong underlying operational result, price discipline and cost structure.

Ron Banerjee

Thanks, Pushkar, for all your questions. We’re getting a lot of questions and we’ll try to take as many as we can. We’re seeing a lot of companies now indicating that the overall EV demand is coming down. One of your competitors recently shut down a factory in Belgium. What are you seeing the others are not?

James Rowan

So the overall industry has got less new sale cars than in the past. That’s just the statement of fact. The only way you can grow your business is to take market share. In my opinion, the only way you can take market share is to offer competitive products at competitive pricing within the market.

We’ve increased our technology stack. We’ve done that significantly now with the EX90, but we’ll continue to increase the technology stack. When you have the right technology vehicles at the right price and you also have the brand attributes that people care about, which is safety, sustainability, human-centric technology, fantastic Scandinavian design, and then you can release products like the EX30, which brings in a younger new demographic to the brand as well, and all those things kind of come together.

So we — and of course, we’ve got the different powertrains as one of the questions earlier. We have PHEV and of course, we have full bear so we can play across that entire spectrum. And that’s — and I should believe that in electrical propulsion. I think it’s a better technology than internal combustion.

Just as an engineer, I look at the facts, I look at the science, I look at the physics, I look at the details on that, that’s a better propulsion system. No loss of energy to noise, vibration or heat and zero tailpipe emissions. However, it’s going to take time to bridge different parts of the world for electrification.

We have a really strong bridge in terms of MHEV and PHEV to get us in that journey. And so I think all of those things come together to the brits benefits. We don’t see, in fact, an you mentioned Belgium compared with in Belgium. We are actually putting in the EX30 into Belgium because we have such strong demand in Europe and in North America for the EX30.

So — but again, I think that because we have the right product at the right price point for the right size region at the right price to those customers.

Ron Banerjee

We probably have time for one last caller then, and this is Stephanie Vincent from Bank of America. Good morning, Stephanie.

Stephanie Vincent

Good morning. Thank you very much. I have two questions, please. One is your strategy in China, you did mention, but I’m just wondering if you have a target for where BEV penetration could trend to in 2024 and 2025? And then my next question is, can you please affirm the gross margin targets for the EX30. So I believe you spoke about 15% to 20% once that move to Ghent happens next year?

James Rowan

Yes, on China, so in China, again, that’s as a follow-on question really from the last question, which is how do you play in a market, which is very turbulent and unchanged. We have a lot more competitors than there’s ever been in the past. And — so we’re very strong across the range in terms of MPEV and PHEV even in the BEV segment. But in the BEV segment in China, we’re playing at the high end of BEV. We’re not in the mass market on BEV, and that’s where we will stay, at least for the time being, and that will allow us to drive our electrical powertrains and those vehicles as well as the MHP vehicles in China until the Turbulan starts to subside, which is probably going to be 18 months from two years.

That’s fine because again, we have the breadth and width of products in terms of powertrains as well as different sizes and segments in China. We don’t give specific guidance on how much EVs will say on it particular region of the world because that’s very dynamic. The whole purpose is that you’ve got to position your company to be able to react to those market dynamics as those market dynamics change.

As more and more competitors come in, in the EV space, of course, has been able to budget quickly, not to get involved in the price war there and sell more PHEV products makes perfect sense. So that’s maybe the answer to the China question.

Johan Ekdahl

And on the gross margin target, we are guiding on 15% to 20% on the EX30, of course, temporarily with tariffs. But excluding that, also when we localize the current Ghent, you have some ups and downs. I mean, there’s a slightly higher production cost in Europe compared to China. On the other hand, you win on tariffs. There already tariffs, remember and logistic costs, et cetera. And we have also other benefits in terms of lower — shorter delivery times for customers, et cetera, being an important car in Europe, lower CO2 emissions, et cetera. But from a pure financial perspective, we guide within the same range for the European-produced cars.

Ron Banerjee

All right. Hopefully, that s all your questions, Stephanie. We really need to bring this to a close. But maybe, Jim, I’ll probably ask you to sort of conclude with your final thoughts. We’ve spoken a lot about the industry transformation and what the EX90 represents for Volvo in the future. Where do you see the industry transformation going from where we are sitting here today?

James Rowan

Well, if I look at Volvo, where we are right now. So we’re pleased with the core fundamentals. We wanted to get — position the company so that we can prove that we have the cost structure, we had the product lineup that we can deliver 8% of EBIT at the core fundamental level of the business, and we achieved that this quarter. So that’s a good proof point.

Of course, we have tariffs, and we will have an impact going into the second half of this year and until we get localized and get it but the core fundamentals have been able to drive cash. So a SEK 12 billion improvement on free cash flow in the quarter, 8.1% on EBIT, SEK 8.2 billion as well as the gross basis approaching 23%. All of that is really positive and I think positions us well.

And then we’ve got some new cars coming out into the market as well. So we’ll have further string from the EX90 as it hits the market. I’m confident. I’m driving that car right now. It’s a fabulous car. Of course, I’m biased, so we’ll wait to see with the reviews, so, on that car in a couple of months’ time. But it does take us to the next level of technology. And really, that’s the fundamental point here.

We will continue to invest in talent, technology and the transitions that we need to make in order to continue to push ourselves forward and be positioned to be one of the ones in next-generation mobility as this whole industry continues to unfold over the next two or three years.

So that’s basically the takeaway. And maybe finally, again, just as a reiteration, when you’re part of that position is that we have cars in a 30 size, 40 size, 60 size, 90 size, We have cars in MHEV, PHEV and BEV. We have sedans. We have wagons. We have SUVs. We now have an MPV as well, of course. And we sell in 90 countries.

We have 2,500 dealers across the world. That’s 50,000 brand specialists or product specialists, 10,000 service space. So it’s the whole package of Volvo cars and where it’s positioned in the world versus a startup.

It’s a very, very different comparison and how you can bridge towards the future of technologies, how you continue to invest in those technologies to remain relevant and even dominant in certain markets in the future. So that’s the position that we’re — and yes, we’ve got headwinds in terms of tariffs and some other things that come in geopolitics and so on.

Our job is the executive team of Volvo is to manage through those faster than the competition.

Ron Banerjee

And we’ll speak a lot more about our transformation in the Capital Markets Day as well.

James Rowan

Yes, yes. And that’s a great point. So hopefully, those on the call here today can join us at our Capital Markets Day where we cancould unpack much more about our technology strategy, about a product strategy, about our commercial strategy as well as obviously some of the financials. So please join us on the 5 of September. And a fabulous new role with Volvo right here in Gothenburg.

Ron Banerjee

Great. With that, that’s all the time we have. Friends, thank you very much for joining us this morning. For those questions we couldn’t take, of course, media lines and the IR phone lines are open. So we are available for you at all times of the day. But for now from all of us here, have a great Thursday. See you. Thank you.