Hello, welcome to one of our calls pre-transcripts. We'll hang on for a minute or two to let people join the call. Let's give another moment and then we'll kick off. All right, we have no further people in the lobby, so let's start. Welcome. This is the pre-transcripts for Volvo Car AB's third quarter 2025 result. We'll do as per usual. We'll start with a little bit of context and then dive into the different items, company specific. After that, we'll open up for questions. If we then first start with the macroeconomic environment, it has remained soft, with only a modest sign of stabilization. Consumer confidence in Europe continued to soften in the third quarter year over year, while industry indicators for both manufacturing and services remained subdued.
In the U.S., consumer sentiment showed no material recovery over the summer months, staying significantly below 2024 levels and pointing to continued cautions among households. Uncertainty surrounding trade policy remains a major headwind. The U.S. has maintained tariffs rates at the highest level in decades, with the 27.5% due to the imported cars in effect. Market concerns are elevated, with the overall economic outlook remaining unpredictable given the risk of further adjustments on the back of volatile macroeconomic data. Volvo Car AB is affected both indirectly and directly. Looking at the automotive sector, S&P Global has again revised its forecast downwards for automotive sales volumes. The most recent forecast, that comes from August, reflects the full impact of tariffs and weaker demand. The U.S. premium segment is now expected to contract by 4% in 2025. The China premium market is forecasted to decline by 11% in 2025.
Globally, the premium market is now expected to decrease by 6% in 2025, compared with the 1% decline forecasted in March before the U.S. tariffs were announced. Looking at Volvo Car AB more specifically, as was communicated in the first quarter as well as in the second quarter of 2025, the first and second quarter wholesales in 2024 were boosted by the ramp-up of the EX30, effectively a comparable number in 2025. It was also communicated that this effect was primarily isolated to the first half of this year. Hence, wholesale volume in the third quarter is expected to be more in line with retail sales, as was also communicated during the second quarter conference call.
We also said during our Q4 and Q1 calls that the significant inventory reduction in the last quarter of last year would have an effect that the retailers would have one or two quarters to adjust their inventory levels in 2025. That adjustment was, as we have said, also completed during the second quarter. This means that the underlying factors driving the first quarter and second quarter imbalance between wholesale and retail deliveries no longer remain. As a reminder, wholesale and not retail sales are the best input to use when calculating volume effects on sales. Reported sales for July and August show a 12% volume decline so far during the third quarter, as has been shown in our releases. Revenues from contract manufacturing were SEK 2 billion in the first quarter of 2025 and SEK 3 billion in the second quarter.
For the third quarter, we have no information available to share at this stage. Moving to gross margin, besides the effect from the weaker volume development, there will be effects from the U.S. tariffs introduced during the second quarter, as previously communicated. We have also taken price actions to mitigate the impact. As of November 2024, the EX30 is subject to higher tariffs as it's imported from China. Since production in Ghent has started, the effects will start to subside from the third quarter when production is ramped up. Also, as communicated, we expect to reach full production pace during the fourth quarter. As previously mentioned, the retail sales have during the quarter dropped by 12%, which will have a negative effect on the gross margin in the quarter. Due to continued stronger Swedish krona effects, this also poses a continued headwind.
If you look at EBIT margin ex-JVs, as we said in the first and second quarter, we're also expecting to increase the depreciation and amortization in 2025 versus 2024 following the ramp-up of production of vehicles such as the EX90 and the EX90. We also said in the second quarter that the revenues from the sale of CO2 credits are expected to also affect the third quarter, but that the revenues we received in the second quarter were related to the full first half of 2025. If you look at EBIT margin including JVs, just as a reminder, we stopped including Lynk & Co earnings in our accounts following the sale of Volvo Car ownership of Lynk & Co in February 2025.
Moving to cash flow, we don't have much items there, more than to just say that the third quarter typically demonstrates a seasonally weak free cash flow generation as there are planned shutdowns during the normal vacation period. That happens in the third quarter. As another comment as well, on the tariff side, as the EU and the U.S. joint statement from August 2021 on the trade deal agreed by both sides, it confirmed that there would be a U.S. tariff reduction to 15% on EU cars and car parts, while the EU will bring down its own tariffs on U.S. autos and car parts to 0%. The U.S. tariff reduction would take effect from the first day of the month in which the EU submits the necessary legislation to lower its own tariffs. The EU has since then submitted the necessary legislation, but the U.S.
still has to publish an executive order to lower its tariffs to 15%. The effect should be retroactive as of August 1. The EU legislative proposal to implement a zero tariff regime on U.S. cars and car parts now rests with the EU member states and the European Parliament for approval. That was our sort of opening statement. We will now be happy to take any questions that you might have. Just raise your hand and then we'll take them one by one. Yes, Agnieszka.
Yes, thank you. A few questions from me. Maybe you can provide us with the progress on the localization of production of XC60 to the U.S., and if the tariff cuts now to 15%, will it change the decision at all or not?
In terms of the localization, we have, as we said in the second quarter, started to localize that. One thing is to install the tooling and set up the factory. As you know, the Charleston plant has been manufacturing SPA 1 cars already. Of course, you also set up the supplier structure. That's what we're doing right now, to negotiate and set up to localize as much content as possible for that. At this point in time, I don't think we have a number to share in terms of how much to localize. We said that setting this up will take roughly a year before we have started production in the U.S. You will have an exposure also to the 15% tariffs during a big part of 2026. When we are calculating these investments, we are simulating certain tariffs rates.
For us, this, we believe, is a good investment also to do, balancing out the production. Also, as a reminder, the Torslanda plant, where we manufacture XC60 here as well, alongside XC90, is also going to be the production location for the EX60 as we've been highlighting. For us, that plant is running at quite high capacity utilization. Also from a footprint perspective, it definitely supports us freeing up capacity in Torslanda while also localizing to the U.S.
Perfect. Thank you. The last question on your kind of pricing strategy, if you can refer to that, what you're seeing in the markets and how you react to that. Also, maybe with regards to the tariffs for the U.S. markets as well.
I mean, nothing much has changed basically since the second quarter. It remains a quite sort of competitive market, but it's also not moving dramatically. You see in certain markets, certain periods of time, competitors are more aggressive and then they pull back on certain campaigns. I wouldn't say that it's radically different. It is a competitive market. As we've been talking about in the past, we have done pricing increases to try to mitigate the tariffs effect. If you go back to our previous comments that we had a year and a couple of years ago when we saw incentives normalizing because they were at a very low level historically after the pandemic, etc., that has been more normalizing as it is right now. It's more back to normal. It's a bit softer demand in general, looking also at the S&P Global forecasts.
I think nothing dramatically has happened sequentially if you look at the second quarter.
Thank you.
Thank you. Yes, Will.
Hi, John. Thanks for taking my question. It's Will Jones from BNP Paribas. I just wanted to ask you about the logistics of the retrospective relief on tariffs that you're anticipating. Are you expecting that to come as a rebate in the future? Is that going to be credits that you can then offset against in the future? Just trying to understand the timing effects between maybe Q3 and Q4.
That's a very good question that I don't know the answer to. I'll see if any of my colleagues know. I've said, no, we don't know it yet. We haven't got that type of details yet, William. Let's check with the legal team if we have something there. Since it's still up for decision, and the practicality is how that works retroactively, I don't know. We'll check it, but none from IR at this point in time knows that.
Okay. I appreciate it. Thank you.
Of course. If we get an answer, we make sure to send it out to the whole group here on the call. Yes, Pushkar.
Can you hear me?
Yes, can you hear me?
Okay. Thank you. Thank you. Thanks for taking my questions. A couple of them. First is just a clarification on the CO2 emission credits. You said that you would also continue to receive them in Q3, right? Perhaps not at the same extent as Q2 because Q2 was a combination of Q1 and Q2. Is that correct?
Correct. It was the first half. You can basically more or less split the first payment in half, and that's a good proxy for what to expect in the third quarter.
Okay. Good. Just on the retail and wholesale, I understand that the difference between wholesale and retail is narrowing. Historically, if I look, Q3 is still being, so 2021, 2022, let's say 2023, maybe, that retail sales were still above wholesales. That's kind of your normal seasonality, right? Do we now go back to that normal sort of seasonality, or still wholesales will be lower than retail, but not to the extent that it was in the first half of the year?
It's actually normal seasonality, I would say, would hold because you still have, as we highlighted, also production shutdowns, right, in the third quarter. That creates some kind of seasonality. If you say the imbalance that we had in the first half, abnormal imbalance, that is gone. You're right that you'll be back to more of a seasonal pattern in the third quarter.
Until you, and then just on tariffs, okay? Until you get this clarity from the U.S. that it goes down to 15% from 25%, you would still be paying or recording a 25% tariff. In theory, if it doesn't happen by September, in your Q3, you would still have a 25% tariff, right?
Correct.
Okay.
Correct. Exactly, the debate is if it's retroactive and how we get that payment. You're correct, until that happens, we would pay 25%.
Is there anything in recent meetings or investor conferences that you have been talking about regarding sequential profitability development Q3 versus Q2, if that's something that has been discussed?
could you clarify that question? I didn't understand it fully. Sorry.
No. If you have been recently in your investor conferences or meetings, if you have been discussing the sequential profitability development Q3 versus Q2, if that's something that you can talk about.
There's nothing in particular that has come up. You have the seasonality, it's a different quarter than the second quarter from a seasonality perspective. Of course, you had the abnormalities, if you call it that, on the wholesale, etc. Otherwise, from that day, I think right now investors are more trying to figure out, you know, back on trend that we move, what we talked about in the past, right, moving from one investment phase into another investment phase. They know the quarterly aspects of seasonality. They're aware of those. I think for us, it has been more of the building blocks on, you know, how to make Volvo Car a more profitable, more cash-generative company. More questions on the cost and cash action program, and then, of course, the confidence in seeing low investment, etc.
I would say it's more like, how do you say, semi or medium-term outlook than the next quarter, I would say, in general.
Are you already started seeing benefits of that cost and cash action program?
What we said, I mean, basically right now in the third quarter, we had some effects on the cash flow side, which we talked about in the second quarter. Of course, since a big part of this is the redundancies here in Sweden with the process following with unions, etc., it's basically happening more or less right now that people are being made redundant physically. I would say it still holds what we said, that the cost actions, the result of those, you will see towards the end of the year. You see some effects maybe in the third quarter, but more will come in the fourth quarter when people are out, basically.
Okay, thank you.
Thank you. Any more questions? Yes, Shaun.
Hi. I was just wondering, on the pricing action for the tariff mitigation, have you made any specific comments on how much you've been able to achieve in terms of either pricing or an offset number?
We haven't said that. I mean, we repeated what we said also in the first quarter, that we expect the net of these actions to have a 1% to 2% effect on the group EBIT number for 2025. That was based on a 25% tariff rate, so it's reasonable to assume it's going to be slightly lower. That does not include the effects from the cost and cash action program. We have not sort of quantified the amount that we have increased prices with. I'm sorry, just giving that sort of net estimate.
I've got it understood. If you've taken any action to phase your EX30 deliveries in Europe as you kind of wait for the localization to ramp up, could we expect a pickup in EX30 deliveries in the fourth quarter and beyond?
I think that's what we aim at, right? I think for the third quarter, most of the bulk part, the vast majority of that part for sure will be sort of cars that are manufactured in China since we're ramping up now in Europe. Of course, we're now ramping it up and it looks very promising, and we have a local production and we also are able to sort of go through all the variants, etc. Yes, that is an aim we have with the company, right, to sort of accelerate that sale of EX30 into the fourth quarter and onwards to your point.
You haven't necessarily kind of withheld some deliveries to avoid the tariff? Sorry?
You haven't withheld any deliveries to kind of avoid the tariff?
We don't want to sort of affect, if you call it, the customer experience of having to wait too long for the car. We've been clear also that maybe we have not been manufacturing all the variants when we exported it during the increased tariffs from China to Europe. We have, of course, been delivering according to the customer expectations of delivery time and we promised them to give the new car. We'll be a little bit tactical, but nothing major I would expect. It's been more like we are having these effects also in the third quarter and then we ramp up. You're going to see more of an offset in the fourth quarter.
Perfect. Thank you.
Thank you. Will?
Hi, thanks. Just a quick one. Are the EX30 order books open yet? I think you said that was second half of September.
XC60, you mean in China?
Yes, sorry, yeah.
Yeah, they're open, right? That's my understanding that yes, they're open. You haven't communicated.
We haven't communicated anything yet, but let us come back to that when we have the full year result out.
Thanks.
Thank you.
Hey, John. Thanks for taking the call. Appreciate it. Sorry if I'm repeating the question again, if it's been asked. Can you repeat maybe a little bit the comments you have provided in terms of cash generation, second half of the year, cash full year, minimum cash on the balance sheet, CapEx full year, CapEx second half? I know that you don't guide on those, on some of those categories, but any comments you provide there, and specifically, or not specifically, but sort of minimum cash on the balance sheet that you need to run your operations just to get comfortable there.
Yeah, I mean, if you look at our sort of prospectus for bond issuance, etc., and I think it's also in the annual report, we state that we need a target of 15% liquidity at least that we have on the balance sheet. As I said, seasonally, the third quarter is a soft quarter, and from a seasonal perspective, the fourth quarter is often a stronger quarter. On top of that, as you know, we have the actions to sort of parallel shift both the cost and cash action program and the curves. If you look at the chart that we showed externally up until the first quarter in terms of the decline in the investment, that very much holds. We also shifted that down. You should see in the second half sort of a level of investment that is sort of trending down.
We've been quite clear that, you know, for us, it was important to go out and confirm, you know, the startup production and the reveal for the EX60 because, as you know, we have a lot of these infrastructure investments going into that platform. When we start production of that, those will be completed and more confidence in the investments falling. You will see declining investment in 2026, but much more so in 2027 because we also then, you know, as we have the Korsnitja plant also soon to be finalized. I would say, you know, the building blocks right now are to see cost and cash action delivery, and costs will start to come down from the fourth quarter, supporting the operational cash flow. We still have work to do on the working capital management side to improve the contribution from working capital into the operational cash flow.
On top of that, we have the lower investments kicking in that should have an effect on the free cash flow. Of course, we're not giving out a specific item here. We try to talk about the building blocks. We will also be more open or clarify some of these important building blocks when we have the strategy update on November 6th as well. I think right now it's super key for us to make sure that we execute on these operational projects. At the same time, keep a strong balance sheet, but still be very prudent on cost and cash to make sure that Volvo Car is a more profitable and cash-generative company in the future.
We look forward to the next few quarters, but I think, you know, the strategy update on November 6th is going to be quite important for us to also be more transparent on those building blocks, not only the operational part.
Super helpful. You've been, obviously, Håkan has been super active or very active, I think, in the last months. Can you just give us a bit of a wrap of what he has been doing? He has been flying to the U.S., to China, talking to dealers. From your perspective, what are you seeing from the CEO in terms of, like, you know, changes he's doing on the management front? Has he done more structural changes in the company?
Yeah. It's always things happening with Håkan, right? I think, you know, for him, his key focus, I mean, those pillars that we discussed in the second quarter as well, the regionalization, profitability, and electrification, super important. I mean, I think Håkan has, you know, a couple of really important areas he's focusing on is to make sure that we get, of course, the products out. That's a given. To the previous question as well, to sort of reignite sales. I mean, we have a new leadership in the U.S., and he's done magic in Brazil on electrification. In the U.S., we are not as strong as we should be given our product lineup, etc. Also now when we have the EX90 much more sort of stable from a software perspective, we are reigniting that as well.
When you look at, you know, the different regions, China, a lot of things are happening there right now as we speak in terms of empowering that region more to be more, as we said, locally adapted as many others do. I think one difference that we have is that we actually do not collaborate with a competitor, but a sister company. I think Håkan right now will sort of re-inject the energy to get back on track, but profitable growth. That's super key. I mean, he's so focused on cash and profitability. I think that's very important, of course. I think it's not just driving volumes. It's making sure that we, if we increase, we have it backed by great products with great costs, etc. The EX90 looks to be very promising in terms of how people have received it so far.
Let's see what we can share there in the third quarter result. I think for him, it's a little bit getting back the momentum, if you call it that way, in Volvo Car. Right now, as we speak here and now, it's just balancing in, reducing the costs, and still executing on the operational side and also financially. He said he wants to be very transparent and honest. I think Håkan is, he really is keen to sort of be as transparent as he can also with his thoughts. He wants to have a dialogue with investors and analysts to stay close and be transparent as much as we can.
I think that is also an ambition we have for the strategy update as well and try to sort of not giving out the full business plan, but to be, you know, talk about the strategy of Volvo Car in the next, I would say, 12 to 24 months. Those are particularly important, of course, in executing and then also have a vision on the more longer term of it. You know, Håkan is really energized to come back. I think you've seen some management changes, but I think mostly it's just focusing on the regionalization part, accelerating the cost actions that were already starting before he came back, and then make sure that we have these strong bridges of a strong PR portfolio and strong BEVs. We are super excited about the EX60 soon to be revealed.
Thank you, John. Thank you so much. All the best. Thank you.
Thank you. Yes, George.
Yeah, hi, John. Thank you for taking the questions. Just on the DNA, you did mention that you expected it to increase year over year, and obviously that's consistent with your guidance from the start of the year. I was just wondering, given the impairment in Q2, which is roughly 9% of the balance sheet intangible number, does that give you a bit of relief in terms of the extent to which DNA is going to step up over the course of coming quarters, or could we actually even see that kind of, you know, become a flat number or even a tailwind in the bridge?
Yeah, I think, yes, you're perfectly right. I mean, that since we decided to take that impairment and you're looking at over the lifetime of the different platforms, I think we said around $1 billion related to that platform, around $1 billion lower amortization. On the other hand, we're sort of getting into a more commercial phase with projects and also from a year-over-year perspective. That will be, it will be an increase, but slightly, slightly less than it would have happened otherwise because that impairment effect is around $1 billion of amortization lower.
That's about $1 billion a year lower.
Yes.
Yeah, okay.
Yeah.
That's great. Thank you very much.
Thank you. Any more questions? All right. I just also want to say thank you very much for the collaboration over the last three years. I will, as most of you know, now leave Volvo Car and get back to the investor side. I'm sure I'm going to bump into a lot of new people in my new role at AMF. I really have appreciated the dialogue with you. It's been super interesting. I've learned a lot, you've challenged us, and please continue to do so. We appreciate the interest in Volvo Car. Thanks a lot, and look forward to meeting you in the future. For the rest of the team here, they're going to see you in the third quarter result in a few weeks' time. Thank you very much.