DBRS Confirms AB Volvo at BBB (high) and R-2 (high)

DBRS has today confirmed the Senior Unsecured Debt and Commercial Paper ratings of AB Volvo (Volvo or the Company) and Volvo Treasury Canada Inc. at BBB (high) and R-2 (high), respectively. The ratings reflect the Company’s solid business profile, with Volvo being firmly entrenched as the world’s second-largest truck manufacturer and the third-largest global player in construction equipment. The trend on the ratings remains Stable, recognizing the Company’s solid earnings performance amid improving industry conditions worldwide in both trucks and construction equipment. DBRS notes that Volvo’s business profile has also been enhanced by the Company’s ongoing expansion into emerging markets (notably China). As emerging markets are expected to represent the largest source of growth globally across Volvo’s businesses, the expansion should serve to increase profitability going forward. Additionally, significant cost efficiencies executed through the downturn have increased the Company’s operating leverage, which should bolster earnings going forward.

The Company’s 2010 results, while failing to reach historical norms, still rebounded strongly from 2009 figures, which were very weak in line with the global economic downturn. Revenues for the industrial operations increased by approximately 23% relative to the prior year, with Volvo’s two core segments (trucks and construction equipment) achieving the highest year-over-year growth rates.

The higher sales volumes and achieved efficiencies more than offset increases in material costs. DBRS also notes that the Company gained share in many of its market segments, including the North American truck market, where Volvo has enjoyed strong acceptance of its models, which feature engines compliant with the U.S. Environmental Protection Agency (EPA) 2010 emission requirements.

Through the first half of 2011, the improving trend of Volvo’s financial performance persisted as both revenues and earnings approached historical norms. In addition to the ongoing momentum in the truck industry, significant progress was achieved in construction equipment, with the Company establishing itself as the leader in the important Chinese market. On a geographic basis, the Company’s sales footprint has become very balanced, with emerging markets representing 48% of Volvo’s total revenues through the first six months of this year. Moreover, DBRS notes that the growth prospects over the medium term are strong globally in both mature and developing markets.

DBRS also notes that the Company has aptly managed to control costs amid increasing sales and production volumes. Comparing the first six months of 2011 with the first half of the prior year, operating earnings have increased by 82% (on a semi-annual basis) relative to revenue growth of 20% over the same period. Going forward, Volvo’s earnings stand to benefit from this increased operational leverage should industry conditions continue to improve.

Regarding the Company’s financial profile, DBRS notes that income- and coverage-based credit metrics effectively exceed levels commensurate with the current ratings. With respect to Volvo’s balance sheet, while debt levels increased substantially in 2009 as a result of the downturn, DBRS notes that the Company has been progressively reducing its indebtedness, with Volvo’s gearing (i.e., net debt-to-total equity) reverting to levels below the Company’s targeted ceiling of 40% as of year-end 2010. DBRS notes that Volvo intends to adhere to this gearing ceiling throughout the economic cycle.

DBRS recognizes that volumes in both the truck and construction equipment industries are still not expected to reach mid-cycle volumes by year-end 2011; this suggests that the Company’s earnings should remain solid over the near to medium term. However, the Stable trend also reflects persistent economic headwinds (notably in Europe and North America), which could serve to undermine Volvo’s performance. In the event that Volvo’s results remain on track over the near term (and the Company does not materially deviate from its historically conservative financial policy), positive rating implications would likely result.

Note:
The applicable methodology is Rating Companies in the Automotive Industry, which can be found on our website under Methodologies.