DBRS Upgrades AB Volvo to A (low) from BBB (high), Trend Changed to Stable from Positive

DBRS Limited (DBRS) upgraded the Issuer Rating of AB Volvo (Volvo or the Company) to A (low) from BBB (high). The trend on the rating has been changed to Stable from Positive. The rating upgrade is based on the Company’s sound business risk assessment (BRA) as one of the world’s largest truck manufacturers and third-largest global player in construction equipment (CE) and the fact that its financial risk assessment (FRA) has progressively strengthened to levels meaningfully above those commensurate with its former rating. In its press release dated September 15, 2017, DBRS indicated that Volvo’s rating would likely be subject to an upgrade should the Company’s financial performance remain on track with solid earnings generated in 2016 through H1 2017. DBRS noted further that the Company’s new financial targets (i.e., attaining a consolidated operating margin of 10% through a business cycle and maintaining a net cash position in its Industrial Operations segment) would likely further support favourable credit metrics going forward.

The Company’s earnings momentum has continued, as 2017 represents the fourth consecutive year of profit growth, with earlier gains stemming principally from Volvo’s restructuring and cost-reduction measures (significantly completed in 2015) bolstered by improving market conditions (albeit from very weak levels) for its CE segment. On a year-over-year basis, 2017 earnings benefitted from volume growth in both the Trucks and CE segments, in addition to increased (higher margin) service sales. In Q1 2018, operating income of the Industrial Operations segment was again higher relative to the similar prior-year period. Performance of the CE segment was substantially improved vis-à-vis Q1 2017 in line with higher activity across all major market regions. Trucks earnings were also stronger on an absolute basis, although margins contracted somewhat, which was caused by model changeover costs, higher selling, general and administrative expenses as well as research and development expenses and elevated costs attributable to a stretched supply base.

Notwithstanding moderating margins in Trucks, Volvo’s stronger earnings amid continued debt reductions (facilitated by consistent free cash flow generation) have resulted in ongoing improvements to the Company’s FRA. As of March 31, 2018, Volvo’s industrial operations had a net cash position of SEK 14.7 billion (approximately USD 1.8 billion equivalent), as calculated by DBRS, with credit metrics as of the same date being at strong levels even in the context of the upgraded rating.

Going forward, DBRS expects Volvo’s earnings to continue trending favourably over the near term in line with projected increases in construction activity worldwide. Moreover, despite variances across market regions, truck industry conditions in aggregate are also estimated to remain rather favourable, with Volvo targeting to improve margins as the challenges currently afflicting the supply base alleviate. In line with the above and in the context of the Company’s strong FRA, DBRS does not expect the rating to come under negative pressure over the near to medium term. However, further positive rating actions are unlikely, with Volvo’s existing BRA effectively limiting subsequent potential upgrades.

Notes:
All amounts are in Swedish krona unless otherwise specified.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2017), Rating Companies in the Industrial Products Industry (February 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2017), which can be found on our website under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the internal accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.