Morningstar DBRS Confirms AB Volvo at “A”, Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of AB Volvo (Volvo or the Company) at “A” with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation reflects Volvo’s sound business risk assessment (BRA) as one of the world’s largest truck manufacturers and a major global player in construction equipment (CE). Additionally, the Company’s ongoing solid operating performance, amid its conservative financial policy, has caused its credit metrics and financial risk assessment to strengthen to levels that provide some cushion within the currently assigned rating.

CREDIT RATING DRIVERS
Consistent with the Stable trend, Morningstar DBRS expects the Company’s credit rating to remain constant over the near to medium term. Taking into consideration the sizable costs and investment requirements (in line with tightening emissions regulations worldwide) facing the Company, additional positive credit rating actions are rather unlikely. Moreover, Volvo’s current credit rating is also somewhat underpinned by its existing business risk assessment. Conversely, significantly weaker earnings amid ongoing high investments—resulting in sizable negative free cash flow generation and thereby adversely affecting credit metrics—could have negative rating implications, although this is mitigated by the Company’s conservative financial policy and strong balance sheet.

EARNINGS OUTLOOK
For 2024, Morningstar DBRS expects Volvo’s earnings to moderately soften year over year (YOY) from historical highs, albeit while remaining solid. In aggregate, 2024 global truck conditions are estimated to remain rather favourable, notwithstanding an anticipated YOY decline from very strong levels. While demand in key markets, notably Europe and North America, is forecast to slightly soften YOY, this is anticipated to be effectively offset by ongoing growth across other regions. In the CE industry, the projected decline in 2024 is likely to be somewhat more discernible (compared with the trucks sector); however, global activity is still expected to persist at sound volumes. Moreover, Morningstar DBRS notes that Volvo has been able to maintain very firm pricing across both segments, with strong pricing and production discipline therefore estimated to considerably mitigate the effects of flat/declining volumes.

Over the medium term, Morningstar DBRS expects Volvo’s operating performance to remain solid. Morningstar DBRS also recognizes that Volvo has built up a cushion in its financial profile, which enables it to weather any short-term deterioration in market demand.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates Volvo’s cash flow from operations in 2024 to moderate YOY in line with a slight reduction in earnings. This notwithstanding, operating cash flow is projected to persist at strong levels. Capital expenditures (capex) are estimated to moderately increase consistent with increasing investment requirements given tightening emissions regulations. Regarding dividend payments, these are slated to increase significantly in line with Volvo’s very strong 2023 earnings, with the Company recently announcing that aggregate dividend payments in 2024 will approximate SEK 36.6 billion (~$3.3 billion). The higher capex and dividend payments are nonetheless estimated to be effectively funded internally. Morningstar DBRS anticipates working capital to remain a use of cash, albeit at a reduced level compared with 2023 in line with lower forecast inventories. In aggregate, Morningstar DBRS anticipates net free cash flow (i.e., after working capital items) in 2024 to range from breakeven to slightly negative levels. However, this is more than explained by the elevated capex/dividend payments and readily absorbed by Volvo’s strong financial profile.

CREDIT RATING RATIONALE
Volvo’s credit rating is supported by the solid market position of its core Trucks segment in key regions (notably Europe and North America), while also reflecting the Company’s very consistent operating performance. Moreover, while the CE and financial services segments provide additional diversification benefits, this is bolstered further by the growing services business (representing 23% of Volvo’s 2023 consolidated revenues) that generates considerably higher margins with regard to truck/machine sales while also being considerably more resilient to economic cyclicality. The credit rating also incorporates the Company’s conservative financial policy as its industrial operations are substantially net cash positive (i.e., cash balances exceed industrial debt levels), with Volvo’s FRA and associated credit metrics being strong and exceeding levels typically commensurate with the current rating.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
The following Environmental factor had a relevant effect on the credit analysis: Morningstar DBRS considered that the Environmental factor, specifically costs relating to carbon dioxide (CO2) and greenhouse gas (GHG) emissions, represents a relevant factor as Volvo’s products are subject to a wide range of regulatory requirements that impose standards on (among other factors) emissions and fuel efficiency, with the Company continuously investing in technologies to reduce greenhouse gas emissions, with the Company targeting to attain net-zero GHG emissions by 2040. Although the E factor results in additional costs for Volvo, these are readily absorbed by the Company's strong financial profile and therefore do not result in any change in the credit ratings or trends assigned to Volvo. (For further details, please refer to the following commentary: The Future is Electric: Climate Change and the Global Automotive Sector at https://dbrs.morningstar.com/research/413419.)

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Volvo, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Volvo, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Volvo, the BRA carries greater weight than the FRA.

Notes:
All figures are in Swedish krona unless otherwise noted.

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (April 15, 2024), https://dbrs.morningstar.com/research/431161/
-- Global Methodology for Rating Companies in the Industrial Products Industry (April 15, 2024), https://dbrs.morningstar.com/research/431173/

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186/
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030/

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@dbrsmorningstar.com.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President
Rating Committee Chair: Timothy O'Brien, Managing Director
Initial Rating Date: April 12, 2005

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

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