Morningstar DBRS Confirms Issuer Rating of 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 credit 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 BRA. 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 credit rating implications; although, this is mitigated by the Company's conservative financial policy and strong balance sheet.

Finally, with respect to increasing tariffs globally as a result of trade policies of the Trump administration, Morningstar DBRS notes Volvo is reasonably positioned vis-à-vis its immediate peers to withstand such headwinds, with the Company being quite localized as all assembly for the North American market is sourced out of the United States. (This would also apply to major assemblies, although, certain components are likely to be subject to tariffs.) This notwithstanding, uncertainty largely attributable to changing tariffs have caused Volvo to decrease its heavy-duty truck outlook for North America; although, Morningstar DBRS currently anticipates associated adverse effects to remain well manageable for Volvo.

EARNINGS OUTLOOK
For 2025, Morningstar DBRS expects Volvo's earnings to soften year over year (YOY), albeit while remaining at sound levels. Morningstar DBRS notes that 2025 global truck conditions, in aggregate, are expected to remain reasonable, notwithstanding some anticipated normalization in certain markets, notably Europe. Moreover, uncertainty associated with tariff policies as well as the Environmental Protection Agency's 2027 targets have caused Volvo to decrease its heavy-duty truck outlook for North America. As such, projected volume decreases amid cost headwinds associated with Volvo's model changeover in North America are likely to result in softer earnings YOY. This is expected to be partly offset by ongoing solid performance of the Company's services business (that typically generates materially higher margins relative to the truck business).

Over the medium term, Morningstar DBRS expects Volvo's operating performance to remain sound, albeit discernibly softer vis-à-vis historically high earnings generated in recent years. 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 2025 to moderate YOY in line with softer earnings. This notwithstanding, operating cash flow is projected to persist at solid levels. Capital expenditures (capex) are forecast to be higher YOY, consistent with increasing investment requirements, given tightening emissions regulations in addition to outlays toward Volvo's forthcoming plant in Mexico (currently estimated to be operational by 2027). Regarding dividend payments, these are estimated to remain sizable in line with Volvo's ongoing firm earnings performance, with the Company announcing that aggregate dividend payments in 2024 will approximate SEK 38.0 billion (approximately $3.9 billion). The high capex and dividend payments are nonetheless estimated to be substantially funded internally; although, Morningstar DBRS anticipates Volvo's gross free cash flow (i.e., before working capital items) to be moderately negative for the year. Similarly, negative gross free cash flow is estimated to persist over the near term. However, this is more than explained by the elevated capex/dividend payments and readily absorbed by Volvo's strong financial profile.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): BBBH
Volvo's CBRA is supported by its solid position as one of the world's largest truck manufacturers while also being a major global player in CE, with solid product lines across both its core businesses. Volvo's market share in its core European truck market is strong, amounting to 26.2% in 2024, with market share in North America also being solid at 15.0%. (Volvo's North American truck presence is slated to increase in line with the construction of a new manufacturing plant in Mexico, expected to be operational in 2026). The Company's operating resiliency is further bolstered by its growing services business, which represented approximately 25% of the Company's net sales in 2024. In addition to being more resilient to economic cyclicality relative to the core truck/CE segments, margins in the services business are typically considerably higher than new vehicle/machine sales.

Comprehensive Financial Risk Assessment (CFRA): AAH/AA
In line with solid operating performance over the past several years, Volvo's CFRA and associated credit metrics have progressively strengthened to levels providing moderate cushion relative to the current credit rating. The Company's existing financial targets include attaining a consolidated (including financial services earnings) operating margin of 10% through a business cycle, with the balance sheet of the industrial operations under normal conditions having no net financial indebtedness (i.e., excluding pension liabilities and taking cash balances and intercompany lending activities into account). The Company's objectives, notably with respect to its industrial leverage/balance sheet targets, effectively denote a conservative financial policy that helps support credit metrics. While metrics are anticipated to moderately soften over the near to medium term, significantly because of escalating capex (consistent with higher investment requirements in response to tightening emissions regulations) amid sizable dividend payments, these are nonetheless estimated to readily persist at levels fully supportive of the current credit rating.

Intrinsic Assessment (IA): A
The IA is based on the CFRA and CBRA. Taking into consideration peer comparisons among other factors, Morningstar DBRS places Volvo's IA in the middle of the IA range.

Additional Considerations: None
Volvo's credit ratings include no further negative or positive adjustments because of additional considerations.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/453322.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
The following Environmental factor(s) had a relevant effect on the credit analysis: Morningstar DBRS considered that the Environmental factor, specifically costs relating to carbon dioxide 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. The Company is continuously investing in technologies to reduce greenhouse gas emissions and the Company is targeted to attain net-zero GHG emissions by 2040, with ongoing earnings of the legacy internal combustion engine business underpinning the transition toward Zero-Emission Vehicles . 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.

There were no Social/Governance factor(s) that had a significant or relevant 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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in Manufacturing and Production Industries (February 3, 2025), https://dbrs.morningstar.com/research/447185

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186) which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781
-- Morningstar DBRS Global Corporate Criteria (February 03, 2025)
https://dbrs.morningstar.com/research/447186

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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: Anke Rindermann, Managing Director
Initial Rating Date: April 12, 2005

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

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