DBRS Confirms AB Volvo at A (low), Trend Remains Stable

DBRS Limited (DBRS) confirmed the Issuer Rating of AB Volvo (Volvo or the Company) at A (low) with a Stable trend. The rating incorporates 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). Moreover, Volvo’s financial risk assessment (FRA) has progressively improved to strong levels in the context of the currently assigned rating, with the Company’s 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) further supporting favourable credit metrics going forward.

The Company’s earnings momentum continued in 2018 and Q1 2019, with 2018 representing the fifth consecutive year of profit growth in line with favourable conditions across Volvo’s key end markets. The Company’s core Trucks and CE segments benefitted from associated volume gains, with profitability being further bolstered by service revenues (which typically generate considerably higher margins compared to new equipment sales while also being more resilient to cyclical downturns) that now represent roughly 20% of total industrial revenues and are expected to proportionately increase going forward. Accordingly, adjusted operating earnings of Volvo’s industrial operations attained record levels in 2018 (as was the case for each of the Company’s business segments, with the exception of Buses).

Volvo’s strong operating performance in recent years has allowed the Company to effectively attain its financial targets. This has enabled a progressive increase in Volvo’s ordinary dividend (to SEK 5.00 per share from SEK 4.25 per share), with the Company also having announced an extraordinary dividend of SEK 5.00 per share. Aggregate dividend payments in 2019 will therefore total approximately SEK 20 billion. DBRS notes, however, that Volvo’s financial profile can absorb the elevated dividend payments, in addition to moderately increasing capital expenditures, with net free cash flow (i.e., after working capital items) estimated to persist at positive levels. Moreover, the Company’s goal of maintaining its industrial net cash position target is anticipated to cause a reduction of shareholder distributions in future periods if deemed necessary.

DBRS expects the rating to remain constant over the near term. While a rapid and material industry downturn or a significant change in financial policy could result in negative rating implications, DBRS considers such a scenario rather unlikely, noting that Volvo’s FRA effectively provides some cushion against unexpected challenges at the current rating level. Conversely, further positive rating action(s) are rather unlikely as conditions in the Company’s core markets, while remaining favourable, are nonetheless estimated to progressively soften from essentially peak levels, with Volvo’s existing BRA also somewhat limiting subsequent potential upgrades.

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

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018), Rating Companies in the Industrial Products Industry (February 2019) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

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.

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

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, DBRS used “Rating Companies in the Automotive Manufacturing and Supplier Industries” as the primary rating methodology in order to assess Volvo’s Truck operations, which typically represent the significant majority of the Company’s industrial earnings. The application of “Rating Companies in the Industrial Products Industry” was used to assess the Company’s CE business (the additional material contributor to industrial earnings, albeit to a significantly lesser degree than the Trucks segment). DBRS considers the proportionate earnings derived from each of these two business segments when assigning relative weights to the respective methodologies.

The last rating action on this transaction took place on May 7, 2018, when DBRS upgraded the Issuer Rating of AB Volvo to A (low) with a Stable trend.

Solely with respect to ESMA regulations in the European Union, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Robert Streda, Senior Vice President, Autos
Rating Committee Chair: Charles Halam-Andres, Managing Director, Industrials & Natural Resources
Initial Rating Date: April 12, 2005

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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