DBRS Morningstar Changes Trend on AB Volvo to Positive from Stable, Confirms Rating at A (low)

DBRS Limited (DBRS Morningstar) changed the trend on the Issuer Rating of AB Volvo (Volvo or the Company) to Positive from Stable and confirmed the rating at A (low). The rating remains supported by the Company’s sound business risk assessment as one of the world’s largest truck manufacturers and a major global player in construction equipment (CE). Additionally, following softer earnings in 2020 (substantially attributable to adverse effects of the global progression of the Coronavirus Disease (COVID 19)), Volvo's financial performance rebounded solidly in 2021 through Q1 2022 in line with meaningful recoveries across most of the Company's key end markets (with the exception of China). Amid Volvo's ongoing conservative financial policy, the improved earnings performance has caused the Company's financial risk assessment (FRA) to attain strong levels in the context of the currently assigned rating.

Volvo’s 2021 industrial revenues and profitability increased year over year (YOY) in line with favourable economic conditions, leading to higher freight demand and increased construction activity. Trucks and CE (being the Company's core business segments) benefitted from higher volumes and stronger service demand, resulting in revenue gains in both segments, notwithstanding supply base challenges that affected operations during the year. As a function of the Company's diversified operations globally, softening in the Chinese market during the year was more than offset by strong economic activity in other regions, notably Europe and North America. As such, the Company’s 2021 industrial operating margin increased to 11.0%. Moreover, in line with stronger earnings performance, cash flow from operations also increased YOY. Although both dividends and capital expenditures were higher in 2021, these were supported by the strong operating performance and the inordinately high liquidity position the Company had built up during 2020. Finally, earnings of Volvo's financial services segment also increased YOY in line with a sharp reduction in credit provisions. The Company's performance momentum continued in Q1 2022 (notwithstanding the ongoing slowdown in the Chinese market).

Going forward, industry conditions are expected to remain stable globally. While Volvo faces headwinds in the form of increasing raw material costs, persisting supply base challenges, and the further progression of the coronavirus pandemic, these are estimated to be manageable by the Company. Moreover, ongoing supply-demand imbalances across several goods and products appear likely to bolster freight demand over the near term (although inflationary pressures and a possible weakening in consumer sentiment given increasing geopolitical uncertainty represent potential offsets).

Consistent with the Issuer Rating’s Positive trend, the ongoing solid operating performance of Volvo over the near term would likely result in an upgrade. Conversely, significantly weaker earnings amid ongoing high investments—resulting in material negative free cash flow and thereby adversely affecting credit metrics—could have negative rating implications, although DBRS Morningstar deems such a scenario rather unlikely. Furthermore, DBRS Morningstar notes that the Company's existing FRA affords a sizable cushion in the context of the current rating.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021; https://www.dbrsmorningstar.com/research/385892), Rating Companies in the Industrial Products Industry (January 28, 2022; https://www.dbrsmorningstar.com/research/391382), and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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.

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

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar 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 is an unsolicited credit rating.

This 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 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. DBRS Morningstar used Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021) 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 (January 28, 2022) was used to assess the Company’s CE business (the additional material contributor to industrial earnings, albeit to a significantly lesser degree than the Truck segment). DBRS Morningstar considers the proportionate earnings derived from each of these two business segments when assigning relative weights to the respective methodologies. Finally, DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021) was applied to determine the equity treatment of the hybrid note issuance(s) by Volvo.

The last rating action on this transaction took place on May 4, 2021, when DBRS Morningstar confirmed the Issuer Rating of Volvo at A (low) with a Stable trend.

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

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

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Date: April 12, 2005

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

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

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-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021)
https://www.dbrsmorningstar.com/research/385892/rating-companies-in-the-automotive-manufacturing-and-supplier-industries
-- Rating Companies in Industrial Products Industry (January 28, 2022)
https://www.dbrsmorningstar.com/research/391382/rating-companies-in-the-industrial-products-industry
-- DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021)
https://www.dbrsmorningstar.com/research/386355/dbrs-morningstar-criteria-preffered-share-and-hybrid-security-for-corporate-issuers