DBRS Confirms Volvo at A (low)

DBRS has today confirmed the ratings of AB Volvo (publ) (Volvo or the Company). The confirmation reflects the Company’s improving business profile, driven by its increasing business and geographic diversification, with the financial profile still consistent with the assigned ratings.

Volvo has made numerous acquisitions over the past two years, the two most noteworthy of which are the Road Equipment Division of Ingersoll Rand (IR Road) and Nissan Diesel Motor Co., Ltd. (Nissan Diesel). Through the IR Road acquisition, the Company’s Construction Equipment division has become firmly established as the world’s third largest construction equipment concern with increased road development capabilities and an enhanced distribution network. The Nissan Diesel acquisition, combined with further complementary acquisitions, helps establish a substantial presence in the strategic Asian market, with China and India in particular posting very sharp growth rates and becoming significant truck markets. While acknowledging the integration risks associated with these transactions, DBRS points to Volvo’s strong track record (i.e., Renault, Mack) in this regard and expects the Company to successfully incorporate the acquired entities. The increased product and geographic diversification should stabilize Volvo’s profitability going forward. Furthermore, the Company’s recent focus on growing its ‘soft offers’ (e.g., spare parts and workshop services) should also reduce volatility and smooth future earnings.

Volvo’s recent results remain solid as favourable truck market conditions in Europe (with Eastern European markets growing very strongly) and increased deliveries in Asia (due to the Nissan Diesel acquisition) have helped to offset poor conditions in North America. With the exception of Volvo Buses, all other business divisions are trending positively.


DBRS recognizes that Volvo’s leverage has increased in recent years as a result of the aforementioned acquisitions and augmented shareholder initiatives (i.e., ordinary and extraordinary dividends totalling more than SEK 20 billion), which in 2007 also resulted in negative free cash flow (before working capital items) for the first time since 2001. However, DBRS notes that credit metrics remain well commensurate with the ratings, with the Company expected to be significantly free cash flow positive in 2008, assuming reduced dividend payouts (no extraordinary dividend expected for 2008) and acquisition activity that is expected be more modest. DBRS remains comfortable with the Company’s stated gearing (net debt-to-equity ratio) ceiling of 40% and believes that management will be disciplined in its adherence to this target.

DBRS expects the ratings to remain constant over the near to medium term, with positive fundamentals in most of the Company’s markets somewhat offset by integration risks linked with Volvo’s acquisition activity.


Notes:
All figures are in SEK unless otherwise noted.
Ratings for Volvo Treasury Canada Inc. are based on the parent and guarantor, AB Volvo (publ).

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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