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Rating Action:

Moody's changes Volvo's outlook to positive, Baa1 rating affirmed

17 Sep 2018

Frankfurt am Main, September 17, 2018 -- Moody's Investors Service ("Moody's") has today affirmed truck manufacturer AB Volvo's (Volvo) Baa1 long term issuer rating and the Prime-2 (P-2) short term issuer rating while at the same time changed the outlook on the ratings to positive from stable.

"The outlook change to positive reflects the continuous and strong improvements in Volvo's financial performance and credit metrics and in case these metrics can be sustained even in periods of weaker demand for its products this could result in an upgrade of Volvo's ratings within the next 12-18 months," says Falk Frey a Senior Vice President and lead analyst for Volvo.

A full list of affected ratings can be found at the end of this Press Release.

RATINGS RATIONALE

Volvo's operating performance and financial metrics continue to benefit from the various measures initiated over the period 2012 to 2015 aimed at reorganizing the company to take out overlaps, reduce structural costs and increase efficiency and profitability after a period of acquisition-driven growth. This has led to a positive trend of improving performance and cash flow generation since then also supported by rising demand for trucks and construction equipment in Volvo's main markets.

Volvo's two major business segments trucks and construction equipment further improved profitability in the first half 2018 based on high demand and increased product deliveries. This resulted in reported operating margins of 10% for trucks and 14.5% (adjusted operating margin) for construction equipment.

Volvo's EBITA margin as adjusted by Moody's improved to 9.1% for the last twelve months (LTM) period as of 30 June 2018 from 8.8% in fiscal year 2017 and free cash flow generation as adjusted by Moody's LTM 30 June 2018 amounted nearly SEK16 billion (SEK22 billion in fiscal year 2017) despite a negative working capital impact of almost SEK8 billion (SEK0.2 billion positive in fiscal year 2017). Consequently, Volvo's leverage has been further reduced to 0.8x LTM June 2018 from 1.0x in fiscal year 2017.

For the full fiscal year 2018, Moody's anticipates a further improvement in credit metrics based on strong order books for construction equipment and trucks in North America and Asia. EBITA margin is expected to exceed 10% and gross leverage to decline towards 0.5x, levels that would qualify for a single A-rating if sustained.

Liquidity of Volvo is good with cash sources more than covering cash uses for the next 12 months.

Positive Outlook

The positive outlook reflects the continued progress Volvo has made in further improving its credit metrics and our expectation that the implemented efficiency measures will result in further improvements in operating performance and financial metrics in the current year. It also takes into account the expectation that Volvo's resilience in case of a cyclical downturn has improved from what could be observed during the last downturn, mostly driven by the restructuring measures that have been put in place since. The positive outlook also reflects the possibility of an upgrade within the next 12-18 months should Volvo be able to demonstrate a better resilience to a more adverse market environment than in past cyclical downswings, and if financial policy remains rather conservative without transforming debt-finance acquisitions or significant shareholder returns apart from the current dividend payout of 40-50% of net income.

What could change the ratings Down/Up

The ratings could be upgraded should Volvo be able to generate EBITA margins close to the double digit level on a sustainable basis.

An upgrade would also require leverage to around 1.5x or lower on a sustainable basis, and the maintenance of the current relatively conservative financial policy.

Volvo's ratings could come under pressure in case of (1) failure to sustain EBITA Margin above 8% within the next two years; (2) Retained cash flow to net debt (RCF / net debt) to fall below 30%; (3) a negative free cash flow generation, (4) leverage exceeding 2.0x for more than a year; (5) a return towards a more aggressive financial policy as well as (6) a material deterioration in Volvo's liquidity profile.

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Gothenburg, Sweden, Volvo is a manufacturer of trucks, buses and construction equipment, and drive systems for marine and industrial applications. Moreover, Volvo's customer finance operations provide complete solutions for financing and service. The company generated consolidated net sales of approx. SEK335 billion in 2017 and a reported operating income of SEK30.3 billion.

Affirmations:

..Issuer: AB Volvo

....ST Issuer Rating, Affirmed P-2

....LT Issuer Rating, Affirmed Baa1

..Issuer: Volvo Treasury AB

....Backed Junior Subordinated Regular Bond/Debenture, Affirmed Baa3

....Backed Commercial Paper, Affirmed P-2

....Backed Other Short Term, Affirmed (P)P-2

....Backed Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Volvo Treasury Australia Pty Ltd

....Backed Commercial Paper, Affirmed P-2

....Backed Other Short Term, Affirmed (P)P-2

...Backed .Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

..Issuer: Volvo Treasury North America LP

....Backed Commercial Paper, Affirmed P-2

Outlook Actions:

..Issuer: AB Volvo

....Outlook, Changed To Positive From Stable

..Issuer: Volvo Treasury AB

....Outlook, Changed To Positive From Stable

..Issuer: Volvo Treasury Australia Pty Ltd

....Outlook, Changed To Positive From Stable

..Issuer: Volvo Treasury North America LP

....Outlook, Changed To Positive From Stable

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Falk Frey
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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