Volvo Car Group has revealed another strong rise in profitability during the third quarter of 2017.
IHS Markit Perspective
- Significance: Volvo Car Group has revealed another strong rise in profitability during the third quarter of 2017.
- Implications: This improvement has been driven by increased sales volumes and a further improvement in product-mix.
- Outlook: Volvo anticipates that it will see this level of performance during the full year as well, as it moves into another new phase in the years to come.
Volvo Car Group has announced that it has again strengthened its profitability and margins during the third quarter of 2017. For the three months ending 30 September, the company reported that net revenues had grown by 18.3% year on year (y/y) to SEK48,880 million (USD5,907 million). This has again stemmed from an increase in wholesale and retail sales volumes during this period, the latter increasing by 10.6% y/y to 135,831 units. The was also a boost from a positive sales mix thanks to the XC60, S90 and V90. It also noted that there were also benefits from the sale of licences which helped partly offset the negative impact of currency exchange rates.
There has also been a positive impact on profitability. The automaker's earnings before interest and taxes (EBIT) have risen by 29.1% y/y to SEK3,669 million, which has helped its EBIT margin to increase from 5.0% to 7.5%. This was mainly as a result of positive volume growth and sales mix alongside licences sold. However, this was partly offset by increased research and development (R&D) and selling and administrative expenses for the quarter which stood at SEK8,086 reflecting a larger workforce, higher marketing and event expenses and an uplift in IT expenses. There was also a negative foreign exchange effect of SEK930 million. Overall, the automaker ended the quarter with a net income of SEK2,513 million, an increase from SEK1,327 million a year ago.
The increase during the quarter also helped boost the automaker's performance in the year to date (YTD). For the first three quarters of 2017, sales revenues increased by 18.9% y/y to SEK149,250 million, with retail sales having gained by 9.0% y/y to 413,472 units. EBIT reached SEK10,445 million, a gain of 36.4% y/y, while net income hit SEK7,262 million, an increase of 42.1% y/y.
Outlook and implications
It has been yet another positive financial performance for Volvo Car Group in what has been an eventful quarter for the automaker as it is showing ever greater confidence. Its latest round of growth has been largely underpinned by the market acceptance of its new generation of models that started with the XC90, but which has been taken over by the S90, V90 and V90 Cross Country. The XC60 is still the brand's largest selling model, and is also benefiting to some degree from an overlap between the first and second generations.
However, volumes are set to be further boosted in the coming quarters by the introduction of the XC40 which was unveiled just last month. As well as being the first use by Volvo of the new CMA platform that it is sharing with Geely, it is also the automakers first proper foray in to the hugely popular compact crossover space.
Even then, its model strategy will not stall as during 2018 it will replace both the mid-size S60 and V60. However, 2019 will see it enter the next phase of its strategy as it plans to offer all its new models with a degree of electrification, from mild hybrid, plug-in hybrid electric vehicle (PHEV) and battery electric vehicle (BEV). This will also coincide with the Polestar sub-brand being spun off as a brand in its own right with its focus being on the high-performance EV market. As announced earlier this month, the first model will be the Polestar 1 halo model featuring a PHEV powertrain in mid-2019. However, it will be shortly followed by Polestar 2 – a mid-size BEV that is specifically being targeted at Tesla's Model 3 – and Polestar 3, a larger sport utility vehicle (SUV)-style BEV. Despite the positive rhetoric around the emergence of this brand, the move is still a gamble for Volvo and its parent Geely Holdings, which are effectively building a brand from scratch. Also, with the Polestar 1 being such a limited model, it is difficult to gauge at this early stage how successful this endeavour is likely to be, and we will have a far better indication when details of the more volume-based models are revealed at a later date.
In the shorter term though, Volvo has said that despite the continuation of its product renewal programme and its "industrial transformation" including its investment in new manufacturing capacity in the United States which has recently been increased, it expects revenues to be boosted by increased sales. It also sees its operating income maintained at a high level thanks to a richer model mix after recent launches, although this will be partly offset by increased sales and R&D expenditure.
IHS Markit currently anticipates that global sales in 2017 will increase by 4.6% y/y to 556,000 units. However, we also sees its sales reaching a short-term peak of 721,200 units during 2019 as the XC40 is launched and model cycles come into play. However, it could break through the 800,000-unit mark some time during the next decade.
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