Volvo Cars has announced robust improvement in its profits during 2016, helped by increased sales volumes and a further improvement in its product mix.
IHS Markit Perspective:
- Significance: Volvo Cars has announced robust improvement in its profits during 2016, helped by increased sales volumes and a further improvement in its product mix.
- Implications: The latest financials build on the positive results achieved during 2015, a year which first gave an indication of the performance that was hoped for following investment made by the automaker.
- Outlook: Volvo anticipates a further growth of its revenues during 2017 supported by retail sales increases, despite the continuation of its industrial transformation and renewal of its product portfolio. In addition, it expects its operating income to benefit from a greater premium model mix. IHS Automotive anticipates around 2.5% y/y sales growth, on its way towards sales of nearly 708,000 units at the end of the decade.
Volvo Car Group has revealed its financial results for 2016, in which it has seen a robust improvement in its profitability and margins as its sales revenues have grown. For the 12 months ending 31 December, the automaker recorded an improvement in its net revenues of 10.1% y/y to SEK180,672 million (USD20,386 million). This coincided with the automaker recording an increase in its retail sales volumes from 503,127 units to 534,332 units, while revenue growth was also helped by a positive sales mix, as the second-generation XC90 continued its upward growth trajectory.
This helped to offset negative exchange rate developments.
The automaker's earnings before interest and tax (EBIT) grew by 66.4% y/y to SEK11,014 million, resulting in an operating margin of 6.1% versus 4.0% during 2015. It achieved this despite an increase in its cost of sales from SEK128,238 million to SEK143,282 million, spurred by higher material costs due to the change in its sales mix, as well as the costs related to the launch of the new S90 and V90 models during the year. Its research and development (R&D) have also grown by 6.5% y/y during 2016 to SEK9,374 million, partly related to the ongoing renewal of its product portfolio as well as the reallocation of IT to this type of expenditure.
Nevertheless, despite the ongoing expenditure, the company announced that it achieved a positive cash flow, albeit sliding from SEK7,234 million to SEK6,515 million in terms of operating and investing activities. Overall, net income has grown by two-thirds from SEK4,476 million to SEK7,460 million.
Outlook and implications
The latest financials build on the positive results achieved during 2015, a year which first gave an indication of the performance that was hoped for following investment made by the automaker. Indeed, 2016 was the first full year that the second generation of its top-of-the-line XC90 sport utility vehicle (SUV) was on sale, with 91,500 units reaching customers and making up around 17% of its total sales. The next beneficiaries of the Scalable Product Architecture (SPA) platform in the S90 and V90 are now starting to gain sales momentum, although as noted above, these have their own costs due to their market launches. Nevertheless, the early indications are certainly bright, and they should certainly make a positive impact on its 2017 performance.
Nevertheless, Volvo's financial performance will be offset by the cost of further replacement and new model launches. During 2017, this will include Volvo's biggest seller, the XC60 crossover, and this could result in some disruption to its market performance. This is expected to be followed by the compact XC40 crossover which will be the first Volvo brand model to gain benefit from its joint Common Modular Architecture (CMA) with Geely and will take it into this still growing segment.
Furthermore, the automaker is undertaking capital expenditure and investments in technology with a view to the even longer term. It has already made further adjustments to its site in Torslanda (Sweden), while in the United States it is continuing to construct its new site in Charleston, South Carolina which will build further new models on the SPA platform and is due to be completed during 2018 (see United States - Japan - China - Sweden: 12 May 2015: Volvo selects South Carolina site for USD500-mil. US assembly plant; Subaru advances Indiana production expansion). However, in terms of technology, the automaker has made some strategic alliances during 2016 which should help to reduce the overall expenditure it makes in key areas. Most notable among these are the signing of deals with ride-hailing application company Uber (see World: 19 August 2016: Uber announces partnership with Volvo, autonomous vehicle testing, and acquisition of autonomous CV start-up – reports) and Swedish safety equipment supplier Autoliv (see Sweden: 7 September 2016: Volvo, Autoliv to form autonomous driving software JV) in the area of autonomous technology.
While Volvo's president and chief executive officer (CEO) Håkan Samuelsson noted in a statement that "Volvo is going from strength to strength" and that "2016 was a positive milestone for Volvo Cars' development," his confidence appears to be shared by the financial institutions after entered the bond markets for the first time in its history. As well as two bond issues – one for EUR500 million (USD535 million) in May and another for SEK3 billion during November (see Sweden: 1 December 2016: Volvo Cars raises SEK3 bil. from Swedish bond offering) - it also raised SEK5 billion from the sale of equity to three institutions (see China - Sweden: 20 December 2016: Volvo Cars raises USD533 mil. in share sale). While this is intended to increase liquidity and expand its fund raising options, the sale of these very small stakes in the company have added to the speculation that the company is planning for an initial public offering (IPO). For now, while the company denies that this is in its current plans, Samuelsson noted during the press conference that the this suggests a confidence that the automaker has the "reporting transparency that the financial markets requires from a company with ambitions of acting as a listed company." It is still relatively early days in terms of seeing the best return on investment for parent company Zhejiang Geely Holding, with more new models to come. With this in mind, it may choose to wait until some of these are showing their full benefit and further lifting its global sales.
In 2017, Volvo anticipates a further growth of its revenues during the year supported by further retail sales increases, particularly as it sees the premium segment "in our three home markets" to continue to develop positively. This is despite the continuation of its industrial transformation and renewal of its product portfolio. In addition, it expects its operating income to benefit from a greater premium model mix following the launch of its other 90-Series models, although this will be offset by increased expenses for sales and R&D. IHS Automotive is expecting another year of sales registration growth during 2017 as the S90 and V90/V90 CC gain momentum, as well as being joined by new entries. We anticipate around 2.5% y/y growth this year, on its way towards sales of nearly 708,000 units at the end of the decade.
About this article
The above article is from IHS Automotive Same-Day Analysis of automotive news, events and trends, and is a deliverable of the World Markets Automotive Service. The service averages thirty stories per day and also provides competitor and country intelligence. Get a free trial.