Volvo’s second-quarter sales remained broadly flat at SEK 140.2bn. Weakness in Construction Equipment was largely offset by increased Truck and Bus sales.
Underlying operating income fell 11.4% to SEK 19.4bn. Profitability was impacted by lower sales volumes and increased research and development (R&D) costs, which more than offset higher prices.
Free cash flow rose from SEK 1.1bn to SEK 4.4bn. Net debt rose from SEK 146.2bn to SEK 184.9bn since year-end.
CEO Martin Lundstedt said the group would continue its “strong focus” on volume flexibility and tight cost controls across the business.
The shares rose 4.7% following the announcement.
Our view
Volvo’s second-quarter results showed some weakness in volumes, which is something we’ll be tracking closely moving forward. But for now, price hikes helped to offset this somewhat and keep revenue broadly flat over the period.
Volvo Group is a truck and industrial equipment giant. There are millions of Volvo trucks, buses and machines rumbling around.
Volvo not only produces vehicles, but services them. A 24/7 global servicing support network is a serious asset. If your truckful of goods is stuck somewhere, you need to have faith that it can get moving ASAP. That feeds into more reliable revenue. Services currently make up a small part of overall revenues, and is expected to increase to over 50% by 2030. We think this target is achievable. We're pleased to see momentum in this area's continued in the first half.
Longer-term we admire the group's high barriers to entry. Volvo's manufacturing and supply chains are enormous, helping to protect market share.
The group's also benefiting from growing e-commerce (those extra online orders mean increased need for logistics). Volvo is also a leader in the electrification of heavy-duty vehicles, including trucks and buses. Volvo wants over 35% of its vehicle sales to be electric by 2030. We view being a front-runner of sustainable haulage a real plus point.
The steadier style of Volvo's revenue helps its ability to pay dividends, currently offering a prospective 6.2% dividend yield. Please remember nothing is guaranteed. Overseas dividends can be subject to withholding tax which might not be reclaimable.
For all the positives there are some things to monitor, relating to Volvo's large exposure to global economic activity. Underlying demand and orders stalled at the start of the year, with some customers becoming more cautious. Orders have picked back up in the second quarter which is encouraging, but full-year revenues are still expected to fall around 6% from last year’s heights.
It’s important to recognise this could become a more contracted decline before it gets better, and this could cause some knocks to the valuation. In the case of a severe slowdown, we can't rule out cuts to the dividend, but this would be a drastic measure.
The group is doing a reasonable job at flexing its production capacity to meet lower demand, which is the right move to protect the bottom line. But broader cost cutting is also on the agenda. Trimming fat is no bad thing, but this is something we’ll be keeping an eye on. If cuts look drastic, or very deep, it can trigger questions about whether enough is being spent to fund Volvo’s ambitious electric targets.
Markets are expecting a drop in profits this year off the back of some customer caution in orders and an economic slowdown in Asia. But we think that’s factored into the current valuation, which is sitting below its long-run average. Longer term, we see growth potential at Volvo, but ups and downs along the way can’t be ruled out.
Environmental, social and governance (ESG) risk
General Industrial companies are medium risk in terms of ESG but can trend up to the higher end of the spectrum depending on subindustry. The primary risks can include labour relations, emissions (either product or production-based), business ethics and product governance. Other concerns are waste and health & safety.
According to Sustainalytics, Volvo’s management of ESG risk is strong.
Volvo is addressing its substantial risks related to greenhouse gas emissions by investing in electric and hybrid vehicle technology. The group has also committed to net zero emissions by 2040. However, Volvo is facing consumer lawsuits throughout Europe relating to its previous involvement in a price-fixing scheme in the region
Volvo key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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