Volvo Car Records Full-Year Profit Despite Pressure in H2 2011

Volvo Car Corporation (VCC) has announced its financial statement for 2011, its first full year under Chinese parent company Zhejiang Geely Holding Group. Overall, the company said it had recorded a positive increase in its unit sales and achieved profitability. For the 12-month period, the automaker achieved revenues of SEK125,525 million (USD18,589 million) without giving a comparison with 2010 as a result of transferring to International Financial Reporting Standards (IFRS) principles this year. During this same timeframe, unit sales jumped by more than one-fifth from 373,525 units to 449,255 units. This positive performance was achieved by growth across its core regions. Its largest—EU 20—improved 10.0% y/y to 252,217 units, with a 10.5% y/y improvement coming from its domestic market, Sweden, where sales reached 58,463 units. However, it was outside these borders that the biggest dividends have been reaped with the US market seeing a 24.7% y/y rise to 67,273 units and the Chinese market recording a 54.4% y/y jump to 47,140 units. Its "rest of the world" (RoW) markets also improved by 38.3% y/y to 82,625 units. It added that the improved sales were mainly driven by strong demand for its 60-series models such as the latest generation S60 and V60 alongside the ongoing demand for its XC60 crossover. It is also seeing some benefits from its low-carbon dioxide (CO2) DRIVe range of models available in Europe.

This appears to have had a positive bearing on profitability for the company during the year. Without giving any comparison with 2010, the company recorded earnings before interest and taxes (EBIT) of SEK1,636 million, a profit before tax of SEK1,210 million and finally a net income of EUR927 million.

However, while the full year was a broadly positive experience for the company, the company did see some weakness in its financials emerge in the second half of the year. For the six month period, sales revenues remained in-line with those seen in the first half at SEK62,662 million, as unit sales slipped to 218,509 units as Europe and the US markets weakened and were only partly offset by China and the RoW. EBIT was seen to plummet markedly and stood at SEK107 million for this period, as higher raw material pricing and currency exchange rate translations impacted it. As a result, its earnings before tax also now stand as a loss of SEK439 million for the half, as net profit ended this time as a loss of SEK286 million.

Outlook and Implications

The Swedish automaker, which was sold by Ford around 20 months ago, has had a positive first full year under its now owner Zhejiang Geely Holdings Group, and these latest results underline this feeling. However, the work that Ford did to reduce costs prior to the sale should not be dismissed, and has given the business a strong foundation to build on. During the 12-month period Volvo was also able to take some benefit from the global demand for premium vehicles, which has been supported by the launch of new models during this time.

Nevertheless, this is only really the start, and there is a great deal still expected to come from Volvo under its Chinese owner as it undertakes increased research and development (R&D) and capital expenditure to support its net product strategy and industrial capacity expansion and will have a bearing on its future financials. Much of this will be focused on China, which the company intends to be effectively its second "home" market. In its results, Volvo said that its plans for the market were on track. It is already constructing its first site in the country in Chengdu for small and mid-size cars and is said to be looking at a further two locations in the country—one in Daqing, manufacturing larger vehicles from 2015, and an engine plant in Zhangjiakou. This will be underpinned by a far widening of its dealer network which by 2017 will have almost doubled to 220 outlets from 130. In order to achieve this though, the company may well spend up to USD11 billion with financial support from the China Development Bank (see China: 24 April 2012: Beijing Motor Show 2012: Volvo Car to Sign MoU with Chinese Bank, Expand Local Offering), although it is expected to see it achieve its long-term objective of sales in China of 200,000 units per annum (upa) and 800,000 upa on a global basis. Indeed, IHS Automotive anticipates that it will achieve this level by 2015, before rising to over 300,000 units by around the end of the current decade, contributing to around 770,000 units globally by this point.

For the near term, Volvo has warned that its financial outlook would be beholden to consumer confidence given the economic turbulence in some regions, notably Europe. Here is anticipating falls, while the US market is expected to see only moderate expansion. The luxury segment of the car market in China is also projected to increase. Volvo is expecting to demonstrate positive sales developments on the back of a strong brand and new model launches, the most recent being the new five-door hatchback, the V40, which will replace the S40 and V50 models. It also said that in the short to medium term, costs associated with the expansion plans will affect profitability, and this will include that being made in to new technologies such as alternative powertrains and its new SPA downsized engines. Additionally, continued volatility in raw materials and exchange rates may affect results.