Volvo Cars, Stockholm reported double-digit improvements in 2016 earnings and revenue on Wednesday and forecast a fourth consecutive year of record sales for 2017 helped by the arrival of models such as the second-generation XC60 and the all-new XC40.
Operating profit rose 66 percent to 11.0 billion Swedish crowns ($1.24 billion) and revenue increased 10 percent to 180.7 billion crowns, the company said in a release. That helped improve the automaker's profit margin to 6.1 percent compared with a 4 percent margin in 2015, a result that CEO Hakan Samuelsson was particularly proud of
"I didn't believe we would have achieved that [operating profit level] three years ago," he said today at a press conference to announce the results.
Since being bought by China's Zhejiang Geely Holding Group Co. from Ford Motor Co. in 2010, Volvo has invested in new models and plants to secure a niche in the premium auto market which is dominated by Daimler's Mercedes-Benz and BMW.
Gothenburg-based Volvo reported record high sales of 534,332 cars in 2016. Samuelsson said last month that he expects to set a new record for sales in 2017.
One of Sweden's largest companies by sales and number of employees, Volvo has set an annual sales goal of 800,000 cars by 2020. That is seen as a sufficient level to ensure its place in the market and to sustain future investments.
Volvo also wants its profit margin to rise to 8 percent, Samuelsson confirmed in his interview.
Samuelsson told Reuters today that he expected profitability to stay at a "very strong level" this year as the automaker continued to replace older models.
"This year will be a year with heavy industrial transformation," Samuelsson said. "Two new cars [the XC60 and XC40] will come out and at the end of the year we will, for the first time, have an all-modern lineup of SUVs."
Volvo replaced its XC90 flagship SUV two years ago.
Volvo also said it was looking to hire an additional 700 to 800 employees at its Torslanda plant in Gothenburg in western Sweden.
Last year Volvo also took steps toward an eventual listing, raising 5 billion crowns from Swedish institutional investors through the sale of newly issued preference shares, though Samuelsson told ANE during his interview that there were currently no plans for an IPO.
Will Volvo maintain its record-setting sales and profit growth?
We will continue increasing our percentage of small cars [with the arrival of the new XC40 and another compact model]. That, of course, is a very important factor for better margins. In addition, we aim to have a volume increase. We are ramping up to see how much we can reach. Barring any major unforeseen changes to the market, we should be able to crank out more cars than last year.
What is your target operating margin?
A company that sells 800,000 cars a year [which Volvo aims to do by 2020] should have 8 percent profitability. Another way of saying this is that we want to be as good as anybody else [in the premium sector].
How close is the final transaction price of the XC90 and S90 compared with rival models from Mercedes-Benz, BMW, and Audi?
In the SUV segment, the XC90 and the XC60 are on the same level of earnings as Audi. The S90 and S60 [sedans] are a different story. We don't have the same strong position [in the sedan market] so the distance is bigger. On the other hand, we have a very good car now with the new S90. There is absolutely no reason why we should not be at the same level as our rivals, but I think we will need time to close this gap. We definitely need to do this because that's where the profitability will be earned.
What is Volvo's outlook for Russia?
It's a good market, especially for SUVs. They are very fond of the new XC90. The XC60 has always been a strong product there, and that will be even more evident with the new one.
How many cars did you sell in Russia in 2016 versus 2015?
It was 7,800 in 2015 and 5,800 in 2016.
And you still broke even?
Yes. We are not losing money but not making any money, either.
And in 2017?
If we sell about 8,000 cars, we can make some money. I think we have passed the low point.
Opel quit the Russian market in 2015, would Volvo consider doing the same?
We are definitely not planning to exit the Russian market, although we were in survival mode for a while. Now it looks a bit better. It will continue to be an important part of the Volvo story.
Do you also think the worst is over for the overall Russian market?
I can't provide a prediction for the overall market. For us, profitability is more important. With our new cars and with a slightly stronger ruble, our ambition is to take market share. If you look at our position versus some others, there is definitely room for expansion in Russia. Even if the market does not grow, we can grow.
Can we expect you to float a stake in Volvo next year?
We have no current plans for an initial public offering. What we're doing now is concentrating on making Volvo a sustainable, profitable, bigger company. If we were not doing this, we would not have been able to enter the bond and equity markets as we did. It is important to us to have more diversified funding options than we have now. That's good for the company.
What are you doing to achieve this?
The latest step is the preference shares, or equity, which were added to Volvo [in late 2016]. From that, 5 billion crowns (more than 527 million euros) will go to us. It gives Volvo a much more diversified balance sheet.
Is demand for the XC90 still so high that you need more capacity?
We are building as many as we can.
What percentage of your sales were SUVs in 2016 and do you expect this to rise in the future?
Last year it was 52 percent and it will go up when we add the smaller 40-series crossover. Last year we sold more than 91,000 XC90s and over 161,000 XC60s. We think it will be clearly more than 50 percent in the future.
Are customers still willing to pay more for SUVs?
Yes. Also, it's a concept that’s very attractive to customers because it is perceived to be safe and practical. It is easy to step in and out of, there is a lot of room for the kids and luggage. The concept started in the U.S., but it is getting more and more popular in Europe and in China. It is very likely to continue growing. For us it's good because it’s a segment where we have credibility and strength.
Not long ago Volvo built all its cars in Europe and exported them around the world. Today you have three plants in China and soon will be making cars in the United States. How does this help?
We want to create an open system where some cars are built for the local market while some are exported. The South Carolina plant is another example of this. The S60 will be built there for North America as well as global export. If we make 100,000 cars in South Carolina half will be exported. That is a good example of fair trade with goods going in both directions. It's not just a one-way street. We are building in the U.S. and we are exporting out of the U.S.
Volvo has lost some key members of its management team. What is the company doing to retain talent?
Yes, but we added some key people. To be successful we need a very strong management team. This includes a new generation of top executives. We also need to be more diverse and more international. [New manufacturing boss] Javier Varela is an example of that. He comes from Spain but he also has a lot of international experience with other companies. We have Atif Rafiq coming in from McDonald's [as Volvo's new chief digital officer]. He will give us a totally different perspective on consumer connectivity and things like that. Atif is under 45. As is Henrik Green, who has taken over r&d from Peter Mertens. Henrik has the experience and capability to take us beyond the very strong position Peter brought us to. We also have a new, younger head of human resources, Hanna Fager , who also provides more gender diversity to the group. There will be more to come to make Volvo younger, more diverse and more international in the near future. More than half of our board of directors is non-Swedish [and five of the automaker’s 14-member executive management team are non-Swedes]. Not many manufactures have that type of balance.
Sources: Autonews, 2017, Automotive News Europe, 2017, The Local, 2017.