Volvo Profit Beats Estimates on North America Production Cut

  • CFO says savings project, logistics-cost cuts helped margins
  • First-quarter operating margin widens to 6.2% of revenue

Volvo AB’s first-quarter operating profit beat analyst estimates as the truckmaker reduced costs by scaling back production in response to slowing North American sales. The stock rose to an eight-month high.

Earnings before interest and taxes, and excluding capital gains and restructuring costs, amounted to 4.46 billion kronor ($549 million), the Gothenburg, Sweden-based manufacturer said Friday in a statement. That exceeded the 3.92 billion-krona average of eight analyst estimates compiled by Bloomberg. Operating profit at that level widened to 6.2 percent of sales from 6.1 percent a year earlier. Revenue fell 4.1 percent to 71.7 billion kronor, in part because of currency effects.

The company, which owns the Mack Trucks brand in the U.S., outlined plans in February to reduce North American and Brazilian production in the first quarter following a drop in orders at the end of 2015. U.S. gross domestic product growth probably slowed in the quarter versus the last three months of last year, according to Federal Reserve forecasts, with the Atlanta Fed estimating expansion could have been as low as 0.1 percent.

“Despite the expected market headwind tempering sales, the company managed to keep up margins,” Andreas Zsiga, a credit analyst at Nordea Bank AB, said in a note to clients. “A negative revision of the 2016 North American truck-market outlook was balanced by a positive revision of the European market.”

Volvo rose as much as 5.7 percent and was trading up 4.1 percent at 98.40 kronor as of 11:44 a.m. in Stockholm, the highest price on a closing basis since mid-August. The stock has gained 24 percent this year, valuing the manufacturer at 209.4 billion kronor.

A reorganization project to reduce annual spending this year by 10 billion kronor from 2012 levels has helped profitability, Chief Financial Officer Jan Gurander said at a press conference in Stockholm. In addition, “we are also working quite a lot actually with improving our logistic costs, the material costs and so on,” and “in some of these areas, we see quite an improvement as well,” he said.

Volvo cut its full-year industrywide forecast for the North American market 3.8 percent to 250,000 vehicles. “With stagnant freight volumes, increased availability of competitively priced used trucks and less need for fleet renewal, the market is expected to settle on a more normalized level during 2016,” it said. The company’s business in the region “did a good job” of adapting capacity to demand, Chief Executive Officer Martin Lundstedt said at the press conference.

The company also reduced its forecast for Brazil’s market by 14 percent because of a lingering recession there. Volvo is predicting 290,000 industrywide truck sales in Europe, an increase of 10,000 vehicles from a previous forecast.

First-quarter net income fell 11 percent to 3.77 billion kronor, with the decline buffered by an 885 million-krona capital gain from the sale of its information-technology operations to HCL Technologies Ltd. Gurander said he can’t predict when Volvo may dispose of its Arrow Truck Sales used-vehicle business in the U.S. because of the “correction” in the North American market that has hurt prices.

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