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UPDATE 3-Volvo profit jumps on cost cuts and strong truck demand
April 25, 2017 / 6:05 AM / 8 months ago

UPDATE 3-Volvo profit jumps on cost cuts and strong truck demand

* Adjusted operating profit 7 bln crowns vs 5.3 bln forecast

* Trucks order intake up 11 percent vs forecast 7 percent

* Sees positive signs in North American truck orders

* Raises 2017 construction equipment outlook for China (Adds detail, background, share price)

By Niklas Pollard and Johannes Hellstrom

STOCKHOLM, April 25 (Reuters) - Swedish truck maker Volvo reported a far bigger than expected increase in first-quarter core earnings on Tuesday as robust demand and years of cost cutting boosted turnover and profitability.

Gothenburg-based Volvo also raised its forecast for construction equipment demand in China after a lengthy period of lacklustre sales but left its outlook for truck markets on both sides of the North Atlantic unchanged.

Shares in the maker of trucks, construction vehicles, buses and engines leapt as much as 12 percent to their highest in nearly a decade and were 8 percent higher at 144.7 Swedish crowns at 1030 GMT.

“These are fantastic numbers,” Handelsbanken Capital Markets analyst Hampus Engellau said.

“This is the result of Volvo’s cost-cutting efforts, but also that they run the business much tighter these days, focusing on profitability, productivity and sales.”

Volvo, which competes with German truck makers Daimler and Volkswagen‘s, is starting to reap the benefits of a now completed cost-cutting drive designed to boost margins and improve flexibility across the sprawling company.

Volvo said its adjusted operating profit rose to 7.03 billion Swedish crowns ($793 million) in the first quarter from 4.46 billion a year earlier, beating an average forecast of 5.32 billion in an analyst poll.

Volvo’s construction equipment division, which has weathered years of soft demand and accounts for a fifth of turnover, was behind much of the surprise. Sales volumes picked up while it kept a lid on operating expenses and cut material costs.

Danske Bank said it expected the consensus forecast for operating earnings to rise 10 percent in the wake of the “pretty much perfect” first-quarter results.

Volvo’s adjusted operating margin rose to 9.1 percent from 6.2 percent a year earlier with profit increases in all its business areas, well above the 7.0 percent seen by analysts.

The improvement in fortunes at Sweden’s biggest firm by revenue has pushed its shares up 36 percent in 2017, outperforming a 6 percent rise for Swedish blue chips.

ORDERS RISE

Volvo completed a 10 billion crown cost-cutting programme last year, shedding thousands of mainly white collar jobs and focusing its spending on businesses where it could be one of the market leaders.

Part of the programme also involved shedding peripheral businesses to free up resources, such as its aerospace and external IT divisions, and it expects to sell its largely military Governmental Sales business this year.

While his predecessor handled most of the cost cuts, Chief Executive Martin Lundstedt, who joined Volvo in late 2015 from the smaller, historically more profitable rival Scania, has made further changes.

These have included decentralising the unwieldy group into one where each brand is responsible for delivering on its sales and profit goals, in part to boost response times to swings in the highly cyclical truck market.

“What we see now is a significant improvement in how the operation is run, where they have created separate entities in the company, each with a clear results responsibility, driving the business closer to customers,” Handelsbanken’s Engellau said.

“It sounds like mumbo-jumbo, but that’s what it’s all about”

The company, whose brands include Mack, Renault, UD Trucks and Volvo, said its truck order intake rose 11 percent year-on-year in the first quarter, above the 7 percent rise expected by analysts.

European truck sales reached their highest since the global financial crisis last year and have held up in early 2017 while soft demand in North America has shown signs of improvement.

“After the downwards correction in the long haulage segment in 2016, the North American market seems to be bottoming out. We see positive signs of increased order activity,” Lundstedt said.

Robust demand is also helping Volvo’s rivals, with Daimler beating quarterly earnings forecasts this month.

Demand for construction equipment in China has also begun to pick up. Volvo raised its growth outlook for that market to 20 percent to 30 percent this year from 5 percent to 15 percent.

$1 = 8.8688 Swedish crowns Editing by Mark Potter and David Clarke

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