Volvo sows doubts on cost cuts, North American market outlook

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Reuters / July 18, 2015

The comments overshadowed forecast-beating quarterly earnings from Sweden's biggest company by sales and top private-sector employer.

Truck maker Volvo said its efforts to reach its cost-cutting target were being hampered by a weak Swedish crown, and warned it expected little growth in its crucial North American market in coming years.

The comments overshadowed forecast-beating quarterly earnings from Sweden's biggest company by sales and top private-sector employer, and drove its shares down nearly 5 per cent.

Volvo, locked in fierce rivalry with Germany's Daimler and Volkswagen, is seeking to cut 10 billion crowns ($1.2 billion) in annual costs. But with only about a third of the savings implemented so far, investors have ratcheted up pressure on the group to deliver the remainder on time by the end of 2015.

Jan Gurander, acting CEO until Martin Lundstedt takes the helm in October, said a weaker crown - it has fallen against the most major currencies, particularly the dollar, since October - was increasing the company's overseas costs when translated into the Swedish currency.

He said the cost cuts already implemented - 3.8 billion crowns - would have been around 2 billion higher crowns higher at unchanged currency levels. "We are committed to the 10 billion (of cost cuts) and we are trying to offset this as much as possible," he told a conference call.

Volvo also said the North American truck market - which accounts for a fifth of its deliveries - was likely to have reached its peak for the cycle. A cycle in the industry usually lasts around a decade.

Most of its North American sales come from the United States, where the economy contracted in the first quarter, hit by harsh winter weather, disruptions at West Coast ports and a stronger dollar which has dented exports.

EARNINGS RISE

Volvo shares gave up early gains - made following the quarterly earnings announcement - and were down 4.6 percent by 1045 GMT, underperforming the broader market which was up 0.2 percent.

"The (market) focus has shifted to the pace of the savings, which is seen as quite low," Handelsbanken Capital Markets analyst Hampus Engellau said. "The company is also facing a headwind in terms of taking out costs given the currency levels."

The Gothenburg-based company reported an 82 percent rise in second-quarter adjusted operating earnings rose to 6 billion crowns, beating a mean forecast of 5.3 billion in poll of analysts.

The group also raised its outlook for total truck sales in Europe.

The European upturn was underscored by VW-owned Scania which reported separately a 41 per cent year-on-year rise in its European truck order intake for the second quarter, outpacing Volvo whose bookings rose 9 pe rcent.

The outlook was bleaker for China where Volvo cut its outlook for both construction equipment and heavy-duty trucks in the face of a slowing economy which has been rattled over the past month by a stock market rout.

Falling demand for construction equipment in China has become a serious headwind in Volvo's drive to lift profitability that has historically lagged nimbler rivals such as Scania and Paccar.