Truckmaker Volvo's profit tops forecast despite supply chain bottlenecks

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Reuters  /  July 19, 2018

STOCKHOLM (Reuters) - Swedish truckmaker AB Volvo beat second-quarter profit estimates on Thursday, managing to lift margins despite bottlenecks in the supply chain as demand for trucks remained strong.

Volvo, like European rivals Daimler and Volkswagen, is experiencing rapid growth as construction fleet buyers step up purchases, but parts of the supply chain are struggling to cope, causing raw material, transport and labor costs to climb.

Costs have also increased for some vehicle parts, autos machinery and raw materials used by automakers as Beijing and Washington slap tariffs on goods imported from each other as part of the escalating trade war.

Chief Executive Martin Lundstedt said Volvo was seeing a gradual stabilization in the supply of brakes and other powertrain items in Europe, but in the United States there were still supply bottlenecks and a new shortage of workers.

Tariffs imposed by the United States had also inflated the cost of some products it imported and increased prices for some locally-sourced raw materials, he added.

Volvo, which has cut 10 billion crowns of costs in recent years to boost profitability, sill saw its quarterly operating margin surpass its 10 percent target for the first time.

Lundstedt said there was “still potential” for further cost savings. He said Volvo was compensating for some of the tariff-related raw material cost rises by negotiating with suppliers and was passing the rest on through its supply chain.

“We have a cost increase related to the tariffs... but we’ve been working on moving that forward... in the delivery chain because this is something that we cannot take,” he said, adding that Volvo expected to be able to do that for the rest of 2018.

CFO Jan Gurander said that the company had also built up some excess inventory to mitigate supply chain disturbances.

“In this type of strong market, both in Europe and North America, it would be strange if you didn’t have these problems in the supply chain. But they are handling it pretty well,” Handelsbanken Capital Markets analyst Hampus Engellau said.

Volvo’s shares, which have faltered since it highlighted the acute bottlenecks and related costs in first-quarter results, rose as much as 3.4 percent before paring gains to trade up 1.6 percent at 151 Swedish crowns at 0902 GMT.

UNEASY OWNERSHIP

During the second quarter, which ended in June, China’s Geely completed its purchase of a 14.9 percent voting stake in the truckmaker.

Geely also recently bought a stake of almost 10 percent in Germany’s Daimler but the rationale for becoming the main shareholder in the two rivals remains unclear.

Volvo’s underlying business remained strong. Operating profit jumped to 12.3 billion crowns ($1.4 billion) from 8.4 billion crowns a year ago, coming in well ahead of the 10.8 billion crowns forecast in a Reuters poll of analysts.

Profit was, as expected, partly boosted by a capital gain from the sale of a Chinese subsidiary.

The company’s order intake of trucks, which sells under brands Volvo, Mack, Renault and UD Trucks, grew to 60,656 units from 52,265 units a year ago, missing expectations of 63,201 units.

Lundstedt said this was due to some product mix changes and also customers’ buying decisions being affected by some of the price increases it had introduced.

Volvo maintained its full-year forecast for truck markets in North America and Europe but also hiked the outlook for medium and heavy duty trucks in India and heavy-duty trucks in China.