Volvo profit jumps on cost cuts and strong truck demand

Sweden’s Volvo posted a much bigger than expected rise in first-quarter core earnings on Tuesday as robust demand and years of cost trimming bolstered turnover and profitability at the truck maker.

Gothenburg-based Volvo also raised its forecast for long-depressed demand for construction equipment in China, but left unchanged its outlook for truck markets on both sides of the North Atlantic.

Volvo, a rival of Germany’s Daimler and Volkswagen’s truck brands, has begun reaping the dividends of a now completed cost cutting drive to boost margins and improve flexibility across the sprawling group.

Shares in Sweden’s biggest company by revenues have risen 26 percent this year, outpacing a 6 percent rise for Swedish blue chips.

Adjusted operating profit rose to 7.03 billion Swedish crowns ($793 million) in the first quarter from 4.46 billion a year earlier, beating the mean forecast of 5.32 billion in a poll of analysts.

Volvo’s construction equipment arm, which has weathered years of soft demand and accounts for a fifth of group turnover, provided much of the earnings surprise as sales volumes picked up, while it kept a lid on operating expenses and cut material costs.

“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.”

Danske Bank said it expected analysts’ consensus estimate for operating earnings to rise 10 percent in the wake of the “pretty much perfect” results.

Stronger profitability at the maker of trucks, construction vehicles, buses and engines saw its adjusted operating margin rise to 9.1 percent versus 6.2 percent a year earlier and the 7.0 percent seen by analysts, with profit increases coming through in all its business areas.

Volvo, whose brands includes Mack, Renault and UD Trucks as well as its namesake vehicles, said order intake of its trucks rose 11 percent year-on-year in the first quarter, topping the 7 percent rise seen by analysts.

After reaching their highest since the global financial crisis last year, European truck sales 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,” Chief Executive Martin Lundstedt said in a statement.

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 picking up. Volvo raised its growth outlook for that market to 20-30 percent this year from 5-15 percent previously.

($1 = 8.8688 Swedish crowns)

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