Volvo Beats Earnings Forecast, Sees US Market Weaken

Swedish truckmaker Volvo reported better than expected second-quarter earnings on Tuesday as cost cuts and rising European sales helped fortify it against slumping U.S. demand for commercial vehicles.

Heavy-duty trucks, where Volvo is competing with Germany's Daimler and Volkswagen, are benefiting from strong demand across Europe while battling downturns across the Atlantic.

Volvo, which sells trucks under the Mack, Renault and UD brands as well as its own name, scaled back its outlook for North America, saying it expected industry wide sales of 240,000 trucks, down from a forecast for 250,000 given in April.

Weaker markets in the United States and also China, where sales of construction equipment are falling, will test the new leadership team's skill in boosting profitability.

"In the second quarter we were able to continue the improvement of our underlying profitability despite declining sales, thanks to positive cost development," said CEO Martin Lundstedt, a former Scania boss appointed last year. Scania had long boasted some of the best profit margins in the business.

Gothenburg-based Volvo said order intake of its trucks fell 8 percent in the second quarter compared with a 1 percent drop seen by analysts. A 29 percent fall in North American truck orders led the decline.

Volvo shares rose 0.8 percent by 0756 GMT (03:56 a.m. EDT), outpacing a 0.7 percent fall in the in the STOXX Europe 600 Industrial Goods & Services Index. The stock is up 12 percent so far this year compared with a 2 percent drop for the index.

"The earnings are really good, and what stands out is primarily the 10 percent operating margin in trucks despite them scaling back output in North America," Handelsbanken Capital Markets analyst Hampus Engellau said. "This is exactly what one wanted to see."

Lundstedt has come on board as Volvo begins reaping the benefits of a 10 billion Swedish crown ($1.17 billion) cost cutting drive intended to make the sprawling group less prone to sharp swings in profitability as cyclical truck markets periodically slump.

The group said adjusted operating earnings rose to 6.13 billion crowns from a year-ago 5.98 billion, beating a mean forecast for 5.64 billion in Reuters poll of analysts.

It reported adjusted operating margin of 7.8 percent compared with a year-ago 7.1 percent and the 7.0 percent seen by analysts.

"The results tells us that Volvo are on track to boost its earnings generation capacity also when demand is not great," said Danske Bank analyst Bjorn Enarson.