Supply difficulties put brake on Volvo as trucks accelerate

Truckmaker Volvo struggled to ramp up production to meet a strong rise in demand, hitting quarterly earnings.

The highly cyclical heavy-duty trucks market has picked up rapidly, leading Volvo to raise its forecast for demand on both sides of the Atlantic, but also meaning truckmakers have to raise production from rock-bottom levels.

Gothenburg-based Volvo, which also makes buses, construction equipment and engines, yesterday reported temporary production problems at sub-contractors and in its own operations as output was rapidly increased.

Volvo posted a smaller-than-expected rise in fourth-quarter earnings, with high raw material costs and a strong currency also biting into its results.

The output problems related to increasing deliveries from suppliers, many of whom made sweeping cuts during the financial crisis, as well as training new staff, a Volvo spokesman said.

The company said it expected productivity to improve "gradually" once it and its suppliers had stabilised production at the higher level.

Volvo shares, which plunged after rival Scania's results earlier this week, rose in early trade.

"Volvo has taken a lot of punishment on the other reports, so they should not get the same treatment on this," Sydbank analyst Morten Imsgard said.

Sweden's Volvo posted operating earnings of 5.52 billion Swedish crowns (530m) compared to a year-ago loss of SKr2.32bn to come in below a mean forecast for a profit of SKr5.99bn in a poll of analysts.

Volvo said fourth-quarter earnings were also hit to the tune of about SKr600m by dearer raw materials and components compared with a year ago, while currency shaved off a further SKr700m compared with the preceeding quarter.

"Just as we saw with the Swedish engineering companies, we had a weaker development of margins than the consensus was looking for," Nordea analyst Johan Trocme said.

"They will get a lot of questions today about why the trucks unit did not show a better margin, and on what impact we may see this year from raw materials and currencies."

Volvo, the second-biggest truck maker after Germany's Daimler, said order bookings of its trucks surged 63 per cent year-on-year in the fourth quarter and it expected a further market recovery this year.

Volvo, which makes lorries under the Renault, Mack, UD Trucks and Eicher brands, raised its forecast for 2011 truck markets in Europe and North America to about 220,000 units from 200,000, implying double-digit growth in both markets.

The forecasts, especially for North America where demand has shot up in recent months, are conservative compared with those of many analysts.

While demand looks set to be buoyant, prospects for further improvement of margins is less obvious as truckmakers turn on the taps for new investment, which were closed by the global financial crisis.

Rival Scania's fourth-quarter earnings earlier this week tempered expectations of steady climb in margins which, along with a forecast of unchanged demand going into this year, sent European truckmaker stocks sharply lower.