The Volvo Group has reported year-on-year falls in revenue and operating earnings in the quarter ended 30 September 2012, reflecting weakening unit sales of trucks and buses, a jump in one-off restructuring and other costs, and under absorption of fixed costs in the company’s manufacturing system as production is lowered in order to reduce inventories.
Olof Persson, Volvo’s President and Chief Executive Officer, has commented: “During the third quarter, sales for the Volvo Group were impacted by the weakening in demand that has become increasingly evident around the globe. To respond to declining demand and increasing inventories, we decided to adjust our production rates down in several parts of the company.
“In Europe, the weak demand has spread from southern Europe to an increasing number of countries and the normal pick-up of order activity in September was muted … The uncertainty in the economy makes it difficult to predict the market, but our best assessment is that the total market in Europe 29 will amount to approximately 230,000 trucks this year, which is the same forecast as earlier. Our best assessment for 2013 is that the total market will be on the same level as in 2012.
“In the short term, we have a tough quarter ahead of us to manage the consequences of the slow demand in the third quarter. However, with the production adjustments we are currently implementing, we believe we will have the right level of capacity going into 2013.”
Total Volvo Group revenue in Q3 2012 was SEK 69,111m (US$10.44bn), versus SEK 73,321m in Q3 2011, a decline of 5.7%. Adjusted for currency and consolidation changes, revenue fell 4%. Net revenue for the Volvo Group’s Industrial Operations only in Q3 2012 decreased by 6.2% to SEK 67,143m (SEK 71,559m). Net revenue increased in North America (15%), eastern Europe (2.0%) and Other markets (9.0%), whereas it decreased in western Europe (-12%), South America (-23%) and Asia (-14%).
The Trucks business reported unit deliveries of 50,511 in Q3 2012, down from 54,783 in Q3 2011, with deliveries in Europe at 18,130, down from 19,384. Revenue in the latest quarter was SEK 44,309m, down 6.5% from Q3 2011’s SEK 47,412m. Bus deliveries during Q3 2012 amounted to 2,137 units, compared with 2,954 in the same period last year, while revenue fell 15.6% to SEK 4,256m, from SEK 5,043m.
Despite the Q3 fall, group year-to-date revenue was SEK 231,853m versus SEK 223,860m, a rise of 3.6%, while net revenue for the Volvo Group’s Industrial Operations only was up 3.3% at SEK 226,115m (SEK 218,801m).
Q3 group operating income amounted to SEK 2,927m, versus SEK 5,774m in the previous year, including a non-recurring negative impact amounting to SEK 1,060m, comprising SEK 560m relating to a restructuring in UD Trucks and a SEK 500m adjustment of warranty reserves. Compared to Q3 2011, changes in exchange rates had a positive impact of SEK 594m. The operating margin in the latest quarter was 4.2% (7.9%). Adjusted for the non-recurring items, the operating margin was 5.8%. Under absorption of fixed costs in the manufacturing system undermined earnings in the range of SEK 1bn. Year-to-date group operating income was SEK 16,501m (7.1%), versus SEK 19,944 (8.9%) in the same period of 2011.
Operating income for the Volvo Group’s Industrial Operations only in the latest quarter amounted to SEK 2,544m, compared to SEK 5,516m in Q3 2011. As indicated, operating income was negatively impacted by under absorption of costs in the range of SEK 1bn as a consequence of reductions in production rates in order to adapt to declining demand and address increasing inventories. Earnings were also negatively impacted to the tune of SEK 560m related to the decision to stop production of UD trucks for the North American market and the restructuring in Japan, as well as the increased warranty reserves in Trucks of SEK 500m. The operating margin was 3.8%, which was lower than the 7.7% for Q3 2011. Year-to-date operating income was SEK 15,399m (6.8%), against SEK 19,242m (8.8%).
The Trucks business reported operating earnings of SEK 1,695m (margin of 3.8%) in Q3 2012, down 57.4% from Q3 2011’s SEK 3,983m (8.4%), while the Bus business reported a loss of SEK 58m (-1.4%) in the latest quarter, a SEK 263m reversal from the profit of SEK 205m (4.1%) reported in Q3 2011. Year-to-date earnings in the Trucks business amounted to SEK 9,336m (6.6%), versus SEK 13,361m (9.4%) in 2011, while the totals for the Buses business were SEK 180m (1.2%) and SEK 806m (5.3%), respectively.
In the Trucks business, Volvo noted that in Q3, in addition to one-off costs, profitability was also impacted by under absorption of costs in the range of SEK 600m as a consequence of lower production rates. A changed market mix, with a higher proportion of sales in North America and lower in Brazil and Europe, also continued to weigh on earnings. Compared with Q3 2011, operating income was negatively impacted by changes in currency exchange rates in an amount of SEK 81m. In the Buses business, operating income was negatively affected by continued low volumes, a negative market mix and low capacity utilization. On the positive side, operating income was impacted by changes in currency exchange rates in an amount of SEK 79m.
Group net income in Q3 2012 was SEK 1,382m, down from SEK 3,895m in Q3 2011, while the respective year-to-date totals were SEK 10,417m and SEK 13,317m.
The company has noted that costs associated with the reorganisation of the Volvo Group’s dealer network and sales and marketing organisations in the Europe, Middle East and Africa (EMEA) regions are currently estimated to be in the magnitude of SEK 900m starting in Q4 2012 and going forward. Resulting costs savings benefits from the reorganisation are anticipated to have a gradual impact from the second half of 2013 and onward.
