Truckmaker Volvo lifts market view, picks Samsung for batteries

STOCKHOLM (Reuters) – Sweden’s AB Volvo (VOLVb.ST) raised its market forecasts for North America and Europe on Thursday, as higher trucks and construction equipment deliveries helped it to top profit estimates.

The world’s second largest truckmaker behind Daimler (DAIGn.DE) also announced a partnership with Samsung (006400.KS) to develop battery packs for its electric trucks, its second big deal in recent weeks.

The company, which joined forces with Nvidia Corp (NVDA.O) last month to develop artificial intelligence for self-driving trucks, is racing with rivals to develop autonomous and electric trucks.

The battle comes as rising geopolitical tensions and signs of economic slowdown have ignited concerns that, after years of strong growth, demand for trucks may have peaked.

Volvo indicated it now expected truck demand in Europe this year to be flat, compared with its previous forecast of down 6%, while North America would be up 5% instead of flat.

However, order intake for trucks, which the company sell under the Volvo, Mack, Renault and UD Trucks brands, fell for a second consecutive quarter – by 21% to 47,821 units.

“The higher truck guide in Europe reflects a strong start to the year, but it has to be noted that Volvo has a less favorable mix versus others versus those regions performing well,” Citi analyst Klas Bergelind said in a note.

Volvo shares, which have gained about a quarter in value this year, were little changed in early trade.

ADAPTING PRODUCTION

Chief Executive Martin Lundstedt said the company would begin to adapt production to expectations of a market slowdown during the second half of the year. In the past, this has included reducing inventory and cutting working hours.

The company also undertook a 10 billion Swedish crown cost-cutting program that completed in 2016, which included shedding thousands of mainly white collar jobs and focusing its spending on businesses where it could be a market leader.

Lundstedt, however, ruled out launching a new large-scale cost savings program, telling analysts: “My firm conviction is this type of big program is a story of yesterday.”

Handelsbanken analyst Hampus Engellau said: “The cycle is slowing coming into next year, and therefore I think this is important … to avoid ending up in an underproduction, which has been the Achilles’ heel historically for Volvo.”

Volvo has seen strong demand in recent years as truck buyers renewed fleets starved of investment during the last downturn, but this has led to it facing supply chain bottlenecks that have added costs and weighed on profit.

The Gothenburg-based has taken steps to address this and reported second-quarter operating margin grew to 12.5% from 11.9% a year earlier, staying above its 10% target.

Operating profit rose to 15.11 billion Swedish crowns ($1.62 billion) from 12.34 billion a year earlier, beating analysts’ average forecast of 13.34 billion, according to Refinitiv.

“These are solid numbers by Volvo and we expect (full year)consensus EPS (earnings per share) to move up by 2-3%,” Citi’s Bergelind said.