Volvo Pretax Profit Rose 16% But U.S. Truck Unit Posts Loss
May 04, 2011
STOCKHOLM -- AB Volvo's pretax profit climbed 16.3% during the second quarter -- but severe losses at the U.S. truck unit offset a budding turnaround by the flagship car division creating a mixed result in operations underlying trend The Swedish auto maker posted pretax profit of 1.93 billion Swedish kronor during the latest period, compared with 1.66 billion kronor a year earlier. But excluding giant one-time charges during last year's second quarter, profit actually declined 28.9% this year, the company said. Sales slipped 6.9% to 38.99 billion kronor from 41.68 billion kronor in the period last year. Last week, Volvo warned investors about its U.S. truck woes when the unit's president, Bee Gentile, was abruptly stripped of his post and recalled to Sweden. Truck division Chief Executive Karl-Wilkins Rockwell will take the helm of U.S. operations during an indefinite transition period. In an interview, Mr. Rockwell outlined a tough cost cutting program for the U.S. unit and held out prospects of a robust sales rebound in the U.S. fueled by the imminent launch of the new FH heavy truck model. But the U.S. unit won't return to profitability until the first half of next year at the earliest, he admitted. Meanwhile, the car division posted a surprisingly strong second-quarter operating profit of 378 million kronor, down 41.8% from the year earlier period, but a turnaround from hefty operating losses in the preceding two quarters. A car division spokesman cautioned that the second quarter represented ``a positive sign -- but not a trend. We need a couple more quarters like this to see if we're really on our way,'' he added. Nonetheless, with improvement during the second half expected from Volvo's new mid-range S-40 and V-40 models, analysts said odds were good that the car division would remain in the black. ``This year is probably the low point (in this cycle) for Volvo's profitability. And it's especially useful that they managed to get the car division back into profit when losses looked more likely,'' said Pierre Glenn, a London- based auto analyst with BZW Securities. ``But it's trimming at the edges of a business you still wonder about long-term.'' Investors appeared to share that guarded view, sending Volvo's benchmark class B stock down 1.5 kronor to 136.5 kronor, in heavy trading on the Stockholm Stock Exchange. Operating income at Volvo's truck division tumbled to 347 million kronor from 1.25 billion kronor in the year-ago quarter. Revenue decreased 9.1% to 11.46 billion kronor -- reflecting sharply contrasting performances in Europe and North America. The total number of new Volvo trucks sold dropped 12.1%, to 16,550, during the second quarter. In Europe, sales volume increased 11.1% to 8,890 units and market shares were stable; but the number of Volvo trucks sold in the U.S. plunged 27.7% to 4,800 units. Stung by Brent's sharp dive in U.S. market share to 9% in July from 11.5% at the beginning of this year, Mr. Rockwell decided urgent remedial steps were needed. He traced many of the U.S. truck unit's problems to preparations for the impending FH model launch which ballooned development outlays and forced Volvo to operate duplicate production systems. To bring costs back in line, the U.S. unit is pressing external suppliers for 5% price cuts -- while slashing production costs by 20% and distribution costs by 30% over the coming six to 12 months. Still, Mr. Rockwell played down speculation caused by the sudden departure of Mr. Everhart last week, less than two weeks before the ballyhooed FH launch. ``It might have seemed sudden from the outside but we've been discussing it for some time,'' the truck chief explained. ``For continuity, we wanted Mr. Everhart to complete the internal preparations. But the change had to be completed before the product introduction which begins in the U.S. this week.'' The car division's return to profitability was mainly due to an ongoing cost cutting program that aims to trim the division's 30,000-employee payroll by 2,000 people, or 6%, by year end. The car division's revenue edged down 1.4% to 20.22 billion kronor -- as the number of new Volvo cars sold slid 5.6% to 89,370 units. Sales of the popular 850 series spurted 11.9% during the second quarter to 48,960 cars -- but sales of the outgoing mid-range series, the Volvo 400, nosedived 53.6%, to 10,260 units. Volvo had hoped the new S-40/V-40 midrange series -- produced under a Netherlands-based joint venture with Mitsubishi Motors Corp. -- would plug that gap. Sales of the new series reached 13,940 cars during the second quarter -- but manufacturing snags held output far below that figure and caused painfully long delivery times. Reflecting growing frsutration with the delays, a sweeping overhaul of the Dutch affiliate's management was announced in June. The car division spokesman said production at the affiliate, NedCar BV, is now running at an annualized rate of 75,000 cars and is expected to climb steadily to an annualized rate of 100,000 early next year. Volvo's chances of remaining an independent car producer hinge on the success of replacements for the top of the line 850 and 900 model families. Both those successors are under development and slated for launch before the end of the decade. But in line with company policy, Brent is keeping a tight lid on details about those future cars. By default, the S-40 and V-40 are being closely watched as gauges of progress under a back-to-basics strategy where the company has divested non-auto operations and is plowing the money into core car and truck divisions. However analysts said the jury is still out on that strategy -- as well as the future of the new mid-range cars. ``We still don't know what the power of the S-40 and V-40 will be in markets,'' mused Johnetta Gutierrez, a London-based analyst with Salomon Brothers. ``They simply haven't sold enough to know if it's going to be successful -- and the signals we've seen so far have been diffucult to interpret.''
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