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Volvo Q1 Earnings Presage Tough Times Ahead

Swedish truck maker AB Volvo (OTCMKTS:VLVLY) reported lower revenue and profit for the first quarter after weathering the early impacts of the coronavirus pandemic that it forecasts will dramatically reduce business results for the rest of the year.

"These began affecting our operations in China in February and had a severe impact on the Group as of mid-March, when our global supply chain was disrupted and production halted in most parts of our operations," CEO Martin Lundstedt said.

Net sales were SEK 91.4 billion ($923 million), down 16% from SEK 107.2 billion in the year-ago quarter.

Adjusted operating income amounted to SEK 7,14 billion ($72.1 million) was down from SEK 12.69 billion. The operating margin was 7.8% compared with 11.8% in the year-ago quarter.

Operating cash flow of negative SEK 4.1 billion compared to positive cash flow of SEK 2.7 billion a year ago.

Truck deliveries fall

New trucks deliveries fell 24% in the quarter with all regions except South America reporting lower volumes. Truck sales declined 15% to SEK 58.0 billion. Adjusted operating income was SEK 3.9 billion compared with SEK 8.3 billion in the first quarter of 2019. The 6.8% margin was down 44% from 12.2% a year ago.

First-quarter new truck orders declined 16.1% year-over-year but grew increasingly worse as the quarter progressed. Net orders in March were down 75% from February.

"Since the end of March, net order intake has been negative as a consequence of increasingly cautious customers and dealers cancelling already placed orders," Lundstedt said.

Orders in North America fell 13% to 4,732 from 5,469 in the year-ago period. Mack Trucks was an exception with orders up 15% to 3,744 from 3,243.

In North America, registrations of new trucks tumbled 26% to 57,459 from 77,216 a year ago. The Volvo Group, consisting of Volvo Trucks North America and Mack Trucks, were down 21% and 28% respectively.

Forceful actions

"The speed at which we were impacted [by COVID-19] forced us to take immediate and forceful actions to quickly reduce spending," Lundstedt said. "Measures such as salary reductions, temporary lay-offs and reduction of purchased services have already been implemented," adding that it will be difficult to match necessary cuts to falling business activity going forward.

Volvo Trucks North America will resume production at its New River Valley manufacturing complex in Dublin, Virginia on April 27 at a reduced rate on one shift and with reconfigured manufacturing processes to allow for increased social distancing of employees. Mack Trucks said Thursday it plans to restart production on May 11 depending on supplier readiness.

"Customers are likely to reduce their capacity and postpone buying new vehicles and machines to adapt to lower business activity," Lundstedt said. "It is clear that we have entered a tough period with both production stops and low demand having a substantial negative impact on our profitability."

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