Volvo Expects a Slower 2017

October 21, 2016, 10:10 AM UTC
Volvo Group Test Autonomous FMX Truck At Boliden Mine
A Volvo Autonomous FMX self-driving truck, manufactured by Volvo Group, drives through underground tunnels, at Kristineberg mine in the Boliden area in Arvidsjaur, Sweden, on Friday, Sept. 2, 2016. The Autonomous FMX is equipped with LiDAR light radar sensors and GPS technology to create 3D maps of the vehicle's surroundings enabling it to navigate its way through tunnels. Photographer: Krister Soerboe/Bloomberg via Getty Images
Krister Soerboe — Bloomberg via Getty Images

Swedish truckmaker Volvo forecast lower heavy-duty truck markets on both sides of the Atlantic next year after reporting a surprise rise in profitability in the third quarter despite a slide in sales.

Volvo, (VOLVY) a rival of Germany’s Daimler and Volkswagen’s Scania and MAN, said on Friday it expected industry-wide truck sales to fall by about 5% in Europe and 10% in North America.

European truck sales have been robust for most of last year and this as higher freight volumes prompted companies to invest in aging fleets after holding back during a prolonged economic downturn in many parts of the region.

Volvo CEO Martin Lundstedt pointed to two factors behind the expected cooling of demand in Europe.

“One effect is a softening UK following Brexit, and also that we see that the average vehicle age is coming down so the overswing that we have had in replacement will come down,” he said. “But it is still a market on good levels.”

In North America, however, demand has been less buoyant after peaking early last year, with sales of heavy-duty vehicles tumbling as the industry seeks to address overcapacity and scale back inventories amid weaker freight rates.

Volvo shares, which have gained more than 20% this year, were down 1.5% by 09:03 GMT compared with a broadly flat STOXX Europe 600 Industrial Goods & Services Index.

Volvo’s adjusted operating earnings fell to 4.85 billion crowns ($545.3 million) from 5.09 billion, roughly in line with the average forecast of 4.83 billion in a Reuters poll of analysts.

Still, Volvo showed its years of cost-cutting under Lundstedt’s predecessor were paying off, reporting a rise in profitability for its trucks business despite a double-digit fall in sales volumes due to the downturn in the United States.

Sweden’s biggest listed company by revenue said its overall adjusted operating margin inched up to 7.0% from 6.9% while for trucks alone it jumped to 8.2% from 7.2%, well ahead of the 7.1% expected by analysts.

“The major take-away is really that they have slammed the brakes on production a lot during the quarter in North America to cut inventories, but are still generating an operating margin above 8% in trucks,” Handelsbanken Capital Markets analyst Hampus Engellau said.

Volvo, whose brands also include Mack, Renault and UD Trucks, said orders fell 7% in the third quarter, slightly better than an 8% decline expected by analysts. Besides trucks, the company makes buses, construction equipment and engines.

Rival Daimler (DDAIF) said on Friday that falling demand for trucks in North America and a slump in sales in markets such as Brazil had forced it to lower its full-year revenue forecast.