Volvo braces for 2020 slump as truck orders hit the brakes

Niclas Rolander

Volvo Group is preparing for more output cuts after forecasting a slump in truck deliveries next year in North America and Europe on weaker demand.

Orders for heavy trucks slumped 45% from a year earlier, Volvo said Friday, which was more than analysts had expected, and deepening a drop from the the second quarter. For next year, Volvo expects the North American market to decline by 29% and Europe by 14%, after above-average demand in both regions for some time.

Volvo shares declined the most in a year, before recovering to trade as much as 2.4% higher after Chief Executive Officer Martin Lundstedt detailed measures to navigate the downturn during an analyst and investor meeting.

Bloomberg is prediction a "sharp deterioration in 2020 profitability" for Volvo Group. The Volvo VNL 760 is shown.

“Volvo has already begun to reduce production volumes and, in our view, is much better equipped heading into this downturn than it was in the past,” Danske Bank credit analysts including Natasja Cordes said in a note. A “very solid balance sheet,” as well as efforts to become more flexible and safeguard the quality of its order book “puts Volvo in a good position.”

Truckmakers are adjusting to leaner times as the cycle turns. Last week, the IMF made a fifth-straight reduction to its 2019 global economic forecast, citing trade tensions for its weakest growth projection since 2009. As a result, Volvo’s customers are holding back on investments, Lundstedt said, foreshadowing “action” to maintain “good” profitability.

What Bloomberg Intelligence says…

“Volvo looks set for a sharp deterioration in 2020 profitability, in our view, following its weakest truck order intake since the 2009 recession in 3Q, predicting European and U.S. markets will fall by 15-30% next year. Production levels are being adjusted, but inherent operating leverage – with profit doubling in the 2016-19 cycle – demonstrates the challenge faced.”– Johnson Imode, BI Industrials analyst

The interior of the Volvo VNL 760.

The company still beat its own 10% margin target during the third quarter with a return of 11%, as Volvo factories clear significant backlog following a surge in orders over the last couple of years. This will help the CEO’s quest to defend profitability even as conditions weaken. Third-quarter adjusted operating profit rose to 10.9 billion Swedish kronor ($1.1 billion), beating analyst expectations.

“The correction that we have anticipated is coming in our main markets,” Lundstedt told journalists and analysts in Stockholm. “We are well prepared; we have been working with this for a while now both when it comes to Europe and North America.”