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Volvo sees full effects of strategy overhaul by 2015

Volvo truck maker CEO Olof Persson gestures during a news conference in Stockholm October 25, 2011. REUTERS/Bertil Ericson / SCANPIX
Volvo truck maker CEO Olof Persson gestures during a news conference in Stockholm October 25, 2011. REUTERS/Bertil Ericson / SCANPIX

By Niklas Pollard and Helena Soderpalm

GOTHENBURG, Sweden (Reuters) - World number two truck maker Volvo said on Wednesday its strategic overhaul would boost operating earnings by around 9 billion crowns in 2015, as the introduction of new models this year and a cost cutting drive ahead paid off.

This would be around a 50 percent jump on the company's full year 2012 operating earnings of 17.6 billion crowns.

Chief Executive Olof Persson said he expected to boost earnings by about 2 billion crowns ($306.8 million) this year and 6 billion in 2014, excluding announced restructuring costs.

The forecast was based on full-year net sales of 300 billion crowns. Its 2012 sales were 303.6 billion.

Speaking to investors and analysts in Gothenburg, Persson said 2014 would be a year of "efficiency" as it looked to bolster its profitability drive.

"With all the activities we are undertaking in terms of our structure and with the progress we are making, I hope they feel that we really have this under control," he said on the sidelines of his presentation.

"That we are doing the right things, doing it systematically and doing it step by step."

Volvo, which makes trucks under the Renault, Mack, UD and Eicher brands as well as its own name, has seen its stock underperform those of its rivals in recent months after slumping due to the unexpectedly poor earnings in the third quarter.

In October Volvo said third-quarter core operating earnings fell to 2.50 billion crowns from a year-ago 3.48 billion, well below a forecast 3.34 billion in a Reuters poll of analysts.

After its biggest ever launch of new truck ranges in 2013, next year would see the new models underpin sales while R&D costs and headcount come down and a network of workshops serving its trucks in Europe is streamlined further, the company said.

Volvo, whose profitability lags behind rivals such as Scania , has set a target to raise its operating margin by 3 percentage points by the end of 2015.

The company has also held out the prospect it could improve the margin still further - by a full 5 percentage points - excluding the potential impact from economic headwinds.

It said in October it would cut about 2,000 white collar jobs and consultants as part of its efficiency push which also includes reorganizing distribution and concentrating production at fewer lines at its plants.

While cutting costs in mature markets such as Europe, the strategy also leans heavily on a push into emerging markets with less costly trucks tailored to fit market demand there and produced in countries such as India, China and Thailand.

But progress toward that goal has been bumpy.

The company, Sweden's biggest by sales and number of employees, posted a margin of 3.1 percent for the first nine months of the year, down from a year-ago 7.4 percent, denting confidence among some investors and analysts.

By comparison, Scania's operating margin in the same period stood at nearly 10 percent.

The mean forecast, based on analysts estimates compiled by Thomson Reuters, shows the group reaching a margin of 8.1 percent in 2015 and 10.0 percent in 2016, well shy of the minimum 11.7 percent forecast by Volvo.

"What you can say is that they have clearly explained how much margin improvement they will have," Handelsbanken Capital Markets equity analyst Hampus Engellau said.

A survey of 24 fund managers by Norwegian bank DNB, published in business daily Dagens Industri, showed Volvo's operating margin is expected to reach only 7.8 percent in 2016.

"He (Persson) needs to regain the confidence of the market that he will be able to deliver what he has said and that it will not take too much time to achieve," said one fund manager.

The misgivings have been reflected in Volvo's share price.

Volvo is down 11 percent in the period compared to 3 percent fall for Scania. Daimler , with whom Volvo is vying for market leadership has gained 15 percent while Paccar and MAN SE , the latter like Scania controlled by Volkswagen , have both chalked up smaller gains.

(Reporting by Niklas Pollard and Helena Soderpalm; Editing by Alistair Scrutton and David Evans)

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