Volvo posts fall in Q4 earnings

Swedish truck maker AB Volvo reported a smaller than expected fall in fourth-quarter earnings in the face of slowing demand and announced plans for a payout to shareholders that exceeded market expectations.

The downturn in the volatile truck cycle that will be a test of Volvo’s resilience with CEO Martin Lundstedt having spent his four years at the helm boosting flexibility across the group.

With forecast-beating earnings and shareholder payout, analysts saw clear signs Lundstedt’s work is paying off.

“This is really what people have been waiting for,” Handelsbanken Capital Markets analyst Hampus Engellau said.

“The first quarter will be weaker. But if it is weaker from these levels, that still makes for very strong figures.”

Operating profit at the maker of trucks, construction equipment and buses fell to 9.2 billion crowns ($969 million) from a year-ago adjusted 10.6 billion, beating an analysts’ mean forecast of 8.4 billion, according to Refinitiv estimates.

The rival of Germany’s Daimler and newly listed Traton said it was focused on adapting to lower volumes and while its production in Europe was well aligned with demand in Europe, further cuts were needed in North America.

“Our increased profitability and strong financial position allow us to invest in our future as well as return cash to our shareholders,” Lundstedt said in a statement.

Strong truck sales ahead of the current slump have helped drive cash generation at Volvo in recent years, allowing it to give an extraordinary payout to shareholders a year ago and fuelling analysts’ expectations for more of the same.

Reuters

Volvo proposed raising its ordinary dividend to 5.5 crowns per share from a year-ago 5.0 crowns and said it planned an extra dividend of 7.5 crowns per share, up from the 5.0 crown per share bonus payout last year.

Analysts had on average forecast a total payout of 10.36 crowns per share for 2019, Refinitiv estimates showed.

The Gothenburg-based company maintained its forecast for heavy truck markets to contract just under 15% in Europe and nearly 30% in North America this year, an outlook broadly in line with that delivered by US rival Paccar earlier this week.

Order intake of its trucks, which includes brands such as Mack and Renault, was down 10 percent year-on-year in final quarter of last year, a far milder slump than the 45 percent decline recorded in the preceding quarter.

Meanwhile, Volkswagen’s Traton commercial truck unit said on Thursday it had offered $35 a share, or $2.9 billion, for the shares of US truck maker Navistar International that it does not already own, and investors bet the bid will go higher.

Navistar shares shot up by 50% to just over $36 a share in after-hours trading following Traton’s proposal, suggesting investors expect a potential deal could be richer than Traton’s opening offer. Traton said its offer was subject to Navistar and Traton reaching a merger agreement.

Truck makers across the globe are struggling to stem the costs of developing next generation powertrains during an industry downturn, a step which is forcing the truck makers to seek new alliances to share costs. Navistar and VW in 2017 said they would collaborate on electric truck development.

Traton shares were up 0.4% early on Friday, with Volkswagen trading 0.7% lower and underpeforming Germany’s blue-chip DAX index, which was up 0.2% .

Volkswagen has made its interest in buying the remainder of Navistar clear since acquiring an initial 16.6% stake in 2016, which has since grown to nearly 16.8%. Traton and Navistar have been collaborating on purchasing and certain technology developments, aiming to cut annual costs by $200 million a year.

Traton will have to win over Navistar’s largest shareholder, financier Carl Icahn, whose fund controls 16.9% of Navistar’s shares. Icahn and two other activist funds, Mark Rachesky’s MHR Fund Management and Gabelli Funds, together own 40% of Navistar’s shares, according to Refinitiv data.

Rachesky and another MHR executive, Raymond Miller, sit on Navistar’s board, as does a representative of Icahn’s interests. Traton Chief Executive Andreas Renschler and the German truck maker’s chief financial officer, Christian Schulz, also have seats on Navistar’s board.

Navistar, based near Chicago, called Traton’s offer unsolicited in a statement and said its board would “carefully review and evaluate the proposal in the context of Navistar’s strategic plan for the company.”

The company has been restructuring its operations under Chairman and Chief Executive Troy Clarke since 2013, and last fall rolled out a new five-year plan called “Navistar 4.0” that aims to increase pre-tax profit margins to 12% by the end of 2024 from just under 8% for the fiscal year ended Oct. 31.

Traton includes the European commercial truck brands MAN, Scania and Volkswagen trucks, but it has lacked a strong North American footprint to compete with Daimler AG’s Freightliner operation, Paccar Inc, which owns the Peterbilt and Kenworth brands, or Volvo Group’s Mack truck business.

Volkswagen floated an 11.5% stake in Traton last June. The subsidiary’s shares have trended down from the 27 euro offering price and are trading at 23.23 euros.

The sector is also highly cyclical. Heavy-duty class 8 truck orders were down most of last year in North America compared to a year earlier, according to data from ACT Research.

Before Traton’s offer, Navistar shares had been on a downhill run, off nearly 17% since the start of 2020. The US truck maker had told investors it expected overall industry demand for trucks and school buses in its core markets to fall by 20% this year.

Reuters