Volvo optimistic on truck demand after profit surge

By Esha Vaish

STOCKHOLM (Reuters) - Swedish company Volvo has raised forecasts for truck demand in Europe for the current year after producing strong third-quarter earnings that exceeded expectations.

The company, which makes trucks, construction equipment, buses and engines, also forecast higher demand next year in its other main market North America.

Strong demand has been a feature of the European and North American markets, which account for two-thirds of Volvo's truck sales, as buoyant economic conditions have given fleet operators the confidence to bulk up and expand.

Robust demand has also come from a need for buyers to renew fleets which were starved of investment during the last cyclical downturn. But the surge has caused bottlenecks, leaving Volvo having to cope with higher raw material and labour costs.

The company's earnings, published on Friday, showed progress in curbing costs, with adjusted margins rising 11.1 percent over the quarter, exceeding its 10-percent target thanks to slightly lower R&D costs, improved capacity utilisation and higher sales.

"Although this is the best third quarter ever for the group, it does not mean that we have reached our full potential. There is more to do to improve profitability and drive cash flow," CEO Martin Lundstedt said in a statement.

Volvo also said that supply chain hold-ups were expected to persist in North America, where it also faces labour shortages and higher raw material costs due to the trade war.

The company said earlier this week that it could face "material" costs to fix trucks and buses sold in its two largest markets, where an issue with a component could be causing some engines to exceed nitrogen oxide emissions limits.

On Friday, the company gave no immediate update on the issue.

Jefferies said that the margin growth showed that truck supply chain issues had eased and said that it was surprised by the strong U.S. outlook for 2019.

The analysts at Jefferies also said that they expected Volvo's outlook for a flat Europe truck market in 2019 would be proved conservative and forecast that profit consensus would rise by low single digits.

Volvo's third-quarter adjusted operating profit jumped to 10.25 billion Swedish crowns ($1.13 billion) from 6.95 billion and topped the 9.59 billion forecast in a Reuters poll of analysts.

Order intake of trucks, which sell under brands Volvo, Mack, Renault and UD Trucks, rose to 65,348 vehicles, above the 58,839 vehicles expected by analysts.

"The report is a beat on all levels," said Handelsbanken Capital Markets analyst Hampus Engellau, who has a "buy" rating and a 190 crowns target price on the stock.

Volvo shares were flat percent at 136.85 crowns at 0710 GMT.

($1 = 9.0337 Swedish crowns)

(Reporting by Esha Vaish in Stockholm, editing by Niklas Pollard and Jane Merriman)