10/24/2008 Sales up 2% in challenging market conditions

After a first and second quarter with record sales and record income, Volvo Construction Equipment saw sales growth decelerate more rapidly than expected during the third quarter of 2008.

Despite the tough market conditions net sales in Volvo Construction Equipment rose by 2% to SEK 13,174 M (12,962) in the third quarter. Adjusted for changes in the exchange rates and acquired and divested units, net sales rose by 7%. Operating income declined to SEK 134M (839) and the operating margin was 1.0% (6.5). The decline in operating income was driven by significant cost inflation primarily on the price of steel, negative currency impact and a restructuring cost of 300 MSEK for the move of the motor grader business. 

Mixed picture in global markets

Demand in Europe and North America fell as a consequence of lower activity primarily within residential construction and increased hesitancy among customers in the wake of financial turmoil. The European market is expected to decline by 15-20% in 2008 compared to last year (from a previous forecasted decline of 5-10%). North America is expected to decline by 20% which is the same as the forecast in the second quarter.

Markets outside the United States and Europe have seen a sales increase in the third quarter. South American sales were up 58%, Asian sales were up 17% and other international markets increased sales by 43% during the third quarter. However, there are increasing signs of demand weakening also in markets outside Europe and North America. Overall in 2008, these markets are expected to grow by 15-20% compared to the previous estimate of 20%.

Building for a strong future

In September Volvo CE announced it would move its motor grader activities currently located in Goderich, Canada, to the company’s facility in Shippensburg, USA. This decision has been taken to improve competitiveness and profitability, and it will reduce the exposure to exchange rate fluctuations.

To mitigate the effects of weakening demand, Volvo CE is now quickly lowering production rates and during September and October it gave notice of redundancy to employees in Sweden, among other countries. Volvo CE is also implementing actions to reduce operating expenses.

Other notable events in the third quarter include showcasing a new series of heavy tracked feller bunchers that will be launched in early 2009. Over the past several years, Volvo CE has become a major manufacturer of forestry based solutions for a variety of applications. 

Table 1. Volvo Construction Equipment, net sales by market area, in millions of Swedish Krona (SEK)