Volvo Construction Equipment (Volvo CE) has reacted quickly to a slowing global market – which was down 11% in the year to August – and uncertainties about the strength of demand in 2013 by slowing the rate of production in its factories and reducing the number of machines held in stock at its dealerships. This ‘under absorption’ of costs in the factories put pressure on earnings in the third quarter of 2012, as did increased price competition and a less favorable geographical and product mix, which saw fewer larger machines sold, particularly to the weakened mining sector.
Net sales in the three months of July-September decreased by 9% to SEK 13,272 M (14,571 M). Adjusted for currency movements, net sales were down by 8% during the period. Order intake was also affected, with the value of the order book at September 30 being 24% lower than on the same date in 2011.
This slowdown of global demand in the third quarter of 2012 also weighed on profitability, with operating income at SEK 650 M down from the SEK 1,438 M reported in the same period the year before. This also dented Volvo CE’s operating margin, which at 4.9% was below the 9.9% achieved in Q3 2011.
“The lower economic activity and the uncertainty about the future are impacting customers’ willingness to invest in new equipment,” says Pat Olney, president of Volvo CE. “As a consequence we have reduced production in our facilities and managed to reduce both our own inventories and those at our dealers.”
Market conditions for the full year 2012 show few signs of change in the short term. The European market is expected to be down by 0 to 10% (previous estimate: flat), while North America is expected to increase by between 15 to 25% (unchanged forecast). South America meanwhile is still on course to rise by between 0 to 10% and Asia (excluding China) remains expected to rise by between 0 to 10%. Demand in China itself is projected to fall in 2012 by between 25 to 35%, down further from the 15 to 25% previously forecast.