October 19, 2018 / 5:43 AM / a month ago

Demand outlook, emissions worries put brakes on truckmaker Volvo

STOCKHOLM (Reuters) - Swedish truckmaker Volvo (VOLVb.ST) forecast slower demand for trucks in Europe and China next year, fuelling investor concerns these major markets may have peaked and sending its shares into reverse.

It also gave no clarity on the potential costs of fixing an emissions issue with some trucks and buses sold in North America and Europe disclosed this week, causing its stock to fall 4.8 percent despite its third-quarter profit having topped consensus.

Volvo, which also makes construction equipment and engines, forecast truck market demand in China would fall about 13 percent to 970,000 units next year and predicted a contraction in Europe of about 5 percent to 300,000 units.

It also expects demand in the Chinese construction market to be between flat and down 10 percent. Its comments came after China’s economic growth slowed to its weakest quarterly pace since 2009.

CEO Martin Lundstedt blamed the Volvo slowdown in China partly on the trade war with the United States, but also said new emission legislation had led truck clients to hesitate after a number of years of strong growth.

“Generally speaking there is a certain worry about what will happen when it comes to tariffs and different other types of uncertainty in the geopolitical and macroeconomic climate,” he told Reuters.

FILE PHOTO: The logo of Swedish truck maker Volvo is pictured at the IAA truck show in Hanover, September 22, 2016. REUTERS/Fabian Bimmer/File Photo

“But still I think the overwhelming part of our customers’ sentiment is really good activity in different markets... So what we see, that is not really a strong trend of a downturn.”

Robust demand in recent years has come from a need for truck buyers to renew fleets starved of investment during the last downturn. But the surge has caused bottlenecks, leaving Volvo having to cope with higher raw material and labor costs.

Volvo, in which China’s Geely Holding (0175.HK) has a 15 percent stake, said on Friday that supply chain hold-ups were expected to persist in North America.

EMISSIONS CLOUD OUTLOOK

Volvo said on Tuesday it could face “material” costs as some of its engines could be exceeding limits set for toxic nitrogen oxide emissions as catalytic converters were wearing down more quickly than expected in certain situations.

Volvo management fielded multiple questions from analysts about the scale of the issue and the cost of dealing with it on Friday, but provided little in the way of fresh detail.

Lundstedt told analysts he viewed the problem as a “one off” rather than a “going concern”, adding that some trucks had been fixed already and that Volvo had identified potential solutions.

The company reported a jump in third-quarter adjusted operating profit to 10.25 billion Swedish crowns ($1.13 billion) from 6.95 billion, topping the 9.59 billion forecast in a Reuters poll of analysts.

It also showed progress in curbing costs, with adjusted margins rising 11.1 percent, exceeding its 10-percent target thanks to slightly lower R&D costs and higher sales.

Reporting by Esha Vaish in Stockholm, additional reporting by Johannes Hellstrom; editing by Jane Merriman and Keith Weir

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