Volvo Earnings Preview: Macro Environment Impact Causes Revenue Downturn

According to Bloomberg consensus estimates, for the first quarter:

- Revenue is expected to be $11.991 billion, a decrease of 4.72% year-over-year and a 13.8% decline quarter-over-quarter.

- Net profit is anticipated to be $1.156 billion, down 1.95% year-over-year but up 8.48% quarter-over-quarter.

- Diluted adjusted earnings per share are projected to be $0.59, a decrease of 10.12% year-over-year and an increase of 5.94% quarter-over-quarter.

Volvo Group is a historic Swedish multinational company specializing in commercial transport solutions and construction equipment. Its core businesses include:

1. Commercial Vehicles: This includes heavy-duty trucks (such as the Volvo FH, FM, and FMX series), medium-duty trucks (such as the Volvo FL and FE series), city buses, long-distance coaches, and specialized chassis (such as those for fire engines, construction vehicle platforms, etc.).

2. Construction Equipment: Volvo produces a variety of construction machinery, such as excavators, wheel loaders, articulated haulers, road graders, compactors, etc., which are widely used in civil engineering, mining, infrastructure construction, and agricultural operations.

3. Marine Propulsion Systems: Through its subsidiary Volvo Penta, the company offers marine engines, propulsion systems, and comprehensive after-sales services for leisure boats, workboats, commercial shipping, and the marine energy market.

4. Industrial Drive Systems: Provides complete engine and generator set solutions for off-highway applications, such as generators, pumps, and compressors.

It is noteworthy that the Volvo Group shares the same brand name and historical origins with Volvo Cars. In 2010, Geely Holding Group acquired Volvo's car business from Ford, including related intellectual property, production equipment, research and development capabilities, as well as a global sales and service network, ensuring its independent operation. Meanwhile, the Volvo Group has focused on commercial vehicles, construction equipment, and other businesses.

Chart: Volvo Revenue Composition

Specifically, Volvo's core business is concentrated in the truck and construction equipment sectors, both of which are sensitive to changes in the macroeconomic environment. The truck business is influenced by global economic activity, logistics demand, environmental regulations, and the competitive landscape of the industry, while the construction equipment business is closely related to the health of the construction industry, government investment policies, raw material prices, credit environment, and technological advancements and customer demands in the industry. Accurately grasping and effectively responding to these factors is crucial for the company to maintain its market position and achieve steady growth amidst economic cycle fluctuations.

2023 is considered a potential peak in the current business cycle, and the company has adopted a series of response strategies accordingly. For example, to adapt to the demand for capacity adjustment in Europe, temporary staff reductions were made at the Gothenburg plant in March. Although the US business has not been directly affected by such measures, the expected decline in delivery volumes is anticipated to be gradual rather than sudden, consistent with the normal fluctuations of the business cycle.

Taking the truck business as an example, the company has set a sales target of 280,000 heavy trucks for the European market in 2023. It is noteworthy that several original equipment manufacturers, including Volvo, have increased their market share in the US. The reasons for growth vary, such as Daimler Trucks and Navistar recovering from supply chain issues the previous year, while Volvo and Navistar benefit from the launch of new models.

Given the above market dynamics, Deutsche Bank analysis believes actual market performance may be better than initial forecasts. As a result, Volvo has raised its sales expectations for the North American market, with a target sales volume increased to 290,000 units. In terms of regional delivery cycles, the European market is gradually returning to normal levels, while the US market delivery cycle is still slightly above the regular standard.

Specifically, the first quarter truck orders face a severe year-over-year comparison, with an expected decline of between 15% and 20%, but are essentially stable compared to the previous quarter. Despite a weak market environment, it is not expected to have a significant impact on Volvo's overall outlook for 2024, and no substantial adjustment of expectations is necessary.

Chart: Order Numbers and Forecast

In terms of the construction equipment market, although there has been a decline in deliveries, the performance of the US market has been relatively better than the European market. Given the industry's high dependence on inventory conditions, maintaining current price stability should be the core strategy at present.

Although the operations of Volvo Cars are not directly included in the group's overall financial statistics and performance assessments, as an influential segment, its operating status, market performance, and future development plans will undoubtedly have a significant impact on the group’s overall image, investor confidence, and even stock price trends.

In comparison, Volvo Cars showed a robust growth trend globally in the first quarter of 2024. In the first quarter of this year, Volvo Cars' global cumulative sales reached 182,687 units, achieving a 12% year-over-year increase. In March alone, global total sales recorded 78,970 units, a 25% increase over the same period last year, with new energy models performing particularly well, with monthly sales reaching 33,558 units, a 24% year-over-year increase, accounting for as much as 42% of the month’s global sales.

Regionally, significant sales growth was achieved in the European and American markets. Although the overall performance of the Chinese market has grown, sales of pure electric models have declined. The strong performance of new energy models globally, especially their high proportion of global sales in March, demonstrates Volvo's positive progress in its electrification strategy.

Volvo's revenue for the first quarter may experience a moderate slowdown in growth due to systemic production adjustments triggered by the continuous normalization of demand. However, factors such as carry-over pricing, strict cost control, and a reduction in supply disruptions are expected to support a sequential quarterly improvement in profitability. The operating profit margin is expected to expand by nearly 100 basis points compared to the previous quarter (a year-over-year decline of about 70 basis points), reaching around 13%. Within this, the profit margin for the truck business is expected to be close to 14%, although down by about 30 basis points compared to the same period last year, mainly due to the positive pricing effect being partly offset by reduced deliveries.

Chart: Profit Situation and Expectations

The company's dividend yield TTM (Trailing Twelve Months) is 2.66%, with a relatively stable history of dividend payouts.

The main risks include Volvo's exposure to cyclical end markets in the truck and construction equipment (CE) industries. A weaker macroeconomic environment could impact sales, and actual pricing may be weaker than expected. Additionally, depreciation of major currencies (euro and dollar) is a key downside risk.