Sharply lower global demand, especially in the mining sector, weighed on first quarter 2013 results at Volvo Construction Equipment (Volvo CE). But with improved profitability over the previous quarter and inventories now in balance, the company has increased production to meet the spring selling season.
Volvo CE was negatively impacted by weak demand across most of its markets during the first quarter of 2013. This effect was particularly pronounced in the mining sector, which has seen a sharp reversal of fortunes compared to the same period last year. Despite these setbacks, however, profitability improved over the fourth quarter 2012 and the company maintained its number one position in the important Chinese market.
During the first three months of 2013 Volvo Construction Equipment saw net sales in the first quarter decline by 33% to SEK 12,136 M (SEK 17,999 M in Q1 2012). When adjusted for currency movements, however, this drop was lessened to 29%.
In spite of this reduction in sales, profitability was maintained, albeit at a reduced rate. Operating income was down to SEK 500 M, compared to SEK 2,089 M in the first quarter of 2012, while operating margin was 4.1%, down from 11.6%. Earnings were not only impacted by lower sales but also by the product mix, with fewer larger, typically higher margin machines being shipped, particularly to the mining sector.
These results come amid an across-the-board decline in the market situation. Measured in units, Europe was down 18%, while North America decreased by 7% and South America by 20%. Asia (excluding China) was also down by 7%, while China itself slumped by 42%. Despite the sharp slowing of the Chinese market, Volvo has been able to maintain its market leadership position in the country, staking claim to 14.8% of the wheel loader and excavator market.
The prospects for the rest of the year remain modest. Measured in units, Europe is expected to decline by between 5% and 15%, while North America, South America and China are predicted to hover around the minus 5% to plus 5% mark. Asia (excluding China) is forecast to grow in the range from zero to 10%.
“We have been through a challenging couple of quarters but have now got our inventory pipeline in balance and stabilized the business at a lower sales volume,” commented Volvo CE’s President Pat Olney. “We still need to keep a tight rein on costs, as well as improve our geographical and product mix. But I take confidence in the fact that we have improved our margins compared to the last quarter of 2012, despite similar sales revenues.”
Notable events during the period
Volvo Construction Equipment continued to invest and innovate during the quarter. The $100 million investment program at its North American production hub in Shippensburg, PA, passed two important milestones in March, when both a new headquarters building was inaugurated on the site, and the facility began production of the company’s L60-L90 wheel loaders. This localized production will help the company become more flexible and responsive to customers in the region, as well as reducing the currency exposure.