From the depths of a pandemic-impacted second quarter, Sweden’s Volvo Group (OTC: VLVLY) finished 2020 with lower sales but a strong profit margin. New truck orders surged between the third and fourth quarters.
“We demonstrated that we have significantly improved our volume and cost flexibility, which were crucial factors behind our earnings resilience in 2020,” President and CEO Martin Lundstedt said.
Volvo revenues fell 22% — almost SEK 100 billion ($11.8 billion) — compared to a year earlier. But adjusted operating income of SEK 28.6 billion ($3.4 billion) contributed to an 8.4% profit margin. Fourth-quarter adjusted operating margin was 11.3% compared to 8.8% a year earlier. Q4 net sales were 96.9 billion SEK ($11.5 billion).
“Who would have believed that group trucks would be at peak adjusted operating margins just two quarters after entering into the devastating second quarter,” Chief Financial Officer Jan Yetterberg said on the company’s earnings call Wednesday. “But it happened as demand recovered quickly and the cost execution was strong.”
Deliveries slow as orders surge
Fourth-quarter truck deliveries were on the same level as the October-December quarter in 2019. Overall truck orders rose 61% in the quarter.
North American orders rose 167% to 24,939 trucks, driven by strong Q4 order volumes and a weak year-over-year comparison. Deliveries in North America decreased by 4% to 11,350 trucks. Volvo Trucks’ heavy-duty truck market share for full-year 2020 amounted to 9.4% compared to 9.2% a year earlier. Mack Trucks’ market share was 6.9% compared to 7%.
“There is a clear increase in demand in all our main markets and it is driven by increased freight volumes and the need to increase transport capacity to manage an increased consumption of goods,” Lundstedt said. “The good freight market helps to improve customers’ profitability and give them confidence in the future.”
But supply chain disruptions and parts shortages could present problems for at least the first quarter.
“We are continuously managing a challenging supply chain situation to meet increased demand,” Lundstedt said. “We have seen that in transportation and in parts of the steel supply. … also when it comes to the semiconductor situation.”
Shrinking employment
Volvo Group shed 7,791 employees during the year, about three salaried positions for every blue-collar job. That included about 450 salaried positions in North America.
“Our financial position is strong with net cash of SEK 75 billion ($8.9 billion) at the end of the year, excluding pension and leasing liabilities,” Lundstedt said. “This means that we can act from a position of strength.”
Binding agreements
During the quarter, Volvo signed the binding agreement to create a joint venture to make hydrogen fuel cell-powered trucks with rival Daimler Truck AG. Volvo is paying Daimler almost $700 million for a 50% share in the venture. It is expected to make fuel cell trucks for both companies’ brands in the second half of the decade.
Volvo also signed a binding agreement with Isuzu Motors to form a strategic alliance in commercial vehicles. That included the sale of Volvo’s UD Trucks unit to Isuzu for approximately SEK 20 billion ($2.4 billion).
Both transactions are expected to close during the first half of 2021.
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