MERCEDES-BENZ GROUP AG STOCKHOLM (Reuters) - Truck maker AB Volvo (>> AB Volvo) posted core earnings well below expectations on Friday as it struggled with slow demand for European trucks at the start of the second quarter and a weakening market for construction equipment in China.
The profit miss raises pressure on Sweden's biggest company by sales - and the country's top private sector employer - to show that a sweeping three-year plan to boost profitability is starting to boost its bottom line significantly.
Shares in Volvo, which makes trucks, construction gear, buses and engines, slid 5.0 percent to their lowest level in more than five months, underperforming the European autos index <.SXAP> which eased 1.6 percent by 1219 GMT (1:19 p.m. BST).
The company, vying for market leadership with Germany's Daimler AG (>> Daimler AG) and VW's (>> Volkswagen AG) Scania and MAN (>> Man SE) brands, said overcapacity in its European truck plants, falling demand for trucks in Brazil and construction gear in China had hit earnings.
Volvo Chief Executive Olof Persson said he was still confident the Gothenburg-based group would meet its target of raising earnings by 9 billion crowns (771 million pound) by the end of 2015 from 2012, as it continued to shed thousands of white-collar jobs.
"We are not working in a theoretical world," Persson told a news conference. "And we are going to adjust and make sure that we are fulfilling the targets we have set up to 2015."
Volvo said operating profit excluding restructuring charges rose to 4.3 billion crowns ($629 million) from 3.3 billion a year earlier and below a forecast for 5.0 billion in a Reuters poll of analysts.
Handelsbanken Capital Markets analyst Hampus Engellau said in a research note that the stakes were getting higher for Volvo's second half, given that expectations for second quarter earnings already factored in weak demand.
"However, (the) real kicker if Volvo delivers is still 2015, but this is far out and Q2 is not adding more confidence on this," he said in the note.
Christer Gardell, co-founder of activist investor Cevian Capital, which is Volvo's second biggest owner by votes, said this week the truck maker should be able to end 2014 with a double-digit operating margin.
Volvo's operating margin hit 4.9 percent in the second quarter up from 4.5 percent a year earlier. The group's target is to boost its margin by 3 percentage points above the nearly 9 percent level it had when the efficiency scheme was launched.
SLOW START IN EUROPE
Truck makers have seen North American sales accelerate this year as the economy picks up. In Europe, the need to replace ageing fleets helped but orders kicked in later than hoped.Volvo, which makes heavy-duty trucks under the Renault, Mack and UD brands as well as its own name, said the order intake for trucks fell 6 percent year-on-year in the second quarter, steeper than the 3 percent fall expected by analysts.
"Following the weak first quarter, the European market recovered gradually during the second quarter, but the improvement started somewhat later than we had anticipated," Volvo said in a statement.
The company also said it had taken steps to cut output in Brazil after the country's rapidly cooling economy sent Volvo's order intake down 42 percent across the South American region.
In China, Volvo said demand for construction equipment was likely to remain weak for several quarters.
Volvo stood by its 2014 forecasts for truck markets across the world, implying decent growth in North America and a small decline in Europe due to the weak initial months of the year.
(Reporting by Niklas Pollard and Johannes Hellstrom; Editing by Alistair Scrutton and David Clarke)
By Niklas Pollard and Johannes Hellstrom
