Volvo Group CEO exits despite improved Q1 financial results, appoints Scania CEO as replacement

Volvo Group has announced its financial results for the first quarter of 2015 in which profits have improved. For the three months ending 31 March, the company revealed that it had seen an increase in its net sales of 13.9% year on year (y/y) to SEK74,788 million (USD8,603 million). However, it added that had this been adjusted to reflect acquired and divested units during this quarter, as well as currency movements, sales have only increased by around 1% y/y.

Operating income excluding restructuring charges for the quarter have almost quadrupled from SEK2,588 million to SEK7,066 million. When restructuring charges of SEK229 million are included - a fall from SEK318 million a year ago - the operating margin for the company stands at 9.1% against 3.1% during the first quarter of 2014. This result also benefits from a SEK2,471-million positive contribution from the sale of shares in Eicher Motors (see India - Sweden: 4 March 2015: Volvo sells Eicher shares worth USD292.6 mil.). Taking this into account, the operating margin grows from only 3.9% to 6.1%. There was also some beneficial impact from currency exchange rates of SEK1,282 million. Overall, net income for this period stands at SEK4,236 million, an increase from SEK1,141 million. Operating cash flow from industrial operations has also improved from negative SEK9 billion to SEK1.7 billion.

On a unit basis, its key truck business was heavily influenced by the same adjustments during the quarter. Its sales revenue grew by 17.8% y/y to SEK51,657 million, although this falls to 3% when taking exchange rates and acquisitions/divestments into account. Operating earnings more than quadrupled from SEK1,798 million to SEK6,246 million as it benefited from the Eicher Trucks stake sale. Its restructuring costs fell from SEK318 million a year ago to SEK127 million. The number of truck deliveries has also increased, albeit by only 1% y/y to 48,326 units, as while Europe continues to recover and North America expands, South America and Asia fell back.

Its Buses business recorded an even more significant improvement than the truck division, with a gain in sales revenues of 41.0% y/y to SEK4,748 million. This helped its operating earnings almost treble from SEK36 million to SEK104 million. The improvement is despite a fall in deliveries of its consolidated operations of 10.8% y/y to 1,584 million.

Elsewhere in its business, its Construction Equipment unit's sales revenues declined by 4.8% y/y to SEK12,737 million, although this decline escalated to around 22% when currency fluctuations were taken into account. Operating income almost halved to SEK352 million as deliveries slumped by around a third. It was also hit with SEK75 million of restructuring charges. Sales revenues at its Volvo Penta engine division rose 24.7% y/y to SEK2,250 million as its operating income leapt by 93.4% y/y to SEK253 million. It also had SEK16 million of restructuring costs.

Volvo's financial statement announcement has coincided with the news that its board of directors has chosen to replace president and chief executive officer (CEO) Olof Persson with his contemporary from Scania, Martin Lundstedt. According to a statement, Lundstedt will take on the role from October 2015, with chief financial officer (CFO) Jan Gurander taking the acting role in the interim. Carl-Henric Svanberg, chairman of the board said, "After three years of focus on product renewal, internal efficiency and restructuring, the Volvo Group is gradually entering a new phase with an intensified focus on growth and increased profitability. This will be achieved by further building on our leading brands, strong assets and engaged and skilled employees all over the world... Martin Lundstedt has 25 years of experience from development, production and sales within the commercial vehicle industry. He is also known for his winning leadership style."

Outlook and implications

While Svanberg has given some credit to Persson's efforts during his around four years in charge of Volvo Group, and his three year efficiency and restructuring drive in his statement, progress has not been swift enough to ensure his survival leading the company. Indeed, he had originally said the target would include a reduction in costs of around SEK10 billion while at the same time as an improvement in profitability. However, with the deadline for delivering these targets running down and margins still behind that expected, directors and shareholders have clearly been looking elsewhere for a new leader.

While the announcement of Lundstedt is something of a surprise, there is a great deal of rationale for doing so. He has risen swiftly during his career to end up leading Scania, which is renowned for its profit margins. Christer Gardell, managing partner at Cevian, Volvo's second-biggest stakeholder by votes, has told Reuters that he is "widely recognised as one of the best leaders in the trucking world." The question is now whether he can improve Volvo's fortunes in a similar fashion. It also raises the question as to how the Volkswagen (VW) Group and its new head of its commercial vehicle business Andreas Renschler will replace him.

In the near term the company will need to rely on the foundations laid by Persson. Indeed, acting president and CEO Jan Guarander has said in a statement that, "2015 is the year in which we will see the combined effects of the product launches carried out in 2013 and the cost reductions that were implemented in 2014. Even if we still have many activities to implement also in 2015, the earnings improvement we saw in this quarter shows that we have taken another step in improving the profitability of the Group." Among those activities will be seeking an external partner for its IT business.

As for the key truck business, its order intake for the quarter from its consolidated operations has improved by 2.9% y/y to 56,770 units. While demand appears buoyant in Europe (+21.8% y/y) helped by the low base of comparison a year ago, North American sales continue to grow (+17.9% y/y), it struggles in other markets, including South America where orders have fallen by almost two-thirds on slowing economic growth and falling business confidence while in other markets, orders have fallen 34% y/y as Asia remained flat. Global bus orders did jump 53% y/y during the quarter to 2,101 units. IHS Automotive expects that in the full year, global registrations will grow by around 2.5% y/y to almost 190,000 units and continue to gain momentum to previously seen levels before the end of the decade. The groups presence in Asia going forward is likely to be benefited by it having completed an acquisition of 45% of Dongfeng Commercial Vehicles (DFCV) during January (see China: 6 January 2015: Volvo Group completes 45% acquisition of Dongfeng Commercial Vehicles).