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Volvo's New River Valley campus in Dublin, Va.

Volvo truck orders hit the brakes, 2020 markets set to slump

Volvo expects next year’s North American market to decline by 29% and Europe by 14%.

(Bloomberg) — Volvo Group is preparing for more output cuts after forecasting a slump in truck deliveries next year in North America and Europe on weaker demand. The shares declined as much as 5%, the most in a year.

Orders for heavy trucks slumped 45% from a year earlier, more than analysts had expected, and deepening a drop from the second quarter. For next year, Volvo expects the North American market to decline by 29% and Europe by 14%, after above-average demand in both regions.

“The correction that we have anticipated is coming in our main markets,” CEO Martin Lundstedt said in Stockholm. “What we see for these markets is that they are coming down to a replacement level.”

Truckmakers are preparing for leaner times as the truck cycle turns. Last week, the IMF made a fifth-straight reduction to its 2019 global economic forecast, citing trade tensions for its weakest view since 2009. As a result, Volvo’s customers are holding back on investments, Lundstedt said, foreshadowing “action” to maintain “good” profitability.

What Bloomberg Intelligence says...

"Volvo looks set for a sharp deterioration in 2020 profitability, in our view, following its weakest truck order intake since the 2009 recession in 3Q, predicting European and U.S. markets will fall by 15-30% next year,” said Johnson Imode, BI Industrials analyst. Production levels are being adjusted, but inherent operating leverage — with profit doubling in the 2016-19 cycle — demonstrates the challenge faced."

The company still beat its own 10% margin target during the third quarter with a return of 11%, as Volvo factories clear significant backlog following a surge in orders over the last couple of years. This will help the CEO’s quest to defend profitability even as conditions weaken. Third-quarter adjusted operating profit rose to 10.9 billion Swedish kronor ($1.1 billion), beating analyst expectations.

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