Volvo trucks: the party’s over

by SR on July 25, 2012

Volvo truck book-to-bill ratio by region (x)

Rationality returns to the US truck market

On 24 July 2012, Volvo released its Q2 results and its monthly truck delivery figures for June 2012. Orders received for trucks in the April to June quarter – Volvo is the second largest supplier of heavy trucks globally – came in below expectations at 52.9k units, a decline of 12.8% compared to the previous quarter. Without doubt North America was the unwilling star of this show, with truck orders in April – June plummeting 41.5% relative to the January – March quarter and 47.4% year-on-year. Despite great sales (see second chart below) the order development in North America was easily the worst performance on a regional basis (below).

Volvo truck orders in North American (units)

During the conference call the CEO listed a few positives in the US truck market, none of which seemed particularly fresh, then gave a few negatives including “the wait and see attitude that we have seen from our dealers and in the market in general”. That’ll be what hit the orders then. Volvo’s share price took it pretty calmly, presumably having seen this coming some time ago. Interestingly, despite cutting its forecasts for construction equipment in Europe, Volvo’s management did not feel the need to cut its forecasts for China and Asia, suggesting to me that the worst has already been incorporated into guidance.

Volvo truck deliveries in North American year-to-date(units)

But it’s trucks, not construction equipment that interests me. In previous comments on Volvo’s truck deliveries I have repeatedly pointed out the yawning gap in sales performance between North America and every other region. In this post back in May 2012 I commented that “Volvo management in recent conference calls has said ‘replacement demand’ and ‘refleeting’ is behind this growth but it seems far too strong to be sustainable to me”. In June I noted that despite my misgivings about demand “so far the market is happily proving me wrong” and further pointed out that share prices of US truck-related parts suppliers had seen strong performance in many cases since my May post. In a weak attempt at humour I summed up that post with “Conclusion: Er, buy US truck plays?” That strength in sales (deliveries) continued into June, as shown in the chart above. For the period from January to June 2012, North American deliveries rose 39.6% year-on-year.

Book-to-bill ratio not so good

Going forward deliveries look certain to slide. During the call the CEO argued that “we have become much better after the crisis in 2008 to actually managing and adapting our deliveries and production in line with our orders”. Maybe so, but there are limits to what any company can do when the environment deteriorates. Zooming in on the North American book-to-bill (below) shows the severity of the fall in the ratio, which reflects the weakening order environment.

Volvo truck book-to-bill ratio (x) in North America

It’s just one quarter and therefore not the end of the world, but it is the worst book-to-bill for North America since 0.53x posted in the October – December 2008 quarter, during the worst of the global financial crisis of 2008. Back in the present, in June 2012, it is the speed of the collapse in this indicator that is a little worrying. As shown in the chart below, truck purchases have been strong since beginning of 2011 (the blue line) and have accelerated all the way through 2012 so far (the red line). With orders fading, those deliveries must fade.

Volvo truck deliveries in North America (units) by month

The real question is not the downturn in deliveries, but the timing of a recovery in Volvo’s truck orders in NorAm. Despite management’s hopeful noises, it seems to me that those fleet buyers who really wanted to take advantage of the better fuel economy of the latest trucks have probably already upgraded over the past 18 months. Sure, if the housing market in the US comes back we should see a pick-up in demand for short-haul heavy-duty trucks, but that’s a big call to be making. Maybe you have a strong view on US residential construction; I do not.

I do have a strong view on autos: buy Toyota or its suppliers like Denso or Aisin Seiki.

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