Truckmaker Volvo Q2 profit rises 23%

STOCKHOLM -- Volvo, the world's second-largest truck maker, reported a better-than-expected 23 percent rise in quarterly pretax profit on Friday and raised its forecasts for the European and North American truck markets.

Second-quarter pretax profit at the Swedish group reached 6.46 billion crowns ($881 million), above the average forecast of 6.03 billion crowns in a Reuters poll.

"The reasons behind the earnings are a strong demand for our new and more efficient products, high capacity utilization, but also a more efficient group structure," it said in a statement.

Heavy-duty truck makers have profited from strong demand in North America, Asia and Europe in recent quarters; analysts expect local rival Scania to do even better than Volvo next week, with 28 percent growth in pretax profit.

Truck markets are seen reaching peaks in the cycle this year, with customers bringing forward purchases of older, cheaper models to beat new stricter clean-air rules that come into effect next year.

"The report is strong all over. It may be a little weak on volumes, but what's really interesting is the great result in underlying operating profit, which is totally driven by the trucks. It looks very good, and there will be upgrades following this report," said Cheuvreux analyst Patrik Sjoblom.

Volvo's shares are largely flat so far this year, in line with the development in the automotive index.

The group's operating margin rose to 10 percent from 8.8 percent, one percentage point higher than analysts' expectations and the highest the group has ever achieved.

RAISED TRUCK-MARKET FORECAST

Volvo raised its forecasts for its main heavy-duty truck markets, saying it saw a market of 280,000 to 290,000 trucks in Europe and of 350,000 to 360,000 in North America, including exports to other markets.

The buying spike has worried some investors as truck sales are expected to fall -- at least temporarily -- once the new emissions rules come into effect next year.

Volvo Chief Executive Leif Johansson said the pre-buy effect was less of an issue in Europe now and that Volvo had been taking orders for new-standard trucks in its key market.

"Of course the real test of that will be in the third and fourth quarters, but so far so good in Europe and we've had good acceptance, we think, of the new technologies," he said.

In North America -- with about one-third of group sales -- the pre-buy effect had been more pronounced, Johansson said, adding that this might result in a weak first half of 2007, but that orders would pick up again in the second half.

"We also think that the underlying market in itself still looks quite favorable and attractive," he said.

Order intake for its trucks, sold under the Volvo, Renault and Mack brands, fell 19 percent in the quarter on a year ago to 42,945 as it can no longer take orders for the old trucks.

Revenues at Volvo, which sells trucks, buses, construction equipment and a broad range of engines, rose to 65.47 billion crowns from 61.12 billion a year ago. This compared with a forecast 67.29 billion crowns in the Reuters poll.

Volvo is trading at about 10 times expected 2006 earnings, compared with about 12 for local peer Scania and 9 for U.S. competitor Paccar. Analysts said Volvo's discount to Scania was because its exposure to the American market carried a greater earnings risk. Sjoblom at Cheuvreux added Volvo needed to show it could maintain margins in a weaker future market, which Scania has already demonstrated.

TRUCKMAKER CLOSE TO CHINA TIE-UP

Volvo also is in late-stage talks for a tie-up with a construction machinery maker in east China, becoming the latest foreign giant to tap the country's booming construction gear sector.

"We have been holding talks for a tie-up with several potential foreign partners, and Volvo is the most likely candidate," one senior Chinese executive at Shandong Lingong Machinery Co. Ltd. told Reuters on Friday.

Under plans being discussed, Volvo could form a joint venture with Lingong or acquire a major stake in the Chinese company, said another Lingong executive familiar with the matter. He added the two sides hoped to finalise a deal by next month.

Other foreign giants that have shown an interest in Lingong, based in Shandong province, included Caterpillar Inc. and Komatsu Ltd., one of the Lingong executives said.

Beijing is spending billions of dollars to upgrade infrastructure, fuelling demand for mining and construction gear. The country is also erecting billions of dollars worth of apartments, offices and other buildings in its major cities to meet growing demand for office and residential space.

The Volvo tie-up, if it goes ahead, would mark the latest foreign advance in the $12.5 billion construction equipment market, where Terex Corp., Hyundai Engineering & Construction Co. and others are ramping up investment to grab a larger share.

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