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Volvo eyes best in class operating margin

Volvo eyes best in class operating margin
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First Published: Thu, Sep 22 2011. 04 25 PM IST
Updated: Thu, Sep 22 2011. 04 25 PM IST
Stockholm: Swedish truck maker Volvo is to focus on efficiency more than growth to meet new financial targets calling for an operating margin among the top two of named competitors.
Shares in the world’s number two truck maker after German group Daimler were down 4.4% by 03:25 pm on Thursday, in line with a 4.1% lower European industrial goods and services sector.
Volvo, which sells trucks under the Eicher, Mack, Renault and UD Trucks brands as well as its own name, said organic sales growth for its truck, bus and construction equipment operations and Volvo Penta should at least equal a weighted-average for comparable competitors.
Investor relations director Patrick Stenberg told Reuters the new goals were more challenging than previous targets, which were for an entire business cycle or for the group as a whole.
“They (targets) are more focused on the operational efficiency compared with growth ... the growth goal is more in relation to our competitors,” he said.
Right Direction, But Vague
Sydbank analyst Morten Imsgard said the new targets were not that concrete since figures from competitors could be tough to pin down. He was upbeat about the broader move.
“They now shift the focus more towards earnings and becoming a best-in-class truck maker. So, that way it is a clear signal to the market that they want to be in the lead on the earnings side going forward,” he said.
Volvo said its truck operations will be measured together with its bus operations against Daimler, Iveco , MAN, Navistar, Paccar, Scania and Sinotruk.
Its construction equipment business will be measured, with Volvo Penta, against rivals Brunswick, CAT, CNH, Cummins, Deere, Hitachi, Komatsu and Terex.
Credit Suisse analysts said in a note: “Such benchmarking targets represent a hindrance as opposed to help for new CEO Olof Persson as he seeks to galvanize and mould the company around him.
“Continually monitoring yourself against peers as opposed to defining your own strategy and targets is both backward looking and non-motivational in our view.”
Earnings Potential
Sydbank’s Imsgard said Volvo still had a sizeable gap to Scania -- one of its biggest competitors -- in terms of margin.
“There is a big potential in these targets if they really can fulfill being on level with a company like Scania. Then there is a huge upside for Volvo going forward,” he said.
UBS analysts said in a note that Volvo aimed to improve significantly its performance in downturns.
“While among the top two in trucks margins in a normal environment, it was the worst performing truck manufacturer and one of the weakest construction equipment manufacturers during 2009, and far from the top two in profitability,” they said.
“We believe the group is in better shape this time around with cost cutting already ongoing, increased flexibility and preparedness so it is positive to see that the board also sees scope to improve performance significantly.”
Volvo suffered a sizeable operating loss during the 2009 downturn but bounced back relatively quickly thanks to strong demand in emerging markets and renewed growth in Europe and North America.
“Following the completion of the streamlining of the Volvo Group towards commercial vehicles and a number of acquisitions, the company now has the size and geographical footprint necessary to achieve long-term success,” chairman Louis Schweitzer said.
Volvo’s previous financial targets, adopted in September 2006, comprised an annual sales increase of 10% and an operating margin for industrial operations of 7% or more.
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First Published: Thu, Sep 22 2011. 04 25 PM IST
More Topics: Volvo | Margin | Truck | Bus | Construction Equipment |