Volvo hit by parts glitches as truck demand soars

STOCKHOLM (Reuters) - World number two truckmaker Volvo struggled to ramp up production to meet a strong rise in demand, hitting its quarterly earnings.

The highly cyclical heavy-duty trucks market has picked up rapidly, leading Volvo to raise its forecast for demand on both sides of the Atlantic, but also leaving truckmakers with the task of raising production from rock-bottom levels.

Gothenburg-based Volvo, which also manufactures buses, construction equipment and engines, said on Friday that temporary production problems at sub-contractors and in its own operations had cropped up as output was rapidly increased.

Volvo posted a smaller-than-expected rise in fourth-quarter earnings, with high raw material costs and a strong currency also biting into its results.

The output problems related to securing higher deliveries of components from suppliers, many of whom made sweeping cuts as during the financial crisis, as well as training new staff, a Volvo spokesman said.

Volvo said it expected productivity to improve "gradually" once both the truckmaker and its suppliers had stabilized production at the higher level.

Volvo shares, which plunged after rival Scania's results earlier this week, were up 0.6 percent by 0840 GMT to narrowly outperform a flat DJ Stoxx autos sector. Scania shares rose 0.4 percent.

"Volvo has taken a lot of punishment on the other reports, so they should not get the same treatment on this," Sydbank analyst Morten Imsgard said.

Sweden's Volvo posted operating earnings of 5.52 billion Swedish crowns ($856 million) compared to a year-ago loss of 2.32 billion crowns to come in below a mean forecast for a profit of 5.99 billion seen in a Reuters poll of analysts.

Volvo said fourth-quarter earnings were also hit to the tune of about 600 million crowns by higher costs for raw materials and components compared to a year ago, while currency shaved off another 700 million compared to the preceding quarter.

"Just as we saw with the Swedish engineering companies, we had a weaker development of margins than the consensus was looking for," Nordea analyst Johan Trocme said.

"They will get a lot of questions today about why the Trucks unit did not show a better margin, and on what impact we may see this year from raw materials and currencies."

RAISED FORECAST

Volvo, the second-biggest truck maker after Germany's Daimler, said order bookings of its trucks surged 63 percent year-on-year in the fourth quarter and it expected a further market recovery this year.

Volvo, which makes heavy-duty trucks under the Renault, Mack, UD Trucks and Eicher brands, raised its forecast for 2011 truck markets in Europe and North America to about 220,000 units from 200,000, implying double-digit growth in both markets.

However, the market forecasts, especially for North America where demand has shot up in recent months, are conservative compared to those of many analysts.

While demand looks set to be buoyant, prospects for further improvement of margins is less obvious as truckmakers turn on the taps for new investment, which were closed as the global financial crisis triggered the worst fall in demand in decades.

Rival Scania's fourth-quarter earnings earlier this week tempered expectations of steady climb in margins which along with a forecast of unchanged demand going into this year sent European truckmaker stocks sharply lower.

Prices on raw materials such as metals and plastics have also climbed on the back of the economic recovery while shortages of some components have also begun to crop up as capacity at suppliers.

Volvo, like rival Scania, has also to contend with the sting of stronger Swedish currency which earlier this week hit a decade-high against the euro and is seen strengthening further.

(Editing by Mike Nesbit and Alexander Smith)

($1=6.445 Swedish Crown)

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