After record sales and record volume in the first and second quarters, the worldwide economic slump caught up with Volvo Construction Equipment in the third quarter with sales growth decelerating more rapidly than expected, company officials said. Still, net sales increased by 2 percent to SEK 13.2 billion (about U.S. $1.7 billion), compared with SEK 12.9 billion for the third quarter of 2007. Adjusted for changes in the exchange rates and acquired and divested units, net sales rose by 7 percent.
Operating income decreased to SEK 134 million (about $1.7 million) and the operating margin was 1 percent, compared to 6.5 percent in the year-ago quarter. The decline in operating income was driven by significant cost inflation primarily on the price of steel, negative currency impact and a restructuring cost of SEK 300 million (about U.S. $38 million) for the move of the motor grader business.
Demand in Europe and North America declined because of declines in residential construction and increased hesitancy among customers because of turmoil in financial markets. The company expects the European market to decline 15 to 20 percent year over year in 2008, and North America 20 percent. The company previously had forecast a 5- to 10-percent drop in Europe.
Markets outside the United States and Europe presented a rosier picture. South America sales were up 58 percent, Asia sales jumped 17 percent and other international markets boosted sales 43 percent in the third quarter. Although the company sees increasing signs of demand weakening in markets outside Europe and North America, these markets are expected to grow by 15 to 20 percent in 2008 compared to the previous estimate of 20 percent.
In September, Volvo CE announced it would move its motor grader activities currently located in Goderich, Canada, to the companyâ€™s Shippensburg, Pa., facility. The move is to improve competitiveness and profitability, reducing exposure to exchange rate fluctuations.
To mitigate the effects of weakening demand, Volvo is lowering production rates. In September and October it gave notice of redundancy to employees in Sweden and other countries. The company is implementing actions to reduce operating expenses.