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Volvo quarterly profit gains on Eastern Europe, US - extended

Volvo AB, Europe's second-largest truckmaker, said fourth-quarter profit gained 24% as customers expanded in eastern Europe and bought trucks in advance of new US emissions rules making vehicles more costly.

Net income increased to 3.69 billion kronor or 9.13 kronor a share, from 2.98 billion kronor, or 7.36 kronor, a year earlier, CEO Leif Johansson said at a Stockholm press conference today. The Gothenburg, Sweden-based company plans a 6-for-1 stock split and total dividend payments of 50 kronor a share, he said. Volvo's 2006 sales in eastern Europe surged 40% as Poland's and Russia's economies last year expanded at more than twice the rate of the 13 nations sharing the euro and beat the US economy's 3.4% increase. The truckmaker today forecast „continued strong demand” in the region. „Eastern Europe as such is tending to help keep European truck volumes on a very high level,” said Henrik Breum, an analyst with Danske Equities in Copenhagen who has a „buy” recommendation on Volvo. „This could prolong the high shipment volumes we have seen since 2005 into 2008 and even 2009.”

Shares of Volvo rose as much as 16 kronor, or 3.1%, to 527 kronor, the biggest increase since Sept. 6, and were up 1.2% at 517 kronor as of 2:18 p.m. in Stockholm. Credit-default swap contracts based on €10 million ($13 million) of Volvo bonds fell 0.3% to $27,104, according to prices compiled by Bloomberg in London. The contracts, conceived to protect bondholders against default, pay the buyer face value in exchange for the notes should the company fail to meet its obligations on time. A decrease in the price indicates improvement in the perception of a company's credit quality. Profit missed the 3.8 billion-kronor median estimate of eight analysts surveyed by Bloomberg News. Sales fell 0.5% to 65 billion kronor from 65.3 billion kronor. Q4 operating profit, or earnings before interest and tax, rose 21% to 5.17 billion kronor. Full-year sales at Volvo, which also builds buses, construction equipment, plane parts and marine equipment, gained 7.3% to 248.1 billion kronor, while net income rose 25% to 16.3 billion kronor.

Volvo plans a 49% increase in the regular dividend to 25 kronor. Following the stock split, the sixth share must be redeemed as a 25-kronor extraordinary dividend, leaving shareholders with five shares for each share they currently hold, Johansson said. „They are overcapitalized, it's as simple as that,” Anders Bruzelius, an analyst with Swedbank in Stockholm with a „sell” recommendation on the shares. „The market actually had expected a little bit more.” The truckmaker said today it expects the European heavy-truck market to expand to 300,000 vehicles this year from a record 294,997 vehicles last year. Truckmakers had forecast that stricter European Union emissions standards, which took effect October 1, would cause a significant drop off in sales, a situation they now say never materialized. „It's a much stronger European market than expected,” Johansson said. „We have had difficulties in getting the volumes out in the Q4.”

Poland's GDP expanded 5.6% in 2006 and Russia's economy grew 6.7%. That compares with a 2.7% 2006 growth rate forecast in December by the European Central Bank for countries using the euro including Slovenia, which adopted the currency last month. Scania AB, Sweden's second-largest truckmaker after Volvo, a week ago compared the need for increased transport capacity in eastern Europe to growth in western Europe after World War II. Scania, the target of a failed takeover bid from competitor MAN AG, beat analysts' earnings estimates January 25 by posting a 20% Q4 profit increase that stemmed in part from „enormous” demand in eastern Europe for vehicles. Orders won by Volvo last year in eastern Europe included a 1,000-truck contract from Waberer's Optimum Solution, a Hungarian transport company, and a 300-vehicle purchase by the Russian unit of Coca-Cola Co., the world's largest soft-drink maker.

Volvo's US truck orders, an indicator of future sales, plummeted 60% in the fourth quarter to 7,517 vehicles. Freight carriers in the US have slowed purchases due to new rules that began January 1 requiring cleaner diesel-engine technology that's more expensive. Johansson said he wouldn't give a market forecast for North America truck-sale totals because of difficulties predicting how economic growth will shift. „We see a real downturn in order intake in Q1 and Q2 in North America,” Johansson said, adding the market may fall as much as 45% in the H1. „How quickly the market really swings back is going to be dependent on the economy.” Johansson is overhauling factories and reducing the engine lineup to two models from 18. Volvo incurred 500 million kronor in charges, primarily at Renault trucks, as part of the changeover, and an additional 100 million kronor related to North American capacity reductions.

The company has currency contracts protecting it from exchange-rate shifts for 75% of its needs over the H1 and 50% for the following six months, CFO Paer Oestberg said on the conference call. The dollar declined 14% against the Swedish krona in 2006. Q4 operating profit at the truck division, Europe's second-largest commercial vehicle maker after DaimlerChrysler AG, increased 28% to 3.5 billion kronor. The unit, which makes Volvo, Mack and Renault brand trucks, accounted for 67% of Q4 group revenue. The division's worldwide orders rose 8% in the quarter to 61,999 vehicles, led by a 58% gain in Europe. Operating profit at Volvo's construction equipment division, the company's second-largest business by revenue, soared 35% to 992 million kronor as sales increased 4.4%. The business is operating at a „high capacity utilization” and will invest about 400 million kronor in coming years to increase production, Johansson has said. (Bloomberg)