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Volvo skids to surprise loss

  World number two truckmaker Volvo sank to an operating loss in the fourth quarter as orders slowed to a trickle, and said its key European market was likely to fall further this year.

But relief Volvo was still able to generate cash in the quarter, despite plummeting demand across all its main markets, sent its shares up 17.5% by 8:20 a.m. British time versus a 1.5% gain in the broader market.

The Swedish company reported an operating loss of SEK 999 million ($121 million) in October through December. The mean forecast in a Reuters poll of 18 analysts was for earnings to fall to 475 million from a year-ago of 5.78 billion. But the high level of uncertainty over how the truckmaker would cope with the dramatic downturn was reflected in the wildly differing estimates, ranging from a loss of 2.60 billion to a 3.37 billion profit.

“If you look to the tone of (CEO) Leif Johansson’s comments, these are less panic-stricken than in Q3,” Nordea analyst Johan Trocme said. “If you look to cash flow it was stronger than expected and it is obviously the case that they feel they can pay out a dividend of SEK 2 per share, which is a signal that they are not on the brink of a liquidity disaster.”

Slamming on the brakes at plants across the group, Volvo said it had been able to cut inventories, resulting in a positive cash flow of SEK 1.8 billion in the quarter, while its net debt remained low and its liquidity position strong.

The economic downturn spawned by the global financial crisis has crushed the highly cyclical demand for heavy-duty trucks across Europe in recent months, leaving Volvo and its rivals scrambling to cut costs and production capacity. The company said it expected the European heavy-duty truck market to decline to between 180,000 and 220,000 units this year from well over 300,000 vehicles in 2008 while the North American market was seen unchanged to somewhat down from already weak levels at 165,000 to 185,000 units.

“Customers were reluctant to place new orders while at the same time cancellation of already ordered trucks continued,” the company said in a statement. “In Europe net order bookings were negative in October and November but slightly positive in December as the high cancellation rates slowed down towards the end of the year.” “We do not expect a recovery in demand during the first half year, but with agreed and already implemented actions progressively penetrating during the first six months, we are prepared to cope with the troubling situation,” Volvo said.

Volvo is considered more vulnerable to the downturn than rivals such as Scania and Germany’s MAN, due to issue its quarterly results on February 19, whose more flexible labor forces leave them nimbler in times of declining demand. “The consequence of quickly reducing production pace is that it negatively impacts operating income in the short term,” the company said. “We will also feel the effects of this during the H1 of 2009.” (Reuters)