Renault, Volvo Slash Guidance, Unleashing Shockwaves Across Auto Industry
It has become a fool’s errand to deny that the global automobile industry is in recession (even if there is still some debate as to the causes). We have documented, at length, falling sales around the globe – led by the world’s largest market in China – over the last two years, and recessionary trends in places like North America and Europe show no signs of letting up.
And today, Renault and Volvo were the two most recent examples of just how dire the situation has become… and will be.
Renault shares plunged as much as 12% in Paris overnight after the company slashed its full year revenue and profit forecast, while pre-announcing Q3 revenue: “Due to an economic environment less favorable than expected and in a regulatory context requiring ever-increasing costs, Groupe Renault revises its guidance for FY2019,” the company’s release said.
The auto manufacturer guided for revenues to fall between -3% and -4%, versus previous guidance of near flat. It also guided for a contraction in its operating margin to about 5% from its previous guidance of 6%.
Automotive operating free cash flow “should be positive in H2 while not guaranteed for the full year”, the company said, rescinding its previous guidance of positive full year automotive operating free cash flow. The company plans on reporting full earnings on October 25.
Swiss truckmaker Volvo also reported a sharp decline in its Q3 orders and forecasted an upcoming slump in demand for next year, despite beating analyst estimates for the quarter, according to Reuters.
Volvo said that orders for its trucks, which include brands like Mack and Renault, fell 45% from last year. Analysts had forecast a drop of slightly more than 30%.
The company’s CEO, Martin Lundstedt, said that Volvo is well prepared for an “expected correction” in its main markets. Volvo had been reducing production volumes over the past quarter and said it’s going to continue making “further adjustments” in coming quarters in light of declining orders.
BI Intelligence analyst Johnson Imode stated:
“Volvo looks set for a sharp deterioration in 2020 profitability, in our view, following its weakest truck order intake since the 2009 recession in 3Q, predicting European and U.S. markets will fall by 15-30% next year. Production levels are being adjusted, but inherent operating leverage — with profit doubling in the 2016-19 cycle — demonstrates the challenge faced.”
Brokerage house Pareto piled on in a note out Friday: “Truck order intake was on the weak side, 17% below our estimate and 20% below consensus.”
Volvo’s outlook was anything but optimistic: it said it expects the market for heavy trucks to shrink by about 14% in Europe and 29% in North America next year due to “economic uncertainty”. Analysts had expected estimates of a decline of 11% for Europe and 25% for North America.
Heavy truck demand continues to falter as a result of the global economy weakening. As Bloomberg notes, last week, the IMF “made a fifth-straight reduction to its 2019 global economic forecast, citing trade tensions for its weakest growth projection since 2009.”
But other analysts aren’t as pessimistic. Danske Bank credit analysts including Natasja Cordes said: “Volvo has already begun to reduce production volumes and, in our view, is much better equipped heading into this downturn than it was in the past.”
“For 2020, we expect markets to come down to more normal replacement levels in both Europe and North America, which we have prepared ourselves for,” Volvo CEO Lundstedt said.