Volvo Cars sees stronger second half despite steep China decline; shares fall

STOCKHOLM, July 17 (Reuters) - Volvo Cars expects stronger profitability in the second half, it said on Friday, despite an unexpectedly sharp sales decline in China that hurt its second-quarter operating profit and sent its shares down 8%. 

The Swedish automaker had warned ahead of time that the second quarter would be weak, pressured by high raw material and freight prices and tough discounting.

However, a tougher-than-expected 35% sales plunge in China squeezed its operating profit margin to 1.1% from 1.6% the quarter before.  

"It's a very tough situation; volumes are down and (there is) severe price competition," CEO Hakan Samuelsson told Reuters. "So profitability is far from satisfactory in China." 

The car industry veteran returned to run Volvo last year to revive the company's fortunes and share price at a time of challenges including U.S. President Donald Trump's trade war.

CHINA THE 'MOST DIFFICULT REGION'

The results come a few weeks after Germany's BMW said its China sales had fallen 30% in the second quarter and issued a profit warning that it partly blamed on China.

Volvo Cars' Chief Commercial Officer Erik Severinson said the company was protecting its pricing.

"China is right now the most difficult region in the whole automotive industry," Severinson said. "But we are not going into discount wars."

Handelsbanken analyst Hampus Engellau said the results were slightly better than expected, with orders a particular bright spot. Still, shares fell 8% at market open. If those losses hold, it would be their worst day since February.

The company, majority-owned by China's Geely Holding, posted an operating profit of 800 million Swedish crowns ($82.8 million) for the April to June period, lagging the first quarter's 1.6 billion crowns.

Volvo said it expects its earnings margins to rise in the second half as output of the new flagship EX60 SUV fully ramps up, and sees 10% volume growth from the first half. 

The company last year launched an 18 billion-crown cost-cutting plan, and said on Friday it had delivered 5 billion of indirect savings six months ahead of schedule.

Gross margin, a metric investors are looking at closely to assess the impact from trade tariffs, came in at 16.8%, versus 18.5% in the first quarter. 

($1 = 9.6661 Swedish crowns)

(Reporting by Marie Mannes; Additional reporting by Tomasz Kanik in Gdansk; Editing by Terje Solsvik and Jan Harvey)