 |
 |
Nine months ended September 30, 1996
Operating income in the automotive operations declined from SEK 6,907 M to SEK 2,160 M.
Volvo Trucks reported a loss for the third quarter, which is attributable to the operations in North America.
Consolidated net income of SEK 10,668 M further strengthens Volvo's financial position.
The sale of shares in Pharmacia & Upjohn resulted in a capital gain of SEK 7.8 billion and an increase in net financial assets of SEK 12.9 billion.
Important product introductions including the Volvo C70
coupé and the Volvo VN for the American truck market
(see table: Nine months ended September 30, 1996)
Comment by the Chief Executive Officer
Consolidated net income for the period of SEK 10,7 billion represents a strong improvement in the Group's financial position. The transformation into solely a transport vehicle group continued. The sale of most of the shareholding in Pharmacia & Upjohn yielded proceeds of SEK 12.9 billion and a capital gain of SEK 7.8 billion. The concentration process is thereby nearly completed.
Extensive efforts are under way in the Group within product development and in the production, marketing and distribution channels, measures which will create sustained profitability in line with Volvo's strategy.
Parallel with efforts to secure long-term competitive operations, efforts are now focusing on rapidly restoring profitability to a satisfactory level. The very weak operating income for the first nine months of the year was caused by heavy price competition, an accelerating pace of product renewal and unacceptably high operating costs in certain operating areas combined with a significant loss in Volvo's North American truck operations. Cost-reduction measures are being implemented in all units.
Development in the North American truck operations, illustrates a double problem, which has not been solved in an acceptable manner: preparation of the launch of a new product program - Volvo VN - while, concurrently, in a weak market, maintaining cost efficiency and high activity in work with the existing product program. The measures now being implemented, including concentration of production to a single plant, are aimed at creating an effective and profitable truck business in North America. The severity of the profitability problem for Volvo Trucks in Brazil was significantly lower at the end of the period. In Europe, Volvo Trucks maintains a strong market position and favorable profitability.
Volvo Cars' income level is unsatisfactory, but is developing positively. This is an effect of the cost rationalization measures implemented and increased revenues from the Volvo S40 and V40. Exploitation of the initial investment in the Volvo 850 is continuing with successive additions of new and more exclusive versions to complement the basic model. The sales of Volvo S40/V40 are favorable and meet expectations. The Volvo C70, a coupé developed in cooperation with TWR was premiered in September and was exceptionally well received. Sales will begin in spring 1997.
Despite the decline, operating income for Volvo Construction Equipment was satisfactory considering the weakening in the entire market for construction equipment in Europe.
Both Volvo Buses and Volvo Penta report unsatisfactory income, while Volvo Aero develops favorably.
The weak operating income during the period does not reflect the Group's strategic position. Volvo Cars and Volvo Trucks have very competitive product programs today.
Based on the strength of high operating economy, safety and comfort, Volvo Trucks FH series holds a strong market position despite heavy competition. The product is now being launched globally. The American VN truck, which was introduced in the autumn was very well received. Volvo FLC for the European truck market represents a complement in the medium-heavy segment.
In addition to a strong product program, modularized production methods in Volvo Trucks and Volvo Cars will result in higher efficiency and economies of scale.
Establishment of a central warehouse in Europe to support after-sales service and spare parts supply for the commercial vehicles will provide significant synergy gains and quality improvements. Structural changes in the car dealer network are being implemented in Europe and North America as well as an upgrading in the sales channel for trucks and buses in South America.
The Group's strategic focus of achieving sustained profitability remains
valid. The broadening of Volvo Cars' customer base into new segments and
the continued globalization of Volvo Trucks' operations are necessary for
the balanced growth which the Group seeks. Today, however, the overshadowing
task is to increase productivity and improve cost-efficiency internally.
(see graph: Operating income, before nonrecurring items)
Nine months ended September 30, 1996
Volvo Group sales in the first nine months of 1996 period amounted to SEK 113,640 M, compared with SEK 129,124 M in the year-earlier period. Sales attributable to automotive operations decreased by 9%, excluding acquired units. Adjusted to reflect the effects of foreign exchange movements, the decrease was 1%.
Operating income before nonrecurring items was SEK 2,324 M, which was SEK 5,757 M lower than in the year-earlier period. Lower sales, depressed prices and higher production and product development costs were the main reasons for the decline. In addition, SEK 700 M pertaining to the restructing of the American truck operations was charged against operating income in the third quarter. Positive currency effects were achieved through hedging, despite a strong Swedish krona, and operating income was positively affected by about SEK 600 M compared with the first three quarters of 1995.
The income decline is attributable to Volvo Trucks (SEK 3,612 M), Volvo
Cars (SEK 1,357 M) and divestment of operations, mainly Swedish Match,
Procordia and Abba Seafood (SEK 1,010). Volvo Construction Equipment, which
is consolidated in the Volvo Group from June 30, 1995, contributed SEK
928 M to operating income in the first three quarters of 1996, compared
with SEK 313 M in the third quarter of 1995.
(see table: Consolidated income
statements)
Income from equity method investments amounted to SEK 184 M (SEK 1,318 M). This includes a capital gain of SEK 352 M on the sale of VOAC Hydraulics and Volvo's share of the loss in NedCar of SEK 440 M (385). Excluding write-down of fixed assets linked to the Volvo 400 series. Volvos share of the loss in Ned Car was reduced through increased sales revenues from the new Volvo S40/V40.
Income from equity-method investments in 1995 included Volvo Construction
Equipment and Pharmacia, which are no longer reported in accordance with
the equity method, in the amounts of SEK 478 M and SEK 934 M, respectively.
Dividends received included SEK 325 M from Pharmacia & Upjohn, Inc., SEK 124 M from Renault, SEK 91 M from SAS Sverige AB, SEK 31 M from Investment AB Bure, and SEK 33 M from Protorp Förvaltnings AB.
Gains on sales of securities pertained mainly to the sale of 9.9% of the share capital in Pharmacia & Upjohn, which yielded a gain of SEK 7,766 M.
Net interest income, amounting to SEK 880 M (149), developed favorably due to the Volvo Group's strong financial position and good results in Volvo Group Finance.
Tax expenses pertained largely to current taxes in foreign subsidiaries
and Operations being divested. Sales of shares resulted in only lilited
tax change.
(see tables: Condensed consolidated balance sheets
and Key ratios)
Group assets declined by SEK 1.2 billion in the first three quarters of 1996. Excluding movements in foreign currency rates, the increase was SEK 1.3 billion. As a result of changes in composition of the Group, primarily the distribution of Swedish Match to AB Volvo's shareholders, total assets decreased with SEK 8.6 billion. The sale of Pharmacia & Upjohn increased liquid funds by SEK 12.9 billion and reduced shares and participations by SEK 5.2 billion. Investments in property, plant and equipment, expanded sales financing operations and higher inventories, mainly in Volvo Cars resulted in an increase in Group assets.
Capital expenditures for property, plant and equipment amounted to SEK 5.9 billion (4.2), including SEK 3.1 billion in Volvo Cars and SEK 1.9 billion in Volvo Trucks. Investments in leasing and company vehicles totaled SEK 2.5 billion (2.3).
Net financial assets rose by SEK 14.2 billion since December 31, 1995 to SEK 15.4 billion, of which SEK 12.9 billion pertained to the sale of shares in Pharmacia & Upjohn.
Shareholders' equity rose by SEK 4.4 billion. The distribution
of the Swedish Match shares and payment of a cash dividend to AB Volvo's
shareholders reduced shareholders' equity by SEK 4.2 billion and SEK 1.9
billion, respectively. Net income for the period contributed SEK 10,7 billion.
(see tables: Statement of changes in consilidated financial
position and Operating income, excluding nonrecurring
items)
(see table: Sales by company Group)
Volvo Cars
The total market for passenger cars increased by 3% during the first nine months of 1996, compared with the corresponding period a year earlier. The market in North America was largely unchanged, while Europe showed an upturn of 7%. The car market in Japan was up slightly more than 1%.
A total of 264,270 Volvo cars (286,490) were invoiced, down 8%. The decline is attributable to the Volvo 940/960, while the Volvo 850 reported an increase of 8% compared with the first three quarters of 1995. Combined, the Volvo 400 and the new Volvo S40/V40 posted a 1% decline. After some delay, the rate of delivery of the Volvo S40/V40 stabilized at the end of the period.
Volvo's market shares in Europe declined but were stable in North America despite discontinuing the sale of the Volvo 940. Volvo strengthened its positions in Japan.
Volvo Cars' sales declined by 5%, to SEK 59,832 M. When excluding foreign exchange movements, sales rose by 3%. Operating income amounted to SEK 573 M (1,930). The decline is attributable mainly to the lower sales volume for the Volvo 940/960 and high costs for product development, which to some extent is offset by positive currency effects. Operating margin, which improved somewhat during the third quarter, remained low, 1,0% (3.1).
The Volvo C70 coupé, an exclusive four-seat sport coupé
which strengthens Volvo's product range and broadens the customer base,
was presented in Paris in October.
(see graph: Operating income, Volvo Car )
Volvo Trucks
The world market for heavy trucks declined during the first nine months of 1996, compared with the corresponding period of 1995. The market in Europe remained strong, while the total market in North and South America continued to decline.
During the first three quarters of the year Volvo Trucks delivered 47,360 medium-heavy and heavy trucks, 16% fewer units than in the year-earlier period. The number of trucks delivered in Europe increased by 6% and the market share in the heavy segment rose through August to 16.5% (16.2). Volvo is the second-largest make of heavy trucks in Europe. Deliveries in North America decreased by 39%. Through August, market share in the U.S. in Class 8 declined to 9.2% (11.4). The order backlog at September 30, 1996 was 40% lower than on the same date a year earlier, due primarily to the lower demand in North and South America.
The new VN truck model, which was developed based on the successful FH concept is being introduced successively in the US. Production resources are being concentrated to the plant in New River Valley, Virginia, as a result of which the plant in Orrville, Ohio, will be phased out during the second quarter of 1997. In the commercial system a new sales financing company was established and an upgrading of the dealer organization will be carried out.
Volvo Trucks' sales in the first three quarters of 1996 amounted to SEK 32,707 M, a decrease of 14% compared with the year-earlier period. Adjusted for foreign exchange movements, the decrease was 7%. Operating income amounted to SEK 413 M (4,025), of which a loss of SEK 665 M in the third quarter (profit of SEK 1,083 M).
European operations continued to show favorable earnings, but the adjustment to a tougher competitive climate resulted in depressed margins and reduced profit. Operations in North America posted a significant loss in the first nine months due to low volume of sales, pressure on product prices and higher costs for production and product development and the costs for the development and introduction of a new product program. SEK 700 M of the total loss of about SEK 14,000 M in the North American operations is attributable to costs for such measures as phasing out the plant in Orrville and write-down of its asset value, a personnel reduction of about 940 persons from January 1, 1996 through June 30, 1997 and realignment costs for phasing out existing products. The rationalization measures are expected to have a positive effect during 1997. Volvo Trucks' operations in South America also showed a loss in the first nine months of 1996. An income improvement was noted in the third quarter.
Volvo Trucks' earnings were also charged with increased costs for product
and market development. Operating margin was 1.3% (10.6).
(see graph: Operating income, Volvo Truck)
Volvo Buses
Volvo Buses delivered 5,140 (4,540) buses and bus chassis during the first nine months of 1996. The market share in Europe was 20% (19) according to preliminary statistics. The order backlog at September 30, 1996 was at the same level as on the same date in 1995.
As a result of increased competition and lower margins, operating income
declined to SEK 155 M (282). Operating margin was 2.6% (5.2).
Volvo Construction Equipment
The decline in the total market for construction equipment continued during the third quarter, most particularly in Germany and the rest of Europe, but was less notable in North America. Invoiced sales for Volvo Construction Equipment amounted to SEK 9,631 M (9,921).
Operating income amounted to SEK 928 M (1,294). The decline compared with the corresponding period in the preceding year was attributable mainly to lower volumes, higher development costs for new products as well as for the business as a whole and unfavorable exchange rates. Operating margin was 9.6% (13.0).
Volvo Penta
Volvo Penta's invoiced sales declined by 3% compared with the year-earlier period. Sales of marine engines and spare parts was lower in Europe, Japan, Australia and Brazil. In contrast, sales increases were posted in the U.S., where market shares also improved. Sales of industrial engines rose due to continued strong demand for gensets.
As a result of unfavorable exchange rates and cost increases, operating
income declined to SEK 63 M (197). In order to enhance efficiency and improve
long-term profitability, it has been decided to establish a new global
structure as of January 1, 1997.
Volvo Aero
Invoiced sales of Volvo Aero rose 6%, despite unfavorable exchange rates. In the Commercial Engines segment, Volvo Aero entered into an agreement with General Electric on part-ownership in LM 6000, a stationary gas turbine for generating electrical power. The agreement is expected to generate revenues of SEK 600 M during the next 15-20 years. During the international air show at Farnborough, Volvo Aero secured orders as a partner in various aircraft engine programs totaling SEK 300 M. Operating income amounted to SEK 110 M (97).
Operations being divested
During 1996, shareholdings in Swedish Match, Investment AB Bure and Spira AB were sold as well as 50.006,534 shares in Pharmacia & Upjohn, Inc., corresponding to 9.9% of the share capital in the company.
The selling price for Pharmacia & Upjohn was set at SEK 262.82 per share and the buyers were a large number of institutional investors in Europe and North America. The taxable initial value was SEK 258 per share, which was calculated based on an advanced ruling from the Swedish Tax Board. Following the sale, Volvo's holding in Pharmacia & Upjohn, Inc. amounts to 3.9% of share capital. Other remaining undertakings outside the automotive operations include mainly the shareholding of 49% in Pripps Ringnes AB.
Employees
The Volvo Group had 70,220 employees as of September 30, 1996, a decrease of 8,830 compared with the number at December 31, 1995. As a result of the distribution of Swedish Match, 7,000 persons left the Group.
The preliminary report on operations for the full year 1996 will be issued on February 19, 1997.
Göteborg, October 23, 1996
Sören Gyll
President and Chief Executive Officer
This report has not been reviewed by AB Volvo's auditiors.
|
|
| Source: Nine months ended September 30, 1996 |
Copyright © AB Volvo 2009