Report on 1996 operations

• Comments by the Chief Executive Officer
• Report on 1996 operations
  • Tables
  • Graphs

Swedish Match was distributed to Volvo's shareholders and the greater part of Volvo's holding in Pharmacia & Upjohn was sold.

(see table: Report on 1996 operations)

Comments by the Chief ExecutiveOfficer

The concentration of Volvo's operations on its core business continued during 1996. The divestment of operations not related to the automotive business contributed to a strong net income amounting to SEK 12.5 billion. The Group's financial position has thereby been further strengthened.

Activities in the automotive sector during the year were characterized by many product innovations, a continuing high pace of product development and aggressive rationalization and development programs in both the industrial and commercial system. Operating income for the full year, which was considerably lower than in 1995, was not at an acceptable level.

But Volvo Cars, whose costs rose dramatically in 1995, reports successive gains in operating income in each quarter. The improvement was due in part to better cost control and more efficient work methods and in part to accelerating sales of Volvo S40/V40 models during the second half of the year and continuing strong demand for the Volvo 850. At the same time, preparations were being made to start production of the Volvo S70/V70 cars that were introduced on schedule during the second half of the year. During the autumn the exclusive Volvo C70 Coupé was unveiled as a new concrete result of the Group's product strategy, followed in early 1997 by the Volvo C70 Convertible. Thus, within a two-year period, Volvo Cars will have renewed its product program with six models and versions.

Following exceptionally high income in 1995, Volvo Trucks experienced sharply reduced demand and substantial losses in North America. A comprehensive restructuring program, that was advanced, will not have full impact on earnings until this year. The concentration of production in a single efficient plant and the launching of the Volvo VN truck that was developed for the North American market are expected to significantly improve Volvo's competitiveness in the United States. The Volvo NH truck for the Australian market, is based -- like the VN -- on the so-called FH concept, a cost-saving modular basic design for trucks in all markets. Volvo Trucks further strengthened its position in Europe.

Volvo Construction Equipment maintained a good, if somewhat lower, level of profitability in 1996 despite declining volumes and high costs for marketing and product development. During the latter part of the year the company introduced the first in a new generation of excavators that will be sold in Europe and later in other markets.

Volvo Buses reported weaker operating income, due to increased competition and problems in its South American business. These operations have now been rationalized, with appreciable results in terms of reducing costs.

Overall, the results achieved in 1996 show that much remains to be done to raise Volvo's profitability and stabilize it on a consistently high level. But the implementation of the product companies' aggressive strategies that has resulted in the introduction of new products at a rate unprecedented in Volvo's history, the program under way within the Group to improve efficiency, increase flexibility and take better advantage of synergies, and a financial base that permits preparedness for structural changes in our industry, all lead me to view Volvo's future with optimism.

(see graph: Operating income, before nonrecurring items)

Reporton 1996 operations

Volvo Group sales for the full year 1996 amounted to SEK 156,060 M, compared with SEK 171,511 in the preceding year. Excluding divestments and acquisitions, sales attributable to automotive operations declined by 5%, due to a smaller volume of business in Volvo Trucks. The other operating sectors reported higher or largely unchanged sales.

The number of Volvo passenger cars invoiced was 368,300 (374,600)*. Deliveries of Volvo trucks declined from the record-high level of 76,500 in 1995 to 63,700 in 1996. The decrease was attributable exclusively to operations in North and South America, while deliveries in Europe and other markets were on a level with the preceding year's.

Operating income in the automotive operations, before nonrecurring items, decreased from SEK 7,493 M to SEK 3,619 M. Operating income was higher in both Volvo Cars and Volvo Aero, while Volvo Trucks, Volvo Buses and Volvo Penta reported lower income. Operating income in Volvo Construction Equipment for the full year 1996 amounted to SEK 1,162 M, compared with income of SEK 717 M for the last six months of 1995..

As shown in the table on page 7, the decline in income was attributable mainly to Volvo Trucks. Income in the European truck operations was satisfactory but substantial losses were incurred in the North American business due to smaller volumes of sales and higher production and product development costs. Of the total loss of SEK 1.6 billion in North America, the cost of restructuring the operations and phasing out certain products amounted to SEK 700 M.

After accounting for hedging transactions, movements in foreign exchange rates resulted in a net gain of SEK 800 M, relative to the preceding year, which was credited to operating income. The gain in Volvo Cars was SEK 1,100 M, with a loss of SEK 300 M in the other operating sectors as a whole. Gains were recorded mainly through favorable exchange rates on outflows of German marks, Dutch guilders and Belgian francs.

The profit related bonus for Volvo Group employees in Sweden was charged against operating income in the amount of SEK 300 M (285).

(see table: Consolidated income statements)

Income from equity method investments amounted to SEK 290 M (1,402). Income included a gain of SEK 352 M on the sale of VOAC Hydraulics and Volvo's share, SEK 334 M, (635) of the loss in NedCar. The share of the loss in NedCar was reduced relative to the preceding year as a result of a higher sales volume of the new Volvo S40/V40 models. The share in the earnings of Pripps Ringnes amounted to SEK 263 M. Income from equity-method investments in 1995 included Volvo Construction Equipment (SEK 478 M) and Pharmacia (SEK 1,155 M), which are no longer reported in accordance with the equity method.

Financial income and expenses. Dividends received included Pharmacia & Upjohn, Inc. SEK 327 M; Borgtornet, SEK 165 M; Renault SA, SEK 124 M; SAS Sverige AB, SEK 91 M (formerly SILA); Protorp Förvaltnings AB, SEK 33 M and Investment AB Bure, SEK 31 M.

Gains on sales of shareholdings pertained mainly to the sale of 9.9% of the share capital of Pharmacia & Upjohn, Inc. resulting in a gain of SEK 7,766 M, and the gain of SEK 394 M on the sale of Investment AB Bure.

Net interest improved significantly as a result of the Volvo Group's strengthened financial position.

Tax expenses pertained mainly to current taxes in foreign subsidiaries and to operations being divested. The sale of shareholdings resulted in a limited tax charge.

(see tables: Condensed consolidated balance sheets and Key ratios)

Financial position

Group assets increased by SEK 2.5 billion, to SEK 141.2 billion, in 1996. As a result of the distribution of Swedish Match shares to AB Volvo's shareholders, the Group's total assets were reduced by SEK 9.6 billion. The sale of Pharmacia & Upjohn shares increased liquid funds by SEK 12.9 billion and reduced holdings of shares and participations by SEK 5.3 billion. Group assets were increased through a larger volume of sales financing and large investments in fixed assets. Payments to Volvo Group pension foundations reduced liquid funds by SEK 4.2 billion. Foreign exchange movements affected total assets only marginally.

Capital expenditures for property, plant and equipment amounted to SEK 8.2 billion (6.5), including SEK 4.4 billion in Volvo Cars and SEK 2.6 billion in Volvo Trucks. Investments in leasing and company vehicles amounted to SEK 3.9 billion (2.6). Substantial investments in changes are being made in Volvo Cars' Torslanda plant in preparation for new car models and in the finishing plant in Ghent, Belgium, where capacity is being increased. Volvo Trucks' investments involve programs in the industrial operations in the U.S. as well as preparations for the assembly of the FH series in Brazil. Programs to increase the capacity of assembly and components-production operations in Europe were implemented during the year. Volvo Construction Equipment began a major expansion of its plant that produces wheel loaders and articulated haulers in the U.S.

Net financial assets increased by SEK 10.8 billion, to SEK 12.0 billion. Net assets increased by the sale of shares in Pharmacia & Upjohn, SEK 12.9 billion and decreased by SEK 1.5 billion through repayment of a loan to Renault, and by SEK 0.6 billion, the amount of a contractual capital contribution to NedCar.

Shareholders' equity increased by SEK 6.7 billion. The distribution of Swedish Match shares and cash dividend to AB Volvo's shareholders reduced shareholders' equity by SEK 4.1 billion and SEK 1.9 billion, respectively. Net income for the year increased shareholders' equity by SEK 12.5 billion.

(see table: Statement of changes in consilidated financial position)

(see tables: Sales and Operating income, excluding norecurring items)

Volvo Cars

A total of 35.6 million (34.6) cars were sold in the world market in 1996. The North American market was sluggish while the market in Europe increased by 6%. There was a weak increase in sales in Japan.

Volvo Cars' sales amounted to SEK 83,589 M (83,340). The number of Volvo cars invoiced was 368,300 (374,600). The trend of sales in Europe was weak during the first six months but improved at the end of the year in connection with increased deliveries of the S40/V40 models. The year was also characterized by a favorable trend of sales for the Volvo 850 and Volvo's stronger position in the markets for large cars in the U.S. and Japan.

The number of Volvo cars invoiced in Europe declined to 216,100 (219,800). Sales in Sweden were affected by uncertainty with respect to the pending new tax on company cars. Volvo was affected to a high degree since company cars account for 50% of sales. Following presentation of the Government's bill at the end of the year demand increased. But registrations of Volvo cars fell by 11%, to 43,700. In Great Britain, Volvo's third-largest market, registrations declined 15%, to 33,700 (39,600), as a result of delayed deliveries of Volvo S40/V40s. Gains in sales were recorded in Germany, France, Belgium, the Netherlands, Finland, Austria and Portugal.

(see graph: Operating income, Volvo Cars)

Orders booked in the U.S. increased during the latter part of the year and a strong trend for both the Volvo 850 and Volvo 960 made up for the loss in volume of Volvo 940 sales. Volvo strengthened its position in Japan, where it sold 24,000 cars compared with 20,500 in 1995.

Volvo Cars' operating income increased from SEK 1,089 M in 1995 to SEK 1,498 M in 1996. The program to reduce costs continued and had an impact on income. As a result of a successively higher rate of deliveries of the Volvo S40 and V40 models during the latter half of the year, combined with increased sales of the Volvo 850, Volvo Cars reported a satisfactory trend of earnings in the fourth quarter. The operating margin was 1.8% (1.3) and the return on operating capital was 12% (8).

Volvo Trucks

The world market for heavy trucks declined by 7% in 1996, to 655,000 vehicles, from a record-high level in 1995. The decrease was most apparent in North and South America, but the markets in Japan, Southeast Asia and Australia also declined. The European market continued to be strong, with sales at the same high level as in 1995.

Volvo Trucks' sales decreased by 13%, to SEK 44,275 M. In all, the company delivered 63,700 medium-heavy and heavy trucks, 17% fewer than in the preceding year. Sales in Europe, amounting to 35,030 (35,190) were largely unchanged. Volvo Trucks' sales in North America fell by 38%, to 16,900 vehicles, and deliveries in South America were down 36%.

Volvo strengthened its share of the market in Europe, with a 16.7% (16.1) share in the heavy-truck class, and a 10.8% (10.0) share in the market for medium-heavy trucks (10 to 16 tons total weight). Its share of the market for heavy (Class 8) trucks in North America declined from 11.2% to 8.9% based on preliminary data, and in South America to 22.2% (25.9). The backlog of orders at year-end was 28% lower than a year earlier.

Volvo Trucks' operating income declined to SEK 878 M (5,073). The European operations reported satisfactory income despite lower margins resulting from stiffening competition. The decline in earnings was attributable mainly to smaller volumes of sales in North America and the costs of restructuring operations there. Restructuring costs, which among other also includes the concentration of the production to the plant in New River Valley, and costs related to the phasing out of certain products accounted for SEK 700 M of the total loss amounting to SEK 1,600 M in North America. Income was also affected adversely by a loss in South America following declining sales and depressed margins. The operating margin was 2.0% (9.9) and the return on operating capital was 10% (>25).


(see graph: Operating income, Volvo Trucks)

Volvo Buses

Volvo Buses delivered 7,410 buses and bus chassis in 1996, 8% more than the 6,830 delivered in 1995. Excluding the Prévost operations that were acquired as of July 1, 1995, the increase amounted to 200 buses. The order backlog at year-end was approximately 28% higher than on the same date a year earlier. Based on preliminary market data, Volvo Buses increased its share of the market for buses over 12 tons in Western Europe to 19% (18). Operating income declined from SEK 405 M in 1995 to SEK 331 M in 1996 due to stiffer competition and the continuing strength of the Swedish krona. The operating margin declined to 3.9% (5.3) and the return on working capital was 12% (18).

During the year Volvo Bus Corporation and Shanghai Automotive Company Ltd. concluded an agreement to form a jointly owned company in Shanghai. The agreement, which is subject to approval by various authorities, covers the production and marketing of modern city and intercity buses.

Volvo Construction Equipment

The decline in major markets for construction equipment continued in 1996. It was less striking in North America, but substantial in Germany. Other European countries also showed decreases, notably during the second half of the year. However, Volvo Construction Equipment maintained or strengthened its position in key business areas during the year.

Volvo Construction Equipment's sales declined to SEK 12,804 M (13,684). Higher invoicing, attributable to the acquisition of the Pel-Job company at the end of 1995, was offset by decreasing volumes of business and movements in foreign exchange rates. Operating income dropped from SEK 1,679 M to SEK 1,162 M as a result of higher product and marketing costs, the unfavorable trend of foreign exchange rates, and the smaller volumes. The operating margin was 9.1% (12.3) and the return on operating capital was 23% (>25).

Volvo Penta

Volvo Penta's sales were largely unchanged, compared with 1995 sales. As a result of unfavorable foreign exchange rates and cost increases - including restructuring costs of SEK 85 M - Volvo Penta reported an operating loss of SEK 27 M, compared with a profit of SEK 212 M in 1995. The operating margin was negative (1995: +5.5%), as was the return on operating capital (1995:+17%)

Volvo Aero

Volvo Aero's military-related activities during the year were to a high degree characterized by the Swedish Air Force's cutbacks related to the Viggen military aircraft in favor of the more cost-effective JAS 39 Gripen which is less demanding in terms of maintenance. In January 1997 Volvo Aero made a decision in principle to transfer the operations of Volvo Aero Support and Volvo Engine Services from Arboga to Trollhättan. The decision was caused by a dramatic reduction in Volvo Aero Support's revenue. The company's basic activity, the maintenance of Viggen RM-8 engines, will be reduced by 80% within a year and will cease entirely in the year 2003.

Commercial aviation traffic increased by 8% in 1996. Demand for new aircraft and spare parts rose sharply. Volvo Aero's sales attributable to commercial aircraft engine production increased 14%. During the latter part of the year Volvo Aero signed a joint-venture agreement with MTU the German commercial aircraft engine manufacturer that is part of Daimler-Benz Aerospace. Under terms of the agreement, Volvo Aero will participate in the world's largest aircraft engine program, PW 40 84/90/98, for Boeing 777 aircraft

Volvo Aero's operating income increased from SEK 103 M to SEK 153 M. The positive result was due mainly to sharply higher sales of commercial aircraft engine components and continuing rationalization measures. The operating margin was 3.7% (2.7) and the return on operating capital was 19% (13).

Operations being divested

Since January 1994 shareholdings totaling about SEK 34 billion in businesses not related to Volvo's core operations, excluding the dissolution of the cross ownership between Volvo and Renault, and including the sale of Pripps Ringnes in 1997, have been divested; of this amount divestments in 1996 accounted for SEK 14 billion.

In accordance with the decision of Volvo's Annual General Meeting on April 24, 1996, the shares in Swedish Match were distributed to Volvo's shareholders on May 13. Swedish Match shares were then quoted on the O-list of the Stockholm Stock Exchange and in the NASDAQ electronic exchange in the U.S, with an initial market value of SEK 10.1 billion. During the second quarter of the year the entire holdings of shares in Investment AB Bure (18% of the voting rights and share capital) and Spira AB (9.5% of the voting rights and share capital) were sold for SEK 525 M and SEK 83 M, respectively.

The sale of 50,006,534 shares of Pharmacia & Upjohn, Inc., equal to 9.9% of the share capital in the company, was effected on July 23, 1996. The selling price was set at USD 40, or SEK 262.82 per share, and the buyers comprised a large number of institutional investors, mainly in Europe and North America. The Volvo Group's proceeds from the sale amounted to SEK 12.9 billion. Following the sale, Volvo's holding in Pharmacia & Upjohn amounts to 3.9% of the share capital.

In February 1997, AB Volvo and Orkla ASA (Norway) concluded an agreement whereby Volvo will sell its holding in Pripps Ringnes AB to Orkla. Volvo owns 49% of the share capital and holds convertible debentures which, upon full conversion will increase Volvo's holding to 55%. Volvo is receiving a total of SEK 4.7 billion and the transaction will result in a profit of SEK 3.0 billion in the Group accounts, which will be reported in the first quarter of 1997.

Other changes in the Volvo Group. During the spring of 1996 AVC Intressenter - a holding company owned jointly by Volvo Aero and Atlas Copco completed the sale of the VOAC company to Parker Hannifin, an American company. Volvo Aero also increased its holding in Air Ground Equipment Sales (AGES), an American company, from 5% to 25%. In the beginning of 1997 this holding was increased to 51% and AGES thereby became a subsidiary of Volvo Aero.

In January 1997 Volvo took over the importing operations in Austria from Wolfgang Denzel Kfz. The distribution of Volvo passenger cars and trucks in that country was then integrated with Volvo's other marketing organizations in Europe.

Groupwide pension foundations

During 1996 the Board of Directors of AB Volvo formed two Groupwide pension foundations. The purpose is to secure pension commitments within the framework of the ITP plan and adapt the handling of Swedish pension obligations to international conditions. Liquid funds totaling SEK 4.2 billion were transferred from the Volvo Group to the foundations at midyear.

Employees

At year-end 1996, the Volvo Group had 70,330 employees, a decrease of 8,720 compared with the number a year earlier. The change was due largely to the fact that Swedish Match (7,000 employees) is no longer part of the Group. Excluding acquisitions of companies and changes within the Group, the number of employees in Volvo Cars decreased by 1,300, mainly in the production operations in Sweden. Approximately 800 persons, mainly in the U.S. and Brazil, left Volvo Trucks during the year.

Parent Company

(see table: Parent Company income statements )

Dividends received from subsidiaries amounted to SEK 720 M and dividends from non-Group companies totaled SEK 184 M. Allocations include Group contributions received in the net amount of SEK 997 M..

New President and Chief Executive Officer

Sören Gyll will retire as President and Chief Executive Officer of the Volvo Group in connection with the Annual General Meeting on April 23, 1997. He will be succeeded on the same date by Leif Johansson, who is President of AB Electrolux since 1991 and Chief Executive Officer since 1994.

Dividend proposal

The Board of Directors and President propose that a dividend of SEK 4.30 be paid for 1996 (1995:4.00, plus one share of Swedish Match for each Volvo share held, irrespective of series). The proposed cash dividend amounts to SEK 1.993 M (1995: SEK 1,854 M plus the dividend pertaining to Swedish Match amounting to a book value of SEK 8,000 M in AB Volvo on the date of dividend).

Redemption of own shares

Since the repurchase of own shares is not currently possible according to Swedish law, AB Volvoīs Board of Directors will propose redemption of own shares with one share for each multiple of 20 Volvo shares held. The price will be based on the market price plus a premium. The Boardīs ambition is to implement the redemption procedure as soon as possible. The schedule and terms will be disclosed as soon as possible, however, at the latest in conjunction with publication of the Volvo Annual Report on March 19.

The Annual General Meeting of AB Volvo will be held 2:00 PM Wednesday, April 23, 1997 in Lisebergshallen, Göteborg, Sweden. April 28 has been proposed as the record date for payment of dividends, with estimated distribution on May 6.

The interim report covering first-quarter 1997 operations will be released on April 23.

Göteborg, February 19, 1997