Report on 1997 operations

	1997	1996
Net sales, SEK M	183,625	156,060
Operating income, SEK M	8,418	3,710
Income after financial items, SEK M	13,176	14,203
Net income, SEK M*	10,359	12,477
Income per share, SEK*	22.90	26.90
Return on shareholders' equity, %	17,4	23,7
Proposed dividend, SEK per share	5.00	4.30

* Excluding gains on sales of shares, the net income was SEK 5,739 M for 1997 and SEK 3,961 M for 1996
and income per share SEK 12.70 and SEK 8.50, respectively.

Growth in volume and improved profitability in all operating sectors. • Operating income rose to SEK 8.4 billion. • Sales successes for new passenger car models and variants yielded significantly higher operating income for Volvo Cars. The North American truck operations reported a positive operating income in the fourth quarter and sales of the Volvo VN increased in the United States. • High rate of product renewal and comprehensive investment programs among others in new growth markets. Continued expansion within Volvo's sales financing operations. • The Board of Directors proposes a dividend of SEK 5.00 per share for 1997.

 

Comments by the Chief Executive Officer The growth in Volvo's earnings in 1997 was satisfactory. Sales and operating income increased in all operating sectors. Operating efficiency and productivity increased. The operating margin rose to 4.6%. A large number of product innovations were introduced and were well received in the market. The high rate of product renewal continues. The largest improvement in earnings took place in Volvo Cars. The upgrading of the product line through the Volvo S40/V40 and the Volvo S70/V70 in several highly specified versions resulted in a better price structure and the highest sales recorded during the 1990s. In North America, where our four-wheel drive cars, including the Volvo V70 XC, were major successes, sales of cars exceeded 100,000. Volvo Trucks' earnings improved steadily during the year. In the U.S, sales of the Volvo VN trucks increased which, combined with the effects of the implemented restructuring measures, resulted in a positive operating income during the fourth quarter. Increased demand in South America resulted in a favorable trend of profitability. The market share in Europe declined slightly. Sales in Eastern Europe rose sharply. Volvo Buses is in an expansive phase and earnings improved substantially. Important acquisitions were made during the year, among others Volvo purchased Nova BUS, that is leader in the market for city buses in the U.S. and Canada. The work of establishing a base in Russia is proceeding and an agreement has been reached covering the production of buses in the city of Omsk. Sales and earnings of Volvo Construction Equipment were higher, due in part to organic growth and in part to the acquisition of Champion Road Machinery. The efforts to establish strong footholds in East Asia and South America are continuing. Volvo Penta reported a substantial improvement in earnings for the year as a whole despite a very weak fourth quarter. Sales increased by 15%. Volvo Penta's global growth is continuing, among others, through a joint venture in China and closer cooperation with Mitsubishi Heavy Industries. Volvo Aero reported a sharp increase in earnings, mainly due to a strong increase in Commercial Aircraft Engines and the acquisition of The AGES Group. Operations as a whole in 1997 were characterized by successful exploitation of earlier basic investments through new versions of products, a high rate of product development and establishments in such growth markets as China, India, Russia and Eastern Europe. The turbulence in East Asia is resulting in lower sales at the present time. But, in a longer perspective, we believe that the growth and customer structure in the region well justify a strong presence in these markets. During 1998 Volvo will introduce products whose reception in the market will affect the Group in the new millennium. The phasing out of the Volvo 90 series and the launching of a new passenger car built on Volvo's new, large platform involve a substantial changeover in production and temporarily lower earnings during the running-in period. But I have great confidence that the ongoing product renewal will further strengthen Volvo's competitiveness and reputation as a leading manufacturer of transportation equipment for demanding customers in selected market segments.

Report of the Board of Directors of AB Volvo on the 1997 accounts Net sales of the Volvo Group for the full year 1997 amounted to SEK 183.625 M, compared with SEK 156.060 M in the preceding year, an increase of 17% for the automotive operations, excluding acquired companies. Also adjusted for foreign exchange movements, the increase was 10%. Net sales of Volvo Cars increased by 10%, adjusted for the effects of foreign exchange movements. The number of Volvo cars invoiced was 386,440 (368,240) and new model versions contributed to strong sales in both Europe and the United States. The number of Volvo trucks delivered increased to 68,980 (63,680) and 8,730 (7,410) buses and bus chassis were delivered; as a result, net sales for these business areas, adjusted for foreign exchange effects, rose by 8% and 14% respectively. Notable sales increases were reported for the other business areas. The largest increases in sales for Group operations as a whole were reported in North America (38%), South America (41%) and Eastern Europe (39%). Volvo's sales in Asia declined by 4%, as a consequence of the turbulent economic development during the year. Volvo's sales in Asia accounted for 9% of the Group's total net sales in 1997. Operating income amounted to SEK 8,418 M, which was SEK 4,706 M higher than in the preceding year. All business areas reported higher operating income than in 1996. Larger sales volumes and a more favorable product mix in most business areas contributed SEK 3,000 M to the improvement of the operating income, and the effects of foreign exchange movements contributed SEK 2,600 M, after taking forward contracts and options into account. Increased sales volumes and substantial market investments, primarily for Volvo Cars in North America resulted in higher selling expenses. The operating margin for the Group developed favorably during the year and amounted to 4.6% for the full year and 5% for the fourth quarter isolated.

Financial position

* Sales-financing operations are reported in accordance with the equity method. Internal receivables and liabilities related to the sales-financing operations are excluded.

 

Key ratios	1997	1996
Return on shareholders equity, %	17.4	23.7
Return on shareholders' equity excluding gain on sales of shares, %	10.4	8.1
Shareholders' equity and minority interests as percentage of total assets	37.6	41.4
Shareholders' equity and minority interests excluding sales financing, as percentage of total assets	50.8	48.0
Net financial assets, SEK billion	19.1	12.0
Net financial assets as percentage of shareholders' equity and minority interests	31.2	20.6
Income per share, SEK	22:90	26:90
Income per share excluding gain on sales of shares, SEK	12.70	8.50

 

Cash flow analysis, billions	Total	Volvo Group excl sales financing	Sales-financing
Net income	10.4	10.5		(0.1)
Depreciation and other noncash-related items	7.2	5.2		2.0
Gain on sales of securities	(4.1)	(4.1)		-
Change in operating capital and deferred tax liabilities	(2.0)	5.0		(7.0)
Cash flow from operations	11.5	16.6		(5.1)
Capital expenditures	(9.9)	(9.8)		(0.1)
Investments in leasing assets	(9.8)	(0.5)		(9,3)
Disposals	1.9	1.0		0.9
Investments in shares, net	10,7	10.7		-
Long-term receivables, net	(6.0)	1.2		(7.2)
Acquisitions and sales of companies	(1.3)	(1.3)		-
Remaining after net investments	(2.9)	17.9		(20.8)
Increase in loans	4.4
Dividend paid to AB Volvo shareholders	(2.0)
Rights issue of shares	0.1
Redemption of shares	(5.8)
Other	(0.1)
Change in liquid funds excluding translation differences	(6.3)
Translation differences in liquid funds	0.3
Change in liquid funds	(6.0)
In the cash flow analysis, the effects of major acquisitions and divestments of subsidiaries have been excluded from other changes in the balance sheet. The effects of changes in foreign exchange rates at translation of foreign subsidiaries have been excluded, since they do not affect cash flow.

Net sales and operating income by business area Volvo Cars The total market for passenger cars in 1997 increased to 37.5 (36.4) million units. The North American market declined by 2%, while the market in Europe increased by nearly 5%. Demand in Japan fell by 4%. With a broadened and market-adapted product program, Volvo Cars was able to consolidate and strengthen its positions in 1997, notably in Europe and North America. In all, 386,400 (368,300) Volvo passenger cars, nearly 5% more than in 1996, were invoiced in 1997. The medium-class Volvo S40 and V40 cars were received well in Europe and were also introduced in Japan, South Africa and a number of markets in Southeast Asia. The new turbo versions of the Volvo S40 and V40 made a major impact on the market during the second half of the year. The Volvo S70 and V70, successors to the Volvo 850, contributed to strengthen Volvo Cars' sales in the North American market. Sales of the Volvo C70 Coupé were begun to a limited extent in the United States, Europe and Japan. Volvo Cars' sales and market shares increased in many European countries. Sales of new cars rose in Sweden once the uncertainty with respect to the taxation of company cars was dispelled. The number of Volvo passenger cars registered rose by 18%, to 51,400 (43,700), while the share of the market decreased slightly. Volvo models captured the top three spots in rankings of Swedish car sales. The number of Volvo registrations in Great Britain rose by 21%, to 40,700 (33,700) in a growing market. For the first time since the end of the 1980s Volvo sold more than 100,000 cars in North America. The share of the market increased in both the U.S. and Canada. The 4-wheel drive Volvo V70 AWD and Volvo V70 XC station wagons that were introduced during the year were immediate sales successes. The number of Volvo cars sold in Japan, declined to 19,900 (24,000). Some recovery in demand was noted towards the end of the year.

Operating income improved substantially, to SEK 4,510 M (1,498). The increase was attributable to larger sales volumes, higher margins and a more favorable product mix as a result of the introductions of the new model versions. Operating income was also affected by positive effects of foreign exchange movements, which were offset to some extent by higher costs mainly for marketing. Volvo Cars' operating margin increased to 4.7% (1.8) and the return on operating capital exceeded 25% (12).

 

Operating income, SEK M	1997		1996
Volvo Cars	4,510		1,498
Volvo Trucks	1,812		878
Volvo Buses	550		331
Volvo Construction Equipment	1,444	*	1,162
Volvo Penta	181		(27)
Volvo Aero	472	*	153
Other and eliminations	(577)		(376)
Automotive operations total	8,392		3,619
Operations being divested	26		91
Volvo Group total	8,418		3,710
*SEK 93 M pertaining to Champion Road Machinery Ltd and SEK 242 M to The AGES Group ALP is included in Volvo Construction Equipment and Volvo Aero, respectively.

 

Operating margin, %	1997	1996
Volvo Cars	4.7	1.8
Volvo Trucks	3.6	2.0
Volvo Buses	5.2	3.9
Volvo Construction Equipment	8.6	9.1
Volvo Penta	4.1	neg
Volvo Aero	6.3	3.7
Volvo Group total	4.6	2.4

Employees The number of employees in the Volvo Group increased by 2,570, to 72,900 during the year. Acquisitions of companies, notably The AGES Group and Champion Road Machinery, increased the number of employees by approximately 1,600. Parent Company Income from shares in Group companies included dividends of SEK 23,563 M. Shareholdings in Group companies were written down in the amount of SEK 8,244 M. Allocations include Group contributions of SEK 4,077 M, net.

Parent Company income statement, SEK M	1997	1996
Net sales	520	559
Operating income	(403)	(370)
Income from shares in Group companies	15.360	685
Income after financial items	(98)	179
Net interest expense	(570)	(815)
Other financial income and expense	(594)	239
Income after financial items	13.695	(82)
Allocations	4.354	978
Taxes	-	2
Net income for the year	18.049	898

 

The Volvo share delisted from the exchanges in Paris and Switzerland Considering the low turnover of the Volvo share on the exchanges in Paris and Switzerland, Volvo will be delisting the Volvo share from these exchanges. Proposed dividend The Board of Directors proposes to the Annual General Meeting a dividend of SEK 5.00 per share for 1997, or a total of SEK 2,208 M. The year-earlier dividend was SEK 4.30 per share. The Volvo Group is in an expansion phase and the Board considers that the Group should be assured a financial freedom of action in order to participate in structural changes through acquisitions and for product and market investments. The acquisitions in all significant respects will be in the commercial vehicle area. Should the Board in a future assessment of the Group’s long-term capital requirements consider that the financial net assets exceed requirements, the Board will propose that the shareholders are provided this surplus. In the Board’s opinon, the best method would be repurchase of own shares and anticipates that Swedish legislation provide the possibility for such an action. The Annual General Meeting of AB Volvo will be held in Göteborg, in Lisebergshallen, on April 22, 1998 at 2:00 p.m. April 27 is proposed as the record date for eligibility to receive cash dividends, with May 5 as the estimated date of distribution. The interim report covering operations during the first quarter of 1998 will be released April 22, 1998. Göteborg, February 18, 1998 AB Volvo (publ) The Board of Directors

 

Divestments and acquisitions Shareholdings in Pripps Ringnes (49%), Renault S.A. (11%) and SAS Sverige (5%) were divested during 1997. Sales proceeds amounted SEK 10.8 billion, of which SEK 4.5 billion for Pripps Ringnes and SEK 5.9 billion for Renault. At year-end 1997, the remaining holdings outside the automotive operations comprised a 3.9% interest in the pharmaceutical company Pharmacia & Upjohn Inc. Several industrial acquisitions were carried out during the year. Volvo Construction Equipment acquired all shares in Champion Road Machinery Ltd and Volvo Aero increased its holdings in The AGES Group, from 25% to 60%. At the end of the year Volvo Buses' acquisitions of the Finnish bus coach company Carrus Oy and the share majority (51%) in the U.S. bus manufacturer Nova BUS was announced. Both companies are included in the Volvo Group as of 1998. Within sales financing, the outstanding 50% of the shares in the Brazilian sales financing company Transbanco Banco de Investimento SA were acquired at the end of 1997. The company is consolidated in Volvo's balance sheet as of December 31, 1997. Prior to the date, the holding is reported in accordance with the equity method.

Volvo Group quarterly figures SEK M unless otherwise specified	4/1996	1/1997	2/1997	3/1997	4/1997
Net sales	42,420	41,849	47,175	41,924	52,677
Cost of sales	(32,728)	(32,324)	(35,649)	(31,330)	(39,687)
Gross income	9,692	9,525	11,526	10,594	12,990
Research and development expenses	(2,058)	(2,062)	(2,427)	(2,000)	(2,170)
Selling expenses	(4,265)	(3,681)	(4,201)	(3,914)	(5,364)
Administrative expenses	(1,799)	(1,686)	(1,773)	(1,788)	(1,771)
Other operating income	1.758	1.028	880	340	939
Other operating expenses	(1,942)	(1,236)	(1,945)	(1,405)	(1,981)
Operating income	1,386	1,888	2,060	1,827	2,643
Income from investments in associated companies	109	3,005	75	85	(236)
Income from other investments	211	57	277	845	(11)
Interest income and similar credits	1,349	993	1,035	929	529
Interest expenses and similar charges	(720)	(803)	(710)	(785)	(450)
Other financial income and expenses	(161)	108	(40)	(125)	(20)
Income after financial items	2,174	5,248	2,697	2,776	2,455
Taxes	(447)	(717)	(688)	22	(1,322)
Minority interests	82	(30)	(48)	(7)	(27)
Net income	1,809	4,501	1,961	2,791	1,106
Depreciations included above	1,615	1,670	1,539	1,557	2,030
Income per share SEK	3:90	9:70	4:20	6:40	2:60
Average number of shares, millions	463.6	463.6	463.6	441.5	441.5

Definitions of key ratios Income per share is calculated as net income divided by the weighted average number of shares outstanding during the period. Return on shareholders' equity is calculated as net income divided by average shareholders' equity Net financial assets/net debt is calculated as liquid funds, short term receivables and long-term interest-bearing receivables reduced by short-term and long-term interest-bearing liabilities. Net debt does not include net debt in Volvo's sales finance companies, since interest expense in these companies is charged against operating income and does not affect consolidated net interest expense. Operating margin is calculated as operating income divided by sales.

Please note The new Swedish Annual Accounts Acts being applied by Swedish corporations and certain trading companies as of January 1, 1997 and has affected Volvo's external reporting beginning with the report on first-quarter 1997 operations. As in the case with other major changes in accounting principles, figures for earlier years have been adjusted to conform with the new principles and forms of presentation.

Volvo car sales number of units invoiced	1997	1996	Change in %
Europe	239,950	224,890	+7
Western Europe	234,120	219,980	+6
Eastern Europe	5,830	4,910	+19
North America	102,060	95,650	+7
South America	2,210	950	+132
Asia	36,160	40,280	(10)
Other markets	6,060	6,470	(6)
Total Volvo cars sold	386,440	368,240	+5
Renault cars	29,630	24,920	+19
Total cars	416,070	393,160	+6
By series
Volvo S90/V901	28,290	33,960	(17)
Volvo 940	39,450	38,600	+2
Volvo S70/V702	203,670	196,640	+4
Volvo S40/V40+400	114,150	99,050	+15
Volvo C70	880	-	-
Total	386,440	368,250	+5
1 1996: Volvo 960; 2 1996 850
Volvo truck sales	1997	1996	Change in %
Europe	34,460	34,970	(1)
Western Europe	31,030	32,310	(4)
Eastern Europe	3,430	2,660	+29
North America	20,900	16,850	+24
South America	6,970	4,980	+40
Asia	4,710	4,850	(3)
Other markets	1,940	2,030	(4)
Total Volvo trucks	68,980	63,680	+8
Volvo bus/bus chassis sales	1997	1996	Change in %
Europe	4,200	3,840	+9
North America	990	750	+32
South America	1,420	1,460	(3)
Asia	1,410	1,010	+40
Other markets	710	350	+103
Total buses	8,730	7.410	+18

As of 1997, the Volvo Group's reporting is by market area in accordance with new geographical definitions based on ISO standards. Reporting in prior years has been adjusted to reflect the new principle

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