Report on 1998 operations

	1998	1997

Net sales, SEK M	212,936	183,625
Operating income, excluding items affecting comparability, SEK M¹⁾	9,010	8,418
Operating income, SEK M	6,679	8,418
Income after financial items, SEK M²⁾	11,619	13,176
Profit for the year, SEK M	8,638	10,359
Income per share, SEK, excluding items affecting comparability and gains on sales of shares	14.40	12.70
Return on shareholders' equity, excluding items affecting comparability and gains on sales of shares, %	10.3	10.4

1) Items affecting comparability during 1998 pertain to provisions for restructuring costs of SEK 2,679 M and a gain of SEK 348 M on the sale of Trucks’ rear-axle production in Lindesberg. 2) Includes gains on sales of shares amounting to SEK 4,469 M in 1998 and SEK 4,018 M in 1997.

Comments by the Chief Executive Officer
The Volvo Group 1998
Financial review by business area

Cars
Trucks
Buses
Construction Equipment
Aero
Marine & Industrial Engines

Volvo Group quarterly Figures
Units invoiced

· Net sales of the Volvo Group rose 16%, to SEK 212.9 billion. Of this amount, SEK 103.8 billion (+8%) was attributable to Cars and SEK 111,1 billion (+23%) to Commercial Products*.

· Operating income, excluding items affecting comparability, amounted to SEK 9.0 billion (8.4), divided as follows:
- Cars: SEK 3.8 billion (4.5)
- Commercial Products, SEK 5.6 billion (4,5)

· Volvo made a number of important acquisitions in the commercial sector, among others the bus companies Nova BUS (North America) and MASA (Mexico) as well as the construction equipment division of Samsung in South Korea. After the close of the fiscal year, Volvo acquired 12.85% of the share capital in Scania AB.

· The Board of Directors proposes a dividend of SEK 6.00 per share for 1998. It is also giving notice of a Special General Meeting of shareholders with respect to AB Volvo’s proposed sale of Volvo Cars to Ford Motor Company.

*) Commercial products comprises Trucks, Buses, Construction Equipment, Marine and Industrial Engines and Aero. Other and eliminations not included.

Comments by the Chief Executive Officer

Nineteen ninety-eight was an eventful and in some ways very successful year for the Volvo Group. It was also a year of analysis and strategic deliberations with respect to the future orientation of the Group, a process that has now resulted in the proposed sale of Volvo Cars to Ford Motor Company. Volvo’s intention is to build a partially new, even stronger Volvo, focused on commercial products.

Sales in 1998 were strong and – excluding acquisitions – increased in all business areas. Operating income developed well in Volvo Trucks, Volvo Construction Equipment and Volvo Aero, while income in Volvo Buses and in Marine and Industrial Engines was disappointing. Volvo Cars’ income was satisfactory, considering that the full earnings capacity of the Volvo S80 model will not be realized until 1999. The excess capacity that has been noted in the Group as a whole is today causing corrective measures to be taken in all business areas. This is a situation that should be avoided in the future through more continuous rationalization.

The level of activity in 1998 was high. Parallel with the introduction of important new products, a number of acquisitions and divestments were made in line with plans announced earlier in the areas of growth, product renewal and operating efficiency. The Volvo S80 passenger car, the Volvo FM truck series, the new-generation Volvo FH trucks and the Volvo 5000 and 7000 city buses that were introduced during the year are all the result of strategic investments in product families that will have an impact on earning capacity well into the next decade. A new generation of compact wheeled loaders were launched within Volvo Construction Equipment. The acquisition of Samsung’s construction equipment division and Volvo Buses’ expansion in the North American market, Mexico and in the Nordic region are steps that will strengthen Volvo’s global positions in the field of commercial products over the long term.

Taken as a whole, our program in recent years has involved an all-out effort in which the focus was on product- and process-development. This program has been successful. All parts of our business today have modern, strong product programs that are respected and in demand in all parts of the world.

The transport vehicle industry has long been one of the most competitive in the world. A consolidation is now under way, involving the formation of larger and more cost-effective constellations and units. In this perspective, and against the background of Volvo’s two distinctly separate operating areas – with Cars on one side and Commercial Products on the other, both facing large investments in future generations of products – Management and Board of Directors has made a strategic analysis of the conditions and prerequisites for competitive operations over the long term. The result of this analysis is that – in a longer perspective - Volvo Cars, which today is strongly equipped, would benefit from being part of a larger environment, with access to more substantial development and distribution resources, and consequently the possibility to spread costs over greater volumes.

Following mature deliberation, Ford Motor Company was considered to offer by far the best alternative for Volvo Cars. and Volvo's shareholders. The price of SEK 50 billion, which has been considered to well represent the market value of the Cars' operations. is evidence of a strong increase in value and great confidence in Volvo Cars' potential for growth with Ford as owner. It also means that the Volvo Group is acquiring financial resources that will greatly increase the abilities to continue to build on already strong positions in the field of commercial products. With this financial freedom of action, and through acquisitions and investments, Volvo will be able to establish positions of world leadership in industries that – in terms of profitability, and thus from the perspective of shareholders - is better than the current structure. I hope that the shareholders share the conviction of the Board and Management that this opportunity to focus and create positions of strength in areas where we have already demonstrated our capacity will benefit Volvo, our employees and our shareholders.

Leif Johansson
President and Chief Executive Officer

1) Excluding operations being divested. Items affecting comparability pertain to SEK 1,150 M in the second quarter and SEK 1,181 M in the fourth quarter 1998

In January 1999 AB Volvo reached an agreement with Ford Motor Company to sell Volvo Cars to Ford for SEK 50 billion. The sale, which is conditional upon the parties concluding a definitive contract approval of Volvo’s shareholders and pertinent authorities, will strengthen Volvo Cars’ future prospects and allow Volvo to make aggressive investments in commercial products as trucks, buses, construction equipment and marine engines, as well as equipment and maintenance of aircraft engines.

A separate document containing information for shareholders on Volvo’s sale of Volvo Cars to Ford will be presented to Volvo’s shareholders at the Extraordinary General Meeting at which the matter of the sale will be addressed.

The Volvo Group – 1998

A number of strategic acquisitions and structural transactions involving Volvo’s commercial products were implemented during 1998. Volvo Buses acquired Carrus Oy in Finland, Scandinavia’s largest manufacturer of bus bodies; 51% of Nova BUS Corporation, a North American bus manufacturer (acquired via Prévost Car Incorporated); and Mexicana de Autobuses SA de CV (MASA), a Mexican bus producer. Volvo Construction Equipment acquired the construction equipment division of Samsung Heavy Industries in South Korea and reduced its interest in Euclid Hitachi Heavy Equipment Inc. from 60% to 20%. And Volvo Trucks strengthened its sales-financing operations through acquisition of BRS Truck Rental and Hire in Great Britain.

In December 1998 an agreement was reached covering Volvo Cars’ and Mitsubishi’s acquisition of the Dutch Government’s share of the NedCar automotive plant in Born, the Netherlands, during the first quarter of 1999. Thereafter, the plant will be equally owned by Volvo and Mitsubishi.

In January 1999, following the end of the fiscal year, Volvo acquired 12.85% of the share capital, corresponding to 13.47% of the vote of the Scania AB.

Income summary

Net sales of the Volvo Group for 1998 amounted to SEK 212.9 billion, an increase of 13% excluding acquired companies, compared with sales of SEK 183.6 billion in the preceding year. Adjusted for changes in foreign exchange rates, the increase was 11%.

Demand per market area was characterized by great geographical differences for all of Volvo’s business areas, ranging from strong demand in North America and Europe to very weak demand in Southeast Asia and a leveling-off in South America. Increases in sales continued to be substantial in Western Europe (+16%) and North America (+30%) sales growth stagnated in South America during the year and net sales were at the level posted in the preceding year. Volvo’s sales in Asia declined by 23%.

Excluding acquired units, net sales increased in all Volvo business areas, compared with the preceding year. Cars’ net sales were up 8%, and the increase for the other business areas as a whole was 17%.

Items affecting comparability - provisions for restructuring

Operating income was charged with items affecting comparability amounting to
SEK 2,331 M, of which SEK 1,150 M was allocated in the second quarter as a provision for restructuring costs in Construction Equipment due, among other factors, to the acquisition from Samsung, SEK 910 M, and in Buses’ operations in Europe, SEK 240 M. The balance of the provision, SEK 1,181 M, pertains mainly to costs of contractual retirements and severances. Provision also include writedowns of fixed assets as a result of the alignment of the industrial structure and the distribution and market organizations. The adaptation includes transfer and closing of production, market and distribution units. SEK 681 M of the provision pertains to Cars, SEK 46 M to Trucks, an additional SEK 182 M to Buses, SEK 158 M to Marine and Industrial Engines and SEK 114 M other operations. Trucks’ provision includes a capital gain of SEK 348 M on the sale of the rear-axle production operations in Lindesberg.

Group operating income amounted to SEK 6,679 M. (8,418). Excluding items affecting comparability, operating income increased by SEK 592 M, to SEK 9,010 M.

Operating income in the Commercial Products sector as a whole, which developed well, increased by SEK 1,158 M to SEK 5,617 M. Higher sales volumes, a favorable trend of prices for Volvo Trucks in North America, together with cost-savings in production, were the primary factors in the improvement in income. This improvement was partially offset by increased investments in product development, as well as by costs of retooling production to handle new products.

Volvo Cars’ operating income, excluding items affecting comparability, decreased to
SEK 3,808 M (4,510). Larger volumes of sales, favorable foreign exchange rates and cost-reduction measures in production and purchasing did not compensate fully for declining demand in Southeast Asia, higher product development costs, increased price pressures and increases in costs for the introduction and start-up of production of the Volvo S80.

Trucks and Cars both reported strong operating income in the fourth quarter. The improvement was due mainly to larger volumes of business than in any previous quarter.

The operating margin developed negatively during the year as a whole and amounted to 3.1% (4.6). Excluding items affecting comparability, the operating margin was 4.2% (4.6). The operating margin was lower in all business areas except Trucks. Volvo Construction Equipment and Volvo Aero exceeds the Group target of an operating margin exceeding 5% as well as Trucks in the fourth quater.

The operating margin for Cars was 3.7%, and for Commercial Products, 5.1%.

Income from investments in associated companies SEK 0.4 billion (2.9) mainly of income from participations in NedCar, Bilia AB and AB Volvofinans. The change compared with the preceding year was attributable to a capital gain of SEK 3.0 billion in 1997 on the sale of Pripps Ringnes AB shares.

Income from other shares and participations included a profit of SEK 4.5 billion that arose in connection with the sale of Volvo’s remaining shares in Pharmacia & Upjohn, Inc.

Net interest income amounting to SEK 0.1 billion (0.7) was generated through a return of 5.6% on average interest-bearing assets and average loan costs of 8.8%. Lower net interest income relative to the preceding year was due primarily to lower average net financial assets for the Group as a whole and lower interest rates in Europe. In addition, the expansion in certain growth markets such as South Korea, Eastern Europe and South America involved local financing at high rates in those markets.

Tax expense increased to SEK 2.9 billion (2.7) and was equal to an average tax rate of 25% (21). Tax expense consisted largely of current taxes.

Profit for the year for the year amounted to SEK 8.6 billion (10.4) and the return on equity, excluding items affecting comparability and gains on the sale of shares, was 10.3% (10.4).

Consolidated income statements, SEK M
	1998	1997

Net sales	212,936	183,625
Cost of sales	(163,876)	(138,990)
Gross income	49,060	44,635
Research and development expenses	(10,104)	(8,659)
Selling expenses	(19,042)	(17,160)
Administrative expenses	(8,091)	(7,018)
Other operating income and expenses	(2,813)	(3,380)
Items affecting comparability	(2,331)	-
Operating income	6,679	8,418
Income from investments in associated companies	444	2,929
Income from other investments	4,526	1,168
Interest income and similar credits	1,502	3,486
Interest expenses and similar charges	(1,375)	(2,748)
Other financial income and expenses	(157)	(77)
Income after financial items	11,619	13,176
Taxes	(2,939)	(2,705)
Minority interests	(42)	(112)
Profit for the year	8,638	10,359

Gross and operating margin, %	1998	1997

Gross margin	23.0	24.3
Research and development expenses in % of net sales	4.7	4.7
Selling expenses in % of net sales	8.9	9.3
Administrative expenses in % of net sales	3.8	3.8
Operating margin, excluding items affecting comparability	4.2	4.6
Operating margin	3.1	4.6

Consolidated balance sheets SEK M	Volvo Group excl sales financing ¹⁾		Sales financing		Total
	Dec 31/98	Dec 31/97	Dec 31/98	Dec 31/97	Dec 31/98	Dec 31/97

Assets
Intangible assets	5,678	3,262	100	22	5,778	3,284
Property, plant and equipment	36,045	30,677	162	116	36,207	30,793
Assets under operating leases	1,817	1,366	20,468	12,135	22,285	13,501
Shares and participations	9,707	8,069	715	728	3,393	4,583
Long-term sales finance receivables	171	190	24,375	13,777	24,546	13,967
Long-term interest-bearing receivables	3,293	2,266	20	3	3,313	2,269
Other long-term receivables	3,666	3,708	192	0	3,858	3,708
Inventories	31,876	27,756	252	237	32,128	27,993
Short-term sales finance receivables	81	37	22,171	18,300	22,252	18,337
Short-term interest bearing receivables	1,422	2,398	0	0	1,422	2,398
Other short-term receivables	26,880	21,118	2,140	741	29,020	21,859
Marketable securities	6,850	10,930	318	32	7,168	10,962
Cash and bank	11,969	8,807	1,087	834	13,056	9,641
Total assets	139,455	120,584	72,000	46,925	204,426	163,295

Shareholders' equity and liabilities
Shareholders' equity	68,056	60,431	7,029	4,214	68,056	60,431
Minority interests	804	859	56	40	860	899
Provision for post-employment benefits	2,906	3,268	30	28	2,936	3,296
Other provisions	21,886	18,266	3,301	1,391	25,187	19,657
Loans	5,909	2,097	58,321	39,120	64,230	41,217
Other liabilities	39,894	35,663	3,263	2,132	43,157	37,795
Shareholders' equity and liabilities	139,455	120,584	72,000	46,925	204,426	163,295

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

The Group’s total assets increased by SEK 41.1 billion, to SEK 204.4 billion, during the year. The increase was due primarily to continuing expansion of the sales-financing business (SEK 21.8 bn), to changes in the composition of the Group (SEK 8.7 bn), and to the effect of changes in foreign exchange rates (SEK 5.6 bn). The rest of the increase, amounting to SEK 5.0 billion, was attributable mainly to fixed assets, inventories and current receivables resulting from large investments and increased volumes of business. The increase attributable to acquired operations includes goodwill in the amount of SEK 2.5 billion.

Shareholders’ equity increased by SEK 7.6 billion in 1998. Profit for the year provided SEK 8.6 billion, while the dividend to shareholders reduced equity capital by SEK 2.2 billion. The weakening of the Swedish krona during the year caused an increase of SEK 1.2 billion in equity capital, including the effect of hedging changes in exchange rates through borrowing in foreign currencies.

The Group’s net financial assets at December 31, 1998 amounted to SEK 14.8 billion (19.1).

Cash flow analysis SEK billions	Volvo Group exl sales financing		Sales financing		Total
	1998	1997	1998	1997	1998	1997
Profit for the year	8.3	10.5	0.3	(0.1)	8.6	10.4
Depreciation and other non cash-related items	1.8	5.2	3.2	2.0	5.0	7.2
Change in working capital and deferred taxes	0.2	0.9	(1.8)	(7.0)	(1.6)	(6.1)
Cash flow from operations	10.3	16.6	1.7	(5.1)	12.0	11.5
Capital expenditures	(10.4)	(9.8)	(0.1)	(0.1)	(10.5)	(9.9)
Investments in leasing assets	(0.9)	(0.5)	(11.8)	(9.3)	(12.7)	(9.8)
Disposals	1.5	1.0	1.3	0.9	2.8	1.9
Investments in shares, net	5.5	10.7	0.0	-	5.5	10.7
Long-term receivables, net	(0.5)	1.2	(9.4)	(7.2)	(9.9)	(6.0)
Acquisitions and sales of companies	(0.5)	(1.3)	(0.6)	-	(5.6)	(1.3)
Remaining after net investments	0.5	17.9	(18.9)	(20.8)	(18.4)	(2.9)
Increase in loans					19.9	4.4
Dividends paid to AB Volvo's shareholders					(2.2)	(2.0)
Other					-	(5.8)
Change in liquid funds, excluding, translation differences					(0.7)	(6.3)
Translation differences in liquid funds					0.3	0.3
Change in liquid funds					(0.4)	(6.0)
1) 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 in connection with translation of the accounts of foreign subsidiaries have also been excluded since they did not affect cash flow.

Capital expenditures

Capital expenditures for property, plant and equipment increased to SEK 10.5 billion (9.9). Investments in facilities within Volvo Cars amounted to SEK 5.6 billion (5.5), of which the greater part consisted of continuing investments in the new large platform in the form of changes in the production process in Göteborg and Ghent (Belgium), investments in type-specific tools in suppliers’ plants, and investments in the supply of components. Investments in the Commercial Products sector amounted to SEK 4.1 billion, of which SEK 2.6 billion (2.4) was attributable to Trucks; the company converted production facilities to handle the FM series that was introduced during the autumn and increased capacity and implemented environment-improvement measures in both assembly and components operations, and constructed a new cab plant in Curitiba, Brazil.

Investments in leasing assets amounted to SEK 12.7 billion (9.8), of which SEK 11.8 billion pertained to sales-financing, mainly in North America and Great Britain.

Change in liquid funds
The Group’s liquid funds, which decreased by SEK 0.4 billion in 1998, amounted at year-end to SEK 20.2 billion (20.6), equal to 9% (11) of Group sales.

Key ratios	1998	1997
Return on shareholders' equity%	13.7	17.4
Return on shareholders' equity excluding items affecting comparability and gain on sales of shares, %	10.3	10.4

Income per share, SEK	19.60	22.90
Income per share, excluding items affecting comparability and gain on sales of shares, SEK	14.40	12.70

Shareholders' equity and minority interests as percentage of total assets	33.7	37.6
Shareholders' equity and minority interests, a percentage of total assets, excluding sales financing	49.4	50.8

Net financial assets, SEK billion	14.8	19.1
Net financial assets as percentage of shareholders' equity and minority interests	21.5	31.2

Financial review by business area
Net sales, SEK M	October - December		January - December		Change in% ¹⁾
	1998	1997	1998	1997
Cars	29,862	26,448	103,798	96,453	+8
Commercial products	32,680	26,911	111,107	90,122	+17
Trucks	18,796	15,525	63,837	50,840	+24
Buses	4,562	3,113	14,286	1,582	+2
Construction Equipment	5,736	4,730	19,469	16,758	+6
Marine and industrial engines	1,272	1,129	4,931	4,466	+10
Aero	2,314	2,414	8,584	7,476	+15
Other and eliminations	74	(682)	(1,969)	(2,950)	-

Volvo Group total	62,616	52,677	212,936	183,625	+13
1) Excluding divested and acquired units

Operating income, SEK M	October - December		January - December
	1998	1997	1998	1997
Cars	1,253	1,237	3,808	4,510
Commercial products	1,698	1,581	5,617	4,459
Trucks	1,122	822	3,061	1,812
Buses	40	206	385	550
Construction Equipment	416	448	1,549	1,444
Marine and industrial engines	(58)	(24)	95	181
Aero	178	129	527	472
Other and eliminations	(259)	(175)	(415)	(551)

Operating income, excluding items affecting comparability	2,692	2,643	9,010	8,418
Items affecting comparability	(1,181)		(2,331)

Volvo Group total	1,511	2,643	6,679	8,418
Items affecting comparability relate to Cars (681), Trucks (46), Buses (422), Construction Equipment (910), Marine and Industrial Engines (158), Aero 0 and Other companies (114) SEKM.

Operating margin, %	October - December		January - December
	1998	1997	1998	1997
Cars	4.2	4.7	3.7	4.7
Commercial products	5.2	5.9	5.1	4.9
Trucks	6.0	5.3	4.8	3.6
Buses	0.9	6.6	2.7	5.2
Construction Equipment	7.3	9.5	8.0	8.6
Marine and industrial engines	neg	neg	1.9	4.1
Aero	7.7	5.3	6.1	6.3
Operating margin, excluding items affecting comparability	4.3	5.0	4.2	4.6
Items affecting comparability	neg	0,0	neg	-
Operating margin total	2.4	5.0	3.1	4.6
Operating margin including items affecting comparability: Cars 3.0%, Trucks 4.7%, Buses, negative, Construction Equipment 3.3% and Marine and Industrial Engines, negative.
Cars The world market for newly registered passenger cars increased by slightly less than one percent in 1998, compared with 1997. In all, 399, 680 Volvo cars were invoiced, 3% or 13,240 cars more than in 1997. The increase is attributable to North America and Europe, 24,290 cars, while other markets declined by 11,060 cars. The volumes of business in Europe increased by 6%, which was attributable primarily to the Volvo S/V40 whose share of the European market was higher. than in the preceeding year. The number of large Volvo cars sold declined, due in part to the phasing out of the Volvo 940 and S/V90, resulting in slightly smaller market shares. The volume of Volvo’s sales increased by 9% in the North American market and the Company’s market larger. Each fifth car sold was a 4-wheel drive Volvo V70 Cross Country or V70 All-Wheel Drive model. Volvo Cars’ operating income, excluding items affecting comparability, amounted to SEK 3,808 M (4,510) and the operating margin was 3.7% (4.7). During the fourth quarter of 1998 the operating margin rose to 4.2%, due in part to a more favorable product mix. Larger volumes of sales, favorable foreign exchange rates and cost-reduction measures in production and purchasing did not compensate fully for planned increases in costs for the introduction and start-up of production of the Volvo S80, and for declining demand in Southeast Asia. Return on operating capital was 24% (>25) During 1998 SEK 681 M was provided among others for closing of the plant in Halifax, Canada and CKD (knocked down kits) production in Göteborg and restructuring of the distribution organization for spare parts in the U S. Operating income, including items affecting comparability, amounted to SEK 3,127 M. Utilization of capacity was high during the year in the factory in Ghent, Belgium and in the jointly owned factory in Born, Holland. Production of the Volvo 940 and Volvo S/V90 in the Torslanda plant in Sweden was discontinued in February 1998. The plant was then reorganized prior to the start of production of the Volvo S80, resulting in low utilization of capacity during the year. Large-scale production of the Volvo S80 was begun in August and the cars were being produced at an annual rate of 75,000 after eight weeks. In March 1999 production of the Volvo S70 is planned to be moved from the Torslanda plant to Ghent in order to further improve the efficiency of the Torslanda plant based on the new production concept being applied for the first time with the S80 model. In December 1998 agreement was reached covering Volvo Cars’ and Mitsubishi’s acquisition of the Dutch Government’s share of the NedCar automotive plant in Born, the Netherlands, during the first quarter of 1999. Thereafter, the plant will be equally owned by Volvo and Mitsubishi.

1) Pertains to SEK 681 M in the fourth quarter

Trucks

Global demand for trucks leveled off at an historically high level in 1998. Large increases in demand in Western Europe and North America compensated for declines in Asia, Eastern Europe and South America and the total world market for heavy trucks in 1998 was unchanged, relative to 1997.

Volvo Trucks delivered 83,280 medium-heavy and heavy trucks in 1998, 21% more than in 1997. The increase in delivery was due to a continued strong demand in Volvo’s main markets with an attractive model program.

Deliveries in Western Europe amounted to 37,810 (31,040) vehicles and the share of the market for heavy trucks reached 15.2% (15.3).

Volvo’s deliveries in North America increased to 29,310 (20,900) units, a 40% increase compared with the preceding year that was due in part to favorable acceptance of the Volvo VN truck. Volvo’s share of the U.S. market for trucks in the heavy class (Class 8) rose to 11.5% (9.7) in a growing total market.

Volvo’s deliveries in the Brazilian market decreased to 4,090 (4,510) trucks and the company’s share of the market was 23.1% (23.3).

Volvo Trucks’ operating income, excluding items affecting comparability, amounted to SEK 3,061 M (1,812). The increase in income was attributable to larger volumes of sales in Europe and North America, reduced costs for purchased material, high utilization of capacity in the industrial system and a favorable trend of prices in North America. These factors compensated for the increased costs of developing and introducing the FM series and the new-generation FH trucks.

The operating margin, excluding items affecting comparability, increased to 4.8% (3.6) and the return on operating capital exceeded 25% (18). the operating margin in the fourth quarter of 1998 was 6.0%.

Costs of SEK 394 M pertaining to the closing of the production facility in Scotland and changes in Volvo Trucks’ dealer structure, and the capital gain of SEK 348 M on the sale of the rear-axle plant in Lindesberg amounted to a net expense item of SEK 46 M affecting comparability. Operating income, including items affecting comparability, amounted to SEK 3,015 M (1,812).

Utilization of capacity in Volvo Trucks’ industrial system was high. But the rate of production in the assembly plant in Curitiba, Brazil, was reduced in the fourth quarter to adapt to declining order bookings in the South American market. In all, 84,770 (69,720) trucks were produced in 1998.

1) Pertains to SEK 46 M in the fourth quarter

Buses

Demand for buses with a total weight of more than 12 tons was affected adversely in 1998 by the economic downturns in Asia and South America. In Western Europe and North America, in contrast, the markets for buses increased by 15% and 13%, respectively.

Volvo Buses’ net sales increased to SEK 14,286 M (10,582). Excluding acquired companies the increase was 2% in 1998. The number of units delivered was 10,200 (8,730), including deliveries by companies acquired during 1998: 1,160 units delivered by Nova BUS beginning in the second quarter and 450 units delivered by MASA beginning in October.

Volvo Buses’ share of the market in Western Europe declined from 20% to 17%. Asia Buses deliveries rose through increased volumes to Iran and Saudi Arabia and as a result of strong market penetration in China, where the financial recession was not as severe as in the rest of Asia. In China, including Hongkong, is today Volvo Buses’ fourth-largest market. The volumes of business in South America continued to be at favorable levels, despite some weakening in demand. Volvo’s share of the largest market, Brazil, was higher.

Operating income, excluding items affecting comparability, amounted to SEK 385 M (550). Acquired companies contributed a total of SEK 7 M. The lower operating income was attributable to cost increases in the company’s industrial operations in Europe to sluggish demand in South America and to increased product development costs in connection with the renewal of Buses’ products during the year. Larger volume of business and a higher percentage of sales of complete buses and related services did not offset the decline in income. The operating margin, excluding items affecting comparability, fell to 2.7% (5.2) and the return on operating capital declined to 8% (17).

To improve production efficiency, it was decided during the year to concentrate parts of the European operations in the plant in Wroclaw, Poland. The plant is being enlarged substantially and the new capacity will amount to 1,100 buses and 1,400 chassis annually. The plants gradually being affected are those in Austria, Germany, Finland and Scotland.

After provision of SEK 422 M for restructuring costs, of which the greater part is attributable to the European business, Buses reported a loss of SEK 37 M.

The production of buses and bus chassis amounted to 10,230 (8,930) units. The percentage of complete buses rose from 23% to 43%.

Construction equipment
The total market for construction equipment decreased by 7% in 1998, compared with 1997. Demand for construction equipment in Asia and South America continued to be weak, while demand in Volvo’s main markets, North America and Western Europe, remained firm during the greater part of the year. A certain weakening in the business climate, with signs of a slowing in demand for construction equipment, was also noted in these markets toward year-end.

The number of construction machines sold by Volvo Construction Equipment increased by 16% in an otherwise declining total market, as a result of which the company strengthened its market shares. Adjusted to reflect acquisitions, the number of units sold rose 7%.

During the year, as part of Volvo Construction Equipment’s continuing growth strategy, the company acquired the construction equipment operations of Samsung Heavy Industries in South Korea. The acquisition was consolidated as of July 1, 1998. The integration program is is continuing as planned with the objective of creating an industrial base for Volvo Construction Equipment in Asia.

Net sales increased by SEK 2,711 M, to SEK 19,469 M, of which recently formed Volvo Construction Equipment Korea contributed SEK 1,014 M. Europe, which continued to be the largest single market area, accounted for 48% of total sales, unchanged from 1997. Sales in North America also increased and accounted for 36% (35) of the total. Excluding the operations acquired in Korea, sales in Volvo’s other markets were lower, due mainly to the financial crisis in Asia.

Operating income, excluding items affecting comparability, amounted to SEK 1,549 M (1,444) and the operating margin was 8.0% (8.6). (Less SEK 910 M in items affecting comparability related to costs for restructuring of existing operations in conjunction with the acquisition in South Korea.) Including items affecting comparability, operating income amounted to SEK 639 M (1,444). As planned, Volvo Construction Equipment Korea is included in operating income from the third quarter with a minor loss.

Return on operating capital, excluding items affecting comparability, was 18% (23).

In the end of 1998 a decision in principle to terminate production of excavators in Eslöv, Sweden, was reached. Weak profitability and the acquisition in Korea were the reasons for the decision to concentrate production to Konz, Germany and Changwon, Korea.

Operating Income, Construction Equipment

1) Pertains to SEK910 M in the second quarter

Marine and industrial engines

Net sales increased by 10%, to SEK 4,931 M (4,466), compared with 1997 sales. Sales of marine engines were strong in Europe, notably in the Nordic region and Southern Europe. Volvo Penta’s sales of industrial engines were also higher in Europe, but a tendency toward lower order bookings was noted at the end of the year. Sales of marine engines rose in North America in a generally sluggish market. The trend of sales in South America was also favorable.

Operating income, excluding items affecting comparability, amounted to SEK 95 M (181). The operating margin fell to 1.9% (4.1) and the return on operating capital declined to 7% (14.5). Income was charged with increased costs for product development and marketing.

It was decided during 1998 to allocate provisions for restructuring costs of SEK 158 M attributable to the changes in distribution structure and administration, mainly in Sweden, rest of Europe and Asia, with the aim of enhancing efficiency of operations. The amounts includes costs for closing of plants, reduction of the number of warehousing sites and personnel reductions. After restructuring costs, a loss of SEK 63 M was incurred.

At the end of 1998, to strengthen Volvo Penta’s position in the American market over the long term, Volvo Penta of the Americas Inc. acquired the 40% interest in Volvo Penta Marine Products (VPMC) held by Outboard Marine Corporation (OMC), an American company. VPMC manufactures drives and gasoline-powered engines for marine applications in Lexington, Tennessee. As a result of the acquisition, it is a wholly owned subsidiary of Volvo Penta of the Americas Inc.

Aero

The international air traffic that affects the greater part of Volvo Aero’s business continued to grow during 1998, but the increase was limited to 2%, which was less than half the increase in the preceding year. The decrease is attributable to the crisis in Asia, where air traffic has declined 3%. However, during the autumn there was a change to a positive trend in Asian air traffic.

As a result of high net sales in all operating areas, Aero's net sales increased to SEK 8,584 M (7,476).

Operating income amounted to SEK 527 M (472). The operating margin declined to 6.1% (6.3), due to higher development costs in the commercial aircraft engine program and in the gas turbine operations. Return on operating capital was 23% (>25).

Volvo Aero concluded an agreement to acquire 78% of the shares of Norsk Jetmotor AS, a components manufacturer. The transaction is expected to be completed during the spring of 1999. The remaining 22% of Norsk Jetmotor’s shares are owned by Pratt & Whitney, the American aircraft engine manufacturer.

During the autumn two maintenance contracts valued at a total of SEK 3.5 billion were signed with American aviation companies – Continental Airlines and Challenge Air Cargo. The South African Government decided to begin final negotiations for the purchase of 28 JAS 39 Gripen military aircraft equipped with engines from Volvo Aero.

Sales financing

Sales financing operations related to both Volvo Cars and Commercial Products continued to expand strongly during 1998.

The credit portfolio at December 31, 1998 amounted to SEK 67 billion (44), of which 52% (47) was attributable to Cars and remaining 48% (53) to Commercial Products.

Operating income amounted to SEK 475 M (202), of which SEK 276 M (89) pertained to Cars, and SEK 198 M (113) to Commercial Products. Operating income developed favorably in the established sales-financing companies, both within Cars and Commercial Products. In the newly started companies with high rates of growth, operating income in 1998 was also charged with start-up expenses and with costs of building up required credit and residual value reserves.

Participations in the earnings of associated companies amounted to a total of SEK 109M (146), which was attributable primarily to participations in Volvo Finans AB.

As of December 31, 1998, the general reserves for credit and residual-value risks were equal to 2.2% (2.2) of the credit portfolio. Realized credit losses that were charged against operating income in 1998 amounted to 0.3% (0.2) of the credit portfolio.

The number of employees in the Volvo Group increased by 6,900 in 1998, of which acquired units accounted for 6,500 new employees. Sales of units reduced the number of employees by 700. The number of employees as of December 31, 1998 was 79,800.

Parent Company
Income from shares in Group companies includes dividends amounting to SEK 22,615 M (23,563) as well as Group contributions received in a net amount of SEK 4,887 M (4,077). Shareholdings in Group companies have been written down by SEK 908 M (8,244).

Parent Company income statement, SEK M	1998	1997
Net sales	625	520
Operating income	(494)	(403)
Income from shares in Group companies	26,705	19,437
Income/(loss) from other shares and participations	31	(98)
Net interest expenses	(419)	(570)
Other financial income and expenses	(277)	(594)
Income after finanancial items	25,546	17,772
Allocations	(686)	277
Taxes	(816)	-
Profit of the year	24,044	18,049

Dividend proposal

The Board of Directors proposes that the Annual General Meeting approve payment of a dividend of SEK 6.00 per share for 1998, or a total of SEK 2.649 M. The dividend paid in the preceding year was SEK 5.00 per share.

A sale of Volvo Cars, would give the Group a very strong financial position. The Board has for some time expressed an ambition to expand in the field of commercial vehicles. As a result of the concentration on commercial products, this expansion will be intensified. The Board sees many possibilities for expansion through additional acquisitions, and thus an even greater need for financial freedom of action. Should the Board, in a future evaluation of the Group’s long-term capital requirements, consider that the net financial assets exceed requirements, it will, as stated earlier, propose that said surplus be provided to the shareholders. The Board believes that the best method for doing this would be to repurchase the Company’s shares, and it anticipates that Swedish authorities will speed up the possibilities for such action,

The Annual General Meeting of AB Volvo will be held on April 28, 1999. May 3 is proposed as the record date for receiving a cash dividend, with payment of the dividend scheduled to be made on May 10, 1999.

Göteborg, February 11, 1999
AB Volvo (publ)
The Board of Directors

Volvo Group quarterly figures, SEK M unless otherwise specified	4/1997	1/1998	2/1998	3/1998	4/1998

Net sales	52,677	48,839	52,867	48,614	62,616
Cost of sales	(39,687)	(37,015)	(40,717)	(37,306)	(48,838)
Gross income	12,990	11,824	12,150	11,308	13,778
Research and development expenses	(2,170)	(2,372)	(2,472)	(2,468)	(2,792)
Selling expenses	(5,364)	(4,385)	(4,528)	(4,533)	(5,596)
Administrative expenses	(1,771)	(1,754)	(1,991)	(1,993)	(2,353)
Other operating income and expenses	(1,042)	(1,337)	(438)	(693)	(345)
Items affecting comparability	-	-	(1,150)	0	(1,181)
Operating income	2,643	1,976	1,571	1,621	1,511
Income from investments in associated companies	(236)	99	136	105	104
Income from other investments	(11)	79	2,098	(15)	2,364
Interest income and similar credits	529	427	552	170	353
Interest expenses and similar charges	(450)	(248)	(438)	(216)	(473)
Other financial income and expenses	(20)	(59)	(84)	13	(27)
Income after financial items	2,455	2,274	3,835	1,678	3,832
Taxes	(1,322)	(710)	(920)	(594)	(715)
Minority interests	(27)	17	(21)	(1)	(37)
Net income	1,106	1,581	2,894	1,083	3,080
Depreciations included above	2,030	1,933	2,264	2,286	3,143
Income per share, SEK	2.60	3.60	6.50	2.50	7.00
Average number of shares, million	452.5	441.5	441.5	441.5	441.5
Income per share is calculated as net income divided by the weighted average number of shares outstanding during the period.
Gross and operating margin, %
Gross margin	24.7	24.2	23.0	23.3	22.0
Research and development expenses in % of net sales	4.1	4.9	4.7	5.1	4.5
Selling expenses in % of net sales	10.2	9.0	8.6	9.3	8.9
Administrative expenses in % of net sales	3.4	3.6	3.8	4.1	3.8
Operating margin, excluding items affecting comparability	5.0	4.0	5.1	3.3	4.3
Operating margin	5.0	4.0	3.0	3.3	2.4

Change in accounting for deferred taxes 1999

Until now, Volvo has reported deferred tax receivables pertaining to so-called temporary differences and loss carryforwards to the degree that these items could be offset against deferred tax liabilities in the same tax area. Effective in 1999, Volvo is adapting its accounting rules to generally accepted international and Swedish accounting practice, and deferred tax receivables will thereby be reported subject to the provision that the amounts can probably be offset against future taxable surpluses.

This change in accounting involves a deferred tax receivable of SEK 1.3 billion, based on 1998 accounts, that is attributable largely to so-called temporary differences. The deferred tax receivable as of January 1, 1999 will be shown as a corresponding increase in equity capital.

Units invoiced
Volvo car sales, number of units invoiced	1998	1997	Change in %
Europe	255,540	239,960	+6
Western Europe	249,560	234,050	+7
Eastern Europe	5,980	5,910	+1
North America	110,700	101,980	+9
South America	1,860	2,280	(18)
Asia	24,970	36,170	(31)
Other markets	6,610	6,050	+9
Total Volvo cars	399,680	386,440	+3
Renault cars	36,000	29,630	+21
Total cars	435,680	416,070	+5
By series
Volvo S/V901)	9,100	28,270	-
Volvo 9401)	6,720	39,470	-
Volvo S80	21,770	-	-
Volvo S/V70	201,620	203,670	(1)
Volvo S/V40	151,260	114,150	+33
Volvo C70	9,210	880	-
Total	399,680	386,440	+3
Figures for 1997 have been redistributed compared with the reports in 1997. 1) Production ceased during first half of 1998
Trucks, units invoiced
Europe	42,350	34,470	+23
Western Europe	37,810	31,040	+22
Eastern Europe	4,540	3,430	+32
North America	29,310	20,900	+40
South America	6,020	6,970	(14)
Asia	3,760	4,710	(20)
Other markets	1,840	1,930	(5)
Total trucks	83,280	68,980	+21

Volvo bus/bus chassis, units invoiced
Europe	3,860	4,190	(8)
North America¹⁾	2,730	1,110	+146
South America	1,510	1,350	+12
Asia	1,650	1,410	+17
Other markets	450	670	(33)
Total, buses	10,200	8,730	+17

1) Including the acquisition of Nova BUS as of the second quarter 1998.