Six months ended June 30, 1997

• Comments by the Chief Executive Officer
• Six months ended June 30, 1997
  • Tables
  • Graphs

SEK 5.8 billion is transferred to the Volvo shareholders as a result of the redemption of a total of 22.5 million Volvo shares.

(see table: Six months ended June 30, 1997)

Comments by the Chief Executive Officer

The positive trend of Volvo Group earnings is continuing. Sales were higher in all operating sectors and operating income improved in all sectors except Volvo Trucks. The favorable foreign exchange situation was a contributing factor. More important from an industrial and competitive perspective, however, is the rapid product renewal in most of our operating sectors. Volvo Cars' new and successful product program with the S40/V40 and S70/V70 models in a number of different versions, as well as the "niche" Volvo C70 Coupe and Convertible and, most recently, the Volvo V70 XC, are effectively implementing the growth strategy based on a broader range of products and more frequent introductions of new models. Profitability has been restored and our investments have created a flexible and cost-effective production structure.

The strategy of creating a global industrial structure for Volvo Trucks - in which the benefits of large-scale operations based on the FH series concept can be exploited - is continuing. This long-term program, which involves being totally responsive to the specific requirements imposed by each market and each customer, is well under way.

In a shorter-term perspective, we have to restore Volvo Trucks' North American operations to a solid profitability. Also in the second quarter income was negative. Major rationalization and cost-saving programs have been instituted but have not yet had full effect. Aggressive improvements must continue. Gratifyingly, the Volvo VN, a truck based on the FH concept and developed specifically for the North American market, has been very well received. Order bookings are good. Volvo Trucks increased its share of a declining European market for heavy trucks to 16.4%. Despite lower margins caused by pressure on prices, the company's profitability in this region is still good.

Volvo Construction Equipment reported strong earnings in the second quarter, further confirming the stability of its operations. The acquisition of Champion Road Machinery, a Canadian company, has broadened the product line and provides an important base for activities in the North American markets.

It is also gratifying to note that the combined operating income of Volvo Buses, Volvo Aero and Volvo Penta more than doubled, compared with the first half of 1996.

Following the divestment of its holding in Pripps Ringnes and smaller holdings in companies outside its core businesses, Volvo is now exclusively a transport vehicle group. All of its resources can thereby be focused on core operations.

Our purposeful objective is to develop as an independent transport vehicle company in one of the world's most competitive industries. This requires a sharp focus on product development and the efficient cultivation of both established and new markets.

Volvo's strong brand name and respected product characteristics constitute a strong base for pursuing this program. Despite many difficult tasks that lie ahead, I am confident about our ability to further strengthen our competitiveness and increase our profitability, based on fine and well-reputed products and our fundamental values: quality, safety and concern for the environment.

(see graph: Operating income, before nonrecurring items)

Six months ended June 30, 1997

Acquisitions and divestments

Champion Road Machinery Limited was acquired during the first quarter of 1997 and Volvo increased its holding in AGES Group ALP from 25% to 60% during the period. These two companies, which form part of the Volvo Construction Equipment and Volvo Aero operating sectors, respectively, have been consolidated as of January 1, 1997.

The shareholdings in Pripps Ringnes AB (49%) and SAS Sverige AB -- formerly SILA -- (4.7%) were divested during the period. The amount received for the Pripps Ringnes shares was SEK 4.6 billion, which was SEK 85 M lower than had been announced earlier. The difference was due to the fact that the payment was received in May 1997 rather than in December 1997 as had originally been agreed.

Sales and income

Volvo Group sales in the first half of 1997 amounted to SEK 89,024 M (78,059), an increase of 14%, compared with sales in the corresponding period in 1996, excluding units acquired and divested. Adjusted to also reflect the effects of movements in foreign exchange rates, the increase was 8%. The upturn was attributable primarily to continuing strong trends of sales in Volvo Cars, Volvo Buses and Volvo Aero.

Operating income for the automotive operations rose to SEK 3,940 M, an increase of SEK 1,874 M, compared with income in the corresponding 1996 period. Acquired companies contributed SEK 158 M.

Gross income increased in all operating sectors except Volvo Trucks, and the gross margin rose from 22.7% to 23.6%. The greater part of the increase was attributable to the second quarter, when Volvo Trucks also reported a higher gross margin. The higher margin was due to larger volumes of sales and a more favorable product mix in most of the Group's operations, mainly in Volvo Cars as well as to the positive effects of changes in foreign exchange rates.

The rate of increase in earnings slowed by higher research and development expenses, as well as by higher selling expenses. Calculated as percentage of sales, these items were lower, however.

Effects of foreign exchange movements had a positive impact of approximately SEK 1,000 M on operating income, compared with 1996, after taking into account forward contracts and options contracts. As part of its foreign exchange policy, Volvo hedges important currencies through forward contracts to even out the effects of foreign exchange movements over time. The difference between current rates and forward contract rates that were realized during the first half of 1997 were charged against operating income in the amount of SEK 500 M and reported under "Other operating expenses."

(see tables: Consolidated income statements and Gross and operating margin)

Income from investments in associated companies amounted to SEK 3,080 M, of which the gain from the sale of the shareholding in Pripps Ringnes accounted for SEK 3,027 M.

Income from other investments included a gain of SEK 221 M on the sale of the holding in SAS Sverige AB amounting to 4.7% of the share capital and voting rights in that company.

Net interest expense, SEK 515 M (666), was somewhat lower than in the year-earlier period as a result of the lower level of interest rates during the first half of 1997.

Tax expense pertained mainly to current taxes in foreign subsidiaries.

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

Group assets increased by SEK 15.1 billion during the first half of the year, excluding changes in foreign exchange rates and acquisitions of companies. Expansion of the sales-financing operations accounted for SEK 10,4 billion. Liquid funds, inventories and tangible assets in the industrial operations also increased.

The payment of SEK 5.8 billion to Volvo's shareholders to redeem Company shares increased current liabilities and reduced shareholders' equity in the balance sheet above. Total assets were not affected since the payment was not made until after the end of the second quarter.

Capital expenditures for property, plant and equipment within the industrial operations amounted to SEK 4.4 billion (3.9). The greater part pertained to changeover investments in Volvo Cars' Torslanda plant and to the type specific tools for future models. The investments in Volvo Trucks were related to the continuing globalization of the industrial structure for assembly of trucks in the FH series. Capital expenditures within sales-financing operations amounted to 1.9 billion.

Net financial assets, which are excluding assets within the sales-financing operations amounted to SEK 12.0 billion as of December 31, 1996, and to SEK 17.2 billion as of June 30, 1997. Of this amount, funds generated from operations contributed SEK 7.7 billion and the sale of shares and participations, SEK 4.8 billion. Financial assets were reduced by net investments of SEK 3.8 billion, dividends of SEK 2.0 billion paid to AB Volvo's shareholders and acquisition of companies including their net financial assets of SEK 2.3 billions as well as changes in foreign exchange rates.

Shareholders' equity declined by SEK 0.6 billion, compared with the year-end 1996 figure. Net income for the period, the issue of new shares and translation differences increased shareholders's equity by SEK 7.2 billion, while the redemption of shares and the dividend paid to Volvo's shareholders reduced shareholders' equity by SEK 5.8 billion and SEK 2.0 billion, respectively. Shareholders' equity and minority interests as percentage of total assets declined to 35.4% (41.4). Excluding sales-financing operations, this figure was 43.4% (48.0).

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



Net sales and operating income by operating sector
(see tables: Sales, Operating income, excluding norecurring items and Operating margin, % )

Volvo Cars

The total market for passenger cars declined slightly during the first half of 1997, compared with the first six months of 1996. The North American market decreased by approximately 4%, while the market in Europe was approximately at the 1996 level. The Japanese market increased by 5%. The upturn in Japan occurred mainly in the first quarter. Higher taxes slowed the rate of increase in the second quarter.

Volvo Cars' net sales amounted to SEK 48,160 M, an increase of 21% compared with first-half 1996 sales. The number of cars sold, 196,200 (174,600), was 12% higher.

The favorable trend of sales in Europe in the beginning of the year continued in the second quarter. As a result of the successes of the Volvo S40 and V40, as well as the Volvo S70 and V70, sales and market shares increased in most markets. Total registrations of Volvo cars in the company's largest European markets -- Sweden, Great Britain, Germany and Italy -- increased 29%.

Despite a declining total market, Volvo's shares in North America rose by 3% and its market shares increased in both the United States and Canada. The company's sales and share of the market in Japan declined.

Three innovations were introduced during the second quarter: the Volvo S40 T4 and V40 T4 -- turbo versions of the Volvo S40 and V40 -- and the Volvo V70 XC (for "cross country"), a further development of the 4-wheel-drive Volvo V70 AWD.

(see graph: Operating income, Volvo Cars)

Volvo Cars' operating income amounted to SEK 2,154 M (187). The increase was attributable to larger volumes of sales, higher margins and the favorable effects of foreign exchange movements; this gain was offset in part by higher costs for research and development, and for marketing. The operating margin increased to 4.5% (0.5).

Volvo Trucks

As of midyear, the total market for heavy trucks in Europe was approximately 12% smaller than a year earlier. A downturn is noticeable in most European markets. The total market for trucks in the same weight class (Class 8) in the U.S. was 5% smaller, but the market there is strengthening. In Brazil at midyear, the market for heavy trucks was 33% higher than twelve months earlier.

Deliveries of medium-heavy and heavy trucks from Volvo during the first half of 1997 amounted to 31,540 vehicles, 5% fewer than in the year-earlier period. In the shrinking total market in Europe, Volvo's deliveries declined by 12%, while deliveries in North America were unchanged, compared with the 1996 period. Volvo's deliveries of trucks in South America rose by 21% during the first half of 1997.

Based on preliminary data, Volvo Trucks' share of the market in the heavy-truck class in Europe increased to 16.4% (16.0). Its share of the market in the comparable class in the U.S., was 9.3% (9.5), and its share in Brazil was 21.7% (25.6).

Volvo Trucks' backlog of orders as of June 30, 1997 was 10% larger than on the same date a year earlier.

Volvo Trucks' operating income for the period amounted to SEK 688 M (1,078). The decrease was related to the smaller volume of deliveries and to lower margins in Europe. The operations in North America continued to be unprofitable but the rate of loss has been reduced. The trend of results in South America was positive and Group operations there were profitable. The operating margin was 2.9% (4.7).


(see graph: Operating income, Volvo Trucks)

Volvo Buses

Volvo Buses delivered 3,990 (3,630) buses and bus chassis during the first half of 1997. Based on preliminary data, its share of the market in Europe was 19% (19), unchanged from the preceding year. As of June 30, 1997, the company's backlog of orders was 4% larger than on the same date a year earlier.

Operating income increased to SEK 244 M (134), due largely to larger volumes, higher margins and a favorable foreign exchange development. The operating margin was 4.7% (3.2).

Volvo Construction Equipment

Trends in the company's markets continued to be stable, with a consistently strong market in North America, lower demand in Europe and strong growth in South America and Asia.

Net sales increased to SEK 8,157 M (6,695), of which newly acquired Champion Road Machinery Ltd. accounted for SEK 662 M.

Operating income increased to SEK 745 M (651). Excluding Champion Road Machinery, income rose by SEK 43 M, due to a more favorable market- and product mix and the continuing positive effects of foreign exchange movements. Operating margin was 9.1% (9.7).


(see graph: Operating income, Volvo Construction Equipment)

Volvo Penta

Volvo Penta increased its net sales of both marine and industrial engines. The largest increases ocurred in the heavy diesel-engine segment. Operating income improved from SEK 57 M in the first half of 1996 to SEK 160 M in the first six months of 1997 as a result of larger volumes, higher margins and the effects of foreign exchange movements. The operating margin rose to 7.0% (2.8).

During the second quarter Volvo Penta and Wuxi Diesel Engine Works signed a joint-venture agreement covering the convertion of diesel engines to generator units in China.

Volvo Aero

Volvo Aero's sales in the first half of 1997 amounted to SEK 3,332 M (1,962) excluding AGES, which deals in aircraft engines and spare parts, and which has been a subsidiary of Volvo Aero since January 1, 1997. Volvo Aero's sales rose 18%.

The higher sales were due primarily to the current strong market in the international aviation sector and to larger volumes in all engine programs in the commercial aircraft engine field.

Sales of military aircraft engines also increased, due to increased deliveries of RM12 engines used in the JAS 39 Gripen multirole military aircraft. In June the Swedish Government approved the purchase of an additional 64 Gripen aircraft in a third subseries. The decision involves an order for additional RM12 engines from Volvo Aero.

Operating income rose to SEK 225 M (90), of which AGES contributed SEK 107 M. The operating margin increase to 6.8% (4.6).

Employees

The Volvo Group had 71,010 employees at June 30, 1997, an increase of 680 compared with the number at December 31, 1996. The acquisitions of The AGES Group and Champion Road Machinery increased the number of employees by approximately 1,000, while the transfer of personnel to the newly formed joint-venture company, ABB Olofström Automation, reduced the number by 500.

Redemption of shares

In order to reduce the share capital in the Volvo Group and the number of AB Volvo shares outstanding, shareholders at the Annual General Meeting on April 23 approved an offer to redeem Volvo shares.

When the application period for the redemption of shares expired on June 11, a total of 3,546,185 Series A shares and 19,050,682 Series B shares, equal to 4.9% of the number of shares outstanding and 3.1% of the voting rights in the company, had been tendered for redemption. A total of SEK 5,807 M, equal to SEK 257 per share, was paid to the shareholders on July 10.

To implement the redemption procedure as efficiently as possible, the Board of Directors of AB Volvo, with the authorization of the Annual General Meeting and a Special General Meeting on June 26, approved a special issue of new shares to Stiftelsen Volvoresultat, a staff foundation affiliated to Volvo and a bonus issue of AB Volvo shares through a write-up of the par value of the company's shares from SEK 5 to SEK 6. As a result, the share capital was not reduced by the redemption procedure and notice did not have to be given to known and unknown creditors.

(see table: Redemption of shares)

Parent Company

The Parent Company, AB Volvo, had revenues amounting to SEK 291 M (227) in the first half of 1997. Income before tax was SEK 14,084 M (853). Profit includes income of SEK 15,278 (719), the greater part in the form of dividends, from participations in subsidiaries.

Capital expenditures for property, plant and equipment amounted to SEK 10 M (17). Liquid funds at June 30, 1997 amounted to SEK 6,361 M, compared with SEK 6 M at December 31, 1996. Net interest-bearing liabilities declined by SEK 10.7 billion, to SEK 5.1 billion.

The interim report covering operations during the first nine months of 1997 will be released on October 22.

Göteborg July 22, 1997