Three months ended March 31, 1996

• Comments by the Chief Executive Officer
• Three months ended March 31, 1996
  • Tables
  • Diagrams

(see table: First three months 1996)

Comments by the Chief Executive Officer

Volvo Group income for the first three months of 1996 was affected adversely by declining volumes of sales combined with continuing investments in product and market development.

While the loss in Volvo Cars is unsatisfactory, it represented an improvement compared with operating results in the fourth quarter of 1995. The improvement was primarily due to internal rationalization measures, lower research and development costs and higher effective exchange rates. The decline in sales was attributable mainly to lower sales of the Volvo 400-series and to the fact that the Volvo 940 is no longer being offered in the American market. The Volvo S40/V40 models that were introduced in March have been very well received and order bookings are good.

Volvo Trucks is continuing to experience declining volumes of sales in North and South America. This, combined with increased costs of implementing the FH technology globally, as well as the increased costs of marketing programs had a negative effect on Volvo Trucks' income.

Volvo's present aggressive phase involves investments to ensure future earnings capacity. Parallel with the implementation of the this long-term program, demands for high efficiency and control of operating costs are now being stepped up in all sectors of the Group.

(see diagram: Operating results, before nonrecurring items, rolling 12 months)

Three months ended March 31, 1996

Volvo Group sales in the first quarter of 1996 amounted to SEK 39,068 M, compared with sales of SEK 43,454 M in the first quarter of 1995. Automotive operations accounted for sales of SEK 37,301 M, which implied a decrease of 7%, adjusted for currency rate effects and divested and acquired units (primarily the acquisitions of Volvo Construction Equipment and the Prévost bus manufacturing company, which were not part of the Group during the first half of 1995). Sales were lower in all business segments except Volvo Buses and Volvo Aero.

Volvo's sales of passenger cars in Europe decreased, due mainly to the phasing out of the Volvo 400 series which is now being replaced by the new Volvo S40/V40 program in the medium-size class.

Volvo Trucks' sales decreased due to declining markets for trucks in the United States and in South America.

Operating income amounted to SEK 1,176 M (2,842)*, of which automotive operations accounted for SEK 970 M (2,669). The decrease relative to the corresponding period a year earlier was due mainly to smaller volumes of sales and continuing high research and development costs.

* Figures within parantheses pertain to first-quarter 1995 operations.

(see table: Consolidated income statements)

Income from equity method investments declined to SEK 222 M, compared with SEK 433 M in the first quarter of 1995. In the 1996 years' results the capital gain on the sale of VOAC Hydraulics of SEK 352 M is included. Volvo's share of the loss in NedCar was SEK 130 M (108). The weak results in NedCar were due to start-up costs for the Volvo S40/V40 series, to lower sales of the Volvo 400 series and to high research and development costs. Income from equity method investments in the 1995 period included Volvo Construction Equipment (SEK 216 M) and Pharmacia (SEK 247 M), which are no longer reported in accordance with the equity method.

Dividends received pertained mainly to holdings in Pharmacia & Upjohn, Inc. and Protorp Förvaltnings AB.

Net interest, which showed a very favorable trend as a result of the Volvo Group's strong financial position and a good result within Volvo Group Finance, amounted to SEK 343 M (146).

Tax expenses pertained mainly to current taxes in subsidiaries outside Sweden.

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

Group assets increased by SEK 7.9 billion during the first quarter of 1996. Of this amount, liquid funds accounted for SEK 4.6 billion. The increase is attributable mainly to the fact that Swedish Match, in connection with the pending stock exchange listing of its shares, replaced loans made within the Group with short-term external financing. This accounts for the increase in both liquid funds and short-term loans in the consolidated balance sheet.

Capital expenditures for property, plant and equipment amounted to SEK 1.8 billion (1.1) and investments in leasing vehicles totaled SEK 0.8 billion (0.7).

The Group's net financial assets, which amounted to SEK 1.2 billion at December 31, 1995, increased to SEK 2.4 billion.

Shareholders' equity and minority interests amounted to 36.2% of total assets, compared with 37.4% at December 31, 1995.

(see tables: Statement of changes in consilidated financial position and Operating income, excluding nonrecurring items)

(see table: Sales by company Group)

Volvo Cars

The total market for passenger cars increased slightly during the first three months of 1996, compared with the year-earlier period. The growth in Europe amounted to nearly 7%, while the trend of the market in North America was unchanged. The Japanese car market was smaller, following the upturn in 1995. The trend of the world market during the remainder of 1996 is expected to follow the present pattern.

The trend of Volvo Cars' sales in Europe was negative. This applied primarily to the Volvo 400 series which is now being phased out and replaced by the Volvo S40/V40. Sales of the Volvo 850 were stable and increased in a number of markets, including France and England. Volvo's sales in North America declined but its share of the market was unchanged, due to dealers' sales from inventory. The company's sales and market shares were higher in Japan and Thailand.

(see diagram: Operating results, Volvo Car Group)

Volvo Cars' total sales were 12% lower than in the first three months of 1995. The number of passenger cars invoiced fell by 19%, to 85,200 (104,600). Operating results improved by SEK 650 M, compared with the fourth quarter 1995, but were still negative and amounted to a loss of SEK 191 M. Income was SEK 1,121 M lower than in the corresponding period of 1995. The decline was attributable primarily to the smaller volume of sales and higher research and development costs. The operating margin declined from plus 4.2% to minus 1.0%.

Volvo Trucks

The total market for heavy trucks in Europe continued to be strong during the first quarter of 1996, but there was a slight downturn in Great Britain. The weakening of the total markets in North and South America that began during the second half of 1995 persisted during the first three months of the current year. The world market for heavy trucks in 1996 will be distinctly smaller than in 1995, which was a record year. The greatest decrease is expected to occur in North America, but weaker demand is also foreseen in Europe during the second half of the year.

Volvo Trucks' sales in the first quarter of 1996 decreased by 11%, to SEK 11,656 M. Shipments of heavy and medium-heavy trucks amounted to 16,700 units, 14% fewer than in the first quarter of 1995. But deliveries within Europe rose by 13%, while Volvo's share of the market for heavy trucks declined slightly in Europe. Also in North America the market share declined. The backlog of orders at March 31, 1996 was 45% lower than on the year-earlier date, mainly due to the sharply declining demand in North and South America.

Volvo Trucks' operating income for the first quarter of 1996 amounted to SEK 731 M (1,515). The decrease was attributable to much smaller volumes of sales in North and South America and the resulting lower utilization of production capacity. Income was also affected by increased costs of product and market development. The operating margin was 6.3% (11.5).

(see diagram: Operating results, Volvo Trucks)

Volvo Buses

Volvo Buses delivered 1,490 (1,140) buses and bus chassis, with the Canadian bus manufacturer Prévost, which was aquired in 1995 accounting for 138 buses. The company's share of the market in Europe was higher than in the preceding year. The backlog of orders at March 31, 1996 was approximately 40% higher than on the same date a year earlier. Operating income rose to SEK 69 M (65), while the operating margin dropped to 3.7% (4.1).

In March 1996 Volvo Buses and Carrus Oy, the Finnish bus manufacturer, concluded an agreement covering closer cooperation in the areas of product development and marketing projects outside the Nordic region.

Volvo Construction Equipment

Total demand for construction equipment declined in a number of important markets during the first quarter of 1996, relative to demand in the first quarter of 1995. This applied to in both North America and Germany, as well as other markets in Europe. The downturn in Germany, which was substantial, affected primarily the sale of light construction equipment.

Volvo Construction Equipment's sales decreased from SEK 3,243 M in the first quarter of 1995 to SEK 3,045 M in the first quarter of 1996. The decline in volume, combined with nonrecurring project costs and an unfavorable trend of foreign exchange rates, resulted in lower but sustained operating income of SEK 273 M (443). The operating margin was 9.0% (13.7).

Volvo Penta

Volvo Penta's sales were 5% lower than in the first quarter of 1995. The lower sales figures were attributable primarily to movements in foreign exchange rates, but also to lower demand for engines and spare parts for leisure craft. In contrast, sales of marine engines for commercial applications were higher, as were sales of industrial engines.

Volvo Penta's operating income amounted to SEK 17 M, a decrease of SEK 37 M from the year-earlier period. The weaker earnings were due mainly to lower margins as a consequence of the trend of exchange rates, as well as to higher production costs that could not be fully offset through price increases.

Volvo Aero

Volvo Aero's sales rose 8%, to SEK 956 M. Operating income amounted to SEK 58 M (49) and the operating margin improved to 6.1% (5.5).

The market for large commercial aircraft continued to increase, resulting in higher order bookings in Volvo Aero's commercial engine operations. Deliveries to the Swedish Air Force of the RM12 engine used in the JAS 39 Gripen multirole aircraft proceeded according to plan. A bid for subseries 3 of the JAS 39 Gripen project was submitted to the Swedish Defense Materiel Administration by the JAS Industry Group. In its Commercial Overhauls business area, Volvo Aero increased its holding in Air Ground Equipment Sales (AGES) from 5% to 25%. AGES, which deals in aircraft engine materials, and which had sales of USD 187 M in1995, is of major strategic importance for the operations in Commercial Overhauls.

In March Volvo Aero and Atlas Copco completed the sale of VOAC Hydraulics -- in which each held a 50% interest -- to Parker Hannifin, an American company.

Operations being divested

Operating income of these operations consisted mainly of operating income in Swedish Match, which improved in all Swedish Match divisions as a result of larger volumes of business, cost reductions and the effects of rationalization of production. See also the interim report from Swedish Match.

As approved at Volvo's Annual General Meeting on April 24, Volvo's holding of Swedish Match shares will be distributed to Volvo's shareholders. The program to divest Volvo's remaining holdings in noncore businesses remains in effect. These holdings consist primarily of shares in Pripps Ringnes AB (49%) and the 14% holding in Pharmacia & Upjohn, Inc.

In April 1996, Volvo sold its entire holding in Spira AB, equal to 9.5% of the share capital and voting rights in the company. This sale, which is being reported in second quarter, will yield approximately SEK 80 M in revenue and a small capital gain for Volvo.

Employees

The number of employees in the Volvo Group at the end of the first quarter was 78,890, a decrease of 160 since January 1.

Approvals at Volvo's Annual General Meeting

At the Annual General Meeting the proposal of the Board and the president for a cash dividend of SEK 4 per share and distribution of all shares in Swedish Match AB to the shareholders, with one Swedish Match share per Volvo share, was also approved.

The cash dividend totals SEK 1,854 M and distribution of shares in Swedish Match SEK 8,000 M, corresponding to the book value in AB Volvo.

The record date for entitlement to the cash dividend was set at April 29, 1996. The record date for entitlement to receive dividends in the form of shares in Swedish Match AB was set at May 13, 1996.

Payment of the cash dividend is expected to be made through VPC (Swedish Securities Register Center) on May 7, 1996. The distributed shares in Swedish Match AB are expected to be transferred to the shareholders' VP (securities) accounts on May 15, 1996.

The Annual General Meeting voted a fee to the Board of Directors of SEK 2,475,000, to be distributed among the members as decided by the Board.

The Annual General Meeting re-elected as members of Board of AB Volvo Bert-Olof Svanholm, Per-Olof Eriksson, Håkan Frisinger, Tom Hedelius, Björn Svedberg, Sören Mannheimer and Sören Gyll. Ragne Billing and Nils Brehmer were appointed auditors and Olle Gunnarsson and Anders Ivdal were appointed deputy auditors.

Options program for senior executives

In February 1996 the Skandia and Trygg-Hansa insurance companies offered approximately 100 senior executives in the Volvo Group an opportunity to acquire call options on AB Volvo's Series B shares. Approximately 90% of the executives had accepted the offer when the subscription period expired.

The call options, which may be exercised during the period beginning March 4, 1996 through March 3, 2001, give the holder the right to acquire one AB Volvo Series B share for each option held. The option price, which is based on a market valuation, has been set at SEK 21.15 and the exercise price at SEK 200. Members of the Group Executive Committee were eligible to acquire 6,000 or 10,000 options each. Other senior executives were eligible to acquire 4,000 or 6,000 options each. Total number of options purchased in this program amounts to 514,000.

Pension funds

The Board of Directors of AB Volvo has decided to establish two pension funds for the Group to secure pension obligations within the framework of the industrial supplementary pension plan (ITP). Formation of the funds enables Volvo to conform more effectively with international conditions in connection with the management of its Swedish pension obligations. This does not affect Volvo's pension obligations to its employees.

Volvo's interim report covering operations during the first six months of 1996 will be released on August 21.

Göteborg, April 29, 1996

Sören Gyll

President and Chief Executive Officer

This report has not been reviewed by AB Volvo's auditors.

Source: Three months ended March 31, 1996