Three months ended March 31, 1997

Comments by the Chief Executive Officer

The Volvo Group is in a phase of continuing strong growth and change. Another major step in the final liquidation of non-core operations was taken through the sale of Pripps Ringnes to Orkla, the Norwegian company. Volvo Cars is in a period of rapid product renewal. In Volvo Trucks, the globalization of the FH concept, which when fully implemented, will result in large cost savings, is continuing. In a number of operating sectors, activities are being established as planned in new markets and supplementary product segments.

Developments during the first three months of the year represent the continuation of a positive trend that began in the autumn of 1996. Sales were higher in all operating sectors except Volvo Trucks. Operating income in the automotive operations improved considerably, compared with the year-earlier period -- but from a low level.

The trend in Volvo Cars is highly gratifying. Operating income of SEK 1,068 M was the highest for any quarter during the 1990s and confirms the stability of the basic improvements that have taken place. The product-renewal program is successful, with increasing sales of the Volvo S40/V40 models and the well-received introduction of the Volvo S70/V70.

Volvo Trucks' income is still being charged with losses in the North American operations. Vigorous measures are under way to restore the profitability of the U.S. business. Volvo Trucks' profits in Europe continue to be good.

As I leave my position as President and Chief Executive Officer, I wish to express my great respect for Volvo's employees who, under demanding circumstances, have demonstrated their strong determination to make Volvo an independent and consistently profitable transport vehicle group.

(see graph: Operating income, before nonrecurring items)

Three months ended March 31, 1997

Important acquisitions and divestments

During the first quarter of the year Volvo Aero increased its ownership of The AGES Group, ALP, an American company, from 25% to 60%. The company was consolidated as of January 1, 1997. AGES is involved in the trading and leasing of aircraft engines and spare parts for aircraft engines.

In the beginning of the year Volvo Construction Equipment made an offer to the shareholders of Champion Road Machinery Limited, a Canadian company, to acquire all of Champion's shares. At the expiration of the period specified in the offer, 98% of the shares had been tendered and all conditions had been met; Volvo Construction Equipment accordingly implemented the offer. Champion was consolidated as of January 1, 1997.

In February, Volvo sold its entire shareholding (49%) in Pripps Ringnes AB to Orkla, a Norwegian company. Volvo receives a total of SEK 4.7 billion and the transaction results in a gain of SEK 3.0 billion in the Group accounts for the first quarter of 1997.

Volvo Group net sales in the first quarter of 1997 amounted to SEK 41,849 M, an increase of 10%, adjusted to reflect acquisitions and divestments of units. All operating sectors, with the exception of Volvo Trucks, reported higher sales.

Volvo Cars' sales increased by 18%, which mainly was attributable to higher sales of Volvo S40/V40 models. The positive trend was especially striking in Europe, where the company increased its share of the market from 1.3% to 1.8%. Volvo Buses also recorded good growth in sales, with larger volumes of business in most markets. Volvo Trucks' net sales declined due to lower invoiced sales in Europe.

Operating income from automotive operations increased to SEK 1,891 M (970). The increase relative to first-quarter 1996 income amounted to SEK 921 M, of which SEK 63 M was attributable to acquired units.

Volvo Cars' operating income rose by SEK 1,259 M. The increase was due primarily to the fact that Volvo S40/V40 models are now fully replacing the Volvo 400 series; in addition to the larger volume of sales, this is resulting in higher margins in the passenger car business. Volvo Buses and Volvo Penta also reported substantial improvements in operating income. Excluding acquired units, operating income in both Volvo Construction Equipment and Volvo Aero increased slightly compared with first-quarter 1996 income. Volvo Trucks' operating income was affected adversely by smaller margins and volumes of sales in Europe.

The trend of foreign exchange movements during the first quarter, after giving effect to forward contracts and options contracts, had a favorable impact of approximately SEK 200 M on operating income, compared with the first three months of 1996.

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

Income from investments in associated companies rose to SEK 3,005 M (239), of which SEK 3,027 M in capital gains on the sale of shares in Pripps Ringnes. Volvo's share in income before taxes of associated companies amounted to an aggregate loss of SEK 26 M. The figure for the preceding year included a gain on the sale of VOAC Hydraulics amounting to SEK 352 M.

Net interest income was lower than in the preceding year, despite Volvo's strengthened financial position; this was due to lower levels of interest rates during the first quarter of 1997.

Other financial income and expense included exchange differences of SEK 136 M (30) on financial assets.

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 20.4 billion during the first quarter of 1997 of which changes in foreign exchange rates accounted for SEK 3.7 billion. Expanded sales-financing operations accounted for SEK 5.1 billion.Acquired companies increased the total assets by SEK 3.1 billion, of which SEK 0.8 billion in Goodwill. The sale of the holding in Pripps Ringnes reduced shares and participations by SEK 1.5 billion and increased current receivables by SEK 4.2 billion.

Capital expenditures for property, plant and equipment amounted to SEK 2.0 billion (1.8). The greater part of the expenditures pertained to changes in Volvo Cars' Torslanda plant and to investments in type specific tools for new car models.

Volvo Trucks' investments pertain to the continuing globalization of the industrial structure for the assembly of trucks in the FH series.

Investments in leasing vehicles amounted to SEK 0.7 billion (0.8).

The Group's net financial assets which amounted to SEK 12.0 billion at December 31, 1996, increased to SEK 13.6 billion.

Shareholders' equity increased by SEK 5.2 billion, of which net income accounted for SEK 4.5 billion and translation differences for SEK 0.7 billion. Shareholders' equity and minority interests amounted to 39.6% of total assets, compared with 41.4% at December 31, 1996. Excluding the sales-financing operations, the figure was 46.8% (48.0).

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




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

Volvo Cars

As a result of a sharp increase in sales in Japan, the world market for passenger cars increased by about 1% in the first quarter of 1997, compared with the year-earlier period. However, the Japanese market is expected to level off during the remainder of the year due to higher taxes that become effective in April. The European and North American markets decreased slightly during the first quarter. Demand in Europe and North America for the full year 1997 is expected to be approximately the same as in 1996.

Volvo Cars' net sales were 18% higher than in the first quarter of 1996. The number of cars invoiced rose from 85,200 to 94,500.

Volvo Cars increased its sales and market shares in most of its markets in Europe, due largely to a positive development for the Volvo S40 and V40 models. The new Volvo S70 and V70 models also contributed to the sales increases. The total number of Volvo cars registered in Germany, Spain and the Netherlands increased by 30%, compared with the year-earlier period. Marketing of the Volvo S70 and V70 was begun in North America during the latter part of the quarter. Sales in Japan continued to rise although the company's share of the market declined slightly.

(see graph: Operating income, Volvo Cars)

Volvo Cars showed an improvement of SEK 1,259 M in operating income, from a loss of SEK 191 M in the first quarter of 1996 to income of SEK 1,068 M in the first three months of 1997. The improvement was attributable to larger volumes of business, higher margins and -- to a certain degree -- the favorable effects of foreign exchange movements. Operating income was SEK 143 M higher than in the fourth quarter of 1996. Volvo Cars' income has thus increased for five consecutive quarters. The operating margin was 4.6%, compared with a negative margin of 1.0% a year earlier.

Volvo Trucks

The total market for heavy trucks in Europe declined during the early part of the year. This also occurred in the U.S., but signs of a gradual recovery are now discernible there. The total market in Brazil continued to strengthen. The world market for heavy trucks in 1997 is expected to be smaller than in 1996, mainly due to weaker demand in Europe.

Volvo delivered 14,500 medium-heavy and heavy trucks during the first quarter of the year, 13% fewer than in the comparable period in 1996. Deliveries in Europe decreased 22% but were unchanged in North America. The number of trucks delivered in South America rose 3%.

Based on preliminary data, Volvo's share of the market in the heavy truck class in Europe was to 16.6% (16.3), while its share of the market in the comparable class in the U.S. declined to 9.2% (9.9).

The order backlog at the end of the first quarter of the year is 14% lower than a year earlier. However, Volvo Trucks' order backlog has increased 12% since year-end.

Volvo Trucks' operating income amounted to SEK 304 M (731). The decrease was attributable to smaller volumes of sales and lower margins in Europe. The North American business showed continued loss. The company's operating margin was 2.8% (6.3).


(see graph: Operating income, Volvo Trucks)

Volvo Buses

Volvo Buses delivered 1,840 (1,490) buses and bus chassis during the first three months of 1997. Based on preliminary data, the company had a 19% (20) share of the market in Europe. The order backlog at the end of the period was 14% higher than on the year-earlier date. Operating income increased to SEK 87 M (69), mainly due to larger volumes of business and favorable foreign exchange rates. The company's operating margin was 3.7% (3.6).

Volvo Construction Equipment

Demand in important markets in Europe in the first quarter of 1997 was slightly lower than in the corresponding period of 1996, but the markets in North and South America and Asia showed a positive trend.

Net sales increased to SEK 3,688 M (3,045), of which SEK 285 M was attributable to Champion Road Machinery Limited, the newly acquired company. As a result of Champion's contribution and the favorable impact of a stronger U.S. dollar, operating income increased to SEK 309 M (273). The company's operating margin was 8.4% (9.0).

Volvo Penta

Volvo Penta's sales increased by 5%. Sales of industrial engines and marine engines for commercial applications increased in Europe, while the market for engines used in leisure craft was still weak.

Sales in North America were slightly higher, notably in the market for marine engines used in large vessels. A favorable sales trend was also reported for Latin America, the Middle East and in the Asia region except Japan.

Volvo Penta's operating income amounted to SEK 50 M, compared with SEK 17 M in the first quarter a year earlier. The operating margin increased to 4.9% (1.8)

Volvo Aero

Volvo Aero reported first-quarter net sales of SEK 1,507 M (956), of which AGES, which has been a subsidiary since January 1, 1997, accounted for SEK 466 M.

The formal decision to transfer Volvo Aero's operations in Arboga to Trollhättan was announced on March 21. The move is being caused by the fact that maintenance work on Viggen military aircraft engines, which constitutes the basic activity in Arboga, is being reduced by 80% within a year. The 650 employees in Arboga are being given priority in filling 500 jobs in Volvo Aero in Trollhättan. These jobs are being created by the move from Arboga, the new joint venture with MTU (a German company that is a member of the Daimler-Benz Group), and the expansion of operations in the commercial aircraft engine sector

During the quarter, Volvo Aero Services in Stockholm received a three-year contract valued at SEK 1.2 billion from SAS, covering maintenance of all JT8D engines for MD80 aircraft in the SAS fleet. The contract currently comprises 224 engines.

Volvo Aero's operating income increased to SEK 119 M (58), of which AGES contributed SEK 48 M. The company's operating margin rose to 7.9% (6.1).

Operations being divested

After the sale of Pripps Ringnes, Volvo's remaining undertakings outside the automotive industry comprise mainly the share holding in Pharmacia & Upjohn, Inc.

Employees

The number of employees in the Volvo Group increased by 350, to 70,680, between January 1 and March 31. The number was increased by approximately 1,000 through the acquisition of The AGES Group and Champion Road Machinery, while the transfer of personnel to ABB Olofström Automation, a newly formed joint venture, reduced the number by 500. In addition, the number of employees in the Group declined by 150 persons.

Redemption of shares

At Volvo's Annual General Meeting on April 23, the Board of Directors proposes to offer the company's shareholders rights to redeem shares for cash with one share for each multiple of 20 Volvo shares held in connection with a reduction in AB Volvo's share capital.

Under the condition that the General meeting makes the necessary decisions, an information document will be published on April 24 for distribution to Volvo's shareholders in Sweden and abroad. The document contains the redemption structure, terms and conditions, instructions and schedule. U.S. shareholders will receive a separate document prepared in compliance with the Security and Exchange Commission.

Volvo's interim report covering operations during the first six months of 1997 will be released on July 22.

Göteborg April 23, 1997