Volvo Group's Industrial Operations - good growth and improved earnings

In the fourth quarter, net sales for the Volvo Group’s Industrial Operations increased by 25% to SEK 71,974 M (57,441). Adjusted for changes in exchange rates and acquired and divested units net sales increased by 32%. Compared to the fourth quarter of 2009, all markets grew significantly.

Significant earnings improvement
In the fourth quarter of 2010, the operating income for the Volvo Group’s Industrial Operations amounted to SEK 5,420 M, a significant improvement compared to the operating loss of SEK 2,331 M in the fourth quarter of 2009. The operating margin for the Industrial Operations was 7.5%, compared to a negative 4.1% during the fourth quarter of 2009.

The earnings recovery compared to the fourth quarter 2009 is largely driven by higher sales. Increased production levels improved capacity utilization in the industrial system and resulted in improved cost absorption, which also contributed to improved earnings.

Continued cost control preserved the lower expense level in the Group that was implemented during 2009. Despite a significant sales increase of 25% in the fourth quarter of 2010 compared to the previous year, the increase in research and development and selling and administrative expenses was limited to 3%. In the fourth quarter of 2010, research and development expenses were SEK 3,640 M, equal to 5.1% of revenues. Selling expenses were SEK 5,870 M, equal to 8.2% of sales, and administrative expenses were SEK 1,293 M, equal to 1.8% of sales.

During the fourth quarter of 2010, operating income was negatively affected by higher costs for raw materials and components, estimated at approximately SEK 600 M compared to the fourth quarter of 2009.

During the quarter, operating income was impacted negatively by SEK 125 M as a result of provisions for the Volvo Group’s global profit sharing program.

Compared to the third quarter of 2010, changes in currency exchange rates had a negative impact on operating income amounting to approximately SEK 700 M, including a negative effect of SEK 82 M from the devaluation in Venezuela.

The fourth quarter 2010 includes a negative impact from mark-to-market valuation on cash flow hedges equal to SEK 269 M, compared to a positive SEK 598 M in the third quarter of 2010. Changes in mark-to-market valuation of these derivatives are recorded in the business segment “Group headquarter functions and other”.

Strong cash generation
In the fourth quarter of 2010, operating cash flow from the Industrial Operations amounted to SEK 15.1 billion compared SEK 8.6 billion in the fourth quarter of 2009. The strong cash flow was generated through an operating income of SEK 5.4 billion and a reduction of working capital by SEK 12.2 billion. The reduction in working capital was achieved despite a significant sales increase during the quarter as inventories and accounts receivable decreased by SEK 1.2 billion altogether. Higher production levels as a consequence of increased sales also generated a higher level of trade payables, which increased by SEK 9.2 billion during the quarter.