CEO's Comments

Strong fourth-quarter cash flow

During the fourth quarter of 2010, the Volvo Group continued to grow at a good pace with higher sales in all regions, improved profitability and a very strong cash flow. Year-on-year sales were up 23% to SEK 73.4 billion. Operating income improved to SEK 5.5 billion and the operating cash flow from Industrial operations amounted to SEK 15.1 billion. As a result of improved profitability and strong cash flow, net debt in the Industrial operations is now down to 37% of shareholders’ equity, which is in accordance with our objective.

We ended 2010 strongly. The gradual improvement in Europe continues and North America is now definitely recovering, at the same time as the emerging economies in countries such as Brazil, China and India continue their strong growth. However, the trend in Japan remains weak.

The fourth-quarter operating income of SEK 5.5 billion is a considerable improvement compared with the loss of SEK 2.3 billion in 2009. The improvement in income is naturally attributable to us selling an increasing number of products and services, but it is also a result of a conscious effort to maintain our costs on a low level.

For the full-year, the Volvo Group’s operating income totaled SEK 18.0 billion and the return on equity was 16%. As a consequence SEK 350 M has been provisioned for profit-sharing to our employees in a year that was marked by hard work and a high level of activity throughout the Group. The past two years have required rapid adaptations that we never would have managed without the extraordinary efforts of our employees.

For the full-year, Industrial operations generated an operating cash flow of SEK 19 billion. During the year, we successfully grew sales in the Industrial operations by SEK 49 billion, while reducing working capital by SEK 4.6 billion.

Based on the much improved profitability and a significantly reduced debt level, the Board proposes to resume dividends with a pay-out of SEK 2.50 per share for the financial year of 2010.

Improved demand for trucks
The improvement in demand is clearly visible in our truck operations, where fourth-quarter order intake rose 63% compared with the preceding year at the same time as deliveries were up 49%. Net sales increased to SEK 48 billion and operating income improved to SEK 3.5 billion.

The favorable trend in order intake has led to a gradually increased manufacturing rate in most of our plants. During the quarter, this led to some temporary production disturbances impacting productivity when the entire industrial system, including our subcontractors, raised its manufacturing pace to a higher level. We expect productivity to gradually improve when we and our suppliers have stabilized production at the higher level.

The European market for heavy-duty trucks rose 8% to 179,000 vehicles in 2010, which was in line with our expectations. In 2011, we anticipate the European market for heavy-duty trucks to increase to approximately 220,000 vehicles.

The North American market for heavy-duty trucks grew by 20% in 2010 to 142,000 vehicles. It is primarily the market for highway trucks that is developing well, while demand for construction trucks is considerably weaker. In 2011, we expect the North American market for heavy-duty trucks to increase to approximately 220,000 vehicles.

The South American market, fueled by Brazil, continued to perform well, and our deliveries increased 71% during the year.

In our Asian operations, our Indian joint-venture company with Eicher set new delivery records late in the year as a result of the strong Indian market and increasing market shares. We have decided on key investments to increase our manufacturing capacity in India, which will further strengthen our position there, as well as the export of products to other markets.

Demand in Japan was weak in the fourth quarter and while we anticipate a slight improvement in 2011, demand will remain at a low level.

Strong growth and profitability for construction equipment
Construction Equipment’s growth and profitability remained strong during the fourth quarter. Sales rose 44% to SEK 14.7 billion and the business area generated an operating income of SEK 1.8 billion. The operating margin was 12.0%, which is the highest margin to date for a fourth quarter. The construction-equipment markets in which we are active grew by slightly more than 30% in the fourth quarter and we expect all regions to continue expanding in 2011. In China, we have increased our market shares and are currently the third-largest manufacturer. The launch of the SDLG branded excavators from Lingong enables us to further advance our positions in this key growth segment.

Buses continued its positive profitability trend, which is mainly attributable to extensive efforts to enhance the efficiency of operations and reduce costs. Buses’ sales were down 3%, however the operating margin rose to 3.9%.

Volvo Penta had an operating margin of 3.6% during the fourth quarter, impacted by the continued weak demand for marine engines.

Volvo Aero’s operating income rose to SEK 282 M as a result of rising volumes and thus better capacity utilization, improved productivity and lower costs. Volvo Aero is well positioned through its involvement in many interesting engine programs that will enter production in the coming years.

In our customer financing operation, Volvo Financial Services, the gradual improvement in profit continues as our customers see improved business conditions. As a result of the Volvo Group’s increased sales of new products, we are now also noting renewed growth in our credit portfolio.

Positive trend in the short and long term
On the back of an improved order book, our focus is on trimming the industrial system to enhance productivity and capital efficiency. We are also intensifying our product-development activities ahead of several key product launches in the coming years.

As a result of the Volvo Group’s improved profitability, good cash flow generation, reduced debt level and better market outlook, as well as the investments that we have made and continue to make in our facilities and product development, I have confidence in the Group’s performance, from both a short and long-term perspective.

Leif Johansson
President and CEO