CEO's Comments

Stable first quarter

During the first quarter of 2012, the Volvo Group’s sales development continued to be strong. Net sales rose by 10% to SEK 78.8 billion and was the highest so far for a first quarter. The performance was particularly strong in North America, where the truck operations’ sales rose 42% and those of Volvo Construction Equipment by a full 111%. From a Volvo Group perspective, all markets contributed with sales increases, with the exception of Europe, where sales were on roughly the same level as last year.

The operating income of SEK 6.2 billion was on par with the year-earlier period, adjusted for the nonrecurring items that impacted the first quarter of both this year and last year. The 7.9% operating margin was somewhat lower than in 2011, and was primarily the result of a changed market mix.

The operating cash flow in the industrial operations followed the normal, seasonal trend and was a negative SEK 4.9 billion, mainly due to increased working capital. The Group’s net financial debt remained at a low level.

Trucks – good trend in North America
The truck operation’s net sales rose 8% to SEK 48.9 billion. Increased volumes, primarily in North America, more than offset the declines in Western Europe and Brazil. The operating income and operating margin declined somewhat to SEK 3.5 billion and 7.2%, respectively. The lower margin is mainly attributable to the changed market mix with a lower proportion of sales in Europe and Brazil.

Following a decline in demand for trucks in Europe in the fourth quarter, the market recovered by the end of the first quarter. The order intake in the first quarter was 23,400 trucks, representing an increase of 19% compared with the fourth quarter. As a result of the increased order intake, we are planning a slight increase in production rates in Europe during the second quarter. Based on the current trend in order intake and the expectation that some customers will begin renewing their truck fleets at the end of the year, we are raising our forecast for the heavy-duty truck market in Europe to approximately 230,000 vehicles in 2012. With major uncertainties still prevailing not least about the macroeconomic trend, we are maintaining a continued high state of readiness for swiftly reacting to changes in demand.

In North America, we delivered 12,800 heavy-duty trucks, while we received orders for 13,800 trucks during the first quarter. The good order intake is largely the result of the excellent fuel efficiency of our Volvo and Mack trucks, which is valued by increasing numbers of customers now that diesel prices are returning to near record levels. The total order intake in the industry remains at a level indicating a market of about 250,000 trucks in North America in 2012, which is in line with our current forecast.

As expected, order intake in South America declined in the first quarter following the switch-over to the new, more stringent emissions requirements in accordance with Euro V standards that were enacted in Brazil at the beginning of the year. Consequently, we will reduce production in May and June. At the same time, the trend in the aftermarket has been strong and sales of spare parts were at an all-time high in March, which is a clear indicator that our customers’ fleet utilization and profitability remain strong. We are expecting the second quarter to also be affected by the switch-over from Euro III to Euro V standards. However, we anticipate that demand will rise again in the second half of the year, once our competitors’ stocks of Euro-III trucks have come down and when the new stimulus package for the Brazilian economy and the new favorable financing solutions begin to gain a foothold. We have seen some instances of customers postponing the deliveries of their new trucks into May in order to benefit from the new loans with a lower interest rate. In terms of the Brazilian market, we maintain our forecast that it will reach approximately 105,000 heavy-duty trucks in 2012.

In Japan the reconstruction work following last year’s tsunami is yet to gain full traction. Despite this, we have noted a pick-up in demand for trucks in the beginning of the year and we retain our forecast of a market of about 30,000 heavy-duty trucks in 2012.

In India, our joint venture with Eicher Motors, VECV, had a record month in March, with more than 6,000 trucks manufactured. Both sales and profitability are developing well and we will continue to invest in the growth of our operations in this dynamic market.

Strong development in Volvo CE
Volvo CE’s sales rose 17% to SEK 18 billion despite the global market for construction equipment remaining at the same levels as the preceding year. The operating income rose as well, to SEK 2.1 billion, corresponding to an operating margin of 11.8% – the highest level to date for a first quarter.

The strong sales growth and high profitability is a combination of growth in all regions, with a very strong development in North America, and our success in achieving a sales and profitability level on par with the preceding year in China, despite a significant weakening of that market. The strong growth in China was due to our continued capture of market share, thanks to a strong product portfolio and our efforts to establish stable distribution channels for both the Volvo and SDLG brands. We also had an advantageous product mix with a relatively larger share of sales of heavy machinery. It is satisfying that we have succeeded in further strengthening our position as a market leader in China without lowering our pricing position, and this further convinces us that our dual-brand strategy is the right one.

Weakening trend for Volvo Buses and Volvo Penta
Volvo Buses’ sales rose by 10% to SEK 5.2 billion thanks to the high volume of deliveries in Brazil, where customers placed a large number of orders for buses toward the end of 2011, in anticipation of the introduction of the new, stricter rules on emissions on January 1 this year. The chassis were manufactured in 2011, but the superstructures were completed at independent bodybuilders and invoiced during the first quarter. Consequently, we had a high level of sales but a low level of production at our plant in Brazil, which, when combined with low demand and tougher price competition on city buses in Europe, adversely impacted Volvo Buses’ profitability. The operating margin was 1.2%.

The demand remains weak for marine engines and Volvo Penta’s sales declined 6% to SEK 1.9 billion, while the margin fell to 5.8%. On the other hand, Volvo Aero’s profitability has recovered as a result of improved manufacturing efficiency and an operating margin of 14% was achieved.

The controlled growth of our customer-financing operations continues alongside improved portfolio performance, resulting in increased profitability. In March, Volvo Financial Services successfully executed its second asset-backed securitization in the U.S.

High level of activity in the Group
In the first quarter, the Volvo Group showed its strength in being a global operation, when setbacks in some of our important markets were offset by positive developments in other markets. We will continue to invest to further increase our presence in growth markets by developing new products and further strengthening the sales and service networks.

We are maintaining a high pace in the implementation of the Group’s new organization. One of the objectives with the reorganization is to increase internal efficiency, such as through the elimination of unnecessary duplication of work. We are currently carrying out a thorough analysis of operations to identify concrete measures and this task is expected to be completed during the third quarter. There is more to be gained in this area. A more efficient Volvo Group that has lower cost levels throughout is of great importance for securing future competitiveness.

Olof Persson
President and CEO