CEO's Comments

Financially strong in a weak world economy

In the fourth quarter the Volvo Group’s net sales declined to SEK 71.8 billion (86.5) as a result of lower economic activity in many of our markets and a continued uncertainty about the future direction that makes our customers more cautious. However, overall we have maintained our market positions with some regional variations. Operating income declined to SEK 1,121 M (6,955).

For the full-year 2012, the Volvo Group’s net sales amounted to SEK 303.6 billion (310.4) with an operating income of SEK 17.6 billion (26.9) and an operating margin of 5.8% (8.7).

Our main focus in the quarter was to reduce inventories to bring them in line with current sales levels, which we accomplished. The inventory decreased by SEK 5.4 billion, contributing to a positive operating cash flow in the Industrial Operations of SEK 4.7 billion. I am also pleased that we strengthened the Group’s financial position, with net financial debt in the Industrial Operations being reduced by SEK 12 billion, bringing the financial net debt to equity ratio down to 29%. The Board of Directors proposes a dividend of SEK 3.00 per share for 2012, compared with SEK 3.00 per share the preceding year.

In the fourth quarter operating income was affected by considerable under absorption of costs in the industrial system amounting to approximately SEK 1.7 billion as production cuts were implemented in a more rapid pace than we were able to reduce cost levels. In total, headcount in production was reduced by about 2,000 people during the quarter. Earnings were also negatively affected by non-recurring items in a total amount of SEK 0.7 billion and by targeted marketing activities to reduce inventories.

Furthermore we are currently investing heavily in research and development as we are in late stages of one of the biggest product renewals and product range extensions in the Group’s history. Among the projects are the new Volvo FH series, a completely new Renault Trucks range, a new range of trucks for the lower price segments in emerging markets, a new medium duty engine range as well as R&D for Euro 6 for trucks and buses and Tier 4f for construction equipment and Volvo Penta. Related to the product renewal we have also incurred costs in sales, production and aftermarket support.

Restructuring to improve efficiency in Trucks
On top of the busy product launch schedule, we are taking a number of actions to improve efficiency and reduce costs in line with our strategic objectives. The previously announced program to reduce headcount in Japan was implemented and almost 1,000 employees have left the company. In January of this year we also announced a program to consolidate the industrial footprint in Japan in order to improve overall efficiency.

In Europe the reorganization of the sales and distribution channel is currently in an intense phase. The objective is to reduce overall cost and improve efficiency while at the same time improve the service and aftermarket support for our customers. We are mainly restructuring Renault Trucks’ dealer network in Central and Eastern Europe and moving into one distribution and aftermarket channel for both Renault Trucks and Volvo. When the reorganization is completed, it will increase the number of service points in Europe by about 50% for Renault Trucks and by 15% for Volvo while at the same time improve the service quality for our customers. The cost for the total program is expected to be SEK 800 M, of which SEK 600 M was recorded in this quarter and the remaining amount is expected in 2013. Apart from the improved aftermarket support for our customers, it is expected to generate annual savings of about SEK 600 M with full effect from 2014.

In the fourth quarter demand for trucks continued to be subdued and we saw orders coming down by 10% compared to last year. In Europe order intake for Volvo improved by 7% compared to the fourth quarter of 2011, while orders for Renault Trucks decreased by 18%. The decline for Renault Trucks is primarily a result of efforts to reduce inventories and continued sluggish demand in Southern Europe. For Volvo Trucks the slight improvement in demand has continued into this year, and therefore we have recalled some previously announced stop-days in production in March and April. In Asia demand from the mining segment has dropped significantly and the important Japanese market experienced weak demand. North American customers have remained cautious because of uncertainty about the future economic development, although when compared to the third quarter of 2012 orders have picked up. In South America order intake is strong. In the fourth quarter orders increased by 24% compared with last year, and we will increase production levels in March. We raise our forecast for the Brazilian market from 95,000 trucks to 105,000 trucks in 2013.

Weak earnings but successful inventory reduction for Volvo CE
For Volvo CE demand was lower in most markets during the quarter and especially in the mining segment. With sales of SEK 12.6 billion, we are now on roughly the same level as during the financial crisis in the autumn of 2008, though profitable and with good cash flow. We cut production aggressively in the quarter and brought inventories down to a level in line with current sales trends. Capacity utilization was only about 40% in the quarter, which hurt profitability.

In a very tough Chinese market I am pleased that our dual brand strategy with Volvo and SDLG is working well. Since we bought 70% in Lingong in 2007 our market shares in China have improved substantially. Volvo’s share of the excavator market has gone from 3.2% to 6.5% and with the recent introduction of the Volvo L105 wheel loader we expect to gain market share also in this segment. The SDLG brand's share of the wheel loader market has improved from 11.9% to 18.5% and the excavator range from 0% to 3.8%.

The weak demand in China is currently putting pressure on Volvo CE and its dealers’ profitability, but even more so on our competitors. I am confident that we will emerge as an even stronger company at the end of this downturn.

Volvo Penta and the bus business in an intense period of product renewal
Volvo Penta is affected by the continued low level of demand for leisure boats. On the industrial engine side we are investing in product development in order to leverage fully on our new medium-duty engine that will be produced in India. We intend to launch a completely new range of industrial engines in connection with the new emission regulation Tier 4f in 2014.

Our bus business continues to have an unsatisfactory profitability, driven by weak demand and price competition primarily in Europe. Our decision to close one of our two European plants for the production of complete buses will reduce the installed production capacity in Europe by 20%. On the positive side our hybrid buses continue to make inroads into new markets and new customers, and we are investing in R&D to extend the product range in the next couple of years.

For Volvo Financial Services, trends continued to point in the right direction with portfolio growth and improved margins.

Focus on execution of business cycle adjustments and the new strategy
On a Group level the first quarter of 2013 will also be difficult as a result of the low order intake in many markets during the fourth quarter of 2012. Profitability will be affected by low capacity utilization, high spend levels in research and development and costs associated with the launch of new products. However, we expect market conditions to gradually improve during the course of 2013 when economic growth across the world gains momentum.

We have a busy period ahead of us where we are looking to execute on our development projects and launch a very large number of new products. We have full focus on the new strategy for 2013-2015 in which roadmaps have been developed for each of the 20 strategic objectives. The road maps have been further detailed and broken down into over 400 main initiatives that will be executed in order to improve the Groups overall profitability.

In line with our ambition to grow in Asia, on January 26 we announced a strategic alliance with Chinese company Dongfeng Motor Group (DFG). We will acquire 45% of a new subsidiary of DFG, Dongfeng Commercial Vehicles (DFCV), which will include the major part of DFG’s medium- and heavy-duty commercial vehicles business. This is a very exciting venture that will combine the best of two worlds, strengthening the positions of the Volvo Group and Dongfeng and offering excellent opportunities to both parties. Combining Dongfeng’s strong domestic position and know-how with the Volvo Group’s technological expertise and global presence will offer DFCV excellent potential for growth and profitability in and outside China.

The high level of activity requires hard work around the Group with employees making extraordinary efforts. A lot of work remains, but I am confident that we have done the necessary preparation work in order to achieve our strategic objectives in the next 35 months.

Olof Persson
President and CEO