CEO's Comments

Improved profitability in Trucks and strong cash flow in the fourth quarter

The fourth quarter for the Volvo Group was characterized by a high activity level, with a number of product launches. We have entered into 2014 with a new product portfolio that will strengthen the Group's competitiveness. During 2013, extra costs associated with the product renewal put pressure on the Group's profitability, and this was also the case in the fourth quarter. We have a further couple of quarters before we are through the industrialization of the new generation of trucks and the phase-out of the old generations. We can, however, already now see that the reception of the new generation of Volvo Trucks has exceeded our expectations and contributed to the Volvo brand increasing its market share in Europe to historically high levels. The new generation from Renault Trucks and UD Quester have also been well-received by customers, even if it is not yet evident in our sales since they were launched later.

In the fourth quarter, the Group's net sales rose 8% year-on-year, and amounted to SEK 76.6 billion with an operating margin of 4.0% adjusted for restructuring charges and the write-down of Volvo Rents. The seasonally good operating cash flow of SEK 10.3 billion in our Industrial Operations contributed to the strengthening of our financial position, and at the end of the year the Industrial Operations' net financial debt was 29.0% of equity. The Board of Directors proposes a dividend of SEK 3.00 per share, compared with SEK 3.00 in the year-earlier period.

Last autumn we announced a Group-wide efficiency program based on activities related to the implementation of the Group's strategies and which will be implemented in 2014 and 2015. We have now finished the detailed analysis of the consequences of the program and estimate that approximately 4,400 white-collar employees and consultants will be affected by personnel reductions, including the previously announced 2,000 within staff and group support functions. White-collar employees worldwide will primarily be reduced in Group Trucks Operations, Group Trucks Technology, Group Trucks Sales and Marketing EMEA, IS/IT, Finance and Human Resources. This is a consequence of the transformation the Group is undergoing. With a new organization and new ways of working in place, we will also be able to utilize our resources more cost efficiently. The personnel reductions will begin immediately and a majority will be implemented during 2014.

During the quarter, we made two key announcements aimed at focusing on and strengthening our core business. We agreed to divest Volvo Rents in North America, a transaction that was completed in January. We also announced the acquisition of the Terex Corporation's rigid and articulated hauler business.

Furthermore, in early January, the National Development and Reform Commission (NDRC) in China approved our strategic alliance with Dongfeng with a 45% ownership in Dongfeng Commercial Vehicles. Completion is subject to certain conditions including the approvals of other Chinese authorities, but we aim to conclude the transaction by mid-year 2014. Through this alliance, we will get a leading position within medium-duty and heavy-duty trucks in China, which is the world's largest truck market.

High truck deliveries

During the fourth quarter, deliveries from our truck operations rose by 15% year-on-year to slightly more than 61,000 trucks. The increase was driven by good demand in North America and Brazil, as well as a prebuy effect in Europe ahead of the transition to tougher emission regulations that took effect at the beginning of this year. Profitability was improved and the operating margin, excluding restructuring costs, improved to 5.7% compared with 4.0% a year earlier.

In Europe order intake fell during the fourth quarter, which was in line with expectations after the prebuy effect during 2013. For Volvo, order intake declined by 16% compared to last year, and we have reduced our production from the elevated levels we had during the fourth quarter. For Renault Trucks, order intake declined by 30%, which among other things is explained by the fact that we are in the middle of the transition from the old generation to the new generation of trucks. In light of the order intake during the fourth quarter we have cut Renault Trucks' production and will implement a number of stop days in the factories to adapt to the lower order backlog. In all, this means lower capacity utilization in the European industrial system during the first quarter.

Demand in North America is on a good level, and following a weak start to 2013 we gradually recovered our market shares and ended the year at a higher level than 2012. An increasing number of customers in North America are choosing the Group's engines and transmissions for their trucks, which gradually will translate into a bigger aftermarket business.

Our truck business in Brazil has had a very good development in recent years, evidenced by the growth in market shares. During 2013, Volvo was named the "Most desirable brand" in the truck industry and was on top in image and customer satisfaction. To maintain the good momentum we and our independent dealers are keeping a high pace in the expansion of the aftermarket business.

In Asia the Group's investments for the future continued and VECV, our joint venture company in India, launched the Eicher Pro Series, which is a range of 11 trucks and buses developed for India and other emerging markets. Our new UD Quester truck for Asia and other emerging markets has been very well received. There is good customer demand for the Quester, but deliveries will be restricted for some time since we are starting up production in a new plant and a new supply chain. In Japan, we continue the long-term work to increase efficiency in our dealer network and the industrial operation.

Weak profitability in challenging markets for Volvo CE

During the fourth quarter Volvo CE's net sales amounted to SEK 13 billion, which was on the same level as last year, and the operating margin was 2.1%, also on par with last year. Volvo CE is affected by a market characterized by tough price competition, weak product mix, low capacity utilization and unfavorable exchange rates.

The profitability level is unsatisfactory and we are therefore implementing a number of activities to strengthen the development, including a review of the product portfolio and increased efforts to reduce product costs. These measures are important in order to improve profitability in the medium to long term, even though they will not have an immediate effect.

For 2014 we expect a slight improvement in market demand, mainly driven by China and Europe. We have seen a somewhat increased activity ahead of the spring season and our order intake was up 7% in the quarter compared to last year, with general construction driving the improvement. However, demand in the important and profitable mining segment remains soft.

Continued weak market for buses

Demand in the global bus market remains on a low level, with continued price pressure, primarily in Europe, however there are early signs of some recovery in North America. Bus deliveries rose 9% in the fourth quarter and the higher volumes contributed to Volvo Buses reversing last year's loss of SEK 22 M to a profit of SEK 50 M. The weak market with price pressure and unfavorable exchange rates have a negative impact on profitability, and Volvo Buses is implementing cost-savings measures to strengthen profitability.

For Volvo Penta, the fourth quarter is seasonally weak. Despite this, Volvo Penta was able to achieve an operating margin of 4.0% (0.7) thanks to good cost control and competitive products in both the marine and industrial segments.

Volvo Financial Services continued to perform well in most markets. The return on equity amounted to 12.1% for the full year 2013.

2014 - The year of efficiency improvements

The year we have left behind us was characterized by extensive product launches, which involved a lot of hard work in all parts of the Group and an elevated cost level. Although we still have a couple of quarters ahead of us before we are completely through the Group's largest product renewal ever, this year will be characterized by efficiency improvements, including a reduction in activities and costs, as well as personnel reductions. This will play an important part in the work to achieve the Group's strategic and financial targets.

Olof Persson
President and CEO