Volvo - first six months 2001

Volvo - six months ended June 30, 2001 First six months 2001 2000 Net sales, SEK M 90 848 59 244 Operating income excluding items 2 625 4 307 affecting comparability, SEK M* Operating income, SEK M 1 306 4 307 Income after financial items, SEK M 561 4 318 Net income, SEK M 555 3 153 Sales growth 53% 4% Income per share excluding items 7,60 13,30 affecting comparability, during most recent 12 months period, SEK Return on shareholders' equity, 3,4 6,1 excluding items affecting comparability, % * Items affecting comparability in 2001, pertain to restructuring costs of SEK 1.3 billion. Volvos operating income during the first six months 2001 was also favorably affected with SEK 941 M attributable to capitalization of development costs. See further "Accounting principles", on page 20. ·Global Trucks, Volvo Penta and Volvo CE report increasing market shares on declining markets ·Breakthrough within Volvo Powertrain; agreement to supply truck engines to Navistar. ·Unsatisfactory earnings for the Group. Cashflow positive in the second quarter. ·Continued positive development within Volvo Penta and Volvo Aero ·Divestments completed of Volvo's MMC-holding and Volvia's insurance operations. Comments by the Chief Executive Officer Two separate series of events currently dominate the Volvo Group. One is a long-term program to create a more competitive strategic structure. The other consists of more immediate measures to adapt operations to the prevailing business climate. Structural work is proceeding according to plan. Although operating income remains clearly unsatisfactory, a number of promising trends were noted during the second quarter. Growth is strong in some parts of the Group. We are gaining market share. Volvo Aero and Volvo Penta continue to deliver strong performance. In addition, the focus on cash flow resulted in a significant improvement compared with the first quarter and with the corresponding period in 2000. As in the most recent quarters, it is primarily the weak truck market in North America that restricts earnings growth for the Group. Demand is declining in Western Europe, and we expect a further weakening. A decline in the market for construction equipment is also becoming evident. Since customer financing is primarily linked to Volvo Global Truck's sales in North America, Volvo Financial Services' profitability is affected by credit losses. Volvo Buses is also operating in declining markets. This applies particularly to the Nordic region and Great Britain, which are traditionally strong bus markets for the Volvo Group. Growth is favorable in Eastern Europe, Asia and South America, although economic conditions in North America and Western Europe, which account for the major share of the Group's sales, indicate that little help can be expected from the market over the next few quarters. Despite these difficult business conditions, some units reported excellent results, and, as noted above, we see a number of promising trends. Penta continued to generate growth and excellent operating margins. Order bookings for both industrial and marine engines reached record levels toward the end of the period. In North America, Penta compensated a sharp decline in the market for marine engines by gaining market shares. Aero increased sales and operating income, despite the fact that growth in air traffic declined during the second quarter. In North America, Global Trucks increased its market share for heavy trucks from 21 to nearly 25 percent, in part as a result of Mack's launch during the second quarter of two new truck series, Granite and Freedom. Volvo Construction Equipment increased market shares in both Europe and North America, in large part through successful product introductions. Order bookings increased during the second quarter, primarily as a result of increased demand for Volvo's new articulated haulers. The second quarter was the best ever in terms of sales. Nonetheless, Construction Equipment reported a decline in operating income as a result of a less favorable product and market mix during the first six months of the year. During the second quarter, SEK 3.2 billion was received from DaimlerChrysler as payment for Volvo's shareholdings and other commitments in Mitsubishi Motors. In addition, the remaining car-related operations in Volvia and Volvofinans were divested. Within the two new units Global Trucks and Volvo Powertrain, decisions were taken that will result in more competitive products and significant cost savings over the next few years. Firstly, as part of its product plans, Global Trucks adopted a joint platform concept for its three truck brands. Secondly, Powertrain decided on product plans for the development of two engine families that will supply the entire Group (excluding Volvo Aero) with power systems. The largest of these, a 16- liter engine, will be sold primarily by Penta for industrial and marine power systems. It was very encouraging that Powertrain in late-May was able to sign a Letter of Intent with Navistar for a long-term delivery contract for 12- liter diesel engines. This will result in significant volume increases that will strengthen the Group's engine program. The contract also shows that the market has confidence in our engine strategy. In our effort to adapt operations to prevailing business conditions we have been forced to take strong measures that mean that many employees will leave the company. Such decisions are painful, but by taking these measures, we expect to emerge strong when markets turn upward again. Leif Johansson Significant events during the second quarter of 2001 Volvo to supply truck engines to Navistar At the end of May 2001, AB Volvo's Powertrain business unit signed a Letter of Intent and is negotiating a long-term agreement with International Truck and Engine Corporation, a wholly-owned subsidiary of Navistar International Corporation, regarding the supply of 12 liter engines to International. The engines will be used in trucks manufactured by International in NAFTA countries, and will comply with the US 02 emission regulations. The engines will initially be produced at Volvo Powertrain's plant in Skövde, Sweden. However, Volvo eventually intends to produce the engines in North America. Volvo Aero enters Rolls-Royce's Trent engine program In May 2001, an agreement was signed through which Volvo Aero becomes a risk and revenue sharing partner in two Rolls-Royce engine programs, the Trent 500 for the Airbus A340-500/-600 and the Trent 900 for the new Airbus A380. Volvo Aero's responsibility in the cooperation with Rolls- Royce will cover design, development, manufacture and support for the Intermediate Compressor Case, which is one of the company's specialities. The first Trent 500 components from Volvo Aero will be delivered during the first quarter of 2002. Production of the new engines will last for at least 20 years. Volvo sells its interest in Volvofinans On June 28, 2001, Volvo reached an agreement to divest its entire 50% holding in AB Volvofinans to Ford Credit International, Inc for a total purchase price of SEK 871 M, which will have a marginally positive impact on Volvo's earnings in the third quarter, 2001. The divestment is dependent on approval from the relevant authorities. AB Volvofinans predominantly finances passenger cars and is thus more naturally related to Volvo Cars, which is now owned by the Ford Motor Company, Inc. Divestment of shares in Mitsubishi Motors Corporation ("MMC") completed On June 29, 2001, Volvo received USD 297 M (SEK 3,182 M) as payment for the sale of its 3.3% holding in, and all rights and obligations relating to, MMC. The divestment resulted in a net capital gain of SEK 574 M in the second quarter of 2001. The capital gain is reported in Global Trucks and includes costs for terminating the distribution of Mitsubishi Canter trucks as well as costs for terminated development projects. Divestment of the insurance operations in Volvia completed On February 8, 2001,Volvia reached an agreement covering the divestment of its insurance operations. The buyer is the If insurance company, with which Volvia has had a close partnership. The divestment was completed in the second quarter of 2001 and resulted in a capital gain of SEK 562 M. AB Volvo and Renault SA Volvo and Renault have entered into arbitration regarding the final value of acquired assets and liabilities in Renault V.I. and Mack. This process could result in an adjustment in the value of the transfer. Any such adjustment will affect the amount of acquired liquid funds and Volvo's reported goodwill amount. The outcome of this arbitration cannot be determined with certainty, however Volvo believes that the outcome will not lead to an increase in goodwill. New members of the Volvo Board At AB Volvo's Annual General Meeting held on April 25, 2001, Louis Schweitzer, Patrick Faure and Ken Whipple were elected new members of the AB Volvo Board. Board members Sören Gyll and Sören Mannheimer declined reelection to the AB Volvo Board. In addition, the following members were reelected: Lars Ramqvist (Chairman), Per-Olof Eriksson, Tom Hedelius, Finn Johnsson and Leif Johansson. Volvo's repurchase of Company shares During the beginning of 2001, Volvo repurchased 10% of the total number of shares outstanding in AB Volvo. As a result a total of SEK 8.3 billion was transferred to the shareholders' of AB Volvo. On February 9, 2001, 5% of the shares were transferred to Renault S.A. as final payment for the shares of Renault V.I. Volvo thus holds 5% of the total number A shares outstanding and 5% of the total number of B shares outstanding, corresponding to 5% of the voting rights and 5% of the share capital of AB Volvo. The Volvo Group - 2001 Net sales Net sales of the Volvo Group for the second quarter of 2001 amounted to SEK 47,098 M, an increase of 52%, compared with SEK 30,970 in 2000. All business areas reported increasing net sales in the second quarter and Global Trucks, Aero, Penta and Volvo CE reached the targeted growth rate of 10%. With the combined truck operations of Mack, Renault and Volvo, net sales of Global Trucks' doubled and amounted to SEK 30,128 M. In North America, the company was able to increase its market share from 21% to 24.7%, despite a significant decline in deliveries. In Europe, the combined market share for Volvo and Renault was 27.5%, which was at the same level as in 2000. Mainly due to weakening markets, Buses experienced a declining trend. Net sales adjusted for currency effects decreased by 5% and the number of buses sold by 10%. The most significant decrease was in Europe, with a decrease in volumes of 27%. Net sales for Volvo Construction Equipment reached record high levels, in part due to a strong dollar but also as result of successfully launched products. Volvo Penta managed to increase its sales and gain market shares on a declining market. Within Aero net sales adjusted for currency effects increased by 2%. This related mainly to Aerospace Components and Aviation Support Services. During the first six months of 2001, the Group's net sales increased in all markets compared with last year. Adjusted for acquired companies and the effects of foreign exchange changes, net sales decreased by 4%. Net sales in Western Europe increased by 16.9 billion (55%), of which Renault V.I. represented the major part. Excluding acquired companies, Group net sales in western Europe increased by 5%. The decline in demand in North America, which continued during the second quarter affected net sales in Global Trucks negatively. Excluding acquired companies Group net sales in North America decreased by 8%. Net sales in Volvo's growth markets - Asia, Eastern Europe and South America - increased by 35% compared with last year and accounted for 11% of the Group's total sales. Excluding Mack and Renault V.I., net sales on these markets increased by 19.5% compared with preceding year. During the first six months of 2001 Western Europe and North America accounted for 83.8% of the Group's total sales, compared with 84.7% during the preceding year. The distribution of net sales by market is further specified in the table below: Net sales by market area Second First six Change quarter months SEK M 2001 2000 2001 2000 in % % of total Western Europe 23 624 15 381 47 321 30 450 +55 52 Eastern Europe 1 427 852 2 626 1 611 +63 3 North America 15 354 10 573 28 795 19 704 +46 32 South America 1 727 1 181 3 106 2 145 +45 3 Asia 2 756 2 223 4 697 3 971 +18 5 Other markets 2 210 760 4 303 1 363 +216 5 Total 47 098 30 970 90 848 59 244 +53 100 Income from investments in shares Income from investments in shares in the second quarter amounted to SEK 1,396 M (108). The increase pertains mainly to a dividend received from Scania of SEK 637 M and a capital gain from the divestment of MMC of SEK 768 M, excluding costs for terminating the distribution of Mitsubishi Canter trucks as well as costs for terminated development projects. Operating income Operating income for the Group in the second quarter of 2001 amounted to SEK 2,123 M, compared with 2,507 M for the corresponding period during the preceding year. Operating income during the first six months of 2001 was favorably affected by SEK 941 M, which was attributable to capitalization of development costs. (See also page 20). The distribution of these costs was SEK 750 M for Global Trucks, SEK 71 M for Buses, SEK 64 M for Construction Equipment, SEK 38 M for Marine and industrial power systems and SEK 18 M for Aero. Other non-recurring items effecting operating income during the second quarter of 2001 included gains from the divestments of MMC (574) and Volvia (562), and the dividend from Scania (637). These positive effects were offset by credit losses and increased provisions in the US within Financial Services (-670). Non-recurring effects for 2000 pertain mainly to gain on sale of marketable securities (400) and surplus pension funds from SPP (683), a Swedish insurance company. Global Trucks' operating income for the second quarter of 2001, was SEK 639 M (31). The downturn in North America continued with declining net sales and reduced margins. Together with effects of excess capacity, this affected operating income negatively. These negative effects were in part offset by the positive effects of the divestment of MMC. Lower volumes and low capacity utilization especially in the North American plants, were mainly responsible for the operating loss in Buses of SEK 25 M in the second quarter. Operating income for Construction Equipment was SEK 408 M (740). The deterioration was due mainly to an unfavorable market and product mix and price pressure. Marine and Industrial Power Systems and Aero both reported higher operating income in 2001 than in 2000, Operating margins reached 11.2% and 9.3% respectively. Within Financial Services operating income amounted to SEK 63 M. Credit losses and increased provisions in the US was partly offset by a capital gain on the sale of Volvia. Increased provisions are a direct effect of the declining market in North America. The Group's operating margin for the second quarter amounted to 4.5%, compared with 8.1% in 2000. Net interest expense Net interest expense for the second quarter 2001 amounted to SEK 262 M compared with SEK 273 M for the first quarter of 2001. The funding cost was reduced compared to last quarter mainly due to lower US interest rates. However, higher average net financial debt and higher SEK rates had a negative impact on the net interest. Repurchase of shares and the acquisition of Mack and Renault V.I. affected the financial position and the net interest negatively. The payment for the divestment of MMC was received at the end of June and thus had only minor effects on average net financial debt during the second quarter. Taxes During the first six months of 2001, a tax expense of SEK 43 M was reported (1,150). Costs for current taxes were partly offset by an increase in deferred tax assets. Restructuring costs To secure the coordination gains made possible through the acquisition of Mack and Renault V.I., Volvo decided to implement a number of actions during the next three years to adapt the Group's industrial and commercial structure. For the period up to and including 2003, it is estimated that restructuring costs will total slightly more than SEK 4 billion. Since as of January 1, 2001 Volvo applies the new international accounting principles that will become obligatory in Sweden from 2002, the company's opportunities for allocating provisions for the approved measures are limited. During the first quarter, restructuring costs of SEK 1.3 billion were charged against earnings, of which SEK 0.5 billion pertains to costs for personnel reductions as a direct result of the market decline in North America. The balance includes costs for coordinating purchasing and engine development. The remaining restructuring measures, mainly relating to approved product plans, will be announced later, and the total costs of about SEK 3 billion will be charged against earnings as incurred during the period 2001 to 2003. The actions taken will result in substantial cost savings. At the end of 2002, savings of about SEK 3.5 billion annually are estimated, primarily in purchasing and drivelines. Long term, the successive integration of the companies and their product programs will yield annual coordination gains of an estimated additional SEK 3 billion. Residual value exposure As a manufacturer of commercial vehicles Volvo is exposed to residual value risks from buy-back and operating lease agreements. Management of these risks are split between the business areas and Financial Services. It is Volvo's policy to provide for this exposure on a continuing basis, so that the book value of these vehicles are in line with current and expected future used truck price levels. Over the last quarters, Volvo has increased its provisions for residual value risks as a consequence of declining used truck prices, primarily in the US. Volvo believes that current levels of provisions are satisfactory with respect to current and expected future price levels. ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2001/07/24/20010724BIT00060/bit0002.doc The full report http://www.waymaker.net/bitonline/2001/07/24/20010724BIT00060/bit0002.pdf The full report