Volvo - nine months ended September 30, 2000

Volvo - nine months ended September 30, 2000 First nine months 2000 1999 Net sales, SEK M 94 138 89 806 Operating income, excluding items 4 465 4 601 affecting comparability, SEK M Items affecting - 26 695 comparability, SEK M* Operating income, SEK M 4 465 31 296 Income after financial 4 859 32 180 items, SEK M Net income, SEK M 3 522 30 564 Income per share excluding items affecting comparability and gains on sales of shares 11.90 12.40 during most recent 12-months period, SEK Return on shareholders' equity, excluding items affecting comparability and gains on 5.4 8.0 sales of shares, % *Items affecting comparability for 1999 concerns gain on sale of Volvo Cars to Ford Motor Company. * The Volvo Group's net sales increased by 5%, to SEK 30,142 M, in the third quarter of 2000. A continuing weak trend of business in North America was offset by favorable trends in Europe, Asia and South America. * Operating income in the third quarter amounted to SEK 654 M, compared with SEK 1,198 M in the year-earlier period. The decrease relates primarily to North America. * Volvo Trucks' turn-around program is proceeding according to plan and began to show results in the third quarter. * Volvo Penta's operating income was the best ever in the first three quarters of the year. * Continued aggressive product renewal including several important product launches during the third quarter. * The European Union's competition authority approved Volvo's acquisition of Renault's truck business, Renault V.I./Mack. Comments by the Chief Executive Officer Volvo's sales in South America, Asia and Eastern Europe increased very sharply in the third quarter. Business in Western Europe continued to be strong, while the North American market decreased further. We are continuing to maintain a high pace of product renewal and during the third quarter we introduced a number of new products; A new series of vocational trucks, the VHD, was presented in the North American market, and the FL model, a medium-heavy truck, in Europe. Volvo Buses presented a new product platform, the TX, which will serve as the basis for the planned model changes in the years immediately ahead. Volvo Construction Equipment strengthened its product line with two new articulated haulers, the A35D and A40D models as well as with a new excavator, the EC150, and Volvo Penta introduced a new 12-liter diesel engine. Through an agreement with Mitsubishi Heavy Industries we expanded the commercial marine-engine program to also include engines in the 25- to 65-liter range. Volvo Trucks' continued to report unsatisfying earnings, mainly caused by the sharp decline in the North American market. We are well prepared for further adjustments of the business and we are avoiding inventory build- ups. Gratifying is that the turn-around program initiated by the new Trucks management in July is beginning to yield some results and that the trend of profitability in Europe is positive. Sales in Asia are very strong and were doubled in the third quarter. Volvo Construction Equipment was also affected by the weaker market in North America. The operating margin was lower than in the third quarter of 1999, which had been a very strong period. Sales in Europe continue to be strong, although we see tendencies toward increased price competition. The excavator business is developing favorably and the compact-machine segment is growing rapidly in both Europe and North America. Our finance operations has been affected adversely by the downturn in Trucks' business in North America, but the credit losses are limited and are being largely offset by improved earnings in the other segments of the business. Volvo Buses' sales rose in the third quarter, resulting in a larger share of the market in Europe, among other gains. The company's profitability is continuing to improve, relative to earnings in 1999, due in part to lower purchasing costs, but is not yet in level with our targets. We are expanding our bus operations geographically in China, through the joint venture agreement with SAIC in Shanghai. Marine and Industrial power systems reports record-high earnings in the first nine months. Growth is strong and the business area continues to capture market shares. This is also valid for the North America market, where sales of diesel-powered and gasoline-powered engines for leisure marine craft are increasing sharply, which also helps to improve Volvo Penta's margins. Volvo Aero had a strong third quarter in both the commercial and military components sectors, but was affected negatively in the engine maintenance segment, due mainly to the fact that high oil prices are imposing a strain on aviation-company margins. The AGES Group in North America reversed the trend and improved its profitability. Regarding the acquisition of Renault V.I./Mack, we are planning for an approval from the American fair trade authorities before year-end. We plan for a rapid integration of the companies and intend to have a resolute line organization in place immediately following final approval of the acquisition. In broad terms, this new organization is based on three separate brand- name companies. The line of products offered by the brand-name companies will be broadened and strengthened, starting from a common industrial base, which will include a merged engine unit, among others. We are very pleased with the work performed by the groups preparing the integration. The atmosphere between the three truck companies is fine - and it is not without a certain amount of impatience that we are looking forward to putting our plans into action. Leif Johansson Important events and structural transactions during the third quarter The European Union's competition authority approves Volvo's acquisition of Renault V.I./Mack In April of this year AB Volvo and Renault announced a Memorandum of Understanding whereby Volvo will acquire all the shares of Renault's truck operations, Renault V.I./Mack, in exchange for 15 percent of AB Volvo's shares. This Memorandum of Understanding was confirmed by a final agreement signed by the two parties on July 18. The agreement between Volvo and Renault is conditional on the receipt of the required approvals from the competition authorities. During the third quarter the European Union's competition authority concluded its investigation of AB Volvo's proposed acquisition of Renault's truck business, Renault V.I./Mack, and decided to approve the transaction after Volvo and Renault had made certain concessions. The concessions mean that AB Volvo will divest its holding in Scania within three years from the conclusion of the deal, that Renault V.I. will sell its 50% interest in RS Hansa Auto Oy, a Finnish truck distributor, and that Renault's and Iveco's cooperation in the jointly owned Irisbus bus company will cease. Now that approval has been received from the EU's competition authority, approval has to be obtained from the American fair trade authority, among others. This year, Volvo's Board of Directors has effected the repurchase of shares amounting to 10 percent of the total number of Volvo shares. When Volvo receives the required approvals by the authorities, these shares will be transferred to Renault as payment for Renault V.I./Mack shares. Volvo then plans to repurchase additional shares in order to be able to transfer the remaining 5 percent of the Company's shares to Renault. The acquisition of Renault V.I./Mack is expected to be completed towards the end of the current year. Volvo's repurchase of Company shares At the Annual General Meeting on April 26, 2000 AB Volvo's shareholders voted to authorize the Board of Directors to decide on repurchase of Volvo's own shares, in order to be able to continuously adjust Volvo's capital structure to the Company's capital needs, and to be able to transfer shares in connection with fulfillment of incentive programs undertaken within Volvo, or as a means of financing company acquisitions. On May 18, 2000 the Board of Directors of AB Volvo voted to acquire a maximum of 10 percent - 44,152,082 shares - of the total number Company's shares through an offer to Volvo's shareholders to tender each tenth share held for a cash amount of SEK 264 per Series A share and SEK 271 per Series B share, equal to a premium of approximately 30 percent. The repurchase offer expired on June 30, 2000. In all, 43,285,237 shares, of which 13,628,789 were Series A shares and 29,656,448 were Series B shares, were tendered. Acceptance of the repurchase offer thus amounted to 98.0% of the share capital and 98.3% of the voting rights, equal to 9.8% of the total number of Volvo shares. Payment for the repurchased shares was made on July 18, 2000. During the third quarter, Volvo has acquired 866.851 of the Company's shares - of which 231,705 were Series A shares and 635,146 were Series B shares - on the OM Stockholm Exchange. Today Volvo owns 13,860,494 of the Company's Series A shares and 30,291,594 Series B shares, equal to 10% of the number of shares and voting rights. As a result of Volvo's repurchase of Company shares, a total of SEK 11.8 billion was transferred to Volvo's shareholders. Following the repurchase of 10% of the Company's shares, the number of Volvo shares outstanding is 397.368,797 of which 124.744,450 are Series A shares and 272.624,346 are Series B shares. Following the transfer of the repurchased shares to Renault, the number of Volvo shares outstanding will be unchanged, compared with the number prior to the repurchase. Agreement reached pertaining to Volvo's acquisition of an interest in Mitsubishi Fuso Truck and Bus Company Volvo and Mitsubishi have signed an agreement setting forth the terms for Volvo's acquisition of 19.9% of the shares of Mitsubishi Motors' truck and bus company, Mitsubishi Fuso Truck & Bus Company. In connection with the conversion of its bus and truck division into a subsidiary of Mitsubishi Motors next June, a directed issue of new shares is being implemented. Volvo will then make a capital contribution of approximately SEK 3.2 billion to Mitsubishi Fuso Truck and Bus Company and will receive newly issued shares equal to 19.9% of the total number of shares and voting rights in the company. In accordance with the original timetable, this transaction will be effected July 1, 2001. In addition to the above fixed portion of the purchase price, Volvo may also pay a supplementary amount, depending on the trend of Mitsubishi Fuso Truck & Bus Company's earnings during the years 2002 through 2005. Volvo Construction Equipment invests in e-commerce During the third quarter Volvo Construction Equipment decided to invest in IronPlanet Inc., an American company whose business concept is based on auctioning used construction equipment via the Internet. IronPlanet (www.ironplanet.com), which was formed in 1999, is located in Pleasanton, California. The company offers a marketplace on the Internet for sellers and buyers of second-hand construction equipment. By using IronPlanet, the time and costs of selling equipment are minimized, while the risk to the buyer is reduced since the equipment undergoes an independent quality inspection. Volvo is participating in the second round of funding of IronPlanet Inc. along with other participants in the industry. Volvo Construction Equipment's investment in IronPlanet Inc. amounts to approximately USD 5 M. The Volvo Group in the first three quarters of 2000 Net sales Net sales of the Volvo Group in the first three quarters of 2000 amounted to SEK 94,138 M (89,806), an increase of 5% compared with sales in the first three quarters of 1999. Adjusted for the effects of foreign exchange movements, the increase was 3%. All business areas except Trucks reported an increase in net sales. The increases in Buses and in Marine and Industrial power systems amounted to nearly 20%. Volvo Trucks' net sales in the first three quarters amounted to SEK 44,545 M, which was slightly lower than in the year-earlier period, due to the declining market in North America. Volvo Trucks' net sales fell by approximately 4% in the third quarter, compared with third-quarter 1999 sales. The rate of growth for the Group as a whole recovered in the third quarter and net sales amounted to SEK 30,142 M (28,829), an increase of 5%. The increase was attributable primarily to Construction Equipment, whose sales rose by 17%. Sales were higher in the greater part of Volvo's market areas in the first three quarters of 2000, compared with the year-earlier period. During the third quarter the Group's net sales developed strongly in all markets except in North America, where sales decreased by 15%. The decline in the third quarter was attributable primarily to Trucks. In Western Europe net sales increased by 4% during the first three quarters, and all business areas except Aero reported an increase in sales. The favorable trend in Asia continued and Group sales rose by 44% - from a low level - during the first nine months of 2000. Volvo Trucks, in particular, benefited from the economic recovery in Asia, where its deliveries more than doubled. Group sales in South America have increased strikingly during the year, and the increase relative to sales in the preceding year amounted to 37%, with Buses showing a gain of 84%. Group sales in Eastern Europe have stabilized during the year and the increase relative to the first three quarters of 1999 was 26%. Net sales attributable to Asia, Eastern Europe and South America, as a percentage of overall sales, continued to rise and amounted to 13% of the Group total. The comparable figure for the first three quarters of 1999 was 10%. Operating income Group operating income in the first three quarters of 2000 amounted to SEK 4,465 M (1999: SEK 4,601 M, excluding the gain on sale of Volvo Cars). Operating income, which was affected negatively in the third quarter by Volvo Trucks' weak results, amounted to SEK 654 M (1,198). Volvo Trucks' operating income in the first three quarters amounted to SEK 729 M (2,131), of which SEK 53 M (442) was attributable to operations in the third quarter. Deliveries in the declining North American market decreased by more than half in the third quarter compared with the year- earlier period, and the competition stiffened. Demand in Europe continued to be strong and the volume of business and margins increased slightly in the third quarter despite the price competition and a euro that continued to be weak. The high costs of product development in connection with the launching of new products were reduced in the third quarter and this factor, combined with Trucks' turn-around program, had a favorable impact. Construction Equipment's operating income is principally unchanged compared to the first three quarters last year, and all the other business areas report improved operating income. Operating income for the first three quarters included a refund of SEK 683 M from SPP (see also page 19). In addition, it includes SEK 145 M pertaining to a favorable adjustment of the gain from the sale of Volvo Cars, as well as SEK 610 M in capital gains on the sale of the remaining securities portfolio in Volvia. The adjustment of the gain from the sale of Volvo Cars was due to the fact that one of the reserves established for restructuring costs has proved to be necessary. Operating income was also charged with the allocation of reserves during the second quarter of approximately SEK 160 M. Operating income in the preceding year included a capital gain of SEK 180 M on the sale of a marketing company in Construction Equipment. The Group's operating margin in the first three quarters amounted to 4.7%, compared with 5.1% in the first three quarters of 1999 and to 2.2% (4.2) in the third quarter this year. Income from investments in associated companies Income from investments in associated companies - primarily Scania, Bilia and Volvofinans - amounted to SEK 430 M. On March 14, 2000 the European Union Commission rejected Volvo's application for approval of Volvo's proposed acquisition of Scania. As a result, effective in the second quarter of 2000, Volvo's holding in Scania is no longer reported in accordance with the equity method. However, the dividend of SEK 637 M received from Scania in the second quarter reduced the book value of the holding. Net interest income/expense Net interest expense in the first nine months of the year amounted to SEK 20 M, compared with interest income of SEK 169 M in the year-earlier period. The decrease was due largely to lower net financial assets. This was offset in part by a higher return on financial assets, reduced borrowing in Brazil and South Korea, and lower costs of borrowing in Brazil. Net interest expense in the third quarter amounted to SEK 133 M, compared with interest income of SEK 2 M in the second quarter. The decrease was due mainly to lower net financial assets as a result of the repurchase of AB Volvo's shares. Taxes Tax expense in the first three quarters of the year amounted to SEK 1,316 M (1,556). The average tax rate was 27%, equal to the level during the first nine months of 1999, adjusted for the gain on the sale of Volvo Cars. Tax expense consists of both current and deferred taxes. ------------------------------------------------------------ This information was brought to you by BIT http://www.bit.se The following files are available for download: http://www.bit.se/bitonline/2000/10/25/20001025BIT00190/bit0001.doc The full report http://www.bit.se/bitonline/2000/10/25/20001025BIT00190/bit0002.pdf The full report