Volvo - report on first three months 2001

Volvo - three months ended March 31, 2001 First three months 2001 2000 Net sales, SEK M 43 750 28 274 Operating income excl 502 1 800 items affecting comparability, SEK M * Operating income, SEK M (817) 1 800 Income after financial (1 251) 1 888 items, SEK M Net income, SEK M (801) 1 267 Sales growth, % 55% 13% Income per share excluding 8.6 13.1 items affecting comparability, during most recent 12 months period, SEK Return on shareholders' 3.9 6.0 equity, excluding items affecting comparability, % * Items affecting comparability pertain to restructuring costs of SEK 1.3 billion. Volvos operating income during the first quarter 2001 was also favorably affected with 490 MSEK attributable to capitalization of development costs. See further "Accounting principles", on page 19. · Volvo's acquisition of Renault's truck business completed. A comprehensive integration is in progress. · Net sales of the Volvo Group increased by 55%, to SEK 43,750 M in the first three months of 2001. Adjusted for acquired companies net sales reached the same level as last year. · Operating income, excluding items affecting comparability, in the first quarter of 2001 amounted to SEK 502 M, compared with SEK 1,800 M a year earlier. A continuing weak development in North America during the first three months of 2001 had an adverse effect on the result. · Continued strong development for Volvo Penta and Volvo Aero. Comments by the Chief Executive Officer During the first quarter, the acquisition of Mack and Renault VI was concluded. The Group's truck and engine volumes are thereby doubled, which means that Group sales have increased 55 percent compared with the first quarter of 2000. However, first quarter earnings are clearly unsatisfactory. Global Trucks, Construction Equipment and Buses are seriously affected by the sharp economic downturn in North America. Financial Services' financial performance was also adversely affected due to increased credit losses. The downturn could not be offset by strong performance elsewhere in the world, and the very strong first quarters reported by Volvo Aero and Volvo Penta. The adaptation to a weakening business climate now has top priority. We do not foresee any immediate recovery in North America, while the decline in order bookings in Europe necessitates preparations for new measures. To counteract the downturn in North America, an action program was adopted last year. During the first quarter, Global Trucks decided to reduce the workforce by an additional 1,400 persons, in addition to the 1,800 that had been laid off from truck operations last year. Further actions will be implemented, if necessary. Despite signs of some stagnation, the European market remains stable, particularly in the eastern and southern regions. With its strong presence in southern Europe, Renault VI reached its highest sales level ever. Global Trucks' profitability in Europe was strong, although order bookings were down. The diminished activity in the market also impacted Volvo Buses, where reduced demand was noted in the first quarter. The concentration of Buses' European manufacturing to Poland have continued. Sales to the growth regions, Eastern Europe, Asia and South America continued to increase, mainly in South America, where Global Trucks deliveries rose by 34 percent. Volvo Penta enjoyed a highly positive trend, and continued to win market shares. Operating income was up 62 percent, with demand for marine and industrial power systems continuing to be strong. Volvo Aero also reported a favorable first quarter, particularly in aerospace components. In April, an agreement was reached with DaimlerChrysler which entailed that we sell our shareholding and other interests in Mitsubishi Motors Corporation ("MMC") to DaimlerChrysler for approximately SEK 3 billion. Volvo Trucks' cooperation with MMC on a medium-heavy truck program is thus ended. Volvo intends to invest the SEK 650 M capital gain in a new medium-heavy truck program, which will be developed with Volvo Trucks' and Renault's combined resources. The agreement is a logical outcome of DaimlerChrysler having taken control of MMC, and that the Volvo Group, through Renault VI, is gaining the same volumes in the medium-heavy segment that MMC would have provided. Developing the future medium-heavy truck program in-house will simplify and accelerate the entire process. The decision to abandon the cooperation with MMC was also facilitated by our strong growth in Asia where, among other developments, truck sales doubled last year. In this way, we are maintaining strong growth in the region by our own means. To secure the coordination gains made possible through the acquisition of Mack and Renault V.I., Volvo has decided on product plans for the next product generation, which will impact the Group's industrial and commercial structure. For the period to and including 2003, it is estimated that restructuring costs will total slightly more than SEK 4 billion, of which SEK 1.3 billion was utilized during the first quarter. The actions taken will make yearly savings of about SEK 3.5 billion possible at the end of 2002. Long term, the benefits of coordination will yield additional savings of about SEK 3 billion per year. The need to rapidly achieve a more cost-effective base is not only of importance to our truck operations. It is equally important for Buses, Construction Equipment and Penta, which will all benefit from the doubling of our engine volumes. At present, business conditions are troubling, but in the longer term we can discern highly favorable possibilities for increasing profitability. We have a number of very competitive products in the market and feel that customers have confidence in them. The integration work with Renault VI and Mack which began directly after the beginning of the year, is functioning very well, with plans for the first 100 days now completed. We aim to emerge strongly when business conditions in North America start to turn upwards. Leif Johansson Significant events in the beginning of 2001 Volvo forms Volvo Global Trucks On January 2, 2001, AB Volvo's acquisition of Renault's truck operations, Mack and Renault V.I., became effective. Under the terms of the acquisition AB Volvo acquired all the shares of Renault V.I. in exchange for 15% of AB Volvo's shares. On January 2, 2001, 10% of AB Volvo's shares were transferred to Renault S.A. as partial payment and on February 9, 2001, the additional 5% of the Volvo shares were transferred to Renault S.A. as final payment for the shares of Renault V.I. In connection with the acquisition of Mack and Renault V.I., Renault V.I. Finance was acquired for approximately FRF 154 M. Divestment of shares in Mitsubishi Motors Corporation ("MMC") On April 11, 2001, Volvo reached an agreement with DaimlerChrysler covering Volvo's cooperation with MMC. According to the agreement, Volvo will transfer its 3.3% shareholding in MMC to DaimlerChrysler together with all of Volvo's rights and obligations in relation to MMC. The distribution of the MMC Canter truck will be taken over by DaimlerChrysler in November 2001. The purchase price to be paid by DaimlerChrysler is approximately USD 297 M. The transaction remains subject to approval of all relevant authorities. 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. Louis Schweitzer is Chairman and CEO of Renault S.A. and Patrick Faure is Executive Vice President of Renault S.A. Ken Whipple was employed within the Ford Motor Company for a total of 40 years prior to his retirement in 1999. Among other positions, he served as CEO of Ford Financial Services Group and as President of the Ford Credit Company. Ken Whipple is a member of the Board of CMS Energy Corporation and Galileo International, Inc. He has also been a member of the Board of Governors of the World Economic Forum. 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. Divestment of the insurance operations in Volvia 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 cooperation. The purchase price for the operations amounts to SEK 562 M. The divestment will be completed and accounted for in the second quarter of 2001. The divestment of the insurance operations will have a marginal effect on the Group's ongoing business. Volvo's repurchase of Company shares During the beginning of 2001, Volvo effected an additional repurchase of 10% of the total number of shares outstanding in 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. As a result, Volvo 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 in the first quarter of 2001 Net sales Net sales of the Volvo Group for the first three months 2001 amounted to SEK 43,750 M, compared with SEK 28,274 M in 2000, an increase of 55%. Adjusted for acquired companies and the effects of foreign exchange movements net sales decreased by 2%. All business areas with the exception of Buses reported an increase in net sales. Global Trucks, Aero and Penta reached the targeted growth rate of greater than 10%. With the combined truck operations of Mack, Renault and Volvo Trucks, net sales of Global Trucks' doubled and amounted to SEK 29,962 M. The North American market continued to weaken in the first quarter of 2001, with a resulting negative impact on truck sales. The company was able to increase its share of the market in North America despite a decline in deliveries by 37%. In Europe the market share increased by 1.4% compared with the year-earlier period. Except in North America, Group net sales developed well in all market areas. Sales in Western Europe, which constitute more than 50% of the Group total, increased by 57%. Sales in the North American market increased by 47%. The increases were attributable to the acquired operations of Mack and Renault V.I. The favorable trend of business continued in Asia and Group sales there rose by 11%. Eastern Europe and South America also reported strong growth during the year and the increases relative to 2000 amounted to 58% and 43%, respectively. The increases for the other markets were attributable mainly to Australia. Net sales by First Change market area three months SEK M 2001 2000 in % % of total Western Europe 23 697 15 069 +57 54 Eastern Europe 1 199 759 +58 3 North America 13 441 9 131 +47 31 South America 1 379 964 +43 3 Asia 1 941 1 748 +11 4 Other markets 2 093 603 +247 5 Total 43 750 28 274 +55 100 The percentage of net sales attributable to Volvo's growth markets - Asia, Eastern Europe and South America - amounted to 10% of Group sales. Income from investments in associated companies Income from investments in associated companies - primarily Bilia and Petro Stopping Center - amounted to SEK 2 M (356). In the first quarter of 2000, an amount of SEK 341 M pertaining to Scania was reported as income from investments in associated companies. As of the second quarter of 2000, Volvo's holding in Scania is not reported in accordance with the equity method. Operating income Operating income, excluding items affecting comparability for the Group for the first three months 2001 amounted to SEK 502 M compared with 1,800 M last year. The operating income during the first quarter 2001 was favorably affected with SEK 490 M attributable to capitalization of development costs (see further on page 19). The impact was distributed between Global Trucks, SEK 387 M, Buses SEK 37 M, Construction Equipment, SEK 31 M, Marine and industrial power systems, SEK 23 M and Aero, SEK 12 M. Operating income for 2000 included gains on the securities portfolio in Volvia of SEK 210 M. Global Trucks' operating income for the first three months 2001, was SEK 150 M compared with SEK 645 M in 2000. The downturn in North America is continuing, with declining deliveries and a severe competitive situation. Including amortization of goodwill, the acquisition of Mack and Renault V.I. had only a minor impact on Global Trucks operating income for the first quarter. The operating loss in Buses for the first three months 2001 amounted to SEK 83 M compared with an income of SEK 33 M in 2000. The loss is mainly contributed by lower volumes and low capacity utilization especially in North America. Operating income within Construction Equipment decreased to SEK 81 M (311), largely due to a shift in the market and product mix, but also to production cuts made in order to adapt to the current market situation in North America. Marine and Industrial Power Systems and Aero both reported higher operating income in 2001 than in 2000, Operating margins reached 9.6% and 6.1% respectively, exceeding preceding year's levels. Operating income within Financial Services were negatively effected by the weakening market situation in North America with decline in demand and increased credit losses. The Group's operating margin, excluding items affecting comparability, for the first three months amounted to 1.1%, compared with 6.4% in 2000. Net interest expense Net interest expense for the first three months 2001 amounted to SEK 273 M compared with SEK 237 M for the fourth quarter 2000. The increase is mainly due to increased net debt as a result of the repurchase of Company shares and the acquisition of Mack and Renault V.I. Taxes During the first quarter 2001, a tax income of 422 was reported (tax expense of 629). The tax income mainly consisted of higher amounts of deferred tax assets. Restructuring costs To secure the coordination gains made possible through the acquisition of Mack and Renault V.I., Volvo has decided on product plans for the next product generation, which will impact the Group's industrial and commercial structure. For the period to and including 2003, it is estimated that restructuring costs will total slightly more than SEK 4 billion. Since January 1, 2001, Volvo applies new accounting standards that limit the possibilities to allocate a provision for the decided actions in the first quarter. See accounting principles on page 19. During the first quarter, restructuring costs of SEK 1.3 billion were charged against earnings, of which SEK 0.5 billion relate to costs for personnel reductions as a direct result of the market decline in North America. The balance includes costs of coordinating purchasing and engine development. The remaining restructuring measures, mainly connected with decided product plans, will be announced later and the costs of about SEK 3 billion will be charged against earnings as incurred during the period 2001 to 2003. The actions taken make substantial cost savings possible. At the end of 2002, savings at a pace of about SEK 3.5 billion annually are estimated, most of which in purchasing and drivelines. Long term, the successive integration of the companies and their product programs will yield additional annual coordination gains of an estimated SEK 3 billion. ------------------------------------------------------------ This information was brought to you by BIT http://www.bit.se The following files are available for download: http://www.bit.se/bitonline/2001/05/02/20010502BIT00050/bit0001.doc The full report http://www.bit.se/bitonline/2001/05/02/20010502BIT00050/bit0002.pdf The full report