Volvo - six months ended June 30, 1999

Volvo - Six months ended June 30, 1999 ExcludingCars First six months 1999 1998 1998 Net sales, SEK M 60 977 101 706 53 801 Operating income, excluding items 3 319 4 697 2 857 affecting comparability, SEK M Items affecting comparability, 26 695 (1 150) (1 150) SEK M* Operating income, SEK M 30 014 3 547 1 707 Income after financial items, 30 537 6 109 SEK M Net income, SEK M 29 497 4 475 Income per share, excluding items 12.90 13.40 affecting comparability and gain on sales of shares during most recent 12- months period, SEK Return on shareholders' equity, 8.7 10.3 excluding items affecting comparability and gain on sales of shares, % * Items affecting comparability during the first-half of 1999 pertain to gain on the sale of Volvo Cars and during the first- half of 1998 provisions for restructuring costs of SEK 240 M in Volvo Buses and SEK 910 M in Volvo Construction Equipment. * Continuing strong growth in sales in all business areas during the second quarter. Net sales of the Volvo Group in the first half of 1999 amounted to SEK 60,977 M, an increase of 13% excluding Volvo Cars. * Operating income excluding items affecting comparability amounted to SEK 3,319 M (2,857), including SEK 2,104 M in the second quarter. The substantial increase during the second quarter is primarily an effect of larger volumes of business in both Volvo Trucks and Volvo Construction Equipment. Volvo's other business areas also developed favorably. * Volvo increased its stake in Scania to 20.3% of the voting rights and 21.5% of the capital. Comments by the Chief Executive Officer Demand for Volvo's products during the second quarter of 1999 continued to be strong. Sales rose during the first half of 1999 compared with the first half of 1998, and were also higher, excluding acquisitions. We are thereby meeting our target of a 10% annual rate of growth. Operating income increased in all business areas except Buses. The Group's operating margin in the second quarter increased to 6.2%. The improvement in Marine and industrial engines and in Aero was most striking. Volvo Trucks, which is Volvo's single largest business area, showed a strong first-half result. The renewal of the product program has been very well received and Trucks has thereby been able to benefit from the continuing strong market for heavy trucks in Europe and North America. Production capacity is being expanded in North America, where Trucks is improving its competitiveness through an expanded service network. Volvo trucks are now being assembled in the plant in India and preparations to establish manufacturing operations in China are continuing. Volvo Buses converted its first-quarter loss to a profit. However, much remains to be done to take advantage of the opportunities being offered by the acquisitions in recent years, notably in North America. The work of integrating the operations and correcting the remaining profitability problems is now being intensified. Parallel with this, a strategic shift toward a higher percentage of complete buses is being pursued. The concentration of parts of the European production of buses in Poland is proceeding on schedule. Volvo Construction Equipment, which had a weak first quarter in terms of earnings, reported strong income in the April-June period. It is especially gratifying that Volvo CE, in addition to strong cultivation of the market, also successfully conducted and implemented a comprehensive restructuring- and integration program following the acquisition of Samsung's construction equipment division. The work of integrating the South Korean business in the Volvo Group has been carried out with great precision. The production plant in South Korea is becoming a strong and efficient center for Volvo's production of excavators and the plant is now being prepared to also handle other Volvo CE products. After only a short period, the acquisition has already met our expectations and it will help Volvo to be well equipped for the coming recovery in the Asian economies. Volvo Penta reported the greatest improvement in operating margin, a result of consistent marketing programs and an intensive focus on costs. The business area's strategic orientation as an enhancer of Volvo's diesel engine know-how, and thereby broadening the Group's customer base, is successful. Volvo Penta today is carrying out a strong program of expansion in the North American market for marine engines in particular. At the same time, there is increasing interest in industrial engines in Asia and Volvo Penta, as a partner in a joint venture, is now building a plant in China for the assembly and distribution of diesel engines and generator equipment. Volvo Aero's sales and profitability have improved considerably, notably in the commercial aircraft engine sector. As a result of the acquisition of majority interests in The AGES Group in the U.S. and in the former Norsk Jetmotor (now Volvo Aero Norge), plus joint-venture agreements with Boeing and others, Volvo Aero has taken another step towards becoming one of the world's leading partners in the area of components and services for commercial aviation. Volvo Aero is thereby filling a strategically important role in the Group by expanding the range of our contacts in the transport vehicle industry in an ever-broader global perspective. A not insignificant part of our work during the spring involved the final stages of the sale of Volvo Cars to Ford. This has taken place in a constructive atmosphere. The rules governing the jointly owned company that is to develop, protect and administer our common brand name have now been set and we are looking forward to working together to ensure that the values that Volvo represents -- quality, safety and concern for the environment -- remain strong and intact. Parallel with this, there is the process of setting the course for the continuing growth and orientation of the Volvo Group. Most of the industries in which we are active are today in a consolidation phase. Increasingly larger and stronger units are being formed to increase the global competitiveness. Volvo is participating actively in discussions of the future structure of the transport vehicle industry. It is from this perspective, and against the background of the considerable advantages that cooperation -- combined with a carefully crafted product and brand name strategy -- can offer, that our acquisition of Scania shares should be viewed. But there are many opportunities, and we have a number of alternative approaches. Today we also have the financial strength that is required to participate in the formation of even more efficient units -- through our own investments and organic growth, through acquisitions, or in cooperation with our associates in the industry. Overshadowing everything, however, is the fact that Volvo, based on its own experience, expertise and resources, is building a world-class business, with profitability that offers shareholders a good return on their invested funds. I know that, as part of this work, Volvo's employees are firmly determined to reinforce our already strong positions as the best partner for the market's most demanding buyers of products and services that are used to transport people and goods. Leif Johansson Volvo Group - First six months of 1999 Important events and structural transactions during the second quarter Volvo increased its holding in Scania During the second quarter Volvo increased its holding in Scania to 20.3% of the voting rights in the company and 21.5% of the capital. Because Volvo owns more than 20%, Scania is reported as an associated company. The acquisition value of Volvo's shareholding in Scania is SEK 9,355 M, equal to SEK 217 per share, and the market value of the shareholding at June 30, 1999 was SEK 10,147 M. Volvo Aero concluded an agreement with Boeing and acquired Jet Support Corporation In April, Volvo Aero concluded an agreement with Boeing, the aircraft manufacturer, whereby Volvo's subsidiary, The AGES Group, is acquiring exclusive rights to market and sell new spare parts for commercial Boeing and McDonnel Douglas aircraft on consignment, initially for types of aircraft that are no longer being manufactured. Boeing and The AGES Group will share revenues under terms of the agreement, which covers a five-year period, with an option for extension. As a consequence of the agreement with Boeing, Volvo Aero simultaneously acquired the business of Jet Support Corporation, an American company. The acquired unit will strengthen the sales organization within The AGES Group and be responsible for warehouse operations. Volvo increased its stake in Volvo Aero Norge In June Volvo Aero acquired an additional 11% of the shares of Volvo Aero Norge AS (formerly Norsk Jetmotor AS). As a result Volvo Aero, following its acquisition of a 67% interest in the company in the first quarter, now owns 78%. The seller was Snecma, the French aircraft engine manufacturer. The remaining shares are held by Pratt & Whitney in the U.S. Volvo Construction Equipment divested marketing companies As part of Volvo CE's strategy, which is to organize its sales mainly via independent dealers rather than under its own auspices, the company divested its marketing unit in Spain during the second quarter of 1999. The sale resulted in a capital gain of SEK 180 M, which is included in the operating income. Also parts of the operations in France were divested. Other acquisitions and divestments earlier in the year On March 31, 1999, the sale of Volvo Cars to Ford Motor Company was finalized. In March Volvo Construction Equipment divested SuperPac, a Canadian company, and 65% of Mecalac, a French company. During the first quarter Volvo Aero increased its holding in The AGES Group from 57% to 86%. Income and financial position Net sales of the Volvo Group in the first half of 1999 amounted to SEK 60,977 M, a further increase in the growth rate to 13%, compared with sales in the year-earlier period, adjusted for the sale of Volvo Cars. Excluding acquired and other divested companies, as well as the effects of movements in foreign exchange rates, the increase was 9%. All business areas reported increases of more than 10% in net sales, compared with the preceding year. Company acquisitions produced the increase in sales in Volvo Buses. During the first six months of the year Volvo delivered 41,750 medium-heavy and heavy trucks, an increase of 2%, and 4,330 buses and bus chassis, a decrease of 4%. The higher net sales were attributable to operations in Western Europe (plus 18%) and North America (plus 22%), which combined account for 87% of the Group's total sales. In South America and Eastern Europe sales declined by 38% and 22%, respectively -- although from relatively low levels. In Asia, a recovery was discernible, due largely to Volvo CE's acquisition in South Korea. Sales in Asia were 4% higher than in the year-earlier period. Group operating income in the first half of 1999 amounted to SEK 30,014 M (3,547). Operating income included SEK 26,695 M from the sale of Volvo Cars to Ford. Operating income in the first half of 1998 was charged with SEK 1,150 M pertaining to restructuring costs in Buses and Construction Equipment. Excluding the effects of the sale of Volvo Cars, plus the restructuring costs, operating income increased by SEK 462 M to SEK 3,319 M (2,857). Larger volumes and a favorable marketing mix in Trucks, together with the positive effects of foreign exchange movements, compensated for increased costs of product development, selling and administration. Operating income includes a capital gain of SEK 180 M in Construction Equipment in connection with the sale of marketing companies. The operating margin, excluding items affecting comparability and the sale of Volvo Cars, increased to 5.4% (5.3). All business areas except Volvo Buses reported higher operating income and higher operating margins than in the first half of 1998. However, Buses recovered and converted its first-quarter operating loss to a profit in the second quarter of SEK 123 M. The positive trend of operating income in all business areas contributed to second-quarter operating income for the Group as a whole that improved by SEK 889 M, compared with the first quarter, and amounted to SEK 2,104 M. The operating margin was 4.5% in the first quarter, and 6.2% in the second quarter. Income from investments in associated companies amounted to SEK 107 M (235) and consisted primarily of income from investments in Scania, Bilia and Volvofinans. Income from other shares and participations of SEK 190 M (2,177) consisted primarily of the dividend from Scania during the period when Volvo's holding was less than 20%. Income in the first half of the preceding year included a gain of SEK 2,090 M from the sale of Pharmacia & Upjohn shares. Net interest income in the first half of the year amounted to SEK 86 M (293), of which SEK 144 M was attributable to the second quarter. High costs of borrowing in Brazil and local financing at high rates of interest for the expansion in South Korea, as well as low interest rates in Europe, had a negative impact on net interest income. Increased interest-bearing assets, due mainly to the sale of Volvo Cars, had a positive impact on net interest income. However net interest income was affected negatively since the market value of financial investments declined as a result of rising interest rates during the second quarter. Tax expense, which amounted to SEK 985 M (1,630) consisted mainly of current taxes. Based on a decision by the Council of Advance Rulings, the sale of Volvo Cars does not give rise to a taxable capital gain. This decision is being appealed by the Swedish National Tax Board. Net income amounted to SEK 29,497 M (4,475) and the return on shareholders' equity, excluding items affecting comparability and a gain on the sale of shares, was 8.7% (10.3). Net sales by market % of First six Change area total months SEK billion 1999 1998* in % Western Europe 54.5 33.2 28.1 +18 Eastern Europe 2.3 1.4 1.8 (22) North America 33.1 20.2 16.5 +22 South America 3.4 2.1 3.4 (38) Asia 4.4 2.7 2.6 +4 Other countries 2.3 1.4 1.4 +0 Total 100 61.0 53.8 +13 * excluding Cars First six months Excluding Cars Consolidated income statements, 1999 1998 1998 SEK M Net sales 60 977 101 706 53 801 Cost of sales (47 777)(77 732) (41 468) Gross income 13 200 23 974 12 333 Research and development (2 279) (4 844) (2 042) expenses Selling expenses (4 352) (8 913) (4 111) Administrative expenses (3 021) (3 745) (2 577) Other operating income and (229) (1 775) (746) expenses Items affecting comparability * 26 695 (1 150) (1 150) Operating income 30 014 3 547 1 707 Income from investments in 107 235 associated companies Income from other investments 190 2 177 Interest income and similar 1 124 979 credits Interest expenses and similar (1 038) (686) charges Other financial income and 140 (143) expenses Income after financial items 30 537 6 109 Taxes (985) (1 630) Minority interests in net (55) (4) (income) Net income 29 497 4 475 *) Items affecting comparability during the first-half of 1999 pertain to gain on the sale of Volvo Cars and during the first-half of 1998 provisions for restructuring costs of SEK 240 M in Volvo Buses and SEK 910 M in Volvo Construction Equipment. Excluding Condensed income statement - Cars sales finance SEK M 1999 1998 1998 Net sales 3 673 4 350 2 642 Operating income 160 214 106 Income from investments in 31 61 50 associated companies Income after financial items 191 275 156 Taxes (91) (119) (83) Minority interests in net 9 (3) 3 (income) loss Net income 109 153 76 Excluding Gross and operating margin, Cars Volvo Group % 1999 1998 1998 Gross margin 21.6 23.6 22.9 Research and development 3.7 4.8 3.8 expenses in % of net sales Selling expenses in % of net 7.1 8.8 7.6 sales Administrative expenses in % of 5.0 3.7 4.8 net sales Operating margin, excluding 5.4 4.6 5.3 items affecting comparability Operating margin 49.2 3.5 3.2 Consolidated balance Volvo Group Volvo Group sheets excl sales Sales financing* total financi ng SEK M June Dec 31, June Dec June 30, 1999 Dec 31, 30, 1998 30, 31, 1998 1999 1999 1998 Assets Intangible assets 6 481 5 678 99 100 6 580 5 778 Property, plant and 18 416 36 045 81 162 18 497 36 207 equipment Assets under operating 1 538 1 817 9 19020 468 10 728 22 285 leases Shares and participations 16 069 9 707 671 715 12 596 3 393 Long-term sales-finance 49 171 14 36324 375 14 412 24 546 receivables Long-term interest- 14 466 3 293 3 20 14 469 3 313 bearing receivables Other long-term 2 282 3 666 56 192 2 338 3 858 receivables Inventories 20 850 31 876 316 252 21 166 32 128 Short-term sales finance 18 81 15 98522 171 16 003 22 252 receivables Short-term interest 1 328 1 422 - - 1 328 1 422 bearing receivables Other short-term 23 982 26 880 677 2 140 24 659 29 020 receivables Marketable securities 33 287 6 850 500 318 33 787 7 168 Cash and bank 4 537 11 969 425 1 087 4 962 13 056 Total assets 143 303139 455 42 36672 000 181 525 204 426 Shareholders' equity and liabilities Shareholders' equity 94 722 68 056 4 144 7 029 94 722 68 056 Minority interests 529 804 - 56 529 860 Provision for post- 2 221 2 906 4 30 2 225 2 936 employment benefits Other provisions 12 983 21 886 1 786 3 301 14 769 25 187 Loans 3 319 5 909 34 41258 321 37 731 64 230 Other liabilities 29 529 39 894 2 020 3 263 31 549 43 157 Total 143 303139 455 42 36672 000 181 525 204 426 * Sales-finance operations are reported in accordance with the equity method. Internal receivables and liabilities related to the sales-finance operations are excluded. The Group's total assets as of June 30, 1999 were SEK 22.9 billion lower than at December 31, 1998. During the second quarter the remaining net financial receivables from Volvo Cars were settled, in which connection external borrowing was amortized. Excluding the sale of Volvo Cars, as well as other acquisitions and divestments during the first six months of 1999, the Group's total assets increased by SEK 8.2 billion, of which SEK 4.7 billion pertained to Volvo's sales-financing operation for commercial products. Liquid funds are invested with low risk-exposure in a manner that preserves Volvo's financial freedom of action. Shareholders' equity increased by SEK 26.7 billion. Net income contributed SEK 29.5 billion, and a change in the method of accounting for deferred taxes provided SEK 1.3 billion. Shareholders' equity was reduced by SEK 2.6 billion in dividends to AB Volvo's shareholders, and by SEK 1.5 billion attributable to translation differences. Key ratios July Jan - 1998- Dec 12 month figures unless June 1998 otherwise stated 1999 Income per share, SEK 76.30 19.60 Income per share, excluding items affecting 12.90 14.40 comparability and gain on sales of shares, SEK Return on shareholders' 43.9 13.7 equity % Return on shareholders' equity excluding items 8.7 10.3 affecting comparability and gain on sales of shares, % Net financial assets at end of 48.1 14.8 period, SEK billion Net financial assets at end of period as 50.5 21.5 percentage of shareholders' equity and minority interests Shareholders' equity and minority interests as 52.5 33.7 percentage of total assets Shareholders' equity and minority interests 66.5 49.4 excluding sales financing, as percentage of total assets Volvo Group Volvo Group excl Cash flow analysis sales Sales total financing financing SEK billion June June June June June June 30, 30, 30, 30, 30, 30, 1999 1998 1999 1998 1999 1998 Operating income 3.1 3.3 0.2 0.2 3.3 3.5 excluding gain on sale of Volvo Cars Depreciation and 1.6 2.9 1.0 1.3 2.6 4.2 amortization Change in working capital (0.8) (0.3) (2.3) (0.4) (3.1) (0.7) Cash flow pertaining to (0.7) (0.3) 0.2 (0.1) (0.5) (0.4) financial items and income taxes Cash flow from operations 3.2 5.6 (0.9) 1.0 2.3 6.6 Capital expenditures (2.4) (4.6) 0.0 0.0 (2.4) (4.6) Investments in leasing (0.2) (0.5) (2.3) (5.3) (2.5) (5.8) assets Disposals of tangible 0.5 0.5 0.3 0.4 0.8 0.9 assets Investments in shares, (9.4) 3.1 - - (9.4) 3.1 net Long-term receivables, (0.2) 0.5 (0.5) (5.0) (0.7) (4.5) net Acquisitions and sales of 31.3 (2.2) - - 31.3 (2.2) companies Remaining after net 22.8 2.4 (3.4) (8.9) 19.4 (6.5) investments Change in loans, net 1.9 9.5 Dividends paid to AB (2.6) (2.2) Volvo's shareholders Change in liquid funds, excluding 18.7 0.8 translation differences Translation differences (0.2) - in liquid funds Change in liquid funds 18.5 0.8 In the cash flow analysis, the effects of large acquisitions and divestments of subsidiaries have been excluded from other changes in the balance sheet. The effects of foreign exchange movements in connection with the translation of the accounts of foreign subsidiaries have also been excluded, since these effects do not affect cash flow. The Volvo Group's cash flow after net investments amounted to SEK 19.4 billion. The Group's operating cash flow, excluding the sales-financing operations, amounted to SEK 1.3 billion during the first half of the year. The operating cash flow during the second quarter amounted to SEK 2.1 billion, due to the higher profitability and smaller amount of working capital tied up in operations. The cash flow during the first six months of 1999 was charged with SEK 0.4 billion related to implementation of restructuring measures that were approved in 1998. Dividends received and the purchase price in connection with the sale of Volvo Cars increased liquid funds by a total of SEK 33.9 billion, while the acquisition of Scania shares reduced liquid funds by SEK 9.4 billion. Capital expenditures for property, plant and equipment amounted to SEK 2.4 billion, which was somewhat higher than the level of investments in commercial products in the year-earlier period. Change of net financial assets, SEK billion 981231 14.8 Cash flow from 3.2 operations Capital expenditures (2.4) Investments in leasing (0.2) assets Disposals of tangible 0.5 assets Long term operational 0.2 receivables, net Operating cash flow, excluding 1.3 sales financing Dividend received and 33.9 purchase price Receivables from Ford 12.1 Sale of Volvo Cars 46.0 Acquisition of shares in (9.4) Scania Other acquisitions of companies (1.2) and shares* Dividends paid to AB (2.6) Volvo's shareholders Other (0.8) 990630 48.1 * Including purchase price and net debt in aqcuired companies Financial review by business area Net sales First six Change July Jan-Dec months 1998 - SEK M 1999 1998 in % June 1998 1999 Trucks 33 739 30 407 +11 67 169 63 837 Buses 7 179 6 465 +11 15 000 14 286 Construction Equipment 10 165 9 077 +12 20 557 19 469 Marine and industrial 2 770 2 520 +10 5 181 4 931 engines Aero 4 699 4 226 +11 9 057 8 584 Other 6 324 5 296 +19 12 800 11 772 Eliminations (3 899) (4 - (7 734) (8 025) 190) Volvo Group excluding 60 977 53 801 +13 122 030 114 854 Cars* Cars - 50 453 103 798 Eliminations - (2 (5 716) 548) Volvo Group 60 977 101 212 936 706 * Excluding divested and acquired units the total change was +10%. Operating income First six July Jan-Dec months 1998 - SEK M 1999 1998 June 1998 1999 Trucks 1 884 1 438 3 507 3 061 Buses 56 300 141 385 Construction Equipment 974 861 1 662 1 549 Marine and industrial 173 121 147 95 engines Aero 314 235 606 527 Other (82) (98) (399) (415) Operating income 3 319 2 857 5 664 5 202 excluding Cars* Cars** - 1 840 1 968 3 808 Operating income* 3 319 4 697 7 632 9 010 Items affecting 26 695 (1 25 514 (2 331) comparability 150) Operating income 30 014 3 547 33 146 6 679 * Excluding items affecting comparability ** For the period July 1998 - June 1999 Volvo Cars is included for six months Operating margin First six months % 1999 1998 Trucks 5.6 4.7 Buses 0.8 4.6 Construction Equipment 9.6 9.5 Marine and industrial 6.3 4.8 engines Aero 6.7 5.6 Operating margin 5.4 5.3 excluding Cars* Cars - 3.6 Operating margin* 5.4 4.6 Items affecting 43.8 (1.1) comparability Operating margin 49.2 3.5 * Excluding items affecting comparability Trucks The total market for heavy trucks in Western Europe and North America continued to increase during the first six months of 1999, compared with the corresponding period a year earlier. Demand in Asia, Eastern Europe and South America continued to be weak but, despite this, the world market for heavy trucks is expected to reach a record level in 1999. Deliveries from Volvo Trucks during the first half of 1999 amounted to 41,750 vehicles, 2% more than in the comparable 1998 period. The total number of Volvo trucks delivered in Europe rose 10%, to 22,170, and deliveries in North America increased 12%, to 15,840. Deliveries in South America decreased by 48%, to 1,800 trucks, and deliveries in Asia decreased 53%, to 1,120 trucks. Volvo Trucks' deliveries in the other parts of the world during the first half of the year amounted to 820 trucks, 20% fewer than in the first six months of 1998. Volvo's share of the market in the heavy-truck class in Western Europe at the end of May amounted to 15.4% (15.8). The company's share of the market in the corresponding class (Class 8) in the United States was 11.1% (12.0). Volvo's share of the market in Brazil declined to 17.8% (23.1), due in part to a change of models. The new Volvo NH12 was launched in Brazil in June and was well received. The order backlog as of June 30, 1999 was 9% lower than on the same date in the preceding year. Net sales by market area, First six Change SEK M months Trucks 1999 1998 in % Europe 20 183 17 473 +16 North America 10 795 8 757 +23 South America 1 289 2 248 (43) Asia 724 1 160 (38) Other countries 748 769 (3) Total 33 739 30 407 +11 Volvo Trucks' net sales during the first half of the year rose to SEK 33,739 M, an increase of 11% compared with first-half 1998 sales. Operating income amounted to SEK 1,884 M (1,438). The increase in income was attributable to a high level of deliveries and to improved margins. The operating margin was 5.6% (4.7). During the first half of 1999, based on the favorable trend of sales in North America, Volvo Trucks began to expand production capacity in its plant at New River Valley, Virginia, in the U.S. Buses The total market for buses during the first six months of the year was smaller than in 1998, due primarily to weak markets in South America and Asia. The North American market continued to be stable and the European market reached nearly the same level as in the comparable 1998 period. The total market for heavy buses and coaches (more than 16 tons) in 1999 as a whole is expected to be somewhat smaller than in 1998. Volvo delivered 4,330 buses and bus chassis (4,500) during the first half of the year, a decrease of 4%. Excluding the Nova BUS and MASA units that were acquired in 1998, deliveries declined by 16%. The order backlog is 7% higher than on June 30, 1998. Net sales by market area, First six Change SEK M months Buses 1999 1998 in % Europe 3 022 2 963 +2 North America 3 177 2 093 +52 South America 244 465 (48) Asia 524 764 (31) Other countries 212 180 +18 Total 7 179 6 465 +11 Volvo Buses' net sales amounted to SEK 7,179 M (6,465), an increase of 11%. The increase was attributable in part to a higher percentage of complete buses, relative to the percentage of chassis. Net sales, adjusted to reflect acquisitions, decreased by 1%. Operating income in the first half of 1999 amounted to SEK 56 M (1998: SEK 300 M before items affecting comparability), with SEK 123 M being generated in the second quarter. In addition to the decline in volume of business, income was affected by high product-development costs. The operating margin was 0.8% (4.6). Production in Vienna, Austria, was shut down in April. The build-up of operations in Wroclaw, Poland, as well as the coordination of the acquired units, is developing favorably. Construction Equipment The total world market for construction equipment is estimated to have declined by 5% during the first half of 1999. The market in most countries in Western Europe developed favorably, while the North American market weakened. The Asian markets are recovering slowly, and the negative trend of the market for construction equipment in South America has slowed. Net sales by market area, First six Change SEK M months Construction 1999 1998 in % Equipment Europe 5 298 4 555 +16 North America 3 290 3 286 0 Other countries 1 577 1 236 +28 Total 10 165 9 077 +12 Following a weak first quarter, Volvo Construction Equipment's sales turned upward and rose to SEK 10,165 M (9,077) for the first six months as a whole. Excluding acquisitions and divestments, net sales rose 2%. Demand for Volvo CE's products continued to be strong in Europe, while demand in North America declined slightly. Operating income amounted to SEK 974 M (1998: SEK 861 M before items affecting comparability), which included a capital gain of SEK 180 M on the sale of Volvo CE's Spanish marketing company. The operating margin amounted to 9.6% (9.5). Operating income during the second quarter of 1999 amounted to SEK 791 M. Adjusted for the capital gain, this was the best-ever quarterly result for Volvo Construction Equipment. Factors contributing to the favorable trend include continuing good growth in the dumper business as well as strong demand in the "compact" segment, where Volvo's new mini-excavators and compact wheel loaders have been well received. The business acquired in South Korea is also developing positively and the restructuring of Volvo's excavating machine operations is entering its final phase. During the spring the plant in South Korea was also made ready to produce Volvo's articulated haulers for the Asian market. Marine and industrial engines The total market for both marine and industrial engines continued to be stable during the first half of 1999. Net sales by market area, First six Change SEK M months Marine and 1999 1998 in % industrial engines Europe 1 530 1 484 +3 North America 819 671 +22 South America 52 69 (25) Asia 291 226 +29 Other countries 78 70 +11 Total 2 770 2 520 +10 Volvo Penta's net sales increased 10%, to SEK 2,770 M, compared with the year- earlier period. Sales of marine engines were higher in both Europe and North America, but demand in Asia declined slightly. Sales of industrial engines continued to develop well, notably in Asia, compared with sales in the preceding year. Volvo Penta increased its shares of the markets for both marine and industrial engines in Europe and North America. The positive trend of sales and continued lower overhead costs as a result of the ongoing restructuring program contributed to the increase in operating income from SEK 121 M in the first half of 1998 to SEK 173 M in the first six months of 1999. The operating margin amounted to 6.3% (4.8). In China, construction of a plant for the assembly and distribution of diesel engines and generator equipment was started within the framework of the joint venture with Wuxi Diesel Engine Works. The investment in the joint-venture company amounts to nearly SEK 80 M, of which Volvo Penta is contributing 70%. Aero Air traffic throughout the world increased by 5.5% during the first four months of 1999, compared with the corresponding period of 1998. The growth in passenger traffic was greatest in Asia (+8.1%) and Europe (+7.5%). Net sales by market First six Change area, SEK M months Aero 1999 1998 in % Europe 2 221 2 331 (5) North America 2 013 1 676 +20 South America 138 70 +97 Asia 268 115 +133 Other countries 59 34 +74 Total 4 699 4 226 +11 Volvo Aero's net sales increased by 11%, to SEK 4,699 M (4,226), due primarily to higher sales in Commercial Aircraft Engines and in The AGES Group. Operating income rose to SEK 314 M (235), which was attributable to improved profitability in Commercial Aircraft Engines, where the new subsidiary, Volvo Aero Norge, also contributed to earnings. The operating margin rose to 6.7% (5.6). Sales financing The sales-financing business continued to expand during the first half of the year. Total assets, excluding Volvo Cars and the effects of foreign exchange movements, increased by SEK 4.7 billion, to SEK 42.4 billion, compared with assets as of December 31, 1998. The increase was attributable primarily to the North American market. Net income from sales-financing operations -- excluding Volvo Cars-- amounted to SEK 109 M, compared with SEK 76 M in the preceding year. New millennium Volvo has a comprehensive program throughout the Group to adapt to the year 2000. Despite additional tasks, most of the computer environments, applications and embedded systems have been corrected and tested. The work remaining is expected to be completed by the end of the third quarter. While Volvo is working actively to ensure that suppliers and other important business partners are taking necessary measures prior to the changeover to the year 2000, Volvo's ability to achieve full control is limited. The program of contingency planning is therefore important and is proceeding, in part, through the establishment of preparatory organizations in the various Volvo companies. These organizations consist of both operating groups -- whose job is to correct problems that may arise in work places -- and management groups that are responsible for supervising the work and deciding how available resources are to be allocated in the event of possible problems. Parent Company (AB Volvo) AB Volvo's net sales in the first half of 1999 amounted to SEK 241 M (306). Income before taxes amounted to SEK 18,002 M (4,534), which includes income of SEK 18,249 M (4,819) from shares and participations in Group companies. Capital expenditures for property, plant and equipment amounted to SEK 1 M, unchanged from the year-earlier period. Liquid funds as of June 30, 1999 amounted to SEK 20,690 M, compared with SEK 1,876 M at December 31, 1998. After June 30, 1999, the interest-bearing net receivable amounted to SEK 32,391 M, after having amounted to a debt of SEK 7,444 M at December 31, 1998. Number of employees As of June 30, 1999, the Volvo Group had 52,700 employees. This is a decrease of 27,100 since year-end 1998, which is due primarily to the sale of Volvo Cars. The report covering operations during the first three quarters of 1999 will be released October 20, 1999. Göteborg, July 15, 1999 Leif Johansson President and Chief Executive Officer This report has not been reviewed by AB Volvo's auditors. Quarterly figures, Volvo Group SEK M unless otherwise 2/1998 3/1998 4/1998 1/1999 2/1999 specified Net sales 52 867 48 614 62 616 27 072 33 905 Cost of sales (40 717) (37 306) (48 838)(21 063) (26 714) Gross income 12 150 11 308 13 778 6 009 7 191 Research and development (2 472) (2 468) (2 792) (1 085) (1 194) expenses Selling expenses (4 528) (4 533) (5 596) (2 120) (2 232) Administrative expenses (1 991) (1 993) (2 353) (1 474) (1 547) Other operating income and (438) (693) (345) (115) (114) expenses Items affecting (1 150) 0 (1 181) 26 695 0 comparability Operating income 1 571 1 621 1 511 27 910 2 104 Income from investments in 136 105 104 19 88 associated companies Income from other 2 098 (15) 2 364 1 189 investments Interest income and 552 170 353 667 457 similar credits Interest expenses and (438) (216) (473) (725) (313) similar charges Other financial income and (84) 13 (27) 127 13 expenses Income after financial 3 835 1 678 3 832 27 999 2 538 items Taxes (920) (594) (715) (435) (550) Minority interests (21) (1) (37) (7) (48) Net income 2 894 1 083 3 080 27 557 1 940 Depreciation and 2 264 2 286 3 143 1 180 1 381 amortization included above Income per share, SEK 6.50 2.50 7.00 62.40 4.40 Average number of shares, 441.5 441.5 441.5 441.5 441.5 million Income per share is calculated as net income divided by the weighted average number of shares outstanding during the period. Volvo Group excluding Cars SEK M 2/1998 3/1998 4/1998 1/1999 2/1999 Net sales 29 246 26 530 34 523 27 072 33 905 Cost of sales (22 615) (20 677) (27 160)(21 063) (26 714) Gross income 6 631 5 853 7 363 6 009 7 191 Research and development (1 087) (1 057) (1 166) (1 085) (1 194) expenses Selling expenses (2 094) (2 188) (2 630) (2 120) (2 232) Administrative expenses (1 392) (1 436) (1 639) (1 474) (1 547) Other operating income and (262) (266) (489) (115) (114) expenses Items affecting (1 150) 0 (500) 26 695 0 comparability Operating income 646 906 939 27 910 2 104 Gross and operating margin, excluding Cars % 2/1998 3/1998 4/1998 1/1999 2/1999 Gross margin 22,7 22,1 21,3 22,2 21,2 Research and development 3,7 4,0 3,4 4,0 3,5 expenses in % of net sales Selling expenses in % of 7,2 8,2 7,6 7,8 6,6 net sales Administrative expenses in 4,8 5,4 4,7 5,4 4,6 % of net sales Operating margin, excluding 6,1 3,4 4,2 4,5 6,2 items affecting comparability Operating margin 2,2 3,4 2,7 103,1 6,2 Operating income excluding items affecting comparability SEK M 2/1998 3/1998 4/1998 1/1999 2/1999 Trucks 802 500 1 123 917 967 Buses 225 45 40 (67) 123 Construction Equipment 564 273 415 183 791 Marine and industrial 96 32 (58) 45 128 engines Aero 141 114 178 139 175 Other (32) (58) (259) (2) (80) Operating income 1 796 906 1 439 1 215 2 104 Operating margin excluding items affecting comparability % 2/1998 3/1998 4/1998 1/1999 2/1999 Trucks 5.0 3.4 6.0 5.8 5.4 Buses 5.5 1.4 0.9 (2.4) 2.8 Construction Equipment 11.4 5.9 7.2 4.4 13.1 Marine and industrial 7.0 2.8 (4.6) 3.7 8.3 engines Aero 6.2 5.6 7.7 6.4 6.9 Other (1.2) (2.1) (6.9) (0.1) (2.4) Operating margin 6.1 3.4 4.2 4.5 6.2 Change in accounting principles pertaining to deferred taxes. Volvo has reported deferred tax receivables pertaining to so-called temporary differences and loss carryforwards to the degree that these items could be offset against deferred tax liabilities in the same tax area. Effective in 1999, Volvo is adapting its accounting policies to generally accepted international and Swedish accounting practice and deferred tax receivables will thereby be reported, subject to that it is probable that the amounts can be offset against future taxable income. The change in accounting results in a deferred tax receivable as of January 1, 1999 of SEK 1.3 billion that is largely attributable to so-called temporary differences and is reported as a corresponding increase in shareholders' equity. Trucks, units First First Change invoiced six six in % months months 1999 1998 Europe 22 170 20 110 +10 Western 20 840 18 090 +15 Europe Eastern 1 330 2 020 (34) Europe North America 15 840 14 110 +12 South America 1 800 3 470 (48) Asia 1 120 2 370 (53) Other markets 820 1 030 (20) Total trucks 41 750 41 090 +2 Volvo buses/bus First First Change chassis, units six six in % invoiced months months 1999 1998 Europe 1 700 1 970 (14) 1) North America 1 580 880 (80) South America 290 750 (61) Asia 510 700 (27) Other markets 250 200 25 Total, buses/bus 4 330 4 500 (4) chassis 1) Figures for the first six months of 1999 include 460 units sold through MASA, part of the Volvo Group as of the fourth quarter of 1998. The first quarter of 1999 include 240 units pertaining to Nova BUS, part of the Volvo Group as of the second quarter of 1998. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/07/15/19990715BIT00040/bit0001.doc http://www.bit.se/bitonline/1999/07/15/19990715BIT00040/bit0002.pdf